Lexmark Pre-Earnings: MPS And Perceptive Software Are Keys To Growth

by Trefis Team
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Lexmark
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Lexmark International (NYSE:LXK) is set to release its earnings on 23 April. Last quarter, an unfavorable currency impact, a sluggish European economy and the planned exit from inkjets negatively impacted earnings. It reported a 9% decrease in revenues to $967 million for Q4CY12. Net earnings (non-GAAP) fell dramatically to $40 million from $93 million in Q4CY11. [1]

Lexmark continues to 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. Moreover, Lexmark expects the Enterprise Content Management (ECM) and Business Process Management (BPM) market to grow at 12% y-o-y. Lexmark  is focusing on building its product portfolio through inorganic expansion and has acquired two more companies in Q1FY13 for $31.5 million in an effort to diversify and strengthen its presence in software solution business.

See our full analysis on Lexmark

Outlook For 2013

For Q1FY13, the company expects revenues to decline by 11% to 13% y-o-y and earnings per share, excluding restructuring and acquisition-related adjustments, to be in $0.80 to $0.90 range. For FY 2013, revenue is expected to decline by 8% to 10% y-o-y and earnings per share for the full year to be in $3.90 to $4.10 range. Lexmark’s ongoing restructuring actions, including the exiting of the development and manufacturing of the company’s remaining inkjet hardware, will result in annualized savings of $85 million in 2013.

MPS To Bolster Laser Printer And Cartridge Division Revenues

The printer market is consolidating due to intense competition and the economic slowdown in europe. While the hardware business continues to suffer due to advent of  hybrid machines with multiple functionality, the supplies business suffers from lower spend from consumers who are refilling and reusing cartridges. Moreover, imitators are cannibalizing further sales opportunities in the cartridge business. Lexmark, therefore, has increased its focus on Managed Printing Solutions (MPS) and emerged as leader in this space.

Companies are increasingly adopting 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. MPS integrated with Perceptive’s solutions will deliver value to Lexmark’s growing client base. Within Integrated Sealing Systems (ISS) division, MPS revenue grew 7% in FY12 while non-MPS revenue declined by 12%. We expect MPS to become the biggest driver of revenue in ISS division going forward.

Managed Print Services And Perceptive Software To Drive Growth

Lexmark plans to become an end-to-end solution provider. Perceptive Software is becoming an increasingly important division for Lexmark and is helping the company manage the downturn in the printer and peripherals market. Perceptive witnessed annual growth of 62% in the enterprise content management (ECM) and business process management (BPM) business. It also reported $156 million in revenues for FY12.

Lexmark  is focusing on building product portfolio through inorganic growth. The company completed five acquisitions (Brainware, ISYS, Nolij, Acuo ,Twistage) that will be integrated into Perceptive Software and will help drive the company’s software business. Lexmark has guided 15% growth in Perceptive’s revenue for FY13. We also expect the seamless integration of Perceptive’s array of solution with MPS, to bolster revenue for the company in this division. We,therefore, expect Preceptive’s revenues to increase from $156 million in 2012 to over $400 million by the end of our forecast period.

We currently have a $29.62 Trefis price estimate for Lexmark, which is about 18% above its current market price.

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Notes:
  1. Lexmark Q2 Results, investor.lexmark.com, Jan 29, 2013 []
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