October 23, 2007 / 11:25 AM / 12 years ago

UPDATE 3-Lexmark quarterly profit falls sharply, stock off

(Recasts, adds details, byline, analyst and executive comment)

By Franklin Paul

NEW YORK, Oct 23 (Reuters) - Lexmark International Inc LXK.N reported a 47 percent decline in quarterly profit, sending its stock down more than 10 percent amid uncertainty over the direction of its consumer inkjet printer business.

The stock drop came after Lexmark said its printer sales slumped in the quarter on a 14 percent fall in inkjet printer shipments, and a 7 percent decline in laser shipments.

For the third quarter, net income fell to $45.2 million, or 48 cents a share, from $85.6 million, or 85 cents a share, a year earlier.

Excluding restructuring costs, profit was 60 cents a share, far above analysts’ average forecast of 13 cents, according to Reuters Estimates.

Revenue fell 3 percent to $1.195 billion. Business segment revenue grew 5 percent to $728 million, but consumer segment revenue fell 13 percent.

Lexmark said it continues to suffer a “very challenging situation in (its) consumer market segment”, amid weakness in inkjet cartridge sales and lower per-printer revenue due to aggressive pricing. It has also been hit by higher costs for developing new models, such as wireless printers.

One analyst suggested the stock decline was partly due to a response by company executives, who dismissed the idea that a new restructuring plan signaled Lexmark might exit the inkjet business.

Analysts on a conference call with Lexmark executives had repeatedly asked for specifics about the future of its consumer inkjet business, a unit whose strategy Lexmark has shifted several times in recent years.

“The inkjet business, it seems like it’s been under a perpetual state of restructuring for a couple of years,” said Keith Bachman of Banc of Montreal on the call. “How long do you give it? What are the metrics and timeframes that you’re using to identify whether there is in fact a business case to continue to support the inkjet business?”

INKJET NOT GOING AWAY

Lexmark Chief Executive Paul Curlander told Reuters that no major moves were imminent, reiterating comments he made on the conference call. Lexmark is focusing on selling to users who print a lot and therefore buy more ink and toner, which are far more profitable than printers, he said.

“We are not stepping back from inkjet,” said Curlander. “Our focus is around fixing the business. We are in a difficult position: supplies are dropping. In the end we want to sell units that are going to drive more pages.”

The company, which has been cutting costs and trimming prices in an effort to better compete with rivals such as Hewlett-Packard Co (HPQ.N) and Canon Inc (7751.T), announced plans to consolidate operations in Mexico, including closing one plant and moving about 1,650 jobs to lower-cost countries.

Lexmark said it would spend about $90 million by the end of 2008, as it shifts its consumer market segment focus to customers who print more pages.

Total savings from the restructuring are seen at $40 million in 2008 and about $60 million annually once they are completed.

Lexmark said it expects fourth-quarter revenue to fall in the low- to mid-single-digit percentage range. It forecast net earnings of 32 cents to 42 cents a share, or 50 cents to 60 cents excluding restructuring costs.

According to Reuters Estimates, analysts’ average forecast for the fourth quarter is 40 cents a share on revenue of $1.337 billion.

Lexmark shares tumbled $4.59 to $39.11 in afternoon trade on the New York Stock Exchange.

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