Lexmark Earnings Preview: Perceptive Business To Boost Revenue Yet Again

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LXK: Lexmark International logo
LXK
Lexmark International

Lexmark International (NYSE:LXK) is set to release its Q2 2014 results on July 22. As the company continues to transition from a low margin hardware centric ink jet printer business to high margin services business, its revenues have witnessed decline. However, recent results indicate that the decline in Lexmark’s revenues is slowing down. Nevertheless, operating income and net income are growing, reflecting a shift in focus from low margin business to high margin software services. We expect the company to report similar trend in its Q2 earnings announcement. However, we will be closely following the growth in the number of new licenses for its Managed Print Services (MPS) business, as it can offset the decline in non-MPS revenues of imaging and software solutions (ISS).

See our full analysis on Lexmark

Outlook For 2014

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For Q2 FY14, the company expects revenues to decline by 2% to 4% year over year, and non-GAAP earnings per share to be in the $0.85 to $0.95 range. Lexmark has revised its revenue guidance for FY 2014 upwards and expects revenue to decline at a slower rate by 2% to 4%. However, EPS will be flat in the $3.80 to $4 range.

Revenue Growth from Perceptive Software in Focus

The Perceptive software division is the second biggest business unit and makes up nearly 10% 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 53% in the Enterprise Content Management (ECM) business in 2013, and reported $239 million in revenues for FY13. To ensure that the growth in this line of business continues, the company continues to acquire companies that can bolster Perceptive’s portfolio and reach across the globe. As a result of these efforts, we expect growth trend to continue in 2014. We also expect that the growth in Perceptive’s licensing revenue will contribute to the top line in Q2. In this earnings call, we will continue to closely follow the deal pipeline for Perceptive software business.

MPS Revenues to Boost Supplies Revenues

Laser printer and cartridge division is its biggest business unit and makes up for over 77% of Lexmark’s estimated value. In the recent quarters, the unit sales of printer hardware and supplies have declined. In the industry, there has been a gradual shift in hardcopy peripheral devices away from the desktop and towards more shared and centralized solutions. This shift is driving most of the growth in the printer hardware sales. It is also bolstering revenues for companies that provide MPS, which includes procurement, maintenance and other aspects of printing. We believe that, for Lexmark, MPS integrated with Perceptive’s solutions will deliver value to Lexmark’s growing client base. Moreover, we expect MPS to propel the supplies revenues as most of MPS contracts also contain a clause for supplying printer stationery and cartridges. We expect MPS to become the biggest driver of revenue for the ISS division going forward.

We currently have a $39.71 Trefis price estimate for Lexmark, which 14% below its current market price.

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