OEM Business Slipping Faster At Lexmark, CEO Says

After Lexmark reported lackluster sales and profit for its first quarter, financial analysts questioned Curlander about the Lexington, Ky., company's current stumbling blocks.

"What's going on is the progress we're making on the branded side is being covered up by the decline we're seeing on the OEM side," Curlander said, noting that he couldn't talk about any specific OEM customers. "The reality is that OEM as a whole -- it was a weak 2006 with hardware declines. What's frustrating is we're coming into 2007, and we're seeing those declines continue and actually increase."

For the past several quarters, when major falloffs in its OEM business began to surface, Lexmark has been working feverishly to boost its branded products and heighten investment in the channel. That has worked as solution providers, for the most part, have given a thumbs-up and that portion of Lexmark's sales continues to show strength.

The company is also broadening its product line. Along with the earnings announcement, Lexmark unveiled a series of new color laser multifunction printers and single-function printers.

"As we look to the second quarter, we think that will be even weaker than [what] we saw in the first quarter," Curlander said, adding that OEM business can be cyclical.

Lexmark's largest OEM customer is Round Rock, Texas-based Dell, which has been seeing declining sales and profits and has been trying to stop its own bleeding. Last year, Dell accounted for 15 percent of Lexmark's overall revenue, but that number declined by $38 million to $744 million from the year earlier.

More than a year ago, Dell executives said their initial strategy of practically giving away printers, or selling low-end printers at a loss to gain market share quickly, led to sales of printers to customers that didn't really use them. That deprived Dell of lucrative after-market consumables sales and upsells, causing the PC giant to rethink its printer strategy.

Lexmark and Dell entered into their OEM agreement in 2002. Lexmark has also maintained an OEM relationship with IBM, which plans to exit the printer business.

After Lexmark's earnings announcement, the stock market punished the company's shares, sending them down by almost 10 percent to $56.11. Goldman Sachs analyst Laura Conigliaro, who recently raised her rating on Dell and suggested that company could be on track for a turnaround, issued a report after Lexmark's earnings and repeated her "sell" rating.

"Lexmark's March quarter results were disappointing, pointing to the need for continued reinvestment in sales and marketing and product development and, therefore, keeping the pressure on operating margins," Conigliaro said in the report.