The Spiral Will Continue

Implications: Lexmark's inkjet business is doomed to failure primarily because the brand is positioned to appeal to the 'cost concious' buyer who will not use enough cartridges for Lexmark to recoup the hardware loss from the initial sale.  There is a very strong correlation between usage (pages printed) and the price of the printer.  The lower the price, the lower the usage.  Lexmark's position as the 'price leader' is unsustainable. In terms of the stock buy-back, it is essentially an effort by the executive team (headed by Paul Curlander) to retain control of the company.  The firm is using debt fueled stock purchases as a way to reduce the number of outstanding shares to a level where the executive team can continue to drive the companies perormance without being required to respond to concerns by outside shareholders.

Analysis:

 In order to understand Lexmark's dilemma, one must understand the underlying financial model of the inkjet business.  Lexmark's model is based upon an assumption of using 3 to 4 cartridges per year per printer.  At this rate, Lexmark breaks even in six to nine months as the high margin supplies recoup the significant hardware and merchandizing losses on the initial sale.   While Lexmark attempted to move the brand upward through the addition of wireless functionality, this functionality is very easy to copy and provides little perceived differentiation.

With volumes from Lexmark's largest OEM customer (Dell) declining rapidly, Lexmark must either accept a gradual decline in volumes, or, invest in driving branded unit growth which requires investing significant market development funds. 

Lexmark's stock buy-back strategy will not fundamentally change the equation.  This is a continuation of Lexmark's stock buy-back strategy which has simply resulted in decimating the firms large (at one time over $1B) cash reserves in order to mask the under performance of the stock and a failed strategy by the executive team (primarily driven by the CEO - Paul Curlander).  Now the firm is continuing this strategy, but since the firm has used up it's cash reserves, the firm will now finance this through debt.

The bottom line, the firm will continue in its downward spiral as long as the current management team is in place.