Lexmark - the Next Round

Lexmark announced an earnings warning today ahead of its earnings call scheduled for January 27.  This is maybe not so surprising given the state of the industry and/or the state of the company, and it still is not clear which of these influences is playing a bigger role in today's announcement.

Overall quarterly revenue was is expected to be 17%  down year on year. It should not come as a shock that hardware sales are down and consumer hardware is way down, over 40% year on year. This was announced and anticipated, although maybe not quite at this level. What should be more concerning, though, is the fact that supplies revenues are down in spite of channel filling. The channel bought ahead substantially due to announced price increases, but even that "unnatural act" did not compensate enough to avoid a shortfall. This trend, combined with reduced hardware sales, bodes badly for future supplies sales trends and overall results. We also hear that the supplies sell-out was below expectations so far, implying that we can expect some further lag as the sell-off continues before we can hope for another uptick in supplies sales and additional benefits from price increases.

A couple of parting notes:

 - Much of the supplies shortfall is attributed to unexpected exchange rate movements, which is viewed with skepticism by many experts.  At the most benign level, why were they not able to anticipate currency effects better? More significantly, were there not possibly other influences in play? One explanation at least (!) as logical is that supplies sales are gradually declining as the hardware base contracts.

 - Q4 EPS will be around $0.19-$0.24, including increased restructuring costs of $0.52 and a tax credit of $0.30.  Full year EPS will be well below $3.00, the lowest level in years.  By the way, stock repurchases have reduced the number of shares outstanding by about 30% over the last few years, so it is not hard to figure where the EPS would be at historical levels.

 - While the anticipated results for Q4 are appropriately modest, Lexmark set aggressive EPS guidance for Q1 at $0.65-$0.75, despite anticipated revenue reductions in the mid- to high teens and a significant supplies inventory overhang. It is unclear at present how they expect to achieve this result without another one-time benefit coming from somewhere. Operations do not seem to support that level currently, though Lexmark is traditionally very good at finding a way to deliver relatively positive results. So the next round of "finding a way to deliver" begins. . .