斑馬技術公司 (ZBRA) 2005 Q1 法說會逐字稿

Good morning and welcome to the Zebra Technologies first-quarter conference call. Joining us from Zebra Technologies are Mr. Charles Whitchurch, CFO and Mr. Edward Kaplan, CEO of Zebra Technologies. [OPERATOR INSTRUCTIONS] At the request of Zebra Technologies this conference is being recorded. If anyone has any objections, please disconnect at this time. At this time, I would like to introduce Mr. Charles Whitchurch, CFO of Zebra Technologies. Sir you may begin.

Good morning, everybody and thank you for joining us. Certain statements we will make on this call will relate to future events or circumstances and will therefore be forward-looking statement within the meaning of the Securities Litigation Reform Act of 1995. In particular, any statements we make regarding our financial forecasts for the 2005 second quarter and expectations about trends in the Company's business will be forward-looking statements. The forward-looking statements involve risks, uncertainties and other factors that could cause Zebra's actual results to differ materially from those expressed or implied by such forward-looking statements. Additional information concerning such factors is available in the press release issued today by Zebra, as well as Zebra's filing with the Securities and Exchange Commission. In particular we direct your attention to the Company's form 10-K for the year ended December 31, 2004. Now let me turn the call over to Ed Kaplan for some brief opening remarks.

Thanks, Randy. Welcome to everyone. This morning we've reported first-quarter results that were below our guidance for the first time in the last 15 quarters. We also had very unseasoned gross margin and operating expenses related to one-time writeoffs in additions to reserve accounts. Our sales shortfall was $4 million. Half of the shortfall was due to a temporary shipment bottleneck in our Preston distribution facility. The balance was caused by an order slowdown including some order deferrals at the end of the quarter. Earnings of $0.37 per share were also below guidance. $0.04 attributed to one-time charges and $0.02 to the sales shortfall. While disappointed in these results, this does not diminish our confidence or optimism about Zebra's future. Our core business remains firm.

Our growth strategy continues to deliver results in our pursuit of delivering specialty digital printing applications to high-growth markets. We continue to gain share in established markets and expand into new ones through stronger channels, greater global reach and an expanding product line. We have had a great many reasons to remain very positive in our ability to deliver increased - - increases in stockholder value. The Board's action yesterday approving a stock buy-back program underscores this confidence and favorable outlook. In the first quarter, sales increased 11%. With all geographies, channels, and major product lines contributing to the growth. We ended the quarter with a strong business pipeline. Feedback from our channel partners indicates a healthy deal activity and order flow. We made important progress in extending market leadership and growth in fundamentally healthy markets.

Let me briefly share with you some details about this progress. We've maintained our aggressive investments in international expansion. In China, one of the world's great economic engines, we continued building infrastructure to serve rapidly increasing needs for bar code labeling solutions and other on-demand specialty printing applications. During the quarter, we placed more sales representatives and sales engineers in the country. And hired a managing director, a newly created position, to lead our efforts in this important market. Our plans call for further investments in this high growth territory throughout this year. We also increased staffing in Mexico. Another priority area for 2005.

In both Asia Pacific and Latin America, we migrated and adapted our highly successful Partners First channel program to strengthen relationships and provide a vehicle for further channel expansion in those regions. In Europe, we also added sales representation and recently opened a new distribution center in Heerenveen, Netherlands at more than double the size of our present Preston facility in the UK. Heerenveen greatly increases distribution capacity, improves service, and will lower shipping costs to our customers. Our product leadership continued with the introduction of the RW 420 mobile printer optimized for route accounting and direct store delivery.

Customer interest in this new product family has been high, and we already won some high profile business in this area. In a brief time, route accounting and direct store delivery have emerged as one of the top opportunities for wireless mobile printing. We are optimistic for further success here as the year progresses. Since the beginning of the year, we also unveiled several new RFID products, including our first print engine for high speed print and apply applications and a printer encoder, meeting the European RFID specifications. More than half of the first 137 vendors, currently under Wal-Mart compliance mandate, using printer encoders are printing smart labels with Zebra products. In addition, we are pleased with the engagement of the next wave of companies and are working actively with many of them to help them meet their RFID goals, either in piloting or moving directly to implementation.

While Zebra has been a provider of smart labels for sometime, it has recently stepped up its investments in this area. By vertically integrating this process, we have expanded capacity and are now in a position to ensure smart label quality and reliability. Making an even stronger value proposition for our customers. In corporate development, Phil Gerskovich joined the management team to head up M&A efforts. We look forward to increasing our activity and redeploying our substantial cash reserves in value-creating investments. While we had a small dip below the low end of our sales guidance, our future looks very bright and our competitive position is quite strong. We still anticipate a very positive year. Our confidence is reinforced by the guidance Randy will provide. Now here Randy to give a detailed review of first quarter results and our upward guidance for the second quarter.

Thank you Ed and good morning, everyone. Sales for the quarter were up by 10.7% to $170.7 million and include a 12.7% increase in hardware sales. We're particularly pleased with continued strength in mobile printer products despite three notable order deferrals in Europe. The order flow for mobile products worldwide continues to be very active and strong. Desktop and card imaging printers were also excellent performers in the quarter. Supplies growth of 4.4% was negatively affected by weakness in orders from some of our retail customers. But label shipments for manufacturing and distribution applications increased substantially.

By region, we had strong growth in Europe, up 15.5%, despite the issue of distribution capacity that left $1.8 million of shippable product sitting on the dock at quarter end. The April opening of our new distribution facility in Heerenveen, Netherlands, increases shipping capacity, improves service levels and lowers shipping costs for our European customers. Preston will remain as a label converting operation, serving the European market. Asia Pacific sales growth of 2.5% and Latin American sales growth of 20% resulted in an overall growth of 13.9% to $83.2 million or 48.7% of total sales in the quarter. North American sales increased by 7.9%. We were affected here by a combination of relatively weak retail activity and rescheduling of specific large projects. There was also a general sense we were affected by the recently reported slowdown in IT spending and manufacturing activity in the US.

Sales to ScanSource, our largest customer, accounted for 15.7% of total sales, compared to 13.1% a year ago. Gross margin in the quarter was 51.2% and includes a one-time, $1.5 million increase in our warranty reserve that had a 0.9 of a percentage point increase on profitability - - impact on profitability. During an internal review, we identified a specification variance in a low-volume, older printer that is being discontinued. We are offering all users of this product a complete replacement with a newer model. Excluding one-time charges of $2.6 million, operating expenses were 46.2 million, up 17% over 2004. And in line with the guidance we provided during our last call. The charges included in operating expenses are a $1.1 million writeoff for tooling and materials related to product development. And secondly the remaining value of a lease on vacant office space in Wokingham, UK.

We determined that market conditions would not allow us to sublease this facility. And therefore, we established a $1.5 million reserve for the remaining costs under this lease obligation. The increase in core operating expenses was caused by higher payroll, legal fees and market development funds. First-quarter investment income was $3.3 million, equating to a 2.3% return on beginning balances. Net income of $27.1 million was 15.9% of sales, and $0.37 per diluted share. In total, the first-quarter charges lowered earnings per share by $0.04. Free cash flow for the quarter was $11.5 million. And $7.7 million for - - and includes $7.7 million for the acquisition of a small label converter on the west coast. Receivables were up by $4.2 million. With DSO moving to 54 days because of order and shipment flow at the end of the quarter.

A $4.6 million increase in inventories related entirely to the start-up of the Heerenveen facility in the Netherlands. Our cash position at quarter end was $573 million. We're looking for a sequential and comparable increase in sales and earnings for the second quarter. Sales are expected to be between $177 million and $187 million, which equates to a midpoint growth of approximately 12% from a year ago. We expect quarterly earnings to be in the range of $0.43 to $0.48 a share. This forecast implies a gross margin continuing between 52% and 52.5% and incorporates an operating expense assumption of $47 million to $48 million. The effective tax rate for the year is 35%. That concludes my formal remarks. Thank you for your attention. And I'll return the call to Ed for some concluding remarks.

Thanks, Randy. Zebra holds an unmatched strategic position in delivering specialty printer solutions to attractive global markets. Our long-term success has come about by expanding the number of solutions we provide in an increasing vertical market applications. We continue to have confidence in the fundamental forces that drive companies in a competitive, global environment to adopt on-demand printing solutions as a proven way to help lower costs, improve quality, strengthen security, and drive better customer service. Our financial strength gives us the ability to continue investing in favorable business opportunities to support long-term growth.

This strategy has continually enabled us to gain share, extend leadership, and build an even more formidable, competitive position in our pursuit of creating stockholder value. Looking ahead, Zebra has more avenues for growth than ever before. We have a stronger and broader channel relationship. 120 more than a year ago in North America alone that are driving more business toward Zebra. Greater international infrastructure is positioning us for long-term success in rapidly developing regions that are developing auto I.D. technologies to compete effectively in world markets. Our leading positions in card and mobile and wireless printing are contributing to current growth by serving the increasing demands for personal identification and enterprise mobility.

Our focus on vertical market applications is yielding results in retail, as well as patient safety and other health care solutions. Our position in RFID gives us great optimism for success in these emerging market developments. In conclusion, I'd like to emphasize that Zebra's strategic position continues to improve. And we are optimistic about further growth in the second quarter and the second half of this year. Thank you for listening. We now would be happy to answer your questions.

And I'd like to comment here. Before we get started, I'd like to limit the questions to one question and a followup. And we're going to attempt to end this call no later than 11:00 Central Time. And if there are any remaining questions at that point, we'll be more than happy to take them by telephone one on one. Okay, let's move ahead.

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

I wanted to ask for maybe a little bit of additional detail on the order deferrals you're seeing. I just wanted to confirm, it sounds like you're saying that you're seeing that across multiple geographies. And maybe is there any commentary as to whether there's any concentration by product type or application end markets you might want to share?

Yes. There are order deferrals in multiple regions. I'd have to say - - generally these would be mostly related to mobile printing products. Particularly in the UK. I know that there were three order deferrals that specifically related to mobile printing projects.

Okay. And your confident that you - - is there a catchup in Q2?

There's some catchup in Q2 and some catchup in Q3 and Q4. I mean, it wasn't all - - it wasn't an order deferral from the 13th week of the first quarter to the first week of the second quarter. It was more for the remaining portion of the year.

Okay. And then on the smart labeling side, the commentary you made about vertical integration. Is that something where we're talking about inserting inlays in labels? Is there further opportunity for additional vertical integration? And maybe a broad commentary on what you're seeing in terms of your retention rate of supply sales and RFID relative to your experience more broadly, in your barcode labeling business?

I think you squeezed in three questions there, Jeff. One is we've some made additional capital expenditures to increase our production rate in the capacity of what it is we are able to produce. And yes, we are getting retention in some areas. And yes, we are looking at additional methods to provide vertical integration that will drive down costs, which is all important in this marketplace.

Great. I guess I'm out of questions. Thanks.

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

Good morning, gentlemen. I was hoping you could give us some more color on vertical markets? And obviously it sounds like there was a weakening in retail. And can you give us an idea of whether - - how quickly that came about, that slowdown in the retail sector? And are there other verticals where you think you could see some offsetting strengths to give you the confidence on the go ahead guidance?

I think you're reading more into this than you really ought to. The - - we are in so many different vertical markets. And some - - well if you cut them very high like retail or manufacturing, you cover a lot of countries and a lot of customers and a lot of different subapplications. The revenue shortfall from the guidance is relatively small. It's $4 million. This is not an astronomical amount of money when you look at it in the context of doing 170 million-plus in business. So there are - - we had half of that $4 million was sitting on a shipping dock in Preston because of our inability to process it. Which I, frankly, am embarrassed to even comment on. So I don't know that I can give you a lot of macro kind of feedback relative to particular vertical markets that are showing weakness. I would not be inclined to do that.

Well, at least that order wasn't sitting in Randy's personal warehouse.

Unless it's in Preston. It was not.

This counts as my followup to that question. Which is, portable printing; is it fair to say you have a higher than average exposure to retail in that product line relative to desktop?

Absolutely. Relative to desktop, you said?

Yes.

Yes, absolutely. I would say that the place where the technology today is embraced a lot is in the retail sector. And if you look at the really major retailers in the marketplace, they see the value in utilizing this technology. And it's actually one of the things that gives us very great encouragement. Because if in fact the larger companies can benefit by utilization of the technology, we're quite certain that many of the smaller and smaller - - here, these are still multibillion dollar entities, but smaller companies can also benefit from it. So yes, that is a major place where the technology is used. It's also used in the automobile rental area and in small parcel delivery area. Those are all places where it's - - oh and the last area I would say is route accounting. So all of those areas are utilizing mobile technology. And frequently there is other handheld products besides just printers that are involved, that are provided by, and there are other other companies in our industry.

Okay. I'm out of bullets so I'll circle back.

Your next question comes from the line of Philip Alling with Bear Stearns.

Thanks very much. I wanted to get more color on the domestic sales situation. Obviously you had another quarter down sequentially there. And I wanted to get a better sense of perhaps any changes in relationships with other distribution partners, obviously bearing in mind what you had to say about ScanSource. It looked as if that was on track there. Is there anything that you could share with us that would give us a better sense of what's going on with other distribution partners that may have contributed to the lower than expected performance there domestically in your sales?

I think the domestic sales situation doesn't relate to any changes in relationship with distribution partners. I mean, all we have, a number of them, obviously ScanSource is the most significant. Our relationships with all of them are quite good. What we do see, we find that the - - on the positive side that the - - one of the proxies we use for the health of the overall market relates to the sales out from our distribution partners. And that has continued to be - - continued through the quarter to be quite strong. I mean, there was some dip near the end of the quarter and - - but nothing that we're frankly very concerned about. So I think the overall health of the North American business is quite good. We were affected by some order deferrals. And as I indicated, there was some weakness in purchases of retail - - non-direct retail customers. Particularly as it relates to supplies sales. But overall, I think we see the general tone of business, this continues to be quite good. The order activity is quite high. Quotation activity is quite high. Pipeline is looking good. And we are reasonably comfortable with the prospects for the Company in the near term and very comfortable with it in the long term. So I have no other comments to make about North America at this point.

With respect - - this is my followup on just the art of your 420 mobile printer as well as the RFID printer encoders that you've been selling, have sales of those products, did they meet your expectations in the first quarter? And could you also just comment on with respect to the printer encoder? Should we expect to see any increased gross margin pressure on - - given the sales of printer encoders or is your margin solid there on those products?

Yes. There's really no margin issue as it relates to the RFID. Well - - let me take that back. There's two classes of customers. Those that you - - who buy the product. And those who we give the product to so they can use it for an extended period of time. And so the margins are very low on those that we give away. But on the other hand, those that we sell, we do just fine with. We - - the one remark that was made here, two important remarks relative to the RFID printer encoder. One is that the - - Zebra has just started to be able to ship products that meets the e standard that has been specified in Europe. That is a very important issue for us. Many companies out there don't have reading technology that complies with the standards, and we now have that built into our product. And so we're very optimistic about that.

And secondly, those people who want to operate in high volume, automated print and apply systems, which we will see more and more of that going on as the - - particularly as the Wal-Mart initiative moves from really - - I'd have to call pilot stage into real production stage. More rapid and lower labor consumptive approaches to putting on labels will become important. And so the offering of the PAX product is important in terms of fulfilling that particular need. In terms of the RW 420, we're doing actually quite well with that. And it's essentially, it's a route accounting, direct-store delivery application. And it's what I was really alluding to before when we were talking about the four vertical markets for mobile products. That is, those are indeed the - - one of the verticals where the mobile technology is being employed. And we're very pleased with the reception that we've gotten to the - - to our new product offering there.

Thanks much. I'll get back in the queue.

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

Can you guys give us more understanding of why the distribution issue occurred in Preston and why a similar issue won't happen in the future?

Yes. We didn't have enough floor space in Preston. And we're doing too much business in Europe. And the facility wasn't big enough to shove the product out the door frankly. We couldn't process it all. We've been sensitive to this issue it's been emerging for a number of quarters. And we found a new facility in the Netherlands, which is double the size - - I think it's more than twice the size of the Preston facility and moreover is 100% dedicated to distribution. We opened it in mid April and it will have a number of very favorable benefits for us. One it's closer to our customer. So their shipping costs go down. It's designed to be a distribution facility so our operating efficiencies are going to go up. And we have more floor space to store product. So, our service levels will probably improve substantially to our end-user customers. So we're not expecting any future issues with distribution capacity in the European market. The Preston facility will stay on line but will be dedicated exclusively to label converting, print serving the European market.

Okay. And then on the supplies business, can you just give more understanding of the supplies outlook, Randy? You highlighted what were weak issues in this quarter. But what do you guys see moving forward and - - ?

Supplies outlook is very positive for us. We are - - we opened a - - or acquired a small label conversion facility on the west coast. We find that our ability to be closer to the customer is critically important to growing the business because freight costs and time of delivery are important. And where you are physically located geographically has a major impact on both those issues. So I think our ability to improve our service levels to a concentration of customers located in the western half of the United States is very important. We may - - we are likely to see similar type facilities elsewhere going forward. And I think we have a great prospects for increasing the supplies business. We also mentioned that we acquired - - or made capital investments in vertically integrating the production of our RFID tags. That's also going to be important for the supplies business. So I think we're quite optimistic about that part of our business in the next several years.

Thanks.

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

Good morning, gentlemen. The first question would be regarding your distribution in Europe. ScanSource has opened - - or not opened. But expanded a distribution center in Belgium, I think. What is the kind of - - what are the pros and cons versus your expanding your own facilities versus using redistributors like Scan Source or similar redistributors out there?

Well, I think it's for us, we've spent the time and the money to establish the infrastructure and have the relationships and are able to go ahead and provide the service levels that our customers are after. That's not to say that we don't use ScanSource as a point of distribution for us in Europe. So I think by doing both of these things, I think we get the benefits of each. There are those people who want to buy product through ScanSource for a variety of reasons. And they can do so if they choose to do so. And others prefer the choice of buying from Zebra so we have that ability to do so. So I think it's not too much more than that at this point in time. You should also recognize that ScanSource's efforts in Europe are not that large. And so the advantages that they offer in the United States are not the same advantages that are offered in Europe.

Okay. And then the second question would be regarding acquisitions. With things slowing down in the sort of broader economy valuations coming in, just thinking of Zebra's positioned right now. You just talked about sort of being sort of printing Company or a digital printing Company. So I'd like to get some color as to what happened with the Atlantic acquisition> What progress that's made? And also going forward whether you're looking at yourself as becoming a supply chain Company? Because RFID by itself might not be a printing technology or more of a printing Company and looking at further applications of the printing side as a sort of area of expansion?

Right. Okay. Two questions, huh? Okay. The Atlantic acquisition was done for a couple of reasons. One was that they had a product line within the photo ID marketplace, and they had some very good technology, particularly at the high end. And so we have taken that product and made some improvements to it and integrated it with the balance of our photo ID product line and actually moved it out of the facility in - - on the east coast and moved it to the west coast. So we got the benefit of breadth and some capabilities that we didn't have in our line. The other side that business has to do with digital photo printing. And they had some important customer relationships and some important technology relative to the production of photos. And we have continued that development and expanded the relationship with their customer base. And we are essentially growing a segment of our business that is in photo printing.

Now, this is leveraging, if you will, thermal printing technologies, of which we employ three different thermal printing technologies. So we've become a stronger printer Company. And can utilize this to expand our market presence and to expand our product lines. The supply chain Company - - well, while Zebra is in the barcode business and barcodes are used in the supply chain in a variety of ways and Zebra's also in the -RFID printing and coding business. And the supply chain is -also an element of application for r that technology. We don't - - and we support that and work with companies that are very active in the supply chain. However, there are many, many other applications for the printing technologies and the specialty supplies that we provide. And so we view ourselves more - - I shouldn't say more so. We view ourselves as printing Company that applies its technologies to a variety of vertical markets in terms of solving problems within those particular vertical markets. Supply chain being one of them.

And does the acquisition pipeline look rich right now?

Actually, I think we have a number of options in terms of acquisition. And hiring Phil Gerskovich, to our team, was an important move for us. He comes from Kodak, by the way. And has a great deal of technology experience and experience within the printing marketplace, particularly photo printing marketplace. So there's a number of places where he has experience. And of course, he'll gain some additional experiences here at Zebra. But we are aggressively pursuing a variety of options as it relates to acquisitions. And I'm confident that there will be some of those coming in the near future.

Thank you very much.

Your next question comes from the line of Steven Weiss with Pineglow Capital.

A lot of your competitors over the last year have recently been implementing sourcing initiatives or technology to help them reduce costs by establishing a better line of communication with their suppliers. Helping them to have better collaboration with their suppliers to improve their bottom line. Could you provide some color as to what you've been doing or plan new initiatives for your Company that are going to be helping you reduce sourcing costs to establish better lines of communication with suppliers? I guess the bottom line so we can actually see more profits out of your Company.

I'll try to tackle that question. I don't know if I can offer you any real specifics as it relates to particular relationships. But Zebra over a long period of time has worked very hard to reduce product costs. And certainly the major source of opportunity for us lies in our procurement of the components that are used in our printers. Consequently we have for many years worked to consolidate the number of vendors that we use. To negotiate contracts with them that are - - provide us beneficial pricing. To procure globally, which means we buy a lot of product specifically outside of the United States. And bring it in for assembly in the United States. Going forward, we see many opportunities, particularly as we expand our presence in the Chinese market to engage with vendors on a more direct basis instead of three third parties, which is what we presently do at the present time. And have a direct procurement operation out of a Zebra facility in - - physically located in China.

Certainly we rely heavily on information technology to reduce the processing costs of the purchases that we make. We will be expanding that, as well. So, I think on a variety of fronts we have opportunities to continue cost reduction in our product and maintain the margins that we've enjoyed for a very long period of time. This provides me another opportunity to remind people, which I try to do every conference call I get a chance, is to note that over 14 years, Zebra has actually increased its gross margin in an environment where the average unit prices of our products have come down very, very substantially. And this is something that we are - - that didn't just happen. It happened because we paid a lot of attention to how we procure, how we design and how we manufacturer our products.

That's one good point I'm glad you mentioned that could be attributed to very good management on your part. But the main components that your procuring to have multiple suppliers within the supplier base, how are you making sure any one time in order to keep the costs low, you're running optimal allocation schedules to make sure you're having the right tradeoff?

Would you give me that again, please. I'm not sure I followed that question.

The components that have maybe multiple suppliers within your supplier base. How are you making sure you're always getting the lowest cost for a particular situation? At a particular time, are you running like optimum allocation schedules? How do you make sure that tradeoff of one supplier for another supplier at one time, giving - -?

All I can - - , I think this is getting into a little more detail than I want to get into on a conference call. But will tell you we work the supply chain quite vigorously and negotiate with the vendors that we engage with.

All right, thank you very much.

Your next question comes from the line of Mark Roberts with Roberts and Company.

Good morning. If I could ask a first question. Randy, on the expenses, most of the line items were little higher than what the trend has been running even including the one-time items. Was there a fair amount of cleanup in this quarter? Where there were some maybe unusually heavy accruals or just some accounting conservativism that you used this quarter to - -?

No, I wouldn't say so. I think the only thing that's a bit unusual in the first quarter is that the payroll benefits and taxes tend to spike up. And we had -- we have increased headcount, particularly in the fourth quarter. So we got the full cost of the headcount additions we made in the fourth quarter affecting us in the first quarter. And we also had - - because we had a great year last year we had bonus payments that hit the P & L in the - - or benefits and taxes hit the P&L for those bonus payments, which had been previously accrued. But the bonus and the benefits and taxes definitely spiked up in the first quarter. Other than that, there was the actual spend rate on operating expenses was very much in control. I don't want to - - I want to make sure that you understand that the writeoffs - - the three writeoffs which totaled a little over $4 million were indeed one-time events. And if you strip that out of the operating expenses, they were where we wanted them to be. And very very much in line with what our internal expectations were. And I believe they were also very much in line with the guidance that we provided in the first quarter.

Okay. And my followup question, Ed, you talked about the Kennedy acquisition pipeline. What type of marketing data or evidence do you have about the direction of your market share? Is it steady? Do you believe that you're taking share, or losing relative share in the markets that you're in?

From the data that we're able to get and we get it from various sources, it's usually a series of fragments that we get. Little pieces here and there. It's very clear to us that we are gaining share in the majority - - or I shouldn't say the majority, in the printer marketplace. Where we're providing specialty printers into these applications. We are gaining share.

Okay, thank you.

The next line comes from the line of Bill Fried with [Statila] Capital Management.

A real quick question on your guidance for the second quarter, relatively wide. Does that just - - in a conservativism, does it have to do with some of the deferrals that you're not sure they'll fall into the second quarter? Or perhaps you're seeing slowing in the economy that gives you pause? Could you kind of flush out a bit your thought process on giving a wide range for the quarter?

My reaction would be as - - there's an NBA championship going on. And the size of the hoop that we went ahead and made for ourselves in the first quarter, you could have barely fit a basketball through it. It was very, very tight. And we went ahead and did an analysis of other quarters and other companies, as a matter of fact. And we found that we were really trying to throw a dart through a very narrow hole. So we went back and made some adjustments in that thinking about how to provide guidance. And so that's why it looks much different on a quarter-to-quarter basis.

Okay, thank you.

Your next question comes from the line of Abraham Green with HighGrove Partners.

Hi, thanks for taking my call. First I want to commend the Company for sharing the new repurchase line. I think it's great. The buyback authorization, although it's small relative to the cash position and the free cash flow generation; in the past you guys have talked about you guys want to drain the swamp of all acquisition targets and opportunities. Before you guys did anything with the cash. And I'm just curious from a big-picture perspective, how are you guys thinking about the use of cash going forward? Whether it be internal use of capital, acquisitions, share repurchase? And then also, kind of related to that, I was wondering if there was a timing - - a time related to the buy-back program?

All right. The - - let me let Randy respond to part that for you.

Which part would you like me to respond to?

The buy-back program.

Yes. First of all, the share authorization I believe was roughly 1.7 million shares. If you go back in history, this is what remains from the - - an authorization that the Board put out a number of years ago. I think it was in March of 2000. And we engaged I believe that year in a modest use of that repurchase program. And this really amounts to what's left on that - - on this authorization. Secondly, there is at this point ,no time limit on the authorization. And we will be - - we will determine African time to time whether or not it makes sense for us to go in and make a small purchase of Zebra stock in the market. And as far as I guess you want to handle the uses of cash portion?

Exactly. Yes. The question seems to imply, well, if you're going to be utilizing cash to buy back stock, then maybe what we've been saying in the past relative to acquisitions has changed. And I wouldn't say that that's the case at all. The - - Zebra is generating a lot of cash. We're now approaching $600 million worth of cash. So a relatively small proportion that is being allocated to this stock buy-back program. We are - - we very definitely see employing cash and believe that we can create the greatest amount of shareholder value by utilizing the cash for acquisitions and we intend to do so.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question is a followup from Philip Alling with Bear Stearns.

Thank you very much. I just want to in light of the results here in the quarter, if you could just sort of review the margin and growth goals that you've talked about in the past. Any change to those going forward? And if you could just sort of, review what those targets are.

Well, we've spoken previously with you guys with respect to our long-term expectations for the Company including acquisitions that we believe that we can grow the top and bottom line by 20%. Again, including acquisitions. And our view on that relates to a belief that the underlying market is growing nominally only in the 10% to 12% range, that we can gain share in that market. So our growth rate over time should be higher than that. And we should be able to fill the balance of the difference with acquisitions. And again, on a year-to-year basis, clearly the market won't grow at a steady rate. The timing of acquisitions is always highly uncertain. So the world doesn't operate in a linear fashion and we won't operate in a linear fashion. But our view is that the Company has - - operates in some very, very attractive markets. That our strategic and financial position is excellent. And actually the strategic position of the Company has never been stronger. And the financial position of the Company has never been stronger. So we are ideally positioned in my view for a period of very extraordinary growth in both revenue and profits.

And as far as the margin goals, any change in view there about sort of, --?

No, I don't think so. I not the guidance - - the comments I just made implies that the margins would be relatively similar to what they currently are. I think the rule of thumb numbers that we've tossed around speak of gross margins. Nominally in the 50%, 51% range, operating numbers in the mid 20's. And this is basically where we're operating and have operated over the past several years. We do pay a lot of attention to both the growth rates of the Company and certainly we pay a lot of attention to our cost structure. I think you can see that from the business model that we've operated at. For a long period of time. We've got a track record that you can - - that's quite evident to anybody. And profitability is quite excellent. The cash flow is excellent. And the growth rate has been very strong over a long period of time. And I don't see any reason why that would change going forward.

Thanks.

And our final question comes from the line of Greg Halter with Great Lakes Review.

Hi, guys. In your prepared comments you talked about patient safety and other health care solutions. And to date, has that been better than you've expected or about where you expected? Less than you expected? And what do you see going forward? Relative to those areas.

It's - - this is one of the areas that I think as long as I've been in this business, which is a very, very long time, the carrot, so to speak, or the need for improving patient safety in a hospital environment has existed. And the spotlight has gotten brighter and brighter on that. And we have put more and more resource into focusing in that area. The - - it seems that things always move slower in that environment than you would want them to move. And the thing that we hear today is that the IT systems to support good patient safety initiatives are not there in a lot of cases. And the amount of money that it takes to put in these IT systems are quite expensive. However, we are seeing more and more hospitals stepping up to the plate and going through the financial cost and the organizational adjustments in terms of putting in those kind of systems. And the benefits that you can derive from utilization of wristbands that are either barcoded or provide RFID technology are now available and they work well.

Photo ID cards for nurses and doctors are available and they are of high quality. And there now is an FDA mandate relative to the labeling of drugs, prescriptions, within the hospital environment. So those things now are converging and we are - - the activity levels that we have are high. We have dedicated people in this area and the activity levels are high. And we are seeing business. I can't really answer directly whether or not these meet or are above or below our expectations because the expectations really recognize all the things that I just said. And they are vague. They are coming, they are happening. And they provide huge benefits when in fact they're implemented. So we continue to invest and believe that the future in this area is a good place to be investing.

Okay, thank you. And one followup. You spent about 2.6 million on property plant equipment, capital expenditures, so forth. In light of the new facility, the new DC in the Netherlands, where do you see the budget for 2005 in capital spending?

I would say in the range of $15 million.

Okay, thank you.

At this time, there are no further questions. I will now turn the conference back over to management for any closing remarks.

Thank you very much for your participation in today's call. A reminder, our next conference call is scheduled for July 27. And we look forward to hearing from you at that time. Thank you.

This concludes today's conference call. You may disconnect at this time.