Shares of Lexmark International Inc. (LXK) moved down 2% in afterhours trading yesterday, following lower-than-expected fourth-quarter 2014 earnings results. Moreover, a year-over-year decrease in the bottom line coupled with weak first-quarter and fiscal 2015 earnings guidance resulted in the downside.
Lexmark posted non-GAAP fourth-quarter 2014 earnings per share (EPS) of $1.11 per share, missing the Zacks Consensus Estimate of $1.15 per share. Non-GAAP earnings (excluding restructuring-related charges & project costs, acquisition and divestiture-related adjustments and actuarial loss or gain on pension plan) were also toward the lower end of the company’s guided range of $1.10-$1.20 per share. Moreover, earnings per share decreased 5.9% from the year-ago quarter due to higher tax rate and foreign currency fluctuations.
Revenues
Lexmark reported fourth-quarter non-GAAP revenues (excluding acquisition and divestiture-related adjustments) of $1.03 billion, which not only increased 2.1% from the year-ago quarter but also came ahead of the Zacks Consensus Estimate of $976 million.
On a GAAP basis, revenues came in at $1.02 billion, up 1.7% from the year-ago quarter. The year-over-year increases were primarily attributed to higher revenues from imaging and software solutions. Also, higher revenues from Laser and Perceptive Software, which more than offset a decline in Inkjet exit revenues and the impact of foreign currency fluctuations, contributed to the overall revenue growth during the quarter.
On a year-over-year basis, Laser Hardware revenues increased 4% primarily attributed to 5% growth in workgroup hardware revenues. Supplies revenues decreased 2% from the year-ago quarter whereas Software and other revenues increased 23% from the year-ago quarter and came in at $150 million. Total Laser supplies revenues increased 5% on a year-over-year basis.
Revenues from the Imaging Solutions and Services (ISS) segment declined less than 1% on a year-over-year basis and came in at $933 million. Excluding adjustments for Inkjet exit revenues, the ISS segment grew 4% year over year. Within ISS, revenues from Managed Print Services (MPS) increased 16%, while non-MPS revenues remained flat on a year-over-year basis. However, Lexmark saw a 42% decline in Inkjet exit revenues.
Perceptive Software revenues (excluding acquisition-related adjustments) increased 37% year over year driven by higher revenues and solid cost and expense management.
Operating Results
Non-GAAP gross margin in the quarter was 39.4%, down 236 basis points (bps) from the year-ago quarter primarily due to unfavorable foreign currency impact and product mix.
Non-GAAP operating income came in at $110.4 million, down 0.4% on a year-over-year basis, primarily due to a decline in Inkjet exit revenues and foreign currency fluctuations. Operating margin decreased 22 bps to 10.8% from the year-ago quarter. Total non-GAAP operating expense on the other hand decreased 5.1% from the year-ago quarter to $291.3 million. Operating expenses as a percentage of revenues decreased 203 bps and came in at 28.5%, primarily due to solid cost controls measures and productivity enhancements.
Non-GAAP net income was $68.4 million compared with $75 million in the year-ago quarter. Non-GAAP net income excludes restructuring-related charges & project costs, acquisition and divestiture-related adjustments and actuarial loss or gain on pension plan.
Balance Sheet & Cash Flow
Lexmark exited the quarter with $933.9 million in cash, cash equivalents and marketable securities compared with $833.1 million in the previous quarter. Trade receivables were $421.6 million and inventories were $253 million. The company’s long-term debt balance was $699.7 million, flat sequentially.
The company generated $183 million in cash from operations, up from $123 million in the previous quarter. Free cash flow was 153 million. Capital expenditure totaled $30 million compared with $36 million in the previous quarter.
Lexmark paid dividends of $22 million and repurchased shares worth $22 million during the quarter.
Guidance
For the first quarter, management expects revenues to be down 3% to 5% year over year. Revenues excluding the Inkjet exit are expected to be down year over year. The weak guidance reflects the negative impact of the exit from the Inkjet business and unfavorable currency impact.
Non-GAAP earnings per share are expected in the range of 70 cents to 80 cents (mid-point 75 cents). The Zacks Consensus Estimate is pegged at 88 cents.
Management expects revenues from Laser and Perceptive Software to decline year-over-year, primarily due to currency fluctuations. However, revenues from Perceptive Software and MPS are expected to grow in mid-teens on a year over year basis. It also affirmed its target to return 50% of free cash flow to shareholders through share buybacks and dividends.
For fiscal 2015, Lexmark expects revenues to be down 3% to 5% year over year (previous guidance was flat to down 1% year over year).
Non-GAAP earnings are expected in the range of $3.60 per share–$3.80 per share (previous guidance $4.05 to $4.15). The Zacks Consensus Estimate is pegged at $3.85 per share. For the long term, the company expects operating margin in the range of 11% to 13%.
Moreover, Lexmark expects gross margin and operating expense to be flat on a year-over-year basis for fiscal 2015. Management expects the effective tax rate for fiscal 2015 to be approximately 31%.
Our Take
Lexmark’s fourth-quarter results were mixed with the bottom line missing the Zacks Consensus Estimate but the top line beating the same. Revenues however increased on a year-over-year basis, primarily attributed to strong growth in Laser and Perceptive Software business and imaging and software solutions. Notably, synergies from the ReadSoft acquisition contributed to the quarterly revenues.
Guidance for the first quarter and fiscal 2015 was tepid, reflecting the Inkjet exit, the shift to high margin solutions business and currency headwinds. Pricing pressure and a high debt burden remain added concerns.
Nonetheless, synergies from the recent acquisitions (ReadSoft) and renewed focus on the software space could set it back on the growth path. Moreover, the Inkjet exit, software prospects and the MPS approach are positives that will drive shares in the long term.
Lexmark has a strong market position but reduced demand for traditional printing hardware and overall macro uncertainty could adversely impact product demand.
Though competition form players like Canon Inc. (CAJ), Xerox Corp. (XRX) and Hewlett-Packard Co. (HPQ) 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).
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