Lexmark International (NYSE:LXK) reported earnings lower than the April guidance provided by the company mainly due to unfavorable currency impacts and sluggish European economies. It also stated that focus will be on high growth, high margin businesses such as managed print services (MPS) and perceptive software, which have been growing steadily in the past few quarters. It reported revenues of $919 million for Q2, which is a decrease of 11% y-o-y. Net earnings fell drastically to $39 million from $101 million last year. 
Lexmark along with other key market players such as Canon (NYSE:CAJ) and Epson have lost significant share to market leader Hewlett-Packard (NYSE:HPQ), which owns 56% of the U.S. hard-copy peripheral market. ((U.S. Hardcopy Peripherals Market, IDC).
Managed Print Services And Perceptive Software To Drive Growth
The printer market is consolidating driven by economic uncertainty in Europe and HP is becoming the leader in this space. There is a lot more competition from manufacturers of larger, traditional copier machines as companies adopt hybrid machines with multiple functionality. Consumers are refilling cartridges, reusing cartridges and imitators are eating away further sales opportunities in the cartridge business line. This is impacting hardware sales and pushing Lexmark to focus on MPS and Perceptive Software.
Lexmark is the leader in MPS according to research firms such as Gartner and IDC. Companies are increasingly adopting Managed Printing Solutions (MPS) to cut costs and simplify printer management. Service agreements tend to be sticky and MPS is a high margin business compared to selling hardware, and we expect this to become the biggest driver for Lexmark, going forward.
Lexmark also expects growth from Enterprise Content Management (ECM) and Business Process Management (BPM) market. It expects this $8 billion dollar industry to grow at about 12% y-o-y and is providing solutions in this space with Perceptive Software. Perceptive Software is a provider of ECM and BPM. It involves capturing data in hard-copies, photographs, physical invoices, faxes, etc., and converting them into digital formats to streamline and automate processes that are currently manual. We expect this to be the biggest growth market after MPS for Lexmark. The company has completed three acquisitions (Brainware, ISYS and Nolij), and these will be integrated into Perceptive Software, which will help drive the company’s software business.
We currently have a $31.73 Trefis price estimate for Lexmark, which is about 50% over its current market price.Notes: