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WTT Exclusive: EFI’s Fourth Quarter Down Turn Results in Layoffs

Press release from the issuing company

December 20, 2004 -- (WhatTheyThink.com Exclusive by Senior Editor, Gail Nickel-Kailing) – Late Thursday, December 16, EFI hosted a conference call providing an update on revenue estimates of the company’s fourth quarter results. Based on current estimates, fourth quarter revenue is projected to be about $81 million. That is considerably less than last quarter’s revenue of $97.6 million, and down more than 25% from Q4 2003 when the last quarter revenue reached nearly $108 million. In the company’s press release, dated December 16, EFI pointed out that the poor results were a direct reflection of the slowing demand for high performance color copiers and the tight inventory management by EFI’s OEM partners. It appears that because there are no new engines being launched that would drive people to upgrade, more are purchasing used equipment; and OEM partners are cutting inventory from four to six weeks’ stock on hand, to about two weeks’ inventory. While Xerox continues to be bullish about both color and black & white, the company has launched a new line of black & white machines where EFI doesn’t participate. “We’re confident the demand for high speed color will continue to be strong in both the office and production markets,” said Guy Gecht, CEO, EFI. “The pipeline is good and there is no shortage of people asking us to be on those engines.” New product launches of higher end products are expected to be stronger in the second half of 2005 and early 2006. There are releases of new mid-range and high-end color engines projected across the market, but more will be appearing in 2006 than in 2005. To more aggressively address the changing market, EFI is developing functionality suitable for the low end. Even with the revenue drop, EFI is expected to show a profit for the year. “We’re still profitable,” said Guy Gecht, CEO, in an exclusive interview with WhatTheyThink. “We’re not as profitable as we’d like to be, however we’re taking steps to continue to become more profitable.” One of the areas where EFI is seeing continued profits and growth is in its print commercial print portfolio. “Our MIS sales this year have already exceeded the best year in the history of the former Printcafe (which EFI acquired last year) and both new and old customers have been very anxious to learn about our leading technologies,” Guy noted. Cost containment efforts planned include staffing reduction of about 5%, or around 75 employees. “We are just starting to determine the cuts and we expect to finish in early January,” Gecht said. “We want to do it quickly. It is very painful for us to do because we have fantastic, talented people.” Even as late as November, EFI was hiring, and it appears the hiring was getting ahead of the revenue. Industry analysts have been calling for cuts in R&D for Creo and are just as likely to ask for R&D cuts by EFI whose R&D expenses were 29% in Q3 and, if not reduced considerably in Q4, could exceed 30% of revenue. Gecht defended his company’s expenditures by saying, “80% of our business provides components to original equipment manufacturers, and in an OEM business your R&D costs are higher. Realize that our contribution to the final price is simply the technology, we don’t have high sales and marketing expenditures or product or customer support. The OEM does most of the marketing and almost all of the sales; most of the margin goes to the OEM. Therefore you should expect us to have a high percent of R&D costs.” Having said that, Guy also agreed, “obviously some of the areas where we invested are showing slower growth or aren’t as profitable as we expected them to be. We will be adjusting the R&D down as we adjust the costs across the entire company.” With a large amount of cash in the bank, EFI is becoming more aggressive about acquisitions, however the strategy has not changed. The company is seeking acquisitions that will accelerate the company’s growth, and which will be quickly accretive. The company has always been conservative and looks at acquisitions carefully to make good use of the cash; EFI will not bet the company on something risky. In closing, Guy pointed out, “Expect only more good things from EFI. We feel good about what we accomplished in 2004, and we regret that the year ended in disappointing financial results. We are going to continue to take care of our customers. For those who saw the stock drop 10% as a result of missing the quarter – the stock price is not a reflection of the quality of the company and the things we’re doing for the industry. We’re very committed to the industry and we’re gong to be here for many years, bringing innovation and technology to help the industry be more efficient, more profitable, and more competitive with other means of media.”