EFI Q2 2014 Earnings Call July 17, 2014
Safe Harbor For Forward-Looking Statements Certain statements in this press release are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements other than statements of historical fact including words such as anticipate, believe, consider, continue, estimate, expect, look, and plan and statements in the future tense are forward looking statements. The statements in this presentation that could be deemed forwardlooking statements include statements regarding EFI s strategy, plans, expectations regarding its revenue growth, product portfolio, productivity, future opportunities for EFI and its customers, demand for products, and any statements or assumptions underlying any of the foregoing. Forward-looking statements are subject to certain risks and uncertainties that could cause our actual future results to differ materially, or cause a material adverse impact on our results. Potential risks and uncertainties include, but are not necessarily limited to, unforeseen expenses; the difficulty of aligning expense levels with revenue; management s ability to forecast revenues, expenses and earnings; any world-wide financial and economic difficulties and downturns; adverse tax-related matters such as tax audits, changes in our effective tax rate or new tax legislative proposals; the unpredictability of development schedules and commercialization of products by the leading printer manufacturers and declines or delays in demand for our related products; changes in the mix of products sold; the uncertainty of market acceptance of new product introductions; intense competition in each of our businesses, including competition from products developed by EFI s customers; challenge of managing asset levels, including inventory and variations in inventory levels; the uncertainty of continued success in technological advances; the challenges of obtaining timely, efficient and quality product manufacturing and supply of components; litigation involving intellectual property rights or other related matters; our ability to successfully integrate acquired businesses; the uncertainty regarding the amount and timing of future share repurchases by EFI and the origin of funds used for such repurchases; the market prices of EFI's common stock prior to, during and after the share repurchases; the compliance with the new requirements regarding the conflict minerals, if they are found to be used in our products, and any other risk factors that may be included from time to time in the Company s SEC reports. The statements in this presentation are made as of the date of this presentation. EFI undertakes no obligation to update information contained in this presentation. For further information regarding risks and uncertainties associated with EFI s businesses, please refer to the section entitled Risk Factors in the Company s SEC filings, including, but not limited to, its annual report on Form 10-K and its quarterly reports on Form 10-Q, copies of which may be obtained by contacting EFI s Investor Relations Department by phone at 650-357-3828 or by email at investor.relations@efi.com or EFI s Investor Relations website at www.efi.com. 2
Q2 2014 Financial Summary Record 2 nd quarter revenue of $193M, up 7% YoY Balanced growth across all business segments; EMEA up 34% Record recurring revenue of $53M, up 11% YoY; 28% of total revenue UV Ink volume up 15% Non-GAAP Gross Margin of 54.1%, (-50 bps YoY) Non-GAAP Operating Profit of $26M, up 11%; 13.5% of revenue Non-GAAP EBITDA of $28M, up 13%; 14.7% of revenue Non-GAAP EPS up 16% to $0.44 compared to $0.38 in Q2 2013 Cash flow from operating activities of $27.5M for the quarter, up 44%; $81M over last twelve months, up 6% Share buyback of $11M drives 0.4M reduction in diluted sharecount to 48M Non-GAAP numbers have been adjusted to exclude certain items. See GAAP to Non-GAAP reconciliation & our description of our use of non-gaap information. 3
Q3 2014 Guidance Revenue of $193-196M, up 8-10% YoY 8-10% growth in the Industrial Inkjet segment Mid-teens growth in the Productivity Software segment Low single-digit Fiery growth Non-GAAP EPS $0.43-$0.45, up 10-15% Non-GAAP numbers have been adjusted to exclude certain items. See GAAP to Non-GAAP reconciliation & our description of our use of non-gaap information. 4
Q2 2014 P&L Summary $M Q2 2014 Q1 2014 QoQ % Q2 2013 YoY % Revenue $ 193.0 $ 188.7 +2% $ 180.3 +7% NON-GAAP Operating Profit 26.0 25.3 +3% 23.4 +11% Operating Profit % 13.5% 13.4% +0.1 pts 13.0% +0.5 pts Net Income 21.0 20.4 +3% 18.3 +15% EPS $ 0.44 $ 0.42 +5% $ 0.38 +16% GAAP GAAP Net Income 6.9 10.1 (31%) 9.4 (27%) GAAP EPS $ 0.14 $ 0.21 (33%) $ 0.20 (30%) Non-GAAP numbers have been adjusted to exclude certain items. See GAAP to Non-GAAP reconciliation & our description of our use of non-gaap information. 5
LTM Consolidated P&L Non-GAAP Non-GAAP Consolidated P&L ($M) 2014 YTD 2013 YTD YoY % LTM* Jun 2014 LTM* Jun 2013 YoY % Revenue $ 381.7 $ 351.7 +9% $ 757.7 $ 679.8 +11% GM % 54.5% 54.8% -30 bps 54.4% 54.5% -10 bps Operating Expenses 156.6 146.9 +7% 308.3 283.7 +9% Operating Profit 51.3 45.8 +12% 103.9 87.0 +19% Operating Profit % 13.4% 13.0% +0.4 pts 13.7% 12.8% +0.9 pts EBITDA 56.2 49.5 +14% 113.1 94.5 +20% Other Income/Expense (0.3) (1.7) na 1.7 0.7 +143% Tax Rate 19.0% 22.8% -3.8 pts 20.6% 23.4% -2.8 pts Net Income 41.3 34.0 +21% 83.9 67.2 +25% EPS $ 0.86 $ 0.71 +21% $ 1.73 1.40 +24% Diluted Sharecount (000's) 48,163 48,149 +0% 48,435 47,954 +1% * Last twelve months ending June 30 of the year indicated Non-GAAP numbers have been adjusted to exclude certain items. See GAAP to Non-GAAP reconciliation & our description of our use of non-gaap information. 6
Q2 2014 Non-GAAP Key Performance Metrics * * Non-GAAP numbers have been adjusted to exclude certain items. See GAAP to Non-GAAP reconciliation & our description of our use of non-gaap information. Revenue and Cash Flow from Ops are determined in accordance with GAAP. 7
Revenue by Segment & Region Revenue ($M) Q2 2014 Q1 2014 QoQ % Q2 2013 YoY % Industrial Inkjet 93.9 87.9 +7% 88.0 +7% % of Total 49% 47% 49% Productivity Software 30.8 31.7 (3%) 28.5 +8% % of Total 16% 17% 16% Fiery 68.3 69.1 (1%) 63.8 +7% % of Total 35% 36% 35% Americas 101.6 101.0 +1% 100.5 +1% % of Total 52% 54% 56% EMEA 66.9 60.5 +11% 50.0 +34% % of Total 35% 32% 28% APAC 24.5 27.2 (10%) 29.8 (18%) % of Total 13% 14% 16% Japan 5.8 5.8-5.8 - % of Total 3% 3% 3% APAC ex Japan 18.7 21.4 (12%) 24.0 (22%) % of Total 10% 11% 13% EFI $ 193.0 $ 188.7 +2% $ 180.3 +7% 8
LTM Revenue by Segment & Region LTM* LTM* Revenue ($M) 2014 YTD 2013 YTD YoY % YoY % Jun 2014 Jun 2013 Inkjet 181.8 168.3 +8% 368.2 333.6 +10% % of Total 48% 48% 49% 49% Productivity Software 62.5 56.3 +11% 124.6 109.9 +13% % of Total 16% 16% 16% 16% Fiery 137.4 127.1 +8% 264.9 236.3 +12% % of Total 36% 36% 35% 35% Americas 202.6 194.5 +4% 420.3 383.6 +10% % of Total 53% 55% 55% 56% EMEA 127.4 100.0 +27% 235.0 188.7 +25% % of Total 33% 28% 31% 28% APAC 51.7 57.2 (10%) 102.4 107.5 (5%) % of Total 14% 17% 14% 16% Japan 11.6 13.0 (11%) 20.5 26.1 (21%) % of Total 3% 4% 3% 4% APAC ex Japan 40.1 44.2 (9%) 81.8 81.4 +0% % of Total 11% 13% 11% 12% EFI $ 381.7 $ 351.7 +9% $ 757.7 $ 679.8 +11% * Last twelve months ending June 30 of the year indicated 9
Gross Margin by Business Segment Non-GAAP Non-GAAP Gross Margin % Q2 2014 Q1 2014 QoQ % Q2 2013 YoY % Industrial Inkjet 38.5% 37.3% +120 bps 40.0% -150 bps Productivity Software 72.1% 72.1% - bps 71.0% +110 bps Fiery 67.4% 69.3% -190 bps 67.4% - bps EFI 54.1% 54.9% -80 bps 54.6% -50 bps Non-GAAP numbers have been adjusted to exclude certain items. See GAAP to Non-GAAP reconciliation & our description of our use of non-gaap information. 10
Operating Expenses Non-GAAP Non-GAAP Operating Expenses ($M) Q2 2014 Q1 2014 QoQ % Q2 2013 YoY % Research & Development 31.7 30.8 +3% 30.4 +4% % of Revenue 16.4% 16.3% +10 bps 16.9% -50 bps Sales & Marketing 34.3 34.9 (2%) 33.6 +2% % of Revenue 17.8% 18.5% -70 bps 18.6% -80 bps General & Administrative 12.3 12.5 (2%) 11.0 +12% % of Revenue 6.4% 6.6% -20 bps 6.1% +30 bps EFI 78.3 78.2 +0% 75.0 +4% % of Revenue 40.6% 41.5% -90 bps 41.6% -100 bps Non-GAAP numbers have been adjusted to exclude certain items. See GAAP to Non-GAAP reconciliation & our description of our use of non-gaap information. 11
Q2 2014 GAAP to Non-GAAP Opex Bridge Operating Expenses ($M) GAAP Stock Based Comp Exp Amort of Identifited Intangibles Acquisition Related Transaction Costs Restructuring and Other Special Items* Non-GAAP Research & Development 33.7 (1.9) - - - - 31.7 % of Revenue 17.5% (1%) - - - - 16.4% Sales & Marketing 35.5 (1.2) - - - - 34.3 % of Revenue 18.4% (1%) - - - - 17.8% General & Administrative 15.5 (4.0) - (0.2) - 0.9 12.3 % of Revenue 8.0% (2.1%) - (0.1%) - 0.5% 6.4% Amortization of Intangibles 5.1 - (5.1) - - - - % of Revenue 2.6% - (2.6%) - - - - Restructuring & Other 1.5 - - - (1.5) - - % of Revenue 0.8% - - - (0.8%) - - Gain on Sale of Building & Land - - - - - - - % of Revenue - - - - - - - EFI 91.3 (7.1) (5.1) (0.2) (1.5) 0.9 78.3 % of Revenue 47.3% (3.7%) (2.6%) (0.1%) (0.8%) 0.5% 40.6% * Comprised primarily of the change in fair value of contingent consideration (earnout) in addition to small miscellaneous other reserves. Non-GAAP numbers have been adjusted to exclude certain items. See GAAP to Non-GAAP reconciliation & our description of our use of non-gaap information. 12
Consolidated P&L Non-GAAP Non-GAAP Consolidated P&L ($M) Q2 2014 Q1 2014 QoQ % Q2 2013 YoY % Revenue $ 193.0 $ 188.7 +2% $ 180.3 +7% GM % 54.1% 54.9% -80 bps 54.6% -50 bps Operating Expenses 78.3 78.2 +0% 75.0 +4% Operating Profit 26.0 25.3 +3% 23.4 +11% Operating Profit % 13.5% 13.4% +0.1 pts 13.0% +0.5 pts EBITDA 28.5 27.7 +3% 25.2 +13% Other Income/Expense (0.2) (0.1) na 0.2 na Tax Rate 19.0% 19.0% - pts 22.5% -3.5 pts Net Income 21.0 20.4 +3% 18.3 +15% EPS $ 0.44 $ 0.42 +5% $ 0.38 +16% Diluted Sharecount (000's) 47,987 48,357 (1%) 48,254 (1%) Non-GAAP numbers have been adjusted to exclude certain items. See GAAP to Non-GAAP reconciliation & our description of our use of non-gaap information. 13
Q2 2014 GAAP to Non-GAAP P&L Bridge GAAP to Non-GAAP Bridge ($M) GAAP Stock Based Comp Exp Amort of Identified Intangibles Acquisition Related Transaction Costs Restructuring and Other Special Items* Non-GAAP Revenue $ 193.0 - - - - - $ 193.0 Cost of Sales 89.2 (0.6) - - - - 88.6 GM % 53.8% 54.1% Operating Expenses (Gains) 91.3 (7.1) (5.1) (0.2) (1.5) 0.9 78.3 Operating Profit % 6.5% 13.5% Other Income/Expense (0.2) (0.2) Pre-Tax Income 12.3 7.7 5.1 0.2 1.5 (0.9) 25.9 Tax Rate 43.9% 19.0% Net Income 6.9 21.0 EPS $ 0.14 $ 0.44 Diluted Sharecount (000's) 47,987 47,987 * Operating expenses primarily include the change in fair value of contingent consideration (earnout) in addition to small miscellaneous other reserves. Non-GAAP numbers have been adjusted to exclude certain items. See GAAP to Non-GAAP reconciliation & our description of our use of non-gaap information. 14
Key Balance Sheet Figures Key Balance Sheet Figures ($M) Q2 2014 Q1 2014 Q2 2013 Total Cash & Investments $ 325 $ 316 $ 354 Cash Conversion Cycle (CCC) 59.5 69.3 56.5 Accounts Receivable (net) $ 148 $ 144 $ 129 DSO 69.7 68.9 65.2 Inventory, net $ 71 $ 71 $ 63 Inventory Turns 5.0 4.9 5.2 Total Assets $ 993 $ 982 $ 1,109 15
Key Cash and Valuation Metrics Cash Metrics ($M) Q2 2014 Q1 2014 QoQ % Q2 2013 YoY % Cash Flow From Operations $ 27.5 $ 5.9 +366% $ 19.1 +44% LTM* Cash Flow From Operations 81.0 72.6 +12% 76.6 +6% Cash Per Share 6.77 6.53 +4% 7.33 (8%) Valuation Metrics Enterprise Value (EV)** $ 1,844.0 $ 1,779.0 +4% $ 1,011.5 +82% EV Multiple of LTM EBITDA 16.3 16.2 +1% 10.7 +52% EV Multiple of LTM Cash Flow From Operations 22.8 24.5 (7%) 13.2 +72% EV Multiple of LTM Revenue 2.4 2.4 +2% 1.5 +64%.* Last 12 months ending the third calendar month of the quarter indicated ** Calculated using closing common stock share price on last trading day of the quarter indicated 16
Appendix
2013 Revenue by Business Segment 18
2012 Revenue by Business Segment 19
2011 Revenue by Business Segment 20
2013 Gross Margin by Business Segment Non-GAAP Non-GAAP numbers have been adjusted to exclude certain items. See GAAP to Non-GAAP reconciliation & the description of our use of non-gaap information in the press release for the relevant period. 21
2012 Gross Margin by Business Segment Non-GAAP Non-GAAP numbers have been adjusted to exclude certain items. See GAAP to Non-GAAP reconciliation & the description of our use of non-gaap information in the press release for the relevant period. 22
2011 Gross Margin by Business Segment Non-GAAP Non-GAAP numbers have been adjusted to exclude certain items. See GAAP to Non-GAAP reconciliation & the description of our use of non-gaap information in the press release for the relevant period. 23
Reconciliation of GAAP to Non-GAAP GAAP to Non-GAAP Reconciliation ($M) Q113 Q213 Q313 Q413 FY13 Q114 Q214 Q314 Q414 FY14 YTD GAAP Net Income (Loss) 8.4 9.4 16.1 75.2 109.1 10.1 6.9 - - 17.0 EPS $ 0.17 $ 0.20 $0.33 $ 1.54 $ 2.26 $ 0.21 $ 0.14 $ - $ - $ 0.35 ADJUSTMENTS COGS: Stock Based Compensation Expense OPEX: Stock Based Compensation Expense OPEX: Amortization of Identified Intangibles OPEX: Acquisition-Related Transaction Costs 0.4 0.4 0.5 0.5 1.8 0.5 0.6 - - 1.1 6.2 5.4 5.8 6.6 24.0 8.0 7.1 - - 15.1 4.9 4.9 4.8 4.8 19.4 4.9 5.1 - - 10.0-0.7 0.1 0.6 1.4 0.5 0.2 - - 0.7 OPEX: Litigation Settlement - - (3.3) 0.2 (3.1) 0.1 0.1 - - 0.2 OPEX: Change in FV of Contingent Consideration (0.3) (0.5) 0.4 (5.4) (5.8) (0.6) (1.0) - - (1.6) OPEX: Restructuring and Other OPEX: Building Sale Related OPEX: Gain on Sale of Building and Land OI&E: Interest on Building Sale Tax Effect of Non-GAAP Adjustments NON-GAAP 1.9 1.2 1.0 0.7 4.8 1.1 1.5 - - 2.6 (0.3) (0.6) (0.6) (0.2) (1.7) - - - - - 0.1-0.2 (117.6) (117.2) - - - - - 0.9 0.6 0.3-1.9 - - (6.4) (3.2) (6.6) 58.4 6.7 (4.2) 0.5 - - (3.7) Non-GAAP Net Income (Loss) $ 15.8 $ 18.3 $ 18.7 $ 23.8 $ 41.3 $ 20.4 $ 21.0 $ - $ - $ 41.4 Non-GAAP EPS $ 0.33 $ 0.38 $0.39 $ 0.49 $ 0.86 $ 0.42 $ 0.44 $ - $ - $ 0.86 Non-GAAP numbers have been adjusted to exclude certain items. 24
About our Non-GAAP Net Income and Adjustments Use of Non-GAAP Financial Information To supplement our condensed consolidated financial results prepared in accordance with GAAP, we use non-gaap measures of net income and earnings per diluted share that are GAAP net income and GAAP earnings per diluted share adjusted to exclude certain recurring and non-recurring costs, expenses, and gains. We believe that the presentation of non-gaap net income and non-gaap earnings per diluted share provides important supplemental information regarding non-cash expenses and significant recurring and non-recurring items that we believe are important to understanding financial and business trends relating to our financial condition and results of operations. Non-GAAP net income and non-gaap earnings per diluted share are among the primary indicators used by management as a basis for planning and forecasting future periods and by management and our Board of Directors to determine whether our operating performance has met specified targets and thresholds. Management uses non-gaap net income and non-gaap earnings per diluted share when evaluating operating performance because it believes the exclusion of the items described below, for which the amounts and/or timing may vary significantly depending on the Company s activities and other factors, facilitates comparability of the Company s operating performance from period to period. We have chosen to provide this information to investors so they can analyze our operating results in the same way that management does and use this information in their assessment of our business and the valuation of our Company. Use and Economic Substance of Non-GAAP Financial Measures We compute non-gaap net income and non-gaap earnings per diluted share by adjusting GAAP net income and GAAP earnings per diluted share to remove the impact of amortization of acquisition-related intangibles, stock-based compensation expense, restructuring and other expenses, acquisition-related transaction expenses, costs to integrate such acquisitions into our business, changes in the fair value of contingent consideration, litigation settlement charges, imputed interest expense and depreciation, net of accrued sublease income and capitalized interest, related to the sale of our corporate headquarters facility and related land, and the tax effects of those adjustments. Effective in the first quarter of 2014, we use a constant non-gaap tax rate of 19%, which we believe reflects the long term average tax rate based on our international structure and geographic distribution of revenue and profit. These excluded items are described below: o Intangible assets acquired to date are being amortized on a straight-line basis. o Stock-based compensation expense recognized in accordance with ASC 718, Stock Compensation. o Restructuring and other expenses consist of: Restructuring charges incurred as we consolidate the number and size of our facilities and, as a result, reduce the size of our workforce. Acquisition-related executive deferred compensation costs, which are dependent on the continuing employment of a former shareholder of an acquired company, are being amortized on a straight-line basis. Expenses incurred to integrate businesses acquired during the periods reported. o Acquisition-related transaction costs associated with businesses acquired during the periods reported and anticipated transactions. o Changes in fair value of contingent consideration. Our management determined that we should analyze the total return provided by the investment when evaluating operating results of an acquired entity. The total return consists of operating profit generated from the acquired entity compared to the purchase price paid, including the final amounts paid for contingent consideration without considering any post-acquisition adjustments related to changes in the fair value of the contingent consideration. Because our management believes the final purchase price paid for the acquisition reflects the accounting value assigned to both contingent consideration and to the intangible assets, we exclude the GAAP impact of any adjustments to the fair value of acquisition-related contingent consideration from the operating results of an acquisition in subsequent periods. We believe this approach is useful in understanding the long-term return provided by our acquisitions and that investors benefit from a supplemental non-gaap financial measure that excludes the impact of this adjustment. 25
About our Non-GAAP Net Income and Adjustments (continued) o Imputed net expenses related to sale of building and land. On November 1, 2012, we sold the 294,000 square foot building located at 303 Velocity Way in Foster City, California, which at that time served as our corporate headquarters, along with approximately four acres of land and certain other assets related to the property, to Gilead for $179.7 million. We used the facility until October 31, 2013, for which period rent was not required to be paid. This constituted a form of continuing involvement that prevented gain recognition until the fourth quarter of 2013. Until we vacated the building, the proceeds from the sale were recognized as deferred proceeds from property transaction on our Condensed Consolidated Balance Sheet. Imputed interest expense and depreciation, net of accrued sublease income and capitalized interest, of $0.6 million was accrued during the six months ended June 30, 2013, related to the deferred property transaction. o Tax effect of non-gaap adjustments Effective in the first quarter and continuing for the balance of 2014, we will be using a constant non-gaap tax rate of 19%, which we believe reflects the long term average tax rate based on our international structure and geographic distribution of revenue and profit. The long-term average tax rate is calculated in accordance with the principles of ASC 740, Income Taxes, after excluding the tax effect of the non-gaap items described above, to estimate the non-gaap income tax provision in each jurisdiction in which we operate. The long term average tax rate assumes that the U.S. federal research and development tax credit will be retroactively re-enacted as of January 1, 2014. In addition to excluding the tax effect of the non-gaap items described above, we have excluded the following from our non-gaap net income for the three and six months ended June 30, 2013: Tax charge of $0.3 million resulting from the filing of tax returns by foreign subsidiaries for periods prior to their acquisition by EFI. Tax benefit of $3.2 and $0.2 million from the retroactive renewal of both the 2012 U.S. federal research and development tax credit and certain international tax provisions, respectively, on January 2, 2013. The tax benefit for these items had been previously recognized in our non-gaap net income for the year ended December 31, 2012. Interest expense accrued on prior year tax reserves of $0.1 and $0.2 million for the three and six months ended June 30, 2013, respectively, as well as other tax benefits of $0.3 million for the three and six months ended June 30, 2013. Usefulness of Non-GAAP Financial Information to Investors These non-gaap measures are not in accordance with or an alternative to GAAP and may be materially different from other non-gaap measures, including similarly titled non-gaap measures, used by other companies. The presentation of this additional information should not be considered in isolation from, as a substitute for, or superior to, net income or earnings per diluted share prepared in accordance with GAAP. Non-GAAP financial measures have limitations as they do not reflect certain items that may have a material impact upon our reported financial results. We expect to continue to incur expenses of a nature similar to the non-gaap adjustments described above, and exclusion of these items from our non-gaap net income and non-gaap earnings per diluted share should not be construed as an inference that these costs are unusual, infrequent, or non-recurring. 26