Lexmark International (LXK)

Q4 2011 Earnings Call

January 31, 2012 8:30 am ET


John Morgan -

Paul A. Rooke - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

John W. Gamble - Chief Financial Officer, Principal Accounting Officer and Executive Vice President


Deepak Sitaraman - Crédit Suisse AG, Research Division

Benjamin A. Reitzes - Barclays Capital, Research Division

Katy Huberty - Morgan Stanley, Research Division

A.M. Sacconaghi - Sanford C. Bernstein & Co., LLC., Research Division

Bill C. Shope - Goldman Sachs Group Inc., Research Division

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

Shannon S. Cross - Cross Research LLC

Richard Gardner - Citigroup Inc, Research Division



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Thank you for standing by, and welcome to the Lexmark International Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded on Tuesday, January 31, 2012. I would now like to turn the call over to John Morgan, Lexmark's Director of Investor Relations. Please go ahead, John.

John Morgan

Good morning, and thank you for joining us. Chairman and CEO, Paul Rooke; and EVP and CFO, John Gamble, are with me this morning.

After their prepared remarks, we'll open the call for your questions 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. Please note that Paul and John will be referring to specific earnings presentation slides by number. These slides are posted to our Investor Relations website located at investor.lexmark.com earlier this morning.

Paul and John will be referring to non-GAAP measures during the presentation unless otherwise noted. Pursuant to the requirement of Regulation G, the company has provided reconciliations of GAAP and non-GAAP measures and a discussion of management's use of non-GAAP measures in the Supplemental Materials section of the earnings presentation slides.

Regarding our upcoming dividend schedule, Lexmark anticipates that the record date of its first quarter 2012 dividend will be March 5, with an anticipated payment date of March 16. We have also included our anticipated dividend schedule for 2012 and 2013 in the Supplemental section of the earnings presentation.

Following the conclusion of this conference call, a complete replay will be made available on our IR website. As a reminder, any of today's remarks that are not statements of historical fact are forward-looking statements and 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 A. Rooke

Well, thank you, John, and good morning to everyone. As John said, we'll be using a presentation slide deck. We'll refer to the slide numbers as we go to keep everyone on the same page. So let's begin.

Starting with Slide 4, our fourth quarter financial results reflected good performance for the quarter and the year, given the challenging global economic environment. For the fourth quarter, revenue and earnings per share were at the top end of the guidance range. For the quarter and the year, we saw a record laser revenue, along with record laser supplies revenue. This performance helped to drive a record gross profit margin, along with a solid operating income margin.

We also saw a continued revenue growth in our strategic focus areas. We continue to see growth in our Core, driven by growth in Supplies, managed print services and high end hardware. We also saw strong software revenue growth worldwide, as we continued to expand our international footprint for Perceptive Software. The overall revenue was dampened, however, by the ongoing but expected decline of our Legacy supplies.

We also recently strengthened our hardware and software offerings. On the Hardware side, we announced our new OfficeEdge series of color MFPs yesterday, a new high-performance inkjet platform for Lexmark.

On the software side, we recently announced 2 new business process management software products, leveraging software technologies from our recent acquisition of Pallas Athena. We also are staying focused on delivering value for our shareholders. We continue to shift in focus our imaging talent on solutions to target business customers while aggressively growing our software business. At the same time, we are focused on returning more than 50% our free cash flow to shareholders through dividends and share repurchases.

On Slide 5. Using the non-GAAP numbers, you can see the fourth quarter and full year financial highlights. Revenue for the fourth quarter was $1.061 billion, down 4% year-to-year but slightly better than we expected, and for the year, $4.178 billion, down slightly less than 1% year-to-year.

Now underneath this, we saw solid revenue growth in our strategic focus areas. The Core business was up 2% for the quarter and 7% for the year, with the annual growth driven by a double-digit growth in Core supplies revenue and high end hardware units, along with managed print services revenue which grew in excess of 25% for the year. Now Perceptive Software revenue grew 41% for the quarter and 28% for the second half of the year, the relevant periods of comparison. And our overall revenue growth, as I mentioned before, was dampened by the continuing, but expected, revenue decline from our Legacy consumer business.

Now operating income margin was 11.6% for the fourth quarter, up year-to-year and our full year operating margin of 12% was solid, consistent with our strong 2010 result. This was driven by a record gross profit margins of 38.3% in the fourth quarter, up 180 basis points year-to-year, and 38.4% for the year, up 140 basis points. Operating expense was up year-to-year, primarily driven by the addition of an investment in Perceptive Software. Earnings per share were $1.25 for the fourth quarter and $4.71 for the year at the top end of our fourth quarter guidance range.

Now on Slide 6. You can see where we ended up on total laser unit shipments for the full year and in context with the prior years. While we were down slightly, actually, down less than 100,000 total units for 2011, the mix was favorable, with our high end units up 12% year-to-year. Now our overall laser Hardware shipments into the installed base over the last 5 years have been up and down on a unit basis. However, regardless of the up-and-down, we've seen record laser supplies revenues for both 2010 and 2011. While we have seen uneven laser unit shipment performance into the installed base over the last several years, our statistical model indicates that the record laser supplies growth is attributable to the quality, not the quantity, of the installed base since not all units are created equal. In other words, we're seeing increased average supplies consumption per installed unit of our base, which has played out with consecutive record years the past 2 years.

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