漢威聯合 (HON) 2007 Q3 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Welcome, and thank you for standing by.

  • (OPERATOR INSTRUCTIONS.) Today's conference is being recorded.

  • Now, I will turn the meeting over to Mr.

  • Kevin McCarty.

  • Thank you.

  • You may begin

  • Kevin McCarty - Director of IR

  • Great.

  • Thank you very much, and good afternoon, everyone.

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

  • Joining me on the call this afternoon is Patrick Byrne, Intermec's President and Chief Executive Officer, and Lanny Michael, 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, beliefs, expectations, forecasts, or predictions for the future constitute forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995.

  • Forward-looking statements, including statements about the Company's outlook for the fourth quarter of fiscal year 2007 and future periods, along with other examples described in the forward-looking statements 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 & Exchange Commission, including the Annual Report on Form 10-K and correlated 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 Patrick Byrne, Intermec's President and Chief Executive Officer.

  • Pat.

  • Patrick J. Byrne - President and CEO

  • Thanks, Kevin.

  • And good afternoon, everyone.

  • I've asked Barry Issberner, our VP of Global Marketing, to join us on the call today to answer any questions that may come up about our market results, key wins, new product sales, and RFID momentum.

  • I joined Intermec as the new President and CEO on July 19th.

  • After reviewing our financial performance it is clear to me that the priorities of the Company are accelerating growth and improving gross margins.

  • In our third quarter we made some progress on these two measures of success.

  • Our focus will be making progress every quarter towards a target level of performance which I'll discuss later.

  • Looking into the growth imperative first, we increased revenue 5% compared to the same quarter last year.

  • This is the first time revenue has grown for Intermec in five quarters as compared with prior year periods.

  • We believe that this progress in revenue growth, while modest for this quarter, will strengthen in future periods in view of four important factors.

  • Number one, product bookings growth.

  • Number two, international sales growth.

  • Number three, new product acceptance.

  • And, number four, promising RFID momentum.

  • First, bookings.

  • Beginning in the first quarter of 2007 we have seen product bookings momentum build.

  • In the third quarter we grew bookings, product bookings, 12% sequentially and 39% compared to Q3 of '06.

  • The product bookings growth is driven by strong market acceptance of our new products, a broad based and robust market demand picture, customer requirements for Intermec expertise, and an increased investment and focus in our global sales team.

  • Turning now to international sales.

  • Internationally, we experienced significant revenue growth.

  • In EMEA revenues increased 44%, and in our Asia Pacific region revenue increased 47%, both over the same quarter period in 2006.

  • North America and Latin America revenues decreased 11% and 20%, respectively.

  • In Latin America we had a very strong Q3 of last year.

  • YTD in Latin America revenue has grown 14%, so we are confident we are capturing the market growth in that region.

  • My recent extensive trip to the Latin American region and my meetings with our teams in sales, support, customers, and partners in that region have shown me that technology adoption continues to be strong in Latin America, and Intermec's expertise and local support are right on target.

  • I've also visited over 20 customers and partners in EMEA.

  • This region is experiencing very strong growth in all countries in transportation and logistics, retail, warehouse, consumer goods, and industrial applications.

  • Intermec has an excellent position and deep collaborative partnerships in place in EMEA.

  • Turning now to new products.

  • Our new CN3 has achieved very strong customer acceptance and has been key to our international sales growth, especially in transportation and logistics applications.

  • We believe that the transportation logistics segment is one of the fastest growing in the industry and Intermec is very well positioned.

  • The CN3 is a small, rugged mobile computer with distinctive communication capabilities.

  • It provides users with access to multiple voice and high-speed data options.

  • The CN3 is the first mobile computer to offer integrated GPS and Bluetooth capabilities along with 3G, wide area network, and Cisco compatible Wi-Fi connectivity, simultaneously in one device.

  • We are about to publicly announce an extension to our CN3 line called the "CN3e".

  • The new CN3e targets additional applications in the transportational logistics and consumer goods markets.

  • This new version of our very successful CN3 provides extensive communications options, as well as a wide variety of customer installable accessories.

  • The product is focused on keying applications, as well as [gloved] working environments.

  • Early customer feedback on the CN3e has been excellent.

  • Finally, comments on RFID momentum.

  • I've spent time with top RFID customers and partners on a global basis.

  • The number and variety of closed loop applications with strong return on investment profiles is impressive.

  • Intermec has deep engagements and real expertise because we have continued high levels of investment through the early technology phases.

  • For example, at [Metro Group] and [Testco] we have seen strong momentum towards commercialization after successful pilots in their supply chain.

  • Intermec RFID products were the first certified in China.

  • At the Pan Am Games in Brazil our solutions were adopted for security access.

  • Intermec was also among the first firms to integrate Microsoft's [Bus Talk] RFID platform into its RFID products.

  • Selective global supply initiatives, as well as closed loop applications are our focus going forward.

  • Intermec's broad product portfolio puts us in an excellent position in pallet level initiatives, where we believe the first meaningful revenue will be generated in global supply chain initiatives.

  • We plan to continue substantial technology, service and partnership investments in RFID going forward to maintain and expand our share of RFID product, sales and profits.

  • Turning now to our gross margin improvement imperative.

  • Our Q3 product gross margins have improved 160 basis points sequentially.

  • This was driven by new product acceptance and stabilized average selling prices.

  • We are attacking gross margins on four fronts: new product development, supply chain simplification, manufacturing operations efficiency, and product mix.

  • Lanny will discuss gross margins more in his comments.

  • Our service revenue and service gross margins are also very important.

  • Performance in Q3 was below expectations, especially North America.

  • Going forward, we will be improving both the top line growth and gross margins of this very important business.

  • Now, I want to turn to one of the top issues in Intermec, which is restoring growth in North America.

  • There are three steps we've taken in the last 90 days to improve our results in North America in meaningful ways.

  • First, we've simplified, streamlined, and upgraded the Management Team to improve accountability, alignment to key opportunities, and channel and service mix objectives.

  • We've recently appointed industry veterans with a strong track record of results to the key North America regional sales management positions.

  • These changes have the additional benefit of freeing up investment to increase customer facing, quota carrying sales personnel.

  • Specific account assignments have remained stable to ensure continuity in the fourth quarter and beyond.

  • Second, we have improved our focus and accountability towards channel mix commitments with an objective of at least 70% channel sales.

  • The enterprise and global account program remains very important, as well, and is getting focused management to improve the results.

  • Third, we are focusing in North America on growth opportunities and warehouse operations, direct store delivery, in transit visibility, and field service applications.

  • Customer acceptance of the CN3 has been strong in North America.

  • With the advanced wide area network and GPS capabilities we believe this platform will provide growth in the future in the key applications and industry segments I just mentioned.

  • Product bookings in North America grew 14% compared to Q2 of '07 sequentially, and grew 20% compared to Q3 of '06 a year ago.

  • Momentum is building towards restored growth.

  • Personally, I've spent a good portion of the quarter visiting customers, partners, and Intermec sites around the world.

  • I'm more excited and confident about Intermec's growth opportunities than the day I joined, in mid July.

  • As I've traveled globally over the past 90 days I found that customers and partners are making aggressive investments in new technologies and are looking for Intermec's expertise and portfolio solutions that work better together to enable their business transformation initiatives.

  • Our local teams are a major source of strength to support the large installed base of Intermec systems, as well as growth the business on new projects and accounts.

  • Our partner network is vital to our growth, and my recent meetings with our Partner Advisory Council gives me a confidence that we are better together here, as well.

  • Going forward, we plan to distinguish Intermec from competitors in the partner network by making it easier to do business with Intermec and by investing in platforms that will enable our partners and end users to rapidly develop and deploy applications.

  • Another key factor going into 2008 will be to ensure that each of our product lines delivers on growth and margin commitments that meet our overall Company objectives.

  • Intermec must compete and win both in end user solutions, as well as individual product lines.

  • On November 15th I'll be reviewing our plans to improve our printer, media business.

  • I'll turn it over to Lanny now to walk through the financials on Q3, and then I'll wrap it up with some comments regarding our growth plans and target business goals.

  • Lanny Michael - CFO and SVP

  • Thanks, Pat.

  • Intermec's third quarter revenue of $206 million represented an approximate 5% growth over prior year third quarter.

  • Third quarter EPS from continuing operations were $0.07 compared to $0.05 in the comparable quarter last year.

  • This quarter's revenue and EPS were within our forecasted range.

  • Reviewing our product line performances, strong growth in our system and solutions revenues drove overall revenue growth in the quarter.

  • System and solutions revenues increased 14% over the third quarter of 2006 to $118 million, representing approximately 57% of total revenues.

  • Printer and media revenues of $51 million represented 25% of total revenues, and decreased 5% over the comparable third quarter of last year.

  • Service revenue of $37 million, representing 18% of total revenues, decreased 6% over the comparable third quarter of 2006.

  • By geographic region, EMEA region revenues continued its strong momentum, growing 44% over the prior year's quarter.

  • This revenue growth included approximately $4 million of favorable foreign exchange gains.

  • On a constant currency basis EMEA growth was approximately 36% YOY.

  • Asia Pacific also delivered strong growth with revenues increasing 47% over the prior year's quarter.

  • North American revenues were down 11% over prior year's quarter, primarily on lower enterprise sales.

  • And Latin America revenues were up more than 14% YTD but were down 20% over the prior year's quarter, primarily as we experienced a large shipment in the comparable quarter of last year.

  • Product related gross margin was 37.6%, up from 37.0% a year ago and up sequentially from 36.0% last quarter.

  • We benefited both comparatively and sequentially from a favorable new product acceptance, average selling prices, and currency exchange.

  • Service related gross margin was 39.1%, down from 46.1% a year ago and 49.2% in the second quarter of this year.

  • Service revenue was down primarily as a result of the lower North American hardware revenue over the past four quarters and fewer enterprise customer rollouts during the quarter.

  • Consolidated gross margin was 37.9%, compared to 38.8% a year ago and 38.6% in the second quarter of 2007.

  • Operating expenses of $73.5 million included management transition costs totaling $3.1 million or $0.03 a share.

  • Operating expenses were $70.6 million in the third quarter of 2006 excluding restructuring costs of $1.8 million but including the benefit of a pension curtailment gain of $2.1 million or $0.02 a share.

  • Third quarter net interest income totaled approximately $700,000 compared to approximately $1.7 million in the third quarter of last year.

  • The Company's effective tax rate for the third quarter of 2007 of 16.2% included benefits primarily from certain changes in foreign and state tax law and for deferred taxes.

  • The benefits positively impacted our EPS by approximately $0.02 per share in the quarter.

  • The YTD effective tax rate for 2007 through third quarter was 39.8%, and we anticipate the effective tax rate for the full year will approximate 37.5%.

  • The Company generated $25 million of cash flows from operations during the third quarter of 2007, and our quarter end cash and short-term investment position was approximately $214 million at the end of the quarter.

  • Now, turning for a minute to our outlook for the fourth quarter, we expect fourth quarter revenues to be in a range of between $230 million and $238 million, earnings from continuing operations should be in a range of $0.20 to $0.25 per share, and we anticipate that diluted share count would approximate 61.5 million to 62 million shares for the fourth quarter.

  • That concludes my formal remarks.

  • I'll now turn it back to Pat for some concluding comments.

  • Pat?

  • Patrick J. Byrne - President and CEO

  • Thanks, Lanny.

  • I would like now to discuss our strategies for accelerating growth and improving margins, as well as our intermediate targets for those business goals.

  • First, let me say that we are focused on making progress every quarter, and we will be measuring results primarily against the same quarter in the prior year.

  • We've identified five strategies for accelerating growth and improving gross margins.

  • We expect each of these to contribute to both objectives in the coming quarters.

  • First, we'll be targeting high growth opportunities and applications in the transportational logistics, retail warehouse, consumer goods, and industrial markets.

  • Second, we'll be rapidly developing highly innovated and differentiated new products that work better together and are best in class in their targeted applications.

  • Third, we will strive to differentiate Intermec in the partner network in applications development platforms.

  • This is the second area where "better together" will be a distinct advantage.

  • Fourth, we will target global expansion of our sales and support opportunities to capture international growth.

  • And, fifth, we will develop a world class supply chain to improve gross margins, improve simplification, and cash cycle reduction.

  • Going forward, Intermec is going to be all about focus and execution in these management accountabilities.

  • I'll make some more comments on those subjects at the upcoming meeting in New York on November 15th, but I wanted to quickly outline, as well, our intermediate target business objectives.

  • Our midterm goal is to meet or exceed double-digit profit and growth, that is operating profit and growth.

  • All five of these strategies I've outlined will support these objectives, and we expect to report progress in these areas to investors and analysts on a regular basis.

  • As I've mentioned earlier, we are planning a morning meeting for investors and analysts in New York on the 15th of November.

  • During that meeting I will expand on our strategy going forward, discuss the overall business environment, our strategic growth initiatives and opportunities to leverage Intermec's operating model.

  • I'll turn it back now, over to Kevin, for the next steps in our conference call.

  • Thanks very much.

  • Kevin McCarty - Director of IR

  • Great.

  • Thanks, Pat.

  • We'd now like to open up our call for our Q&A period.

  • Cindy, you can now provide our callers with instructions on how to queue for this session.

  • Thank you.

  • Operator

  • (OPERATOR INSTRUCTIONS.)

  • Our first question comes from Kevin Starke.

  • Your line is open.

  • Kevin Starke - Analyst

  • Good afternoon, gentlemen.

  • On these targets that you've outlined at the end of your prepared remarks there, the one that catches my attention most is supply chain, and I'm wondering if you could give us some sense of what you think might be wrong with it and what might need to be done to improve it?

  • Patrick J. Byrne - President and CEO

  • Yes, I made a comment that our world class supply chain is one of the key initiatives to improve the gross margins.

  • I believe our supply chain is too complex, that we can simplify it and streamline it, we can reduce the number of nodes in the supply chain, if you think about from the time we build the product to the time the customer gets the product.

  • Also, I believe that the manufacturing efficiency can be improved through product design approaches as well as the management of product configurations.

  • Kevin Starke - Analyst

  • I would guess that a lot of your product is manufactured by contract manufacturers in Asia, assembled in Everett, and then shipped back overseas to a lot of customers, is that a fair statement?

  • Patrick J. Byrne - President and CEO

  • Yes, that's a fair statement.

  • Kevin Starke - Analyst

  • And so eliminating some of that, those steps might be one of the things you'd look at?

  • Patrick J. Byrne - President and CEO

  • Well, I think, you know, we're evaluating the different alternatives.

  • The key thing I was trying to emphasize is each of those steps adds value.

  • Kevin Starke - Analyst

  • Yes.

  • Patrick J. Byrne - President and CEO

  • But each of those steps also adds expenses.

  • And so we'll be looking at the number of supply chain nodes, working closely with our contract manufacturing and our manufacturing team to look at how we can streamline that.

  • Kevin Starke - Analyst

  • Okay.

  • Patrick J. Byrne - President and CEO

  • As I've outlined, we have a strong amount of growth on international sales.

  • I believe that's going to be a durable trend in our industry, and so making sure that we have a supply chain that is effectively efficient or that is efficient for global customers is a key way for us to capture value in the future.

  • Kevin Starke - Analyst

  • If I could ask another question, in your remarks you gave the impression that your service revenues are dependent perhaps primarily on your domestic revenues, so I was wondering, one, if that's true?

  • And then, two, if there's a major difference in the attach rates of service between U.S.

  • and overseas?

  • Patrick J. Byrne - President and CEO

  • Yes --

  • Kevin Starke - Analyst

  • Can you quantify that?

  • Patrick J. Byrne - President and CEO

  • The comment that Lanny made was that North America, our service revenue was down primarily due to North America, primarily due to hardware bookings or hardware bookings in the last several quarters.

  • Our attachment rates are not substantially different between regions, but North America is a very important region, and so we have robust service businesses globally and we expect to once we address these issues in North America to restore growth and growing earnings and revenue.

  • The service business is profitable.

  • We want to be sure that we're growing the earnings and services in every region.

  • Kevin Starke - Analyst

  • Okay.

  • Thank you.

  • Patrick J. Byrne - President and CEO

  • Sure.

  • Operator

  • Our next question comes from Philip Alling.

  • Your line is open.

  • Philip Alling - Analyst

  • Thanks very much.

  • So just with respect to the North American region, you have had five quarters in a row of double-digit declines in North American revenue growth, the -- at what point should investors expect that the -- with the improved bookings that you've given some visibility to, when should investors expect that that would translate into improved revenue performance in North America?

  • Patrick J. Byrne - President and CEO

  • I would expect that -- the first thing that we've got to do is stop the decline, so that's the first priority we've got.

  • As I said, the bookings, if you compare to a year ago or sequentially bookings are up, so the first thing that I hope to report is very soon that we have stopped the decline in North America on a YOY basis, and that is a top priority.

  • Philip Alling - Analyst

  • Is there anything that you could share with respect to the competitive environment?

  • I mean some of the other firms in the space, you know, the Symbol unit of Motorola, it appears that since becoming part of Motorola that unit has improved execution some, and managers there are reporting double-digit growth this year.

  • So is that -- has there been anything different in terms of their go-to-market strategy since Motorola has acquired them?

  • Is there any insight that you can share with us in terms of sort of the impact on Intermec's results thus far this year?

  • Barry Issberner - VP Global Marketing

  • Well, this is Barry Issberner, and in my prior life I spent 12 years with Symbol, and I know the competition very well.

  • I can tell you there has not been a material change in their go-to-market approach.

  • However, in fact, they were essentially left alone, the old Symbol Division, until fairly recently.

  • We're now starting to see the indications of the consolidation with Motorola and the public sector business that's combined under the enterprise group.

  • Because of the new combination we've, in fact, do not have as much visibility into what's going on inside of the old Symbol any longer, frankly.

  • And so we have not seen any increase in competition.

  • We continue to be very strong in the core markets that we focus on.

  • Philip Alling - Analyst

  • Okay.

  • And just a final question for me then.

  • You did make some positive comments with respect to some momentum in the RFID space.

  • Now, should that -- should we interpret that to mean that the royalties that you have received from the licensees to your intellectual property and RFID are improving, and what should an investor expectations be about possible impact to your margins and your financial model from royalties?

  • Lanny Michael - CFO and SVP

  • Let me -- this is Lanny.

  • Let me touch on the first comment and then perhaps from a business standpoint Barry can comment more on the -- what we really described in the conference call.

  • You know, as you know, we don't specifically spell out or give guidance on our royalty income, and what we were referring to in the comment had more to do with the, you know, what we're seeing going on in the marketplace in terms of both closed loop and other specific applications, where there's been strong momentum where we, in fact, are not only participating, but seeing increased momentum coming from that from a supply chain and other aspects of where those are being tested and also implemented.

  • Pat mentioned Metro AG and Testco as an example, and in previous timeframes we've commented on some of the specific airport closed loop.

  • So the momentum is on a relative basis, underlying the business we feel is very strong, but as you know we don't disclose specifically what the impact of that is either on royalty income or RFID revenue as a separate item.

  • Philip Alling - Analyst

  • Well, yes.

  • I just was really trying to get a sense about trend, whether there's -- you know, those are becoming material or not or, you know, without sort of specifying particular royalties from any given licensee, but so that's really more specifically what the question was, was to try to get a sense of whether that's becoming material or whether investors should really not give much consideration to that as far as financial performance of the Company?

  • Lanny Michael - CFO and SVP

  • It's not reaching the level of materiality for separate disclosure at this point.

  • Philip Alling - Analyst

  • Thanks for the clarity.

  • Operator

  • Our next question come from Eli Lustgarten.

  • Your line is open.

  • Eli Lustgarten - Analyst

  • Good afternoon.

  • Patrick J. Byrne - President and CEO

  • Hi, Eli.

  • Eli Lustgarten - Analyst

  • Can you help me a little bit with the fourth quarter, because the sales volume obviously is seasonally stronger, and is that all in product and services will still be down?

  • And, more importantly, in order to get to the $0.20 to $0.25 with a tax rate that looks like it's around 36.5, your operating margins have to return close to double digit, you know, 9.5% at a minimum is probably double digit to get there.

  • What's changing or what is causing -- just the higher volume?

  • What is changing that all of a sudden we're getting profitability almost back to a level we haven't seen since the second quarter of '06?

  • Patrick J. Byrne - President and CEO

  • The -- let's see, I think maybe I'll address the second question, which is that we have aggressive activities in place on all areas of margin management, while we're also driving the top line.

  • I believe, and we can verify the numbers in a moment, but we'll be in the 7% to 8% range in the guidance that we've provided.

  • Again, this is all about continuous improvement in revenue growth.

  • Eli Lustgarten - Analyst

  • 7% to 8% operating margins is what you're saying?

  • Patrick J. Byrne - President and CEO

  • What I'm -- no, what I'm saying is the top line growth --

  • Eli Lustgarten - Analyst

  • Top line, okay.

  • Patrick J. Byrne - President and CEO

  • -- compared to the same quarter last year, that would be in that 7% to 8% range.

  • And then in terms of operating income given the tax rates, we have -- I've already outlined the key things we're doing in focusing on our operational efficiency, as well as in margin management and product mix related to improving the gross margins.

  • This is a key priority and has the entire Management Team's focus, along with revenue growth.

  • So the things I've already outlined are the things that will improve the margins in Q4.

  • Eli Lustgarten - Analyst

  • But it's just a -- because I mean you're going from, what, [3.7] in this quarter to 9.5 in the fourth quarter, some magnitude that way, or at least 9.5 in the fourth quarter based on your guidance, is the things you're talking about enough to just do it, to --

  • Patrick J. Byrne - President and CEO

  • That plus the additional volume.

  • Lanny Michael - CFO and SVP

  • I mean a couple of things.

  • As Pat pointed out, we are aggressively addressing margin improvement, as we commented on, for third quarter on product margin improvement increased to about 160 basis points in the third quarter.

  • And with the focus we have, and as Pat stated, it's certainly one of our business initiatives to make improvement on that in the fourth quarter.

  • Certainly, some of that would be revenue related, in other words the incremental revenue, but also the other initiatives we had in place to make incremental improvement on that line item, itself.

  • Secondly, our SG&A costs with the $30 million sequential improvement in revenue, we would certainly expect to get leverage in our SG&A spending.

  • We would anticipate there to be some operating cost pressure with that increased revenue but, you know, certainly we would expect to get some leverage from that aspect, as well.

  • And those are the two, as you know, the two primary components below the revenue growth line to give us some improvement in operating margin.

  • Eli Lustgarten - Analyst

  • Is the service margins expected to be restored or are they still under pressure, under 40%, the gross margins?

  • Lanny Michael - CFO and SVP

  • I would expect the service margins to improve sequentially.

  • Eli Lustgarten - Analyst

  • But back -- in your goal outlook you were talking -- you're looking for double-digit revenue growth and double-digit operating?

  • Patrick J. Byrne - President and CEO

  • That's right, that's what we're focused on.

  • Now, that's not going to happen overnight.

  • We're going to show continuous improvement, but that's what we're focused on.

  • Eli Lustgarten - Analyst

  • You're running into share creep all of a sudden of some materiality, I guess.

  • I mean [a half] million shares.

  • Is that an extensive -- is this a onetime occurrence or is this something that's going to be controlled in the future?

  • Lanny Michael - CFO and SVP

  • Like you say "share" you mean in terms of the shares outstanding?

  • Eli Lustgarten - Analyst

  • Yes.

  • Lanny Michael - CFO and SVP

  • They're almost entirely related to stock option activity.

  • Eli Lustgarten - Analyst

  • Yes, I recognize that, but all of a sudden, you know, the stock is going up, are you going to let shares [go] or is there any intention to use some of the cash to buy back some of the, you know, to prevent the share creep?

  • Lanny Michael - CFO and SVP

  • I see.

  • Thank you for the clarification.

  • The Board has no plans in place at this point in time for any approved share repurchase.

  • Eli Lustgarten - Analyst

  • And one final question, is part of your growth aspect, I mean how does acquisitions fall into, you know, the aggressive top line and bottom line growth that you're looking for?

  • Patrick J. Byrne - President and CEO

  • Well, I'm currently evaluating -- this is Pat -- I'm currently evaluating those aspects.

  • You know, Intermec has a broad product portfolio.

  • What we want to do is be sure that we've got the strong organic engine in place, and we'll be evaluating different alternatives for acquisitions going forward.

  • I don't really have any more comments about that at this point.

  • Eli Lustgarten - Analyst

  • All right.

  • Thank you.

  • Patrick J. Byrne - President and CEO

  • You're welcome.

  • Operator

  • Our next question comes from Andrew Abrams.

  • Your line is open.

  • Andrew Abrams - Analyst

  • Hi.

  • I wonder if you could give a little detail on the North American, the progressive weakness?

  • Was this printer related, you know, I know CN3 is sort of just rolling out there, but can you give us a little color on kind of what happened in North America in this particular quarter?

  • Barry Issberner - VP Global Marketing

  • This is Barry Issberner.

  • I think historically we were -- we had some product gaps in the mobile line, which you've pointed out.

  • We've started to replace.

  • We had some scanning technology gaps, which we've also subsequently taken care of now with our exciting new EX line.

  • Coupling that with some adjustments that were needed in the sales organization, we feel like we're back on track to start taking advantage of the opportunities in North America.

  • And we're starting to see signs of a pretty strong uptake in the CN3 and other mobile product lines in the U.S.

  • We've got some great account wins, some of which are announced, some of which are still confidential, across the board in the mobile, in the printing area, and uptake on the new imaging technology.

  • Andrew Abrams - Analyst

  • Okay.

  • And --

  • Barry Issberner - VP Global Marketing

  • We've done what we need to do on the product front to take care of that situation.

  • Andrew Abrams - Analyst

  • Okay.

  • Can you talk a little bit about the military side of RFID?

  • I mean there's been some rumblings about things actually picking up in the military side, which has been sidetracked for a long time.

  • Have you guys seen anything along those lines?

  • Patrick J. Byrne - President and CEO

  • We're definitely seeing some renewed strength in our government area and some opportunities to improve our margin picture in there on some of the activity that's going on in, say, the IT area, as well as outside of the U.S.

  • Andrew Abrams - Analyst

  • Mostly outside of the U.S.?

  • Patrick J. Byrne - President and CEO

  • No, I'm saying in addition we're seeing some good opportunities and uptake in international government opportunities, as well.

  • Andrew Abrams - Analyst

  • Thank you.

  • Operator

  • Our next question comes from Chris Quilty.

  • Your line is open.

  • Chris Quilty - Analyst

  • Good evening, gentlemen.

  • A question with regard to the tax benefit in the quarter.

  • Looking back through my notes I didn't recall any implication that we should expect something, so is it fair to assume that excluding that $0.02 benefit you were actually a little bit below your guided range for the quarter?

  • Lanny Michael - CFO and SVP

  • Well, we had $0.07, and that was about a 2% benefit.

  • Chris Quilty - Analyst

  • Right.

  • But was the $0.02 included in your guidance that you were assuming?

  • Lanny Michael - CFO and SVP

  • Thanks for the clarification.

  • No, we really didn't have visibility of that when we gave guidance for the quarter.

  • Chris Quilty - Analyst

  • Okay.

  • And so just another clarification in terms of coming out towards the low end of the guidance either with or without the tax benefit was it singly the printer business, or sorry, the service business and the underperformance there, or what other rank factors were the things that turned out worse than your expectations?

  • Lanny Michael - CFO and SVP

  • Well, I think that as we've commented, on a top line and margin basis certainly the service was one of the primary impacts to YOY, as well as sequential improvement.

  • So from an overall business standpoint that was -- the other thing I wanted to comment on relative to your question about the guidance, we also had, as we disclosed, approximately a $0.03 per share impact which was also not something we had transparency on when we gave guidance at the end of July, so I would just point that out, as well.

  • From the tax standpoint it gives us a positive impact of $0.02 but the operating costs which are substantially behind us now of about $3.1 million had a negative impact of $0.03, too.

  • Chris Quilty - Analyst

  • Fair enough.

  • Also, with regard to the channel program, we have seen in the industry going back a couple of years ago, just about everybody in the industry announced a new channel program.

  • When you talk to many of the resellers out there they just kind of shrug their shoulders.

  • Is there something we should expect that's different about this channel program?

  • And one clarification, you had mentioned you want to get about 70% of the product moving to the channel, does that indicate 70% through either tier one or tier two, or are you talking about more of a push through the two-step distribution model, and where do you stand now relative to that 70%?

  • Barry Issberner - VP Global Marketing

  • This is Barry Issberner, Chris.

  • We are definitely going to be putting more energy into our channel program in terms of promotion and the activity.

  • We know we've got a lot of channel interest in the new products that we've announced or the ones that are coming down the track, that they're aware of, so we do expect to apply more resources to that channel initiative in general.

  • And we are looking for increases in both tier one, going through distribution, as well as through the direct VAR programs going forward.

  • Chris Quilty - Analyst

  • Okay.

  • So when you say 70% through the channel, you're just distinguishing that from direct sales, not necessarily saying like Symbol and some other competitors, we want to move to a two-step model?

  • Patrick J. Byrne - President and CEO

  • I think that we're saying it is based -- it is a comparison against direct sales.

  • Chris Quilty - Analyst

  • Okay.

  • Patrick J. Byrne - President and CEO

  • I think that where there's opportunity and great value to take advantage of key distributors, we'll continue to do that, we'll continue to strengthen that internationally, as well.

  • Chris Quilty - Analyst

  • Okay.

  • And did you say where you're at now relatively to 70%?

  • Patrick J. Byrne - President and CEO

  • In terms of?

  • Chris Quilty - Analyst

  • Well, what's the mix today?

  • Lanny Michael - CFO and SVP

  • It goes through distribution.

  • Chris Quilty - Analyst

  • I'm sorry, I was talking over you.

  • Lanny Michael - CFO and SVP

  • 70% of revenue is through distribution partners, either through direct VARs or through distributors, it is not direct sales.

  • Chris Quilty - Analyst

  • Okay.

  • So there's really no change then in terms of your emphasis of percent of sales going through the channel?

  • Patrick J. Byrne - President and CEO

  • No, I think there's confusion -- this is Pat.

  • The confusion is -- Chris, the question you're asking is what is it currently, what is our target?

  • It's below that by 10% to 15%.

  • Chris Quilty - Analyst

  • Okay.

  • Patrick J. Byrne - President and CEO

  • And so -- by the way, this thing about shrugging the shoulders, that is not what I've seen.

  • I've met these partners, they are very excited about a more focused and aggressive Intermec in working with them.

  • Chris Quilty - Analyst

  • No, I -- to be fair, what I'm talking about is a couple of years ago when Symbol, Zebra, Intermec handheld, everyone announced channel programs within a year of each other, and if you asked any of the channel partners, you know, who has got the best one, how do you distinguish, there wasn't a lot of difference.

  • But I've consistently heard from the channel partners that they'd like to see more commitment from Intermec, that you guys have tended to use the direct channel more than the other companies, and that that would be a positive.

  • So I think you're moving in the right direction there.

  • Patrick J. Byrne - President and CEO

  • Yes, this is -- again, I've met these executives, and I believe that this will really turn into results in a powerful way.

  • Again, this stuff -- none of this stuff happens overnight, but I think it's a very, very clear accountability, there's -- we're eliminating ambiguity, we're very focused, direct, with very clear accountability but also very clear metrics on channel sales and aggressive investments to convert that to results.

  • Chris Quilty - Analyst

  • Okay.

  • A specific question on the printer business, which I think you've had seven straight quarters of YOY declines.

  • You made -- the Company made a number of major changes with the printer product line, beginning a couple of years ago, shutting down [Gottenberg] and bringing more product development in-house rather than using OEM partners, is that strategy not working or is this endemic of end market weakness, or competitors that have gotten more aggressive?

  • Patrick J. Byrne - President and CEO

  • I'll be making more comments -- this is Pat -- I'll be making more comments about this on November 15th, Chris, but I think our products relatively -- our products are good products, that's what I get consistently.

  • The key thing is the execution of the go-to-market strategy in a very focused and deliberate way compared to competitors in this space.

  • We intend to get that business on track and participating growth in the Company, and we just haven't executed against that strategy effectively in the past, and we have to improve that.

  • Chris Quilty - Analyst

  • And the two printers that you announced in the -- or talked about in the press release, are those internally developed units?

  • Patrick J. Byrne - President and CEO

  • They --

  • Chris Quilty - Analyst

  • You had the PM4i and the EasyCoder PD42?

  • Barry Issberner - VP Global Marketing

  • We are working with partners, but we are leading in the design effort in terms of specs and requirements.

  • Chris Quilty - Analyst

  • Okay.

  • Patrick J. Byrne - President and CEO

  • Chris, I don't think that this topic of designing the products inside the company or outside the Company is the material issue.

  • I think the key thing is getting the right products and then working closely with the partner network and the customers to be sure that we get the results to happen.

  • Chris Quilty - Analyst

  • Okay.

  • And a final question here, last month Honeywell announced that they were acquiring a competitor [of] handheld products, can you give us any thoughts on what impact that acquisition might have on Intermec or what are the broader implications for the industry?

  • Patrick J. Byrne - President and CEO

  • Well, let me comment a little bit -- this is Pat -- on this.

  • This is -- I think I'd make two.

  • One of them is that this is another move in the industry in acquisition, right.

  • So there's -- this is what's happening in the industry in different spaces, this is another example of it.

  • The second comment is I can't specifically comment about another company's proposed acquisition, whether it is not completed yet.

  • I do believe that if Intermec is all about focus and execution on the five strategies that I've outlined that we will take advantage of the disruption in the marketplaces associated with these changes.

  • Again, it's all up to us to do that.

  • Chris Quilty - Analyst

  • Right.

  • All right.

  • Thank you, gentlemen.

  • Operator

  • Our next question comes from Reik Read.

  • Your line is open.

  • Reik Read - Analyst

  • Hey, good afternoon.

  • I just wanted to go back to the channel.

  • And maybe, Pat, if you could comment a little bit more in terms of what do you think the key issues are out there that you face?

  • I mean this isn't just having to move more mix [indirect], and as Barry suggested there's some promotion programs you have to do, but I would assume that there are other things you're looking at, as well.

  • If you could give us some color that would be great?

  • Patrick J. Byrne - President and CEO

  • Well, in fact, this is going to be another topic that I'll cover in some depth on November 15th in New York.

  • [Mike Wills], the Senior VP of Sales, will be there, joining me, to discuss this some more.

  • I think I'll ask Barry to make some comments on some of the things that we can do besides promotion in this -- at this point and then, again, we'll follow-up in a couple of weeks.

  • Barry Issberner - VP Global Marketing

  • Just in general, the effort that we'll be putting on education on the new products that we're bringing out, we've got some exciting new technologies, like the new EX near/far imaging technology, the integration of GPS into our mobile devices has got a lot of interest in the channel, a lot of folks eager to work with us to figure out how to integrate that technology into their application solutions to give their customers competitive advantage.

  • So I would -- we will be spending time and effort to get that material message out and work with those partners to do the integration of those technologies into their solution set.

  • We'll be doing the same thing in the RFID space, now that we've made headway there with our announcements, for example, to the first industrial reader, supplier to get support under the Microsoft Bus Talk platform.

  • That now enables an entire network of Microsoft partners to sit up and take notice and be interested in learning more about our products, for example.

  • We've done work in partnership with NACCO Materials Handling, for example, who are one of the largest forklift components solutions providers.

  • They've now set-up a relationship with [Heister & Yale], forklift dealers, where they can directly supply the data communications solutions on those forklift products at the point of delivery.

  • So we've done some programs and efforts in those veins which we now need to mine, for example.

  • Reik Read - Analyst

  • Can you comment, at least -- I mean that's helpful, but can you comment, at least, too, are there structural things that you need to change?

  • And if you don't want to talk about them I understand, but is there significant changes that need to be made from a structural standpoint?

  • Patrick J. Byrne - President and CEO

  • Again, some of the initiatives we'll be talking about a little bit more -- not to put that off -- until the -- and we'll be talking more in New York.

  • There are some activities and changes that we're making that are of very much of interest to channel partners in some of these segments, and we'll be talking more about those at a later date.

  • Reik Read - Analyst

  • Okay.

  • Fair enough.

  • And then just going back to, Pat, the programs that you talked about to accelerate gross margin, can you give us a sense for how much investment you need to make, how much cultural change needs to be done, and how much change in infrastructure needs to be made along the way for you to really realize what you ultimately intend?

  • Patrick J. Byrne - President and CEO

  • I think that there are some things that we can do that are relatively straightforward.

  • I've seen them done before.

  • It's really about picking them and making sure that -- the management of complexity, the number of nodes in the supply chain, the operational efficiency of executing the revenue plan through the quarter, these are things that are about operational discipline.

  • There's also some things that do take some time.

  • The -- anything that would be impacted by product design, product configuration complexity, those things take some time to do.

  • We have very strong contract manufacturing partnerships which we can leverage.

  • So I think it's a combination, as I said, some of them will take some time, some of them we can act on, we already are acting on, and it's part of our plan in Q4 and beyond.

  • Reik Read - Analyst

  • Okay.

  • And then just lastly on the European side of things with transportation logistics, one of the opportunities that seems to be out there are the postal with deregulation, and you probably have won some of the smaller ones, but it seems some of the larger ones have been mired in strikes and not wanting to go forward and modernize.

  • Now that some of those are ending do you see a clearer path for opportunity there or is that something where their unwillingness to modernize from a work force standpoint is just going to continue to drag that along.

  • Patrick J. Byrne - President and CEO

  • Yes, let me add into that, and then Barry can make some comments.

  • I visited these customers in EMEA, so this is one of the key reasons that I was there.

  • And I think that during 2008 there will be meaningful contributions in the European postal services.

  • This is really a must do, there isn't an alternative.

  • The question is a matter more one of timing.

  • And my judgment is that there will be meaningful contributions in 2008 to that, and that we are very focused on these and believe we're well positioned.

  • So I'll turn it over to Barry now.

  • Barry Issberner - VP Global Marketing

  • We also already announced some early momentum there with our UK GeoPost win, for example, and there are others that we feel we're well positioned on.

  • Reik Read - Analyst

  • Okay.

  • And, I'm sorry, I just wanted to go back to one other question just on the gross margin side of things.

  • Pat, I heard you say that there's some things you can do in the short term, and then there's some intermediate things that need to be done.

  • But it doesn't sound to me like you think that anything structurally needs to be changed significantly where you would be taking a meaningful step backwards to take three steps forwards?

  • Patrick J. Byrne - President and CEO

  • No.

  • I don't see any meaningful step backwards.

  • So I have a lot of experience with this, you know, five or six years of it, so this -- the simplification, the streamlining of the operational improvements, the product design, the configuration, the mix improvements, these are all well understood and can be laid out over a period of time to execute.

  • Reik Read - Analyst

  • Okay.

  • Great.

  • Thank you, guys.

  • Barry Issberner - VP Global Marketing

  • You're welcome, Reik.

  • Operator

  • And our final question comes from Andy Young.

  • Your line is open.

  • Andy Young

  • Oh, hi.

  • A couple more clarifications regarding your market share in North America.

  • Maybe I missed it, did you guys mention what the percentage is currently in [indirect] and what is currently through the direct channel?

  • Patrick J. Byrne - President and CEO

  • What I tried to outline -- this is Pat Byrne -- what I tried to outline is that our goal is 70% and we're at 10% to 15% below that in North America, and that's what's being adjusted.

  • Andy Young

  • Okay.

  • And so if you move to more indirect channels, would that impact your gross margins, you know?

  • And then, also, I mean I guess that would probably be negative for your gross margins, and positive for your operating margins, would that be a correct categorization of the situation?

  • Lanny Michael - CFO and SVP

  • No, there isn't a material difference in gross margins through the channels or through our -- you know, it depends on product mix, it depends on agreements with channel partners, but there isn't a material difference in gross margin results.

  • We can achieve our gross margin targets and our growth objectives with this channel move.

  • Andy Young

  • Okay.

  • And for I guess for operating margin that would be a benefit for you guys, if you moved to more indirect channel?

  • Patrick J. Byrne - President and CEO

  • Well, you know, the operating margin comes as a result of ensuring that we achieve the top line growth, the gross margin improvement, and the operating expense, so it all goes together.

  • As I said, our goal is to achieve double-digit operating profit and double-digit growth, that is the focus of the team, and this channel plan is part of that.

  • Andy Young

  • Great.

  • Thank you.

  • Operator

  • We did have another question queue up, it comes from Christopher O'Donnell.

  • Your line is open.

  • Christopher O'Donnell - Analyst

  • Hi.

  • Thanks for taking my question.

  • I just wanted to get back quickly to the services gross margin side.

  • Was I understanding the commentary correct in the beginning that the margins in the European business are a little lower on the services side than in the U.S., and that's partly to be blame for the sequential down tick, or is it just a straight revenue number, lower revenue, you know, lower services margins?

  • Lanny Michael - CFO and SVP

  • No, we did not make a comment relative to service margins being lower in Europe.

  • Christopher O'Donnell - Analyst

  • Okay.

  • So it's pretty -- it's a -- you did make a comment in terms of the sell through on services being similar in both regions, so basically a similar profile for both?

  • Because I'm just trying to understand the large drop there, you know, if it's regional or just get better clarity on that.

  • Lanny Michael - CFO and SVP

  • Yes, clarity, just kind of reiterate it, and I'll be glad to do that.

  • We commented that because of the lower North American hardware sales that have been indicative over the last four to five quarters, as well as within the current timeframe there being lower enterprise, you know, large account type of sales compared to a year ago, that the cumulative impact of that was a, was the impact on both service revenues and margins.

  • And so to clarify we were indicating that that was primarily caused on a regional basis by the North American hardware sales not being as -- at the level we'd like to see.

  • Christopher O'Donnell - Analyst

  • Okay.

  • And specific to the enterprise accounts, which carry a better sort of (inaudible) rate, right?

  • Okay.

  • Great.

  • And then the second question is just a follow-up, something you mentioned on last quarter, having the 700 Series being operable with Windows [Mobile 5], has that generated a little interest in the channel?

  • I mean what -- just a general update on that, whether that still matters or is that product kind of quickly being eclipsed by the CN3?

  • Barry Issberner - VP Global Marketing

  • No.

  • The good news is we're continuing to see robust business, continued business on the 700 Series, as well as additional business with the CN3 model, so we're seeing strength on both fronts.

  • Christopher O'Donnell - Analyst

  • Okay.

  • Great.

  • That was it.

  • Thanks very much.

  • Operator

  • At this time, I will turn the call back over to Kevin McCarty.

  • Kevin McCarty - Director of IR

  • Great.

  • Just a quick housekeeping item before we end the call this afternoon.

  • Our upcoming Investor Meeting will be webcast on our Corporate Investor Relations website at www.intermec.com/investorrelations.

  • The presentation and corresponding live webcast will begin promptly at 8:30 a.m.

  • Eastern Time on the 15th of November.

  • Our replay of this event will be available on our site for approximately one month.

  • If you require further information please don't hesitate to contact me.

  • Once again, we appreciate everyone joining us on the call this afternoon, and that will conclude our call for today.

  • Have a great night.