Missteps Cost Lexmark

After failing to cut prices in line with its competitors and neglecting to emphasize the rapidly growing color laser-printer market fast enough, Lexmark International is feeling the heat. Earnings for the most recent quarter came in well below what the printer giant led Wall Street to believe, and the short-term outlook doesn't look much better.

This month's disclosure by Lexmark chairman and CEO Paul Curlander that its earnings would be about half of what it had forecasted has sent the company's shares into a free-fall. In recent weeks, Lexmark has traded at less than half its 52-week high of $90 per share. Curlander blames an expected year-over-year 4 percent to 5 percent decline in revenue for the quarter on soft demand for Lexmark's products, notably for consumables, such as ink and toner. Based on last year's third-quarter revenue of $1.27 billion, that amounts to a decline of approximately $60 million. But failing to cut pricing sooner in line with key rivals has turned out to be a major factor as well, Curlander told analysts.

"We have not been proactive enough regarding recent market price moves," Curlander said. "During the quarter, we decided to improve our price position and more aggressively promote our color laser products."

Lexmark's problems, however, can be traced back more than a year ago, when it failed to respond to aggressive price cuts of network color laser printers by Hewlett-Packard and Dell, says Ian Hamilton, printer analyst at Current Analysis, a technology-assessment research firm based in Sterling, Va. "We were really surprised to see Lexmark had almost no competitive reaction to that situation," Hamilton recalls. "Many of its laser printers were still priced as if the Lexmark brand carried a pretty heavy premium. I think it's questionable how much of a premium they really do demand."

In the high-volume consumer and small-business segment, Lexmark is seeing less demand for its single-purpose inkjet printers where it had previously performed well, as a result of higher demand for multifunction systems and photo printers, according to Hamilton. "We are really seeing that space going away," he says. "I don't think they were ready for that."

Lexmark's soft demand can be attributed to marketing issues, as well, Hamilton notes. With a large installed base of HP monochrome laser printers in the enterprise, Lexmark now has to give customers a compelling reason to change. The company will have an opportunity to do so shortly with the expected rollout of a new line of color laser printers.

Hamilton says Lexmark should focus less on the low end of the market and more on the high end. "I believe they will be able to turn it around; they need to focus on what they do best," he says.

What Lexmark does best is in the enterprise, he says. "They really need to make sure they get that correct and that they get out there and make sure they are able to sell services attached to their printers," Hamilton says, "as well as ensure they get the consumables revenue from any hardware that they are able to sell."

Toward that end, Lexmark needs to do a better job of gaining the loyalty of channel partners. According to the 2005 VARBusiness Annual Report Card (see the Oct. 17 issue), Lexmark scored dead last in the Network Color Laser Printers category, behind HP, Xerox and Oki Data, despite the fact that partners say Lexmark offers the highest revenue and profit potential.

Much of the problem traces back to a lack of end-user demand for Lexmark's products, says Jalil Mahini, CEO of Micronet Systems, a Niles, Ill.-based custom systems builder that resells Lexmark and other vendors' printers. "I don't think Lexmark is responding fast enough," Mahini says. "HP, Brother and others are coming out with newer products faster, and with more favorable price points."

For its part, Lexmark said channel partners should see an improvement based on moves it made earlier this year. Lexmark officials pointed to the company's new Expert Series and Certified Solution Provider programs.

Yet, Lexmark officials acknowledge they need to get better partner mindshare.

"We want to be the easiest to lead with from a partner perspective and the most profitable," says John Linton, vice president of Lexmark's solution-provider channel. "I think you're going to see dramatic improvement."

Lexmark believes it can shake things up with the release of its new C52x printer line, which are network-ready color lasers that print 20 pages per minute, both in monochrome and color. They start at $499. The color output benchmarks, at least for now, would give Lexmark an edge in the lower-end color laser segment, where output speeds are typically about 8 ppm or less, says Mark Barnett, the company's director of U.S. marketing. "We are coming out with the best price/performance offer in the industry, bar none," Barnett says.

The C52x is intended for the volume market of small workgroups and home offices, borrowing from several features introduced by Lexmark in the midrange to high end of the market. In particular, the C524 supports a 20-GB hard drive that encrypts stored data, printing only when a user inputs a PIN.

"There's no doubt in my mind that this is a very solid response" to the criticism that Lexmark was slow to react to trends in color laser printing, Barnett says.

Perhaps, but will that be enough to bring Lexmark's stock price back up and revive revenue and earnings in the upcoming year? That remains to be seen, Current Analysis' Hamilton says. For one, Lexmark is getting hammered in the lucrative consumables market, while availability of those supplies in the channel has been weak. Lexmark also has to be more competitive with consumables pricing, he says.

In an industry ripe for consolidation, Lexmark could also find itself attractive to a suitor with deep pockets, Hamilton says. Samsung or, perhaps, Kodak, he argues, could pursue Lexmark as it would give their companies a solid midrange and high-end portfolio, and channel to complement Lexmark's lower-end monochrome offerings, Hamilton says.

"We're going to see some consolidation," he says. "Whoever isn't healthy is going to be ripe for a takeover."