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Electronics For Imaging, Inc. (NASDAQ:EFII)

Q3 2011 Earnings Call

October 20, 2011 5:00 PM ET

Executives

JoAnn Horne – IR

Guy Gecht – CEO

Vincent Pilette – CFO

Analysts

Ananda Baruah – Brean Murray Carret & Co

Shannon Cross – Cross Research

Morris Ajzenman – Griffin Securities, Inc

Gaurav Gupta – Bank of Montreal

Richard Gardner – Citigroup

Operator

Good evening. My name is Keisha and I will be your conference operator today. At this time I would like to welcome everyone to the Q3 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. Ms. JoAnn Horne, Investor Relations for EFI. You may begin your conference.

JoAnn Horne

Thank you operator, and thank you for joining us everyone. I have here with me today Guy Gecht, Chief Executive Office; and Vincent Pilette, Chief Financial Officer.

Before we get started 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 facts including but not limited to our strategy, estimates, projections and revenue and EPS. Forward-looking statements are statements of risks and uncertainties that could cause our results to differ materially or cause a materially adverse effect on our results.

Please refer to the risk factors discussed in our SEC filings in the press release. We do not undertake to update 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. There are also slides available there that corresponds to today’s comments.

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

Guy Gecht

Thank you, JoAnn. Good afternoon and thank you all for joining us today. We are very pleased with our Q3 results. Despite the economic uncertainty, we are all hearing about over the past few months, EFI delivered 14% of revenue growth, a seventh consecutive quarter of double-digit growth and a fourth consecutive quarter of double-digit operating margins.

Once again, we saw continued strength across all three business segments and across all geographies and in particular Europe was strong for us. We grew our operating profit by approximately 50% and if it wasn’t for the non-operational impact of the significant volatility in currency we would have posted a similar growth in EPS. Our results once again validates our strategy of addressing the growth areas of print, by enabling this segments to transfer from analog to digital printing.

Now turning briefly to our three business segments starting with the Fiery segment. We are pleased with the 9% revenue growth driven by strength across all partners as our targeted areas. While as anticipated, we saw weakness in Japan. We continued to see solid growth in China and India. We are excited about the introduction of Fiery System 10, during the quarter which opens yet another innovation gap with the competition and provide customers with advanced capabilities in the four key areas of color, usability, performance and integration.

Over the past few months, we have received some questions regarding the potential impacts to our Fiery business given the worsening environment. Obviously this segment of our business isn’t immune to the overall economy and we have seen a slower growth rate than earlier in the year. However, as we have proven over the past two years, delivering out innovates for that in conjunction with new engines introduced by our strategic partners has allowed us to grow our share and increase Fiery revenue faster than the growth of the market segment, we are targeting.

To that end, our R&D group remains very busy developing exciting new and innovative products for the robust pipeline of new engines from our partners, planned for the next couple of years. To add to this customer loyalty to Fiery and the benefit of Fiery integration with our fast growing customer base of EFI APPS and you can understand why we believe we are better positioned than in the past if we see the macroeconomic environment further worsening. Looking to the fourth quarter, we continue to closely monitor our partners’ inventory as well as our shipments to them. We also anticipate that this quarter we’ll see the final if minimal impact on business from the Japanese tsunami.

With that we look for Q4 operating revenue growth of low single-digit in the Fiery segment. We are very pleased with Inkjet business which ended the quarter just shy above 40% gross margin target and achieved 14% revenue growth with minimal revenue benefit from new products. As we discussed at conferences and trade shows during the quarter, we have announced a new product cycle consisting of four innovative printers which increase our addressable markets. One of this product is a GS3250LX which utilize LED based queuing. The first system designed for production printing with lower temperature queuing than UV based queuing. Our printer delivers significant energy, substrate and shipping cost savings for our customers.

Let me share what Nick Olson [ph] owner of PBS, one of our LED benefit is saying about the technology. The GS3250LX has enabled us to bring on thinner substrates. This saves us both cost of material and shipping. Now we call roll output for shipping instead of using flat boxes, saving the customer about 30% on the job, due to lower cost of material as well as 30% reduction in cost of shipping. In addition, we are very excited about the new applications this printer has enabled including the ability to print on aluminum, steel, wood and out in conference campus. It will certainly be growth engine for our business. We obviously couldn’t be more delighted to hear about the new printer enabling cost savings while providing growth opportunities at the same time.

Another significant new product innovation we are enthused about is Jetrion 4900. A revolutionary UV inkjet digital printing system that combines high quality digital printing with an inline level finishing to produce top quality labels. With cost savings that goes straight to our customers bottom line. The Jetrion 4900 was introduced for the first time a few weeks ago in front of record attendance at Labelexpo in Brussels and as IT Strategy, a leading industry consulting company noted and here is the next quote. EFI Jetrion announced that the standard for UV Inkjet in label and the standard is high.

Beyond the new product which will start to contribute to the current quarter revenue, we posted the eighth consecutive quarter with over 20% UV ink volume growth. This growth in the long-term will benefits of placing more and more of our industrial inkjet printers and consumes that our customers are getting more jobs and increasing utilization of the equipment. The robust UV ink consumption contributed to record recurring revenues in the quarter and is one of the reasons why our pipeline and demand remains strong despite some customers being cautious about buying new equipments and pushing out their buying decisions. Looking at Q4, we expect roughly 10% year-over-year growth in our Inkjet segment.

Now turning to our APPS segment. We are again very pleased with this segment performance. Once more exceeding our expectations with 36% revenue growth resulting in record revenues. We are witnessing very good demand from customers using our business process automation software to drive efficiency. The increase in sales proves with the actual benefit of using our software despite the world economic concerns. At the same time our international expansion strategy continues to accelerate the growth of this business segment. For Q4, we expect another all time record quarter with over 25% growth in our software segment.

And we believe we’re just beginning to reap the benefits of offering the strongest fully integrated portfolio available to the market. Our integrated portfolio not only gives end user, a compelling reason to buy additional EFI products when they are already an EFI customer, but also positions us as a complete solution provider, very different from our competitors who don’t have nearly the same depth in their product portfolio. The integrated portfolio solution approach is unique in the print industry and is one of the key reason EFI is growing faster than any other company in our space.

Lastly during a very active quarter for worldwide trade shows, our product portfolio has never looked better. At GRAPH EXPO in Chicago, we won the highest number of the Must See ‘em innovation award in the history of the show. This accolades once again demonstrates that we innovate where it matter most. Looking ahead to Q4, our goal is to maintain the consistent track record we established over the past couple of years. Even in a tougher economic environment, our team has worked out to position the company in the growth segments of our industry, opening a bigger innovation gap between us and our competition and streamline our operations. While all of the factors are clearly working in our favor, we believe that given the current market concerns we should be prudently cautious in the outlook.

For the current quarter we anticipate a growth rate of 7% to 10% with further expansion in our operating margins yielding in EPS for $0.31 to $0.34.

With that, let me turn the call over to Vincent to review Q3 financial results in greater detail.

Vincent Pilette

Thank you Guy and good afternoon everyone. As Guy mentioned we are very pleased by continued improvement in executing in a quarter marked by financial uncertainly and currency volatility.

Revenue for the third quarter of 2011 totaled $147 million, up 14% from the prior year. Recurring revenue grew 12% year-over-year amounting to a new record of $36 million driven once again by record results for both ink and software maintenance. With disciplined execution, we delivered gross margin expansion both year-over-year and sequentially. Q3 also market the return of the inkjet gross margin to its business target of about 40%.

Robust demand for products and efficient cost management led to an 11.2% non-GAAP operating profit margin, growing operating profit by 49% year-over-year. We delivered $0.25 non-GAAP EPS including $0.03 of non-operational loss from currency. Finally cash from operating activities amounted to $11 million at 59% year-over-year in a traditionally lower cash flow quarter impacted by backend loaded revenue.

Now let me go into more details starting with revenue by business segment and region. For the third quarter of 2011, Fiery revenue totaled $66 million, up 9% year-over-year and represented 45% of EFI total revenue this quarter. Our channel inventory remains within our operational target range on a global basis and we intend to keep it that way monitoring very closely how the center evolves through the quarter.

Inkjet revenue amounted to $59 million, up 14% year-over-year and contributed 40% of EFI total revenue. The revenue linearity was more backend loaded than historically but we are very pleased to have finished the month of September on a very strong note. Demand for our printers was very solid with double-digit growth in Americas and Europe. The 24% year-over-year growth in UV digital ink volumes stabled through the quarter was driven by a continuously increasing install base addressing the growing demand for commercial digital print.

Our APPS business unit delivered a record quarter with revenue of $21.5 million, up 36% year-over-year and contributed 15% of our total revenue. The industry demand for efficiency gains and automated business processes are the key drivers for the site organic growth of our APPS business. We have achieved $75 million in revenue for the last 12-months, up 46% from the prior 12-months which validates our growth core strategy and our ability to execute on the opportunity.

By geography, revenue in Americas grew 12% year-over-year totaling $85 million. Revenue in Europe increased 24% year-over-year and amounted to $47 million led by the solid organic growth of our Inkjet and APPS businesses. Finally, the rest of the world excluding Japan grew 77% year-over-year with solid performance in emerging markets.

Looking forward to Q4, we expect revenue in the range of $155 million to $160 million or 7% to 10% year-over-year growth. This outlook is based on Fiery revenue growth of low single-digit, Inkjet revenue growth of approximately 10% and over 25% growth in APPS.

Now moving onto gross margin. Non-GAAP gross margin for the third quarter was 56.6% up 210 basis points year-over-year basis and up 60 basis points sequentially. Fiery gross margin up 67.5% was down 80 basis points from Q3, 2010 and in line with our target range. Inkjet gross margin improved to 39.6% in Q3, 2011 up 510 basis points from Q3, 2010 and up 210 basis points sequentially driven as expected by the progress made with our warranty cost reduction initiatives as well as the growing sales volume.

This is the sixth consecutive quarter of sequential gross margin improvement for Inkjet, an important milestone in our recovery journey. Finally APPS gross margin was 70.5% for the quarter, up 330 basis points year-over-year driven by scale.

Looking ahead to Q4, 2011 we expect the overall gross margin to be up year-over-year and slightly down sequentially driven by product mix. We expect our Inkjet business to be at 40% gross margin. Now turning to operating expenses which as a reminder, we manage both in dollar terms and as a percent of revenue.

Non-GAAP operating expenses amounted to 45.4% of revenue, a decrease from 45.8% of revenue a year ago and 46% last quarter. Non-GAAP OpEx of $66.9 million grew 13% year-over-year. Excluding OpEx growth related to currency, business acquisition, and variable compensation tied to our strong performance, OpEx increased 5% year-over-year. Like in the prior quarter this operational increase was mainly driven by the restoration of the 2009, 2010 salary and benefit cuts as well as an increase in trade show activities. Non-GAAP R&D expenses were $28.2 million representing 19.1% of revenue compared to 20.1% of revenue a year ago and 19.1% last quarter. Non-GAAP Sales and marketing expenses were $29.1 million representing 19.8% of revenue, down from 20.3% a year ago and 20.2% last quarter. Finally, non-GAAP G&A expenses were $9.6 million, 6.5% of revenue compared to 5.4% a year ago and 6.7% last quarter.

For Q4 2011, we expect non-GAAP operating expenses to be slightly higher mainly driven by variable compensation linked to the over achievement of our 2011 sales brand. Now moving onto operating margin. We delivered non-GAAP operating profit margin of 11.2% in Q3 2011, up 260 basis points from Q3 2010. This is the highest operating profit margin since Q3 2007 and it marks the return of EFI into double-digit profit margin for four consecutive quarters, another important milestone in our journey.

Non-GAAP other income and expense amounted to a net expense of $1.5 million driven by quarter-over-quarter U.S. dollars appreciation relative to other currencies. This non-operational unfavorable foreign exchange impact represents $0.03 loss per share. Rounding on the P&L, our Q3 2011 non-GAAP tax rate was approximately 23% with about one point coming from favorable 2010 provision returns. As we mentioned last quarter, improvement in our tax rate is driven by the growth in international sales coupled with profit margin expansion. We expect the Q4 2011 tax rate to stay at around 23%.

As a result, we delivered non-GAAP EPS of $0.025 per share including the $0.03 loss from currency. This compares to $0.23 non-GAAP EPS in Q3 2010 which at the time included a $0.04 gain from currency. On a constant currency basis, we improved EPS $0.09 or 47% year-over-year. For Q4, 2011 we expect non-GAAP EPS of $0.31 to $0.34 per share assuming relatively mutual foreign exchange rates.

Turning to the balance sheet; total cash, cash equivalents and short-term investments amounted to $203 million. The net decrease of $29 million versus the prior quarter was driven by $23 million buyback activities and two acquisitions. These cash outflows were partially offset by cash generated from operations. Q3 2011 cash flows from operating activities amounted to $11 million, up 59% from $7 million cash flow from operations in Q3 2010.

This quarter cash generation was impacted by the intra quarterly narrative [ph] of our revenue and the appreciation of the U.S. dollars compared to the main currency. On the year-to-date basis, we generated $43 million cash from operations, that’s 127% year-over-year and we are on track with our goal to deliver cash from operations equal to one time pre-tax net income on an annual basis.

Account receivables amounted to $91.5 million, up 7% year-over-year leading to DSO of 57.2 days compared to 61 days a year ago. Our net inventory balance was $47.3 million at the end of Q3 2011, up 5% year-over-year. That increase was driven by the new inkjet products in our portfolio, partially offset by operational efficiencies. Overall, inventory turns amounted to at 5.4 turns compared to 5.5 turns a year ago. Overall working capital amounted to 59.2 days compared to 61 days a year ago. Finally, our total diluted weighted average share count for Q3 amounted to 47.3 million shares.

This concludes my comments and now we’ll be happy to answer any questions.

JoAnn Horne

Operator, we will take questions now please.

Question-and-Answer Session

Operator

(Operator Instructions). We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ananda Baruah.

Ananda Baruah – Brean Murray Carret & Co

Thanks guys for taking the question. I’m just wondering if you could make few comments (inaudible) third generation coming out of the handful of conferences again this quarter and leave that, how do you just talk around that quarter coming out accounts as well and how they expect down typically do at the conferences and how they expect about the relative stratification going into them. Thanks.

Guy Gecht

Yes, it’s excellent point Ananda. So I would say overall we are very pleased with trade shows. And I’ll give you few examples including one today. So GRAPH EXPO obviously we are very happy. We had more leads to mainly for our software because it’s really that the target audience for the show than ever before. We have 25 Fiery’s in throughout the industry, throughout the show. We had Heidelberg as you sell yourself putting VUTEk in the front of their book, showing the digital is what people looking for. And we had more sales, I think we had doubled the amount of sales for software than we had ever before.

If you look at couple of weeks later at Labelexpo, it was record attendance for the show because label is a very strong part of printing and digital printing is very interesting and we showed 4900. We got more leads that I remember in any shows and that’s just for the Jetrion 4900. That was just an incredible number of leads and that’s the first system that’s still in beta. And we’re very cautious about how many people would sell into until we get enough time run by the initial customers.

And then here is the last example, yesterday SGIA started, SGIA is the largest finance [ph] show, at least for second half of the year for U.S and really targeted other form of advisement very important for view the product portfolio. Yesterday we sold more hardware, more printers at the show that I remember selling in any first day of any show. And it was just very busy. This morning we got the product of the year award for the LED printers on the VUTEk side and that’s the first time it’s really available commercially that anybody wants to sell to buy. And so there is a lot we joke, that the product is old despite the cold queuing nature of LED.

So those shows tend to be – the internal investment for us tend to be a lot better than before, keep in mind in our industry people come to compare the output between machines not just the spec that’s the best way for them. They bring their own samples, they go compare between machines and decide what’s the speed, the quality the best given return on investments. So performing well in those shows is important in a way that we show that we do have a very strong innovative gap over the competition.

And the competition continues to innovate – to continue to watch that we definite don’t under estimate them. So overall we will continue to invest in those shows in the U.S. and aboard because that’s what allows decision being made, a lot of customers are coming to compare. We get a lot of leads that feed our future growth and we calculate ROI, the ROI is getting better.

Ananda Baruah – Brean Murray Carret & Co

Excellent, thank you. Much appreciate it.

Guy Gecht

Thanks Ananda.

JoAnn Horne

Operator, we’ll take our next question.

Guy Gecht

Hello.

Operator

Your next question comes from the line of Shannon Cross.

Shannon Cross – Cross Research

Thank you, hi.

Guy Gecht

Hi Shannon.

Shannon Cross – Cross Research

Hi, can you talk first about the Fiery business, just in terms of what you are hearing from your various OEM partners. And what they are hearing from their customers, what you think inventory levels are. Just any additional color you can give especially maybe on a regional basis talking about Europe and China and some of the other geographies. Thank you.

Guy Gecht

Yes, so I’ll take the customer reaction in the market overall and then Vincent will talk about the inventory level. So in general, I think that people are cautiously optimistic. There is a good traction to digital printing especially in production, especially in color, those are the areas we’re focusing anyway. And that’s almost across all geographies and across all OEMs. I think that the OEMs that have the best line up obviously in the areas where people are making money out of the machine, they don’t just bring casually probably that one that enjoying that the most.

I would say that actually in Europe things will, as you see for overall EFI and that’s including the Fiery, sales was pretty good, all those levels are pretty good. The U.S is pretty good. The areas that we saw weakness was Japan that was declining over year but that was more than offset than we are seeing a very fast growth in China and India from a number that is meaningless becoming now that number that is meaningful, still small but definitely adding to our growth. I think that there is the message simple for a lot of people digital printing is what customers want especially in tough economy if you want to show client, they don’t want to even pay on the back. And the people that can invest in digital printing can benefit.

So to the segments that we would follow I would say that overall I think there was not bad as far as definitely placement of units. I can’t speak obviously to the volume of page volume on those devices. And then inventory.

Vincent Pilette

So on the inventory side, Shannon, as I mentioned now for many times on the call, we have a very robust process. We’re viewing by product by country where we stand from an investing [ph] perspective. And the process is getting better and the data is getting more and more refined. We finished the last few quarters, we did our operational engine and Q3 is no exception to that. We brought money through the inventory in dollar terms but also in sales through. And we’ve seen very handy sales in September. So we are very encouraged by that momentum.

Our inventory is positioned for the Q4 guidance. And then as we also discussed, we will always want to stay out pretty lean within our operational range. So that’s what we build our guidance on.

Shannon Cross – Cross Research

Okay, great. And you actually just sort of answered one of the questions I had which is linearity during the quarter, can you talk about it, it sounds like I guess it was solid during for the Fiery business. Can you talk about linearity in terms of demand?

Guy Gecht

So on the Fiery side, at the same pace on historical level, no change there and sales through with our OEM is always stronger in September. We are pleased to see that it was no exception this quarter. When you look at the direct business or the business we sell direct that Inkjet and Software. Ink revenue and maintenance and services revenue were stable through the quarter, so we saw very good demand through the quarter. And when it comes to license sales and printer sales we definitely had a little bit more backend revenue than historical. Q3 is always more back-ended in September. It was like couple of points more back-ended but we’re very pleased by the strong finish in September which gives us a pretty strong feel moving forward into Q4.

Shannon Cross – Cross Research

Okay, great. And then can you talk a bit about cash, share repurchase clearly acquisitions, just how are you thinking about your cash balance these days?

Guy Gecht

Yes, so we’ve generated cash from operations $43 million year-to-date, it’s more than doubling versus last year. So the first thing is continuously focusing on working capital and operations to increase the cash that the business can generate and we’re pretty pleased by the progress made so far. When it comes to usage of cash, the first target of using these acquisitions, we announced Prism in July, a software acquisition. Another strategy there is the ready to roll out the software market, the ERP market for commercial printers and we’re making good progress.

Our primary focus is but not only in Europe or international to build our infrastructure there and increase our sales, we believe we have more opportunity there. So definitely M&A and growing the business based on the forward opportunities is part of our strategy. Secondly share buyback, we have a program from the Board to buy share. We’ve announced a new $30 million buyback program in August. Obviously price matters and we’re already executing against that program at this point. So we would continue you to do that based on price.

Shannon Cross – Cross Research

And just one last, I am sorry, just one last question on cash flow. When we think about working capital and you clearly done a really good job with that. Where do you think it can go and are we getting closer to where that’s sort of done and therefore it becomes more of a net income for communication spending [ph]?

Guy Gecht

Yes, so couple of things right, so obviously by quarter it would change based on how backend loaded your revenue could be and those kind of things. This quarter both the U.S. dollar appreciation and the revenue linearity impacted our cash generation or cash generation from operations. With that said, we grew 59% cash from operation and we’re pretty pleased. When you look at cash flow, it’s really more equal on the year-to-date basis. We’ve done $43 million.

We believe that the onetime pre-tax net income is a good metric. At this point in time we want to deliver a full year at that level, maybe slightly higher but we’re definitely comfortable getting to that level. And then as we continue to improve revenue product rolling out in the economy holds, I think we can also continue to have better payment terms and improve on that side.

Shannon Cross – Cross Research

Okay, great. Thank you very much.

Guy Gecht

Thanks Shannon.

Operator

Your next question comes from the line of Morris Ajzenman.

Morris Ajzenman – Griffin Securities, Inc

Hi guys.

Guy Gecht

Hi Morris.

Morris Ajzenman – Griffin Securities, Inc

Just in your very early comment, you referenced in Fiery, you spoke about still gaining share. Can you just give us some sort of numbers of where you think that share is and what that share gain has been recently?

Guy Gecht

So this is a topic that is tough to collect data, although we do have data because there is no another company that would share the progress and growth in similar product, for products that’s too small to report and our own partners had their own units they don’t report. But having said that, we have ample evidence that in the last two years we’re growing faster than the industry placing us [ph] in our area and we’re gaining share, gaining attachment played because customer more and more prefer the products we have and we have the leverage of connecting more without ever going install base of our APPS business.

In Investor Day, that I am hoping you will attend in about two weeks, we’re actually going to present data that we have about ourselves of the Fiery and how we change over the last two years. And you would see that not only we have good indication we gained share but there is still more share to be gained.

Vincent Pilette

If I can complement that, at the high level Morris, if we look at the Fiery business, we seen it would be a GDP plus kind of business, we’ve grown this quarter at 9% then we definitely know that the market is not growing at that pace. So by product may depend exactly where we go but we feel very comfortable that we’re gaining share.

Morris Ajzenman – Griffin Securities, Inc

One last question, Inkjet I think you said this quarter gross margins were 39.6% and you’ve articulated, you want to read it 40% run rate exiting the fourth quarter, which you are very close to at this point. I’ve asked you the question in the past but my presumption is, and correct me if I am wrong that you want to keep that in 40% goal forward. Is that fair or is there some sort of thought that gross margin can exceed the Inkjet business, it can exceed 40%?

Guy Gecht

So technically it can exceed the 40% Morris, but you’re fair with your assessment that we believe 40% at this point in time is the right metric to using the business model. We will use excess margin if I can call it this way to reinvest in price and accelerate the placement of our printers. We believe the industry is still transforming from analog to digital and we have a lot more opportunities in the marketplace to accelerate the printer placement that will deliver incremental revenue growth in the short term, but as you know also increasing the install base very critical than increase the ink revenue stream on the long-term.

Morris Ajzenman – Griffin Securities, Inc

Thank you.

Guy Gecht

Thanks Morris.

Operator

Your next question comes from the line of Gaurav Gupta.

Gaurav Gupta – Bank of Montreal

Hi guys, this is Gaurav for Keith Bachman from Bank of Montreal.

Guy Gecht

Hi Gaurav.

Gaurav Gupta – Bank of Montreal

Hi, I have a question again back going back to the guidance. So you guys have guided for about 7% to 10% year-over-year growth in the Q4 and the economic activity is slowing in all parts of the world. So I just want to understand a little bit more about the level of conservatives in the U.S. considered in your business not only for Fiery but also Inkjet and APPS while giving that guidance. And what are the puts and takes that if things slowdown, how can you make that up say just slowdown in Fiery, how can you make that up in other parts of the business?

Guy Gecht

Okay. So as I called that when I talked it was we call this guidance prudently cautious giving the headline. And we believe that our pipeline and activities and customer engagement and the way we start, we finished September and the way we started October clearly giving us very good confidence that we can do that and in other times we would probably – we’ll be thinking about even better numbers, but we want to be cautious given economy around us. So there is a lot of interest enough for that, the ROI for customers I’ve just read the quotes, somebody that saves 30% on materials and 30% on shipping and getting to new applications with buying LED on GS [ph].

The SGIA show that started yesterday and going on true to more evening start very strong. There is a lot of indication to us that customers even in bad economy can certainly benefit from the latest product in the fastest growth segments of print. I can tell you on the total EBIT [ph] at the end of the quarter I wanted to go through one of the eye of the storm so to speak so my team send me too eagerly for a day to visit, customer is trying to close from zero and actually I came back completing the college because the first two customers have met some that grow their business 25%. They are over in Italy because there is more targeted marketing showed for certain products maybe overall marketing is shrinking but the area they are working they set goals.

And some customers who are thinking about buying and decided to wait till Q4 because of the headlines, but total all the things are pretty good. So we think enough evidence that even in this environment there is a lot of interest in that. Now talking about leveraging our PL, they are things get a lot worsen that’s Vincent.

Vincent Pilette

Yes, so let me talk to you in a bit about how I think about the solidity of our EPS guidance. So it all started for me with revenue. When you decompose our revenue $36 million is recurring revenue which we’ve been growing pretty nicely, sequentially and year-over-year, now delivering very good margin for us. Then you have the software business, that both organically and from an M&A strategy are very favorable even in downturn. Customers are looking for ways of making their processes more efficient to streamline the operations even more at times of economic uncertainty. And our small tuck-in acquisition strategy has been on a very good path and we will maintain that momentum.

So when I look at revenue I really compose the different piece. Then it comes to the cost structure, would mean very good progress with our inkjet as we’ve mentioned. We’ll currently need to do that and so we’ll have a little bit more room there to go to get to our business target. That’s independent of the economy. The cost structure also has been a lot more variable.

We also told you quarter over the – now last three quarters that we booked a lot of variable compensation. We will realized a lot of cost structure and able to respond more to short term change in revenue assumptions. So that’s on the cost structure side. And then obviously we have our capital strategy and usage of cash to continue to elaborate any opportunities in the marketplace. So those are the different levers that make our guidance very – make us confident in our guidance.

Gaurav Gupta – Bank of Montreal

Okay, thanks. Just a quick follow-up on the acquisition side, you guys were active during the quarter making couple of acquisitions. If you can talk about A, what those acquisitions are, and B, from a long-term perspective is it a level that you are looking for with regard to spending cash on making acquisition to close the business in the future as well?

Guy Gecht

So the two acquisitions were relative small one. One is Entrac is very small group in Toronto that specialize in self service printing. It’s something that we believe has a lot of interest now. The printed copies of the machine are variable and need a person to monitor there, a system where you can put in a library in university. People can come and print with EFI mobile printing and print directly through this engine. It will charge you your credit card and your account. They worked with one customer FedEx that deployed it all of those stores. It was very good success. We believe there is a great opportunity with EFI would bring to OEM relationship and so on.

The second acquisition is more the continuation of the strategy of international expansion of our APPS business. It’s a company Prism. Most of their customers are outside of the U.S especially Asia Pacific, South Africa. The way we go about it, and again we’re going to get more into this on the Investment Day in couple of weeks but in short, we are buying install base. We stop selling the product that the company had. We are doing only minimal improvement for the existing customers and we work the customers to move them to EFI install base, EFI portfolio overtime. It gives us great access to international install base. It give us small group (inaudible) very familiar with the local markets, speak the language know the customers.

So it accelerates the international growth and the international growth is very strong in Q3. Again so it’s certainly something that we know we can grow in any economy because our share is so much smaller outside of the U.S. than there is in the U.S. going forward we are looking for things that essentially speaks in our three segments, whether what we do with OEM, walkthrough our solutions on the side of the business. The business process automation software and the industrial inkjet and we’re looking for a credit additions to those things that accelerate growth and accelerate – add more opportunities to scale than have more efficient operations.

So we’ll continue to look at those type of acquisition. Of course we’re only going to buy one out of 100 targets we are going to look at and we’re going to buy the one that fits the most EFI that’s perhaps when we get the best return to our shareholders.

Gaurav Gupta – Bank of Montreal

Thanks Guy. Just one last question if I may, sneaking it’s just one of the weakness Japan, you mentioned that you continued to see some weakness there. What is the throughout the quarter or it is setting the quarter did you see anything different from what you have seen in the few months and that’s it for me.

Guy Gecht

Yes, so we don’t break out specifically on what is in Japan. All I am saying essentially every other geography performs fairly well. In our product portfolio Japan was weak, and we think that’s with something with the economy there and the aftermath of obviously the tsunami and we thought it’s worth noting.

Gaurav Gupta – Bank of Montreal

Okay, thank you Guy.

Guy Gecht

Okay.

Operator

Your next question comes from the line of Richard Gardner.

Richard Gardner – Citigroup

Okay, thank you. Guy, how are you gentlemen?

Guy Gecht

Very good

Vincent Pilette

Good.

Richard Gardner – Citigroup

And lady?

JoAnn Horne

Hi Rich.

Richard Gardner – Citigroup

Guy, it certainly doesn’t sound like it based on your comments but I was wondering if you’d seen any changes in product development plans by your OEM customers on the controller side based on what’s going on in the economy or whether it’s pretty much full steam ahead?

Guy Gecht

I think there was no major changes in the last few months. I think they see the return on investment in the digital printing and production and different production color [ph] I cannot speak to areas like office or black and white where we have almost no exposure. But we have roadmaps that potentially take us to the end of 2014. I think there is a huge interest from them to get this product into best shape. I don’t know we’re very busy with that, you know that there is going to be show. The biggest show in printing next year in May where everybody is going to try to show off things that are even half ready including us. And so everybody is working out over that. So the short answer, no I didn’t see any changes on product portfolio.

Richard Gardner – Citigroup

Okay, that makes a lot of sense ahead of next year but and the other question was Guy, I was just hoping to get your thoughts on the competitive environment and wide format inkjet right now. I know that you’ve seen very well positioned from a product and technologies, can you just talk about, maybe add a little bit more color on the technology side and then talk about what you see from your large competitors like HP out there in terms of competitive pricing and how aggressively they are pursuing business right now?

Guy Gecht

I would say the competitors are as usual, very good. They do a good job in sales and they do good job in innovating. Specifically on HP they normally most of the time we see them is actually in a space slightly below us and so it’s more of a competition to our emerging Rastek line up than the actual high-end of the VUTEk. Although they do have a products that compete with us. We have Inca that belongs to (inaudible) private company in Europe. We have Agfa as a competitor. They all I think continue to advance the product line up in same way as we do.

I think we have an advantage of being in the production space in wide format, the largest especially in the U.S. I think in Europe there was share to be gained. Our share is Europe is not as good as in U.S. and I think that one of the reason why in Europe we’re growing faster. I think definitely we’ve opened innovation gap, few things we did, notably the LED. We have more opportunities to enter areas below when we’re out there VUTEk and Rastek and we will do that. And I think we have an advantage with the overall portfolio. We bring solution that involve the fastest, the most common front-end (inaudible) the Fiery and we introduced a new level of Fiery and graphics for that. We think it’s like six times faster than the closest competitor we’re still checking but that’s initial indication show we have the business process automation.

We have as we said before about 70% share in the U.S., that’s certainly something that helping us when we come talk to customers with the integration built. So that’s one of the biggest competitive advantage we have today including very good print. So overall as far as pricing, I would say we didn’t see anything different, the only thing that maybe worth noting is the strengths in the U.S. during the – in the U.S. dollar during the quarter caused some pressure outside of the U.S. and actually in some cases we adjust this pricing. We felt pretty good about the gross margin. You can see from the numbers why and so when we fell like we need to offset that international, we did not in every case. But that’s the biggest question we saw in pricing was actually the strength in the U.S.

Richard Gardner – Citigroup

Okay, great. All right, thank you.

Guy Gecht

Thanks Rich.

Operator

There are no further questions at this time. Mr. Gecht, do you have any closing remarks?

Guy Gecht

Yes. Thanks a lot everybody for joining us today. Once again we want to thank our shareholders. We want to appreciate the hard work by our employees and the loyalty of our customers. And we look forward to report more good news in the future. Thanks a lot.

Operator

This does conclude today’s conference call. You may now disconnect.

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