Missteps Cost Lexmark

After failing to cut prices in line with its competitors and neglecting to emphasize the fast-growing color laser printer market fast enough, Lexmark International has cut in half its earnings estimate for the third quarter, which will likely affect the company's earnings for the fourth quarter.

Tuesday's disclosure by Lexmark chairman and CEO Paul Curlander sent the company's shares tumbling nearly 30 percent. Lexmark is now trading at less than half its 52-week high of $90 per share. The company will formally report earnings for the period on Oct. 25.

Curlander blamed 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. Based on last year's third-quarter revenue of $1.27 billion, that will amount to a decline of approximately $60 million. But failing to cut pricing sooner in line with key rivals 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.

"We were really surprised to see Lexmark had almost no competitive reaction to that situation," Hamilton says. "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, Hamilton says.

"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 adds. 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 that 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 at gaining the loyalty of channel partners. According to the 2005 VARBusiness Annual Report Card, Lexmark scored dead last in the Color Network Laser Printer category, behind HP, Xerox and Oki Data, despite the fact that partners say Lexmark offers the highest potential revenue and profit potential.

Much of the problem traces back to a lack of end-user demand for Lexmark 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. When people compare features and prices, they are finding they can get more bang for the buck from vendors other than Lexmark."

For its part, Lexmark said channel partners should see an improvement based on moves earlier this year. While declining to comment on the earnings shortfall (citing a quiet period before formally reporting), Lexmark officials pointed to the company's new Expert Series and Certified Solution Provider programs.

Yet Lexmark officials acknowledged they need to get better partner mindshare.

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