Lexmark International (NYSE:LXK) is the undisputed leader in managed print services (MPS) according to industry analysts, Gartner, IDC and UK based Quocirca. ((Quocirca MPS Report, http://filecache.drivetheweb.com, May 2012)) The company has picked up a five-year printing solution contract from Statoil, a leading oil and gas company. The contract is valued at $20 million for the initial period and Lexmark will be the sole printing solution services provider for its operations worldwide.
The printer hardware market is highly commoditized and margins are low, which explains why Lexmark has been offering managed printing services. We estimate Lexmark’s hardware margins at 16.8% and expect them remain at same levels till the end of our forecast period. From a customer’s point of view, MPS provides cost efficiency. The Quocirca report estimates that security and cost efficiency are the biggest drivers for enterprises to shift to MPS, followed closely by lower carbon foot print and operational efficiency. 
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MPS Drives Cost Efficiency
The contract will involve optimization of Statoil’s output infrastructure, structuring and providing output solutions, close security vulnerabilities and implement other managed services. Lexmark will also deploy its intuitive multifunction products , which will streamline business processes and be environmentally sound. The goal is to create a solution that improves energy efficiency and consumables usage.
The service will enable Statoil to monitor and control its print volume, reduce cost by reducing the printing of unnecessary pages and increase information security. The service will also improve connectivity and networking, allowing employees to release their printouts to any printer in the company.
Lexmark has also won contracts from the USDA and Anehuser-Busch recently to provide MPS.
MPS currently contributes to a small portion of Lexmark’s revenues, but is set to grow as it focuses its business on the service aspect. Currently, the largest division for Lexmark is laser printers and cartridges, which constitutes 75% of our current price estimate.
Focus On Services To Drive Business Growth
A significant growth opportunity for the company is the Perceptive Software business, which is used to bring paper invoices, bills and other non-electronic invoices into the electronic mainstream for more efficient processing. We estimate a margin of 25% for this business as well as for MPS. Perceptive Software is the main service offering of Lexmark and constitutes 10% of the current Trefis price estimate.
We currently expect revenues from Perceptive Software will reach $313 million at the end of our forecast period. If MPS and Perceptive Software drive services growth, which doubles the revenues to $626 million, we expect a near 16% upside to the current Trefis price estimate. This may happen as MPS grows faster than anticipated with more contract wins.
We currently have a $32.35 Trefis price estimate for Lexmark, which is above the current market estimate.Notes: