斑馬技術公司 (ZBRA) 2003 Q2 法說會逐字稿

Good morning, and welcome to the Zebra Technologies second-quarter earnings release conference call. Joining us from Zebra Technologies are Mr. Charles Whitchurch, CFO, and Mr. Ed Kaplan, CEO of Zebra Technologies. All lines will be in a listen-only mode until after today's presentation. Instructions will be given at that time in order to ask a question. At the request of Zebra Technologies, this conference call is being tape recorded. Should anyone have any objections, please disconnect at this time.

At this time, I would like to introduce Mr. Whitchurch, CFO of Zebra Technologies.

Thank you. Good morning, everybody, and welcome to Zebra's second-quarter conference call. As is our normal practice, we have some prepared remarks to make before opening the call to your questions. I will now turn the call over to Ed Kaplan, who will make some prepared remarks.

Good morning. We're delighted that you can join us to discuss Zebra's excellent results for the second quarter of 2003. Certain statements we will make at this call relate to future events or circumstances, and therefore will be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. In particular, any statements we make regarding our financial forecast for the 2003 third quarter and expectations about trends in the Company's business will be forward-looking statements. Forward-looking statements involve risks, uncertainties and other factors that could cause Zebra's actual results to differ materially from those expressed 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 Securities and Exchange Commission. In particular, we direct your attention to the Company's Form 10-K for the year ending December 31, 2002.

With the second quarter, Zebra has now turned in five consecutive year-over-year quarters of higher sales and earnings. We had record international sales, record card sales, record supply sales and the fifth consecutive quarter of sequential growth in North American sales. From the trough in the first quarter of 2002, sales were up 18 percent to the second-highest level in the Company's history, giving us record sales for the first half of the year. We maintained strong margins, had another superb quarter in cash generation and finished the period with more than 400 million in cash and investments. We achieved these results against the backdrop of ongoing economic challenges. As we discussed so many times, our performance is due to a consistent investment strategy in geographic expansion, product development and delivering high-growth applications to vertical markets. It is also a testament to the strength of Zebra's business across several dimensions, geographic diversification, product depth and breadth, and a broad and expanding number of end-market using Zebra's products. In addition, all of these factors give us great confidence for further growth, both in the coming quarters and over the longer period. The action taken by the Board of Directors last week declaring a 3-for-2 stock split reflects this confidence and our mission of building stockholders value.

At this year's halfway mark, let's review some of the important events that contributed to the second-quarter and first-half results, and position Zebra for further growth. Undoubtedly, the success of our international business, which was up 16.5 percent for the second quarter and 18.4 percent for the year to date, is a highlight. International sales accounted for fully 46 percent of total sales for the second quarter, and now have increased on a sequential basis for 9 of the last 10 quarters. To capture the growth opportunities in Eastern Europe, Latin America and Asia/Pacific, Zebra has added more than 30 people to our sales organization since the third quarter of 2002. Virtually all of these associates are front-line people with demand creation responsibilities. They are generating additional business by working with channel partners in high-growth geographic territories such as China, Mexico, Brazil and Eastern Europe. They are also reinforcing coverage by providing additional sales support and application engineering in established regions. Still other application specialists are working with key accounts in areas where previously we did not have sales reach or visibility.

It generally takes 18 months to two years for an account manager in a new assignment to become fully productive. So we can expect an increasingly positive impact from the substantial investment in personnel, as we move through the second half of the year. Importantly, we already saw the positive effect of our new sales representatives, especially in China. Even though SARS prevented local involvement from other Zebra sales associates outside the region, these new members of the China team got up to speed on Zebra products and applications through new remote sales training tools, and exceeded their sales objectives for the quarter and year to date. Most recently, we strengthened the leadership of our international operations with the addition of a new managing director in the European region.

From the beginning, new products have been the life source of Zebra. By delivering innovative products that have the versatility, reliability and durability to meet customers' needs, Zebra continues to enhance its brand equity, extend its market leadership (technical difficulty). The second quarter was no exception. About 25 percent of printer sales from products that were introduced over the prior 18 months, reaching the highest level in five quarters. We had several product successes in the second quarter, many of which led to significant orders to be filled in the third and fourth quarters of this year. Continuing our leadership in high-performance tabletop printers, we had the first shipments of our 110XiIII+ model during the second quarter, as well as strong shipments of the 310i intelligent card printer. Shipments of our four-inch QL420 mobile printer ramped up nicely since its first-quarter introduction for warehousing and similar supply-chain applications. Our newer ZPL-based desktop models are also meeting with excellent market acceptance, with the extension of the ZPL programming language across all bar-code printer lines to offer the broadest range of compatible printers.

Shortly after the end of the second quarter, we completed the mobile QL family, with the introduction of the two-inch QL220. The outlook for the entire mobile line is very bright, and the backlog of orders going into the third quarter was high. During the third quarter, we began shipping the largest single order for the QL320, which will be deployed in a major new application using 802.11b wireless technology to assist retail delivery, and rack jobbers to complete in-store transactions. We will also begin shipping against a multi-year, multimillion dollar agreement to supply a major retailer with several thousand units of our PS2122 transportable printing solution to outfit all stores in the chain for item marking and shelf label applications.

One of the questions investors regularly ask is, how has Zebra been so successful through these challenging times? Certainly, the investments I just described, and our ability to use our substantial financial strength to make them, are some of the reasons. Another important factor has been our march toward organizing the Company to help customers solve business problems. Unquestionably, we are winning more business because of this solutions orientation and our goal to deliver high-growth applications to vertical markets. Since the latter half of 2001, we worked hard at training our organization and building an infrastructure to support business improvement and specialty printing applications, driving more direct interaction with the end user and creating demand for our channel. We also broadened our portfolio of strategic alliances with well-known software developers and system integrators. The result has been better visibility into large and varied project opportunities, and our ability to bring these opportunities to a successful conclusion. As an example, an alliance with one software partner has generated at least $20 million in sales over a two-year period. Joint business development with another hardware manufacturer quickly yielded an order for 600 printers. The success of this solution orientation is also helping our bar partners strengthen their businesses, as well. We place great value in our relationship with our channel partners. Our recently introduced new channel program, called Partners First, is designed to strengthen these ties even more, as well as to help us reach new buyers, integrators and software developers who can partner with us in penetrating targeted vertical markets with a strong business improvement application and value proposition. We have identified in catalog the hundreds of applications under which our products are sold. We are now replicating reference solutions in and across vertical markets. These solutions include queue-busting, on-demand shelf labeling, ticketing for traffic violations, stamp and label printing for postal applications and visitor access for multitenant office buildings. We also built vertical market teams. Our life sciences group is focused on market and strategy development, alliance development and sales. We organized this team well before the FDA announced its proposal to bar-code drugs at the unit of use level in the first quarter of this year. Because we had already begun working on this and other auto-ID Healthcare opportunities, Zebra is very well-positioned to capitalize on them as they materialize. More immediately, sales are already benefiting from sales representatives and marketing efforts targeting the government sector, law enforcement and retail.

As you can see, Zebra's future is bright, indeed. The diversity of our business and the ongoing strategic investments we are making helped sustain strong sales and earnings growth in the second quarter and the first half of the year. These investments also created an infrastructure of people and culture that contributed to the positive momentum building for the third quarter and beyond. At no time in the Company's history has this management team been as excited or confident about Zebra's growth prospects. Our market leadership, global reach, product portfolio and fiscal discipline create sustainable and improving competitive advantages.

Now, I want to turn the call over to Randy, who will review details on second-quarter results and share our outlook for the third quarter of 2003. Afterward, I'll return and provide some perspective on the latest developments in radio frequency identification, as well as other matters.

Thank you, Ed, and good morning, everyone. As you can see from the press release issued this morning, Zebra had another excellent quarter. 12 percent sales growth, a 3.2 percentage point increase in gross profit margin, operating expenses within expectations and higher investment income drove a 35 percent gain in net income. I think it's important to recognize that sales and earnings exceeded the upper end of the guidance we provided in our previous conference call. As I customarily do, I'm going to limit my remarks primarily to comparisons with the second quarter of last year, and I will conclude with comments and our guidance for the current quarter.

With that in mind, let's go over the sales results. Hardware sales were $98,565,000, 12.9 percent up from last year, and now comprise just under 76 percent of our total sales in the quarter. Supply sales were 24.2 million, a growth rate of 11.5 percent, and supplies are now 18.6 percent of total sales. Severs and software was a little over $6 million, a percentage change of 1.4 percent over last year, and just under 5 percent of total sales. Both bar-code and our card division had excellent growth in the quarter, increasing revenues on both a comparable and sequential basis. Card imaging set a new quarterly sales record with particularly strong results in North America. We had great reception for our 110XiII printer, as well as the QL series of mobile printer products, which helped boost hardware sales in the quarter. These products are the result of continued investment in product development throughout the recent economic downturn that are now helping Zebra gain share and penetrate new high-growth applications worldwide.

By geography, our international sales were up to $59,750,000, a percentage increase of 16.5 percent, and international sales are now fully 46 percent of our total sales worldwide. North American sales of $70.1 million grew by 8.4 percent, and make up the other 54 percent of our total sales. Double-digit increases in Europe and Asia/Pacific drove international sales growth of 16.5 percent. As Ed mentioned, sales into China were notable because of the quick ramp-up of our new sales reps in China prior to the SARS outbreak. Also encouraging was growth in North American sales, which were up 8.4 percent on a comparable basis, and also up from the first quarter. The positive tone of business, both from a geographic and product point of view, fuels our optimism going into the second half of the year. The continuing strength of sterling and the Euro versus the dollar clearly benefited sales in the second quarter. In the second quarter, foreign currency translation added about $7.2 million to sales compared with last year. And we had another quarter of strong gross profit margin. At 51.3 percent, gross margin was up 3.2 percentage points from the second quarter of last year, and was roughly comparable to the level achieved in the first quarter, and resulted in 19.4 percent growth in gross profit. This quarter was very consistent with our experience for the prior three quarters, with the major contributors to margin improvement being higher capacity utilization, foreign exchange rates and product cost reductions. The slight decline in gross margin from the first quarter was primarily due to increased inventory reserves related to the end of life on selected printer models.

Operating expenses of $34.9 million were within the range we discussed with you in the first-quarter conference call. Up 13.4 percent for the quarter, the most significant increases came from growth in selling and marketing expenses, which were up 23.8 percent in the quarter. We added additional sales representation in Brazil, Mexico, China and other high-growth markets over the last year. We also had increased spending in advertising, market development fund and legal fees, principally related to patent work. Going forward, we expect relatively flat operating expenses at around the current level for the balance of the year.

Investment income was $3 million, a return of 3.2 percent on beginning balances and a $1.8 million increase from a year ago. This income, combined with a 35 percent tax provision rate, delivered earnings of 70 cents a share, up 33 percent over last year. Free cash flow for the quarter was $15.2, and total investment balances now stand at just over $400 million.

We remain very optimistic about Zebra's prospects in 2003 and beyond. We expect that third-quarter sales will be in the range of $129 to $135 million, and earnings in the range of 68 to 73 cents a share. This implies gross margin in a range of 50.7 to 51.2 percent, and operating expenses in the range of $34 to $36 million.

I will now turn the call back to Ed before opening the call to your questions.

Thanks, Randy. So far today, we discussed with you Zebra's current financial results. The investments we have made over more than two years of challenging economic times have had a positive impact on our business, and will continue to provide benefits. These investments are the reason for optimism for growth over the near term, in the third quarter and the second half of the year. Our investments have also positioned Zebra for growth over a longer period. These investments include our commitment to resources in life sciences, among other verticals. They also encompass Zebra's transformation to deliver solutions that create demand, rather than just fulfilling demand. The improved international sales coverage, where the building of economies is generating higher rates of demand for auto-ID technologies will endure, as well, since other investments cover greater resources devoted to information technologies and (indiscernible).

Another area where we have invested for at least four years is in the area of RF ID. Lately, we have been getting more questions on the subject of RF ID, so we thought we would add some things today. For those of you who are unfamiliar with the technology, RF ID uses radio waves to encode and read transponders that contain information such as part or serial numbers and address, or any combination of data used in supply chain management. RF ID offers great promise to increase supply chain efficiency because of the benefits it offers -- non-line-of-sight reading, the ability to modify and append information and the scanning of many RF ID chips simultaneously. The recent announcement by Wal-Mart to run a pilot program to determine the real-world benefits the technology can deliver has thrust RF ID into the center of the public spotlight. More than a few articles have appeared in print and the radio, extolling the virtues of RF ID. Zebra is enthusiastic about the future for RF ID. There is no longer a matter of if the technology will be adopted, but when. Even given the many technical and infrastructure hurdles that still exist, Zebra has already delivered products that enable RF ID employment. Specifically, our printer/encoders give users the ability to print human-readable information and bar codes on a label and encode the RF ID transponder, thereby creating a smart label. Smart labels are well-suited for use in the supply chain at the case and pallet level, to enable the movement of goods through warehouses, distribution centers and similar facilities. Our products can be configured to work with a variety of currently competing standards and protocols, several promising areas that offer a longer-term growth potential. We are making appropriate investments to develop and bring more RF ID solutions to the market, and recently increased our commitment to this technology with the addition of Chris hook as Director of RF ID Market Development. Chris is a recognized authority on RF ID solutions, and will be an important contributor to our strategy and product plans. He will also be of great value to potential users who want to understand the technology and employee it successfully in their businesses.

Zebra is actively involved in many RF ID pilot programs, both large and small. These pilots cover applications in retail, distribution, small package delivery and transportation, among others. We are working closely with early technology adopters and standard-setting bodies to ensure that Zebra provides the right products for these emerging and exciting technologies.

Let me be clear. RF ID is a longer-term opportunity for Zebra and the auto-ID industry as a whole. The technology has the potential to deliver important customer benefits. We do not, however, want to hype these possible application benefits or the growth potential. The market and media are full of misinformation, and we're taking great care to deliver accurate information in a market that is developing and changing quickly. RF ID is one of many elements to support Zebra's future growth and stockholder value. Bar-coding itself is a well-known and understood technology. It continues to be adopted at high rates because of the many benefits it provides in enhancing productivity, delivering better customer service and providing increasingly important security for people and property. Personal identification with photo ID cards also remains a high-growth business, for many of the same reasons. Zebra's competitive leadership, global presence and peerless financial strength enables the company to gain share in current markets and forge new business activity in emerging sectors. We continue to strengthen our management team, enhance our product lines and generate increasing brand equity. Our demand creation activities are gaining momentum. In short, the outlook for Zebra is very bright. We look forward to sharing with you more of our progress through the second half of this year.

Now, we would be pleased to answer any questions you might have.

Before we get into the question-and-answer period, due to the time constraints on all the people on this call, we're going to limit the questions to one question and one follow-up. Okay, let's go to the questions at this time.

(CALLER INSTRUCTIONS). Jeff Rosenberg, William Blair.

First, I wanted to ask for maybe some color on what's happening in health care, I guess, specifically whether you are seeing any increase in demand in advance of the FDA regulations being approved, and maybe some color related to the pharma side versus the hospital side of the equation there?

John is here with me here today, and I'll let him comment on that.

Yes. We would like to talk a little bit about life sciences. We see this is a new vertical market with a lot of opportunity. However, we're focused on specific areas where our products today can provide business improvement and security and patient care. In health care areas specifically, we're looking at pharmaceutical applications, we're looking at patient wristbands, and we are looking at the tracting of the product from point of manufacturer to point of use. Based on these initial opportunities and analysis of the market segments, they appear to be markets that we can address with our current product, and also be active with our RF ID products in the future. So we see these as growth opportunities. We are focused, and we focused on markets that we believe have low penetration and high-growth potential.

So as we wait for the FDA regulations, do you see people taking action in front of that, or is there perhaps a bit of a stall as people wait to see exactly what is required of them? What would you say the demand profile looks like today?

It varies across the market segment, and we're seeing some of the companies being early adopters. And as a result of that, we are working closely with them. Others are taking a wait-and-see. But the early adopters are the well-known companies in the industry, and I believe that as they progress with the implementation of bar-code and RF ID tracking, you'll see many of the other companies start to follow.

And then, if I could just ask about the Asia/Pacific region, I wonder if you could give us any sort of flavor as to how much that has grown as a percentage of international business, and maybe some characterization on how the competitive environment differs from what you see elsewhere in the world?

I think you know, Jeff, that we don't break out each of the regions of the world, so we don't have any percentage information for you on the Asia/Pacific, other than to tell you that when you look at international growth, Asia/Pacific certainly is one of the important regions because of the movement of manufacturing activities to that region. And since our technology is so supportive of manufacturing and distribution applications, we of course are getting business as a result of that.

And competitively?

And competitively? You don't get another follow-up.

Thanks very much.

Peter Barry, BearStearns.

Randy, I think this is for you. In your third-quarter guidance, you suggested a range of 4.7 to 9.6 percent revenue improvement, which is considerably slower than the second-quarter 12 percent gain. And similarly, the earnings-per-share improvement, between 6.2 and 14.1. Could you share with us what economic and currency assumptions you have built into those forecasts?

Well, the currency assumptions we built in were basically currencies at the level they were at the end of the second quarter, which was roughly a Euro at about $1.13 to $1.14. I think the comparables, Peter, that you are focusing on -- really, we're entering a period now where the comparables are getting a little different than they were earlier in the year. The third quarter of last year was a very strong quarter for us. In fact, it became the quarter where we really started to see very definite signs that we were emerging from the economic downturn. So the year-over-year growth rates -- percentage terms are somewhat lower, but that's to be expected because the comparables are getting a little bit more difficult, at this point. But, that being said, I think it's important also to focus on the fact that this is the, I don't know, X number of quarters where we have actually increased the revenue guidance and increased the earnings guidance. We are expecting to have sequential increases in sales in the third quarter, and normally we would expect to have flat sales for the second quarter, given our historical performance as a company. So I wouldn't read a whole lot into the decline in the comparable growth rates. I think the Company and the management is very optimistic about the third quarter and the rest of the year, and certainly we have a great deal of optimism about the markets that we are operating in and our competitive position.

One thing I would add to that, Peter, is that if you look over the history of the Company and you go back to the year 2000, it was in the second and third quarters of years 2000 when we had sales that were just a tad below 130 million. As it turns out, we sit here in the second quarter that we just completed with just slightly less than that, in terms of sales. So basically, we have spent the time between the second and third of '00 into Q2 of '03 to get back on a revenue basis to where we were before. What we are looking at here in Q3 is a breakout above that level, the level of past business that we have done in the Company. And we will have to see how the numbers ultimately play out in the quarter, but it will be an all-time record for the Corporation, we believe, on both the top line and bottom line.

And this is still my first question, because there was an economic portion of that question.

Well, that's sneaky. What was the economic portion, Peter?

What assumptions are you making about the economy in the September quarter -- any?

Nothing explicit. I think our expectations are just like, I assume, a lot of other peoples' -- is that we're continuing to see some emerging strength in the U.S. economy. Europe is clearly going through some difficulty right now, and I think that the main source of strength for Zebra's sales for the balance of the year will probably be in North America and the Far East.

Which confirms the environment for bar-coding demand seems to be on the upswing? Is that fair to say?

Yes, that's fair to say.

Second question -- foreign margins. Are they comparable to domestic, and if not, might they be, in the not terribly --

They are very comparable to domestic, yes.

Thank you for my two questions.

That was great.

(CALLER INSTRUCTIONS). Chris Quilty, Raymond James.

Just before I ask my question, is there a limit on the number of follow-up questions that I can ask on questions that other people have asked?

You know the answer, don't you?

At least I asked upfront. I guess I will use my one question and follow-up on the RF ID topic. Can you give us an idea whether you have seen actually any preliminary interest coming out of the top 100 suppliers contacting you? As far as I know, you are the only or certainly one of the few companies that have a ready-to-go solution in the market. And at what point would you expect to see some real P.O. or quoting activity going on, coming out of the base?

I actually don't have the direct knowledge of the top 100 customers or the 100 that they are actually selecting at Wal-Mart, and whether or not we have been in touch with them. I can tell you that the activity level that we have had since the Wal-Mart announcement relative to specific products that we have, and in addition to that, products that people might like us to have, has been very high for us. There are certain obvious companies that are undoubtedly in the top 100 list, and so some of those we know that we have spoken to -- and actually more than spoken to; there's a series of them that have made direct inquiries to us and indicated that they want to establish a relationship. But this is still early, and we did have an extensive meeting with Wal-Mart to be able to gain more detail relative to what it is they're looking for, and how well our products comply with their needs there. So the activity has been very high, and my expectations, though I can't explicit state them, is that we are talking to people that are in that top 100 list, that is, Wal-Mart has indicated they are going to have a first-phase implementation with.

The printer that you already have and has been on the market for, I think, a couple of years now, was originally working with a TI (ph) integrated inlay in the label. But I assume you are -- well, TI is probably positioning themselves to supply an EPC-type chipset, whenever that gets determined, in terms of the makeup. But you are relatively flexible, in terms of integrating whoever's chipset becomes available or used?

First of all, let me clarify a little bit. There's two printing products that are in the market -- two printer/encoders that are in the marketplace. One is built off of a platform of our performance line, the Xi series of products. And that was first to the marketplace, and then we came in with a desktop product. And that desktop product has not been in the marketplace even for a year, at this point in time. It is more economical. It has some more contemporary thinking in it, and our expectations are to have additional products, or variants of these products, that will allow us to serve each of the segments that we think will be the more popular segments in the marketplace.

And is it fair to assume that you get probably get a higher retention level on the consumables than you do with the traditional business?

I would say that certainly would be the case at the onset. However, there's a lot of different companies out there that are looking to provide chips, looking to provide antennas and looking to build up smart labels. So, while we expect that we will have some of that, it's really hard to say how much of it we will have.

Reik Read, Robert W. Baird & Co.

I just wanted to ask about the supplies business. You guys have seen your third consecutive quarter of improved growth, and Ed, I think you had mentioned in the past that you guys have put some new management in there and applied some new focus. I guess, just a couple of questions on that -- one, what changes have been made there that have kind of helped that up? Two, do you have an expectation going forward in terms of growth? And, three, how much room for profitability improvement?

Well, that's a lot. Yes, we do have an individual who is Vice President and General Manager of the North American Supplies. Actually, it's North America and Asia/Pacific. It's supplies excluding -- his responsibility excludes EMEA, but the rest of the world falls under his responsibility. He is a very experienced individual within the supplies world, and came to us from Wallace (ph), actually, just prior to Wallace's merger with (indiscernible). And yes, he has spent his time really digging in to understand our business. He understands the supplies business, of course, quite well, and understands the pressure-sensitive label business and even bar-code labeling business. But specifically, interviewing our channel partners, talking to all of our suppliers and developing a strategy to allow us to grow the business more effectively. His actions so far, I think he would characterize as being tactical actions. So they are things to make improvements in the business, but not strategic in nature, and we are expecting that later in the year, we will embark upon a strategic plan for the supplies business.

I also want you to -- when you are thinking about supplies, you should be thinking beyond what the bar-code business generates, which is primarily labels and then thermal transfer ribbons that are used in conjunction with those labels. In our photo ID business, we also have an active supplies trial, and we have some pretty good retention rates with the supplies that are used in those applications. Does that do it?

Can you just talk a little bit about what -- as you go through the rest of this tactical planning and get more to the strategic area, what are the opportunities for growth moving forward, and also the profitability opportunities? (multiple speakers).

Frankly, I am very confident that we can go ahead and grow the business. If you were to really analyze the amount of -- if you were to take a look -- and we are doing this -- as to what's the volume of supplies that are going through Zebra products versus what part of that are we supplying, you would find that the numbers -- while you can't get your hands directly around it, the numbers are relatively low. We think those numbers can be bigger, and that's what we expect to get out of the strategic plan as a method to get at the pieces that we currently don't get at. So I don't have specifics relative to that, but that's the intent, is to approach the problem from that perspective -- or the opportunity, really, from that perspective. And we are prepared to make investments in the business, because we think it's a good business; it's a particularly good business as it relates to what we consider to be the specialty supplies, those supplies that have unusual face stocks (ph), overcoats, adhesives. So these are areas where capped-ons (ph) and tiebacks and metal foils and so on are used. The thermal transfer printing technology is very good, in terms of printing on those particular materials.

And with those investments, does that reduce near-term profitability, or are there opportunities to improve that, as well?

Well, we don't have a plan. So, whether or not we're going to sacrifice near term for the longer term, I can't tell you at this particular point in time. We will clearly make investments, and how big those investments will be and how they will affect profitability has yet to be determined -- profits, I should say, not really profitability.

George Day (ph), M.A. Weatherbee & Company (ph).

My question is really regarding if you could give us a little bit more granularity on your international side. It seems that from your prepared remarks that your sales in Asia was very strong, and it sounds like sales in Europe is relatively weak. If I back out the foreign exchange benefits, it seems the international growth was about 2.5 percent year over year. Let me know if my math is wrong. So I'm just wondering if you could give us a little bit more details regarding the strength in different geographic areas.

When it comes to European business, it really depends upon how you choose to look at it. If you choose to look at it from the perspective of let's take and bring this -- repatriate the currency into dollars, you come up with one answer. If you look at it from the perspective of what happens in the Euro, you get another look. If you look at it from the perspective of the British pound, you get yet another look. What I like to do is take a look at what are the products that we're selling, and in fact are the unit quantities that we're getting, are they improvings, and are they improving at a reasonable rate? And I will report to you that, while I don't have those numbers at my fingertips, the unit growth, the year-over-year unit growth is very good. It's very good in some particular areas of our business; for example, it is good in the areas of our portable product line, where we have done a fair amount of investment to extend portable applications into Europe. And so, some of those that I mentioned are actually accounts that are European-based. And we are excited about the progress that we have made. We have a dedicated team that focuses in the portable area that we have decided to further expand our investments in that regard. On the other hand, when we look at the Asia/Pacific area, we have a lot of customers that have shifted their manufacturing to that region, which is also true in terms of Eastern Europe. You have European companies that have shifted manufacturing to Eastern Europe. And those segments for us are doing quite well, so that's -- you asked for, I think, granularity; right?

Yes.

That's as much grain as I can give you for right now.

Could you give us a little bit more flavor on the quantitative side? Let's say Asia is up a certain percentage year over year or quarter over quarter, whereas the EU is probably up on certain product lines, and maybe declining in some other lines?

Charles Whitchurch Actually, I can't do that.

Shawn Connor (ph), of Van Kampen (ph).

I was wondering if you might be able to just talk briefly about margin expectations for the new RF IDs? And the second question would be dividend possibilities.

Okay, margin and dividends. We really don't have any information to provide you relative to a breakout of margins that we're going to receive in RF ID, either in printer/encoders or in smart labels. Really nothing to give you on that account, and in terms of cash dividends, there are currently no plans in the Company to grant cash dividends.

And a follow-up just on that -- stock buybacks?

We have no plans in place for a stock buyback.

Stephen McBoil (ph), Lord Abbett.

I was wondering if you could talk to homeland security as a vertical? Specifically, to what extent did you see activity in the quarter, and what would your outlook be for the back half of the year?

Well, this is really your very good fortune day, because we have a homeland security expert here at the table with us, so I'll let him speak.

Thank you very much, Ed. We see a lot of opportunity in the homeland security area, specifically related to three things that we look at. We have a market here that has a need, we have a market here that has the cash, and we have products that fit the various applications today that the homeland security needs. We are making good headway in law enforcement relative to a number of applications within the law enforcement sector. We are also working now with providing security solutions for homeland security across the board, both at various deployments and military areas, as well as civilian ports of entry. And we have provided support to the military under the defense logistics group, wherein we did bar-code all the major products going over to Iraq. And as a result of that, not a single product was misdirected; everything arrived where it was supposed to arrive, on time. And that was one of the best deployments that our U.S. military has had in many years.

So overall, we see a good demand for existing products, we see a demand for new products where we are working closely with the homeland security. And as you may know, we are now on the GSA contract, so we have the ability to provide products to the non-military group within the government. And we are also partners with Timbold (ph) on the AIT, which provides a product to the military groups.

So overall, we are optimistic about homeland security. It's still being shook out from the standpoint of applications and funding that are being specifically rolled down to the various units and departments, but we see progress there and we see an opportunity.

And just with respect to timing and to the extent that funding is perhaps somewhat of a moving part, would you still characterize the environment as one of heavy requests for proposals, but the sales cycles continue to be a little bit longer? Or are you seeing funds increasingly being released?

The sales cycle with the government is always a little longer than commercial, because you have to respond to the RFQ. However, on the smaller quantities, you have the advantage of being on the GSA. And we can supply those as requested by the government, so that help shorten that piece, but they are smaller quantities. The funds have been released; they are sorting through the organization and down to the user level. We are starting to see requests for quotes coming out of the user level, and we expect to see that momentum continue through the rest of this fiscal year, the government's fiscal year, which ends September 30th. And we also expect to see significant budget increases for fiscal year '04.

And maybe if I just may -- just one quick question -- scan source as a percentage of revenue in the quarter?

A little over 13 percent.

At this time, there are no further questions. Mr. Whitchurch, are there any closing remarks?

No. The only closing remark we would have to be to remind you that the conference call for our third-quarter results is tentatively scheduled at this time for Wednesday, October 27th. And we look forward to talking with you at that time. Thank you for today's participation.

This concludes today's Zebra Technologies Corporation conference call. You may now disconnect.

(CONFERENCE CALL CONCLUDED)