漢威聯合 (HON) 2009 Q2 法說會逐字稿

Hello and welcome to Intermec's second quarter 2009 earnings call.

All lines have been placed in a listen-only mode until the question and answer session.

Today's call is being recorded.

If anyone has any objections, you may disconnect at this time.

I would now like to turn the call over to Mr.

Kevin McCarty, Director of Investor Relations.

Sir, you may begin.

Thank you, Kim.

Good afternoon, everyone, and welcome to Intermec's second quarter fiscal year 2009 earnings release conference call.

With me on the call today is Intermec's President and Chief Executive Officer, Patrick Byrne, and our Senior Vice President and Chief Financial Officer, Bob Driessnack.

In a moment, Pat will discuss our quarterly overview and Bob will provide a summary of our operating performance and guidance.

Subsequent to those discussions, we will begin our question and answer period.

Now, let me quickly cover our Safe Harbor Statement.

Today's discussions may include predictions, estimates, or other information that might be considered forward-looking under the Private Securities Litigation Reform Act of 1995.

Some of the statements we make today may be considered forward-looking, including but not limited to Intermec's expected financial performance as well as Intermec's strategic and operational plans, along with additional examples that are set forth in today's earnings release.

These statements involve a number of risks and uncertainties that could cause actual results to differ materially.

Please note that these forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise or publicly release the results of any revision to those forward-looking statements.

In addition, we will describe certain non-GAAP financial measures, which we also refer to as adjusted items.

These should be considered in addition to and not in lieu of comparable GAAP financial measures.

Please refer to today's earnings release which shows our reconciliation from GAAP to non-GAAP net earnings.

And for a more detailed description of our risk factors that may affect our results, please refer to our SEC filings including our annual report on Form 10-K and our quarterly reports on 10-Q.

Copies of these reports can be obtained from the SEC or by visiting the Investor Relations section of our website.

With that, it is now my pleasure to turn the call over to Pat.

Thanks, Kevin, and good afternoon, everyone.

Intermec delivered second quarter operating results in line with guidance provided in April, managing expenses well, lowering our breakeven as planned, and generating cash.

In challenging market conditions, we generated revenues of $158 million and adjusted EPS loss of $0.03.

Through effective working capital management, we extended our cash balance to $227 million in spite of an operating loss and restructuring expenses.

Bob will be reviewing our financial results in some detail, and then I will provide an overview of market conditions, new products, and channel progress.

Now, I'll turn it over to Bob.

Thank you, Pat.

Intermec's second quarter revenue of $158 million represented a 28% decline over the prior year's second quarter.

On a constant currency basis, revenues declined 23% year-over-year.

Our second quarter loss per share was $0.11 compared to earnings of $0.13 in the comparable quarter of 2008.

Included in the $0.11 loss was the impact of restructuring costs of $7.3 million, or approximately $0.08 per share, in the second quarter.

On a non-GAAP basis, excluding restructuring charges, our adjusted earnings per share loss was $0.03.

Second quarter revenues on a regional basis were as follows.

In North America, revenues declined 22% from the prior year quarter.

Europe, Middle East, and Africa, or EMEA, were down 36% in the quarter.

12 percentage points of the decline was due to currency.

EMEA did see an increase of 24% sequentially from the weak first quarter.

Latin American revenues were down 34% and Asia-Pacific declined 21%, both versus the prior year quarter.

Reviewing our product line performance, system and solutions revenues declined 33% over the second quarter of 2008 to $86 million.

Printer and media revenues of $37 million declined 28% year-over-year but increased quarter-over-quarter by 4%.

Service revenues of $34 million were down 9% over the prior year quarter, and up 1% from the first quarter of 2009.

Total gross margin was 36.2% in the second quarter as compared to 40.7% a year ago, representing a 4.5 percentage point decline.

Second quarter product related gross margin was 34.4%, a 5.6 percentage point decline from the year ago margin of 40.0%.

In the quarter, our product gross margins were impacted significantly by lower volumes and by a number of items including competitive pricing in the current economic environment, the impact of currency, particularly in EMEA, and a less favorable product and geographic related mix.

To improve margins, we are focused on driving top line growth with pricing discipline and channel management.

We continue to simplify and streamline our supply chain.

We expect our gross margins will reflect these positive efforts as this year unfolds and the markets strengthen.

Service gross margins were 42.7% in the second quarter, a decrease of 1.3 percentage points compared to 44.0% in the prior year quarter.

The decline was due to lower volume.

On a sequential basis, our service margins increased 210 basis points from the first quarter of 2009.

Operating expenses, excluding restructuring costs, were $60.1 million, or 23% below the $77.7 million reported in the second quarter of 2008, and were down 10% sequentially from the first quarter.

We have made great strides in tightening our expense controls and reducing the level of spending in line with lower near term volume expectations.

At the same time, we are aiming our spending on key new products, evidenced by our recent product introductions while investing in sales and marketing efforts to win where the markets are the strongest.

We are using deeper insights gained from customers to enhance the effectiveness of our investments and open innovation, including outside partner resources, to leverage the dollars invested in product development.

Next, let me provide a quick update on our goal of reducing our annual breakeven level as we exit 2009 by more than $150 million from our 2008 level.

As a point of reference, in 2008 the Company's breakeven point was approximately $760 million.

In the second quarter, we made significant progress lowering our annualized level to approximately $665 million.

Our objective is to be profitable exiting 2009 even if the economy does not recover.

We expect that when the economy recovers and the markets pick up, we will realize strong operating leverage.

Looking at the balance sheet, we made a substantial reduction in total net inventories, which were about $15 million down from the first quarter of 2009, and $45 million lower year-over-year driven by the outsourcing initiative and continued management focus along with improved forecasting processes with our contract manufacturers.

We continued to manage receivables well during the quarter, which declined roughly $2 million sequentially and $32 million from the 2008 year-end levels.

In the second quarter, we generated positive operating cash flow of almost $8 million, which includes the impact of $4 million of payments related to restructuring costs.

At quarter end, our cash and cash equivalents increased to $227 million.

The Company is very focused on managing our costs in line with economic conditions and continuing to drive strong working capital management to generate cash.

With no debt on our balance sheet, the Company continues to be in solid financial position.

As we look to the third quarter of 2009, the current state of the global economy continues to show significant weakness and uncertainty.

Revenues are expected to be within a range of $165 million to $175 million.

Earnings or loss per share is expected to be within a range of a loss of $0.08 to a loss of $0.03 per diluted share, including the expected impact of a minus $0.06 for the restructuring plans announced during 2009.

Excluding these restructuring charges, the non-GAAP adjusted earnings or loss per share is expected to be within a range of a loss of $0.02 to earnings of $0.03 per diluted share.

We anticipate the effective tax rate for the third quarter to be approximately 37%.

Our earnings per share guidance assumes a diluted share count of approximately 62 million shares for the third quarter.

And with that, I'll turn the call back to Pat.

Thanks, Bob.

I will now highlight what we are seeing in the market and our key priorities going forward.

We believe that the overall market conditions have stabilized and are showing some signs of improvement compared to the first quarter, but they are still well below a year ago.

Most end markets have lower capital spending planned throughout 2009 and appear to be holding to those reduced budgets.

Customers are focused on extending the useful life of their current assets and engaging in evaluations of new technologies.

The overall level of bookings in Q2 was a modest improvement compared to Q1, and our sales funnel has grown sequentially.

We believe these are early signals of a gradual recovery led by the phasing of these new deployments.

We are staying engaged on the larger enterprise deployments in anticipation of market recovery.

Mobility investments where the cellular network is leveraged as an enterprise platform remains a top operational investment priority for customers.

Mobile workforces are becoming the focus in many companies and industries, and our new products are reaching these new applications.

Our rugged mobile business solutions enable customers to increase revenue, lower their cost, deliver better experience to their customers while also improving the productivity of their mobile workforces.

Our priorities in this environment are to introduce compelling new products, expand the addressable markets for our technologies through channel engagements, and stay actively and aggressively engaged in new deployments.

We plan to continue to lower our breakeven point in order to conserve cash in the short term and to enable strong operating leverage when the markets recovery more fully.

During the quarter, we introduced several significant new products which offer compelling value and represent highly innovative technologies.

Our new CN4 is a lightweight and fully rugged 3.5G mobile computer built from the successful CN3 platform.

The CN4 is designed to perform in the most demanding work environments.

With a six-foot drop specification, a compact internal antenna design, and IP64 sealing, the CN4 reduces worker downtime and the risk of critical data or revenue loss.

We also introduced the CN50, a high performance, rugged, 3.75G mobile computer that is optimally designed for hold and carry environments and direct customer interactions.

We anticipate that the CN50 will bring new customers to our business, especially in field service related applications.

These mobile workers require speed and accuracy on data intensive applications and a single convenient device.

The CN50, at 11 ounces and in a smaller package, is a game changing product.

It fills the gap between a fully rugged device and simpler, more vulnerable commercial products while also delivering new technologies that can transform the mobile business process.

The CN50 features numerous innovations including a flexible network radio that can be reprovisioned to a different network as business needs or coverage options evolve.

This capability enables customers to deploy a single hardware platform on the wireless network offering the best cost and geographic coverage.

A built in accelerometer can be used in applications, for example a digital compass, that allows the user to track position, direction, and movement.

This means that in addition to combining computing, communications, location, and identification technologies into our products, with the CN50 we have effectively built sensor technologies into rugged mobile solutions as well.

We also have included a three megapixel camera, advanced imaging technologies, and voice over IP and push-to-talk capabilities.

The CN50 is the industry's most advanced rugged mobile computer.

The CN4 and CN50 are both available with a new Intermec innovation, enhanced mobile document imaging, or EMDI.

This new capability provides mobile workers with a fast, reliable way to convert full-page paper documents into electronic documents at the point of transaction.

With EMDI enabled devices, mobile workers now have the ability to transmit high quality document images captured in all lighting conditions to back office applications in real time as part of their mobile business process.

We are very excited about these two compelling new products and are in a shipment position at this time.

The sales funnel is robust and we expect them to begin to have an impact on the business in the second half of 2009.

Recently, Intermec also added five new rugged mobile label and receipt printers to its PB product family, the PB21 and 22, PB31 and 32, and the PB51, as well as an upgrade to the PB50.

The new printers features two times more memory, print 20% to 30% faster than competing solutions, and are the industry's only smart rugged mobile receipt and label printers.

Smart printers lower the total cost of ownership by putting more computing power inside the printer.

These products are focused on route accounting, transportation and logistics, retail and field service applications in the case of the receipt printers, and retail warehousing distribution centers and factory maintenance in the case of the mobile label printers.

Next, I want to make some comments on our regional performance and outlooks.

As I mentioned, enterprise businesses (inaudible).

In North America, we saw the expected decrease sequentially in US governmental business due to the expiration of the Department of Defense, or DOD, AIT-III contracts.

This week, we announced that Intermec has been awarded a contract with the AIT-IV.

The contract has a three-year period with a possible extension of another six years.

We have a long history of successful engagement on the AIT contract with DOD, and we believe as the incumbent that we are well positioned to win with our strong product lineup.

We anticipate this contract beginning to create business later this year.

As I mentioned, enterprise business is still at lower volumes compared to a year ago.

But, in Q2, we did win a number of important transportation and logistics deals as well as in warehousing with our new CK3 product.

We also saw improvement in our printer business in the quarter with sequentially stronger bookings.

One of our key strategies is to expand the business with the channel.

In Q2, we made progress in the channel, recruiting approximately 80 new VARs in the Americas focused on a number of areas including grocery, utilities, and mobile healthcare.

We anticipate new business opportunities in these field service and mobility applications, especially with our new products.

As an example, we delivered a solution with a partner in a healthcare distribution application where our customer wanted to implement a voice-directed picking process to improve productivity using the CK3.

The sales funnel in North America has grown well in Q2, and we believe we are well positioned to capture the growth in the future.

We expect that the combination of new products, channel expansion, and new technology deployments will catalysts for continued share gains in the region.

In Latin America, we are seeing an expansion of the channel activities and some restoration of the transportation and logistics business as well as improvement in the consumer packaged goods market, a strength for Intermec in the region for many years.

In Europe, Middle East, and Africa, or EMEA, we grew 24% sequentially from a weak Q1, but it is still down compared to a year ago.

Many of the transportation and logistics rollouts have been delayed due to capital spending reductions.

We have seen strength in some of the retail segments, especially food and consumer staples.

Overall in this region, the sales funnel has grown since Q1.

During Q2, we had success in postal mobility with a significant order from Hermes, a provider of home delivery services using a network of over 7,500 couriers in the UK.

This solution is based on the CN3 with GPS capabilities, and highlights the positive leverage we have from our successful deployment with Royal Mail last year.

Hermes is replacing its existing paper systems with our rugged mobile solutions.

Hermes plans to complete the deployment over the next several months.

And there are several other European postal projects in the planning phase, and we anticipate some of this business starting in 2010.

Another area of strong activity in Europe is the government sector, especially related to revenue generating activities in municipalities and inspections, for example in meter reading, traffic police, security applications, and environmental regulation.

These mobile workforces are often underserved, and Intermec, along with partners, can expand the businesses with new rugged mobile business solutions.

We believe our new products will do well in Europe, and this region has historically been an early adopter, driving new Intermec technologies into the industry.

In the second quarter, we added Ingram Micro and Blue Star as complementary distribution partners in parts of EMEA, and we anticipate these partnerships helping us to reach previously underserved markets.

In Asia-Pacific, we saw some strength in China infrastructure projects and consumer packaged goods direct store delivery.

In Australia and New Zealand, the transportation and logistics sector remained strong.

And during the quarter, we provided new rugged mobile business solutions to a major parcel delivery company.

In summary, we believe our markets are improving, albeit a gradual recovery led by new deployments and newly addressable mobile workforces.

Our priorities are to gain share with our new products and channel expansion, and to stay in engaged on these new deployments of rugged mobile business solutions.

Our products and services provide excellent value to current and new customers for Intermec, which we believe positions us for the future.

We continue to lower our breakeven point while we keep these new products and channel leverages on track.

We expect this will provide significant operating leverage when the markets recover more fully.

I am confident of these business plans delivering strong, long-term shareholder returns, and we appreciate the support of our employees, customers, partners, and investors.

This concludes my formal remarks.

I'll now turn it back to Kevin for question and answers.

Thanks, Pat.

Kim, we'd like to now open up our call for our question and answer period, please.

Thank you.

(OPERATOR INSTRUCTIONS.) Our first question comes from Reik Read with Robert Baird and Company.

Thanks.

Good afternoon, guys.

Just in terms of the product gross margins, they were down just a little bit over 200 basis points sequentially.

I understand that revenue was down, but it wasn't down that much.

Can you help us understand what else might be putting some pressure on those margins?

And you had mentioned competitive pressure in your script.

Could you comment on that?

Thanks, Reik.

This is Bob.

A couple of comments.

We are seeing the continued impact of sort of the economic environment and the overall impact on volumes, which, as you know, were down just a little bit.

Our outsourcing model is working well.

We are seeing the cost savings and things there.

I do have some fixed costs that still cause us to deleverage a little bit.

Competitive pressures, really it starts with buyer power in this environment across all of our markets.

We are focused on winning business.

That is hard fought business in many cases.

Also from the product -- the geographic mix, while Europe was up sequentially from the first quarter, the second quarter, it's still down substantially from the prior year.

And as Pat, I think, has commented a couple of times, Europe historically has been one of our better or our best margin region overall.

Product mix also came into play with just certain products that carry a little bit higher gross margin being a smaller share of our mix in the second quarter.

And when we look at the new products that you guys have now released, is there some margin weakness that will occur as those ramp?

Reik, this is Pat.

I would expect these new products to establish strong pricing power as a result of having unique technologies.

As I mentioned, the CN50 is the most advanced rugged mobile computer in the industry.

So, we've established those pricings and those margin objectives as we launched these products.

I think there is a natural transition point occurring as these products get introduced, in some cases replacing the volumes that we had in our older and in our more established products.

But, I would expect overall that these would add to the margin profile in the future.

Okay.

And then, just on the operating expenditures, which was -- showed a real nice decline sequentially, can you guys talk a little bit about what specifically kicked in with the programs that you had underway?

Were there any one-time things in there that might not recur?

And how much more would we expect throughout the rest of the year, or are you done?

Reik, this is Bob.

As we've talked about with our breakeven, we're trying to substantially reduce the cost structure, get to a sustainable going forward run rate.

We made substantial progress, as you noted, in the quarter.

Really, the first thing was we did have headcount savings, to the actions we announced in January and April, there was impact and savings from that as we'd planned.

We did make good progress in controlling discretionary spend, and I think we've made better than expected progress to date on looking at how we attack indirect savings in certain categories of spend.

The other thing that probably helped us a little bit year-over-year, not so much sequential first to second quarter, was lower foreign currencies and the translation impact.

So, I think we are solidly on track.

We are looking for additional savings in the second half of the year, and we've actually made substantial progress here in the second quarter.

I'd say on expenses we're a little bit ahead of where we had originally planned, but we also managed very aggressively given the continued top line pressure and some of the margin challenges that we've talked about.

Is it fair to say that with you continuing to get to your -- that breakeven target, more of that will come out of cost of sales than operating expenses, or is that not right?

I think improving margins is a good assumption.

Whether that is cost reduction, there certainly will be some of that above the gross margin line, but also expansion of the margins with pricing, new product mix, and the other items that Pat alluded to here.

Okay.

And just one last question, again just kind of going to what sounds like it might be a little bit more of a price competitive market.

You guys said you plan to remain disciplined.

Can you talk a little bit about if that discipline cost you in the quarter?

This is Pat.

I don't think, Reik, that the pricing disciplines that we've established have materially impacted our top line.

I think we're on good track of winning business.

We've made significant progress in the channel.

But, this is an important discipline to have through this recessionary period because it establishes the capabilities of the Company to get the operating leverage when the markets recover.

Okay, great.

Thank you, guys.

Thank you, Reik.

Our next question comes from Chris Quilty with Raymond James & Associates.

Evening, gentlemen.

Lot of new products in the last month or two.

I was hoping -- could you give us perhaps, Pat, some metrics on the percentage of products -- or, excuse me, percentage of sales from new products, where you're at now and, on a historical basis, what that would indicate and how you think it's going to look on a go forward basis?

The second part of the question is what are you expecting in terms of the margin contribution on these new products relative to the products that they're replacing?

So, our revenues -- again, you have to look at the product revenues.

Our service revenues are about 20% of the Company.

But, on the product revenues, we typically have -- these products last about five years.

So, you typically see 20% or so of revenue from new products.

That has been -- the last several quarters, we've been in that kind of range.

As these products were anticipated in the market, that declined a little bit recently.

But, I would expect it to pick up to be above 20% going forward as these products are adopted in the marketplace.

And as we especially pursue new applications, that's going to be net new business and would make a substantial progress or contribution to our new product revenue.

The second question had to do with margin contribution.

Is that right?

Yes.

The margin contribution -- our goal, as I outlined before, is that the new products would have 5 to 8 points higher gross margin than the products that they're replacing in the marketplace.

And that remains our goal.

Okay.

Do you think the announcement of some of these new products, some of which have not shipped and you mentioned anticipation, was there an impact in the current quarter, a falloff in sales, because of the timing of new products and the sun setting of old products?

Well, I would say that we are, with the anticipation of the CN4 -- CN3 has been very successful.

We have a very robust CN3 funnel and a very large installed base, and it's an outstanding product.

I think the impact on the CN3 was modest in the quarter we just finished.

And I do think these products are additive.

The CN50, I think, will be substantially -- will substantially contribute to growing the business.

At the same time, there's a natural transition point of one product declining and another product growing.

So, I think, in summary, that there was a significant impact in Q2 on the anticipation of these new products, but there probably was some.

Okay.

And Bob, just real quickly on the SG&A, I mean, very good sequential performance here.

Can you give us an idea, are those levels sustainable going into the back half of the year, or should we expect some upward migration?

Chris, I think the stability or the ability to sustain them is very strong.

Actually, there was one part of Reik's question I didn't answer, which is any one-time items.

We had less than $1 million, probably $0.5 million to $1 million, of items that would not be easily repeatable in the second quarter.

So, therefore, the only thing that I would expect to drive those up would be volume increases and any variable costs related to that.

I do think there are some additional actions that we have already begun that would give us an opportunity to keep that at about the same level near term, though.

That's great.

Thank you.

Thank you.

Our next question comes from Ajit Pai with Thomas Weisel Partners.

Yes, good afternoon.

Hi, Ajit.

A couple of quick questions.

I think the first is about AIT-IV.

Could you give us some color as to you have given us the size of the contract, but how many of our competitors for your key products also have won the contract?

So, we don't have complete visibility into this.

But, we believe that this will be -- we'll remain competitive.

From what we can tell, there are key competitors that are in this.

We know of at least one, but we don't know of any more than that.

And who is the one?

I wouldn't be saying that.

Okay.

But, is it on the printer side or is it on the -- sort of more on the mobile computing side?

I think it's on both.

On both sides, okay.

And then, when you're -- the share that you expect between you, between Intermec and the other competitor, do you expect it to be 50/50?

Do you expect to have greater than 50%, less than 50%?

Well, I would say it's a large multiyear contract.

You've seen in the press release how large it is for three years with an extension, possible extension, of six years.

We're in a very strong position because of our incumbency.

We have an excellent new product lineup.

So, I think we're well positioned.

I wouldn't predict the future market share of that.

But, I think we did very well on AIT-III and we anticipate strong results on AIT-IV.

And on AIT-IV, it's only dual source to the best of your knowledge?

It's not triple source for each category?

We believe that there are three winners or people appointed, awarded, with the contract.

This has to do with how many people are priming the contract and how many sub-suppliers there are.

So, there are three awardees.

We don't believe that means that there's three winners in each product category underneath that.

Got it.

So, your belief is that it's going to be a dual source right now, based on what you know for each category, but not three people supplying each category.

Is that fair?

Yes, I think that's a fair assumption.

But, I think that -- as I said, three awardees.

We're one of the winners, and there are other product -- companies that are providing to the other two.

I think thinking about it in terms of a dual source of individual complements within the solution is reasonable.

Okay.

So, then pricing should not be deteriorating materially on this?

I mean, it's fixed pricing, you've already -- like all of that is agreed on already.

Yes.

But, the way that this AIT is designed compared to other AITs, this really provides the basis for winning individual requirements of deployments through the lifecycle.

So, I believe we're in a strong position with the technologies we have.

The products are established.

I think we'll have good pricing as a result of it.

We are the only one of the suppliers that primes this.

And so, we have a prime position and we're the only one among our competitors that's in that position.

I think that puts us in a strong position to contribute to the customer and therefore earn pricing power.

Got it.

And then, when you're looking at the CN4 and the CN50, the new products, I think you've talked a little bit about the margin impact.

But, could you tell us, from a pricing perspective, have these products managed to get a premium in terms of pricing relative to their predecessors?

The pricing is, of course, public information on these products.

And they are good margin products.

If you look at the pricing of these products, they're similar to or above our current prices of existing products.

Right.

But, were they similar or higher than when the products are first introduced?

Like, when -- is the CN4 priced higher than the original pricing for the CN3?

The CN4 is priced above the CN3.

The CN3 price has not changed substantially.

Okay.

And then, the CN50, what kind of price point is it at?

What's the list price?

The CN50 is priced around where the CN3 is priced currently, CN4 being above the CN3, the CN50 being similar to the CN3.

And what are the differences in the targets?

Like, where -- who are you targeting the CN4 with and who are you targeting the CN50 with in terms of verticals and kind of customers?

Yes.

So, the CN4 is the fully rugged device.

It is the most rugged rugged mobile computer.

And so, for those environments, transportation and logistics, for example, would be a significant opportunity for the CN4.

For the traditional CN3 markets, the CN50, of course, will also go into some of those.

But, I think its growth opportunities are in these other mobile workforces, field service applications, mobile maintenance and repair, some healthcare applications, those kinds of places where a smaller device -- at 11 ounces, it's a smaller product -- will allow us to reach some of those new applications, broadly speaking, I think in the field service applications.

Got it.

And then, the last question would be just looking at some of the postal efforts that you'd made and some of your wins especially in the second half of last year, some of your deliveries there, on a global basis, penetration is pretty low in that market and there are lots of postal workers there.

Are you seeing -- just given the sort of taxes falling globally, tax revenues for governments and the postal departments coming under pressure globally because of lower traffic, are you seeing any increased interest in that vertical?

Are you seeing none in that vertical?

Are you seeing folks delaying?

What I would say is that in the transformation of the postal business model, using this technology is a key priority for many postal agencies.

These are large organizations with large workforces.

And I didn't mention it, but the CN50, we believe, will be well accepted into postal applications for more mobile workforces.

And so, the interest is very high in these technologies.

The Royal Mail is an example well known in the postal industry, the success of that deployment.

And we see a lot of strong interest moving forward as that business model is shifting and there's more competition and new opportunities for revenue generation as well, as I mentioned.

That's one of the key attributes of these products is enabling these mobile workers to add more to the business and really turn a transaction into an interaction.

Got it.

Okay.

Thank you.

You're welcome, Ajit.

Thank you, Ajit.

Our next question comes from Eli Lustgarten with Longbow Securities.

Good afternoon.

Hi, Eli.

Hi, Eli.

A couple quick questions following on.

One, foreign currency big in EMEA.

You gave us the impact on sales.

Do you have an impact on profitability from the foreign currency pressure?

The -- it's a little bit -- the sales percentage tends to track down to gross margin at a pretty high rate, Eli.

Operating expenses obviously have benefitted year-over-year from the currency.

It's in the neighborhood of 4% to 5% as well.

So, the earnings have been impacted by a reasonable amount of money for negative currency.

The reason I'm saying is currency, I think you have planned -- in the third quarter you have similar currency planned.

But, the currency is going turn positive toward the end of the year, these comparisons, at current rates.

And that's -- yes, there's an interesting dynamic coming as we compare year-over-year in currency.

Third quarter currency last year was about at its peak for the euro, the pound, and a number of currencies, as you noted.

My expectation is, if I compare to the current rates, it's going to be more than a 12% revenue impact in the third quarter year-over-year.

However, in the fourth quarter, currencies weaken substantially, and I'm not going to predict at this time where I think currencies will end this year.

Yes, but I'm just saying, but the -- one of the things that could drive you very quickly to profitability in the third and fourth quarter would just be the change in currency.

Is that a fair -- I mean, you're talking a third quarter breakeven.

With all things being equal, the fourth quarter would be positive just on the currency change.

Yes, I think for our Company --.

If the sales rates stay at the current rates.

You know what I'm saying?

Yes, I think certainly the current situation has created a certain amount of pressure.

And if that current situation moves in the opposite direction, I do anticipate that that could help, though there's plenty of other activities and options that we need to work on as well to drive that result.

Yes.

Now, what was AIT sales in '08, and how much are you seeing in '09 before the new contract came out?

So, we don't disclose the AIT revenue within the Americas.

It's part of the Americas' number.

It's a substantial amount of our -- it's a meaningful contribution to our Americas' revenue.

It's one of our larger customer bases.

It has been for several years.

And so, it's a -- we would anticipate that business would be strong this year as a result of AIT-III finishing, AIT-IV starting up.

This is sort of a transition year as AIT-III wrapped up and as AIT-IV starts to ramp.

Is it down year-over-year in the first half?

Yes, it is.

And the $418 million contract is three years with a six year buy -- six-year option and extension.

Is that $418 million the cap on nine years or on the -- that's the cap on nine years, isn't it, or is it a cap on the three year?

Yes.

It's the cap on the total contract, right.

So, it's a three-year contract with a possible extension of six years.

So, if it was extended the entire extra six years, then that would be nine years.

But, as I said, it's three years with a possible extension of six.

Yes.

And the $418 million max is the total for nine years, if it went that far?

If it went that far.

And the previous AIT contracts have not gone that far.

Have you given sort of a thought of a measurement of what the difference between 2010 and 2009 could be from having the new contract?

Is there an incremental magnitude that you could expect?

Well, I think that -- part of this just depends upon the -- on what the macroeconomic conditions and spending environment is.

I think that we'll have the entire contract for the whole year in 2010.

These are new products that the AIT contract is -- involves, and 2009 was relatively lower than 2008.

So, I would expect that -- again, we don't give guidance for 2010 at this point.

But, I would anticipate that in 2010 we would be able to grow the business compared to 2009.

Yes.

But, by a meaningful amount is, I guess, what I'm driving to.

Right.

Well, yes, I think it's too early to say that.

Yes.

But, the potential is there.

Will --?

Yes, this is a substantial contract and we'll have a full year in 2010.

Like the stock market, everything is hopes and dreams today, I guess maybe.

What was the impact of pricing on the quarter and so far this year?

Do you have a measurement of how much -- how far down pricing has gone?

Eli, we normally don't break out the impact specifically of pricing in a period.

Or, what you're expecting for the year?

What kind of pricing pressures?

I mean, is that a fair way of looking at it?

Because it looks like there's going to be a couple of percent of pricing impact.

Well, there's certainly an impact, as I talked about, from the economy, the buyer power, and then certainly the competitive pressures.

I do think there is some impact on pricing.

We don't break out what that exact impact is.

Have we seen any change in the pricing environment?

There's some stabilization now that things sort of are stabilizing in the marketplace and in the economy at this point.

Has that translated into pricing stabilization yet, or do you have to wait for the new products to sort of drive that?

Well, certainly the new products we anticipate having significant pricing power because of the new technologies that we have to bring to the market.

And that's certainly our objective.

One, I think, new color commentary I would add to the pricing environment is that there are not as many big deals out there.

There's not as many deals that are 10,000 units on a regular basis on a single deployment.

And as a result, there's more competition for more modest site or size or medium sized deals than maybe would have been the pricing in a pricing environment previously for larger ones just because there's less of the larger ones out there right now.

And do you have a -- can you give us some idea of when these new products will really begin to be available and in quantities?

Well, the products are available, shipping now.

I said that earlier.

What I also said was that they would begin to have a positive impact on the business in the second half.

So, we have a robust sales funnel.

We're in a shipment position.

The products will be shipping this quarter, the quarter that we're in.

And Q4 will be, then, the -- will be the first full quarter of shipments.

But, it'll be still ramping -- we anticipate it still ramping for the remainder of 2009.

So, it's really next year before we get really in the full impact.

Well, I think, as I said, we'll ramp it this quarter.

It'll begin shipping this quarter.

We'll have a full quarter of shipment in Q4.

But, we anticipate that it will still be ramping in terms of volumes really through the rest of this year and into the beginning of 2010.

Is there much cannibalization between the new products and the CN3?

The way we think about this is that it's the CN3 plus the CN4 is going to grow that business, that overall business.

It's advanced radio technology.

It's a very rugged product.

It's a very competitive and also allows customers who are in the installed base of the CN3 to have a migration path to the latest technologies.

So, we think about the CN3 plus CN4 building the business as a result of having both products.

And the CN50 is -- goes after some of that to complement those products at -- with a different form factor, a different weight, but with advanced technologies, but also representing a growth in the business.

The CN50 is also pursuing new applications, as I mentioned, field service applications and so on.

So, that's the way to think about it.

Okay.

One final question.

You mentioned enterprise.

There haven't been many big projects in the first half of the year.

But, you sort of gave an indication that you're starting to see some of the marketplace percolate at least in some big enterprise programs or so.

Can you give us some magnitude of what may be talked about on the horizon over the next six to 12 months?

I mean, I realize the timetable is tough to get, but --.

Yes, the way I would frame that up is that I think that there's two kinds here.

The first one are -- is the replacement cycle, technologies that are four, five, six years old that have been out there.

Those represent opportunities to upgrade those as those technologies reach the end of their useful life and our customers are looking for opportunities to upgrade those.

Those are large installed bases.

There's a number of those, and there are tens of thousands of units that are out there.

Now, those get upgraded over a period of time.

They don't get all upgraded all in one period.

And then, there's a number of deals in our funnel that are thousands of units.

There are some that look like they may be larger than that.

Those tend to be further out as people are looking at how are they going to set their 2010 capital budgets.

Okay.

But, most of the stuff -- we don't expect to see anything this year at this point, I recognize that.

I'm just trying to know if there's a magnitude of 2010 versus 2009 on the shelf that may show up.

We're just trying to get magnitude of improvement more than anything here.

I think one of the key things here is what's the macroeconomic environment and what happens to capital spending, because that is one of the things.

As I said in my prepared remarks that in 2009 people reset their capital spending early in the year as the recession, it looked like -- people were trying to see will it stabilize and so on.

And so, in 2010, people will look at the overall economic environment and see where do they need to set their 2010 budgets.

And as a result, the piloting, the phasing, the evaluation of new technologies in the next six months is an important step towards being prepared for an anticipation of increased capital spending in 2010.

That's the way that I would think about that.

There's enough activity out there.

These mobile workforces are important.

These product refreshes are coming up.

The overall macro environment, I think, will set the overall spending environment.

All right.

Thank you.

You're welcome.

You're welcome.

Thank you.

Our next question comes from Andrew Abrams with Avian Securities.

Hi, guys.

I just wanted to get a little more color on the enterprise side.

If I remember, last quarter or even a little earlier than that, it was conversations were basically at zero.

And now, it seems like not only are conversations happening, but some of the orders are actually coming through.

If you could characterize how the enterprise guys are looking at things, from their perspective especially, is it, "Gee whiz, I had a big order.

I'm not going to do the big order.

The order is going to be smaller than that and it's going to play out this way over the next six months?" Or, is it the same size order, just extended out a little further than maybe normal?

I mean, is there some characterization you could give on the enterprise side?

Yes.

What I would say is that, just as I mentioned one and two quarters ago, people are looking, in this environment, for returns that are six to nine month ROIs.

That's still the overall spending environment.

So, people are looking for solid returns.

The good news is our products are operational tools.

They lower costs.

They improve customer experience and so on.

So, they are priorities even when the return cycle is that short term.

So, what is really emerging in the last three to six months is that people are -- their businesses have stabilized.

Many companies know what their breakeven point is, what their cash flow is.

They believe that -- they understand more about the overall demand environment and how do they need to build their distribution systems, their warehousing systems.

And so, they're beginning to look at what are the new technologies that I should be evaluating and preparing for and beginning deployments of.

Either a portion of the deployment, so that then they can get started on proving it out in the environment, or the evaluation so that when they have larger capital budgets they can spend it.

And I think both of those are the case.

The key thing to me is that it's less -- it seems to be less now about save capital at any cost into more let's plan on how we're going to come out of the -- when this market does recover in a stronger way, and either doing part of the deployment or planning it carefully so that when capital budgets are available they can accelerate those.

That's our reason for these key strategies of channel engagement, new products, and deployment engagement so that we're well prepared on both current and future applications.

Now, have you seen any characteristic that you can point to on the VAR side through the channel?

I know you don't have quite the visibility that you would on the enterprise side, but is it the small guys still doing very small deals, the ones and twos and fives and tens, or is there some kind of traction coming out of the VAR channel a little bit more than it was a quarter or so ago?

I would say that the -- there's less business for everybody right now.

And so, the -- I think many VARs, along with ourselves, are ensuring that we're engaged on projects that have real traction, partial deployments, engaging on the longer terms projects but ensuring that they have service and solution revenue that'll keep their businesses strong in the midst of this recession, because there is fewer large deployments going on.

I don't think that there is significant changes to the channel profile based on what we see, but certainly active engagement in the next project and looking for and pursuing value added solutions.

It's one of the things we believe we provide very well is the ability for these valuation added resellers to add value on top of our products thereby building a business model that has ongoing revenues streams.

Just one last question.

On the new products, the 50 and the 4, is the revenue that's going to come in in third quarter coming from your beta testers, or are you actually pulling in new customers?

And if it's the latter, what does it look like in terms of the kind of let's kick this around for a while before we place a real order, we'll take a couple and see how they work.

What's that cycle time look like?

Well, I think that there are the beginnings of a significant deployment.

There's also customers looking at this really for their new mobile workforce enablement.

And so, they're evaluating the technology.

Because it reaches this new functionality, this new form factor and capability, some of these organizations haven't implemented these mobile solutions before.

And so, they're getting going on those deployments.

And I think it's a mix of those.

If I think about the sales funnel, we have a combination of existing customers that we are engaged in on doing the beta development, and they're adopting it, but also new customers through the channel in new applications.

And both of those, I think, will make a contribution in the second half.

Thanks.

Our next question comes from Tavis McCourt with Morgan Keegan.

Thanks, guys.

This is Justin Patterson on behalf of Tavis.

Hey, Justin.

Hi, Justin.

Hi.

Just a quick one regarding linearity for the quarter.

Can you comment just from a geographic perspective how bookings trended throughout the quarter?

Did things just get incrementally better progressively or was it just kind of volatile from, say, month-to-month?

No, what I would say is that April was better than January, May was better than February, and June was better than March, which is that Q1 was weak in terms of bookings, momentum.

And if you just compare those first months, there's various linearity through the quarter.

Maybe just compare the comparable months in the quarter.

We saw progress throughout Q2.

Okay.

And with respect to regions, was there any geography that was, say, dramatically better or worse than you had expected?

No, I would say that the regions performed according to the relative ratios that we expected at the beginning of the quarter.

Okay.

As we had outlined, we had said that we -- that the North America region would see a sequential decline, for example, in Q2 because of some previous -- some revenue in Q1 that had been booked awhile ago scheduled for shipment in Q1.

And that's, in fact, what we saw.

We saw a substantial improvement to the EMEA business, as Bob had outlined, 24% sequential improvement.

That's what we anticipated and that's what got delivered.

Okay.

And then just shifting gears to the product side of things, obviously the new products sound like they're generating quite a bit of interest.

When you're talking about new customer wins here or new customer entrants, are you primarily talking about, say, ones that might be first time, I guess, industries for Intermec here?

Or, are we talking about, say, kind of your existing verticals, more competitive win type of things?

What I would say is that when we talk about new customers, we're talking about two things.

One is new vertical applications or deployment environments.

There's a number of those.

And there's also portions of the mobile workforce in our current clients where, because of the capabilities, for example of the CN50, while also retaining a very strong fully rugged product, there's more of their workforce that can now access Intermec technologies as part of their overall rugged mobile business solution.

And so, both of those, we expect, would occur as a result of having both of these product families in the marketplace.

Right.

But, I guess as it goes right now, have you seen sort of a skew toward one or the other?

What I would say right now is that there -- on a relative basis, there is more interest in the total funnel associated with some new applications.

But, it isn't a 70/30, 80/20 kind of thing.

It's a good balance between the two.

There's a substantial amount in our existing customers who are looking at new mobile workforces being enabled.

But, I would say that in balance, there's probably slightly more in new application areas, new customers, new deployment environments, where the CN50 and its value proposition is compelling, to provide sometimes the first rugged mobile business solution that the customer will have used.

Okay.

Got it.

So, kind of a decent mix between the two in there.

Yes.

There's also some places in this where, in the CN50 funnel, again, this is in -- we're looking into the future trying to give you some perspective about what's possible here, where they are replacing smartphone deployments where the total cost of ownership is lower for our solution because, when you deploy these smartphones in a rugged environment, their capability, their uptime, their physical ruggedness, the total cost of ownership is expected to be lower using Intermec products.

And that's not an insignificant portion of the sales funnel.

So, we expect that we would actually generate substitution revenue for other categories.

Interesting that you brought up smartphones.

So, if you look at that market right there, is that something that you kind of view as kind of a long term opportunity here?

The CN50 is somewhat of a new, additive product for Intermec here.

Can you guys -- or are you at least thinking about transitioning more toward kind of a smartphone, I guess, new type of market opportunity here where you can get more of those substitution effects over time?

Well, make a few comments about the smartphone trend.

First thing is that the smartphone -- I mean, that whole phone dynamic is a key economic and use case catalyst for our technologies because the cellular infrastructure has been deployed driven by consumer voice and data traffic.

And so, this is a very significant economic and use case catalyst for our business to grow and provide these solutions into rugged mobile products.

That's the first thing is that this is a -- something that helps enable these products to be productive for mobile workforces.

The second point I'd make is that we are leveraging technologies from the smartphone.

We had an announcement earlier today that we have a partnership on the CN50 with Qualcomm, which is obviously a major supplier into the wireless industry.

So, from a technology and infrastructure point of view, the smartphone industry is something that we strongly leverage and utilize.

We anticipate our products and our solutions, because they enable the productivity of this mobile workforce and is able to offer a compelling total cost of ownership, to be a very -- to be a robust industry as the cell phone -- the smartphone business is also a robust industry.

So, we see them as complementary.

Okay, great.

Thank you.

Thanks, Justin.

Our next question comes from Chuck Murphy with Sidoti & Company.

Good afternoon, guys.

Good afternoon, Chuck.

I'll try to keep it quick, since I know we're dragging on a while here.

Two questions, first regarding the third quarter guidance.

Anything different you're expecting for mobile computers versus printers and service?

I think -- we would be expecting, I think overall, obviously sequential increase of perhaps up to 10%, 5% to 10%.

But, it should be across the different categories.

We haven't really guided or are not ready to guide whether it's more in one versus the other.

Okay.

Anything you can say regarding the end markets, industrial versus retail or transportation logistics?

In our forward-looking picture, we are not expecting a significant turn up in the overall buying environment.

As I said, the 2009 capital budgets are set.

Some of these industries, industrial, transportation, logistics, were hit pretty hard as a result.

So, we think a combination of our new products and our channel expansion, pursuing upgrades to the refresh cycle of current customers as well as competitive accounts that we can go after, combined with these new applications will give us probably a broader mix, looking forward, of the industries we participate in.

But, we're not expecting a turn up in the significant economic condition of these industries we've historically served.

I think they've stabilized and new technologies will be deployed, but we don't expect some significant purchasing catalyst in the next quarter.

Okay.

All right.

And then, the other question was the sales guidance of $165 million, $175 million.

On that basis, what would be the ballpark for gross margin?

I would expect gross margin to be up sequentially a little bit from the second quarter, but not substantially improved, Chuck.

Okay.

And, I mean, would it kind of stay at that run rate for a while, or is it improving thereafter?

I think -- the point that Pat just made where we don't see a substantial change in the markets overall, I think that's also what would drive kind of the near term margin expectations.

There's no catalyst near term to change that other than additional discipline and things that we want to bring.

Okay.

That's all I had.

Thank you.

Thank you.

Our last question comes from Chris Quilty with Raymond James & Associates.

Two quick questions.

First, service revenues, I guess as expected, have held up better than the product sales.

But, is there some point in the future when maybe the benefits you're seeing from customers fixing stuff shifts over to people buying new stuff and you get a big drop off in the service, or how much of the service -- that service repair depot stuff, has shifted out to the channel?

Well, we are -- our service revenue, as you said, is relatively flat.

It really -- it's servicing the installed base.

And so, as that installed base -- and we saw a significant -- a material increase in units shipped in 2008 compared to 2007.

As that 2008 volume moves into service life, that would be revenue in the service business.

So, I would expect, first order, that the service business goes up and down with the overall business but is a slower moving function.

I don't think it has a substantial disruption, from what we can see, in the future.

Okay.

And second question, you guys have had this sort of on again, off again thing with the retail market.

Can you talk about whether the current or new product portfolio gives you any better leverage into that channel?

Because I consistently hear from a lot of the channel partners that that seems to be one of the verticals that's probably most in need of upgrade and replacement.

So, we would anticipate -- first of all, the CK3 has had a number of -- that's a product we introduced about nine months ago, has had a number of important mobile retail application wins in warehouse applications and some other places in retail.

We would anticipate that the CN50 would also find applications in the retail market.

And we see some of the same dynamics that you're talking about, which is that the age of the assets, and there are some significant opportunities that we're looking at in that refresh cycle that you mentioned.

Great.

Thank you very much.

You're welcome.

Thanks, Chris.

Thank you.

This concludes the question and answer session.

Great.

Thanks, Kim.

That will conclude our call for this afternoon.

We really appreciate you joining us, and have a pleasant evening.