Lexmark’s Q4 Results Underscore Continued Transition to High-Value Solutions

robert palmerby Robert Palmer | 1/28/15

Lexmark’s Q4 and FY 2014 results indicate that the firm’s overall transformation strategy remains on track. For the past few years, Lexmark has been quite vocal about its plans to transition from a hardware company to a software and solutions provider. Recent acquisitions and customer wins bolster that position, but overall growth will clearly be challenged by the shift to high-margin solutions, the impact of currency fluctuations, and continued threats to the firm’s core printing business. 

On a non-GAAP basis, Q4 revenue of $1.03 billion grew 2 percent from $1.01 billion in 2013, exceeding Lexmark’s own guidance. Quarterly revenue growth was primarily attributed to increased revenue from Lexmark’s “high-value solutions portfolio,” which includes the firm’s MPS and Perceptive Software businesses. For the year, non-GAAP revenue of $3.73 billion grew 1 percent, compared with $3.68 billion in the year-ago period.

As has been the case for some time, revenue continues to be negatively impacted by Lexmark’s exit from the inkjet business. Inkjet Exit revenue of $58 million declined 42 percent in Q4 compared with the year-ago quarter, and was down 37 percent on a year-over-year basis. Lexmark expects Q1 revenues to decline year-to-year, with continued negative impact from the inkjet exit and unfavorable currency fluctuations. Even so, the firm expects revenues to decline slightly excluding the impact of declining inkjet exit revenues.

Lexmark’s printing business was essentially flat. Hardware revenues of $236 million were up 3 percent compared with the same period a year ago. Supplies revenue of $646 million declined 2 percent year-over-year, primarily due to the impact of the inkjet exit. Laser supplies revenue of $589 million grew 5 percent compared with the year-ago quarter.

As mentioned, Lexmark’s solutions portfolio continues as a bright spot for the firm. Fourth quarter revenue from Higher Value Solutions, excluding acquisition-related adjustments, grew 22 percent year-over-year to $341 million, and accounted for 33 percent of Lexmark’s total revenue, up from 28 percent in the same period in 2013. For the year, high value solutions revenue of $1.13 billion, excluding acquisition-related adjustments, grew 18 percent year-to-year and accounted for 30 percent of total revenue, up from 26 percent in the same period a year ago.

On a non-GAAP basis, Lexmark’s Q4 net earnings were $68 million, compared with $75 million in the year-ago quarter. For the full year, net earnings declined to $255 million, compared with $269 million in 2013.

Our Take

Lexmark’s results presented a bit of a mixed reaction from the market. On the one hand, revenues increased on a yearly basis and the firm’s solutions business continues to show strong results. On the other hand, bottom-line results missed most market expectations and Q1 guidance was lukewarm at best. Many analysts remain concerned about Lexmark’s dependence on its core printing business, despite a continued mix shift to higher value solutions and an aggressive acquisition strategy that has clearly improved the firm’s long-term outlook.

There is no question that Lexmark’s continued transition to high value solutions and services, particularly managed services and ECM solutions, is paying strong dividends. The Perceptive acquisition has served as a foundation for Lexmark’s software business, and the recent acquisitions of ReadSoft and Claron Technology should only strengthen that position. Lexmark highlighted several key deals that it landed in the fourth quarter, including a five-year MPS agreement for approximately $100 million with Alberta Health Services (AHS) of Alberta, Canada.

Lexmark also continues to show favorable results from the decision to transition its printing business to higher-end product segments. It is not easy these days to show revenue growth from hardware sales, and while the inkjet exit will continue to be a drag on revenues for some time, the overall strategy appears sound. Of course, many of the Lexmark’s competitors are now leveraging inkjet technology to target the dominant position of laser in the office segment, so it remains to be seen how the firm might respond to those threats. 

Meanwhile, Lexmark is slowly but surely becoming a major force in the office software and solutions business. The firm is widely recognized now as a leader in enterprise ECM, and recent acquisitions will strengthen its portfolio in document capture, workflow automation, and other areas. Lexmark is also doing a good job of leveraging its software business to sustain its overall printing business, which will help deflect declining demand in that sector. 

 

Robert Palmer is chief analyst and a managing partner for BPO Media, which publishes The Imaging Channel and Workflow magazines. He is an independent market analyst and industry consultant with more than 25 years experience in the printing industry covering technology and business sectors for prominent market research firms such as Lyra Research and InfoTrends. In December 2012 he formed Palmer Consulting as an independent consultancy focused on transformation, mobility, MPS, and the entire imaging market. Palmer is a popular speaker and presents regularly at industry conferences and trade events in the U.S., Europe, and Japan. He is also active in a variety of imaging industry forums and currently serves on the board of directors for the Managed Print Services Association (MPSA). Contact him at robert@bpomedia.com.