斑馬技術公司 (ZBRA) 2007 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. Anders Gustafsson, CEO, of Zebra Technologies. All lines are in listen-only mode until after today's presentation. (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. Sir, you may begin.

Good morning and thank you for joining us today. Certain statements we will make on this call will relate to future events or circumstances, and therefore will be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Words such as expect, believe, and anticipate are a few examples of the words identifying a forward-looking statement. Forward-looking information is subject to various risks and uncertainties which could significantly affect expected results. Risk factors were also noted in the news release we issued this morning, and are also described in Zebra's 10-K for the year ended December 31, 2006, which is on file with the SEC.

Now let me turn the call over to Anders Gustafsson for some brief opening remarks.

Thanks, Randy, and good morning, everyone. I am very pleased to be here today to review Zebra's third quarter results. I have asked Mike Terzich to join Randy and me on the call today. Mike leads global sales and marketing for our specialty printing solutions business unit.

Record sales and improvements in gross profit margin drove profitability higher, to put Zebra's third quarter results at the upper end of our forecasted range.

We had continued strength through channels and high growth in our international regions. Coordinated and good sales execution, combined with a solid opportunity pipeline, resulted in key wins in targeted, vertical markets. These results are evidence that Zebra continues to be the winning brand in our core specialty printing business, and they demonstrate the success of our growth strategy. During the quarter we further positioned Zebra for accelerated growth with the acquisition of proveo, and an agreement to acquire Navis, which we announced last week. These companies build on our platform in realtime location systems, which we established through the acquisition of WhereNet in January.

These three companies expand the range of data acquisition technologies and solutions Zebra is able to deliver to current and potential customers, to identify, locate, and track valued assets across the supply chain. During my first month at Zebra, we have worked diligently to further identify and develop the various growth areas available to the Company. The activities we have undertaken in our established businesses to sustain more consistent sales growth and profitability, combined with our investments in higher-growth adjacencies, position Zebra for increased success going into the fourth quarter and 2008.

Let me now cover some of the third quarter highlights. In EMEA, sales bounced back from lower growth in the second quarter. Nearly all nine subregions made meaningful contributions to the turnaround. Sales growth was particularly robust in central and eastern Europe, Italy, the Middle East, and India.

The strong backlog going into the second half of the year generated a consistent healthy rate of business throughout the quarter, with project wins in retail and warehousing, among other verticals. The outlook for EMEA continues to be favorable.

Sales growth in Latin America accelerated, with solid performance across nearly all printer product lines and all geographies.

Consistent with our second quarter experience, adoption rates of Zebra's mobile route accounting solutions remained high.

Asia-Pacific continued to stand out as an important contributor to overall growth. Greater penetration of large multi-national accounts, plus strategic wins in government, retail, and health care, are a result of our investments over the past two years to strengthen our leadership infrastructure and people in this region. This greater, more focused presence gives us optimism for further growth in the Asia-Pacific region.

Growth in North America improved over the second quarter to deliver record quarterly revenues. Sales benefited from favorable business activity in several verticals. We also captured all of the sales deferred by retailers in the second quarter. While relatively unchanged from the second quarter, activity with retailers is up for the year, thanks to our efforts to diversify and broaden our customer base.

Sales from WhereNet also made a contribution to consolidated North American sales growth. Overall we made considerable progress in securing higher sales growth and greater profitability for Zebra during the third quarter. High sales growth in international regions demonstrates the success of our geographic expansion programs, higher gross profit margin resulted from focused efforts to improve operational efficiency and reduce product cost, and our acquisitions demonstrate a strategic intent to deploy capital in related high-growth businesses.

Now I will turn it back to Randy to provide a detailed review of third quarter results, and guidance for the fourth quarter of 2007.

Thanks, Anders, and good morning, everyone. Well, I guess you would have to say we are really pleased with the quarterly results for Zebra. 16.5% growth put sales at the upper end of our forecasted range, while acquired companies certainly contributed to this growth, our core business showed excellent strength, with double-digit growth in the quarter.

Hardware sales accelerated by 16.9%, from 12.6% last quarter, along with an improved product mix. Average unit prices for the quarter were $585, which was down from $621 last year, but up from last quarter's $573. New printer products accounted for 5.1% of third quarter printer sales.

While we are clearly disappointed with this result, we expect this number to improve significantly in the fourth quarter, due to four new printer products we introduced in the third quarter, the ZM400 and 600 label printers, two high-volume midrange products we introduced, plus a high-performance card printer, the P630i, and a new 6" photo printer. We expect these products to make meaningful contributions to sales in future quarters. Additional new products are scheduled for release in 2008.

Supply sales rebounded significantly, increasing 8.7% in the quarter, from 2.2% in the second quarter. A strong September set the stage for further improvement in the fourth quarter. We are beginning to see the benefit from our Texas label converting facility, with an influx of new business from manufacturers in northern Mexico. We also have new label converting capacity in Poland, which became operational in the quarter, and will enable us to expand business in central and eastern Europe.

By geography, we have set sales records in North America, Latin America, and Asia Pacific. North American sales were up 8.6% to $105 million, from higher business activity through channels supplemented by several key wins in route accounting. Sales in our retail vertical were flat year-over-year, but we made important gains in broadening our account base.

Sales growth in every international region exceeded 20%. EMEA sales, which include $4.8 million of foreign exchange gains, advanced 25.2% to $74.2 million. On a constant currency basis, EMEA growth was a solid 17%. All subregions within the territory contributed to the result.

Asia-Pacific and Latin American also delivered strong growth. Latin America was up 22.9% with several wins in retail and other verticals with mobile applications. Asia-Pacific sales increased 26.5%, driven largely from continued penetration in China, where sales are up over 50%, with notable wins in manufacturing and government applications.

Consolidated gross margin came in above guidance at 48.2%, up from 47.1% a year ago, and 47.6% in the second quarter. We benefited both comparatively and sequentially from a favorable product mix, foreign exchange gains, and improvements in manufacturing variances. The drag of nearly a full percentage point from WhereNet masks the substantial progress we made in improving the profitability in our core businesses.

Operating expenses of $67.6 million were within the forecasted range. They include one-time charges totaling $4 million, or $0.04 a share, related to the retirement of former Chairman and CEO, Ed Kaplan, and Board activities for the search and hiring of our new CEO, Anders Gustafsson. Amortization of intangibles and FAS-123R expenses totaled $7.3 million, including $1.7 million directly related to the CEO retirement. A year ago, non-cash charges totaled $2.4 million. Excluding non-cash charges, third quarter '07 operating margin was 20.6%, up from 19.1% for the second quarter, and 17.1% on a GAAP basis. Details on these pro forma results are contained in our press release.

Third quarter investment income totaled $4.4 million, with a return on beginning balances of 3.6%. Net income equated to $0.39 a share. Free cash flow for the quarter amounted to $15.6 million net of acquisitions. During the third quarter, we used $42 million to buy back 1.2 million shares of stock.

For the year-to-date, we have deployed close to $200 million in acquisitions and stock repurchases. An additional $145 million is earmarked for the Navis acquisition, to bring total capital deployment to approximately $345 million for the year. DSO for the quarter was a comfortable 56.2 days. Inventory turns were 5.3.

Our quarter-end cash position was $469 million. We expect fourth quarter sales to be between $215 million and $227 million. Earnings should be in the range of $0.38 to $0.45 per share. This forecast assumes a gross margin between 48% and 49%. We expect operating expenses to be in the range of $68 million to $69 million. Our forecast includes up to $4 million each in FAS 123R expense and intangibles amortization. The effective tax rate for the quarter will be 34.5%.

That concludes my formal remarks, thank you for your attention. Now here is Anders for some concluding comments.

Thanks, Randy. Our third quarter results validate the strength of Zebra's core business, and the success of our growth strategy. Expanding geographic presence, delivering applications in high-growth vertical markets, and creating greater customer intimacy with high-touch sales models, are some of the activities that are enabling Zebra to extend global leadership, and become a more formidable competitor.

My observation is that these are the right activities, that can and will lead to consistent sales growth. Continued focus on operational efficiencies will enable further improvements in profitability and earnings growth. In short, I believe there to be significant growth and profit potential in specialty printing and bar code labeling solutions.

Our capital deployments in higher-growth, adjacent businesses enhance Zebra's growth prospects across multiple dimensions. Our acquisition of WhereNet in the first quarter established Zebra as a leader in active RFID and realtime location systems. It also strengthened our position in key vertical markets for active RFID, such as in Industrial Manufacturing, Distribution and Logistics, and Aerospace and Defense. We added GPS to our portfolio of identification and location technologies in the third quarter with the proveo acquisition.

This transaction also gave us a more meaningful presence in the airline industry. With these transactions, we have clearly expanded the business opportunity with new customers for Zebra. Equally as important, they expand the breadth of solutions we are able to deliver to current large key accounts. We can build on our trusted position as a leading provider of bar coding and passive RFID identification solutions, which are well suited for tracking items, cases, and pallets.

Active RFID and GPS provide a more comprehensive ability to identify, locate, and track critical assets. Established customers are already seeing the potential benefits of deploying solutions, incorporating these technologies to improve their business processes. We believe that Navis will add another high-value element for Zebra in delivering business improvement solutions, complementing our data acquisition technologies, Navis' software systems optimize the flow of goods in and around the enterprise.

The drive for greater efficiency in the global supply chain, provides ample growth opportunities for this expanded set of Zebra solutions. Thank you for your attention. We appreciate your time and interest in Zebra.

We would now be happy to answer any questions you may have.

(OPERATOR INSTRUCTIONS)

Do you have any questions, operator?

Yes, sir. Your first question comes from the line of Phil Alling from Bear Stearns.

This is Philip Alling.

Hi, Phil.

You can hear me? Good. Given the technical difficulties, I thought I would just double check to make sure you could hear me.

That is a good thing apparently today.

We thought we had been so clear, there were no questions. (laughter)

I appreciate the opportunity to ask some questions. With respect to the WhereNet and Swecoin acquisitions that you made last year, end of last year as well as the beginning of this year, how have they performed with respect to your expectations?

Also, as far as the outlook going forward on your growth, clearly you are making some acquisitions in the asset tracking area, diversifying from your core in the bar code printing space.

How should we be thinking about relative growth in your asset tracking unit going forward, versus the core bar code printing business? And then on a blended basis, what are your expectations at this point for longer-term growth going forward?

Well, I would say first of all, Philip, there are two parts to that question. One, how is Swecoin doing, and how is the WhereNet prevail, or WhereNet going? Swecoin is doing really well. We are integrating that very tightly into what we would characterize as our core business. So that will not be, going forward after this quarter, will be considered because we bought it exactly a year ago, will be in the comparable results year-over-year, and will be part of the core business.

The WhereNet acquisition is a little bit behind where we would have expected it to be at this point. That being said, we are fully expecting the combined business, which would include, after we get through HSR, the Navis transaction to be growing substantially faster than the core business.

I can't give you a precise blended growth rate at this time, although I will say that after the first quarter, we expect to be reporting on a segment basis, so the numbers will be crystal clear at that time, because the combined operations of these businesses, assuming that we get clear HSR, will exceed 10% of the total combined sales of the Company.

Again, I should emphasize that we are planning to have an Analyst Day in New York some time in the first quarter. So we will be a little more clear about the plans going forward at that point.

What could you say, at this point, as far as the margin structure? Your asset tracking business unit, clearly will be a different go-to-market strategy, with much more reliance on direct sales, as opposed to the channel and so forth.

I would say, again, this is anticipating clearance from HSR, which has not happened yet. So we are not closed on Navis. So everything we have to say here is very circumspect. But again, assuming that that goes through, Navis is a software company, so one would expect that the gross margins would be substantially higher, and they are indeed higher.

So we would see higher gross margins from that part of the business, and somewhat lower operating margins, at least out of the box, until we scale up and expand the operations of the business.

Okay.

So more rapid sales growth, greater gross margin, and somewhat lower operating margin out of the box.

Okay. Just with respect to the foreign exchange impact on the reported revenues, was there any meaningful currency impact revenue outside of EMEA? You did sort of give the --?

No. The currency impact is isolated in EMEA. And overall for the Company is $4.8 million, and it was roughly 2.6% of the year-over-year growth.

One final question for me, just with respect to G&A, how should we be thinking about that going forward? You did mention the impact regarding the payment to Kaplan that you showed in the third quarter, so what --

Well, we gave the guidance of $68 million, $69 million, and that is an all-in number including 123R and amortization of intangibles. I will tell you that excluding the acquired growth of the Company's year-over-year operating expenses were up a little over 10% in the core business. Again, I think it is going to have to, we are going to have to leave it at this point, Phil.

Thanks very much. I will pass it along.

Again, I want to refer you to the details provided in the press release on all the non-cash charges relating to the business. It breaks out the 123R and the amortization of intangibles.

Thanks so much, Randy.

Yes.

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

Good morning.

Hi, Ajit.

Hi, how are you?

Good.

A couple of quick questions. The first one is just your guidance. Relative to your normal seasonality that Zebra has seen in the past, and just given the fact that your business momentum seems to be accelerating in North America, Europe, and even in Asia. Why is your guidance so conservative? Were you seeing any early signs of weakness in some markets in your orders? Why is it so conservative?

Well, first of all, we are not seeing any signs of weakness. Business is quite good, and I would not characterize the guidance as particularly conservative. I think it is fair to say that Zebra likes to deliver results, rather than talk about future performance that might not develop. So I think that it is a reasonable guidance, it is certainly sequentially up by a decent margin, in our view. So I would not characterize it as particularly conservative.

Okay. So there is no sign of weakness anywhere, business momentum that is accelerating? You continue to see it accelerate. You have discussed what the margin structure of the new businesses are from a broad perspective. And there is one other thing that I think you know in prior calls that you had addressed that you are exploring. I think in the most recent call, you said that it is something that's not the highest priority right now, and that could be setting up low-cost manufacturing operations elsewhere. Is that still something that you are working on?

Yes, we are doing a pilot at the moment to look at outsourcing as a potential benefit to us. We haven't concluded the pilot yet, so if you hold with us for another quarter or so, we will be able to share some more light on that at that point.

Right. But when you're looking at it and using an outsourcing company or a vendor, have you considered setting up a Zebra wholly-owned operation overseas as well, or is that primarily looking at outsourcing?

You mean for us to do in-house manufacturing overseas?

Yes.

No, we have not looked at that. I think the contract manufacturers, they manufacturer other people's goods for a living. I think that they are quite good at it. I think we can probably get more savings by doing it that way, than by setting up our own wholly-owned subsidiary, as you suggest.

Got it. Thank you.

And your next question comes from the line of Jeff Rosenberg of William Blair.

Good morning. Randy, I wanted to ask you another angle on the operating expenses. You mentioned with the expenses for the CEO transition, it got you into the end of the range that you had for the quarter. Were those expenses anticipated in your guidance? I was confused about that relative to--

No, they were not anticipated in the guidance.

Okay. So if you back those out to consider your performance relative to the guidance, expenses were lower and yet you are guiding for pretty significant sequential increase, kind of apples-to-apples with that taken out in the fourth quarter. So can you maybe look at it from that perspective, and give us some insight there?

Well, again, Jeff, we roll up a forecast of operating expenses from our operations every quarter. Again, this does include the full boat-load of amortization of intangibles and the 123R expenses in the numbers. So, yes, I would think this is the right number to give you.

All right. I was just, it's about a $5 million number at the increment at the midpoint, so it was a substantial increase in expense, so I was just looking to see if there is any insight to be gained there.

On the sales growth side, could you, maybe just taking a step back and looking at the success you are having in Europe, ex foreign currency, the high-teens growth that you have got, relative to the growth in North America, is there something inherently you have been able to capitalize on in Europe that is less available to you in North America, or any comment you can make to opportunities that you have in North America? Do you feel like that could improve, I mean ,maybe just some high-level comment there is on the things you have been doing this year to improve North America?

Jeff, this is Mike Terzich. I will take your question. On the European front, as you know, we have over the last couple of years, we have been pretty active in expanding our sales coverage model in Europe, and we have certainly taken advantage of the Zebra brand, and the multi-national migration that has occurred within the region, particularly in a couple of the very heavy growth areas, eastern Europe, for instance, and India as well.

So I think our strategy has been to be there, to build infrastructure, local sales and marketing infrastructure, and continue to develop the channels that support where the business is migrating to. And that has been in play for us for several years now, and it has been working very well.

Now, the question in North America has been really one of diversification vertically for us. So the business being very steep and strong in the supply chain manufacturing space, and in the retail space, our strategy has been to smooth out some of the lumpiness associated with parts of that business by extending our solutions vertically.

So we have been concentrating on new vertical spaces for Zebra, health care, government, the mobile work force space that we have talked about in the past, and that is giving us growth and it's offsetting some of the lumpiness that we see, particularly in the retail side.

Okay. Last question I had real quick was, is there anything incorporated in guidance for the new acquisition, or is that, any expenses and/or revenues there completely incremental to what you are giving us in guidance?

The new acquisition meaning Navis?

Yes.

There is nothing in there for Navis. Navis is not closed, there is nothing in there, in our guidance related to that acquisition.

Okay, thanks.

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

Hello, guys. Hi. I knew I was doomed given the Thomas Weisel. (laughter) You may have given it and I may have missed it, Randy. Did you break out organic growth in the quarter?

I didn't break it out specifically, I said it was in the double digits. The core business did really well in the quarter, I will say that, and we are quite pleased with that. We got some really great results internationally, and even within North America, which is highly, which is where the retail vertical is highly concentrated in our business, we had relatively flat sales in the retail vertical, but we made some important gains in diversifying our account base.

So we are moving into a position where we want to be able to offset weakness in one large account with strength in another. We seem to be able to do that in the quarter and we are, despite the fact that the retail vertical is relatively flat, I think strategically we are really pleased with the results we got.

So would you say your biggest surprise in the quarter by product or by geography was North America then? In terms of surprise, better than you had expected?

No. I think, actually, the biggest surprise in the quarter was how really strong the international business was. Everything was up really in the mid-20s. It was a terrific result.

Okay.

The other thing that was really, I think that was really good for us in the quarter was the fact that we continued to make gains in improving the gross margin. This is something we have talked about with you guys for multiple quarters, and our operations guys have done a heck of a job in fixing some of the issues we were dealing with there.

And it really doesn't show up quite as much in the numbers as the result that we actually got, because the WhereNet business drags the gross margin down a little bit. So it really masks the level of improvement that we have been able to get in the core business.

That was actually a question I was going to ask, a clarification. You had said in the prepared text that WhereNet was a 1% drag, but was that gross margin or EBIT?

That is gross margin.

Okay. But shouldn't WhereNet longer-term be accretive to the gross margin because of the higher [software]?

Yes. We would expect those margins to improve as their sales mix shifts much more to a software and maintenance component.

Of course, assuming the Navis transaction gets approved, there is going to be an even bigger shift there, because Navis is principally a software company.

Okay. And when you mentioned that WhereNet was a little bit behind where you had thought it would be at this point, were you talking primarily about the financial contribution, or where they are in terms of business development, pipeline, order book, and stuff like that?

It's the financial contribution at this point.

Okay.

One of the areas where WhereNet has had historically quite a strong presence is in automotive and that as a segment has been somewhat weaker this year.

Surprise, surprise.

Yes.

And also talking on the gross margins, you had mentioned earlier, oh, that question got asked. Sorry about that. Order delays, last quarter you had mentioned a number of things that were pushing out to the right, and should land in Q3/Q4. Could you give us a sense of how those delayed orders are coming in?

Chris, this is Mike. Yes, we did mention in the second quarter call that in the 11th week of the quarter we had some pushouts. Primarily, retail-centric and we were very pleased that those orders came in full in the third quarter. So we recovered what was pushed from Q2 into Q3 by about the midpoint of the quarter. So we are in good shape there.

Okay. And I know the Ed Kaplan rule for one question isn't in place, but I will ask only one more question. Which is, the consumables business, which you normally mention as sort of a leading indicator, hard for us given the new facilities and everything else that's going on to figure out what the real growth in margin trends are there, but what is the consumables business telling you today?

The consumable business, I will tell you, it's a tale of a couple different stories. In particular, the first half of the year, it was a little softer than we would like to see, primarily as the result of two critical markets for us in North America, one being the retail market, which we have talked a lot about, the other being automotive supply chain. We did see some second half of the quarter surge, primarily in the retail space, which was good to see because that is usually tied to some of the Back-to-School initiatives that were going on in retail. So that improved our outlook quite significantly.

Then secondarily, we have been doing some expansion, as you know, with that converting, our converting capability in Europe and we are picking up nice pieces of business in proximity to our locations now. We have three locations in Europe; Poland, Holland, and the north of England, and we are picking up nice pieces of business, both in the retail space and in some of the manufacturing, extended supply chain space.

So it is been going really well and if you check with the industry as a whole, our growth is significantly better than industry projections, and we feel we are taking some share.

And taking share attributed to the local presence?

Yes. Definitely.

Okay. Great. Thank you, gentleman.

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

Thank you for taking the time. Just a quick one on ScanSource. Wondering if you could delineate what percentage of that company represented your sales?

Greg, I don't have that handy. Let me look it up here and we will get back to you.

All right. And relative to ScanSource with WhereNet and potentially if you acquire Navis if it goes through, are they involved in that at all, or is that totally outside of their scope?

That is outside of ScanSource scope today. There might be over time some opportunity to work with them, to cooperate in that area, but today that would be beyond what they do.

Okay. And relative to WhereNet, I think in the past you have talked about net operating loss carry forwards there, has there been any decision made on what is happening with those, or how that stands?

No, not at this point. And the ScanSource is a little over 15% of sales in the quarter.

Okay, thank you. And on the RFID side, I know there was some mention on the second quarter call that there is some light stirring there relative to the core RFID, if you will, I wonder if you could provide us an update on what you saw in the third quarter, and what you see going forward?

Greg, this is Mike. We saw some improvement in the, you are talking about the passive RFID space?

Correct.

All right. We saw some improvement in the quarter. There has been a little bit more activity, primarily at the government level, and there were a couple of key pieces of -- a key project that we actually won in the quarter through the Armed Forces. So we are beginning to see a little bit of uplift in that particular space.

The retail side has been relatively quiet.

Okay. And one last one relative to the investment income. I think Randy had mentioned 3.6% return on beginning balance, and I think that's compared to 5% in the second quarter. I wonder if you could explain the differential in the rates of return.

We liquidated some positions in the second quarter where the profit was, as you say, deferred on to the balance sheet. So it was reported on to the P&L.

Secondly, rates came, in the portfolio came down and we had less money to invest. So from a combination of factors, the reported numbers were a little weaker in the second quarter, in the third quarter than the second.

Okay, great. Thank you.

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

Good morning. I just want to go back to the operating expense side of things. In the last couple of quarters, you guys have actually --

Reik Read.

Hello?

We hear you, Reik.

They came back at me. Those operating expenses have been relatively lower than what you had thought, and now you are seeing this boost up. Were there some things that you delayed or deferred, and they are coming into the fourth quarter, or is this kind of the level that we should be looking at things now, and can you talk a little bit about, Randy, I know you've talked in the past about some of the selling initiatives and driving forward. Is that something that is now adding more to the expense line?

There are a couple of things. One, we do have the acquired companies coming in, and in terms of operating expenses going forward, I think what we are going to do after the, in the analyst call, we will be a little more specific about future numbers and things like -- Analyst Day, we will be a little more specific about numbers going forward. Because the business model will be different.

It will be different, because of all these acquired companies. The step up in the quarter is largely related to the timing of expenses that we are anticipating to have in the quarter, and I don't think it necessarily represents a new, higher level of expenses.

Now included in that number are $7 million of 123R and amortization of intangibles. So you really have to strip that out from the core real spend rate, if you will, to get a better look at what is going on.

Right. Okay.

Okay.

Okay. Good enough. And are there I guess, just directionally, are there any things that you guys are doing from an internal initiative that might affect those expenditures? I.e., are there new projects or programs coming under way that could cause that to boost up -- or will they -- I am just talking directionally, I am not looking for guidance on the numbers?

No, I would say not.

Okay. And then with respect to the gross margin, the manufacturing improvement, how much of that, if you look at the 60 or 70 basis points sequentially, how much of that is due to the manufacturing variance improvement?

On a year-over-year basis, about 1.2 points.

Okay. And then Mike, just on the RFID business within the DOD, is that more of a short-term boost, or is that something that you see as relatively sustained as they start to open up Asia?

Well, I would like to say we see it as sustainable. I think we have seen just in the pipeline the activity pipeline has improved, which gives us a good indicator that I think they have centered on a couple of sweet spots from an application standpoint, and that is creating some opportunity for us. So I think at this point we see it as sustainable.

Okay. And then just last one, share repurchase, you guys announced that the $1.2 million in the quarter. Is that something where you are planning to be opportunistic, or is that something where you think you will be regular repurchasers as you look forward?

I think more generally, generating a solid return to our investors is clearly our top priority. And assessing our capital structure is also on my agenda for the rest of this year here. Return on investment capital will be one of our key metrics.

Revenue and earnings growth will be the key operational drivers, but capital structure is also a factor which we will address . So we will get back with some more detail on that in probably the Q4 or the Analyst Meeting we have in

Thank you, guys.

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

I was wondering if you could go a little further on the manufacturing variance side. You had mentioned 1% to 2%. Is there a lot more behind that, or is there more behind that, first off?

Second, can we talk just a little bit about Navis, should it close, what kind of growth rate are we looking at for this company historically? You don't have to go forward, you can go backward?

I am really going to decline to answer any questions about Navis at this point, because the transaction hasn't closed. That is really kind of off-limits for us at this point.

As far as the gross margin improvement, I would say we have really gotten to the point now where we have squeezed out most of the variances that we have been talking about for the last several quarters, as it relates to what I characterize as the blowback from the Ross conversion of a little over a year ago.

So I would not anticipate a lot of additional gross margin improvement coming from that source. I think we have reached a point where the gross margin improvement is going to come from other initiatives that we are looking at, and the normal impact that we get from product mix changes and foreign exchange, are really the two factors that are the principal drivers of gross margin.

Thanks.

Our next question comes from the line of Jeremy Grant from Stanford Group.

Hey. Congratulations on the great quarter.

Thank you.

I think most of my questions have been answered. It happens when I am last in the queue. Just wanted to confirm, this might have been asked, but there was a note in the press release that G&A expenses had about $4 million in one-time charges. With Ed leaving and all that going on, does that mean that G&A would have been right around $17.5 million for the quarter without that?

That is right.

Okay. I think that's all I had. Thanks.

Thank you.

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

Two questions. Randy, is there a particular euro rate embodied in your fourth quarter forecast?

Yes. What we use going forward is the current rate.

Current rate. Okay. And the second question, rough idea of the number of units sold in the third quarter?

I will give you more than a rough idea.

Okay.

But you are going to have to hold a minute while I look it up.

While you are doing that, it may be premature, but you mentioned a week ago on the call about Navis, that you were looking at what integration and synergy possibilities there were, and it sounded like you were going to be looking at that pretty quickly. Have you come up with anything yet that you can share with us?

From an integration perspective, we are looking to certainly get working on that very rapidly, to start to plan for what the combined organization should look like once we have, assuming we get all the approvals and everything, but once the acquisition goes through.

But the synergies were more on the top line synergies, really than they were on the bottom line. We are buying the company for growth, but we would also be looking at how we can leverage, particularly our shared services within the company, so Finance, HR, IT, and so forth.

Between WhereNet, Navis, and Zebra core business, do you feel there might be a little too much overlap between your network of global offices, and that some of them could be shut?

That is part of what we would look at in our integration plan. But so far we have a reasonably good global footprint. These other companies are very much smaller footprints, and we will be looking to see if there are opportunities to do that, but that will be fairly minor.

Okay.

Kevin, your unit count is 228,000.

Thank you. That is all for me.

You have a follow-up question from the line of Reik Read from the Robert W. Baird Company.

You talked about, with respect to the gross margins the manufacturing variances are largely done, but there are more improvement opportunities. Are these improvement opportunities beyond the outsourcing that you alluded to before, and can you talk a little bit about the timing of when you might start to see those?

Yes, they are, actually. They are improvement opportunities that we are working on across the supply chain. They are not related to the outsourcing, and we would expect to start seeing those early next year.

Okay. Great. Thank you.

I am showing no further questions in queue.

Okay. At this point we are going to conclude the call. Thank you for your participation today.

Just as a reminder, the conference call for our fourth quarter and year end results is currently scheduled for February 6, 2008, at 10:00 Central Time. Thank you for your participation today.

And this concludes today's conference call, you may now disconnect.