UPDATE 4-Lexmark to dump inkjet business, shares jump

Tue Aug 28, 2012 11:56am EDT

* To take $160 mln related charge, mostly in 2012

* Ending inkjet development globally, to cut 1,700 jobs

* Plans to sell about 1,000 inkjet related patents

* Shares jump 20 percent

By Sruthi Ramakrishnan

Aug 28 (Reuters) - Printer maker Lexmark International Inc said it will stop making inkjet printers and focus on its more profitable imaging and software businesses, sending its shares up as much as 20 percent.

Lexmark, never a big player in inkjet printers, said it would continue to sell laser printers as it beefs up its print services business, for which it has made several acquisitions over the last couple of years.

The company said it planned to sell about 1,000 inkjet-related patents and would cut 1,700 jobs, or 13 p ercent of its workforce.

Most printer makers are struggling with falling sales as printing has been a target of corporate cost cutting and personal computing moves to tablets and smartphones.

As well, falling laser printer prices have cut into sales of inkjet printers, which traditionally have cost less to buy but can be expensive to buy ink for.

The overall inkjet market declined nearly 13 percent in the second quarter, according to research firm IDC.

"Lexmark's 'rip the band-aid off' approach, while creating greater near-term revenue headwinds than a more gradual wind down, should result in a cleaner slate sooner from which to grow," Wells Fargo analyst Maynard Um wrote in a note.

Lexmark expects revenue from inkjet hardware and supplies, which accounted for 21 percent of revenue last year, to drop to about 10 percent in 2013, as it continues to supply ink and support existing printers.

HP, Canon Inc and Epson Corp together account for about 90 percent of inkjet sales worldwide.

Lexmark said it was quitting the inkjet business because of aggressive market pricing and the investment required to maintain a sustainable acceptable return.

Revenue from the company's legacy inkjet hardware business declined 66 percent in the first half of 2012, forcing the company to cut its full-year forecast.

"We plan to continue using part of the free cash flow to accelerate growth in the software business through acquisitions," Chief Executive Paul Rooke said on a conference call.

Lexmark bought Perceptive Software in 2010, which provides software and services used to manage documents, imaging, and other content.

It then bought Brainware Inc, ISYS Search Software and Nolij Corp earlier this year and added them to the Perceptive unit.

Perceptive has until now just broken even but is Rooke said it was expected to start turning a profit from 2013.

The software business accounted for nearly 5 percent of second-quarter revenue, up from about 2 percent a year earlier.

Lexmark had already laid off 625 employees related to manufacturing of consumer ink supplies in January, part of a broader pattern of problems in the printer industry.

Rival Xerox Corp cut its full-year profit outlook in July while Canon trimmed its operating profit forecast as the companies braced for tough economic conditions in Europe.

Printing and imaging sales at HP fell 3 percent in the third quarter.

Lexmark said it would take a pre-tax charge of $160 million related to the restructuring, with $110 million incurred in 2012 and the remainder in the next three years.

The company also said it is working with advisers to explore the sale of inkjet-related technology, which includes about 1,000 patents worldwide.

It will close its Cebu, Philippines-based inkjet plant by 2015.

The company, which expects annual savings of $95 million once the restructuring is complete, also said it would buy back an additional $100 million of its shares in the second half of 2012.

Shares of Lexmark, which had about 13,300 employees worldwide at the end of last year, leapt to a six week high of $22.75 before easing back to $21.62 in mid-day trade on the NYSE.