February 10, 2003 -- On Thursday, February 6, Creo Inc. (NASDAQ:CREO, TSX:CRE) announced First Quarter Fiscal 2003 financial results, for the quarter ended December 31, 2002. The earnings call produced no new information regarding the Creo agreements to increase their stake in Printcafe Software Inc. (NASDAQ: PCAF) and acquire the company. Creo currently holds 44.4% of the outstanding shares, with 10.1% expected to close February 23. The company reiterated its intent to obtain the balance of the company and combine Printcafe and Creo. The “Reading of the Financials” For the fiscal 2003 first quarter, Creo revenue was $142.8 million, an increase of 3 percent from $138.4 million in the fourth quarter of fiscal 2002. Compared to the first quarter of 2002, revenue was up 2 percent from $139.5 million. Adjusted earnings were $2.4 million compared to $2.8 million in the previous quarter, and improved by $4.7 million over the adjusted loss of $2.3 million reported in the 2002 first quarter. Under Canadian GAAP, Creo recorded earnings of $1.5 million this quarter. Weighted shares outstanding (diluted) under Canadian GAAP were 50,267,797 for the period. The Three “Rs” of Business While Creo, like most other manufacturing companies, and certainly those in the Graphic Arts industry, faces a challenging business climate with the “right team, the right products, and the right customers” according to Amos Michelson, chief executive officer of Creo. The company is on track for $1 billion in revenue by 2007. “Our competitive position is very strong, and we will continue to drive the adoption of digital production and workflow.” Successful printers will take advantage of systems to drive down costs and differentiate their services. Performance improved in Europe and Asia. China is the fastest growing market for technology and Creo has installed a newspaper CTP system in Beijing. While Europe is a larger market than North America the prospects are uneven. To strengthen the sales teams, a market-specific and industry-focused sales force is being fielded. Segment results are: The Americas – 39% of revenue Europe, Middle East, Africa (EMEA) – 35% of revenue Asia-Pacific – 12% of revenue OEM and Other – 14% of revenue (includes ScenicSoft) Creo has reached a corporate milestone: the company has placed 5000 CTP devices world wide, over one-third of all installations. And in the last two years has sold 107 newspaper CTP devices around the world. Large format CTP systems are maintaining their margins despite pricing pressure. The OEM business is showing continued strength, and Creo renewed its strategic agreement with Xerox for the supply of color servers for current and future Xerox high-speed digital printers. Graph Expo was a strong trade show resulting in the sale of two new proofing machines. Veris is in beta where results have been good, and the beta program is being expanded to Europe. Production will begin in early Q3. Consumables are a continuing revenue stream with the US market share up 40%. Creo launched a consumable bundle in 2001, and 40% of sales to single sites include the bundle now. There is also a steady increase in consumable bundling in Europe. Going Forward Creo will continue to manage its business conservatively given the uncertain economic climate around the world. The company expects an increase in operating expenses in the second quarter resulting from returning salaries to market levels after a year of reduced cash compensation. Items gleaned from the question and answer session with the analysts: 1. The ship date for the new Veris proofer has been moved out. Production is being ramped up next quarter, and there will be a slight delay. The impact of shipment will show in low single digits in Q3 and Q4. Creo wants to verify the reliability to perform to and exceed customer expectations. The company is committed to shipping reliable equipment. 2. Operating expenses haven’t dropped with revenue, and there is a sense of urgency to reduce those expenses. The return to market rate salaries was an expected increase in costs. The consolidation of the Iris facility in Vancouver should reduce costs. Creo is looking at other ways to reduce costs in the US and not affect customers or service. Targeting below $64 million in Q4. 3. January revenue in the Americas was softer than projected, and Europe performed better. The OEM business with Xerox is seasonal and on plan. The company is looking for more alternatives in the face of uncertainty. 4. Staccato® screening is a major initiative for Creo. The ability to deliver photographic quality and save money with two dot sizes is “taking over like fire” in the US and is now moving to Japan and Europe. Creo has the only equipment in production with Staccato printing. There are twelve printers in the world using 10 micron Staccato for all production – 100% of what they print is photo quality. There are hundreds of users of 20 micron Staccato. No competitor has workflow solutions to deliver equal quality stochastic printing in the workflow. 5. Creo expects to gain CTP market share this year. Market share is already significant in the US, market share in Europe is slightly more than half the market share in the US, and in Japan Creo has abut half the market share of Europe. There is room for growth in Europe and even more in Japan. The company is getting sales teams in place. 6. Violet plate technology is on the retreat. There are competitors pricing low enough to buy market share, however Creo will focus on customers who appreciate the value Creo brings. The company will not price below profitability. 7. Creo is a great believer in proceessless plates, as an unbeatable combination with stochastic printing. The only plates in production now are from Presstek. The Presstek plates are excellent plates, and if the company had been pricing to buy market share there would have been movement, but higher prices slow the penetration. Creo expects to see more vendors bringing in processless plates, and the company has demonstrated their initiative on this front. 8. The Euro ended the quarter strong, and $700,000 of financial income was recognized due to Euros held in Canada. The tax rate has increased and analysts should expect to see it in the 25% range for the rest of the year. 9. Additional provisions have been put in place for doubtful accounts in two locations: Latin America and Korea. The total is still 2-3% of revenue. 10. Creo is more bullish about the Americas and specifically the US market. The company expected more pick up as more printers were budgeting for capital expenditures. Those companies are becoming more cautious and Creo will match their caution. 11. Because the packaging market is more sensitive to the economy, Creo has not projected growth in the market. There are improvements in the packaging market outside the US. The company quickly picked up market share in the newspaper business in the US and has done well in Europe and Asia; units shipped should be 200-300 per year 12. Break down of units shipped: 30% to printers larger than $10 million 20% to printers between $5 and $10 million 30% to printers under $5 million 20% to specialty printers 13. R&D costs should go down with the Iris consolidation, and Creo will continue with an 80/20 split. The company is not specifically targeting high return short-term projects, but will continue to look at long-term investment. 14. With nearly $70 million cash on the balance sheet, Creo is always open to acquisitions. The acquisition of Printcafe is of strategic importance, though there are other vendors to turn to. Creo is not considering any offer from EFI to acquire Printcafe shares. Since Creo established Printcafe originally, and the sales teams are now thinking together, Creo wants to bring the company in. The company declined to discuss synergies and savings if Creo acquired 100% of Printcafe. Creo is also not considering acquisitions in the consumables space. 15. Integration of ScenicSoft has resulted in a drop from 72 employees to 60 in that group. 16. There has been no major change in the competitive landscape. Creo’s four main competitors are: in Europe - Agfa and Heidelberg, and in the US - Fuji and Dainippon Screen. Creo is still confident in its technology and believes it is years ahead of what the competition can provide to customers. When Creo competes on the merits of the system, it does not lose. 17. Networked Graphics Production (NGP) must deliver all components to go from idea to delivery in a complete integrated process. Creo is working to fill in the missing components. Two new inkjet contract proofing systems are available, and the next target is to connect Spire technology into NGP. Growth in Spire sales was significant in Q4 02. 18. Third party financing is part of 20-30% of all sales. In the US, 30% of deals include third party financing, and about 10% of deals in Europe are through recently added leasing company relationships. Bundling and third party leasing are having a good effect in Europe. 19. The “gray market” or used market is having an effect on image setters in North America. The used image setter market is very strong, few new 8-page image setters are being sold. But as far as used CTP equipment, Creo hasn’t seen any impact of used equipment.