摩托羅拉 (MSI) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2005 Symbol Technologies earning's conference call.

My name is Colby, and I will be your coordinator for today.

At this time, all participants are in listen-only mode.

We will be connecting a question and answer session towards the end of this conference.[OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes.

I would like to turn the presentation over to your host for today's call, Miss Nancy Coco, Investor Relations.

Please proceed ma'am.

Good evening, everyone, and thank you for joining us today.

If you have not yet seen the press release, it can be found on our website at symbol.com investor.

With me today are CFO, and Interim CEO, Sal Iannuzzi, and Chief Accounting Officer, James Langrock.

Other members of the senior management team also joining us, include Todd Abbott, Senior Vice President of Worldwide sales, Todd Hewlin, Senior Vice President of Global Products Group, John Bruno, Senior Vice President and General Manager of RFID, and Pete Lieb, Senior Vice President and General Council.

Before I turn the call over to Sal, I would like to mind you that the matters we will be discussing today, may include forward-looking statements and of such, are subject to the risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements .

Including those risks and uncertainties discussed in our recent Form 10-K and other periodic filings with the SEC.

We also will presenting some GAAP, some non-GAAP financial information, a reconciliation of GAAP for non-GAAP items can be found in the financial tables included in our press release and our website.

Symbol assumes no obligation and does not intend to update forward-looking statements made on this call.

Sal, I will turn the call over to you.

Thanks, Nancy.

I would first like to thank our associates in management team for their commitment and efforts during the quarter.

Considering the challenging the Company faced during the past year, what was accomplished this quarter could not have happened without the dedication and hard work.

Thank you, everyone, for a job well down.

Before I get into the specifics of the third quarter results, I want to give a quick overview of our Q3 performance.

I am pleased we are moving in the right direction demonstrated by Q3 revenues slightly exceeding our expectations and the significant improvement in earnings compared with last quarter.

We achieved our operating expense target one quarter ahead of schedule, and we are lowering our [INAUDIBLE] targets to 160 by Q2 of '06.

We posted significant sequential improvement in margins, with gross margins up 270 basis points, and operating margins up by 420 basis points.

We also had a number of positive legal developments this quarter, removing additional overhang from the Company.

The book-to-bill ratio is approximately 1, more importantly, bookings accelerated in late September, and throughout October.

We are cautiously optimistic this momentum will continue into November given the current pipeline.

In summary, we are pleased with the results delivered in Q3, and how our team executed our business plan.

We remain committed to the vision and strategy we have for the Company and to the be leader in enterprise mobility market.

Now, let's move on to review the issued third quarter results in more detail.

We are encouraged by our progress in penetrating verticals outside of retail, and have a number of significant customer wins to report.

That are resulting in the strong pipeline based on the competitive differentiation of our product.

Specifically we want 15 travel and transportation deals, of which 10 are new customers, including Old Dominion and National Fast Freight in the U.S., along with Central Logistics Systems, [INAUDIBLE] - and TNT in Europe.

We have a number of wins in the manufacturing sector, and we are very excited with a recent win weighing global 100 manufacturing company has recently notified us that will it has selected Symbol's industry-leading product line as its global standard.

This opportunity represents a potential for over 50 million in revenue, over the next 2 to 3 years.

We have also seen traction in number of strategic projects in the government and healthcare sectors around the world.

As noted by our recent win with the Veterans Administration Hospital, the 3000 Mobile computers support the patient care initiative.

We introduced four significant new products in Q3, specifically our XR400, RFID Reader, and EPC Global Gen 2 certification.

The gun form factor for the MC3000 and MC1000 entry level Mobile Computer and the top of the line LS4208 Scanner.

These product innovations deliver on our commitment to expand the breadth and global reach of our product portfolio.

You will see additional significant product roll-outs over the next several quarters, as a result of the investments we have been making in R&D.

In passive UHF RFID, We have established the number one market share position.

We are well positioned to expand this leadership even further given the experience we are gaining with early adoption of production deployment.

This alone with our technology innovation is enabling us to deliver the best performing RFID systems, and positions us well for the developing market.

While our sharp focus on cost saving initiatives are the cornerstone to our own growing operations, these efforts in no way detract from our commitment to research and development.

Symbol's strong culture of technology, innovation and leadership continues.

We have spent approximately $120 million in R&D in the first 9 months of this year, and have increased the number of engineers by 21% since 2003.

These efforts have resulted in filing 152 new patents since the beginning of this year.

This compares with a record of 148 filed during all of 2004.

We believe our technology expertise is our number one competitive advantage.

Symbol's strong patent portfolio is wide and deep and includes laser, imaging, wireless, bar coding, de-coding, RFID, and [mems] patent.

And contrary to what some report, we have important patents in each of these areas that do not expire until well into the next decade.

Now, I'll focus on the financial highlights.

The results will include 9.3 million impact of converting certain resellers to accrual base accounting. the WC class-action settlement, and the pretax restructuring and other one-time charges.

This provides a normalized view of our financial results.

Revenue in the quarter slightly exceeded what we expected and came in at 432 million compared to 428 million reported last quarter, and 429 million reported in Q3 '04.

Product revenue was 84% of total sales or 362 million.

Increase in approximately 2% on a sequential and year-over-year basis.

Services revenue was 70 million, or 16% of total revenue compared for 72 million last quarter.

As a percent of total product revenue in Q3, the U.S. region contributed 57%, while international operations contributed the remaining 43 %.

The break-down of international revenue was as follows: EMEA contributed 28%, Asia-Pacific was 9%, and America's international was the remaining 6%.

On the sequential basis, product revenue derived from the U.S. increased 1%, EMEA increased 2%, Asia-Pacific 14%.

While Americas international decreased 8%.

We are currently dedicating an executive to focus on growing on our Americas international business.

By division, Mobile Computing contributed 65% to Q3 product revenue.

Advanced Data Capture contributed 30%, and Wireless Infrastructure contributed 9%.

The Other categories, which includes customer rebates and royalty revenue had a negative 4% impact to product revenue.

Compared with last quarter, Mobile Computing product revenue increased 1%, Advanced Data Capture grew 6%, and Wireless Infrastructure declined 2%.

Of the total ADC product revenue, RFID accounted for 15 million compared to 9 million last quarter.

It should be noted that 67% of our product revenue was derived from products introduced since 2003.

As a result of increased traction from our new products announced early this year, and the introduction planned through Q1 of '06, we expect a percentage to continue to increase.

Moving on to gross margin, gross margin increased 270 basis points to 45.4%.

Versus 42.7% last quarter.

The sequential increase in the gross margin is attributable to our focus on improving manufacturing efficiencies, and service operations.

Ongoing value engineering and a more favorable product mix and improved foreign exchange hedging strategy.

Our total operating expense in the quarter was 170 million.

SG&A of 131 million, declined 4 million from last quarter as a result of our commitment to reduce cost in G&A function.

R&D of 39 million was essentially flat compared with last quarter.

The 170 million includes approximately 7 million in legal expenses related to prior management.

Operating margin increased 420 basis points to 6% versus 4.8% last quarter.

Other expenses was 1.5 million versus 1 million in Q2.

During the quarter, we terminated the Cisco sales transaction as part of our restructuring program, which eliminated 11 million in annual interest expense, and reduced the volatility of other income and expense lines on the P&L.

Using a normalized tax rate of 31%, net income for the quarter was 17 million, or $0.07 per share.

Turning to the balance sheet and cash flow, we ended Q3 with an unrestricted cash balance of 156 million versus 136 million at the end of Q2.

The restricted cash balance remains unchanged at 52 million.

The increase in cash is primarily due to 42 million generated from operations, offset by 12 million in capital investments and 18 million of debt replacement.

Accounts receivable balance in the quarter was 191 million, relatively flat to Q2, and in balance with 39 days sales outstanding versus 41 days last quarter.

We expect DSOs to remain in the range of 35 to 45 days on a going forward basis.

Ending Q3 inventory balance declined 7 million, sequentially, to 166 million, with turns of 5.8 excluding restructuring and asset impairment charges.

At the end of Q3, total debt was 129 million, which included 73 million in short term debt, and 56 million in long-term debt.

By terminating the Cisco sales agreement, we eliminated 85 million in short-term debt.

Before I comment on product bookings and the outlook for Q4, I would like to briefly discuss some recent positive developments on the legal front.

In the Smart Media appeal --excuse me.

Won on all five independent grounds why Symbol 1 on 2 out of 3 grounds.

With the settlement of the PWC case, we received 18 million in cash during the quarter, including 3 million we are obligated to pay in the class.

The Metrologic case, an arbitrator found that Metrologic they owed Symbol 12 million plus interest, a clear validation of the continued strength of our laser patent portfolio.

Our cross licensing agreement with [Intermax] alleviated litigation, and customer concerns regarding RFID intellectual profiting.

Furthermore, and though it's still too early to tell whether we will achieve a complete settlement, our own going discussions regarding other patent disputes with [Intermax] are proceeding well.

Back to total product booking.

Although our book-to-bill ratio was approximately 1, our product bookings were 358 million down 26 million from Q2.

While the retail spending environment in the United States and Western Europe remains challenged, due to increased energy costs and the resulting concerns regarding consumer spending levels, the progress we have made in penetrating new markets have enabled to us minimize the impact of the slow-down in retail on our business.

And in turn, delivered results in Q3 that were slightly ahead of our revenue expectation and position us for continued growth.

The level book -- the level of bookings experienced in the first month of Q4 has not been seen in any quarter in over a year.

We are on track to post the strongest booking linearity performance in 6 quarters.

Which when combined with the fact that Q4 traditionally is our strongest booking quarter has us feeling cautiously optimistic .Despite the increased activity, it is too early to call this improvement a long-term positive trend, especially given the economic outlook for retail segment.

Moving on to Q4 guidance.

Although bookings in October have exceeded our expectations, they remain concern about the impact the economy will have on our customers capital expenditures.

This year, retail holiday season represents one of the most difficult seasons for our customers to forecast.

Given this challenging environment, we are forecasting revenue and gross margin for Q4 to be approximately flat compared to Q3 revenue of 432 million, and gross margin of 45.4%.

We expect total operating expenses to be in the range of 158 million to 170 million, including 7 million in legal expense for the prior management's offense.

As a result, we expect Q4 earnings per share to be in the range of $0.06 to $0.08.

For 2006, we have identified additional cost savings of approximately 5 million from cost of goods sold, and approximately 10 million in operating costs.

This is expected to bring our quarterly operating expenses down to approximately 160 million by Q2, '06.

As a result, the total quarterly savings expected from our restructuring program will be approximately 30 million by the second half of the year, versus our original expectation of 15 million by the end of 2005.

The restructuring charge will remain in the range of 75 to 95 million of which 2/3 will be in cash, 1/3 will be in non-cash charges.

To date, we have recorded 61 million of the total charge and expect to record the remaining charge in the subsequent two quarters.

As we move into 2006, we remain focused on executing the following 3 key initiatives: First, growing our revenue, and market share vertically and internationally.

Two, maintaining our cultural innovation and product leadership.

And three, delivering a double-digit operating margin by the second half of '06.

But our restructuring activity and focus on top line growth, we believe this target is achievable.

Before I open the call for questions, I want to once again thank our associates for their continued commitment.

I am proud of how this team has come together to execute on our strategy, and deliver a solid Q3.

We remain committed to our strategy envision, which continues to be validated by our customers and partners.

With our restructured operating models, expanding product portfolio, and market coverage, we are well positioned to strengthen our leadership in this market.

On a personal note, VP of Investor Relations, Lori Chaitman, is due to deliver her first child any day, and as such, she is not with us this evening.

But I know she is is listening anxiously to this call.

On behalf the me, and the entire Symbol team, we wish Lori and her family all the best life has to offer.

So in closing, I simply want to say Symbol remains a vibrant company, with tremendous opportunity and we are doing fine.

Thank you for joining us and operator, please open up the lines for Q&A.

Yes, sir. [OPERATOR INSTRUCTIONS] Your first question come from the line of Phillip Alling with Bear Stearns.

Please proceed.

Thanks very much.

Sal, I was wanting to get some more specifics from you with respect to the first of these three initiatives that you talk about in terms of growing your revenues.

You've given us a lot of details here as far as material cost savings here on the restructuring.

Can you give us some specifics on what the impact is going to be on your sales effort, and how specifically to take the top line higher from where it is here?

Sure.

First of all, with regard to top line, on the revenue side, I think that if we continue to move both vertical market and internationally, and as more of our product comes to market, you know, completing really the fulfillment of our product road map, if you will, I think that that will position us well on the revenue side.

I think on the expense side, if we indicated, as we indicated here, we have a lot of room for improvement, we see 160 to be the certainly within reach by Q2 of '06.

We also see, and I want to be, I make sure I make this point clearly, that achieving that 160 is not at the risk of sacrificing our innovation engine, nor our commitment to expand to these other vertical markets.

We are, this significant re-deployment of dollars that we are not returning, if you will, to the shareholders, but are re-deploying to different -- to achieve those goals and to make further investments.

Particularly, we still have plenty of room for savings in our G&A function, as we continue to make strides in those areas.

So I think that there's a number of things that we have on the way that will all go to both top line and bottom line growth, you know, over the next year or so.

Operator, next question, please?

Your next question comes from the line of Manave (ph) [Inaudible] with Lehman Brothers.

Hi, this is Scott Schabner (ph) at Lehman Brothers

First question, Sal, can you give us any update on the CEO hunt, please?

Sure.

The hunt is going well.

You just made me think, it's deer season up in Vermont.

So you stopped me in my tracks there.

I think the CEO search is going very well.

We've identified several candidates, that have certainly viable and good solid candidates.

The board and I remain determined to find the absolute best candidate for the job.

We are not in a hurry.

The Company is running well.

The management team is strong.

The associates throughout the Company -- I'm sorry, we had some interference, the associates throughout the Company are performing very well.

It's amazing really to watch.

So we are not in a hurry.

The most important thing is not whether we get it done a month sooner or a month later.

The most important thing is that we get right, so we are taking our time to do that.

Great, thanks.

Could you provide any update on the smart media money that is held in escrow, timing on when that may be available again and what the remaining legal process is there?

I'll turn that over to Peter, he's sitting here, and he could probably give a more accurate picture.

That money remains in escrow until the case is over, and you know, as we know we prevailed and Telzon prevail in the appellate court.

Monday is the deadline for the plaintiffs to file their appeal, if they do, If they don't file appeal, we would get money back fairly soon.

If they do file appeal, the question is whether the Ohio Supreme Court takes the case.

If they don't take the case, we get the money shortly after they decide not to take the case.

If they take the case, you know, assuming we prevail, we would get it at the end of that.

Great.

Thanks, one final quick one, if I could.

Could you elaborate a little bit more on expanding into vertical market?

It sounds like you have positive momentum there in this quarter.

If you could elaborate a bit more, we'd appreciate it.

This is Jeff Kessler, just to give a lucrative percentage.

Percentage of how this is proving?

Percentages of what?

The expansion in the new vertical markets.

So this is Todd Abbott.

We don't break down the revenue by vertical at this point because we are still working through the process of really making sure we have the integrity on the sales-out basis given our focus on the channel aspect of our business.

We believe we are getting good traction outside of retail.

Retail is a challenged industry at this moment.

We continue to do good business there, but fundamentally, our growth is coming from the -- a lot of the hard work that's been done in the last 12 months.

These sales cycles are 9 to 15 months in duration and we are starting to see some of that work that we started make the investments in the second half of last year, and through the first part of this year, as well as, some of the new products coming.

Really now starting to generate greater traction.

The best traction we've had to date has been in the travel and transportation industry, primarily in parcel, parcel delivery as well as DSD, and we're also seeing some good initial traction as a result of some investments that we've been making in the manufacturing side.

So good balance from the non-retail segments that we've put a lot of focus in over the last 18 months.

Operator, next question, please?

Your next question come from the line of Reik Read from Robert W. Baird.

Please proceed.

Hi, good evening.

Can you guy give us a little bit of an update on both Europe and Asia from a management and underlying structure standpoint?

You had been making some changes there in the past year or so, and want to under how far along each of those changes are?

And then also, can you talk a little bit about, do you have any significant product gaps in any of those geographic region that you would like to fill in the next couple of quarters?

Asia-Pacific, I'll start with Asia-Pacific first.

This is Todd.

Asia-Pacific has been stable now, they have had the same leadership team in place since the beginning of this year.

And that's stability has gotten -- has delivered some very strong traction for us.

And we've had good growth there from both bookings and revenue each quarter now for the last 3 quarters.

So we feel like our business in Asia-Pacific is moving along quite nicely, and gets stronger as we start to roll out product that has been designed specifically for the form factors and price points that are required to be successful in that market.

Most recently, we announced MC1000.

Much smaller form factor, much more applicable for the smaller form factor requirements in that space.

So we feel good about Asia-Pacific, very stable, that organization, no changes expected there.

We are staying the course.

In Europe, we've made some minor changes, made a change in the UK.

All the rest of the organization has been placed now for since the beginning of the year, early Q1.

I remain in the acting role for the EMEA organization, and will continue to do that over the next 1to 2 quarters.

And it's right now about doing some of the cultural and business process implementation there.

The team has been in place -- I think that the balance that we've been getting outside retail has done the best in Europe, as we're pretty pleased about the pipeline that we've got there, and in think that we will see more consistent velocity going forward starting in Q4..

Operator, next question, please.

Your next question comes from the line of Paul Coster with J.P. Morgan.

Please proceed.

If I may, I'll bundle up a couple questions in one.

As we look at '06, how should we be thinking about the tax rate, legal expenses that you've described?

And also licensing revenue?

Will we see an influx of licensing revenue in view of the patent activity?

Well, first of all, with regard to first part your question, tax rate, we see it at approximately 33%,I would venture to guess probably between 31, 34%, somewhere in that range.

With regard to legal expense, I think, that probably the most significant change that we are hopeful and can't happen too soon as far as we are concerned, is that we are alleviated of the burden of continuing to spend for the prior management percent.

We're hoping that by the end of Q1 or so that will occur, and that will free up the lion's share of $7 million run rate currently of $7 million per quarter.

You will not see that savings roll into the bottom line.

We're planning for that -- to use those dollars to fund inflationary pressures the next year.

The largest of which is raises for our employees.

That's not to say we won't hit the 160.

We will hit the 160 in spite of that issue, but that's what we are planning to do with that money.

The rest of the legal expense, it really depends on a number of issues.

I think as I mentioned, in my comments, we are making significant progress with regard to on the negotiations with Intermak, but having said that, there were always issues that will arise, I'm sure, and while our hope is always to resolve rather than to involve the courts, I think that for the most part, our legal expense will probably remain within a certain bend, constant, and at points in time, if we feel it's in the best interest of our shareholders and customers, we may pursue.

We may pursue matters.

But the biggest single item is the prior management defense.

Peter, any other comments?

The trial of the prior management is now scheduled for November 21st.

We understand that several defendants -- sought an adjournment of trial, and the judge denied it.

So we are hopeful the trial will begin then.

The judge has said he does not expect the trial to last more than a month.

Defense lawyers think it will last somewhat longer, but regardless of whether the judge is right or defense lawyers are right, if the trial starts in November, 21st, it should be over in the first quarter.

Operator, next question, please?

Next question comes from the line of Ted Wheeler with Buckingham Research.

Good evening.

Couple things.

Just on the intellectual property, did you pay a front end or up front royalty for the Intermak deal and was it in the operating expenses or R&D, or is just something that is not visible.

We have a qualify agreement, terms of our agreement are confidential, and we really can't get into it.

On the pipeline of projects in the orders that you hope are picking up, so far you did see a pick up in September and October, would you character right those -- the pipeline, I guess, a typical up and down sort of thing?

Or do you think there's any indications of perhaps a log jam breakage, if you will, and a little bit of deferred project starting to really come back into the forefront?

I'm going to let Todd respond to that in a moment, but I just want to make one or two comments there.

I think what we are seeing, and I can't over emphasize that we used a term in my comment was cautiously optimistic.

We want to hold our power to drive as long as possible.

We are seeing some signs that are very encouraging.

We see that they look to be sustainable somewhat into the future, we don't want to totally commit to that until we see a little bit more.

Having said all of that, I'll turn it over to Todd to fix what I just said.

I think the only thing I would add is in the uncertainty in the economic conditions, our customers themselves are having great difficulty in forecasting their business.

The , visibility is very challenging out beyond a quarter.

So clearly, that has an impact on their ability to give visibility on CapEx spend and, consequently, the visibility in our business is challenged.

So while we've had a good first month, even the next 60 days, especially with the dependence we have on retail, there still a lack of visibility that we would like to have in going into Q1.

It's still a little too early to tell.

The pipeline of transactions we got this quarter is strong.

We feel good about it.

It's the strongest we've seen in a while.

Whether or not that is a data point on a long-term projectry that looks much more promising, it's just too early to tell at this point.

Operator, next question.

[OPERATOR INSTRUCTIONS] Your next question come from the line of Chris Quilty with Raymond James & Associates.

Please proceed.

In past quarters, you would give us the booking trends by-product lines, I think you said the overall book-to-bill was around 1.0, but could you possibly share with us on a product line basis what the movements are looking like?

We have, we've purposely pulled back from talking in that level of detail, because frankly, it's not the standard in this industry.

And number two, it's very difficult to translate that to revenue production, given the variables in project roll-outs, and the deals are getting larger and so how that translates to a given quarter's visibility on revenue, too many variables.

So therefore, meaning, not a very meaningful data point, and hence, we've pull back from sharing that level of detail.

Operator, next question, please?

At this time, there are no further questions in queue.

Okay.

Well, there are no further questions.

Thank you for joining us for our Q3 earnings call.

And we look forward to speaking with you in the upcoming weeks.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.