Lexmark International, Inc. Q1 2010 Earnings Call Transcript

Lexmark International, Inc. Q1 2010 Earnings Call Transcript
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Lexmark International, Inc. (LXK)

Q1 2010 Earnings Call

April 27, 2010 8:30 am ET

Executives

Paul Curlander – CEO

John Gamble – EVP & CFO

John Morgan – Director IR

Analysts

Tony Sacconaghi - Sanford Bernstein

Bill Shope - Credit Suisse

Shannon Cross - Cross Research

Kathryn Huberty - Morgan Stanley

Ben Reitzes - Barclays Capital

Richard Gardner – Citigroup

Mark Moskowitz - JPMorgan

Ananda Baruah – Brean, Murray, Carret & Co.

Chris Whitmore – Deutsche Bank

Presentation

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Welcome to the Lexmark International first quarter 2010 earnings conference call. (Operator's Instructions) I would now like to call the call over to John Morgan, Lexmark's Director of Investor Relations.

John Morgan

Good morning and thank you for joining us. Chairman and CEO Paul Curlander and EVP and CFO John Gamble are with me this morning. After their prepared remarks we'll open the call for your question as time permits.

We ask that you please limit yourself to one question and one follow-up, if needed, so that we can get to everyone. Following the conclusion of this conference call, a complete replay will be made available on our investor relations website located at

http://investor.lexmark.com

.

I’d also like to mention our upcoming participation in the 38

th

Annual JPMorgan Global Technology Media & Telecom Conference on May 19

th

in Boston, and in Sanford C. Bernstein’s Twenty-Sixth Annual Strategic Decisions Conference on June 3

rd

in New York. Please visit our Investor Relations website to obtain more information regarding our upcoming events.

As a reminder, any of today's remarks that are not statements of historical fact are forward-looking statements that involve certain risks and uncertainties that are disclosed in the Safe Harbor section of our earnings releases and SEC filings. Actual results may differ materially from such statements, and Lexmark undertakes no obligation to update any forward-looking statements.

With that I'll turn it over to Paul.

Paul Curlander

Thank you John, our first quarter financial results were significantly better than expected reflecting strong customer demand for both our hardware and supplies. The overachievement was broad based with all regions exceeding expectations in revenue and profit.

Revenue for the first quarter was $1.043 billion, up 10% year to year against a weak first quarter 2009 compare. However this 10% year to year first quarter revenue increase was a significant improvement from the 1% year to year revenue decline in the fourth quarter of 2009.

Also our sequential revenue performance from the fourth quarter to the first quarter was significantly better than our historic norm. Hardware revenue in the first quarter 2010 was up 18% year-to-year and better than expected. The 18% year-to-year hardware growth is a significant improvement from our flat year-to-year performance in the fourth quarter of 2009.

Supplies revenue in the first quarter of 2010 was up 9% year to year and was better than expected as both laser and inkjet supplies exceeded expectations. Now this 9% supplies revenue growth is a significant improvement from the 1% year-to-year decline in the fourth quarter of 2009 and reflects strong growth in laser supplies partially offset by an ongoing but reduced decline in inkjet supplies.

Overall supplies revenue growth was helped in the quarter by improvements in end user demand as well as year-to-year changes in channel inventory including a modest sequential channel inventory increase.

Earnings per share in the quarter were $1.20. Excluding restructuring related charges earnings per share in the first quarter were $1.35, a 51% increase year to year. In the first quarter net cash provided by operating activities was $146 million.

Now let’s talk about our two divisions, in our printing solutions and services division, or PSSD, first quarter 2010 revenue was $717 million, up 20% year to year and better than expected with strong year to year growth in both PSSD hardware and supplies revenue.

PSSD operating income excluding restructuring was $156 million, up 65% year to year. PSSD laser units for the quarter grew 15% year to year with laser MFP’s, color lasers, and workgroup laser units growing at a significantly greater year to year rate benefiting from our new product introductions in these segments over the last 18 months.

This improvement in laser mix towards workgroup products resulted in PSSD hardware revenue growth of 27% year to year. Now in the first quarter of 2010 our laser hardware sales have again been supply-constrained primarily due to the unexpected demand level, component shortages, and increased component lead times.

During the quarter we had strong growth in our enterprise management services business. We continued to close new enterprise deals and help our customers such as BB&T and Cummins to optimize their distributed output environment to lower their cost and to improve the visibility of their distributed [field] devices with ongoing managed services.

According to IDC data for 2009 we have continued to gain branded market share in our focus segment of A4 workgroup lasers with our share increasing almost two and a half points last year to 13% further solidifying our number two market position. And according to our internal analysis for 2009 Lexmark continued to be number one in the US printer market in laser product awards received with more than three times the awards of any other vendor.

Let’s talk about our imaging solutions division or ISD, in ISD we continue to make sequential progress in reducing the year-to-year revenue decline in both hardware and supplies. In the first quarter ISD revenue was $326 million, up slightly sequentially and down 6% year to year which was an improvement in year-to-year hardware and supplies revenue performance from the fourth quarter of 2009.

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