漢威聯合 (HON) 2009 Q4 法說會逐字稿

Welcome, and thank you for standing by. (Operator Instructions). Now I would like to turn the meeting over to Kevin McCarty, you may begin.

Great, thank you very much, Bobbie. Good afternoon, everyone. And welcome to welcome to Intermec's fourth 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. Today's discussions will include predictions, estimates or other information that might be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Some of those statements we make today, may be considered forward-looking including, but not limited to Intermec's expected 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 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 filings with the SEC, including our annual form -- our annual report on Form 10-K, and our quarterly reports on Form 10-Q. Copies of these reports can be obtained from the SEC or by visiting the Investor Relations section at of our website. With that, it is my pleasure to turn the call over to Pat.

Thanks, Kevin, and good afternoon. Intermec delivered fourth quarter 2009 revenues of $179 million and $0.10 earnings per share from continuing operations. On an adjusted basis, which excludes restructuring charges, EPS was $0.12. Revenue grew 13% sequentially, and both our revenue and EPS exceeded guidance from one quarter ago, demonstrating solid operating leverage on the incremental revenue. Sequential growth in the quarter came from the run rate business, through the reseller channel as well as some larger enterprise deals in systems and solutions, especially in the direct store delivery and transportation logistics market, where spending has been constrained over the last several quarters. International markets drove most of the sequential growth. I'm going to turn it over to Bob now to cover the quarter on our financial highlights, And I will return to discuss our growth strategy for 2010, and the progress in Q4.

Thank you, Pat. Intermec fourth quarter revenue of $179 million, represented a 19% decline from the prior year's fourth quarter. On a constant currency basis, revenues were down 22%. As Pat mentioned, revenues were up sequentially by 13% due to stronger enterprise business and run rate business through the channel. The fourth quarter net earnings from continuing operations on a GAAP basis were $6.0 million or $0.10 per share, compared to earnings of $0.15 in the fourth quarter of 2008. This included the impact of restructuring costs of $1.9 million, or approximately $0.02 per share. On a non-GAAP basis, excluding the restructuring charges, our adjusted earnings per share from continuing operations were $0.12 for the current quarter.

Turning the fourth quarter revenues on a regional basis and compared to prior year quarter, North America revenues declined 33%, Europe, Middle East, and Africa, or EMEA declined 8%. On a constant currency basis, revenues in EMEA were down 16% versus fourth quarter 2008. Latin America increased 43%, while our Asia-Pacific region was virtually flat. On a sequential basis, fourth quarter versus third quarter of 2009 revenues in North America increased 4%, and EMEA increased 17%, which includes the benefit of two percentage points from currency. Latin America increased a strong 78%, and Asia-Pacific our smallest region decreased 12%. Reviewing our product line performance, and compared to the prior year quarter, Systems and Solutions revenue of $101 million increased 28%, Printer and Media revenue of $41 million declined 5%, and Service revenue of $37 million was down 4%. On a sequential basis, Systems and Solutions revenue grew 14%. Printer and Media revenue increased 9%, and our Services revenue increased 13%.

Total gross profit margins of 39.7%, increased to 50 basis points over the prior year year. Product gross margins of 38.3% decreased 20 basis points compared to the fourth quarter of 2008. This slight decline was primarily due to low volumes year-over-year. Sequentially, total gross margins increased 110 basis points, and product gross margins increased 130 basis points. The sequential increase was driven by new product sales, improved product mix, and pricing discipline. We continue to capture the benefits of our supply chain initiatives. Service gross margins of 45.3% increased 260 basis points over the fourth quarter 2008, as we continue to realize the benefits of the consolidation of service depots, and associated overall cost structure of our Service business. On a sequential basis, our Services gross margin increased 60 basis points from the third quarter of 2009.

Operating expenses, excluding restructuring charges of $1.9 million were $61.1 million for the quarter, lower by 19% compared to $76.8 million the fourth quarter 2008, which excludes comparables restructuring charges of $2.4 million. Total operating expenses for the same periods were $63.8 and $79.2 million respectively. Providing a quick restructuring update as mentioned, we recorded $1.9 million in the fourth quarter and for the full-year 2009, we recorded approximately $20.6 million. We expect remaining costs of approximately $2 million to be recorded in the first quarter of 2010. We have been able to achieve our desired cost structure through the workforce adjustments announced in early 2009, and the success of indirect spending and other expense reduction programs. We have considerably reduced our annual break even level from the 2008 break even level of approximately $760 million.

Although the quarterly break even level will fluctuate due to seasonality and quarterly variations in expense levels, we believe our annualized break even levels will be within the range of the $615 million to $625 million in 2010, approximately the level we saw in the fourth quarter. Our current break-even level was driven by the gross margin improvement that we realized in the past two quarters, and significantly reduced expense levels throughout 2009. Moving to operating profit. Our fourth quarter operating profits from continuing operations were$7.3 million or 4.1% of total revenue. This compares with $7.6 million or 3.4% of total revenue in the fourth quarter 2008. Excluding the impact of restructuring charges, the non-GAAP adjusted operating profits from continuing operations were $9.3 million or 5.3% of total revenue, compared to $10 million, 4.5% of total revenue in the fourth quarter 2008.

We expect that as the economy strengthens and capital spending increases, we will expand on the strong operating leverage demonstrated by our business model during the fourth quarter. In the income tax area during the quarter, we recorded a favorable resolution of a federal tax audit of approximately $1 million. This adjustment was the primary factor which reduced our normalized tax provision to $1.4 million for the quarter. As a reminder, in the fourth quarter of 2008, the Company recorded favorable tax adjustment of approximately $4 million, as a result of the company's new manufacturing structure, and future foreign income expectations.

Looking at the balance sheet as of year-end, our total net inventories were up approximately $13 million from the third quarter of 2009. This stronger inventory position during the fourth quarter, allowed us to be in position to fulfill year-end customer orders. The increase is comprised of current product inventory, and we expect our inventory level will trend down as 2010 orders are filled. Our year-end inventory balance versus the prior year-end, is down approximately $14 million. The decrease year-over-year is driven by our outsourcing initiative, continued management focus, and improving forecasting processes.

Moving to accounts receivable, at the end of Q4, our receivable balance was $107 million, which was essentially flat versus the third quarter, despite the 13% increase in revenues. We continue to manage our receivables well, and have reduced the balance by approximately $32 million since the end of 2008. In the fourth quarter, we generated positive operating cash flow of $3 million, including impact of $6.8 million of payments, related to restructuring costs. For the full-year of 2009, we generated $21 million of operating cash flow, including $19 million in payments related to restructuring charges. At quarter end, our cash, cash equivalents and short-term investments remained essentially flat to the third quarter at $238 million. We expect operating cash flows to improve, driven by our operating model leverage as growth returns, also driven by ongoing cost management, and continued strong working capital management. With no debt on our balance sheet, the Company continues to be in solid financial position.

As we looked to the first quarter of 2010, and taking into context a gradual global economic recovery, we are viewing that our first quarter 2010 revenues are expected to be within the range of $155 to $165 million, compared to first quarter 2009 revenues of $163 million. First quarter 2010 earnings per share are expected to be within the range of minus $0.01 to positive $0.03 per diluted share from continuing operations on a GAAP basis. This compares to the first quarter 2009 GAAP earnings per share loss of $0.17. Excluding restructuring charges of approximately $2 million, first quarter 2010 earnings per share on a non-GAAP basis are expected to be positive $0.01 to positive $0.05 per share, compared to first quarter 2009 non-GAAP basis earnings per share of a loss of $0.09 per share.

A few quick comments on the outlook. First quarter historically, has shown a decline of 10% to 15% from the fourth quarter. Our projection reflects this seasonal effect. Our forecasted earnings for the quarter are reflective of a breakeven point of $615 million to $620 million annualized, consistent with the levels achieved during the third and fourth quarter of 2009. We anticipate the effective tax rate for the first quarter to the approximately 37%. And our earnings per share guidance, assumes a diluted share count of approximately 62 million shares for the first quarter. That completes our financial comments. And with that, I will turn the call back to Pat.

Thanks, Bob. As we outlined last quarter, Intermec is focused on growing the business faster than the market in 2010 by executing on several key initiatives, expanding the use of the channel, introducing new products, pursuing compelling new market applications, and capturing the technology refresh cycle on larger projects. When combined with our more efficient operating model, and lower break-even point, this growth represents an opportunity for significant operating leverage. A couple of key Company highlights before I dive into Q4.

Next week in Orlando, Florida, we are holding our annual Intermec partner summit. We anticipate very strong partner attendance, based on the advance registration results. At this event, we plan to introduce new channel programs for our value added resellers, independent software vendors, and key distributors from around the world, in order to drive profitable growth in 2010. We expect a seven to be an important kick off of the sales year. In early January, we announced appointment of Jim McDonnell to lead Global Sales for Intermec. Jim comes to Intermec with 26 years experience at Hewlett-Packard where he held senior sales and marketing leadership roles, most recently as Vice President of Global Sales, within the Enterprise Storage and Servers Group.

Jim's extensive experience and focus on execution, in both direct and channel sales will make a big contribution to driving global growth at Intermec in 2010 and beyond. The message is clear, Intermec is focused on driving growth as the market recover, by offering compelling value to customers and partners. Turning now to Q4, I will discuss some details as they relate to current market conditions and our growth strategies for 2010. There were favorable times in Q4, which indicates some of the underlying market dynamics are improving, and that Intermec is well-positioned to capture the market opportunities. In Q4, we saw a 9% sequential growth in our Global Printer Media business, with consumables growing even faster.

Consumable sales are often at an early indicator of a broader recovery in hardware sales, as customers buy more labels in direct response to higher shipment levels due to transportation, logistics and delivery networks. In Q4, the revenue per customer, revenue per order for consumables rebounded to the levels similar to those we last saw in mid 2008. In Q4 bookings on printers were the highest level in several quarters. The vast majority of printers are through the channel and we have grown substantially our sales through our Intermec Partner Service Partner Program in 2009. Our recent introduction of new rugged mobile receipt and label printers add to the Intermec portfolio, and provide opportunities for both our channel partners and direct sales team, as many as many of these printers are used in combination with our new rugged mobile computers. We're confident and excited about the prospects for our Printer Media business in 2010.

Throughout 2009, a top priority for Intermec has been increased use of the channel resellers to extend our sales reach. As I mentioned earlier, this will be the major focus of our Partners Summit next week. During Q4, we saw continuation of progress in the channel as measured by approximately 200 new resellers accounts within the quarter. Complementing the recruitment and activation of resellers is the use of two-tier distribution for fulfillment. Q4 Global two-tier distribution results continue to be strong and grew sequentially. Overall, 2009 was very strong quarter year for of sales through two-tier distribution, in spite of the overall business conditions. We are entering 2010 with strong momentum and partnership with our value added resellers, independent software vendors, and global distribution partners.

Next, I want to review a couple of specific regions that they relate to our growth strategies. In Europe, Middle East and Africa, we saw a 17% sequential revenue growth, driven by channel performance. In Q4 the number of active reseller accounts in EMEA grew 20% sequentially. We had good channel sales results in both rugged mobile computers and printers. Postal also contributed to strong results in the quarter in EMEA. Europe went into recession-driven decline earlier than the rest of the region, starting in the second half of 2008. And we anticipate continued improvement in the business going forward, as the markets recover.

Another factor contributing to an improvement in sales in Q4, was some improvements in larger enterprise deals. Customers are replacing their older technologies because they are aging, but more importantly because newer technologies enable them to increase revenue, and improve productivity through real-time information, in ways that were not feasible with older technology. This is what pushes our technology up the priority list for IT spending plans, and creates the compelling customer economic event. Latin America had a very strong quarter, driven by some technology refresh projects in our core markets, consumer packaged goods, direct store delivery and warehousing applications.

In addition to these results in the quarter, we have recently won a large deal for over 12,000 CN50 units in the region for deployment in a direct store delivery application over the next couple years. And in North America, we had sales in the technology refresh projects in transportation and direct store delivery for markets. We believe these results indicate that we are well positioned to capture the technology refresh cycle with our advanced new products and ongoing customer engagements. Globally, new products like the CK3 and Premise and the CN50 high mobility rugged mobile computers had very strong results in Q4, as customers and warehousing, direct store delivery and transportational logistics are adopting new technologies in the early phases of the technology refresh cycle.

Recently Intermec was awarded a 6000 unit deployment of CN50, in large logistic provider in Europe, and we anticipate deployment in the first half of 2010. In addition, the CN50 is reaching new applications in a variety of field service verticals including home health care delivery and public-sector application like traffic, census, police and utilities. During the quarter, we won deals of several thousand units each for the CN50, in new applications like food merchandising and field service. These are often situations where customers are adopting field mobility solutions for the first time. The CN50 is the industry's most advanced rugged mobile computer for Field Service application.

The global sales funnel for the product is strong, and we believe the introduction is well-timed for the expanding market in field mobility based applications. These field mobility solutions leverage high data rate cellular networks, along with advanced identification location based technologies, to provide real-time information needed to enhance our customers' business results, when they go through mobile business process transformations. Customers are focused on mobile workforce productivity, increasing revenue generation, and an increase in customer satisfaction, and our solutions deliver those benefits. In summary, Intermec has been focused on growing revenues faster than the market, through the increased use of the channel, to extend our sales to reach, introduction of new products, capturing the technology refresh cycle, and reaching new applications and verticals to expand our addressable of the market.

In each of these areas, we made real progress in Q4 and have momentum going into 2010. To wrap up, 2009 was a challenging year for the global economy. Intermec came out of this year in a strong position, with a number of key accomplishments. First, we were very strong financially. We generated over $20 million in cash in 2009, while also paying for over $90 million in restructuring. With $238 million of cash and no debt, our balance sheet is very strong. Furthermore, our income statement is a stronger than a year ago, with a much lower break-even point, and a more flexible cost structure in manufacturing sales, product development, and general and administrative functions.

Second, the company has compelling, new product portfolio, and an exciting new product pipeline. Our new computer and printer products provide industry-leading innovation and meaningful growth opportunities for technology refresh projects, and for new applications. We have established important development partnerships in the industry, which we believe will enable Intermec to continue in leadership in new products and technology. We expect 2010 to be another year of important new product launches.

Next we have improved our channel engagement and results in 2009. We have increased the number of active partner sequentially every quarter this year, and have strong distributor momentum. We're kicking off 2010 with an exciting new set of channel program elements and sales momentum. Finally and most importantly, we have a strong focused and innovative team to capture the growth opportunities for the future. I want to thank Intermec employees worldwide for the contribution to 2009, and their commitment and dedication to success in 2010. I will now turn it over to Kevin for the question and answer portion of the call.

Great. Thanks, Pat. Bobbie, at this time, we would like to open our call for our question and answer period, please.

(Operator Instructions).

Our first question comes from Chuck Murphy. Your line is open.

Afternoon, guys.

Good afternoon.

Just had one question, really. Could you kind of give us some idea of what to expect from gross margins and OpEx going forward, what should we consider to be a reasonable run rate?

Chuck, this is Bob. On the gross margin, we've got a business model that is shooting to be in the 40 plus percent range. Near-term first quarter, we would expect it to be comparable to the fourth quarter. We will have less volume obviously. On the downward side a little bit, but continued benefit from new products, pricing disciplines, and looking for good results in Europe and services to offset that. But in the near term, I think pretty consistent with the fourth quarter. Our goal is to keep that edging upwards. From operating expense level, we exited the year about $62 million in the fourth quarter. We want to keep a tight rein on spending. We are looking for ways to push that down a little, but offset it with some targeted investments, R&B, marketing, in the channel in particular, and also some selling initiatives. So the net results will be a first quarter, I would expect it to be comparable to the fourth quarter.

Have you done any analysis that you got back to 2008 level sales close to $900 million, what you're gross margins would look like under that scenario?

I think without specifically saying where the gross margins would be, I think the way to answer that is we have a break-even point, that is in the 615 to 625 range. W expect to see probably 40% plus or minus a little bit on operating leverage going forward. And so, in terms of total profitability, which will be driven of course by gross margin, but also operating expenses, growing slightly,but much slower than revenue. You can kind of do the projections back toward that 800 to 890 level that we were in 2008, and kind of model the profitability that way.

Got you.

Thanks a lot.

Our next question comes from Reik Read, your line is open.

Good afternoon, just can you guys talk a little about Europe, and the sustained -- you had a nice pick up there, and it seemed like a lot of that was run rate business. But Pat, you also mentioned postal, is that something that is sustainable or is there other enterprise business kicking in there as well?

Yes, so, Reik, in the fourth quarter, there was some postal business in the quarter, but the percentage sequential improvement was really driven by the channel, the number of partners, and a broad demand picture in multiple product lines, and across really the portfolio, the current products and new products. I think there is really is momentum building in EMEA for a sustained level of business that we've got, and that we have been able to rebuild since the first quarter. And there wasn't a significant portion of enterprise deals in the quarter in EMEA other than the postal one that I mentioned.

Okay, and I think it was part of your comments, Pat, you mentioned the direct store delivery and transportation logistics. Those have been markets I think you have been waiting for for a little while. Can you talk a little bit about the stage of the investment, and is there a ramp here, or is this more of a steady state type piece of business that is out there?

I think the broader questions that you are bringing up is really the shape of the recovery. And I think there is a sort of a next phase of the recovery, which has sort of the following characteristics. There were previous rollouts that were multi quarter, multi-year rollout in these large transportational logistics, and consumer packaged companies that were put on hold during the recession. Those things have been reactivated because they established projects for capital spending and that have been pushed out. I think the larger new projects are an active pilot and capital planning phase and kind of a one step at a time capital deployment. So the number of these both established technology projects that are getting capitalized, that have already proven as well as the new active ones, that rate is picking up. And we saw that in the quarter, as well as the number of things that we are bidding on and engaging on. There is the building, I wanted to outline the previous roll out restarting, as well as the new larger projects and active pilot.

Okay. And then are there component shortages, or is there any manufacturer and bottleneck that would cause this to be a gating of some of the projects you are talking about ramping up ?

You mean in our own manufacturing capacity?

Either that or your suppliers.

We do not see a significant impact of supply chain limitation in our ability to deliver revenue.

Okay. Great. Thank you.

Thank you.

The next question comes from Tavis McCourt. Your line is open.

Thanks for taking my question. I have a couple of of them. First, in terms of Q4 results, the service revenues looked like they were up quite significantly sequentially. Can you talk a little bit about what drove that?

Service revenue of course is a function mostly of two components, where it is a break repair business, where the older products already shipping are due for repair. And so that is a relatively moving function does not go up or down, because it is really a function of the size of the installed base. And so we completed, and this is one of the places where people spend money is to keep the assets functional and productive in their work forces, and so they do both contract renewals, as well as other repairing activities. Also then also is another service component, which is really engaging on new projects and technical services that allow people to deploy technologies. And so it is really both of those elements that contributed to Q4. And this is part of our ongoing customer engagement, to keep our service business, supporting our customers through this economic cycles.

And does any of that change when you engage the channel more? Is there more revenue share with them? Or do you still do all the break fix and the technical work?

Our channel does significant amount of th technical engagement. And so most of our Service revenue of that type is with direct customers. And then we attach our own services, our break repair services through channel engagements, as well as directly with customers. The core maintenance business, break repair business is both through the channel and direct.

But for large enterprise installation you are captured the project, technical portion?

Yes, that's right.

And if you look at the geographic breakdown, there are some areas of strength, and also some areas of weakness. I would imagine the market probably grew a little faster than your business in North America. What do you think accounted for that, is it just the lack of enterprise deals in North America I suspect? Your channel business was probably up a little more. And then, what accounts for the APAC trends sequentially?

On North America, we don't believe we lost market share in North America, it is more a sequencing of larger projects. Our run rate channel business is strong in North America. We saw a sequential improvement in the number of channel partners. And so we believe that has more to do with timing. And then on APAC, it really is -- these are relatively small numbers, and so the project pipeline is strong in APAC. And the sequential decline I don't think it is a notable trend.

Okay. And then in terms of the cash, how much of the cash and the balance sheet is unencumbered in the US. And now that we are kind of past the point of any realistic chance of cash burn. How should be think about the potential use of that cash going forward?

Tavis, this is Bob. The cash is pretty much split between international and domestic. The domestic is freely accessible. Even on the international side, the vast majority of it is accessible. We would have to do a little bit of planning, which will look at a continuous basis, on where that is best located. And one of our focuses is just on the security and preservation of our cash, that continues to be top of mind, and how we drive improving yields on the cash. We always look at our capital structure. We review that regularly, and then evaluate any opportunities for investments or other changes as appropriate.

Pat, if you want to comment about any acquisition potential, are there assets out there, smaller players that might get you a new product capability, or vertical markets that you would be interested in? Or are you happy with just accumulating cash on the balance sheet ?

Well, I will make some comments, and I think that Bob can add to this. The company has a strong broad product portfolio. We are frequently evaluating as a regular part of our management process, opportunities for expanding that product portfolio, through both organic and inorganic approaches. So Bob, did you want to the comments regarding the use of the balance sheet?

I think the use of the balance sheet, we do obviously intend to expand our operating cash flow generation going forward. So we do view the about balance sheet as an opportunity press. And by just by policy without comment specifically on an acquisitions that could be out there. And we're focused on the things I mentioned earlier.

And one final one, Bob, we have seen a pretty big move and the dollar and Euro relationship in the last couple days. Do you guys hedge one quarter in advance for your revenues coming out of the international?

We are looking at both the dollar and the pound have moved quite a bit, dropping below the 140 level here. We do look at our exposure on a new regular basis. We do hedge them. Looking out into the future, and we were to time that with the expectation of when, for example, inventories would flow in and/or specific customer contracts that we can adequately protect and forecast.

Great. Thanks a lot and congratulations on the quarter.

Thanks very much.

Our next question comes from Andrew Abrams, your line is open.

A couple questions, first, can you give us an idea of where you are in the distribution side, you were -- I think the number was close to 70% last quarter, has that changed appreciably? Or balanced out a little bit?

There's a small variation per quarter, depending upon the number of direct deals that we've got. So some of the larger enterprise deployments, those are the largest enterprise direct engagements. So in the fourth quarter, it was approximately 70% as well, because as I said, the channel grew in Europe, but we also had some large enterprise direct deals in Latin America.

Got you. And enterprise deals in North America, have you seen any kind of substantial change in any of the verticals from the last quarter to this quarter, or looking forward a quarter, do you see any kind of movement and the large enterprise deals just on the North American basis?

I do think there is the next phase of the recovery recurring, where the previous rollouts, we are in a new fiscal year now. And 2010 capital spending is being planned, and people are looking at these mobility deployments, as a means to generates more revenues. That is one of the key effects happening in capital deployments, which is how do these to push up of the top of the IT spending, these capabilities, these technologies enabled revenue generation. So there are more active pilots, there is more work or activity in previous roll outs restarting. But there's also a gradualness to it, associated sort of with a one quarter at the time, as the economy recovers. The activity level is good, and the sales funnel is strong and has grown over the last two quarters.

If you have to look at a gating factor for the enterprise business, we are not in the credit situation I would assume, with any of your enterprise customers, or the large number of your enterprise customers, is it just the deployment side 2010 budgets? Or 2010 budgets generally a gating factor also?

Yes.I think the amount of capital being deployed will drive or will modulate the rate of deployment. I think one way of looking at this, is that there is significant deployments about every five years or so. Y2K, five years later, 2004, 2005, another deployment, 2009, 2010 under normal conditions, that has been pushed out some. And so each one of these times, there are new enablers that drive it , real-time information, rather than batch, location-based management, document capture, voice control, these are some of the enabling capabilities. And then these priorities for customers, revenue generation, customer satisfaction, so those are compelling customer economic events, and it's modulated the restoration of capital. But, as I said, by funnel, by number of projects, that is building.

Lastly, the CN50, it seemed to be picking up traction very quickly there, in the last two or three months. Is it specific application that you are seeing, the CN50 being adapted to? I am assuming through the (inaudible) channel? And if there are any enterprise deals, large or small on the CN50, is it in a particular vertical or particular application that you can specify?

So the CN50 is going to have a broad appeal. I mentioned in the prepared remarks, that there is -- there was both transportational logistic and direct store delivery significant deployments, And I outlined, what the unit count was. So that this in our core vertical. So the CN50, we anticipate will be strong in our core verticals, transportation, logistics, consumer package, direct store delivery. But also in new field service applications. And I mentioned some of those because of the form factor, radio performance, and some of its key capabilities like document capture, it really does offer to field service workers, sometimes even the first time, right product for mobile work force productivity improvement. So broadly speaking, it is in the field service work force that is reaching new applications.

Got you.

That is mostly through the channel of course.

Thank you.

The next question comes from Ajit Pai, your line is open.

Yes, good afternoon, and congratulations on a very solid quarter.

Thank you, Ajit.

A couple quick questions. The first is about the competitive environment, so there has been some changes, you had Honeywell get into the business, and consolidate folks over there on the printer side. Could you discuss the impact on the pricing environment has been with the (inaudible) and the slowdown right now, from (inaudible) and Motorola and Honeywell and other players in the space?

I will speak to it and then Bob can add his. The pricing environment of course,we track on a regular basis, Ajit. Both through our own pricing discipline initiatives, as well as through our channel mix. The overall pricing environment has stabilized in the last couple quarters. The larger deals are always more competitive. We also have more efficient SG&A's supporting those, even if that margins are slightly less. And we compensate that in the overall mix with service attachment, channel run rate business, new products and new capabilities. For example, the document imaging which enables us to sustain and build average sales prices.

Right. And then looking at your new verticals, maybe four or five years ago, Intermec sort of pointed out they were highly under penetrated in the retail vertical, as well as in the health-care vertical, and also in the service professionals. And I think you were going to focus on retail first, you introduced a few products out there. And then, the other two that you said you might look at in the future. So could you give us any color as to any progress you have made? And any new verticals, whether its the retail vertical itself, and whether you see that as potential area of growth organically? And then also, health care, and service professional out there in the field, whether those are still vertical of interest, or you think that you are only considering them down the road?

Ajit, as I outlined, the CN50 is really the most advanced rugged mobile computer for these field service applications. And I think what you just said, is our professional service folks. I think that is the phrase you used. We see that those field service verticals, and I include that in public sector applications, home health care delivery, the utilities industry. These are places where merchandising, there are few service workers. And we believe this is a great product for those, and we are really building momentum in the channel. Another vertical that we had really good progress in, and focus continue, is the postal market, which we believe it because of deregulation, is going to go through a capitalization phase, has and will, as those workforces having increasing focus on productivity and real-time information and increased revenue generation. We do have business in retail sectors, and our European business has a meaningful portion of retail, and some places in North America as well. But I think the place we need most progress and will continue to, is these field service related applications.

And the manner in which you are going to be targeting these verticals, outside of a product perspective, is it going to be through beginning to invest in new channel partners? I mean how are you getting to the markets? Is it going to be potentially through an acquisition? How are you planning to penetrate these services?

We are actively, and have made progress this year, as I said, sequentially increased the number of active resellers this quarter. And so we have a program, and continue to focus on the program to recruit resellers to reach these markets. And as I said, and as Bob said earlier, we don't comment on acquisition. But we believe we are making real progress in expanding the base of applications. And our product capabilities are very unique, and compelling to these workforces.

And then looking at the Asia PAC market where you have been seeing some decent trends, relative to the rest of the world, I know that Latin America has been very strong, but Asia as an overall market, is a very huge market. Is there, do you still feel that you are under penetrated, and you have the ability to grow much faster than the market in Asia? And what steps are taking to increase that, outside of just resellers, small resellers?

So what we have done in Asia is, the total available market, on our evaluation, is we are under penetrated, but not nearly as much you as just take by looking at the numbers themselves. The market is actually sort of smaller, as a percentage of GDP across most of those countries. But we have increased the distribution network, it's a two-tiered distribution which allows us to reach more resellers through a leveraged model. And we engaged in some multi-national corporation global deployments of technologies. So these might be companies that are headquartered elsewhere, but have MMCs that are deploying in Asia, and we leverage our global arrangements in order to gain market access. And as I said earlier, the acquisition topics will not be commenting on.

But you believe the pricing in Asia is sufficient to allow you to have gross margins and operating margins that are comparable with the rest of the world?

The over all - we don't disclose the margin structure per region. We believe that our products and product roadmap being competitive and win, and be good for the shareholders of the Company in Asia. And the environment is a different environment, we believe we're well-positioned now and in the future to outgrow the marketplace there.

Thank you so much.

Thank you, Ajit.

Our next question comes from [Derek Josie]. Your line is open.

Hi, guys, I just have a few housekeeping questions. Could you talk about --your tax rates next year, what is implied in your forecast. And then also, is there any currency change implied in the forecast?

This is Bob. So I think on the tax rates for the first quarter, I said, 37% is what I would expect. Just rom a normalized perspective, that is roughly what we would expect. As we return to profitability, and look at some planning opportunities, look at our operational structure, it could be a little bit higher, a little bit lower, but it will be in that range I believe. The second part of your question? Remind me on that? On the currency, we looked to be, look at the end of 2009 as the starting point. Certainly that is sort of the levels incorporated into our first quarter guidance we provided. Currencies are moving around. And I think earlier it was noted that foreign currencies have most recently weakened in Europe in particular. I cannot say I think they will stay weaker forever. But I'm not trying to speculate on where those go either.

Okay. Did in terms of compensation, is there any add back in the upcoming year, that you guys took out this year to cut costs, that we might be seeing?

I think we did announce early last year, that the senior-most officers of the Company had taken a pay cut, and the Board also followed suit. That would be an add back. And then from an incentive compensation perspective, certainly 2009 was a significant decline from 2008, And I would expect 2010 to return to a more normal levels. But that is the guidance that we provided on the earnings per share, and certainly for first quarter.

Okay.Thanks, guys. That's it.

Thank you.

Our last question comes from Jay Meier. Your line is open.

Hi, thanks, nice quarter.

Hi, Jay.

My first question, obviously the channel uptick was pretty strong. You mentioned you had as many as 200 new channel partners sign on during the quarter. How much of that channel uptick is really just stocking shelves for the first time? And what can you tell us about your backlog going into the first quarter, and maybe looking out into the year?

I will answer the first part, and Bob, will answer the backlog question. This is Pat. So these are active resellers. So these are customers where we both have sales in out. So they are really actively working on projects in the target markets that we got, as opposed to primarily building inventory. There is not a lot of building inventory right now, because people are looking to turn business, use cash to generate real revenue and real results. The metrics that I was outlining are really indicative, we believe of the underlying business activity.

And Jay, from a backlog perspective, certainly, the end of 2008, was just the beginning of the recession. So backlog was at a higher level. As the recession hit, it came down kind of early in the year, and stayed at a lower level, year-over-year. And actually will publish these numbers, when we file our 10-K. We exited 2008 with I believe it was roughly $88 million of backlog, and we'll be about $40 million below that, exiting 2009. Certainly, we had some long scheduled backlog of $20 million or so, scheduled that delivered in the first quarter of last year 2008. So hopefully, that gives you a framing of where our backlog is. And build, obviously we expect it to build as bookings and as the markets recover.

Great. Okay. And I have not heard you mention anything about the DOD. I'm not sure if how the current administration views this type of capability as far as necessary or to secure our homeland. So I wonder if you can comment on your visibility at DOD purchases, especially with the new buying cycle coming up?

We announced last year that we were one of the of the awardees on the AIT-4 contract. We anticipate business in that in 2010. There has been some federal spending approval delays, related to DOD spending under the AIT-4 contract. DOD spending delays which would have purchased under the AIT-4 . So we expect that contract vehicle to be active in 2010, after some of these delays.

Would you expect that those delays -- should we really qualify them as delays or reductions? Are they pushing out or have they just tried to reduce their spend?

The anticipation of what we've got, is that there would be spending under AIT-4 -- there is no indication we have that what we put in our announcement last year, that the overall contract of the $400 million -- I think it was more than 400 million -- there is no indication that that is going to be reduced, going forward. That is what we anticipate is that the government will spend against that contract to that amount over time.

Great. Thank you very much.

Thank you, Jay.

Actually, we do have a few more questions. Our next question comes from Reik Read. Your line is open.

I wanted to follow up, Pat, on the service comment. with the revenue jump there. I can understand why some of the installation stuff jumped, and their revenue part going up. But why would the maintenance revenue jumped as well, and is that suggesting that that would be coming up to the level?

At a high level, there are two main vehicles for a break repairs services. One is contract and the other is Time and Materials. Time and Materials is where customers don't have it under contract, but they still need the products repaired. That is an important component for service revenues and part of sequential increase. So in that regard, these are critical assets for business operations. And I think it does represent a vote of confidence that the technology is important for operational execution, that the customers are spending money, repairing them, keeping them up to date. The key focus is continue to increase attachment rate, make sure that our service contracts are renewed, and continue to have a robust partner network as part of our service platform.

What would you expect over the next couple of quarters that time and materials will fluctuate, and would that have an impact on the gross margins?

I think the way to think about these, these are the number of movable pieces in service gross margins.. But these all work in to the overall picture. We built a good business model in services, sequentially improved it, and improved the margins structure, and that is sustainable.

So with everything that you are talking about, this jump, you're kind of at a new level, and think about that as a baseline?

Right.

And, Bob I apologize, I think you said this before, but I didn't catch it. What would did say was the contribution margin -- for the dollars above break-even?

We expect to be roughly 40%, Reik.

Great, thank you very much.

And our final question comes from Rick Lane. Your line is open.

A follow up on to Reik - I didn't hear what the contribution margin was actually, so it's 40%. With reference to the potential addbacks though, given the pay cuts and the like in 2009, do we need to get back to some different level before you hit that 40% contribution margin, because you will have some addbacks that will dilute that initially?

I think it is factored in. That is why I said approximately 40%. So as we build volume going forward, I do expect that we would see some expansion in gross margin over time. That will fluctuate a little bit quarter-to-quarter, based on the type of activity, whether it's through the channel or enterprise. We also will work hard on the operating expenses to keep them -- we got a tight rein kept on operating spending -- with the investments will be targeted in those areas, so the incentive and pay add backs were not significant in our roughly $245 million to $250 million of annual operating expense levels. They are in -- those totals.

So it's not as if there is a pivot point. That is a fair way to look at it, incrementally.

That is correct.

Thank you very much.

Thank you.

We are showing no further questions.

Great, thanks, Bobbie. That will conclude our call for this afternoon. We sincerely appreciate you all joining us today. And have a pleasant evening, and please don't hesitate to give me a call, if you have any follow up questions.

Thank you for everyone's participation. You may disconnect the this time.