Lexmark Earnings Preview: Growth In MPS And Software Business In focus

Lexmark International (NYSE:LXK) is set to release its Q1 2014 results on April 22. In 2013, the revenues declined by 4% to $3.67 billion. However, the operating income and net income grew, reflecting a shift in focus from low margin hardware business to high margin software services. We expect the company to report similar trend in its Q1 earnings announcement. However, we will be closely following the growth in the number of new licenses for its Managed Print Services (MPS) business, as it can offset the decline in non-MPS revenues of imaging and software solutions (ISS).

See our full analysis on Lexmark

Outlook For 2014 And Beyond

For Q1 FY14, the company expects revenues to decline by 3% to 5% year over year, and earnings per share to be in $0.80 to $0.90 range. Lexmark guided that its revenues in FY 2014 will decline by 3% to 5%, while EPS will be flat in $3.80 to $4.00 range. Furthermore, in long term, the company plans to grow its revenues at or above the market rate and maintain operating income margin in the 11% to 13% range.

MPS Revenues to Boost Supplies Revenues

Laser printer and cartridge division is its biggest business unit and makes up for over 76% of Lexmark’s estimated value. In the recent quarters, the unit sales of printer hardware and supplies have declined. In the industry, 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 most of the growth in the printer hardware sales.  It also is bolstering revenues for companies that provide MPS, which includes procurement, maintenance and other aspects of printing. We believe that, for Lexmark,  MPS integrated with Perceptive’s solutions will deliver value to Lexmark’s growing client base. Moreover, we expect MPS to propel the supplies revenues as most of  MPS contracts also contain a clause for supplying printer stationery and cartridges. We expect MPS to become the biggest driver of revenue for the ISS division going forward.

Revenue Growth From Perceptive Software In Focus

The Perceptive software division is the second biggest business unit and makes up nearly 9% 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. Perceptive experienced annual growth of 53% in the Enterprise Content Management (ECM)  business in 2013, and reported $239 million in revenues for FY13. We expect this trend to continue in 2014 as well and believe the growth in Perceptive’s licensing revenue will contribute to the top line in Q1. In this earnings call, we will continue to closely follow the deal pipeline for Perceptive software business.

We currently have a $40.22 Trefis price estimate for Lexmark, which is 15% below its current market price.

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