Lexmark Earnings Preview: Profit Margins To Improve In Q4

by Trefis Team
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Lexmark International (NYSE:LXK) is set to release its Q4 2013 earnings and full year results on January 28. In Q3, the company reported a 2.7% decline in revenues to $896 million. We expect that the company will continue to report lower revenues due to its transition from hardware centric business to an end-to-end printing solutions provider. However, the decline in revenues will slow down during the quarter due to demand for its managed print services (MPS) and Perceptive software solutions. Since these businesses also garner high margins, we expect the company to report improvement in margins during the quarter.

According to IDC, the worldwide hardcopy peripherals market showed encouraging signs of recovery in the third quarter of 2013, as the market experienced its first year-over-year growth in unit shipments (2.6%) since the fourth quarter of 2011. [1] We expect this trend to continue in Q4 and Lexmark to report marginally better results for its hardware printer division. However, the planned exit from inkjets will continue to negatively impact earnings. Furthermore, we expect that Lexmark’s revenues and margins from Perceptive Solutions will continue to improve in Q4.

See our full analysis on Lexmark

MPS To Boost Printer Division Revenues

The downturn in the worldwide hardcopy peripherals market seems to be subsiding. [1] However, IDC notes that a gradual shift in hardcopy peripheral devices away from the desktop and towards more shared and centralized machines will drive the growth in the hardware industry, and bolster revenues for companies that provide MPS (Managed Print Solutions).

Lexmark is strengthening its Managed Document Services (MDS) product offering. It is synergistically combining printing services with content management, electronic documentation and business process management, so as to establish its MPS business vertical. Currently, Lexmark leads the MPS market, according to Gartner. [2]

Laser printer and cartridge division is its biggest business unit and makes up for over 75% 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 contracts have increased and this has offset the decline in non-MPS revenues of imaging and software solutions (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.

Perceptive Is Key To Revenue Growth

The Perceptive software division is the second biggest business unit and makes up nearly 8% 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. Perceptive experienced annual growth of 62% in the ECM and BPM business in 2012, and reported $162 million in revenues for FY12. It remains a small part of the whole.

Lexmark continues to build its product portfolio through inorganic growth and in the quarter acquired PACSGEAR to bolster its healthcare ECM offering. [3] In Q3 2013, Perceptive reported 38% y-o-y increase in revenue to $60 million due to growth in licensing revenues. We expect this trend to continue in Q3 as well and the growth in licensing revenue to contribute to the increase in gross profit margin. We also expect the seamless integration of Perceptive’s array of solutions with MPS to bolster revenue for the company in this division. In this earnings announcement and call, we will continue to closely follow the deal pipeline for Perceptive software business.

Outlook For Q4 2013

For Q4 FY13, the company expects revenues to decline by 3% to 5% year over year, 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 downward to $3.85 to $3.95 range.

We currently have a $38 Trefis price estimate for Lexmark, which is 5% above its current market price.

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Notes:
  1. Worldwide Hardcopy Peripherals Market Returned to Year-Over-Year Growth in the Third Quarter of 2013, December 3 2013, www.idc.com [] []
  2. Gartner again positions Lexmark in the Leaders quadrant of 2013 MPS Magic Quadrant, October 29 2013, newsroom.lexmark.com []
  3. Read Lexmark Strengthens Perceptive’s Portfolio with PACSGEAR Acquisition for more information []
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