October 21, 2002 7:31 AM PDT

Lexmark downplays Dell deal

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Printer maker Lexmark on Monday downplayed expectations for the company's partnership with Dell Computer.

On its third-quarter earnings conference call, Lexmark executives said they weren't expecting an immediate payoff in the fourth-quarter holiday season from the company's new position as Dell's preferred printer supplier.

Lexmark, which makes a full line of printers and supplies, reported strong third-quarter earnings and boosted its outlook for the fourth quarter, but set the bar low for the Dell deal.

Last month, Lexmark and Dell forged an agreement to sell Dell-branded printers and supplies. Dell's move into the printer market is designed to grab a piece of the lucrative inkjet supply market and roil Hewlett-Packard.

Even though analysts expect Dell to make some noise in the printing market, details thus far have been hard to come by. The PC company will make Lexmark its preferred supplier, but no volume goals have been set for Dell's line of printers.

Meanwhile, Lexmark CEO Paul Curlander said Lexmark's future growth will reside with selling its own brand, not Dell's. "We can't really give specifics on Dell," said Curlander. "As we look at the business, OEM (original equipment manufacturing) is less than 10 percent of our business. We're not looking at it to drive growth."

Curlander also set the bar low regarding any fourth-quarter boost from Lexmark printers being bundled with Dell's PCs. "Year-to-year, it's not significant because we were in those bundles last year," said Curlander.

Curlander wanted to emphasize that Lexmark isn't depending on the Dell deal for growth, largely because the deal's future financial effect is still sketchy. For starters, Lexmark may not be the only printer supplier in the long run. He also noted that when Dell-branded printers launch in the first half, the PC maker's own brands will be bundled. "We will count on the Lexmark brand for growth," said Curlander.

On that front, Lexmark had a lot to be upbeat about.

Lexmark reported third-quarter earnings of $89.8 million, or 70 cents a share, on sales of $1.04 billion. The results included a write-off of $15.8 million, or 9 cents a share, for abandoning a customer relationship management (CRM) software project.

Lexmark started the CRM project using Oracle software more than two years ago, but the company never launched the project because of software problems and integration issues. Instead of overhauling the CRM effort, Lexmark will "meet its desired functions through modular projects."

Excluding that CRM charge, earnings would have been 79 cents a share, up 50 percent from a year ago. Analysts were expecting earnings of 78 cents a share, according to First Call.

The company also raised its earnings outlook for the fourth quarter, despite remaining cautious "due to uncertain future information technology spending, a relatively weak consumer market and aggressive competition," it said.

Lexmark projected fourth-quarter earnings of 70 cents a share to 80 cents a share, topping First Call projections. According to First Call, Lexmark is expected to report earnings of 74 cents a share. Revenue is expected to grow in the low-to-midsingle digits.

Curlander said corporate customers are holding back on spending, viewing color-printing products as largely discretionary. "We see dollars out there, but people are very cautious," he said.

Lexmark's revenue was driven by laser and inkjet supply sales, which were up 19 percent to $568 million. Printer revenue, however, was down 3 percent to $381 million; but Lexmark's all-in-one line of printers did well.

Like rival HP, Lexmark printing supplies are the most profitable business for the company. Lexmark said gross profit margins increased to 32.5 percent, up from 30.3 percent a year ago.

 

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