Q4 2018 Earnings Call
At this time I would like to welcome everyone to the electronics for imaging Q4, and full year 2018 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. If you'd like to ask a question. Please press Star then one on your telephone keypad to withdraw your question press the pound key.
Joann Horne Investor Relations for EFI, you May begin your conference.
Thank you Jesse and thank you everyone for joining us. This afternoon to review <unk> fourth quarter 2018, operating result, and the outlook for Q1, 2019, <unk> CEO and Mark <unk> and CFO will lead the discussion following management's prepared remarks, we'll take your questions before Bill begins his comments, let me review the Safe Harbor statement during the call.
Today, we will be making forward looking statements, which are statements other than statements of historical facts statements in the future tense, including but not limited to statements regarding our strategy plans expectations regarding revenue growth introduction of new products product portfolio productivity future opportunities for our customers demand for our <unk>.
<unk> as well as market trends product innovations, new market opportunities and acquisition strategy as well as estimates and our projections of revenue operating profit growth EPS gross margin cash flow market share operating expenses tax rate working capital and any statements.
The assumptions underlying any of the foregoing forward.
Forward looking statements are subject to risks and uncertainties that could cause our results to differ materially was closed materially adverse effects on our results. Please refer to the discussion of risk factors in our SEC filings.
We do not undertake to update in light of any new information or future results statements. We make today are made as of the date of this call and are subject to revision until the company will have on file its Form 10-K for the year ended December 31 2018.
In addition reference will be made to non-GAAP financial measures information regarding reconciliation of non-GAAP to GAAP measures can be found in the press release that was issued this afternoon on our website in the IR section at Www Dot EFI Dot com. Please note that slides corresponding to the information reviewed on today's call are also available on the investor relation.
Website, and with that I'll turn the call over to Bill.
Thank you for joining us this afternoon to review our fourth quarter results and discuss our outlook for Q1 in 2019.
Im, especially pleased to share with you. The initial steps we are taking to upgrade EFI is execution and improve the consistency of our financial results.
Final Q4 results were in line with the preliminary numbers, we shared on January 15th.
So the cash generation was actually slightly stronger.
Cash from operations for the full year exceeded our goal of 100% of non-GAAP net income.
Despite the disappointing revenue results the strong cash generation was a highlight of the quarter. Thanks to the hard work of the team.
Mark will review the details of the Q4 results.
I would like to use my comments to discuss my long term plan to once again make efi's industry, leading innovation and products the story.
I assured from the beginning that it was efi's technology that brought me to the company.
My confidence in my excitement about the innovation and the opportunity ahead has only grown over the past few months.
I'd like to start with connect our user conference last week.
Anytime with these incredibly enthused customers crystallized for me the critical role EFI plays in their success.
While listening to them discuss how the EFI ecosystem drives our business was very enlightening.
Our success this quarter with our mid market software suite, which integrates with our display graphics systems reflects how customers value the ecosystem.
The same can be said about the next generation fiery for display graphics, the fiery pro server.
Which we introduced the connect.
Our <unk> are an important differentiator and I heard over and over that the integration of our products is one reason our customers truly value EFI.
Over four days I had more than 50 meeting with customers.
Confirm for me that the strategy, we are developing over the past few months is the right one to deliver the execution our customers deserve.
To that end with my 100th day at EFI now under my belt.
We have begun rolling out a series of initiatives to drive value for our customers and EFI.
Many of these are multi quarter initiatives, but we are off to a solid start.
First we kicked off thorough supply chain review exercises across two areas of the businesses.
Both exercises identified mid single digit percentage savings opportunities that will provide capital to reinvest in the business and improve our margin profile.
We are also close to completing a search for a senior operations executive who will lead the robustness speed and cost effectiveness of our supply chain and operations.
Our second initiative is focused on product development cadence, we have completed two thorough value stream mapping exercises and our R&D process, both of which were specifically target targeted at display graphics developments.
Our review has uncovered the opportunity for substantial waste elimination, which will you realized through a combination of standardization and adoption of a more robust stage gate process.
Additionally, we will implement more timely interim stage gates with a focus on minimally viable products.
In addition, I am very pleased that we just on boarded a senior executive to head our display graphics business unit.
We expect this new leader to prioritize product initiatives and resource allocation decisions, which will be invaluable in helping to avoid the delayed product cycle cadence that has impacted our display graphics business.
Another necessary initiative is to progress our go to market approach.
Our historical approach has served us very well through the years and is a large part of EFI success to date.
Yet as our customers evolve and the industry consolidates.
We must meet customers at points that now create value for them.
We are focused on developing our consultative enterprise sales approach as well as building deeper domain expertise in markets poised for growth.
I view this opportunity as additive to where EFI is today and not a radical realignment of our sales process and.
In short by adding expertise, we can better serve customers with larger scale and organizational complexity.
This will be a longer term process. We are in the early steps of working with a third party to evaluate our current approach.
I will share more details around this topic at our Investor day in May.
The obvious question is how these steps translate to our financial results and to be clear. This is not a fast fix.
I firmly believe we are on the right path, but to rethink our internal operations and approach is only part of the answer.
The backend loaded nature of our sales was a contributor to the disappointing Q4 results.
As such this quarter, we have instituted a more rigorous financial review process as well as taking some steps to modify incentive plans.
The good news is the sales forces on board with this plan it.
It will probably take a few quarters for these changes to have a measurable impact, but we are committed to improving productivity and strengthening margins and capital generation.
While this will impact our near term results. We believe it will help to rebuild backlog smooth our results and normalize our activity throughout the quarter.
Our first quarter guidance reflects this plan.
We have also reduced our outlook to reflect conservatism following the difficult Q4, when we experience lower close rates.
To be clear the business today looks very similar to this time last year.
And without the strategic decision to change a quarter linearity our outlook would be in line with the first quarter of 2018.
We are optimistic that Q1 is a low point in this transition year.
Due in part to our outlook for Nozomi and to a much lesser extent volt.
My excitement about the nozomi opportunity has only grown after visiting a number of the customer installations.
Listening to our partners discuss how nozomi is beginning to change their businesses and the way digital expands the jobs. They can take on from customers highlights where we can take this business.
You will see our announcement later today that CSI purchased three printers throughout last year.
For competitive reasons, we couldnt announce the transactions until now but they were in our 2018 results and are not included in our 2019 outlook.
We are very excited that we are seeing multiple orders from a single customer as proof of the value of the nozomi can bring we have we have another multiple unit order from a current customer that we expect to share in the very near future.
I am equally excited about bolt, which was introduced last quarter at an event attended by 200 plus customers instead of the 100 expected.
With its unique approach marrying digital with with some high end analog technology and its unmatched speed and color quality.
<unk> brings something really special to the textile industry.
We expect to record the initial bolt revenues in the next few months and expect sales will ramp slowly through the year.
With our confidence in $120 million of revenue from Nozomi, along with an initial contribution from bolt.
And our outlook for the fiery business and the rest of the EFI business. We are confident we will achieve both revenue and EPS growth for full year 2019.
My goal once we begin to realize the benefits of the plans I just guessed out is to exit 2019 as a much more nimble efficient organization.
There is a great deal of work ahead, but I'm pleased with the engagement from the entire EFI team to take the necessary steps to improve our operations.
We will go into deeper detail on many of these topics at our Investor Day in New York in May I look forward to seeing many of you there and with that I will turn the call over to Mark.
Thank you Bill.
We delivered revenue of $257 million in Q4 in line with the preliminary results we announced on January 15 results were lower than our original expectations due to weakness in industrial inkjet equipment in productivity software license sales towards the end of the quarter.
The weakness we saw was present across all of our inkjet segments.
The highlight of the quarter was a significant year over year improvement in cash flow, allowing us to exceed our full year cash flow target.
Fiery delivered revenue just over $60 million as expected and we also saw a recovery in our ink volume as we corrected the supply issue discussed in Q3.
Productivity software had a Q4 revenue decline of 6% year over year, primarily due to weakness throughout the Americas, our industrial inkjet sales declined 5% year over year with lower printer sales, primarily in the Americas and Asia Pacific.
Industrial inkjet gross margin was lower sequentially, but up year over year due to improved margins for nozomi and our other inkjet printers. Thanks to some initial success with our efficiency initiatives.
Total recurring revenue was $84 million of 4% year over year, and representing 33% of total revenue.
non-GAAP earnings per share were <unk>, 46 down, 12% your year and lower than our expectations given the weakness in revenue.
Currency negatively impacted this quarter's revenue by about $4 million in reduced EPS by about <unk> when factoring in currency at the levels of Q4 2017.
Now, let me explain in more detail the revenue by business segment and region. The industrial Inkjet segment generated Q4 revenue of $154 million, which was equal to 60% of total EFI revenue.
This would have represented a 3% decline year over year had currency remained where it was in Q4 2017 as we mentioned during our earlier call we saw greater than expected weakness in display graphics and a more mature hybrid products beyond just the high end hybrid weakness that we experienced in Q3. This was felt primarily in the Americas.
While we sold out of our <unk> products as we expected we are not yet at full capacity on the H five simple since it was the first quarter, we shipped that product.
Our building materials and textile businesses were weak in Asia Pacific with both experiencing double digit percentage declines in China, specifically our.
Our intention going forward is to no longer give ink volume data since we are reporting ink revenue in our 10-Q, and we will hit a full year of data with the 10-K, but given the ink shortfall in Q3 due to supply constraints. We wanted to provide a final update.
In the quarter ink volume returned to double digit growth levels, which we believe primarily reflects inc. Shipments returning to normalized levels combined with some catch up from the orders we are not able to fill in Q3.
Productivity software delivered Q4 revenue of $42 $4 million, representing 17% of total EFI revenue in the quarter. This would have represented a decline of 5% had currency remained where it was in Q4 2017 as.
As we mentioned on our prior call we saw weakness late in the quarter with many deals pushed out of Q4 due to concerns by customers about making significant capital commitments.
The fiery segment delivered revenue of $60 5 million.
Down 1% year over year, representing 23% of total revenue product mix drove the gross margin up from the prior year fiery channel inventory remains in the targeted range.
In the Americas revenue totaled $129 million down 4% year over year caused primarily by a decline across our industrial inkjet and productivity software business units.
EMEA was down slightly by 1% year over year with revenue of $94 million and would have shown an increase had currency remained where it was in Q4 2017.
APAC was down 13% year over year, mainly due to lower industrial inkjet sales in China and the rest of the Asia Asia Pacific region as previously mentioned.
Looking to the March quarter for 2019 as Bill discussed we are implementing our strategic initiatives to address linearity, which we expect will result in improved margins and dsos because of this we anticipate that while nozomi will grow the rest of our direct businesses will decline, we expect industrial inkjet.
The decline high single to low double digits based on a very difficult comp with Q1 of last year when productivity software grew 25%, we expect a decline of mid to high single digit for that segment.
We expect fiery to be about flat with last year and what is the seasonally slowest quarter of the year, but expect we will average approximately $60 million per quarter for the full year continuing the trend we've seen since the start of last year all of that results in revenue guidance of $215 million to $225 million for Q1.
The strategic shift we've mentioned will take some time to positively impact our performance and therefore, we expect to see continued pressure in Q2 on revenue as a result, we will see a modestly higher percentage of our revenue in the back half of the year compared to typical years, such as 2016 and 2017.
As Bill stated already we do expect to see growth in both revenue and EPS for the full year with the benefit of Nozomi and bolt and the changes taking place throughout the rest of the business.
Moving to gross margin, where I'd like to remind you all that further commentary is on a non-GAAP basis, unless otherwise noted fourth quarter gross margin was 49, 2% up 130 basis points year over year and above our expectations due to better than expected margins in industrial inkjet and fiery industrial.
Industrial inkjet gross margin of 34% up.
100 basis points year over year, but down 60 basis points sequentially due to product mix fiery gross margin was 71, 9% with growth of 280 basis points year over year due to product mix and.
And the productivity software segment gross margin was down 120 basis points year over year to 71, 8% due to a weak license sales in the quarter.
For the first quarter of 2019, we expect overall gross margins to improve to 50% to 52%. Thanks in part to the initiatives mentioned above on revenue, we expect industrial inkjet to improve to 35% to 36% software to be in the low seventies and fiery to be around 71%.
Turning to operating expenses for the fourth quarter operating expenses were $105 million up 2% year over year, and comprising 39% of revenue an increase of 230 basis points from the year ago period, as a result of higher compensation related expenses in Q4 2018 year over year.
R&D expenses were $36 $7 million, representing 14, 3% of revenue up from 13, 9% a year ago.
And marketing expenses were $43 9 million, representing 17, 1% of revenue up from 16, 1% a year ago G&A expenses were $20 million, representing seven 8% of revenue up from six 8% a year ago.
As we have discussed we have been shifting opex within the company from products such as fiery in ceramics to our rapidly growing nozomi and textile product lines, while continuing to invest in other inkjet and software product lines to deliver consistent growth.
Higher gross margin from fiery in industrial inkjet, but lower year over year revenue combined with investment in R&D spend for our new packaging textile products resulted in an operating income was $25 $9 million down year over year with an operating margin of 10, 1%.
Other income and expense had a net loss of $1 million driven primarily by cost of our convertible bonds are constant non-GAAP tax rate remained at 19% and we expect it to remain at that level into 2019.
Looking to the first quarter of 2019, we expect non-GAAP earnings per share of 20 to 27.
As a reminder, our Q1 outlook assumes our January foreign exchange rates stay flat for the balance of the quarter. It also includes approximately <unk> <unk> per share quarterly impact from the convertible bond interest payment.
Now turning to the balance sheet.
Total cash cash equivalents and short term investments amounted to $411 million compared to $294 million at the end of last quarter cash flow from operations was $33 million or 162% of the non-GAAP net income for the quarter, a robust year over year increase in exceeding our expectations for the quarter.
Cash generation in the quarter was positively impacted by improved balance sheet metrics year over year for the full year cash from operations ended up at 101% of our non-GAAP net income.
This significant turnaround and cash generation for the company with thanks to the hard work of many people throughout our organization and I'd like to thank them for their efforts in getting us over our target level. Despite the challenging Q4 revenue results.
For 2019, we expect to again target, 90% of our non-GAAP net income and cash from operations with one qualification.
Of that about $60 million of the money, we will repay our $345 million convertible bond that matures in September is required to be classified as cash from operations as it represents the option value portion of the bonds.
We exclude this amount from our ratio calculation going forward.
Net accounts receivable was $242 million down $3 million year over year, but up 1% sequentially Dsos were 87 days up three days versus Q4 of last year.
Our net inventory balance was $134 million up $13 million sequentially and up $9 million from Q4 of last year, primarily due to unsold inventory of industrial inkjet printers in the quarter.
This drove inventory turns to $3 nine down <unk> four turns sequentially and down <unk> five turns year over year.
Stock based compensation this quarter was $14 $8 million due primarily to the grant of our annual long term performance based restricted stock units during the quarter, which are tied to our next three years' results.
This quarter, we returned $59 million to shareholders as part of our $150 million buyback program, which was put in place in January one 2016, and $125 million buyback program, which was started in Q3 2017. This.
<unk> the execution of these buyback programs, which we had committed to spend before the end of 2018 when they were created.
Total diluted share count went down sequentially to $44 5 million shares.
In summary, while it was a difficult Q4 for US there were a number of important milestones reached during the year, our nozomi launch while generating a little less than we expected for the full year at $66 million in revenue exceeded our target. When we started the year and was the biggest product launch in the history of the company.
We're able to build a significant business within a year of the launch of the product and have established EFI as the clear leader in the industry with the highest market share.
I am extremely proud of the many hours of hard work from teams across all of EFI that supported this launch and drove our success.
We mentioned during our earlier call that during Q4, one of our nozomi opportunities was delayed as the customer was not prepared to move forward Bill.
Bill mentioned in his comments that we hope to have this signed very soon I am happy to say that we just received the order from this customer which was actually our first client.
That ordered two additional nozomi units, which will be placed in two new facilities. We see this as a great endorsement of the value of nozomi to the industry.
This order was factored into our Q1 guidance <unk>.
Continuing with my review of 2018, our productivity software and textile businesses, both had record years with productivity software delivering 7% revenue growth <unk> also met our expectations for the year achieving the plan we laid out at our Investor day in November of 2017.
As Bill stated in his remarks, we are at the start of our next chapter of EFI. We are a lot of work to do but the underlying strength of our company our products our people and our customers are as strong as they have ever been and while it will take a little time I am confident we can return to the revenue and profit growth we've achieved in the many years of our history.
As always we'd like to conclude by thanking our customers employees and shareholders for their continued confidence in EFI, we will now be happy to answer questions.
Operator, we'll take questions now and if you could limit yourself to one question and a follow up and get back into queue, if you'd like to ask something else.
As a reminder, in order to ask a question. Please press Star then the number one on your telephone keypad, we will pause for just a moment to compile the Q&A roster.
Your first question comes from Shannon Cross with Cross Research. Please go ahead.
Alright. Thank you very much bill can you talk a bit about the strategy you have in terms of.
Looking at supply chain and looking at go to market.
How specifically you are running that how how many people you have and Alan I don't know just if you can kind of give us some ideas of how youre doing that and then also how that can go on at the same time is running the business, which obviously you have to do so do you have like a separate team doing it or.
What's the strategy.
Sure Hi, Shannon nice to speak to you again.
So a couple of different things.
We start in the supply chain side of things I would say, we have an opportunity to to look at our business and I use this phrase a lot a bit more horizontal than we do today today I think we look at it a bit siloed and theres, an opportunity for us to aggregate spend a bit more effectively across the organization.
Some of the efforts.
I outlined are being run by individuals that we have within the supply chain organization today just.
Maybe through a different lens of looking at the business.
Different expectation for how maybe we should engage with the supply chain.
And maybe maybe a broader mandate to leverage spend across the company.
In this area. We've also use third party resources to more quickly get at opportunities that we think might be quick wins.
And then I think as I mentioned in my prepared remarks, there are some things that we're doing to finalize kind of staffing that would be incremental to that.
In order to bring what I would consider be greater depth and experience set from a supply chain expertise.
I think we're hitting that on a couple of different vectors internal resources with a bit of a different mandate third party resources that are helping us accelerate some quick wins.
And then and then at the same time, we will be augmenting our resource base with some experienced leaders in and I think most likely one or two areas folks it.
I had good experience working with previously.
So that's the supply chain piece of things.
The sales piece again, I'm trying to I'm trying to be clear in my commentary about this being an additive exercise to what to what it is we're doing today and it's it's one of the top initiatives that we have across the company.
We are leveraging third party resources to help us if you will kind of whiteboard our organization.
Our customers' organizations have evolved over time, what we might need to do to evolve our organization.
I would tell you that a substantial amount of the the focus for me here is how do we how do we continue to build deep domain expertise in markets such as packaging and textile we think we're poised to really grow and then at the same time. This this basket of customers that are larger in scale more complex how do we <unk>.
<unk> differently.
And I think Youll see us over the next couple of next couple of quarters.
And resources to really augment both of those so I would say today, we're in a bit more of discovery phase, where a bit more and kind of work and trying to understand the organization how to best map it and in parallel looking to augment that with external resources.
Okay. Thank you that was helpful and I'm just curious since you've had a few weeks.
You guys had and then I'll just number and then everything sort of went south.
And do.
Do you have any thoughts about what happened now now that people salespeople have come back and gone back to those customers and then clearly some of the deals.
The Big news on anyone who was just signed but just in general have you got any more clarity in terms of.
Why people didn't sign at the end of the year and then.
Do they anticipate say in the next six months that you actually will close as if even if it's not in first quarter.
Yes.
Thanks for the question I figured that would be that'd be kind of top of mind for lots of folks.
One of the great things about last week as we get the opportunity to spend a few days and connect.
We we probably touch somewhere between 40 and 50% of the company's revenue stream with the number of customers that are present there.
And I think I think what I heard from from a number of customers fairly consistently is is just a bit of trepidation.
Bit of concern about where the economy is a bit of concern as to what the next couple of months might look like.
And if I go to the first part of your question.
What happened and kind of the last two weeks of December .
I think we've tried to we tried to kind of reiterate our experience set.
From when we spoke two weeks ago to today.
We entered Q4 with a really robust pipeline, we are tracking well ahead of plan and in the last two weeks really really dried up and.
And we saw that across a couple of different areas of the business.
I think thats consistent with commentary, we heard last week and what we've heard so far from customers just a bit more a bit more trepidation in terms of how they're feeling about the near term environment.
The wholesale news, which.
Which is about as real time as you can get is as good reassurance for us.
But I think we've we've factored in a level of conservatism relative to kind of the macroeconomic environment and what we experienced in December in terms of how we're thinking about the beginning part of the calendar year.
Thank you.
Your next question.
Your next question comes from Katy Huberty with Morgan Stanley . Your line is open.
Yes. Thank you.
Ask a follow up to your answer to Shannon's question I guess it would be helpful to the cause.
Context around the weaker <unk> guidance is that conservatism, because youre hearing from customers that they're going to be a bit more cautious towards capex or is that purposely assuming lower close rates and intending to.
Closed fewer deals. So that you can you can keep that pipeline going into future quarters and drive that linearity. If you can just sort of untangle those two dynamics and then I'll ask my follow up maybe Mark you can comment on this.
What are you it seems like if you take the pipeline today, what would typical conversion have been in the past and what are you assuming in guidance around compete conversion just so that we can understand.
How much you might be able to clean up the linearity issue in the first quarter versus this taking.
A couple of quarters to get rate. Thank you.
Yes, that's an awesome question. Thank you for that and I'm sure that again kind of top of mind for lots of folks.
So here's how we think about this and there is probably no perfect or to give you an exact formula but I think we started with this quarter.
And a bit a bit on the day after the after effects of kind of December we started with a much more rigorous financial review.
Of what's in the pipeline of what deals legitimately have a good shot of closed in this quarter I think we started with kind of a more detailed deeper review of every every stage in the buying process, where we capital expenditure.
Readiness by the customer et cetera to get to a starting point.
In addition to that as we go through this quarter, we're instituting a more rigorous financial review in terms of deals that will get approved.
<unk> to your point that will impact our close rates.
We're looking to do so in a thoughtful way as we look to drive margin expansion as we look to drive better and more predictable capital generation, So that will that will drive.
Our level of reduction of our close rate and then finally, we couldnt, we couldnt get to the point, we arent today without a level of factoring in the macroeconomic environment and.
And what our close rates were in Q4.
Would tell you that the close rate assumptions, we have made for Q1 are more conservative than the close rates that we experienced in Q4, I'll, let mark add a little bit more color on that in a second.
With that backdrop, we've we've kind of factored that into our guidance for Q1.
On top of which we will also be more rigorous in terms of our deal approval process.
As we look to drive margin expansion and better capital.
And then Mark just in your response, maybe maybe you can comment.
What was it what was typical linearity in the past for an average quarter right in terms of percentage of revenue in the last month, and where would you intend to get the model in the future with this with this change.
Yes, let me I just want to make one final comment, which I think was either in my prepared remarks remind mine and marks.
For what the customer.
When the customer would like to make the purchase.
And so that we believe will that lead to less lumpiness.
In the quarter.
That's great that's good.
<unk>. Thank you.
Okay.
Your next question comes from Rod Hall with Goldman Sachs. Your line is open.
Yeah, Hi, guys. Thanks for the question I guess I wanted to come back to this linearity effort my understanding and this kind of business as people tend to push deal to the end of the quarter because they understand the dynamics of poorly reporting so they use that as leverage to get better pricing.
And I guess, what I'm wondering is are in order to get them to close earlier, you're going to have to give any sort of economic and send it to them or how how exactly do implement this.
Less linear sort of a quarter and then I have a follow ups.
So so I think Roger you're exactly right.
Customers have been trained and it's been getting let's say worse over the last few years about their understanding of that so I think that's why we are saying, it's going to try to it's going to take a couple of quarters before we'd let this filter through the system, but the idea is not that we're going to try to offer a low.
Pricing or.
Or more extended terms earlier in the quarter I think the point is that where we're just there are certainly a decent quantity of deals that close each quarter, even at the end that don't require those supplemental.
Incentives to the clients and so the idea is to try to control the depth of that discounting and control the extent of the extended payment terms that we offer to the clients and if it pushes to the next quarter will let it pushes the next quarter, we don't want to lose a deal to a competitor, but by the same token we don't want to provide a.
Greater than necessary incentive to get somebody to close and one quarter versus waiting another month to the next quarter and so I think that that's the methodology and that's why you see.
Significant impact in Q1.
With the revenue guidance, where it is because we're prepared to allow those deals to slip and move forward and we're not sure whether it's going to take one quarter two quarters.
Until we start to see that momentum picking up and the deals closing on a more normal cadence.
Okay I appreciate that and then just as a follow up I wonder given that's the case what do you think the margin impact of this is going to be overtime.
We're not we're not prepared to to put a stake in the ground. I mean, you can see already with what we gave in Q1 that we're expecting margins to start the trend higher already on the gross margin side just by examining deals that were done in the prior quarters and figuring out okay. If we eliminate things that fall below that.
Threshold, what's that going to do in terms of our gross margins, but over the long term I think it's it's too soon to say.
We need to seek begin what a naturalized the level of of discounting and and payment terms will be.
Without having to provide the extra incentives to move deals upwards. So great.
Great. Okay I appreciate that.
Thank you thank you Ron.
Your next question comes from Ananda Borough with.
Capital Your line is open.
Hey, Thanks, guys for taking the question.
Hey, So just coming out last week do you do.
You feel like you're yet able to.
Well I guess.
How.
If it sounds like your customers Dell and Mark are still sort of 10 it is showing.
So in that context how.
How would you handicap.
Your ability to kind of develop confidence new revenue run rate right now guidance notwithstanding.
How would you contact that if you're not able to like if you don't feel authentically that you can you feel like sort of is great about the run right now as you would like to.
When do you think at what point and according to sort of develop that and then I just have a follow up I'll slip. It in are there any.
The supply chain initiatives that you think could hit sooner rather than later that could.
Provide a little bit more op income left.
First half of the year, thanks on both of those.
So I think we can all speak to the the supply chain initiatives I don't I don't see any of those as being Q1 benefits.
I think.
They're going to take some time to put in place in.
We wouldn't really start to see that so the back half of the year and heading into primarily in 2020 is when we will start to see the real benefits to that again, we're talking about trying to unify purchasing across different continents, and find common suppliers and leverage scale.
Things don't happen overnight.
We have to get the team in places.
Bill was talking about we have some people in mind, but we gotta get those those people on board.
In terms of when we would gain confidence.
In the in the pipeline conversions and so on that I think.
As Bill mentioned, we've done our.
Our numbers for Q1 based upon a lower close right. Then we had in either <unk> or Q1 of last year to reflect this change in behavior that we're we're putting forward.
Sure.
In our approach.
But even with that it's still going to be close to 50% of the deals.
That are going to close in that last two weeks of the quarter. I mean, that's just the nature of the Beast, we're just trying to keep that to not be 60%.
And and tried to start bringing it downwards. So it's still going to be a decent size percentage and so we're still not going to have that visibility until the very end of the quarter.
And Mark would you also just to sort of I think it was bill's comments that.
You guys are a bit more rigorous with the pipeline review.
Would that mean that.
There is there is some degree of greater confidence philosophically and it should be.
In the pipeline that you are now applying the lower clothes rates too so in theory, while while you're still getting a 50% last two weeks a quarter and customers know cautious.
This should be philosophically, there should be a bit more.
There should be a bit more firm of of revenue Guide then may be typical.
Yes, I think thats, we definitely.
When when developing the 215 to 225.
That was as Bill mentioned.
Based upon a more conservative setup assumptions around close right. Then we typically had if we were guiding like.
Using the same assumptions enclose rates that we've done historically, we would've been guiding to flat with last year.
Okay got it thanks a lot.
Thank you. Your next question comes from Jim Suva with Citigroup. Your line is open.
Hi, there Bill and Mark This is Michael can be for Jim apologies for that so my question is more general on the competitive landscape and industry house, because with that question I am trying to understand is what we saw in late for Q and thus far in this quarter indicative of behavior in the medium.
The longterm.
Or essentially is the transition from from.
Analog to digital is it.
He is a risk to it somehow will it be new later protracted I'm trying to see if.
It's just a gift followed by a trajectory to the same end point or is it the line shifted completely because of this.
Michael is bill kick off I don't know that you started off on the competitive side I don't know that we've seen anything that that is that is really shifted in terms of competitive landscape.
And I don't know if it's a question is more from the standpoint of.
Either an inhibitor or governor on the on the analog to digital Trans transfer information again, I don't know that we've seen anything whatsoever.
That.
That is slowing that I looked at data points like Nozomi and some of the some of the news coming in with with customers like you know horsa as <unk>.
Continued desire by the marketplace to enable that digital transformation.
We're hopeful, albeit albeit at a lower level and lower right. We're hopeful of seeing the same and bolt as as we launched in a product out into the marketplace.
But there's there's nothing that I'm seeing and meeting with customers.
That would.
That would indicate a slowdown in the analog to digital transformation, nor is there anything that I would put in the category of a.
A a substantial change the competitive landscape.
Very good thank you.
Thank you Michael.
Your next question comes from Jim maturity with Needham and company. Your line is open.
Alright. Thanks, Good afternoon, just a couple of questions on the new products I'm. Just wondering how we should think about that then nozomi revenue guidance that you've given for the year.
Should we assume some of that given the clothes rates that you're striving for that that's going to be more skewed toward the second half of the year.
So so I think I think maybe maybe to help from a modeling standpoint.
If you start with if you start with with the 120 assumption for the year.
And you look at you look at kind of the revenue linearity Q1, Q2, Q3, obviously queue for being being a bit of a step back.
I think fair to look at it and say year over year growth that would imply a level of acceleration as we go through the year.
So I offer that up and hope to that's helpful for modeling standpoint.
So yes, there will be more of a back and load I think.
I think again, if you look at at the first three quarters of the year and kind of model that from a from a year over year growth standpoint.
And then maybe a bit more growth in queue for that that'd be helpful and reflected on business.
Okay.
Go ahead, I'm, sorry, no no I didn't mean to cut you off marketplace.
So I was just going to say just not sure if that was clear before but so we are expecting nozomi revenue growth all four quarters of this year. So.
Kyle.
Again, I would expect that the largest portion of the growth will be towards the end of the year.
We are seeing as we mentioned some of the carryover from from last year with one of the two customers that had put a pause on queue for committing which was.
In Q1.
And we're hopeful that the other one will also commit before the end of this quarter.
Beyond that as Bill mentioned the bolt is also an important product for us for this year, that's going to be in beta for some time, we've got to get the first one ship this quarter, but that's going to be in data for three to six months and so by definition that that revenues definitely going to be in the bag.
Half of the year.
And one of the things we wanted to share on the call today relating to bulk is that.
People have been asking us about what that's going to sell for we expect the average selling price for both to be between two and a half and $3 million.
Okay. That's that's helpful and just my follow up question is.
I'm excited about about Paul.
And that's great.
You also saw some.
Slowing and the Red Gianni business, the existing Reggiani business that you have and sounds like one of your competitors is also called that out.
And their conference call and I was just wondering what what are you seeing in terms of the market.
Trends in the textile printing business, putting aside so the excitement around bulb.
Yeah. So so I would say the challenge has been in some of the developing countries.
In their general.
Their general investment profile, so China some of the other developing Asia countries.
Have really slowed down some spending and so that ripples into the.
Into the textile World certainly Reggiani still grew last year.
For Ah for the year as we expected them to grow for the year, but.
But I think they.
Outsize hit on the textile business, because there's more business in the in some of the developing countries.
But.
Bolt as a step change for us certainly for that business that that type of AFP are most of our printers sell for.
An average of about a half a million dollars a piece of going to a two and a half to $3 million printer.
Significant change for us and while we're not going to sell that many in 2002.
19.
It's still it's still a big change in a big opportunity for us to accelerate the textile world.
Got it thanks a lot.
Your next question comes from Aaron Rakers with Wells Fargo. You May if you can you.
Yeah. Thanks for taking the question I do have a follow up as well I just wanted to go back to the earlier comment on just kind of a setup as we work through some of this kind of change in linearity in.
Given some of the product things that you had talked about if I look back over the past, let's call. It three years, you've grown into Q sequentially about 7% on average.
Just made a comment that you would expect growth to accelerate through the course of of 19. Some I'm curious as should we assume that normal seasonality into cute into <unk> is a fair point of reference to consider when do you think it could be below seasonality given some of these these things you are working through and I am just do you.
Thank you actually can get back to year over year revenue growth in the back half of the calendar year.
Yeah. So first in terms of.
The sequential behavior from Q1, Q2, I do think that should be.
Behave normally obviously, we're at a lower number for Q1.
Full year growth in sales and EPS. So I'm trying to bridge. This so from one standpoint, you're saying that customer tepid newness and spending is there and you guys are more conservative and closing rates.
Assuming that the first half is going to be down in it.
Order to get to a full year grow that kind of implies some really strong seasonality in second half guide.
15, 20% growth second half versus first half just trying to understand what gives you confidence that you know that that <unk> going to disappear and the pipeline is gonna be dare I understand you guys have some new projects coming up.
And that but do you guys have assumed at the closing rates are going to improve in the second half of 19.
Yeah, I'll start off and as Mark.
Color.
So what gives us confidence I guess, maybe bucket that in three or four areas kind of given the current macroeconomic environment.
First I would start with nozomi given the growth expectation, we have for that business coming off a good 2018.
The level of substantial growth in 2019 as well so I think that if you think about how you think about the nozomi contribution as a percentage of our business that gives us confidence.
If you think about bold and the contribution although again.
Muted in 19, I think the incremental bolt contribution which is absolutely not in any of our 18 numbers that gives us the level of confidence.
We've talked about we talked about the fiery business, averaging $60 million a quarter of revenue every quarter kind of on average right.
For for the year, So I think from a foundational standpoint that gives us a level of confidence.
Although I guess, we haven't talked much about the productivity software business as we think about the outlook for that business and we think about historical ranges that we provided in terms of organic growth of our <unk>.
3% to 6%.
Feel good about we feel good about that being towards the lower end of those ranges. So if I. If I think about all of those with a couple of those being additive to our 2018 run rate.
And then still factor in maybe some headwinds in some other areas of the business.
The summation of all that that that gives us a level of confidence that we'll achieve year over year growth.
Okay.
No I would just add to that.
We are we will have a compare against a unusually weak Q4.
For 2018, and the combination of the bulk being available in Q4.
Of 19 plus.
We've mentioned before our high end of display graphics launch, we expect to have in the back half of 19.
We will have or are the existing 83 and <unk> five at full speed in the back half of 19, which it wasn't in the back half of 18.
And obviously, we expect nozomi to continue to ramp so all of those factors give us the confidence in being still able to look at it enough growth in the back half to get us the growth for the full year.
Okay that makes sense and just as a follow up can you guys talk about nozomi capacity plans for 2019.
To the extent you can do you see the need to expand capacity beyond the 10 units predictions per quarter and I'm sure I'm not sure. If you guys are 10 or you can achieve a little bit more than that with the current capacity.
So.
We can do.
Clarify again for everybody.
Our current team can produce 10 per quarter.
If we have demand for more than 10.
We can produce many more than that in the existing facility by just adding another shift.
Is that basically just running one eight hour shifts a day, we could go to two eight hour shifts if needed and double that capacity without changing the footprint. So.
So we're not concerned about capacity constraints right now.
Okay. That's helpful. Thanks, guys. Good luck.
Thank you very much thank you.
And this is all the time, we have for questions I will turn the call back over to Bill mirror for some closing remarks.
Folks just wanted to say thank you. Thank you for your interest in our company. Thanks for the thoughtful questions today, Mark and I sit here incredibly excited about the opportunity we have in 19 and beyond there's some hard work in front of US I think we have good line of sight as to as to what that hard work is and more importantly, I think we have good line of sight.
To the extent that we execute as we should to the value that we can create.
For our customers and by extension for the company.
So we're looking forward to updating you on our progress as we go through the year and again, thanks for your interest.
This concludes today's conference call you may now disconnect.
Okay.