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Electronics For Imaging, Inc. (NASDAQ:EFII)

Q1 2014 Earnings Conference Call

April 16, 2014 17:00 ET

Executives

JoAnn Horne - Investor Relations

Guy Gecht - Chief Executive Officer

Dave Reeder - Chief Financial Officer

Analysts

Shannon Cross - Cross Research

Ben Reitzes - Barclays

Ananda Baruah - Brean Capital

Keith Bachman - BMO

Morris Ajzenman - Griffin Securities

Jim Suva - Citi

Operator

Good afternoon. My name is Shannon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Electronics For Imaging First Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

JoAnn Horne, Investor Relations for EFI. You may begin your conference.

JoAnn Horne - Investor Relations

Thank you, operator, and thank you everyone for joining us today. I have here with me Guy Gecht, Chief Executive Officer and President, and Dave 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 which are statements other than statements of historical facts, including but not limited to statements regarding our strategy, growth expectations, product innovations, new market opportunities and acquisition strategy, 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 to 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 to 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. Please note the slides that correspond to today’s comments available on the Investor Relations website.

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

Guy Gecht - Chief Executive Officer

Thank you, JoAnn, and thank you all for joining us. We are very pleased with the start of 2014 as EFI team delivered very strong results in the first quarter. Our strategy which is the focus on the transformation from analog to digital on-demand printing in large growing industrial segment continues to work. This strategy combined with the passionate dedicated and focused EFI team enable us to consistently deliver solid results.

As we look ahead, to the remaining of the year, our expanding geographical footprint and new products from both EFI and our partners give us confidence that we can continue to deliver strong growth. In the first quarter of 2014, we posted double-digit revenue growth up 10% with profitability again increasing faster than revenues. Operating profit grew 14% contributing to a 27% growth in EPS. We saw solid growth across all segments and geographies with the exception of Japan.

Also, as mentioned earlier, our strategy to focus on expanding our international footprint continues to work well, 52% of revenues came from outside of the United States in Q1. Asia was strong with an quarter of solid growth in China. And for the third quarter in a row, we saw solid quarter of solid growth in sales recovery in Europe as customers begin to catch up on investments in digital printing and productivity improvement and feel more confident about the business outlook.

Turning to each of our business segments. Industrial inkjet posted 10% level of growth, driven by healthy market dynamics and share gains as we continue to focus on expanding our geographical footprint particularly in emerging markets. Sales of our printing systems were particularly strong in the quarter even ahead of a upcoming significant product refresh. UV Ink volume increased 25% indicating solid end demand for customers. In Q2, we have three important ratios for industrial inkjets. We plan to announce significant product refreshes across our inkjet portfolio which we expect to shift later this quarter throughout sales through early Q4. So, while Q2 might be more of a transitional quarter, the upcoming major shows, product refresh and the robust end market demand make us very confident about the opportunities for our industrial inkjet segment in the short and long-term.

Turning to our Productivity Software segment. We delivered solid growth of 14% year-over-year. In January, we announced our acquisition of SmartLinc a small group of software engineers that develop software that optimizes the shipping process of printing products. Also, just a couple of days ago, we announced the acquisition of Rhapso a small team that develop machine critical scheduling software for the packaging industry. In both of those deals, we will bring to the acquired products, we at the EFI sales force to a much larger audience as well as offer the EFI portfolio to the hundreds of users in of the acquired both.

We will continue to execute our packaging and geographical expansion M&A strategy. Our business model of buying a small local player and expanding using the local team is working well. Overall, there continues to be a high level of interest in productivity tools that enable print providers to become more efficient, reduce cost and become more productive. As always for the segment, beyond being a great growth business for EFI, our productivity software is unique and significant differentiator for both the inkjets and the Fiery’s businesses as it creates a very compelling ecosystem.

Lastly, we’re very pleased with the out-performance of our Fiery segment. Our partners are doing well and our share is strong. The March quarter was aided by a couple of new products from Konica Minolta. While with the couple of small group products announcement for major Fiery partners in the next couple of months. We don’t expect to see meaningful revenue contribution from those new products until it’s free. We are also very pleased with the record gross margin driven by the team’s focusing on increasing the add-on options, services and solutions and thus like (ph) as well as the reiteration of the cost reduction initiatives we began last year.

In summary, we are very pleased with our Q1 results and plan to continue executing on the strategy we have outlined over the last many quarters. Our market leading product portfolio and ecosystem are well positioned and will enable us to capture the significant market opportunity ahead. We will continue to target industrial segments with a digital printing demand technology bring significant value and we can enable our customers to increase the competitiveness, profits and productivity. We continue to strides to out innovate and out execute our competition and our focus on expanding our geographical footprint. Looking to the June quarter, we expect total revenues growth of 5% to 7% with EPS growth of 11% to 16%.

And with that, let me turn the call over to Dave.

Dave Reeder - Chief Financial Officer

Thank you, Guy. As JoAnn mentioned, please refer to the supplemental data in the Investor Section of our website for additional information. I couldn’t be more pleased to report 10% year-over-year growth year-over-year growth, while the sales pipeline is typically slow to develop in the first quarter. Q1, 2014 pipeline development was particularly slow in the U.S. in part due to significantly colder regional temperatures that impacted our customers’ retail activities. In the later half of the quarter, however demand was robust enabling us to achieve 10% revenue growth and exceed our forecasted revenue range.

First quarter 2014 revenue was $188.7 million up 10% year-over-year. Non-GAAP operating income increased to $25.3 million which is 13.4% of revenue and an increase of 30 basis points year-over-year. Non-GAAP earnings per share were $0.42 up 27% year-over-year. Additionally, recurring revenue was $51.8 million up 16% year-over-year and representing 27% of total revenue.

Let me now go into more detail on the revenue by business segment and regions. First quarter revenue was driven by strong growth across all business segments. The industrial inkjet segment generated revenue of $87.9 million up 10% year-over-year and contributing 47% of total EFI revenue. UV Ink volume a leading indicator of our customers’ business opportunities increased 25% year-over-year marking our 18th consecutive quarter of double-digit growth.

Fiery continue to strong performance with revenue of $69.1 million up 9% year-over-year and contributing 36% of total revenue. Favorable mix across servers and solutions in addition to increased demand due to recent engine launches propelled by a retuned outstanding quarter. In addition to a strong top-line quarter, channel inventory declined sequentially and remains lean with inventory at the low end of the four to eight week targeted range.

The productivity software segment delivered revenue of $31.7 million up 14% year-over-year and contributing 17% of total revenue. Q1 2014 continues the software group’s growth trend providing an additional prude point that our software strategy is yielding positive results. We expect continued expansion in this segment throughout 2014. Revenue on the Americas amounted to $101 million up 8% year-over-year and a good indicator of strong demand for the year. EMEA continued a strong growth with total revenue of $60.5 million up 21% year-over-year.

Moving to Asia, revenue was $27.2 million down 1% year-over-year. Excluding Japan, Asia revenue grew 6% year-over-year to $21.3 million driven by strong industrial inkjet sales. We continue to make strong inroads into China with Greater China representing approximately half of total APAC revenue.

Looking to the second quarter of 2014, we expect revenue to grow 5% to 7% year-over-year. This is predicated upon year-over-year, mid single-digit growth for industrial inkjet, low to mid-teen growth for productivity software and Fiery growth in the low single-digits. Moving to gross margin, where I’d like to remind you that all further commentary is non-GAAP unless otherwise noted. Non-GAAP first quarter gross margin was 54.9% up 90 basis points sequentially and down 10 basis points year-over-year. Fiery gross margin was 69.3% up 230 basis points year-over-year driven primarily by long-term cost cutting initiatives coming to provision as well as favorable product mix.

Industrial inkjet gross margin was 37.3% down 250 basis points year-over-year primarily due to our continued focus on footprint expansion and lack of ceramic ink. In the productivity software segment, gross margin amounted to 72.1% up 20 basis points year-over-year. For second quarter 2014, we expect the overall gross margins to be approximately flat on a year-over-year basis.

Turning to operating expenses. First quarter operating expenses amounted to $78.2 million up 9% year-over-year driven by higher variable sales compensation related to revenue growth and increased headcount related to acquisitions. We continue to demonstrate considerable operating leverage with OpEx representing 41.5% to revenue a decrease from 41.9% a year ago. R&D expenses were $30.8 million representing 16.3% of revenue and down from 17% a year ago.

Sales and marketing expenses were $34.9 million representing 18.5% of revenue down from 18.6% a year ago. G&A expenses were $12.5 million representing 6.6% of revenue up from 6.3% a year ago. For second quarter, non-GAAP operating expenses will be approximately flat sequentially. We believe leverage remains in our model as we drive towards the lower end of our long-term OpEx range of 37% to 41% of revenue on an annual basis. Strong revenue growth in operating leverage delivered first quarter operating income of $25.3 million up 13% year-over-year and generated an operating margin of 13.4% up 30 basis points year-over-year. Other income and expense had a net loss of $0.1 million and our static tax rate was 19%. The combination of strong revenue growth and focus cost containment enabled us to deliver earnings per share of $0.42. This compares favorable aid to the year ago quarter EPS of $0.33 representing an increase of 27% year-over-year. For second quarter 2014, we expect non-GAAP EPS of $0.42 to $0.44 and 11% to 16% growth in year-over-year earnings per share.

Turning to the balance sheet. Total cash, cash equivalents and short-term investments amounted to $316 million compared to $355 million at the end of Q4. Net accounts receivable was $144 million up $14 million sequentially reflecting the strong month of March. DSO was 68.9 days, up 7.9 days sequentially. Our net inventory balance was $70.8 million up $2.5 million sequentially with inventory turns of 4.9. Days of inventory increased 5.4 days with DPO and DPO declined 1.9 days. The total cash conversion cycle increased by 15.2 days sequentially finishing at 69.3 days reflecting the backend linearity of the quarter. We generated $6 million in cash flow from operations.

In Q1, we returned a record $34 million to shareholders through our buyback program representing an amount greater than all of 2013 combined. Our total diluted share count was 48.4 million shares a sequential decrease of 417,000 shares and inline with our target to reduce share count to approximately 48.5 million shares.

Before concluding my prepared commentary, I’d like to thank the entire EFI team for an outstanding quarter.

And with that, we will now open the lines for questions.

JoAnn Horne - Investor Relations

Operator, we’ll take questions now please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Shannon Cross from [Cross Research]

Shannon Cross - Cross Research

Thank you, very much. I wanted to follow-up on through the linearity during the quarter and the strength in March. Can you talk little bit about how to continue – did it continue on into April and how you’re thinking about perhaps some of your cash conversion cycle increased in terms of days, declining next quarter. So, just if you can talk a bit about what you’re thinking about in terms of linearity?

Guy Gecht

Yes. I’ll start and Dave will take more about the balance sheet items. But, normally Q1 is probably slow for various reasons. We expect to have very good pipeline of opportunities, it’s a higher mix of early stages of opportunities when customers did early in the cycle. So, that wasn’t that different when we started in prior years. What we notice is particularly in the U.S. it moved a little slower in January and February and I’ll get to this in a minute but in March, they all came together very nicely and we finished with best momentum and we feel like there is tons of activities right now, lot more opportunities in both various stages.

So, this was really a phenomenal of January and February. When we look that at the U.S. we did a little exercise, we split the U.S. to states with severe weathers and states with just a normal winter weather. And when you look at for example the ink consumption it was unbelievable the difference in the ink consumption between those – the states with the severe weathers we’re a lot lower in growth, very low growth rate year-over-year compared to a very strong growth rate in the states without the severe weather. What was interesting is, for the quarter, the severe weather actually called out, so March was a very strong quarter – month. So, we don’t know how with exactly to correlate but clearly we see the ink consumption has something to do with that. And again we finished – the good news is we finished the year with very strong notes in all products upfront and we started April with a lot of activities and a much stronger pipeline when we started the Q1. Yes.

Dave Reeder

Yes. So, as Guy mentioned, we did have strong momentum exiting Q1. Obviously, when you have a lot of orders that come in, in the last month of the quarter, you don’t quite get a receivable your accounts receivable in the current period. So, if you were to look at DSOs where they increased 7.9 days sequentially. Days of inventory, which increased 5.4 days sequentially largely due to inventory that we’ve ordered to support some of the new products that Guy mentioned earlier. And then you look at days payable that decreased 1.9 days sequentially. It’s quite easy to get to the 15.2 days increase in the cash conversion cycle that you’re seeing. So, we expect Q2 with regards to working capital to revert to the normal ranges.

Shannon Cross - Cross Research

Okay, great. And then can you talk a bit about the margin improvement that we’re seeing in Fiery, sustainability I think you mentioned it was further provision of some of the cost cuts that you’ve put in place, so the changes you’ve done. But, how should we think about margins on a going forward basis given the benefits you had there. And then just what you’re expecting in terms of revenue and leverage?

Guy Gecht

Sure. So, as you mentioned it’s the combination of two things, one is the team worked hard last year on various cost cutting initiatives and some of them just kicked in while the work was done last Q2 and Q1 and there is a definite benefit and that will continue. But on top of it, we had a very, very favorable mix Fiery this quarter, lot of them all high margin products, more service compared to embedded a lot of add-on sales, more solution sales, services sales. So, it’s all came together with almost the more favorable mix we can imagine. I would not count on that favorable mix in every quarter, sometimes the mix will be less favorable, sometimes it’s more favorable. This was the quarter when to came favorable.

Shannon Cross - Cross Research

Okay, great. And then just one last question, can you just talk a bit about some of the sort of future products, ceramic ink, potential to expand the software perhaps into 3D printing. Just how should we sort of think about what your outlooks regard to those and then with regard to acquisitions is just we can see opportunities for incremental expansion? Thank you.

Guy Gecht

Okay. I can take an hour to talk about what you just mentioned, I’ll try to do it in a short manner. So, as I mentioned, we are actually a very, very significant product way push across the portfolio, we started Fiery because it’s easier. We’re expecting couple of significant announcement of our partners this quarter although those products will really shape partnership in Q3 but there are products, that’s leading the spot – sweet spots of EFI. From the inkjets in the trade shows, we’re going to announce across the board, new products and product refresh that are very significant, we’re very excited about that.

As far as M&A, we will – the pipeline has really pulled from small companies to somewhat larger, it’s tough to predict the timing but we feel pretty good about the pipeline we’re at now. Ceramic ink, we will stay with our statement that is 2014 event. I can tell you we’re very, very pleased with our – where we got focused on that. And then expanding the software to 3D, this is still something under investigation but we have a lot of ideas fort the software how you can play additional all and in industries we’re playing in and completing the ecosystem. And therefore, I think there is a lot of good opportunities for us to act on them up to as well as and if anything all the other portfolio that we have to-date.

Shannon Cross - Cross Research

Great.

Dave Reeder

Yes. I’d just like to add in that with regards to future growth, the growth in the ink volume the opportunity for credit print ink in the future, the international expansion and then the growth that you’re seeing in the productivity software. In addition to the M&A that was discussed a little bit just a second ago, I mean we’ve got some great paths for future growth.

Shannon Cross - Cross Research

Thanks.

Guy Gecht

Thanks Shannon.

Operator

Your next question comes from the line of Ben Reitzes from Barclays. Your line is open.

Ben Reitzes - Barclays

Hey, thanks guys. Can you talk about what drove? Thanks. Can you tell me what drove the gross margin for industrial inkjet in the quarter was little lower than we expected and how is that going to look as we go throughout this year that do we expected to pick backup. And then I just have a follow up. Thanks a lot.

Dave Reeder

Yes. So, when we think about what’s different today versus what’s different in prior years and prior quarters, it’s really that we have a truly diversified business portfolio. Fiery and productivity software are performing extremely well with respect to gross margin. The strength from these two segments really enables us to focus on growing the inkjet footprint particularly internationally where we had some very nice growth across industrial inkjet. So, with corporate gross margin at 54.9%, we’re very, very pleased with corporate gross margin and with our ability to grow the footprint both domestically as well as internationally on the inkjet side.

Ben Reitzes - Barclays

Okay. And you talked about weather a little bit and obviously backend loaded, I believe it’s backend loaded in the quarter which is lot of receivables. Did you – managing a few conference calls, did you talk about revenue pushed into the couple of quarters, so did where you – do you have better visibility now perhaps due to some of the shipment timing that they got pushed into this quarter or would you say it’s looking pretty linear into the portfolio transition?

Guy Gecht

I think we are in a very, very healthy stage right now as far as the pipeline sales, we review that minimal this time to last couple of weeks, lot more opportunities, the lot more advanced. And so, I don’t think looking at I don’t think where this is same type of seasonality extreme linearity we saw in Q1 and we don’t have the weather that slow down in the U.S. which was really for the linearity was more than the usual for Q1. But, what’s working also in this quarter on trade shows and I know customers that are going to make a decision when you go to the trade show and it’s big one in U.S. where big one in Europe and one in China, so three big markets. They’re going to go to trade show and make a buying decision there based on what they see and hopefully refreshing when an ops is going to go out way a lot more that’s not going to go away.

So, that’s getting quite a little bit of linearity but we feel pretty good as far as the partners they actually seems to be tracking, I can actually tell you Canada announced a light production engine yesterday in Japan, they said to ship in Japan in June so you can imagine they ship rest of the world not too far after that so that’s the first one. And then there is another coming, there will be announcement next couple of weeks, I think we have a pretty good visibility to where it is and it’s not part of the Q2 guidance but definitely will help beyond that.

Ben Reitzes - Barclays

Alright. Thanks a lot guys. Really appreciate it.

Guy Gecht

Thanks, Ben.

Operator

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

Ananda Baruah - Brean Capital

Hey, thanks guys for taking the question. Congrats on a solid quarter. Few things if I could, so with the implication, guys of the commentary around the June Q inkjet product refreshes be that there is a little bit of pause from customers in March and June, I guess it will take us to June guidance. I know there is a weather impact in March as well but you think there is also some pause ahead of the product refreshes?

Dave Reeder

It could be. Customers know that those shows are very significant and vendors will do everything in empower to show the best next generation an improvement of the product. So, I met personally a few customers so look we did another unit but we’re going to wait for the show to see what you guys when other people will announce. So, definitely you can draw a line there. Again, we ended up, again March we had already we finished with some momentum, momentum continued. Therefore so , we can’t complain on a 10% year-over-year growth in inkjet but I would say those shows cause people to some people to wait and see what’s going to be announced.

Ananda Baruah - Brean Capital

Yes. So, guys I’m just wondering with the 10% growth in the March quarter and the guidance for 5% to 7% in June, coming off with the run rate saying you’ve been coming in that you’ve been at sort of over the last couple of years, that’s after year-over-year growth and as you compare to tough, but it’s still a pretty meaningful shift. And I don’t know I just make you think that maybe there is pause ahead, if it’s not pause ahead, what do you think happens with the run rate as we go forward?

Dave Reeder

The way I would think about Ananda is that we’ve been somewhat prudent with our guidance given the kind of the full portfolio refresh on a significant number of new products that we’re announcing in Q2. We guided productivity software between low to mid-teens, we’re still on the Fiery kind of low single-digits GDP range. And really what we’ve done from a prudent perspective is we just looked at that industrial inkjet segment and given the number of new announcements across the entire product portfolio, we’ve been somewhat prudent in our guidance at 5% to 7%.

Ananda Baruah - Brean Capital

Got it, got it. That’s helpful Dave. Thanks. And then I guess just guys on OpEx, so you talked about flat dollar wise in Q2, now there is three trade shows which is a big number. So, should we expect – I guess when we think of that sort of OpEx, OpEx levels for the second half of the year for a modeling, should we think of their sort of being three trade shows what they nearly comes out. And should we expect sort of a new run rate where we get to to the second half of the year?

Dave Reeder

Well the way I would think about it is and the way we’ve modeled it, is that we have a high pay for performance culture here at EFI. And so, to the extent that you see top-line 5% to 7% guidance obviously, we’ve got some room in the OpEx model to be able to accommodate for trade shows. To the extent that we outperform on the top-line and obviously you should expect to see higher pay for performance. So, we’ve got some built-in regulators across the company with regards to OpEx.

Ananda Baruah - Brean Capital

Okay. And then I guess this is the last one from me for now. What – any comments around what’s the timing for new markets might be and you’ll make acquisitions as you make acquisitions but I guess I’m just looking for something anecdotal whether it be something organics for you guys come up with, that allows you to approach new markets, like you do with textiles (ph) is certainly be, just to get some sense of what that might look like, what that might feel like?

Dave Reeder

Yes. So, we’re working on many things, I would say the real new type of application that we talked about is the ink for the ceramic inkjet as we sell more and more systems, industrial inkjet and ceramic, we obviously like to sell many of them for the ink and we stay on this 2014 relatively big portfolios. We had spent for lot of things including M&A and organically but we got a new confidential – I could tell you and the more and more companies are listening to our call going over the states I get questions from competitors on what exactly we said. Thankfully I have an absence and not everything is well understood but we want to be very careful with that.

Ananda Baruah - Brean Capital

Got it. I can appreciate that. Just one last one if I could, follow-up on the leverage on the OpEx. The March OpEx was a little bit softer than what prior sort of what leverage has been in prior quarters and for prior markets and if I keep the OpEx dollars flat in the model, the same would be – it will be the same case for June. The second half of the big product cycle I guess is going to be a big product cycle half for you guys, I think it’s not just because of an inkjet products but because of the sort of the hitting all gears on Fiery. So, should we expect the leverage to resume at what the levels have been as we get into the second half of the year or should we just expect the less OpEx dollar leverage going forward?

Dave Reeder

Well, a lot of our I mean as you know Ananda lot of our costs are somewhat fixed about 70% ish of our cost, our headcount related. And so, as top-line grows faster or slower then you get the disproportional amount of OpEx leverage that comes out the bottom. So, as we have a higher growth rate and you should expect to see higher drop down rate given the most of our costs are somewhat fixed. So, I don’t know if that explains your question enables you to model it. But certainly as top-line grows, because that’s the opportunity to grow bottom-line faster.

Ananda Baruah - Brean Capital

Got it guys. Thanks a lot.

Dave Reeder

Thanks, Ananda.

Operator

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

Keith Bachman - BMO

Hi, guys.

Dave Reeder

Hi, Keith.

Keith Bachman - BMO

I wanted to, Guy this may surprise you but I want to talk about Fiery a little bit. It was actually up sequentially from the mistaken. And just wondering what the pipeline, the underlying pipeline looks like there, now that we’re one quarter deeper into the year particularly relative to what appears to be a very strong Q1. And did you – did that pull forward or is that kind of what you guys were expecting, I understand you’ve guided Fiery up low single-digits year-to-year. But, maybe you could just talk about the pipeline of product launches underneath as you look out?

Guy Gecht

Yes. So, if you go back to about Q3, somewhat predicted this you will ask about in Fiery. So, if you look back at the call we had in January, I mentioned that in next few days the major part that we’ll announce in major new production line up. And Konica was the top and their announces on the big (indiscernible) starts to throwing out of the gate and they bought some good definitely you’re going to planning in as well, so definitely was good. And I would say Fiery was really a strong across the board, the entire quarter, we went and checked quite a few times when we got hold of those that nobody is taking too much inventory. When it’s all set and done, Dave and I and mostly Dave who spend a lot of time with GM and the team trying to figure out what’s the inventory in the channel. We are very plenty of supplies at – if you said in general it was low taxing was below the level that we finished Q4. So, there is definitely not any pulls even by accident by a major Basel so that was very good. As far as the – obviously we’re hoping to see the momentum going forward, there is a good Basel on Fiery right now. I think the lot of customers know that they’re making a compromise, if they don’t buy Fiery with their digital press and I think fewer people would like to make this compromise when they invest a lot of money in digital printing.

Besides the new product introduction, I already mentioned the one that was announced in Japan yesterday. There is another major production, very strong production place that will be announced by one of our other partners in the next few weeks. But, also it’s not going to shift significantly this quarter, so that’s good. Then we have some other things that’s coming to market likely in due. So, it’s thoughtful today then we try to be careful this quarter by quarter but I tell you today as we talk about the Fiery business, I feel even more confident that I tell when I answer your questions generally.

Keith Bachman – BMO

Okay.

Dave Reeder

I would just add on to the channel inventory declined mid-teens from where it started the quarter. And I would also say on the top-line, we really had a great mix and then we had a strong mix of servers versus embedded. We had a strong attach rates on services and solutions and options. And part of that droves not only to top-line but you also saw it fall through to the gross margins.

Keith Bachman – BMO

Okay. Fair enough. And let me just ask a follow-up, perhaps I’m not sure if it’s addressed, I apologize, this is on a different conference call but if talking about cash flow, how you’re looking at it for the year?

Dave Reeder

Yes. So, I guess is that the full question?

Keith Bachman – BMO

Yes, sir.

Dave Reeder

How we look at it for the year. Okay, perhaps I was waiting for something more perhaps but I mean we’re targeting one X operating income.

Keith Bachman – BMO

Okay. So, it’s a same metric?

Dave Reeder

Yes. So, when you’re growing, obviously that’s a hard target to achieve, last year you saw us did about 0.9.

Keith Bachman – BMO

Yes.

Dave Reeder

Of that number. But, that’s the number that we continues to be a target and aspirational for us. Obviously, we had backend loaded quarter.

Keith Bachman – BMO

Yes.

Dave Reeder

It makes accounts receivable a little bit more difficult to get in inside the quarter. But, certainly we’re not looking to deviate over a long period of time far more historical normal range.

Keith Bachman – BMO

Okay. So, should we still be thinking about one X then?

Dave Reeder

You should still be thinking about one X for an annual basis every 12 month basis, yes.

Keith Bachman – BMO

Okay. Alright. That’s it from you guys. Thank you.

Dave Reeder

Thanks, Keith.

Operator

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

Morris Ajzenman - Griffin Securities

Hey, guys.

Dave Reeder

Hey Morris.

Guy Gecht

Hi, Morris.

Morris Ajzenman - Griffin Securities

I’ll start with an previous question on inkjets. You highlighted in the first quarter top-line of 10% guiding to low mid excuse me guiding to mid single-digit growth into the second quarter. Howe should we look again you talk about new offerings specifically I guess refreshes of trend as this thing in transition quarter. Should we look at the whole year as the 10% growth still? And then adding on that portion of estimate pass to somehow give us some color, how this growth for you whether it’s mid single-digits, 10% how that compares to market. You talk about share gains but can you put out what the market share numbers are approximately, so we can kind of have some sort of projection looking at how your share gains have played out, give us a bit of feeling for high U.S. standard and market. Maybe 5% growth in any one quarters, compare very strong versus the market. Can you put out some color more granularity on that for us?

Guy Gecht

Yes. So, Morris, first of all it’s difficult particularly the effect normally for the share. We’re actually the only company that gives this kind of numbers. And so, which I think this is difficult but I can tell you looking at the win loss, we are doing quite well especially I mentioned Butek had a very strong quarter. And we’re winning more than we used to win as a percentage of the peers and we’re tracking that. And I think with the product refresh would be in stronger position to win. What’s your seeing in the market of course the rule is that customers can carefully care about quality, about speed, about reliability making sure that they get in older for variant influent customers.

Those system will work no matter of what’s and those are the things that you’d find notable and then the combination of the ecosystem, well the Fiery forms them inside of the inkjets and the software is the leading unique operating but nobody else offer in the market and that’s something that we’re seeing making more and more impact on the market. So, the guidance which we’d meant to be conservative on the interest side for the quarter there is nothing to do with a different win loss scenarios, it’s actually we think we’re going to be in a much great shape once even a better shape once we announce the new product. But we believe that some people very perpetual we will announce product that will not keep in Q2 is something we will wait for that for Q3 to get those codecs in shape. So, you got to factor that into this when we are in April I think you might put. I would tell you another metrics on share gains that I think will give you a strong evidence.

We keep giving out the number, the growth in volume of UV ink and I think our customers are gaining share with machines. When you – if you look at this quarter 25% is reasonable in spite of pretty slow stopping ink flow out of the U.S. nothing in advertisement, nothing in our markets go 25%. So, you tell me that are customers that are more and more jobs that are growing into the equipment that we’re providing. And so that’s a very strong indication that as we maybe not in system but a system on the volume we can see a very strong correlations that we going faster than the market.

Dave Reeder

Morris, I’d just like to add that, we still have a long term growth model for this segment, industrial inkjet at 10%.

Morris Ajzenman - Griffin Securities

10% plus.

Dave Reeder

And that hasn’t changed.

Morris Ajzenman - Griffin Securities

Would you able to give us any sort of color on what percentage of inkjet revenues comes from ink?

Guy Gecht

Nothing changed from what we said in the Analyst Day and it’s all more – so we gave a little bit of – I think it wasn’t significantly different in the quarter.

Morris Ajzenman - Griffin Securities

Thank you.

Guy Gecht

Okay. Thanks Morris.

Operator

(Operator Instructions) Your next question comes from Jim Suva from Citi. Your line is open.

Jim Suva - Citi

Great. Thanks guys. It’s Jim Suva here. A lot of a detailed questions have been answered so maybe I could take a big strategic question for you guys. When you think about the addressable markets, digital from analog, can you maybe help us understand where you think we are say for a percentage saturation or a percentage of a transition both are large form factor and then to say it is ceramics. So, I imagine we’re probably extremely early innings and maybe you can help us understand like what percent of the market you think you guys have been able to attract so far, you guys in the industry through that transition?

Dave Reeder

So, Jim nothing really significantly changed in the last five, six months since we had the Analyst Day back in the October and we talked about the theme of the early innings of analog to digital printing. And so as far as we gave actually pretty good information I think at the various segment and can’t be ever was about felt of the addressable market is all digital for those 2X more to convert in the many e-commerce as well as the market grow by itself and obviously we’re able to receive with tens of volume growing instead of – and the replacement that we’re seeing in the markets.

So, that still largely impact and that was kind of the base through the feel we’re off that mostly organically and with M&A we can reach and bypass the $1 billion target in 2016. And if I look at what you want to and what I know about the pullback and what’s where we feel like not have to say that it’s really been more confident about achieving the targets and we fell back in October.

Jim Suva - Citi

Great. And then on a different topic, when we start thinking about the potential margin expansion is ink fertiles get in sourced. Can you help us either quantify or think about the timeline of how we should be and basically measure ourselves to make sure we’re not overly optimistic about it or being too (indiscernible) to me it seems like it would be a margin expansion with the ink fertiles being in sourced.

Guy Gecht

It is a significant opportunity for us both from the top-line and bottom-line the portion about it. We actually gave a little more details again back of the Analyst Day that we’re happy to send you the specific slides but the machine in ceramic consumer lot more than any other applications that we’re addressing today although the ink has been lot cheaper still very significant revenue and profit opportunity. So, what we said look, we’re going to have to pull those out, this market exist for many years that lot of established players we’re going to show up focus on few geographies, get some customers to be very successful, show them that ink is better work extremely well for machine and the slide in form of that it’s a great combination and hopefully we’ll see people migrating. But nobody should hope that once we announce it, the entire market is going to come back to us and say now give us an ink but up to way in one at a time but again as we win is going to continue to help us to grow and as the great part of what we believe future opportunity in this market.

Jim Suva - Citi

Great. And thank you and congratulations to you and your team there at EFI.

Guy Gecht

Thank you, very much Jim. Appreciate that.

Dave Reeder

Thanks.

Guy Gecht

Operator?

Operator

Your next question comes – I apologize. Your next question comes the line of Keith Bachman from BMO. Your line is open.

Dave Reeder

Hi, you want to talk? You want to ask about the Fiery? Yes.

JoAnn Horne

Operator?

Operator

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

JoAnn Horne

Operator, we’ll go to the next question please.

Operator

There are no further questions at this time. I will turn the call over to Mr. Gecht.

Guy Gecht - Chief Executive Officer

Thank you. As always I would like to thank the EFI team for their passion and dedication, our customers with their royalty and our shareholders for their confidence in that. We’re very excited about the opportunities ahead for EFI and we look forward to sharing for this with you next quarter. Thanks a lot.

Operator

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

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