漢威聯合 (HON) 2010 Q4 法說會逐字稿

Welcome and thank you for standing by.

(Operator Instructions)

I would like to turn the call over to Kevin McCarty.

Good afternoon everyone, and welcome to Intermec's fourth 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 Chief Financial Officer, Robert Dreissnack.

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

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

Today's discussion may include predictions, estimates, and other information that might be considered forward-looking statements.

Under the Private Securities Litigation Reform Act of 1995, some of these statements that 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, the confirmation of the pending acquisition of Vocollect, by Intermec, and future financial and operating results of the combined Company along with additional examples that were set forth in today's earning release.

Both 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 opinion as of the date of this presentation and we undertake no obligation to revise or publicly release 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 lieu of, compared to GAAP financial measures.

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

A more complete description of what we consider to be forward-looking statements and about the factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements is contained in our press release and in our SEC filings, including form 10K and 10Q.

Copies of these filings may be obtained by contacting us or the SEC.

With that, I want to now transition to the next part of our call and turn it over to Pat.

Thanks Kevin and good afternoon.

Intermec reported fourth-quarter revenues of $200 million and earnings before taxes of $9.7 million or $0.13 per share on a GAAP basis.

Our North American region had a solid quarter growing 9% compared to Q4 of last year and 20% sequentially.

The primary driver was stronger enterprise spending on rugged mobile computers.

US Government business grew compared to the fourth quarter of last year, the first time we saw an increase in the business during 2010.

We believe we will continue to see improvement in US Government sales in 2011.

International sales continued with strong results.

They have delivered all year, growing 14% compared to Q4 last year.

These results reflect strength in our rugged mobile computer business, continued growth in printers, and good results from our channel programs.

We believe momentum is building for Internet products and services, thanks to our investments in R&D and sales and marketing.

Our R&D investments have resulted in multiple new product introductions, including most recently the 70 series, which is our new line of ultra rugged computers.

Our sales and marketing investments are driving substantial growth in channel and enterprise sales.

We believe the acquisition of Vocollect, the industry leader in voice solutions, reinforces Intermec as a clear market leader in warehouse solutions, and provides significant long-term growth opportunities for the Company.

I am 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 Q1.

Thank you Pat.

Intermec's fourth quarter revenue of $200 million represented a 12% increase from the prior year fourth quarter and was up 19% sequentially from the third quarter.

On a constant currency basis, year-over-year revenues were up 13% and the sequential increase was 17%.

On a GAAP basis, our fourth-quarter earnings before tax were $9.7 million, with net earnings from continuing operations of $7.9 million or $0.13 per diluted share.

This compares favorably to fourth quarter 2009 GAAP earnings before tax of $7.4 million and net earnings from continuing operations of $6 million or $0.10 per diluted share.

Turning to fourth-quarter revenues, on a regional basis, and compared to the prior year quarter, North America revenue increased 9% and as Pat noted, our US Government business delivered quarter-over-quarter growth for the first time, the last four quarters.

Europe, Middle East, and Africa, or EMEA, increased 15% year-over-year.

On a constant currency basis revenues in EMEA were up 23%.

Our other international areas also delivered strong results, with Latin America increasing 6% from a very strong quarter a year ago, while our Asia-Pacific region grew 30%.

On a product line basis, our systems and solutions revenue of $121 million was up 20% year-over-year and on a sequential basis grew 30%.

This was driven by strong growth in CN50, CK3, and CN3 products and included multiple enterprise sales both through the channel and with key direct customers.

Pat will provide more detail in his comments.

Printer media revenues of $43 million increased 5% year-over-year and were up 4% sequentially.

Our services businesses of $36 million, declined 3% year-over-year but increased 6% sequentially.

Total gross margin of 39.7% was flat, versus the prior year period, while increasing 90 basis points sequentially.

On a product level, gross margins improved by 70 basis points to 39.0% versus the prior year, and were up 110 basis points sequentially.

Service gross margins declined year-over-year by 260 basis points to 42.7%, versus a very strong fourth quarter in 2009, a comparison of 45.3%.

Our service margins on a sequential basis showed improvements of 50 basis points over the third quarter of 2010.

Total operating expenses for the quarter were $69.8 million compared to $63.8 million in the prior year quarter.

The fourth quarter 2009 included restructuring charges of $1.9 million, therefore the comparable operating expenses on a year-over-year basis were $69.8 million and $61.9 million, respectively.

Expenses for the quarter reflect our investment in new product development and the associated product launches, along with additional sales resources and marketing initiatives to drive fourth quarter and future growth.

Our tax rate in Q4 was approximately 19%, which reflected a base rate of 40%, less the benefit of the reinstatement of the US R&D tax credit during the quarter of $1.1 million, or about 12 percentage points, and the resolution of an audit in a foreign subsidiary, with the benefit of about $800,000, or almost 8 percentage points.

Moving to the balance sheet, we reduced of inventory by an additional $3 million in the quarter.

Our net inventories have declined approximately $19 million from our 2009 year end, and represent the Company's lowest inventory balance, since we began the reinvention of our supply chain in 2008.

Moving to accounts receivable, at the end of Q4, our receivable balance of $110 million was about $4 million above the 2009 year end levels.

Considering that our fourth-quarter revenues increased $20 million year-over-year, this is a very strong result.

The number of days in receivables was approximately 50 days at the end of the quarter, as a result of improved timing of revenues during the quarter, and improvements in overall aging.

Fourth-quarter cash flow from operations was about $17 million and year-to-date is approximately $22 million.

As of year end, our cash, cash equivalents and short-term investments, are more than $228 million.

We ended the year with no debt outstanding.

And as we look to the first quarter of 2011, we are viewing that first quarter revenues are expected to be within a range of $162 million to $170 million, which represents growth of 7% to 14% from the prior year first quarter.

First-quarter earnings per share on a GAAP basis are expected to be within the range of minus $0.02 to positive $0.02 per diluted share.

We anticipate the effective tax rate for the first quarter will be approximately 41%.

And our earnings per share guidance assumes a diluted share count of approximately 60.4 million shares for the first quarter.

It is important to note that this guidance does not include the financial results or costs directly related to the Vocollect transaction.

The timing of Intermec's acquisition of Vocollect is subject to regulatory approval and satisfactory completion of other conditions to close the acquisition.

So, that concludes my financial comments and I will turn the call back over to Pat.

Thank you Bob.

To recap 2010, Intermec grew 3% compared to 2009, with approximately 25% operating leverage on incremental revenue.

Net of the US Government business, Intermec overall grew 11.5% in 2010.

International markets performed well for the Company in 2010, delivering 18% growth, with strong results in every region and segment.

Our North American business had mixed results, with a significant decline in US Government business substantially impacting our overall results in the region.

The overall North American business declined 8% for the year, with mobile computers and printers bearing the brunt of the downturn, in US Government business.

Net of US Government business, the region grew 6%.

During 2010 we introduced important new products like, the CN50 and the CS40.

We also expanded our global channel program and strengthened our global distribution network.

We made significant progress in North America by growing and leveraging the channel, improving distribution, and staying deeply engaged with major enterprise pilots and deployments.

The printer business also had a strong year, growing 9% compared to 2009, and 23% net of the US Government business.

With all of these factors taken into account, we showed sequential improvement in our overall results throughout the year and finished with a strong Q4 performance.

Turning now to Q4 specifically, the highlight for growth in Q4 was the systems and solutions business driven by sales of our rugged mobile computers.

The computer business results were strong in every region; we had excellent acceptance of our new products with the CK3 and CN50 both achieving record quarterly sales.

The CN3 also had a strong quarter, demonstrating the lasting value of this industry leading product, as customers continue to expand the CN3 deployments, they began before the recession.

The computer business was equally strong in our direct and indirect accounts.

We won several large deals in our target deployment environments - warehouse, direct store delivery, field service, and postal.

For example, there were 26 enterprise deals that generated $36 million, or approximately $1.4 million per deal.

This increased enterprise activity is happening in each region, as customers have tested the new technologies and are now in phased deployments.

The business was a good mix of technology refresh projects and new mobility deployments, where customers continued to replace paper-based processes with intermixed rugged mobile business solutions.

The channel also had very good results in each region and at every level of our partner net at program.

Midsize resellers grew over 30% compared to Q4 of 2009, and distribution delivered 24% growth compared to Q4 of 2009.

Our premier partners also delivered good results, since they are responsible for many of the large deployments I mentioned earlier.

Last, but not least, we saw solid recovery this quarter in US Government business.

We have improved results in the US Armed Forces and have been developing new business in the Federal Civilian Agencies, some of which began to deliver revenue in Q4.

We expect the US Government business to gradually grow in 2011, from the 2010 levels.

So we exited 2010 with good market momentum, and we're moving quickly to strengthen and accelerate that trend.

Turning now to important business development this quarter.

In January we introduced the 70 series of ultra-rugged computers.

This is the first time the industry has seen four major products introduced simultaneously.

These products are all based on the same platform and represent the highest performance, most rugged, computers in the market.

For example, the 70 series has the most responsive bar code imager in the industry, the highest performance computer platform, and the smallest form factors of all ultra rugged devices.

Furthermore, the 70 series products are the first, in the industry, to meet an eight foot drop specification, and we believe they will establish a new industry benchmark, for lowest cost of ownership.

The 70 series has a four distinct products sharing a common platform.

The CN70 is designed for field service, and transportation, and logistics.

Our CN70e, is intended for direct store delivery and route accounting.

The CK70 is planned for parcel delivery and courier and express operations.

And the CK71 is designed for manufacturing and warehousing operations.

Customer and partner interest in these products is very high, and we anticipate shipping the products starting this quarter.

When combined with our new products, like the CN50 and CS40, Intermec has a compelling product offering for each of the major price performance points.

In January we announced our acquisition of Vocollect, the industry-leading solution for voice in the warehouse.

Over the past 20 years, Vocollect has established technology and market leadership in the voice market -- in warehouse applications.

We believe voice solutions for work or productivity are still in the early phases of adoption, so there is substantial upside potential in voice.

We also believe there will be significant synergy between Intermec and Vocollect.

When we combine our leading products, strong channel networks, and customer relationships, it will make Intermec the clear market leader in warehouse solutions and give us the talents and technology base for extending voice into other attractive segments of the AIDC market.

As revenue growth accelerates we anticipate that the operating leverage will expand for the Company.

We believe that our strong channels, new products and services, and acquisitions, will be key elements to position Intermec for profitable growth in 2011.

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

John at this time we would like to turn our call over to the question and answer period and if you can provide the instructions on how to do that, that would be great.

Great, thanks Pat.

At this time we would like to turn our call over to our question and answer period, and if you could provide -- give me the instructions on how to do that, that would be great.

(Operator Instructions)

Chuck Murphy.

Good afternoon guys.

Good afternoon, Chuck.

Couple questions for you, first, can you give us your gross margin expectations for first quarter of '11, for the core business ex- Vocollect?

Chuck , this is Bob.

As you know, we don't normally quote an exact number, but I think what you should expect, is that it will be much closer to the level that you saw in this year's fourth quarter, as opposed to earlier in the 2010

Okay, and my question was, if we go back to fourth quarter of 2009, you guys beat -- and then the first quarter of 2010, things came a little bit lower than what you were expecting - is there something different this time around, that gives you more confidence?

Yes, you beat fourth-quarter, but you still feel good about your guidance for the first quarter?

Yes, let me outline this.

This is Pat.

I think it's an important -- important topic to discuss.

Let me cover a few points.

One is bookings have been building for six months now.

And our overall bookings rates are 15% to 20% higher than compared to Q4 of last year, and we finish with solid backlog entering Q1.

The average deal size is up 20 or 30% sequentially in terms of -- just look at the number of deals and the revenue from those deals.

I outlined that we have seen a number of larger deployments.

This is a good balance of different products, new products, technology refresh, new deployments - also we're seeing good growth across different regions.

Each of the international regions are performing and North America has improved.

The key thing that is the difference, is that of course, last quarter, Q1, we had the significant decline in our US Department of Defense government business and of course that comparison is behind us.

With those factors taken into account, I believe we have a strong base and foundation to build on in real market momentum.

Chuck, this is Bob, I would add that from a seasonality perspective, the guidance that we have provided is pretty much in line with what we would see seasonally.

The change from Q4 to Q1, with Q4 traditionally being our strongest quarter, and Q1 traditionally being the lightest quarter, within a calendar year.

I think that is pretty close to a normal trend with the guidance that we have talked about.

I guess the 4Q '09 to 1Q '10, was the more unusual trend and you are just expecting a reversion to the norm.

Is that safe to say?

Yes, more of a reversion to the norms would be correct.

As Pat said, the real factor that impacted Q1 and explained basically the entire decline from year-over-year there, was the government spending.

Okay.

Thanks a lot.

Thank you.

Andrew Abrams of Avian Securities.

I was wondering if you guys could put a little more color on the increase in the enterprise business?

You mentioned that the deal size was larger; is this a characteristic of new products, is it a characteristic of deals you have been working on for a while?

Is it, gee whiz, all of a sudden they're coming back to us and saying I need more than I thought, as opposed to spreading the deals out over longer periods of time, which I guess has been the case for a while.

Is there any way you can characterize that ?

I have two key points.

One of them is that we are in more deals, than we were a year ago.

Our channel has really delivered great results, as I said distribution had a very strong quarter.

We have added a lot of resellers over the last year, and our - sort of - midsize resellers in our program, grew 30%.

So the first point is that the number of deals we are in has expanded, because of our channel efforts.

And then if you just looked at the amount of revenue per those deals, and some of those deals are modest sizes, but that revenue per deal has grown.

Both of those dynamics has built a stronger foundation.

The way I would characterize that is, we are in the market recovery.

And we are, with these products, reaching -- delivering a compelling r y for people to upgrade or add new technologies.

In addition -- so that is the channel results in the quarter.

In addition, we saw these larger than $1 million deals, now we have been working on those throughout the year, and they are in phased deployments.

This was one of the phases.

Many of these have more phases in the future, and they - some of them have delivered them in the past, but I would say that we are in our technology refresh stage as these deployments -- as the pilot phase, is completed.

We thought both of those delivered in Q - a strong underlying channel business, as well as several multi million dollar deals, as I said 26 deals, delivering $36 million.

Got it.

Is there anything you can tell us about Vocollect?

I know the deal is not done yet.

I guess the number that has been bandied about is $120 million in revenues for the 2010 year.

If you could talk a little bit about that and maybe some specifics on the synergies in terms of their customer base versus your customer base, or their channel versus your channel.

If you could shed a little light on that.

This is Bob.

Let me start with some of the numbers, and Pat may want to come back with some comments on the synergies around the different customer sets as well.

The parameters that we laid out in the original announcement were that, their most recent full-year is expected to total about $120 in revenue.

They are obviously closing their books at this point, as well.

As a non-public company, that is a little tougher to finally project.

We believe that the growth rates in this area though are strong, better than the market average, if that is 10% plus.

And that in addition to that, we expected $10 million of revenue synergies in the first year after close.

The other things we talked about specifically were, we indicated we expected $7 million to $9 million of transaction related costs, and the amortization of intangibles was $10 million to $12 million in the first 12 months of the -- after the close.

The primary focus is on revenue synergies.

If I pause for just a second, we are looking at -- we will look for points of leverage, we will look for cost synergies, and the opportunity in the supply chain or the GNA structure, where we can leverage to spend, where we may have contracts that will benefit them, and where there may be overlaps, but the primary focus is the revenues.

The key thing I would add to that, is that the organic plan, that Vocollect has delivered over the last period in time, is strong, it's a growing business, it's a strong business.

So, what we want to do is also generate revenue synergy on top of that, and really, it goes both ways.

Intermec's technologies into Vocollect's customer.

And channel base is important and will contribute to the synergies.

It is also true that Vocollect's technologies into Intermec's warehouse deployments is a significant portion of the synergy.

We see it going both ways - leveraging both channels, both sets of customers, to deliver warehouse solutions, and that is the focus of our year one deployment strategy, with the two teams working together.

Just a quick follow-up on that, on a hardware view, would you expect the kind of offshore stuff that you have been doing, and the way you have been working your inventory levels down, would they have the same benefit going forward, not instantaneously -- I know they have a hardware piece and a software piece.

Would you expect that to follow the same track after a quarter or two?

I think it is too early to say what the supply chain leverage points are, but I think we're -- we are in the process of understanding what the opportunities may be.

We have a high-performance supply chain we have been working on as you know, and reducing inventories.

I think we'll take some of those key things we have learned and see how they can be leveraged for the benefit of the Vocollect business and at the same time making sure that we do the reverse as well, which is, what Vocollect has been able to develop to leverage into the Internet business.

Got it.

Thanks.

Thank you.

(Operator Instructions)

Chris Quilty, of Raymond James and Associates.

Good evening gentlemen.

I have a couple of questions for you.

First of all, if we could Bob -- perhaps help us a little bit with where you think the operating expenses are going to trend through the course of the year.

You had previously said the R&D expenses should come, down but you'll likely see a step up in some of the sales and marketing.

Yes, Chris.

I think -- if I step up to a high level, revenue growth is really going to dictate and drive what we do overall with expenses.

We would not expect to grow total expenses more than half the rate of any revenue growth, so that is an overarching principle.

Secondly, the investments that we would make would be in the selling and marketing area to accelerate that growth, to get to the points in the market that are growing, the customers that are buying.

On the R&D expense, I would expect that we will not increase our investment over the 2010 level, may bring it down slightly, it would probably be comparable to down slightly.

And then we are looking for efficiencies in the GNA area, the only real investments in the GNA area are around deployment of our global SAP system into Europe, and then also, management reporting projects that we have, to really increase visibility into the business.

Other items would be flat or we would be looking for efficiency.

So I think the overarching question is, expenses not to grow more than half the rate of revenue for the year.

Okay.

From your fourth quarter base?

From the full -- from -- well basically if your are to look at the full year 2010, more so than just the fourth quarter.

The fourth quarter, as my comment said, did include investments for product development and the related launches.

As you know we just announced five key products with the 70 Series and the CS40.

And then also, seasonally, typically the fourth quarter is the highest for selling and marketing as well.

Chris, you could just look at each of the quarters of last year and look at that trend of growing revenue less that half -- growing expenses less than half the rate of revenue.

That would be a good way to look at it.

Okay.

Speaking of new products, years and years ago, not to dredge up the past, you had some issues when you announced new products and the channel basically froze up waiting for the new products.

Are you comfortable, clearly with your guidance, that there is not going to be any major issues there?

Yes, I think that the momentum on the CN50 is very strong; it has built all year.

As I said, Q4 was the highest revenue quarter in that product's -- since we introduced it.

The CK3 also very good -- the product is more than two years old and had a record quarter.

The CN3 has a very strong 2010, even though its a product that is several years old.

The reason is, that it is such a solid product and the deployments have been really invested in.

I think that the 70 Series product.

Furthermore, a couple of those models, the CK71 and the CK70 are new form factors for the Company, so this represents incremental business that we have competed for in the past.

Okay, great.

Also, I think - at least I'm hearing, from the channel, that you guys made some decent size changes with your sales structure, specifically on the printer side.

Can you give us an idea of what you see happening with your sales force and sales strategies on a go forward?

Yes, our sales strategies, without getting into the organizational specifics, we have a strong focus on building channel, and channel management.

You know the printer business is a channel lead business.

We have really significant investments that we have made over the last couple of years, building our channel for printers, and of course our computers as well, so we have a focus there.

Then we have a focus on our direct accounts.

Those are all within -- managed within the regions, so we have both those kinds of resources.

We had good results in printers in 2010, and we think that the -- some of the modifications that we have made going into 2011, will continue to build the printer business.

Okay.

Final question.

For a quarter where you are getting ready to introduce new products - your inventory came down quite a bit, does that just reflect the fact that you are now out -- off shoring the production?

Yes, the indent supply channel, I'll have Bob answer this in just a minute.

The indent supply chain work that has been done, is really looking at all the nodes of the supply chain - with our distribution partners, with our shipping lanes, with the inventory that is held in bumper stock, all that has been really engineered over the last couple of years.

We have good performance and on-time delivery, and so on.

It's really performing at the design goals that we put in place a couple of years ago.

Bob, did you want to add to that?

Yes, Chris, I think there's a couple other things as you think about inventory going forward.

One, is the improvements that we have made, you know, can't continue forever.

But, I think we are in a really good spot where we are right now.

And that team has done a good job, working very closely, got strong tools in place for forecasting, so that we also make sure that we fulfill customer demand, and that we are in great supply position.

That's one of the things that I think we have done a good job on in 2010, is making sure that we have the right product, didn't have component shortages and things, as we went through the year.

I think going forward, we are trying to balance a couple of things.

One, is we do have the new products coming out.

We do expect revenue and volumes to increase, and we want to make sure that we are positioned correctly for that, turning the inventory quickly in support of that, In addition, we are balancing carefully the cost of freight, being impacted by oil and things.

And if I carry a little bit more inventory going forward to optimize my freight lanes and my freight mode, then we may consider that as well.

Okay, and I guess I Iied, one final question.

I know we are only part way into the first quarter here, but have you seen disruptions in demand coming out of the EMEA region, given debt crisis in Europe, and political unrest in the middle east region?

Chris, this is Pat.

Our Middle East and Africa team is -- had good results in 2010, and we anticipate good results in 2011.

Like everybody else, we are watching it carefully, but we don't really see much disruption right now.

As we reported, our EMEA results, Europe, Middle East, Africa results, have been strong all year.

We have good momentum and we anticipate continuing to build that.

Obviously we are watching the current situation, just as everybody else is.

Very good.

Thank you.

You're welcome.

Thank you.

At this time I show no further questions.

I would like to go ahead and turn the call back over to Kevin McCarty.

Mary, thank you very much.

We want to thank everyone for joining us this afternoon, and as always if you have any follow-up questions, please don't hesitate to give me a call.

That will conclude our call for this afternoon.

We appreciate, again.

Talk to you soon.

That concludes today's conference.

Thank you for participating.

You may disconnect at this time.[Event Concluded]