Lexmark&'s 3Q Profit Plunges, CEO Cites Sluggish Channel Sales

The Lexington, Ky.-based company turned a profit of $70.2 million, or 59 cents per share, down from $156.1 million, or $1.17 per share, a year ago but higher than its most recent forecast of 40 cents to 50 cents per share. Lexmark's sales for the quarter totaled almost $1.22 billion, compared with nearly $1.27 billion a year ago.

Curlander attributed the declined revenue and earnings in part to reductions in channel inventory in the face of significant pricing pressure throughout the market.

"It's hard for us to know why channel partners have [reduced inventory]," he said. "We received less orders than we expected. Laser [printers were] a big piece of that. In the end, channel partners make decisions based on what they see, such as weakness with end users."

Weak sales of inkjets, lower-than-expected sales of branded products and charges for workforce reductions also squeezed Lexmark&'s third-quarter results, as did a bloody pricing environment that continues to depress product margins, the company said.

Though acknowledging that Lexmark took some steep pricing actions in the quarter, Curlander dismissed one financial analyst&'s suggestion that the company might drop product prices by 15 percent to 50 percent in the fourth quarter.

The earnings announcement came a day after Lexmark formally announced a new family of color laser printers, including sub-$500 models that print at 20 pages per minute. Curlander said Lexmark would never be the lowest-priced vendor but added that he believed it was important to reach the sub-$500 segment.

Analyst reaction to Lexmark's numbers was as swift as it was negative. Toni Sacconaghi, an analyst at New York-based investment firm Sanford Bernstein, observed in a question to Curlander that Lexmark "had the worst quarter in history this quarter" and that Curlander was "basically saying everything is going to get considerably worse next quarter."

"We don't detect any lack of commitment to the Lexmark brand," said Curlander, who repeated several times that Lexmark hasn't gotten a firm handle on the rationale for reductions in channel orders.

"We are dealing with a two-tier structure," Curlander said. "We deal with just the first tier, we just get reporting out of the first tier. We don't think we're going to be seeing a loss in channel partners going forward. We could be looking to increase distribution."

Some solution providers point to Lexmark's 2002 decision to begin building Dell-branded printers for Dell as a key reason that Lexmark has lost momentum with its own branded systems. But Curlander said Lexmark hasn&'t heard that directly from VARs and doesn't think the Dell arrangement hurts his company.

"The channel has talked to us a lot about Dell over the last two years," Curlander said, noting that sales of its branded and OEM laser printers continue to show double-digit growth. "I don't think Dell or our OEM business is at the heart of it."

In early trading on Wall Street, shares of Lexmark dropped $1.53 to $40.93 on the New York Stock Exchange.