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Edited Transcript of EFII earnings conference call or presentation 20-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Electronics for Imaging Inc Earnings Call

FOSTER CITY Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Electronics for Imaging Inc earnings conference call or presentation Thursday, April 20, 2017 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 and 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

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Brian Drab

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

* James Andrew Ricchiuti

Needham & Company, LLC, Research Division - Senior Analyst of Advanced Industrial Technologies and Display, Vision and Imaging Technologies

* Jim Suva

Citigroup Inc, Research Division - Director

* Joan K. Tong

Sidoti & Company, LLC - Research Analyst

* Joseph Eric Wolf

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

* Joseph Helmut Wittine

Longbow Research LLC - Research Analyst

* Kathryn Lynn Huberty

Morgan Stanley, Research Division - MD and Research Analyst

* Morris B. Ajzenman

Griffin Securities, Inc., Research Division - Senior Research Analyst

* Patrick M. Newton

Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Senior Analyst

* Shannon Siemsen Cross

Cross Research LLC - Co-Founder, Principal and Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Kelly, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Electronics for Imaging First Quarter 2017 Earnings Conference Call. (Operator Instructions) Thank you.

JoAnn Horne, Investor Relations for 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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Thanks, Kelly, and thank you, everyone, for joining us today to discuss EFI's first quarter 2017 results. Leading the call today from EFI are Guy Gecht, EFI's Chief Executive Officer; and Marc Olin, EFI's Chief Financial Officer. Before management's remarks, let me review the safe harbor statement.

During the call today, we'll be making forward-looking statements, which are statements in the future tense, including, but not limited to, statements regarding our strategies; 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 innovations; 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 that may affect future results included in our SEC filings and the press release. We do not undertake to update in light of any new information or future events.

In addition, reference will be made to non-GAAP financial measures. Information regarding the 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 that correspond to today's conference are available on the Investor Relations website also.

I'll now turn the call over to Guy Gecht, EFI's CEO.

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

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Thank you, JoAnn, and thank you all for joining us to review our first quarter results. You all have seen the results, and we are obviously disappointed. In particular, the weak Industrial Inkjet revenue, specifically related to our VUTEk brand, is taking away from our significant achievement this quarter, including a return to double-digit growth of Reggiani, Nozomi beta progress and Inkjet gross margin close to a targeted 40%. I realized that we have had different one-off issues in the past quarters, which understandably and unfortunately takes attention away from our very real progress in many areas.

Going into Q1, our goal was to post a clean quarter across the board so that investors would focus on our new products, growth opportunities and balance sheet improvements. Unfortunately, this quarter, we did not have -- unfortunately, this quarter, we did have an execution issue in our -- in display graphics printer sales.

As we discussed last quarter, with the successful combination of all VUTEk roll-to-roll development and manufacturing with Matan in Israel, we are benefiting from the expertise of the combined technology teams along with significant cost efficiencies. The initial releases were of new 3- and 5-meter LED printers, which ended up with a higher demand than we forecasted. And as a result, we sold out of those printers, which leads me to one of our issues in the quarter, which was around our production mix. We sold out of our new higher-margin printers, including the ones I just mentioned, which helped drive inkjet gross margin to almost 40%. But we didn't sell enough of the more mature products.

Normally, when we launch new products, we make a limited production quantity in the first quarter of our release. With the benefit of hindsight, it is clear that we should have had pushed to build even more of the newer products.

Now add to this the fact that our 2017 comp plan was too punitive when the sales force offered discount on our more mature products and we ended up with unsold printers that had real opportunities associated with them. We put in place this comp plan change to improve gross margin. But in retrospect, we were too aggressive and we should have let the sales force make more money when the mature products are sold at a discount.

We have already taken clear actions and revised the comp plan and discount levels on the more mature models and are optimistic this will help drive better traction for these products. It's true, we believe it's prudent for us to be -- not to be too aggressive in our Q2 revenue outlook as we work to sell more and more of the mature printers. At the same time, we have also taken steps to accelerate the ramp-up in production of our newer production models.

Now let me turn to the positive news in the inkjet results. First, we continue to see solid utilization in the installed base. The 20% increase in volume in Q1 proves that customers are seeing significant demand, and we believe this reflects that the growth trajectory of the on-demand digital printing has not changed. Another positive outcome for inkjet in Q1 was the rebound of Reggiani's performance. With the transition to EFI control now complete, we are pleased that Reggiani again posted double-digit growth ahead of the second half timeline we discussed last quarter.

In addition, EFI's proprietary textile ink is getting good traction, helping to drive the attach rate to over 50% compared to the 40% rate when we bought Reggiani less than 2 years ago.

Finally, results were in line with our expectations. We are pleased with the integration of the Xerox FreeFlow business, and our partnership is performing on track. We see great benefit from being Xerox production DFE provider and believe this is a great win for Xerox and EFI, and most importantly, a win for our shared customers. The market has reacted fairly positively to the news of our partnership with Xerox and the fact that Xerox has trusted EFI as their production DFE provider and focus instead on their own growth initiatives.

The software segment performed largely in line with our expectation, with high single-digit growth and continued interest in our ecosystem in our target industries. Our unique suite approach has gained traction with customers around the world and as we continue to build our packaging and textile suites in order to offer a unique ecosystem for each industry.

A very important achievement in the quarter was the progress we made with Nozomi development. Our first beta unit is now at our initial customer, Hinojosa, in Spain. In fact, we spent weeks running Hinojosa's production jobs on the beta Nozomi unit when it was in our factory. So they have already seen the quality of the output, which more than met their expectation.

The second beta unit is being built as we speak and is on schedule for a customer placement by June or July at another European client, with revenue recognition for the 2 beta units anticipated for the second half of the year. After the second beta unit is placed, assembly will immediately begin on the third unit, which we plan on being our first production unit. As a reminder, we currently can only produce one unit at a time. But as we previously discussed, we intend to be at 2 per month production run rate by year-end. We have added to the more than 30 cancelable orders we reported to you last quarter and now have about 40 of those orders in hand.

Bottom line, the plan we laid out last year is on track for Nozomi to begin shipping commercially midyear. And we couldn't be more excited about capitalizing on this game-changing opportunity. For those of you who are interested to see Nozomi in action, we will release some videos in the next few months and intend to host an investor trip in late August to visit the Nozomi factory in Hinojosa in Spain to see the Nozomi in operation. We're also planning to visit the Reggiani factory and textile customers in Italy on the same trip.

So as you can see, short of this temporary and very frustrating display graphics shortfall, our long-term strategy remains sound and continues to gain traction. As always, using M&A to accelerate our growth and success in our segment is part of our strategy. And in the past couple of months, we have seen more opportunities and gotten inquiries from small to midsize companies looking to join EFI on our journey to transform industries. We remain disciplined on culture and strategic fit balanced with the right price, and as discussed in the past, we are only evaluating opportunities that build out our current footprint with significant TAM and growth avenues.

Before I turn the call over to Marc, let me be very clear. Our management commitment and my personal commitment is to improve execution and return to posting clean growth quarters. We expect and accept nothing else on ourselves and are taking direct, targeted and necessary action to deliver as much to your and our own expectations.

And with that, let me turn it over to Marc to discuss the financial details of Q1 and our outlook for the second quarter.

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

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Thank you, Guy. As you mentioned, we were all disappointed in the revenue results of $229 million in Q1, which were down 2% year-over-year and down 1% ex currency in what is our seasonally weakest quarter each year. We were, however, pleased to see strong progress on gross margin across all of our segments and improved performance and cash generation.

The Industrial Inkjet business sales were down 2% year-over-year, flat ex currency, which was below our expectations for the quarter due to lower printer sales. As Guy mentioned, we were pleased with the initial demand for our refreshed roll-to-roll display graphics product line, which we launched toward the end of 2016, and the progress on gross margin that we've been working hard at achieving over the last 2 years.

Productivity Software delivered 8% year-over-year growth with minimal ex currency impact. Fiery had a decline of 7% year-over-year, as expected, and we continue to work through the tougher pre drupa compares, which conclude at the end of Q2.

Total recurring revenue was $77 million, up 12% year-over-year and representing a record 34% of total revenue. Non-GAAP operating profit margin was 14.5%, up 20 basis points from last year, resulting in non-GAAP earnings per share of $0.55, flat year-over-year and in line with consensus. Non-GAAP EPS would have been $0.57 had currency remained where it was when we gave our Q1 guidance.

For Q2, the euro, Chinese yuan, British pound and other developing country currencies have declined significantly versus 2016. Therefore, we expect $5 million of negative currency impact on our year-over-year revenue comparison and a negative $0.02 to $0.03 impact in EPS if currency remains as it was on April 1.

Now let me explain in more detail the revenue by business segment and region. The Industrial Inkjet segment generated revenue of $123.3 million, down 2% year-over-year, flat ex currency and 54% of total EFI revenue. This segment's revenue was driven by a decline from our display graphics product lines, offset by strong growth from Reggiani and credit print product lines. Total ink volume was up 20% for the quarter.

The Fiery segment delivered revenue of $70.4 million, down 7% year-over-year, representing 31% of total revenue. Strong server mix drove another good quarter in gross margin. Fiery channel inventory remains in the targeted range but is further down from Q4 as Xerox is leveraging our new post-FreeFlow acquisition supply chain agreement to maintain lower inventory levels. We expect this to continue in Q2 and limit the year-over-year improvement we see in the Fiery revenue until we lap the drupa compares in Q3.

The Productivity Software segment delivered revenue of $35 million, up 8% year-over-year with minimal ex currency impact and contributing 15% of total revenue. Optitex, our June 2016 acquisition, delivered good results within our expectations for the quarter.

In Americas, we experienced most of the impact from our display graphics segment, where revenue amounted to $109.9 million, down 9% year-over-year, with minimal currency impact. EMEA grew 5% in Q1 to $88 million and 8% ex currency, driven by Industrial Inkjet sales in the region with higher sales for Reggiani product lines. In Asia Pacific, revenue was $30.8 million, up 2% year-over-year and 3% ex currency.

Looking to the June quarter, we expect inkjet to grow low to mid-single digit, Fiery to decline mid- to high-single digit and Productivity Software to grow mid-single digit, resulting in total revenue guidance of $244 million to $250 million. Due to the impact of Brexit and other significant currency changes, which took place over the last 12 months, our revenue range would have been $5 million higher had currency remained where it was in Q2 of 2016. Our guidance assumes that currency levels remain at that level -- will remain at the level they were on April 1. Had currency remained where it was in Q2 '16, our year-over-year growth rate guidance in Industrial Inkjet would have been high single digit, mid- to high single-digit decline for Fiery and mid- to high single-digit growth for Productivity Software.

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 54.8%, up 380 basis points year-over-year, our highest gross margin for the company since Q3 of '14. Industrial Inkjet gross margin was 39.8%, up 610 basis points year-over-year despite currency driving it down by 40 basis points. Fiery gross margin was 72.1%, up 180 basis points year-over-year due to product mix. In the Productivity Software segment, gross margin was 73%, up 20 basis points year-over-year, driven from the benefit of higher revenue and license mix.

For the second quarter of 2017, we expect overall gross margins to be 51% to 53% as we have a larger portion of our revenue driven by Industrial Inkjet and we implemented a more aggressive pricing policy for older inkjet models that Guy discussed previously. Even with that, however, we still expect inkjet gross margin to continue to show year-over-year improvement as we focus on driving productivity increases across our product lines and the increasing contribution of ink to our inkjet gross margin.

Turning to operating expenses. For the first quarter, operating expenses were $92.2 million, up 7% year-over-year and comprising 40.3% of revenue, an increase of 360 basis points from the year-ago period. R&D expenses were $36.1 million, representing 15.8% of revenue, up from 13.9% a year ago. Sales and marketing expenses were $40.7 million, representing 17.8%, up from 16.5% a year ago. G&A expenses were $15.4 million, representing 6.7% of revenue, up from 6.3% a year ago.

We expect operating expenses to increase sequentially in dollars for the second quarter due to normal seasonal increases tied to employee compensation and trade shows. Strong gross margin performance across all business units helped us deliver first quarter operating income of $33.2 million, slightly down year-over-year with an operating margin of 14.5%, which was slightly higher year-over-year. Other income and expense had a net loss of $1.3 million, driven primarily by higher FX losses and reduction in other income, offset by an increase in interest and investment income. Our constant non-GAAP tax rate remained at 19%, and we expect this level to continue through the remainder of 2017.

Despite continued currency challenges and a revenue shortfall, we delivered earnings per share of $0.55. This is flat year-over-year. As mentioned earlier, if currency had stayed at the levels when we gave our guidance for the quarter back in January, we would have reported an additional $0.02 in EPS.

Looking to the second quarter. We expect non-GAAP earnings per share of $0.54 to $0.60. As a reminder, this 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 $443 million compared to $460 million at the end of last quarter. Cash flow from operations was $15 million or 58% of the non-GAAP net income for the quarter, below our full year target of 90% of non-GAAP net income but up 66% from Q1 of '16. Cash flow of $127 million for the last 12 months represented 109% of non-GAAP net income, well above our long-term targeted plan.

Net accounts receivable were $226 million, up $5 million sequentially, due to new product introductions, which began shipping in February and March, late customer decision-making and demands for increased payment terms from our customers in the competitive market, particularly for our hardware business.

DSO was 88.8 days, up 12.6 days sequentially and up 8.9 days versus Q1 of last year. As we said in the past, our direct businesses have a higher DSO profile than our Fiery channel business. And as Fiery becomes a smaller portion of our total sales, this shifts our DSOs higher. That said, the DSO level in Q1 was higher than we would like. We will continue to work to reduce this number in order to drive more cash generation.

Our net inventory balance was $114 million, up $15 million sequentially but $8 million lower than Q1 last year, due primarily to the lower sales of our older inkjet products that we previously mentioned and the buildup of our Nozomi product. This drove inventory turns to 3.7, down 0.1 turns year-over-year and down 1.3 turns sequentially. We are targeting to improve our inventory turns in Q2 as we look to sell off some of these prior models.

Stock-based compensation this quarter was $9 million, which is slightly below our normalized run rate of about $10 million to $11 million per quarter and down significantly from Q1 of last year as a result of the company reducing the expected level of achievement for our 2017 stock grants from lower revenue performance versus targeted levels after the first quarter.

As we stated in the past, we believe in pay per performance for our employee base, and we continue to expect the level of stock compensation to be driven by the company's success in achieving goals across 3 categories: revenue, operating profit and cash generation.

In the first quarter, we returned $17 million to shareholders as part of our $150 million buyback program, which was put in place on January 1, 2016. Total diluted share count decreased 0.3 million sequentially to 47.2 million shares. This leaves $58 million available in our $150 million buyback program.

As always, we'd like to conclude by thanking our customers, employees and shareholders for their continued confidence in EFI. And we are committed to resolving the short-term issues we have mentioned so we can focus on the huge opportunities in front of us, especially in our corrugated and textile market segments.

This concludes my prepared commentary. We'll now be happy to answer 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 Shannon Cross from Cross Research.

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

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Okay. Can you talk a bit about what you're seeing in terms of backlog? And if you had these issues, as you, obviously, weren't compensating the sales force and the way that was driving the right revenue, where did you sort of end the quarter in terms of backlog on the high end? And then how quickly do you think it will take to sort of restart demand or at least customer orders for the lower end? And then I have a follow-up.

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

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Yes. Shannon, it's a very good question. As far as I would say, that giving the orders, we have a customer signing contract, so whether they put a deposit or not, the way we consider backlog aside, if we build enough of the newer product, we will be willing to arrange. Let's put it this way. We had enough of those transactions to build. And those deals, I don't think, will go away.

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

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Okay. And the lower end?

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

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Well, the lower end, well, there's more mature and less mature. The low end is an interesting. We did mention there's a little transition where we introduced the next-generation lower end in Connect, and we started to ship it to (inaudible) this quarter. So there was a little bit of transition there, too. But the more mature, we had deals -- quite a few deals associated with them. Unfortunately, we did not discount enough, not thinking that we will get -- not seeing that we get a good situation at the end. And to make things worse, we launched a new comp plan that makes things even worse for the sales force to discount. Even if they get a permission to discount, they don't get the full benefit of the transaction once they discount. So it's pretty clear. We -- in the first few days of February, we went back and undid this comp plan. We gave them all the ability to benefit from the transaction, whether it's the discount or we reduced the prices. We went and increased the production level of the newer option to reflect the much stronger trend, which is overall good. It was bad because we didn't build enough. And so we are in a situation now that we are ready to go in and fight and get much better results. And so far, I would say 2 weeks into this, the response from the market and the sales force is very strong.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal and Analyst [6]

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Okay. That's helpful. And then from the Fiery perspective, can you talk a little bit about what's driving the declines and if they're a little bit better on a sequential basis? But clearly, I think it's a little below what we have anticipated. So how do we think about, I don't know, what's going on with Xerox and then also how should we think about timing in terms of product launches that you've seen from your partners as well as thoughts maybe if we look at the drupa comps?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [7]

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Yes. So as we've talked about all along, the Fiery recovery, in terms of year-over-year growth, we were always expecting to be in the back half of the year as we lap the end of drupa, which ended at the end of June last year. So that's definitely what we see as a critical point there. We do believe that the customers are indeed waiting for new products to show up. The digital printing, the digital page printing market is in this transition from toner to inkjet page printers. You probably saw that Landa, one of our first partners for an inkjet page printer that we signed up a number of years ago, announced that they were going into beta with 3 customers later this year. So clearly, a lot of people out in the industry are waiting to -- for that printer to be launched. They had $0.5 billion worth of preorders on that printer at drupa last year. So those are people that are expecting to spend $3 million who are probably not going to be buying another toner printer in the meantime while they're waiting for that to come out. So we think all of those things are having some impact on people rushing to buy a new toner printer and the year-over-year comparison in Q2.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal and Analyst [8]

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And then just finally, to be clear, there's been no change in terms of your expectations for what's going on with Nozomi? I mean, as Nozomi launch -- or any demand -- any change given HP's been a little bit more vocal recently?

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Guy Gecht, Electronics for Imaging, Inc. - CEO and Director [9]

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Yes. So no, we -- if anything, we even feel stronger about the opportunity. We made great progress since the beginning of the year. We have demonstrated to more customers. We work to file first and second beta site, especially the first one, to run their production jobs. They're super happy with the quality. And we delivered, as we said, the first unit. And it's in the process of being -- putting together for real operations. And so we're super excited about it. Of course, there is a reason why we call it beta. So there's going to be some -- expecting to see some tweaks and improvements over the next couple of months. But we feel very good about it. We feel very good about the demand. You mentioned HP. We always expected them to be a competitor. When we announced in drupa, they said they will have a printer after us. And we still -- and we get some intelligence after that. I think the market is -- can definitely take more than 2 big players, but -- and we expect more competition down the road. But it's a great, exciting space. Obviously, every day that go by, people shipping more boxes when they buy online. And those boxes, they get to be colorful and short run manufacturers. So the opportunity is just growing all the time.

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Operator [10]

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Your next question comes from Aaron Rakers from Stifel.

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Aaron Christopher Rakers, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [11]

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I was curious if you could help us understand or bridge the results relative to the 2 items that you had referenced as impacting the inkjet. And first, can you help us quantify (inaudible)?

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

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Aaron, I think we lost you on the question there. Maybe you're in a bad cell area or something like that. Can you repeat the question?

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

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Maybe we take another question.

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JoAnn Horne, Market Street Partners, LLC - Co-Founder and Partner [14]

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Operator, why don't we move to the next person and we'll...

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

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Come back with Aaron.

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Operator [16]

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Your next question comes from Joseph Wolf from Barclays.

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Joseph Eric Wolf, Barclays PLC, Research Division - MD and Deputy Head of United States Equity Research [17]

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I wanted to follow up -- I wanted to dig into the commentary on the Reggiani, the textile market. You said it's back to double-digit growth. Can you give us a little bit of color on, geographically, where that's happening? Are there new customers? I want to assume that the customers were primarily European when you bought it. How has that changed? And then on the ink attach rate, you said it went from 40% when you bought it to 50% now. What's a reasonable intermediate goal or long-term goal for the attach rate of your ink in the textile business? And what would that do to gross margins if you hit that number?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [18]

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Okay. Well first, from the standpoint of the growth for Reggiani, it's still certainly -- especially from the industrial textile space, it's much stronger in Europe than in the Americas. We did have some nice success with the soft signage printers that Reggiani makes for the Americas. But Europe was still a big source of strength for the Reggiani performance last quarter. In terms of the mix long term, we haven't set a target for that. I definitely think it can continue to go higher from the 50%, and obviously, each increment in attach rate is helping us on gross margin in the inkjet business as a whole. Obviously, the volume increases from the existing clients are also helping there to drive that mix, more to ink and help the gross margin number. But I wouldn't want to put out a long-term target for that. We haven't set a specific number on both -- on either attach rate or specific gross margin impact.

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Guy Gecht, Electronics for Imaging, Inc. - CEO and Director [19]

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Joe, let me just add, in general, there's nothing really surprising with the success of our textile product, both Reggiani and Optitex. We're very encouraged to see that. But if you -- I'm sure you remember in Q4, we had a transition. We had to buy out the earnout, take control, new GM. So there was a little bit of uncertainty around that. And we've said we expect to go back to double digit, which was we expect from the business in the second half of '17. So the good news is things are back in full motion. We're back in double digit. The new GM and the new group is doing extremely good job and very aggressive going after the opportunity. And the market is, as you pointed out, is big and will grow for the next many years.

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Joseph Eric Wolf, Barclays PLC, Research Division - MD and Deputy Head of United States Equity Research [20]

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Excellent. And then I just -- if I take a look at the last couple of quarters, you had -- there was that issue there. Then there was an execution issue here. If we think about the next half -- the next 3 quarters, 2017, you've got the Nozomi. Are there overall company-wide initiatives that you're doing in terms of the operations that will keep every part of the business on track? Or are we just looking at some anomalies that happened to be back to back?

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Guy Gecht, Electronics for Imaging, Inc. - CEO and Director [21]

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Well, I'd like to think we're looking at an anomaly, but we have too many of those. So we don't want to take any chance. We really want to deliver great numbers in the next quarters. And so there is definitely a much stronger focus on let's get to our numbers and to our plan, no excuses. We put different metrics in place. We're reviewing different things. So we make some adjustments in investment internally. I can say there's one thing that we did although we Q -- in I think like April 4, we already fixed the issues we had in Q1. But as you fairly mentioned, we had more than this just one issue in the last quarter. So we want to go back and deliver results that are the full potential of our opportunities. And we see every day iteration of why is it -- why the opportunities are so significant. So we made many changes. We are very focused. We had 2 days of senior leadership offsite to talk about how we're going to just focus on delivering results in the next few months. Obviously, we want to see Nozomi is going to help a lot once we achieve quantity. But before that, and we have other initiatives, we're determined to come back and deliver much better results.

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Joseph Eric Wolf, Barclays PLC, Research Division - MD and Deputy Head of United States Equity Research [22]

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And then finally, I guess, for Marc, on the cash management side, you mentioned the buyback program. When you think about that, is that a question of M&A opportunities in the quarter? So if you don't see them, you spend the -- you're doing the buyback? Is it stock price related? What's motivating in terms of moving towards the remaining $58 million on that buyback program?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [23]

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So we do have a 10b-5 in place that's doing a certain amount of automatic purchasing each quarter. Beyond the 10b5 for when we go into the market and do our own purchasing, that is largely a function of whether we see opportunities with where the stock is trading. So the $17 million we did last quarter is less than some of the quarters we've done -- some of the purchasing we've done in prior quarters. But we evaluated each quarter just based upon the market performance. We're not really balancing that out against the M&A in a given quarter because the stock buyback amounts are not that material as compared to the specific M&A opportunities that we will be looking at. But certainly, as Guy mentioned, there's a lot of things that have been percolating, a lot of -- we've gotten a lot more incoming interest from companies looking to sell over the last 60 days than we have in quite some time. So there's definitely plenty of things out there to look at right now.

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Operator [24]

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Your next question comes from Katy Huberty from Morgan Stanley.

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Kathryn Lynn Huberty, Morgan Stanley, Research Division - MD and Research Analyst [25]

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On the inkjet gross margins, obviously, up a nice 600 basis points plus. How much of that do you view is sustainable versus more onetime in nature because of the mix of low-end ink sales and inkjet sales? And then I assume you also benefited because of the weak hardware from higher ink mix. And then I have a follow-up.

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

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Yes. So definitely -- we definitely saw some benefit from the mix, as you said, of larger amounts of ink. But within each of the segments, we saw gross margin improvements at credit print, at Reggiani as well as in our display graphics segment and then the printers we sold within display graphics. So as we start selling more of the mature models out in the industry, that will be more aggressively discounted that will definitely put some pressure on the gross margin. We certainly weren't expecting to be at a 40% ex currency gross margin on inkjet in the quarter. I think we talked about that taking a number of years to get back to. So the guidance we gave was to be in the high 30s again for inkjet gross margin in the quarter. That's a more normalized level and still represents a very nice increase year-over-year for inkjet gross margin. But we need to temper that aggressiveness a little bit in terms of driving that margin so we can continue to maintain the growth in revenue.

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Kathryn Lynn Huberty, Morgan Stanley, Research Division - MD and Research Analyst [27]

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Okay. And I think you mentioned that you have some new low-end display graphics printers that have launched. And so what's the dynamic as you attempt to sell out the older versions? Is there a point that you have to look at inventory and figure out whether you've taken a charge or accrual if you don't think you can sell those through?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [28]

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Yes, no, no. They're not that -- we're not talking about something that's ancient to your -- obsolete from a marketplace perspective. There's still very good demand for it. We just have to build -- and for all of those models I was mentioning, we still sold a number of them in the quarter. We just didn't sell as many as we anticipated because of the discounting that we talked about and the comp plans. But we still expect to be able to sell what we've made, and we still actually expect to need to make more of those in the coming quarters, just not as many of them as we would have made last year.

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Kathryn Lynn Huberty, Morgan Stanley, Research Division - MD and Research Analyst [29]

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Okay. Understood. And then just lastly, are any of the 40 Nozomi orders noncancelable at this point? Or are they all cancelable orders? And then when would you expect to convert them to more of a contract or noncancelable order?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [30]

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So only the 2 beta clients have noncancelable orders at this point in time. They're committed to take the printers. But of course, they're still in beta, so there's no revenue as of yet until we get it out of the beta cycle. In terms of the conversion of the existing ones, of the other 30-plus preorders, we're going to -- we want to get some experience running in the beta environment at the customer, get a sense for the customer's feedback about the product, and then we'll use that as kind of a basis of when we start going back to those initial clients and getting them to sign binding agreements.

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

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We're not worried at all about -- Katy, we're not worried at all about ability to sell our production of this. I mean, we -- the excitement from the customer base is definitely extremely strong. So we need to finish the beta. We need to declare it ready and start to multiply and then start to expand our ability to manufacture.

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Operator [32]

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Your next question comes from Brian Drab from William Blair.

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Brian Drab, William Blair & Company L.L.C., Research Division - Partner and Analyst [33]

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I guess just tacking on to that last question, how many Nozomis do we think at this point that we'd ship in the third quarter? You recognize beta -- recognize revenue on the 2 betas and then maybe revenue on 2 others. I think in the last call we said maybe 4 Nozomis in the third quarter. Is that a reasonable estimate?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [34]

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Yes. I mean, I think we're still -- again, we'd rather not give specific guidance on the third quarter as of yet. We're certainly, as we mentioned, hoping to have at least the 2 beta machines ready in the third quarter for recognition. And then beyond that, I think it really just depends upon how things go and when we're ready to start shipping the subsequent models and whether the first quarter clients are willing to sign agreements that early on after the betas that don't have any acceptance provisions or things of that sort. So we haven't -- we don't have binding agreements with those customers as of yet. Our standard agreements, we recognize revenue when we ship to clients. But this is a brand-new product and we just have the first beta client in place. So it's just too early to say right now exactly how that's going to wind up for Q3.

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Brian Drab, William Blair & Company L.L.C., Research Division - Partner and Analyst [35]

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Okay. Do you, today, feel like you are -- do you have the capacity to build one per month? Or is that -- what's the target date when you can say, "I can turn on the factory and build one per month"? Is that in June or July?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [36]

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Yes. I would say that's a Q3 timeframe. At this point, it still takes more than a month to build Nozomi because we're still, again, in the beta phase, refining the product. So it's not in kind of a straight manufacturing type of environment. But by Q3, we should be in that mode to able to build one a month, and then as we've mentioned in the past, by Q4, be able to build 2 a month.

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Brian Drab, William Blair & Company L.L.C., Research Division - Partner and Analyst [37]

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And I hate to nitpick, but I guess by Q3, are we saying -- is a hope or expectation by early July? Or is it just sometime in Q3?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [38]

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Again, our goal would certainly be by July to be able to start doing one a month. But we have to make sure that that's really a function of when we finalize the beta process because until the beta processes are done, the design and of the machine is not final. So you're not going to start making them obviously en masse.

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Brian Drab, William Blair & Company L.L.C., Research Division - Partner and Analyst [39]

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Okay. And then on Fiery, forecast is suggesting that it will be down about 10% sequentially in the second quarter. And I'm just trying to figure out. I know you've made some comments as to why that is and what's happening in Xerox. Just wondering if you can give some further commentary on that dynamic with Xerox and anything else that's going on there. And also, if you look at the acquisition that you did there, you would be down even more, of course, right? So I'm wondering if you're -- without the acquisition, are we at kind of this like $60 million revenue -- quarterly revenue level, which is like 15% below where you were on average last year? And I'm just trying to figure out if something fundamentally changed in this business, and if not, if we can get back to that kind of average that we had last year, when is that and how do we get back there.

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [40]

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Yes. So as we talked about, getting to the point that we've lapped the drupa compare will definitely allow us to show some better growth rates. With the guidance we gave, we said mid- to high single-digit decline from last year, which is about the same thing sequentially, because last year, I think we were around $69 million and we did $70 million in Q1. So it's essentially the same sequential decline as it is year-over-year decline as it relates to the Q2 guidance. And the thing that's changed, as I mentioned, is that these inkjet printers that we talked about before are now becoming viable and I think people are waiting for those things to start becoming available in the market. And that will drive Fiery demand once they are, but it's holding up some purchasing decisions on toner-based printers. So Q3, again, as we lap the compares, we're going to start to see some of the printers, the inkjet printers start to gain some momentum. Xerox is starting to ship some of those. As we mentioned, the Landa thing is going to be in -- going to have a few beta units out this year. So those things are going to start to drive demand. But it's not going to instantly snap back to $70-plus million a quarter, but the key for us is getting back to the year-over-year growth cycle and starting to demonstrate that again.

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Operator [41]

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Your next question comes from Aaron Rakers from Stifel.

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [42]

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Aaron?

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Operator [43]

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Your question comes from Jim Suva from Citi.

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Jim Suva, Citigroup Inc, Research Division - Director [44]

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It seems like you've got kind of a bit of a good problem in that your newer products are outselling. So that's a good problem, but to address the good problems, you've got to have good theories and a better solution of if that what's part of the reasons of the miss in Q1, the Q2 outlook is not very impressive, and it's hard for me to comprehend how products could take 6 months to build. So why isn't that problem resolved in Q2?

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

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So thanks, Jim, for the question. So I think when you look at the Q2 guidance, you really need to look at a few things. So we kind of attribute the -- let's say, our guidance versus where perhaps some of the expectations were for Q2, the 3 different things. And they're about 1/3 each in terms of their impact. 1/3 is I think the Fiery recovery is taking a little longer than some people had anticipated it to take, and some people had maybe had it, again, flat year-over-year. And that was definitely beyond where we think it's going to be in Q2. So I think about 1/3 of that -- 1/3 of the difference is from that. About 1/3 of it is from currency, which -- people should not ignore that it's the biggest impact we're seeing in Q2 in currency in quite some time because that was the quarter that's right before Brexit occurred. And so for all of last Q2, you had much higher levels of British pound, you had higher levels of the euro, you had higher levels of the yuan. And so that cost us -- about 1/3 of that difference is from the currency. And the last third is, as Guy mentioned, us wanting to be more conservative on the inkjet guide because we want to build up and demonstrate that we can turn around that demand in the more mature products. We're certainly going to build more of the new products and ramp that up. But you can only ramp up production so much in each quarter beyond the prior quarters. So we have to go back to also selling more of the mature products as well, and we're going to try to do that through the discounting and through the change in the comp plan. Initial indications are that it's going to work, but we want to be -- we definitely want to be measured to make sure that we're going to meet whatever number we said.

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Jim Suva, Citigroup Inc, Research Division - Director [46]

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And then from your commentary about all the other various items, is it fair to assume investors -- without giving guidance, investors should expect year-over-year sales and EPS growth to return in the second half of this year? Because right now, it's not happening in Q2.

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

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Yes. Obviously, Nozomi, in the second half of the year, is a significant revenue -- or can be a significant revenue contributor. And we would certainly be disappointed if with the benefit of Nozomi, we were not seeing both revenue and EPS year-over-year growth in Q3 and Q4. That has the opportunity to drive some significant incremental revenue there. And as we said, we expect Fiery growth in Q3 and Q4 as well year-over-year. So with the benefit of that additional revenue and the margin that comes from Fiery, it again sets us up for a very good second half opportunity.

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Guy Gecht, Electronics for Imaging, Inc. - CEO and Director [48]

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And Jim, just to be clear, the little growth, if we take the midpoint of the guidance and we look at top line and bottom line and even if you have the currency impact year-over-year, that's definitely not our expectation for EFI going forward. That's just we view it as a cautionary recovery quarter.

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Operator [49]

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Your next question comes from Jim Ricchiuti from Needham & Company.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst of Advanced Industrial Technologies and Display, Vision and Imaging Technologies [50]

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So it looks like your revenues in the Americas were down about 9%. I'm still trying to get a sense, how much of that decline is due to the weakness in the mature product line for the display graphics area and how much of it is Fiery-related?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [51]

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Both of them were contributors to that. I'd say it's about half and half between the 2.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst of Advanced Industrial Technologies and Display, Vision and Imaging Technologies [52]

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And as you look out into Q2, the Fiery portion, I mean, if we just set aside the issues around Xerox, are you beginning to see any signs of recovery in some of the drupa-related issues? It does sound like you're suggesting that this is -- this issue with the Fiery business could continue into the second half of the year.

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [53]

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I think we see -- when we start hitting the drupa compares in Q3, we definitely think that we will start to see growth again there just, again, based upon the level of activity we're seeing now. There's not an event that would cause the revenue to go down that significantly from Q2 to Q3 that we have visibility to anyways that would put us in jeopardy of not having growth in Q3 versus last year. So with the Q3 numbers being around $62 million for Fiery, that the -- all indications that we see of kind of future demand, future pipeline -- or future backlog and pipeline for -- from our partners indicates that, that -- we should definitely see growth starting after the midpoint of the year.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst of Advanced Industrial Technologies and Display, Vision and Imaging Technologies [54]

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Okay. And then maybe just turning to Reggiani. A quicker recovery in that part of the business. Based on what you saw in Q1, does that change your view of the business looking out over the balance of this year? Is it potentially maybe tracking a little better than expected versus where you were thinking?

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Guy Gecht, Electronics for Imaging, Inc. - CEO and Director [55]

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Well clearly, Q1 came better than we expected. We didn't expect to see double-digit -- back to double-digit growth. I think the team is working really well now. The new GM, she's really good. And the team is doing a lot of initiatives, revamping the product lineup, marketing, sales. There's a lot more work to do. So it starts to project whether it's for the year we're going to be above plan, but I would say that we feel pretty good about where we are. We're seeing similar activities on the Optitex, and we're seeing more and more synergy between the 2. So we feel pretty good where we are on the textile offering in general.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst of Advanced Industrial Technologies and Display, Vision and Imaging Technologies [56]

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So it sounds like you think it could be sustainable, this kind of improvement that you're seeing?

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Guy Gecht, Electronics for Imaging, Inc. - CEO and Director [57]

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I think we also -- we're definitely going to try double down and push harder there, seeing that it was better than expectation in Q1.

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Operator [58]

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Your next question comes from Joan Tong from Sidoti & Company.

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Joan K. Tong, Sidoti & Company, LLC - Research Analyst [59]

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Most of my questions have been answered, but I want to ask about free cash flow and your cash conversion cycle. Obviously, it's worsened, and we talked about the direct sales being a bigger piece of the pie. But it would have been worse, I mean, if -- I can only imagine if like the Inkjet printer sales was beating expectation this quarter. So I just wanted to ask about moving through the rest of the year when you have -- expect Inkjet to pick up as well as the ramping of Nozomi. How should we think about the capital intensity that you would need and working capital requirements like as we move through 2017 in relation to the ramp?

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

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Yes. So thanks for the question, Joan. So we actually -- while certainly the DSO number was not a good number and the cash conversion cycle was not a good number, that was driven most prominently by the revenue being down year-over-year and the AR carryover from Q4 where we sold a lot of stuff right at the end of the year and a lot of that money's still due or not even yet due from the customers. It's just sitting in AR. When you actually -- when we look at kind of how the company executed internally, we actually collected about $236 million of cash this quarter on $229 million of revenue. So we collected more cash this quarter than we generated in revenue, which is certainly a good thing. So we think things are definitely in -- from an execution perspective, the company is doing a better job on the collection side and getting whatever money we can. But obviously, if we sell a deal that has gotten longer payment terms because that's what's needed in the market to get a deal closed, you can't collect that earlier. So we did improve pretty significantly year-over-year on the cash generation in Q1. I think it was 66% improvement from last year. And so we're now at 109% of our non-GAAP net income, which is well above our target in the trailing -- for the trailing 12 months in terms of cash from operations. In terms of free cash flow, we're still kind of at this $20 million a year of CapEx type of spending level. So our free cash flow now -- last year ran -- last 12 months, let's say, ran over $100 million. So we think we're still very positioned well to generate a very good amount of free cash flow on a go-forward basis.

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Joan K. Tong, Sidoti & Company, LLC - Research Analyst [61]

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Okay. So even though like we're talking about the Nozomi sales, revenue ramp in the second half, like do you need like, obviously, working capital need in terms of inventories and things like that? And do you still feel pretty good about the second half free cash flow trajectory?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [62]

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Yes, because while we do have some buildup of Nozomi inventory now because we still have the beta units effectively in inventory for us until that gets recognized, the -- we can't really build inventory of Nozomi because they don't have the space. They're 120 feet long or 140 feet long in some cases, and so there's no place to put them after we build them. So we can only really build one and ship it. And so while we may end up with as many as 2 or 3 of those in inventory in the initial batch before we get out of beta, after they're out of beta, it should go to really just having 1 or 2 in inventory at maximum at any point in time, which is about the level that we have in terms of inventory now on our balance sheet for Nozomi.

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Joan K. Tong, Sidoti & Company, LLC - Research Analyst [63]

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Okay. And then my second question is related to the Industrial Inkjet gross margin. You projected -- you project second quarter high 30% range. Obviously, it's like that high level is pretty sustainable as you expect going into the second quarter. How about the second half? Obviously, you're looking for Inkjet sales -- printers sales to be higher. And how should we think about like the gross margin in the second half with Nozomi being more in the mix?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [64]

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Yes. So definitely, we'll see -- we certainly don't want to give guidance for gross margin for the second half of the year as of yet. But the first quarter in which Nozomi ships, the beta units that we ship for Nozomi will definitely have a lower gross margin than the production units because they're going to have a lot of additional work done on them, additional cost embedded in them before they get to production release. So those first 2 units will be at a lower margin. After that, we should see a more normalized gross margin out of the Nozomis we sell. So we don't think it will have that significant an impact on our overall group -- on the inkjet gross margin. But Q3, you can see a little bit of impact from, again, those first 2 units.

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Operator [65]

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Your next question comes from Joe Whitney (sic) [ Joe Wittine ] from Longbow Research.

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Joseph Helmut Wittine, Longbow Research LLC - Research Analyst [66]

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Of the 40 preorders, I'm curious if you're issuing even informal expectations for the timing of the delivery and the conversations when you're taking the orders. And would customers in line, would they be okay with delivery in 2019 or beyond? Is that standard practice for situations like this?

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

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I think our team is having its personalized discussions with each one of the customers, talking about what they want to see and what we're going to see and timing and when they can come and visit and see. And then we can talk exact timing. And we're trying to prioritize. We don't want to get into this yet before we're really very certain when we can deliver this unit. But again, our goal is not to be bounded by manufacturing. Our goal is to do whatever we take. Once we finalize the unit, the first release of Nozomi, we will try to build them as fast as possible. And definitely, we don't want to come back to any of them and say, "You have to wait until the end of next year."

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Joseph Helmut Wittine, Longbow Research LLC - Research Analyst [68]

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Okay, great. And then finally, in display graphics, can you update us on what organic growth is like in that market right now? So obviously, exclude the production issues that you experienced. And related is, is there an update on kind of the digital penetration rate in display graphics?

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

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Yes. So display graphics as a whole, that market we believe from what we see in the industry, reports for the segment of the display graphics market that we operate in, it is high single digit to very low double digit. So let's say 8% to 11%, that type of range, depending upon which report you look at. And so I think that in terms of penetration of digital, we haven't updated a number on that since our Investor Day. We believe it's still somewhere around 40%. It might be approaching a little higher. But I definitely don't think it's over 50% yet.

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Guy Gecht, Electronics for Imaging, Inc. - CEO and Director [70]

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And what we're seeing in display graphics, as we said, digital replacing digital, which is, again, reinforcing the importance of new technology to offer customers a compelling faster, better, sometimes cheaper machine.

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Operator [71]

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Your next question comes from Morris Ajzenman from Griffin Securities.

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Morris B. Ajzenman, Griffin Securities, Inc., Research Division - Senior Research Analyst [72]

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You saved the best for last. You gave Q1 guidance in Industrial Inkjet being up mid- to high single digits. So if you do the math, it should have been about $132 million, $137 million. It came at $123 million. And then you also talked about actually Reggiani returning with double-digit growth. So you haven't actually expected that. So given that's said and done, your shortfall, I think it was between, let's call it, $9 million to $14 million, if not more. I presume that's all display graphics?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [73]

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Yes. The shortfall in Inkjet was all display graphics this quarter, for sure.

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Morris B. Ajzenman, Griffin Securities, Inc., Research Division - Senior Research Analyst [74]

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And the numbers I just kind of put out, the $9 million to $14 million, as being the shortfall versus excitations, that would all be accounted for by display graphics, if not more?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [75]

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I wouldn't say necessarily more, but in that neighborhood is basically yes, I think you're -- as usual, Morris, your math is correct.

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

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It was a really, really disappointing quarter on display graphics, no question. A lot of other good things happened, but that display graphics, given what we expect, was a pretty weaker quarter.

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Morris B. Ajzenman, Griffin Securities, Inc., Research Division - Senior Research Analyst [77]

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Okay. And last question here. Everyone's probably tired here. But Productivity Software guidance to mid- to high single-digit growth ex currency. And you have single digit this past quarter. What's keeping it from being in more consistent mid-teens or low teens growth rate there?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [78]

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Well, I think for the Productivity Software group, we -- organically, we've always said that, that thing cannot grow double-digit levels because there's so much annual maintenance revenue, so much recurring revenue that makes up the base that can't grow at a very fast rate. So we haven't done any M&A in a while. We're lapping the Optitex acquisition. So I think that for it to grow in the 10% to 20% range, it needs more M&A. And I do expect that we're going to see more M&A for the software group later this year. There's a lot of stuff that we're looking at right now. So I definitely think we'll see a return to more M&A activity for software this year.

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Operator [79]

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Your last question comes from Patrick Newton from Stifel.

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Patrick M. Newton, Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Senior Analyst [80]

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I guess a question on the ink side. One is on ceramic. I don't think I heard any updates on trends there. It sounds like you didn't hit a new milestone. But could you at least speak to what ceramic ink is doing, either year-over-year or sequentially? And then on ink volume growth, you talked about plus 20% year-over-year, showing solid demand from your installed base. But this metric has also decelerated each quarter for 4 consecutive quarters. So how should we think about that longer-term growth trend?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [81]

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Yes. So I think we've said that the ink growth rate has no choice but to decelerate as some of the segments like ceramic, for example, were coming from very, very low numbers in the prior years and so the compares get tougher and tougher as we go. We did not hit another specific milestone, but we still saw well into double-digit growth across all of our primary segments for UV ink, for our textile ink, for our ceramic ink, very solid growth across all of them. So we'll certainly be happy with double-digit growth for our overall ink volumes for the foreseeable future. Obviously, when Nozomi starts pumping into there, that's going to spike them back up again because it's essentially coming from 0 for that segment.

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Patrick M. Newton, Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Senior Analyst [82]

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And then maybe to expand on Brian's earlier question, you talked about the hope of producing one Nozomi per month around the July timeframe. And then you also talked about exiting the year doing 2 units per month. Could you help us maybe understand, should we be expecting you to be able to rev rec 2 units per month exiting the year? And should we similarly think towards the front half of the fourth quarter that you could be hitting that output pace?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [83]

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Yes. Our goal is to be able to do 2 a month for rev rec by the end of the year because again, our standard terms that historically we've used on most of our -- on virtually all of the deals we sell is that we recognize when we ship to customers, and we'll certainly be looking to replicate that for our Nozomi contracts. Of course, we haven't signed those Nozomi contracts yet, so we have to negotiate them with the clients and make sure we get to that point. But we do expect to be able to do that and get to be able to do 2 a month for both manufacturing and for rev rec by the end of the year.

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Patrick M. Newton, Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Senior Analyst [84]

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And just one clarification. Did I hear you, in an answer to an earlier question, say that the legacy VUTEks that you could have sold substantially more if it wasn't -- or if they were simply discounted more? Was that the only thing that held back the revenue on those?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [85]

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Again, we view the discounting problem really as a side effect of this comp plan issue that Guy raised that we essentially were too punitive on our sales reps if they did discount the products significantly. And so they basically held back on pushing the higher discounts out to the clients and getting the deals over the finish line as a result. And we've adjusted and changed that. But that's -- we still see demand for the prior products out in the marketplace. We still did sell a number of them in Q1, again, just a significant amount less than what we thought we were going to sell. And so we are hopeful that the changes we put in place in the comp plans and the pricing policies will help get back to the level of growth we're expected -- we've been seeing there historically.

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Patrick M. Newton, Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Senior Analyst [86]

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And are these -- is it right to think that these legacy printers that are -- that you'll be discounting are your production printers?

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Marc D. Olin, Electronics for Imaging, Inc. - CFO [87]

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Yes. They're all -- I mean, they're -- all of our printers are really production printers when it comes to inkjet. But we're talking display graphics, everything from our entry-level products which sell for about $100,000 up to our kind of midrange hybrids that are in the mid-hundreds of thousands of dollars is really what we're talking about in this class of printers. So there are a number of models. It's not just one model.

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Guy Gecht, Electronics for Imaging, Inc. - CEO and Director [88]

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The discount level is factored into the guidance for the margin and EPS. So yes, we did the math. And we definitely can live with that, especially given that the new models is selling really strong and selling at a very good gross margin.

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Operator [89]

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There are no further questions at this time. I will now turn the call over to management for closing remarks.

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Guy Gecht, Electronics for Imaging, Inc. - CEO and Director [90]

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Thank you, everyone, very much for joining us today and being very engaged on the call. We appreciate your time and attention to EFI. We definitely appreciate the loyalty and support of our shareholders and the partners and the customers and of course, the very hard work and dedication of the EFI team. We look forward to share with you more news, hopefully, much more positive as our progress and -- with our progress and talk to you in the near future. Thank you very much.

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Operator [91]

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