Lexmark Inc. (LXK) is scheduled to announce its third quarter 2011 results on October 25, 2011. We witness a few changes in analysts’ estimates post the release of its second quarter 2011 results.
Second Quarter Overview
The company reported a strong second quarter 2011, with earnings per share of $1.36 outperforming the Zacks Consensus Estimate of $1.02 and the company’s guided range of $1.00–$1.10.
Lexmark’s second quarter revenue of $1.04 billion increased 1.1% from $1.03 billion in the year-ago quarter and surpassed the Zacks Consensus Estimate of $1.0 billion. The upside in revenues was attributable to strong Laser toner sales, partially offset by lackluster hardware sales.
On a year-over-year basis, Hardware revenues declined 9.0% due to reductions in channel distribution. Supplies saw a 3.0% growth while Software and Other revenue rose 33.0%. The growth in Software revenue was on the back of higher demand for the company’s products as well as market share gains.
On a GAAP basis, gross margin was 39.6% in the second quarter compared with 36.8% in the year-ago quarter. Including restructuring and acquisition-related charges, non-GAAP gross margin was 40.1%, up 360 basis points from the year-ago quarter.
Guidance
For the third quarter of 2011, management expects revenue to increase at a flat to low single-digit percentage range. Earnings on a GAAP basis are expected in the range of 86–96 cents per share.
Excluding restructuring and acquisition-related adjustments of 8 cents, non-GAAP earnings are expected in the range of 94 cents–$1.04 per share. The Zacks Consensus Estimate for the third quarter is pegged at 99 cents, which is roughly in line with the mid-point of the company’s guided range.
Agreement of Analysts
Out of the 10 analysts providing estimates for the third quarter, one analyst raised the estimate while two analysts cut estimates over the last 30 days. Similarly, for fiscal 2011 and 2012, only three analysts lowered estimates over the last thirty days.
Despite witnessing better-than-expected growth in Supplies during the previous quarter, the analysts expect segment growth to slow down in the second half of 2011. Moreover, the analysts also believe that if Supplies growth remains stronger than expected, it could result in higher revenue guidance. The analysts are also of the opinion that if pricing stabilizes, the company would experience better selling price going forward.
As per the analysts, the company intends to further drive work group and MFPs, which in turn will drive higher usage and higher ASPs. Moreover, with increased usage of Perceptive software, LXK is looking to reduce the sale of legacy products that have seen lower usage. Additionally, LXK continues to invest in MPS (Managed Print Services) and ECM (Enterprise Content Management), which are also thought to be positives for the company.
Magnitude of Estimate Revisions
Over the last 90 days, the Zacks Consensus EPS estimate for the upcoming quarter has improved to $1.12. For fiscal 2011, it has increased by 39 cents to $4.65 and for fiscal year 2012, it has increased by 13 cents to $4.31.
Recommendation
Lexmark is well positioned in the printer market. The company reported strong second quarter results, which exceeded Zacks expectations. Lexmark provided a conservative revenue outlook for the third quarter based on its efforts to enhance the quality and quantity of its product portfolio coupled with continuous share gains in the Software market.
Despite stiff competition from key players such as Hewlett-Packard Company (HPQ), Canon Inc. (CAJ), Epson and Samsung, we believe that Lexmark will benefit from its retail presence as it sells its products through Best Buy (BBY) stores in the U.S.
Currently, Lexmark has a Zacks #3 Rank, implying a short-term Hold rating.
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