Electronics For Imaging CEO Discusses Q4 2011 Results - Earnings Call Transcript

Jan.24.12 | About: Electronics for (EFII)

Electronics For Imaging, Inc. (NASDAQ:EFII)

Q4 2011 Earnings Conference Call

January 24, 2012, 17:00 p.m. ET

Executives

JoAnn Horne - IR

Guy Gecht - CEO

Vincent Pilette - CFO

Analysts

Shannon Cross - Cross Research

Ananda Baruah - Brean Murray Carret & Co.

Morris Ajzenman - Griffin Securities

Operator

Good afternoon. My name is Rob, and I’ll be your conference operator today. At this time I’d like to welcome everyone to the Q4 2011 Electronics For Imaging Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After speakers remarks there will be a question-and-answer session. (Operator Instructions)

Ms. JoAnn Horne, Investor Relations for EFI, you may begin your call.

JoAnn Horne

Thank you, operator and thank everyone for joining us today. I have here with me Guy Gecht, 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 will be making forward-looking statements, but our statements other than statements of historical facts including but not limited to statements regarding our strategy, growth opportunities, industry innovation, introduction, as well as estimates and/or projections of revenue, operating profit growth, EPS, gross margin, operating expenses, tax rate, working capital, and any statements or assumptions underlying any of the foregoing. Forward-looking statements are statements of risks and uncertainties that could cause our results to differ materially or cause a material adverse effect on our result. 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 on 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 everyone and thank you for joining us today. At the $163 million Q4 represents the highest quarterly revenue EFI has ever recorded and our eight consecutive quarter of greater than double-digits growth. Perhaps this number is most meaningful, because we have continued this core play as we move fast to easy compared quarters when the industry was just beginning to recover from the recession. And despite concerns about the softening economy we delivered 12% top line growth in the quarter, but it's not just the top line.

In the fourth quarter we saw about 48% increase in operating income and 29% increase in non-GAAP EPS despite the negative currency impact. So, we are not just generating more revenue we are dropping more and more away to the bottom line.

We are particularly excited about the record Inkjet and APPS revenue, delivering record revenue in the softer and the inkjet part of our business highlight the progress we have achieved in balancing the revenue drivers of the company. And while Fiery segment had a challenging compared to the prior year as Q4 2010 included the initial revenues from product launches by a number of our partners and perhaps more favorable macro conditions a year ago. We were able to see modest growth in the segment and expect normal seasonality in Q1. This relative stability would not have been possible if it wasn’t for the disciplined approach we implemented to carefully monitor our partner’s inventory levels and adjust for changes based on those results.

Before we turn our outlook for 2012, I wanted to quickly review some of the highlights for 2011. Beginning with how pleased we are with the 17% growth following a 2010 that benefitted from the economic rebound. In 2011, we grew our operating profit by 93% and EPS by 90%, and delivered solid cash flow from operation. Clearly the strategy of focusing on the transformation of analog to digital printing in the growth segment of printing coupled with a solid execution by EFI team.

We also delivered on our commitment to bring our Industrial Inkjet segment margin to its 40% target and are now beginning to see the benefits of the new products introduced during 2011 including strong initial orders for our new LED based gun format printer. And as we have discussed color print expands the opportunity for Inkjet ink increasing both the time along with the opportunity to introduce the full EFI ecosystem in the future including ink. We are off to a solid start with color print revenues projected to grow in Q1 at the high end of 5 to 7% revenue guidance. And we are confident than past the initial month of integration, the addition of Cretaprint's line of printers will add to EFI’s profitability in 2012.

The 41% growth in our APPS business this year is particularly gratifying, coupling solid organic revenue growth with few strategic tuck-in acquisitions, we are pleased with the result and momentum in this segment. In addition to its solid contribution to EFI’s growth and profitability our business process automation software providing a Fiery and Inkjet product portfolio with a unique advantage when selling through over 25,000 customers in our APPS install base.

The outstanding growth in APPS in contributing to our ever increasing recurring revenue stream between maintenance contracts and subscription, similarly our solid growth in Inkjet printers is also contributing to recurring revenue as it drives increased ink sale. In Q4 we posted over 20% growth in UV ink volume for the ninth consecutive quarter. The combination of increasing ink sale and growing of software install base is having profound impact on EFI’s business and it's another reason to celebrate the record results in the Inkjet and APPS segment.

For 2011 our total recurring revenue was 142 million up from almost nothing when we started this transformation years ago. As EFI becomes more balanced from business segments perspective, we are also getting more diversified on the international level, looking first of you which we grew nearly 20% in 2011 though at a much lower rate in Q4. We believe that our additional growth opportunities for APPS in Europe as we level that our acquired install base and local teams to gain share. This deal we also saw solid growth in Asia excluding Japan, doing part the increasing demand for Fiery in China and Asia.

And of course, Cretaprint will also increase our revenue opportunities in the emerging markets. We will continue our efforts to position EFI as a global company with flattening reliance on the more mature market. As we [start new yield] which we expect to be a record revenue yield the EFI team is charged with tremendous amount of enthusiasm and energy. While we continue to push ourselves throughout innovate and now to execute our competition in all aspects of our operations. We don’t need to transform the company and we don’t need to fundamentally change EFI.

While we are focusing on is executing on our strategy, enabling the industry to conform to digital printing targeting the growth segments of printing while continuing to build a great company that can sustain growth even in the challenging macro condition.

In 2012, we plan to introduce new industry leading innovation in every part of our business, 2012 is also the year of the Olympic games of the printing industry. The Drupa Show in Dusseldorf during May. We aim for a great show in Drupa and for EFI to win many industry gold medals in our targeted growth segments.

Finally, let me share with you our current outlook for the first quarter of 2012. We believe we can achieve solid growth in the seasonally weak March quarter, despite the difficult Fiery compared from the new products introduction I discussed earlier. In Q1 we expect revenue growth of roughly 10% year-over-year with operating income growing also at about 10% resulting in a non-GAAP EPS of $0.27 to $0.28 per share.

And with that I will turn the call over to Vincent to provide more detail around the financial results for Q4 and our Q1 outlook.

Vincent Pilette

Thank you, Guy, and good afternoon everyone. We are delighted to deliver record revenue for the last quarter of a very strong year. Revenue for the first quarter of 2011 totaled $163 million up 12% from the prior year, eight consecutive quarter of double-digit growth.

Recurring revenue was a record $37 million an increase of 16% year-over-year. Non-GAAP gross margin equaled 56% up 210 basis points year-over-year as we successfully expanded margin in Inkjet and APPS segment while sustaining Fiery margin.

Record revenue and disciplined spend management led to a 14% non-GAAP operating profit margin which operating profit growing 48% year-over-year. We delivered $0.36 non-GAAP EPS including $0.03 of unfavorable non-operational currency impact. Finally, we generated $29 million cash from operating activities supported by rigorous management of working capital days down 1.7 days year-over-year.

Now let me go into more detail starting with revenue by business segment and region. For the first quarter of 2011, the Industrial Inkjet segment became EFI’s largest business segment with revenue amounting to $73 million, 18% year-over-year contributing 45% of EFI’s total revenue.

Our new product portfolio and trade shows early in the quarter generated solid momentum for the entire period and we finished on a very strong note in December. UV ink volume was a record for the quarter with the growth of 34% year-over-year driven by the industry migration to digital print as well as our growing install base.

Our APPS business unit delivered another record quarter with revenue of $24 million up 32% year-over-year which contributed 14% of our total revenue. We continue to be pleased by the double-digits organic growth rate driven by strong demand for more business process automation in the print industry as well as by our recent business acquisitions in this segment that continue to outperform their plans.

Fiery revenue totaled $67 million up 2% year-over-year representing 41% of EFI total revenue this quarter. As we exited 2011, our channel inventory was down sequentially and well within our operational target range on the global basis which gives us a healthy position growing into 2012. By geography revenue in Americas grew 21% year-over-year totaling a $103 million led by the steady growth of our Inkjet and APPS segments. Revenue in EMEA increased 2% year-over-year totaling $45 million. Finally, Asia Pacific excluding Japan grew 24% year-over-year with continued strong performance in emerging markets.

Looking forward to Q1 2012, we expect approximately 10% revenue growth year-over-year, this outlook is based on Industrial Inkjet revenue growth of over 30% year-over-year with double-digit organic growth and double-digit organic growth for our Cretaprint printers which in the first quarter as part of EFI I expected to contribute at the high end of the 5 to 7% range of EFI total revenue.

APPS revenue is expected to grow over 40% year-over-year. Finally Fiery revenue is expected to be back to historical seasonality with Q1 2012 down sequentially approximately 5% from Q4 2011. Fiery is the only segment down year-over-year driven by the exceptional timing of new product launches at the end of 2010.

Now moving on to gross margin. Non-GAAP gross margin for the fourth quarter was 56% up 210 basis points year-over-year due largely to operational efficiency and down 60 basis points sequentially driven as expected by revenue mix. Inkjet gross margin improved to 40.4% in Q4 2011 up 560 basis points from Q4 2010 driven by cost reduction initiatives, higher value product mix and growing sales volume. This is the seventh consecutive quarter of sequential gross margin improvement for Inkjet and it marks the return to the 40% gross margin objective for this business.

APPS gross margin was 70.9% for the quarter up 90 basis points year-over-year and up 40 basis points sequentially driven by economies of scale. Finally, Fiery margin of 67.6% was up 30 basis points year-over-year and up 10 basis points sequentially.

Looking ahead to Q1 2012, we expect the overall gross margin to be slightly down sequentially, as a result of product mix. We expect that Inkjet gross margin to be slightly down sequentially, driven by higher mix of printer revenue versus ink revenue due to the acquisition of Cretaprint. We are maintaining a long-term gross margin objective of approximately 40% for the Inkjet segment which will be achieved to a supply chain synergies in the medium term and the introduction of the ceramic ink revenue stream in the long-term.

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 were 42% of revenue decreased from 43.3% of revenue a year ago. Non-GAAP OpEx of $68.4 million grew 9% year-over-year with about 4 percentage points from business acquisition and valuable compensation tied to our strong performance.

Non-GAAP R&D expenses were $28.3 million representing 17.4% of revenue compared to 18.3% of revenue a year ago. Non-GAAP sales and marketing expenses were $30.4 million representing 18.6% of revenue down from 19.4% a year ago. Finally, non-GAAP G&A expenses were $9.7 million 5.9% of revenue compared to 5.6% a year ago. For Q1 2012, we expect non-GAAP operating expenses to increase slightly sequentially driven by the acquisition of Cretaprint partially offset by lower valuable compensation.

Now moving on to operating margin. We delivered non-GAAP operating profit margin of 14% in Q4 2011 an increase of 340 basis points from Q4 2010. This is the highest operating profit margins since Q3 2007 and represents operating profit of 48%.

Non-GAAP other income and expense was a net expense of $1.5 million driven by quarter-over-quarter U.S. dollar appreciation relative to other currencies. This non-operational unfavorable foreign exchange impact represents a $0.03 loss per share.

Rounding out the P&L, our Q4 2011 non-GAAP tax rate was approximately 22% with about 1 percentage point coming from favorable 2010 provision return. For the full-year our non-GAAP tax rate came to a 24% operational tax rate compared to 25% in 2010.

Going into 2012, we expect the tax rate to be approximately 24% achieving the renewal of the R&D tax credit by the U.S. Congress. As we continue to expand internationally, improve our profitability and integrate Cretaprint, we should continue to see improvement in our tax rate in the long-term.

Strong demand for our product and disciplined operational execution enabled us to deliver non-GAAP EPS of $0.36 per share in Q4 2011 net of the $0.03 loss from non-operational currency fluctuations. For Q1 2012 we expect non-GAAP EPS of $0.27 to $0.28 per share assuming relatively neutral foreign exchange rate and the breakeven OI&E. Keep in mind that in Q1 2011 we had a $0.03 non-operational gain from currency fluctuation and a one-time $2.4 million gain in OI&E.

Turning to the balance sheet, total cash, cash equivalent and short-term investment amounted to $219 million. The net increase of $16 million versus the prior quarter was driven by solid cash generation from operations partially offset by the acquisition of Alphagraph. Q4 2011 cash flow from operation amounted to $29 million. On the full-year basis we generated $72 million cash from operating activities of 62% year-over-year and slightly above our internal goal to deliver cash from operations equal to about one-time annual operating income.

Accounts receivable were $91.9 million resulting in DSO of 51.9 days a decrease of 2.3 days year-over-year. Our net inventory balance was $44.8 million as of year-end resulting in inventory turns of 6.2 in Q4 2011 compared to 5.9 turns a year ago.

Inventory efficiencies were driven by improved execution and strong sales volume this quarter. Overall working capital was 50.6 days compared to 52.3 days a year ago. In Q1 2012, working capital will be slightly impacted by the acquisition of Cretaprint due to its less efficient cash cycle. In addition to R&D and supply chain synergies we will implement a more efficient cash cycle at Cretaprint as we integrate the business into EFI.

In Q1 2012, we expect cash flow from operating activities to be approximately breakeven due to payments related to the expected impact of one-time items such as the variable compensation payments linked to our exceptional 2011 performance and the additional earn out payments linked to the strong performance of our business acquisition. Finally, our total diluted weighted average share count for Q4 2011 amounted to 46.8 million shares.

Let me finish with total company performance for fiscal year 2011. In 2011 we achieved revenue of $592 million up 17% year-over-year and marking the second consecutive year of double-digit growth. We delivered an operating profit margin of 11.7% an increase 460 basis points compared to 2010. Non-GAAP EBITDA was $75 million for the year or 12.7% of revenue. Finally, we delivered non-GAAP EPS of $1.12 up $0.53 or 90% year-over-year.

We entered 2012 with confidence, strong momentum and I’m very excited with the addition of Cretaprint to our portfolio. We have covered a lot of ground with this prepared remarks, so let me summarize the Q1 2012 outlook.

We expect revenue growth and operating profit growth of approximately 10% year-over-year and non-GAAP EPS in the range of $0.27 to $0.28 assuming relatively neutral currency fluctuations.

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

JoAnn Horne

Operator, we will take questions, please.

Question-and-Answer Session

Operator

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

Shannon Cross - Cross Research

My question is with regard to the how you are thinking about your guidance for first quarter. So, clearly there is a lot of mixed signals out there in terms of where demand levels are out Europe and all of that. So, can you just give us a little more color on what you are hearing from your customers in terms of product pipeline, you talked about the year-over-year comp, but just any more color you can give us. Thank you.

Guy Gecht

In general I think we finished the year with a very strong momentum, we had a great December, the pipeline is pretty good across the board on products and across the geographies. Definitely there is interest in products that make people more efficient, add value to where initial printing is definitely very much in fashion now. The APPS portfolio get a lot of fraction, because people try to get efficiency in those business and our liability is great. So, across the board I think we are very pleased what we are hearing from customers. Obviously, there is a lot of mixed signals, bad headlines, especially in southern parts of Europe. So, we see more hesitation there. We see people staying on decision longer, deciding to wait couple of more months. We saw more delays on debt fund before. The good news for us is we do have a very good pipeline, the innovation is good, we are gaining share and so we can guide or we can expect to continue to see a good growth we see over there.

Shannon Cross - Cross Research

And then can you just talk a little bit more about your thoughts on cash, clearly you made this acquisition, what your acquisition pipeline looks like and just thoughts on use of cash, so you got the cash coming in. You had strong cash quarter, you bought something, you have done share repurchase, just what your thoughts are there. Thanks.

Guy Gecht

We are very, very pleased with the cash generation in Q4. We said Q1 seasonally low, the multiple factors in Q1 but beyond that we think we are going to focus on continue to generate good cash and we think Cretaprint is actually an opportunity to get to a more EFI like cash discipline as far as collecting money and paying vendors and other everything we incremented on the EFI side. So, in general we competed to generated cash, of course priority will be for acquisitions that make our segments of business stronger, more diversified across the globe. We’re not looking to transform the company as we said few times. We really like the Cretaprint opportunities, open the door for a great growth and selling software and ink down the road. And we think the metrics are very strong. We’re paying them upfront what we essentially generated in Q4, and then if we ended up being anywhere near the earn-out number that mean it will be a very, very good acquisition for EFI shareholders.

So, we do have a pipeline of acquisitions, we always said that we view the industry we are going up to have fewer vendors of technology just getting tougher for people to compete. And we have good momentum so we will use that to gain shares, some people that too small to compete by themselves we will try to see if they have good faith with EFI. So, we do have pipeline of acquisition, we are only going to make the one that make sense within the guideline we talked about, accretive in the first year and the one that help us to extend the geographical balance the way we described few minutes ago.

Shannon Cross - Cross Research

And my final question is just from a share standpoint. I actually think by your opportunity to gain share given Kodak's challenges, filed for bankruptcy both on the outside as well as potentially within the controller business?

Guy Gecht

It's clearly as I said it's definitely challenging situation for some of our competitors, we do compete with Kodak on the controller side, for them it's a very small business. For us it's a significant business though we definitely saw an opportunity in the past few months as they need to decide where to quickly sell to gain share in the controller. We’re very pleased with where we are, but we still have great opportunities to grow after that.

So, we are not going to let go, we can actually push the gap, although we hired quite a few sales people in last few months, experienced sale people to help us to get more customers. We are seeing better opportunity especially in Drupa where a lot of customers going to come and make a buying decision in the second quarter. So, obviously we will try to level a job momentum and hopefully to gain share for people that need to make tough decision where to put the money at.

Operator

Your next question comes from the line of Ananda Baruah [Brean Murray Carret & Co.]. Your line is open.

Ananda Baruah - Brean Murray Carret & Co.

Congratulations on even more solid quarter than you pre-announced here. Hey, I guess just a couple of things sort of piggybacking off of Shannon’s demand question. Now that we’re into the year, Guy and Vincent, any I guess more clarity around how you’re thinking about seasonality going into Drupa and I guess there are no coming out of Drupa, but any thoughts there would be great.

Guy Gecht

I think in general we don’t see a big change for seasonality in the industry going to Drupa, we definitely see some people, especially in Europe, holding on decisions and it’s probably a mix of bad headlines and waiting to go to Drupa in May. We are comfortable especially if you look at our outlook for the first quarter, we’re comfortable where we have enough in the pipeline people that need to get new technology working for them now that their opportunity is that they have to continue with the momentum, so that’s the only thing that can maybe push people from Q1 to Q2, but that’s definitely built in our outlook.

Vincent Pilette

As you know, traditionally before the recession, our industry is kind of a low Q1 and a high Q4. We definitely see more returning towards that. Cretaprint is an industry that has the same characteristics and I think that’s where we’ll go along with Drupa, Drupa just reinforcing that seasonality.

Ananda Baruah - Brean Murray Carret & Co.

Yes, thanks. And LED was called out as an area of strength for Q4. I mean, I particularly remember that being the case on the pre-announced call a couple of weeks ago. Can you just, it sounded like, I guess, connotation sounded like it was maybe a little bit stronger than what you guys had previously thought it might be, can you talk about is that the case and can you talk about maybe what you saw there and what you’re expecting first half of the year?

Guy Gecht

Sure, we didn’t know what to expect on the LED, we knew the ROI is very strong, but it’s the first time that such a technology has been introduced in the production part of printing. The feedback was very strong. We sold well and beyond that we have a lot of people that are contemplating buying LED and despite at this point the price level is pretty high compared to normal GS. Over time we’re expecting the technology to mature and have more volume so we can potentially offer at some areas of the world better pricing. But we’re very pleased with the interest right now in LED, the compelling ROIs, the initial customers raving about the benefits. We have this new technology and again it’s unique to us and we will continue to advance technology. This is step one in LED. There are going to be other steps in the future on LED.

But in general, we’re very pleased with other innovations. We started to ship the textile, first textile signage for soft signage, people want to print on textile. We started to ship the new (inaudible), the 4900 on the Jetrion definitely grab a lot of potential, we have a good pipeline of interest. So, we’re seeing that those new products definitely generate interest. The ROI is very strong, the differentiation to EFI is very strong and we have a lot of pipeline of our own new printers coming to market this year as well. So, we’re not done yet with our new product introductions.

Ananda Baruah - Brean Murray Carret & Co.

Can you Guy, maybe can you comment how many LED installations you guys actually had in Q4?

Guy Gecht

That’s a competitive number and I don’t want our competitors to know, but we’re pleased and we think it’s going continue to grow throughout the year when we have full-year. And there’s a little bit of a ripple effect. If you all compare it to using LED, that a reason for you to consider that. So, as those guys going to stop to put pressure in their markets, we think we will see more adoption of that technology.

Ananda Baruah - Brean Murray Carret & Co.

And just last one for me, I guess stronger than expected quarter, are there any areas of your business that or could you talk about which areas of your business are performing better than you thought they would entering the quarter and does that make you feel any differently about the positioning of the businesses as we go into ‘12 where you’re more optimistic about those businesses above and beyond the outlook that maybe you provided back at the Analyst Day? Thanks.

Guy Gecht

Yes, I mean, we’re not changing the long-term outlook at this point. But I would say if I have to pick, I mean, I’m pleased with the cost of all the products, all the areas and all the products we’re selling. But if I have to pick couple, I would say certainly the APPS portfolio finishing at 41% year-over-year growth. And as Vincent mentioned, we’re expecting another 4% growth this year. There is a lot of organic growth. As you know, when we buy those companies, we buy it for the installed base, we’re not continuing. We’re not selling the products for new customers; we’re actually bringing our own portfolio there. So the booking is very strong and it’s based on the EFI core organic portfolio.

The expansion on the international from a business that was essentially just a year ago almost 100% U.S. based is going really well. So, I think APPS is really doing great and as I mentioned this is not just a growth opportunity for us, it’s actually making a strong differentiator for Fiery and inkjet when somebody that use our software to run their business process, they’re definitely much more inclined to buy a Fiery that plugged in naturally or a buyer of VUTEk that plug in naturally to the installed base.

And then the second thing is just the overall in the VUTEk printers with the LED and outside of LED grew quite a bit, which hopefully expect to continue growth in our recurring revenue. Having 34% year-over-year UV volume increase is a very strong number. In the beginning of the quarter I did not expect giving all, again, the headlines to see such a strong increase in the volume of UV, which speaks not only the fact that we’re growing this product, our customers are gaining share and our customers are gaining growth, which is again good indication going forward.

Operator

(Operator Instructions) Your next question comes from the line of Morris Ajzenman [Griffin Securities]. Your line is open.

Morris Ajzenman - Griffin Securities

Just can you go over your or you went through some numbers quickly and when you spoke about the first quarter 2012, gross margins I think you said down marginally, was that year-over-year or sequentially in that guidance statement?

Vincent Pilette

Hey, Morris, this is Vincent, and yes gross margin in Q1 2012 will be slightly down sequentially from the Q4 2011 that we just reported of 56%.

Morris Ajzenman - Griffin Securities

Okay. And you then added Inkjet gross margins to be down sequentially. I missed, I don’t know if you touched on APPS and Fiery, you normally give us some sort of outlook into the next quarter, did you give anything there or did you not touch on that in the remarks?

Vincent Pilette

So the short answer is, I did not touch on APPS and Fiery, Morris. No, we normally don’t break guidance by segment. The reason I mentioned it is we have the addition of Cretaprint and I thought it would be valuable for you to know that in the short-term Inkjet gross margin will be down sequentially as the results of Cretaprint, and in the long-term that we maintain our gross margin objective of 40% for Inkjet including Cretaprint.

Morris Ajzenman - Griffin Securities

Okay, and then what would the revenue gain be in the first quarter without Cretaprint?

Vincent Pilette

So as we said, Cretaprint is part of Q1 2012 guidance, will be on the high end of the range of 5 to 7% of total revenue that we had mentioned two weeks ago and then from there you can imply.

Morris Ajzenman - Griffin Securities

I’m sorry, the 5 to 7% is an organic number, I missed.

Vincent Pilette

5 to 7% is what Cretaprint will contribute as part of the total revenue guidance.

Morris Ajzenman - Griffin Securities

Okay.

Vincent Pilette

And it will be on the high end of that range.

Operator

Your next question comes from the line of Ananda Baruah, [Brean, Murray, Carret & Co.]. Your line is again open.

Ananda Baruah - Brean Murray Carret & Co.

I just had a couple of clarifications I guess about the guidance. When I set my model to control is down 5, APPS up 40 and Inkjet up 30, it is common to something greater than 10% revenue guidance. And I’m wondering, I guess something like 11, 12%, and I guess is my model wrong or is that just sort of is the 11 kind of geared to guidance.

Vincent Pilette

No, all the guidance we’ve mentioned is approximately 5% down, approximately 40% up for software and approximately 30% for Inkjet, and then you can drive your own assumptions from there. Overall, it’s approximately 10% year-over-year.

Ananda Baruah - Brean Murray Carret & Co.

And then the next thing is that, so I guess if you get down to say $0.28 of selling margins and about [64.5%] something in that ballpark. And maybe my OpEx is up a little bit, but I guess the question is I need to take the income margins down, it feels like 500 basis points so like mid-30s percent and without getting exactly specific, is that the order of magnitude that we’re talking about in inkjet?

Vincent Pilette

So, the answer is no. Let me quickly rephrase the guidance, revenue up approximately 10% year-over-year for total of EFI. Gross margin slightly down sequentially from Q4 2011 of 56%, OpEx will be slightly up from Q4 driven by the Cretaprint minus the lower variable compensation and operating profit growth of approximately 10% year-over-year, breakeven OI&E assuming no currency or no material currency fluctuations, and an EPS guidance of $0.27 to $0.28. I think with all those there, you should be able to get to something in mind.

Ananda Baruah - Brean Murray Carret & Co.

And then just how much approximately should we have the inkjet margins down? It sounds like it’s not that dramatic, it’s just a couple of few hundred basis points.

Vincent Pilette

Yeah, so I don’t want to give a number, you’ll have to draw your own conclusion, but a couple of facts we’ve mentioned is Cretaprint to the bottom-line of Q1 will be neutral to profit, but obviously they deliver acceptable gross margin. There will be printer-only gross margin and as you drive your mix of printer hardware gross margin along with how much revenue they contribute to total EFI, you should get to something that within the range that you’ve mentioned.

Ananda Baruah - Brean Murray Carret & Co.

And how long before Cretaprint will actually start to generate I guess ink revenue, ink margins?

Guy Gecht

So, I talked about impacting the EFI ecosystem, which is ink and software somewhere in the year to two year from now, obviously we’re trying to get as fast as possible, but before that there’s so much supply chain and synergy on the R&D opportunities that we think we’re going to have an opportunity to increase gross margin on that product lineup to begin with.

So, we have the medium-term, short-term which is supply chain, and medium term is more on the design and then more longer term which is I’d say year to two years to bring the ink which is tremendous. Just to remind you, I talked about 10X, roughly 10X the volume we see on a single VUTEk printer they get consumed on the Cretaprint. The low buys on the spend level is anywhere between four to eight times. So the long term opportunity I think is substantial, but even without that, we are very pleased with the overall metrics and contribution of Cretaprint going forward.

Ananda Baruah - Brean Murray Carret & Co.

I guess just one last one for me, after doing the acquisition I guess the cash is, net cash is sort of (inaudible) now for a couple of quarters in a row. Just wondering do you guys have sort of a theoretical net cash boundary that you want to keep it at or above based on what your outlook is so you can do the acquisitions that you want to do?

Guy Gecht

Look, we’re speaking to the board all the time about what’s the right level and clearly if you look at 2011, we completed, what $45 million of buyback when the stock was trading at an opportunistic level, we jumped on that and potentially we’ll continue to do that. And if we can buy more Cretaprint type of companies, we’ll do it all day long. Unfortunately I don’t think that those exist that frequently, but there are other opportunities move acquisition to grow, time to grow geographical balance. So, we’ll continue to discuss with the board the right level of cash and the use of cash. So, I can tell you that our focus is shareholder value in the short-term, mid-term and long-term. So, we want to make sure that we use the cash to enhance that.

Vincent Pilette

And, Ananda, a couple of clarification points. I reported in my remarks that we generated at the end of Q4 a total of 219 cash and cash equivalents being on the balance sheet, that was before we bought Cretaprint, which was early January obviously. And therefore, that was an investment for us, $31 million of cash up front and we definitely will focus on driving the upside from that business case. As we mentioned at the Analyst Day, our priority is to develop the business through the M&A opportunities and we definitely see a very good funnel in front of us in our three main segments, and then secondly on an opportunistic basis doing some buybacks.

Operator

Your next question comes from the line of Morris Ajzenman, [Griffin Securities]. Your line is again open.

Morris Ajzenman - Griffin Securities

Just a follow-up on the Cretaprint. This year should we expect to see a 40% gross margin in the Inkjet business in any quarter or with the Cretaprint just have the Inkjet printer, should we then look at that 40% into 2013?

Vincent Pilette

So Morris, so Cretaprint, yes includes only printer revenue at this point in time, and I’m sure you have assumption on printer gross margin versus ink gross margin. In the short-term, as we integrate or consolidate Cretaprint into our business, our margin will be sequentially down from the 40.4% that we just reported. In the very short-term and already over the last two weeks, we’ve been working on the supply chain synergies that we can bring to that business, which will help the margin to improve from there. And then on the long-term, we will introduce ink revenue stream, which will continue to boost margin in that segment. We maintained the 40% gross margin goal in a few quarters, but as you know we don’t give a timeline for that and/or guide for the full-year.

Morris Ajzenman - Griffin Securities

Okay. And just one last follow-up on Europe specifically in the quarter, you break that as EMEA, but can you talk about Europe alone in the fourth quarter, was it up modestly, was it flat as the overall numbers in this geographic region showed here, just give us a little more sort of color on the fourth quarter for Europe?

Vincent Pilette

So, Europe specifically grew a few points aligned with 2% I reported for EMEA. Definitely it’s a slower growth that’s what we’ve seen, on the full-year basis we’re roughly 20% up and we want to see where we go into 2012 being cautious.

Operator

This concludes today’s question-and-answer session. I will now turn the call back over to Mr. Gecht for any closing remarks.

Guy Gecht

Thanks everybody for joining us this afternoon. Once again, I want to thank our shareholders for their trust and our customers for their loyalty and, of course, our employees for their hard work that allow us to accomplish those record results, and we look forward to share even more exciting news in 2012.

Operator

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

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