斑馬技術公司 (ZBRA) 2008 Q4 法說會逐字稿

Good morning and welcome to the Zebra Technologies 2008 fourth quarter earnings release conference call. Joining us from Zebra Technologies are Anders Gustafsson, Chief Executive Officer; Mike Smiley, Chief Financial Officer; Mike Terzich, Senior Vice President, Global Sales and Marketing, SPS; and Doug Fox, Vice President, investor relations. All lines will be in a listen-only mode until after today's presentation. (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 and good morning. Thank you for joining us today. Certain statements we make on this call will relate to future events or circumstances and therefore will be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Words such as expect, believe, and anticipate are a few examples of words identifying a forward-looking statement. Forward-looking information is subject to various risks and uncertainties, which could significantly affect expected results. Risk factors were noted in the news release 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 opening remarks.

Thank you, Doug and good morning, everyone. Thank you for joining us. Here in the room with me is Mike Smiley, our CFO and Mike Terzich, our SVP of Global Sales and Marketing for our Specialty Printing Group. Today, Zebra reported strong fourth quarter results. Our sales were $233 million, well within our forecasted range, demonstrating solid performance in today's challenging business environment. Zebra also reduced operating costs and improved control over working capital. Our financial strength and flexibility continue to play a significant role in our ability to react decisively to changes in the business environment. This further solidifies our position as an industry leader.

As of December 31st we had $225 million in cash and investments with no debt and we generated $99 million in free cash flow for the year. Difficult economic conditions impacted most companies in the quarter, Zebra included. As you saw in our press release, we took $157 million in total impairment charges during the quarter. The majority of these charges are related to weakness in the markets served by awareness, which has been particularly hard hit over the last six months. Charges also include write-downs in the value of prepaid RFID licenses and other intellectual property. Our operating results were relatively strong, due in large part to increased business diversity. Some of our targeted verticals, including healthcare and government, performed well, while others, such as manufacturing, experienced a global slowdown.

In response to changing business conditions we adop -- adapted our sales and marketing strategies to ensure we remain successful at further penetrating attractive segments and gaining market share. We continued to leverage our strong cash flow by making prudent investments in our business and returning excess cash to shareholders through our share repurchase program. During the quarter we repurchased 2.6 million shares. For the year we deployed $158 million in stock buybacks to reduce the number of shares outstanding by six million, or about 8%. During 2008 we continued to strike the appropriate balance between preserving near-material profitability and positioning Zebra for long-term growth and continued market leadership.

On the cost side, during the second half of 2008 we took several actions to lower annual operating expenses by approximately $20 million on a run-rate basis. During this time we reduced headcount by over 120. Additionally, we reduced discretionary spend in areas such as travel and entertainment and marketing activities. We will continue to focus on executing our manufacturing outsourcing program, which will reduce our manufacturing costs by $25 million to $30 million in 2010 compared to our cost structure associated with in-house manufacturing. We will also complete our multi-year investment in a new ERP system, which remains on budget and on track. This will help us improve our customer service levels and improve organizational efficiencies.

We have taken steps in 2009 to further reduce operating expense by $25 million from current levels, including an $8 million reduction in amortization expense. This reduction will be partially offset by $10 million in higher IT costs associated with the ERP implementation and the full bonus accrual, netting to a $15 million reduction in annual operating expense in 2009. These actions demonstrate our commitment to reduce costs and realize increased efficiencies across our business, which is important in this environment. We will continue, however, to invest in opportunities to improve our competitive positioning.

We have identified and are focused on activities that will deliver the highest risk-adjusted returns. These include: First, continuing to develop important new products that help customers reduce their operating costs by improving supply chain visibility, customer service and security; second, enhancing our channel partner programs, we are proud that Zebra was recently named one of the best channel vendors in a survey in 1,600 VARs in Business Solutions Magazine; third, targeting customers in healthcare and government in our Specialty Printing Group; fourth, deepening our strongest customer relationships in our Enterprise Solutions Group by cross-selling and targeting adjacent industries where our solutions make good business sense; and finally, buying back our own shares because at this time we clearly view share repurchases as the best risk-adjusted investment alternative.

I'd now like to review some fourth quarter highlights. Our Zebra Specialty Printing Group, or SPG, performed well during Q4. Our results benefited from increased business diversity across partners, customers, geographies and solutions. Highlights include: Our North America region had its best performance of the year in Q4; we increased our volume of large deals to key accounts in small package delivery, government and retail; and our installed base generated strong sales of aftermarket parts, supplies and follow-on business. Mobile desktop and kiosk printers performed well in the fourth quarter, as customers continued to implement solutions to improve employee and operational efficiency. During the quarter we extended product leadership with our introduction of our P4T printer, the world's first RFID-enabled mobile thermal transfer printer. We also expanded our mobile printer product line with the introduction of the the EM220 for easy, economical receipt printing, as well as a new kiosk print station for easy integration of Zebra printers into self-service locations.

We were also pleased with the performance of our card products. The consolidation of our card and bar code businesses in 2008 has delivered stronger channel relationships. Our Zebra Partners First program now includes close to 100 new CPS channel partners worldwide. Our stronger product line and our global channel makes us optimistic about future growth for card. The depth and breadth of our SPG product line also helped us penetrate vertical markets more closely -- more deeply. For the year healthcare was up 21% in North America. Our HC100 direct thermal risk wristband printer continued to gain traction in this attractive space. During the quarter, we helped hospitals increase patient safety with the introduction of a new, more comfortable wristband, as well as internationally compliant labels for blood bags. We further benefited from our diverse retail customer base this quarter. We saw our larger customers increase invest to improve in-store productivity and reduce costs.

Let me now provide an update on Zebra Enterprise Solutions Group, or ESG. ESG's financial performance for 2008 has not met our expectations and we realize it has fallen short of yours, as well. We also recognized that the impairment charge we took this quarter reinforces the urgency we must bring to generate the appropriate level of return from this business. That said, ESG did end the fourth quarter with the highest level of total bookings for the year and a solid backlog. We made good progress this quarter and strongly believe that our integration efforts and our plan position us well to unlock the full value of this segment. We are pleased to start the year with a new general manager for ESG. Bill Walsh comes to Zebra with more than 20 years of leadership experience in high-growth enterprise solutions companies. He brings extensive integration experience and the right combination of skills in business development, technology and international markets to maximize the success of this business.

We continue to view the value proposition of ESG and its synergies with our core SPG business as compelling. ESG makes Zebra a more important strategic business partner through industry-leading asset tracking and management technologies, high-value software products and a comprehensive solutions set. ESG is well aligned with Zebra's core brand attributes and provides deep expertise into attractive industries. In addition, it gives us access to high-level decision makers in the world's largest enterprises. Recent successes during the quarter provide evidence of our progress in realizing these important synergies. These include in Q4, working with a long-standing SPG partner who sold our awareness, material flow and replenishment solutions to a major truck manufacturer. We also sold awareness and prevail solutions into an important existing Navis customer. We sold the Navis system into a non-marine worldwide distributor, which is using the software for yard and distribution center management at six regional hubs in North America. And we won several aviation deals in the Middle East, effectively doubling our global install base in aviation.

In addition, as we communicated last year, we have been executing on a comprehensive three-phase strategy, to fully integrate ESG. During the fourth quarter we achieved the following milestones. We completed the heavy-lifting stage of our strategy, simplifying and streamlining our infrastructure and back office support functions. We completed the year with full Sox compliance within ESG. Second, we aligned our sales teams along vertical markets to sell the entire suite of ESG solutions. And last, but not least, we lowered ESG's cost structure by $10 million per quarter. As a result, ESG should be able to breakeven on earnings before interest, taxes, depreciation and amortization, and other non-recurring items at approximately $23 million in quarterly sales. This is an important first step towards making ESG a meaningful contributor to our profitability. With the appropriate foundation in place we are now focused on integrating ESG's product portfolio and leveraging these products to create broader solutions in the industries we serve. In addition, we are accelerating the development of partner programs and creating tighter alignment with our SPG segments. The ESG team has committed to leveraging our assets to drive higher sales and market leadership.

Let me share with you several important milestones we expect to achieve in 2009. First, signing up 20 new channel partners in 2009, of which 25% will be combined SPG partners. Second, deploying 25 systems where we cross-sell multiple platforms, such as Proveo into maritime and Navis into AIMG. Third, installing at least 50 solutions with customers around the world. This includes upgrades, as it indicates a significant investment for our customers during a tough year. Giving these goals and the actions taken to reduce ESG's breakeven we have laid the groundwork for ESG to be roughly EBITDA breakeven for 2009 given current market conditions. I am confident that Bill and his team will leverage ESG's unique position of strength as the only consolidate and well-capitalized Company in its space. This unique position gives our customers confidence that they have a partner capable of serving their needs well into the future.

In summary, Zebra remains well positioned to extend its industry leadership. The breadth of our solutions improve our customers' business performance by enabling them to deploy their assets smarter. Our clear brand leadership, diverse revenue base and comprehensive go-to-market channels enables us to extend industry leadership and build stronger customer relationships. Our financial strength and global presence give customers and partners the confidence that Zebra will be there to meet their needs well into the future, and our knowledgeable and dedicated employees give me the confidence that Zebra will continue to succeed. As we leverage our leadership position and compelling value proposition to customers we remain committed to enhancing the value of our shareholders' investments in Zebra. We continue to strike the appropriate balance between preserving near-term profitability and positioning Zebra for long-term growth and continued industry leadership. By adapting to changing business conditions Zebra will maximize return for investors.

I'd now like to turn the call over to our CFO, Mike Smiley, to provide a detailed review of fourth quarter results and guidance for the first quarter of 2009. After Mike's remarks I'll return for some closing comments on our outlook.

Thank you, Anders. Before we go through the numbers let me highlight the key financial drivers for the quarter. We maintained strong cash flow and operating earnings. Sales performance came from strength in key account sales to large customers in North America and from our acquired businesses in ESG. Gross margin was predominantly affected by changes in foreign exchange rates and product mix. Additional SG&A expenditures from the ESG acquisitions was offset by cost reductions in the second half of 2008. And we recorded a $157 million in non-ca -- in a non-cash impairment charge.

Let's turn to sales first. For the quarter sales were comparable with the year ago, declining only 0.4%. On an organic basis, sales were down 2.8%, with sales from our Specialty Printer Group down a modest 3.1%. Our Enterprise Solutions Group contributed $5.7 million to fourth quarter sales, driven by recent acquisitions. For the quarter, ESG provided $1.2 million in services related to lost purchased accounting revenue. Under the accounting rules we are delivering the services for which we are obligated from the Navis acquisition but do not book revenue against them. We have about $2.6 million left to deliver.

Let's take a look at sales by product line. Hardware sales declined 7.8% to $163.5 million from last year and represented 70.3% of total sales. We experienced continued strength in mobile printers for ongoing deployments by large retail customers for in-store solutions. Desktop printer sales also held up relatively well with shipments to small package delivery customers. We had weakness in our high-end and mid-range lines, which put some downward pressure on gross margins, reflecting the weakness in global manufacturing. We expect this trend to continue into Q1. The percentage of printer sales for new printers was held up well at 19%. We shipped a record 249,900 printers in the fourth quarter. Average unit price of $538 was down from $600 a year ago because of foreign exchange and product mix. Supply sales of $40.9 million were off a modest 1.7%, and comprised 17.6% of total sales. Service and software revenue increased 85.3% to offset the declines in hardware and supplies sales. These higher margin pieces of our business accounted for 11.2% of total sales.

In North America sales grew 3.6% to $112 million. Diversity of our business across verticals and customers clearly benefited us during the quarter. In North America SPG had its strongest quarter of the year with key accounts, which offset lower demand in the channel. In addition to shipments to retailers and small package delivery, we also experienced strong sales in health -- into healthcare, government and mobile workforce. Going forward we see further opportunities in these sectors. The strength and diversity of Zebra's product line is enabling us to win more business, especially in this difficult operating environment. International sales were off 3.9% for the quarter. Sales to customers in Latin America were up 15.7% and Asia-Pacific was up 26.3%, countered by a 12.3% decline in EMEA sales. Excluding the effect of foreign exchange and sales by the Enterprise Solutions Group, EMEA sales declined about 11%. The hardest hit sub-region continued to be the UK. Still within this environment, Zebra continued to win important new business in targeted verticals.

During the quarter we closed three deals in postal, plus others in healthcare and retail. Consolidated gross profit was 47.7% compared with 48.5% a year ago. Specialty Printing Group gross margin declined to 46.2% from 48.5% on significant strengthening of the dollar against the Euro. On a year-over-year basis, the dollar decreased 9.1% in value versus the Euro, which resulted in a $6.4 million negative impact on our gross profit. This shift in product mix -- the shift in product mix, particularly with lower sales of tabletop printers, also impacted our profitability. The change was partially offset by growth in higher-margin aftermarket sales. Gross margin for Enterprise Solution Group of 61.5% was up from 48.7% a year ago. During the quarter we benefited from improved profitability for services. In addition, a reversal of a contract loss reserve, partially offset by an inventory adjustment, had a $1.8 million favorable impact on gross margin for the quarter. Looking to the first quarter of 2009 and beyond, we expect a normalized gross margin for the ESG business in the range of 58% to 62%.

Let's now turn to operating expenses. Fourth quarter SG&A was down $5 million from the prior year. This change includes an additional $4 million from ESG's acquisitions late in 2007 offset by cost reductions of $9 million, primarily in the second half of the year in 2008. R&D increased $5 million from the prior year. This increase primarily came from R&D associated with the ESG acquisition. Amortization also increased $1.4 million, again due to ESG. As Anders mentioned, annual operating expense came down roughly $20 million on a run-rate basis in the second half of 2008. Most of these reductions came in the form of wages, T&E, marketing and professional fees. In total headcount was reduced by 120 in the second half of 2008; 40 in the third quarter and 80 late in the fourth quarter.

The third-quarter reductions were primarily associated with services and effected -- and affect cost of goods sold. The fourth quarter includes a $158 million non-cash asset impairment charge, which resulted from the testing we did in response to current business conditions. A significant majority of the charges relates to ESG's legacy aware net business, which is affected meaningfully by declines in the automotive sector. Simply put, the value of the intangible assets in our books didn't match the current or expected business in this area. The charges also include write-downs of patents and other intellectual property, including prepaid RFID licenses associated with the ESG business. The impairment charge will result in a reduction in amortization of approximately $8 million in 2009.

For the quarter, the investment portfolio had an annualized return of 3.8%. On an absolute basis, investment income was down because of our deployment of cash to buy back stock. The net loss per share came in at $1.88 or -- on 62.6 million average shares. The impairment charges had a $2.20 per share impact. Exit costs and integration expenses reduced EPS by $0.08 per share. We ended the quarter and the year with 60.9 million shares outstanding, down 8% from the number of shares that were outstanding at the end of 2007. We did a good job managing working capital during the quarter. Net receivables fell $19.3 million to $152.7 million, the lowest level of the year. Days outstanding were a comfortable 60 days. Inventories moved down by $6 million and we ended the quarter with $225 million cash and investments.

During the quarter we made significant progress on the five million share buyback authorization. For the period we bought back 2.6 million shares at an average price of just over $19 per share. As Anders mentioned we used $157 million to repurchase six million shares in 2008. We also announced today that the board authorized a purchase of another three million shares of common stock.

Before I talk about our expectations for Q1, I want to spend a few minutes discussing our capital allocation policy and strategy going forward. In the near term our highest priority is to maintain sufficient liquidity and balance sheet strength to ensure we can support our business objectives under any economic scenario. In doing so we maintain a longer-term view of our business, as we continue to pursue activities to extend industry leadership and build shareholder value. That said, because of the consistency of our cash flow and low capital requirements we can also continue to buy back our stock at attractive prices. Today, share repurchases stand as our highest return on investment alternative on a risk-adjusted basis.

In addition, given the current market environment, we will not make more acquisitions for the ESG business before we have demonstrated the ability to generate adequate returns with the assets we have in place today. Over the long term we intend to move to a balanced capital allocation model. Based on our analysis of future resource requirements and investment alternatives, we will use approximately 25% of our cash to flow -- cash flow to fund working capital and capital expenditure needs. We expect to use remaining 75% of cash flow equally between returning cash to shareholders through share repurchases and other investments that provide the highest risk-adjustment return.

This capital allocation matches closely with how we have invested our cash over the last five years. We don't expect to follow this allocation policy precisely every year, as our decisions will be dictated by current business conditions and available investment alternatives. However, we believe our policy serves as a long-term aspirational framework for how we intend on deploying our capital. For the first quarter we expect to continue to buy back shares at rates similar to our activities in 2008. We will be more aggressive at lower valuations.

Now let's turn -- now let's look at our first quarter forecast. For 2009 we are taking some cost actions, such as salary freezes and decreasing our 401(k) plan match, which will meaningfully affect our 2009 earnings. For the first quarter we are forecasting sales of $195 million to $210 million. In this environment we are taking an appropriately conservative approach with our guidance, based on trends we see with channel partners, key accounts and enterprise customers. This forecast consists of expectations for Zebra's Specialty Printing Group sales in the range of $175 million to $188 million and the Enterprise Solution Group sales between $20 million and 220 -- between $20 million and $22 million.

The forecast incorporates an average US dollar/Euro exchange rate of 1.3 compared with with 1.51 a year ago, which has a negative impact on operating income of $8 million, or $0.08 per share. Hedging activity will have an immaterial impact on first quarter results. GAAP earnings are expected to range -- are expected in the range of $0.11 to $0.20 per share. Our forecast assumes gross profit margin in the range of 44.5% to 46%, based on the impact of foreign exchange, product mix, and lower volumes. GAAP operating expenses are forecasted at $76 million to $79 million and reflects the $2 million of lower amortization expense. We're estimating exit costs and integration expenses to total $3 million and the income tax rate will be approximately 34.5%.

That concludes my formal remarks. Thank you for your attention and now here's Anders for some concluding comments.

Thank you, Mike. While the uncertainty in the global economy presents a challenging outlook for 2009, we have addressed areas within our control to preserve profitability and extend our industry leadership over the long term. In 2008, we took a number of key actions to prepare Zebra for the current business downturn. These include: First, taking costs out of the organization and prioritizing those projects with the most immediate and highest returns on investments; second, streamlining marketing functions to drive efficiency and a stronger global brand; third, canceling products that didn't meet our profitability targets; fourth, reducing SKUs to improve efficiency and profitability; and fifth, funding our outsourcing and ERP initiatives to lower costs, enhance business execution, and improve customer service.

During the challenging economic times all companies continue to look for ways to improve their business processes and Zebra's product solutions help them do that. The diversity of our business across partners, customers, products and geographies positions Zebra to pursue a broad range of prospects. Programs are under way to direct resources to the most promising opportunities. Card mobile and kiosk printers in healthcare, government and retail verticals stand out as among the most you attractive. Our investments in new products continue to extend the range of customer needs we can satisfy. New software tools also enhance the value proposition of Zebra products by making them easier to integrate, use and manage.

As Mike discussed, we are increasingly focused on deploying our resources in those areas that have the highest risk-adjusted returns. Our first priority is to maintain cash reserves to remain nimble in today's challenging operating environment. Given our financial strength, in the near term we will continue buying back our shares at attractive prices. In fact, the board just gave authorization to buy up to an additional three million shares of Zebra stock. To reinforce this further, we are introducing ROIC as a component in our 2009 executive incentive plan.

We have made significant progress in sizing ESG to currently available and foreseeable opportunities. We enter 2009 with a much lower cost structure and breakeven point. We have continued confidence in the long-term outlook for this business. Our balanced approach to managing our business will not only ensure we navigate the current environment, but will also position Zebra for enhanced earnings leverage when market conditions improve. Zebra is well-positioned in the current environment. Our financial strength and flexibility, industry leadership and focus on the customer all represent elements that will help drive success and the creation of shareholder value.

Thank you for listening and we will now be happy to take your questions.

Thank you. Our first question is coming from the line of Chuck Murphy of Sidoti & Company. Please go ahead with your question, sir.

Morning, guys.

Morning.

Morning.

Just wanted to touch on what you were saying at the end there, Mike. You said OpEx should be $76 million to $79 million?

Yes.

Okay. And can you just give us the break out for your sales guidance for the first quarter between SPG and ESG?

Sure. We have -- for SPG, we said $175 million, so basically $188 million, and ESG's roughly between $20 million and $22 million.

Okay, great. Thank you.

Thank you.

Our next question is coming from the line of Paul Coster of JPMorgan. Please go ahead with your question.

Thank you. Good morning. You said that the bookings were strong in the Enterprise Solutions Group, can you give us some breakdown of the backlog, whether it by geography or by industry vertical?

We had a good bookings performance in Q4. We had orders from a number of new customers, ranging from people in China, Manila, Pakistan, Middle East -- particularly for the aviation business -- and Africa, along with US and Europe. Our backlog at this stage is commensurate with what we saw going into 2008 from a plan perspective.

And sorry, just on that, the industry verticals?

I'm sorry, one more time?

What industry verticals are yielding that strong backlog for you in ESP?

Aviation is one that's done very well in Q4 for us, as a specific growth market. Maritime is still our largest signi -- market and also had good business the fourth quarter.

Okay. And my last question is, as the year progresses and you get closer to the outsourcing, how should we think about inventory and gross margins as you go through the transition year end?

I think you'll see we have a lot -- we've done a lot of transition so far but we still have a fairly significant amount to do in 2009, so we would expec -- and so what happens is you'll end up with two lines, one in the US and then one in Jaypul running at the same time and then you'll shut down the US line, so there'll be a build up of inventory on the raw materials side as we transition the inventory from the US over to China. So I'd expect a build in inventory in 2009 for a bit. And as far as gross margins go, we would expect that you'll see the improvement more meaningful in the fourth quarter than from the first quarter. And as I mentioned, just as -- I'd like to highlight, one of the big points in our margin that's affecting us is the fact that we have a meaningful shift in product mix from the high-end products to more low-end products and then again, because our volume is lower than we -- in prior years -- prior quarters, that volume also affects our margin in the first quarter.

Great, thank you.

Our next question is from the line of Brian Drab with William Blair. Please go ahead with your question.

Good morning.

Good morning.

First question, on ESG. Would you be willing to break out the portion of the impairment charge that was attributable to ESG so we can get an idea what actual operating -- run-rate operating expenses were in the quarter there?

Yes, the roughly -- of the $157 million, roughly $15 million is related to SPG and the rest is related to ESG.

Okay, great. And just one other question. You said, if I heard correctly, that currency hedging in the first quarter will have an immaterial effect and -- that's correct, right?

Yes, we -- the hedges that we have are basically close to the spot rate that we're assuming for the plan.

Okay. And then looking forward to the rest of 2009, given where your hedges are at and the current exchange rate, do you expect that you'd have an immaterial effect for the balance of the year or how should we forecast that?

We're not really giving guidance beyond this quarter.

Yes. Okay. All right, thank you very much.

Thank you. Our next question is from the line of Reik Read of Robert Baird. Please go ahead with your question.

Hey, good morning. I was wondering if you guys could just give us a comment on the direct business, which seemed to hold up pretty well for you guys, and you mentioned a number of markets -- retail, transportation, logistics -- that are fairly weak end markets right now. Is that something that, as you consider your guidance and you're looking at the year that you think that that will still hold up reasonably well or will we see that ebb back a little bit?

Right, this is Mike Terzich, I'll take that question. You're absolutely correct. In the fourth quarter the direct business performed very well and that's essentially a North America concentrated business and was in the retail and transportation space. What we're seeing is in the retail space, with discount retail there's been some roll-outs of some store refresh programs that we took advantage of in the fourth quarter and the transportation sector was along similar lines, some product refresh. As far as the course of the balance of '09 and how that's going to play out, retail -- the broader retail business, as you know, has been under some pressure and they're working off of very thin margins, so we expect that some of the productivity initiatives that they are still looking to advance, are still going to play out. But net-net, retail, we're expecting as a whole, retail will be soft as part of our '09 plan.

Okay, great. And then just, Mike, going back to the Jaypul side of things, with the duplicate lines when does that -- I guess the question is when does that cease and as you get to the end of the year, can you give us a sense of how much of that overall program has been completed in rough percentage terms?

We expect that -- as we've said, we're really pleased to be able to say that at the end of 2009 we'll many have this stuff transitioned, we are on track for that. And so at this point we're not giving any more guidance than that, but we're on track with what we said; by the end of 2009 those lines will be transferred over.

And so really what you'd expect is end of year that that duplicate line would shut down?

Oh, absolute -- yes. So by the end of the year we'll be all on one line out in China.

Okay. And -- but is that going to be a -- to your comment that the fourth quarter ought to be better, is that reflective of a number of lines slowly shutting down in a staggered format or how does that translate?

It's going to be -- yes, we don't just -- fortunately, we're not just like moving them all at one time, it will be a transition. I'll tell tell you a lot of it's in the second, third quarter type timeframe, so you'll see the fourth quarter -- if you asked me just generally the fourth quarter margin will reflect more of the benefit of outsourcing than the third quarter.

Okay, great. Thank you.

Yes.

Thank you. Our next question is from the line of Chris Quilty of Raymond James. Please go ahead with your question.

Do I have you?

Yes, yes.

Okay, good. Just checking the line there. Just a follow up, I think, Mike, you mentioned the $15 million of the goodwill intangible write-down was attributed to SPG. Which acquisition was that? Was that the sweet corn or going way back to the Atlantic?

That was primarily to passive RFID licenses that we had prepaid.

Okay, so nothing acquisition related?

No, no, no. No acquisition.

Okay. And the ESG, did I catch the number, there were $5.7 million of acquisitions -- acquisition-related revenue in the quarter?

That's additional -- that's incremental and when we look at the year-over-year change in revenue, part of that increase, $5.7 million, is due the ESG from year over year.

Got you.

Total Q4 revenue was $22.1 million.

Right. But Navis was picked up very late in the quarter and that's a business that had been running around $15 million a quarter -- $14 million, $15 million, and you picked up ostensibly another million or two from Multispectral, so fair to assume you're seeing order of magnitude 50%, 60% down even in the Navis business?

No, Navis came in at 14th of December, I guess it was, 2007. The Navis business has held up very well so far. The weakness we've seen has been really focused on the automotive and to some degree the industrial manufacturing markets.

Okay. And to shift over, the Jaypul and the outsourcing, is there -- do you have an update? I think your fourth quarter charges for restructuring were much bigger than you had projected. You had originally talked about $24 million to $26 million for the entire implementation of the strategy. Should we expect that number is now going to move up?

When we talked about the exit cost we had not envisioned -- as Anders said, we'd done some second half cost reductions, which is more of the restructuring, which is not really part of what we call the exit -- the manufacturing switchover. So those layoffs are primarily the difference between the number that we quoted in the past and our actual results. We had severance and stuff that we had to pay to affect some of those cost reductions.

Okay. But other than that, the cost or the -- you're on plan for what you had expected for the --

Yes.

-- the exit costs?

Yes, we are.

Okay. Those were the three follow ups, so I'll count that as my one question.

Thank you (LAUGHTER).

Our next question is coming from the line of Andrew Abrams of Avian Securities. Please go ahead with your question.

I wonder if you could talk about the channel a little bit. Did you increase penetration or decrease penetration into the channel during the last quarter or so? And the results that came out of the channel I'm assuming were a little weaker than they were in the previous quarter given the strength in your direct business in North America, maybe you could characterize that for us?

Yes, I think we had very strong broad-based performance in the first 11 weeks, really, of -- ten, 11 weeks of December and I think we continue to make good strides with our channels. I believe we do -- we are continuing to extend our leadership in that area. We saw some fall-off, as I said, at the end of the quarter. There are more sales out from some of our largest distributors, but that we don't see as an ongoing thing. That was more a correction from their sales out perspective in the short term. I think Mike, you can maybe add some more color.

Okay. Andrew, your question is a bit complicated. In the broadest sense, we saw further penetration and growth through the channel. This is across all geographies. Now, within North America, to Anders' point, the strength that we saw in the fourth quarter was our direct sales versus our through-channel business. But in the international markets, we continue to advance our growth. It's all principally through our channel business, so growth in the international markets comes through channel. And I think we mentioned in the prepared comments, we essentially doubled the number of channel partners we have in our card business. So all indications are that our channel business is continuing to progress and we're continuing to take share.

Thank you.

Our next question is from the line of you Ajit Pai of Thomas Weisel Partners. Please go ahead with your question.

Good morning.

Good morning, Ajit.

A couple of quick questions. I think the first one is, just looking at the gross margins that you saw in your Enterprise Service Group, the ESG group, it was at a record level and I think you did attribute it to mix of business and service margins but would love to understand what the backlog for that business looks like in terms of mix. And on the same question, I think you talk about a record backlog in that business but you also talk about the fact that business is going to be on a year-over-year basis down for the first time going into the first quarter. So could you give us some color as to what the tenure of that backlog is, about when you expect that backlog to shift, or to actually ship and be recognized as revenue? Okay.

Ajit, just talking about the ESG gross margins i just wanted to make sure you highlight the fact that I said that in the quarter we benefited from roughly $1.8 million of a contract loss provision adjustment offset by some inventory, so in Q4, I would say that $61.5 million benefited from some one-time items. Needless to say, though, we've had some significant improvement in our services margin business that's helped up dramatically and we've been able to do that, again, through the cost reductions we did in the second half in some of the headcount that services the -- that services business.

And what we said was that our bookings in Q4 was at the highest level for all of 2008 and that our backlog going into 2009 was commensurate with the backlog we had going into 2008 -- sorry, going into 2009 was commensurate with the backlog that we had going into 2008 from a plan perspective. We're not quite prepared to break that into the different components of it, but when we get a contract, usually it takes us between six and 12 months to realize the revenue for that, depending on which segment. So if it's in Marine, it's more like a year. If it's more in the automotive and industrial manufacturing side that tends to be more like a six month contract, six months to realize the revenue.

Got it. And then the second question -- or the follow-up question would be, just looking at the number of store closures that you're seeing right now in the US and potentially also in Europe at some point in the immediate future, are you seeing any competition from the secondary market, any equipment -- Zebra equipment, that's hitting the secondary market as folks shut down stores or is that not the case?

Ajit, this is Mike. No, we're not seeing that. And principally, a lot of the store applications are mobility-based products and solutions and those products tend to get pretty beat up in the marketplace and usually when a store shuts down those products get retired with it.

Got it. Thank you.

Thank you.

Our next question is from the line of Anthony Kure with KeyBanc. Please go ahead with your question.

Good morning. Just a couple of questions in relation to the international markets. I think on the third quarter you said China during the third quarter was the third biggest country revenue wise, just wondering what you're seeing out of China or what you saw out of China in the fourth quarter?

Our China business in the fourth quarter was still very good. It was clearly the leading region -- sub-region in Asia from a growth perspective. We did see it slow down towards the end of the quarter, consistent to some other things we've seen. Principally because they're serving a big portion of the Western demand for export and Western demand in the United States and Europe has slowed down.

Okay. And then as far as the fourth quarter, the $7.8 million or so total costs, how much of that was, if you could break down, related simply to the outsourcing?

I'm sorry, the $7.8 million of COGs?

No, the $7.8 million called out which was the exit, restructuring and integration expenses?

Oh, and how much of that was what?

How much of that was the actual outsourcing program?

Oh, yes, I've got that. Hold on a second. Of that amount, $7.8 million, roughly $3.4 million was exit associated with the outsourcing.

Okay, great. Thank you.

Thank you.

Our next question is from the line of Greg Halter. Please go ahead with your question, sir.

Yes, good morning. Have a question for you about the cash and investments of where that is invested currently in terms of investments and then where in terms of geography?

They're all in the US and it's primarily almost entirely government-backed, municipal-backed type securities, highly rated, so we're feeling really good about the availability of those funds and what they're invested in.

Okay. And you provided, I think, a 3.8% annualized rate of return on the investments?

Yes, for Q4.

For Q4, right. If I do the math on the one point -- I think it was $1.3 million that you realized and divide that into 3.8% I get $136 million of investments and obviously you have more than that. Just wondering if you could maybe walk me through the apparent discrepancy there?

Yes. Well, I think the part that you got in the math, you got to look at a lot of them are in munis, so the tax -- you have to look at the tax impact, we sort of back into that.

Okay. And one other quick one, if I could. Can you comment on your receivables quality currently?

Certainly. I think at the end of the quarter I was very pleased with where we came in with the receivables. We saw some meaningful collections from the ESG side of the business where it's 60 days, and basically the SPG business held flat with their DSOs and ESG improved. Now, ESG we're continuing to focus on, but that was where we saw the meaningful improvement in the fourth quarter. Got to tell you, though, we're going into a difficult market, so Mike and I spend a lot of quality time together, making sure we're making the right decisions on customers and credit. But that's where we are.

Okay. Thank you.

Thank you. Our next question is a follow up from the line of Paul Coster with JPMorgan. Please go ahead with your question.

Yes, I've just got one follow up on the gross margin and the transition to outsourced operations. Clearly, you're doing something really clever here because surely, as you wind down your operation in North America, isn't your absorption rate going to decline or am I just simply misunderstanding the way in which you're going to do this transition? Obviously, I'm worried that the domestic product gross margin is weighed down by lower absorption rates for a finite period.

So is your -- I'm not sure -- could you help me restate what you're looking for just to make sure I can answer your question well?

So you're going to wind down operations -- internal operations and then you're going to move to the outsourced operations over the course of this year. As you wind down your operations -- in-house operations then your absorption rate on your plant and your production lines will fall, so gross margins will be weighed down. But you're saying that that won't happen, so why is it that you're able to avoid that transition risk?

Well, the point is that the chal -- one of the challenges with the transition is, as you move these lines over the objective is then to reduce the costs associated with those lines that are being transitioned so that you end up with not carrying too much capacity. So that's one of the challenges that the SPG group has is to time the transition from one group to the other and so you're right. When you -- in the middle of the transition, you're not running at an optimal -- optimally, but we expect that at the end of the fourth quarter that we'll be close though that. And our gross margins that we're talking about, it's not so much the capacity of the volume in the two lines, it's just that when you look at Q4 to Q1 there's a meaningful decline in revenue and when we look at that revenue decline that is having some impact on our margins.

Okay. Got it. Thank you.

Thank you.

Thank you. Our next question is from the line of Reik Read of Robert Baird. Please go ahead with your question.

I just wanted to follow up again on retail and transportation logistics. You guys had been doing quite a bit of diversification within the retail markets. Is that something that, even though it's a weak environment, do you think that that will help you out on a relative basis more than transportation logistics?

Right, this is Mike. Yes. The retail space -- the diversification of our business has been on two fronts. One, globally. Retail has become more important in the international markets in its contribution to the whole and that has certainly worked well for us. We saw good retail success in the fourth quarter. We expect that to continue. And then second, we've diversified from the big box discount retail into specialty retail. I think the challenge in the marketplace right now is specialty retail. This is usually the higher-margin, higher-goods retailers are struggling but we've been offsetting that with good growth in the discount retail, including, by our definition, retail as into grocery and some of these other sub-verticals, which we've seen some good success in.

If you remember back, our Q2 call of 2008 we actually said that we benefited at that point from small customers and also international and in Q4 it was more North America and larger customers, so I think the diversification is working for us very well.

Okay, and then just one follow up on the ESG. Mike, I think as part of your comments, that you said you've got roughly $2.5 million of burn-through remaining of the purchase accounting. When do you expect that to be finally completed?

We're not very good at guessing that. I think we've been running at roughly a million or two a quarter, so you can just extrapolate, but we're not really -- I'm not really certain.

Okay, fair enough. Thank you.

Thanks.

Our next question comes from the line of Timothy Robinson with [Merani Advisors]. Please go ahead with your question, sir.

Good morning, guys, thanks for taking my call.

Sure.

Just back to the receivables question. What was the collection day for the ESG segment this quarter?

The collection day to the ESG segment -- let me just pull that out -- was -- it improved from basically -- at the beginning of the -- the end of last year, it was north of 180 days, now it's down to 125 days.

Okay. Okay, great. And could you give me a breakdown of the inventory balance between raw materials, (inaudible) finished goods and I believe it's deferred contract costs?

Yes. Roughly, half of it is raw materials, the other half is finished goods and then a little bit of work in process and deferred costs and long-term contracts.

Okay. And what was the obsolescence reserve at year end?

$7.2 million.

$7.2 million.

Yes.

Okay. Do you expect any additional one-time items to be flowing through gross margin in Q1?

Do I expect it? If I expected it I would have included it in our forecast. I don't know of anything at this point.

Okay, great. Thank you very much.

Thanks.

Our next question is a follow up from the line of Greg Halter from the lines of Great Lakes Review. Please go ahead with your question.

Thanks for letting me back on. The comment in the release about the year-end share count at 60.86 million. I presume versus the average for the quarter that that would have meant that you bought quite a bit of those shares later in the quarter to bring you down to that year-end figure?

We -- I think we were -- I don't know. We obviously became a lot more active after the second quarter -- or after the third quarter earnings call and that happened sort of a third of the way through, so you're right, it was probably more back-end loaded than front-end loaded.

Okay, I was just trying to get a gauge on the share count. Looks like the 60.86 million is about it because does not appear there's much in the way of option dilution currently?

No, no, there's not.

Okay. Thank you.

Our next question is a follow up from the line of Chuck Murphy of Sidoti & Company. Please go ahead with your question.

Hey, guys, could you just talk about the linearity of your orders for the past three or four months? Was January lower than December and February lower than January?

So in Q4, we saw very strong broad-based bookings through October, November and first part of December. Then we saw a weakening in the last two to three weeks of that -- of the fourth quarter. That's part of our guidance as we go into Q1. I think we've seen in the first quarter a lot of companies doing things like we are doing, actually, delayed their actual budgeting process so a lot of the business units haven't seen their capital allocu -- capital budgets yet, so they don't have necessarily the capital budgets to go spend. So our January was a bit weaker than we had expected, but that's also then baked into our forecast and we expect that those budgets will now be finalized and people will be able to get their budgets to spend.

Okay. To me, I guess as it stands now would you feel like it's more likely than not that June is at least flat, if not a little bit better than the March quarter?

I think we're -- we'll stay with the Q1 guidance. (LAUGHTER) I think that we feel getting into Q2 gets to be a little farther afield in this environment.

There's been a lot of debate with a lot of companies about whether they give next quarter guidance at all and it's a tough market now so we feel good to be able to give you the guidance that we are but we don't want to go beyond that.

Okay. Sounds good. Thank.

Thank you. Our final question and that will be coming from the line of Chris Quilty. It's a follow up, and he's from Raymond James and associates. Please go ahead with your question.

Thanks, guys. I just wanted to qualify with regards to the restructuring efforts. The numbers you had mentioned previously about cost savings for this year, those are all based upon restructuring charges that have already been accrued and those are annualized rates?

Yes I don't think there's much more going on. Most of it's already been accrued.

Okay. And I was trying to go back during the discussion here and back through all the numbers of the strict exit charges and what not, but maybe you could just make it easy for me. Beyond the amount you stated for the first quarter in exit and restructuring charges, what would you -- what are you assuming is left for the balance of the year in remaining charges?

We're not going beyond the quarter but I know we've got basically $3.1 million in the first quarter for exit and ESG integration costs and that's what we have right now.

Okay. But if I add up what you've previously charged through 2008 -- and again, I couldn't quite back out between the exit and the restructuring side --it doesn't look like there's all that much left through the balance of the year, or am I running the numbers wrong?

I think you're in the right ballpark there.

Okay. I just want to make sure.

Yes.

Thank you.

Thank you. I'd like to turn the floor back over to management for closing comments.

This is Doug. Just want to say thank you. Our hour is up. Mike Smiley and I will be around the rest of the day if you have further follow-up questions. Also, I just wanted to let you know that our first quarter conference call will be held on May 5th, so we look forward to talking with you at that time. Thank you very much.

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