By Arik Hesseldahl Dell's foray into the printer market is leaving a mark on Lexmark. Investors hammered shares of Lexmark International (LKX) on Oct. 4 after the printer maker slashed its profit forecast, citing an unexpected decline in sales.
Third-quarter earnings will be 40 cents to 50 cents a share, compared with an earlier forecast for 95 cents to $1.05 a share, the company says. Profits will miss analysts' expectations for $1.02 a share. Lexmark stock spiraled out of control, shedding $17.44, or 29%, of its value by trading on Oct. 4 and closed at $43.50.
What's ailing Lexmark? Weaker-than-expected sales of toner cartridges for inkjets and laser printers, says Chief Executive Paul Curlander. And behind that is a strong push by Dell (DELL), the world's largest computer maker, into the printing business and resulting price cuts by Hewlett-Packard (HPQ), says analyst Charles Wolf of Needham & Co. in New York. "Dell's endgame is to drain the printer profit-margin pool, and in the process hurt Hewlett-Packard's ability to use printer profits to subsidize its personal computer business," Wolf says. "Lexmark is getting caught in the middle."
NO COMPETE CLAWS. Dell's share of the worldwide market for inkjet and laser printers was 5.8% in the first quarter of 2005 compared with 10.2% for Lexmark, according to market research firm IDC. But only a year ago, Dell's share was 3.2% to Lexmark's 12.1%. HP still leads the market with more than 40%, followed by Epson and Canon (CAJ), each accounting for about 14%.
In response to Dell's aggressive pricing, HP has tried to preserve market share by following suit, Wolf says. "HP announced they were going to cut prices, and that had a fairly significant impact on Lexmark's June quarter," he says.
Rather than swiftly responding in kind, Lexmark fumbled, says Ian Hamilton, an analyst at Current Analysis in San Diego. "About 14 months ago prices started to come down on color laser printers, and about the same time Dell came in with its own color laser printer aimed at small and medium businesses and enterprises," he says. "Lexmark didn't have a competitive reaction to all this. Dell has had an effect, but I think Lexmark really has to take a hard look at itself. It's hard to point primarily at Dell for Lexmark's problems."
Curlander says he's trying to right the ship by getting competitive on price and relying more on Lexmark-branded printers. That may not go far enough. It sells printers at razor-thin margins, if not at cost, says Hamilton. "That's a dangerous business model," he notes. To stay ahead, he says, Lexmark needs to do a better job of locking in customers through sales of related goods, such as inkjet and toner cartridges. Meantime, Dell is likely to keep the printer maker jammed.
Hesseldahl is a reporter for BusinessWeek Online in New York