斑馬技術公司 (ZBRA) 2008 Q1 法說會逐字稿

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

Thank you. Good morning, everyone, and thank you for joining us today for our second quarter results -- first quarter. 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 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 statements information is subject to various risks and uncertainties which could significantly effect expected results. Risk factors were also noted in the news release we issued this morning and are also described in Zebra's 10K for the year ended December 31st, 2007, which is on file with the SEC. Now let me turn the call over to Anders for some brief opening remarks.

Thank you, Randy. Good morning, and thanks for joining us on the call. This morning we made several significant announcements, including excellent first quarter financial results, a favorable second quarter outlook, Randy's retirement and the transition to Mike Smiley as Zebra's new CFO. I will now cover our first quarter performance. We maintained strong momentum throughout the first quarter to deliver record sales, improved profitability and solid earnings growth. The increasing diversity of our business across geographies, products and vertical markets was an important element of our continued growth.

International regions performed exceedingly well. We had sales growth in nearly all printed product lines with increasing success in further penetrating targeted vertical markets. The percentage of printer sales from new products also maintained an upwards trajectory. Gross profit margins benefited from a richer mix of business and material cost reductions. During the first quarter we made meaningful progress in integrating Navis, WhereNet and proveo into a single, cohesive Zebra Enterprise Solutions business unit. Shortly after the end of the quarter, we add Multispectral Solutions to the group, known for its leading ultra-wide band radio technology. Without question, the expanded of automatic identification and specialty printing solutions that Zebra now delivers has made us a more valued strategic partner. Our customers continue to respond positively to our direction and value proposition. We are unmatched in our ability to help our customers identify, track and manage assets, transactions and people through disciplined chain and across the enterprise. We're off to a strong start to the year and we are optimistic about further growth.

Let me cover some of the highlights in our first quarter results. Strong order rates in our specialty printing business throughout the quarter propelled high double digit growth in international territories. Our e-mail region had key wins in retail, hospitality, transportation and logistics and government verticals to help deliver our second consecutive quarter of record sales. Growth was particularly robust in Germany, eastern Europe, (inaudible) and Liberia. We further strengthened our presence in the developing market for specialty printing solutions in Russia and India. Business conditions in India remained favorable as we entered the second quarter. In Latin America, improved business execution, a strong supplies business and solid performance across nearly all printer lines highlighted the quarter. Our team closed multiple deals across the region including a large route accounting order for a major retailer in Mexico.

In Asia Pacific, record sales were driven by a more focused organization and a healthy business pipeline. Sales growth was notably strong in China, where we greatly expanded the number of resellers, many from nonAIDC industries, on the success of our PartnerFirst channel partner program resulting in significant wins in retail and manufacturing. Progress in the region continued in expanding our presence in healthcare, government, and transportation and logistics. Momentum remains high in this region where our solid opportunity pipeline gives us optimism for further growth.

Solid business performance in North America was led by good business momentum through the channel. Key wins in right accounting, healthcare and retail and further diversification of our customer base. During the quarter, we delivered the initial phase of our first large scale deployment of self-service kiosks with a large retail customer. We also opened our newest label converting facility in Atlanta. This operation is already expanding our business by enabling quicker response to customers along the east coast for genuine Zebra supplies.

During the quarter, Zebra Enterprise Solutions made progress on several fronts. Integration focused on assigning staff growth and responsibilities, developing integrated marketing plans and aligning product road maps. The business unit also delivered strong bookings in marine terminal operating systems and airport solutions with announced wins at Maher terminals on the east coast and Santos-Brasil Tecon Terminal in Brazil. Each of these leading terminals replaced systems developed inhouse with Navis, a trend we expect to continue well into the future.

To strengthen Zebra Enterprise Solutions further, we recently acquired MSSI. This recognized global leader in ultra wide band radio technology is an excellent complement to our other RFID solutions. Ultra wide band is unique in its ability to deliver high tracking precision in environments with high level of RF interference. MSSI has developed a solid base of business tracking personnel in hazardous environments such as refineries. It also has excellent wins with its Sapphire DART real time location system in manufacturing systems, distribution, retail and government.

Overall, we are making significant progress on moving the business forward, supported by the strength of the Zebra brand. This is evidenced by record sales from our extended geographic presence, ongoing customer demand for Zebra's broad printer product line, the solid progress of the integration of Zebra Enterprise Solutions, and its continued deployment of systems that improve end to end visibility in the supply chain and the positive outlook for further growth. Now I'll turn it back to Randy to provide a detail result of growth and guidance for the second quarter of 2008, and I'll then return to discuss the transition of the CFO role.

Okay. Thank you, Anders, and good morning. Before I'll get into the numbers, I want to point out that we have now transitioned into segment reporting. Specifically we're now breaking out results from our enterprise solutions business from our core specialty printing group. Results of each group reflect fully burdened number in as much as we are fully -- we're allocating a portion of our corporate expenses to the business units that are in direct support of those units. Both business units delivered solid financial results. The record sales were driven by strong international growth in SPG and sales contributions from all three acquisitions completed last year. We also made real progress on improving gross margin and controlling operating expenses in the core business.

Sales in the core of specialty printing group were up a very respectable 11.3%. With the full quarter's contribution from WhereNet, proveo and Navis, our enterprise solutions group contributed $21.5 million in sales, raising solid growth to 18.1% compared to last year. Now from a product line perspective, hardware sales were $180.2 million, an increase of 12.9% over last year, and they made up 73.2% of total sales. Nearly all printer product lines contributed to this result with record sales of high performance, mid range and desktop printers. The percentage of sales from new printers increased for the second consecutive quarter to 19.1%, compared with 16.6% for the fourth quarter of 2007 and 5.9% for the third quarter. Supply sales were 49 -- $41.9 million increasing by 10%, and supplies comprised 17% of total sales in the quarter.

The richer revenue mix from the Navis acquisition is evidence in the service and software line. This category increased 168% to $25.2 million or 10.2% of total sales versus 6% in the fourth quarter of last year. International growth was excellent, up 31.8% with AMEA up 28.1% to a record $97.4 million. Sales in Latin America increased 27.6% to $16 million, and Asia Pacific had a sharp increase in sales up 52.8%, which was a strong rebound from the 3.7% decline in the fourth quarter 2007. Results in each of these regions were largely driven by strength in our core business. For the quarter, foreign exchange contributed $9.3 million of consolidated sales, as the Euro strengthened 15% over the first quarter of '07. First quarter sales in North America were $109.1 million, a record, and an increase of 4.4% over last year. Sales out from our North American distribution partners remain consistently strong throughout the quarter as did our rate of incoming orders. We did have more variability in our key account business, particularly with retailers, but a more diversified customer base and new solutions such as the kiosk rollout that Anders mentioned, offset some of the softness we saw in the retail sector.

Consolidated gross margin reached 49.9%, up from 47.8% a year ago. Gross profit margin in the SPG business unit increased nearly 1.5 points to 49.8% from 48.4% due to a richer product mix and product cost reductions. The predominantly software and service-based revenues of the Zebra Enterprise Solutions contributed positively to gross margin at 50.4% for the quarter. I might add here that the Enterprise Solutions group in essence lost $2.3 million worth of reported sales in gross margin due to purchase accounting adjustments and treatment of deferred revenues. So on reality, the sales were higher and the gross margin was higher in that group and overall that would have added another roughly .4 of a point to gross margin, so the gross margin of the profile of the company has improved rather materially over the course of the year through a combination of these acquisitions, and the product cost reductions I just mentioned to you, which were actually some of the first benefits we've seen from the outsourcing to Jabil, because we're now manufacturing our printer circuit board assemblies completely in China. And we've gotten some very nice cost reductions out of there.

Consolidated operating income was up 11.4% and delivered a GAAP operating margin of 16%. On a fully burdened basis, SPG operating margin was 27.4% up 1.7 percentage points to 27.4% -- that's obvious, right, okay. We maintained good control over operating expenses in the specialty printing group, which was only up 5%. If you look at the numbers, the operating expenses were up a rather astonishing percentage amount by something in the order of 29%, but if you peel the onion back and you go back to the corp business, operating expenses are up only actually 5.2%, so it was really good operating expense control. Results for the specialty printing group include $3.2 million in exit cost for the outsourcing initiative, and less than $1 million for the relocation of our label converting facility to Atlanta from Warwick, Rhode Island. These costs lowered earnings per share by roughly $0.03.

The vast majority of the increase in operating expenses relates to the acquisitions made during the course of 2007, and of course, included in these numbers is $4.5 million in the amortization of intangibles, which is a $2.2 million increase over last year's amortization. Expenses for 123(R) totaled $3.4 million versus $3.3 million last year, basically flat. Investment income was $2.4 million. It's worth noting again here that we've liquidated the vast majority of our fund and fund investments in the fouth quarter 2007, and as of this moment we only have trace amounts left because of the details of unwinding these investments. The balance of the investment portfolio is invested in three categories of investment grade assets: municipal securities, government agencies and a small amount of corporate bonds. These assets are professionally managed by outside money managers. Earnings per share came in at $0.42 on $66.6 million -- diluted average shares. Free cash flow for the quarter was $28 million.

The increase in receivables was due entirely to our acquisitions of specifically of Navis and also of WhereNet. Inventories were up modestly for the period and we ended the quarter with $306 million in cash and investments. And during the quarter, we repurchased roughly a little over one million shares of stock under our authorization to buy up the three million shares. Our guidance for the second quarter indicates 18% to 24% sales growth to a range of $248 million to $260 million, with specialty printing sales of $226 million to $235 million, and Zebra Enterprise Solutions of sales at $23 million to $25 million. Earnings are expected to be in the range after $0.38 to $0.44 per share. Our forecast assumes gross profit margin in the range of 49% to 50%, and GAAP operating expenses of $87 million to $92 million. We are estimating outsourcing costs in the second quarter of roughly $4.8 million. That concludes my formal remarks. Thank you for your attention, and I will turn the call back on Anders for some concluding remarks.

Thank you, Randy. Zebra is off to a strong start in 2008. Our activities to accelerate sales growth and increase profitability are delivering results. We've made solid progress on our 2008 strategic priorities. Our efforts to extend the global leadership in our core printing business is delivering high growth in international regions. Our vertical market focus is enabling deeper penetrations of industries with significant growth potential. The acquisitions we completed last year, and most recently MSSI, give us additional capabilities to deliver solutions that help our customers identify, track, and manage valued assets, people and transactions. The globalization of world economies including an increasing focus on supply chain efficiency and greater concern over safety and security, continue to support high growth around the world for barcoding and other automatic identification solutions.

Before we conclude the formal part of this call, let me turn to the other piece of news we announced today, the transition of our Chief Financial Officer position from Randy to Mike Smiley. Many of you on the call today know Randy well. His numerous contributions to Zebra's success since the IPO in 1991 have been significant. He has built our finance and IT organizations, which supported our growth in annual sales from less than $50 million in 1991 to where we are today. Zebra's financial integrity and a credibility we have with investors are largely attributable to Randy's skills and leadership. As the longest tenured member of Zebra's senior management team, his contributions in building value for Zebra's stockholders extend well beyond finance. After 17 years on the job, Randy will be retiring from Zebra, but I'm sure he will be engaged in many new ventures including more than a few Cubs' games. We all wish Randy well in his future endeavors.

Mike Smiley, who will join Zebra on May 1st, has been appointed Zebra's new CFO. Mike brings a depth of experience in global finance, international technology operations, outsourcing, and acquisitions that will play a critical roll in bolstering Zebra's ability to achieving its growth goals and move to the next level. He comes to Zebra from Tellabs, where he's spent six years in financial and operating roles. Beginning with treasury, he then headed up all of international finance, he progressed to lead the global finance for supply chain and all of product development. Mike also held the position of interim CFO for the corporation, which has annual sales of nearly $2 billion. Most recently, he served as General Manager for the Tellabs Denmark division, which is a global supplier of optical telecommunications equipment. I have known and worked with Mike for several years. He's an independent thinker who has the professionalism and high ethical standards that will make him a valued member of Zebra's senior management team. Now I would like to hand it back to Randy for a few final comments.

Yes. Thank you, Anders. I want to take this opportunity to express my thanks to our investors and analysts who have supported Zebra over the past 17 years. We've had a long relationship together and we've worked very hard -- I in particular worked very hard to deal with you as much honestly and integrity as possible in this role. And I hope you will continue to regard Zebra for the quality of its organization, it's management team, and the outstanding opportunities that remain for this company's growth, which I believe are quite outstanding. My work at Zebra has been very exciting. It's been fulfilling. It's been very interesting. We've had quite a few colorful conference calls over the years. And being part of Zebra for the majority of my career and seeing it grow into truly a global player has been truly rewarding, and it's been an honor to work with a great team of professionals here at Zebra and a great team of professionals among our investor base. It's a daily interaction with these people, yourselves among them, that will be, quite honestly, the hardest thing to leave behind. So thank you for listening today. We would like to answer any questions you might have on our financial results for the quarter. Thank you.

Thank you, we will now be conducting a question and answer session. (OPERATOR INSTRUCTIONS) One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Jeff Rosenberg with William Blair. Please proceed with your question.

Good morning. Congratulations, Randy.

For what, the quarter or leaving?

It's like when people graduate, you always congratulate them. But it's certainly a milestone. Sorry to see you go, but happy for you. I wanted to ask about on North American sales or maybe just put differently, to look at the ESG group. Can you give us some sense of the geographic breakdown so when we look at the growth there, it looks like the contribution that would have been expected with Navis folding in that North America growth slowed some in the quarter. Can you comment on that specifically and sort of the tone of business there overall?

Obviously, I would say the split on the revenues from ESG are roughly 50/50. They have a very high proportion of international sales and getting our hands around this from a regional sales prospective and splitting the sales up we were able to do with Zebra at this point was not as easy as we would like. It's going to get a lot better over the course of the next several months. But they've got a high component of international sales and it -- I don't think it distorted the percentages, materially in terms of what we're doings as a business. We have clearly moved into a mode now where we are more international than we're domestic and that trend is going to continue. We've had phenomenal growth outside of the U.S., really phenomenal.

So it looks like looking at that, maybe there was some sequential decline in the first quarter. That's pretty normally seasonally. So would you say that it was anything unusual or any change in the tone of things --

No. We did not have a sequential decline in the -- quarter-over-quarter.

Our core business was -- sequentially up.

Core business was sequentially up. Okay.

Yes, which as you correctly noted.

I'm saying in North America.

That in itself is unusual because typically, the core Zebra business is sequentially down fourth to first. And I'm saying in North America it was sequentially up in the core business? Yes.

Okay. Okay. Okay. And then the other thing, the Asian business, I realize looking at one quarter versus another it's been lumpy but it really was a dangerous improvement both quarter-over-quarter and year-over-year.

It's also a typical weak quarter for us. In Asia Pacific, the first quarter is typically a weak quarter and it was a very strong quarter this quarter.

So with that kind of pop anything in terms of larger orders or anything unusual that creates a difficult compare -- any color commentary on such an extraordinary gain from fourth to first?

There was no real material one time say very large orders. It was very solid growth across the entire geography, particularly China was very solid, where we expanded a number of partners we worked with quite substantially. So it's just the solid growth overall. We had some new large retail customers in Australia that were probably the biggest individual increases that we saw.

Okay. And just one more if I could. On margins -- just let me ask this one. Randy, you didn't really say much about currency as it related to benefits in gross margin and the improvement there. But I would think it would be significan't. Do you have a sense of how much currency helped gross margin?

Yes. Typically about 80% of the currency gain drops through -- right through to operating profits. Again, I mentioned to you before, the -- on a consolidated basis, roughly 25% of our consolidated revenues is denominated in euros, and the way the math works out for us, given the expense structure and revenue play, about $0.80 of every $1 of foreign exchange gain drops through to both gross profit and operating profit.

Okay, so we should take 80% of that $9.3 million and think that as being a pretty direct contributor to gross profit.

You can do that if you want.

Okay, thank you.

Thank you. Our next question comes from the line of Chris Quilty with Raymond James. Please proceed with the question.

Good morning, gentlemen.

Good morning,.

Just wanted to clarify an earlier point there with regard to the North American business. Was up 4.4% year-over-year, but if you look at the core barcode business stripping out the enterprise group, would have that business still been up year-over-year?

Yes.

Okay. And still at weak levels compared to historic results, can you give us a sense of is there a light at the end of the tunnel where you see demand picking up by year-end or any discrete events either by vertical market or macro that you think might help the growth in North America?

Chris, this is Mike Terzich, I'll answer that for you. The -- we do see a different composition in the North America business today. So, while the business has been a little sluggish, as you know, when we look at where we're getting contribution, we have a much broader diverse customer base in North America. So the manufacturing sector, the healthcare sectors for us have been very good. Retail has been a little sluggish and it's been primarily sluggish in the big box side of our business. We've picked up quite a bit of new tier-two retail business. I think we noted in the prepared comments, we've extended new technology into some of those new customers via our kiosk platform. So all in, it's been okay, and we do see that if we can get a little bit of relief out out of that retail sector, the other sectors are performing nicely for us.

Okay. And on the international business, great results there seem somewhat in contrast to the weakness that your biggest distributor, ScanSource, reported revenue wise a couple of weeks ago. Any ideas there on what the divergence might have been?

I think that -- I would postulate that our business is a little bit different certainly than ScanSource business. As you go across the international markets, we were very strong in a couple geographies where ScanSource doesn't have a strong presentation. So a strong market for us was Brazil in Latin America, and as you go across Europe, I think there's some challenges -- Pan-European challenges relative to some of the currency issues we talked about. ScanSource is facing competitors that are pricing in U.S. currency and it's creating some challenges for them. And our business is -- we have a little more flexibility in how we deal with those issues with our partner community in the region?

Okay. And you mentioned -- I think Anders mentioned, the new product distribution continuing to increase. Can you give us the specific number there?

19.1%.

19.1%. Yes.

Oh, great, that's definitely moving up. And finally on the OpEx guidance $87 million to $92 million. How come it's not lower now that you're getting rid of Randy? Actually, the real question is that's guidance for second quarter. You have had a lot of new people coming on board. And I'm just wondering does that guidance reflect sort of a long-term trajectory for the year, or is it fully reflective of all of the recent hiring activity that's happened?

First of all most of the operating expense growth is attributable to the acquired companies. As I mentioned in my remarks, the core business year-over-year operating expense growth was 5.2%, okay, and the head count growth is actually less than that in the core business. We have acquired three, now four business that are in different locations. They have different organizations. They have different expense structures and for a while -- and plus we have a bunch of expenses related to the amortization of the intangibles that are related -- directly related to the acquisitions also. And we have a whole bunch of stuff moving around here. I think longer term, we should be able to -- we expect fully expect to moderate the growth in the operating expense side of that part of the business. But while we're knitting this together and before we get the benefits of the integrating on some of the systems reporting in, I expect the run rate to be right around this level for the duration, I would think. And we're paying lot of attention to it and management and ESG is paying lot of attention to it as well, to make sure our expense growth is consistent with our profitability objectives.

We're clearly mindful of the overall economic back drop in North America, particularly, and want to make sure we don't get caught out. So we are watching both daily bookings rates and the expenses very carefully.

Okay. Speaking of which, it just brings up a question, you haven't yet talked until this conference call about the Multispectral acquisition, which obviously just happened, but clearly prior to acquiring both companies, they would have been viewed as competitors, bringing different locating technologies to market. Can you just help us understand how easily -- easy it is to integrate at the technical level those two technologies, which are very different in how they function? Can you bring it into a a single platform, or do you treat them as two stove pipe technologies offered by one company, or have you decided that yet?

Yes. So first, they're not really competitors. They are largely complimentary applications. WhereNet has really a strong advantage when it comes to larger coverage areas. More of an outdoor application where the range of their antennas are much longer, up to 1,000 meters or yards. But the accuracy is -- they're not quite as accurate as MSSI. MSSI has a much stronger value proposition for more indoor applications where there's a lot of interference where they can actually track down to a foot of accuracy. Generally, we see them as being very complimentary. From a technology prospective we'll do some integration. Not quite sure if we'll go all the way to have a single platform for both of these companies. But they're certainly a lot of synergies that we can get from looking at which application we'll pursue and what features we've develop in each of them.

Got it. Thank you very much, gentlemen.

Yes. Thank you.

Thank you, our next question comes from the line of Reik Read with Robert Baird. Please proceed with your question.

Hey, good morning. Just a followup on the question. Mike, maybe this is for you. In the North America market you talked about a number of verticals. Can you comment too on transportation logistics, DSD? And also maybe can you comment, the market versus what you guys are doing from a solutions' selling standpoint, and how much that may be benefiting you in excess of what the market is doing?

Okay. A couple of things, Reik, in the transportation sector, our first quarter business was very good. So, the product and the solutions that we offer into that space, a lot of that product goes into applications that are used in shipping systems, manifest systems, with the large transportation carriers, and we had very good quarter in that regard. I think that's fueled by a couple of things that are important to note in North America. The manufacturing space for us in North America was good. We think this is fueled by some increased export volume. So we saw some good volume, good business growth in the manufacturing sector. Our big iron, I think Randy mentioned, our table-top product lines had strong growth in the quarter, and the other proxy for us has been looking at labeling volume. And when labeling volume is high, that tends to core late to a lot of parcels, a lot of tagging, and we saw strong correlation there as well. So, I think it's just -- some of it is driven by some of the economy, and I think export volume is increasing, and I think we're taking advantage of that with our strong brand.

And then on the second part of that, Mike, can you talk a little bit about the things you guys are doing from a solutions development prospective that may be helping you in addition to the marketplace?

Well, I think we're getting a little bit of a lift. We've had -- when you look at the contribution of revenue from new products, we've released a couple of products into the market, that always creates some opportunity, greater awareness of the Zebra brand. We've been very vertically focused as a company, so we've been doing quite a bit of trade activity -- trade show activity, demand generation activity in each of those respective verticals. We're very much boutique now in how we demonstrate our solution sets to the marketplace. I think we're just honing our marketing messages and being more specific and following that up with some product releases that some of the market has been waiting for, for some time and I think it's paying dividends.

And with the solutions selling activity that you're doing, is that broad based amongst your resellers, or is that limited to a more knowledgeable group at this point?

Well they're -- it's a little bit of both. I think you've got people that -- you have partners that sell applications across multiple vertical markets and you have partners that focus on specific vertical markets. So there's kind of an intersection and it appeals to both, and I don't think it's anything specific to one group or another.

Okay. And just one followup on Europe. Can you talk -- and maybe this is too general, but you can break it anyway you want. Can you talk a little bit about the market you've talked as being strong, but how much is that a function of what you might see as general market growth and how much of that is, say, Greenfield opportunity, like European postal?

Okay. Well, I think in Europe, we had a strong quarter as we noted, and I think there were -- particularly there were regions that really carried the day for us. We continue to see quite a bit of what I would call Greenfield activity in the region that we titled CEE, central and eastern Europe. And it's that same story that we've told over the years about manufacturing migration, and there are parts of Europe, western Europe, that have been migrating to the region. The Zebra brand is very strongly positioned there, and when people set up residents in those locations, we benefit, so there's lots of infrastructure. If you look at foreign -- direct investment in those parts of the worlds they over high and that's typically driven by multi-national companies where we have at strong brand presence and that's fueling some growth for us. What was good to see is that some of our traditional regions, UK, Germany, were also very strong and those have been markets that we have been in for a long time and heavy manufacturing markets. So, everything is -- has been very good.

So, think about manufacturing and postal is really being two of the stronger ones in that regard.

Absolutely, and quite a bit, I will say, quite a bit of retail. When I look at the wins -- the key wins that we picked up in the quarter, we saw quite a bit of retail activity, unlike the states where the number of large volume deals were lower. Retail was still very -- was hopping pretty well in parts of Europe.

One last question from me going back to the enterprise group and integration. Can you guys maybe outline what major activities or milestones you might see coming up this the next couple of quarters? And with any of those activities would you have an expectation that there would be any of these one time charges in the second or third quarter?

I'm not sure I understand what type of activity milestones are you thinking about?

Well, just in terms of -- obviously you're integrating two different companies that have sales force and IT and infrastructure issues. I don't know if there's any major kind of milestones as part of your project planning that would be coming up.

I think we -- on the integration part we're looking to we've already really established the new organization structure. We have all of the key leaders are in place -- named and in place. We are working on refining our long-term product road map to ensure that we know exactly what functionality we want to add by when and which vertical we want to target by order of priorities and sequencing from that perspective. There's no expected one-time charges to come out of the ESG group from any restructuring or anything like that, if that's what you're referring to.

Okay. Great. Thank you.

Thank you. Our next question comes from the line of Ajit Pai with Thomas Weisel. Please proceed with your question.

Just looking at the enterprise group, could you give us some idea of what the projectory regarding even and break even will be, and in the current quarter what the cash flow is quarterly basis of that business looks like?

Okay, Ajit, I don't have the data for you on the cash flows for the business at this point. However, we do expect the enterprise group to be profitable in the third quarter.

And looking at that group, I think you gave revenues out of expectation for the coming quarter of about $23 million to $25 million for that business.

Yes. $22 million to $25 million, right.

And that's lower than the revenue run rate if you just consolidate all of the trailing revenues of the businesses you've already bought. So is there some kind of slowdown there in anticipation of the slowdown in that business?

First of all there's two factors playing against us right here. One is, first of all it's a lumpy business. And second of all, you have to take into account that those are GAAP revenues and we do lose -- like we did this quarter, we will lose a certain portion of revenue due to the purchase accounting treatment of deferred revenues when we acquired the companies. So if you probably, on a nonGAAP basis, the revenues would probably be -- I'm going to guess here now, $3 million to $4 million higher than what we're guiding to at this point. Now we should be through that knothole pretty much by the end of the second quarter. I think there's going to be some residual going into the third quarter, but certainly by the fourth quarter we're going to be completely through that revenue recognition/purchase accounting issue.

Got it. And when you look at the core set of business, you've talked about the transportation and industrial, verticals in North America and on the retail side you said it's weak. But do you see any sign that it's weakening further from the current levels?

Ajit, this is Mike. No. No. I would say that our business in North America has been soft, but I wouldn't qualify it as weak. What I said earlier is why that while there's been large lot business that has been deferred because of the state of the economy and a lot of that IT spending is driven off of retail same-store sales, what we've picked up is we've diversified our retail customer base and so we've picked up nice business to offset that. And when I look at the activity pipeline at that tier-two retail level, it's pretty good. So, just a little, maybe clarification on the comment.

To just add to that, I think if you look at our overall business now, we're more diversified than we've been historically. So we're much less dependent on even on retail on a few large customers. We're much deeper into the retail segment as a vertical. We're much broader as far as the verticals we do address and serve and much more global which has been a big part of the results now, and we also have a broader product solution set. So I think all of those things makes us more diversified as a business and less dependent on any one customer or any one vertical.

Right. And then when you look at your overall business right now and the kind of trajectory the margin profile that you're guiding to on a go-forward basis, why wouldn't your margins be increasing on a go-forward basis [momentarily] already at the high range of guidance for the next quarter and -- why wouldn't be it be going further up?

Well nothing goes up forever, for starters, okay, and when we look at the sales mix in the second quarter, it was a little less rich than the first quarter. We had an extraordinarily rich revenue mix that was highly -- there was more waiting of high performance line and mid range printer products. We had a nice increase in average selling price of the printers, both sequentially and year-over-year, and when we looked forward at the mix we were expecting in the second quarter, and again subject to the vagueries that it's virtually impossible to forecast mix, we came out with a gross margin that was slightly down sequentially than what we reported in first quarter.

Got it. And then during your analyst day you talked a lot about even though the card printer business has been a part of Zebra for a while now, that the synergies hadn't been fully captured between the card printer side of things and the other printers that you have and through the channel. Could you give us some color as to initiatives over there and do you expect some impact of that over the next couple of quarters?

The -- there's two areas that we can talk about. First is on the supply chain side, as we are progressing with our outsourcing program with Jabil we've put together an integrated common supply chain for all of our printed products. So we have a common interface with Jabil. We have the same group of people managing all the transitional product lines, that will minimize the risk of mistakes twice and also it ensures we can deal more comprehensively with our outsourcing partners and make sure we can leverage all of the volume discounts and so forth we can get for that. The other side is on the sales and marketing front, and I think there's two areas that we can talk about -- I don't know if you're trying to leverage there. One is that SPS has a broader geographic coverage than the one CPS has. It's already been able to make more investments in resources and infrastructure in emerging markets for instance. And we can now better leverage that investments to also drive revenue for CPS without having to make the commensurate investment in resources. And the other one is that we have the strong channel management organization within SPS, which we can also reapplies to drive and improve the channel program we've have in CPS.

Got it. Thank you.

Thank you. Our next question comes from the line of Greg Halter with Great Lakes Review. Please proceed with your question.

Good morning, and Randy, would like to thank you for your precise answers over the last nine years that we worked with you.

You're welcome.

Question on the -- you briefly touched on the number of printers shipped in ASP, but do you have the specific numbers for the quarter?

Yes. 243,000 printers shipped and the average selling price is [$614].

And the cost of the share repurchase if I look at the cash flow statement gives me $24.6 million, but that can't be --

We purchased a little over a million shares and the average price was roughly $33 a share, something in that range.

Alright. Anything purchased so far in '08 -- this quarter?

Yes.

Okay. Thank you. And congrats on the Jabil. You're seeing the benefits already. It appears you're ahead of schedule, I guess. Just wondering what's regard next in regard to that initiative?

First we said, I don't think we could consider it to be ahead of schedule. I think we're tracking roughly with our plans. We're probably a little behind on the actual line transfers. We want to make sure we really staffed them appropriately and make sure we have the right quality coming out of our manufacturing there and eliminate any risk of quality issues for us. But we've seen greater than expected opportunities for material cost savings. So I think we feel overall we are on track with the program at this stage.

Okay. And on the new product side, obviously, the 19.1% is a dramatic improvement which is very good to see. Any specific products that you would like to mention that came out in the quarter or anything that you see coming or going forward going through the rest of '08?

I think for Q2, we expect the number to be similar to what we had in Q1, and our expectation is it will inch up a little bit in the second half of the year.

We're also, Greg, we're seeing acceleration on some products. Typically because so much of our business flows through channel, products that are launched in the quarter, you really don't see traction from a revenue standpoint for about two quarters. So what you're seeing is products that have been recently released that are gaining momentum in the marketplace. So we've seen some nice acceleration to some products, both the ZM series product that has went through a refresh recently. We have released over the course of the last year some products in the mobile space, and even the product that has been released over a year ago is starting to pick up a significant traction and that is the S4M product. So that's typically the way it flows out. It takes a while for the channel to get their hands around it and then embed it into some of the opportunities that they're pursuing.

Okay. And one last one if you could comment on your opportunities in the merger/acquisition area.

One comment. There's lots of them.

Okay.

That's a precise answer for you, there's a lot of things going on. Talk about the priorities we have for that?

Sure. Sure.

The first priority we had was really to make sure we got the organization bedded down and get everybody clear about what the roles are and how we're going to drive the business forward. I think we achieved that in the first quarter. I think the organization is now in place and well -- working well together. What we are -- one of the priorities we continue to work on, which is never going to be quite done, but I think we made good progress, and we continue to work hard in Q2 is to really nail down all of our product road maps and understand exactly what feature functionality set and which -- we work on each product and which markets, opportunities, which refer to the market we want to pursue in sequence from each of these -- with each of these product lines.

Okay, I hear the buzzer. I must be done.

Thank you. Our next question comes from the line of Jeremy Grant, Stanford Group. Please proceed with your question.

Okay. Thanks. Good morning, guys. And congrats on a solid quarter. So since I'm at the back of the queue, I will see if if I can dig on a few things people haven't done yet. First question was looking at overall growth, 18.1%, about $9.3 million from the benefits of our awful dollar, which if I do the quick math shows that actual growth would have been right around 13.6%. Digging deeper into that, printer sales up 11.3%, if I exclude the dollar impact, what would the actual growth rate have been there?

We don't have that figure for you.

Okay. I can try to do some math and figure that out. And then on OpEx, I understand where thing particularly with the the acquisitions. One number that was down was -- at least sequentially, was sales and marketing, which I think was $35 million and change last quarter and down this quarter. Why such a big reduction this time?

Jeremy, this is Mike. A couple of reasons. One, there is a little bit of a timing impact in Q1, and we expect some of that to bounce back up and it's part of our Q2 guidance, particularly in North America. And then secondly, we had gone through an exercise at the very end of last year where we integrated several organizations within North America, and as a consequence of that integration we picked up some efficiency. So the rate of spend and the rate of increase is going to be much less as part of the '08 operating line.

Okay, that's helpful, thanks. Talking a bit about the outsourcing effort, I think the original guidance for Q1 was $4.8 million and it came in the $3 million range, and I think it was -- Anders had mentioned that things were moving a little behind what you had mentioned. Is that why we had the lower number recorded in Q1?

Yes. Yes. It was a little slow from that. And we made a few changes to the plan as far as what we move and it what we build in China from a tools prospective, which had an impact on the Q1 expenses.

Okay. And I guess, one question I want to sort out in that, does that mean this is the overall cost over the six-quarter period is going to be a little cheaper, or are some of these costs just going to get pushed out a little further to the right?

No. I think we feel the overall plan still is intact, so the total overall timing that we talked about earlier still holds, and the overall cost and the improvement -- the cost improvements are still intact.

Okay. So things will just sort of get sprinkled around in some other quarters then with that. That's helpful. Can you talk a little more about the latest acquisition? You have announced how much you paid for it or what the revenue rate is?

No. We have not announced how much we paid, nor the revenue, but it's a small tuck-in acquisition, and revenues are less than $10 million.

Okay. So we shouldn't -- this is not really factor much into guidance being a little higher than where the industries been --

That's correct. This is the small tuck-in there that we think makes ultimate strategic sense and it really expands our leadership position within real time location systems, we now can address a much broader set of solutions particularly in the indoor manufacturing sites and also with some kind of exciting opportunities around personnel safety in very hazardous work environments.

Okay, on the -- looking more where this sort of digs in with the Enterprise Solutions group, was there comments more on that side?

No, no.

I heard some chatter. I think the 2007 pro forma figure for Enterprise Solutions was right around $100 million, and I'm not sure if you gave specific guidance for this year, but I know in the analyst day slides you were talking about a [keiger] in this group of say 17% to 24% between now and 2011. So Q1 came in at what $25.1 million, and I understand that the deferred revenue might have pulled that up to say $25 million or so. I guess the question is this whole unit on pace to growth you think to exceed $100 million this year and where should that come, and if not what are some of the issues?

So we specifically didn't provide guidance for the year. I think we're comfortable with the long-term growth rate that we discussed at our analysts day, and we're also comfortable the business is performing as we expected it to.

Okay. And then I think the only other question I had is, obviously, the currency gain particularly with the Euro strengthening against the dollar, was notable this quarter. Are your assumptions in guidance for Q2 that currency exchange rates stay right around where they are?

That's correct.

Okay. I think that's all I had.

Okay. Great. Thank you.

I think that's -- we've reached the end of our hour. I realize this is a busy time for you guys so we're going to defer any further questions to follow-up phone calls, should you decide to make them. And just as a reminder -- although I won't be here, these guys will, July 23rd is the next call, and -- at which time Zebra will hopefully deliver some really terrific results for the second quarter. Thanks for your participation today.

Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.