斑馬技術公司 (ZBRA) 2006 Q3 法說會逐字稿

Good morning and welcome to the Zebra Technologies Third Quarter Earnings Release Conference Call. Joining us from Zebra Technologies are Mr. Charles Whitchurch, CFO; and Mr. Ed Kaplan, CEO of Zebra Technologies.

[OPERATOR INSTRUCTIONS]

At this time, I would now 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'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 fourth quarter and expectations about trends in the Company's business will be forward-looking statements. The forward-looking statements involve risks, uncertainties and other factors that could cause Zebra's actual results to differ materially from those expressed or implied by such forward-looking statements. Additional information concerning such factors is available in the press release issued today by Zebra, as well as Zebra's 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 July 1, 2006.

Now, I'll turn the call over to Ed Kaplan for some brief opening remarks.

Thanks, Randy, and good morning to everyone. Before we get started, I'd like to tell you that I've asked Mike Terzich to join us for today's call. He is the Senior Vice President in the SPS division and he reports to me. He is responsible for global sales and marketing within the SPS.

And I think as many of you know, SPS is divided into four geographic regions, and the leadership in each of these regions report to Mike. In addition, he has supplies manufacturing reporting to him. Since I will be retiring soon, as indeed you all know, I thought it'd be a good idea for you to hear a little bit from Mike today.

So without further ado. Third quarter sales met forecast and earnings exceeded consensus. Business benefited from continued growth in international territories, coupled with an improving sales trend in North America through better penetration of high growth vertical markets and increased shipments into large deals. The flow of bookings were steady throughout the quarter. Two acquisitions improved our competitive position and enhanced our growth opportunities.

We enter the fourth quarter with a high backlog and optimism for improved growth in 2007. In the third quarter, we achieved lift in our North American business and continued our strong growth in EMEA. In addition, we completed the acquisition of an important IP portfolio in RFID, and we acquired Swecoin to further extend Zebra's thermal printer product line.

Improved execution and a cumulative effect of infrastructure investments helped drive in international territories. In EMEA, we continue to see a solid picture of performance across all sub regions. Our expanded distribution from our facility in Heerenveen, opened a year ago, greatly enhanced our ability to serve Germany, the Benelux countries and other areas of the continent more effectively. We recently added a new label production capacity to the continent as well.

Now with a selling organization eight times the size of only a few years ago, we are successfully moving our strategy forward in business improvements and vertical market applications. Strong demand for compliance applications in the manufacturing vertical and adoption of mobile solutions supported high growth and another record quarter in Latin America.

During the quarter, our new mobile printer, model RW 420, filled orders in route accounting and direct store delivery applications for food and beverage distribution. We also saw further use of mobile printers in workforce automation solutions in utility meter reading and billing among others. Our business in the region remains robust. In November, we are scheduled to open a new label production facility in Texas. It will help support further business development with resellers in the area.

In North America, shipments against the large deals we discussed in previous conference calls translated into improved sequential and comparable sales growth. We had deeper penetration of vertical market applications in government, healthcare and route accounting.

Our business with retailers also saw growth in an incrementally improving environment, including business with new accounts. Shipments during the quarter include mobile printers to a large humanitarian relief organization for new labeling protocols to reduce air in blood donations. Our healthcare focus helped deliver the best quarter yet for wrist banding and other patient safety solutions.

A large US metropolitan police department is deploying Zebra printers in e-citation applications. A major home and business security company is using Zebra printers for route management and service transaction applications. These wins are a sample of more effective engagement with channel partners and end users. These activities continue to build stronger deal pipeline, which we are now converting into sales and increasing confidence.

During 2006, we completed a project that put all Zebra bar code label printers on the same hardware, firmware and printer management architectures. This common platform is a unique technological advantage. It gives Zebra scale and time to market benefits as well. It enables end users to deploy uniform label formats, encryption, networking and other capabilities across the enterprise. End users are responding positively and seeing great value in this capability across our full product range.

During the quarter, we introduced the ZP 450 desktop printer, which is optimized for small packet delivery applications. We also had the first shipment of the PS4000, our new wireless print server to enable cart-based printing in a variety of applications.

In RFID, we continue to make progress in sales of printer encoders and smart labels. During the quarter, we also strengthened our technology position with the acquisition of a portfolio of some 200 RFID patents. This intellectual property, including some of the oldest patents for RFID, gives Zebra increased freedom to operate in this growing area.

It will enable us to develop new high-value products, as well as the opportunity to generate licensing revenue. The third quarter also included our largest RFID order to-date. This government supply chain application is scheduled for shipment in the fourth quarter.

Favorable trends continued in sales of card and photo printers as well. Card printer sales were particularly robust in international regions. The beginning of a high profile photo kiosk placement generated record sales of photo printers. During the quarter, we also had the first shipment of Zebra's new P430i card printers, a dual-sided version of our most popular card printer products, the P330i.

Finally, we took another step in the systematic expansion of Zebra's product line with the acquisition of Swecoin. With Swecoin, Zebra can now serve a broader set of specialty printing applications in the fast-growing sector of unattended kiosk printing. It is a great platform on which to leverage Zebra's global sales and distribution capabilities, just as we have done successfully with desktop, card and mobile printers.

We've clearly made progress on many fronts in the third quarter to position the company for accelerating growth. The evidence of our actions to improve sales is apparent through greater penetration of vertical market applications, further geographic expansion, and tighter engagement with alliance and channel partners.

Now here is Randy to give a detailed review of third quarter results and the guidance for the fourth quarter.

Good. Thank you, Ed, and good morning, everyone. Sales for the quarter were up slightly over 6% to $186 million. This was within our forecasted range and consistent with expected seasonal patterns. Hardware sales were up 5.5%, which was driven principally by growth in nearly all printer categories, including high-performance printers. New products -- new printer products accounted for approximately 11% of third quarter printer sales.

Expanded production capacity and a greater focus on integrating label and ribbon sales with printers supported 18% sales growth in the supplies category. We had particularly strong results in Europe, which is the result of the new converting capacity in The Netherlands, which Ed referred to earlier.

We are particularly pleased with the improving trend of business in North America, which was up 2.8% from a year ago, but a strong 6.1% from the second quarter, led by multiple large deal wins involving mobile printer applications. Sales in EMEA remained very strong, up 13% for the quarter, aided with a positive impact of approximately $2.5 million from foreign exchange gains. EMEA sales were down sequentially, but this was entirely due to seasonal factors.

Latin America had its second consecutive record quarter with sales up 23.4%. Asia Pacific sales had 19% sequential growth, but were down 6.6% from a strong period a year ago. ScanSource, our largest customer, accounted for 17% of total sales this quarter compared with 15.9% a year ago.

Gross margin for the quarter was 47.1% compared to 49.8% a year ago. The major factors affecting profitability with about equal importance were a shift in product mix and unfavorable manufacturing bearings principally related to higher cost RoHS components and freight expenses.

I expect to see a reduction in these manufacturing variances in the fourth quarter, which should lead to a sequential improvement in gross margin. We also have the opportunity for further margin expansion next year, as engineering resources are now more fully engaged in product development, specifically focused on better meeting market price points.

Operating expenses, excluding the onetime charge for the Paxar settlement, were $50.7 million, up 2.3%. Increased spending on sales and marketing programs and headcount increases were offset by lower legal fees and a year-to-date favorable adjustment to our property tax accruals -- excuse me, our payroll tax accruals.

Third quarter results include a $53.4 million charge for the settlement and licensing agreement with Paxar. We'll be amortizing the remaining $10.4 million of the total $63.8 million settlement over four to seven years. In the fourth quarter, the settlement will result in an approximate $450,000 increase in amortization expenses.

Third quarter investment income was $6 million, and the net loss of $4.3 million equates to $0.06 a share. The Paxar settlement and other adjustments to tax accruals affected earnings by a negative $0.46 per share in the quarter. During the quarter, Zebra repurchased approximately 234,000 shares of stock.

With the payment to Paxar and the acquisition of the RFID IP portfolio, free cash flow was a negative $25.9 million. This also includes a $4.7 million increase in inventories, again largely the result of the RoHS conversion. We're actively managing our inventory position and expect to see improvements in turns over the next several quarters. Our ending cash position at quarter-end was approximately $547 million.

We expect fourth quarter sales to be between $190 million and $200 million. Earnings should be in the range of $0.39 to $0.43 a share. This forecast assumes a gross margin of between 47.5 and 48.5%, and operating expenses in the range of $54 million to $56.5 million. The effective tax rate for the fourth quarter would be 34.5%.

Now that concludes my formal remarks. Thank you for your attention, and I'll return the call back to Ed for some concluding remarks.

Thanks, Randy. We gained positive momentum in the third quarter. The work we have done to expand our geographic presence, penetrate high growth vertical markets and build stronger alliances with channel and integration partners is delivering results. We are capturing more of the opportunities available to us and look to the fourth quarter 2007 and beyond with great optimism.

More effective coverage delivered by greater number of sales representatives, sales engineers and support personnel continue to drive high growth in international regions. In Asia-Pacific, this growth is also sustained by our recent investments in China where we have new leadership, local distribution and five sales offices. In EMEA, Zebra is distinguishing itself from the competition with its programs, depth of management and leadership in business improvements and Auto-ID.

The opening of our distribution facility in the Netherlands last year significantly improved our ability to serve the European continent. Looking ahead, we will leverage on the business platform and infrastructure put in place over the past several years with the placement of more sales personnel, plus additional label production facilities.

Latin America also remains a bright spot for Zebra. Here, the impact of more people in the field is evident. The region continues to hold great promise, particularly in the delivery of basic compliance labeling solutions and mobile applications, which the region has embraced enthusiastically.

In North America, we continue to see the success of our strategy in building alliances and stronger channel relationships. These efforts, which created a more robust business pipeline at the beginning of the year, are now translating into improved order flow and more favorable outlook. Our channel business remains strong. We are seeing the beginnings of an improvement in our direct business as well. New products are meeting with increased end user approval.

Our set of growth opportunities and ability to create stockholder value is also enhanced by our recent acquisitions. We expect to monetize our investments in RFID intellectual property through the RFID Patent Consortium currently under formation. As a founding member and active participant in this organization, Zebra maintains its leadership role in this emerging technology.

The Swecoin acquisition is a natural extension of our printer-centric business and an ideal platform for expanding our presence in the high growth areas of unattended printing applications.

Thank you for your attention. We would now be happy to answer your questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Jeff Rosenberg with William Blair.

Good Morning.

Good morning, Jeff.

Randy, when you talk about gross margin, I think you gave us a comparison relative to kind of year-over-year factors. Can you talk about it relative to your expectations? I mean think relative to where you were a couple quarters ago, you expected a little bit more improvement than we've seen. Can you talk about what hasn't happened?

Yes, what hasn't happened is the manufacturing variances have not come down quite as fast as we had originally expected. We're making progress there, but it's still an issue. And I expect gradual improvement to the -- well, in the fourth quarter and on into 2007.

So the RoHS conversion caused a lot of dislocations as it relates to both the cost of the individual components, expediting them into the factory, assembling them in the printers and then expediting the finished product to Europe, in this case. And now we have a situation where we still have a lot of non-RoHS components in our inventory.

And we are working that off, because we can still sell leaded components in regions outside of Europe and expect to work that inventory down over the next several quarters, and eventually we will be producing nothing but lead-free RoHS-compliant product to distribute on a global basis. But it's going to take some time to work it through. And I expected more improvement in the third quarter than we actually got, but we're making progress.

Okay. And what was average selling price in the quarter?

$621.

Okay. Thanks a lot.

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

Good morning, gentlemen.

Good morning.

I was hoping you could help flush out a little bit better for us your plans and intentions for the supplies business. It's done very well over the last couple of quarters, and you seem to be on a bit of an expansion bench here in terms of opening new facilities. Where do you think you will go in terms of trying to make that a major competitive product line relative to some of the larger commodity producers? And also what would be the margin implications if that business continued to grow at a much faster rate than the hardware business?

I'm going to let Mike answer that question.

Okay. Thanks, Ed. Good morning, Chris. The -- our strategy over the last couple of years has been to get much closer to our customer base. I think we've learned over the course of time that a big part of the ability to serve customers with our supplies is to be closer to their location. And so we have advanced strategy of expansion clearly both in the United States and in Europe, and it has resulted in some significant growth and improvement in that business.

I don't think our intent -- we have focused on specialty materials where we've looked at the value of the label tag or ticket that's being produced. So we tend to focus on high value products versus the commodity products.

So our intent is not to compete head-up with the very large commodity producers of media. And we have centered on that sweet spot as part of our strategy. So on the long-term basis, while we expect to see some acceleration and continued contribution of our supplies business, I think it's going to be very consistent to margin expectations that we've had with that business to date.

Which you've never given us.

That's right.

And just as a side note there with regard to your RFID production capabilities, is that something you would want to have resident in each of your factories or is that something you would centralize?

You know what, we -- at this point, we have not really centered on the broader portion of where and to what extent we're going to have that in each of our facilities. So I would say at this point, it's been much more centralized.

Okay. Thank you.

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

Thanks very much. Just a quick follow-up with respect to the gross margins, just in terms of the shift in the product mix going forward, is your expectation that that could continue to weigh on the gross margins there or how should we be thinking about that going forward?

I think the trend -- the overall trend in product mix is toward lower cost product, lower price product. These tend to have slightly lower margins. So the trend would be -- in that sense, would be a more unfavorable mix. That being said, I will tell you that there are -- we believe there are still very significant cost reduction opportunities throughout our product line on a variety of areas, and we fully intend to take advantage of that.

Now, I should also remind you, Phil, thatwe have had this trend toward, "lower cost, lower price printers" happening over the last 15 years. And broadly speaking, our gross margins are at least as high as they were 15 years ago. In many cases, they are higher.

So we have had the ability, through increasing our volume, being able to put more efficient designs into place, improving our manufacturing yield through quality improvement and a variety of other tactics and strategies, we've been able to keep the costs down and the margins up. And I would expect that to continue.

All right. So you've been seeing stronger growth in your supplies business. Could you speak to any change that you've had in your longer-term growth expectations as far as your hardware business is concerned and if you could also perhaps just, you know, delineate what you think is going to drive improved performance in North America going forward?

Phil, this is Mike. And I'll answer that question. In regard to -- yes, we have seen increased contribution from our supplies business, as we've been focusing on that part of our strategy. It's part of an attach strategy. I think on the greater side of North America where we've started to see some improvement in our business, as Ed noted, as we had several large deals in the third quarter, we're relatively absent from the business over the last three or four quarters.

So we're encouraged with the visibility we have into our pipeline. And we really think that a big part of our success in North America on a go-forward basis is going to be, let's say, taking more control over demand. So with some advances and investments in some more selling resource, our expectation is that we are going to be working more closely with large end user customers with the intent of stimulating demand in large volume opportunities and having that demand primarily fulfilled through our existing channel models.

And so it gives us the opportunity to generate business on a larger scale, and it gives us a much better opportunity to attach supplies to those transactions.

Okay. Final question from me just with respect to cash. I mean, should investors still look to acquisition as the primary intended use of cash to supplement your growth?

Yes.

Thanks.

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

Hey. Good morning. ASPs were up 6% sequentially. Can you guys talk a little bit about what was happening in the mix there versus maybe traction out of new products? And then just given that maybe it's a little bit more of a richer mix, Randy, you had mentioned that the gross margin impact was negative year-over-year, but what about sequentially?

We had a more favorable mix of high-end and mid-range printer products being sold in this quarter than we had a year ago. And that was -- that clearly had a favorable impact on the AUPs. And again, that would otherwise result in a much higher -- tend to have a higher -- result in a higher gross margin.

But again, as I mentioned to you, we had the manufacturing variances did not come down as I had anticipated they were. So we kind of didn't get all the benefit that we would have otherwise expected on the gross margin line.

Right. And do you have a sense for what drove the higher product lines at this point?

There was a -- actually in Europe, they pay particular attention to driving for promotional programs on high-end printers, and it got some real good traction in the quarter. They had excellent results, and we'd love to see that, of course. And we were encouraging them to continue that. .

Okay. And then, if I can go back to the RoHS question, you just touched on that a second ago, but can you talk a little bit about if you break down the components of RoHS, the engineering, I assume there were a fair number of inventory moves. Now, that the date has passed, and you're probably bringing some inventory back to North America?

And then the component cost, can you talk a little bit about each of those is trending from a cost perspective?

Well, the engineering impact was pretty profound. I mean I think there was a lot of engineering resources directed to re-pinning circuit boards.

And of course, that means when you're respinning the circuit board on existing product, you're not designing new product, which has a lot of impact downstream in terms of your ability to grow sales, because ultimately new products are the engine that drives the top line.

So that activity is over with. I mean, the products are -- the boards are respun, the products are redesigned there and manufacturing so the engineering cost is behind us. We're still -- we still have situations -- the RoHs components in and of themselves tend to be, at this point, still somewhat higher cost on a unit basis than the leaded components that they replaced.

And then for considerable time now, we will be carrying, probably through a good portion of 2007, we will be carrying both RoHs and non-RoHs compliant printers of the same type, same model, have two basic versions. A RoHs comp version and a non-RoHs version. And we're going to continue do that, of course, until we bleed down the non-RoHs raw material inventory that we've got and everything is converted over to the lead-free version.

Which will happen -- there will be a transition point. We don't know exactly when it's going to be, but we expect it's going to be sometime next year. And of course, carrying -- you know, doubling up on these components and doubling up on the finished goods in many cases, as resulted in -- largely been responsible for this high level of inventories, which I think everybody has noticed, certainly we've noticed it.

And we're trying -- we're working very hard to manage that down because we don't believe that that's the way we want to run the business. So the RoHs thing had a lot of impacts in various parts of the organization, on the balance sheet, the P&L, our product development capability and resources are -- ultimately I think it had an impact on our top line growth. Because we've touted for many years the many advantages that the breadth of our product line gives us.

We got a snoootful of one of the disadvantages of our product. We had to convert one heck of a lot of parts to be RoHs-compliant. So that was a major effort. And it diverted a lot of engineering resources to this compliance work.

Okay. And then, one thing on new product intros. You guys began either late last year or early this year with a wave of new introductions, which has kind of continued throughout 2006. Can you give us a sense for the traction that you're seeing with the earliest of those intros, the level of interest with the most recent?

And then Randy, to your comment, now that you've got those engineering resources recommitted, can we expect a greater series of new product development or are those resources going to be focused more on cost reducing?.

Right. This is Mike. I'll answer that question. As far as traction from new products, yes, indeed, we had several new products that we've announced over the last several quarters. And those products are doing very well. And in several respects, they're contributing to some of the softness you see in the gross margin because those products are not at their in the groove cost position as of yet. And the early results of those products have been very favorable.

And those products span both our mid-range and our desktop and our mobile product. As well as photo, thank you. And as far as the longer-term, to Randy's point, there was a significant amount of our engineering and development budget that went into dealing with these lead-free compliance issues, which really don't generate a lot of value for the business.

As a matter of fact, they generate a lot of additional cost. And we're very excited, very bullish about the 2007 development road map. And we have a significantly greater percentage of our engineering budget that is allocated towards new product development.

Great. Thank you.

Your next question comes from Jay Meier with MJSK.

Yes. Thanks. Good quarter. My question is more macro-related specifically with respect to RFID. You know, you've made some solid progress during the quarter. It appears, you talked about the larger shipment to date, and things seem to be progressing for you with RFID. Is that Zebra specific or would you say that's more macro- related, and can you give us your view of how that industry is developing now?

Well, first of all, pretty much everything we have to say is Zebra specific. We are -- our product line is a segment of a set of solutions. In this particular case, what Zebra is providing something really a compliant solution.

And a large percentage of the activity that we've had in this area breaks down into two areas. One is the Wal-Mart initiative and the drag-along of all the other retailers along with that, as well as the US government programs. And in those areas, we are really limited in what we are providing. And that is, we're providing printers that have an RFID encoding capability, and we're also providing smart labels.

Now, to get back to sort of the macro look. The macro look, which is I guess Wal-Mart would love to hear this, is the Wal-Mart look. And the programs at Wal-Mart have slowed materially from those that were initially presented by them. And even those that were subsequently provided by them.

This is in terms of numbers of distribution centers, numbers of stores, number of SKUs that are covered, timeframe for all of those things has -- have been materially reduced. And that has affected, of course, many auto ID companies that have chosen to participate in the RFID space. So I don't think that retail is going to get going big time until Wal-Mart puts more of its might behind this. Now, that's not to say there aren't other applications for RFID. There are and Zebra has been investing resources in some of those other areas. So I think that gives you some sense of where the industry is at this particular point-in-time.

Thanks a lot.

Sure

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

Good morning.

Good morning.

The first question is about the manufacturing. I think you did focus a little bit on engineering out the costs, but what's happened in terms of exploring instead of manufacturing in low cost regions? I think you talked about it a little bit the last time. Could you give us a status update there?

We're looking to move portions of our product line to an outsource model, and we've continued to work at that, and my expectation is in 2007. We will start to see a step-up in that particular area of our business.

And when you're looking at the Chinese business, since you've been investing in sales over there, are the margins in China comparable with the margins you have in the rest of the world?

China is definitely a cost-conscious environment. And so there is a lot of pressure to reduce costs. The way that we've come at this is to bring products to the marketplace that are not as feature-rich and yet have sufficient features to meet the requirements of many of the applications.

It seems that in that space, there is -- and this is not the entire space. But it seems that there are people who are really looking for very basic functionality and probably a better way to say it is they're looking for the absolute minimum price they can get, and they satisfy themselves with minimum functionality.

And so that is the way we've dealt with that. We are actually introducing to the marketplace a mobile printer very soon that will meet that model that I just explained.

Right. And when you're looking at China, are the competitors that you're facing there, you know, the traditional competitors that you've faced or are you seeing some low cost regional local competitors coming up again more frequently?

Actually it's both of those things. We have a situation where most of the companies that we would compete with in the United States. And of course they're a global company, but most of those that we would compete within the United States, we will also compete with in China.

But in addition to that, there are a series of printer manufacturers, particularly Taiwanese manufacturers, but some mainland, that we also compete with. So you have a situation where our competition is more intense than it would be in many other regions of the world.

And the other aspect of the Chinese market is the rate of change of that market in terms of the utilization of our products, who we are selling to, the applications for the technology. It's a very dynamic environment, and that's proven to be challenging, I think, for many companies to deal with the rapid change that's going on.

Right. And then when you're looking at the kiosk and sort of unattended printing application right now, particularly this acquisition that you've just made. Are the ASPs in that market, are they higher or lower than your corporate average, right now and what approximately would they be?

I would have to say that generally -- generally lower.

Right. And then when you --.

In that particular case, you should understand that what's being delivered is a -- since it's an embedded product, a lot of the things that you would need in a -- as compared to a tabletop product, a lot of things that you need, you don't need in an embedded product like, in terms of enclosures and controls and things of that nature.

So it's a much more stripped down kind of product that's being used. So in order to answer this question for you, it sort of depends which applications of embedded printers we are looking at, what level of product is utilized, and in many of these applications, it's not much more than a receipt printer. It's not a label printer that Zebra sells, you know, a lot of our sales are in the label printing marketplace, and in kiosk printing, there's lots of receipt printing.

Right. So when you look at things, strategically, especially stepping into this one region where the growth prospects might be quite attractive, one of the facets for Zebra that has, really help Zebra have really good margins is the brand, which is the equity that folks associated with reliability, with quality. Does the brand matter at all in these embedded applications?

Well, it matters if, in fact, reliability and durability and quality are necessary. And as it turns out, in unattended applications that they're very important because you have a situation that if there's a failure, you know, the ability to deliver service vanishes.

And so breakdowns are not -- really are very, very bad things. So the reliability of the product turns out to be a very important aspect in that application. And it depends on who you are selling to and what their ultimate responsibility is relative to the product that's being delivered

So I think that while the brand on the face of the product, which is a positive in Zebra's world, we won't get that benefit in most kiosk applications unless they want to adopt the Intel mantra and put a label that says 'Zebra' inside, which, of course, would be very gratifying to our egos. But no, I think that that reliability is very important in this space, and Zebra is well-known for having extremely reliable products.

So will the margins be impacted, I mean, will there be lower margins for those applications when they're embedded?

I don't think I can really answer that question for you at this point in time.

Okay. And then just looking at the RFID, I think you mentioned that you had a very large shipment, in fact, the record shipment, and you mentioned government in I think the same sentence. Is that to do with the department, the DOD's set of supply chain initiative or is it a different initiative? And is that initiative sort of seeing greater momentum right now than the Wal-Mart initiative?

I actually -- the actual agency that's involved slips my mind. And I just leaned over to Mike and asked him if he knew, and he doesn't. So maybe we can get back with you.

Okay. And the acquisition pipeline lastly, you have announced many acquisitions recently, but is it still something that you're -- that is pretty rich right now?

Yes, actually, it is. And we -- we see the -- we've seen the importance for a long time, and we are eager indeed to do a deal. We just want to do the right kind of deals for the corporation. And we just had a board of directors meeting yesterday, and a reasonable portion of our time was spent on the subject of acquisitions.

Thank you.

Sure.

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

Good morning, and thank you for taking the question. Wondered if you could comment on the currency impact in the quarter on the top and/or bottom line.

Yes. The currency impact in the quarter was $2.4 million. And it was roughly a little less than 0.5 in gross margin.

And that's $2.4 million favorable?

Yes. $2.4 million.

Okay. And on the share repurchase, can you repeat how many you bought? Was it 134 or 234?

234.

Okay.

But that was just -- we started near the end of the quarter. So I mean, there was, you know, more activity subsequent to that.

Okay. And I guess that's why the 4.07 million works out to about $17 a share. There must be some carryover on the cash flow statement?

I can't comment on that. I haven't done that particular piece of arithmetic for you. So you know, the number of shares is what we said it was.

Okay. And also, relative to new products and the traction there, can you comment on what percentage of sales have come from products introduced in the last...

Right. It was 11% in the quarter.

Okay. Great. And last question. Your core tax rate for the third quarter was what?

I don't recall exactly what it was. It was a very weird percentage, something in the 57% range, something like that. But there was a lot going on there with tax credits and -- when you get in the negative territory, the numbers get very weird.

Okay.

So I wouldn't put much stock into the percentage. I would put stock in the fact, though, that we did give guidance that the tax provision rate for the fourth quarter is going to be 34.5%.

Okay. And there won't be much impact from the increased amortization of the 4.07?

No, it's not much of an impact. I mean I gave a number roughly $450,000 incremental increase in amortization expense. And that's going to change over the years. But for next quarter, that's what it is.

Okay. Great. Thank you.

You're welcome.

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

Good morning, guys. How are you?

Good morning.

A couple of housekeeping questions. Looking at the expense line, I was a little surprised to see some restraint on some of the OpEx items. It looks like all the three major categories were down slightly Q-to-Q. And then looking at your Q4 guidance for OpEx, it looks like there is somewhere the healthy rebound in expense growth. And I'm just wondering if can you give a little flavor on that?

For example, in the third quarter, we did some year-to-date adjustments and some payroll tax accrual, so that was kind of a one-time deal that affected operating expenses. We did have a decline in year-over-year decline in legal expenses, and that was clearly related to the Paxar litigation.

In the fourth quarter, you have, going into the pot now; you have the operating expenses that are related to suite coin, all right? You also have some increase in the amortization expenses, and there are some marketing programs that are scheduled to be spent in the -- spent on those in the fourth quarter as well.

In reality, the -- although the sequential increase looks rather significant, if you go back and check your math on the comparable increases, it's very modest.

Okay.

You know in the couple of -- you know 2% to 3% range, something in that range.

Okay. And then, jumping over to RFID, which I guess everybody -- there's a lot more talk about RFID than action still at this point in the game, but trying to get a better sense of you all are obviously participants in both the RFID consortium as well as the Rapid Start program. And I'm wondering if maybe you can help us understand how you view those various programs and how they might either interact or supplant each other.

I think you'd get a better answer on that question by talking to Intermec.

Okay. But what...

I really don't have -- I don't really have a view of the interaction between those things.

Okay. Well,...

Go ahead.

Looking at your role in the RFID consortium, what are your expectations for the consortium?

We fundamentally expect that there will be various companies that will contribute some of their RFID intellectual property to the consortium. And then, there will be sharing of revenue that comes as a result of that portfolio.

And is it your understanding that that IP portfolio would represent the kind of comprehensive solution for somebody looking to adopt RFID?

I think that you -- I may be speaking a little out of school here, but I think that when you combine the Intermec portfolio with the Zebra portfolio, you would have a pretty comprehensive coverage within certain areas of RFID.

I mean, what we're talking about here, we're talking about a lot of different things. So it's -- I hesitate to say very much, but a lot of focus, let's say, has been on the Wal-Mart passive ID Gen to application. And so when you look at that space, which is certainly a subspace within RFID, but what people are talking about a lot.

Okay, then if you look at the Intermec portfolio and our portfolio, you'll have a significant amount of intellectual property. I think between the two, there's close to 400 patents.

Okay. And then, final question, if I might. You have talked a bit in the past about exposure with the security vertical through some card printing operations. And obviously there are Barcode and RFID applications developing in security. And I'm wondering if you can give us a sense of what you think '07 or '08 might mean for security applications for Zebra that you haven't being seeing in the past. .

Within the security piece of this that you're talking about, I don't know that I could provide you with any additional help. What I would tell you is that there are applications that are outside of security that are becoming more interesting to people.

And in my prepared remarks, I quickly went over one of those and that was the gift card application. The ability to produce gift cards on demand that are customized to the needs of the store or to the purchaser of the gift card is an interesting application for the technology and we have benefited from revenue in that space, and we have other customers that -- or put them in the category of potential customers that are evaluating the technology for that application.

So that was something that became really new from the perspective of on-demand printing of gift cards toward the end of last year. And it's continued into this year. Of course not on-demand to printing, pre-printed gift cards are an enormous, multi- multi-billion dollar retail business. And so we're in new territory here relative to producing customized cards on demand.

Got you. Okay. Well, that's helpful. Thank you.

Sure.

Your next question is a follow-up question from Jeff Rosenberg.

Thanks. My follow-up was asked.

Your next question comes from Christin Armacost with Lazard Asset Management.

Thank you. Lazard Capital Markets. Good morning. You cited improving North American trends, and if you look at your past couple quarters on a year-over-year basis, you've definitely improved the year-over-year growth over this year in North America. What's giving you the confidence? Is it bigger deals coming back or is it strengthened particular verticals that had been weak previously?

Hi. Christine, this is Mike. I'll answer that. Its a couple things. One, as we mentioned earlier, the quarter, we experienced some closing of some large pieces of business, and as I had mentioned, you know, we have some pretty good visibility into those larger deals and that deal flow was relatively absent for several quarters.

So we're starting to see some projects that for a variety of reasons, that were pushed off the burner, put back into play and the visibility that we have on a go-forward basis suggests that there is some relief. I think in particular, the retail space and the route space for us are showing some very solid signs. And I think secondarily, we tend to look at our business through channel, which is serving multiple applications and multiple markets.

When we look at the rate of bookings and we do our own channel checks, we're hearing kind of a similar story. So that there is some strengthening in the marketplace, projects are being advanced where in the past, they've been on hold. And when we look at the quarter Q3 in particular, it was a very steady pace to the quarter, which is usually a very good sign for us that there's some strength in the channel business.

And then my last question is about backlog. You said that backlog is up, but it's not typically a number that you disclose, so can you just help us think about -- help us think about how we should look at the backlog? Is that a quarter or half of next quarter's revenue that you typically go into the following quarter with?

You should look at it in accordance to the guidance that Randy put forward on Q4.

Okay. But is that --do you typically into --.

No. The answer is, we enter a quarter with very minimal backlog. I mean, we referred to the backlog in this case because it was in comparison to previous quarters. It was substantially larger, and on top of that, there were quite a number of -- this was generated by a number of large deal opportunities that closed during the third quarter, which have shipment dates that started in the third quarter and continue on into the fourth.

So the comments that Mike was making about the flow of large deal opportunities carries over into the backlog comments, because the more large deal opportunities you have, typically these will ship over multiple weeks. In this case, they extended over one quarter and into another and gives us really a great deal of optimism about where fourth quarter is heading at this point.

Excellent. Thank you.

Okay. I think we are now at just about the one-hour mark. And with respect to the fact that it's earnings season, you guys probably have another 30 calls to do today, I'm going to terminate today's conference call. And remind you that our Zebra's next call is going to be on Valentine's Day. So we'll look forward to wishing you a happy Valentine's Day at 10 o'clock central time on February 14, 2007. And thank you for attending today's call.

This does conclude today's conference call. You may now disconnect.