Lexmark Profit Tumbles on Dramatic Slump in Demand

Printer maker Lexmark International Inc. (LXK) Tuesday said third-quarter profit fell by more than half, hurt by slack demand for printers, ink and supplies, driving its shares down 6 percent.

Lexmark, which has had to cut prices for its printers amid increased competition from industry leader Hewlett-Packard Co. (HPQ) and others, also said fourth-quarter profit would be significantly below Wall Street views.

Chief executive Paul Curlander blamed the weakness on a dramatic slump in demand for supplies, which are far more profitable than printers, and a slowdown in purchases by office supply and electronics stores that sell Lexmark products.

The Lexington, Ky.-based company posted third-quarter net income of $70.2 million, or 59 cents a share, down from $156.1 million, or $1.17 a share, a year earlier. The profit included costs of 5 cents a share from previously announced job cuts, offset by a tax benefit of 5 cents per share.

Revenue declined 4 percent to $1.22 billion.

The results exceeded analysts' lowered expectations. Earlier this month Lexmark warned that its earnings would fall far short of its previous forecast of around $1 per share, driving its stock lower.

On a conference call, one analyst characterized the results as "your worst quarter in history." Others worried that Lexmark's demand dilemma could pinch 2006 profits.

"Fourth-quarter guidance was weak (and) brings into question the company's earnings power in 2006," said Cross Research analyst Shannon Cross, who kept her rating on Lexmark shares at "sell."

"Industry pressures, risk to the Dell relationship and the need to invest internally will lead to disappointing earnings," she said.

Curlander declined to detail any specific flaw in Lexmark's strategy, saying a number of factors could be hurting sales of supplies, from lower printer sales to decreased use of printers by consumers.

Lexmark needs to spark renewed interest in its printers, he said.

"Whenever you have a weakness in end-user demand, the actions are always the same — you (need) to drive more demand of branded hardware, which is what we are focused on," he said.

Lexmark, which makes printers that computer maker Dell Inc. sells under its own brand name, said third-quarter revenue from sales of laser and inkjet printers fell 10 percent from a year earlier due to aggressive pricing and slack demand.

Revenue from sales of supplies, including ink and toner replacement cartridges, rose 1 percent.

Increased sales of lower-priced printers pushed margins down to 29.4 percent from 35.2 percent a year earlier.

Lexmark said it expects fourth-quarter earnings of 40 cents to 50 cents a share, far below analysts' average view of 64 cents as compiled by Reuters Estimates.

Lexmark said it expects revenue to decline in the high-single-digit to low-double-digit percentage range.

Lexmark shares were down $2.55 to $39.91 on the New York Stock Exchange (search) after earlier dipping to $39.77, their lowest level since late in 2000.

The shares have fallen more than 50 percent this year, including a 31 percent decline in the last three months. Hewlett-Packard shares are up 34 percent so far in 2005.