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Lexmark International (NYSE:LXK)

Q1 2012 Earnings Call

April 24, 2012 8:30 am ET

Executives

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

Analysts

Benjamin A. Reitzes - Barclays Capital, Research Division

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

Shannon S. Cross - Cross Research LLC

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

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Michael Holt - Morningstar Inc., Research Division

Katy Huberty - Morgan Stanley, Research Division

Deepak Sitaraman - Crédit Suisse AG, Research Division

Matthew Prince

Operator

Thank you for standing by and welcome to the Lexmark International First Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded on Tuesday, April 24, 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 page 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 requirements of Regulation G, the company has provided reconciliations of GAAP to 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 the second quarter 2012 dividend will be June 1, with an anticipated payment date of June 15. Please note that future quarterly dividend payment are subject to board approval. We have also included our anticipated dividend schedule for 2012 and 2013 in the Supplemental section of our earnings presentation.

Also, Lexmark will be participating at 3 investor conferences in the second quarter including JP Morgan Global Technology Media and Telecom Conference, Barclays Capital Global Technology Media and Telecommunications Conference, and Sanford C. Bernstein & Co.'s Strategic Decisions Conference. More details can be found on our Investor Relations website. 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, everyone. As John said, we'll be using a presentation slide deck and 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 first quarter financial results reflected revenue and earnings per share performance, in line with our guidance range, along with a strong gross profit margin performance, a first quarter record, and free cash flow of $44 million roughly consistent with last year. We also saw a continued revenue growth in our strategic focus areas. We achieved double-digit growth in Managed Print Services and Perceptive Software, both outperforming the market, along with growth in large work group hardware and core supplies. The overall revenue was dampened by the ongoing but diminishing Legacy headwind.

We also strengthened our high-value offerings in our Core portfolio. On the hardware side, we recently announced new smart devices for the mid-range color laser market. And on the software side, we recently announced the acquisition of 3 software companies, giving us additional technologies to provide even more advanced end-to-end solutions growth.

We remain focused on delivering value for our shareholders. Our imaging talent resources are squarely focused on business, customers and were aggressively growing our solutions business. At the same time, we are focused on returning more than a 50% of our free cash flow to shareholders through dividends and share repurchases.

On Slide 5, using non-GAAP numbers, you can see the first quarter financial highlights. Revenue for the first quarter was $993 million, down 4% year-to-year. Underneath this, we saw a continued revenue growth in our strategic focus areas, this will provide double-digit growth in Managed Print Services, along with growth in large work group hardware and core supplies. Perceptive software revenue grew 41% for the quarter, an 18%, excluding the 4 recent acquisitions. And our Core revenue growth as mentioned before was more than offset by the continuing -- a diminishing headwind from our Legacy consumer business.

Our operating income margin was 11% for the first quarter. Record of first quarter gross profit margin was offset primarily by the increased operating expense investment in Perceptive Software and additional acquisitions throughout future growth. Earnings per share were $1.05 for the first quarter in line with our guidance, and we generated $44 million of free cash flow. 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'll see the percentage of our Supplies revenue split between that, which is driven from our Core installed base, the red bars, fed from the large and small work group of product 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 represents the year-over-year growth rates of the Core, and the Legacy Supplies revenue. As you can see, the Core Supplies revenue grew 4% driven primarily by our lasers but also getting contribution from our small work group Inkjets. We also believe there was contribution from an increase in supplies channel inventory, in advance of our early April price action. The Legacy Supplies revenue continued to decline in the first quarter, representing a 15% of our total Supplies revenue. So overall in the first quarter, we had growth in Core Supplies revenue, that was more than offset by the decline in the Legacy inkjet Supplies revenue, resulting in a year-to-year Supplies revenue decline of 4% overall.

And as we've said before, as the Legacy segment naturally declines with time and becomes a smaller piece, and the growth of the Core supplies segment becomes more dominant, we expected to drive growth in overall Supplies revenue.

Putting this all together on Slide 7, you can see the year-to-year total revenue comparisons through the first quarter with a revenue split between the Core, meaning our Core Hardware supplies software and services; and Legacy, the older consumer Hardware and supplies. Here you'll see for the first quarter, the Core grew 1%, and represented 89% of our business. The remaining consumer Legacy component is declining as expected, and becoming a smaller piece of our total revenue. The Core growth was more moderated this quarter, reflecting double-digit growth in both Managed Print Services and Perceptive Software. Growth in large Workgroup Hardware and Core supplies, dampened by decline in smaller Workgroup Hardware driven by our planned transition from retail to non-retail distribution.

We are committed to growing the Core. While we're not satisfied with this level of Core growth, we believe we are laying the groundwork for higher growth in the future, by investing in the highest usage segments and expanding our software solutions business to drive profitable growth for Lexmark.

On slide 8, you can see our unit share position in the high-usage A4 laser you Workgroup segment. For those not familiar with the A4 laser workgroup designation, this simply refers to the market of laser printers and MFPs that are designed for letter and legal sized documents, in contrast to the larger A3 or 11x17 format, typically designed in the floor standing copier devices. Now these A4 laser Workgroup devices are increasingly displacing the larger copier devices due to their smaller size, lower cost and improved functionality. And according to IDC, for the last 4 quarters ending the fourth quarter of '11, Lexmark continued to grow share in this A4 Laser Workgroup segment, this is important since these are higher-usage devices which drive Supplies revenue.

An example of -- this is our recent win at the U.S. Department of Agriculture, as you can see in Slide 9. For this multi-year, Managed Print Services win, Lexmark, will provide a broad range of capabilities, bringing value to the USDA through insightful analysis of their current imaging infrastructure; more efficient and standardized deployment of smart MFPs and printers; proactive and automatic consumables deployment; and continuous data analytics for ongoing optimization of these assets; and business process improvements.

As further proof, our overall Managed Print Services revenue, as I mentioned earlier, grew double digits this quarter, exceeding the market growth for Managed Print Services once again. And within the last 24 months, we competed for and won, 20 new Managed Print Services contracts with companies listed on either the Global 500 or Fortune 500 list, which represent incremental business to Lexmark. And we believe this is a clear indicator that our value proposition here is strong, and continues to be relevant with these large discriminating customers.

Turning to Slide 10. You can see the new family of color workgroup devices announced last week. These smart printers and MFPs incorporate both, industry-leading color touchscreen interfaces and advanced solutions capabilities, consistent with our strategy of providing differentiated industry-specific, end-to-end solutions.

We've also announced a series of acquisitions recently, as you can see on Slide 11. These acquisitions provide key technologies and customer bases, as we build our solutions capabilities. In addition to Perceptive Software, we've recently added Pallas Athena for business process management, Brainware for intelligent capture, ISYS for enterprise and federated search, and Nolij, for web-based document management. All of these now report into and are being integrated into Perceptive Software.

On Slide 12, you can begin to see how they've fit into our evolution, from a hardware-centric company to an end-to-end solutions provider. From our beginning as a printer provider, we've become a leader in Managed Print Services and fleet solutions, supplying the largest companies in the world. From this, we have built a leadership position in smart, A4, Workgroup MFPs, capable of capturing document content and routing it electronically. And now, with the addition of Brainware, Pallas Athena, ISYS and Nolij, we have the advanced technologies to build leading end-to-end solutions; leveraging our MPS fleets of devices; and enabling customers to capture, manage and access any content, structured or unstructured in the context of their host systems or processes. And all of these capabilities can be delivered on premise or through the cloud.

As we build out our capabilities, we are squarely focused on business customers. On Slide 13, you can see the Legacy elements of our business on the left, and the Core elements on the right. On the Legacy side, we have exited the consumer market, and as a result of taking restructuring actions over the past several years to eliminate the parts of our operations dedicated to this market. We're now squarely focused on the business market as shown on the right side, investing in a consolidated range of hardware, both large and small Workgroup with 8 of the 9 segments being laser, and 1 being high-performance business inkjet, all produced through a network of hardware manufacturing partners in a highly consolidated Lexmark supplies manufacturing footprint. In addition, we are also investing in a growing set of software technologies, also through non-retail business channels in our direct to Lexmark.

As mentioned earlier, we are focused on growing the Core. On Slide 14, in the upper left, adjusted on a constant currency basis, we are expecting to grow the Core revenue, 3% to 5% in 2012. Long term, you can see our growth objectives in the upper right. We expect to grow our solutions revenues, meaning the MPS and Software revenues together, in double digits, in excess of the market growth. For the transactional business, the rest of the Hardware Supplies and Services, we expect to grow low single digits. And if the Legacy headwind declines, shown in the lower left, this will enable the Core growth to come through. And as you can see for 2012, we have revised our full year revenue guidance, from a range of, minus 3% to minus 5%, to a range of minus 2% to minus 4%, largely driven by the addition of our recent acquisitions.

Looking ahead on Slide 15. You can see our second quarter, full year 2012, and long-term outlooks. For the second quarter, our outlook is for revenue to be down, 7% to 9% year-to-year. We expect earnings per share for the second quarter, excluding restructuring and acquisition-related adjustments to be in the range of $0.95 to $1.05. For the full year 2012, our outlook is for revenue to be down 2% to 4% year-to-year. We expect earnings per share for the full year excluding restructuring and acquisition-related adjustments, to be in the range of $4.70 to $4.90. Long-term, our outlook is to grow revenue at or above the market, with an operating margins in the range of 11% to 13%.

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. As John indicated earlier, the discussion that follows is on a non-GAAP basis and reflects non-GAAP adjustments, unless otherwise noted. As a reminder, included in the earnings Supplemental Materials posted to the Investor Relations section of the lexmark.com website, a reconciliations of GAAP and non-GAAP measures.

Before I get into the details, let me make a few overall comments on the quarter. Taken together, 1Q '12 continued to show good progress in our strategic initiatives, and included significant steps forward in enhancing our solutions capability with the acquisition of Brainware, ISYS and Nolij, and the launch of our 740 [X740] series of color products. In terms of our revenue, our performance was at the high-end of our guidance and our trends remained consistent with our performance over the past several quarters. We saw growth in our strategic segments of MPS, large Workgroup Hardware, Core supplies and software, including 41% growth of Perceptive. Again, these trends -- positive trends were offset by declines in Legacy consumer revenue, and in Small Workgroup Hardware reflecting declines in business inkjet.

In terms of EPS, we delivered in line with our guidance. Supplies revenue was slightly stronger than expected, however, largely driven by an increase in first tier channel inventory as our first tier distributors purchased ahead of our supplies price increases. The income benefit of this was offset by losses at Perceptive as revenue growth although strong, was lower than our expectation resulting in an operating loss.

I will cover each of these areas more fully in my detailed comments to follow.

Turning to Slide 17, total revenue for the first quarter was $993 million, down 4% compared to last year, down 6% sequentially from 4Q 2011, and on the high-end of the guidance we provided in January. Core revenue growth of 1% year-to-year was offset by a 34% reduction in Legacy revenue. Legacy now represents only 11% of total Lexmark revenue in Q1 2012. By the end of 2012, we expect Legacy revenue to represent less than 6% of total Lexmark revenue. Currency negatively impacted revenue by about 2% year-to-year, in line with our guidance estimate. ISS segment revenue in 1Q 2012 of $963 million, was down 5% versus 1Q '11, down 6% sequentially, and slightly better than the typical sequential pattern. Again, ISS had good revenue performance in MPS, and continued to see good growth in Core supplies and large Workgroup Hardware. This growth was offset by declines in Legacy Hardware and supplies, and declines in small Workgroup inkjet Hardware as we shift our distribution from retail to non-retail.

Perceptive Software revenue in 1Q '12 was $30 million, up 41% year-to-year, and down 4% sequentially. Excluding revenue from acquisitions completed over the last 4 quarters, growth was 18% year-to-year. Perceptive's revenue reflects growth in both North America and internationally. Despite the strong growth, revenue was below our expectations, as several significant transactions slipped into future quarters. We expect to close the majority of these transactions over the next several quarters, and remain very positive on Perceptive and expect revenue growth to accelerate in 2Q versus the growth generated in 1Q '12.

As shown in Slide 18, geographically for the first quarter, U.S. revenue of $423 million declined approximately 3% year-to-year. EMEA revenue of $368 million declined about 5%, and the remaining geographies had combined revenue of $201 million and declined about 6%. The decline in U.S. revenue principally reflects the ongoing trend in Legacy consumer revenue. The U.S. also saw some weakness in OEM, while Lexmark branded hardware showed continued growth. In Q1 2012, the U.S. saw a good performance in MPS and Large Workgroup Hardware placements and continues to win large new major MPS accounts such as USDA. The decline in EMEA was principally due to Legacy revenue declines in currency.

As shown on Slide 19, Hardware revenue in the first quarter declined 9% year-to-year. Large Workgroup Hardware revenue, which in 1Q 2012 represented about 70% of total Hardware revenue, was up 7% year-to-year, driven by a 15% growth in units. Large Workgroup Hardware AUR declined 7%.

Small Workgroup Hardware AUR, which in 1Q 2012 represented 23% of total Hardware revenue, declined 36% year-to-year, driven by a 31% decline in units. Small Workgroup Hardware AUR declined 7%. The decline in Small Work Group Hardware was due to declines in Core inkjet units and revenue. The small Work Group Hardware decline more than offset the growth in large Work Group Hardware, resulting in the 8% year-to-year decline in Core Hardware revenue. This mixed shift has a positive impact on overall Core AUR, which was up 18% year-to-year.

Legacy Hardware revenue was $3 million in 1Q last year. All Hardware sales in 2012 were principally Core Hardware. Going forward, we will continue with providing details on our Hardware sales based on the Large Workgroup and Small Workgroup categories. We will no longer provide a breakdown by laser and inkjet technology.

Supplies revenue in the first quarter was down 4% versus 1Q 2011. Core supplies revenue grew 4% year-to-year. Core supplies growth was negatively impacted by approximately 2% due to currency. However, this negative currency impact was more than offset by an increase in channel inventory, as the first tier purchased ahead of the recent price increases. As we look to the second quarter, we expect this channel inventory added in 1Q '12 to decline, negatively impacting Core supplies growth. Legacy supplies declined 33% in 1Q '12 versus 1Q '11. Legacy supplies represented only 15% of total Supplies revenue in 1Q 2012, versus 21% in 1Q '11. By the end of 2012, we expect Legacy supplies to represent less than 9% of total supplies. In 1Q 2012, Software and Other revenue was up 6% year-to-year, driven by growth in Perceptive Software.

As shown on Slide 20, gross profit margin for 1Q was our first quarter record: 39.4%, up 120 basis points versus 1Q 2011, and up 110 basis points sequentially. The increase versus 1Q 2011 was driven by 360 basis points of positive mix, due to less hardware relative to supplies. This was partially offset by 240 basis points of lower product margins. The lower product margins were in small Work Group Hardware, predominantly inkjet. This partially offset the net benefit of the resolution of the non-manufacturing cost issues we incurred in 1Q '11, net of the incremental costs we incurred in 1Q '12, related to the Thailand crisis. The sequential increase in gross margin of 110 basis points was driven by positive product mix of 510 basis points, primarily reflecting a larger percent of supplies relative to Hardware. This was partially offset by lower product margins, predominantly in small Workgroup Inkjet Hardware. In 1Q '12, as expected, we did incur incremental costs, related to recovery from the Thailand floods, principally in expediting an increased component costs. The costs incurred were somewhat less than the $10 million to $15 million, we had expected. We do not expect to incur a significant cost, net of insurance recoveries, related to Thailand floods in 2Q '12. As we indicated previously, we expect the majority of all costs incurred related to the Thailand floods to be covered by insurance, with recovery later in 2012.

Turning to Slide 21, operating expense for the quarter was $282 million, up $10 million versus 1Q 2011, down $1 million sequentially, and in line with our expectation. The year-to-year increase is driven by ongoing Perceptive investments, including the acquisition of Pallas Athena in 4Q '11. As expected, R&D declined slightly versus 4Q '11, resulting in a sequential decrease in OpEx.

As shown on Slide 22, operating income for the first quarter of 2012 was $109 million, down $15 million versus 1Q 2011, and down $14 million sequentially. ISS segment operating income in 1Q 2012 of $188 million was stronger than expected, and down only $2 million versus last year, and down $6 million sequentially. The stronger-than-expected operating income, reflects the stronger-than-expected supplies, that I referenced earlier. The decline in operating income versus 1Q 2011, reflects the negative impact on the income of lower Legacy Supplies revenue, partially offset by the positive income impact of lower Inkjet Hardware revenue and the lower non-manufacturing and other costs, due to the resolution of issues we incurred in 1Q '11, net of Thailand costs. The $6 million sequential decrease was driven by seasonally lowered total Supplies revenue in Q1 and the Thailand impact mentioned earlier.

Perceptive segment operating income in 1Q 2011 was negative $8 million, below our expectations of approximately breakeven. The 41% year-to-year growth by Perceptive was a strong performance, however, it was below our expectations with several large transactions slipping into future quarters. We continue to invest heavily in Perceptive to accelerate the development roadmap; increased industry solutions for both Perceptive and Lexmark customers including MPS customers; and drive international sales expansion. As we have sized our investment ramp based on these higher revenue goals, due to the high gross margins in this business, the revenue mistranslated directly into a significant operating loss. We remained very pleased with the progress in growth being delivered by Perceptive, and the opportunity for accelerated growth from our recent acquisitions of Brainware, ISYS and Nolij. However, operating income performance needs to improve, as our expectations remains that in the remainder of 2012, that Perceptive should operate at approximately breakeven operating income, while delivering accelerated above market growth.

All other operating income was a negative $71 million, was in line with our expectations and unfavorable versus 1Q 2011 by $5 million, primarily due to currency and compensation expense. Operating income margin in 1Q '12 was 11.0%, down 90 basis points from 1Q 2011, and down 60 basis points sequentially, primarily reflecting the operating loss of Perceptive.

Now turning to Slide 23. Net earnings for the quarter were $76 million, or $1.05 per share, compared to 1Q 2011 net earnings of $91 million or $1.14 per share. Our effective tax rate in 1Q 2012 was approximately 26%, versus the 25% we had expected, and the 21% incurred in 1Q 2011. Please note that my comments on the balance sheet, cash flow and cash conversion cycle are based on GAAP results and refer to Slide 24.

Cash and current marketable securities at the end of 1Q 2012 was $949 million, down $200 million from 12/31/2011. This reduction reflects the $212 million of acquisition consideration for Brainware, Nolij and ISYS incurred in 1Q '12, as well as the $30 million of share repurchases and $18 million of dividends executed in the quarter. March 31, 2012, U.S. cash and marketable securities balances are $88 million. Total long-term debt, at the end of 1Q 2012 remained at $649 million, with maturities on the debt in 2013 and 2018. Cash flow from operations for the quarter was $92 million compared to $85 million in 1Q 2011. Free cash flow was $44 million, slightly below the $49 million we generated in 1Q 2011. For Perspective in general, our goal is to generate free cash flow equal to 100% of non-GAAP net income. The first quarter cash flow is generally below this goal, due to the timing of certain annual payments, specifically bonuses and employee profit-sharing, as well as pension contributions. 1Q '12 was consistent with this pattern, with free cash flow equal to about 60% of non-GAAP net income. 1Q '12 free cash flow was also impacted by certain payments related to the acquisition of Brainware, ISYS and Nolij, which under purchase accounting impact operating cash flow.

For the full year 2012, we expect free cash flow to be approximately 90% to 100% of non-GAAP net income. Depreciation and amortization for the quarter was $62 million, approximately $12 million of which, is accelerated depreciation related to restructuring, and amortization of the acquisition-related intangible assets. Capital expenditures were $48 million. Cash used by accounts payable and accounts receivable were $17 million and $8 million respectively. Inventory was a $7 million source of cash. In 1Q 2012, on a GAAP basis, we saw a 4 days sequential increase in our cash conversion performance. The weaker performance in both receivables and inventory metrics versus 4Q '11 and 1Q '11, was driven by the revenue and COGS in 1Q '12 being more weighted to the last month of the quarter. Process execution, receivables, payables and inventory in 1Q '12 was very good. Looking at the metrics on a monthly basis to eliminate the skew, collections performance remained very good at under 33 days, and the inventory performance improved, versus both calendar year '11 and 1Q '11 -- 1Q '12 -- I'm sorry, 1Q '11. GAAP payables benefited from the skew of revenue versus 4Q '11, however, GAAP payable's days on monthly basis remained very strong at over 70 days. We remain focused on improving cash cycle in 2012 and beyond, and we'll continue to ensure process performance remain strong.

Now turning to Slide 25. In 1Q 2012, we continued the execution of our capital return framework of returning over 50% of free cash flow to shareholders through a combination of dividend and share repurchases. In 1Q '12, we returned $48 million to shareholders through dividends and repurchases. At quarter end, we had approximately $211 million of share repurchase authority remaining under the share repurchase program, which has no expiration date. In the Investor Relations slide deck, we have provided estimated dates for dividend declaration and payment for 2012 and '13.

Shares outstanding at the 3/31/2012 were 71.107 million. Average shares outstanding for use in calculating diluted EPS for 1Q 2012 were 72.3 million. Non-GAAP adjustments for the first quarter of 2012, consisting of restructuring and acquisition-related cost and expenses, were $20 million on a pre-tax basis, or $0.21 per share.

Please refer to Slide 26 for my forward-looking comments for 2Q 2012. We expect second quarter revenue to be down 7% to 9% year-to-year. This guidance is equivalent to sequential revenue performance of down 2% to 4%, with this range being slightly lower than normal sequential trends. This outlook includes a negative currency impact to revenue of approximately 3 percentage points year-to-year, and an assumed reduction in supplies channel inventory as the first tier liquidates inventory they purchased in 1Q '12, ahead of our price increases. Due to these new 2 negative impacts and despite continued growth in the strategic focus areas of MPS, Large group of Workgroup Hardware, and Software, we expect Core revenue will decline in 2Q '12. We expect Core revenue to grow in the second half of 2012, and for the full year of 2012. GAAP EPS in 2Q 2012 is expected to be $0.65 to $0.75 per share. GAAP EPS in 2Q 2011 was $1.27 per share. In 2Q 2012, non-GAAP adjustments made up of restructuring and acquisition-related cost and expense, are expected to be $29 million. This includes restructuring cost of $0.14 per share, and $0.16 per share of acquisition-related cost and expense. Non-GAAP EPS is expected to be $0.95 to $1.05 per share. Non-GAAP EPS in 2Q 2011 was a $1.36. The decline in non-GAAP EPS versus 2Q '11, is due to a lower Supplies revenue and related income. The decline in Supplies revenue reflects several factors including the impact of an expected 35% reduction in Legacy Supplies revenue. As you have seen in 2010 and 2011, we have generally been able to offset much of the impact of declining Legacy supplies on EPS, through Core supplies growth, reduce losses on Hardware replacements, cost and expense reductions and share repurchases. In 2Q '12, we again expect lower Hardware losses, lower operating cost and reduce shares outstanding than in 2Q '11. However, in 2Q '12 the large negative impact of currency, and the expected reduction in supplies channel inventory, resulted in expected decline in Core Supplies revenue, and therefore the negative impact on EPS. In the second quarter, we expect the gross profit margin percentage to be consistent with 2Q 2011. Operating expense is expected to be roughly consistent with the $282 million incurred, in 1Q 2012. Operating income margin in the second quarter is expected to be down from the record 14.2% level achieved in the second quarter of 2011. We expect the effective tax rate for 2Q 2012 to be about 25%. As we indicated on the 4Q earnings call, the tax rate of 25% reflects approximately 2 percentage points of increased tax rate, due to the expiration of the U.S. R&E tax credit. Our planning assumption is that Congress will pass the U.S. R&E tax credit by the end of 2012, resulting in a full year tax rate of approximately 23%. Our guidance is based on foreign exchange rates as of the 3/31/2012. At these rates, the currency impact on revenue in 2Q 2012 versus 2Q 2011 is negative 3%, and negligible versus 1Q 2012. At these rates, the currency impact on revenue in second half '12 versus second half '11, is expected to be negative 1%.

Our expectations for the 2012 calendar year are shown on Slide 27. We expect revenue to decline at a 2% to 4% rate in 2012 versus 2011. The improvement versus our prior expectation is due to a revenue from our recently acquired companies. The majority of the decline versus 2011 is due to the negative 2% impact of currency in 2012 versus 2011. Core revenue is expected to grow, driven by growth in MPS, Workgroup Hardware, Software and Core supplies. This is expected to be offset by declines in Legacy supplies. Overall, by the end of 2012, the Legacy revenue should decline to be near 6% of total revenue. We expect operating income margin to be in the 11% to 13% range we previously indicated, and remained consistent with levels we have seen over the past several years. EPS is expected to be in the range of $4.70 to $4.90, reflecting the results above, and of our ongoing capital return philosophy. For calendar year 2012, we expect free cash flow to be approximately 90% to 100% of non-GAAP net income; capital spending is expected to be approximately $185 million; and depreciation and amortization is expected to be approximately $230 million. The increase in estimated depreciation is driven by the amortization of purchased intangible assets. We anticipate pension funding of approximately $45 million in 2012.

As shown on Slide 28, our guidance for 2Q '12, reveal the first half of 2012, with a year-to-year revenue decline of 6% to 7%, and EPS of $2 to $2.10. In order to achieve our full year guidance, we would need to deliver revenue growth of flat to up slightly in second half '12, and EPS of approximately $2.70 to $2.80. The improved revenue expectation is driven by an increase in Core growth, principally in ISS large workgroup hardware and related parts and services, as well as significant growth in Perceptive Software revenue. The EPS growth of about $0.70 per share is driven by 3 main factors: first, about a quarter of the EPS growth is driven by non-operational factors, specifically a lower tax rate, due to our expectation of the passage of the U.S. R&E tax credit, and lower shares outstanding in second half '12; second, slightly over half of the EPS growth will be driven by improvements in the ISS division, principally related to cost improvements from the restructuring savings, and the lack of Thailand flood expenses in the second half '12, and increase sales of large workgroup hardware and related parts and services; finally, the remaining EPS increases in Perceptive Software returning to operations at approximately breakeven, and some other small factors.

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 Ben Reitzes of Barclays Capital.

Benjamin A. Reitzes - Barclays Capital, Research Division

Actually, I want to talk about that last slide you just went through, John. With regard to the earnings in the second half, I mean, you went through all the drivers. This guidance implies almost 60% of your EPS comes from the back half or it was almost the exact opposite where you earned more in the first half, the last 2 calendar years. So you went through those drivers. Is there anything else that helps? I mean, do you get Thailand recovery insurance? Is there any other gains flowing through the P&L? And what is your confidence that you can buck the trend? And what are you most confident in those drivers?

John W. Gamble

Well, Ben, I think, we covered the drivers. Yes, we will get some benefit from Thailand insurance. We expect to get a recovery there. We did announce a restructuring in January, and we're going to get restructuring savings in the second half which -- versus the first half, which again is not something you see in the normal trend. And plus, we're expecting to have a very good second half in terms of large workgroup hardware, which we know is positive to both revenue and margin, and which we think is significant. And finally, Perceptive is on a very strong growth rate, and we're expecting that growth rate to continue and we're expecting to get some contribution from the acquisitions as well. So those are what we think drives the second half, in terms of confidence. We gave our guidance, so I'm not going to comment, specifically on confidence.

Benjamin A. Reitzes - Barclays Capital, Research Division

Okay. And my follow-up is, I'm surprised you didn't mention channel inventory, as one of the drivers. It sounds like, it's a hit in the 2Q. I was wondering if could quantify. And then, whether getting that supplies sales back, is part of the drivers in the back half as well. And if you can quantify it and talk about whether that's a driver in the second half.

John W. Gamble

Yes, I think what we indicated is that, Ben, in the second -- sorry, in the first quarter, there was a negative 2% impact of currency on Supplies revenue and then we thought that the channel inventory was slightly -- was more than that. So it was more than 2%. We didn't quantify it more specifically than that. And what we expect is to see much of the channel inventory reverse in the second quarter. And I wouldn't expect there to be a benefit at all, in the back half, right. Channel inventory tends to decline over a period. So it won't necessarily all come out in the second quarter. But we aren't expecting any channel inventory increases at all, in the second half.

Operator

Your next versions coming from the line of Toni Sacconaghi of Sanford Bernstein.

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

I wanted to first follow-up on the supplies channel inventory questions. So you reported supplies growth of about minus 4%. You're basically saying, you got at least a 3-point game from the channel taking on inventories. That would suggest that normalized supplies growth is kind of, minus 7 this quarter. If I look to next quarter, you have a much tougher supplies compare. You're basically saying, you may draw down 3-point to channel inventory. Are you expecting a double-digit decline in Supplies next quarter? And I have a follow-up, please.

John W. Gamble

Well we didn't give a specific guidance on overall supplies Toni. What we did talk about was Core supplies, right? And Core supplies is up 4%, right, this quarter. And effectively what happened as we indicated, is that we had the negative effect of currency of about 2%, and then the channel inventory growth, which more than offset that too. So we did indicate we're expecting Core to be down. So with Core down, and with the 35% reduction in Legacy Supplies, obviously we'll see Supplies revenue be weaker than it was this quarter. But we didn't give a specific guidance for total supplies in the second quarter.

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

I'd like to also just talk about your overall Core growth. Last quarter on the call, you are pretty explicit that you expected Core to grow faster in Q1 than it did in Q4. In Q4, it grew 2%. So you expected 3% or better, you did 1%. You talked about the retail transition being planned. So I don't think that was unexpected. So what was unexpected relative to your forecast in Core? It looked like the work -- small workgroup was probably worse than you've had anticipated. So I'd like to understand: a, was that the case? Or was there something else for the difference, versus your expectation in Core? And can you comment on the competitive environment, was there -- were there forces at work there?

Paul A. Rooke

Toni, you're right. We had a Core growth of 2% in the fourth quarter, 1% here. And if you normalize for currency, they're actually aren't that different, if you normalize probably around the 3% rate. But you're right, the main hit was the -- a greater decline in that low or small workgroup hardware piece, as we're working that transition from retail to non-retail that accelerates a little more than we had expected, and that was the primary driver.

And competitively, I would say -- I'm not seeing anything dramatically different. Overall, in the competitive environment, we see customers continue to shift towards services -- Managed Print Services. And then we're seeing that double-digit growth there, and the competitors -- we're winning more than our fair share there. We're predominantly seeing Xerox, in most cases, in those competitive cases in the MPS area. In the transactional space, we're reducing as we shift from retail to non-retail. We're seeing less action there because we're shifting more to the non-retail environment. And in the software area, we're growing that. And with Perceptive, we've got a number of competitors but as you saw there, the growth -- I mean 18% apples-to-apples compares is pretty strong. And we think, it might close to double the rate that's out there in the market.

Operator

Your next question is coming from the line of Shannon Cross of Cross Research.

Shannon S. Cross - Cross Research LLC

My first question is on the software side, where you talked about deals being pushed out. I'm just curious as to sort of, what are the drivers behind that? And what makes you more confident that they're going to come through in the next couple of quarters?

Paul A. Rooke

Yes, Shannon, anytime you're working more complex agreements with customers, whether it would be Managed Print Services or Software in this case, you're dealing with large accounts, enterprise accounts, and these things take time to: one, sell, in the selling process; and then you got contractual things that go on, that take a little more time. So I think it's just -- we do our best to forecast when things will close, and sometimes we miss those. And I'd say, it's more just timing, more than anything. In fact, I know, one of the deals is already closed here in the second quarter. So I think it's more timing of actually working through the details of the contracts and signatures and all of that.

Shannon S. Cross - Cross Research LLC

Okay. And then, when you're looking at the growth I think you're seeing, or you're expecting in terms of Core -- if I have the slide here correctly, it sounds like you've kind of expect to see your Core business grow in the low single digits, with software clearly above it, this is on a longer-term basis. Can you talk a little bit more, Paul, about sort of, what you think the drivers are there? And the reason I'm asking is, because when we talk to the guys in China or so not China, but the guys in Japan; and Xerox and some of the other players, HP, what have you, I think the low single digits would be sort of a very positive outcome to what they're thinking about in terms of the printing market. So can you just sort of, explain a little bit more on where you see your key drivers are?

Paul A. Rooke

Yes, in our Core -- as you point out in the well the -- we've got our Hardware piece of it, which we're shifting, as you see us both in Inkjet and laser side shifting, to these Higher-usage segments. So you'll see the growth in our Large Workgroup segment there, and that's where we expect to see the growth to continue. And particularly, as we drive Managed Print Services, which are beginning to displace one of these higher-speed copiers. And as we execute these Managed Print Services, we drive more consolidation of those footprints. And that drives higher value in Large Workgroup kinds of devices, so that would be the biggest thing on the Hardware side, and Managed Print Services of course, is a key thing. It's a customer trend that's clearly evident out there so we expect growth from that. On the lower -- the Small Workgroup segment, our goal there is to get it from being a negative to certainly flat and then, some low-growth going forward there. So we've got a few steps to go through there and we're keenly focused on that. And then, of course, the Software segment, as you mentioned is going quite rapidly. We've added a few acquisitions, obviously, they will have some growth. But we're quite excited in each of those pieces. But what we're most excited about is, the combination of all those and the leverage and synergies we believe that, Managed Print Services with our software solutions will bring to our customers.

Operator

Your next question is coming from the line of Ananda Baruah of Brean Murray.

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

I guess along those same lines, it's just interesting getting your thoughts on the interplay between Managed Print Services, and the Core Hardware business. I guess other folks, who participate in each of those markets are sort of, looking at the net of that opportunity as being, kind of a flat to slightly up, revenue opportunity longer-term. It seems like you're suggesting if they -- at these for your business, can be a little bit better than that. So I wanted to get your thoughts on that, number 1. And I guess, just my follow-up to that will also be, is there anyway to tell right now that some of the softness in the Core business relative to your expectation, is actually because of some of the business moving to Managed Print Services? And maybe it's not your Managed Print Services, or maybe other people are winning MPS deals? Those are my 2 questions.

Paul A. Rooke

Clearly, the Core Hardware business and the Managed Print Services are clearly connected, because any Managed Print Services deal that we executed -- the combination of all of those, the hardware elements, the supplies elements, as well as an increasing amount of software elements, as we execute business process improvement with them. So in the MPS market, we believe is growing 9%, 10%, or something like that, and we're growing double digits in excess of that. Our Large Workgroup Hardware is growing -- we said 7%. So we're getting good growth there, which is all in line with those trends. So we're -- and then in the Software element, as we to get into these Managed Print Services, oftentimes when you get into the second cycle or third cycle of these things, you've consolidate the footprint. And you've worked on improving the process elements of getting consumables to machines and support. And then the customers are looking for business process improvements and that's where the software elements come in to attract even more savings for the customer, from this element of capturing, managing and accessing content. And that's what's driving our Software business at an accelerated rate as well.

Operator

Your next question is coming from the line of Brian Alexander of Raymond James.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Yes, back to Toni's question. I also get a double-digit supplies decline for the second quarter. So can you talk about, how you expect Core supplies to trend? So excluding the channel inventory, rebalancing or correction, just looking for your sell-through assumptions on Core supplies in the second quarter and in the second half of the year?

John W. Gamble

Yes, so we -- again, we spoke about Core supplies briefly, right. What we indicated is, in the second quarter, we expect it to be down. And we thought the drivers of Core Supplies in the second quarter being down, were specifically the negative 3 points of currency. And then the fact that -- with that, the supplies channel inventory will likely draw down in the quarter. And what we indicated is that, the impact of that in the first quarter was likely more than 2 points. In terms of the rest of the year, what we indicated is we expect our Core supplies to be growing, right? We didn't give specific numbers. We don't give guidance of that level of detail but we expect to return to growth and we expect growth for the full year. So what we think is happening here is, really a currency effect and an impact on channel inventory. And that's why we're seeing a weaker second quarter. We don't think it's a long-term issue, but we do think it's affecting us in the second quarter, because of those 2 specific issues. To the extent, we continue to do really well in MPS, which you're seeing. We continue to do really well in high-end hardware, which you're seeing. I think that what drives supply. So as long as that continues to happen, we feel very confident in our supplies position, over the long term. But in the short term, obviously, there are things that can jerk that performance around. And that's what you're seeing in the second quarter.

Brian G. Alexander - Raymond James & Associates, Inc., Research Division

Okay, John, just to follow-up. The 2012 revenue outlook suggests the second half revenue will grow about 7% versus the first half. Normally you're up low single-digits, and it doesn't sound like channel inventory is playing a role in the second half versus the first half. So is the pickup in the second half, in Workgroup Hardware, the primary driver there? And how much of visibility do you have into that Workgroup Hardware, based on, maybe some of the MPS deals, that you signed?

John W. Gamble

Yes, so the 2 biggest effects are Large Workgroup Hardware and supply -- and Software, right? So those are the 2 things driving -- that driving the revenue growth and the improved performance year-on-year relative -- in the second half relative to the first. Again, our MPS performance has been very good and we feel very good about our MPS performance and MPS funnel. And our Software does have shown very nice growth. Certainly, the last 3 quarters we've seen very good organic growth. We feel good about the acquisitions. So now obviously, we have to execute, right? It all comes down to execution. We need to execute the integrations of the acquisitions. To get the growth, we need to execute the MPS sales to close them. But I think our track record in -- in certainly in MPS has been very good. And our track record in supplies growth over the last 3 quarters, we think has been good.

Paul A. Rooke

A little less currency impact in the second half.

John W. Gamble

That's true. And a little less currency impact in the second half. So that's really where we are. But we understand there's a lot of work to deliver those numbers.

Operator

Your next question is coming from the line of Michael Holt of MorningStar.

Michael Holt - Morningstar Inc., Research Division

I wanted to follow-up on the earlier commentary on the competitive environment. And specifically as we see you, aiming to grow at or above the market, postings some nice share gains in the A4 laser, and pushing through an increase in supplies prices, what kind of competitive response are you seeing from the larger competitors?

Paul A. Rooke

I don't know that we're seeing anything distinct here in the last quarter or so. I think, most of it are the same trends we've been seeing. There's a small set of competitors including ourself of course, that have the tools and skills, abilities to compete, in this Managed Print world because it's -- particularly these multinational accounts, it's non-trivial to be able to execute those on a worldwide basis with consistency and so there's a small set. And like I've mentioned earlier, we typically see a, Xerox occasionally, maybe one of the Japanese copier companies in those -- the finals of any MPS deal. But I would say, the trends have changed there, I mean, the small -- few that are able to execute those are still the small few. As we look at just the main hardware businesses, certainly HP, comes back into that play just from their channel presence. And they've been aggressive with their pricing. But we're -- our growth is largely coming from our Managed Print Services piece there, where we're growing in excess of the market and that's where, we're keenly focused in. In -- and on the the Software front, you see a range of competitors and -- but again, it may, us [ph] competitors at times, are the large software competitors but where we win, is where we go deep. We differentiate in the industry-specific solutions, just like we've done for 20 years in the Hardware business. We're doing the same thing in the Software business and that seems to be working for us.

Michael Holt - Morningstar Inc., Research Division

Okay. Another quick follow-up. Is the share gains that you're posting in the A4 Work Group, is that driven by the MPS? Or more on the Hardware side? Or a mix of both?

Paul A. Rooke

Actually it's a mix of both. It -- but it would tend to be more, large enterprise than, say, small business at this point. And -- because what we find -- there are some customers who are ready and go with Managed Print Services. Others that are just still buying large fleets of devices, they aren't quite ready to do the Managed Print Services. Obviously, we work with them overtime to convert them. But -- and I think the other key trend in this -- while it seems to be more large enterprise and small business focused is, we're focused on the A4, this paper size -- 8.5x11 paper size type of device. And we're seeing growth there, because the market appears to be shifting from the large A3 floor-standing copiers to these A4 devices just because they're leaner, more functional, lower cost, lower energy type devices.

Operator

Your next question is coming from the line of Katy Huberty of Morgan Stanley.

Katy Huberty - Morgan Stanley, Research Division

Just thinking about Core supplies longer term. Is there a scenario? And if so, what are the drivers that return Core supplies to a growth rate that's above the company average, such that it's driving a mix in the margin uplift? Or is the mix story, going forward, really just dependent on MPS and Software?

Paul A. Rooke

Well, certainly, Katy, supply is just part of MPS. So as we grow our MPS, we grow Supplies. But Supplies is always a function of your installed base growth and the mix, most importantly, of that installed base growth. So we're continuing to drive that Large Workgroup mix up. And were also trying to improve the mix from mono to color. We're also trying to improve the mix from single function to multi-functions. All those -- the mix shifts that we're focused on. When we talk about Higher-usage Hardware, I mean, those are the mix things that we're working on. As you saw, we just announced 2 mid-range color devices here just last week. So those are the things, that if we drive that mix and drive -- the size of that installed base is higher mix then obviously, that's the key lever in driving long-term Core supplies growth.

John W. Gamble

Yes, but Katy, what you described is our business model, right? What we drive is MPS and high-end product. Because the percentage of Supplies that you place, in terms of the total value of the transaction is higher in high-end product, than it is in low-end products. So that's exactly our business model. So to the extent we continue to win an MPS and continue to drive more High-end Hardware, the percentage of transactions we place, is a higher percentage of Supplies revenue and it should grow faster than Hardware. That's -- that is the business model we're running, that's what we're trying to do.

Paul A. Rooke

Yes, so.

Katy Huberty - Morgan Stanley, Research Division

And then, just as a quick follow-up. I know you talked about the deal slippage. But you also made a comment that the quarter was a little more back-end loaded. Was that a function of demand getting off to a slow start? Or were there a component availability issues, earlier in the quarter?

John W. Gamble

It wasn't really driven by component availability. It was somewhat related to the Thailand floods. There was a little bit of back-end loading, in terms of the delivery of some product but it was just really timing within the quarter. Sometimes it's just a little more back-end loaded than others.

Paul A. Rooke

Yes.

Operator

Your next question is coming from the line of Deepak Sitaraman of Credit Suisse.

Deepak Sitaraman - Crédit Suisse AG, Research Division

Paul, on Small Workgroup Hardware, can you give us a sense of what portion of Core Hardware it comprises? And how much more do you have to go, just in terms of shifting distribution from retail to non-retail?

Paul A. Rooke

I believe the percent of Small Workgroup to the total is about 23%. So you're right, it's not the majority of what we do, building on John's comments there, about where our focus is, in terms of the mix and the pages and all of that. But having said that, the Small Workgroup is a component that we're -- that is a part of our offering. Because not always, particularly as you can see in the small medium business, and even in some large accounts, there is a balance of the mix. I mean they are placements where you have Smaller Workgroups performing those types of devices. So both laser -- we've had lasers for many years, they're both mono and colored. We'll continue to invest in those Small Workgroup lasers. And then, secondly the Inkjet as you saw last quarter, we made a major shift in our platform to move it up to a higher performance, Small Workgroup Class Inkjet with our OfficeEdge platform. So that's another key move there to bring the Inkjet, particularly, a lower cost color of platform into that Small group -- Workgroup segment. What we're moving and shifting from is some of these lower Inkjet platforms, if you will better more, kind of, one-on-one devices, as opposed to servicing Small Workgroups. And so that shift, as we shift the platform, we're also shifting the channel because the majority of those were sold in retail outlets and so we've begun that process. I mean that won't time out as we go through the year. It just takes time to work through our inventories, our commitments and so forth. But we're working through that, as we speak. And our focus going forward, will be investments in these higher performance engines, these platforms, whether it would be Inkjet in the Small Workgroup and some laser, and certainly all laser in the Large Workgroup.

Deepak Sitaraman - Crédit Suisse AG, Research Division

Okay, that's really helpful. And as my follow-up, Paul, just on acquisitions. Following the deals that you've done recently, what stage are you at, just in terms of building out the solutions portfolio. And also, just given your capital allocation framework of returning over 50% of your free cash flow through buybacks and dividends, do you think this in anyway limits your ability to transform towards the solutions-oriented portfolio more quickly?

Paul A. Rooke

Yes, let me answer the second one first. The answer is no. We believe our capital allocation assumes that we'll have -- we're generating cash and have cash available to continue future acquisitions, if they seem to fit. And how these -- once that we've done, fit together, we think they move us a long way towards providing more complete end-to-end solutions for our customers. And if you can -- if you kind of put them together, from the capture side, with our MFPs to intelligent capture, now with the Brainware offering, that's a very natural step, a very close adjacency, if you will, scanning pages in. And then, doing this automatic extraction of content, which then, we placed into repositories like, provided by Perceptive with their ImageNow product. And there now with the addition of ISYS, gives us the ability to search on content, which is a very high value-add component for us in that space, and then Nolij, gives us a more web-based, lighter-weight kinds of content management, which will be the applicable -- I think in a number of industries and perhaps even in smaller businesses. So I think, the combinations of these things are starting to fit together. And I think provide a another [ph] mix -- Pallas Athena, which is a process workflow component that lays in quite nicely with our content focus. And I think all of these together, when knitted together with our customers, I think this will provide a very integrated, seamless experience for them that we don't see -- balance what the out there, in fact, combined with our Hardware capability, that I think is a very unique combination in the marketplace, the ability to leverage our MFPs, our capture -- Hardware capture capability with now the Software solutions, provides a unique combination that, I don't see that exists in the marketplace today.

Operator

Our next question is coming from the line of a Ananda Baruah of Brean Murray.

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

John, I just wanted to get a sense, and Paul as well. You mentioned that you expect Perceptive, I believe, to be breakeven in the second half of the year. Can we use that as a proxy for where, sort of the bundle of acquisitions are now, on the Software business today, collectively. Sort of, going to be operating around breakeven in the second half of the year. And if not, any sort of timeframe on when we can expect you guys to get to breakeven on the newer Software Solutions. It sounds like you're implying by your last remarks, that you might be through the bulk of -- I guess of the acquisitions, for at least for a period of time, and that, these are the ones that you feel can, kind of drive you forward for a while?

John W. Gamble

So, in terms of the financial performance, the income performance of the Perceptive Software now, there are added companies, we expect them to operate at around breakeven. But I'm -- what we expect them to -- in this year. But we're going to integrate them so that, kind of the -- talking about them individually really won't be relevant, right? They'll be highly integrated. Their technologies will be integrated. Salesforces will be integrated. Professional services will be integrated. And we'll be hopefully linking them very closely with MPS in selling a lot through MPS directly, as well as individually, to customers who may, or may not use Lexmark hardware. So that's the goal and that's what we're trying to drive and we feel very positive about our ability to do that. But at the end of the day, we're expecting them in the second half of this year to run at about breakeven. As we move forward, we expect them to have software margins, right? It's a software company that should have software margins and software growth rates.

Paul A. Rooke

I don't want imply that we're done, we're catching our breath at the moment because we've got 3 here, 4 if you include Pallas Athena, that we're busy integrating. So we've got some work to do to get those working smoothly as we want. But looking ahead, I mean, it all depends on our strategy. We learn more as we get into some of these adjacencies for about additional opportunities, that might be worth investing in. But we'll take those, one at a time. And I think it is clearly part of our future strategy.

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

Got it. Thanks. So it's not a reasonable to have an expectation for profitability from that group of acquisitions in 2013?

John W. Gamble

We didn't give it -- we didn't give 2013 guidance. But long term, it's a software company that should have software growth rates, software gross margins and software operating margins.

Operator

Our final question will be coming from the line of Matthew Prince Of Kane Street Capital.

Matthew Prince

I have a question with the revenue guidance for the year. So when I look back at the last quarter, on the fourth quarter, you were talking about down 3% to down 5%, total revenue for the year. And when I look at this quarter, there's an incremental 1% from the acquisitions that you made. And it looks like, you also changed your currency impact assumption from negative 3% to negative 2%. So that should be in total of 2% bump to the total revenue, but I only see a 1% bump actually, in the new guidance. So to me that means on a pre-acquisition constant currency basis, you reduced guidance by 100 basis points. So first of all, am I right in doing that math? And secondly, what changed in the quarter that caused that reduction in the pre-acquisition constant currency growth?

Paul A. Rooke

Yes, Matthew, it's hard to argue with your statement. But we're one quarter in, and we got 3 quarters to go. So as we go through the year, we'll refine that, if it looks like it needs to be refined.

Matthew Prince

But something obviously changed in the quarter, right? Because you didn't make a change in the assumptions. So is it due to the Smaller Workgroup or something else? Or I'm just curious what caused that 100 basis point reduction.

John W. Gamble

I don't think anything specifically changed, right? We wouldn't intend to modify our guidance, every time currency moves a small amount. Okay, so is it technically correct? Yes. So is it something we would intent to do every time currency moves a little bit? No, right? So -- but what we were doing as we were saying, we acquired companies that should give us, at least 1% of growth. So we added that to the growth rate that we have provided to -- as our guidance. But the currency comment, yes, it's technically correct. But our intention would not be to jerk the guidance around every time, currency moves a little bit.

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

I'm closing our first quarter financial results. We're in line, with our prior guidance delivering a record first quarter gross profit margin and solid free cash flow. We continue to grow our revenue year-to-year, in our strategic focus areas delivering double-digit Managed Print Services and Software growth, along with Large Workgroup Hardware and Core supplies growth. While we aren't satisfied with the Core growth in the quarter, we do believe we are laying the groundwork for future growth. We believe the investments we're making in our high-usage Hardware and high-value Software technologies to bring new and differentiated solutions and services to market, will drive growth; sustain margins; and drive long-term value for Lexmark and our shareholders.

With that, I'll turn it back over to the operator to close out the call.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

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