斑馬技術公司 (ZBRA) 2002 Q3 法說會逐字稿

Good morning and welcome to the Zebra Technologies third 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 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.

Thank you, everybody, thank you for your interest in Zebra Technologies third quarter conference call. We have some prepared remarks to make prior to opening the call up to your questions. Ed will begin and I will follow up with information on the financial statements. Then Ed will close with some additional prepared remarks and we'll open up the call up to your questions. Ed?

Thanks. Good morning, everybody.

We're of course delighted you could join us today for the Zebra Technologies 2002 third quarter conference call. As can you see from the press release issued this morning, Zebra's performance significantly exceeded the top end of our guidance range, essentially delivering in the third quarter what we had forecast to be delivered in the fourth. So jumped the gun.

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 the 2002 fourth quarter and expectations about trends and the Company's business will be forward-looking statements. The forward-looking statements involve risk, uncertainties and other factors that could cause Zebra's 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 release issued today by Zebra as well as Zebra's filings with the SEC. In particular, we direct your attention to the Company's Form 10-k for the year ended December 31, 2001.

Any way you look at the numbers, Zebra simply had an outstanding third quarter. Strong sequential and comparable sales growth was the best in two years. Profit margins expanded, earnings moved sharply higher, substantial free cash flow generation continued, and working capital remained well controlled. Third quarter results validate Zebra's strategy to build stockholder value. This quarter's results directly benefited from our investments in sales and marketing, geographic expansion and product development.

In addition, we believe that during this challenging economic period, the Zebra brand is working in our favor. Our channel partners are recognizing that Zebra has been able to invest and strengthen its position while our competitors couldn't. Our financial strength, commitment to new product development and channeled support are helping us win business as never before. Our leadership position with commitments to outstanding product design and manufacturing, global coverage and technology is presenting business opportunities that were not available even two years ago. These factors, which became increasingly evident in the third quarter, helped to position Zebra for further success as we look to 2003 and beyond.

Quarterly sales increased 11.6% from a year ago. More impressively, sales increased 6.2% on a sequential basis for a period that is normally little changed from the second. Third quarter sales were exceeded only by the peak levels achieved in the second and third quarters of 2000 and included a single highest sales month in the Company's history. The sharp increase in North America sales clearly stood out as the quarter's highlight. Sales of bar code products, which were a source of weakness throughout 2001 have gained considerable momentum as 2002 has unfolded. The sequential improvements was broad-based. Several of our channels participated in the growth, indicating broad implementation of bar coding and specialty printing technology. Nearly all product segments contributed to the sales increase. Shipments into small package delivery, retail shelf labeling, in-store inventory management and warehousing were among the applications served during the quarter.

Internationally, sales remain near record levels. Latin America achieved a new quarterly sales record. Europe benefited from ongoing sales in Eastern Europe and strong mobile printer sales. The mobile business there continues to perform extremely well, and has already exceeded annual expectations. These examples demonstrate that Zebra sales are benefiting from the investment made last year and demand creation activities to build long-term stockholder value.

Sales of plastic card products just keep rolling along. We achieved another record quarter reinforcing the vitality of this excellent business. Drivers license installations and OEM products for high-security application and personal I.D. cards for retail banking customers were among the projects for which we shipped products in the quarter.

We also received our first major order for our new P-200 series printer, an entry level unit that is expanding the number of applications for personal card printing. We also saw the successful launch of our new P-320 intelligent card printer, which features a lock-protected metal enclosure with the electronic pass code system to prevent unauthorized the use. The P-320-i is the first model from Zebra that uses RFID technology to detect ribbon type, automatically configures the printer settings for optimal card printing and display the number of card images remaining. Initial response of the P-320 with these innovative security and operating features has become very positive. By the first quarter of 2003, all of Zebra's card printers will incorporate these intelligent features. As expected, the increased sales volume helped push gross profit margin higher. Operating profit margin expanded to 23.5%, a level not seen since 2000. Randy will give you details on these numbers.

Our sales performance, operating leverage and investment income led to a 32% year-over-year growth in earnings to 64 cents per share. This exceeded the top end of our forecast as ranged by four cents and beat consensus by six. Free cash flow totaled $20.1 million bringing year-to-date cash generation to $53.6 million and our cash balances currently stand at $311.2 million dollars.

Before I turn the the call over to Randy, let me take a moment to talk about corporate governance, accounting, and controls. Since its founding, Zebra has maintained rigorous controls to ensure the integrity of its financial performance and operation. Over the past few years, we have devoted a significant portion of our capital expenditures in the improvements of our financial and information systems. Since the passage of the Spunus-Oakley [ph] Act in July, investors and regulators are scrutinizing a company's internal control and financial reporting systems more than ever.

I'm pleased to report that during the third quarter, Zebra was recognized for its achievement in this area by receiving the business finance magazine 2002 vision award for excellence in business performance management. This year, Zebra was one of four winners out of more than 350 entries. These annual awards measure the overall contribution of the financial functions to improve business performance. The areas reviewed include financial process cycle times, internal and external reporting quality, planning, financial analysis and the use of technology. In addition to having met the above criteria, award winners must have established organizational cultures that support and reinforce best practices and business performance management. This award did not happen by accident. It was the result of hard work by a large number of people and speak to the integrity of our Zebra associates. Especially since this is a time of low investor confidence, this award shows that we are truly working to enhance the value of Zebra for all of its stockholders.

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

Thank you, Ed, and good morning, everyone.

It 's a real pleasure to share these great results with you today. Third quarter performance came from many places on the income statement, but none was more notable than sales. Sales advanced 11.6% over last year and sequentially they grew 6.2% which accelerated from the sequential growth of 5.2% in the second quarter. This is particularly noteworthy because third quarter revenue is typically flat with the second.

Growth was very broad based across channels, product segments, geographies and applications. We saw significant improvement in sales to key accounts, through distribution and through our var channel and OEM accounts. Desktop printers and portable printers have significant growth. North America, Latin America, Asia Pacific and Europe all made important contributions to our quarterly results with a new record being set for sales into Latin America. We sold products and applications ranging from international postal applications to mobile printing solutions for the U.S. Navy. By virtually every measure, the breadth of sales performance this quarter was stunning.

I'm going to limit my remarks primarily to comparable growth for this call. I will conclude with comments on our guidance for the fourth quarter.

Let's go over the sales results. Hardware sales were $94.7 million dollars, which were up 15.4% over a year ago. Supply sales of $21.4, are actually down 1.46%, but this was more than made up for the 22% growth in the service and software revenue which reached $6.1 million. Total sales for the quarter, $123.1 million, an 11.6% gain over last year. Both card personalization systems and bar code products contributed to this growth. Notably, the sales improvement was led by the sale of bar code printers which previously was a source of sales weakness. Nearly every bar code printer segment experienced comparable and sequential growth.

In addition, our card printer business unit set a new record for sales. Consolidated hardware sales accounted for 98% of our year-over-year sales growth. Looking for a moment on a sequential basis, hardware sales advanced $7.3 million which accelerated from the sequential growth of nearly $5 million we recorded in the second quarter. The strong 22% year-over-year growth in service and software revenue primarily related to a project with a major retailer by the implementation of a new in-store and labeling inventory tracking system.

By geography, sales break out as follows -- international sales were $51.2 million, a percentage change of 13.1% over last year. North American sales at $72 million grew by 10.6%. The big news here was the growth in North American sales, which continued to recover from the weakness experienced in 2001. For the quarter, sales were up 10.6% from a year ago and 11.3% from the second quarter.

International sales remained up in double digits from a year ago. Record sales in Latin America accompanied year-over-year growth in Europe and relatively flat comparable sales in Asia Pacific. Much of the story in Europe continues to be sales in Eastern Europe and the rapid growth of mobile printer applications. China, Korea, Southeast Asian countries continue to deliver excellent sales results. The sales -- the record sales into Latin America were driven by the shipment of printers into a major postal application. As expected, the strength of sterling and the Euro against the U.S. dollar benefited sales in the third quarter, reversing the negative effect we experienced from currencies last year.

For the third quarter, foreign currency translation added about $2 million to sales compared with last year, contributing approximately two points to our growth rate in the quarter. If the weakness in the dollar continues as benefits should extend into the fourth quarter for sales and profitability.

As we projected during our last call, gross profit margin improved. Gross margin of 49.1% was an improvement of 1.9 points over last year, resulting in a 16% increase in gross profit. A major contributor to the margin improvement were capacity utilization and foreign exchange. Identical factors were responsible for the one-point sequential improvement in margin.

Operating expenses of $31.5 million were up 12.6% over last year and modestly exceeded our forecasted range. Most of the increase came as a result of performance-related payroll expenses, specifically commissions and bonuses that resulted from our strong financial performance in the quarter. Head count on our operating departments was actually up by only two people versus last year.

Other operating expense increases were concentrated in engineering for product development work and for consulting services. Trade show expenses and insurance costs were also higher compared with last year. These increases were offset by the change in good will amortization accounting that went into effect on January 1 and netted to an overall increase of just over 15% for total operating expenses. The result was a 21.8% gain in operating profits and an operating margin of 23.5%. Investment income rebounded in the third quarter to $2.2 million for a yield on beginning balances of 3.3%. You should note the change in our tax provision rate to 35% from 36. This is the result of implementing tax mitigation strategies and should be used as Zebra's going-forward provision rate.

Quarterly earnings were 64 cents a share compared with last year's 48. Free cash flow is a strong $20.1 million for the third quarter. Year-to-date free cash is 10% ahead of a year ago. Receivables increased $4.8 million from the second quarter and reflect the higher level of business activity. Even with this increase, we saw an improvement in extinguishment DSO to 48.8 days, down from both last quarter and last year and a new low for the Company. In addition, inventory turns increased 6.8, a new high and compared to turns of 5.4 one year ago and 6.0 just last quarter. With the strong free cash flow, including continued effective control over working capital, we ended the third quarter with cash and investment balances totaling over $311 million or 57% of our total asset base.

For the fourth quarter, we're keeping our forecast unchanged. Sales in the range of 120 to $125 million and earnings between 61 and 66 cents. This puts full year sales in the range of $469 million to $474 million up approximately 5% over the $450 million in sales for 2001. Imputed 2002 earnings of $2.32 a share to $2.37 excluding merger costs and the one-time charge related to the Fargo transaction are 15% ahead of the $2.03 reported last year. We expect fourth quarter gross profit margin between 48 1/2 and 49 1/2%. With operating expenses of between 30.5 and $32 million. Investment income should be approximately $2 million.

Thank you for your attention. I'll turn the call over to Ed for some closing remarks.

Thanks, Randy.

Third quarter results demonstrate that Zebra's's growth strategy supported by its investments in demand-generating activities are delivering value for its shareholders. At no other time in the Company's history has Zebra's competitive and financial position been stronger or opportunities for growth brighter. These investments and positions give us great confidence for further growth and success as we look next year and beyond.

In 2002, we've made good progress in developing our strategy to pursue high growth vertical markets and applications. We expect this focus will make a more meaningful sales contribution as we progress through next year. We are already seeing sales growth in business improvement and specialty printing applications. In many retail and postal venues, we are meeting the needs of the specialty printing applications with our desktop product offerings including our 2800 series and the ZPL embedded DA-402.

Our optimism also comes from our leadership in mobile and wireless printing systems. Last quarter, we mentioned the W. H. Smith, London Transport, and Group O Electra installations that use Zebra mobile printers to improve customer service, cut costs and improve productivity. This quarter, we moved beyond these referenced solutions to a queue busting applications for a major retailer in Singapore and the London Eye tourist attraction in the U.K. And we also had new installations for rail and airline receipt and ticketing. We also began shipments of the PS-2122 mobile printing solution. This versatile, cart-based system incorporates two printers for high capacity label and receipt printing and a windows CE hand held device. The transportable system is designed to accomplish a variety of tasks, including shelf edge labeling, price markdowns and inventory control.

Other new product introductions add to the positive outlook for mobile printing solutions. We introduced a QL-420 at this year's front line expo. This 4 inch printer follows the extremely successful 3 inch wide QL 320, which we introduced in the first quarter of this year. It incorporates the same popular modular radio design.

Maintaining our investment in geographic expansion is another important element for growth. This year-to-date, sales of international customers are up 10.3%. Greater use of outsourcing and economic growth in China, Eastern Europe and elsewhere create important opportunities for Zebra as companies establish new production facilities and implement compliance labeling applications. In compliance labelling, we are seeing increasing numbers of specialty applications coming from these regions. This observation is a direct result of having more Zebra representatives serving our channel partners closer than ever before.

Card personalization systems, which posted record sales in four out of the five most recent quarters remain a superb business for Zebra. The need for greater safety and security is evident. Our growing family of plastic card printers is expanding the number of applications for personal identification. As I mentioned, our plans call for introducing our intelligence printing estimate system across our line over the next few months. We are also strengthening our channels by working more closely with resellers with the capabilities for selling and implementing high security applications.

Thank you for your attention. We'll now be happy to answer any questions you might have.

At this time, would I like to remind everyone, in order to ask a question, please press star then the number one on your telephone key pad. We'll pause for just a moment to compile the Q & A roster. Your first question comes from Jeff Rosenburg with William Blair.

Good morning, congratulations.

Thank you.

Obviously, it was quite a hockey stick after a year in North America up about 65, $66 million, up about 10%. Ed, you talked before about some large opportunities in the pipeline, you know, how much did those sorts of things contribute and what does that pipeline look like, you know, coming into the next couple of quarters?

You know, I have John here next to me, and he's closer to the situation. So I'm going to let him answer that question.

Thank you, Ed. Thank you, Jeff. The issue here is that we've had a number of opportunities with the smaller numbers of contracts and delivering a number of our products into a number of accounts. The pipeline was full going into Q3, and it's filling for Q4 as we go forward. And we're optimistic about the '03 fiscal year.

The good news on our side is that not only are we seeing significant growth in compliance labeling but also nonbar code applications and we're seeing opportunities throughout the world in these areas. And we're focusing some of our new products in nonbar code applications such that we have brought our service to our customers as well as being able to provide a greater breadth of printing solution. So overall, I'm very optimistic about the opportunities. We're seeing the use of our broad breadth of products from portable desktop all the way up to the mid and high range.

Many of our customers are coming to us because we have that broad range of products and we are able to, in fact, provide a printer solution. These are the things that are helping us with our sales. And another area that we focused on are the new vertical markets and also with some of our direct sales people helping create demand in the marketplace for various applications. That was newly started in the latter part of Q2 and we had some early results on that in Q3 and we expect that to continue to produce opportunities.

Now you can see why I have John with me. He makes me look good.

Yeah. That's a helpful answer. Just to follow up on the last thing you were talking about in terms of creating demand in vertical applications. I think when I'd spoken to you guys about that, you had expected that that would naturally take sometime before that would start to bear fruit. As you get into it for a few quarters now, are you thinking you can get results that from that more quickly or a little bit more color on how that's being received in terms of life sciences and security and some areas where you've been particularly focused?

Jeff, it always takes a longer period of time to develop those markets when they are new. You have a lot of education to go through, and that's where some of the smaller sales came out, where we're putting in beta sites. We're selling smaller amounts of product as the new markets start to look at our applications. So I think, you know, we're still standing by our original comments, that it takes longer to develop the vertical markets. The good thing that we're seeing is that the early adopters are, in fact, moving into beta sites. As a result of that, we see some potential in the out quarters.

Great. Thanks very much.

You're welcome.

Your next question comes from Peter Barry with Bear Stearns.

Good morning.

Good morning. I'm sorry, we didn't catch you, Peter.

Um, obviously, the stock price says it all. Congratulations on just a terrific quarter.

Thank you.

Ed, as you look at Q4, would you expect the revenue profile to look much different from Q3, either by vertical market geography or product?

No, I'd expect it would be quite similar.

And, you know, given the fact that in the last conference call you mentioned that the visibility factor, especially some of your major customers was getting better, are you feeling any more comfortable with looking out into '03 a little further and sharing some of those thoughts with us.

Well, if those thoughts are numeric, no, I'm not here to make projections for '03. However, from a confidence point of view, there is no question that we are gaining confidence because what's happening for us, is, as we approach these individual vertical markets and seek out applications within those markets, and do installations at those individual accounts, we create a reference account situation, and those reference accounts then allow us to go to companies who have similar kinds of applications, and we can demonstrate to them how effective it has worked out. What was the integration process, how long did it take, and what were the actual results that were achieved after implementation?

When people see how successful you are, they have a lot more confidence and there is a much greater willingness to proceed. So our first stage here is that stage of developing, doing these reference account installations. The second stage, which we have actually started for some of these applications is to get business from other people, and I expect through '03 that we will see that take place.

Are you able to get a sense of what percentage of your incremental revenues are in, fact, being driven by your new marketing initiative?

I don't know if we can do it so much on a percentage basis because we still have the situation where a high percentage of our business is indirect business. Either through two-step or through the var. However, I must say that doing these -- going after these vertical markets and particular applications, there tends to be more involvement on the part of our people where we might not in the past have heard from the customer, or what the customer's exact requirements are, we now frequently are pulled in, and maybe there is some adjustment that has to be made to the product, or maybe there's just questions about how to utilize the product in a particular application. So I don't have quantification, per se, but we certainly have a sense that we're getting more of that kind of business, and we're having more and closer customer involvement.

Can you add any color for us in terms of some of the major customers that have given you this comfort level?

Particular customers?

Um, I'm thinking of maybe a var or two or maybe a U.P.S. Are they still robust in their demand despite the environment that we see out there?

Actually, U.P.S.'s business has improved from where it was in '01, you know, to name one company. And that particular market, the small parcel delivery market, has been improving.

And just one final one from me.

Well, you're loading up here on me.

No, you didn't give me any limits this time, so --

Go ahead, Peter.

The supplies area was obviously the weakest link in the chain at the moment. Could you give us a sense of how you might be addressing that category?

You see when you get the hard questions like that, I have to turn them over to John.

How are you, John, congratulations.

Thank you, Peter. We are addressing those issues. We had a recent change in management with our supplies business, but we're more focused in the field. We have -- we're putting supplies specialists to work with our sales people in our indirect channel. We made an arrangement with scan source to sell into some of their customer bases which we didn't have before. We've enhanced tele-sales to the point where we're incorporating selling to the second and third tier users which we hadn't done very much of in the past. That's starting to show some good results.

And also our Zebra zip link online is showing some good results. Albeit, it is a small number, it is an opportunity for small orders to be accessed to us. And the other thing that we're doing is being very assertive relative to our web site and allowing the customers to actually get into the Zebra web site and understand exactly what can be purchased online as well as through tele-sales. Those results, those things which we incorporated over the last two quarters really haven't started to show a lot of results. We had some good results in Q3 for tele-sales, but we expect to see better results in the supply side as a result of that.

Would it overstate to say you are trying to decommoditize that area, John?

No, we're not trying to decommoditize it, what we are trying to do is make our products more available and by making it easy for second and third tier buyers to come to us either through tele-sales or through the web site. It makes it easier for them to buy directly from us. They prefer to do that. When that's not available, they buy from local vendors.

Terrific. Well done, gentlemen.

Your next question comes from Chris Bolty with Raymond James.

Good morning, my congratulations, also.

Thank you.

Could you perhaps prioritize for us in terms of growth, the -- how you would layer the bar code, the general bar code business, versus the portables, versus the I.D. cards, in terms of contribution here in the quarter?

Contribution meaning from the standpoint --

Well, which of the businesses were growing faster?

Which ones created more of the growth, is that what you mean?

Yes.

Well, number one, I don't have that information, and number two, I've got a huge number of competitors that are on this line that would love to have it. So given that I don't even have it, I don't have to worry about giving it. [Laughter ]

Okay. How about this. Is it -- [ Laughter ] Is it fair to assume that in the last, say, 6 to 12 months you've seen an uptick in the portable business numbers?

Here, what would be fair to say is that we believe that when you look at applications, let me sort of roll the clock back a bit here. We went ahead and acquired Comtec, which was about 2 1/2, approaching 3 years ago, 2 1/2 years ago, and we did that because our view was that applications that utilize portable printers were underserved in the marketplace and that we, with our channels, with our geographic reach could go ahead and extend those applications. That has, indeed, happened, and it continues to be a priority and a focus point for the corporation. It's our intent to globally provide solutions that involve portable printers. Let's say we want portable printers to be part of solutions on a global basis.

It is our intent, also, to go ahead and sell portables through multiple channels. And by that, I mean utilizing the var channels, utilizing the two-step distribution channels in addition to direct. The primary channel in geography of those products prior to the acquisition was the direct channel, direct to the user channel for large deals, and concentration in North America. We're moving to change that, and we've had considerable success in doing so. So that's, you know, gives you a view of what I would call a priority area of our business, and something that we expect will contribute significantly as we continue to grow.

Okay. Do you feel that any of the wireless capabilities you are now selling, either the blue tooth or wireless lan 80211 is enhancing the growth of the categories as a whole?

Yeah. It actually has an impact on table top products and desktop products.

In terms of an enhanced replacement cycle? Would somebody actually get rid of something sooner because they covet that feature so much?

Yeah. We have customers who see the benefit of having RF capabilities on table top products, products that are typically powered with, you know, out-of-the wall, and so when we do an installation, a portable installation, it gives us an opportunity to sell them on those benefits. And in some cases, not a high percentage, but in some cases, people see those advantages as being so important to the way they do their business that they will go ahead and add table top products. I don't know if per se we will find them actually disconnecting hard wired products and instead going ahead and putting in RF table top products. I don't know that we'll see that, but I think that we do have an opportunity to sell those table top products a long with our portable products.

Okay. On the I.D. card printer side of the business, what sort of success have you had with the implementation of your true colors program?

The true colors program? Well, I guess you're talking to the wrong guy relative to that. I really couldn't tell you.

Okay. Who's the right guy?

Well, the right guy would be the guy who runs the division, so what we'll do is we'll get some information for you, and get back with you, okay?

Fair enough. And I had a final question on the competitive front, you know, always had a concern going into the slowdown here that you'd see increased price competition perhaps from the Asian competitors, and that doesn't seem to have happened. In fact, I haven't really seen any increased effort coming out of [inaudible] or any of the other Japanese vendors. What's your sense there of how the competitive situation is shaking out or might on a go-forward basis?

I think that your sense is right in terms of competition within North America, per se. However, I would say that there are Asian manufacturers who are trying to establish positions in high-volume OEM applications. And, you know, those are challenges for us. We do well against those challenges, but just the same, there is definitely an attempt to make progress in that direction.

Very good, thank you.

Sure.

Your next question comes from Rick Reid with Robert Baird and Company.

Hi, good morning. Ed, I was hoping could you spend a little bit more time on the new opportunities that you have in some of the emerging verticles and talk a little bit more specifically about some of the opportunities you might have have in health care. There's some renewed focus by the FDA in maybe asking hospitals to implement bar coding. Some of the government opportunities that I understand that you guys are going for your GSA approval. Maybe talk about that and any other verticles that might be worthwhile talking about at this point.

Okay. I'm going to let John speak to that one. Basically, health care verticles and opportunities within them.

Yes, in health care it's a new vertical for us, although the FDA is trying to mandate certain requirements. They are meeting a lot of reluctance and a lot of resistance within the health care communities. The new RSS , the reduced symbology [ph] code, will take effect primarily for the pharmacies. We see opportunities there to grow our business. We have very good solutions for that, and I think, um, like any of the verticals, and I said this earlier, it takes a little longer to develop the confidence and credibility within that vertical and to cultivate the customers. And that's about where we are.

One of the policies I like to have is that we don't talk a lot about where our future focuses are in these new verticals or in other areas because what we're doing is alerting the competition as to where we're headed. And I have -- generally do not like to support that. We're spending a lot of time and effort in developing these new markets, and we expect to see some results in '03.

Can you talk, John, about some of the execution issues that you still need to accomplish, and I guess from the standpoint of what areas you still need incremental partner support?

I think as we enter the new verticals, that's a critical aspect of developing the market is to recruit partners that are well known in the new verticals and have credibility and have a presence. So that's what we're out doing, and we have started to work with some of these alliances. And that will start to produce some results. And we're also working with the larger system integrators that are in these marketplaces to be their printer of choice for applications related to the pharmacy, to the hospitals and also to the pharmaceutical manufacturers.

And then last question, just maybe a general one, you know, I guess you guys have talked enthusiastically about some of the opportunities, you had a very strong quarter. Why are you guys kind of keeping the guidance flat here and not picking it up if the pipeline, as you suggested, is filling up so rapidly?

Why? Because I have experience with sticking my neck out too far and losing my head. That would probably be the biggest reason. We can go ahead and, you know, certainly provide you with, you know, more numbers and perhaps reinforce your confidence by doing so. But I think that it's a situation that when you go ahead and beat your numbers, people are very happy and reward you accordingly. And the way things work in the U.S. capital markets, when you miss them, you get destroyed.

And I just looked at the cover of "The Chicago Tribune" this morning, and Sears Roebuck stock was down 32%. I mean, I seriously doubt whether the value of Sears Roebuck was changed by 32% between yesterday and today, but in fact, it's down 32%. So I don't think there's a good payoff for me to go ahead and provide more information on in terms of guidance. And so consequently, we're not taking that attack.

So it's more an issue conservatism than any incremental weakness that you are seeing?

Oh it's absolutely conservatism. As I said, there just isn't the payback for going ahead and putting your neck out.

That's fair. Thanks a lot.

Yep.

Your next question comes from Elliott Schlang with LGAR Great Lakes Review.

Hello this is Greg Halter for Elliot. I'm wondering if the strike on the west coast is having or could potentially have any impact on your componentry needs?

Well, I personally have not heard anything that would say that that's the case. Has anybody here?

No, we have not heard.

Not yet. We could see impact a little later maybe, but not right now.

Okay. And regarding your capitalist spending plan, long term, is there any need to really ramp that up above the $10 million level?

Basically for us, it's a matter of looking at the individual capital expenditure and evaluating what the return is we get by making that investment. And invest accordingly. We have actually over the history of the Company not been shy about making those kinds of investments when they are there to be made and we see the payoff. It's strictly a matter of a financial evaluation. Obviously, we've got total access to the capital, and wouldn't hesitate to spend it, so the -- so I don't think that $10 million is, you know, a barrier or -- as a matter of fact, I don't think it's meaningful at all.

Okay.

As a matter of fact, I wouldn't have known that it was $10 million other than the fact that you just mentioned it.

Regarding your investment portfolio, your return, I think Randy stated was 3.3% yield, which seems awfully high relative to where the market is. Can you elaborate on what's in the investment portfolio?

I'll respond but I won't elaborate. The portfolio is just high-grade quality municipals, governments and corporate. I mean that's really what it is. Yeah, we had a good quarter because there were -- we were in an environment where rates were coming down so we did have some mark to market gains on some of the investments that we made and the facts are what they are. I mean, we had roughly a $2.2 million return on our portfolio on our investments in the quarter and you do the arithmetic. It's 3.3% on the beginning balances.

And last question, interest expense is $114,000 in the quarter. I know it's small, but given the fact that your debt is minimal, I just wonder where that's coming from or what's in that line?

That was actually interest expense relating to a settlement on an IRS audit that we had covering the years, I think, through 1996.

Okay.

That's all it was.

All right. Thank you and very good quarter.

Thank you.

Your next question comes from Mark Hillwill with Spectrum Advisory.

Just checking in. Glad to hear you laughing a lot, Ed.

Yeah. Definitely feels better than the reverse.

You need your head on to laugh.

Right.

And I jumped in late, so the usual question with regard to your cash balances and the like. Any sense of how you're going to use them over the next year or two?

Yeah, my sense is that we're going to use them to acquire a company.

Okay. So it will be -- that implies an acquisition in the nine-figure category or close to that?

Nine figures? Let's see, I've got to add this up. [ laughter ]

$100 million range

Isn't that billions, nine figures?

Yeah, you're right. No, I think that's -- already already -- [ Laughter ]

I don't have any billions on mine.

A fairly large acquisition in the 80, 90, 100 million dollar range?

We certainly are looking at a variety of deals and a $100 million or $200 million transaction is certainly things that we would consider. Frankly when we were a much smaller company, when we did the Etron transaction, it was over -- more than $200 million, and so, yeah, those are, sitting here with $300 million in cash, and the ability to go ahead and leverage if we chose to puts us in a good position. We were very actively operating in this area, have looked at a number of companies, and however, have no announcements to make, but hopeful that -- we will be able to make some.

Great. Thanks a lot.

Sure.

Your next question comes from Mike Burke with Basics Capital.

Hello, guys, good morning. In the desktop I.D. area, what parts are you most excited about, and what areas do you think needs a little bit more work?

Well, I'm going to give that one to John.

Yeah. Desktop for us has been a good story. And it's very rewarding from the standpoint --

Are you talking about plastic card?

Yes.

Oh, I'm sorry.

Yeah.

I thought you said desktop.

You said desktop I.D.

I'm sorry, I can't answer that question. We'll take your question and get some answers from --

Let me just -- would you rephrase your question so I can go ahead and give you a response?

Just in the -- you know, for the desktop I.D. printers.

Yes?

What area are you most -- do you think is going well, and what areas do you think, do you want to improve on?

Well, I mean, what's going, certainly what's going well is, there is a, you know, an increased, um, demand for security in all kinds of places, and of course, utilizing I.D. cards of various types --

Which areas do you see the best demand?

Well, security applications are a very important piece of the business and a growing piece of the business. So, I mean, that's where I would say things are the best. I wouldn't necessarily single out a particular area of that where I think things are bad or have gotten worse.

Is the outlook -- are things -- do you think things will continue to get better just because of, you know, with homeland security and just that kind of stuff?

I think there are a lot of factors that would suggest that the business is going to continue to be a bigger business. This has been a very steadily growing business for us. If you look over the product range that we have, the product range has changed very substantially over the years. If you look at it over, say, a five-year time period, you'll see in the earlier part of that period, the introduction of a very high quality but economical print engine that we proliferated through a series of machines. That was the heart of the 300 or the 310 products.

We then went ahead and over the course of the last year or two made two important product development moves. One was to the higher end with the introduction of the T-720 which is an edgeless lamination product and then we have at the other end, which sort of sandwiched our product line, we introduced lower priced machines within the 200 series of products, 205, 210, which I mentioned in some other prepared remarks here. Those are machines that are smaller and are more economical than others that are in the product line. And that allows customers who perhaps couldn't afford, um, the more expensive products to be able to afford these less expensive machines. And particularly, what we have found interesting is those less expensive machines allow people to, in applications that require quantities, to consider them. Where they can get a payoff at, you know, a sub-$2,000 price point. They couldn't justify, perhaps, at over $3,000.

So those -- that's unearthing applications for the Company. That just gives you sort of a synopsis. I don't know how familiar --

No, no, no. That's good. And then I guess in regards to competition, do you feel that you are taking share?

Um, feel that we're taking share? I would say that we probably are taking share. The -- would I go ahead and look at the initiatives of some of the competitors, I think that they haven't done that much to improve their product range or their channel structure or their geographic reach. We have done all of those things, and that's naturally going to lead if you've got good products. It's going to lead to share gains. So I do think over a long period of time, we have improved our share of position.

Would you be willing to share who you feel your biggest competitor is?

I could give you a litany of companies that are all over the world, that sell these kinds of products. There's a lot of companies that are in this market, and, you know, outside the United States, there are companies, oh, like [inaudible] Print Therm, there are Japanese manufacturers products, Victor Data Systems would be a notable company within the -- there's a company that's a U.K.-based corporation [inaudible]. And in the United States, there are some notable companies, Data Card, Fargo. So, you know, those are all people that are in the so-called, um, table top product area.

We have other companies that come at this market from another perspective, and that's by utilizing more mainstream technology and adapt their products to provide, um, provide solutions. And, you know, companies such as Hewlett-Packard or Lexmark who will go ahead and come at various segments of the market or customers of theirs will take their products and come at various segments. So it's a market that is not a super large market by any means, but it does have a number of small competitors, each of which provide their own advantages to the marketplace.

Hey, thanks a lot.

Sure.

At this time, there are no further questions.

Gentlemen, thank you very much for your participation on today's call. Our next conference call is tentatively scheduled for February 12, 2003. And we look forward to see you at that time.

Thank you for participating in today's Zebra Technologies Corporation third quarter conference call. This call will be available for replay beginning at 12:00 noon Eastern Time today, through 11:59 p.m. Eastern Time on Friday, November 1, 2002. The conference ID number for the replay is 5632393. Again, the I.D. number is 5632393. The number to dial in for the replay is 706-645-9291. Again, 706-645-9291. Thank you, you may now disconnect.