Lexmark Earnings Preview:Inorganic Growth To Boost Revenues

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LXK: Lexmark International logo
LXK
Lexmark International

Lexmark International (NYSE:LXK) is set to release its Q1 2015 results on April 28th. In 2014, the revenues improved marginally by 1.17% to $3.71 billion. However, the operating income and net income declined as the company pursued inorganic route to grow its business, especially in the electronic content and business process management vertical. As the company transitions from low-margin hardware business to high margin software services, we expect the profitability to increase. We expect the company to report a marginal decline in revenues from organic streams in its Q1 earnings announcement. However, revenues from acquisitions should offset the decline in organic revenues to some extent, especially for Perceptive software division. Additionally, 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 Q1 And 2015

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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.

Laser And MPS Revenues to Boost Supplies Revenues

The laser printer and cartridge division is its biggest business unit and makes up for over 82% of Lexmark’s estimated value. In the recent quarters, unit sales of printer hardware and supplies have declined, both for Lexmark and the market at large. According to IDC, the worldwide hardcopy peripherals market declined 1.16% in 2014. [1] However, to some extent, resilience in laser hardware sales has offset the decline in total sales. While laser printer sales increased marginally from 40.38 million in 2013 to 40.5 million in 2014, inkjet printer sales declined by 2% from 67.66 million in 2013 to 66.28 million. Lexmark has been concentrating on the large work group segment that is typically attached directly to large workgroup networks in corporations. We expect Lexmark to gain ground in the laser market in Q1, and buck the downtrend in the Hardcopy Peripherals Market.

Furthermore, 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 some 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 expect that MPS integrated with Perceptive’s solutions will deliver value to Lexmark’s growing client base. We also expect MPS to propel the supplies revenues as most of the MPS contracts also contain a clause for supplying printer stationery and cartridges. Going forward, we expect MPS to become the biggest driver of revenue for the ISS.

Revenue Growth from Perceptive Software in Focus

The Perceptive software division is the second biggest business unit and makes up nearly 8.7% 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 31% in 2014 and reported $313 million in revenues for FY14. Lexmark has guided 15% growth in Perceptive’s revenue for 2015. 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 Q1, and in 2015. We also expect that the growth in Perceptive’s licensing revenue will contribute to the bottom line in Q1 as it is a high margin business. In this earnings call, we will continue to closely follow the deal pipeline for the Perceptive software business.

We currently have a $42.20 Trefis price estimate for Lexmark, which is 4.6% below its current market price.

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Notes:
  1. Worldwide Hardcopy Peripherals Market Declines in the Fourth Quarter of 2014, February 15 2015, www.idc.com []