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Electronics For Imaging, Inc. (NASDAQ:EFII)

Q1 2012 Earnings Call

April 19, 2012 05:00 pm ET

Executives

JoAnn Horne - IR

Guy Gecht - CEO

Vincent Pilette - CFO

Analysts

Ananda Baruah - Brean Murray

Shannon Cross - Cross Research

Keith Bachman - BMO Capital Market

Morris Ajzenman - Griffin Securities

Operator

Good afternoon. My name is Missy and I’ll be your conference operator today. At this time I’d like to welcome everyone to the Electronics For Imaging Q1 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

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

JoAnn Horne

Thank you, operator and thank 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, that our statements other than statements of historical facts including, but not limited to statements regarding our strategy; growth opportunity; 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 materially adverse effect on our results. Please refer to the risk factors discussed in our SEC filings and the press release. We do not undertake to update in light of new information or future events.

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

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

Guy Gecht

Thank you, JoAnn. Good afternoon and thank you for joining us today. Our string of record quarterly achievements continued in Q1. At $160 million in revenues Q1 marked our best March quarter ever and EFI's ninth consecutive quarter of double-digit revenue growth. Our Productivity Software and Industrial Inkjet businesses both posted an all-time record quarters as well as record recurring revenues. In this seasonally low and pre-drupa quarter, we could not be more pleased with the execution by the team.

Our success in balancing the revenue drivers of the company is once again historic. While Fiery revenues came largely in line with normal, seasonally low expectations Industrial Inkjet revenues were up by 47% and Productivity Software grew 45% year over year. As we have long discussed, the Inkjet and Software businesses are becoming the key driver of the company as they now comprise more than 60% of our revenues.

Not only do the Inkjet and Software segments bring fast growth with both short and long-term opportunities, more importantly we have direct control in these two segments over the rate of innovation and the activity in the field. I could not be more pleased with how this played out in this pre-drupa quarter, when customers have all the reasons in the world to wait with their buying decisions. We were aggressive and determined to start the year on a high note.

While I don't have precise data yet we have strong indications that in those direct sales segments, our field team delivered the share gain in almost every category in which we compete. And perhaps the best part about our fast-growing Industrial Inkjet and Productivity Software segments is that every new sale lead to higher margin recurring revenues for years to come.

Before reviewing each segment business segment in more detail, I wanted to quickly highlight the completion of a very successful Connect User Conference. Our 13th Annual Conference held in Las Vegas drew about 1200 attendees and featured more than a 160 educational sessions, user groups and demos of the latest EFI products. During the conference, we briefed you new products that could be formally introduced at drupa next month including One; the cloud-based Fiery Dashboard which enables shop owners to analyze their digital print operations and make better business decisions; Two, the new VUTEk HS100 a digital press targeted towards superwide screenprinting that is twice as fast as our current GS printer and better quality than anything currently available in the market and Three; Orion, our new inkjet printer operating system which will be available as an upgrade to all of our current GS customers.

Of course we have not yet announced all of the new innovations. So stay tuned for more exciting announcement in the next couple of weeks. Now turning to our business segments. Starting with Industrial Inkjet which delivered a very strong quarter at $75 million posting outstanding growth at 47% and again exceeding our expectations with solid double-digit organic growth in all of our inkjet product lines. Perhaps the most encouraging data point is the 41% growth in UV ink volume. Our customers are clearly capitalizing on the growing opportunity for digital printing, for [platform] advertising and packaging applications.

I can tell you first hand that I have met many customers around the globe in the past few months who tell me they are enjoying a very strong business environment. If I had to pick just one example, it will be [Marcos Sapia] the owner of a great company called [Outfix] in São Paulo Brazil. Marcos told me when I visited him in early March that he simply can't wait for drupa to get his second VUTEk GS. His first VUTEk GS unit is working literally 24/7 and he's turning business away because of capacity constraints.

Q1 was also our first quarter with Cretaprint and I am happy to report that the relation is going very well and we are becoming even more enthusiastic about the future opportunities to transform the tile manufacturing industry. Looking at Q2 we expect solid 30% year-over-year growth in the Industrial Inkjet segment. Even when factoring into our focus, the possibility that some customers will delay their purchases to the second half of the year when the innovative new products we will shortly announce at drupa become available.

We are very pleased with the 45% revenue growth in our APPS Software, a record all-time quarter at $24 million. Please note that we will know refer the APPS segment as Productivity Software to more effectively describe the market and applications. Our Productivity Software products continue to be in strong demand globally. As we know in any economic environment there is no shortage of reasons for customers to automate their operations, use less manual labor in the process and increase efficiency.

Our work is fuelled by international expansion as we have become not only the largest Productivity Software provider in North America but also the undisputed leader in this category in Europe, Asia-Pacific and now Latin America with the recent acquisition of Metrics which I will expand on in a minute. In a couple of weeks, we will introduce new innovations in our Productivity Software segment especially around expanding our cloud-based offerings and the integration of the entire EFI product portfolio.

With those new offerings and strong pipeline of opportunities we expect continued momentum with 30% year-over-year growth in the current quarter. Turning to the Fiery which performed largely in line with expectations given the seasonally softer Q1 and facing the (inaudible) compared given the strong product cycle in the first quarter of last year which we don't have in the first of this year. The results in this segments may also have been somewhat impacted like customers delaying purchases until after drupa.

We continue to innovate in Fiery and we're working with our partners on many exciting new engines offerings that will be shipping in the next 12 months. For Q2, we expect it to be slightly up sequentially but still below last year levels as we wait for the new product cycle.

Turning to our global results, in Q2 52% of revenues came from outside North America including solid results in Europe. This was particularly good news considering most customers in Europe will be visiting drupa and traditionally delay purchasing decision until after the show. In Asia, we continue to see good acceptance of our higher end products which drive a very high rate of growth in almost every market with the exception of Japan which continues to slide in revenues.

This growth in our international revenues leads me to our acquisition strategy. As we have discussed in the past we are strategically focused on expanding our geographical footprint. We are focused on the smaller acquisition especially in our Productivity Software segment because they enable us to quickly expand and leverage our existing product portfolio by utilizing a team of sales, development and support staff on the ground and building upon a solid initial customer base.

The acquisition of Metrics follows this strategy and will not only open up Latin America for our software business it will also bring the EFI ecosystem to the region and support accelerated growth for our Inkjet and Fiery segment. One of the most exciting incremental opportunities in Brazil is for our Cretaprint product line as it is the second-largest electronic market but completely untapped by Cretaprint prior to becoming part of EFI

Let me summarize with the same themes you heard over the past few quarters. One, a strategy of enabling the print industry to digitalize continues to drive results. Two, we are playing in the growth area of print and continue to leverage the positive plans.

And three, our team continues to execute better and better. Our enthusiasm for EFI future increases with each quarter as we head to drupa, the industry Olympics Games, we are very well positioned to lead our targeted segments of a very large industry.

From a business perspective, we expect revenues in the current quarter to go roughly 15% and on GAAP EPS to be at the range of $0.29 to $0.30 per share, roughly 30% up over the last year.

With that, let me turn the call over to Vincent.

Vincent Pilette

Thank you, Guy, and good afternoon everyone. While Q1 is traditionally our seasonally low quarter, studied execution enabled us to deliver another quarter above expectations. Revenue for the first quarter of 2012 totaled $160 million, up 14% from the prior year, our ninth consecutive quarter of year-over-year double-digit growth.

Recurring revenue achieved another record level at $29.5 million, up 21% year-over-year. Disciplined spend management and fast pace integration of color print led to non-GAAP operating profit growth of 16% year-over-year and non-GAAP EPS of $0.30.

Finally, we generated $10 million cash from operations, exceeding the breakeven outlook we provided in January.

Now, let me go into more detail starting with revenue by business segment and region. The first quarter of 2012 once again demonstrated a success of our portfolio diversification strategy. The Industrial Inkjet segment generated $75 million of revenue, up 47% year-over-year and coincidentally also contributing 47% of total EFI revenue.

We saw a split momentum for our wide and super-wide format printers, finishing on a very strong note in March. We saw a solid demand for our ink through the quarter, leading to 41% year-over-year volume growth for UV ink.

This is the 10 consecutive quarter of UV ink volume growth above 20% year-over-year. This strong momentum led to another quarter of double-digit organic growth in a segment where we are clearly gaining market share.

We are equally pleased by the progress achieve by Cretaprint, slightly ahead of our target in this first quarter.

EFI Productivity Software, which we previously referred as APPS, delivered another record quarter with revenue of $24 million, up 45% year-over-year, which contributed 15% of our total revenue.

We continue to see strong demand for more business process automation in the print industry and we’re uniquely positioned to help our customer transform the business and increase their productivity.

We continued to expand sales coverage internationally and we are particularly excited by the opportunities in Latin America with the addition of Metrics into our portfolio.

In line with our January outlook, Fiery proceed lower Q1 revenue of $61 million, down 16% year-over-year, and representing 38% of total EFI revenue this quarter.

Fiery returned to a more historical quarterly linearity driven by the current printer manufacturers' product roadmaps.

As we aggregate the quarter, we focus on maintaining our channel inventory in line with our positional target range on a global basis and we are in a healthy inventory position going into the second quarter.

By geography, revenue in Americas grew 11% year-over-year totaling $82 million, led by the steady growth of our Industrial Inkjet and Productivity Software segment. Revenue in EMEA was particularly strong with an increase of 24% year-over-year, totaling $55 million driven by share gains across our product lines.

Finally, Asia Pacific grew 7% year-over-year, including Japan, and 66% year-over-year excluding Japan with continued strong performance in emerging markets.

Looking forward to Q2, 2012, we expect approximately 15% revenue growth year-over-year. This outlook is based on the growth of over 30% year-over-year for both the Industrial Inkjet and the Productivity Software segment. Fiery revenue is expected to be slightly up sequentially and down on a year-over-year basis.

Now moving on to gross margin. Non-GAAP gross margin for the first quarter was 55%, down 140 basis points year-over-year due to an expected revenue mix shift. Non-GAAP Industrial inkjet gross margin was 39.3% in Q1, 2012, up 320 basis points year-over-year, driven by cost reduction initiatives.

As we integrate Cretaprint, our priority has been to drive supply chain synergies. We have delivered product cost synergies ahead of our integration plan and are very pleased to be able to maintain the Industrial Inkjet segment close to 40% despite a revenue mix, skewed more towards printers in the short term.

In the Productivity Software segment, non-GAAP gross margin continue to increase, resulting in 71.3% for the quarter, up 320 basis points year-over-year and up 40 basis points sequentially driven by economies of scale.

Finally Q1, 2012, non-GAAP Fiery gross margin remained at the high end of our target range at 67.8%, thanks to product mix.

Going into Q2, 2012, we expect the over gross margin to be slightly up sequentially as a result of product mix and continued improvement in supply chain synergies.

Now turning to operating expenses, which as a reminder, remained at both in dollar terms and as a percentage of revenue. Non-GAAP operating expenses were 43.7% of revenue, a decrease from 45.2% of revenue a year ago.

Non-GAAP OpEx of $69.9 million grew 10% year-over-year, primarily driven by acquisitions, sales coverage and R&D investments, partially offset by targeted operating leverage.

Non-GAAP R&D expenses were $29.3 million, representing 18.3% of revenue compared to 19% of revenue a year ago. Non-GAAP sales and marketing expenses were $30.2 million, representing 18.8% of revenue, down from 19.5% a year ago.

Finally, non-GAAP G&A expenses were $10.4 million, 6.5% of revenue compared to 6.7% a year ago. For Q2, 2012, we expect non-GAAP operating expenses to increase sequentially, driven by drupa, the two-week trade show happening every four years, as well as Connect, our annual software user conference, representing an investment of over $2 million.

Now moving on to profit margin. We delivered non-GAAP operating profit of $18 million, up 16% year-over-year. Non-GAAP profit margin amounted to 11.3% of revenue, up 20 basis points year-over-year, with stronger operating leverage, partially offset by revenue mix.

Non-GAAP other income and expense was a net gain of $0.6 million, with income sequential currency impact.

Winding up the P&L, our Q1, 2012, non-GAAP tax rate was approximately 24% in line with our January outlook, assuming the retroactive renewal of the federal R&D tax credit by the US Congress.

As we continue to expand internationally, improve our profitability and integrate Cretaprint into operational framework, we could see an improvement of our tax rate overtime.

Strong demand for our products and disciplined operational execution enabled us to deliver non-GAAP EPS of $0.30 per share in Q1 2012 compared to $0.28 per share in Q1 2011 which included a one-time $0.03 favorable currency impact.

Excluding this non-operational currency impact on OI&E we grew non-GAAP EPS 20% year-over-year. For Q1 2012, we expect non-GAAP EPS growth of approximately 30% year-over-year or $0.29 to $0.30 per share assuming relatively neutral foreign exchange rates.

Turning to the balance sheet total cash, cash equivalent and short-term investments amounted to $203 million; a net decrease of $16 million versus the prior quarter was mainly driven by the cash paid upfront for Cretaprint as the acquisition closed this quarter partially offset by cash from operating activities and other financing activities.

Q1 2012 cash flow from operating activities amounted to $10 million compared to $11 million in Q1 2011. As expected, Cretaprint and its industries less efficient cash cycle, as well as the overall product mix shift impacted our cash flow from operations and overall working capital. One of our goals as we integrate Cretaprint is to improve its working capital management.

As such although working capital was 64.5 days, up seven days compared to a year ago, accounts receivables were $120 million resulting in DSO of 68 days, an increase of 8.5 days year-over-year mainly driven by Cretaprint’s additional cash cycle and our strategy to selectively utilize payment terms to add an incentive for customers to close deals ahead of drupa.

Our net inventory balance was $56 million with inventory turns of 5.1 in Q1 2012 compared to 5.5 times a year ago. The delta in turns was entirely driven by Cretaprint to support its strong demand and longer manufacturing cycles. It will take us a few quarters to drive sequential improvement for our new level of working capital days.

Finally, our total diluted weighted average share count for Q1, 2012 amounted to 47.4 million shares.

Let me summarize our Q2 2012 outlook. We expect revenue growth of approximately 15% year-over-year and non-GAAP EPS of $0.29 to $0.30 per share or EPS growth of approximately 30% year-over-year assuming relatively neutral currency fluctuations.

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

JoAnn Horne

Operator, we’ll take questions now please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ananda Baruah from Brean Murray.

Ananda Baruah - Brean Murray

I guess just a couple of things; the first things is, given that the revenue run rate for the first half of the year is still strong. Can you give us and then that you have easier compares the second half of the year and from product cycles that seems like you guys will be positioned to benefit from as well.

Can you give us, I know you can’t guidance but some sense of what we should expect I guess in terms of normal seasonality maybe, I mean I guess with regard to seasonality from the controller business? And then I guess any sort of you know commentary around the other product lines as well would be helpful? Thanks.

Guy Gecht

Hey, thanks Ananda. We are guiding one quarter at a time and even that some times is challenging. So we will stick to that. In general, we are very pleased with not only how we performing, how our customers are performing.

At least on the Inkjet side, we can see the ink demand was outstanding, 41% year-over-year growth and volume coming from a quarter ago where it was 34% we thought in fact the absolutely maximum as we can see as far it goes. So talking to customers around the world, business and auto-foam packaging, (inaudible) is very good and hopefully that will continue.

As far as the product cycle, from an EFI perspective in our area of direct sales, we coming up with some very exciting innovation, I mentioned the HS100, the Avaya software, cloud-based altering on both the Fiery side and the Productivity Software side so there is a lot to hope for that customer would see reasons to continue to spend money with us.

On the partner side, we are very busy with new engines. As I mentioned, it’s really not something that come into play in this half - first half of the year, but my sense is in the next 12 months post drupa, we will see more introductions by our customers, by our partners on the Fiery segment and areas that and products that are in the sweet spot of EFI, so there is a lot to hope for definitely in that kind of timeframe for continuous growth in the Fiery business.

Ananda Baruah - Brean Murray

And Guy, I guess given you guys view of sort of the end markets on production, what’s your sort of expectation for I guess the benefit from this coming around of OEM product cycle is relative to what we saw last year when there was probably some pent-up demand?

Guy Gecht

The Q1 last year was fantastic so we overcome the seasonality because we develop our partners at multiple products so that’s really unique. Last year, I remember we grew on 30% in Q1 last year.

It’s tough to say what will be the impact, the exact timing as I know that when we develop products, we have a direct control on the rate of innovation; when it’s coming to market, how it’s been positioned, how aggressive you are and what you do in the end in the field, we have less control inside when we are just providing a subsystem to our partners, but I am sure they are going to do really, really well with that. They invest again in innovation.

Clearly, that’s the way to grow today in our markets we need to bring benefits to customers in order for them to spend money. So what exactly the impact of the timing, it’s tough to say from our perspective. We noted we are very, very busy on the Fiery side with our partners with products and unfortunately not in the first half of year, but in the quarters, the four quarters after drupa I think was some good interaction.

Ananda Baruah - Brean Murray

And I guess, just last one from me, this is on Inkjet. Can you give us a sense, you mentioned share gains and it sounds like you meant across the products, but I guess I am just wondering specifically in Inkjet, what are you seeing kind of share gain wise right now and also what are you seeing -- are you able to get a sense of how much the demand is sort of markedly moving towards the digital, I mean is it moving towards digital away from sort of non-digital technology?

Guy Gecht

I think rate of moving is good and constant, again back to our ink numbers, this is the 10th consecutive quarter of 20% or better growth in ink, UV ink volume for EFI; so I think that to give -- but I am not sure that that was the main story in our Industrial Inkjet this quarter. The share gain was certainly a very big part of it. We started the quarter knowing that that's going to be requiring a lot of great execution and hard work because customers have already stopped new orders I mentioned to wait for drupa.

They know they are going be announcement in drupa potentially some discounts in drupa and we decided to be aggressive to win every competitive deal of course for the reasons not to as you see with our gross margin we actually did not sacrifice as much as one will think and to leverage their ability to control the market, to control the messaging. When we needed we disclosed to customers what we are going to show in drupa and showed them that they can buy now and still be in a good shape and as far as the win-loss we are still compiling the data. I think it was one of the best quarter as far as gaining share on the Inkjet, Industrial Inkjet and entirely in the company but especially in this category, in this segment, and actually maybe more in Europe than in any other region we want more deals than in a competitive situation never before. So I am very pleased with what the team did on the execution level.

Vincent Pilette

And if I can add we saw double-digit growth across all of our product within that segment, all of our product lines across all of the region, so the balanced share gain or the balanced growth if you want was particularly pleasing.

Operator

Your next question comes from the line of Shannon Cross with Cross Research.

Shannon Cross - Cross Research

First question I have is just on Kodak and what's going on with the software business there as well as just sort of a competitive landscape for the applications business, so what I am trying to ask is how much of your growth is share gain versus you know actually tick up and significant tick up in demand for these products and how should we sort of think about it on a longer term basis?

Guy Gecht

Yeah, so our main competition we’ve got is probably is on the Fiery front end and even that is over the last year or so that to focus on their commercial print probably was left with an issue and never before. On the application side, on the Productivity Software side, we are competing in some areas with them, it’s not the main competitor. Most of the competitors are actually relatively small with the exception of HP that has a product that is matching there. And I think, yes, we are becoming stronger, people feel very comfortable going with EFI because we are the largest provider in every region. With the small acquisition we did, we are the largest provider in Europe, we have team on ground, development on the ground support. So it's easier to pick up to but not just an American company that sell there, we are doing the same effort now in Latin America with the acquisition in Brazil again a small company give us the footprint.

So it’s a few fold deal, the growth is one is people want to invest in productivity announcement, that the market is not that easy they have to take cost out of their system, their stakes, they want to run business as a very accurate business. Secondly, we have the geographical expansion. A couple of years ago we were almost a 100% US based. Now we are well diversified on the software segment. And further thing is a start up to compete with us, because we have the masses, the footprint. People feel that they can trust us with their ELP because we've committed, we are the largest. So it’s all adding up to those kind of results.

Shannon Cross - Cross Research

Okay, great. And then (inaudible), can you talk a little bit about where you are in terms of cost reductions within the businesses especially I guess Inkjet, just where you see further opportunity for gross margin expansion I mean clearly a great job so far. And how we should sort of think about you know cost net of, of course the additional Connect and drupa cost?

Guy Gecht

Yeah. So on the Inkjet supply chain side we have been a driving a lot of initiatives now for many quarters. You have seen the margin expanding. We had guided margin slightly down this quarter on the sequential basis because of the addition of Cretaprint which then brings more printer revenue, but we were very pleased that integrating the supply chain work on manufacturing operations, procurement and we are very pleased by the results here dating to the 39.3% gross margin.

Our long-term target has not changed, it is still 40% in that segment and we will work on sequential improvement and try to get to that level as fast as possible and we have more to do there. When it comes to other synergies, obviously you talk about the cost but there is also the sale side synergy on Inkjet and we also shared our direct sales experience with Cretaprint as well as our global footprint to accelerate the growth rate and the synergies that we are also very focused on.

When it comes to OpEx, we mentioned the Q2 normally is the highest kind of quarter versus Q1, due to all the trade shows and this year is the exceptional Connect and drupa in the same quarter which will drive an incremental expense on the quarter-over-quarter basis. We do focus on operating leverage across all of our segments. We had software leverage, software components in all of our segments as well as sales and operation synergies if you want to leverage across all of the countries.

We put an operating expense target as a percent of revenue out there on the long term, 40% to 44% of revenue was slightly above that this quarter, trending down and we will continue to trend to fall into that range and then work towards the bottom of that range.

Shannon Cross - Cross Research

Okay, great. My last question is, just you made some acquisitions from a international standpoint whether in Brazil or in Europe, how are you thinking about leveraging the sales forces across these products, I don’t know may be development capabilities in the various regions just how should we think about this as EFI becomes, I mean you have always been International but clearly you have more of a footprint in this one I guess.

Guy Gecht

Absolutely that’s a big effort inside of ESI while you know the R&D sometimes is different, the R&D group that work on Inkjet is very different than the R&D that work Software Fiery. When we are funding the customers, they need to see one EFIT and I think they seem more and more of that. The sales forces to a large degree is unified although we have different professional experts in some areas. They see one sales force from EFI, they see more and more the same support and then we are leveraging with both sales. There is a initiative and there is incentive in EFI.

If your call is based mostly on Inkjet, but you will refer your installed base to the software guys and sale will happen you are going to get financial rewards. Our sales system is very good, the after sales management is very good at that and we of course marketing through our installed base. So we see a lot of cross-selling activities and I talk from a customer perspective if they are happy with the VUTEk printer they are very likely to talk to us about what next from EFI. If I can buy software from you, can you optimize it, can I run it more efficiently, can I connect to my own customers via the web, via the cloud and get the process from order to production, to be as efficient and as fast and as pleasing to my own customers as possible. So we definitely see that these three segments are working extremely well together both from the sales side and from a customer experience side.

Operator

Your next question comes from the line of Keith Bachman with BMO Capital Market.

Keith Bachman - BMO Capital Markets

I had a couple, just on Cretaprint, is the Spanish economy having an impact there or is there enough footprint as you think about the construction industry or what not to keep that running? And what have you’ve added are they diversified enough across a number of different geographies that they can overcome the way that the Spanish economy?

Guy Gecht

Yeah, so one of the reasons that the original owners thought that they would like you join EFI is the business being really focused on Spain and Italy to be a global company and EFI has a lot of experience. And I think Q1 was an example of how we got involved very quickly and revenue was a lot more diversified. So in general, yes its not heavily impacted or heavily relying on those. And in Spain clearly there are issues in Spain as far as contraction.

Having said that, actually what we are saying that in Spain and Italy sometimes then we will go and invest in digital printing because the ROI is very good, you are saving money, you can do short run, you don't need to have the inventory of all the possible types, you can print on demand and you definitely a lot more efficient in operation where we have. So sometimes this investment actually leads to a more efficient outcome for them. So we are still selling in those markets and the customers still see the ROI.

Keith Bachman - BMO Capital Markets

And so if we did, if you had a back year of Cretaprint, would it have year-over-year growth? In other words, if you had a normalized number would have been up on a year-over-year basis?

Guy Gecht

Absolutely, and to your point a lot more international diversification this year just compared to last quarter so far.

Keith Bachman - BMO Capital Markets

And my second question is, it seems like controller was a little slower than you guys were thinking. I think on the last call you thought controllers will be down around 5%, sequentially it was down a little bit more than that at 9% and I would have thought it would get a bigger boost off of drupa, is it just, is it the economies win on the controller sales or is the cycle so to speak expected product shifts from drupa will they get the orders in June and then actually fulfill in September -- your customers I am referring too obviously Xerox and Canon etcetera?

Guy Gecht

So first of all I would say it’s probably on the lower end of our expectation in line, but on the lower end. And there is probably a drupa effect with a lot of customers that are waiting to see what would be announced in drupa hoping to close deals with whether it’s Xerox or Canon or Ricoh, Konica Minolta or whatever partner on the show floor.

So I certainly think that it’s the base of my discussion that it’s certainly a part of that. One thing is the economy, you know that in this industry, in our business more a lot is depend on the replacement cycle and we obviously, we knew there is now new printer in our color printer now the sweet spot, but to the degree of exactly how much that will influence we don’t know.

But I have to tell, look, we are very pleased with the results; we are doing quite well, the product pipeline is well and the last thing I want to say about is that you know a few years ago if we will come at the lower end of expectations on the Fiery side that would be a very challenging quarter for us.

And because we are so balanced, when we have so much upside in the direct business which is now more than 60% of our business, so we can influence things both in the lab and in the field, we can overcome sometimes the cyclicality of coming a little bit shorter and obviously the longer term is pretty good on the Fiery side.

Keith Bachman - BMO Capital Markets

On the expense side, Vincent for you, I think you said that OpEx would be up $2 million due to the two trade shows; I just want to make sure I heard that right that it wasn’t the two trade shows would be $2 million, but the net of OpEx would be up $2 million as a consequence of the trade shows?

Vincent Pilette

So, approximately $2 million, that’s good rough estimate for sequential growth.

Keith Bachman - BMO Capital Markets

And then back down in September I would assume?

Vincent Pilette

One quarter at a time.

Keith Bachman - BMO Capital Markets

Okay, alright. That’s it from me.

Guy Gecht

And on drupa, that is a fair assumption. I hope there is no, I hope it’s full until the next one.

Keith Bachman - BMO Capital Markets

Well, I hope there is no drupa in Q3 either, just for travel. Alright, thanks guys. That’s it for me.

Operator

Your next question comes from the line of Morris Ajzenman with Griffin Securities.

Morris Ajzenman - Griffin Securities

Just a further follow-up on Europe, and then if you could just touch on Japan. You had a couple of commentaries, one actually referring to Inkjet that you actually gained share in Europe.

So I am just curious if you can just discuss probably the landscape in Europe, but we don’t know the fiscal environment in Europe and how that played out in the first quarter overall for you guys. Again, you touched Inkjet where you say you’re gaining share. How is Europe for the other two businesses in this quarter?

And then if you can just lastly, just touch on Japan. It’s been difficult for a while going forward and you think that you will do or can do to kind of change those to broken comparisons?

Guy Gecht

Yeah, so starting with Europe, certainly we feel very good about the share, the outcome of the competition in Q1. I mentioned some of the reasons, but the one other thing to mention is that few quarters ago, a couple of quarters ago, we said that we are going to invest in direct sales force in Europe both for the Software side and the Inkjet side. And we’re starting to see that paying off with much better coverage and we hired really, really good people there so they start to deliver good results.

So if you look at the economy of course, we all know that the economy is a lot more difficult and challenging than almost any other place in the world and I look at country by country, I can tell you are we are going well in Germany, we are going well in UK, in the Nordic, probably actually we grew a little bit initially that was a pleasant surprise and you know we probably doubled in some of the countries, we would expect this to be done.

But overall, I think when the economy is reasonable not even growing much, stability as people know that investing in digital equipment is the right decision from their perspective.

On Japan I wish I had a more confident answer. We are definitely trying a few things all the time. It’s a very conservative market. They are big in analog printing. It’s difficult for anybody. I am not aware of any player in our industry that managed to get a good growth in digital printing in Japan.

They like the long-run. They are very traditional. They don’t tend to jump on the digital until we get to a certain point in speed and who knows how far away. So we continue to try in Japan; we are not factoring any of our plans for the few quarters; a huge rebound, if we manage to get the formula right, obviously that will be a nice upside.

Operator

(Operator Instructions) We have a follow-up question from the line of Ananda Baruah with Brean Murray.

Ananda Baruah - Brean Murray

Hey Vincent this one is probably for you; on the software business now that you are sort of $100 million annual run rate, just want to get sense of when we might expect to see or are you already seeing good OpEx leverage? And I guess, sort of the sense is then they can get a lot better from where it has been. I think prior comments least contextually have been when you kind of get to the run rate of $130 million to $150 million then you can start to generate some really good OpEx leverage. It doesn't seem like we are all that far, you know sort of from that place now, given your role in the business of like 30%.

Guy Gecht

Yeah, you already see some of that leverage, right. So we delivered here revenue growth and you've seen the operating probably gross margin at 71.3% and that's of course you know an expansion of 320 basis points on a year-over-year basis. As we continue to go into business you are going to continue to see that gross margin expansion.

On the OpEx it’s the same story and that's why you can see our total OpEx, we don't break it out by segment because we drive a lot of operating leverage across software development and the field but you can see that from an OpEx as a percentage of revenue we are at 43.7% of revenue versus 45.2% a year ago and that will enable us to get to over time to the bottom of our range of to that OpEx at 40% of revenue.

Ananda Baruah - Brean Murray

And then just one last one I guess. I will try, you sort of like the second half revenue in another way, I appreciate you are not going to give guidance but it sounds like you guys have been going out of your way to try to sort of smooth business at least to take some of the volatility out. Should that be the expectation for the second half of the year relative to the first half of the year or is there anything that can make second half revenue lumpier than typical in the second half of the year?

Guy Gecht

So I know I appreciate you try a different way but I will answer the same, one quarter at a time but certainly sustainable growth is (inaudible) by being just an OEM company a few years ago and having a lot of volatility, we are doing everything we can to make sure that we have very good control of our business and we sustain the goal and we don’t run into big of hiccups. So that's definitely our goal and Vince and Stephanie watch a lot of inventory and trends to make sure that we are ready in line and reacting quickly to something moving.

Vincent Pilette

We definitely and are driving on all our levers and as Guy mentioned we have a very diversified portfolio now with very different business models would give us a lot of levers that may go different ways but give us an opportunity to have sustainable growth. When you talk about more than one quarter, I would refer to our long-term model where we’ve guided Fiery on the long-term basis as a GDP plus growth. The APPS business growing between 10% and 20% on a year-over-year basis and Inkjet 10% to 15% and that obviously is excluding any special effect from acquisition on growth rate. And we are managing the business that way, we are structuring the cost structure that way and we are managing the profit expansion and in the expansion target that way.

Operator

Your next question comes from the line of [Ted Morrow] with [Knight] Capital.

Unidentified Analyst

I wanted to zero in on the trade show that’s coming up and the strong product cycle and strong introduction that you have over the next couple of months, is this an unusual cycle and because of the trade show you have a lot of new products or is this going to be sort of an ongoing flow and will your R&D consequently stay up around 18% and 19% levels, at a normalized level or might it drop off a little bit as we look out maybe to later in the year or next year to achieve your margin goals?

Guy Gecht

Good point. So we have an update, we have some (inaudible) in the industry; drupa is unique, because it’s every four years and are the largest and there is a reason why we compare it the Olympic Games beyond being every four years. This where a lot of customers come to compare between the players in the industry, so everybody works hard to look great with new innovation in the industry.

I would say definitely the reason, this drupa and last drupa there was also a sense of I don’t want to show too many things in advance to give information to my competitors or even slow down my own sales causing people to delay, so you definitely need to balance that.

So from our perspective, a lot of products that we were working on, a lot of innovation, we know we want to show it in a very good shape in drupa and we also know that we can’t delay them too far ahead because we might impact our sales for too long, so in a way, it’s definitely a factor that accelerate innovation.

I wouldn’t say that we’re spending more on R&D, we will probably spend a little more as far as building prototypes and getting more conductors to help; that’s not a significant amount. But I would tell you our R&D team is working extremely hard to deliver outstanding line up in drupa and I know some of the teams are working every weekend for the last many weekends, so EFI is going to look very good in front of tens of thousands of visitors. So in that regard, yes, it’s a special effort and is a special event.

Vincent Pilette

If I can add two things, so we’re definitely a technology company. So the rate of innovation and investment in R&D is critical for us to sustain the long-term growth and the opportunity to convert many industries from analog to digital is still untapped, if you want and we invest in innovation that way.

When it comes to operating expense as a percent of revenue, and that’s really how you need to think about it. We still need to get to the bottom of our range at 40% and so as a percent of revenue you’re going to see more leverage overtime. But obviously, on R&D dollars perspective, you are going to continue see the amount that you see today.

Unidentified Analyst

Vince, would you say 18% and 19% as a percentage of revenue then is probably a normal level as you go ahead, because you certainly got to keep reinvesting in your business and maintain that level despite that….?

Vincent Pilette

I would say in the long-term it’s call it 40% to 44% OpEx; it’s what we guided last November as long-term model within that I would say 17% to 18% R&D, 17% to 18% sales and marketing and 5% to 6% on G&A.

Unidentified Analyst

So you’re running a little bit above trend, the long-term trend, probably because of all the Olympics of the trade show I guess?

Vincent Pilette

I would say, it’s probably because, but I would say slightly differently, we’ve been consistently over the last many quarters driving the operating leverage in the system. You see on the percent of revenue, year-over-year for OpEx, it is continuously trending down, getting to the range. We are now within that range of 40 to 44 on the high side and overtime you will see it dropping to 40%.

Operator

At this time, I would like to turn the call over to Guy Gecht for closing remarks.

Guy Gecht

Thank you, operator. So thanks everybody for joining us this afternoon. Once again, I want to thank the shareholders and I want to add for trusting us and for the customers for their loyalty. And of course, I want to thank the employees of EFI for their hard work that allow us to accomplish those record results. We look forward to share even more exciting news later in the year. Thanks a lot.

Operator

This concludes today's Electronics For Imaging Quarter One 2012 Earnings Conference Call. You may now disconnect.

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