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Edited Transcript of EFII earnings conference call or presentation 30-Apr-18 9:00pm GMT

Q1 2018 Electronics for Imaging Inc Earnings Call

FOSTER CITY May 2, 2018 (Thomson StreetEvents) -- Edited Transcript of Electronics for Imaging Inc earnings conference call or presentation Monday, April 30, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Guy Gecht

Electronics for Imaging, Inc. - CEO & Director

* JoAnn Horne

Market Street Partners, LLC - Co-Founder and Partner

* Marc D. Olin

Electronics for Imaging, Inc. - CFO

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Conference Call Participants

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* Aaron Christopher Rakers

Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst

* Ananda Prosad Baruah

Loop Capital Markets LLC, Research Division - MD

* Brian Paul Drab

William Blair & Company L.L.C., Research Division - Partner & Analyst

* Erik William Richard Woodring

Morgan Stanley, Research Division - Research Associate

* James Andrew Ricchiuti

Needham & Company, LLC, Research Division - Senior Analyst

* Jim Suva

Citigroup Inc, Research Division - Director

* Joseph Eric Wolf

Barclays Bank PLC, Research Division - MD and Deputy Head of United States Equity Research

* Joseph Helmut Wittine

Longbow Research LLC - Research Analyst

* Shannon Siemsen Cross

Cross Research LLC - Co-Founder, Principal & Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Chantal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Electronics for Imaging First Quarter 2018 Earnings Conference Call. (Operator Instructions)

JoAnn Horne, Investor Relations of EFI, you may begin your conference.

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JoAnn Horne, Market Street Partners, LLC - Co-Founder and Partner [2]

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Thank you, Chantal, and welcome, everyone, to EFI's discussion of its first quarter 2018 operating results. Guy Gecht, EFI's Chief Executive Officer; and Marc Olin, Chief Financial Officer, will lead the discussion. Following management's prepared remarks, we'll be happy to take your questions.

First, I'll review the safe harbor statement. During the call today, we'll be making forward-looking statements, which are statements other than statements of historical facts and statements in the future tense, including, but not limited to, statements regarding our strategy; plans; expectations regarding revenue growth; introduction of new products; product portfolio; productivity; future opportunities for our customers; demand for our products; as well as market trends; product innovation; new market opportunities and acquisition strategy; as well as estimates in our projections of revenue, operating profit, growth, EPS, gross margin, cash flow, market share, operating expenses, tax rate, working capital; and any statements or assumptions underlying any of the foregoing.

Forward-looking statements are subject to risks and uncertainties that could cause our results to differ materially or cause materially adverse effects on our results. Please refer to the discussion of risk factors in our SEC filings. We do not undertake to update in light of any new information or future results. Statements we make today are made as the date of this call and are subject to revision until the company will have on file its Form 10-Q for the period ended March 31, 2018.

In addition, reference will be made to non-GAAP financial measures. Information regarding a reconciliation of non-GAAP to GAAP measures can be found in the press release that was issued this afternoon on our website in the IR section at www.efi.com. Please note that slides corresponding to the information reviewed on today's conference call are also available on the Investor Relations website.

And with that, I'll turn the call over to Guy.

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [3]

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Thank you, JoAnn, and thank you for joining us to discuss the first quarter 2018 results. EFI started the year strong, reporting revenue results above our expectations, reinforcing our strategy to be the lead enabler in the digital transformation of industries, where images really matter, such as packaging, fashion, display graphics and building materials. We are far from realizing the full potential of this strategy, but Q1 was a good step toward that goal.

Our direct business grew 17%, driven by record first quarter revenue for both Inkjet and Productivity Software. This included 34% recurring revenue. Software in particular performed very well, posting 25% growth. Inkjet revenues increased 15%. And we met our objectives to ship 4 new Nozomi units.

From a market segment perspective, we're experiencing solid demand for both our textile and packaging portfolios. We are seeing this momentum continue into Q2, leading to a solid sequential and year-over-year outlook, despite Fiery continued to report results significantly below prior year levels.

Taking a closer look at the quarter. I don’t usually start by highlighting Productivity Software, but we are well encouraged [by the] 25% growth that the team delivered this quarter. The results were driven primarily by organic growth in almost all of our product lines and geographies. And we also saw some deals close that has been delayed from previous periods. As promised, we also strengthened the management team of this segment, recruiting seasoned general managers to focus on software for packaging, enterprise, print and textile. We believe we're seeing the early returns from the increased focus on those specific product lines, which enable our targeted industries to automate and transform the business workflow.

The results for our direct business also benefited from a strong Inkjet quarter. In display graphics, we continued to see strong demand for the relatively new wall-to-wall platform introduced last year. As expected, display graphics hybrid [printed sales was slower in anticipation of the new platform release, which will be introduced in a couple of weeks at the (inaudible). Multiple [better] units are expected to be installed this quarter, with general availability to begin in the second half of the year.

We are beginning even more -- we are bringing even more innovation to our textile portfolio, as we just introduced Reggiani COLORS, which is our new top-of-the-line system and our first high-speed fabric printer offering [12] colors. We are also on plan to introduce the 1-touch system for textile later this year. This 1-touch textile product, while very innovative for textile, is just the next key 1-touch printer introduction on our long-term road map. In fact, we expect to introduce a number of 1-touch high-volume industrial printers addressing EFI target markets over the coming years. These systems will be designed to leverage EFI's unique technology and expertise in transforming very large industries to digital-based manufacturing.

Speaking of 1-touch systems, we are very pleased with the progress of Nozomi, including meeting our commitment to ship 4 units in the March quarter. Through the end of Q1, we have transacted and shipped 9 units, including a sale to Alliance, which we received approval to announce after quarter-end. In the second quarter, we anticipated -- we anticipate shipping 5 units, with 7 planned for Q3. We are increasingly confident in our ability to generate $60 million in revenues for Nozomi for the full year.

Our confidence in our revenue target is linked to the increasing interest we're seeing from corrugated suppliers around the globe. We have received positive feedback for most of the large players in corrugated packaging, with many of them indicating they plan to start testing digital production initially in 1 or 2 factories and then expand to other locations based on the ROI and the customers' reaction to the unique digital capabilities. We believe this will drive the sale of additional units within a single location. While at the same time, we expect other players serving the same market will almost be forced to adopt digital technology to successfully compete.

At the same time, we are ramping our global service and support organization to provide timely, high-quality service when needed. We have heard time and time again from early adopters that once they show the output to their customers and start to sell in volume, Nozomi becomes mission-critical to their operations and they can't afford any downtime.

Now turning to Fiery, where results were slightly weaker than expected. However, we now actually have increased confidence in the statement we made last quarter that Q1 '18 is the bottom of the cycle. We did see a number of anticipated new product launches take place in the quarter, but in some cases, they were not initially sold on a global basis. As we discussed last quarter, we are on track for revenues to bounce back to the approximately $60 million per quarter for the remainder of the year.

We also added key new people to our management team to fulfill our commitment for improved execution. During the quarter, we strengthened our accounting team with new management led by Gene Zamiska, Chief Accounting Officer; and Mark Allred as our new VP, Corporate Accounting. We added Jill Norris as a CIO, with solid tech experience; and we just concluded the search for the new Head of our HR organization. We are already encouraged by how this new team is working together.

We are continuing to interview for the new permanent general manager of display graphics, and we are seeing high-quality candidates in addition to the strong internal candidates, who ably led this business through a strong first quarter.

We have also continued to focus on improving financial metrics. This quarter, we increased collection [in the overhead] and reduced inventory levels sequentially. But the positivity isn't yet showing up in cash generation since it was mitigated by the ramp of Nozomi and other new Inkjet products slated for the second half of the year as well as by the $5 million restructuring charge, which includes the announced Fiery cost reduction. However, as Nozomi manufacturing normalize and we continue to see [indiscernible] and cash-related optimization, we see a path, and while working toward returning to cash from operation equaling 90% non-GAAP net income later this year. Marc will add some additional detail on the important topic of cash flow.

I said on our January earnings call that we entered 2018 with a renewed energy at EFI, and I believe our Q1 results reflect this. I'm actually speaking to you today from a short visit to our elite trip for our top salespeople, and the excitement about the start of the year is truly evident here. With Q1, we passed [perhaps a] symbolic milestone, crossing the $1 billion revenue mark for the trailing 4 quarters. I think this symbolized a new era for EFI, raising the bar in our game as we go after clearing the $1.5 billion and $2 billion marks. With the entire company focused on getting back to a cadence of consistent performance, we are on track for another solid growth quarter in Q2 and despite the headwind from a [falling] cycle, for increasing profitability for 2018.

Now let me turn the call over to Marc to provide additional color on our Q1 progress and Q2 outlook.

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [4]

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Thank you, Guy. I am pleased to announce record Q1 revenue results of $240 million. This was above our guidance range, with strong growth for Industrial Inkjet and Productivity Software, solid recurring revenue growth together with shipping 4 Nozomi presses.

We were extremely pleased to see our overall Industrial Inkjet sales up 15% year-over-year, with strong growth in printer sales from not only Nozomi but a number of our other product lines as well. Industrial Inkjet gross margin, as expected, was higher sequentially, but was lower year-over-year due to the continued impact of the Nozomi ramp-up and a lower percentage of ink versus equipment revenue than we saw in Q1 of last year.

Productivity Software had record Q1 growth of 25% year-over-year, with much higher than our expectations in the quarter and keeping up the momentum of improved close rates. Fiery had a decline of 23% year-over-year, a little worse than expected, but we have further conviction that we will see sequential revenue improvement in Q2.

Total recurring revenue was $81 million, up 5% year-over-year and representing 34% of total revenue. Non-GAAP earnings per share were $0.38, down 31% year-over-year and within our guidance range.

Now let me explain in more detail the revenue by business segment and region. The Industrial Inkjet segment generated record Q1 revenue of $142.2 million, which was up 15% year-over-year and equaled to 59% of total EFI revenue. Inkjet revenue was driven by an improvement in close rates for our printers in the quarter and the 4 Nozomi printers shipped in the quarter. Ink volume was up 8% year-over-year, with strong double-digit growth in textile and UV display graphics, offset by weakness in ceramics.

Productivity Software delivered record Q1 revenue of $43.8 million, driven by strong growth from all of our market segments we serve and representing 18% of total EFI revenue in the quarter, also a record percentage for software. We were especially pleased to see over half our growth coming from our organic products, those owned more than a year, thanks to outstanding close rates around the globe.

The Fiery segment delivered revenue of $53.9 million, down 23% year-over-year, representing 23% of total revenue. Product mix drove the gross margin down slightly from the prior year but was still good enough to show a sequential improvement over Q4 '17. Fiery channel inventory remains in the targeted range.

In the Americas, revenue totaled $117.4 million, up 7% year-over-year, caused primarily by double-digit growth in both Industrial Inkjet and Productivity Software, partially offset by reduced Fiery sales.

EMEA was flat year-over-year at $88.2 million, driven by higher Industrial Inkjet and Productivity Software sales in the region, but offset by a decline in Fiery sales.

APAC was up 11% year-over-year, driven by strong growth in Industrial Inkjet and Productivity Software, partially offset also by a decline in Fiery sales.

Looking to the June quarter for FY 2018. We expect Inkjet to maintain its strong momentum and grow mid-teens. Productivity Software to grow high single digit and Fiery revenue to be approximately $60 million, representing in total revenue guidance of $259 million to $265 million. We expect to ship 5 Nozomi units in the quarter and 7 in Q3 of '18 and remain on track to achieve our target of $60 million in Nozomi revenue in 2018.

Moving to gross margin, where I'd like to remind you that all further commentary is non-GAAP unless otherwise noted. First quarter gross margin was 50%, down 480 basis points year-over-year. Industrial Inkjet gross margin was 35%, also down 480 basis points year-over-year. Fiery gross margin was 71.9%, down slightly by 20 basis points year-over-year due to product mix. In the Productivity Software segment, gross margin was down 120 basis points year-over-year to 71.8% due to product mix in the quarter.

For the second quarter of 2018, we expect overall gross margins to be 48% to 50%, as we have a larger portion of our revenue driven by Industrial Inkjet, including Nozomi, which while delivering positive gross margin and improving each quarter, is still scaling to get to normalized Inkjet margin levels. We anticipate that this will continue to result in Inkjet gross margin in the quarter of between 35% to 37%.

We expect software gross margin to continue in the low 70s and Fiery to show additional sequential improvement due to manufacturing efficiencies, which we have implemented as part of our cost-cutting measures.

Turning to operating expenses. For the first quarter, operating expenses were $98.3 million, up 7% year-over-year and comprising 41% of revenue, an increase of 70 basis points from the year-ago period. R&D expenses were $35.9 million, representing 15% of revenue, down from 15.8% a year ago.

Sales and marketing expenses were $44.9 million, representing 18.7% of revenue, up from 17.8% a year ago. G&A expenses were $17.5 million, representing 7.3% of revenue, up from 6.7% a year ago, primarily as a result of the increased investment in our accounting team we announced last year.

As we discussed during Investor Day, we've been shifting OpEx within the company from Fiery and other slower growth product lines to our rapidly growing Nozomi and Textile product lines while continuing to invest in other Inkjet and software product lines that delivered consistent growth.

The restructuring expenses shown in our GAAP financial results in Q1 '18 are primarily the result of the reduction in Fiery expenses, which were largely completed during the quarter. Lower gross margin from decreased Fiery revenue combined with investment in R&D spend for our new packaging and textile projects resulted in operating income of $21.6 million, down year-over-year with an operating margin of 9%. As Nozomi continues to scale and Fiery recovers, we expect the operating margin to return to double-digit levels.

Other income and expense had a net loss of $0.3 million, driven primarily by a reduction in investment income, which was offset by favorable foreign exchange variances. Our constant non-GAAP tax rate remained at 19%, and we expect this level to continue through 2018, even with the changes from tax reform. We delivered non-GAAP earnings per share of $0.38. This is a decline of 31% to the non-GAAP earnings per share year-over-year, as anticipated, due to the reduction in Fiery revenue and increased investment in our fast-growing product lines.

Looking to the second quarter of 2018, we expect non-GAAP earnings per share of $0.49 to $0.56. As a reminder, our Q2 outlook assumes our April foreign exchange rates stay flat for the balance of the quarter. It also includes approximately $0.02 per share of quarterly impact from the convertible bond interest payment.

Now turning to the balance sheet. Total cash, cash equivalents and short-term investments amounted to $304 million compared to $319 million at the end of last quarter. Cash from operations was $6.3 million or 37% of the non-GAAP net income for the quarter, weaker than we expected, primarily due to lower-than-forecasted Fiery revenue, which has a much faster cash conversion cycle than our direct business. While this percentage of non-GAAP net income is lower than last year, it is in line with the levels we've seen in the past in Q1 as it is typically our weakest cash flow quarter of the year.

Cash generation in the quarter was also impacted by the previously mentioned restructuring cost for Fiery as well as purchases for our Nozomi presses, which, due to scaling up newer vendors, are requiring shorter payment terms than our other Inkjet products. As previously discussed, we expect cash generation to improve in the back half of 2018 as Nozomi begins generating operating profit for the company and Fiery recovers.

Net accounts receivable was $251 million, up $6.8 million sequentially due to the back-end-loaded nature of Q1, with much of the Inkjet printer business taking place in the last 2 weeks of the quarter. DSO was 94.3 days, up 5.5 days versus Q1 of last year, due to the significantly higher mix of direct business versus Fiery revenue, which have longer payment terms despite the DSO of our direct business being essentially flat year-over-year. We will continue to work to reduce the DSOs in the direct business in order to drive faster cash generation.

Our net inventory balance was $124 million, down $2 million sequentially and up $13 million from last year, due primarily to scaling up our Nozomi production to support forecasted increases in Q2 '18 sales levels and investment in other new Inkjet platforms as discussed in our Investor Day. This drove inventory turns to 3.9, up 0.1 turns year-over-year, but down 0.5 turns sequentially.

Stock-based compensation this quarter was $6.8 million, which was significantly below our normalized run rate of about $10 million to $11 million per quarter and down from Q1 of last year due to our delivering results last year that were below our plan. As we've stated in the past, we believe in pay-for-performance, primarily with stock-based compensation. And we continue to expect the level of stock compensation to be driven by company's success in achieving goals across 3 categories: revenue, operating profit and cash generation. As we fell below our expectations last year and our cash generation was lower than expected this quarter, the expected level of stock compensation to be paid was also adjusted lower.

As you may be aware, last quarter, we filed our 10-K within the extended filing deadline after taking extra time to ensure that all information was correctly represented in the filing, given the material weaknesses that we were working to remediate. Our expectation this quarter is that we will file our 10-Q before the specified deadline, and we are not aware of any issues that would prevent us from doing so. As there were a number of factors that were in play during the prior quarter, we were limited in terms of the open market buyback that we could execute. And as a result, we returned $17 million to shareholders as part of our $150 million buyback program, which was put in place on January 1, 2016, and the newly authorized $125 million buyback program starting Q3 of '17. This leaves approximately $92 million available in our buyback program.

Total diluted share count decreased sequentially to 45.5 million shares. As always, we'd like to conclude by thanking our customers, employees and shareholders for their continued confidence in EFI. We are very pleased with our Q1 2018 results and are very excited about the significant opportunities in front of us for the remainder of 2018 and beyond. We will now be happy to answer questions.

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JoAnn Horne, Market Street Partners, LLC - Co-Founder and Partner [5]

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Operator, we'll take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Shannon Cross with Cross Research.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [2]

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I wanted to just dig a little bit more into Fiery. If you can give us, I don't know, maybe some more details on your confidence level on this bottoming out. How maybe you're seeing the overall landscape, what you're hearing from your partners in terms of demand just around that business unit? And then, I have a follow-up.

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [3]

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So Shannon, when we talked to you last quarter on the earning release, we said that we're seeing product introduction, deals in the pipeline, reduction in inventory with our partners that will lead us to sequential improvement. And essentially, we said Q1 would be the bottom. We are tracking to what we talked about and what we expect to see. We said we're going to get to roughly $60 million later in the year. We're already guiding that in Q2. And we believe that the following quarters this year should see that, again, because of the same thing that we talked about. This is still below what we'd like to see in the Fiery. And obviously, putting some pressure on earnings and cash. We will get that from other means. As we said in 2018, despite the headwind of the Fiery, we're expecting to actually be up profitability-wise year-over-year. But at least, we can say we feel even more confident that what we said last quarter, Q1 being the bottom, is coming through at least in our focus for the next couple of quarters.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [4]

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Okay. And then, with regard to Nozomi, you're holding to the $60 million and you did 4 and then you said 5 and then 7. And I assume fourth quarter probably will be up from that. So I guess, maybe if you could talk a bit -- conversations you're having with the market, people who've installed, how their track record is going. I don't know, just a few more details, because clearly, you're setting up to have a pretty strong 2019, assuming the pace continues.

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [5]

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Yes, I can tell you, I cannot be more pleased with the reaction we're hearing from the market and how Nozomi performed early in the game of digital packaging -- digital manufacturing and packaging. We have a lot of conversations, a lot of deals in the pipeline. We feel very good about the target we set, very confident about the target we set for this quarter, next quarter. And people talk about starting a new -- starting in 1 location or 2 location, getting the feedback, learning it and then expanding it if the ROI is [the] material, like it happened to Hinojosa. And so we feel very, very good where it's heading. The thing that we need to realize is that the ramp-up, by the time they install and get customers to approve those new color -- more richer color output, takes a while. For example, Orora, which we sold 2 units back in Q4 last year is just having, I think, next week, their innovation day, where they're going to show to their customers the capability, [indiscernible] what they can do with Nozomi, and we're very excited about them showing that loud and proud. And so those kind of things, I think, we're going to see throughout the installations. People are going to be careful. They're ready to go. And then -- though it will be slower ramp-up once we install, but as far as selling, we feel very good where we are today.

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Operator [6]

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Your next question comes from the line of Joseph Wolf with Barclays.

Your next question comes from Joseph Wittine with Longbow Research.

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JoAnn Horne, Market Street Partners, LLC - Co-Founder and Partner [7]

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Operator, let's go to the next question.

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Operator [8]

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Your next question comes from Ananda Baruah with Loop Capital.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [9]

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It seems like the business momentum is stable to picking up. A few if I could here. Could you just comment -- I think you guys made mention for the December quarter that you've got $10 million in Nozomi revenue, and you had the same number of units (inaudible) from the March quarter. But I think there were some features that weren't yet monetized for the December quarter units. So can you talk about December revenue relative to kind of Q-over-Q [and not] Q-over-Q? And then, I have a couple of follow-ups on that too.

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [10]

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Ananda, you kind of went like 1/3 volume there and cut out in that question. So I don't know if your headset shifted or something, but we could barely hear you.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [11]

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Sorry about that, is that better?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [12]

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Much better.

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [13]

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Much better.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [14]

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Okay, great. Was just wondering, some of the -- you did the 4 units in the March Q for Nozomi, which is the same as the December Q. And I think you made mention, the $10 million of revenue in the December Q, but hadn't yet recognized all the revenue from the features. So are you also seeing revenues increase sequentially March versus December for Nozomi? And then, should we continue that dynamic to sort of amplify itself as we get through the year as well? And then I have a couple follow-ups.

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [15]

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Yes, sure. So Ananda, we don't want to give -- we're not going to give kind of quarterly guidance around Nozomi revenue both kind of revenue guidance or revenue actuals just for competitive reasons at this point in time. So what we did say is that we're on track for the $60 million for the full year that we gave as full year guidance on Nozomi. And so -- and based upon also the unit shipments that we have planned for Q2 and Q3, again, we feel very confident about the $60 million full year number.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [16]

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Okay, great. And for the non-Nozomi Inkjet business, another second quarter -- consecutive quarter of good momentum. Yet you have meaningful new product coming out midyear into the second half. Is it a situation where we should expect the run rate of the non-Nozomi Inkjet business to actually kick up in the second half? I mean, you'll have seasonality as well. But as distinct from seasonality, should we also expect potentially another pickup just from the new products in the second half of the year also?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [17]

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Yes. So I think it's a little premature to give guidance for the second half of the year within the sectors. But we definitely -- every time we've had new product introduced in our Inkjet sector, we've seen a boost from that. Last year, we had a roll-to-roll product introduction. We had some new textile product introductions. This year, we've got the hybrid introductions. So I guess, generally, we're feeling very good about the momentum within our Inkjet sector and excited about the opportunities with our -- especially in our display graphics and textile segments with the big product releases in the second half.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [18]

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Okay. Good, good. And this is the last one from me. Again, it's another second half question. But you made mention, Marc, that you wanted to get back -- or you believe you'll get back to 10% operating margins, kind of call it soonish. It seems like, particularly if the Nozomi margins continue to normalize and new products that incoming on -- that we could see a good kickup in growth in operating margin in the second half of the year. But what are the kind of the levers on that as we think about modeling, how we should model our operating margins in the second half of the year, just the key signposts and the key levers, so we can -- we're not missing anything?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [19]

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Yes. So I'd say the 3 most important things there are the Fiery recovery back to the levels that Guy mentioned, and the $60 million level that we gave as guidance; the Nozomi getting to operating profitability in the second half of the year; and the benefit that we'll get from the new platform launch in display graphics, which should definitely help as we get later in the year. And then, the product should definitely help drive better gross margins for the display graphics segment.

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Operator [20]

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Your next question comes from the line of Erik Woodring with Morgan Stanley.

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Erik William Richard Woodring, Morgan Stanley, Research Division - Research Associate [21]

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Just if we could go to the software segment first. Just based on your regional commentary, it seems like most of the growth could have come out of Asia for Productivity Software. So just curious why that would be, if it was concentrated on a few deals. Any color on that would be helpful. And then, I have a follow-up.

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [22]

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Yes. So actually, that's -- if we gave that impression, we did not intend to. While we did see growth in Asia for Productivity Software, it's from very low numbers. So that helped, but Europe and the Americas also had very, very strong growth on Productivity Software as well. So it definitely wasn't an Asia -- wasn't driven specifically by Asia. It probably had the highest percentage growth, but again, coming from a very small number. So it was, again, a very unique quarter from a software perspective, because the strength came across pretty much all of our product segments and across all of the geographies. And anyway we looked at it on an organic basis, ex currency basis all -- it was just very strong across the board.

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Erik William Richard Woodring, Morgan Stanley, Research Division - Research Associate [23]

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Great. And was there anything lumpy in there? Just -- the only reason I ask is just because obviously results were so much better than guidance that you originally gave 3 months ago?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [24]

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There was no megadeal that showed up in there that was a huge impact. We did get some benefit from the -- a small amount of benefit from the change in revenue recognition rules, the 606 revenue rules, but it was less than $1 million. So -- that was anticipated when we gave the guidance. So we knew we were going to get that.

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Erik William Richard Woodring, Morgan Stanley, Research Division - Research Associate [25]

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Okay, perfect. Right, okay. And then, just last question. I think in Guy's original narrative, he talked about closing some deals that were delayed, I think, from 4Q. Any color if you could give on that would also just be helpful. Where were they from and whatnot?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [26]

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Just -- no one specific concentrated area. Again, I think we just saw better close rates in Q1. And some of the things that didn't get done in Q4 carried over into the quarter. But again, that always happens to a certain extent. It's just -- we just outperformed in Q1 in the direct business really across a bunch of the different geographies, as I mentioned. And especially towards the end of the quarter, I would say the last 2 weeks of the quarter, we definitely saw a very nice level of activity and closed a large amount of business.

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Operator [27]

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Your next question comes from the line of Joseph Wolf with Barclays.

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Joseph Eric Wolf, Barclays Bank PLC, Research Division - MD and Deputy Head of United States Equity Research [28]

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I wanted to start with a question on Fiery just in terms of the marketplace. There's been a lot of talk about the Fuji Xerox deal. You talked about that last quarter. I'm wondering if you felt any of that or if that had anything to do with the overall environment for the Fiery product?

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [29]

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Thanks, Joe. So we are watching what happens, like everybody else. We have no active role in this, and we hope it's going to resolve to the best interest of everybody concerned. We mentioned that we believe that Xerox [sits] in great savings and efficiency with working with us on the single platform for DFE in the production space, a deal we announced a year ago. And we hope that once Fuji Xerox and Xerox will become one, we'll have this opportunity in Asia. We're essentially seeing very little business from Fuji Xerox right now. I actually believe that some of the court documents that got out showed that they intend to save on duplication and control of development. We believe that means that some of the -- definitely on the production side, there is a great opportunity for us to [play be-all] of the combined company if it were to happen. If the deal will not happen, obviously we'll be happy to continue to serve Xerox to the best of our ability and we'll continue to work with Fuji to allow them -- Fuji Xerox to allow them to be much more efficient, more competitive with DFEs.

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Joseph Eric Wolf, Barclays Bank PLC, Research Division - MD and Deputy Head of United States Equity Research [30]

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I'm not sure that -- I don't think somebody asked this already, but I was missing because of the call issues. With Nozomi, what is the capacity right now? You've got 12 orders. You talked about back-end loaded, but you've got pretty good visibility right now. So if we look at the DSOs and we look at your capacity for how many you can make a quarter, what should we think about that in terms of timing? And then, last quarter and last year, there were some feature sets that weren't out there that were keeping you from hitting the full dollar value of the machine. I'm wondering if -- where -- what the status of that is right now? Or any of the feature sets that will get you to the full value of the machine?

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [31]

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I'm going to take the capacity and let Marc talk about the impact to DSO and the revenue recognition. But capacity is beyond manufacturing capability. We said we can move to 2 units a month, and we're already guiding for more than that in the third quarter of the year. We need to ramp up the service. It's not just hiring technician or moving them from other parts of EFI. It's just making sure they're very efficient when it comes to supporting Nozomi, both in the commercialization of the units and then, of course, in the run rate. We learned that customers, once they start to work with us, are very particular. They want it done all the time. They get their end customers addicted to the capabilities of digital. And we like that, and we want them to stay addicted. So we want to make sure we have great service. So we ramp it up. As you can see, we are already projecting 5 and 7 for Q3. The demand, I have to say, it's not right now a main limitation. We're seeing a pretty solid demand for Nozomi so far. Marc?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [32]

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Yes. And so, I'd say from the revenue perspective, there are still carve-outs that we have to do on the Nozomis after they're shipped. The White Ink is something we're targeting to have shipped in early Q3. So we're still carving out for that. And we still continue to see that with new deals, there's specific requests from customers that we're adapting to, not huge things, not huge innovations, but still things that require deferrals. Somebody wants a different type of feeder or different types of transport or different other types of maybe safety devices on the printer that are just unique to that environment. And so, that requires some deferrals as part of the process.

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Operator [33]

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Your next question comes from the line of Aaron Rakers with Wells Fargo.

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [34]

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If I can also on Nozomi, I apologize for this. But I think, last quarter or even the prior quarters to this, you discussed kind of the $60 million revenue number, which you've reiterated was underpinned by 24-system shipping. So I guess, the first question is, is that still the case, and therefore the implied number of systems to be delivered into Q4 would be 8 to hit that 24-system number? And then I think, also last quarter, you alluded to 150 active deal engagements that you were involved in. Could you give us kind of an idea of where that stands today and how do we think about the hardening of those opportunities in terms of progressing to potential signed opportunities?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [35]

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Okay. So let's start first with the 24. So I think what we've said is $60 million is kind of the key point on the revenue side. And we said we had many ways to get towards the -- to get to the $60 million based upon the combinations of configurations and how the revenue is recognized and the units and so on. Yes, to get to the 24, we'd have to ship 8 in Q4. We do believe we could do that if needed. But there are other ways, again, that we can get to the $60 million also as part of that. And I'll let Guy speak to the pipeline next in terms of what we're seeing there.

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [36]

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Yes. So from a pipeline perspective, we're not really measuring (inaudible) based on how many companies we're talking to, because many of those can do multiple units, some of those can do many units. The word you use, "hardening" is the right discussion. We advance a lot of it. We think we'll be ready to -- we already signed some, we're ready to sign some more in the quarter. We're getting very close with some other companies for Q3 delivery. And so, we advanced it a lot, people come to see the new facility, they come to see Hinojosa in Hinojosa (inaudible). Now we have another possibilities to show the system. And we feel like we made a very good progress on the pipeline. A lot of people want to know much more, since it's a new concept of digital manufacturing. They want to make sure we're passing the specific tests, regulation, different type of files, different type of color. So they sometimes go on lengthy discussion. It's not unusual for us with a single customer to have multiple visits to our factory to test multiple things. We like it. We -- so far, we think we're pacing it. We're not running faster than our capability to deploy. And we're very encouraged with the advance of the pipeline.

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [37]

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Perfect. And then, as a quick follow-up to that, I mean, as you kind of build installations, I guess, the first question is, has there been any change of your views of how we could possibly think about the volume of ink these systems would consume? And then, just real quickly, give us an update of what you're seeing on the competitive landscape in the corrugated digital print side?

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [38]

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So on the ink, I think it's too early to make any different ranges from what we said before. People are ramping up, and we mentioned, for example, key customer that bought 2 units in Q4 we just announced. It's just going to the do their innovation -- in next few days, Innovation Day with customers. So it takes a while to ramp to full speed. And then, we can judge. We still think that range of 0.5 million to 1 million per machine is as good as any. Once people -- we see once people get that, they like it and customers getting to digital, the quickness of changing design, the color you can reach, it's very appealing in today's market. As far as -- sorry, what was the second part of your question?

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [39]

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Just the update on the competitive landscape for Nozomi?

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [40]

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Yes, competitive landscape, nothing really changed. We're still expecting HP to reach commercial availability sometime this year. They're a very good company. They will have a good machine, no doubt. But the market is very, very large. And we don't think it's negative. I think they're actually going to help us to increase the awareness of digital printing. And we think we're going to have a very good share of the competitive market. We are not aware of anything new as far as new competitors entering the market anytime soon.

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Operator [41]

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Your next question comes from the line of Joe Wittine with Longbow Research.

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Joseph Helmut Wittine, Longbow Research LLC - Research Analyst [42]

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I'll stick with Nozomi. Wondering if you could speak to the utilization for the printers that are in the field. I know it's only a couple of units that are "fully ramped", but for those, can you address utilization on -- in some fashion?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [43]

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So thank you. I think it's a similar question to the ink volume because utilization lead to the ink volume. We -- again, it's too early to change any of our prior assumptions. I don't see a reason why we change. I think, once -- a lot of those installations -- we shipped -- we transacted 9 units as of the end of the March, so a lot of those units are still in process of coming up to speed. It will take a while to be in full speed. Once they're in full speed, I expect the end customer of our customer to continue to demand digital. We have seen that definitely with Hinojosa. So nothing changed from our perspective. We think those units are going to work more than one shift, in many cases, 24 hours a day and then x5, x6, depends how many days they're going to work.

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Joseph Helmut Wittine, Longbow Research LLC - Research Analyst [44]

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Okay, got it. And then, Marc, is there any impact on those from Nozomi? I'm specifically wondering how the terms they're offering there compare to legacy Inkjet printer mix. And beyond Nozomi, I'm just wondering if you could put a finer point on what levers you may have at your disposal to get the DSO number ticking down?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [45]

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Sure. So on Nozomi, we haven't seen the DSOs -- again, it's a limited quantity of units, but the DSOs have been comparable to what we've seen in our core Inkjet portfolio. So nothing that unique there as of yet. As I mentioned, the DSOs for our direct business were about the same as what they were last year in Q1. It's just they're making up a bigger mix of our overall revenue. In terms of what we're planning to do going forward to help drive that down because we are -- in order to compete globally, we are offering some -- across our Inkjet portfolio, we are offering sometimes sales leases, as we've mentioned on prior calls. And I think we're going to look to -- because we do charge typically above-market interest rates when we do those sales leases for expediency's sake, trying to get the deals closed faster, we're going to look to perhaps sell some of those sales leases to leasing companies. We've been approached by a number of leasing companies that have interest in buying some of those from us. And so, we think that can help now. The sales leases don't contribute specifically to DSO, but also we have some extended payment term agreements that also have interest on them. And so, again, we can sell those without really hurting revenue or anything else from that perspective. So I think we're going to start to get more aggressive on shopping some of that portfolio out there to monetize that.

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Joseph Helmut Wittine, Longbow Research LLC - Research Analyst [46]

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Great, that's helpful. And then, finally from me, just a quick question on rev rec we've taken. Are you recognizing all corrugated units at shipment from [Palencia]? And then, I'll step aside.

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [47]

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So I don't -- as we've said in the past, we don't want to go into specifics around individual shipments or individual deals on how we're recognizing revenue for competitive reasons and also for negotiation reasons, as we're certainly doing a lot of deals each quarter. But that's certainly our default methodology is that we recognize revenue upon shipment.

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Operator [48]

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Your next question comes from the line of Brian Drab with William Blair.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [49]

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The first one. I don't see anything on currency in the slides. I might be missing it. But Marc, can you give the FX contribution to revenue in the quarter for the segment?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [50]

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Sure. So I can give it in general terms to say that, well, first, FX didn't change much from when we gave guidance. So there is really very little impact from the time we gave guidance to today. In terms of year-over-year what impact it had, a small impact on software. I think it would have reduced our software growth rates by less than 4 -- less than 5 points. It still would have been over 20% year-over-year growth ex currency on software. Inkjet would have been a little bit lower, but again, still very good growth ex currency on Inkjet as well. So Fiery has no impact from currency really to speak of.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [51]

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Okay. I guess, so to get the specifics on that, we'll wait for the Q?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [52]

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There can be -- yes, breakdowns of the...

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [53]

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When it was a headwind, just for our models, it'd be really helpful to have those numbers. But I guess, I'll just wait for the Q.

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [54]

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Yes. And again, it's no impact on Fiery, as we mentioned. For overall Inkjet, as a whole, we spoke about 15% year-over-year growth. It's actually 8% ex currency growth on Inkjet. And the totals are in the -- actually, if you look at the tables that are attached to the press release, it's got the breakdown of each of the segments ex currency. So again, I think it's 21% on software, I believe 8% on Inkjet, and Fiery not really having a significant impact.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [55]

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Okay. I'll take a look at that. And then, is there any way you could give us a sense for what Inkjet would have been if we exclude the impact of the Jetrion deal divestiture?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [56]

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Yes. So excluding Jetrion adds another point of growth to Inkjet. So that makes it 16% growth instead of 15%.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [57]

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Okay. And then, the last question along this line of questioning is, I think it'd be helpful for everyone on Fiery, same question. There were a couple of acquisitions in there. We really don't have the number from you recently in terms of what revenue contribution from acquisitions was in this quarter year-over-year. I'm guessing it's like...yes.

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [58]

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Yes. So -- I mean -- yes, so when you look at the year-over-year compare, the only acquisition in Fiery was the Generation Digital acquisition, which is a very small, less than -- very low revenue numbers per quarter. It's -- it might even be less than $1 million per quarter, but it's -- or just over $1 million per quarter. So very little impact. FreeFlow was done in Q1 of 2017. So that would be considered organic at this point in time, right, because it was included in -- yes, exactly. So in Generation Digital, actually, is below -- it's actually well below $1 million. I just see here now. So very little impact from Generation Digital on Fiery at all. On the Productivity Software side, we're not breaking out the organic numbers each quarter, but we did still see double-digit organic growth in the quarter for Productivity Software, even with the recent -- there were 2 acquisitions done last year, Escada and CRC, and we still saw a double-digit growth even with those acquisitions.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [59]

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Okay, great. And then, just one last quick one just to help us model here. Is adjusted OpEx for the second quarter similar to the first quarter? Or is it stepping up just -- and I haven't been able to work through the whole model yet, but I think I would have forecast slightly higher EPS based on the revenue and gross margin guide.

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [60]

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Yes, we do expect it to step up a little bit. Our salary increases go into place -- our annual salary increases go into place in Q2 every year. And so we typically have a step-up from Q1 to Q2 as a side effect of the salary increases.

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Operator [61]

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Your next question comes from the line of Jim Ricchiuti with Needham & Company.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [62]

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Most of my questions have been answered. I have one question on Nozomi. I know you can't always identify customers, but in the past, you've talked about fairly good interest among some of the top tier corrugated customers. Can you give us an update on where you might be with some of those customers?

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [63]

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Yes. So some of those are very particular of not wanting us to say what exactly we do in digital, and we're 100% going to respect that. All I can tell you that I'm very pleased with how those discussions are progressing. And we're prioritizing the big large international companies for this quarter, so some of our 5 units for Q, 2 for example, will go to some of those large companies.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [64]

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Okay. And with -- I believe there's just one customer right now, Orora, that has 2 units -- 2 Nozomi machines. As you look at the guidance you're providing for Nozomi revenues for the full year, is the assumption that this is mainly going to be one of these per customer, at least initially, as it relates to what you're looking for in 2018?

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [65]

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Go ahead, Marc. Go ahead.

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [66]

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So we do have -- while we've just spoken about Orora or identified Orora as the only 2 printer customer to date, we do have another customer that's purchased more than one, but we're bound by confidentiality from not disclosing that at this point in time. So we do expect to see more multiunit purchases going forward. But again, we just can't divulge the name at this point.

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [67]

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The majority of the units we focus for the year is the single -- is the first unit per customer.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [68]

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Got it. One final question from me just on the software -- Productivity Software, the growth being as strong as it was. Is there anything where there are some deals that you had anticipated closing in Q2 that actually ended up being closed in Q1? I think I heard you allude to that. And I'm not sure if -- to what extent you're just seeing stronger underlying momentum in that part of the business as you look out over the balance of the year?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [69]

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So for -- what we actually spoke about was the reverse, Jim. Actually, we had some stuff in Q4 that didn't close that we ended up being able to close in Q1. I don't really think there was a significant pull-in impact where we closed deals in Q2 that -- closed deals in Q1 that were planned for Q2. I know I was involved in a -- working on a nice deal in Q1 that actually pushed out of the quarter to Q2. So that was a decent-size deal. So I think we're not expecting a repeat in Q2, as you could tell from the guidance, what we saw in Q1, that was a unique situation. But we don't think the Q1 business damaged the Q2 opportunity.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [70]

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And then, last question, just on textile. What can you say about that? I know you don't normally speak about specific growth rates. But can you give us some flavor as to how that business performed in Q1? And just in broad strokes, your expectations for that business over the next 1 to 2 quarters?

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [71]

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Yes, correct, we will not give the exact numbers. I would say, we're very pleased with the performance in Q1 from textile business. Our forecast for Q2 is actually quite good. We announced 2 new units, one as I mentioned, the [Como.] The other one is 340i, which is a soft signage. Actually, anecdotally, I mentioned I'm with the top salespeople here on a [wow] trip, short visit for me. And I caught one guy near the pool today with the spouse talking on the phone. I tried to shut him off, but apparently he just sold another textile machine from the pool. So that was good to see. But we feel pretty good about this quarter. We feel pretty good about the rest of the year. With textile, it's going strong. Obviously, once we will introduce the [1-touch] toward the end of the year, I think that will definitely give us another strong lift for the business.

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Operator [72]

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Your next question comes from the line of Jim Suva with Citigroup.

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Jim Suva, Citigroup Inc, Research Division - Director [73]

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A lot of the Nozomi questions have been asked. I'll ask a question on Fiery. You mentioned a bottoming here in Q1. Do you mean that in the past, while you said the long-term growth rate of this Fiery should be closer towards GDP, should we expect long-term year-over-year to be off this low, low, low level? Or are we going to get back to a more normalized level? I'm -- what I'm trying to get at is have you competitively lost some share and -- because I believe it's been about 9 quarters of year-over-year decline?

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [74]

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Jim, third question. In Q3, actually we had a -- the increase. But you're right. The trajectory in the last couple of years, the trend was not good in Fiery. And that's exactly why I'm not going to get too much into a long-term trajectory. We need to earn some credit here -- credibility here. We said we'll bottom in Q1, and we're expecting it to go back to the 60s level for the rest of the year. We feel that we made the right call in Q1, giving what we guide in Q2 and what we're seeing in the marketplace. Let's get a few more quarters of improvement, and then we can talk about long-term Fiery trend.

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Jim Suva, Citigroup Inc, Research Division - Director [75]

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Okay. I think last year, there were some cheaper Fiery competition that came out. Have they even got more aggressive? Or has the competition remained kind of relatively stable? Just trying to get a sense for the landscape competitively on Fiery.

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [76]

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Yes. Well, the biggest thing that happened from a market share perspective in the last 2 years is -- interestingly enough is the Fuji Xerox pushing very strong their lower-end in Asia. And customers in Asia have less expectation, I would say, from the [appeal,] less demand from speed and workflow. So it was a tougher thing for us. And they almost tried to get really [custom]. I mean, they push very, very hard compared to Fiery to the point that it was very difficult for customers to buy Fiery. Outside of Asia, that will be close to impossible to (inaudible), because customers are well aware of the Fiery and wants the Fiery and see the -- how Fiery makes them competitive in Asia was easier. Obviously, with Fuji Xerox thinking about how to potentially merge with Xerox, so in general be more productive and more competitive, I think it opened the door to a different discussion on Asia and just actually opportunity for us to gain share there.

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Operator [77]

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Your next question comes from the line of Shannon Cross with Cross Research.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [78]

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I'll make it very brief. I was just curious, how do I think about -- as Nozomi ramps, is there any difference in sort of the sales comp plan for that and how it's going to run through your SG&A line because theoretically there could be a fair amount of leverage on the revenue side with the new product?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [79]

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Yes. So we don't see a huge SG&A impact from Nozomi. Obviously, we'll be paying sales reps commission on it, but it's not like somebody gets the same commission percentage. I'm sure that'd make the people at the pool very happy that Guy was just speaking about. But they don't get the same commission percentage on the Nozomi that they get for selling one of our display graphics printers, for example. So we have done some ramp up already of some Nozomi salespeople around the globe. And so now we're looking to try to leverage that investment we've made. And we'll continue some -- a little bit of a ramp-up there. But we are primarily leveraging our existing Industrial Inkjet sales force around the globe to close the Nozomi deals. And so while we're deploying some corrugated experts in different geography, it's primarily our existing sales force that will be working those deals.

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Operator [80]

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There are no further questions at this time. I will now turn the call back over to the Guy Gecht.

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Guy Gecht, Electronics for Imaging, Inc. - CEO & Director [81]

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Again, thank you all for joining us today. We're very pleased with the start of the year. And as we -- hopefully you've heard, we're very excited about the quarters to come. We truly appreciate the loyalty and support of our shareholders and our partners and our customers. And of course, we very much appreciate the very hard work and dedication of entire EFI team. We look forward to speaking with you again next quarter.

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Operator [82]

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This concludes today's conference call. You may now disconnect.