Electronics For Imaging's (EFII) CEO Guy Gecht on Q2 2016 Results - Earnings Call Transcript

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Electronics For Imaging Incorporated (NASDAQ:EFII)

Q2 2016 Earnings Conference Call

July 25, 2016 05:00 PM ET

Executives

JoAnn Horne - Head, IR

Guy Gecht - CEO

Marc Olin - CFO

Analysts

Shannon Cross - Cross Research

Ananda Baruah - Brean Capital

Katy Huberty - Morgan Stanley

Jim Suva - Citigroup

Joseph Wolf - Barclays Capital

Joan Tong - Sidoti & Company

Presentation

Operator

Good afternoon. My name is Shelby and I’ll be your conference operator today. At this time, I would like to welcome everyone to the EFI Second Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

JoAnn Horne, Head of EFI Investor Relations, you may begin your conference

JoAnn Horne

Thank you, Shelby and thanks everyone for joining us today. Joining us for the today will be Guy Gecht, ESI's Chief Executive Officer and Marc Olin, Chief Financial Officer. Before management’s remarks, let me review the Safe Harbor statement. During the call today, we’ll be making forward-looking statements, which are statements in the future tense and statements other than historical facts, including but not limited to statements regarding our strategy, plans, expectations, market trends, product innovation, new market opportunities, and acquisition strategy, as well as estimates in our projections of revenue, operating profit, growth, EPS, gross margin, cash flow, market share, and demand for our products, productivity, operating expenses, tax rate, working capital, and any statements or assumptions underlying any of the foregoing.

Forward-looking statements are statements of risks and uncertainties that could cause our results to differ materially or cause materially adverse effects on our results. Please refer to the discussion of risk factors that may affect future results included in our SEC filings and the press release. We do not undertake to update in light of any new information or future events.

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

I’ll now turn the call over to Guy Gecht, CEO of EFI.

Guy Gecht

Thank you, JoAnn and thank you all for joining us this afternoon. EFI posted another solid quarter despite global turbulence in the last week of June, which impacted customers’ willingness to close deals, especially in Europe and caused currency volatility. In fact, based on a normal pipeline conversion rates, we had sufficient pipeline at the quarter end to outperform our expectations, but presumably driven by Brexit, we saw much lower close rates than in recent quarters.

As the initial reaction to Brexit has settled down, our momentum has resumed and our sales force is very active working through opportunities. The strength we are seeing in our direct businesses keep us on track to achieve $1 billion revenue target by year-end, with EPS most likely at the low end of our target of $2.45 to $2.60 due to the prior year headwind, which I will discuss shortly. At the same time, I'm very pleased with the team’s success in improving a number of financial metrics, in particular inkjet gross margin and cash flow. Cash conversion has been a companywide focus, and I look for a continued progress on those two forms in the second half of the year.

Now taking a closer look at each of our segments, overall Industrial Inkjet had a good quarter. Once again we saw strength in textile, ceramic tiles and display graphics of Signage. Ink grew 42% on an apples-to-apples basis, if we include the acquired companies ink volume before they were part of EFI. We were especially encouraged by the record growth in [Creta] ink sales which crossed the $2 million level in Q1, 3 million this quarter and we are on track to cross 4 million in Q3. I believe that our outlook for Q3 of 15% or higher growth is a good indication of the strengths we are seeing in the Industrial Inkjet business, along with a record pipeline for September quarter. Keep in mind that since we have just completed the first full year since the acquisition of Matan and Reggiani, this quarter’s Industrial Inkjet results will reflect primarily organic growth.

Productivity Software posted solid results in Q2. One area we’re seeing great uptick is with our productivity suite for packaging, which is a focused market for us given the upcoming launch of our Nozomi platform. We are also excited about the acquisition of Optitex at the end of the quarter. Optitex is an innovative market-leading software application that shortens the time from design to production in textile, and is a key enabler in the adoption of fast fashion by brands around the world. You probably noticed that most of the payout to the Optitex shareholders will be an earnout. Tied to very ambitious growth targets, this structure reflects our belief that Optitex brings to EFI a unique application and when paired with our Reggiani Printers creates a unique ecosystem in textile market. This recreates what we have done in other markets, which has long been a key to EFI success.

Similar to Industrial Inkjets the pipeline of deals in Productivity Software is at all-time high for Q3, with many deals already at advanced stages. All of these factors would have provided the momentum for strong Q3. However, we are facing headwinds entirely this quarter. There are two main issues that bring down our focus for the quarter; first, while we always anticipate that there could be a product introduction delay from a partner, we are seeing a number of partners push back the release of new engines. The second factor is that the excitement around new inkjet production previewed at Drupa which won't be available until next year, seems to have delayed some purchasing decisions.

We believe that the first factor will be largely resolved by Q4 and based on our review of pipelines with our partners, our current internal Fiery focus is pointing to revenue improving to roughly flat year-over-year for the December quarter. In terms of the second factor, we expect to see those new revolutionary inkjet presses from our Fiery partners to start hitting the market in 2017 and with that resolve the freeze situation for customers waiting for those new digital presses.

Let me spend a little more time discussing more development at Drupa, as it was the real highlight of the quarter where EFI’s innovation and technology leadership were again on display. And if Drupa was the highlight of the quarter, perhaps the highlight of the highlight was our introduction of the very powerful and versatile Nozomi platform. This platform is targeted first at the corrugated packaging market, which is the largest segment of the 525 billion packaging market and far bigger than any segment we are addressing today. We could not be more excited about the reception to the Nozomi single pass LED platform, which will print up to 9,000 corrugated boards an hour.

While not targeting the display graphics market yet, we also saw healthy interest from high volume display graphics customers, who love the speed and quality. The Nozomi platform combined with the productivity switch, along with Fiery will enable us to quickly build out a strong ecosystem to serve the corrugated packaging segment as it moves to digital printing, digital posters and on-demand manufacturing.

In Drupa, we’ve started taking orders to allow strategic customers to guarantee their delivery within the first 12 months of the product production. After we passed our target of 10 orders, we quickly realized that we need to go back and re-think our production capacity for this project as it seems that we may soon exceed our capacity for the first deal. We now have plans to increase capacity and although we’ll start slowly with the first couple of beta units, we believe that when we get to commercial availability around mid-2017, we will see a healthy market demand.

Another highlight at Drupa was the permanent position of the Fiery with two new Fiery platforms launched; the first will drive the exciting new inkjet printers I mentioned earlier, currently under development by Xerox Scanner and Landa as well as our own Nozomi. The second Fiery platform will be driving the toner based engines from our partners. Overall there were no less than 43 Fierys in use at our partners and EFI booth at the show. Drupa also marked our most successful ever trade show for software, while we typically expect trade shows to build demand for future sales of Productivity Software, we actually saw a record level of sales activity take place at the show. Helping to build the record Q3 pipeline I mentioned before.

We saw a strong reception to our version 4 release of the productivity suites in all segments, including commercial and publications, and especially strong interest in our packaging suites. So although Drupa did a great job filling our pipeline for the second half of the year, our balanced business model allow us to use this strength in our direct business to offset the temporary weakness in the Fiery and still achieve our $1 billion revenue targets.

With that in mind let me turn to our outlook for Q3. For the current quarter, we are seeing a tale of two cities. Our direct business has a very solid pipeline and good momentum. Yet at the same time the current Fiery situation is tempering the overall company outlook for Q3. In terms of revenue, we're expecting $245 million to $250 million representing a growth rate of 7% to 9% or 8% to 11% growth using Q3 of last years’ currency rates and $0.55 to $0.60 per share in non-GAAP EPS representing a non-GAAP EPS growth of 10% to 20% without currency impact a growth of 14% to 22%.

In summary, our Q2 performance was solid and we believe that our results again prove of innovation, balanced product portfolio and ecosystem enables EFI to maintain consistent growth. Regardless of the many challenges impacting our market, the global economy as well as the current headwind in Fiery, we expect solid second-half even if the product mix maybe different than what was our original expectations.

With that let me turn the call over to Mark.

Marc Olin

Thank you, Guy. In Q2 we delivered another strong quarter with record revenue of $246 million up 21% year-over-year despite the macroeconomic disruption that we experienced at the end of the quarter. The Industrial Inkjet business delivered 47% growth year-over-year with the addition of our 2015 acquisition, which performed well in the quarter. As Guy mentioned we saw a significant volume of customers defer deal making at the end of the quarter due to global events.

Productivity Software delivered a solid quarter, growing 8% year-over-year. Fiery was down 6% year-over-year as we experienced weakness around the Drupa trade show a little more than we anticipated entering the quarter. Total recurring revenue was $78 million, up 30% year-over-year and representing 32% of total revenue, a record percentage of total revenue for the company.

Non-GAAP operating profit margin was 13.8%, resulting in non-GAAP earnings per share of $0.56, up 17% year-over-year. The currency levels remained where they were when we gave our Q2 guidance in April as opposed to the significant declines which took place in the value of the British pound and the Chinese yuan during the course of the quarter. We would have delivered $0.58 in non-GAAP earnings and revenue would have been $247 million.

Now let me explain in more detail the revenue by business segment and region. The Industrial Inkjet segment generated revenue of $140.1 million, up $44 million year-over-year, comprising 57% of total EFI revenue. This segment's revenue was primarily driven by the addition of Reggiani and Matan both acquired in Q3 2015 that are in their final quarter before becoming part of our organic growth rate, as well as very strong Cretaprint demand. On an apples-to-apples comparison basis assuming we had owned Reggiani and Matan in Q2 of 2015 this segment would have grown high single-digit year-over-year.

The Fiery segment delivered revenue of 69.2 million, down 6% year-over-year representing 28% of total revenue. Historically, the smallest portion of EFI total revenue Fiery has ever represented. Strong server mix drove another very good quarter in gross margin. However, weak sales for Fiery persisted in China and Asia. Fiery channel inventory remains in the targeted range. The Productivity Software segment delivered revenue of $36.4 million, up 8% year-over-year contributing 15% of total revenue.

Revenue in the Americas amounted to $115.5 million, up 7% year-over-year with minimal currency impact. EMEA grew 47% in Q2 to $95.9 million in large part due to the contribution of our 2015 acquisitions. In Asia Pacific revenue was $34.3 million. Industrial Inkjet sales in the region increased especially in the Cretaprint product line. Despite continued weakness in China in a number of our segments, we did see growth in sales of both Cretaprint and Reggiani printers in the country.

Looking to the September quarter, we expect revenue to grow 7% to 9% year-over-year resulting in revenue of $245 million to $250 million with currency rates of Q4 2015 levels revenue growth expectations would have been 8% to 11%. Included in third quarter guidance is an assumption that currency stay at their July levels, which implies a roughly flat euro of, a 14% decline in the British pound and 7% decline in the Chinese Yuan based upon the current exchange rates as well as the current levels of other currencies around the globe many of which have also declined year-over-year versus the dollar.

This results in approximately $3 million of currency impact in our year-over-year revenue comparison and about $0.02 of impact in non-GAAP EPS. The given idea of the impact currencies, the British pound represented about 6% of EFI revenue in Q2 of 2016 and the Chinese Yuan represented about 4% of EFI revenue in Q2 of ’16. While these percentages due vary by quarter, we wanted to give a benchmark based on Q2 so you have an idea of the scale of impact of the different currencies.

Total third quarter revenue is predicated on year-over-year growth rates of 15% to 17% in Industrial Inkjet with this being the first quarter in which we have an equivalent compare for our Reggiani and Matan product lines. High single-digit percentage decline for the Fiery business and 16% to 19% growth in Productivity Software with the benefit of our strong pipeline post Drupa and the Optitex acquisition.

Moving to gross margin, where I’d like to remind you that all further commentary is non-GAAP unless otherwise noted. Second quarter gross margin was 51.1%, down 270 basis points year-over-year, driven by the increased mix of Industrial Inkjet in our total revenue. Industrial Inkjet gross margin was 35%, up 60 basis points year-over-year with zero impact from currency, as result of our continued efforts to improve efficiency in our manufacturing operations by levering our worldwide platform and the increasing mix of Ink as a percentage for Inkjet revenue.

We are pleased that our efforts resulted in the first year-over-year increase in gross margin for our Inkjet segment since Q1 of 2013 and see this as an important milestone in moving back towards our 40% goal for gross margin in this segment and overcoming the significant currency headwinds we faced over the last two years. Fiery gross margin was 71.3%, up 90 basis points year-over-year. In the Productivity Software segment, gross margin amounted to 74.9%, up 180 basis points year-over-year, reflecting the continued benefit we get as Productivity Software scales.

For the third quarter of 2016, we expect overall gross margin to be 50% to 51% as we have a larger portion of our revenues driven by Industrial Inkjet versus last year. We expect Inkjet gross margins to continue to show sequential improvement from Q2 as well as year-over-year improvement and be in the mid 30% range as we increase our Ink mix, continue to integrate our acquisitions and leverage our global manufacturing platform and our supply chain and manufacturing expertise.

Turning to operating expenses, despite the Drupa show, we kept tight control on our operating expenses. For the second quarter, operating expenses were $91.7 million up 15% year-over-year and comprising 37.3% of revenue a reduction of 210 basis points from the year ago period. R&D expenses were $35.8 million, representing 14.6% of revenue, down from 15.5% a year ago.

Sales and marketing expenses were $41.2 million, representing 16.8% of revenue, down from 17.2% a year ago. G&A expenses were $14.7 million, representing 6% of revenue, down from 6.7% a year ago with no currency impact. We expect operating expenses to be approximately 36% to 37% of revenue for the third quarter.

Strong inkjet and software revenue growth combined with strong Fiery gross margin and operating leverage delivered second quarter operating income of $33.8 million, up 16% year-over-year, bringing our operating margin to 13.8%. Other income and expense had a net loss of $0.9 million, driven primarily by the resulting balance sheet affect of weak international currencies, as well as by the net quarterly interest expense related to our convertible bond debt.

Our static non-GAAP tax rate remained at 19% and we expect this level to continue. Strong operating income offset by continued currency challenges resulted in earnings per share of $0.56 a 17% increase over the prior year, and as I stated previously our non-GAAP earnings per share would have been $0.02 higher had currency remained where it was when we gave our Q2. Looking to the third quarter, we expect non-GAAP earnings per share of $0.55 to $0.60. As a reminder, this outlook assumes our July foreign exchange rates stay flat for the balance of the quarter. It also includes approximately $0.02 per share of quarterly impact from the convertible bond interest payments.

Now turning to the balance sheet, total cash, cash equivalents and short-term investments amounted to $449 million compared to $614 million a year ago. Cash flow from operations was $23 million or 87% of non-GAAP net income for the quarter, a good improvement compared to Q1 but still a 7% decrease over last year, primarily due to $1.6 million in cash that was spent for integration and acquisition related cost for Optitex the software acquisition we closed on June 16th and the more capital intensive profile of our business since acquiring Reggiani and Matan.

Cash flow of $68 million for the last 12 months represented 64% of non-GAAP net income. We were very pleased to see the progress made towards our targeted rate of 90% of non-GAAP net income and cash from operations, considering the more capital intensive structure of our business this year in Q2 versus last year due to the increase manufacturing presence of Reggiani and Matan.

DSO was 78.3 days, up 1.8 days from Q2 ’15. As we indicated at the beginning of the quarter, we expected to see some late activity in the quarter due to the Drupa trade show which took place during the first two weeks of June. This is one of the reasons why we are not able to improve our DSOs as much as we would have liked. However, we did still show positive progress from Q1 with the sequential improvement of 1.6 days.

When comparing year-over-year DSO the increase in our direct sales percentage due to acquisitions and the related payment terms caused AR to increase in the quarter to $211 million. Our net inventory balance was $111 million, down $11 million sequentially, as a result of high of our efforts to improve inventory levels that we discussed last quarter. This drove inventory turns to 4.3 down 0.7 turns year-over-year but up 0.6 turns sequentially.

Stock-based compensation for this quarter was $7 million, which marks a return to more normalized levels as we expect an average of $10 million to $11 million per quarter. In the second quarter, we returned $20 million to shareholders as part of our $150 million buyback program which was put in place on January 1st. Total diluted share count decreased 0.1 million shares to 47.8 million shares sequentially. Our buyback over the prior two quarters increased year-over-year from $22 million to $40 million, comprised of both purchases through our 10b5 program and supplemental buying we did in the open market during periods in which we were permitted and we saw an opportunity to climb in the stock price as we continue to return value to our shareholders.

We also maintain our long-term share count target of approximately 48.5 million shares. As always we would like to conclude by thanking our customers, employees and shareholders for their continued confidence in EFI and we are very excited about our opportunities over the rest of 2016 and the years beyond.

We will now be happy to answer questions.

JoAnn Horne

Operator we will take questions now please.

Question-and-Answer Session

Operator

[Operator Instruction] Your first question comes from the line of Shannon Cross with Cross Research. Go ahead.

Shannon Cross

Thank you very much. I have a few questions, the first Guy, can you talk a little bit more maybe go back through how we should think about Nozomi for 2017? You gave some numbers that I am just trying to think about making sure everybody sort of understands the magnitude or how this will somewhat progress both from a hardware standpoint and then also from an Ink perspective as you start to roll this out?

Guy Gecht

Absolutely, so Nozomi is a new platform and the first target market is the Corrugated which most of us get to touch when we get boxes when online shipping and of course it is something that drove, so people would like this definitely move to on demand personalization the need for digital printing is very obvious there is no great solution yet out. But definitely we got customers so we have been looking for something like that for quite sometimes. So when we introduced it we said this is going to be different configuration up to $3 million at this point we are only taking the high end configuration, the $3 million pre orders those are cancelable because we can't really show the final product to customer, the final quality but people putting deposit in order to guaranty allocations.

We got a tremendous feedback in the show. Our goal was actually to get 10 pre orders so we can kind of log get to by the end of day we kind of log the first deal and we realized we are going to -- significant market opportunity for us to sell. I would also add that while originally we only target the Corrugated market, we got some of our traditional customers for display graphics that said I have the volume in analog that I can shift now almost dramatically or completely to digital, so I want to be part of this first deal allocation on Nozomi and they are in discussions with us. And that is the first application of Nozomi, of course as you mention is going to drink a lot of ink because when you print 9,000 boards an hour, there is a lot of ink that is going to be used it is going to be lower than the VUTEk but as far as ASPs but volume is going to be tremendously bigger than any machine, that we have today in a similar way -- well above that with this kind of momentum and interest. So we went back and relooked at the capacity and the space, we manufacture in Spain and the people where we need came back with a plan with much higher capacity.

We have said that we will start to sell it commercially about a year from Drupa, Drupa was early June so early June next year, we will do better sites before that. And obviously I think we will pass with a very high speed with a customer that warranties to be better sites. And I think after that there is going to be -- it seems to be significant market opportunity for us to sell. I would also add that while originally we are only target the Corrugated market, we got some of our traditional customers for display graphics that said I have the volume in analog that I can shift now almost dramatically or completely to digital so I want to be part of this first deal allocation of Nozomi and they are in discussions with us. And that is just the first application of Nozomi, of course as you mentioned is going to drink a lot of ink because when you print 9,000 boards an hour, there is a lot of ink that is going to be used it is going to be lower than the VUTEk but as far as ASPs but volume is going to be tremendously bigger than any machine, that we have today in a similar application.

And then from there it will we're going to target these other markets of course display graphics is very close to and very similar to Corrugated but our plan is to use it for other segments yet to be announced of packaging and other segments that EFI today is active at that can use this high end platform. Is this -- answer your question Shannon?

Shannon Cross

It does, I guess if you take 3 million you multiply it by something substantially above 10, I mean is it fair to say that could be a $50 million business in the first year or just I guess what would be the -- like the issues with how quickly it could ramp or is that sort of a reasonable way of thinking about it?

Guy Gecht

I think that once we get to really, we have few better sites that are working well and pulled into -- it's working and we are ramping. I think right now how we feel about it to sell 20 units in a year is not a big, is not a huge reach and assumption, the market is there, customers talk to us about multiple machines to begin with.

Marc Olin

Yes, CapEx was a bit up this quarter although again the cash generation was up this quarter as well. The CapEx, most of the CapEx increase would really relate to some of the inkjet investments that we've been doing especially around the Nozomi platform that the -- building those initial prototypes and getting some of that technology in place on the inkjet side both for Nozomi and some of the other innovations that are in the pipeline on the inkjet side is what has been the primary driver of that, I do not expect that level to be the kind of the new normal for the CapEx level of investments that is up pretty significantly over the prior quarter but it's related primarily to inkjet investment in the quarter.

Shannon Cross

Okay. And then my last question is just, how should we be thinking about acquisitions given you've got Nozomi coming, you're ramping Reggiani, you made the software acquisition but what's kind of your feeling in terms of acquisitions and what do you see in the pipeline?

Guy Gecht

So, our business development team continues to evaluate, it remains very active, our goal at this point is not to enter the new market by acquisition, it's just to make the markets we're in a lot stronger. So, to the extent we make our offering to packaging stronger we'll act in this to the extent we can make our offering it makes us stronger like we did with Optitex we'll act on this to the extent we can make any other segment stronger we can act on this. We think between the multiple segments there's such a tremendous future opportunity that all we want right now is to double down on what we do.

Operator

Your next question comes from the line of Ananda Baruah with Brean Capital. Go ahead.

Ananda Baruah

Just clarification for me, Marc you guys commented in the prepared remarks that if things hadn’t manifested, it sound like you really thought it was due to Brexit, etcetera. In the last week I think you said you would have exceeded your expectations and so just context around that does that mean you would have received at the high end of your revenue guidance range and then I have a part B to that question? Thanks.

Guy Gecht

So let me answer that obviously we have an end of quarter being direct business always being back and low that we have an end of quarter process, we have wall women on, so I was looking into this as we got to last two weeks and 10 days. As we had it just before the Brexit vote, our internal forecast gave us a range of the high end of our guidance, the high end of the range we gave you up until above that and of course that's a focus. We don't -- that was assuming a normal close rate of deals and so if you ask us then we would have not seen us coming at the low end of the range as we came in. So with that obviously the close rate and I was looking at that the numbers the close rate in the quarter in the last week were a lot lower than any quarter that I can remember.

Ananda Baruah

That’s helpful and then I guess for that book of business as it was constructed, what would have drop through profile would have looked like, I guess it looked because this just has really great margin, it feels like it was probably at the lower end of your expectations or probably you can still call it in line. If that book of business would have closed as you would have expected given what you saw, what would the leverage look like coming off of it the cost model?

Marc Olin

So that's a -- most the deals that were delayed at the end of the quarter and the pipeline were Inkjet related, so you want to think about those in the context of our Inkjet gross margins obviously there is some variation from segment-to-segment that we don't go into the full breakdown of that. But I think it's overall you should think about in the context of our Inkjet gross margins in terms of the incremental value of the deals that we were delayed.

Ananda Baruah

Got it. And okay we can do that math and then I guess really just two more for me, going to kind of the organic growth expectations back half of the year and then actually heading into ’17, if we sort of do the old slot based on the my organic growth math you sort of have flat organic growth rev dollars for Inkjet kind of December, March, June or probably ’15 unlike June, but December March and June. And then the growth rate that your -- kind of like the mid-teens plus growth rates that you're guiding through to December, it seemed they would have carry through quite frankly into next year. So is that an accurate way to think about organically now that Reggiani and Matan are going organic the next kind of 12 months organic growth rate on the Inkjet side could look like -- I know you got all the stuff going on like [Creta Ink] is ramping and Nozomi is coming on and that's going to be organic etcetera, but sort of ex that stuff is that an appropriate way to think about it and if not, how would you like us to think about it? And I have one more to follow-up, thanks.

Marc Olin

Yes, so the guidance we gave for Q3 as you know is pretty much a straight organic growth rate at this point in time for the Inkjet group and so I don't -- we're not giving guidance for Q4 and beyond yet to say that that's going to be the sustained growth rate for the group. But I think we have we have talked about long-term that we expect Inkjet to be in a 10% to 13% organic growth. So in terms of looking at how you average the back half of the year and beyond that's we haven’t changed that long-term guidance for the Industrial Inkjet segment and -- but again I don’t think Q4 we are on a much tougher compare year-over-year if you look at what we did in 2015. So I definitely would not expect Inkjet to grow at the same rate organically in Q4 as we are forecasting in Q3.

Guy Gecht

Just on that just to be fair we are also benefitting a little bit in this quarter from deals that got pushed in last week of June.

Ananda Baruah

And just to that and Guy how would you characterize to the best of your ability kind of the Brexit impact right now, you said you see some come back in close rates. I mean do you expect, I guess what's your view on the impact now that we kind of get past the event itself?

Guy Gecht

I think look once the I think the vote was on 23rd so 24th for the results out but it looks couple of days the stock market went down dramatically around the world there was some, a lot of nervousness keep in mind that lots of customers need to get a bankrupt pool well that might have been also an issue the last those few days, so it was kind of a shock people saying I will think about it some people don’t think Brexit so they wait a few more weeks I will wait a couple of months let's see. I think since then in the early July that was gone and obviously there is always hesitation to some customers while we are back to normal momentum and we kind of looked at the pipeline of where we are coming from Drupa after that, at the beginning of the quarter full time high for the September quarter both for Software and Inkjet, a lot of opportunities and things started that didn’t close some of the things didn’t close already closed some of them are back in discussion with the customers, so we feel pretty good about where we are right now.

Operator

Our next question comes from the line of Katy Huberty with Morgan Stanley. Please go ahead.

Katy Huberty

If you just compare the geographic growth rates America has decelerated this quarter, EMEA accelerated so just curious how you reconcile that with Brexit impact that would presumably have more meaning in the EMEA region. And then just connected to that during the call you talked about Brexit you mentioned weak Asia and then you also mentioned delays in the Fiery business that were greater than you expected at the end of the quarter? Just wondering if you could rank those three as it relates to the negative impact on results? And then I've a follow-up.

Marc Olin

Sure. So, first dealing with the growth in the Americas versus EMEA so most of the benefit of the acquisitions came in EMEA growth, so Reggiani a lot of their revenue is a lot of the revenue from Reggiani was Europe based so there was a significant uplift in Europe, as a result of that. The Americas actually the biggest the weakness we saw within Latin America in the quarter. Latin America was very weak for us in Software and Inkjet in Q2, we didn’t talk about that in the script but we definitely saw weakness their Brazil was very, very slow in the quarter with the current situation down there so that wasn’t related to Brexit but by the same token that wasn’t really also related to the delays that we saw at the end of the quarter. A lot of those delays took place in Europe and that's why we were saying, that's why we were attributing that to the Brexit situation because that would tie to EMEA. I think Asia the -- nothing really changed in the quarter I would say Creta is in a very good state in Asia, it's been improving consistently and so Creta I would say is through any slump it had last year. But we are still seeing some weakness in other segment especially Fiery most pronounced I would say, Fiery has had the biggest hit in Asia from a standpoint of activity and we have also seeing that on our display graphic side where that seen some weakness in Asia. So that’s around more commercial print so again I think that maybe -- we maybe seeing some general weakness in the commercial print sector in Asia Pacific that’s more of the micro -- continuing micro situation there nothing really got worst in the quarter, which just did continued at that lower level for a number of prior quarters.

Katy Huberty

As a follow-up, are you still thinking that you can get to cash flow from operations 90% of non-GAAP net income for the full year which would obviously call for better than that in the back half?

Marc Olin

We are not -- that is certainly what we are targeting and we think we are going to continue to make great progress around that goal, I think certainly the progress in Q2 was a nice achievement for the team, we definitely saw a lot of changes in behavior with the new compensation plans we put in place at the end of Q1, a lot more focus on keeping the inventory low and on collections and on better payment terms and so with the change in the mix of the sales that we had year-over-year getting that close to the prior year number and Q2 was a significant accomplishment for the group and we weren’t sure that we could get that high cash flow in the quarter from operations. So we were very pleased to see that. So I think we will continue making progress towards that number and put out a specific number for the full year but I think we will continue to show that progress which showed in Q2.

Katy Huberty

Okay. And then just finally, as it relates to the commentary earlier in the call around Nozomi, the 20 units as a potential target, is that in the first 12 months? Or you think you could get that type of volume in the back half of next year?

Guy Gecht

That was a answer to Shannon that asked, if we can hit 20 units in the first deal and again the way we think about after the reception we got in Drupa was exceptional is that I think we definitely from a demand perspective it will be available. I mean we got more than 10 people already put a deposit and say hi call me for the first 12 months, and that’s what we earn just in July we are not going to really sell them until sometime in the first half of next year. So we feel very good about the ramping up the run rate once the first couple of bets declare it is running very high reliability, we are getting what we want, let's now scale it around the world. So yes, 20 is definitely doable from a point of view -- for the point of time we feel it's time to scale.

Katy Huberty

Thank you.

Operator

Your next question comes from the line of Jim Suva with Citigroup. Go ahead.

Jim Suva

Thanks very much. I have two questions and maybe I can cap in at the same so you can address them both. It sounds like that the June quarter, potentially could have been better than expected and therefore that business hopefully or should flow into the September quarter. So if that’s the case, is the guidance it looks like it is more a little bit more below seasonal or whatever simply because of the Fiery softness or is there something else that I'm missing about why the guidance isn't stronger? And then my second question is related to M&A, you did some software acquisitions and I'm not that familiar with it, does it take a part of little bit effort to integrate that or is it fairly easy to where you could continue to make more software acquisition in the next quarter or two or how much of your efforts are tied up in integrating these? Thank you very much.

Marc Olin

Sure, thanks Jim. So, you got it exactly right, in terms of the Q3, situation, the reason the guidance is a little lower than perhaps you would have expected it, it's really just tied to the lower Fiery number we're seeing actually I think 15% to 17%, I'll take any day in organic growth on Industrial Inkjet and Software being 16% to 19%, again both of those are outstanding growth rates for us and well beyond normal seasonal growth again driven by the strength coming out of Drupa, so, you're right on, on that question. And as it relates to the second part of the M&A, so, Optitex did you know we've done an average of about four software acquisitions per year over the last five years and so, we're definitely prepared to be able to do additional software acquisitions, that does not preclude us, it's not that big of a company, it doesn't preclude us from doing additional software acquisitions later this year.

Guy Gecht

I would say Jim specifically a software is actually in a way easier than hardware acquisitions, there's less inventory, there's no inventory or products and things we need to look at, focus or be able to focus things like that, we have normally we have at the time of G&A maybe the only thing the software is a little more complex is the accounting rule around software revenue recognition, we've an excellent accounting team and they are very committed with their focus.

Operator

Your next question comes from the line of Joseph Wolf with Barclays. Go ahead.

Joseph Wolf

I wanted to ask a question about ink, in the presentation I guess there was an attach rate for the ceramic business and I'm wondering if you could give us an outlook for 2H and the momentum there in terms of that run rate which seems to be around 2 million a quarter right now? And then there was also the new water based inks and I'm just wondering about the timing of the deployment, the initial markets you're targeting, the reach of that product and then you had a JV announced with Dupont for ink as well and I'm wondering about the overlap and/or the complementary nature of what you're doing in ink?

Marc Olin

So, first on the [Creta Ink] the ceramic ink it actually 2 million per quarter was the run rate we had in Q1, last quarter in Q2 we actually were over $3 million in the quarter for ceramic ink so, that continues to scale and we expect that to continue to get higher as we go forward in the year. So, let's say you could call it over $12 million a year run rate exiting Q2 and we certainly expect it to end up much higher than that exiting the year. On the water based ink so, the primary application of water based ink we're talking about here is non-textile based water based ink is what we showed at Drupa, our new AquaEndure platform which is really for our display graphics printers going into new applications like wallpaper and other things that have in packing, food sensitive packaging where you need to have closer contact. Now in parallel to that we have our Reggiani water based ink that we continue to work with customers on and continue to progress. We got more customers, now testing that for us so we're continuing to bring that forward. I would say it's not yet at full commercializing but we definitely made some progress there in the quarter and so we're pleased with that.

Joseph Wolf

And then just as a follow-up for the commentary on the I guess some make up revenue in the third quarter driving the organic growth rate, could you give us a little bit more color on Reggiani's progress either in terms of customer base, growth rate, applications and how the customer acceptance a year into that, into that market and is the 15 to 17 is that still growing at a 25% to 30% growth rate right now?

Guy Gecht

So I have to say in general, we are very pleased with Reggiani acquisition both from the market perspective definitely textile is a big market, very early on in the digital conversion and Reggiani now believe is a market leader when it comes to production going from analog to digital and we continue to see good traction there. The upside for us is the ability to take the same technology package it as a VUTEk brand and selling it to the signage market we've been selling Drupa with VUTEk ink, which water based what we call soft signage. That's actually doing exactly well. We're ramping up from zero three quarters ago to pretty strong and in fact we finished the quarter with a backlog. We do not focus the entire demand. We expect that to be pretty strong in the quarter so that continues to be very strong on all fronts. So all-in all we think textile is a great market for us to be. There is a lot of interest in growing fast fashion, manufacturing on demand, there are a lot more skews there are faster time to market. I think that the Optitex acquisition is exactly the tool that can get people to design very quickly and send to manufacturing then adjust if they need. We already had some calls with some very big brands, they like this EFI ecosystem and they want to talk some more, so that's very positive. And I think we're going to do really well on despite maybe the tough compares. We're going to continue to do pretty well on textile, continue to look for acquisitions, continue to build the portfolio though.

Joseph Wolf

Does the Optitex software integrate with the hardware or anybody else’s hardware in terms of optimizing the use of the fabric and the textile world, or it is just a design tool right now?

Marc Olin

Today, it's really designed -- it's built for design and it does integrate to cutting technology especially the 2D portion of their software suite, so that integration is built. In terms of the integration to the printer part of the portfolio, that is still underdevelopment and that is something that we're really going to create as a unique part of the EFI ecosystem to differentiate the Reggiani printers.

Operator

Your next question comes from line of Joan Tong with Sidoti & Company. You may go ahead.

Joan Tong

I have a question regarding software, the Productivity Software for the quarter guidance obviously very solid but if you look at this particular segment has been -- we have seen some volatility in the past. Do you think we have hit some sort of inflection point and do you feel comfortable now that software is getting stronger you talk about the pipeline is very strong any particular segment or verticals that needs -- seeing very good strength?

Marc Olin

Actually in software it was pretty universal across all of our segments at Drupa. We were really very excited about the reception we had there it was really the buy far the best reception for software we've ever had at a trade, so in the history of the company, so that was very positive from our perspective and it wasn’t contained to just one area it wasn’t just packaging or publication or commercial print it was really across the spectrum there and it’s really the buildup of that -- of the demand post Drupa that really filled the pipeline very nicely and gave us a good bunch of deals that go hunt in the second half of the year and beyond. So, are we kind of finished with any potential volatility there, I can't see that far into the future but certainly for the foreseeable quarters we have we're looking at a very strong pipeline to work from.

Joan Tong

Okay, thank you. And then on Fiery obviously you talked about like low single-digit type of decline earlier then you had alluded to like only maybe we are going to see some further weakness here and I'm just wondering like what type of visibility that you have like outside one quarter and can we talk a little bit about like some sort of long range not guidance maybe a higher level how we should think about like Fiery going into 2017 knowing that like you mentioned something about on the customer level of the production gets pushed out?

Guy Gecht

Yes. So, on the Fiery of course we have very good visibility as we work with partners on what they are expecting in the market their focus they like to share with us so we build accordingly we are working together on projects and some of them got delayed in the second half and obviously that when they delayed that's it's putting an impact on the demand we can't be existing for it don’t sell as good and there is anticipation from new one so that's create a gap. And then as I said some of it would start to ship in Q4, and therefore we based on what we hear today from partners based on all the focus we have, based on internal assessment we believe we are going to be recovering back to about flat deal over in Q4. So that's on that part.

As far as we are on the longer term I can tell you look even though we might cause some pause and freeze in the market those new interest engines that are in many cases exclusively connected to EFI very exciting for the market and very exciting from our perspective, and once they start to ship I think we are going to see another round of -- it will be a good injunction into the Fiery, if you look at for example new entrants Landa. They announced that they had sales of $0.5 billion of orders obviously that market doesn’t have an extra $0.5 billion, so one can say some people may have waited -- are waiting for Landa ship and I believe they said it would be within the early years after Drupa so by June next year that was their public comment on timing, and we know we show the great combination with Xerox Inkjet, inkjet Canon show a new inkjet for the high-end with Fiery as the only frontend.

So there is a lot of reasons to look forward to that once those would start to ship and customers can make good decision between the toenail base that cost a lot less in existence today or the inkjet that are much higher end, Fiery is going to be much higher much more expensive much faster. But it's going to be a new reason to move from analog printing to digital printing and perhaps will grow the market.

Joan Tong

Okay that’s fair. And then how about on the textile side and obviously there is new acquisitions of Optitex, it seems very interesting and I think one of the key areas that is it's particularly interesting is like your -- it would give you more access of the brand owners versus the manufacturers, the fabric manufacturers. Can you elaborate that point, are you looking to expand your customer base, obviously you are growing at 25%, 30%, I mean if you have better access to like the people who are actually pushing this fast fashion, can you be potentially going faster?

Guy Gecht

Joan yes, I think that’s exactly the strategy here. And what we like about Optitex that it is a very small company, a very small business at this point with a great opportunity, great growth rate in the last couple of years is that they really appeal to the brand owners as you said, and part of the due diligence as you take a look and see who are the people that making decision on implementing an Optitex like system. And it's pretty high level people at the brand owners because it's changed something they think about a lot how quickly you can prototype, how quickly you can test different models, most the models people put on design don’t end up in manufacturing and then there is more and more models, more and more skews that need to be replaced faster as part of the fast fashion trend. And so Optitex is the light tool and from there if you search a good app but I need to print those effect, I need to do it closer to where I need those machines, I need to do it with a quick turnaround and change design very quickly in the short time where digital printing is a great opportunity to do that and Reggiani is the market leader for that. So by now appealing to the brand and saying if you are interested in fast fashion, we have the software tool that take care of most what you need and then we can take in on the production level what you need is very high quality. I think it's a very appealing proposal and it's also helped them to move faster into fast fashion.

Joan Tong

All right. That’s fair. And then I have a question on cash flow, and may be more like a follow-up. So looking at the second half of this year, you are actually lapping the Matan and Reggiani acquisition so your inkjet is not growing -- I mean organic growth, you are still looking for 15%-17% for the third quarter. But obviously it's not as high as Q4 because that the lapping the anniversary of that two acquisition. So are we going to see like sequential continuous sequential improvement or potentially year-over-year improvements in cash flow?

Marc Olin

We certainly are targeting that, and we do think that the efforts that we put in place around capital management inside of the company on keeping inventory at lower levels on driving the AR down, all of those things will certainly help drive cash generation improvements. And as we lap the acquisitions because this will be the first quarter where we have the acquisitions as a compare we certainly expect to improve that year-over-year.

Joan Tong

All right, thank you guys.

Operator

There are no further questions at this time. And I’ll turn the call back over to the presenters.

Guy Gecht

Thank you everyone for joining us today. We definitely appreciate the loyalty of our shareholders, the trust of our customers and of course the hard work and dedication of EFI employees. We are looking forward to share with you more news on our progress and talk to you in the near future. Thank you.

Operator

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