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Lexmark declares improved fortunes – but embarks on massive give-aways on business inkjet

Issue #1013 – As Lexmark claims to have outperformed the market over the course of 2009 and 2010, we see some of the most significant giveaways ever seen and a market position that is, nonetheless, on the edge and inferior to other major manufacturers.

Certainly, Lexmark’s financial results show an upturn over the last three quarters but this is largely only because of the desperately poor results returned in the three corresponding quarters in the previous year. Despite a clear upturn in sequential earnings from Q3 to Q4 of 2009, Q4 still returned a loss compared to Q4 of 2008 – and this is traditionally the biggest quarter for the industry due to Christmas sales. The previous two years had been consistently poor for Lexmark even before the general crash of late 2008.

With year-on-year growth of 12% for the first half of 2010, compared to an industry average of 6%, and beating both Canon and Hewlett-Packard into second and third places with growth of 10% and 9% respectively, Lexmark’s claims can only be described as misleading! They are not untrue but do not reflect the abysmal position the company was in a year earlier. In fact, Q4 results will have to be impressive to show growth over Q4 of 2009.

So, we currently see Lexmark achieving an upturn in revenues year-on-year (Q1, +10%; Q2, +14%; Q3, +7%), driven by an apparent renewed growth in sales of both laser and inkjet printer, AiO and MFP units, which the company also claims to have led to a growth in market share in the US over the first half of 2010.

To put this properly into perspective, the chart below shows quarterly revenue from four printer manufacturers, indexed relative to Q3 of 2007 for direct comparison over a four-year period.

It is quite clear that Lexmark’s position is not yet great despite the upturn, with the trend still being clearly negative. This is, however, generally in keeping with the market as a whole.

In compiling the chart, we’ve put Lexmark’s performance over the last four years against three of its major competitors. The choice of competitors is driven more by pitching two US companies against two far eastern companies. There is no implied dismissal of other manufacturers or preference towards these players – these players all have strong offerings in both inkjet and laser segments, like Lexmark, together with a strong presence in the market.

Revenue from Printer Activities

By Calendar Quarter – Q3, 2006 to Q3, 2010

Note: Brother C&PE = Communications and Printing Equipment; Hewlett-Packard IPG = Imaging & Printing Group

What we see here (as a snapshot on Q3 2010 vs Q3 2006) is that Lexmark has been outperformed over the past four years by Hewlett-Packard and Brother. On the other hand, over the last three quarters, Lexmark’s upturn has reduced the degree of decline quarter-by-quarter to put the company in a more positive position than either Brother or Epson. Only Hewlett-Packard has had such a good 2010 that its overall position from Q4, 2009 is better than level. Expectations for Q4 would be that all manufacturers will gain some ground relative to last year – the one exception here being that Epson had an extraordinary Q4 last year that is probably unbeatable this year.

This spike from Epson is actually very significant because these spikes occur in Q4 every year. There may be two reasons for this. Firstly, Q4 is the quarter when consumers are buying Christmas presents – Epson’s performance in Q4 is probably a clear indication of its historical pre-eminence in the consumer inkjet market. And, secondly, in every instance they coincide with a poor quarter from Hewlett- Packard.

Last year’s Q4 was a time when Hewlett-Packard had been suffering from severe supply difficulties on its LaserJet range. All three of these other manufacturers experienced a more than averagely healthy Q4 by comparison as they picked up sales from Hewlett-Packard.

Epson’s smallest Q4 spike was in Q4 of 2008, when the financial crisis had just hit the world in a big way. However, there still was a spike for Epson whereas all other manufacturers experienced a serious downturn in that quarter.

One final note on this point, Calendar Q4 for Hewlett-Packard relates most closely with the company’s fiscal Q1, which is November to January. This has the effect of putting only two months of Christmas buying into the quarter, whereas the results for the other manufacturers include three months, October to December. This may contribute to Hewlett-Packard’s results for ‘Calendar’ Q4 being less impressive than for other companies while ‘Calendar’ Q3 is better than average because it does include October.

Back to Lexmark – hardware revenue grew by 10% in the quarter, which certainly looks much more healthy for a Q3 than at any time in the last several years. Even more encouraging for Lexmark though, is that supplies revenue grew by 4% in the quarter. This follows two quarters when supplies revenue has grown by around 10%.

In the chart below, we see how big a deal this is for Lexmark.

Revenue Growth – Lexmark

By Calendar Quarter – Q3, 2006 to Q3, 2010

The company hasn’t had supplies growth anywhere near double figures since 2005 (Q2 +9%) – more familiar with negative growth during the past two years and very minimal growth in the three years prior to that, before which supplies were a major revenue driver.

Overall, this chart dramatically shows how the current high growth figures are merely the result of the appalling situation of the previous year. Lexmark has not been in an overall growth position since the middle of 2005, with hardware revenue taking a massive beating over the entire second half of the decade.

In terms of hardware revenues specifically, it is also clear that Lexmark’s forté is in the laser segment. While revenue growth on lasers this year has averaged 27%, average revenue growth on inkjet machines has been -6% with the latest figure falling off badly, to -15%.

Unfortunately data for all of the categories is not complete right back to 2004 but the picture is clear (data for laser and inkjet hardware starts in Q4, 2008, while there is obnly one data point for total hardware before Q3 of 2005 – note that blanks in these charts show as zero). What is equally clear is that inkjet hardware continues to be a disaster area for Lexmark despite its renewed vigour in the development and production of a business inkjet range. In fact, inkjet hardware is performing so badly that it is the only sector that is still in the red compared to Q3 of 2004 and is holding back the rest of the company severely.

This leads us to the bundle of amazing inkjet deals that have been doing the rounds over the last few weeks. Monitoring UK deals, here is a sample:

Recent and current Lexmark offersLexmark offers

We are all perfectly familiar with cashback deals and special offers that may or may not include an element of free inks or toners – but never ever on this scale before.
– Huge cashback offers of up to 70%!
– Four of these offers include 10 black ink cartridges – sometimes in addition to a huge cashback money offer.

In one instance, the cashback of £175 on a £249 purchase represents an effective discount of 70% while in another the cashback of £150 plus 10 free 105XL cartridges, valued at £56, making a total of £206 on a £240 purchase, represents an incredible effective discount of 86%!!

What is going on? Surely Lexmark is resorting to dumping these products. Could this possibly be another indication that Lexmark may be preparing to ditch the inkjet technology?

As a final comment (and perhaps in support of the suggestion that the inkjet line could be phased out) Lexmark has just announced that it is to integrate its inkjet and laser divisions into one Printing Solutions & Services Division (PS&SD). No doubt this is at least in part to save money on administration support functions. But, could it be a forerunner to going laser only by burying inkjet in an organisation where it can be easily lost without too much pain?

After all, in 2001, Xerox completely shut down its consumer inkjet operation and has focussed on laser technology, services and solutions ever since – flourishing as a result. But it was a painful act and one that saw many employees lose their jobs.

In conclusion, we see some light in the tunnel for Lexmark as the global financial situation begins to sort itself out but probably still some hard times to come with tough decisions to be made.

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