斑馬技術公司 (ZBRA) 2003 Q1 法說會逐字稿

Good morning and welcome to the Zebra Technologies first quarter earnings release conference call. Joining us from Zebra Technologies are Mr. Charles Whitchurch, CFO and Mr. Edward 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, Wendy, and good morning, everybody. Thank you for participating in today's conference call. As is our usual practice, we have some prepared remarks before we open the call up to your questions. I'll turn the call over to Ed.

Thank you, Randy. Good morning, everybody. Thank you for joining us today for Zebra Technologies 2003 first 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 2003 second 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 express 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 ending December 31, 2002. I'm sure you'll agree that the first quarter financial results were simply outstanding. They are the tangible result of an investment strategy articulated almost exactly two years ago. At that time, we stated that our financial strength gave us the opportunity to invest in the attractive markets for bar coding, despite economic weakness. While other companies were compelled to scale back investments, Zebra was able to focus on the long-term, to gain share and emerge as an even stronger company and a more formidable competitor. In 2001, we implemented this strategy. In 2002, our investments in new products, better geographic coverage, and a greater external focus generated increasingly positive results, market share gains, and a greater competitive advantage. In 2003, first quarter results reflect the continuing effects of this investment strategy. These investments, which are ongoing, also give us great optimism for further growth and stockholder value creation. Even within the current business environment, dominated by war and uncertain world economics, first quarter sales reached the upper end of our forecasted range. Both our bar code and plastic card business unit achieved healthy growth. All three international regions, Europe, Latin America, and Asia-Pacific, registered near 20% sales increases or better. North America sales increased from both the first and the fourth quarters of 2002, signaling the returning strength of this market and the increasing success of Zebra's vertical market focus and solution delivery orientation. Significantly improved gross margin and effective expense control amplified the positive effect of our sales performance. Operating profit margin exceeded 25%, as gross profit margin reached the third highest level in Zebra's history, and our associates did an outstanding job managing operating expenses. This improved profitability, produced earnings of four cents per share above the top end of our predicted range, and helped generate another quarter of strong, free cash flow. We continue to invest and effectively manage our operations to support sustainable long-term growth. Our efforts to bring innovative products and technologies to market are enabling us to serve more applications for more business improvement. The success of our expanded international coverage is evident, as Zebra representatives overseas are able to work effectively with our international channeled partners to develop more business from straightforward compliance-labeling applications to sophisticated business improvement solutions, incorporating mobile printing and wireless technologies. The external focus of our sales and marketing organization is engaging greater interest in solutions using Zebra products that deliver the business benefits associated with bar coding and other auto ID technologies.

Our investments to identify underpenetrated vertical markets positions Zebra to take advantage of additional high-growth opportunities. Product development is the foundation of Zebra's long-term success. Our decision to keep investing in this critical area throughout last year's downturn resulted in product introductions throughout 2002, and into the first quarter of this year. Nearly 21% of first quarter sales came from products introduced over the past 18 months. Among the products introduced this quarter was the QL420 mobile printer, a four inch version of our popular QL family featuring a flexible modular radio design. Interest in this model and the QL platform is very high as [inaubible] extends to an increasingly broad array of applications. Mobile and wireless systems remain an important component of Zebra's growth strategy. Increasingly, companies are turning to these systems to improve worker productivity and deliver better customer service. We are seeing more placements of in-store labeling applications, greater interest in Q-vesting, as well as new applications that support store delivery and secure wireless transaction processing. Also during this quarter, we started shipping the first units of our model 2844-Z desktop printer. This ZPL version of our four inch 2844 model leverages on the proven reliable design that made it a favorite for a wide array of applications, including small package delivery. The embedded Zebra programming language allows for seamless integration with networks already supporting other ZPL-based Zebra printers. In addition to small package delivery, we are finding interest in pharmacy and postal applications, as well as other areas that require ease of use and superior performance in a compact design. The first quarter also included shipments of Zebra's PS2122 transportable modular data collection and printing solution. Designed for in-store price marking, shelf labeling, and inventory tracking, this configurable system enhances worker productivity by supporting several tasks simultaneously with a full function turnable and two thermal printers. The PS2122 is an excellent example of Zebra's ability to leverage its technology-based to deliver a deliver a unique solution to meet customer requirements. With our investments in international expansion, more Zebra representatives are working with channel partners in underpenetrated countries and regions to generate higher sales and share gains. Just as the sales representatives put in place over the past two years had a positive impact on results in 2002, and the first quarter of 2003, we expect recent placements to have an increasingly positive effect on growth in future periods. During the first quarter, we increased staffing levels in some established locations to support current and anticipated business. New office openings expanded our international presence as well. During the quarter, we placed Zebra representatives in India. We also opened a new office in Monterey, Mexico, to serve the growing needs of manufacturers along the Mexican side of the U.S. border. In China, we recently hired sales representatives and are nearing the opening of as many as three offices to support burgeoning growth in China's major commercial regions. Our greater external focus and enhanced stability of our sales and marketing organizations to demonstrate the business benefits associated with implementing bar code labeling and specialty printing solutions are helping us win more business across a border set of applications. In addition, our progress in building an organization focused on vertical markets is positioning Zebra for further growth. During the quarter, Zebra added sales representatives to pursue business in life sciences, and developed stronger relationships with systems integrators, valuated resalers and other channel partners dedicated to various segments of this market. We also added resources to cover homeland security and related law enforcement, which are obvious areas for applications using bar coding, RFID and photo ID carat printing. Recently, the media paid considerable attention to the FDA's proposed mandate to bar code drugs at the unit of use level to reduce errors in drug delivery. Well prior to the FDA's announcement, we started working with major drug manufacturers on implementing bar coding systems to achieve this goal, as well as to track drugs through the supply chain more efficiently.

Our life sciences team is uncovering several areas of opportunity in hospital laboratories, retail pharmacies, and other areas within life sciences. Lastly, the GSA certification that Zebra obtained in the first quarter enables our team of sales specialists, along with our authorized channel partners to deliver bar coding and identification solutions to the federal government. We are currently pursuing several military and civilian programs to enhance logistics, asset tracking, and other vital services. Zebra's strategic position keeps getting better. The investments we are able to make because of our financial strength and leading market positions make us generally excited about Zebra's growth and prospects for further stockholder value creation. These investments extend our leadership position, and help us gain share in fundamentally attractive growth markets. Zebra remains exceptionally well-positioned to provide products that deliver real value for applications and identification and authentication, transaction processing, and routing and tracking. The first quarter was an excellent start to this year. Our work during the quarter building on the success we achieved in 2002 gives us great confidence about our future. I now want to turn the call over to Randy, who will provide details on the first quarter results and share our outlook for the second quarter of 2003.

Thank you, Ed, and good morning, everyone. As you can see from the press release issued this morning, we had an excellent quarter. Sales growth of 13.2%, a 4.4 percentage point increase in gross profit margin and lower than forecasted operating expenses, drove a 47% gain in net income and earnings per share four cents above the forecasted range. As I customarily do, I'm going to limit my remarks primarily to comparisons with the first quarter of last year, and I will conclude with comments on our guidance for the current quarter. So let's go over the sales results. Hardware sales in the quarter were $94,552,000, that was up 15.1%, and that comprises just under 76% of our total sales in the quarter. Supply sales were up 10.7% to $23,139,000, and were 18.6% of sales, and service and software was a little over $6 million, up 5.2%, and we're just under 5% of sales. That brings the total to $124,685,000, up 13.2%. Much like the second half of 2002, both plastic card and bar code products contributed to the growth of sales improvement led by the sale of bar code printers, indicating continuing broad strength of business, all bar code printer categories demonstrated double digit sales growth. Hardware sales remain strong. They were up $12.4 million from a year ago, and had only a modest decline from the sequentially stronger fourth quarter preceding it. Hardware sales accounted for 85% of the comparable quarterly sales growth. Supply sales also remain robust, having the second best quarter sales -- sales quarter ever, just below the record achieved in the fourth quarter of last year. Geographically, our sales breakdown is as follows. We had $57,127,000 of sales from international sales regions, which was up a whopping 20.5% over a year ago, and comprised 44.2% of our total. North America comprised the rest, which would be $69,558,000, which was up 7.9%, and comprised 55.8% of our total sales. Double digit sales increases in Europe, Latin America, and Asia-Pacific drove our international sales growth. Sales in the China were notably strong. Actually, they were over double what they were a year ago. Particularly encouraging, however, was the growth in North American sales. Sales here increased 7.9% from a year ago, but also increased on a sequential basis from the fourth quarter. We remain very encouraged by the positive tone of business across our markets, including North America. The continuing strength of Sterling and the Euro versus the dollar clearly benefited sales in the quarter. In the first quarter foreign currency translation added about $5.6 million to sales, compared to last year, and contributed approximately 5.1 percentage points to our growth rate in the quarter. I might add here at this point that the Euro and the pound were probably at their weakest at this time last year, and of course, they've strengthened considerably over the past 12 months, leading to the $5.6 million improvement in our sales results that came about because of those changes. Perhaps the biggest positive surprise for the first quarter was the sharp improvement we had in gross profit margin. At 51.6%, gross margin was among the highest ever achieved by Zebra, an increase from the 47.2% last year, resulting in a 23.7% growth in gross profit. Consistent with our experience in 2002, the major contributors to margin improvement were higher capacity utilization, foreign exchange rates and product cost reductions. You'll recall that during our February conference call, we discussed our expectation for a sequential decline in operating expenses. This decline is exactly what happened. For the first quarter operating expenses were $32.7 million, an increase of $231,000 or less than 1% from a year ago, but down $1.4 million from the fourth quarter. The largest decreases on a sequential basis were in consulting and legal fees, market development funds, bonuses and commissions. As a result, operating income increased to $31.6 million, up 62% from a year ago, with operating margin of 25.4%. Investment income was $2.4 million, a return of 2.8% on beginning balances. This income, combined with a 35% tax provision, delivered earnings of 70 cents a share, an increase of 47% over last year. To say that we are very satisfied with this result would be a gross understatement. Free cash flow for the quarter was $24.5 million, up significantly, actually up over 21% from last year. Free cash flow, which we view as a key financial indicator for our business, is calculated as cash from operations, which includes changes in working capital, minus investment and fixed assets. Total cash and investment balances now stand at just under $376 million. During the quarter, DSO increased to 57 days from 51, entirely because of the timing difference in shipments in March versus December. Similarly, inventory returns decreased from 6.7 to 6. This change was due to receipt patterns of raw materials at one of our facilities. I expect both DSO and inventory returns to improve for the second quarter. We continue to be very optimistic about Zebra's prospects in 2003 and beyond. We expect that second quarter sales will be in the range of $123 million to $128 million, and earnings in the range of 64 to 69 cents a share. This implies some decrease in gross margin to a range of 50.5% to 51.5% and some increase in operating expenses to between $34 million and $35 million. We're lowering gross margins because of the inherent difficulty of predicting sales mix and the inherent volatility of the foreign exchange markets. Operating expenses are projected to increase because of our commitment to continue investments and the growth of our business and the confidence we have in our business model. This concludes our formal remarks. Thank you very much for your attention. And we would now be happen TO answer any questions you might have about the quarter. Ed?

Thanks, Randy.

At this time, in order to ask a question, please press star and then the number one on your keypad. We'll pause for a moment to compile the Q&A roster. Your first question comes from Jeff Rosenberg with William Blair.

Good morning, congratulations.

Thank you.

Good morning, Jeff.

A couple quick, questions. Randy, if we look at the gross margin improvement quarter on quarter, I guess it seems like utilization and currency, would, I don't know, it seems like there's more than would naturally be there, maybe a little bit of color there, and I guess my specific question in that regard is, how much do we think that mix plays, in other words, the variability of profitability amongst the different product lines, and was that a major factor?

No, it wasn't. 1.9 points was contributed by foreign exchange. 1.3 points was contributed by product cost reductions and the balance was contributed by capacity utilization.

And is that a quarter on quarter comment?

Year over year. Year over year, yes.

Okay, great, and then the second question, if I could. When you guys continue to Ben trait some of the vertical applications, it seems like some of them, and you talked about reseller partners and software developers, things like that. How about on the hardware side, when some of the solutions require data collection. Can you talk about whether or not you've been developing partnerships or relationships there, or how that strategy sort of plays out in terms of providing a complete solution?

I'll let John see if he can respond to that.

Sure. It's a combination of utilizing our existing partner solution set, and expanding our ability to collect data with the PS2122, for instance. So it is a combination of the two functions, and we are continually looking for new products that we can add to our solution set. That's one of the critical things we see going forward is providing better solutions for both our partners and our end users.

Okay, thanks.

Your next question comes from Peter Barry with Bear Stearns.

Good morning, gentlemen.

Good morning.

I just wanted to add my congratulations as well. A standout quarter.

Thank you.

Ed, can you provide us, or maybe remind us, maybe in descending order of importance what your key vertical markets are?

Well, what I'll do is tell you some of the markets that we participate in, and you know, I won't rank them in any particular way.

Some markets that some folks may not be aware of, one is the area of small parcel delivery. We, of course , have mentioned several times in our conference calls over the years about UPS and FEDEX and other people like that, but it is an area that we do spend some time on. The rental car companies, when you return your rental car returns and get a receipt off of a portable printer, that's an application where we spend some amount of energy in that vertical market. In retailing, in the area of Q-busting , shelf labeling,product identification, those are areas we've been spending a considerable amount of time.

Within the manufacturing sector, important markets to us would be the electronics manufacturing industries, as well as the automobile manufacturing industries. In the service sectors, we would consider health care to be an important area for us, and also important for Zebra historically has been the areas of warehousing and distribution. We have done some business of late in the hospitality sector, where, as you know, that area is under a great deal of pressure , due to the reduction in travel all over the country. So that gives you, I think, an idea of some of the places, at least, that we concentrate resources on a product or on a market and sector basis.

Although, clearly, the number will vary considerably from vertical to vertical. Is it still fair to say that domestically, but certainly internationally, the level of penetration is still relatively low?

For bar coding?

For bar code printing, particularly.

You know, the, certainly, you know , you see our sales going up and you see the sales of other people within the sector going up. So yes , there is still considerable opportunity to sell these products, and the trends are, or the demand, let's say , is stronger outside the United States than it is within the United States, and of course, it's been a key element of Zebra's strategy for a long period of time to invest really more outside the United States than inside the United States.

Can we assume that the international market is largely a low-end printer market, and how would the margins compare international to domestic?

Actually, you know, we did a bit of recent analysis of that, and the answer is they vary. And you know, there's a lot of international business we get as a result of having been a supplier to various companies within the United States. This happens a lot in the manufacturing sector, and so you've got companies that - particularly in electronics - which I mentioned is one of the important verticals for us. Manufacturing companies moving either their manufacturing either to Mexico or to China, or other places in Southeast Asia.

We have benefited considerably from those movements, and being successful in terms of being a supplier to those companies within the United States. So there's some of that, and the other place that I would say is interesting internationally for us is, in the retailing sector, the United States is -- there's no surprise to, I think, to anybody -- is a much more commercial country than any other country in the world.

We do a great deal more of promotion, discounting and so on and so there's a lot of sophistication that's been developed within the retail sector.

But we are finding considerable interest for some of our products in the retail sector in

Europe, in particular. I wouldn't say that much in Asia-Pacific.

A little bit in Latin America, but mostly in Europe. Particularly, you know, western Europe.

And on a constant currency basis, are margins comparable international to domestic?

Randy, could you comment?

Yeah, they are, actually, Peter. They are comparable. I mean, it's clearly, this is an interesting question, but frankly, we get good prices for our products around the world, and of course, our manufacturing costs are dollar denominated, vastly dollar-denominated. Even when you factor in the freight and customs, duties and things, you end up getting the same operating -- actually, you get slightly better operating margins offshore because our operating expenses as a percentage of sales tend to be somewhat lower outside the U.S. because our operating infrastructure is domestic.

One final question from me, Randy. Given your second quarter guidance, are you allowing for a somewhat faster rate of domestic growth in that calculation, or will the mix of growth be essentially the same as it's been for the last two quarters?

You know, I can't comment on that. I will fundamentally say that our view is that we see a pattern of sequential sales increasing, sequentially increasing sales. Margins, I would expect, are going to remain very firm. I mean, I did mention the slight anticipation of some slight decline in gross margin, but that's really fundamentally driven by some uncertainties that relate to exchange rates and some of the sales mix issues that are always going to have some marginal effect on your profitability.

But you're not building any expectation of accelerating domestic growth into your second quarter expectations?

Not explicitly, no.

Thank you. Well done.

Your next question comes from Chris Quilty of Raymond James.

Good morning, gentlemen. Randy, a couple of quick questions. Did you throw out a CAPEX number projected for this year?

I did not.

Any changes to the status quo?

No, not really. There's no anticipation of big CAPEX expenditures at all.

Nothing for --.

Steady as she goes, really.

Nothing in terms of overseas?

No.

And can you remind us what you're doing on the cash management side? You're getting better returns than my money market accounts.

Well, send us your money. We'll invest it for you. Our fees are low.

I'm not giving you my money!

Actually, it's a portfolio of -- it's a corporate cash, plain vanilla corporate cash flow that's heavily weighted toward tax exemptions at this stage in the cycle.

How about flipping from there on other uses of the money on the acquisition front, anything becoming more likely in the near term, anything changing in terms of strategy, things that would make sense so far?

I really have nothing to announce relative to a pending deal, and nothing to say relative to a change in strategy.

On the end markets, have you seen -- I guess this would probably be inclined more towards the portable printer business, but any sort of an uptick in the retailing sector or large deal activity that might happen in any of the verticals, or did you receive in the current quarter any, what you would call sizeable deals, or is it still pretty much small replacement orders?

I would say generally speaking, our retail sector is still under pressure.

Okay. And on the desktop units on the bar code printing side, anything -- any sort of a shift in terms of demand of lower versus higher end unit, the performance units?

As has been the trend for quite some time. There is more demand for mid range products, and low-end products on a unit basis than there is at high-end products. The good news for us is, over the period of years, we have managed to dramatically improve our margins on products in those ranges, as contrasted with the high-end.

Okay , and on the --.

It really is an opportunity to spread the technology more broadly on a global basis through mid-range and lower end products.

Is there any kind of -- so you're heavily weighted on the lower, mid-range internationally relative to the high-end?

I didn't say that, nor am I going to say that.

Okay. You want to give us your percentage breakdowns?

Next caller.

Okay, I'll give up there .

You have a follow-up question from Peter Barry with Bear Stearns.

Ed, I couldn't help but notice over the last two quarters that the momentum in supply revenues has clearly begun to accelerate. Is that something that accompanies your vertical market focus, or is there some other dynamic at work, and is this a sustainable level of sales volume?

Okay , I'll take a stab at that, and one is, we are paying more attention to it. Number two, we have gone ahead and invested more in certain marketing strategies than we had in the past, and number three, is we've had a change of leadership in that part of our business. So I think all of those things contribute to the improvement.

You have long viewed that as something of a commodity-type business. Is your attitude changing as your vertical market orientation --.

I'm sorry that I didn't respond to that. You even guided me in that direction. Yes, absolutely. We have a view that particular vertical markets, the printers and the supplies, are well tied together, and in those cases, the supplies are generally not commodities, and so the opportunity for better margins and for retention of the business is improved. So yes, more attention is being focused on that in the vertical market strategy.

And the margins there can be expected to improve along with that?

That's right. They are better margins.

Looking at international, again, for just a second, if we may, is the structure as defined perhaps by vertical markets terribly different from that domestically, and could you give us a sense of what's driving you know, clearly more geography helps, but there's more to it than that, it seems, in terms of vertical opportunities. Do they differ from domestic, and if so, might you point this in what direction?

I don't want to do too much pointing , because there's too many competitors that are listening to us. However, there is definitely a difference in the vertical markets, in North America. Actually, I would say each of the four regions, if you were to dissect the vertical markets we sell to, you would find quite a difference. I did speak before to one of those, and that happens to be the retail sector.

The utilization of our technology, of bar coding technology, identification technology in general is different in the United States, in particular, than it is in most of the rest of the world, and you can see that in the numbers of, you know, other people that actually have bigger positions in that space than we do.

I think it comes about because of the basic sophistication and marketing in terms of dealing with inventory turns, merchandising concepts that are applied in the United States versus other places in the world. You know, you just don't find , for example, when you go into Europe, the kind of discounting and the advertising of price that we find in the United States. It's substantially different. You can go into five stores and find the products at exactly the same price and the promotional efforts that have gone into selling them nowhere near as sophisticated as what happens in the United States .

So we can assume, perhaps by your comments, that a poor environment in retailing domestically doesn't necessarily mean that you're doing similarly poorly outside the United States.

Actually, contrary to that, we have had an opportunity to do some penetration in retail outside the United States.

Just one final question from me. Charles Whitchurch, looking at your operating margins, I mean, just a knockout achievement in the first quarter, is there any reason to assume, given your guidance for the second quarter, et cetera , that somewhere in this 25 to maybe 26% range could very well be your average for the full year?

Well, again , you'd have to do the arithmetic, Peter. I did give you guidance that indicated a sequential increase in operating expenses, because we have to -- we're continuing to make investments in the key areas of product development, vertical marketing, and global expansion that we have focused on for the last eight quarters. So that's going to result in some increase in expenses. We were fortunate this quarter to have a really stunning result in terms of improvement in gross margins. When you do the math, you'll see that the operating margins will probably be -- my sense is they'll probably be in the range of 24%, 25%, thereabouts, but the guidance I gave you should be sufficient to clarify that.

I'm sure. Thanks again , and keep up the good work.

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

Ed, you talked about the FDA proposals and the initiatives that you had that really had preceded that. Can you give us a sense of how health care -- what kind of impact you're seeing out of health care today, and, given the FDA proposal that's out there, what kind of inflection point might you expect, and how does that improve the overall market opportunity?

My, there's so much detail in that question , I have to turn that over to John.

Thank you, Ed. You have to understand that the FDA and the health care markets are in the very early stages. We're doing a lot of beta site testing today on various applications within the health care market, and we don't want to comment on those relative to the fact that, you know, the competitors are on line here, and we are making headway in certain areas of FDA applications, number one, and number two, our products really fit well with the requirements of the FDA, and also for productivity improvements, as well as patient care, that we're looking at both sides of the equation, and we've integrated or if I detag with one of our products that really enhances our ability to provide significant increases in productivity within a hospital, as well as significant, reducing significantly the errors that are made with patient care. So we're looking at two things in health care, and that's from the point of manufacturer to point of use right through the hospital operation.

So I think overall, we're in a good position to gain additional market share, and to grow with that market segment.

John, could you give us a sense as to how the market opportunity might change as that FDA proposal moves forward?

Yes, I think most of the participants are already starting to change ahead of the FDA proposal. Some of them are adding even more requirements than the FDA has. They're trying to reduce their risk. So I think, you know, overall, on the life sciences segment of the market, we're going to see significant applications that fit our product type in order to track all levels of medication, narcotics from the point of origin of the manufacturer to the end user. As we look at it, we're really good in logistics. That's where our bread and butter has been for many, many years.

We see a step and repeat here in the FDA market. It's really leveraging our expertise and applying new technologies , as we said earlier in Ed's comments to another question, relative to investing in new products that are more versatile, that provide more of a solution to the customer base. I think overall, we're well-positioned to take advantage of this growth and we're working closely with all levels of the life sciences market to work with the early innovators and to follow that market growth.

Okay, great. That's helpful, and just turning over to the mobile and wireless space, you guys continue to get further into that segment. You got some new products in there. Can you give us a sense as to what the risk is that you're going to start bumping up heads with Symbol and start to compete with them , rather than being a little bit more cooperative as you've been in the past?

You're asking about the risk of us becoming more competitive with Symbol?

Correct.

I don't know if I have much to say about that. Symbol buys our products. How we collaborate with them in terms of a variety of applications, domestic, as well as outside the United States, I don't have an awful lot to say about that. I mean, well, maybe one point would be the amount of revenue that Symbol is deriving from wireless technology versus that that Zebra is deriving is, you know, night and day, substantially less than they are, their company is built around wireless technology, where ours is not built around that.

But so, just from a lot of the new products that you're developing, you don't see that as a real risk to you guys?

No, I think that there's certain products that we've developed that are attractive to Symbol, and I don't sense out of Symbol that their focus is, you know, going to be on printing solutions. I think that they use printers sometimes, and we collaborate frequently in that deployment.

Okay, great. Thank you.

All right.

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

Good morning, guys. Phenomenal quarter. I wonder if you could comment on the opportunity in RFID, you know, from the size of the market and the growth opportunities that you see there?

Well, we think that RFID is a great market or let's say great technology. I wouldn't yet say that it's a great market. And we have developed a couple of products that are well-suited, designed specifically for RFID applications. The problem with RFID is that there are a number of obstacles that have inhibited, you know, its adoption. Part of it is a lack of understanding, I might comment on that for what it does and what it doesn't do. There was an interesting announcement, a couple of announcements, made by Bendleton(ph), the high-end women's garment market provider. And they announced earlier some number of months ago that they were going to utilize RFID tags in their products , and in essence, utilize that for the supply chain and be able to track those products through the supply chain, and there were -- there have been some groups in the United States, and in particular, privacy groups and so on that have, you know, really objected to the utilization of this technology, and they've objected to it on the based that people walk out of a Bendleton store , buy a Bendleton product and we can go ahead and track their whereabouts all over the world, where they're going and what they're wearing, even.

Now, this is a farce. I mean, you know, this is absolutely absurd. However, this is the kind of arguments that are being raised. The technology has no ability -- unless you want to go ahead and put a human being a few feet behind the person who is wearing the sweater, and so that you can go ahead and scan it, you're going to have no ability to track their garments , who the people are or whatever.

But yet, they're communicating that kind of information to the market at large, putting fear into the consumer, and as a result, quite interestingly enough, Bendleton, I think it was yesterday or the day before, announced that they were going to rethink what it is they're doing, and slow down the deployment of the technology, and I think you'll find probably you know, they'll evaluate whether or not it's worth dealing with these kinds of groups who can have a negative impact in terms of them selling their products. So that's an example of an obstacle that comes way out of left field, but an obstacle in terms of utilizing the technology.

Probably the other major one are standards, and particularly cross-border standards that are needed in order to apply the technology in a lot of places where other technologies might be applied today. So that's another real big usage, different countries of the world have different band breakouts in terms of radio communications, and they're in conflict with one another.

And frequently, the only systems that can be applied are closed systems within a corporation, or within a corporation's own data systems. So RFID is really new technology and I do think it can provide a number of consumer benefits, but it does have some obstacles it has to overcome and I think over time, it will overcome them.

Okay, great, thank you.

Sure.

Your next question comes from Bob Fetch of Lord Abbott.

Good morning , gentlemen. I haven't heard any discussion on plastic cards. Can you talk about how much of the business they represented and did they grow as fast or in line with the overall quarter?

We don't generally -- generally I think would be an understatement. We never break out the sales of the plastic card business versus or best plastic card printers versus bar code printers, and we, however, have made comments in the past that generally speaking our plastic card business is growing faster than that of the bar code business.

Okay, so that remained true in the current period?

Yes. Well, no, I didn't say that it was true in the current period. I said just generally, that is the case. There are fluctuations quarter to quarter in terms of what happens, but when you look at plastic card on an annualized basis versus bar coding, I think that probably every annual period probably has exceeded it -- I don't have the numbers in front of me, but I would say that is the case.

Understood. So on a going-forward basis, you would expect that off the small revenue base to remain true?

Yes, we do anticipate this business will continue to be a good business, and particularly with the higher or the increased emphasis on security and the benefits that cards can provide in a security environment, all different kinds of cards now, and beta test programs that are under way for utilization of cards. I fear, however, we're all going to have to get very thick wallets because there's going to be a lot of these different cards that are floating around inside of them.

Understood. That's why if we just have a national ID card it would probably be helpful.

Don't hold your breath. People are listening.

Exactly. In regards to your vertical markets, is the parcel delivery, is that one of your -- is that either the largest or one of your top three largest markets?

Small parcel delivery is an important market for us, and I can't say that it is the largest market for us but it's definitely an important market, and we have commented on past calls that UPS is an important customer for us, and you know, they are, as well as other players, within that marketplace. So our products have a lot of really nice attributes that make them applicable to small parcel delivery, and in many different segments of small parcel delivery we find our products.

You might find them in the warehouse, where our bigger, heavy-duty products are used. You might find them with a carrier, a mobile deliverer utilizing portable printing devices. You might find them in shipping rooms, maybe desktop printers being used to make the labels for products that are being picked up by the various carriers. We do deal with a lot of different applications in small parcel delivery, and it is an important segment of our business. Yes, I know your exposure to that became more important after you made acquisition.

Yes, that's right.

The business you acquired at times had lumpy sales cycles based on the buying patterns of principal customers. It looks like one of those principal customers may be upgrading here over the next, say annual period or so. Are you expecting that to benefit the business?

Well, sure, if they upgrade, I certainly would expect it to benefit the business, but you were right about the lumpiness of the business. It was really, for Eltron, that was a pretty serious problem, being a public company. We still see those same variations. The difference is it's in a corporation of a much larger size. So we have had some quarters, I think, where we've commented on how much some of that business moves around, but it's much less material than it was for Eltron.

You mentioned that China doubled for you. What revenue run rate were they at in the quarter?

We don't break the specifics out. I just told you the facts, that is that the sales were actually up more than double from what they were a year ago, and fundamentally, Greg, this is a validation of Zebra's long-term strategy for global expansion, and that is by putting Zebra sales representatives in national markets, they get much closer to the channel partners.

They're able to partner with them, calling on accounts and providing technical support and service, and essentially, helping them to build the business, and it's been a very, very effective means for us to grow our business. We're following that model going forward. We see China as a terrific opportunity. I think Ed mentioned that we're talking about putting as many as three sales offices in China during 2003. We're very, very excited about our opportunities there.

So continue to grow at a meaningful highway for awhile?

I hope so.

That's our belief, that we will indeed grow the business China and that's going to be a significant deal for us.

Outside of China is eastern Europe the next biggest?

We mentioned that in the past. Eastern Europe's been a hot market for us. Again, it relates to western European companies putting up factories in eastern Europe to build product, take advantage of the low labor rates, and build these products primarily for export, and when you build a new factory, you put in good technology. Bar coding is one of the good technologies we'd love to see them put in, and they're doing a lot of it. So it's a great opportunity for us.

I'm just curious, since we're talking geographies, is Russia anywhere in site?

We actually have a sales representative in Moscow.

Um-hum.

And you generated another 20 million in cash in the quarter, ex-acquisition.

24.2 million.

He's very sensitive.

At a minimum, we should see a two in terms of incremental cash in front of any number in the next few quarters?

Well, you know, actually, the second quarter is probably going to be a low point in cash generation, because we have Uncle Sam dumping into our wallet two different times during the quarter, once in April and once in June, so he gets his share, but we will generate a lot of cash in 2003.

We have good margins, low capital requirements. We've talked about this for a long time, and you know, I call it my high class problems. What do you do with all of the cash, right? You guys haven't asked that yet

High class problem. Lastly, I noticed your capitalization's about $2 billion. My guess is the company might be finally in the process of being discovered from an investor's relations standpoint. Are you finding that more people are curious about who you are and what do you?

Sure. No, frankly, we have not. I mean, seen an uptick , necessarily. We've had a lot of interest actually over the last couple of years. We've had a pretty proactive communications program. We've gotten out and made investment marketing trips to a variety of investment centers and talked to a lot of people during the year. We participate in four or five conferences, et cetera. So it's interesting.

Thank you.

You're welcome.

Your next question comes from Hussein Kareem of Pacific Edge.

Given the heavy calendar of calls today, we're going to limit the call to this question, plus one other. Okay?

Just a question on 10% customers. Were there any in the quarter?

Yes, we have one 10% customer and that is Scan Source. I believe they're approximately 13%.

I know you gave the foreign exchange impact year over year. Do you mind giving it quarter-over-quarter as well?

There was approximately $1.7 million of sequential sales resulted from exchange rate gains, if you will, translation changes. As you know, the Euro and pounds appreciated significantly against the dollar since January 1st.

Okay, and were there any costs associated with that on the gross margin line?

Oh, sure. There were some.

What were they?

I can't give that you figure right now. But the gross margin contribution was approximately 1.7, 1.8 points in the quarter, sequential.

And then finally, one of the things you mentioned last quarter was a certification in China. That came in late in the quarter and you say you saw some pent up demand towards the end of the December quarter. Was that pretty much what you saw in the March quarter and so doubling of sales in China year over year, was that part of the reason as well?

No, that wasn't the reason. Certainly, the certification was an important element in selling in China, obviously. The engine for growth in China is our market strategy in China of putting sales representatives in the market, developing channel relationships and selling the product to the end users.

And do you mind just giving us a feel of what the western European market looks like? I guess is it similar to the U.S. in terms of kind of lackluster -- it's stable, but not as much growth as you're seeing in the far east?

That's an accurate characterization.

Okay, thank you.

Your next question comes from Matthew Weatherby with Weatherby.

This is actually George Day here. Congratulations on a good quarter. One question is regarding SARS, which has caused the worldwide kind of panic or distress. My question, is whether that has impacted the business so far.

I don't know whether it affected the business but it sure did affect my business trip. I was scheduled to leave in early March to go to China, and I'm not going to make that trip until the SARS situation clears up. So it probably does have an effect. There's some people I won't see - at least I won't see as soon as I was hoping to see them. But I couldn't really, you know, quantify it in any way how it affects it.

So far you haven't seen an impact yet?

No measurable impact.

Nothing I could say we could measure.

Thanks a lot.

You're welcome.

Wendy, this will be the end of our call at this point.

We'd like to thank everybody for participating in today's conference call and just as a reminder, our next quarterly conference call is scheduled for July 23rd. We look forward to hearing from you at that time. Thank you and good day.