斑馬技術公司 (ZBRA) 2006 Q4 法說會逐字稿

Good morning and welcome to the Zebra Technologies fourth-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 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.

Good morning, thank you for joining us today. Certain statements we'll make on this call will relate to future vents 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 2007 first 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 ended September 30, 2006. Now let me turn the call over to Ed Kaplan for some brief opening remarks.

Thanks, Randy, and good morning to everyone. Zebra achieved record sales and the highest rates of sales growth in eight quarters but fell short of expectations for gross margin and operating expenses. All dimensions of our business, products, channels, and geographies contributed to deliver our favorable sales performance. The fourth quarter was a strong end to a year in which we positioned Zebra for higher growth. During the year we made acquisitions to extend our product line, add technology, and grow our customer base. We completed product redesigns to perform -- conform to RoHS mandates and added new products that will enable us to serve a broader range of high growth vertical market applications. Supplies growth was augmented by increasing label production capacity and adding production facilities that are geographically closer to our customers.

Sales and marketing programs were established that improve relationships with channel partners and strategic accounts. More large companies are viewing Zebra as a strategic technology partner that brings higher levels of productivity, security, and customer satisfaction to their organizations. Our expanding geographic presence continued to deliver results. The momentum of our core business going into 2007 is strong. WhereNet and Swecoin offer additional growth opportunities on top of this favorable outlook.

In the fourth quarter we had rapid acceleration in North America business and continued high growth in EMEA. Secondly, the acquisition of WhereNet which closed shortly after the quarter will add another high-growth element. Consistently robust business through the channel helped set a new North America sales record. Further momentum and large deal shipments augmented this activity and included mobile and desktop solutions delivered to retailers and further penetration of route accounting. These favorable trends are continuing in the first quarter in which we have already started deploying our pharmacy labeling solution to a new retail strategic account.

Key to our improvement in 2006 was attracting and adding partners through the Partners First program. Another element in North America was managing a more aggressive sales pipeline of opportunities that has been consistently building over the year. We have seen material progress throughout 2006 on this endeavor, and I expect the progress to continue into 2007.

In our execution in EMEA, it continues to excel as three out of four quarters hit new records in 2006. The high growth in Eastern Europe supplemented solid gains in the UK, Germany, and France. In addition to the accruing benefits of improved regional coverage, a material jump in deal wins and likely share gains resulted from our success in meeting RoHS compliance standards across the product line. Increased activity with multiple resellers resulted from a larger, more experienced account management and sales engineering team in Latin America. Our strategic accounts and strategic alliances were important sources of business during the quarter in the region.

In December, our new label production sector facility opened in Texas. It will serve South Central United States as well as Mexico. It is already helping to increase business in the area. We had a record year and record quarter in RFID. Growth in both Zebra printer encoders and genuine Zebra smart labels contribute to another year of extending our leadership in this emerging technology. Card and photo printers were also up over both periods. New products coupled with successful channel and distribution sales programs were the primary reason for this performance. Sales of our P100 series of value card printers introduced a year ago were particularly satisfying.

It was also a busy time for supplies. Sales registered another quarter of strong growth. In addition we opened new converting facilities to relieve capacity constraints. Overall, we expanded our label production footprint by nearly 54,000 square feet, which is a 78% increase over the three locations, all in the fourth quarter.

To be sure, we accomplished much during 2006, to reaccelerate growth and position the Company for greater success in 2007 and beyond. Our investments in channel programs, vertical market applications, and geographic expansion have increased the level of activity and deal flow in our core operations. Operating expenses within our core operations are being effectively managed. Swecoin and WhereNet opened Zebra to new businesses and will generate additional sales.

We made extraordinary progress in the fourth quarter, particularly in the North America core of our business as a result of the careful and significant investments we have made over the last year. It's very disappointing that transitional, operational problems and one-time events have so strongly undermined this quarter's financial results at the very time the underlying strength and momentum of our business are so favorable. Now here's Randy to give a detailed review of the fourth-quarter results and guidance for the first quarter of 2007.

Thank you, Ed, and good morning. Sales in the quarter were up 17.1% to just under $210 million, which is almost $10 million above our forecasted range. Hardware sales were up 18.3%, with numerous product line sales records. Of course Swecoin products were among the mix but the majority of the growth came from historical Zebra products. New products accounted for 12.2% of fourth quarter printer sales excluding any contribution from the addition of Swecoin. Supply sales maintained its upward trajectory with growth of 15%. Supply sales have now registered double-digit, year-over-year growth for four consecutive quarters. Importantly, North American business advanced 15.8% from a year ago. The strongest showing in eight quarters propelled by the strength of channel and distribution sales and further improvement in large deal activity.

Sales in EMEA reached a record for the third out of four periods, up 22%. Foreign exchange contributed $5.6 million to our sales results or 9.1 points of growth. Latin America was up 7.2% off a strong period a year ago, and Asia Pacific sales finished the year with an advance of 13.8%. Zebra completed the year with perfectly balanced geographic sales with exactly 50% generated from international sales, the other half from the United States.

Gross margin for the quarter was 46.9% versus 50% a year ago and 47.1% from the third quarter. Very simply, we were not successful in bringing down manufacturing variances which accounted for points of the year-over-year change in gross margin. We continued to have higher material costs and labor variances as we transitioned to all lead-free components. We also had increases in excess inventory reserves and incurred higher than expected scrap, labor inefficiencies, and startup costs for our new and expanded label-converting facilities. These startup costs which approximated $600,000 are now behind us, and we now have additional capacity on line to support our supplies growth strategy.

Clearly the transition to RoHS-compliant products has been more complex and disruptive than expected. These challenges are definitely fixable. Programs to reduce product costs, improve inventory turns, and minimize manufacturing variances are a top priority for 2007. We fully expect improvements in gross margin will result from these programs. Operating expenses excluding the charge for the debt writeoff were $60.1 million, up 12.4%, which is below the rate of sales growth. Contributing to this increase were operating expenses at Swecoin, adjustments to our bad debt reserve, consulting expenses, and IS, and the increase costs of radio certifications and engineering.

During the quarter we provided a 100% reserve for the debt of our reseller partner that cost the Company $0.12 a share. In 2004, we loaned money to a long-time reseller of Zebra to assist it in restructuring its business. The debt was guaranteed by an insurance company doing business in the UK. The reseller partner eventually went bankrupt, and we sought recovery of our debt with the insurance company. The insurance company failed to honor its guarantee obligation. We have initiated legal action to enforce our rights under the guarantee but believe that a 100% reserve is appropriate under the circumstances. Fourth-quarter investment income topped $6.9 million. Net income including the writeoff equates to $0.30 a share. Free cash flow was $40.1 million.

During the quarter, we -- we purchased $1.9 million shares of stock to bring the total number of shares purchased to 2.2 million out of the 2.5 million authorization from the Board. We began to make progress in inventory reduction as turns increased sequentially to 5.5 from 4.8. We continued to actively manage our inventory position and expect to see further improvement in turns over the next several quarters. Our cash position at quarter end was $559 million, of which we paid out $126 million in January for the WhereNet acquisition.

We expect first-quarter sales to be between 195 and $205 million, including the effect of the WhereNet acquisition. Earnings should be in the range of $0.33 to $0.37 a share. This forecast assumes a gross margin between 46 and 47%, including the impacts of currently lower gross margins on WhereNet products. We expect operating expenses to be in the range of 60 to $63 million, the increase includes expenses for Swecoin, WhereNet, and the amortization of intangibles from both transactions. The effective tax rate for the first quarter will be 34.5%. That concludes my formal remarks. Thank you for your attention, and I'm now going to return the call to Ed for some concluding comments.

Thanks, Randy. We enter 2007 with enhanced capacity for accelerating growth. Our broader range of products and technologies is enabling Zebra to serve a greater set of high growth vertical market applications. These products and technologies are also causing more companies to view Zebra as a truly strategic partner for their specialty printing and auto ID needs. Our supplies business is opening doors to more reseller partners, as well. In short, we have more leverage today than ever to drive growth and value.

Our vertical market applications continue to gain traction. In retail, we have a much broader range of solutions incorporating mobile, stationary, photo, and [FEOS] printers. Most recently we added a new MZ line of lightweight, ergonomically designed mobile printers for low-cost receipt printing. Similarly, our work in route accounting, government, and health care, with the right set of products and channels is also paying off and will deliver further benefit in 2007 and beyond.

Our efforts to transform sales and marketing with more high-touch content will also help accelerate sales. It is already working in EMEA, where greater contact with end-user customers and fulfillment through the channel has regularly positioned us ahead of other companies in business wins. We are optimistic that our further investments in sales in marketing in North America coupled with the realignment in leadership recently announced will support the desired growth in the region. We are also very excited about WhereNet. Our newest platform for growth in real-time-locating systems. Points of synergy and iteration have already been found and are being pursued. These activities include building on Zebra's international presence to accelerate overseas expansion. WhereNet has excellent technology, which is the basis for a strong, competitive offering in the marketplace. Its systems provide the right combination of cost and functionality to deliver great value to customers.

Zebra's global leadership position is strong and getting better. Over the past year, we continued to position the Company for improving growth. Fourth-quarter sales demonstrates our strategy as working. More than ever, customers are choosing Zebra. Thank you for your attention. We'd now be happy to answer your questions.

And before we embark on the questions, I'd like to say that we'd like you to hold yourselves to one question and one follow-up question.

Thank you, sir. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Philip Alling with Bear Stearns.

First question here, with respect to the gross margin performance in the quarter, could you speak to other impacts there such as the mix shift to lower margin supplies and how long do you think that really could impact the gross margin performance going forward and thus far, through the first quarter, is there any change really in your longer term outlook about where you may be able to take gross margins in '07?

Okay. Let me take that, Phil. First of all, I will start off by saying that mix was an immaterial factor in the gross margin change from quarter to quarter, year over year. The entire 3.1 decline, percentage point decline is exclusively attributable to manufacturing variances. This is a high priority for us to fix this year. We have a renewed focus on product cost reduction, and we expect to make important progress on that during the course of 2007. And I think I'll leave it at that because I don't want to give you any long-term forecast on that because I forecasted improvements in manufacturing variances for two quarters in a row, and I am embarrassed that we haven't delivered on it. So I'm not going to put myself in that position for the first quarter other than to say that it is getting a lot of attention internally. And it is going to be fixed.

Okay. Just my follow-up question is on the -- the Swecoin acquisition. At this point, do you have a better sense as to whether the growth that you had expected, north of 25% I believe is what you had indicated that that business had been growing. Now that you've had it sort of in your fold for a little bit there, is your sense that that business has that type of growth potential--?

I don't recall ever making any specific forecasts with regard to Swecoin, I think you may have been talking about the WhereNet transaction. And our expectations for WhereNet are continuing the same as they were before. We indicated in our previous call that we expect WhereNet to do approximately $50 million of sales in 2007, and we have no reason to change that forecast going at this point.

I appreciate the comments with respect to WhereNet, but I actually am looking back at the notes with respect to Swecoin, I believe there had been comments that that had ben growing--?

Okay. Well, first of all, Swecoin -- first of all, Phil, Swecoin is very small.

Just want to get a sense about sort of what your sense is about how that business has been doing since you made the acquisition.

Phil, do you want to comment about that? Philip Gerskovich is here, and he was very instrumental in the Swecoin acquisition, so he's more qualified to talk about their prospects than anybody in the room here.

Excuse me. We continue to be happy with the results that Swecoin is delivering to us. They -- we are seeing synergies with the rest of Zebra, and we are seeing a significant flow of regeneration from the broader Zebra Corporation into the Swecoin business unit. But we're not prepared to quantify that in any way at this point.

I appreciate the comment, thanks.

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

Good morning.

Good morning.

Randy, on the gross margins, all coming from manufacturing variances, can you triangulate that the idea that with $5 million of positive benefit from foreign exchange, I would think a lot of that flows to the bottom line.

Actually, there was -- if you go through the number drill, about 0.3 of a point benefit can be attributable to foreign exchange changes year over year. We managed to offset all of that with a variance performance, or should I say variance nonperformance. A variety of issues relating to inventory reserves, cycle count adjustments, there were some transition costs relating to the opening of three supplies facilities during the quarter, and there was some related labor variances because one of the supplies facilities that we opened was a brand-new operation down in McAllen, Texas, and there were some training costs involved with that. There was some continuing material variances relating to the RoHS compliance. And if you dig back into the root cause analysis of what in the heck is going on in manufacturing variances, you come to the inescapable conclusion that a lot of the -- we're still suffering a hangover from a lot of the inventory build that was directly related to the RoHS conversion.

The larger inventory requires larger inventory reserves, the larger inventory results in additional scrap. The larger inventory results in a lot of duplicative SKUs because we're making leaded, as well as lead free product so that generates extra finished goods inventory in some cases and creates labor inefficiencies and planning inefficiencies and purchasing issues. So it's a very complicated problem and quite frankly we underestimated how difficult it was going to be to get over the hangover. But as I commented earlier, this is a -- a big issue for us internally. And it is going -- it is getting a lot of attention, and it's going to be fixed.

Okay. So as we look to Q1, I -- I guess kind of a two-part question, or maybe the same question asked two different ways, but if you look at WhereNet, you had given us a specific number in terms of dilution for the full year. I'm wondering either if you could give us a feel for what the specific effect is in Q1 or--?

Yes, the dilution -- the dilutive impact of WhereNet on the first quarter is a little over $0.01.

Okay. And what would be your gross margin expectation in Q1 excluding WhereNet?

A little bit higher than it currently is.

Like 50 basis points kind of move, or if we shift the range up--?

Yes. Actually, it would be about that.

Okay.

A little less than that. But that's close.

All right. That helps. Thanks.

Your next question comes from the line of Reik Read.

Good morning. Randy, just to touch on the manufacturing variances again. I mean, my understanding of one of the problems with RoHS is that it's very difficult to produce the same product on the same assembly line, which sounds like it removes a fair bit of inefficiency and what you need to do is have additional safety stock to compensate for that. I guess the question is, can you give us some sense as to what you need to do over the course of the next couple of quarters to start reducing that safety stock inventory given that we have leaded and unleaded requirements worldwide.

What we have to do is the object -- one of the principal objectives of the manufacturing organization this year is to bleed off all of the leaded inventory we have. And we can ship leaded product into geographies outside of Europe. We're going to continue to do that until the leaded inventory is consumed, and we -- there are varying projections internally about when that is going to happen. And it's -- it's a tricky proposition, but it's going to take several quarters to work it all off. And in the interim, we do indeed have this issue with making two SKUs for a lot of the products that we manufacture. It's complicated. It creates a lot of planning issues, it certainly creates some inventory issues. And we have to work our way through this. It is a, again, at the risk of repeating myself, it's a lot -- it became a lot more difficult to get through this than we really expected. We underanticipated how difficult it was going to be.

Can you tell us what the one or two key things are that provided that level of difficulty that you didn't anticipate?

I think a lot of it had to do with the -- the planning and the purchasing and the managing of the size of the inventory that we've got.

Okay. And then, if I can shift to just to one other topic, North America, as you guys pointed out was very good, large projects kicked in. Can you talk a little bit about the pricing and the margins of those projects, and I guess with -- can you give us some sense to I think in Ed's comments he suggested that those things will continue. Was there a big pop in the fourth quarter, and they'll continue at a lesser pace, or do you see these things as continuing to gain momentum throughout the year?

You're on a roll.

I'm on a roll. Okay, listen. I think we would characterize the sales in the first quarter as -- in the fourth quarter, excuse me, as coming largely from the channel. I mean, I think there were -- there were certainly some important, large transactions, but we are -- we did not see anything in the fourth quarter that was kind of a one-time buy action that distorted the core underlying results. I think the thing that was particularly encouraging from our perspective was the fact that distribution sales were very strong. And distribution is a very good indicator in our view of the health of the overall market. We were particularly pleased with how well we did in North America. And as we have said on many, many occasions that North America because it is so large as a percentage of our total sales, if that doesn't grow rapidly, the whole corporation is going to have a heck of a time growing at the rates that we want. Well, North America did very well indeed in the first quarter. And North America of driven principally by channel sales, sort of principally through our distribution partners, and it was a very, very encouraging result because it indicated very -- good underlying strength in the marketplace.

Okay. Great. Thank you.

And I would also -- you know, as a follow-up here because I know this is eventually going to come up, I mean, there -- we alluded -- we didn't allude to it, we commented very -- in our first-quarter conference call and perhaps even in the second that we had a series of pricing issues. And there are nasty mix shifts and we're getting whacked on big deal pricing and stuff like that, we saw none of that kind of thing going on. Okay. But we again, the issue we had with gross margin was exclusively related to manufacturing issues. Manufacturing variance issues. And these are -- the good news there, the bad news is we have them. And when we said we were going to deal with them and bring them down this quarter. The good news is these are -- are eminently fixable problems, and they're -- again, they're gaining a lot of attention, and I'm confident that we're going to successfully deal with it.

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

Randy, I was wondering if you could tell me what the annual run rate would be on amortization of intangibles including the effect of WhereNet.

Yes. The one point -- the current run rate on that is I believe $1.6 million, 1.6 to $1.7 million a quarter on the amortization of intangibles.

After WhereNet?

Yes.

Okay.

Yes. And again, you won't see the full impact of that until really the second quarter because WhereNet was acquired during the first quarter. So, you won't see the full 1.6, 1.7 until Q2.

The second question is, I'm wondering what percentage of your inventory by dollar value might contain lead.

Oh, boy. I honestly don't have that right here. I can certainly -- I'll have to get back to you on that. If you want to have a follow-up conversation about that. But it's, again, one of our main objectives in 2007 is to bring that leaded inventory essentially to zero. Get rid of it. So we make only one type of each product that we make.

I don't mean to ask you to explain your opponent's side of the argument, but I'm wondering what the insurer's saying are the grounds for failure to honor the guarantee.

Oh, that's -- that's under legal discussion right now. I'd rather not get into that.

Okay. Thank you.

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

Good morning, gentlemen. Shifting topics, surprising when I went to type in the revenue number there, thought I had mistyped. Congratulations on a good number. And likewise, the guidance for Q1 was probably better than I had been projecting. And can you give us perhaps a sense of whether you're seeing a more optimistic input there from your channel or what's perhaps driving this move back towards double-digit growth and what the outlook for the year might be?

Well, we don't have a -- we're not disclosing a -- an outlook for the full year. We are operating on a quarterly system. That's proven to be difficult enough. But the trends that we've -- what we've seen here in the fourth quarter, we expect to continue in similar fashions over the -- over the course of '07. The channel business continues to build which means the breadth of our distribution is really good. We're putting more products through distribution. We are doing better in terms of achieving large contracts from large corporations. Contracts that are multimillion-dollar contracts that while it isn't that the Company hasn't seen any of those in the past, we certainly have, we are seeing more of them.

We are getting closer to our customers in terms of understanding their applications and being able to work out solutions with them. We're able to go ahead and in many cases customize our product to suit their particular requirements. The supplies business is growing because we have more capacity, and we're closer to our customers, and again, understand their problems better. We continue to go ahead and disproportionately expand outside of the United States. So it is all those things that we're working on, and we are achieving -- we're achieving some good results.

What will happen over the course of this year that I didn't mention is particularly with WhereNet, having the -- WhereNet having the benefit of the large platform that Zebra has. I mentioned in my early remarks about synergies and as it turns out, the customer base of where WhereNet is particularly strong, they can actually provide help to Zebra. We've gotten calls from companies who are saying, we're buying these products from WhereNet or vice-versa buying them from Zebra, and we'd really like to consolidate our purchases across these additional product lines that we have. So that's encouraging for us that companies see the benefit of dealing with a large vendor.

Our advice -- I mean, the people we are talking to are higher up in corporations. Where the strategic decisions are being made to adopt our technology. So these are all very favorable things for the Company, and it's very disappointing that we have a -- posted a reserve that took $0.12 off of our earnings, and that we had some stumbles in terms of some of the variances that we've already belabored in this call. But if you can look beyond that, you can really see quite a stunning quarter in terms of Zebra's results.

Certainly the revenue progress was pretty astounding.

Yes.

And just to quantify Ed, a couple of things you talked about in terms of the international expansion. And we know you've opened up offices with the supplies business, you've opened up factories.

Yes.

Do you see more of that capital-type investment or at the same level in '07, or might you be able to leverage some of the investments you've already made on a go-forward basis?

We do expect to open additional label-converting facilities in '07. And we do expect to open up additional sales offices where we are currently not located. Probably two or three of them.

Okay.

Yes. I -- in terms of answering your question, really which was -- what's the dollar -- the relative dollar impact on CapEx, I don't have that to be able to give you. But we definitely have plans for further expansion.

Very good. Thank you.

Sure.

Your next question is a follow-up question from the line of Jeff Rosenberg with William Blair.

Hi. Looking at the Q1 guidance at the midpoint, it's down about 5% sequentially which is I think above average sequential decline for seasonal for Q1. But particularly when you consider I'm guessing that there's about 5 to $10 million of WhereNet contribution in there. So can you talk a little bit about what might be happening in the core business in Q1 seasonally.

Yes. I can address that. If you go back and look at the comp growth rate for performance in the previous two years, a year ago we first quarter our comparable performance was 3%. Two years ago, it was 10.7. And the only guidance I'm going to give you right now is that the -- the growth in the core business exceeds those numbers. And you'll have to figure it out from there, Jeff.

I won't--.

No, look, the core business -- the core business -- the core business is doing very well, indeed, okay. And I don't think anything should be -- you should not infer from the mid point of the guidance range where it shows a growth rate of 13.8%, anything negative about the performance of the core business because the core business is growing at double-digit rates.

The way I'd look at it, Jeff, is there was a particularly -- and this speaks to the SPS business. There is a particularly strong channel component in the business in the fourth quarter. We expected to have a good quarter in the channel business. But that was stronger than we would have expected going into the quarter. However, very early business was strong, and it played out through the -- through the whole quarter.

When you -- the thing that Zebra has -- it's the good news/bad news scenario. It's these big -- it's these large contracts that we get, some of which the release of them comes without a lot of notice. And so when you get this quarter-to-quarter kind of estimate that you have to make, that volatility really enters a lot into our projection, projections that we're making. The addition of WhereNet to the mix, this is a business where almost all the business is big deals. Okay? So what we're adding is a larger component of big, corporate deals. And exactly when they're going to hit becomes a little bit more difficult for us. So that's the background of behind these numbers.

One other thing that I would say is if you -- if you get the, what I'll call maybe the elation factor and the punishment factor, Wall Street tends to punish us very severely for missing and gives us some -- well, depends upon how much we beat the numbers by, but usually it's not proportionate to the punishment that we get for being wrong on the downside. So there's a -- after getting beaten up for a long time, you go ahead and you adopt a little more conservative philosophy.

Okay. All right. On the tax rate, is the fact that it's staying at the rate it's been at a signal that you are not expecting WhereNet to be profitable this quarter?

WhereNet is not profitable this quarter. And I would say that the other thing that we have not yet factored into the tax rate are the benefits of the net operating loss carry forwards that are coming along with the WhereNet acquisition. Now our -- the reason we didn't put them into the forecast yet is that we have some analysis work that has to be done by tax professionals to quantify specifically what we can claim net operating loss carry forwards this coming -- during this year and the next several years. That analysis as most tax matters are is complicated. So we've got to hire outsiders to do that.

So in the absence of getting a specific number, we didn't put anything in there. But there will be something, but I just don't know how much. We defaulted to what we previously guided to in prior quarters, and that is our best estimate for the what the tax revision ought to be.

That's what I was wondering about is the NOLs, thanks.

Your next question is also a follow-up from Philip Alling from Bear Stearns.

Thanks very much. Just was wanting to get any update from the Company as far as the search for a new CEO.

Sure. We are continuing to interview candidates, checking references in some cases, and we're on a path that probably will end up with a position filled -- well, let's just say the second quarter of the year.

Okay. And just a follow-up question just would be on the -- should investor expectations be different going forward, as far as acquisitions, I know that that has figured prominently in plans for use of cash. You have been buying back stock. Does that in any way signal a change in thinking in terms of acquisitions as a supplement to your organic growth going forward?

No. It is not a change in strategy. We continue to seek strategy that make strategic sense for the business and can help us achieve our growth objectives and you should only check, Phil's travel schedule and you'd know, how much looking we're doing. So--.

Feel free to forward that along.

What?

Feel free to forward his travel schedule along.

Yes, right. I'm sure he is. Would you like some names associated with those? Maybe we can get your ticker symbols, as well.

Okay. E-mail as opposed to doing the conference call--.

There you go.

Thanks very much.

Okay.

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

Yes, hi. Good morning.

Good morning.

Two quick questions. The first one is just the 2.1 million shares that you've already purchased under your current authorization. Do you plan to extend the authorization, expand it right now? That would be the first question.

We -- we have not made any moves to increase that authorization. We have still some capacity in it. So we'll go from there.

Okay, the second one is just looking at your gross margin, over the past three years, some of your faster growing businesses have been on the gross margin line relatively lower margins just based on commentary you've provided in the past. And the second is you talked about large orders and indirect distribution being big drivers of the fourth quarter. So combined when you look at the mixed shift of -- you said, I think you specifically said today that mixed shift was not a contributor to lower margin, and you also saw a set of greater orders from some of your large customers. So both of these combined, you -- didn't contribute to any gross margin decline.

No, they didn't.

So would we expect then after this 300 basis points of manufacturing sort of variances to get out of the way, the gross margins to bounce back to sort of the 50% range?

Well, they'll certainly go to from where they are now. Again, because I have been -- I feel burned twice in a row, and I'm not going to put myself in a position of getting burned three times in a row, I am going to resist the temptation to give you a specific forecast for 2007. I will say again that the manufacturing variance issue and product cost issue in general are a very important thing for Zebra to get under control and reduce the product cost as well as reducing the variances. And we are confident that we'll be able to do that.

Let me, the non accountant in the group here, talk about the variances a little bit because I wouldn't want you to be left with the -- with the opinion that there's an expectation that these variances will go to zero because there's a whole variety of things that are included in variances. For example, and Randy mentioned one of them today, and I'll just use this as an example. When we go ahead and we open up a label converting facility, there's costs that are associated with doing that which show up as a variance in our P&L.

In the fourth quarter, as an example, we really -- we went ahead and opened up three new facilities. We actually moved one facility, doubled the size of a facility that we have in Wisconsin. We materially increased the size, we went to a new facility in California, and we opened up an entirely new facility in Texas. Those things contributed to the variances of the quarter, okay. My view is that is not a screw-up, that is -- that's business. That's business -- we are going ahead and -- you expand your company, and you incur certain kinds of costs as a result of it. When our sales go up, let's just forget the absolute level of the inventory for a minute, but when the sales go up, there's an expectation that your inventory will rise. If your inventory rises, your reserves will go ahead and go up with them. So we're a growth company. So consequently, those things show up as variances.

Now there's other things that you do which I put in the screw-up category. Okay. To use a technical term. And it's the screw-ups, the things that unnecessarily cost us lots of money that we have to go ahead and get rid of. We have to reduce them, reduce them materially. And there have been areas, operational problems within the Company that have resulted in variances in and those variances have negatively affected the gross margins of the business.

Okay. Thank you.

Sure.

Your next question comes from the line of Elliott Schlang with Great Lakes Review.

Good morning. Two questions if I may. Number one, on RFID, would you bring us up to date on the profitability of that operation and what you're seeing as far as market share gains or losses and where you stand in that market versus the competition.

Okay. First of all, we -- I could be -- I can react to this. I think pretty well. One is the business, the RFID business that we're -- first of all, the range of RFID business that we are in now has expanded quite materially as a result of the acquisition of WhereNet. Since the technology that is being employed there is fundamentally active RFID. So from that perspective, we had a giant boost in terms of RFID revenue, starting with the closure of that business which was at the end of January. But if you look at the business excluding that--.

Which I really was.

Which I suspect you were. That technology that was being employed there is predominantly passive RFID. And our business is growing in that regard, we had a record quarter in the fourth quarter in that business. We continue to penetrate in terms of selling very high-quality, smart labels as well as selling printer encoder products. We're expanding the range of that product line, and that business is while if you would -- if you would look at the projections that we and others made, years ago as to where we would expect to be by '07, they're materially different than those numbers. The trajectory of what's going on is definitely in the right direction.

And as far as your own internal profitability in that sector, any comment there as to how much progress you're seeing and also what market share you may have had in '06?

Right. I have a definitive no comment relative to what the profit is in the RFID business. And, so I -- just -- we don't -- we historically have not broken out operating profits or gross margins for various businesses that we are involved with and predominantly for competitive reasons.

And secondly, have there been any unanticipated management changes at WhereNet since -- I realize it's been a short period of time since you had them under your belt.

No, there have not been any unanticipated ones.

Thank you.

All right.

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

Thank you, my questions have been answered.

Thank you.

Your next question comes from the line of John Szabo with Virgin Capital.

Hi, guys. On this manufacturing problem, and I know that you've sort of been through it enough times, but you keep referring to it as sort of a -- a management mistakes for a lack of a better way because of what's happened in the marketplace and also just the transition.

I'll just give you an example of what I consider to be poor management, okay. It -- because it really varies quite a bit. You go ahead and you have an expected demand in Europe for certain products, okay. And if you're going to go -- you'd like to ship that product by surface for its economic advice surface boat and you miss the ship date, you had a shortage of some component or some mistake was made in the assembly process or who knows, something was done not that what we wanted to happen, and that causes us to fix the mistake by shipping by air, shipping some of our products by air is really very very expensive and we absorb that cost. Now there's an expectation that some amount of our businesses we're going to ship by air. We intend to do that. But when you're shipping substantially over what those expectations are. That's a variance that I find to be very annoying.

So I guess where I was headed on this was--.

The same thing happens, by the way, with shipments into our facilities that come by air because we need it so quickly, you know.

So I guess where I was headed on it was is somebody accountable for this? I mean, is somebody--?

Yes, there's definitely somebody that's accountable for it. And two things I'll say there, I mean, we have--.

It's a major -- this isn't just a small problem, it's a big problem as you pointed out.

Yes, it's an important problem. Right. It's a problem I think Randy said. How did he say it here? He was pounding on the table I think with his head or something. It was -- know , we're going to fix it. You know. And--.

Is this--?

We've gone out and we have hired a head of supply chain mail. Vice Presidents of supply chain management.

Okay. So someone has been replaced and a new person has been put in to run it?

Actually, that's a new position in the Company.

Okay.

That's a new position in the Company. And the individual hasn't started yet. They will start toward the end of this -- toward the end of February. But someone who's very, very experienced in this area. And we expect that that will help us to resolve this. We've done a number of things in the fourth quarter to improve the operations of the business. But it still is not where we want it to be. This is a company, you know, that for a very, very long time has prided itself on having very predictable operations, good controls.

Right. That's why I was kind of disappointed to see something like this happen.

Yes, well, you--.

You're not the only one.

When you operate in a different environment then you start seeing this happen around you, it becomes very, very frustrating. And there's a lot of things going -- we've talked here about the RoHS and the spinoff of various kinds of events that -- that just tripped us up, that shouldn't have tripped us up.

Now let me put this on the other side because there's good news on the RoHS as well. And I feel bad, because sometimes you criticize people for a particular result. But what I would tell you is if our European people were on the phone here talking with you today, they would say that the Company did a spectacular job as it relates to RoHS. So what does that mean? That means that they had virtually all the products they needed in their inventory that they could ship to customers before the deadline date. Okay? Almost everything that was needed was sitting there at inventory. Now we may have had to go ahead and bear the expense of having RoHS inventory, raw material being shipped into our factory by air. We may have had to ship it to Europe by air, there was no may, we did ship it to Europe by air. So we bore those expenses, but we went ahead, and we served the customers very, very well. So we got points with our customers as a result of doing that. We helped satisfy their particular -- their particular needs.

They would also tell you that we gained market share in Europe because of that.

So, it's the good news/bad news tease. Obviously we would like to have done it without the air shipments. And we would like to have done it so that, in the beginning of the fourth quarter we had only RoHS inventory. And we didn't have any of the non-RoHS inventory so we wouldn't have all of these issues in terms of managing two sets of circuit boards for virtually all of our products, two sets of power supplies for all of our products. That really changes the complexity of running a business. So that's what it is, and it's -- we got to get it behind us.

Okay. Great. Thanks.

Sure.

Your next question comes from the line of John Emerich with Iron Works Capital.

Thanks. A couple of unrelated questions if I could ask them separately. Randy, if I go over my notes from our last meeting up in Vernon Hills you talked about one of the underappreciated things out there was the return of the core buyers. And I had to jump off the call in the middle, but I think it sounds like that that positive remains.

The return of the core-buyers, I'm not sure which--?

Are you talking about investor buyers?

Walgreens.

Oh, those buyers. Customer buyers.

Buyers that really matter.

Yes. Okay. Yes. We are -- I don't know return of. What I would say is the growth of that piece of our business is becoming more and more person.

Okay.

Yes. And we have just over the course of the last 30 days reorganized our North American sales operation so that we have really one Vice President who is in charge of what -- well, what we would call strategic business, but that really is a fundamentally national accounts, direct sales type of business. We have one VP who has that responsibility and a second VP who has responsibility for channel, VARs, distributors, et cetera. So we have really elevated, split and elevated those positions within the Company to give us higher focus in those two areas, two important areas of our business.

Okay. Thanks. I think the issue might have been that earlier in the year they weren't coming through as -- their buying had slowed down but it was making a comeback at the end of the year.

Yes.

Random question. Is the tax rate for '07 -- I know you're not providing earnings guidance, but do you have any guidance on that front and clarify if there's a meaningful difference between book and tax?

No, there's not. Again, I think the only comment I have about the tax provision rate that we're recommending for the first quarter is that we have not factored in the net operating loss, the benefits of the net operating loss carry-forwards that are attached to the WhereNet acquisition. The only reason for doing that is we haven't completed the analysis that would enable us to give a reliable number on that. There will be some benefit to that in 2007. We just can't quantify it at this point.

So the recent trend of what, 34% to 35% I'll keep until you clarify the NOL benefit?

That's what I would recommend, yes.

And your EPS guidance is GAAP after options expense and all that?

Yes, that's correct.

What is the annual run rate of the--?

It's about $0.02 Pretty de minimus.

Right.

Per quarter. Yes, $0.02 per quarter. Yes. $0.02 a quarter. Yes. About -- it is about 1.6 to $1.7 million if you want an actual number to put in there.

That's actually helpful.

Glad to be helpful.

And lastly, is the -- again, selfishly going back to my notes from our meeting, you hadn't yet gained enough insights to share on the economics of the digital photo printing. Do you have anything to share on that front?

No. We really don't.

Not yet?

Not yet.

Okay. Thank you very much.

Okay, guys. Given the fact that it's 11:00 and it's earnings season, I'm going to -- I think we'll take one more -- one more question, then we'll end the call. And we'll take -- Doug and I will both be glad to answer any additional calls on a one-to-one basis this afternoon.

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

First off, congratulation on the revenue line. It was far better than I think most people had expected.

Thank you.

And second, I was wondering if you could talk a little bit about new products. From the perspective of R&D being focused on the RoHS conversions for quite a bit of last year and hopefully that focus has now moved more toward new products. Are you in that mode, or are we still in, we need to work through some of the -- any -- are there any other variances in the RoHS side that need to be worked through in terms of product changes that would affect R&D or are we in totally new product mode and if so, can you kind of outline where you're going for the next--?

We definitely are in -- indeed as you would say, in the new product mode. The engineering organization is predominantly has RoHS behind it. It is fundamentally at this point in time is a manufacturing organization set of issues. So of course there's some manufacturing engineers as well. But in terms of new product development, we have transitioned all of those people back into if you will new product development.

In terms of an outline of what products are going to come to market, it's not been our habit to go ahead and do that. Sometimes there's some strategic reasons to do it. But -- but we have products that are in development almost across the entire corporation. There's areas of opportunity that we want to address and we are addressing and we will be introducing some very interesting new products over the course of '07 which will offer some capabilities that heretofore have not been in our products. And I think they will be attractive, particularly -- some particular vertical market segments.

We have hired an individual who is with us now for, oh, between six and nine months, and he is in charge of what we call Ideation, he is a Vice President. And Ideation really deals with innovation, longer term product development ideas, new technologies, things that can serve our customers more effectively. And so we're starting to see within that group a growth of interesting ideas and in some cases some of these have been -- have been approved for development. And so we're -- we're getting good flow from that. And as you know, in the world of innovation you may have one success and nine things that don't go to production. So it's a matter of figuring out what can work for you financially to serve your customers the way you want to serve them. I'm very optimistic about the output that we're getting from that group.

Thank you.

On that positive note I think we'll end the conference call. Just a reminder, the next call is scheduled for Monday, April 30, at 10:00 Central daylight time. And I'm looking forward to talking to you about first quarter results at that time. Thank you for your participation today.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.