Lexmark Slows Less Than Expected As Restructuring Supports Outlook

by Trefis Team
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Lexmark International (NYSE:LXK) released its Q1 earnings on April 23. An unfavorable currency impact, a sluggish economy and the planned exit from the inkjets business negatively impacted earnings. It reported a 11% decline in revenues to $886 million for Q1 CY13. Net earnings (non-GAAP) decreased to $57 million from $76 million in Q1 CY12. [1]

As we had stated in our pre-earnings article (Lexmark Pre-Earnings: MPS And Perceptive Software Are Keys To Growth), Lexmark continued to report growth in managed print services (MPS) and Perceptive software. Lexmark continues to evolve from a hardware vendor to a solutions centric company. Lexmark is focusing on building its product portfolio through inorganic expansion and has acquired two more companies in Q1 FY13 for $31.5 million, in an effort to diversify and strengthen its presence in software solution business. [2]

See our full analysis on Lexmark

Outlook For 2013

For Q2 FY13, the company expects revenues to decline by 6% to 8% y-o-y, and earnings per share, excluding restructuring, the sale of assets 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 exit from inkjet business will result in annualized savings of $85 million in 2013. The company also announced the sale of inkjet-related technology and assets to the Funai Electric Company for approximately $100 million and expects the deal to close by the end of Q2 CY13.

Q1 Revenue At Higher End Of Guidance

Imaging Solutions and Services (ISS) revenue declined 13% y-o-y to $840 million. This was mainly due to exit from the Ink-jet division, which negatively impacted ISS revenue by 7%. Within the ISS division, however, Managed Print Services (MPS) revenue increased by 10% y-o-y to $160 million, non-MPS revenue declined by 12%to $558 and inkjet revenue declined by 34% to $122 million. Perceptive Software revenue grew 54% y-o-y to $46 million. Hardware and supplies revenue declined 9% and 16% respectively while software and other revenue grew 37% y-o-y.
In Q1, Lexmark reported revenues at the high end of their guidance range as its supplies revenue declined at a lower pace by 11% to $609 million. Moreover, Lexmark continued to increase its market share in large workgroup laser hardware that drives supplies revenues. Large workgroup laser hardware revenue now represents 83% of total hardware revenue, and since Lexmark’s share in this segment is improving, we expect this will bolster its supplies revenues in the future.

MPS To Bolster Laser Printer And Cartridge Revenue

Laser Printer And Cartridge division is its biggest business unit and makes up over 70% of Lexmark’s estimated value. As we had stated in our pre-earnings article, MPS revenues, to some extent did offset the decline in non-MPS revenues of ISS. Lexmark continued to report a decline in hardware and supplies division, which declined by 9% and 16% respectively.

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. We expect MPS to become the biggest driver of revenue in ISS division going forward.

Perceptive Software To Aid In Diversification And Drive Growth

Perceptive software division is the second biggest business unit and makes up nearly 14% of Lexmark’s estimated value. As 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.

In Q1 FY13, Perceptive reported 54% y-o-y increase in revenue to $46 million. However, this division reported an operational loss of $8 million for the quarter, but we are not concerned as this is a high-margin, high-growth business. We expect this division to deliver better revenues in Q2 that will offset the operational loss reported in Q1.

Moreover, Lexmark continues to build its product portfolio through inorganic growth. The company completed two acquisitions (Twistage, AccessVia) in this quarter 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. 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 are currently updating our Lexmark model. At present, we have a $29.60 Trefis price estimate for Lexmark, which is about 5-10% over its current market price.

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Notes:
  1. Lexmark Q1 Results, investor.lexmark.com, April 23, 2013 []
  2. Lexmark SEC Filings, www.sec.gov, April 23, 2013 []
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