斑馬技術公司 (ZBRA) 2007 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. Anders Gustafsson, CEO of Zebra Technologies. All lines will be in 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, thank you for joining us today to discuss Zebra's fourth quarter financial results. Certain statements we'll make on this call will relate to future events or circumstances and therefore will be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Words such as expect, believe, anticipate are a few examples of 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 noted in the news release we issued this morning and are also described in Zebra's 10-K for the year ended December 31st, 2006 which is on file with the SEC. Now let me turn the call over to Anders Gustafsson for some brief opening remarks.

Thank you, Randy, and good morning everyone. I've 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.

We had a solid finish to an important year of change for Zebra with record sales and record EPS for our fourth quarter of 2007. Sales for the period reflect the increasing impact of our vertical market focus, the account activities and ongoing international expansion. We achieved another quarter of gross margin improvement and our activities towards a more efficient product development process began to yield results. During the fourth quarter, we completed the Navis acquisition and began integrating its operations with WhereNet and proveo to form our new enterprise solutions business unit. This platform positions Zebra well in several high growth segments. It gives us leading positions in attractive verticals and enables us to deliver a broader range of solutions that help our customers identify, track and manage assets, transactions and people through the supply chain and across the enterprise. We also laid the foundation for a global supply chain to support sales in high growth regions and lower product costs. This move to outsource final assembly of our printer products will enhance Zebra's competitive position in our core specialty printing solutions business. Overall the change that began in 2007 and has continued in 2008 positions Zebra for improving growth and financial performance in 2008 and beyond.

Let me cover some of the highlights in our fourth quarter results. Our EMEA region concluded an excellent year with a strong finish. Sales growth for the quarter was particularly robust in the UK and the Middle East with sales to customers in retail, postal and law enforcement. Eastern Europe is now benefiting from the label conversion and distribution facilities opened in Poland in the latter half of 2007. The region maintained good momentum going into this year. Similarly, sales in Latin America maintained solid performance across nearly all printer product lines, with especially strong sales to customers in Mexico and Brazil. Throughout the year, Latin America has been a leader in the adoption of mobile workforce solutions. The fourth quarter was reinforced by several wins in route accounting. Asia-Pacific performed as expected in a year that ended well above expectations. Growth for greater China continued in the quarter, the result of a more focused, execution oriented sales and marketing organization. In addition, a sharper focus on pursuing larger opportunities resulted in a number of wins in manufacturing and government projects. Asia is positioned for a solid start in Q1 with a nice backlog of business going into the quarter.

We continued to gain traction in our vertical market activities with several large wins from mobile workforce, retail and other verticals in North America. Our focus on key accounts secured several direct store delivery wins which incorporate Zebra mobile printers. We also did a good job in retail by diversifying our customer base and increasing the number of applications we sell into this important vertical. These applications include the sale of the first large scale roll-out of self service kiosks. We were also pleased with our efforts in healthcare. Sales into this attractive vertical with the focus on patient safety increased 35% for the year.

Finally, let me spend a moment on our acquisitions. Both WhereNet and proveo had solid bookings in the quarter and contributed modestly to sales. Wins during the quarter include a WhereNet installation with a major container shipping company and proveo won its third installation at the UK airport. These companies went into 2008 with good business momentum. Overall for the quarter, we made considerable progress in securing higher sales growth and greater profitability for Zebra. Record sales and earnings demonstrate the ongoing strength of our core specialty printing solutions businesses. The Navis acquisition and formation of the Zebra Enterprise Solutions business group position us to deliver a broader range of Enterprise Solutions to customers in targeted verticals. Zebra now has a unique set of capabilities and scale to deliver a broader range of solutions that help our customers identify, track and manage valued assets, transactions and people. Now I'll turn it back to Randy to provide a detailed review of fourth quarter results and guidance for the first quarter of 2008.

Thank you, Anders. First, an overview. The fourth quarter was a strong period for Zebra. And our outlook for the first quarter of this year is equally positive. Sales were at record levels, gross margin expanded and earnings exceeded the top end of our guidance to a record $0.45 a share. New printer products accelerated to 16.5% of total printer sales, sequentially up from 5.1% last quarter. Our core business growth was solid and bookings continued strong throughout the quarter. Sales growth clearly benefited from our acquisitions of WhereNet, proveo and Navis, which was completed on December 14th, and from foreign exchange. We also completed a Board authorized share buyback, continuing our commitment to strategically redeploy cash and boost stockholder returns. On the down side, operating expenses were above guidance.

Let's look at some of the details. Sales in the fourth quarter were $233.6 million, a record, increasing 11.3% over an unusually strong fourth quarter 2006. For the full year, sales were $868.3 million, also a record, and 14.3% ahead of last year. Excluding acquired growth, Zebra's core printer and supplies business increased 3.5% over an unusually strong 4Q '06, and was up 2.9% sequentially, which in this case I believe is a better indication of the real strength of our core business.

For the full year, our core business growth was 9.7%. We believe this exceeds overall industry growth. Acquired companies had sales of $35.2 million for the full year, significantly short of our initial expectations and due largely we believe to weakness in the Automotive sector. Fourth quarter revenue contribution from acquired companies was $16.3 million. This number includes two weeks of financial results from Navis. For the quarter, foreign exchange contributed $8.1 million to consolidated sales as the Euro strengthened 12.4% over last year. For the full year, exchange rate movements contributed $23.3 million in sales.

Hardware sales were $177.4 million, an increase of 8.8% over last year, and comprised 76% of total sales. Supply sales were $41.6 million, up 7.8% and 17.8% of total sales. Service and software sales were $14.2 million. This was an increase of 103% and shows the emerging impact of our acquired companies on Zebra's revenue profile. These sales represented 6% of total sales in the quarter, a figure that will increase substantially over the next several periods. Next quarter, or this quarter, we'll be reporting our results on a segmented basis with the results of our acquired companies combined under a single segment, Zebra Enterprise Solutions.

Geographically, we had very strong results from our international regions. Combined, they were up 19.5% with exceptionally strong results in EMEA, up 26.1% and $93.9 million, aided of course by the strength of the Euro. Sales in Latin America increased 11.5%, to $16.1 million. Although Asia-Pacific sales decreased 3.7% in the quarter, this was against a very strong comparison. For the full year, Asia-Pacific sales increased an impressive 17.1%, versus 12.1% for Latin America and 21% for EMEA. Full year international growth was 19.1% compared to 9.6% in North America. Fourth quarter sales in North America were $108.1 million, an increase of 3.1% over last year, but again, against a very tough comparison. Sequential growth was 2.9%, a very solid result and more representative of the genuine progress we're making in our vertical market programs.

A key indicator of our business in North America is sales out from distribution partners. This statistic remained consistently strong throughout the quarter as did our rate of incoming orders. Gross profit margin increased both comparatively and sequentially to 48.5%, the highest in two years. Gross margin was favorably affected by foreign exchange, but these gains were largely offset by inventory reserve adjustments and warranty charges. Our program to eliminate [Ross] related manufacturing variances is now essentially complete as we begin to accelerate our programmed outsourced production. Over the course of 2008, we expect $10 million of incremental outsourcing expenses to hit gross margin, with another $8 million to $9 million affecting operating expenses.

As I cited earlier, operating expense growth was an area of disappointment in the quarter. Our reported increase of 5.2% to $76 million is modest. But last year's spending was boosted by a large one-time charge. Navis was clearly not in the quarterly guidance and accounted for $1.4 million of the miss. In addition, we moved forward with some changes in our organization which resulted in unforecasted severance expenses. The balance of the miss was attributed simply to timing of expense recognition and frankly a forecast error on expenses related to our outsourcing project and 123(R) stock option expense.

Investment income was an unusually high $8.5 million. During the quarter, we began liquidating our fund to fund investments which caused approximately $4.2 million of accumulated profits previously carried on the balance sheet to move onto our P&L this quarter. The balance of the income is attributable to our core investment portfolio. A comment here about our investments. We are invested in three categories of investment grade assets: municipal securities, government agencies and a small amount of corporate bonds with the majority being AAA rated. The minimum underlying credit of our municipal bonds is A minus. As a result, we have not and do not expect to be affected by the current turmoil in the credit markets. Earnings per share came in above guidance at $0.45, a record, on $67.9 million diluted average shares outstanding.

Couple of brief comments on the balance sheet. First, as you might expect, cash is down, both as a result of the Navis acquisition, as well as share repurchase activity during the quarter. During the quarter, we repurchased 1.8 million shares for a total cash outlay of approximately $63 million. You will also note that goodwill and intangibles are up, both a direct result of the Navis acquisition. One final comment on the balance sheet. DSO increased to 59 days, reflecting, again, the impact of Navis, whose customer base has longer payment cycles than the traditional Zebra customer. Cash and investments year end totaled $281 million.

Our guidance for the first quarter calls for sales in the range of $238 million to $255 million, and earnings of between $0.36 and $0.44 a share. Our forecast assumes gross profit margin in the range of 47 to 49% and GAAP operating expenses of $78 million to $84 million. It's important to note that these numbers reflect the impact of purchase accounting rules that do not allow us to recognize approximately $4.8 million of Navis deferred revenue. In addition, we will be incurring approximately $4.7 million of incremental expenses directly related to our outsourcing project in the first quarter. In combination, these factors impact earnings by $0.09 a share. For the full year, the purchase accounting impact on revenues from Navis will be between $8 million and $9 million and should be fully reflected by the end of the third quarter and affect earnings by approximately $0.07 to $0.08. The incremental expense of the outsourcing project for the full year is expected to be approximately $18 million, split between cost of good sold and operating expense. The impact on earnings will be approximately $0.18 a share.

Despite the reports of impending recession in the U.S., our business remains robust. Order rates continue to be strong, but we're obviously sensitive to all the recession talk and we're closely monitoring our customer base for signs of weakness. We continue to be optimistic about the quarter and the full year. That concludes my formal remarks. Thank you for your attention. Now here is Anders for some concluding remarks.

Thank you, Randy. Zebra's performance in 2007 was a result of investments made over the years to extend our global presence, build stronger channels, and serve customers in targeted vertical markets better with innovative and reliable products. During the year, we initiated new activities to extend our leadership in specialty printing solutions even further. We also invested in attractive businesses that are natural adjacencies to our core business. These businesses offer higher growth potential and would enable us to serve customers better, with a broader range of technologies and solutions to identify, track and manage valued assets. In 2008, we will build on these activities to accelerate growth and increase profitability. Within specialty printing, we will maintain our global expansion activities. Globalization of world economies, increased focus on supply chain efficiency, and greater concern over safety and security continue to support high growth around the world for bar coding and other automated identification solutions.

Our plans for supporting these global expansion efforts include a deeper penetration of targeted vertical markets. Our success in healthcare by focusing strategically on solutions for specific applications is an excellent model for further expansion into retail mobile workforce and government as well as manufacturing and transportation and logistics. Much of this focus will be accomplished with a mission to increase Zebra's involvement with the customer. Our drive for greater customer intimacy will help us deliver new solutions that truly meet their future printing and identification needs.

Our focus going forward will also be on cost control and margin expansion. Earlier this month, we announced an initiative to move final assembly of Zebra printers to third party electronics manufacturer in China. We calculate the upfront cost of this program at $24 million to $26 million, with about $18 million to be incurred in 2008. Financial benefits are expected to begin accruing in 2009 with the full impact currently projected at $25 million to $30 million hitting in 2010. We are also well aware of the need to manage operating expenses, particularly in the face of a potential economic slowdown.

Capturing synergies across our business will be another activity we will be undertaking this year to unlock value within Zebra. Some of the opportunities we're finding to save cost and drive growth include consolidating printer manufacturing into a single supply chain, merging card and bar code sales to marketing organizations and consolidating our [work] label conversion facility with our newly opened operation in Atlanta.

Acquisition integration is also top priority for Zebra in 2008. During the year, we'll be combining the data acquisition technologies and solutions that WhereNet and proveo brought to Zebra with Navis's enterprise systems. The combination of these elements gives Zebra a unique end-to-end solution that maximizes our customer's visibility over their supply chains. We are truly excited about bringing these businesses under one roof and believe they were an excellent investment with for Zebra. The first stages of the consolidation into Zebra Enterprise Solutions have gone well.

Let me conclude with a comment on capital efficiency. As Randy mentioned, we bought back 3 million shares of Zebra stock in 2007. Today we announced that the Board has authorized the purchase of an additional 3 million shares. We believe acquiring Zebra stock is a vote of confidence in Zebra's future and a good use for the excess cash that we generate. Going forward, we intend to be more deliberate in our buybacks, mindful of cash needs for acquisitions and other corporate activities. Thank you for your attention. We appreciate your time and interest in Zebra. Before we open up the call to questions, I want to remind you about Zebra's upcoming analyst day, which will be held in New York City this Friday. Please check our website for details and registration.

Thank you. Ladies and gentlemen, at this time we'll be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Jeff Rosenberg with William Blair.

Good morning.

Good morning.

Randy, could you break down for us on the $4.7 million for the outsourcing expenses how that splits this quarter between cost of goods sold and operating expenses?

Later in the call I can. I don't have that handy right with me now, Jeff. Why don't you just contact me later? It's roughly -- normally for the full year it is $10 million of COGS and $8 million of OpEx. So you can proportionalize the first quarter roughly along the same lines and you'll be pretty close.

Just in terms of looking at the acquired growth, can you give us how much acquired growth we should assume when we fold in Navis in the first quarter and remind us what that would have been in the first quarter?

I'm not going to segment the guidance at this point, Jeff. I think I'd like to make you come to the analyst day.

Okay. Just in terms of how we think about the seasonality, if you will, in the $60 million that we've talked about before, how should we just -- any sort of help there in terms of trying to understand what the core business is doing, quarter on quarter, in Q1?

Quarter on quarter in Q1, you can -- okay. You can anticipate that the core business we'll do somewhere in the range of $213 million to $225 million. But the balance coming from the acquisitions, the Enterprise Solutions group.

Okay. All right.

That's as far as I'm going to go. Any more information you have to get from us out at analyst day.

Well, I'll be there. And then last question I'll ask you, just for some color on the strength in the acquired revenue in Q4 versus throughout the course of the year. I assume that that wasn't too much of that due to proveo, sounds like a pretty positive lump of revenue in WhereNet, maybe some color there in terms of what happened?

We had a good increase in activity in the Enterprise Solutions group in the fourth quarter. I mentioned -- we mentioned in our comments that overall for the year, the -- we were disappointed in the revenue results from WhereNet in particular. And this was largely attributable, we believe, to some weakness in the Automotive sector which caused some order deferrals. Again, in the fourth quarter, the results were actually pretty positive. We're going into the year with some momentum. We're pretty encouraged about the direction of the business right now.

Can you give us a little bit of how much we should consider to be lumpiness in big orders that come through versus visibility into that really sustaining?

I'd really rather not provide any more color at this point.

Okay. All right. Thanks.

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

Good morning, gentlemen.

Good morning.

Just wanted to clear up an item, Randy, on the guidance here and the forward treatment of deferred revenues.

Okay.

Well, it's sort of a new item. If you could give us your philosophy?

Software companies -- it's one of the weird things about purchase accounting rules. There's a certain amount, a chunk of deferred revenue that was on the books of Navis when we bought it and we, Zebra, as the acquirer are unable to recognize that revenue. We're only able to recognize a very small portion of it actually. It's particularly acute when you acquire a software company, because the fulfillment costs of the revenue are very small and the fulfillment margin on this revenue is very small. So we only get to recognize a very small portion of the deferred revenue that they've got on their books and the impact of that is for the total year at Navis we estimate it between $8 million and $9 million. Because it's a software company, most of that lost revenue converts into lost operating profit to the tune of $0.08 to $0.09 a share. It's really significant. We will be through this mostly in the first two quarters and I'm pretty assured that we're going to be completely through it by the end of the third quarter. In each of the first two quarters, our GAAP revenue from Navis will not reflect the real reality of their business. That's just a fact.

Fair enough.

Software -- acquisition of software companies just has this weird result. And we're just going to have to live with it. And that's it.

Okay. But you do on a cash basis recognize the deferred revenues.

Oh, yes.

Okay. I mean I guess the point I'm getting to is midpoint of your guidance is $0.40. You've got the charge for restructuring which is $0.045, let's call it $0.05. If you reported $0.45 it would be in line with what the guidance was. The deferred revenue is something that's going to be picked up in a forward quarter and shouldn't be something that would be backed out of what we had modeled.

Let's talk about this offline. It should be. We're not getting credit for this revenue and consequently we're not getting credit for the profit on the revenue. In the first quarter, that's going to have a negative impact on our results of $0.04. If we were able to recognize that deferred revenue our earnings would have been $0.04 higher, but we can't. Those are just the rules. We have to live with it.

With regard to geographical sales, I know you don't give a breakout on the acquired revenues, but is it fair to assume that if we backed out the acquired revenues, North America probably would have looked negative on a strong year-ago comp?

That's right.

Okay. And I think --

Excuse me. Slightly positive.

Right.

Very slightly positive. Basically have been flat.

Okay. And you indicated that the Q4 over Q3 is a better indicator but Q4 is always up over Q3. So just in general --

Not to the extent that fourth quarter was last year. We had just a huge surge in the fourth quarter of last year which was quite unusual on a sequential basis, even for Zebra. We are typically -- that is typically the strongest quarter of the year for us, but it's not that strong as it was last year. I think we went from $208 million to $217 million.

$187 million to $209 million.

$187 million to $209 million.

Just in general, the outlook for the North American business, is there anything about either that you're hearing from the channel or from large orders in the pipeline that would give you any kind of confidence about how North America is going to pan out in the year ahead?

Chris, this is Mike Terzich, I'll take that. A couple things that I thought were very interesting in the way the year finished and a lot has been discussed relative to retail outlook, which is a big portion of our business in North America. And the composition of our business has changed for the positive. And what I mean by that is we've been less dependent now on a go-forward basis with some of the big box retail business that we had seen in the past. And so we've built a nice diversity to our retail business which really helped as we exited the year. From an outlook standpoint, I think we mentioned in the prepared remarks that sales out from distribution channel is a very healthy proxy for the state of our business and that number continues to impress us. It's been very solid. And we don't see a let-up on the rate of bookings that we're seeing from that portion of the business. We actually feel that we exited the year in better health in North America than we've seen over the last four quarters.

To add to that, we can say also that our manufacturing sector has been performing well in the U.S. Partly I think buoyed by the weakness in the U.S. dollar.

Right. Okay. Thank you, gentlemen.

Our next question comes from Reik Read with Robert W. Baird.

Just to follow up on that. It just seems like a lot of the strength that you guys are seeing right now is in that core business and in some respects the end markets look so-so, neither good nor bad, but can you guys pinpoint a little bit more in terms of what's driving that? Is it a couple of specific verticals that are seeing some strength? Is it the diversification you're talking about in retail? Is it new products? Any color you can provide there would be helpful.

I guess first point would be -- we see the base business as being quite strong at the moment and there's a lot of trends I think in the industry that will give us some level of confidence that that will continue for some time. There is all the supply chains are getting much longer and more complex and more -- focused on cost reduction, supply chain agility and so forth, drives a lot more investments into supply chains. I think that's something we expect we'll be well placed to take advantage of also. We've seen I think in the U.S. certainly pretty robust base business. Our vertical market activities are working out quite well for us so far. I think several of them are growing quite nicely. I think I mentioned in my opening remarks that healthcare was up 35%. And also I think there's still a lot of growth going from -- coming from the international markets. Overall I think our core business is doing quite well and we feel it's being quite robust and we believe we're taking share.

For a long time we've all been discussing healthcare in these conference calls. Is there something that you guys are seeing different that's causing that market to really move forward?

This is Mike. I would say the difference now is we've been at it, as you know, for I think your point a long time. We've been making investments in this space on a real deliberate basis for about four years. And we're finally seeing a point where at the patient safety level, choices are being made to invest in technology that can deliver the efficiency that the hospitals would like to see and the patient safety improvement that the hospitals would like to see. And for the first time we're seeing those investments are taking on equal weight as some of the other technology investments that hospitals typically made. We see it. It's reflected in the pipeline of opportunities that we've built. We've been working with the largest hospital management information system integrators that there are in the marketplace. And the pipeline has improved considerably and we exited the year with some strong business results as a consequence.

And just going back to the WhereNet side of things, Randy, as part of your comments you had mentioned auto was weak. I take it from what you were saying in terms of how you finished the year that auto started to strengthen. Is that something you continue to see as you get into '08 and also can you guys comment on transportation logistics and how that vertical is doing with WhereNet?

The Automotive business is still kind of so-so right now for WhereNet. I would say that the -- I did mention that we had nice acceleration in combined sales from both WhereNet and proveo in the fourth quarter and it was actually quite significantly the strongest quarter of the year for those two companies. And Mike, you want to comment on the transportation, make any comments on transportation logistics vertical?

Our transport and logistics vertical across the whole of the business has been very strong. And primarily due to some larger postal opportunities, some transportation opportunities that we've won internationally, so it's doing well.

Is that postal in Europe that has to do with the deregulation?

Absolutely.

Last question on expenses. With respect to the things that you're doing in terms of solution selling, putting Navis and WhereNet together, those are causing expenses to kind of come up. Can you talk a little bit about if you look a couple of quarters out, how should we see that, given the guidance that you've given us today, I mean, how should we see those expenses? Will they stay relatively flat or will they start to come down as we get later on in the year?

I'm not going to forecast anything more than the first quarter right now. Other than to say that clearly, operating expense management and control is a very high priority for us in the first quarter. We did miss our guidance in the fourth quarter due to a combination of things that could not have been forecasted and quite frankly some forecast errors. So we really dug into what was going on, the spend rates and in particular in the core business and reached a conclusion that the core spend rate, I mean, if you adjust for some of the things like the severance costs and some timing issues that were clearly one-time in nature, is basically okay. I mean, we're monitoring it. We are expecting to finish the quarter within the guidance we provided you. And we are being very sensitive to making spending commitments by hiring a lot of people, because of all this talk about the weakness, potential weakness in the economy, which although we have not seen anything in our business, is obviously going to be something we're going to be watching very carefully in the year. So we're going to make sure we get the revenue result before we release the spending.

Okay. Guys, thanks very much.

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

Good morning.

Good morning.

Couple of quick questions. I think the first is about your Asian business. I see that was down sequentially. Could you give us some color as to what's going on over there, one in terms of the seasonality of demand -- but more importantly, when you're setting up the China business, and the -- what is your strategy in terms of being able to price in that market relative to your traditional pricing strategy in that market and could you give us some color as to what the competitive dynamics you're facing over there are as well?

That was a lot of questions in one, I think. I guess first, the Asian business was down a little bit on an annual comparison but growth year-over-year was very robust in Asia, and China has been one of our fastest growing countries over the past year and it's now our third largest revenue generating country worldwide for us. I think we're making good progress from that perspective. We also signed up -- I think it was about 50% additional new partners in the greater China region in 2007 to make sure our reach got much better. The competitive environment in Asia, I would say is -- it's a little different from here in that we do face some more local competitors. They tend to be very much at the low end, so our -- but our business for most of our product lines are -- I wouldn't say unaffected but we're certainly holding our own and we believe gaining some in those areas in Asia as well. That also would go for the pricing environment we would see -- on the mid-to higher end of our product range we are holding up prices quite well.

When you shift part of your production to China, is that going to be able to -- like the margins you're seeing right now, is it comparable to your corporate average across the world or is it actually lower when you're selling in Asia? Shifting production there, is part of that to actually help with the margins over there?

The intent of moving our -- the manufacturing to Asia is not to necessarily give it back as price concessions. It's really to make sure we improve our gross margin and as time goes, there's always some price erosion in the market and we hope to hold on to most of that ourselves and not really looking at this as a way of enabling us to be more price aggressive on price in Asia.

You talk about 18 to 24 months for that transition to be complete. In the meantime, when do you think you'll see the biggest sort of savings? Is it going to start beginning like in early 2009 and accelerate as you go through the end of the year? At what point will the redundancy in expense where you have the infrastructure in the U.S. and in China start showing the most drastic fall?

I think in general, we're going to start to see some benefits beginning in 2009. But I think for further detail on that it will be best to attend the analyst conference. We'll have more -- we'll have a presentation by our operations people on -- they'll provide a little more color to the outsourcing strategy.

In terms of the Latin American trend you talked about, you specifically mentioned Mexico and you mentioned Brazil. Historically Mexico has been tied a lot into what is happening in the U.S. economy. Was the strength of your thing in Mexico more to do with local retailers that are selling into the Mexican economy or a lot of folks that are producing for the U.S.? In Brazil, like the level of penetration and the strength you've been seeing, how long do you think it can continue?

This is Mike. I'll answer that. The business in Mexico, similar to some of the business that we're seeing in Asia, we tend to be -- that business tends to be influenced by some large deal opportunity and we see a little bit of lumpiness in our business. So I think when we go on a go-forward basis, when we start drawing comparisons quarterly and sequentially in both of those regions, oftentimes the quarter result is influenced by some large deal opportunity and we've been making that a specific point of focus, both in Asia, in China and in Latin America as well. And so in Mexico the strength that we saw in the quarter was that we won several large pieces of business and that business was across the manufacturing sector and retail sector and also in government sector and some security application. So our focus has been entirely on continuing to drive large deal opportunity. So we don't really have any insight as to -- at the core level I think the business has been fine. It's been steady. It's been pretty solid and we're supplementing it with some large win opportunities. As far as the outlook, I would say Brazil is similar. We've been concentrating on extending ourselves vertically and a lot of the mobility applications and the retail applications are very attractive in the Brazil marketplace as well. And we don't see anything in the foreseeable future that is changing our view at this point.

Just in terms of operating margins, I think this fourth quarter was probably the lowest margins on the operating side that you've delivered in many years. Looking out into the next three quarters, I think you're going to have redundant expenses and redundant cost structure at least for the next two to three quarters before the savings start kicking in. Would it be fair to assume that even given a challenging environment as long as you have growth on the top line, even if it's very modest, that the operating margins will sort of bottom in the first half of '08?

Well, our objective is to improve operating margins. Let me just leave it at that. The expectation is that operating margins over time will expand, both as a result of the benefits that will begin to happen, accrue to us as a result of the outsourcing activity but of also integrating, being more successful in the integration of our acquisitions and frankly working on improving internal processes, helped in some degree by technology.

But the timing of that, would you say that it would be --

I'm saying we should see some improvement in operating margins in 2008.

Okay. Okay. Thank you so much.

You're welcome.

Thank you.

Our next question comes from Greg Halter with Great Lakes Review.

Good afternoon, guys or good morning I guess it still is. Lot of questions asked already. One regarding your capital spending levels for '08. Do you see any sort of big increase into the current year, given the acquisitions?

Not at this point, no.

And any figure that you may throw out there as a range for what you expect for '08?

At this point, no.

Okay. And wonder if you could provide an update on how things are moving in the passive RFID side.

Yeah, on the passive side, we met the growth objectives for 2007. The outlook we have is for further consistent growth in 2008. We're seeing more closed loop pilots applications where we have solid return on investment in pretty short paybacks and we are seeing some more growth from Wal-Mart using the Sam's club operations there and also the Metro group in Europe. But I think we also would say that we don't expect the (inaudible) driven market to really be the driver for growth. We see a lot of opportunities now in the active RFID side and also in more of the closed loop applications where it's easier to get a very solid return on investment.

Okay. And would you happen to have the figure for what scan source representative sales in either the quarter or year or both?

Let me get back to you on that. I believe it was 16% in the quarter.

Okay. Thank you very much.

Our next question is a follow-up from Chris Quilty with Raymond James.

Randy, just a quick question for you. Did you give a feedback on the supplies business and a little bit of a slowdown there -- that's oftentimes been a leading indicator on the printer side of the business?

Chris, this is Michael. Let me answer that. I think Randy mentioned that in the prepared statements that we actually saw some sequential improvement in the supplies business. We measure supplies sales as a good proxy indicator for the health of our business. Actually, the fourth quarter across the whole of the business, supplies growth was very solid, near double-digit growth on a consolidated basis between the SPS business and the card business. So we were -- that was probably the best quarter performance we've seen over the last couple quarters. Now, wrapped in that number we tend to put other things like aftermarket products and some other parts of our solution offering and so that may be a bit misleading. But the health of the supplies business was actually very good and it was nice to see because it's been a little bit softer associated with some of the large retail roll-outs that we had previously won.

And pricing trends there are staying relatively static?

Pretty much. Pretty much. I think pricing -- listen, pricing for us has been very stable. I think there's a lot of conversations on just our regular -- what's our AUP, what's the environment like. And I will tell you that very isolated issues of pricing, by and large Anders' earlier point, we've seen improvement in a lot of our AUPs across all of our product families and supplies is no different.

Final question on the restructuring activity. Fair to assume that almost all those cost benefits, I think you said about $25 million to $30 million by '10 are going to accrue in cost of goods sold and benefit gross margins?

Actually, the -- it's going to be a -- the incremental costs of the project are going to be split between -- the benefits will accrue in gross margin. A lot of the costs will be split between gross and operating expenses.

Most of the benefits are gross margin. There are some in manufacturing, overhead, and other things that come below. It's -- by far the most is in gross margin.

But at this point, I mean, even with the down sizing of the operations there in Illinois, have you plugged into that any facility closings and removing overhead and those sort of items?

In the out years we have, yes.

Okay. And actually, I think you mentioned a consolidation of the bar code printer and ID card printer.

What we have done is, first, we consolidated the supply chains for our bar code and card printing businesses. As we now outsource, we've got to have one organization that will deal with the outsourcing partners and get all the efficiencies and benefits of that. So there was one of them. We also decided to consolidate our sales activities, sales and marketing activities for bar code and card. As we deal with many of the same customers and we have as many of the same issues, particularly as we start looking to expand and grow the card business into more emerging markets, we already have resources from a bar code printing side there, but not necessarily from cards. So we have a better chance of leveraging some of the investments we've already done there to ramp revenue without any commensurate increase in expense.

So do you end up losing Camarillo?

No, Camarillo will not be going away.

Okay. Great. Thanks again, guys.

Our next question comes from Jeff Rosenberg with William Blair.

Hi. Wanted to ask a gross margin follow-up. You said 47 to 49% in Q1, right? And I guess I'm trying to understand, maybe this is all related to outsourcing, but with folding in a software business incrementally, you'll [lie] gross margin -- and then you had some of the higher expenses from reserves and warranties. Why wouldn't gross margins be moving up in Q1?

Not moving up because we're incurring some incremental costs relating to outsourcing that's going to affect gross margin. I mean, we've analyzed this thing both from a sales mix and cost perspective, and this is where we come out.

From a software perspective, there's two things there. One is the purchase accounting issue that Randy talked about, where we will defer some $4 million or not recognize $4 million. The other part is that the Navis business or the ES Enterprise Solutions business is -- has large component of services. So that obviously has cost associated with it also.

Should we be thinking excluding the outsourcing issues that there would be improvement in gross margin, maybe not getting you down to the quarter, but just in general gross margin should be trending up as we move past these noisy items?

Yes.

Yes, I think is the answer.

Then the other follow-up I wanted to ask you was, Randy, what sort of interest rate are you assuming on your cash as you come up with your forecast?

4%.

I'm sorry, what was that again?

4%.

4%. Okay. Thank you.

Our next question comes from Reik Read with Robert W. Baird.

Just a quick follow-up on retail. The market has been pretty weak in the bar coding space in the last couple of years. Is some of the improvement that you're seeing is just that market may be coming back and coming up on the priority list or is it new customer or is it both? Any color you can give would be great.

This is an example where our vertical market activities have worked quite well for us in that we have been able to penetrate much deeper into the verticals, so we are less dependent on some of the very large retail organizations. And we also have been able to introduce a number of new applications. So in that respect we're dealing a lot more customers. We have a much broader customer base and been able to replicate a lot of the successes we've had in some applications across a much wider base of accounts. So the overall market for us was up slightly in 2007. But some of the larger accounts were down a little bit more.

But so think about new accounts and new applications as really driving the growth right now and the market might help you a little bit but not much?

Yes. Yes, I think that's fair.

Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS) Seeing as there are no further questions, I'll turn the call back to the managers.

In that case, if we don't have any more calls, we'll end today's session. But again, I would like to invite you and encourage you to come visit and attend our analyst day in New York on Friday here.

One last comment, our next conference call is currently scheduled for April 23rd at 10:00 and we look forward to reporting great results for the first quarter. Thank you for your participation.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.