Lexmark (LXK) Misses on Q2 Earnings; Revenues Down Y/Y

Lexmark International Inc. LXK reported second-quarter 2016 non-GAAP earnings of 69 cents per share, way below the Zacks Consensus Estimate of 82 cents. Reported earnings also witnessed a year-over-year plunge of 28.9%.

Lexmark's second-quarter non-GAAP revenues (excluding acquisition and divestiture-related adjustments) of $865 million dropped 2.9% from the year-ago quarter. On a GAAP basis, revenues came in at $863 million, down 1.8%.

The company's quarterly results suffered due to a strong U.S. dollar, a decline in non-MPS revenues and the ongoing exit of the company from the Inkjet business, which more than offset the benefit from revenue growth in Enterprise Software businesses.

Segment-wise, non-GAAP revenues at Enterprise Software were up 11%. Imaging Solutions and Services ISS and Non-MPS revenues tumbled 6% and 5.2% year over year, respectively.  Moreover, Inkjet exit business also suffered a loss on a year-over-year basis.

Non-GAAP gross profit in the quarter came in at $359 million, down 7.9%. Also, gross margin contracted 230 basis points (bps) to 41.5%. Operating expenses decreased 18.3% to 314.1 million. Operating expenses, as a percentage of revenues, decreased to 36.4% from 43.7% in the prior-year quarter.

The company's non-GAAP operating income plunged 22.1% to $75 million, while operating margin contracted 200 bps to 8.6%.

Lexmark's non-GAAP net income slumped 26.7% year over year to $44 million. Non-GAAP net income excluded restructuring-related charges & project costs, as well as acquisition and other one-time related adjustments.

Balance Sheet & Cash Flow

Lexmark exited the quarter with $103.1 million in cash, cash equivalents and marketable securities, compared with the quarter-ago level of $127 million. Trade receivables were $373.1 million whereas inventories were $236.7 million. The company's long-term debt balance was $988.7 million compared with $992 million in the last quarter.

The company generated $24 million of cash from operational activities. Free cash flow came in at $9 million during the quarter. During the quarter, the company paid a dividend of $23 million (36 cents per share).

LEXMARK INTL Price, Consensus and EPS Surprise

LEXMARK INTL Price, Consensus and EPS Surprise | LEXMARK INTL Quote

Our Take

Lexmark's second-quarter results were not very encouraging given the earnings miss. Also, both earnings and revenues decreased on a year-over-year basis primarily due to a strong U.S. dollar, a decline in non-MPS revenues, and the ongoing exit of the company from the Inkjet business.

Although Lexmark has a strong market position, reduced demand for traditional printing hardware and overall macroeconomic uncertainties have been dampening demand.

Also, synergies from the acquisitions of Kofax and 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 to-be-reported quarter.

Competition from players like Canon Inc. CAJ, Xerox Corp. and HP Inc. HPQ are additional concerns.

Currently, Lexmark has a Zacks Rank #3 (Hold). Investors may also consider Facebook, Inc. FB, which sports a Zacks Rank #1 (Strong Buy).

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