漢威聯合 (HON) 2010 Q2 法說會逐字稿

Good afternoon, everyone.

Thank you all for standing by and welcome to today's conference call.

At this time your lines have been placed on listen-only for today's conference.

(Operator instructions).

The conference is being recorded today.

If you have any objections you may disconnect at this time.

I will now turn our call over to Mr.

Kevin McCarty, Vice President of Corporate Development and Investor Relations.

Mr.

McCarty, you may proceed.

Thank you very much, Jill, and good afternoon everyone and welcome to Intermec's second-quarter fiscal year 2010 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 Dreissnack.

In just a moment Pat will discuss our quarterly overview and then Bob will provide a summary of our operating performance and third-quarter guidance.

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

Today's discussions will include predictions, estimates and other information that might be considered forward-looking statements under the Private Security 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 were set forth in today's earnings release.

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

Please note that these forward-looking statements only reflect our opinions 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 will also refer to as adjusted items.

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

Please refer to today's earnings release which contain and illustrate our reconciliation of GAAP to non-GAAP items.

If warranted, a more detailed description of our risk factors that could impact our actual results can be achieved by reviewing our filings with the Securities and Exchange Commission.

These filings include our annual report on Form 10-K and our quarterly reports on Form 10-Q.

To obtain these copies of these reports please visit our Investor Relations section of our corporate website.

Transitioning now to the next portion of our call, I'd like to turn the call over to Pat.

Thanks, Kevin and good afternoon, everyone.

Intermec had second-quarter 2010 revenues of $161 million which resulted in a loss of $0.04 per share.

On an adjusted basis the loss was $0.03.

These results met our expectations in spite of continued slowness in the US Government business and the currency impact from Europe.

North America revenue was down 4% but up 15% outside of US Government compared to Q2 of last year.

I will comment later on the US Government business.

International sales increased 10% compared to Q2 of last year and up 13% on a constant currency basis.

Printer Media sales were strong in the quarter.

The Systems and Solutions business was flat in the quarter with strong new product sales volumes offset by the decline of the US Government business and foreign currency in Europe.

The sales funnel has been growing over the last six months and we believe we are seeing a gradual recovery as overall market confidence is building and capital for larger deployments is beginning to return.

The overall channel business continues to turn in strong results and sequential growth.

This trend in small and medium businesses, we believe, indicates that market conditions are improving and Intermec is participating well in the recovery.

Total gross margins as well as product gross margins increased on a year-over-year basis.

Service gross margins declined, however, due to several factors, including foreign currency and the decline of the US Government business.

We believe service margins will recover in the coming quarters.

Bob will discuss the service business more in his comments.

I'd now like to turn it over to Bob and I will return to discuss our results in more detail as well as the outlook for Q3.

Thank you, Pat.

Intermec's second-quarter revenue of $161 million represented a 2% increase from the prior year's second quarter and was up 8% sequentially.

On a constant currency basis, year-over-year revenues were up 3% and on a constant currency basis the sequential increase was 10.5%.

On a GAAP basis our second quarter net loss was $2.7 million or a $0.04 loss per share compared to a loss of $0.11 in the second quarter of 2009.

This includes the impact of a real estate impairment charge of $600,000 and restructuring charges of approximately $200,000 which collectively equated to $0.01 per share.

On a non-GAAP basis, excluding those charges, our adjusted loss per share was $0.03 for the current quarter.

Turning to second-quarter revenues on a regional basis in comparison to the prior year quarter, North America declined 4%, impacted by the continued softness in US Government sales.

Excluding US Government sales, the remainder of North America grew almost 15%.

Europe, Middle East and Africa, or EMEA, increased 3%.

On a constant currency basis revenues in EMEA were up 10%.

Our other international areas also delivered strong results with our Asia-Pacific region up 54% while Latin America increased 13%.

Revenue increased in aggregate across our international regions by 10% year over year, and sequentially was up about 2% despite the significant currency headwinds in Europe.

On a product line basis, our Systems and Solutions revenue of $86 million was flat year-over-year, yet on a sequential basis this product line grew 9%.

Printer and Media revenues of $42 million delivered strong growth, up 14% year over year and up 16% from Q1.

Our Services business declined 6% year over year and was down 3% sequentially, both comparisons primarily impacted by the decline in spending in the US Government business.

Moving to gross margins, our total gross profit margin of 36.9% increased 70 basis points over the prior-year period.

On a product level gross margins improved by 190 basis points to 36.3%.

Improvements in material costs and pricing were partially offset by foreign currency impacts of approximately 70 basis points.

Service gross margins declined year over year by 370 basis points to 39%.

Our Service business was impacted by foreign currency headwinds as well as reduced utilization associated with US Government service contract cutbacks.

We expect our Service margins will return to a level of approximately 43% in the third quarter.

Adjusted operating expense totaled $64.2 million.

This total excludes facility impairment charges of $600,000 and restructuring charges of $200,000.

Total expenses for the current quarter on a GAAP basis totaled $65 million.

As we had indicated on our last call, expenses in the second quarter reflect an investment in R&D expense for planned new product introductions later this year of approximately $3 million.

The facility charge is related to real estate that we hold for sale following the divestiture of a former business and reduces the carrying value to the estimated current fair value of the property.

Operating expenses totaled $60.1 million in the previous year excluding restructuring charges of $7.3 million.

Total operating expenses on a GAAP basis were $67.4 million for the prior-year quarter.

We continue to keep tight controls on our spending and we anticipate expenses before restructuring of $62 million to $63 million in the third quarter.

We anticipate recording the remaining restructuring charges from our previously announced programs of approximately $1.5 million in the third quarter.

These costs are largely facility related and will be primarily non-cash.

The tax benefit in Q2 reflects an effective tax rate for continuing operations of 51.3%compared to the prior year rate of 36.6%.

This is due to several factors, including the level and mix of income by geography and the transitional effect of licensing non-US IP rights to our Singapore subsidiary.

In addition, the current year projected tax rate is impacted by the US Congress's delay in renewing the Research and Development Tax Credit which existed in 2009.

If this credit is renewed during 2010 for the current tax year, there would likely be a favorable impact on our effective income tax rate.

Looking at the balance sheet, we have reduced our inventory balance approximately $2 million in the quarter and $9 million from our December year end.

We expect our inventory level will continue to trend down in 2010.

Moving to accounts receivable.

At the end of Q2 our receivable balance was reduced to $94 million, down approximately $13 million from the year-end levels.

The number of days in receivables, or DSO, was 54 days at the end of the quarter.

We continue to manage our receivables well.

Second-quarter cash flow from operations was $7.1 million which year to date is slightly negative at $700,000.

As of quarter end, our cash, cash equivalents and short-term investments totaled just over $223 million.

Looking forward, we expect positive operating cash flow driven by our operating model and continued strong working capital management.

The Company continues to be in a very solid financial position.

As we look to the third quarter of 2010 we are viewing that third-quarter revenues are expected to be within a range of $160 million to $170 million compared to third-quarter 2009 revenues of $159 million.

Third-quarter earnings per share on a GAAP basis are expected to be within a range of breakeven to a positive $0.03 per diluted share compared to a breakeven per share result in the third quarter 2009.

Excluding estimated restructuring charges of approximately $1.5 million, third-quarter earnings on a non-GAAP adjusted basis are expected to be $0.01 to $0.04 per share compared to the non-GAAP adjusted third-quarter 2009 earnings of $0.03.

We anticipate the effective tax rate will be consistent with the second quarter or approximately 51%.

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

Before I conclude my remarks, I wanted to provide a quick update on our share repurchase program.

We announced in early June that our Board authorized the Company to repurchase up to $75 million of its outstanding common stock.

We anticipate that this will commence in the third quarter.

So that completes our financial comments and I'll turn the call back over to Pat.

Thanks Bob.

In Q2 we grew the international business by 10% compared to Q2 of last year, continuing a growth trend from Q1 where we grew 27% compared to the first quarter of 2009.

On a constant currency basis the growth in Q2 was 13%.

Growth was across all product lines, both hardware and services.

Our business in Asia-Pacific, for example, is up 45% year to date compared to the first half of 2009.

Most of the international business is sold through the channel, either direct to reseller or through two-tier distribution.

The channels performed well for us, especially through two-tier distribution where we've grown substantially in the last year.

We added approximately 130 reseller partners in Q2 in the three regions making up our international business.

We also had some important new product wins in the quarter.

In Europe, for example, we had wins in parcel delivery and field service with the CN50 and in warehouse and retail applications with the CK3.

Turning now to the North America business, we had a number of areas of significant progress in the quarter.

New product unit volumes grew sequentially in year over year.

These new product sales are a result of both pilot activity in larger deployments and a broad-based adoption of Intermec's latest technologies by new customers and SMB resellers.

The CN50 and CK3 rugged mobile computers, in particular, had strong sales in the quarter.

The CN3 also had a strong quarter and maintains its position as a premier product in the rugged mobile computer market.

We're pleased with the progress we're making in the North American channel, reaching many new customers in both the Systems and Solutions and Printer businesses.

We added approximately 80 new partners in North America in the quarter.

Enterprise spending on larger projects in the Systems and Solutions business is still modest in the quarter but clearly momentum is building.

We've seen solid adoption of new products in field service, parcel delivery and merchandising applications.

The sales funnel for larger deployments is strong and we anticipate the pilot phases in the first half will result in larger scale deployments starting in the second half of 2010 and into 2011.

As an example of our enterprise progress in the quarter, we secured two postal contracts.

One of them we're not disclosing publically, but we can say that it involves several thousand units of the CN50.

In addition, we publically announced the Canada Post win which will involve over 8,000 CN50 mobile computer units in the second half of 2010 and extends into the first half of 2011.

The CN50 solution will enable Canada Post to transform and modernize their postal network operations from end to end.

Through our advanced data capture and radio technologies, the CN50 will facilitate the communication between Canada Post planning systems and their employees in the field.

The CN50 is integral to Canada Post's objectives in mobile workforce productivity and real-time visibility.

In North America overall we had a modest decline compared to last year.

Setting aside the US Government business, North America grew almost 15% compared to Q2 of last year.

We experienced continued weakness in the US Department of Defense spending where business is currently very low compared to 2009 levels.

We believe spending has been redirected to other pressing demands within the Department of Defense.

This decline continues a trend we saw in the first quarter.

We anticipate some recovery of the business in the second half based on US Government spending seasonality and some recent RFP activity.

As I mentioned earlier, we had another good quarter for Printer Media sales results.

Our new Printer products combined with our channel efforts are demonstrating solid results.

On the Media side, we saw a 25% increase in revenue per customer which we believe is an early indicator of demand for more printer hardware in the future.

Turning now to the outlook and the second-half priorities.

As I mentioned, we have improving momentum in global channels, international sales, new product acceptance, printer media and the pilot activities on larger enterprise deployments.

Our objective is to keep that momentum going while continuing to drive for sequential growth in the business.

We anticipate some recovery of the US Government business in the second half.

We expect the service margins to return to the level of prior periods as Bob discussed.

We increased R&D spending in the second quarter to keep new products on track for the second half of 2010 and early 2011.

New products are a key priority for the Company and we are confident they represent significant growth opportunities as we reach new applications in the broader AIDC marketplace.

Our channel strategy is also important to the expansion of addressable markets.

We believe the progress we continue to make in reseller recruitment and two-tier distribution positions the Company well for long-term growth as the markets recover more fully.

The global Intermec channel program called PartnerNet which we announced earlier this year has been well accepted and we believe is providing a predictable and profitable business model for both Intermec and its value-added resellers and distribution partners.

I'll now turn it over to Kevin for the question and answer session of the call.

Great, thanks, Pat.

Jill, at this time we'd like to open up our call for our question and answer period, please.

Thank you so much.

(Operator instructions).

Please stand by for questions.

Our first question comes from Reik Read with Robert Baird and Company.

Sir, your line is open.

Hey, thank you.

Thanks very much.

Good afternoon.

Hey, Reik.

Could you guys maybe just start with the Service margins?

You talked about the Government issue there.

And it sounds like what you're suggesting is that business is maybe a little volatile.

Why does that -- why would that margin rebound so quickly?

It sounds like from your comments that the Government business might only kind of creep up slowly in the back half of the year.

Reik, this is Bob.

I'll start and then if Pat -- Pat may have a comment or two to add here.

I think in the quarter the Service business was impacted by FX but it was more significantly impacted by really the absence of professional services contracts or projects in the Government business.

Moving forward into the third quarter, we do have line of sight to some of that project business and then we've also had the opportunity to look at and will be managing our costs as appropriate to obviously drive a strong result in the quarter.

And is that -- when you say line of sight, is that to Government -- is that replacing Government business or is that away from the Government?

The folks that are there have in the past worked extensively on Government projects, but they have multiple project capabilities, so it's really about repositioning the assets within the Company overall.

Okay, and then can you just -- you talked about the product margins year over year.

Can you talk a little bit about the sequential puts and takes?

Just with higher revenue, those margins were down a little bit sequentially.

If you could tell us what that was about.

Sure, the largest -- so year over year, really the increase benefit from material cost reduction, some pricing disciplines that we put in.

I do believe that the channel program is having an effect positively.

Foreign exchange year over year was about a 70 point impact.

If we look at that sequentially, foreign exchange was a larger impact.

So it was closer to 150 basis points sequentially from the first quarter to the second quarter.

That was the largest single driver.

The rest of the items as far as product mix and things were pretty neutral.

We did see good traction in terms of new product volumes.

That was really what drove the volume increase in the quarter.

And those margins were about where we expected them to be.

So really it comes down to the exchange rate had quite a substantial impact especially in Europe and at the aggregate level almost 150 basis points.

Okay, great.

Thank you, guys.

Thank you.

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

Your line is open.

Good afternoon, guys.

Good afternoon, Chuck.

Hi, Chuck.

I was just wondering what kind of the linearity of the enterprise business was throughout the second quarter?

And I know you mentioned the postal order.

I mean, how do you see that business?

Will it ramp up as the year goes by?

Yes, let me comment on that, about the sort of the shades of what's happening.

A few things, I think, are important.

One is that our new products are being well accepted and unit volumes are meeting or exceeding our expectations.

We have many pilots, both in the funnel as well as pilots underway.

And in fact the funnel is about 50% stronger than it was at the beginning of the year.

And the pilot activity, or the work and the volume that's in the funnel, is hundreds of units to thousands of units of deployment.

So really what's happening is it's building.

I think it's stronger than it was a quarter ago in terms of total funnel size.

And it's really about those being successful pilots and then scaling them.

Got you.

Okay.

I'll jump back in the queue.

Thanks.

Thank you.

Thanks, Chuck.

Thank you.

Our next question is from Tavis McCourt with Morgan Keegan.

Your line is open.

Couple of questions, thanks.

I wondered if you could maybe provide a little more (technical difficulty).

Hey, Tavis, you seem to be breaking up.

Can you resay that, please?

Mr.

McCourt, could you repeat your question, please?

Your line is breaking up.

Hello.

Very good, sir.

Oh hi, sorry about that.

I was wondering if you could talk a little bit more about the DSO trend.

It was obviously very good in the quarter, but did that have anything to do with the linearity as well?

No, the linearity was -- in the quarter, Tavis, was probably just a little bit better than we'd seen in the most recent quarters.

But really, part of the impact on the DSO is that the new PartnerNet program that we have has a favorable impact on our DSO.

We -- instead of cutting checks to issue rebates back to customers, essentially it's a netting.

So we picked up probably about three or four days favorable in the DSO just due to the contract change.

A comparable number would be more like 58.

That's comparable to the 60 to 61 days we've been running.

So we did have improvement in the quarter.

The receivables are being managed well, but part of that is a little bit of a change in process.

Okay, and Pat, a couple of things.

Your biggest competitor in the market is clearly growing a little faster on a year-over-year basis.

Do you believe that's more related to their focus on various different verticals or is it more related to market share losses in terms of not having the right products in the market?

Yes, so let me just outline what I think is the comparable data.

If you take out the US DOD business, and I realize that at a Company level we don't take that out.

But setting that aside for a moment because that has had a significant impact as you can see.

North America was 15% up year over year, setting aside North America -- setting aside US DOD.

If you look at that on a global basis we grew revenues 12% all-in, currency, everything, year over year.

We believe that 12% year-over-year growth is consistent with and in some regions exceeding our competitive -- the competitive rates of growth.

So I believe we're in the right categories.

We -- with the CN50 and with the CK3 these are mid-tier market products and we believe the channel growth that we're experiencing through the SMB channel, through two-tier distribution, is meaningful momentum that we've got in those channels.

It really is.

I think the next level of growth comes from continuing to build that as well as seeing these enterprise larger deployments transition from pilot to scale deployments.

Anyway, the number that I would leave you with is 12% year-over-year growth in Q2, all-in, with currency.

And highlight some of the international numbers to see what those look like on inspection.

Okay, that's helpful.

And then tell us what you see in terms of RFID.

Right now there's been -- it looks like a little more activity recently, especially in the retail vertical.

Have you guys seen it in some of your products that are a licensing business as well?

Yes, let me outline a couple of things related to this.

So the recent announcements are at item-level apparel tagging.

We anticipate that that application will grow.

We believe right now it's in the pilot testing certification phases.

So early, it's still early days on that.

We believe the next phase would be building the business processes and support infrastructure around that.

Intermec is in the testing and certificational phase on these, along with other RFID suppliers.

So we're engaged on -- in that area.

Intermec also benefits from IP revenue.

If and when our IP licensee partners sell tags, fixed readers or hand-held readers.

We are seeing -- so that's the commentary I can give you on the item-level apparel tagging news recently.

Other RFID applications are, for example, reusable asset tracking for pallets, crates, containers, as well as for electronic vehicle registration applications in the international markets.

Got you.

And final question, over the last, I guess, six to nine months there's been some sales management changes.

And I was wondering if you can kind of detail what the structural changes that the new sales leads have brought to the team, how much turnover there's been and kind of when would you expect enough stability in sales leadership and sales teams to expect kind of a real bump-up here in direct sales business?

Yes, so Jim McDonnell joined the Company in January and Jim has already made big contributions.

And you can see in the sequential growth of Q2 compared to Q1 we have a very strong sales team on a global basis.

One of the big changes over the last six months has been the introduction of PartnerNet which we believe is already delivering solid results in reseller recruitment as well as in overall channel growth through two-tier distribution and the number of active resellers.

We also -- so I believe our sales leadership team is stable, that we have the strong focused team going forward.

They're very engaged with customers, with partners.

And we've got a lot of great results already, and we have a very strong funnel.

The sales turnover within the organization, sales personnel turnover within the organization has been very small, under -- within Jim's organization on a global basis.

Great, thanks a lot.

You're welcome, Tavis.

Thanks, Tavis.

Thank you.

Our next question comes from Ajit Pai with Stifel Nicolaus.

Your line is open.

Yes, good afternoon.

Hi, Agit.

Ajit.

A couple of quick questions.

I think the first one is more sort of in in terms of use of capital.

What -- could you tell us a little more about the Board's thinking sort of for uses of the cash, the focusing on a share buyback rather than on acquisitions.

Any further color there and whether the Company itself is potentially considering scaling the business inorganically?

Ajit, I'll start with a couple of questions and Pat might have a comment here, too.

So on the share repurchase the Board looked at really the availability of cash, our ability to generate cash going forward, and believe that a share repurchase program and the opportunity to return some cash to shareholders was a prudent program to have authorized.

We do expect to commence that program in the third quarter.

We'll be looking at alternative uses of cash across multiple things as we balance the spend there with other potential opportunities.

I think we're -- we know that there's activity in M&A but our policy would not be to comment or speculate on anything in that area.

Going forward, yes, Jim and the question that Pat was just talking about with sales management, we think that there could be investments that would make sense there to grow the business organically and we'll be evaluating those going forward really from now on.

Right.

And Pat, did you have any comments on like being more active in inorganic growth for the Company or is that something that isn't really a part of the strategy for Intermec?

Well, Ajit, what I'd just say is that we wouldn't be commenting on -- just as a matter of policy on anything related to acquisition activity.

Okay, but not even whether there's a focus on identifying things in general over there?

Yes, I would say that we are evaluating the landscape related to product category growth opportunities, opportunities in the key verticals that we're focused on, but I wouldn't say anything beyond that.

Okay.

And then the second question is just looking at in the retail shop floor right you've watched the smartphone manage to start penetrating that.

I know that that's not an area that's been a heavy focus for Intermec in the past.

But are you seeing smartphones right now start entering your traditional markets where you've been selling your devices?

They've gotten much more ruggedized, the capabilities have improved a lot and the number of applications that are available on a number of these smartphones have been increasing.

So are you seeing them as a greater competitive threat or you believe that they're not a competitive threat in your verticals?

I believe in the core markets in which we compete, which is critical line of business applications where the uptime and reliability and performance of the hardware, combined with the software through our partners, is a critical line of business application, combined with the compelling total cost of ownership that we provide.

And as I said the entry into mid markets like with the CN50, we believe that is the compelling business proposition for the companies looking for these kind of applications.

So actually in a number of places we have competed and won against smartphone alternatives, in some places.

But it's not a primary focus for us.

Obviously, we watch that trend, but our focus is really on these customer applications and we believe the compelling economic event is there for rugged business solutions that we provide with our partners.

So if you step back and just look at the business model in terms of the growth and operating margins may be a couple of years out, what is the target model now based on the sort of business mix that you think you're going to have?

Well, we believe that the target business model that we've outlined before where we are able to grow the top line by double digits and achieve -- and what we've outlined is 33% operating expenses, 43% gross margin, those are our-- that's our target business model that we're focusing on.

Right now, of course, the -- we've got to get the top line growing.

We are -- we did grow the business sequentially but that's our go-to point.

Got it, thank you.

Thank you.

Thank you.

Our next question comes from Chris Quilty with Raymond James and Associates., Your line is open.

Mr.

Quilty?

Yes, I'm here.

Thank you, your line is open, sir.

Okay.

Question for you guys on the Government business.

This is the second quarter in a row where you've hit a real rough year-over-year comparison.

And given that we don't really have the sort of dollar amount visibility, haven't been able to back into it, maybe you can help us as you look out into Q3 and Q4 are you still facing negative comparisons or at what point does it likely not become a drag?

In Q3 we do expect -- I mean just looking into the second half, just speaking about Q3.

We would expect Q3 to be sequentially improved from either Q1 or Q2 but still year-over-year down in Q3 compared to Q3 of last year.

And I can't really comment on Q4 at this point but we would -- but it would have less of an impact as the year progresses than it has in the first half.

As you may well remember our North America results in Q1 were down 30%, Q1 compared to Q1 of last year, but it was flat without US Government.

That's a 30 point delta.

And now we're talking about in the teens, 15% up without.

So we're clearly building momentum outside of US Government and we expect some recovery in the second half and -- but I think for the remainder of the year that those comparisons would still be in place.

Okay.

And you didn't mention and so I'm assuming you're not having any problems with component shortages which is something we've seen throughout the IT supply chain?

Right that isn't an issue for us.

And is that -- would you attribute that to specifically the types of parts you're dealing with or the partners you're working with?

I'd say that our unit volumes are strong on new products, and as I said there's a lot of momentum.

We're able to -- really, the partners that we're working with and how we're managing the supply chain, I would just say it's a combination of design, supply chain management and the partners that we've -- the partnerships that we've established with our supply chain partners.

Okay.

And there were two questions asked on the call, one regarding resurrection of the item level RFID opportunity and the other being smartphones.

And you've got significant pieces of litigation in both of those areas and haven't really talked about them in awhile.

But are there any sort of milestone trial dates in either of those major cases that would be coming up any time soon?

Chris, this is Bob.

There are -- the legal proceedings are moving forward.

There is nothing that is imminent at this point in time.

And as you know, these can stretch out for a long period of time.

Well, it's been a couple of years already.

It has been and we don't anticipate a quick snappy resolution of it.

It's going to continue to take a little bit of time.

Okay.

And a final question here regarding the improving funnel on the large enterprise business.

In essence are you still facing the same sort of competitive situation you have in the past or have there been any changes in those dynamics?

I'd say that the competitive dynamics are similar to what they've been.

We focused a lot on making sure that we help solve our customers' business problems with our partners, building the partner program and differentiating on our product capabilities.

There hasn't been a significant shift in that competitive landscape over the last months.

Okay.

Great, thank you, gentlemen.

Thanks, Chris.

Thanks, Chris.

Our next question comes from Andrew Abrams with Avian Securities.

Your line is open.

Thank you.

Question on new product margins.

I realize as they first came out you were under margin pressure.

Are we making progress there in terms of new product margins since you're starting to sell volume?

Are you at the target where you thought you would be at this point or are you close to your -- what you get -- what you would expect your kind of terminal margin to be?

Andy, this is Bob.

So those margins that we have gotten on those are what we expected near term.

We do have both the desire and expectation that we'd be able to expand that a little bit.

Volume as it continues to build gives us increasing leverage from that perspective, and then as the pilots roll out, as projects go on and as the additional applications in the verticals are proven, then I think it will deliver what we've expected.

Okay.

And on the new products that are coming out end of third quarter, fourth quarter, are we going to run through that same kind of margin situation or are some of these kind of further along in the new product category, meaning they're closer or similar to what exists out there now as far as your product line goes?

Well, there's probably -- it's difficult to put a blanket statement around that, I think.

We certainly have a general expectation that new products would be at or above the level of the products that they are either replacing or if it's an expansion to a product category or product line.

I wouldn't project at this point what that will look like.

I think it will be something that we're focused on very much obviously as we want to expand and improve the business model of the Company and the operating model.

Okay, and the partner program that you were talking about, the newer partner program, you said you added 80 in the second quarter.

Would you expect to add a similar amount in the third and fourth quarter or would you expect that that was kind of the easy fruit and it's going to get a little more difficult to add partners over time?

So we added 80 in North America and 130 in the international markets, so a little over 200.

And we have an active partner recruitment program underway and in fact we've reported in previous quarters the growth in the number of active partners that are engaged.

And we would expect to continue to grow partners within the SMB area and also strengthen our partnerships and continue to invest in growing the business with the partners that we already have as they're focusing on our key vertical markets.

So I think we'll see both, both a growth with the existing partners we've got and adding partners throughout the rest of this year.

Okay.

And enterprise pilot conversions, is there a -- I know this is a hard question to answer, but is there a timeframe for these pilots?

I mean, do they run six months, especially on the new product ones is just really I'm interested in.

Do they run six months where you're doing the pilot and then if everything goes well you see the first part of a bulk order being shipped or is there a different timeframe there?

Yes, I think that that's roughly the right amount of time.

These typical pilots which also involve business process integration and they're integrating in the mobile workforce process automation initiatives within companies, combined with the successful deployment within the workforce and some of the mobile business process changes that happen with -- especially in new deployments, those take several months.

And as I said the funnel is building and the number of pilots has built and the unit volumes are strong.

So as I had commented in my prepared remarks we'd anticipate that conversion the second half 2010 and into 2011.

Great.

And last, just one more on the component shortages.

If you're not seeing any component shortages, would you expect that your distribution partners are in need of product more than you can deliver at this point or are you satisfying the distribution channel as it's asking for parts or as they ask for full components?

We believe that we're meeting the requirements of delivery times with our distribution partners and resellers as a result of our ability to deliver against our commitments.

Got it.

Okay, thank you very much.

Thanks.

Thanks, Andy.

Our next question comes from Chris Marangi with [Gabriel] and Company.

Your line is open.

Hi, Chris Marangi, Gabelli and Company.

Just picking up on the RFID questions earlier.

Could you just review for us the size of the RFID patent estate and what you may be doing to keep that fresh?

The overall patents, I think we've talked about this before, Chris, are in the hundreds.

As far as the freshness, we have an IP group that's always out looking to see.

We've added a little bit there but not a significant amount in the past year or so.

As far as keeping it fresh, we have internal development and things that we do on our products.

That's probably more from a product perspective as opposed to the IP specifically, but I think that's probably a high level summary.

Okay.

And I think heretofore you haven't sized that business or the RFID licensing and products business except to say that it's not yet material.

But would you care to characterize the growth of those revenues?

Well, right now I think we haven't broken that out separately.

At this point in time I think there are projects that are being identified and things but we haven't seen any significant growth in those at this point.

I think per the earlier questions we see some opportunities both in asset tracking tagging, the international waste managements, and then of course this -- the latest news that's out there could create opportunities for us on some of the product side or through our licensees with IP.

We do anticipate -- this is Pat.

We do anticipate that we -- we have a strong position and we believe we have core intellectual property here.

And that as RFID gains adoption through the item level apparel tagging as well as through others that we're in a strong position to -- and we have a strong licensing program to be able to grow that IP revenue in the future.

Great.

Let me ask one just here-and-now question on the Printer business where you continue to show some momentum.

Where are you in terms of mobile printer attach rates and how big an opportunity is that for you?

Well, we continue -- that is a key opportunity, we're the only company in this market space that has both computers and mobile printers and so we are -- we are making progress on attaching mobile printers and mobile computers.

We have very compelling offerings on both sides.

We have key performance advantages and it's a sales initiative that we've got.

We've made progress and we continue to believe that that represents a growth opportunity for the Company.

And that's through the channel as well as direct?

That's right, that's right.

Okay, great, thank you.

You're welcome, Chris.

(Operator instructions).

Our last question at this time is a follow-up from Reik Read with Robert Baird and Company.

Mr.

Read, your line is reopened.

Thanks.

Could you guys maybe just define what you mean by pilot programs?

And I guess I ask from the standpoint that just the normal course of business there would always be some element of pilot and things moving on.

Is there a reason that there is such a high level of concentration right now and is it in a specific industry group?

And are you talking about lots of pilots that might roll out a little bit, or are there just a couple of pilots that might turn into really big programs?

Yes, so the -- what I mean by a pilot is where a customer through a partner or direct is engaging -- has dozens or maybe ten, twenty, fifty, a hundred, typically dozens of units in an initial deployment.

So for example they would have many distribution centers and pick a couple of them to deploy the technology to in order to get it to work, integrate with the back office systems.

So when I speak about pilots, what I'm speaking about is place where the initial deployment that we've got now is going to get multiplied by some number in the future as -- where it's going to go from dozens to hundreds to thousands.

Now I would say that there is also -- the pilot activity and the unit volume growth we've got so far is not on just a few big deals.

We have many, many projects underway that scale from hundreds of units potential to thousands of units potential.

So the combination of our -- the product categories that we're competing in, the channel expansion that we've got and the nature of the field service applications -- we're going after parcel delivery, direct store delivery, these are touching many customers.

And so we do have some as well that are dozens and then a couple hundred and can translate into thousands in the future.

We have announced the Canada Post one; that's a large deployment.

And so we anticipate that this is both broad-based as well as next-generation technologies in some of our traditional markets.

So it sounds like what you're saying, Pat, this is a function of you've introduced a series of new technologies in the last couple of years.

Things are getting better and so as a result of things getting better these numerous programs are just going to expand and it very much is like the normal course of business?

Yes, I would say that the technology refresh cycle in this industry -- just call it five years.

And so during the recession of 2009 some of that was pushed out and the capital was preserved.

And now operating managers, IT managers are looking at what are the best investment choices for IT spending in terms of getting an ROI in real business operations.

And so what we're doing is focusing on the compelling benefit to customers of investing in and driving a mobility solution.

And so I believe that combination of technology refresh, some of which was postponed, as well as the expanding applications and the channels we're working on, I do believe will have an accelerating effect out of 2010 into 2011.

Okay and then just I guess as a follow-up on that, the 12% growth that you talked about excluding the DOD, if we use that as the base and continuing to exclude the DOD just with everything that you've talked about, the capital improving, these pilot programs moving forward, the channel improvement, does that suggest that that growth rate should stay stable or should we see it expand?

Yes, I would say that we're in that neighborhood.

Again, we've guided for Q3.

We don't guide beyond that.

That's important to note.

We haven't broken out the US DOD business in our Q3 guidance and we won't be doing that.

But I do believe that that underlying adoption rate is -- we're in that double-digit area coming out of this recession because of the compelling benefits of mobility and the new products we've got and so on.

Okay, and just one last one.

On the R&D front, it sounds like what you guys were saying is that that will stay a little elevated here as these new products come out.

Should we expect that to come down at some point in the future to a more normalized level?

Like in the -- we guided for the-- I commented for the third quarter that I expect total expense to be $62 million to $63 million.

R&D will come down a little bit from the $18 million that you saw in the second quarter.

There are other -- so for example, marketing and the SG&A and selling, some customer demo units and things would pick up a little bit.

So it might come down a little bit but we'll continue to evaluate the right level going forward depending on our roadmaps and things.

Okay.

Thank you, guys.

Gentlemen, I show no further questions.

So at this time I will turn our conference back over to Mr.

McCarty.

Great.

Thanks, Jill.

For any follow-up questions please don't hesitate to reach out to me.

That will conclude our call for today.

And as always we appreciate you joining us on our call this afternoon and have a great afternoon and we'll speak soon.

That does conclude today's conference call.

You may now disconnect and have a great afternoon.