Electronics for Imaging, Inc. (NASDAQ:EFII) Q3 2018 Results Conference Call October 29, 2018 5:00 PM ET
JoAnn Horne - Investor Relations
Bill Muir - Chief Executive Officer
Marc Olin - Chief Financial Officer
Shannon Cross - Cross Research
Katy Huberty - Morgan Stanley
Aaron Rakers - Wells Fargo
Ananda Baruah - Loop Capital
Joseph Wittine - Longbow Research
Jim Suva - Citigroup
Brian Drab - William Blair
Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the EFI Inc. Q3 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session [Operator Instructions].
I will now turn the call over to JoAnn Horne, Investor Relations for EFI, you may begin your conference.
Thank you, Mike. And thank you everyone for joining this afternoon to discuss EFI’s third quarter 2018 operating results. Bill Muir and his initial call as EFI's Chief Executive Officer will lead the discussion along with Marc Olin, EFI’s Chief Financial Officer. Following management’s prepared remarks, we'll be happy to take your questions.
First, I'll review the Safe Harbor statement. During the call today, we’ll be making forward-looking statements, which are statements other than statements of historical facts and statements in the future tense, including but not limited to, statements regarding our strategy; plans; expectations regarding revenue growth; introduction of new products; product portfolio; productivity; future opportunities for our customers; demand for our products; our CEO transition; as well as market trends; product innovations; new market opportunities and acquisition strategies; as well as estimates in our projections of revenue, operating profit, growth, EPS, gross margin, cash flow, market share, operating expenses, tax rate, working capital and any statements or assumptions underlying any of the foregoing.
Forward-looking statements are subject to risks and uncertainties that could cause our results to differ materially or cause materially adverse effects on our results. Please refer the discussion of risk factors in our SEC filings. We do not undertake to update in light of any new information or future results. Statements we make today are made as of the date of this call and are subject to revision until the Company will have on file its Form 10-Q for the period ended September 30, 2018.
In addition, reference will be made to non-GAAP financial measures. Information regarding a reconciliation of non-GAAP to GAAP measures can be found in the press release that was issued this afternoon on our Web site in the IR section at www.efi.com. Please note that slides corresponding to the information reviewed on today’s call are also available on the Investor Relations Web site.
And with that, I’ll turn the call over to Bill.
Thank you, JoAnn, and welcome everyone to our call. Before I get into the quarterly numbers, I want to start with a heartfelt to our customers who puts their faith in EFI and our employees who work tirelessly in the support of our customers.
Today marks two weeks that I’ve been at EFI. Let me first say that I am truly honored and humbled to be here. I’ve already come to admire EFI’s culture on multiple fronts. The combination of courageous innovation, technical leadership and customer care is something special and I am thrilled to be a part of it. I see an exceptional group of individuals who are passionate about driving EFI’s success and I see exciting growth opportunities ahead of us. I had the opportunity to attend the SGIA show in Las Vegas recently and met with a number of customers. I gained an appreciation for the breadth of the customers we are fortunate to serve; from customers just starting out and looking to break $1 million in revenue to those who own a fourth generation family business, which is expanded into a few new facilities; to finally multibillion-dollar enterprises, which are truly global firms. Time and again I heard how much customers value our company, typically expressed as, I love your technology.
It was also conveyed how much our livelihoods depend on EFI being at its very best every single day. Many of the customers I met leverage our entire ecosystem; Fiery, productivity software and various inkjet platforms. They value our ink innovation and depend on our technology and services to serve their customers. It's humbling to think how much our success drives their business and how when EFI is not at our best, we impact their livelihood. As I’ve started to learn the organization, our customers and our business and I have a great deal more to learn, it is becoming clear to me that for EFI to be at its very best, we must leverage the many capabilities we possess simultaneously and more seamlessly for our customers. In other words, we must work more as one integrated EFI team and deliver one EFI solution. While our customers rightly value our technology, we are at times uneven in how it scales in support of their business. The result is that our execution has been inconsistent, which hurts both our customers and EFI's financial performance.
The disappointing third quarter revenue results, specifically in the high-end display graphics, are a good example. We have been very clear about the delay in the new McKinley platform. But as we work through that issue, we should have better anticipated how the delay would impact sales of the current products. The h3 is selling very well and we have received exceptional feedback from our customers, but we don't yet have the new products available to meet demand at the high-end of this market. We will get there and we will have an industry leading product when we do. But we have to accelerate our innovation timeline.
In the textile segment of inkjet, our innovation is on track with the introduction of BOLT in Q4, which is our one pass system derived from the Nozomi platform. Both will be shown publicly for the first time in just a couple of weeks to over 100 customers from around the world. And while we are not expecting anywhere near the first year revenue growth we saw with Nozomi, in the long term, BOLT is a game changer in accelerating the digital transformation of textile. In Q4, we will deploy our new pigment ink-set and binder, which provides a fast, sustainable and cost competitive new digital process for the textile market.
One of the key opportunities that drew me to EFI was Nozomi and its early success in transforming the $9 billion corrugated packaging market to digital. I've been very encouraged by everything I've already learned about Nozomi and the reception at the first installations. As expected, in Q3, we finalized development of the white ink option and shifted to a few initial customers. White ink is in such high demand as our many of the other options available for Nozomi that they are driving higher ASPs. As such, we are raising our full year outlook for Nozomi revenues and now expect $70 million for 2018. Based upon the pipeline and customer demand, we expect this momentum to continue and we anticipate revenues of $120 million in 2019.
Turning to Fiery, revenues were slightly above expectations. We just completed the integration to new Rico and Konica engines, which help drive some incremental demand around those new product launches. In software, we continue to see good demand for our corrugated solutions, which help drive revenue to the high-end of our expectations for the quarter. As usual, EFI’s technology is at the heart of every discussion. But to be a very successful global company, the best technology isn't enough.
We also need to ensure that EFI’s various businesses are operating in a more integrated fashion. EFI has grown in part by acquiring terrific technology and brands. We need to more thoughtfully integrate those businesses so they can scale and service a global market. We also need to improve our manufacturing processes so we can meet demand in a cost-effective repeatable manner. These are just a few of the areas where I see opportunity to instill greater discipline so EFI can scale to meet its potential. In short, we need to match EFI's legacy of innovative technology with industry best execution, so we can consistently delight our customers.
We have a lot of hard work ahead, but I am very confident in our ability to continue bringing innovative technology to an expanding number of industries where colorful images truly matter. I look forward to working with the team at EFI to harness this potential and to provide the consistent growth and financial results that our customers, employees and shareholders expect and deserve.
With that, I’ll pass the call to Marc.
Thank you, Bill, and welcome to EFI. Even though it's only been two weeks since you’ve assumed the helm, I'm very excited about your thoughts for EFI and the enthusiasm you brought to the Company.
Before I go into the financial results, I wanted to comment on the events of last weekend in Pittsburgh. This tragedy struck, especially close to home for me, as for 25 years I’ve lived within a block of where this occurred and attended the synagogue on occasion for different events. Thankfully, none of our employees or family members were involved but, nonetheless, it has a huge impact on our Company, our city and our country. I hope you'll join me in praying that, if nothing else, this event can help unify our country to prevent this type of horror from ever occurring again. Now, onto the financial results.
We delivered revenue of $257 million in Q3, a record for the third quarter, including record revenue for productivity software, and Nozomi continuing to exceed our expectations. We shipped seven Nozomi presses and also recorded significant year-over-year improvement in cash flow and other financial metrics. Productivity software had Q3 revenue growth of 9% year-over-year at the high-end of our expectations for the quarter and Fiery delivered revenue of approximately $62 million, also above our expectations. Our inkjet results were disappointing and below our expectations for the quarter, however, due primarily to weakness in the high-end segment of our display graphics business and ink, which I will speak about in a minute.
Our overall industrial inkjet sales increased by 8% year-over-year, primarily due to Nozomi. As expected, industrial inkjet gross margin was lower sequentially and year-over-year due to the impact of the Nozomi ramp up and a lower percentage of ink versus equipment than Q3 of last year.
Total recurring revenue was down slightly at $83 million, representing 32% of total revenue. Recurring revenue levels were negatively impacted by growth of only 2% in ink volume this quarter. This was due largely to issues in China where we saw changes in tariff structure and some supply chain issues. Some of the key components that we sourced from China for ink manufacturing, not only had a significant price increase but were in short supply due to greatly reduced production levels at a number of facilities. As a result, we were limited in the volume of our display graphics ink we could ship during the quarter as we work to put in place alternate supply chain partners in different parts of the world. We are ramping up these new sources in Q4 and expect to have them in place fully by the end of the year, but we could still see some impact on ink volume growth during the fourth quarter.
Non-GAAP earnings per share were $0.50, down 7% year-over-year but a bit above our expectations given the weakness in revenue, thanks to strong efforts around gross margin and spend management across the Company. Currency impact this quarter was fairly minor; revenue would have been $258 million and EPS would've been $0.51, when factoring currency levels at the time we gave guidance or using the levels of Q3 ’17.
Now, let me explain in more detail the revenue by business segment and region. The industrial inkjet segment generated record Q3 revenue of $154.9 million, which was equal to 60% of total EFI revenue. This would've represented 9% growth year-over-year, had currency remained where it was when we gave our guidance. Productivity software delivered record Q3 revenue of $40.4 million, driven by strong growth from our corrugated software products and represented 16% of total EFI revenue in the quarter. The Fiery segment delivered revenue $61.8 million, down 9% year-over-year, representing 24% of total revenue; product mix drove the gross margin up from the prior year; Fiery channel inventory remained in the targeted range.
In the Americas, revenue totaled $134 million, up 4% year-over-year, driven primarily by double-digit growth in industrial inkjet in North America and single-digit growth in productivity software, which was offset by reduced Fiery sales and significant weakness in Latin America and industrial inkjet. EMEA was also up 4% year-over-year with revenue of $89 million, driven by double-digit growth in industrial inkjet and productivity software sales, which were offset slightly by Fiery weakness in the region. APAC was flat year-over-year with growth in Fiery offset by a decline in industrial inkjet in developing countries, especially China.
Looking to the December quarter for FY’18, we expect inkjet to deliver mid-single to low double digit growth as our H3 and H5 platforms continue to scale to full capacity, and as we expect ceramics and the high-end of display graphics to continue to be constraint. We expect productivity software to be flat to low single-digit growth and Fiery revenues to continue to be around $50 million, resulting in total revenue guidance of $275 million to $285 million. We expect to ship eight Nozomi units in the quarter as previously announced. And based on what we continue to see in the selling price of the printers, we are raising our Nozomi revenue target for the full year 2018 to $70 million.
Moving to gross margin, where I’d like to remind you that all further commentary is on a non-GAAP basis unless otherwise noted. Third quarter gross margin was 49.2%, down 230 basis points year-over-year but at the high-end of our expectations due to better-than-expected margins in industrial inkjet and Fiery. Industrial inkjet gross margin was 34.6%, down 280 basis points year-over-year and down 50 basis points sequentially due to higher printer mix, but also at the high-end of our expectations due to the faster than expected improvement in our printer margins. Fiery gross margin was 71.8% with growth of 150 basis points year-over-year due to product mix.
In the productivity software segment, gross margin was down a 150 basis points year-over-year to 70.2% due to product mix in the quarter. For the fourth quarter of 2018, we expect overall gross margins to be 47% to 49% as we will have a larger portion of our revenue, driven by industrial inkjet printers, including Nozomi, which while delivering positive gross margin and improving each quarter, is still scaling to get to normalized inkjet margin levels. The larger Nozomi mix, combined with the ramp up of our H3 and H5 products in the quarter, which will have lower margins as we complete their scale up, will reduce our inkjet gross margin slightly to a range of between 33% and 35%. We expect software gross margin to continue in the low 70s and Fiery to be around 70%.
Turning to operating expenses. For the third quarter, operating expenses were $97.5 million, up 1% year-over-year and comprising 38% of revenue, an improvement of 110 basis points from the year ago period as result of the improved fiscal discipline we put in place over the past few quarters and the scale up of the Nozomi business. R&D expenses were $36.7 million, representing 14.3% of revenue, down from 15.2% a year ago. Sales and marketing expenses were $42.2 million, representing 16.4% of revenue, down from 16.6% a year ago. G&A expenses were $18.6 million, representing 7.2% of revenue flat year-over-year.
As we discussed during our Investor Day, we have been shifting OpEx within the Company from products such as Fiery and ceramics to our rapidly growing Nozomi and textile product line, while continuing to invest in other inkjet and software product lines that deliver consistent growth. As we anticipated, Nozomi was at a breakeven level of direct operating profit in Q3 and we expected to show a profit in Q4, which is helping to drive the planned increase in operating profit year-over-year. Lower gross margin dollars from decreased Fiery revenues, combined with investment in R&D spend for our new packaging and textile projects, resulted in operating income of $28.9 million, down year-over-year with an operating margin of 11.2%.
As Nozomi continues to scale, and Fiery stabilizes, we expect that our operating margins will continue to recover from the low point of Q1 this year. Other income and expense had a net loss of $1 million, driven primarily by foreign exchange impact. Our constant non-GAAP tax rate remained at 19% and we expect this level to continue through 2018 even with the changes from tax reform.
Looking to the fourth quarter of 2018, we expect non-GAAP earnings per share of $0.57 to $0.65, returning us to growth in EPS for the first time in two years as Fiery revenue stabilizes and we see increasing benefit from Nozomi. As a reminder, our Q4 outlook assumes our October foreign exchange rates stay flat for the balance of quarter. It also includes approximately $0.02 per share quarterly impact from the convertible bond interest payment.
Now, turning to the balance sheet. Total cash, cash equivalents and short-term investments, amounted to $294 million compared to $314 million at the end of last quarter. Cash flow from operations was $13 million or 57% of the non-GAAP net income for the quarter, a robust year-over-year increase and exceeding our expectations for the quarter. Cash generation in the quarter was positively impacted by higher collections and reduced inventory year-over-year. But as we mentioned on last quarter's call, would be lower than the annual target of 90% as we scaled inventory levels from Q2 to prepare for the higher manufacturing levels in Q4. Currently, year-to-date, cash from operations is 80% of our non-GAAP net income.
Based upon the strength year-to-date, we are now confident we can reach our targeted 90% of non-GAAP net income and cash generated from operations for the full year despite the drag on cash from ramping Nozomi, developing our new BOLT textile printer and rolling out the H3 and H5 and the first models from our new McKinley platform. I want to commend the hard work of the finance and operations team on helping us achieve this goal.
Net accounts receivable was $240 million, up $3 million year-over-year, but down 1% sequentially. Thanks to strong collection efforts, even with the continued back end loaded nature of the quarter. DSOs were 86 days, down two days versus Q3 of last year, despite the significantly higher mix of our inkjet and software direct businesses, which have significantly higher DSOs than our fiery business. While we will continue to work to reduce DSOs in the direct business, as we mentioned in last quarter, we expect DSOs will remain around this level going forward.
Our net inventory balance was $121 million, up $3 million sequentially but down $11 million from Q3 of last year due primarily to our efforts managing display graphic and ceramic inventory, reduced volume and release of inventory buildup associated with the new product launch this year, partially offset by the previously mentioned buildup of inventory for the expected higher Q4 sales level. This drove inventory turns to 4.3, down 0.2 turns sequentially but up 0.7 turns year-over-year.
Stock-based compensation this was quarter $12 million, similar to last quarter as we granted our long term performance grants during the quarter. These grants are tied to our next three years results. This quarter, we returned $22 million to shareholders as part of our $150 million buyback program, which was put in place on January 1, 2016 and the newly authorized $25 million buyback program starting Q3 '17. This leaves approximately $59 million available on our buyback program.
Total diluted share count stayed consistent sequentially at 45.4 million shares. While we decided not to go forward with a bond offering last quarter, we are again reviewing our finance to options in Q4 and will not be doing open market buyback until we decide a plan. As always, we'd like to conclude by thanking our customers, employees and shareholders for their continued confidence and EFI. I want to once again welcome Bill and say how excited I am to work with him on leveraging the opportunities in front of EFI.
We'll now be happy to answer questions.
[Operator Instructions] Your first question comes from the line of Shannon Cross from Cross Research. Your line is open.
Can you take a moment to step back and talk about -- and you did a little bit during your prepared remarks. But what you think you're going to -- what you're going to bring to EFI from the differentiated your experience, what drove you to take the job with the company and just provide some initial thoughts with the caveat that I realized you've only been there a couple of weeks?
I appreciate you giving me the caveat. I was going to take it, and probably take it a few times today. So I think that’s very kind of you to give that to me. So, I'll the second part of the question first and then circle to the first part. What drew me to EFI -- I probably referenced some of this in the prepared comments. I see a culture of managerial courage. I see a culture of innovation of appropriately looking at markets and having enough conviction and courage to expand into adjacent marketplaces. I would tell you, it's not lost on me that the company has built a, what I believe, is very, very, very solid software business through the years and then have the ability to go from being a software company, I mean software and hardware company and working to integrate both, which I think not many companies can do and can do well.
So there is lot of things that in terms of just technical depth, the view of the marketplace, brought me to the Company. And I would tell you the short two weeks that I've been here, my view points on the technical expertise at existent have only been reinforced. And what's been maybe even more pleasantly surprising is the level of passion and commitments that I've seen from every single EFI employee with whom I've come in contact with has been absolutely phenomenal. So, again, I said this a few times and that's why I am thrilled to be here.
So your first part -- to the first of your question, Shannon, it's always hard for me to speak about myself in a way that might, in any way, shape or form, be perceived as boastful. So I'll try and answer your question as most appropriately as I can. I think I've been very, very fortunate to have the experience that of taking businesses at different stages of their evolution and helping them scale in a way that creates sustainable value, in a way that creates foundational underpinnings to allow businesses to scale successfully. And this -- my answer now becomes a combination of the first -- of the two questions that you asked.
When I think about the opportunity in Nozomi and what should be $9 billion corrugated packaging market and when I think about the opportunity in textile and what we've identified as a $5 billion market, I get incredibly excited over a multi-quarter and eventually multi-year time horizon to think about the level of value that EFI can bring to those two marketplaces. The combination of leveraging a Fiery digital front end, the expertise that I think we've developed from a productivity software standpoint in these marketplaces, which I think gives us a better view as to how customers can transition from an analog way of working to digital way of working and combine with that inkjet expertise, I think positions the Company exceptionally well in markets that have very powerful secular trends behind them. So, that’s a little bit of intent to try and answer your questions.
Marc, can you maybe dig a bit further into the weakness that we saw in inkjet. And what I am trying to bridge is the pressure on ink and continuing into fourth quarter and then how you’re guiding up, or at least you’re guiding up for this year in terms of Nozomi and then overall a healthy guide for Nozomi revenue in 2019. So, if you can just give us an idea of some of the puts and takes that are behind that that would be helpful? Thank you.
Sure, so first on the ink side. So the impact that we saw in ink, I don’t want to overstate that impact, because it's not that huge. We’re talking about low single-digit millions of dollars in play here for ink in Q3. And we do have some new supply-chain partners lined up to help address the issue we had in Q3 and we put in place some price increases on certain types of our ink to help address some of the increased costs that we have and the raw materials, but we’re still scaling up the new supply sources. So we want to be cautious with that for Q4. We expect to have it fully resolved by the end of the quarter.
The high-end portion of the display graphic space, that's where HS100 and HS125 lives, and that's really where we saw the biggest impact in Q3. And really it just changed pretty dramatically from where it was in Q2, that's why we did not anticipate that. That segment of the market, let’s say if it’s running well, averages about $10 million a quarter and we saw it at a dramatically lower level in Q3 from that. So that was really unexpected and that was the most material part of the display graphics product line.
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We also mentioned in some of the developing countries around the world, we saw weakness as well that was a little bit worse than we contemplated, especially Latin America where I think a combination of currency, because we sell in U.S. dollars there and the U.S. dollars are now a lot more expensive than Latin America, could have had some negative impact for us as well.
Your next question comes from Katy Huberty with Morgan Stanley. Your line is open.
Thank you, Bill, welcome to the role. Look forward to working with you. I want to ask you a high level question to start, if you look over the last couple of years of the company and you referenced this in your prepared remarks, struggled a bit to consistently deliver results. And I just -- I'm wondering whether you plan to approach guidance and the outlook in a way that perhaps sets a bar where you can more consistently beat and raise, have you thought through the potential tempo and strategy around guidance?
Hi, Katy. It was nice to meet you virtually as well and similarly I look forward to working with you. Probably the best way I can answer that is, it's certainly not something I enjoy to have -- my first interaction on an earnings call be one where we’re a little bit outside on the low end of the range from a revenue perspective. That's something I take very, very seriously. That's something that from here on out I along with Marc will obsess about the underpinnings, the assumptions of risk factors in terms of how we do that. I think there's things that always happen that are sometimes outside of your control, but I think there's many, many things that happen that are within your control, and we'll work to as diligently as we possibly can, appropriately factor those things that are within our control. And I look forward to building on kind of a culture of execution here at EFI, a culture of sustainable value creation that we can measure over quarters and years. And I recognize that kind of from where we are right now, we have to do some work to reinstill some confidence, some credibility in terms of how consistently we've been in our guidance and our performance. And again, at the risk of being a little bit redundant, I would assure you something I take very, very seriously.
Okay. Thank you. And Marc, you mentioned that the buyback is on hold at least in terms of the open market purchases until you make a decision on a bond deal. Can you just talk broadly around what you're thinking about in terms of addressing the convertible that comes due next year and what the potential options are? Thank you.
Sure. So as we mentioned on the last call, we did open up some discussions with bankers in Q3 after the last earnings call. We did elect at that point not to go forward with the buyback -- I'm sorry, not to go forward with the convert refinancing in the summer time. And so we were able to do a little bit of open market buyback during Q3. We're now entering into discussions with them. Again, obviously, we had a CEO transition that was happening right after that. And so, I wanted to get with Bill and talk to him about his philosophy and approach around that before we committed to anything in terms of the debt. And so, now we're in those discussions. We're looking at the full range of options there from straight bank debt through converts and kind of weighing the appropriate balance between those things, given the cost of capital and all the different scenarios. So I guess that's the best I can say at this point is that we're weighing kind of a full range of alternatives of refinancing options.
Okay, that's helpful. Thank you very much.
Your next question comes from Aaron Rakers with Wells Fargo. Your line is open.
Yes, thanks for taking the questions, and Bill also, nice to meet you. First, I want to just ask a housekeeping question. I think on the cash flow statement, there were some numbers, I think a $10 million repayment of debt assumed through business acquisitions, and there's about a $1 million I think acquisition related payment in the quarter. I'm just curious, is that implying that you did make an acquisition in this last quarter. And if so, can you talk a little bit about that or was there revenue contributions to consider into the fourth quarter? And I do have another question. Thank you.
Sure. So there were no acquisitions done in the quarter, those were prior payments that were owed from previous acquisitions that were done, that either had earn out associated to them or delayed payments associated to them, including the FreeFlow Print Server acquisition we did with Xerox back at the beginning of 2017. So no new acquisitions during the quarter and no impact on revenue for Q4.
Okay, thank you. And then as we think about the guidance for Nozomi into 2019. And just underpinning that guidance would be what assumption with regard to system shipments? And then as we think about that, is it fair to assume that with some of the new product platforms that the other inkjet -- Industrial Inkjet businesses should post growth year-over-year in 2019. Any thoughts around that would be helpful? Thank you.
Hi, Aaron. This is Bill. Nice to meet you virtually as well. I guess, I'll start on the Nozomi peace and then probably let Marc add some color on the balance of the business. So here's kind of how we think about Nozomi guidance and how we'll look to keep the investment community updated as we go through ‘19. And if I take a step back, I would say I think the company has done an incredibly nice job of ramping this business from essentially a zero start to $70 million of expected revenue now this fiscal year, taking guidance up from $60 million to $65 million and $65 million up to $70 million. And then looking at what would be roughly a 70% increase on that business at our anticipated run rate of $120 million in 2019. So I think all things considered, a very impressive level of innovation, of fortitude, of deployment at this platform in an exciting marketplace. It gets -- as that business starts to really scale, we believe that our $120 million, our revenue figure is a more apt indicator or more appropriate indicator of what the business is doing as opposed to shipments on an ongoing basis. And I'd say that because features in consumption what we hope to be continued innovation by customers that drive ongoing adoption of features are going to weigh so much on ASPs that I don't know that ASP in isolation or units in isolation would be as meaningful as just letting the investment community understand how we think about the revenue run rate. Keeping you updated on that. And treating it as a business in ‘19, which hopefully is the business a real scale, much like some of the other businesses in the EFI family. So a positive on Nozomi and I hand off to Marc on the balance of the inkjet.
Yes, thanks, Bill. And yes, so for the balance of inkjet, we do expect inkjet as a whole to behave in what we've given for long-term guidance in the past, which is double-digit growth. And so that definitely implies that there's growth coming from other parts of inkjet as well for 2019. Though clearly, we're not going to go into individual segment level guidance or product level guidance for the rest of the business at this point.
Fair enough. Very helpful. Thank you.
Your next question comes from Ananda Baruah with Loop Capital. Your line is open.
Hey. Good afternoon, guys. Thank you for taking the question. Two if I could, Bill, welcome, certainly look forward to working with you. Marc, our thoughts are certainly with Pittsburgh as well. I guess just the first one sticking with McKinley, sounds like you guys are saying and just correct me if this isn't accurate that you expect to kind of be back on cadence entering the year on the hardware side. Again please correct if that's not accurate. And then also on the supply side as well, and if that's so, do you expect to kind of get back at run rate the sales in September quarter and December quarter that may have been lost because of that? And then this is sort of -- this isn't the second question, but it does tails with the first. To what degree was the APAC softness a result of this? I know you spoke to it initially but I just want to make sure, we all accurately dimensions the dynamics on the APAC softness as well. And then I have a follow up. Thanks.
Sure. So let's start with the display graphics. So while we expect the h3 and now the h5 in Q4 to start mitigating some of the pressure we've seen in the display graphics and that will improve as we fully scale up those platforms going into next year, they don't really address yet the high-end of the display graphics market. I don't expect the products for that portion of the display graphics market to really be out for the back half of next year. And so, while we will see improvement continuing as we get to that point because the mid-range which is where the h3 and h5 play and that is the biggest part of our display graphics market, they will see improved performance each quarter going forward when looking year-over-year because of the h3 and h5 being such great platforms. They don't address the high-end of the market yet. We need another product for that that will be yet another derivative from McKinley. And so that's going to take more time to get to market, again, the back half of the year. I do expect the supply chain issues to be remedied by the end of Q4. So entering next year we should be back to normalized levels of supply for any of the ink.
In terms of APAC and the developing countries, I think the best way to think about it is that if either the high-end -- or there is a little bit of overlap between the high-end and the developing country market. So the best way to look at it is to say that if either the high-end of display graphics had performed the way it did in Q2 or the developing countries had performed the way they did in Q2, we would have been at the high-end of the range for our guidance for the quarter.
That is helpful. Appreciate that. And then just the follow-up is with regards to sort of the Q4 Nozomi guidance. How much of that is -- it sounds like your -- well, maybe I'll ask you this, you're sticking with the eight units it sounds like. So how much of that is from deferred revenue versus something else? Revenue -- the revenue is deferred before the new features are introduced? Thanks.
So we -- our raise of guidance, the $65 million to $70 million raise that was done was not really done because of deferred revenue improving. We knew what we were anticipating for that and that's kind of on track for Q4. It's really because our selling price for Nozomi continues to improve each quarter and we're seeing great demand across the globe for the product. We didn't mention actually in the script but we had a customer bought their third Nozomi during Q3 from us, which unfortunately I can't divulge the name of the client at this point in time. But they bought their third unit during the quarter there. So that was a nice thing to see as well and we thought a good proof point of the value that customers are recognizing already from Nozomi.
Okay, great. Very helpful. Thanks a lot guys.
Your next question comes from the line of Joe Wittine from Longbow.
Yes. Thanks, guys. With Nozomi, I just want to put -- see like a bit a finer point in that 2019 number of $120 million. Is that expected ‘19 growth versus ‘18 solely driven by the higher ASPs that you referenced and then a full run rate for all four quarters? Or does that also contemplate shipments above that kind of 10 per quarter baseline for production that you've established for the fourth quarter?
Yes. So, Joe, first, this is Bill. Let me take a crack at that, and Marc might chime in with a couple of comments. To some of the earlier comments, we're going to stay away from kind of unit-by-unit type guidance. I think we've been consistent in the past that we've ramped up our operational capacity to produce 10 units a quarter and that assumes just a one shift operation. We'd have the opportunity to scale that. But we're going to guide on a revenue basis for ‘18 -- sorry, for ‘19 for the reasons I mentioned earlier, because we continue to see kind of a good level of adoption, a good level of creativity around the feature set, that's kind of driven us to the assumptions that drives us to the $120 million number for ‘19, and we'll continue to update you relative to that number.
Hey, Bill, I asked you in a way you don't have to be gently against the unit numbers. So maybe let me just ask more simply. Are you -- you have a big interest, a big customer list. I assume you're taking up capacity really slow and steady throughout the years. Is that a fair way to think about your manufacturing capacity?
Yes. So Joe, I think, we'll continue to scale capacity as we need to deal with whatever demand we see out in the marketplace. As we mentioned on the last quarter's call, 10 units is what we can do with a single shift at the factory. We expect to be at that level in Q4, and to make 10 of them. And I do expect that as Nozomi gets, let's say more developed in the market, we'll start to see seasonality in the quarters based upon people spending budget. So I don't know that we're going to sell the same. I would not expect we're going to sell the same amount of units every quarter next year. I think some quarters will be higher, some quarters will be lower, because that's the way all of the other capital equipment businesses we have operate, Nozomi has been the exception to that because it's been scaling so rapidly during 2018.
Okay, very helpful, Marc, thanks. And then as my follow-up with Nozomi an obvious success, at least on the top-line, I'm wondering for BOLT, and any future Nozomi derivatives for that matter. How we should kind of view the company's ability to I guess dazzle that supply chain since there, I think you'll be selling into print verticals where Inkjet platforms already exist, if that makes sense?
Yes. That is the case with BOLT. Obviously, we'll be selling to textile there, which we sell into today. It does give textile manufacturers an ability to do higher volume textile production than they can do with carriage-based printers today. We are not the first to bring out a single path digital textile platform in that market but we think we have some unique technology approaches that we're taking, that differentiate us from the other products currently on the market, and get people into a different let’s say economic model that makes digital much more compelling for them than under the other alternatives that are out in the market today. And as Bill mentioned, we're having this customer release event in November in Italy and Bergamo at our facility there, and we have about 100 customer signed up to come. You're welcome to make the trip to Italy, Joe, if you want to make a quick jaunt over there to attend. But I think we don't want to spoil the surprise for the people attending, but you'll hear on our next quarter call certainly what some of those key differentiators that we think we've come up with for that market.
Your next question comes from Jim Suva from Citigroup.
Thanks. Thanks very much. This is the question probably for Bill. As the new CEO, you mentioned about execution the key focus item. You have a lot of global supply chain experience throughout the world and your past employer. Does EFI need a lot more investments in respect to that? Or do you see low hanging fruit that don't need investments? Or how should we think about when you talk about execution is a key focus, how to get from where the company is now to where you think it should be?
Hi, Jim. Nice to hear your voice again. Thanks for the question. So here's how I would think about it, and again, with the caveat of kind of two weeks in and not knowing all the facts and all the figures I need to make the definitive determinations. I wouldn't think about that as a cost adder, I would think that any activity we drive from a supply chain perspective in reasonably short order would be self-funding to the extent that it requires investment, and in the medium-term would provide some financial benefit to the corporation. I would think about it a couple of different ways. I would reference a comment I made earlier, I think it's reasonably difficult to go from being developing really, really rich software expertise and then transitioning into the hardware space. So I think there's some opportunities for us to bring a level of hardware supply chain expertise that would be beneficial to the enterprise given where it sits today. I would also think that given our manufacturing footprint and our supply chain footprint, that there is probably a two factor opportunity in regards to potentially leveraging lower cost geographies and a level of maybe optimization simplification. And again, that will take a lot of time to further understand and understand both risk and opportunity that come with those decisions as we work through those. But I think those present opportunities for us to have a supply chain that's more responsive, manufacturing processes that are more responsive, and hopefully, as we go through this, more cost competitive as well.
Thank you so much. And I do have a follow-up for Marc. Marc, on the Fiery. I think you've guided to if my memory is correct about $60 million for the fourth quarter. I think I'm -- I think that's about right. Is that just run rate going forward or is there anything about ebbs and flows or hey, remember, a key customer has this or competition has that or anything we should be aware of that could either take that higher or lower?
So we've been kind of bouncing up and down around $60 million throughout this year. We started lower, jumped over $60 million in Q2 and over $60 million again in Q3. We think we're going to settle back down to around $60 million in Q4. And we think that seems about the right level to think about for Fiery. We clearly are not going to give guidance for 2019 as of yet, but that $60 million level seems sustainable for us.
Great. Tthanks, Bill and Marc for your details and clarifications. It's greatly appreciated.
[Operator Instructions]. The next question comes from Brian Drab from William Blair.
Hi. Good afternoon and welcome, Bill.
Thank you, Brian.
My first question is on Nozomi, the $120 million in 2019. Can you give us any sense for how that breaks down between ink and equipment? I know you don't want to give a number of machines, but is that like a roughly a -- maybe a 75-25 split?
Yes. So I think what we've disclosed previously is at run rate, I'll look to Marc just to make sure I'm being consistent with historical comments. But at run rate, you should think about the revenue being two-thirds equipment, one-third ink. And I guess kind of the next question that comes out of that, then I'm assuming you're going to ask is, is when do we get to that point? And the short answer would be, not sure, because that ends up being a function of how successful we are in continuing to grow at a really, really rapid rate. So there could be a scenario where equipment continues to deploy at a much faster rate than ink, simply because we're being really successful in the marketplace. Long-term, I would think that be a good story for the company. But I recognize that in the near-term that might have some headwind relative to gross margin structure specifically to Nozomi. I hope you understand the rationale for not providing kind of more granularity on ink options, equipments, it's going to become increasingly difficult as the business really scales and as we see hopefully larger opportunities with customers to understand how those different pieces might come into play. And again, our belief is that, at a run rate of $120 million a year, a full annual revenue figure is the best approximation what the business is going to do.
And I can just add a little bit of color to that with some of the things we've said in the past, which is that, again, we are still looking at $500,000 to a $1 million per printer per year. However, as we've said in the past, it takes a while for customers to scale to that level. I think when we first started speaking about Nozomi, we were speaking about the fact that it would take about six months after the printers were deployed to get to that full level. And last quarter, we kind of clarified that to say that because a lot of people were modeling, you can't know when the printers get deployed. So we started talking about in terms of when the printers are sold and to think about that it's really 12 months after a printer is sold until it's going to get to that full run rate of $0.5 million to $1 million of ink. And so that's kind of the way if you're looking at modeling and so on to figure out, okay, well, you know when the units are sold based upon the quantities we've given and you can kind of think about it in those terms as to how quickly the ink can ramp up based upon that 12 month ramp up time.
Okay, got it. That's all very helpful. And then my second question is on gross margin. Is there anything that you could tell us just directionally, help modeling? My assumption is that with Nozomi being the growth engine or the primary growth engine in the near-term, running at lower gross margin than the company average, that gross margin might come down in 2019 from where we finished the year in 2018. I know that consensus estimate is for an increase in gross margin next year. Consensus is also too high apparently relative to the fourth quarter guide in terms of gross margin, a little over 49% for the consensus. So it might be helpful just to give us some directional guidance there?
Yes. So I guess you've got a couple of factors working in play here which can impact that number. So in terms of why gross margin will improve. On Nozomi, the gross margin of Nozomi has -- on the equipment has improved every quarter since we've launched the Nozomi platform. And so when you're lapping the Nozomi compares, let's say, in Q1, you're going to have a higher gross margin on the Nozomi printers. Now, depending upon what you assume for a number of Nozomi's in Q1, Nozomi is going to make up a bigger portion of our inkjet number potentially in Q1. And even at the current gross margin numbers for Nozomi, even though they have scaled up, they're still lower than the rest of the inkjet business. So you've got that balancing act between the two and that we continue to improve the margin, but it's still not at the industrial inkjet average. Other factors you've got in play on the margin is that h3 and h5, those new display graphics platforms are not yet at their kind of steady state gross margin. So that will improve heading into next year and we'll get some benefit from improved margins in display graphics as those products are fully scaled up.
So all that being said, we're not giving guidance for gross margin for next year certainly as of yet. But you do have a couple of things in play that drive margin in both directions. So it's really a function of kind of how fast you want to ramp up Nozomi on a quarterly basis, and how much display graphics ends up contributing as h3 and h5 scale.
Okay. So in summary, gross margin could be up or down in 2019 depending on how you model those factors?
Yes, exactly. Now, one other factor, I should have mentioned is BOLT, that also -- for that platform, as Bill mentioned in his comments, it's going to be certainly you should not expect anywhere near the volumes that we have in Nozomi. But as we're going to start shipping the initial units of those at the beginning of next year, those will be at lower gross margin as it's a brand new product that's launching and the first ones are always at lower margin. It will however be a pretty small part of the overall revenue as we said, because we're -- the units are not going to be nearly as big.
Okay. Thank you very much.
There are no further questions at this time. I'll turn the call back over to the presenters.
Folks, I would like to thank the analysts and investors who joined us on the call today. We greatly appreciate your loyalty and support. I look forward to meeting many of you over the coming months. Thank you very much.
This concludes today's conference call. You may now disconnect.