漢威聯合 (HON) 2007 Q1 法說會逐字稿

Good afternoon and welcome to the Intermec first-quarter fiscal 2007 earnings release conference call.

At this time, all participants are in a listen-only mode.

After the presentation, we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS).

At the request of the Company, this conference is being recorded.

It is now my pleasure to turn the meeting over to host, Mr.

Kevin McCarty, Director of Investor Relations and Analysis for Intermec, Incorporated.

Sir, you may begin your conference.

Thank you very much and good afternoon, everyone.

We appreciate you joining us as we discuss Intermec's first-quarter fiscal year 2007 earnings release.

Joining me on the call this afternoon is Larry Brady, Intermec's Chairman and Chief Executive Officer, Steve Winter, President and Chief Operating Officer, and Lanny Michael, our Senior Vice President and Chief Financial Officer.

Before we begin our prepared remarks, I wish to remind investors that statements made in today's release and related statements during the course of this conference call that express the Company's or management's intentions, hopes, indications, beliefs, expectations, forecasts or predictions for the future constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include statements about the Company outlook for the second quarter of fiscal year 2007 and future periods and other examples described in the forward-looking statement paragraph in today's earnings release.

These forward-looking statements reflect our opinions only as of the date of this presentation.

Our business is subject to a number of risk factors that could negatively affect our results from business operations, or cause actual results to differ materially from those projected or indicated in any forward-looking statements.

These include, for example, the risks and uncertainties described more fully in the Company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K and quarterly reports on Form 10-Q.

Copies of these filings may be obtained by contacting the Company or the SEC.

With that, I'd like to turn the call over to Larry Brady, Intermec's Chairman and Chief Executive Officer.

Larry?

Thank you, Kevin.

Today, Intermec reported revenue of $179 million for the first quarter of 2007.

This was slightly above the revised revenue guidance that we gave on April 9 but at the bottom of the range in our initial guidance during our last conference call.

First-quarter revenues down 12% from the first quarter of 2006.

Three factors which we've previously described continue to impact our sales and margin comparisons.

They are, first, delays in enterprise orders caused by ongoing new product introductions; secondly, the conversion of our entire product line in midyear 2006 to a new European regulatory standard, the so-called "Rose Standard"; and third, the effect of more aggressive competitive behavior.

The last two of these items have related more recently to gross margin declines than to revenue declines.

Our loss for the quarter of $0.07 per share was below our range of guidance and compares to a profit of $0.23 per share in the first quarter of 2006.

Major differences versus the prior-year quarter include an intellectual property settlement in the first quarter of 2006, which accounted for a $0.16 EPS difference.

Lower sales and gross margin percentage in the first quarter of 2007 contributing an additional $0.16 differential, only partially offset by lower operating expenses as a result of the restructuring announced in late 2006 that contributed $0.09 in favorable impact for the quarter.

The difference in tax rates from the prior-year quarter contributed the majority of the remaining decline in earnings per share.

These differences will be discussed in more detail in our review of operations and finance.

During the first quarter of this year, we saw a marked difference in the performance by region with North America revenue showing significant decline, while the total revenue for international markets improved.

To some extent, this pattern is influenced by the relative comparisons in the prior-year period, where North America was relatively strong and international sales relatively weak.

However, we believe a major reason for the difference was the availability in the regions of the CN3, our next generation rugged mobile computer.

As we said in our release on April 9, the availability of our CN3 radio configuration was driven by speed-to-market considerations.

Our initial radio configuration was with GPRS, the mode generally favorite in the international markets and with less-demanding certification requirements and variants.

We introduced the CDMA radio configuration, more popular in North America, in February of this year, and the GPS version in March.

There are two measures of the traction of new product introductions, which provides some insight into our progress in new product acceptance.

They are quotations activity and bookings.

Our U.S.

quotation activity in the first quarter of 2007 has increased by 25% in number of quotes and more than 50% in value of quotes from the trough in the third quarter of 2006 and now exceeds the level of the prior-year first quarter.

Our worldwide bookings for the CN3 have consistently exceeded historic norms for a new product introduction.

In the month of April, bookings exceeded twice the level achieved in the entire first quarter.

Bookings for the entire product line were also encouraging, as Steve Winter will explain.

Now, I'd like to turn it over to Steve for a detailed operations review.

Steve?

Thank you, Larry.

As Larry noted in his remarks, revenue has primarily been impacted by two factors, the impact of new product introductions on enterprise sales and the disruption in European sales caused by the adoption of the RoHS environment regulations.

We previously stated it was our belief that the impacts of new product introductions would be behind us in the second half of 2007 as we complete introduction of the CN3 rugged mobile computer and the Intellibeam EX25 auto-focusing area imager, and that the revenue impacts of RoHS were limited to the third quarter of 2006.

The CN3 is the first rugged mobile computer in our industry to simultaneously accommodate four radio options, such as Bluetooth connectivity for peripheral devices like receipt printers and voice headsets, Wi-Fi local area network connectivity, cellular, voice and data connectivity, and global positioning system access.

These radio features require both regulatory and in the case of cellular communication, carrier approval.

Because of the wide variety of carriers in North America, each (technical difficulty) radio and certification requirements, we adopted a phased introduction approach designed to build product momentum beginning with the more unified and simpler international cellular versions.

Our international revenue results and North American booking activity are providing positive indication that the RoHS-related revenue impacts are behind us, new product introductions are having the desired impact on enterprise sales, and the conditions are right for a second-half revenue recovery.

Comparing the first quarter of 2006 to the first quarter of 2007, product and service revenues, exclusive of IP settlements, were down 12%.

On a regional basis, rest-of-world revenues increased 19.4% and European revenues increased 16.4%, providing further indication that European sales have recovered from the impact of implementing the RoHS regulations, and international sales in general have benefited from the Q4 introduction of the CN3 with GPRS cellular radio option.

North America product and service revenues were down 29% against challenging growth comparisons with the prior year.

For example, in Q1 of 2006, North America enterprise sales were particularly strong, resulting in a 17% growth in revenue over Q1 of 2005.

As indicated, we believe that limited availability of North American versions of the important new products had a significant impact on our surprise sales in the region.

In Q1, we released many of the key North American features of the CN3 rugged mobile computer, like the popular CDMA radio, and the global positioning system capability.

We have secured important, large enterprise account wins for the CN3 in transportation, retail and field service in North America and international markets with major roll-outs beginning in Q2.

While partial-quarter results are always volatile and can be misleading, especially in the area of bookings, they are nonetheless the best indicator we have at this time of potential increases in sales volume and new product traction.

Therefore, to provide a bit more commentary in the area of bookings, April hardware and media bookings increased more than 50% over January of 2007 and more than 25% over April of 2006.

April bookings for the CN3 rugged mobile computer, on a unit basis, exceeded the combined bookings for all of Q4 2006 and Q1 of 2007.

This ramp rate for shipments of the CN3 has now exceeded that of the popular model 700, as well as all other computer products we've introduced in the Company's history.

The much-anticipated EX25 auto-focusing area imager, the only two-dimensional imager able to scan barcodes from 6 inches to over 60 feet, will be released in Q2 as an option in a popular industrial computer and handheld scanner.

The EX25 is the first scanner to provide universal scanning capability and should begin contributing significant revenue growth in the second half.

Comparing Q1 2006 to Q1 2007 on a product-line basis, Systems and Solutions revenue declined 20% and Printer Media revenues declined 4%.

All of the decrease in these product lines occurred in North America on lower enterprise sales, where new product introductions have had the greatest impact.

Internationally, we saw significant growth in both Systems and Solutions and Printer Media sales.

Service revenues were up a modest 1%.

Moving onto an analysis of gross margins, in the February 2007 earnings call, we stated it was our expectation that first-half 2007 gross margins would be a slight improvement over the 38.8% that we achieved in Q3 of 2006, and this would be driven by completion of the RoHS introductions and improving new product volumes.

The predicted improvement did not occur in Q1.

Relative to the prior year, gross margins were 36% in the first quarter of 2007 versus 39.4% in the first quarter of 2006 and 37.5% in the fourth quarter of 2006.

On a product-line basis, product margins declined from 39.5% in Q1 of 2006 to 34.9% in Q1 of 2007.

The entire decline was in Systems and Solutions.

Printer and Media margins improved slightly from prior year, and service margins increased from 39% in 2006, Q1 of 2006 to 40.3 in Q1 of 2007.

The difference in product gross margins from the prior-year quarter can be attributed to higher other cost of goods sold associated with residual cost from the RoHS transition, lower product volumes and increased price erosion.

Looking at each of these factors, in Q4 of 2006, we reported a $3.5 million increase over historical run rates in other cost of goods sold associated with the RoHS transition.

It was our belief we would fully recover from the RoHS impact of other cost of goods sold in Q1 of 2007.

In Q1, we reduced other cost of goods sold by over $2.3 million versus Q4 but did not fully return to historical run rates, resulting in a 1 point negative impact on margins versus the prior year.

With Q1 revenues down 12% from the prior-year quarter, lower product volumes accounted for another 1 point decline in gross margin.

Finally, Q1 price erosion of $3 million negatively impacted gross margins by about 1.5 points.

We attribute the higher price erosion, which is primarily occurring in Europe, to increased competitive pressures during the RoHS transition and our new product transition phase.

On a schedule basis, the decline in gross margins from 37.5% in Q4 of 2006 to 36% in Q1 of 2007 is primarily due to the decline in service margins from 45.5% to 40.3%, respectively.

Traditionally, Q1 has the lowest service margins of the year, due to the higher volume service contract renewal activity that occurs at the beginning of each year and higher failure return rates following the busy holiday season.

Looking forward, we expect incremental improvement in gross margins throughout the remainder of the year, driven by additional reductions in other cost of goods sold to bring them in line with historical run rates, savings in purchases of materials, as well as improved margin contribution from increasing new product volumes, higher service and media margins, and decreased price erosion.

The buildup in lower-margin enterprise business to historical levels should partially offset the expected improvement.

Turning to expenses, our restructuring and productivity initiatives have achieved the favorable results anticipated in our November guidance.

Q1 2007 SG&A expenses of 69.5 million were down 8.2 million or 10.5% from Q1 of 2006, representing a significant improvement over the expense guidance of 72 million to 75 million provided in February.

European restructuring actions implementing a lower cost shared service model were completed in Q1, as planned.

The remaining restructuring actions scheduled for Q2 are expected to be completed according to plan.

Expense levels for the remaining quarters of 2007 are expected to be in the $69 million to $71 million range.

Several important product introductions were completed in Q1.

As previously discussed, we released the global positioning system option for the CN3 and the CDMA cellular data radio for voice and data communications with certifications from several key North American carriers.

We also introduced new RFID products that fill out our solution, including the PF 2i RFID-enabled smart label printer for bag tag applications, and the Antenna Cell for the forklift of the future adjustable-load back rack.

The PF 2i smart-label printer is currently deployed or being deployed at the Hong Kong airport in their automated baggage sorting system.

The Antenna Cell is part of the RFID Forklift of the Future project, which transforms conventional forklifts into highly productive material management systems using RFID technology.

The Antenna Cell fits into an adjustable-load back rest designed specifically for the Forklift for the Future by Cascade Corporation, a leader in the design, manufacture and marketing of materials-handling equipment.

In the second quarter, we will be releasing a number of new products that bring us into new applications and improve our competitive position.

In May, we will introduce the CK32I, intrinsically safe handheld computer, which is the first device on the market to meet all of the new stringent global certification requirements for operations in hazardous environments such as petrochemical, oil and gas, and pharmaceutical.

Introduced in April, the IF61 fixed RFID reader is our latest-generation architecture with world-class performance for portal and conveyor applications.

The highly anticipated EX25 auto-focusing area imager will be released this quarter as an option in the popular CK31 rugged handheld computer and the SR61 handheld scanner.

Additional releases of the EX25 will be announced throughout the year.

We are also introducing two new printers, the PF42 as a mid-range industrial-value printer and the PF8 as a low-cost printer designed for emerging markets.

In April, Intermec launched its new Web site with state-of-the-art search capabilities, fast navigation, and dynamic product information.

The new site better reflects the solution content and industry knowledge that are available from Intermec.

I would now like to turn it over to Lanny for further comment on financial matters.

Lanny?

Thank you, Steve.

As Steve indicated, our SG&A expenses during first quarter of 2007 were reduced to $69.6 million or approximately $8.2 million lower than the prior-year first quarter and $3.8 million lower than the fourth quarter of last year.

Operating expenses responded favorably, as expected, as a result of the cost-reduction initiatives implemented in 2006.

The restructuring activities which were initiated in the fourth quarter of 2006 have been substantially completed.

We have anticipated an effective tax rate of approximately 37.5% in 2007.

The tax provision line item for the first quarter of 2007 included a reduction in certain foreign deferred tax assets, which had the impact of decreasing the effective tax -- excuse me, the effective rate of the tax benefit in the current quarter to approximately 6.9%, resulting in a negative impact of about $0.02 per share in the quarter.

Looking at our liquidity position, total cash and short-term investments at the end of the first quarter was $173.2 million.

This reflects a net utilization of cash of 11.3 million in the quarter, primarily the result of increased inventory levels.

Inventory build was associated with our next-generation product offerings.

The RoHS transition impact and slowed North American sales were the primary drivers of an increase in net inventory balance of $13.4 million during the first quarter.

Focusing on inventory-level management, (technical difficulty) product change continues to be a key component of our operating strategy.

We believe inventory levels will fluctuate over the next few quarters, as we balance production and inventory purchased during the transition to major new products.

Finally, we would like to provide our outlook for the second quarter of 2007.

We believe second-quarter revenues will be in the range of $195 million to $205 million.

Diluted earnings per share from continuing operations are expected to be within a range of $0.05, plus or minus a $0.04 per share range for the second quarter of 2007.

That concludes my prepared commentary.

I will now turn the call back to Kevin for your questions.

Great.

Thanks, Lanny.

Wendy, at this time, we would like to open up our call for our question-and-answer period, please.

Thank you.

(OPERATOR INSTRUCTIONS) Dick Davis, Richard W.

Davis & Company.

How did sales of the new fixed mount terminal, the CV30 -- how are they going?

Yes, this is Steve Winter.

They are going fine.

The product is used in our Forklift of the Future application, as well as standard forklift applications for traditional non-RFID products.

It's meeting our expectation.

The thing that we think will help accelerate its growth is the introduction of the SR61 handheld scanner with EX25 in it.

It's a companion product, and that product combination we think will even accelerate its growth.

But currently, it's meeting our expectation.

Tavis McCourt, Morgan Keegan.

Larry, I wonder if you could comment on the CEO search right now, kind of how active it is and what the timing we should be thinking about in terms of that.

Sure, Tavis.

As you know, we announced that we were moving forward on March 22 I think, and so we are a month into a process.

That's fairly young in terms of expectations.

It is an extremely active process.

The Board is actively engaged and at least to date we are optimistic about outcomes.

In terms of the commentary around bookings growth in April, now that all of the different versions of the CN3 are available, historically when would you expect to see that kind of growth in bookings start exhibiting itself in growth in revenues?

This is Steve Winter.

Typically, with large rollouts, you're looking at kind of a six to nine-month gestation period.

It can be as short as three months or as long as nine months, but I would say the three to nine-month kind of time frame for large bookings for large enterprise rollouts.

Okay, thanks a lot.

Chris Quilty, Raymond James & Associates.

It looks like you're getting some good order follow-through here.

But do you feel that, in the interim period, you may have lost any of those enterprise sales that may have originally been spec-ed on an Intermec 700 device and had to wait through the transition period?

Yes, Chris, this is Steve.

We do believe that we've been in a very competitive environment.

Certainly North America has been the primary area where we've seen that competition and where we haven't had release of some of the key features that are required in North America.

So it's certainly possible that we've lost some ground there, but we don't see it as being a long-term issue for us.

The interest in the product and the bookings level and the landing of orders has been very impressive since we've been releasing those features, and so we are pretty confident about the ability to recover from that.

Okay.

With regard to the Printer business, it seems to have held up certainly much better than Systems and Solutions.

Can you give us sort of a rundown on where that business stands, given (technical difficulty) following the headcount and facility reductions and offshoring of manufacturing, and sort of the new product roadmap, where all that stands?

Sure.

Let me talk first about just revenue levels.

The primary decline that we saw was in North America, and it was portable printers associated with enterprise rollout.

So that correlation is not unexpected.

Everywhere else, including North America fixed printers and especially international printer volumes, we saw increases.

So, we are pleased with what we are seeing with the printer line, with the exception, of course, of the North America enterprise business.

As far as the roadmap, the roadmap looks good.

We are going to be introducing some new portable printers in the fall, including some products that we haven't had in our product line previously.

We are getting additional products developed out of that leveraged development model we put in place in Singapore.

So it's proceeding as we anticipated; the partnership is working well.

The volume of new products that we're getting (technical difficulty) out of that are pleasing and pretty much in line with what our expectations were.

On the margin side?

I mean, I think there were some pretty high expectations of being able to improve the margins in the business through all of those actions.

Yes, that's correct.

On the margin side, one of the key factors will be the release of our own portable products.

That will be a contributor to improvements in the margins in the printer area.

We expect that will be one of the drivers for second-half recovery.

We also are seeing good synergies in cost reductions through our manufacturing activities over there.

You know, quite frankly, the RoHS transition interrupted some of the normal cost savings that we achieved as you convert from one set of parts that you've been buying all along to another set of parts that you just begin to buy.

So that interrupted some of the normal flow, but we see that recovering.

The new quotes that we're getting for new volumes of new RoHS products are coming back in line with what we would anticipate.

Steve, just to clarify, in terms of RoHS transition, you know, what percent of your overall product line will be converted to RoHS-compliant and what products will you choose to maintain with traditional lead hazardous stuff in them?

Virtually 100% of the products are transitioned, and it's one of the challenges.

We have the broadest product line in the industry, so that was a major task for us.

It was, from an economic perspective, it's a big impact in the short term, but in the long-term, we think the benefit of one configuration of product going forward versus two will be better than maintaining the two.

Have you -- I've read stories of companies encountering problems like tin feathering of soldering joints and other quality problems that just haven't been worked out with the new materials.

Have you encountered any of that?

We haven't seen manufacturing-quality issues.

That hasn't been a factor that we've seen.

Okay.

Final question -- you gave some detailed metrics with regard to the gross margin decline.

With respect to the pricing erosion issue, do you feel that was primarily an external issue of other companies coming in and getting aggressive on price, or was it in fact Intermec discounting some of the old 700s and trying to move volume out?

I think, to some degree, it was a combination of those two activities.

We see most of the price erosion in Europe.

In Europe, we tend to have a higher volume of sales in the retail market.

It tends to be a pretty aggressive competitive environment.

In addition, in order to smooth out the transition challenges that we had in Europe, we got aggressive to try to maintain installed base.

So, I think it was a combination of those two activities.

So would you suspect, at some point, RoHS inventories get sold off and the pricing environment gets a little bit more rational?

Yes, we think that will be an impact.

Also, the new products, the new products, as they build volumes, should improve our margin picture and as they become a larger percentage of our total sales.

Great.

Thank you, gentlemen.

Reik Read, Robert W.

Baird & Co.

Just to follow up on the question on RoHS, how much inventory is -- I mean, it sounds like you are 100% converted in terms of your products but there's some inventory there.

How much inventory is still there?

Do you have to get increasingly aggressive with your discounting to get rid of it?

There's two reasons for the inventory.

One is to sustain, on a service basis, all of our installed base.

We have a huge installed base of non-RoHS products, and so to a large degree we have inventories in place to support that.

That is a source of burn-off for us, of burning off those parts.

So we're not overly concerned about the volume of non-RoHS inventory that we have.

We don't think it will result in large write-offs.

In fact, we don't think it will result in any significant write-offs, because, as I say, we are still selling those products; they are still in our product catalog.

In addition, we have a large volume of service consumption that we have to support.

But is it fair to say there still will be some -- it is still a material amount in terms of your product sales and there will be some discounting associated with it, which will be one of the factors that would put pressure on the product margins, at least for the next quarter or so?

It's not a factor in the margin erosion because, the installed base of those products is so large, there is a desire on the part of those customers to maintain a single product configuration.

So we're not seeing a lot of pressure to discount non-RoHS products.

The bigger issue is everybody mentally switched from non-RoHS to RoHS for new implementations, so people are just automatically buying the RoHS product even if they don't need it.

But for our installed base, we have plenty of demand for it.

Okay.

I think, as part of your comments, you had suggested that we ought to see a decrease in the competitive environment with respect to the pricing.

Can you just give us a little bit more understanding of what you mean by that?

Well, what we mean by that is, as we complete the introductions of our products, some of the feature areas where we've been challenged will go away.

Therefore, it won't be a situation where we feel compelled to reduce price because we are in a feature deficit.

We will be in a feature-rich position.

In fact, in many cases, we will be advantaged in features with the GPS option with the EX25.

So, we think that's part of the benefit that we see coming in the future -- is that the feature issue will resolve itself, and the new products will just have momentum because of that.

Okay.

Then with respect to the CN3, if I look out to the third quarter, it seems like you're getting some decent traction in Europe.

The third quarter is presumably a quarter where you really start to see this traction kind of kick-in in total.

What I getting at is the Europeans holiday during the third quarter.

To what extent does that kind of disrupt that traction that you are starting to get with the CN3?

You know, we typically see pretty flat sales, Q2 to Q3, in Europe because of that holiday season.

We would anticipate we would probably have the same sort of pattern this year.

It would be wonderful if we benefited from the fact that we had some build-up in the second quarter of additional enterprise customers that would roll out in Q3, but typically even the roll-outs tend to be moved more towards the September-October-November timeframe.

So I don't anticipate the pattern will change this year.

Okay.

Then just on the RFID side, there seems to be an ongoing discussion in the industry over architecture.

The question is do you put intelligence at the reader or do you manage it centrally?

And you guys are taking a bat with the IF61 that you do it at the reader.

I guess two questions off of that -- one, what gives you the confidence that you're right, given that we are so early in this process?

Two, what's the back-up if it does wind up going centralized?

The reason why we think that's a good bet is one of the benefits of RFID in the supply chain is the ability to get contextual information and to provide additional feedback through the material-handling people as it goes through the system.

What I mean by contextual information is not only did I read it but when did I read it, where was it traveling, is it a shipment that should be diverted, is it a shipment that was too long in the truck and is spoiled or been jostled too much?

There is a lot of information that you can gather and react to with RFID as the primary data-collection environment.

Therefore, we think an intelligent reader with the ability to provide feedback and interpret data and turn that into information is going to be valued.

Otherwise, there's not a lot of reason to change from RFID to barcode, because RFID provides a lot more information and therefore a lot more decision-able data.

So we think the feature-rich capability will be beneficial.

We are developing a value line, so in addition to our high-end smart readers, we are developing a value line, because there will be some people that are just going to do compliance, and value is all they want.

So we do have both product lines.

Great.

Thanks very much.

(OPERATOR INSTRUCTIONS).

Philip Alling, Bear Stearns.

The first question for me -- I was just wanting to get more of a sense about the geographic split of upcoming product introductions.

You know, certainly disappointing performance in North America the past two quarters, so should investors expect that, with upcoming product intros, that we will see improved performance in that region?

Also, is there anything you can share with us with respect to sales management in those regions or go-to-market strategy?

Thanks.

Sure, Philip.

The answer to that is that we -- as I explained in my remarks, the North American was one of the last places where we introduced features for the CN3 that had particular importance here.

There was a specific reason for doing that; the North American regulatory environment and the carrier situation is far more complex than it is internationally.

Internationally, they basically have one radio standard, GPRS.

You can basically get it certified for almost all of the European countries in a fairly simple matter.

So, we choose to release it there and build momentum there first.

The good news is we are seeing the immediate impact of that in our European results.

We expect our recovery in the second half to be driven by North America because, basically, Europe is back.

They are back at historical levels and are growing from there, and so North American will be the engine for growth in the second half.

Okay, that's helpful.

Just with respect to the international sales, could you let us know what the currency impact was on revenue in the quarter?

Currency was positive for us.

$1 million.

I'm sorry.

Once again, Larry?

About $1 million.

About $1 million, okay.

That's helpful.

Just a question -- with respect to the increase in inventory in the quarter, you did make some comments on the earnings call last quarter about working to reduce that over time, despite coming out with new products.

So was the spike in inventory that you had you the quarter you expected and it's not so (inaudible) different from what you had expected?

Sure.

The buildup in the first quarter is driven by two factors.

One is sales were slightly lower than we anticipated in the first quarter.

The other factor is that we are building up inventories based on the bookings levels we are seeing for the CN3.

You know, with a new product, you've got about a 90-day window or about a 90-day order time for many of the parts, so we don't want to be caught short of inventory in the second quarter in a product that's taking off at a very steep curve.

So, we did build up in support of that new product to build our pipeline so that we can be responsive to that volume.

Okay.

Just a final question from me -- with respect to the 100 million in short-term debt now on the balance sheet, should investors expect that you're looking to refinance that, or would you expect to be in the position to pay that off this year?

How should we be thinking about that?

Well, on the second comment, we don't anticipate paying it off this year.

It's due March of '08, and we don't have any specific plans on refinancing that.

We will take that into consideration relative to our cash forecasting, cash needs, and we will make considerations of that.

We are evaluating on more of a liquidity basis, renewing a bank facility.

In conjunction with that, we will be looking at our overall liquidity requirements, including cash requirements for either paydown or refinancing of the debt.

Thanks much.

(OPERATOR INSTRUCTIONS).

Ajit Pai, Thomas Weisel Partners.

Yes, good afternoon.

One question about the CN3 -- I think you're giving us some idea about the product features impacting the demand when you are introducing it.

Could you give us some color as to, whether on the production side, there were any constraints that were unique to the CN3, and if so what they were and whether they are behind the product now?

No, there are now manufacturing constraints associated with the CN3.

It really all is related to getting through the regulatory approval process to release certain radio features into the environment and get certification from carriers.

There aren't any manufacturing constraints.

Okay.

Then just looking at the European competition you've talked about, can you give us some color as to whether that was a U.S.

manufacturer that you face in other markets as well over there?

(inaudible) the increased competitive threats you're facing there were from a European manufacturer?

You know, Ajit, our competition is primarily North American.

We do have some local competition but they tend to be in niche markets that are more on the fringes than a direct competitor.

But from a pure size perspective, it's (inaudible) and Intermec and we are the ones that fight it out across the world.

Okay, thank you.

At this time, I show no further questions.

I will turn the meeting back over to Mr.

McCarty for any closing comments.

Thank you very much, Wendy.

We appreciate everybody joining us on our call today.

That will conclude the call for this afternoon.

Good night.

This concludes today's conference.

Thank you and have a good day.