漢威聯合 (HON) 2010 Q3 法說會逐字稿

Welcome and thank you for standing by.

At this time all participants are in a listen-only mode until the question and answer session of today's conference.

(OPERATOR INSTRUCTIONS) I'd now like to inform all parties this call is being recorded.

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

I will now introduce Mr.

Kevin McCarty, Vice President of Corporate Development.

You may begin, sir.

Great.

Thanks, Lori, and good afternoon everyone and welcome to Intermec's third quarter fiscal year 2010 earnings release conference call.

With me on the call this afternoon are 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 Bob will provide a summary of our operating performance and discuss fourth 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 Securities Litigation Reform Act of 1995.

Some of the statements we make today may be considered forward-looking including, but not limited to, Intermec's expected financial performance as well as Intermec's strategic and operational plans along with additional examples that were 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 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 also refer to as adjusted items.

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

Please refer to today's earnings release, which contains and illustrates our reconciliation from GAAP to non-GAAP items.

If warranted, a more detailed description of the risk factors 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 copies of these reports, please visit the Investor Relations section of our corporate website.

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

Thanks, Kevin, and good afternoon.

Intermec had third quarter 2010 revenues of $169 million and adjusted earnings before taxes of $4.1 million, meeting our expectations.

Tax provisions were $9.2 million this quarter, which is in excess of earnings.

Bob will discuss this primarily non-cash expense in his remarks.

In North America, the US government business continued slow in the quarter but did show progress in bookings, which we anticipate converting to revenue in Q4.

North America revenue was down 6% compared to Q3 of last year but was up 4% excluding the US government business.

Bookings were stronger in the quarter for North America overall and we expect sequential growth in the fourth quarter.

International sales results were strong with 21% growth compared to Q3 of last year.

These results continue a trend we've seen all year in the international markets.

In addition, we saw continued strength in new product sales as well as strong results from our global channels.

Total gross margins and product margins increased both sequentially and year over year.

Service margins improved sequentially as we expected.

In the quarter, we introduced innovative new products and services, which I will outline in my later remarks.

We also completed the acquisition of a software company for our solutions business.

I'm now going to turn it over to Bob.

And then I will return to discuss our results in more detail as well as our priorities and outlook for Q4.

Thank you, Pat.

Intermec's third quarter revenue of $169 million represented a 6% increase from the prior year third quarter and was up 5% sequentially.

On a constant-currency basis, year-over-year revenues were up 9% and on a constant-currency basis, the sequential increase was 4%.

On a GAAP basis, our third quarter earnings before tax were $2.3 million.

The Company recorded a $9.2 million primarily non-cash tax expense in the quarter to align its year-to-date provision with updated fiscal year 2010 revenue and income estimates.

This true-up resulted in a net loss of $6.9 million or a loss of $0.11 per share, which compares to a breakeven earnings per share in the third quarter of 2009.

Our GAAP results included the impact of restructuring charges of approximately $1.8 million, which equates to $0.02 per share.

The Company's tax provision for Q3 of $9.2 million primarily reflects 3 items.

First, we reversed tax benefits recorded in Q1 and Q2 that were based on our then current forecast of full-year income.

Combined with a non-cash tax provision for our earnings in Q3, this year-to-date true-up is a total non-cash expense of approximately $6.2 million.

Second, we recorded a charge from steps we took to establish an international headquarters for our supply chain and international sales of approximately $2 million for the quarter, which is also non-cash.

Third, profits in certain foreign sales offices will be taxed in those countries and we will owe cash tax of approximately $1 million, which we recorded in the quarter.

These three items drove the requirement for a tax provision of about $9.2 million in the quarter, but as noted only $1 million of this amount represents a cash tax expense.

Looking forward, we expect that as annual profitability increases, additional pretax income will lower our tax rate to normal levels.

Additional disclosure and discussion of our tax rate will be included in our Form 10-Q.

Turning back to our third quarter revenues, on a regional basis as compared to the prior year quarter, North America declined 6%, impacted by continuing softness in US government sales.

As Pat noted, outside of the US government business, the remainder of North America grew 4%.

Europe, Middle East, and Africa or EMEA increased 11% year over year.

On a constant-currency basis, revenues in EMEA were up 21%.

Our other international areas also delivered strong results with Latin America increasing 62% while our Asia Pacific region grew 13%.

On a product line basis, our systems and solutions revenue of $93 million was up 6% year over year and on a sequential basis, this product line grew 8%.

Printer and media revenues of $41 million delivered solid growth, up 10% year over year but were down slightly from Q2.

Our services business increased 4% year over year and was up 5% sequentially.

Overall, gross margins of 38.8% increased 20 basis points over the prior-year period and 190 basis points sequentially.

On a product level, gross margins improved by 90 basis points to 37.9% over the prior year and were up 160 basis points sequentially.

Service gross margins declined year over year by 250 basis points to 42.2%.

Sequentially, our service margin improvement of 320 basis points was consistent with guidance provided on our last call.

Our total operating expenses for the quarter were $63.1 million compared to $61.2 million in the prior-year quarter.

Adjusted operating expenses, excluding restructuring charges of $1.8 million in Q3 of 2010 and $2.7 million in Q3 2009, totaled $61.3 million and $58.5 million respectively.

Third quarter 2010 expenses include the favorable effect of a gain from the sale of intellectual property of $2.9 million.

Excluding the benefit of the gain on sale of IP assets, our expenses reflect investments in new product development and launch along with additional sales resources and initiatives to drive future growth.

We recorded the remaining restructuring charges from our previously-announced programs of approximately $1.8 million in the third quarter.

These were primarily non-cash real estate related costs.

Looking at the balance sheet, we reduced our inventory by approximately $8 million in the quarter and $16 million from our 2009 year end.

Moving to accounts receivable, at the end of Q3 our receivable balance of $107 million was flat from our year-end levels.

While the ending balance increased from the second quarter, this was driven by the timing of revenue in the quarter, with September reflecting a higher level than June.

The number of days in receivables was 58 days at the end of the quarter.

During the quarter, we repurchased approximately 1.8 million shares at a total cost of $20 million.

These purchases were at an average price of $10.89 per share.

The Company's outstanding shares ended the third quarter at approximately 60 million shares.

Due to the timing of the repurchases, the average share count for Q3 was 61.4 million.

Third quarter cash flow from operations was $5.7 million and year to date is approximately $5 million.

As of quarter end, our cash, cash equivalents, and short-term investments totaled just over $211 million.

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

Now as we look to the fourth quarter of 2010, we are viewing that fourth quarter revenues are expected to be within a range of $180 million to $190 million.

Fourth quarter earnings per share on a GAAP basis are expected to be within a range of $0.04 to $0.09 per diluted share.

We anticipate the effective tax rate for the fourth quarter will be approximately 40%.

While our earnings per share guidance assumes a diluted share count of approximately 60 million shares for the fourth quarter.

That completes our financial comments.

And I'll turn the call back to Pat.

Thanks, Bob.

The highlight for growth in the quarter was our international business, where we continue a trend of solid sequential and year-over-year growth.

The international business was up 21% compared to Q3 of last year.

In each of the international regions, we had strong channel sales results and good performance from each of the three businesses, Systems and Solutions, Printer Media, and the Service business.

Year to date, the international business is up 19% compared to the first 3 quarters of 2009.

In Europe, Middle East and Africa, or EMEA, we had a number of important wins in transportation and logistics, postal, retail, and consumer packaged goods delivery.

We saw solid growth in distribution sales and indirect channels across the EMEA region, especially in Eastern Europe, Nordic, and the Middle East.

The pilot and first phases of deployments of new technologies was also strong, which is driving good growth in some of the larger European economies.

Many customers are committing to the first phases of deployment, which they intend to scale throughout the next quarters.

A typical example is where a couple of hundred units were deployed in the first phase of a project so far this year and now the customer's planning a multi-quarter rollout of several thousand units planned for Q4 and into 2011.

We also added about 100 new channel partners in the EMEA region in the quarter.

In Latin America, we had strong sales results with technology refresh projects in consumer packaged goods delivery.

We also saw continued progress in channel and distribution sales.

Also in Latin America, we had an important win in RFID.

The local government in Brazil's Rio Norte region will begin implementing an electronic vehicle registration or EVR system based on Intermec's RFID tags and fixed and mobile readers.

In Asia, we had a solid quarter in printers and rugged computers with good results in Australia, New Zealand or ANZ as well as Southeast Asia and China.

We held our APAC Partner Summit in Taiwan during the quarter and the summit launched our APAC PartnerNet program, which was deployed in the Americas and EMEA earlier in the year.

The event was well attended by partners from across the region.

Our North America business grew 4% compared to Q3 of last year, excluding the US government business.

There are a number of positive factors in the region including CK3 and CN50 new product sales, distribution sales in printer media.

We're seeing good progression, support, and feedback as it relates to our piloting activities.

There are a number of customers who have deployed a couple hundred devices and anticipate scaling those deployments in 2011.

We're also focused on increasing our sales coverage and demand generation with our channel partners as well as attaching services for those deployments.

Accelerating growth in North America remains a top priority for the Company.

We continue to see weakness in the US government business in Q3.

However, we did make progress in bookings for these customers and anticipate sequential improvement in the business in Q4.

There have been a number of Intermec wins this year under the AIT-4 contract.

We also won the RFID hardware portion of Homeland Security's Land Border Integration Initiative.

As we've outlined before, we've been building the channel sales organization in North America and we continue to make good progress.

Our channel program has gotten very good traction, excellent feedback from resellers.

It is now rated one of the top channel programs in the industry.

We added approximately 70 partners in the PartnerNet program in North America in Q3.

We also announced the addition of both Ingram Micro and Bluestar to our North America distribution network.

Ingram Micro and Bluestar are well aligned with our business goals and can provide the credit and inventory capabilities needed by resellers.

We anticipate this change will enable us to sell to more resellers in the future and grow our run rate business.

During the quarter, we introduced several important new products.

And in the coming quarters, we expect to continue this initiative.

As we outlined six months ago, we expect this year to be a significant year for new products and are making investments this year to continue to strengthen our product lineup to fuel long-term growth.

These investments are in R&D and sales and marketing initiatives related to new product launches.

Intermec has the broadest range of products in the AIDC industry to offer our customers and our new product development efforts are focused on building and sustaining this advantage.

In September, we introduced the CS40 rugged mobile computer, which is a new form factor for the Company and the industry.

It is almost 40% smaller and lighter than our CN50 and leverages many of the same technologies.

When the CN50 was launched a year ago, it was 30% smaller and lighter than previous models.

So it's clear we're making big contributions in industry leadership in rugged mobile product design.

Compact rugged design is a key differentiator for Intermec.

The CS40 delivers these benefits along with advanced data capture technologies as well as the robust software platform that supports applications.

Furthermore, the CS40 is compatible with Intermec's Skynax, smart systems and INcontrol managed services, which makes a significant contribution to the ease of deployment and data security for these devices as well as the long-term supportability.

The CS40 is designed for mobile workers in the merchandising, presales, field service and transportation markets.

The customer and partner interest in the CS40 has been positive and we anticipate shipping the product during the quarter.

We expect the product to make contributions to new business in 2011.

In addition to the CS40 and other hardware products under development, we have been introducing new solution offerings, targeted at adding value in software and services in our core vertical markets and applications.

Intermec is well positioned to deliver rugged mobile business solutions to our customers, both directly and through our partners.

The following are three examples of key innovations in this area.

Intermec announced the acquisition of Skynax software, which provides reliable and secure mobile communications and data management capabilities used in enterprise class applications.

Connectivity and secure data management are important in many of the deployment environments in our core markets, especially those requiring real-time proof of delivery and payment.

In fact, BDC recently ranked connection as the most frequent problem encountered by mobile device users.

Skynax is our solution to that problem and the one that has already been adopted by several large consumer packaged goods customers.

We also launched INcontrol services, our new managed services portfolio which allows customers to ship their day-to-day device management over to Intermec and our value-added partners.

Using a hosted, web-based tool set, this improves uptime and lowers total cost of ownership for mobility deployments.

Again, according to BDC, the use of services like INcontrol can save a company up to $300 per user per year.

So this key service will be very beneficial for customers engaged in consumer packaged goods delivery via service roles.

We also introduced VERDEX software, which is a joint development between Intermec and RAF Technologies, a leader in information extraction and data verification solutions in the postal industry.

VERDEX is the industry's first mobile version of address extraction and verification at the point of parcel collection.

This is a key solution complemented for the courier express delivery and postal companies because it improves the mobile business process by eliminating a major rework process called unavailable as address or UAA.

We estimate that address errors caused more than $200 million in extra costs each year in the North America region alone.

Looking forward, our focus in Q4 is to deliver sequential and year-over-year growth.

We have strong momentum in international sales as well as printer media and expect good sequential results for North America this quarter.

We expect to begin shipping the CS40 this quarter as well as starting delivering the new solution offerings we just discussed.

We're also planning significant new product offerings in early 2011.

We believe these investments will deliver growth in 2011 as these new products and service offerings ramp.

In addition to the new products and service offerings we've been investing in and preparing for the related sales and marketing initiatives.

I'll turn it now back over to Kevin for the Q&A section of this call.

Great.

Thanks, Pat.

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

Thank you.

Thank you.

We'll now begin the question and answer session.

(OPERATOR INSTRUCTIONS) Our first question comes from Chuck Murphy.

Your line is open, sir.

Afternoon, guys.

Hi, Chuck.

A few questions for you.

First, the sales kind of came in I guess at the higher end of your range.

I was just wondering how margins and OpEx reported compared to your expectations?

Chuck, this is Bob.

I think both the margins were in line or perhaps just a little bit better than we had originally expected coming into the quarter.

We saw the guided improvement in services from the second quarter to the third quarter that we expected.

Products were just a little bit better and we had some favorable mix with some of the international growth as well.

The operating expenses were a little below.

You'll recall on the last earnings call we said $62 million to $63 million.

That compares to about the $61.3 million level that we achieved.

I had included in the $62 million to $63 million some gain on the sale of the patents that we were aware of.

It came in a little bit better than I had expected.

Okay.

If I back out the gain, I back out the restructuring and I kind of use a more normal tax rate, I mean I get to like a EPS of about $0.01.

I mean is that about right?

Does that sound about right to you guys?

I understand your math.

I think it's-- I can't really project a non-GAAP tax rates.

So but I understand your math.

Well I was just wondering if the sales are on the high end and then the margins were as expected if not a little bit better and the OpEx was a little bit lower.

I was just kind of wondering how the EPS wound up on the lower end of the range?

I think it's-- I think they were consistent.

I think it would be the mix of the revenues and the contribution of the dollars from those.

So on an individual product margins came where expected and services a little difference in the mix of revenues toward products as opposed to services would drive some dollar shift.

Okay.

And then my other question was could you talk a little bit about defense sales?

Where are they today versus the kind of historic norm?

And will they be getting any better anytime soon?

Yes, I'll add a few comments on that.

So, so far this year the-- through the third quarter, defense sales have been low.

As I said bookings picked up some in Q3, which we anticipate shipping in Q4.

We're not guiding any-- we're not guiding in 2011 yet, but we do believe that the business will be growing as we're going forward.

It hasn't returned to the levels of 2009, as I had mentioned before.

It's down significantly compared to 2009.

But we do expect sequential improvement in Q4 and returning some growth going forward in 2011.

Got you.

No I think part of the explanation before was that they needed to authorize some more funds for Afghanistan and so-- or they hadn't authorized money for Afghanistan yet and so all the money was being funneled over there rather than on stuff like mobile computers.

Is that still the case?

I mean what needs to happen in order for your defense sales to pick up?

Yes, so I think that there's-- there was a significant amount of business we got for 2008 and '09 on the AIT-3 contract.

The AIT-4 contract people are, as I said, we have a number of wins there.

They're starting to spend.

So I think that there's a technology refreshers that will happen over the next several years as new opportunities emerge as well as frankly outside of the DOD applications and other federal government agencies we're seeing some progress as well.

Okay, thank you.

Our next question comes from Andrew Abrams.

Your line is open, sir.

Thanks.

A couple of questions.

If you look at the new product the CS40, are we looking at the same kind of ramp that you guys looked at for the CN50?

Is this-- in your mind is this going to ramp roughly the same way or is this a faster or slower depending on how you guys perceive this product?

Yes, I think that this will ramp similar to that.

There's an adoption cycle of the technologies which happens in the first quarter.

The way to think about this in the first quarter we get some distribution orders as well as early customer adoption as those devices are tested.

Then they go through a verification and deployment phase, which then shows up as more growth, three or four quarters later.

So we expect that the product will ramp, you put all that together, there's sort of a multi quarter ramp from the time we introduce it and begin shipping it.

So as I said, we expect it to deliver similar kinds of ramp as prior products and deliver new business growth in 2011.

Got you.

The recent focus on software, is this going to be in your mind, is this going to be a meaningful change in your revenue stream for one and should we expect to see this as all service revenue or how are you going to account for most of the revenue that goes on?

And is it going to be significant enough that you're going to start to break it out as a separate item or at least talk about it as a separate item?

Yes, Andy this is Bob.

Let me start with the classification.

So software for us is considered a product.

So it is in the product revenue stream today.

And as it builds, unless it became a significant number for us, I would expect that it would continue to be in there.

Going forward, we're looking to break-- to build the business from a solutions standpoint.

And Pat, I don't know if you had any comments on the solutions side of the business focus overall on how software factors into that?

Yes, so the way I-- we'll be reporting it in the segments that we've got, Systems and Solutions and Services.

The managed services business will be reported and our current plans are to report that as part of the rest of our service business.

There's a number of elements that make up our service business besides repairing hardware.

So we'll be reporting that in that area.

And I think it's premature to outline how big that business will be at this point.

But it's an important part of building a competitive advantage and solving customers' needs in the key industries that we're in.

We believe it's part of getting closer to customers and adding more value.

Got you.

And just-- anything left on the restructuring side or are we almost done there?

Nothing for the previously-announced programs.

Those were completed in the third quarter.

Okay.

Thank you very much.

Welcome.

Our next caller is Matt [McKee] on behalf of Tavis McCourt at Morgan Keegan.com.

Your line is open.

Hi, guys.

Thanks for taking my call.

Hey, Matt.

Had a couple questions.

The first is you addressed the R&D a little bit with the IP sale.

But where should we think about it on a run rate going forward?

So could you clarify the question?

Is this related to R&D spending or--?

Yes.

How should we think of R&D going forward, what sort of run rate?

Yes, so what we've got is I think Bob you can comment on the percentages.

But as we outlined six months ago that we were increasing R&D spending in this year, fiscal 2010, in order to get these products that were under development, some of which we've released and some of which are still under development.

And we-- our expectation is to as we're headed into 2011 to look at the ratios that how fast we grow expenses relative to revenue.

So we'll, again I don't want to guide any further ahead of that, but I think that the R&D spending is down from Q2 in Q3 and I think it's fairly stable where it is.

Yes, I think what I would add is sort of we did reduce R&D spending last year by about 10% versus 2008.

In 2010, we've brought it back up what I would expect for a full-year forecast is something that's close to 2008 but a little bit less, in the-- don't normally guide a line item on the OpEx but I'm going to start that and wouldn't really guide going forward into 2011, but you can tell from Pat's description the number of products that we've developed and released.

And our expectation is that that would continue at a similar level.

A similar level to 2008?

To the 2010 run rates.

Okay.

And then with the increased gross margin recently, do you guys see that as stable going forward?

And are you seeing any price competition in the market?

Let me start with the level we expect and we don't provide the guidance on the gross margin.

I think the third quarter was a good step forward for us.

We saw a similar pattern last year.

And then the fourth quarter last year was just a little bit better.

Volume improves our leverage ability.

And I would expect, based on the revenue, you could assume that.

Let me just make a few comments on gross margin.

We have made progress on improving gross margins and we expect to continue to make progress.

It's a key focus of the Company.

We believe there continues to be opportunities for streamlining the end-to-end supply chain as well as other cost initiatives.

We also believe that as we add more software and services to the mix that will help us as well.

New products are also an opportunity for current and future product line ups and it gives the opportunity for customers to get a range of price performance level from Intermec, which enables us to participate in a broader range in the marketplace without needing to bring the prices down at the higher end more premiere products.

It is a very competitive marketplace and I think it has been and we anticipate it will continue to do.

So by having a range of product offerings as well as some of these other attributes, we believe we'll continue to make progress on gross margins.

All right.

Thanks a lot.

Thanks, Matt.

Thanks, Matt.

Our next line is Ajit Pai of Stifel Nicolaus.

Your line is open.

Yes, good afternoon.

Hi, Ajit.

Yes, just looking at the CS40 mobile phone, mobile computer, it's beginning to resemble more and more the smart phones that are in the market.

I know it's far more comparable all of that but it's beginning to get that similar kind of form factor, which makes it very usable.

But just in terms of threat in the marketplace as you go out and you're out there with this product is-- are you beginning to see smart phones, Blackberry's, iPhones, etc.

begin to start reaching into your market?

And also if you are and they have hundreds of developers, application developers and those platforms, what are the steps you're taking to check that from your end?

Well, Ajit, what we're focused on with the CS40 is really the use cases where there's a real value to ruggedness and high functionality.

We deliver advanced data capture technologies.

We also make these products compatible with our software and our managed services capability, which really enables it to be very effective in deployment.

So our contribution is very much the focus on, again we've made the product more compact but we've made sure that it also delivers the core benefits people expect from rugged products.

But physically rugged as well as how they work on systems.

And we believe that's a key innovation.

And as a result, a product that is significantly smaller than traditional devices and has some of the styling as you've probably seen on the product that makes it very appealing to the target markets we've got, which is presales, merchandising, some field service applications, transportation.

And we believe that-- if we keep focused on those applications and the value we deliver that it offers the superior total cost of ownership to a smart phone or other alternatives.

In fact, the work that's been done on total cost of ownership shows it's a clearer differentiated position relative to the smart phone.

But we don't really think about that as the competition.

We really think about adding value to our customers in these applications.

Got it.

But are you-- do you really have the applications?

Because traditionally you've had the best and one of the most recognized devices out there.

So total cost of ownership, the value add is pretty apparent.

But when you're looking at your customers, I mean are they looking more for applications or are they looking more for the rugged nature of the device?

Yes, so there's-- so you have to think about these applications as enterprise class line of business applications.

These are things that are task-oriented, mission-critical tools in the hands of mobile workers to conduct business every day.

That's the focus of these applications.

We work with leading resellers as well as independent software vendors to deliver best in class applications with those hardware products as well as of course it delivers the infrastructure, the software infrastructure that enables those applications to really become robust, enterprise class applications.

That's the way to think about the application of these products and our customers.

Got it.

So then to the same point, the amount of content you're getting, maybe not in a [polar] device but when you do a deployment of like 50 or 100 of these computers, are you seeing the total average price per computer when you look at the whole deployment.

Are you seeing that static over the past five years, down or up?

So the overall -- this is reported in analysts' reports about the industry.

There is-- the development of the marketplace is in expanding mobility applications.

So many people are starting to use these.

And the reason is that the wide area network is available as an enterprise IT platform, so people are able to use these devices in wide area applications.

In order to do that, people are innovating with products to add products across their portfolio.

Intermec is leading this charge we believe.

What that's doing is adding unit count in devices that are a range of products.

There's still the strength of the really rugged products and those prices are relatively stable, but they're going down over time as all devices.

That's what happens with-- in IT businesses.

But it's not dramatically going down.

But you have to look at the product categories and the range of product categories.

It's a fully rugged and then some of these more field mobile devices.

And those are-- we're targeting those at specific prices that adds volume over time and builds new businesses.

Got it.

Thank you.

Our next call is from Richard Davis of Richard Davis & Company.

Your line is open.

Yes, I just wanted to follow up about how many pilot operations do you have with the CS40 at this point?

So the CS40 has not begun shipping yet.

As I said, it will ship in the fourth quarter.

So we have units out with some development partners.

And they're developing with the product.

But we have not begun shipping it to customers yet.

But that will-- we anticipate that happening in the fourth quarter.

I see and from enterprises that you've done business with in the past, is there active interest in the CS40?

Yes, there is.

So we've-- during the development phase, we have a very customer-oriented product development approach.

And so we've been-- as we've been developing the product, we've been discussing it with customers under nondisclosure.

And now, of course, it's public for the last month and a half.

And there's a strong interest in the product.

As a complementary product to some of the other ones that we've got because what it does is it allows a form factor and functionality that is, as I said, complementary to more-- high end premiere products.

We still believe it's a strong rugged-- it's really compact ruggedness.

It's a new product category.

So we believe we'll add business in the future.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from Eli Lustgarten of Longbow.

Your line is open.

Good afternoon.

Just a couple quick follow ups.

One, what's the incremental change in R&D spending in 2010 versus 2009?

How many million dollars or what is the change we're actually spending?

Yes, on the year-to-date basis, it's about $3 million to $4 million.

So it's about $4 million year to date, Eli, is what you're seeing.

And you'll recall the first quarter was actually less than the second or third.

And basically that's and are we expecting to keep it this run rate for a while is sort of the guidance I'm hearing?

Yes, as Pat talked, we've got new-- additional new products that will be launching early next year.

And so obviously the R&D spend is related to those product launch.

And then there's been a lot-- more volatility in the service profitability than you might have expected as well as revenues.

Can you talk about what's going on in the service business?

Is it basically not going anywhere or are we going to see some growth?

Or what's happening in that part of the business?

In the service business, I think from a profitability standpoint, the first half of the year was impacted by the significant decline in the government business, which included a significant service component previously.

We've obviously taken actions here in the third quarter as we had said we would to bring the service profitability back to a little over the 42% level and would anticipate continuing to expand that in the fourth quarter.

The service business growth really comes from attaching our service contracts to the devices that are sold, additional advanced services and the managed services that Pat has mentioned and that we had some announcements on recently and were included in the press release today.

That'll drive additional revenue growth at a pretty solid profit margin.

Yes, we do anticipate growing the service business.

As I said, we recently introduced INcontrol managed services.

We believe that's a meaningful opportunity for the Company.

And as Bob said, we've improved the margins in Q3 back more to the levels that we've seen in prior quarters after a dip, as we outlined last quarter in Q2.

Thank you.

You okay, Eli?

Yes, I'm fine.

Thank you.

I have no further questions at this time.

Great.

Thanks very much, Lori.

On behalf of Intermec, we sincerely appreciate you joining us this afternoon.

And that will conclude our call for the day.

Have a great evening.

This concludes today's conference.

We thank you for your participation.

You may disconnect your lines at this time.

Have a great day.