斑馬技術公司 (ZBRA) 2007 Q1 法說會逐字稿

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

At this time I would like to introduce Mr. Charles Whitchurch, CFO of Zebra Technologies. Sir, you may begin.

Good morning, and thank you for joining us today. Certain statements we'll be making 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 2007 second quarter and expectations about trends and 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 10K for the year-ended December 31, 2006. Now let me turn the call over to Ed Kaplan for some brief opening remarks.

Thanks, Randy, and good morning to everyone. Before we review the quarter, let me update you on the search for a new CEO. On the fourth quarter conference call in February I stated there was a reasonable likelihood of an announcement regarding a new CEO, who would succeed me as I move into retirement. Over the past several months, the board search committee identified several candidates for the job, and discussions took place with a number of them. However, the committee is not yet ready to announce a successor who will lead the Company to the next level. Consequently, the committee will continue the search and I will continue as CEO.

Now, we'll move onto the first quarter. We exceeded sales and earnings expectations, gross profit margin increased and inventories declined to produce an outstanding quarter for Zebra. First quarter sales growth accelerated from the fourth quarter of 2006, and the strength of our core business and supplemented for the first time with WhereNet acquisition for part of the quarter. First quarter results are another validation of our growth strategy. They show our success in executing on a plan to provide solutions for targeted vertical market applications. This orientation has guided our investment decisions, choices in pursuing channel relationships, geographic expansion activities, product developments and other critical matters. This year is off to a strong start. We are optimistic about further growth and confidence in our abilities to deliver increasing stockholder value.

In the first quarter, sales growth accelerated in North America and EMEA, our two largest regions. We have reduced inventories and manufacturing variances, and we began incorporating the results from WhereNet. High levels of business activity both through the channel and with key accounts fueled first quarter North American sales growth. Within the channel, PartnersFirst remains the premier channel program in our industry. It is the cornerstone in building relationships with more value-added resellers. Our investments in global alliances have also strengthened our position as the premier strategic partner for a company's specialty printing and automatic identification needs. During the quarter, these activities led to healthy pipeline activity and greater penetration of targeted high growth vertical markets, including: retail, transportation logistics, and healthcare.

Key account management also made meaningful contributions to the quarter in a number of ways. During the period, we successfully expanded the volume of bookings with new customers. We also increased the number of new applications with established accounts with many of these wins involving competitive displacements. Better national account management led to higher direct supplies, business, and a growing pipeline of mobile workforce solutions. Significant deals in route accountings/DSD were an important part of our overall success for the first quarter. EMEA delivered its fourth sales record in five quarters on superb execution throughout nearly the entire region. In central and eastern Europe, we are meeting customers needs with primarily compliant labeling applications in manufacturing, warehousing and logistics. Elsewhere, our recent successes have been built on delivering business improvement solutions to customers in retail, coastal and healthcare.

During the first quarter we opened a new sales office in Mumbai, India, to support further geographic expansion, and we are in the final stages of opening a new label converting facility in eastern Europe as well. Our expansion activities continued in Latin America, where we added sales management and sales engineering. While this quarter sales were below plan, the long term outlook for Latin America remains very -- very favorable. In Asia Pacific, new leadership in the region has revived growth. Recent successes include: expanding the range of industries served beyond manufacturing to securing deals in agriculture , transport, retail, healthcare, and government. On top of successful sales growth, we started bringing manufacturing variances back into line. I'm optimistic that further progress can and will be made particularly in the latter half of the year.

Finally, let me spend a moment on WhereNet. Since we acquired this leader in realtime locating systems, we announced a new program at the port of Oakland for truck identification and tracking. This installation is the first for WhereNet in the Bay Area and now gives us deployments in all three major ports on the West Coast, Los Angeles Long Beach and Seattle being the other two. The WhereNet system is enhancing security and enabling better throughput by automating data collection and verification. We also announced the opening of a new office in Shanghai as part of expanding WhereNet's global footprint. Together, we are now reviewing other sites to enhance global coverage.

The strength in our business is evident. Our transformation from a Company focused on printers and their specifications to an organization dedicated to delivering world class printing and automatic identification solutions is delivering results. Our global reach, product breadth and worldwide channels are attracting more companies to Zebra's industry leading brand. We look forward with confidence for continued growth in the second quarter and the rest of the year. Now, here is Randy to give you a detailed review of our first quarter results and guidance for the second

Thank you, Ed, and good morning, everyone. First quarter sales of $208.6 million were up a very strong 18.6%, and exceeded the upper end of our forecasted range. We're clearly aided by the acquisition of WhereNet and Swecoin which took place in the fourth quarter and favorable foreign exchange comparison, but excluding these factors, core Zebra sales and constant currency increased at double-digit rates compared to last year. Hardware sales maintained strong growth and were up 19.6%. New products -- new printer products accounted for 11.5% of first quarter printer sales, excluding any contribution from the addition of WhereNet and Swecoin.

Sales in Asia Pacific were up 11.5% -- excuse me, excuse me, I flipped a page here. Supply sales were up 10.9% largely on the result of exceptionally strong growth in EMEA. We're particularly pleased with the continued strength of our North American business which increased 20.1% to 100.5 million -- $104.5 million. This growth was supported by strong growth through our channel partners as well as excellent performance from our direct account business. Sales in EMEA, aided by $5.7 million of foreign exchange gains were up 22.9% to $74.6 million, a record. On a constant currency basis, EMEA growth was 13.5%. We're particularly pleased to see that sales in our three largest markets, the UK, Germany, and France, had a combined sales increase exceeding 21%. Sales in Asia Pacific were up 11.5% and Latin American sales were down 3.1%. Total international sales in the quarter were 49.9% of total sales, and increased 17.2% over last year.

Now, last quarter we spent a lot of time discussing operational issues that hit gross margin. We made clear progress on this front in the first quarter with a gross margin that was up both year-over-year and sequentially to 47.8%. This improvement comes despite a .5 point drag resulting from the WhereNet acquisition. Product mix favorably affected comparable margin improvement. The sequential improvement, however, in margin came despite the effects of a negative product mix. Acquisition-related charges and stock-option expenses had a very significant effect on GAAP operating profits in the quarter. These charges include: the amortization of intangible assets, the write-off of in process research and development and FAS 123 (R) expenses, and totaled $7.5 million in the first quarter compared to $2.3 million a year ago. Excluding these charges, operating profits increased 20.9% over last year and operating margin expanded to 20.5%. On a GAAP basis, operating profit growth was 6.5%. Operating expenses again exclusive of these noncash charges increased 21.1%; however 7.6 points of this growth is attributable to the acquisition of Swecoin and WhereNet which were not in the expense mix a year ago.

Core Zebra expense growth was 13.5% year-over-year. Because these type of charges were likely become an increasingly large, and I might say unpredictable component of operating results as we execute on our acquisition strategy, we will report this nonGAAP measure of Zebra's financial performance in subsequent quarters. First quarter investment income was $5.3 million with a return on beginning balances of 3.8%. Investment income was down sequentially due to the WhereNet acquisition in January. Net income equates to $0.39 a share on 69.4 million average shares outstanding. Free cash flow was a negative $105.7 million which of course includes $127.2 million for acquisition payouts. Receivables were up at the end of the quarter due to WhereNet and the timing of sales within the period. Day sales outstanding increased to 59.9 days. Inventories declined slightly with turns holding at 5.4. Our cash position at quarter end was $452 million.

Now, we expect second quarter sales to range between $208 million to $220 million. Earnings should be in the range of $0.34 to $0.40 per share. This forecast assumes a gross margin between 47% to 48%. We expect to see continued improvement in manufacturing variances. However, much of this improvement is likely to be offset by expected increases -- expected changes in product mix. We expect operating expenses to be in the range of $66 million to $68 million. Our forecast includes approximately $3 million of FAS 123 (R) expense and $2.7 million of intangibles amortization. The effective tax rate for the second quarter will be 34.5%. That concludes my formal remarks. Thank you for your attention, and now here is Ed for some concluding comments.

Thanks, Randy. We sustained positive momentum in the first quarter of 2007. The channel and strategic account programs now in place have great capacity to generate further growth. The success of these programs continues to be based on a broad technology and product offering that enables Zebra to serve a wider range of vertical market applications. Our global reach leverages these capability, as does an increasingly robust and effective group of valued resellers, integrators and strategic alliance partners. All of this gives us great confidence in the future of our business.

Our business in North America remains firm. Among our vertical market applications we are seeing further traction in healthcare following strong growth last year. Adoption of wrist banding for improved patient safety is now being joined with bedside printing of labels to increase the accuracy between patient and specimen collection. Some early adopters are already deploying this next generation solution. Zebra recently signed one of the largest healthcare integrators to its PartnersFirst channel program to help advance the solution further. This action demonstrates Zebra's systematic alignment of products and channels to extend our leadership in this attractive market sector.

In addition to healthcare, activity in retail is being supported by technology upgrades to improved wireless data security. Better coverage in public safety and government is also paying off in greater business generation. In addition to ongoing opportunities in vertical market applications, RFID supplies after market products, photo printing and card printing contribute to our optimism for further growth. The outlook for international territories also remains positive. In EMEA, our programs and strategies for better market penetration continues to pay off. Stronger account management in each of nine subregions has created greater accountability and responsibility and resulted in more business wins. We are equally enthusiastic about the opportunities in Asia Pacific and Latin America where we have good pipeline of business moving into the second quarter. We will support this expected growth with further additions to personnel and infrastructure. Thank you for your attention. We'd now be very happy to answer your questions.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Your first question comes from Jeff Rosenberg with William Blair.

Good morning.

Good morning, Jeff.

I wanted to ask a couple questions about margins if I could. The first one is when I look at your operating expense outlook you just gave us for the second quarter, it looks like it's up about $4 million to $5 million from Q1, and I thought maybe you could give us a little bit of color there because I think the incremental amortization is only about $.5 million, so it seems like a pretty big increase. I'm curious if you could elaborate on that.

Yes. There's -- there's some acquisition-related expenses. Clearly WhereNet is going to be part of that mix and then we do have some programs that we're putting into support the sales growth of the business. I think we talked previously about Zebra's need to support its operating infrastructure to grow top line sales growth, and we are going to fund that with product cost reductions going forward. We do have these programs in place. We are executing on them. They are delivering results, but as we indicated in previous conversations, Jeff, that the building out the infrastructure to support the rev -- high end revenue growth, top line revenue growth was really important for Zebra's growth strategy going forward.

Okay, and when you talk about the unpredictability element of this and maybe the acquisition related stuff in the short-term, is there anything here that you expect to fluctuate or should we think about this as a level that you'll -- you're making --

Well we're still getting our hands around the operating expense levels that are going to be necessary to support the acquisition strategy and the new expenses that we're acquiring as a result of that. Certainly, we're putting in place programs to manage those expenses in a responsible way to support the growth of the business. Clearly, with the expense levels are up, the unpredictable nature of the -- that I referred to in my comments relate specifically to the things such as the amortization of intangible assets for acquisitions that you don't really know until you do the purchase accounting, and obviously until you know the acquisition you're making so those are a little bit -- those are completely unpredictable and to a lesser degree, but certainly contributing to that of the stock option expenses.

Okay. And then just a second thing, I hope you'd elaborate on was the product mix and its effect on gross margin. It sounds like it was a negative in Q1 and incrementally so in Q2.

Right.

Should we think about that in terms of higher volume orders or shift toward lower price printers or what more say --

Well we have seen over time, as you are very aware, a systematic shift toward higher volume but lower -- lower priced products in our product range, and we are continuing to see that. We do make a fairly detailed effort to identify -- to make the sales forecasts and identify the expected mix going forward. Now, again, this is -- this is something you really don't have a heck of a lot of control over, and so it will fluctuate, but the expectation that is exemplified -- reflected in the forecast is that the mix will be a little less rich from a profitability standpoint in the second quarter than we had in the first, and it was also that way in the first in relation to the fourth quarter of last year.

Okay. Thank you.

Your next question comes from Chris Quilty with Raymond James.

Good morning, gentlemen.

Hi, Chris. Good morning.

Randy, quick question for you. It looks like the weighted average share count declined by about 1.2 million shares and yet it doesn't seem to show up in the -- the cash flow statement. Am I missing something?

Yes. We'll point it out to you later. Yes. Now this is, it's a result of the share buyback, that was completed very early in the first quarter.

Okay. But I should see that on the cash flow statement?

right.

I don't. I'll call you later.

Okay.

Okay. Can -- can you give us a quick update on the number of new label conversion facilities you've opened in the past year, and what, if any impact that's having on some of the gross margin issues that you experienced back end of last year?

I'll give you part of the answer. And we opened a facility in McAllen, Texas, and we are in the final stages, I think I mentioned in my opening remarks of opening another facility in Europe. It's not open quite yet in Eastern Europe. We did over the course of last year change facilities, move to a larger facility in Greenville, Wisconsin, and we also moved to a larger facility in -- in California, in Southern California. So those are the changes that took place. A lot of capacity was added over the course of last year.

And the strategic thinking behind that? Because historically that's been a relatively lower margin business. Is this positioning the Company for longer term when RFID makes that business more attractive or geographical opportunities?

The idea is that we can be more successful if we can respond better and faster to our customers needs, and so by being closer to them, that enhances that ability. The other thing is that business, which as you pointed out for us, is a lower margin business. It still provides us with very good returns on equity. It is a piece of when we are talking about mix changes, that is one of the mix components that tends to drive the overall margin of the business up -- down, I wish up, down, but of course it depends on its relative growth versus business that is in higher margin areas.

Okay, and the growth in the North American market, obviously some of that was attributed to the WhereNet acquisition, so it was probably more of a sort of 12% to 14% organic growth for North America?

I don't think Randy commented on what it was.

No, Randy did not. Randy doesn't have that figure handy.

Yes. Chris, it would be in that range and certainly the WhereNet business is concentrated in North America and we got essentially two months of contribution from them during the quarter.

Okay. And I think you had said about $0.01 dilutive in the first quarter business tracking as expected.

It was a little more dilutive in the first quarter largely due to the higher level of intangible amortization than we originally predicted.

Okay, and finally, RoHS transitions, inventories and impacts I may have missed it. Did you make specific mention?

We did not make specific mention about RoHS, and, however, the big problem for us is locations where we can move the nonRoHS inventory to. And so we're spending a fair amount of energy jockeying things around, so that in fact we can get rid of all of our nonRoHS inventory and just be able to ship RoHS on a global basis and that problem is, I think, going to persist beyond '07.

As long as it doesn't end up in Randy's garage.

Well, if he pays on time, it would be okay.

But he won't. Okay, thanks, gentlemen.

Right.

Your next question comes from Phillip Alling with Bear, Stearns.

Thanks very much. Just wanting to get some color with respect to how you feel your WhereNet and Swecoin acquisitions have gone thus far and whether they're meeting your expectations and what you can share with us there?

What I'd say is the Swecoin acquisition is going well for us, and that one of the key strategic reasons for doing this is the ability to expand the breadth of our printer product line and be able to penetrate some of our existing customers with kiosk solutions, as well as some new customers, and so we have developed a pipeline for that kind of business, and its worked out to be a pleasing surprise. Relative to WhereNet, the quarter went pretty much as expected from a -- from a revenue perspective. I think that we didn't do as well as we would have wanted to have done on the profit side of it, because I would have to call this a mix-related issue. And, however, in terms of continuing to advance the strategy of the business, and that is aligning our strategic reasoning behind doing the acquisition with the rest of our business, we made some good progress in that regard.

Okay, and so with respect to those acquisitions then, presumably, they have had much less impact on your supplies growth than they've had on your hardware growth. The question for me is just what should investor expectation's be regarding supplies growth going forward? You did post double digit growth in this quarter. That is down from what you were showing last year. So how should we be thinking about sort of acquisition impacts and supplies growth and sort of where you are now and what you were posting last year?

Okay. I did ask Mike Terzich to sit in on this conference call with us. Mike is the Senior Vice President of the Corporation, and he has responsibility for all of the revenue that's in, what we call our SPS business, so I'm going to let him see if we can deal with an answer to your question.

Okay, thanks, Ed. Phillip, the -- a couple points. One, when you look at the two acquisitions in question, the contribution from those businesses relative to our supplies business is very small, so when you look at the supplies business and the quarter performance we just had, that's really the -- that's in the core business, and our performance in the quarter was generally pretty good. I would say that it was stronger in Europe than it was in North America. We had some softness in North America primarily related to some large retail opportunities that just didn't manifest themselves in the quarter versus the same period a year ago, but the outlook, when I look at our pipeline and our quoting activity, both our pipeline and quoting activity for the supplies business is very strong, and so our expectation is that you'll see some improvement in that business throughout the course of the year.

Secondly, we are focusing on new vertical markets. I think Ed mentioned this earlier. Those markets tend to have a higher specialty label component to the solution sale, which is the business that is very attractive to us versus the commodity label business, and we like how we're positioned in pursuit of those opportunities to get a bigger piece of the total sale. So I expect that you'll see our supplies business improve in the out quarters.

That's helpful, and just a housekeeping question for me to finish up, is just on the share count assumptions and your Q2 EPS guidance?

69.2 million shares.

Thanks, Randy.

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

Randy, I was wondering if you could quantify or otherwise give us an order of magnitude in the improvement in manufacturing variances from the December quarter to the March quarter.

The manufacturing variances contributed -- improved by -- contributed 1.7 points, the sequential margin gain, and again, as I've mentioned, we had an offset, a rather significant offset due to product mix changes in -- sequentially, but we saw very substantial improvement in the core business in terms of our ability to manage manufacturing variances, and of course that's very encouraging. We talked a lot about this in the last quarter. Our guys did a very good job of starting to get a handle on this and we continue -- we expect to see further improvement in the balance of the year although I will tell you most of the improvement is going to be -- is concentrated in the second half of the year. The second quarter is a little more modest in terms of the improvement we expect to get, and when you combine that with the forecasted change in mix, which is another drag and again part of that is acquisition related, you don't get as much of an improvement sequentially the second quarter as we probably would have expected originally and consequently, this is -- has a rather impact full effect on our profitability in the second quarter.

Second question, are you concerned about Zebra inventory in the channel that is nonRoHS compliant and then another question related, are you concerned about the level of general industry nonRoHS compliant inventory in the channel?

Well, I would say as far as Zebra specifically, no, I'm not. Again we don't have much inventory in the channel. The place -- the locations where we do have inventory of course are with our distribution partners and those are primarily concentrated in the United States where we have -- we can still sell nonRoHS product, and of course we get good information on the level and composition of that inventory and we co-manage it with our distributer partners.

If I could add something to that, the deadline for having the RoHS compliance was the middle of last year and so we are now 10 months beyond that point. At the point in time that the deadline showed up, we were in a position where we could ship almost all of our products RoHS compliant, so in terms of shipping nonRoHS product into Europe there was almost none of it that took place after that cut-off date.

Okay, thank you very much.

There was potential to do that, but just the same that's what we accomplished.

Alright. Thank you.

Yes.

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

Good morning, and congratulations on a very solid quarter.

Thank you.

A quick question about the sort of two areas where you have opened offices recently, one in the Shanghai in China and then again in India. When you are looking at the products, the expectations for the margins for the products you'll be selling there, could you give us some color as to whether they will be at corporate average or with the same product selection you'll have to take lower margins in those areas of growth. And then also whether you have a manufacturing strategy to deal with those geographies, independent of what you're manufacturing in the U.S. for the -- for products.

Okay. I'm going to let Mike handle this one.

Okay. Ajit, when you look at the two offices that we have that you mentioned, Shanghai and Mumbai, let me talk about Shanghai first. We've been in China for quite a while, and our preliminary success in China has really been about supporting the multinationals that have set up their operation in the region. So I would suggest to you that when you look at our AUPs of our business in greater China in total, it has been very strong contribution from our mid range and high end products initially. We expect that over time as the supply chain becomes much more of a local supply chain within the region at that those AUPs will normalize out to what I would say is our corporate average or the words that you use.

Now in Mumbai, it's a -- it's a bit different. We're at a different stage at its economic development, and what you have there is a situation where the per capita wealth is increasing in India, and we're setting up operations to support what we envision is going to be much more of localized manufacturing as people buy houses and cars and electronics, etc, So similar to what's taken place in place in China just it's a -- at an earlier stage in its evolution. So at this point, it's a much more price sensitive market, so some of our business initially has been maybe mid tier to maybe the lower-end desktop range. So, again, I don't see it being -- I don't see it being much different than what I would say today is the corporate average where I think in China where actually the AUPs are actually accreted into the corporate average. And there was a second point to your question?

Right. Which is that are you planning to shift as your international business grows and some of the high growth is going to come from some of the sort of more price sensitive markets, are you planning to shift some of your manufacturing more actively to low cost regions?

Well, we -- we are definitely looking at that. I think the challenge for us is, as you know, that our products have a -- when you look at it from a cost of goods standpoint, it's got a relatively lower label -- labor cost component to it, a higher material cost component to it, so what you save in labor, you kind of lose in some of the freight and shipping, but there will come a point where the indigenous consumption in those regions really warrant us to be manufacturing a higher percentage of our products offshore, and that's certainly something that we're building from a plan and consideration standpoint.

Okay. And then one next question which is just looking at competitive dynamics in the United States as well as in Europe right now , you're seeing very decent growth, but your competitors, is the pricing environment, is the price competition deteriorating, is it steady or do you think that the pricing pressure is actually

No. Actually, on the mix issue that we were discussing earlier, if you really look at the AUPs across our product families in the quarter, we actually saw a comparable growth across just about every product family we have from an AUP standpoint. I think what put some pressure on the consolidated AUP is the mix shift, so there is to Randy's point movement towards the lower end, lower margin products for us, but within each of those respective families we've been able to improve pricing and so -- and win business at the same time concurrently. So it's not been an issue of pricing pressure that we've been facing in the market.

Got it. Thank you so much.

Okay.

(OPERATOR INSTRUCTIONS) Your next question comes from Andrew Abrams of Avian Securities.

Hi. Two questions. On the sales programs that you guys are kind of building up on, are we talking about, in second quarter kind of the absolute expense level that we're going to see for the next quarter or two, or are you going to ramp these up as the revenues start to increase, based on those programs? And second, can you just talk a little bit about the WhereNet revenue stream and how things come through at WhereNet? Is it bunchy? Is it hardware first and software afterward and maybe you can give a little color there.

Well, I'll handle the question on the sales programs. I don't think we're prepared to say -- give much further guidance beyond the second quarter, although I will say that the -- our typical pattern is that we invest and then, as we see success, we'll invest more, but the guidance that we gave is strictly for the second quarter and doesn't necessarily imply that that's what it's going to be for third and fourth quarters. As far as the revenue stream from WhereNet, it tends to be rather large deal enterprise sales. They tend to be longer sales cycles and the revenue stream tends to be a little lumpy, so I mean that's just the nature of the business.

Is there any component that comes first or after, or is this broken up or is this just you got a $1 million deal and you're pro rating it as the deal goes through? Do the hard -- does the hardware come first, the software come after? Is there any color you can give there?

Actually, I don't think I can -- I don't think I can respond to that. I can tell you that we're taking a relatively conservative approach, relative to revenue recognition in these deals, but it really varies with the type of deal that is involved, and I know that that's the case, but I can't give -- I can't tell you what type of deal and what kind of recognition takes place.

Got it. Okay, thank you.

Sure.

Your next question comes from Rob Spine, with Robert W. Baird.

Good morning. To follow on with the operating expenses question, is any part of that that you guided for next quarter or is a significant part due to integration expenses of WhereNet, some expenses that might be temporary and we could expect that to go away within a quarter or two?

I would say the integration expenses are insignificant.

Okay. And then on the RoHS issue with the manufacturing variances, are any of that related to RoHS or is the RoHS issue pretty much on inventory issue for you now?

No, many of the -- much of the blowback in terms of manufacturing variances, was, we believe is directly related to the RoHS conversion, and as we -- so much of the improvement we're seeing in manufacturing variances comes to working our way through some of these issues and some of those issues are inventory related. We have higher inventories than we would otherwise have because of RoHS, because just to give you simple example, we're carrying RoHS parts and nonRoHS parts and finished goods. So it complicates our planning processes, it complicates our purchasing activities, it compromises the efficiency of our labor force. So, yes, a lot of this stuff is RoHS related, and as we work through this and get these inventories -- these RoHS inventories down and get into a -- into a world where we're producing nothing but RoHS finished goods, then we'll be through it all, but it's going to take awhile for that to happen.

Okay. So you still have more costs to take out there?

Oh, yes. Again, we expect to see additional improvements in manufacturing variances in -- for the duration of 2007, and much of those improvements are directly related to RoHS, dealing with some of the residual effects of the RoHS conversion.

Okay, and one more quick one. Do you have an update on the outsourcing of production that you had mentioned on previous calls?

No, we don't. Not at this point.

Okay, thanks.

Your next question comes from Randy Hick with Goodnow Investment Group.

Hi. Thanks for taking the call, and I apologize if someone asked this. I had to jump off the call for a moment, but the WhereNet, what -- what do you suspect that's going to cost you, or is it going to cost you earnings in the second quarter? The accretion or dilution -- dilution I should say?

$0.01 or $0.02.

Okay. Alright. That's all I have. Thanks.

Okay.

Your next question comes from Scott Scher with Clovis Capital.

Randy, on the increased SG&A expenses how much of that is in North America and how much of it is outside North America?

Scott, I don't have that break down for you in terms of the geographic dispersion of that.

Could you just give us a general feel as to where it's being directed? Is it some of the new activities in China, in -- because you said Ed spoke about increased salesforce in Latin America, so is it to accelerate the growth in some of these faster growing markets and enhance that would salesforce initiatives? That's what I'm guessing, but can you just delineate which side it is?

Scott, this is Mike Terzich. I'm going to answer that for you. Predominantly, the increase in the SG&A is in two places. One, it's in North America, because we have a strategy in place. We've been working -- it's as much a timing issue as anything else, so second quarter expenses have the impact of some marketing development programs that we pushed to the front half of the year with our channel partners in an effort to get demand generation into the pipeline so that we could take advantage of it within the context of the calendar year. So that's one issue. Second, as we've expanded in Asia Pacific, we've opened some new offices, we've added some additional sales resources and marketing resources, and it's a combination of added headcount, some of those same program investments and quite frankly, the cost of some expensive, additional office space, particularly in the greater China area.

Thank you.

There are no further questions at this time.

Okay, thank you, everybody, for your participation in the -- today's conference call and we look forward to seeing you or hearing from you or talking to you some time in mid to late July. Thank you for your time.

Thank you.

Thank you for participating in today's Zebra Technologies first quarter earnings release conference call. This call will be available for replay beginning at 2:00 PM eastern standard time today through 11:59 PM eastern time on Monday, May 14, 2007. The conference ID number for the replay is 3414465. Again the conference ID number for the replay is 3414465. The number to dial for the replay is 706-645-9291. Again the number to dial for the replay is 706-645-9291. You may now disconnect.