EFI: In the Industry’s Sweet Spot? An Interview with Fred Rosenzweig

By Cary Sherburne, Senior WTT Editor

October 26, 2005 -- On October 19th, EFI reported outstanding financial results, with pro forma net income of $21.8 million or $0.35 per diluted share in the third quarter of 2005, up compared to $8.9 million or $0.15 per diluted share for the same period in 2004. The Company also stated that it is raising its expectations for Q4. It expects revenues in the range of $140 million to $143 million and pro forma earnings per share of $0.33 to $0.35. EFI indicated that strong performance in its Fiery controller business was largely responsible for this performance.

WhatTheyThink talked with EFI’s President, Fred Rosenzweig, to get the inside scoop on this outstanding performance, as well as his views on the future of EFI and the industry.

WTT: Fred, first, congratulations on your third quarter results and excellent fourth quarter prospects! Variability in the Fiery business has been an issue in the past, but this time it seems to be working in your favor.

FR: It feels really good to be able to deliver this type of performance. We have announced eight to ten new products over the last three months, and they have generated great demand. In 2004, our OEM partners only introduced two new color engines during the entire year, and one was at the lower end of our range at 22 ppm while the other was the Xerox DocuColor 8000 that came out at the end of the year. This market is really driven by new engines, and in 2005, we finally got them. The good news is that there are still a number of new engines coming out between now and the end of next year. The OEMs seem to create similar engines around the same time, so every three to four years, they have a huge bubble of new product development. That is what is happening now.

WTT: As you look at your progress following your numerous acquisitions, which were partially done to stabilize your business, do you feel you have achieved that aim?

FR: We have stabilized some of it. Who knows what market conditions will do over time or what will happen with market share. But we do believe we have stabilized the Fiery business. The stabilization of the rest of our business by diversifying into areas other than the OEM business will only make us stronger.

WTT: How is the VUTEk integration going?

FR: It is going very well. We haven’t done massive integration They were a very well run and profitable business, and though we have tried to influence them a little bit in some of their development efforts by sharing our expertise, we haven’t had to make any huge organizational changes. One of the key things we are doing is working with our entire combined sales force to enable MIS/Fiery/VUTEk cross-selling. We see a lot of synergy there. We are very proud of the fact that VUTEk sales have continued to grow post-acquisition, and the customer base is very happy with the fact that we bought VUTEk. Usually the customer base is leery about an acquisition of this nature and wants to see what the new owner is all about. To counteract that, we have been out in the field and have done a lot of personal one-to-one messaging with our executive team and through the sales force, reinforcing the fact that the acquisition is good for the company, and the customers seem to be agreeing. That is demonstrated by a nice, steady increase in revenues from VUTEk.

WTT: You had a strong presence at Print 05. How did that go?

FR: Print was great for us. We actually had two booths, since VUTEk had already committed to a booth before we acquired them. Theirs was in the wide format pavilion. Last year at GraphExpo, the show company made some very attractive offers to the superwide format players because it was a new category and they wanted to incent them to come to Print in addition to their normal venue at SGIA. Unfortunately, SGIA was scheduled to be held in New Orleans and was cancelled due to the hurricane issues. So we put an extra investment into VUTEk’s Print 05 presence to increase exposure. In the EFI booth, we had all of our MIS, workflow, Fiery and the traditional products. There was some connectivity between the two booths, and of course, we were able to send people from one to the other as their interest dictated, since booths were fairly close to each other. Some VUTEk customers were interested in looking at MIS, and some EFI visitors were interested in superwide format. There was also some cross pollination on proofing. We are excited about the way this has all come together.

WTT: What was the response to your Executive Information System?

FR: If you Google EIS and EFI, it is unbelievable. Even before the show, there were over 20 articles written. When customers hear about it, their eyes get huge. Our customers have always asked us for more informative report writing, and this gives them the opportunity to easily structure the presentation of their business information in a way that helps them better manage their businesses.

WTT: Coming off the show, what are some of the industry trends you are seeing?

FR: I think a lot of things are happening. Short runs are becoming more and more prevalent. People are saying they are glad JDF is happening, allowing them to change over presses between jobs more quickly. And more work is migrating to digital production. Variable Data Printing is becoming more important. And printers are recognizing that this new market is here to stay and that we are never going back to the “good old days” of 1999. As a result, they know they need to be more efficient and have solid business data at their fingertips in order to be profitable. The kind of products EFI offers puts good information at their fingertips and gives them tools to more efficiently do shorter run, high value work.

WTT: What are your thoughts about the future of print and EFI’s role in that?

FR: There is no question that the market is changing permanently. There is a lot of competition for media. There is competition with the Internet, e-mail, telemarketing—the reality is that printers have to be smart about what kinds of things they do and use. We are enabling a lot of that—how to get the best information to accurately estimate a job, how to produce the job most efficiently, and how to capitalize on the value of variable data campaigns and to market and sell them. To be honest with you, we think the market has moved into our sweet spot, and we are actively helping printers deal with the reality of the market today. Our entire R&D budget, over $100 million a year, is focused on printing. That is what we do. We don’t have a biological sciences group or a health imaging group here. Our R&D investments go into areas that will make printers more productive and profitable, and if we can do that, they will buy more from us.

WTT: What does that say about the longer term viability of print?

FR: I hardly get any e-mail campaigns because they go right into the spam filter. Telemarketing is harder because of Do Not Call initiatives. When I travel on planes, I see a lot of people carrying a lot of paper. For example, I print out the stories from WhatTheyThink that I want to read and take them on the plane. I believe that printing has increased tremendously because of Internet. It is just that it is being printed differently. There is so much more information generated. Our generation does not like to read long articles on the screen. That will probably change in the future, but for now, print still has a significant role to play.

WTT: How about RFID?

FR: RFID is certainly a growth area, but it has to go through a phase of cost reduction. It is a lot like digital color printing. We talked about digital color a lot in the mid 1990s and it didn’t really happen until the early 2000’s, mostly due to price/performance issues. RFID is pretty costly right now, and the infrastructure in the country and the world isn’t set up to handle it yet. As it becomes more efficient, it will definitely have an impact. We are watching these trends carefully.

WTT:Document management is another area EFI seems to be getting into. What do you see happening there and how does that play into the role of print in the media mix?

FR: Document management in general has been a big trend. People are struggling to efficiently get to the valuable information they have scattered around the enterprise in all their corporate disk space. Companies are also looking at budgets with respect to how to more effectively spend their marketing dollars. And they are harnessing marketing data contained in document management and other database systems in the deployment of variable data campaigns, not because they are cool, but to get a better return on the dollar. A lot of companies, like Proctor & Gamble, for example, are spending less on generic television ads. There are so many different TV stations and so many different targeted markets, and it costs so much to produce a TV ad, you wonder if it is even possible to produce a TV ad that you can show to all these markets and be effective. So companies are really looking for ways to achieve a better ROI on marketing spend. To do that effectively, people will have smaller variant marketing messages in smaller variant campaigns. This means that one-to-one marketing, variable data print, smaller print jobs, shorter runs, will become the name of the game, and that’s our sweet spot. It has taken a long time to get to that point, but people are realizing it is harder and harder to get huge revenue growth and that with smaller revenue growth they have to contain their dollar spend to gain the best return they can. These types of programs help them do that.

WTT: Fred, thanks for sharing your thoughts with us. Is there anything else you would like to add before we close?

FR: Yes. At heart, we are a printing company, a company for printers. Our whole reason for being is to help make their profits and productivity go up. That’s where our R&D moneys are spent. We are listening to customers all the time, looking for new applications that can help them grow their businesses profitably. We are working to make them better, and that will make us better. We are excited about what’s happening, and we are in the part of the market that’s growing. That was very evident at Print 05, and we believe it will be the case for some time to come.

This Interview was conducted by Cary Sherburne. She can be reached via email at cary@sherburneassociates.com, online at www.sherburneassociates.com and by telephone at 603-430-5463.

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