A Quick Look At Lexmark's Business Strategy

| About: Lexmark International, (LXK)

Quick Take

  • The printer hardware market declined by 9.7% in Q1 CY13. Lexmark is focusing on high margin process management software services, laser printer hardware and managed print services.
  • Revenues from MPS and Perceptive solution will increase to 30% of total revenue by 2014. MPS will drive revenue growth at the printer and supplies division as companies look to outsource their printing needs.
  • Perceptive solutions will help the company in bucking the decline in the printer industry as process management industry is expected to grow at 10% annually.

Lexmark International (NYSE:LXK) is well positioned as a leader in managed print services (MPS) according to industry analysts, Gartner, IDC and U.K. based Quocirca. (Lexmark again named a leader in Quocirca MPS Vendor Landscape, May 16, 2013, www.lexmark.com) The company is in the middle of transforming its business from a hardware-centric business to an end-to-end printing solutions provider. Since 2010, Lexmark has acquired eight software companies in its bid to strengthen its managed document services (MDS) product offering and synergistically combining printing services with content management, electronic documentation and business process management.

In this article, we’ll discuss some important trends that are affecting Lexmark’s business. We’ll closely look at the changing printer market landscape and Lexmark’s strategy for bucking the downtrend in the printer hardware industry.

Worldwide Hardware Peripheral Market

According to IDC, the worldwide hardware peripheral market is contracting. In Q1 CY13, the worldwide hardcopy peripherals market decreased 9.7% y-o-y, with 25.8 million units shipped. However, Laser printers continued to witness growth in units shipped with a 3.2% increase in color laser multifunction printers (MFPs) and 0.9% increase in monochrome laser MFPs. [1]

While larger players such as HP (NYSE:HPQ) are addressing this downturn by investing in R&D and rolling out new innovative products to stay on top of the product renewal cycle, smaller players are exiting the inkjet business and offering managed printing services to deal with the downturn. Additionally, the printer market is consolidating driven by economic uncertainty in Europe and intense competition from leading companies such as HP. Competition from the manufacturers of larger, traditional copier machines is also increasing as companies adopt hybrid machines with multiple functionality. Consumers are refilling and reusing cartridges, and imitators are cannibalizing further sales opportunities in the cartridge business line. As a result, the printer hardware market is highly commoditized and margins are low.

Lexmark's Strategy For Growth

Lexmark has been restructuring its business in light of the emerging trends in the printer hardware industry. In the past few years, Lexmark has exited from its low margin Inkjet printer business and increased its focus on the laser printers, high margin managed print services and process management vertical. This shift in business focus is evident from the fact that Lexmark’s margins have improved since it started its restructuring and diversification process.

According to Lexmark, the addressable market for both MPS and process management is fairly large and offers good growth rates. Lexmark estimates that the worldwide spend for content and process management in 2012 exceeded $10 billion. While the managed print services will witness double-digit growth rate in the coming years, content and process management is expected to grow at 10% per annum. [2] Lexmark expects that the combined MPS and content, and process management software will account for about 30% of its revenue by 2014.

MPS Will Drive Growth Of Printers And Supplies

Tough economic conditions, intense competition and refurbished printer supplies from secondary vendors has resulted in a shift in Lexmark’s business from hardware to MPS. Companies are increasingly adopting MPS to cut costs and simplify printer management. Additionally, service agreements tend to be sticky and MPS is a high margin business compared to selling hardware.

The laser printer and cartridge division is its biggest business unit and makes up over 81% of Lexmark’s estimated value. In the recent quarters, the unit sales of printer hardware and supplies have declined in line with the decline in the printer hardware industry. However, MPS contracts have increased and has offset the decline in non-MPS revenues of industry standard servers (ISS). We believe that MPS integrated with Perceptive’s solutions will deliver value to Lexmark’s growing client base. We expect MPS to become the biggest driver of revenue in the ISS division going forward.

Perceptive Focus On Services To Drive Business Growth

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 and is helping the company manage the downturn in the printer and peripherals market.

Moreover, Lexmark continues to build its product portfolio through inorganic growth. Lexmark has guided 15% growth in Perceptive’s revenue for FY13. Additionally, we estimate that profit margins for this business will increase to 16% by the end of our forecast period. We also expect the seamless integration of Perceptive’s array of solution with MPS to bolster revenue for the company. We, therefore, expect Perceptive’s revenues to increase from $156 million in 2012 to over $400 million by the end of our forecast period.

We currently have a $32.75 Trefis price estimate for Lexmark, which is slightly above the current market estimate.


  1. Worldwide Hardcopy Peripherals Market Sees Year-Over-Year Decline in Both Units and Shipment Value in the First Quarter of 2013, May 15th, 2013, www.idc.com
  2. Lexmark 10-K, www.sec.gov

Disclosure: No positions