Lexmark reports third quarter results

 

Revenue and EPS reflect strong Enterprise Software growth and margin expansion

Highlights

– Exploration of strategic alternatives to enhance shareholder value underway

– Grew Core revenue in constant currency while reducing laser supplies channel inventory

– Strong results in Higher Value Solutions reflect growth in Enterprise Software and MPS

– Deferred software revenue increased 66 percent year to year

– Annualized subscription contract value increased 25 percent year to year

– Paid 16th consecutive quarterly dividend

Lexmark International, Inc. today announced financial results for the third quarter of 2015.

“While the third quarter was challenging, Lexmark Enterprise Software drove strong growth in our Higher Value Solutions revenue, which now accounts for 43 percent of total revenue,” said Paul Rooke, Lexmark chairman and chief executive officer.

“While Lexmark continues to focus on this growth and transforming the company, Lexmark also recently announced that our Board of Directors has initiated an exploration of strategic alternatives to enhance shareholder value and unlock the intrinsic value created by the company,” Rooke said. “During this process, Lexmark will remain squarely focused on our customers and delivering strong financial results.”

Third Quarter Results

  • Third quarter revenue and EPS reflect strong Enterprise Software growth and margin expansion, more than offset by the strong U.S. dollar, the optimization of laser supplies channel inventory and the ongoing exit of inkjet.
Revenue (millions) 3Q15 3Q14
    GAAP $851 $918
    Adjustments 17 3
    Non-GAAP $868 $921
     
EPS 3Q15 3Q141
    GAAP -$0.25 $0.55
    Adjustments 0.82 0.41
    Non-GAAP $0.57 $0.96

Third Quarter GAAP Results Year-to-Year Comparisons

  • Revenue of $851 million in 2015 compares to $918 million in 2014.
  • ·Gross profit margin of 37.6 percent compares to 38.9 percent in the same period last year.
  • ·Operating income margin was -2.5 and 5.9 percent in 2015 and 2014, respectively.
  • ·EPS of -$0.25 in 2015 compares to $0.55 in the same period last year.

Third Quarter Non-GAAP Results Year-to-Year Comparisons

  • Revenue of $868 million in 2015 compares to $921 million in 2014.
  • Core revenue2 of $837 million declined 3 percent, grew 4 percent at constant currency3.
  • Gross profit margin of 40.9 percent compares to 40.4 percent in the same period last year.
  • Operating income margin was 7.4 percent and 10.5 percent in 2015 and 2014, respectively.
  • Adjusted EBITDA4 of $104 million in 2015 compares to $140 million in 2014.
  • EPS of $0.57 in 2015 compares to $0.96 in the same period last year.

Third Quarter Non-GAAP Segment Revenue Year-to-Year Comparisons

  • ISS5 revenue declined 16 percent, down 11 percent at constant currency.
  • Managed Print Services (MPS6) revenue grew 1 percent, up 8 percent at constant currency.
  • Non-MPS7 revenue declined 18 percent, down 14 percent at constant currency.
  • Inkjet Exit8 revenue declined 48 percent, down 45 percent at constant currency.
  • Enterprise Software revenue was $148 million. Excluding adjustments, Enterprise Software revenue of $165 million grew 92 percent, up 102 percent at constant currency.
  • Deferred software revenue9 increased 66 percent year to year.
  • Annualized subscription contract value10 increased 25 percent year to year.

Third Quarter Non-GAAP Higher Value Solutions Revenue Year-to-Year

  • Lexmark’s Higher Value Solutions revenue11 of $372 million excluding adjustments grew 28 percent, up 37 percent at constant currency.
  • Higher Value Solutions revenue accounted for 43 percent of total revenue, up from 32 percent in the same period in 2014.

Third Quarter Annuity Revenue

  • Lexmark’s Annuity revenue12 of $2.4 billion comprised 68 percent of Core revenue.
  • Lexmark’s Annuity revenue base consists of laser supplies, software maintenance, software subscriptions and ISS extended warranty for the trailing four quarters.

Balance Sheet

  • Cash13 was $143 million at quarter end, $140 million of which was non U.S.-based.
  • Net Debt14 was $954 million. This includes cash minus credit facilities of $397 million and long-term bonds of $700 million. This compares to Net Cash14 of $133 million in the same period last year.

Cash Flow

  • Net cash flow provided by operating activities was $22 million compared with $123 million in the same quarter of 2014. 
  • Free cash flow15 was $2 million compared with $87 million in the same quarter of 2014.
  • Capital expenditures were $19 million compared to $36 million in the same quarter last year.

Driving Shareholder Value

  • Lexmark’s Board of Directors has authorized the exploration of strategic alternatives to enhance shareholder value and unlock the intrinsic value created by the company.
  • Lexmark’s target is to return more than 50 percent of free cash flow to shareholders, on average, through quarterly dividends and share repurchases.
  • Lexmark has returned 93 percent since the first quarter of 2011.
  • Lexmark paid a third quarter dividend of $22 million, its 16th consecutive quarterly dividend.
  • Lexmark’s dividend yield places the company in the top 10 percent of dividend-paying technology companies16.

Lexmark Enterprise Software Healthcare Solutions Selected by UNC Health Care System and UF Health Shands

  • Lexmark announced that North Carolina-based UNC Health Care System and Florida-based UF Health Shands Hospital have selected Lexmark Enterprise Software solutions.
  • UNC Health Care System (HCS) will deploy the Lexmark Vendor Neutral Archive (VNA). A consolidated, VNA-based medical image repository and integrated enterprise viewing solution will support the UNC HCS vision of “one patient, one chart, one image repository.”
  • UF Health Shands Hospital, part of the Southeast’s most comprehensive academic health center, will deploy the Lexmark VNA to serve as an enterprise solution for managing medical images across its healthcare facilities and clinics. Lexmark VNA is expected to provide enhanced interoperability of patient information with the hospital’s existing electronic medical record and other clinical information systems.

Lexmark’s Leading Higher Value Solutions Recognized

In the third quarter, several top industry analyst firms positioned Lexmark as a leader in their key evaluations for the year. The recognition reflects the strength of Lexmark’s higher value solutions, connecting people to the information they need at the moment they need it. Lexmark was named a leader across a range of software and services categories:

MPS – Quocirca positioned Lexmark for the fourth consecutive year as a leader in managed print services17.

  • Enterprise Content Management – Lexmark was positioned in the Leaders Quadrant of the Gartner, Inc. Magic Quadrant for ECM for the third consecutive year18, and was named a leader in The Forrester Wave™ ECM Business Content Services, Q3 2015.
  • Enterprise Search – For the second consecutive year, Gartner positioned Lexmark in the Leaders Quadrant for enterprise search solutions, 201519.

Looking Forward – Fourth Quarter of 2015

  • Core revenue is expected to decline -1 to -3 percent year to year.
  • Total revenue is expected to be in the range of -4 to -6 percent year to year.
  • GAAP EPS are expected to be around $0.00 to $0.10.
  • Non-GAAP EPS are expected to be around $1.05 to $1.15.

Looking Forward – Full Year of 2015

  • Core revenue is expected to be flat to down 1 percent year to year.
  • Total revenue is expected to be in the range of -3 to -4 percent year to year.
  • GAAP EPS are expected to be around -$0.38 to -$0.48.
  • Non-GAAP EPS are expected to be around $3.42 to $3.52.