Lexmark International (NYSE:LXK) released its Q3 earnings on October 28th.  The company announced that it has entered into a definitive merger agreement with a consortium of investors led by Apex Technology Co., Ltd. (Apex) and PAG Asia Capital (PAG), under which Lexmark will be acquired for $40.50 per share in an all-cash transaction with an enterprise value of approximately $3.6 billion, net of cash.  On July 22nd, the company announced that its shareholders have approved the merger. Post the close of the transaction, Lexmark’s common stock will cease to be publicly traded on the New York Stock Exchange. The merger remains subject to approval from China’s State Administration of Foreign Exchange (SAFE) and other customary closing conditions. The parties continue to expect the transaction to close in 2016.
For the quarter, the company reported a 1% decline in revenues to $844 million, even as its high-value solutions (MPS, etc.) delivered 3% growth driven by 5% growth in enterprise software solutions. The most encouraging news in the announcement was that the higher value business revenue makes up 43.36% of total revenues. It’s imaging solutions and services (ISS) revenues declined by 2%. Within the ISS division, managed print services (MPS) revenue declined by 2% year over year to $379 million; non-MPS revenue was flat at $465 million as softness in laser hardware and supplies persisted in Q3. Additionally, Lexmark’s Perceptive software division (Enterprise software) continued to post growth as revenues grew by 5% to $156 million. In this note, we review Lexmark’s earnings.
Weak Demand For Laser Printer And Supplies Impacts Revenues
- Lexmark Pre Earnings: Printer Revenue To Decline, Software Revenue To Report Growth
- Lexmark Earnings: Revenue Declines Less Than Expected As Merger And Delisting Seems Eminent
- Lexmark Earnings Preview: Decline In Revenue To Continue
- What Percentage of Lexmark’s Stock Price Can Be Attributed To Growth?
- Lexmark Earnings: Revenue Declines More Than Expected
- What has Been The Key Driver For Lexmark’s Enterprise Revenue Over The Past Two Years?
The Laser Printer and Cartridge division is its biggest business unit and makes up 75.2% of Lexmark’s estimated value. According to IDC, the worldwide hardcopy peripherals market shipment declined by 3.8% in Q2 2016.  The trend indicates that the decline in demand for both inkjet and laser printers slowed in Q2, as was the case in the first quarter of the year. However, most of the improvement in the global market was largely driven by strong demand in the color laser (21ppm+) and mono laser (21-30 ppm) segments with 18.0% and 8.9% year-over-year growth, respectively.
However, the decline in demand for laser printer in both Multi-Function printer (MFP) and single function formats was steeper than the industry. It seems this trend continued in Q3 as well. Lexmark posted weak demand for its laser printers and supplies resulting from tighter customer print spending, longer sales cycles, and a more competitive environment. Lexmark’s ISS revenue, which includes laser printer hardware and supplies, declined by 2% to $688 million. MPS, which has been the key contributor to laser revenue growth, also reported 2% decline. Going forward, we believe that MPS integrated with Perceptive’s solutions will deliver value to Lexmark’s growing client base. Annuity service contracts tend to be sticky and MPS is a high margin business compared to selling hardware. We expect it to become the biggest driver for Lexmark going forward. However, Printer supplies and hardware margins declined by 350 basis points year over year and 470 basis points sequentially, reflecting the competitive pricing environment in the industry.
Perceptive Business Revenues And Margins Grow
The Perceptive software division is the second biggest business unit and makes up nearly 24.8% 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 5% to $156 million. The company expects the electronic content management (ECM) and business process management (BPM) segments, which serve a $10 billion dollar industry, to grow about 10% per year. While the company is targeting this segment through Perceptive software, and it continues to build Perceptive’s product portfolio through organic and inorganic means, it has stopped reporting the performance metrics for this division as it gears up for delisting. However, we expect the seamless integration of Perceptive’s array of solutions with MPS to bolster revenue for the company.
We are in the process of updating our Lexmark model. At present, we have a $30.78 Trefis price estimate for Lexmark, which is 23% below its current market price.Notes:
- Lexmark reports third quarter results, October 28th 2016 [↩]
- Lexmark agrees to be acquired by Apex Technology and PAG Asia Capital, April 19th 2016 [↩]
- Worldwide Hardcopy Peripherals Market Shows Signs of Improvement in the Second Quarter, According to IDC, August 30 2016, www.idc.com [↩]