Electronics for Imaging, Inc. Q4 2008 Earnings Call Transcript

Electronics for Imaging, Inc. (EFII)

Q4 2008 Earnings Call

January 29, 2009 5:00 pm ET

Executives

JoAnn Horne – Market Street Partners

Guy Gecht - Chief Executive Officer

John Ritchie - Chief Financial Officer

Analysts

Shannon Cross – Cross Research

Keith Bachman – BMO Capital Markets

Richard Gardner – Citigroup

Presentation

Operator

My name is Tim and I’ll be your conference operator today. At this time I’d like to welcome everyone to the EFI fourth quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there’ll be a question-and-answer session. (Operator Instructions) I’ll now turn the call over to Miss Horne of Investor Relations.

JoAnn Horne

I have with me here today Guy Gecht, EFI’s CEO and John Ritchie, our CFO. 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.

Statements other than statements of historical fact including words such as anticipate, believe, estimate, expect, consider and plan and statements in the future tense are forward-looking statements.

The statements that could be deemed forward-looking statements including statements regarding a non-cash charge related to impairment and our impairment analysis, GAAP net loss estimates, statements about our non-GAAP net income and adjustments about our non-GAAP net income and adjustments.

Past performance is not necessarily indicative of future results. Forward-looking statements are subject to certain risks and uncertainties that could cause our actual future results to differ materially or cause a material adverse impact on our results.

For further information please refer to the risk factors discussed in EFI’s SEC filings including but not limited to annual report on Form 10-K, quarterly reports on Form 10-Q, a Form 8-K filed with the SEC today and the attached press releases.

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 website on the IR section at www.EFI.com giving an overview of much of the information the company will cover today. EFI undertakes no obligation to update any forward-looking statements or information discussed today.

I would now like to turn the call over to our Chief Executive Officer, Guy Gecht.

Guy Gecht

As is evidenced from our Q4 results EFI continues to be impacted by deteriorating business conditions especially in our inkjet business where we sell high priced printing equipment directly our end customers. Our customers’ businesses in this market are driven largely by the overall demand for advertising and marketing [complaints]. In the current economic environment companies around the world are pulling back on this type of spending.

In addition we continue to be impacted by the difficult credit environment and the sharp fluctuation in foreign currencies throughout Europe and emerging markets. Given all that we were pleased that our controller and application businesses performed relatively well and enabled us to achieve the low end of the outlook that we shared with you back in October.

In a minute I will review our controller, inkjet and apps businesses in more detail as well as the steps we’re taking to lower the operating expenses but first let me expand on the announcement we made this afternoon regarding the close of the sale of our excess real estate. We are pleased that we have fulfilled our commitment to monetize this asset.

We believe in any economic environment the $137.5 million price represents an attractive valuation for our shareholders especially in a period when we have seen significant pressure on commercial real estate values. With the uncertainty of the deal closed behind us our Board will shortly determine how we will utilize the proceeds. We remain committed to deploying a portion of the after-tax proceeds toward the share buyback.

Part of our long term commitment would use our share count. Note that in 2008 alone we reduced share count for EPS purposes by over 20%. At the same time we believe the worsening economic environment places an even greater premium on capital preservation. Finally we also feel that the current market conditions may offer us unique opportunities to make some strategic growth acquisitions at very attractive valuations.

Looking at the fourth quarter our Fiery business outperformed our expectations with 5% year-over-year increase driven by the strong orders for the Fiery Canon production engines, Xerox DC700 and the new IKON [IDPPM]. Looking at the Q1 forecast from our OEM partners we do not expect this trend to continue as we believe they are expecting a substantial decline in engine sales during the current quarter.

In addition the steps we have taken over the past year to improve our visibility into our OEM inventory indicated that the Q4 initial ramp up of the Ricoh and Canon engines provided sufficient inventory levels for most or all of the Q1 forecasted run rate. We extended the program we had in place throughout 2008 to improve profitability in our controller business even at the lower revenue levels.

Over the last 12 months we have taken out a significant portion of our Fiery costs while maintaining the necessary R&D programs to meet our OEM demands for new product portfolio every 24 months. We believe the business is properly structured and positioned in the current environment to remain at healthy levels of profitability.

While all three of our businesses were negatively impacted the deteriorating macro economic environment our VUTEk engine business was most affected during the fourth quarter. We believe our inkjet business which has the most upside significant opportunity in a normal economic environment as evidenced by the 25% year-over-year growth we delivered in the same quarter a year ago also has the most downside in a slow economy.

Last quarter obtaining financing was an issue for many of our customers. This has deteriorated even further especially outside of the US. The softening of the retail sector and the related demand for signage, billboard and point of purchase displays has impacted our customers’ business which in turn resulted in a softer ink revenue for us.

After several quarters of healthy growth in ink we are now experiencing a modest decline in ink revenue which also impacts our customers’ needs to buy additional printing equipment. While visibility is very challenging right now our ink [foliums] indicate that the customers are seeing less end market demand which will continue to negatively impact our VUTEk product lineup.

As part of our cost cutting plan we have implemented a significant cost reduction in the VUTEk business. We are however committed to continue to bring innovative products to the market which will help our customers to grow new sources of revenue, increase productivity and identify areas where their costs can be trimmed.

When the capital equipment markets stabilize we want to continue to have the absolute best product and service portfolio in the grand format market. To this end we have continued to fund the three new VUTEk printers that we previously discussed targeting first customer shipment for all three in 2009.

We certainly have some bright spots in our inkjet business. For instance our UVE ink revenue which was a point of focus for us ever since we embarked on the digital inkjet strategy has continued to grow at double digit levels. Our Jetrion 4000 digital laser printer also reported another strong quarter of growth though off a relatively small base.

We remain very bullish on the long term opportunity in using digital on demand inkjet technology for packaging applications and plan to increase our investment in the Jetrion area. A related step in growing our share of the inkjet space is the close of our acquisition of Raster Printers.

Raster offers a system in the 80,000 to 100,000 range below the minimum 200K VUTEk product which allows us to target the new market especially when many new [inaudible] customers have limited budgets or an appetite for spending. We look for Raster to solidify our distribution network in inkjet and expand our sales to customers at the lower end of the market that we could not currently service with our VUTEk lineup.

The new large format product portfolio makes EFI a more attractive partner to many of the industry distributors. Turning to our software business our apps category performed relatively well driven by the streamline of our product offering following the Pace acquisition. In the first full quarter since we acquired Pace and retired the Logic and the PSI MIS system we saw relative strength in our MIS business which grew at roughly 20% year-over-year.

As importantly the restructured organization enabled us to substantially improve profitability in this business. Unfortunately we saw weakness in our non-MIS business and we did not meet our growth objective for the total software business. We expect to see the positive momentum in this business continue into Q1 impacted by the normal seasonality and tempered by the weakening spending environment in our industry.

While we obviously cannot control the economic environment and its negative influence on demand we are committed to delivering on our promise to size our expenses to match the business. Our comprehensive plan to cut spending across the board includes the following actions. One, the headcount reduction we instituted earlier this year in addition to the headcount reduction we completed in 2008.

Two, the shutdown of certain offices around the world. Three, mandatory four day shutdown of our worldwide offices with the most significant shutdown in our inkjet manufacturing facility. Four, and lastly, actions started in compensation including a company wide salary freeze in 2009 as well as our senior management team foregoing their bonuses for 2008. With these steps we expect the expense to decline roughly 8% year-over-year in Q1.

I noted at the beginning of my remarks that the environment has continued to deteriorate which has left us with less visibility than ever before. As such we’re not providing a full financial outlook for the first quarter today beyond the expenses that I just shared and some of the color John will provide around expectations for our three business lines.

Before I turn the call over to John to review those details I wanted to share with you our priorities for 2009 as we operate in these unprecedented economic times. One, first is to maximize cash generation which is supported by the cost cutting efforts I just outlined as well as our emphasis on decreasing inventory levels.

Two, gaining share across our three business lines. While the current environment may limit the size of our market we intend to increase our market share in each of our businesses by introducing industry leading products and utilizing our financial strength. Third, position EFI for a strong rebound when the economy recovers. Carefully investing in key strategic opportunities while maintaining our focus on profitability will allow us to emerge stronger from this period.

Even with the setback by the economy we firmly believe that our strategy is in tact and remain very optimist about the opportunity for our digital solutions. At the same time we are prepared to take the necessary steps to not only survive but to succeed in the current environment. Now let me turn the call over to John.

John Ritchie

I’ll now go over the detailed financial results for the fourth quarter of '08. Revenues were $135.3 million down 6% sequentially and down 11% on a year-over-year basis. Non-GAAP net income for Q4 was $0.13 per share down 35% from $0.20 in Q3 of '08 and down from $0.23 in Q4 of '07. A reconciliation between our GAAP and non-GAAP results is posted on our Investor Relations portion of our website.

The GAAP results will include the estimated range of our asset impairment charge. Before I go through the quarter in detail I want to highlight some key data points. Our non-OEM sales were 52% of total revenues. Our recurring revenues were 18% of total slightly below the 19% posted last quarter. As a reminder our recurring revenues primarily consist of inks related to our inkjet business and software maintenance contracts.

Although we saw year-over-year increase in our UV ink revenues we experienced our first sequential decline in UV ink revenues. We believe that this is an indicator that our customers’ utilization rates of their VUTEk equipment has declined. We are attributing much of this to our customers who have exposure to the retail and automotive sectors. For example fewer point of purchase displays are being printed due to the increase in retail bankruptcies.

The apps business posted strong revenue growth driven by the successful integration of Pace combined with our streamlined product portfolio. Our controller business recorded strong quarter-over-quarter revenue growth both sequentially and on a year-over-year basis. The Jetrion 4000 label printer saw a good quarter as well.

Turning to revenue by geography revenue in the Americas were essentially flat on a sequential basis with Fiery and software revenue offsetting large declines in the inkjet business. On a year-over-year basis Americas revenues was also approximately flat. EMEA revenues saw a broad based decline that spread across most of our product lines. EMEA revenues declined 16% sequentially and 23% year-over-year. Clearly this geography is being impacted by volatile FX rates.

Japanese revenues remained flat sequentially and declined 8% on a year-over-year basis. Finally our rest of world sales were down 37% sequentially and 56% on a year-over-year basis. Although a relatively small part of our overall business we saw an acceleration of the decline of our rest of world business as the economic issues spread across this region.

Now moving on to our product line results, Fiery revenues were $70.2 million up 3.2% from Q3 of '08 and up 4.8% on a year-over-year basis. Fiery revenues were 52% of total revenues for the quarter up from 47% in the prior quarter. The increase was attributable primarily to a favorable product mix towards high end solutions driven by strong sales of Fiery solutions for the Ricoh 9000, the Xerox 700 and the Canon 1670 page per minute devices.

With several OEM partners holding new product introduction levels of inventory we believe the Fiery business will see a significantly larger than normal seasonal decline in the first quarter. for the fourth quarter our inkjet products contributed 35% of revenue or $47.8 million compared to 42% of revenue or $60.8 million in the third quarter of '08 a sequential decrease of 21.4%. Year-over-year revenues were down 31% in total primarily driven by lower printer volumes.

As we noted we spoke last quarter Q4 of '07 was our highest revenue quarter ever for the inkjet business making for a tough compare. In addition slowing ink sales as Guy discussed also negatively impacted inkjet revenues. We expect to see this typical seasonal decline in Q1 compounded by a tough economic environment especially as the credit weakness intensifies outside the US.

During the fourth quarter the apps category contributed 13% of our total revenues or $17.3 million up 9.5% year-over-year and 9.3% sequentially driven largely by the strong performance of our MIS product offerings. The strong results of our MIS product offerings which grew 17.5% sequentially and 20% on a year-over-year basis did not offset the weakness in our proofing and web to print software products resulting in total apps revenue below our expectations.

Even in these challenging times the MIS related Pace acquisition is exceeding our expectations and delivered more than the promised incremental $0.01 of accretion. In addition it’s on track to contribute at least a $0.03 to $0.05 to FY '09 as we discussed at the time of the acquisition. Overall our key takeaways regarding revenue was that outside the US revenue decline seemed to be accelerating.

Moving on to gross margin non-GAAP gross margin for the fourth quarter was 56.6% down 50 basis points from 57.1% in the third quarter of '08 and up from 55.9% in Q4 of '07. The decline in gross margins was driven by lower margins in our inkjet business as a result of lower than expected volumes and lower ASPs in our more mature solvent product line partially offset by improved Fiery and apps margins.

In Q1 we expect to see a decline in gross margins driven by lower revenue levels. Turning to expenses R&D expenses were $31.8 million up $1 million or 3.2% from the third quarter. In the fourth quarter R&D expenses represented 23.5% of revenue up from 21.3% in Q3 of '08. The increase in R&D was driven by higher nonrecurring engineering expenses incurred in preparation of new product launches planned for the second half of 2009.

R&D spending was modestly impacted by the acquisition of Raster Printers. Sales and marketing costs were $27.5 million down $1.3 million when compared to $28.8 million in the third quarter of '08. The decrease in sales and marketing spend was drive by headcount attrition and lower variable compensation costs. In the fourth quarter sales and marketing expenses represented 20.4% of revenue up from 19.9% in the prior quarter.

G&A costs were $8.3 million down $1.5 million from the third quarter primarily due to a focus on cost cutting efforts in non-revenue producing areas. For the fourth quarter G&A expenses represented 6.1% of revenue compared to 6.8% in the third quarter of '08. This is the lowest G&A expend in absolute dollar terms since the second quarter of 2005.

Our non-GAAP expenses excluding the amortization of acquisition related costs, stock based compensation charges, severance, restructuring and asset impairment charges were down $1.8 million or 2.7% to $67.6 million in the fourth quarter compared to $69.5 million in the third quarter of '08. As we committed to on the Q3 call we took aggressive steps to scale back expenses when we saw revenue coming into low end of our guidance.

Q4 actions and additional actions taken in Q1 include a closure or reduction in size of five facilities on a worldwide basis, additional headcount reductions related to the Pace acquisition, elimination of any payout of the senior management bonus for 2008, a mandatory company wide shutdown in Q4, elimination of approximately 100 heads and unlike past eliminations all businesses and geographies were impacted by this headcount reduction.

We are taking a two pronged approach to our cost cutting efforts. We have made certain cuts that are focused on lowering our overall cost structure on a more permanent basis such as facility closures and headcount reductions. In addition we have instituted a number of temporary measures to respond more immediately to the economic environment such as travel restrictions, salary and bonus freezes, hiring freezes and mandatory company wide closures.

We expect significantly lower spending levels in Q1 of '09. On a year-over-year basis we expect spending to be down 8% despite the impact of two acquisitions in the back half of 2008. On a sequential basis we expect a reduction of approximately 7%. Note that the first quarter will include a non-GAAP charge related to the headcount reduction actions we talked about.

Going forward we’ll continue to size our expense levels to reflect the economic environment and the level of our business. As Guy noted our goal is to remain profitable in the first quarter given the challenging economic environment. Non-GAAP margins for the quarter were 6.6% down from 9.1% in the prior quarter and 8.6% recorded in the year ago period. We expect a significant decline in operating margins in the first quarter of 2009.

Other income showed a loss of $300,000 which was $500,000 lower than the prior quarter’s gain of $200,000. This was primarily driven by unusually volatile foreign exchange markets that we experienced throughout the quarter. Rounding out the P&L our tax rate for the quarter on a pro forma basis was 22%. Moving on to headcount at the end of Q4 full time headcount was 2,021 or 16 heads higher than Q3 '08.

The increased headcount was primarily driven by the Q4 acquisition of Raster Printers and key focused efficients to our industrial inkjet business partially offset by reductions in our apps group. As I previously mentioned we announced a company wide headcount reduction that will reduce our total worldwide headcount by about 5% or 100 heads.

Turning to the balance sheet we ended the quarter with $189.3 million in cash, cash equivalents and short term investments a decrease of approximately $12 million compared to the $201.6 million the September 30^th quarter. We generated about $1 million in cash prior to the acquisition of Raster which was about $3.3 million prior to the stock buy back program in the quarter which was $9.6 million and about $300,000 worth of real estate transaction costs.

We currently have approximately $33 million remaining in our stock buy back authorization. Our net inventory balances were $48.8 million at Q4 an increase of $800,000 from Q3 levels. Q4 inventory turns were 4.9 compared to 5.3 in the previous quarter. The increase in inventory related to lower than expected revenues from VUTEk and the acquisition of Raster printers.

Note that we saw results from some of the plans we instituted as promised last quarter to reduce inventory levels including trimming production and procurement. However these improvements were more than offset by the weaker revenues. Looking forward we are executing on additional plans to reduce inventory levels in the first quarter. Accounts receivable balances increased to $97.3 million compared to $96.6 million at the end of Q3.

The increase in AR was primarily driven by the acquisition of Raster Printers. Overall DSOs increased by five days to 66 compared to 61 days in the prior quarter. The primary driver in the increase in DSOs was shipment linearity through the quarter and the extension of longer credit terms and the absorption of the Raster Printers AR portfolio. We provided a good deal of color around our expectations for Q1 as Guy discussed.

We are not providing specific revenue and EP estimates for the quarter due to the unprecedented lack of visibility. We intend to resume providing guidance when the business environment returns to more normal levels. Now moving on to the asset impairment charge we mentioned in our press release today. We concluded that there were sufficient indicators to require EFI to perform an interim impairment analysis including goodwill and other long lived assets.

Factors we considered in this analysis included the current economic environment and the sustained decline in our market gap. We have not yet completed the analysis however the non-cash charge is currently estimated in a range of $100 million to $130 million. The company expects to finalize the impairment analysis prior to the filing of our 2008 10-K and these estimates are subject to change and revision.

Last quarter I discussed our intention to use our balance sheet during this turbulent period to help drive our inkjet business. To this end we announced a deal with GE Capital to provide non-recourse financing for our distribution partners. We will seek other opportunities to increase our customers’ ability to purchase our equipment which in turn drives our recurring ink revenues.

We continue to believe our financial strength positions us to gain market share and solidify our leadership in inkjet markets versus our weaker less well capitalized competitors. Lastly as Guy mentioned based on current economic environment we will not be providing any revenue or EPS guidance. Now with that I’ll turn it over for questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Shannon Cross – Cross Research.

Shannon Cross – Cross Research

Can you talk a little bit about what you’ve done in terms of the, you talked about cutting expense across the board, I’m trying to figure out the amount of variable versus fixed costs and opportunity to be more aggressive if things warrant?

John Ritchie

You look at the cost cuts that we’ve been put in place, the 100 person headcount reduction is clearly a permanent attempt to change the cost structure, the facilities closures, things like salary freezes, hiring freezes, mandatory company shutdowns. Those are the levers we can pull on the variable side to scale the business down if the economic environment changes.

Shannon Cross – Cross Research

I apologize because I just was able to jump on the call, any more details you can give us in term of cash usage and thoughts you have on the current environment?

Guy Gecht

What I mentioned specifically regarding the process of the real estate transaction that we were very happy to complete in this environment, that now that the uncertainty is behind us shortly the Board is going to meet once again to conclude the discussions around that. As we said before we look to use a portion of that to buy back shares.

Of course in this environment the quantity and the speed with which we buy back shares is something that they will have to discuss. Beyond that we see a couple of a few strategic acquisitions opportunity at potentially attractive valuations. Of course we’re very far from concluding on this but we’re seeing more and more opportunities and we’re looking into this. All of that will be taken into account.

Shannon Cross – Cross Research

My final question is if you can talk a little bit about what you’ve seen with Canon, Ricoh, IKON, how that’s going, the opportunity to pick up shares, Xerox is better. Just the competitive landscape as it impacts you.

Guy Gecht

On the Canon, IKON, I’ll start with that, actually we’re pleased to see that we got very little impact especially on the production side. I think Canon did a good job as far as ramping up their distribution and I think on the IKON Ricoh we are excited about the opportunity for IKON to sell the high end Ricoh. It seems like so far on the production side we didn’t lose much. On the office side it’s tough to say what is economic and what is the IKON Ricoh transaction.

It’s tough for us to say. On the Xerox front I think we had some time to look at what they said, we’re seeing the same thing. Very pleased with the 700 sales. Clearly that’s a lower rate speed than the other production engines. That needs to sell a lot more to compensate for a potential drop in the higher end more expensive production engines.

From the Fiery perspective Ricoh has a good responded market. A lot of people saw [inaudible], a lot of people interested in the new 90 PPM engine. They order a lot from us, they sold, their run rate is good, we think that looking at their inventory levels they probably are set for a big portion of the quarter and that’s one of the reasons why we think the drop from Q4 level of the Fiery would be more than the normal seasonality in this environment.

Overall we’re very pleased with that. Having said all of that, you saw the results, you saw the comments. Everybody’s saying Q1 is tough, the run rate is tough, it’s difficult for people when there’s uncertainty to pull the trigger on buying printing equipment.

Operator

Your next question comes from Keith Bachman – BMO Capital Markets.

Keith Bachman – BMO Capital Markets

I have a couple to follow Shannon, Guy or John, you mentioned that Canon and Ricoh were probably set for inventory. Is there any way you can indicate how much they represented of your total Fiery this quarter? We’re just trying to understand how that may impact seasonality if those guys just step away entirely. Can you give us any dimensions on how much they contribute this quarter?

Guy Gecht

Let me just first clarify, I was talking about two specific engines, the Ricoh 90 PPM, there’s other Ricoh engines we are shipping orders for but that’s obviously the star right now in the Ricoh portfolio. On Canon it’s the C1 class, it’s a follow up engine to the C1 that they launched in Q4 and certainly got good response from the market but they bought quite a bit from us in anticipation to a good run rate.

We can’t quantify that but clearly that’s a significant part of our revenue and I’m expecting it to sell relatively speaking but it’s not as good as in a normal environment those types of things will be sold.

Keith Bachman – BMO Capital Markets

Is it your sense, Guy, that the inventory levels at your other major OEMs are normal, high, low?

Guy Gecht

I think besides those two I think we’re more or less fine. In some areas I wish it was a little lower but I think overall it’s built to what we said beyond those two. Remember that inventory level is not just the absolute number of Fierys they have, it’s how is that compared to the run rate. So what could look in November as a light inventory could now look at maybe a little bit above average because the sell through is not as good as anybody expected.

Keith Bachman – BMO Capital Markets

On the ink side, you mentioned that you’re seeing lower usage levels by your customers. What are you seeing in terms of pricing patterns related to ink? Are customers coming back and not only using less but suggesting or demanding lower price points for the same types of inks? Are you seeing any pricing pressure there?

John Ritchie

No, we’re not. Our pricing is holding up well on both of the ink technologies UV and [inaudible].

Keith Bachman – BMO Capital Markets

John, for you the asset impairment charge that you’re taking, what will that do to fix the expense structure particularly difference GAAP, non-GAAP? What does that do for you, you think over the course of CY '08 after you take that charge?

John Ritchie

Not an easy question to answer because the first assets that you apply the charge against is goodwill which isn’t amortized. To the extent that the charge exceeds the goodwill value it could drop the amortization of the remaining intangibles. But we’re not that far in the analysis.

Guy Gecht

I want to just add a little bit on the demand for ink. Outside of normal price pressure I would say the currency is really what’s fluctuated the prices outside of the US. It impacted us negatively. We are very pleased given the environment and drop with the Gulf in UV ink volume. In Q4 it was up 25% from Q4 last year.

That shows what we’ve said all along that UV is giving customers great opportunities to do high value applications and in fact we’re launching now next generation ink for the QS series. We think that’s actually a differentiator that will help customers to get some business in this environment.

In general we believe that more capabilities for our customers will help us because if one customer gets more capabilities will put pressure on their competitors to be at the same level and also the same capability to the same customer, if you understand what I’m saying.

Keith Bachman – BMO Capital Markets

Last one for me and then I’ll cede the floor, if you just talk about product roles this year. In particular labeling has been something we’ve talked a lot about over the last couple years. Is there any traction there vis-à-vis the economic downturn or any other product transitions or product opportunities you’re going to have this year? And then that’ll conclude it for me.

Guy Gecht

As I mentioned I think that actually in every environment new products are very important, in a good environment clearly giving us an upside. We actually think that that could be something that can make the difference on the top line.

New capabilities, new costs, new efficiency, new productivity can help differentiate customers and where few people compete on the same print job for the same customers somebody that can offer something faster, cheaper and better quality certainly has an advantage. As I said we have three new platforms we’re working on in the VUTEk lineup. We mentioned that before, one of them is the DS that we’ve already shown in public.

The other two we did not discuss in public and we’re not going to do it today. All three will ship in '09 and we think that there are very significant. We have more product introduction in the Jetrion. In the Raster we just bought it’s a small startup.

We have essentially one product today but we’ll have multiple products in '09 and of course finally we’ll have more Fiery functionality and our OEMs will launch new engines knowing the same thing, that the new products will help customers to make a buying decision. It’s tough for customers to buy the exact same product they already have because they don’t have extra demand to utilize multiple machines.

Operator

Your next question comes from Richard Gardner – Citigroup.

Richard Gardner – Citigroup

I just had a couple of quick ones, first of all was hoping that John or Guy you could walk us through the timing of the various different cost reduction initiatives that you discussed on the call and when we should see those really hit the P&L.

Secondly, was hoping that John you could give us some working capital targets given that you talked about a focus on working capital and cash preservation this year and given the deterioration that we saw in some of the metrics in the current quarter, realizing that it was partly acquisition related.

John Ritchie

Going back to the first question on the cost cuts, those cuts have taken place, you’ll see the benefit in Q1, you’ll see the 7% to 8% sequential and year-over-year decline in the op ex. In terms of working capital targets, our focus is cash generation. I’m not sure if that question derivative would be what do we do with the excess capital.

Our focus this year is just to reduce our inventory balances, make sure we stay on top of our AR balances in the declining credit markets and maintain our track record of cash generation.

Richard Gardner – Citigroup

Any targets for the inventory balances, John?

John Ritchie

Our targets are based around turns. Right now our turns are about five. We have internal targets we haven’t disclosed but or goal is to take those turns up by at least one.

Richard Gardner – Citigroup

Finally you suggested that part of the reason that DSO was up was because of the extension of additional credit some of your customers. Can you talk about your experience with AR aging and can you talk about what you’re doing with reserve and anything that can help us get comfortable that the quality of the AR remains high?

John Ritchie

In terms of the specific reserves, we’re applying a slightly more aggressive approach to the reserves than we have historically. We also are looking at the aging buckets and when we look at our aging buckets, it’s actually slightly improved quarter-over-quarter. Our aging buckets are not on absolute days out but are based on days beyond terms. So we’ve seen a slight improvement there.

We’ve dramatically increased our AR collections activity. We now have people working basically around the globe so our collection activity is going on 24 hours a day, we just bounce from region to region in terms of the efforts to collect the cash.

Richard Gardner – Citigroup

I guess one housekeeping question, any change in the mix of stand alone versus embedded within the controller this business this quarter to speak of?

John Ritchie

There was a slight skewing towards the stand alone product offering as a percentage of the overall controller revenues end units.

Richard Gardner – Citigroup

What drove that?

John Ritchie

I think it was the products that Guy mentioned, the Ricoh 9000, the Xerox 700 and the Canon 1670 page print devices.

Operator

At this time there are no further questions. I will now turn the call back to Mr. Guy Gecht.

Guy Gecht

I would like to thank our shareholders, customers and employees for their support especially during this difficult economic period. We look forward to speaking with you next quarter. Thanks.

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