Perceptive Software Worth 10% of Lexmark’s Value, See 30% Upside
Last year in June, Lexmark International (NYSE:LXK) acquired Perceptive Software, a leading provider of Enterprise Content Management (ECM) software and solutions, adding to its portfolio a complementary, fast growing software business aligned with its existing industry-focused value proposition. Lexmark manufactures and sells laser printers and cartridges primarily to business customers in North America and Europe. It competes with HP (NYSE:HPQ), Xerox (NYSE:XRX), Canon (NYSE:CAJ), and Kyocera (NYSE:KYO) in the printer business. The acquisition has allowed Lexmark to participate in the adjacent ECM software solutions market providing additional growth and a new revenue stream in software maintenance and professional services. [1]
We estimate that Perceptive Software makes up nearly 10% of our $47.40 Trefis price estimate for Lexmark’s stock, which is about 30% above the current market price.
Perceptive Software’s Double Digit Growth
- Lexmark Earnings: Revenue Decline Across Printer Division Continues
- Lexmark Pre Earnings: Printer Revenue To Decline, Software Revenue To Report Growth
- Lexmark Earnings: Revenue Declines Less Than Expected As Merger And Delisting Seems Eminent
- Lexmark Earnings Preview: Decline In Revenue To Continue
- What Percentage of Lexmark’s Stock Price Can Be Attributed To Growth?
- Lexmark Earnings: Revenue Declines More Than Expected
Perceptive Software’s core offering is to provide ECM software and solutions to businesses. The ECM market has witnessed rapid growth over the past few years and was one of the few markets that even grew during the recession. We expect the market to continue growing rapidly in the future at a compound rate of 10% annually reaching $5.7 billion in 2014.
We estimate that Perceptive Software’s revenues will grow at an even faster rate than the ECM market as Lexmark’s strong sales capabilities will provide Perceptive Software with new avenues for growth allowing it to expand into international markets.
Higher Margins on Software Business Will Increase Lexmark’s Profitability
Software businesses usually have higher margins than hardware business as they are generally free from component costs. While Perceptive Software had EBITDA margin of ~23% in 2010, which was much higher than Lexmark’s printer business, we expect the division’s margin to increase going forward as there will be fewer merger related expense, if any, and merger synergies will help reduce costs.
You can drag the trend lines above to see the impact of various Perceptive Software’s revenue and margin scenarios on Lexmark’s stock.
See our complete analysis of Lexmark.
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