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AnonymousInactiveEarnings forecast drops Lexmark shares 5%
Move to cut inkjet sales has impact
Shares
of Lexmark International Inc. tumbled nearly 5 percent yesterday after
the Lexington, Ky., printer maker said it would not earn as much as
analysts had predicted during the final three months of the
year.Lexmark announced stronger-than-expected third-quarter earnings
yesterday, reporting net income of $85.6 million.But the earnings
surprise was dampened by predictions that it would earn 80 to 90 cents
per share during its fourth quarter, excluding restructuring costs.Analysts polled by Thomson First Call had been predicting 91 cents per share.
Lexmark
shares fell $3.09 to close at $59.94.Paul Curlander, Lexmark’s chairman
and chief executive, told analysts on a conference call that the
lower-than-expected earnings forecast reflects the company’s decision
to stop selling many of its least expensive inkjet printers, focusing
instead on laser printers and inkjets that can print, copy, scan and
fax documents.That plan called for cutting inkjet printer sales by
about 20 percent.”During the first half of the year, we lost some shelf
space” at office supply stores and electronics outlets, Curlander said.
“Since then, we’ve been improving.”Analysts had called the plan to dump
some inkjet sales risky because of Lexmark’s business model. The
company has traditionally lost money on printers and made its profits
on replacement ink and toner supplies. Cutting out low-end sales risked
losing ink buyers.On the other hand, the multifunction devices that the
company is now spending more time developing and promoting use more ink
than single-function printers, Curlander and others have argued.Lexmark
Chief Financial Officer John Gamble said in an interview that the
company is continuing to eliminate sales of unprofitable low-end
printers, expand sales of higher-value inkjet and laser printers and
expand its business and consulting services.”Those segments that we’ve
been talking about all year, we think we had very good success in
those,” Gamble said. “For the rest of this year and into next year,
you’re going to see us continue with that strategy.”Goldman Sachs
analyst Laura Conigliaro said the third-quarter figures show that
Lexmark has successfully dumped much of its bundled business — deals
under which buyers got a free printer with the purchase of a
computer.In a research note, she said such deals, especially with Dell,
lowered the average sales price of a Lexmark printer and hurt the
company’s basic business model.”Lexmark’s performance through year-end
should be strong, and Lexmark’s targets seem set for another big beat,”
Conigliaro wrote in her report, referring to the lower-than-expected
fourth-quarter earnings guidance.
Lexmark working hard to right itself
Stock recovers, but challenges remain
A
year ago, Lexmark International began a protracted slump when
executives cut their third-quarter earnings forecast, sending shares of
the company into a tailspin that saw the stock lose almost 30 percent
of its value in a single day.Now, as the company prepares to announce
its third-quarter earnings on Tuesday, industry observers say the
Lexington-based printer maker continues to face a series of challenges
in its quest to turn the business around.The company has acted quickly
in the past year, cutting or transferring hundreds of jobs, closing an
inkjet cartridge production plant and focusing its printer
introductions on high-growth product segments.The company also
significantly reduced the number of inkjet printers it sells in
bundles, printers that executives have said were not producing enough
profit.Investors have rewarded the company’s strategy. Before last
year’s slashed forecast, the company’s stock traded in the $60 range,
but dropped almost $20 on Oct. 4, 2005. It’s recovered throughout the
year and is now trading higher than it was before the fall.But the
share price has approached or exceeded the target set by some analysts
who, along with industry observers, caution that the company still has
a gradual recovery ahead.”It’s hard to turn the battleship around
quickly,” said Larry Jamieson, director of the Hard Copy Industry
Advisory Service at Lyra Research.
Inkjet issues
Among
Lexmark’s biggest changes in the past year was its decision to withdraw
from about 20 percent of its inkjet sales, a group that includes a
number of bundling agreements, where purchasers of a computer would
receive a free or heavily discounted printer.The company called some of
those agreements bad deals, as consumers fail to buy enough ink
cartridges and supplies over the products’ lifetimes to offset low
profit margins on the initial piece of hardware.The move has helped
Lexmark’s gross margin in recent quarters because the inkjets in that
group typically had lower margins on hardware sales than inkjet
all-in-ones or laser printers.The tradeoff, said analyst Shannon Cross,
is a smaller installed base of customers.That installed base is relied
upon in the long term for sales of supplies like ink and toner. With
fewer owners of its inkjet printers Ð albeit owners who didn’t print an
overwhelming amount Ð the company could face earnings pressures at a
time when it needs to be “more aggressive in terms of their investment
in the business,” said Cross, managing director at Cross
Research.Lexmark is in a quiet period before the announcement and
declined to comment for this story.Part of the company’s ongoing
strategy is to develop more printers for high-growth product
segments.On the inkjet side, those segments are 3-in-1 and 4-in-1
products, typically referred to as all-in-one printers that include
copying, scanning and sometimes faxing functions.For lasers, the
company has focused on color lasers, laser all-in-ones and low-end
monochrome laser printers.In the past year, the company introduced a
spate of products in the categories, and continued to invest more money
into research and development.But the research and development budgets
pale in comparison to industry behemoth Hewlett-Packard.”The giant in
the industry does about as nice a job as anybody in touching all the
bases,” Jamieson said. “It’s almost like how can the other guys do
about the same thing on a more limited budget.”
Advertising
Building
up brand awareness has been another goal for the company in the past
year. It recently launched an advertising campaign that touted how its
printers go to work for some of the world’s largest businesses.Jamieson
said the company should also consider using its marketing to point out
more of the features of Lexmark printers.”They have some really good
feature-rich products,” he said, noting the company’s progress in
reducing the time it takes for a printer to start printing and its
inclusion of duplexing features on more models. Duplexing allows
printing on both sides of a page.”You don’t have to carry as many
papers in your briefcase or you have fewer filing cabinets. The benefit
is you’re using less space in your office,” he said.
Going forward
The
company has said it expects third-quarter earnings per share to be 65
cents to 75 cents.Analysts surveyed by Thomson Financial expect 79
cents a share.Lexmark’s forecast amount excludes a charge of 16 cents a
share related to a restructuring announced in January that included the
closing of an inkjet cartridge manufacturing plant in Scotland.As part
of the plan, the company is eliminating or transferring 1,350 jobs,
including up to 200 in Lexington, to countries where wages are
lower.Looking forward, Jamieson said he expects the next year may
“still be a tough one to get rolling” for Lexington’s largest private
employer. “It’s a tough battle.” -
AuthorNovember 2, 2006 at 2:37 PM
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