Is Lexmark Spending Enough On R&D To Beat HP?

Curlander's comments came as he acknowledged Lexmark suffered a "disappointing" second quarter, during a conference call with Wall Street analysts to talk about Lexmark's earnings.

Richard Gardner, an analyst with Citigroup, New York, questioned Curlander sharply over Lexmark's R&D compared to rivals and even asked whether the company had to make some "tough decisions" about its flagging inkjet business.

"I was wondering if you would acknoweldge a big problem in (Lexmark's) inkjet (business) is lacking print-head technology," Gardner said. "Given that your competitors are spending five and 10 times as much on inkjet R&D technology as you are, I'm wondering how you can atch up at this point, cost-effectively, and, as you say, spend as much as you need to spend on R&D to get back to where you'd like to be in the consumer segment?"

"And, if that's impossible, why not just make some tough decisions about that business?," Gardner asked.

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Lexmark, which reported second-quarter earnings Tuesday that showed declines in revenue and earnings, blamed much of its recent softness on slow sales of both inkjet printers and inkjet printer supplies. At the same time, rival Hewlett-Packard, Palo Alto, Calif., has een aggressively integrating its proprietary print-head technology into its inkjet devices to increase performance and push pricing down. Curlander, in response to Gardner, defended Lexmark's R&D and technology spending.

"I would tell you, clearly, we are focused on improving our technology in the products," Curlander said. "The comments you make about competitors spending more on technology than Lexmark - - those are correct but that's not a new situation for Lexmark. Since the company started in 1991, we've always faced significantly greater investments by the competition than we've been able to afford. And the way that we have survved, the way that we have succeeded and competed is we've focused. We don't try to do everything the competition is doing."

Among other things, though, Lexmark recently began integrating wireless capabilities into some of its consumer printers, betting that un-wired printers would become a key point of leverage in the market.

Curlander said HP, the marker share leader in the printing space, is pushing its inkjet technology into segments including light production and wide-format priting. Lexmark is focusing on driving its inkjet business into the consumer space. Curlander brushed off the suggestion that Lexmark get out of that segment.

"Relative to how we see the inkjet business - - obviously we're disappointed with the result we've had here," he said. "We're not happy with where we are relative to profitability. But we do believe, long-term, that inkjet can be a profitable contributor to Lexmark. It has been in the past."

Mike Hicks, CEO of Electronic Business Machines, a Lexington, Kentucky-based solution provider and Lexmark channel partner, said his business not focused on the inkjet segments. "Personally, I know they would like for us to sell more," Hicks said. "I don't worry about that aspect of it." Hicks said he is more focused on commercial-grade, color laser technology - - an area where Lexmark did not see the softness it did in its inkjet business. And, Hicks said, he believed the company was correct in continuing aggressive price promotions on some product lines - - promotions that he believes helps smaller solution providers such as his company.

"These 25-percent off MSPs (Manufacturer Suggested Prices), 50-percent off a couple of targeted models - - that helps me drive business," Hicks said. "I can do marketing campaigns behind that stuff.."