Lexmark Earnings Preview: Printer Hardware And Perceptive Revenues In Focus

Lexmark International (NYSE:LXK) is set to release its Q3 2015 results on October 27^th. The company is reorganizing its business with focus on the higher-margin  laser printer hardware and end-to-end printing and business management solutions. As the company transitions from its low-margin hardware business to higher margin software and services, the company’s profitability will increase, in our view. We expect the company to report a marginal decline in revenues from organic streams in its Q3 earnings announcement. However, revenues from past acquisitions should offset the decline in organic revenues to some extent, especially for the 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 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.

Hardware Sales To Dent Revenue Growth

Laser printer and cartridge division is its biggest business unit and makes up 82.6% of Lexmark’s estimated value. According to IDC, the worldwide hardcopy peripherals market shipment declined by 6% in Q2 2015. ^[1] The trend indicates that demand for both inkjet and laser printers faltered in Q2, as was the case in Q1. However, the decline in demand for laser printer in both Multi-Function printer (MFP) and single function formats was steeper than the industry.  While the single function laser printer market declined by 14.4% year over year in the second quarter, MFP shipments decreased by 6.6%. We believe this trend was prevalent in Q3 as well, and this could well have impacted revenue growth at Lexmark. However, since 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 report higher average sales prices for the number of units of printers it sells in Q3.

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. Lexmark is offering managed print services (MPS), under which the procurement (of hardware and cartridges), maintenance (of printers and printing solutions) and other aspects of printing are managed by Lexmark. As a result of these efforts, Lexmark’s MPS contracts have increased. This has positively impacted its printer supplies business.

Revenue Growth from Perceptive Software in Focus

The Perceptive software division is the second biggest business unit and makes up nearly 17.3% 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. The company witnessed excellent growth across subscription, maintenance, and professional services. Lexmark has guided to 15% growth in Perceptive’s revenue for 2015. We expect that the growth in Perceptive’s licensing revenue will contribute to both topline and bottom line in Q3 as it is a high  growth and high margin business. In this earnings call, we will continue to closely follow the deal pipeline for the Perceptive software business.

You can drag the trend lines in the interactive charts above to see how various scenarios for laser printer market share, cartridges per laser printer and Perceptive software revenues affect Lexmark’s stock value.

We have updated Lexmark price estimate to $36.80 , which is 30% above its current market price.

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1. Worldwide Hardcopy Peripherals Market Declines Nearly 6% in the Second Quarter of 2015, August 24 2015, www.idc.com [↩]