Earnings report suggests Lexmark's strategy is working

Progress seen in inkjet, laser lines

ssloan@herald-leader.comMay 17, 2010 

The past five years have been a transition period for Lexmark International, and, based on its recently announced first-quarter earnings, its much-discussed strategy appears to have begun paying off.

Executives of the Lexington-based printer maker have talked for years of how it would take time to realize success in their plans to sell more high-end inkjet printers and fill out their laser printer lines with more products in today's fastest-selling categories.

Its recent earnings show that it's made progress in both initiatives, as the downturn in its inkjet division has slowed to just a 6 percent year-over-year revenue decline and its laser printer division saw revenue increase 20 percent.

"We've improved our capability to compete in high usage, higher-value segments of the market," CEO Paul Curlander told analysts during the company's recent earnings conference call. "And despite our expense reductions, we've continued to invest significantly in our core print technology and product development and are driving a strong pipeline of future Lexmark products."

And others are beginning to take notice, too. A year ago, shares of Lexmark's stock were trading regularly below $20. Now the stock is about $40.

Also, Moody's recently upgraded the company's credit outlook, which forecasts what moves the credit rating agency might make, calling it "stable" instead of "negative."

Inkjet

Lexmark's pipeline of products has shown in the inkjet division, as Lexmark has released higher-end products with features like touchscreens and high degrees of customization. Many come with various functions like scanning and copying and appeal to people who use lots of ink.

Those products replace a legacy of low-end devices that Lexmark has sought to distance itself from in recent years. The company walked away the past few years from significant portions of its former inkjet customers, people who bought printers sold for nearly nothing or bundled in with PCs for free.

For example, in 2006, Lexmark sold 14.7 million inkjet printers. In 2009, it sold just 4.2 million.

It may sound like a surprising move, but many of those 14.7 million customers didn't print enough to give the company the sales of ink it needed to meet profit expectations. In contrast, the 4.2 million printers sold in 2009 boast features that aim at high-usage customers.

But that move has brought financial pain, as year-over-year sales for the inkjet division have fallen each quarter since the second quarter of 2005. Sales declines have ranged anywhere from 4 percent in the third quarter of 2005 to as high as 28 percent in the fourth quarter of 2008.

It's now on the low end of those year-over-year declines, and Tom Carpenter, vice president and senior equity analyst at Hilliard Lyons in Louisville, said the company is "moving in the right direction" and has "stabilized inkjet."

As evidence, while printer hardware revenue fell 2 percent year-over-year in the first quarter, the average revenue from that inkjet hardware rose 28 percent as customers bought more of the high-end products.

The company has aimed squarely at small businesses with many of its offerings and succeeded last year in dramatically expanding its shelf space at office superstores including Staples, Office Depot and OfficeMax.

Todd Hamblin, Lexmark's vice president of worldwide sales and marketing for the inkjet division, said that's paid off. In those stores, Lexmark has doubled its market share from 5 percent to 10 percent for printers costing above $100.

In doing so, it passed Epson, Canon and Brother and now trails only HP.

"What that has opened up for us is more opportunities," he said. "We're really happy about our progress, but we're even more excited about the future."

Carpenter said he expects Lexmark to soon begin seeing a modest year-over-year increase in inkjet printer shipments.

"And as they obtain more shelf space, you'll see sales of cartridge supplies increase as well," he said.

Laser

While the company's laser printer division hasn't seen the major revenue declines of its inkjet counterpart, it has undergone its own shift to higher-end products, too.

The company has focused on selling more color lasers and laser multi-function products, which see more toner usage and are categories that have seen higher growth rates compared to others.

In the first quarter, laser hardware revenue soared 27 percent and average unit revenue rose 12 percent, as businesses bought more higher-end products.

"Our mix has shifted to these workgroup products, which drives higher average unit revenue for our hardware and we expect over time will drive more demand for" toner, said Keith Jones, vice president of worldwide marketing for the laser division.

In the first quarter, the division saw a strong growth rate in toner sales, too.

"What we want to flesh out in 2010 is how much of the supplies increase is with distributors," Carpenter said. "Are distributors carrying more supplies because they're carrying more of Lexmark's products, or is the increase in supplies driven more by increased usage?

"It's probably a combination, but if it's more of the latter, which is Lexmark's goal, then that's evidence that their strategy and restructurings are paying dividends."

Reach Scott Sloan at (859) 231-1447 or 1-800-950-6397, Ext. 1447.

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