By Jean Goodwin November 2, 2004 -- EFI (Nasdaq: EFII) today announced third quarter revenue of $97.6 million down 1% from $16 million for the third quarter of 2003. Pro forma net income was $8.9 million or $0.16 per diluted share for the third quarter. On a year over year basis, pro forma net income decreased 31% from the $12.8 million and $0.24 per share from the third quarter of 2003. GAAP net income was $16.1 million or $0.30 per diluted share for the quarter, up 31.0% over the GAAP net income of $12.2 million or $0.23 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 Americas increased to $54.9 million showing a 16.4% year over year improvement. The year over year results reflect revenue from print MIS software not included in the previous year offset by declines in the embedded product category. Revenues in Europe were $24.4 million, a 10.5% increase. The year over year came from a decline in the embedded business with modest growth in servers and strong growth in professional services. Japan revenues were $14.2 million, down 27.9%. The decline was entirely due to reduced embedded sales. In the Asia/Pacific region, revenues were $4.0 million, up 28.2% on a year over year basis and up 7.0% sequentially. The year over year strong results came from server placement which offset the weakness in the embedded category. Segment Performance Server products showed 25.3% in unit volume, contributed 44% of total revenue, and was down 5.4% on a sequential basis. Server product revenue was up 8.8% year over year driven by the S series platform which was launched in the fourth quarter 2003. This segment was impacted by the delay of a server with an existing OEM whose scheduled launch has been pushed out to next year. Embedded Products was 73.7% of volume, and was 30.9% of revenues. Professional Printing Applications continues to be an important part of the business and is made up 17.3% of total revenues and showed a 31% organic growth during the third quarter. Miscellaneous segment was 8.0% of total revenue and made up 1% of total volume. This was a 3% decline sequentially. A reduction in spares was the largest driver of the decline. Guidance EFI anticipates a fourth quarter proforma earnings per share of $0.17. EFI expects fourth quarter revenue to be roughly flat with the third quarter. Professional Printing Applications are on track to beat the 15% to 20% growth guidance. Raine Analyst Take: Many of the questions centered on the performance in the server and PPA segments, the competition and new product release schedule. EFI continues to believe new product launches and a commitment to the software business will continue with their solid profitability and strong margin opportunities. Last quarter, EFI restructured their sales organization of the “Printcafe” acquisition by consolidating territories and terminating sales personnel. We believe the restructuring is a result of poor sales for print management systems in general. EFI continues to focus on their Hagen products; however over the next 2-3 years, Raine sees the demand for sophisticated estimating software in decline. EFI will have to re-invent the Printcafe suite of products to a new audience otherwise the ROI on this highly-publicized acquisition is questionable as best. Q & A The $1,000,000 severance breakdown is as follows: $300,000 in R&D, $600,000 in Sales and marketing and $100,000 in G&A EFI sees more of the newer engines produced in the second half of 2005. The first half of the year will continue to move the product that was pushed out at the end of this year. The reason for less software being sold was not due to unbundling of the offering. They just sold fewer servers in Q3. The explanation for stating a desire to reduce dependency on the OEMs is to reduce the volatility from a financial perspective on EFI. Today 80% of the business is in OEMs and 20% in software. EFI continues to grow faster in the software side to increase the percentage of their business in software. EFI will continue to consider all possible acquisitions when there is a fit both geographically and technically. It was said that a competitor is looking to acquire Strategic Alternatives. EFI was not interested in them at this time. Even though there is a shift with the top customer, EFI does not see a change in their product mix as a result. They continue to have a full mix of products to their top three customers. As far as market conditions, the need for MIS and applications is as strong as ever. The question is about when they are going to buy it. Competition is always a factor; however, there are fewer players due to acquisitions. EFI continues to focus on solutions for the print industry and is recognized as a leader in the business. They continue to develop products that are very intuitive and are able to move quickly. The timing of the first wave of the new controller feature/functionality should be in the second half of 2005 with the second wave in 2006. With the lower end office, EFI is hoping to get a higher share of the market by adding feature/functionality that provides a greater value to the customer as well as looking at ways to lower the cost. EFI will never be less expensive than a home grown OEM controller. The expansion of the PPA segment will be done primarily through a direct sales channel with some through OEM partners and distributors. The reason for the decline is PPA for Q3 is directly tied to the decline in server sales. EFI believes with new product launches the trend will not continue. With regards to a stock buy back, EFI will opportunistically look at their options.