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Electronics For Imaging, Inc. (NASDAQ:EFII)

Q4 2013 Earnings Call

January 28, 2014 5:00 p.m. ET

Executives

JoAnn Horne – IR

Guy Gecht – CEO

David Reeder – CFO

Analysts

Shannon Cross – Cross Research

Ben Reitzes – Barclays

Gaurav Gupta – BMO Capital Markets

Matthew Kempler – Sidoti

Morris Ajzenman – Griffin Securities

Jim Suva – Citi

Ananda Baruah – Brean Murray

Operator

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Electronics For Imaging fourth-quarter and fiscal 2013 earnings conference call. (Operator Instructions) I will now turn the call over to JoAnn Horne, Investor Relations. 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 David Reeder 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 available on the investor relations website.

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

Guy Gecht

Thank you, JoAnn, and welcome, everyone and thank you for joining us. We are delighted to report an exceptionally strong quarter and 16th consecutive quarter of revenue and EPS growth, which caption our spending [ph] for EFI. The company posted Q4 revenue of $197 million, up 13% year over year, reflecting strong execution and double digit growth across all segments and all regions and delivered $0.49 per share non-GAAP EPS, up 17% year over year.

We couldn’t ask for more clear validation of the opportunity we had or stronger reinforcement of our team's top focus in executing on this significant opportunity. Before I get into the highlights on each segment, I would like to briefly mention our user conference connect which took place last week in Las Vegas. We hosted the record number of attendees and I can tell you that the feedback from our customer base as well as from the industry media in attendance has never been better.

Connect 2014 was a fantastic event where business leaders from around the world gathered to participate in more than 200 educational sessions, receive hands on experience, discuss industry trend, network with peers, voice their opinions and learn from others. There was a lot of excitement on the EFI’s vision, direction, innovation and customers’ focused culture and I believe it was yet another indication that what we do at EFI is becoming increasingly important for the vast industries we are serving.

Now turning to the individual segments and the highlights for the quarter. Industrial Inkjet again delivered solid growth, up 16% in the fourth quarter driven by strong demand for the LED line up, the HS 100 [indiscernible]. We believe that we gained sales across all geographies with our leading product line up.

The Americas again delivered a solid growth quarter. Asia was strong with significant revenue coming from China where we more than doubled sales over the period. And Europe continued to recover across the product portfolio. We saw good demand for our LED and we are excited about the new volt to volt [ph] streaming for LEDs, we introduced in October with new more flexible links which enables our customers to broaden their applications.

UV ink volume was up 33% in Q4 and 25% for the year, making the fourth consecutive year of 20% or more ink volume growth. This once again proved that our customers are enjoying solid demand for output from our products. Driven by the ongoing migration from analog to digital, which is the central focus of subscribers.

For Q1 we expect another solid quarter from the inkjet segment growing at the low double digit. [indiscernible] grew 14% in Q4 driven by another very strong booking quarter. EFI is the leading provider of business process automation software and our ability to streamline customers print operation and drive efficiencies reflects our passion and commitment to their success. We continue to see good pipeline conversion and as previously discussed we continue to build and grow our recurring revenue in the segment. We saw good demand in Europe and Latin America and continue to expand our international footprint. We expect solid growth in Q1 in the low double digits.

Fiery revenues increased 10% in Q4 with strengths across our partners. The product introduction roadmap continues to be business with no products in the upcoming quarter. Last week we announced at Connect that Landa, the future provider of what could arguably the fastest digital production printer in the world has selected Fiery as their exclusive digital content for their next generation presses. While we don’t see this partnership as a meaningful revenue contributor in 2014, we believe this is an important statement about Fiery leadership in the digital content market.

When looking at the Fiery momentum, we are pleased that despite Q1 being a seasonally low quarter we expect revenues to be approximately equal to Q1. The fourth quarter kept a very strong deal where the EFI team drove progress and achieved milestone across the business.

To briefly review some of the highlights of last year, 2013 was the fourth consecutive year of double digit revenue growth, increasing 12% leading to a record revenue. Net income grew 11% and the recurring revenue increased 14%. UV ink volume was up 25% over the prior year again demonstrating the solid end demand from our customers.

Our revenue growth was almost completely organic, though we did complete the few small tuck in software acquisitions. At our investor day we announced a $1 billion revenue target in 2016 yielding $2.40 to $2.60 earnings per share and increased the long term operating margin target from 12% to 15% to 14% to 16% of revenue, plus a new $200 million share buyback program.

We generated $89 million of cash from operations, which is at the rate of 91% of our non-GAAP operating income. Finally following the sale of our headquarters in late 2012 for $180 million, we built a new -- built-out a new campus showcasing our products as well as our unique culture throughout the building. We look forward to hosting many of you in Fremont.

While we are very pleased with how we finished 2013, EFI is only in the early innings of driving the analog to digital migration. We remain focused and committed to our strategy as we enter 2014. We will continue to target the high growth segments of print out-innovating competitors and helping our customers grow their businesses.

We are committed to increasing revenues through organic growth along with strategic acquisition, especially expanding our inkjet target addressable market into adjacent segments. We will continue expanding our geographic footprint and most importantly lest successful execution continue to build shareholder value.

As we look at our first quarter of 2014, we expect it to be another step in our journey to deliver on the strategy. We expect revenue in the range of $184 million to $188 million, representing 7% to 10% growth. With non-GAAP earnings per share of $0.38 to $0.42 per share, up 15% to 27% from prior year.

Lastly, I would like to welcome David Reeder to his first call as our CFO. Before I turn the call over to David, let me briefly touch on the management changes we announced recently, which better position us to deliver on our $1 billion revenue goal by 2016. David’s extensive financial and operational background, as well as a very unique international experience gained at Cisco, Broadcom and TI will be a tremendous success to our diversified business. I would also like to thank Marc Olin for his contribution as an interim CFO and his success as the software GM.

I look forward to Marc’s utilizing his robust skills and outstanding leadership to take on a new sets of responsibilities in the newly created role of chief operating officer. I am very confident in the capabilities and the increased steps of EFI’s senior management team as we continue to pursue our significant growth opportunities and expand our business globally.

With that, I would like to turn the call over to David. Welcome David.

David Reeder

Thank you, Guy. It is an exciting time to join the EFI and I appreciate the warm welcome extended to me and my family. As many of you know, I recently left the divisional CFO role at Cisco to join EFI. Before we cover the operating results, I would like to share with you the tremendous opportunity that I saw at EFI.

One, the market is in the early stages of an analog to digital transition. Two, EFI’s product portfolio and ecosystem are well positioned to capture the market transition and three diversification such as recurring ink and software revenue is enabling the company to execute in a predictable consistent manner. I believe that the most recent results both fourth quarter and annual highlight the opportunity for EFI in the years ahead.

I look forward to working with EFI team, our shareholders and those of you in the investment community. I could not have asked for a better quarter to transition into the CFO role. As Guy mentioned we reported fourth quarter of 197.3 million, up 13% year over year and resulting in full year revenue of $727.7 million.

Fourth quarter non-GAAP operating income increased to $29.8 million which is 15.1% of revenue, up 100 basis points year over year. Non-GAAP earnings per share were $0.49, up 17% year over year. Additionally, cash from operations increased 13% year over year to 31 million.

Now I will explain in more detail the revenue by business segment and region, also please note that for further commentary is non-GAAP unless otherwise specified. Fourth quarter revenue was driven by strong double digit growth across all business segments and regions. The industrial inkjet segment generated record revenue of 99.2 million, up 15% year over year and contributing 15% of total EFI revenue.

UV ink volume, a leading indicator of customers expanding business opportunities, increased 33% for the quarter and 25% for the year marking our fourth consecutive year of volume growth exceeding 20%. Fiery continued its strong performance this quarter with revenue of 64.4 million, up 10% year over year and contributing 33% of total revenue.

The fourth quarter kept an extremely consistent year of Fiery revenue, a year in which revenue trended within a 2% range for four consecutive quarters. The productivity software segment delivered record revenue of $33.6 million, up 14% year over year and contributing 17% of total revenue. 2013 marks our fourth consecutive year of 22 plus percent growth in EMEA, proof that our EMEA software strategy is yielding positive results. We expect continued expansion in this segment and region throughout 2014.

Total recurring revenue was a record $50 million, up 18% year over year and representing 25% of total EFI revenue. In the fourth quarter, we experienced double digit growth across all geographic regions. Revenue in the Americas amounted to 115.3 million, up 12% year over year, a continuation of the strong demand throughout the year especially for Fiery.

EMEA continued its strong second half recovery with total revenue of 55.4 million, up 17% year over year. Moving to Asia, revenue grew 11% year over year to 26.5 million, driven by strong industrial inkjet sales. Excluding Japan, Asia grew 20% year over year and we continue to make strong inroads into Greater China.

Looking to first quarter 2014, we expect revenue growth of approximately 7% to 10% year over year or 184 million to 188 million. This guidance is based upon low double digit year over year growth for both industrial inkjet and productivity software as well as approximately flat sequential Fiery growth.

Moving to gross margin, non-GAAP fourth quarter gross margin was 54%, down 40 basis points year over year. Industrial inkjet gross margin was 38.6%, down 110 basis points year over year. Fiery gross margin was 67.8%, up 110 basis points year over year. In the productivity software segment gross margin amounted to 73.4%, up 60 basis points year over year.

The first quarter 2014, we expect overall gross margin to be approximately flat on a sequential basis. Operating expense. Fourth quarter operating expenses amounted to $76.8 million, up 9% year over year driven by higher variable pay across various functions within EFI, including sales compensation related to our strong revenue growth and increased headcount related to acquisition. We continue to demonstrate considerable operating leverage with OpEx representing 38.9% of revenue, a decrease from 40.3% a year ago.

R&D expenses were $30.9 million, representing 15.7% of revenue, down from 16.4% a year ago. Sales and marketing expenses were $34.1 million, representing 17.3% of revenue, down from 17.9% a year ago. G&A expenses were $11.8 million, representing 6% of revenue and flat to the prior year.

For the first quarter 2014, operating expenses will be slightly up sequentially driven by Connect, last week’s well attended user conference and a full quarter of expenses from recent acquisitions. We believe leverage remains in our model as we guide towards the lower end of our long term OpEx range of 37% to 41% of revenue on an annual basis. Solid revenue growth and considerable operating leverage delivered fourth quarter operating income of $29.8 million, up 22% year over year and generated an operating margin of 15.1%, up 100 basis points year over year.

Other income and expense had a net gain of $600,000, slightly down on a year over year basis and including a favourable currency impact of $0.01 per share, similar to last year. From a tax perspective, we booked a fourth quarter non-GAAP tax rate of 21.5%.

Starting in first quarter 2014 and continuing for the remainder of the year we will use a constant non-GAAP tax rate of 19%, which we believe reflects the long term average of our current tax structure and geographic distribution of revenue and profit. While there was no change [ph] fourth quarter 2013, for first quarter 2014, this change has approximately $0.01 of impact to non-GAAP EPS.

The combination of strong revenue growth and focused cost containment enabled us to deliver earnings per share of $0.49. This compares favourably to the year ago quarter of $0.42 and represents an increase of 17% year over year.

For first quarter 2014, we expect to grow operating profit faster than revenue and deliver non-GAAP EPS of $0.38 to $0.42, which includes $0.01 from the newly implemented static tax rate. This range represents 15% to 27% year over year growth in earnings per share.

Turning to the balance sheet. Total cash, cash equivalents and short-term investments amounted to $355 million compared to $363 million at the end of Q3.

Continued realignment of our working capital framework helped generate another strong quarter of cash from operations. Accounts receivable was $131 million in the fourth quarter, down 3% year-over-year on a 13% increase in revenue. DSO was 61 days, down 10.4 days from the prior year. Our net inventory balance was $6.3 million, with inventory turns of 5.3.

The cash conversion cycle improved 11.4 days from the year ago period finishing fourth quarter at 54.1 days. Fourth quarter cash flow from operations was $31 million.

For the full year, we generated $89 million of cash from operations, up $36 million compared to 2012. We made tremendous progress in 2013 toward our operational cash flow model of one to one cash flow to operating income.

With respect to the stock buyback program, we have repurchased 6.9 million worth of shares in the fourth quarter. As announced at our investor day, last November, we canceled our previously authorized $100 million program and initiated a new 200 million three year program. Of the 6.9 million repurchased, 2.6 million was under the new program. Our total diluted share count was 48.8 million shares with the small sequential increase primarily due to timing of the program implementation.

With the current buyback plan in place, our objective for first quarter 2014 is to reduce the share count to approximately 48.5 million shares.

Let me finish with full year performance. We achieved record revenue of $727.7 million, up 12% year over year marking the fourth consecutive year of double digit growth. We posted record industrial inkjet, productivity software and recurring annual revenues. We delivered operating income of 25% year over year and operating margin of 13.5%, an increase of 140 basis points compared to 2012.

Finally we delivered non-GAAP EPS of $1.58, up $0.29 per share year over year. We entered 2014 with confidence in our strategy, our execution, our ability to serve customers and our ability to deliver value to shareholders.

This concludes my prepared commentary. We will now be happy to answer questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Shannon Cross with Cross Research.

Shannon Cross – Cross Research

You had extremely strong results from a revenue standpoint, in several categories. And could you provide a bit more color on what you're hearing from your customers? Any linearity during the quarter, how did the quarter end? If you can give us some commentary that helps us see what you've done this year will be repeatable next year, and that again, the strong results are not one-timers but more recurring business?

Guy Gecht

So I will start with the linearity, it was a normal Q4 linearity which means there was a lot of action at the end of the quarter, lot of deals that play, I feel very good about – the high percentage of deal we ended up winning at the end of the quarter, we entered this year with very good momentum.

As far as what we are hearing from customers, actually was growth in newer Asia in December and in last week in Connect, we are hearing very positive feedback from customers. They see EFI as enabler in the area of new revenue, digital printing, ability to provide higher value product for customers which in turn they can charge a little higher margin, not being a commodity business. And also with our software differentiation, EFI is a company that can build a complete solution for them, not just helping them be more competitive, make them more productive, more profitable, we are the only company that actually offer that.

I would say in general, I was very encouraged with the energy and enthusiasm of our customers, and you can see an evidence of this in the ink results. We grew ink consumption UV ink 33% in Q4. That’s an outstanding number, that means our customers are really doing very well, we [indiscernible] inkjet product, and obviously all the machines, all the inkjet printers we shipped in Q4 will most definitely start generating revenue for us and during this quarter.

Shannon Cross – Cross Research

And then can you talk a bit about opportunities to expand your software business, how you're thinking about growth? And where it comes from, maybe geographic, or in adjacent markets?

Guy Gecht

The software had an awesome booking quarter, really across the board and across geographies. But we are still of a small part of the European market and we are very strong in the U.S. So Europe and Latin America I think we will continue to see very good growth but still lot of opportunities for years to come to help customers becoming more productive.

On a geographical basis, the next big frontier is Asia. We have some deals footprint in software and we will start to see investing organically and also looking at acquisitions, as we did in Europe to build the footprint in Asia, there is a tremendous opportunity there for productivity gain for customers with the software. Of course it would help us in differentiation.

For our industry – can bring and we still can bring a software to different segments, obviously the ceramic tiles is an area where we will be active and we will try to start to bring the software from the Fiery and then into the productivity software. We are looking at some other areas including the much talked about 3D printing where a lot of customers are telling us the same challenges that the printing industry saw in the last 10-15 years are starting to emerge. That means that they need an accurate estimate on the cost of the product and they need to be able to schedule that, they need to connect the buyer to the producer over the internet. So we are looking carefully within – pull the trigger on that but we are looking carefully on the opportunity with that emerging market.

Operator

Your next question is from Ananda Baruah with Brean Capital.

Ananda Baruah – Brean Murray

Just a question, or a couple if I could, I guess the first one with regards to the revenue guidance. If I take a look back at what you're guiding seasonally, it seems to be the softest seasonal, if you were to hit your guidance, it would be the softest seasonal quarter I think since the recession, since March of 2009. The controller guidance makes sense. I was wondering, if you were look back on inkjet and on software, it would bear out the same way however. Soft, it's been a while. So I was wondering if you could walk me through the dynamics there, and then I have a follow-up. Thanks.

David Reeder

Sure, when we look at the guidance for the first quarter, 7% to 10% on the top line with the bottom line growing almost twice as fast. We feel like that’s strong guidance. We finished the year as you know I mean extraordinarily strong. We got record recurring revenue which we believe makes future quarters more predictable and consistent. And so from a guidance perspective, we feel like 7% to 10% on the top line which is low double digits for inkjet solutions as well as productivity software as well as flat sequentially for Fiery, we feel like that’s strong guidance.

Ananda Baruah – Brean Murray

So there's nothing going on exiting this year, exiting 2013 entering 2014, that is causing an unusually soft seasonal dip? It's business as usual for you?

Guy Gecht

It’s normal seasonality especially on the Fiery we are very pleased with actually having a flat sequentially. If you look at our partner though is that most of them have a Q4 that’s a lot stronger than Q1, so nothing there is unusual. We actually feel pretty good about the momentum going into Q1 the way we finished Q4 and we think 7% to 10% is a pretty good outlook.

Ananda Baruah – Brean Murray

And then could guys just take a minute and walk us through what new products we should expect on both sides of the business, as we go through the year? And from a timing perspective, whatever you can provide to us would be helpful, just for our modeling purposes. I know there's some new engine refreshes when we go through the year, and I think you had some new stuff on inkjet front as well. That would be helpful.

Guy Gecht

I will start with Fiery. We have new products with our partners as well as new Fiery systems software that goes out – in fact, one partner is going to announce next few weeks some new products and then we have partners that are going to launch during the year. So it’s a very busy on the fiery side. And then when I look at the inkjet, we have a tremendous line up for the year, very exciting, we shared some of it with our sale force last week and they are super excited about the improvement, the improvement would be in speed, productivity, image quality, we are going to take the next level. We are going to take LED to different level of productivity. We just introduced a new ink [indiscernible] middle I was mentioned it briefly in my opening remarks that allow customers to bring on ink that before, were not possible to bring digital economics through those applications.

So on our inkjet, we are very, very busy with the product introduction, very exciting year from that regard. Software, we continue to deliver new releases and as well as localization offering more and more functionality that we got via the tuck-in acquisitions. So we bought couple of products that has 5, 10 people – new feature that will integrate this year and we will also through our 20,000 strong installed base of software to go and build the new modules we are going to show. We are going to have more modules, they are going to be offered as cloud and a subscription model. So it’s another busy on the software front as well. Very busy from all R&D, and we tell our employees that our customers expectation, our own expectations and of course, our investors’ expectations just keep going up, we need to perform at a better level in 2014 than we performed in 2013,

Operator

The next question is from Ben Reitzes with Barclays.

Ben Reitzes – Barclays

Your performance is earning it back in spades. So, appreciate it. I wanted to ask about gross margins in the industrial inkjet. You had really good growth, but the margin was the lowest it's been on the gross margin side, for a couple years. I was just wondering if there's an opportunity for additional leverage there, as in that segment, with these high revenue growth rates, as we go throughout 2014?

David Reeder

Overall we were very happy with the total gross margin. We had margin strength both from Fiery up 110 basis points and productivity software of 60 basis points. What that did is it enabled us to opportunistically expand our industrial inkjet footprint while keeping corporate gross margin flat. So we were very excited about that.

Guy Gecht

As I mentioned, we actually saw quite a few deals in Q4. We definitely allow ourselves to be a little bit more aggressive, giving the opportunity to grow more units, and we feel very good about the ink growth especially, we know that whatever we sell in Q4, we are going to get returning news to come. So I am actually very pleased with the performance, I know the reasons for the gross margin slightly below the target 40%, I think that was the right action and we will see if we have – what the right balance between growing up the more install base, so keeping it 40%.

Ben Reitzes – Barclays

And I know the China performance was really good. Just in terms of Japan, what are your expectations for a turn there and the timetable? And any color there on how that could ramp?

Guy Gecht

I mentioned it last quarter, Japan has one is, digital printing is still way behind any other major geography, but we have our own issues of execution in Japan. We made changes in the last few months both on changes, we are sending people from here for some – longer periods of 6 to 12 months to work there and turn things around. I think we are going to start to see – it’s just going to take no longer than a quarter or two but we’re definitely addressing it, we don’t want to see the decline in Japan.

Operator

The next question is from Gaurav Gupta with BMO Capital Markets

Gaurav Gupta – BMO Capital Markets

I have a couple of questions as well. The first question is on controllers, which is Keith's favorite topic. I think controllers were okay in this quarter, and even the guidance sounds okay. But one concern we have is that in the entire CY ‘13 you were able to do controller revenues within a tight span. And as we look out over CY ‘14, what's the level of confidence that you have that you'll be able to, again, to control it within a tight band, and not fall-off especially when the compares get tougher in the second half?

Guy Gecht

We are very, very pleased with the results of the Fiery business in Q4. I think that the growth of 7% is software then the growth of the target market and there is indication that more customers are picking Fiery, we are gaining sale. As I mentioned the Landa announcement will not change – change anybody’s number for 2014 meaningfully but definitely give very strong credibility to the fiery brand out there, and there is no one in the industry to figure out. So with that, having Q1 being flat sequentially it’s a very good news, up to 3% from last year, although very tough competitors we mentioned. This is what we expect normally from the fiery the type of relatively a slow – low single digit growth. So nothing here that should alarm, in fact, we are very pleased with that, and I am not going to guide for the rest of the year but as I mentioned, we feel pretty good about the fiery and the product productivity for the rest of the year.

David Reeder

When I came in, lot of people were telling me and actually articulating to me that fiery was extremely volatile. So one of the first things that I looked at when I came in was I looked at past performance looking at the last four quarters, seeing the revenue trend within a range of 2%. That made me a little bit more comfortable. The second thing that I did was I went to work with the team to monitor the inventory channel. Historically it looks like the channel inventory range has ranged between four to eight weeks based upon our most recent checks which were, let me assure you, very recently done, in the last 10 days that I have been here, we are at the low end of that range. So when I look at Q1 and I think our forecast of guiding flat sequentially I feel pretty good about that.

Gaurav Gupta – BMO Capital Markets

Maybe I can try, but do you think Fiery can grow this year, in 2014?

Guy Gecht

We are not going to give a full year guidance on the fiery segment. The question is can it be of course, as we are starting the [indiscernible] we expect it to grow to 2% to 3%.

Gaurav Gupta – BMO Capital Markets

And I guess just one follow-up this is more on operating margin line, and it ties back to controllers. So in CY ‘13, controllers had a good year, and operating margin expansion was about 140 basis points. So as we look out over the next couple of years, more specifically CY ‘14, how should we think about the puts and takes of operating margin, given what you just said controllers, might be a little bit slower or maybe flat? And then the other two segments grow at similar rates? So can you expect again your long-term guidance is 14% to 16%, do you think the margin expansion can continue at a healthy rates similar to what you did in CY ‘13?

David Reeder

I think we feel very comfortable with the ‘14% to 16% range. I think the stability of the businesses as well as the recurring nature of the revenue makes us feel quite good about that range that we have given.

Gaurav Gupta – BMO Capital Markets

So that’s a disparity in controllers being slower in 2014 versus 2013 I guess?

David Reeder

We feel very comfortable with our 14% to 16% range.

Operator

The next question is from Matthew Kempler with Sidoti.

Matthew Kempler – Sidoti

I was wondering if you can start by updating your thoughts on the timing of the planned launches of the inks, and the Fiery controller for the ceramic markets.

David Reeder

So fiery, we are launching it, we go a little slowly geography by geography. Initial feedback is very positive and so hopefully we will scale it in the next 90-120 days to the major geographies. But again the goal is to build really strong differentiator before we even talk about delivering.

As far as the ink, there is still plan for 2014 for a variety of reasons – but we focus on that, we track into this. It’s a big opportunity for us to selling to the installed base. So obviously selling a lot more machine just in the installed base to which we have been selling.

Matthew Kempler – Sidoti

And at this point, are you seeing major impediments to bringing any of those products to general availability this year?

Guy Gecht

No, it’s going to be – as always involved a lot of works. The fiery is a new concept in the environment and therefore we will have to train people and get them to be comfortable with different functionality – the potential is huge. The customer reaction is very favourable to the fiery side. The ink, we will be the first company in the industry, the only company in the industry that actually offer both machine and ink. Some people will welcome that, they will have one partner to work with, to have machine and ink and everything to work flow. Some people will still want to have some sort of freedom between the machine and the ink and we will take more work from outside to convince them in the value. But other than work, I think the strategy is right [indiscernible] excited about adding those two components.

Matthew Kempler – Sidoti

And then I wanted to touch on the software side, so it sounds like we're making good inroads internationally. I just wanted to get a sense, with the broad product suite that we've been building out, how do you feel about EFI's success in the past year cross selling to existing customers?

Guy Gecht

I think the cross selling is getting much better than – we sell, we view that as a really great opportunities for revenue and we think that’s happening. What we don’t see happening is a lot of deals were at the same time, somebody buy both equipment and software, normally it’s two different sales cycles, it’s also good for us. We don’t want to delay one to wait for the other. But it’s certainly – it means there is opportunity as we continue to increase our footprint in the world of software. It’s a great differentiator.

Matthew Kempler – Sidoti

And then lastly for me I was wondering if you could elaborate a little bit more on the reception you're seeing for the new LED printer, and do you think that attach rates are sustainable at a 15% level, which I think you mentioned in the past call?

Guy Gecht

Now we are seeing people moving to LED. The ROIs coming on the note, we are seeing that they find more and more applications because now you don’t worry about the actual materials that because you queue at the normal temperature. So we see people bringing on very slim materials. We have some examples, if I can show you… so it’s really opened the door for lot more applications for customers. The greener printer is cheaper, running cost specially basically consumption is smaller and so we view that as something we are going to push higher speed and higher speed with more applications with more flexible as we do to make sure the gap between us to the next [indiscernible] pretty big and I am very pleased with the R&D progress on that. So adoption is very strong by customers. And I think the gap between us with the next player is growing wide.

Operator

The next question is from Morris Ajzenman with Griffin Securities.

Morris Ajzenman – Griffin Securities

One question. Again, following up on Cretaprint. When you made the acquisition a couple years back, the operating profile, the difficulty there was working capital management some expenses, et cetera, and you've been working on that pretty diligently -- and that with, I guess, coupled earlier, and I've asked on previous calls about manufacturing ink. As 2014 plays out, will this year be a differentiator of breakout or whatever for Cretaprint with potentially having the operating profile under better control, et cetera, and potentially ink? How does 2014 look, without asking you to make projections. But nonetheless verbally, how does Cretaprint look through 2014 for the full year?

Guy Gecht

Unfortunately even verbally what we will say, we will consider projections. So we are not going to comment on the 2014 for Cretaprint. I always say is the opportunity is great there and the fiery, Cretaprint press [ph] and then our own ink is significant. And that’s the one segment today that we don’t have ink, obviously it’s helping us and the opportunity to get it which is pretty significant. And that’s the one segment we actually get ink revenue is bigger and we’re only going to grow faster than actual machine level. So it’s strategically important for us, we are making very good progress on that and I think we are going to exit the year with much stronger product portfolio than on ceramic side as we entered the year.

Morris Ajzenman – Griffin Securities

And then on the operating side, the cash flow management, working capital, is that under control, or is there still more that needs to be done?

David Reeder

We feel like we made pretty good progress with respect to working capital and getting to our operating model. We delivered $89 million of cash flow from operations versus $98 million of operating profit, so that, that’s approaching kind of 90%. That’s actually –that’s a pretty good ratio when you think about a growing business.

Guy Gecht

So on the equation side, Cretaprint, we made a great progress in the two years we are in the business, and I would say it’s probably not at the same operational excellence that we see on the VUTek side. So we clearly see ability to group and even on the – we never say never here as far as we can always get better as far as our results. So we are not stopping here. We’re definitely targeting the higher results for sales as far as efficiency in 2014 and that’s including Cretaprint most.

Operator

The next question is from Jim Suva with Citi.

Jim Suva – Citi

A lot of good questions have been asked. I want to make sure I heard it correctly on your prepared remarks. Am I correct that you're guiding to a 19% tax rate, and if so, can you help us understand, because that looks like it's a pretty impressive step down from historical where you've been, and maybe I should look at hiring your tax advisors.

David Reeder

We are guiding to a 19% non-GAAP static tax rate. So without getting too detailed, we move to a static non-GAAP tax rate for two reasons. One, it drives transparency and predictability as related to disclosures and two, it ensures consistency of method application. So when we calculate our static tax rate we apply a multi-year regional revenue and profit forecast. We included considerations such as statutory tax rate by jurisdictions, segment mix, growth, profitability. In summary, making this change now will enable us to be more transparent with regards to disclosure and it also helped a consistency of application.

When you look at historical rates, we have been in the 22.5% to 23% range, this most recent quarter was 21.5%. If you predict that forward over a multi-year period, you get a rate of 19%.

Jim Suva – Citi

And then the impact to cash flows, are you looking at a cash flow impact in the mid-22.5% range, or does that 19% also flow through to the cash flow from the taxes?

David Reeder

That doesn’t really have an impact on our cash flow. It will impact our non-GAAP EPS.

Jim Suva – Citi

And then I believe you guys were talking about changing some of the tile ink, and potentially I think insourcing it, if I'm correct. Or maybe correct me if I'm wrong. And if so, I would imagine that there may be a margin benefit from that as you move it in-house and not pay an external -- am I right on that, or am I just getting my things mixed up?

Guy Gecht

Today [indiscernible] we and all the other equipment providers sell the machine, the industrial inkjet player and then there are lot of companies that offer inks, quite a few companies that offer inks with those machines. There is no one company that offer both the equipment and we are the first company that offer equipment and ink. We have a tremendous opportunity of ink at EFI and outstanding ink team in place. So we have managed to bring a very good ink to the market and offer it to the customers [ph].

Yes we are going from not having ink to having ink as part of our revenue mix and of course, it would be gradually the adoption rate for ink, we are not going to start very high but obviously incremental.

Jim Suva – Citi

And timing of that, is that already started, or is that something this year that gradually rolls out?

Guy Gecht

As I mentioned to Matt, this is something we are targeting for 2014 and we will not be most particular in this point – next time.

Operator

The next question is Ananda Baruah with Brean Murray.

Ananda Baruah – Brean Murray

I just had a quick follow-up. Two, if I could. What is the timing of the trade show through the spring if you're going to be attending? I know they are bunched up a little bit more than typical last year.

Guy Gecht

So on the inkjet side, Q2 we have big one in Las Vegas and one big in May in Europe. As far as the overall market – for around September October – what time – exactly it’s in Chicago. There is a trade show that’s called ifest, we are going to meet more of our software show, that’s middle of March. And then we have a few regional, the July show in Brazil, July show in China. So we are going to be pretty busy, actually we are participating in more trade shows this year than ever before. Our largest footprint part of our marketing expansion, we are going to be in many, many places, many, many regions with our product portfolio.

Ananda Baruah – Brean Murray

And I guess is any one quarter 2Q, 3Q, or 1Q, 2Q probably, sounds like, going to be OpEx-loaded I guess? So more than a normalized level for the increased ratio activity?

Guy Gecht

No, it’s like fireways [ph] that push shows through the year, and then Q4, either you have graphics or mapping, normally there is no trade shows over the holidays November–December. We hope that Q4 is going to be OpEx loaded from a performance based bonuses and I don’t like we had a few folks that will be a good lead to have the OpEx but other than that, from a trade show perspective it’s normally graphics was going to be the last one.

Ananda Baruah – Brean Murray

And finally on free cash flow, it was just a tad lighter than what we were expecting. I wanted to see if it was in line with your expectations, and if there's any dynamics there that need to be pointed out, that would be great.

David Reeder

I think it was largely in line with our expectations. I mean we did have a record quarter in fourth quarter. We do have a variable pay comp system in place and that’s really related both to the sales and marketing as well as the performance of our acquisitions. So our cash flow was very much in line with our expectations.

Operator

There are no further questions. I will turn the call back over to Guy Gecht for closing remarks.

Guy Gecht

Thank you and thank you everyone for joining us today. Obviously we are very pleased to see another great quarter of solid results and the team is hard at work to deliver record year that we just discussed. As always I want to recognize the entire EFI team for their efforts and dedication to EFI success. And we truly appreciate the confidence of our customers and the loyalty of our shareholders.

I’m looking forward to see many of you in the coming months and looking forward to share with you the results of our first quarter in about 90 days. Thanks a lot.

Operator

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

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