Lexmark Inc.(LXK) is scheduled to announce its second quarter 2011 results on July 26, 2011. There have been a few changes in analysts’ estimates post the release of its first quarter 2011 results.
Second Quarter Overview
The company reported weak second quarter results, with earnings per share of $1.14 missing the Zacks Consensus Estimate of $1.24 and management’s guided range of $1.18–$1.28. The disappointing results were primarily attributable to lower revenues and higher operating expenses.
Revenues in the reported quarter decreased 0.8% to $1.03 billion from $1.04 billion in the year-ago quarter and marginally missed the Zacks Consensus Estimate of $1.05 billion. The decline was due to lower printer shipments resulting from the customers’ shift in preference toward digital documentation.
On a year-over-year basis, Hardware revenues fell 12.0% due to reductions in channel distribution. Supplies remained flat but Software and other revenue grew 44.0%. The growth in Software revenue was due to higher demand for its products as well as market share gains. Imaging Solutions and Services revenues dropped 3.0% to $1.09 billion. Perceptive Software revenue came in at $19.0 million.
Gross margin in the first quarter was 37.6% compared with 36.9% in the year-ago quarter. After adjustments of restructuring and acquisition-related charges, non-GAAP gross margin stood at 38.2%, up 60 basis points from the year-ago quarter. The improvement was due to solid Supplies and Software revenue, partially offset by higher non-manufacturing costs.
Guidance
For the second quarter of 2011, management expects revenue to decline in a low single-digit percentage range from the year-ago quarter. Earnings on a GAAP basis are expected in the range of 89 cents to 99 cents per share.
Excluding restructuring and acquisition-related adjustments of 10 cents per share, non-GAAP earnings are projected in the range of $1.00–$1.10 per share. The Zacks Consensus Estimate for the second quarter is pegged at $1.14, higher than the company’s guided range. We believe that successful product launches could boost the quarter’s results.
Agreement of Analysts
Out of the twelve analysts providing estimates for the fourth quarter, none have made any revisions in the last thirty days. Similarly, for fiscal 2011 and 2012, none of the analysts revised their estimates over the same period. On the other hand, in the last 90 days, significant estimate revisions have been witnessed.
As per different analysts, the company continues to work on driving work group and MFPs, which is expected to drive higher usage and higher ASPs. Moreover, LXK winds down the sale of any legacy low usage parameter, and continues to invest in MPS (Managed Print Services) and ECM (Enterprise Content Management), with increased usage of Perceptive software.
On the other hand, some of the industry experts believe that competition will be intense in the coming days. Competition from Hewlett-Packard Company (HPQ) in the laser segment is likely to increase, as HP has resolved issues related to its laser printer availability. Hewlett-Packard is expected to adopt aggressive strategies to improve its market share in this space.
Magnitude of Estimate Revisions
Over the last 90 days, the Zacks Consensus EPS for the upcoming quarter has reduced by 12 cents to $1.02. For fiscal 2011, it has decreased by 43 cents to $4.27 and for fiscal year 2012, it has declined by 64 cents to $4.17.
Recommendation
Lexmark is well positioned in the printer market. The company’s first quarter results were disappointing, as both top and bottom lines missed Zacks expectations. Lexmark provided a conservative revenue outlook for the second quarter given its efforts to enhance the quality and quantity of its product portfolio as well as continuous share gains in the Software market, in our view.
Despite stiff competition from key players such as Hewlett-Packard Company, Canon Inc. (CAJ), Epson and Samsung, we believe that Lexmark will benefit from its retail presence as it sells its products through Best Buy stores in the U.S.
Currently, Lexmark has a Zacks #3 Rank, implying a short-term Hold rating.
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