Lexmark Preview: Printer Hardware Revenues To Decline, Perceptive Revenue To Increase As Alternatives Are Reviewed

LXK: Lexmark International logo
Lexmark International

Lexmark International (NYSE:LXK) is set to release its Q4 2015 results on February 23rd. [1] As the company transitions from its low-margin hardware business to higher margin software and services, we expect that the company will continue to report slight decline in revenues, albeit its profitability will increase. However, revenues from past acquisitions should offset the decline in organic revenues to some extent, especially with the Perceptive software division. Nevertheless, weaker printer supplies and hardware demand will continue to impact revenues. Additionally, we will look for additional commentary on the review of strategic alternatives the company initiated last fall. Reports have recently appeared that both its hardware and software businesses have attracted potential buyers. We suspect management will have little to say if, in fact, discussions are underway.

See our full analysis on Lexmark

Weak Printer Demand And Currency Headwinds Weighs on Outlook For Q4 And 2015

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For Q4 FY15, the company guided revenues to decline by 4% to 6% due to cross currency head winds and softness in printer supplies and hardware demand. It projected non-GAAP earnings per share to be in the $1.05 to $1.15 range. Lexmark now projects that its revenues will decline by 3 to 4% in 2015. Additionally, due to assimilation of acquired companies and currency headwinds, it has lowered its Non-GAAP EPS to $3.42 to $3.52 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 6.3% in Q3 2015. [2] The trend indicates that demand for both inkjet and laser printers faltered in Q3, as was the case in the first half of the year. However, shipments of Basic and Managed print services (MPS) devices continue to grow, posting more than 380,000 units in 3Q15. Furthermore, high-end color laser devices (45 ppm+) recorded double-digit year-over-year growth (15.3%). We believe this trend persisted in Q4 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 Q4.

Furthermore, as stated in  IDC news release, 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 18.2% 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 Q3, revenues from this division grew by 92% to $165 million, driven by an acquisition. The company witnessed excellent growth across subscription, maintenance, and professional services. Lexmark had guided to 15% growth in Perceptive’s revenue for 2015. We expect that the growth in Perceptive’s licensing revenue due to recent acquisition will contribute to both topline and bottom line in Q4 (and FY2015). Therefore, in this earnings call, we will continue to closely follow the deal pipeline for the Perceptive software business.

We currently have a  $33.32 price estimate for Lexmark, which is 10% above its current market price.

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  1. Lexmark Press Release []
  2. Business Inkjet Market Continues Its Growth Trajectory with 16.3% Year-Over-Year Growth in the Third Quarter of 2015, According to IDC, December 8 2015, www.idc.com []