Lexmark 2nd-Quarter Net,Year View Plunge on Weak Hardware Demand
07/24/2012| 12:06pm US/Eastern
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--Company blames drop in hardware, supply demand
--Full-year earnings outlook cut over 20%
--Company to continue dividends, stock buybacks
(Updates with analyst commentary, additional details throughout.)
By Drew FitzGerald
Lexmark International Inc. (>> Lexmark International Inc) blamed weaker printer use and unfavorable exchange rates for its steepest profit drop since late 2009, adding new urgency to the company's effort to expand beyond dwindling legacy business lines.
The Lexington, Ky., company's second-quarter profit fell 61% on soft hardware and supply sales, which prompted the provider of printing products and services to slash its full-year earnings outlook by more than 20%.
Chairman and Chief Executive Paul Rooke said the steep drop reflected its customers' own cost pressures rather than "any new mobile or other secular trends," though weaker sales are expected to persist through the rest of the year.
"While we can't predict the future, we do believe the trend is one of economic belt tightening," he said.
For the year, Lexmark removed $1 from its profit outlook, now projecting between $3.70 to $3.90 a share of adjusted earnings. The company said it presently sees adjusted revenue falling 8% to 10% this year, more than doubling the 2% to 4% decline it projected just three months ago.
Shares of Lexmark fell below $18 for the first time since September 2009 and are down around 66% from a high of $48.07 in October 2010. The stock recently traded at $16.25, down 15.5% on the day, as the company's forecast is well below the average analyst estimate for 2012 of $4.19 a share in earnings and a 6% revenue drop, according to Thomson Reuters.
Lexmark has posted three straight quarters of revenue declines. Earlier this month, the company cut its already downbeat second-quarter forecast on weaker-than-expected demand, especially in Europe, and a larger-than-expected impact from foreign currency exchange rates. The company said Tuesday that unfavorable foreign-exchange rates negatively affected about $50 million of revenue.
Diminishing demand for Lexmark's traditional printing products prompted the company in 2007 to start exiting its consumer inkjet business in favor of higher-performance printers for businesses and electronic-document management software. Lexmark's growing service offerings have failed to outpace broader sales deceleration in its core business, however.
Rival printer makers Xerox Corp. (>> Xerox Corporation) and Hewlett-Packard Co. (>> Hewlett-Packard Company) have likewise reported declining sales of printing equipment for the latest quarter. Xerox on Friday posted a lower second-quarter profit due to similar demand headwinds in Europe, which contributed to 8.5% lower equipment sales.
At the same time, Xerox has shifted a comparatively larger share of its business away from hardware and supplies sales. Its overall service offerings have grown to account for more than half of its top line.
"Lexmark over the years has chosen to repurchase shares as opposed to invest in the future," said Shannon Cross, analyst at Cross Research. "Now those decisions are coming home to roost."
Despite the latest results, Lexmark said it plans to continue to meet its goal of returning an average of 50% of free cash flow to shareholders using dividend payments and share buybacks.
Rooke also pointed to growth from the company's Perceptive Software business, which delivered 88% revenue growth after acquisition-related adjustments.
Overall, Lexmark posted a profit of $39.2 million, or 55 cents a share, down from $101.3 million, or $1.27 a share, a year earlier. Excluding restructuring costs and acquisition charges, per-share earnings dropped to 89 cents from $1.36. Sales fell 12% to $918.6 million.
The company's lowered guidance earlier this month called for a per-share profit between 87 cents and 89 cents on a 12% revenue drop.
Sales of hardware and supplies dropped 17% and 14%, respectively, while revenue from software and other business lines grew 24%.
Lexmark, for the third quarter, projected earnings, excluding certain items, of about 75 cents to 85 cents a share on a 9% to 11% revenue decline. Analysts' average estimate called for a profit of 98 cents a share on a 7% sales drop, according to a poll by Thomson Reuters.
Write to Drew FitzGerald at andrew.fitzgerald@dowjones.com
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