By Steven Schnoll April 27, 2005 -- EFI (NASDAQ: EFII) announced disappointing results this quarter. The company exceeded earnings estimates, but is still performing well below 2004 levels. Revenues were down 23% to $82.0 million from $106.7 million in the comparable quarter in 2004. Pro forma net income in the first quarter was down 69% to $3.8 million, or $0.07 per diluted share, compared to $12.3 million, or $0.20 per diluted share, for the same quarter in 2004. The company was impacted by a recent head count reduction costing it $700,000 during the quarter as well as a stagnating market for high end digital color engines. The company’s balance sheet is still strong with total assets down slightly to $1.01 billion from $1.02 billion in the Q4 of 2004. Liabilities also decreased from $350.3 million to $344 million during the quarter ending March 31, 2005. Cash and equivalents are still strong at $656.2 million. The company also announced the acquisition of VUTEk, inc, a leader in super-wide format inkjet printers. The deal is expected to close during the third quarter of 2005. Topics of this summary: Regional Performance Segment Performance Guidance Raine Radar Q & A Regional Performance Business in China and Australia continues to prosper and grow. The first quarter global sales breakdown: North America $48.4 million, or 59% Europe – $19.7 million, or 24% Japan – $9.8 million, or 12% Asia Rim – $4.1 million, or 5 % Segment Performance Professional Printing Applications grew in the quarter by almost 14% as the company’s MIS products and workflow software continue to dominate within the graphic arts industry Weak server sales were attributed to lack of new engine introductions in the Q1. EFI expects improvement in the second half of 2005 with several new announcements anticipated. Some concern was expressed about how several low end color product introductions have negatively impacted server sales. Embedded products took a heavy hit for the quarter, decreasing 52% from $31.2 million in Q1 2004 to $20.5 million in 2005. Guidance The company restated its position that the consensus estimate for Q2 2005 revenue should come in at approximately $84 million with pro forma earnings per share being in the $0.09 range. The company is also estimating its tax rate at 25% pro forma and 22% GAAP. Raine Radar EFI’s dependence on its partners’ new product introductions has impacted the company significantly over the past few quarters. With many new product releases being delayed, EFI has had little to no control over its financial destiny. Enter the VUTEk acquisition. Similar to the Print Café purchase 2 years ago, VUTEk provides EFI a definable and controllable product. One only has to look at its solid Professional Printing Applications group to see that when it controls the sale it brings more stability to the revenue column. The market for wide format continues to expand and EFI will no longer rely solely on the fortunes of Xerox and Canon. VUTEk is a tightly run and profitable organization that should produce almost immediate positive results for EFI. This could prove to be the turnaround EFI was looking for. Q & A EFI believes they have seen the bottom in the controller business. There were no new product introduction during the Q1 The company expects to make new product announcements during the 2 nd half 2005 and beginning of 2006. New high end office color introductions by partners will positively impact revenue for 2 nd half 2005 Gross margins are down sequentially from Q4 2004 to Q1 2005 Standalone servers and PPA should grow modestly over the course of the year Businesses are replacing monochrome devices with high end office color EFI anticipates VUTEk to grow at a rate of 10% annually Fiery is the preferred controller with partners over competition EFI has no immediate plans for additional acquisitions, and will be focused on the integration of VUTEk However, EFI would consider further M&A if the company was small, had a quality product and strong opportunities for collaboration, had at least a 10% growth level, and an attractive price. According to EFI: growth opportunities still exists in the workflow market, MIS still has plenty of room to grow, homegrown systems are still the biggest competition, e-commerce acceptance still low, and CTP is mature. Currently there is no meaningful relationship between EFI and Kodak, although EFI mentioned looking forward to initiating some technology discussions