斑馬技術公司 (ZBRA) 2009 Q1 法說會逐字稿

Good morning, and welcome to the Zebra Technologies 2009 first quarter earnings release conference call. Joining us from Zebra Technologies are Anders Gustafsson, CEO; Mike Smiley, CFO; Mike Terzich, Senior Vice President and Global Sales and Marketing, SPS; and Douglas Fox, Vice President, Investor Relations. All lines will be in a listen-only mode until after today's presentation. Instructions will be given at that time in order to ask a question. At the request of Zebra Technologies, this conference call is being recorded. Should anyone have any objections, please disconnect at this time.

At this time I would like to introduce Mr. Douglas Fox of Zebra Technologies. Sir, you may begin.

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 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, 2008, 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. I appreciate your joining us today. Here in the room with me are Mike Smiley, our CFO; and Mike Terzich, our SVP of Global Sales and Marketing for our Specialty Printing Group. Today, Zebra reported first quarter EPS well within our guidance range, but fell slightly short on sales. The environment during the first quarter was particularly challenging, due to reduced capital spending, inventory reductions, and project deferrals by our customers.

Our team, however, did a remarkable job managing the business prudently by executing well on the areas within our control. We continue to focus on increasing operating efficiencies, further aligning our expenses to match reduced sales levels, and managing inventories and receivables effectively. In addition, our long-term projects, including transforming our supply chain through outsourcing manufacturing, and implementing our new ERP system, are progressing as planned. Sales activity, as driven by our Specialty Printing Group, demonstrated some pickup in the first weeks of February, but was softer than anticipated in the second half of March. On a regional basis, we experienced weaker than expected sales in the Asia-Pacific and Latin America. We also saw greater softness in North America as distributors moved aggressively to reduced inventory levels in the face of weak demand.

Business in EMEA met our internal expectations. As our outlook for the second quarter suggests, however, we could be seeing early signs of stabilization. As expected, our targeted verticals in healthcare and government performed relatively well. We had some nice wins in the retail sector in Asia-Pacific and North America, and activity with postal organizations improved in EMEA. As we expected, the substantial decline in sales to customers in manufacturing impacted product mix, gross margin and average unit prices, which we expect to rebound as business conditions improve. In the face of current economic headwinds, we continued to align our sales activity towards the most promising and durable markets, including the government, healthcare and mobile work force verticals.

On the expense side, we began to more fully realize the benefits of our actions taken in the second half of 2008 and early 2009 to align costs with business activity. For the quarter, we reduced operating expenses by 40% from a year ago. The entire team can be credited for doing an excellent job controlling discretionary spending during this challenging period. In addition, we made structural changes to our operations, including streamlining our sales and marketing functions. Initiated in the fourth quarter of 2008, we continued to streamline and integrate sales and marketing to create a model with better coverage and resource alignment with our growth goals for 2009. These efforts are beginning to improve execution, flexibility, and responsiveness. These actions made an immediate contribution, and will give Zebra added earnings leverage when market conditions improve.

Operationally, our supply chain transformation remains on track to realize cost savings of $25 million to $30 million or 2.5 to 3 percentage points of gross margin improvement in 2010. In our Q3 2008 call, we discussed that we had moved approximately 40% of our production capacity to [cable]. At the end of the first quarter, that number had increased to 59%. Approximately 40% of first quarter printer sales were reproduct sourced from cable. Likewise, our ERP implementation continues on schedule and within budget with the latest module successfully launched as recently as yesterday. Both of these multi-year projects will help Zebra deliver better customer service and greater operational efficiency.

We also remained focused on our disciplined capital allocation strategy to deliver the highest risk-adjusted returns our investments to build enduring shareholder value. Our highest priority continues to be maintaining financial strength and flexibility to navigate effectively through this challenging environment. In Q1, we viewed repurchasing our shares as the highest risk-adjusted return alternative. At the end of the first quarter, we had $189 million in cash and investments with no debt. For the quarter, we used $29 million to buy back $1.7 million shares. Since the beginning of 2008, we've deployed $186 million to buy back 7.7 million shares. During our previous conference call, we discussed the urgency for the Enterprise Solutions division to generate an appropriate level of return. For the first quarter, Enterprise Solutions performed within guidance, and I am pleased to report that the actions we took to lower the cost structure and improve operational efficiency led to an adjusted EBITDAR breakeven. We remain confident we've laid the ground work for Enterprise Solutions to be roughly EBITDAR breakeven for 2009.

While we realize this is only a step towards our ultimate goal for Enterprise Solutions, it's an important financial milestone that demonstrates real progress and underscores our commitment to unlock the full value of these operations. In addition, we remain on course with our paced strategy to fully integrate Enterprise Solutions into our global operations. In 2008 we focused on integrating and streamlining the acquired operations with each other and gaining SOX compliance. This year, our energies are focused on solution integration, cross selling, and channel development. The Enterprise Solutions team is committed to realizing our vision for these businesses by leveraging our assets to drive higher sales and market leadership, and I'm pleased with our progress. The success of Enterprise Solutions is critical to our global competitive positioning, as it enhances the value of our core business. It 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.

The Enterprise Solutions division is well aligned with Zebra's core value propositions to our customers and provides deep expertise into targeted industries. In addition, it gives us access to high level decision makers in the world's largest enterprises. I am pleased to report that we made good progress in achieving the milestones we provided last quarter to cross sell and bundle our solutions within the division. During the quarter, we formally signed five new channel partners, including three current specialty printing retailers. We have nearly 20 more integrators who have applied or are in various stages of evaluation. This level of interest gives us confidence in meeting our goal signing 20 for the year.

We deployed five systems in cost selling situations out of this year's goal of 25. We continue to cross sell the solutions across industries and into adjacent markets such as the outdoor wide band solution that we typically sell into manufacturing. In this quarter, we sold ultra wide band into government and aerospace and defense. This demonstrates the combined sales team's ability to upsell current customers and cross sell into new markets. And we installed 12 solutions out of this year's goal of 50, with customers around the world. The installations were in industrial manufacturing, maritime and aviation, in EMEA the United States and Latin America.

These achievements are all the more impressive given the difficult market environment in general and the continued pressure on the automotive industry in particular, coupled with pushouts of IT projects in other segments. Even with these challenges, our customers continue to see value in the solutions this business offers. Zebra has aggressively taken steps to maintain financial strength, align expenses with sales, and position the company for improving returns and earnings leverage when market conditions improve. While disappointed with the level of sales driven by current industry conditions, I am very pleased with how Zebra continues to execute in this environment. We remain well positioned to extend global leadership in a fundamentally attractive industry. Our solutions incorporating a broad range of established and emerging technologies enable our customers to deploy their critical assets smarter for improved business performance. We continue to build on our clear, brand leadership, product breadth, financial strength, and global presence to move up the value chain and become a more strategic business partner.

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

Thank you, Anders. Let me highlight the key financial year-over-year drivers for the quarter. Sales were down comparably in dollar terms across all geographic regions. Gross margin was affected by lower sales volume, the expected shift in product mix, and changes in foreign exchange rates. Operating expenses fell, with the biggest declines occurring in sales and marketing and amortization of intangibles. The income tax rate of 32% was affected by non taxable interest income which is a larger percentage of pretax income than in prior periods. We expect a 32% rate to be effective for the full year of 2009. Foreign exchange had a negative impact on operating income of approximately $2 million.

Let's take a look at sales. For the quarter, sales were down 22% from a year ago and 17% from the fourth quarter. Sales in Specialty Printing Group were down 24% with the slowdown in large deal activity, reduction of inventories at distributors, and general pushouts and delays. Even with the slowdown, we are comfortable that we maintained or extended our global leadership position. Enterprise Solutions sales increased 1% as we had entered the quarter with a good backlog. Booking activity at Enterprise Solutions remained healthy in the quarter.

Let's take a look at sales by product line. The breadth of the sales decline occurred in hardware, which was down 30% to $126 million from last year and represented 65% of total sales. As Anders commented, we have greater weakness in our high-end and mid-range printer lines from the extreme slowdown in manufacturing across the globe. This mix change was relative to better sales. Sales performance from desktop model printers put greater downward pressure on gross margins than we expected. We view this decline as temporary and expect margins to rebound as product mix benefits from improvements in the economy. The percentage of printer sales from new printers came in at 7% while printer sales introduced over the last 18 months have been ramping nicely. Our very popular ZM400 and 600 models fell off the back end of the calculation. We expect this number to move up as we introduce new printers and printers such as our HC100 Wristband , G-series desktop, and TS printers gain further traction.

We shipped 199,000 printers in the first quarter. Average unit price of $517 was down from $614 a year ago, largely because of product mix and foreign exchange. Pricing within product families remains stable year-over-year. Supplies of $38 million provided a moderating effect, down 9% and comprised 20% of total sales. Service and software revenues increased 3% and accounted for 13% of total sales.

By region, we have comparable sales declines between 20% and 30%. Adjusting for FX, EMEA sales declined about 15%. Foreign exchange, net of hedges, reduced consolidated sales by $6.7 million or 3%. Consolidated gross margin was 44.6% compared with 49.9% a year ago. Again, the big story here was mix and volume. Specialty Printing Group gross margins declined from 49.8% to 43.1% including 0.7 percentage points from foreign exchange changes, or $4.2 million. Gross margin for the Enterprise Solutions group increased to 55.6% from 51% with a benefit from a more profitable services business in which we aligned resources with the current level of activity.

We're very pleased with our overall control of operating expenses. First quarter total operating expenses were down $12 million or 14.3% from the prior year. Of this decline, $2 million was due to changes in foreign exchange rates. The biggest changes in operating expenses occurred in areas of business development, prototypes in tooling, and other discretionary spending. Amortizations decreased $1.9 million, the result of impairment charges taken in the fourth quarter. For the quarter, the investment portfolio had an annualized return of 3.1%. On an absolute basis investment income was down principally because of our deployment of cash to buy back stock. The income tax rate for the quarter was 32% down from our historical 34.5%. The difference was driven by non taxable interest income, which was a higher percentage of pretax income than in prior periods. We expect the 32% rate to be effective for the full year.

Net income came in at $0.16 per diluted share on 60.3 million average shares outstanding. Exit restructuring and integration costs reduced earnings by share by $0.02 per share. We ended the quarter with 59.4 million shares outstanding. Net receivables were down $15.5 million. Days outstanding were 65 days, compared with 63 days because of the timing of sales. Inventory levels were in line with our expectations and moved up only slightly during this period of transition to outsourcing. Inventory reserves likewise remained flat with fourth quarter levels, and we ended the quarter with $189 million in cash and investments.

Cash flow was affected by some big reductions in liabilities. We had $24 million in accrued liabilities, including declines in accrued payroll and bonuses, and the settlement on foreign exchange balance sheet hedges. Income taxes payable declined by $8 million and accounts payable were down by $6.5 million. We viewed this high use of cash to be principally-timing related. During the quarter, we maintained progress on the share buyback program. For the period we bought back 1.7 million shares at an average price of $17.30. We now have 3.7 million shares remaining authorized for repurchase.

Let me turn a moment to capital allocation. Like all companies Zebra has five potential uses for its excess resources to build shareholder values. Invest in internal projects, reduce debt, pay dividends, make acquisitions, or buy back stock. Given the current business environment, our highest priority is to maintain sufficient liquidity and balance sheet strength to ensure we can support our business objectives under any economic scenario. Beyond investing in important internal projects, share repurchases remains as our highest returning investment alternative on a risk adjusted basis. In addition, our focus continues to be on increasing returns on Enterprise Solutions before we make any more acquisitions in this area.

Now let's look at our second quarter forecast. We are forecasting sales of $186 million to $200 million. This forecast consists of expectations for Zebra Specialty Printing Group sales in the range of $168 million to $180 million and Enterprise Solutions sales between $18 million and $20 million. The forecast incorporates an average US dollar/Euro exchange rate of 1.3 compared with 1.56 a year ago. GAAP earnings are expected in the range of $0.12 to $0.20 per share. Our forecast assumes gross profit margin in the range of 44.3% to 45.6% given the impact of FX, product mix, and lower volumes. We expect GAAP operating expenses at $72 million to $74 million. We're estimating exit restructuring integration expenses to have a $0.04 per share impact on EPS. The income tax rate will be 32%.

That concludes my formal remarks. Now here's Anders for some concluding

Thank you, Mike. Going forward, we continue to manage our business prudently with a balance between preserving near-term profitability and pursuing long-term opportunities to ensure we position Zebra for accelerated earnings growth when business conditions improve. The effectiveness of our expense controls on current financial results is evident. At the same time, we are using our financial strength and flexibility, industry leadership, and focus on the customer to drive greater success and create shareholder value by directing our resources to areas that have the highest risk-adjusted returns.

To date, our largest investments have been in Zebra itself, with stock buybacks leading the way followed by our high-value outsourcing and ERP projects. In addition, we continue to invest in new products and solutions to serve more customer needs and further enhance our global competitive position. The printer products we introduced last year are steadily gaining traction. In the middle of the year we will begin shipping our new retransfer card printer, which gives us greater access to RFID smart card applications. We also have new table top, desktop, and kiosk printers under development for release later this year.

In these turbulent times when many companies are cutting back to survive, we have used our financial strength to bolster our competitive position by making selective additions of seasoned industry veterans. These additions include experienced sales representatives for mobile solutions, an area of great opportunity for Zebra, and new leadership in sales management and engineering.

We are also taking advantage of opportunities the global economic crisis is presenting by focusing more marketing efforts to gain share in areas where weaker competitors are having trouble meeting customer requests. Our Zebra employees have done an excellent job under difficult circumstances to maintain global leadership by capturing more available opportunities through meeting customer needs. Let me close by saying that Zebra will be a more nimble and formidable company as we come out of this global recession. Zebra is in a strong position in a great industry that serves critical customer needs. I'm confident that we are using our resources prudently to create lasting shareholder value.

This concludes our prepared remarks, and we would now be happy to take your questions.

Thank you. We will now be conducting a question and answer session. (Operator Instructions). One moment while we pull for questions. Our first question comes from Paul Coster with JPMorgan. Please proceed with your question.

Yes, first of all, the OpEx is going up sequentially, notwithstanding the tough top line at the moment. Can you just talk about where you are increasing your OpEx and why?

OpEx for the fourth quarter was 85 -- so the guidance. Why isn't the guidance going up, I'm sorry. Guidance is going up for a couple of reasons. I think first of all in the first quarter we had a lot of our discretionary spend was slightly below. We've put a lot of pressure on that. We're expecting that level may have to ramp up just a little bit from the first quarter as a primary driver for that. We're seeing -- we're comfortable with the guidance that we're giving but we're not seeing a big increase again the first quarter was we thought -- we put a lot of pressure in trying to keep that number down.

I can see that's not very much. I'm just curious as to whether I can tie it back to your comment about global leadership, Mike. You said you feel like you are gaining somehow. Is that because you're spending more than others on SG&A? Can you just talk about the competitive landscape and what you're doing to capitalize on this weakness amongst your competitors?

This is Anders. We are trying to very carefully balance our short-term profit requirements with the long-term opportunities to position Zebra for growth and creating shareholder value. We have taken opportunities to strengthen our team by hiring some very strong people in our sales organizations, sales management and engineering. So we want to make sure we take advantage of the market as it is. We're also continuing to develop a lot of new products, and we see some of the expenses that come from molding and other -- tooling for new products, and we continue to do a lot of marketing in order to stimulate end user demand to make sure our brand name is out there and continues to extend its leadership.

If you were able to pinpoint the weaknesses amongst your competitors which geographies and which product areas are they starting to fall behind you?

I don't think we want to go into anything specific with our competitors. We have a lot of different competitors, and it varies by region and product line and so we take them all seriously and everybody is fighting hard.

Okay, last question. You did mention the word stabilization. Can you just give us a little bit color around what you're seeing that might be more constructive out there at the moment?

First the environment continues to be very tough. We are not saying that this has become a benign environment. It's still tough but we do see some early signs of stabilization we believe. We see increased proposal activity, and I think our pipeline is a little less volatile, but visibility is still limited. Some signs of stabilization.

Great, thank you very much.

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

Hi, good morning. If I could go back to the operating expense side for a second. It looked like most of the reductions that you saw from an OpEx standpoint really came out of the sales and marketing area. Can you address why that is, given the importance of that area and why not more of a focus maybe on administration and talk about those actions. And Mike, to your point, can you talk about how much of the actions you've taken is sustainable and what needs to be back filled?

This is Mike Terzich, I'll take your question. On the sales and marketing side, we commented in the prepared remarks about streamlining some of that activity, and it's principally focused in two areas. We have taken a look at the business across the globe, and we are pretty well diversified across a variety of markets and application spaces and we have been moving some investments from some areas that have softer performance and a softer outlook into areas of the business that we are seeing some growth and opportunity. So in an overly simplified manner, we're pulling back on some investment in the manufacturing sector and we're redirecting investment into areas such as direct store delivery, retail and healthcare. And secondly on the marketing side, what we've done is we've consolidated some operations and prior to the start of the year, we had investments, duplicative investments across the business including both the SPS and the Enterprise Solutions business. We've consolidated some investments. We've reduced the number of PR firms as an example, and it's giving us a little bit more control over the spend. We're getting more productive use out of that spend.

Going back to your question on G&A. By the way, in the first quarter our G&A tends to be a little lumpy with respect to benefits. The first quarter tends to be a little bit higher and that tends to level off. We would expect the second quarter for G&A to be a little bit down from where they are in the first quarter.

And also, in the Enterprise Solutions group we've talked earlier about our efforts to reduce the breakeven point and you see some of that in here also, that reductions in sales and marketing in other areas is part contributed by the Enterprise Solutions group.

And I guess I've heard what you guys have said is that at least with respect to the SG&A -- with respect to the sales and marketing area, a lot of those changes are permanent, the streamlining ought to create that continued efficiency?

Yes, most of it is structural changes, but obviously some of the marketing spend we can go up and down based on activity.

Certainly a piece of this stuff is commission. So as the revenue goes up, the commissions would go up, those kinds of things.

Okay, great and then just on the ESG side. Anders, maybe you could spend a little bit of time -- just given automotive's a key market and there's been all these changes within the greater automotive space. Can you talk about -- they may want the stuff but their real ability to implement it, what's the status there?

Yes, I think our customers continue to see good opportunities with the solutions from ESG. The vision we've laid out of being able to help our customers improve their business processes by identifying, tracking, and managing different types of assets is I think a very appropriate and good strategy and direction. They do see good return on investments for the projects they put in, but it's clear that in many segments the ROI expectations have been pulled in. So if you were to go back 18 months, I think most projects below 18 to 24 months would get funded. Today I think very few projects get funded with payback of more than 12 months and many of them are looking at more like nine months to get payback but in ESG there's certainly some market segments that are cash strapped also particularly on the automotive side and then the ROI is the secondary consideration. They're first looking to just preserve cash.

And so is that the situation with automotive. Is it the ROI may be reasonable in some cases, but you're seeing business continue to get delayed because they simply don't have the cash at this point.

Yes. One I think they are looking to preserve cash, and two they're also looking to reduce the number of plants they have and they haven't necessarily all been able to determine which ones. So they're waiting for some of the clarity as to what the overall strategy's going to be.

So until --

But we are working very hard to make sure we diversify our business though. We talked about how we're trying to make sure we expand more into industrial manufacturing and government side and we're building up our channel capabilities to help us penetrate those segments better and I think we have good proof points that that is working although we wish this would ramp quicker.

Okay and then just also on the marine market, can you just talk about one, the status of that market and how it's performing and then two there's always been this opportunity to sell hardware on top of the [Navis] platform and how is that going?

First I think our bookings activity into the Maritime segment has been quite healthy. Now the -- and our cross-selling opportunities have been pretty good also. We've been able to introduce our fleet management solution into a number of courts. We've been able to sell our (inaudible) solution into a number of ports again. But it's also fair to say that the ports are a cash flow business. They make a very substantial upfront investment, and then use that cash to pay down debt and when they get into a situation like now they do focus a lot on managing that cash, which makes it a little harder to get the implementation to go as fast as we would like.

Okay, great, thank you.

Our next question comes from Brian Drab with William Blair. Please proceed with your question.

Good morning.

Good morning.

First question, just regarding your use of the channel given the current environment. You talk a little bit about your thoughts regarding using the channel more or less given the current economic situation.

There are two parts to that question. First, our Specialty Printing Group is a very channel-centric organization. We do sell through two-tiered distribution and that has been a model that has worked very well for us to create great reach at a relatively modest investment and we are very much committed to that model. On the Enterprise Solutions side, we believe that we have opportunity there to make some products more channels ready, and then to focus on a limited number of channel partners who have greater software and integration expertise to provide an extension to our own sales force and really penetrate particularly the industrial manufacturing and government segments.

Okay, and then also regarding your distributors, you mentioned you've seen inventory reductions in the first quarter, of course, and do you expect to see that going forward or do you think that's mainly behind us at this point?

We saw sales out trend from our North American global distributors starting to decline in the late December or December of last year and continued into this year, and our distributors are -- they didn't have excess inventory before, but when sales out declines they do reduce their inventory to just keep the inventory turns stable. I think we've seen the vast majority of those corrections. We expect there to be some laggards say in Q2 but it's pretty stable.

Okay. Thank you.

Our next question comes from David Bagley of The Boston Company. Please proceed with your question.

Hi, gentlemen. Two questions. One on the last one. The [Disney] channel on sales out stabilizing. Does that mean stabilizing at a down level or stabilizing at flat?

Stabilizing at flat. Basically the front half of the first quarter was difficult, but in the second half of the quarter we actually saw a slight uptick in the sales out run rate through distribution, and we expect that run rate is going to maintain continued through the second quarter.

Great. A couple of questions on the balance sheet here. Inventories look a little elevated versus trend. When do you think those get worked down?

So we're going through the big piece of our outsourcing now and for the next quarter or two, and actually we were given the transition that we're in, we were pleased with where we ended up at end of the first quarter. We would expect Q2, Q3 to be up slightly from where we are today. Again because of transition, but then after Q3 we would expect that those balances would go down and we would start seeing some efficiencies in our turns.

As -- our process for outsourcing is that we start manufacturing a line in China, but we still maintain the production of that line also in the US. We get the line kind of ramped up and ensure the quality and everything is as it should be. Then we ramp it down in to the US -- during that period, we do have -- we do carry somewhat larger inventories than we would normally do, but I think also if you look at what happened in the first quarter when revenue came down very substantially and the mix shifted very substantially. I actually think we did a good job of managing holding inventory flat. That was a good outcome.

I would agree. And then lastly on the accounts receivable, do you break out your net of allowances? So your allowance for bad debt?

Yes.

Can you tell me what that was this quarter?

The allowance was $2.4 million and $1.7 million of our -- 1.7% of our receivables we have as a reserve for bad debt. We were very -- for the quarter, we felt the team did a great job watching those receivables. The processes are good and we feel good about where we ended up in the quarter there.

Okay. Can you just -- if I look at the trend line the last six to eight quarters, that number as a percentage of receivables has come down materially. Can you just walk through what's driving that?

Well I would also say that our DSO over time has also improved. I think and so a couple of things are happening for us. First of all on Enterprise Solutions, that has been part of the business where the collection time has been extended and we've worked over the last year, but we have seen good improvement since the second half of last year on that. So the reserve -- required reserve would have to go down as a result of that. So predominantly again because DSO is good the reserve seems adequate.

Great. Thank you

Our next question comes from Ryan [Rakin] with Raymond James. Please proceed with your question.

Good morning, guys.

Good morning.

Are you still looking at the restructuring and exit process? Are you still expecting operating costs to be in the $24 million and $26 million range?

The operating cost to be $24 million to $26 million?

I'm sorry. The expense of doing the restructuring and the exit.

For outsourcing yes.

Okay. And the bulk of that will take place in what 2Q, 3Q of this year?

We've already gone through quite a lot of that but the bulk of it -- the remaining bulk of it will be in Q2, Q3.

Yes, I'm sorry. And you'll expect the initial margin benefit. Will that come in the fourth quarter of this year or will that --

We expect some in Q3 but really starting to ramp in Q4 and as we enter 2010 we expect to be seeing the full benefit.

Okay. Great, and can you provide a little color on what your order trajectory has been over the past, say, three to four months

I guess we will say that our guidance is based on the beginning -- the order trajectory we've seen in the beginning of this quarter. So we feel they have stabilized somewhat, and that the proposed activities are up a bit that the pipeline volatility has moderated. So I think we feel that the guidance we have given has been based on all of that and is appropriate for this time.

Okay. Well great, thank you, guys.

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

Good morning.

Good morning.

Just looking at the Enterprise Solutions group, I see on a year-over-year basis while your revenues are up, your expenses over there are down quite materially. Could you give us some color as to what the new breakeven point in terms of revenues is for that business and also at what point or in terms of time do you expect to actually get there?

What we have talked about earlier was in the last conference call, our Q4 call we said that the EBITDAR -- adjusted EBITDAR breakeven point was about $23 million. We came in at about $21.5 million in revenue, but we still achieved the EBITDAR breakeven point. We also have taken additional steps to reduce the breakeven point, but it also depends on the margin obviously, the gross margin on the products. So our guidance has been that we expect to able to be adjusted EBITDAR breakeven for the year 2009.

That said the business is a little lumpy so there's going to be periods where's it's going to go up and down a little bit but for the year that's our goal.

Got it. And then when you're looking at -- we talked about the average unit prices and the decline in ESG, but a lot of that you attributed to a mix shift in terms of product. That is the color you provided. Could you give us some sort of sense of what the pricing environment is like right now given the slowdown and the fact you believe you're taking share from competitors.

So we see the AUP decline as we said was driven by two factors. One was a mix issue where we sold a lot more as a percent of volume of our lower end products and the high end that primarily goes into manufacturing has declined more quickly and the other issue would be FX. Now the AUPs within each product family has been very stable. So we haven't seen much degradation within our product families. Where we see most price pressure or intense competition is more on the larger deals. That we do see more aggressive pricing behavior.

Right, and when you talked about -- I think reducing some of your marketing spending, et cetera, and consolidating some of the folks you work with over there, what exactly has happened in terms of vertical. Why do you have sort of a overlap or excess spending there. Which verticals are you focused on much more.

This is Mike. Where the overlap principally was as we expanded the business and we decentralized geographically we were working with variety of -- as an example, a variety of PR firms across the globe. We had an opportunity to consolidate that under a single firm. What you wind up doing is you use that money, instead of paying retainers to firms, you use that money more productively for demand generating activity. We've been going through exercises such as that across our marketing spend.

As far as vertical markets, I think the markets that right now are most attractive to us and we continue to invest and put money behind have been our retail. Retail is still a good global market particularly outside of the United States right now. Healthcare has been very good to us. We don't expect that that is going to change. There's a lot of demand for wristbanding solutions applications in the marketplace right now, and quite a bit in what we would characterize in the mobility space as direct store delivery and in the government space e-citation work with a lot of the local law enforcement communities.

Got it. And the last question would be just, you talked about use of cash and buying back your shares the most and also that you don't plan to do any more acquisitions in the Enterprise Solutions group, although I see they're improved of the current business, but looking at the -- are you continuing to look at acquisitions in the Specialty Printing Group and what kind of acquisitions -- what is the nature of those acquisitions right now?

I think at this stage is that we are trying to make sure we first and foremost maintain financial flexibility to steer our way through this difficult environment and make sure we do allocate our cash to the highest risk-adjusted returns. We do look at additional acquisitions in the SPG side, but at this stage I think we're being cautious because before we see the markets kind of stabilized and we don't want to make sure we catch a falling knife so to speak.

Thank you.

Our next question comes from Chuck Murphy with Sidoti & Company. Please proceed with your question.

Good morning, guys.

Good morning.

I was just wondering. Any sense in terms of SPG perhaps doing a little bit better sequentially, how much of that is due to real in demand versus some distributors maybe restocking.

I'm not sure Chuck, this is Mike. I'm not sure I understand the question.

Is it a matter of them buying because they have no inventory left or a matter of the hospitals and the transportation logistics companies actually needing new products right away.

I think, going back to an earlier question, I think in the context of SPG in North America, distribution, the distribution channel is a significant piece to our business and that business has relatively stabilized. What we mean by that is as the quarter started, we saw some soft demand. Obviously the distributors pulled back more so on their inventory position than they would normally do. That has -- as the quarter progressed, we saw an uptick in the sales out. We expect that run rate is going to continue through the quarter. We don't expect that they're going to return to the inventory positions they were carrying when the business was a little bit more robust. So, as far as any further uptick beyond that in the distribution channel, we're not seeing it at this point in the second quarter.

Just to clarify, our -- the vast number of our partners are general integrators or resellers and they tend not to carry inventory. Either good times or bad times they really don't carry inventory. We've been able to either supply them directly on short notice, or they can get the equipment they need from distribution. So we don't have a big inventory position at any point really in our channels, but obviously the distributors, they do manage their inventory very, very carefully on a returns basis.

Okay. And Anders, in terms of, I think it was 2.5 to 3 percentage point gross margin improvement in 2010, is that what you said?

Correct.

And what level of sales does that assume?

That's basically assumes any -- off today's levels, we would be able to get that. If we were to increase sales, say in between now and then or have a different mix situation, we would still be able to get that 2.5 to 3 percentage points gross margin improvement. That's the value the outsourcing will give irrespective say of volume or mix.

Got you. And my final question, the cash flow was pretty weak for the quarter. Just wondering what your expectations were going forward.

We really don't forecast the cash flow per se on these calls, but as I mentioned in my comments, the quarter had anomalies with the timing of some of these cash flows. We wouldn't expect the experience we had in the first quarter with the working capital driving so much requirements that would continue going forward.

Okay. Thank you.

Yes.

Our next question comes from Anthony Kure with KeyBanc Capital Markets. Please proceed with your question.

Good morning, just a quick question on end market overview. You talked about retail being relatively healthy and manufacturing not so much and also healthcare and government being a source of growth. Would you say that at this point healthcare and government, from a scale basis is 20% of your total business yet, or if you could segment it that way or is it 10%. Just trying to get an idea of how big that market is now.

As they combined as two separate spaces, we typically wouldn't disclose that. It's something that we keep company confidential, but I would say that as a ballpark figure that the combined segments are less than 30%.

Okay and maybe -- I don't know if the answer is going to be similar on a product-type basis, the mobile and kiosk printers, also another growth-type area. Would that realign the same way based on what those types of printers are and those types of applications? Is it around the same size relative (multiple speakers)

Not necessarily. Mobility is a pretty significant piece to our overall business. We see a lot of growth opportunity in that space and kiosk is -- the growth opportunity in kiosk is under the current economic environment there's a lot more demand being built around unattended printing, self help so to speak, so we like our position in that market as well, but we've been in the mobility space for basically a decade and that's a significant piece to our business.

Given the growth in those comments it's fair to say it's bigger than the 30% those two together. Is that correct?

That's something I'm not going to disclose. I'm sorry.

Okay. And then just one more question on the April 4th close date for the quarter. Why was it different than last quarter? What's-- I'm just trying to get the mechanics behind that?

We just do it on a weekend.

Tony, this is Doug Fox. We're on a 13-week quarter, but we always end the year on December 31st.

Okay. Okay. Thank you.

Our next question comes from [Greg Halter] with [Great Lakes Review]. Please proceed with your question.

Good morning, guys.

Good morning.

Wonder if you could comment on your capital spending expectation for year if there's been any change in your thoughts?

Again, we expect that the capital spending would be a little below what we did in 2008. I think we are seeing the levels that we saw in the first quarter continuing on a little bit. Although we think it will ramp down again as the outsourcing finalizes and stuff like that. We had a lot in 2008 for buying tooling and stuff for the outsourcing. That will start diminishing.

Okay. And regarding the cash investments, has there been any change in either what that is invested in or where it is located throughout the world?

Well, no. It is located here in the homeland of the United States. And they are the same type of securities they have been in the past and they continue to be very solid investments.

Okay. What would you estimate-- and I know you have a commentary that you are looking at maintaining the financial flexibility, but what would you estimate your cash need to operate the business on a daily basis?

Well, I think --ask me that question today and ask me a year from now that's going to be different. And I think -- we don't have -- when you look at the economic statistics, we're in an environment that most of us around the table never experienced in our careers. So we are very cautious right now. So I'm not really prepared to say what I need today, but I know that in the future --when the economy settles down, I would need less than I have today.

Okay. Thank you.

(Operator Instructions) Our next question is a follow-up question from Reik Read from Robert W. Baird. Please proceed with your question.

I was wondering if you could talk about the ASPs on a sequential basis. They were down quite a bit there. Is that the same issue that's the mix, and if that's the case can you talk about why the end markets of manufacturing got materially weaker relative to the others?

The reason they're down sequentially is really based on mix and the manufacturing is off. The individual product family AUPs have been pretty stable. I think manufacturing held up longer than what I think we actually had expected in the fourth quarter, but as you saw, export rates from China I think were down like 29%. Japan were down more than that. I think Germany had some similar numbers in the 30s. Our manufacturing customers basically pulled the hand brake in a lot of areas. If manufacturing utilizations go down to less than 75%, we generally don't see a lot of buying activities.

Just one other comment to add to that. When you look at the manufacturing space for us, a couple of the big end markets for us, automotive, manufacturing, automotive supply chain, aerospace, durable goods manufacture, electronics manufacturing. Not only within the United States, but as Anders pointed out, in the export regions, so in China and in Mexico. And those are all markets that move a lot of those high-end products.

When you look the margins sort of what we call the standard margin on these products. If you look at it sequentially, you don't see any trends or anything like that. When we say that year-over-year and certainly sequentially, it's hugely mix and then year-over-year it's definitely much more FX participating in that.

Okay and then Mike, just a couple of housekeeping issues. The $2.3 million in charges, where are those located between printing, ESG and admin?

Probably about 400,000 of that would be related to ESG and the rest would be with SPG and the other part of the business.

Okay. And then using that same breakdown, printing, ESG and admin, the admin expenses are up quite a bit sequentially. Can you talk about --

Yes. A lot of that has to do with again -- we find in the first quarter you end up with higher benefits cost than we do in the rest of the year because you're paying out for social security and stuff like that. It tops off. We've also had some experience with some medical healthcare-type stuff that is a little bit higher than we've traditionally seen. We don't expect that to continue. As I mentioned earlier, we are expecting that our G&A costs from Q1 to Q2 to go down from where we've been.

Okay. Great, thank you.

Yes.

Our next question comes from Richard Davis, please proceed with your question.

Yes good morning, gentlemen.

Good morning,.

I missed part of the presentation so this might have been asked. I see that you're lowering your breakeven point for the Enterprise Solutions business, and that you've made good progress in that move. Do you expect operating expenses in that area to go down, or do you expect to be -- sales to go up and therefore cover the deficit?

You mean for Q2 or for longer term.

Q2, 3 and 4.

For Q2, we would expect the OpEx to be up slightly, but we're not seeing a big change near term change for ESG quarter to quarter. We've taken down the breakeven point I think from the middle of last year about $33 million to we said $23 million on the Q4 call last call. We did generate an EBITDAR breakeven point at $21.5 million this time and we've continued to reduce expenses. Some of that expense comes out of the COGS line. A lot of services people say projects get delayed or slowed down, that is more of a variable spend on that perspective, so we expect to continue to manage the expenses very carefully for our EBITDAR breakeven position for the year but obviously the economic recession here we expect to grow revenue and have nice earnings leverage in that business.

Very good. Thank you very much.

There are no further questions in queue. At this time, I would like to turn the call back over to management for closing comments.

This is Doug Fox. I would like to thank you all attending today. I would like to inform you that our next conference call, our next quarterly conference call will be on August 4th. So thank you very much. Have a good day.

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