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Original Source: FD (FAIR DISCLOSURE) WIRE
MIN PARK, ANALYST, GOLDMAN SACHS: Good morning, everyone and thank you for attending the Lexmark presentation. My name is Min Park and I am part of the Goldman Sachs hardware team and we are fortunate to have with us today John Gamble, CFO and John Morgan, Director of IR. Welcome and thanks to you both for joining us today.
MIN PARK: So John, why don't we just get started. Can we just start off by talking about your most recent results? Your December quarter came together pretty well, slightly (inaudible) on the top line, but the big surprise was on the bottom line where EPS came in almost at $1.30, twice what the Street was expecting. So mainly coming [in] from higher growth margins. So can you just quickly review some of the key variables that kind of drove that margin upside in December?
JOHN GAMBLE, CFO, LEXMARK INTERNATIONAL, INC.: Sure. Before I do, I have to read the Safe Harbor, if that's okay. The contents of this discussion that are not statements of historical fact are forward-looking statements and involve risks and uncertainties that are discussed in the Safe Harbor section of our earnings release and SEC filings. Actual results may differ materially from such statements. Lexmark undertakes no obligation to update any forward-looking statements.
MIN PARK: Okay, giving you an opportunity --.
JOHN GAMBLE: So in terms of the fourth quarter, earnings were stronger obviously than had been expected and the biggest factors were several. First, obviously, we sold fewer inkjet units than we had expected. So inkjet sales were down and I think a lot of that was around -- we had indicated we expected about a 30% reduction. It was down more than that and as the quarter progressed and we saw the market become increasingly more aggressive we believe and pricing become more aggressive, we tried to stick very diligently to what we talked about, which is trying to make sure we held price points and trying to make sure we focused on getting into higher usage segments. We think we did that to a degree. We saw our higher priced products actually grew in the period in [branded], but the result was that the reduction in overall inkjet was more than we expected and therefore, obviously that was a benefit in the quarter related to margin.
Also, we saw improved margins in general related to some of what I just talked about in terms of price. So we had -- we did have better price realization than we would have initially expected around the fact that we think we did do a very good job around making sure that we didn't chase prices down to levels that really weren't justified by the investments that we had. And also OpEx came in a bit low. So you add those three things up, kind of in that order and you ended up with a much stronger quarter in terms of financial results, in terms of operating income than we had previously expected.
MIN PARK: One of the things that actually helped the margin further was consumer channel sales going into your OEM partners, going into that retail experience (inaudible). Was most of the price rollout kind of completed in the December quarter or are we still seeing additional benefits from an ongoing ramp as you expand into more distribution outlets?
JOHN GAMBLE: In terms of the fourth quarter, what we said is we thought it was worth about two-ish points of growth in terms of supplies in period, but quite honestly, I think some of that -- most of that was expected, so I wouldn't consider that to have been a reason for upside versus expectations, but it certainly was a reason for better performance.
The roll-out that occurred in the fourth quarter, a fair amount of it was certainly channel fill because it is a new channel for an OEM partner. We would expect some of it was incremental sellout as well since there is more distribution, but certainly a big chunk of it, a significant chunk of it would have been channel fill.
In terms of -- on a go-forward basis whether there is more channels to add, at this point, we don't forecast them, so we don't completely know what our partners intend to do with their retail strategies. So should they choose to expand, obviously we would see some of that benefit, but in terms of a forecast basis, we generally don't assume that we will continue to see it until we know for sure it is going to happen.
MIN PARK: And then as far as -- the big disconnect that people are still trying to get their hands around was the fact that your revenues were a little bit higher, but pretty much where you thought it was going to come in, but it was leveraged on the bottom line with (inaudible). I know you highlighted some of the key issues, but given that your revenues kind of came in -- was there anything else within the mix besides more than say inkjet (inaudible) attrition?
JOHN GAMBLE: Again, the biggest thing was around kind of the first two factors as we talked about in terms of the impact on the quarter. The [software] units, which obviously is a positive impact, but the revenue wasn't impacted as much as the units because we saw better price realization than we had expected. I think those two things have just a major impact on our margins.
MIN PARK: And as you mentioned, your new strategy is to kind of lead the 30 lowest performing end markets for (inaudible). So can you just -- for those who aren't familiar with the recent strategy, can you just really quickly give us a brief overview of what you are …