Lexmark Results: Results Reflect Anemic Demand For Printers

Lexmark International (NYSE:LXK) released its Q1 earnings on April 28^th and the company posted yet another quarter of solid results as its high-value managed printer services (MPS) and Perceptive software businesses delivered 13% growth (19% in constant currency). However, the company reported 3% year-over-year decline (3% growth in constant currency) in revenues to $855 million as exiting inkjet division tempered results. The revenues and earnings per share exceeded the guidance range. The most encouraging news in the announcement was that the higher value business revenue exceeded an annualized $1.1 billion, i.e. over 25% of the total revenues. It’s imaging solutions and services (ISS) revenues, excluding the inkjet business, declined by 6%. Within the ISS division, managed print services (MPS) revenue grew by 3% year over year to $185 million; non-MPS revenue declined by 6% t0 $533 million and inkjet revenue declined by 34% to $48 million. Additionally, Lexmark’s Perceptive software division continued to post growth as revenues grew by 40% to $90 million.

See our full analysis on Lexmark

Outlook For Q2 And 2015

For Q1 FY15, the company expects revenues to decline by 2% to 4% year over year and non-GAAP earnings per share to be in the $0.75 to $0.85 range. Lexmark maintains its guidance for the year and expects revenue to decline by 3% to 5% in 2015 and Non-GAAP EPS to be in $3.60 to $3.80 range.

Weak Demand For Laser Printer And Supplies Impacts Revenues

Laser printer and cartridge division is its biggest business unit and makes up 82% of Lexmark’s estimated value. According to IDC, the worldwide hardcopy peripherals market declined 1.16% in 2014. ^[1] It seems this trend continued in Q1 as well as Lexmark posted weak demand for its laser printers and supplies. While laser printer hardware revenues declined by 9% year over year (4% in constant currency) to $152 million, supplies revenue (including the inkjet business) declined by 6% to $568 million. MPS, which has been the key contributor to laser revenue growth, was instrumental in boosting laser supplies revenue that grew by 9% in constant currency (2.26% decline in dollar terms). 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.

Perceptive Business Revenues Grow

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. During Q1, revenues from this division grew by 34% to $90 million. During the quarter, the company witnessed excellent growth across subscription, maintenance, and professional services. While the annual subscription contract value for Perceptive increased by 64% from $6 million in 2014 to $10 million in Q1 2014, licenses and maintenance revenues grew by 20% to $19 million and 50% to $36 million respectively. The annualized subscription contract value at the end of Q1 stands at $50 million, which translates into 108% year-on-year growth. 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% year over year. The company is targeting this segment through Perceptive software, and it continues to build Perceptive’s product portfolio through organic and inorganic means. In March, Lexmark acquired Kofax, which should double Perceptive software’s revenues going forward. ^[2] We also 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 $42.20 Trefis price estimate for Lexmark, which is 3% below its current market price.

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1. Worldwide Hardcopy Peripherals Market Declines in the Fourth Quarter of 2014, February 15 2015, www.idc.com [↩]
2. Read Lexmark Acquires Kofax To Double Its ECM-BPM Business [↩]