Hewlett-Packard has fired the first salvo in what may turn out to be a price war over consumer inkjet printers, a move made easier by last week's ouster of Chief Executive Carly Fiorina, analysts said Thursday.
"We are not satisfied with our consumer hardware performance in the first quarter, and we will take aggressive action to correct this in the coming quarter," Vyomesh Joshi, who runs both HP's printer and PC businesses, said on a conference call with analysts Wednesday.
The No. 2 computer maker and No. 1 printer maker late on Wednesday posted a rise in quarterly profit of less than 1 percent, helped by a 10 percent revenue gain.
But profit margins narrowed in its imaging and printing business, the source of two-thirds of HP's operating profit, amid strong pricing pressure from rivals such as Dell and Lexmark International.
Analysts said HP is likely to focus its considerable resources on sales of printers that also scan, fax and copy—called all-in-ones—a segment in which Lexmark has done well in recent years.
"The news is bad for Lexmark," analyst Shannon Cross of Cross Research said. "There has been growth at the sub-$100 level, and HP has started putting products out there, but there is the need to take prices down to compete more effectively."
As a result of a 13 percent decline in HP's consumer printer hardware revenue, versus a 16 percent rise by Lexmark in its most recent quarter, HP might also give additional incentives to retailers, offer rebates or boost the number of HP representatives roaming stores to woo consumers.
Shares of Lexmark fell $3.05, or about 3.7 percent, to $79.00 in late-afternoon trading on the New York Stock Exchange. HP shares slipped 13 cents to $20.93, and Dell eased 6 cents to $40.54 on the Nasdaq.
Analysts said it's too soon to tell whether HP's move will be countered by Lexmark and by Dell, which sells Lexmark inkjet printers under the Dell brand. Pricing action could also come from other players, including Epson or Canon, which have said they intend to take U.S. share in photo printers.
"HP is going to go out to make more of a statement, just to get it into customers' minds that Dell is not the ultimate low-price selection—'come to us, and see what we can do for you,'" said Jennifer Thorwart, an analyst at research firm IDC.
The increasing availability of recycled printer cartridges could also further hamper margins at both HP and Lexmark, but analysts said the devices don't yet pose a major threat.
HP's decision to be even more aggressive with rivals comes only a week after the departure of Fiorina, who analysts say was fiercely protective of the printer unit and was not a fan of toying with prices and the likelihood of thinner margins.
"(Fiorina) is not there, and they have a little more flexibility in how they approach competition in the market," Cross said. "There was always the thought that she was milking the printer business for profits to support the rest of their business."
Credit Suisse First Boston analyst Andrew McCullough called the looming printer price war a chink in HP's armor, and he reiterated his neutral rating on the stock.
"Given our continued belief that HP remains competitively challenged between Dell and IBM...some sort of structural change will be required to unlock incremental shareholder value," he said in a client note.
"Management's mandate to regain share in IPG places undue pressure on HP's enterprise and PC businesses to close the presumed profitability gap," McCullough said.
Analysts and investors have called for HP either to spin off its lucrative printing business—leaving behind its PC, computer server, computer services and software businesses—or sell its PC business, or some other combination.