Executives
JoAnn Horne – IR, Market Street Partners
Guy Gecht – CEO & Chairman
John Ritchie – Chief Financial Officer
Analysts
Ananda Baruah – Banc of America Securities
Jay Vleeschhouwer – Merrill Lynch
Shannon Cross – Cross Research
Richard Gardner [ph]
Electronics for Imaging, Inc. (EFII) Q3 2008 Earnings Call Transcript October 23, 2008 5:00 PM ET
Operator
Good afternoon. My name is Teeke and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2008 earnings conference 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).
I would now like to turn the conference call over to Ms. JoAnn Horne, Investor of Relations. You may begin your conference, ma'am.
JoAnn Horne
Thank you, operator, and good afternoon everyone. Before we begin the prepared remarks, let me review Safe Harbor statement. Please note that during the call and during the question-and-answer session that follows the company will be making many forward-looking statements, each of which involve a number of risks and uncertainties.
Actual results could differ materially as a result of many factors including, but not limited to, variation of customer order patterns; timing of new product introductions; market acceptance of new products; the company's ability to attract and retain key customers; intense competition in the marketplace; integration issues surrounding acquisitions; unforeseen risks in new investments and business strategies; litigation related activity; particular investments or restatements deemed necessary by the company; and the company's ability to service its debt; and current worldwide financial, economic, and political difficulties and downturn including the ongoing contraction in credit; and inverse variations and foreign exchange rates that could affect demand for our products; as well as the risk of bank failures, insolvency, or liquidity of other financial institutions; and other adverse conditions in financial markets that could cause the loss of our cash deposit and invested cash and cash equivalents; and other risks outlined in the company's SEC report and in the company's earnings press release filed with the SEC today.
The company recommends that you read these documents in conjunction with the review and the financial statement. For your convenience the company has posted slides on the Web site on the IR section at www.efi.com giving an overview of much of the information the company will cover today.
I would now like to turn the call over to Chief Executive, Guy Gecht. Guy?
Guy Gecht
Thank you, JoAnn, and thank you for joining us today. By any measure, Q3 was a very challenging quarter. When we provided our outlook for the quarter we were enjoying one of the fastest start of the quarter we had ever experienced in our inkjet business. But still we provided conservative guidance as we are already seeing a slowdown in the U.S. and Europe and many customers will be failing in their purchase decision being concerned about the economy. But in September the environment got worse, and funding was almost impossible to obtain for many inkjet customers that financed or purchased.
Despite this deteriorating environment, we are pleased that we achieved almost 6% (inaudible) in our inkjet business and reached the low end of our outlook. We believe this speaks to the tremendous opportunity for the inkjet business in a more normal economic environment. At the same time, we reported the highest operating margin in four quarters as we continue to focus on cutting cost and optimizing our operations.
The financial crisis not only impacted our revenues, but the turmoil in the financial markets also impacted our profitability. The combination of a negative FX-seat [ph] to earnings as well as short-term investment in the primary reserve money market fund which (inaudible) negatively impacted our EPS by approximately $0.03.
John will expand on our other income shortfall in a few minutes.
As I noted we began to see the signs of this economic slowdown earlier in the year and implement the steps to position EFI to weather the downturn. One of the first commitments, as we stated back in May, was to explore opportunities to monetize our real estate assets.
As we announced today, we have signed an agreement to sell a substantial portion of our headquarter campus, selling one of our two buildings on our campus and all the unused land for $137.5 million.
We are pleased with the valuation of our campus and believe we achieved a good value for our shareholders in this difficult environment. We look to deploy a substantial portion of the after-tax proceeds to buy back our shares shortly after the deal closes. The exact amount to be determined by the economic environment and outlook as well as acquisition opportunities at the time of buyback.
Second, we redeemed our convertible bond in reducing our EPS share count by 9.1 million shares. We have also been active in the buy back program and have used our cash to buy back $110 million in the last year. In fact year-to-date we have reduced our EPS share count by 16.5 million shares or 25% reduction.
Costs have also been a key area of focus. Since Q4 we cut costs by primarily in our Fiery and APPs businesses. While expanding our inkjet (inaudible) and investing selectively in new innovative products in our inkjet business. Given the new economic reality, we are planning to cut costs further, but we will not be able to provide details today about the exact levels of those cuts.
Finally, the acquisition of Pace was also tied to streamlining cost in our APPs business while eliminating most of the legacy platform support and streamlining our product offerings. More on the integration of Pace in a minute.
We believe all these steps along with our strong balance sheet leave us well-positioned versus some of our less capitalized by the competitors. For example, we have provided 90 days bridge financing to a small group of high quality inkjet customers, allowing them to close a transaction while they waited for bank financing.
In September, we saw customers reluctant to even access bridge financing as they were uncertain about getting final approval from their banks. To this end, we are exploring opportunities to leverage our financial strength to expand financing options for small select group of customers.
We also are positioned to make strategic acquisitions, should they become available at the (inaudible) prices. We have looked at many companies over the past few years and are planning to revisit some of those opportunities. With the management of those targeted companies perhaps more realistic about the valuation and their ability to weather the storm as a standalone company.
Finally, as we did in the prior quarter, we will continue to be aggressive with pricing as means to attract customers who demand EFI quality, but are reluctant to make capital purchases in the current uncertain environment.
Before I discuss our outlook for the balance of the year, let's take a brief look at our performance of our three businesses in Q3. Starting with the Fiery, similar to Q2, the economic environment continued to negatively impact our Fiery sales which was down 20% year-over-year and 4% sequentially.
We continue to see a mix shift over embedded although at a much slower pace than in the previous two quarters. I believe you are hearing from our OEM partners that selling laser based production engines is no less challenging in this environment than our experience in selling inkjet production devices. And while we see some bright spots, like the Xerox PC 700, we believe that the current overall demand especially in the production part of the market remains under pressure.
Looking forward, we are excited about the Fiery we have ready for the new Ricoh 90 ppm which Ricoh has announced it will begin selling at Graph Expo. Perhaps later than originally planned, but a great step forward for Ricoh entering the production market.
I also wanted to comment on the Ricoh IKON deal and its potential impact on EFI. While there is no official word from Canon or IKON, like many of you, we have heard that Canon will potentially stop selling new equipment via IKON after the deal closes. We obviously are pleased to see Canon use their strong financials and portfolio to successfully supplement sales via other dealers and expanding their own direct sales channel.
At the same time we look -- we will look for IKON to leverage the power for Ricoh [ph] and maintain the current (inaudible). Yet realistically the market may see some dislocation as this channel is out sorted out and we will see a short-term impact to our results driven by this merger.
Turning to our inkjet business, we will have a very solid pipeline of interested customers, but we are cautious about the length of the sales cycle and customers willingness to pull the trigger on an expensive equipment purchase in the current environment.
As I noted earlier the ability of our customers to obtain financing is a primary issue, as even potential customers will still (inaudible) to obtain credit. The majority of our deals are financed, so, as I outlined, we are taking steps to address this issue. Importantly, we do not believe that any opportunities have been lost to competitor and our data indicates that we have gained share especially in the UV market.
Ink sales were a strong point in Q2, growing at about 30% year-over-year. In Q3 we saw about 25% year-over-year in the total ink sale with the record over 50% growth for UV ink. Our customers are reporting that they are seeing a softening in demand from end customers as advertising and marketing budgets are slashed, but the work being done is increasingly on UV product, which play to EFI strengths.
In other (inaudible) Jetrion which met its first full quarter sales plan for the 4,000 due to a strong customer demand for this new innovative labeling product. While we are cautious overall, we do expect a sequential increase in Q4 sales for the 4,000 as we continue to benefit from the initial demand and excitement about the product.
Despite the short-term impact, the economy is having in our inkjet business, we are still very excited about the number of new inkjet product introductions in 2009. As we have discussed in the past, one of the key new products will be the DS, which we showed in operation at the SGIA show last week. The DS is just one of several new products which we believe can lead to a strong rebound in inkjet revenues once we have a more normalized economic environment.
Finally, we are pleased with the integration of Pace into our APPs business. We have executed very successfully in accomplishing the back office and the product platform integration in only six weeks and have reduced headcount by 40 as promised and on schedule to complete the promised further reduction by the year-end. Pace will contribute $0.01 to Q4 results as promised and appears to be on track to achieve our guidance of adding $0.03 to $0.05 to 2009 results.
Looking forward to the current quarter, the sharp downturn we saw in September of slow end demand in a very challenging credit environment has carried over into the fourth quarter. At the same time it is very difficult to have visibility into customers' buying patterns in this environment. As such, we intend to be very cautious in how we run our business and the outlook we provide you.
Given the very limited visibility and the difficult environments, we believe it will be prudent for us at this point to view this quarter as a flat to sequentially down quarter and therefore provide an outlook in the range of $135 million to $145 million in revenues and EPS at $0.12 to $0.20 per share.
Lastly, as we are in the process of finalizing next deal plans, we will take a similar cautious approach towards 2009 and take action adjusting our spending levels to ensure they reflect the new economic reality. As many of the forces that impact EFI shareholder value are outside of our control, our strong intention is to execute on everything we can control to restore EFI shareholder value.
Now, let me turn the call over to John to discuss the Q3 results in further details.
John Ritchie
Thanks, Guy. I'll now go over the detailed financial results for the third quarter of 2008. Revenues were $144.7 million, up 1% sequentially and down 8.6% on a year-over-year basis. Non-GAAP net income for the quarter for Q3 of '08 was $0.20 per share, down 5% from $0.21 per share in Q2 of '08 and down from $0.34 in Q3 of '07.
For the quarter on a GAAP basis we have a net loss of $3.6 million or $0.07 per share compared to net income of $8.1 million or $0.13 per share in the third quarter of '07 and down from break even results in the second quarter of '08. A reconciliation between our GAAP and non-GAAP results is posted in the Investor Relations portion of our Web site.
Before I go through the quarter in detail I wanted to highlight some key data points. Our non-OEM sales were 59% of total revenues. Our recurring revenues were over 18% of total, holding steady with last quarter. As a reminder, our recurring revenues comprised primarily of inks related to our inkjet business and our software maintenance contract.
Our APPs business recorded a very strong quarter driven by the successful integration of Pace and we are on track for a very strong Q4 in that business. We had a great ink quarter with revenue and volume both up significantly on a sequential and year-over-year basis. Jetrion benefited from good product demand for the 4000 and we expect to see continued growth in Q4.
Turning to revenue by geography, Americas revenue represented 53% of total revenues, up from 50% in the second quarter of '08, largely driven by the quarter-over-quarter increase in inkjet revenues.
Our European revenues were 35% of total revenue, down from 38% in Q2 of '08 due to a slowing economy and tightening credit markets in Europe.
Japan represented approximately 9% of revenue, slightly up from the prior quarter, driven by an increase in Fiery revenues. And finally, rest of world revenues were 3%, roughly equivalent with the prior quarter.
Now moving on to our product line results, Fiery revenues were $68.0 million, down 5.8% in Q2 of '08 and down 21% year-over-year. Fiery revenues were 47% of total revenues for the quarter, down from 50% in the prior quarter. The year-over-year decrease was driven by significant slowdown in standalone servers with a much smaller decline in our embedded product category.
On a sequential basis, our high end product line showed growth driven by prelaunch orders of the new Ricoh 90 page-per-minute device. Although we do not see the direct impact the credit markets are having on our Fiery business like we do in our direct business, we believe it is also negatively impacting the Fiery results.
For the fourth quarter we expect the Fiery business to be down approximately $2 million to $4 million as our OEM see a slowdown in their production segments.
For the third quarter, our inkjet products contributed 42% of revenue or $60.8 million compared to 40% of revenue or $58 million in the second quarter of '08, a sequential increase of 4.8%. Year-over-year revenues were up $6.6 million in total, primarily driven by higher ink revenues.
For the quarter, this business will have a tough compare as Q4 '07 was an all-time record revenue quarter for inkjet product line. Given the challenging environment, we expect Inkjet revenues in the low to high $50 million range.
Moving on to APPs, during the third quarter this category contributed 11% of revenues or $15.8 million, up 15.9% sequentially from Q2 '08 level and up 6% year-over-year. The increase was driven by the Pace acquisition. For Q4 we expect revenues to be up approximately 25% to 30% from the Q3 level.
Non-GAAP gross margin for the quarter was 57.1%, down 20 basis points from 57.3% in the second quarter of '08 and down from 58.8% in Q3 of '07. The small decline in gross margins was driven by product mix swing towards the inkjet business as well as aggressive pricing in the VUTEk business. Given the dynamics of the quarter, we were pleased to hold gross margins at these levels. In Q4, we expect to see a decline in overall gross margins driven by the lower revenue levels.
Our non-GAAP expenses, excluding the amortization of acquisition related cost, stock-based compensation, charges -- severance charges, restructuring, and option review costs were down about $3 million or 4.2% to a total of $69.5 million in the third quarter, compared to $72.5 million in the second quarter. As the stock option related litigation was settled in Q3, Q3 should mark the last time we see any costs associated with this event.
R&D expenses were $30.8 million, down $1.6 million or 4.9% from the second quarter. In the third quarter R&D expenses represented 21.3% of total revenues, down from 22.5% of revenue in Q2 of '08. The decrease in R&D was driven by lower overall headcount cost in Q3 primarily due to cost containment initiatives focused on our Fiery business.
Sales and marketing costs were $28.8 million, down $1.3 million compared to $30.1 million in the second quarter of '08. As expected, Q3 sales and marketing spend was down from Q2 as the prior period included costs associated with the group at trade show. In the third quarter, sales and marketing expenses represented 19.9% of revenues, down from 20.9% in the prior quarter.
G&A costs were $9.9 million, down $0.1 million from the second quarter. For the third quarter, G&A expenses represented 6.8% of revenue compared to 6.9% in the second quarter of '08.
Looking forward to Q4 spending levels, we expect spending to be approximately flat with Q3 if we commit at the high end of our revenue range. We will scale expenses lower if we are at the lower points of our revenue range. As we mentioned on our previous call, we plan on taking a charge in the fourth quarter related to headcount reductions in our APPs group.
Non-GAAP operating margins were 9.1% in Q3, the highest level of the year, up from 7% in the prior quarter and down from 14.5% recorded in the year-ago period. We expect operating margins to decline in the fourth quarter.
Other income of $200,000 was $5.3 million lower than the prior quarter, driven by large decreases in our cash balances related to our $240 million bond reduction in Q2 as well as our stock repurchase program. Other income was also impacted by FX losses associated with the strong U.S. dollar and losses we absorbed as part of the fallout of the reserve money market fund breaking the buck.
The other income issues cost us approximately $0.03 of EPS during the quarter with approximately half a penny coming from the reserve fund loss and the balance coming from volatile exchange markets.
Let me go into more detail on how we were impacted by the foreign exchange situation. During Q3 we saw unprecedented volatility in the foreign exchange market, with the U.S. dollar appreciating significantly against the Euro. The Euro to U.S. dollar exchange rate bounced between $1.39 and $1.51 during the quarter.
Our losses are primarily driven by local currency accounts receivable balances which are a very small part of our overall balance sheet. Although the absolute exposure is extremely small on a relative basis, the speed of the dollar appreciation -- approximately 15% led to sizable FX loss. As the dollars continue to appreciate we expect other income to be zero for the fourth quarter, offsetting this decrease in other income, we should see some benefit in operating expenses as our European costs drop due to the weakening Euro.
Turning to our tax rate for the quarter, it was 22%. We are currently estimating the non-GAAP rate would be between 22% and 23% for Q4 of '08.
Moving on to headcount. At the end of Q3, full time headcount was 2,005 or 66 heads higher than Q2 of '08. The increase in headcount was primarily driven by the Q3 acquisition of Pace and additional hiring in our Indian facility, offset by headcount reductions in both our controller and software business. As I mentioned before, we will be making additional headcount reductions in our software business at the end of the quarter.
Turning to the balance sheet, we ended the quarter with approximately $201.6 million in cash and cash equivalents and short-term investments compared to $238.4 million as of the last quarter, a decrease of approximately $37 million. The decrease was driven by $21 million spent on the Pace acquisition, approximately, $13 million for stock buy back program, a $5.6 million tax charge related to the redemption of our bond in the prior quarter and lastly generation of about $2.5 million of cash from operations.
We currently have approximately $43 million remaining in our stock buy back authorization. We plan on buying stock back in the fourth quarter under this existing authorization.
Our lower than usual cash generation was primarily driven by two factors, an increase in accounts receivable and an increase in our inventory level. Our net inventory balance was $48 million at the end of the quarter, an increase of $3 million from the prior quarter.
Q3 inventory turns were 5.3 times down from 5.7 times. The increase in inventory related to lower than expected revenues from the VUTEk team and inventory build for the Jetrion 4000 product. We are currently executing our plans to reduce our inventory levels by the end of the fourth quarter.
Accounts receivable increased to $96.6 million compared to $90.3 million at the end of Q2 of '08. The increase in AR was driven by the Pace acquisition and shipping linearity during the quarter. Overall, DSOs increased by 4 days to 61 days compared to 57 days in the prior quarter. The primary reason for the increase in DSOs was a one-time bump related to the Pace acquisition. The Pace acquisition was responsible for about 50% of our increase in DSO.
Now, turning to our outlook for Q4, we are currently expecting revenues in the range of $135 million to $145 million. We expect non-GAAP earnings of $0.12 to $0.20 per share, and GAAP results from $0.03 of income to a $0.05 loss.
As Guy mentioned earlier today we announced the sale of certain real estate assets to Gilead Life Sciences for $137.5 million. We expect this deal to close in January of '09 subject to certain closing conditions. The sale should generate a taxable gain of approximately $80 million. As part of this transaction, we will terminate our synthetic lease related to the sold property while maintaining the synthetic lease on the remaining building. We expect to use the substantial portion of the after-tax cash proceeds to repurchase our shares.
Lastly, I'd like to follow up on Guy's comments regarding the use of our balance sheet during this turbulent period to help drive our inkjet business. We plan on doing this to win deals from our less well capitalized competitors and furthering our position in the market.
Our goal is on a very selective basis to provide financing to key customers to increase our unit placements. Our high margin ink business will benefit from this approach. We will limit this to customers that despite strong financials have struggled to line up financing for their purchases. We will also limit this exposure over the next few quarters to a low single digit million dollar range.
With that, we'd be happy to turn it over for questions. Thanks.
Question-and-Answer Session
Operator
(Operator instructions). Your first question comes from the line of Ananda Baruah.
Ananda Baruah - Banc of America Securities
Hi, thanks guys. Thank you for taking the question. Just I guess a few if I could. Can you guys just talk a little bit more specifically around where you saw I guess the weakness in the controller business, U.S. versus Europe, higher-end versus lower-end? And I guess we think for you it sounds like the bar is getting reset across the board over the next quarter or so in terms of what seasonality in both businesses might look like. I was just wondering if you can give us a sense at least on the controller side what might be the biggest swing factor, what are the secular demand versus what the impact from Canon through IKON might be.
Guy Gecht
So first of all -- talk about the short-term impact, I think we saw since the beginning of the year or even Q4 last year softening demand, and which was related to makeshift in our OEM sales lower than units where we have less attach rate versus higher end. It was originally only in the U.S. in Q4 last year, then mostly in the U.S. but I think in Q3 it was across the board. We finally see softness in Europe. In general, it's tough to call right now the normal run rate of the controller business, and I hope you understand why we are trying to not say anything beyond this quarter. Clearly, we have a great brand, a great customer demand, great channel access. We are on all the engines. We like to be. Of course more engines would be better for us. We are seeing good attach rate on, for example, the OCC 700 [ph]. We are very pleased with our share on this engine, but keep in mind the ASP on this engine and ASP for the Fiery for the engine is a lot lower than the ASP on the 5000, 6000, 7000, 8000 that you saw lot more a year ago. So that's clearly impacting us as well.
Ananda Baruah - Banc of America Securities
Okay. Great. And then, Guy, just I guess on the cost cuts that you guys talked about, maybe it's the -- rationalization maybe is a better word. You guys are looking over a considering doing any -- can you give us any anecdotal comments about what the goal is, I guess kind of from an intermediate margin perspective once you settle in there? Can you give us some kind of sense what the timing might be on that?
Guy Gecht
Our focus is really to impact the fully '09. Those cost cutting -- additional cost cutting will not be meaningful to impact Q4. But we've been doing cost cutting since January and obviously given the new economic reality we are going to take a harder look and turn every stone and make sure that we are ready to weather the long downturn in the economy. And our goal is to have the substantial amount of profitability even in downturn.
Ananda Baruah - Banc of America Securities
Got it. And I guess -- it sounds like it's probably part of a moving target. I know you -- some of them are moving target. Are you prepared to say that you are or not sort of setting maybe I don't know 10% operating margin as a goal for '09? Is it just too early to say something like that?
Guy Gecht
We are certainly not going to comment about operating margin goal, certainly nothing beyond this quarter. The visibility is the worst we've, and everybody has including OEM partners and even our end customers tell you that we talk to an end customer in Europe that move now to a daily production meeting because they cannot predict how many jobs they get and from which customers they get. So they moved to a daily planning. But -- so we will not go beyond anything this quarter, but we are pleased with the fact if you look at the operational results, we have a shortfall in other income, but if you look at the operational results, we are very pleased with the fact that we had the best operating margin in four quarters and we certainly like to continue to work on that.
Ananda Baruah - Banc of America Securities
Guy, I guess just this last one from me regarding the sale of the real estate and the subsequent buyback. Are there any other details you can provide about what the buyback might entail? Will it be limited to the retail -- the assets that you get from real estate or might you actually attach some more capital to that? And then any sense on what it might actually look like an accelerated buyback, much you intend to a tender offer, any details around that would be helpful? Thanks.
John Ritchie
Ananda, it's John here. So -- we currently have $43 million left in the existing authorization. We should on the gross -- the net proceeds on an after-tax basis for the real estate sale should be right about $100 million. So we think we've got -- we are pretty well armed there in terms of a buyback. Regarding the specific methodology, yet to be decided, we'll get closer to decision on that when we get closer to the January date. We clearly haven't decided whether we are going an accelerate program or Dutch tender and we'll update you on that on the Q1 call.
Ananda Baruah - Banc of America Securities
Thanks. John, is it safe to assume that it will be likely one of those two options?
John Ritchie
Again, I can't really give you much more flavor than what I gave you. We are exploring all the opportunities that are available, and once we make a decision we will communicate that.
Guy Gecht
For the best most efficient way to exercise a substantial amount of the buyback.
Ananda Baruah - Banc of America Securities
Thanks, guys.
Guy Gecht
Thanks, Ananda.
Operator
Your next question comes from the line of Jay Vleeschhouwer.
Jay Vleeschhouwer - Merrill Lynch
Thanks. Good afternoon. Guy, do you have any visibility into the extent of OEM inventories of controllers on hand at the OEM level? And similarly do you have any visibility into the inks inventories that your printer customers may have? Normally how many days or weeks of production would they keep in ink inventory before they need to replenish for example?
Guy Gecht
Surprising this time we have better visibility into inventory versus general overall pattern -- purchase pattern. I would say in the OEM it's a normal level of inventory. They are cautious too and so the same thing we have said, so maybe the only one exception would be the Ricoh 90 ppm where we started to ship to them this quarter, and we expect them to start the sale at Graph Expo next week. So maybe, there is the impact of inventory but we think it's going to be very successful product in any environment.
As far as inventory, we suddenly saw a slowdown in growth. As I said we went down from 30% to 25% and maybe there were adjustment during the quarter or maybe there were adjustment in Q4. Our outlook reflect softening demand for advertising and marketing. We still think the ink is going to go nice, the UV ink is going to go strongly as more jobs are moving to UV, which we were focusing, since we bought VUTEk, but I think the issue would be the ongoing consumption and not the ink inventory.
John Ritchie
One other comment to add to that, Jay. Most of our end user customers don't want to tie up a lot of capital in the ink purchases. So it is very tightly tied to demand.
Jay Vleeschhouwer - Merrill Lynch
Right. Guy, your comments on the RIKON merger seem reasonable, but sounded a bit more conservative than right after the news came out that Ricoh was buying IKON. So it sounds like there might be in your mind some greater risk of some probations in the market than you might have felt before?
Guy Gecht
When the news came out, clearly sounds from IKON and for the expectation is that people will be trying to maintain status quo for a while. After that, we got some comments this from the field, you personally I think forward us something you heard about potentially Canon not selling the IKON after the acquisition. So hopefully that those guys aren't efficient enough to overcome that and customers that bought color engines before will continue to buy color engines. If they like Fiery before, they will continue to like Fiery. But every time you have changes like that, you have the potential problem in the market. The IKON is I would say in the neighborhood of 20% of our Canon business and Canon is one of the two largest customers. So we don't expect all of the revenue to go away. We expect revenue to come back. To what extent are we going to get everything back that's still a big question.
Jay Vleeschhouwer - Merrill Lynch
Couple of questions on the controller business. For the last quite a few number of years, the total ASP of standalone server business has been pretty stable even with changes in mix the numbers seem to have been pretty steady. Now, however, do you think that either for customer negotiating reason or mix that maybe the ASP will change more meaningfully than it has in the last number of years?
Guy Gecht
I think what we are saying this is that certainly the mix of engines which drive with that the mix of Fiery because the lower end the engine, the lower cost Fiery is, is changing, and that was the same thing we have seen in buyer downturn, though I don't think we've seen such a big downturn before, but people tend to buy lower end solutions. And therefore the mixes changing on us and those are the ASPs (inaudible) we do not provide any discount that I can think of the seal given the economic on a specific product. The ASP is just a reflection of the mix.
Jay Vleeschhouwer - Merrill Lynch
Okay. A couple of last ones. Do you think that there is any reason to believe that your addressable or target markets for the controller business, your opportunities for attach rate or penetration have altered in some way -- I guess that competition question, but do you have any reason to believe that in either the graphic arts market, print for pay, trans promo and so forth, that your net position will have been altered in some way over the next number of years?
Guy Gecht
In some areas where I think we have actually better opportunities than before, especially the high end of the office and entry point. Those areas should grow in a normal economic position. The OEMs are very interested in add-on applications for the copiers because they are facing tough competition from low end MSPs or from even regular printers. And so we have a lot of dialog about how to extend what we do with the OEMs in the high end markets and high end office, and we've been making good progress on that, I think to some degree it help us because the embedded business performed a lot better than the overall Fiery business. As far as the high-end production remain to be seen how in a normal environment things will be. We feel good about our share, and so, if the OEMs would sell more engines we would be in better shape. This is certainly a tough time for the OEM to sell production engines. I think Xerox commented this morning and I think everybody is saying that and it's understood. It's a big capital equipment purchase. A lot of people need financing, same thing is VUTEk.
Jay Vleeschhouwer - Merrill Lynch
And then lastly, irrespective of the economy or demand conditions, you think you pretty much locked in margin improvement in the APPs business from a low level for software business to a more normal or improving level for the software business?
Guy Gecht
We are not done yet. We are very pleased with the execution in the first six weeks. We immediately announced that we will retire the Logic and PSI platform which we had to work closely with a lot of customers to make sure that they can handle the transition. We are going to be leading with Pace in most of our markets, especially in the mid market, the biggest part of the market, and we think there is more efficiency to gain. As revenue will go up, obviously, we think it's going to be better for us in this business. So we certainly in the beginning of that, we think it's a major transformation of the APPs business. I think there is a lot of opportunities in again normal times. We are very pleased with the results. We gave some thoughts before we gave you an outlook of 25% to 30% improvement in APPs for Q4, and we think that the normal times would be better. Once we start to go international there obviously even more opportunities for the APPs because it's really centralized in North America.
Jay Vleeschhouwer - Merrill Lynch
Thanks, Guy.
Guy Gecht
Thanks, Jay.
Operator
(Operator instructions). Your next question comes from the line of Shannon Cross.
Shannon Cross - Cross Research
Hi, good afternoon. The first question is just as we look at the uncertainty that's out there in terms of the top line and I think everybody is kind of in the same position, how should we think about the variability of the cost structure, I am not necessarily talking about actually the ability to just go in and cut costs, but what percent of your cost structure right now is sort of variable going with demand versus or top line versus fixed and how has that sort of morphed over the last year or two?
John Ritchie
Shannon, it's John here. So we are not going to give you a percentage. I would say the percentage is greater than has been historically, but specifically in the fourth quarter, that quarter has more variability to spend than any other quarter. As we head into things like commission rates accelerated on commission programs, bonus programs, there is -- the fourth quarter has a larger percentage of variable spend than any other quarter, and that variability is tied specifically to the performance of the business. You can imagine going in with this range, we'll peel back that variable spend.
Shannon Cross - Cross Research
Great. I guess -- I was also -- I'm not trying to get 2009 guidance or any -- what I'm trying to figure out here is people are going to sort of start I think with companies worst casing everything and trying to figure out, you are obviously sitting on $6 a share in cash right now and other real estate -- so there is a lot sort of behind what you've got there, but as we try to worst case things I guess maybe on a macro basis, we should think fourth quarter is more variable than others, but I don't know if there's any color you can give us there.
John Ritchie
Again, we are going to stay away from any kind of on-point comments in '09, but I just want to reiterate Guy's comment. We are focused on driving substantial profitability in '09, irrespective of the economic environment. How we get there, if it means taking cost actions, we'll take them.
Shannon Cross - Cross Research
And then a question just with regard to sort of what you are hearing following troop of pushbacks on orders. I'm kind of curious as to how things work through the quarter linearity and then just any sort of comments people have made or changes. Obviously, you've had some pushback on the ink side.
John Ritchie
So the -- our business -- as our business evolves being a more direct sales business, we'd always be back-end loaded. So we did see significant linearity. We shipped more in the last month of the quarter than we shipped in the -- earlier in the quarter. That being said, that linearity was impacted by the credit situation. We could have -- on a normal situation it would have been more linear. We would have closed more deals.
Guy Gecht
Shannon, we started -- July was actually a very strong month for both ink and machines, given the fact that's the first month of the quarter and normally is pretty slow. So we felt pretty good despite all the bad news about our opportunity. And we reached before the turmoil of September, we reached the low end of the range despite a lot of decision being pushed and people that wanted to buy couldn't even get financing or the bank to call them back We have few instances where customers got approval from the bank and the bank called them and say, hey, we are taking it back, we are not going to go forward with that. So we had a lot of horror stories.
Beyond that, the mood, I'm sure you will understand that the mood is pretty bad. People read bad news. Even if they know they need a new device, and they have the business to justify it and they have the money, they just hesitate. They read a lot of bad news every day. So hopefully things will start to bottom up and at some point there would be less bad news than there is today and I think people will feel more comfortable going forward in building the business. We think what we are working on the engine side and what the OEMs are doing on their engines with the Fiery has a lot of tremendous value add opportunity for customers in printers and moving to digital printers and moving to on-demand and valuable printing.
Shannon Cross - Cross Research
Okay. Great .And just one last question. With regard to your cash, obviously, share repurchase is going to be a pretty big focus, but can you talk about the acquisition environment and potential opportunities, what you are thinking? And also, John, maybe you can just touch on what you think you need to have in terms of a cash balance just to run the business.
Guy Gecht
So certainly we believe that this is an environment to get few low risk high return very attractive deals done. We got calls from people we talked before that wanted to start to talk. It's still probably -- we see the impact of the economy can only imagine how smaller companies feel about the potentially long downturn. And so we are certainly looking back at everything we looked before, talking to people, being very cautious about valuation and outlook for sure, because our valuation is terrible, and if we find the right target we will certainly pull the trigger. We like some of the -- we like we have a lot of facets. We can leverage that.
John Ritchie
In answering the question on the right cash on the balance sheet, again, given the economic environment we probably would be a little more cautious than we have been historically. But I preface that by saying that we're talking about cash values in our balance sheet that are historic lows. We haven't taken our cash balances down this low in the last decade. So clearly, we think there's tremendous opportunity and what's clearly grossly undervalued stock, but at the same time we want to also keep some powder dry to do acquisitions. But the number is less than the $200 million we have on the balance sheet today.
Shannon Cross - Cross Research
Thank you.
John Ritchie
Thank you.
Guy Gecht
Thanks.
Operator
Your next question comes from the line of Richard Gardner [ph].
Richard Gardner
Thanks very much. John, I was wondering if you could give a sense of what costs will be associated with unwinding the synthetic lease and whether that was included in the net $100 million that you talked about in proceeds from the headquarter sale?
John Ritchie
It would be very little cost associated -- immaterial amount of cost associated with unwinding the lease. Notification of the termination is about it.
Richard Gardner
Okay, great. And then does this conclude your efforts to monetize your real estate or are there additional opportunities there still?
John Ritchie
So at this point we sold the building we partially occupied. We will be transitioning those folks into our current building. We sold the excess land. The economics don't make sense for us to enter into a sale leaseback at this point. Our OpEx would go up considerably. But to be blunt for the right price, nothing is off the table.
Richard Gardner
Okay. And then finally you talked about a lot of things today, but I was hoping you could just walk us through exactly where you are on the restructuring actions that you announced -- each of the restructuring actions that you announced last quarter, including the consolidation of manufacturing into a single facility and so forth.
John Ritchie
First of all, on the Pace acquisition, we are at or slightly ahead of schedule there. The business is performing better than we want. We have taken out all the costs and we are scheduled to take out more costs as the quarter progresses. We are still on track for the planning process of the consolidation of the ink plant and that will be an early '09 event.
Richard Gardner
Okay. Great. That's it from me. Thank you.
John Ritchie
Thank you.
Operator
There are no further questions at this time.
Guy Gecht
Thank you very much for joining us today. I would like to thank our shareholders, employees, and customers for helping us to continue to make progress in this difficult environment and we look forward to talking to you soon.
Operator
Thank you. This concludes today's conference call. You may now disconnect.
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