Issue #0632/1 - restructuring on track – turn-around looks possible - Quarterly results have exceeded Lexmark’s expectations and brought some growth to the company for the first time in 12 months.
For the financial quarter ended September 2006 (Q3), Lexmark has posted improved year-on-year results, including its first overall revenue growth since the second quarter of last year. Albeit modest, a growth of 1.6% was recorded in comparison with Q3 of last year, exceeding the company’s expectations for the quarter.
After four quarters in a row where revenues have steadily fallen year-on-year, the sense of relief must be enormous but there will still be a lot of work to do to ensure that the upwards trend now continues.
Lexmark has clearly been working very hard on its cost base. The company has managed to post an increase of almost 40% in Operating Income (GAAP - $115m from $83m) with an Operating Margin of 10.4%, an increase of 2.9 points over last year.
This is further underlined by the fact that Operating Income for the Consumer segment was 101% higher than in the same quarter the previous year, despite revenue in the segment that fell by 5%! Furthermore, Gross Profit Margin improved from 29.4% to 32.6%.
As well as revenue in the consumer segment falling by 5%, the number of inkjet units sold in the quarter fell by a massive 19% with particular emphasis on single function printers. Only branded AiOs are in growth. So, for operating income to have grown so much, Lexmark must have slashed costs somewhere in the process.
In contrast, Operating Income in the business sector grew by a modest 6% on revenue that improved by 8% due to unit shipments of laser devices increasing also by 8%. This is excellent news for the company because business revenue accounts for 56% of overall revenue.
Turning to the hardware breakdown, the continuing slump in unit sales and revenues on the inkjet side of the business (especially single function inkjet printers) outweighed the unit and revenue growth of laser devices, causing the revenue from sales of all hardware together to continue falling, by 3%.
Again as an overall observation, branded hardware shipments have been strong while sales to other vendors (primarily Dell and IBM) have continued in decline. Part of this trend is sure to be down to the fact that the major market growth area is colour laser printers – a segment that Dell does not source from Lexmark. To compound this effect, Dell has only one single function inkjet printer on its list, which is hardly worth keeping there.
Its clear focus on All-in-One devices is sure to push single function purchases to other manufacturers with wider choice. This will leave Lexmark supplying only inkjet All-in-Ones and mono laser devices to Dell. As Dell continues to push colour laser hard, Lexmark stands to lose even more OEM sales in coming quarters.
Reversing a very worrying trend for Lexmark, the revenue from sales of printer supplies last quarter grew by a healthy 6%. To achieve this reversal – and more importantly, to maintain growth in supplies revenues – is absolutely vital to Lexmark’s very survival.
Geographically, Lexmark seems to be falling from grace amongst Americans whereas Europeans appear to be more keen on Lexmark than they were. Revenue in Europe grew by 5% in the quarter and revenue in the rest of the world grew by 3%. But, in the US (the biggest market), revenue fell by 2%.
To put a positive spin on the results, Lexmark claims that, “75% of the leading banks, retailers and pharmacies use Lexmark to print smarter, save money and get more done.”
This is a relatively small market segment to pick on to make the point and in no way reflects the overall market share position – if it did, Lexmark would be way ahead of Hewlett-Packard in the shipments league table.
Statistics gathered by CharisCo Printer Labs indicates that Lexmark hardware is present in about 31% of companies, putting it in 5th position – not bad overall but not the sort of position suggested by the figure Lexmark quotes.
Lexmark says that it expects revenue over the current quarter, to the end of December, 2006, to be flat, or even to show a small decline over last year’s Christmas quarter.
Despite the improvement shown in the last quarter, built on business-to-business sales, a result of this nature would be entirely probable as business purchases (mainly laser oriented) tend to fall off at this time of year, leaving the focus on the consumer segment (inkjet oriented) where Lexmark is ailing badly.
On a final note, the fact that the price of Lexmark stock has been rising steadily in the New York Stock Exchange over the course of the last 12 months must bode well for the company. Shares are now worth about 52% more than in October 2005.
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