Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Electronics For Imaging, Inc. (NASDAQ:EFII)

Acquisition of Cretaprint Conference Call

January 10, 2012 5:00 pm ET

Executives

JoAnn Horne – Investor Relations, Market Street Partners

Guy Gecht – Chief Executive Officer

Vincent Pilette – Chief Financial Officer

Analysts

Shannon Cross – Cross Research

Ananda Baruah – Brean Murray, Carret & Co.

Keith Bachman – BMO Capital Markets

Morris Ajzenman – Griffin Securities

Operator

Good afternoon. My name is Valerie, and I will be your conference operator today. At this time, I would like to welcome everyone to the EFI call to discuss the acquisition of Cretaprint and Q4 2011 preliminary results. 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)

At this time, I will turn the call over to Ms. JoAnn Horne of Investor Relations. Ma'am, you may begin.

JoAnn Horne

Thank you, operator and thank you, everyone for joining us today. I have here with me today, Guy Gecht, our Chief Executive Officer; and Vincent Pilette, our Chief Financial Officer. Before we get started, let me review the Safe Harbor statement. During the call, we’ll be making forward-looking statements that are statements other than statements of historical facts including, but lot limited to our expected fourth quarter results, revenues and EPS, the impact of the Cretaprint acquisition on our 2012 results, our estimates regarding the ceramic inkjet products and revenue to be derived from that market 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 material adverse effect on our results. Please refer to the risk factors discussed in our SEC filings and the press release. We do not undertake to update in light of new information or future events. In addition, reference will be made to non-GAAP financial measures. Information regarding the reconciliation of the non-GAAP and GAAP measures can be found in the press release that was issued this afternoon on our website on the IR section at www.efi.com.

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

Guy Gecht

Thank you, JoAnn, good afternoon everyone and thank you for joining us on short notice. As you saw from our press release earlier today, we have two very exciting topics to discuss. First, we announced the acquisition of Cretaprint, a leading provider of inkjet printers for ceramic tiles. This transaction [extends our time] and further accelerates the growth of our inkjet segment, which was key factor in our record Q4 results. Our second piece of great news today.

We're very pleased to have achieved record revenues for the fourth quarter of 2011, with revenues of approximately $163 million. We expect non-GAAP earnings per share to be in the range of $0.34 to $0.35. Now this includes approximately $0.03 of negative non-operational FX impact. These solid results reflect the increasing importance of our direct sales businesses as we achieved record revenues in both the inkjet and APPS segments in Q4. Our direct business now represents close to 60% of total company revenues.

Changing the mix toward our APPS and inkjet segments where we typically sell directly to customers and enjoy growing recording revenue stream is that cornerstone in our strategy and particularly important in light of the uncertain economic environment, as we have greater control in successfully marketing, selling and supporting customers around the world. Obviously, we will have much more detail on our fourth quarter results and our outlook for the Q1 2012 on our regular [earning] call, scheduled for January 24.

As such, we don't we plan to provide additional detail about Q4 today, as the primary purpose of this call is to discuss the strategy behind our expansion into ceramic tile imaging, which we have been evaluating for a long time and our choice of Cretaprint to enable EFI to participate in this fast transition from analog to digital technology. Cretaprint, which is located in Spain, is a leading provider of inkjet printers for ceramic tile. EFI paid approximately $31 million in cash, in addition to up to $21 million earn-out based on growth targets over the next two years. We expect Cretaprint to contribute approximately 5% to 7% of our 2012 revenue and anticipate the acquisition will be immaterial to Q1 earnings and accretive to the full year 2012 results.

We are very excited about this transaction as it [extends the time] for inkjet business by about $500 billion, while tile imaging is estimated to be only 4% converted to digital technology today. The pressure in past couple of years on the construction industry has accelerated the adoption of digital print, due to both the reduced costs along with the saving presented by not getting inventory of hundreds of tile design. Further the capability and the quality of digital print have reached a level where it’s superior to the analog forces and as such it enables manufactures to charge a premium for the higher quality.

Currently tile imaging is one of the industries converting the fastest digital printing technology. as noted by an industry analyst in our press release this morning, the payback can be as fast as six months. Synergies are key factor behind this field. Cretaprint would benefit from EFI’s industrial leading inkjet R&D capabilities to innovate as well as supply chain synergies as both companies use similar designs and key components.

We see a great opportunity to sell more and more of those inkjet printers worldwide. At the same time, this helps accelerate EFI sales into a large emerging markets such as China, India, Brazil, Indonesia and Turkey and reducing our reliance on the more matured market in Europe and U.S., but perhaps, the biggest upside to deal lies in the opportunity to bring the whole EFI ecosystem, which includes ink and business process automation software to this tile imaging market. As a small company, Cretaprint focused on selling printer only while third-party ink companies provided the ink for their printers.

We believe that the ceramic inkjet printer consumes about [Phoenix], the volume of ink of our VUTEk equipment. We however anticipate that it will take us one to two years to stop gaining meaningful revenue from ink and software sales into this market.

So in summary, we are very excited about the opportunity to expand and accelerate that the global and industrial inkjet segment by adding strategic new markets along with the upside opportunity to over time, bring the EFI ecosystem to an expanded set of customers.

Vincent and I are now happy to take your questions.

JoAnn Horne

Operator, we’ll take questions now please.

Question-and-Answer Session

Operator

(Operator Instructions) And the first question comes from the line of Shannon Cross.

Shannon Cross – Cross Research

Hi, good afternoon.

Guy Gecht

Hi, Shannon.

Vincent Pilette

Hey, Shannon.

Shannon Cross – Cross Research

Okay. So I guess we’re not allowed to ask anything about the quarter? Did I get that correct?

Guy Gecht

No, you’re allowed to ask whatever you want. I’m not sure what we can – we’re going to decide to answer.

Shannon Cross – Cross Research

Well, let’s see. Can you talk just a little bit about – you mentioned strength in Inkjet as well as your software business. But can you talk a little bit about just sort of the overall business? I mean do you think you’re taking share? Was this as a sign of positive demand in the market? Just anything you can give us in color in terms of sort of fourth quarter? And then, I have some questions on the acquisition.

Guy Gecht

Sure. So in both the Inkjet and APPS, I think we bring to the market very compelling ROI. And in Inkjet, the LED technology especially helped us. This is a great new innovation, unique to a fine production, people love it. In APPS, people try to get their business in order and get more efficiency, running a better way, turn around things faster. This is definitely helping us. We have now a few small acquisitions. Now we have a base globally. So we’re selling to a much bigger broader audience worldwide.

Those two businesses had a tremendous Q4. The demand was very strong. I think that we definitely take share, it is tough to measure. But keep in mind we are just compiling the data as we speak. But certainly, it was more than just the demand for those types of applications. I think we really dominated the market in Q4.

And we feel very good entering the year [with] knowing that customers really can make money out of those devices. Now geographically, things different between geography, Europe was maybe a single-digit growth. In other areas, we’re faster growth, but as I think, as expected.

Shannon Cross – Cross Research

And what about the controller business?

Guy Gecht

The controller business was as we anticipated was flat to slightly up year-over-year. I think that is one of the reasons we’re super pleased with doing a record revenue despite the controller having a small increase year-over-year. Because we now can control our destiny and sell a lot faster with direct sale, recurring revenue carrying businesses around the world. So we’re very pleased with the controller business, but the growth actually came year-over-year from the Inkjet and APPS.

Shannon Cross – Cross Research

Okay. And then on the acquisition side, forgive me since I don’t know the technology that well. Is this something where you can take like your LED technology or anything that you’ve developed and leverage it?

Guy Gecht

So I want to be very careful, it’s still early in the game. We just owned them for about an hour. So there’s definitely a lot of technology we identify in EFI that can benefit them tremendously, either on the cost, helping them to actually have a better cost, a faster speed and lower cost.

And also on the side of stronger machines, higher quality, high resolution, some of this I think we can be doing in the next few months, and some of it might take a roadmap of couple of years. And so, there is a lot of technology synergy that we found out in due diligence between the machines. At the end of the day, it is very similar to what we bring to the market today, printing on all sort of materials, printing higher quality, very high speed, et cetera.

Now, there is another element to this that is bringing EFI color management, workflow and business software applications to this, that we feel this industry will benefit from this. We didn’t find anything that is similar to what we brought to the market. And we think there is a great opportunity to kind of revolutionize workflow and business process automation and potentially new sets of customers.

Shannon Cross – Cross Research

Okay, great. And then from the standpoint of potential other acquisitions, since this one isn’t that expensive relative to your cash balance. How are you sort of thinking about the assets that are sitting out at Kodak, which is quickly slipping towards having to file that thing we don’t like to talk about? So I guess, are you open to more acquisitions in this year? How do you feel, Vincent, about the ability to sort of absorb more acquisitions?

Vincent Pilette

Yeah. Certainly, we find this big acquisition very compelling, as far as the price we pay. And it is flattening our segments, and it’s in line with our strategy. So we feel very good about that. We continue to be very selective. There are definitely acquisitions there including parts of existing companies and standalone companies.

But we want to be selective. We want to go after accretive acquisition. We want to be in a position that fit into where we’re going after the growth segments of the industry. We are very fortunate. We’re talking more about Q4 when we said we’re not. But we had actually a very strong cash flow Q4 quarter.

And to be honest, what we’re paying upfront for Creta is essentially roughly the same amount of cash we generated in Q4. So, we definitely have the capability to fund those acquisitions. And we continue to look this.

As far as Kodak specifically, obviously you can tell there are couple of things that are closer to the business that we are in. They probably have a price that we will be open to discuss, if Kodak ever open to sell it to us. I think they know very well which areas we are very interested; we made it clear to them a few times.

Shannon Cross – Cross Research

They may not have a choice?

Vincent Pilette

Yeah. We are ready to deal with it, if necessary. (Inaudible) I have to say; in the meantime, we are competing with them in the market on the Fiery side quite successfully.

Shannon Cross – Cross Research

Okay, great. Well unfortunately, we don’t have any bankers that can do the transaction. But thanks so much for taking my questions.

Vincent Pilette

(Inaudible)

Operator

And our next question will come from the line of Ananda Baruah.

Ananda Baruah – Brean Murray, Carret & Co.

Hey, guys, can you hear me okay?

Guy Gecht

Yeah.

Ananda Baruah – Brean Murray, Carret & Co.

Okay, great. Congratulations on the quarter and the acquisition. I guess just a few follow-ups, if I could. You mentioned Europe was low single-digit growth. Was that an Inkjet comment? It sounds like it was. And I guess if you could give us any detail around how you saw the business kind of environment and I guess customer interactions shape up as you kind of moved through the quarter sort of what the concern that has been Europe? That would be helpful, thanks.

Vincent Pilette

So again not ready to get into segment per geography we’ll do it in couple of weeks, Ananda. But I would say, certainly that we had a lot of interest in all of our products, and some, we certainly saw some customers, they decided to wait with buying decisions, given all the bad news. Despite that, the interest was so large that we managed to get to this record all-time quarterly revenue.

And maybe in Europe more than in other places, people were holding on some decisions. That is not just including things with selling (inaudible). It’s including Fiery, that’s sold with conjunction with other things. So maybe Europe was higher level of people waiting, decision being pushed.

And I would say even Europe is not even – the users (inaudible) countries are more difficult, Germany, France, UK, the Nordic, actually, we did quite well. So, overall I’m pleased with Europe. I’m just saying that what we read in the newspaper, we’re seeing as far as how many people are sitting on decisions.

Net-net, at the end of the day, we had enough fund and enough interest in the market that we feel very good about where we are, and how much deals we managed to convert and the ROI that is pretty fast for people in buying EFI equipment.

Ananda Baruah – Brean Murray, Carret & Co.

Is there any way you can tell us you had been, you and me let me think about some of the forces that have been driving Inkjet strength since over the last couple of years really such as I guess the implementation of digital versus offset versus analog, and some of the other things. I mean, the product cycles, is there any way, can you tell us any of those forces that have changed in their magnitude, to be able to sort of drive solid adoption needed in a tough economic environment.

Guy Gecht

True I would say that the ultimate buyers, the people that advertised and using marketing dollars they certainly are more into buying more shorter quantity faster very fast turnaround from the day they announce a product, they want to see signage in the store very quickly. They definitely, there is less willingness to carry inventory. Now digital give you other options you can bring on all sort of media, we actually have taken some great quality level in some areas.

So, I think digital is getting better and better. The analog is staying the same. There is no innovation there. And therefore, there was less and less reasons not to buy digital, and more and more compelling ROI in a tough environment, where you definitely want to print on demand, you don't want to carry any inventory, you want to print when you need it, you want to be able to provide short times to your customer. Somebody call in the morning and need something urgent, in two hours, you are able to do that.

And that is definitely not different from what we are seeing in the business of Cretaprint. Their business had accelerated, as well as their competitors, in the last 18 months because people not willing to carry inventory, because people like to print on demand, because people like to improvise and print when they needed it at very quick time. And there is a huge saving in cost there by going digital, because the analog process is very complex. By switching from design to design, there's a penalty of significant amount of money. So in digital you can switch between designs at no cost and you can do it instantly.

Ananda Baruah – Brean Murray, Carret & Co.

Was LED, was it a little bit better than you expected in this quarter? I was not expecting it to be called out as a contributor of the upside?

Guy Gecht

It was, we know we cannot start, we finished the beta at the end of October, and we start to push out worldwide. And the response from customers was very strong. I mean that people that are not buying LED, definitely talking about that. Now keep in mind that if you buy a regular GS for a certain amount of money, not an insignificant amount of money, you could actually upgrade it to LED. We give the customer that option, which is a potential revenue for us down the road.

So, even if people don’t buy an LED I think it gives us an advantage to sell the GS; because customers know that down the road, if the LED is what needed, they will go forward. There is, you always have a bunch of customers that don't want to be the first one with technology, so they sit on the sideline. But I say that I am very pleased with the level of interest and excitement in the market around the LED technology, and I'm pretty sure we are going to do well with it in the future.

Ananda Baruah – Brean Murray, Carret & Co.

I think that’s a nice one, one last follow-up guys, the Cretaprint acquisitions, it says in the comments you expect to contribute 5% to 7% to '12 revenue growth. So, should we just take what our EFI estimate is before the acquisition it’s another 5% to 7%, or whatever it takes to get the 5% to 7% of overall EFI revenue for '12?

Vincent Pilette

Yeah, so, definitely, 5% to 12% to our internal plan, you can take your model that gives you a pretty broad range. We have a plan that is focusing on continuously growing the revenue stream coming out from the ceramic tile. And then, on January 24, we'll talk more about Q1.

Ananda Baruah – Brean Murray, Carret & Co.

Okay, great. I could just add, I will sneak one more in, I guess, if I could, is this also an opportunity to expand the APPS distribution? The new video acquisition?

Guy Gecht

So that’s the first step and I mentioned, I talked about first of all, it is exciting, accretive, fast growing, healthy business located in Spain, actually that being having the most of the team located in Europe is actually an advantage, that the flip side of the euro slipping, on one hand we are paying with FX, but on the other hand, it is really an inexpensive area to build, to design system and to manufacture.

So we’re taking that, this is exciting, but if you think about the opportunity in the next deal to add the EFI ecosystem that we build already (inaudible) Inkjet that has ink. This company does not sell ink today because they are small. They are focused on printers, and they do quite well with it. We are going to add ink we are going to add software. We are going to add the entire EFI ecosystem. I think that can be a dramatic upside to this business that even just by continuing selling the printers, we are very excited about, but there is definitely an element here to bring the APPS business too, as you alluded to.

Ananda Baruah – Brean Murray, Carret & Co.

Right, thanks guys.

Vincent Pilette

Thanks a lot.

Guy Gecht

Thank you.

Operator

And our next question comes from the line of Keith Bachman.

Keith Bachman – BMO Capital Markets

Hi, guys I had two; on the acquisition could you speak at all to, it is new technology, so we are not real familiar with it. But in terms of, is there a different perspective on economic sensitivity, compared to your traditional Inkjet business? Any kind of dynamics or additional color on growth rate and the sensitivities on this growth rate that we should be thinking about here.

Guy Gecht

First of all, let me, I think you actually more familiar with the technology than you probably realize today because it’s very similar with the technology that EFI apply in our VUTEk and Jetrion printers.

Keith Bachman – BMO Capital Markets

Okay.

Guy Gecht

But as far as since the [PVC] it’s actually very interesting. We’ve been following this market for quite sometime, and we were amazed with the acceleration of adoption in the last, call it, 12 months and because of the compelling ROI, I think the pressure in the market and the concern about the future cause people to go into Inkjet. Investment level for those providers relatively small compared to how much they need to invest in equipment. So, sometimes for a VUTEk customer, that is the biggest investment they will make is to buy this type of printer. Certainly, for people that manufacture tiles, that is not – that is by far not the biggest investment they can make in equipment.

And as the ROI is so dramatic, and they actually can sell today the designs they can do on the spot at a premium. So today, if you buy a tile and if it is based on Inkjet the quality is higher and therefore they are getting at a premium. But even without that this ROI, the saving on cost, the saving on inventory otherwise, you need to, there's hundreds of designs you need to keep an inventory is dramatic and my guess is that because of the concerns in the economy and because of the pressure on the end customer, this is actually accelerating inkjet adoption and not impacting that and that’s exactly what we saw. Keep in mind, only 4% of that ceramic tiles lines – production lines in the world have inkjet technologies. So, even if it is accelerated the last year, where there is many, many more years of selling, a lot of printers to everybody worldwide, to benefit from this. And the technology will continue to evolve; I mean, we are just in the beginning year of moving from analog to digital in this industry.

Keith Bachman – BMO Capital Markets

Okay. But is the customer base that you would sell to – is there sales force leverage associated with this acquisition?

Guy Gecht

So, the leverage in the sales force is a lot smaller. Here, the leverage is really in technology, in R&D, in supply chain. There is an element of presence. I think they sell a lot in emerging markets. Clearly, we’ll have a bigger name for EFI. We’ll be well-known; we’ll have more people on the street. So, at this point is less sales synergy, but as we bring EFI ecosystem, obviously, that will expand that.

Keith Bachman – BMO Capital Markets

Okay. All right. Vincent, I’m just taking it back to the numbers question, when the present addition to this years revenues that was related to the total EFI revenues not the inkjet revenues right?

Vincent Pilette

That is correct. Total EFI revenue.

Keith Bachman – BMO Capital Markets

Okay. Then the last one I have which is more than two is, Vincent can you just give us comfort that on the healthy EPS number there is nothing funny or inconsistent I should say, on tax rates or other income or anything like that, it was a good revenue quarter and nothing desperate in those categories which investors wouldn't particularly like?

Vincent Pilette

So, we’ll give more details obviously on the 24th, but the outside coming from our operations – so operational, the health of the business and the upside in revenue. And then, the only abnormal I would say that was not planned, is the $0.03 loss from currency.

Keith Bachman – BMO Capital Markets

Okay. That’s it from me guys. Many thanks.

Vincent Pilette

Thanks, Keith. Good talking to you.

Operator

(Operator Instructions) And our next question comes from the line of Morris Ajzenman.

Morris Ajzenman – Griffin Securities

Hi, guys.

Guy Gecht

Hi.

Vincent Pilette

Hi, Morris.

Morris Ajzenman – Griffin Securities

Okay. So the 5% to 7% of 2011 revenues gets you somewhere in the low 30s and low 40s in the revenue run rate for 2012 for Cretaprint. Can you share with us what the revenues will be in 2011? So we have some sort of idea of what sort of growth rate we can look at?

Guy Gecht

(Inaudible), we are not ready today to share the prior year revenue. And keep in mind, this is a small company. We rushed our close [forces] to give preliminary numbers, which is next to close in Q4 and we really – today, we want to focus on the contribution two years by, they will continue to grow. We are very confident that there is a tremendous upside not just this year make the following year, and that’s what all we can say and again, we’ll share more in two weeks and we’ll share more later is that we estimate that they will be 5% to 7% of our revenue in 2012.

Morris Ajzenman – Griffin Securities

(Multiple Speakers) you will have enough material; you can give a stab at maybe the EBITDA numbers or whatever, no problem, a few weeks out?

Guy Gecht

We did not decide what past information we are going to give, and how confident we are in those numbers. But we get – in two weeks, we’ll definitely share, but I don't know what type of information, we’ve still have not decided. And as I say, we just owned them for about – we signed the deal and closed the deal at the same time; an hour ago.

Morris Ajzenman – Griffin Securities

Congratulations. One last question then. Can you give us the size of the total market for tile industry, as far as the printing part of that businesses? And then, I think you said, did you say 4%, I missed it is digital printing?

Guy Gecht

So that’s how about 10,000 lines worldwide, and there is a printer that – for every line we’ll need one printer to convert to digital. So, at 400 printers worldwide got sold, by Cretaprint and their competitor. So, that’s a 4% penetration. A printer is about roughly the same price as our higher-end VUTEk, so about $500,000 per printer. So if you do the math that’s about $5 billion worldwide if all the printers will convert at one year, obviously that’s not going to happen. So, if you take a conservative approach of saying well, I’m expecting 10% of this market on average. Of course, going over the year, that’s about $500 million a year, that’s not including what I call the EFI ecosystem. Once we start to have -- participating in the ink revenue and software revenue [with that]. So that’s kind of the size of the market. The market is more heavier in emerging market, which is another exciting part of this news. There is a lot of market in China. And like we have seen with other market, they want to see more and more quality (inaudible), big markets in India, Brazil, Turkey, Indonesia -- Italy and Spain are still good markets, Mexico. U.S., interestingly enough, is a big importer, but not a big manufacturer of tiles. So, overall, in a couple of fields, when you look at that, it is definitely going to change EFI revenue geographically mix; it would got it well will be more in emerging than we are today.

Morris Ajzenman – Griffin Securities

Thank you.

Guy Gecht.

Thanks, Morris.

Operator

There are no further questions at this time. I will turn the call back over to our host Mr. Guy Gecht, CEO for the closing remarks. Sir, you may go ahead.

Guy Gecht

Thanks and thank you everybody for joining us on a short notice. We are looking forward to share with you more in couple of weeks on January 24. Thanks a lot.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Electronics For Imaging's CEO Discusses Acquisition Of Cretaprint (Transcript)
This Transcript
All Transcripts