INTERVIEW-HP printing chief not scared by Dell or economy
Tuesday October 1, 8:31 pm ET
By Peter Henderson and Duncan Martell
PALO ALTO, Calif., Oct 1 (Reuters) - Hewlett-Packard Co. (NYSE:HPQ - News) will post printer sales growth of 10 percent a year or more despite the weak economy and increased competition from Dell Computer Corp. (NasdaqNM:DELL - News), the head of the division which accounts for the bulk of HP's earnings said on Tuesday.
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"Customers are buying. We are getting market share and growing the market," Vyomesh Joshi, executive vice president of the imaging and printing group at the No. 1 personal computer and printer maker, said in an interview.
Back-to-school season sales of HP printers were strong, Joshi said, driven by the roll-out of a new line of digital photo printers and a demand from customer buying increasingly sophisticated printers independent of personal computers.
Printer and supply sales had risen even as PC sales fell, he said, and HP's roughly $20 billion printing business can grow about 10 percent per year, Joshi said.
"That means adding half a Lexmark every year," Joshi said, referring to his 10 percent revenue growth target. Competitor Lexmark International Inc. (NYSE:LXK - News) sells about $4 billion annually.
The Palo Alto, California-based company's printing and imaging business amounted to 28 percent of HP's $16.5 billion revenue last quarter, and it accounted for 183 percent of its operating profit.
The positive trend for printers is crucial for HP, which created the No. 1 computer hardware maker by acquiring Compaq Computer Corp. in May but is relying on the profitable printing division to subsidize losses in all its computer divisions.
HP's biggest threat, along with the economy, may be Dell, which aims to regain its No. 1 PC maker title from HP and on Sept. 24 announced a much-anticipated deal for Lexmark to make Dell-branded printers, beginning next year.
Fears Dell would use its PC business model to grab market share were unfounded, in part because he did not see Lexmark making the changes in its own business that would be necessary to operate the Dell way, Joshi said.
Some analysts strongly disagree.
Charles Wolf of Needham & Co. sees Dell capturing 20 percent of the printer market in a decade. He assumes, however, that Dell will get ink at 30 percent below wholesale prices from Lexmark and, in turn, be able to sell ink to consumers at roughly wholesale prices. Lexmark's share gains would outweigh profit margin erosion, he said.
'SHOOTING THEIR OWN FOOT'
But Joshi said his rival Lexmark would not allow such big discounts in ink, the lifeblood of the printing industry.
"I don't think that will happen, because Lexmark will be shooting their own foot," Joshi said. Lexmark in its July conference call had said that sales of printers under other companies' brand names accounted for less than 10 percent of sales, he pointed out. Lexmark at the time also said its first priority would be to build its own brand.
Joshi has nearly first-hand experience, because Lexmark made Compaq-branded printers before the merger, he added. "Pre-merger Compaq had a relationship with Lexmark, and we know what that means," he said.
Joshi also argued that Dell's model of selling on the Internet and quickly moving products to avoid keeping inventory on hand would not work as well for printers and ink.
The cost to Dell, for instance, of shipping to individual customers is more an issue at $30 for ink cartridges than at for $1,000 computers, he added. Moreover, consumers wanted cartridges faster than the Internet could deliver, he argued. (Needham's Wolf called HP's argument that consumers will only buy cartridges at retail "absurd".)
But HP has fallen behind in one area -- digital cameras. The printer company briefly was near the top of the market last year, but its share has fallen, Joshi said.
He blamed short supplies of a light-sensitive microchip crucial to digital cameras. He said he did not expect supplies to improve in time for the holiday buying season.
Other camera makers also made that part, giving them an advantage in tight times, he said. HP had loudly trumpeted its brief triumph in digital cameras, but Joshi said he did not expect to regain the title soon.
"We need to be in digital imaging, but we don't need to be No. 1 or No. 2," he said.
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