Lexmark Earnings:Growth In Laser Hardware And Perceptive Fillip Revenues

Lexmark International (NYSE:LXK) released its Q4 earnings on January 27^th , and the company posted yet another quarter of solid results as its managed printer services (MPS) and Perceptive software businesses delivered growth. The company reported 2% year-over-year growth in revenues to $1.032 billion, even as the exit from inkjet division tempered results. The revenues and earnings per share exceeded the guidance range. It’s imaging solutions and services (ISS) revenues, excluding the inkjet business, grew by 4%, buoyed by 4% growth in sales of laser hardware. Within the ISS division, managed print services (MPS) revenue grew by 16% year over year to $242 million; non-MPS revenue was flat at $633 million and inkjet revenue declined by 42% to $58 million. Additionally, Lexmark’s Perceptive software division continued to post growth as revenues grew by 37% to $99 million.

See our full analysis on Lexmark

Outlook For Q1 And 2015

For Q1 FY15, the company expects revenues to decline by 3% to 5% year over year and non-GAAP earnings per share to be in the $0.70 to $0.80 range. Lexmark expects revenue to decline by 3% to 5% in 2015 and Non-GAAP EPS to be in $3.60 to $3.80 range.

MPS Revenues Boost Laser Printer Revenues

Laser printer and cartridge division is its biggest business unit and makes up 88% of Lexmark’s estimated value. According to IDC, the worldwide hardcopy peripherals market declined in Q3. ^[1] To some extent, resilience in laser hardware sales has offset the decline in total sales. This trend seems to have prevailed in Q4 as well, and Lexmark’s result indicates that it gained the most in laser printer related sales. While laser hardware revenues grew by 4% year over year to $236 million, supplies revenue grew 2% to $589 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 16% to $242 million during the quarter. Going forward, 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 11% 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 37% to $99 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 third 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 104% from $5 million in 2013 to $11 million in Q4 2014, licenses and maintenance revenues grew by 12% to $26 million and 55% to $38 million respectively. The annualized subscription contract value at the end of Q4 stands at $46 million, which translates into 114% year-on-year growth. 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 8% above its current market price.

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1. Worldwide Large Format Printer Shipments Continue on Growth Trajectory in the Third Quarter of 2014, According to IDC, December 04 2014 [↩]