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Electronics For Imaging, Inc. (NASDAQ:EFII)

Q4 2012 Earnings Call

January 24, 2013 5:00 pm ET

Executives

JoAnn Horne – Investor Relations

Guy Gecht – Chief Executive Officer

Vincent Pilette – Chief Financial Officer

Analysts

Shannon Cross – Cross Research

Keith Bachman – BMO

Ananda Baruah – Brean Murray Carret & Co.

Operator

Good afternoon and good evening. My name is Sherry and I will be your conference operator today. At this time, I would like to welcome everyone to the EFI Fourth Quarter and Fiscal 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Ms. JoAnn Horne, Investor Relations for EFI, you may begin your conference ma’am.

JoAnn Horne

Thank you operator, and thank you everyone for joining us today. I have here with me Guy Gecht, EFI’s Chief Executive Officer; and Vincent Pilette, our Chief Financial Officer.

Before we get started, let me review the Safe Harbor statements. During this call, we’ll be making forward-looking statements that are statements other than statements of historical facts including but not limited to statements regarding our strategies, growth expectations, product innovation, new market opportunities, acquisition strategy, expectations regarding our future relocation from the Foster City campus as well as estimates and our projections of revenue, operating profit growth, EPS, gross margins, operating expenses, tax rates, working capital, and any statements or assumptions underlying any of the foregoing.

Forward-looking statements are statements of risks and uncertainties that could cause our results to differ materially or cause a materially adverse effect on our results. Please refer to the risk factors discussed in our SEC filings in the press release. We do not undertake to update in light of any new information or future events.

In addition, reference will be made to non-GAAP financial measures. Information regarding the reconciliation of the non-GAAP and GAAP measures can be found in the press release that was issued this afternoon on our website at the IR section at www.efi.com. There are also slides available there that corresponds to today’s comments.

I’ll now turn the call over to Guy Gecht.

Guy Gecht

Thank you, JoAnn, and welcome everyone to our call. We are delighted to report an exceptionally strong record quarter, which marks another terrific year for EFI.

Q4 revenues increased 7% overall, reflecting record revenues for both Industrial Inkjet and Productivity Software. EPS increased 17% to $0.14 per share; it was our 12th consecutive quarter of revenue and EPS growth, once again a result of a successful execution with better than expected performance in all three segments, despite the economical drag and some level of uncertainty around the world. As I believe that our Q4 results speak for themselves, I would also today only a short notice regarding the quarter with a few parts of 2012 and conclude with our views about Q1 as we head into 2013.

Let’s start with a quick summary of the fourth quarter. Our Industrial Inkjet segment grew 19%, driven by strong demands for VUTEk and Cretaprint. The demand for the new product including the new mid range VUTEk product, QS4 as well as the LED, which is now available in the smaller two-meter form factor drove our results. In this segment, we enabled customers to put high quality images on those sort of materials, from packaging, odd shaped sign, vinyl, metal, glass to ceramic tiles. The demand for digital technology in Industrial imaging is still in its early stages and thus we expect this growth momentum to continue into 2013 with new products such as the VUTEk HS100 Pro, Cretaprint CC3 and the new 13-inch Jetrion machine. We project inkjet will grow mid to high single digits in Q1.

Our Productivity Software segment delivered a fantastic record quarter growing at 24%, driven by improved conversion from the pipeline built earlier. This part of our business is targeted at helping our customers cut cost and become more productive. In that context, the pressure on the industry helps focus our customers on taking steps to automate their business processes and drive productivity in areas in which we are the undisputed market leader. Europe for this segment was strong in Q4, as was Asia, and we remain focused on continuing to expand our international footprint. We expect the momentum to continue into 2015, and we project solid growth of roughly 15% in Q1.

Fiery came in better than expected, and its starting to benefit from the first shipments of new product cycle. We saw some stability in Europe, and we expect new products into those throughout 2013 to drive some recovery in our strategic partners businesses. For Q1 2013, we expect Fiery to be roughly flat sequentially, despite the seasonally low March quarter.

We just posted a record number of attendees at our Annual Connect User Conference. The event proved extremely productive for EFI and our customers. There were over 190 great sessions for our customers, dynamic speakers, and a fantastic opportunity to get our sales team connected even closer to our customers. There was a lot of excitement in the reinforcement around EFI’s vision, direction, and customer focused culture. Our customers left the event with the knowledge needed for the continued success of their businesses. Our marketing and engineering team left with significant insight into our customers’ requirement, and our sales teams left with tools needed for another record year for EFI.

Now let me turn into the highlights of 2012. Revenue grew 10% solidifying our third consecutive quarter of double-digit revenue growth. Net income was up 16%, while our most profitable segment Fiery saw a cyclical sales down 15%. With the acquisition of Cretaprint, we are bringing our Industrial Inkjet strength to the new market of ceramic tile, transforming this industry where the conversion from analog to digital print is still in the early stages.

The growth of direct businesses Industrial Inkjet and Productivity Software increased growing revenue to 25% decreasing EFI’s reliance on our cyclical Fiery segment, which now represents only one-third of our business. 53% of our 2012 revenues were from outside of the United States, delivering on our focus to diversify geographically. 29% growth in our UV Ink volume during 2012 and for the first time, we sold over 1 million liter of UV Ink in 11 months, demonstrating that our Industrial Inkjet customers are going as well.

We sold our headquarters for $180 million, adding approximately $3 per share net of taxes and relocation costs. We are expecting to finalize the new headquarter location in current quarter and complete the move early in Q4 this year.

In summary, our strategy and direction that we shared with you as we enter 2012 holds true in 2013. We continue to target high growth segments where digital print technology brings significant value and we can help our customers cut costs, being more productive, and grow their businesses. We remain focused on out innovating and out executing our competition, expanding our geographic footprint, especially in emerging markets, this remains a priority.

And finally and most importantly, we are confident that successfully executing in those areas of focus will continue building shareholder value. We look at Q1 as another step in our journey to deliver on our strategy and continuously improve our execution. We expect revenues of $163 million to $167 million with earnings per share of $0.30 to $0.32 per share.

Now, I will turn the call over to Vincent to provide additional details on the financial results for the quarter and full year.

Vincent Pilette

Thank you, Guy, and good afternoon everyone. We continue to execute well against a focused strategy, establishing EFI as the leader in industrial digital printing. In the fourth quarter of 2012, EFI achieved all time record revenue of $174 million, up 7% from the prior year supported by record revenue for both Industrial Inkjet and Productivity Software. Fiery started to turnaround and we’ve continued to grow our recurring revenue building resilience into our business model. Consistent execution and solid spend management led to earnings per share of $0.42, up 17% year-over-year including a $0.03 catch-up related to the renewed R&D tax credit.

We have achieved a unique market leadership position coupled with strong focus on execution leading to consistent results on both our top and bottom line. Rounding out a great quarter, we are also pleased by the solid improvement in working capital with $28 million cash generated from operating activities this quarter.

Now let me go into more detail starting with revenue by business segment and region. This quarter was driven by performance above our expectations for all three segments. The Industrial Inkjet segment generated a record quarter at $86 million of revenue, up 19% year-over-year and contributed 50% of total EFI revenue. Once again, we saw robust demand for our products with very strong quarters for the new products we launched in the second part of 2012.

Strong ink consumption again pointed to expanded business opportunities for our customers. This quarter UV lnk volume grew 18% year-over-year leading to the third consecutive year with UV Ink volume growth over 20%.

The Productivity Software segment delivered record quarterly revenue of $29 million, up 24% year-over-year and contributed 17% of total revenue. Throughout the year, we discussed a growing all-time high sales funnel but slower conversion rates. In Q4, we were pleased to see the conversion rate improving leading to double-digit growth and record bookings.

Fiery revenue amounted to $58 million, down 12% year-over-year but up sequentially 15%. Fiery represented 34% of Q4 total revenue compared to 41% a year ago. Throughout the year, we focused on lean channel inventory, which positions us very well as we embark on the 2013 product refresh cycle.

Across our segments, recurring revenue was up 14% year-over-year at $42 million. By geography, we saw a strong demand for our products in Asia driven by the emerging market. Asia delivered record revenue at $24 million, up 58% year-over-year. Europe continued to be challenging so the operating environment stabilized compared to Q3. Revenue in EMEA was $48 million, up 6% year-over-year. Finally, revenue in Americas totaled $103 million approximately flat year-over-year.

Looking forward to Q1 2013, we expect revenue in the range of $163 million to $167 million. This outlook is based on mid-to-high single digit year-over-year growth for Industrial Inkjet, approximately 15% year-over-year growth for Productivity Software and approximate 5% year-over-year decline for Fiery or flat sequentially.

Moving on to gross margin, non-GAAP gross margin for the fourth quarter was 54.4%, down 160 basis points year-over-year mainly due to the expected revenue mix shift towards the Industrial Inkjet. Non-GAAP Industrial Inkjet gross margin was 39.7% in Q4 2012, down 70 basis points year-over-year driven by a larger mix of printer revenue versus ink.

In the Productivity Software segment, non-GAAP gross margin continue to increase as we scale the business resulting in 72.8% for the quarter, up 190 basis points year-over-year. And non-GAAP Fiery gross margin was 66.7%, down 90 basis points year-over-year driven by product mix within the Fiery portfolio. Going into Q1 2013, we expect overall gross margin to be relatively flat sequentially.

Turning to operating expenses, in line with our guidance, Q4 non-GAAP operating expenses grew to $70.2 million, up 3% year-over-year despite acquisitions and two trade shows, as we continue to manage tightly our expense, balancing efficiencies, which targeted investment opportunities. As a result, Q4 non-GAAP OpEx represented 40.3% of revenue, a decrease from 42% of revenue a year ago, and the lowest level achieved at EFI, into begin operating three segments.

Non-GAAP R&D expenses were $28.6 million, representing 16.4% of revenue, compared to 17.4% a year ago. Non-GAAP sales and marketing expenses were $31.1 million, representing 17.9% of revenue, down from 18.6% a year ago. And non-GAAP G&A expenses were $10.5 million, 6% of revenue compared to 5.9% a year ago. For Q1 2013, non-GAAP operating expenses will be approximately flat sequentially and slightly up year-over-year driven by Connect User Conference that moved to January this year, compared to April in 2012.

Non-GAAP other income and expense was a net gain of $0.9 million, including a favorable currency impact of $0.01 per share. We booked a non-GAAP tax rate of 21.9% in Q4, which includes a $0.03 catchup for the federal R&D tax credit that was renewed by the U.S. Congress earlier this month.

For the full year 2012, non-GAAP tax rate was 23.7%. As we start a new year, we are conservatively forecasting a 24% non-GAAP tax rate for Q1 2013, changes in either the geographic mix or product mix of worldwide sales, we have an impact on the tax rate in future quarters. As the result of our performance, we delivered non-GAAP EPS of $0.42 this quarter compared to $0.36 a year ago, a growth of 17% year-over-year. For Q1 2013, we expect non-GAAP EPS of approximately $0.30 to $0.32 assuming today’s foreign exchange rate.

Turning to the balance sheet, total cash, cash equivalents and short-term investments amounted to $365 million, up $173 million from $192 million in the prior quarter. In addition to the cash generated from operations, there have been many activities impacting our total cash balance this quarter including the sales of our headquarters building, M&A activities and stock buyback. Let me provide more details on the main components.

First, we generated $28 million in cash from operating activities in Q4 2012. In our last earnings call, we talked about selected extended payment terms for known customers when we found ourselves in competitive situation. We have not seen the same level of pressure this quarter and payments from customer for product sales confirm that we had made a sound decision earlier this year.

Accounts receivable was $135 million in Q4 2012, up $12 million sequentially mainly driven by the $11 million sequential increase in deferred revenue associated to 2013 Productivity Software maintenance.

DSO amounted to 71.4 days in Q4, down two days from the prior quarter. DSO would amount to 65.6 days, down eight days sequentially if we were to exclude the AR related to the $11 million sequential increase in deferred revenue. DSO of 65.6 days better represent the true sequential improvement we made in Q4 collections.

Our net inventory balance was $58 million, down $5 million sequentially driven by strong printer sales resulting in improved inventory turns of 5.4, up one turn sequentially. It is important to note that approximately 10% of our inventory is seeing to new products not yet commercialized.

Total working capital days amounted to 65.5 days down nine days sequentially. Working capital days have been impacted this year by our rapid penetration in the Industrial decoration space, which acquired a print acquisition, new product introduction and growing international opportunities. Also the cash cycle has been longer as a result, ultimately cash is coming back into the system, and Q4 is a good proof point of that fact. We will continue to work on improvement in our working capital days in 2013. However, once we have the necessary, we will carefully productize revenue growth, new product introduction, and, related product qualities over short-term cash maximization. As we will continue to focus on helping our customers transformed their industries.

Another impact to our total cash balance was the sales of our headquarters building that closed on November 1 for total gross proceeds of approximately $180 million. At this point, Gilead is the legal owner of the building, and the $180 million gross proceeds has been received increasing our cash balance by approximately 90%. Cash outflows related to tax and other costs associated with our move, will be incurred in 2013, and will be excluded from our non-GAAP P&L. We estimate that the proceeds net of tax and other costs related to move will be approximately $3 per share.

Following the accounting literature, and because we are occupying the building until Q4 2013, we have to record the building for $62 billion as property plant and equipment, and $180 million as deferred proceeds from property transaction. Until we vacate the building we will record depreciation on the property also we no longer the owner of it, record notional interest on the deferred proceeds and record notional rental income from the space already occupied by Gilead.

These three accounting driven items and non-cash events are unrelated to our ongoing operation and as a result are excluded from our non-GAAP P&L. The gain on our building sales, net of tax, will be recognized at the end of this one year free rent transitional period and we will also exclude from our non-GAAP P&L net gain. Please note that we added one slide in our standard earnings deck posted on our EFI website explaining the accounting treatment of our building sales, and the related impact on our balance sheet and P&L.

On the common stock buyback front, we repurchased 17 million worth of shares this quarter as part of the 100 million buyback program bringing the total purchase to $23 million since we announced the program in early September. Our total diluted weighted average share count for Q4 2012 was 47.6 million shares with a buyback effect partially offset by the dilution coming from the share price increase this quarter.

Let me finish with total company performance for fiscal year 2012. We achieved record revenue of $652 million, up 10% year-over-year and marking the third consecutive year of double-digit growth. We posted record Industrial Inkjet, Productivity Software, and recurring annual revenues. We delivered operating profit growth of 14% year-over-year and operating profit margin of 12.1%, an increase of 40 basis points compared to 2011 despite a down cycle in Fiery.

Finally, we delivered non-GAAP EPS of $1.29, up $0.17 year-over-year of 15%. We enter 2013 with solid confidence in our strategy, our execution, and our ability to serve our customers.

This concludes my comments and now we will be happy to answer any questions.

JoAnn Horne

Operator, we’ll take questions now please. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Shannon Cross. Your line is now open.

Shannon Cross – Cross Research

Good afternoon. Vince and Guy, can you talk a bit about the leverage on the business as you are starting to see obviously the revenue growth kick in nicely, benefiting from some of the acquisitions you’ve made. How do you sort of think about operating expense, R&D, obviously the gross margins tends to move with revenue mix, but I am curious as to how we can expect sort of the leverage to continue, or if you think at some point you are going to need to invest more to keep supporting the growth? And then I have a follow-up.

Vincent Pilette

Hey, Shannon. Good afternoon. This is Vincent. So let me take the first crack at this. So we presented the long term business model here with Fiery at about a third of our revenue stream inkjet being over 50% of our revenue, and we’ll continue to diversify with our direct business outgrowing the Fiery segment. As we presented that model, we have an operating expense target in term of percent of revenue of 42%, 44%. At the end of 2012, this year was around 42%, 42.5% of revenue. So I would say we are half way through the leverage we will get on the long-term model in our business model.

Guy Gecht

And in general we will continue to invest, we hired more direct sales people in the last 18 months because we see great opportunity. We put more R&D people in for example Cretaprint was very lean and mean as that type of company. We put a lot more R&D support people on the street. We continue to do that as the opportunity is great there. But you don’t see the bump in spending, because at the same time we’re working hard to get more efficient to make sure that we cut as we add, and therefore a lot of those increases in investment don't come of course when you look at the P&L.

Shannon Cross – Cross Research

Great. And then, my second question is with regard to clearly you have the big cash balance and you’re buying back stock, I'm curious as to what the acquisition pipeline looks like, Cretaprint obviously has been a good hit. I am not sure how many of those sort of fall from the sky, but just what hearing of people's appetite for selling right now, and do you anticipate being able to complete some acquisitions in 2013?

Guy Gecht

Cretaprint didn't fall from the sky. We actually watched it, ceramic tiles for three or four years, we didn’t feel that the inkjet technology is there, and we had our own cleanup to do with the lineup of VUTEk injector. So, we’re watching other segments of industrial print that we can enter in the future. We know who the players are. We are talking to them. We have people that go talk to customer and trade shows, and when we feel it is the right time and we have the right target, we will pull the trigger on that. There’s a lot to do, especially in the area of packaging by the way, it’s still a big area. We are only addressing really the label with that. So the pipeline is actually pretty good.

We are in the space where there are very few buyers. As you know, a lot of the companies in our space need to play a lot more defensive and we play a lot more offensive. So, it’s a good place to be as far as buyer. We don’t need to pay huge premiums, so we can – and we don’t need to fight over the right companies. We do of course, there are other buyers, but it’s not as large as other segments.

And our people are interested in merging into a big company. We do have a great reputation the company that people like to be part of EFI. I mentioned that to our customers and in Connect. If I looked at the last 11 acquisitions we did, 10 of the heads of those acquisition, the people that ran it, either the President or CEO stayed with EFI, and normally you don't see that. And the reason is the way we do acquisitions are the way we enjoy operating EFI. Part of it is we like to have an in and out the first couple of years, is they see that they can continue to work and get benefit from the successful part of the acquisition.

So I actually believe that we will do more acquisitions, we did about four in 2012, maybe its going to be plus, the same number plus, minus couple. We see good pipeline work on this, but of course we stay discipline so it's really tough to predict the exact number.

Shannon Cross – Cross Research

Okay. Great.

Guy Gecht

If I can – sorry, go ahead, Shannon.

Shannon Cross – Cross Research

Oh, no. I just had one follow-up go so go ahead.

Vincent Pilette

Just wanted to see if can add that. Obviously what Guy, we said on prior calls, we don’t issue a press release every time we bought some acquisition, but based on our valuation model, our cultural feel and then obviously our strategy fit, there is lot of companies we look at and we just bought on and continue to look at what the right fit for the business.

Shannon Cross – Cross Research

Okay. That sounds great. And then my last question is on the Fiery. I am just curious about pace of roll out this year some of your partners launches? I mean Xerox talked today about how they are going to be launching a lot starting in February, and you actually mentioned that you were starting to see some of the initial benefit from some of the product launches in the fourth quarter. Does this seem look a more balanced year, because I know a lot of times it tends to be sort of back-end loaded in terms of product launches, so I am curious if this is from a Fiery perspective we should just start of just expect this?

Guy Gecht

So we had one new product, not a huge one in Q4 which helped us a little bit. We were expecting it. It was part of our focus. The segment performed better than the forecast. And Xerox product, they mentioned for production, they do a lot of products in the office obviously. The one product they mentioned for production is actually a product that they show secretly in Connect User Conference and they got a very good feedback. They actually sold quite a few of that. And we are working very closely with them, we're very excited about this product, it is more of the end of this quarter kind of from our perspective, from revenue perspective.

And so we will see a more balance to answer the last part of your question. So 2015, things can always shift. Those things tend to get delayed for couple of months and not get earlier, but we’ve taken this into account, its probably more balanced maybe little bit more in the second half than the first half, but not dramatically in one quarter or another.

Shannon Cross – Cross Research

Great. Thank you very much.

Vincent Pilette

Thanks, Shannon.

Operator

Your next question comes from the line of Keith Bachman. Your line is now open.

Keith Bachman – BMO

Hi, guys. I just want it on record that I don't think your acquisitions fall from the sky.

Guy Gecht

We are opening a new sunroof here.

Keith Bachman – BMO

I did want to ask about the cash flow, Vincent. It was better than it was last quarter. Still down on a year-over-year basis, and I just wanted to see if you could provide some comments on at least how investors should be thinking about your cash flow generation capability, and CY13 versus CY12, up down flat, and any color?

Vincent Pilette

Yeah. So let me start first with what we said in Q3 right. We said that cash from operations would improve sequentially but still be below last year. We worked really hard to try to not do that, but that’s what happened. We generated $28 million versus $29 million last year. We actually, Keith, very pleased by the progress we’ve made; it’s ahead of our expectation.

On the long term business of our business model, we said cash from operations is at around one-time operating profit. We are not changing that target.

Keith Bachman – BMO

Okay.

Vincent Pilette

We’ve been doing that in 2011 and in prior years. 2012 is a year of transformation with Fiery down to about a third of our business and over 40% of our business in 2012 as well as of new sales. You know the penetration in the Industrial decoration space was (inaudible). That has consumed some cash in 2012. Also we still generated over $50 million of cash from operations for the full year. Moving forward, we will improve in 2013 versus 2012, I don’t expect to get fully to the one-time operating profit in 2013, because on the long-term model, that's where we will get to.

Keith Bachman – BMO

Okay. But still no comments about up, down, flat relative to 2012?

Vincent Pilette

I said improving versus 2012, yes.

Keith Bachman – BMO

Okay. Okay. Fair enough. I wanted to go to actually from Shannon's question on Fiery. You are guiding Fiery flat sequentially. I think you said which is certainly better than normal seasonality. I just wanted to see from there if you want to provide any color on the June quarter? Again it is unusual for Fiery to be flat sequentially. Does that mean you might have a little say negative seasonality in Fiery in the June quarter?

Vincent Pilette

So we’d like to say one quarter at a time…

Keith Bachman – BMO

Yeah.

Guy Gecht

Especially the side where – depends on our partner schedules and their focus and execution in the field, but we are one step even though we move on that. We stay, as Vincent told, very close to the inventory in the channel. We're very happy with the level of inventory that we finish the year, very healthy in fact low. So we're hoping that there will be a lot of [sales growth] and we will see, but let's just see one quarter at a time. We are pleased with what we focused in Fiery for Q1 being flat.

Keith Bachman – BMO

Okay. Then my last one is gross margins. Inkjets was down a little bit sequentially color there? No pun intended, but can you talk a little bit about the changes in gross margin? Inkjet I thought might hold at 40, and yet by the same token rather software was up a lot, and so maybe just give us a little color there?

Guy Gecht

Yeah. So let me address, Keith. Inkjet, we said that we manage the business at around 40%, obviously it’s never exactly precise because there is an element of mix mainly printer versus ink.

Keith Bachman – BMO

Right.

Guy Gecht

Q4 is traditionally, Q4 is the highest quarter in term of printer sale.

Keith Bachman – BMO

Yeah.

Guy Gecht

It is exactly the same dynamic for ink and so the 39.7% we’ve reported is actually entirely driven by the mix. We are actually very pleased by as we said over the last three quarters and it was still true today by the cost improvement we made with Cretaprint, and being able to hold the segment that’s around 40% despite the fact that we have a lot more printer sales this year than the year before.

Keith Bachman – BMO

Yeah. Fair enough.

Guy Gecht

In term of software business model, as you know, it scales with revenue. We have lot of companies we’ve acquired in the past that we put immediately in maintenance more than we up sell our current portfolio into and we leverage our current cost structure to drive that strategy. We will continue to see margin expansion as the business continues to grow and grow double digit.

Keith Bachman – BMO

Okay. Thank you. I will cede the floor. Appreciate it.

Guy Gecht

Thanks, Keith.

Operator

Your next question comes from the line of Ananda Baruah. Your line is now open.

Ananda Baruah – Brean Murray Carret & Co.

Hey, guys. Thanks. And congrats on a solid quarter and Happy New Year.

Guy Gecht

Hi, Ananda, Happy New Year.

Ananda Baruah – Brean Murray Carret & Co.

Yes. Happy New Year. You are welcome. We will have to get together and have a fiesta. Hey, just going back to the controllers, flat guidance obviously better than normal seasonality, like you said. How much, can you give us any sense you said you are like really satisfied with where channel inventories are for controllers. But Xerox's product isn't going to hit until the end of the quarter at least for you guys, so any sense of how much of the flatness is because of what might be channel fill, as opposed to shipping to demand? Can you give us any sense there, since it is sort of against normal seasonality and Xerox isn't until end of Q?

Vincent Pilette

Hey, Ananda, this is Vincent. So as we mentioned right, we are very pleased with the where we finished in terms of channel inventory. We've been managing that very vigorously. I've been here two years and we’re going to improve the process every month and every quarter. We are very pleased from where we are from that perspective. When we forecast for the next quarter, we definitely try to keep the channel inventory moving in line with the sales-out, and the forecast that our OEM partners are projecting. So you will not see a forecasted increase in the channel inventory, we’re trying to keep it within that tight operational range.

Ananda Baruah – Brean Murray Carret & Co.

That is very helpful. And then just I guess going back to the point about leverage, you have Connect costs in this quarter so they would be out, sort of June quarter. So should we expect a little bit more of the leverage to work in the June quarter as Connect costs roll-off, or do you envision having some backfill investment going into June?

Vincent Pilette

So we’ll repeat what Guy told Keith, right, one quarter at a time. We have also other trade shows across Europe obviously and when we can, we’re trying to offset efficiencies with investment. We invested in emerging countries to build operations. We definitely want to keep the innovation engine to support the growth. Over time so on the long-term model, we are, as I mentioned to Shannon, about halfway towards our OpEx leverage. And so on the long-term model, you’ll continue to see efficiencies measured at OpEx percent of revenue to trend towards that 40%.

Ananda Baruah – Brean Murray Carret & Co.

Got it. Got it. That is helpful. And then I guess just can you remind us of the cadence of how you expect the inkjet product cycle to taper in through the year? I guess it looks like I guess some semblance, it is hard to tell your normal seasonality for inkjet for Q1 kind of any more, but I guess down sort of 9% at the softest point of your guidance. It feels like normal seasonality, but you also, Guy, talked about the benefit of some, of the new products already kicking in, so could you give us some sense of what the cadence of the new products rolling into the system will be?

Guy Gecht

Yes, I can do that. So traditionally for our industry and inkjet industry in general, Q1 is the low quarter, Q4 is the high quarter, it is true from revenue perspective, it's also true from a cash flow perspective and we don't expect 2013 to be that much different at least at this point in time. We’re guiding inkjet in Q1 at around mid-to-high single-digit growth which we're very pleased by and we will see what the year turns out to be.

Ananda Baruah – Brean Murray Carret & Co.

That is helpful. And how much of the, I guess are you seeing any benefit from, what is the benefit from the Heidelberg relationship right now, or from anything else sort of that is Heidelberg-like that maybe you haven't talked about?

Guy Gecht

The Heidelberg relationship is stable, it's only in the U.S. it's a small portion of what we do, and so it's not expanding at this point. But in general, if you look at the year in 2012, we actually have done a little bit more direct sales than we did via our partner distributors. We hired from the best sales people in the industry, we invested in sales, we feel very strong with the capabilities of our salespeople. So we like to work with partners, but in the meantime we get stronger ongoing direct to some of those industrial segments.

Ananda Baruah – Brean Murray Carret & Co.

Thanks. Just one last one, and then I promise I will stop asking questions. Just on the buy back, it looks like you guys did close to $18 million or $19 million this year, I mean this quarter. I guess in the diluted at least it was offset by options so can you – it looks like you are not guiding the share count down materially in the March quarter, so can you give us some sense of how we should expect the buybacks to kind of taper through, and if the stock continues to work, I guess at what level do the buybacks actually show up in the share counts, and not offset by exercise options?

Vincent Pilette

Let me take that one and then give you a few directions here. So on the numbers, we bought 17 million worth of share this quarter, 6 million in the quarter before that was just the month of September total on the 100 million program $23 million. When it comes to the buyback program, I think we mentioned that in the press release we are buying through a 10b5 plan that we put in place. Obviously the stock is slow, it will be more aggressive than the stock is high. Despite run in our stock, we still feel that from a valuation perspective if you look at the enterprise value versus our earnings potential, it’s still a very cheap stock and so our buyback program will continue to kick in.

In term of share count, obviously the share count is impacted by many different factors including the buyback. But there is the dilution effect and a big portion, this quarter dilution effect is just the fact that the share price increased through the quarter. When it comes to forecasting, we are trying not to forecast the share price and therefore I’m always trying to build my model for the following quarter using a relatively flat share count and then happens what happens.

Ananda Baruah – Brean Murray Carret & Co

Got it. Thanks, Vincent.

Vincent Pilette

Thanks, Ananda.

Operator

Your next question comes from the line of Jim Suva. Your line is now open.

Unidentified Analyst

Congratulations, gentlemen. This is Asiya on behalf of Jim. I just had a very quick question on the controller margins. Can you just explain why they dipped down this quarter despite your sequential growth in the revenue for the quarter?

Guy Gecht

Yes, absolutely. Hi, Asiya. The Fiery business is outsourced manufacturing control, so volume really doesn’t play into the margin, and pricing is very stable because those are long-term contracts by products with our OEM partners. What happened is we have a lot of products within our Fiery portfolio and depending on what sales and what sale within the quarter versus the next month in the following quarter, gross margin can change.

Our guidance to our investors and the Street has been to manage the Fiery business within our business model range of 66% to 68% gross margin. It happened that the mix had rights to fall between 67% to 68% for the last six or seven quarters and this quarter we’re at e 66.7%. The entire mix shift if you want is purely on product mix related, and therefore we’re still very comfortable with our range 66% to 68%. Again when I plan on the long-term business model for that on generally take the midpoint and then the mix happened on the quarterly basis based on what happens that quarter.

Unidentified Analyst

And so for the next quarter guidance, I know you are guiding kind of flattish sequentially. Are there any mix shifts that are going to work in your favor to kind of kick that back up to the 67% range?

Guy Gecht

So we are not guiding the gross margin by each one of the segment. I think we already provided a lot of details in term of the next quarter guidance, and we'll have some room to drive and manage and drive the business during the quarter. What I would keep is overall for Fiery gross margin would be somewhat flattish to Q4 and then you can make your assumption within that parameter.

Unidentified Analyst

Yeah. And then just on the products, on the APPS software business, the Productivity software business, nice sequential uptick in gross margins, and I think you said those margins would continue to expand. So how should we think about the margin profile of that business going forward through the year?

Guy Gecht

Absolutely. So first of all, let me say something. We are very excited with our software business having crossed the $100 million annual revenue range. When I joined the business two years ago, they were at a good path, good strides in place and the team here really executed very well and you’ve seen that in the results. As we executed our strategy, we also see a very strong interest to our business and organic growth.

As we grow the business, obviously as you know in software we can scale and leverage the current infrastructure we have in place. We are not giving a specific guidance, but you could quickly say in the linear improvement you can look at the business we generated around $60 million or little bit below $60 million of revenue two years ago, and generated gross margin of 68% and then went to 80% and around 70%, we are now at 100%, closer to 72% and that gives you an idea of the margin expansion.

Now it will be a little bit less as we continue to progress to scale as we need to build infrastructure to support the potential for much bigger business, but it will continue to scale up.

Unidentified Analyst

Okay. Thank you.

Guy Gecht

Thank you.

Operator

Your next question comes from the line of Morris Ajzenman. Your line is now open.

Unidentified Analyst

Hi guys.

Guy Gecht

Hi, Mark.

Unidentified Analyst

The question was touched on earlier; I was going also ask about Industrial Inkjet and the outlook you gave there, and you already touched on it, but just can you give us a little color? I know Cretaprint is in there, and you’ve stated in the past if you are already kind of merged in with Industrial Inkjet, so it is tough to separate, but year-over-year 2012 revenues were up 19%, fourth quarter up 9%, and you project mid-to-high single-digits. Do you care to venture what organic those numbers are, would have been for the full year, and is the projection for this first quarter, I forget Cretaprint when it was closed, is that going to be an organic number, or is that part Cretaprint in there that was not there last year?

Guy Gecht

Hey Morris, you first addressed the organic Q1 question, so we've guided mid-to-high single-digit growth for Q1. And as we said, Q1 is traditionally the low quarter, so we now have a full business that purely organic. We closed the Cretaprint acquisition on January 10 of last year, so the mid-to-high single-digit growth that you see here in term of guidance is, it’s purely organic. And we’re pretty please to have that, I’ll be able guide that way in Q1, it’s supported by all the new products we’ve introduced in 2012, the QS Pro 2 and 3 meters, the Cretaprint CC3, Compact 3/4. For Cretaprint we received a lot of good interest, we have new printer in our label business, all of that enables us to sustain a pretty healthy growth going into 2013.

Unidentified Analyst

How would you paint the picture for the industry? I know in the past you’ve been garnering share. Looking out to the first quarter, how would you project the industry growth? Would it be flat, or would it be near your trends? How would you surmise the industry that you [cater] to overall, having growth or no growth in the first quarter?

Guy Gecht

Sure, I’ll take it regarding the industry. So we’re focusing a lot from people that using digital printing technology, and they see pretty good growth. We were just in connect finding many hundreds of our customers, I think almost everybody I talked who told me that their business is growing and good in 2012. And I think that testament to the people they’ve work with us, they're focusing on areas we will go for print, and they’re focusing with our software getting more productive, so they handle the cost. So with that they can go and be more aggressive and getting more business.

So overall I would say digital printing is going very well. The number of tiles in the world is probably slightly growing, but the end of the lot more conversion to happen from analog type of imaging to digital, same for the commercial print, same for the packaging.

Overall I would say the printing industry, our vision for the printing industry is, is that it would be a smaller industry in the next three, five years, but a lot more efficient, a lot more in demand, a lot more digital. So in industry of the hundreds of billions of dollars we will become bigger, because we already – as people can grow the business, and get more productive and we extending into the Industrial Inkjet business is an area that is not going to shrink, because there is no electronic way to replace you tiles, or your labels or your off shape signage, et cetera.

So overall I would say it depends on which segment of the industry look at some of them clearly like publishing shrinking, the document printing screen found them clearly and growing, and digital printing in every category is growing.

Unidentified Analyst

Is there anywhere you can categorize the segments you focused on, and come up with some sort of broad number then help us understand what you share is in that particular segments?

Guy Gecht

Yes, we go into this in every Analyst Day and we yet to schedule one, but we’ll get more into this, but in our Industrial Inkjet our share is inkjet in general north of 20% in each one of our major segments. I would say going to 2012 based on what my gut feeling is not anybody come up with numbers. We’re the only real player that gives out those numbers, the competition is either private or big companies that don't give up the numbers. And but we think definitely a lot more wins than this with innovation, execution, stronger sales force. And there are still more shelves to take, I would give just the example you mentioned Cretaprint.

We have done, I think the team have done a great job with the integration. We sold in 19 different countries. There’s been sell before, before we bought up. We grew the number of units dramatically working with them on sales and support on innovation, distribution, on marketing, on trade shows. So while that may not consider organic, the contribution of EFI to the business was dramatic and we’re continuing to following it. So we see a great opportunity in those segments, and when we meet and we'll talk about the longer term goals of each segments and give you lot estimates of market share.

Unidentified Analyst

One last quickie on this in the same sector here. How close are you, I presume you are moving closer but to producing ink for Cretaprint?

Guy Gecht

Sure, we are closer. For competitive reason, I would not give the exact timeframe. We will be excited about the ink consumption is very high in those machines. We put a lot of machines in the field in 2012 that will be a great target to bring our ink. With that, we want to make sure that we will bring the ink since that's already provided in the market, we are doing something that is technically better, than the ink that is available. We don't want to compete on price. We want to compete on quality. So that's why we'll take our time and when we bring it to the market it should be pretty good outcome for everybody.

Unidentified Analyst

And again, 2013-2014 you want to venture on that or not at this point?

Guy Gecht

No, I rather keep it at EFI. When ready, we will tell you.

Unidentified Analyst

Thank you.

Guy Gecht

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Ananda Baruah. Your line is now open.

Ananda Baruah – Brean Murray Carret & Co.

Hey, guys. Just a quick follow-up. Just going back to sort of the leverage conversation, and so your point to Shannon that we are kind of halfway through the leverage. Does that include the leverage that you guys think you ultimately can drive as a software business sort of at the operating margin line, or I guess on the OpEx, because I know we’ve talked in the past, or you’ve talked in the past about, sort of the gross margins expanding, but the operating margins continuing to be pretty under levered, and at some point net operating leverage actually being able to kind of be brought to bear. Does the leverage amount you have today incorporate your thinking for long-term leverage potential from the software business operating leverage, or could that be incremental to what is in the long-term model today?

Vincent Pilette

So the long-term model Ananda of course for an OpEx in the range of 40% to 44% of revenue, obviously we are working towards getting to that 40%. We’re also as part of that long-term model cannot provide that revenue mix, because that’s an important factor. We will continue to diversified with inkjet being over 50%, software getting at around 20% and that 17% today, and then Fiery at around 30% or third of the business. Obviously changing that mix could create a different leverage assumption, but for now our leverage assumption are based on that mix and then we can always make whole different assumptions. But that's what I would give you.

Ananda Baruah – Brean Murray Carret & Co.

Okay. Yeah that’s helpful. Thank you.

Operator

There are no further questions in queue at this time. I’ll turn the call back over to Guy.

Guy Gecht

Thank you everybody for joining us today. We’re delighted with the results we share with you and we’re committed to continue to work hard and execute in the coming quarters. We would like to extend a thank you to our employees, and customers and loyal shareholders, for all the support so far. And we’re looking forward to share some more good news in the future. Thanks a lot.

Vincent Pilette

Thank you.

Operator

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

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