Lexmark International (NYSE:LXK), recognized as the leader in Managed Printing Services (MPS) by industry analysts Gartner, IDC and U.K.-based Quocirca, has extended its lead by bagging a 5-year $21 million contract from the Federal Aviation Administration (FAA), which will make it the sole provider of printing solutions. The contract would involve streamlining and optimizing printer networks across 900 FAA locations across the U.S. and could include additional agencies within the U.S. Department of Transportation, which can take advantage of this contract to access Lexmark’s product offerings to improve its printing solutions infrastructure. 
MPS To Drive Cost Efficiency And Security
Lexmark has been actively shifting its business model to move away from hardware sales to managed printing services to fight falling hardware margins and commoditization of the printer business. The MPS strategy is paying off as it has become the leading provider in the space and is building on its Perceptive Software line, which helps integrate paper-based invoices into regular work-flow by providing superior scanning and aids in efficient processing of bills and other paper-based data. We estimate the margins on this business to be ~25 percent and estimate that this would be the margins for MPS as well. Perceptive Software is the main service offering and constitutes ~10 percent of our current valuation for Lexmark.
The company will be integrating the stringent printing and scanning security requirements set by the Federal Government to safeguard sensitive and confidential information. Personal Identity Verification (PIV) cards will have to be used to access printers, copy and scan documents, and send faxes. This will be implemented through Lexmark’s secure Print Release, a solution that is integrated into Lexmark’s smart workgroup printers and multifunction products (MFPs) which enable user authentication and data security.
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This will enable the FAA to have a greater control over its data and keep an eye on the access of confidential information. Lexmark’s Markvision Enterprise fleet management tool is a web-based remote management software which allows IT administrators to monitor printer fleets from a central location, in order to collect access information and troubleshoot devices. This should help increase the visibility of its network of printers.
We currently estimate that the company’s revenue from services will reach $285 million at the end of our forecast period. If MPS and Perceptive Software drives services growth doubles to $570 million in the same period, we expect a 12% upside to the current Trefis price estimate. This may happen as MPS grows more quickly than we expect with more such contract wins.
We currently have a $32 Trefis price estimate for Lexmark, which is ~20% above the current market estimate.Notes:
- LEXMARK AWARDED 5-YEAR, $21 MILLION PRINTING CONTRACT FROM FAA, newsroom.google.com, June 22, 2012 [↩]