Lexmark revenue up, profit down in 3Q

Printer maker Lexmark International had an up-and-down third quarter. The Lexington-based company announced Tuesday that its revenue grew slightly in the quarter but its profit fell almost 7 percent.

"You saw growth coming from our core areas, which was very, very encouraging for us," CEO Paul Rooke told the Herald-Leader, noting that the company continues to see some drag from printers it is phasing out.

To illustrate the phenomenon, Lexmark has divided its business into what it calls "core" products, which it will continue to market going forward, and "legacy" devices that focused on consumers and are being phased out in favor of higher-end business-focused printers.

"In our core strategic areas, we had very, very good numbers," Rooke said. "That helps support the top-line growth for us."

Using the comparison, the company said that sales of its core printer hardware were up 5 percent in the quarter compared to the same period a year earlier. Legacy hardware sales represented less than $1 million — a tiny percentage of the $1.035 billion in sales for the quarter. Rooke said the company expects to phase out sales of legacy hardware later this year.

The drag, though, remains on supplies sold to support legacy printers. That still accounts for 16 percent of total ink and toner sold, despite a 35 percent drop year over year in that type of supplies. "It will continue to decline at that rate," Rooke said. Sales of ink and toner for core printers grew 12 percent year over year in the quarter. That was enough to offset the legacy drop, so that total ink and toner sales were flat year over year.

The company also saw a setback in its recently acquired Perceptive Software unit. While the division saw sales growth of 15 percent, it wasn't as high as Lexmark had anticipated, leading to a $3 million operating income loss for the division.

"We're investing for growth there. ... We grew faster than the industry," said Rooke, citing an industry growth rate of about 10 percent. "We just have higher demands on ourselves."

He said some of the lower-than-expected growth came because of the way the company records revenue for software products sold since some are sold on a subscription basis while others are bought outright.

"They're looking to invest, and clearly it's costing them a little bit more," said analyst Shannon Cross of Cross Research.

"One of the challenges they will have over the next few years is the scale issue," Cross said, referring to Lexmark's smaller size compared to its competitors. "You've got HP, Xerox and a few others doing substantially more business and able to absorb fixed costs over a larger revenue base."

Another factor in the company's profit decline was taxes, as Lexmark saw its provision for income taxes jump 60.6 percent to $24.9 million from $15.5 million a year ago.

Among the brightest spots was its managed print service offerings, in which it manages printing for other companies. It continued to see sales gains of more than 25 percent year over year, Rooke said.

This story was originally published October 26, 2011 at 12:00 AM with the headline "Lexmark revenue up, profit down in 3Q."