斑馬技術公司 (ZBRA) 2006 Q2 法說會逐字稿

Good morning and welcome to the Zebra Technologies Second 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 are 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.

Okay. Good morning, thank you for joining us today. Certain statements we will make on this call will relate to future events or circumstances and therefore will be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. In particular, any statements we make regarding our financial forecast for the 2006 third quarter and expectations about trends in the Company's business will be forward-looking statements. The 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, and Form 10-Q for the period ending April 1, 2006.

Thanks, Randy, and welcome to everybody. Zebra reported record second quarter sales, led by strong sales growth in EMEA that compensated for continued sluggishness in North America. We clearly benefited from our strategy to diversify across geographies, products and markets. We are gaining increasing success with large deal opportunities from stronger channel partners and alliances. All of this work to gain share, deliver solutions to targeted vertical markets, and provide specialty printing solutions beyond bar coding reinforces our confidence and positions the Company to accelerate growth.

In the second quarter, we set sales records in EMEA and Latin America, shipped a record number of units and improved gross profit margin. Zebra's business for the second quarter generated 16% unit volume growth. This result included the contribution of several new products, which are in their initial stages of growth and cost reduction cycles. It also reflects advances in wireless technologies across the entire range of printers, which is enabling significant growth in distributed on-demand printing applications.

International regions continued to drive the overall growth for Zebra. In Europe, further penetration; in Eastern Europe, recovery in the UK and strong mobile product sales into warehousing, distribution, and route accounting/DSD applications drove robust results. Strategic wins, positive business momentum, and an improving economic trend support our continued favorable outlook for this region.

Latin America turned in another record quarter. Here the story remains the same. More Zebra associates working more closely with the indirect channel to uncover additional business opportunities. During the quarter, we opened new sales offices in Guadalajara and Buenos Aires in Argentina to expand our presence further. We are also developing our Supplies business in Northern Mexico, which will be supported from a new labeling facility in South Texas. Our Shanghai warehouse, opened in the second quarter, further strengthened our presence in China and will support further growth in that important region. We continue to develop channel relationships and build infrastructure throughout the region.

In North America, we made initial shipments against several notable wins at the end of the first quarter that were generated through our alliances with large integrators. During the second quarter, we won a number of other important deals that will be layered on in future periods.

The fundamental tone of business in North America was firm. During the quarter, we had double-digit sales growth through channel and distribution partners. Business with these accounts remained consistently positive throughout the quarter, while overall growth in North America was dampened by continued weakness in retail, the channel growth gives us confidence in the underlying strength of our core market. Another indicator of market health is Supplies. With 19% growth, our Supplies business had its third consecutive record quarter. Zebra's work to get closer to the customer and improved service appears to be winning our take-share strategy.

More geographically dispersed production facilities, capacity expansion, and pushing for higher attach rate with printer sales is clearly proving effective. Capacity expansion in our Wisconsin facility helped us meet robust demand throughout the operation, including non-retail applications for large strategic accounts. Additional production capacity, including the new facility in Texas, is scheduled to come online during the third quarter.

We're also encouraged in our outlook by growth in selected vertical markets where the opportunity for the attachment of high-value supplies to printers is great and many new relationships with healthcare information technology companies, general purchasing organizations, and integrators are now building business in healthcare in a more material way. These relationships generated significant growth in revenue during the second quarter with the beginning of large-scale implementations of wristbanding applications. In addition, early adopters began moving beyond wristbanders by using mobile printers for the bedside printing of labels for specimen collection and Zebra has been there to help them. This practice is another step in ensuring greater patient safety and fewer errors in delivery of health care services.

Strong growth in card and photo kiosk printers also contributed to second quarter results. Our winning line of products have strong demand through all channels and geography. Five new card printers introduced within the past six quarters supported this growth through more worldwide office locations. Within the past six months, we increased the number of personnel and sales offices in China, the Southeast United States, Mexico, and Poland. Within the past year, we also opened offices in Brazil and France. More products and office openings are scheduled. This month, we released for production the P430i, a high performance card printer that offers more user-friendly features, RoHS compliance and several hardware and software improvements.

In RFID, we maintained a growth profile, both through continued sales of printer/encoders and further momentum in smart labels. We continue to widen our leadership in this technology for the retail supply chain applications. At the same time, we are extending our reach into new areas where RFID is beginning to find a home. Many of you are aware of exciting developments in pharmaceutical industry to use RFID for product authentication or ePedigree. Zebra is currently involved in a number of pharma applications. We expect to increase this number during the second half of the year along with more products supporting HF RFID. To this end, earlier this month we announced an important licensing agreement with Magellan Technologies to incorporate its Phase Jitter Modulation or PJM technology into Zebra printer/encoders. PJM technology offers exceptional read accuracy and data transfer rate for item-level marking with HF RFID. We are very pleased to be able to take a leadership role in promoting this innovative and highly effective technology.

Just as the second quarter built on the first, we look forward to the third and fourth quarters building on the first half of the year. More new products are scheduled for release during the second half of the year. Additional production capacity will support further expansion of our Supplies business. We expect more project wins through alliances and new channel partners to build further on the success in targeted vertical market application. Now, here is Randy to give a detailed view of second quarter results and guidance for the third quarter.

Thank you, Ed, and good morning everyone. Sales for the second quarter increased 6.1% to $187.4 million, and this was at the upper end of our forecasted range. Hardware sales increased 3.4% to a record, driven by volume growth in virtually all printer categories, with particular strength in desktop and card printers, which drove a small sequential decline in average unit prices to $585. Market acceptance of recently introduced products remained strong with new products accounted for in excess of 12% of printer sales. Our West Coast label converting operation, capacity expansion in Europe and North America and more effective sales and marketing strategies continued to attract more business for our Supplies business, which was up 19.1% for the quarter.

As Ed mentioned, North American business showed modest improvement over a year ago and from the first quarter, increasing 1.6% and 4.8% respectively. We began shipping products against several large orders received at the end of the first quarter, which will be fulfilled over the next several periods. Sales in EMEA were up 16.8%, with zero contribution from foreign exchange translation. Latin American sales remained strong, also reaching anew record, up 2.8% and surpassing $13 million for the first time. Asia-Pacific sales took a small dip from strong sales a year ago. Scan Source, our largest customer accounted for 16.6% of sales compared with 15.2% a year ago.

Gross margin for the quarter was 47.8%, which was down from 50.5% a year ago, but was in the expected range. Major factors affecting profitability in order of importance were mix shift toward lower-margin products, lower unit prices and foreign exchange which moved against us for manufacturing costs related to labels produced in the UK and sold throughout the region. The sequential increase in margin was the result of a slight improvement in average unit prices within certain product categories and favorable exchange rate comparisons.

Operating expenses were down 3.8% to $51.7 million, exclusively the result of a decline in legal expenses. First quarter investment income was $5 million, which help generate $27.7 million of net income and $0.39 per diluted share which was also at the upper end of our forecasted range. Free cash flow of $13.1 million was affected by a sequential $10.8 million increase in inventory resulting from the RoHS conversion adding to safety stocks of certain components to ensure product availability and other factors. With the RoHS project now behind us, inventory reduction is a top priority for the Company. I expect to see consistent improvement over the second half of the year. DSO decreased to 56.2 days and is now generally in line with our normal target of 55 days. Our cash position at quarter end was $585 million.

Forecast for the third quarter is the same as for the second, which is a normal progression in Zebra's seasonal pattern. Sales are expected to be between $180 million and $190 million. This forecast takes into account the seasonal decline in demand from Europe. Quarterly earnings should be in the $0.34 to $0.39 a share and gross margin between 47% and 48%. The forecast incorporates an operating expense assumption of $52 million to $54 million and a tax rate of 34.5%. That concludes my formal remarks. Thank you for your attention and Ed will have some concluding comments at this point.

Thanks, Randy. We enter the second half of the year optimistic about further improvements and growth, built on our progress during the first half of the year. The greater diversity in our business broadens the scope of opportunities available to Zebra. Our extended global reach, broader and stronger products and technologies, and increased ability to deliver vertical market applications give us great confidence Zebra's future. The success of placing Zebra's sales representatives, sales engineers and other support personnel in China, Eastern Europe, and Latin America is evident. The activity level in these regions remains high as developing market economies in a global competitive environment support the further adoption of automatic identification technologies. We look to further growth in international sales as the people we recently placed in new territories become more productive and additional personnel are located in new and expanding regions.

In North America, we have seen just the beginning of an improving order flow from our work building alliances and new channel relationships. These new channels are giving us greater visibility in the targeted vertical markets. Our robust product line is enabling us to win more business, often as we go head-to-head with competitors who have been in this space longer than Zebra. Ultimately, the health and success of our business rest on the quality of our products, with a deserved reputation for reliability, durability, and innovation. The recently introduced products are meeting with favorable market acceptance.

Zebra mobile printers are enhancing mobile worker effectiveness. We are finding increased success in applications for route accounting, warehousing, distribution, public safety and healthcare among others. Card and digital photo printers continue to diversify our business by opening new applications where on-demand printing is delivering better customers service and tighter security. We look forward to the impact more new products will have as they are introduced over the second half of the year.

The world of RFID continues to expand. Zebra's taking its usual leadership role on several fronts to ensure that the technology gets deployed in a manner that most benefits the industry. We are truly very excited about the recent developments in RFID and the greater set of opportunities they open for us. Clearly, we will support these developments with new printer/encoders and smart labels incorporating the best of RFID technology.

Thank you for your attention. We look forward to improving growth in the second half of the year and as we prepare for 2007. We would now be happy to answer your questions.

[OPERATOR INSTRUCTIONS]

You have a question from Jeff Rosenberg of William Blair & Co.

Good morning.

Hi, Jeff.

The first question I wanted to ask was on gross margins. Randy, when you talked about the reasons for the gross margins decline, I did not hear you talking about manufacturing variances or things like the cost of RoHS compliance, can you talk about that and sort of --?

Right. We had manufacturing variances areas in the quarter, of course. On a dollar basis they were essentially equivalent to what they were a year ago. So, they really had no impact on overall margin. They had slightly different sources. Some of those -- the nature of the variances this quarter were related to -- some of them were related to RoHS compliance because the cost of these components right now are somewhat higher than the components they replaced, and we expect that to be a source of further margin improvement going forward in the quarter -- in subsequent quarters, as those component prices come down.

So, is that something that is more material in Q4 or --?

It's hard to say, Jeff, exactly when the prices are going to start coming down. But, they are slightly higher than the components they replaced. But, over time, as the production of these components gets more -- gets larger, we expect the prices to come down. I would expect to see benefit from that emerging during the balance of the year.

Okay.

That's one of the sources -- we expect -- we've given some guidance I think at the previous conference call that we expect the gross margins to improve sequentially through the year, and that is one of the reasons we believe that is going to happen.

Right. That's what I wanted to kind of get some more color on. And I guess my second question relate to Supplies. With the strong growth you are seeing there, it is a two-part question -- I just wondered if you would comment on the effect of margins on having stronger Supplies growth? And then, just more tactically, relative to your -- the way I have understood your historical orientation towards the Supplies market has been to really focus on the much higher value-add specialty type supplies. Do you have a strategy now as you look to improve your tax rate that broadens the portion of the market that you are targeting there?

In terms of impact on margin, it definitely has a -- puts downward pressure on margin, having Supplies. It is really a mixed bag for us. You have already asked about that. The more specialty type supplies have better margins and better retention with the customers. So, yes, we do spend our time focusing on the high end, but it is also necessary in many cases and desirable, really, to supply the full complement of label needs of the customer, have better account control, and provide a more commodity-like supplies as well as the specialty supplies.

So, would you view that as -- it's kind of on the margin, a tactically different approach than you've had in the past in terms of your interest in gaining share at the plain paper labels or in more commodity like supplies?

I think that is a difference in strategy. I think what you are seeing is more attention given to various aspects of the sales cycle. And that is the attach -- initial attach to printer sales and then the retention of the business after you go ahead and get that initial attach. And what we are doing, what we have been doing, and we have mentioned it several times, is providing material, providing finished rolls, much closer to the customer. We have expanded the capacity of two of our facilities and we have added additional facilities. We are going online actually in Texas this quarter. And so, being closer to the customer is a positive for some customers. Actually, it is a positive for all customers, but it makes more difference for some of them. So, I think that's the reason why you are seeing improvement in terms of the revenue.

Okay, thank you.

Sure.

Your next question comes from Chris Quilty of Raymond James & Associates.

Chris, do we have you or are do we still have Jeff?

Can you hear me?

Yes. I did not hear anything before can you hear me?

Okay.

Okay.

I hate to waste my one question on this, but I will give it a shot. The legal cost and the sequential decline that you saw here, how should that be modeled on a go forward basis? And I guess in aggregate, in Q2, you are typically going to see seasonally up -- in Q3, you are going to see a slight sequential improvement historically in sales. You are not expecting gross margins to go down. And yet your EPS guidance is below -- the midpoint is below what you just reported in Q2. So, I am just trying to --

I would model the operating expenses in accordance with the guidance that we provided, which is between $52 million and $54 million. That's kind of an all-in-number, including our view on what legal expenses would be.

Okay and so, can you elaborate a little bit more on how those legal expenses trend, is there some unusual pattern here?

No, I -- they don't trend in any particular way. It is a review of what the expenses are expected to be in the quarter. I mean they are inherently a little tough to predict because you do not know exactly what is going to happen. But, the operating expense forecast incorporates the variability that we might expect in a variety of expenses and they net out to a $52 million to $54 million guidance.

Okay. Can you just remind in terms of trial date because that is when costs usually ramp?

Trial date is currently scheduled for early 2007.

In the first quarter.

Okay. And so, it would be fair to assume that we will see a sequential ramp going into that quarter?

As a component -- look, we provided guidance for the third quarter and the -- there is a component of legal expenses in there that incorporates our view about preparation that might begin for a trial that would start in the first quarter of 2007.

Okay. I will be a good citizen and circle back into the queue.

Okay, thank you.

Your next question comes from Philip Alling of Bear Stearns.

Thanks very much. I just want to get some color on the catalyst that you see for improved sales growth in North America in particular, if you could just elaborate a bit there, I would appreciate it?

Could you rephrase that?

Yes. Ed, I was just hoping to get some more from you on the catalyst that you see in particular for improving sales growth in North America and whether that is tied to views on improving IT spend in tier one retail, what you could say that?

I guess the only thing I would say is that there is increased emphasis in the Company on the identification of vertical markets and applications within those vertical markets and utilizing a sales effort, more of a direct sales effort in many of those instances. And essentially, it is about getting closer to the customer. And Zebra has historically had a huge amount of its revenues coming from indirect channels either two step or one step. We have an extensive wire network globally as well as two-step distribution. However, there are large accounts, or accounts of smaller companies but have large rollouts that we feel that providing direct attention to those accounts, working more closely with them, will provide benefits to Zebra in terms of enhanced sales. And actually, like Randy mentioned in his remarks and I alluded to it, that we are seeing more business in those areas. And there is actually rollouts of some business that we have gotten that not only started in the second quarter but will extend into further quarters of the year. So, that's what I would just generally say in terms of why we think we will do better. It's a selling strategy of getting closer to the customer, particularly the larger customers.

Good enough. And just my one follow-up then, with respect to comments that you made about the RFID space, you talked about some opportunities in the HF area. So, do you think the demand looks better for a high frequency business activity in RFID as opposed to UHF?

Let me first say that in UHF, which is -- all the attention in that space is being, I don't know if monopolized is the correct word here, but it is very much to support the Wal-Mart initiative. That's not to say there aren't other things going on but, there is a lot of attention that is given to that. And that initiative, no mystery, has gone substantially slower than I think anybody who has done an analysis of that segment would have expected. And there are other types of RFID technology beside UHF and there are benefits that those technologies have. And there is other types of systems, more closed loop systems as opposed to the open loop supply chain systems that we see in the Wal-Mart application. So, we have spent -- we are spending time and energy looking at RFID in a broader way than many of the other companies I suspect are looking at. So, that's -- and so, when you do that, you discover places where the technology can be a benefit.

Do you see less margin pressure in HF versus UHF?

I don't know but I, first of all, I would say that in the Wal-Mart application when you look at the smart label, there is a lot of companies out there that are providing product and many of them are not providing much competitive advantage. So, they are simply selling price. In the case of Zebra, when we are selling a smart label, we are selling it in conjunction with our printers and of course, guaranteeing that it will operate very well with our printer/encoders and guarantee that it will do that, and that provides some advantage in the marketplace. We also work with many of those companies, work closer than some of the commodity providers of RFID smart labels. So, in terms of margin, unlike in any market, if there are fewer companies that are competing for the business, you generally are -- have a situation where there is better margins unless one of the players that is competing happens to have particularly very, very low prices.

Ed, thanks very much.

Sure.

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

Good morning. Randy, as part of your comments, you mentioned revenue from new products greater than 12%. Can you give a specific number on that?

12.2%.

And that's fairly flat with last quarter?

Actually, it's up from last quarter.

Well, you announced 12% last quarter. So, I guess two-tenths up. But I guess, I am trying to understand, it's still well below where you normally would see it.

Right.

Kind of the 20% --

Our definition of what constitutes a new product is anything that has been -- that was introduced into the line within the prior six quarters. So, we have inzies and outzies. In this quarter, we had something that a product that dropped off the new product -- out of the new product window, and other products are coming in to fill the space. And I would expect -- we expect overtime to see that percentage increase. We had a decline last year that we talked about before and one of the reasons for that decline is we had a diversion of engineering resources away from new product development and into RoHS compliance. One of the disadvantages, I think probably one of the few disadvantages that I can think of, of having a broad product line is when you have one of these compliance requirements come to fore, you got a lot of products to convert and it takes a lot of effort and costs a lot of money, and we had to divert a lot of energy into that effort. And it had an impact on our ability to produce a consistent stream of new products like we have historically done. So, we're now getting back on track. The percentage should increase over time. It won't necessarily be a linear, sequential increase, but we would expect to get it up in the 20% to 30% range, which is where we have historically been.

But, you guys have stated that you have got a number of new products that have come out.

Yes, that's right.

You said that's getting pretty good traction.

That's right, yes.

Is that something that you would suggest then that we should see at least a little bit of improvement over the course of next couple of quarters or more of these products would be dropping off the back-end?

Again, I haven't looked at what products are dropping off the back-end, frankly, but I will do that. My expectation is that the acceleration in the demand for these new products is going to offset the products that are dropping off the back-end. That is where we are going to see the increase. So, look, it is going to take some time to get us up to where we want to be. But, it is going to happen and it is going to happen over the next several quarters, several being in more -- in excess of two.

Okay. And just going back to the gross margin question, if these products continue to ramp and gain traction, as you introduce more new products, what would be kind of the net impact of margins just directionally in the next several quarters?

As we have indicated before, all things -- the products will have the -- as they initially start off in their production, they will have probably the worst gross margin that they would have during their lifecycle. And over time, as you get them in the grove, they improve in terms of gross margin. That being said, we have forecasted, we have made the statement -- we made it last quarter and I think we repeated it again earlier in this call that we expect gross margins to improve for the balance of this year. And I'm not going to go further than that other than to say that our performance on the gross margin line has been historically pretty darn good and I do not expect that to change significantly.

Let me add just a couple things to what Randy said. One is I would like to just remind everybody who is on the call because there is always news people and so on, this metric that we are talking about only applies to printer revenue and that's the only thing that is involved. It's not spare parts, it is not Supplies, it is nothing else that we sell. It is strictly printer revenue and it is also only over an 18-month time period. Most of the products -- new products that we introduce, they reach their peaks well beyond that 18-month time period. So, it's just -- I would not be obsessed over the metric, I guess, is what I would say. It is a metric. It's one of many, many metrics that you can look at in terms of the health and vitality of Zebra's new product development program. Some products ramp particularly fast; other products ramp relatively slowly and it's really the nature of certain products, some products are derivative products that we're adding some important features to it, but it ends up being classified as essentially a new product. And other products are platform products that may be totally new to the marketplace, and they will start from a much lower base. And yet those products, that are -- those platform products may turn out to be the most successful products in terms of overall benefit to the corporation. So, it is just a metric.

Right. So, can you guys -- just one last question here on the retail side of things, can you just talk a little bit about -- you still maintain that it's fairly weak out there. Can you talk a little bit about what you are seeing with the existing tier one accounts in some of the large business that you are talking about having, one, is that with retailers? And secondly, are there other potential customers out there that you think you may be adding at this point?

We're focusing on other large accounts. As I mentioned, we are trying to get closer to our customers and potential new customers. So, we do expect growth in that segment. The retail business, we have got some retail accounts that are very large consumers of our products and their business is lumpy. There are time periods when we sell them a lot of product and there is time periods when we sell them not so much. And as it turns out, '05 and '06 so far has many of those companies that are really the big consumers of our product on a relative basis not consuming as much as they had in the past. Not because we've lost the business to anybody else but simply because of their buying cycles.

Right, thank you.

Sure.

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

Hi, good morning. Quick question about the -- maybe it's not so quick, but question about the RFID and the traction there from an industry perspective. What would you attribute the sluggishness to? Is it just simply not achieving that ROI or is it still the wranglings in the standards development work?

I think it is essentially the way Wal-Mart is handling their vendors. I think it's -- there is a lot of stuff in the press about Wal-Mart and relationships with their customers and relationships with their vendors and of course, they're very sensitive about these kinds of things these days. But at any rate, this is how much -- it's Wal-Mart's readiness for a more expansive rollout and it's the extent to which Wal-Mart puts pressure on their suppliers to comply. You have -- I would say those are the two factors. And to date, what we have is a very, very narrow amount of SKUs that are affected from each manufacturer and a very few, a fragment of the distribution centers of Wal-Mart that's involved. And that is, in essence, why the revenues in that space haven't materialized the way that they are expected. Companies, who -- if they had rolled out all their SKUs, and they roll them out to all of the distribution centers of Wal-Mart, they would have purchased many, many more printer/encoders from us than they would have otherwise. And as a matter of fact, some companies just aren't even taking the approach of utilizing printer/encoders. They're taking other approaches that they can take because they have such a limited rollout of the technology. That in essence is the issue and I think most people are aware of that. At least, when I say most people, people who are suppliers of the various types of RFID technology are quite well aware of that.

So, vendors are resisting and doing what is required of them and not much more. Would you say that that kind of rule applies to the DoD penetration as well?

DoD is a different situation. I mean it's a totally different kind of situation. And I think DoD is doing what the government normally does, and that's takes their time about doing what they do. We have got lots of interesting programs that are going on in the government, but these programs by and large are pilot programs, not rollouts.

Okay, thanks.

Sure.

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

Yes, good morning. Congratulations on a very solid quarter.

Thank you.

Addressing the margins again, the gross margins, not in the near term but looking further out, I think over the past several quarters, the fastest growing part of your business has been some of the lower margin businesses. Going forward, is that going to change, will Supplies and some of your lower ASP printers be driving most of your growth, that puts sort of downward pressure on gross margin?

I would essentially say that this is a very, very long-term trend in -- at Zebra Technologies. And that is, I mean not just Zebra, the market in general for, let's just say, bar code label printers, where you have a lot of different kinds of printers. But let's just limit it to that for the time being. The way this market has grown is by Company starting sort of at the highest price point within the market and have steadily gone to lower price point products, products that deliver on a relative basis and you got really a moving target here but, on a relative basis, delivering less performance, less capability at a lower price.

And so, to give you further clarity on that, 20 years ago, Zebra introduced to the marketplace, what today we call our performance line of printers or the Xi Series of printers. We have -- I think we have now have an XiIIIPlus. So, there are several little generations that are in there but those products are relatively high in average selling price. Subsequent to those printers were introduced what we call the time value printers, today we call them midrange printers. And so, they were a step-down in terms of performance and at a lower price. And from there, we went ahead and introduced what are called desktop products. Again, lower performance, easier specs, and lower price, smaller footprint.

And then, there was more attention given to the mobile products and mobile products are at a similar price point, varies in terms of -- relative to desktop, in many cases, a little bit higher than desktop products but still, generally speaking, lower in price. So, that has been the evolution of products. And the -- our gross margins on the lower-price products are -- it's not a direct relationship because some of those products have pretty good margins; others don't have the greatest of margins. So -- and the competitive landscape is different at the high end of the market versus the low end of the marketplace.

But just to answer your question about, which I think revolves around AUPs, is we get -- we are achieving higher growth in the lower-price products, some with good margins, some with lesser margins. And that pattern has been the pattern of Zebra, actually longer than it has been a public company, which is over 15 years. That's what we have done. And the challenge always is how do you go ahead and reduce your cost of high-price products as well as lower-price products. And so we work hard to do that and that is why Zebra, over a long period of time, has sustained margins in the 50% plus or minus some number of percentage points. But, nominally, let's call it 50%. So, that's the pattern and it's what we would expect going forward.

Okay. And the new sort of in terms of the pricing dynamics in the industry, is there any material change that things are becoming less or more competitive in terms of pricing behavior of your competitors and for you?

This place is where there is -- there is a variety of different kinds of competitive situations. And yes, this place is where the customer or the competitive -- either the customer has a significant amount of buying power or there is a lot of vendors that are in that particular space offering an alternative. And so, you look -- clearly Zebra looks for ways to differentiate itself, so we can go ahead and get as high price as possibly can. Sometimes we are more successful than others. But yes, there definitely are places where there is increased competition. Geographically, we have talked a lot about Zebra's broad geographic scope and we literally sell into roughly 90 countries around the world and it's very well distributed in terms of where we sell product. And different markets, different geographic markets are drawn to -- in some cases very low-price products, in some cases products that would have lesser margins for us. And in some cases, there are a lot of competitors that are present in those marketplaces. So, it varies a lot around the world in terms of which products are preferred in the product lines.

Right and then the last question would be, you are growing cash balance, there are two things over there that you have sort of mentioned that you would use it for, one of them was acquisition. So, we would love to get an update on what the pipeline looks like, whether there is -- and the attraction of potential targets has increased or decreased recently? And then, also whether given that your stock has been weak whether you are considering being active in the share buyback?

Well, relative to the M&A front, we definitely are very active in that area. We are looking at many companies. And our expectation is that acquisitions will follow and it's a complicated business. I don't have to tell you. But definitely, in terms of the use of our cash, that is the number one use for our cash. We have the cash we have because we expect to go ahead and use a substantial portion of that cash in terms of M&A opportunities. I know, if you are going to -- many of you are probably shaking your heads, saying it's an old story and I would tell you, yes, it is an old story. But, it still is the story. In terms of share buyback and the pressure that the Zebra's price -- Zebra's shares have been at, certainly makes it more attractive for us to buy back stock. We are authorized to buy back stock currently, and we are giving that serious consideration.

Okay. Thank you so much and congratulations again on a very solid quarter.

Thank you.

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

Hello. Just one quick one. On the international side, specifically on Asia-Pacific and Latin America, just wondering if there was any sort of foreign currency exchange impact on the topline?

That is an easy question to answer, the answer is no.

All the sales from Latin America are dollar denominated and the vast majority of the sales in Asia-Pacific are dollar denominated. We're beginning to invoice out of our Shanghai warehouse into the China market in RMB. But, that is just beginning to start and consequently, the foreign exchange impact is, I would say, zero right now.

Okay, great. Thank you.

Your next question comes from David Sterman of Jesup & Lamont.

Thank you, but my questions were answered.

Your next question comes from Chris Quilty of Raymond James & Associates.

Thanks. Can you guys comment on whether you feel that you have products in the ID card printer market that would allow you to participate in some of the large scale both domestic and international ID card programs that are underway or are you going to continue to focus on more of a sort of workforce P310 type solutions?

Well, I -- it's a little bit of a rigor that you put at the end of that. So, I'm not exactly sure how to --

Let's just take the first part of your question. The answer is yes.

And what products would those be?

Well, it really depends upon the market. It depends a lot on the individual market. We introduced a number of products this year in the card business. Two very interesting products at the low end or value end of the marketplace, small footprint, low-price products and they are doing well in the marketplace. There, we also -- when we acquired Atlantic, they had in development an interesting product that is a more heavy-duty, robust type of product. And we have done some re-engineering of that product and brought it to market and it is doing -- it is being received very well. So, for some applications, some government applications in particular, it is an attractive type of product. But --

But, are you actively pursuing through partners or through a government direct sales organization that you formed?

Yes. We have a direct selling organization into the government.

Okay.

That is the US government. And we basically are utilizing channel relationships and our sales management in various foreign governments.

Okay. And can you give us a quick update on where the kiosk printer product line sits?

We are shipping 8 by 10 photo printers. And actually, the customer would like us to ship more than we are shipping. And we will start shipping 4 by 6 printers in the third quarter if all goes well.

Were they, both of those printers part of the new product push?

What you mean by --

[inaudible] I mean you get down to 7% of sales from new products. Are those -- both of those products part of the --?

Yes. Both of those would be -- one is currently counted; the other has not been released yet. So, yes, but the 8 by 10 photo printer -- yes, that is less than 18 months in the market.

Great. Thank you very much.

Sure.

Your next question comes from Reik Read of Robert Baird and Co.

I just want to follow up on your comments with the repurchase. Can you give us some thought or some idea into your thought process given that in the third quarter you did a significant repurchase at prices above where we are today, and what it would take for you guys to engage in a repurchase program?

What did you -- a year ago, we bought in?

Third quarter of '05.

Okay. And you’re asking what would it take for us to buy stock back?

Yes. The average purchase price then was $39. We are below that now, so I am just wondering what your thought process is?

Certainly, the lower the price is the more attractive we are to it; the greater the intrinsic value. Other than that, there are -- probably the biggest factor is the trade-off between utilizing that capital for acquisition. And if in fact we go ahead and buy back stock, it takes -- we have put ourselves in a situation perhaps where we have to borrow money to do an acquisition or sell stock to do an acquisition. And those are the trade-offs. So in terms of thought process, that's what we consider.

But I take it from that comment that you would be considering either a very large acquisition or several medium-sized acquisitions. Is that a fair way to look at it?

We have looked at very large acquisitions.

Okay, great, thank you.

Your next question comes from [Joe Hertvik] of Merrill Lynch.

Hello?

Yes.

A couple of questions. I wonder how are you guys streamlining the selling process to reduce order inaccuracies to allow your customers configure your products more effectively?

Would you repeat that question please, I'm not quite sure I understand it.

How are you looking to streamline the selling process to reduce order inaccuracies, to allow your customers to overall improve the buying process from you guys? Reduce order inaccuracies and configure your products more efficiently.

We always want to reduce order inaccuracies. I mean customers can call in and configure the product with our customer service reps and basically get a printer that's configured precisely to their specifications.

What I mean, I guess, how are you guys working to overall shortening the sales cycle? Because that will overall enhance the customer buying experience, so you can improve on revenue.

We have a massive distribution organization who have the products in stock and are able to ship in most cases next day. So, I think that is very efficient.

Okay. And regarding to DSOs, what's your proposal to reduce DSOs going into 2007?

Our guidance around DSOs is that our expected DSO is nominally 55 days. We have occasionally been substantially -- occasionally been below that. We -- most recently, we are slightly above it. But you should plan on a 55 day DSO.

[inaudible] Okay. Going into 2007, final question, what is your plan, your biggest challenge to improve on revenue and improve on gross margin and customer satisfaction? And how do you plan to tackle that head-on?

Well, we are really not going to talk much about 2007 right now. I think that the Company's plans, the Company's strategy for growing the business has been articulated in a variety of forms, whether it's sell-side conferences or in conference calls and it's heavily oriented around vertical market penetration and international growth. So, I think if you look at those two pillars of our growth model and understand that the growth in our markets is substantially oriented outside of the United States, the more rapid growth is outside the US, and the incremental investments of this Company are heavily oriented towards taking advantage of that. And within the United States, we are heavily focused on a more vertical market sales and marketing motion. That will give you the essence of what the growth plan is.

All right. Thanks.

Okay. It's time now to -- we've been on the conference call now for an hour, so I think what we're going to do in respect for your time and the many calls you're taking today, we are going to cut this conference call at 60 minutes and I give you the opportunity to give us a ring if you have any additional questions you would like to direct either to myself or to Doug. Lastly, a reminder, our next conference call is going to be November 1 at 10 o'clock in the morning Central Time and we look forward to hearing from you at that point and giving you some great results on Zebra's third quarter. Thanks again for your time.

Thank you.

Thank you for participating in today's Zebra Technologies second quarter earnings release conference call. This call will be available for replay beginning at 2 o'clock PM Eastern Time today through 11:59 PM Eastern Time on Thursday, August 10, 2006. The conference ID number for the replay is 2726168. Again, the conference ID number for the replay is 2726168. The number to dial for replay is 706-645-9291. Again, the number to dial for the replay is 706-645-9291. Thank you, you may now disconnect.