斑馬技術公司 (ZBRA) 2003 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. (OPERATOR INSTRUCTIONS). 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 the Zebra Technologies. Sir, you may begin.

Good morning and welcome to Zebra's fourth quarter and year-end conference call. As a usual practice we had some prepared remarks to make before we open the caller to your questions. And at this time I'll turn the call over to Ed.

Good morning. Thank you, Wendy. Thank you for joining us to discuss Zebra's record results for the 2003 fourth quarter and the full year. By any measure the year finished on a very strong note. We are extremely pleased to share with you the results today, as well as discuss the things that make us optimistic about the prospects for further growth in 2004. We have a very positive outlook. Business remains robust. And our forecast for the first quarter is an encouraging start to the new year.

Briefly, I would like to cover two items with you. The first is on the financial front. Sales growth accelerated in the fourth quarter, up better than 16 percent, with business strengthening as the quarter progressed. Net income growth showed improvement for the quarter and the year up 20 percent and 28 percent respectively.

The second point is that during the fourth quarter a strategic acquisition strengthened our card imaging product line and gave us entry into the promising area of digital photoprinting, certainly a big topic in the news these days. We also enter 2004 ready to benefit from rapidly emerging trends in RFID and activities focused on delivering targeted solutions to high-growth vertical markets.

Certain statements we will 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 forecasts for 2004 first 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 SEC. In particular, we divert your attention to the Company's Form 10-K for the year ending December 31, 2002.

The fourth quarter sales exceeded our most optimistic expectations, over 7 million above the upper end of the forecasted range. The strength of our results span nearly all dimensions of our business and demonstrates the effectiveness of our growth strategy. Our results confirmed that management has positioned the Company to benefit from the improved economic conditions. It also showed that bar coding remains a robust technology that companies that rely on to deliver real business improvement.

Throughout 2003 the strength of our business came from our core business, supported by the power of our brand, excellent channels, and market leading products. Growth was contributed by bar code laboring solutions, card printer sales, mobile and wireless, and our international expansion.

In 2003 we introduced eight new printers to help insure product superiority and global competitiveness. For the fourth quarter 22 percent of our sales derive from products introduced over the prior 18 months. Our channel partners and market feedback tells us that the brand equity of Zebra products has gotten materially stronger on a global basis, which bodes well for future business.

We also improved distribution relationships and captured more business through a new channel program that strengthened the economic model of established channel partners. Diversified sources of revenue through alliances, OEM business and solution VARs have also led to great success in generating more and larger pieces of business.

Internationally, Zebra sales representatives, put in place over the past two years, are continuing to increase productivity and expand channel relationships. In particular, we experienced rapid business expansion in Asia-Pacific. New sales representation there, with contributions from fast-growing new partners, made a positive impact on regional sales.

We also are very encouraged by results in North America, our largest territory. North America has now experienced steady improvement for six consecutive quarters. The upward trend includes year-over-year growth in bar code label printers in all four quarters of 2003. Sales growth spans nearly all product categories and channels.

Notably we saw a tremendous growth in mobile printer deployments. Sales were significant into both vertical retail applications, such as shelf labeling and price marking, and through channels. In Europe Zebra mobile printers were installed into onboard train ticketing applications in Italy and in Denmark, in addition to retail.

Card imaging products continue to enjoy another quarter of steady growth. While I will have more to discuss later, it is important to know that Atlantek, which is now part of our card imaging division has only had a minimal effect on Zebra sales for this quarter.

Higher gross profits and profit margin, both on a comparable and consequential basis, helped sustain high operating profits and record earnings. We achieved this growth even though additional expenditures were made to support our RFID efforts, which we expect to start paying off in 2004.

We generated nearly $23 million in cash for the quarter and 77 million for the year. And ended the period with 450 million in cash and investments on the balance sheet. Following Randy's review of the numbers, I will return to discuss how Zebra has enhanced its growth outlook.

Several recent developments have had little or no effect on sales in 2003. They did however, expand Zebra's opportunities set for growth by adding to our technology portfolio and moved the Company beyond bar coding to encompass a greater set of specialty digital imaging opportunities now covering bar code label printing, card imaging for personal and high security applications, radio frequency identification for use in targeted supply chain applications, and digital photoprinting.

Now here is Randy to review details on the fourth quarter and results for our share -- and share our outlook for the first quarter of 2004.

Good morning everyone. Fourth quarter financial results were really quite excellent. Sales and net income set new records. We had strong free cash flow, higher gross profit margin, and despite Atlantek acquisition costs, Varades shutdown costs, and higher operating expenses to support future growth, we increased operating profits by 13.5 percent.

Let's start the review with some details of our sales results. Hardware sales in the quarter were $113.3 million, which is a growth of 17.9 percent over the last year. Supply sales were 26.7, or just under 12 percent. And supplies are now approximately 18 percent of total sales. Service and software was 6.2 million, a 13.1 percent growth. And miscellaneous other items were roughly $1 million, bringing the total sales for the quarter to 147.2 million, or 16.5 percent.

I would like to comment that bookings were consistently strong throughout the quarter. And this enabled us to achieve 16.5 percent comparable and 9.3 percent sequential growth in shipments. Sales in both bar code and card imaging products set new records. We also achieved new records sales in supplies, which over the four quarters of 2004 consistently increased sales in each successive quarter.

Card imaging products sales remain strong with sales into a broad range of domestic and international projects. We remain quite encouraged by the ongoing high-growth profile of card imaging products, particularly with this quarter's acquisition of Atlantek, which provides us with both new products, technology, and a key OEM relationship.

Even more encouraging however, has been the strength of bar code printer sales. Growth was strong across all product segments with particular strength in mobile printer products. We also shipped a record number of Z Series tabletop printers as we refreshed the line during the year to keep it one of the most popular printers available anywhere.

Geographic sales. European sales were $47.9 million, a 21 percent increase over last year. Latin American sales were up by 9.4 percent to just under $8 million. Sales in Asia-Pacific set a new record at $14.2 million, up 38.5 percent. And total international sales came in at sightly over $70 million, an increase of 22.6 percent, and now comprise 47.6 percent of total sales for the Company. Our remaining region, North America, $77.1 million, growth of 11.5 percent, and now comprise 52.4 percent of total sales.

Now the record results we had internationally were paced by sales growth in all regions. In Europe our records sales were of course aided by a strong euro and pound sterling. And the change in foreign exchange rates year-over-year had a positive $6.3 million benefit to quarterly sales growth.

Now I might pause here to comment that in response to exchange rate changes there have been some pricing actions taken in Europe that have actually reduced prices. So the prices are actually lower than they would have otherwise been in the absence of exchange rate gains. So I think the $6.3 million somewhat overstates the actual impact of foreign exchange on our results. However, I do expect we will continue to get exchange rate gains well into 2004, unless there is a dramatic reversal in rates. And as I am sure all of you know, the euro is trading against the dollar at roughly $1.26, 1.27.

I should also note here that the sequential foreign exchange gain was $1.7 million, which reduced growth in AMEA's -- sequential growth in AMEA from 17.5 percent to a very robust 13.2 percent. So business and is improving in Europe, and we're very encouraged by that.

Asia-Pacific sales were up 38.5 percent in the quarter, and are now close to 10 percent of total sales. And this is paced by a strong growth in both Japan in China. The success of our international expansion program is clearly evident in these numbers. In China we opened sales offices in Beijing and Shanghai during 2003. In Japan we have a new distributor for our printers. And we will be adding more resources to our China operations, and expect that sales will continue to grow rapidly.

We are particularly pleased with the strength of our North American business, which is up 11.5 percent year-over-year. You'll recall that sales here were the source of weakness in our business in 2001. Now North America, boosted by a strengthening U.S. economy, is quickly becoming the engine of Zebra's growth.

Gross profit margin of 50.5 percent was up 1 point from a year ago, and essentially flat with the third quarter. Higher production volumes and favorable exchange rates contributed to this result. Going forward we expect a relatively stable gross margin between 50 and 51 percent.

Operating expenses of $42.1 million were up 23.4 percent from the prior year. Excluding the costs related to Atlantek, the Atlantek acquisition and the closure of Varades, they were up 17.5 percent or $6.1 million both sequentially and year-over-year. Payroll expenses including increased headcount, higher commissions resulting from higher sales, Atlantek, and severance payments explained about half the increase. The balance is explained by inventory, market development funds, consulting and legal fees. We expect that operating expenses will be sequentially down in the first quarter.

Reported operating margin was 21.9 percent, or 23.2 percent when you exclude acquisition related and closure costs. Operating profit increased 20.3 percent year-over-year excluding these charges. A 16.5 percent increase in sales.

Fourth quarter investment income totaled $4.1 million that included roughly $1 million of what I would characterize as onetime events, including interest income from deposits with the state of Illinois that were returned to us following resolution of a long-standing tax dispute, and payouts from two investment partnerships.

Zebra's effective income tax rate drop rate dropped to 31.2 percent from 35 percent last year. Our settlement with the state of Illinois reversed $1.3 million in reserves related to that dispute. Looking ahead, our work in 2003 on tax management strategies will reduce Zebra's tax provision rate to 34.75 percent.

Fourth quarter net income of $24.4 million was a record. This converts to 51 cents per diluted share. The net income number is an increase of 20 percent over a year ago. And sequential increase in net income was 6.1 percent. Free cash flow in the quarter was $23.3 million and $77 million for the full year.

Even though sales were up quite substantially in the fourth quarter, receivables actually decreased because our days sales outstanding set a new record low of 50.7 days. Inventory turns remained constant at 6.8.

We're very optimistic about our growth prospects for 2004. We expect first quarter sales to be in the range of 145 to $150 million. I should remind you at this point that first quarter is normally the slowest sales period for Zebra, and we have historically experienced a sequential sales decline from the fourth quarter.

Quarterly earnings are expected to been in the range of 47 to 53 cents per share, also straddling the current fourth quarter result. Our first quarter expectation includes $824,000 in charges related to the consolidation of manufacturing and service operations.

In January we announced plans to move manufacturing of mobile printers from our facility in Warwick, Rhode Island to Camarillo, California to take advantage of the economies of scale available at the Camarillo location. North American repair and service of all bar code printers will be moved to Vernon Hills. The plan calls for these moves to take place over the next 12 to 18 months. With mobile and wireless products as a growth area for Zebra, we will be adding further engineering resources in Warwick over time to develop future generations of mobile printers.

Our forecast implies gross margin in a range between 50 and 51 percent, and operating expenses of between 38 and $40 million, including the charge I just mentioned related to the closure of Warwick, and also additional charges related to closure of Varades.

That concludes my formal remarks. And now I would like to return the call to Ed for some additional comments.

I would now like to comment on our future, which I think is probably the most important to all of us. We have a high level of optimism for further growth in 2004. First, Zebra will continue to benefit from those events that had a positive impact in 2003. Adoption of bar code technology remains high, as companies invest in proven technology with predictable meaningful returns. An improving U.S. economy supporting increased capital in IT expenditures helped make bar coding a continuing engine for growth in 2004.

We will also enjoy an enduring effect of sales representatives placed in high-growth territories over the past several years. The outlook for our card printer remains positive. And we expect further deployment of mobile and wireless products.

Second, just as the results announced today are the consequence of what began in the quarters in years before, our optimism for further growth is also based on initiatives that will add another layer of growth in 2004. This favorable outlook is enhanced by more aggressive pursuit of sales dollars from a vertical market focus, further investments in overseas expansion, including China, expansion into digital photoprinting, beginning shipments of EPC RFID related products.

Let's focus on the last two. In November the acquisition of Atlantek gave us additional domestic engineering resources and moved us into the emerging area of digital photoprinting. It also established an OEM relationship with Kodak. Our printer, which is marketed by Kodak as the ML500 Professional Photographers uses die sublimation technology to produce exceptionally high quality photographs on demand. Like our other products, this printer delivers real business benefits by enabling photographers to provide better customer service in producing pictures in a matter of seconds in the studio or at events.

I should point out the recent announcements made by Kodak relative to their commitment to digital technology, their movement away from traditional silver hay (ph) light technology, and the large investments that they are going to making going forward in digital photography. Zebra's relationship with Kodak should allow us to benefit by Kodak's moves in those directions.

The acquisition also enhanced our technology base and strengthened our competitive position in card printing. Earlier this week we announced the availability of a new product, the P620, which incorporates patented micro printing capabilities and locking features important in high security applications. We will leverage our global distribution system to sell Zebra Atlantek products.

Let me now turn into RFID. In September Zebra was the first to introduce UHF RFID printer encoders incorporating EPC standards to enable companies to comply with Wal-Mart's upcoming RFID mandate. During the fourth quarter we committed more engineering, sales and marketing resources to RFID, as Wal-Mart affirmed its commitment to the 11/05 implementation date. Others, including the Department of Defense, and retailers Metro, and Testco, also announced their own plans to implement a technology in their supply chains.

We completed several beta tests for our RFID Printer/Encoder product and announced commercial availability of the RF4M at the beginning of this month. We're now taking orders and shipping units to support the pilot initiative that is getting underway this year. Demand is high and production is ramping.

Zebra is exceptionally well positioned to benefit from the adoption of RFID technology. Because of our leadership in bar code label printing, we estimate that more than 80 percent of Wal-Mart's top 100 suppliers already use Zebra printers in some capacity. Our relationships with key integrators, such as Manhattan Associates and RedPrairie, also position us well to capitalize on RFID adoption. During 2004 we will continue to build infrastructure to support our RFID as revenue begins to flow.

Thank you for listening today. Zebra's position to deliver increasing stockholder value has never been better. We're extending our global leadership in bar code labeling. Mobile and wireless printing continues to expand rapidly, and we have an enhanced competitive position in card imaging. Exciting additional avenues of growth are now open in digital photoprinting and RFID. Taken together, the opportunities for growth are more abundant than ever before. We look forward to sharing our progress with you throughout this year. And we would now be happy to answer any questions you might have.

(OPERATOR INSTRUCTIONS) Jeff Rosenberg with William Blair.

I guess I wanted to first ask about just kind of what we should expect in operating expenses? If we look at 2003, I think, if you combine SG&A and R&D it was about 26 percent of sales. I know you're looking for it to come down a little bit this quarter. Can you talk about -- is that 26 percent, 26.5 percent a number you feel like we can use throughout the year? And what kind of is the trend if you looked out over '04 for spending there?

I don't think I would look at right now, Jeff, in terms of percentage of sales. I think I would take 38 to $40 million range that I laid out for you for the quarter. And I don't anticipate any significant growth at this point going forward, although we're not prepared to issue guidance much -- any beyond the first quarter.

A lot of this certainly depends on opportunities that come out through the year. Certainly RFID is going to be a continuing area of investment for us. And a variety of other opportunities certainly emerge over time, and we are going to have to respond to them appropriately. And some of that will come as shifts from other areas of the business. Some of it may add on additional operating expenses. But we're really not prepared to offer guidance on that this point.

Does the consolidation spending -- is that a one quarter thing or will that continue on throughout the course --?

Consolidation spending, for actually the total estimate for consolidation of the Warwick facility and the Camarillo and the closer of the Varades facility is roughly is between 2.7 and $2.8 million for the full year. And this will be disclosed of course in or 10-K report which will be issued shortly. But that is what the number is going to be. And how that plays out in terms of actual reported expenses against those projects remains to be seen. But we expect to spend roughly that amount this year.

This quarter only represents -- this is the first traunch?

Yes, that's right.

On Europe, maybe a little bit of elaboration, obviously the (indiscernible) currency was a real nice acceleration in growth there. Can you maybe give a little bit of color on how much of it was strength in the market that they saw versus productivity from your new sales outpost that you have added -- the resources you have added there?

The real growth in Europe we believe was in the range of a little over 13 percent. We saw an acceleration of business in the quarter. Certainly our Managing Director in Europe is realigning his sales and marketing resources on a more subregional basis, putting more resources in country. And we believe that that'll be a more effective way of approaching the market in 2004. So we expect to have strong growth in Europe as a result of those changes. Those are management changes.

And that is things that you would also say were apparent in Q4?

I think we started to see some impact of that initially, but I think most of those changes are going to be taking place in '05. Excuse me, '04. '04 not Q4.

Peter Barry with Bear Stearns.

Ed, clearly you're focusing on what appears to be something of a new category, digital photoprinting. Combining that would RFID, should we anticipate a meaningful rise in R&D expenditures, investment spending, let's call it in '04 and beyond? I notice the number was up sequentially -- a meaningful number. But might it rise substantially more than that over the next year or more?

I don't think we have guidance for you relative to R&D expense. I don't have anything.

I'm not asking for a specific number, I'm just asking is the commitment to RFID and --?

Peter, there is no question that expenditures in engineering, specifically engineering in both the digital photo area as well as in RFID, will be -- those expenditures will increase materially over the course of the year. They have increased in RFID over in '03, and they will continue to increase into '04.

Digital photo is an area that we would expect also increases now that we have completed the acquisition of Atlantek. And we are specifically pursuing initiatives in the digital photography arena. So, yes, those areas will increase. What I am not prepared to talk about is will expenditures in other areas decrease and what those areas would be.

Clearly digital photoprinting as a stand-alone business is viewed as, dare I call it a new growth medium for you? But is it also an additive to your card printing strategy going forward?

Basically if I could just digress into a little bit of technology, the printing technology that is used in the card printer business predominantly is called dye diffusion, or D2T2. And that is a form of thermal technology. The photo printers, the high-quality photo printers, and this printer that we are producing for Kodak is at the professional level. This is not -- these are prints that are 8 by 10 prints, poster prints -- I shouldn't say poster, banner prints. So this is large very high-quality printing. And we are also utilizing dye diffusion for that.

So we expect with the knowledge that we already had in dye diffusion and now the increased knowledge that we will be able to produce very, very high-quality images of a variety of types that could be applied in our business in many, many ways. Right now we're talking about applying it in digital photoprinting. Clearly some of the things that we will learn about the D2T2 we will then be able to put back into our card printer products.

Would it be an over exaggeration to suggest that there's a high level of proprietary characteristics to all of this?

There is.

Just one other question for me. And without necessarily providing any very long-term guidance, are you assuming particularly in the back end of '04 that the dollar begins to strengthen?

No. We don't have an assumption like that.

So the $1.26ish euro is something that we should build into our models for the full year?

Probably what you should do is consult with your economics department. You have a much better economics department than I do. And see what they're telling you, because whenever they're telling you is probably better than what we are going to tell you.

But you are using that assumption?

We're using -- actually in our own internal forecast, we're using something lower than that, because we tend to -- we like to be more conservative on these kind of things.

Chris Quilty with Raymond James.

I have got a couple of quick questions for you. First of all on the T620, it was unclear from the discussion whether that was an Atlantek printer or was that internally developed out at Camarillo?

It was an Atlantek printer.

And obviously that given a number designation you have given it, it sits up at the high end of your scale from the P310 upwards?

That's correct.

Also, in the bar code printing area, you mentioned improving strength in both North America and Asia. Can you give us any indication across the spectrum of product lines whether it has been equally strong at the high performance as it has been through the mid and low range?

And a corollary to that question, have you, or could you, see any hold back in customer orders, especially at the high end, as they contemplate whether they are going to need to buy new printers that are RFID capable? And at what point might that happen?

There is some talk of some customers waiting to see how the smoke will clear relative to RFID. Because there is a tendency in the RFID area, at least in this earlier stages, for people to want to use a higher volume, more rugged, more durable printing devices that they can really depend upon. And so they tend to go to the higher priced products versus lower-priced products. However, we do offer a variety of choices for customers. So, yes, I have heard that there is some hold back in that regard. I can't quantify it. I don't even know if it is real, but we do hear that.

It in terms of how the sales of printers go by category, a printer -- it tends to be something we don't talk about much. And what I will tell you is that the -- what has been going on in the marketplace is as you're able to go ahead and drive down price and/or really dramatically improve feature sets, people are drawn to those products.

And so as an example, in the mobile wireless arena we have been able to come up with some pretty attractive products that work very, very well, and they are relatively economical and provide that added functionality. So there has been very good demand in that arena. And the any expectation in '04 is that that will continue to be a good area.

Now I mentioned that in my introductory comments today, and I think I mentioned it even later in the comments about that area of our product line. So I suspect what we will be doing it is getting somewhat of a boost in our high-end performance products because of the RFID initiatives, and we will have good growth in the mobile wireless sector of our product line.

A clarification, you don't have, and I don't think any of your competitors have an upgrade path, so that if you were buy a high-end Xi Series you can plop in an RFID module into it. You've got to really buy a specific printer.

That's correct.

So if there is any hold back it is because of that issue. There is no way to do an upgrade path. You either got to go one way or the other?

That's right. There are issues that are internal to the printer that has caused us to go down that road. Yes.

Also, can you give us any clarification on the wireless side, whether you have seen any uptake in Blue Tooth technology, or is it all still 802.11b?

You know I couldn't break that out for you. I don't have a good answer for that. I know that we have a very strong demand for 802.11b, but I really couldn't comment on the relative position of those two technologies.

Additionally, is there anything about your implementation of wireless that would give you advantage over everyone else, or is simply the move towards wireless and portability lifting all those?

There are a variety of things that we have done in our QL Series which has really taken hold in the marketplace. I'm not going to go into what those exact competitive advantages are. But there is differentiation in the product line, particularly in the QL, which is now the flagship of the wireless product that we have, that make them attractive to particular categories of customers.

A final clarification question from Randy. I assume when you gave that $6.3 million foreign exchange impact that was corporatewide, but at the time you were talking about European operations?

It was corporatewide, and the exchange gain is concentrated in Europe because that is the only place where we invoice in euros and sterling.

Reik Read with Robert W. Baird.

Ed, can you just talk a little bit about now that the R4M is out there what you viewed as an expected uptake in terms of how that might -- not specific quantification, but how that might ramp during the quarters throughout '04? And can you give us a price point in relative margins on that product?

The price point is about 4495 is the list price on the product. And I don't understand how I can answer the question without quantifying it the way that you have posed it. So you may want to take another shot at asking the question in a different way.

Can you talk about -- I guess not specifically quantifying with numbers, but can you talk at least relatively orders of magnitude that you might see in terms of first versus second versus third quarter?

There will be material improvements as we go through the quarters of the year relative to printer encoders. But I will tell you that there are -- you have got to look at the timetables of the various programs that are out there. Two of the important programs are the DOD program and the Wal-Mart program. And there are people, lots of people out there that are working very hard to run pilots. And when those pilots are completed, they will undoubtedly, some of them, will place some production contracts.

My guess is there will be a lot of scurrying around here in the first and second quarter. People will be doing a lot of testing in the third and perhaps the fourth quarters. And then Wal-Mart will go ahead and start receiving product that has these smart labels on them. And people will just start getting feedback. And that should in fact then lead to perhaps some product changes and volume orders.

So you really would not expect anything material until later in the year?

Well what I did say is that I expect there will be a burst of orders in the first -- basically the first half of the year. And there will be a lot of testing in the second half of the year. Now that is only looking at -- when you look at the programs of Wal-Mart and the Department of Defense. There are many other programs that have been announced by other companies and the timetables are not exactly the same timetables.

So to predict when people who are trying to comply with those other requirements, on a quarter by quarter basis looking forward into a very new world is just very difficult for us to predict. It is highly speculative how that will roll out. However, we do expect to have material amount of sales in this category over the course of the next couple of years. It will be a very steep ramp on a quarterly basis. There may be some pluses along the way, but that is how we see it today.

When will the Alchemy product be available for shipment?

I don't think we have announced a date, so I won't do that here.

You talked a little bit about the R&D resource commitment for RFID. Is there is sales and marketing components that will increase as well? And can you talk a little bit about how much that might be?

Yes. No, not how much it will be, but absolutely there is a sales and marketing component. We are taking approaches to the marketplace. We're coming at the marketplace from a variety of perspectives. Some of that will be utilizing existing channels, and some of it will be more focused on particular market areas and particular customer segments. And so we are -- we're staffing to deal with that.

Ajit Pai with Thomas Weisel Partners.

Congratulations on a very strong quarter. Just a few questions. The first was about looking at the operating expenses in this current quarter would be possible to tell us, give us some color on how much of the increase sequentially it is a onetime increase to do onetime activities and how much would you expect to see ongoing through 2004?

I think you'll have to infer that from the guidance we provided you -- the expenses came in at roughly $40 million for the fourth quarter. Certainly there were some onetime factors related to that, including things such as commissions that were naturally higher because we have such strong sales results.

We reduced -- we did say that expenses are likely -- we expect them to be sequentially down as much as $2 million. So I think you can infer from there that there there is a component of onetime event in that number that I gave you. So I think you're just going have to take it from that point. And we're not prepared to issue guidance as far as -- any further than the first quarter as far as OPEX goes, or anything else for that matter.

I know that you have been making an effort right now to look at different verticals to create demand rather than just have a compliance driven demand -- sort of responding to that. To that end when you're looking at your end markets, if you look at them as verticals rather than geographies or as hardware and supplies. Can you give us some color in Europe and North America, are there any particular verticals that you see coming back?

For example, in the farmer market or the retail are you seeing any verticals where the spending overall is improving?

Yes, there are some. I am relatively hesitant to be discussing those with you, but let's see. In the area of retail there is in fact spending that is going on. And that spending is predominantly in wireless areas and in the RFID area. In areas of transportation, small parcel delivery, there is -- it is a focus for the Company, and we are doing well in those areas.

There are many places around the world were automation is being applied to parcel delivery, and we're participating in that space. There are opportunities for us in hospitality. And that comes into play a lot in our mobile product areas. So that gives you some sense for where we're dissipating in the market.

On the retail side, are you seeing the spending improving in North America or in Europe?

In North America.

Just then just looking at your digital photoprinting opportunity that you talked a few minutes ago, could you give us some color as to how we should be sizing that market, and whether we should just be looking at the opportunity as an opportunity that will be driven by Kodak, or whether there is an addressable market outside of the relationship with Kodak?

There are definitely opportunities outside of Kodak. However, our focus at this point is to work very carefully and closely with Kodak and satisfy their requirements, which are there are many requirements. You can just imagine what with the transition that is taking place from silver highlight photography to digital photography there is opportunities to produce digital photographs in a whole raft of different ways. And you've got to just open up your Sunday newspaper and see that every -- there have got to be 10 different companies that are offering printing devices that you can use at home to produce digital photographs. You can go to your quarter drugstore and operating kiosk and get digital prints produced in that fashion.

We mentioned here the professional market. There is an event photography marketplace. So there are many, many different ways in which digital photography is going to come into play. And I'm not here to lay out an entire marketing plan for you as to how Zebra can participate in that.

I think we are going to have to move onto the next caller, Ajit. For the remaining callers on the line we would like to limit your questions to one question and a follow-up, please. And we can follow-up with you afterwards one-on-one.

Mike Whitfield with Wachovia Capital.

I wanted to ask you about gross margin. Right now it looks like the Company is running near all-time highs. Where do you see -- is there a potential improvement still? And if so, how do we get there?

I think there are two areas of potential improvement. Certainly as volumes ramp we will continue to get higher rates of capacity utilization. Certainly one of the reasons we're doing the consolidation of mobile printing and our service facilities from Warick and transferring them to Camarillo and Vernon Hills has a component of gross margin improvement related to that.

And we have active cost reduction programs, again, some what related to volume. Clearly as our volume increases we're able to take positions with our suppliers where we procure components and assemblies on a worldwide basis and negotiate better prices. And we have the opportunity also to reduce costs by outsourcing some portion of our subassemblies to firms other than Zebra where they have specialties and cost advantages that we cannot get. So I think there are a whole variety of areas that are available to us where margin can be -- or positive influences on margin.

Regarding that potential outsourcing of subassemblies, how much of that does Zebra do now? And do you have an established long-term target?

I can't quote a target for you, but yes, we do assemblies of circuit boards outside of the United States.

Final question is, can you, given your level of cash -- has the Board actively considered initiating a dividend?

No.

Jason Rogers with LJR Great Lakes Review.

I had a question about how much scan source contributed to revenues for the quarter?

It was slightly over 13 percent.

Any update on the FDA mandate for bar coding prescription drugs?

No. There is no -- no. The only comment there is that the mandate is expected to be issued within a very short period of time. It was expected by year-end but it got delayed for some reason, but it is expected momentarily.

Peter Barry with Bear Stearns.

Just to look at Europe for a moment. In past quarters Eastern Europe has been a significant contributor to incremental revenues. Is that still the case? And is there still substantial penetration opportunity available to you in those markets?

Peter, I don't have a good answer to that question. I don't have the detail on it. My expectation is it is still doing well for us, but I don't have specific information.

There are no further questions at this time.

Thank you very much for your participation today. Our next conference call is currently scheduled for Wednesday, April 28, at 10 AM central time. And we look forward to discussing our first quarter results with you at that time. Thank you.

This concludes today's Zebra Technologies' fourth quarter and full year end earnings release conference call. You may now disconnect.