Lexmark International (NYSE:LXK) released its Q3 earnings on 23 October. As guided by the company, revenue fell 11% y-o-y to $919 million due to the ongoing economic weakness particularly in Europe. Operating expenses were up at $316 million compared to $283 million last year. Net earnings were $0 million compared to $67 million last year.
Lexmark expects growth to be driven by the new laser printer lines as well as the Enterprise Content Management (ECM) and Business Process Management (BPM) market. It expects the ECM-BPM, a $8 billion dollar industry, to grow at about 12% y-o-y and is providing solutions in this space with Perceptive Software, 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. 
Below we highlight segment-wise performance and some of the key drivers for Lexmark and its future outlook.
Outlook For 2012
The Inkjet exit revenue represented 16% of total revenue this quarter and as it falls to zero, we can expect a drop in overall revenues as well. In Q4 2012, it expects revenue to decline 10% to 12% y-o-y. GAAP EPS in Q4 2012 is expected to be around $0.17 to $0.27.
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 should improve profits and result in 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, and 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 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 and 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 $27.61 Trefis price estimate for Lexmark, which is about 50% over its current market price.Notes: