Electronics For Imaging's (EFII) CEO Guy Gecht on Q3 2016 Results - Earnings Call Transcript

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Electronics For Imaging, Inc. (NASDAQ:EFII)

Q3 2016 Earnings Conference Call

October 26, 2016 5:00 PM ET

Executives

JoAnn Horne - IR, Market Street Partners

Guy Gecht – Chief Executive Officer

Marc Olin – Chief Financial Officer

Analysts

Shannon Cross – Cross Research

Joseph Wolf – Barclays

Patrick Newton – Stifel

Ananda Baruah – Brean Capital

Joe Wittine – Longbow Research

Katie Huberty – Morgan Stanley

Brian Drab - William Blair

Jim Suva – Citigroup

Jim Ricchiuti – Needham

Joan Tong – Sidoti & Company

Morris Ajzenman – Griffin Securities

Aaron Rakers – Stifel

Operator

Good afternoon. My name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the EFI Third Quarter 2016 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. JoAnn Horne, Investor Relations for EFI, you may begin your conference.

JoAnn Horne

Thank you, Amanda, and thank you for joining us today to discuss EFI’s third quarter 2016 results. Meeting the call today from EFI are Guy Gecht, EFI's Chief Executive Officer, and Marc Olin, Chief Financial Officer. Before management's remarks, let me review the Safe Harbor Statement.

During the call today, we’ll be making forward-looking statements, which are statements in the future tense and statements other than historical fact, including but not limited to statements regarding our strategy, plans, expectations regarding revenue growth, product portfolio, productivity, future opportunities for our customers, demand for our products, as well as market trends, product innovations, new market opportunities and acquisition strategy, as well as estimates in our projections of revenue, operating profit, growth, EPS, gross margin, cash flow, market share, 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 materially adverse effects on our results. Please refer to the discussion of risk factors that may affect future results included in our SEC filings and the press release. We do not undertake to update in light of any new information or future events.

In addition, reference will be made to non-GAAP financial measures. Information regarding the reconciliation of non-GAAP to GAAP measures can be found in the press release that was issued this afternoon and on our website in the IR section at www.efi.com. Please note that slides that correspond to today's conference are available on the Investor Relations website also.

I’ll now turn the call over to Guy Gecht, EFI’s CFO.

Guy Gecht

Thank you, JoAnn, and thank you all for joining us today. I am proud of the progress that EFI team achieved in almost every area of this third quarter. Industrial Inkjet revenue grew 17%. Productivity software revenue grew 25%, which combined with 35% ink volume growth helped drive recurring revenue to another record percentage of sales.

And for the second consecutive quarter, cash flow increased significantly. Our main disappointment was Fiery revenue, which declined significantly more than we expected due to the level of orders from one partner. Thankfully, our team executed well on a strong pipeline in the rest of our business and offset this weakness in Fiery. And as a result, we still achieved the mid point of our non-GAAP EPS guidance.

Let me jump right into the Fiery results. We went into the quarter expecting product delays from a couple of partners and deferred buying decisions as customers wait for some of the new engines they saw at Drupa. The good news was that even with these issues all but one of our partners came in largely flat with Q3 2015. The orders from one of our largest partners were impacted by two new issues for us. The main factor was that this partner unexpectedly implemented a strict balance sheet optimization push, which they have told us will continue for the remainder of the year. In addition, sales were weak in their exclusive Asia Pacific channel with soft demand not only impacted our revenue, but also closed this channel to push their own Asia Pacific lower cost DFE alternatives.

Unlike in most markets in Asia we find that buying decisions tend to place less emphasis on the quality and functionality Fiery provides compared to competitors. Also we do not have a large installed base of our productivity software customers and therefore we are more exposed in Asia to those alternative offerings. We indicated last quarter that we expect Q4 results to be largely flat with last year, which still the case for all the partner expect this one, which has indicated to us they expect to complete their balance sheet optimization in this current quarter and we expect Asia weakness to continue as well.

While we are of course disappointed with the second half results of this segment, we are upbeat about the opportunities we see for our Fiery segment sales to rebound in 2017 with the many new platforms that were shown at Drupa starting to ship. In that context, you can appreciate that the key benefit of our balanced portfolio is that we have more control on our opportunities and greater ability to offset the variability of an OEM business. And once again, we were seeing this benefit. Our industrial inkjet segment hit on all cylinders with 17% revenue growth almost all organic. We saw strong demand across our target markets: signage, textile, building materials and labels were all robust.

Our ecosystem is delivering results and differentiation. For example, in the first quarter as part of EFI, we are starting to see some sales synergy between Optitex and Reggiani. So vision of the textile ecosystem is beginning to play out. I can say the same thing about the strengths in our Packaging software; which will play very well with our upcoming Nozomi platform. This strength led the way to a robust productivity software quarter with 25% growth. Customers around the world find the vision of a fully automated on-demand manufacturing using inkjet printing and our productivity suites very appealing. EFI is unique in our ability to offer customers the technology and expertise to automate when they migrate to digital printing.

Before I update you on our progress with Nozomi, I wanted to say a few words regarding the short report published two weeks ago on EFI. You can only imagine how frustrated we are that this anonymous [inaudible] issued this report with so many misleading statements during our quiet period, so we could not instantly respond. Marc will provide information around the accounting areas, but I wanted to say something about the personal attacks levied against both the Board and Marc, which frankly I found distasteful.

We are very fortunate to have a highly qualified Board of Directors, which is always focused on shareholder value and proper compliance. The Board audit committee is particularly strong with all three members of the audit committee considered financial experts based on the SEC financial expert definitions. The audit chair, Eric Brown, has served as Chief Financial Officer of three large public companies. The Board appointed auditor, Deloitte, assigned a strong team which is led by one of their top partners.

And of course our internal accounting team is very experienced and dedicated, led by our Chief Accounting Officer, Brandy Green, who has been a CPA for more than 20 years. Brandy reports to Marc and has been a key to Marc’s success as EFI’s CFO. His 14 years’ track record at EFI as a GM, COO, and now CFO speaks for itself. So you get the picture of the caliber of people that oversees EFI’s financial reporting and compliance coupled with a strong tone from the top of EFI, from me and other leaders about the importance of ethical behavior and transparency. Now compare that with the authors of this report who choose to remain anonymous, so none of us can judge their background, experience or track record.

Okay, enough said on this, let’s turn back to business and the successful execution by the team, which is best exhibited by the progress on Nozomi, a single-pass platform that we have been developing at EFI over the last couple of years. The development and testing is progressing well and we are on track to install our first beta site during Q1, going live in the second site during Q2 and then start commercially selling as previously announced in the June 2017 timeframe.

We anticipated building one Nozomi per month when the platform is introduced in mid 2017, increasing to two per month by fall of next year. So we are on target to sell roughly ten units in 2017 and as I said on the last call about 20 in the first 12 months of shipments. And as far as demand and pre-orders go, on our last call I reported that we have more than 10 cancelable orders. I am happy to report today that this number has now passed 20 units with many more customers in talk with us. We could not be more excited with this opportunity as well as with the market feedback for this game changing platform.

We look for inkjet and software strength to continue for the balance of the year, but obviously the Fiery shortfall in the second half will make a challenging to achieve $1 billion revenue targets we announced three years ago. In fact, even with the Fiery weakness, if exchange rate had stayed where they were back when we announced the $1 billion target, we would already have passed the $1 billion target in the last 12 months. Nevertheless, we are not going to make any excuses and we will push hard to pass this milestone despite all the challenges. Marc will provide the outlook, but if we achieve the high end of the Q4 guidance, we will successfully hit $1 billion in revenue and $2.45 in EPS.

While crossing $1 billion mark this year remains on our mind we are obviously continuing to plan for 2017 and the years ahead. We see tremendous opportunity that is dependent mostly on just one thing, our ability to continue to execute on our proven strategy. We will remain innovative and continue to lead the industry. Nozomi is just the latest example. Our unique ecosystem will continue to differentiate EFI. And finally in addition to continuing to grow what we have at EFI today, selective accretive acquisitions remain key to the long-term strategy, doubling down on our current areas of growth.

Now I will turn the call over to Marc to fill in the financial details about the quarter and to discuss some of the other financial topics where we would like to provide clarity and facts.

Marc Olin

Thank you, Guy. In Q3, we delivered another strong quarter with revenue of $246 million, up 7% year-over-year with a $3 million currency impact from 2015 levels. While the Fiery business had a challenging quarter, both the industrial inkjet and productivity software businesses delivered results at or above the high-end of our expectations. The industrial inkjet business delivered 17% growth year-over-year, 19% ex-currency with significant growth taking place across our product lines.

Productivity software delivered a record revenue quarter, growing 25% year-over-year with the benefit of our recent Optitex acquisition as well as continued strong growth in our other product lines. Software growth would have been 27% had currency rates remain where they were in Q3 2015. Fiery was down a greater than expected 15% year-over-year as we saw a significant drop in revenue from one of our partners as Guy mentioned during his remarks.

Total recurring revenue was a record $80 million, up 22% year-over-year and representing 33% of total revenue, also a record percentage of total revenue for the company. Non-GAAP operating profit margin was 14%, resulting in non-GAAP earnings per share of $0.58, up 16% year-over-year. For Q4, while the euro slightly improved year-over-year, the Chinese Yuan, British Pound and other developing country currencies declined significantly versus 2015. Therefore, we expect no significant currency impact in our year-over-year revenue comparison at a negative $0.01 impact in EPS.

Now let me explain in more detail the revenue by business segment and region. The industrial inkjet segment generated revenue of $143 million, up $20 million year-over-year comprising 58% of total EFI revenue. This segment’s revenue was driven by a strong sales increase in printers and ink across our target industries including the 35% ink volume increase as well as about just $3 million of acquisition revenue resulting in inkjet organic growth of 14% and 16% ex-currency. Like many other companies, we defined organic growth is the growth in revenue of the businesses, which EFI owned during the same quarter one year ago.

The Fiery segment delivered revenue of $62.9 million, down 15% year-over-year representing 26% of total revenue, historically, the lowest percentage Fiery has represented total EFI revenue. Strong server mix drove another very good quarter in gross margin. Weak sales for Fiery persisted in Asia due largely to the partner issue previously discussed. Fiery channel inventory remains in the targeted range, despite the partner issues.

We will remind everyone that when we speak about Fiery channel inventory that inventory has not reflected on our balance sheet and instead we are discussing inventory levels at our partners. Over 95% of the inventory on our balance sheet consists of inkjet materials and products.

In addition, our inkjet sales are almost entirely direct, so the behavior of any of our channel partners has no material impact on the level of inventory reflected on our balance sheet. And despite the inaccurate statements about our financial data in the short report, we of course report no revenue based on any inventory reflected on our balance sheet.

The Productivity Software segment had a record quarter and delivered revenue of $39.7 million, up 25% year-over-year, 27% ex-currency and contributing 16% of total revenue. Acquisitions generated a stronger than expected $6.1 million of revenue in the quarter, $6.3 million ex-currency and as a result Productivity Software delivered 6% organic growth, 7% organic growth ex-currency in-line with our long-term target for the business.

Revenue in the Americas amounted to $128.3 million, up 6% year-over-year with minimal currency impact. EMEA grew 6% in Q3 to $85 million and 10% ex-currency. In Asia-Pacific revenue was $32.2 million, up 17% year-over-year, driven by an increase in Industrial Inkjet and Productivity Software sales in the region, offset by a decrease in Fiery.

Looking to the December quarter, we expect revenue to grow 5% to 7% year-over-year, resulting in revenue of $270 million to $275 million, with currency rates at Q4 2015 levels, revenue growth expectations would have been similar. Included in fourth quarter guidance is an assumption that currency stay at their October levels, which assumes a roughly flat euro, a 13% decline in the British pound and 4% decline in the Chinese Renminbi based on our current exchange rates, as well as the level of other currencies around the globe.

Total fourth quarter revenue is predicated on another strong year-over-year growth rate of 13% to 16% in Industrial Inkjet, low double-digit decline for the Fiery business and high single-digit to low double-digit growth in Productivity Software.

Moving to gross margin, where I’d like to remind you all that further commentary is non-GAAP unless otherwise noted. Third quarter gross margin was 51.2%, flat year-over-year, driven by the increased mix of Industrial Inkjet in our total revenue. Industrial Inkjet gross margin was 35.3%, up 70 basis points year-over-year, including a 40 basis point reduction from currency. The gross margin increase was a result of our continued efforts to improve efficiency in our manufacturing operations by leveraging our worldwide platform and the increasing mix of ink as a percentage of our Inkjet revenue.

Fiery gross margin was 72.1%, up 290 basis points year-over-year. In the Productivity Software segment, gross margin amounted to 75.7%, up 270 basis points year-over-year, reflecting the continued benefit we get as Productivity Software scales.

For the fourth quarter of 2016, we expect overall gross margin to be 50% to 51% as a larger portion of our revenue will be driven by Industrial Inkjet versus last year. We expect Inkjet gross margin to continue to show year-over-year improvement and be in the mid-30% range as we increase our Ink mix and continue to leverage our global manufacturing platform and our supply chain and manufacturing expertise.

Turning to operating expenses. Third quarter operating expenses were $91.4 million, up 8% year-over-year and comprising 37.2% of revenue, the same percentage as a year-ago. R&D expenses were $34.9 million, representing 14.2% of revenue, down from 14.8% a year ago.

Sales and marketing expenses were $40.8 million, representing 16.6% of revenue, the same percentage as a year-ago. G&A expenses were $15.7 million, representing 6.4% of revenue, up from 5.8% a year ago. We expect operating expenses to be approximately 33% to 34% of revenue for the fourth quarter.

Strong Inkjet and software revenue growth combined with strong gross margin performance across all business units and operating leverage delivered third quarter operating income of $34.4 million, up 7% year-over-year, bringing our operating margin to 14%. Other income and expense had a net loss of $0.4 million, driven primarily by an increase in interest in investment income, offset by much lower exchange losses.

Our static non-GAAP tax rate remained at 19% and we expect this level to continue. Strong operating income offset by continued currency challenges resulted in earnings per share at $0.58, a 16% increase over the prior year. While we typically do not comment on our GAAP net income results, we felt it important to discuss why there was such a material increase in our GAAP net income year-over-year. This was caused by the expiration of a tax reserve that was accrued on our balance sheet related to the gain on the sale of building at Foster City a number of years ago. This is a one-time benefit and just one example why we believe that our non-GAAP net income is an important indicator of the relative performance of our business.

Looking to the fourth quarter, we expect non-GAAP earnings per share of $0.71 to $0.76. As a reminder, this outlook assumes our October foreign exchange rates stay flat for the balance of the quarter. It also includes approximately $0.02 per share of quarterly impact from the convertible bond interest payments.

Now turning to the balance sheet, total cash, cash equivalents and short-term investments amounted to $449 million, compared to $511 million a year ago. Cash flow from operations was $24 million or 87% of non-GAAP net income for the quarter, a 160% increase over admittedly an easy compare from last year which was the quarter we did our Inkjet acquisitions. This was primarily due to better cash collection and reduced inventory levels offset by an increase in receivables from especially back-end loaded quarter in our Inkjet business.

Cash flow of $83 million for the last 12 months represented 75% of non-GAAP net income. We are very pleased to see the progress made towards our targeted rate of 90% of non-GAAP net income and cash from operations, considering the more capital intensive structure of our business this year versus last year, due to high growth in Inkjet, the increase manufacturing presence of Reggiani and Matan and the continued acquisition and integration related spend which is reflected in our cash-from-operations number. Of course, accounting rules prevent us from including the purchase price of acquisitions in our cash from operations number, but we trust our investors remember that we raised $350 million in a convertible bond and last year we stated the intent of spending $300 million of this in acquisitions from 2016 to 2018.

We also reduced our CapEx spend in Q3 to $3.9 million, getting us back to a more normalized run rate in spending, which drove our free cash flow to $20 million in the quarter.

DSO was 83.2 days, up 7.5 days from Q3 2015 due to increased direct sales mix from our inkjet and software businesses, which have material payment terms than our partner Fiery business. In the back-end loaded quarter, we saw in Q3, especially in our Inkjet business. In fact, the ratio of primarily direct businesses of Inkjet and Productivity Software versus our Fiery partner business, has increased from 54% to 74% over the last five years. These factors caused AR to increase in the quarter to $212 million. Despite some unfounded third party comments to the contrary, these AR numbers do include trade receivables having a contractual maturity of greater than one year.

As per GAAP requirements we do not include sales type leases in AR that we hold with clients, which are to market rates for these leases and they are offered in rare cases where our competitors who have much more significant lease portfolios are offering leasing terms. To date we have experience no significant defaults on these leasing receivables and the amount we enter into each quarter typically represents less than 2% of the sales of the quarter. We currently have $11.7 million of these in our balance sheet earning a range of 5% to 7% interest.

Our net inventory balance was $107 million, down $4 million sequentially, as a result of higher sales levels and increased focused on planned manufacturing levels by the Inkjet business unit during the quarter. This drove inventory turns to 4.4 up 0.4 turns year-over-year and up 0.1 turns sequentially. We were especially pleased with this improvement, given the increased mix of Inkjet in our total revenue and the much higher inventory levels required for that business versus Fiery or Software.

Warranty reserves were up $500,000 year-over-year, due to our increased sales of printers from our Inkjet portfolio, offset by the continued improvement in the quality of our printers which continues to reduce our actual cost incurred per printer in the field. These two factors drive our warranty reserve accrual as required by GAAP. Of course virtually every industrial printer sold by EFI or any of our competitors comes with a warranty of at least one year. And we’re not aware of any company in our addressable market which does not offer a similar warrantee.

On some occasions with the high end of our product line these warranties will extend to 18 months. However, this practice has remained fairly consistent over the last 20 years that Industrial Inkjet printers have been available. There might be some people that misunderstand how the industry works. If they are comparing a desktop Inkjet printer that sells for $99 in a retail outlet, and is distributed entirely through channels versus an industrial Inkjet printer that is sold direct for hundreds of thousands or millions of dollars.

Stock-based compensation this quarter was $9 million, which is just below our normalized run rate of about $10 million to $11 million per quarter. In the third quarter we returned $18 million to shareholders as part of our $150 million buyback program, which was put in place on January 1. Total diluted share count decreased 0.2 million shares to 47.6 million shares sequentially.

Our buyback over the prior three quarters increased year-over-year from $40 million to $58 million, comprised of both purchases through our 10b5 program and additional opportunistic buying we did in the open market during periods in which we were permitted as we continue to return value to our shareholders. We also maintain our long-term share count target of approximately 48.5 million shares.

As always we’d like to conclude by thanking our customers, employees and shareholders for their continued confidence in EFI and we are very excited about our opportunities for Q4 and the years beyond.

Now we will now be happy to answer questions.

JoAnn Horne

Operator we will take questions now please.

Question-and-Answer Session

Operator

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

Shannon Cross

Thank you very much. I wanted to revisit the Fiery business and some of the challenges there and just try to understand, I guess, historically you've had a very good look into your partners’ inventory levels and I guess I'm trying to figure out is this end demand that they are seeing is weaker so they are losing share and therefore pulling back or is that something that could possibly reverse when you get through the end of this year and some other things that they are going through have changed. So I’ll just want to get an idea of sort of what you think the underlying health of that business is at that partner and maybe just in general in the industry?

Marc Olin

So while we did mention two factors that were present at the quarter, I do think we are having in Asia some challenges that Guy mentioned. But the inventory adjustments there is really just a function of them trying to optimize their balance sheet throughout the balance of this year. They’re still in the targeted range . They were in the targeted range at the start, they are still in the targeted range now, but they are just trying to work it down to basically improve their working capital as much as possible through the balance of the year.

Guy Gecht

And certainly Shannon, other than Asia I would not draw any conclusion to any of our partners’ business. We need to talk about some weakness in the industry giving post Drupa and until some of those platforms will go up, but nothing really changed from that perspective this quarter.

Shannon Cross

Given the fact that we’re going to now have a, I guess there’s always that silver lining, there’s an easy comp in the second half of next year. I mean, do you think that you are going to see some pretty significant growth opportunities as we look at 2017 in the Fiery business given timing of launches from Drupa and now theoretically you won’t have this inventory clearance in the second half?

Guy Gecht

Yes, so obviously too early to comment on 2017 but we certainly say that I’m expecting a rebound in the Fiery business in the next year. And I think obviously the easy comp in the second half would definitely help. And I don’t think we are going to have this kind of extraordinary balance sheet optimization this one partner have. So, all the reasons to believe next year will be a rebounding year.

Shannon Cross

Great. And then with regard to Nozomi, can you just remind us how these are sold, will they be - how will the – the launch of this if you are doing 20 of them over the 12 months like over that 12 month period in theory how that might impact the balance sheet in terms of inventory just you know as you’re sort of launching this new business line can you help us think about the puts and takes of it.

Marc Olin

Yes. So we will expect inventory to go up a little bit as we prepare for launch but we are not – this is a situation we really have to make them and ship them in very close proximity, the things are too big literally for us to warehouse any quantity of the things. So that’s really a limiting factor we got to build them, ship them, build them, ship them and so on in kind of sequence. So we don’t – I don’t expect it to have that materially an impact on the inventory in the balance sheet. We’ll raise it a little bit because even for two of them, you’ve got some extra inventory there but its not like you are going to see the inventory for 20 of them appear on the balance sheet.

Shannon Cross

Great. And then just finally in terms of ink, the ink growth of – that you had this quarter was obviously strong. How do we think about how much of this is new product, so selling into the Cretaprint installed base how much of this is just underlying demand. Can you talk a little bit about what you're seeing maybe geographically in terms of demand for ink that would be helpful, just clearly it's a key growth driver? Thank you.

Guy Gecht

Yes, I think it's all of our business target market share of very strong demand which is of course very good news, that means customers are getting more jobs, they're moving from the digital. If they utilizing more they will need at some point more capacity hopefully from us so all – we definitely like to see and its a very high number across the board. I would say in geography probably nothing unusual – the ceramic tend to be more in Asia. So we say it's more in Asia, more in China.

Textile is around the world more installed base in Europe so we getting it more in Europe and signages across the globe. So essentially across all industries and essentially across all geographies. We’re seeing good growth in ink.

Shannon Cross

Thank you.

Guy Gecht

Yes, thanks Shannon.

Operator

Your next question comes from the line of Joseph Wolf of Barclays. Your line is open.

Joseph Wolf

Thank you. Just as a quick follow-up to that last question you've been giving out the run rate on the Cretaprint ink; can we get that again?

Guy Gecht

So we - you know we have been giving the milestones on Creta as we have kind of crossed the million dollar barriers and so we did not cross another million dollar barrier this quarter. There was we saw some pressure in China this quarter as they – I don’t know if you recall but the G20 summit was held there and they shut down a large chunk of industrial production to try to improve the air quality there. And so that did slow down ceramic production as well in China and therefore reduce some demand as a side effect of that. So we did not cross another million dollar boundary in the quarter.

Joseph Wolf

Okay, and I guess connected to that, when you talk about the recurring revenue number of the $80 million and I guess if you’re link it into margins can you talk about any mix shift in the recurring what are you seeing is recurring right now, are there more subscriptions in the software business is that related at all. Is the Optitex business part of that or is there some sort of mix shift where you're considering some of that ink also to be recurring?

Marc Olin

So just to be clear recurring revenue for us includes - does include ink and it includes our subscription and maintenance revenue on software and it includes our service contracts on our equipment in our Fiery, those last two being very small portions of that total number. So the increase in the recurring revenue came primarily from the ink and also from maintenance contracts on the software side. There is some maintenance revenue on Optitex but that was not a material driver of that increase in maintenance revenue.

Joseph Wolf

So does the recurring revenue have a – does ink help the margins for the recurring revenue or is it kind of neutral to the margin – if you took just the recurring revenue base margin case?

Marc Olin

Yes, so we have not disclosed in the past a recurring revenue margin profile. So in terms of comparing the maintenance margin to the ink margin there is not that material a difference between the two, so I don't think that there's - we haven't gone into that in any greater detail.

Joseph Wolf

Okay. And then finally just I know you're not going to break it out specifically but can we get a ballpark within the Inkjet if you look at just the textile business as a growth opportunity. How is that matching up to kind of a 20% or 25% to 35% kind of annualized growth rate right now and lining up with your results and the guidance for the fourth quarter?

Marc Olin

Yes, so we really – just for competitive reasons we do not want to give out the growth rates of the individual segments of the Inkjet business. I'll just say that we're certainly very pleased in the Reggiani textile business is exceeding our expectations that we set when we acquired it.

Joseph Wolf

Okay, perfect. Thank you, Marc.

Joseph Wolf

Thanks.

Guy Gecht

Thank you.

Operator

Your next question comes from the line of Patrick Newton from Stifel. Your line is open.

Patrick Newton

Yes, good afternoon, Guy and Marc. Thank you for taking my questions. I guess pertaining to Nozomi. Could you provide us with a couple of incremental data points one as you talked about producing two units per quarter exceeding 2017. What's the realistic capacity target as we exit 2018? And then around the orders in the incremental orders that you received is there a specific region or geography where you're seeing some of this outsized demand?

Marc Olin

So first let me clarify it. Two units per month is what we said we were going to be doing towards the back end of this year so just to be – sorry towards the back end of next year, thank you, Guy. Not two per quarter, so because that's how we're getting to the ten effectively you start with one per month. And then it'll gradually increase to two per month as we get towards the end of 2017. So in terms of how much beyond two per month, we could potentially do I think that remains to be seen. It's still too early in the process to talk about how much beyond two per month we could get to. From a demand standpoint Guy can talk to…

Guy Gecht

So we are actually not trying to sell it to get more orders so just that we made a lot of noise in Drupa and we talked about it in other forms and people come to hear. And we have people actually outside of our sales organization that processing that and people wants to get the preordering so they will get consider for the first 12 months. We're going to start to show it to customer sometimes in the next couple few months. And we – there’s a lot of people want to see it first before they placed on all this. So right now things can change of course always as we stand demand we think it would be very good from our perspective as we get this thing up. And we need to take care of making sure the system is overachieving expectation by the customers and we can make them as to the schedule beyond that obviously we're hoping that demand will continue to increase so we can make even more than two months but that's why that's beyond next deal.

Patrick Newton

Great. And I guess on customer focus. What percentage of revenue was Xerox on the quarter?

Marc Olin

We did not disclose the percentage for Xerox in the quarter.

Guy Gecht

Obviously that would be a confidential information for them.

Marc Olin

Yes.

Patrick Newton

I believe it's something you disclosed in all your 10-Q. So is it fair to say Xerox is sub-10% in the quarter.

Marc Olin

Again, I think we have disclosed on occasion in the past and I think as we prepare the Q will have that information there. But I don’t think we're prepared at this point to give the percentage.

Patrick Newton

Okay. And just one more if I may just on the ceramic ink opportunity, were could penetration of your own Cretaprint solutions go longer term. And then could you just discuss the viability of your timing of selling your ink to for third-party printers?

Marc Olin

So you know we're seeing actually we're seeing nice interest in the Cretaprint ink around the globe. So China certainly as I mentioned before that we did have that issue in Q3 as we talked about. But India we're seeing demand for it as well as in a number of our European customers. So I don't think there's any one place for that. In terms of third-party printer demand there we are studying that as an opportunity and it's something we're still contemplating, we've been experimenting a little bit. But not ready to commit to saying that we're going to sell that actively in the market yet.

Patrick Newton

Great. Thank you for taking my questions. Good luck.

Marc Olin

Thank you, Patrick.

Operator

Your next question comes from the line of Ananda Baruah of Brean Capital. Your line is open.

Ananda Baruah

Hey, thanks guys for taking the questions. A few if I could, I guess just going back to the Fiery. Guy and Marc, was it only the one customer that was softer than your expectations, is everybody else in line?

Guy Gecht

Yes, one partner…

Ananda Baruah

I guess collectively in line – was the business collectively in line?

Guy Gecht

Yes, actually I said it more or less everybody were flat with last year, one partner and again I don’t want it to reflect on their business. It's more balance sheet optimization as we said they are doing. And secondly, the relation with this partner is very, very strong. So there is nothing outside of we try to be as fully conspired as possible on this and without calling disclosing the partner but this is just one partner of situation this quarter.

Ananda Baruah

And did I hear you accurately, Guy, in the prepared remarks that you still expect the December Q, Fiery revenue to be the dollars to be what in line with your expectations were 90 days ago?

Guy Gecht

No, I said it – 90 days ago we were expecting it to be roughly flat. That would be true for everything but this one partner that will continue to push down inventory all the way to the end of their deal.

Ananda Baruah

Got it. And do you think they – would you think that that exercise for them seizes at the end of the year. So would you think there is…

Guy Gecht

Based on what they know I think so. They're going to be in a very low inventory and I think so that will be end of the exercise as far as I know.

Ananda Baruah

Okay, got it. And just touching based on the dynamic that you mentioned where some of their customers you’re going to their homegrown lowering controllers. Do you think that I mean do you think that’s isolated and so what extent do you think that others could do that in Asia-Pac?

Guy Gecht

So Asia-Pac overall is less than 15% of Fiery revenue and through the math is probably 4% of EFI revenue. But we – this partner specifically we always had a very high attachment rate. And what happened is kind of a double whammy, one is the sales are not doing that great in the region a lot of pressure there. And secondly, they try to create very low cost bundles to recover some of the sales and therefore our share is not nearly as good as it used to be with them.

The other partner is always at the lower end of tentative that they develop and always told that I’ll share with them. We're not as good not nearly as good as with this one partner. Outside of Asia-Pacific we always had a very strong brand, a very strong ecosystem customers always willing to go and pay a little bit more for Fiery and the specific functionality that would bring the quality, the speed, the integration for the workflow. So we're a lot more protected outside of Asia-Pacific and we’ve saw through the ups and downs that we maintain – we actually increase our tax rate over the last two years, three years.

Ananda Baruah

Got it. Okay, cool. And, just last one for me. The Inkjet growth the last two quarters has been – at the high end; actually a bit higher than the high end of what your normalized range has been that you talked to at your last Analyst Day. And you're guiding – you sort of guiding above that range, also for the December quarter. And then you have Nozomi coming in sort of second half in next year. Should we begin to think about the organic Inkjet growth rate opportunity differently, given the numbers you put up and what you're guiding to and then you have Nozomi coming in? I mean, I think we all just want to make sure that we're taking out the business in the appropriate way. Thanks.

Guy Gecht

I would say, we're very upbeat about what we see in inkjet. We’ve – not only we added up at a very good number last quarter and this quarter specifically in all of our target industries, and then Q4 the pipeline of opportunities is very strong, obviously we need to execute on that and close the deals by the end of the year. And looking next, there's a lot more new products are coming, Nozomi of course is the highlight. And so – and all of those going to generate some ink, not just a one-time sale. So there's a lot to be excited about. There was this strategy of helping people to move from analog printing to on-demand manufacturing using inkjet technology. And we think actually the relative software element of the ecosystem in those industries is actually doing quite well.

And so a lot to look for; a lot of validation to this strategy. Whether we should change at this point the long-term, hope I think it's too early. I mean we get the point, we do it for any quarters going forward, then we'll come back and definitely see how Nozomi is successful in shipment and the ongoing multi-year kind of demand, and then we will come back and reassess.

Ananda Baruah

Okay, great. Thanks a lot guys.

Marc Olin

Thanks, Ananda.

Operator

Your question comes from the line of Joe Wittine of Longbow Research. Your line is open.

Joe Wittine

Hi, thank you. Guy, I think most people will consider $998 million is equivalent to $1.0 billion, so I wouldn’t waste much time beating yourself on that goal, beating yourself up. Again on ink to start off, is the organic growth in inks any different than the headline number you reported? I forget it how much if any Reggiani and Matan may have sold. And is the total run rate now north of 20% of sales at this point?

Marc Olin

So just to be clear, the Reggiani and Matan because they were acquired at the start of Q3 of 2015, are included in organic performance at this point in time, we've lapped the acquisitions. The 35% ink volume number is a pure organic volume number, there's no other ink revenues that or ink volumes that we've acquired in the intervening timeframe, so that's kind of one and the same at this point.

Joe Wittine

Yes. So I guess the question, can you continue to grow with this recent – the current trajectory, looking out to next year, because it seems Nozomi would have ink day one because it's Greenfield. And I think you’ve said in the past, probably pretty thirsty printers.

Marc Olin

I mean, Reggiani did have significant ink sales when we acquired them. We talked about having a 40% attach rate there. So it's not that, it was starting from zero there. Obviously the ceramic ink year-over-year growth is going to slow down, it can't continue to grow at the rates that it has. You look at the year-over-year growth rates there and they're dramatic, so that has to slow down. But overall we're certainly not going to forecast 35% volume growth forever into the future, but we're certainly very excited about the opportunities there.

Joe Wittine

Okay. And then nice uptick in cash flow; on receivables and the expansion you mentioned in DSOs, walk us through why September in particular was back end loaded for inkjet. And then Marc at the sale type leases, maybe walk us through an example scenario of why that’s instrument is used, I think the discussion could be helpful.

Marc Olin

Sure. So first on that overall DSO number. What you have to remember is that the mix in the business has shifted pretty dramatically. So you've got a situation where the Fiery channel business has materially lower DSOs, because there's really four primary customers and the arrangements with those customers call for shorter payment terms then our direct business. So you have that shift that really pushed a lot more of our business to the direct side of the house, the software and inkjet with those businesses growing much faster, and Fiery down to only 26% of our revenue.

So when we looked at one of the things we did was we went and looked at the DSO performance within the individual businesses and we saw if we look at our direct business the combination of Fiery – I'm sorry, the combination of software and inkjet, the DSO in the software and Inkjet business combined only increased by two days year-over-year. But because it made up such a much larger portion of our total DSOs and because – in our total revenue, because of the Fiery shrinking year-over-year and again Fiery having much lower DSOs in it's part of the revenue, it raised the total DSO number by a larger amount.

In terms of why Q3 was the back end loaded quarter, we just – we saw tremendous amount of inkjet activity happen in September. The summer months were a bit slower than usual, in September it was a lot busier than usual, maybe it's the timing of some of the trade shows, because we did have some three large trade shows that took place in September this year, maybe that was part of what drove it this year. Some of those trade shows occurred in Q4 last year, but for whatever reason we just saw a lot more inkjet activity in September.

So beyond that to your question about the sales type lease receivables, so that's basically us holding a long-term lease, a three-year lease, a four-year lease, a five-year lease for a customer, where the customer is paying us an interest rate like they would to a financial institution. And so we get a deposit of certain amount that varies per lease, typically 10% to 20%. And then they're paying over time with interest, typically over a three-year period is the most common situation, and again, paying at market rates 5% to 7%.

And again, we're really doing it when we're in a competitive situation, a number of our competitors you know who they are. Have significant financing bodies that are part of their company, where that’s a common practice on their part is to do leasing. But as we mentioned, we're talking about $11.7 million in total on the balance sheet and that’s in the history since we've been doing it. So it's a very, very small amount here.

Joe Wittine

Great. Thank you.

Marc Olin

Thanks.

Operator

Your next question comes from the line of Katie Huberty of Morgan Stanley. Your line is open.

Katie Huberty

Thanks. Good afternoon. On the Fiery business, how do you get comfortable that other customers won’t adjust balance sheet inventory? It sounds like you didn’t have visibility that inventory was running high and this was a bit of a surprise. So how do you get comfortable that others don’t follow through? And then I have a follow-up.

Marc Olin

Well, I’ll say, I think the one partner that’s involved here is in kind of a special situation in terms of what they are dealing with internally there that drove this change, I think we've seen that the behavior of these partners typically don't changes. It’s really the first time in the history of Fiery that that sort of thing has happened. And it’s disruptive that how they run their internal supply chain and how they do their distribution around the globe.

So it's certainly not without a lot of pain that they go through this process, but again, we think it's kind of a unique situation that that one partner is going through right now that's unprecedented in the history of any other different partners and it's not something that we expect to continue.

Katie Huberty

Understood. And then Marc on cash flow, you made some good progress towards the 90% goal. Do you think that you can get there for the full year or are there headwinds from Nozomi inventory and the revenue mix in the inkjet and productivity software business that limit you from hitting this goal? Thanks.

Marc Olin

So, I know I think we talked about on the last quarter's call that getting to 90% of non-GAAP net income and cash from operations for the full year, it was going to be a challenge because of the exactly for the reasons that you mentioned for Fiery being a smaller portion of our total revenue and the faster cash conversion cycle on Fiery. So we are focused on just trying to maximize it and trying to get each quarter to that 90% rate or as close to it as we can and continue to show improvement.

Katie Huberty

And with the mix of normalizing at this level, do you think you have the prophecies in place to make that a reasonable goal for next year? I know it's early, but just for a big picture standpoint.

Marc Olin

I think we've seen the structural changes in the company. I mean, you've seen Q2, we were – I think 86%, in Q3 at 87%, so I think you've seen the changes in place. In Q3, historically has been a much weaker cash generation quarter for us. I think the fact that we got up to 87% in this quarter is kind of proved to me internally that we have the capability to get to that number on a consistent basis with the new focus we have on cash generation and keeping an eye on our inventory levels and our manufacturing plants each quarter and so on, that, and of course with collections as well, that we have the capability going forward to achieve that.

Guy Gecht

Okay. Just for me to add, you know that we said before that part of our annual bonus this year is trying to hitting – getting as close as possible to 90% of net profit. So since then the Board gave us a spot of a three-year grant, made cash from all of the percentage of net income, it’s criteria – performance criteria. And that is, if you follow, our grant is – most of the grant that we’re getting is performance based and that's a big part of the criteria we think. So now, we have incentive in place for not just Marc and I; I think our management team continue to read those numbers.

Katie Huberty

Okay. Thank you very much.

Marc Olin

Thanks.

Operator

Your next question comes from the line of Brian Drab of Blair. Your line is open.

Brian Drab

Hi, Guy. Hi, Marc. Thanks for taking my question. First question just I wanted to go back to the Nozomi and make sure that I'm understanding this correctly that you had a few months ago 10 orders coming out of Drupa, now you have 20. And it sounds like you're really not doing anything to try and sell it at this point. Is that right – am I understanding that correctly?

Guy Gecht

I wouldn’t characterize and trying to – not trying to do anything for the sellout. We don’t have the sale force to sell it, we have the product management and the group that dealing with it, trying to get our customers, taking the early orders, secure the customer, making the customer feel good with their secured unit. But there’s no really – we’re not going up with this, nobody really have a quarter at this point of the FY. And here obviously that will come too, but we cannot be more pleased with being over 10 90 days ago and now we are over 20 units in pre-orders.

Brian Drab

All right, that’s great. Are you taking deposits when you take those orders and if so would we see those showing up in the statements?

Marc Olin

So we take small deposits when we take the orders, but they don’t have a material impact on – they are on the balance sheet as a prepaid, but there is no material impact that’s having on either cash or/and certainly it’s not a good in revenue at all.

Brian Drab

Okay, thanks. And then on Fiery, I know you talked a little bit about this dynamic that you are seeing in Asia at the lower end. Is there anything else going on at the higher end in terms of competition, so Heidelberg is talking little more I think about a DFE offering and anything to keep an eye on in terms of the competition within the front end server market?

Guy Gecht

No, actually on the higher end, we feel like we really secured ourselves the clear market leader. I know we’ve talked about Heidelberg, if you look at the full – really large player that we teaming up which is the Xerox, Canon, Ricoh and Konica Minolta, definitely they rely on us on the very high percentage for the higher end. And I would say on average they are actually investing less in the offerings, they have type choices where to put the money, and trying to duplicate what EFI is doing less of a priority.

Again, we wanted to make clear that why the Fiery so much below, so we said in Asia-Pacific we do see an emphasis on the lower end, front end by power player exclusively partner of – one of our large partners, but that’s the extend that we are seeing. The other places we actually see the opposite direction, where people try to team with us more.

Brian Drab

Okay, great. And then just quickly through the fourth quarter, you get the 5% to 7% consolidated revenue growth forecast, is it safe to say that maybe there is like 2 points or so of acquisition related revenue in there and organic would be something like 3% to 5% in the fourth quarter if you get that guidance.

Marc Olin

Actually it’d be much less than that just…

Brian Drab

Okay.

Marc Olin

Because of the only – we’ve only done two acquisitions after Q4 of last year and those were single-digit million the dollars of revenue involved on a quarterly basis.

Brian Drab

Okay. So yes, just the software businesses, so we’re seeing those are less than 2 points maybe 1 point almost immaterial.

Guy Gecht

Yes.

Brian Drab

Okay, okay. Thanks a lot.

Guy Gecht

Thanks.

Operator

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

Marc Olin

Hi, Jim.

Jim Suva

Thank you very much, Marc. Marc and Guy, thank you so much. On the Fiery, you talked about one customer internally going through some unprecedented changes. When they exit December, will they be at the new run rate or will they have to restock?

Guy Gecht

You mean from inventory based on what we are seeing and what we got information, they will be at very, very low point of inventory that we did not have in recent memory, but that’s again –that’s the plan.

Jim Suva

Okay. And then again, everyone likes to optimize their balance sheet even myself personally and my family. So yes, why won’t this percolate to the other ones and – I guess also we’re concerned about why won’t others look at this is, hey, maybe everyone else is running too high of inventories, because I believe three months ago you felt like inventories were pretty well contained and now you are seeing that are customers materially impacting you.

Marc Olin

Yes. So I believe that as I mentioned before I think it would have pretty material impacts on the way that those companies run their supply chains with the way that they distribute product from us around the globe. We said that the overall Fiery inventory is still in that normalized range that we monitor, which is essentially in the four to eight weeks per quarter is basically the level of inventory that we target.

So we’re not talking that there is a huge amount of inventory that we able modify here from these clients and to be able to really alter significantly the revenue levels in the other partner. So again nothing is impossible, but it would require a lot of pain for them to be able to capture that. And again we think the one partner is doing it for – because they have special incentives to try to take advantage of that this year.

Guy Gecht

And again, just to add, nobody carry inventory because they like to make it favorably Fiery I think it’s a good idea. It’s all they are trying to on it some sort of few – some sort of weeks of sales, so they can deploy it very quickly and be ready around the world with a different type of Fiery, then Fiery tent to be a fast moving inventory for everybody. On general I mean they sell what they buy, so there is no much risk of that, they again being stock of it.

Jim Suva

Thank you so much for the details.

Guy Gecht

No problem, Jim.

Operator

Your next question comes from the line of Jim Ricchiuti of Needham. Your line is open.

Jim Ricchiuti

Thank you. Good afternoon. I just wonder if you could tell me – tell us among the pre orders that you received for Nozomi, how many different customers does that represent, because I think you have alluded to some placing multiple orders?

Marc Olin

We have customers that definitely will be looking to place multiple orders. They have many locations around the world for Colgate and packaging. But as far I know there is no customer to place more than one order. Everybody wants to get it installed, run it and then scale from there.

Jim Ricchiuti

Okay. And then on Reggiani and Optitex, you just touched very briefly that you are starting, or you are encouraged by some of the potential cross selling synergies. Is there anything that you could elaborate on that guide – in terms of what you are seeing?

Marc Olin

I mean its – keep in mind, it just a first full quarter with them, so with Optitex – but the strategy was to get the synergy. And what do we think as we go one meeting when the topic is Reggiani and people want to follow-up also on Optitex. So we go to meeting on Optitex and people wants to follow-up on Digital Printing. And so that’s great. Because we get to talk to the right people and they see the value in both buying for one company and they feel so where it’s going. You design with Optitex. If you save a lot of money, you save a lot of time, you can change fashion very quickly and then you sent to the factory, the job with the right way you design it, make sure it’s getting prints into the high quality and exactly how you design it. So they think where we taking it and I think the feedback so far so good.

Jim Ricchiuti

Okay. Last question from is just going back to Q2, some of the weakness you had in Q2 you eluded to Brexit. And I’m just wondering to what extend that business snapped back or you still seeing some lingering caution from the potential fallout, economic fallout from Brexit?

Marc Olin

So I think we saw what we expected to see on the Inkjet side when we had the earnings call, which was that the Brexit thing was a temporary crisis at the end of Q2 and things recovered very quickly in Q3. And I do think that’s one of the reasons why the Inkjet number was so strong in Q3, as we think we got some of that carryover business that didn’t close at the end of Q2, and that drove was to the high end of the range in Q3.

Jim Ricchiuti

Okay. Thanks a lot.

Marc Olin

Thanks, Jim.

Guy Gecht

Thanks.

JoAnn Horne

Operator, do we have any additional questions?

Operator

Your next question comes from the line of Joan Tong of Sidoti & Company. Your line is open.

Joan Tong

Good evening. So the questions regarding – it’s regarding Fiery again. So the low end of controller, print controller in Asia, it’s a competitive landscape. I was just wondering if you just make an assessment of the market, do you think that this is a problem that’s going to last for a while?

Guy Gecht

So look we – it’s definitely not a one quarter situation but in Asia, but first hopefully the sales will recover as I said it’s one thing that the sales in Asia, the question the other thing is the shift to the – there is more shift to the lower end controllers. But we will obviously work really hard in Asia with our team of a partners, with customers, with marketing to build up and promote the value of Fiery. And hopefully, we’ll see some recovery in high end for commercial print, digital printing.

Marc Olin

We are certainly not sitting – certainly not sitting idly by we have a number of ideas that will be seeing in the coming quarters certainly to help turn that around.

Joan Tong

Would that involve like maybe going a little bit low end to compete with some of these guys?

Marc Olin

Yes, we’re looking at a few options there – again I don’t want to…

Guy Gecht

We don’t want to spoil this.

Marc Olin

So anyway, we don’t want to transmit it to people they don’t want us to be successful. But we definitely putting together – put together the plan up attack, we said it’s less than 50% of Fiery revenue, but we still like to recover that as well.

Joan Tong

Okay, okay. And then maybe this question is more for Marc. Obviously there are some moving parts here for the tax line to taxation line and on the GAAP basis, do you have a benefit? And I just want to make sure that would not – that did not benefit your cash flows or whatever you're seeing the improvements in cash flow year-over-year basis is really coming from the improvement in work in capital.

Marc Olin

That's correct. Yes, there's no benefit from the release of the tax – the tax accrual on the balance sheet. Again, we have to – we accrued when we sold our office in Foster City, you have to accrue potential tax exposure for that if it’s materializes the statue limitations lapse, and so the of accrual was released and that’s simple as that.

Joan Tong

Okay, got it, got it. And then finally on the productivity software, organic growth I think Marc you mentioned it was 7%.

Marc Olin

Yes.

Joan Tong

And then for next year the guidance and I'm just wondering what’s the assumption there between organic growth and acquisition.

Marc Olin

So I certainly don't think we're ready to talk about next year, yes, but our long-term guidance that we gave for productivity software was mid-to-high single digits. So it's kind of we're at right in the midst of that range. And reminding everybody again one of the reasons why productivity software is difficult for that to grow organically more than single-digit is because maintenance revenue mix up half of the total and we have thousands and thousands of clients on maintenance today.

And so the maintenance portion of that revenue organically can only grow very low single-digit. So even when we see the overall business growing organically in that mid-to-high single-digit range it means that the new sales or license sales are growing well into the double-digit to allow that to happen.

Joan Tong

Thank you for talking about next year. I meant for – I meant to ask about next quarter – your next quarter guidance?

Marc Olin

Okay.

Joan Tong

Thanks for the color.

Marc Olin

Yes. So in next quarter, because we're lapping the acquisitions we said high single-digit to low double-digit. We did two acquisitions in Q4 of last year at the start of the quarter. CTI we did and then we also bought Shuttleworth last year in Q4. And so that's why the growth rates are lower, because that's now considered organic revenue and we are lapping the acquisitions there we don't have – let's say that counting as an incremental revenue growth year-over-year.

Joan Tong

Okay, okay. All right. Thank you, guys.

Marc Olin

Thanks a lot.

Guy Gecht

Thanks.

JoAnn Horne

Operator any additional questions.

Operator

And your next question comes from the line of Morris Ajzenman from Griffin Securities.

Morris Ajzenman

Hey guys.

Marc Olin

Hey, Morris.

Morris Ajzenman

Hey, just the quick follow up to the last question, productivity software, again, Q1 plus 5%, Q2 plus 8%, Q3 organically plus 6%, now high single digits or double digits fourth quarter. So we looking that the momentum is picking up coming out at Jupiter or whatever instead of fourth quarter and then we can surmise of that reason for next year.

Marc Olin

I would definitely say the momentum picked up in Q3 for sure with that 25% growth rate, although I think part of what you don't really see in there because we broke out the organic. But even the acquired companies that we bought when you look at CTI, which was our Corrugated solution. We bought in Q4 of last year, that's not included in the organic growth in Q3, but that was one of our fastest growers in the quarter sequentially. We saw some great activity from our CTI sales efforts in the Corrugated space.

Again that synergy with Nozomi and the Corrugated Software is playing out. So we're definitely seeing some nice growth there and we're excited about that in after tax, I would say also exceeded our expectations in the quarter we saw – we talked about $4 million to $6 million in the back half of the year for after tax and we did about $3 million in Q3 on after tax.

Morris Ajzenman

And the gross margin run rate there, 75%, 76%, that’s sustainable with these sort of revenues being generated?

Marc Olin

I wouldn't say it's necessarily that's not the new normal for every quarter to have, but I would say the big jump that we saw in license and subscription revenue in the quarter. Our license revenue in particular I should say, that helped power that that high single-digit organic growth that I spoke about. That's what really drove the gross margin up. We just had a lot of momentum in Q3 on new license sales and the license portion of that business is that very, very nice much higher than the 75.7% gross margin and that's what boosted up the number in the quarter.

Morris Ajzenman

Okay, last question Fiery revenues down $11.5 million year-over-year and you highlighted two things, one large partner doing the balance sheet optimization, which sales in the Asia-Pacific particularly low end. Which sales in Asia related to this one large partner or is that a separate distinct from that?

Marc Olin

Yes. It’s same partner they have a reseller in Asia that they sell to that their exclusive channel in Asia and it was – so it happened to be the same partner that also was doing the balance sheet optimization.

Morris Ajzenman

Can you breakdown that $11.5 million approximately how much is due to you optimization versus this which sales in Asia from them.

Guy Gecht

But I said Morris in my opening remarks, as most of the bigger issue was the optimization and smaller issue in Asia.

Morris Ajzenman

Thank you.

Guy Gecht

Thank you, Morris.

Marc Olin

Thanks, Morris.

Operator

And your next question comes from the line of Aaron Rakers from Stifel.

Aaron Rakers

All right. Thanks for taking the questions. I'll keep it brief. I think last time that you gave or you at given your $1 billion target was back in 2013. I'm just curious as we now obviously approach or near that $1 billion target. Is the company thinking about an updated longer term model forecast?

Marc Olin

Yes. So we obviously have three year and five year plan and the plans did not end at 2016 and we have goals to go away further than $1 billion. We have a strategy that allow us to do that we have a market that will allow to do that. The question is that what point you make this thing public. A lot of companies don't make this thing public. We felt that it's a good idea back in 2015 and we probably will do it at some point in the future. We just need the pick the right time and opportunity in the right target.

Aaron Rakers

Perfect, perfect. And then on the Nozomi products, I know that we are – there was a lot of talk about manufacturing orders and everything else that you're seeing. I'm curious of what you're seeing from a competitive perspective. These customers are coming in for orders. Are you seeing any increase talk or discussion around the potential competitive offerings that might be coming to the market and who are you guys most focused on there?

Guy Gecht

There is definitely more than one competitor. The one competitor that everybody’s familiar with is HP that they announced plan also to provide solutions for Corrugated. They have their advantages – they’ve very good company, we have our advantage, we're very comfortable where we are. I think it's a gigantic market of Corrugated. Every time that somebody buy online, they increasing the target developable market and I think there will room for both companies, the old companies will be competing to do quite well. But we obviously watching and customers are helping us to selling us what we need to beat in order to beat the competition as far as performance and speed and quality and prices.

Aaron Rakers

And customers that are providing orders today and there’s some nominal amount of orders that you capture. Did – does that increase as you move towards the manufacturing? And I think you mentioned you’re just going to start showing these products here over the next couple of months. Is there further on kind of trigger is that, if the customer wants to take the Nozomi product there's incremental orders or things that happen prior to the actual delivery. Or once an orders placed let's say, since Drupa that customer is basically going to get Nozomi at this point.

Guy Gecht

Yes. I think look at the end of day we will have to see who is – where were the customers, who is willing to take one of the first few units and who would be ready to and where we have pull from geographical perspective. And so on but with time to show it to customers, because we want to see – we want to have a lot of demand input pressure on our team to manufacture to move faster on manufacturing. We're going to go cautiously in the beginning. But clearly we think the opportunity is tremendous definitely corrugated, which is the largest packaging industry and definitely we all buyers of boxes that shipping to us, that people ship to us, and they’re not looking that great.

So the definitely opportunity to become colorful and personalize and short it on. And we’re going to extend the Nozomi to other industries. So we have a long-term plan on Nozomi. And the long-term plan does definitely involve manufacturing more than two a month. Just the way we scale it and control it and support it in the first 12 months is something we want to be very careful about.

Aaron Rakers

Very good. Thank you for taking the questions.

Marc Olin

No problem, Aaron.

Guy Gecht

Okay. I think we will wrap it up at this point. Thank you very much for being very engaged in the call. We appreciate you joining us today. We definitely appreciate the loyalty of our shareholders, the trust of our customer, and of course, the hard work and dedication of the EFI team. We're looking forward to share with you more news on our progress and talk to you in near future. Thank you very much.

JoAnn Horne

Operator, you end the call.

Operator

This concludes today’s conference call. Thank you for your participation. You may now disconnect.

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