By Ann Levine July 26, 2004 -- EFI (Nasdaq: EFII) recently announced second quarter revenue of $109.1 million up 23% from $88.7 million for the second quarter of 2003. Pro forma net income was $12.6 million or $0.23 per diluted share for the second quarter. On a year over year basis, pro forma net income increased 37% from the $9.2 million and $0.17 per share from the second quarter of 2003. GAAP net income was $10.1 million or $0.18 per diluted share for the quarter, up 23.8% over the GAAP net income of $8.1 million or $0.15 per diluted share reported for the same period last year. Topics of this summary: Regional Performance Segment Performance Guidance Q & A Regional Performance Revenues in the America’s increased to $59.4 million showing a 35.5% year over year improvement. This was due to print MIS software and growth in servers. Revenues in Europe were $29.1 million, a 2.4% increase. Europe showed strength in the server business. Japan revenues were $16.6 million, up 48.4% showing strong overall sales and strong server sales. Japan also had significant volumes in design licensing products. In the Asia/Pacific region, revenues were $4.0 million, down 23.4% on a year over year basis and up 5.2% sequentially. The decline was due to fewer design licensing sales into the region. Segment Performance Server products showed 23% in unit volume, contributed 42% of total revenue, and was down 9.9% on a sequential basis. This segment saw exceptional demand during the fourth quarter of 2003 and is expected to modestly increase during the third quarter of 2004. Embedded Products was 76% of volume, was 34.1% of revenues. Increases in this segment was due to growth in office color products and higher margins on design licensing. An OEM product delay has caused softness in this segment and is expected to continue. Professional Printing Applications made up 17% of total revenues and showed a 30% organic growth during the second quarter. 15-20% organic growth is expected for future quarters. Miscellaneous segment was 7.3% of total revenue and made up 1% of total volume. A slight increase in anticipated in the category in the third quarter. Guidance EFI anticipates third quarter revenues at $110 million with diluted earnings per share of $0.26. EFI expect a strong third quarter in Professional Printing Application and softness in Embedded Products. Q & A Raine Analyst Take:In today’s excruciatingly long conference call, EFI answered the same analyst question at least three times from various participants with regard to its Server product segment and its statement of expecting a softness in this area. EFI officials finally admitted the segment did not experience softness but that performance was not as strong as expected. EFI did not give specifics during today’s call with regard to revenues in the fourth quarter of 2004. The Server segment is typically strong in the fourth quarter. Embedded products are expected to decline slightly from the second to third quarter with a slight increase between the third and fourth quarter. PPA will have continued growth from the third to fourth quarter. The Miscellaneous segment is expected to remain essentially flat. Overall, revenues are expected to be slightly higher in the fourth quarter over the third quarter. EFI experienced a product delay on a design licensing deal for a low-end office color product. This delay had a two-cent impact of EPS lowering guidance to $0.26 from $0.28 per share. The lunch has been pushed out to the beginning of next year. Higher end products are experiencing a strong year over year growth. It is a healthy category but could be stronger. EFI has $15 million remaining on its current authorization for stock buy-back and can aggressively move forward with a buy back if officials sense a weakness in the market. In commenting on its pipeline, EFI indicated they have over 100 new products running through the organization that is up from 75 a year ago. There is not a linier relationship between number of products and revenue. EFI expects server revenue in the fourth quarter due to product activity and seasonality of the product. Europe experienced a weakness in the Server business on a sequential basis in comparison with the U.S. There was a drop in revenue expectations due to a mixture of issues, such as one product delay which would have had a couple of million dollar impact on the bottom line, and some third quarter softness. With regard to OEM controllers, focus has been on products where EFI typically has a lower market share. Officials noted that nothing is eroding, as EFI continues to add new products. It was noted that EFI has allot of cash on its balance sheet and a question was raised regarding future acquisitions with that cash. EFI took a break, so to speak, from making actively pursing acquisition opportunities in order to merge the most recent acquisitions into its operations. The cash balance may be used for future acquisitions or stock buy backs. EFI’s acquisition strategy is to look at companies with strong bottom line results. There are currently a number of opportunities with software companies that have new growth opportunities or provide a way to target a new area. EFI looks at companies that can be accretive in the first couple of quarters. Acquisitions have to make sense in the near term. FX did not have a significant impact on EFI’s guidance as the majority of its products are sold and billed in U. S. dollars. FX can always have an impact but there is nothing significant anticipated in the second half of the year. EFI has not seen any dramatic shift in the momentum between devices and office products. Design wins in office products require faster changes and there are opportunities to upgrade existing users. Aside from revenue, EFI is measuring progress in its PPA segment through the positive reception at their recently sponsored user conference. Attendees expressed receptivity for new solutions and a migration towards additional automation. Other measures include field level opportunities, and case studies in trade publications showing the market is receptive to new products. The $0.02 impact for the delayed design license product will have an impact in both the third and fourth quarters of 2004. The softness in Embedded products was related to the 2cent hit, aging products in the market place and the focus of the sales teams on new products over older products. Operating expenditures for the third quarter are targeted at $53 million. The largest reduction will come out of sales and marketing mainly due to the drop off in trade shows for the remainder of the year. The company is taking measures across the board to reduce operating expenditures. There was a 30% organic growth in the software side of the business in the second quarter. EFI expects continued organic growth in the back half of the year, but at a 15-20% level. Software sales people have been added mostly outside the U.S. where there is more opportunity in the Print MIS business. EFI’s guidance has not taken into account anything for a contingent conversion to date.