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| EFII > SEC Filings for EFII > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
Forward-looking Statements
This Quarterly Report on Form 10-Q ("Report"), including "Management's Discussion and Analysis of Financial Condition and Results of Operations", contains forward-looking statements regarding future events and the future results of the Company that are based on current expectations, estimates, forecasts, and projections about the industry in which the Company operates and the beliefs and assumptions of the management of the Company. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report under the section entitled "Risk Factors" in Item 1A of Part II and elsewhere, and in other reports the Company files with the Securities and Exchange Commission ("SEC"). The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as amended (the "2008 Form 10-K") and the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason, except as required by law.
Business Overview
We are the world leader in color digital print controllers, super-wide format printers and inks and print management solutions. Our award-winning solutions, integrated from creation to print, deliver increased performance, cost savings and productivity. Our robust product portfolio includes Fiery digital color print servers; Inkjet products including VUTEk super-wide digital inkjet printers, Jetrion industrial inkjet printing systems, Rastek wide format digital inkjet printers, and inks for each of these product lines; and APPS consisting of print production workflow and management information software, and corporate printing solutions. Our integrated solutions and award-winning technologies are designed to automate print and business processes, streamline workflow, provide profitable value-added services and produce accurate digital output.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Please see the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2008, as amended.
Recent Accounting Pronouncements
See Note 1 of our Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.
Results of Operations
The following table sets forth items in our condensed consolidated statements of
operations as a percentage of total revenue for the three and nine months ended
September 30, 2009 and 2008. These operating results are not necessarily
indicative of our results for any future period.
Three months ended September 30, Nine months ended September 30,
2009 2008 2009 2008
Revenue 100 % 100 % 100 % 100 %
Gross Profit 52 57 53 57
Operating expenses:
Research and development 27 23 29 25
Sales and marketing 26 21 27 21
General and administrative 9 9 9 10
Restructuring and other 2 3 4 2
Amortization of identified
intangibles and in-process
research & development 3 7 5 6
Total operating expenses 67 63 74 64
Loss from operations (15 ) (6 ) (21 ) (7 )
Interest and other income,
net 1 - 1 3
Gain on sale of building and
land - - 28 -
Income (loss) before income
taxes (14 ) (6 ) 8 (4 )
Benefit from (provision for)
income taxes 1 3 (7 ) 2
Net income (loss) (13 )% (3 )% 1 % (2 )%
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For the three months ended September 30, 2009, pretax net loss of $13.9 million includes $5.0 million of U.S. pretax net loss. The pretax net loss attributable to U.S. operations was impacted by the amortization of identified intangibles of $3.1 million, stock-based compensation expense of $4.9 million, and restructuring and other costs of $2.2 million.
For the nine months ended September 30, 2009, pretax net income of $21.1 million includes $35.6 million of U.S. pretax net income. The pretax net income attributable to U.S. operations was impacted by the $80.0 million gain on sale of building and land, offset by the amortization of identified intangibles of $15.5 million, stock-based compensation expense of $13.3 million, and restructuring and other costs of $12.2 million.
Revenue
We classify our revenue into three operating segments. The first segment, "Fiery," includes products, services, and technology, which connect digital copiers with computer networks, and is made up of stand-alone controllers and embedded desktop controllers, bundled solutions and design-licensed solutions primarily for the office market and commercial printing. This segment includes our Fiery series (external print servers and embedded servers), Splash and MicroPress, color and black and white server products, software options for Fiery products and parts. It also includes server-related revenue comprised of scanning solutions. The second segment, "Inkjet," consists of sales of super-wide and wide format inkjet printers, industrial inkjet printers, inks, and parts and services revenue from the VUTEk, Jetrion, and Rastek businesses. The third segment, "Advanced Professional Print Software," or APPS, consists of software technology focused on printing workflow, print management information systems (PMIS), proofing, e-commerce and job tracking tools.
On a sequential basis, the revenue performance in the third quarter of 2009 was $10.7 million, or 12%, higher than second quarter of 2009 results, due to increased revenues in all three operating segments. Fiery revenue increased by $1.8 million, or 5%, largely due to increased sales of low end servers. Inkjet products increased by $7.9 million, or 22%, primarily driven by new product launches across all product categories. Revenue in the APPS category increased by $1.1 million, or 8%, mainly due to the close of a large transaction.
Revenues by Operating Segment
For the three months ended September 30, 2009 and 2008, revenues by operating
segment were as follows (in thousands):
Three months ended September 30,
Percent Percent Change
2009 of total 2008 of total $ %
Fiery $ 42,004 41 % $ 68,036 47 % $ (26,032 ) (38 )%
Inkjet 44,336 44 % 60,805 42 % (16,469 ) (27 )%
APPS 14,515 15 % 15,825 11 % (1,310 ) (8 )%
Total revenue $ 100,855 100 % $ 144,666 100 % $ (43,811 ) (30 )%
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Fiery Revenues
Fiery revenues decreased 38% in the third quarter of 2009 compared to the same period in 2008 resulting from declines in all Fiery product categories. The overall decline was caused by reduced demand from our OEM customers throughout the world due to the global economy. The tightening of the global credit markets also indirectly contributed to the decline as it has become relatively more difficult for some customers to obtain equipment financing.
Inkjet Revenues
Inkjet revenues decreased by 27% in the third quarter of 2009 compared to the same period in 2008 due to decreased sales of our Inkjet printers due to the tightened credit market, partially offset by the release of new products at the end of the quarter. It has become relatively more difficult for customers to obtain financing to purchase our products due to the tightening of global credit markets. This was partially offset by the release of new products during the third quarter of 2009. The Rastek business was acquired during the fourth quarter of 2008 and benefited revenues during the third quarter of 2009.
Sales have increased in the current quarter as compared with the preceding quarter due to new products launched in all three product categories, but these revenue increases have not yet achieved prior year revenue levels due to the challenging economic environment.
Advanced Professional Print Software Revenues ("APPS")
APPS revenues decreased by 8% compared to the third quarter of 2008 primarily due to decreased license revenue.
The APPS operating segment includes our management systems software, including Monarch (formerly Hagen), Pace, PSI, Logic, PrintSmith and PrintFlow; our web-based order entry and order management software; and our color proofing software. In 2008, we reorganized our PMIS product lines after the acquisition of Pace to better leverage our investment in this segment and concentrate our resources on fewer products. As a result, we are no longer selling PSI and Logic to new customers and have reduced our investment in the development of these products. We currently sell PrintSmith to small print-for-pay and small commercial print shops, Pace to medium and large commercial print shops, and Monarch to large commercial, publication, and digital print shops.
For the nine months ended September 30, 2009 and 2008, revenues by operating segment were as follows (in thousands):
Nine months ended September 30,
Percent Percent Change
2009 of total 2008 of total $ %
Fiery $ 131,319 46 % $ 208,547 49 % $ (77,228 ) (37 )%
Inkjet 112,897 39 % 172,185 41 % (59,288 ) (34 )%
APPS 42,894 15 % 44,384 10 % (1,490 ) (3 )%
Total revenue $ 287,110 100 % $ 425,116 100 % $ (138,006 ) (32 )%
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Fiery Revenues
Fiery revenues decreased by 37% during the nine months ended September 30, 2009 compared to the same period in 2008 resulting from declines in all Fiery product categories. These declines were caused by reduced demand from our OEM customers throughout the world due to a slow global economy as well as inventories held by customers in prior quarters. The tightening of the global credit markets also indirectly contributed to the decline as it has become relatively more difficult for some customers to obtain equipment financing.
Inkjet Revenues
Inkjet revenues decreased by 34% during the nine months ended September 30, 2009 compared to the same period in 2008 due to decreased sales of our Inkjet printers due to the tightened credit market, partially offset by the release of new products during the third quarter of 2009. It has become relatively more difficult for customers to obtain financing to purchase our products due to the tightening of global credit markets. The Rastek business was acquired during the fourth quarter of 2008 and benefited revenues during 2009.
Advanced Professional Print Software Revenues ("APPS")
APPS revenues decreased by 3% during the nine months ended September 30, 2009 compared to the same period in 2008 primarily due to decreased PMIS license and service revenue, as well as decreased e-commerce revenue.
Revenues by Geographic Area
Revenues by geographic regions for the three months ended September 30, 2009 and
2008 were as follows (in thousands):
Three months ended September 30,
Percent Percent Change
2009 of total 2008 of total $ %
Americas $ 58,184 57 % $ 77,274 54 % $ (19,090 ) (25 )%
EMEA 30,083 30 % 49,885 34 % (19,802 ) (40 )%
Japan 8,879 9 % 13,755 10 % (4,876 ) (35 )%
Other international locations 3,709 4 % 3,752 2 % (43 ) (1 )%
Total revenue $ 100,855 100 % $ 144,666 100 % $ (43,811 ) (30 )%
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Americas revenues decreased by 25% for the three months ended September 30, 2009 compared to the same period in 2008, primarily due to weakness in sales of our Fiery products caused by reduced demand from our OEM customers due to a slowing of the economy and weakness in sales of our Inkjet products due to the tightening global credit markets and the decline in global marketing spending. Likewise, the softening of the retail sector and the related demand for signs, billboards and point of purchase displays has impacted our customers' businesses. Europe, Middle East, and Africa ("EMEA") decreased 40% in revenue primarily due to the slowing economy and tightening of credit markets in Europe while Japan decreased 35% in revenue due to lower demand for our Fiery products. Other international locations revenues are comparable to the same quarter in the prior year. New product launches during the third quarter of 2009 are beginning to mitigate the impact of the economic environment.
Inkjet product revenues in the third quarter of 2009 represented 42%, 55%, 11%, and 60% of revenue in the Americas, EMEA, Japan, and Other international locations, respectively, compared with 40%, 54%, 5%, and 56% in the same quarter of 2008.
Revenues by geographic regions for the nine months ended September 30, 2009 and 2008 were as follows (in thousands):
Nine months ended September 30,
Percent Percent Change
2009 of total 2008 of total $ %
Americas $ 167,349 58 % $ 220,830 52 % $ (53,481 ) (24 )%
EMEA 85,307 30 % 152,468 36 % (67,161 ) (44 )%
Japan 24,897 9 % 38,224 9 % (13,327 ) (35 )%
Other international locations 9,557 3 % 13,594 3 % (4,037 ) (30 )%
Total revenue $ 287,110 100 % $ 425,116 100 % $ (138,006 ) (32 )%
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Americas revenues decreased by 24% for the nine months ended September 30, 2009 compared to the same period in 2008, primarily due to weakness in sales of our Fiery products caused by reduced demand from our OEM customers due to the slowing economy and weak sales of our Inkjet products due to the tightening of global credit markets and the decline in global marketing spending. Likewise, the softening of the retail sector and the related demand for signs, billboards and point of purchase displays has impacted our customers' businesses. EMEA revenues decreased 44% primarily due to the slowing economy and tightening of credit markets in Europe while Japan revenues decreased 35% as a result of lower demand for our Fiery products. Other international locations revenues decreased by 30% mainly driven by lower sales due to the impact of macro-economic conditions.
Shipments to some of our OEM customers are made to centralized purchasing and manufacturing locations, which in turn ship to other locations, making it difficult to obtain accurate geographical shipment data. Accordingly, we believe that export sales of our products into each region may differ from what we are reporting. We expect that sales outside of the U.S. will continue to represent a significant portion of our total revenue.
A substantial portion of our revenue over the years has been attributable to sales of products through our OEM customers and independent distributor channels. For the nine month period ended September 30, 2009, two customers - Canon and Xerox - each provided more than 10% of our revenue individually and approximately 24% of revenue in the aggregate. For the nine month period ended September 30, 2008, two customers - Canon and Xerox - each provided more than 10% of our revenue individually and approximately 30% of revenue in the aggregate.
Our decreasing revenue reliance on our major OEM partners is attributable to the increase in the Inkjet operating segment where most revenue is generated from sales to distributors and direct customers. No assurance can be given that our relationships with these and other significant OEM customers will continue or that we will be successful in increasing the number of our OEM customers or the size of our existing OEM relationships. Several of our OEM customers have reduced their purchases from us at various times in the past and any customer could do so in the future as there are no contractual obligations with most of our OEMs to purchase our products at all, or in significant amounts. Such reductions have occurred in the past and could in the future have a significant negative impact on our consolidated financial position and results of operations. We expect that if we increase our revenues from Inkjet and APPS products, the percentage of our revenue that comes from individual OEMs will decrease.
We intend to continue to develop new products and technologies for each of our product lines including new generations of server and controller products and other new product lines and to distribute those new products to or through current and new OEM customers, distribution partners, and end-users in 2009 and beyond. No assurance can be given that the introduction or market acceptance of current or future products will be successful.
If sales of our products do not grow over time in absolute terms, or if we are not able to meet demand for higher unit volumes, it could have a material adverse effect on our operating results. There can be no assurance that any products that we introduce in the future will successfully compete, be accepted by the market, or otherwise effectively replace the volume of revenue and/or income from our older products. Market acceptance of our software products, products acquired through acquisitions, and other products cannot be assured. In addition, we may experience potential loss of sales, unexpected costs, or adverse impact on relationships with customers or suppliers as a result of acquisitions.
We also believe that in addition to the factors described above, price reductions for our products will affect revenues in the future. We have previously reduced and in the future will likely change prices for our products. Depending upon the price-elasticity of demand for our products, the pricing and quality of competitive products, and other economic and competitive conditions, price changes have had and may in the future have an adverse impact on our revenues and profits.
Gross Profit
Gross profits by operating segment, excluding stock-based compensation, for the
three months ended September 30, 2009 and 2008 were as follows (in thousands):
Three Months Ended September 30, 2009
Stock-based
Compensation
Fiery Inkjet APPS Expense Total
Revenue $ 42,004 $ 44,336 $ 14,515 $ - $ 100,855
Cost of revenue 15,101 29,385 3,926 253 48,665
Gross profit $ 26,903 $ 14,951 $ 10,589 $ (253 ) $ 52,190
Gross profit percentages 64.0 % 33.7 % 73.0 % 51.7 %
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Three Months Ended September 30, 2008
Stock-based
Compensation
Fiery Inkjet APPS Expense Total
Revenue $ 68,036 $ 60,805 $ 15,825 $ - $ 144,666
Cost of revenue 21,570 35,604 4,867 560 62,601
Gross profit $ 46,466 $ 25,201 $ 10,958 $ (560 ) $ 82,065
Gross profit percentages 68.3 % 41.4 % 69.2 % 56.7 %
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For the three months ended September 30, 2009 our gross profit was 51.7% compared to 56.7% for the same period in 2008. The decrease in overall gross profits was primarily due to a mix shift toward our lower gross profit Inkjet product lines, lower Fiery gross profits, and Inkjet fixed manufacturing costs spread over lower Inkjet revenue. Inkjet fixed manufacturing costs have decreased as compared with the prior year, but not by enough to offset the revenue decline.
For the three months ended September 30, 2009 Fiery gross profit was 64.0% compared to 68.3% for the same period in 2008. Fiery gross profit was negatively impacted by chipset royalties and spare parts gross profits.
For the three months ended September 30, 2009 Inkjet gross profit was 33.7% compared to 41.4% for the same period in 2008. The decrease was primarily driven by relatively fixed manufacturing costs spread over lower printer revenue and a mix shift toward lower margin Inkjet product lines. Inkjet fixed manufacturing costs have decreased as compared with the prior year, but not by enough to offset the revenue decline. Inkjet gross profit has increased in the third quarter of 2009 (33.7%) compared with the second quarter of 2009 (30.0%) due to the impact of new product launches and increased volumes.
For the three months ended September 30, 2009 APPS gross profit was 73.0% compared to 69.2% for the same period in 2008. APPS gross profits improved from the same quarter in 2008 primarily due to operating efficiencies, which continue to be achieved through the Pace acquisition, which closed during the third quarter of 2008, and the impact of a large transaction, which closed during the third quarter of 2009.
Stock-based compensation expense included within cost of revenue decreased to $0.3 million in the third quarter of 2009 as compared with $0.6 million during the same quarter of 2008 primarily due to the timing of equity awards issued during the last twelve months amortized under the graded vesting method.
Gross profits by operating segment, excluding stock-based compensation, for the nine months ended September 30, 2009 and 2008 were as follows (in thousands):
Nine Months Ended September 30, 2009
Stock-based
Compensation
Fiery Inkjet APPS Expense Total
Revenue $ 131,319 $ 112,897 $ 42,894 $ - $ 287,110
Cost of revenue 44,058 77,651 12,705 807 135,221
Gross profit $ 87,261 $ 35,246 $ 30,189 $ (807 ) $ 151,889
Gross profit percentages 66.4 % 31.2 % 70.4 % 52.9 %
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Nine Months Ended September 30, 2008
Stock-based
Compensation
Fiery Inkjet APPS Expense Total
Revenue $ 208,547 $ 172,185 $ 44,384 $ - $ 425,116
Cost of revenue 68,065 98,974 14,784 2,023 183,846
Gross profit $ 140,482 $ 73,211 $ 29,600 $ (2,023 ) $ 241,270
Gross profit percentages 67.4 % 42.5 % 66.7 % 56.8 %
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For the nine months ended September 30, 2009 our gross profit was 52.9% compared . . .
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