斑馬技術公司 (ZBRA) 2005 Q3 法說會逐字稿

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

Good morning, and thank you for joining us today. Certain statements we'll make on this call will relate to future events or circumstances, and therefore will be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. In particular, any statements we make regarding our financial forecast for the 2005 fourth 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 from such forward-looking statements.

Additional information concerning such factors is available in the press release issued today by Zebra, as well as Zebra's filings with the Securities and Exchange Commission. In particular, we direct your attention to the Company's Form 10-K for the year ended December 31, 2004. Now, let me turn the call over to Ed Kaplan.

Thanks, Randy. And welcome to everybody. Zebra delivered results generally in line with our forecast. Our challenge remained weak sales in North America retail accounts against peak shipments a year ago, and economic softness in Western Europe. By contrast, several segments of our business continued to improve, including sales into non-retailed accounts, strong performance in Asia-Pacific and Latin America, and our supplies business. It was a period of incremental margin improvement; and most important, further progress toward achieving our goal -- our long-term business goals. Our confidence is firm, and our growth strategy is sound. We are working through the current business environment and continue to focus on those elements that have historically built stockholder value.

Sales in the -- in the quarter were $175.6 million, and hit the midpoint of our expectations. Operating expenses were lower than forecast at 47.6 million, with delivered earnings of 41 per share -- $0.41 per share. We maintained spending and programs that are important to the long-term growth and success of the Company. These programs are already yielding results. Let's take a look at some of these programs. First, international expansion. Our commitment to placing Zebra personnel in underserved and emergent territories continues to pay off. All parts of Asia-Pacific contributed to the region's 40% growth, aided by an increased number of sales representatives, sales engineers and support associates. An important part of this growth is China, where we greatly expanded sales and marketing resources, and are now positioned to open a warehouse, logistics, and repair [depot] capability in the fourth quarter.

Most recently, we've -- we greatly expanded our distribution capabilities by signing Digital China as a distributor of Zebra product for China. Digital China is the largest IT product distributor, system integrator and networking product developer in China. In Latin America, the launch of our partner's first channel program earlier this year has allowed us to work more closely with the indirect channel, uncovering new business opportunities and provides more geographic and vertical coverage that generates strong growth in the region. Robust business in Eastern Europe, Italy and Spain helped offset generally weaker results in the U.K. and other parts of Western Europe. Now let's move on to RFID. During the third quarter Zebra demonstrated read-write capabilities for Gen 2 chips, expanded the geographic coverage with the release of country compliant versions of our printer/encoders, and are now ready for commercial role out of Gen 2 technology. Actively with the 200 Wal-Mart next wave suppliers increased significantly.

In addition, because of our broad, wide and [INAUDIBLE], we are engaged in more than 30 business improvement RFID projects spanning more than a dozen industry verticals. Importantly, these projects are driven by a calculated ROI on a solution designed to deliver real business benefits. We believe the long-term outlook for RFID remains bright, and Zebra more than any other company in the printer/encoder space is well positioned to benefit from the deployment of this technology. So the area is mobile. Business opportunities in route accounting and direct store delivery and other new markets continue to grow at a strong pace. Sales of the new RW420 mobile printer optimized for the solutions have grown steadily throughout the year, and helped us secure several strategic wins on a global basis, often against entrenched competition.

Fourth, [INAUDIBLE]. The quarter also sold record shipments for card printer products, an ongoing source for growth for Zebra. Within our card printer solutions group, we always had an initial shipment of our new 8x10 Digital Photo Printer. This OEM product will be used in the Kodak Picture Maker kiosk. Additional new products: We have said repeatedly that new products are the life blood of Zebra, central to its long-term success. We saw incremental improvements in the percentage of printer sales from new products, and I further expect -- and I expect further improvements in the fourth quarter and additional gains in 2006. Several products completed testing over the past few weeks.

In November, we will begin shipping two new card printers and one new label printer that is -- that set new price performance standards and meets Zebra's traditional high standards or reliability, durability and ease of use. All of this progress gives us great confidence about Zebra's future and our ability to create shareholder value. We are operating with a growth strategy that delivers results in a fundamentally healthy market with secure drivers for growth. Our leading competitive position remains firmly intact. We are making the Company stronger, with targeted investments that are expanding geographic coverage, delivering new, demonstrably better products to customers, and building stronger channels with valued strategic partners. Now, here is Randy to review the third quarter results and our guidance for the fourth quarter.

Okay. Thank you, Ed, and good morning to everyone. Sales of $175.6 were at the midpoint of our forecasted range and generated 2.6% growth for the quarter. As in the second quarter, consolidated growth is negatively affected by declines in sales to large retail customers against record shipments a year ago, and was reflected in a decline of 1.4% in hardware sales to $133.5. New products represented 8% of printer products sold in the third quarter, up from 4% in the second quarter. Supplies sales increased 12.3% to 32.6 million, and we're 18.5% of consolidated sales. By region, European sales were up 6.2% to $51.6 million. As we discussed with you last quarter, weaker economic conditions in Western Europe, particularly in the U.K. and Germany, are having an impact. Sub regions where we have invested to strengthen Zebra's presence -- Eastern Europe, Italy and Iberia -- continued to record solid year-over-year sales gains.

Asia-Pacific had record sales of $18.9 million, up nearly 40%; and we saw strength across the entire region, in particular in China, where our investments to build sales and marketing infrastructure are getting excellent results. Latin America also performed well in the quarter, with sales up 13.5% to $10.9 million. All product lines, including mobile, contributed to these strong numbers in both territories, which made for total international sales growth of 13.6%. International sales were 46.4% of total sales for the quarter. The 5.3% decline in North American sales again reflects the impact of shipments to tier 1 retail accounts from the peak of last year's third quarter. Excluding these accounts, North American sales increased at double digit rates, which is consistent with the strength we see in our core business. Sequence, North American sales were up $4.4 million to the second highest level for this region, showing consistent improvement in other parts of the business.

Lastly, sales to our largest customer, ScanSource, accounted for 15.9% of total sales compared with 14.1% a year ago, and were up 16% for the quarter. We believe this figure is another indicator of the health of our underlying market and is indicative that the source of our sales weakness was exclusively concentrated in the retail vertical. Gross margin was down by one point to 49.9%, and the main source of this decline was lower capacity utilization. Higher distribution and royalty costs also had an impact. Changes in foreign exchange rates and raw material costs were not factors this quarter. Operating expenses of $47.6 million were $2.4 million below our expectation of 50 million and were the main source of favorable EPS for the quarter. There were two principal sources of this variance: First, legal expenses were less than expected.

Secondly, sales and marketing expenses moderated in the quarter, showing an $1.8 million decline from the second quarter. This operating expense level resulted in a 22.8% operating margin, down from 26.3% a year ago, but up from 21.2% for the second quarter. R&D expenses were up 20% for the quarter, increased in part because of programs supporting environmental compliance mandates in Europe, including the lead free initiative that goes into effect on June 30, 2006. Third quarter investment income was $3.3 million and equated to a 2.4% return on beginning balances. Income tax expense of $14.4 million resulted in a 32.9% tax rate and was aided by an $800,000 reversal of reserves following the favorable resolution of several state income tax audits.

Net income of $29.4 million was 16.8% of sales and $0.41 per diluted share. Free cash flow was a strong $33.6 million. Receivables were down by 6.7 million, with DSO improving to 51 days. Inventory turns were 5.5. Our cash position at the quarter end was $530 million. As we mentioned in today's press release, we completed the purchase of Zebra's common stock that the Board authorized earlier this year. The Board recently authorized the purchase of an additional 2.5 million shares. Lastly, let me bring you up-to-date on the litigation with Paxar. I can inform you that the summary judgment hearing is scheduled for November 16 in the Federal District Court of Dayton, Ohio.

No date for trial has been set, but the Court advised the parties it will not occur before January 19, 2006. I refer you to our disclosure in the notes to our consolidated financial statements that will be filed with our 10-Q report. Our fourth quarter guidance reflects a continuation of the same factors affecting our business throughout this year, with sales in the range of 170 to $180 million. Our expectation of earnings in the range of $0.36 to $0.41 per share implies a gross margin of 50 to 51%, an operating expense assumption of 49 to $50 million, and an effective tax rate of 35%. That concludes my formal remarks. Now, here is Ed for some concluding comments.

Thanks, Randy. Several dimensions of our business continue to achieve new sales records within the current business environment because our historical commitment to invest in those activities that extend competitive leadership builds stockholder value and create a more formidable company over the long term. We do this because of our great confidence in the long-term health of our industry, our financial strength and the effectiveness of a proven growth strategy. Companies continue to adopt on-demand specialty printing solutions to improve business processes and we are winning more business on the great strength of our products' channels and global reach.

I am optimistic about Zebra's product development program. The product scheduled for introduction this month will be followed with releases throughout 2006. These products include RFID printer/encoders to support Gen 2 adoption, new mobile printer, hard printer products, and printer and media solutions for vertical market applications. The winding down of environmental compliance projects over the next year should free up funds that could be directed at more new development initiatives to accelerate product development activities. Other dimensions of our business continue to move forward as well.

Our channel development activities are building stronger ties with more buyers and integrators. Recently, we signed strategic agreements with key organizations involved in the deployment of AIDC Technology and Healthcare, a contract with Consorta, a leading healthcare group purchasing organization, to make Zebra printers, supplies and service agreements available to the organization's 500 acute care hospitals and 300 extended care facilities. Yesterday, we announced a similar agreement with MedAssets, another GPO for health care, with the goal of improving the safety and efficiency of delivering quality health care. These agreements improve our position even more for growth in these vertical markets application, beginning next year. Global expansion activities are also progressing as planned.

We look forward to the increasing contribution from our investments in China. Our greater presence in Eastern Europe from placements made this year enable us to capture the rapidly growing business opportunities in this region. We appreciate your attention, and now we would be happy to answer your questions.

If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, press star 2 on your telephone keypad. I'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jeff Rosenberg with William Blair.

Good morning.

Good morning.

I want to start by asking if we could talk a little more about Europe. I guess I'm just trying to separate the seasonal weakness that I would imagine affected Europe versus the underlying economic conditions there. So I guess maybe my specific question is whether you see any sort of a sequential bounce-back there in the fourth quarter, and -- or do you think that this is becoming kind of the primary regional drag in the business right now?

Jeff, I don't have a break out of the forecast by -- by country, but you know, I can tell you that what we -- what we experienced here is a -- is a -- is a softening of business, particularly in Germany and in the U.K. These are probably the two most important countries to us. As an offset to that, we had improvements in -- in other countries in Western Europe, as well as growth in our -- in our Eastern Europe initiatives.

Okay. And then on the mobile printer area, is that an area where we need to see a recovery in retail capital spending type trends in order for you to return to growth, or do you feel like once you've got past the typical comparison from a year ago, that just the overall application base there and the opportunity there allows you to expect growth in '06?

It's -- the situation that we're facing with mobile printers is a -- it's a good news and bad news story, having some very large companies making very large purchases in one period, and substantially reducing their purchases in other periods. This is the -- more the nature of the orders that we have in mobile printing, particularly in the retail sector; and we frankly -- we just have to live through the benefits of those large orders, but realize that they'll will be time periods when the comparisons will be difficult. And this quarter in particular is one where the comparisons are very, very difficult for because of what happened in this quarter last year.

Yes, I guess that's what I was trying to understand. I mean, as you look at future quarters and the comparisons are no longer quite so tough, do you feel better about that returning solid growth or do you really still see the overhang from weak spending there?

What I think will happen is we will continue to get large orders, which will create this volatility in the comparisons. And we will have quarters where there isn't much of that type of business, and we'll have other quarters where there's a lot of it, and it -- it is -- it is a challenge for us. It's a challenge to respond from a production point of view. We have done reasonably well accomplishing that. But it -- the comparisons are difficult comparisons, and I think that as our -- as our penetration in the mobile area increases and there's more and more companies that we are selling to, it will be -- it will -- it -- the comparisons or the volatility of the comparisons will be reduced. But for the time being, that's the nature of -- of our business.

Okay. Thank you.

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

Good morning, gentlemen.

Hi, Chris.

Just to -- to clarify, I I have you give some numbers on new product contributions. I think this is the first time you have given specific numbers. Was it 8% in the current quarter versus 4% sequentially in the -- the second quarter?

Yes, that's right, Chris.

Okay. And is this -- do you expect to continue giving those numbers on a go-forward basis?

Well, yes. And we have actually given them historically.

Oh. I didn't have them in my notes. And was there any single product area that gave the largest contribution? Because that's a pretty steep sequential jump.

But it was off a low base.

That's true.

You know, actually the -- last quarter we made a specifically comment about that -- that number, which we have reported, and it's normally in the range of 20 to 30%. I mean, that's historically what we have been doing, and it was due to a variety of factors. It was down last quarter and it's beginning to rebound, and we expect further gains in that -- that number going forward -- again, relating to some of the new products that Ed alluded to earlier that are coming out actually this month. So we should see improvement in that statistic going forward.

Let me add a little bit more clarity to that. We had reported in earlier quarters there was a write-off that we had, and that write-off had to do with the development of a particular product. And it affected us in two places. It affected us in terms of our operating expenses, and it affected us in terms of our gross margins. And so -- the -- the -- that product, which was expected to be shipped earlier this year, will now be shipped in the fourth quarter -- the shipping of that product will start in the fourth quarter of this year, and that -- in addition to that, there are two products that are in our card group, which we expected to be shipping earlier this year, we we are -- which we actually have just started to ship in the fourth quarter of this year. Okay? So that number -- that number that Randy was referring to, that 8% number, and the fact that it is lower than it historically has been, has been the direct result of delays in shipping three new products in the corporation, and those very -- those very -- those three products actually will be shipping in the fourth quarter of this year, and I think that's an important fact for all of us to understand.

And is there -- in terms of gross margin contribution, should they be in line with the corporate average?

I'll let Randy answer that.

Yes. That's an easy answer.

Okay. And question here on the -- the tax reversal, is it fair to assume 35% go-forward basis on tax rate?

Yes, it is.

And you mentioned record card printers. Was that units or sales in the current quarter?

Sales -- dollar -- dollar revenues.

Okay. And fair to assume that units moved in the same direction?

They did.

Okay. And final question here, since you didn't limit questions, environmental compliance --

My mistake. Yes. Doug's got to fix that us next conference call.

Will do.

Can you quantify for us the size of those environmental costs? Within the business? I mean, is it an impact of gross margin being -- or as it goes into development?

Actually, these were -- these were expenses that appear in our -- in our operating expenses; and cumulatively, I believe we have spent in the range of $3 million on environmental compliance -- $5 million -- $5 million on environmental compliance. And this is both the lead-free initiative, and there's another -- there's what they call a green initiative that are both affecting our business in Europe, and in particular the lead-free initiative has been a -- a costly thing to comply with. I mean, you basically have to replace all of your components such that -- so that they don't have any lead in them, because you can't sell anything with lead in it beginning on June -- July 1st of next year.

Great. Thank you.

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

Thanks very much. I just wanted to get a bit more color on operating expenses in the quarter. Certainly down from what the prior guidance has been. Has there been any change in thinking with respect to the level of investment that you want to make going forward, some of which you had commented on in the last earnings call, and you know -- so some additional color there will be helpful.

You'll notice some guidance we provided for the fourth quarter was higher than what it is we did in the third quarter. And so to answer your question, no. We -- we expected to -- to play out our spending plans that we made early in the year, and that will continue into the fourth quarter.

Well, wouldn't that increase in the fourth quarter have to do sort of with year-end bonuses?

No. No, it's not. It does haven't anything to do with that. It has strictly to do with a return to a more normal spend rate in sales and marketing. You know, for example, expenses relating to these three new products that Ed referred to. We have product launch expenses that we'll be incurring in the fourth quarter. And we're projecting a higher level of legal expenses in the fourth quarter as well.

All right. Okay. Another question just on any change in emphasis really with respect to, you know, M&A? You have obviously been repurchasing your shares and having additional authorization in place. And is there stilt a focus on sort of pursuing some M&A as sort of a source of growth of the company going forward?

Absolutely.

Good enough. That's all I have for now. Thanks very much.

Okay.

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

Good morning. Can you guys just first off comment on the repurchase program? Is this a plan where you expect to be in the market regularly? Or is it -- is it more on an opportunistic basis? And if that's the case, can you just give us a sense for what level?

We'll be in the market more on an opportunistic basis. And no, I'll decline the opportunity to give you a price point.

Okay. And then, I just wanted to ask you about some language that you included in the release with respect to your guidance. You talked about the estimates don't take into consideration acquisitions, disposition, corporate, reorganization, and you talk about that may include in the fourth quarter. That's not language that you have inserted in there before. Can you give us a sense for what -- what -- what's the reason for putting it in there at this point?

Well, it was -- it was, again, we're -- we're the victims of our legal advice. I think that's more -- more the sense I would rather give you. I don't think you should read anything into it in terms of expected events.

Okay. And just one last question from me on the expense side of things.

Sure.

First off, can you just give us a sense for beyond the fourth quarter? You know, Ed, I take it from your remarks that there's some product development that's going to occur in the first part of '06. Will that also carry with it some additional operating expenses? And then as you get into '06 would you expect the legal expenses to continue to increase, or would they stay relatively flat?

We -- we're not making any forecasts for '06 in the way of operating expenses at this time. However, we do have litigation that we know will -- will take place after -- I think we said here January 19th. We don't know exactly when after January 19th. But it will be in '06, and -- I mean, when I say litigation, a trial.

Okay. Great. Thank you.

Sure.

Your next question comes from the line of [Jay Meyer] with MJSA Equity Research.

Good morning. Thanks for having me on the call. Ed, just a couple of questions along the line --

Hey, Jay, you are a little faint. Can you talk up a bit?

Sure, I'll try. Is that better?

Yes. Little bit, yes.

Okay. Good. You mentioned new card printers. Can you talk a little bit about those printers? What type of printers are they? What type of cards they design for?

They are at the -- the economy end of our -- of our price -- of the price range of our products. It -- they really are break-through products in terms of providing a -- a price performance point that has not been -- not been available in the marketplace here before. And so those are two printers. They -- they have similarities to each other, but that's where they fit into our product line. So it in essence expands the -- the -- the range of our -- our products, and we have a stronger offering in the value segment of the marketplace.

I understand, good.

Uh-huh.

Next question, did you -- in -- in each of the previous two quarters, you incurred about a million dollars in charges, if you will, related to write-downs for ongoing R&D development programs. Did you incur any charges during this quarter?

No. No there were no charges of that nature.

Do you anticipate -- I know you mentioned you expect these products to ship -- at least three of the new products to ship starting in the fourth quarter. Do you anticipate any charges related to product development going -- in the fourth quarter?

We do not.

Okay. Good. Any comment on kind of the revenue benefit from hedging and things like that? It seems like we're -- or any -- any thoughts about where you expect the revenue break-down to shift inQ4?

Well, as far as -- we do have an ongoing program of hedging expected revenues, and we derive some benefit from that in the fourth quarter because of our -- because of the hedging program. I think it was close to a million dollars, actually. [INAUDIBLE]. In the third quarter,excuse me.

In the third quarter?

Yeah. As far as the fourth quarter goes, I mean, there's some foreign exchange challenges I would say ahead of us, because the exchange rate last year on the Euro was in the range of $1.30 and now it's down to about $1.21. Now, I will tell you the guidance we gave incorporates that expectation. Now, we have sequential gains in sales in Euro terms, in Europe next quarter; but in dollar terms, that's more problematical because of the foreign exchanges drive.

Right. Okay. And last question, with respect to the environmental spending, Ed, I think you mentioned that you expect that to slow down or even conclude over the next year sometime --

Yes, basically compliance has to take place by -- it's mandated to take place by the middle of next year. So most, if not all, of our -- of our spending and n that regard should cease sometime prior to that. I don't have an exact -- in front of me, any -- a roll out of what the expenses are, but the real big bite that comes from that, will have been incurred in '05.

I understand. And you mentioned that -- thought the total expense related to this environmental mitigation was roughly $5 million. Can you give us an idea of over how much time, that 5 million?

That was a 2005 expenditure.

So far in 2005.

Uh-huh. That's right. That's projected to be through all of 2005.

Oh, okay. I understand -- good. Thank you very much.

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

Yes, good morning.

Good morning.

Couple of quick questions. The first one would be the retail weakness that you have seen and some of the others have seen, can you give us an indication or your perspective of why you're seeing that weakness, and you know, when you expect that to start strengthening again?

Why the weakness? I mean, it's -- there -- this mobile product category that I was talking about earlier is predominantly sold into the -- into the retail sector, and the consumption patterns -- and those applications that we were selling those products for just turned out to be -- to be soft -- actually softer than we would have anticipated for the year.

Do you expect it just to be a push out, that, you know, people are not buying right now, but it will probably come back in the first quarter of next year once the sort of retail selling season is over, and they're going to have more time? Or do you think that things in the retail sector is just cutting back on expenses and it might be a more prolonged sort of softness?

Generally, there is not a lot of rollout of technology in the retail sector in the fourth quarter because of the holiday season, and they don't want to be distracted doing installations in that period. So I would anticipate that we will again -- we will have, you know, a soft -- soft period, and expect a soft period in the -- in the fourth quarter. Now, relative to deferrals, yes, some of the orders that we had over the course of this year, or we were expecting to ship over the course of this year were deferred into -- into '06. I don't have the -- the dollar amount of those orders, but there was definitely deferrals on the part of some of the very large consumers of technology.

Okay. The second question would be just looking at -- you know, your competitive dynamics right now. You have -- you know, some of your competitors that -- you know, just looks at RFID, et cetera, being far more intense in the bar code printer space, the encoder space, and other players that have said they want to get out of the business. Can you give us color as to whether you're seeing increased competition or reduced competition relative to last quarter in this quarter?

I wouldn't say that it -- in terms of the places that we participate -- well, let me back up just a little bit -- I mean, we'll give you -- I mean, you may be aware of this, you may not. But you know, there are two companies out there that are in the smart label space, or actually the in-lay space. There's two -- two companies, and they are -- I suppose you would have to say at each other's throats in that they are -- they are each vying for share. Now, Zebra goes ahead and takes those in-lays and utilizes them -- integrates them into a final smart label. Okay? There is a fair amount of competition in that smart label space. However, Zebra has really a very significant competitive advantage in that space, because so many of the companies that are running pilots are running pilots with our hardware and they believe that it's advantageous to run our smart labels through our hardware.

And we -- you know, we see that as -- as a -- a benefit. So there is competition. There's companies of various sizes in the smart label space; but I do believe we are well positioned to compete effectively within that space. Now, when you go the printer/encoder portion of this -- of the market, things have not changed too much from a competitive point of view. However, there is one player in the market that has started to offer a printer/encoder that didn't have an offering earlier in the year. So -- I guess that's about all I have to say.

Okay. And then when you are looking at some of our other verticals like manufacturing and the logistics, et cetera, in those verticals of the government are you watching any change in buying behavior, particularly in the government? Or are you seeing things, you know, similar to the pattern that they were following last quarter?

Actually, as it relates to RFID, we are having -- doing some interesting projects with the government. And the other vertical markets, if you look at our broad marketplace, have been -- have been quite favorable for us. I think that Randy provided a number when he was -- or a comment as he was going through his presentation as to what our business would have looked like if -- if, in fact, the -- we didn't have the effect of the -- it's called the retail effect.

Right.

From some large companies.

Okay. And then the last question would be the tax rate. When you are looking at your international business, particularly in Asia growing so rapidly, should we be expecting the tax rate of the company to begin to decline at some point? Or would you expect to it to remain at 35%?

The tax rate is not likely to decline until we change our -- the footprint of where we really do business in terms of where our major legal entities are that record profit. That's pretty much a U.S. company and a U.K. company, and both of those companies are in what you would characterize as high-tax areas. Now, if we start manufacturing in low-tax areas, which we are not doing at this point, then that can change; but for the foreseeing future, I would not expect the tax rate to come down.

Is that something you are considering, manufacturing in low cost regions?

I think manufacturing costs is going to become an increasingly important issue for us going forward.

Okay. Thank you so much, and congratulations on very strong earnings.

Thank you.

Your next question comes -- is a follow-up from Philip Alling.

Again, a sense -- was there any additional converting capacity that you acquired in the quarter, say on the investing activities there about the -- and the acquisition section there, is there any color that you can give us as far as sort of expansions there of that capacity?

We have expanded -- we have expended money for capital equipment to be used in the converting area.

Okay, can you give us any more of an update about what sort of what the capacity is that you have in terms of in the smart -- smart label area? Presumably. you would be focused on converting in-lays into smart labels? Can you -- any sense really about what the ramp is if you're looking at the --

I don't think that we have come public with -- with numbers in that regard, so --

Well, could you give color without actually divulging specific numbers?

Well, about the only color we can give you is we -- we are interested in this business. We have added capacity, and I I would expect we're going add more capacity going forward.

Thanks, much.

Yes.

Your next question comes from the line of Kevin Starke with Weeden & Company.

Good morning, gentlemen. Two real quick questions, and I'm sorry if they've been asked already. The first is, could you tell us what unit sales were in the quarter?

Yes. Ask your other question while I look that up, okay?

The other one is, what is the acquisition of intangible assets, the 13.8 million on the tax flow statement. That's new.

Yes, first of all, we -- let's see here in the quarter. In the quarter. We -- we acquired a -- a small IP portfolio from the U.K. company.

Oh, okay.

And that was the reason for the intangible asset increase. And it looks like we had about 180,000 printers shipped in the quarter.

Would a license fee from [INAUDIBLE] rapid start to show up in your financial statements anywhere?

The income -- yea, that showed up last quarter.

Oh, it did. Okay. In which line item?

It will be in the intangible assets.

Okay. Thanks.

Your next question comes from the line of Greg Halter with Great Lakes Review.

Good morning, guys, and thank you for taking the call. One question on the share repurchase, I just wondered if you repurchased any stock so far in the fourth quarter?

The answer to that is no.

Okay. And then looking at the return on the beginning balance of 2.4%.

Right.

Just looking at short-term rates, they have moved up to 3 to 4%, and I wonder when we could see an increase there?

Yes, well, you know, what this is a pretty simplistic calculation. The only reason we give it is because you can get it directly from the numbers we present to you. The vast majority of the investments we have are tax exempt. So you have to gear that up to get a pre-tax equivalent. So the pretax equivalent is substantially higher than 2.4% and I would say it's probably in the range -- it's in excess of 3% actually on the actual return we earned on the portfolio on a tax equivalent basis.

Great. That's -- that's helpful. Thank you a lot.

You're welcome.

Your next question comes from the line of [Louis Oregon] with Kingsford Capital.

Hi, I had a couple of questions. In terms of the North American business, can you talk about what percent retailer component is of that as maybe compared to a year ago?

Well, actually we don't have data we can provide you on that, I'm sorry.

Okay. And then a couple of balance sheet and cash flow questions. The inventory in terms of days has actually been up for the last 4 quarters.

Right.

Is that a matter of SKUs or what is behind that?

Well, actually, it's related -- again, it's related to the issue we have with tier 1 retail. We had expected sales of mobile printer products in particular to tier 1 retailers to be substantially higher than it actually has been this year. And consequently because of the long lead time on a lot of the components that go into mobile printing devices, we've laden some inventory that actually has not moved because the sales have been down. And that's the principle source of the fact that turns are not where we want them to be. Now, we've got a program in place to improve those, but it's going to take a few quarters to take effect. The ultimate cure of, this of course, is for the retail accounts that have been the subject of a lot of discussion today to come back and start -- resume -- resume the purchase of the products that they have bought from us historically.

But you don't see any need to take a reserve --

No, no, the inventory is quite adequately reserved.

Okay, and then the long-term other assets line was up quite a bit sequentially -- 40.2 million versus 30.9. Can you break that out for me?

Yes, that relates to insurance -- insurance that we had.

Insurance related to -- to what exactly?

Yes, life insurance.

It was a $9.4 million sequential increase?

Right. That's exactly right. It's an investment program that we have, exactly.

I mean, can you talk about that a little bit? An investment program in what sense?

I'll talk to you a little bit more about that offline.

Okay. Thanks very much.

Sure.

Your next question comes from the line of Andrew Abrams with Avian Securities.

Hi, I have two quick questions, one on the rapid start program. What you talked about earlier, I guess when the question was asked, was the up-front payment or the pay down. When would you expect to see some royalties paid out? I assume these are probably going to be focused on Gen 2, so would you be looking toward the middle of the year, or would it be earlier or later than that?

Well, it will -- it will take place as, you know, you'll see royalty payments showing up as we obviously sell -- as RFID products accelerate. But as far as providing any information about royalty rates or anything of that nature, of course we're prohibited from -- by the terms of our agreement from disclosing any of them.

Would you expect it to be substantial enough that it would be commented on sometime during this year or -- ?

No, actually I would not expect that.

Okay. And if you could just add a little color to the -- probably over -- overtalked about retail sector, I don't want to put words in your mouth, but ScanSource gave a fairly easy representation to understand, which is very similar to yours in terms of the large retail accounts versus small accounts. However, they were talking a little bit more about the positive side of the smaller VAR accounts, of which they have a lot of -- and I would assume you have a fair amount also that don't go through distribution.

No, actually --

Or is it all --

All [contraire].

Okay.

The reason that we -- that we had the relationship -- the good relationship with ScanSource that we do have is because they are ideally set up to service the small VAR, and we are not. So they provide us access to this small application VAR that is -- that we would not otherwise have if we were trying to do it directly.

Now, do you have any see-through in that at all, or is this -- ?

Well, not in terms of end users. You know, we get information from ScanSource on their POS; but that again only goes into the -- that's another channel relationship. So where they ultimately sell is -- you know, in a sense pretty obscure to us.

Right. Okay so there's -- there's no comment you can make on the -- the lower end of that -- ?

That's correct.

Okay. Got it. That's all I need. Thank you very much.

Okay.

Your next question comes from the line of Ron Gibbs with Columbia Management.

Could you elaborate a little bit on the opportunity in the healthcare vertical in terms of the size of the -- of the market that you would be addressing and the scale? And specifically, are we talking about having bar codes on every patient bracelet, and are supplies and drugs distributed within the hospital to the patients' rooms? Are they not being bar coded currently? Is that what you are talking about?

Okay. You have a lot of questions there.

Right.

Relative to the size of the -- size of the opportunity for us, I'll pass on that one. The -- however, wristbands are an -- if we're talking about patient safety, there are three -- from an identification indication point of view -- there are three components of the identification. One of the patient themselves, and that is typically handled by use of an auto ID type of -- of wristband, bracelet. The second is the drugs. And we are involved with -- with drug labeling at several different levels, within the hospital and -- and outside of the hospital.

And lastly, it's the identification of the person who is administering the drugs, and we have a division of the company here that we make photo ID cards, and those photo ID cards are used in a variety of different types of identification. So it's the convergence of those three elements with a reading device hooked into a computer system at bedside or in the operating room that ends up providing the data, and it's one of the key locations where we are participating as a company. So you may find our printers in the pharmacy within -- within the hospital so that -- you know, the drugs that are administered are -- are labeled at that point.

But how automated it is today?

Not very.

We're still --

In essence, what you have is a -- when you go through the -- when you go through and look at all of the expenses that are involved in implementing this, it does rely upon a -- a robust computer system, and a network that's able to reach into basically all of the rooms within the hospitals. And the capital expenses required to make that happen are high. And hospitals don't have a lot of money. And it's all very unfortunate because that means that lives are still unnecessarily being taken as a result of medication errors. So what we would all like to see, particularly the larger hospitals, implementing comprehensive IT systems and data collection schemes and having sophisticated software, but that process is not as fast as -- as all of us would like it to be.

Okay. And just -- just one final here, then. Just to get a sense of the size. How -- what percent of our sales do you think go into the healthcare vertical, and -- what do you think that could be, say 5 years from now.

I don't have a comment on that.

Thank you.

Your next question is a follow-up from Ajit Pai with Thomas Weisel Partners.

Given all of your new product introductions right now that are expected in the last quarter, and also, you know, some of the push outs in retail that have been pushed in 2006, would you be commenting double digit topline growth in 2006?

We -- we are not projecting our revenues for '06 at this point in time.

Okay. But there's no reason to expect '06 to be -- you know, slower than any of your recent years other than coming out of a recession, right?

Well, I really don't have any -- any specific comment on the year, but, you know, if we -- you -- you look at Zebra over a long period of time being -- being a public company, and you can see, you know, there's very few years -- very few -- where revenue actually declined in the company or profits declined in the company, as one year.

Okay.

And I would not anticipate, you know that -- that pattern to -- to change. We are -- we've -- we have got tremendous opportunity going forward in the company, and we -- you know, we look forward to '06, and we know that there's a variety of different places that we can get very positive contributions to revenue and the resulting bottom line.

Right. And just revisiting that healthcare subject, you talked about the hospital wins that you have right now; but at what point do you think that -- you know, when you're looking at -- you also talked about the issues in hospitals spending money. In these ventures, like you know, when -- when you look at the stages of, you know ,deployment out there, what stage into your getting a project do the revenues actually reach critical mass? It is two quarters, three quarters, four quarters? When do you begin to recognize the revenue?

Well, we do have revenue.

Right.

But in terms of recognizing significant revenue, I'm really not prepared to answer that question for you.

Okay. But does the typical rollout schedule which lasts about a year after you get an order, is it over a two-year period? You know, what kind of time line do one of these orders take to deploy?

Within a given hospital?

Yes.

Oh it -- if -- if it -- it's -- I don't think it's that long.

Typically, two quarters would be a fair assumption?

It -- if in fact the hospital has in place the IT system to support the -- the -- the type of products that we sell, the rollout is relatively simple; but if in fact they don't have the IT system in place, then if you want to include the time it takes to put an IT system in place and debug it, it becomes a very significant length of time.

Okay, thank you so much.

I would like to limit the -- limit us to two more questions. We're approaching an hour on the call, and I know you guys have a lot of other calls today, so two more questions and then we'll call it a day.

Your next question comes from the line of Chuck Thomas with [INAUDIBLE] Investments.

Thanks you very much. Sorry to just beat a dead horse here, but on -- on the retail sector, what percentage of those sales into that sector would you estimate come from mobile printers at this point? And then also what -- you know, what are the lead times on these deals?

Just not to beat an old horse?

Well, I mean it's become a critical issue for you guys going on several quarters now. I'm trying to get an understanding of what we can expect, say looking into next year.

Well, you're asking the lead time between the time that we receive an order and the time we ship the order?

Right. On a deal to a large retailer for mobile printers, what sort of lead time is that? Is that something that comes in and it's turned around within a month? It's turned around within a week?

It's not a month or a week. If we're talking about a large rollout within a retail company that has not many, many, stores or they are using multiples of our devices within the stores, the rollouts can take -- can take several quarters of time.

I'm looking specifically at the lead time, not the implementation time. I'm trying to --.

The lead time between when we receive an order and the time we ship the product?

Yes.

Right. It -- it depends. You know, it just -- it just depends. I think that I would say for -- in most situations it can be one to two quarters.

And then what percentage of sales into large retail would you say are coming from mobile devices?

I wouldn't say.

And then two quick housekeeping -- I'm sorry, Cap Ex depreciation and then the change in warranty expense?

The -- I -- the Cap Ex and depreciation will pretty much be a wash in the quarter. I'll get you an exact figure here in a moment; and there was -- warranty expense is a non-issue.

Okay, and just pricing -- pricing on printers, you gave the units? Any indication of what pricing trend looks like?

No. There is no indication on what the pricing trend looks like. We -- the pricing basically had been -- you know, over time due to mixed changes in the product line, because we ship a lot of products that are -- many more products now that are at the low end of our price range. The average unit prices have come down very substantially over time. We expect that to continue in the foreseeable future. So we -- but we have been able to maintain gross -- actually, increase gross margins over time. And as far as the Cap Ex it was $2.6 million in the quarter, and depreciation expense was $2.3 million.

Thank you.

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

Yes, thank you very much. Actually, all of my questions have been answered.

Okay. I guess you -- we get a bonus here. We get one more question.

Your next question comes from the line of Dick Davis with Richard W. Davis & Company.

Thanks for taking my question. I realize I'm a little late. The question I would raise -- and you might have answered it before -- was the competitive landscape in mobile printing. How do you see that? Is that a bunch of -- yourselves and a lot of other players, or is it only two or three?

The competitive landscape is -- there's a handful of companies that are involved with relatively rugged application-specific mobile printers. There's, say, three or four companies that involved in that. On the other hand, there are printers that are not so rugged and not so application specific that are also being provided in the marketplace, and they are typically lower in price, and so they are attractive to some customers that feel that they can live without the rugged nature of the product or having the product specifically suited -- tailored for the application. And you know you'll find companies, some of the large -- typically Japanese-based printer companies that are involved in that.

I see. Does your product line encompass both the low end and the high end, or is it mainly in the high end?

We have a -- several different printers within the space, but I would generally say that our products tend to be very hot -- they are very rugged, they are very reliable, durable products that can take the kind of abuse that you'd frequently see in these applications.

Thank you very much.

Uh-huh.

Okay. That concludes the call for today. I would like to remind you that our next conference call for Q4 '05 and full year '05 results is currently scheduled to be February 8th, 2006, at 10 o'clock central time. We look forward to seeing you at that time. Thank you.