斑馬技術公司 (ZBRA) 2006 Q1 法說會逐字稿

Good morning, and welcome to the Zebra Technologies first 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 on 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.

Thank you, and good morning. 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 2006 second quarter and expectations about trends in the Company's business will be considered forward-looking statements. The forward-looking statements involve risks, uncertainties, and other factors that could cause Zebra's actual results to differ materially from those expressed or implied by such forward-looking statements.

Additional information concerning such factors is available in the press release issued today by Zebra, as well as Zebra's filings with the Securities and Exchange Commission. In particular, we direct your attention to the Company's Form 10-K for the year ended December 31, 2005.

Now, let me turn the call over to Ed Kaplan for some brief opening remarks.

Thanks, Randy. Welcome, everyone.

During 2005, Zebra funded a number of strategically important programs. These programs accelerated product introductions. They further strengthened our channel partnerships and alliance relationships with large IT integrators. We ended the year with a much stronger international presence.

The result of these activities becomes evident in the first quarter. Our extended global reach and greater international infrastructure supported strong sales growth in emerging territories and record sales overall. International sales exceeded 50% of total sales for the first time. The effectiveness of the global expansion component of our growth strategy is apparent.

Significantly, these activities also built a more robust and diversified pipeline. Late in the quarter, a number of big deal wins emerged from that pipeline. These orders are for primarily fulfillment in Q2 through Q4 time frame and give us encouragement for further improvements.

Our efforts to expand the range of specialty digital printing solutions are working. We have every confidence in our growth strategy and our ability to deliver increases in stockholder value.

For the first quarter, record international sales were driven by strong growth in Latin America and Asia-Pacific. Secondly, an improving picture emerged in North America. Lastly, an accelerating stream of new products achieved high customer acceptance.

Broader Zebra representation continues to generate high growth in international regions. In Europe, strong momentum throughout the quarter helped achieve record sales in local currencies. Strategic key accounts wins in postal, retail, and public safety accompanied a strengthening of the opportunity pipeline. An ongoing migration into low-cost manufacturing regions fueled robust business in Eastern Europe, Italy, Spain, and other emerging areas, an improving picture began to develop in the UK.

Our greater presence in China supported the 22% growth in Asia-Pacific. Since our last call in February, we secured legal entity status in China that will enable Zebra to work more seamlessly with our growing number of channel partners there. The opening of a new warehouse during the second quarter will further strengthen our presence and effectiveness in the region.

Latin America turned in another solid quarter, up 28% for the period. Our Partners First channel program is allowing to us work more closely with the indirect channel to uncover more business opportunities. Adoption of our mobile solution is strong, with our main opportunities in the route accounting space. Our focus in developing our supplies business also contributed to our growth in the region.

In North America, conditions have improved throughout the period, culminating with several notable late-quarter wins. These deals span a range of retail, supply chain, and field force automation applications.

Many incorporate multiple printer and media combinations from Zebra's broad product range, an important strategic advantage. Clear technology leadership and data encryption and wireless connectivity were also important determining factors in these wins.

The first quarter also saw further improvement in sales coming from new products. Rapid growth in the S4M mid-range tabletop label printer, the 8 by 10 kiosk photo printer, and the value line of card printers push new printer sales up 5 percentage points to 12% of total printer sales.

Our mobile printers optimized for route accounting introduced one year ago, are also receiving excellent market acceptance and helping us to win share in field force automation and direct-store delivery applications.

During the quarter, we added a two inch mobile printer designed for receipt printing and payment processing. We also announced introduction of a new two inch desktop printer. Supporting Zebra's powerful ZPL programming language, this printer is ideal for specialized printing for vertical market applications in healthcare, hospitality, retail, and public safety. These, and other products that are scheduled for release later this year, make me optimistic about further increases in the contribution of new products.

During the quarter, the supplies component of our business delivered 15% sales growth. All dimensions of the supplies operation performed well, aided by strong demand from West Coast customers who we now serve from a Southern California facility. Solid growth from major retail customers supplemented new business from large strategic accounts.

With innovation important in this part of our business as well, we launched a new antimicrobial wristband for emerging patient safety applications and a number of new RFID smart-labeled products.

New production capacity is scheduled to come on-line during the third quarter to support the growing demand for genuine Zebra supplies. In RFID, we continue to extend our position as the market share leader in printer encoders. Smart-label converting operations, with recent certifications from RFID inlay providers, are performing well. We are working with a growing universe of suppliers to retailers, as well as many firms in the wide range of industry and manufacturing sectors.

With an additional 300 companies currently scheduled to comply with the Wal-Mart RFID labeling mandate by the beginning of next year, we are seeing favorable signs for growth in the technology this year.

I'm sure that many of you are disappointed with our financial results, even though sales and EPS are in the range we provided at the beginning of the quarter. I'd like to discuss two factors that materially impacted our P&L. The first is exchange rate.

I mentioned earlier that more than 50% of our sales are outside the USA, and we've been making significant investments outside the United States. That strategy exposes us to the impact of currency conversion on our P&L.

This quarter the impact was significant, and the financials distort the health of our business. If currency was constant, sales would have been above the mid-point of our range, about $181 million, and sales growth, instead of being 3%, would have been 6.1%. In addition, EPS would have been above the top of the range at $0.41 per share. All of this relates to exchange rate.

The second point is that many new product introductions were made in Q4. We've spoken about those before, and I've repeated some of them today. However, Q1 was the first quarter that most of these products started to ship in volume. So, while our sales from new products improved substantially, start-up costs and low volume purchases of parts put pressure on gross margin.

I'd now like to turn the call over to Randy.

Thanks, Ed.

Good morning, everyone.

As you can see from our published financials that sales were up only 3%, to 175.8 million, which was at the low-end of our forecasted range. Within the components of these sales, hardware sales were flat at $133.5 million.

The sales mix within hardware shifted toward lower price printers across and within printer categories, and although we had unit volume increases in every major printer category that we manufacture, with particularly strong growth in mobile desktop and mid-range label printers, card printers, and photo printers, supplies growth of 14.6%, reached a new quarterly record. As Ed mentioned, our West Coast operation attracted significant new business from customers in that part of the country.

On a regional basis, we had continued weakness in North America, which was down 0.7 of a point, and this came primarily from ongoing slow sales to retailers. Sales in Europe, Middle East, and Africa were up 0.2 of a point on a dollar-basis and that includes a foreign exchange drag of almost $6 million, which took 9.7 points off the region's growth rate.

Year-over-year, the Euro fell to a $1.20 from $1.31, which is a drop of 8.4%, and this is the foreign currency issue that Ed referenced in his comments.

Performance of local currencies was quite strong, paced by a 35% growth in Eastern Europe and robust sales in Italy, Spain, Africa, and the Middle East. During the quarter, conditions also improved in Western Europe, including the UK. Strong growth continued in Latin America and Asia-Pacific, up 28% and 22% respectively, resulting in overall international growth of 6.8% to 50.5% of total sales. Both Mexico and China remain excellent markets for us, the result of investing in people and energy there.

Scan Source, our largest customer accounted for 15.9% of total sales, compared with 15.7% a year ago.

Gross margin in the quarter was 47% versus 51% a year ago. A big impact on profitability came from unfavorable foreign exchange movement, which lowered gross margin by $4.9 million, or 2.7 percentage points. The remaining 1.3 points is attributable to a variety of factors, including the following -- temporary capacity constraints in label manufacturing; new products, which are currently undergoing ramp-up and are subject to cost reduction programs; expediting costs for manufacturing materials to meet increased demand at the end of the quarter; mix shifts toward lower margin products; increases in material costs related to the compliance with the European RoHS compliance to eliminate hazardous material from electronic products; and lastly, various pricing actions focused on increasing market share.

We expect improvement in gross margin for the balance of the year, assuming current exchange rates, as we reduce manufacturing costs on new products, add capacity in label manufacturing, and reduce the costs of compliance with the RoHS transition.

Operating expense growth slowed sharply from previous quarters, up 1.1% to $49.5 million. Absence of the product development write-offs, a decrease in legal fees, MDF expenses, options expense, audit and consulting fees were the principal drivers of the reduced growth. By function, selling expenses increased 10%, largely caused by headcount additions in China, Europe, and in customer service. Options expense, which began this quarter, was approximately $1.4 million and is spread across all functional areas with an additional $138,000 charged at cost of goods sold.

First quarter investment income totaled $5.2 million, which computes to a 3.8% return on beginning balances.

Net income of $26.1 million, almost $0.37 per diluted share, and includes $1.3 million for the cumulative effect of accounting change for the adoption of 123R. This adjustment recognizes the value of all forfeitures of previously issued options, hence, the credit to income and adding $0.02 to first quarter earnings.

Restated first quarter 2005 earnings, also for the adoption of 123R, came to $0.36. The restated results for each quarter of 2005 and the full-year are provided in today's press release.

Free cash flow for the quarter was $20.8 million. Inventory was up by 4.9 million, primarily for two reasons -- one, an inventory build in China in anticipation of our warehouse opening there during the second quarter -- actually, in the third week of May; and component transition to comply with the RoHS initiative to eliminate hazardous substances in electronics going into the EU. Days sales outstanding moved to 60.4 days because of a high level of shipments at the end of the quarter in comparison to what it was a year ago.

Our cash position at quarter-end was $569.5 million.

Now, for the second quarter, we're guiding sales to between $180 and $190 million. We expect earnings to be in the range of $0.34 to $0.39 per share, compared with the restated $0.35 a share for the second quarter of '05. This forecast assumes a gross margin between 47% and 48%, and incorporates an operating expense assumption of $52 to $54 million. The effective tax rate for the year is 34.5%.

That concludes my formal remarks. Thank you for your attention. Now, here's Ed for some concluding comments.

Thanks, Randy.

Zebra continues to follow a winning strategy that is extending our unequalled position in delivering specialty printing solutions to attractive global markets. The programs we funded last year improved our competitive position further. They enlarged our set of opportunities for growth and success.

In 2006, we have greater global reach, more effective channels, more formidable products and technology, and greater leverage in vertical market applications. All of this makes us optimistic about the future.

Our work building alliances greatly expanded our visibility into more and larger projects. It filled a pipeline that is now turning into improved order flow.

International operations continue to deliver great results. The high pace of building economic infrastructure in emerging regions supports the further adoption of automatic identification technologies.

In 2006, we will extend Zebra's global reach further with more sales engineering and support staff in China, Eastern Europe, and Latin America. The opportunities in these parts of the world remain strong with much further room for growth.

Our work in building out vertical market application teams is now positioned to pay off. In healthcare, our sales and marketing team worked hard to secure several contracts with group purchasing. These arrangements include an exclusive three-year arrangement with Magnet, Inc., which serves more than 700 hospitals, announced earlier this month. Through a growing network of dedicated healthcare information technology channel partners, business activity is increasingly -- with some deals already closed and more anticipated later this year. This model for serving vertical markets will serve Zebra well as we pursue other opportunities.

Finally, the bedrock of our success is the products we make. Our innovative mobile printers are making great inroads in solutions for field force automation and direct-store delivery. Among others, our card and digital photo printers are performing well too, opening new applications such as customized gift cards and kiosk printing.

We remain well positioned in RFID, with the industry's broadest line of printer encoders and strong capability in smart-label production. I'm optimistic that our product development efforts will continue to add to our product range and increase the percentage of printer sales generated by new products.

Thank you for your attention.

Zebra's strategic position has never been better, nor its opportunities as great. We look forward to improving growth in the second quarter and the second half of this year.

We'd now be happy to answer your questions.

Before we get to questions, with respect to the questions, we'd like to limit to you one question and a single follow-up please.

[OPERATOR INSTRUCTIONS]

Your first question comes from Jeff Rosenberg of William Blair.

Morning.

Good morning.

I wanted to ask -- I guess my couple of questions about gross margins. First of all, on the effect of a mix shift towards lower margin products, my understanding is then that over time, you've seen a steady shift towards lower priced products, which -- I just wanted to clarify whether or not that's something that's accelerated, or that's not really the issue in terms of where the lower mix is coming from? Just a little bit of clarification as to how important that issue was?

It was a factor among a number of factors, Jeff, that I cited to you. Clearly, the biggest issue was the foreign exchange issue. Mix shift is a highly variable item, and it moves both ways, quarter-to-quarter. This quarter it moved against us somewhat. I wouldn't anticipate that as a -- it's hard to predict the direction of that.

I mean we do have effective programs that focus on increasing -- reducing the cost of products overall. I think you've seen that over the years, and I would expect those to continue. So, to the extent that we had mix shift toward lower priced and consequently, lower cost product, we're working very hard to improve the margins on those products over time.

And again, the mix shift in the demand is highly unpredictable.

Okay. Well, I guess what I want to clarify -- I guess you mentioned that the foreign exchange is the largest issue, but relative to when you gave guidance of 50% to 51% in February, I'm thinking the foreign exchange is much more of an issue year-over-year in that--.

Yes, it is.

So, I don't understand how the abrupt change in gross margin relative to--?

Yes, well we had unusually low manufacturing variances in the fourth quarter, and they got up to a more normal level in the first quarter.

So, I think that the sequential basis -- you had changes in gross margin that were impacted by higher levels of manufacturing variances, and some of those issues were the purchased parts were higher because of the RoHS compliance. Those costs are likely to come down going forward. We had some start-up expenses relating to the rollout of new products in manufacturing so, the initial buys of raw materials for those parts tend to be higher than you are when you get to volume production. And again, the mix issue was indeed a factor in the first quarter.

So, a variety of things went on. On a sequential basis, the foreign exchange was about -- I would say -- about a third of the change in gross margin, manufacturing variances were about a third, and the balance was mix and some of these other issues that we mentioned.

Okay. That helps. Thanks.

Your next question comes from Philip Alling of Bear, Stearns.

Thanks very much. I just wanted to get a better sense about -- you've talk about the foreign exchange impact here. What have you really built into your projections with respect to currency impact on the forecast going forward, maybe you could give us a little bit of commentary there?

The forecast we make is typically based on -- well, is based on the foreign exchange rates at the end of the quarter. So, for the quarter just ended, the rate was approximately 1.21 to 1.22 Euro to dollar. That was the basis of the exchange rate assumption embedded in the guidance.

Now, this morning, the Euro was slightly under 1.25 so, that's -- from our perspective, that would be, of course, a favorable movement.

A follow-up question -- with respect to receivables and inventory turns, those have been under pressure some, what should the investor expectations be with respect to those metrics going forward?

Sure. DSO should be around 55 days. That's what we work toward, and when we're doing that, we think we're doing a good job.

The credit quality in the portfolio is excellent. As I mentioned, we had an exceptionally large percentage of our shipments go out in March of this year in comparison to March of the previous year. So, that is the source for the increase of the DSO. I would expect that to come down the next quarter.

As far as inventory turns go, I've mentioned to you on several calls that our expectations are that inventory turns should be better than where they currently are. They've been as high -- I believe -- as seven turns. We'd like to get up to that level, but at this point, we are dealing with this transition to the RoHS initiative, which begins on July 1. We have to be shipping lead-free product in Europe, and consequently, that impacts finished goods inventories in Europe. That also impacts our raw material inventories at our manufacturing sites, which are higher than they would otherwise be.

I would expect that beginning in the third quarter and fourth quarter, I would like to see inventory turns increasing because those issues -- those transition issues will be largely behind us.

Excellent, Randy. Thanks very much.

You're welcome.

Your next question comes from Reik Read of Robert Baird & Company.

Good morning. Just to go back to the gross margin question, Randy, there were some other things that it hit as well. You guys had talked about capacity constraints in supplies and expediting costs in pricing.

Right.

Can you talk a little about those in terms of what the impact was for each of those in the quarter, and what you expect from each of those looking forward?

Well again, I don't have specific figures on each one of those other than to say that the impact of those is the component of those -- that additional 1.3 points -- that was not explained by foreign exchange.

To give you an idea of one of the issues that I did refer to was capacity constraints in supplies. We saw -- we've seen excellent sales growth in supplies. We have had, as a result, some capacity issues at all of our facilities -- all three of our facilities in North America, and we have -- we are currently undergoing a facility expansion, or soon to have facility expansion, in our Greenville, Wisconsin facility. We are buying new equipment, and we should have that on-line within the next 90 days or thereabouts, and that should ease some of these capacity issues.

So we're expecting -- that should be a source of margin improvement for us going forward.

But you're expecting -- what I would term as -- some fairly modest improvement in the second quarter, and I take it what you're saying by this, is that these are more back-half related. That you'll see the--?

We're forecasting -- the guidance we provided was for some modest improvement in gross margin in the second quarter. That's correct. We are expecting to see continued modest improvement through the balance of the year.

Okay.

And that would be given the exchange rate environment that we had at the end of the first quarter, which was nominally 1.21.

Depending on which way the exchange rate moves, we will see either more improvement or less improvement, and that's obviously something that's very difficult to predict.

Right. And then, just one question on new products here -- can you guys give us what the percentage of revenue was from new products, and can you also just summarize for us -- Ed, in your comments, you talked about a number of the new products that have come out -- can you summarize the number of new products that have come out in, say, the past six months and what might be coming out in the next six months?

I'll give you the first figure, and that's 12%. That's 12% of printer revenues were derived from products that were brought into the market within the previous 18 months, or six quarters. That's the way we measure it.

Reik, I don't have a list in front of me, but I'll give you some of the stuff, at least, from memory. We started shipping our -- we started shipping in Q4 our 8 by 10 photo printer that's being used in the Kodak kiosk. Volume shipments for that product started in Q1 of this year substantially. So, the comparison there between Q1 of a year ago is, of course, zero.

We also started shipping in much higher volumes, and we're having a lot of market success in our S4M, which is the low-end of the mid-range tabletop product line.

We have the RW220, which is the two-inch version of the route accounting mobile printer, and that just started shipment. We also have two card printers that are at the value-end of the card printer range -- That's our P110i and P120i. Lastly, we put out an improved version of our QL-series of mobile printers called the QL-plus.

So, those are all products that are moving into volume production in the first quarter -- a lot of important introductions for us.

And just a quick comment on what we might be seeing in the next six months in terms of just general trends with the new products?

I won't announce any particular products, but we do have a variety of machines that will add materially to the volume of new products.

Okay. Thanks much.

Right.

Your next question comes from Jay Meier of MJSK Equity Research.

Yes, thank you. I'd like to hear your thoughts about the capacity expansions scheduled for later this year relative to your gross margin assumptions. Should we expect that the gross margin should improve materially beyond those capacity deployments, and how should we expect your gross margins to behave as you're deploying or, at least, until you get those running efficiently?

The capacity expansion will contribute a marginal amount to gross margin improvement. One, because it's only focused on supplies, which is roughly 19.5% of sales, and secondly, we're doing -- the most important impact of that is it will eliminate our need to outsource some of the jobs that we're getting in. I mean, we're just flat out of label conversion capacity and have had to outsource some of the jobs that we've booked in order to meet customer demand.

So, that's an expensive way to meet your customers' requirements, and we don't want to do that. We want to make it ourselves. So, that's one of the things we'll be able to accomplish. Also, the equipment, of course, will be new stuff, and we'll be getting much more -- we'll be able to run the jobs on the right kind of equipment, which has an -- which is an important factor in individual job profitability.

Okay. So as we --

It will be -- the overall message -- it will be a marginal positive contributor to gross margin improvement in the next several quarters.

Okay. So, as we start modeling out gross margin improvements, do you think we should target something like what you were targeting in the first quarter, maybe a 50% or 51% range?

No, what I would encourage you to do is follow the guidance we provided. Again, there's a lot of things that affect gross margin. I think to go into the level of granularity you are implying here, and focusing on specific gross margin improvements attributable to one or two factors, is not going to get you very far.

Again, the main impact -- the main things that influence gross margin, in terms of big impacts, are foreign exchange. That is a huge issue. We get -- about a quarter of our sales, on a global basis, are denominated in Euros, and we have very few of our costs are Euro-denominated. So when you move the dial on the value of those Euro-revenues on dollar terms, it has a very significant impact that flows right down to not only gross margin, but also, operating margin and net income.

I understand. Thanks.

Okay.

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

Randy, I guess that brings up the question is there anything you can do about the fact that a quarter of sales are in Euros and very few of your costs are in Euros?

We do engage -- we do have a hedging program where we hedge forward approximately 50% of our sales for the next six months, and what that's intended to do, is to remove some of the volatility on--.

[INAUDIBLE - TECHNICAL PROBLEMS]

As far as strategically, what you have to is to, in the case of the Euro, you'd have to get more of your expenses in Euros. So, you get the natural hedge to offset the revenues. As I mentioned to you, we have an imbalance there with far more revenues than we have expenses, and we don't have any material expansion plans to put facilities in Euro-denominated regions. Again, this is a problem that is not unusual for international companies.

Did we lose everybody?

I don't know.

Yes, Mr. Whitchurch?

I just wanted to make sure that we were still on-line here.

Yes, you are. You can continue.

That's the end of my response to that question.

Your next question comes from Agit Pai of Thomas Weisel.

Good morning.

Good morning, Agit.

The first question would be, just looking at the growth that you've seen in some of the emerging markets, which is exceptionally strong, is the pricing environment for your products, and the margin profile of your sales in those regions comparable with your corporate average and what you have in the developed regions?

The Asia-Pacific, in particular, China, of course, is a very price-intense region. There's a lot of price activity going on. The competition is very intense. You have to be agile and responsive in order to get and maintain market share in that region.

We also are finding a relatively high level of competitive pricing going on in Europe. So, in two areas, in particular, we're finding that you have a much more robust, competitive environment as far as pricing goes.

You also have, in some regions of the world, in particular, in Latin America and in some parts of Asia-Pacific, a preference to go for more value-oriented product, in order words, printers that are less expensive than an equivalent buyer would, perhaps, purchase in the United States.

So, I would say, overall, the trend, internationally, is A, more price competitive, and two, more value-oriented in terms of the products they typically buy.

Is your product pipeline right now trying to address an opportunity with lower price points?

Yes.

Okay. And then, the second question would be the acquisition pipeline, which is, just given the kind of volatility broader fundamentals have had, are you seeing a much richer set of opportunity with your very generous cash balance to make any acquisitions in the near-term?

I'd say the volume of transactions that we've looked at over the course of the last year is at a much higher rate and much deeper looks than, perhaps, it's been in periods before that. We're very active, but we've got no announcements to make relative to a transaction that we'd like to do.

And some color on the acquisitions, are they within the broader printer space? Are they at looking at some of the vertical markets that you play in, like the supply chain or security, are they going into adjacent markets outside of printing?

We have looked at vertical markets, and -- however, it's not been the highest level of intensity for us. The companies that we've looked at tend to have printers as an important component in their business, and the consumables trails that go along with those printing devices. Devices that are similar from a technology point of view, from a manufacturing point to a view, to the kind of products we currently make. Doesn't mean that we don't look at anything else, but things that are closest to home are likely to generate the greatest amount of synergies. We've been successful with those kinds of transactions before, and I believe that we can be successful with them in the future.

Okay. Thank you so much.

Yes.

Your next question comes from Chris Quilty of Raymond James.

Thank you. Just a few clarifications here. I think you may have covered this in the discussion about the international markets, but when you talked about using selective pricing, price reductions, is that primarily focused in those international markets, or is that also something you're seeing in North America?

I would say it's primarily an international phenomenon, but not exclusively.

And are those the typical North American competitors, or are those actions to wedge yourself in against the local domestic competition?

Wow. Chris, that -- I can't answer that question. I don't have the specifics on that.

Okay. Fair enough. And when you talked about some inflationary pressures, is that -- is there any specific area where you're seeing component costs moving up?

Well, certainly the equivalent lead-free components are currently more expensive in the marketing than the leaded products -- leaded components that they replace. We've also seen some inflationary pressures on other pressures that have some kind of an oil-related component -- plastic parts and things like that.

Okay. And one item I missed, just, when you gave it was the operating expense guidance?

$52 to $54 million.

Great.

And that includes, of course, options expense.

Alright. And, Randy, if you're hearing buzzing, you might want to go back and check into the chamber again.

That's not funny.

I expect you're right about that though.

Thanks, guys.

Yes. Thanks.

You have a follow-up question from Jeff Rosenberg of William Blair.

Hi. I wanted to ask about the large orders that you guys saw towards the end of the quarter -- a little color there. Could you talk about whether or not those were from the usual suspects -- the large retailers, small package delivery companies, or do they represent some success in your efforts to diversify your large-customer base -- add some new customers?

It's more than retail accounts. It's a variety of other kinds of businesses actually, which is very encouraging for us. They were all large-volume contracts. Many of them are spread over several quarters, and they are likely to lead to other business in these areas. While most of our business in the past that we've spoken about has been to companies in the small-parcel delivery area, as well as in the retail space, this includes verticals that are outside of those two areas.

Great. And the other thing on that, can you comment on, as those become a larger part of the mix, what that means for the gross margin mix?

I really don't have a comment.

Okay. Thanks.

You have a follow-up question from Philip Alling of Bear, Stearns.

I just wanted to get a bit more color with comments with respect to the comments that you've made about the demand environment for supplies, and whether -- obviously, it's been relatively strong, and whether you really anticipate it to be capacity constrained there -- if you could comment on that, I'd appreciate it.

Okay. I don't think I can really comment on that. We've had quite a -- over time, we've put a lot of energy into trying to improve the position of our supplies business, and one key component of that was putting label-converting facilities closer to the customer.

Our first endeavor in that area really was this facility that we now have in Southern California, and we saw some excellent results in that operation in the first quarter, and that was an important component of the accelerating percentage sales growth that we had in supplies during the quarter.

We're going to continue following that path about converting facilities closer to the customer, and consequently, we think we'll attract additional business for our converting operations.

Excellent -- just a follow-up question -- with respect to the demand environment in the printer area, whether you could give some color as to the split between card, photo, and bar coding?

No. That's a piece of information we don't provide typically.

Thanks very much, Randy.

You're welcome.

You have a follow-up question from Reik Read.

With respect to the healthcare vertical, the April 26 implementation date for bar coding medications is now here, can you just comment on what impact that may be having on your business?

I don't have specifics, to go ahead and respond to you on that. We can look into that though.

Okay. Great. One other question on the retail side -- you suggested that some of these customers are coming back a little bit, but as I recall, you only have a very small handful of big customers in the retail space. That would suggest that there are other good tier-one penetration opportunities. Can you talk about what some of those opportunities might be, and how close they are?

They are typically opportunities that involve wireless connectivity and/or mobile products. Not entirely that, but there's a lot of interest in that particular area. Some of these are opportunities that we're now getting are where we've been highly concentrated in big business that we've gotten within the United States. There's now some orders that have developed outside of the United States, and that's also encouraging to us.

Some of these orders are being percolated as a result of some of the alliances that we initiated some time ago, and those alliances have really become more effective, had improvement in that regard, and have stronger offerings that we can present. So, I guess that's all under the subject of color.

Does that suggest that you will be able to further diversify, if you will, that small retail set of customers throughout this year?

Yes, I think that's right. We are actually diversified in terms of I expect that there will be more retail customers, perhaps some of them might be considered to be maybe tier-two companies, as well as companies that are outside the retail space. We are definitely after that -- the higher volume strategic accounts.

Great. Thank you.

Yes.

You have a follow-up question from Kevin Starke of Weeden & Company.

Could you just give us the unit sales, and if possible, the ASPs for the quarter?

The -- I'm doing this from memory. Now, the ASP for the quarter, I believe, is $549.

Okay.

And I don't have the actual -- can we get the unit sales--? Units, 192,000.

Thank you.

Your next question comes from [Chuck Thomas] of Bessemer.

Thank you very much. A general broad question, looking out instead of focusing on this quarter, next quarter, the quarter after, in the past you've talked about getting to a growth rate in the 20% range, going through underlying market growth of 10 to 12%, market share gains of 2, and acquisitions in the 6% to 8% range. Could you give some color on -- given the rapid growth in international, the change in your product mix, the change in your vertical markets? Could you give some color on that growth for the market, and then, for you guys?

The boss is looking at me funny.

Well, I'm just trying to get a -- your business seems to be changing rapidly.

I'm sorry?

Your business appears to be changing.

Yes, well, I tell you, certainly, we have been reporting some sales performances that's going to -- been within a very tight range for the last six quarters now, so I would say, yes, certainly our aspirations are to number one, gain share over what's a reported market growth rate long-term of 10% to 12%, and secondly, to supplement that growth with acquisitions with an expectation that the combined growth, both internal and acquisitive, would approach 20% over a three to five-year period compounded.

Look, we've fallen short of that. There's no doubt about that. I don't think there's any inclination at this point, within the Company, to change our aspirations there.

One of the key questions is what is the underlying market growth on top of which we plan to gain share. We've operated under a belief, which is sourced out of third-party market research studies, that the market growth rate for our product segment is in the range of 10 to 12%. Now, whether that is actually the case here in the last year, to year and a half -- I don't have any data to provide you with that, at this point.

What would you expect to change? You had 12.5% unit growth this quarter, offset by -- I'm going to call it -- 10% pricing decline. Is that going to be the normal state of the world going ahead?

I hope not.

Okay. One last question, then follow-up -- what would you see, say, twelve, three, four quarters out as your target operating model?

Well, certainly, we want to get our operating margins into the mid -twenties. That's what we aspire to do.

Based on what sort of gross profit margin?

Well, again, I think the gross profit margin is -- we're expecting it to improve from current levels, and it's going to result -- that's going to be driven by product cost reductions, volume increases, relief of some of these capacity constraints we've had in certain segments of our product line, the supplies business, and a better -- maybe -- hopefully, a more favorable foreign exchange environment, but even given the current exchange rate environment, we do anticipate a gradual improvement approaching 49% to 50% by the end of the year would be our expectation.

Thank you.

Your next question comes from Marc Heilweil of Spectrum Advisory.

Hi. The question -- the comment about looking at the boss reminds me to ask you -- not something we're looking forward to, but have you indicated to the Board your plans to remain at -- how long you might want to remain as CEO, and if you have, can you share those with us?

I really don't have a response to that for you other than to tell you that the Board is very concerned about, and rightly so, with executive continuity and succession within the corporation, and that goes far beyond just my position. So, they're on top of those issues, and I think that's about as much as I can tell you.

Well, since you apparently are going to be around for the next week or so, can you give us some insight into any new verticals that you might think are promising -- that the Company is either taking a look at or doing some introductory--?

No, I would not sit here and announce new verticals for you in areas that we are not participating in, but have an interest in participating. That's like talking about products that have not been introduced to the--.

Yes, I understand. Actually, I answered --. Can you just review what verticals you're in now, and maybe give us maybe a number for the additional verticals that you might be entering over the next two years -- just a number of them?

There's route accounting, small parcel delivery, retail, manufacturing, warehouse distribution, security, and law enforcement -- I got off track over here -- government -- there was one other that I was just about ready to say, when I got derailed here -- but that gives you an idea of places that we're currently playing in. (multiple speakers)

Are there one or two, or three, additional verticals that might be likely to be entered the next two years?

Let me add, by the way, healthcare was the one that I was trying to think of that I didn't give you on that list. Would we find ourselves in two or three verticals over the course of the next couple of years -- additional verticals? I'd say that's probable.

Great. Thanks a lot, Ed.

Yes.

You have a follow-up question from Chris Quilty of Raymond James.

Hello? Chris?

Hold one second.

Hello?

Hello?

Can you hear me?

Yes, we can hear you now, yes.

Okay. I was joking that Randy wasn't going to take my questions anymore. Randy can you comment on the reclassification of the cash from short-term to long-term, and what we should be modeling for a return on that portfolio?

You should be modeling around 4%, and the classification into long-term is simply due to the fact that those are assets that have a maturity in excess of one year that we currently intend to hold until maturity. This is the appropriate accounting treatment for that kind of an asset.

Was that a recent change in policy as to where you want to be positioned?

Yes, that's correct.

Years ago, you used to have a lot of long-term investments, and you made the move into just putting everything short-term.

No, I don't believe that was the case. I think there was a classification change, but it didn't have to do with long-term versus short-term, it had to do with trading securities versus available-for-sale. These are all still securities that are considered available-for-sale.

Okay. And one final question, the -- Ed, in the fourth quarter conference call, you had talked about RFID activity, or printer sales, actually picking up post, or in the early part of the first quarter, as some of the next tranche of Wal-Mart suppliers were playing catch up with the deadline. Have you seen that activity carry through the end of the quarter and into Q2, and can you also comment on whether you are seeing any increase in the number of printers sold that perhaps aren't RFID printers, but as -- I guess you'd call it -- RFID-ready element built into that?

I don't have, in front of me, the detail, on the RFID business, but perhaps we could get together later and provide you with some insight.

Very good. Thank you.

Okay.

Your next question comes from [Richard Davis] of Richard W. Davis & Company.

Yes. Good morning. I have a couple of quick questions. Do you had not regard the Magnet opportunity to be a large one, and could you give us some color on that? That's a fairly big organization.

We're happy to have an agreement with them. We have agreements with others, GPOs in the -- but, in terms of the estimate of how much business we expect to get from them, I don't know that, and if I did know it, I don't think I 'd be eager to share it with you.

It's sort of like a military contract, is it not, where the participating hospitals, or medical facilities, order at will, and so you have no, really--?

It's not a commitment kind of contract, that's right.

Right, I understand. And the other question I would raise is global printers. Were they -- are they improved in, vis-a-vis where they've been in terms of growth and that sort of thing in the units?

Yes, they have. Unit growth in mobile printers has improved.

Thank you.

Yes. I think we're done.

Your next question--.

We're going to have to make this the last question for the day. If there are additional questions that we haven't responded to that are in the queue, I'd encourage you guys to give us a direct call, and we'll respond in that fashion.

So, one more question, please.

Your next question comes from [Steve Cronco] of [Ballston Trust].

Hi. I was wondering if you could comment on two things in your core bar code market just what the underlying growth of that market segment is, and any market share shift that you guys have seen over the last six to 12 months?

Growth in the bar code market, you said?

Right.

The way things are going in the bar code market, generally speaking, is -- the way we like to look at this market is those applications that are compliance-related and those that are, on the other hand, that are business improvement. There's those out there that would say compliance is a business improvement, but that's not the way we look at it. We're looking at where the demand is being generated from, the source of need, and what's been going on and what we would expect to continue to go on.

By the way, we're only talking here about bar codes, so keep that in mind. That the compliance side of the bar code business, the growth rates in those areas have slowed, and we had predicted that that would happen. We have commented on it several times on calls.

On the other hand, the opportunities to take and utilize bar code technology to improve your business, those applications are growing, and that is where the focus is of Zebra in terms of its growth. When I talked before about some larger accounts that we've booked some business with, and then, being in a variety of verticals, virtually all that business is related to business improvement. So, that is where we are concentrating a lot of energy, and that's not it.

Generally, the financial community is aware of our activities in that regard, and we've shared that with them over the course of several years, but that is becoming a more and more important part of our bar code business. Okay?

And then with respect to your market share performance over the--?

Market share?

Yes.

I guess I would refer you to Venture Development. They are probably the best source you can get on market share information.

But I mean, in general, are you guys holding share, gaining, losing?

Well, there's not reporting in this industry on a quarterly or annual basis, and so, let alone segmenting it out by various product or market situations, so, to give you that kind of information is something that we don't know. We really don't know. We have anecdotal information relative to our success through various channel structures, but to be quite frank, it's difficult to get your hands wrapped around that information.

So, that's why I'd refer you to Venture Development. They do a variety of different kinds of work in this regard, and that information may prove to be useful for you.

Okay. Fair enough.

Okay, this -- that response concludes today's conference call. Again, if anybody has any further questions, please give us a direct call please.

As a reminder, our next quarterly conference call is scheduled for July 26, at 10:00 Central time, and we look forward to talking to you about our results at that time.

Thank you very much.