斑馬技術公司 (ZBRA) 2002 Q4 法說會逐字稿

Good morning. And welcome to the Zebra Technologies fourth quarter and full year 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 your conference.

Thank you. And good morning, everybody.

As is our normal practice, we have some prepared remarks to make prior to opening the call up to your questions. Ed would like to make some statements first, and then I'll go into some of the financial information. Ed.

Thank you, Randy. Good morning, everybody. And thank you for joining us today for the Zebra Technologies 2002 fourth 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 the 2003 first quarter and expectations about trends in the company's business will be forward-looking statements.

The forward-looking statements involve risks, 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 filing with the SEC. In particular, we direct your attention to the company's Form 10-K for the year ending December 31, 2001.

As you might expect, I am very pleased with our Q4 results and the significant progress we made in '02. Specifically, I believe we are a stronger company today than we were in '01 when we achieved record sales and earnings.

I'd now like to share with you the progress we have made and the outlook we have for Zebra. At this time a year ago we discussed with you our strategy of investing in activities to extend Zebra's leading market position, improve its growth prospects, and fundamentally continue to build value for all of Zebra's stockholders over the long term.

Throughout the U.S. economic downturn we took advantage of our financial strength to achieve these goals. During this very difficult economical environment our investments resulted in a steady improvement in financial results. Quarterly sales increased in consecutive quarters in '02, growing 15 percent from the first quarter to the fourth. North American sales began to rebound. For the year we achieved record sales in our plastic card business unit in all three international geographic territories, Europe, Latin America, and Asia-Pacific. Profitability improved and Zebra generated record free cash flow for the second consecutive year.

We invested in bringing innovative products and technologies to market that would enable us to deliver applications for business improvements. We worked to orient our sales and marketing organizations to be more externally focused on delivering the business benefits associated with implementing bar code labeling and specialty printing solutions.

We identified under-penetrated vertical markets that offer high-growth opportunities for Zebra's printing and connectivity technologies. Our organization expanded its international coverage by placing Zebra representatives in countries and regions to work more closely with our channel partners to uncover business opportunities and gain market share.

At the same time, we strengthened our management team, worked to enhance our already enviable financial condition, and acted to ensure full compliance with the new corporate governance statutes and regulations enacted last year.

At its heart Zebra is built on providing thermal printers and related products with the durability and reliability that are regarded by many of the industry standards. With any technology company continual product innovation is the key to long-term success. Because we made the strategic decision to invest through the economic downturn the stream of new products from Zebra continued in 2002.

During the year we introduced products in all major categories, and the products introduced in 2001 gained growing market acceptance. Among those introduced in 2002 was the QL Series of mobile printers, which are now being used in an increasing diverse set of applications such as shelf labeling, in-store product marketing, receiving, and receipt printing.

Printer introductions were accompanied by the enhanced functionality provided by improved connectivity. We are seeing more applications incorporating [BlueTooth] [ph] and 802.11B wireless protocols, including greater interface with handheld devices. Zebra tabletop printers now support wireless connectivity, building on our expertise in mobile printers.

We also provided internal Ethernet across all tabletop and desktop printers, and enhanced printers with USB connectivity. As a member of the Auto ID Center Zebra is at the forefront of emerging RFID technology. In 2002 we introduced the R402 smart label printer encoder which is designed to cover a wide variety of applications in life sciences, asset control and security, and leisure and entertainment venues.

New products were an important part of our plastic card business unit, achieving another record sales year. Our P320I intelligent card printer incorporates enhanced security and ease of use features that are migrating across nearly all of Zebra's plastic card printers. The entry level P200 Series printers is expanding the number of amplifications for personal card printing with price points around $2,000 and below.

The successful introduction of Zebra products was accompanied by a change in focus in our sales and marketing organizations. Over the past couple of years we talked at length with investors about moving from primarily a product and compliance labeling focus to an external orientation dedicated to encompassing business improvement applications and providing compelling business propositions for the adoption of bar code and specialty printing.

Under Bar Code President John Paxton's leadership this solution selling approach is making a difference. Our channel partners and end users are responding as they see the dollars and cents business benefits of implementing a solution with Zebra's products. This extension of our marketing strategy is one reason why we believe we are gaining market share, a cornerstone of our growth strategy.

This solutions orientation along with our products and technologies is not only making a more compelling case for implementing applications in traditional manufacturing and distribution environments it's also driving higher adoption rates in emerging business improvement applications. The reference solutions implemented a year ago in [queue busting], bus and train ticketing, and other applications are leading to a proliferation of these solutions today.

We are now working on new and different reference solutions. We are also leveraging on our expertise in small packet delivery and enabling better parcel tracking for postal organizations around the world. We're even finding new ways for retailers to improve worker productivity and lower costs with thermal printing systems at multiple in-store locations.

Our results for 2002 benefited from the investments, placing more Zebra representatives in international territories. Our European mobile printer team built on its impressive first year by nearly doubling sales this year. Better coverage of our international channel partners clearly paid-off with more business in all territories across the spectrum of compliance and business improvement applications. These activities led to record sales in all three international territories.

Market leadership and growth, and the ability to deliver increasing stockholder value over the long-term can only be accomplished with effective management leadership. Last week we announced the latest additions to our management team. We are pleased that [Stuart Ipton] [ph] joined us as Vice President of Marketing and Product Management in our Bar Code business unit, and [Noel Elfanz] [ph], Vice President and Corporate Counsel.

Stuart with many years of experience in the auto ID and technology industries will lead the business unit in the planning, development, and implementation of broad-based marketing, product, and sales support strategies.

Noel will be an important worldwide legal resource in Zebra's day-to-day activities, and ensuring that Zebra continues to comply with the latest and increasingly complex corporate governance regulations.

The investment Zebra made unquestionably had an increasingly positive affect on sales and earnings as the year progressed. We extended our market leadership by building on the industry's broadest product line, the strongest channels, and exceptional thermal printing design and manufacturing capabilities. The more formidable Zebra brand and the qualities for which it stands are also attracting new business opportunities that could further enhance growth. These investments will all have an enduring affect on growth as we move through 2003 and beyond. They provide a foundation for additional investment and position Zebra for further success in stockholder value creation.

Following Randy's comments I'll provide some insight into our outlook for this year. Now, here is Randy who will provide details on the fourth quarter and share our outlook for the first quarter of 2003.

Thanks, Ed. And good morning, everyone.

As you can see from the press release we issued this morning, the fourth quarter was truly an excellent quarter for Zebra. Net sales were up 13.2 percent, operating income increased 24.7 percent, and EPS were up 32.6 percent. Sales exceeded the upper end of our guidance, and earnings were at the high end of the range. Our third consecutive sequential quarter of sales growth reflects the positive impact of our continuing investments in product and market development that began in 2001.

As I customarily do, I am going to limit my remarks primarily to comparisons with the fourth quarter of last year. I will conclude with comments on guidance for the current quarter.

Let's review our sales results. Sales in the quarter for hardware were $96,030,000 which were up 15.3 percent from a year ago. Supply sales increased 23.9m, a 7.7 percent gain. Service and software were up by $5.5m, an 18 percent gain. Total sales of $126,324,000 were up 13.2 percent. Hardware sales in the quarter were 76 percent of the total. Supplies were 19 percent. And service and software were 4.3 percent.

Like the third quarter both plastic card and bar code products contributed to the growth, with sales led by improvements in the sale of bar code printers. As a sign of the overall quality of the quarter business performance was very broad-based in terms of both channels and products.

Hardware sales had a genuinely strong quarter. They were up $12.7m from a year ago, and showed continuous improvement throughout the year, and accounted for 86 percent of the comparable quarterly sales growth.

Supplies reached a new sales record it the fourth quarter and for the full year.

By geography we had an outstanding sales growth in the international part of our business, which was up 25 percent to $57.2m. North American sales were $69.2m, or five percent over last year. The strong international sales growth was paced by record sales in Asia-Pacific and Europe. We are encouraged by the positive trend and tone of business across all of our markets, including North America where sales were up five percent.

As expected, the strength of sterling and the Euro versus the dollar benefited sales in the fourth quarter, reversing the negative affect we experienced in the prior year. In the fourth quarter foreign currency translation added approximately $3.3m to sales compared with last year, and contributed approximately three percentage points to our growth rate in the quarter.

As expected, gross profit margin continued to improve. Gross margin of 49.5 percent was up 3.4 points over last year, resulting in a 21.5 percent increase in gross profit. The major contributors to margin improvement were higher capacity utilization, foreign exchange rates, and product cost reductions.

Operating expenses were up more than expected. At $34.1m they increased 18.9 percent over last year and 8.3 percent sequentially. In both cases the principal causes were bonus and commission payments that increased as a result of improved sales, legal fees, trade show expenses, and to a lesser extent travel and entertainment expenses, and recruiting costs. Nevertheless, operating profits were up by 24.7 percent, over $28m, as improvements in gross margin and a higher level of sales fully funded the increased level of operating expense in the quarter.

The explanation for our improved investment income is quite simple. Higher rates of return on higher cash balances. Last year we earned 2.8 percent on $211m, this year we earned 3.1 percent on $311m. Quarterly earnings were 65 cents a share compared with last year's 49 cents, an increase of 33 percent.

At $27.2m we generated the highest amount of free cash flow in any quarter of the year. For the full year we generated a record $82.8m in free cash, bringing cash and investment balances to over $348m, up 40 percent since the end of 2001.

We continue to be optimistic about prospects for growth in 2003. For the first quarter which is normally sequentially down from the fourth we expect revenues of between $120m and $125m. Because of continued weakness in the dollar versus the Euro and sterling which has accelerated since year-end and good rates of capacity utilization gross margin should remain high, somewhere between the current rate of 49.5 percent and a high end of 50.3 percent.

We expect operating expenses to come down from the levels reported in the fourth quarter, to between $32m and $33m, delivering operating margins of approximately 22 percent.

Investment income of $2m and a tax provision of 35 percent will generate earnings in the range of 61 to 66 cents a share.

If you notice a striking similarity with our guidance for last quarter you're correct, it's the same, $120m to $125m in sales, and earnings of 61 to 66 cents a share.

That concludes the financial portion of our presentation, and I'll now turn the call over to Ed for some final remarks.

Thanks, Randy. Great numbers!

From 2001 we've implemented a strategy of continued investments to support long-term growth. In 2002 our investments in new products, better geographic coverage, and greater external focus extended our market leadership with increasingly positive results.

In 2003 these and further investments will continue in our pursuit of stockholder value creation by providing products to deliver real value to businesses for applications and identification and authentication, transactions processing, routing, and tracking.

Geographically, the developing regions of Asia-Pacific, Eastern Europe, and Latin America continue to offer above average growth potential for Zebra. Whether it's the shipped products for consumers in Western Europe, North America, or Japan, or for consumption internally businesses are rapidly adopting bar code technology for compliance labeling, as well as business improvements and specialty printing purposes.

In 1999 sales to international customers accounted for 37 percent of Zebra's net sales, in part because of higher investments in these regions supported by the rapidly growing economies, international sales increased 14 percent in 2001, and amounted to 43 percent of net sales. For 2003 our plan calls for additional investments in people and infrastructure to generate further growth in these regions. Our investment plans include more in-country representation to cover high-growth areas, applications engineering support in more international territories, and greater use of multi-language web pages to make it easier for international customers to do business with Zebra.

This year we also expect to build on our strategy to deliver applications into high-growth vertical markets as a supplement to our overall business strategy. We expect this focus will make a more meaningful sales contribution as we progress through the year.

One such market is life sciences. Recently increasing media attention has paid to the issue of reducing errors in healthcare. All of us have heard too many stories of surgeries performed on the wrong person because sticky notes were mixed-up on lab samples rather than relying on the accuracy of bar codes to mark specimens.

Other areas of concern is making sure the right drug gets to the right person at the right time. Drug makers are now beginning to bar code more pharmaceuticals at the unit dose level at the point of manufacture to be able to track the drugs in the supply chain more accurately. More hospitals are bar coding drugs to improve the accuracy of prescription delivery to patients, as well.

Zebra under the leadership of a life sciences vertical market manager is working in a number of areas in healthcare to implement bar code solutions, including with an increasing number of pharmaceutical manufacturers and other businesses along the drug delivery supply chain. As part of this work last week we announced the signing of a new Zebra systems integrator to help retail pharmacies lower costs and provide better customer service in the dispensing of prescriptions.

Our ability to support growth in new and established markets rests on our ability to deliver innovative products that can solve customers' problems. You have heard us say many times that 'new products are the lifeblood of our company.' The fourth quarter of 2002 was no exception. Products introduced over the prior 18 months represented more than 21 percent of printer sales for the period.

This year we will continue developing a stream of new bar code and plastic card printed products. We began shipping the four-inch QL420 mobile printer in January. That's a four-inch version of our popular QL320. And we expect introductions of more mobile products for the growing number of wireless applications. We are also working on next generation tabletop and desktop products to keep these lines in a leadership position of these categories.

New card printer products with features that address the need for identification in safety and security applications are also under development. Through our applications assistant group we are ensuring that the versatility of our printers is optimized for the application in high-growth vertical markets and specialty applications.

During this conference call we've talked a lot about stockholder value creation. So, how is Zebra's strategy of market leadership, financial excellence, and focus on growth delivered in this all important measure?

For the two years that ended December 31, 2002 Zebra stock appreciated approximately 40 percent, compared with the S&P down 33 percent, and the Nasdaq composite down 46 percent. Over the five-year period stockholder [wealth] in Zebra stock has increased by 93 percent, or about 14 percent per year. Over the same period the S&P 500 and the Nasdaq composite were down 10 percent and 15 percent, respectively.

If you had become a stockholder in Zebra at its initial public offering on August 15th of 1991 the value of your holdings would have increased by 639 percent through the end of 2002. For the same period the market was up about 150 percent.

Looking ahead we are confident that Zebra's business strategy is the correct one, and that the future holds an abundance of growth prospects for the company. Zebra's management team, product portfolio, infrastructure, competitive and financial positions have never been stronger. We have the financial resources to invest in high-growth areas to gain share, open new markets, and make acquisitions to build our competitive position. Our ongoing development of innovative products backed by industry leading support continues to set Zebra apart from other companies in our industry. Our financial strength gives current and potential customers comfort that Zebra will be here well into the future to provide them with the printers for their bar coding and business improvement needs.

Thank you very much for our attention, and I'll be very happy to answer your questions.

(Caller Instructions.)

Your first question comes from Jeff Rosenberg with William Blair and Company.

Good morning.

Hi, Jeff.

Let's see. First, on operating expenses it looks like you're guiding for the percentage of sales to be similar to what it was say a year ago, and so it seems like expenses are kind of growing along with sales. I am wondering if - should we expect this 26.5 percent type number to be what you need to spend going forward given your new, you know, the marketing plans? Or do we see leverage as we think about operating margin over the long term?

You know, that's a good question. I mean I guess I would say that there are no such thing as a truly fixed cost. We're going to have to continue to invest in key areas of the business to grow the business. Product development, sales and marketing, they're all going to require people, they're all going to require - or people are going to require resources. I think we can say, however, that we're going to be very careful about how we manage the growth in our operating expenses, and leverage our investments in these areas to optimize our growth opportunities.

I think, you know, being right around that percentage point is reasonable. I mean I don't see us radically reducing that as sales go-forward, although I'd love to see it. I don't think it's realistic to expect, frankly.

Oh, Jeff, let me give you some - what's behind the numbers. And I think that maybe will help you in terms of doing your planning. As we've commented here in the prepared remarks we are focusing on vertical markets. We are being much more cognizant of customers' particular applications and what the solutions are to those particular applications. This has resulted, let's say in order to be effective in this area expenses that Zebra has not incurred in the past it did incur in 2002. And we expect that we would incur more of those type of expenses in 2003.

Specifically, what I mean are things like industry managers that focus on particular target verticals, and identify these interesting applications for us. The implementation of an AAG, that for us means application assistance group. This is a group that fields questions, that come from end users as well as our channel partners, and that conveys to them solutions for that particular application that they have in mind.

It also will require some additional level of tailoring our products, or maybe even customization in some cases if the opportunities are large enough in order to win the business. So we will see expenses in places we haven't seen them before. On the other hand, we will get revenue that we also haven't gotten before because of the attractiveness of what it is we'll be delivering to the customers in these markets. So I hope that helps you a little it more.

Yeah, no, that's helpful detail. All right, my follow-up would be if we look at the - I mean I was listening to what you were saying about sort of the broader drivers of international growth. But I did want to kind of focus in a little bit on the sequential growth in the quarter, it was particularly strong. I don't know if there's anything you might want to talk about in terms of sequential currency affect there? Or just whether or not there was more weighted towards Asia, or Europe, or any kind of color there because it was surprisingly good?

We did have, you know, I think as Randy pointed out, you know, a very strong quarter in the international marketplace. And you know, that was - if you look at the relative contributors to growth that clearly was a key reason why we saw such a positive result. That's coming about because of the investments that we have made.

What I am going to do - John has joined us here in the meeting. And I'll let him elaborate a bit on the answer to that question, okay.

Okay. Thank you very much, Ed.

We also benefited from a kind of demand of products for China while we're awaiting the CTC certification which we started back in Q2 of '02. And that was received in the early part of the fourth quarter. So as a result of that we saw a surge of orders as a result of that certification being approved.

And we also saw a surge of orders at year-end for North Asia. And that was something that we didn't count on, but it was an order that they needed to fulfill their demands coming up in fiscal year '03 Q1.

The other area that was a lot stronger than we expected was Latin America, both in Mexico along the [Quiladores] [ph], and down into Brazil. So those two areas were specifically higher than we expected. We did have good growth in the EMEA areas, but there was more in-line with our plan.

Great. Just one - excuse my ignorance, what's the CC certification?

It's the equivalent to our UL type of certification, and it's a requirement now in China to have your products pass that certification as a safety, primarily a safety issue.

Great, thank you.

Yes.

Your next question comes from Chris Quilty with Raymond James.

Good morning, gentlemen.

Good morning.

First, I want to ask Ed for some other good stock tips!

I think it's simple, ZBRA!

A question for you on the new products. In the past you've kind of given us an indication of, you know, what percent of product sales were from products introduced in the past 18 months. Do you have that number, or just in general?

Yeah, it was 21 percent.

21 percent?

Yeah, in the quarter, right.

And can you remind me how that has changed from prior quarters?

Off-hand I can't, but I can probably do it offline.

Okay. And in terms of end market, either domestically or internationally are their particular sectors where you're seeing strengths, or weakness?

Yes, we do. This is John Paxton. We see sectors that relate to both [selectives] worldwide. We see mobile applications going beyond the typical bar code. We call it specialty printing. We see printing in other business improvement activities. So we see some good growth in those areas. And I, we expect the growth to continue through '03.

And how about the retail sector?

The retail sector we see particular demand in-store for such things as queue busting, and also, business improvement activities relative to receipt printing. And also, some inventory tracking. So we do see that. And we think we've stabilized the decline here in the U.S. and as a result of the retail we see some demand coming up from some of our major retail customers.

Okay, and in terms of the healthcare market, obviously, the FDA hasn't set any standards yet for bar coding, but there's been some early voluntary adoption. Do you think the actual passage of an FDA regulation will spur some immediate activity, or is this thing going to happen over a period of three to five years?

I think it'll happen sooner than that. I think we can't wait three to five years. Healthcare certainly can't wait that long. The early adopters are using the RSS symbologies now, and then some of the linear codes. And I think we'll create a demand rather quickly once that standard is out. And, but I see different than previous bar code adoptions of standards is that this is related to people's lives. And as a result of that the healthcare industry is really responding to being able to reduce the number of errors that are occurring.

Okay. And have you seen any impact on your consumable business from some of the pricing war that's going on in the thermal transfer ribbon market? Or what should be the impact?

No, that's been a significant impact on everybody in the industry. There is a war going on, and it's coming from primarily Japan. So we - while we've sold a lot more units our average price has dropped overall. But we see that bottoming out, and it's in an effort to get gained market share in the U.S., in particular. And as it bottoms out I think it will stabilize, and then we'll go-forward with the pricing that we are in the range of today.

Okay. And a question on the international market. With, you know, just the general economic activity and weakness in overseas economies be projected to have a, you know, negative affect on you this year? I mean I don't know what your consensus thinking is in terms of whether the end market will pick-up and how that'll impact you?

I don't see a major impact right now. As the economic conditions continue to be hard and tough on everybody businesses that we supply need to have business improvement activities, and we're focusing on that. If we can increase the sales and reduce the costs it's a good investment for our customers, and we're getting good results relative to the return on that investment. So I think we have a better share of mine relative to the products that we're providing than the average providers to these customers.

Okay. And final question. On the ID card business, was that larger than 10 percent of sales? And what are you thinking the growth rate should look like out into '03 for that business?

Relative to the amount of our sales, we don't release figures in that area. And in terms of its growth rate you can expect higher growth rates than we would achieve in our bar code business.

Okay. I've got to try every quarter! Thanks, guys.

One of us is going to forget! It won't be you, though!

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

Hey, good morning. I just wanted to go-back to the question on costs and operating expenses. Randy, could you talk a little bit about maybe some of the headwind issues you might see in terms of operating expenses in '03? Such as increased healthcare or corporate governance, or any of the other things that it might be adding on at this point?

Yeah, I mean we - just like everybody else we're having to incur some additional costs related to the corporate governance issues, but I wouldn't characterize those as significant for God's sake. I mean it's, you know, we're talking a blip on the radar screen. When you're spending, you know, in the range of $120m to $125m a year on opex that's not going to be very much. It is something. And, again, like everybody else we've had increased healthcare costs. But, again, these are - we try to balance the growth there with managing our growth in other areas.

Fundamentally, I think that --as Ed has indicated, the major drivers of our growth in operating expenses are going to be some of the costs related, that are inherent with the vertical market strategy that we're in the process of implementing. It's a somewhat more expensive way of going to market, but we think it's going to deliver some significant benefits for the company.

No, I understand that. I just want to get a handle on expenses that are going to come-up in '03 that you typically incur but just might be higher than normal because of these factors.

Well, those - the two that you identified would be part of it, for sure.

Yeah, I mean do you have a sense as to how much of an EPS impact those incremental expenses might be in '03?

No, no I don't.

Can you give us a sense for, you know, given all of the increased costs that you're talking about where can the operating margins reach in the next one to two years? What should ... ?

I, you know, I would really rather not speculate on that now. I mean our guidance is really limited to the first quarter. We've - I was pretty specific about what the margins - where we expected the revenues and the margins to be, and where operating expenses were going to fall. And I am going to stick with that at this point.

Okay. And just one more side question here. If you guys can talk about, you know, the opportunities within the Government? I know you guys were working on getting your GSA approval. Just a question, is that done? And what opportunities are you seeing in that marketplace?

This is John Paxton. It's a little early yet to give the forecast as to what opportunities we see. We just received our GSA approval a week-and-a-half ago. So that will start to analyze the opportunities within that marketplace.

Okay, guys. Thank you very much.

Your next question comes from Greg Halter with LJR Great Lakes Review.

Good morning, gentlemen. And good quarter, again. I'd like to ask about the investment portfolio. And it seems to be one of the questions every quarter. But I would like to get your comments on what that is invested in currently, and what plans you have in using that portfolio?

Well, the portfolio consists of - it's a pretty plain vanilla corporate cash portfolio. It consists of municipals, agency securities, some government's, a smaller percentage of corporate's, it's more weighted for tax exempt securities right now. But it's a portfolio like many corporations have. It would be very straightforward, nothing, nothing unusual there at all.

As far as the anticipated uses for the cash, we've stated many times in the past and continue to state our interest in doing acquisitions to extend our product range and our technologies. And we're continuing to be very active in looking at opportunities in that area. And I anticipate at some point we're going to be using a portion of this cash and reinvesting it in a way that will deliver more than a three percent rate of return that we're currently getting in the portfolio.

Any chance of a dividend, given the Busch's proposal?

Well, what do you think the chances are that's going to pass?

50, 50!

Yeah, well ...

If it passes we'll have a comment!

And can you comment on how large of a customer Scan Source is, either in the quarter or for the full year?

Yeah, it was 13.1 percent in the quarter, and 13.6 percent for the year.

Okay, great. And two last ...

And they were the only 10 percent customer.

Two last questions that are sort of inter-related. Your capital spending budget for 2003, as well as depreciation and amortization?

I don't have those figures directly available, but if you can look - you can look at our statement of cash flow. And I would not anticipate any significant changes in either the depreciation or the capex spend rate in 2003 than it was in 2002.

Okay, great. Thank you.

Your next question comes from [Ensena Dreem] [ph] with Pacific Edge.

Good morning. Just a question on the FX benefit again. If I were to back that out and look at the growth margin impact I am getting about 130 basis point impact. Is that right, or were there costs in the quarter from the Euro?

There were definitely some costs from the Euro. I think the overall impact, if I can recall, on our gross margin was eight-tenths of a point were attributable to foreign exchange differences fourth quarter this year versus fourth quarter of the year before. So eight-tenths of one percentage point. And on a sequential basis it was zero, because - now, I would say that in the first quarter I would expect that we would receive some incremental benefit on a sequential basis simply because both the Euro and sterling have appreciated significantly against the dollars since year-end.

Okay. The other question I had is looking at your DSOs it's the lowest it's been in two years. Which is great. And considering the international, the growth in international sales, how did you manage to keep that down?

Well, we have a good collections group. I mean we pay attention to it, and it is managed very actively. We're very aware of the issues and the importance of having an active collections process, and we just do - we just manage it well.

Yes, as far as the management of the whole financial organization, actually, we are - all of the finance organizations report into our organization here in Vernon Hills. In other words, they're not reporting directly to their local management. And so, consequently, we're able to put a very high priority on the financial management of the business. It's not suborned to local operating needs, or it's just - for control purposes and financial management purposes it's a much more desirable structure to have. And I think in this kind of an environment, in particular, that kind of a management structure is superior.

On the international front are you seeing your domestic customers when they go overseas pull your product there? Or are you getting demand from international customers?

We absolutely do. We find companies who are moving to Southeast Asia, in particular, setting up assembly or manufacturing facilities, wanting to replicate what they've used in the States. It's worked for them. And so, we, as part of our marketing programs stay tightly in touch with those companies that are moving offshore to see that we can better serve them.

Okay.

This is John Paxton, again. I think, you know, I want to amplify also that our financial organization in conjunction with our sales organization really has some pretty stiff standards relative to our partners in foreign countries. And generally they're very, very strong financially. So I think that helps us with our collections, as well.

Okay. And then in terms of looking at sales growth sequentially, domestic sales are down slightly. In the March quarter is there any seasonality that you expect domestic sales to pick-up versus international sales?

Actually, overall consolidated sales we would normally expect to be slightly down sequentially from the fourth quarter. That's kind of a normal pattern that we've experienced as a company. I really can't comment as of the split of that domestic versus international. I don't think that's, it's not in my information set here. But overall, a normal pattern and, you know, there are exceptions to that, but a normal pattern is for sales to be sequentially down. But you'll notice that the guidance we gave for the first quarter was the same guidance range in revenues that we offered for the fourth quarter.

Thank you.

You're welcome.

Your next question comes from Reik Read.

Just a quick follow-up, with the international markets - and maybe this is for John. Most of the market forecasts suggest that the international market is going to grow 2X that of North America. If I back-out your foreign exchange you guys did 3X this quarter. Is that something that's sustainable given the investments that you've made, and the investments that you intend to make?

Well, we saw the growth opportunities in the foreign markets, as well. And we did make investments there, as Ed said earlier, to enhance the sales and shorten the sales cycle, and create demand for our products. And working with - and working much closer as a result of our strategic focus with our value-added resellers and our partners. And it's difficult to project whether or not we'll grow as fast as we did in the prior quarters, but the fact of the matter is that we're seeing demand in the international markets. And at this point we don't see that demand diminishing.

But you're both seeing demand - and it sounds like you're taking share, and that we would expect that if the market over the next couple of years in the international arena does grow 2X that of North America your ratio of international and North American sales would be above that? I mean is that what you guys think at this point?

Yeah, I think our plan is that we want to be above that, and because we do, our strategy is that we want to take more market share. So in order to do that we have to be above that 2X number or any number that they're growing out of it decreases, or obviously, try to stay above that, and the same if it increases.

Okay. And then, Randy, one follow-up with you. Just on the DSO question. Is the level that you're at right now sustainable?

Yes.

Okay, thanks.

(Caller Instructions.)

Your next question comes from [Kevin Stark] [ph] with Bear Stearns.

Good morning. Just wondering about Eltron. Does the domestic versus international growth rate there parallel what you're seeing overall in terms of total corporate sales?

We don't break-out that business unit separately from the overall.

But you can't comment on whether international sales are similarly stronger there, as they are with bar code?

No, I can't comment.

Okay. At the NRF Show you demo'd the PS2100 Series which includes the data collection device. I was just wondering if you could explain a little bit about what the strategy and positioning of this product is? Especially if I recall correctly, this would be the first time that you've actually marketed your own portable data terminal?

Go for it, John!

Okay! This is John. I think what we're doing here is we know that we have to provide a solution set, and as we said in our press release, solution sets are being required by our customers for a number of reasons. One is their IT departments are cut. Secondly is that they're looking for a single supplier, and in our partnership concept relative to our indirect channel and what we provide them we're trying to broaden that product suite out. That gives us more value-added to the customer base, and also gives us a significant differentiator from the competition.

Okay. It differentiates you against other bar code printer makers, but it then puts you squarely in competition with similar Intermec, and so what's the differentiation value-add there?

Well, as you know, [Symbol] [ph] does have a product suite of printers, but they're from different customers, suppliers I should say. And we had the connectivity capability within our product suites, from mobiles through desktop. And data and high-range tabletop printers. And so, that gives us, I think, a significant advantage over both Symbol and Intermec, as the product suite that we have relative to being able to connect all aspects of printing under one provider.

Did you say in your remark, in your initial question, did you talk about an Eltron product?

No, the first question was about Eltron card and printer sales overseas versus domestic. The second question is simply about the PS2100.

Okay.

Yeah. Okay, thank you very much.

Your next question comes from Greg Halter with LJR Great Lakes review.

Hello, again. You guys have done a great job of putting out new products, and your R&D expense was up about 3.5 percent in dollars in 2002. What are the prospects for spending there, either higher or lower, or what can we look at in that regard?

Well, we - first of all, we don't - we're not going to break-out what the expected level of spending is in any of the operating areas of the business at this point. But I think it's fair to say, Greg, that the company is totally committed to a very robust product development program. And we're going to fund whatever requirements we see in that area.

The R&D spending, the engineering spending, is going to fluctuate significantly quarter-to-quarter. This is largely driven by project expenses related to new product development projects.

And consequently, it's, you know, the percentages are going to change and the dollar amounts are going up and down, and overall, it's going to be, you know, a highly variable number on a quarter-to-quarter basis. And the company spends what - in the range of $25m a year, I think, on overall product development expenditures. And that will continue.

Okay, thanks.

$29m.

$29m last year?

$29m, up 3.6 percent for the year, down for the quarter.

There are no further questions at this time. Are there any closing remarks?

No, I just want to thank everybody for their participation today. We're going to be having our conference call for first quarter earnings release tentatively scheduled at this point for April 17th. And so, I look forward to talking with you at that time. Thank you very much for your participation today.

Thank you for dialing in for today's conference call. You may now disconnect.