Electronics For Imaging (EFII 22.73, -4.45, -16.37%), which makes hardware and
software for commercial and enterprise digital printing, is trading sharply
lower today after it stated that Q4 results will come in below market
expectations. Revenue is expected to be between $255-257 mln while non-GAAP EPS
is expected around $0.45-$0.47. Both of these metrics are well below what
analysts were expecting.
What happened? Management cites weakening economic conditions across its direct businesses for the results. Customers, said the company, that have become increasingly concerned about economic trends and insufficient clarity regarding the course of the economic environment have decided to defer and delay spending on capital equipment and software while awaiting the resolution of uncertainties. These trends amounted to a substantial shift in buying behavior versus the prior year in many of the industries that EFII serves, felt most significantly in the Americas and resulting in impact to the company’s business. Reportedly, the delays in spending materially reduced the company’s close rates at the end of the quarter.
EFII entered the quarter with a robust pipeline, and its Inkjet sales progress was tracking ahead of the prior year through the middle of December, says the company. However, the quarter’s closing few weeks were “exceptionally weak.” The majority of revenue shortfall was realized in the company’s Industrial Inkjet business, which declined approximately 5-6% year/year. Display Graphics and Building Materials were expected to be weak in the quarter but ultimately decreased more significantly than was expected.
The company noted, as expected, strong demand for its new mid-range Display Graphics products, which sold out, and again weakness at the high end of the portfolio. However, there was greater than anticipated softness around more mature hybrid products. The competitive advantage provided by the newest products outweighed some economic concerns but not enough to make up for shortfall from mature hybrid products.
A few thoughts here. First, this was a pretty large miss for EFII. This was not a penny or two on EPS; the result was quite a bit below expectations. Second, that the weakness was especially pronounced at the end of the quarter is concerning. Had it been weak in October with improvement perhaps in November/December, that would be less of a concern. The main problem with a late-breaking drop-off in sales is that it could spread into Q1 and 1H19.
Third, this could have repercussions for other companies as well. If EFII is seeing commercial and enterprise companies delaying cap-ex spending for printing equipment, they probably are delaying spending in other areas as well due to economic concerns -- just something to be cautious about heading into earnings season. Commercial printing is probably not the most representative industry for corporate spending patterns. However, if we see similar comments from other companies in other industries, we would be concerned.
With that said, the stock is sharply lower today -- not the best start for EFII's new CEO, who was hired in October 2018. Hopefully, this weakness does not linger too long into 2019, but for now, investors are apparently concerned that it might.
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