摩托羅拉 (MSI) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to Symbol Technologies first-quarter 2005 earnings conference call.

Just as a reminder, today's conference call is being recorded.

At this time, I would like to introduce our speakers, Mr. Bill Nuti, CEO, and Mr. Mark Greenquist, CFO.

Please go ahead, gentlemen.

Hi, this is Mark Greenquist.

Thank you for joining us on our 2005 first-quarter conference call.

Please note that the conference is supported online with presentation content available at www.symbol.com/investor.

With me today is Bill Nuti, Symbol President and CEO, as well as other members of our management team, mainly John Bruno, SVP of Corporate Development, and Sal Iannuzzi, SVP and Chief Administrative and Control Officer.

Before I review our first-quarter results, a brief disclaimer reflecting the Safe Harbor provision of the Private Securities Litigation 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 future financial performance of the Company.

Such statements are solely 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 filings are available from the Company upon request or by accessing our Company website, www.symbol.com, where you'll also 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.

And as required, in this presentation we provide a reconciliation of those measures to the most directly comparable GAAP measures.

I'm on slide three now.

After reviewing our first-quarter 2005 financial results, we will provide our customary commentary on geographic and product mix.

We'll also bring you up to date on new product and present a snapshot of recent key customer wins.

Also, we'll provide the customary bookings and backlog metric and close with an update of our outlook for 2005 and guidance for Q2 '05.

Then, we'll take your questions.

First, I'll turn it over to Bill for a brief overview of our financial performance trends in Q2.

Bill?

Thank you, Mark, and thanks to all of you today for joining us.

I'd like to share these metrics with you to demonstrate the continued improvement we're making as we execute our strategic plan and advanced Symbol into a leadership position in the enterprise mobility market.

Even though the first quarter is our industry's most challenging quarter from a seasonality point of view, it was a record quarter for Symbol.

We were especially pleased to achieve sequential growth, while most in our industry have seen their business decline in the first quarter.

This speaks to our continued momentum in the market and our keen focus on market share gains.

However, we did experience somewhat lower revenue than we had expected as the economy cooled a bit in the first quarter, as did IT spending.

A Merrill Lynch survey of United States and European CIOs released last week found that while spending was below plans in both the United States and Europe, during the March quarter, many companies expect technology spending to be on track in Q2.

Let me take you through a brief overview before Mark goes into detail on the quarter.

Q1 2005 was a record quarter for Symbol Technologies, with revenue of 458 million.

The first quarter represented the eighth sequential quarter of increased product bookings.

Q1 was the fifth sequential quarter in which we had DSOs below 30 days.

And inventory turns of 5.8 were the highest of any quarter in the last two years.

With cash flow from operations of about 73 million, Q1 '05 was another solid performance for cash generation.

And we continued to have strong cash balances, with 218 million at March 31, 2005, which does not include the 52 million of restricted cash on the balance sheet.

Also, cash balances remained unchanged in Q1 '05 versus Q4 '04, even though we paid down 50 million in bank debt.

These continued accomplishments demonstrate the hard work and commitment of Symbol associates, as well as our channel partners, and I want to sincerely recognize them all for driving a solid financial performance while the Company has worked diligently to improve operations.

This has been achieved in part because we remain focused on the needs of our customers and partners.

Now, let me turn the mike over to Mark to run you through the numbers.

Mark?

Thanks, Bill.

As Bill mentioned, in the first quarter, we continued to build the Company's fundamental financial strength.

Year-over-year, total revenue was up 9%, growing to 458 million in Q1 '05 from just under 420 million a year ago.

It increased 2% sequentially from 451 million in 2004's fourth quarter.

Q1 '05 product revenue rose 10% year-over-year to 384 million from 348 million a year ago, and was up sequentially 2% from 375 million in Q4 '04.

Service revenue for Q1 '05 of $73 million was up 3% year-over-year but was down 3% sequentially.

Turning now to gross margins, gross margin of 206 million or 44.9% of sales was down 3.2 percentage points sequentially and down 1.6 percentage points year-over-year.

In Q1 '05, gross margins were unfavorably impacted by a strengthening U.S. dollar, which negatively impacted Symbol by just over $2 million in Q1 '05, or about $0.01 of earnings, as well as a greater-than-normal mix of larger customer lower margin revenue in the quarter.

Operating expense in the first quarter at $181 million was approximately 3 million higher relative Q4 '04's 178 million.

This increase was driven primarily by increased costs related to engineering and product development, as well as the increase in sales expense related to our initiative to improve our sales coverage.

Below the operating line in other income expense, net interest expense ran at about $3 million for the quarter.

There were also a couple of negative surprises versus our expectations, mainly the mark-to-market of the Cisco sales negatively impacted the P&L by just over 3 million or about $0.01 a share.

In addition, we did not receive a 2.5 million royalty payment due to us from Proxim as part of our Q3 '04 settlement of a wireless patent dispute.

And this also added another $0.01 downside to our EPS expectations.

The effective tax rate in Q1 '05 was a negative 25%, and this negative Q1 effective tax rate is the result of approximately 10 million of tax benefit representing a favorable $0.04 impact to EPS attributable to refunds and settlements related to a number of previously outstanding foreign and domestic tax matters, as well as the receipt of favorable tax rulings from U.S. and foreign tax authorities.

First-quarter net earnings were $22 million and earnings per diluted share were $0.09 in Q1 '05.

Now, let's turn to the balance sheet.

We ended Q1 '05 with strong cash balances of $218 million, up $39 million from 179 million a year ago.

The first quarter ended with 111 million in receivables, translating to DSOs of 22 days, a four-day improvement year-over-year and a one-day improvement sequentially.

We continue to manage our inventory with the goal of ongoing improvement.

The inventory was down sequentially from 207 million at December 31, '04 to 172 million at March 31, '05 and down year-over-year from about $212 million at March 31, '04.

As we discussed on our last call, this inventory reduction was primarily attributable to the transition of inventory to a distribution center owned by one of our large retail customers as we ceased in Q1 '05 the practice of holding this inventory in a Symbol-owned facility.

In addition, our operations team continues to make good progress in overall inventory management.

As a result, first-quarter inventory turns of 5.8 represented a 1.3-point improvement sequentially and a 1.6-point improvement versus Q1 '04.

Current liabilities at March 31, '05 decreased about $59 million from year-end '04, primarily due to the repayment of $50 million of our short-term bank debt and at the end of Q1 '05, we had 50 million of our short-term revolver drawn and $100 million of term debt outstanding.

Let's turn now to cash flow.

We're pleased with the continued strong cash from operations, $73 million in Q1 '05.

Our ongoing investment in IT infrastructure was the primary driver of our cash used in investing activities, which came in at $23 million in Q1.

This investment in our business, as well as the repayment of $50 million of our short-term bank debt, was funded by our strong cash flow from operations.

And as mentioned previously, our cash balances remained unchanged in Q1 versus year-end '04 at about $218 million.

I will now turn the mike back over to Bill.

Bill?

Thank you, Mark.

First, let me review our progress in leveraging our portfolio of partners to serve end-user Symbol customers.

These charts show product bookings mix, which is a good forward indicator of how products are being delivered to our end-users.

In Q1 '05, we generated 68% of product bookings through our partner network versus the full year 2002, when we had 46% of bookings from partners.

An additional 7% of first-quarter bookings were from our OEM channels, bringing total indirect bookings through partners to 75% of our total Company bookings.

This progress is the result of two years of work implementing our PartnerSelect program, along with delivering channel-focused solutions, services and marketing programs.

Our continued commitment to the development of our channel partners' business has positioned Symbol with what we believe is the strongest portfolio of partnerships in our industry.

Last month, we launched the next generation of PartnerSelect, further strengthening the program which, for the second consecutive year, has earned a five-star rating from Bar Business Magazine.

Among the changes to PartnerSelect are a simplified pricing structure to make it easier for our partners to do business with Symbol and realignment of program tracks related to marketing and technical support.

At the same time, we introduced the PartnerSelect independent software vendor program, designed to promote ISV relationships among Symbol, our solution and business partners and certified -- Symbol-certified professional service providers worldwide.

This program lets qualified software developers leverage our technical, sales and marketing programs as they innovate along with Symbol to create for our mobile devices significantly better applications with greater functionality.

Now on to the revenue splits by geographic theater.

With the strengthening of our sales structure in Asia-Pacific, the reorganization of EMEA sales organization and development of our Americas international business, we feel we are well-positioned to advance our goal of achieving revenue balanced amongst the geographies, with the ultimate goal of a 50-50 split between the domestic U.S. business and our international businesses combined.

We were very pleased with the performance of our Americas team in the first quarter, traditionally a tough, slow quarter.

In the Americas, representing the United States, Canada and Latin America, first-quarter 2005 revenue was up 7.7% sequentially and increased 15% year-over-year.

Bookings were flat sequentially but increased a healthy 15% year-over-year.

We believe this is a sign that our restructuring efforts in the Americas during 2004 are beginning to pay off.

Retailers continue to upgrade and build out their mobility infrastructure for greater employee productivity, increased customer satisfaction and improved inventory control.

We're seeing a number of retailers, both new and existing Symbol customers, planning to broaden their investments in our systems as they recognize the value of an architected enterprise mobility approach.

Several projects are beginning to deploy in the current quarter of Q2.

While I would not at this point call this a trend, we're seeing an increasing volume of larger deals in the pipeline.

Importantly, in the Americas, Q1 bookings through our business and solution partners -- Tier 1 and alliance partners, increased significantly, which we believe validates the value proposition of our channel-centric go-to-market strategy from the customer's perspective.

This strength offset a traditionally slow Q1 in the small and mid-tier of the market through our distribution partners.

While we are experiencing some year-over-year progress in EMEA, revenue in that theater was down 9% sequentially and up 6% year-over-year.

Bookings declined 1% sequentially while up 7% year-over-year.

Our performance in EMEA was impacted by a challenging business climate, typical Q1 slowness in retail spending, particularly for customers in the United Kingdom and southern Europe, and execution issues related to our EMEA restructuring plan.

In Q3 and Q4 of 2004, we initiated the second phase of our EMEA restructuring plan, rebalancing sales coverage by reallocating resources into faster-growing countries and markets.

The rebalanced sales coverage was just completed in early Q2 as a result of slower-than-expected recruiting efforts.

As we've seen in other theaters, we expect the increase and reallocation of sales headcount to drive more consistent growth going forward.

Slide 12.

As we discussed on the last call, 2004 was a year of change for Symbol in Asia-Pacific, with a completely new leadership team and several country-level restructurings.

In 2005, we believe we'll start to see better results from the execution of this change process in what we expect to be our fastest-growing theater.

Sequential performance in APAC was encouraging, although the year-over-year compare is negatively impacted by the previously disclosed China lottery order, which shipped last year in Q1.

Revenue in APAC was up 5% sequentially and decreased 13% year-over-year.

Bookings showed sequential growth of 4% and declined 22% year-over-year.

As we mentioned in March, Hewlett-Packard veteran Michael Muller joined Symbol in January to head up our Asia-Pacific business.

We continue to build out our reseller channel in Asia-Pacific, and at the end of Q1, we had recruited and approved a total of 307 partners, up from 263 at Q4's end.

In Q1, we hosted the first-ever Symbol partner conference in China.

We also hosted our first Asia-Pacific distributor meeting and first Asia-Pacific customer advisory council, all directed at building relationships with partners as well as end-user customers.

Let me add that in early Q3, we will introduce another mobile computing innovation, a totally new mobile computer designed to address the requirements of the Asian market.

In addition to improved sales coverage and leadership stability, we believe that some of the new products slated for the second half will help position our Company for consistent growth from this sales theater going forward.

Now, a snapshot of results by products division.

First-quarter 2005 product revenue rose 10% year-over-year to 384 million, with a 2% uplift sequentially.

This chart shows the revenue split by product group, and as you can see, the mobile computing division in the first quarter continued to represent greater than 60% of total product revenues.

In the first quarter, our mobile computing division revenue was down slightly versus Q4 '04's record performance, but increased a solid 20% year-over-year.

Bookings continued to be healthy, up 15% year-over-year, but down 3% versus Q4 '04's record bookings performance.

The momentum of our core ruggedized mobile computing line was ongoing in Q1 '05.

True to form, the MC9000 continued with strong shipments and bookings, representing the fourth sequential quarter of MC9000 bookings in excess of $65 million.

As of the end of Q1 '05, we had cumulatively approximately 300 million in MC9000 family sales since the launch of this product just over one year ago.

Complementing the MC9000 is the newest addition to our industrial mobile computing product line -- the MC3000 mobile computer.

As anticipated, the MC3000 has seen uptick from our more price-sensitive DOS users who want to upgrade to a current technology CE device that's both rugged and versatile.

And, as mentioned, in early Q3, we will introduce an attractively priced rugged handheld product that fills out our industrial mobile computing line.

Importantly, it will give our partners and us an affordable and effective device to address the lower end in the mobile computing market, a segment for which Symbol never before designed and/or manufactured.

The MC50, the first in our differentiated mobile computing line of enterprise digital assistants, started to gain traction in the first quarter and generated a lot of excitement in our partner community.

Since the launch of our MC50 EDA in mid-January, we've booked more than 24,000 units, of which 19,000 have already shipped.

Tesco, a leading global retailer based in the United Kingdom, is in the process of rolling out the new Symbol MC50 enterprise digital assistant throughout its 1900-store chain in the United Kingdom.

Tesco, like other major retailers, sees the enterprise digital assistant category and our MC50 as an important tool to enable store managers to gain access to back office and desktop applications while out on the retail floor interacting with customers and store associates.

Keep an eye on this category of mobile computers, as we see the early beginnings of a buying cycle in the general enterprise, when corporate IT buyers will begin to consolidate applications and devices such as voice, secure access to corporate data, data capture such as bar-code and RFID, messaging and e-mail, and Internet access onto a single mobile computing device.

We believe that these new products rejuvenating our mobile computing lineup will help sustain the momentum generated by the success of the MC9000 family over the past year.

First, please note that revenue from the Symbol RFID product line, approximately $8 million in Q1, is now represented in the advanced data capture divisions results.

But more about RFID momentarily.

In the advanced data capture division, representing 27% of total product revenue, Q1 '05 sales increased 7% sequentially from Q4 '04, but were down 1% year-over-year.

You will recall that we had a large cordless scanner deal that revenued in last year's first quarter, yielding a difficult year-over-year compare.

First-quarter bookings showed solid performance after a slower than hoped for Q4, increasing 6% sequentially and up 14% year-over-year.

In the first quarter, bookings were at an all-time record, even without the RFID numbers included, and were up in all three geographic theaters, and increased across all traditional advanced data capture product lines, including our scan engines.

Based upon recent competitor earnings reports, we believe that we significantly improved our advanced data capture market share position in Q1 '05 and remain well-positioned for further gains in Q2.

As customers continue to upgrade their point-of-sale platforms, a trend we're seeing in the global retail segment, we're positioned with both data capture solutions and partnerships to continue the positive momentum in our advanced data capture business.

For instance, J.C.

Penney, a long-time Symbol customer and one of America's largest retailers, is rolling out the Symbol LS2200 handheld laser scanners plus our PD8500 secure payment signature capture terminal throughout its operations for more than 1000 stores nationwide.

The LS2200 accelerated its record-setting pace, and in Q1 '05, we shipped in excess of 130,000 LS2200 units, up 10% sequentially.

And first-quarter bookings trend suggests that this momentum will continue.

Sales of our newly launched LS3400 ruggedized handheld scanners are scaling quickly.

These scanners, designed for harsh user environments such as manufacturing and warehousing, saw a quarter-over-quarter increase in unit shipments of more than 70%.

Note that two new cordless variants were added to the LS3400 roster at the end of Q1.

Now, on to the RFID division.

Last quarter, we talked to you about our successful ongoing RFID partnership with Wal-Mart.

Another Symbol partner is Philips Semiconductor, which is providing RFID solutions to a number of customers as part of our EPC Generation Two early adopter program.

Reinhard Kalla, Philips' Vice President and General Manager, says -- and I quote -- "Achieving rapid interoperability will be a critical success factor in enabling our customers to realize the benefits of Generation Two."

These accelerator RFID tags and readers will be an active pilot by the end of the current quarter Q2 '05.

Pacific Cycle is using Symbol RFID systems to manage inventory from its distribution centers through to its retail network.

Ed Matthews, Information Systems Director, says, and I quote, "The Symbol RFID solution gives us unparalleled visibility for our products throughout the supply chain.

We have experienced near-perfect read rates with Symbol's RFID readers and tags, far surpassing the results of other equipment we tried."

As is the case with Wal-Mart, we are in the midst of serious real-world deployments now well beyond the pilot stage.

In Q1 '05, we certified two key distributors on RFID, Blue Star and Westcon, and two more are scheduled for certification in this current quarter.

Our backlog for RFID products, stationary and handheld readers as well as tags indicates continued good progress and momentum in the RFID space in 2005's second half.

Some of you have expressed concern that recent legal actions may somehow curtail RFID activity.

Let me assure you that among our customers, there has been no downturn in the interest, investment and/or the implementation of RFID solutions.

And we remain committed to an air interface protocol for EPC, the most basic component of the technology that is available without a royalty to all companies, in order to drive widespread adoption of this important yet nascent technology.

We were pleased with our wireless business unit performance in Q1.

In Q1 '05, wireless revenue increased 20% compared to Q4 '04 and was up 5% year-over-year.

Bookings increased 9% sequentially, but declined 29% year-over-year.

There is a very difficult year-over-year compare here, because in Q1 '04, we had a total of four sizable deals booked that added up to nearly 16 million in Q1 last year.

We continue to work through a transition period in the wireless world from the legacy fat access points that Symbol first brought to market in the early 1990s to today's wireless switch, with its flexibility and affordability.

Symbol remains as the wireless switch market leader, with a total of more than 40,000 switch units deployed through the first quarter of 2005.

As a percent of Symbol wireless sales, wireless switching represented 46% in Q1 '05 compared to 42% in Q4 '04.

This trend in our business is indicative of the broader industry trend to wireless switching-based products and away from the older access point-based technologies.

In February, we introduced the WS5100 enterprise wireless switch, a hardware refresh of the industry-leading Symbol WS5000 product line.

The WS5100 is designed for large, campuswide Wi-Fi deployments and affords greater flexibility and scalability.

I would like to spend a few minutes now on the progress we've been making in delivering value-added end-to-end enterprise mobility solutions, which has required an increasing focus on developing, selling and implementing software-based products and features.

First, I can tell you that we're experiencing strong early customer interest in our mobility services platform, which launched in Q4 '04.

Although sales are still relatively modest, we're beginning to sell our mobility services platform into our traditional retail market as well as both heavy and consumer product goods manufacturing and to parcel delivery and other transportation companies.

The Symbol mobility services platform is a product that is in response to growing customer concerns regarding the current and expected growth of the mobile workforce, mobile devices, mobile applications and soon-to-be mobile objects with the advent of RFID at the edge of our customers' enterprise.

As the number of mobile people, mobile devices, mobile applications and mobile objects expand, customers are faced with significantly increased life cycle costs and concerns regarding data security.

The Symbol mobility services platform has been designed to drive down lifecycle costs while providing a security management system as robust as any available in the wired world and/or the tethered world.

The Symbol mobility services platform provides low-cost provisioning tools to ease and speed mobile deployment; combines wireless LAN, mobile device, and mobile application management capability to decrease total cost of ownership; provides remote diagnostics capabilities to rapidly resolve wireless LAN or mobile device and/or mobile application-related problems, thereby improving applications' uptime and associate productivity.

Wireless software distribution resources in the mobility services platform are designed to rapidly deploy new software or firmware securely without human intervention, thereby saving costs, and a large number of end-to-end standards plus mobility features that improve overall network security, voice communications and performance, applications performance, data capture, battery life and more.

Also, note the importance of a core software competence at Symbol has led us to expand our software development operations in Bangalore, India, where staffing has grown to 170 today from just 50 a year ago.

Our Bangalore facility now joins Holtsville, New York, San Jose, California, and Rockville, Maryland as one of our four global development centers.

Engineers in Bangalore are helping accelerate the time to market and drive localization of products across all of our divisions.

Beyond the products themselves, the Bangalore team is building next-generation end-to-end features such as voice and security that make our complete platform what we believe is the best choice for customers mobilizing their enterprise applications.

Finally, as mentioned earlier, the PartnerSelect independent software vendor program that we announced in the first quarter has been met with enthusiasm.

It lets ISVs leverage our technical, sales and marketing programs as they develop applications.

Now, onto progress of our global services division.

Service revenue of 73 million for the quarter was up 3% year-over-year, yet down 3% versus Q4 '04, which traditionally experiences seasonally high activity related to peak retail periods.

Year-over-year growth in customer services revenue was up 9% as significant improvements in the delivery execution model clearly generated improvements in the tax rates and improved the customer experience.

In addition, we expect to extend this positive momentum as we continue to see better scores from ongoing independent customer satisfaction surveys.

However, the year-over-year growth in overall services revenue was diluted by a 52% decline in professional services revenues.

While the displacement of legacy products and related service contracts will continue to dilute the overall service growth rate for some time, we're seeing encouraging signs of growth in multiyear prepaid contracts.

This is evident in the increase in the deferred revenue position on the balance sheet.

Identification of partner-delivered professional services offerings and the certification of those partners are also now well advanced, and the transition of that business to our channel partners is essentially complete.

On the professional services front, we're now turning our attentions and focus on reversing what has been a declining revenue trend, developing and rolling out emerging technology offerings related to RFID and wireless solutions.

Service inventories continued to decline and have contributed to the improvement in overall inventory turns.

We have now experienced five quarters of sequential reduction despite the product range expansion and significant growth in the installed base of Symbol products.

Finally, continuation of repair site consolidations and completion of our transitions to concentrate delivery activities in Gruneau (ph), the Czech Republic, and Juarez, Mexico, will help drive higher service profit contribution as we proceed through the next few quarters.

Our focus in services continues to be on improving customer satisfaction and the overall customer experience.

This will drive improved financial results through increased topline growth and margin improvement.

Now, on to a few key recent customer wins.

Here is a sampling of some of our customer successes in Q1.

As part of Circuit City's technology transformation project, announced by IBM and Circuit City in August 2004, Circuit City is installing the Symbol enterprise mobility architecture in its 600-plus consumer electronics stores throughout the United States to improve customer service, workforce productivity and business performance.

In the Netherlands, FIMA (ph), part of the largest nonfood retailer in that country, is installing Symbol WS2000 wireless switching communications networks along with the Symbol mobility services platform server in its stores nationwide and using Symbol mobile computers to ensure shelf price accuracy and to improve in-store inventory management with the goal of eliminating out-of-stock situations.

Australia's Star Track Express is deploying with our partner, IR Data Systems, Symbol mobile computers to track parcels from pickup to delivery.

Star Track also is installing in its 28 sortation depots the Symbol wireless switching architecture, as well as our new mobility services platform for system deployment and management.

And, on this side of the globe, California Overnight, a regional package delivery company, is arming its 1000 drivers with a Symbol MC9000 -- by the way, communicating via the Sprint nationwide PCS network -- for wireless proof of delivery replacing a legacy DOS system in order to improve system functionality and driver productivity.

Now, we'll take a look at recent trends in bookings, revenue and backlog.

Product bookings continued their positive year-over-year momentum with an increase of 9% from last year to reach 383 million in 2005's first quarter.

Our starting Q2 '05 backlog, represented by our unshipped backlog as well as our shipped but not recognized backlog, decreased slightly to 303 million from the prior quarter.

Contributing to this decline in total backlog was the onetime movement of inventory to a customer facility from a Symbol facility, as we've previously disclosed.

This drove a reduction of about 25 million in backlog classified as shipped but not recognized on this chart.

However, as you can also see on the chart, we moved the mix of this total backlog to a higher amount of unshipped backlog during the quarter.

Unshipped backlogs increased about 20 million to approximately 181 million in the beginning of Q2 '05.

We continue to have as one of our main objectives growing our unshipped backlog in order to continue to improve our visibility as well as linearity and the corresponding operational efficiencies.

Now, let's go through our second-quarter guidance.

Although it remains to be seen whether or not Q1 economic sluggishness represents a soft patch or will be longer-term in nature, our guidance today assumes no improvement in the current economic and/or IT spending environment in Q2.

That said, we remain cautiously optimistic about improved revenue growth in the second half of 2005, but feel it is more likely that revenue growth for 2005 will be at the lower end of our 10 to 15% guidance.

Assuming no worsening of economic conditions and/or the IT spending climate, the second half of our fiscal year typically provides both a seasonal uplift, and in 2005 also represents a time when Symbol will introduce a number of new products to further fill out our refreshed and bracketed product portfolio.

In addition, there is increasing evidence that enterprise mobility will grow faster than most other IT segments, and therefore represent a higher percentage of our customers' IT spending.

With that backdrop, we expect revenue in the second quarter of 2005 to be in the range of 460 to 470 million, representing growth of 1% to 3% sequentially and 6% to 9% year-over-year.

With regard to gross margins, we expect gross margins in the second quarter of 2005 to be in a range of 45% to 46%.

This gross margin forecast includes the impact of higher RFID revenues at lower margin, very large mobile computing rollouts at lower-than-traditional margins, and an increase in channel program promotions.

For the second quarter of 2005, we expect operating expenses to remain higher than we would like as a percentage of sales as we continue to invest in the business to position Symbol for future growth.

Nevertheless, we do expect to see some decrease in operating expenses in Q2 '05 to a range of 177 million to 180 million.

Going forward, we are planning to adopt a more conservative approach to reducing our total operating expenses, both on an absolute basis and as a percentage of sales.

In this regard, we are currently developing a comprehensive action plan to reduce our operating expenses and overall cost structure.

And while we cannot discuss the details with you now, our target is to lower our OpEx run rate to approximately 170 million by year-end 2005.

On our Q2 2005 earnings call, likely to be held in early August, we will provide details on any charges associated with this plan, as well as outline the anticipated financial impact to our operating margins in 2005.

The goal of this process is to increase our operating margin safely into double digits by Q4 2005, setting up the Company for much improved earnings traction going forward.

It also happens to be very good timing for us in that as we complete our three-year turnaround plan, which was announced and started in 2003, our attentions can be focused on organizing around growth and profitability principles versus completing a successful turnaround.

The net-net is that the turnaround phase of our strategic plan is nearing its end and our primary goals have been achieved.

Now is the right time to take the great work that has been substantially completed and turn it into bottom-line leverage for our shareholders.

On the tax line, after experiencing onetime favorability in Q1 '05, we expect a negative onetime $5 million impact from a change in New York State tax law.

To summarize briefly, we will write down a portion of our deferred tax assets to reflect a future reduction in New York State taxation that will negatively impact our ability to fully recover the value of the deferred tax assets on our balance sheet.

As a result, the effective tax rate, which would otherwise be at about 34%, will likely be approximately 50% in Q2 '05.

In total, this level of revenue, gross margin and operating expense performance, combined with a higher effective tax rate, would have Symbol generating Q2 '05 diluted EPS of $0.05 to $0.07 per share.

Without the impact of the onetime negative tax impact, diluted earnings per share would be $0.07 to $0.09 per share, which would represent core run rate Q2 operating margins of approximately 6.5% to 7.5%.

I want to thank you all for joining us and thank you for your continued interest in our Company.

Now we're going to open up the lines to your questions.

Operator, you can open up the lines.

(Operator Instructions).

Paul Coster, J.P. Morgan.

Revenues came in a little bit light this quarter.

And yet, the guidance was issued two-thirds the way through the quarter.

In addition, part of the weakness appears to have been related to currency movements.

Yet, the appreciation of the dollar was in the first half of the quarter, not in the second half.

Can you just give us some color on why things disappointed, Bill?

Yes, I'll give you color on the revenue and I'll ask Mark to address the currency impact.

On the revenue side, as we approach the last month of the quarter, I think there were two key factors that led to missing by about $7 million in revenue on the guidance line.

The first, frankly, was lower-than-expected sales through distributors.

We had anticipated about approximately 6 more million in what we call sales outfall through the distribution channel.

The second would be the first quarter was an anomaly for us with respect to our book -- what we call our book-to-ship terms, and all that means, Paul, is in a given quarter, if we book approximately $400 million in a quarter, we typically could ship approximately 60% of that -- against that.

We had several very large deals that came in in Q1 in excess of $10 million to some approaching $20 million that had longer than one-quarter deployments or rollouts, which also impacted our ability to turn those bookings into revenue in the quarter.

Hence, what ended up happening, we had a lower-than-normal -- in fact, the lowest that we've ever had since I've been here -- of book-to-ship turn ratio in Q1.

And a lot of that, frankly, happened in the latter part of the quarter.

And then, I would add to that that I think we began to experience some of the slowness, I would say economically as well as with regard to IT spending, in those last four weeks.

But, you know, Paul, also there was a little bit of misexecution on our part.

There were areas where I think we could have executed better to drive to a higher topline, not by much, but those were the general factors that impacted revenue.

Mark, why don't you talk about currencies?

With regard to currency, Paul, as we said, it was about a $2 million hit to gross margins.

That was about a 50 basis point hit from what our expectations had been.

I guess it's important to note, though, that versus the fourth quarter, we had discussed the favorability in the fourth quarter that we had from currency.

I think we said that it was about a 1.5 point uplift to gross margins in the fourth quarter.

So a full 2 points of the gross margin swing from fourth quarter to first quarter was really just due to the lack of the favorability that we had in the fourth quarter due to currency and a little bit more hurt in the first quarter.

And then, the remainder of the gross margin was really as we discussed, a higher mix of large customer lower margin business and we had incrementally a little bit more RFID revenue, which comes in at below average.

Although that impact year-over-year would be larger but, versus the fourth quarter, it wouldn't be that big.

Just so I'm clear on currencies with you, Paul, when we say currency impact, it's largely due to the FAS 133 repatriation of dollars back onto our balance sheet, not with regard to how we price products in the market, because we price products in the market based on local currency.

I just wanted you to know that.

Got it.

Second question, there was no mention this time of legal costs.

Can you just give us some color on what's happening there and are they likely to be an issue later on this year?

Yes, we had talked about the fourth quarter, the legal costs specifically for the defense of prior associates had been running between 4 and 5 million in the first quarter.

It ran at just over 4 million, so right in line with our expectations and roughly the same as it was in the fourth quarter.

And we think that that will continue into the second quarter as well.

Paul, don't expect any relief on this 4 to 5 million a quarter of expenses for dispense of prior management, if we can call him that.

But, at the end of the day, we're going to experience that for probably the next two to three quarters in that many of the upcoming trials, I think start in Q3.

If I'm correct.

Got it.

Last question.

Why are you not disclosing more about this intended reduction of operating expenses at the moment?

So, I will close with that.

So, we are in going to, over this quarter Q2, put a plan together to bring down the expense structure of the Company from a run rate of approximately 180 million to 107 million.

But what we're really going to do, Paul, frankly, is take the expense structure down about 12.5 million a quarter and we're going to take 2.5 million and fund greater sales coverage.

We are at a point in the turnaround plan for us where we can actually now do this.

We're ready to move forward.

We were not ready, Paul, until this point.

We were still deeply involved in the turnaround.

So the goal of this to get down to 107 million is really all operating margin related.

However, frankly, let's be clear.

Over the last two years, we have consciously thrown an awful lot of cost at just about every function in this Company.

G&A got a lot of costs thrown to it for the purposes of driving the restructuring -- I'm sorry, of the restatement -- as well as Sarbanes-Oxley certification and the overall turnaround.

Inclusive of that in the G&A functions, of course, we threw a lot of costs at leadership development, at information technology for business transformation and certainly at legal for all of the obvious reasons on the legal side.

We threw a lot of costs in our global products group to completely refresh our entire product line and the team has done a wonderful job at that.

And we've thrown a lot of costs at marketing and sales, but not enough.

We have optimized organizationally and optimized our cost structure for the last two years around completing a successful turnaround and I want to congratulate every one of our associates and partners.

We've done a terrific job.

Now, what we're going to do is optimize organizationally and cost structure-wise around growth and profitability.

And that's the fundamental focus of what this plan is.

It will be very pinpointed.

This is not going to be a traditional 5% takeout of expenses across the board.

This is going to be a very pinpointed approach to where we go and get the savings.

And, frankly, G&A is really one of the areas that we're going to target to drive an innovation around restructuring and also to get a lot of the costs out.

Philip Alling, Bear Stearns.

I wanted to get a better sense from you, really, on the change in your outlook with respect to growth for the year.

You're now indicating you think maybe closer to 10% growth year-over-year for calendar '05, down from your earlier view of say 10 to 15.

Could you give us a sense of why you are moderating your growth outlook going forward?

Admittedly, we've heard what you've had say about the current quarter, down maybe 7 or so million from what you thought you would do this particular quarter.

But perhaps a little more color from you as far as sort of the longer-term growth outlook coming down?

I would say it's almost all primarily due today to the current economic conditions, Phil, as well as the IT spending environment.

As I said, on a number of calls, we will be at the higher range of the 10 to 15% estimate based on fair to good economic conditions and a fair to good IT spending environment.

Almost neutral.

However, when economic sluggishness occurs, which certainly we have had, as well as the IT spending environment begins to look more on the downside than on the upside, we would not be responsible unless we gave you a perspective based on that.

And the only other thing I would add to that is I have some slight concern right now over the overall economic circumstances of Europe and what's going on there.

So, the combination, and that's really a subset of the macroeconomic conditions in the IT spending environment, and right now, given the visibility we have, that's where we see it coming in.

Have you changed your view about what you think the industry is growing and how would you say you did with respect to competitors in the quarter?

No, I haven't changed my views at all about the industry growth.

And in fact, I still am very bullish about the long-term growth of this industry.

I am, however, very pleased to tell you that I think in Q1, we are going to perform better than our peer group and in some cases, substantially better.

If you look at our advanced data capture division, we clearly gained market share in Q1 versus our competitor peer group.

I can't say yet anything about the mobile computing area because some of our peers have not yet announced.

But I can tell you that we have received some preliminary feedback from some of the industry analysts in the market and we will be sharing this with you in early August, that we had a really solid market share gains in 2004 largely driven by the MC9000 as well as anecdotally here in Q1.

So, I think we're going to be one of the only companies that will announce sequential growth in a seasonally challenging quarter.

And I think we're going to be a Company that's going to be a standout with regard to market share gains.

But we will wait to see.

Philip, if I could also just jump in and add, I mean, if you look at the guidance that we're giving you for the second quarter, what that essentially would imply that if we could grow in the second half of the year, year-over-year, up 15%, maybe even a little bit higher, combined with what we just posted in the first quarter and the guidance that we gave in the second quarter -- when you add that up, we're going to end up for the year somewhere between 10 and 12.5%.

So I think the math of it is that given where we are in the first half of the year and the fact that in the second half of the year I think we are cautiously optimistic.

We do think things are going to get better.

We've got some good new products coming.

You put those two together and you average it out, you're going to find that just the way the math works, it's going to put us down in the middle or maybe even the lower end of the previous guidance that we have giving you.

Still within that guidance, but I think that that's the view right now with what we're seeing in the first half of the year.

Yes, what about the -- this escalation of legal wranglings that you have with Unova, you see lots of headlines coming out on that.

Has that had any impact on sale cycles in the quarter and so what has the effective impact of that escalation there been on your sales?

This is no hyperbole, but frankly, if anything, it has helped us a little bit.

Because, frankly, I think if you were to talk to many of our customers, especially some of the customers in EPC, and you were to do kind of a poll of those people in the RFID space, I think there's a growing sentiment that what we are attempting to achieve here, which is no different than what the Company has done in the past with respect to some of our bar coding technology, is to create an environment where the air interface protocol between the talking bar code and the reader is largely royalty free.

In the market.

And so I think there's some positive sentiment for Symbol in this regard.

I can tell you it absolutely has had no effect on our sales in mobile computing, advanced data capture, mobility software and/or wireless.

In the RFID space, we did 8 million in revenue in Q1 and I think we will do probably the same if not a little bit higher in Q2, so it hasn't slowed us down in terms of some of the revenue growth rates as well.

Any change in view as to what you think you're going to do in RFID for the year?

Because before you had indicated sort of a 40 to $60 million range, any--?

No, no change.

I still think we're looking at about 40 million revenue, and as I said, depending upon market traction and frankly our own execution, how well we do, that could be 20 million or it can be 60 million.

Now, 20 million is probably we're going to beat that, because by the end of the first half we'll probably be awfully close to that.

So, you know, I think we're still looking at more like the $40 million range.

Reik Read, Robert W. Baird.

Bill, can you just elaborate a little bit more on your comments on Europe in terms of -- you just kind of said a minute ago that the business environment over there is challenging.

In your prepared remarks you also talked a little bit about execution.

Can you separate those two and talk to us about, as we go into next quarter or so, the changes that you might expect there?

Yes.

So, on the economic side, I won't take you through the detail.

We all kind of know where GDP in the euro countries are landing.

But you know what was interesting about Q1 is we saw a slowness in our large retail segment.

And that was pretty much across the UK and southern Europe.

Now, we traditionally see that in Q1, because, again, it's the end of the retail fiscal year, the end of January, it's the beginning of our fiscal year, it's seasonally always a challenging quarter.

But I have to say, I thought it was a little bit worse than normal.

And that would be a data point for you beyond the obvious macroeconomic indicators, the IT spending indicators.

That -- I want to separate that with regard to our own execution.

Our execution challenges have been in hiring.

As you know, last year, in 2004, we spent a good deal of money on restructuring EMEA with the goal of increasing our sales headcount.

And we just have not done that job as well as we would've expected in Europe.

And hence, many of the new salespeople that we would very much like to have on board in Q4 did not come on until about a week or two ago.

And so you lose whatever productivity you get out of those new heads in sales that we spent all those restructuring dollars on.

So we just have not done the job we needed to do in recruiting the new heads in the market.

That being said, the overall team there, I think, given the macroeconomic circumstances, some of the slowness we saw in retail in Q1 -- and I want to be clear, because I don't want my EMEA teams feeling as though we're down on them.

They have done a fairly good job in EMEA.

As you know, Reik, sometimes both the termination process in EMEA is not very easy and the hiring process is also not so easy there.

So I wanted to put that in context in light of both the execution challenges, which I've described, as well as some of the other economic indicators.

Okay, great.

And then just kind of want to go back to the operating expense side, and I know you don't want talk about the details of your plan, but can you give us a sense of -- as you strive towards this 170 million quarterly run rate, what are the assumptions behind that in terms of some of these kind of extraneous expenses that are out there right now -- stocks, legal, the IT things that you're going through.

Can you just give us a sense for how those assumptions change throughout the year?

They will all be bolted onto and included in the 170.

So hopefully, as we go into Q1 next year, where we typically get a 7% inflation hit through merit, promo, etc., and some of these expenses begin to bleed off, expenses associated -- the 4 to 5 million a quarter of expenses associated with defending prior management, some of the expenses associated with Sarb-Ox that will bleed off a bit, will give us an ability to hopefully keep a lid on that 170 or close to that as we go into the first quarter of next year.

But all of those expenses as they currently exist will be bolted onto the 170 in Q3 and in Q4.

The goal of this exercise is really to add about 10 million a year to our sales spending, bringing our expense to revenue ratios up in sales to the extent where we can hire 50 new salespeople as early as humanly possible.

And that's why we're going to take the fundamental expense rate of the Company down about 12.5 million a quarter or so, add 2.5 million back into sales and thereby get your $10 million difference that we currently have.

If I look at what those extraneous expenses are today, maybe they are 8 million, 10 million, something along those lines a quarter.

Is it fair to say that they get cut in half or could you put a percentage on that?

It is fair to say that they will at least get cut in half by the first quarter of next year, because we won't have by then, most likely, the prior associate defense of about 4 to 5 million a quarter.

It is not fair to suggest, however, that the other half will bleed off.

Because, frankly, we're very cautious in terms of spending in areas that have anything to do with the accurate reporting of our financials up to and including making sure we stay at pace with Sarbanes-Oxley, which is a very primary goal that we have.

So I think what's fair to assume is 5 million bleeds off, not the whole of it, but we're going to come back to you in August and tell you exactly what you can expect both in run rate expenses as well as operating margin.

Clearly, this exercise, even with 10 or 11% year-over-year growth, would give us operating margins in Q4 of around 12%, maybe as high as 13%, and earnings per share correspondingly associated with that.

What we're trying to get to with this last phase of our restructuring plan is to set the Company up for much improved earnings traction in '06.

And as you can see, if we can get that expense run rate down to 170, we're likely to be able to achieve that kind of earnings per share growth.

Okay, and just quickly on the RFID side, if I just look at the goal which you guy guys had put forward on the $40 million, can you give us a sense for how much of that comes from tags, how much of it comes from readers, and then looking at it a little bit differently, how much comes from closed-loop type solutions like McCarran's (ph) and how much are supply chain going to consumer product companies?

Yes, the bulk of the RFID revenue we do this year will be in readers.

I would say it's probably 75% readers, 25% tags.

In terms of your question about where, I would say 90% of that will be in the retail supply chain customer environment and largely driven by three to five customers.

The 10% would be in transportation, travel, logistics like the Hong Kong airport, like the McCarran airport, like the international papers of the world, and like some of the other announcements we've made recently, on some of the other RFID wins that we've had.

Jeff Kessler, Lehman Brothers.

Jeff Kessler, Lehman Brothers: First, with regard to the dynamics of the way your business worked out in the first quarter, we heard from ScanSource that they were weak at their -- essentially at their POS level.

If there was weakness there, it was in distributing scanners specifically to the lower-end stores.

And yet at the same time, you were talking about having larger orders impact your gross margin.

Are you looking at a -- was there a shift in the blend of -- despite the fact that you gave us those pie charts to look at, was there a shift in the blend on how you went to market?

Now, we know it affected the gross margin, but the key is, are we going to continue to see this throughout the year?

Are you going to be able to improve your gross margin with these large customers so we don't have to hear about how that's hurting you, if indeed ScanSource comes back in the second quarter and says, looks like the grocers aren't buying again.

Okay, so, let me break this down into several parts for you.

So, first with regard to distribution sales out in Q1, we did a good job.

However, towards the end of the quarter, we did expect that we would get about $6 million more in sales out revenue through the distribution channel.

This is not specific to ScanSource.

This is specific to all of our distributors on a worldwide basis.

And that did not flow through.

The answer your question about mix in the quarter and the impact -- let me be very clear.

The largest impact to gross margin in Q1 was the fact that we transitioned about $26 million of inventory from a very large customer who was -- where this inventory was being held on our premises and our location over to their premises and their location.

And this particular customer happened to have lower than traditional margins than the rest of our customers.

The only other small area that impact gross margins in Q1 was the $8 million in revenue from RFID, where today our gross margins are nil to none in that particular space.

However, I wouldn't call that as a longer-term trend.

I do expect gross margins this year to remain in a range of 45 to 47%, and hopefully a bit more on the high side.

Because as we restructure this year, we're also going to take an opportunity to drive up -- drive down our cost structure and services and drive up our gross margins and services as well as operations.

Whether or not that helps us pay for increased market share through more aggressive pricing or we take it to the bottom line is a decision we will make as the year goes on.

But I still expect gross margins to be in the 45 to 47% range.

Europe I can understand -- I mean, everybody from Checkpoint Systems to everybody else is bemoaning Europe and there's nothing you can do about a macro situation.

However, in Asia, it appears that, number one, some of your competitors -- some of your smaller competitors, even at the cost of their earnings, are spending a lot of money to increase their -- to already get their sales force and their product levels sold by the sales forces up there.

I realize that you folks have said that you're going to get a product out there.

But are you in a position in Asia where you believe you might be a little bit behind some of the same type of things that you were seeing in Europe a couple of years ago when you didn't have a low-end product to compete very well back then?

No, I think that's fair.

I think we're playing catch-up in Asia a bit.

And I was encouraged by the revenue being up 5% sequentially and the bookings being up 4% sequentially.

And, last year, as you remember or you may not, we introduced the LS2200 -- (multiple speakers)

I remember back to 1992 on you guys, so -- (multiple speakers)

All right.

So we introduced a new Asia-based scanner last year and we're about to introduce an Asian-based mobile computer in early third quarter.

My bias right now on Asia is I'm a little bit more encouraged about Q2 -- sorry, and Q3 with respect to Asia simply because I believe, one, the stability of our sales force given the fact that we've changed out the entire sales force -- one important figure for all of you on the phone to bear in mind is that out of all of the salespeople we had here two and a half years ago, only 34 of those salespeople were here two and a half years ago.

The entire sales forces has fundamentally been retrenched and essentially upgraded.

And Asia Pacific was one of those areas that went through that kind of a transformation.

It's akin to the other numbers we've thrown out in the past, where in fact you now know we have in the last two and a half years terminated 3600 people and replace them all, virtually 65 to 70% of our entire workforce.

That same thing happened in sales.

And what's important to note in Asia is that as Mike has come on board, we've done the country-level restructurings, I'm feeling better about the stability of the sales force, we're getting new products in that market done, we're bringing on new partners, we've increased our partner count by nearly 40-plus this past quarter, we're increasing our distributors in that area, we're beginning to pay more attention to the channel in that area, and I do expect that to pay dividends.

But I'm cautiously optimistic, as you should be, in that execution will show us the way.

We'll come back to you next quarter.

why if things -- are things going to get a little bit better in the second half of the year toward 15%, which is kind of the number that you threw out, so we can walk away with at least a 10% smile on our face after this call?

Yes.

I want to be clear here.

We do not have a crystal ball.

And I do think it's important for you to understand that right now, we're cautious about the second quarter, as you can see a bit from our guidance, and I remain a little cautious about the second half if the macroenvironment doesn't improve as well as IT spending.

That being said, what gives us a bit of bullishness about the second half is, one, the third quarter is typically when retailers begin to buy for the Christmas holiday season.

Every year, we typically see a natural uplift in the third quarter in buying from the retail segment.

And that's because they are buying more scanners, more mobile computers, more wireless devices, all to get ready for the Christmas season.

Secondly, we have a bunch of new products coming out in Q2 that we'll be announcing to you on the next call that we expect to add to our topline opportunity and in fact, better globalize our total product portfolio.

Thirdly, it's a quarter for us where just seasonally, if you go back and you look at the trends of the Company, the third quarter tends to be a very solid quarter from a seasonality point of view in general.

And so that's the third quarter.

Fourth quarter for us again seasonally always a solid quarter for us as well.

We tend to get the natural effect of the sales kick-in at the end of the fiscal year.

We, by then, both in Q3 and Q4, will hopefully have a much more mature sales force on the ground, people will have another three months under their belts -- remember, these are very new people.

And our typical sales productivity curve is six to nine months.

And by third quarter and fourth quarter, many of these new salespeople we have hired and will hire will have more experience in their patch and we hope that that productivity uplift that we expect will add to the topline.

So those are just a few of the things that we expect in the second half that are leading us to that conclusion.

Thank you and I can congratulate you guys at least on your working capital and your cash flow management.

That was good this quarter.

David Sterman, Halpern Capital.

Just wondering if you can give a little more flavor on where we are with RFID relative to what your view was six months ago at the time of the Matrix deal.

Obviously, we've heard some of the technological hurdles that have come through and some of the IP issues that have been a little bit challenging.

Can you give us a sense how that you've already talked about what you're seeing here for the rest of '05, but can you kind of just take a step back for a minute to paint the macro picture for -- is deployment on track for '06 and beyond, or are you seeing this to be a slow-growing market?

I'm encouraged with -- from the standpoint that topline revenue growth is, at least in Q1 and we think will happen in Q2, slightly better than our expectations, but pretty much on plan.

But at least that we're realizing what we expected from our business plan.

We've got to go to work on cost structure of our RFID tag business and our reader business.

We're just not generating the margins in those two businesses today that I would've liked to by this point be able to generate.

That being said, I can tell you that we have very concerted efforts underway to significantly drive down the cost of tag manufacturing as well as readers.

And with that, we would expect a natural uplift to gross margin.

So if I were to give you the balance, we're on track with revenue, we're not on track with cost structure reductions in terms of the products, and what we're seeing is a very strong interest level that is turning into either pilots and what we're seeing now are pilots turning into small-scale production.

So we're seeing more interest in pilots in the retail supply chain and even outside the retail supply chain, and we're seeing many of the small-scale pilots and mid-scale pilots that we had going on in the last six months turn into more production rollouts.

That aside, I can't give you any picture yet on 2006 because we're still dealing with a technology that's relatively nascent and requires a tremendous amount of work by us and our industry peers in order to enable scale so that we can confidently build very large RFID-based networks.

And that's going to be the gating factor, one of the gating factors.

Of course, EPC Generation Two standardization on a global basis is going to be a factor; scalability of the technology is going to be a factor; and cost will be a factor.

We're working on all three.

And just as a quick follow-up related to that, can you comment relative to your initial expectations that the Matrix acquisition, what you're seeing from your customers related to RFID on a stand-alone basis or RFID in conjunction with your other wireless mobility products as something of a comprehensive sale, or is it -- is the market still too early to really address from a comprehensive approach?

That's where it's going to go, but it's too early right now.

That's where it's going to lead to though, right?

Eventually, when you have all of these objects floating around the perimeter of your corporate enterprise in the not millions, but billions, our -- what we're hearing from our customers is that our mobility services platforms is going to feature importantly in helping them gain control of what could be systems chaos at the edge with all of these essentially roving databases and talking barcodes.

Our goal is to build an end-to-end systems capability that reinforces a lower total cost of ownership and much greater visibility into the supply chain of where RFID is really driving its most benefit.

Ajit Pai, Thomas Weisel Partners.

On the pricing side, I think we have found that in Q1, our focus on cost reductions in the scanner space has allowed us to achieve same or better margins at a lower price point.

And I think we've found a price point that enables us to grow our market share position.

We haven't seen any degradation in price points in mobile computing, except to say when there are very large deals at play.

We're talking 15, $20 million deals that we've recently done, where of course the volume drive -- the simple volume drives a lower price point of mobile computing.

So what is our goal in mobile computing?

Like it is in ADC and will continue to be, let's continue to have a cost reduction value engineering program which enables us to do the same as we did in ADC and in MCD.

Even when these large deals hit us, we'll be able to absorb them with same or better than gross margins.

So in the pricing environment, that's ADC mobile computing.

Wireless, same, and RFID, given we're one of the very few companies that actually has RFID products, we're not seeing an awful lot in the way of any pricing.

It's mark.

I was just going to say that I think to follow up Bill's points, the negative impacts that we saw on gross margin quarter-over-quarter, while they had -- a couple of them had pretty big effects, specifically the currency swing from roughly, like I said, over a positive 7 million in the fourth quarter to just over negative 2 million in the first quarter, they were relatively narrow.

And actually if you look at the large bulk of our revenue, there, we saw margins hold up extremely well.

And I would say I think that's indicative of the fact that the pricing environment, I think, is pretty stable.

So I don't believe that the lower gross margins really are pointing to a much more competitive pricing environment on the vast bulk of our business.

But, as we've discussed before, when you get into very, very big deals, those are hotly contested.

And if you have a few more of those and a little bit more revenue in a particular quarter, you can dilute the margins a bit, and that effect got compounded with the currency swing.

But there's -- again, I'll emphasize that there's nothing else in the vast majority of the rest of the business that's going to indicate that really the competitive dynamics are changing all that much or the pricing environment is getting that much tougher.

We just don't see that.

The second question would be about your pro forma tax rates.

You did provide us with a 50% tax rate right now and what the New York State law, how it affects things.

But could you give us sort of the pro forma tax rate both for North American business as well as for international?

I think if you -- as we said, we had about 10 million of benefit in the first quarter.

You back that out, our tax rate probably would've been somewhere in the low 30s.

You know, I think that the tax rate on an actual basis in the second quarter would've been about 34%.

But given the somewhat lower pretax income and then this $5 million hurt on the tax line, it just drives the effective tax rate up to -- for your own modeling purposes, I think what I would encourage you to do is whatever you come up with in terms of pretax income, apply around a 34% rate to it and then just add a $5 million fixed amount to the tax line.

And then the -- your effective tax rate is going to fall out wherever it falls out.

My guess is it's going to be pretty close to 50% or even slightly above it.

you could be defending these folks about two years out, eight quarters out, or do you think the lawyers have any incentive to finish that off at some point over the next six months?

Well, I guess it would be speculative to guess, but -- and what we think is that we're hoping that sometime this year, certainly in the second half of the year, but sometime this year, these trials actually happen.

And I suspect that if the trials happen, then hopefully it's not going to take that long to some kind of conclusion.

So I think your two years would be a relatively pessimistic view of the timing of this thing.

But I think, as Bill said, it's not going to go away anytime soon.

And it's going to probably be with us certainly through the bulk of this year if not through the entire year.

Okay.

And then, the last question would be about (multiple speakers)

Just one more second I wanted to just make sure, because we just got some late-breaking information.

I want to make sure I hand it out.

The actual trials of our former management we just learned were pushed out now to November 21.

Now of course, that could change on a given notice.

But we expect it to actually be earlier in the year.

I think we expected it in July (multiple speakers)

July.

July was the date.

They've now been pushed out to November 21.

So, as you can see, it's a moving target.

Right, right, thanks for that.

And the last question would be about when you're using the indirect channel, there were two things that I think you were working on.

One was trying to get a better view into the verticals that you're serving.

And I want to get an idea whether you have a better quality of data as far as that's concerned.

And the second is inventory in the channel and your visibility there.

Do you think that the channel has too much inventory right now, just right, or too little?

The first part of your quest of the question was in terms of the verticals.

I think you know the quality of data or how much is retail, how much is manufacturing, how much is health care.

Those verticals you're doing some work on for the past few quarters trying to improve the quality of the data before sharing it with us?

I would be lying to you if I told you we made much in the way of progress.

We're getting sales out data from our reseller channels through our distributors that now is giving us better visibility as to the markets we're serving.

However, let me give you my anecdotal feedback.

We are still very focused both in terms of sales coverage as well as revenue in the retail segment.

And until we transition the Company from a turnaround organization structure to a growth organization structure and hire these 50 new salespeople, we're not going to be able to invest the kind of sales coverage in those other vertical markets that will enable us to substantially grow our position in those vertical markets.

And that is exactly what we intend to do over the next 90 to 120 days.

Okay.

But do you have better visibility into your revenues by vertical at some point in the next three to six months?

Yes, no, we will -- I think within the next three to six months, we'll be able to get you better visibility.

I can't commit to that, because again, this sales out data we're getting through our distributor channel we just want to flesh out how accurate it is, because frankly, it ebbs and flows too much for all of our likings.

But, believe me, there's no one in the Company who more than Mark and I want to get our hands on understanding what our actual revenues are by vertical market.

Anecdotally, I believe that our revenues for retail today are representative by 55, maybe upwards of 60% in the retail segment followed by the next largest segment, which would be transportation and logistics, followed by then probably the manufacturing sector.

I'm sorry -- not manufacturing, probably warehousing and distribution.

Chris Quilty, Raymond James.

Just a clarification on the Proxim payments.

They were obviously late paying fourth quarter and late again this quarter.

You own -- I think you had projected 5 million in this quarter and you only collected 2.5?

No, no, they were late paying in Q1.

Their payment schedule is 2.5 million per quarter, and they did not pay us in Q1.

We did not get any royalty payment for the quarter.

The $2.5 million would've obviously added about $0.01 a share to our earnings line.

So (multiple speakers) we expect to get that payment.

How much in arrears are they at this point?

One quarter.

Okay, so does your projection for Q2 included 2.5 or 5?

It doesn't include -- it includes 0.

Okay.

Probably a good guess.

Yes, so in that EPS of $0.07 to $0.09, I'm sorry, the $0.07 to $0.09 without the tax effect, that is raked in.

Otherwise, it would've been a penny higher.

A question going back to the last conference call, you were projecting full-year gross margins of 45 to 50 and now you're saying 45 to 47.

Is that decrease in the gross margins primarily related to some of these price discounting competitive issues that you're starting to see, or is it more related to an assumption that the revenue growth might be at the lower end of the range and you're going to see manufacturing variance-related issues?

I think we had always said that our target was to get gross margins in the 45 to 50% range.

I don't think we had ever projected specifically for the full-year '05 exactly what they were going to be.

And I think, to your point, a little bit lower expectation in the revenue probably merits, at least for this year, somewhat lower expectations as to where we fall out in the gross margins.

But, having said that, we still feel good about staying in this 45 to 50% range.

And we're going to continue trying to work toward the higher end of that range.

As Bill mentioned, we think in service, they can contribute.

If we get some continued growth in the second half of the year, those volume impacts are going to help as well.

So I don't -- I really don't think from a financial modeling perspective, we'll come off at all what we're targeting.

And as we discussed before, a lot of getting to this 15% was based on revenue growth.

So it's going to be a little bit tougher now, but we're still going to drive toward those ultimate objectives.

Okay.

The comment you made earlier and I think you may have said if I wrote it down correctly, that there were nil margins on a large retail deal, at least one specific deal.

No.

I was talking up about the RFID revenue in the quarter.

Okay.

That's understandable.

Yes, we had nil to no margin on the RFID -- 8 million in RFID revenue in the Q1 quarter.

Okay.

But there has been some margin pressure on large retail deals, and albeit there haven't been a tremendous number of large retail deals over the prior couple of years, I can't recall really from the Telzon days a quarter where you came out and said we're seeing pricing pressure to the degree that you're really pushing margins down.

So, I guess my question is, is the retail environment just getting that much more competitive, or have some of your traditional competitors stepped up to the plate with their offering, or what's changed?

Well, I mean, I would think, well, what's changed first is we're beginning to see deal sizes much larger than we've ever seen before in terms of some of these expensive rollouts of mobile devices.

And, as I said, in Q1, we had several large multi-million dollar transactions.

And based on some of the volumes there, that did impact the gross margin.

I wouldn't say, though, that the pricing environment for mobile devices in and of itself should be indicative of those three deals that we had.

In general, on a run rate basis, our margins in mobile computing on a run rate basis, when you extract some of these larger deals, is pretty consistent with what it's been in prior quarters.

But I think it is fair to say that given the size of some of these transactions, our customers are intelligently bidding these out.

And we've even had one case where a customer had a reverse option in place on a very large transaction.

And of course, that had some impact on margins.

Okay.

And I guess the thing I still can't put together here, though, is you've had three very large deals in the quarter and you're still coming up short on the revenue side, at least from what the analyst committee was projecting.

Don't misunderstand.

The three large deals were bookings, not all revenue -- not all revenue.

Bookings.

And remember, the key impact to Q1 was this transition of this $26 million in inventory from a Symbol-owned facility to a customer-owned facility.

And this happens to be a very large customer with traditionally lower margins than most of our other customers.

That was the real impact besides the currency impact in the quarter as well.

Okay.

Switching gears over to the wireless side of the business, statistically, it looks like you've been losing market share in the last couple of quarters, just on the reported growth rate.

And I know you were sort of angling to pick up some of Airspace's lost OEMs.

And it looks like those went in a different direction.

In order to sort of recover some of the lost ground there, is it a matter of the next-generation product launch or is it your ability to tap out into other markets rather than the vertical?

Yes, I think the market share data we'll be able to share with you in August will show that we've kind of held our own in market share in the total enterprise space, as well as continue to be the leader in the wireless switching area.

In Q1, our revenue was up 20% and bookings up 9%, which was encouraging.

The key challenge for us in wireless is that really when you take a look at it, we really largely sell our wireless solutions into retail.

We have some wireless being sold into T&L, but we do not have a traditional networking horizontal coverage model and/or a traditional broadline distribution of products in the market.

So we're limited in terms of the vertical markets we sell wireless into, which is why you see us being relatively -- it's relatively a lumpy business.

And what our goal is is to expand beyond retail and to a certain extent T&L, into these other new markets.

Because what's happening is wireless and all of our customers in the general enterprise are beginning notionally to get this, is an enabler of mobility.

Wireless in and of itself is isn't an application.

Being able to connect a laptop portable computer from a conference room to the data center securely used to be very special.

It is not special.

It's essentially, it's basic connectivity today.

But what's happening is customers are beginning to recognize that what wireless infrastructure they want to deploy, largely switching-based infrastructures because it's more secure, it's lower cost in terms of moods at -- and changes, you can of course centralize all of that within one console.

The access ports themselves are cheap, relatively speaking, because they are max five layer (ph) devices, as well as now what they're looking for, the special soft mobility features to help improve and enable mobility at the edge.

We've got to capitalize on that and the only way we're going to do that is the increase in our sales force, our sales coverage and our channel.

So, does that require a sort of an entirely different sales structure than you've had previously?

Because I can't think of many Symbol products that have been sold basically on a horizontal basis; most everything is bundled.

And given the architecture of the product today, which has quite a number of proprietary extensions to optimize with your devices, can you -- would you have to strip down some of the feature sets in order to sell it on more of a horizontal basis?

No, no.

Because first and foremost, wireless customers are getting the point that wireless is not an extension of the wired network.

It's essentially an architecture for the new edge of the corporation, where the last mile is largely wireless.

And the mobility features are really what they are after now, which is to say, hey, I get that you can connect a portable laptop from a conference room.

What I want you to do is to make sure the application at the edge sitting on top of a mobile computer doesn't go down.

WAN, LAN or PAN.

And you need to help us to manage that.

So, wireless is an enabler of mobility, and as such, what we need to do in our own sales force and what we've done very successfully -- I have to tell you I'm really pleased with how our sales force is coming along here -- is we're now beginning to do a much better job of positioning wireless as part of the capture move advantage architecture associated with enterprise mobility.

And customers are resonating with that, partners are resonating with that and the industry is resonating with that.

So, we'll see where it leads us, but it's not a foreign sales cycle to our sales force today, nor is it less than expected from our customer base tomorrow.

Ted Wheeler, Buckingham Research.

Couple of follow-ons on some of the points made earlier.

Just on this Proxim royalty, they paid the back amount, is that correct?

That's correct.

And the go-forward, is that in dispute?

Is that just your calculation of what they owe, or is there just a problem with Proxim that probably doesn't get resolved?

I think it's more of the latter.

So we just shouldn't anticipate any contribution there?

Like we said, we haven't included it in our second-quarter guidance.

And that would've been in your other income line, I take it?

That's correct.

I think that was the whole point.

I mean, year-over-year, the customer service part of business actually grew reasonably well at around 9% or so.

But, as we've been talking before, we've been transitioning away from the professional services business, which was at a lower run rate last year, but it still shrank by about 50%.

So I think personally, that we've hit kind of the low point of the professional services revenue and what we think there is is some opportunity, specifically in wireless and RFID, where if not just keep it at the same level, actually start to grow that a little bit.

And if we can keep the customer service portion of the business growing at sort of the same rate, then you should start to see eventually the service revenue start to contribute.

And, as we've discussed, it's a highly leveraged business.

If we can get the revenue growth growing, you're going to see some increase -- some good flowthrough into gross margin and into operating margin, for that matter, because it doesn't tag along a lot of SG&A costs.

So -- (multiple speakers)

Well, if the core service is growing, if that continues, I would think you'd almost automatically be seeing some growth in future quarters from the overall service line.

Yes.

Okay.

Was there any impact -- I guess it was late in the quarter, but you have terminated your supply agreement with Intermec and what would be the impact going forward of the absence of those scan engine sales?

As we've talked about before, we think that that represents 1, 1.5% of product revenue.

It's relatively small, Ted, and I don't think that there's going to be a huge impact, frankly.

And we also had a pretty good quarter on scan engines.

Scan engine deliveries this quarter, I believe, Ted.

I'll try to get you some of the data, but I thought this was a very solid quarter for us on OEM sales of our scan engines.

But let's see if we can't get that data before the call is out.

But the impact of this 1 to 1.5% decline is baked in to obviously to your second quarter and the rest of your comments.

Yes, of course.

Another comment I think related to some pricing issues at the distributor level, I think we talked about pricing on large jobs. etc.

But is there some change in sort of the methodology or the -- I've forgotten the term that you used.

But I think it had to do with maybe simplification of pricing in the distributor area and what is the impact of that on your pricing going forward?

Well, first of all, this has been a two-year project for us.

We started this project two years ago, and we call it the global pricing project.

We used to have upwards of nearly 50 different discount categories across our entire product line.

And to be able to price out a Symbol deal in the channel, I think you needed an MBA from Symbol University.

What we've done is we've simplified that dramatically going down to very few discount categories now.

And so this will absolutely greatly simplify for our partners and our customers and for us internally, both pricing as well as eliminate a lot of waste in our system with regard to what we call special pricing requests.

Because we had such a convoluted pricing mechanism in the Company, we have had a deals desk built for two years that largely had to look at every single deal to determine whether or not it was at the right profit margins, to determine whether or not it was a deal we wanted to do.

And today, with the new simplification of global pricing, we're going to be able to reduce the number of special pricing requests dramatically, but also for our partners, greatly simplify how they do business with Symbol.

It doesn't -- it's not going to impact it, Ted, because we're not talking about changing the price positioning of the products.

We're talking about simplifying the discount structures that we use to price off of suggested retail prices.

So, I really don't think it impacts, frankly, the price position of the products, the competitive dynamic, the gross margins, it has nothing to do with that.

This is just about making Symbol a much easier place for a partner to do business with.

Because now, when they buy product from us, they actually know what the discount is on that product.

It's just pure and simple simplification.

We had, as Bill mentioned, an extremely complex price discount structure that, frankly, the complexity did not add a whole lot of value.

And all we've done is just made it a heck of a lot simpler to understand, to administer and to use for the partners.

It's down from 44 discount categories to 3.

With most -- with the vast majority of the business going through one of those.

Right.

Just to come back on the point earlier, on scan engines, sales in Q1 '05 -- Q4 '04 we had scan engine sales which I believe included an order from Intermec of $16.7 million.

In Q1 '05, our scan engine sales were 19 million.

John Frank (ph), SCM Capital Management.

Just a quick follow-up to the previous caller's question regarding the termination of Intermec's contract for laser scan engines.

That 1 to 1.5% of overall sales, can you give me a feel for what the impact is on a gross margin dollar basis?

If it's 1 to 1.5, why don't we just say we round up to 1.

I mean, it's probably around -- it's probably -- I don't know, 0.5 million to $1 million in gross margin.

And you're talking about a Company that generates over $200 million a quarter in gross margin.

So, I classify that as relatively immaterial and noise.

Peter Wright, Paul Partners (ph).

If your mute function is on, please turn it off.

Let's go to the next in line.

(Operator Instructions).

Paul Coster, J.P. Morgan.

Second crack at things here.

RFID, can we just go back to that for a second.

Are there any gating factors at the moment to your scaling up on the chip manufacturer side?

Actually, that's an area of strength for our Company now, frankly.

We do have capacity issues, Paul, right now.

We have capacity issues because we have very solid demand on tags.

For example, this year, we'll probably do around 150 million tags.

And I think by the end of this year, we're going to have a very solid number of tools online to be able to produce upwards of 650 million tags in 2006.

And we're scaling right now to meet that need.

So, currently, we have capacity issues.

We've already placed orders, frankly, for new tools to be able to spec up with 150 million tag demand this year.

And we're buying even more tools as well as now beginning to mature our pica technology, which will help us to dramatically increase both volume of tag manufacturing while also reduce cost of manufacturing of those tags.

So we are actually in a position today where although we're feeling a bit of the capacity crunch, we believe we've gotten ahead of the curve to a large extent and are setting ourselves up for success, not just to reach this year's demands, but also next year's as well.

And, where's the price point on the Gen Two tag at the moment?

The average price points, Paul, depend upon the type of tag, the type of customer, they really range.

And I would be remiss if I could give you that range, because it could be anywhere from $0.18 to $0.40.

Okay, got it.

And then I guess with 75% of the RFID revenue coming from the device rather than the tag, I'm kind of surprised that you're not making margin on the sale of the readers.

Can you just talk us through that a bit?

It sounds like it's also a volume story.

Well, we're in the middle of shifting now between product lines.

That's partly the issue.

Our current AR platform in the market is going to be replaced this next quarter with a new platform called the XR, and as such, we're doing all of our cost reduction work really on the XR platform, not on the AR.

So the current ARs that we've actually shipped haven't been effectively cost produced and that is the fundamental issue.

So, it's not a volume story, it's a cost of manufacture story.

Volume certainly helps, doesn't it, Paul, because it's largely a cost reduction issue -- a cost reduction program.

Where do you put your focus and your energy?

We're putting it in the new product, which we've achieved some decent cost reduction.

And so I expect the margins on readers, actually, to be in the second half of the year, pretty good.

Okay, got it.

And that's part of the integration, presumably, of Symbol and Matrix and the fact that you're able to use standardized products moving forward, is that correct?

Correct.

Operator, can we just take one more question?

Dick Davis, Richard Davis & Company.

Thanks for taking my call.

The MC50 to me represents a spearhead into more horizontal markets, and is this your intent or am I wrong on that one?

As you add new salespeople, that there will be hopefully expanding the market for, shall we say, mobile computing.

Yes, so Dick, I think you've hit the nail on the head.

The only difference in the way you have described it and the way I would describe it is that it's a platform that is attacking both the emerging horizontal applications in mobility that are growing very very quickly such as messaging, e-mail, and CRM, like field sales automation, field service automation, etc., and combining those horizontal applications on what will be known in the future as something called a converged device that will also have vertical (technical difficulty) specific applications integrated onto the very same platform.

So, now, you're going to get a convergence of devices and applications.

Today, application-specific devices that we carry around, like a cellphone for voice, a laptop personal computer for secure access to data, a PDA for PEM, a BlackBerry for messaging, so on and so forth -- a pager -- all of those applications will be combined onto a single platform in the future.

And the IT buyer downstream will be procuring this device much like today they procure the laptop for the enterprise user, the cellphone for the enterprise user, they're going to be procuring an enterprise digital assistant that will combine these applications and -- as well as these devices into making a much more simplified architectural approach to how they deliver communications to the edge.

I see.

A couple of other quick questions.

How many salespeople have you added in the first quarter?

How many have we got, guys?

In the first quarter? 40?

(inaudible -- microphone inaccessible)

Around 40.

So you're pretty close to halfway through your goal of 100.

And then the other question I would have, on the last conference call, you mentioned that this number of salespeople was exceeded by the accounting people, and how is that ratio coming, because that would reflect cost control.

Well, today, we have approximately 350 headcount in finance.

And -- is it more than that?

And in sales, headcount, I think, we're up at 377 or so now.

So we beat it this quarter.

We surpassed it.

Okay.

Thanks for your comments.

Thank you, and I want to thank everybody for being on the call today.

And we look forward to seeing you all or talking to you all in early August.

Take care.