斑馬技術公司 (ZBRA) 2004 Q4 法說會逐字稿

Good morning and welcome to 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 this time I would like to introduce Mr. Charles Whitchurch, CFO of Zebra Technologies. Sir, you may begin.

Thank you, good morning, everybody, and thank you for your attendance at today's conference call. As usual, we have some prepared remarks before we open the call up to your questions, so I'll turn the discussion over to Ed at this time, and we'll get started.

thanks, Randy. Good morning, everybody, and let me add my thank you for you joining us today. It was truly a great year for Zebra -- four consecutive record quarters, a year of outstanding financial and strategic performance, and an excellent outlook for further growth. For 2004, virtually all dimensions of our business attained new performance records.

Our performance demonstrates the effectiveness of our strategy to deliver specialty digital printing solutions to targeted high-growth markets. Our actions extended our industry leadership, positions Zebra for further high growth, and improved our capacity to increase stockholder value. It built on prior years and supports our optimism for growth in 2005 and beyond. We ended 2004 with strength and go into the new year with a positive momentum.

In the fourth quarter sales we forecast with several product lines and geographies setting new sales records. In addition, RFID sales grew sharply from the third quarter. Customer product satisfaction is high. We are winning more placements, and the outlook for further opportunity for growth in this emerging market is excellent. We are clearly an industry leader in this emerging market.

Going into 2005, business momentum remains positive, and the outlook is bullish. Certain statements we'll make on 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 2005 first quarter and expectations about trends and the company's business will be forward-looking statements. The forward-looking statements involve risks, uncertainties, and other factors that could cause Zebra's actual results to differ materially from those expressed or implied by such forward-looking statements. Additional information concerning such factors is available in the press release issued today by Zebra as well as Zebra's filings with the SEC. In particular, we direct your attention to the company's form 10-K for the year ending December 31, 2003.

Sales growth for 2004 was 23.6%. This was the highest growth Zebra's achieved since 1996. So it's significant not only in being a record, but, in fact, there being a valley in terms of our growth -- not that the growth was poor, but we are very, very happy with the 23.6%. In particular, all product lines, geographies, and channel contributed to this result. Profitability improved, gross profit margin reached the highest level in the company's history. In large measure, stronger channel partnerships and expanded global presence, deeper penetration of vertical market applications and improve business execution supported our growth. The foundation for all of the success continued to be an expanding portfolio of printer devices to feed more printing applications. We have gained share by working systematically to deliver greater value in products, solutions, and services to our partners and customers on a global basis.

In addition to the record sales performance, net income rose to a record level and grew nearly 32%. We are very pleased with our sales and profit performance in 2004. Our network of channel partners in all international regions expanded with the help of more Zebra sales representatives and sales engineers. In 2003, we added people in Mexico, Brazil and China. We gave them a mission, support, and clearly defined their responsibilities. In 2004, we got our payback -- significant higher sales, stronger channels have been developed, and an outlook for further growth.

While we made considerable progress in 2004, our ability to expand internationally is nowhere near saturated, and we will continue to invest disproportionately to develop our international business further.

Our increased focus on delivering applications to targeted high-growth vertical markets produced results in 2004. In retail we are now moving productivity-enhancing solutions pioneered by tier 1 reference accounts deeper into tier 2 and tier 3 organizations. At the same time, solutions developed for retail are being proliferated to other industries. The practical application of our Zeus project is being deployed with products, channel partners, and point solutions that deliver demonstrable benefits to customers.

A streamlined organization structure, greater clarity on areas of responsibility and accountability, an improved integration of business processes has material impact on business in 2004. We made it easier for customers to do business with us and sharpened our focus and skill in delivered valued solutions. These improvements enabled us to fulfill a better-than-50% increase in business with strategic accounts and improve service levels to our most demanding high-touch customers.

Greater responsiveness to customers can also be seen in our custom applications group. This organization became the focal point for winning more deals by providing better support for product customization, largely through software and firmware development.

None of our success would have been possible without great products. We have focused on delivering better printers, supplies, and connectivity tools. Our commitment to product innovation and reliability unquestionably built stronger brand equity in 2004. A broad range of RFID product coupled with recognized technical leadership is proving a definite benefit in working with companies implementing RFID solutions. Innovative product design such as in our family of QL mobile printers allowed us to expand the reach of the product and grow sales through expanded distribution channels.

In addition, new security and ease-of-use features support continued growth in our card printer product line. Incorporating complementary technology such as wireless connectivity and product authentication is also attracting more customers. Notably, our portfolio of high-level security technologies has enabled a greater interoperability with more systems in more customer locations.

We are operating in a positive business climate with a continued strong appetite for the adoption of AIDC technologies. With advancement in wireless, RFID, and other technologies, companies are employing on-demand thermal printing deeper in the enterprise to improve productivity, deliver better customer service, and strengthen security. A more effective Zebra organization is helping to create this demand and fulfill it through more robust economically healthy global channels. We look to 2005 with great optimism in our ability to create further increases in stockholder value.

Now here is Randy to give a detailed review of fourth quarter results and the outlook for the first quarter. Following his remarks, I'll return with some brief remarks on RFID and other activities that will support our growth in 2005.

Thank you, Ed. Good morning, everyone. Ed's remarks focused on the strategic successes that led to our sales records and a strong business in all corners of our business, so I'm going to limit my remarks to the fourth quarter results. So let's go over those details right now.

Hardware sales were $137,529,000, an increase of 21.4% for the quarter; supply sales were up 15.5% to $30,895,000; the balance of our sales consisted of service and software, shipping and handling, and some hedging activities resulting in total sales for the quarter of $174,874,000, an increase of 18.8% from a year ago. This topped the upper end of our guidance range, and we've now had 11 out of 12 quarters with sequential sales increases.

Building on the record third quarter sales, all printer categories grew in the fourth quarter from the prior year. Seven out of eight increased on a sequential basis with five of them growing 20% or better. Mobile printers continued to stand out with large deployments of wireless mobile printing technology as penetrating broader and deeper into retail venues and finding new applications in warehousing, distribution, and hospitality, among others. Mobile printing has been a top performer for Zebra. Over a two-year period, annual sales of mobile printers has nearly tripled, and the outlook for further growth is quite positive.

The fourth quarter was also a breakout period for RFID. Printer and coder sales increased markedly from the third quarter, as some companies scrambled to meet January compliance labeling deadlines. Zebra's brand equity, product breadth, and reputation for quality are clearly paying off. Our successes in the fourth quarter make us increasingly confident of our position, as companies to adopt RFID and this technology induced replacement cycle for compliance labeling.

Broad product participation also means high growth among high performance, mid-range, desktop, and card printers. Supplies growth was 15.5% and had a great year overall with sales growth of 18.6%. Our strategy of operational excellence, superior quality, price competitiveness, and telesales presages further sales growth in 2005. Sales also grew across all regions with particularly strong growth in Europe and Latin America this quarter.

European sales were $59,398,000 and were up 24% for the quarter. Latin America sales of $10,597,000 were up 32.8%, and total international sales of $84,529,000 increased 20.6% and comprised 48.4% of our total sales for the quarter. North American sales, our largest market, were $90,345,000, an increase of 17.2%. All international regions reached new sales records. In Europe, we're benefiting from a comprehensive strengthening of our sales and marketing personnel and the reorganization of EMEA into seven sub-regions to foster greater responsibility, accountability, and focus.

For 2005, we'll be refining this structure, going to nine sub-regions and dedicating more resources to Eastern Europe and other under-penetrated areas. North American sales reported the 10th consecutive quarter of comparable growth. Sales were down sequentially, simply because of the timing of shipments of mobile printers to large retail customers. For the quarter, foreign exchange had a neutral impact when offset by exchange rate motivated price adjustments to maintain competitive positioning in Europe.

At 52%, gross margin was up 1.4 percentage points from a year ago, and 110 basis points from the third quarter. During the quarter, we completed the Warwick and Camarillo manufacturing consolidation and the relocation of North American repair services into Vernon Hills. We expect this move will help keep gross margin at or above fourth quarter levels as we move into the first quarter and through 2005.

Operating expenses increased 6.1% including exit costs. The largest increase came in selling and marketing expenses, largely relating to headcount increases. Other contributing factors were higher legal expenses and business development activities such as advertising and MDF funding. Our plans call for further additions to sales, marketing, and engineering resources in upcoming quarters to support our growth plans.

At this point, I'd like to add that our Sarbox 404 compliance costs for the full year were less than $400,000. This is testimony, I believe, to our strong control environment and the investment we've made over the years in financial processes and controls.

Higher sales, increased gross margin, and moderate growth in operating expenses expanded operating margin to 26.4%, up from a year ago and also the 26.3% of the third quarter. Operating income grew 43.1% including exit costs. Fourth quarter investment income was $2.9m, which is a 2.3% return on beginning balances. Net income of $32m was 18.3% of sales and 44 cents per diluted share, representing an increase of 31% over a year ago. Sequentially, net income was up 2% from a very strong third quarter.

Free cash flow for the quarter was $32.7m, bringing the annual figure to $95m. Receivables were up $1.6m from the third quarter and DSO was 52 days. A $4.9m increase in inventories simply related to the higher level of business activity and some increase in safety stocks as part of our manufacturing consolidation effort. We expect to work these safety stocks down beginning in the first quarter. Our cash position at quarter-end was $558m.

Anticipating a question in the call, I wanted to remind everybody that our intended use of the cash remains acquisitions to support our growth strategy. There are no immediate plans for either a dividend or a share repurchase.

In a period normally down from the fourth quarter, our first quarter forecast points to a flat-to-upward trend this year and positive momentum going into 2005. Sales in the first quarter are expected to be between $175m and $178m, up approximately 15% from a year ago. We expect quarterly earnings in the range of 43 cents to 45 cents. This forecast implies a gross margin in the range of 52% to 52.5%. It also incorporates operating expenses of between $46m and $46.5m to reflect the higher spending on personnel and other infrastructure to support our expected growth. Our effective tax rate for the year is expected to be 35%.

That concludes my formal remarks. Thank you for your attention, and I'll turn the call back to Ed.

Thanks, Randy. Much of our success for 2004 resulted from the actions we took in prior years to strengthen our long-term competitive position. Today, our stronger channel relationships, more robust product line, greater international coverage, and better business execution will have an ongoing positive impact on our business, as we move through 2005. The unlimited opportunities and Zebra's position in wireless, mobile, and RFID, give us great optimism for continued high growth.

In addition, share gains in core barcoding segments, greater adoption of barcoding, card printing for personal identification, movement into digital photo printing, and other specialty printing applications will drive Zebra's growth. We still continue to invest in product development, global expansion, sales and marketing activities to support further high growth and competitive advantage. Among these areas are -- during 2004 Zebra invested for clear global leadership in RFID technology. We increased our product offerings from two to nine, we built our channel infrastructure and staffed key positions, we won many competitive situations based on product performance, often in head-to-heads tests in these early stages of market development. For 2005, we are well positioned to take advantage of expected rollouts of RFID technology. We will introduce additional new products to support international adoption and are leveraging on strategic relationships to ensure easy integration with a growing number of software offerings supporting enterprise RFID deployments.

Countries and regions with developing market economies and infrastructures offer abundant places for further geographic expansion. For 2005, we'll build on our previous successes and invest further in Mexico, China, and Eastern Europe. Opportunities in retail remain high as more companies deploy productivity-enhancing technologies to lower cost and improve customer satisfaction. Going into 2005, we are also focusing more attention on patient safety and mobile warehousing in addition to supporting the progress we've made in public safety and small packet delivery.

The outlook for mobile and wireless printing is excellent. In addition to supporting the growth in several of the vertical market applications already discussed, we are moving aggressively into new areas with innovative products. The RW-420, the first thermal printers optimized for route accounting and direct-store delivery, has already opened several new incremental sales opportunities since its introduction late last year. We expect to introduce more mobile printers in 2005 as we continue to expand distribution and support this exciting product line.

Thank you for your interest in Zebra. By any measure, we completed a great year. As important, our strategy to deliver specialty digital printing solutions to targeted high-growth markets and the actions we are taking to achieve our goals position us for further growth and success. As you can tell, we have a high level of optimism going into 2005, and we look forward to sharing our progress with you as the year unfolds. We would now be very happy to answer your questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Jeff Rosenberg.

The first question I wanted to ask was related to the strength in RFID. Could you comment at all on the supplies element of that at this stage? Are you seeing success in terms of your hope of retaining a higher percentage of the supplies that are coming from your products?

Well, I don't know that we can speak very much to retention at this early stage. What we're really involved with are pilots, so retention is far down the road for us.

Clearly, we're hopeful that we can retain business in this area, because the relative cost of an RFID label to a non-RFID label is, of course, quite significant. So we're attracted to that area and have done a number of things so that we can pursue that.

Overall, the RFID business for us has been very encouraging -- lots of twists and turns in the road, but clearly making progress and I think that we're one of the key leaders in that space, at least as it relates to printing and encoding technology and smart labeling.

Okay, and then to follow-up on a different topic, I was struck by the trend sequentially and geographically, and I wondered if there was anything in terms of lumpiness that you saw that you could comment on relative to the strength that you saw in Europe and internationally more broadly and then, conversely, some unusual sequential decline in the North American region?

The sequential decline in the North American region was strictly due to the fact that large retail customers don't like to deploy technology in the fourth quarter during Christmas season -- I mean -- that's flat-out the reason. And as far as the growth in Europe, which you correctly observe, was quite impressive, especially if you look at it on a sequential basis. I think they're up over 20% sequentially.

To be perfectly honest with you, Jeff, there was no single large lump to cause that. It was a broad-based sales effort. I think we are very clearly benefiting from the reorganization that our new managing director put in place earlier in the year. We now have seven sub-regions that are pretty independent in terms of the resources they have available to them. We're expanding that to nine sub-regions in 2005, and we've also gone through a comprehensive upgrade of the staff, the sales staff. We've got better people in more regions. So we're just recognizing the benefit of a reorganization and an investment in the sales infrastructure in Europe, and it's getting great results.

Your next question comes from the line of Chris Quilty with Raymond James.

Good morning, gentlemen. A question for you, Randy, it looks like there was a bigger lump of capex in the fourth quarter. Was there anything specific going on there?

No. I think I've observed to you guys on other occasions that the largest amount of our investment goes into information technology, and I believe that during the quarter we had some rollouts of some technology initiatives that actually came online during the quarter. So we just recognize the capital expense. So it's really nothing other than that.

That and your new office furniture?

You can count on that, right?

Also, on the foreign exchange and hedging side of the activity there, can you give us an indication of what you're targeting in terms of currency, looking out into 2005 and where the hedging strategy hits and what the impact might be?

What we do is -- 2005, we plan out to be at the same rate that we ended 2004 with. We have no real ability, as anybody else, to forecast where exchange rates are going. We do have a hedging program for revenues that goes out roughly six months on a portion of our euro-denominated revenues, which, as I think I've indicated previously, is about 25% of consolidated sales. Euro-denominated revenues are 25%, and we hedge up to -- we hedge a portion of that out to as much as six months.

Again, it's really a question of -- there's no effort here to forecast what exchange rates are going to be. This is really an effort simply to moderate, if you will, the quarter-to-quarter fluctuations and rates that we've experienced. This quarter it was a losing proposition, as you can see. Rates spiked up rather substantially, and we didn't benefit from the full amount of the spike-up.

Okay, and investment income looked a bit lower than I would have been expecting and I know -- well, going back a year ago, you went to a more active --

A year ago, and you go back and check the call, we had several one-time events in the fourth quarter, and one-time events are, indeed, one time. It didn't happen again this year. We had a state tax settlement. We got some interest back on that. We had some recognition of some income on some investments, and this quarter was a much more normalized experience, if you will. Again, the rates of return on these kinds of investments are not very high right now, as you are well aware -- 2.3% on beginning balances is -- it's 2.3%, and --

If I can ask a question on the RFID side of the business -- is it likely that the robust sales you saw in the fourth quarter was simply tied to companies looking to come in compliance with Wal-Mart and are we, in fact, likely to see a fallow period here for the next six months until gen 2 standard -- or gen 2 tags start to become available and at that time companies will get a little bit more aggressive about putting in place printers?

It looks like you've got it all mapped out. Actually, we don't have any comment, and what our RFID business will be in the first half of the year. I would agree with you, however, that there were some companies who felt some pressure, I think, to be in compliance at the end of the year, and, on the other hand, there were several companies that didn't feel that same pressure. So it's hard to really predict, because there are a lot of companies that are having favorable results with their pilot programs, and they're moving on to the next stage. So I think you know that the Wal-Mart is moving to the next couple of hundred. The work that has been done so far was limited to distribution center in Texas. So there will be a major rollout and more capacity is needed. Probably the most dampening factor on the situation where we stand right now is having gen 2 technology available in the marketplace and people delaying investments until gen 2 is available. So there's a variety of different factors and motivations and predicting exactly what's happening in a very, very volatile business is -- well, certainly, we have internal budgets, but we're not publishing or communicating quarterly expectations on RFID sales.

Oh, I understand that. The printers you have sold, to date, are all upgradable to gen 2, is that true?

When you say -- all the printers that we've sold?

Well, not going back to 1998, but in the past year or year-and-a-half are you giving customers the ability to --

We offer people -- if they want a product that is upgradable, then we have available to them an upgradable product.

That would be more expensive than if it's just a class 1 printer today?

Actually, I don't know exactly what the price differentials are, but, yes, it is more expensive than buying a product that is not upgradable. That option is available to customers who choose to exercise that option.

Okay, and I can't remember, do you have a gen 2 printer available for sale today that meets all the specs approved in December?

No.

But will in the next quarter or two, obviously?

That's right.

Okay, and final question on the Alchemy printer that you introduced, going back a year ago -- what's been the general take from customers on what that sort of a design of printer that does -- creating tags on the fly from separate consumable streams?

It really depends upon who the customer is on the reaction to it and what their business is. We actually have not released a production version of the product. We've built some prototypes of the product, and we have not made definitive plans relative to the future of the product in the form that we showed it or -- perhaps in a next-generation form but nothing I can announce on that.

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

Good morning. Could you guys just address a little bit the facility consolidation that's completed this past November and what you expect to gain in terms of leverage from that and how that might impact the margins? And also if you could comment on would there be any investment initiatives that you would have, going forward, that might offset any gains that you have there?

We have completed the move from -- there's actually two different parts to this -- one part is the manufacture of mobile printers, and so that was moved from Warwick to Camarillo, and actually we finished our consolidation ahead of schedule, and the gains that we have seen, so far, are roughly double what we anticipated we were going to get, and we got gains across a variety of different dimensions of what you'd expect from a consolidation.

We actually got more benefit in the area of cost reduction of some of our sub-assemblies than we anticipated getting. So, overall, that move has been very favorable. It's increased our capacity, and it was important that it was important that it did increase our capacity as well as consolidate the manufacture of like-type products. I think you're aware that the desktop product line is also made in Camarillo, so those are small, lightweight products just like the portable products are, and so there's a lot of commonality in terms of the manufacturing processes to choose.

In addition to that, what we have done is consolidate the repair organization. We actually had three repair organizations -- one in Warwick, one in Camarillo, and one in Vernon Hills, and we have consolidated that into one repair organization that's based in Vernon Hills, centrally located in the United States. And that has also worked very favorable for us. We had a major reduction in terms of the amount of total space that's consumed for repair. Our service levels have gone up, and our costs of providing the service have declined. So we are very pleased with the results of both of these moves, and I don't know -- you asked in your question about other expenses that we might incur that would offset the benefits that we've gotten -- none come to mind, in particular.

Okay, and then I just also wanted to circle back on the supplies business. Can you just address a little bit more about the things that you've done there -- just in your core supplies, not necessarily referring to RFID -- the things that you've done to try to boost that business and, as you go through that process, are you able to put through price increases?

There's a variety of things that we've done. We have taken some pricing actions and, actually, as it turns out, some increases, some decreases, not detail beyond that. We also have instituted marketing programs that we have found to be particularly effective in terms of certain segments of the marketplace, and we also have got a closer collaboration with certain segments of our channel, and, lastly, we have been able to improve the quality of the product that we serve -- the consistency of the product and the absolute quality of the product -- not just the physical product but in terms of processing of orders and our responsiveness in terms of shipping the orders. So there have been a lot of things that we have done in this area, and we are anticipating doing more in this area over the course of '05.

I think you know what our supplies revenue is, and our estimate is that we sell supplies for over a relatively small percentage of our installed base, and so that carrot is out there for us to capture and retain more of the supply business or in product that can go through our machines.

Now, with that said, there are certain customers who are in the supplies business themselves in one way or another, and they're not particularly interested in buying the supplies from us, as that is their business.

And can you comment on what the attach rates are that you have now and what they might be able to get up to?

No. I really don't have that information.

Your next question is from Philip Alling with Bear Stearns.

Thanks much -- I just wanted to get a better sense in terms of the long-term growth outlook that you have, given the performance that you've shown in the December quarter and what you're looking at in your pipeline now. Is there any change now from what your view was, say, three and 12 months ago?

We have just come off of a year of over 20% growth, and I think I commented that we haven't seen that level of growth since '96, was the last time we were in that neck of the woods, so that's pretty significant for us. As we look forward, we see our business as being very robust and the visibility that you have into this kind of a business is not too long term. And while we have not gone ahead and provided you visibility, other than Randy provided some guidance for the first quarter, one of the things that I tried to do in my prepared remarks was to highlight very specific areas where the company is doing quite well and where our visibility is really quite good, and expectations are relatively high.

So we believe that we can sustain, for some period of time, let's say more robust business than we saw in the early part of this decade, recognizing, of course, that there was quite a pullback in the auto ID business in '01 that's a part of that period of time, but we have strengthened our company in so many ways and have so many different ways to grow it. We're very, very fortunate in that regard, and I think we've said here in the call, that we're quite optimistic about the year.

With that said, the first quarter for us is historically a very challenging quarter. I really don't know all the reasons why it is so challenging, but the fact of the matter is, if you historically look back over our record, it doesn't fall this way every year, but it's usually difficult for us to beat the fourth quarter in the first quarter. We did that this last year, and the guidance we're providing says that we are expected to do that again, here in the first quarter of this year. So I hope that gives you some color and some view about our optimism, even though it's not numeric.

I just also want to follow-up quickly on Asia Pacific region. It looks like the growth that you reported there, a little below in some other regions is -- what are the expectations there, going forward, and is there anything in particular in the performance there that was maybe one time in nature?

China is a major investment area for us. We have done well in China and actually what people would call "the greater China area." If you look at our long-term growth in the Asia Pacific region, it has been favorable. We have a number of offices in China, and we expect to increase that number of offices over the course of this year, and we intend to provide more than just a sales office to support our marketing efforts in China. So that's an important area, and we're going to invest accordingly.

A final question with respect to the RFID sales. I know you've had some questions on it before, a lot of comments in and around Wal-Mart. Certainly, they're not highlight only big-box retailer that's moving forward with plans to implement this technology for inventory tracking. Could you give us a sense as to what your exposure may be to some of those initiatives outside of Wal-Mart and are you baking in some growth from some areas outside of Wal-Mart compliance?

We absolutely are. The DOD initiative, of course, is a very important initiative, and it has far-reaching potential impacts on a company and on our results. There are a number of other companies, major corporations, that have announced initiatives in that area, and they're all in the press, and some are U.S.-based and some are based outside the United States, and, as you would expect, as we learn of each and every one of those, we deploy people to meet, present, and hopefully garner some pieces of their business. So, yes, there's little question about the dependency going far beyond Wal-Mart and, you know, Wal-Mart's efforts, so far, have primarily been their top 100 suppliers. Their plan calls for a rollout to the next tier of their suppliers very soon, and to expand the first year on a broader base than they did, so far, with these pilots.

Any color on the card printer business in the December quarter and the near-term outlook?

The card business for us is a good business, and actually our card business, or our card division, if you will, really is involved with three businesses, our three major product markets, let's say. One is a photo ID card market, and the second would be the driver's license marketplace, of which we do a pretty good job in that area, and the last would be photo printing, and we have relationships within the photographic industry, photo-processing industry, and have design manufacture printers that are used in digital photography to reduce dye diffusion photographs. So that division of our business, as you can see, those are areas -- digital cameras is an explosive area in terms of number of prints that are being produced; the number of cameras that are being sold for digital photography is really, really impressive. So we expect to benefit from that.

The photo ID card business is a good business, and it gets extra stimulus from the security needs of people -- access control, identification, are a bigger and bigger deal around the world, and so we like our position in that business and expect it to continue to grow.

Your next question comes from the line of Ajit Pai with Thomas Weisel Partners.

Hi, congratulations on a great quarter. This is Andy for Ajit. A couple of questions -- one is regarding the geographic sales. I would like to gather more color in terms of the competitive situations in North America and in Europe. If you can also see if you can provide what's their currency impact on European sales and also, in North America, can we expect the acceleration of growth out there in shipment -- lumpiness is gone. Is that more or less is not an issue?

Okay, you asked a whole bunch of things over here. I'm going to turn this over to Randy, because I know he has part of the answer.

The part of the answer I have is the currency impact. Ajit, we had about 1.2% of our consolidated growth could be laid at the feet of currency gains in the quarter. That was immediately offset with 1.2 percentage points of growth that was knocked off the top line by pricing adjustments to maintain our competitive positioning specifically in the European market. So I would say the currency impact on our overall results was zilch in this quarter.

That being said, we also had a report on the P&L, a $1m reduction in our top line due to hedging activities, which said if we had flown naked instead of flying hedged, we would have had $1m more of revenues in the quarter than we actually reported. Currency, overall, for the year certainly was a positive benefit for us, because we manufacture in dollars, and we get 25% of our revenues in euros and another portion of it in sterling, and both of those currencies strengthened materially against the dollar during the year, and, yes, we benefited as did a lot of companies that are U.S.-based, and we would expect the comparative exchange rates in 2005 to also have some positive benefit for us.

Regarding North America, it seems like this is the first sequential decline in many quarters.

We talked about this already -- that was strictly due to the fact that large retail customers don't like to deploy technology in the fourth quarter simply because it's the Christmas season. If you look -- well, that's simply what it was. It was strictly the timing of shipments. The overall health of the market in North America is quite strong. We had a very, very strong third quarter in North America. So it would contribute to the sequential number.

Okay, and the next question is regarding the opening margins. It seems like often we take out -- it is very high margins, and it seems like if we take out all the one-time, like exit costs and M&A costs, the fourth quarter seems to be flat or slightly declining. Is that trend due to seasonality, or is this a trend that we can -- can you give a little bit more color on that?

Well, the operating margin, excluding the intangibles and all the one-timers that you mentioned was 26.8%, and you correctly observed that it was down from 27% on the previous quarter. Nonetheless, I would remind you that a year ago that same operating margin was 23.6%, so it's up year-to-year. We experienced considerable, what I would say "operating leverage," throughout 2004 because our operating expenses grew at a slower pace than our sales did throughout the year. We have a need, as most organizations do, to hire people to support the growth that we anticipate. So we are hiring people, we are investing in market expansion activities, we're putting people in various parts of the world, we're hiring engineers to develop products, and all this is going to drive top-line growth. I would opine that a 26.8% operating profit margin for what amounts to a manufacturing company is pretty healthy manufacturing operating margins. I wouldn't get overly concerned about the fact it's down three-tenths of a point from the prior quarter.

The reason I asked you that is because we want to know, with the benefit from the [indiscernible-highly accented language] can we expect operating margin to expand again?

Well, I think we provided some guidance in our press release and in my comments that indicated we're still going to have a pretty healthy operating margin in the first quarter.

Your next question comes from the line of Mike Whitfield with Wachovia Securities.

Thank you, good morning. I wanted to ask about -- you called out specifically in the press release some IP-related expenses, and can you talk about how much of that will be ongoing, and when can we see an abatement to that? What kind of magnitude are we talking about?

Legal expenses -- I would say -- you said IP expenses, correct?

Correct.

I would say that we expect to continue to see some IP-related expenses, and I believe those are technically would be legal expenses that are related to IP, simply due to the fact that we are in a litigious environment, and we have -- IP has become an increasingly important area for all companies, particularly in new technology areas like RFID. We've done some staffing in the area of IP. We recognize, as we've always recognized, the importance of IP, but I would say that it's taken on more importance in the recent years and, consequently, we have people on staff that, in the past, have not been on staff. So we are incurring costs as a result of that. And there are people that challenge us from time to time.

Okay, and then you mentioned specific areas on the international front, where there are opportunities to grow, and can you talk about some of the forward-looking actions and how does that work out in terms of costs being one-time versus ongoing costs for additional personnel?

In terms of international opportunities, there's two or three things that I might comment on. One is in the area of mobile printing. When we entered this space of mobile printing, actually, when we made an acquisition in the area of mobile printing, we found the absolute lion's share, over 95% of our business, was U.S.-based, and our intention was to roll that technology out on a European basis first. And so we took a number of steps and made a lot of investment, and we are starting to reap some of the benefits from making those investments.

Secondly, the RFID opportunities have spread to Europe, and so we are putting additional money into RFID support. And the third -- I think Randy spoke about the sub-regions and what we've done is picked certain regions of Europe that, in the past, we did not staff very moderately, and we've stepped up our staffing in those regions. So those three areas, the opportunities from mobile, the opportunities from RFID, and the geographic expansion within Europe are three things we are focusing energy here.

Okay, so with those three things in Europe, for example, represent kind of an ongoing SG&A type costs?

Well, there's a step function in terms of moving from the seven to nine regions, but I would expect, in the area of mobile and RFID, those expenses will continue to rise as those areas become larger and more attractive to us.

Could you comment on how the outcomes and milestones we could look for in your ERP and particularly the SAP relationship that you've established?

Milestones that you could look to?

Yes, some way to gauge the success of it from our vantage point.

I don't know what I could tell you on that regard. I don't think I've got a good answer to that question. Randy, would you want to add something?

I think the short answer is we don't have any specific milestones that we'd report externally. Clearly, we have internal objectives on this, but it's not something that we would disclose. I think the overall -- the most important milestone from your perspective is certainly our continued success in growing our revenue, and that will be a contributor to that, as will many of the other things that we're doing from a geographic expansion and a variety of other measures. And they'll be a contributor. Listen, we've been online for an hour now, and with respect to the fact it's earnings season, we're going to have one more questioner, and then we're going to ask you guys if you have any additional questions to give us a direct phone call, and we'll be glad to take care of those questions in that venue. So -- next question -- last question.

Yes, your final question is from Greg Halter with LJR Great Lakes Review.

Congratulations on the record earnings. I know on the last quarter you had talked about steel prices, but you hadn't been able to effectively offset those -- and I know it's a small part of your business -- but can you comment on that relative to your business.

I'd have to say, Greg, that it is so insignificant I can't comment on it. We have -- you know, quite honestly, there are so many ups and downs in that area and the simple fact is we have benefited and continue to benefit from product cost reductions quarter after quarter. One thing we did not mention is that the gross margin we reported for the full year -- for the full year -- was the best gross margin we've ever had as a company, period. And this is an environment where our average unit prices are 79% down from what they were when we went public. So we figured out the magic sauce, and we're continuing to use it. And I anticipate that we'll continue to have strong gross margins.

And along those same lines, I know, Ed, in the past you've talked about the mobile margins and, as you sell more of them you get more effective and efficient. How far -- and I presume that's helping your margins as well, but how far along in that process do you think you are -- halfway there or 10% or 90?

I couldn't put it into a percentage for you, but what I can tell you is that the move from Warwick to Camarillo certainly contributed significantly to improvement in that area. I do expect, as mobile takes on a more and more important part of our business, we'll continue to improve in the margin area. However, I would have to say that my number-one focus is really not gross margins in the business. They're nice, but I am more concerned with enhancing shareholder value and so consequently the growth that we can achieve -- the bottom-linen growth that we can achieve, even if the gross margins are below average for us, frankly, that's fine. The competitive environment in different markets is different, and in order to play the game in some places, sometimes you have to take the lower margins. That doesn't mean we won't strive to improve our margins, but that it's not critical to our game plan as long as we can be competitive in the market, which I believe we are.

Okay, great. Two last quickies -- has the portfolio composition changed at all from the last quarter and what are your thoughts on capital spending for 2005?

The answer is no, and, yes, we have capital spending plans for 2005. They are not going to be materially different from what they've been historically, which is pretty modest, and as you, I'm sure, noticed. We continue to make investments that are necessary to support our product development efforts. We continue to invest in information technology, to improve our business processes, and support our customers, and that's going to continue. Certainly, we're clearly not in a position where we're capital-constrained, as you know, and we'll continue to do what's necessary to grow the business.

That concludes our call for today. The next time we have a scheduled conference call is for our first quarter earnings release, which is currently scheduled for May 4th. So we look forward to reporting some great results for the first quarter at that time. Thank you again for your participation today.

This concludes the Zebra Technology's fourth quarter and full-year earnings release conference call. You may now disconnect.