Lexmark International (NYSE:LXK) is set to release its earnings on 23 Oct. In the last quarter, unfavorable currency impacts and a sluggish European economy led to lower than expected earnings. It guided that the company will focus 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 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. 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.
Outlook For 2012
For the third quarter, the company expects revenue to be down 9% to 11% y-o-y and earnings per share excluding restructuring and acquisition-related adjustments to be in the range of $0.75 to $0.85. For full year 2012, revenue is expected to be down 8% to 10% y-o-y, with earnings per share for the full year, excluding restructuring and acquisition-related adjustments, to be in the range of $3.70 to $3.90.
Restructuring To Improve Profitability
The company has pulled the plug on its low profit inkjet hardware business and will concentrate on the more profitable laser printer line. Exiting the inkjet hardware business will improve profitability and result in an annualized savings of $95 million. It also planned an additional $100 million in share repurchases during the remainder of 2012. It will continue to provide service, support and supplies to the inkjet installed base. 
The restructuring action is expected to result in reductions in inkjet related infrastructure costs, research and development costs, supply chain and other support functions. It also includes closing the Philippines inkjet supplies manufacturing facility by the end of 2015, and this move will eliminate ~1,700 jobs worldwide, including 1,100 manufacturing positions. Lexmark will also look to sell the company’s inkjet-related technology. This is expected to generate $85 million savings in 2013, increasing to $95 million beginning in 2015. The pre-tax cost for the restructuring is expected to be $160 million, with a $110 million outflow in 2012, $30 million incurred in 2013, and $20 million spread over 2014 and 2015. The cash flow impact of the restructuring is expected to be $75 million, with $40 million impacting 2012, $30 million impacting 2013, and the remaining $5 million impacting 2014 and 2015. Lexmark also announced an additional $100 million of share repurchases in the third and fourth quarter of 2012.
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.
We currently have a $31.73 Trefis price estimate for Lexmark, which is about 50% over its current market price.Notes: