Executives
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
John Morgan - Director of Investor Relations
Analysts
Benjamin A. Reitzes - Barclays Capital, Research Division
Mark A Moskowitz - JP Morgan Chase & Co, Research Division
Katy Huberty - Morgan Stanley, Research Division
Chris Whitmore - Deutsche Bank AG, Research Division
Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division
Brian G. Alexander - Raymond James & Associates, Inc., Research Division
A.M. Sacconaghi - Sanford C. Bernstein & Co., LLC., Research Division
Deepak Sitaraman - Crédit Suisse AG, Research Division
Jeffrey Fidacaro - Susquehanna Financial Group, LLLP, Research Division
Bill C. Shope - Goldman Sachs Group Inc., Research Division
Lexmark International (LXK) Q3 2011 Earnings Call October 25, 2011 8:30 AM ET
Operator
Thank you for standing by, and welcome to the Lexmark International Third Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded on Tuesday, October 25, 2011. 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 permit. 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 that are posted to our Investor Relations website located at investor.lexmark.com earlier this morning. Following the conclusion of this conference call, a complete replay will be made available on our Investor Relations website.
Also on this site, you'll find details regarding our upcoming IR events, including our participation in Barclays Capital Global Technology Conference on December 8 in San Francisco.
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 A. Rooke
Thank you, John, and good morning to everyone. As John said, we'll be using a presentation slide deck as we did last time. We'll refer to the slide numbers as we go to keep everyone on the same page. So let's begin.
Starting with Slide 3, our third quarter financial results reflected good operational performance. We saw better-than-expected revenue growth in Imaging Solutions and Services, or ISS, and 15% year-to-year growth in Perceptive Software. Gross profit margin was strong and up year-to-year. Operating margin was driven by solid improvement in ISS's margin, offset by increased investment to accelerate the product roadmap and expand globally in Perceptive Software and other cost and expense. This, along with an unfavorable impact from discreet tax items of $0.06 per share, resulted in earnings per share at the low end of what we expected.
Secondly, we continued year-to-year revenue growth in our strategic focus areas. With ISS's core imaging business growing 10%, driven by double-digit revenue growth in high-end hardware at 17%, core supplies at 12%, and managed print services in excess of 25%. Perceptive Software grew 15%. This overall growth, however, was dampened by the continued, but expected, year-to-year revenue decline in our legacy consumer business.
We also resumed our share repurchase program in the third quarter; we repurchased $125 million of shares in the third quarter, and we anticipate repurchasing an additional $125 million in the fourth quarter. Finally, we continue to execute our strategy focused on the higher growth and higher page-generating segments of the imaging market and the higher growth enterprise content management software market. In the third quarter, we continued to strengthen our business process in fleet management solutions in support of this. Last week, we announced the acquisition of Pallas Athena, a Netherlands-based business process management software company that builds upon our world-class fleet management capabilities and strengthens our business process solutions capability even further. I will cover this more later.
We also announced the new enterprise class, cloud-based Print Release solution enables comprehensive mobile printing across network attached fleets. And finally, we announced 2 additional vertical solutions for healthcare and education to help customers capture, manage and access content more efficiently.
Now looking at our third quarter 2011 results, our GAAP revenue was $1.035 billion, up 1% year-to-year. GAAP earnings per share for the second quarter were $0.86, down 4% year-to-year. On Slide 4, using the non-GAAP numbers, you can see the key third quarter takeaways. Revenue for the third quarter 2011 was $1.035 billion, up 1% year-to-year, much better than expected. Underneath this, on a year-to-year basis, we saw a solid revenue growth in our strategic focus areas; ISS's core imaging business was up 10%, driven by double-digit growth and high-end hardware and core supplies, managed print services,again grew over 25%. Perceptive Software grew 15%, an encouraging sign. However, Lexmark's overall revenue growth was dampened by the continuing revenue decline from our legacy consumer business.
Now our operating margin of 10.4% was less than expected, down 0.5 percentage point year-to-year. Gross profit margin was up year-to-year with good operational performance and continued improvement in our nonmanufacturing cost.
Operating margin was driven by solid improvement in ISS's margin offset by increased investment to accelerate the product roadmap and expand globally in Perceptive Software and other cost and expense that John will describe later.
This, along with an unfavorable impact from discrete tax items of $0.06 per share, resulted in non-GAAP earnings per share of $0.95, at the low end of what we expected.
Now on Slide 5, we've shown our total unit laser shipments from 2007 to an estimate for 2011. As you can see, our overall laser hardware shipments into the install base over the last 5 years have been up and down on a unit basis.
At the same time, we saw record laser supplies revenues for 2010 and for the first 9 months of 2011, and we're projecting for the full year 2011. Although 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. Remember, supplies revenue is a function of the installed base size and the supplies revenue generated per unit of installed base, while one may debate whether our laser installed base has grown based on the variation in the shipments into the installed base over the past few years, our model indicates that a key driver of the core laser supplies growth we're seeing is an increase in supplies revenue generated per installed base unit.
We believe our strategy is driving this impact. First, we have expanded our laser products line over the last 5 years, particularly in workgroup class laser multifunction and color devices. Secondly, customers are continuing to consolidate their fleets, as indicated by our managed print services growth, driving more usage per device. And third, we're seeing customers substitute our A4 workgroup MFPs for their higher usage A3 copiers since the smaller, leaner A4 devices are now able to handle more of the copier-like paper handling tasks than they could 5 years ago. These factors are all helping to drive increased usage per device. We believe these increasing usage dynamics are the primary drivers of our supplies performance, more than compensating for fluctuations in unit shipments quarter-to-quarter or year-to-year. This is important since the supply's annuity drives our profit and cash generation engine.
So let's look at our supplies revenue performance on Slide 6. As we stated before, our strategic focus is to build a more productive, higher value installed base in terms of pages and supplies revenue. Here on Slide 6, you see the percentage of our supplies revenue split between that which is driven from our core installed base, the red bars fed from the laser products and business inkjet sales, and from our legacy inkjet installed base, the gray bars, representing the supplies revenue still flowing from our legacy consumer inkjet installed base. Now the percentages on the bars represent the year-to-year growth rates of the core in legacy supplies revenue. As you can see, the supplies revenue from our core installed base continues to grow, driven primarily by our lasers and the customer dynamics I just discussed, but also getting contribution from our high-end business inkjets. Our core supplies grew double digits again in the third quarter, at 12% year-to-year, an encouraging sign as we continue to make investments to improve the quality of the core installed base. On the other hand, the legacy supplies revenue continues to decline over time in both absolute terms and as a percentage of our supplies revenue. In the third quarter, legacy supplies were just 16% of our total supplies revenue.
So overall in the third quarter, we had growth in supplies revenue from our core installed base that was offset by the decline in the legacy inkjet supplies revenue resulting in flat supplies growth overall year-to-year.
As we've said before, as the legacy segment naturally declines with time and becomes a smaller piece, the growth of the core supplies segment becomes more dominant, and we expect it to drive growth in overall supplies revenue. The double-digit core supplies growth that continue this quarter is just another data point reinforcing the fact that what matters is improving the mix of the installed base, not the absolute size of it. And as we improve the mix of the core installed base, with our enterprise and small business initiatives, the average supplies revenue per installed unit continues to increase, more than compensating for any unit declines in our installed base.
So putting this all together on Slide 7, we have the year-to-year revenue comparison for the third quarter, with the hardware and supplies components now combined into the core and legacy split. Here you see at the core, along with the Software and Other piece grew 10% and 5%, respectively. These 2 pieces represent the majority of our business. The remaining consumer legacy component is declining, as expected, and becoming a smaller piece of our total revenue. And we are committed to growing the core in total, focusing on the highest usage segments to drive profitable growth along with the Software and Other segment to drive overall growth for Lexmark.
Now moving to Slide 8. Last week, we acquired Pallas Athena, a business process management software company based in Apeldoorn, Netherlands. This was a $50.2 million non-U.S. cash transaction. This acquisition builds upon and further strengthens Lexmark's end-to-end managed print services and business process solutions capability with the addition of process mining, business process management and document output management software technologies.
Now on Slide 9, the combination of Lexmark and Perceptive, and now Pallas Athena, creates a unique capability in the market that further strengthens and differentiates Lexmark's core industry focused workflow solutions and managed print services proposition to our customers. It expands our market for revenue growth and now provides cross-selling opportunities between imaging products, fleet management, content management, business process management and document output management solutions. And as with Perceptive, there is good opportunity to grow Pallas Athena worldwide, leveraging Lexmark's global presence.
On Slide 10, you can see our announcement last week of a new enterprise class, cloud-based fleet solution that enables customers to send a print job from anywhere, and then release it on-demand from any device on the network. For the end-user, it's easy and convenient since print jobs can be sent from Apple iOS, Android or BlackBerry mobile devices to the cloud, enabling the print job to follow you wherever you want to print it. It's secured since the job is only released at the device upon authentication and eliminates jobs just left lying around on the device. It's also green since the user only prints what's needed, eliminating wasteful printing of jobs that often get sent to be printed but ultimately aren't needed.
On Slide 11, you can see 2 new solutions we also announced this quarter for the healthcare and education segments. These solutions leverage the combined technologies of Lexmark and Perceptive to provide an end-to-end content solution for paper-intensive processes. On the left side, you'll see the Lexmark patient admission and registration solution to enable healthcare providers to electronically capture, organize, route and access patient documentation quickly, accurately and securely. On the right side is the Lexmark individualized education solution to help education professionals manage the paper-intensive areas of special education, in order to comply with strict legal requirements and annual compliance audits.
Now over time, our strategy has enabled Lexmark to grow a strong presence in the top enterprise customers across a number of key industry segments, as you can see on Slide 12. We also find that once Lexmark establishes a presence, many of these customers also become managed print services customers. In fact, as you see here in the retail and financial services segment, Lexmark is a high percentage of these top 10 customers as MPS or Management Print Services customers. Additionally, 36% of the Fortune 50 companies are Lexmark customers, and 24% of the Fortune 50 are managed print services customers of Lexmark. And for the third quarter, our overall managed print services revenue grew in excess of 25% year-to-year, and we have averaged over 25% year-to-year growth in the last 7 quarters. In fact, we've delivered year-to-year double-digit annual revenue growth for managed print services over the last 5 years. And within the last 24 months, we competed for and won 24 new managed print services contracts with companies listed on either the Global 500 or Fortune 500 list, which represent incremental business to Lexmark. We believe this is a clear indicator that our value proposition here is strong and continues to be relevant with these large discriminating customers. Additionally, our contract renewal rate over the last few years with these large, managed print services customers is an excess of 90%, also indicating that our ability to execute globally is industry-leading.
On Slide 13, you see a sampling of the awards we've received year-to-date across our hardware and software platforms. These continue to be a testament to the strength and innovation of Lexmark's product and solutions offerings.
On Slide 14, you can see our share position in 2 high-usage segments, a workgroup laser and business inkjet greater than $200. On the left, according to IDC, for the last 4 quarters ending second quarter of '11, Lexmark held share in our focus segment of A4 workgroup lasers. And on the right, according to IDC, for the last 4 quarters ending second quarter of '11, Lexmark continued to gain share in this higher performance inkjet segment.
So in summary, we're encouraged by these third quarter results in a rather stagnant market in North America and Europe and with economic uncertainty worldwide. However, we believe the growth we're seeing in our core, through managed print services and business process solutions, is indicative of our value proposition resonating strongly with customers as they look to find ways to save time and money. So we continue to execute our strategy focused on the higher growth and higher page-generating segments of the imaging market, and the higher growth enterprise content management software market. We're focused on growing our core hardware consisting of all laser hardware and new business class inkjets. We're continuing to expand and strengthen our laser product line, particularly in color lasers and laser MFPs, while strengthening our industry workflow solutions capabilities and advancing our managed print services business. The transition of our inkjet hardware is nearly complete, as we expect to finish exiting legacy inkjet products by year-end 2011. We are focused on growing our core business inkjet proposition, targeting higher-usage business customers with an improved high-end inkjet product line and distribution through both retail and non-retail channels.
In addition to strengthening our core imaging business, Perceptive Software is enabling us to compete in the fast-growing segment of enterprise content management software and is expanding and strengthening our industry workflow solutions capability. And now, with the addition of Pallas Athena's business process and document output solutions, Lexmark's capability has been notably strengthened.
And together with our managed print services business, Perceptive and Pallas Athena will be at the center of a strong growing software and services business at Lexmark.
Now looking ahead on Slide 15, you can see our fourth quarter, full year 2011 and long-term outlooks. We are expecting the markets in North America and Europe to become weaker with the Latin American and Asian markets continuing to grow. For the fourth quarter, outlook is for revenue growth to be down mid-single digits year-to-year. We expect GAAP earnings per share for the fourth quarter of 2011 to be in the range of $1.02 to $1.12 and earnings per share for the fourth quarter, excluding restructuring acquisition related adjustments, to be in a range of $1.15 to $1.25. Now for the full year 2011, our outlooks is for revenue growth to be down low-single digits year-to-year and operating margin to be about the 12.3% achieved in 2010. In long-term, our outlook is to grow at or above the market with an operating margin in the range of 11% to 13%.
Now before I turn it over to John, let me comment on the Thailand situation. First of all, we at Lexmark express our sympathy to the people of Thailand for the loss they have experienced from the flooding. We do not have a manufacturing logistics presence in Thailand. However, we do have a number of suppliers that were impacted by this crisis. We're working closely with them to understand the impacts to the supply of materials and components and working on alternative solutions as needed. Having said this, this only impacts a portion of our laser and inkjet hardware product line and does not affect supplies at all. We believe the impact to hardware availability in the fourth quarter is expected to be about $10 million of Hardware revenue or roughly 1% of total revenue. This impact has been factored in to our fourth quarter guidance. We are currently evaluating whether there'll be any impact to future quarters. I'll now turn it over to John Gamble for his more detailed comments on our financials.
John W. Gamble
Thank you, Paul, and good morning. Let me begin with the P&L. I will start by providing our third quarter 2011 GAAP results. Third quarter GAAP revenue was $1.035 billion, gross profit was $382 million, gross profit margin percent was 36.9%, operating expense was $283 million, operating income was $99 million, net earnings were $67 million, and earnings per share were $0.86.
The discussion that follows is on a non-GAAP basis and reflects non-GAAP adjustments unless otherwise noted. The non-GAAP pre-tax income adjustments in 3Q '11 were $9 million comprised of $6 million for acquisition-related adjustments and $3 million for restructuring-related adjustments. As a reminder, included in the earnings presentation slide deck posted to the Investor Relations section of the lexmark.com website, our schedule detailing the non-GAAP adjustments and reconciliations of GAAP and non-GAAP measures.
Before I get into the details, stepping back and looking at the quarter, our operational performance in ISS and in revenue overall, including Perceptive revenue, were both very positive this quarter and reflect good performance by Lexmark in the market. ISS divisional performance, the print-in-print services business, was strong; revenue growth was better than we had guided, with very strong hardware mix as high-end Hardware revenue grew 17% and MPS grew over 25%. Also, ISS division operating margin grew 40 basis points year-to-year. For Perceptive Software, our focus is growth, and revenue grew again, up about 15%. EPS performance, however, at $0.95, was at the low end of what we expected, generally driven by items less operational in nature. The biggest impact on EPS was a higher tax rate in the quarter, which was driven by a discrete tax item related to cash repatriation. This negatively impacted EPS about $0.06 per share. Also, other segment costs and expenses were about $3 million or $0.03 per share unfavorable, primarily driven by negative transactional FX performance due to the large currency movements in September. Absent these items, EPS performance would have been toward the top end of our range at about $1.03 per share and operating margins would have been closer to flat year-to-year at about 10.7%.
The remaining decline in operating margin from the 10.9% we had indicated in July was the approximately $3 million of losses at Perceptive Software. Perceptive showed 15% revenue growth in the quarter, but this was less than we had anticipated. As we are and continue to invest in Perceptive to accelerate the product roadmap and expand globally, this lower revenue growth resulted in a loss in the period.
Looking at Slide 16. Total revenue for the third quarter was $1.035 billion, up 1% compared to last year and down 1% sequentially from 2Q '11. Currency had a negative impact of 1% on Lexmark revenue in 3Q '11 versus 2Q '11. The currency impact on Lexmark revenue from 3Q '11 versus 3Q '10 was positive approximately 3%. Versus our expectation at the time, we provided our financial guidance in July, which was based on the exchange rate as of 6/30/11, currency had a 1% negative impact on revenue.
Hardware revenue in the quarter increased 2% year-to-year. Core hardware revenue, which in 3Q '11 represented about 99% of total Hardware revenue, was up 5% year-to-year. High-end core Hardware revenue, which in 3Q '11 represented over 70% of total hardware, was up 17% year-to-year, driven by 27% growth in units. As we have discussed before, high-end products produced, on average, an estimated 4x to 5x a lifetime supply per placement of low-end devices. Low-end core hardware revenue, which in 3Q '11 represented just under 30% of revenue, declined to 16% year-to-year due to a 14% decline in units. Hardware revenue increased 12% sequentially, well above our average sequential growth, again, principally due to strong growth in high-end hardware revenue. Supplies revenue in the third quarter was about flat versus 3Q '10 and above our expectation for the quarter. Core Supplies revenue growth of 12% was stronger than expected, reflecting strong growth in both laser supplies, which represents almost 90% of core supplies, as well as core inkjet supplies. Legacy supplies declined 35%, a bit more than our modeling. Legacy supplies represented only 16% of total supplies revenue in 3Q '11. In the first 3 quarters of 2011, supplies revenue ran above our models, and hence, ahead of our expectations. Software and Other revenue, which consist principally of hardware, spare parts and related service revenue, as well as software license, subscription, professional services and maintenance revenue, was up 5% year-to-year. This was driven by Perceptive Software's 15% revenue growth in 3Q '11.
Slide 17 provides detail on Hardware revenue in our traditional laser and inkjet format. Laser Hardware revenue, which represents over 85% of total Hardware revenue, increased 9% versus 3Q '10. Laser Hardware units increased 6% in the third quarter versus the prior year. Laser Hardware average unit revenue increased 4% year-to-year in the third quarter, driven by the positive shift to workgroup and MFP products. Inkjet Hardware revenue declined 27% in the third quarter versus the prior year, driven primarily by legacy inkjet, which declined 83% year-to-year. Inkjet Hardware units decreased 34% year-to-year in the third quarter, again, driven by legacy inkjet units, which declined 80% year-to-year. Core inkjet units declined about 15%, driven by declines in sub-$200 inkjets as greater than $200 inkjets continue to show growth. Inkjet hardware AUR in the quarter increased 10% versus the prior year.
Moving to Slide 18 in our earnings presentation. Geographically for the third quarter, U.S. revenue of $458 million declined about 2%. EMEA revenue of $359 million grew about 6% and the remaining geographies declined about 1% year-over-year.
As shown on Slide 19, gross profit margin for 3Q was 37.3%, up about 80 basis points versus 3Q '10 and down about 270 basis points sequentially. The 80-basis-point increase versus 3Q '10 was due to improved product mix, principally less inkjet hardware and increased laser supplies. The approximate 270 basis points sequential decrease was driven by 250 basis points of negative product mix, primarily due to increased mix of hardware, reflecting sequential growth in hardware revenue and sequential decline in supplies revenue.
We continue to make progress in resolving the nonmanufacturing cost issues we experienced in 1Q '11. Through 3Q '11, we have resolved the bulk of the issues and expect to have the issues fully resolved by the end of the year. Operating expense for the quarter was $279 million, an increase of $16 million versus 3Q '10, and $8 million versus -- and $8 million sequentially. R&D was up $3 million year-to-year to $95 million, reflecting program timing in the ISS division and increased development spend in Perceptive software. SG&A increased $13 million versus 3Q '10 to $184 million, principally due to currency in ISS division and other support costs and due to increased investment in Perceptive Software as we expand our marketing and sales footprint globally.
Sequentially, the increase was in both R&D of $5 million and SG&A of $3 million. The R&D increase was principally program timing, the increases in SG&A was driven by higher commissions and demand generation, as well as legal fees related to our patent infringement litigations. As we look at 2011 year-to-date operating expense, it is up about 8% year-to-year; over half of this increase is the addition of Perceptive Software operating expenses as Perceptive was not part of Lexmark in the first half of 2010, and we have increased investment in Perceptive due to -- to drive revenue growth through product and global expansion. The remainder of the increase in the ISS division and other segment is primarily due to currency. For the full year, we expect overall operating expense increases to be somewhat lower than the first 9 months results, with the increase driven predominantly by the addition of Perceptive Software in 2010. Operating income in 3Q '11 was $108 million, down $5 million from 3Q '10 and down $40 million sequentially from 2Q '11. I will provide more color on movement in operating income in our discussion with segment results. ISS segment revenue in 3Q '11 of $1.012 billion was up 1% versus 3Q '10, reflecting the hardware and supplies trends I discussed earlier. ISS segment non-GAAP operating income in 3Q '11 of $181 million was up $5 million versus last year and down $37 million sequentially. The improvement versus 3Q '10 was principally due to strong laser growth in both hardware and supplies revenue. ISS segment non-GAAP operating margins expanded 40 basis points, generally due to improved hardware mix of more high-end products. $37 million sequential decline was in line with expectations and consistent with seasonal patterns; this was driven primarily by lower supplies revenue and increased operating expense. Perceptive Software revenue in 3Q '11 was $23 million; this represents 15% growth versus 3Q '10 and an 8% sequential decline versus 2Q '11. The sequential decline from 2Q '11 is consistent with the expected seasonal pattern for Perceptive, as they have a strong presence in higher education. Perceptive segment non-GAAP operating income in 3Q '11 was negative $3 million, decreasing $4 million versus 3Q '10 and $3 million sequentially. The 15% year-to-year revenue growth by Perceptive was, we believe, strong performance. However, it was slightly below our expectations. We are investing in Perceptive to drive expansion of international sales, accelerate the development roadmap and increase the industry solutions Perceptive offers to both Perceptive and Lexmark customers, including MPS customers. To achieve this, we have increased both development and marketing and sales expense of head of revenue growth. Operating income was lower than expected in 3Q '10 as the 15% revenue growth was lower than our expectation, and therefore, did not fully cover this increase in operating expense.
We remain pleased with Perceptive's progress overall and believe the capabilities we are adding drive not only growth in Perceptive but also in our imaging business.
In 3Q '11, other operating income was negative $71 million, approximately $3 million unfavorable to our expectations and unfavorable $6 million versus 3Q '10 and $1 million unfavorable to 2Q '11. Versus our expectation, the $3 million of unfavorable performance was primarily due to the negative transaction effect from the impact of movements in foreign currencies, principally in September as both euro and, importantly, non-euro based currencies substantially declined relative to the dollar. We also incurred higher litigation expense related to our patent infringement litigation including our successful ITC action to block the importation of cloned laser cartridges infringing our patents.
Operating income margin in 3Q was 10.4%, a decrease of 50 basis points from the third quarter of 2010 and a decrease of 380 basis points sequentially. As indicated earlier, ISS division operating margins increased 40 basis points year-to-year. The decline in overall operating margins of 50 basis points was driven principally by the increased other segment costs, principally related to September's foreign exchange movements and higher litigation expense, as well as Perceptive Software operating margins.
Our effective tax rate in 3Q '11 was approximately 27% versus the 23% we had expected. The increase in the effective tax rate was driven by a discrete tax accrual of approximately $5 million, or $0.06 per share, incurred to reflects an increase in expected cost of cash repatriations executed in late 2010 and early 2011. As these repatriations were being executed, we had to estimate the net U.S. and foreign tax to be paid to affect the action. This estimate was made prior to our U.S. and many foreign tax returns being completed. As these returns are being completed, the more accurate estimate of taxes to be paid required we now increase this accrual.
For the full year 2011, we continue to expect our effective tax rate to be approximately 23%. The discrete items incurred in 3Q '11 will not impact 4Q '11. In 3Q '10, Lexmark had a low effective tax rate of 18%, principally due to positive discrete items incurred in the period. The net effect of the lower effective tax rate on EPS in 3Q '10 was a positive approximately $0.04 per share. Net earnings for the quarter were $74 million; 3Q '10 net earnings were $87 million. Earnings per share for the quarter were $0.95; this compares to 3Q '10 earnings per share of $1.09.
Now moving to the balance sheet and cash flow items. My comments on the balance sheet, cash flow and cash conversion cycle are based on GAAP results and refer to Slide 20. Cash flow from operations for the quarter was $48 million and weaker than expected. We believe the factors that drove this were timing-specific and will reverse over the next several quarters. Importantly, inventory performance remained very good and is indicative of our strong hardware and supplies sales in the quarter. The factors that drove the weak cash flow in 3Q '11 were increased receivables, driven by the timing of shipments, and revenue in the quarter, which was more heavily skewed to September than expected. Collection performance, as measured by delinquencies, remained good this quarter, increased other assets reflecting the very strong MPS shipments in the quarter. As some of these are executed on a per-page basis, payments occur with usage and not with product shipment. This manifests itself as an increase in other assets on the balance sheet: Decreased liabilities and -- decreased payables and other liabilities. The timing of standard AP processing in the quarter resulted in more payment cycles. As there were no changes in payment or other terms, this is an item we expect to reverse. Also, pension payments were made this quarter. In 3Q '11, our cash cycle performance of 20 days remains flat with the same quarter last year, as improved inventory performance was offset by lower payables days. For the quarter, capital spending was $41 million; depreciation in the quarter was $54 million. Cash and current marketable securities at the end of 3Q '11 was $1.221 billion, down $119 million from 6/30/11. This reduction reflects the $125 million share repurchase executed in 3Q '11. Going forward, we will provide a split of U.S. and non-U.S. cash on marketable securities balances. At September 30, U.S. cash and current marketable securities balances were $300 million.
Total long-term debt at the end of the 3Q '11 remained at $649 million, with maturities on the debt in 2013 and 2018.
Now turning to Slide 21. During the third quarter, we announced the resumption of our share repurchase program and indicated that we anticipated repurchasing $250 million in the second half of 2011. During the third quarter, $125 million of Lexmark shares were repurchased at an average price of $30.66 per share. The company anticipates repurchasing an additional $125 million of Lexmark shares in the fourth quarter of 2011. At quarter end, we had approximately $366 million of share repurchase authority remaining under the share repurchase program, which has no expiration date. Shares outstanding at 9/30/11 were 75.196 million. Average shares outstanding for the 3Q '11 for use in calculating diluted EPS were 77.964 million. Also on October 18, as Paul discussed in detail, we announced the acquisition of Pallas Athena for $50.2 million cash. Non-U.S. cash was used to fund this transaction.
Now for my forward-looking comments for 4Q '11, please refer to Slide 22. We expect fourth quarter revenue to be down mid-single digit percent year-to-year. GAAP EPS in 4Q '11 is expected to be $1.02 to $1.12. GAAP EPS in 4Q '10 was $1.10. In 4Q '11, non-GAAP adjustments to EPS are expected to be $0.13 comprised of acquisition related adjustments of $0.08 per share and restructuring related and other adjustments of approximately $0.05.
Acquisition related adjustments may be impacted slightly as we complete the accounting for the Pallas Athena acquisition. Non-GAAP 4Q '11 EPS is expected to be $1.15 to $1.25 per share. Non-GAAP EPS in the fourth quarter of 2010 was $1.29 per share. As a reminder, 4Q '10 had a low effective tax rate of 8.3%, reflecting discreet items in the period. If the 4Q '10 effective tax rate was equal to the approximately 23% we are expecting for 4Q '11, 4Q '10 non-GAAP EPS would have been approximately $1.12. Our 4Q '11 revenue guidance of a 5% to 6% year-to-year decline implies a sequential increase in revenue of 1% to 2% versus 3Q '11. The sequential increase is lower than the normally expected about 6% increase. The main drivers of this lower sequential performance are currency, which is negative about 3 points sequentially, the expected impact from the current situation in Thailand on Hardware revenue, about $10 million or 1%, and the impact of economic slowdown in the U.S. and EMEA. For total supplies revenue in 4Q '11, we expect the mid-single digit percentage decline versus 4Q '10. We expect core supplies growth to remain strong but somewhat lower than the very strong 12% core supplies growth we saw in the first 9 months of 2011. This reflects the tough [ph] compares 4Q '10 supplies were also very strong, negative currency impact as well as some negative impact from slower expected economic growth in the U.S. and EMEA. The strong core growth is offset by the expected 35% decline in legacy supplies. Although overall Hardware revenue is expected to decline year-to-year in 4Q '11, we're expecting year-to-year growth in high-end hardware and software revenue in 4Q '11, as Paul discussed. The income statement guidance provided is on a non-GAAP basis. In the fourth quarter, we expect the gross profit margin percentage to be up versus the 36.5% we achieved in 4Q '10. Operating expense is expected to about flat to down slightly versus the $270 million incurred in 3Q '11. Operating income margin in the fourth quarter is expected to be above the 11% achieved in the fourth quarter of 2010. For 4Q 2011 and full year 2011, we continue to expect our effective tax rate to be approximately 23%. This guidance is based on foreign currency exchange rates as of 9/30/11. At these rates, the currency impact on revenue in 4Q '11 versus 3Q '11 is expected to be negative 3%. The currency impact on revenue of 4Q '11 versus 4Q '10 is expected to be 1% -- negative 1%.
Based on our fourth quarter guidance, our expectations for the 2011 calendar year are shown on Slide 23. We now expect revenue to decline at a low single digit percentage rate in 2011 versus 2010. We expect Hardware revenue to decline year-to-year as growth in core hardware, driven by good growth in high-end lasers is more than offset by declines in legacy inkjet hardware. We expect supplies revenue to be flat to down low single digit percent as good growth in core supplies revenue is offset by declines in legacy supplies.
We are targeting a full year operating income margin of around 12.3%, similar to the strong 12.3% we achieved in 2010.
The slight change in our full year expectation for revenue and operating margin primarily reflects the significant weakening of foreign currencies we saw in September. We will be providing more color on our expectations for 2012 on our fourth quarter 2011 earnings conference call in early 2012. With that, we'll go ahead and open it up for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question is coming from the line of Katy Huberty of Morgan Stanley.
Katy Huberty - Morgan Stanley, Research Division
Today, Canon lowered its forecast for laser hardware growth, and their explanation was that they expected impact of HPs adjustment to channel inventory, I assume due to some pricing in the channel. So I wonder if you could comment on that as well as what you're seeing competitively in the laser market as we go into December.
Paul A. Rooke
Yes, Katie. As you saw on our third quarter results here, we're quite encouraged by the growth in our core business. A lot of that driven certainly by our lasers, and particularly, our high-end lasers. I mean, have 17% growth was very exciting for us. So we feel good about the positioning of our products and the strength of our product line. Having said that, I mean, as you seeing in our fourth quarter guidance, there are some headwinds that we're working against: One being the Thailand situation, we've got currency, and then just the overall economic situation, particularly in North America and Europe. So we're trying to balance all that, and that results in the guidance that we've given. So but overall, I mean, we feel good about our laser business. Our channel inventories, we feel, are quite normal.
Katy Huberty - Morgan Stanley, Research Division
And then just as a quick follow-up, what do you think drove the uptick in demand in September? And has that carried into the month of October?
Paul A. Rooke
Well, the demand, overall, we're seeing strong growth in our managed print services, for example. It was up again in excess of 25%, and that particularly drives more of the high-end mix of our business. And I think it's just -- our managed print services value proposition is compelling to customers, and we see more and more customers coming to us for that, and then you see that in on our growth. So I think that's a key driver to it. Additionally, on the essence of the small and medium business, I mean, we are seeing some growth there as we move our lasers in the particular channels there, and I think that's also driving some growth for us.
John W. Gamble
If you're referring specifically to my comments about September being larger and that being an impact on receivables, that was -- part of that was just timing of rollouts, that just some of our larger rollouts just occurred more in September than might normally occur. And also some product availability; we had some product availability that slipped in September, which caused our revenue to move more into September the normal.
Operator
You're next question is coming from the line of Ben Reitzes of Barclays Capital.
Benjamin A. Reitzes - Barclays Capital, Research Division
The hardware demand was better than expected, but versus my modeling, this other category was the big surprise. I just wanted a little more color on how much Perceptive was below your expectations? You grew, the reported growth was like 200% last quarter then going to 15% [ph]. So I was wondering if you could quantify what that was below your expectations? Maybe it was $5 million to $10 million. And then what was the other reason for the shortfall in the other? I assume there's no legacy supplies that you've been talking about, at least from the inkjet side, in there. And what's the new run rate for that other category? And then I have a follow-up.
Paul A. Rooke
Ben, on the Perceptive, remember, we didn't have Perceptive in the first -- most of the first half of last year, so that's why you saw a bigger growth there in those numbers. And then, so the third quarter is really our first full apples-to-apples quarter compared there- that's why you see the drop off there. 15% though, is, we believe, in excess of the market growth, and we're happy with that. And obviously, we want to do better and wanted to do better, but we're quite happy with what we're seeing there. I'll let John comment on the other category.
John W. Gamble
So and -- Ben when you're talking about other, I want to try to understand the question, you're talking about our other cost and expenses, or are you talking about something else?
Benjamin A. Reitzes - Barclays Capital, Research Division
No. Well, the revenue. I mean, that line was arguably, $15 million, $20 million short. I would have thought, than people's expectations, and Perceptive's probably a little bit of it, and what's the rest and what's the new baseline there?
John W. Gamble
Our other -- the other line, I think, was relatively consistent with our expectations other than the fact that Perceptive was a little short on revenue, right? I mean, just trying to size Perceptive, we indicate it's a reportable segment, so its loss was just under $3 million, which, as we indicated, we've been running it to around break even. So it was about -- as we said about $3 million worse than we expected. And Perceptive has pretty standard gross margins for a software company, generally in the 70s, so you can size maybe what we thought we were short. But in terms of other, no, I don't think, we don't think that there was a significant shortfall there, other than what I just talked about, services and parts are continuing to perform okay.
Benjamin A. Reitzes - Barclays Capital, Research Division
All right. And then I wanted to follow-up on the prior question with regard to competition. I mean, Canon puts out a big cut due to HP. There's a perception there is some disruption there. So I just think you guys may need to clarify why the biggest competitor in the world is cutting orders and you guys are okay with inventory and okay with -- I mean the revenue guidance you did, I don't think its above the street. But basically, pre-currency, it seems pretty in line. So I was wondering why are you -- your forecasts intact to the fourth quarter when Canon is cutting, are you taking share from HP? Are you seeing disruptions? I think that's going to be the key question on this call.
Paul A. Rooke
I can't comment on Canon or HP's business; all I can do is point you to the growth that we're seeing, and we do believe, for example, that managed print services growth is well in excess of the industry there. So I do believe, and you saw it in some of the comments we've made about capturing incremental business over the last 24 months. So we do believe we are shifting some share there, and particularly in the managed print services area, which is the fastest growing piece of that imaging business. So we have reduced our exposures in some of the consumer channels, if you will, as we have exited that. So we're very focused on business. I can't comment on the breadth to what Canon's or HP is seeing, but we're -- if there was any consumer exposure, we're kind of out of that, and our business is very focused on the business customer.
John W. Gamble
Yes, the bulk of our shelves, as Paul said, are enterprise-driven and direct demand generated. So a much smaller percentage probably of our sales than some of our competitors would be channel generated. So that would be a difference for us versus them.
Operator
You're next question is coming from the line of Toni Sacconaghi of Sanford Bernstein.
A.M. Sacconaghi - Sanford C. Bernstein & Co., LLC., Research Division
You commented on the legacy inkjet business, but it's, from a hardware perspective, very, very small. So it looks like your core inkjet hardware business was down about 17% year-over-year. I think under almost any circumstance, collectively, that's losing share. It's only $37 million in revenue on the hardware side, which feels kind of subscale to me. So the first question is, how often do you really reevaluate this business? What are the criteria for kind of staying in this inkjet business? And are you committed to it, because I think that the numbers are, quite frankly, even if you exclude the legacy on the hardware side, are pretty sobering.
Paul A. Rooke
Toni, we are committed to the inkjet technology. As we've said, we've been shifting it from a low-end consumer business to more of a higher performance business class product. And as you point out, we did have some down numbers in the -- even the core inkjet part. And most of that is really at the low-end kind of a sub-$200 level there. We are seeing growth in the $200-plus level, which is kind of the hardware where we're making our investments here and beyond. So inkjet, think of inkjet, it's one of many technologies that we have. Hardware and software, and we're still working hard to reposition that really to attack more of the business customer, the higher-end business customer.
A.M. Sacconaghi - Sanford C. Bernstein & Co., LLC., Research Division
I can't help just following up on that one. I mean, I appreciate the fact that $200-plus is the focus and it's growing. But by definition, if it's growing, then it's going to be really small. It's going to be maybe $15 million in quarterly revenue. And that just feels like a tiny subscale business, because you can only get to minus 17%, if part of your business is growing, by having a bigger part of it shrinking. And so to me, I think you just have to continue to question about whether that is an appropriately scaled business because we've just seen, despite the transition in the legacy part getting smaller and smaller and smaller and now being diminutive, that collective new business is still shrinking collectively and growing much, much slower than the marketplace. And at some point, is there a point at which you say, "This isn't working"?
Paul A. Rooke
I understand your point, Toni. And remember, it's also about the supplies. You see in our laser business, it doesn't take a lot of units to drive that supplies business. So even if we move the inkjet technology up, again, it's not about units, it's about those pages. But having said that, we're constantly looking at our platform mix and how much we're investing in each of those platforms. And again, inkjet, that platform is just one of several that we have in our business that we're constantly looking at to make sure it is optimized.
A.M. Sacconaghi - Sanford C. Bernstein & Co., LLC., Research Division
And then just a follow-up on share repurchases. You have a slide saying that you returned $4.3 billion to shareholders since 1999. Your market capitalization is only $2.5 billion, which certainly suggest that you have not received credit for that. Is the company reevaluating its cash policy? And can you comment on why you wouldn't consider a dividend given the -- or perhaps retaining cash, given the consistency of cash flow you've had over the years?
Paul A. Rooke
Toni, this is a regular thing we do, do. We look at it internally. We look at it with outside consultant help us well. We take feedback from our investors. And all of that is regularly reviewed with our board. So we're constantly looking at that, and as you pointed out, I mean, we made a decision earlier in the year to return a chunk of that to our investors that we're in the process of executing.
Operator
You're next question is coming from the line of Brian Alexander of Raymond James.
Brian G. Alexander - Raymond James & Associates, Inc., Research Division
Could you go over again the key drivers of the mid-single-digit supplies decline you're expecting in Q4? You've been flat-to-up this year in supplies. You have an easier comparison, even if I adjust for currency, and you have a strong high-end unit momentum for the last several quarters. So I'm just struggling to understand why you're seeing such a notable deceleration in supplies, particularly on the core?
Paul A. Rooke
Yes, Brian. You're right. I mean, the supplies results that we've seen to date have been encouraging for us, and particularly in the laser side of our business. Now having said that, we are facing some tailwinds that we're trying to weave into the whole estimate. We talked last time about being -- versus our expectations and versus our model. And we have been running above that for -- through the first 3 quarters of this year. So models go up and down around means and things, and so we're just not sure we'll stay above that model. So we've got some of that factored in that it may revert back. We also have currency facing us. We also have just kind of the overall general economic environment facing us, and we all remember back in '08, '09, so all of that is factored into our thinking ahead, and that's why you see that decline.
Brian G. Alexander - Raymond James & Associates, Inc., Research Division
So are you assuming single digit core supplies growth, and just, Paul, any more insights into what's been driving the variants versus your expectations, why you think the model has been wrong for the last few quarters?
Paul A. Rooke
We think the core will still grow, just less than what it has been for the reason -- We got a tough compare, too, in the fourth quarter. It was a very strong quarter for us last year, you may recall. But these models are just that, they're models. And so we're encouraged by what we see, but we know how models work, and if it ends up being more of a strong trend as opposed to one that come and go, then we'll see some upside from it.
Operator
You're next question comes from the Deepak Sitaraman of Credit Suisse.
Deepak Sitaraman - Crédit Suisse AG, Research Division
John, for growth margins in third quarter, how much of a benefit did you see from the progress you've made in resolving the nonmanufacturing cost issues? And how much more of a benefit are you expecting in the fourth quarter here?
John W. Gamble
And so I think as we talked through at the end of the second quarter, we had resolved more than we expected right through the second quarter. And so we saw continued improvement in the third quarter, but it wasn't a big driver of the improved margins in ISS; that wasn't the major driver. So basically, I think, we're continuing to operate on the path that we've been on. We're encouraged by what -- the progress we're making, and we expect to have it resolved by the end of the year. But as we talk about the end of the second quarter, the biggest move, the biggest improvement was -- happened in the second quarter.
Deepak Sitaraman - Crédit Suisse AG, Research Division
Okay. And just as a follow-up then, the impact from -- or the potential impact from Thailand that you've factored into your guidance is primarily on the revenue side of it rather than on the cost side of it. Is that the right way to think about it?
John W. Gamble
It's primarily hardware, right, and as we know, the hardware margins are much different than supplies margins. So yes, primarily a revenue impact.
Operator
You're next question is coming from the line of Mark Moskowitz of JPMorgan.
Mark A Moskowitz - JP Morgan Chase & Co, Research Division
I just want to try to understand the assumptions around your commentary that both U.S. and EMEA are expected to weaken. Can you give us a sense of what you're seeing out there in the field? Did you see some corporate customers pull forward orders? Did you see higher scrutiny on the part of the other customers? Any color there would be great.
Paul A. Rooke
Yes, I think, Mark, what we're seeing -- we did see a little bit of deal movement from the third quarter. Let's say primarily in the federal space, a little bit in the financial services. Those will be the 2 I'd point out. So we're watching that very closely. We don't think there -- that will be the business that isn't going to happen. But it may, it is moving to the right, and we will see what happens with budget and so forth in those segments going forward. So that's really what we're seeing. In Europe, who knows what's going to happen there, but I'd say both of those markets, North America and Europe, are fairly sluggish at the moment. On the other hand, we are seeing growth in the Latin American and Asian regions and expect those to continue.
John W. Gamble
And partially, we're just reacting to the general economic forecast. We're continuing to see expectations of weakening economies in the U.S. and EMEA, and our assumption is that eventually, we'll see some of that hit us.
Mark A Moskowitz - JP Morgan Chase & Co, Research Division
And then a follow-up on supplies. Just given the supplies commentary earlier, just trying to get a sense in terms of how are you going to try to prop up the growth here in the face of currency? Are you going to make some sort of pricing adjustments going forward?
Paul A. Rooke
Mark, historically, I mean we have and continue to harmonize prices when we see currency movements. We don't give forward indications what we're going to do pricing-wise. But historically, that's typically what we've done.
John W. Gamble
Please keep in mind, our core supplies growth has been very good, and we expect it to be very good for 2011 for the full year, right? So I think as we look at our supplies growth, we continue to think it's been very, very good, especially in the core. Right? We saw a little more deceleration in legacy than we expected. But in general, we've seen core performance to be very strong.
Paul A. Rooke
The other thing, in this tougher economic times, we have, I think, the reason for our managed print services growth is the value proposition becomes very attractive. And even when we were back in '08, '09, our managed print services business continued to grow through that. So it's a good tailwind for us there.
Operator
Your next question is coming from the line of Bill Shope from Goldman Sachs.
Bill C. Shope - Goldman Sachs Group Inc., Research Division
I heard you guys comment earlier on the channel inventory dynamics for hardware. But can you comment on the sell-through pattern you've seen within the laser supplies business? And how you think the inventory dynamics playing out, and in particular, I'm asking at the macro context because, obviously, there is a lot of uncertainty out there, and we've seen in the past that, that business can be quite cyclical, and suddenly cyclical if you see macro conditions weaken. So I want to talk about your view on that risk going into the fourth quarter?
Paul A. Rooke
Bill, we think, overall, our supplies channel inventories are fine. The point on the economic uncertainty, when things get a little uncertain and currencies are moving around, the channel does tend to get a little nervous and tighten down things. So that's the thing that we're watching closely there. But right now, we think our supplies channel inventory, as I said, are in good shape and maybe up a little bit, and laser a little bit down. But overall, we think they're in good shape.
John W. Gamble
And we did see a big movement in the deep recession we saw a couple of years ago. But if you look back over the last 10 or 15 years, the channel has been a little less cyclical in recessions than maybe you're implying, right? Because it certainly was quite deep in -- a couple of years ago. But that isn't -- I wouldn't say that's been the norm for the recessions since we've seen over the past 10 years.
Operator
You're next question is coming from the line of Shannon Cross of Cross Research.
Shannon S. Cross
My first question is just with regard to printing volumes and what you're seeing from your end-user customers. And I realized that your mix shifting up in terms of the devices that are out there, so the volumes are increasing on average. But just in general, when you talk your customers and to your -- the VARs out there and everything, what are you hearing people saying in terms of page volumes? Canon was actually just relatively positive on seeing an improvement in page volumes. Xerox also saw a slight improvement, albeit it, it's still a decline. So I'm curious as to what you're seeing?
Paul A. Rooke
Shannon, pages are holding. As you point out, what we said, our mix is continuing to increase so the per unit is going up. But overall, apples-to-apples, we think our page volumes are holding, which is a good thing.
Shannon S. Cross
And with regard to color, can you talk a little bit about penetration of color and what you're seeing in terms of sales there?
Paul A. Rooke
Color we're continuing to work on; as you've seen in our product line, we are making the investments there. You've seen that the product growth there both in the printers as well as the MFPs, as well as -- both lasers and inkjet, for that matter. Color is still an outside, underdeveloped area for us, and an opportunity for us going forward.
Shannon S. Cross
And then my final question, just sort of from a normalized standpoint, when you think about growth rate for MPS, when you think about growth rates for Perceptive, given the investments you're making, what are sort of your target growth rates? I would assume MPS benefited this quarter from the fulfillment of the VA contract, so I mean, is 25% what we should sort of think about or, again, on the Perceptive side, is 15% -- you said it was a little light, but kind of what do you think those jet businesses should be generating?
Paul A. Rooke
Shannon, what we said is want to grow faster than the industry, and we think in both those cases that we are doing that, both in MPS as well as that ECM segment.
Operator
You're next question is coming from the line of Ananda Baruah of Brean Murray.
Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division
On the ways of business, John, is it really MPS that's sort of driving the growth, I guess, this quarter. And also, I just want to get your comments on in the last couple of quarters. And I guess, what are you seeing, if that's the case, what are you actually seeing laser demand-wise in your non-MPS laser business?
John W. Gamble
Well you have to keep in mind, our strategy is to grow the high end and grow MPS and grow services. So the fact -- our MPS business is growing very well, and the asset is a fast-growing part of the business and certainly growing faster than the rest of the business. So it has been a very big contributor to the good performance in the high end. But again, that's a strategy. Right? So that's what we were trying to do is to drive to MPS and drive to solutions -- a solutions-delivered contract that make us more sticky. So we're not really trying to separate the business as you asked. We're trying to drive people toward a more deep relationship with Lexmark, and the deepest relationship we can have is MPS.
Paul A. Rooke
Ananda, I'd also add that there's the enterprise, MPS element; there's also small, medium business, and we're continuing to move our lasers. You can work through class [ph] lasers into and through channels that feed small and medium business, which oftentimes aren't under an MPS -- and be part of that non-MPS world that you refer to.
Operator
Our next question comes from the line of Chris Whitmore of Deutsche Bank.
Chris Whitmore - Deutsche Bank AG, Research Division
I wanted to come back to the supplies growth in the core business one more time. You mentioned for the first 3 quarters is tracking above your model. Can you help us understand how large that deviation is versus your model? And again, you said channel inventories are in good shape there. I'm just trying to understand both, number one, why the tracking above the model. And then number two, given the compare was 6 points easier in the quarter just reported and another 5 points easier on the outlook, why are we seeing that core supplies growth decelerate?
Paul A. Rooke
Chris, as I've said, the model is just what that is. It's a model. We think that what's driving it is all of the things that we talked about in terms of shifting our mix and so forth. But models, we've been in this a long enough time to know that we've seen things go above the average and then they come back down. So we'll see; we'll see what happens there. As we look ahead, it's just a -- we had a good, strong quarter in the fourth quarter's 10, making it a tougher and tougher compare. But we also have some of these headwinds that we're facing as we look into the fourth quarter, specifically around currency, further legacy fall off the economic situations that we talked about. So those are the things that we see.
Operator
Our final question will be coming from the line of Jeff Fidacaro of Susquehanna Financial.
Jeffrey Fidacaro - Susquehanna Financial Group, LLLP, Research Division
Just really going back to the fourth quarter guidance, if you look at the full year, I'm looking for an operating margin of 12.3%. And you're guiding for supplies to be down mid-single digits and revenues down mid-single digits in the fourth quarter. It would imply you need that fourth quarter operating margin closer to 12% versus the 11% year-over-year to hit the full year guidance. Just could you talk a little bit about the puts and takes on that operating margin in the fourth quarter that could get you there?
Paul A. Rooke
So I think what we indicated, all we indicated, really, in my comments is we'd be above the 11% level. So certainly, 12%, that would fall into the range. So no, I mean, what we need to continue to do is everything we talked about today. Right? So we're confident or comfortable to the extent that we continue to deliver high-end hardware that it's going to drive supplies, and it will drive positive performance for us. But, we understand the math that it takes to close the full year.
Jeffrey Fidacaro - Susquehanna Financial Group, LLLP, Research Division
But wOuld it be, just one quick follow-up, would it be on the supplies just a greater mix of the high end versus the low end that could actually improve that margin within supplies?
John W. Gamble
Supplies margins, we don't really give specifics on, but supplies margins don't vary that dramatically. When I talk about high end, it's high-end hardware, which delivers a lot more supplies in terms of quantity. Right? So that the more high-end hardware we can deliver, the more supplies revenue we generate.
Operator
Thank you, with that, I would like to turn it back over to Paul Rooke, Lexmark's Chairman and CEO, for closing remarks. Please go ahead, Paul.
Paul A. Rooke
So in closing, our third quarter financial results reflected better-than-expected revenue and a strong gross profit margin, but with the impacts of currency, investments in our software business and discrete tax items, our operating margins, earnings per share were less than what we expected. We continue to grow our revenue year-to-year in our strategic focus areas; the core imaging business grew 10%, driven by 17% high-end hardware growth and 12% core supplies growth. Driven by our strategy to target higher usage segments and our continued success growing managed print services in excess of 25%. This strategy combined with the investments we've made and continue to make to improve the functionality of our workgroup products is also enabling us to capture more pages from the high-usage competitive copier installed bases. Perceptive Software grew 15% year-to-year; we're making good progress in growing and integrating Perceptive Software into our business. And now with the recent acquisition of Pallas Athena [ph] and further investment in Perceptive Software to bring new and differentiated solutions to market, our future is focused on building a strong core of software solutions and services to complement our strong sales and workgroup lasers and high-end inkjet devices that together will grow sustained margins and drive long-term success for Lexmark. With that, I'll turn it back over to the operator to close out the call.
Operator
Thank you. That does concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day.
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