Lexmark International's stock dropped more than 15 percent by noon Tuesday, after its first-quarter earnings failed to meet revenue and profit projections.
The Lexington-based printer maker's performance was linked to a number of factors, including an unexpected series of high costs related to distribution of its products.
Revenue dipped 1 percent year over year, reversing expectations by Lexmark and analysts of a 1 percent increase. Analysts also expected profits of $1.24 a share, excluding one-time charges, while Lexmark delivered $1.14 a share. That was below its own expectations of $1.18 to $1.28 a share.
The company revised downward its yearly earnings estimates, forecasting that revenue will be down by a low single-digit percentage. It previously forecast a low single-digit percentage increase in revenue.
The company said that the unexpected distribution costs were the largest drag on earnings during the quarter and that they were due to a consolidation occurring in how products are shipped from manufacturing locations to customers.
"Clearly, we had issues in the transition and need to resolve them," Chief Financial Officer John Gamble Jr. told analysts. He said the company does not expect to have the issues resolved fully until the second half of the year.
CEO Paul Rooke said the company also was hurt by aggressive pricing in some laser- and inkjet-printer segments and noted that the company opted in some cases not to lower its prices to match.
Its inkjet operations were also stung with a 41 percent decline in hardware revenue year over year because the company has stopped selling some low-end printers through mass distributors.
Rooke said the earnings masked good results for its strategic goals. For instance, its high-end laser multifunction printers grew more than 40 percent year over year. Its offerings in managed print services, in which it manages printing for organizations, grew more than 25 percent year over year. Sales of color laser printers also saw double-digit percentage growth, he said.
"These are very encouraging numbers because the growth means deeper penetration into customers with high page generation," Rooke said.
The company separated its ink and toner sales into two categories — legacy and core — to differentiate its strategic goals from businesses it is de-emphasizing. The core segment saw growth of 13 percent year over year, Lexmark noted, while legacy ink and toner sales fell 30 percent.
"These dynamics are happening underneath the surface," Rooke said.
Analyst Shannon Cross of Cross Research said the earnings "reflect a lot of the concerns we have ... in terms of Lexmark's competitive positioning and declining installed base."
"They need to invest aggressively and bolster sales and marketing and research and development, and start growing revenue," she said. "That's going to pressure margins."