Lexmark Earnings: MPS And Perceptive Business Propel Revenues

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LXK: Lexmark International logo
LXK
Lexmark International

Lexmark International (NYSE:LXK) released its Q3 earnings on October 21st, and the company posted yet another quarter of solid results, as its managed printer services (MPS) and Perceptive software businesses delivered growth. Furthermore, the company reported 3% year-over-year growth in revenues to $921 million, even as the exit from inkjet division tempered results. The revenues and earnings per share exceeded the guidance range. The stock market reacted positively to the results and the stock price increased by 4%, reflecting market sentiment. It’s imaging solutions and services (ISS) revenues, excluding the inkjet business, grew by 5%, buoyed by 7% growth in sales of laser hardware. Within the ISS division, managed print services (MPS) revenue grew by 12% year over year to $205 million; non-MPS revenue was flat at $570 million and inkjet revenue declined by 29% to $60 million. Additionally, Lexmark’s Perceptive software division continued to post growth as revenues grew by 46% to $86 million (including $16 million revenue from ReadSoft).

See our full analysis on Lexmark

Outlook For Q4 And 2014

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For Q4 FY14, the company expects revenues to decline by 2% to 4% year over year and non-GAAP earnings per share to be in the $1.1 to $1.2 range. Lexmark has revised its revenue guidance for FY 2014 upwards and expects revenue to decline at a slower rate, specifically by 1% or less. Non-GAAP EPS guidance has also been revised upwards to $4.05 to $4.15 range.

MPS Revenues Boost Laser Printer Revenues

Laser printer and cartridge division is its biggest business unit and makes up for over 77% of Lexmark’s estimated value. According to IDC, the worldwide hardcopy peripherals market declined for the first time after three consecutive quarters of growth. [1] However, to some extent, resilience in laser hardware sales has offset the decline in total sales. This trend seems to have prevailed in Q3 as well, and Lexmark’s result indicates that it gained the most in laser printer related sales. While hardware revenues grew by 8% year over year to $196 million, supplies revenue declined 2% to $593 million. According to research firms such as Gartner and IDC, Lexmark is a leader in the MPS business. MPS contracts for the company have increased over the past 24 months and offset the decline in non-MPS revenues in the previous quarters. In our pre-earnings note published earlier, we had stated that we expect MPS to propel revenues. MPS was the key contributor to Laser revenue growth as these revenues grew by 12% to $205 million during the quarter, it boosted laser revenues by 5% year over year during the quarter to $775 million. Going ahead, we believe that MPS integrated with Perceptive’s solutions will deliver value to Lexmark’s growing client base. Service contracts tend to be sticky, and MPS is a high margin business compared to selling hardware.  We expect it to become the biggest driver for Lexmark going forward.

Perceptive Business Revenues Grow

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. During Q3, revenues from this division grew by 46% to $86 million. During the quarter, clients chose to sign up for Perceptive’s evolution subscription service rather than the perpetual license, deferring recognition of the revenue from the second quarter. As a result, the company did witness excellent growth across subscription, maintenance and professional services. While the annual subscription contract value for Perceptive increased by 136% from $19 million in 2013 to $45 million in Q3 2014, licenses and maintence revenues grew by 36% and 62% respectively.

The company expects the electronic content management (ECM) and business process management (BPM) segments, which serve a $10 billion dollar industry, to grow about 10% year over year. The company is targeting this segment through Perceptive software, and it continues to build Perceptive’s product portfolio through organic and inorganic means. We also expect the seamless integration of Perceptive’s array of solutions with MPS to bolster revenue for the company.

We are in the process of updating our Lexmark model. At present we have a $44.77 Trefis price estimate for Lexmark, which is 5% above its current market price.

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Notes:
  1. Worldwide Hardcopy Peripherals Market Declines in the Second Quarter of 2014, August 22 2014, www.idc.com []