斑馬技術公司 (ZBRA) 2008 Q3 法說會逐字稿

Good morning, and welcome to the Zebra Technologies third quarter earnings release conference call. Joining us from Zebra Technologies are Anders Gustafsson, CEO; Mike Smiley, CFO; and Doug Fox, Vice President - Investor Relations. (OPERATOR INSTRUCTIONS). At the request of Zebra Technologies, this conference call is being recorded. Should anyone have any objections, please disconnect at this time. At this time, I would like to introduce Mr. Doug Fox of Zebra Technologies. Sir, you may begin.

Thank you. Good morning. Thank you for joining us today. Certain statements made 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 at expect, believe and anticipation are a few examples of words identifying a forward-looking statement. Forward looking information is subject to certain risks and uncertainties which could significantly affect expected results. Risk factors were noted in the news release issued this morning and are also described in Zebra's 10-K for the year ended December 31, 2007, which is on file with the SEC. Now, let me turn the call over to Anders Gustafsson for some brief opening remarks.

Thank you, Doug, and good morning, everyone. Thank you for joining us. Today, Zebra reported solid third quarter results. We executed well, delivering sales growth, profitability and cash flow. We further positioned Zebra for success over the long-term by extending our industry leadership with customer solutions that deliver hard ROI, which is particularly important in these tough economic times. Given the unprecedented environment in which we and many companies are now operating, we are adapting our 2009 strategy to keep Zebra nimble in ever-changing business conditions.

Early in the quarter, we recognized the potential impact of economic uncertainties, and quickly moved to reduce our annual operating expenses by more than $10 million. Our actions included refocusing our resources in the Enterprise Solutions group to high priority opportunities; streamlining the management of our Specialty Printing group's sales organization; and eliminating many contractors. In addition, we remained very frugal in our discretionary spending given the current environment. At the same time, we continued to build on the strengths that enable us to serve more of our customers' needs and deliver value for our shareholders. Zebra is in a solid position to extend our leadership in all economic conditions. In good times, our customers buy Zebra solutions to expand their business. In tough times, our customers continue to buy our solutions to generate operational efficiencies. It's worth repeating the reasons for Zebra's enduring ability to extend its industry leadership.

First, Zebra serves more of our customers' needs with the broadest range of products, technologies and solutions in our industry. With the largest install base in the industry, we have an increasingly diverse base of customers across geographies and industries. More than 90% of Fortune 500 companies use Zebra products and solutions. Our global go-to market channels deliver these solutions to help our customers improve their business performance and competitive position. Second, Zebra operates a model of high profitability and substantial cash flow generation. Year to date, we have achieved a gross margin of 49.5%, a GAAP operating margin of 15.7% and an EBITDAR margin of 20.9%. These results compare favorably to the performance of our peers and technology companies in general. We generated free cash flow before acquisitions of $67 million. Between our current cash balances and cash flow generating capabilities, we are able to internally fund all of our currently anticipated business plans. In other words, we can invest in new products to meet more customer needs and extend our leadership, even in the current economic environment.

We are equally focused on profitability. That's why we are reducing our operating expenses both in the short-term and over the longer term, with projects like our new ERP system and outsourcing of manufacturing. These programs will have long-term enduring benefits. Third, Zebra's financial condition is strong. At the end of the third quarter, we had no debt and $247 million in cash and investments. This equates to almost $4 per share. In addition, we have a $100 million untapped credit line with a consortium of highly-rated global banking institutions. This financial strength gives our customers the confidence that Zebra can be their valued long-term business partner. Our financial strength further provides our shareholders the comfort that Zebra can continue to create shareholder value in good times and bad. And finally, it gives us the ability to invest in Zebra by buying back our shares. For all of these reasons, we are in a good position to extend our leadership.

I would now like to review some Q3 highlights for you. Our Specialty Printing group grew as a direct result of our business diversity. As Mike will explain, North America operations performed to expectations, while European sales continued to be impacted by economic conditions. We had all-time sales records in Asia/Pacific and Latin America. Our performance was re-enforced by the investments we've made to build stronger channels to better serve our customers. Specifically, in the past year we have increased the number of Zebra resellers in China by more than 200. Earlier this month, we opened a new distribution facility in Singapore. This operation is part of our global expansion strategy to serve our resellers in the region and our global supply chain transformation. It will also provide income tax benefits as more products flow through it.

In Latin America, we put in place a more substantial infrastructure, leading to stronger sales, most notably in Brazil. The breadth of our solutions drove performance. Sales of mobile work force solutions were particularly strong, as customers look to make their field personnel more productive in light of higher fuel prices and tougher business conditions. As an example, one of our customers is using our RW420 mobile printer in a new route pallet accessory to speed deliveries of food and beverages, which improves efficiency. We also have multiple pilots underway for Zebra mobile desktop and kiosk printers. These pilots are being driven by our customers' desire to invest in upgrading their existing Zebra solutions with newer technology, deploy new solutions to improve business performance, and consolidate their printer needs around a suite of Zebra products. Investment in Zebra Solutions typically deliver a return in as little as six months. Results like these help drive customer demand, even during a difficult economic environment.

Our card business delivered a record quarter. This success was due to the actions we discussed with you earlier in the year. As promised, we consolidated the card printer sales, marketing and supply chain organizations into the bar code business unit. These actions resulted in adding 30 new card resellers through our partners' First Channel program and leveraging an expanded global sales force to reach more opportunities. Our goal for the Specialty Printing group include focusing on growth in key vertical markets, driving growth in brick countries, and improving operational efficiency with such projects as outsourcing and ERP implementation. We are optimistic about the future for our Specialty Printing group, and look forward to continuing to extend our leadership in this market.

Let me now provide an update on our Enterprise Solutions group, where we continue to extend our leadership through a more diversified solution set and customer base. Let me remind you again of the rationale behind these acquisitions in order to provide an understanding of the significant value that they bring to our Company. Again, ESG currently makes up only 10% of Zebra's total sales. Yet, it also enables Zebra to provide its customers the broadest set of asset-tracking solutions available from any Company today. Zebra's Enterprise Solutions group extends the breadth of our products and solutions, expands our deep expertise in attractive vertical markets and enhances our technology portfolio so we can meet more of our customers' needs. Essentially, Zebra Enterprise Solutions group enables the Company to realize its vision of helping customers improve their business performance through a host of innovative solutions that identify, track and manage assets, transactions and people. As you are well aware, our 2008 priority for ESG has been to integrate four companies into one business unit.

So far, we have made significant progress to position the organization for profitable growth and deliver more robust solutions to targeted customers. These actions include implementing a global business strategy, establishing common integrated organizations for strategy, product management and services, and integrating our sales teams along targeted verticals. We are excited about ESG's long-term prospects and continue to execute our growth strategy, which includes penetrating deeper into existing vertical markets with a broader suite of solutions, moving into adjacent markets, developing programs that leverage system integrators and other channel partners, and expanding internationally. We have made good progress and we continue to execute on initiatives to achieve profitability. Make no mistake, this is a top priority for us. Given the current business environment, we can only expect the time line to reach profitability to be longer than originally anticipated. Since mid-August, I have been even more involved in Enterprise Solutions business.

I have met with multiple customers throughout the world to discuss how well we are supporting their needs and how we can best address their requirements in the future. For example, I attended the opening of the Euromax Marine terminal in Waterdam last month. Our terminal operating system makes Euromax one of the most advanced and automated container-handling facilities in the world. We have also diversified our sales across customers and verticals. Examples include the first sale of our operating system into a rail terminal in Australia. This is an important milestone in our strategy to expand in adjacent markets. The second example is the first sale of a combined suite of products from both our Enterprise Solutions and Specialty Printing groups to a single customer. This channel-driven sale to a large U.S. government agency highlights the value of Zebra's capability to deliver an expanding array of asset tracking solutions.

And finally, a growing number of installations of our Material Flow: Replenishment solution. Last month, I visited a large equipment processing plant in the U.S. where our customer has implemented the Zebra Realtime Location system and Material Flow solutions, and they have achieved an inventory reduction from $14 million down to $1 million. In summary, we are a leader in an attractive industry in a globalized economy. And today, we have a broader and more powerful solution set. Each day, we see how our customers rely on our products and solutions to gain efficiencies, lower cost and increase competitiveness. Our commitment to our customers is matched by our commitment to our shareholders. To ensure we will grow profitability over the long term, we will continue to control our operating expenses through this challenging time to manage our margins and ensure shareholder returns.

We realize this is a challenging environment, and we will continue to assess our programs to ensure we are investing wisely, focusing on growth and profitability. I would now like to turn the call over to our CFO, Mike Smiley, to provide a detailed review of third quarter results and guidance for the fourth quarter of 2008. After Mike's remarks, I will return for some closing comments on our outlook.

Thank you, Anders. There are three key points to keep in mind while we go through third quarter results. They are first, North America, Latin America and Asia/Pacific geographic territories performed at or above expectations. Sales were principally affected by the continued weakness in EMEA. There is no material year over year net impact from foreign exchange. Two, we had four nondiscretionary one-time items that had a $0.03 combined positive impact on EPS. And three, operating expenses include the effect of more than $10 million in annual cost reductions. So let's start with sales, which increased 12.4%, with organic growth of 5.2%. Specialty Printer group sales increased 3.5%. Our Enterprise Solutions group contributed $25.6 million to third quarter sales, with continuing contributions contributions from terminal operating system installations and Realtime Location system deployments.

For the quarter, ESG delivered $1.7 million in services related to loss purchase accounting revenue. Under the accounting rules, we're delivering the services for which we are obligated from the Navis acquisition, but do not book the revenue against them. We have about 3 million left to deliver. Let's take a look at sales by product line now. Hardware sales increased 6.6% to 175.7 million from last year, and represented 72% of total sales. We saw particular strength in mid-range, mobile and card printers. The percentage of printer sales from new printers was a solid 20%. The pipeline for scheduled product introductions makes us optimistic that we will see continued strength in this number. The new products we're introducing are design with features and benefits that open new opportunities for Zebra.

In addition, we are continuing to add to our suite of software tools and make Zebra printers easier to integrate and use on enterprise networks, a clear benefit to our reseller partners and customers. We shipped 242,000 printers in the third quarter. The average unit price of 596 was up from a 585 to a year ago, but down from last quarter because of FX and product mix. Record supply sales of 45.5 million were up 9.1%, and comprised 18.7% of total sales. Their percentage of revenues from services and software held steady at 10.8%. International sales were up 18.8%, with Latin America up 27.3% and Asia/Pacific increasing 25.2% to a new record. EMEA increased 15.1%. Continuing the spotty weakness we discussed during the last conference call, EMEA sales declined about 3% net of FX and Enterprise Solutions group acquisitions. Out of our nine subregions, France, Germany, the Middle East, Africa, India and Eastern Europe saw the greatest strength, countered by weakness in the UK, Italy and Benelux countries. Third quarter sales in North America were up 5.5% to 110.9 million.

Here again, the diversity of our customer base in verticals has been paying off. In retail, we saw healthy refresh and replacement printer business. Sales to customers and small package delivery were also strong this quarter, as well as mobility solutions in several verticals to help customers improve performance in their field operations. Consolidated gross margin was 48.3%, up slightly from 48.2% a year ago. Specialty Printing group gross margin declined to 47.4% and 48.4%, principally from some temporary production problems that arose in label manufacturing as we transferred lines to our new facility in Atlanta. These problems will begin to abate this quarter with the installation of new equipment in the Atlanta location. Gross margin of 55.9% for the Enterprise Solutions group was up from 40.2% a year ago on favorable shifts and revenue mix from the acquisitions.

Let's take a look at operating expenses. First, our activities to reduce operating expenses covered several areas of the Company in both business groups. Specifically, we found savings in areas of overlap in Enterprise Solutions group to the integration process, and consolidated sales management in the Specialty Printing group. Some one-time items also hit the quarter. First, we booked a $5.3 million settlement on the claim we had on the WhereNet escrow. In addition to lowering operating expenses, it reduced our tax burden in the quarter by 2.6 million, since the settlement is (inaudible) reduction in the purchase price for tax purposes and is not taxable. Next we also recorded a $1.1 million gain on the sale leaseback of our facility in Camarilla, California, as we adjust our business to an outsourcing model for printers. Profitability to business remained high. For the three-month period, EBITDAR margin was 22.3%, which was comparable to the 22.4% margin last year. Specialty Printing group EBITDAR margin was a solid 27%. Expenses for 123R totaled 3.8 million versus 4.8 million last year. Exit costs amounted to $2.6 million, relating primarily to our outsourcing activities.

In addition, we incurred $1.7 million integration expenses primarily related to severance as we merged duplicate functions to optimize resources across Enterprise Solutions group. Investment income is another area with two one-time items. One, a writedown of $4.4 million for the impairment of our investment in Fannie Mae auction rate preferred securities; and two, a $2.9 million writeoff of a long-term investment the Company entered into in 2002. On the impairment, many of you may recall that beginning a year ago, we began to reduce risk in our investment portfolio. These actions included exiting the small amount of hedge fund investments we had, as well as selling auction rate securities. We have liquidated a substantial portion of them, but not all. The impairment charge incurred in conjunction with the Fannie Mae going into conservatorship in the third quarter. Other than Fannie Mae preferreds, which were written down by 93%, we hold 7.7 in other auction rate securities. We are comfortable with the value of the securitization 97% of which are double-A rated or better municipal, government and government agency securities.

Excluding one time charges, the investment portfolio had an annualized return of 3.7%. Diluted earnings per share came in at $0.40, or -- on 64.7 million average shares. Exit costs and integration expenses reduced diluted earnings by $0.04. We ended the quarter with 63.3 million shares outstanding. We had a 7.1 million sequential decline in net receivables, and brought down day sales outstanding from 55 days at the end of the second quarter to 54 days. The increase in inventories was primarily due to the transition of printer manufacturing to Jabil. We ended the quarter with $247 million in cash and investments. During the quarter, we used entire 3 million share authorization with a repurchase of 1.9 million shares of Zebra common stock. As we announced today, the Board gave authorization to buy up to an additional 5 million shares of Zebra stock. This year so far, we have used $107 million for stock buybacks.

Over the past two years, we've reduced number of shares outstanding by nearly 8 million. Our fourth quarter guidance is appropriately conservative given current conditions, FX rates, our deal pipeline and channel activity. For the quarter, we are forecasting sales of 225 to 241 million, with Specialty Printing group sales of 203 to 215 million, and Enterprise Solution group sales of 22 to 26 million. This forecast incorporates an average U.S. dollar Euro exchange rate of 1.28, which is a huge swing from the average 1.46 for both 3Q '08 and the December 2007 quarter. Hedging activity will have immaterial impact on quarterly results. The weakening of the Euro against the dollar is expected to affect sales by 2.5% compared with 3Q '08 results, which flows through to the bottom line. Without this impact, EPS would be $0.05 higher.

Earnings are expected in the range of $0.30 to $0.38 per share. Our forecast assumes gross margin in the range of 46 to 48% and GAAP operating expenses of 76 to $80 million. We're estimating exit cost integration expense to total $2.8 million. The income tax will be 34.5%. That concludes my formal remarks. Thank you for your attention. Now, here is Anders for some concluding comments.

Thank you, Mike. We will continue to use our financial strength to extend our global leadership by building our business across customers, geographies and solutions. This diversity across multiple dimensions gives Zebra resilience during challenging types. We will prudently manage our business and adapt to changing market conditions. Programs are underway to review the products in our portfolio to ensure they meet both our customers' needs and our profitability requirements. For example, we will stop producing photo printers, a business we began four years ago. This product generates revenue, but little profit. And since this is an OEM product for a single customer, our exit will have no impact on our channel.

We continue to makes steady progress on our ERP implementation. To date, we are on plan and within budget. In fact, we just reached a major milestone as we began implementing Phase 2 of this project. We are taking a low risk approach to this multi-year project, which will lower costs by streamlining business processes and deliver multiple benefits to the Company and our customers. Our outsourcing project is also on target to deliver 25 to $30 million in cost savings in 2010. As of today, we have moved 40% of our production capacity to Jabil for delivering the same high quality as our customers have come to expect from Zebra. This number will rise significantly over the next several quarters. In the near term, we will focus on high return activities that are right for our business and our customers. Looking ahead into 2009, we will continue to invest in activities that deliver sustainable returns, including geographic expansion, which continues to be a core area of investment and growth, driving double digit growth year-over-year for the last several quarters. We expect to place small resources into the brick countries of Brazil, Russia, India and China, plus Eastern Europe and Turkey.

We will also invest in new product development and innovation, introducing new products to meet more customer needs. Most recently, we previewed our new re-transfer card printer, which we will be introducing early next year. Initial reports from our customers tell us that they are excited about this new level of performance that this product will deliver. Because Zebra has a strong focus on our customers and improving their business performance, I am confident that our strategy will pay off. Zebra has the financial strength, industry leadership and fiscal discipline to navigate through these challenging times. Prudent investments in geographic expansion and new product development will enable Zebra to extend its leadership and build value for our shareholders over the long term. Thank you for listening. We would now be happy to take your questions.

Thank you. (OPERATOR INSTRUCTIONS). I'd like to hand it back to Mr. Fox for some comments.

Thank you. Just to keep the Q&A moving along, we would like to -- we'd appreciate it if you could keep your questions to one question and one follow-up. If you have additional questions, feel free to get back in the queue. So with that, let's open it up for some Q&A.

Our first question comes from the line of Reik -- from Reik Read with Robert Baird. Please proceed with your question.

It's always very confusing. (LAUGHTER). Good morning. Could you guys maybe -- Mike, as part of your comments, you talked a little bit about some of the markets, so maybe you could expand and talk about just maybe the retail, the industrial segment and the transportation logistics, what you are seeing from a macro perspective; and then, how Zebra might be able to fit into those markets in the next, say, several quarters with the introductions of new solutions or new products or new customers or new channels. Anything along those lines would be real helpful.

I will take that, I think first. This is Anders. We've talked about the weakness in the retail segment for the last four quarters on our calls. And we have been also talking about the weakness in Europe since Q2. Now I think the investments we've made over the last several years to diversify the business have made us more robust, as we can offset weakness in any one segment with strength in others. Now specifically to the retail segment, I think we have been able to offset some of the weakness we seen with the largest U.S. reseller by penetrating deeper into that vertical, and also expanding more internationally. More recently, we've also introduced our Kiosk printers into retail, and we have basically doubled the revenues from Kiosk printers in retail. We are certainly still seeing weakness in that sector, but we have been able to offset some of that. Health care was a good vertical for us in the past quarter, with strong growth. Also our mobile work force did well for us. The manufacturing sector was -- met expectations, but wasn't particularly weak, but also did not exhibit any strength.

Okay, and then on the ESG side of things with respect to the integration, can you expand a little bit, Anders, on your comments to talk about how you are trying to bring reseller system integrators into the fold, and what is the status of the sales force? Do you have a unified sales force now?

Yes, I think we have -- we have made good progress on integration, particularly here in the third quarter. And I will go through integration a bit more realistically. We have a three phase approach. The first phase is to really to do the structural or the organizational integration; and that was really to integrate four companies into one business unit, and we have come a long way by now. I think we were largely done, actually, at the end of Q3. We now have a common organization for strategy, for product management, for our services organization, and we have aligned our sales organization along our targeted verticals. When we get the ERP system implemented, we will be able to see some further integration of our shared services and supply chain organizations also.

The second phase of the integration will be -- or is -- that's really with a we are in the middle of right now. That is to integrate more of the ESG's product portfolio into the various vertical markets that we are serving. And some examples of how we made progress here, or how our customers are responding to this, I mentioned in my prepared remarks that we had a first order for really a combined solution from both ESG and from [SVG], there was an order to a large U.S. government agency that included -- (inaudible) Prevail, MSSI products, as well as (inaudible) printers. And we have also largely completed the road map in the development for integrating WhereNet and our Marine Terminal solutions, the Terminal operating system solutions. The third phase of the integration is to really build stronger ESG capabilities where we can leverage the ESG channel partners more fully, and that's something we already have on the agenda for 2009.

Great. Thank you.

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

Good morning.

Hi, Ajit.

Couple of quick questions. I think the first is, just looking at the operating expense structure and profitability of the enterprise solution group, I take it that the vast improvement in the operating profitability is primarily due to the one-times -- so WhereNet as well as some other one-times?

Yes. You got your hand on it.

Right. So when you are looking at that 30% negative operating margin, that is about 6% now. So on an overall basis, you're actually looking at a business model that is still very dependent on scaling. You're not looking at any cost cutting to get any margin improvement as far as the ESG group goes, right? It's still an investment in growth rather than a reach profitability more any time soon, is that fair assumption?

Yes, I think -- let me just put it this way. I think one of the things, as part of the integration process that Anders was talking about, as we put these organizations together, we want to make sure we're focused on the right things so we don't have people doing -- more than one person doing the same thing. So that's part of the integration. But we're still investing for the growth, and that's what we are doing.

Right. And would you say that the -- in terms of the integration, the vast majority of the cost and streamlining and position mapping of the integration is behind us? Or do you think there is still some potential over there for redundancies to be eliminated?

We will continue to make prudent investments in new product development for the long term and look at how we can make the organization as efficient as we possibly can. It's fair to say that the real driver for profitability will be growth and scale. But I think we made good progress over the last several quarters in establishing ourselves with our customers, proving the value proposition for these things. We also -- we did implement a pretty substantial cost reduction in the third quarter. And for us, getting ESG to profitability is an absolute top priority. No question about it. But with current economic conditions, it makes it a little harder to predict.

Right. But looking forward, can we still expect the expenses on a sequential base? I know in year over year in Europe the acquisition is a little difficult to model. But can we still expect the expenses even -- accounting for the WhereNet, one-times, et cetera, including that, to keep rising over the next several quarters? Or do we expect them to stay sort of flat?

We expect them to hold them flat.

Okay, so you expect the expenses to be held flat and the revenues to keep rising?

Hey, Ajit, one question, one follow-up.

Okay. This was primarily with one issue. The other one is just the card printers, you've talked about the synergies that you expected with the rest of your channel and the fact that you are using two completely different models of distributing that; and I think of two or three quarters ago there is initiative to ensure that you get better synergies across that. Could you give us some color as to how that is working right now?

In my prepared remarks I talked about the card having had its best quarter ever. And that was really as a direct result of the activities we did in the beginning of the year, by consolidating the sales and marketing organizations of our card business into our Specialty Printing groups and also on integrating the supply chain. Now we have -- we were able to incorporate the card group into our partners' First Channel program, and that helped us add 30 new resellers to our card business. And also we were able to then leverage a much larger global sales force to get better reach and see more opportunities.

So I guess still quite early in that process -- there's still tremendous growth left over there?

We are coming out with a new printer next year, a new re-transfer printer which we are very excited about and we hope that -- we expect that to generate good business.

Okay, thank you.

Okay, next question.

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

Yes, good morning, guys.

Good morning.

Good morning.

Of the cash investments that you currently hold, I wonder if you could break that down for us between strictly cash, money market funds or treasuries and everything else -- or however else you want to break it out, just so we can get a better feeling on what is there.

Yes, we -- first of all, I think I mentioned -- this is Mike -- that 97% of our investments are Double-A rated or above. Besides the Fannie Mae security, which we wrote down, there is really nothing below Single-A. And we have, I would say, as I'm looking across this, probably about two-thirds of our investment -- a little more than two-thirds are municipal bonds, and then the rest are agencies and government-backed bonds. Actually, I misstated here. No, that's right. About two-thirds of our investments are municipal bonds.

Okay. And secondarily, I think on the last call you had talked about China with some impact from the Olympics and so forth. In the quarter, how did China do on a growth basis?

China did very well for us, actually. We probably saw little less effect of the Olympics than we expected. Greater China is now our third largest revenue generating country -- in the third quarter was the third largest generating country.

Okay, great. Thanks.

Our next question comes from the line of Chris Quilty with Raymond James & Associates. Please proceed with your question.

Good morning, gentlemen. I was hoping you that you might be able to give us a little bit more direction with regard to the sort of anticipated revenue break down, just specifically for Q4 between ESG and SPG.

Well, I think if we go back to the call, we quoted that SPG would have between -- let me just pull my notes out here.

I may have missed it.

Yes, I'm sorry about that. So SPG we said was between 203 and 215 million, and the Enterprise Solutions group was between 22 and 26. So in total, we are saying 225 to 241 million.

Okay. And the key driver when you look at the enterprise solution group is still Navis, or are you expecting to see some year-over-year growth in the WhereNet business?

So Navis will continue to be the largest single unit, but WhereNet had nice growth in Q3.

Okay. And is that primarily because the pick up in the port terminal business relative to the traditional exposure to automotive?

N, this was primarily driven by our realtime location systems and a new software package that we developed that we call Material Flow: Replenishment solution that goes into the automotive side. But we have been exposed, though, to some of the vagrancies of the automotive industry now, where four of our high confidence deals were for factories that actually are getting shut down. So we are redirecting a lot of our marketing activities for this solution into more industrial manufacturing and government opportunities.

So as you describe that product, it sounds like the old (inaudible) system that you used to have. Does that mean this is basically an upgrade to what existed and you're getting upgrade business, or are these establishing new customers?

Both. So it's an expanded solution from what we've had before, with much greater intelligence and you are able -- our customers are able to drive the efficiencies of their supply chain much further back into their suppliers. And it eliminates stockouts and it reduces inventory. So it's both an upgrade from what we have had, and it gives us ability to bring to new customers.

All right. In the spirit of Ed Kaplan, I will stick to my one question and circle back.

Our next question comes from the line of Anthony Kure with KeyBanc. Please proceed with your question.

Good morning, I'm just trying to get some color on the mechanics surrounding the claim against escrow, that $5.3 million offset to operating expenses. Sounds like there was an escrow account set up. I'm looking at your "K" from 2007, along -- associated with the WhereNet purchase, which makes sense. But when this was established, how was it treated on the operating income line above the line and relative to how it's treated now? Can you just give me some color on that?

The way this thing works is, because it was settled after the one-year window of the acquisition, that goes to your P&L; and so at this point it was sitting in the -- effectively in a balance sheet, and now that this has been recognized -- as the purchase it has to flow through the P&L, which is what is reflected in the -- in our income statement. Interestingly enough, so basically from a tax standpoint, though, those proceeds are treated as a return on investments so it doesn't get taxed a permanent tax difference.

Okay. And then it looks like the escrow account was $13.6 million. Is -- are there -- is the balance still left to be collected, or is that factored into your revenue guidance? Or I'm sorry, your EPS guidance? How will that work with the remainder?

We have now reached a final settlement with the WhereNet shareholders.

Okay, so no more impact from something like this?

No more impact.

No.

Okay, thank you.

Our next question comes from the line of Timothy Robinson with [Boyant] Advisers. Please proceed with your question.

Good morning. Thanks for taking my call. I had a quick housekeeping question and then a follow-up. First of all, what is the balance of the inventory obsolescence reserve at the end of the quarter?

Inventory obsolescence, I don't have that number with me. I can get back to you, if that's okay.

Okay, yes, I can just follow up after the call.

Okay.

And lastly, I was just trying to get some more color into the increase in the receivables year-over-year? What is the average ESG segment DSO versus SBG segment, too? And lastly, have you named a permanent replacement for the head of that segment yet?

The DSO for ESG business is longer. So one of the things you will notice as you look at our business year-over-year that our receivables days is longer than it was, let's say, a year ago. Part of that is because of the type of customers that the new business brings relative to the kind of -- the business that we have on the Specialty Printing groups. So part of that increase is a big increase from the acquisitions that happened.

Okay. Is there a ballpark number there? Is it 90 days, is it 70 days versus 50 days?

It's more in the 100 days right now --

Okay.

-- for ESG.

Great. And legacy business is about 50 to 60, I believe, correct?

Yes, between 50 and 60, in that ballpark.

Okay, treat. And have you named a permanent replacement for the head of that segment yet?

No, we started a search in the beginning of August. And we are in the middle of that now, and our expectation is that we will name somebody by the end of this year.

Okay. Great. Thank you very much for taking my calls.

Our next question comes from the line of [Cary Kelley] with Ironworks Capital. Please proceed with your question.

Hi, guys. I guess a bit of a follow-up on the inventory question. It's ticked up a bit here, at least more than I expected. Can you explain a little bit behind what's behind the increase in inventories, and maybe what you might be expecting that to be going forward? And then I have a follow-up on your Cap Ex. Have your expectations changed at all given the current macro environment? Thanks.

So the reason the inventories has gone up is because of our outsourcing program. So as we are moving more of our production lines to China, we are still manufacturing the same products in the U.S. as we ramp them up in China. So that means that we will have some extra inventory, or parts inventory. And then as part of the outsourcing to Jabil, we will have a more finished goods inventory in container ships coming back to the US. So the entire difference is really made up of the transition to Jabil in our outsourcing. We would expect that it will continue to be at elevated levels through the first quarter, and after that we would expect it to come back down to our normal -- what we have seen as normal historic levels.

Okay. So, I mean, given, though, that you will have, I guess, more product shipping in these containers, that that alone won't cause your inventory to stay high? You will be able to bring it back into normal levels?

So what happens is that we have -- we take possession of the product when it's finished from Jabil for the most part. So we don't -- we wouldn't have as much parts inventory at that point, but we will have more finished goods inventory instead.

Okay. Great. Thanks. And then on the Cap Ex?

What was the question on Cap Ex?

I guess my follow-up was what -- given the kind of lowered -- I guess lower revenue expectations in the macro environment that we are going through here, has that caused a change in what your Cap Ex --

Our Cap Ex requirements are generally very low.

Yes, but this year you are seeing the Cap Ex for the ERP in our --

Yes, it's a higher Cap Ex this year, and that will run through -- at a lower rate, but it is -- still continue to be investments in our ERP program for next year.

Okay. Thank you.

Our next question is a follow-up question from the line of Chris Quilty with Raymond James & Associates. Please proceed with your question.

Thanks, gentlemen. A bit of a nebulous question here -- and I know the indirect channel may not give you tremendous insight into the actual integrators and reseller -- but could you give us a sense of where your end customers stand in terms of the financial crisis and how they are dealing with it, and whether major projects or small projects are being put on hold due to the current economic conditions?

You know, from a perspective of where the end customer stands, there's obviously a lots of different customers. And I think I will answer it by -- in two ways, I think. First, the feedback we have from our channel partners, particularly from the U.S., has been that they are seeing some softness, but not a material drop off or softness. But they are obviously more cautious about the outlook, which is perfected in our guidance for the fourth quarter. But we feel good about our position in that we are a leader in the industry and that our solutions really enable our customers to generate very quick ROIs and reduce their Op Ex. So we should be somewhat less exposed to the vagrancies of the economy from that perspective.

Okay. And with -- specifically on retail channel, have you gotten any feedback on -- obviously the strong impact that the reseller have seen that there is going to be a big slowdown?

We haven't seen or -- we have been -- actually, our retailer's business for Q4 looked to be in line with our expectation in North America.

Okay.

We've seen some strengthening by some of the larger ones in this quarter.

Very good. Thank you.

Our next question is a follow-up question from the line of Reik Reed with Robert W. Baird. Please proceed with your question.

Anders, I think you talked a little bit about this as part of your remarks. But maybe expand -- the big balance sheet that you guys have is going to be a large benefit if we go into a protracted global recession. How do you use that balance sheet to take advantage and gain over your competitors?

Yes, we are trying to balance, obviously, the requirement for short-term -- managing our margins in the short term, with also our long term profitability -- or long-term growth objectives. We see a benefit to us in that we have the ability to continue to invest in attractive opportunities to grow, to innovate and develop new products, and also in our sales channels and new products. So the -- and when it comes to also the use of cash from a prospective where to invest it, we see that (inaudible) at this stage, really, one of the most attractive investment opportunities out there. So we continue to continue to acquire our shares in the market, as we have for the last 12 months.

Okay, and then can you just talk a little bit about the RFID space, and the planned level of investment there. I mean, I know that you -- you know, if I separate ESG out as more of the active side, what's happening on the passive side?

Passive RFID has been up slightly this year.

But can you talk a little bit about -- I mean, just given where that market is, what's is the planned level of investment?

We have a leading position in that market. We have, we believe, at least the same level of market share, if not higher, as we have in our traditional printer side. And we will continue to make sure we nurture that and maintain that. The overall investment level for next year, we are still working through our 2009 plans. And so I'd say it's a little too early to say exactly what it will look like.

Okay. Thank you.

Our next question comes from the line of Timothy Robinson -- which is a follow-up question. Please proceed with your question.

Hi, guys. Thanks for taking me on again. I just had a follow-up on the ESG segment collection periods. You said that right now they are longer than 100 days. Do you have an internal goal for where you would like those to be? Is it close to that? Or is it with the integration? Is this substantially higher than you expect it to be? Just looking for a little bit more color there.

Well, it's about 100 days. And the point is, is that we will have longer days on that, but we expect that they will improve over time, and we are continuing to focus on those. I think that's part of the activities I would say is in the integration side, is to follow up on improving on those collections. So we expect those to improve. But they won't be to the levels that we have on the SPG side in the long run.

Okay, great. Well, thank you very much.

Yes.

There are no further questions in the queue at this time. I would like to hand it back over to management.

Okay, well thank you very much.

Thank you very much for calling in and for your questions; and obviously, if you have any follow-ons, we will be around for the next -- here in the office today and for the rest of the week. Our next call is scheduled for February 17, and we will report on our Q4 results.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.