Lexmark Halves Estimate and Shares Plunge

Lexmark International signaled yesterday that it was losing the price war in inkjet printers when it announced that its earnings for the third quarter would be half of what it had predicted.

Investors quickly dumped the stock, which closed down .44, or 28.6 percent, at .50 while trading at 18 times average volume. The shares sold for almost at the beginning of the year.

The company, which is based in Lexington, Ky., and makes home and office printers, said yesterday that it expected earnings of 40 cents to 50 cents a share in the quarter ended Sept. 30. In July, it had forecast earnings of 95 cents to .05 a share.

Lexmark also said that revenue would be down as much as 5 percent from the quarter a year earlier. The detailed results will be announced on Oct. 25.

"We were very surprised," Lexmark's chief executive, Paul J. Curlander, told analysts in a conference call. "We did not expect this to happen."

As executives explained the problem to analysts, Hewlett-Packard, Dell and other major printer makers began cutting prices this year on low-end inkjet printers.

But Lexmark executives said that they were slow to react and the company lost market share. Lexmark has a weaker brand image than Hewlett or Canon, so when prices are similar, consumers tend to buy the better-known name.

Lexmark, which had been the low-end price leader, began to cut prices in the last three months - about 7 percent on inexpensive models and as much as 30 percent on those at the high end. But by that time, the pool of Lexmark users had shrunk.

That was significant because manufacturers make most of their money on the ink cartridges and other supplies, not on the printers. With fewer printers in use, fewer Lexmark ink cartridges were sold. Retailers saw that, the company said, and cut back on orders of supplies to reduce their inventories.

The weakness will continue into the fourth quarter, executives predicted, and additional price cuts on printers will probably be needed to stave off a further loss of market share.

At the end of June, Lexmark held about 12 percent of the worldwide inkjet printer business, compared with Hewlett-Packard's 40 percent and Canon's 19 percent.

"Lexmark is clearly in the worst position among the major vendors," said Laura Conigliaro, a Goldman, Sachs analyst, in a research report issued after the announcement.

Though the company blamed lower user demand, Lexmark's problems are unlikely to be repeated by its rivals.

"I have to assume that is primarily a Lexmark thing," Mr. Curlander said.

Analysts agreed. While Epson has reported softness in its supplies business, Dell and Hewlett, the two biggest printer sellers, have not.

Lexmark executives told analysts that they were examining the company's business model in light of the "significant deceleration" of sales.

William Hand, a technology analyst with Bear, Stearns, said, "It makes you take a second look at the model to see what's going on."

But he indicated that he did not think the model was fundamentally wrong. Rather, the company has been slow to match the technology and features of its competitors, such as offering printers intended specifically for printing photographs - an ink-intensive operation. Executives did not blame ink cartridge refillers, who have been a thorn in the side of printer makers.

Lexmark will also face challenges in the laser-printer business. Hewlett-Packard began releasing new models of color lasers and reducing prices sharply. Dell is focused on color laser printers as well. Samsung Electronics just jumped into the laser-printer market with a monochrome model.

Dell sells printers made by Lexmark that it brands as its own. Lexmark executives also said that sales of printers to Dell and other companies were flat to slightly down compared with the quarter a year earlier.