Twin Buys to Boost Lexmark Growth

Lexmark International Inc. (LXK - Analyst Report) seems to be on track to spur growth and regain its lost market share through back-to-back acquisitions. Earlier this week, the imaging and printing solutions vendor announced that it completed the acquisitions of two software companies for a consideration of $32.0 million each.

The first company was Australia-based ISYS Search Software, which is a leading provider for search and text mining software. The second one is Boston-based Nolij Corp., which develops Web-based document imaging and workflow software targeted toward the education sector.

Both the units have become a part of Lexmark’s Perceptive Software business. With newly added intellectual properties, Lexmark is optimistic about taking a larger share of the Managed Printing Services (MPS) arena of the printing industry.

As a new development in the printing business, MPS is attracting major industry players. Gartner sees this as the service provider’s capability to take up the primary responsibility of meeting customers’ office printing needs, including printing equipment, supplies, service and overall management. Moreover, the service helps to cut costs and reduce the time employees spend on print-related activities.

Apart from the MPS sector, Lexmark is prudent about refurbishing its revenue model by focusing on the software space. Lexmark’s intention was clear with the four consecutive acquisitions. Earlier this month, the company took over Luxembourg-based software company BDGB Enterprise, along with its U.S. subsidiary Brainware Inc. for approximately $148.0 million. In October 2011, Netherlands-based Pallas Athena was acquired for $50.2 million cash.

All the four acquisitions were made to strengthen Lexmark’s Perceptive Software. Lexmark acquired Perceptive Software in May 2010 and stepped into the enterprise content management market.

The Perceptive Software acquisition continued to play a material role in Lexmark’s recently concluded fourth quarter. While the company saw its revenue decline on account of lackluster demand for its legacy consumer products, this was mostly evident in the 5.0% revenue decline in the Imaging Solutions segment. Perceptive Software revenue on the other hand grew a whopping 41.0%.

The success from Perceptive Software is forcing Lexmark to invest heavily in the segment, which led to a significant increase in operating expenses during the quarter. The above mentioned acquisitions, which are expected to enrich Perceptive’s portfolio, is reflective of its continuous investments.

We see good growth prospects for Lexmark in the software sector. However, the company is also trying its luck in new hardware solutions. But the overall macro uncertainty could wash out its product demand ramps. Stiff competition from Hewlett-Packard Co. (HPQ - Analyst Report), Xerox Corp. (XRX - Analyst Report), Canon Inc. (CAJ) and Kyocera Corp. (KYO - Snapshot Report) is also a concern. Moreover, Lexmark is becoming the victim of the evolution of digital technology and e-commerce, which has lowered the usage of paper and thus need for printing, as a whole.

Currently, Lexmark has a Zacks #3 Rank, implying a short-term Hold rating.