Lexmark International Inc. (LXK) has posted second quarter 2011 earnings per share of $1.36, strongly beating the Zacks Consensus Estimate of $1.02 and its own guidance range of $1.00–$1.10. Deal wins, continuous product ramps and strong demand from corporate vertical have boosted the quarter’s results.
Revenue
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. Sales of Laser toner drove the quarter's revenue growth, offsetting the 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% uptick while Software and Other revenue grew 33.0%. The growth in Software revenue was backed by demand for its products as well as market share gains.
Imaging Solutions and Services revenues remained roughly flat year over year at $1.02 billion. Perceptive Software revenue recorded a whopping 275.0% year-over-year growth to reach $24.0 million.
Operating Results
On a GAAP basis, gross margin was 39.6% in the second quarter compared to 36.8% in the year-ago quarter. After adjusting restructuring and acquisition-related charges, non-GAAP gross margin was 40.1%, up 360 basis points from the year-ago quarter.
GAAP operating margin was 13.2% compared to 11.5% in the year-ago quarter. Excluding special items, operating margin was 14.2% versus 13.1% in the year-ago quarter. Total operating expense increased due to a 10.7% rise in selling, general and administrative expenses, partially offset by a marginal decline in research and development expense.
Net income on a GAAP basis was $101.0 million or $1.27 per share, compared to $85.0 million or $1.07 in the year-ago quarter. Non-GAAP net income was $109.0 million or $1.36 per share, compared to $98.0 million or $1.23 per share in the year-ago quarter.
Balance Sheet & Cash Flow
Lexmark ended the quarter with $1.34 billion of cash, cash equivalents and marketable securities, up from $1.27 billion in the previous quarter. Trade receivables were $445.4 million and inventories stood at $352.1 million. The company’s long-term debt balance remained at $649.2 million, flat with the previous quarter.
The company generated $94.0 million of cash from operations, up from $85.0 million in the previous quarter. Capital expenditures totaled $34.0 million versus $36.0 million in the prior quarter.
Guidance
For the third quarter of 2011, management expects revenue to be flat to down by a low single-digit percentage from the year-ago quarter. Earnings on a GAAP basis are expected in the range of 86–96 cents per share.
Excluding 8 cents per share for restructuring and acquisition-related adjustments, non-GAAP earnings are expected in the range of $0.94–$1.04. 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.
Our Take
Lexmark’s second quarter results were encouraging, as both top and bottom lines surpassed our expectations. However, Lexmark provided a lackluster revenue outlook for the third quarter. Though new products launched during the quarter could stem market share losses, the impact on results could still be some way off.
Lexmark operates in a highly competitive market. So there is a constant price war among major players to snatch market share from one another. On top of that, the market is narrowing as digital technology and e-commerce is becoming more prevalent.
However, Lexmark may benefit from its retail presence as it sells through Best Buy Co. (BBY) stores in the U.S.
Currently, Lexmark has a Zacks #3 Rank, implying a short-term Hold rating.
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