斑馬技術公司 (ZBRA) 2002 Q1 法說會逐字稿

Welcome to Zebra Technologies conference call. Joining us from Zebra Technologies are Mr. Whitchurch CFO and Mr. L. Kaplan CEO of Zebra Technologies. All lines will be in a listen only mode until after today's presentation. Instructions will be given at that time in order to ask a question. At the request of Zebra Technologies, this conference call is being tape-recorded. Should anyone have any objections, please disconnect at this time. At this time, I would like to introduce Mr. Charles Whitchurch, CFO of Zebra Technologies. Sir, you may begin.

Good morning everybody and welcome to Zebra's first quarter conference call. As is our usual practice, we have some prepared remarks we would like to make before opening the conference to your questions. At this time, I would like to introduce Ed and let him make his prepared remarks.

Good morning, we are delighted that you could join us for the Zebra Technologies' 2002 first quarter conference call. Certain statements we will make in this call relate to future events or circumstances and therefore will be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. In particular, any statements we make regarding our financial forecast for the 2002 second quarter and expectations of our trends in the company's business will be forward-looking statements. Forward-looking statements involve risks, uncertainties, and other factors that could cause Zebra's actual results to differ materially from those expressed as such forward-looking statements. Additional information concerning such factors is available in the press release issued today by Zebra as well as Zebra's filing with the SEC. In particular, we direct your attention to the company's form 10-K for the year-end December 31, 2001.

Zebra's first quarter was marked by several important accomplishments, which give us great confidence in our ability to grow the business and build stockholder value. During the quarter we strengthened our management team with the addition of John Paxton as President of our Bar Code Business Unit. Our Card business continued to grow as we received a large number of orders from all over the world in a range of for the recently introduced P720 high-performance printer. These orders plus our OEM supply agreement with 3M show us that this increased security-conscious world with increasing demand for high-value secured identification card and systems.

Sales in Zebra's International regions continued to make progress. Sales to all regions were up for the quarter and included some major wins for mobile printing systems at high-performance tabletop units into applications that supply products to US markets.

In North America, we saw significant and major reversal in business with our top bar code customer. This tangible evidence gives us optimism that an upward trend in this region maybe beginning.

Our pipeline of acquisition is full. We are seeing an abundance of transaction opportunities in products and technologies where we can deploy our cash resources, now at 270 million dollars to bring long-term stockholder value.

Financially, we met our first quarter sales and earnings forecast. These results included an improved gross profit margin as projected as well as strong free cash flows supported by further reductions in inventories and DSOs. I would like to elaborate on these key points.

First, I consider the addition of John Paxton to Zebra's management team one of the biggest accomplishments in the quarter. As the CEO of three major Auto ID companies in his professional career, he has one of the most experienced and executive in the industry. His understanding of Auto ID technology, strong market and applications focus and breadth of contacts among manufacturers, resellers and end-users are real assets for Zebra. That should not be under-estimated. Since joining us in February, John, with his energy and enthusiasm, has already made a maturely impact on the organization. His experience and abilities compliment my own. As of yesterday, we will also benefit from John's business acumen as a member of our Board of Directors.

The Card Personalization Systems business continued to grow in the first quarter with strong support particularly in security applications. We received several awards for identification programs, both domestic and international. These programs for driver's licenses, national ID cards, employee IDs, and military and law enforcement, specifically Zebra's new P720 dual-sided laminating high-performance printer which we introduced in the fourth quarter of last year, for high-security applications. Zebra's Card will be deployed in Afghanistan for badging peacekeeping personnel. The outlook for the card business indeed remains bright in this post-9/11 era. To support higher security applications we are actively working with organizations on developing the next generation of security standards and infrastructure requirements for Card Personalization Systems. We have already begun introducing printers that incorporate high value security features such as the S820i secured ID card printing and laminating system, for which we have an OEM supply agreement with 3M's Safety & Security Systems division. As we progress through 2002, we expect to introduce more products for this growth business as well as strengthen our channel alliances.

Internationally, our European business continues to perform extremely well, growing both sequentially and on a YoverY basis our investments and distribution into Eastern Europe and infrastructure to support mobile printing system sales in the region continued to pay off. Our European organization has done an excellent job of working with customers on implementing applications that help deliver better customer service, improve productivity and drive down cost. Previously, we mentioned a recent installation of wireless Zebra mobile printers with a Virgin for the printing receipts, maps, tickets, and transfers. We also secured high-value applications in retail and distribution. In particular, I want to bring your attention to an exciting award winning application for the UK's WH Smith chain of retail stores. This world-class solution relies on Zebra's mobile printers to reduce checkout times during peak periods. The program has been extremely well received and we have the opportunity to leverage this success by expanding the concept to other retail and customer service organizations. We expect last years investments and a dedicated mobile sales force in Europe to build on its success this year.

We expanded our reseller network. Our investments in in-country representation continue to pay off with better coverage and new business. In Thailand, we secured a new mobile printing application with the Bangkok Water Utility to improve the productivity of their field personnel. We received a contract to supply mobile units for a similar application in the Dominican Republic and lottery organizations in South America are now incorporating Zebra mobile printers in their systems. We had good success in both regions supplying high-performance tabletop printers for more traditional manufacturing and retail application at companies that supply components and finished goods to the US markets. These sales point to an improving business environment.

In North America, our largest customers were a clear source of strength. With sales to our top-15 up 8 percent on a comparable basis and 12 percent sequentially. These numbers are a sharp reversal from our experience in previous quarters, when our largest bar code customers were source of weakness. The recent news of a recovery in the US manufacturing also gives us a reason for optimism. In addition, we expect to be more efficient in the future because our investments in demand generating activities including intensive sales and training sessions with our reseller partners which took place in January to align our business models for growth.

Our efforts to deploy our cash in acquisitions remained unabated in the first quarter. The level of activity with our involved investment last year in more resources remained high. With John Paxton now on board, I will be able to devote more time to acquisition-related activities as well as other strategic issues. Of course, we are able to announce any deals before the appropriate time but I can tell you that I am very excited about some of the opportunities we are currently pursuing. We entered 2002 a stronger, more formidable competitor and we clearly built on these accomplishments in the first quarter. We firmly believe the strategic decision to continue investing for long-term success is the right one and our results in the first quarter confirmed it. Today, Zebra is increasingly focused on delivering applications or we can deliver real value for our customers, particularly in vertical markets where we see high growth opportunities. We expect to capitalize further on these strategic goals in 2002 and the first quarter shows we are off to a great start.

Now let me turn the call over to for the elaborate on our results for the first quarter and the outlook for the second. After remarks we will open the call to your questions. Thank you for your attention.

Thanks Ed and Good Morning everyone. First I would like to review the segmentation of our sales results by product category and geography, which we provided as an addendum to our press release. Then I will go over the key factors affecting our gross profit margin, which improved both on sequential and a comparable basis, and our operating results. Then I will close with some comments on cash flow and provide guidance for the second quarter.

First of all our hardware sales in the first quarter 82 million and196,000 dollars, which was, down 6.8 percent from a year ago. Supplies were basically stable at 20 million and 898,000 dollars. Software & Service income revenues were up to 5 million and 712,000 dollars, which is an increase of 20.3 percent. The balance of our revenue of $110,185,000 was made up by Freight revenue.

Overall sales decreased from a year ago by 4.3 percent. But, I would like to remind you of course, that was the strongest quarter of last year. For the fifth consecutive quarter net sales were in the 110-115 million dollar band established a year ago. The sequential increase was 1.3 percent from the fourth quarter.

Sales on our Card Personalization Systems continued its positive growth trend year over year, but was down modestly from the record achieved in the fourth quarter. Historically, I might mention that the first quarter is typically the weakest quarter for Zebra in terms of sales.

By geography, the sales breakout is as follows:

International sales were 45 million and 639,000 dollars, which was an increase of 3.4 percent.

In North America, sales were 64 million and 546,000 dollars, which is a decline of 9.1 percent from a year ago. Undoubtedly the 9.1 percent decline in our North American business continues to be the direct result of the US economic slowdown, and most particularly the difficulties in the Manufacturing and Information Technology sectors. repeating that sales to our largest customers improved both sequentially and comparatively in this quarter. International sales were up on a year over year basis and virtually flat sequentially.

Sales in Europe, however, remained strong in part because of the rapid growth of sales in the Eastern Europe. We achieved these results even though foreign currency changes reduced reported sales by approximately 1.1 million dollars.

Sales in the Latin America and Asia Pacific were up on a comparable basis but slightly down sequentially.

Quarterly earnings before the merger and Fargo acquisition expenses and the gain in the sale of Fargo stock was 51 cents a share compared with last year's 55 cents. The gain on the sale of Fargo stock was 1million 953,000 dollars, which had a 4 cents per share positive effect on earnings.

Let us take a look at the various components of our expenses.

First, gross profit margin. Gross profit margin increased to 47.2 percent or 110 basis points on a sequential basis and 30 basis points from the first quarter of 2001. Improvements in manufacturing variances notably from better component pricing and improved capacity utilization were the primary reasons for this increase. was partially offset by product mix and the weakness in the Pound Sterling against the Dollar.

Operating expenses increased roughly 1.5 million dollars both sequentially and on a comparable basis to 28.7 million. Some of the major items affecting operating expenses were a large swing in vacation accrual from the fourth quarter, the cost of sales meetings and trainings, and consulting work.

Investment income spryed to 4.2 million dollars in the first quarter, which includes the gain on the sale of Fargo stock that I mentioned earlier. The rest of investment portfolio earned 2.2 million dollars with a return of 4 percent on beginning balances compared with the just. 2.9 percent in the fourth quarter of 2001 and 6.1 percent one year ago. At 20.1 million dollars, free cash flow remained strong in the first quarter.

In our working capital accounts, you will note that the accounts receivable increased by 5.2 million dollars. This increase is truly the result of large quarter-end shipments in comparison with the fourth quarter when the Christmas holiday period limited shipping activity. In fact, using the method of calculating DSO, Day Sales Outstanding actually dropped for the quarter to 51 days from 52 days. We are continuing to monitor credit policies and remain very comfortable with quality of receivables and the level of bad debt reserves. Inventories continued the downward trend reaching a level that has not been in at least two years. Inventory turns improved to 6.3 times from 4.4 times at the same time, a year ago. With the strong free cash flow, we ended the first quarter with cash and investment balances totaling 270 million dollars.

Let me now turn to second quarter guidance.

Although reversal in sales to our largest customers gives us optimism, we have not yet seen the consistency in sales from our broader customer base to support raising our forecasts of sales range at this time. For this reason we are projecting continued stability in our sales and earnings outlook at this time. So, for the second quarter of 2002, we are going to project sales in the range of 110-115 million dollars. This is we provided in the previous two quarters.

Gross margin is forecasted between 47-47.5 percent with operating expenses between 29.5-30 million dollars. Investment income should be approximately 2.2 million. This range of results will deliver earnings in the range of 50 cents to 55 cents a share.

Thank you for your attention. We would now like to field your question. I would like to limit you guys to one question with one followup in order to complete the question and answer period by 11 o' clock and wants to return your attention to the other calls that I am sure you are taking in the day. So, at this time, I would like to open the call for your questions. Thank you.

Press star then the number one on your telephone key pad. If you would like to withdraw your question, press the pound key. We will pause for just a moment to compound the Q&A rafter.

Your first question comes from Peter Barry of Bear Stearns.

Good morning gentleman. First, congratulations on a very eventful first quarter. If I am limited to one question, let me just focus on software and services.

One question and one follow up. So, two questions.

One can't help to notice the strength in software and service revenues. In your view does this establish something of a new level of productivity there and what is behind that improvement?

I would say not this point here what this really represents is we had a large increase in service revenue in our multiprinter group in the quarter. I would not characterize this as an up-step function increase in overall service revenues at this time.

So, something of an anomaly?

Yeah, I would say so.

Follow up question. Could you give us a little more detail as regards what was behind the strength in the top 15 customer performance in the first quarter?

John Paxton has joined us here for the call. This keeps me out of the hook for some answers. So, we are going to see how well you can do on this.

Good morning John. Congratulations on your board appointment.

Thank you very much. Yeah, I am very excited about my association with Zebra and I think I am very optimistic about the company overall.

I think we are seeing our top customers now getting prepared for growth in their businesses. We looked over at the general economy and we are seeing some slight changes now in the economy in all levels of business, particularly in the software areas. If you look at the Microsoft forecast, that is slightly up. So, this really is indicative of, I think, a gradual turnaround in the demand. The customers need our product now to enhance productivity and efficiencies within their organizations and they are starting to loosen up some of their capital spendings to achieve that.

Does it give any greater insight into the vertical markets involved like logistics and whatever? I assume UPS is one of those that has shown some improvement.

That is correct. The logistics' market is opening up a little more but we are also looking outside of our traditional markets for new vertical applications and we are seeing some opportunities in those areas, both on the domestic side and the international side.

Thanks. That was two and half questions. I appreciate and am delighted to.

Your next question comes from Chris Quilty of Raymond James & Associates.

Good morning. Its Chris Quilty . Quick question for you. Just in terms of which in-markets you are seeing the most strength and the most opportunity for this year and if your could comment specifically on the retailing sector on what your exposure there and the AIT contract, sort of an updat

Okay. On the most strength, I think, we are seeing right now is logistics and expansion of the compliance labeling area and also asset tracking areas. Retail is, in my opinion, still not fully recovering, recovered, from our standpoint, we see some opportunities coming the near term, which is an upward sign, but I expect to see some additional opportunities in the latter part of this year, particularly the fourth quarter. The AIT program is relatively flat right now. What we see and we are doing here is we are expanding our role in the government sector and we see a lot of opportunity for our products outside the traditional military markets and we are putting ourselves on the camps so that we can those. But, we expect to see a little more activity on the government side.

Okay. On the consumable business, there are two separate answers here because your Bar Code and consumables have different dynamics than the ID card printing. Any new trends on your side of that business, either in terms of price competition or strategies that you are pursuing or is everything pretty much status quo?

Let me comment about the strategy and then we will talk talk about what we have seen in the margins. The margins are actually holding for us on these typical media products. Our strategy is to expand our media sector. We have 2 million 500,000 units in the field. We need to really leverage that install base with our media. We have already made an agreement with one of our major customers to be able to sell into their customer base, which is a major agreement for us. We are expanding the media production capabilities in the Northeast and Mid-Atlantic areas and we are looking at the . So, we see some opportunity here to grow and we are working directly with our channels and they understand where we are headed and we are going to be looking at doing some direct sales of product sales opportunity.

Great. Welcome and keep up the good work.

Your next question comes from Reik Read of Robert W. Baird.

Good morning. With regards to the bar code printer products area, it seems that has been a market that really two years plus now has had some rough sliding and has been fairly soft. And I guess my question comes in with the softness, you know, to what extent do you think there is an upgrade cycle that is coming? And I guess I also ask that with regards to the significant number of new products that you have introduced, while things have been soft?

The growth that we will see in the future will come from most targeting, particularly vertical markets where there has not been much penetration. We have spend some time and money identifying where those are and have looked at the channel that we were going to use in order to penetrate those particular markets. Clearly, the compliance area, large portions of the compliance area, the opportunity is really for replacement products - products that offers features that improve productivity in applications or perhaps networking features that are required in terms of the changing from a market perspective.

With regards to the ERP systems that are out there and you know, coming out of Y2K, people thought that they really didn't get much returns on them. I think there have been a number of studies which suggests that adding something like bar coding to those systems would get you a significant improvement in ROI. To what extent is that an opportunity for you, going forward?

I think it is a very definite opportunity for us and one, where we have gotten some business and I would expect we will get more.

Can you quantify what you think that might be and when you think that might start to ramp? You have any information on that?

Yeah. As I had mentioned earlier, we are looking outside of our traditional markets and we are putting together strategic plan . What we are really going to see this year is driving our existing businesses as we are using cross-selling techniques in the markets that we are currently in to leverage our install base. But this is for 2003. The strategic plan will focus on the new vertical markets that we are looking at and we are also a multi-faceted channel strategy where we are using partners and direct selling capabilities for both the and tele-sales activities.

Well. Thank you very much.

Your next question comes from Jeff Rosenberg of William Blair & Company.

Good Morning.

Good Morning.

Not withstanding what you said about the relative opportunity in compliance versus the more application-specific vertical opportunities I was and the positive comments that John made about compliance being a little bit better this quarter. Is that something you think is the function of some of your big resellers, who I am assuming are part of those top 15 customers executing better or is that something we can read into, seeing a little bit better turn in the economy. I just wanted to hear a little bit more about that if I could.

Jeff, there is a little bit of turn in the economy and we are seeing, you know some of our larger reseller businesses start to pick up. It may be complementary to the compliance labeling opportunities that we see today. Some of those are going in some areas. So, I don't expect a big uptick there but I think it was significant contributor to our current quarter.

Okay and then I just wanted to ask in terms of how operating expenses, sort of, unfolds for the year, I know, obviously there is growing number of initiatives and can you hold, if we just assume that we don't know when revenues are going to break out of the band that they have been in and obviously there is lot of reasons you guys are talking about it. Hopefully, it is going to happen, But if we make the assumption for the moment it continues to be frustrating, can operating expenses be held where they are or there are things untapped that needs you to continue to expand that on an absolute basis?

I think that there is couple of things going on. Certainly, as the year unfolds, we expect to see some incremental improvements in gross margins as our capacity utilization increases throughout the year. This should give us the opportunity to fund our operating areas of the business to support the investments we need to make in the vertical market applications that we were talking about. Right now, I gave you some guidance relating to operating expenses that said that second quarter was probably going to be in the range of 29.5-30 million dollars and I am not going to go any further than the next quarter in terms of saying what the direction of spending is going to be because we are going to monitor very closely what the revenue flows are and adjust our spending accordingly.

I assume that getting that utilization improvement is clearly a function of improved sale.

Oh yes, absolutely. It is also a function of the fact that we have basically got into a position on our finished goods inventory where we are not liquidating finished goods inventory any more. We are really balanced with our production with our sales. So, consequently, we don't have that inventory drag on the at this point.

But you did bring inventory down QonQ.

That was raw materials.

Okay, great. Thank you.

Okay.

Peter Barry of Bear Stearns

John and Ed looking at what looks like a broad strategy and that is new vertical market opportunities as a compliment to the cross selling as you leverage your existing install base. In terms of the vertical market opportunities, how long do you think it might take for sufficient traction to begin to produce recognizable revenues from those sources? Is this a 2003 phenomenon or might it, in fact, begin to show up later in this calendar year?

Okay. We have already started to implement those strategies and we have hired a couple of new people focused on the new vertical market. It takes typically three to six months for them to be productive and to start to see something flowing so that is if you are lucky. I guess some of the low to the possibility we see a little bit in 4Q, but this is really a strategy that is being put into place to enhance the growth in fiscal year 2003.

In terms of that, from an initial foray point of view, might that put pressure on operating margins and may be gross margins as well at the offset?

I don't think so. I think some of the initial expenses that we are talking about here is to bring additional people and in fact the sales in these areas that we have highlighted so far are high growth areas of low penetration. So we expect to be able to maintain good gross margins going into these areas, that is number one and number two is the way are designing the channel is that some of these vertical markets going into will be direct. So we will command a little better gross margin on an overall balance. We also have our partners and value added resellers in those channels, but we will be looking at areas where we can have account control and grow into a leadership position in these particular verticals.

Let me ask this question quickly. Could this initiative, that is, the new verticals add as much as 5 to may be 10 percent points top line growth rate over ?

It's way too early to tell that. As I said earlier, the strategic playing process goes into effect in May, and that's going to give us the marketing research. It will give us a better hand on it as to what we are seeing the growth rates as.

Is that your #1 priority, however, John?

That's my #1 priority.

Thank you sir.

You have a followup from Jeff Rosenberg of William Blair & Company.

Hi, I think when you acquired contract to mobile printer, I think it was like 95 percent domestic and 5 percent international, something like that. Could you give us an update on it at this point on how much of that business is international?

I don't have that information.

And just another quick clarification, when you are talking about your top 15 customers, are you including distributors and I guess specifically in that?

Yes.

Okay. Thanks.

Your next question comes from Kim - Kenneth A. Berry & )

Good morning. I wonder if you could address what areas of the card personalization systems that you would say that Zebra is maybe lacking at the moment that Fargo would have filled in? And also related to that as Zebra attempts to improve and expand its card system, is the company hindered by any Fargo patterns or similar issues in the marketplace? (Kim - Kenneth E. Berry & )

I don't like to answer the second one very well but the first one I would say primarily it is a product that Fargo offers the HDP product, is a transfer system of printing and that allows you to get certain quality attributes in a smart card application that we currently don't have in our product line.

Is that considered something that you want to have and are you allowed to pursue that?

Well, in terms of being allowed to pursue it, I would say we are allowed to pursue it. There is a variety of ways of accomplishing, you know that objective. There is a variety of ways.

So, obviously if this is an area that is of strength to Zebra, you are focusing on R&D in this arena?

I am not here to disclose what our R&D programs are. I mean, your question had to do with, is there a capability within the Fargo product line that Zebra doesn't have at this point of time and, you know, that's the question that I answered. You can, you know, make any assumptions you want beyond that.

Thank you.

Your next question comes from

Hi, it is and I have to get off so may have addressed this. But, in terms of this potential developing business within the customer base, is there a lead time until that, you know, becomes a reality and that is why you are maintaining a near-term guidance or is just too early to know what it is going to become?

What the question is that you are asking?

Well, you said that your core key suppliers, or whoever you work with partners had started to see an uptick in some of their business or had started to express more interest in picking up their business trends and I am trying to get a feeling for when you might actually see that realize itself in some revenue?

Well, what we did say here was that if you look at our top 15 customers on the basis of their dollar volume with this, there was a considerable increase on a year over year basis as well as on a sequential basis. I think we don't have the numbers at my fingertips here but we mentioned some numbers in the presentation.

But this is an of trend. In another words I had the impression that there was something incrementally under developed and you are yet to see or what not relative to security?

Well what we were saying here is maybe we have got few wishes that are mixed together. What we were saying is, you know, Zebra is experienced here a number of quarters of softness in the business and during those conference calls we had indicated that a sizeable portion of those declines came as a result of a very small number of companies, as a matter of fact, some of our very biggest customers. And what we are seeing here, which gives us some optimism for the future is that those particular grouping of customers, the direction of their business changed here in the first quarter and, you know, that was the basic point.

Right. That's . Thank you.

Okay, well then, I think we will terminate the call at this point and thank you for participating today. You can expect that we will have our second quarter results announced in mid-July and we will release the date for the conference call within the next two weeks. Again, Thank you for your time today and we will see you in July. Thank you.

Thank you for participating in today's Zebra Technologies first quarter earnings release conference call. This call will be available for replay beginning at 2 o'clock p.m. Eastern Standard Time today through 11.59 Eastern Standard Time on Friday, May 03, 2002. The conference ID number for the replay is 360-7426. Again, the conference ID number for the replay is 360-7426. The number to dial for the replay within the United States is 1-800-642-1687. If you are calling outside the United States, the number to dial is 706-645-9291. Thank you. You may now all disconnect.