According to IDC’s latest Hardcopy Peripherals Tracker, worldwide hard copy unit shipments declined by 13% annually to 27 million units this quarter and is the fourth consecutive quarter of decline. While larger players such as HP are addressing this downturn by investing in R&D and rolling out new innovative products to stay on top of the product renewal cycle, smaller players are exiting the inkjet business and offering managed printing services to deal with the downturn.
Lexmark International (NYSE:LXK) has led the way by not only becoming the leader in managed printing solutions (MPS) but has also become a software services company in an effort to mitigate the risks involved in the hardcopy peripherals market. In the last quarter the company reported a revenue fall of 11% y-o-y to $919 million due to the ongoing economic weakness particularly in Europe. Operating expenses were up at $316 million compared to $283 million last year. Net earnings were $0 million compared to $67 million last year.
The company has experienced growth an 88% annual growth in the Enterprise Content Management (ECM) and Business Process Management (BPM) business and reported revenues of $41 million. It expects the ECM-BPM, a $8 billion dollar industry, to grow at about 12% y-o-y and is providing solutions in this space with Perceptive Software, a provider of ECM and BPM. The company has completed three acquisitions (Brainware, ISYS and Nolij), and these will be integrated into Perceptive Software, which will help drive the company’s software business. 
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Lexmark Adds Security Software to its Software Business
The company recently launched the Lexmark Secure Content Monitor, a security solution designed to mitigate risk related to loss of confidential information by enabling businesses to track and audit sensitive information. It is designed to save costs related to compliance with government and industry standards. The company reports that on average, unauthorized release of restricted information costs organizations upwards of $8 million per breach other than loss of reputation.
The latest solution automatically captures and collects information extracted from documents through an enterprise content management (ECM) system. The service also helps businesses comply with government regulations, such as the Health Insurance Portability and Accountability Act (HIPAA), Sarbanes-Oxley (SOX) and the Data Protection Act, with features such as identifying unauthorized users of key documents or information.
Managed Print Services And Perceptive Software To Drive Growth
Lexmark is the leader in MPS according to research firms such as Gartner and IDC. Companies are increasingly adopting Managed Printing Solutions (MPS) to cut costs and simplify printer management. Service agreements tend to be sticky and MPS is a high margin business compared to selling hardware, and we expect this to become the biggest driver for Lexmark, going forward.
The printer market is consolidating driven by economic uncertainty in Europe and HP is becoming the leader in this space. There is a lot more competition from manufacturers of larger, traditional copier machines as companies adopt hybrid machines with multiple functionality. Consumers are refilling and reusing cartridges, and imitators are eating away further sales opportunities in the cartridge business line. This is impacting hardware sales and pushing Lexmark to focus on MPS and Perceptive Software.
Imaging Solutions and Services (ISS) revenue declined 13% y-o-y to $879 million. This was mainly due to the restructuring efforts by Lexmark to shut down the ink-jet division. Within the ISS division however, Managed Print Services (MPS) revenue grew 2%, Non-MPS revenue declined 12% percent and Inkjet Exit revenue declined 29% y-o-y.
Outlook For 2012
The Inkjet exit revenue represented 16% of total revenue this quarter and as it falls to zero, we can expect a drop in overall revenues as well. In Q4 2012, it expects revenue to decline 10% to 12% y-o-y. GAAP EPS in Q4 2012 is expected to be around $0.17 to $0.27.
We currently have a $32.76 Trefis price estimate for Lexmark, which is about 50% over its current market price.Notes: