Zebra Technologies Corporation
Q2 2010 Earnings Call Transcript

Published: 5 Aug 2010

[Reik Reed:]

Brian Drab - William Blair & Company

[Greg Halter:]

Andrew Abrams - Avian Securities

[Operator:]

Good morning, and welcome to the Zebra Technologies’ 2010 second quarter earnings release conference call. Joining us from Zebra Technologies are Anders Gustafsson, CEO; Mike Smiley, CFO; and Mike Terzich, Senior Vice President, Global Sales and Marketing, SPG; and Doug Fox, Vice President Investor Relations. All lines will be in a listen-only mode until after today’s presentation. Instructions will be given at that time in order to ask a question. At the request of Zebra Technologies, this conference call is being recorded. Should anyone have any objections, please disconnect at this time. At this time, I would like to introduce Mr. Doug Fox of Zebra Technologies. Sir, you may begin.

[Doug Fox:]

Thank you, and good morning. Thank you for joining us today. Certain statements made 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 words identifying a forward-looking statement. Forward-looking information is subject to various risks and uncertainties, which could significantly affect expected results. Risk factors were noted in the news release issued this morning and are also described in Zebra’s 10-K for the year ended December 31, 2009, which is on file with the SEC. Now, let me turn the call over to Anders Gustafsson for some brief opening remarks.

[Anders Gustafsson:]

Thank you, Doug and good morning everyone. Here in the room with me are Mike Smiley, our CFO; and Mike Terzich, our SVP of Global Sales and Marketing with the Specialty Printer Group. Today, Zebra reported results that well exceeded expectations. Sales of $235.7 million established the fourth consecutive quarter of sequential sales growth and we are up 4% from the first quarter and 26% from a year ago. Broad-based demand in all regions and all major industries helped drive this favorable performance. Globally, further improvements in large-deal activity complemented an ongoing firm run rate business. At $0.39 in GAAP EPS, we sustained high gross margins and offering profits aided by benefits from our outsourcing initiative. Over the past two years, we have developed and executed an integrated strategy to build stronger customer relationships, lower product costs, capitalize in growing opportunities in emerging regions and improve operational efficiency. Our second quarter performance is due impart to this strategy. Our scale and execution are extending Zebra’s industry leadership and making us the most strategic partner to our customers. All of this has positioned Zebra for further profitable growth and greater shareholder value creation. During the second quarter, we continued to make progress on our strategic initiatives to deliver shareholder value. We substantially completed this year’s investments in geographic expansion with the addition of Zebra sales people in emerging markets and the opening of new sales offices in Brazil, Turkey and China. In addition, our second quarter results reflect 360 basis point improvements to gross margin from outsourcing, exceeding our 250 to 300 basis point target. At the same time, we began positioning Zebra higher in the value chain by enriching our goal to market channels by building stronger relationships with system integrators and independent software vendors. Our product development activities have also enabled us to continue to create an increasingly compelling product line to meet more regional and vertical specific needs. In addition to our internal activity investments to drive organic growth, we continue to deploy our resources in other activities with the highest risk adjusted returns. During the quarter, we invested $26 million, nearly all the quarter’s free cash flow to buy back nearly 1 million shares of Zebra stock. As we disclosed in this morning’s press release, we completed the repurchase of all 3 million shares under the previous authorization, and the Board has approved an additional buy back of 3 million shares. Since 2005, we have returned more than $520 million shares to shareholders by buying back a total of 15 million shares or 20% of shares outstanding. We believe that repurchasing Zebra shares continues to be an attractive investment at this time. We’ll briefly cover some of the highlights for the quarter in Specialty Printing and Enterprise Solutions, in Specialty Printing or SPG, all geographic regions performed well across a wide range of industries and products, a further indication of Zebra market and brand strength. Sales increased $5 million from the first quarter. These results were driven by particularly strong performance in North America. The pace of North American bookings were strong with sales into retail, food service and small package delivery of mobile, kiosk and desktop printers. During the quarter, sales of wristbands exceeded $1 million for the first time, an indication of the growing traction of our healthcare solutions. Furthermore, we secured another new and exciting pilot for our innovative IQ color labels, which enables spot color on thermal printing. We also launched a pilot that pairs Zebra mobile printers with smart phones, enabled by Zebra developed smart phone printer drivers. We are beginning to see an increase in smart phone applications in the [AIDC] market and we believe Zebra is well positioned to benefit from this important trend. Our RFID printer/encoder sales reached an all time quarterly record in Q2. Shipments for the period include a significant order for Zebra RP-14 mobile RFID printers into a retail-based apparel application. As a leader in passive RFID, Zebra offers its customers unique printing and encoding technologies. The Zebra RP-14 is ideally suited for in-store applications as the world’s first mobile thermal transfer printer with RFID printing and encoding capability. Further, our tabletop printer encoders incorporate our patented on pitch or near-field encoding which facilities Packard’s encoding of closely spaced labels at high speed. This capability means customers reduce waste, improve productivity and ultimately save money. All these benefits lead to high return on their RFID investments. Zebra has the industry’s broadest range of RFID printer encoders to serve more of our customers on demand labeling needs. We are seeing growing interest in RFID applications. We believe the current developments in retail to implement item level apparel marking will stimulate greater interest in RFID, and we have set up our marketing activities to take advantage of these emerging opportunities. In addition to North America, all these financial regions remain strong and steady throughout the quarter. In EMEA, nearly all sub regions performed well, with France, the Middle East and Central and Eastern Europe posting notable growth. Here again, retail along with government and healthcare were favorable industries for Zebra. Further economic recovery in Asia Pacific led to record SPG and consolidated sales in the region. We view these results as a positive confirmation of our recent decision to add resource in this region. We continue to experience strong demand for high performance printers from the manufacturing sector as well as increased penetration into government, healthcare and retail. In Latin America, card applications for driver licenses in Argentina and national ID cards in Ecuador complemented sales of high performance printers for manufacturing. Continuing with high rates of growth, SPG sales in Brazil increased more than 130% year-over-year for the second quarter. Let me now turn to Zebra Enterprise Solutions or ZES. As $23 million, ZES’ revenues exceeded expectations. Bookings were also strong. Momentum and the dealer pipeline grew for location systems to track high value assets, as traditional customers in automotive and manufacturing began to reinvest in our solutions again. On the supply chain logistic operation side of ZES, we had some significant deals for our maritime and core systems. Terminal operators around the world continue to rely on ZES solutions for state of the art software and hardware that optimize their business operations. We also made solid progress with our channel network. ZES enhanced its programs with go-to-market training to strengthen partner relationships and selling effectiveness. We secured an increased number of active RFID contracts through our channel partners for customers in manufacturing, healthcare and retail. In addition, we have seen increased interest in our personal safety systems. We’re trying to track personal assets in petrochemical and other process industries. The system was developed around our proprietary, ultra wide band radio technology for high precision, real time location systems in hazardous environments. In conclusion, Zebra’s results for the second quarter and first half of 2010 demonstrate the effectiveness of our strategy to serve global customers with innovative solutions through superior go-to-market channels. We are confident that the programs underway to extend our global reach; yield a more robust product pipeline and develop stronger channel relationships will all enable us to gain share and continue to deliver increasing shareholder value. Our results demonstrate that customers are increasingly turning to Zebra as a strategic partner to more affectively identify, track and manage assets through the supply chain and across the enterprise in a smarter and more connected world. I’d now like to turn the call over to our CFO, Mike Smiley, to provide a detailed review of second quarter results and guidance for the third quarter of 2010. After Mike’s remarks, I will return for some brief closing comments.

[Mike Smiley:]

Thank you, Anders. Let me highlight some of the key components of Zebra’s second quarter financial performance. First, we had double digit year-over-year sales growth in all geographic territories, record sales in Asia Pacific and strong sequential sales growth in North America. Second, we maintained high gross margins of 3.6 percentage points from a year ago including the effect of unfavorable foreign currency translation and continued higher than normal expediting freight charges in a constrained supply chain environment. And third, operating expenses of 14% year-over-year, were within our guidance range. Let’s take a look at sales. For the quarter, sales were up 26% from $188 million last year, the low point during the downturn. SPG sales increased 27%. ZES sales of $23 million were up 14% from a year ago. With a stronger U.S. dollar against the Euro, foreign exchange had an unfavorable impact of $5 million on sales. On a constant currency bases sales grew 28% year-over-year. Sequentially, net sales increased 4% including a $5.7 million unfavorable impact from foreign exchange. On a consolidated basis, all geographic regions contributed to the year-over-year growth. North American sales up $22 millions was the largest contributor to the increase with a consistence pace of bookings, including the further return of large-deal transactions concentrated in retail and mobile workforce. Asia Pacific sales up 44% reached a new quarterly record of $29 million, a notable strength in manufacturing in China and South Korea. Favorable business activities across nearly all sub regions enabled EMEA sales to advance $12 million or 17% including a negative impact of foreign exchange. Latin American sales were up 38%. By product line, hardware sales were up 31% year-over-year. While sales of all major printer categories were up from a year ago, sales of high performance and mid-range tabletop models were restricted by component shortages in the extended supply chain. Overall, however, our printer supplier Jabel worked extremely well to give us products to fulfill customer orders. Supply sales were also strong up 22% from a year ago and 7% from the first quarter. In addition to the favorable sales trends, we were successful in improving profit margins in this category by focusing more on proprietary products such as wristband and running operations more effectively. The Zebra Enterprise Solution sales of $22 million up 22% from the first quarter exceeded our guidance range. As Anders mentioned, pipeline activity and bookings improved along with sales. In addition, the cash earnings lost near, considerably to $800,000 from $2.8 million for the first quarter. Consolidated gross margin of 47.2% up 3.6 percentage points from a year ago was comparable with the first quarter margin. On a sequential basis, material savings largely from outsourcing along with volume improvements and mix offset the one percentage point unfavorable impact from foreign exchange. Freight charges to expedite shipments, necessary because of continued supply chain constraints declined modestly as anticipated from the first quarter will remain elevated by approximately $3 million or 140 basis points of margin over normal levels. Operating expenses of $78 million in line with expectations were up 14% from a year ago and 4% from the first quarter. Bonuses and commissions were the primary reasons for the increases, both year-over-year and sequentially. Business development expenses, marketing events, PR and marketing development funding also contributed to the increases. Employee related benefits also had an impact on the increase from a year ago. The sales growth; gross margin, operating expenses combine to generate 150% increase in operating income to $33 million for a 14% margin. Adding back $2.3 million in amortization and $5.9 million in depreciation to the $33 million of operating income resulted in $41 million of earnings before interest taxes, depreciation and amortization and with 17.4% of sales, up from 11.3% last year. With an income tax rate of 32%, GAAP net income came in at $0.39 per share on 57.7 million average shares outstanding. At July 3, we had 57.2 million shares outstanding. Second quarter free cash flow totaled $28 million; $26 million of which we used to buy back 935,000 shares of Zebra stock. The average price of the second quarter purchases was $27.76 per share, which is the same as in the first quarter. So, the first half of 2010, free cash flow amounted to $52 million. Today’s sales outstanding improved from 59 days for the first quarter to 58 days. Inventory turns increased to 6 times from 5.9 and we ended the quarter with $255 million in cash and investments. Now let’s look at our third quarter forecast. We are forecasting sales of $230 million to $244 million in a period that is seasonally flat to down from the second quarter. We expect SPG sales in the range of $210 million to $222 million and ZES sales between $20 million to $22 million. Our forecast assumes consolidated gross profit margin in the range of 46.5% to 48% including an assumption for continued elevated freight charges related to ongoing supply chain constraints. GAAP operating expenses are expected between $77million and $80 million. GAAP earnings are expected in the range of $0.36 to $0.43 per share and income tax rate will be 32%. That concludes my formal remarks, thank you for your attention. Now, here’s Anders for some concluding comments.

[Anders Gustafsson:]

Thank you, Mike. Our second quarter and first half results demonstrate that Zebra’s industry leadership, global scale and business diversity are enabling us to help more customers solve more asset tracking and management challenges. Our strategy of investing our investment to strengthen customer and channel relationship, capitalize on high growth regions across the world, improve operational efficiency and lower product costs are all proven low-risk, high-return activities. They will continue to pay off in improved sales and earnings growth and will provide considerable benefits to the company and our shareholders well into the future. Our multi-faceted growth strategy includes the following areas

[Operator:]

Thank you. (Operators Instructions) Our first question is from Reik Read with Robert W. Baird. Please proceed with your question.

[Reik Read:]

Thanks, good morning. Could you guys maybe just talk a little bit further about what you are seeing with improving large-deal activity? You talked about retail, is it extended into other verticals as well. Then maybe could you talk a little bit about what may be driving that at this stage of the game?

[Anders Gustafsson:]

So, we see it more broadly across many industry verticals. We’ve seen it in retail, we’ve seen it in DOD or Direct Store Delivery. We have seen it in manufacturing, transportation and logistics. So, it’s really gone across most of our large verticals. I think this just goes back to our customers now feeling a bit better about the economic outlook. They are investing to improve their operations and our solutions really do help them improve their ROI and make streamline their business operations.

[Reik Read:]

Is this a case where they are confident enough that they are deploying capital to expand their own operations and that’s why these larger deals are kicking in or is this just increased volume and are ordering more on these 1C’s and 2C’s.

[Anders Gustafsson:]

I think it’s more the first, I think. It’s not so much they are ordering 1C’s and 2C’s for the large deals. It tends to be more that they are either refreshing older installations or expanding their facilities.

[Mike Terzich:]

Hey Reik, this is Mike Terzich, let me add a little color to this. When you look at the large deal opportunities as Anders mentioned, we are really well balanced geographically right now and it was good to see some return of that activity primarily in North America over the last quarter, but a lot of it is centered in mobility applications where that refreshed rate on mobility as we talked about in the past is, about three or four years, that product gets pretty beat up in the application space. So, it’s a combination of some retail applications, direct store delivery applications where we are entering some refresh cycles as well as some expansion of applications by those end users to improve the efficiency or the customer experience of their business.

[Reik Read:]

Okay, great. Thank you for that. And then just going back to Asia, you just hit some very strong sequential growth there for a number of quarters now. How much of that is, you guys call it recovery in your remarks, how much of that is the market just simply improving and how much of that is due to your sales initiatives? Can you just also let us know in the back half of the year how many more salesmen you tend to add in that area?

[Anders Gustafsson:]

It’s hard for us to really separate out how much the economy versus how much our activities, our strategies are driving the growth, but clearly there is a strengthening particularly in the high-end manufacturing sector in China, but we have also put a meaningful amount of more salespeople into China already, about 40 for all the emerging markets, China getting the largest share and the majority of those are already on the ground. We are actively recruiting channel partners and pursuing new opportunities. I would think that the meaningful part of the increase is coming from our actions and we believe that we are positioning ourselves very well in emerging markets in China.

[Reik Read:]

Okay, great. Thank you guys.

[Operator:]

Thank you. Our next question is from Brian Drab with William Blair & Company. Please proceed with your question.

[Brian Drab:]

Good morning. Congratulations on a great quarter. First question, just on the margins; Anders, you pointed out a great gross margin improvement year-over-year exceeding the goal 360 basis points expansion going forward, give you’ve put up tow quarters of 47% plus gross margin. Is this a rate that you feel, a level of gross margin that you feel is sustainable even through 2012?

[Mike Smiley:]

Brian, this is Mike Smiley. I think we have a couple of things we talked about. Number one, is we still feel like we have room, in a sense that number one we are carrying elevated rates. So, when we are able to address the supply constraints challenges that we have, we think we’ll be able to get the product to our end customers more cost effectively and that would help us. We also think that as business continues to grow, that will also help increase our margins. I will tell you that our margins are affected by FX, this quarter they negatively impacted us. We are also working on trying to improve some of our efficiencies in our supply chain, even though we’ve moved most of all of our printing outsourcing to China, we are still trying to, as a team figure out how to work as efficiently as possible. So, we have a number of things that we think that we have opportunities to at least maintain and certainly improve from where we are.

[Anders Gustafsson:]

We were feeling very pleased to see that the improvements from outsourcing came into a 360 basis points, and was clearly above the targeted range with 250 to 300. So we feel very good about how we’ve executed on that program.

[Brian Drab:]

Yes certainly, and my second question is on the Zebra Enterprise Solutions Group. As you look out to 2011, what are your goals for 2011 for that business, and do you think that will be beyond, better than cash, if you’re breakeven on the cash basis?

[Anders Gustafsson:]

Yes, I think we are comfortable giving or setting the forecast for the next quarter. I can talk a bit more directionally as how we feel about the future and for both and for the company. I think that we feel that we are well positioned across the Board with all the initiatives and the strategies we put in place. We have seen good traction in a number of new areas for us with ZES. We have a new ultra-wide band tag that really aimed at going into petro chemical or other hazardous work environments, that’s also been certified for Europe wasn’t before. We’ve seen many of our traditional strong customers in automotive and manufacturing come back again after it was a very difficult year in 2009 and we’ve continued to develop our channel programs, and we’ve had more deals come through in the channel in this quarter again. So we think that there is a number of good initiatives that we have, good strategy we have that’s going to yield through as we move into 2011 also.

[Brian Drab:]

Okay, great. Thank you. Congrats again.

[Anders Gustafsson:]

Thank you. Thank you.

[Operator:]

Thank you. Our next question is from Paul Coster with J.P. Morgan Securities. Please proceed with your question.

[Maria:]

Good afternoon. This is Maria on behalf of Paul. I have a couple of questions. First of all, regarding RFID you mentioned the strength in that business. So I was wondering where is the business in terms of percent of revenue and where do you see it going in the future. And then along the same lines, given Wal-Mart’s July announcement regarding relaunching EPC RFID effort, do you think that we will see a second way of adoption for useful retail applications?

[Anders Gustafsson:]

Firstly, we don’t really breakout individual product lines, but we did mention on the call that we had our best quarter ever for passive RFID. So obviously we feel much more encouraged about where we are with our passive RFID today, but it is still a very small part of the overall business, but overall much more encouraging than what it was the year ago. So we are going to take some credit or pleasure in that I guess. We have seen more pilots and more activity across our customer base today. I think we feel very encouraged by having the broadest product portfolio for passive RFID and we have some unique passive solutions or technology that really enables our customers to get higher ROIs on investing in our printers, by being able to print on much more narrow labels and not waste as much paper. So overall, we think that the next couple of quarters the outlook looks quite good, with enhanced sales activity with more pilots and better pipeline, but again we got to be a little cautious about the adoption rate as we go forward. It’s proven to be slower in the past. We think this is a great shot in the arm for the industry, and we certainly want to make it to be here to help nurture it along.

[Maria:]

Okay, thank you. Then regarding the SPG group, to what extent were they resolved, the consequence of pent up demand and to what extent would that normalize rather than new market penetration? Thank you very much.

[Anders Gustafsson:]

I think that pent up demand kind of includes a lot of different things. We don’t think that there is much of any channel inventory re-stocking. We think that happened much earlier into cycle. So this is really end user demand that we see. There are probably some refresh cycles going on as Mike mentioned in the mobile side. I think there is probably a wholesale ahead of the refresh cycle of the high-end, but generally I think this is based on customers being confident of investing in their business again and expanding and taking advantage of our technology to further stream line and improve the efficiency of the operations.

[Maria:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question is from Chris Quilty with Raymond James Associates. Please proceed with your question.

[Chris Quilty:]

Good morning gentlemen. I think you mentioned that you are seeing good demand across most verticals, but I just want to probe a little bit on the retail segment, which historically has been a more important vertical for you. Typically what happens in multi-year refresh cycles and arguably it’s long overdue. (NYSE

[Mike Terzich:]

Chris, this is Mike Terzich. Let me take that. I think generally we see a similar pattern. I mean as you mentioned, the retailers are typically a little bit lumpier relative to the schedule for refresh. What drives that is a number of factors and part of that is the age of the equipment, the use of the equipment in operation, their near term profitability, their outlook obviously on the state of their business. There is a lot more emphasis being put on store efficiency, a lot more emphasis on self-help in retail, so we are seeing lots of interest in the kiosk space, in that mobility space. So our pipeline for retail, and that’s retail beyond even the United States has been growing and its really well balanced across a range of applications, both new applications for retailers to improve that efficiency or that customer experience if you will and the replacement of some aging technology, often times driven by changes in wireless security protocol and some other stimulates, that forces them to refresh with newer technology. So we feel really good about the near term prospects of retail.

[Chris Quilty:]

Okay, and second question, you talked about the ZLA solution and more generally about some of the active tracking. To what degree might the ZLA be viewed as competing with your customers who often provide, your systems integrators provides software based solutions or is it truly something that’s helped them in winning larger transactions. Are you seeing any kind of a break in terms of directionally what’s happening with technology? There’s been for too many years, too many different standards out there of WiFi based or ultra-wide band technologies or is this just a market application where you need appropriate solutions?

[Anders Gustafsson:]

Yes, first on the ZLA, I think that’s really meant to help other partners of ours like ISDs that have software applications on their own. So historically our ZES solutions have been more vertically integrated. So we’ve had a software application for automotive or various industries that has been very much tied to our specific hardware. Here the ZLA really enables us to create the kind of a middle ware layer that we can open up and put more standardized interfaces on, so that other ICs or application developers can work easily, incorporate the location technology that’s in their solutions going forward. So we see that the way for us to work more effectively with partners and give them a chance to participate in the growth of the industry. With respect to that technology and there being so many of them, we don’t expect to see a reduction say, in the different types of technology here. I think they are all have a specific benefit for certain environments; they are particularly well suited, so the ultra-wide band by these solutions. They are particularly well suited for indoor applications or where there is a lot of metal or other interference. The 24x7 30, the old granite type of active RFID solutions, they had a better range, so they were much more cost effective if you were outside and GPS can be very effective too over larger areas and we don’t have to implement the infrastructure to support the location. So I think that there is going to be a number of different technologies that would be part of that portfolio to most optimally be able to support our customers, and I think that the benefit for us to have this portfolio and that we can be much more specific in how we address our customers needs and we don’t have to kind of force it, our solution into their need.

[Chris Quilty:]

And does that suggest that there is perhaps other targeted technology acquisitions that you might need to make over time?

[Anders Gustafsson:]

At this stage I think we believe that the portfolio we have is sufficient. We think that we have lots of good run rates with the solutions we have and we like to make sure we commercialize those and get the good business return on them before we step into new technologies.

[Chris Quilty:]

Great. Thank you.

[Anders Gustafsson:]

Thank you.

[Operator:]

Thank you. Our next question is from Ajit Pai with Stifel Nicolaus. Please proceed with your question.

[Ajit Pai:]

Yes, good morning and congratulation on a very solid quarter.

[Anders Gustafsson:]

Thank you Ajit.

[Ajit Pai:]

A couple of questions; I think one is just looking at the acquisition pipeline and strategy for uses of cash. You bought back your shares, you also denote that they don’t need anymore for ZES. But overall, can you just walk us through how you’re prioritizing for those acquisitions right now, and then I can sort of square off the others?

[Anders Gustafsson:]

Well the first, when we talk about acquisition, we got to go back to our capital location strategy. So we are very disciplined in looking at making sure we invest in opportunities with the highest risk adjusted returns. That being said, we do engage in looking at the various types of acquisitions. We certainly want to make sure that we are aware of what goes on, and particularly looking at things that our close to our core, and could be say, smaller talking, but it really has to have a good return and very much fit our strategy.

[Ajit Pai:]

Right. But the pipeline is still rich right now in terms of acquisitions you can make?

[Anders Gustafsson:]

I don’t think we want to characterize the pipeline at this stage.

[Ajit Pai:]

Okay. Second, I am just looking at your gross margins. While you have shown some pretty incredible improvement over the pass several quarters. You have talked about cost improvements etc; it’s still substantially below where your gross margins are trending in the 2003 through 2005 kind of range, north of 50%, and you’ve also required some higher gross margin business on the enterprise side, the ES side. So could you give us some color as to, is there a set of targets that you have a couple of years out where your gross margins could get back above 50%. Similarly on the operating margin side, I think you did answer the question when someone asked you about directionally on the ZES group, that you expect profitability to improve in 2011, but you expect that to actually become profitable in 2011, positive, or is it 2012 or further out? Is the focus there still on investing in the business to drive greater scale or do you think that it could reach breakeven at some point next year?

[Mike Smith:]

That’s a good question. [Indiscernible] couldn’t ask that for the questions. So I’m going to take the first half and Anders will take the second half. On the gross margins, I just want to make sure you are aware. When you look at some of the historical quarters that we quoted north of 50%, we had some one-time adjustments to those numbers. So I would say the more robust gross margins that we had historically were in the high 40’s, I wouldn’t say they were 50’s. I would argue that we talked about a couple of things already that we feel encouraged about with regards to our gross margin going forward. We talked about the fact that volumes will continue to benefit us. We also know that we are carrying extra freight right now, and we do think we have some ability to continue to improve some of our efficiencies in some of the processes that we are working with that will help us to move. So I think right now it’s been good. We still feel like we have room to improve that. So what we would try to say is, probably in the high 40’s is probably a good target to sort of keep yourself focused on. Yes, and that would be more like an average read in every quarter. I’ll also tell you though, with ZES for this quarter we were hampered by a couple of small things. Number one, our services margins were a little bit low, because the volume for services was a little bit lower than we had anticipated, and we also -- ZES had some third party hardware sales that were low margin; that also negatively affect our gross margin in the quarter. Then the other thing too is that FX obviously plays plus or minus and this quarter we were negatively affected by FX this quarter.

[Anders Gustafsson:]

And with respect to ZES’s profitability in 2011, again as I said earlier, we don’t really want to start forecasting into the 2011, but our expectation is that we will be able to continue to drive the business forward and get to the casual breakeven or casual positive in 2011.

[Ajit Pai:]

Got it. I’ll get back in queue.

[Operator:]

Thank you. Our next question is from Anthony Kure with KeyBanc Capital Markets. Please proceed with your question.

[Karl Ackerman:]

Good morning gentlemen. This is Karl Ackerman phoning in for Anthony Kure. Most of my questions have been answered already, but I was wondering, kind of taking backing on the gross margin question previously, I think as you generate a larger part of your overall sales by expanding your geographical footprint to Latin America and Asia Pacific, how should we think about the sustainability of your average selling price of total printer ship going forward.

[Anders Gustafsson:]

So first, since our products are global in nature, our price lists are very much the same across the world. So we can’t go and sell one product for much lower in one region and higher in another one, because then we have the gray market and products flowing from different regions. So we have a very disciplined approach to how we price our products. If you look at Asia particularly say, we do a lot of high end products for the manufacturing sector there and they tend to have very good price points and margins, but as we become more focused on starting to penetrate the more local economies, we probably will have more lower end products, that will probably be on a gross margin side slightly lower than the average, but it will be a much smaller part of our business also. So we believe that we are in good position to continue to drive the gross margin. That’s what Mike might have said here earlier.

[Karl Ackerman:]

Okay great, and then just one final question. Your recent share authorization, do you anticipate the pace of share buybacks to continue from recent levels?

[Anders Gustafsson:]

We’ve been, we don’t forecast our share buybacks, but I think that you sort of -- if you can look at us over the last three, four quarters, you can sort of see that that’s a highly realistic view going forward, but I will tell you that we are price sensitive. So when the shares are low and the company’s valuation feels a little bit more attractive, we will be more aggressive and when we feel it’s a little less attractive, we will be less aggressive.

[Karl Ackerman:]

Okay, great. Thank you guys.

[Anders Gustafsson:]

Thank you.

[Operator:]

Our next question is from Greg Halter with Great Lakes Review. Please proceed with your question.

[Greg Halter:]

Yes, I’d like to delve into the comments that you made Anders about the apparel side and the RFID. I presume that’s maybe Wal-Mart and some others there. I’m just wondering if you could elaborate on what you are doing there specifically for that customer or those customers and how far along you are in the process?

[Anders Gustafsson:]

I don’t think we can expand too much on the specific applications or what they do, but this is an active rollout. I guess we can say that we have deliberate products to the customer for that application.

[Greg Halter:]

Okay, and relative to the component shortages that you have seen in the higher freight, has that caused you to lose any sales to any competitors that you are aware off?

[Anders Gustafsson:]

The supply chain environment has been very tight over the last several months, but I think we’ve been very diligent and executed very well by working by ourselves and with our other supply chain portions like cable, to make sure we get an appropriate volume of parts. We actually shipped more printers in Q2 than we have done in any other quarters historically. So we still got a lots of volume and material out and I think we took the step of continue to air freight a much higher proportion of our volume, in order to make sure that we protected our market share and protected our brand, and I think that’s been very well received, and I think we have extended our lead in the industry by doing this. I am sure there is a few deals that we’ve lost, but on net balance, I would say we won more than we lost.

[Greg Halter:]

Okay. That’s excellent. Thank you.

[Operator:]

Our next question is from Andrew Abrams with Avian Securities. Please proceed with your question.

[Andrew Abrams:]

Hi. Just two questions. There has been some questions about EMEA, both on a seasonal basis and on the financial side slowing a bit in the third quarter and this is more an expectation than anything else. Given your guidance, it doesn’t seem like you guys are expecting anything from that sector to slow down at all. Is this a function of the fact that the channel is just remaining strong or is this something more particular to you guys, both on the enterprise side and the channel.

[Anders Gustafsson:]

A few months back there was I think a lot of speculation in the press and TV and stuff about the European economy largely driven I guess by Greece, and Greece is about 2% of the EMEA or the Euro zone GDP. So I think that’s -- but over the last few weeks, I think the news we have seen has been much more encouraging and settling down much better. I think we’ve seen some of the larger export oriented regions of Europe do very well. I think Germany and Central Europe are doing very well economically and I think they are doing very well with us and our suite spot that Europe is really around the Central Europe region for export oriented companies, and the weakening of the Euro I think is giving them a boost. So we should see some unit volume increases to offset some of the weakening of the Euro. So, overall I think we feel that Europe was -- so far we have not seen any indication that Europe is slowing or there is a change in economy outlook for it, but it is something we are paying a lot of attention to, as there is obviously an important impact to the factor for us. But I would also like to go back and say, I think we have the ability to react quickly to changes in the economic environment. When the recession started, I think we were pretty quick with taking steps to adjust for that and equally as we were kind of coming out of the recession, we took steps to invest appropriately in the business, to make sure we can really come out strongly and gain share as we did that. So I think we feel that Europe looks good today and we are well positioned there, but I’d let Mike give you some extra insights maybe for you.

[Mike Smiley:]

Andrew, a couple of other things that I think are worth mentioning. One is that from a seasonality prospective, historically that third quarter in Europe is always a bit of a softer quarter, because of the heavier holiday schedule that western Europe typically enjoys, but quite frankly, over the last several years our expansions strategy has been in areas in Eastern Europe in the Middle East and Saudi Arabia, Turkey. So you look at what has taken place and in those regions we have seen the continuation of business. So they don’t really, they don’t fall in line with the traditional Western Europe holiday schedule and it’s kind of smoothed out, that seasonality effect. So I would postulate that some of our investment strategy over the last couple of years, particularly in those emerging areas of Europe has helped stabilize a little bit of the seasonality effect.

[Andrew Abrams:]

Great, thank you. Also, just a quick question on the Smartphones. You guys have a Smartphone solution; are you seeing a large amount of traction with Smartphones or are you just filling a need that was already there? Are you seeing additional Smartphones being used in package delivery or whatever it happens to be or is this just you meeting the demand that was already there.

[Anders Gustafsson:]

Well I think we see this as a growing trend. It’s also a very small base, but it is a growing trend and we have developed drivers for our printers to work with Blackberry, Android, Window C and iPhones. So you know, we believe that it’s an important strategy for us to kind of expand our address of the market into some application where we otherwise might not be considered.

[Andrew Abrams:]

Thank you, and congratulations on a good quarter.

[Anders Gustafsson:]

Thank you.

[Operator:]

Our next question is a follow-up question from Reik Reed with Robert W. Baird. Please proceed with your question.

[Reik Reed:]

Could you guys just talk a little bit about the improved mix as part of your comments Mike year-over-year, but the ASP is roughly flat. Is there an offset in there that you’d highlight. Is it pricing or is it something else?

[Mike Smith:]

There’s a couple of things. First of all, there is FX. There FX I still can’t tell you is that we have -- we talk about mixes, there are some products that aren’t really captured in the printer side. So for example, here is some after market parts or something like that, which in volumes change as a major impact on some of our margins.

[Reik Reed:]

Okay, and then I guess a similar question. Just why is the ASP down sequentially? Just if you could talk about what maybe drove that and what the outlook maybe or the general trend maybe from here?

[Mike Smith:]

Well I think it’s interesting, because sequentially I think its again, you got some strong demand and some mobile products that’s sort of in desktop, actually that’s been driving that. So we do talk about, I think longer term trends in our business. One thing that will affect our gross margins is the relative growth rates of certain product lines and I would say that our historic core tabletop printers is something that probably we don’t foresee growing quite as dramatically as more as a desktop, mobile type printer card applications going forward. So as a result, that mix will change things over time, but again, we feel good about the gross margin dollars that we are generating as we continue to expand the business.

[Anders Gustafsson:]

And if you were to look at the AUP’s within product families, that’s again much more stable.

[Mike Smith:]

Yes, very stable across product families.

[Reik Reed:]

Okay, great. And then just a follow-up on the Enterprise Solutions Group. You guys sound more positive than I guess what we’ve heard in the long period of time. The bookings are there, the pipeline is good. I’m just trying to understand the guidance there, which is basically flat to down sequentially. Is that some conservatism or are there still some issues that you know about, that you are battling and if you could comment on that?

[Anders Gustafsson:]

I think the guidance is as I said you know, kind of flat with the prior quarter. We think that there is certainly an improvement in our pipeline. We have seen more activity, but also we know that the sale cycle is much longer, so we don’t want to get ourselves overly enthused about the improvements we see in one quarter. We want to make sure we can put some quarters behind us before we start getting really bullish on this.

[Mike Smith:]

The other thing too is the actual time between bookings and revenue recognition, it’s a little bit longer. So even though we have good bookings in this quarter, it doesn’t really roll out to the P&L for a little while.

[Reik Reed:]

Okay, perfect, and then just one last question, a follow-up on the RFID side. What you are focused on primarily, the jeans and the undergarments or are you seeing broader expansion to other categories, sub categories within the apparel market?

[Mike Smith:]

Reik its Mike. Initially a lot of that work effort is around apparel tagging in retail, and clearly there are different retailers with different levels of progress, relative to their own view of where the opportunity is. We feel that it will extend itself beyond apparel into other what would be qualified as complex SKU. So we can see it finding its way into other parts of the in-store retail experience, where that inventory visibility is critical to not only revenue, but the service level capability of the retailer.

[Reik Reed:]

And I understand that Mike, but part of the question I am asking is, is it just in those subcategories of apparels the jeans and the undergarments or are you expanding to other subcategories within the apparel segment.

[Mike Smith:]

Over time I think its directionally going to go to other apparel subcategories, beyond the jeans and the garments that you are noting

[Reik Reed:]

In most of the applications it sounds like what you are saying are with the mobile products right now and not so much with tabletops in the distribution centers?

[Mike Smith:]

Correct, but I think ultimately what happens is, over the course of time, the back room tagging is going to increase in opportunity and we are really, as you know we are really well positioned there from a product line standpoint.

[Reik Reed:]

And if things go to source tagging at manufacturing, what type of opportunity is that for you?

[Mike Smith:]

Well, I think it depends. I think if there is a lot of that source tagging that’s being done in very large volume bulk if you will the other day, and that’s not necessarily an immediate opportunity for us. I think where the opportunity is, is a lot happens between the source of where that tag is applied and the condition of those tags when they come into the distribution center. So there is an opportunity, a fair amount of, I call it moderate volume retagging that will take place at the distribution centers and that’s where some of that stationary products will come into play and then obviously in the store, there’s another retagging opportunity and that’s where we are very uniquely positioned as the only provider of a mobile RFID device today.

[Reik Reed:]

Okay guys. Thank you very much for the time.

[Anders Gustafsson:]

Thank you.

[Operator:]

Our next question is a follow up question from the line of Ajit Pai with Stifel Nicolaus. Please proceed with your question.

[Ajit Pai:]

Yes, I just wanted to address the sort of comparative environment on the printer group side, the traditional bar code printer. There has been consolidation in that space and things over there from an intensity of competitions is getting better. But as you have gone into Asia, have you seen any new competition? Anyone that’s been far more aggressive there as you have been growing your business over, they have some of the reasons for the set of decreasing ASP and printers and historically you’ve said it’s much more of a mix shift in your business, greater mobile, all of that than anything else. Have there been any changes in the pricing environment there? Is pricing getting better or worse or has it been the same trend over the past several quarters.

[Mike Smith:]

Yes, I guess first on the traditional competitive side, I think we haven’t seen any main big changes to that. I think that we feel that we are competing well. We believe we have extended our lead in the industry. From a price prospective, we haven’t seen any increased pressure sale on price, particularly in this supply constrained environment, we haven’t had to lead with price much. When we get into Asia, there is obviously a number of other smaller competitors. We do see more of them. Part of what we are doing has to ensure that we can compete very effectively with them. That’s been to identify three new printers that are going to come out beginning of next year are more focused on the low end in Asia, and we have been moving our supply chain to Asia, and also setting up a development center in China, to be able to leverage some of the same resources there. So we think that we have a quite comprehensive strategy to make sure that we can engage with them. It’s both, an offensive and a defensive strategy. So from an offensive prospective, we are going into some of the markets where we haven’t had the same market shares we had before. So we’re seeing a net incremental revenue and margin for us and the from the defensive side, we are trying to make sure that those competitors, those Chinese or Asian competitors are having to fight with us at the low end and not get a chance to build their business to come up, higher up in the value chain.

[Ajit Pai:]

Right, and now those products that you are introducing, just understanding the impact in your income statement, I know that it’s going to be a very small percent of your business. But in the way you are thinking about it, while the ASPs might be lower, is there a possibility of the gross margins being equal to or better than your corporate average or will it also have lower gross margins?

[Anders Gustafsson:]

We’ve developed these printers very specifically for these markets and we haven’t even decided if they are going to be introduce outside of the emerging markets, so the cost point is much lower. Our expectation is that they will be slightly below our corporate average from a gross margin prospective, but not much here really so. They are also coming off a very small base, so it’s not like its [Inaudible].

[Ajit Pai:]

Got it. Okay, thank you.

[Anders Gustafsson:]

Thank you.

[Operator:]

There are no further questions at this time. I would like to turn the floor back over to Mr. Fox for any closing remarks.

[Douglas Fox:]

Thank you for joining us today. Have a great day. Just as a reminder, our next conference call will be currently scheduled for November 4. If you have any further questions, both Mike Smiley and I will be around for the rest of the day. Don’t hesitate to give us a call. Thank you very much.

[Operator:]

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.