斑馬技術公司 (ZBRA) 2002 Q2 法說會逐字稿

Good morning, and welcome to the Zebra Technologies second quarter earnings release conference call. Joining us from Zebra Technologies are Mr. Charles Whitchurch, CFO, and Mr. Ed 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 objection, please disconnect at this time.

At this time I would like to introduce Mr. Charles Whitchurch, CFO of Zebra Technologies. Sir, you may begin.

Thank you. Good morning everybody and welcome to our second quarter conference call. As is our usual practice, we have some prepared remarks to make, and then we're going to open the call to your questions.

And I'll turn the call over to Ed.

good morning everybody. Thank you very much for joining us today for the Zebra Technologies 2002 second quarter conference call.

Certain statements we'll make on this call will 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 2002 third quarter, and expectations about trends and the company's business will be forward-looking statements. The forward-looking statements involve risks, uncertainties and other factors that could cause Zebra actual results to differ materially from those expressed or implied by such forward-looking statements.

Additional information concerning such factors is available in the press released, 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 ended December 31, 2001.

We are very pleased with our Q2 results. In addition, our confidence and visibility into the second half has improved materially.

In Q2 we exceeded our forecasted ranges for sales, gross profit and operating income. Margins expanded and we met our EPS forecast as the tone of business continued to strengthen throughout the quarter.

Sales of $116 million were up 5.2 percent from the first quarter and 2.7 percent from a year ago. This growth was the first time since the fourth quarter of 1999 that quarterly sales increased both on a sequential and comparable basis, if the is basically backed out of our results. All geographic regions, all product segments and both business units experienced sequential sales growth with several records and important milestones being achieved.

Let me highlight them for you. All three of our international regions posted year-over-year sales gains with our European and Latin America regions achieving record sales levels. These two territories also received the largest single orders in their history. Importantly, both applications involved mobile printing systems, in which we invested last year to expand the geographic penetration of this high growth business.

In Europe, London transport integrates mobile receipt printers with bluetooth connectivity and Casio PDA hand-held terminals to provide seamless fair and ticket printing on the London bus network.

In Latin America , one of Mexico's largest retailers, now equips its collection personnel with mobile printers, bluetooth and compact handheld terminals, to streamline the complex systems of consumer credit collections.

These reference solutions are supporting growth by enabling Zebra with its channel partners to proliferate the implementation of these applications to other end users.

At the last quarterly conference call, we reported to you on the strength of our top 15 customers as a reason for optimism. Overall that strength continued. Excluding the sales volatility associated with shipments to one large retail customers, comparable sales were up a strong 14% with a sequential improvement of 9%. We are engaged that sales to our top 4 customers as a group grew an astounding 17%. Our ability to focus more attention on growing our card business led to strong sales growth and new quarterly record. This resolve came from a variety of business wins for driver's licenses and other ID application. Our P 210 and P 720 card printers, which we introduced in the fourth quarter of last year, continue to gain excellent acceptance as sales of these products have grown nicely. Gross profit margins experienced a sharp improvement to better than 48%. Operating income grew 14 1/2% with a profit margin of 21 1/2% to deliver the highest level of operating profit in five quarters. Randy will provide more details on these numbers.

We posted 53 cents in EPS, right in the middle of our forecasted range and free cash flow, an excellent measure of the company's ability to build stockholder value, totaled a very respectable 13.4 million dollars. For the first half of 2002, Zebra generated 33 1/2 million in cash, or 45% more that night first half of 2001. Adding to our previous cash balance, we now have 289 million dollars in cash available for acquisition. The level of activity in our acquisition program remains have high. We are reviewing more potential transactions than ever before. Those of you who know zebra understand that we are deliberate and disciplined in our evaluation process. Above all, we look for a strategic fit. We must under stand how and acquisition will con tribute to the over all growth of our business in specialty printing. At the same time we have to find deals that make financial sense. While we have nearly 200 million of cash in the bank, we are not rushing to make just any acquisition, for that does not serve the long-term interest of the Zebra stockholders.

Investments to support our growth remain unabated. During the quarter we added to our management team by bringing on Jack as Vice President of Marketing of our bar code business unit. Jack's job is to assist bar code President, John Paxton, in implementing our, as our strategy becomes applications oriented and focused on high growth vertical markets. Our work to date confirms that this strategy, which will supplement our traditional approach to the market, is the right avenue to accelerate sales growth by tapping into the great unmet need for business improvement and specialty printing applications. We expect the success of this strategy to become more evident as we progress through the second half of the year.

Development activities continued with a stream of innovative products. During the second quarter, we introduced the XI3 Plus series of high performance printers. This latest generation of our flagship printers incorporates several enhancements that keep them as the printers of choice for mission critical applications. Internal improvements boosted and provided additional capacity to start complex graphics and bar codes, international fonts and multiple label formats. Wireless capabilities have un-tethered the tabletop unit from hardwired systems to eliminate costly rewiring each time they are moved. New conductivity features allow for hot swapping to eliminate the need to restart a computer each time a printer is changed on the system. The XI3 Plus remains the standard for manufacturing and logistic companies demanding maximum up time to meet the needs of the ever more integrated international supply chain.

For the second quarter, more than 17 percent of printer sales came from products introduced over the prior 18 months. Just this week, we announced the introduction of a new product platform for Zebra, a mobile printer module that snaps together with a hand held computing device to provide exceptional flexibility and an easy grip design. The incorporates a 2-inch direct thermal printer in a pistol grip unit that accepts a variety of symbol portable data terminals. Ideal for shelf labeling, ticketing, and receipt printing, the gives users an innovative way to accomplish mobile printing applications while adding ruggedness to the PDT.

Expect more new product introductions from Zebra during the second half of the year. Very notable for Zebra, this is the first time that we truly are offering terminal devices integrated with printing devices in the marketplace. Second quarter results continue to support Zebra's investment strategy to build stockholder value. The foundation laid over the past year with investments in demand generating activities, sales and marketing initiatives, geographic expansion and product development is paying off in an improving business outlook.

We have remained very enthusiastic about delivering applications in vertical markets where we see high growth opportunities. Our strengthened, competitive position will help us capture more business opportunities as the economy improves. Further geographic expansion will allow us to deliver our technology more effectively throughout the world. We look for further progress toward these strategic goals in the second half of the year.

Now here's Randy, who will provide details on our second quarter results and share our outlook for the third and fourth quarters.

Thank you, Ed, and good morning everyone. As Ed mentioned, results this quarter were very strong, up and down the . We're particularly pleased with our strong sequential revenue growth of 5.2 percent, which not only exceeded consensus estimates but also the upper end of the guidance range we provided last quarter.

Let's go over these results in more detail. I will conclude with comments on our guidance for the third and fourth quarters. Hardware sales in the quarter were $86.9 million, supply sales were 21.7, and service and software revenues were $6.4 million, with freight revenue comprising the balance of our quarterly sales of $115,951,000. After five quarters, we finally broke out of the $110 to $115 million we established in 2001. Year over year sales were up 2.7 percent from a year ago, and a strong 5.2 percent sequentially.

Sales of both card personalization systems and bar code products increased from a year ago and the first quarter. Card sales set a new record. Consolidated sales of hardware products, while up only $474,000 from the second quarter of 2001, were up nearly $5 million from the first quarter of this year.

And I might add at this point that the hardware sales increase is somewhat understated here because of a reclassification of some of our connectivity parts from our products from hardware to service and software that occurred in the second quarter of this year, so the comparable results are a little bit distorted in the sense that they understate hardware growth and overstate the sales of service and software products.

Supply sales and service and software revenues showed strength -- growth on a year over year and sequential basis, as well.

Geographically our sales break out as follows. International sales were $51, 127,000, which grew by a very strong 13.8 percent. And North American sales were $64.8 million and actually down four percent on a year-over-year basis. It's important to point out here that this comparison in North America is against the period in which the sales decline in North America really didn't stabilize until the third and fourth quarter of 2001. North American sales were actually up somewhat on a sequential basis and it's quite clear to us that the tone of business in North America is clearly improved from prior quarters.

International sales hit a new record in the second quarter, both overall and within both our European and Latin American sales regions. We experienced continued sales gains in Eastern Europe and also derived from new mobile printer applications.

Sales in the Latin America benefited from a broad pickup in business activity, aided by better coverage from in-country Zebra sales representation and significant growth in mobile printer applications.

In Asia Pacific we saw particular strength in Korea and China and among contract, U.S. contract manufacturers in Southeast Asia.

A word here on foreign currency translation. Many of you know that the strong U.S. dollar reduced Zebra's reported sales throughout 2001. This situation began to reverse itself in the second quarter of this year as the euro, as it's now at about parody with the dollar, compared with about 90 cents at this time last year.

For the second quarter, foreign currency translation added approximately $1.2 million to sales compared to last year. If the weakness in the dollar continues, we expect even greater benefit to sales and profitability during the second half of 2002.

Quarterly earnings were 53 cents a share compared with last year's 48 cents before merger costs. Merger costs from the integration of and are now at such a minimal level and are now incorporated into general and administrative expenses.

The improvement in gross profit margin to 48.1 percent from 46.3 percent a year ago, and from 47.2 percent in the first quarter, was clearly a highlight of this quarter.

I'm going to limit my brief comments here on the 180 basis point improvement from the second quarter of last year, but the general concepts apply to the sequential improvement as well.

We had important favorable variances from better component pricing. We achieved higher capacity utilization in our assembly plants, and benefited importantly from foreign currency translation.

We expect that gross profit margin will continue to benefit from these same factors throughout the second half of 2002.

Turning now to operating expenses. Sales and marketing expenses were up $1.6 million from the first quarter. Recall that we are making additional investments in sales and marketing activities, based on our vertical market and applications focus. During the quarter we saw sequential increases in advertising, co-op expenses, consulting services and personnel related costs. All other operating expense categories remain relatively flat from the first quarter.

On a comparable basis, operating expenses increased by $235,000 including a $930,000 reduction in goodwill expense, resulting from the accounting change that was implemented on January 1st.

The increase in administrative costs on a comparable basis consists primarily of payroll related expenses, including quarterly cash bonuses and consulting fees. Operating profits increased by 14 ½% year over year. At 1.2 million dollars, investment income came in below expectations, compared with the 2 million dollars last year and the 2.2 million dollars earned in the first quarter. Going forward, we expect to earn a 3% return on beginning portfolio balances. Free cash flow remained a strong 13.4 million dollars for the second quarter and included two tax payments made during the period. A 1.2 million increase in receivables reflects higher business activity in the quarter. This increase was mitigated by an improvement in to 58 days, down both from last quarter and from last year. We remain vigilant in monitoring our credit policies and are very comfortable with the quality of receivables and the level of bad debt reserves.

Inventories increased 3.1 million dollars from the first quarter, also a partial reflection of this better business activity. Inventory turns were a very reasonable 6 times for the quarter, down slightly from 6.3 times for the first quarter, but up significantly from the 5.1 turns of a year ago. With a strong free cash flow including effective control over working capital, we ended the second quarter with cash and investment balances totaling 289 million dollars.

Now for the second, forecast for the third and fourth quarter. During the second quarter, Zebra broke out at the 110 to 115 million dollar sales band established in 2001. We have now moved that range up to 114 to 119 million dollars for the third quarter, which would provide a 3.3 to 7.9% sequential sales growth over last year or comparable sales growth over last year. With this increase, we are also moving up our guidance for gross profit margin between 48 and 48 ½% with operating expensed of between 30 million and 31 million dollars. Investment income should be approximately 1.8 million dollars. This range of results will deliver earnings in the range of 55 to 60 cents per share, compared with 49 cents a share for the third quarter of 2001 for a 12.2 to 22.4% year over year growth.

Better visibility into the second half now gives us the ability to forecast results for the fourth quarter as well. AS we stated in our press release, we expect further sequential improvement in sales to the range of 120 to 125 million dollars. This implies comparable sales growth of 7 ½ to 12%. We expect gross profit margins, operating and expenses and investment income to approximate the levels forecast for the third quarter. This operating leverage in our business will then deliver earnings growth of 22 to 32%, or 61 to 66 cents a share, up from the 50 cents reported in the fourth quarter of 2001.

I'd like now to turn the call over to Ed for some concluding remarks before we open the call to your questions.

Thanks, Randy. It's evident from this call that we believe the business trend for Zebra's up barring any unforeseen economic downturn or perhaps our, our enhanced competitive position, financial strength and strategic investments for growth give us tremendous confidence in Zebra's long term future. Our performance is a direct result of following a growth strategy, provide specialty-printing solutions that improve security, productivity, quality and customer service. Independent research and Zebra's own market analysis revealed a world wide demand for business improvements and specialties applications hold substantial business prospects for Zebra and it's technology. Let me review some of our current activities that support our growth plans.

First, we're targeting high growth vertical markets and applications with a focus on business improvement and specialty printing. As Zebra has expanded its product portfolio, first with desktop, then mobile printing systems, wireless technology, RFID, and other connectivity technologies, we have improved our ability to serve more applications in more markets. Five years ago, Zebra did not have the products to serve the needs of small package delivery. Today, we're a major force in the market for bar code label printing.

Our investments in marketing and sales are extending Zebra's reach into other vertical markets. By moving toward an external orientation, we are providing a compelling business proposition for adopting bar coding and specialty printing systems that address various business processes. London Transport, Group Applications I spoke about earlier are excellent examples of Zebra's ability to deliver a solution that improves employee productivity, customer satisfaction, and accountability. Curbside passenger ticketing for airline travelers, queue busting during peak times in retail, and label samples and a life sciences lab are other applications that we can proliferate to accelerate growth.

Many of these business solutions will involve hand held printing solutions. The proliferation of PDTs is offering Zebra outstanding growth avenues. Our wireless mobile printers, and now hand held printers, are giving unprecedented flexibility to mobile workers. Over the past several months, we have seen an increasing number of applications putting Zebra's printers in the field for utility work, gaming activities, and postal operations.

Zebra's portfolio of technologies is making us the company of choice in this high growth area for specialty printing. New products will also continue to play an important role in enhancing Zebra's comp4etitive position and ability to expand into new markets. Already this year, we introduced the latest generation of our high performance Tabletop line to keep it on the leading edge of printers for mission critical applications. We expanded our product breadth with the hand held printer for PDT devices. We also launched a 600 dpi version of our industry leading print engine, an industry first for ultra-small, ultra-fine print and apply applications.

As I mentioned earlier, we expect further product introductions during the second half of the year. We are also maintaining our investment in geographic expansion. During the quarter, we added to our Latin America coverage with a representative based in Argentina. She will cover all countries in South America except Brazil, where we already have in-country representation working with a growing number of channel partners.

We are looking to put further representation in eastern Europe, southeast Asia, and China. Time and again, we have proven that a Zebra representative residing in the region adds significantly to the growth potential in that region. Card personalization systems continue to hold excellent growth prospects. With record sales in the second quarter, our card printer business unit keeps getting stronger as the need for greater safety and security around the world keeps increasing.

Our printers are meeting with excellent market acceptance. Look for new product introductions during the second half. In conclusions, I'd like to really emphasize that we're very pleased with Q2 results, and we believe that this quarter is a turning point for the company. We have more confidence in the future of the corporation. We provided guidance, not only for the, for Q3, but going into Q4, which is further emphasizes our belief and confidence in the future of the corporation.

I think that's probably the biggest take-away from this call.

Thank you very much for your attention. We'll now be happy to answer your questions.

At this time if you would like to ask a question, please press star, then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from of William Blair.

Morning.

Good morning.

Wanted to ask a little bit about some more detail on international I guess to start. Is it possible to get a flavor for the break down between, in international sales, between Europe, Asia and Latin America?

No.

OK, well let me ask a little bit different, well different question there. Is, when you look at the strong growth you're seeing there and this may be different in Asia and Latin America relative to Europe, but can you comment at all whether you feel that it's predominantly Zebra gaining market share through other penetration of new in-country representation, that sort of thing? Or just the stronger growth opportunities in some of the emerging markets relative to the compliance opportunities not being as mature that sort of thing? Any color there as to what you think the driver?

It's difficult to give you a direct answer relative to gaining share in each of the international markets. Number one, I'm not close enough to it, nor is anybody that's sitting here in the room with me.

But what I would say is that the solutions that we are participating in are expanding the market that we're going after. That clearly is a piece of what's going on here. So that target market for Zebra is basically a bigger target market than it has been in the past. The proliferation of hand-held products, the tying of our products together with hand-held terminals, going after these types of applications, these are newer applications for the technology. And they are providing important growth for us.

The mobile printer business and the related terminal applications with those printers is an important element of the geographic expansion.

Probably the other major take-away is the movement into Eastern Europe. I suspect we're one of the, when we would look at our competitors, we're one of the more aggressive companies in terms of pursuing those markets and so we probably would have to say there that that would be a share gain situation.

So that's as much as I can give you on that particular point and most of that's opinion rather than backed up with hard facts.

Oh that's helpful, thought. Forgot the ground rules. Do I get more?

We'll let you have one more , just because I gave you a flat no on the first one.

OK, just wanted to ask for a little bit color on the comment about stronger visibility. Is that coming from a function of increased weekly order rates, that sort of broad-based thing or is there a little bit better large-order backlog, any sort of additional detail there?

There are specific orders that we are working in that we anticipate booking in those periods and so we have much more, clearly, it is possible for some of these orders might not get booked, they might get delayed, but the feel that we have and in many of these cases, these are really direct deals, is that the business is clearly firming for us and the visibility is definitely farther out. And we wanted to share that with the financial community and, of course, we're very pleased, it helps us run the company a hell of a lot better if we have stronger visibility into the future in terms of making investments. So I think that there is other interests, there is definitely concrete reasons to make the change in terms of giving the guidance.

Great, thank you.

Yup.

Your next question comes from Rike Reed, of Robert W. Baird.

Randy, can you give us, I just wanted to ask a question, I guess, on, with respect to your fourth quarter guidance and I think that last conference call you had suggested that as revenues got up to 125 or so million, you could see 200 to 300 basis points improvement of gross margins, which would imply 49 to 50%. The guidance you gave for fourth quarter was similar to the third quarter in, kind of, the 48 ½. Is that a case of being conservative, or is, has something changed?

Nothing's changed. Let me, I'll answer it indirectly by saying nothing's changed. And I would continue to expect, as sales increase, we will run our factories at higher rates and that is going to have a favorable impact on some capacity variances that we've experienced, well, that we've experienced throughout 2001. Those will pretty much be eliminated at that point. And I've, you know, I've indicated in a variety of venues that I though that from the low point of around, you know, 47%, that there was as much as a 2 ½ to 3 point upside potential as the company approached its prior record sales levels which were around 130 million dollars in revenues on a quarterly basis.

OK.

So, I mean, I think you can, you can look back and see what the margins were at that point, I mean, it's, I would expect us to be at or close to that. I mean, there are other things on, clearly, and product costs that are both positive and negative, I'd say on the balance, the influences affecting gross margin in the near term are very positive.

OK. Fair enough. And then, just last question for me. Can you guys give us a sense for ongoing opportunities with enhancing your supplies business?

What we are doing is putting more emphasis on other channels and having more direct contact with users. So we have a situation where we're utilizing telesales, I'd say, more effectively. We are getting some amount of business from, through the Internet, e-commerce. And we are trying to work closer with large users of our product where we can do direct business with them.

But is, Ed, is there an emphasis on changing the component of your supplies business? For example, trying to put some technology in that allows you guys to have some proprietary business?

You're talking about in the card business? Or are you talking about---

Well, I guess both really.

Well, in the card business, we have implemented a system that provides a series of customer advantages in the product. And the -- it's a -- well, it's -- basically, it's an RFID application that -- that links the printer to the supply stream and allows for things like automatic setup of the printer. It eliminates the need to do manual setting of burn tables. That allows you to keep track of consumption.

So that has been implemented in some of the products within the plastic card business.

And can that be translated into the bar code business at all?

I don't think so. However, we have taken a look at that, but I really don't think that the same characteristics are present in the marketplace.

OK, thanks a lot.

Great.

Next question comes from of Bear Stearns.

Good morning, gentlemen.

Hi, Peter.

Looking at geographic expansion initiatives for a second, would it be fair to say that a lot of your new business -- there, eastern Europe as an example, is sort of legacy-like compliance driven business, or is there more to it than that?

In terms of eastern Europe?

Well, just in terms of your newer markets in general.

Oh no, I would not say that at all.

No, I would say it's primarily new applications for technology, not legacy applications.

Now, looking at your most recent quarter, international was about 44 percent of revenues. Do you have any deliberate target in mind as to what portion of total revenues international will eventually represent?

I wouldn't say we have a deliberate target, however, I expect that the basic trend of more growth outside the United States, we will see for years to come. That's been a long term trend for us. You know, as you well, know, southeast Asia and China in particular are offering new market opportunities, for, you know, many corporations. And the -- we -- many of them we are operating at within the United States are indeed older markets.

Are there any ...

We still are not, you know, if there's one thing that we are not happy with or satisfied with in terms of progress here in terms of getting -- overcoming the problems, the recent problems, it certainly is the North American business still is nowhere near as strong as we think it can be. We do see some very good opportunities down the road, but that still is -- still is an issue for us.

Are there any margin implications as the revenue mix shifts toward international, either positive or negative?

I think in the near term, , certainly the fact that the dollar is weakening relative to -- particularly to the euro and pounds sterling, that has a favorable impact on the margins on our European sales.

Certainly in comparison to last year where the dollar was quite strong.

How about on a longer term basis, Randy?

Well, it's hard to say. I mean, you know, it really is a function of how -- largely on how the currencies will move. I mean it -- and who knows? We just don't have an understanding of that. I mean, our manufacturing costs are denominated in dollars and our revenue base is dollars, sterling and euros at this point.

Another one of your growth initiatives, the high-growth, vertical market applications, clearly is playing out in the international arena very nicely. Is there any way to measure how much traction you're relay gaining in terms of these various, vertical markets, whether it be retail or curbside or small package delivery?

Yes, sure, I mean, there's ways to do it and we actually are, when it comes to a direct sale, you know, it's, it is much easier for us and I will say that even when they are indirect sales, these applications that we're involved with tends to require more involvement from the corporation. So we get more information as to where we are having success. Now, ending up being able to totally quantify it and get, you know, really nice good comparisons, you know, we're handicapped there, but in terms of accounts and applications, we are getting much more information than we have seen in the past.

And we can assume they are better margin markets as well, correct?

The newer ones are, I can say, very definitely better margins, yeah.

One final question from me. In the card personalization area ...

Is this your, how many questions have you asked here? You're on a roll.

I'm going to keep going until you stop me.

All right.

Those are your rules, remember?

Right, so we got to enforce them huh? OK.

Finally, clearly, Fargo was going to bring critical mass to you in terms of the card personalization system area. Allowing for that no longer as an option, what is it you're really looking to gain from whatever acquisitions you affect in that area? Is it technology? Is it customer? Is it, something other than critical mass?

Oh I would say that the first two things you mentioned certainly, adding to our customer base, adding to our product portfolio, adding to our geographic reach, those are all things that are interesting to us.

The, yes, I mean, all of those things. All of those things are strategic gains for the corporation. I don't know what else to add to that.

Congratulations on a great quarter. Thanks.

Thank you very much.

Your next question comes from of Raymond James.

Thanks. Ed, can you go back over, I missed in your discussion you had said of your top 15 customers, if we, I think what you were saying is we scratched out one that didn't behave that the balance of them were up nine percent sequentially. Is that correct?

I'll let Randy respond to that, OK?

That's correct.

OK, and Randy, when you ran through the operating expense and gross margin for third quarter, gross margin 48 to 48.5, and the operating expense level was ...

30 to 31.

OK.

Yes.

And what percent of sales did the card business account for?

Somewhat over 10 percent.

OK. Normally that's my flat no question.

Well you're, we're getting loose you know.

OK.

Not too loose.

This is a question, it's somewhat related to the international sales. Do you expect your mix between high performance down to entry-price point printers to change appreciably with the growth in the international market?

The trend of our business for a very, very long time, on a unit count basis, is for fewer and fewer, of the high, the highest price products to represent a smaller and smaller percentage on a unit count basis.

OK. And I would assume that has probably been on of the product lines that has been hit a little bit more in the recent environment?

I don't have any comment on that.

OK.

And, Randy, with the, you know, some of your critical components coming from Japan and the changes here, how do you end up offsetting that in terms of margins? Where as the ...

Well, no. I would say that we are benefiting from procurement of some of our components, outside the country. And I wouldn't, you know, we are buying some components from, important components from Japanese suppliers. We are getting other components from other suppliers in the far east and outside the US. I, we had some very significant work done in this company over the last six to nine months by some commodity teams that have gone in and analyzed our purchase patterns, gone back to suppliers, renegotiated some new pricing on certain commodities. They've done a, I'd say a very, very excellent job of reducing the costs of the components that we put into our products. So it's been a nice contributor to gross margin improvement and we think this is, we anticipate that's going to continue going forward.

So, a rising yen to the dollar isn't necessarily as troublesome ...

No, not really, it isn't. I think it's not, it's a . I mean, it really isn't the overall trend on the pricing for the components that we put into our products is very definitely down.

OK. And final question, I mean, back a couple years ago with the Compaq acquisition, I think even for a bit of an ongoing period, you had some issues with the direct versus indirect channel and how that was structured and conflict. Can you kind of just give us a rundown now of who's running which side of the business and how well you feel you've ironed out any of those potential issues?

What do you mean by who's running what side of the business?

I mean, if I remember correctly, obviously, your center of excellence for the portables is out of Rhode Island, but do you have, somebody with separate authority running the direct sales rather than the indirect channel in coordinating those activities.

No, we've got a vice president of sales and that vice president of sales has geographic responsibility for all regions, but the region and that vice president of sales has responsibility for all indirect, let's call it, you know, single level, say bar sales has responsibility for two step distribution and has responsibility for direct, for the user sales. So all of that is embodied in the, in one person and his responsibility then goes across the product ranges of the three printers COE's that we have.

OK. And you're real comfortable with how the channel is running?

I mean, is there anything you would want to change?

Real comfortable with how the channel is running.

Well, now it's pushing through the channel, how you're structured there.

Well, yes, I mean -- I think the structure we have is fine. The -- we are in a position today which is much more advantageous for us in that we do have the option on any given -- any given situation, if the customers requirements are such that a direct relationship is needed in order to have a successful relationship, we have the ability, organizationally, to support that customer's requirements.

Whereas in the past, the company was strictly utilizing either one step or two step distribution, and it was really pretty difficult for us to support a customer who required a direct relationship. So we have, you know, more tools if you will, more options available, and allow us to get business that would be more difficult in the past. And allow us to compete with certain of our competitors who did have -- or do have, a direct channel.

Very good. Well keep up the good work.

Thank you.

Your next question comes from of .

Hi. Two questions. The first, can you just describe a little bit about what areas you might wind up pulling into when you kind of referred to specialty printing as opposed to bar code printing. You know, what could that encompass, and you know, what could your technology enable, number one. And number two, can you just give us a few examples of what you're referring to when you talk about demand creation? Ed, it's something you and I talked about not too long ago, and I just think it would be helpful to kind of remind us as to exactly what you guys are referring to when you talk about demand creation. Thanks.

The specialty printing, a very good example of specialty printing would be the creation of a receipt from a mobile printer. That receipt, in many applications, does not require any form of automatic identification, so there's no bar code or other kind of auto ID that's being used. But yet the printer is really a specialty-type device. It's a portable device, it has RF connectivity, it has a certain kind of form factor and so on and is really not a mainstream kind of product.

So that would be an example of what we would call a specialty printing application. Other forms of receipt -- there's different forms of receipt printing. You might produce a receipt when you return your car at Avis. You might go ahead and utilize the mobile printer application in a queue busting application in a retail establishment, so you might be associating your printer with a mag stripe reader for your credit card, a terminal device, and a printer in order to facilitate the queue busting application.

Now let's talk about demand creation. Well, demand creation is for us -- is finding particular vertical applications for our technology, and then being able to facilitate a -- that solution in the marketplace. Facilitating that solution might involve an alliance or a partner. As an example, in the queue busting situation -- or let's take this -- let's take this application in Mexico we were talking about, this credit collection situation. In that case, I think we're integrating with a Compaq hand held PDA -- you know, I think it's an I-Pac and a Zebra device. So you come up with this kind of application, you find somebody such as Compaq to ally your interests with, and create demand in the marketplace by providing this kind of a solution where no solution existed before. Or let's say -- an inferior solution existed before.

So that would be a demand creation activity. OK?

OK, thank you very much.

Your next question comes from of .

Hey guys, great numbers.

Thank you.

In particular, your cash flow continues to be fabulous and improved, I think the number's up over 30 percent year over year in the first half, which is great. You did mention that you continued to actively evaluate acquisitions, but Ed, I'm beginning to wonder if you're ever going to get a chance to spend all this money, and I wonder if you could just provide us some long term thoughts on that, because it is becoming a pretty big percentage of the value of the company, the cash balance. And whether you might end up feeling forced to look farther afield than in directly adjacent spaces, or whether you would ever consider buying back stock as a use of that capital, although I understand that there are strategic reasons for preferring acquisitions that offer up the opportunity to generate growth in the out years as opposed to purely accretion in the near term.

OK.

It's a high-class problem to have.

Well, I guess. It is -- you know, the first thing I would say is that the cash balance we have is about $90 million or $100 million larger than we thought it would be at this particular point time because of the difficulties we encountered with the acquisition. You know, we certainly had a track for deployment of the capital and anticipated that it would get deployed for that purpose, and that it would be accretive to the corporation. We had looked at a variety of applications, and I will say that some of them have been pretty complicated, and unfortunately, the complicated ones take a long time to analyze and figure out whether or not you really want to do them.

So we've had the experience of walking away from a series of transactions, either -- well, fundamentally because the risk value equation, by the time we got to the end of the analysis, didn't meet our requirements. Is it possible that we'll go farther afield from what our thinking has been? Yes, I think that's -- certainly is always possible. It's particularly possible when you -- you know, you reflect upon the FTC's position relative to a particular, you know, particular acquisition.

I mean, essentially blocked in a particular dimension. So that's -- so the possibility of going farther from what the might be of our thinking is certainly there. So that's about probably the end of my comments on acquisitions. Relative to buying back stock, I mean, you know, that's always a possibility. It is, in my view, more of a distant second. Sometimes, opportunities, anomalies, or circumstances develop in the marketplace that make buying back your stock to be particularly attractive.

And so under those circumstances, you know, we might become opportunistic, but other than that, you know, I'm not -- you know, we currently don't have, you know, plans to acquire the stock.

However we think it's a great stock for you to acquire.

Well, I haven't sold any, let's put it that way.

Well, opportunity is definitely knocking here.

It looks very attractive to me, too. Just on the FTC issue, is it your impression that that is an issue you face specifically with respect to the card business, or do you think that it may reflect a perception of printers in general that could affect your ability to do acquisitions on the bar code side as well.

Well, I can tell you that the particular issues of discussion had everything to do with the card business. That's -- that was the focus point, I don't think it had -- it wasn't printing in general, and it had very much to do with a definition of market that the FTC chose to .

So that's the ...

Yes, those are usually the issues, I'm just wondering whether your sense is that they would slice and dice the other printer segments, including bar code, smaller than they might have in the past, and that would also represent a constraint for you.

I really don't have any comment on that, I've got no knowledge on that.

OK, and back on the cash since it is so big and growing so nicely -- you have not, from what I can tell, set aside any portion of the cash in some sort of longer term investment vehicle, which does imply that you expect to have uses for it, you know, at least over the next couple of years. Is that an accurate interpretation, or is that not a good way of looking at it.

Well, I won't go into the details of where the money is invested, it's readily accessible, you know, in the short term.

And is the logic what I just mentioned, or not?

It's readily accessible in the short term.

All right, thanks very much.

You're welcome.

At this time, there are no further questions.

OK, I guess I will conclude the conference call for the second quarter. Again, we thank you for your participation and we look forward to talking to you about third quarter results some time in mid-October. Thanks again for your participation today.

Thank you for participating in today's Zebra Technologies conference call. This call will be available for replay beginning at 2:00 PM Eastern Standard Time today to 11:59 PM Eastern Standard Time on Friday, August 2nd, 2002. The conference ID number for the replay is 443-1685. Again, that number is 443-1685. The number to dial for the replay is 706-645-9291. Again, the number is 706-645-9291. Thank you, and you may disconnect at this time.