Lexmark's software unit suffers growing pains

Paul Rooke is CEO and chairman of Lexmark.
Paul Rooke is CEO and chairman of Lexmark.

During its quarterly earnings conference call last week, Lexmark executives said they intend to make their burgeoning software unit profitable in 2013.

Lexmark has acquired several software companies that now comprise the division since the company started it in 2010 by purchasing Kansas-based Perceptive Software.

The goal has been for the division's software programs to complement Lexmark's printers and offer businesses easier ways to improve the flow of documents.

Since that time, the company has poured money into the division to help spur growth, but that has also led to high expenses and operating losses for Perceptive Software.

In the most recent quarter, the division saw growth of 88 percent compared to a year earlier. Excluding acquisitions made in the last year, though, the growth was 22 percent. In the quarter, the division lost $8 million.

"We're going to limit the expenses here for a while, while we let the organization mature and catch up to its rapid growth then deliver profit in 2013," Lexmark chief executive Paul Rooke told analysts.

Despite its 22 percent growth, the software division did see some weakness in the quarter, as Rooke said Lexmark expected higher sales.

"We had a few deals that didn't close," Rooke said. "We think they'll close in the fourth or first quarters."

Analyst Shannon Cross of Cross Research said it will be a challenge for Lexmark to properly manage revenue growth with profitability.

"It's one of the few areas of their business that's growing, so you don't necessarily want to starve it," she said. "They'll have to have a careful balancing act.

"My assumption is they won't be acquiring anything more for a while."

Dissecting sales of large-workgroup printers

Nearly 75 percent of Lexmark's printer hardware sales revenue in the third quarter came from printers designed for large workgroups and are the type of high-usage printers the company has been looking to sell more of in recent years.

While the company saw unit sales growth in North America, the hardware segment was down 6 percent in units shipped overall. Rooke said international performance, particularly in Europe, hampered sales.

The quarter was a big one for government deals, and while "we were quite happy with our federal results ... they took the lower end of the high end," Rooke said.

He noted that low-end purchasing was an indication of the still fragile economy.

"But overall, I wouldn't get alarmed about this," he said. "What we see in these sluggish economic times is customers do decide to pause and defer their purchases.

"They have printers, and the usage continues. It's just when they want to refresh them."

Deal with Statoil

Lexmark announced recently that it was selected to be the sole printing provider for Statoil, an oil and gas production company.

The five-year deal is valued at $20 million, according to a Lexmark statement.

The deal will see Statoil using printing solutions Lexmark offers, such as secure printing.

"Lexmark's business solutions will make it easier for Statoil to reduce its environmental impact from printing," Lexmark executive vice president Marty Canning said in a statement.