Lexmark’s Business Diversification And Restructuring Drive $30 Value

by Trefis Team
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Lexmark
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Lexmark International’s (NYSE:LXK) short term revenues suffered in Q4 and FY 2012 due to its restructuring efforts as the company shut down its inkjet printer market. Inkjet revenues fell by over 40% y-o-y, as the company reported revenues of $3.8 billion for 2012 and $970 million for Q4. While revenues were down 8% for the quarter measured on a yearly basis, it was still above guidance provided due to the boost from Perceptive software. Revenue decline was also attributed to weakness in Europe and a weak economic environment for the industry.

Going forward,  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. [1]

Below we highlight segment-wise performance and some of the key drivers for Lexmark and its future outlook.

See our full analysis on Lexmark

Outlook For 2013

As the inkjet business exit accelerates, the company expects Q1 2013 revenue to be down 11% to 13% y-o-y. EPS is expected to be in the range of $0.80 to $0.90. Full year 2013 revenues are expected to be down 8% to 10% y-o-y, with a full year EPS of $3.90 to $4.10. While revenues are expected to fall, the company expects that its long term revenue will grow at, or above, the market’s growth rate and will focus on improving operating margins with a target of 11% to 13%.

Perceptive Software Key Growth Area

Imaging solutions and services (ISS) revenue declined 10% y-o-y to $925 million. This was mainly due to the restructuring efforts by Lexmark to shut down the inkjet division. However, within the ISS division, managed print services (MPS) revenue grew 3% to $170 million, Non-MPS revenue declined 9% and Inkjet Exit revenue declined 26% y-o-y. Perceptive Software revenue was $42 million, up 37% y-o-y. Hardware revenue and supplies revenue declined 15% and 10% respectively, while software and other revenue grew 27% y-o-y.

Restructuring To Improve Profitability

Lexmark is exiting the inkjet hardware business with the aim of improving profitability and should result in annualized savings of around $95 million. 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.

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 $30 Trefis price estimate for Lexmark, which is about 40% over its current market price.

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Notes:
  1. Lexmark SEC Filings, www.sec.gov, Jan 2013 []
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