Lexmark International Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.22.13 | About: Lexmark International, (LXK)

Lexmark International (NYSE:LXK)

Q3 2013 Earnings Call

October 22, 2013 8:30 am ET

Executives

John Morgan

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

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

Analysts

Jeffrey Koche

Ananda Baruah - Brean Capital LLC, Research Division

Ryan Jones - Barclays Capital, Research Division

Eric Garfunkel

Shannon S. Cross - Cross Research LLC

Benjamin James Bollin - Cleveland Research Company

Matthew Cabral

Kathryn L. Huberty - Morgan Stanley, Research Division

Asiya Merchant

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

Operator

Thank you for standing by, and welcome to the Lexmark International Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded on Tuesday, October 22, 2013.

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. Please note that Paul and John will be referring to specific earnings presentation slides by page number. These slides were 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 reconciliation section of the earnings presentation slides. As a reminder, I want to call your attention to the quick reference revenue trend slide that we have included, again, in the supplemental section of the earnings presentation. This slide includes the many details of our revenue disclosures summarized on one page.

Lexmark anticipates that the record date of its fourth quarter 2013 dividend will be November 29, with an anticipated payment date of December 13. Please note that future quarterly dividend payments are subject to board approval. We have also included our anticipated dividend schedule for the remainder of 2013 through 2015 in the supplemental section of the earnings presentation. Following the conclusion of this conference call, a complete replay will be made available on our IR website.

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

Paul A. Rooke

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

Starting with Slide 4. It was a solid quarter for Lexmark. Our third quarter financial results delivered revenue that exceeded our July guidance range and grew 5% year-to-year, excluding the Inkjet Exit revenue, delivered earnings per share at the top of the guidance range despite a higher-than-expected tax provision and generated strong free cash flow. Our full year guidance also continues to reflect solid free cash flow and year-to-year growth in earnings per share.

In the third quarter, we continued our progress in creating a higher value portfolio for Lexmark, driving double-digit revenue growth for our high-value areas of Managed Print Services and Perceptive Software. We also continued to receive confirmation that our unique proposition of helping customers solve their unstructured information challenges is resonating. Gartner positioned Lexmark's Perceptive Software as a leader for the first time in their Magic Quadrant for Enterprise Content Management, reflecting the synergies we're creating for Lexmark's investment in Perceptive Software. We also acquired Saperion, a leading provider of enterprise content management software in Europe and recently announced the acquisition of PACSGEAR in October, a leading provider of medical imaging and connectivity software. I'll touch on each of these a little later. We continue working to increase our profitability and we remain committed to our long-term operating margin assumption of 11% to 13%. We delivered strong year-to-year improvement in Perceptive Software's profitability and we still expect to deliver annual savings of $85 million in 2013 for the restructuring action we announced last year, driven by the Inkjet Exit, to improve our profitability.

Finally, we continue to maintain our capital allocation discipline to deliver shareholder value. Our focus is squarely on the needs of business customers as we build and grow our solutions business through organic expansion and acquisitions where we have grown our strategic software capabilities significantly in breadth and depth. We remain committed to returning greater than 50% of our free cash flow to shareholders through dividends and share repurchases on average having returned more than $650 million since July of 2011.

Now on Slide 5, you can see the third quarter financial highlights. Revenue for the third quarter was $896 million, down 3% year-to-year but exceeded the July guidance range. Excluding the Inkjet Exit revenue, revenue grew 5% year-to-year, reflecting record Managed Print Services revenue with growth of 18% and Perceptive Software revenue growth of 38%. With a strong revenue growth from our high-value areas, we again came close to offsetting the headwinds of a continued weak economic environment and the planned ongoing decline from the Inkjet Exit, resulting in a low single-digit total revenue decline.

Our operating income margin was 10.6% for the third quarter, about flat year-to-year and up sequentially. It reflects growth in the high-value segments with a record 40.8% overall gross profit margin along with good cost and expense management. Operating expense was flat sequentially and year-to-year for the third quarter, in line with our expectation, with reductions in ISS offsetting increased software investments, including recent acquisitions to drive future growth. This also reflects the benefits of the previously announced actions to improve our cost and expense structure in 2013 and beyond.

Now coming back to my earlier Perceptive Software comment, we, again, delivered significant year-to-year improvement in Perceptive Software profitability this quarter, up $9 million driven by 2 factors: First, we delivered solid Perceptive Software revenue growth year-to-year, including good license revenue growth. This increased licensing revenue contributed to a year-to-year gross profit margin increase. The second, we also had a full quarter of cost and expense savings from the actions we started to take in the second quarter to further reduce Perceptive Software's cost and expense growth without negatively impacting revenue growth. And for the fourth quarter, we expect further cost savings in addition to continued year-to-year revenue growth. And for the full year 2013, we expect to achieve double-digit software revenue growth and remain committed to delivering a positive software operating income margin.

Finally, earnings per share were $0.95 for the third quarter at the top of the July guidance range, and we generated strong free cash flow of $98 million.

Moving to Slide 6. You can see how the composition of our revenue continues to shift as we evolve to an imaging and software solutions company. On the left, you see the 3 sections we've been reporting. The Inkjet Exit section, the gray part, is the revenue comprised of the past consumer and business inkjet segments that we've exited. Inkjet Exit revenue is expected to decline over time at a rate above 40% year-to-year as the trailing supplies revenue from the installed base naturally decreases.

The Imaging Solutions section, the purple part, is comprised of both MPS and non-MPS revenue. The MPS part is our enterprise Managed Print Services revenue, which has been consistently growing faster than the imaging market. The non-MPS portion includes revenue that flows through our partners, some of which flows through transactional partners and some of which flows through copier dealers that are managing fleets of our devices as a service.

Then the third section, the blue part, is the Perceptive Software revenue. Now combining the Imaging Solutions and Perceptive Software revenue, the purple and the blue sections together, this represented 91% of our total third quarter revenue and will continue to grow as a percentage of our total revenue as the Inkjet Exit revenue declines over time. And for the third quarter, Imaging Solutions and Perceptive Software revenue, on a combined basis, grew 5% driven by strong double-digit growth in both MPS and Perceptive Software revenue. Now combining the MPS and Perceptive Software revenue only, the bottom 2 sections, representing higher value add, longer-term solution relationships with customers, this combined software and services business grew 22% in the third quarter. Additionally, we expect that as the software revenue grows and the margins expand here, this will be a significant driver of future profitability.

Now Slide 7. You can see how our recent actions fit into the larger strategy we're driving. To drive our strategy of becoming an end-to-end solutions provider, we've been making a number of key investments over time. First, we've been investing since early the 2000s and continuing to invest in smart MFP solutions and Managed Print Services solutions, including a global enterprise focused sales force along with best-in-class global infrastructure and systems to support our MPS customers. Second, we've been aggressively investing in software solutions through acquisitions from our initial acquisition of Perceptive Software in June 2010 to our most recent acquisition of PACSGEAR earlier this month. Finally, we've been exiting the inkjet business, including the exit of our consumer inkjet business starting late 2007 and then business inkjet last year. These actions have all been taken with the end in mind of becoming a world-class, end-to-end solutions provider.

Now Slide 8, you can see a quick recap of where we're headed strategically, our unique value proposition, and what we're doing to accelerate this growth. So starting at the top, we're rapidly becoming a broader provider of unstructured information solutions focused on helping customers capture and connect their unstructured information to their core systems and applications. And building on our core strength of output management technology, we quickly added a broad portfolio of content and process management technologies that, together, comprise the key technologies to solve our customers' key unstructured information challenges. We now have the ability to help our customers capture, manage and access a broad range of unstructured documents, photo, video and audio across a broad range of industry segments.

Now moving to the lower left block. We win through a unique customer value proposition that combines technology ownership, deeper industry experience and superior customer intimacy. Together, these enable us to listen more closely and act more responsibly with industry-specific solutions to our customers' unstructured information challenges.

Finally, in the lower right box, we're accelerating our growth with the synergies we're creating between the Imaging Solutions and Perceptive Software units. The Imaging Solutions unit is leveraging its global large-account presence, industry expertise and global infrastructure to open doors to grow our new Perceptive Software solutions quickly, deepening Lexmark's overall penetration into these accounts. The cash generating capability of the Imaging Solutions unit also continues to provide funds for additional growth of our software solutions business. With this advantage, Perceptive Software is then able to provide more advanced software capabilities and can further differentiate and grow our Managed Print Services offering. In addition, Perceptive Software's presence and expertise in healthcare, higher education and back-office operations also provides further access for the Imaging Solutions unit to expand into as well.

And as proof of these synergies, we're beginning to win software solution deals in ISS accounts across a range of industry segments. In fact, year-to-date through the third quarter, we have won over 25 new capture, content and process software deals across a range of ISS banking, retail, manufacturing, government and healthcare accounts, and our sales funnel continues to strengthen. We're also beginning to see the reverse happen as well, where ISS is capturing MPS deals in Perceptive Software healthcare accounts. In fact, our MPS and Perceptive Software revenues each grew double digits again this quarter, well in excess of market growth rates and, on a combined basis, grew 22%. And as we expand our solutions offerings and build more customer references, we expect these synergies to continue to grow.

So moving to Slide 9. Over the last year, Lexmark has been recognized across several key areas. First in the output management space, we've been recognized as both a Managed Print Services leader by 4 leading independent research firms and as a leader in smart MFPs by Gartner. These accolades showcase our leadership position driven by our world-class smart MFPs, the seamless integration with Perceptive Software's growing array of solutions and the world-class MPS capabilities we've built and refined over the past 13-plus years. In fact, IDC recently positioned Lexmark as the leader of the leaders for MPS. As proof of this leadership position, our overall Managed Print Services revenue set another record and grew, again, by double digits in the third quarter. 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, which represent incremental business to Lexmark. We continue to believe this is a clear indicator that our value proposition resonates strongly and continues to be differentiating with these large, discriminating customers.

The second, in the content and process management space, we're also becoming a leader. Gartner recently positioned Lexmark's Perceptive Software as a leader in their enterprise content management Magic Quadrant for the first time. This is a direct result of the synergies Lexmark is bringing to accelerate Perceptive Software's R&D and sales capabilities through our organic investments and acquisitions. And as we've stated before, Perceptive Software's content management and VNA, or vendor neutral archiving solutions from the Acuo acquisition, have both been recognized as leaders in the healthcare segment by KLAS and Frost & Sullivan, respectively. In fact, IHS recently recognized Acuo as the world's #1 independent VNA provider in this fast-growing healthcare VNA market.

Moving to Slide 10. Our A4 laser technology is a key component of our unique value proposition. Here you can see our unit share position in the high-usage large workgroup segment for A4 or letter-sized format lasers. These large workgroup, A4 laser devices, are increasingly displacing the larger A3 or 11 by 17 format copiers due to their smaller size, lower cost and improved functionality. According to IDC for the last 4 quarters ending second quarter of '13, Lexmark continued to hold share in this large workgroup A4 laser segment. This is important since these are higher-usage devices which drive Supplies revenue.

Moving to Slide 11. Lexmark recently made 2 acquisitions that further strengthen our software solution capabilities. During the third quarter, Lexmark acquired Saperion, a leading provider of enterprise content management software in Europe. Based in Germany, this expands the European-based footprint for Lexmark's Perceptive Software and provides additional capabilities to help companies manage their unstructured information. And then earlier this month, Lexmark also acquired PACSGEAR, a leading provider of imaging and connectivity solutions for healthcare. PACSGEAR's technology to capture unstructured documents, film, video and visible light images is used by approximately half of all U.S.-based hospitals. This acquisition, combined with Lexmark's prior acquisitions, uniquely positions Lexmark's Perceptive Software to manage the entire range of unstructured content within the healthcare enterprise.

Then as a reminder, on Slide 12, Lexmark's overall capital allocation framework is to return more than 50% of free cash flow to shareholders on average through quarterly dividends and share repurchases, while pursuing acquisitions and organic growth that support the strengthening and growth of the company. In the third quarter, Lexmark paid a dividend of $0.30 per share totaling $19 million, our eighth consecutive quarterly dividend payment, and repurchased $21 million of stock. Since mid-2011, Lexmark has returned more than $650 million to shareholders through quarterly dividends and share repurchases. And for the fourth quarter, we are planning to continue share repurchases and paying a quarterly dividend.

On Slide 13, you'll see our longer-term revenue growth assumptions. Earlier, I discussed how we're creating synergies between the Imaging Solutions unit and the Perceptive Software unit to grow each faster. Based on these synergies, we expect to grow the Imaging Solutions revenue greater than or equal to the market, leveraging the differentiation obtained through the Perceptive Software solutions portfolio, along with the industry growth trend towards MPS and workflow solutions. Similarly, we expect to grow Perceptive Software revenue greater than the market, leveraging the expanded reach through Lexmark's worldwide large account presence and relationships and continued investment in software development, marketing and sales. And while the Inkjet Exit is currently a large headwind, it is a declining headwind and we expect it will be less than $100 million by 2015. Therefore, as we grow Imaging Solutions and Perceptive Software together against the declining Inkjet headwind, the underlying revenue growth will emerge.

Moving to Slide 14. You will see our revenue guidance for full year 2013, an improvement from our prior guidance. It now reflects an overall 5% to 6% decline driven by several dynamics. For the Inkjet Exit revenue portion, the gray part, we're now assuming an accelerated decline of slightly less than 40% and expect this portion to be about 11% of total revenue for the year. For the strategic Imaging and Software Solutions revenue portion, the purple and blue parts together, we're assuming this now to grow about 1%, driven by a stronger combined MPS and Perceptive Software growth, slightly greater than 15%, with MPS being less than 15% and Perceptive Software being greater than 15%.

Then looking ahead on Slide 15, you'll see our fourth quarter, full year 2013 and long-term outlooks. For the fourth quarter, outlook is for revenue to be down 3% to 5% year-to-year, and we expect earnings per share for the fourth quarter to be in the range of $1.07, to $1.17. For the full year 2013, our outlook is for revenue to be better, down 5% to 6% year-to-year. We expect earnings per share for the full year to now be in the range of $3.85 to $3.95 adjusting for the higher-than-expected tax rate driven by the shift in our geographic earnings mix. The long-term outlook is to grow revenue at or above the market, with an operating margin 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. As John indicated earlier, the discussion that follows is on a non-GAAP basis and reflects non-GAAP adjustments unless otherwise noted.

Please turn to Slide 17. 3Q '13 was a solid quarter for Lexmark. Revenue exceeded our guidance, driven by strong performance at both ISS and Perceptive Software, which I will discuss more in a moment. EPS was at the top of the guidance range and up slightly from 3Q '12 due to ISS operating income being stronger than expected as laser profitability strengthened, driven by the strong MPS and laser supplies growth in the quarter and operating expense reductions. This allowed laser profitability to offset a greater percentage of the lost income from the declining Inkjet Exit revenue.

Perceptive Software was profitable again in the third quarter, a substantial improvement from 3Q '12. And as we indicated earlier, we expect it will be profitable for all of 2013. This overall strong operating performance was partially offset by an increase in our effective tax rate. Our ongoing tax rate increased to 30%, driven by a shift in our geographic mix of earnings, which I will discuss in more detail later. This negatively impacted 3Q '13 EPS by about $0.04 per share versus the July guidance.

Free cash flow in 3Q '13 at $98 million was very good. Our calendar year 2013 guidance for revenue has improved to minus 5% to minus 6%, reflecting the strong revenue performance in 3Q '13 and the acquisitions of Saperion and PACSGEAR. Free cash flow is expected to be at the high-end of our range of 80% to 90% of non-GAAP net income. We've adjusted the EPS guidance to $3.85 to $3.95 per share, reflecting the impact of the higher effective tax rate. I will provide additional information regarding our guidance and the higher tax rate later in my comments.

As you see on Slide 18, total revenue for the third quarter was down 3% year-to-year, up 1% sequentially. Inkjet Exit revenue negatively impacted overall revenue by 7 percentage points. Total revenue, excluding Inkjet Exit, grew 5% year-to-year and 3% sequentially, driven by the strong growth in Perceptive Software and Managed Print Services. Year-to-date, total revenue, excluding Inkjet Exit, is up 1%. Perceptive Software's revenue grew 38% to $59 million, another good quarter.

Organic revenue growth of 7% was below recent quarters but still outpaces the overall market and we expect to return to double-digit percentage growth in 4Q. We continue to see good performance from our transaction-focused content and capture business, but the strong overall growth in the quarter was driven by accelerating growth in healthcare from our combined traditional content and capture businesses and the vendor-neutral archive capability we acquired at the end of 2012.

With the addition of PACSGEAR, the acquisition we closed in October, we expect a further acceleration of our growth in healthcare. We are now the leader in providing integrated access to unstructured medical content like MRIs and x-rays and other unstructured medical records. Now with PACSGEAR, this will strengthen our industry leadership in the access of unstructured content from a broader range of medical devices.

The year-to-year decline in ISS segment revenue of 5% includes an 8 percentage point impact from declining Inkjet Exit revenue. Excluding Inkjet Exit, ISS revenue grew 3% year-to-year, driven by 18% growth in MPS and 5% growth in laser supplies revenue. Although laser supplies channel inventory did increase in the quarter, the increase was similar to what we experienced in 3Q '12 and therefore, did not impact our year-to-year growth rate.

The impact of currency movements on revenue were negligible year-to-year and sequentially. Currency was a benefit of less than 1 percentage point to revenue versus the levels at June 30. This impact is lower than the relative strengthening of the euro as we saw weakening in the Brazilian currency in the period, which partially offset this euro benefit.

Now moving to Slide 19. Large workgroup hardware revenue, representing about 83% of total hardware revenue, grew 1% year-to-year. This reflects a 14% unit decline offset by an AUR increase of 17%. While total large workgroup laser units declined, we saw growth in color laser units and laser multifunction units. AURs increased due to improved pricing on newer products and a mix shift from the lower end to the higher end of our large workgroup products. Large workgroup unit sales in 3Q '13 were negatively impacted by a substantial reduction in purchases by the U.S. federal government. We expect this weakness to continue in 4Q '13.

Small workgroup laser hardware revenue declined 19%, driven by a 27% decline in units, partially offset by an 11% increase in AUR. Branded color MFP units grew year-to-year. The unit decline reflects several factors: the impact on laser units of exiting the retail channel when we exited inkjet; OEM units are down; and the overall small workgroup market becoming very price aggressive. Nonetheless, this result is a disappointment, and we remain committed to holding our revenue level in the small workgroup market and are taking actions to do so. The AUR increase was driven by mix and improved pricing on new products.

Laser supplies revenue grew 5% as MPS wins continue to add to quarterly output growth. As I indicated earlier, laser supplies channel inventories grew in the quarter versus our expectation of flat. On a year-to-year basis, laser supplies channel movements had a minimal impact on revenue growth. As we look forward, we, again, expect supplies channel inventory to remain relatively flat sequentially in 4Q '13.

Software and Other revenue growth was primarily driven by the 38% growth in Perceptive Software. Geographically, all regions were impacted by our planned exit from inkjet technologies. Excluding Inkjet Exit, the U.S. declined 1%. Also excluding Inkjet Exit, EMEA grew 15% against a weak 3Q '12 result. EMEA growth was from both ISS laser, which showed strength in both MPS and our new laser product line up, and Perceptive Software.

As shown on Slide 20, in 3Q, we continued to deliver a strong gross profit margin. Gross profit margin increased 90 basis points year-to-year, 50 basis points sequentially and 40 basis points year-to-date. The year-to-year increase was driven by 310 basis points of positive mix, principally from less inkjet hardware and relatively more laser supplies and software revenue. This was offset by 220 basis points of negative project -- product margins both in hardware, primarily due to unit cost increases driven by overall volume declines, and in inkjet supplies. The 50 basis points sequential improvement reflects 160 basis points of improved product margins, principally in laser hardware. This was offset by 110 basis points of negative mix.

ISS gross margins increased both sequentially and year-to-year. Perceptive Software's gross margins improved year-to-year and declined sequentially. The year-to-year increase is principally due to improved relatively mix of high-margin license and subscriptions revenue. The decline sequentially is due principally to the seasonal decline in high-margin license revenue.

Turning to Slide 21. Operating expense in the quarter was about flat sequentially and year-to-year as expected. Versus 3Q '12, lower ISS expense is being offset by increases in All Other and Perceptive Software expenses. As we discussed with you last quarter, Perceptive Software's expense growth is being moderated and we did see that begin to take effect in 3Q '13. The ISS expense reduction was driven by our 2012 restructuring and solid overall expense management. All Other expense increased reflecting increased employee variable compensation and higher IT costs. On this chart, we have provided additional detail to give you a view of R&D and SG&A by division. Year-to-date, operating expense is down 2%, reflecting lower expenses in ISS.

As shown on Slide 22, operating income margin declined 10 basis points year-to-year and improved 60 basis points sequentially. Operating income improved sequentially, $6 million, driven by a $5 million improvement in ISS. Year-to-year operating income was down $3 million.

Divisional operating income, or ISS plus Perceptive Software, was up slightly as improved performance at Perceptive Software and in ISS laser more than offset the decline in Inkjet Exit profit. All other expense increased year-to-year, reflecting the higher employee variable compensation and IT expense referenced earlier. ISS segment operating income declined year-to-year as lower Inkjet Exit profit was partially offset by improved laser profitability, driven by growth in laser supplies and reduced operating expenses. Increased Perceptive Software operating income year-to-year was driven by above-market revenue growth. The actions taken to slow cost and expense growth in 2Q '13 moderated Q3 cost and expense growth. We continue to project positive operating income in the segment for the full year of 2013 and further improvements in operating income in 2014.

Turning to Slide 23, earnings per share increased year-to-year and were at the top end of our July guidance. The year-to-year increase reflects lower shares outstanding from ongoing share repurchases offset by the small decline in operating income and the higher tax rate in 3Q '13.

Our expected ongoing effective tax rate, excluding discrete items, for calendar year 2013 has increased to approximately 30% from the 26.5% we expected in July. Although overall operating performance has been good, the mix of income in lower tax locations outside the U.S., particularly Asia Pacific has been weak, is being offset by improving operating performance and ongoing cost and expense management actions in high-tax countries, principally the U.S. and certain countries in EMEA. This actual and projected change in income mix drove the increased tax expense in 3Q '13 and our increased expectation for 2013 in total.

For 4Q '13 our effective tax rate is expected to be approximately 30%. Our 3Q '13 effective tax rate of 29.6% and year-to-date effective tax rate of 24.6% reflect the positive impact of discrete items on those periods.

For 3Q '13, the increased effective tax rate unfavorably impacted results versus our July guidance by approximately $0.04 per share. The calendar year 2013 effective tax rate, including discrete items incurred through 3Q, is expected to be slightly over 26%, with this increase negatively impacting our full year outlook versus our July guidance by approximately $0.10 per share.

Turning to Slide 24. Cash from operations and free cash flow in 3Q were very a strong $143 million and $98 million, respectively. We expect to deliver free cash flow for 2013 at the high end of the 80% to 90% of non-GAAP net income range. We maintain strong liquidity position with $974 million of cash, along with other significant sources of liquidity. U.S. cash at 9/30/13 was $88 million. The shift in geographic profitability, which is negatively impacting our tax rate, is increasing the percentage of our cash generated in the U.S.

Cash conversion days remained strong, with a net 4-day improvement year-to-year. The sequential increase in inventory days was driven by MPS hardware to support strong growth and customer rollouts and selected end-of-life spare parts purchases. Receivables days improved sequentially, driven by revenue timing and strong collections, especially in EMEA.

Turning to Slide 25. Restructuring and acquisition-related costs and expenses in 3Q '13 of $0.50 per share were higher than our expectation. The increase is principally driven by increases in the expected cost and savings related to the restructuring program announced in August of 2012. This program included actions to rightsize certain support and marketing and sales functions. As we are completing these actions, the cost and expense reductions and therefore, related cost and savings have increased. We now expect restructuring costs for this program to be $170 million, up from the previously indicated $160 million. We also expect ongoing savings from this program to increase by $10 million to $105 million.

Please turn to Slide 26 for my forward-looking comments for 4Q '13. We expect fourth quarter revenue to decline 3% to 5% year-to-year. This guidance is equivalent to sequential revenue performance of up 3% to 5% that reflects roughly normal sequential trends for the laser portion of the ISS business with larger declines in the inkjet business we are exiting. This outlook includes a decline in Inkjet Exit revenue of approximately 40% year-to-year, with an impact to total revenue of approximately negative 6 percentage points.

Laser supplies are expected to be roughly flat year-to-year, reflecting an assumption of no change in first-tier laser supplies channel inventory. We expect continued strong growth in Software and Solutions.

Operating income margin is expected to increase sequentially and year-to-year for both ISS and Perceptive Software. For ISS, compared to 4Q '12, continued strong MPS revenue growth, cost and expense decreases and some laser hardware margin improvement are expected to overcome the impact of declining Inkjet Exit revenue. Perceptive Software's operating income improvement is driven by strong revenue growth and continued expense growth moderation.

GAAP EPS in 4Q 2013 is expected to be $0.57 to $0.67 per share. GAAP EPS in 4Q 2012 was $0.10 per share, which included an approximate $0.25 per share negative impact from income tax rate changes. In 4Q 2013, non-GAAP adjustments made up of restructuring expense and acquisition-related items are expected to yield a net cost of $0.50 per share. This includes restructuring costs of $0.19 per share and an estimated $0.31 per share from acquisition and divestiture-related cost and expense, including costs related to the acquisition of Saperion and PACSGEAR. Non-GAAP EPS is expected to be $1.07 to $1.17 per share. Non-GAAP EPS in 4Q 2012 was $0.61, including the $0.25 per share negative impact from tax rate changes. In 4Q '13, we expect gross profit margin percentage to be up year-to-year, operating expense dollars to increase sequentially, reflecting the acquisitions of Saperion and PACSGEAR. And operating income margin percentage is expected to increase sequentially and year-to-year. We expect the effective tax rate for 4Q to be approximately 30%.

Turning to Slide 27. Our full year 2013 expectations include a revenue decline of 5% to 6% versus 2012. This is a 1 percentage point improvement from our prior expectation, reflecting good performance in 3Q '13 and the acquisitions of Saperion and PACSGEAR. Inkjet revenue is expected to decline slightly less than 40% from the $640 million we had in 2012. This results in approximately negative 7% impact on year-to-year total revenue in 2013. By the end of 2013, Inkjet revenue should decline to be less than 10% of total revenue.

Total imaging and software solutions revenue, which excludes Inkjet revenue, is expected to be up approximately 1%. Combined MPS and Perceptive Software should grow over 15% in 2013. We expect Perceptive Software to deliver positive operating income for 4Q and the year as it did in 2Q and 3Q. We are expecting continued strong revenue growth from Perceptive Software, but we'll continue to manage expenses more conservatively to deliver profitability for the year and improving profitability in 2014.

As indicated earlier, the increase in our ongoing effective tax rate to 30% has resulted in an increase in our expected effective tax rate for 2013, including discrete items, to just over 26%. This negatively impacted our overall 2013 EPS outlook by approximately $0.10 per share.

Principally due to the tax impact, we have changed our non-GAAP EPS expectation for 2013 to $3.85 to $3.95 per share from the prior expectation of $3.90 to $4.10 per share.

For calendar year 2013, free cash flow is expected to be at the high end of our previously indicated 80% to 90% of non-GAAP net income range. We are below our target range of 90% to 100% of free cash flow in 2013 due to the impact of significant restructuring payments principally related to our August 2012 restructuring announcement.

Going forward, beyond 2013, we expect free cash flow to be 90% to 100% of non-GAAP net income as we have previously indicated. The additional cost and expense savings related to our August 2012 restructuring that I referenced earlier will not meaningfully benefit 2013 but will benefit 2014.

At our Analyst Day in May, we discussed improvements in 3 main areas: Perceptive Software profitability; laser supplies margin dollars; and cost and expense management, would be our focus for offsetting the negative impact on operating income of declining Inkjet income. The increased cost and expense actions in ISS and All Other are focused on this objective. As we have discussed throughout the year, we also continued to work both Perceptive Software profitability and laser supplies margin dollars.

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 Brian Alexander of Raymond James.

Jeffrey Koche

This is Jeff Koche in for Brian. I'm just trying to get a sense for -- it seems like your guidance would imply that operating margins are up pretty substantially, especially with the higher tax rate. I'm getting like maybe over 50 basis points. I'm just trying to figure out what drives that. Is it more like -- can you break it out between Perceptive and ISS?

Paul A. Rooke

Yes, it's -- you saw that for the fourth quarter. Right, Jeff?

Jeffrey Koche

Yes.

Paul A. Rooke

Yes. So our guidance there, yes, it -- our margins are going to be improved. Primarily, we've got operating performance improvements as we continue to see growth in ISS, in their MPS business. Some improved hardware margins and then cost and expense from our OpEx reductions, the restructuring. Perceptive, the continued growth there in their top line in license growth as well with the moderated cost and expense is improving their margins as well. So yes, we expect to see margin improvement both in ISS and Perceptive sequentially and on a year-to-year basis. And we don't split it out between them but certainly, that's a big driver. Additionally, in the fourth quarter, we got a little bit tax help certainly from the tax movements that happened in the fourth quarter last year, and we get some share improvement from the share reductions.

Jeffrey Koche

Okay. And then I'm just trying to understand, you guys reiterated the 11% to 13% margin target. To us, like you're coming in 10% this year and we're still calculating like $100 million headwind in operating profit from Inkjet that you're going to have to overcome. So I'm just trying to get a sense for what gives you confidence that you can do that.

Paul A. Rooke

Yes. So, Jeff, yes, you're right. We're coming in just under the low end of 11% to 13%. And as we look into '14, our goal still remains the same of 11% to 13%. And as John articulated the 3 areas and as we said in our Analyst Meeting back in May, the 3 areas that we're focused on is, one, continued cost and expense improvement. So we're continuing to work on areas where we can further reduce our expense structure and consolidate and do all those things that we normally do. We're also looking for some supplies profit improvement year-to-year, which some comes from design changes we've made in our new product lineup that -- in the consumables area that will help, we believe, as well as just continued growth. I mean, you saw growth here this quarter in our laser supplies, driven a lot by our MPS momentum and we expect that to continue into '14. And then Perceptive Software, we're making -- the growth you saw here in this quarter, we believe there'll strong growth in the fourth quarter. And then as we moderated their expense level, that will drop right to the bottom line and so we continue or expect to continue Perceptive margin to increase as well as we go into '14. So those 3 elements, cost and expense, supplies and Perceptive, are the real drivers that we talked about back in May and continue to be the drivers that we're focused on here to get in the range going into '14. But we'll give that -- the guidance for '14 as we close out the year. After year end, we'll give more guidance on '14.

John W. Gamble

Look, just a general reflection of the fact that as we go to more solutions and software, it's a higher-margin business, so our margin should increase. And it's just a reflection of that fact and we expect to deliver that as the strategy continues to execute.

Jeffrey Koche

Okay. And then really quick on the units. I got that large workgroup seemed to be impacted by federal. I mean, does that make you -- do you guys really -- do you have visibility into that improving? How much of a headwind should that be? How could they impact supplies, I guess, is my concern. And then I wasn't quite sure what would the weakness -- not sure I caught every -- all the details in the small workgroup. So if you could just reiterate what you said there, I'd appreciate it.

Paul A. Rooke

Yes. So in the large workgroup, Jeff, yes, we were up 1% in revenue, and large workgroup units were down certainly. But we had AUR improvement, which indicates that we had actually a shift within large workgroup. It's a range of products and so we actually had more high end of the large workgroup than maybe the middle end, if you will, and that's indicative of when we're shipping a larger -- our Managed Print Services, it tends to be the larger, the higher page consuming producing engine. So that's what you're seeing there as we shipped more of the higher end of the large workgroup and saw that AUR improvement. So those are good page producers for us long term. Nonetheless, while we had an impact in North America, the other 3 geographies all produced large workgroup revenue growth. And North America was impacted by the federal impact, but I would say it wasn't the shutdown. It's more of the sequester that's impacting there as they are deferring their hardware refreshes, if you will, their installed base. And so you have to remember, we're in a consuming model. And while they may defer hardware, the supplies keep going and so that helps us weather these blips in various segments because the supplies consumption continues to go, continues to run even though the hardware gets deferred. So that's really the story there on large workgroup. And then remember, we were sequentially up 11%, which was a good thing for us. On the small workgroup, as John said, the retail exit of our Inkjet drove with it some laser as well. So we got a little bit of that year-to-year. Some OEMs were a little softer. And then overall, we can do better, we're not happy with our performance there. So we're focused on the growth areas within small workgroup, like MFPs and color. In fact, color MFPs grew in the quarter. We just had some other downs that countered that. So we're focused on it because we feel we can do better there.

Operator

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

Ananda Baruah - Brean Capital LLC, Research Division

Could you just elaborate a little bit more on the federal comments that you made with regard to it being more a factor of the sequester as opposed to the shutdown?

Paul A. Rooke

Yes. And on the shutdown, while it was 13 days, obviously when people don't work, they're not in the office and so you have some impact -- a little bit of impact on supplies there. But they're back to work, so they'll be back working and printing as before the shutdown. The larger issue there is really the sequester where the government is actually reducing their expenses and so as they prioritize things to mission-critical IT investments versus printing replacements or installed-base refreshes, obviously, those get a bit lower priority. But nonetheless what we've seen, even in the private sector as companies defer hardware, it eventually catches up with them and these are electromechanical devices that wear out in time. And so while they may defer for a period, sometime -- at some point in time, they've got to replace them. But in the meantime, while hardware may be deferred, the supplies keep going.

Ananda Baruah - Brean Capital LLC, Research Division

Got it. And just for clarification, are you guys saying that you're seeing like an incremental impact? Maybe the rate of sequester impact is greater now than it was previously or is it about the same?

Paul A. Rooke

No, we have baked in some impact and then obviously, it's in our fourth quarter guidance as well, some impact from that as we expect the hardware to be deferred out in time. So I wouldn't say it's any more than what we had baked in, but it is a headwind in the North American for the U.S. segment.

Operator

Your next question comes from Ben Reitzes of Barclays.

Ryan Jones - Barclays Capital, Research Division

This is actually Ryan in for Ben. I wanted to see if you could give any color on what the contribution from the 2 acquisitions should be on a revenue basis to the full year guidance. And kind of tied to that, bringing in these 2 deals and they're fairly sizable, can you help us to think about why Perceptive profitability should snap then higher in the fourth quarter? Because it seems like bringing those 2 deals in would start to dilute the trajectory of profits somewhat in that business.

John W. Gamble

So in terms of revenue, we don't really give revenue levels with the acquisitions we execute. So I can't really give you specifics. We will see certainly some incremental growth, and you'll see that in the fourth quarter results. But in terms of profitability, I think what we're seeing is sequentially, fourth quarter is a stronger quarter for Perceptive in general. We're expecting growth in the base business, excluding the acquisitions, and very nice growth. So as Paul said, as we're working to moderate the expense growth in the business and we see the growth in the base business, the organic growth in the business accelerate, we're expecting to see much better profitability in the fourth quarter. So we're not expecting a material negative impact from the acquisitions in the period, and we're expecting to see the profitability from the business prior to those 2 acquisitions accelerate, so that's why it'll -- it should go up.

Ryan Jones - Barclays Capital, Research Division

Another question I had on -- in Perceptive. Are you seeing any additional customer demand for a subscription-based model versus a license-based model? And if that shift happens over time, do you -- is there any impact to profitability within Perceptive?

Paul A. Rooke

Yes, Ryan, we are seeing subscription growth, a nice growth there. And so we are seeing some shift there, but it is quite profitable for us. So while we may see some shifts in the revenue mix over time, I think the profitability shouldn't be a profitability impact for us.

Ryan Jones - Barclays Capital, Research Division

And then on accounts -- on AR days, those came down nicely this quarter, so should we start to think that this is kind of where they settle out at about 49 days for the next couple of quarters? Because they had gotten kind of high. But it seems like this quarter, that performance came in pretty well.

John W. Gamble

Yes. There was a lot of effort to try to bring down AR days and, obviously, accelerate payments as we should do every quarter. Given that it's been a bit choppy, I think 1 quarter is not enough for me to say that it's going to stay here forever, but I think the activity that we did in the third quarter to accelerate payments was very good and we intend to continue that activity in the fourth quarter and next year, so we're hopeful that we'll continue to see very good performance.

Operator

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

Eric Garfunkel

This is Eric Garfunkel calling in for Toni. I just want to ask you a question on the full year guidance. You beat EPS this quarter, and even with the tax rate were at the high end of your Q3 guidance. But if I look out to the FY '13 guidance, you're lowering it by $0.05 to $0.15 versus a Q4 tax hit of only about $0.06. So is there something else that you're expecting as a headwind in Q4? I'm just trying to understand the dynamics.

John W. Gamble

Not really, no. I mean, we're -- basically, if you take the tax hit out, we would be kind of right in the middle of the guidance range we gave, right? Without that $0.10 we'd be at $3.95 to $4.05, which is right in the middle of the $3.90 to $4.10 range, so not really, I don't think there's anything material other than that. Yes, there is lots of puts and takes in the business in any quarter and for the year, but the major driver of the change in our guidance was, indeed, the movement of the tax rate.

Eric Garfunkel

Okay. And then on the laser supplies growth. I think you had guided originally for it to be flat year-over-year versus the 5%. How much of that was the increase in channel inventory? And how much of it was just kind of better demand? And channel inventory has continued to rise over the last several quarters and how concerned are you that, that could reverse?

John W. Gamble

So in terms of the last part of the question, as we've indicated recently, we're -- we feel like the best forecast for us is to indicate that it'll stay flat, and so that's where we're going. In terms of where channel inventory moves on a go-forward basis. As we've always said, it's -- we don't really control the channel and it's very difficult for us to predict. And that's why, on a go-forward basis, we've decided to just assume it's going to stay flat. In terms of supplies revenue, I think the key fact for us is that year-over-year, there really wasn't a meaningful impact of the change in channel inventory. So the fundamental growth in supplies revenue -- in laser supplies revenue, sorry, was about 5%, and so we were very happy with that and it was similar to the prior quarter and so we think those are 2 nice quarters in a row. And we're hopeful that we continue to see good performance going forward.

Operator

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

Shannon S. Cross - Cross Research LLC

I just wanted to follow up on the prior question. You talked about the 5% growth relative to year-over-year. But relative to the guidance that you gave, can you talk a little bit about how much channel inventory was up relative to your expectations during the quarter?

John W. Gamble

Yes. Shannon, we're not going to give specifics in terms of individual movements in channel inventory in a quarter. We've tried very hard not to do that unless it's extremely large. So the -- we didn't -- we'd rather not give specifics there. But again, we think the important fact is kind of year-over-year, it really was a material impact and that we had nice growth of 5%.

Shannon S. Cross - Cross Research LLC

Okay. And then Paul, can you talk a bit more about the small workgroup units? What you're seeing in terms of pricing? You said you're taking actions to try to right the ship in terms of units there. I mean, is this something where you're looking at it similar to how eventually Inkjet was really deemphasized and then ultimately, you walked away from it? I would be surprised if that's the case because, obviously, laser goes into enterprise. So can you just give us some more color on what you're seeing there and what you're doing to fix the decline rates?

Paul A. Rooke

Sure, yes. It's not analogous to inkjet, as you stated. It's very much aligned with our business, our enterprise business, and even in small and medium -- more small and medium than SOHO in that respect, but it's a more transactional business as you know. And the pricing is very aggressive. We're focused on the higher profitable products with -- emphasis on color, emphasis on MFP. And while we were down overall, we did see growth in our color MFPs, for example, where we have put it in the system. So that's what we're working on is to make sure we remain competitive there and continue to push that into, not only enterprise, but also the medium and small elements of the small and medium business sector.

Operator

Your next question comes from Ben Bollin of Cleveland Research.

Benjamin James Bollin - Cleveland Research Company

The first question relates to the 25 deals you referred to. Could you talk about the average size of those deals and kind of the linearity of them as they've been realized through the course of the year and anything about how they're structured?

Paul A. Rooke

You're talking about the software solutions deals, Ben?

Benjamin James Bollin - Cleveland Research Company

Correct.

Paul A. Rooke

Yes. We don't give out the average size, but we're making the point there that we're -- when we acquired each of these software companies, they had their own sales focus. And what we're doing to create synergies now is to leverage our imaging unit's large enterprise presence, and so we're noting that to say we're now seeing those synergies, we're introducing our various software elements, whether it be healthcare or retail, wherever it may be, to bring the software element into those large enterprises, and we're starting to see that now. But we don't specify the average deal size. Obviously, it varies depending on the term and scope of it. But as you heard in John's comments, the capture elements, the content management and particularly in healthcare, we've got good growth there from some of these more specific healthcare elements, like vendor-neutral archiving. And we believe the PACSGEAR acquisition here recently will add even further momentum as we have a real strong strategy there in the healthcare segment.

Benjamin James Bollin - Cleveland Research Company

And one other question relates -- a lot of emphasis obviously on the supplies trends. But as the business becomes more exclusive on the laser side, can you talk about standard linearity through the course of the year? For instance, do you tend to see more activity from the channel in 4Q in front of the price increases in 1Q? Or is there any standard linearity that you do see within the laser supplies business through the course of the year?

Paul A. Rooke

As we've moved away from the consumer inkjet and SOHO inkjet, there's been less and less seasonality. So the -- certainly, there are spikes that can happen when price actions are taking or a channel buys ahead and those types of things. But overall, the business segment is fairly stable. You may have some government impacts during their cycles but largely, it's much more muted versus, say, the consumer seasonal cycles you have.

Operator

Your next question comes from the line of Kulbinder Garcha of Crédit Suisse.

Matthew Cabral

This is actually Matt for Kulbinder. On Perceptive, you guys have done several acquisitions over the past couple of years. Can you talk about the portfolio as a whole? Is it becoming complete? Or are there still gaps that you feel that need to be filled going forward? And should we expect a similar cadence of M&A or is it approaching a point where that will start to wind down?

Paul A. Rooke

So Matt, it's -- we filled out a number of key segments of our software solutions strategy over time and so our ability now to capture a broader array of content and manage it and give access to it is much more compete than where we're certainly at the beginning -- with the beginnings of Perceptive. Having said that, M&A is still part of our strategy but it has to make sense in the scope of the strategy, so we continue to look for opportunities and gaps, either technology or industry depth aligned with some of the value proposition I described earlier. So it is part of our strategy, but it's highly dependent on its fit and certainly the financial attractiveness of it to us. But we're happy with what we've done and we believe it's -- as you can see in the growth rates, whether you take it in total or organically, we're growing several times the market rates. So we're pleased with what we're seeing.

Matthew Cabral

Great, and then one more following up on the earlier questions about laser supplies. Hardware units have been down for 5 of the past 6 quarters, but now this is 2 in a row where the laser supply has been up 5% year-to-year. Can you just talk from a high-level what's driving the difference? And should we expect the difference to normalize over time? Or is there something structurally different going on?

Paul A. Rooke

So Matt, the supplies number is a function of the installed base and the quality of the installed base. So while you may have quarterly ups and downs in hardware because, like we said, when the federal government, for example, decides to defer purchases, it doesn't mean the supplies don't continue because they keep consuming. It's just they haven't decided to refresh it. Now in terms of growing the installed base, you can see with our MPS numbers, being a strong up 18%, I mean, that's many, many times the MPS growth rate there. We're ratcheting up the installed base as our retention rate is quite high, up in the 90s historically in terms of retaining customers. And then when you're adding customers, as we've indicated, and put the various measures that we talked about, you're ratcheting up that installed base. So that's kind of how it works. It's a function of the quality and the size of the installed base, which we continue to ratchet up we believe. And you may have some quarterly fluctuations just from people deferring refreshes. But all in all, we feel pretty good there. And again, each hardware unit, they aren't operated equal, small workgroup versus a large workgroup. There's a wide spread in the consumption page -- consumption of each of those. So it depends very heavily on the mix.

Operator

Your next question comes from Katy Huberty of Morgan Stanley.

Kathryn L. Huberty - Morgan Stanley, Research Division

The large workgroup shift from strong double-digit growth last quarter to double-digit declines this quarter is hard to believe that that's all government related unless you are coming off some really big government purchases in June. So can you just talk to whether there were any other areas of weakness if you're maybe choosing not to compete aggressively with some of your peers like HP, who have been talking about pricing to grow their installed base?

Paul A. Rooke

Yes. Sequentially, it was up 11% and so we had -- in the large workgroup segment, I mean, it's a core of our results and our strategy and so we're pushing hard there. We obviously had the federal impact there. We expect to continue to see that here as we go into the fourth quarter. But that was largely it. I mean, the large enterprise deals can be a bit lumpy from time to time, but we had a strong federal quarter, third quarter of last year. So that kind of impacted as well. It was a tougher compare and the fact -- the sequester so that helped amplify it.

Kathryn L. Huberty - Morgan Stanley, Research Division

Okay. And then just as a follow-up. As the product portfolio and revenue mix evolve towards MPS and software at a stickier laser installed base as you just talked about, can you just talk either quantitatively or qualitatively about how your visibility is changing, both near-term visibility a quarter out and longer-term visibility a year out? I imagine that you feel much better as it relates to forecasting your business but would love to get your thoughts on that.

Paul A. Rooke

Yes, it's -- Katy, both of them are fundamentally consumption models in a way, right? You place hardware, you place licenses and you have -- you create supply streams and maintenance streams. So from that perspective, once you build up those installed bases, it becomes maybe a little easier to predict. But the actual -- what's a little trickier is just the actual hardware placements or license placements, particularly in an enterprise environment quarter-to-quarter. So I don't know if that gets any better. The stickiness of supplies, obviously, to the consumption and the maintenance streams, they go along with it. So from that perspective, yes. But I'd say it's still always a challenge to predict exactly when deals will fall quarter-to-quarter.

Operator

Your next question comes from Shannon Cross of Cross Research.

Shannon S. Cross - Cross Research LLC

I just had a couple of follow-ups. On Perceptive, can you talk a bit about -- well, you said that we have 10% organic growth this quarter and you expect it to be higher next quarter, back in the double-digit range. So were there deals that slipped this quarter that will come in next quarter? Or what leads you to feel comfortable with that? And you also mentioned that you thought -- I think you said that the Perceptive revenue growth was in line with the market or better than the market. So is that -- that you expect -- you thought the market did less than 7% this quarter? I'm just trying to figure that one out.

Paul A. Rooke

Yes, so, Shannon, quarter-to-quarter, it's tough to think of when the enterprise software business, it's a little lumpier. We do believe it was a little better -- we think the market here in this year is running close to maybe to 6% or something. So it was a little above that at 7%. Third quarter is a down quarter in the kind of a -- the full year 2 and 4Q were the strongest ones, so we think we'll see more of a surge here in the fourth quarter as we move into their side. There's nothing there that we're alarmed about. And again, remember, third quarter was I think the strongest third quarter we've had in our history. It would've been an all-time high had we not had a record last quarter. So it was a good software quarter for us, albeit the organic was just a little lighter than normal. But we expect that to pop back, given the momentum that we see in that business.

Operator

Your next question comes from Jim Suva of Citi.

Asiya Merchant

This is Asiya on behalf of Jim. Very quickly on MPS, can you talk to us about where you're seeing -- specifically within segments, where you're seeing a great amount of strength, where you seem to be gaining share whether geographically or specifically within certain verticals?

Paul A. Rooke

Yes. So MPS overall, 18% growth this quarter. I think year-to-date, I don't know, 13% something like that. So it's many, many times what -- well, well over the market rate there. Our core markets, we're seeing good growth in North America or Europe. You saw the Europe results were much stronger this quarter across-the-board, not just MPS. So we think we're gaining share certainly in our core markets. I would throw Latin America in there as well. Asia, we tend to be underdeveloped, so that one would be an area where we're just -- we're not where we want to be and we're focused on that to balance out our presence. But nonetheless in our core markets absolutely, we feel like we're gaining share. And you can see that in the various parameters that we've noted in our presentation today.

Asiya Merchant

Any insight into vertical, where you seem getting more trends in certain verticals?

Paul A. Rooke

I'd say it was -- there are certain verticals that are more biased to doing MPS than others. Some are further ahead on the MPS spectrum than others, but I wouldn't call out any one in particular. I'd say it's pretty broad based as we look across. I mean, we have retail accounts, manufacturing, banking accounts. I mean it's across there. The healthcare segment, which hasn't been historically one of our Lexmark core segments, we're now moving into that with the synergies we're creating between ISS and Perceptive. Now we're starting to see some MPS deals in the healthcare segment, some of the larger hospital systems, which is encouraging for us and not only because it gives us MPS business but it reinforces the synergies that we're very focused on.

Operator

Our final question will be coming from Brian Alexander of Raymond James.

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

All my questions were answered.

Operator

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

In closing, it was a solid third quarter. Operationally, we delivered revenue that exceeded our guidance range, including double-digit revenue growth in MPS and Perceptive Software and total revenue growth of 5% excluding the Inkjet Exit revenue. We delivered earnings per share at the top of the guidance range, continued to improve Perceptive Software's profitability year-to-year and generated strong free cash flow. We remain confident in our strategy. 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 long-term growth in our business, sustain margins and drive long-term value for Lexmark and our shareholders.

With that, I'll turn it over 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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