By Ann Levine February 6, 2004 - Creo, Inc. (Nasdaq: CREO) today announced first quarter 2004 revenues of $154.9 million, a 9% increase over the $142.8 million reported for the same period last year. Net earnings for the quarter were $12.3 million or $0.24 per diluted share. For the same period last year, net earnings were $1.5 million or $0.03 per diluted share. First quarter net earnings include a one-time gain of $0.17 per diluted share from the sale of PrintCafe. With the earnings announcement, Creo delivered its best performance in fourteen quarters and the highest quarterly revenue in nine quarters. Topics of this summary: Company Performance Creo Strategy Second Quarter Guidance Q & A Company Performance Consumable revenues were $13.4 million, up 13% over Q4 2003. The company expects to increase consumable sales by 50% in 2004. Newspapers continue to be a strong market for Creo with sales about even as the fourth quarter. Unit shipments showed a strong upward trend. At the end of the first quarter, the Veris proofer was moved into production and is expected to be a source of consumable revenue growth. Also announced during the last month was a joint development agreement with Xerox for the development of workflow software for digital printing. Regionally, performance in the America's was down 9% compared the Q1 2003, due to customer orders booked late in the quarter and corresponding delays in system installations. EMEA had a 21% increase in performance principally due to the strength of the Euro foreign exchange. Asia/Pacific revenues increased 22%, primarily driven by strong sales growth in Japan offset by reduced product revenue in other parts of Asia/Pacific. Creo Strategy Moving forward, Creo announced three elements of its strategy. During the first quarter, the company closed on its acquisition of a plant in S. Africa, which it plans to quickly integrate into operations. Secondly, Creo has added digital presses to its product offering. Lastly, the company plans to maximize its operating leverage through a restructuring that will impact approximately 100 employees. Restructuring and severance charges will impact performance by $0.03 per diluted share in the second quarter. Creo will scale down activities in R & D and will consolidate operations. Second Quarter Guidance For the second quarter, Creo expects revenues between $155-160 million with diluted earnings per share between $0.02 and $0.06. Creo will also begin expensing stock options granted in 2004 and beyond. Creo has chosen to adopt the new CICA accounting standards early. Q & A The guidance for the quarter considered an anticipated decline in North American business. The company expects to reach fourth quarter levels in North America during the second quarter of 2004. Creo is at full volume with the production in its digital plate business and they are focusing on increasing the attachment rate according to the company's plan. The restructuring impact will fall across sales and marketing and G & A equally. The commercial printing business is running well with Creo a major competitive printer in North America, Europe and Japan. Competitors are moving to put a new product in place that is similar to Creo's Staccato product. Scanning technology can be developed by any competitor, but Creo has been able to implement their technology in the field. Company revenue growth year over year, and quarter over quarter, can be attributed to foreign exchange impacts and organic growth. About 75% is attributed to foreign exchange because of a strengthening Euro, and 25% to organic growth. The net impact on the bottom line ranged from $0.01 - $0.02 per share. Impact on the operating expenses has been significant year over year. Orders have come in as expected in the first quarter. The company is also on track for business volume in the plate business and is still on track for 50% year over year growth. Creo cites expenses associated with the upcoming Drupa show as offsetting some of the operating leverage recently gained. Expenses include marketing materials, ramping up some R & D activities and the cost of materials. Severance expenses have also impacted first quarter operating leverage. Creo expects sequential revenue growth as a result of building orders around the world. The greatest level of order intake will be after Drupa. Outside of Europe, there will not be a substantial increase in orders, but a slow and steady growth. The Veris proofer went into production at the end of last quarter with the initial results very strong. Creo plans to deliver and install over 100 units by Q3 2004. In North America, Creo is focusing on growth markets such as newspapers, packaging, and enterprise systems. The company has reorganized its sales force in North America to focus on enterprise and commercial segments. Enterprise accounts are considered to be those that generate $3 million and above in revenues, therefore $3 million and below are in the commercial segment. Even with the announcement of the reseller agreement with Xerox, Creo will not be adding significant headcount to the sales force. Creo mentioned in their latest news release a focus on the growth aspects of the business and de-emphasizing other aspects. Creo has realigned operations through the reduction of operational staff in Israel and Canada, and reduced back office staff and field support in Europe. Creo has also reduced some of the R& D staff that was working in lower priority markets. The company categorized the change as realigning its cost structure a general belt-tightening. The focus in the next quarter or two will be the Drupa launch in May 2004 and securing and improving the Xerox distribution. The realignment steps were taken to strengthen the company's operating leverage. The facility in S. Africa was an efficient facility before Creo's purchase and the expectation is for the plant to be accretive in the second quarter 2004. In Asia, business is primarily in computer-to-film rather than computer-to-plate. Creo is expecting to see and explosion of CTP in China in the next couple of years due to consumable prices falling and due to savings on paper and press time realized with the CTP product. Creo expects a 15% margin level by the end of 2005. Creo has seen an increasing amount of leasing activity in Europe, approaching leasing levels in North America. Leasing is still attractive in North America and the sales forces for Europe are increasingly utilizing this option.