摩托羅拉 (MSI) 2005 Q4 法說會逐字稿

Good day and welcome to Symbol Technologies' fourth quarter and full year-end 2005 conference call.

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

At this time, I would like to introduce our speakers, Lori Chaitman, Vice President, Investor Relations;

Sal Iannuzzi, President and Chief Executive.

Please go ahead.

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

If you have not yet seen the press releases, they can be found on our website, www.symbol.com/investor.

With me today are President and CEO Sal Iannuzzi;

Chief Accounting Officer, James Langrock;

Senior Vice President of Worldwide Sales, Todd Abbott;

Vice President and Deputy General Counsel, Elise Kirban; and Martin Nussbaum, representing Dechert law firm.

Before I turn the call over to Sal, I would like to remind you that the matters we will be discussing today may include forward-looking statements and, as 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 most recent Form 10-K filed with the SEC.

We are also presenting some non-GAAP financial information.

A reconciliation of GAAP to non-GAAP items can be found on our website.

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

Sal, I will now turn it over to you.

Thanks, Lori, and thanks, everyone, for joining us on today's call.

First of all, I'd like to welcome Lori back from maternity leave.

It's good to have her back.

Before we get into the discussion of the financial results, I'd first like to thank the members of the Symbol Board of Directors for their support and for giving me the opportunity to lead this great Company.

I'm excited about Symbol's potential, look forward to a bright future.

I would also like to thank Symbol associates for their hard work and our channel partners for their commitment.

I am proud of what we have accomplished in the past six months, and I'm confident that Symbol is positioned for success.

Earlier today we announced some management changes at the Company, that Boris Metlitsky, a 25-year veteran of Symbol was recently named Senior Vice President of our Global Products Group.

Boris has played an important role in Symbol's success, helping the Company grow from a startup technology venture to an industry leader.

We look forward to continued contributions in propelling Symbol into a new era of growth.

Ray Martino, Jr., a 19-year veteran of Symbol, has been named Vice President and Chief Technology Officer.

In this role, Ray will guide Symbol's strategy in development of new technology and next-generation products and services.

Most recently, he has worked with Symbol's Global Sales Product and Marketing team to define customer need and to develop end-to-end solutions.

Martino earned a Bachelor's Degree from Drexel University and a Master's Degree from the University of California at Davis, both in electrical engineering.

He also has 24 patents.

Anthony Bartolo, who heads up our Wireless Infrastructure Division, will now take on the added responsibility of leading the RFID Division.

Anthony has deep domain knowledge of wireless industry, which has already experienced transformation cycle from early adopter to mainstream adoptions.

In his new role, Anthony will be able to leverage his experiences gained in managing Wireless Division into the RFID Division, both of which are based on radio frequency technology.

In the RFID Division, he will implement some of the mature processes and structures we have in the Wireless Division.

Jan Burton, who spearheaded our successful channel program has now taken the helm for our operations in EMEA.

We look forward to Jan's continuing her success on the other side of the Atlantic.

Todd Abbott, head of worldwide sales will be managing her channel strategy for an interim period, until a search for replacement is completed.

Andrew Levander, of the law firm Dechert LLP, will supplement our strong internal legal team's counsel to the Company on legal affairs until we name a new General Counsel.

As you may already have read in our press release, we also announced that some executives who have made substantial contributions to Symbol's progress during the past several years have chosen to pursue other career interests outside of Symbol.

Peter Lieb, Senior Vice President and General Counsel;

John Bruno, Senior Vice President and General Manager of the RFID Division; and Todd Hewlin, Senior Vice President of Corporate Development are leaving the Company.

On behalf of Symbol, I'd like to thank Peter Lieb, John Bruno, and Todd Hewlin for their many contributions and wish them great success in their future endeavors.

However for the near future they will remain with Symbol to ensure a successful transition in their functional areas.

Before I get into the specifics of our Q4 results, I want to give a quick overview of our performance during the quarter.

I am pleased to report that we exceeded our revenue and earnings expectations.

Our strong margin performance continued in Q4.

Our gross margins were 45.6%, up from 45.4% in Q3.

Operating margins were 7.6%, up 6% -- up from 6% in Q3.

We also continued to drive operating efficiencies with Q4 OpEx of 167 million.

We expect this trend to continue, as we are forecasting total OpEx in the 163 to 167 range in Q1.

This forecast includes approximately 7 to 9 million in legal expenses for the defense of prior management.

Our Partner Select Program continues to develop into a competitive advantage as we pass the $1 billion mark in annual booking from our indirect sales channel in 2005.

In summary, we are pleased with the results delivered in Q4 and remain committed to our business strategy.

We look forward to driving future revenue growth, developing new technologies and product to better serve our customers, and continuing our strong operational performance.

Now let's move on to review the Q4 results in more detail.

We are encouraged by our ability to succeed in a challenging retail spending environment and by the progress we have made in penetrating other verticals.

The breadth of our product line, along with our product refresh program, and ongoing innovation, has enabled us to continue to diversify our customer base.

Once again, we expanded our presence in the travel and transportation, manufacturing, and field mobility markets with over 30 new customer deals won for deployment over the next 12 to 18 months.

In the travel -- in the travel and transportation vertical, we won over 15 new deals, for a total value of over 15 million.

These wins include Golden State Overnight in the Americas, the Russian Post in EMEA, and Mainfreight in Asia-Pac.

In manufacturing, we had 10 wins, with a total value of approximately $10 million.

In healthcare, we're optimistic that the FDA's bar code regulations that go in effect in April of 2006, will drive demand in this industry.

We have won five strategic customer wins, and we look forward to participating in the further development of this market in 2006 and beyond.

While we are planning to continue our sharp focus on operational excellence and cost containment, the innovation engine at Symbol remains strong.

We spent approximately 155 million in engineering in '05.

More specifically, we introduced a total of 12 new products from across each of our business units in 2005.

We recently introduced the MC70, our first Enterprise Digital Assistant that offers WAN, PAN, LAN capability and our traditional data capture functionality.

The MC70 has a sleeker form factor, designed for customers -- customer-facing application environments.

We are receiving positive feedback from customers, and have a strong pipeline building for this product.

We also recently introduced a best-in-class miniaturized laser scan engine that offers maximum reliability and high performance and market-leading price point.

RFID is an extremely critical technology and strategic focus for Symbol.

We remain committed to playing a key role in the RFID market and will continue to heavily invest in our research and development efforts in this area.

We believe that RFID technology will be a growth driver for our Company, given Symbol's expertise in AutoID solution, we are ideally positioned to lead in RFID.

The combination of our technology innovation, market knowledge, and intellectual property will be a tough combination to beat.

We applaud the efforts of RFID early adopters, particularly customers in retail and government verticals, and expect that other markets will soon follow their lead.

Our confidence and commitment in the technology remains stronger than ever.

While RFID will be one of the fastest-growing technologies, it is off of a small revenue base and, therefore, it will not be a significant contributor to Symbol in the near term.

As I mentioned earlier, our channel strategy continues to deliver strong results.

Revenue generated through the channel accounted for approximately 75% of our total sales.

Our Partner Select Program has become the industry standard, and, once again, we received a five-star rating from VARBusiness magazine.

For the third consecutive year, we improved partner satisfaction and loyalty and are pleased to announce that we crossed the $1 billion mark in annual bookings from our channel.

We also established an Independent Software Vendor, or ISV program, which added a broad set of applications to our current solution offering.

Now I'll focus on the financial highlights.

When comparing Q4 results to last quarter and Q4 2004, we will exclude the non-recurring items in order to provide a normalized view of our financial performance.

Excuse me.

Revenue in the quarter exceeded our expectations and came in at 439 million, compared to 432 million reported last quarter and 451 million reported in Q4 '04.

Product revenue was 84% of total sales, or 366 million, increasing approximately 1% quarter-over-quarter, and declining 2% year-over-year.

Services revenue was 73 million, or 16% of total revenue, compared to 70 million last quarter.

As a percent of total product revenue in Q4, the Americas region contributed 63%, EMEA contributed 28%, and Asia-Pacific contributed the remaining 9%.

On a sequential basis -- pardon me, again.

On a sequential basis, product revenue derived from the Americas and EMEA was relatively flat, while Asia-Pacific increased 8%.

By division, Mobile Computing contributed 71% to Q4 product revenue;

Advanced Data Capture, including RFID, contributed 24%; and Wireless Infrastructure contributed 9%.

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

Compared with last quarter, Mobile Computing product revenue increased 10%;

Advanced Data Capture, excluding RFID, decreased 10%; and Wireless Infrastructure increased 2%.

Of the total ADC product revenue, RFID accounted for 5 million, compared with 15 million last quarter.

For 2005, RFID revenue was 36 million, slightly below our target of approximately $40 million.

Our RFID business is highly dependant on the deployment schedule of large early adopters, and as a result, we expect revenue to continue to fluctuate quarter-to-quarter.

Moving on to gross margin, gross margin increased 20 basis points to 45.6%, versus 45.4% last quarter.

Our total operating expense in the quarter was 166 -- $167 million.

SG&A of 133 million includes approximately 9 million of legal expenses related to the defense of prior management.

This compares to SG&A of 132 million last quarter, which included 7 million of prior management legal expenses.

Engineering of 34 million declined by $5 million, due to product rollout schedules and more efficient deployment of engineering resources.

We expect engineering proportion of our total spend to increase in the coming quarter.

Operating margins increased 160 basis points, to 7.6%, versus 6% last quarter.

The additional $2 million quarter-on-quarter in legal expenses related to the criminal trial negatively impacting our operating margin by approximately 50 basis points in Q4.

Using a normalized tax rate of 32%, net income for the quarter was $23 million, or $0.09 per share.

Turning to the balance sheet and cash flow.

We ended Q4 '05 with an unrestricted cash balance of 139 million, versus 156 million at the end of '03 -- I'm sorry, Q3.

The restricted cash balance remains relatively unchanged, at $53 million.

The sequential decrease in cash is attributable to $26 million in debt repayment and 14 million in net capital investment, offset by 25 million generated from operations.

The accounts receivable balance in the quarter was 213 million, up from Q3's ending balance of 191 million, with 44 day sales outstanding versus 39 last quarter.

We currently expect DSOs to remain in approximately the range of 40 to 45 days on a going-forward basis.

The ending Q4 inventory balance increased 16 million sequentially, to $182 million with turns of 5.2, excluding restructuring and asset impairment charges.

At the end of Q4, total debt was 102 million, which included 58 million in short-term debt and 44 million in long-term debt.

Before I move on to Q1 guidance, I'd like to address some developments on the legal front.

Last night, the judge declared a mistrial in the case against prior Symbol management.

While we expect the jury's efforts -- while we respect the jury's efforts in the case, we would have preferred a complete, final resolution to the matter.

If the government elects to retry the defendant, we are obligated to pay for the legal expenses, and we will cooperate fully.

Due to scheduling issues, the court indicated that a new trial would not begin until the summer time frame.

Despite ongoing legal expenses, we continue to target 160 million of quarterly operating expenses in Q2 '06.

As you are aware, it has been our plan to invest the savings from reduced legal expenses into new initiatives and salary adjustments.

To the extent our legal expenses end up running materially higher than anticipated, we may have to spend more to finance attractive revenue-generating opportunity.

As for Smart Media -- for the Smart Media appeal, we are pleased that the Ohio State Supreme Court declined Smart Media's appeal.

When we appealed the initial judgment from the lower court, we posted a $50 million bond.

We will seek return of that bond, which was recorded on our balance sheet as restricted cash.

Moving on to Q1 guidance.

Although we had some nice wins in the retail market, the overall spending environment remains relatively weak on a global basis, as Q1 is traditionally a slow quarter for this segment, specifically retail customers continue to be cautious with capital expenditures.

We have maintained our leadership position in the retail market.

We believe we are very well positioned to seize opportunity when the retail markets increase their capital spend rate.

We are also encouraged by our customer wins across multiple verticals and regions.

The spending environment in the Americas region is somewhat mixed; however, we are seeing signs of improvement in EMEA and long-term growth opportunity in Asia-Pac.

Based on customer deployment schedules and the normally challenging seasonality associated with Q1, we think it is prudent to remain cautious for this quarter.

We are forecasting revenue in Q1 to be approximately flat to slightly down compared with Q4 revenue of 439 million.

Currently, we expect gross margins to continue to improve, with total operating expenses in the range of 163 to 167 million.

We anticipate legal expenses for the defense of prior management to be approximately 7 to $9 million, or $0.01 to $0.02 per share, which is included in our EPS guidance.

As a result we expect Q1 earnings per share to be in the range of $0.08 to $0.09.

Our EPS estimate for the quarter excludes the impact from expensing stock options, which will be approximately 1% -- $0.01 per share.

In closing, I want to reiterate our plans for 2006.

Growing revenue is our top priority.

Our other priorities are to increase our spending on engineering and technology innovation, delivering a solid, double-digit operating margin by the second half of 2006 and meeting our $160 million quarterly operating expense target by Q2.

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

We remain focused on our enterprise mobility strategy and vision, which continues to be validated by our customers and partners.

Our expanding product portfolio and market coverage, along with our restructured operating model positions us well to strengthen our leadership in this market.

Thank you for joining us.

And, Operator, please open up the lines for Q&A.

Thank you. [OPERATOR INSTRUCTIONS] And we'll take our first question from Reik Read with Robert W. Baird.

Hi, good afternoon.

Could you guys talk a little bit more?

Sal, you had mentioned America looks a little bit mixed to you.

Can you tell us what you're seeing by vertical market there and if you've seen any incremental weakness in December and January?

Sure.

I'm going to turn that over to Todd.

He's right across from me, I think.

And I'll help if you still need -- have questions at the end.

I think from a vertical standpoint we still continue to see a great deal of caution from a retail standpoint.

As we said the last quarter, our contribution from retail had dropped from the 50 to 55 to 40 to 45%, and it dropped a little bit further this past quarter to about 40% of our business.

We have been able to make up a great deal of that from some of the increased traction we're getting in, primarily three areas -- continued traction in travel and transportation; some good traction from some investments we made 12, 18 months ago in manufacturing with some good wins; and field service, being an area that we've been investing in, and with the new announcement of the MC70, positions us extremely well.

So it's kind of a mixed view.

I mean, retail continues to be a challenge.

Q1 is traditionally a difficult quarter in retail as the investments and rollouts typically start in Q2.

So that will be the critical quarter to see how that CapEx starts to get released from a year-on-year perspective, but it's very tough to call right now.

And did you guys see the incremental weakness in December and January?

No.

I mean, Q4 for us was a very good linear quarter, so no real weakness in December.

January in Q1 is traditionally a very tough quarter because of, just, typical transitions from a retail standpoint.

You've also got the Chinese New Year in Asia, which impacts our business and all IT companies in that sector.

So Q1 is traditionally a tough quarter from a linearity and from a quarter-to-quarter growth perspective.

Not seeing anything that we haven't seen in previous Q1.

Okay, great I'll hop back in.

Thank you.

Operator, next question.

And, next we have Philip Alling from Bear, Stearns.

Yes, thanks, much.

I, just, Sal, wanted to get a sense from you as far as the goal that you set here for quarterly operating expenses, at $160 million, that's unchanged from what you'd said previously.

Could you give us a sense of what you had baked in that $160 million level with respect to legal expense?

And what are your views, really, for, sort of, the second quarter and beyond as far as legal expense is concerned?

Sure.

I think that when we set the target of 160 million, it was with anticipation that the cost from the ongoing litigation with regard to the prior associates would end sometime in Q1, Q2.

Okay?

Obviously, with yesterday's decision to declare a mistrial, there will ongoing -- some degree of ongoing costs, although we're not certain -- we have no visibility, really, to what that might be at this point in time.

What we are still forecasting is that we will be able, based on the trajectory that we're on, based on what we see in front of us, that that target, unless those courts just go completely haywire -- for lack of a better term -- that we will be able to come either very close or hit that target of the 160.

We have some fairly clear visibility to being able to achieve that at this time.

Got you.

With respect to the growth drivers you talked about, one, of course you mentioned RFID, numbered down sequentially from what you had printed in the prior quarter.

Would you expect a similar type of volatility in the RFID revenues that you report throughout '06?

And what can you tell us, really, about the pipeline there?

Yes, absolutely.

I think -- look, we're extremely bullish on the RFID market, the RFID technology, and where that market will lead in the future.

I think that it is, without question, a big bet for Symbol.

We are fully behind it, and we view it as, strategically, extremely important to us.

Having said that, in the near term, I would expect, because of such an -- it's such an embryonic market to us from a sales standpoint, volume of sale -- that the number will just -- it's the rule of small numbers.

The one shipment will make the difference of one quarter seeming far superior to another.

As a matter of fact, that's what happened last quarter, and it is that -- it was literally one customer, one shipment that made the difference and ballooned that quarter to 15 million as opposed to this quarter being 5 million.

So I would expect that kind of volatility.

I think that to measure it, it would have to be over a longer period of time, and to see that the overall trajectory is positive.

All right.

And can you give us any sense, really, about sort of the growth outlook on the -- for the different product lines that you have, Mobile Computing in particular?

What additional color could you provide, really, as far as the growth outlook for that?

We're not giving any guidance on that at this point.

I know you don't want to hear that.

But I think that at this point, we're staying away from projecting above -- beyond the next quarter.

All right, I'll get back in the queue.

Thanks, much, Sal.

Thank you.

And we'll move on to Chris Quilty with Raymond James.

Good evening.

Good evening, Chris.

How are you?

Well, in the context of the question that was just asked, you might not answer mine, but I was just going to ask, not by product segment, but if the goal is revenue growth this year, is it fair to assume looking out for '06, that the general growth of the Company should be, perhaps, in the 6 to 8% range of the retail business?

Or do you feel you can do better than that with wins outside of the retail?

I think that I won't respond with regard to retail or the different product segments, but I think that we expect -- we fully expect that overall, '06 will be much better performance than what we're expecting to see in Q1.

We do not think that Q1 is at all indicative of what will happen for the rest of the year.

Okay.

And should we expect to see, sort of, a linearity to the year as it moves forward through the quarters, then?

I think you will see -- my bet is that Q2 will be stronger.

Q3 tends to be a little softer, and Q4 traditionally is a strong quarter.

So I think you'll see probably a little bit of a wave, if you want to plot it.

But I think, overall, the year we're expecting good results.

Okay.

And to clarify on the guidance for the operating margins, is that double-digit operating margins by the third quarter?

Or is that in the back half of the year, more towards the fourth quarter that you'd expect to get to that bogey?

I think that it will be the second half of the year.

And it could be at Q3 if -- with a little bit of a luck.

If not, I firmly believe we'll get there by Q4.

Okay And is it fair to assume, given the $160 million quarterly run rate, you're going -- it would imply at least that you're going to maintain operating margins up close to that 40 to -- sorry, gross margins, at the 40 to 45% level?

Yes.

Okay.

Great.

I'll back out into the queue.

Operator, next question, please.

And we'll move on to Scott Schneeberger with Lehman Brothers.

Hey, good afternoon.

Just one follow on the line of revenue questions that we've had.

I guess, Sal, if I could ask, are you looking for, on an overall Company basis, a revenue growth here relative to '05, flattish?

Give it some type of framework that way?

Look, we are looking at revenue growth here, unquestionably.

The question is -- the real issue is just how much?

But we are looking at it to be a growth year.

We fully understand that '05 and into '06 we've done a great deal of work on managing our cost side, but the game now is revenue.

And we are committed and working in that direction.

We plan to deliver.

Our hope is that we deliver this year market-leading growth for '06.

I also want to correct, before you go on to your next question.

Sure.

The last question we had, someone said 40 to 45% in gross margin.

We expect to be in the range of 45% gross margin this year.

If we go to 40%, we've obviously done something wrong.

So what we're aiming for is to stay in the 45% range.

Great.

Thanks, a lot.

While we're talking the P&L, I guess, tax benefit in the fourth quarter, I guess, if you could talk that through a little bit?

And, also, give a little bit of guidance as to how we should model for the year ahead in the tax line?

Sure, I'm going to turn that over to James Langrock.

He's our Controller, sitting across the table from me.

The tax benefit in Q4 was associated with a favorable settlement of a tax audit.

So that was in the as-reported column.

So that's what the benefit was in Q4.

If you look at the -- excluding that, we've normalized the tax rate to be 32%.

I would expect, from a modeling standpoint, that in '06, somewhere between 32 and 34% would be the full-year effective rate for the Company.

The only thing I would advise to is the R&D tax credit has not been extended to-date in Congress.

So that could potentially put some pressure on the Q1 tax rate.

But a full year, I'd model 32 to 34%.

Great.

Thanks.

And one more final one, if I could, on, obviously, some turnover in the quarter at the high level.

Will we see much more at the high level?

And also if you could address just overall Company headcount and how that's going to move going forward, how that moved in the quarter?

Thanks.

Sure.

First of all from -- on a high level, I won't answer the question because that allows me to keep the high-level staff on their toes.

So -- no, seriously, we do not anticipate any further changes at the senior management level.

We are working at this point to recruit a CFO.

We will be recruiting a new General Counsel.

I believe we're relatively close on at least one of those searches right now.

So, hopefully, we'll be able to make an announcement into the not-too-distant future.

With regard to the rest of the staff, we intend to stay at pretty much the same level that we are today.

Symbol has -- I've said this before, and I'll say it again and I want to be extremely clear and extremely sincere on it -- is we have a tremendous amount of depth.

A number of the changes that were made today were made from promoting people from within.

And I am extremely confident that we've made some really good choices.

And so we're looking forward to the future.

Basically what's going on here, so that we say it and we say it up front, I am putting in place my own team to lead the Company forward from where we are today.

Great, thank you.

You're welcome.

Operator, next question, please.

And, next we have with Ajit Pai with Thomas Weisel Partners.

Yes, good evening.

A couple of quick questions.

The first would be just in terms of retail, the retail vertical.

Your business fallen, like, over there from, like, the mid-50s down to the very low 40s.

Could you give us some indication as to what's happening over there?

Do you expect that to come back at some point this year?

Or do you think that it's going to fall to these levels and stay at these levels for a while?

And what the drivers for it to rebound would be?

When you look at the retail market, it's been primarily a tier-one retail phenomena.

The underlying tier-two, tier-three has not been impacted anywhere near as bad or as challenging.

But in essence what you're -- what we're finding is that retailers still are breaking up their projects up into smaller elements, smaller sizes, releasing CapEx on a limited basis, rather than what we historically would have seen would have been large product roll-outs.

So we still see a degree of cautiousness by the retailers in making investments in IT.

There is a lot of -- a great deal of pipeline in projects that are in the queue.

How and how soon and when they begin to get released in greater scale is the challenge that we have from a visibility standpoint.

I don't think that this is something that is a long-term systemic change to the industry, because fundamentally, investment in efficiencies, which our technology typically provides -- focuses on two elements -- improvement in efficiencies to improvement profitability, or improvement in customer-service-based applications.

And in both those areas, those are things that retailers ultimately are going to have to invest in and spend in.

It's just a matter of get -- them having the confidence to begin to release the CapEx.

Right.

So there's an inflection point right now that you're waiting for.

Do you think retailers are just being cautious?

But at some point, the tendering activity that you're seeing right now would get converted to real orders, and you could see -- I mean, what happened last year and over the past three quarters, you look at it more as a push out rather than cancellations.

Is that a fair of assumption?

I think that's a fair assumption.

Okay.

The second question would be about RFID.

Who would be responsible for the RFID initiative now under the new management structure?

Anthony Bartolo.

Anthony has been leading our Wireless Division, and we see a great deal of synergy between the Wireless Division and RFID.

And we're looking forward to getting a number of those benefits by reason of this management change that we've --

And who will Anthony report to?

Anthony will report to Boris Metlitsky, and -- who is the head of our GPG Division.

Having said that, I do spend quite a bit of my time with the product managers, or the group managers, within GPG.

It's an area of -- that's extremely important to us.

So, I will certainly spend a great deal of time there.

But the leader of that group is Boris.

And the last question would be about the legal case to protect -- to pay for the defense of the prior management team.

Could you give us some color as to how long, if you had to give a worst case scenario, how long could that progress -- that litigation beyond the summer time frame and it comes up for retrial?

After the results of yesterday, I wouldn't dare.

The last thing I expected yesterday was the result that we received.

So it's very difficult to tell.

There are a number of things that are up in the air.

We don't know what the government will do.

We don't know what the defendants will do, what the judge will do.

A lot of things that really need to be sorted out.

So it would be -- any prediction at all would be really baseless at this point.

We have on the line, by the way, Martin Nussbaum, assuming that, technologically, we've got him piped in correctly.

Martin is an attorney with the Dechert firm, and they led the -- Andrew Levander let the investigation of Symbol and -- through all of the -- and he has been cooperating extensively with the United States Government in prosecuting the case.

So, Martin, do you have anything else to add?

Sal, assuming you can hear me.

Am I coming through okay?

Yes, you are.

Okay.

No, I reviewed what you just said and listened to it carefully.

I spoke with Andy before the conference call began to see if he had any more recent information.

And, unfortunately, it's as inconclusive as you anticipated.

There is no sound and reliable information that we have that would indicate whether there will be a retrial, and if there is how long or how complicated it will be.

And on both of those things will ultimately depend on the costs that the Company will be required to advance.

So I think you hit it just right.

It's too uncertain to make any kind of reliable estimate now.

But is it fair to assume that Symbol will have to continue to pay the fees until we have a final outcome for the trial?

Symbol has an obligation, as virtually every corporation has, by law, as well as by contract, to indemnify officers and directors and employees who are subjected to civil or criminal litigation relating to their service for the corporation.

And it's in response to that obligation that Symbol has been providing funding of -- for the defense.

So the answer, I think, is that Symbol does have an obligation to continue provide funding for the defense.

And, unfortunately, this is not a process that the Company has any control over.

Okay, thank you.

Operator, next question, please.

Yes, we'll move to Lauren Setting with JPMorgan.

Hi, this is Lauren for Paul Coster.

Most of my questions have been answered, but just a quick one on RFID and then a follow-up.

Can you tell us what the current price point is for RFID price tags?

There are a number of price points depending upon the different tags, specialty tags, more common tags, et cetera, but we don't discuss price point.

It's not our policy to discuss price point in these sessions.

Okay.

And, then, is there any change in the competitive environment for the mobile computers or data capture, particularly in light of the PSC and Datalogic deal?

I --

What was the last part?

Competitive environment change, particularly in light of the PSC, Datalogic deal?

No.

There's -- on an overall basis -- this is Todd.

On an overall basis, we've seen no real dramatic change in the competitive landscape and the merger of Datalogic, PSC has not added to any structural change that we're seeing in the marketplace.

Thank you.

Operator, next question, please.

We'll move to Ed Wheeler with Buckingham Research.

Yes, hi.

Good evening, all.

In going over the revenue mix, you talked about a 4% degradation in revenues from a variety of items, including royalties.

Could you expand on that a little bit and talk about what that might look like as we go into and through '06?

I think we just talked about it.

It's a 4% negative impact.

Yes.

That is -- included in that is royalties as well as rebates.

So the negative impact is the rebates that we offer to the channel partners.

So that's dependant on the programs and the volume.

So, this is Todd.

So as you continue to drive more and more business through the channel, by nature, rebates are going to increase.

So this is a normal number, then?

It's a -- yes.

Yes.

We --

I mean, this degree, this 4%-degradation-type number?

Yes.

There's been no underlying structural change to the royalty revenue stream.

Okay.

So, whatever royalties were involved with the settlements with Intermec would be included in that number?

We don't get into the specifics on what the royalties are, but there's no structural change to the royalty revenue rates that we've had historically going into '06.

Okay.

Yes, but, I mean, to the degree that there was, say, an up-front payment, I don't even know if there was or wasn't one, but anything that was -- ?

We are not at liberty to discuss what the -- our agreement is with Intermec.

No, no.

But just, is it included in that line, is my question?

It's -- you're -- it's a backended way of asking -- Is their revenue stream coming from the Intermec settlement?

We don't get into specifics relative to what's contained within the royalty stream, but there is not structural change to what -- from our historic run rates, going forward, in that 4%.

Okay.

So, I guess, to the -- whatever royalties are involved with the Company would be in that broad item, as you talk about it at this point, now and going forward?

Yes.

Okay.

And the other question I wanted to ask was on the -- just on the balance sheet and CapEx.

Do you expect any particular change in capital spending and cash flow items in '06?

Nothing of significance that we can see right now.

So, in line with those '05?

Yes.

Great.

Thank you.

Operator, next question.

Yes, we'll move to David Katz from Matrix.

Hi, guys.

Hi, David.

Last quarter you talked a little bit about book to bill.

Did not hear any mention of that today.

I think that what we've decided to do is not to cease disclosing booking on a going forward basis.

And we did it -- we chose, since this is the first quarter of the new year, we'd be discussing Q1, I'm not giving out that information.

What we found is that it's really -- it doesn't give much indication of anything.

And let me explain that for a moment, so that -- in the spirit of full disclosure here -- that, number one, we saw in Q3 that bookings were actually down significantly from the quarter before.

And, then, Q4 actually ended up being higher than we expected with regard to revenue.

Q4 booking actually increased over 9% over Q3, but we don't think that that's necessarily indicative.

There are many other factors that go into what will happen going forward, that giving that information could actually be a cause of concern.

We could be misleading in terms of predicting what the future might be.

There's just too many factors that would have to be considered in giving any kind of real projection, if you will, of being able to use it, to see quarter to quarter.

So that's why we've decided to avoid it.

We had -- to be honest with you, there was a lot of discussion about that, particularly since it's a quarter that, from a booking perspective, it's the best quarter we ever had.

So we wanted to highlight it, but after quite a bit of internal debate, we decided that this was the right time to stop disclosing it.

So it's not being stopped because it was anything negative, you're, in fact, implying it probably was pretty good, but you're changing the posture on it.

It was definitely very good.

It was 9% growth quarter-on-quarter.

We're not trying to hide anything, to be blunt.

It's just the opposite.

The debate was whether we should highlight it because it was a very good story.

We just don't think it really helps anyone and, in fact, could be -- could mislead a little bit.

Okay.

Last quarter you talked about gaining traction in a number of other verticals.

You spent, I guess, less time today highlighting that.

Does that mean you lost momentum there or, just, you're focusing on different things?

I'll let Todd answer that first, and then I'll chime in at the end.

No, quite the opposite.

I mean, we had -- last quarter, if you recall, we really highlighted the travel and transportation industry, and we had continued success there in Europe, where that market is really taking off.

We had seven new partial wins, three -- four of which are new customers to us.

We also had some significant traction in Asia-Pacific, with Australia Post and Mainfreight, which was highlighted on the call.

So travel and transportation continues to be strong.

We're actually quite pleased with the progress that we're getting in manufacturing.

Our specific focus in manufacturing really is in three subsegments -- automotive, as we all know, the automotive segment in the U.S. is quite challenged, but internationally, it's quite strong.

So we had good traction with a number of the global auto manufacturers, having picked up two new customers.

And then also in petrochemicals, which is another area within manufacturing, also received some good traction on a new iSafe product, which is in essence the certification for use within a highly contaminated or chemical environment.

And, then, the last is in what's traditionally the DSD or route accounting.

And we continue to have good, strong market share gains there.

Picked up two new customers that total 11,000 routes that will be rolled out over the next 12 to 18 months.

So manufacturing continues to be strong.

And, then, the last area is in healthcare, which we're cautiously optimistic on.

We had a very big win with the Veteran's Affairs environment, or a customer, I should say, within the Federal Government, and also picked up a very large health win down in the southeast for 5,000 imagers.

So we're seeing good traction in the verticals outside of retail.

And the last, really, is field service, which we think is going to be a key growth area for us, with the MC70 platform, positions us well.

Some early, good, strong indications on pipeline.

We'll see how that ramps up over the next several quarters.

I think that what we're seeing on the other verticals outside of retail bodes well for us.

When retail comes back and with what we're doing in other verticals, that's what causes us to be optimistic with regard to the future, the both of those things starting to hit simultaneously.

Last quarter we announced -- we said that we had a large transaction with a large Fortune -- global Fortune 50.

And I'd love to report that we had another one of these this quarter.

Todd promises me we'll have at least one or two during the course of the year.

He's grimacing right now, but we'll see what we can do there.

But, realistically, those don't come every day of the week.

So, but, we really are -- I should say, cautiously optimistic as to what the rest of the year will bring, particularly if we start to click, both on the retail side and the progress we've made in the other verticals.

Okay.

Last question.

I appreciate the time.

The -- one of your competitors reported and had their discussion this morning, and they talked about some tier-one wins and that retail was actually okay.

Do you think that it's more retail or that you're losing share?

Or what do you think about your share?

Well, I think, first of all, you got to compare apples to apples with our business versus theirs, and there are some aspects of the business that we don't compete in.

Which is predominately where -- when they refer to their tier-one wins, where it's coming from.

We had a couple of losses in the first half of the year of last year, but it had no tier-one competitive losses in the second half of last year.

It's like we picked up a competitive displace in one large retailer that I can't, unfortunately, disclose.

So I don't see us, certainly from the second half on, losing share in the retail space.

I think it's much more about our EBC business had some comparables in it relative to scan engines year-on-year, as well as their success in some segments that are not in the same markets that we address.

Okay, thank you.

Sure.

Operator, next question, please.

And we will move to Kevin Starke with Weeden & Company.

Hi.

I was just wondering if you could tell us how much expense did you incur in relation to the management retention plan you put into effect on August 26th?

I beg your pardon.

Can you ask your question again?

The management retention program that you put in place August 26th that gave basically a one year salary to a lot of the top executives at Symbol.

How much was the total -- how much did that cost in total?

How much expense was related to that in the fourth quarter?

We don't disclose that information, I'm sorry.

Even though you put it in an 8-K

It's in the 8-K.

Whatever information is there, that's what we wish to disclose.

All right, thank you.

Operator, next question, please.

And we'll move to Andrew Abrams with Avian Securities.

Good afternoon.

When you look at retail coming back, when and if this happens, are we going to see a quick jump back up to that 50, 55% level?

Or have you intentionally structured things so the level remains at -- in the, let's say, the mid-40s or thereabouts, looking for the tier-one customers coming back?

Do you have a very structured plan there?

Or is it if it comes back, it comes back?

We had always been, as a stated strategy over the last couple years, investing to get a better balanced portfolio across the verticals.

We had been limited getting great traction there, due to just getting some of the key products out that were critical for success in some of the verticals that are now out, as well as getting the return from the investment in new sales coverage and partner developments.

So those things are now all starting to come together.

I think Q2 becomes a critical quarter to see how tier-one retail balances out for the year.

Typically, the large retailers do a lot of their deployments in Q2, Q3.

They set their plans in Q1.

So we're watching the pipeline very closely as it's developing to see how that's going to transition into bookings and revenue for the second and third quarter.

Those -- that's when it becomes, I think, most telling.

Does it come back to 50 to 55?

Probably not, because of some of the success and the growth that we're getting in the other verticals.

And, frankly, we'd like to have it more balanced both industry, as I said, as well as geographic, be able to weather the storms that occur in different verticals at different points in time.

Very tough to tell if it goes back up to 45, 50.

I think we believe at this point that 40 tends to feel like the bottom.

If you look at quarter-on-quarter or year-over-year, last quarter we had a number of very large multi-million-dollar transactions with retailers to the tune of over five.

And this quarter we have one.

And that really points to that large project investment and decision-making now being much more cautious and cut up into much smaller pieces.

How that translates to multi-million-dollar global roll outs or cross-domestic roll outs really remains to be seen.

So I think 40 is probably -- feels like the bottom.

But I don't think -- I would not model it going back up to 50 to 55.

Thank you.

Also, on the RFID side, do you have any -- and this is over a couple of quarters -- any understanding of what the mix looks like now in terms of product gen-one verses gen-two?

Have you seen any trend toward gen-two being actually sold instead of just being tested?

And what's your color there?

I think everything is moving to gen-two pretty aggressively.

Terrific.

Thank you, very much.

Operator, next question, please.

Yes, we'll move to Tavis McCourt with Morgan Keegan.

Good afternoon, this is Tavis.

A follow-up on the data capture business.

Obviously, it's been down year-over-year for a few quarters in a row.

I presume most of that's due to just the exposure there to retail.

But I was wondering if you could talk a little bit about what percentage of that business is scan engines or other kind of embedded devices that may be seeing some weakness versus what percent is actually in market devices?

Yes, so, we don't break out the scan engine business separately, but we have disclosed previously that they -- the decision around the litigation with Intermec, obviously, had a comparable year-on-year that was going to hurt us because we -- they stopped buying and we stopped selling scan engines to them.

And there was a fairly good volume of that in the previous year.

So that absolutely hurt -- has hurt us on a year-to-year basis relative to the comparables in the ADC space.

But, as I said, we don't break that out separately.

We also had a product transition on our high end scanner, which we announced in the middle part of the year.

Our 2208, which is the middle level of our product segment is -- has become our best-selling platform within the ADC space in the history of the Company, shipping over 175,000 units last quarter.

So we've seen good traction in the mid-tier.

We've had a product transition on the high end.

And combine that with the scan engine year-on-year comparable, has a lot to do with the year-on-year results.

Got you.

And, then, a couple of details on the financial statements for you, Sal.

Inventory was up pretty meaningfully, I guess, sequentially.

Was there any particular reason for that?

Sure.

That was intentional.

We decided -- two things -- one, to make sure that our channels were well supplied, our distributors were well supplied going into the year end so we can take advantage of opportunities that were there.

If it's not on the shelf, you lose a sale, basically.

Yes.

And, additionally, we decided to grow some of our inventory in our production side, okay, for really the same reason.

So that was intentional.

We think where it is, is relatively where it will stay, in this range.

I do not think you will see our growth anywhere near this growth going forward.

Got you.

And, then, the last one, it looks like depreciation and amortization was well above trend line in the quarter.

Were there any kind of one-time expenses in there?

Or is that what we should see going forward?

Just give me a moment on that.

We're -- we want to make sure I look at the numbers and ask your -- answer your question properly.

Okay.

Looking at cash flow?

I'm sorry, could you repeat your question?

I've got depreciation and amortization of 17.2 million in the quarter, versus the first three quarters of this year was in the 13 million range?

No, we had depreciation for September of 17.1 million.

Okay.

Depreciation and amortization.

And depreciation and amortization at December 31st of 17.2 million.

So I guess we're just --

Yes, that's is obviously my problem.

So, great.

No question there, then.

Okay.

Thanks, Sal.

Thank you.

Operator, next question.

And we'll take the next question from David Kalis with Segall Bryant.

Thank you for taking my question.

You guys seem quite confident in the revenue outlook as it gets into the back part of the year.

Obviously because you're saying you want to get to double-digit margins.

But the first quarter looks pretty weak.

And I just would like some more talk, more conversation, discussion about some wins or why you think the back half of the year or starting in the second quarter is going to move in the direction you think it is, especially considering your comments about retail?

I think it has -- this is Todd.

I think it has a lot to do with the fact that we're coming out of the last year with a tremendous amount of product refresh, as well as expansion into new markets with new products.

As we said on previous calls, in the Mobile Computing space, there's a six- to nine-month transition to new products.

The applications get developed, the applications get ported, we get through test cycles and beta schedules, et cetera.

And, so, we've got a number of products that are kind of coming out at that six- to nine-month period.

In addition, we've got a -- we've had a very strong product launch this quarter, which also continues to refresh and expand into new markets, as in the MC70.

And with the MC70, we've gotten much smarter about how we introduce products into the ecosystem so that there's applications and beta customers so we've got pipeline with new launches much faster to try to condense that six- to nine-month period as best we can.

And the MC70 pipeline is extremely strong.

It's a new market that contain a lot of new customers.

So the pipeline for us feels very strong.

That's also augmented by the investments we've been making in sales coverage that takes a good nine to twelve months to really develop those business cases, those ROIs, and then the capital expenditures.

So Q1 is traditionally a tough quarter in this industry.

It's been that way for many, many years.

And, so, there's nothing that's different about this quarter than what we've seen in previous fiscal years.

The pipeline looks very strong.

That's what really gives us the bullishness that's backed up by the investment in sales coverage, in the expansion of product, and kind of being, now, virtually complete with the refresh activities.

So we've got a lot of old install base that we can go after as well as our market expansion into some of these verticals.

Okay.

Thank you.

Can you comment, though, about the sales force?

I know there was a lot of hiring at one point, some turnover, and I think along with the products not being mature, it seemed like the sales force, at least three to six months ago, was not mature, but it sounds like things are getting better.

Do you have any general comments there?

That's one of the things that gives us reason for optimism is that, you're quite right, there was tremendous turnover and change in our sales force, but that sales force is now maturing.

As Todd has indicated a number of times before, what we found is that -- and they'll probably hate me for using this terminology -- but the incubation period, if you will, for a salesman before he becomes -- gains full traction is probably closer to a year, maybe even a little bit longer than that.

So we're entering, now, a maturity phase that we think is going to help, in addition to the things that Todd talked about a moment ago, will give us even more impetus going forward.

Okay, thank you.

Operator, next question, please.

Yes, we'll move to Dick Davis with Richard Davis & Company.

Congratulations on your solidification and going forward.

A question I would have is, EMEA has been a rough area for you guys for at least a year and a half.

And, so, I'm wondering if you'd give me a little color on what's going on there.

I see that you just promoted Jan to that position.

So EMEA has actually had a pretty -- had a good second half from a stabilization standpoint, been quite active over there.

This past quarter they had a tremendous bookings quarter, a record bookings quarter, our fastest-growing, in fact, actually right in there in line with Asia-Pac.

So we feel like the business has done quite well there.

U.K., it continues to be a challenge from an economic standpoint, not necessarily from our business, but economically.

We're seeing tremendous traction in Central and Eastern Europe, as well as up in the Nordics and in Germany.

So that team, now, very much in line with what Sal just went through, that leadership team now has been in place for the last 12 months.

So they're through a great deal of the incubation or assimilation process of really understanding this business and the Company and its competitors and really getting to know the markets and customers.

And so they're starting to really hone in now on an execution level that I think will deliver much more consistent growth going forward.

So we feel pretty good about where we are entering this year in EMEA.

Thank you, very much.

Sure.

Operator, we have time for one last question.

Yes, we'll take our last question from Chris Quilty with Raymond James.

Thank you.

And I forgot to welcome Lori back.

Thanks.

Sal, you caught me before I meant to say 40 to 45 on the gross margins.

But a question there, if you can talk on your cost-reduction efforts, you've made significant strides in reducing the number of SKUs.

What do you have on the plate on a go-forward basis in terms of driving down cost of products?

Or is that really the effort, is it to move up the ASP and value of products in order to maintain margins?

I think that, look, it's always obviously our job, and it's always a significant piece of the GPG function's job to as -- to look for opportunity to reduce cost on product.

And we will continue those efforts going forward.

I think that, as I said before, I mean, we need to watch the purse strings, no question about it.

We can't fall back into the same trap we were in last year.

Having said that, we have to make sure -- and as I promised in the past, I don't think that -- I set a target of approximately $160 million.

I expect there to be opportunities in certain areas for additional savings, but I don't think right now that we're looking to return those savings to the shareholders at this juncture.

I think that what we need to do in order to give them the growth that they expect and deserve, what we're planning to do is reinvest some of those dollars both on the sales side as well as in the engineering side.

So that's our going-forward methodology, if you will.

That's fair enough.

I guess my question was, however, it seems in the past year or two, you've had some significant cost savings from reducing the SKU count from, whatever it was, 8,000 to 3,000.

And I'm guessing that there's not a similar order of magnitude cost-reduction effort that you've got on the plate on a go-forward basis or is that untrue?

No, I think -- this is Todd.

Chris, I think what you're seeing is, after spending an awful lot of time on changing the process and culture on how we test product from point product to platforming, where you've got a family of products on the same underlying technology as number one.

Number two is also a change in the DNA in our Company that we design product now with a requirement to have continual cost reduction on a quarterly basis.

And so we're two years through the process, two and a half years through the cultural change process on how you design product and, then, what the DNA is of your engineers and manufacturing team and your sourcing team to continue to drive cost out of your product on an ongoing basis.

I would love you tell you that we can take our ASPs up.

But that is not the assumption we make in giving you the margin expectations.

That would be upside.

But we feel really good that what you're seeing now with the new upgrading of product and new market expansion of product, it all has the benefit of platforming and the engineering mindset of cost reductions now built into those designs on an ongoing basis, and that wasn't the way we designed products in this Company before.

Same thing on the service side.

We made investments on the consolidated repair centers, knowing where this technology is going and the difficulty to begin to do repairs remotely on integrated technologies, very much like the PC industry.

We were out in front of the industry on that, and that is now starting to drive a much higher level of service quality as well as margins on the service side.

So in both cases, they're very much programmatic, cultural changes that are now delivering results and expect them to on an ongoing basis.

We're -- I hate to use the term again -- we're really cautiously optimistic on our ability to keep on this trend.

There are a number of strategic initiatives in addition to the, call it the normal flow that Todd is talking about, in terms of controlling and bringing cost down that we're working on.

So I really am fairly confident that we will continue to demonstrate an efficiency in our cost side.

Okay.

And one final question there on the gross margin expectations.

As you go out and target these new vertical markets and exclude any incremental sales activity that's required to get them and you look at product gross margin, are they generally comparable with what you would get in your more traditional retail markets or are they better, equal?

I would say that they're -- really, I'm hedging because it really varies.

But we're not seeing they are significantly lower on the portfolio side by any stretch of the imagination.

Always displacing a competitive installed vendor who's been there for years can present some competitive challenges, but it has not translated to a -- to us having to buy the business.

We're going in pretty much on an equal level with the margins that we have historically seen in retail.

And the benefit that Sal and I have just been talking to you about relative to the margin capability, allows us to be competitive.

And that's why we say we don't see any competitive threats out there that are a serious exposure to our margins because of the programmatic changes in how we design product and to deliver ongoing cost reduction.

Great.

Thank you, very much.

Sure.

Take care.

Operator?

And that does conclude our question-and-answer session at this time, and our conference call.

We do thank you for your participation.