Lexmark Down Despite Q1 Earnings Beat - Analyst Blog
23 April 2014 - 3:00PM
Zacks
Shares of Lexmark
International Inc. (LXK) went down 11.2% in after-hours
trading following its first quarter 2014 results. Shares tumbled as
a result of year-over-year declines in the top and bottom lines and
a tepid second quarter earnings guidance provided by the
company.
Lexmark posted non-GAAP first-quarter 2014 earnings per share (EPS)
of 92 cents per share, beating the Zacks Consensus Estimate of 87
cents per share. The beat was mainly attributable to
better-than-expected operating income and lower share count.
Non-GAAP earnings (excluding restructuring-related charges &
project costs and, acquisition and divestiture-related adjustments)
surpassed the company’s guided range of 80 cents–90 cents per
share. However, earnings per share decreased 4.0% from the year-ago
quarter.
Revenues
Although Lexmark’s first-quarter non-GAAP revenues (excluding
acquisition and divestiture-related adjustments) of $880.7 million
decreased a marginal 0.6% from the year-ago quarter, it came ahead
of the Zacks Consensus Estimate of $844.0 million..
On a GAAP basis, revenues came in at $877.7 million, down 0.7% from
the year-ago quarter. The year-over-year decline was primarily
attributed to a decline in Inkjet Exit revenues. Decrease in
hardware and supplies revenues also led to the year-over-year drop
in revenues.
On a year-over-year basis, Hardware revenues and Supplies decreased
8.0% and 1.0%, respectively. However, Software and other revenues
climbed 13.0% from the year-ago quarter.
Revenues from the Imaging Solutions and Services (ISS) segment
decreased 3.0% year over year to $817.0 million. Within ISS,
revenues from Managed Print Services (MPS) grew 12.0%, while
non-MPS revenues increased 1.0% on a year-over-year basis, which
was offset by a 40.0% decline in Inkjet Exit revenue. Perceptive
Software revenues (excluding acquisition-related adjustments) grew
38.0% year over year to $64.0 million driven by higher license and
subscription revenue.
Operating Results
Non-GAAP gross margin in the quarter was 41.2%, up 112 basis points
(bps) from the year-ago quarter due to favorable mix.
Non-GAAP operating margin increased 37 bps to 10.5% from the
year-ago quarter primarily due to growth in Perceptive Software
business and efficient cost management. Total non-GAAP operating
expense increased 1.7% from the year-ago quarter to $269.7 million,
primarily due to acquisitions related expenses and higher
investments.
Non-GAAP net income was $58.3 million or 92 cents per share
compared with $62.0 million or 95 cents per share in the year-ago
quarter. Non-GAAP net income excludes restructuring-related charges
and acquisition-related adjustments.
Balance Sheet & Cash Flow
Lexmark exited the quarter with $985.2 million in cash, cash
equivalents and marketable securities, down from $1.05 billion in
the previous quarter. Trade receivables were $429.4 million and
inventories were $277.9 million. The company’s long-term debt
balance was $699.7 million, flat sequentially.
The company generated $10.0 million in cash from operations, down
significantly from $205.0 million in the previous quarter. Free
cash flow was ($34.0) million. Capital expenditure totaled $44.0
million compared with $41.0 million in the previous quarter.
Lexmark paid dividends of $19.0 million and repurchased shares
worth $21.0 million during the quarter.
Guidance
For the second-quarter, management expects revenues to decline 2.0%
to 4.0% (previous guidance 3.0% to 5.0% decline) year over year.
Revenues excluding the Inkjet Exit are expected to be up year over
year. The weak guidance reflects the negative impact from the exit
of the Inkjet business.
Excluding restructuring charges and acquisition-related
adjustments, non-GAAP earnings are expected in the range of 85-95
cents (mid-point 90 cents). The Zacks Consensus Estimate is pegged
at 91 cents.
Management expects Laser supplies to be roughly flat to positive on
a year-over-year basis. It also affirmed its view to return 50.0%
of free cash flow to shareholders through share buybacks and
dividends. Management also expects the effective tax rate to be
approximately 30.5%.
Moreover, Lexmark expects gross margin to increase on a
year-over-year basis. Operating expense is expected to be flat
sequentially while operating margin is expected to be down
marginally.
For full year 2014, Lexmark expects revenues to decline 2.0% to
4.0% (previous guidance 3.0% to 4.0%) year over year, primarily due
to the adverse effect of the Inkjet business exit and shift to high
margin solutions business.
Excluding restructuring charges and acquisition-related
adjustments, non-GAAP earnings are expected in the range of
$3.80–$4.00 per share. The Zacks Consensus Estimate is pegged at
$3.89 per share. For the long term, the company expects operating
margin in the range of 11% to 13%.
Our Take
Lexmark’s first-quarter results were better-than-expected wherein
both the top and bottom lines beat the Zacks Consensus Estimate.
However, both revenues and earnings declined on a year-over-year
basis.
Guidance for the second quarter was tepid, reflecting the Inkjet
exit and macro uncertainty. Though synergies from the acquisitions
and renewed focus on the software space could set it back on the
growth path, their impact on results could still take some time to
materialize.
Nonetheless, we see the Inkjet exit as a positive. Lexmark will now
be able to focus more on MPS and the software business where growth
prospects are better. Moreover, Lexmark is doing really well in the
MPS market and is winning deals continuously.
Though restructuring and share buyback plans could boost share
prices in the near term, the overall outlook for the printing
industry remains bearish. Demand for printers is slowing down due
to increasing usage of digital content through mobile devices.
We see good growth prospects for Lexmark in the software sector
although the company is also trying to expand its hardware
solutions business. But the overall macro uncertainty could have an
effect on product demand. Lexmark has a strong market position, but
reduced demand for traditional printing hardware has impacted
pricing in the computer peripherals market.
Though constant pricing pressure from competitors such as Canon
Inc., Xerox Corp. (XRX) and
Hewlett-Packard Co. (HPQ) and a high debt burden
remain concerns, we expect Lexmark to turn the tables with an
increased focus on software and services.
Currently, Lexmark has a Zacks Rank #3 (Hold). A better ranked
stock in the technology sector is Rambus Inc.
(RMBS), carrying a Zacks Rank #1 (Strong Buy).
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