Electronics For Imaging, Inc. (NASDAQ:EFII)
Q3 2012 Earnings Call
October 18, 2012 5:00 PM ET
Joann Horne - Investor Relations
Guy Gecht - Chief Executive Officer
Vincent Pilette - Chief Financial Officer
Good afternoon ladies and gentlemen. My name is Alan, and I will be your conference operator today. At this time, I’d like to welcome everyone to the EFI Third Quarter 2012 Earnings Call. All lines have been placed on mute to prevent any background noise. After the presenters’ remarks, there will be a question-and-answer session. (Operator Instructions).
I’d now like to turn the call over Ms. Horne, Investor Relations for EFI. Please go ahead.
Thank you, operator and thank you 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 statements.
During the call, we will be making forward-looking statements that are statements other than statements of historical facts, including but not limited to statements regarding our strategy, growth expectations, industry innovation, new product introduction, new market opportunities, product cycle continuation, acquisition strategy, expectations regarding the date of closing of our real estate transaction, 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 there that correspond to today’s comments.
I’ll now turn the call over to Guy Gecht. Guy?
Thank you, Joann; and welcome everyone to our Q3 earnings call. Our Q3 results were largely the story of two significant forces. One is the realization of the tremendous opportunity in our Industrial Inkjet segment, where our production digital presses help customers that are under word to put great images on almost any material, from flip-flops and banners to labels and ceramic tiles, in an efficient digital on demand process, and as the ongoing growth in our UV Ink volume indicates, the opportunity in industrial printing is not only showing in the advised results, it is also translating to that volume of business our customers are seeing.
The second factor that impacted our quarter was the economic environment in Europe. Every part of our business with results in Europe were below our expectations. Even our Industrial Inkjet segment had a tough quarter in Europe despite being up 33% overall. Of course, the European issues didn’t just impact EFI, as our results in the Fiery segment reflects weakness for our partners in Europe as well.
The European situation reinforces the payout of our ongoing strategy to go and invest in the emerging markets such as China, India, Brazil and Indonesia. In fact our revenues in Asia grew 68% in Q3 and we look for the strength to continue as we expand our presence in those valuable markets.
Turning to our numbers, total revenue increased 5% to $154 million with EPS of $0.28, up 12% from last year. And before I turn to each of our segments, I would like to mention that we also just completed a very successful Graph Expo, the largest event in North America for our industry, where EFI’s fast leadership continued to shine. In fact, we owned Five MUST SEE 'EM Awards, once again, more awards than any other company in our space, and three Best Of Category awards, where no other company, including the large global companies earn more than one category leader award.
Now let me quickly review the highlights for the three segments. As I mentioned, we had a terrific quarter across the board for Industrial Inkjet despite the input from Europe and the temporary slowdown at the beginning of a new product cycle. As we have discussed in the past, we use ink volume as a living indicator of utilization of the installed base. So 30% growth in UV volume confirms that our customers continue to see strong demand, mainly for the kind of applications that our inkjet printing systems will enable. This usually involves putting great images on almost every type of material, as compelled to the conventional print on paper where most of our industry is focused.
This quarter demand, for a VUTEk LED was very strong and we will add more products, utilizing our LED Curing Technology starting in Q4 as part of our new major new product refresh in the Inkjet space.
We have a customer in Portland, PVS who publicly stated, and I am quoting “There aren’t many games changers in our industry but the VUTEk LED printer is one of them”. So we know our customers will be excited by our new products offerings. We have also started to ship the next generation of Cretaprint Digital Presses in Q4. We think some customers held back purchases this quarter, waiting for this new ceramic product that we introduced at the Tecnargilla Trade Show in Italy during the last week of quarter. While the timing of the show could not be more unfavorable from a quarterly revenue prospective, the industry feedback for this new type printer could not have been more positive. We continue to work to optimize the infrastructure and expand distribution of Cretaprint with particular focus on the emerging markets.
We also showed, for the first time in September, two new Jetrion products, including a wider 13 inch upgradable extension of our Jetrion 4900 products. Digital Label Printing continues to represent a significant, it slowly penetrated opportunity.
For Q4, we are expecting Industrial Inkjet to continue the momentum and increase revenue by approximately 15% to 20%. Productivity Software revenues increased by 13%, though they were slightly below our expectations. The economic environment is making it more difficult to close deals, yet our deal pipeline is at all-time high, as customers are very interested in saving cost and driving productivity. We are hearing from customers all the time, how our business automation software saves them time and money.
For example, Belk Printing Technologies in North Carolina told us that they went from four to five people in the job planning function to just one panel after implementing our MIS software and also print turnaround time by 2 to 3 days per job. So while economy concerns are slowing decisions, there are clear indications that pressure on the industry should lead to more Productivity Software sales. In Q4, we expect to see Productivity Software revenues increasing by approximately 15%.
Finally, while we expect the Fiery revenues to be soft in Q3, due to the ongoing impact of Europe as well as in front of a new product cycle in 2013, there is also 61 (ph) million where more like last year as Europe has more significant impact on our Fiery business, than we had previously anticipated. In addition, our Fiery partners are operating on very lean inventories to reflect this market trend, which also impacted our quarter.
Let me point to something that is actually a positive validation in our Fiery business results. In the past, we had concerns that because Fiery contributes the largest portion of EFI’s profitability, as our revenue mix began to transition to a higher percentage coming from Inkjet and Productive Software, our earnings power was at risk. If you look at our year operating numbers, you will see that despite the 24% decline in Fiery, our operating profit in dollar terms actually went up. Our transformation continues to work, while we are managing our business mix shift with a double digit EPS growth.
Now, if you factor in anticipated rebound in the Fiery business, driven by the new products coming from our partners in 2013, as well as our own development efforts, you can see why we are excited about the opportunity for our balance product portfolio and while we are working on 2013 engine introductions by our partners, we showed and got great feedback for our next generation Fiery System Software, FS100, in graphics which was evident that Fiery continues to be the industry standard in term of color management, digital workflow and image processing. And as one customer in Las Vegas shared, Fiery technology has enabled us to greatly increase our productivity and efficiency. Color requirement, personalized content, the Fiery ended all of these demands with ease.
One new area of growth for the Fiery, that we are really excited about is that Fiery for Cretaprint, which we introduced at Tecnargilla and will start shipping in 2013. The use of Fiery content (ph) is an incredible differentiator for Cretaprint. Fiery allows for proofing a design on a paper and then printing the tile, which is a revolutionary development in the flowing space.
This new process saves inventory and minimize risks, increasing efficiency and decreasing working capital needs for our customers. While we expect Fiery results in Q4 to increase from Q3, the ongoing impact from the issues outlined above will result in roughly 15% revenue decrease over the prior year.
Shortly after the end of the quarter, we closed a small technology acquisition in the Productivity Software space, Online Print Solutions has some from Key Cloud technology that allows for a print provider to set and maximize a web content.
In fact, the acquisition pipeline across both software and Industrial Inkjet is becoming busier. We are seeing an increasing number of motivated sellers, who are more realistic and rational about pricing. We continue to explore opportunities, while utilizing the same discipline on pricing, due diligence and strategic and culture fit we have shown in the past acquisitions.
We believe there will be good opportunities in the coming quarters to strengthen our software Industrial Inkjet segments, as well as unique EFI ecosystem, while leveraging the customer base, technology, go-to-market and industrial structure we currently have in place.
At the same time, as you all know, we are returning cash to our shareholders, with a $100 million share buyback, which we began executing upon, following our announcement in September. We are funding it partly through the proceeds of the sales of our building, which would close shortly.
In summary, our strategy and direction remains valid and on track. We are using innovation and focused execution to continue to grow and increase profitability despite market conditions. When we make our customers more efficient and help them enter new opportunities with innovative products and industry leading technology, they win and ultimately we win. EFI has continued to perform despite the economy and our optimism continue to grow as we look to benefit in the coming quarters from the all new products just discussed.
For the short term, in Q4, we are expecting another solid quarter with all-time record revenues, despite the fact that we are still seeing the impact from the economy, mainly in Europe and the lack of new Fiery products. We anticipate revenues will be between $165 million to $170 million and EPS of $0.34 to $0.36.
Now, let me turn it over to Vincent.
Thank you, Guy and good afternoon everyone. Revenue for the third quarter of 2012 totaled $154 million, up 5% from the prior year. We got a non-GAAP EPS of $0.28, up 12% year-over-year in a challenging business environment, especially in Europe. Our diversification strategy and growth strategy are paying up with our direct sales force driving Industrial Inkjet growth of 33% and Productivity Software growth of 13% year-over-year. Combined, those two high growth businesses amounted to 67% of EFI total revenue, compared to less than a 50%, just 18 months ago.
Revenue from our international operations, another key dimension in our growth strategy, represented 52% of EFI total revenue, up 14% year-over-year this quarter. Finally, recurring revenue amounted to $43 million, up 19% year-over-year.
Now let me go into more detail stating with revenue by business segment and region. The Industrial Inkjet segment generated $79 million of revenue this quarter, up 33% year-over-year and contributed 51% of total EFI revenue. We showed double-digit growth rates across all of our product lines building on the analog to digital conversion in display graphics, labels and ceramic tiles. Due to the markets anticipation of Cretaprint third generation printer launch at the end of September, Cretaprint revenue was slightly down on a sequential basis.
Once again, we saw steady demand for our ink with a strong finish in September, delivering 30% growth in UV Ink volume, driven by a growing installed base. This was the 12th consecutive quarter of over 20% UV Ink volume growth.
The Productivity Software segment produced revenue of $24 million, up 13% year-over-year and contributed 16% of total revenue. While we are pleased with the ninth consecutive quarter of double digit year-over-year growth, we saw longer sales cycles than we initially anticipated. Some of the deal delays were driven by the Graph Expo Trade show early in October this year, compared to early September last year.
As expected, the third quarter of 2012 was particularly challenging in Fiery, with the demand impacted by economic headwinds and the timing of the new product cycles. Fiery revenue amounted to $51 million, down 24% year-over-year and represented 33% of Q3 total revenue, compared to 45% 12 months ago.
Throughout the quarter, we focused on maintaining lean inventory in the channel as we’re preparing for the next product refresh cycle with our printer manufacturing partners. As Guy mentioned, we are also continuing to leverage the Fiery brand and its product leadership to create a differentiator for our Industrial Inkjet solutions.
By geography we saw a strong demand for our product in emerging markets, especially in Asia offset by a challenging operating environment in Europe. Revenue in EMEA amounted to $41million, a decline of 12% year-over-year, compared to 24% growth a year ago and 21% growth last quarter.
In addition to the difficult micro economic environment in Europe, we are also navigating successfully through the shift of the ceramic tile industry from Southern Europe such as Spain or Italy, toward emerging markets like China or India.
In Asia, revenue amounted to $26.5 million, up 68% year-over-year with triple digit growth rates in China, India and Indonesia, These three countries generated over 40% of our APAC revenue this quarter, versus less than 20% a year ago. Finally revenue in Americas grew 2% year-over-year at $86 million, with strong growth from the Industrial Inkjet and Productivity Software segment.
Looking forward to Q4 2012, we expect revenue in the range of $165 million to $170 million. This outlook is based on growth of 15% to 20% year-over-year for Industrial Inkjet and approximately 15% year-over-year growth for the Productivity Software segment. The Fiery revenue cycle will drive a year-over-year decline of approximately 15%.
Now moving on to gross margin, non-GAAP gross margin for the third quarter was 54.1%, down 250 basis points year-over-year due to the continued expected revenue mix shift towards Industrial Inkjet. Non-GAAP Industrial Inkjet gross margin was 40.3% in Q3 2012, up 70 basis points year-over-year driven by cost reduction initiatives and successful execution of cost synergies in Cretaprint.
In the productivity software segment, non-GAAP gross margin continues to increase on a year-over-year basis, as we scale the business resulting in 71.5% for the quarter, up 100 basis points year-over-year. Finally, non-GAAP Fiery gross margin held relatively steady at 67.4%, down 10 basis point year-over-year. Going into Q4 2012, we expect the overall gross margin rate to be approximately in line with Q3, based on our revenue mix outlook.
Turning to operating expenses, we were promptly (ph) managing our customers in front of a challenging environment, which enabled us to deliver $3.7 million sequential decline in our non-GAAP OpEx. The key drivers of the sequential decrease are lower Trade Show expenses, lower valuable compensation and targeted cost reductions. Non-GAAP OpEx of $66.7 million was slightly lower year-over-year despite acquisitions and represented 43.3% of revenue, a decrease from 45.4% of revenue a year ago.
Non-GAAP R&D expenses were $27.7 million, representing 18% of revenue, compared to 19.2% a year ago. Non-GAAP sales and marketing expenses were $29.5 million, representing 19.2% of revenue, down from 19.8% a year ago; and non-GAAP G&A expenses were $9.4 million, 6.1% of revenue compared to 6.5% a year ago.
Please note that we excluded from our non-GAAP operating expenses, a $1.8 million restructuring charge, linked to our cost reduction actions.
For Q4 2012, non-GAAP operating expenses will be slightly up sequentially, driven by two key Trade Shows Graph Expo and SGIA and our normal historical seasonality with our spend, partially offset by the Q3 cost reduction action taken.
Non-GAAP other income and expense was a net gain of $1.6 million, including a favorable currency impact of approximately $0.02 per share. This favorable currency impact was offset by an unfavorable tax charge of approximately $0.02 per share, driven by a changing our assumption related to the Federal R&D tax credit.
Up to now we had assumed that the U.S. Congress would renew the credit retroactively back to January 1st, 2012. Under that assumption our Q3 tax rate would have been approximately 22%. However, after waiting 10 months, the U.S. Congress has still not renewed this credit; therefore we reversed our view and took a more conservative approach assuming that it will not be renewed for 2012.
As a result, we booked an incremental tax charge of about $0.02 per share, bringing our non-GAAP tax rate this quarter to 27.1%. Assuming that the R&D tax rate will not be renewed, we are modeling Q4 non-GAAP tax rate at about 27%, based on our current revenue mix outlook.
Please also note that we have excluded from our non-GAAP tax rate, a benefit of $9.7 million, due to a release of a tax reserve related to 2007 and 2008 activities. This explains that the GAAP tax rate of minus 141%.
As a result of our Q3 performance, we delivered non-GAAP EPS of $0.28, compared to $0.25 per share a year ago. For Q4 2012, we expect non-GAAP EPS of approximately $0.34 to $0.36 per share, assuming today’s foreign exchange rate and the R&D tax credit not being renewed, which will present approximately an additional $0.02 unfavorable impact per share, compared to our prior assumption.
Turning to the balance sheet, total cash, cash equivalents and short-term investments amounted to $192 million, flat from the prior quarter, with cash generated from operations offset by stock buyback and other financing activities.
Q3 2012 cash from operating activities was $7 million, with overall working capital at 74.6 days. Accounts receivable was $123 million, down $2 million sequentially resulting in DSO of 73.4 days. Accounts Receivable was impacted by product mix, growth in international markets, intra-quarter linearity and the overall challenging business environment.
When it came to competitive sales opportunities, in some cases we favored extended payment terms for credit worthy customers over incremental discounts, enabling us to maintain solid profitability at the expense of slightly longer DSO’s.
Our net inventory balance was $64 million, up $2 million sequentially in raw materials and work-in-progress as we ship for the ambitious new product cycle in our Industrial Inkjet categories. This resulted in inventory turns of 4.4.
In Q4, cash flow metrics should sequentially improve but be below last year’s level. Our total diluted weighted average share account for Q3 2012 amounted to 48 million shares. We started to execute on our buyback program in September, buying approximately 6 million worth of shares, which did not materially impact our weighted diluted share count this quarter.
Finally, we are on track with the sales of our headquarter building in Foster City and expect to close a transaction in a few weeks for approximately $3 per share net of tax. This concludes my comments and now Guy and I will be happy to answer your questions.
Operator we’ll take questions here please. Operator we’re ready for questions.
(Operator Instruction) Your first question comes from the line of Shannon Cross. Your line is now open.
My first question is with regard to Europe and some of the trends you saw there. I’m curious if things worsen during the quarter there, if there were certain countries that were weaker just any color you can give us on it and sort of how are things looking now, that would be very helpful.
Sure. So, it’s tough to judge Europe over time in Q3 because July and August are traditionally pretty slow. But what we saw in September is really a lot of hesitation for people to commit capital especially in the Western Europe. Obviously, the Southern part is weaker than the rest of Europe. Eastern Europe is fine, so far from our perspective. So it definitely got worse than we saw it in Q2.
Now, when you talk to customers, when I look at the Ink consumption, they are not bad, customers are doing quite well; maybe not as good as customers elsewhere in the world but certainly growing the digital part of the business, but back again hesitation to commit capital in many cases, they are growing up to make decisions, in some cases take longer to secure financing and that was across the board, wasn’t just for the Inkjet, was for Software was well. Though we did okay in Software we were expecting a lot more and same for, of course, the Fiery numbers were worse in Europe than anywhere else in the world.
And then just one more question from macro standpoint, than I’ve got a couple of more? With regard to China, I’m just curious, you talked about strength in the immerging markets but did you, sort of what’s the demand for products like your Inkjet product in China?
Actually, pretty good. Our customers in China’s history to see that there is still a lot of money going to advertisement, to get consumer to buy, I think that part of China feels really healthy for numbers, obviously I know that some of the manufacturing in China are going down but that’s less of an impact for us. We saw a little bit of the pose on the side of Cretaprint, compared to prior quarter still a great result but we attribute that really to the Trade Show at last the week of the quarter, at the Trade Show and after the trade we got a fantastic funnel and a lot of opportunity. We closed deals last week of the quarter and afterwards. So although, we’re very pleased with China across the board, maybe Fiery was a little weaker than year ago, but still pretty good.
And then can you talk little bit on the Fiery side, they coming refreshers (inaudible) has one, that's probably next year I think but Canon’s later this year, I think you guys put a couple of products when you got the Konica 100 page per minute device. So, you see this as a trough, you expect to see improvement again there or do you think that pressure in Europe you is just too great.
Yes, definitely the trough of the Fiery side, we’re already expecting improvement in this quarter without really impact from new products and when we work with four or five partners of course it’s difficult for me to tell you what each partner is going to do, that they like to keep it highly confidential until they launch it. You saw the KM 100 PPM. That is coming, obviously we’re working very closely with them, as well with all of the other partners and I think the level of inventories probably will feel low, if not historically low, based on all the indications we have with our partners. So that clearly will help us to go up from here.
And then my final question for either one of you is just with regards the cash that you have, I know it never burned a hole in your pocket but you're about to have a whole bunch more. You have the share purchase authorization in place; Have been any discussions on dividend where you’re thinking about with acquisitions, just anymore color on cash?
Yes. So as we said, we except to close the sales of the building in a few weeks and that will obviously increase the current cash balance pretty well. We got the buyback program open too. We start to execute that in September, depending on our -- we have a (inaudible) in place and that may go at a certain rate. And then frankly a lot of the discussion along the M&A opportunities, we have M&A per share with all of you. In software the opportunities are there, small acquisition tucked into the portfolio, you’ll see us continue to do that obviously on an opportunistic basis, but very active in that area. And then on Inkjet we’ll continue to look at different opportunities to continue to expand our addressable market.
But Shan, just to reinforce what I said, no hole in our pocket, I know there’s another $180 million away, hopefully very soon. We’ll continue with the buyback. We’ll continue to be very disciplined on which targets we go after, the due diligence we do, how we negotiated the deals and how we integrate that and who we pick and who we don’t pick and there’s a lot more companies we decide not to buy compared to companies we decide to buy. My point was that, just seeing a lot more targets recently, people are much more motivated, they're much more reasonable smart evaluations and the opportunity to strengthen the segments really and especially the Software and the Industrial Inkjet, via acquisition as well as organic growth is very good right now.
Your next question in queue comes from the line of Ananda Baruah. And the line is open for you now.
I guess couple of things if I could. Vincent, I guess on the December quarter rev guidance, I think by my calculation it’s up, 9% sequentially, which is pretty close to sort of, I guess you want to take a typical seasonality, yet you know it’s a softer environment out there. So could you us a sense of and then Guy, I think you made a comment you're not really expecting to see much benefit in controllers from new engines. I guess, maybe clarify that, if I heard that incorrectly, but I was wondering if you could give us a sense of how much of that growth do you think is coming from new products versus, where I guess we might just consider like seasonality since it’s a pretty solid sequential growth number.
Yes. So Ananda, historically we have been growing sequentially going into Q4 at around 8% to 10% in the product segment I think you mentioned it. You pick the midpoint of the guidance, you’re on 9%, obviously Europe was a difficult environment in Q3. We integrated that into our forecast and do plan for somewhat a similar environment, obviously nothing deteriorating a lot worse but not getting better too fast either.
If you look at by segments, I would say Software is probably on the high side in term of sequential improvement, we have a very strong funnel and we feel good going into Q4. Fiery is probably an Inkjet, somewhat at that midpoint. So there is definitely the factor of going into Q4. Now, obviously new products will help and we don’t separate a lot if those two factors, as we forecast, we will look at the opportunities that are in our funnel.
Ananda, I can just add the new products as once we hang up the phone here, we both Vincent and I, after a few calls, we are going to rush to the airport flying to SGIA, great show in Las Vegas, where we introduce a couple of those new products from the Inkjet. So while, from our partners on the Fiery side, it’s probably, it’s a 2013 story, we are starting now to see the benefit of new products on the Inkjet side, our new products in the show of Cretaprint the tiles we show, the next generation Cretaprint, we will start to ship it sometime mid-quarter this quarter and we already have orders and very good demand. So we would see definitely benefit that will offset the economy and the environment from our own products in Q4.
Guy, I think that’s helpful, and you’ll probably talk to this in a couple of weeks at the Analyst Day, but do you still think you are benefiting meaningfully from share gains? I know that was the theme, kind of the year ago at the Analyst Day.
Yes. So it’s easy to track them on annual basis than on quarterly basis. We feel pretty good about the share. Certainly Europe wasn’t a share gain. We win days, we lose days, we won more than we lose. I think across the board we feel pretty good about the share.
And I guess it sounds like you are running inventory pretty lean. I doubt that many folks who are going to buy too much ahead on the controller front but are you expecting any benefit from, you know, let’s call it a channel sale or do you think you will be selling demand for the most part?
I don’t see that happen in Q4. Normally in Q4 people are very tight in inventory. They want to finish the year, their targets and the inventory is already lean. People need to feel more confident to buy a little bit more ahead to change that, but maybe next year with new products there are an opportunity to do, if people feel a little bit more confident, they would go back to the inventory levels we saw 3 or 4 months ago.
Last one for me and then I’ll get back in the queue but where are you guys right now on the European Software expansion. I know that’s kind of been a theme for you as you move through the year wanting to sort of drive, guess that’s sort (inaudible) opportunities in Software. I think most of the growth you have been driving has actually becoming in the U.S. So could you just give us an update on where you are there and I guess, if you’re just getting started, I guess, how quickly you think you can ramp into Europe?
No, we started around about 18 months ago. So on a Graph Estate (ph) state we (inaudible) Europe this quarter, but our expectations were much stronger growth then we saw, given the opportunity, given the fact that we would not really in Europe until 18 months ago. So, it’s going nicely, it could be a lot better in a normal environment. That irony here is that actually customers are saving money once they buy the software and we see it over and over. They just need to make a decision to go and invest. Some people do it, some people are still reviewing and reviewing and reviewing the outline but it’s still going to be growth, because we’re coming from a very low base, now number one in share, but nowhere near the penetration we have in the U.S.
And if I can just add that, when we look at our growth strategy for Software business it’s really international, right with both metrics in Brazil in April of this year and that’s doing really well for us. Last year we bought Prism in Australia and we feel that we have a lot of opportunity both in Europe and in other places outside of the U.S.
And I guess, yes, definitely familiar with that, sort of strategy to grow software outside of the U.S. Maybe I was under the wrong impression; for some reason I thought that the growth you have actually been driving in recent quarters has been more so inside the U.S. than in Europe, is that incorrect? Has it really been coming from outside of the U.S., the growth dollars in Software?
No, also from outside in the U.S. we’ve had double digit growth but we have been also growing outside and so are not just mainly in the U.S.
Your next question comes from the line of Keith Bachman. Your line is open now.
A couple of question. Just, Vincent, I want to go back to cash flow from ops. It was a down quite a bit on a year-over-year basis, turns down, DSOs up. You mentioned you had extended some credit. The days were up quite a bit. Is that going to permanent part of how you are thinking about this business? In other words, are you going to continue to extend some credit there at the expense or instead of I should say lower cost, but I’m just trying to figure out what’s a normalized cash flow number look like for the company now?
I understand. So let me give you a few thoughts here. The first one is, we had guided Q3 somewhat in line, slightly better than Q2 and we came, $1 million shorter than Q2. So while it is a little bit weaker, it’s not out of the range of what we had in our current forecast. And working capital is really impacted by three or four factors, three mainly and the fourth one. The first one that happened in January is the fact that we added Cretaprint, which had a lot longer sales cycles and while we can work trying to reduce those, there is definitely an industry dynamic that we need to take into consideration. That’s one and I’ll answer your total question in a minute.
The second one is this rapid transaction in our portfolio mix from Fiery which has a lot shorter sale cycle and direct business, which has a longer sales cycle. So, that’s a second impact. The third one is really our gross strategy going into immerging markets and while we feel really good in term of credit quality et cetera, in many cases these are backed up by letter of credit, customer has the time to pay just because it takes a long time just to shift there versus the U.S. and so that also impacts the DSO.
And then the final one which frankly is less in term of the total delta versus a year-over-year is the economy. To answer or go back to Shannon’s first question in Europe, we’ve seen a few customers that are very big customer in credit applying for lease or financing from the banks and that process took longer than when they seem usually. In those kind of cases, we gave them extended payment terms like Net 60 or Net 90 to give them the time to close their lease with their banks, right. And we do that within our current credit environment, so we review the credit ourselves et cetera. Because of the weakness in Europe, we do plan to continue that process in Q4 and support the demand out there in their in that way.
What kind of cash flow you think you’ll do in Q4?
Yes. So, when it comes to cash from operation in term of generating them from the business, we’re not moving away in terms of the long term model target to generate cash from operations at about one time operating profit. However this year being a year of transition, we’re impacted by that, at one point in time the cash is still tied up in the inventory but will continue to improve.
And then secondly to answer your question around, what do I expect in term of DSO for the whole business, it really depends on the revenue mix and what you assume but by business Inkjet versus Fiery versus Software we will continue to improve from where we are today. So, now to you answering Q4, we do expect better cash flow than in Q3 but it will still be below the $29 million we had delivered last year.
Okay. Turning to geography for a second, how is that Fiery revenue recognized on a geographic basis? In other words, we can understand how Inkjet is and Software, it’s where the ships are but when you ship to Xerox and what not, how is that distributed across the geographies? How is that revenue recognized?
Fiery is the most balanced in term of the revenue on a global basis. There will ship them to and sometimes we ship on a global basis and then there we distribute to the distribution center to each of the region, but I would say it's fairly balanced. We've seen a higher decline in Europe over the last 12 months in Europe and U.S., while in Asia or China we have seen actually growth last quarter, this time a lower decline than the global rate. So I would say a little bit of a shift towards Asia, but that's minimum. Overall, we're pretty well spread, aligned to a GDP type of metric.
Excuse me, (inaudible) what is to what (ph), as normally different part numbers, different localizations and so on, so unless 07 and somebody that insist to have Italian screen in the U.S., most likely when they order Italian system for Italy as well.
Okay. Well, my last question then perhaps, Guy is for you. As you think about Fiery, you mentioned there are some product cycles coming up. This has been a pretty rough year for Fiery and can this business grow in calendar year '13 is a short way to say it. Obviously the compares are easier, you have some products, but what's your confidence when we turn the page here and look at calendar year '13 as a positive number for Fiery?
So I'll start with what I must say that we don't talk about 2013, but to this specific question, looking at what I know today and the numbers we have in 2012 and the orders now for 2013, I would be personally very disappointed if Fiery doesn’t grow really. I mean we have all the things that historically help us to grow the business. Now we know this economy get a lot worse than all of the things that are not in our control but first if you look historically on how this business performs, that should perform well.
Your next question in queue comes from the line of Jim Suva. And our line is open for you now.
Hey, congratulations gentlemen, this is Auxi (ph) on behalf of Jim. Very quick question on the Inkjet, forecasting growth of 15% to 20% year-on-year in that business, how should we think about the trajectory of that going into 2013, keeping in mind that it has now posted three good solid years of double digit growth? How long is this runway of double digit growth as you see it?
I see that I open a can of worms with answering Keith about Fiery in 2013, now I'm getting question about Inkjet. We are not commenting 2013, but I tell you we’re super excited about the opportunities in Industrial Inkjet. When you look at what customers are using those places, to print on things that’s specially not paper, that have no replacement with iPad or iPhone, materials, plastic, metal, glass, big vinyl, textile, tiles of course, labels, packaging, all those things are stable or growing in consumption and there is definitely a shift toward digital. In many of those areas we are the market leader and the Ink volume about 30%, in a tough environment showing you the customers are just needing more capacity. So we feel pretty good about where we're going with Inkjet, we conduct Inkjet going forward. And welcome to the call by the way.
(Operator Instructions) Your next question comes from the line of Ananda Baruah. And your line is open.
Just a quick follow-up; I guess rest of the world revenue doubled sequentially, essentially. I know you know you guys commented on the strength of China and India and there is one another country,
Indonesia, can you just talk, I guess Guy, about the sustainability of those growth dynamics, given the big increase sequentially and what, I guess even though economies there are softening. So it feels like kind of more like you guys are seeing Greenfield even in the softening economy. So can you give us some sense of what we should kind of expect from those three countries going forward?
Ananda what are you seeing in those markets, better appetites for high quality advertisement, other form advertisement or declaration like tiles or fabric and with that we are hoping those advertisers to get to market faster with higher quality. So even if there is less spent, or less growth and spent, actually all those markets are growing overall, maybe not at the same speed they grew before, there is definitely better appetite to the kind of the products that we bring to market and the applications our customers can do with that. So maybe people build less houses in China or offices but they really want tiles that will print digitally to their specifications. So, we think that will continue with many, many years ahead. This is just a beginning and there is a lot of consumer though that purchased more and more things that the products company would like to get their attention.
Which of the products, I guess the inkjet products that are, I guess are you leading with over there or doing the best over there?
We think it is doing quite well in emerging markets and Cretaprint is doing quite well in emerging markets. So as we said Q3 was a little bit of a poll, because of the new product refresh, but Q4 will be strong. Label printing is something we did not focus on emerging markets so far. We are focusing on probably the benefits in ROI and we’re seeing that now in Europe, in the U.S. and we are pretty close to launching it in emerging markets as well.
Your next question comes from the line of Morris Ajzenman. And our line is open for you now.
A quick question on software; revenue is up this quarter 13%. You have been running stronger rates in the past and you did touch on Europe did have an impact. Anything else beyond that, you have a rebound in 15%, but you had strong both organic and total growth with acquisitions. 15% sustainable, is it more of functional -- again anything in this quarter beyond Europe and any sort of target of the growth rates you think this thing should sustain that?
So Morris, anytime we grow any segment of the business we are happy of course. We expected frankly slightly better than 13% overall, given the pipeline we had. I would tell you that last week of the quarter, some deals we thought we will close, the customers as we need one deal on the ROI, there’s another (inaudible) before we sign, just another level, another layer, another step. We wanted to do other demo, not backing away but just taking more time to make the decision which I think is just the cautious, not just in Europe, even the U.S. people are hesitating to deploy capital, even it’s for software.
So, that kind of the overall theme. Since then, we close more deals in October, the funnel went even higher, as far as how many people are interested in that, it’s not surprising to us because this industry definitely need efficiency, continued efficiency. So I think we’re going to see pretty good growth going forward. Closely it’s tough to guess on a quarterly basis but we have tremendous opportunities also.
Okay. And the last follow up to that question. You talked about acquisition targets become more realistic. I presume it’s especially in software because that’s always I guess could be a pricy acquisition, you know small acquisitions, otherwise in this case in that example also becoming more realistic in what they’re asking for?
Yes. I think the answer is yes. Smallest, we have seen people that we follow for some time that they are all much more reasonable talking to us, calling us back. We try even those, those deals are small and on a deal basis they would not make any difference to basically a five we think about in aggregation. So, we don’t want to pay 10% over what we should pay on every deal because in aggregation it would be a lot of money. But I would also want to say that we are seeing some good deals in the Inkjet space, as again nothing beyond what I said all along that we want to strengthen the spread, the segment making sure that we have great products that consume a lot of ink. So, we are looking at nothing concrete but it just the funnel M&A in those two segments is stronger than we have seen before.
And I’m sorry, I do have one last question; this one for Vincent and this is the last question. Getting back to the cash flow generation operations, I know you guys don’t like discussing next year out but let’s talk broadly again, get working capital really; there has been a big run up on working capital support, inventories, accounts receivable. Would that be specific? Should we see a meaningful improvement in that working capital into next year based on things unfolding the way you hope they do?
Yes. The answer is yes. Obviously our focus is by segment, as Guy mentioned we differently will not see the same deterioration in Fiery next year than we’ve seen this year, which was a big driver of the 15 working capital for this current year. So, we’ll continue to improve next year working capital on a by segment business and that will be slightly offset by continued mix shift going towards the high growth business, Inkjet in particular.
(Operators Instruction) And your next question comes from the line of Keith Bachman. Your line is open now.
Label business; can you give us an update on any metrics there; percent of total Inkjet or how you’re thinking about the business in terms of adoption trends with customers, seeing traction? Throughput seem like Canon or HP (ph) was further long in terms of the quality of print but even competitive dynamics on the label part of the business?
So we try not to break too much the data of Inkjet for competitive reasons, but I would tell you we've seen better traction. We have a new platform that is very modular, it can start with lower end and add the laser cut that we are uniquely integrated into our system. So it's complete process and then we're going to go to 13 inch label early next year which has a lot of demand, great feedback when we introduced it in September. So all those are very encouraging.
The metrics I can share with you is what we said, I think on Dupa (ph) timeframe, I think we issued a Press Release with the ink consumption on the Jetrion, which was up if I'm not mistaken 90% year-over-year. What we think, the fastest growth in ink is actually in the label printer. So people take it, they're cautious; they don't know if they can get the business, to more customers to short run. Take them few months and then customers get used to the fact you can order the label, the customers show up, you can drive and get in two hours later, their business is booming. So we have customers not buying the second, third, fourth printer, but it's more a matter of education conservativeness in this industry to move to digital printing. HP is our number one competitor. They have very different products based on their different technology. Its toner based. Ours is inkjet. We fundamentally believe that as for packaging, Inkjet is the solution. So we have advantage there today and in the future. But in general since only 1% of this market is digital, every time that HP make a push marketing wise or tradeshow announcement, they're helping drive interest to digital, which is good.
So I want to thank everybody for joining us today, and thank you operator as well. Once again I want to thank the shareholders for their trust in us and of course I want to thank all of our employees for their hard work that allow us to accomplish those record results. We look forward to the year and we will talk to you some more soon. Thanks a lot.
Ladies and gentlemen, thank you for your participation on today's call. You may now disconnect.
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