Electronics for Imaging CEO Discusses Q2 2011 Results -- Earnings Call Transcript

Jul.21.11 | About: Electronics for (EFII)

Electronics for Imaging Inc. (NASDAQ:EFII)

Q2 2011 Earnings Call

July 21, 2011, 5:00 pm ET


JoAnn Horne - IR

Guy Gecht - CEO

Vincent Pilette - CFO


Shannon Cross - Cross Research

Ananda Baruah - Brean Murray, Carret & Co

Morris Ajzenman - Griffin Securities, Inc.


Good afternoon. My name is Tracy and I will be your conference operator today. At this time I would like to welcome everyone to the Q2 2011 Electronics For Imaging 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. And I will now introduce and turn the call over to Ms. JoAnn Horne, Investor Relations for EFI. You may begin your conference.

JoAnn Horne

Great, thank you, operator, and good afternoon, everyone. I have here with me today Guy Gecht, EFI’s CEO; and Vincent Pilette, our Chief Financial Officer.

Before we begin the prepared remarks, let me review the Safe Harbor statements. During the call, we’ll be making forward-looking statements, that are statements other than statements of historical fact. Forward-looking statements are subject to risks and uncertainties that could cause our future results to differ materially, or cause a materially adverse effect on our results.

For more information, please refer to the risk factors discussed in our SEC filings, and the press release that we issued today. We do not undertake to update any of these statements in light of 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 in our website on the IR section at www.efi.com.

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

Guy Gecht

Thank you, JoAnn and thank you all for joining us today. When we last spoke to discuss Q1 results I said the highlights for me was that our strategy targeting the growth areas of printing was making great progress across every metric we track. Today, I'm very pleased to share that EFI’s performance in Q2 again reflected strengths across all segments and solid execution against our strategy. During Q2, we achieved the goals I outlined in our last call.

The successful introduction of significant new Inkjet products and the continued improvement in that segment gross margins, expansion of our APPS sales coverage which led to another record quarter with APPS revenue 54% year-on-year and continued momentum in our Fiery business which again included a significant Fiery add-ons. All of these was tied together by a series of industry shows including our own Connective Conference where we had record attendance and demonstrated tightly coupled integration between our software and hardware products.

The show yielded strong sales and a solid pipeline that should carry over into Q3 and beyond. The EFI team’s solid execution across the board resulted in revenues of $141 million, up 19% year-over-year, with each segment contributing to the continued momentum in our results.

Looking at each of our segments. Our Q2 Fiery outlook included an anticipated impact on engine supply from the disaster in Japan which did materialize still at the end of the quarter, where we saw supply chain constraints for multiple products across the number of our distribution partners.

Even those challenges, we are particularly pleased with the 15% revenue growth. While, we believe that our OEM’s factory will have caught up by the end of current quarter, but still anticipating some impact on the quarter as well as a result of the remaining supply chain challenges. Regardless we expect Fiery to continue show positive yield for the quarter.

The Fiery results were driven primarily by continued strong demand for current products across all of our distribution partners. While we are excited about the announcement of Fiery content for the new Eco 65 and 75 pages per minute engine and Xerox 80/80, we saw a little benefit from new engine this quarter. We anticipate revenue from these engines as well as more new engine introductions later in the second half of the year.

At the same time, Fiery add on options continue to show significant growth as this value add on software products allow end users to be more efficient and comparative in the ink product offering. Our plan is to continue to bring Fiery add-ons to market along with services and education offering to leverage Fiery’s vast and tremendously low install base. Along the lines of expanding our line of add-ons, we recently announced our Fiery related acquisition since 2003, privately had Entrac Technologies to bring some market leading technology that enable self service printing. With the strategic deployment of already a two key EFI customers FedEx and Staples. While immaterial to 2011 revenue, we are excited about the opportunity to use EFI’s footprint and Fiery’s brand to extend the offering, including an exciting opportunity to integrate our mobile printing with Entrac’s install base of over 4000 small terminals.

Speaking of mobile printing, we took another major step in expanding our role in the mobile market place through an agreement with Canon to collaborate on mobile printing technology and enable Canon customers to print to Canon MFPs. First from Apple based products and later from any mobile device. This follows our agreement with Xerox which allows office workers to bring to literally any of multi-function device using EFI’s printing technology embedded in Xerox printers.

We are very excited about the long-term opportunities and partnering with these key players in mobile printing while working on adding more partners to drive adoption of our printing technology. And we have some important news on the Fiery product one. Earlier this week we announced the addition of a new Fiery OEM, the first in many years. We are delighted to form a partnership with (inaudible) to bring EFI’s Fiery controller and software to KMC MFPs. So it may take them time to familiarize and train the sales force to sell the Fiery technology, it represents another avenue to further the penetration of the Fiery brand in the highend office market as well as the professional print market.

Combined these three developments, the acquisitions of Entrac, the mobile printing alliance with Canon and the addition of (inaudible) to the Fiery distribution process, reinforce the business and demonstrate how we continue to execute on our strategy. We will continue to expand the growth opportunities for our Fiery business to further limit cyclicality while diversifying our revenue base.

Turning to Inkjet, we are pleased with the 14% growth in revenues and it have achieved in advance of a new product cycle. EFI success is mild by our customer base as they are leveraging our technology to go throw their business as evident by record recalling ink revenue in the quarter, driven by yet another strong quarter of UV ink volume which moved 24% from a year ago.

As we discussed on our last call we significantly expanded our inkjet product lineup in Q2 along with expanding our addressable markets. The new printers which are scheduled to start shipping commercially in the second half of the year includes the GS 3250LX which is an industry first as the engine utilize LED based queuing lamps in a production supervised form of device. This enables full queuing for printing on lower cost on subsequently while increasing subsequently flexibility at a reduced power consumption.

We also introduced the GI 3250 which establishes a new benchmark for printing high quality, high fidelity point of purchase output at a high speed. And other new printer is TX 3250R which expands reach into textile signage and unparallel quality and productivity. Finally there are also AL 3204 three meter UV first in its class also the production UV out to all device at a price point below $150,000 and we didn’t stop there. As we are also launching significant field upgradeable productivity options to our current GS product line, all of this has a tremendous new innovation and a great achievement for our world class R&D team.

The response for this new product line up attrition rates shows which includes West side Hamburg, the IFI show in Vegas and just a couple of weeks ago the International science exposition hike has been very strong and it is creating a solid deal pipeline for printer segment. Since the trade show have proven to be a valuable opportunity to showcase and drive sales of our products, we are maintaining this active schedule in Q3 with participation in GRAPH EXPO in Chicago, the Labelexpo in Brussels, [Feiras de Gráfica] in Brazil and the Expo in Shanghai I just mentioned. We expect this lineup of industry events and demand for both our new and current product to maintain double digit Inkjet level in Q3.

Finally, on the Inkjet segment, we are very pleased with our execution on reducing our GS warranty cost and again achieving sequential increase in Inkjet gross margins. We expect continued improvement in Inkjet gross margins throughout the balance of the year.

Turning to the APPS segment, we are excited about the results. The 54% year-on-year increase represents a strong growth from international revenue as well as the continued benefit from strong booking in the U.S. This was not only all-time record for APPS business. In Q2, we also achieved record level of recurring revenues. A very robust sales pipeline includes a range of small to large software deals and points to continued strong APPS results for the balance of the year potentially, boosted by small acquisitions to accelerate further growing of international footprint.

One more key point in our APPS segment. Software is not only becoming a significant source of reliable solid growth for, it is also creating the glue with more and more customers. When a customer deploys our business process automation software, the strategic elements for EFI in the account is beyond compelled. We are seeing increasing number of customer choosing Fiery, our inkjet printer, not only because they are best in class but also because of the importance of the full integration with the EFI software infrastructure. This is significant and strategic long-term advantage we build that will be increasingly important in our competitive landscape.

Overall, the balance goals across our business segment resulted in the third consecutive quarter of double digit operating margins, which continues to be a priority for our team. We again achieved solid cash generation as we continue to focus on maximizing the leverage and the business model and maintaining solid execution in all aspects of our operation.

To summarize, by mirroring my comments from last quarter, the strategy is working and we believe that there is much more to be excited about as we look forward. We should benefit from the new Inkjet product cycle. The improvement of the Inkjet gross margins, the continued international expansion of our APPS business as well as strong innovation and execution in the Fiery segment.

Our ability to out innovate the market across our product portfolio is a key to our success and we will not lose sight of it. This innovation will be brought to markets by leveraging both our partner distribution power and our own ability to go direct to the market.

At the same time EFI is evolving. The printing industry is moving toward the areas where EFI is well positioned including our targeted growth area where print has high value as well as business process automation. All of that should result in another solid quarter for our business. Looking at the September quarter, we expect revenue growth of 11% to 13% for the quarter and EPS of $0.24 to $0.26.

Lastly, before I turn the call over to Vincent, I would like to mention that as part of our earnings release today we announced the planned retirement of Fred Rosenzweig, the EFI President following the completion of 2011 after nearly 19 years of service. EFI can't be more thankful to Fred for his outstanding contribution to EFI in the past two decades. We are not planning to replace Fred in his current role as our management team members are going to step up and take over his responsibilities. While Fred will be missed, we couldn’t ask for better timing for this transition. As we have sent from today's announcement, our business is strong and the management team is complete, experienced and eager to take on future growth opportunities.

With that, let me turn the call over to Vincent to review Q2 financial results in greater detail.

Vincent Pilette

Thanks Guy and good afternoon everyone. In the second quarter, EFI delivered its most finest performance to-date with above expected results in all three segments. As Guy mentioned, our strategy focusing on the high growth segments of the print industry continues to grow well and is supported by solid execution.

Revenue for the second quarter totaled $141 million up 19% from the prior year. We delivered double-digit revenue growth across our segments and regions. Recurring revenue grew 10% year-on-year amounting to a record $24 million driven by record results for both ink and software maintenance.

With a disciplined execution, we successfully expanded gross margins in all three segments as well as our overall operating margin on a year-on-year basis. We grew non-GAAP earnings per share by 156% year-over-year delivering $0.23 EPS and we generated $20.8 million of cash from operations, up 73% year-over-year.

Now let me go into more details starting with revenue by business segment and region. For the second quarter of 2011, Fiery revenue totaled $65 million, up 15% year-over-year bringing Fiery to 46% of EFI total revenue this quarter. Q2 Fiery revenue was driven by double-digit growth across most of our OEM partners and a continued strong performance of our add-on software options.

In particular, we saw a solid demand for our ColorProof Fiery suite and for a work flow that integrates with our business management software to switch for our Fiery business unit. On the channel inventory side, we closed the quarter within our operational target range.

During the quarter, we again saw solid demand for our industrial Inkjet solutions supported by the increasing deals are now generated at the major Trade Shows we attended. Inkjet revenue amounted to $57 million, up 14% year-over-year and contributed 40% of EFI total revenue.

We saw strong demand across all regions, but particularly in Europe from the very successful FESPA Trade Show during which we signed a record number of deals. The 24% year-over-year growth in UV ink volume was again a strong statement about our customer’s ability to leverage EFI’s inkjet solutions to accelerate their own revenue growth.

Bringing business process automation to our customers our APPS business unit delivered a record quarter with revenue $19.3 million, up 54% on year-over-year basis and contributed 14% of our total revenue. We are very pleased with both the organic growth rate as well as the retention rate from our acquired companies. The demand for our software solutions was especially strong in Europe.

By geography, revenue in Americas grew 19% year-over-year totaling $83 million. Revenue in Europe increased 17% year-over-year and amounted to $43 million led by the steady growth of our APPS and Inkjet businesses. Finally, the rest of the world excluding Japan grew 55% year-over-year.

Looking forward to Q3 2011 we expect revenue in the range of $143 million to $146 million or 11% to 13% year-over-year growth. This guidance is based on Fiery revenue growth of high single digit year-over-year, Inkjet revenue growth of approximately 15% year-over-year and greater than 25% year-over-year growth in APPS.

Now moving on to gross margin. Non-GAAP gross margin for the second quarter was 56% up 260 basis points on a year-over-year basis. Fiery gross margin of 68.1% was up 70 basis points from Q2, 2010 driven by product mix and over higher sales volume. Inkjet gross margin improved to 27.5% in Q2, 2011 up to 390 basis points from Q2, 2010 and up 140 basis points sequentially driven as expected by the progress made with our warranty cost initiatives as well as the growing sales volume.

APPS gross margin was 70.1% for the quarter, up 100 basis points from a year ago and up 200 basis points sequentially driven by the growing scale of this business and the synergies derived from prior acquisition. Once again our strategy is working.

Looking ahead to Q3, 2011 we expect the overall gross margin to be relatively flat sequentially driven by the continued improvement in Inkjet gross margin offset by revenue mix shift.

Now turning to operating expenses which we manage both in dollar terms and as a percent of revenue. Non-GAAP operating expenses were $64.9 million or 46% of revenue, a decrease from 47.3% of revenue a year ago. Excluding the OpEx goals related to currency, acquisitions and viable compensation tied to our exceptional performance. OpEx in dollar terms increased only 4% on a year-on-year basis. The 4% increase was mainly driven by the expected restoration of 2009-2010 salary and benefit cuts. R&D expenses were $27 million representing 19.1% of revenue compared to 20.2% of revenue a year ago. Sales and marketing expenses were $28.5 million representing 20.2% of revenue compared to 21.1% a year ago.

Finally, G&A expenses were 9.4 million, 6.7% of revenue compared to 6% a year ago.

For Q3 2011, we expect number of For Imaging expenses to increase approximately $1 million driven primarily by the acquisition of Entrac. In Q3 we are planning for maintaining momentum in trade show activities as Guy discussed and a high level of variable compensation driven by the full year guidance provided.

Now moving onto operating margin non GAAP operating margin was 10% in Q2 2011, up 400 basis points from Q2 2010, which is the third consecutive quarter of double digit operating profit margin and we are on track to delivering double digit operating profit margin on a full year basis by driving leverage into the finance model.

Other income and expense amounted to $0.8 million. About half of that amount came from a quarter-over-quarter favorable foreign exchange impact, which is more than offset by the unfavorable currency impact on our banks. We are assuming that had a mutual impact from currency for Q3 2011.

Rounding out the P&L, our Q2 2011 Non- GAAP tax rate was approximately 24%. As we mentioned last quarter a improvement in our tax rate was driven by the growth in international sales coupled with this profit margin expansion. We expect the Q3 2011 tax rate to remain at around 24%. Note that even without the lower tax rate and foreign exchange gain in [inaudible] we would still be reporting EPS of $0.23 cents for the quarter.

Turning to the balance sheet total cash, cash equivalent and short-term investments amounted to $232 million an increase of $19 million, compared to a year ago and an increase of $7 million versus the prior quarter.

Q2 2011 cash flow from operations amounted to $20.8 million, up 73% from $12 million cash flow operations in Q2 2010.

We are on track with the company’s internal target of generating operational cash flow in the range of pre-tax net income on a full-year basis.

As we continue to improve our manufacturing and field operations, our working capital decreased to 57.4 days compared to 60.7 days a year ago and 58.6 days last quarter.

A strong focus on cash collection led to lower AR balance and DSO metric. Account receivables amounted to $87.5 million, a decrease of 5 million versus the prior quarter.

DSO were reduced to 56.4 days, 3.1 days less than the prior quarter. Our net inventory balance was $46.7 million at the end of Q2 2011, a 4% increase compared to descending balance of the prior quarter. That increase was driven by the new inkjet products partially offset by operational efficiency. Overall, inventory returns was flat compared to the prior quarter at 5.4 turns.

Our total share count amounted to 48.5 million shares. We have executed that year over half of our $30 million share repurchase program announced in early March, offsetting the share dilution as anticipated.

In closing, I want to reiterate our Q3 2011 non-GAAP EPS guidance of $0.24 to $0.26 per share, assuming relatively new foreign exchange rate.

This concludes my comment and now I will be happy to answer any questions.

JoAnn Horne

Operator, we will take questions now please.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of [Amanda Barua], your line is now open. Please go ahead.

Guy Gecht

Hi Amanda.


Amanda, your line is open.

JoAnn Horne

Okay operator, we’ll keep moving please.


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

Shannon Cross - Cross Research

I have got a few questions, I guess the first is just can you talk a little bit about what your are hearing from your partners in terms of end market demand and then also what you are thinking on the Inkjet side because clearly there's a lot of mixed signals with regard to whether corporations are buying and also any comments that you and your partners have made with regard to their feelings on inventory that they want to carry into the second half of the year?

Guy Gecht

So before I comment on what we are hearing from our partners in general obviously that's the job to comment and our exposure is only to certain areas of the business but the certain areas of the business we are exposed to are doing actually quite well, there is demand for short-run digital, high speed printing, our partners continued to bring to market faster and high quality digital printing that can take away from offset volume so clearly benefit them, benefit us. As I mentioned this quarter was not the most normal because some products, not too many products, but some products more than one before the one, had supply chain constraints. We knew its going to come, it was well planned, well executed by our partners, some of it is still going on to some degree but basically we know we expect everybody to catch up in September but we are very pleased with that, We continue to pay very close attention to inventory especially knowing that there's going to be some supply chain issues and in general we are very pleased with the inventory level of the Fiery with our partners. So that's on and its within the normal operation guideline so its based on good and close attention and we’re pleased where we are on that.

On the end market, the customer, they’re actually doing quite well. I mean they’re buying 24% more volume of Fiery ink from us. So the reason I think they’re taking some share with faster and more higher quality devices from other people but we clearly are seeing good demand there. The Inkjet going to the four printers I talked about it, we showed in shows but yet to get revenue for, we start to see some of them. The feedback is very good and the show it was very good, the pipeline is very strong. So to me that’s why the people are saying good business.

Now, different geographies have different -- I think some areas are stronger than others but overall I think we – in the areas we’re focusing on, the customers are doing well. Lastly, I think there’s more and more pressure on the industry in all and actually the area, the people that are not necessary very strong in their business, do automate their business processes. We’re seeing people that actually trying to get line of credit or trying to get the business to be more efficient with less OpEx coming to us and buying more products, implementing more software where they can take away costs of the system, inefficiency and obviously you know exactly how much it cost to print every print job. I just saw an e-mail yesterday from a customer that’s actually in the book printing, which is under lot of pressure and they’re implementing now our software because they got to be a lot more prudent if they were to be printing what they do and where they operate.

Shannon Cross - Cross Research

Great, thank you and maybe can you talk a bit about the margin improvement that you’re seeing. I'm just curious sort of what and where do you think you’re in, in term of getting through and looking at everything and finding cost reductions and just how we should think about the progression of margin improvement as we look ahead to the next few quarters?

Vincent Pilette

Yes, so on the Inkjet business, so we’ve improving our margin sequentially. In majority due to the warranty cost improvement that we discussed on the call last quarter, there was a two factor, right, we are still going to refurbishing of the printers we had, got back to the from the field at the end of 2010. We are going through that and then we flushing through the warranty cost that have a backward looking 12 months on account of core base on last 12 month failure rate. So forward looking everything is pretty, we are going linearly, improving going towards our business model and we maintain our momentum going toward the 40% gross margin goal on the inkjet side.

On the software side obviously its lot depending on the scale of the business and as we continued to scale the software business we are going to continue to see solid margin in Q2 its reflection of that and then the Fiery side of usually depends on the product mix and we will stay within our target range of 6o to 68% gross margin.

Shannon Cross - Cross Research

Okay, great. And then last question just given the substantial cash generation that happened this quarter, how much more do you think you can range from a working capital and then just taking it a step further? What are you thoughts on use of cash on a continued basis because clearly the model is working right now? Thanks.

Vincent Pilette

Yes, on the working capital we continue obviously to focus a lot on our AR balance. That has to be obviously offset, that’s a financing issue that a customer has to find financing. But overall I think with we continue to see improvement I would say on an overall annual basis. I want to really focus on the quarter-over-quarter trends. On the inventory side this must be continued to try to be as personalized as we can, as we come up here at the beginning of a new product cycle going to increase slight inventory to address the demand for not the expanded portfolio but overall working capital should continue to trend down slightly on overall annual basis. So as the use of cash, as Vincent mentioned we all will have the mark during the quarter, on the buyback that we announced a few months ago.

So once we finish that we will consider with the Board what to do next and of course we are, we are seeing good small tack-in acquisitions that either expand our winning APPs. We are very pleased with Radius acquisition that now is that one year anniversary for the acquisition. Do we sell it within a year, definitely a big boost for our goal and also we are seeing national targets. We are seeing potential other targets. We just did the acquisition for the first time for the Fiery business, anything that we can bring into a high leveraged brand, strengths and the distribution power, either via (inaudible) or directly something we will consider. So we continue to balance all of that and obviously you right, if you continue to generate nice cash and may be low, we will have to consider multiple things in lieu of the cash.


The next question comes from the line of Ananda Baruah, your line is open.

Ananda Baruah - Brean Murray, Carret & Co

I apologize if this has been asked already, but could you just discuss I guess what we should expect from the product cycles, in the second half of the year and I know you know Josh has just announced a new product. And then I know Guy, you have been talking for a couple of quarters now about due for next year and the potential for there to be, you know, some things are announced here as they are typically are, I just want to make sure that we have kind of a firm grasp on how the?

Guy Gecht

So our new engines is on the Fiery side as you alluded to. We are very pleased with the work that we are doing for all of our partners. You mentioned Xerox, really a very innovative company. They could work with us with many products as well as a lot of partners I mentioned Eco came up with a pretty compelling entry production level that we think is going to do well in the second half of this year. So the pipeline is full obviously, the people look at that and that is the Olympic games of the printing industry. Every four years, lot of customer come to see and compare. So you will expect to see a lot of innovation there. May be things that will not ship immediately after but will ship in the quarters after and we are working with our partners, so that certainly is something that create a lot of work, a lot of investment in R&D.

As far as the inkjet this is our own engine, I can be in more to discuss. We are certainly having a record number of new engines and new innovation coming to market in the second half of this year. We are expanding the target expanding the addressable market they talked about textile printer, a lower cost and then the LED is still new for our industry for this type of application but it is used the cost of printing for the heavy duty customers remain to be seen, but all of that got very good feedback as I mentioned in quite a few we did in the past few months?

Ananda Baruah - Brean Murray, Carret & Co

Great and where are you sort of I guess in terms of execution on the software expansion and can you give us a sense of sort of like what the process feels like mechanically. How are you engaging print shot, where are you engaging the print shot and some sort of sense of how that process is going to unfold over in the next couple of years, may actually the next twelve months will be great.

Guy Gecht

Coming up after recession took us a while before we really out to invest in Europe for Apps and really at the end of last year we hired the head of sales. We didn’t have an official head for sales for Apps and somebody from was familiar with (inaudible) and he hired people and those guys are up to speed of selling the growth in Europe is significantly faster than the rate which was 54%. S0 you can imagine how strong Europe for us and we continue to hire actually look we have opened more position for sales people, we want no more coverage, our coverage in that did great.

But the opportunities there are significant. There is no large player, international leader. There are a lot of smaller players. We think that nobody has this kind of robust portfolio we have and so once we get the way to get the market not just to sell-to-service the opportunity is significant.

And we continue to evaluate, we will do it organically but there is a chance we are going to do one or more inorganic investment buying people with the install base and sales force to accelerate the growth internationally.

Ananda Baruah - Brean Murray, Carret & Co.

And what might, can you share this, what might be the countries that you will be focusing on primarily as you sort of rollout the sort of the software strategy?

Vincent Pilette

Hey Ananda this is Vincent, obviously I spent a lot of time on that. The good thing is as we now have a few proof points that that is working very well – is one of them, we have more and more tied companies coming and talk to us, both customer and on the acquisition side and so our funnel is really active and growing.

Now you have to balance that with the fact that we don’t want to over pan that we definitely pay reasonable valuation more likely to print industry than software industry and so we will take our time to move that up.

Primarily, our first target would be in Europe, but again I wouldn’t install limited to Europe where our funnel cover the three regions with different stages if you want. You know, again, timing is in our favor as we brought our best strategy. So focused on international first and then across.


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

Morris Ajzenman - Griffin Securities, Inc.

Just a follow-up on the Inkjet, clearly you are getting your hands around this warranty issue and gross margin is 37.5% what’s the likelihood exiting 2011 we can be at 40% target you want to kind of touch that?

Vincent Pilette

Hey Morris this is Vincent, right. So when I joined I told you that I spent my first few weeks really diving into the manufacturing operations, the warranty, the overall quality projects and we are making extremely good progress in all fronts here and supported by the margin improvement.

You have seen the margin improvement is really sequential as you’ve seen right depending all irrelevant of the volume we've improved quarter-over-quarter now for three-four quarters and we continue to do that.

Now we really guide one quarter at a time and for next quarter as we’ve mentioned you should improve, you should count on also a sequential improvement from Q2. Now everything we said about target business model stays in place and we will work as hard as we can to get there.

Morris Ajzenman - Griffin Securities, Inc.

Okay, alright fair enough. I am not sure if I get this number right. Earlier you talked about recurring revenues, did you say that was $34 million, by way of pace on that?

Vincent Pilette

No that's correct $34 million.

Morris Ajzenman - Griffin Securities, Inc.

And it was up 10% year-over-year?

Vincent Pilette

Yeah so the beauty of recurring revenue is that if the overall market is going down people still consume new consumables and its kind of a very sticky and recurring. On the other hand when the markets recovers of course it grows less fast than the market and you've seen that in many different recurring revenue streams like in software or in inkjet with ink. We are very pleased by the 10% year-over-year and it was not only that the industry is recovering, but our customers are consuming those and are gaining share in growing faster. It’s 34 million and it’s made of ink on one side and some to a maintenance on the other side and the third little portion of that is also coming from Fiery, where a portion of our strategy is also to develop some recurring revenue stream in that business.

Morris Ajzenman - Griffin Securities, Inc.

All right and should we look at the growth rate to merit the company where it was not to become larger percent of revenues. How should we look at that going forward.

Guy Gecht

Well, obviously we like to have most of our revenue coming from recurring sources that will take us a while to get most of our revenue just to say. We do our job well and I think to innovate we will sell a lot of non-recurring Inkjet refills will lead to recurring revenue down the road. So I think the most its let’s say about 80% of that revenue is recurring it will take us many years to get there but clearly our goal is to continue to increase the recurring revenue and as Vincent said, we’re very pleased that’s up the record recurring revenue of $34 million at the high scale.

Vincent Pilette

And as we model this, I would continue to focus on the fact that a big portion is not recurring. Means that we have a lot more room to grow, place more licensees as we were up in the software market. Send more hardware to innovate with our products, so we see that as a good thing and right now 25% of the total revenue, so around 24% or 25% is a good business model. We see enough room for leverage as we grow drop through but also enough stability if the overall industry stabilized.


There are no further questions at this time. Mr. Guy Gecht, I turn the call back over to you for any closing remarks.

Guy Gecht

Thank you everybody for joining us today. We’re very pleased with the result and we’re very thankful to shareholders and customers


This conclude today’s conference call you may now disconnect.

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