Zebra Technologies Corporation
Q1 2008 Earnings Call Transcript

Published: 23 Apr 2008

[Operator:]

Good morning and welcome to the Zebra Technologies first quarter earnings release conference call. Joining us from Zebra Technologies are Mr. Anders Gustafsson, CEO and Mr. Charles Whitchurch, CFO of Zebra Technologies. (Operator Instructions) At this time, I would like to introduce Mr. Charles Whitchurch, CFO of Zebra Technologies. Sir, you may begin.

[Charles Whitchurch:]

Good morning, everyone and thank you for joining us today for first quarter results. Certain statements we'll make on this call will relate to future events or circumstances and therefore will be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Words such as expect, believe and anticipate are a few examples of the words identifying forward-looking statements. Forward-looking statements and information is subject to various risks and uncertainties which could significantly affect expected results. Risk factors were also noted in the news release we issued this morning and are also described in Zebra's 10-K for the year ended December 31, 2007 which is on file with the SEC. Now let me turn the call over to Anders for some brief opening remarks.

[Anders Gustafsson:]

Thank you, Randy. Good morning everyone and thank you for joining us on the call. This morning we made several significant announcements, including excellent first quarter financial results, a favorable second quarter outlook, Randy’s retirement and the transition to Mike Smiley as Zebra's new CFO. Let me now cover our first quarter performance. We maintained strong momentum throughout the first quarter to deliver record sales, improved profitability and solid earnings growth. The increase in diversity of our business across geographies, products and vertical markets was an important element of our continued growth. International regions performed exceedingly well. We had sales growth in nearly all printer product lines with increasing success in further penetrating targeted vertical markets. The percentage of printer sales from new products also maintained an upward trajectory. Gross profit margin benefited from richer mix of business and material cost reductions. During the first quarter we made meaningful progress in integrating Navis, WhereNet and Proveo into a single cohesive Zebra Enterprise Solutions business unit. Shortly after the end of the quarter we added Multispectral Solutions to the group, known for its leading ultra wide band radio technology. Without question, expanding the range of automatic identification and specialty printing solutions that Zebra now delivers has made us a more valued strategic partner. Our customers continue to respond positively to our direction and value proposition. We are unmatched in our ability to help our customers identify, track and manage assets, transactions and people through the supply chain and across the enterprise. We are off to a strong start to the year and we are optimistic about further growth. Let me cover some of the highlights of our first quarter results. Strong order rates in our Specialty Printing business throughout the quarter propelled high double-digit growth in international territories. Our EMEA region had key wins in retail, hospitality, transportation and logistics and government verticals to help deliver our second consecutive quarter of record sales. Growth was particularly robust in Germany, Eastern Europe, the Benelux and Iberia. We further strengthen our presence in the developing markets for Specialty Printing Solutions in Russia and India. Business conditions in EMEA remained favorable as we entered the second quarter. In Latin America, improved business execution, a strong supplies business and solid performance across nearly all printer lines highlighted the quarter. Our team closed multiple deals across the region, including a large route accounting order for a major retailer in Mexico. In Asia Pacific, record sales were driven by a more focused organization and a healthy business pipeline. Sales growth was notably strong in China where we greatly expanded the number of resellers, many from non-AIDC industries on the success of our Partner First channel partner program, resulting in significant wins in retail and manufacturing. Progress in the region continued in expanding our presence in healthcare, government and transportation and logistics. Momentum remains high in this region where our solid opportunity pipeline gives us optimism for further growth. Solid business performance in North America was led by good business momentum through the channel, key wins in accounting, healthcare and retail and further diversification of our customer base. During the quarter we delivered the initial phase of our first large-scale deployment of self service kiosks with a large retail customer. We also opened our newest label converting facility in Atlanta. This operation is already expanding our business by enabling quicker response to customers along the East Coast for genuine Zebra technologies. During the quarter, Zebra Enterprise Solutions made operational progress on several fronts. Integration focused on assigning staff roles and responsibilities, developing integrated marketing plans and aligning product road maps. The business unit also delivered strong bookings in marine terminal operating systems and airport solutions. We've announced wins at terminals on the East Coast and Santos-Brasil Tecon terminal in Brazil. Each of these leading terminals replaced systems developed in house with Navis, a trend we expect to continue well into the future. To strengthen Zebra Enterprise Solutions further, we recently acquired MSSI. This recognized global leader in ultra wide band radio technology is an excellent complement to our other RFID solutions. Ultra wide band is unique in its ability to deliver high precision tracking in environments with high levels of RF interference. MSSI has developed a solid base of business tracking personnel in hazardous environments such as refineries. It also has excellent wins with its Sapphire DART real-time location system in manufacturing, distribution, retail and government. Overall we are making significant progress on moving the business forward, supported by the strength of the Zebra brand. This is evidenced by record sales from our expanded geographic presence, ongoing customer demand for Zebra’s broad printer product line, the solid progress of the integration of Zebra Enterprise Solutions and its continued deployment of systems that improved end-to-end visibility in the supply chain, and the positive outlook for further growth. Now I will turn it back to Randy to provide a detailed review of first quarter results and guidance for the second quarter of 2008. I'll then return to discuss the transition in the CFO role.

[Charles Whitchurch:]

Thank you, Anders and good morning. Before I get into the numbers I want to point out that we have now transitioned into segment reporting. Specifically, we are now breaking out results from our Enterprise Solutions business from our core specialty printing group. Results of each group reflect a fully burdened number in as much as we are allocating a portion of our corporate expenses to the business units that are in direct support of those units. Both business units delivered solid financial results. The record sales were driven by strong international growth in SPG and sales contributions from all three acquisitions completed last year. We also made real progress on improving gross margin and controlling operating expenses in the core business. Sales in the core specialty printing group were up a very respectable 11.3% with a full quarter’s contribution from WhereNet, Proveo and Navis, our Enterprise Solutions Group, contributed $21.5 million of first quarter sales, raising consolidated growth to 18.1% compared to last year. Now from a product line perspective, hardware sales were $180.2 million an increase of 12.9% over last year and they made up 73.2% of total sales. Nearly all printer product lines contributed to this result with record sales of high performance, mid-range, and desktop printers. The percentage of sales from new printers increased for the second consecutive quarter to 19.1% compared with 16.6% for the fourth quarter of 2007 and 5.9% from the third quarter. Supply sales were $41.9 million, increasing by 10% and supplies comprised 17% of total sales in the quarter. The richer revenue mix from the Navis acquisition is evident in the services and software line. This category increased to 168% to $25.2 million or 10.2% of total sales versus 6% in the fourth quarter of last year. International growth was excellent, up 31.8% with India up 28.1% to a record $97.4 million. Sales in Latin America increased 27.6% to $16 million and Asia Pacific had a sharp increase in sales up 52.8%, which was a strong rebound from the 3.7% decline in the fourth quarter of 2007. Results in each of these regions were largely driven by strength in our core business. For the quarter, foreign exchange contributed $9.3 million in consolidated sales as the euro strengthened 15% over the first quarter of '07. First quarter sales in North America were $109.1 million, a record, and an increase of 4.4% over last year. Sales out from our North American distribution partners remained consistently strong throughout the quarter as did our rate of incoming orders. We did have more variability in our key account business, particularly with retailers, but a more diversified customer base and new solutions such as the Kiosk roll out that Anders mentioned offset some of the softness we saw in the retail sector. Consolidated gross margin reach 49.9% up from 47.8% a year ago. Gross margin in the SPG business unit increased nearly 1.5 points to 49.8% from 48.4% due to a richer product mix and product cost reductions. The predominately software and service-based revenues of the Zebra Enterprise Solutions contributed positively to gross margin at 50.4% for the quarter. I might add here that the Enterprise Solutions Group in essence lost $2.3 million worth of reported sales in gross margin due to purchase accounting adjustments and the treatment of deferred revenue so in reality the sales were higher and the gross margin was higher in that group and overall that would have added another roughly four-tenths of a point in consolidated gross margin. So the gross margin profile of the company has improved rather materially over the course of the year through a combination of these acquisitions and the product cost reductions I just mentioned to you which were actually some of the first benefits we have seen from the outsourcing to Jabil because we are now manufacturing our printer circuit board assemblies completely in China and we have gotten some very nice cost reductions out of that. Consolidated operating income was up 11.4% and delivered a GAAP operating margin of 16%. On a fully burdened basis, SPG operating margin was 27.4% up 1.7 percentage points to 27.4%. We maintain the control of our operating expenses in the Specialty Printing Group which was only up 5%. If you look at the numbers the operating expenses were up a rather astonishing percentage, something in the order of 29% but if you peel the onion back and you go back to the core business operating expenses were up actually only 5.2%. So it is really, really good operating expense control. Results for the Specialty Printing Group include $3.2 million in exit costs for the outsourcing initiative and less than $1 million for the relocation of our label conversion facility to Atlanta from Warwick, Rhode Island. These costs lowered earnings per share by roughly $0.03. The vast majority of the increase in operating expenses relates to the acquisitions made during the course of 2007. Of course, included in these numbers is $4.5 million in the amortization of intangibles which is a $2.2 million increase over last year’s amortization. Expenses for 123 R totaled $3.4 million versus $3.3 million last year, basically flat. Investment income was $2.4 million. It is worth noting again here that we liquidated the vast majority of our fund-in-fund investments in the fourth quarter of 2007 and as of this moment we have only trace amounts left because of the details of unwinding these investments. The balance of the investment portfolio was invested in three categories of investment grade assets

[Anders Gustafsson:]

Thank you, Randy. Zebra is off to a strong start in 2008. Our activities to accelerate sales growth and increase profitability are delivering results. We have made solid progress on our 2008 strategic priorities. Our efforts to extend the global leadership in our core Specialty Printing business are delivering high growth in international regions. Our vertical market focus is enabling deeper penetration of industries with significant growth potential. The acquisitions we completed last year and most recently MSSI give us additional capabilities to deliver solutions that help our customers identify, attract and mange valued assets, people and transactions. The globalization of world economies, including an increasing focus on supply chain efficiency and greater concern over safety and security continue to support high growth around the world for bar coding and other automatic identification solutions. Before we conclude the formal part of this call, let me turn to the other piece of news that we announced today, the transition of our Chief Financial Officer position from Randy to Mike Smiley. Many of you on the call today know Randy well. His numerous contributions to Zebra’s success since the IPO in 1991 have been significant. He has built our finance and IT organizations which supported our growth in annual sales from less then $50 million in 1991 to where we are today. Zebra's financial integrity and the credibility we have with the investors are largely attributable to Randy’s skills and leadership. As the longest tenured member of Zebra senior management team, his contributions in building value for Zebra's stockholders extend well beyond finance. After 17 years on the job, Randy will be retiring from Zebra but I am sure he will be engaged in many new ventures, including more than a few Cubs games. We all wish Randy well in his future endeavors. Mike Smiley, who will join Zebra on May 1, has been appointed Zebra’s new CFO. Mike brings a depth of experience in global finance, international technology operations, outsourcing and acquisitions that will play a critical role in bolstering Zebra’s ability to achieving its growth goals and move to the next level. He comes to Zebra from Tellabs where he had spent six years in financial and operating roles. Beginning with Treasury, he then headed up all of International Finance. He progressed to lead Global Finance for Supply Chain and all of product development. Mike also held the position of interim CFO for the corporation which has annual sales of nearly $2 billion. Most recently, he served as general manager for the Tellabs Denmark division which is a global supplier of optical telecommunications equipment. I have known and worked with Mike for several years. He is an independent thinker who has the professionalism and high ethical standards that will make him a valued member of Zebra’s senior management team. Now I’d like to hand it back to Randy for a few final comments.

[Charles Whitchurch:]

Thank you, Anders. I want to take this opportunity to extend my thanks to our investors and analysts who have supported Zebra over the past 17 years. We have had a long relationship together and we worked very hard, I in particular worked very hard, to deal with you with as much honesty and integrity as possible in this role. I hope you will continue to regard Zebra for the quality of its organization, its management team and the outstanding opportunities that remain for this company’s growth, which I believe are quite outstanding. My work at Zebra has been very exciting, it’s been fulfilling, it has been very interesting. We have had quite a few colorful conference calls over the years. Being part of Zebra for the majority of my career, I've seen it grow into truly a global player has been very rewarding. It has been an honor to have worked with a great team of professionals here at Zebra and a great team of professionals among our investor base. It's the daily interaction with these people, yourselves among them, that will be quite honestly the hardest thing to leave behind. So thank you for listening today. We'd like now to answer any questions you might have on our financial results for the quarter. Thank you.

[Operator:]

(Operator Instructions) Our first question comes from Jeff Rosenburg - William Blair.

[Jeff Rosenburg:]

Good morning. Congratulations Randy.

[Charles Whitchurch:]

For what? For the quarter or leaving?

[Jeff Rosenburg:]

It’s like when people graduate, you always congratulate them. It’s certainly a milestone. Sorry to see you go, but happy for you. I wanted to ask on North American sales, or maybe put differently, as you look at the ESG group, can you give us some sense of the geographic breakdown so when we look at the growth there, it seems like with the contribution I would have expected with Navis folding in that North American growth slowed some in the quarter. Can you comment on that specifically? The tone of business there overall?

[Charles Whitchurch:]

Obviously the split on the revenues from ESG are roughly 50-50. They have a very high proportion of international sales and getting our hands around this from a regional sales perspective, splitting the sales up the way we were able to do with Zebra at this point is not as easy as we would like. It is going to get a lot better over the course of the next several months. They have got a very high component of international sales and I don’t think it distorted the percentages materially in terms of what we are doing as a business, but we have clearly moved into a mode now where we are more international than we are domestic. That trend is going to continue. We’ve had phenomenal growth outside the US; really, really phenomenal.

[Jeff Rosenburg:]

So it looks like, looking at that, maybe there was some sequential decline in the first quarter. Now that’s pretty normal seasonally, so would you say that there was anything unusual or any change in the tone of things?

[Charles Whitchurch:]

We did not have a sequential decline in the quarter. Our core business actually was sequentially up.

[Jeff Rosenburg:]

Core business was sequentially up in the quarter?

[Charles Whitchurch:]

Yes, which as you correctly noted, I mean –

[Jeff Rosenburg:]

In North America?

[Charles Whitchurch:]

That in itself is unusual because typically the core Zebra business is sequentially down fourth to first.

[Jeff Rosenburg:]

I am saying in North America it was sequentially up in the core business? Okay. Then the other thing, the Asian business is -- I realize that looking at one quarter versus another has just been lumpy but it really was a dramatic improvement both quarter on quarter and year over year.

[Charles Whitchurch:]

It’s also typically a weak quarter for us. In Asia Pacific, the first quarter is typically a weak quarter and it was a very strong quarter this quarter.

[Jeff Rosenburg:]

So with that kind of a pop, anything in terms of larger orders there or anything unusual that creates the difficult compare? Just any color commentary on such an extraordinary gain from fourth to first?

[Anders Gustafsson:]

There were no real material one-time very large orders. It was very solid growth across the entire geography. Particularly China was very solid where we expanded the number of partners we work with quite substantially. So it’s just a solid growth overall. We had some new large retail customers in Australia that were probably the biggest individual increases that we saw.

[Jeff Rosenburg:]

Randy didn’t really say much about currency is it related to the benefits in gross margin and the improvement there, but I would think it would be significant. Do you have a sense of how much currency helped gross margin?

[Charles Whitchurch:]

Typically about 80% of the currency gain dropped right through operating profits. I mentioned to you before on a consolidated basis roughly 25% of our consolidated revenues are denominated in euros. The way the math works out for us, just given the expense structure and the revenue, about $0.80 of every dollar of foreign exchange gain drops through to both gross profit and operating profit.

[Jeff Rosenburg:]

So we should take 80% of that $9.3 million and think of that as being a pretty direct contributor to gross profit.

[Charles Whitchurch:]

Yes, you can do that if you want.

[Operator:]

Your next question comes from Chris Quilty - Raymond James.

[Chris Quilty:]

I just wanted to clarify an earlier point there with regard to the North American business. It was up 4.4% year over year but if you look at the core barcode business stripping out the Enterprise Group, would that business have still been up year over year?

[Charles Whitchurch:]

Yes.

[Chris Quilty:]

Still at weak levels compared to historic results, can you give us a sense of is there a light at the end of the tunnel where you see demand picking up by year end or any discrete events either by vertical market or macro that you think might help the growth in North America?

[Michael Terzich:]

We do see a different composition in the North America business today, so while the business has been a little sluggish as you note, when we look at where we are getting contribution we have a much broader, diverse customer base in North America. So the manufacturing sector, the healthcare sectors for us have been very good. Retail has been a little sluggish and has been primarily sluggish in the big box side of our business. We’ve picked up quite a bit of new tier 2 retail business that we noted in the prepared comments. We’ve expanded some new technology into some of those retail customers via our kiosk platform. So all in it’s been okay and we do see that if we can get a little bit of relief out of that retail sector, the other sectors are performing quite nicely for us.

[Chris Quilty:]

On the international business, great results there; seemed somewhat in contrast to the weakness that your biggest distributor, ScanSource, reported revenue-wise a couple of weeks ago. Any ideas there on what the divergence might have been?

[Charles Whitchurch:]

Well I think I would postulate that our business is a little bit different certainly than ScanSource’s business. As you go across the international markets we were very strong in a couple geographies where ScanSource does not have a distribution presence, though a very strong market for us was Brazil in Latin America. As you go across Europe I think there are some challenges, pan-European challenges, relative to some of the currency issues we talked about. ScanSource is facing competitors that are pricing in US currency and it’s creating some challenges for them. Our business, we have a little bit more flexibility on how we deal with those issues with our partner community in the region.

[Chris Quilty:]

I think Anders mentioned the new product contribution continuing to increase. Can you give us the specific number there?

[Charles Whitchurch:]

19.1%.

[Chris Quilty:]

Great. That’s definitely moving up. Finally on the OpEx guidance, 87 to 92, how come not lower now that you are getting rid of Randy? Actually the real question is that’s guidance for the second quarter; you have had a lot of new people coming on board and I’m just wondering, does that guidance reflect a long-term trajectory for the year or is it fully reflective of all the recent hiring activity that’s happened?

[Charles Whitchurch:]

First of all, most of the operating expense growth is attributable to the acquired companies. As I mentioned in my remarks, the core business, year-over-year operating expense growth is 5.2%. The headcount growth was actually less than that in the core business. We have acquired three, now four businesses, that are in different locations, they have different organizations, they have different expense structures and plus we have a bunch of expenses related to the amortization of the intangibles that are directly related to the acquisitions also. So there is a whole bunch of stuff moving around here. I think longer term we fully expect to moderate the growth in the operating expense side of that part of the business, but while we are knitting this together and before we get the benefits of the integration and some of the systems we are putting in, I expect a run rate to be roughly right around this level for the duration of the year. We’re paying a lot of attention to it and the management in ESG are paying a lot of attention to it as well to make sure that the expense growth is consistent with our profitability objectives.

[Anders Gustafsson:]

We are clearly mindful of the overall economic backdrop in North America in particular and want to make sure we don’t get caught out so we are watching both daily bookings rates and the expenses very carefully.

[Chris Quilty:]

Speaking of which, it just brings up a question you haven’t yet talked until this conference call about the Multispectral acquisition -- which obviously just happened -- but clearly prior to acquiring both companies they would have been viewed as competitors bringing different locating technologies to market. Can you just help us understand how easy it is to integrate at the technical level those two technologies which are very different in how they function? Can you bring it into a single platform or do you treat them as two still pipe technologies offered by one company? Or have you decided that yet?

[Anders Gustafsson:]

First, they are not really competitors. They are largely complementary applications. WhereNet has really a strong advantage when it comes to larger coverage areas, more the outdoor applications where the range of their antennas are much longer, up to 1,000 meters or yards but the accuracy, they are not quite as accurate as the MSSI. So, MSSI has a much stronger value proposition for more indoor applications where there is a lot of interference, where they can actually track down to a foot of accuracy. So, generally we see them as being very complementary and from a technology perspective we will do some integration. I’m not quite sure we will go all the way to have a single platform for both of these companies, but there are certainly lot of synergies that we can get from looking at which application we pursue and what features and functionality sets we develop in each of them.

[Operator:]

Your next question comes from Reik Read - Robert Baird.

[Reik Read:]

Mike, maybe this is for you. In the North America market you talked about a number of verticals. Can you comment too on transportation, logistics, DSD and then also maybe can you comment on the market versus what you guys are doing from a solution selling standpoint and how much that maybe benefiting you in excess of what the market is doing?

[Michael Terzich:]

A couple of things, Reik. In the transportation sector, our first quarter business was very good. So, the product and the solutions that we offer into that space, a lot of that product goes into applications that are used in shipping systems, manifest systems with the large transportation carriers and we had a very good quarter in that regard. I think that’s fueled by a couple of things that are important to note in North America. The manufacturing space for us in North America was good. We think this was fueled by some increased export volumes. So we saw some good volume, good business growth in the manufacturing sector. Our big iron -- I think Randy mentioned our table product line had strong growth in the quarter. The other proxy for us has been looking at labeling volume and when labeling volume is high that tends to correlate to a lot of parcels, a lot of tagging and we saw strong correlation there as well. I think it’s just some of it is driven by some of the economy and I think export volume is increasing and I think we are taking advantage of that with our strong brand.

[Reik Read:]

On the second part of that, Mike, can you talk a little bit about some of the things that you guys are doing from a solutions development perspective that may be helping you in addition to the marketplace?

[Michael Terzich:]

I think we’re getting a little bit of lift. When you look at the contribution of revenue from new products we’ve released a couple of products into the market that always create some opportunity, greater awareness of the Zebra brand. We’ve been very vertically focused as a company so we’ve been doing quite a bit of trade activity, trade show activity, demand generation activity in each of those respective verticals. We are very much more boutique now in how we demonstrate our solution sets to the marketplace. So I think we are just honing our marketing messages and being more specific and then following that up with some product releases that some of the market has been waiting for for some time and I think its paying dividends.

[Reik Read:]

With the solution selling activity that you are doing, is that broad based amongst your resellers or is that limited to a more knowledgeable group at this point?

[Michael Terzich:]

Well it’s a little bit of both. You have partners that sell applications across multiple vertical markets and you have partners that focus on specific vertical markets. So there is a kind of an intersection and it appeals to both and I don’t think it is anything specific to one group or another.

[Reik Read:]

One follow-up on Europe, can you talk -- and may be this is too general, but you can break it down anyway you want -- can you talk a little bit about the market you talked as being pretty strong, but how much of that is a function of just what you might see as general market growth and how much of that is say greenfield opportunities like European Postal?

[Michael Terzich:]

I think in Europe we had a strong quarter as we noted and I think particularly there were some regions that really carried the day for us. We continue to see quite a bit of what I would call greenfield activity in the region that we titled CEE, Central and Eastern Europe, and its that same story that we’ve told over the years about manufacturing migration and there are parts of Western Europe that have been migrating to the region. The Zebra brand is very strongly positioned there and when people set up residence in those locations we benefit so there is lots of infrastructure. If you look at foreign, if you look at direct foreign investment into those parts of the world they are very high and that’s typically driven by multinational companies where we have got that strong brand presence and that’s fueling some growth for us. What was good to see is that some of our traditional regions -- UK, Germany -- were also very strong and those have been markets that we have been in for a long time and heavy manufacturing markets. So, everything has been very good.

[Reik Read:]

So think about manufacturing and postal as really being two of the stronger ones in that regard?

[Michael Terzich:]

Absolutely and quite a bit of retail. When I look at the key wins that we picked up in the quarter we saw a quite bit of retail activity unlike the States where the number of large volume deals were lower. Retail is hopping pretty well in parts of Europe.

[Reik Read:]

Just going to back to the Enterprise Group and integration, can you guys maybe outline what major activities or milestones you might see coming up in the next couple of quarters and with any of those activities would you have an expectation that there would be any of these one-time charges in the second or third quarter?

[Anders Gustafsson:]

I am not sure if I understand -- what type of milestones are you thinking about?

[Reik Read:]

Well just in terms of obviously you’re integrating two different companies that have salesforce and IT and infrastructure issues; I don’t know if there is any major kind of milestones as part of your project planning that would be coming on.

[Anders Gustafsson:]

I think on the integration part we’re already pretty established in the organization structure. All the key leaders are named and in place. We are working on refining our long-term product roadmap to ensure that we know exactly what functionality we want to add by when and which verticals we want to target by order of priorities, so sequencing from that perspective. There is no expected one-time charges to come out of the EST Group from any restructuring or anything like that of that is what you’re referring to.

[Operator:]

Your next question comes from Ajit Pai - Thomas Weisel.

[Ajit Pai:]

Just looking at the Enterprise Group, could you give us some idea as to what the trajectory in terms of reaching breakeven will be? In the current quarter what the cash flows on a quarterly basis of that business look like?

[Charles Whitchurch:]

I don’t have the data for you on the cash flows for the business at this point. However, we do expect the enterprise group to be profitable in the third quarter.

[Ajit Pai:]

Looking at that group, I think you gave a revenue expectation for the coming quarter of about $23 million to $25 million for that business?

[Charles Whitchurch:]

$22 million to $25 million, right.

[Ajit Pai:]

Right. That’s lower than the revenue run rate if you just consolidate the trailing revenues of the businesses you’ve already bought. So is there some kind of slowdown there, anticipation of a slowdown in that business?

[Charles Whitchurch:]

First of all, there are two factors playing against us right here. One is first of all it’s a lumpy business. Second of all, you have to take into account that those are GAAP revenues and that we do lose like we did this quarter, we will lose in the second quarter a certain portion of revenue due to the purchase accounting treatment of deferred revenues when we acquired the company. So probably on a non-GAAP basis the revenues would probably be -- I’m going to guess here now $3 million to $4 million higher than what we are guiding to at this point. Now we should be through that knot hole pretty much by the end of the second quarter, I think there is going to be some residual going into the third quarter but certainly by the fourth quarter we are going to be completely through that revenue recognition/purchase accounting issue.

[Ajit Pai:]

Got it. When you look at the core set of business you’ve talked about the transportation and industrial verticals in North America and on the retail side you said it’s weak. But do you see any signs that it’s weakening further from the current levels?

[Michael Terzich:]

No, I would say that our business in North America has been soft but I wouldn’t qualify it as weak. What I had said earlier was that while there has been some large lot business that has been deferred because of the state of the economy and a lot of that IT spending is driven off of detailed same-store sales, what we’ve picked up is we diversified our retail customer base and so we picked up some nice business to offset that. When I look at the activity pipeline at that tier 2 retail level it’s pretty good, so just a little clarification on the comment.

[Anders Gustafsson:]

Just to add to that, I think if you look at our overall business now we are much more diversified than we’ve been historically. So we’re much less dependent on say even in retail on a few large customers. We’re now much deeper into the retail segment as a vertical; we are much broader as far as the verticals we do address and serve and we’re much more global which has obviously been a big part of the results now and we also have a broader product solution set. So I think all of those things makes us more diversified as a business and less dependent on any one customer or any one vertical.

[Ajit Pai:]

When you look at your overall business right now and the kind of trajectory, the margin profile that you are guiding to on a go-forward basis, why wouldn’t your margins be increasing on a go-forward basis more materially? You are already at the high end of the range you guided to for next quarter. Why wouldn’t it be going further up?

[Charles Whitchurch:]

Well, nothing goes up forever, for starters. When we look at the sales mix in the second quarter, it was a little less rich than the first quarter. We had an extraordinarily rich revenue mix and there was more weighting of high performance line and mid-range printer products. We had a nice increase in average selling price of the printers both sequentially and year over year. When we look forward at the mix that we were expecting in the second quarter -- and again subject to the vagaries that it is virtually impossible to forecast mix -- we came out with a gross margin that was slightly down sequentially than what we reported in the first quarter.

[Ajit Pai:]

Got it. During your Analyst Day you talked a lot about the fact that even though the card printer business has been a part of Zebra for quite a while now that the synergies hadn’t been fully captured between the card printer side of things and the other printers that you have through the channel. Could you give us some color as to some initiatives there and do you expect some impact of that over the next couple of quarters?

[Anders Gustafsson:]

There’s two areas that we can talk about. First is on the supply chain side as we are progressing with our outsourcing program with Jabil, and we have now put together an integrated common supply chain organization for all of our printer products. So we have a common interface with Jabil, we had the same group of people managing all the transitional product lines. We minimize the risk of having to relearn mistakes twice and also it ensures that we can deal more comprehensively with our outsourcing partners and make sure we can leverage all the volume discounts and so forth that we can get through that. The other side is on the sales and marketing front. I think there’s two areas that we can talk about from leverage there. One is that SPS has a broader geographic coverage today than the one that CPS has. It has already been able to make more investments in resources and infrastructure in emerging markets for instance and we can now better leverage that investment to also drive revenues for CPS without having to make the commensurate investment in resources. The other one is that we have the strong channel management organization within SPS which we can also utilize to drive and improve the channel programs we have in CPS.

[Operator:]

Your next question comes from Greg Halter - Great Lakes Review.

[Greg Halter:]

Randy I’d like to thank you for your precise answers over the last nine years that we worked with you.

[Charles Whitchurch:]

You’re welcome.

[Greg Halter:]

You briefly touched on the number of printers shipped and ASP but do you have those specific numbers for the quarter?

[Charles Whitchurch:]

242,000 printers shipped and the average selling price was 614.

[Greg Halter:]

The cost of the share repurchase, if I look at the cash flow statement it gives me $24.6 million but that can’t be --

[Charles Whitchurch:]

We purchased a little over 1 million shares and the average price was roughly $33 a share, something in that range.

[Greg Halter:]

Anything purchased so far in ’08, this quarter?

[Charles Whitchurch:]

Yes.

[Greg Halter:]

Congrats on Jabil, you’re seeing the benefits already; it appears you’re ahead of schedule I guess. I am just wondering what’s next in regard to that initiative?

[Anders Gustafsson:]

First as I said I don’t think we would consider to be ahead of schedule. I think we are tracking roughly with our plans. We’re probably a little behind on the actual line transfers. We wanted to make sure we really staffed them appropriately, to make sure we had the right quality coming out of our manufacturing there and eliminate any risk of quality issues for us. But we’ve seen greater than expected opportunities for material cost savings. I think overall we are on track with the program at this stage.

[Greg Halter:]

On the new product side, obviously the 19.1 is a dramatic improvement which is very good to see. Any specific products that you’d like to mention that came out in the quarter or anything that you see coming going forward through the rest of ‘08?

[Anders Gustafsson:]

I think for Q2 we expect the number to be similar to what we had in Q1 and our expectation is it will inch up a little bit in the second half of the year.

[Charles Whitchurch:]

We’re seeing acceleration on some products. Typically because so much of our business flow through channel, products that are launched in the quarter, you really don’t see traction from a revenue standpoint for about two quarters. So, what you’re seeing is products that have been recently released that are gaining momentum in the marketplace. So, we’ve seen some nice acceleration to some products both the ZM Series product that has gone through a refresh recently. We have released over the course of the last year some products in the mobile space and even the product that had been released over a year ago is starting to pick up significant traction and that is the S4M product. So that’s typically the way it flows out. It takes a couple of quarters for the channel to get their hands around it and then embed it into some of the opportunities that they are pursuing.

[Greg Halter:]

If you could comment on your opportunities in the merger/acquisition area?

[Charles Whitchurch:]

One comment

[Anders Gustafsson:]

You mean talk about the priorities we have for that?

[Greg Halter:]

Sure, sure.

[Anders Gustafsson:]

The first priority we had was to make sure we got the organization bedded down and get everybody clear about what their roles are and how we’re going to drive the business forward. I think we achieved that in the first quarter and the organization is now in place and working well together. One of the priorities we continue to work on which is never going to be quite done but I think we made good progress and we continue to work hard on that in Q2 was to really nail down all our product roadmaps and understand exactly what feature functionality set we want put it on each product and which market opportunities we want to pursue in sequence from each of these product lines.

[Operator:]

Your next question comes from Jeremy Grant - Stanford Group.

[Jeremy Grant:]

Congrats on a solid quarter. Since I’m at the back of the queue I’ll see if can dig in on a few things we haven’t done yet. First question was looking at overall growth 18.1%, about $9.3 million from the benefits of our awful dollar which if I do the quick math shows that actual growth would have been right around let’s say 13.6%. Digging deeper into that printer sales up 11.3% if I exclude the dollar impact, what would the actual growth rate have been there?

[Charles Whitchurch:]

We don’t have that figure for you.

[Jeremy Grant:]

On OpEx, I understand where things are up particularly with the acquisitions. One number that was down was sequentially with sales and marketing which I think was $35 million and change last quarter and down this quarter. Why such a big reduction this time?

[Michael Terzich:]

Jeremy, this is Mike. A couple of reasons. One, there is a little bit of a timing impact in Q1 and we expect some of that to bounce back up and it’s a part of our Q2 guidance, particularly in North America. Secondly we had gone through an exercise at the very end of last year where we integrated several organizations within North America and as a consequence of that integration we picked up some efficiencies so the rate of spend and the rate of increase is going to be much less as part of the ‘08 operating plan.

[Jeremy Grant:]

Talking a bit about the outsourcing effort, I think the original guidance for Q1 was $4.8 million and it came in the $3 million range and I think Anders had mentioned that things were actually moving a just a little bit behind where you expected. Is that why we had the lower number reported in Q1?

[Charles Whitchurch:]

Yes, and also we made a few changes to the plan as to what we move and what we actually build in China from a tools perspective which I think had an impact on the Q1 expenses.

[Jeremy Grant:]

Does that mean the overall cost over the six-quarter period is going to be a little cheaper or some of these costs is going to get pushed out a little further to the right?

[Anders Gustafsson:]

No, I think we feel that the overall plan still is intact so the total overall timing as we talked about earlier still holds and the overall cost and the cost improvements are still intact.

[Jeremy Grant:]

Some things were just sprinkled around in some other quarters then with that. Now that’s helpful. Can you talk a little bit more about the latest acquisition. Have you guys announced how much you paid for it or what the revenue rate is?

[Anders Gustafsson:]

No, we have not announced how much we paid nor the revenue but it’s a small tuck-in acquisition and revenues are less than $10 million.

[Jeremy Grant:]

This is not really factored much into guidance being a little higher than where the industry has been?

[Anders Gustafsson:]

That’s correct. This is a small tuck-in that we think makes ultimate strategic sense in that it really expands our leadership position within real-time location systems. We now can address a much broader set of solutions particularly in the indoor manufacturing sites and also with some exciting opportunities around personnel safety in very hazardous work environments.

[Jeremy Grant:]

Looking more at where this digs in with the Enterprise Solutions, was there a comment more on that side?

[Anders Gustafsson:]

No, no.

[Jeremy Grant:]

I heard some chatter. I know I think the 2007 pro forma figure for Enterprise Solutions was right around $100 million and I’m not sure if you guys gave specific guidance for this year but I know in the Analyst Day slides you were talking about a CAGR in this group of say 17% to 24% between now and 2011. So Q1 came in I think $21.5 million and I understand that the deferred revenue issue might have pulled that up to say $25 million or so. The question is, is this whole unit on pace for growth do you think to exceed $100 million this year and about where should that come? If not, what are some of the issues?

[Anders Gustafsson:]

We specifically didn’t provide guidance for the year. I think we are comfortable with the long-term growth rate that we discussed at our Analyst Day and we are also comfortable that business is performing as we expect it to.

[Jeremy Grant:]

Obviously the currency gain particularly with the euro strengthening against the dollar was notable this quarter. Are your assumptions in guidance for Q2 that currency exchange rates stay right around where there are?

[Anders Gustafsson:]

That’s correct.

[Charles Whitchurch:]

I think that we’ve reached the end of our hour. I realize it’s a busy time for you guys so we’re going to defer any further questions to follow-up phone calls, should you decide to make them. Just a reminder, although I won’t be here, these guys will. July 23rd is the next call at which time Zebra will hopefully deliver some really terrific results for the second quarter. Thanks for your participation. Good day.