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Electronics For Imaging Inc (EFII) Q4 2018 Earnings Conference Call Transcript

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Electronics For Imaging Inc  (NASDAQ: EFII)
Q4 2018 Earnings Conference Call
Jan. 30, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Jessi, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Electronics for Imaging Q4 and Full Year 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session.

(Operator Instructions)

Thank you. JoAnn Horne, Investor Relations for EFI. You may begin your conference.

JoAnn Horne -- Investor Relations

Thank you, Jessi and thank you everyone for joining us this afternoon to review EFI's fourth quarter of 2018 operating results and the outlook for Q1 2019. Bill Muir, EFI's CEO and Marc Olin, CFO will lead the discussion. Following management's prepared remarks, we'll take your questions.

Before Bill begins his comments, let me 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 innovations, new market opportunities and acquisition strategies 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 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 of the date of this call and are subject to revision until the Company will have on file its Form 10-K for the year ended December 31st, 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 call are also available on the Investor Relations website.

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

Bill Muir -- Chief Executive Officer

Thank you for joining us this afternoon to review our fourth quarter results and discuss our outlook for Q1 in 2019. I'm especially pleased to share with you the initial steps we are taking to upgrade EFI's execution and improve the consistency of our financial results. Final Q4 results were in line with the preliminary numbers we shared on January 15, though the cash generation was actually slightly stronger. Cash from operations for the full year exceeded our goal of 100% of non-GAAP net income.

Despite the disappointing revenue results, the strong cash generation was a highlight of the quarter, thanks to the hard work of the team. Mark will review the details of the Q4 results. I would like to use my comments to discuss my long term plan to once again make EFI's industry-leading innovation and products the story.

I'd shared from the beginning that it was EFI's technology that brought me to the Company. My confidence and my excitement about the innovation and the opportunity ahead has only grown over the past few months.

I'd like to start with Connect, our User Conference last week. Spending time with these incredibly enthused customers crystallized for me the critical role EFI plays in their success. While listening to them discuss how the EFI ecosystem drives your business was very enlightening. Our success this quarter with our mid-market software suite which integrates with our display graphics systems reflects how customers value the ecosystem.

The same can be said about the next generation Fiery for display graphics, the Fiery proServer, which we introduce at Connect. Our DFEs are an important differentiator and I heard over and over that the integration of our products is one reason our customers truly value EFI. Over four days, I had more than 50 meeting with customers which confirmed for me that the strategy we are developing over the past few months is the right one to deliver the execution our customer's deserves.

To that end, with my 100th day at EFI now under my belt, I have begun rolling out a series of initiatives to drive value for our customers and EFI. Many of these are multi-quarter initiatives but we are off to a solid start. First, we kicked off thorough supply chain review exercises across two areas of the businesses. Both exercises identified mid-single digit percentage savings opportunities that will provide capital to reinvest in the business and improve our margin profile.

We're also close to completing a search for a senior operations executive, who will lead the robustness, speed and cost effectiveness of our supply chain and operations.

A second initiative is focused on product development cadence. We have completed two thorough value stream mapping exercises in our R&D process, both of which were specifically targeted at display graphics development. Our review has uncovered the opportunity for substantial waste elimination, which will be realized through a combination of standardization and adoption of a more robust stage gate process.

Additionally, we will implement more timely interim stage gates with a focus on minimally viable products. In addition, I am very pleased that we just on boarded a senior executive to head our Display Graphics business unit. We expect this new leader to prioritize product initiatives and resource allocation decisions which will be invaluable in helping to avoid the delayed product cycle cadence that has impacted our Display Graphics business.

Another necessary initiative is to progress our go-to-market approach. Our historical approach has served us very well through the years and is a large part of EFI's success to date. Yet, as our customer's evolve and the industry consolidates, we must meet customers at points that now create value for them. We are focused on developing our consultative enterprise sales approach as well as building deeper domain expertise in markets poised for growth. I view this opportunity as additive to where EFI is today and not a radical realignment of our sales process.

In short, by adding expertise, we can better serve customers of larger scale and organizational complexity. This will be a longer term process. We are in the early steps of working with a third-party to evaluate our current approach. I will share more details around this topic at our Investor Day in May. The obvious question is, how these steps translate to our financial results? And to be clear, this is not a fast fix.

I firmly believe we are on the right path, but to rethink our internal operations and approach is only part of the answer. The back-end loaded nature of our sales was a contributor to the disappointing Q4 results.

As such, this quarter, we have instituted a more rigorous financial review process as well as taken some steps to modify incentive plans. The good news is the sales force is onboard with this plan. It will probably take a few quarters for these changes to have a measurable impact, but we are committed to improving productivity and strengthening margins and capital generation. While this will impact our near-term results, we believe it will help to rebuild backlog, smooth our results and normalize our activity throughout the quarter.

Our first quarter guidance reflects this plan. We have also reduced our outlook to reflect conservatism following the difficult Q4 when we experience lower close rates. To be clear, the business today looks very similar to this time last year. And without the strategic decision to change the quarter linearity, our outlook would be in line with the first quarter of 2018.

We are optimistic that Q1 is a low point in this transition year, due in part to our outlook for Nozomi and to a much lesser extent BOLT. My excitement about the Nozomi opportunity has only grown after visiting a number of the customer installations, listening to our partners discuss how Nozomi is beginning to change their businesses and the way Digital expands the jobs they can take on from customers, highlights where we can take this business.

You will see our announcement later today that CSI purchased three printers throughout last year. For competitive reasons, we couldn't announce the transactions until now but they were in our 2018 results and are not included in our 2019 outlook.

We are very excited that we are seeing multiple orders from a single customer as proof of the value that Nozomi can bring. We have a -- we have another multiple unit order from a current customer that we expect to share in the very near future.

I am equally excited about BOLT which was introduced last quarter at an event attended by 200-plus customers instead of the 100 expected. With its unique approach marrying digital with some high-end analog technology, and its unmatched speed and color quality, BOLT brings something really special to the textile industry.

We expect to record the initial BOLT revenues in the next few months and expect sales will ramp slowly through the year. With our confidence in $120 million revenue from Nozomi, along with an initial contribution from BOLT, and our outlook for the Fiery business and the rest of EFI business, we are confident we will achieve both revenue and EPS growth for a full year of 2019.

My goal, once we begin to realize the benefits of the plans I just sketched out is to exit 2019 as a much more nimble, efficient organization. There is a great deal of work ahead, but I am pleased with the engagement from the entire EFI team to take the necessary steps to improve our operations. We will go into deeper detail on many of these topics at our Investor Day in New York in May. I look forward to seeing many of you there.

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

Marc Olin -- Chief Financial Officer

Thank you, Bill. We delivered revenue of $257 million in Q4 in line with the preliminary results we announced on January 15th. Results were lower than our original expectations due to weakness in industrial inkjet equipment and productivity software license sales toward the end of the quarter.

The weakness we saw was present across all of our inkjet segments. The highlight of the quarter was the significant year-over-year improvement in cash flow, allowing us to exceed our full year cash flow target. Fiery delivered revenue of just over $60 million, as expected and we also saw a recovery in our ink volume as we corrected the supply issue discussed in Q3. Productivity software had a Q4 revenue decline of 6% year-over-year, primarily due to weakness throughout the Americas.

Our industrial inkjet sales declined 5% year-over-year with lower printer sales primarily in the Americas and Asia Pacific. Industrial inkjet gross margin was lower sequentially but up year-over-year due to improved margins for Nozomi and our other inkjet printers; thanks to some initial success with our efficiency initiatives.

Total recurring revenue was $84 million, up 4% year-over-year and representing 33% of total revenue. Non-GAAP earnings per share were $0.46, down 12% year-over-year and lower than our expectations, given the weakness in revenue.

Currency negatively impacted this quarter's revenue by about $4 million and reduced EPS by about $0.01 when factoring currency at the levels of Q4 '17. Now, let me explain in more detail the revenue by business segment and region. The Industrial Inkjet segment generated Q4 revenue of $154 million which was equal to 60% of total EFI revenue. This would have represented a 3% decline year-over-year had currency remained where it was in Q4 '17. As we mentioned during our earlier call, we saw a greater than expected weakness in display graphics in our more matured hybrid products beyond just the high-end hybrid weakness that we experienced in Q3. This was felt primarily in the Americas.

While we sold out of our h3, h5 products as we expected, we are not yet at full capacity on the h5 since it was the first quarter we shipped that product. Our building materials and textile businesses were weak in Asia-Pacific with both experiencing double-digit percentage declines in China specifically. Our intention going forward is to no longer give ink volume data since we are reporting ink revenue in our 10-Q, and we will hit a full year of data with the 10-k.

But given the ink shortfall in Q3 due to supply constraints, we wanted to provide a final update. In the quarter, ink volume returned to double-digit growth levels which we believe primarily reflects ink shipments returning to normalized levels combined with some catch up from the orders we were not able to fill in Q3.

Productivity Software delivered Q4 revenue of $42.4 million, representing 17% of total EFI revenue in the quarter. This would have represented a decline of 5% had currency remained where it was in Q4 '17. As we mentioned on our prior call, we saw weakness late in the quarter with many deals pushed out of Q4 due to concerns by customers about making significant capital commitments.

The Fiery segment delivered revenue of $60.5 million down 1% year-over-year, representing 23% of total revenue. Product mix drove the gross margin up from the prior year, fiery channel inventory remains in the targeted range. In the Americas, revenue totaled a $129 million, down 4% year-over-year caused primarily by a decline across our Industrial Inkjet and Productivity Software business units.

EMEA was down slightly by 1% year-over-year with revenue of $94 million and would have shown an increase had currency remained where it was in Q4 '17. APAC was down 13% year-over-year mainly due to lower Industrial Inkjet sales in China and the rest of the Asia-Pacific region, as previously mentioned.

Looking to the March quarter for 2019, as Bill discussed, we're implementing a strategic initiative to address linearity, which we expect will result in improved margins and DSOs. Because of this, we anticipate that while Nozomi will grow, the rest of our direct businesses will decline. We expect Industrial Inkjet to decline high-single to low-double-digit. Based on a very difficult comp with Q1 of last year when productivity software grew 25%, we expect a decline of mid-to-high single-digit for that segment.

We expect Fiery to be about flat with last year in what is the seasonally slowest quarter of the year, but expect we will average approximately $60 million per quarter for the full year, continuing the trend we've seen since the start of last year. All of that results in revenue guidance of $215 million to $225 million for Q1. The strategic shift we've mentioned will take some time to positively impact our performance and therefore, we expect to see continued pressure in Q2 on revenue. As a result, we will see a modestly higher percentage of our revenue in the back half of the year compared to typical years such as 2016 and 2017.

As Phil stated already, we do expect to see growth in both revenue and EPS for the full year with the benefit of Nozomi and BOLT and the changes taking place throughout the rest of the business.

Moving to gross margin where I'd like to remind you all that further commentary is on a non-GAAP basis unless otherwise noted. Fourth quarter gross margin was 49.2%, up a 130 basis points year-over-year and above our expectations due to better than expected margins in Industrial Inkjets and Fiery. Industrial Inkjet gross margin of 34% are up 100 basis points year-over-year but down 60 basis points sequentially due to product mix. Fiery gross margin was 71.9% with a growth of 280 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 weak license sales in the quarter.

For the first quarter of 2019, we expect overall gross margins to improve to 50% to 52%, thanks in part to the initiatives mentioned above on revenue. We expect Industrial Inkjet to improve to 35% to 36%; Software to be in the low-70%s; and Fiery to be around 71%.

Turning to operating expenses; for the fourth quarter, operating expenses were a $100.5 million, up 2% year-over-year and comprising 39% of revenue, an increase of 230 basis points from the year ago period, as a result of higher compensation related expenses in Q4 '18 year-over-year.

R&D expenses were $36.7 million, representing 14.3% of revenue, up from 13.9% a year ago. Sales and marketing expenses were $43.9 million representing 17.1% of revenue, up from 16.1% a year ago. G&A expenses were $20 million, representing 7.8% of revenue, up from 6.8% a year ago.

As we have discussed, we have been shifting OpEx within the Company from products such as Fiery and ceramics to our rapidly growing Nozomi and textile product lines, while continuing to invest in other inkjet and software product lines that deliver consistent growth. Higher gross margin from Fiery and Industrial Inkjet, but lower year-over-year revenue combined with investment in R&D spend for a new packaging textile products resulted in an operating income of $25.9 million, down year-over-year with an operating margin of 10.1%.

Other income and expense had a net loss of $1 million driven primarily by cost of our convertible bonds. Our constant non-GAAP tax rate remained at 19% and we expected to remain at that level into 2019.

Looking to the first quarter of 2019, we expect non-GAAP earnings per share of $0.20 to $0.27. As a reminder, our Q1 outlook assumes our January foreign exchange rate to stay flat for the balance of the quarter. It also includes approximately $0.02 per share quarterly impact from the convertible bond interest payment.

Now, turning to the balance sheet. Total cash, cash equivalents and short term investments amounted to $411 million, compared to $294 million at the end of last quarter. Cash flow from operations was $33 million or 162% of the non-GAAP net income for the quarter, a robust year-over-year increase and exceeding our expectations for the quarter. Cash generation in the quarter was positively impacted by improved balance sheet metrics year-over-year.

For the full year, cash from operations ended up at 101% of our non-GAAP net income. This significant turnaround in cash generation for the Company was thanks to the hard work of many people throughout our organization, and I'd like to thank them for their efforts in getting us over our target level despite the challenging Q4 revenue results.

For 2019, we expect to, again, target 90% of our non-GAAP net income and cash from operations with one qualification that about $60 million of the money we will repay of our $345 million convertible bond that matures in September is required to be classified as cash from operations, as it represents the option value portion of the bond. We'll exclude this amount from our ratio calculation going forward.

Net accounts receivable was $242 million, down $3 million year-over-year but up 1% sequentially. DSOs were 87 days, up three days versus Q4 of last year. Our net inventory balance was $134 million, up $13 million sequentially and up $9 million from Q4 of last year, primarily due to unsold inventory of Industrial Inkjet Printers in the quarter.

This drove inventory turns to 3.9, down 0.4 turns sequentially and down 0.5 turns year-over-year. Stock-based compensation this quarter was $14.8 million due primarily to the grant of our annual long-term performance-based restricted stock units during the quarter which are tied to our next three year's results.

This quarter, we returned $59 million to shareholders as part of our $150 million buyback program which was put in place in January 1st, 2016 and a $125 million buyback program which was started in Q3 '17. This completes the execution of these buyback programs which we had committed to spend before the end of 2018 when they were created. Total diluted share count went down sequentially to 44.5 million shares.

In summary, while it was a difficult Q4 for us, there were a number of important milestones reached during the year. Our Nozomi launch, while generating a little less than we expected for the full year at $66 million in revenue exceeded our target when we started the year and was the biggest product launch in the history of the Company. We're able to build a significant business within a year of the launch of the product and have established EFI as the clear leader in the industry with the highest market share.

I am extremely proud of the many hours of hard work from teams across all of EFI that supported this launch and drove our success. We mentioned during our earlier call that during Q4, one of our Nozomi opportunities was delayed as the customer was not prepared to move forward. Bill mentioned in his comments that we hope to have this signed very soon.

I'm happy to say that we just received the order from this customer which was actually our first Nozomi client (technical difficulty) that order two additional Nozomi units which will be placed in two new facilities. We see this as a great endorsement of the value of Nozomi to the industry. This order was factored into our Q1 guidance.

Continuing with my review of 2018, our Productivity Software and Textile businesses both had record years with Productivity Software delivering 7% revenue growth. Fiery also met our expectations for the year, achieving the plan we laid out at our Investor Day in November of 2017.

As Bill stated in his remarks, we're at the start of a next chapter of EFI. We have a lot of work to do, but the underlying strength of our Company our products, our people and our customers are as strong as they have ever been. And while it will take a little time, I'm confident we can return to the revenue and profit growth we've achieved in the many years of our history.

As always, we'd like to conclude by thanking our customers, employees and shareholders for their continued confidence in EFI. We will now be happy to answer questions.

JoAnn Horne -- Investor Relations

Operator, we'll take questions now. And if you could limit yourselves to one question and a follow up and get back in queue if you'd like to ask something else, please.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Shannon Cross with Cross Research. Please go ahead.

Shannon Cross -- Cross Research -- Analyst

Thank you very much. Bill, can you talk a bit about the strategy you have in terms of looking at supply chain and looking at go to market, how specifically you're running that? How many people you have it on? And I don't know -- just if you can kind of give us an ideas of how you're doing that and then also how that can go on at the same time as running the business, which obviously you have to do. So, do you have like a separate team doing it or what's the strategy?

Bill Muir -- Chief Executive Officer

Sure. Hi, Shannon, nice to speak to you again. So, a couple of different things, when I started with supply chain side of things, I would say we have an opportunity to look at our business and I use this phrase a lot a bit more horizontally than we do today. Today, I think we look at it a bit silo-ed and there's an opportunity for us to aggregate spend a bit more effectively across the organization.

Some of the efforts I outlined are being run by individuals that we have within the supply chain organization today, just maybe through a different lens of looking at the business, a different expectation for how maybe we should engage with the supply chain and maybe a broader mandate to leverage spend across the Company.

In this area, we've also used third-party resources to more quickly get at opportunities that we think might be quick wins. And then, I think as I mentioned in my prepared remarks, there is some things that we're doing to finalize kind of staffing that would be incremental to that, in order to bring what I would consider to be greater depth and experience set from the supply chain expertise.

So I think we're hitting that on a couple of different vectors, internal resources with a bit of a different mandate. Third party resources that are helping us accelerate some quick wins. And then, at the same time, we'll be augmenting our resource base with some experienced leaders and I think most likely in one or two areas, folks that I have good experience working with previously.

So that's the supply chain piece of things. The sales piece, you know again I've tried to be clear in my commentary about this being an additive exercise to what is it we're doing today and it's one of the top initiatives that we have across the Company. We are leveraging third-party resources to help us, if you will, kind of whiteboard our organization, how our customer's organizations have evolved overtime? What we might need to do to evolve our organization?

I would tell you that a substantial amount of the focus for me here is how do we -- how do we continue to build deep domain expertise in markets such as packaging and textile we think are poised to really grow? And then at the same time this basket of customers that are larger in scale, more complex; how do we approach those differently? And I think you'll see us, over the next couple of -- next couple of quarters, add resources to really augment both of those.

So I would say today we're in a bit more of discovery phase. We're a bit more in kind of work and trying and understand our organization, how to best map it, and in parallel, looking to augment that with external resources.

Shannon Cross -- Cross Research -- Analyst

Okay, thank you. That was helpful. And I'm just curious since you've had a few weeks since the -- you guys in the middle of December and then everything sort of went south. And do you have any thoughts about what happened now, now that people -- the sales people have come back and gone back to those customers.

I mean clearly, some of the deals, the big Nozomi one was just signed, but just in general, have you gotten any more clarity in terms of why people didn't sign at the end of the year and then, do they anticipate say in the next six months that you actually will close those, even if it's not first quarter?

Bill Muir -- Chief Executive Officer

Yeah, so thanks for the question. I figured that'd be kind of top of mind for lots of folks. So one of the great things about last week is, we get the opportunity to spend a few days at Connect, we probably touched somewhere between 40%, 50% of the Company's revenue stream with the number of customers that are present there. And I think what I heard from a number of customers fairly consistently is just a bit of trepidation, a bit of concern about where the economy is, a bit of concern as to what the next couple of months might look like.

And, if I go to the first part of your question, so what happened kind of last two weeks of December. I think we've tried to -- we tried to kind of reiterate our experience that from when we spoke two weeks ago to today, we entered Q4 with a really robust pipeline. We were tracking well ahead of plan and then the last two weeks really, really dried up, and we saw that across a couple of different areas of the business.

I think that's consistent with commentary we heard last week and what we've heard so far from customers, just a bit more -- a bit more trepidation in terms of how they're feeling about the near-term environment. The (inaudible) news which is about as real time as you can get is good reassurance for us. But I think we've we factored in a level of conservatism relative to kind of the macroeconomic environment and what we experienced in December in terms of how we're thinking about the beginning part of the calendar year.

Shannon Cross -- Cross Research -- Analyst

Thank you.

Operator

Your next question comes from Katy Huberty with Morgan Stanley. Your line is open.

Katy Huberty -- Morgan Stanley -- Analyst

Yes, thank you. Can I ask a follow up to your answer to Shannon's question? I guess it would be helpful to the context around the weaker 1Q guidance, is that conservatism because you're hearing from customer's that they're going to be a bit more cautious toward cutbacks or is that purposely assuming lower close rates and intending to close fewer deals so that you can -- you can keep a pipeline going into future quarters and drive that linearity. If you can just sort of untangle those two dynamics.

And then I'll ask my follow up, maybe Marc you can comment on this. What are you -- like if you take the pipeline today, what would typical conversion have been in the past and what are you assuming in guidance around conversion just so that we can understand how much you might be able to clean up the linearity issue in the first quarter versus this taking a couple of quarters to get right? Thank you.

Bill Muir -- Chief Executive Officer

Yes. That's an awesome question. Thank you for that and I'm sure that's, again kind of top of mind for a lots of folks. So here's how we think about this and there's probably no perfect art to give you an exact formula. But, I think we started with this quarter in a bit -- a bit on the after -- the after effects of kind of December, we started with a much more rigorous financial review of what's in the pipeline, of what deals legitimately have a good shot of closing this quarter.

I think we started with kind of a more detailed deeper review of every stage in the buying process, where were we capital expenditure readiness by the customer et cetera to get to a starting point.

In addition to that, as we go through this quarter, we're instituting a more rigorous financial review in terms of deals that will get approved. And Katy, to your point, that will impact our close rates. We're looking to do so in a thoughtful way as we look to drive margin expansion, as we look to drive better and more predictable capital generation. So that will drive a level of reduction in our close rate.

And then finally, we couldn't get to the point we are today without a level of factoring in of the macroeconomic environment and what our close rates were in Q4. I would tell you that the close rate assumptions we have made for Q1 are more conservative than the close rates that we experienced in Q4.

I'll let Marc add a little bit more color to that in a second. But that backdrop we've kind of factored that into our guidance for Q1 on top of which we'll also be more rigorous in terms of our deal approval process as we look to drive margin expansion and better capital.

Katy Huberty -- Morgan Stanley -- Analyst

And Marc, just in your response, maybe you can comment what was it -- what was typical linearity in the past for an average quarter, right, in terms of percentage of revenue in the last month and where would you intend to get the model in the future with this change?

Bill Muir -- Chief Executive Officer

Yeah, let me -- I just want to make one final comment which I think was either in my prepared remarks or mine and Marc's. I do think this won't -- this won't manifest itself fully just in one quarter. I think we'll see a bit of transition as we go through Q2 as well. And then we think we'll see a bit of a bigger uptick in terms of -- in terms of growth in the back half of the year.

With that I'll hand it back over to Marc.

Marc Olin -- Chief Financial Officer

Yeah. So, Katy, I think if we first start to look at what is typical linearity. So typical linearity historically has been -- for Q4 for example what we saw, which was that, over half of the quarter's new sales and so that's printer sales obviously not ink but -- and that's license sales on software not maintenance. But those types of things that are based upon deals being closed, you get over half of those deals are closed in the last two weeks of the quarter and that was typical and that's what we were expecting heading into those last two weeks of December and again, we were ahead of plan going -- entering those last two weeks and the pipeline was more robust than it was the prior year entering those last two weeks for what was remaining to close.

So everything points to the very positive indication. But it obviously didn't turn out that way. So I think we would like to -- we're not going to end the concept of a back-end loaded quarter when it comes to selling capital equipment or software that's not enterprise software but significantly priced software, it's still going to be somewhat back end loaded. We're trying to smooth that out though and get it more pushed toward the front.

How much of that we're going to be able to do? I don't know. But I'd say, our primary goal for this is also to mitigate the DSOs and improve margins that have to -- basically to let deals close more on the customer's timeline of when they need the product, not when we need to close the deal. And that's kind of a more natural close date, if you will, for what the customer -- when the customer would like to make the purchase. And so, that we believe will lead to less lumpiness in the quarter.

Katy Huberty -- Morgan Stanley -- Analyst

That's great. A good change too. Thank you.

Marc Olin -- Chief Financial Officer

Thanks.

Operator

Your next question comes from Rod Hall with Goldman Sachs. Your line is open.

Rod Hall -- Goldman Sachs -- Analyst

Hi guys. Thanks for the question. I guess I want to come back to this linearity effort. My understanding in this kind of business is people tend to push deal to the end of the quarter because they understand the dynamics of quarterly reporting. So they use that as leverage to get better pricing. And I guess, what I'm wondering is, in order to get them to close earlier, are you going to have to give any sort of economic incentive to them or how exactly do you implement this less linear sort of a quarter? And then, I have a follow up so.

Marc Olin -- Chief Financial Officer

So, I think, Rod you're exactly right, the customers have been trained and it's been getting, let's say, worse over the last few years about their understanding of that. So I think that's why we're saying it's going to try to -- it's going to take a couple of quarters before we'd let this filter through the system. But the idea is not that we're going to try to offer a lower pricing or more extended terms earlier in the quarter. I think the point is that we're just -- there is certainly a decent quantity of deals that close each quarter even at the end that don't require those supplemental incentives to the clients.

And so the idea is to try to control the depth of that discounting and control the extent of the extended payment terms that we offer to the clients. And if it pushes to the next quarter we'll let it push to the next quarter. We don't want to lose the deal to a competitor; but by the same token, we don't want to provide a greater than necessary incentive to get somebody to close in one quarter versus waiting another month till the next quarter.

And so I think that's the methodology or -- and that's why you see a significant impact in Q1 with the revenue guidance where it is because we're prepared to allow those deals to slip and move forward and we're not sure whether it's going to take one quarter or two quarters until we start to see that momentum picking up and the deals closing on a more normal cadence.

Rod Hall -- Goldman Sachs -- Analyst

Okay, appreciate that. And then, just as a follow up, I wonder given that's the case, what do you think the margin impact of this is going to be over time?

Marc Olin -- Chief Financial Officer

So we're not -- we're not prepared to put a stake in the ground. I mean you can see already with what we gave in Q1 that we're expecting margins to start to trend higher already on the gross margin side just by examining deals that were done in the prior quarters and figuring out, OK, if we eliminate things that fall below this certain threshold, what's that going to do in terms of our gross margins. But over the long term I think it's too soon to say. You know we need to see kind of again what a naturalized level of discounting and payment terms will be without having to provide the extra incentives to move deals upwards.

Rod Hall -- Goldman Sachs -- Analyst

Great. Okay, I appreciate that.

Marc Olin -- Chief Financial Officer

Thank you.

Bill Muir -- Chief Executive Officer

Thank you, Rod.

Operator

Your next question comes from Ananda Baruah with Loop Capital. Your line is open.

Ananda Baruah -- Loop Capital Markets -- Analyst

Hey, thanks guys for taking the question. Hey, so just coming out of the last week, do you feel like you're yet able to -- well, I guess how -- if you -- it sounds like your customers, Bill and Marc, are still sort of tentative. So in that context, how would you handicap your ability to kind of develop confidence in revenue run rate right now guidance notwithstanding, how would you context that if you're not able to -- like if you don't feel authentically that you can -- did you feel like sort of it's great about the run rate now as you'd like to, When do you think at what point in the quarter do you sort of developed that. And then I just have a quick follow up, I'll slip it in. Are there any supply chain initiatives that you think could hit sooner rather than later that could provide a little bit more op income lift first half of the year? Thanks on both of those.

Marc Olin -- Chief Financial Officer

So, I think we can -- I'll speak to the supply chain initiatives. I don't see any of those as being Q1 benefits. I think they're going to take some time to put in place and we wouldn't really start to see that till the back half of the year and heading into primarily in 2020 is when we'll start to see the real benefits of that. Again, we're talking about trying to unify purchasing across different continents and find common suppliers and leverage scale, and those things don't happen overnight and we have to get the team in place, as Bill was talking about, that we have some people in mind, but we got to get those people on board.

In terms of when we would gain confidence, in the pipeline conversions and so on, that I think, as Bill mentioned, we've done our numbers for Q1 based upon a lower close rate than we had in either Q4 or Q1 of last year to reflect this change in behavior that we're putting forth in our approach.

But even with that it's still going to be close to 50% of the deals that are going to close in that last two weeks of the quarter. I mean that's just the nature of the beast. We're just trying to keep that to not be 60% (ph) and try to start bringing it downwards. So it's still going to be a decent sized percentage and so we're still not going to have that visibility until the very end of the quarter.

Ananda Baruah -- Loop Capital Markets -- Analyst

And Marc, would you -- also just to sort of -- I think it was Bill's comments that you guys were a bit more rigorous with the pipeline review. Would that means that sort of there is some degree of greater confidence, philosophically they should be in the pipeline that you're now applying the lower close rates to. So in theory while you're still getting 50% last two weeks a quarter and customer is little cautious, this should be -- philosophically, this should be a bit more -- this should be a bit more firmer of a revenue guide than maybe typical.

Marc Olin -- Chief Financial Officer

Yeah, I think that's, we definitely when developing the $215 million to $225 million that was, as Bill mentioned, based upon a more conservative set of assumptions around close rate than we typically had, if we were guiding like using the same assumptions on close rates that we've done historically, we would have been guiding to flat with last year.

Ananda Baruah -- Loop Capital Markets -- Analyst

Okay, got it. Thanks a lot.

Bill Muir -- Chief Executive Officer

Thank you.

Operator

Your next question comes from Jim Suva with Citigroup. Your line is open.

Michael Cadiz -- Citigroup Inc -- Analyst

Hi there, Bill and Marc this is Michael Cadiz for Jim, apologies for that. So my question is more general on the competitive landscape and industry health, because with that question I'm trying to understand is what we saw in late 4Q and thus far in this quarter indicative of behavior in the medium to long term? Or essentially, is the transition from analog to digital, is it -- is a risk to it somehow? Will it be delayed or protracted? I'm trying to see if it's just a dip followed by a trajectory to the same endpoint or has the line shifted completely because of this?

Bill Muir -- Chief Executive Officer

Hey Michael, this is Bill. I'll kick off. I don't know that -- you started off on the competitive side. I don't know that we've seen anything that has -- that has really shifted in terms of competitive landscape and I don't know if the question is more from a standpoint of either an inhibitor or a governor on the analog to digital transformation.

Again, I don't know that we've seen anything whatsoever that is slowing that. I look at data points like Nozomi and some of the news coming in with customers like you know HOSA as continued desire by the marketplace to enable that digital transformation. We're hopeful -- albeit at a lower level and lower rate we're hopeful of seeing the same in both as we launch that product out into the marketplace. But there's nothing that I'm seeing in meeting with customers that would indicate a slowdown in that analog to digital transformation, nor is there anything that I would put in the category of a substantial change in competitive landscape.

Michael Cadiz -- Citigroup Inc -- Analyst

Very good, thank you.

Bill Muir -- Chief Executive Officer

Thank you, Michael.

Operator

Your next question comes from Jim Ricchiuti with Needham & Company. Your line is open.

James Ricchiuti -- Needham & Company -- Analyst

Hi, thanks. Good afternoon. Just a couple of questions on the new products, I'm just wondering how we should think about that -- the Nozomi revenue guidance that you've given for the year. Should we assume some of that, given the close rates that you're striving for that that's going to be more skewed toward the second half of the year?

Bill Muir -- Chief Executive Officer

So, I think, maybe to help from a modeling standpoint, if you start with the $120 million assumption for the year and you look at kind of the revenue linearity Q1, Q2, Q3 obviously Q4 being a bit of a step back. I think fair to look at it and say year-over-year growth that would imply a level of acceleration as we go through the year. So I offer that up and hope that's helpful from a modeling standpoint. So, yes, there will be more of a back-end load. I think again if you look at the first three quarters of the year and kind of model that from a year-over-year growth standpoint and then maybe a bit more growth in Q4, that'd be helpful and reflective of the business.

James Ricchiuti -- Needham & Company -- Analyst

Okay.

Marc Olin -- Chief Financial Officer

Go ahead, Jim. Sorry.

James Ricchiuti -- Needham & Company -- Analyst

No, no I didn't mean to cut you off, Marc, please.

Marc Olin -- Chief Financial Officer

So I was just going to say that I'm not sure if that was clear before, but we are expecting Nozomi revenue growth all four quarters of this year. So while -- again I would expect that the largest portion of the growth will be toward the end of the year, we are seeing, as we mentioned, some of the carryover from last year with one of the two customers that had put a pause on Q4 committing which was in (inaudible) in Q1 and we're hopeful that the other one will also commit before the end of this quarter.

Beyond that, as Bill mentioned, the BOLT is also an important product for us for this year. That's going to be in beta for some time. We've got to get the first one shipped this quarter but that's going to be in beta for three to six months and so by definition, that revenue is definitely going to be in the back half of the year. And one of the things we wanted to share on the call today relating to BOLT is that because people have been asking us about what that's going to sell for, we expect the average selling price for BOLT to be between $2.5 million and $3 million.

James Ricchiuti -- Needham & Company -- Analyst

Okay. That's helpful. And just my follow up question is, you sound excited about BOLT and that's great. You also saw some slowing in the Reggiani business -- the existing Reggiani business that you have and sounds like one of your competitors has also called that out in their conference call. And I'm just wondering what are you seeing in terms of the market trends in the textile printing business, putting aside the excitement around BOLT?

Marc Olin -- Chief Financial Officer

Yeah. So, I would say the challenge has been in some of the developing countries in their general investment profile. So China, some of the other developing Asia countries have really slowed down some spending and so that ripples into the textile world. Certainly, Reggiani still grew last year, for the year as we expected them to grow for the year.

But I think they -- you know there's an outsized hit on the textile business because there's more business in the -- in some of the developing countries. But BOLT is a step change for us certainly for that business as that type of ASP are -- most of our printers sell for on average of about a $0.5 million apiece. So going to a $2.5 million to $3 million printer is a significant change for us. And while we're not going to sell that many in 2019, it's still a big change and a big opportunity for us to accelerate the textile world.

James Ricchiuti -- Needham & Company -- Analyst

Got it. Thanks a lot.

Marc Olin -- Chief Financial Officer

Thank you.

Operator

Your next question comes from Aaron Rakers with Wells Fargo. You may begin.

Aaron Rakers -- Wells Fargo Securities -- Analyst

Yeah, thanks for taking the question. I do have a follow up as well. I just want to go back to the earlier comment on just kind of the setup. As we work through some of this kind of change in linearity and given some of the product names that you had talked about. If I look back over the past -- let's call it three years, you've grown in 2Q sequentially about 7% on average.

You just made a comment that you expect the growth to accelerate through the course of '19. So I'm curious, should we assume that normal seasonality into 2Q as a fair point of reference to consider. Do you think it could be below seasonality given some of these things you're working through? And I'm just -- do you think you actually can get back to year-over-year revenue growth in the back half of the calendar year?

Marc Olin -- Chief Financial Officer

Yeah. So first, in terms of the sequential behavior from Q1 to Q2, I do think that should be -- to behave normally. Obviously, we're at a lower number for Q1 with the $215 million to $225 million versus last year. But I think that sequential behavior should still be about the same, but the sequential behavior from Q2 into the back half of the year with the BOLT launch and starting to recognize revenue that's -- and plus the let's say starting to get some of the benefit of the change in selling approach that should give us more pipeline to the back half of the year -- more backlog for the back half of the year, we do expect the back half to make up a greater than normal percentage of the total revenue for the full year and so I would say sequentially from Q2 to Q3 it will be abnormal from prior years, but from Q1 to Q2 should be difficult.

Aaron Rakers -- Wells Fargo Securities -- Analyst

And is your view, sorry to push you, but is your view that you get to a return of year-over-year growth in the back half of calendar year?

Marc Olin -- Chief Financial Officer

Yeah. So it's in the back half of the calendar year and actually for the full year I don't know if you -- that was in Bill's statement, but we do still expect despite the slow start to the year that for the full year we can get to year-over-year revenue growth and to year-over-year EPS growth because of the strength of the back half of the year. So both Q3 and Q4, we would expect to show growth and you know -- and certainly for the full year.

Aaron Rakers -- Wells Fargo Securities -- Analyst

Okay, that's helpful. And then as a real quick follow up. You talked in the initial comments about your display business and you talked about the h5 platforms, you shipped out of those and you're ramping manufacturing facility. How much revenue did you actually not capture because you just don't have the manufacturing capacity set up and when does that -- when do you feel like you're fully in a position to capture all the business from a capacity perspective?

Bill Muir -- Chief Executive Officer

So, I don't think we missed that much in Q4 from not being ramped up fully because it was -- we were in an early adopter stage. So it's not like the sales reps in Q4 were actively pushing the h5 as aggressively as they would if we had demo units and reference client set up. We commercialized the product basically at the end of the quarter, allowed us to recognize the initial units that were shipped, but we intentionally always limit the amount that we could make.

It's not that we couldn't make more. We chose not to make more of the h5 because it was just commercialized late in the quarter and that was the plan from the beginning. So this quarter will ramp up more of the h5 and I'd say we'd be at full production capacity for h5 by 2Q. For the h3, the initial model, that's at full production capacity this quarter in terms of being able to make whatever we think the market demand for that would be.

Aaron Rakers -- Wells Fargo Securities -- Analyst

Okay. Thank you.

Marc Olin -- Chief Financial Officer

Thanks.

Bill Muir -- Chief Executive Officer

Thank you.

Operator

Your next question comes from Brian Drab with William Blair. Your line is open.

Brian Drab -- William Blair -- Analyst

Hi, thanks. I just have a couple of small questions at this point. Did you say that you have consultants on board there that are helping you? I think you used the term whiteboard things and if so, when did they come onboard and how long will they be around and what kind of expense should we see?

Bill Muir -- Chief Executive Officer

Hey Brian, it's Bill. So folks who are third-party consultants are helping us on some of the go-to-market efforts, probably been onboard here for, I don't know, four, six, eight weeks or so; somewhere in that time horizon. I wouldn't -- I would not think about it as an overly material line item as you're thinking about our expenses and hopefully, there's enough other things with some of the other stuff we're doing that would offset any, what I would frame as reasonably nominal creep there.

How long are they going to be on board? I don't know the answer to that. I would say that what we're trying to do to augment what historically has been a very, very good well-positioned sales force as we look to build deeper domain expertise as we look to become a bit more consultative in our approach. I don't view that as a 90 day effort or maybe even a 120, 150 day effort.

I think there are some things from an ongoing education and training standpoint tool development to allow us to be better from the sales enablement standpoint that will take us some time and I tend to think about that as really, really worthwhile investment to make sure that we're positioning ourselves in a way that really adds value for customers. So, we think about that as being some time, but I wouldn't think about that as a line item that if I were modeling, I'd be overly concerned about

Brian Drab -- William Blair -- Analyst

Okay. Alright, thank you. And then, just on the margins for Nozomi and then also BOLT if you could, what's the current outlook for both of those machines in terms of maybe however you'd like to talk about it, EBIT margin relative to the industrial inkjet segment maybe and when you hit segment average EBIT margin for each of those machines.

Bill Muir -- Chief Executive Officer

So, I'd rather not go into too much detail on the EBIT margin profile, instead speak about the gross margin profile for those because there's different investments we make that you know we may be doing in terms of future technologies that would bleed into those things. But in terms of gross margin, Nozomi is still below the average inkjet gross margin but it's getting closer to our target margin even though the ink is still a very small portion of the total there.

So I do believe it will -- as the ink becomes a more significant portion of the total Nozomi revenue that we have an opportunity for Nozomi to be a little higher than the average gross margin in the rest of our portfolio. In terms of BOLT, it's too early. You know we haven't even shipped the first one yet. So we need to get more experience with it to go through the beta process and see what we need to do to the machine to get it fully commercialized with the client.

Brian Drab -- William Blair -- Analyst

Does the Nozomi gross margin get to the segment average in 2020 or 2019?

Bill Muir -- Chief Executive Officer

I would say that we have -- it's probably toward the end of the year, probably by Q4 I would say we have an opportunity to get it to the segment margin. The ink won't be at the ratio by then, but I think because of the very good work that they're doing on the equipment side that can allow us to get to that segment margin before the ink is there, but it won't be at that for the full year, I wouldn't think and heading into 2020, hopefully we can -- 2020 we can get it at or above the segment margin for the full year.

Brian Drab -- William Blair -- Analyst

Okay, thank you very much.

Operator

Your next question comes from the line of Nik Todorov from Longbow. Your line is open.

Nikolay Todorov -- Longbow Research -- Analyst

Hey guys, good afternoon. I want to go back to the question on achieving full year growth in sales and EPS. So I'm trying to bridge this. So from one standpoint you're saying that customer tepidness in spending is there and you guys are more conservative in closing rates. Kind of assuming that first half is going to be down, in order to get to full year growth that kind of implies some really strong seasonality in second half, close to 15%, 20% growth second half versus first half. Just trying to understand what gives you confidence that that tepidness is going to disappear and the pipeline is going to be there. I understand you guys have some new projects coming up and that. But do you guys assume that the closing rates are going to improve in the second half of '19?

Bill Muir -- Chief Executive Officer

Yeah, I'll start off and ask Marc to add color. So what gives us confidence I guess, I'd maybe bucket that in three or four areas kind of given the current macroeconomic environment. First, I'd start with Nozomi, given the growth expectation we have for that business coming off a good 2018 for a level of substantial growth in 2019 as well.

So I think that if you think about -- as you think about the Nozomi contribution as a percentage of our business, that gives us confidence. If you think about BOLT and the contribution, although again reasonably muted in '19, I think the incremental BOLT contribution which is obviously not in any of our '18 numbers; that gives us a level of confidence.

We've talked about -- we talked about the Fiery business averaging $60 million a quarter of revenue every quarter kind of on average, right, for the year. So I think from a foundational standpoint that gives us a level of confidence. And although, I guess we haven't talk much about the Productivity Software business, as we think about the outlook for that business and we think about historical ranges that we provided in terms of our organic growth of 3% to 6%, we feel good about -- we feel good about that being toward the lower end of those ranges.

So if I think about all those with a couple of those being additive to our 2018 run rate and then still factor in maybe some headwinds in some other areas of the business, I think it's a summation of all that that gives us a level of confidence that we'll achieve year-over-year growth.

Marc Olin -- Chief Financial Officer

And, I would just add to that that we are -- we will have a compare against an unusually weak Q4 for 2018 and the combination of the BOLT being available in Q4 of '19; plus we've mentioned before our high-end of Display Graphics launch, we expect to have in the back half of '19; we'll have our -- the existing h3 and h5 at full speed in the back half of '19 which it wasn't in the back half of '18; and obviously, we expect Nozomi to continue to ramp. So, all of those factors give us the confidence in being still able to look at enough growth in the back half to get us to growth for the full year.

Nikolay Todorov -- Longbow Research -- Analyst

Okay, makes sense. And just as a follow up, can you guys talk about Nozomi capacity plans for 2019 to the extent you can? Do you see the need to expand capacity beyond the 10 units production per quarter and I'm sure -- I'm not sure if you guys are 10 or you can achieve a little bit more than that with the current capacity?

Marc Olin -- Chief Financial Officer

So, we can do, just to clarify again for everybody, our current team can produce 10 per quarter, if we have demand for more than 10 we can produce many more than that in the existing facility by just adding another shift, so that's basically just running one eight-hour shift a day, we could go to two eight-hour shifts if needed and double that capacity without changing the footprint. So we're not concerned about capacity constraints right now.

Nikolay Todorov -- Longbow Research -- Analyst

Okay that's helpful. Thanks guys and good luck.

Marc Olin -- Chief Financial Officer

Thank you very much.

Bill Muir -- Chief Executive Officer

Thank you.

Operator

And this is all the time we have for questions. I will turn the call back over to Bill Muir for some closing remarks.

Bill Muir -- Chief Executive Officer

Folks, just want to say thank you. Thank you for your interest in our Company. Thanks for the thoughtful questions today. Marc and I sit here incredibly excited about the opportunity we have in '19 and beyond. There's some hard work in front of us. I think we have good line of sight as to what that hard work is, and more importantly I think we have good line of sight to the extent that we execute as we should to the value that we can create for our customers and by extension for the Company. So we're looking forward to updating you on our progress as we go through the year. And again, thanks for your interest.

Operator

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

Duration: 65 minutes

Call participants:

JoAnn Horne -- Investor Relations

Bill Muir -- Chief Executive Officer

Marc Olin -- Chief Financial Officer

Shannon Cross -- Cross Research -- Analyst

Katy Huberty -- Morgan Stanley -- Analyst

Rod Hall -- Goldman Sachs -- Analyst

Ananda Baruah -- Loop Capital Markets -- Analyst

Michael Cadiz -- Citigroup Inc -- Analyst

James Ricchiuti -- Needham & Company -- Analyst

Aaron Rakers -- Wells Fargo Securities -- Analyst

Brian Drab -- William Blair -- Analyst

Nikolay Todorov -- Longbow Research -- Analyst

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