Electronics For Imaging's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.17.13 | About: Electronics for (EFII)

Electronics For Imaging, Inc. (NASDAQ:EFII)

Q3 2013 Earnings Call

October 17, 2013 5:00 PM ET

Executives

JoAnn Horne – IR

Guy Gecht – CEO

Marc Olin – Interim CFO and SVP & General Manager, EFI Productivity Software

Analysts

Shannon Cross – Cross Research

Ananda Baruah – Brean Capital

Keith Bachman – Bank of Montreal

Matthew Kempler – Sidoti

Morris Ajzenman – Griffin Securities

Jim Suva – Citi

Operator

Good afternoon. My name is Jeremy and I would be your conference operator today. At this time, I would like to welcome everyone to the Electronics for Imaging Third Quarter 2013 Earnings Conference Call. (Operator Instructions) Thank you.

I’d now like to turn the call over to Ms. JoAnn Horne, Investor Relations for EFI. You may begin your conference.

JoAnn Horne

Thank you, operator, and thank you everyone for joining us today. I have here with me Guy Gecht, Chief Executive Officer and President; and Marc Olin, Interim Chief Financial Officer.

Before we get started, let me review the Safe Harbor statement. During the 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 strategy, growth expectations, product innovations, new market opportunities, acquisition strategy, relocation to our new headquarters and related costs, as well as estimates and/or projections of revenue, operating profit growth, EPS, gross margins, market share, operating expenses, tax rate, 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 and the press release. We do not undertake to update in light of any new information or future events.

In addition, reference will be made to non-GAAP financial measures. Information regarding the reconciliation of 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 correspond to today’s comments.

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

Guy Gecht

Thank you, JoAnn, and welcome, everyone to our call. We are delighted to report that the EFI team again delivered outstanding results. Our focused strategies, solid execution and continued operating efficiency combined with our ability to offer unique technology which provides customers with new profitable avenues of growth led to our 15 consecutive quarter of revenue and EPS growth. We posted double-digit growth in all three segments leading to a 16% revenue growth or $179 million record results for the September quarter and we delivered $0.39 EPS, up 39% year-over-year.

Our passion for making our customers more efficient and more competitive continues to fuel our drive for innovation. At the recent Print 2013, North America’s largest print trade show, EFI earned 8 MUST SEE ‘EMS awards, winning the most honors presented for the third consecutive year and not to mention, the most ever given to a single company. This annual graphic arts technology competition serves as an industry wide roadmap for the most compelling new print production technologies. So we are very excited to again be recognized as the leader by an independent panel of judges. At Print 13, we featured advanced Inkjet technologies, our industry leading productivity software portfolio and a new software release for our Fiery Digital front end offerings.

We also participated in numerous partner [booths] [ph], reinforcing the value of EFI’s market leading product portfolio and showing visitors an additional view of how these products are integrated into real world multivendor production platforms.

Before turning to our business segments, a few words on the geographic regions. We saw significant rebound in Europe which grew 27% in Q3 with all three business segments growing 20% or more. Once again, we saw a strong performance in the Americas. However, our Asia growth was slower than the previous quarter primarily related to the timing of product introductions and deal closure. Overall we saw strength across the globe with the only exception being Japan.

And now turning to results for our business segments. We delivered 10% level of growth in Industrial Inkjet driven by strong demand for our VUTEk, Jetrion and Cretaprint industrial printers and our UV ink. Once again, we saw strong growth in our UV ink volume with an increase of 21% proving that our customers are experiencing solid demand for output from our products and validating a strategy to focus on growth markets.

Next week, we will participate in SGIA, the largest signage and display trade show in the U.S. and showcase our product portfolio including the first wall-to-wall VUTEk printer which is based on our LED queuing platform. We are again very pleased with the outperformance of the Fiery segment in Q3 which grew 25%. We are seeing with more and more customers that our strategy of software differentiation as demonstrated by the integration of Fiery to our productivity software is giving us a unique advantage in the marketplace.

We continue to work closely with our partners in the field and in the lab getting ready for a relatively busy product introduction roadmap ahead.

Productivity software delivered solid growth of 18% year-over-year. We continue to see good pipeline conversion with a relatively high mix of subscription based transactions.

As businesses in our industry around the globe are continuing to make it a priority to streamline their print operations and drive efficiencies we continue to expand our position as the leading provider of business process automation software and the only company that can integrate their entire operation. And we use this unique strength as a great differentiator for both our Fiery and industrial Inkjet.

As we head into Q4, our sales pipeline is strong as we continue to capitalize on the significant opportunities surrounding the analog to digital conversion in imaging. With that in mind, we expect revenue growth in each of our business segments of 7% to 10% leading to revenue in the range of $186 million to $191 million, with another solid quarter of growth and profitability leading to an EPS increase of up to 7% or $0.42 to $0.45 per share.

Before I turn the call over to Marc, I do want to mention two significant milestones EFI will celebrate on Monday. 10 years ago on October 21st, we closed the acquisition of Printcafe, a print MIS company. It was the very beginning of our transformation which led us to enter the industrial Inkjet space a few years later. And on October 21, 10 years to the date of the beginning of the new EFI, we will start to operate from our new headquarters in Fremont.

And with that, let me congratulate Marc on his ten year anniversary with EFI and welcome him to his first earnings call.

Marc Olin

Thanks Guy.

I want to begin by also thanking you and the Board of Directors for entrusting me with the Interim CFO position. I could not have asked for a better quarter to transition in the Interim CFO role with the great results we had. As Guy mentioned, we reported record September quarter revenue of $179 million, up 16% year-over-year. We expanded our operating profit margin to 12.7% of revenue compared to 10.8% a year ago and we delivered non-GAAP earnings per share of $0.39, up 39% year-over-year.

We improved our working capital metrics and produced $16 million of cash from operations compared to $7 million a year ago.

Now let me expand it to more details starting with revenue by business segment and region. Our results this quarter were driven by the consistent performance across all product lines and across all geographic regions. All of our business segments delivered double-digit growth this quarter and all regions excluding Japan delivered positive growth as well with EMEA and Americas growing at a double-digit rate. I think this more than anything else illustrate how the market and our customers worldwide are seeing great value in the products and services we offer and how EFI’s innovation is allowing us to consistently outperform our competition.

The Industrial Inkjet segment generated revenue of $87.1 million, up 10% year-over-year and contributing 49% of total EFI revenue. Demand for industrial digital printers was robust across our portfolio and UV ink volume grew 21% year-over-year.

Fiery revenue again exceeded our expectations with $63.2 million in revenue, up 25% year-over-year and contributing 35% of total revenue. Fiery growth, once again, was driven by new products introduced in recent quarters by our partners while maintaining channel inventory within our normal operating range. We’ve been very pleased with the recovery of Fiery this year and have seen some great wins in both new engine attachment and with some of our large productivity software clients.

As a great example of this, recently a top 10 printer in the U.S. who had never purchased a Fiery previously but is relying on our business process automation software to run their operations is now converting to Fiery as their platform of choice, to leverage the Fiery’s advanced capabilities as well as its unique integration to our software applications.

The Productivity Software segment delivered revenue of $28.5 million, up 18% year-over-year, and contributing 16% of total revenue. Total recurring revenue was a record $48.1 million, up 12% year-over-year, representing 27% of EFI total revenue.

By geography, we saw a double-digit growth in the Americas and EMEA and positive growth in APAC excluding Japan. Revenue in the Americas amounted to $102 million, up 18% year-over-year, a continuation of the strong demand we saw in Q2 especially for Fiery.

EMEA saw a strong recovery with total revenue of $52 million up 27% year-over-year. The Productivity Software team in EMEA posted a record quarter that quite surpass the previous record in that region and what is normally a seasonally weak period. This demonstrates that our strategy of investing in our European business to build market share, support the launch of our core products into the European market has been delivering solid results. This has allowed us to become the largest provider of business process automation solutions for the imaging industry in Europe as well as the Americas even as most of the market is still untapped.

Moving on now to Asia, while we showed a 9% decline in total revenue year-over-year with Japan excluded, Asia grew 5% year-over-year. Looking forward to Q4 2013, we expect revenue growth of approximately 7% to 10% year-over-year or a $186 million to a $191 million. This is based upon 7% to 10% revenue growth for each of our business segments in Q4.

Moving on to gross margin, non-GAAP gross margin was 54.6% in Q3, up 50 basis points year-over-year. Non-GAAP Industrial Inkjet gross margin was 39.8% in Q3 2013. Non-GAAP Fiery gross margin was 67.5%, up 10 basis points year-over-year and sequentially. In the Productivity Software segment, non-GAAP gross margin amounted to 71.5%, flat year-over-year and up 50 basis points quarter-over-quarter. Going into Q4, we expect overall gross margin to be flat to last year and down slightly on a sequential basis driven by a higher Industrial Inkjet product mix.

Turning to operating expenses. In line with our guidance of a slight sequential decline in expenses, Q3 non-GAAP operating expenses amounted to $74.9 million, up 12% year-over-year driven by a higher variable pay across various functions at EFI including sales compensation related to our strong performance as well as increased headcount relating to our acquisitions and growth of the business.

In Q3, we continued to gain OpEx efficiencies with non-GAAP OpEx representing 41.9% of revenue, a decrease from 43.3% of revenue a year ago and slightly better than our expectations. Non-GAAP R&D expenses were $30 million, representing 16.8% of revenue compared to 18% a year ago. Non-GAAP sales and marketing expenses were $33.6 million, representing 18.8% of revenue, down from 19.2% a year ago. And non-GAAP G&A expenses were $11.3 million, representing 6.3% of revenue up from 6.1% last year.

For Q4, non-GAAP operating expenses will be slightly up sequentially with higher variable compensation expenses related to our strong annual performance and the increased cost for moving into our new headquarters campus. We believe leverage remains are a model as we drive towards the bottom of our long terms target range of OpEx at 40% to 44% of revenue on an annual basis.

As a result of solid revenue growth and operating leverage, we delivered Q3 2013, non-GAAP operating profit of $22.8 million, up 36% year-over-year and generating an operating profit margin of 12.7%, up 190 basis points year-over-year. Non-GAAP other income and expense was a net gain of $1.4 million slightly down on a year-over-year basis driven by a favorable nonoperational currency impact.

On the tax front, we booked a non-GAAP tax rate of 22.5%, which was flat sequentially and lower than last year’s tax rate of 27.1% reflecting the renewal of the R&D tax credit by the U.S. congress. Changes in either the geographic mix or product mix of worldwide sales may have an impact on the tax rate in future quarters.

Our strong operational performance enabled us to deliver an operating income growth of 36% which yield a non-GAAP EPS of $0.39 in this quarter compared to $0.28 a year ago up 39% year-over-year. For Q4 2013, we expect operating profit growth of 10% to 16% at a non-GAAP EPS of approximately $0.42 to $0.45 a range of up to 7% year-over-year EPS growth, assuming today’s foreign exchange rates. Keep in mind that in Q4 of last year, we had a $0.01 per share benefit from FX as well as the $0.03 per share benefit from a lower tax rate due to the catch up from the delayed renewal of the R&D tax credit.

Turning to the balance sheet. Total cash, cash equivalents and short-term investments amounted to $363 million compared to $354 million at the end of Q2. We generated $16 million of cash from operating activities compared to $7 million a year ago.

Continued realignment of our working capital framework compared to last year helped us generate another strong quarter of cash from operations and a seasonally tough cash quarter. Accounts receivable was $126 million in Q3, up 3% year-over-year on a 16% revenue increase. DSO amounted to 64.9 days in Q3, down 8.5 days from the prior year. Our net inventory balance was $73.7 million, up 16% year-over-year with inventory turns of 4.4 flat to last year as we build product in advance of our seasonally high fourth quarter.

Total working capital amounted to 56.4 days, down 18.3 days year-over-year. As a result, we generated $16 million cash from operations. Excluding tax expenses related to our headquarter building, we generated $63 million cash from operations year-to-date of approximately $37 million from the same period last year. For the full year, we expect to deliver near our model of cash from operations equaling approximately one time operating profit.

In Q3, we paid $3 million towards the build out of her new headquarters campus. As we mentioned last quarter, we expect to spend an additional $19 million in construction costs as we are planning to move in this weekend and starting last month we began to incur operating expenses relating to the new headquarters . On the common stock buyback, we repurchased 5 million worth of shares this quarter as part of the $100 million buyback program bringing the total purchase to $38 million since we announced the program.

Our total diluted weighted average share count for Q3 2013 was 48.6 million shares with a small sequential increase primarily due to the share price appreciation this year.

To summarize, a unique portfolio of innovative products and consistent execution have led to a record year-to-date performance in 2013 with revenue growth of 11%, operating profit growth of 26%, and cash from operations growth of 145%. We are delighted to serve our customers while delivering value to our shareholders and are on track for a record revenue year.

This concludes my comments regarding the quarter. I want to thank Brandy Green, our Chief Accounting Officer and the rest of our outstanding finance team for helping to make my first quarter in the CFO role as seamless as possible and for their great work on the quarter close.

Now, we will be happy to answer your questions.

JoAnn Horne

Operator, we’ll take questions now, please.

Question-And-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Shannon Cross of Cross Research. Your line is open.

Shannon Cross – Cross Research

Can you talk a bit more about Europe and the strength you saw there and perhaps even the strength in Americas, I know the comps are relatively easy, but is it something that you think is going to be sustainable or was it one time catch up? Just any color you can give.

Guy Gecht

Yes. So very pleased with Europe; a year ago in Q3 as you said the comp was easy, a year ago in Q3 it was really an area of uncertainty. And actually our customers when they look at us, they’re willing to make a purchase with us even when the economy is not that great because we’re helping them to move to areas of growth and we’re helping them to get a lot more productive. However, when there is uncertainty a lot of people hesitate to put a lot of money to work. And I think what happened later is there is a lot less of debt, a lot less of uncertainty, it’s not like the demand is fantastic but a lot less of debt and therefore we’re seeing a lot of the people coming back and buying.

And one of the things I was looking at to see if it also reflect in the activities and actually the ink numbers in Europe are actually fairly good. So, we’re seeing also their businesses improving which probably means that companies are spending more on advertisement and campaigns and so on which is a good news. So overall we’re not going to see too many quarters unfortunately of 27% the overall growth, we like to see it but it’s not the level of growth in Europe, we’re expecting every quarter, we’re definitely benefiting from an easy compare but I feel good about Europe going forward.

As far as America, we had begun a fantastic quarter, good growth, North America especially was strong in all three segments and again customers are making money, look at the ink numbers, they all are very strong, they’re making money, they grow, we give them a way to get into a – to get more revenue and they take the opportunity and run with it.

Shannon Cross – Cross Research

Okay. And then it’s – I still have a couple more questions. So the first one is just on share. Can you talk about your shares especially in inkjet, I mean how do you see share movement going between your products and your competitor’s products and then perhaps and I don’t know if you or Marc want to talk about the acquisition pipeline what you see out there and obviously any color you can give on the little one you made today but how do you think - see everything playing together? Thank you.

Guy Gecht

So, I’ll take the share question and Marc will follow up on the Metrix acquisition. So as far as share I think we’re seeing a good movement to our direction. We’re not the lowest cost provider in inkjet but we bring a lot of value especially with LED technology that we are the only one that can do LED queuing at a very high speed and that giving people benefit of being more green, being more efficient, it’s cheaper to run and it’s also – you can add it on the smaller material, more slimmer materials which are cheaper and let you do application otherwise you cannot do.

And as I mentioned we actually bring now the LED platform to the wall-to-wall category the first time that we or anybody else will have it in their production level in wall-to-wall and we will introduce it next week in the SGIA show.

I was [inaudible] show from the Fiery perspective we’re fairly pleased with where we’re in production. As Marc mentioned, we’re seeing now more examples of people saying I’m already using your software - the productivity software, the Fiery fit great with that in addition to all the other benefits, I’m getting a great integration and I think that definitely help our share although it’s very difficult for us to measure. Marc you want to talk about the acquisition?

Marc Olin

Sure, the Metrix acquisition which we did yesterday was very small company. It’s about 10 people are joining EFI but it is a product that we had previously done a little bit of integration work before but hadn’t really been able to fully take advantage of the opportunity to build integration with our different MIS products. And so as part of EFI, really allows us to drive much more automation for our clients, we can tie the two products or all of the products together or much more closely and we can leverage our sales force around the world to really drive that product into a very large existing user base of our MIS product. So from an acquisition pipeline, we’re really looking at those types of acquisition as well as the acquisitions in the productivity software space that allow us to expand our geographic footprint.

Shannon Cross – Cross Research

Great, thank you.

Guy Gecht

Thanks Shannon.

Operator

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

Ananda Baruah – Brean Capital

Hey, thanks guys, congrats on a solid quarter.

Guy Gecht

Thank you Ananda.

Ananda Baruah – Brean Capital

Yes, you’re welcome. And Marc welcome officially to the earnings call.

Marc Olin

Thank you.

Ananda Baruah – Brean Capital

Yes. Hi, so just a few things if I could. I guess with regards to the Fiery strength, is there anyone to delineate between how much is due to sort of OEM product cycle, it sounds like you guys in a new way are talking about almost sort of I guess reverse attach now from existing software companies now, sort of reverting backwards and saying, hey, give me a Fiery, I’ve been using this software for a while and maybe you could comment to sort of – to what I said any that actually is a new-ish kind of phenomena. And then to what degree at all you can comment on if sort of any of the strength could be attributable to [inaudible] [ph] with Fiery as front end? Thanks.

Guy Gecht

Yes, sort of the reverse attack, this is really fairly rare. So it’s not significant amount of revenue but what it is is getting more and more customers to get used to the fact that to get into the Fiery, to like it, to get use and being more loyal, so it has a more longer term affect from a share perspective. And I would say in the quarter but we’re very pleased to see that something like a top-10 printer will decide to standardize Fiery and things like that. As far as the share like we definitely benefiting from products with our partners introduced in the last few quarters.

But when I looked at the numbers, I saw strength in products that got launched even last year or before that. So, I think it seems like our partners are doing quite well at least in the production space, digital is in demand, customers would like to do more shorter run personalized products versus the longer run that they did before. So, I think we’re just benefiting from the trend with a little bit better share and as we said and we don’t want the point to be missed. We clearly had an easy compare with Q3 last year being the bottom of the down cycle of the Fiery.

Ananda Baruah – Brean Capital

Got it. And then any comments on sort of what’s going on with regards Creta attached with Fiery?

Guy Gecht

What do you mean, Ananda, sorry?

Ananda Baruah – Brean Capital

No, just, is there any benefit as, or are you seeing any benefit for both kind of perhaps attaching Fierys on the front of Cretas?

Guy Gecht

Oh okay, that’s what you mean. So this program is going on. We still don’t see revenue from this. And main reason is as we started to look at – start to engage customers we felt like the user interface and the functionality is way more sophisticated where the industry is today. Although in a [inaudible] everybody understand color management and work flow in ceramic it’s all fairly new. And we felt that we should go back and simplify it, we should go back and make sure it’s really tied to ceramic before we launch it worldwide. For us it’s a strategic move. And we want to make a great first impression. So this is still in beta because we want to make sure the software is something we would be very proud and work for everybody and so still no benefit from that this quarter but it’s definitely a strategic differentiator and a growth opportunity for Fiery in the future.

Ananda Baruah – Brean Capital

Got it. And then Guy, do you feel that sort of the LED technology now all the way up to the high end, you feel that you’re getting the benefit – have you begun to actually - have those capabilities begun to resonate yet with customers or is that something that’s yet to come. And then I guess if you can give us actually maybe some update on sort of the high end platform relative to the rest of the business and just how the dynamics are sort of playing out there now that you I think you’ve been out the market with that product for a full quarter now?

Guy Gecht

So I will start with the LED, I think we’re seeing more and more interest in that people willing to pay the slight premium to go to LED. I was looking at in consumption numbers between customers that purchase the LED options to customers that decided on the same platform not to take it and in-consumption are substantially high yield for customers that bought the LED option which I think show the customers are getting much more business when they go off the LEDs. It’s not like LED is consuming more ink, it’s just that you get a lot more utilization and more business when you take the LEDs. I think that’s definitely going to continue to take to grow interest in the market we’re very pleased with the interest.

We’ve been offering it on not only the kind of the mid-range what we call the hybrid product that combines on any surface, now we’re introducing it on the old version, now we’re going to have other type of customers that can actually purchase LED. As far as the HS100, this is still moving at a speed, blending a speed that it’s too fast for the LED to cube, but we’re working on that as well. And I’m sure we’re going to get that faster than anybody else to this type of production speed. And then feedback so far has been outstanding from the platform, customers [inaudible] they are fully utilizing it, winning great business from strong brand names, companies out there. So I definitely think that we’re going to see that as a global opportunity through next year, the new platform is going to continue to grow interest.

Ananda Baruah – Brean Capital

Got it, Guy. Thank you. And then just a last one from me just clarification. Did you guys say a guidance for each of the segment was up relatively the same?

Guy Gecht

Yes, we want to keep it simple for you. So we just said 7% to 10% on those segment.

Ananda Baruah – Brean Capital

Okay, guys, thanks a lot.

Guy Gecht

All right. Thanks Ananda.

Operator

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

Keith Bachman – Bank of Montreal

Hello, gentlemen. Asia Pac, can you talk a little bit Guy, you said that it sounded like you’re saying some execution issues, some other small companies like IBM, Teradata have had real problems in emerging markets, did I hear you correctly or are you seeing a decline in demand in the Asia Pac region?

Guy Gecht

So a combination. I think in Japan, digital is still tough. I think everybody struggling with selling digital but I think with – I’m not happy with our execution. And in Japan and we just hired the great [BP] [ph] for Asia Pacific came from Kodak and then Kodak over $1 billion in the region. And I think we’re going to see improvement and we definitely going to work on improvement. That’s for Japan only.

Keith Bachman – Bank of Montreal

Yes.

Guy Gecht

As far as [inaudible] Asia Pac in China, wasn’t that strong as before I think there is combination of few things. First of all there was a holiday just at the end of the quarter which slowed things down and kind of deferred revenue by a week – October. I think that there was change in regulations on financing and caused customers to readjust to how to purchase and it took a little longer. We hope we’re going to catch up with that and things will get simplified.

So, I don’t know if I would attribute that to the things at IBM, we’re talking about any witness we still see a lot of interest in China and we think we’re going to continue to see growth but maybe we will see something else later.

Keith Bachman – Bank of Montreal

Okay. All right. Second question, I didn’t hear but did you buy stock back and if not why and if you did why not more?

Marc Olin

Keith, we did buy $5 million worth of stock back in the quarter as we have done in the prior quarters up to this point in the year. And we are at $39 million out of our $100 million buyback. But I think our general strategy has been to use the buyback to cover the stock if we see any significant declines in the stock and unfortunately we have not had that problem today.

Keith Bachman – Bank of Montreal

All right. I got a follow up, I mean your cash flow was good, your free cash flow was $16 million and you bought $5 million and you got all this money sitting on the bank, I would suggest or humbly submit, it sounds like you could be more aggressive on your buyback than what you are doing, even if you are – for an acquisition appetite your deal is using, or is that aggressive, why not go after it?

Guy Gecht

So on the radar screen of acquisitions we of course have to position them more significant than Metrix we did last night. And I think it’s still assessed by already add to the organic growth – acquisition growth that let us expand the time and bring a lot of the technologies to bigger markets and we are going to talk more about in the upcoming Investor Day here. And again, from the buyback, we are trying to keep the share count roughly the same number and jump and be a lot more good if the stock come down.

Now, if we see that the acquisitions are still on the radar screen and not on the books at some point, yes, I think we are going to get lot more aggressive even if the stock continue to do well.

Keith Bachman – Bank of Montreal

Okay. Guy philosophically we are going to be talking 91 days from now and you guys are going to make some comments on March quarter, I always worry about the Fiery business particularly relevant to how street estimate set up against that. Just philosophically, would Fiery be up, down or flat from the December quarter, we are modeling it down sequentially. Is that the right way to think about it at least philosophically?

Guy Gecht

So Keith, we are only commenting on one quarter at a time but since you said philosophically, I think philosophically Q1 is normally a down quarter for the industry and our partners as well. So philosophically, I would think Q1 historically was down from Q4. We are going to try our best and we are going to have some more product introduction, we have to do, whatever we can. But it’s too early to talk about Q1.

Keith Bachman – Bank of Montreal

Okay. All right. I will see the floor. Thank you.

Guy Gecht

Thank you, Keith.

Operator

Your next question comes from the line of Matthew Kempler from Sidoti. Your line is open.

Matthew Kempler – Sidoti

Thank you. So I wanted a follow up on Fiery, you mentioned that you have a relatively busy product roadmap ahead. And I was wondering if you can provide some perspective on the plan that we enroll out over the next several quarters.

Guy Gecht

Okay. Matt, so fairly busy in the next year, year and a half. Our partners are working hard to innovate. They see the benefits of additional digital painting. One of the things that we like this time is that it kind of struggled. So we don’t see any quarter with too many announcement and then in a few quarters there is drought, things can change, obviously schedule change but right now we feel like it’s actually struggled in the coming quarter and we are very happy with what we have in the opportunity there.

Matthew Kempler – Sidoti

Okay. So from your perspective, is there any chance yet of if Fiery that peak revenue is or if there is still sustained minute to come from rollout that are forthcoming?

Guy Gecht

Last Q3 when we had a tough quarter for Fiery I said that’s the bottom. We are going to stop it seeing coming up. I’m not ready to declare at the top. I think we are still, again in the long-term, we are not talking about any specific order, I think we have room to go up.

Matthew Kempler – Sidoti

Okay. And then on the productivity side, you mentioned that we are seeing higher subscription demand which seems to be an emerging trend here. Can you talk about to what degree, this mixed shift is occurring and our bookings meaningfully exceeding revenue growth at this point?

Marc Olin

Yes. So we can’t give a breakdown of the mix between subscription and the license growth but I can say that our bookings growth quarter-over-quarter is significantly outstripping revenue growth quarter-over-quarter and that our organic revenue products that we sell – the products that we focus on aggressively delivering to new clients are the ones that we offer on a subscription basis as well as on a license basis. So we are definitely seeing, it was a very successful bookings quarter for us in Q3, certainly.

Matthew Kempler – Sidoti

Okay. And then lastly you mentioned the strong sales pipeline heading into the quarter and I’m just wondering, have you seen any influence in activity from your customers due to the government issues that did not materialize in the last month?

Guy Gecht

It’s interesting. I was trying to gauge especially coming to the call, if anybody seeing anything differently. On the Fiery side, couple of our partners mentioned that they having to plan government deal this quarter anything with the shutdown will last too long. They may not be able to do as much as they want. We factor that in what we say is, the good news is, we are not facing it.

I was looking at the ink consumption in the U.S. every day I check that and to see if there is anything unusual and actually the ink consumption is very robust so far the quarter it’s including the U.S. So far we haven’t seen any impact or shutdown.

Matthew Kempler – Sidoti

Okay. Thank you.

Guy Gecht

Thanks.

Operator

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

Morris Ajzenman – Griffin Securities

Hi, guys.

Guy Gecht

Hi, Morris.

Marc Olin

Hi, Morris.

Morris Ajzenman – Griffin Securities

Hello, the question is pretty well picked over here. Let me just reach out Europe strength, any areas in Europe particularly where you can highlight strength and areas where not so were more lackluster?

Guy Gecht

I think was around fairly well distributed from Europe is good specifically, I think U.K. came back nicely. I think that Germany was fairly strong especially on the software side for us, maybe not so much France and maybe not so much Italy and Spain. But, overall was kind of well distributed.

Morris Ajzenman – Griffin Securities

And just switching to the inkjet side, new product introductions are – has to have for the quarter, it is more in a pipeline that will help drive revenue over the next couple of quarters or is that sometime in progress before new products meaningfully get introduced, how does the timetable play out there?

Guy Gecht

Definitely it was very busy with the ongoing introduction. So I mentioned SGIA with our first LED based sole tool. That is very exciting for us. We actually a couple of weeks ago, few weeks ago, we were in Labelexpo in Brazil and we introduced the first LED based label printing and it’s not shipping yet. But, there is a lot of interest in that too. And then we have for next year very busy, very ambitious product did an introduction then for interest and I hope we are going to get everything done next year. But, the team is working harder than that.

Morris Ajzenman – Griffin Securities

Maybe you can give some color on new product introduction inkjet, what percent of revenues from products introduced in the past year or two? Any thought on that if not maybe on the ounce you can give some color on that?

Guy Gecht

Yes. So I don’t have the exact percentage. But if you say in the last few that’s essentially everything because once we introduced a product the interest, think about it, if you are a customer, if you buy an old product, you are going to compete with somebody that just bought the latest [inaudible] and it’s not going to be fun. So you want to stay current with the products. So what happen is normally those all products will get traded and will be sold in emerging markets, in Africa, in some other places and but currently the strong markets always going to look for the new products.

Morris Ajzenman – Griffin Securities

Can you give us some color not on [inaudible] but on ink usage, on new machines over the past year or maybe capacity utilization of new machines by your customers versus machines replacing, do you have any handle on how greater frequency of use is?

Guy Gecht

The ink is – so in general, we report every quarter that volume of ink, the ink that we sell, in this quarter was 21% which is very good number from our perspective and so we are very pleased with that. We think very good utilization, customers are very busy. A lot people like to run the machine 24 hours a day. And on top of it, really the pleasing thing is, with the LED it’s really a great differentiator, with far ability to do great machines, great for the government and the high speed LED queuing is that customers that buy them then sure there is big growth in volume. And so as we continue to introduce LED platform into written application, I think we are going to see more of that. So net-net, when I talk to customers, they are very busy and [drop] [ph] the bill and going.

Morris Ajzenman – Griffin Securities

Thank you.

Guy Gecht

Thanks Morris.

Marc Olin

Thanks Morris.

Operator

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

Jim Suva – Citi

Thank you and congratulations to you and your teams and company for great results.

Marc Olin

Thank you.

Jim Suva – Citi

Probably we have seen some currency volatility for kind of extended amount of time now meaning multiple months and quarters. Can you talk about what your competitors have been doing as a landscape change with currency, the fluctuations, so just kind of highlight how that kind of sorted out kind of serving out?

Guy Gecht

I think that it depends on the competitor, obviously, when we compete sometimes we compete with European competitors, if the dollar gets stronger that would put pressure on us. If the dollar gets weaker as happened in the last month or so that helped a little in our perspective from a pricing situation. And so that’s the only really what differentiate us from a competitive perspective, I don’t think anybody does anything different from the currency. Keep in mind that for the Fiery side, all of our contacts are in the U.S. dollars. And so there is no currency impact to [inaudible] the business.

Jim Suva – Citi

And then as a quick follow-up again I know the question was asked, really going to call, but if you can just help us understand a bit more. Are you seeing not just a normal deceleration in the China growth [inaudible] coming down gradually over time as the company gets bigger and bigger – of large numbers.

With the critical change, have you seen corporations change their behavior at all in their purchasing trends in China?

Guy Gecht

So we don’t see less appetite and opportunities to grow in China. This year China became our second largest market after the U.S. But the penetration is very small, we see a lot of interesting digital technology obviously manufacturing that was very deep. So even if the overall market will not grow much we have so much growth opportunities in the second largest economy. That I think if we execute well, we can certainly continue to see growth. Keep in mind that we don’t have a single dollar of revenue from the software part of our business and we expect at some point to get into China on that front too because more and more customers are now China, the worry is now about the cost of labor. It’s becoming a main concern in the last year or two and so efficiency in productivity becoming more important.

So I’m actually very upbeat about the opportunity in China next year. I think that we have a great opportunity though.

Jim Suva – Citi

Thank you very much and congratulations again for you and your teams.

Guy Gecht

Thank you. I appreciate that.

Operator

(Operator Instructions) Your next question comes from the line of Keith Bachman of Bank of Montreal. Your line is open.

Keith Bachman – Bank of Montreal

Excuse me. How are you guys. I just want to catch up in terms of number of questions. The two quickies I want to – could you tell us a little bit about CapEx for the next two quarters if you could and then also just what tax rate are you thinking about using particularly for Q4 and then beyond?

Marc Olin

So for – I think we are expecting the tax rate to continue on a consistent basis primary use of CapEx is going to be the continued improved in the building, as we mentioned we have another $19 million worth of spend that plan for the building improvement that will be finishing up next quarter.

Keith Bachman – Bank of Montreal

Actually did %19 million CapEx [inaudible] quarter remodel really what I was asking?

Marc Olin

Yes. Approximately that will be a little bit of additional CapEx for other miscellaneous projects but that’s –

Guy Gecht

I don’t think – we are moving kits, we are moving literally tomorrow afternoon. But this weekend we are moving from this building.

Keith Bachman – Bank of Montreal

All right, okay. And so then 22.5%, 23% tax rate?

Guy Gecht

Yes.

Marc Olin

Yes. That’s what we are expecting pretty consistent run rate.

Keith Bachman – Bank of Montreal

Okay.

Marc Olin

Obviously it depends on the revenue mix but –

Keith Bachman – Bank of Montreal

Okay. And I assume CapEx falls back down to a normalized number in the March quarter?

Marc Olin

Most definitely, other guy you have no further plans for an additional headquarters last year.

Guy Gecht

No. I think we have done with previous state deals for quite sometime.

Keith Bachman – Bank of Montreal

Okay. All right, thanks guys.

Guy Gecht

Thanks Keith.

Operator

As there are no further questions at this time, I would like to turn the call back over to Mr. Guy Gecht for closing remarks?

Guy Gecht

Thank you. Thank you everyone for joining us today. Obviously we are very pleased to have sure we had another quarter of solid results and the theme is, how that works to deliver the record day we have just discussed. As always I want to recognize the whole EFI team for the records and dedication to EFI success. And we truly appreciate the confidence of our customers and the loyalty of our shareholders.

I’m also looking forward to see many of you in our investor day in New York on November 8. And we are looking forward to talk to you again in 91 days.

Marc Olin

Thanks.

Operator

And this concludes today’s conference call. You may now disconnect.

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