摩托羅拉 (MSI) 2004 Q2 法說會逐字稿

Good day and welcome to the Symbol Technologies 2004 second quarter financial results teleconference.

This call is being recorded.

Our speaker today is Mr. Mark Greenquist, Symbol's Chief Financial Officer.

Mr. Greenquist, please go ahead.

Thank you for joining us on 2004 our second quarter conference call, and please note that the call is supported online with presentation content available at www.symbol.com.

Speaking on the call with me is Mr. Bill Nuti, Symbol's President and CEO, and Todd Hewlin, SVP of our Global products group.

He will briefly recap our planned acquisition of Matrics announced on Tuesday.

Others from the leadership team will join us during Q&A, Peter Lieb, General Counsel, Todd Abbott, SVP of Worldwide Operations we and John Bruno, Symbol's CIO and SVP of Corporate Development.

Before I review second quarter results, a brief disclaimer reflecting the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

Displayed on the screen is the customary Safe Harbor provision.

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 solely projections and actual events and results may differ materially.

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

Copies of our SEC filings are available from the Company upon request or by accessing our Company website www.symbol.com.

Where you also will find details regarding the replay of today's call.

In addition, you should be aware that this presentation includes certain non-GAAP financial measures as defined under SEC rules, as as required in this presentation, we have provided reconciliation of those measures to the most directly comparable GAAP measures.

Now, before previewing our agenda, a quick comment on the news announced today announced that the U.S.

State District Court has entered an order requiring Proxima to pay Symbol approximately $23 million in damages plus $3 million in interest..

In a wireless land patent case stemming from a jury verdict announced in 2003.

The court rejected Proxima's post trial motion.

And unless the court issues a stay or Proxima posts a bond, Symbol will attempt to execute the judgement.

We'll keep you posted on future developments.

So now on to the call.

After a brief review of our second quarter 2004 financial results, Bill will comment on channel geographic and product mix, and delve into trends, within each of the sales theaters and product divisions, followed by some key customer wins.

Then we'll hear from Todd Hewlin who will recap our Matrics acquisitions with its industry leading technology and product set which fits well into our enterprise mobility strategy.

In addition what you can expect from us in the RFID area going forward.

And after that Bill will come back and update you on bookings and backlogs and provide a brief update on guidance for the third quarter.

Before we move on to take your questions.

We continue to experience steady progress in the topline growth of the Company.

Revenue in Q2 '04 was a record for the Company, 432.8 million, up 16% over Q2 '03 revenue of 337.8 million, and a gain of 3% over Q1 '04's revenue of 419.7 million, better than we had anticipated when providing guidance on our May call.

Product revenue of 356.6 million was led by gains in our mobile computing and wireless infrastructure divisions, second quarter advanced data capture revenue increased 27% over Q2 '03's revenue by declined sequentially primarily due to revenue recognized on an especially large order in Q1.

You'll recall that the EDC division generated all time revenue records in Q1 of this year.

Overall, Q2 product revenue increased 23% from Q2 '03's 290.3 million, and showed a 2% gain sequentially from Q1 '04's product revenue of 348.2 million.

Service revenue in the second was 76.2 million, in line with what we believed to be that division's anticipated anticipated annualized run rate of about $300 million.

While service revenue declined 9% from revenue of 83.5 million in 2003 second quarter, that's a result of the positive impact that bill and collective revenue recognition had during that period in 2003.

Second quarter '04 service improved 7% from the first quarter 2004 revenue of 71.4 million.

Second quarter gross margin or gross profit of 196.7 million showed solid growth of 29% over Q2 '03 gross profit, and 152.4 million and increased sightly on a sequential basis.

Q2 '04 gross margin came in at 45.4%, included in gross margin is a charge of 3.9 million for our ongoing restructuring of the service organization, partially offsetting this charge is a reduction of our standard warranty expense roll of approximately $1.1 million, due to improvement in the reliability rates of our products, as well as lower estimated average costs of repairs because of increased efficiency in the repair depot operations.

That's a trend we believe will continue.

Q2 '04 operating expenses of 153 million were up $4.9 million versus Q2 '03, and down 12.5 million compared to last quarter's OpEx of 165.5 million.

Our SG&A spend included continued investments in our sales and marketing groups to extend our coverage, as well as the ongoing upgrade in our overall systems infrastructure as we've mentioned before.

In Q2 '04, we reduced by $9 million our net estimated accrual related to the tentative settlement of the recently concluded government investigations and associated class action litigation.

This included a reduction of $4 million, part of the amount of the originally estimated Company liability that ultimately was paid by Jerry Schwartz, our former Chairman and Chief Executive Officer, as well as the receipt of $5 million of insurance proceeds related to the class action settlement.

Earnings from operations for Q2 '04 were 43.7 million, a 49% increase sequentially from first quarter's 29.4 million.

Operating margin for the quarter improved 3 percentage points and 9 percentage points year over year to 10%, a significant milestone for Symbol as we continue to drive to our long term objective of 15% operating margins.

Q2 '04 earnings were negatively impacted by a nonoperating and noncash accounting charge of approximately 6.2 million, with a change in fair value of our embedded equity color in the Cisco sale's debt arrangement.

To our benefit in Q2 we had a lower than expected effective tax rate of 19.4%, differing from the statutory tax rate primarily because we've implemented a tax planning strategy that resulted in the release of certain of certain valuation allowances.

As a result second quarter net earnings were 28.8 million, or 12 cents per share, compared to Q2 '03 net earnings of 6.6 million, or 3 cents per share, and Q1 '04's 6.8 million dollars, or 3 cents share.

Now turning to the balance sheet.

The encouraging progress continued in Q2 with continued strong cash balances, another drop in receivables, and a quarter to quarter 3 day decline in DSOs to 23 days, as well as further improvement in inventory turns.

Cash balances of 143.7 million at June 30 were down 35.3 million from the March 31 balance of 179 million.

Hour, this reduction was driven by 2 separate events.

First, during the quarter, we paid $40 million toward the settlement with the U.S.

Attorney's Office and the SEC., and in addition, we placed $50 million in an account with the Court in Ohio to bond a judgment entered in the Smart Media litigation against Symbol and our wholly telecom subsidiary.

You will recall that that decision is under appeal.

Also note that this $50 million of restricted cash is now shown on the balance sheet, within long-term assets.

At Q2 '04's end, receivables of $110.5 million resulted in DSOs of 23 days.

A 3 day improvement from the end of Q1, and an 8 day gain over Q2 '03.

Our DSO progress continues to to be attributable to improved bookings and revenue quality consistently good revenue linearity, and another strong quarter of cash collections of approximately $460 million in the quarter.

Inventories grew slightly quarter to quarter to 216.4 million in Q2, from Q1's $211.7 million.

Despite the increase, we improved turns by .2 points from Q's 4.2.

Finally, with regard to cash flow, in the second quarter, operating income and strong cash collections generated cash flow from operations of $62.8 million, excluding the $40 million that was paid to the government.

Net of that payment, cash flow from operations was 22.8 Million.

Now I'll turn the mike over to Bill, and he can go through some more detail.

Thank you, Mark.

Before I get into the guts of my portion of the l call, I wanted to give you a high level perspective of the quarter and how we are progressing relative to our corporate wide business plan execution and overall change program.

Q2 marks the fourth quarter in a row of revenue growth, bookings growth, and operating income improvement.

Including operating incomes as a percentage of revenue and shareholder equity.

Amongst several other key business metrics, I want to congratulate Symbol employees and channel partners on driving continuous improvement from a financial point of view.

In addition we believe we have gained back profitable market share during this period.

In addition, this level of performance consistently occurred during a time that was marked by tremendous change and relative instability due to the pending outcome of the SEC, DOJ class action and other important past issues which are now largely in our rear view mirror.

In Q2 we not only put the vast majority of our past issues behind us but also drove record quarterly revenue and double digit operating margins while continuing to improve the state of our balance sheet.

In addition, we remain fiscally disciplined with regard to driving profitable market share gains.

And not follow into falling into the trap of chasing revenue at all costs.

A few of the more publicly recognized sales opportunities were just not good business deals for our Company.

And our team had the courage to maintain a focus on profitable revenue growth.

Moreover, if you look closely at our competitive peer group, it is clear that our corporate wide growth in Q2 of 16% year-over-year, and even higher product revenue growth of 23% year on year illustrate that we are winning and gaining back market share profitably.

I'll talk more about wins later in my presentation.

Lastly, our corporate change program, which we are almost 2 years into, is going extremely well.

We are now in a position to focus nearly all of our energies on our collective future.

A future that will include the continued expansion of our available markets a continued focus on profitable market share gains, and a leadership position in the rapidly emerging enterprise mobility market.

Now let's move into the breakout of channel mix, product revenue by sales theater and by product division.

As we have mentioned previously, we have a goal to deliver 75% of product revenue through the indirect channel by year end, as illustrated in the pie chart at the far right.

These charts represent product bookings only, a good indicator of where the business is headed.

You'll see, at far left, how in 2002, our split was 51% delivered through indirect sources, which includes 5% delivered through our OEM business, which is largely scan engines, and close to half of our business going through the direct sales channels.

At the end of Q1 '04, with our emphasis on better leveraging our indirect channel, that split had progressed to 67% of bookings through the indirect channel, including 9% OEM business, with the remaining 1/3 going direct.

In the quarter ended June 30, 2004, we advanced to 70% indirect, again including 9% through OEM, with 30% direct.

At the far right of this chart, you see our goal exiting 2004.

All in all, we're pleased with our progress, and we'll keep you updated on future calls.

As mentioned before, we see the growth of our partner ecosystem as a key to our business plan, as well as our overall ability to scale Symbol.

Moreover, the feedback from our partners has been great.

On that note, in May, we hosted our global partner conference, attended by more than 700 channel partners from around the world.

By all measures, it was a successful conference.

We conducted pre- and post conference satisfaction surveys, and our overall post conference satisfaction levels rose by 41%.

More importantly, our partner satisfaction with our service and support increased 187%, and partners indicated a 99% competence level with Symbol's enterprise and mobility strategy.

We couldn't be more pleased with the strides that partner select has had made during the last year.

With the Q2 rollout of partner select in Asia-Pacific the program is now in place on a global basis.

A significant accomplishment, and one we feel will begin to show substantial benefit in forthcoming quarters.

Now let's move on to revenue splits by geographic theater.

Here you see quarter product geographic theater.

In Q2, the mix reflected progress in our previously stated goal to better balance revenue on a global basis.

With product revenue growing sequentially about 2%, EMEA, and Asia-Pacific contributed a total of 38%, up from a total of 34% in Q2.

You can see the regional breakouts on the chart with Asia-Pacific and EMEA each up 2 percentage points sequentially.

The inherent lumpiness in our business, which is largely due to cash basis accounting, and large orders impact on our revenue, makes it challenging to pinpoint trends.

That said we're very pleased with the year-over-year growth in the global markets, as well as TAS, where Q2 booking growth was encouraging.

The America's represented 62% of Q2 '04 total product revenue, compared to 66% in both Q1 '04 and Q2 '03.

Product revenue in the Americas declined 4 percentage points from first quarter's strong performance, but was up 15% year-over-year.

You will recall that in Q1 '04, revenue from our advanced data capture division was a record.

In TAS, our product sellthrough in the indirect channel increased 10% sequentially.

As I mentioned, we were encouraged by TAS bookings, up 8% sequentially.

In the quarter, we also had some significant wins that led us to believe that we continue to gain market share here in the Americas, where sales of the various form factors of our MC 9000 mobile computing family were especially impressive.

Europe, Middle East and Africa represented 28% of overall product revenue, up 13% sequentially from Q1 '04, and up 32% compared to last year.

EMEA is showing solid gains with our indirect channel focus with partner select now fully implemented.

In Q2 '04, approximately 76% of product was delivered through the indirect channel.

Although overall bookings in EMEA were flat sequentially, product bookings increased in the quarter, and year-over-year bookings increased by 35%.

Retail is holding its own in Europe with a number of Symbol's long time retailing customers rolling out our MC 9000 mobile computer, and M 2000 hand held laser bar code scanner and a range of other products.

Asia-Pacific's share of overall product revenue was up 2 percentage points in Q2 '04.

Significant in that it begins to demonstrate the potential of that market and is a sign that our investment plan is paying dividends. [Coughing] Excuse Me.

With 18% revenue growth, versus Q1 '04, and a volume 57% year-over-year, Asia-Pacific is quickly becoming a more substantial growth engine for our Company.

Partner select also rolled out in Asia during Q2 '04 and of 122 partner applications we've approved 106 partners to date.

Also in the quarter, we signed up Nimax, a leading multinational distributor of barcode, point of sale, and wireless networking hardware products, as a Symbol distributer for Hong Kong and Taiwan.

You may have seen the press release last night announcing acquisition of Nimax by Ingram Micro which has distributor operations in 100 countries and is the only global IT distributor with operations in Asia.

We feel that this relationship will help us to provide greater reach in the Asia-Pacific market.

While Asia-Pacific bookings declined sequentially, they were up 47% year on year, and we feel confident that the sales infrastructure we are building will result in more consistent growth over time.

As Mark mentioned product revenue of 356.67 million was led by gains in our mobile computing and wireless infrastructure divisions.

In fact, Q2 it was a record revenue quarter for our wireless infrastructure division.

As was the case in 2004's first quarter, new Symbol products introduced in 2003 - - sorry, 2002, 2003, and the first half of 2004, are again were big contributors and garnered 44% of total Q2 '04 product revenue.

Revenue from our mobile computing division grew 5% sequentially and 21% year-over-year.

This growth compared to our industry competition provides a clear indication of market share gains which started in 2003 and continued into 2004's first half.

Revenue from sales of our newest ruggedized mobile computing product line, the MC9000 in it's 3 form factors more than doubled in 2004's second quarter compared to first quarter revenue, and that trend is likely to continue in Q3.

Bookings grew at 4% versus Q1 '04, again showing a healthy sequential gain.

At the heart of mobile computing's bookings growth is the MC9000, although we've, experienced gains in bookings across most of our other core mobile computing lines.

Sales of our discrete scanners and scan engines for the OEM market totaled 27% of Q2 '04 revenue, but declined sequentially.

You will recall that the division booked record revenue in 2004's first quarter.

In Q2, our advanced data capture business grew 31% year-over-year.

The Symbol LS2200 handheld laser barcode scanner line continues to lead the way, realizing a 60% sequential revenue gain in 2004's second quarter.

Although there was a healthy balance across the product line overall.

And importantly, the advanced data capture division realized 83% of its total Q2 sales through indirect channels which of course includes OEM,.

The LS2000 is on track to be Symbols's first product ever to achieve a quarterly run rate in excess of 100,000 units.

I would also like to note that Symbol holds the #1 position in shipments of hand held laser barcode scanners in the America's, EMEA, and Asia-Pacific, according to the most recent data from venture development released this month reflecting 2003 market share.

In the second quarter, the wireless infrastructure division increased its product revenue contribution by 2% percentage points up 25% sequentially, and up 27% year on year.

The Symbol wireless switch product line which began shipping in 2003 represented nearly 1/2 of the wireless infrastructure division's overall revenue which grew 25% over the division's first quarter revenue.

Wireless sales in the America's outpaced those in both Asia-Pacific and EMEA.

Interestingly the industry analyst group Synergy is forecasting that the market for enterprise class wireless, Symbol's business, will grow more than 28% in 2004 to more than 1.1 billion.

According to Synergy's May 2004 market share report, Symbol holds the #1 portion with 58% of revenue share in both the market for wireless LAN light access port equipment and the wireless LAN market for switches and controllers where we hold 25% share.

Before I detail some recent customer wins, I would like to address some of the recent high-profile sales opportunities where Symbol competed and lost.

As we've stated for the last 2 years, we are running the business with the following goals in mind.

Gross margins in the 45% to 50% range.

OpEx in the 35% to 35% range.

With a resulting operating margin of 15%.

With that in mind, it is our plan to remain fiscally disciplined even as we drive profitable market share gains.

In the case of 2 recent Government deals, U.S.P.S the United States Postal Service, and AIT3, during the bidding process we concluded that they might not represent the kind of deals, that would be good for our Company at this time.

Our management team maintained its focus on profitable revenue growth, and hence we weren't willing to make all of the concessions necessary to compete for this business.

Don't mistake that statement for not wanting to win, because we did.

And we worked hard on these opportunities.

But not at the cost of booking revenue at very low margins and taking our focus away from other more profitable opportunities in the commercial sector.

It is important for you to understand that the U.S.P.S. opportunity in particular was not included in our guidance, given the 1-time nature of the contract.

In the case of AIT3, where we demonstrated similar financial discipline, it is also important for you to understand that this contract vehicle represented on average 12 million per year of Symbol business with less than 5 million of that being higher margin product revenue.

Now I'll profile some key customer contracts.

Our roster of wins is substantial, and we've made gains in our various vertical markets.

In Europe, retail demand remains strong.

In the second quarter, Toys 'R' Us rolled out our MC90000 product line, along with the Symbol wireless switch for instore applications.

A good example of an end to end enterprise mobility win.

Another win for the MC 9000, Flower's Bakeries, one of the largest bakery food companies in the United States have selected the MC9000 for better control of ordering and direct store delivery along their are 3,500 routes.

Our MC 9000 is replacing legacy Fujitsu equipment.

And another long time Symbol customer [Carshgott] a large German retailer is upgrading its point of sale scanners with our M2000.

The versatile hand held laser scanner that decodes an array of barcodes.

The sale was in partnership with IBM Germany, and [Carshgott] was especially attracted to the scanner's sleek ergonomics and advanced firmware.

Here in the States another important advanced data capture win in conjunction with our business partner [Strattics], SACs incorporated has purchased 2,400 of our high performance P460 memory barcode scanners for the 50 stores in its Yonkers division.

They will use them for point of sale scanning and in sales floor applications to decrease third party inventory costs and increase sales through improved inventory visibility.

In partnership with Direct Source, Symbol is installing 2,500 Symbol PD4500 interactive payment devices at the point of sale for debit, credit, and electronic benefit transfer transactions at PetBoys.

The U.S. automotive after market retail and service chain with 600-plus stores and 5 warehouses.

The PD4500 compliance with Triple DEZ ensures the reliability and security of transactions.

In the local government sector, Amsterdam City in the Netherlands is adopting the traffic citation application that we spoke about a few month ago in use here in New York City, Los Angeles, and other major cities, using our MC9000 along with [Deper] printers important here was the integration of both GPRS wide area radios and Blue Tooth personal area radio communications capabilities.

And CVS, the nationwide drugstore chain that recently purchased the Eckerd chain is implementing a new system based on our WS2000 wireless switch to give them the ability to run more advanced retail management applications in partnership with our strategic alliance partner IBM, the Symbol system also includes 3,600 MC9000 rugged mobile computers and 1,300 of our new microkiosks.

The MK2046.

There's a bit of an update on some recent customer wins.

The momentum is with Symbol.

Now Todd will recap the planned Matrics acquisition.

Todd?

Thanks very much Bill.

Now I know many of you were on the call earlier this week when we announced our intent to acquire Matrics, a leader in the exciting and emerging RFID industry.

So I'll be brief.

The Matrics acquisition round out our enterprise mobility portfolio, and allows Symbol to accelerate our commitment to providing open standards based RFID solutions and complete solutions that can scale for world class deployment.

We see an inflection point coming in RFID as customers shift from pilot to production rollouts.

Symbol, Matrics, and our industry peers have made good progress on technology standards for RFID within EPC global.

Successful tests and pilots have led to broad RFID mandates from customers, our major systems integration participators like IBM are building substantial specialists teams in RFID.

These are all signposts of the RFID acceleration that we see coming.

Acquiring Matrics at this point is a natural step.

RFID has always figured in our enterprise mobility strategy.

Symbol and Matrics have worked together in RFID pilots and in the standards bodies for the last year or so.

It's a good fit since both companies address in the same or adjacent vertical markets including the retail, pharmaceutical, consumer packaged goods transportation and defense segments.

On the product front, Matrics, RFID tags, fixed readers and systems capabilities complement our internal focus on hand held RFID readers.

From a financial standpoint, this is a $230 million cash for stock transaction.

We plan to acquire 100% of Matrics' shares, and we anticipate that the deal will close by the end of the current quarter.

We are very energized about converting our partnership with Matrics into a synergistic relationship that will be of great benefit to our customers and ultimately our shareholders.

Now let me turn it back to you, Bill.

Thank you, Todd, and congratulations As you can see gross product margins continued their positive trend.

Reaching almost 362 million in 2004's second quarter representing a sequential increase of close to 3%, and a year over year increase of about 33%.

With continued strong performance, our backlogs, represented by our unshipped backlog, as well as our shipped but not recognized backlog increase about 2% to approximately 305 million.

Our objective remains to grow our backlog in order to continue to improve linearity and ongoing operational efficiencies.

Finally, as you can also see by this chart, our book-to-bill ratio has exceeded 1 now for 4 straight quarters.

Now a brief update on third quarter guidance.

Our watch words continue to be "cautiously optimistic".

As I've mentioned throughout 2004, our sense is that the business climate is neutral to slightly improving with somewhat of a moderate uplift in IT spending.

We continue to believe that growth in the area of enterprise mobility where we lead is likely to outpace other technology segments as a percentage of overall IT investment.

Building on the improving 2004 first half financial results Symbol expects that third quarter 2004 revenue will be in the range of 435 to 445 million, representing a sequential increase of 1% to 3%, and a year-over-year growth of 15% to 18%.

Symbol believes that revenue growth will be fueled primarily by gains in product revenue, as service revenue is expected to be flat versus the second quarter of 2004.

With regard to gross margins, we anticipate again that in the third quarter of 2004, they will come in at about 45% to 46%.

We expect Q3 '04 operating expenses to remain between 160 million and 165 million.

We anticipate an effective tax rate of 26% in each of the remaining quarters of '04 with the full year effective rate of approximately 33% to 34%.

That said, with revenue in that range, and this sort of gross margin and operating expense performance, net earnings for the third quarter of 2004 are expected to be 11 to 12 cents per share.

Third quarter 2004 guidance does not reflect any impact of the pending acquisition of Matrics Incorporated, the agreement of which was announced July 27, 2004, and which the Company believes will close by 2004 third quarter end.

As always, thank you for joining us today.

We appreciate your ongoing interest in Symbol Technologies.

And now operator, we'll open up the line to questions.

Thank you, the question-and-answer session will be conducted electronically, if you would like to ask ask a question today, please press the star key followed the digit 1 on your touchtone telephone.

If you are use you are joining us using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, it is star 1 if you do have a question.

And we'll go first to Peter Barry of Bear Stearns.

Good morning gentlemen.

Good morning Peter.

How are you?

I'm well, thanks.

Mark, just a couple of data points.

Could you give us the share count for the quarter?

239.5 million.

Was there any currency impact in the second quarter?

Relatively small, no, at most, you know somewhere between 1 million and 1.5 million.

What we saw in the nonNorth American markets are was in fact real core growth?

Yeah.

the tax rate going forward for modeling purposes, especially going into '05, if you look out that far?

I think what you'll see for the year is that the tax rate should average out at about 33% or so.

And for '05, maybe it's up a point or so.

So that's why you saw a very high effective tax rate in the first quarter.

And what you're seeing now is that in order to get it to average out at around 33% for the year, it's going to be lower for the remaining quarters of '04.

As you go into '05, I would keep it at 33%, 34%.

And Bill just a couple of general questions.

Clearly retailing was a very strong vertical for you in Q2.

Were there any other standout verticals that you might refer to?

And could you share with us the pricing environment as it exists today?

I'll take the front end of that, Peter, and actually before I answer the question directly just with regard to other vertical market traction and the pricing environment, I'm going to have Todd Abbott also jump in.

What I wanted to do was make sure you and everyone on the call understood our perspective of the Q2 performance on an earnings per share line basis.

The way I would like at the quarter is you look above the line.

We had puts and takes that pretty much cancelled each other out.

Below the line on the tax line we got about 2 cents of benefit.

On a core operating run rate, essentially the Company was operating at about a 10 cent per share core operating run rate in Q2, 12 cents.

We got about 2 cents of benefit, which largely is - - you can see on the tax line, that's the way you should look at the Q2 performance.

Let move on now to vertical market traction.

As we stand here today, Peter, we still have the vast majority of our resources in the Company focused on retail.

We have not executed as well as we need to in terms of balancing our resources across all of the 6 verticals we're targeting.

We're doing a better job at targeting other verticals.

And you scan see we're making traction in the public sector with wins for the first responders, and some of the applications you're seeing in state and local government.

You can see that we continue to move forward in the transportation and logistics sector, and we're making some progress there.

However, we have a long way to go in the Company, and really the challenge we have, Peter, is coverage.

We don't have a demand problem, we have a coverage challenge.

And as we continue to move OpEx more from the G&A side of our balance, to be able fund greater sales coverage and more product development, you're going to see us to extend further into each one of those 6 core targeted verticals.

I'll have Todd give you some more detail.

The second would be on the pricing environment.

The pricing environment overall remains stable.

There are point deals out there, particularly in government, where the pricing can get very, very ugly.

And along those lines, there are point deals in government, there are also point deals in the commercial sector where some of our competitors whose pipeline may not as good as ours get very, very aggressive.

And that's where we tend to decide and make the key decision as to whether or not we want to be equally aggressive.

But generally speaking, the pricing environment is okay.

Todd.

I would agree with that.

And I would also just in terms of positioning that we know that we want to get back to reporting a breakdown on our revenue by vertical.

We're working aggressively on implementing that plan.

We have some good velocity on getting the sales out data from our channel, which is the key requirement to be able to have accurate data to report.

To be able to demonstrate and show the trajectory that we're getting on a more balanced revenue contribution across those verticals.

We're seeing some early signs of better balance, like we are seeing some good signs from a geographic standpoint.

But until we've got a fact based reporting mechanism in place, we're not going to be -- we're not going to be sharing that data, because we want it to be accurate and fact-based.

We would expect to be able to start doing that probably coming out of Q4.

Thank you all.

Thanks, Peter.

We'll go next to Arindam Basu with Morgan Stanley.

Hello.

How are you?

A question, Bill, on the Asia-Pacific environment, you know, you talked about Asia-Pacific bookings being down quarter over quarter, and then you talked about Nimax and the Ingram microsituation.

I'm wondering if you had any conversations with them about integration.

Because I'm just wondering ir you're going to see any bookings lumpiness if the operations are integrated and inventories are reconciled among those 2 guys.

So first on Asia-pacific, Arindam we had a very very good Q1 in revenue there, and a very good Q1, it was almost up 100% year on year up in bookings.

And so the ability for that team I think to carry that momentum forward into Q2 is a bit of challenge.

Now, make no mistake about it, we're not going to embarrass this team with a low goal, and we expect a lot more out of Asia-Pacific.

That being said, I wanted to make sure people understood the relative balance of the Q2 versus Q1 performance.

Todd, you got any comments on Nimax?

I would expect no lumpiness as a result of the Nimax transaction.

Okay.

Thanks.

Now, you mentioned AIT3 that was, was that 12 million recurring?

Yeah, we were getting about 12 million a year, of which 5 million was about product, and the rest was service.

Okay.

And then Mark could you give us a sense on the drawdowns of the short term borrowings that are going to be required to fund Matrics.

Do you think we should be factoring in some higher interest expense for short term borrowings in the near term?

And then you talked about doing the equity financing to finance that, are you anticipating raising an additional amount in terms of working capital cushion beyond that?

Right.

Well, first of all, to answer your question on the borrowings, yes, once the transaction closes, what we'll do is we'll drawdown on the credit facility that we've set up in order to close the transaction.

So subsequent to that, there should be some additional interest expense, as well as the amortization of the fees related to that borrowing.

And that actually was - - those costs were included in the 5 to 6 cent diluted impact that we had talked about on Tuesday.

Okay.

Gotcha.

With regard to, then, the capital markets transaction that we will then do to basically take out the bank borrowings, we haven't - - I believe we'll probably do equity or equity length.

We haven't decided finally.

We're going to reserve the right to make sure that we do the right thing.

But certainly our preference right now is some sort of equity or equity link transaction, and that's the other part of the dilutive impact that you would see.

And with regard to amount and things like that, I think, you know, we're just going to have to wait and see, and decide what the right thing to do is.

So we're still finalizing that right now.

Okay.

So when you mentioned that last part, the equity to equity link is part of the dilution that you might see, that's also part of the 5 to 6 cents that you factored in?

Absolutely.

My feeling is that there was a little bit of confusion in terms of the impact that we talked about this year, and people extrapolating that to a full year impact.

You need to keep in mind that the way we've set this up, we're actually going to raise the funding to close the transaction with the banks.

And then we're going to raise the funding again to add permanent capital to take the banks out.

And as a result of that, you're having a little bit of extra costs in the second half of the year that contributed to that 5 to 6 cents.

That isn't going to be a recurring sort of item.

Gotcha.

Thank you very much.

Take care Arindham.

We'll move next to Paul Coster of J.P. Morgan.

Hi, I'm still just a little bit confused from that last point.

The 5 to 6 cents dilution, is that post the dilutive effects of the equity?

The way we calculated that Paul is we looked at what the bank borrowings were going to cost us in fees and interest, and then also the influence of share count related to an equity or equity linked transaction.

And that's how we calculated that 5 to 6 cents.

Okay.

Got it.

All right.

Thank you.

A couple of nitpicky things.

I think that Bill, I think you've already addressed this but I just want to make sure this I've got this straight that if you exclude some of the 1- time items, gross margins were probably closer to 46.5% this quarter, and operating margins were probably closer to 8%?

Yeah, I think you're right.

It's probably more 8.5% on operating margins Paul, but you're absolutely right.

If you exclude through 1-time items, the Company's core run rate was about 10 cents, and you are absolutely right to point out at that the operating margin margin is probably more in the 8.5% range.

Paul if you look at the first quarter, we had that 5 cent charge to taxes excluding that we were at about 8.

I think we were running 10 cents this quarter and as we've guided, we think the third quarter is going be up another penny or 2 to 11 or 12 cents.

So I think we're making good progress.

Feels like just a brief high on the operating margin improvement.

When were we go going to get 15%?

Paul, as we said in December of 2002, we thought it was go to take 3 years.

We think by the end of next fiscal year, it's possible we could exit the year at about a 15% operating margin.

I agree.

I think if be keep growing the top line like we are, and making progress on OpEx, and as long as the margins are - - the product margins are holding in there we're going to get uptick from service margins, we're going to get leverage on the revenue growth, we're going to get leverage on the OpEx.

And I think if we continue along this trajectory, we should be able to get there as we enter into the second half of 2005, and if the revenue growth is a little bit slower, is I think it's early 2006.

But right now we would be driving toward getting to those sorts of levels by the end of '05.

Is it unrealistic to expect further improvement in DSOs?

Other than maybe a day or 2, I think that's right.

It's going to be very tough to drive them much lower.

I do think, though, on the inventory side, we definitely have potential there.

I mean, we made a couple of a tenths of a percent improvement in the turns.

But at 4.4 turns we're still well below where we think we should be.

So right now we need to turn our attention to inventory.

And make sure that we're really driving that as hard as we can.

And that's probably the best place for us to go and get some further working capital improvement.

Because to your point, the receivables, I think we've done just about all we can do there

And Paul, the only other point I want to make on DSOs, I made this point on the last call but I want to remind everybody.

Because our service revenue is on a cash - - I'm sorry, is on a bill and collected basis, so it's a cash basis accounting, the DSOs that we quote are largely from product only revenue.

However, if you were to include, and I'm going to give you a kind of a gut on this one, if you were to include service on an accrual basis, and back service into the DSO number, the DSOs would probably go from 23 days to close 33 to 35 days with services back included, which is pretty darn good.

It's actually quite excellent.

So I want to make sure that you know that.

Our DSOs for services have also come down dramatically in the last 6 months.

From a high of over 100 days to about 59 days.

So that's why the DSOs when you bring services back in now only adds about a 10-day to maybe 12-day increase to the current DSOs we have.

Okay.

Last question, December is generally pretty strong.

Why is that, and should we expect it this year?

What month did you say?

The fourth quarter

We actually are going to give fourth quarter guidance on the third quarter call, Paul.

I know, I'm just trying to get a move ahead of everyone here.

I noticed that.

Trying to leap frog.

Generally it's seasonally strong isn't it?

Why has that been in the past?

I think last year, Paul, it was a little bit seasonally strong simply because we had some big orders.

We had some lumpy orders that it came into the quarter.

And we also - - you know you also have the Christmas time rush for point of sale scanners, and otherwise.

But I wouldn't say right now that you to can call Q4 a trend with regard to that.

And right now seasonally speaking we are we're still learning about our seasonality a little more so as a Company.

Okay.

Thank you.

Take care.

Our next question comes from Reik Read of Robert Baird & Company

Hi.

Good morning.

How you doing?

Bill, you talked a second ago about a coverage problem with respect to the number of the verticals you're focusing on.

Can you talk a little bit more about the extent of that problem as you see it?

And the steps you need to solve it, and now long it takes to implement those plans?

Yeah, so Reik as we - - as I mentioned we earlier, we've got the vast majority of our coverage, sales coverage in the Company is still pointed at the retail vertical market.

And I would say it's almost 80 to 90% of that coverage today, in that kind of a range.

We're still not covering effectively the other vertical markets where there is significant opportunity.

The - - what we're doing right now, what we've continued to do, is we're looking hard at exactly the fact base of what we have covered, what we don't have covered.

We have already contracted with outside firms to help us to review this.

We do continue to make some strides with respect to adding headcount into sales, and with getting greater coverage overall and we're doing a better job.

Over the course of this year, as money frees up from the G&A side, as we take down our expenses in G&A, and we're able to fund more so sales in our product group, sales being the first priority, and out into the beginnings of '06, you're going to see us continue to add sales headcount as aggressively as we possibly can add it.

Because this is a huge opportunity for Symbol in the market.

It's absolutely huge.

And we're missing it, and partly we're missing it because we want to.

You know, we've got a change program underway, and you can only crawl - - you've got to crawl before you walk before you run.

And so we're taking our time and making sure that we're doing what we need to do.

The second thing is, is that we're working with the sales team now to definitively understand what those markets are.

And the third thing is we're going to be - - as we free up the money from the G&A side, and as we're able to add more operating expenses on a run rate basis, because we're more comfortable with the top line, you're going to see us as a first priority to add sales people.

I think the only thing I would add to that is that fundamentally is also one of the key drivers of our channel centric approach is that channel and recruiting channels that sell into these other verticals that we're unable to cover from a direct standpoint, it gives us the extended coverage from the historic run rate.

So that a key aspect of the interim evolution of extended coverage.

So if we were to look at this growing forward from just a financial perspective, as you improve internally your SG&A, or your G&A, that's going to go into sales?

And we really shouldn't expect in terms of absolute dollars the operating expenses to really come down in - - for the foreseeable future?

Is that a fair statement if?

That's a fair statement.

Reik, I think we've been pretty clear.

For the rest of the year, we've talked about OpEx in the 160-165 range.

Yeah, and I guess, Mark I'm looking beyond that, because that's why I'm wondering how long does this plan take to implement?

Well, see Reik, I think what you need to know is that the vast majority of this headcount increase will most likely come at the end of this year and in '06, I'm sorry in '05.

The benefit we'll probably get won't be seen until the second half of '05.

Okay.

And then just one follow-up question on the Matrics acquisition.

Are you guys prepared to give, you know, any kind of EPS guidance at this point?

And if you're not, can you just at least talk to us about, you know what will be the changes in terms of Matrics operating loss next year, so that we can just try to understand what the dilution might be?

I'm sorry, but I just can't.

And all I can tell you is that as soon as we can, we will give you that information.

And I think actually, you know, you will get some - - eventually you'll get some historicals on it.

And you'll get to see obviously as we're talking about it, and what we plan in the future more detail on that.

But as of this time Reik, there's really nothing we can say.

Okay.

Thank you.

And we didn't make this acquisition for this to be dilutive for a very long period of time.

We made this acquisition because this right strategic move to make, and as Mark said we can't talk about 2005 right now.

But be assured the team going work hard and is excited about the opportunities we have in '05 and beyond.

Great.

Thank you guys.

Take care.

We'll move next to Jeff Kessler of Lehman Brothers.

Thank you and just one comment.

When your competition starts telling you how great the acquisition of Matrics is, I guess its something to perk up your antenna on.

If the competition is saying it, as well.

Well, as you know, they don't call us and tell us that.

But we're happy to hear that's what they're saying.

Well certainly your stock price didn't indicate it yesterday either.

Just one calculation is that when we add back in some some of the costs in your table, you do take out the Schwartz payment, but when you actually take out the $3.9 million restructuring and the $1.1 million gain out of it, we calculate an 8.7% operating margin for the first quarter.

That's right.

That's exactly right.

That's what I said earlier.

And the gross margin comes in it looks like 46.1%, somewhere in that area.

Maybe a little over that.

That's correct.

But it was a little bit above 8.5% for the operating margin.

I guess the question that I have is on your partner select program, you went through it by region.

But I'm wondering if you could give I've you did not give a big broader perhaps overview of where you are in terms of not just partner select, but in terms of convincing your partners and your channel out there to hand over or to take on, to give you the service function.

You've described service in terms of the numbers.

We know that it's essentially flat sequentially, but I would like to hear some anecdotal information from you as to how successful or not successful you are in, number 1. implementing the partner select program?

And number 2, getting your channel partners to give you over, or to hand over to you the - - that service function?

So very quickly Jeff.

The anecdotal feedback is good.

It's getting better.

In fact some of the more staunch partners who were originally very, very disappointed and very angry with Symbol going back 2 years ago when we first announced partner select - - - I'm sorry, is it a year and a half now?

A year and a half ago when we announced partner select, I can't name names, about but 2 of them this particular quarter have just agreed to work more closely with us.

A transferring their service business to us.

And B. signing back up to become Symbol partner select hardware resellers as well.

And so we've been working hard - - we recognize that there's been some dislocation for many of those service partners out there.

And our goal was not to drive dislocation for their business, our goal was to improve quality, customer satisfaction, and get a better handle on the business.

And we're happy to see that some of these very large more disappointed partners a few years ago are beginning to work much more closely with us and coming back.

Any other comments John?

I think just 2 other quick things.

I think a lot of it also has to do with our execution capability from a service standpoint.

And we've reviewed in a previous call some of the metrics and performics that we're driving on service execution.

And so when we can consistently and reliably deliver a high level of service through our consolidated center in El Paso, it certainly helps to drive the confidence that we need.

We're also now starting to see a lot of passthrough sellthrough business to our partners of our service.

And that's another indication, another anecdote of the success of the strategy.

With that said, again we're still talking about sequentially flat types of service revenue.

When do you think given the anecdotal stuff you've just given us you can get some type of sequential improvement in the service business?

I don't think, we're going to see that as is I've said Jeff for the last few quarters until 2005.

And even in 2005 I think the first half will be some sequential improvement, not significant, but the second half should be improving.

It's about attach rates, Jeff.

It's all about what we're doing right now to drive up the attached rate for services both on new contracts, and of course those contracts that are reuping with us.

Reupping on service.

And I can tell you anecdotally, the attach rates are improving sequentially, we're getting better because we're measuring it maniacally.

Every single week, but we are still far from where we need to be an attach rates.

And take it from me the team understands what we need to accomplish here.

It's also about putting the capability to deliver service in some countries where we haven't had it before.

Which obviously affects to ability to have attach rates.

So in a lot of the international theaters frankly we have not had the capability.

And we're at various stages of implementing and improving that.

So going into next year, that's the right guidance.

Okay.

One final question.

For probably about the last 2 years there's been an ongoing debate as to what the relationship is of good revenue growth in some of your channel partners that are publicly reported.

Obviously ScanSource is a good example of that.

And any relationship it might have to Symbol given that there is business moving and consolidation in to ScanSource from some of your smaller partners who can't go direct to you anymore.

It may be skewed a little bit, but is there any way for us to extrapolate what ScanSource says on to Symbol's indirect business as a predictive measure?

There really isn't Jeff.

And I certainly wouldn't want to comment on ScanSource and how they report revenue and what they say.

Let me just tell you this: A good chunk of the channel indirect mix is really coming from shift versus incremental.

We are see some incremental growth there's no doubt in the channel.

But a good chunk of the mix shift from direct to channel has been shift from direct to channel.

Not as much in incremental.

We're getting a little bit better.

Incremental revenues are growing a little bit, but it's been mainly shift.

Okay.

Great.

Thank you very much.

Take care.

We'll move next to Ajit Pai of Thomas Weisel Partners.

Yes, good morning gentlemen.

How are you?

Good.

The first question is more of a housekeeping one.

You have an $8 million item I think in interest expense or income.

Could you give us some further color into what that is and where's that's going to be going?

That's where you see the $6.2 million noncash charge for the Cisco sales

Right.

And the remaining 1.8?

Is going to be a myriad of miscellaneous items that run through there.

So that shouldn't be recorded in the next quarter?

Normally you're going to see, you know, other income expense, you know, a million or so either side of zero.

Okay.

The second question is about your gross margins.

You have guided 45% to 46%, but for the past 2 quarters of you had above 46% on a pro forma basis gross margins.

Going forward with the higher revenues, why do you expect the gross margins to actually decline?

You're still going to see -- we still believe that there's going to be some increased competition.

We're trying to be a bit cautious there.

We mentioned that we believe that we should get - - start to see some improvement in service margins.

But nevertheless, you know given the competitive environment as it is, and, as we've talked about, we're very focused on market share growth, but it needs to be profitable.

There could be a little bit pressure on the product margins

And the net net Ajit there is that we still don't have a bracketed high to low product line that's going to allow us to compete more effectively in the lower and the mid-space of the market.

So if we have to, in certain cases on the MC9000 platform, sometimes the pricing is somewhat impacting the fact that we just don't have a mid-range product out in the market that we intend to have out by the way in the next 3 months.

Actually 4 months.

So we will have something this year that will help us a bit along those lines.

And then as we go into next year, we have a whole host new product announcements that we've funded for the last year that will be coming out on the lower end of the product line as well.

At good margins that will help us to get back on track with possibly driving towards higher margins In '05.

Okay.

And just moving on to your scanner products right now, could you give us some idea of what the mix has been in terms of laser scanners versus imaging scanners and what your strategy is right now on the imaging side of things.

We don't have that right now Ajit but we'll get it to you.

We'll make sure we get it to you.

I do want to be clear here.

We do have imaging products in the market, and we're proud of our imaging technology.

We came out with an engine last year quarter called the Pico Imager which is a dynamite product.

And quite frankly in compare and contract to our competitor's it's far exceeding their capabilities.

And although we were slightly behind in imaging, we feel like we're making a quick comeback.

And we intend to announce some new products quite frankly in the discreet scanner space very shortly that have image capability.

You notice anything else Todd?

Todd Hewlin, cause there are 2 Todds that are in the meeting today.

This is Todd again.

I'll just say that you saw in Q2 us launch something we call a digital scanner.

Which is an imaging based scanner to read barcodes omni-directionally.

And I'll leave it for follow up for you to get the details on the product.

But we do think it really does set the new high bar for using imaging technology for data capture in at a speed and in a way that there's no product on the market that matches it today.

So we're very proud of being technology agnostic in ways.

We selling many more laser scanners than we sell imaging scanners.

But from a technology perspective, we see big growth in imaging and we're making the requisite investments in R&D to really be competitive and lead there.

Okay.

What was the largest - - or not who was the largest but what percentage of your revenues was the largest customer you had during the quarter?

Well we don't have any 10% customers.

We have no 10% in customers.

The only 10% customer we have is ScanSource.

Okay.

And the last question would the mix in your SG&A.

Could you give us some indication of sales and marketing and G&A, again just a proportion over there?

And also I guess part of the same question and perhaps could you give us the headcount at the end of the quarter versus at the end of the year?

I'm going to have to get back to you all those details.

I mean once again with regard to the SG&A, the one thing that I would say is that every quarter, and we're going to continue to do this, we're moving money out of G&A, and into sales and marketing, as well as into engineering.

And we we would like to be able to adjust that mix quicker, but we are making steady progress on doing that.

And with regard to headcount, I think the worldwide headcount was probably around 5600 at the end of the quarter.

And that really is not all of that different than what we've seen over the last couple of quarters.

Thank you so much.

Take care Ajit.

We'll move next to Mark Roberts of Wachovia Securities.

Good morning.

Good morning, Mark.

Going back to some of the market share questions, where you were talking about gaining market share, if you think about it in maybe not so much in the verticals, but just of in the class of where we are in the supply chain, are you seeing yourself pick up market share more in your traditional retailing focus?

Or is it market share in logistics and distribution, or someplace else?

It really, Mark, is across the board.

There's not one particular market where we think we're gaining more market share than others.

It's across the board.

Are you seeing market share gains for applications that are actually within the manufacturing process?

Manufacturing has been an area that we have put some increased focus on over the last 12 months.

We've had some early wins there.

It's a developing market really from a mobility standpoint.

So a little bit early to tell, I think, in manufacturing.

But we feel pretty good about where we're headed.

Okay.

Thank you.

Take care, Mark.

Your next question comes from Earl Ruddman of Ruddman Capital.

Good morning Earl.

Good morning.

We don't have a question at this time.

It's been answered.

Thank you.

Have a good day.

You too.

We'll move next Zack Lieberman of Reliance Management.

Good morning.

I have a 3 fold question regarding the Matrics acquisition.

Number 1, what's the status of the patent infringement case with [Intermec] and how comfortable are you with it?

On the patent infringement case. let me be clear here, [Intermec] is both a customer and a competitor to Symbol Technologies.

We of course in doing due diligence had a - - really better understood this particular case.

And we feel confident that we're going to reach a reasonable conclusion with them in the forthcoming several months.

Okay.

My next question is regarding the manufacturing operations of Matrics, do you anticipate moving that to Mexico?

No, we do not.

You do not.

And my last question is, regarding the tag business, do you anticipate that that's going to be just a commodity with low margins?

So on the tag side, I'm going to ask Todd Hewlin to take a shot at that right now.

However on the call the other day, we did talk about the fact that this business is an important business for us over the course of the next few years.

And we feel they have a good lead.

Their dual dipole technology in particular is one reason they get such great read asks the reads and their read rates are so high.

Todd did you want to comment any further.

I think add we mentioned on Tuesday is that we really believe there is value in the end to end system for RFID.

And this is what we've been hearing from customers in our due diligence prior to the acquisition.

It's what we're hearing from our customers separate from the acquisition of Matrics.

Customers are asking for 1 supplier to bring a system.

Bring the tags, bring the readers, both fixed and mobile readers by the way and bring the system level software that makes it work together, makes it manageable.

So we really do see margin at the system level in how RFID is going to get deployed as these deployments steps from these pilots to the product rollouts.

Thank you so much.

Take care, Zack.

We'll go next to David Fineberg of Morgan Stanley.

Hi.

My questions have been answered at this time.

Thank you.

Moving on, we'll go to Ryan [Novastic] at Sea Haven.

You give guys give us a little color on this kind of 15% annual growth target you've had in the past.

And what you expect that be to be from now until the year end 2005

I missed the last half of your question.

I think you are asking to give you some more color on the 10% to 15% growth guidance?

Revenue growth guidance?

Right.

We feel comfortable that that guidance is - - remains solid.

Thanks.

We have a goal low up question from Paul Coster with J.P. Morgan.

Actually my questions have been answered.

Thank you.

There appear to be no questions in the queue at this time.

I'm turn the call back over to you.

Did you say there were no questions, operator?

That is correct.

There are no further questions in the queue.

Okay.

Well, let us conclude the meeting, then.

First of all, thanks everybody, for taking the time to be with us this morning.

We, of course, as you know, changed the format of our conference calls where this is the first time we actually sent out the presentation the night before we were actually doing the conference call.

We would love in the 1 on1 sessions afterward if you would give us some feedback on how you thought this call went versus others so we can continue to improve for you.

Take care, have a terrific day.

Bye bye.

And that does conclude today's conference.

Have a great day.