摩托羅拉 (MSI) 2003 Q3 法說會逐字稿

Good day and welcome to the Symbol conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the conference over to Mr. Rich Bravman, CEO and Vice Chairman.

Mr. Bravman, please go ahead, sir.

Thank you operator and thank you all for joining us on our third quarter 2003 financial analysts conference call.

Please note the conference is supported online with presentation content and can be reached at www.symbol.com/investor.

With me today are Bill Nuti, Symbol President and COO, and Mark Greenquist, our CFO.

Today we will review our unaudited financial results for third quarter 2003, including commentary on geographic and product mix.

In addition, we will present some key customer wins in our core businesses, update you on our inventory management and productivity initiatives, discuss progress we are making in our global services operation as well as our channel go to market program Partner Select.

We will talk briefly about RFID market, our opportunity and overview of our strategy and then will close with an update to 2003 guidance providing additional detail you requested on our 2003 guidance as well as texture on the new bookings and backlog metric we began providing in October.

Then, we move to the Q and A portion of the call.

Before we start, a brief disclaimer reflecting Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

Moving to the next slide.

Displayed on the screen is customary Safe Harbor provision.

Beyond that, let me caution that the numbers we are providing on today's call and on today's news release are unaudited.

We believe however that these reported results accurately reflect in all material respect, results that would be reported in our quarterly report filed on Form 10-Q for 2003 third quarter.

And where comparisons are made, results that will be reported in our 2002 annual report filed on Form 10-K as well as the Form 10-Q for the first and second quarters of this year.

As you are all aware, we have not filed our December 31, 2002 year-end results with the SEC as we are finalizing the document and our external auditors are finalizing their audit.

Our current work has principally to do with the processing of certain transaction information for periods covered by the restatement into a form appropriate to serve as record support for the timing of revenue associated with these transactions.

We are working with our external auditors to bring these matters to a close as soon as possible.

When complete, the 10-K, as well as 2003's 3-10-Qs will be filed with the Commission.

However, at this point, we're not in a position to provide a time table for those filings and until the audit is complete and the documents are filed, these results are subject to change.

During the course of this conference call we may make projections or other forward-looking statements regarding future events or the future financial performance of the company.

Such statements are just projections and actual events or results may differ materially.

Any forward-looking statements are further qualified by risks and uncertainties identified in filings Symbol makes periodically with the SEC.

Copies of our SEC's filings are available on request or by accessing our company's Web site www.symbol.com.

And lastly, let me say that the earlier reported Securities and Exchange Commission and Department of Justice investigation are continuing and we won't be able to address those issues in today's Q and A. Going forward, we will continue to provide update on the course of these investigations as events warrant.

Now, let's go to results for third quarter and for that I turn the mike over to Bill.

Thank you, Rich.

We are going to move to slide 3 if you are following with your presentation.

By the way, the charts we are using today are posted to the Symbol Investor Relations Web site, as are the charts we presented in early October that detailed financial during the period of restatement 1998 through 2002.

Also, as has been our prior practice, a replay of this conference call will be available beginning of November 5, through November 13.

Now, let's go into the numbers.

Third quarter revenue of 382 million was up slightly compared to restated third quarter of 2002 revenue of 380 million and a 2% increase over 2003's second quarter where we saw revenue of $375 million.

That said, on the next chart, which we'll discuss in a moment, you'll note that sequential and year-over-year comparisons are made more difficult due to the way we handled revenue recognition in our financial statements.

Product revenue in 2003's third quarter was $313 million, a year-over-year increase of 3% and a quarter-to-quarter improvement of 8% from $289 million.

This was offset by a 10% decline year-over-year in services revenue to 69 million and a quarter-to-quarter decline of 20% from 86 million in Q2.

The volatility of our service revenue has been mostly related to the timing of collection and not due to significant fluctuation in the market or our operation.

Symbol's underlying services business has remained flat during the last few quarters.

We'll talk more later on the plans to increase service revenue and gross margin.

Higher product revenue drove the year-over-year increase of $9 million in gross margin to $169 million or 44.1%.

Gross margin also saw a three point improvement sequentially up from 154 million or 41.1% in Q2.

Gross margin improvements were largely driven by increased product revenue, operational efficiencies in manufacturing, product cost reduction initiative; and improved inventory management.

Operating expense in the quarter at $140 million was approximately $6 million lower relative to the second quarter's $146 million.

Again in this quarter, we had expenses related to restatement activities of approximately $11 million.

These expenses were about 3.5 million lower than the 14.5 million incurred in Q2 '03.

Also, due to our continuing collection efforts in the third quarter, the quality of our receivables improved significantly.

This drove reduction in our allowance for uncollectable receivables of approximately $3 million, but negatively impacted DSOs by adding approximately 1 day.

Of note here, is an expense line item related to the company's late filings with the SEC.

While this issue does involve stock option, I'd like to point out this issue is unrelated to the stock option issue we discussed on our October 8 conference call.

Because of the late filings, all exercises of Symbol options have been suspended for all option holders and the suspension will continue until the company becomes current with all other periodic SEC filings.

The company's stock option plan include a provision that allow the exercise of option that are divesting or will vest during a period of suspension to be held in abeyance.

As an accommodation to both current and former Symbol associates whose options have been impacted by the suspension, the compensation committee of the board approved an advance program that allows associates whose options are affected during this suspension period right to exercise such option up to 90 days after the end of the suspension period.

This result is a new measurement date for those option which leads to non-cash accounting compensation charge for the intrinsic value of those vested option when the employee other terminates employment during the suspension period or within the 90-day period after the end of the suspension period.

Accordingly, as you see on the chart, the company reported approximately $8 million for affected option of associates who terminated employment in the third quarter 2003.

We anticipate that this issue will also have some impact in Q4 and 2004's Q1.

With the exact effect indeterminable at this time, but we believe it will be less than the impact in Q3.

You'll also note that other income expense had a swing of $6 million quarter-over-quarter from a positive 3 million in Q2 to a 3 million expense in Q3.

This unfavorable quarter-over-quarter move was a result of the portion of the Cisco sale agreement, shared appreciation income linked securities agreement that runs through the income statement of the company.

Third quarter net earnings improved to $12 million from second quarter's $9 million with a corresponding improvement in Q3 earnings to 5 cents per share compared to EPS of 4 cents in Q2.

The underlying improvement to the income statement are that much more notable when you recall that the expenses relate to restatement activity and the change related to stock option created a 6 cent drag on EPS in the quarter.

Next slide.

Before turning to our balance sheet, I want to give you some insight into our product and services revenue performance and address some of your questions from our conference call last month.

Many of you sought further clarity on year-over-year revenue comparisons.

This slide summarizes for you the quarter-over-quarter and year-over-year revenue comparison for the first three quarters of 2003 and 2002.

For the first and second quarter, you see that our revenue increased approximately 19% and 15% respectively.

However, in the third quarter, that dropped to 1%.

This chart clearly indicates what I discussed earlier, that sequential and year-over-year comparisons are made difficult due to our reporting of some revenue on a bill and collected basis, coupled with necessary other adjustments affecting 2002 revenue.

For example, as you see on the chart, in the third quarter bill and collected revenue recognition caused a drag of approximately $4 million on revenue while the year-ago quarter revenue was increased by about $13 million.

Now, let's look at 2003 balance sheet year-to-date.

Next slide, please.

Of note here is the company's continuing progress in managing cash, receivables, inventory and debt which have all trended positively during 2003.

Due to continued strong cash flow from operations and cash collection efforts, our cash balance increased to $121 million at September 30.

We ended the third quarter with $136 million of receivables, representing DSOs of 32 days.

The quality of bookings and revenue and overall collection efforts continue to be the drivers of our DSO performance.

Additionally, as we mentioned on our October 8th call, receivables and DSOs are lower cue to bill and collected revenue recognition.

At the third quarter end, we had $188 million in inventory, down from $261 million at the close of 2002.

In the third quarter, we had inventory turns at 4.5.

Continuing the positive trend that we've seen over the last three quarters.

Current liabilities continued their downward trend in third quarter as a result of the pay down of $15 million in short-term bank borrowings, resulting in no current borrowings under our bank credit facility.

Slide six, we are going to slide six statement of cash flow.

Briefly looking at our cash flow, we continue to see strong cash from operations with approximately $56 million in Q3.

You will also see that by generating approximately $176 million from operations in the first five months, we were able to pay down net debt by $87 million and increase our cash balance by $45 million to $121 million at September 30th.

Next slide.

This chart shows third quarter revenue by geographic theater indicating consistent quarter to quarter growth from each of our three theaters.

In the America, the revenue growth was primarily led by our continued success with enterprise mobility solutions within the retail vertical.

We also experienced good booking velocity from those verticals that serve as extension of the retail supply chain such as transportation and distribution, while gaining traction in the government vertical.

In the international theaters, we also experienced solid product revenue growth.

In our EMEA (ph) theater, changes in our leadership team, along with implementation of our management system are beginning to deliver results.

As we begin to turn the quarter, our business velocity is being driven by success throughout the retail supply chain along with more solid footing in our distribution channel as a result of Partner Select implementation.

In Asia/Pacific, we expect to announce several appointments to fill out the leadership rank as the team there is upgraded.

Japan, China and Korea continue to fuel our growth from this theater with significant contributions coming from our OEM products.

We have also experienced some important competitive wins in track and trace, in the postal and parcel delivery area as well as warehousing.

While we sense generally some improvement in U.S. economic conditions bolstered by a pick-up in business investment, we remain cautious with respect to calling it a longer term trend.

Customers remain very focused on return on investment, productivity improvement and competitive advantage as key to their decision criteria.

The pricing environment has remained stable, although a few of our competitors are getting more aggressive primarily due to market share gains we have made in some of their targeted markets, specifically in Q3.

We will discuss market share gains in much more detail on our Q4 conference call.

We're now moving to slide 8, revenue distribution by product group.

This chart depicting simple revenue breakdown by major product area illustrates the relatively consistent sequential product mix.

Our Advanced Data Capture product division, a combination of our scan engines and our discreet scanners experienced a good quarter with revenue of approximately $87 million, up about 16% quarter-to-quarter and up about 12% year-over-year.

We're seeing strong interest in new products launched in Q2, including LS2208-Handheld laser scanner and LS9208-Omnidirectional POS scanner.

Wireless infrastructure continues to show growth with Q3 revenue up 10% sequentially and 27% year-over-year.

The growth comes primarily from sales of our new wireless switch, the WS 5000 with customers and the market endorsing our pioneering wireless switch approach that provides inherently higher network performance, greater mobility with security and overall better management with a lower total cost of ownership.

Our mobil computing division experienced slower growth in Q3 with quarter over quarter growth of 4% to approximately $183 million while a year-over-year was flat.

Hand held key devices such as PDT 8000 and PDT 8100 as well as PDA form factor devices such as TPT 2800 and 8800 both showed quarter-over-quarter revenue increases in excess of 15%.

In particular the PDT 8100 and PDT 8000 families continue to make inroads into mobile field sales and service applications.

This is an area we need to keep an eye on as mobile CRM, that stands for Customer Relationship Management, applications are pertinent to all enterprise verticals.

Some of the early signs of Enterprise Mobility Momentum will come from uptick in implementation of CRM and ERM application, ERM standing for Employee Relationship Management.

The Symbol PDT 8100 was selected by one of the largest food distributors in North America which began rollout of approximately 7000 of our wireless LAN enabled mobile computing terminal in Q3.

The system will be used in an in-vehicle transportation system developed by our partner SAE, System Application Engineering for pre-sale, delivery confirmation and receipt to facilitate customer invoicing, to assure that customers receive the right products on time, every time and to improve overall customer care.

The system will be rolled out across the distributors nation wide delivery fleet during the next two to three years.

Moving to the next slide, slide nine.

As we announced earlier today, the world's largest home improvement specialty retailer, Home Depot, selected Symbol to provide nearly 40,000 Symbol P-370 ruggedize high performance wireless scanners for its point of sale application and mobile work force to maximize customer service, convenience and the overall shopping experience.

The Symbol P370 uses wireless communications to allow Home Depot associates to roam up to 150 feet from the register to complete customer transaction and assist shoppers.

The rollout, set to begin later this month, is targeted to be complete by mid-January 2004.

Symbol has teamed with Home Depot on in-store and supply chain solutions for more than 10 years.

Next slide, slide 10.

In Europe, Practiker (ph), a large home improvement and do-it-yourself specialty store leader there, has chose symbol PDT 8100 ruggedize mobil computer with pocket PC operating system and wireless connectivity to improve and implement additional ware housing in-store application in it's 342 stores located throughout Germany, Australia, Poland, Turkey, Hungary, Greece Romania and Luxembourg.

As Enterprise Mobility Requirements continue to grow, our customers are realizing the benefits of symbols unique, enterprise architecture combining mobile computing with our wireless technology.

Today, Symbol's enterprise mobility architecture provides improved performance, manageability, security and scalability with investment protection built in.

We are moving to slide 11.

DHL has been a simple customer for more than a decade with major installation and it's distribution hubs and in the hands of it's delivery personnel in both North and South America as well as Europe.

Now, Symbol has widened scope of this business with DHL into the Asia/Pacific region.

We are rolling out with an 1000 PPT 2800 mobile terminal for use by DHL express carriers in Malaysia, Korea, India and China to provide up to minute tracking information directly to customers.

In a press release DHL said, "With Symbol PPT 2837 we are able to upload realtime information for customers to access 24/7.

The businesses that rely on delivery companies as the supply chain, this can make a big difference."

We know, moving to slide 12, as you know data security is main differentiator of the wireless switch platform that we introduced last fall.

Now, Symbol reseller SC Logic has announced the first two sales of Symbol switched wireless infrastructure to U.S.

Federal government customer with two classified national research facilities choosing to deploy the Symbol WS 5000 wireless switch and access port based on a stringent security standards.

SC Logic is first reseller to be certified under partner selection sell the Symbol wireless switch to the U.S. government.

We are now moving to slide 13.

While the hospitality vertical market is in the emerging phase, the use of enterprise mobility architecture Symbol wireless networks in mobile computers is nevertheless a growing trend.

As we announced last week the MidEvele (ph) time inter feeder chains and NBA City Restaurant and National Basketball Association for Readers has deployed Symbol enterprise mobility solution.

The solution feature PPT 8800 enterprise PDA, combined with our wireless technology enabling these restaurants and entertainment venues with the ability to increase customer service and operating efficiency while installing an architecture that can seamlessly and cost effectively grow along with them.

Richard Dunn, Vice President of Merchandising for MidEvele time estimates that the system "will pay for itself in less than one year."

And Alberto Axion, Chief Financial Officer for NBA City says the system can quote "Streamline operations freeing up the hostesses and service and spend more time reading guests answering question and taking care of customer needs."

Next slide.

Several of you have asked about the progress of our efforts with our customer access technology business, also referred to as mobile commerce.

Retailers, both general merchandise retailers and especially food retailers in the U.S. and Europe continue their significant interest in this new way of doing business.

We are seeing growing evident that our portable shopping system will gather momentum in 2004.

We have the right product set, years of customer experience behind us and more importantly, it's the right time for a solution platform that improves customer service, decreases cost and improves employee productivity, increases revenue and builds store brand loyalty.

In Europe, with the system has been enthusiastically embraced for several years, we installed the system in 150 additional stores in the third quarter bringing our total there to 700 stores.

In particular, both Wattros and Saint Burry have added stores throughout their chains.

A year ago, Constanca (ph) installed the system in its hypermarket in Boidana Italy, the single largest installation with some 400 of our hand held devices.

Constanca has expanded the use of the system, it has installed for its rolling out the system to 9 of the 11 Hypermarkets. 13 of 38 Supermarkets and in all 10 of its mini-markets.

Here in the U.S., Albertson has expanded its very successful proof of concept pilot program to a total of 6 (inaudible) stores in the Chicago area.

We continue to see focus on new shopping modality in depending paradigm shift in the retail space, which will create significant new opportunity for solutions like m-commerce to make their way into the main stream.

Now, let's direct our attention to internal operation that Symbol were few words on inventory management where we have seen noticeable progress.

Next slide, please.

As I first addressed in our February conference call, inventory management is a high priority for us in 2003, with new management, new processes and controls, including a realtime management system to improve turns.

To give you a better idea of the improvement we made with our focused effort to drive down inventory we show eight quarters of quarter-end inventory balances.

Note the increasing velocity we've seen in the last three quarters in particular.

This remains an area of concentration and by continuing to gather better visibility into our backlog, we anticipate continued improvement along this trend line.

Next slide.

Slide 16.

As we have addressed and discussed on previous calls, we have fundamentally focused on two internal five-point plans.

One, focus on growth initiatives and one focused on improving profitability, increasing productivity and improving cash flow velocity.

We made progress in the area of employee productivity, which I will detail here.

As this chart shows we have succeeded in improving productivity growth year-over-year while stringing together three successive quarters of growth, although productivity is only one measure of operational improvement, it is increasingly important gauge of our ability to control long-term operating expenses by introducing new processes and tools designed to make us more efficient.

Next slide, slide 17.

As I said on the last call, we're focused on improving the quality of our service offering and we are fully expect the services restructuring work that is underway, as well as new service products and higher attach rates will result in enhanced customer satisfaction ultimately leading to better margin and expansion of overall revenue growth.

In our call center, we fundamentally changed our help desk and technical assistance center business processes.

More specifically, we have added telephone support personnel, retrained existing staff, installed new call handling system and improved our web-based self-service portal.

The result is that we effectively cut in half the average wait time for incoming calls while dramatically improving call center abandon rates.

We are also redoubling our efforts on quality building a new quality team from the ground up and implementing new procedures and corrective action plans.

Correspondingly, we are now driving our repair operation based on due date in order to better meet the customer requirements.

Although this is still a work in progress, we are experiencing incremental improvements weekly.

I want to announce we added another executive to our global services team.

Chris Shay, as Vice president of customer support operation.

Chris joins us from Hewlett-Packard, bringing to our service team 22 years of experience in customer and product support in field services, manufacturing, engineering, material management, quality, IT and motor services.

He also has five years of experience managing multi-national teams in Europe, Middle East and Africa.

In his new role, Chris will oversee our global call center operations, customer services engineering, critical account management and customer satisfaction reporting.

Chris is another great addition to Symbol leadership team.

Next slide.

As we announced yesterday, we have added a distribution partner, Westcon group, a global provider of networking technology products and solution providers, integration, dealers and evaluated resellers.

We are especially enthused about Westcon's significant presence in Europe in addition to its significant operations in North America, as well as Africa, Asia, Australia and South America.

Westcon brings a particular strength and leadership position in wireless networking that will help Symbol recruit and enable a new set of partners that we believe will result in additional mobility enterprise sales around the globe.

This is an important milestone in our go to market strategy that includes driving ever-increasing volume of sales through our channel.

As we stated during our last call, partner authorization and certification is continuing to ensure commitment to new parameters of the new program.

Symbol certification is accruing greater partner benefit in helping differentiate partners in the marketplace while ensuring customers are properly supported.

Moreover we continue to effectively manage sales in and sales out to drive optimal inventory balances while introducing new tools to our partners, which will result in a lower cost of doing business, improve loyalty and mind share and increase end-user satisfaction.

Before moving on to metrics and guidance, I would like to take a few minutes to talk about RFID on everybody's mind with Wal-Mart this week hosting a symposium on the important business technology solution.

Next slide.

As you know, Symbol has a legacy of leadership in Advanced Data Capture technologies and a track record of providing mobility solutions to a range of markets across the retail supply chain.

With past as prologue, our basic understanding setting framework within which to understand the strategic role of RFID technology in Symbol's plan.

Symbol has been actively engaged and participating in RFID initiative as driven by Wal-Mart and DOD.

Symbol was invited to attend and is demonstrating our RFID technology this week along with other vendors at Wal-Mart's RFID Symposium.

We are encouraged by positive feedback we have received to date from our core vertical and we will continue to drive toward world class RFID solution to meet the market requirement.

Symbol is both fundamentally committed and ideally positioned to lead in solutions around this technology.

We've been working in RFID technology for more than a decade and during that time have participated in and lead the industry dialogue on the subject.

Our view is simple and balanced, we will focus on RFID as part of total enterprise mobility solution and develop products under a standard space system architecture providing integrated platforms.

RFID will work with other data capture technologies in a complementary fashion to enable enhance standard based solutions based on intrinsic characteristics, including most importantly that of non-line of-sight reading.

Its application will be circumscribed by a fairly higher cost and other factors.

In thinking about this, it's useful to recall that things tend to move around in between organization in nested packaging hierarchies.

Items inside Multi-packs, intern pack inside of cartons, loaded on top of pallets, set in vehicles or containers.

RFID technology is finding application at the outer layers of this nested sequence first most importantly in supply chain application linking distribution load between manufacturers and retailers and in the military.

This is where Symbol is focused.

In these supply chain applications, barcode and RFID technology will work in concert with barcodes on cartons for multipack scanned in outer packs or pallets are assembled and capture data will be written into or linked with RFID tags placed on those outer layer packages.

At the EPC symposium in September, Symbol demonstrated prototypes of a mobile computer designed to address this requirement.

On the screen, you see a concept design from our labs.

These units integrate for high performance barcode scanning and a portable RFID interrogator capable of capturing electronic product code tags, the emerging RFID standard in retail supply chain application at distances in excess of 30 feet.

These multimode platforms anticipate still other aspects of Symbol's planned RFID based system architecture.

As first mover customer implement pilot program in 2004, Symbol will be there as trusted partner.

While the developing of this market may have less velocity than some would portray, we are investing to lead the market.

We look forward to providing updates on progress along the way.

Next slide.

Here is an update of the chart we introduced to you on our October eighth call.

You'll note we added to the chart, Q3 product revenue, which came in at 313 million.

With regard to our outlook for the remainder of the year, the annual guidance we updated on October eighth call remains un change, specifically approximate 10% increase over restated 2002 revenue of $1.398 billion.

Next slide, please.

From the previous backlog chart, you can see that we have good reason for short-term optimism, combined with dose of healthy caution.

In terms of appropriate caution we have work ahead in areas of global services business, supply chain operation, solution engineering and the overall human resources function specifically leadership development.

Now, in Q4 and into 2004, Symbol will continue to reorganize and restructure several core operations.

Although we are very focused chain management execution, coupled with dynamic organizational focus, change never easy is represents risk.

All of that said, the promise of upturn is incurred in other quarters of the technology industry, as well.

In particular, we are adhering more from industry leaders and customers on the topic of enterprise mobility.

According to industry analyst firm Gardner, 55% of large companies plan to move pilot mobile application into production this year.

The primary reason is competitive pressure.

With customers and trading partners growing more demanding about speed and quality of service, large businesses need to get useful data out to mobile workers.

At a recent conference Gardner said it anticipates technology spending is poised to return to solid growth as companies shift focus from cost cutting to innovation that drives sales.

Gardner is advising its 10,000 corporate and government clients to spend more in 2004 on wireless networks web services and technologies that help businesses grow.

To quote Gardner, companies will make the turn from protecting profitability to driving growth.

Three other prediction from Gardner were rapid shift to secure, high-speed wireless networks within many organizations, as well as evolution to a more mobile workforce and the growing demand for realtime access to information.

All of this plays to Symbol's strength and gives us confidence.

Thank you for joining us today.

Rich, Mark and I will take your questions.

Thank you, gentlemen. [operator instructions].

We will take our first question from Scot Ciccarelli with Harris Nesbitt Gerard.

Hi, guys.

Can you hear me?

Yes, we can.

Yeah.

I guess my question is regarding the service business.

Can you remind us of the changes that you implement in terms of revenue recognition first of all kind of when those changes occurred?

And then is there any reason to believe that the Partner Select program could be impacting the service revenue?

Sounds like you are suggesting it is a timing difference in terms of when you receive payments, but could the partner select program have an impact on that?

Thanks.

Hi, it's Mark.

What we did in restatement actually went to a bill and collected basis on all other service revenue.

So that now in the numbers that we presented to you on October 8 is consistent over that entire period and that also continues in the first, second and third quarter of '03.

Okay.

And -

This is Bill.

In terms of Partner Select.

Partner Select is introduction of new channel programs has not had yet a negative and/or a positive impact on our revenues.

We do expect, however, longer term, particularly as the tax rates come up within the channel as we get smarter about how that skew up services products in the channel, we'll have a positive impact.

The second thing you need to recognize is that, now as we move to supplying the services for our partners as oppose to they competing against us in the market that will also have a positive impact longer term.

I would not expect, however, given the way we recognize revenue and services today under cash basis methodology or even as we move back to accrual basis accounting methodology for you to see substantive impact in 2004 with the exception that we do expect that both the combination of the two will have a positive impact more toward second half of 2004 because as you know, we amortize the service revenue over a longer period of time and then into 2005.

I guess specifically, are the Partner Select program partners, are they properly incentivize to attach the services?

Today that is not the case.

However, as we go into next fiscal year and we re look at the ways in which we're driving rebate structure and the overall discounting structure, that will certainly come into play as we move forward.

This year we took a first small step in the right direction with respect to working with our partners in terms of training them on services and the impact, as well as asking for higher level of service attached.

I have to tell you, we've only asked for 5% service attach rate this year.

Next year that will be higher service attach rate.

Our longer term goal is to have service attach rates in 80 to 90% range for both the direct and through the channel.

Okay.

Thanks.

One other question, if I may.

You guys had mentioned you are happy with the quality of your receivables, quality was improving.

Did that imply some sort of issue before?

I'm looking for clarity and then I will turn the floor over.

Hadn't really been this market again, hadn't been an issue in terms of bad debt, there had been receivables that were past due and over the last few quarters we've really worked hard to clean those up.

I mean, a lot of them frankly are a result of us not billing customers properly.

We've gone back, I think we made some progress on processes and cleaned up and resolved the lot of issues and that's one reason why you've seen the receivables and DSOs come down over the last few quarters.

Great.

Thanks a lot, guys.

Thanks Scott.

We'll take our next question from Paul Coster with J.P. Morgan.

Yeah, hi.

Couple of quick questions.

First one is we didn't hear much regarding health care on this conference call.

Is the FDA labeling mandate taking any effect, seeing any activity in health care industry at the moment?

This is Rich.

We do see the impact of that and is creating dialogue with health care providers across the U.S., it is still early days with regard to the implementation of that program.

It is, I think the way we put it, the best way is sponsoring dialogue.

It has been the trigger for some business that we reported in earlier calls.

But, it is still early days.

Health care is still a relatively speaking minor contributor to overall revenue, something well under 10% of revenues.

We have an objective of increasing that contribution and believe with the FDA mandate and with the inherent mobility centric aspect of so many health care applications in provider settings, we think we are in a good position to accomplish that.

But again, early days.

Secondly, I may have missed presentation, I apologize, but can you just give us an update on the UPS contract?

Is that revenue contributor?

If not, when will it be?

How much you're expecting in 04?

Very small pilot quantities at this point.

It will ramp into significant volume quantities over the course of 2004.

First half and second half, I don't believe, Paul, we disclosed the amount of that expected in particular in 2004 and beyond.

It is much as the plan that UPS have not been fully solidified from their side.

They have shared with us planning schedules, but they are subject to change.

I have to feel comfortable not forecasting the flow.

We should see a ramp into commercial deployment in 2004 probably is the best thing I can say about that.

Okay.

Last question is can you just give us quick update on the recent litigation that you have been subject to?

I'm sorry, Paul, are you speaking of which matter?

I forget the name of the company.

Smart Media, right.

I think I am going to let the statement the company has made, including the most recent update, stand on their own merits.

We really have nothing to share beyond those statements that have been released.

I am trying to recall, the last statement was probably two and-a-half weeks old.

Refer you back to those, no developments since those statements that are appropriate to speak of at this moment.

Any sense how long it will take before we get some kind of resolution there?

Not possible to say.

Thank you.

Appreciate your time.

Bear Stearns, Peter Barry.

Good afternoon, gentlemen.

Hi, Peter.

Every year we know what we know about the service business, are we able to determine what a normal "normal" level of service volume really is, $70 to $80 million a quarter?

Or is that number likely to change dramatically going forward?

Let me break it down for you.

What you are looking at on go-forward basis and I will give you approximatations, I will break it down into customer service and professional services.

Customer service is approximately 60 to 62 million per quarter in that range, barely consistent.

Professional services ranges anywhere from $12 to $15 million per quarter in those ranges.

So, approximately the combination of the two about $75 million per quarter.

And so far as margin opportunity is concerned, could you give us a sense of how profitable that business is now and what you can do to improve it?

Sure.

Look, today the business is approximately at about 30% gross margin.

It ranges quarter-to-quarter, for us.

We are clearly not happy with the current state of gross margin in the services business.

If you look at Q3, as an example, services gross margin was down to 22.2%.

Now, there is lot as to why it is 22.2%.

However, I can assure you that there are any number of programs we have internally to drive gross margins up.

If I was to point to two areas in the company where we believe we have trapped or unlocked value, services would be number one on the hit parade.

Number two would be the supply chain, both of which we still have very significant ongoing workout programs in to yield longer term growth out of both of those areas of the company.

I wouldn't today want to give you a prediction or forecast what we think we can yield in the future in terms of gross margin.

However, I can tell you we are very disappointed in the current state profitability of that business.

Bill, while we're talking about improving profitability and areas of opportunity, you mentioned personnel changes at both Amia and Asia/Pacific, as well as the Westcon agreement.

Should we conclude that non-domestic and wireless are perhaps two of the major growth areas of opportunity for you?

Those certainly are two of a handful that I would cite, Peter.

Asia/Pacific in particular is a significant growth opportunity for us in the future.

As I did mention on the call today, we are going through restructuring and reorganization in that part of the world.

In fact, we just installed a new vice president of that theater this past month, whose ex-patriot coming over from the U.S. to Asia/Pacific.

We've had a few other key changes to our leadership team and that would be one area I would look longer term for growth.

It is in fact, Peter, part of the five-point plan we laid out several quarters ago.

If you remember the five-point plan, one of them was geographic expansion.

Asia/Pacific is a piece.

Westcon and the continued growth of our channel will also have an impact to our growth.

That was also part of the five-point plan.

It was point five, which was echo-system development.

Westcon is another example of bringing on a world class partner we think is going to be incremental, largely incremental to the current set of distribution partners we have around the world and allow us to have greater access into the networking/IT/wireless world, but also they signed up to become an enterprise mobility distributor to help us build out enterprise mobility partnership echo-system that would drive architecture into the market.

Couple more from me.

Bill, or Rich, perhaps, can you provide some additional color on just exactly what sort of demonstration you are providing the folks down in Arkansas?

Yes, Peter.

It involves the device that was actually pictured on the slide that Bill was speaking to during his remarks regarding RFID, which is a prototype variant of our mobile computer 9000, the product we introduced the last conference call.

This particular version incorporated integrated RFID reading capability that assembles out on the front of the mobile computing device is the antenna for the RFID interrogator.

We are demonstrating the ability to read the type of RFID tag called EPC Electronic Product Code tag that are going to be at core of the retail supply chain use of RFID.

So, you already have internal reading capability that I gather you have developed in your lab?

Yes, we have -- a combination of own developments and integration of technology available from other suppliers.

I think I've commented past calls, our approach is on focusing on how RFID can be part of total enterprise mobility solutions we deliver.

We are going to focus our attention strongly toward some aspects of that solution, like mobile computing device, wireless infrastructure, which in the future by the way, will tightly integrate RFID reading portal devices and we will partner with companies who provide complimentary products and services like the tags, for example, you wouldn't look for Symbol to be a manufacturer of tags that are used within the solutions.

So, our main focus will be in areas that play to our strength such as mobile computing.

Mark, could you remind us about your DSO and inventory turn targets are?

Well, we've said before that our target on turns was to get it up between 4 and 6 and we've definitely pierced the lower part of that range.

We will try to move it up to the high end of the range there.

With regard to the DSOs, I think we're pretty much where we're going to get to, Peter.

I don't think that there's a lot more we will ring out of the receivables than what we've done.

One thing to note, Peter as you link to model, the company going forward with regard to receivables.

Receivables as reported today benefit from the fact that a certain portion of revenue is on a bill and collect basis, cash basis.

So, outside of the revenue that it is factored into the DSO calculation, so the current DSOs that are shown are in some sense artificially aided or improved in the current level based on that fact as we move back to accrual accounting in the future, that will change.

Just a related note.

That being said, it doesn't change at all the significant progress we've made with receivable, the indication it has as to the quality of business, which is very good and our satisfaction with the levels we are at.

We are happy.

Low 80s is good target?

Low 80 on DSO, no.

We're currently in the low 30s.

As Rich mentioned, that reduced because of the effect of cash basis accounting, bill and collected accounting.

But, no low 80s would be way too high in our opinion.

Okay.

Peter, just to mention, if we adjusted for that impact, what you would see is the DSO, average DSOs would actually be pretty close to our stated terms.

So, I think that -- if we are pretty close to stated terms then we have DSOs where we want them.

Very good.

Peter, I did not want to leave you with the impression earlier that all of our growth is going to come out of Asia/Pacific or the channel.

I want to let you know we are also encouraged with respect to what we believe we can accomplish here in the United States, as well as in Europe.

A quick example for that is we are going to be adding close to 100 sales people both in the United States and Europe this quarter alone in Q4 as we stand here today.

Thank you, Bill.

We'll take our next question from Jeff Kessler with Lehman Brothers.

Thank you .

I want to touch on the competitive situation a bit.

Last quarter you talked about losing a little bit of share in Europe due to a product transition you were involved with.

Some of your competition continues to talk about taking share and I suspect its taking share at the low end.

You talked about taking back share this quarter.

I am wondering if you could elaborate on where you see yourself taking share and what areas you are taking share in and whether you see competitor statements as being untrue or relegated to another area at the low or specific end you might not have focused on in this conference call?

There's no doubt that in 2002 and into Q1 and to some extent into early Q2 in our that in our Advanced Data Capture business we have been losing share, primarily at the low end of the market.

As you can see this past quarter, we grew very substantially in our automatic data capture business and big piece of that was driven by new product introductions, one in particular, the LS 2208, which is a low-end device.

We feel really good about the fact that we believe we've gained significant market share back in Q3 and we think that's going to continue into Q4 and beyond.

So, in the scanning space, new product introductions, Q3 performance in that particular space has bolstered our confidence.

As I mentioned earlier, I'm going to do deep dive on market share in Q4 because I really want you to appreciate where we are today in our core markets and what our targets are and how we expect to get there.

In mobile computing we believe based on analysis of some of our competitor most recent results that we also gained significant share back in Q3 and we believe with the introduction of our new product, the MC 9000 will also be gaining share in Q4 and on a go-forward basis.

We hope to have some announcements along those lines in Q4.

I would say, targeted in handheld mobile computing as well as in low-end scanning are the two areas where I think we've gained the greatest traction and clearly also in wireless networks where we continue to see very healthy growth sequentially and year-over-year.

We believe we've gained a few share points in that particular space.

So, across the board Q3 on a product growth basis year-over-year on product growth basis sequentially versus that what we could measure on our competition in these markets, we believe we fared very well.

However, we're fact-based culture of the company, we want to get all of our facts together and pull it together and we want know where we stand.

As I said in Q4, we will be letting you know exactly where we are in market share basis and what our goals are.

So, that's kind of the way we see it right now.

Thanks.

To the best of your knowledge, when you go into a market or given application for - in competition whether its one of these three areas you just described, depending on that area, are you running mainly into VAR that are trying to mix and match various competitor products and you are going in with one solution or perhaps with a VAR to help you out, or are you seeing overall mixture of going head-to-head with a company perhaps and a VAR mix into it?

In other words, what are you seeing on the other end of the competitive scale here?

Jeff, it depends on the tier of market you are looking at.

Top-tier customers they have got our high charge sales force engaged directly with the customers generally will be facing off directly against other manufacturers together with their channel partners, we and tour channel partners can stay in their channel partners in the high touch top-tier major customers.

One tier below that, often the competition plays out among channel partners.

That competition takes place at the specific end user account level and before that, is looking to gain share of channel.

The only interesting thing we are seeing happening right now in the market is we are beginning to see some of our competitors partnering with some of bear competitors or some of our industry colleagues to present what is, if you will for the lack of a better term, end-to-end solution, that would be the virtual feathering of mobile computers, mobile terminals and wireless infrastructure.

Why?

Because of the obvious, economies of scale, because of scalability, manageability, cost, application, uptime, all of the soft and real true hard benefits you would derive out of doing business with one vendor seamlessly versus several vendors.

So, in the high-touch space, particular the Fortune 2000, we're now beginning to see a Symbol going in into end to end integrated solution competing against the likes of may be one, two or three competitors attempting to get together to try to build common infrastructure and architecture.

That is one thing that we continue to monitor and continue to look at and we think we are well positioned in.

Okay.

One final question, the markets that you are targeting outside of retail and when I mention that I'm talking about government manufacturing, I realize you may want to get more specific on this later on, particularly in the fourth quarter.

But, can you give us some idea since you have given us some idea on the retail side, what areas in government, what areas in manufacturing, are you focusing on more closely now given that there has been a lot of rumors of that, all types of potential contracts swirling around these various areas?

I will do government and Rich, I thought you can do manufacturing.

In government's pace, we are both focused on the civilian side of government, as well as DOD side of the government.

So, you will find that we have operations on both sides of that coin and today in particular, there is also Homeland Security, which is beginning to pop up more on the radar screen as having requirements whether it be for wireless, networking or whether for mobility clients or whether it be for automatic data capture equipment, we are beginning to find there to be some greater interest particularly in delivering on the promise of security at the state and local government level within public security, as well as in the federal government.

Then, of course, the public safety aspect, sub-group of the government vertical, public safety, where we recently announced wins with New York City and MTA, as well as Los Angeles, we are beginning to see much greater interest in enterprise mobility solution in the public safety areas where we have not traditionally competed.

Those two wins in particular, were very important for us because as you can imagine there are hundreds of -- or tens of thousands of those clients around the world, of opportunities we could possibly participate in on the manufacturing part, Rich, can you take that?.

On the manufacturing front, Jeff, the core activity tends to be - sort of applications which tend to be those related to supply chain optimization processes.

While there are important exceptions such as work that we do with the automotive industry related to their work and process control systems, you know that represents good core of business.

The significant manufacturing opportunities lie in applications linking the flow of materials from manufacturing shipping docks through distribution centers and warehouse out to ultimate customers be they retailers or other enterprises within the supply chain.

That is where the primary focus is.

It is where we have the strongest suite of products where many of our business partners have developed their application solutions and where we're seeing the best traction today.

It has the benefit of course of linking to strengths we enjoy elsewhere across other industry verticals such as transportation logistics because often the application go back to back, a shipping dock, and manufacturer leading to pick-up and track and trace application within a trucking company, for example, ultimately to the retailer because we have customer relationships all up and down the supply chain, we can leverage those relationships to turn strength to strength.

Okay.

A couple competitors are try tog combine their resources and compete against you in the manufacturing supply area.

No doubt, but again as per Bill's remarks, we believe we have the basis for significant competitive advantage.

Not only do we have products that each on their own stand very favorably in terms of capability performance, value comparison against our competition, but taken as a whole, the entire end to end enterprise mobility solution when deliver from Symbol will have very significant additional capabilities over those cobbled together on a fixed match base from a variety of manufacturers.

Our systems will be deployed easier, managed better, will have higher security, lower total cost of ownership and this end to end enterprise mobility story that we've been talking about for quite sometime now, really is resonate our customers.

It is the major sustainable competitive advantage I think that we have as we drive operational excellence and drive continued innovation in technology, we focus around the notion of end to end mobility solutions built on top of construct that I think you have heard us reference architecture for mobility.

That is where capital sits.

It is bright people who develop thinking with regard of how to bring to life the things I just rattled off about manageability and security and customers are resonating strongly with it.

Okay.

Thank you very much.

Appreciate it.

Moving on we'll take a question from Zach Chevron (ph) with Waddle and Read (ph).

Two questions.

I know you can't comment on investigation, but can you give us some sense as to if the nature or scope of the inquiries have changed whatsoever?

Can't comment at all.

Don't upon know of any change, but that is not to say they haven't.

Second question revolves around distribution.

The deal with Home Depot through Westcon, I know you said there hasn't been major shift in revenue, have you seen shift in terms of percentage of total business coming from the larger partners?

Just to be clear, the partner that worked with us on the Home Depot win was Stratux (ph).

Sorry.

Westcon is distribution partner and to your question, no, I don't think we're going to see substantial or quite frankly that much share shift from the distribution partners.

Myen, we are poised to bring and to move a lot more business through the channel so our distribution partners actually stand to win the most in this particular space.

We built the Westcon relationship on the basis of their incredible footprint in Europe, their ability to also via yet another global partner, their success in wireless networking and data networking.

The ability for them to build a very strong enterprise mobility channel and quite frankly the fact that they are complimentary to the distribution partners we have, rather than competitive.

Thank you.

Our next question will from Ted Wheeler with Buckingham Research.

Good evening.

Question on the prior caller just asked.

In the earlier stage of the presentation today, you commented on various list of issues that are being looked at in terms of the audit.

And I guess I will repeat the question, were those issues a smaller list of issues than you would have described say three months ago?

And do you sense that other issues have other than the ones you mentioned have been hurdles have been cleared?

We have certainly cleared hurdles relative to those we talked about on earlier calls back into the summer timeframe.

The comments I made earlier in my remarks had to do with a particular class of transaction wherein we are reading the appropriate record support to support the timing of revenue recognized under the restatement.

So, that as I commented earlier is principal activity at present that is getting result of our work and in earlier times we were working on more activity than that.

Great.

You commented on share gains, are you measuring share gains by your reported revenue under current methodology or are we looking at orders or some other metric?

I mean, revenues as we see them are up 2% product year-over-year quarterly growth and is that the revenue metric that you are using when you discuss share gains?

No, you have got to go one step below that and look at each product area.

Within mobile computing, as an example, we have gun-shaped products, rip-shaped products, PDA form sector products.

What we do is, we take a look at each one of our product line and we look at revenue for one each of our key product line, we do the best we can at comparing and contrasting that versus our competitors revenues in the same segment.

In essence, we look at their revenues year-over-year and quarter-over-quarter versus our year-over-year and quarter-to-quarter as best we can in the product segments.

We also have of course have full visibility out there in the market to where our competitors have an installed base, who their largest customers are.

We have clear indication there that we are taking install base business away from them and in some cases more significant than others in Q3.

Again I hope to be able to talk little bit more about this with (inaudible) in Q4.

Okay, I just meant the way you are reporting externally the revenues may be slightly different from the way you're measuring them as a share issue, that was my question.

You got it.

Okay.

The core service aspect of the company is on track.

How would you differentiate core service from service revenues you discussed with us today?

I don't think we said core service.

I thought I heard that comment.

No, the services business, let me be clear here, is largely flat and has been flat for a long time.

And we are working every single day to not only attack what are the unlocked value in terms of cost structure of our global services business, but also looking at how we drive top line significantly with efforts to put build new services products and introduce them to market, as well as drive cash rate through hi-cut shores (ph) with direct channel as well as our indirect channel.

Okay.

I just had the feeling the service revenue you are reporting subset of revenue that are behaving somewhat differently from the overall number?

That is not happening, Ted.

On the earnings release you gave today, you commented on cost to account for Cisco shares which are in the 7 or 8-year option deal that you have.

Is that issue that cropped up in this quarter one quarter's worth of addressing this issue, a year's worth, how recurring is that aspect or that item?

Ted, it is mark.

It happens every quarter.

What we do, on the balance sheet, on the asset side of the balance sheet, we've got the valued Cisco shares.

And then on the liability side, there's the long-term debt.

What happens is there is a revaluation of the option that is embedded in the sales agreement and essentially what happens is at the value of the option the value of the derivative doesn't always track one for one with the value of the Cisco stock.

There is going to be differences.

A portion of the difference runs through the income statement.

Sometimes it will be slightly positive, sometimes slightly negative and goes through other income expense.

You identify it this time.

Maybe I have been remiss and I haven't seen it before.

It's been there before and moving around, is that -

Yes, it moves around, relatively small like we highlighted this time.

3 million?

Could be positive 3 or negative 3.

That's what happened, still we had 6 million swing.

Wouldn't that be the worst swing you might ever see in a quarterly -

No, because it is going to be completely dependent upon how the value of the derivative against the underlying asset.

They could diverge by more.

You wouldn't think so.

At the end of the day, when the transaction finally terminates, essentially the debt is expired by handing over the Cisco shares.

So, there is some income statement volatility that's introduced, but it is non-cash and in the end of the day it doesn't really matter it should even out over time.

What was full year impact be roughly?

It's impossible to predict.

I'd have to know exactly what's going to happen to the value of the derivative and Cisco shares for the fourth quarter.

You can's say that the net impact at the end of the agreement is 0.

That's what I'm trying to focus -

Ted, it will move through the balance sheet up and down depending upon Cisco share price, value derivative and you can only calculate that at the end of the month and at the end of the quarter, so it would impact is on your P&L and at the end of month and end of quarter.

We do that at the end of every month.

We also do that at the end of every quarter.

To be fully transparent, in Q2, we had $3 million positive into the P&L where in Q3, we had $3 million negative on P&L on the Cisco shares.

I just try to remember Mark, what was the date of the initiation of the agreement?

Approximately two years ago, so in the number on the order of two years

I believe it terminates in 2007, that is my recollection.

Very good.

Thank you.

Welcome.

Next Dick Davis (ph) with Richard W. Davis and Co.

Could you talk about the improvement in gross margin which if I heard correctly the service margins were at least 22% and then you reported that your overall gross margin improved to 24%, which is a nice move from the prior quarter.

It is.

And the underlying reason for our growth quarter-over-quarter were of course product revenue, which grew sequentially from 289 to 313 million.

I think the biggest factor quite frankly was operational efficiency that we were able to drive in the quarter.

We had substantially better factory absorption.

We had improved cost-reduction activity in the form of purchase price variance and we had much better inventory management in the quarter, which helped lead to that.

We also have seen pricing largely stabilize for standard margin point of view.

Our standard margins were up slightly and we did not experience any if you will degrading a price in the field at the end-user level, whether it be at the end of the week, month or quarter.

The sales team is doing a very good job.

The other point I want to make here is that as the market moves from product to solution, it's going to be increasingly important for us to be not only best degree of product, we will continue to be best of breed in each product area, but also best in breed in solution.

When you move from product to solution, your ability theoretically over time is to do so at greater premiums, we hope, as there is well.

We are not forecasting that to be the case.

We have seen some of that in some of the transactions we done with customers where they tend to go with us as vendor for both wireless infrastructure needs for mobility and mobile clients.

Okay.

Now, could we in terms of modeling do you hope to be as good next quarter as you were this quarter?

The modeling we have been talking about we continue to give you guidance on.

The long-term model, you should expect for the company is in the 46.5% gross margin range, 31.5% operating expense range to yield the 15% operating margins.

I would not want to prognosticate Q4 or 2004.

However, what we let do, of course, is give you a better read on that during the 2004 conference call when we give out guidance.

Thank you.

We'll take our next question from Mike Hughes with Delaware Investment.

Looking at slide four, I apologize for my ignorance.

I don't really understand the itemizing volatility, is that the number that should be added or subtracted on accrual basis?

Can you give me an example of what that means?

This is Mark Greenquist.

That is an adjustment that was made to any kind of accrual accounting to bring the accounting into cash basis.

Okay.

Effective cash accounting on the revenue numbers.

For example in the third quarter of 2003, it says service revenue 69 million minus 3 million, that would mean if it were under strip accrual basis, 72, is that correct?

That's right.

72 then in the first quarter, 77 overstated by 4.

So on strict accrual basis, 73, basically flat from first quarter under accrual method of accounting, correct?

That would be right.

That's my first question.

Second question.

When you gave the guidance back in early October, did you anticipate -- you did not anticipate the accounting charge for the options, which is over 2 cents per share, is that correct?

That would be right.

Okay.

Any cash outflow related to that or simply

No, it's accounting non-cash.

Non-cash.

Do you have any idea where the number falls out in fourth quarter, you said it may recur?

I think it will recur in first quarter and fourth quarter of '04, should be lower than the 8 million in this quarter.

I can't determine exactly what it will be, but believe strongly it will be lower.

Okay.

And then, the cross-related to restatement 14 and-a-half million in second quarter, 11 million in third quarter, should that decline in the fourth quarter?

Since we continue to have quite a bit of restatement activity in this quarter, I would expect that to be pretty steady, to be honest with you.

The effort here is ongoing and could be little lower, but I would assume it would be pretty much the same.

Okay.

One last question.

You generated significant free cash flow on the year.

Is there any reason next year to think the cap ex number will be much higher than the run rate in this quarter or the year-to-date number annualized?

We will, I think we will see CAPEX come up next year somewhat related to number of infrastructure projects we are driving within the company, particularly on the IT side.

It really is IT driven.

If you take a look at number of infrastructure projects we are driving to improve our business control, financial controls, for example in our global services business we are now basically moving from a infrastructure where our application weren't connected, systems weren't connected, systems invoicing system, etc, to a program that's going to build a seamless set of applications on top of a single instantiation (ph) of our ERP infrastructure to drive greater efficiency throughout our organization.

Those are the kinds of projects we are investing in and have three or four of them ongoing throughout 2004 into 2005 in our global services business we have a project that is underway.

In our supply chain area we have a project that's underway.

In financing, we have several projects that's underway.

In sales several projects are underway.

The area where we are going to spend considerably more cap ex dollars next year will be in IT-related projects.

Okay.

Then, your backlog slide, I think it is slide 20.

How quickly is backlog typically converted into revenue?

The backlog we're actually showing on the slide to you, what you see in Q4 is $150 million, that's a $148 million of product-only backlog.

That will almost inevitably turn within the quarter.

Now, do customers come to us and ask us to move certain aspects of their rollout one quarter to another?

Sometimes they do, yes.

But you can count on good percentage of our backlog starting at the beginning of the quarter to turn within the quarter.

Just to clarify, what we are showing here in this bar is only the backlog for that quarter.

It is not the forward backlog still further out.

We are not showing you the full backlog, we are showing you the backlog scheduled to ship in Q4.

90 plus percent of that back log should turn in the quarter unless a key customer with a very large rollout happens to move those dates into the next quarter.

Okay, you gave the precise number of 148 for the fourth quarter.

What was the precise number for the third quarter?

This is Mark, I believe it was 123, if I'm not mistaken.

We will get the precise number in a moment.

Thank you very much.

Next we will hear from Jeff Leeber (ph) with Wafer Management.

Rich, can you quantify the size of the contract with the United States Postal Service and whether or not you are the sole supplier?

US postal service, are you referring to a contract that is scheduled to be led into 2004?

That is what I thought I was referring to, I heard someone earlier in the call mention it and I was wondering if that was a new information.

I think you are referring to two separate things.

The earlier caller talked about UPS.

That is a contract that we originally announced I believe about a year or a little more than and-a-half ago, maybe.

In the Spring, sometime earlier.

I think it was announced originally -initially at 200-something -- you have to go back to the earlier announcement.

Forgive me for not remembering.

I believe it was $224 million with a projected four-year deployment beginning this year, very small this year and then beginning in 2004 through 2005 and the bulk of the deployment, once again, though, the exact deployment plans have not been locked down and are subject to future change based on the way the program is going.

So, that is the UPS deal although we previously announced there is a USPS deal, which is a renewal, next generation of a contract we won the earlier generation of several years ago.

Another USP, as U.S postal service deal that will be coming up for award in 2004 and we are competing for that bid, as well.

But no update on that as of now?

No.

Okay, thank you.

I know we have time for one more question and it will come from Kevin Sonnet (ph) with Sounders Asset Management.

Thank you.

Also on that slide 4, would you mind giving us the build and selected impact on Q4 2002 just to round out the quarterly information?

Billed and collected impact on Q4.

I know Q4 revenues on a restated basis were $372 million.

On a restated basis, I -- what we'll need to do is get back to you on that.

We will get to you Kevin because I don't have it in handy.

Okay, I'll follow-up with that.

You also gave us the service gross margin for the quarter, which is real helpful.

Obviously it is little bit lower than you like to see.

Has that looked about the same over the last few quarters?

No, it's largely fluctuated.

If you look at this past quarter Q3, our services gross margin was 22.2%, our product gross margin was 48.9%, that was right from 4302% last quarter and our services margin last quarter was 34.7% now.

The reason service margin in Q2 2003 was 34.7%, that if you look on the chart, you will know that we had about nine million of billing collected service that came in, all of which counted as 100 margin above.

Do you understand where we are going with that?

I do.

That impacted our margin.

Our current static margin in services are approximately in mid-20s, as we speak today if you look on a core basis.

Okay.

That is what we should think about going forward and --some of those programs ?

You bet.

On the backlog, you are expecting a little bit lower turns business, it looks like in the current quarter, in the December quarter relative to September quarter.

On a normalized basis, what sort of business would you think on the product side would come from turns each quarter as compare to coming out of backlog from where you start the quarter?

I think we mentioned this on the last call, I know we mentioned this on the last call.

We were running at a average rate of approximately 60% of our quarter being turns business, meaning booking comes in within the quarter and we ship that booking within the quarter.

And approximately 40% of our revenues were coming from incoming quarterly backlog scheduled to ship that quarter.

That is what you expect going forward?

No, optimally what we would like to get to is the point we can build enough backlog and introduce more of a lead time, a structure into our field where we have greater visibility into our backlog knowing our cost radar supply chain giving us greater predictability of what to ship and ship by when, as well as lower turns business which will have also a very positive impact as well on customer satisfaction and other key metrics.

So, we don't -- I can't today give you specific percentage of what we'd like to see.

However, we are focused on having the terms business within the quarter come down and the backlog are really driving the bulk of our revenues within the quarter.

Okay.

Fair enough.

One more, if I could squeeze it in with the last question around here.

The build and collected impact looks to be fading in Q3.

It was very small, only a percent or so of product revenue.

Is that about out of the way now and actual reported product revenue should look about like the normalized accrual based revenue?

That would be our expectation because what happened previously is you had past due receivables that were basically being cleaned up at the same time you were collecting on current billings and that was adding a positive impact to recognized revenue.

As we mentioned, we made a lot of progress on the receivable front so as a result of that the impact, the differential shouldn't be as great in any particular quarter going forward.

Having said that, you could have a quarter where especially I would think on the service side is could be fluctuations that as a percentage basis might be little bit bigger in relation to service revenue.

But, I think you're exactly right that the amount that this is swinging revenue around on a going forward basis should be less than what we had seen certainly back in '02.

Okay.

Great.

Very helpful thank you.

I want to thank everyone for participation on the call today.

We very much appreciate your question and the time you devoted to participating in this call and I look forward to speaking to you soon.

And that does conclude our conference call.

We thank everyone for their participation, we hope you have a great day.