Issue #0613/1 - Falling revenues and unit sales in crisis characterise Lexmark’s quarterly financial report as the company continues to struggle to keep its head above the water.
What does “better than expected” mean when overall revenue for the quarter is down 6% and operating profit is down 25% year-on-year?
This is the situation in which Lexmark finds itself, for the first quarter of 2006, following a poor showing for the final quarter of 2005 and not-so-healthy full-year results for 2005.
Perhaps any company can claim ‘better than expected’ if it pushes expectations for a forthcoming period down in light of poor results for the previous period. In point of fact, the revenue drop of 6% for Q1, 2006 over Q1 of 2005, was indeed only half as bad (!) as in the previous quarter where we saw a revenue loss of 12% compared to the same quarter the year before.
Nevertheless, this must represent a desperate situation for Lexmark.
Q4 is supposed to be a company’s best time of year. Does Lexmark’s failure in Q4 mean that high-spending opportunistic Q4 customers decided it was time to look elsewhere?
A revenue loss of only 6% for Q1 of 2006 tends to indicate that loyal year-round customers have not deserted Lexmark to the extent that floating customers did in Q4.
Similarly, the loss of operating profit is not as bad as it was in Q4, 2005, with a decline of 25% year-on-year, compared with the 42% decline recorded in Q4.
Certainly, it would appear that the business segment is maintaining a higher degree of loyalty overall than the consumer segment. Having seen the business sector decline by as much as 12% in Q4, against an 11% decline in the consumer sector, the most recent quarter showed business slowdown to be just 5% compared to a 7% consumer slowdown.
Share of Revenue by Segment
This is certainly an interesting statistic in light of the fact that it is the supplies for business printers that have attracted the highest price increases over the year while inkjet supplies have hardly been affected. But, putting these factors together could imply that business customers may be more prepared to look around now than they were a year or two ago – thus creating a greater proportion of ‘floating customers’, as opposed to loyal customers, for whom Total Cost of Printing is becoming a bigger issue.
Breaking the results down a little, there was one bright spot for Lexmark in the global situation. The ‘other’ international markets (i.e. markets outside the US and Europe) actually saw a revenue increase of 6%, helping to disguise the fact that revenue decline in the two major geographies was as bad as 9% (Europe)!
Despite the fact that Lexmark has cut hardware prices even more aggressively than usual over the last year or so, supplies sales and revenues have not been given the boost that Lexmark would have hoped for.
Laser printer unit sales might have been up 7% over the previous year but inkjet unit sales crashed by 18% - resulting in revenue from all hardware together falling by a huge 18%. This poor showing has contributed to supplies revenue from laser and inkjet together only managing to grow by 3%.
However, this is an improvement on the previous quarter when supplies revenue actually fell by 1%. Growth of 3% compares rather poorly with supplies revenue growth from Hewlett-Packard that is typically in the region of 8-11% but, when supplies represent around 60% of total revenue (having risen rapidly from 56%), 3% growth just isn’t good enough to counterbalance the scale of negative growth being experienced elsewhere.
One other rather alarming factor for Lexmark emerges – OEM sales were poor (as were sales of mono workgroup printers). There could be two reasons for this: firstly, that the market is generally depressed; or, secondly, that Lexmark’s OEM customers are also experiencing a downturn.
General market depression is unlikely in light of Hewlett-Packard’s Q1 results (January 2006) that showed IPG revenue increased 8% year-on-year with printer hardware unit sales up 8% and supplies revenue up 11%. Brother experienced 12% revenue growth in its Communications and Printing Devices division in the 4th quarter of 2005, with sales (reaching record heights) of MFPs and Supplies more than compensating for lower sales of single function printers.
Balancing this though is the fact that Xerox experienced a revenue decline of 2% for Q1 of 2006 with hardware revenue growth being 4% down on the quarter in the previous year. However, office hardware installations were up 15% for Xerox - double the growth at Lexmark (laser only to compare with Xerox that has no inkjet products).
(Original Equipment Manufacturer = Lexmark)
Q1 06 Revenue down 8% - due to “Competitive Pricing”
If Dell and IBM in particular are selling fewer Lexmark-built laser printers, the question is, could there be an anti-Lexmark move amongst customers or are these companies simply experiencing a minor downturn along with Lexmark, but unrelated to the fact that they use Lexmark manufactured equipment? We’ll at least have to wait for Dell Q1 figures to begin to find an answer to this but IBM reports printer hardware revenues having fallen 8% due to ‘competitive pricing’! I wonder who is responsible for that!!
From the perspective of inkjet printers, unit sales at Lexmark were down a disastrous 18% with branded AiOs being the only growth area. This implies that Dell has not experienced growth in its inkjet sales either.
Furthermore, Lexmark’s profit margins are down by 1.3 points, to 31.7%, as the expense to revenue ratio continues to worsen – up 1.2 points to 22.2%. This leaves operating income margin down 2.4 points at 9.5%.
So, what does Lexmark say is the reason for the “better than expected” performance?
Improved supplies sales are credited with the partial relief. However, it is only the consumer environment that is quoted as being a “more benign pricing environment” – in other words, Lexmark hasn’t put up prices on inkjet supplies and the effects of the 18% drop in inkjet hardware sales are not yet being felt.
Lexmark expects the overall situation to continue worsening, with revenues continuing to fall. There is no indication of when the company might expect to see a reversal in its fortunes or any further news on plans to expedite a change (see TCPglobal Issue #0603, "Lexmark’s financial troubles continue"), just a comment that published plans are being executed.
Future prospects for Lexmark should look good – in theory. The company claims several industry firsts that should encourage customers to buy Lexmark.
These include: the ability to scan directly to, and print directly from, a USB pen drive on laser devices; the fastest A4 MFP (X644e at 55ppm – see TCPglobal Issue #0612 "High speed A4 mono MFP joins the Lexmark line-up along with A3 MFP range"); the largest standard paper capacity in an MFP (X850e series at 3,100 sheets – see TCPglobal Issue #0612 "High speed A4 mono MFP joins the Lexmark line-up along with A3 MFP range"); and being the first to offer a scan preview on an MFP (more typically associated with scanners).
But, is the Total Cost of Printing with Lexmark hardware becoming just too high?
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