Lexmark’s Profit Margins In Focus For Q2 Earnings

by Trefis Team
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Lexmark
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Quick Take

  • Lexmark is set to announce its Q2 results on July 23, and is focusing on its high margin managed print services (MPS) and laser printer hardware to carry results.
  • In Q2, MPS will drive revenue growth in its printer and supplies division as companies are increasingly outsourcing their printing needs.
  • Perceptive Solutions reported double-digit growth in revenue in the past few quarters; however, it continues to post operational loss. We expect Lexmark to report positive margins in Q2.

Lexmark International (NYSE:LXK) is set to release its Q2 2013 earnings on July 23. Last quarter, an unfavorable currency impact, a sluggish European economy and the planned exit from inkjets, negatively impacted earnings. It reported a 11% decline in revenues to $886 million in Q1. [1]

The company is in the middle of transforming its business from a hardware-centric business to an end-to-end printing solutions provider. In our article A Quick Look At Lexmark’s Business Strategy published earlier, we discussed Lexmark’s strategy for growth going ahead.  We expect this strategy to enable Lexmark to deliver better margins for the quarter.

See our full analysis on Lexmark

Outlook for Q2 2013

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

Focus On High Margin Business To Improve Profitability

According to IDC, the worldwide hardware peripheral market is contracting. In Q1 CY13, the worldwide hardcopy peripherals market decreased 9.7% y-o-y, with 25.8 million units shipped. However, Laser printers continued to witness growth in units shipped, with 3.2% increase in color laser multifunction printer (MFPs) and 0.9% increase in monochrome laser MFPs. [2]

Lexmark has been restructuring its business in light of the emerging trends in the printer hardware industry. In the past few years, Lexmark has exited from its low margin inkjet printer business and increased its focus on laser printers, high margin managed print services (MPS) and process management vertical. This shift in business focus is evident from the fact that Lexmark’s margins have improved since it started restructuring . During Q1, Lexmark’s gross margins improved to 39.8% from 36.8% in FY 2012. We expect this trend to continue in Q2 as well, and Lexmark to report higher gross margins in the quarter.

MPS Will Drive Growth Of Printers And Supplies

Lexmark is in the middle of strengthening its managed document services (MDS) product offering and synergistically combining printing services with content management, electronic documentation and business process management. These services form the MPS business vertical of Lexmark.

Laser printer and cartridge division is its biggest business unit and makes up over 81% of Lexmark’s estimated value. In the recent quarters, the unit sales of printer hardware and supplies have declined in line with the decline in printer hardware industry. However, MPS contract have increased and has offset the decline in non-MPS revenues of imaging and software solution (ISS). We believe that 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 for ISS division going forward. In this earnings announcement, we want to know the number of new contracts Lexmark has signed for its MPS business.

Profitability At Perceptive Business In Focus

The Perceptive Software division is the second biggest business unit and makes up nearly 9% 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. Lexmark has guided 15% growth in Perceptive’s revenue for FY13.

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 in Q1. Lexmark has embarked on cost cutting measures to improve profitability at this division. The company has stated that it will deliver positive operating margins for this division in 2013. Therefore, Q2 results, will help us in ascertaining whether Lexmark did achieve its objective to turn the division around. We expect this division to deliver better margins in Q2 that will offset the operational loss reported in Q1.

We currently have a $33 Trefis price estimate for Lexmark, which is in line with its current market price.

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Notes:
  1. Lexmark Q1 Results, investor.lexmark.com, April 23, 2013 []
  2. Worldwide Hardcopy Peripherals Market Sees Year-Over-Year Decline in Both Units and Shipment Value in the First Quarter of 2013, May 15th 2013, www.idc.com []
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