Lexmark Earnings: Kofax Boosts Revenues Even As Printer Business Suffers

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LXK: Lexmark International logo
LXK
Lexmark International

Lexmark International (NYSE:LXK) released its Q2 earnings on July 21st and the company posted yet another quarter of solid results as its high-value managed printer services (MPS) and Perceptive software businesses (including the recently acquired Kofax) delivered 37% growth (46% in constant currency). The company reported that its revenues were flat (7% growth in constant currency) at $891 million as exiting the inkjet division tempered results. The revenues and earnings per share exceeded the guidance range. The most encouraging news in the announcement was that the higher value business revenue exceeded an annualized $1.5 billion (i.e., over 25% of the total revenues). It’s imaging solutions and services (ISS) revenues, excluding the inkjet business, declined by 8%. Within the ISS division, managed print services (MPS) revenue grew by 4% year over year to $203 million; non-MPS revenue declined by 12% to $503 million and inkjet revenue declined by 48% to $35 million.  Additionally, Lexmark’s Perceptive software division continued to post growth as revenues grew by 136% (50% growth excluding Kofax) to $150 million, with a contribution of $48 million from Kofax.

However, Lexmark shares fell 20 percent to $37.75 at the close in New York, the biggest drop since 2010, as the decline in revenues was more than expected ona like for like basis (i.e., adjusting for Kofax’s revenues). Furthermore, the guidance for Q3 and remaining year suggests that the demand for printers will continue to lag. This dampened investor sentiments further. In this note, we review Lexmark’s earnings.

See our full analysis on Lexmark

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Outlook For Q3 And 2015

For Q3 FY15, the company expects revenues to flat-line, including  revenue from Kofax, and non-GAAP earnings per share to be in the $0.51 to $0.61 range. Lexmark projects that its revenues will improve marginally in 2015. However, due to assimilation of acquired companies, it has lowered its Non-GAAP EPS to $3.55 to $3.75 range.

Weak Demand For Laser Printer And Supplies Impacts Revenues

Laser printer and cartridge division is its biggest business unit and makes up 86% of Lexmark’s estimated value. According to IDC, the worldwide hardcopy peripherals market shipment declined by 2.5% in Q1 2015. [1] It seems this trend continued in Q2 as well as Lexmark posted weak demand for its laser printers and supplies. While laser printer hardware revenues declined by 2.5% year over year to $149 million, supplies revenue (excluding the inkjet business) declined by 10% to $482 million. MPS, which has been the key contributor to laser revenue growth, was instrumental in boosting laser supplies revenue that grew by 5%. Going forward, we believe that MPS integrated with Perceptive’s solutions will deliver value to Lexmark’s growing client base. Annuity 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 9.7% 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. During Q2, revenues from this division grew by 136% to $150 million, primarily due to $48 million revenue from Kofax. During the quarter, the company witnessed excellent growth across license, subscription, maintenance, and professional services. While the annual maintenance contract value for Perceptive increased by over 100% from $25 million in Q2 2014 to $52 million in Q2 2015, licenses revenues grew by 250% to $53. The annualized subscription contract value at the end of Q2 stood at $55 million, which translates into 124% 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 $42.48 Trefis price estimate for Lexmark, which is 25% below its current market price.

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Notes:
  1. Worldwide Hardcopy Peripherals Market Shows a Small Dip in the First Quarter of 2015, According to IDC, May 21 2015, www.idc.com []