漢威聯合 (HON) 2009 Q3 法說會逐字稿

Hello, and welcome to the Intermec Second Quarter 2008 (sic - see Press Release) Earnings Call.

All participants are at this time in a listen-only mode.

(Operator Instructions) Today's conference is being recorded.

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

Now I'd like to go ahead and turn today's call over to Kevin McCarty, Director of Investor Relations.

Sir, you may begin.

Great.

Thanks, Julie.

And good afternoon, everyone, and welcome to Intermec's Third Quarter Fiscal Year 2009 Earnings Release Conference Call.

With me on the call this afternoon is Intermec's President and Chief Executive Officer, Patrick Byrne, and our 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 statements 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 these forward-looking statements.

In addition, we will describe certain non-GAAP financial measures, which we 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 Securities and Exchange Filings, including our annual reports on Form 10-K and our quarterly reports on Form 10-Q.

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

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

Thanks, Kevin, and good afternoon, everyone.

Intermec delivered third quarter revenues of $159 million in break even earnings.

On an adjusted basis, which excludes our restructuring charges, EPS was $0.03.

Although revenue was short of our guidance from a quarter ago, earnings exceeded guidance due to tight expense controls, lower than expected restructuring charges, and improved sequential gross margins.

The revenue shortfall was primarily due to lower than anticipated enterprise spending.

We continue to make solid progress in two-tier distribution and channel sales and our new products are being well accepted.

Total gross margins for the quarter increased sequentially due primarily to new product sales, improved mix, and improved pricing discipline.

Spending controls continue to capture the benefits of our cost reduction initiatives, resulting in both sequential and year-over-year operating expense reductions.

Through effective working capital management, we have extended our cash and short-term investment balances to $239 million.

Our objective at the beginning of the year was to lower our break even point by approximately $150 million and to be profitable exiting 2009, even if the economy had yet to recover.

In Q3, the Company reached both those objectives one quarter early.

This operating model forms the basis for strong operating leverage as the markets recover more fully.

Bob will be reviewing our financial results in some detail, and then I will provide an overview of market conditions and our objectives going forward.

I'll turn it now over to Bob.

Thanks, Pat.

In the third quarter, we continued to see ongoing economic pressure and lower than expected enterprise deployments as Pat has mentioned.

Intermec's third quarter revenue of $159 million represented a 32% decline from the prior year's third quarter.

On a constant currency basis, revenues declined 30% year over year.

Sequentially, revenues were up 1% due to the favorable impact of currency of 2 percentage points.

Our third quarter earnings of $60,000, rounded to $0.00 per share, and compares to earnings of $0.18 in the third quarter of 2008.

Included in the break even earnings was the impact of restructuring costs of $2.7 million, or approximately $0.03 per share, in the third quarter of 2009.

On a non-GAAP basis, excluding these restructuring charges, our adjusted earnings per share was a positive $0.03 for the current quarter.

On a regional basis, our revenues compared to the prior-year quarter were as follows -- North American revenues declined 31%; Europe, Middle East and Africa, or EMEA, declined 41%.

In EMEA, there are two items of particular note.

Approximately 5 percentage points of the year-over-year decline was due to currency translation.

In addition, third quarter 2008 revenue included a significant European postal deployment, which represented approximately 21 percentage points of the decline.

Versus Q3 2008, Latin America declined 23% while Asia Pacific, or Asia, delivered an increase of 8%.

On a sequential basis versus second quarter 2009, revenues in North America increased 1%, EMEA decreased 5%, Latin America increased 4%, and Asia increased 33%.

Reviewing our product line performance as compared to the prior-year quarter, Systems and Solutions revenue of $88 million decreased 39%.

Printer and Media revenue of $38 million declined 25%.

And Service revenue of $33 million was down 15%.

On a sequential basis, both Systems and Solutions, as well as Printer and Media revenue, increased 2%, while Services revenue was down 4%.

Total gross profit margins of 38.6% declined 0.5 percentage points from the prior-year period.

Product gross margins of 37.0% decreased 1.7% percentage points compared to the third quarter of 2008, primarily due to lower volumes year over year.

Sequentially, total gross margins increased 2.4 percentage points and product gross margins increased 2.6 percentage points.

This sequential increase was driven by new product sales, improved product mix, and pricing discipline.

We are also capturing the benefits of our supply chain initiatives.

Service gross margins of 44.7% increased 3.6 percentage points over the third quarter of 2008 as we realized the benefits of the consolidation of two US service depots and the associated overall lower cost structure of our Service business.

On a sequential basis, our services gross margins increased 2 percentage points from the second quarter of 2009.

Operating expenses, excluding restructuring charges of $2.7 million, totaled $58.5 million in the quarter, 19% below the comparable $72.2 million for the third quarter 2008 which excludes restructuring charges of $3.3 million.

Total operating expenses for these same periods were $61.2 million and $75.6 million, respectively.

On a sequential basis, excluding restructuring charges, our operating expenses were lower by 3%.

In April, we announced a restructuring plan which we expected would reduce our global headcount by about 12% from previously announced levels.

Total costs were estimated at $15 million to $17 million, substantially all of which were anticipated to be severance related.

As a part of this plan, we had estimated that our restructuring charges for the third quarter of 2009 would be approximately $5 million to $6 million.

Due to very successful operational and expense management efficiencies, we have been able to reduce the number of positions impacted by this plan and the related severance charges within the quarter.

Therefore, the lower restructuring charges for the quarter reflect the retention of additional personnel, primarily to drive future product innovation and preserve selling and marketing capacity.

As an update to the April restructuring announcement, we expect the total headcount reduction to be approximately 10% versus the previous estimate of 12%.

We expect total costs to be in the range of $11 million to $13 million.

We have reported approximately $9.5 million in the second and third quarters.

We do expect approximately $2 million will be reported in the fourth quarter with any remainder in the first quarter of 2010.

Although headcount related savings from the restructuring plans have been reduced, we have been able to achieve our desired cost structure through the success of indirect spending and other expense reduction programs.

We have considerably reduced our operating expense outlay, while safeguarding our research and development spending on major new products and targeting sales and marketing efforts in verticals most advantageous in this market environment.

Next, let me provide an update on the goal of reducing our annual break even level from the 2008 level of approximately $760 million.

We calculated break even by dividing annualized operating expenses, excluding restructuring charges, by total gross margin.

We have made substantial progress throughout the year, and at the end of our third quarter, we have lowered our annualized break even level to approximately $610 million.

This was driven by the gross margin improvement we realized in the quarter and the significantly reduced expense levels.

As Pat mentioned, we achieved two of our key objectives a quarter early -- to be profitable exiting 2009 and reducing our break even point by $150 million.

We expect that when the economy strengthens and capital spending increases, we will realize strong operating leverage.

Now looking at the balance sheet, we continue to make progress in reducing our total net inventories, which are down an additional $2 million from the second quarter of 2009 and $27 million from year end 2008.

This decrease was driven by our outsourcing initiative, continued management focus, and improved forecasting processes with our contract manufacturers.

Moving on to accounts receivable.

At the end of Q3, our receivable balance was $107 million.

We continued to manage our receivables well, maintaining a consistent level sequentially and $32 million lower than year end 2008.

In the third quarter, we generated positive operating cash flow of $10 million, including the impact of $4.3 million of payments related to restructuring costs.

For the year to date, we have generated positive $18 million of operating cash flow, including $12.5 million in payments related to restructuring charges.

At quarter end, our cash, cash equivalents, and short-term investments increased to $239 million.

The Company remains very focused on managing 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 fourth quarter of 2009, the current state of the global economy continues to show weakness and uncertainty.

Fourth quarter revenues are expected to be within a range of $160 million to $170 million.

Earnings per share are expected to be within a range of $0.00 to $0.05 per diluted share, including the expected impact of approximately $0.02 for the restructuring plans announced during 2009.

Excluding these restructuring charges, the non-GAAP adjusted earnings per share are expected to be within a range of $0.02 to $0.07 per diluted share.

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

Our earnings per share guidance assumes a diluted share count of approximately 62.1 million shares for the fourth quarter.

So that completes the financial comments, and with that, I will turn the call back to Pat.

Thanks, Bob.

Turning now to the markets and our focus going forward.

We believe that overall market conditions have stabilized, but large enterprise deployments have not yet returned due to constrained capital budgets and continued economic uncertainty.

We believe this is in line with IT market trends this year.

There are several important factors that we are seeing that give us confidence of our position with customers and provide growth opportunities in the future.

We're seeing customers engage in product refreshes based on new technologies.

This quarter, for example, we closed business and direct store delivery, warehousing and transportation logistics applications with new technologies.

Intermec's new products, including the recently introduced CN50, CN4, and CK3, are providing compelling value for these technology refresh projects.

The new technologies offer strong ROI for the next generation of mobile business processes.

Although these have not yet turned into large deployments in many cases because of the market conditions, we anticipate these deployments will scale as market conditions improve and capital is released.

We believe we are reaching new markets and applications with our new products.

These expanded applications include, for example, field service, mobile asset management, mobile healthcare distribution and delivery, new public sector markets, and the utilities industries.

These solutions leverage high data rate cellular networks and advanced identification location-based technologies to provide the real-time information needed to improve our customers' business results.

Customers are focused on mobile workforce productivity, increased revenue generation, and an increase in customer satisfaction.

These elements are vital to our customers' competitive advantage and lead to strong ROI from rugged mobile business solution investments.

During the quarter, our CN50 rugged mobile computer began shipping to customers and partners worldwide.

This is a game changing product with many advanced technologies including the industry's only flexible network radio, which means that the same hardware can be used across multiple carriers based on software configuration.

The early adoption of the CN50 is strong, and we anticipate this new product will make a significant contribution going forward.

The CN50 functionality and form factor is reaching new applications and verticals.

For example, in the first quarter of shipments, it is being adopted in several international public sector markets where it is used for census, construction site management, and the utilities markets.

We are also seeing it adopted in adjacent markets like merchandising applications and consumer packaged goods delivery.

In addition to the new rugged mobile computers, we had a strong quarter for mobile printers and the business grew sequentially.

Our new rugged mobile receipt and label printers are getting strong customer interest.

Overall, it was a strong quarter for new product revenue.

We believe we are increasing our reach through channel expansion into markets and geographies previously underserved by Intermec.

We added over 140 new partners in the quarter.

Industry analyst data on channel satisfaction indicates, for example, that Intermec has leadership positions in our partner program, technical support, value-added services, and hardware performance.

These are important factors, we believe, in developing and expanding the channel.

Channel sales in Q3 were approximately 70% of hardware revenue, and two-tier distribution continues to grow as a percentage of revenue.

In North America, we had a sequential improvement in total revenue with hardware sales increasing, partially offset by sequential decline in services, due primarily to government spending on the AIT-III contract rolling off.

We expect the AIT-IV contract to begin to create business in 2010.

Sales through two-tier distribution grew sequentially in the quarter as we continue to develop the channel model.

As I mentioned earlier, some segments are spending on technology refreshes.

For example, food distribution and warehousing where voice picking is gaining adoption and the CK3 is being well accepted.

The early adoption of the CN50 has been strong in field service.

The sales funnel is growing in North America, and we believe our new products are being well accepted.

With increased channel capabilities and the early signs of technology refreshes, we anticipate the region will improve sales going forward.

In Latin America, we are also seeing strong interest in our new products and the early signs of technology refreshes in direct store delivery applications.

In Europe, Middle East, and Africa, net of the impact of currency and the significant postal deployment in Q3 of last year, the decline was about 15%.

We believe this is in line with market conditions.

In Europe, we have also seen lower than anticipated enterprise spending on-- as technology refreshes and new deployments are being phased during the current economic environment.

The two-tier distribution business grew, and there's a strong pipeline of business in the early qualification stages on new products, especially in Middle East and Eastern European countries, driven by infrastructure investments and mobility and supply chain technologies.

We are seeing interest in the CN50 in public sector areas like traffic census, police, and utilities.

We're also seeing continued positive results in postal markets due to new market players enabled through deregulation.

Turning now to Asia Pacific.

Asia Pacific grew over 30% sequentially and 8% year-on-year.

This was driven by expanded use of the channel and new products in mobility applications.

Key applications include airport expansion, parcel delivery, and infrastructure investments in China.

Our new value-added distributors in Asia are growing their Intermec business.

Lastly, there's been pent up demand for 3G products in Australia, New Zealand, and the CN4 and CN50 is being well accepted.

In summary, I am optimistic about the growth opportunities going forward.

Our sales funnel and quoting activity is growing in each region, and the new products are being well accepted in existing and new applications.

We believe that the expanded channel is providing more market access, while we're also staying very engaged in the pilot phases of technology refreshes and larger deployment opportunities.

Our direct customer engagement is very strong, and our team is focused on solution selling with our partners and customers.

Going forward, we are focused on sequential revenue growth and operating leverage.

We believe we have achieved a stable operating model with a lower break even point.

With revenue growth through technology refreshes, new products, new markets and applications, and the expanded channel, we anticipate creating strong operating leverage as the markets recover more fully.

Finally, I want to thank all the Intermec employees for their hard work, dedication, and the financial results they've delivered for the Company this year.

I'll now turn it over to Kevin for questions and answers.

Great.

Thanks, Pat.

Julie, you can now provide our callers with instructions on how to queue for our question-and-answer session, please.

Thank you.

(Operator Instructions)

Julie, are you still there?

Yes, one moment.

Thank you.

First question comes from Reik Read with Robert Baird & Company.

Your line is open.

Thank you.

Good afternoon, guys.

Could we just start with the break even achieving the 610 early?

Does that suggest that 610 is the bottom, and if not, where can you go?

And then also, can you talk about now that you're at that level, how much of each incremental dollar of revenue above the 610 falls to the operating income line?

Hi, Reik.

This is Bob.

On the 610, in the quarter, I think our operating expenses of $58.5 million, I anticipate that that's pretty close to the low end of where we will go.

That was part of clarifying the restructuring costs and comments as well, as we believe that that's a good sort of target expense ratio and level for the Company to be at.

So that's kind of-- I don't know if it's the floor, but it's pretty close.

That's the target that we had set at the beginning of the year.

Worked pretty hard to get here and get here 90 days earlier than we thought at first.

As far as the leverage going forward, I think it depends a little bit in terms of the mix of products, where they're sold geographically, customer mix and so forth.

Certainly we anticipate strong operating leverage as we go forward.

I don't think I have a specific number that we're targeting for leverage on each incremental dollar of sales, but certainly expecting strong leverage going forward.

Sure.

And I understand what you're saying is that there's a lot of factors involved, Bob, but is it something that's closer to 40% or 60%?

Can you ballpark it at all?

It's not going to be 60%, Reik.

It would be closer to 40%.

It would be plus or minus probably around that number.

Okay, great.

And then just going to the revenue, I guess from your comments that the biggest factor in coming in a little light of the expectations that you guys had suggested is the enterprise spending.

I guess the question I have off of that is it seems like the channel has gotten a little bit stronger, so given that you were sequentially flat in revenue, does that mean enterprise spending got weaker?

And if so, can you talk a little bit about why that might be?

Sure, I'd be happy to.

This is Pat.

So the channel sales continue to grow, and as I said, two-tier distribution had good performance in the quarter.

So a couple things, if you look at it sequentially.

The first one is that the-- is the AIT-III business is stronger earlier in the year that contract was completing, and has-- most of that revenue for this year is behind us on the AIT-III contract.

So sequentially, Q2 to Q3 that revenue declined.

And then also the other thing that caused the enterprise sequentially to be down as some of the channel sales was growing was legacy longer-term roll outs completing.

So we actually did see, if you take out some of those factors and you just look at the adoption of new technologies and the prospects for those deployments growing, then we did see the bottom of the business in earlier in the year, and it's starting to gradually recover.

But as I said, some of those legacy roll outs on older technologies that had been done a few years ago, the completion of those roll outs have been done.

And then the AIT-III revenue is behind us for the year, and now we're moving forward on AIT-IV.

Those are the largest factors that compensated for the channel sales continuing to grow in the quarter.

Okay.

And did you see any freeze in the market as a result of new product intros?

Sometimes those transitions can cause some disruption.

No, we really didn't.

There's these products that had came out when we said they would come out.

We had introduced them and committed to shipping them and we shipped them on schedule, and these technologies are being evaluated according to what we expected.

Evaluated and adopted according to what we expected.

Okay.

And then just one quick question on the guidance.

When I looked, the guidance is flat to a little bit up.

And if I look at some of the good guys that you have out there, the CN50 looks like it's going to ramp a little bit more.

You've got a bunch of new printer products that look like they want to ramp.

Stable channel.

What are some of the offsets or the things that give you pause?

Is it still AIT?

Is it the strikes in Europe with postal, or are there other factors there?

I would just say, Reik, that the current environment is one where we believe the overall IT markets have been pushed down through the year.

If you just look at capital spending at large companies, those budgets were evaluated and pushed down earlier in the year.

And what we're seeing is just the pipeline is growing, this quoting activity is growing, we have these new products, we have real momentum.

But we believe that the current environment just has limitations on the capital constraints on the capital that leads us to that, so that kind of Q4 range for us.

Okay, great.

I appreciate the comments.

Thank you.

Thanks, Reik.

The next question comes from Chris Quilty, Raymond James and Associates.

Your line is open.

Hey, guys.

Congratulations on good results in a tough environment.

Question for you, Bob, you kind of gave it in the third quarter, but do you have at the ready what would sales look like ex-Royal Mail year to date?

I mean how much are you down year to date if you scratched out Royal Mail as a single sort of non-repeating contract?

Well I think you can probably do the math and come pretty close on what the dollars were in the quarter.

That's essentially about the same for the year-to-date, year-over-year comparison.

The hard part, and actually what we worked on, Chris, was making sure that we weren't double counting any currency impact when we kind of gave that range.

So it's about 21% impact on Europe in the quarter.

Europe's been roughly the same percentage of the total for the full year.

I think for the quarter it was about a 9% impact on total Intermec revenues and a year-over-year comparison.

So it'd be year-to-date, it'd be in a ballpark of close to a third of that.

Our revenues overall have been pretty consistent quarter to quarter.

Okay.

So you're saying, just to clarify, without the Royal Post comparison, Royal Mail comparison, you're down about the same in the quarter as you were for the first nine months, about 20% or so?

I think that's accurate, yes.

Okay.

And second question for you.

You had mentioned good pricing discipline as something that helped you in the quarter, and yet ScanSource, which you're using for distribution, talked about some aggressive pricing hurting their margins.

So can you square those two items?

I think, Chris, what we've done in the quarter -- and this isn't just in the channel -- we did have a solid performance in the channel in the quarter.

We're focused on the pricing discipline from our perspective.

I can't speculate on what ScanSource is seeing from a second tier perspective.

Certainly, we're seeing very competitive pricing.

Buyers are very demanding in their expectations in this environment.

We worked very hard, whether it's on direct customer business or whether it was on business that may go through the channel, through a second tier distribution, on making sure that we knew exactly where our price had to be to win.

Okay.

And so another clarification, you said $58.5 million being the floor for OpEx for the quarter.

Does that-- do we presume from that that it will get no lower than $58.5 million, but it may go up as sales go up?

I think there's-- certainly there's a variable component to the expense, and as sales increase, that should follow.

I actually hope it does increase a little bit as sales increase, driven by that top line.

But I think it's about the floor.

We did have maybe $0.5 million of favorable what I would say is non-recurring or less more one-time type events in the quarter.

So that's, the $58.5 million, $59 million is roughly the range that I think we could run at right now.

Okay.

And in terms of the fourth quarter is sometimes a quarter where you'll end up getting end of the year CapEx expenditures, people spending their budgets.

Not that anybody had a budget this year, but are you getting any sense sitting here almost in November of what some customers are thinking about spending money now that we're past the worst of it?

Yes, this is Pat.

So I think that there will be some of that.

People do have capital budgets.

And the fourth quarter we-- as I said, our sales funnel is strong, our quoting activity is good, the new products, the channel performance, the new applications.

So I think there will be some of that.

But the overall environment is one where capital spending has been pushed down substantially for this whole period of time.

And it doesn't appear to be big catalysts that drive restoration of capital that hadn't been planned, but I would anticipate that there is a gradual recovery, a sense of a gradual recovery, capital being released.

But capital being released in pilot deployments and being metered out in anticipation of a gradual economic recovery.

Okay.

And final question here.

You guys have a pretty strong balance sheet.

You're in a good position.

There's probably some competitors or other companies in the industry that maybe are not in such a good financial condition that might make interesting acquisition candidates.

Is that something you're considering at all?

I think, Chris, first and foremost, as it relates to our cash, we're focused on preserving the cash, continuing to grow the cash, and then certainly we look every day at our security and the yields that we're getting on that.

Those are our sort of primary focuses.

In addition, we're evaluating opportunities not on a day-to-day basis.

We look at our capital structure.

We would certainly consider opportunities if we felt that they were right thing for us, but we've got nothing that I would announce or close to announce.

Okay.

Great, thank you, gentlemen and Kevin.

The next question comes from Ajit Pai from Thomas Weisel Partners.

Your line is open.

Yes, good afternoon.

Hi, Ajit.

Hi, Ajit.

Couple of quick questions.

I think the first is just looking at some commentary on the pricing front, I think ScanSource talked about a lot of large deals in this quarter.

Were you seeing the same pattern, or was that in some of the other businesses?

So we-- this is Pat.

I had outlined it.

There weren't a lot of large deals in the quarter.

This was a channel-driven quarter in terms of our two-tier distribution, the pilot programs.

There are pilot programs in direct accounts, but none of the large substantial big deals.

But have some of the large deals that you used to do directly, has that shifted to the two-tiered distribution model, or you think that--?

So some of our-- the way we're going to market is, has substantially shifted to resellers, and then fulfilling resellers through two-tiered distribution is part of our supply chain and channel expansion strategy.

So more business is going through the channel that previously might have gone directly to resellers, but now it's going through two-tier distribution.

Got it.

And then just looking at the competitive environment, you know you've had Honeywell now in the business with two of your competitors, consolidating two of them, and symbol as part of Motorola, combining with another business there.

So in terms of their market presence, have they been stronger competitors, or have they offered more opportunity for you to actually gain share?

Well see, our strategy is really fairly straightforward.

We're very engaged in new deployments and new technologies.

And so I don't think the competitive landscape has materially changed our ability to compete on these significant deployments of mobile technologies.

The second one is new applications, new markets, new channels that I had mentioned during my prepared remarks.

And I think we're in a very good position.

In our channel results and the expansion of the number of partners, the feedback we're getting from the channel in terms of the attractiveness of our products, our post-sale support and so on, means we're in a very-- I think we're in a very good competitive position.

I wouldn't say that the competitive landscape has materially changed.

We're very focused on the factors that I just outlined.

So there isn't any change in the ability of your competitors to price if they've gotten greater scale now?

I think the pricing environment is one where it is not-- it hasn't substantially changed, in my view, according to the competitive situation so much as the general economic conditions and the constrained capital, which means that we have to have pricing discipline, we have to have compelling value in our new products.

As I said, that made a contribution in the quarter.

Got it.

Thank you.

Sure.

Next question comes from Tavis McCourt from Morgan Keegan.

Your line is open.

Hi, thanks.

This is Justin Patterson on behalf of Tavis.

Hi, Justin.

Hi, Justin.

Hi.

First, just a quick one on accounts receivable.

DSOs have been within their norms.

But just looking at the allowance for bad debts, that's actually been a little bit up on a percentage of the overall amount.

Is that just a function of accounting conservatism in this environment, or are you seeing come collection issues with some of your customers?

So Justin, this is Bob.

Now I think overall, the DSO has been pretty consistent.

And yes, you are correct; the allowance is up slightly about $0.5 million this quarter.

That's really just some specific accounts we looked at and identified.

We tend to be pretty conservative on that, and we're certainly very consistent this quarter.

Okay, great.

Then my next question would be on just the OpEx level right here.

Just based off of your competitor who reported this morning, it sounds like we're starting to see some signs of life in the enterprise market.

So as that hopefully starts to improve in Q4 and then on to 2010, how exactly are you guys thinking about investing in the business to continue growing and capture on some of the opportunities?

So one of the things that Bob has outlined, Justin, is that we had elected-- we wanted to get the break even point where we had said we, because we believed that that's where it needed to be exiting the year, we wanted to be profitable.

So what we did is we managed both expenses and the kind of gross margin results that we're turning in.

We also outlined, as Bob said, is that we've elected to retain more personnel because we achieved our expense reductions in other ways.

We have a very compelling set of new products, we're investing in significantly and continued pipeline of new product development.

Our new product output is significantly than it was a couple years ago, and we're continuing to keep that on track.

We have a very exciting set of things that we continue to work on.

So we'll be continuing to invest in new products.

We believe that's very important for enabling our customers' competitive advantage.

And then we'll be continuing to invest in the sales and marketing, too, in channel sales and in our marketing activities to reach the markets.

So if you think about that, the engine of this is sales and marketing and making sure we continue to have product development very aggressively focused on capturing new opportunities.

Okay, perfect.

Thanks.

Next question comes from Andrew Abrams from Avian Securities.

Your line is open.

Hi, guys.

Just a couple of quick questions.

One on the VAR channel.

If you look at it on a steady state number of partners in this quarter, would your business have gone up, or was some of this attributed to the fact that you added a fairly large number of new partners?

The new partners that we added -- this is Pat -- the new partners we added in the quarter have to go through a qualification and enablement and activation.

And really, those represent a small portion of the revenue this quarter, but they lay the groundwork for expanding the business going forward.

So it'd be-- most of the channel sales would have gone through the resellers that we had last quarter as well.

Got it.

And on enterprise deals, it's kind of getting toward the end of the year, and whatever budget money, I guess whatever little budget money was allocated for IT this year is probably getting near the end of the cycle.

Are you seeing less deals, or are they just continuing to be-- when I say less deals, I mean are guys just saying, okay listen, let's just wait until next year when we have a new budget.

Or is this still just kind of the same trickling out of the lower spending that most enterprises seem to be doing this year?

The way I would characterize it is that overall capital spending is down.

People are spending it on the things that they really want to see enable their own competitive advantage in 2010.

And so the amount of quoting activity, the number of deals, the quality of the sales funnel, all those things are improving.

And they've been improving, as I said, sort of on a gradual recovery.

I do think the overall environment is one where there's continued pressure on capital spending and just the amount of capital available, so people are deploying it on new technologies so that they're prepared through the pilot phase to be able to scale when capital is released.

Do you get the impression that your enterprise customers are looking -- I know it's not quite budget time yet -- but are looking to make reasonable improvements in their IT spending budgets for next year?

You know, that's a subject of a lot of discussion with customers.

And what I would say is a few things.

One is if you asked the resellers that, what they would say is they expect there to be a gradual recovery.

And most of them would say they think that in the future, it's going to improve.

But I think there's also people are going through the same things that lots of companies are.

They're looking at 2010, how much of a recovery.

Customers are looking to see how can they make investments that will make sure that they're well positioned when things do recover.

But I think we're-- we still got kind of a combination of caution and optimism, and lots of engagement, pilot projects, new technologies.

So I think they're starting to lean into it more than being this phase that was earlier in the year where there was just generally, let's just hunker down.

It starts to look now more like they're thinking about 2010 might be better.

But again, it's a mixed set of signals.

Okay.

Just lastly, AIT-IV.

You've got a lot of history on these projects, and I don't know qualitatively how different this one is from the other ones.

Can you give us some idea of how they ramp, or at least how they've ramped in the past, given this one's probably going to be starting in first quarter?

Is there a lot of upfront business that happens right when the project starts, or is it a kind of gradual ramp up over a year or year and a half?

Yes, it's more of a gradual ramp, historically.

Okay, great.

Well thank you.

I appreciate the help.

Thank you.

You're welcome.

Next question comes from Andy Young from Thomas Weisel Partners.

Your line is open.

Hello, Andy Young from Thomas Weisel.

Your line is open.

Please check your mute box.

Hello, Andy?

He's not responding.

We'll take the next question.

No problem.

Next question comes from Jay Meier from Feltl and Company.

Your line is open.

Hi, guys.

This is Shaun Vincent stepping in for Jay Meier at Feltl.

Hi, Sahun.

Hi, Shaun.

Hi.

Can you provide a little bit more visibility on AIT-IV for us?

Well I think the-- here's the viability I can provide which is that we were awarded this earlier in the summer.

We outlined that it's over $400 million total contract size.

We are well prepared.

So we've got the products prepared for this.

There is some early kind of staging and evaluation phases.

I'd expect it to make a contribution in 2010, but we don't provide guidance on 2010.

So as I said, we anticipate it making a contribution to that year.

We're well prepared.

We're very engaged.

It's a key priority for the Company.

Okay.

And another quick question.

Some of the major package delivery services, including some of your customers, are investing in capital infrastructure.

Do you sense that the investment is a true system-wide refresh, or rather a capacity buy after some delivery firms have closed?

Yes, I think-- so by the way, I think it's both of those.

I think that there's a technology refresh cycle.

If you were to look at the installed base of the kind of rugged mobile computers that are out there compared to the products that we have, there's a, as I said, technology refreshes across a number of these segments that we anticipate.

I think there's also going to be a selective capacity investments.

Again, this is what we anticipate.

Selective capacity investments where they think they can sort of strategically gain share, and they could add to their delivery network.

And we're seeing some of that as well.

Thank you very much, guys.

Thanks, Shaun.

And right now I'm showing no further questions.

Great.

Thanks, Julie.

Please contact the Investor Relations department with any follow up questions from this call, and we look forward to speaking with all of you again.

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