Lexmark’s MPS Business Can Drive Growth In The Future

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LXK: Lexmark International logo
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Lexmark International

Lexmark International (NYSE:LXK) has been identified as one of the leaders in Managed Print Services (MPS, in industry parlance) by industry analysts. Gartner, IDC and UK based Quocirca have all recognized Lexmark as an MPS market leader. However, the intense competition from companies such as Xerox (NYSE:XRX) and HP (NYSE:HPQ) exists in this segment, and Lexmark in the recent quarters has stepped up its efforts to ensure that it continues to be the top contender in MPS industry. In this note, we explore how MPS is affecting Lexmark’s business across laser and Perceptive software divisions.

See our full analysis on Lexmark

MPS Drive Cost Efficiency

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Managed Print Services (MPS) are being offered by most companies that manufacture printer hardware. MPS tends to make printing cheaper and more efficient as it is offered as a service. Under MPS, procurement, maintenance and other aspects are taken over byvendors such as Lexmark. Over the past few years, the printer hardware market has become highly commoditized and margins are low. Tough economic conditions, intense competition and refurbished printer supplies from secondary vendors have resulted in a shift in hardware manufactures business focus from hardware to MPS. Furthermore, clients of printer manufacturers are increasingly adopting MPS to cut costs and simplify printer management. From the customer’s point of view, MPS provides cost efficiency. A report from Quocirca estimates that security and cost efficiency are the biggest drivers for enterprises to shift to MPS followed closely by reduction in carbon footprint and operational efficiency. This shift in client behavior augurs well for companies such as Lexmark because service agreements tend to be sticky and MPS is a high margin business compared to selling hardware.

Lexmark’s Offering

Lexmark is focused on both enterprise and middle market customer growth with industry-specific solutions focus in the following areas:

  • Electronic content management: – Unstructured content is instantly available at the time and place it’s needed.
  • Output management:- Output is optimized for the time and place it’s needed
  • Process management:- Manual processes are automated and integrated

According to Lexmark, the addressable market for both electronic content management (ECM) and business process management (BPM) is fairly large and offers good growth rates. Lexmark estimates that worldwide spending for content and process management in 2014 exceeded $10 billion. It expects that the content and process management software will account for about 30% of its revenue in 2015. The content and process management is expected to grow at 10% per annum in the near foreseeable future. [1]

Lexmark Managed Print Services has three components that cater to ECM and BPM segment:

  • Infrastructure Optimization: Includes output and process assessment, change management, training, deployment, reverse logistics, utilization management, and project management.
  • Proactive management: Includes asset management, proactive monitoring and diagnostics, consumables management, maintenance service, help desk services, configuration management, management reporting and governance.
  • Business Optimization: Includes business process optimization for customers, including leveraging industry and horizontal solutions, content management, business process management, intelligent capture, search and mobile capture.

Focus On MPS Services To Drive Business Growth

Laser printer and cartridge division is its biggest business unit and makes up over 82% 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. MPS currently contributes to a small portion of the revenues but is set to grow as it focuses its business on the service aspect. MPS contracts have increased and have offset the decline in non-MPS revenues. We also estimate that this will also help the company to shore up its EBITDA margins for hardware over the coming quarters as MPS is a high margin business. While we expect EBITDA to decline to 24.5% for our forecast period due to commoditization of hardware and supplies, margins can stabilize at 2014 levels of 24.5%.

The MPS offering also works in conjunction with with Perceptive Software, which is used to bring paper invoices, bills and other non-electronic invoices into the electronic mainstream for more efficient processing. Perceptive Software is the main service offering of Lexmark and constitutes ~9% of the current Trefis price estimate. We currently estimate that revenues from will reach $505 million at the end of our forecast period. If MPS can fillip Perceptive Software revenues to $650 million and margins to 17% in the same period, we expect 10% upside to the current Trefis Price estimate.

We have a $42.20 Trefis price estimate for Lexmark, which is inline with its current market price.

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Notes:
  1. Lexmark 10K, www.sec.gov []