Lexmark - Stabilization or Decline?

The recent Lexmark earnings call signaled some gradual but significant shifts in the market and in their own position in the industry. On the positive side (if you can call it that), the announced results did not precipitate any drastic market reactions. Also positive was a somewhat more satisfactory operating income number ($74.6M), the best result since the middle of last year.

But while the operating result was positive and better than the last two quarters, it was well below the average historic result, which had been typically well in the range of the three-digit millions.  Also, their quarterly revenue ($944.1M) dipped below $1B for the first time in over 20 quarters.

Lexmark management defended the results as positive and healthy. Viewed as a product of the strategic shift away from unprofitable consumer business, that is correct in a limited sense. But the idea of that strategy was to compensate with healthy mid-range and corporate installations, and that hope has not come to pass.

The imaging industry is indeed healthy and can be enormously profitable, but only if you capture and maintain installations and drive ongoing output volumes.  But with hardware sales declining 30%, you will not maintain your MIF (machines in field), and even improving print volumes will not deliver the level of revenue and margins required to drive future business. This development is certainly not (yet) a death spiral, but it is a serious warning sign.

One also has to wonder about certain cost allotments. Lexmark has only two main business divisions, the laser ("Printing Solutions and Services") and inkjet ("Imaging Solutions") product groups. We can debate the sense or nonsense of these naming conventions in another space. In a somewhat murky accounting exercise, the operating incomes for both divisions were reported as strong positives: $93M for PS&SD and $52M for ISD. But that total is then reduced by $71M for "other" operations. Since these "other" activities account for an amount greater than one of the major business divisions, it seems like it might have been better to allot those costs directly to the respective operating areas. But depending on how those activities/costs are are parsed out, these might limit (or even eliminate) that division's positive result.

Analysts are also learning to track these key drivers, especially print volume developments. Many of the questions addressed different aspects of that issue: inventory buildup in danger of going chronic, increased threats from third party supplies, reasons for weak supplies demand, cost implications from underutilized production facilities.  These analysts know that this is what drives the future business, and they obviously feel the softness that Lexmark is now exposed to.