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Electronics For Imaging, Inc. (NASDAQ:EFII)

Q2 2014 Results Earnings Conference Call

July 17, 2014, 05:00 PM ET

Executives

JoAnn Horne - Investor Relations

Guy Gecht - CEO

David Reeder - CFO

Analysts

Ananda Baruah - Brean Murray Carret & Co.

Shannon S. Cross - Cross Research

Benjamin Reitzes – Barclays

Keith Bachman - BMO

Matthew Kempler - Sidoti & Company, LLC

Jim Suva - Citigroup

Morris Ajzenman - Griffin Securities

Operator

Good afternoon. My name is Phoenix, and I will be your conference operator today. At this time, I would like to welcome everyone to the Electronics For Imaging Second 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.

I would now like to turn the call over to JoAnn Horne, Investor Relations. You may now begin your conference.

JoAnn Horne

Well thank you, Phoenix, and thank you everyone for joining us today to discuss EFI's second quarter 2014 results. Leading the call today will be Guy Gecht, Chief Executive Officer; and EFI's Chief Financial Officer, Dave Reeder.

Before management's remarks let me review the Safe Harbor statement. During the call today 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 and market trends, 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 rates, working capital and any statements or assumptions underlying any of the foregoing.

Forward-looking statements are statements of risks and uncertainties that could cause our results to differ materially or cause a materially adverse effect 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 non-GAAP to GAAP measures can be found in the press release that we issued this afternoon on our website at the IR section at www.efi.com. Please note the slides that correspond to today’s comments are available on the Investor Relations website.

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

Guy Gecht

Thank you, JoAnn. The EFI team again delivered solid results in the second quarter. Our strategy continues to work, our commitment to market leading innovation with new product introduction across our Industrial Inkjet and Fiery segments and our focus on execution, operating efficiency and geographic expansion are evident in another quarter of consistent performance.

Solid growth in all three businesses led to total revenues of $193 million including record recurring revenue, a 10% increase in operating profit and EPS of $0.44, up 16% year-over-year. We are pleased with our progress half way through the year and in fact as you can see in our Q3 guidance expect the growth to accelerate. This trend makes us even more confident in our ability to deliver on our $1 billion revenue target by the end of 2016 with 10 more quarters to go.

As I mentioned above EFI industry leading innovation was truly a highlight this quarter on display at key trade shows around the globe. Let me give you a few examples. First, we took steps to move both up and down market in industrial inkjets. On the high end our HS100, an industry leading high volume production inkjet printer delivered near offset quality for display graphics, corrugated packaging and other applications. Corrugated equipment and ink is about $9 billion market. So we are pleased to begin addressing this opportunity if only in a very small way.

Down market we introduced the H1625 entry level production LED printer. With its low total cost of ownership the H1625 gives users the ability to print faster, high margin wide format graphics on a broader range of rigid and flexible substrates, opening the door to increased business opportunities. LED capability in a hybrid printer that addresses this roughly $400 million total addressable market is truly unique so the initial demand has been very strong. We sold out our Q2 production and we are very close to selling out our Q3 production.

We also announced UltraDrop technology which creates ultra-resolution, high quality output without slowing down production speed. It offers the powerful combination of smallest drop size in its class combined with grayscale. The reception to this differentiated capability has been tremendous and we are currently phasing it in across the inkjet product portfolio.

The attractiveness of UltraDrop was very evident in the initial demand over the past couple of weeks for the newly introduced VUTEk 5500LXr, the industry's first 5 meter LED inkjet printer with UltraDrop technology as a standard configuration.

On the ceramic tile front we introduced a revolutionary special effect capability, we call the XL [bar] which allows for new 3D effects using a large drop on printed tiles. At the same time demand for our Fiery Front End for Cretaprint continues to pick up. We are also making progress on our Ink for Cretaprint line-up and are on schedule to commercialize the ink later this year.

Finally we started to ship our most advanced, digital Front End platform in the Fiery FS164 which offers even faster processing, unsurpassed image quality, seamless MIS integration and enhanced feasibly and automated work flow for the digital printing environment.

Now looking a little more closely at each segment. As you may remember we were cautious last quarter in discussing Inkjet Q2 growth in the form of new product introductions and trade shows. So we are encouraged with the 7% revenue growth. The demand for our product line-up including these new additions remains strong and we are excited about the new innovation in our development pipeline. As such we expect growth to accelerate in the third quarter with revenue growth between 8% to 10%.

We are very pleased yet again with the performance of our Fiery segment. The consistency of our results is particularly important. After 11% growth in 2013 there were some valid questions about our ability to grow this segment again in 2014. For the first six month of 2014 Fiery revenues increased 8%, with the strength of our results and additional product introduction from our partners expected in second-half of 2014 we feel confident in projecting another growth year Fiery in 2014.

We believe the results reflect the essential role EFI plays for our partners. As today we are the only company in the industry focusing and investing in digital Front End innovation. So again innovation is key to our success. We expect the Fiery strength to continue and for the third quarter we expect growth in this segment of a low single-digit.

While historically we have driven double-digital growth from the productivity software segment this quarter we are disappointed to only deliver 8% growth, which we attribute to an unusual number of large deals that got pushed out of the quarter. We look for software revenue growth rate to rebound to meet double-digits in Q3.

We strengthened our software team with the addition of Gaby Matsliach as Senior VP and General Manager of software in May. After a long search and reviewing countless candidates we selected Gaby due to his impressive background in enterprise software and product architecture coupled with deep global M&A experience. We believe Gaby brings great leadership to the strategically important part of EFI and we’re already seeing from him great new ideas on how we can expand globally as our businesses both large and small become more efficient and competitive.

From a geographic prospective our investment in growing our footprint in EMEA continued to yield solid results with 34% growth year-over-year. In the Americas we saw good momentum in North America while Latin America had mixed results. Similarly in China we had strong results in VUTEk and Fiery offset by weakness in Cretaprint which we believe is largely attributed to our customers in China slowing down investments as they get concerned about slowdown in construction spending.

In summary our Q2 performance was very solid and we believe our consistent results prove that our technological innovation, balanced product portfolio and ecosystem positions EFI to capture the significant market opportunity. As always we will continue to target high growth segments where digital print technology brings significant value and we can enable our customers to increase the profits productivity and efficiency.

As we head into Q3 we have strong momentum, new products and a solid pipeline of both deals and innovation. With that in mind we expect 8% to 10% total revenue growth with EPS up 10% to 15% to the range of $0.43 to $0.45 per share.

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

David Reeder

Thank you, Guy. As JoAnn mentioned, please refer to the supplemental data in the Investor section of our website for additional information. We delivered strong results with record June quarter revenue of $193 million, up 7% year-over-year. Total recurring revenue was $53 million, up 11% year-over-year and representing 28% of total revenue. We expanded operating profit margin to 13.5% and delivered non-GAAP earnings per share of $0.44, up 16% year-over-year. Our cash conversion cycle improved by 9.8 days and we delivered $27.5 million in cash from operations, an improvement of 44% from the year ago period.

Let now explain in more detail the revenue by business segment and region. Second quarter revenue was driven by balanced growth across all of the business segments. The industrial Inkjet segment generated revenue of $93.9 million, up 7% year-over-year and 49% of total EFI revenue. Revenue in the segment was driven by strong growth in both display graphic printers and UV ink. UV ink volume increased 15% year-over-year marking our 19th consecutive quarter of double-digit growth.

The Fiery segment continued its strong performance with revenue of $68.3 million, up 7% year-over-year and contributing 35% of total revenue. Strength in digital Front End and Fiery Solutions drove another solid quarter.

In addition to a strong top line quarter, channel inventory remains lean at the low-end of the targeted range and similar to last quarter. The Productivity Software segment delivered revenue of $30.8 million, up 8% year-over-year and contributing 16% of total revenue. Though we are disappointment that we did not deliver double-digit revenue growth in this segment the large quantity of high value opportunities, many of which are near fruition give us confidence that this segment will return to double-digit growth in the third quarter.

Regionally, revenue in the Americas amounted to $101.6 million, up 1% year-over-year. EMEA continue to deliver strong revenue growth with total revenue of $66.9 million, up 34% year-over-year.

Moving to Asia Pacific, revenue was $24.5 million, down $5.3 million year-over-year. As expected in Asia Pacific we experienced some delays in industrial inkjet sales due to an early July display graphic trade show. Also as Guy mentioned in his opening commentary our ceramic customers in China are concerned about a potential slowdown in the construction industry resulting in a longer than normal sales cycle.

Looking to the third quarter of 2014 we expect total revenue to grow 8% to 10% year-over-year. This is predicated upon 8% to 10% growth for Industrial Inkjet, Fiery growth of low single-digits and mid-teens growth for Productivity Software.

Moving to gross margin, where I'd like to remind you that all further commentary is non-GAAP unless otherwise noted. Second quarter gross margin was 54.1%, down 50 basis points year-over-year and down 80 basis points sequentially. Industrial inkjet gross margin was 38.5%, down 150 basis points year-over-year, but up 120 basis points sequentially.

Fiery gross margin was 67.4% flat to the year ago period and down 190 basis points sequentially as product mix returned to normalcy. In the Productivity Software segment gross margin amounted to 72.1%, up a 110 basis points year-over-year. For the third quarter 2014, we expect overall gross margins to be approximately flat sequentially.

Turning to operating expenses, second quarter operating expenses amounted to $78.3 million, up 4.4% year-over-year. We remain focused on profitable growth and continue to demonstrate operating leverage. Expenses as a percentage of revenue declined to 100 basis points from the year ago period to 40.6%. R&D expenses were $31.7 million, representing 16.4% of revenue and down from 16.9% a year ago.

Sales and marketing expenses were $34.3 million, representing 17.8% of revenue down from 18.6% a year ago. G&A expenses were $12.3 million, representing 6.4% of revenue up from 6.1% a year ago. For the third quarter operating expenses will increase slightly on a sequential basis.

Solid revenue growth and strong cost containment delivered second quarter operating income of $26 million, up 11.4% year-over-year, generating an operating margin of 13.5%, up 50 basis points year-over-year. Other income and expense had a net loss of $0.2 million and our static tax rate was 19%. The combination of solid revenue growth and focused cost containment enabled us to deliver earnings per share of $0.44. This compares favorably to the year ago quarter of $0.38 representing an increase of 16% year-over-year.

For third quarter 2014, we expect non-GAAP earnings per share of $0.43 to $0.45, a 10% to 15% growth and year-over-year earnings per share.

With respect to the balance sheet, cash, cash equivalents and short-term investments amounted to $325 million compared to $316 million at the end of Q1, 2014. The total cash balance increased $9 million sequentially as $27.5 million of cash from operations was partially offset by share repurchases, acquisition costs, and corporate headquarter construction payments. Net accounts receivable was $147.8 million, up $3.4 million sequentially reflecting strong sales performance from EMEA that generally come with longer payment terms and $1.8 million of receivables related to the Rhapso acquisition.

DSO was 69.7 days, up 0.8 days sequentially. Our net inventory balance was $70.5 million, down $0.3 million sequentially with inventory turns of 5.0. The cash conversion cycle improved 9.8 days sequentially returning to historical norms and generating $27.5 million in cash flow from operations.

In second quarter we returned $10.5 million to shareholders as part of our $200 million buyback program bringing our total purchases under this program to $47.4 million. Second quarter repurchases reduced diluted shares outstanding by 370,000 shares resulting in a total diluted share count of 48 million shares. We continue to maintain a long-term share count target of approximately 48.5 million shares.

To summarize, a refreshed product portfolio and balanced segment performance drove record second quarter results. Revenue grew 7%, operating profit grew 11% and earnings per share grew 16%. We enter the third quarter optimistic and with momentum which is reflected by top line guidance of $193 million to $196 million, up 8% to 10% year-over-year and earnings per share guidance of $0.43 to $0.45, up 10% to 15% year-over-year.

As always we're delighted to serve our customers while delivering value to shareholders and opportunities to our employees. Before concluding my prepared commentary I would like to once again thank the entire EFI team for an outstanding quarter and with that we will now open the lines for question.

JoAnn Horne

Operator we'll take questions now please. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Ananda Baruah from Brean Capital. Your line is now open.

Ananda Baruah - Brean Murray Carret & Co.

Hey guys, thanks for taking the question. A couple of -- I guess the first one is just with regard to software, I guess the guidance for mid-teens growth in September quarter that sort of was in the June quarter as well. So with the deals slipping it would sort of suggest that may be the guide, given the mid-teens guide sort of suggests that may be guides would have been -- will be lighter than mid-teens growth if you had gotten the deal. So the question is, is there anything else about the environment that you see shifting with regards to sort of secular growth rate or does everything sort of feel as is?

Guy Gecht

Hi, Ananda we looked at that quite a bit since the beginning, since the end of the quarter. And we're pretty convinced that that's an anomaly. Every quarter we have some portion of revenue come from large deals. The second quarter was a higher ratio of large deals that got deferred and each one of them for separate reasons. So keep in the mind a lot of our customers are private companies. They don't have that early respect to the June 30th deadline. Since the end of the quarter we already closed couple of those large deals.

The team feels pretty good and so we feel like this is 15 quarters of double-digit growth one quarter of single. We think we can come back to a very good momentum of double-digit. The geographical expansion is working in Europe. And we're not down in geographical expansion or M&A, we feel pretty good about the business. We can always guide higher. We’d rather guide where we think we can deliver and we think at this point after guiding at mid-teens we should be roughly double the growth rate of Q2, is pretty good.

David Reeder

Ananda I would just like to add as well that many of these deals were near fruition as we kind of ended the quarter. Several of them have actually closed -- have closed early in this quarter which gives us pretty good confidence about our mid-teens growth guidance.

Ananda Baruah - Brean Murray Carret & Co.

Got it, thanks guys. And I guess just on sort of the overall growth guidance and some context around your comments, Guy and Dave and you made similar comments last quarter as well, which are very encouraging with regard to your confidence to meet your '16 revenue guidance of $1 billion. I think last quarter you actually said you thought you could exceed it. I guess you're guiding, you're doing kind of the low double-digit growth first half of the year, you're guiding to the high-end double-digit for the September quarter, yet clearly there are things that are taking place that have increased your confidence, you can take your '16 guidance which are contingent on 10% to 13% revenue growth.

So could you put some context around sort of what the things are that are actually increasing, are increasing your confidence in the guidance sort of while the same time generating revenue growth below the target range.

Guy Gecht

Sure. Ananda we're going to check the transcript of the last call, but I have a feeling this achieving the $1 billion didn't come from me, it came from somebody named Ananda on the call but we'll check that.

Anyway, we definitely see very good momentum now and the new innovation definitely opened another gap, especially on the inkjet and Fiery from the market, the competition, demand is very strong and we predicted, as you said in Q2 we're going to have, it's going to bear product transition in Q2 and we can start to see accelerated growth. So that's exactly what we're guiding right now.

We also when we talked about 2016, $1 billion goal we said we're going to get most of it organically between 2015 to 2016. But we're going to see some M&A. And we're very busy with M&A activities. We have a higher level, higher mix of larger and let's call larger, tens of millions of dollars type of revenue, then we ever had before. Whether any of them will close, or multiple will close remains to be seen but we feel pretty good where we are today on both the M&A pipeline and the organic growth, better than actually we felt back in November when we made this $1 billion by 2016 target public. So that's what we meant by saying we increased confidence in that.

David Reeder

Hang on, and I'd just like to add on and then I kind of mentioned this up in Meredith. We're very excited about moving up market with the HS100. That opens up albeit a small segment of the corrugated market, it does open up the corrugated market. So we're extremely pleased with that innovation. We're also very excited about the H1625. We’re bringing LED technology to an entirely new price point at around $100,000 where we're super excited about that portion of the market.

And then finally, I would just add that for the first half of this year our growth rate is about 9% year-over-year. If you were to compound that 9% where you'd actually wind up with by 2016 is you'd wind up with about $940 million of revenue and that's without including any of our software roll-up strategy, that's without fully baking in international expansion, that's without baking in additional innovation and M&A activity. We feel reasonably confident about where we're headed towards our $1 billion goal.

Ananda Baruah - Brean Murray Carret & Co.

I appreciate it. I think it also doesn't bake in [trade ink] either.

Guy Gecht

Yes, absolutely.

David Reeder

Absolutely.

Guy Gecht

Part of the plan.

Ananda Baruah - Brean Murray Carret & Co.

Great. Thanks a lot guys.

Guy Gecht

Thanks.

Operator

Your next question comes from Shannon Cross from Cross Research. Your line is now open.

Shannon S. Cross - Cross Research

Thank you very much. Guy and Dave can you talk a bit more about the strength that you saw in Europe, was that end demand, is it selling, is there some channel still going on there. Just where are you seeing the strength in that region?

Guy Gecht

I'll start up, should Dave would want to add up to this. We've been investing in EMEA for quite some time; most of our acquisitions were based on EMEA. We've been investing in headcount. There was a large industry trade show few months ago that most of the large vendors backed out and we actually stayed and I think it paid dividends. So customers see that. We continue to innovate in producing better and we continue to see the benefits of that.

In addition if you look at few years ago our market share in essentially every category was higher in the U.S. or in Americas compared to EMEA, and we're catching up to this market. So it's not just we're seeing the growth from the investment, we're also seeing catching up a market share there on Fiery and on inkjet and software for sure. And so we're seeing the growth across the board. It’s definitely no reflection of any inventory in the channel. This has been the fourth I believe quarter in a row of double-digit growth, so it's pretty consistent and as we head to Q3 and beyond we feel pretty good that we are far from being done expanding in EMEA.

David Reeder

Yes and I'd just follow-on to Guy's comment about the fourth quarter in a row. I mean if you were to go back to last four quarters 27% growth, 17% growth, 21% growth, 34% growth. I mean we made a conscious effort. We had a plan for international expansion to try to drive our share in EMEA up to similar levels as what we have in the U.S. I think you are seeing the results of those plans as we execute against them. All the segments grew double-digits and EMEA, obviously you’ve got to have a lot of segments that perform to be able to deliver 34%.

Looking at the three segments again industrial Inkjet software and Fiery I mean the lowest growing of all those segments was actually 15%. So we feel very, very good about where we’re headed internationally, we feel good about the execution in EMEA and we’ve really fired on all cylinders there.

Shannon S. Cross - Cross Research

Great. And then can you go into a little bit more detail on the weakness in China with Cretaprint. Just how do we think about the exposure of the market to the Chinese construction market, linearity during the quarter? Just any comments you can give us about you know, will there will be rebound there or if this is something that you consider to be prolonged?

Guy Gecht

Sure, China is very important to us and actually in the quarter China was going to -- the tale of two cities. And one in five did pretty well. The view pack that normally reflects other format advertisement, other commercial, other marketing promotion was very strong and in fact if it wasn’t for the trade show that happened in the beginning of July and as a result we closed quite a few deals it could have been even stronger. Demand there is the strongest ever been, so we are very encouraged with that.

On the flip side, what we saw on the Cretaprinters is our customers feeling that maybe demand is not going to be able to grow so maybe started to decelerate and they’re just delaying investments in new equipment which we unfortunately are part of it, right. So I can -- a larger customer had ordered significant amount of dollars from us to tie to new production lines and then decide to delay the opening of the production lines by some months because they feel like it’s not the right time to open new lines. I need to wait and see what’s going on so.

The good news is we are very balanced in rest of the world and of course in China and while maybe one line-up had some weakness, the other line-up had some strength and we delivered the numbers. But we continue to monitor there and I’m sure that the investment in digital production will continue at some point.

Shannon S. Cross - Cross Research

Okay, and then just an update on your Ceramic Ink strategy or the Tile Ink still on track, happy with the performance?

Guy Gecht

The good news is that we started with the year, we said it’s going to be in 2014 that was a window of 12 months, we’re down to 5.5 months window and we feel very serious about that, very excited about that. We’d rather not give too many details because our competitors are listening to everything we said on the call and so we will leave it at that.

Shannon S. Cross - Cross Research

Okay, great. Thank you very much.

Guy Gecht

Thanks Shannon.

David Reeder

Thanks Shannon.

Operator

Your next question comes from Benjamin Reitzes from Barclays. Your line is now open.

Benjamin Reitzes – Barclays

Hi, guys.

Guy Gecht

Hi, Ben.

Benjamin Reitzes – Barclays

How are you?

Guy Gecht

Very good.

Benjamin Reitzes – Barclays

Good. I like that you call me Benjamin. So the question I have is around the capacity constraints for the Inkjet and how it looks into the next quarter, can you alleviate these constraints? And how much did the capacity constraints hurt growth again in the quarter on the Inkjet side? And also how’s backlog look given those constraints?

David Reeder

Yeah, this is a high class problem Ben. Hi, this is David. This is a problem that we are only too happy to work. You know we did sell out 2Q or second quarter production with a large portion of our new line-up. We are somewhat constrained going into Q3. I mean we sold a lot of the production already. So many of those upside orders were going have to go after the production very diligently to ensure that we get those units. We have got engineers on the ground in variety of locations working with our suppliers to make sure that we deliver that production capacity that’s required to satisfy the market.

So we are working, we are working those constrains and quite frankly we are happy to have those high class problems to work.

Benjamin Reitzes - Barclays

So it’s a higher than usual backlog going into the third quarter in Inkjet, safe to say?

David Reeder

I think when you look at the new production models that we have released at the trade shows, those models we do have a fair amount of backlog on.

Benjamin Reitzes - Barclays

Okay. And then with regard to Fiery you are hitting some tough comps but still guiding for really good growth there. Just how is that really sustainable, what’s, is there something more secular in terms of economical recovery going on in the color, copy or printer, digital printer saying market or what is going on to get those kind of growth rates because that sort of defies history.

Guy Gecht

I know. So Ben I think the two main trends that we're going to focus on the number one, our partners are focusing more and more on digital production. It's tough to sell printers in the office for obvious reasons and there is a lot of promise, we finally are going to digital short run in the world of production.

And so more they invest there the more there is opportunity to get it to digital. At the same time we don't see the same focus on trying to catch up on digital front end with EFI as we used to have with our partners. We are the, as I mentioned in my comments, we are the only one that really take it as a business.

We spend a lot of money as you guys know. We have great people on that and we get great innovation. And that work together with our partners’ focus on machines and I think that was the fact that we historically we used to have more third-party competitors, great competitors such as Kodak. It really help us to be featured prominently in front of customers. And customers do the homework. They go and check which DFE they should buy and they know that they're going to be happier with their big investment if Fiery is in front of that and our partner know that customers are going to be more satisfied, more productive with Fiery and all of that works together.

And I'll just give you one example that is Xerox launched at the beginning of the quarter a new grade entry production engine, the Versant. We worked with them to support 10 bits per pixel per color so that means 40 bits per pixel compared to the eight bits that is standard on everything else. And it creates a great higher quality and a better text quality for that. And Xerox is featuring Fiery left and right worldwide and getting great success with that, on that engine. So I think we're going to see a lot more of that.

Benjamin Reitzes – Barclays

All right great. Thanks a lot.

Guy Gecht

Thanks Benjamin.

Operator

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

Keith Bachman - BMO

Hey guys, on the Fiery I jumped on a little bit late but can you, if you already addressed this in one of Ananda’s questions, why was the Fiery margin down?

Guy Gecht

Yeah we were flat year-over-year, we were down 10 basis points. If you recall in Q1 we had a gross margin of 69.3%.

Keith Bachman - BMO

Yeah that’s what I was referring to.

Guy Gecht

Yeah it was extraordinarily high. I mean we had the perfect confluence of events and mix that drove that 69.3% margin in first quarter. That was not something as we articulated on the call that we expected going forward. In fact we forecasted that we would return to normalcy on gross margin. And that's exactly what happened.

Keith Bachman - BMO

So 67.5% is kind of the right run rate going forward?

Guy Gecht

I think what we've kind of pointed to in the past is 67%, 68% somewhere around those guideline is what we've articulated and that's certainly what you've seen over the last several quarters with the exception of very, very strong Q1.

Keith Bachman - BMO

Okay, all right. Looking at cash flow is up strongly, excuse me, year-over-year in the quarter for the latest 12 months, it's up 6% per your slides, can you just remind us how investors should be thinking about the growth potential in cash flows, as we look at calendar year '14?

Guy Gecht

Yeah I mean what we've targeted aspirationally is we’ve targeted kind of 1x operating income. Now obviously that's what we said in the past. Obviously when the company is growing at 9% in the first half that's something that's difficult to achieve particularly when you're expanding internationally. When you expand in EMEA you typically have a little bit longer payment terms quite frankly. So that's aspirationally something that we would like to achieve looking at net income, kind of one time net income or may be a little bit more than one time of net income is something that's probably achievable on a shorter timeframe.

Keith Bachman - BMO

Okay, well it leads to my last question, as you mentioned M&A, that sounds like your pipeline is picking up. Could you give investors kind of at least some parameters on how you're thinking about size of deals Cretaprint was one of the largest that I can recall and that was call it $30 million. But can you just give some size parameters on how big those deals could be amongst there all the range that you are possibly considering and against that if you’re generating all this cash flow why not be a bit more aggressive on buying back some stock?

Guy Gecht

So I'll start with the deal Cretaprint was just to correct, it was $30 some million dollars upfront as I said but the total deal was $50 million including earn out which we paid almost 100% getting the performance. And we like to do earn out as part of the deal. Obviously we want to keep the original one involved. So, now to that discussion about the sizes we have all sort of sizes. We certainly have an pipeline, it is very, very busy maybe an all- time busy, some deals that are at the level of [set of print] from a deal prospective that’s not to say we are going to end up executing on them.

Keith Bachman - BMO

Right.

Guy Gecht

The bigger the deal, the more scrutiny the diligence, planning for integration we will take before going after the deal. But we would like to do deals that are strengthening our current segments, the company is transformed. We don’t need to transform the company again. We have a very allergic reaction to anything dilutive. We like accretion, we like that we add value and we’ve definitely seen more deals in the software and inkjet, just from that segments just from that front, that not that we have anything against something that strengthens the Fiery business but it’s just that the universe of those deals are bigger and I mean those are types of deals we’re looking at.

Keith Bachman - BMO

Okay. And then David?

David Reeder

Yeah. With regard to the share count, your question on share count and perhaps becoming more aggressive on buying back shares, I mean you know we have already bought back more shares this year than we did all of last year. So I feel like we actually have been reasonably aggressive on share buyback. We committed to the fact that we would try our best not to dilute shareholders which we committed and we have actually delivered on in the first-half of this year. So we will continue to support the stock if it’s under pressure or we feel like it’s unfairly valued in the marketplace but right now we are kind sticking to our $48.5 million shares outstanding, the long-term target.

Keith Bachman - BMO

Okay, alright guys. Thanks very much.

Guy Gecht

Thanks Keith.

Operator

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

Matthew Kempler - Sidoti & Company, LLC

Thank you. So I wanted to follow-up on the 15% in volume growth a solid number but a slowdown from recent quarters. Are you sensing any change in tone or activity levels at the print service providers?

Guy Gecht

Hi, Matt. Not really, if you look at the past many quarters I think we were between 15% to 40%. So you are right, that 15% is in the low end, but it’s still a very good number. Our customer seems to be very busy. This idea that you can print on many type of surfaces, shapes and use it for commercial market is a very strong one. Obviously we are placing a lot of printers, especially on the high-end, the HS will consume a lot of ink. So we see that continue. I think we -- it’s just a matter of some times of timing in some region of the world where the distributor order, and they can order something in the first of July not the last week of June. And secondly, we need to realize also we’re showing, the compare is obviously not that easy with the growth that we have. But we are very pleased with the growth rate, we are very pleased what our customers are saying as well as far as their business growing and we’re expecting good opportunity to grow.

Matthew Kempler - Sidoti & Company, LLC

Okay. And then on the software side, EFI is not the lone one in that larger deals have slipped out of the second quarter but does your guidance assume that we are back in an environment in the third quarter where sale cycles are normalized or are you assuming that we are still going to see some larger deals take little longer to close?

Guy Gecht

Look I think that we combined two things in the guidance. Number one is we are expecting some of those deals to close because we looked at them and there was nothing really other than just timing and decision making and processing those companies to get it done. But you know we definitely took into account that we finished the quarter below what we expected in the segment and we want to be a little bit more careful of what we are projecting. So the combination of two will more normalized that mid-teens growth rate.

David Reeder

Yeah, just to highlight that I think what we kind of guided in this segment at least more recently we’ve kind of guided 10% to 15% I mean this quarter we’ve guided mid-teens, to try to give you all some visibility into what we are thinking about with regards to the segment in third quarter.

Matthew Kempler - Sidoti & Company, LLC

Okay. And then regarding Asia I guess the company has been talking how that will the target for more aggressive push on the product side. Is the slowdown that we are seeing there at all as we consider those plans in near term?

Guy Gecht

No, I think we view Asia as a gigantic opportunity for us in all the segments. And again I want to be careful that’s not every we’re well diversified with a balanced portfolio, some of our portfolio did extremely well in Asia especially the VUTEk line-up since we are very strong and probably, and probably the highest level of interest from customers that I’ve ever seen in this region and in China particularly. So we are very bullish on the region. We are going to obviously look carefully at what segments of the business that maybe are not as working as well as we want. We will push hard there, will try to be more creative but I think that nothing changes as far as how bullish we are about the region.

Matthew Kempler - Sidoti & Company, LLC

Okay, thank you.

Guy Gecht

Thanks Matt.

David Reeder

Thanks Matt.

Operator

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

Jim Suva - Citigroup

Thank you and congratulations to you and your team there at EFI.

Guy Gecht

Thank you, Jim.

Jim Suva - Citigroup

A quick question because I am not very smart about Japan, but I know there are some tax rate changes that recently happened, I believe it was in April. Does that affect EFI products, do you know or was it more for consumables or just kind of wondering if there is any impact from that to EFI in the sales channel?

Guy Gecht

Actually Jim, I just came back from Japan. I was there last week and it did more influence consumer products where people tried to expedite some purchases because the tax went up April 1st. It really didn't change I think the behavior of more professional manufacturers. They take their time, they're buying, the tax they have a way to I think deduct it later from what they work. So it wasn't that big of a deal for them. So we didn't see anything.

We started to see a turnaround in Japan, we replaced some personnel. We moved a strong manager into there from Europe. So we started to see some good momentum and I think we're going to focus on that and there is an opportunity for us to grow there.

Jim Suva - Citigroup

Okay, great. And then for the China softening, can you help us understand how your distribution and channel works there like is it built to order or is there a little bit of hub and spoke inventory because we're just going to, I'm just going to wondering is, did the China take a little bit of time to divest some inventory also if there is any excess or maybe just how the channel works in China.

Guy Gecht

We have in China of course Fiery it's all channels. We don't think there is anything unusual there with the inventory and again as I said China, Fiery had a pretty good quarter in China. As far as the inkjet, it's a mix of direct sales and nobody really carry much of an inventory of 4x from spare parts. The distributors we have ordering from us, when they get the order from the end user and we ship directly to the end user. So there’s not really not a matter of inventory there.

Jim Suva - Citigroup

Okay, So it sounds like even though you saw softness in China, it won't be compounded by inventory adjustments, is that correct?

Guy Gecht

Nothing is -- and again I want to mention that some areas in China for business is doing quite well.

Jim Suva - Citigroup

Great, thank you very much and congratulations.

Guy Gecht

Thanks Jim.

David Reeder

Thanks Jim.

Operator

(Operator Instructions). Your next question comes from Morris Ajzenman from Griffin Securities. Your line is now open.

Morris Ajzenman - Griffin Securities

Hey, guys.

Guy Gecht

Hi, Morris.

David Reeder

Hi, Morris.

Morris Ajzenman - Griffin Securities

Not too many questions left to you, but let me try this one. Productivity Software, last 12 months probably your revenue run rate about $125 million is so, and gross margins are back but I guess pushing 72%. As that revenue run rate continues to grow, $150 million, $170 million, and a year or two I wound ever, can that gross margin continue to rise much further based on mix of business, how does that play out as that top-line grows?

David Reeder

Yeah, I think we're -- this is David. Morris, I think what we've communicated here in the past is that the mix of that business as the top line gets bigger than there is some opportunity for margin expansion, I think you've kind of seen that going from kind of 71% range that you've seen in the past the first two quarters of 2014, you've seen us around 72%.

So yeah, we're kind of thinking about this business from a model perspective, 72-ish percent but obviously there is always room for operating leverage as top-line grows.

Morris Ajzenman - Griffin Securities

Would you care to share a potential to rise a couple, 100 basis point, is that too aggressive over a couple of years, how should we look at that?

Guy Gecht

I think we'll mostly stick with guiding one quarter at a time right now. But certainly we have been very pleased with roughly the 100 basis points of gross margin that we've gotten out of this business over the last call it six to eight quarters.

Morris Ajzenman - Griffin Securities

And just switching on the same source subject with industrial inkjet, a 40% gross margin is still feasible over a cycle.

Guy Gecht

Yes, that's certainly our objective, our long-term target. I think what we have communicated in the past there is that we're managing gross margin at the corporate level which we’ve really targeted for a long term objective of 53%, around 53% to 55%. And what we articulated was that when we had strength in businesses that we would use that strength to then place printer footprint and expansion in the marketplace. So in first quarter we had significant strength in Fiery due to some just fantastic mix. And so Fiery had 69.3% gross margin and you saw inkjet gross margin go down to 37.3%.

What happened in Q2 was we had Fiery returned to normal gross margin and then you saw inkjet industrial inkjet go up by about 120 basis points sequentially.

And so we're managing gross margin at the corporate level and then we're also leveraging strength in our balanced portfolio to be able to drive additional recurring revenue in the future.

Morris Ajzenman - Griffin Securities

Thank you.

Operator

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

Guy Gecht

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

Operator

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

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