Lexmark International (NYSE:LXK) released its Q3 earnings on October 23, and the company posted strong results as its managed printer services (MPS) and Perceptive software businesses delivered growth. The company reported 2.7% decline in revenues to $896 million as the exit from the ink-jet division tempered results. However, the revenues exceeded guidance range. Additionally, the company delivered adjusted earnings per share of $0.95, topping the Wall Street expectation by 4 cents.
Lexmark’s Perceptive software division continued to post health growth as revenues grew by 38% to $59 million. In the last three months, the company acquired two companies i.e Saperion and PACSGEAR to bolster its Perceptive division. However, imaging solutions and services (ISS) revenues declined by 5% as exit from inkjet negatively impacted results. Within the ISS division, Managed Print Services (MPS) revenue grew by 18% y-o-y to $184 million, non-MPS revenue declined marginally to $569 million and inkjet revenue declined by 44% to $84 million.
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Outlook For 2013
For Q4 FY13, the company expects revenues to decline by 3% to 5% y-o-y, and earnings per share to be in $1.07 to $1.17 range. Lexmark has revised its revenue guidance for FY 2013 upwards and expects revenue to decline at a slower rate by 5% to 6%. However, the company has revised its earnings per share for the full year to $3.85 to $3.95 range.
Q3 Revenue At Higher End Of Guidance
In Q3, Lexmark reported revenues at the high end of their guidance range as both Perceptive and ISS performed better than expected. While Perceptive’s revenue grew by 38% due to record license and subscription revenue, ISS revenue (excluding inkjet business) grew by 3% y-o-y due to 18% growth in MPS. Moreover, Lexmark continued to maintain its 17% market share in large workgroup laser hardware that drives supplies revenues. Lexmark reported 1% growth in revenues from the large workgroup laser hardware.
Margins Improve Due To Revenue Growth In High Margin Businesses
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 MPS and process management vertical. Additionally, as Lexmark plans to become an end-to-end solution provider, Perceptive Software is becoming an increasingly important division for Lexmark.
The change in revenue mix, principally due to improved relatively mix of high-margin license and subscriptions revenue, resulted in 90 basis point improvement in gross profit margins to 40.8%. While ISS gross margins increased to 39.6%, Perceptive Software’s gross margins improved to 71.3% during the quarter.  We expect this trend to continue in the future and the growth in high margin revenues to contribute to the increase in EBITDA margins going ahead.
MPS and Perceptive Business Key To Revenue Growth
According to IDC, the worldwide hardcopy peripherals market showed encouraging signs of recovery in the second quarter of 2013, as the market experienced its smallest year-over-year decline in unit shipments (-1.8%) since the fourth quarter of 2011.  However, this industry is still in consolidation phase. Competition from incumbents such as HP and Canon is on the rise. Additionally, consumers are refilling and reusing cartridges, while the imitators are denting further sales opportunities in the cartridge business line. This is impacting hardware sales and pushing Lexmark to focus on MPS and Perceptive Software.
According to research firms such as Gartner and IDC, Lexmark is a leader in the MPS business.  Companies are increasingly adopting Managed Printing Solutions (MPS) to cut costs and simplify printer management. As a result, MPS contracts for the company have increased and offset the decline in non-MPS revenues of ISS division. 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.
Moreover, Lexmark continues to build Perceptive’s product portfolio through inorganic route. We expect this trend to continue in the future and the growth in software licensing revenue to drive revenue growth at Lexmark. We also expect the seamless integration of Perceptive’s array of solution with MPS to bolster revenue for the company.
We currently have a $38 Trefis price estimate for Lexmark, which is inline with its current market price.