斑馬技術公司 (ZBRA) 2009 Q2 法說會逐字稿

Good morning, and welcome to Zebra Technologies' 2009 second quarter earnings release conference call. Joining us from Zebra Technologies, are Anders Gustafsson, CEO, Mike Smiley, CFO, and Doug Fox, Vice President of Investor Relations. (Operator Instructions). At the request of Zebra Technologies, this 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 made on this call will relate to future events or circumstances and, therefore, will be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Somewhere words such as expect, believe or 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 31st, 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. Good morning, everyone. Here in the room with me are Mike Smiley, our CFO, and Mike Terzich, our SVP of Global Sales and Marketing for the Specialty Printing Group.

Today we reported second quarter sales of $188 million, and EPS, excluding exit and restructuring costs of $0.19, both within our guidance range. We delivered solid performance by maintaining effective control over operating expenses, working capital and sales execution, although the business climate remains challenged, we are seeing signs of stabilization during the quarter. Order activity resumed and pipeline levels and conversion rates also improved. We are well positioned to benefit from this environment both in the near and long term.

Our global industry leadership across multiple dimensions gives us the ability to maintain share and capture ample profitable growth opportunities as we position Zebra for significant earnings leverage when business conditions improve. Overall, I was pleased with how Zebra employees continue to prudently operate the business by executing well in the areas within our control. We continue to reduce operating expenses. We also did a great job managing inventories and receivables that allowed us to deliver a strong free cash flow.

Zebra Enterprise Solutions, also known as ZES, achieved adjusted EBTR or cash earnings break even for the second consecutive quarter, and we continue to expect ZES to achieve cash earnings break even for the full year. In addition, our manufacturing, outsourcing and ERP projects are progressing on target and within budget. And we expect to achieve the operational efficiencies and cost savings outlined earlier.

In the Americas, we saw a return of some large deal activity, a sign that customers willing to commit to projects that have granted quantifiable pay backs. Latin America and Asia-Pacific have positive sequential growth, but Europe remains more challenged. In addition, distributors around the world continue to tighten inventories, particularly in Asia. In our run rate business remained weaker than this time last year. We ended the quarter, however, with an improving backlog, which gives us increased confidence that the business environment is stabilizing.

We had a healthy diversity of wins in key verticals, including retail, healthcare, direct store delivery and logistics. We are pleased with the increase in demand for our HC-100 wristband printer which continues to gain traction for improving patient safety in hospitals, and other health care venues. In addition, we have some rewarding wins in retail, including further deployments of kiosk printers. We also won a strategically important piece of business for our rugged RW series of mobile printers with a major food distributor this quarter. As we noted in the first quarter, the global slowdown in manufacturing resulted in a proportionately greater decline in sales of high-performance and mid-range printers. This changing product mix continues to put pressure on gross margins.

There is nothing permanent, however, about the gross margin reductions. We remain confident they will return to historical levels as mix and volume return and the benefits of outsourcing kick in. While we have protected key investments that drive long-term sales and profitable growth, we continue to pursue further expense reductions to align costs with business activities. In the second quarter, operating expenses declined 24% from a year ago, and an additional 3% from the first quarter. We will continue to look at ways to adjust our cost structure to drive long-term structural changes in the business, and reallocate resources and activities with higher risk adjusted returns. Operationally, our supply chain transformation remains on track to realize 2.5 o 3 percentage points in gross margin improvement in 2010.

In our Q1 call, we discussed that we had moved 59% of our printer production to Jabo. As of today, that number has increased to 90%. Over the next two quarters, we will be ramping down our US manufacturing infrastructure before the full financial benefits of the project are realized. We have already begun to realize some key operational benefits of our ERP implementations, which continues on schedule and within budget. During the first half of 2009, we implemented knowledge use for payroll, human resources, procurement in payables and portions of our general ledger. Both the outsourcing and ERP projects will help further deliver better customer service and greater operational efficiency.

Turning to Zebra Enterprise Solutions, I am pleased to report we continue to make good progress in achieving the milestones that we provided earlier this year. For the second quarter, we had a strong sequential increase in sales due to industrial manufacturing and government, the result of more concentrated efforts to diversify our base of industrial customers beyond the automotive sector. Again, we are on track to achieve our stated goals for ZES. During the second quarter, we had 18 major goal lines, with customers around the world, bringing our year to date number to 30 against the goal of 50. We assigned five new channel partners in Q2, which brings our total to eight against our goal of 20.

For the quarter, more than 35% of bookings in the automotive and industrial manufacturing sector were partner-generated deals. Integrators remain highly interested in participating in our channel program, and we are confident in meeting our goal of signing 20 for the year. Lastly, we had four new cost sales in adjacent markets, bringing our total for the year to 11, on schedule to achieve this year's goal of 25. These are all encouraging results, and we are confident we will meet our goals for the year.

We also remain focused on our disciplined capitalization strategy to deliver the highest risk adjusted returns on our investments to build enduring shareholder value. Our highest priority continues to be maintaining financial strength and flexibility to navigate through this challenging environment. We will also continue to repurchase shares as our stock remains attractive on a risk adjusted basis. During the second quarter, we used $13 million to buy back 600,000 shares. Since the beginning of 2008, we've deployed $200 million to buy back 8.3 million shares, or 12.5% of shares outstanding.

In conclusion at this halfway point in 2009, we are encouraged by the signs of stability within the current business environment. Customers are once again willing to engage in discussions about the larger business improvement projects that offer rapid quantifiable pay backs. However, we are mindful of the ongoing challenging business conditions, and will maintain our aggressive approach to sustain financial strength, align expenses with sales and position the company for improving returns and earnings leverage, when market conditions improve.

Looking beyond this quarter, we see long-term prospects for Zebra as excellent. Significant opportunities exist to extend our global leadership in specialty printing and other asset tracking technologies that offer real business improvement benefits. With the industry's leading brand, strongest channels, broadest product line and global presence, we have continued to invest prudently through this downturn to position Zebra for accelerating sales and improving profitability. These investments are focused on expanding our product line, building even stronger chance, and extending Zebra's already considerable global reach into key markets. All of these objectives will help us continue to move up the value chain and become a more strategic business partner as well as improve our overall competitive position.

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

Thank you, Anders. Let me highlight the key financial year over year drivers for the quarter.

The story is much the same as for the first quarter. Sales were down comparably on a percentage basis in all regions against peak sales in the second quarter of 2008. Gross margins were affected by mix and volume, which affected overhead absorption. Operating expenses decreased in line with the sales declines, with the biggest reductions in sales and marketing and amortization of intangibles. We did a great job managing working capital with sequential declines in inventories.

Let's take a look at sales. For the quarter, sales were down 26% from peak sales a year ago, and down 3% from the first quarter. Sales in our specialty printer group were down 27% from a year ago, but down only 2% from the prior quarter. As Anders mentioned, large deal activity began a return in North America, with notable business in mobile workforce solutions, health care and government. Even with the slowdown, we are comfortable we maintained or extended our global leadership position. Enterprise solution sales of $20 million were at the high end of our guidance range.

Let's take a look at sales by product line. The bulk of the sales decline occurred in hardware, which was down 33%, to $125 million from last year and represented 67% of total sales. Sequentially, hardware sales were off less than 1%. On a used basis, printers declined 14% from a year ago, but were up 3% from the first quarter. Supply sales of $36 million were down 19% and comprised 19% of total sales, which is up from 17% of total sales a year ago. Service and software revenue continue to increase as a percentage of sales, reaching 14% for the second quarter, up from 11% last year.

By region, we had comparable sales decline between 25 and 30%. Foreign exchange had an unfavorable impact on sales of $3.4 million or 1.3% from a year ago, with an average Euro rate of $1.38 for the quarter versus $1.56 last year. As Andrews commented, we had greater weakness in our higher priced printer lines from the extreme slowdown in manufacturing across the globe. This mixed change with relatively better sales performance from desktop to mobile printers along with the greater proportion of supply sales put downward pressure on gross margins.

Consolidated gross profit margin of 43.6% was down from a peak of 50.3% a year ago, and 44.6% in the first quarter. The effective mix in lower volumes, which negatively affected overhead absorption, primarily drove gross margin in the quarter. For the quarter, Specialty Printing Group gross margin came in at 41.6%, down from 40.5% a year ago, and 40.1% for the first quarter. We view this decline as temporary, and expect margins to rebound as volumes increase, product mix improves and outsourcing is completed.

DS margin had a healthy increase moving from 49.1% a year ago and 55.6% from the first quarter to 60% in the current period. Better margins in services and improved mix of business helped to further push profitability of this segment. We maintain excellent control over operating expenses. Second quarter total operating expenses were down $21 million or 24% from last year. They were down an additional $2.3 million or 3% from the first quarter. Year over year, the biggest changes in operating expenses occurred in the areas of payroll and other employee-related expenses from the cost actions we have taken over the past year.

The declines in reduction payroll costs, as employees are encouraged to start the summer by taking Fridays off in May as vacation, the cost of which was previously accrued. Lower cost for business development, legal fees, travel and entertainment, and project expenses also contributed to the downward move and operating expenses from a year ago. Amortization decreased $2.1 million, the result of impairment charges taken in the fourth quarter. For the quarter the investment portfolio had an annualized return of 4.5%. Year over year, investment income was down principally because of lower interest rates and cash balances from the buy back of Zebra's stock. Net income, excluding $0.04 per share in exit and restructuring costs came in at $0.19 per diluted share on 59.4 million shares outstanding.

Stock buy-backs continue to push down the number of shares of Zebra stock outstanding. During the second quarter, we bought back 600,000 shares of Zebra stock at an average price of $18.04. The volume we purchased was down from previous periods, largely because of the tighter cash flow we experienced in the first quarter. We now have 3.1 million shares remaining authorized for repurchase. We ended the quarter with 59.1 million shares outstanding.

Net receivables were up slightly from the first quarter due to the timing of shipments and collections. Still, the day sales outstanding were a comfortable 67 days compared with 65 days for the first quarter. Inventories declined $8 million from the first quarter with turns increasing from 4.2 to 4.4 times. Finally, we ended the quarter with $207 million in cash investments, up from $189 million at tend of the first quarter.

It was also a very good cash generating quarter for Zebra. Free cash flow amounted to $28 million. In addition to effective control over working capital, capital expenditures totaled approximately $6 million, which is down from previous quarters and closer to a more normalized rate, now that we are largely past the elevated expenditures for the ERP and outsourcing projects.

Let me turn for a moment to capital allocation. Like all companies, Zebra has five potential uses for its excess resources to build shareholder value. 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. To this juncture, share repurchase remain the highest returning investment alternative on a risk adjusted basis. In addition, our focus continues to be on increased unit turns of ZES before we have any more acquisitions in this area.

Now let's look at our third quarter forecast. We're forecasting sales of 186 to $198 million. This forecast consists of expectations for Zebra specialty printing group sales in the range of $168 million to $178 million, and Zebra Enterprise Solution sales between $18 million and $20 million. The forecast reflects the seasonally slow third quarter, particularly in Europe and incorporates an average US dollar Euro exchange rate of 1.4 compared with 1.38 in the second quarter. Our forecast assumes gross profit margin in the range of 44.3% to 46%, reflecting a portion of the benefit of outsourcing and the modest improvement in product mix.

We expect GAAP operating expenses at 71 to $74 million. This is up slightly from Q2 as we do not expect to see as much of a benefit from employees taking vacation, like we experienced in the second quarter. GAAP earnings are expected in the range of $0.14 to $0.21 per share. We're estimating exit, restructuring, and integration expenses to have a $0.03 per share impact on EPS. The income tax rate will be 32%.

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

Thank you, Mike. In challenging times it's even more important for companies to understand their growth opportunities and the path rates for increasing shareholder value. During this downturn, we've increased our dialogue with end users and channel partners and we have reconfirmed the soundness of our business strategy. We are even more confident in the opportunities for profitable growth in specialty printing, and we are making the right moves to drive future success of Zebra Technologies.

In this turbulent environment, customers are consolidating their relationships with companies that can meet more of their needs. We are well positioned today, and we will become stronger by selectively investing in areas that will enable us the to gain share and build on our industry-leading customer base as industry recovers. Geographic expansion continues to be a top priority. Asia is one region which we have an opportunity to penetrate more fully over the next 12 to 18 months. We have added more than a dozen sales and marketing employees to the region over the past year, and we intend to add more.

We continue to invest in growth, through expansion of our channel-centric model to facilitate the placement of Zebra products with more customers around the world. We are focusing on growing our global base of value added resellers and on building relationships with large system integrators and independent software vendors or ISVs, which are a natural extension of our channel model. This group of partners will help Zebra move further up the value chain with large enterprise customers, penetrate existing target verticals more deeply, and enable entry into new opportunities more quickly and efficiently.

Ultimately strengthening our channels will help us serve our current base of customers more effectively as well as expand the number of customers we serve. Zebra consistently ranks among the highest in the industry in terms of customer satisfaction and loyalty, as measured by net promoter scores. This loyalty has led to a high level of repeat business. Broader channels help Zebra serve an increasingly diverse range of customers, from value users of thermal printing, to those who place a premium on innovation, software and creativity to track assets in a smarter way.

With signs of stabilization in the still challenging business climate, we will continue to balance two key priorities. Pursuing near-term profitability, we're pursuing long-term opportunities. Our results demonstrate the effectiveness of our actions. We are using our financial strength and flexibility, industry leadership and focusing on the customer to drive greater success and create shareholder value by directing our resources to areas that have the highest risk adjusted returns. Our Zebra employees continue to do an excellent job maintaining global leadership by capturing more available opportunities through meeting customer needs.

This concludes our prepared remarks. We will now be happy to take your questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question from the line of Brian Drab from William Blair and Company. Please state your question.

Good morning, guys.

Good morning.

First question is just around market share gains or potential market share gains that you think you might be seeing globally. Can you talk about that a little more in detail within specific geographies and end markets or product lines, where you think you might be gaining some share?

I think overall, we believe that we are holding or extending our share in our product lines across the world. One area that we have put more emphasis on has been mobile workforce. We believe that we've been doing quite well there for the last while. Health care is a market that we believe we're also doing well in today, and growing. And the government is another market for us that we believe we're doing quite well in.

Okay. Great. And within specific geographies, and any particular geographies you think you're doing better than others in?

This is Mike Terzich.

Hi, Mike. How are you doing?

Specific to geography, the mobile workforce opportunities have been prominent for us in North America and in Latin America. Health care has been very solid, both in North America and in Europe, and the government has been also concentrated in North America and Europe, the government inclusive of some of the postal opportunities in Europe and through the Armed Forces Department of Defense in the United States.

Okay. Great. And just one more question. The end of the first quarter, the sense that you gave us, I believe, was that inventory reductions at your distributors had pretty much played out, and you didn't think that you would feel the effects of that to any great extent on the second quarter. What effect did inventory reductions at distributor have on your sales in the second quarter?

It was some impact of inventory reductions in the second quarter. I think sales out of some of our distributors on a worldwide basis continued to reduce a bit, but they also increased the inventory turn targets they have. So we believe that at this stage, the inventory corrections is really behind us; and at this point, we should see a nice flow-through of orders as they receive them.

Okay. Great. Thank you.

Thank you. Our next line from the question of Chris Quilty from Raymond James. Please state your question.

Good morning, gentlemen. I was hoping you could help us quantify better sort of the accumulated cost savings we should be seeing by next year, in two areas, one on the manufacturing side. I know you had talked about incrementally taking up $20 million or more once the US base of manufacturing is down. That's the first one.

Okay.

And -- I was going to say -- and the second one would be the ERP spending. When that will pay off and what the incremental pickup might be for next year?

First of all, on the gross margin, I think we mentioned that from the second quarter to our third quarter forecast, we're seeing a little bit of the benefit of the outsourcing and the improvement of that gross margin. We expect -- if you look from Q2 to what we're going to see in 2010, the figure we've given you before still remains intact. Again as volumes increase, the savings will increase. As volumes decline, the savings goes down; but at this level we're sort of in the ballpark of what we've been telling you all along.

As far as the ERP spending, I think, if you look at our capital expenditures, you can see that for the quarter, they were down. I think a lot of the heavy cash flow has already gone through -- a lot of it through 2008, and we expect sort of the current levels roughly to be sort of where we see ourselves going forward. Again, 2008 had both the ERP implementation and some CapEx associated with the outsourcing. So we will -- again, I think, in 2009 -- and we're not quantifying this; but in 2009, we are, in some respects carrying two sets of ERPs, because we're not sure if switching one off and turning one on all at the same time. We're trying to take something that's a little less risky, so as a result, going through our P&L, we have software costs and maintenance on legacy systems as well as new systems. In 2011, we'll see ourselves through most of the ERP implementation.

Okay. And have you quantified any tax savings from the off shoring? Not that the administration might not take those away, but --

Well the 32% rate is meant to reflect sort of the potential tax benefits of outsourcing for this year. We haven't really computed -- I think -- you bring up a really good point. It's difficult to know how the administration is going to act our tax benefits in 2010 and going forward. So at this point, we're not really giving a figure out for that.

Okay. Thank you.

Your next question is from the line of Reik Read with Robert Baird. Please state your question.

Good morning.

Good morning.

Anders, in your comments, you had mentioned that the pipeline is building; and just could you clarify that a little bit. I know it's more of a turns business with more minimal pipeline and maybe in the enterprise solutions group there's more of a pipeline, but can you just clarify what you mean there?

Yes. The number of activities -- number of deals that we see in the pipeline has been increasing. So that gives us some better confidence about the outlook. We're also seeing a better conversion rates of deals. They are actually deals that end up in our pipeline have a higher proportion of getting close, and third, I would say as we entered the third quarter, we actually had the healthiest backlog that we've seen in the last year.

And when you talk about a backlog in pipeline, are these deals that your sales force is going out and earning and may fill through the channel and come quick through in the fashion.

Yes. These are deals that we and/or our channel are working on. So we are aware of a number of deals that our channel works on that we aren't necessarily involving directly ourselves. We're also helping -- doing a high-touch module with our sales channel partners to ensure they get the full support, as much benefit as they can from our resources.

Okay. And with respect to your guidance, can you talk a little bit about what your assumptions are for hitting the 186 number versus the 198?

So we're in the third quarter, which is a little bit -- I think, given what Anders was saying about the pipeline, that we felt good. I think the hard part about predicting the forecast is we're going into what is in Europe a holiday season, so we're trying to balance sort of on one hand, knowing that we have a holiday season -- like going around the moon on Apollo 13 on the back side for EMEA. We're trying to balance the fact that we don't know exactly how the holiday will act us, but we're also seeing things right now look attractive. That's how we try to balance the range.

And you mean attractive in Europe as well as North America? Right .

This is Mike Terzich. Yes, that's what it means. July was -- we felt pretty comfortable with July, but we recognized that typically August is the month of European holiday; and with the broader economic situation still prevalent, it's just -- we're just not certain how that holiday season is going to play out. But we like the way July looked, and we feel pretty comfortable with the range.

Okay. And then, Mike, since we have you on the phone, could you maybe give us just a little bit of an update on some of the key vertical markets, manufacturing transportation, logistics, retail and what you're just generally seeing in the marketplace?

Well, I think, in Anders' earlier comment, I think, with certainty the manufacturing -- the extended manufacturing supply chain, including the transportation sector has been the most challenging market that we're seeing, and that's on a global basis, not only in last, but also in just about every one of the export dependent international markets as well. Where we have seen opportunities, including the pipeline comments that Anders made earlier is in a couple of markets, particularly in what we call mobile workforce, which is a lot in the direct store delivery space, as an example.

Where the efficiency of our solutions, even in tougher economic environments, there's quite a bit of interest right now for the folks that are delivering goods and services in the field to streamline printing solutions. So that's created an opportunity. Health care has been very good, and continues to be pretty robust for us. Globally for that matter, we're very well positioned there with the partners and the solutions we have.

And the retail space is a bit hit or miss right now. And what I mean by that is you look at the high-branded goods retailers and their business obviously is soft. They feed off of the same store sales as a key metric for IT solution deployment. The box retailers, the discount retailers. That business has been good, and so we're seeing some interest in some of the larger project deployments that serve that space. So it's really a mixed bag.

And just real quickly, two follow ups on what you just said. One on the retail side of things. Can you just talk -- you guys have been talking about trying to diversify that retail space for awhile. To what extent is that helping to offset some of the more general weakness? And then, on the health care front, if you look at the stimulus spending -- and I know that's going into a lot of different places, but there's $23 billion that are out there floating for IT in health care, how much of that can you guys capture?

As far as the diversification strategy, that is working well. We actually look at that from two dimensions. The first dimension is diversification of selling a broader range of solutions into our existing retail customers; and then the second dimension is adding retail customers, and I can tell you, in the second quarter, that served us well in both markets.

For example, we introduced some key printing solutions in some of our retail customers, and that was meaningful relative to the contribution in the second quarter, and we've added some new retail accounts as well, both here in the United States and in the international markets. On the health care front, I think it's what you said. I think there is -- there is some surge in bringing AIDC technology into the healthcare. We've been well positioned there for a number of years, and we had a number of large hospital patient related safety applications that we closed in the second quarter and the pipeline for the third quarter looks as robust.

Okay. Great. Thank you, guys.

Thanks.

Our next question is from the line of Paul Koster with JPMorgan. Please state your question.

Hi, good morning. It's actually Mark Strauss on behalf of Paul. Apologies if we missed this earlier, but can you remind us how far along we are in the outsourcing initiative?

The outsourcing we have now moved 90% of our production capacity to Jabo in China. The focus is to complete the last 10%; but over the last two quarters, we have ramped down the remaining capacity we have in the U.S. So if you remember our strategy was to start up the line in China, ramp it, and prove that we had the supply chain working properly, and it was being robust. We had to run our North America and Chinese product lines in parallel about six weeks. And now -- 90% -- we are ramping down the benefits or the product lines in the U.S.

We've also now started in July, really, to be able to reduce our head count, with some well over 200 people have been leaving the organization now, many of them indirect employees. So obviously more of the expensive part. So that's a difficult part of outsourcing, but that's also one that's going to help us drive the benefits in this third quarter here now. And we're still confident that the guidance we've given earlier, about 2.5 to 3 percentage points of gross margin improvement in 2010.

Got it. Thanks. And then, have you seen -- can you tell us how to maintenance revenue has been trending has the customers have been delaying their new printer orders?

The after-market revenues?

Right.

After-market revenues have been holding up much better than the new product sales, as customers have been repairing older printers. They have been buying new or spare replacement print heads and other things like that.

Yes. Okay. Thank you very much.

Our next question is from the line of [Mark Howsale with Vectra]. Please state your question.

Good morning. I'm wondering if you can give me -- give us a little insight into the progress of the enterprise solutions, and can you address, as part of that the question of whether you're jeopardizing any charitable donations by this project?

So first progress on the business one of the big objectives for this year was to make sure we got EPS to cash earnings breakeven, and we've now done that two quarters in a row, and we expect that we will continue to achieve that for the full year. We laid out three different priorities or three different objectives. One was to see 50 new large go-lives for ZES, and we are now at 30 for the half points. We said we wanted to sign up 20 new channel partners, and we now have eight for that, and the majority of those are SBG traditional SBG partners, and the last one was, we were looking to provide more cross sales between the new verticals -- new products into existing customers, and we're now done 11 of those out of a goal of 25.

So I think we're tracking quite nicely on the objectives we set out, and we're feeling quite good about that. But this is a tough environment obviously for Zebra as a whole and ZES. Automotive was the largest single market for the granite acquisition that we did, and container traffic is down for the first time, I think, in the history of the container. So it's not like those industries have been spared. But I think we've been dealing with that quite well.

With respect to the second part of your question, whether or not any of our traditional SBG partners will be concerned about the ZES, I don't believe so. I think we are working closely with a number of them to enable them to become also resellers for our ZES organization, and for the most part, our traditional partners don't have contacts or relationships or even capabilities to say -- to market certain terminal operating systems into marine terminal operators. So I think that we have a good situation with our current SBG partners, and many of them are working with us to become partners for ZES also.

Thanks, Anders.

Our next question is from the line of Anthony Kure with KeyBanc Capital Markets. Please state your question.

I just want to touch on the mix headwinds with the larger printers versus the smaller printers. Can you just give me an indication of what kind of historic mix you may have experienced in the higher margin days for these types of printers? Is it -- were the larger printers more than 50% of unit sales or less than 50%? I'm just trying to gauge the magnitude of what you're being impacted here?

For the last five, six years, the mix of our high end, sort of the table-top printer lines have been around 30% of our printer revenues, and that has come down a bit to 25% here now, and I think we're really largely driven by manufacturing being down very substantially around the world. If you look at many markets where we had strong positions, like in Asia, they're very much export oriented, and exports have gone down substantially. So the manufacturing lines are not being utilized to the same extent they were.

But we believe we have a very strong market share in that area, and we are holding our share, if not gaining share, and we have a number of new products in the pipeline at the high end, as we believe it will help stimulate demand over the next many months. In the fall we'll be coming out with the new XI-4 printer, which is a new high-end high-performance printer for us. We also have a retransfer printer for our core business; and earlier next year, we come out with a high-performance and security printer for our car business also. We're doing a number of things to make sure we have a very healthy and vibrant product portfolio that will help stimulate demand in that space for us also.

Okay. And then I think you mentioned, when the historic mix continues or returns to normal, you get to historic margins. When you say -- I want to quantify or get an idea for the time frame we're talking about. Are we talking about historic operating margins? And in that light, would that be sort of the low 20s? Is that what you're referring to as historic margins.

We're talking about gross margins.

Okay.

And I think that historically we've been sort of in the 47, 48% range, and I think that's sort of what we're talking about now.

Okay. And then last question -- I didn't catch the full comment on the impact of the employees taking the day off and the impact of accrual. Could you just, Mike, go through that portion of your comments again?

We're not disclosing how much it is. But let me say it's a meaningful part of the difference from quarter to quarter.

Of which piece? Of the G&A?

Yes.

All right. Thank you.

Your next question is from the line of Ajit Pai with Thomas Weisel. Please state your question.

This is [Andy Young] standing in for Ajit Pai.

Good morning.

First a couple of questions regarding the enterprise solutions group. I believe this is the first sales decline for the segment on a year over year basis. Can you give us some color on end market conditions, given your pipeline? Do you see improvement in the coming quarters?

Yes. That's correct, that this is the first year over year decline for ZES. So from that perspective, ZES has done well by hanging in there for as long as it has. Obviously the markets ZES are operating in are tough and exposed to the economic downturn no less than the economy as a well, with automotive and shipping volume being two big drivers for us. That being said, I still believe we are well placed in a number of attractive markets here, and we do expect that we will be able to hold and expand our share, and we are focusing very much on being able to expand particularly in the industrial manufacturing area and in government to leveraging channel partners, which will be a more cost-effective way for us to go to market .

Okay. And also, you mentioned that segments actually achieved cash breakeven and given the cost reductions and restructuring that you have implemented so far, what is the sales breakeven level now? Is this going to be roughly $20 million in the quarter, or are you aiming for even lower volume?

It's roughly 20 million per quarter, and I think that's -- we think that's -- that's a good target for us to have at this stage.

Okay. Great. One final question. You mentioned that mix shift and lower sales volumes were the main driver for lower gross margin for this quarter, but do you see any increase in pressure in the markets?

Well, I think we talked about the fact -- and historically when we see large deals, we'll see a number of competitors that will chase those deals. And so quarter to quarter always be a little pricing up and down. We don't see anything terribly abnormal about this quarter's results in regards to pricing, but we will see again -- and as big deals pop up, it will attract a lot of competitors, and the pricing will be more competitive.

Just one more point on that. When you look at our press release, you can see AUPs have declined. That's driven by mix shift, not by actual price decline within the product bandwidth. So pricing within product bandwidth is very, very stable. The only area where we see some extra modest price pressure is on larger deals where competition is somewhat tougher.

Got it. Thank you.

Our next question is from the line of Richard Davis with [Precision Data]. Please state your question.

Yes. Along the lines of the enterprise area, it looks as though there is a terrific improvement in either gross margin or operating costs. Looking at the numbers, could you give us some color on that?

Yes. There's a meaningful improvement in both gross margin and operating costs. We have worked very hard for the last year to really get the cost structure in place to enable us to operate at the cash earnings breakeven point. On the gross margin, we have worked really hard first to improve the services gross margin. That's one big component of this. The other one is that we have a more healthy mix in this quarter, and we also expect that to be the case for next quarter. And then we have some very substantial structural changes to the organization, which has reduced the operating expense by $7 million per quarter.

I see. Thank you.

Our next question is from the line of Greg Halter from Great Lakes Review. Please state your question.

Thank you. Good morning.

Good morning.

I didn't hear the figure for new products and reductions and the percentage of sales and wonder what that is, and Anders, I think you've discussed a couple of the new ones, but what your prospects are there going forward?

Yes. New product revenues for the quarter was 7.5%. So in line with our -- the prior quarter, and we have, as I said a number of new attractive products coming up in the second half of 2009 and too into 2010. That should help to give that a nice boost.

Okay. And what percentage of your sales now is scan source accounting for ?

I have to look that up.

Still around 15%?

Yes.

Have there been any changes in the investment portfolio composition?

Our investment portfolio?

Yes.

No. No, not at all.

Okay. And I know, Mike you touched on the receivables and so forth, but I just wanted to know if you could expand on your thoughts as to the quality that you're seeing there, and if you have any issues in terms of collectability and so forth.

Our working capital over the last couple of quarters is, we've been very pleasantly pleased with where things are. So the receivables -- we haven't had any meaningful customer inability to pay or anything like that. So the quality of our receivables, we feel, are very good. I say the other piece that doesn't play in as much is, actually, for our inventories to moved in the direction that they did, given we're in the middle of the outsourcing, I think our operations team has done a very good job of trying to manage that. I think at the beginning of the quarter, I would have told you that I expected inventory to increase a little bit; and actually, for it to decline in the middle of what we're going through, we felt good about that.

Okay. That's good. Regarding the backlog, you had been making comments about that, but is there any directional figures that you could provide whether it's up 10 or 20 or 50% year over year?

I think we're comfortable if we just reiterate what we said earlier, that it's the healthiest we had in the last 12 months.

Okay. I thought I'd give you a chance. Thanks.

(Operator Instructions). Our next question is from the line of Reik Read with Robert W. Baird. Please state your question.

Just with respect to the ZSG business, the automotive segment or the automotive industry is showing some signs of stability, and obvious through there's a lot of cash being infused by governments around the world to stabilize that. Does that suggest that there may be some returning opportunity, or is that something that's just going to stay dormant for awhile?

We believe there's opportunities to do more in automotive. We actually had an increase in automotive and industrial manufacturing orders quarter over quarter. So it was up from the first quarter. Had a very strong position in automotive, and I think we are well placed to be able to capture additional budgets that the automotive manufacturers may invest in. And as the automotive manufacturers are starting to get out of bankruptcy for some and improve their financials in others areas, we expect they will continue to drive hard to improve the efficiencies of their operations. And our products have a very quick pay-back, and it's very well respected by the users within the automotive community. So we are expecting to see improvements in that side of the business.

Are you -- Anders, at this point, are you having those discussions with them? Or is it still kind of a wait and see given everything that they've gone through?

It's obviously a lot of different manufacturers out there. And some of them are more active in discussions than others, but we had a number of new automotive wins in the second quarter.

Okay. And then just one follow-up on the specialty printing group. The operating margin, if I factor out the onetime items, declined by about a hundred basis points sequentially. Revenue was down modestly, less than 2%. What would have driven that decline, given all the positive things that you had going on.

It was --

We had -- I mean, obviously we had -- we walked through the gross margin quarter over quarter. We've talked about the fact that we have the vacation benefit, but there's not -- we didn't really have any huge changes in our OpEx quarter to quarter except the items that we talked about.

Okay. Thanks.

Yes.

Thank you. There are no further questions at this time. I would like to turn the call back over to manager for closing comments.

This is Doug. First of all, thank you all for attending our conference call for today. Just put on your calendar our next quarterly conference call will be on Wednesday, November 4th for the third quarter conference call. Also, if any of you want to follow up, Mike Smiley and I will be around to answer your questions all day today. Thank you very much.

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