斑馬技術公司 (ZBRA) 2009 Q3 法說會逐字稿

Good morning, and welcome to the Zebra Technologies 2009 third quarter earnings release conference call. Joining us from Zebra Technologies are Anders Gustafsson, CEO, Mike Smiley, CFO, Mike Terzich, Senior Vice President, SPG Global Sales and Marketing, and Doug Fox, Vice President, Investor Relations and Treasurer. All lines will be on 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 obligation, please disconnect at this time.

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

Thank you. Good morning, and 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 31st, 2008, which is on file with the Securities and Exchange Commission. Now let me turn the call over to Anders Gustafsson for some brief opening remarks.

Thank you, Doug, and 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 are pleased to report third quarter results that were well ahead of our expectations. Sales of $200 million exceeded the upper end of our guidance range and earnings per share of $0.23, excluding exit and restructuring costs were at the high end of our forecast. We also announced the sequential improvement in sales and earnings for the fourth quarter. As you can see, business conditions improved considerably from the first half of this year, and we are working closely with our suppliers throughout the system to ramp production. We are pleased with the progress we've made to date, and are encouraged about the further progress in coming quarters.

During the quarter, we capitalized on improved business through our valued channel partners and distributors, particularly in North America. In addition, we saw a strong run rate business and realized initial benefits of our outsourcing initiative. By balancing cost reduction with investments for the future over the past year, Zebra has been able to extend its leadership position by forging stronger ties with channel partners around the globe, and launching new products to meet more customer needs. The diversity of our business across verticals, channels, and geographies continues to work in our favor.

During the quarter, we took advantage of business opportunities in the healthcare, government and retail verticals, strengthened our relationships with channel partners, continued to focus on new product development, deepened customer relationships and enterprise solutions, and furthered our initiatives to improve operational efficiencies through our supply chain transformation and ERP system implementation. Because of these actions, Zebra is in a stronger position, both strategically and financially than many of our competitors. Additionally Zebra shifted from defense to offense in the third quarter, in line with the improvement we are seeing in our operating environment. Our strategies enable us to extend our leadership, improve returns on our investments and build shareholder value.

Let me quickly take you through some of the highlights for the quarter in our specialty printing and enterprise solution segments. Specialty printing, or SPG, experienced strong sequential sales growth in North America of 13% driven by improved business through channels, coupled with a few large deals in retail and government. In addition, product mix improved with better sales in the high performance and midrange printer categories. The region also had record sales in supplies in the quarter. An important part of our success in the quarter resulted from our continued investment and support for our channel partners during the downturn.

During the period, we focused on supporting our channel partners with co-marketing programs. We also worked closely with our card resellers to strengthen our partners first channel program to meet more of their needs and make Zebra cart printers more attractive. This commitment to our channel partners is now paying dividends. Latin America and Asia-Pacific also had positive sequential growth with notable sales into government and mobile applications, as well as a stronger deal pipeline for the quarter. fourth quarter. We also saw an increase in demand from contract manufacturers in Mexico.

Europe performed well in a seasonably slower quarter, which included an increase in UK sales versus the same quarter last year. While the region's channel business remained pressured, activity with retailers was strong for kiosk applications and mobile printing. In Europe as well as our other regions we are seeing a substantial increase in activity around patient safety applications, including wristbanding. The UK's National Patient Safety Agency issued an advisory recommending the use of printed wristbands, which standardized information to reduce errors. This advisory has caused great interest for Zebra's HC-100 wristband printer and associated wristbands in the UK, and is just one example of the growing interest globally in patient safety.

The HC-100 is unique in that it requires customers to use our supplies, providing Zebra with a recurring supplies revenue stream. We are optimistic about the outlook for this important vertical. Our healthcare solutions are an example of Zebra working to be ahead of the market and we are confident this will continue to pay off for us as more governments recognize the need for patient safety and mandate the use of printed wristbands.

I am pleased to report that the transition of outsourcing is nearly complete. As of the end of October, 99.8% of printers shipped were sourced from JABL. While we have moved production from almost all of our printer products to JABL, we still need to shut down a number of our old lines in the US. We will spend the next few months ramping down our US manufacturing to achieve our goal of 2.5 to 3 percentage points in gross margin improvement in 2010. During the third quarter we saw a two percentage point sequential increase in gross margin, including the impact of an improved product mix and outsourcing. We remain confident that gross margin will continue to improve as we realize additional benefits from outsourcing, launch new products and witness further improvement in product mix.

Turning to Zebra Enterprise Solutions, I am pleased to report we experienced another quarter of revenues that met our expectations and positive adjusted EBITDA or cash earnings. We continue to believe we will break cash earnings break-even for 2009 as a whole. The entire ZES team has done a great job this year meeting their objectives. Supply chain operators need industry specific solutions that create the ability to squeeze more out of the assets they currently hold and we are providing them with the broad and scalable technologies to locate and optimize their mission critical assets.

In Q3, we had particular success selling to customers in aerospace and defense, manufacturing and retail industries. These customers are using both hardware and software to optimize the flow of goods in complex logistical operations. I am pleased to report that these customers include both existing customers from SPG and enterprise solutions as well as new customers. We established these relationships through direct efforts and extended channel relationships.

Of particular note in Q3, we had some interesting wins in ultra wide band or UWB solutions, one large grocery store chain is using our UWB tags to provide realtime precise locations of carts within the grocery store. While a military unit is using our UWB tags and receivers to track military troops in a training environment. In addition, another customer is using our Infoman GPS solution to track assets in an aluminum plant. These are just a few of the ways ZES is extending and integrating our hardware and software solutions to meet the requirements of our customers.

These customers help us meet the vision and milestones that we set out last year. We remain on track to achieve all of the milestones for 2009. During the third quarter we added 14 go-lives with customers around the world, bringing our year-to-date number to 44 against our goal of 50. We signed seven new channel partners in Q3, bringing our total to 15 against our goal of 20. We had six new cross sales into adjacent markets, bringing our total for the year to 17 against our goal of 25. An example of this is a deal where a major automotive manufacturer established our SPG kiosk printers as the standard for fixed workstations for their ZES material call system on all of their plant floors. We see this cross-selling opportunity as one where the customer recognizes benefits from having a single vendor and we can leverage the existing relationships of enterprise solutions and SPG partners. Finally, we stayed focused on our disciplined capital allocation strategy to deliver the highest risk adjusted returns on our investments to build shareholder value over the long term.

Without question, Zebra's financial strength has served the company well during these challenging times, by enabling us to increase Zebra's leadership position through stronger more enduring ties with channel partners and customers. The continued focus on R&D and flexibility to invest in emerging opportunities. We also continue to repurchase shares, which remained attractive on a risk adjusted basis. Since the beginning of 2008, we have deployed more than $200 million to buy back 9 million or 30% of our share.s We do this because we view Zebra as the best risk adjusted investment alternative at this time.

In conclusion, we started the second half of the year on an encouraging note, by remaining nimble in the still challenging operating environment we are capturing more opportunities in attractive verticals through stronger bonds with our customers and channel partners. Additionally, we continue to position the company for improving returns and earnings leverage as market conditions improve. Zebra's long term prospects are excellent. Zebra is now benefiting from our decision to invest prudently through the downturn. These investments have been focused on expanding our product lines, building even stronger channels, and extending Zebra's global reach. We spent considerable time and resources during the third quarter to understand where the growth opportunities lie for Zebra, how best to drive improvements and accelerate our business strategies. We will be dedicating new resources to take advantage of significant opportunities in geographic expansion and product development, among other areas to extend our global leadership in specialty printing and our asset tracking solutions that offer quantifiable business improvements.

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

Thank you, Anders. Let me focus on some of the relevant sequential drives from the quarter. Quarterly sales were up from the second quarter, with North America and Latin America experiencing the highest growth rates. Gross margin increased 2 percentage points from improve mix and volume and the first benefits from outsourcing. We also had higher gross margins in Zebra Enterprise Solutions. Operating expenses, which are at the upper end of our guidance range, reflect higher payroll and other employee-related expenses as well as consulting services.

Inventories maintained their downward trajectory and we generated $24 million in free cash flow. Zebra Enterprise Solutions had its third consecutive quarter of cash earnings break even. Sales for the quarter were down 18% from a year ago and 7% from the second quarter, the first increase in five quarters. Foreign exchange net of hedges had a favorable impact of $4.4 million on the year-over-year change in sales and a $2 million impact on the sequential change. Sales in the specialty printing group were down 17% from a year ago, but up 8% from the prior quarter. Business in North America was up $11 million or 13% from the second quarter. The primary driver for the sequential improvement was a stronger run rate business.

Latin America was also up sharply from the second quarter increasing 16% on strength in Brazil. Only EMEA sales were down from both a year ago in the second quarter, although the sequential seasonal decline was less than normal. 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. Hardware was the most affected on a year-over-year basis, down 25% to $131 million from last year. Sequentially, hardware sales were up 5% as an improved product mix with more high performance mid range printers making up the greater proportion of our printer sales. The percentage of printer sales from the new printer products was 7.3% for the third quarter. We had an excellent quarter in supplies, which were down only 5% from a year ago but up 22% from the second quarter. Again, North America led the way with supply sales hitting a new record, driven by strong sales in government and to a large lumber manufacturer.

Consolidated gross margin of 45.7% was down from last year's 48.3%, and up from the 43.6% for the second quarter. As in the second quarter, mix and lower volumes, which negatively affected overhead absorption, primarily drove the year-over-year margin decline, offset by about 1% benefit from outsourcing. For the quarter, Specialty Printing Group's gross margin improved 200 basis points from the second quarter to 43.6%. Again roughly half the improvement came from outsourcing. Enterprise solutions also had a gross margin improvement of 4 -- up 4.3 percentage points from the second quarter.

Operating expenses of $76.5 million were down from a year ago. Excluding exit restructuring and a one time claim settlement, operating expenses were down 5.1 million from a year ago. Amortization increased $2.1 million, the result of impairment charges taken in the fourth quarter. Sequentially, operating expenses were up $7 million for the second quarter. The biggest sequential changes occurred in payroll and other employee-related expenses where we did not have the benefit of employees taking Fridays off in May as a vacation as well as other employee benefits. We also incurred higher costs related to consulting services to help identify and implement plans for positioning the business for long term growth and improved returns.

Net income excluding $0.04 per share in exit and restructuring costs came in at $0.23 per diluted share on 59.1 million average shares outstanding. During the quarter, we used $8 million to buy back 327,000 shares of Zebra stock at an average price of $24.50. We now have 2.8 million shares remaining authorized for repurchase. We ended the quarter with 58.9 million shares outstanding. Net receivables were up during the third quarter due to the timing of shipments and checks.

The days sales outstanding were a comfortable 66 days compared with 67 days for the second quarter. Inventories down $13 million from the second quarter are now down more than $20 million from the end of 2008. Inventory turns increased from 4.4 in the second quarter to 5.1 times. Finally, we ended the third quarter with $223 million in cash and investments, up from $207 million at the end of the second quarter. Quarterly free cash flow totaled $24 million to bring the year-to-date total to $43 million.

Let me spend a moment on 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. Our highest priority continues to be maintenance of a sufficient liquidity and balance sheet strength to ensure we can support our business objectives under any economic scenario. Share repurchases have remained our highest returning investment alternative on a risk adjusted basis. In addition, our focus continues to be on increasing returns at ZES before we make any acquisitions in this area.

Now let's look at our fourth quarter forecast. We're forecasting sales of $200 million to $212 million. This forecast consists of expectations for specialty printing group sales in the range of $182 million to $193 million and ZES sales between $18 million and $19 million. Our forecast assumes gross margin in the range of 45.3 to 46.6, reflecting a further improvement from outsourcing and improvement in product mix. We expect GAAP operating expenses of $74 million to $78 million. GAAP earnings are expected in the range of $0.18 to $0.25 per share. We're estimating exit restructuring integration expenses to have $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 pathways for increasing shareholder value. As I mentioned earlier, we have spent a considerable amount of time reviewing our business to identify the best ways to accelerate growth and improve Zebra's return on capital. After reconfirming the soundness of our business strategy, we are even more confident in the opportunities for profitable growth. Looking ahead, we will focus on aggressively taking share where we have position of greatest strength. Organically pursuing high potential, high growth and low risk adjacencies where we can win and continuing to build a lean world class operation.

In addition to reducing redundancies and increasing internal efficiencies, we are developing plans to deploy more resources to geographic areas such as Brazil, Eastern Europe and China where we've identified the most attractive opportunities and have already seen meaningful success. These countries and regions have not yet hit an inflection point with technology and are ripe for further growth. To capture these business opportunities our investments abroad will focus on expanding our global base of value rated resellers and other channel partners. This effort will include introducing our award winning partners first channel program, beginning with Brazil in this quarter. To maximize the effectiveness of these efforts, we will be developing products to meet customers' requirement in specific geographies.

Product development remains a cornerstone to our long term success. During the third quarter, we introduced the latest generation of our flagship high performance thermal printer, the XI4. This all metal for use in mission critical applications, boosts operational productivity by printing 40% faster and improves Ethernet connectivity over previous generations. This printer is an ideal choice for industrial enterprise printing solutions. In late October, we introduced the Zebra ZXP series 8 retransfer cart printer, incorporating patent pending technology for simultaneous dual sided printing, the series 8 offers customers print speeds twice as fast as competing printers, and delivers superior image quality, all at a competitive price.

The retransfer printer is an important addition to the Zebra card line. It enables us to participate more fully in Smart Card and other high end applications. The fastest growing segments of the ID card market. Combined with our new XML-based software platform, the ZXP series 8 is easier to use and integrate into enterprise systems. By staying close to our customers and channel partners, Zebra remains well positioned for success well into the future. Zebra employees have done an excellent job in achieving this objective through a difficult period. As customers continue to consolidate their relationships with companies that can meet more of their needs with robust offerings, Zebra is capturing more available opportunities. While we remain cautiously optimistic in the near term, the improving business conditions are encouraging and the outlook for Zebra is bright.

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

Thank you. (Operator Instructions). One moment, please, while we poll for questions. Our first question comes from Paul Coster from JPMorgan.

Thank you. And I just want to reconcile a little bit, your prepared remarks were very encouraging. The guidance is good, but perhaps it kind of disconnects a little bit from the outlook that you've depicted here. Is it just simply that you think this is really a 2010 recovery and 4Q is just the early signs of that? Can you just clarify a little bit?

Well, first I think our Q3 results were strong. We were up sequentially 8% in a quarter that seasonably is reasonably weak and we guided up again in Q4 and I think that our view is that the markets have stabilized and we will see growth also in 2010.

Okay. Two sort of cyclical issues as you come out of this downturn. One is to what extent are you competing with your own sort of refurbished equipment in a gray market? And the second, really on an operating expense side, to what extent have you got suppressed costs you think perhaps bounce back a little bit in 2010?

So on the refurbished side first there is a we believe modest sized market of refurbished equipment. We've tried to do a fair bit of research to try and understand how large that opportunity is, and if that's something we ought to get involved with, and to date we have determined it is relatively modest and not go that is really of interest to us. So we don't think that has a material impact on our business.

Yes. On the OpEx thing, this is Mike Smiley, a couple things. One is, you know what, you look at things sequentially, we've -- versus the second quarter we've had higher stock option expense and bonuses from the second quarter which has affected us and the other thing is that you see is in the second quarter we talked about encouraging employees to be taking vacation and so they took a lot of vacation in the second quarter and as a result, they took less vacation in the third quarter. So there's a little bit of strangeness in those numbers. We do have also highlight in 2009, we have temporarily held back some employee benefits this year. So that's one thing for this year that we'll see us reinstate some for 2010. So we will see some expenses pick up, but we also have on the other side, some activities we're working on to sort of continue to streamline our operations to help offset some of that.

Okay. Last question. It sounds like you're about to flex Zebra's muscles in the recovery. Is this going to be price-based competition that wins you market share or perhaps you can give us a little bit of color around that.

No. We're not looking to compete on price. I think we believe that our brand and the breadth of our portfolio and the breadth of our channel partners really enables us to compete more from a premium perspective and we see, though, that, you know, our pipelines are strengthening. Our backlog is stronger. So we're coming out with new products that also help stimulate particularly the high end of our portfolio. The XI4 is obviously the premium printer we have in our portfolio and the retransfer printer that I talked about that is a new printer for Zebra at the high end of the card printer range. So I think we have a lot of interesting product in our portfolio and more to come that helps stimulate additional market opportunities for us.

Thank you.

Thank you. Our next question is coming from Reik Read from Robert W. Baird.

Good morning.

Morning.

Could you guys just comment maybe a little bit more from the sequential improvement that you saw. Is this a function of simply more onesies and twosies in the channel or is there maybe some identifiable projects that maybe had been delayed that are starting to move forward? A little color there would be great.

The recovery we saw in Q3 was really broad based and it was really focused on our run rate business. There were some larger deals, but it was fewer larger deals than what we would normally see. So I think that there's probably some projects that were approved and made sense that were kind of being frozen you can say through the past year that were allowed to come through, but it was not a majority of sale big large deals. This is really a broad based run rate improvement.

And it sounds like the direct deals were on really on the retail and the government side. Government is understandable, but what seems to be moving forward in retail?

This is Mike Terzich. On the retail side, we tend to look at things through our pyramid and everybody knows who's at the top of the pyramid, but the activity in the quarter for us was really what we would define as some of the tier two retailers, still very large national retailers that were basically sitting on the fence in Q1 and Q2 on some technology deployments, and they advanced some solutions, in-store solutions, in the quarter, and which is essentially the last quarter for them to do that because they get that stuff in place for the holiday season. So it was good to see. It was activity across about a half a dozen tier two retailers, in store labeling, shelf labeling applications.

Okay, great. Thank you. And then just on the DXI4, maybe you guys can talk a little bit about what the opportunity is there in terms of does this actually generate some new opportunities, or is this something that helps usher in a refresh cycle?

I think it does a little bit of both. It has substantially higher print speeds and better connectivity and also improved use of interface. So I think that, this makes us more competitive at the high end. It gives our sales teams an opportunity to go back into accounts and talk about accelerating the refresh cycle and also gives us a better chance of competing on some new products and the pipeline for the XI4, since we launched, it has been very healthy. We've been very encouraged by what we've seen.

And is that maybe the key reason or one of the key reasons for the ASP being up sequentially?

No. That wouldn't. That's not enough to make it that big of a difference. The ASPs were up through a more general mix shift. We didn't see each of the product families were steady to up, but it was really driven more by a mix shift of selling more high end products.

Reik, it's Mike again. It was principally driven from that onesie twosie demand we saw across the board through distribution and the product -- preferred product of choice in a lot of those applications is the midrange product which also creates some favorable AUP for us, so we saw strong performance in Q3 in the midrange.

Okay. And then just last question, would the resource investment that you're making in the international markets, how much of that is underway? How much of that is in front of revenue? And what type of pricing -- I guess what type of product/pricing will be -- will those markets kind of accept?

A couple of questions there, I guess. First from an investment perspective we have invested in the international markets over the last several years and even in the downturn, we increased investment in some of the -- our emerging markets of highest growth areas. As we go forward, we are looking to continue to invest in those markets and we think that they are going to come out of the recession strong and they are substantial growth opportunities there. We have not yet hit an inflection point from a growth perspective and we believe that we have a solid portfolio of products for that. As we look forward into specific products that we are looking to develop, it's probably going to be more focused on Asia and China in particular, but it will be products that we believe would have a global opportunity, but be particularly attractive for that market. We think Asia and China is now large enough that we can make those types of investments and have good returns on those.

Okay. Thank you, guys.

Thank you. Our next question is coming from Brian Drab from William Blair.

Good morning.

Good morning.

I think you explained pretty clearly the reason that operating expense is up slightly, specially in third quarter over second quarter. sequentially in third quarter over second quarter. I think it was a bit higher than you expected. Is the reason that was a bit higher than expected, the two reasons the payroll and the consulting and then could you comment on going forward how those two items might affect the fourth quarter.

I think you've got it right that a lot of this was, you know, the vacation and some of the benefit stuff. I think that we're in the fourth quarter, we are going to be spending -- I think our guidance for the OpEx was up a little bit. We're going to be adding some hedge prudently where we think it makes some good sense to do that but not in a major way, and the consulting is probably something that we will probably go down a bit in the fourth quarter. So that's how I would sort of describe what's going to happen for OpEx in the fourth quarter.

Okay. So I think we understand what happened in the third quarter. Could you talk specifically about if you were surprised by any of the expenses in the third quarter, that might have come in above where you thought they were originally going to be.

Yes. The one surprise was I would say it's difficult to guess when people are going to take -- how much vacation people are going to take is one area and we're always -- given that we went through the vacation in the third quarter -- or in the second quarter, we really didn't know how it was going to show in the third quarter, and we were surprised, in fact, that people took less vacation than they thought, which basically increased our costs a little bit more than we thought it would.

Okay. Thanks. And then just one more quick one. On the supply sales side, great sequential improvement. Looks like 21% improvement. You mentioned some strong sales into the government vertical. Do you feel like you're doing something there to gain share, and that might be a sustainable type of movement there, or do you think that that was more the function of just the large order and is there anything else going on on the supply side?

The supplies market is, a huge market and we are a relatively modest player from that perspective. You know, we're really looking to compete more on making sure we compete for the right opportunities where we have a differentiated advantage and not really go for market share where we tend to be competing more on price with people who are more commodity providers. So our strategy is to really differentiate than compete for the opportunities where we have something unique to offer.

Okay. Thank you.

Thank you. Our next question is coming from Chuck Murphy from Sidoti & Company.

Morning, guys.

Morning.

A couple questions for you. First regarding the ESG business, I know you kind of have some goals for how many cross sales you make and that sort of thing. Would you talk a little bit about how much integration you've done of the ESG subsidiaries, both from a kind of operational as well as a sales and marketing perspective?

Yes. So from an organization perspective I think we're pretty much done with the integration. We have aligned our sales teams around verticals and geographies. We have integrated our product strategies quite substantially. So we have ideas of how we are trying to take the businesses forward to maximize the synergies we can get from common end users of verticals and leverage the R&D developments or resources we have to the maximum. So I think we feel that we've done a good job of being able to integrate these and the organization's always continued to evolve, but we from an acquisition perspective, we're largely done with the integration.

And what about from a production perspective? I mean is there any integration there?

So we are basically running, using our SPG resources to assist and move a lot of our contract manufacturing from that's currently in the S2 to China and use our more other partners that we have familiarity with.

Okay. And then looking out into like fourth quarter especially, 2010, is there a specific ESG business or product or application that you're excited about, more than others?

I think, we think the ZES business all have very attractive applications that really do help our customers improve how they -- the efficiency they get out of the assets they and other inventories. They can all demonstrate, are very demonstrable ROIs. So we think that, we're in some very attractive longer term markets. They're still modest in size, but we think that they will hit inflection points over the next year or so, but the current market conditions are tougher. Aviation, automotive and marine container traffic are all been hit harder than most industries in the last year, but we do believe that our solutions for realtime location services and, UWB out of tags and the GPS solutions are very attractive and has good growth opportunities over the next couple years.

Okay. And my final question was, could you just talk a little bit about, what happened sequentially for the printer units and maybe qualitatively what your expectations are for the fourth quarter for units and the ASPs of printers.

We really usually don't forecast units much. Units were down somewhat sequentially in Q3 and that was really driven by our selling more of the higher end product. That was part of the mix shift.

Improvement in AUPs from $508 to $530. So it's -- for us it was nice to see. I think we've been talking about the high end being a challenge for a while. It was nice to see that in this quarter that we had the high end or actually the midrange come back and help our margins and mix.

And for Q4 we would expect to see a strengthening of volume similar to what we've seen for the revenues. I got you. And were the lower end systems, were they tougher in the third quarter relative to the second quarter or was the second quarter some kind of -- was it a timing issue that you got a large order for lower end systems or something like that?

This is Mike Terzich. No. I think just the composite of the quarter with the strength that we saw through the broad based small sales, small unit volume sales across distribution channel. It just played out that that was more weighted towards some of our midrange solutions. The desktop solutions and the mobile solutions tend to be a little bit more product centric, right, in some of the earlier commentary, we saw fewer large deals in the quarter and this is typical of a composite you would see. It would reflect that. So we were more weighted towards the midrange, a little less weighted towards the mobile product and that was favorable from an AUP perspective.

Okay. Got you. All right. Thank you. Thank you.

Thank you. Our next question is coming from Andrew Abrams from Avian Securities.

A couple of quick ones. Just could you go through the impairments for us and, you know, where did all that come from? Is that small players that just sort of went away or are you taking reserves against some of the large ones that you're a little less comfortable with?

When you're talking about impairments, what are you -- what specifically are you relating to?

Asset impairments. Did you take some in the quarter?

No.

I'm sorry, my error. On the VAR channel, I know you don't see fully through the VAR channel. Is it possible for you guys to categorize the type of VAR customers that were buying in this quarter? Was it, the small one's and two's kind of or the bigger VARs where you're talking about 40, 50, 60, 70 units? Is there any way you can see into that?

We have some ability to see into that, but I think we -- as I mentioned earlier, the recovery we saw was broad based and it really did include all types of VARs. So there wasn't just, the really say either the very small ones or the larger ones. There was much more broad based and included all our partners.

Okay. And on the enterprise side deals, can you give a characterization on the activity level relative to last quarter? I'm assuming that it was better even though, you know, not that many deals closed for anybody in the AIDC space.

I'm sorry. One more time?

Can you characterize the level of conversation with your customers in the enterprise side, large deal oriented? I know it's hard to close, but has the activity level been higher this quarter than it was last quarter?

When you talk about enterprise side, is that the Zebra Enterprise Solutions area or just enterprise customers?

Just enterprise customers.

Enterprise customers. Yes, I think we had a healthy dialogue with enterprise customers about larger deals but they haven't closed yet. We think that there are going to be a good deal for us. We've got good deal flow for Q4 and particularly if 2010.

Would you expect it to be a budget issue where they're still working off relatively low 2009 budgets and you should start to see some activity as the 2010 budgets start to roll out in January?

I'm sure that will be a factor because a lot of companies basically set their budgets beginning of 2009 after they've seen the early impact at least of the recession and cut down the CapEx quite hard. So I would expect that the combination of new budgets and more confidence will increase their willingness to make some of the capital investments we need.

Okay. And one last question, on ZES for 2010 can you give us some idea of what your plans are in terms of an acquisition that might be in ZES? Are we very far away from that at this point because you're still trying to rationalize what you have there or is it still in the realm of possibility that you could add some additional assets to the ZES side?

First our priority for ZES is to make sure that we demonstrate value out of the assets we've acquired and we don't believe that there's a big gap in our portfolio that we need to fill with an acquisition or anything like that. So we are not looking at acquisitions at this point. We first want to make sure we get the performance of that organization up to expectations.

Great. Thank you very much.

Thank you. Our next question is coming from Ajit Pai from Thomas Weisel Partners.

Yes, good morning.

Good morning.

A couple of quick questions. The first one is just talking about, you know, the emerging markets as you said is an area you intend to focus on particularly in China. Could you give us some color on what the challenges of there are in terms of where the ASP is, and whether the margins over there, if you expect them to be comparable with your current margins?

So to date, our margins in emerging markets are comparable to what we see worldwide. We entered a lot of the emerging markets by basically following our North American European customers into those areas, and they've been buying a lot of our high end printers and products. We believe we have now good experience in those markets to understand where they're going, where the opportunities are, and I think we have opportunities to penetrate deeper into those geographies, both from a perspective of participating or with the local companies, the local economies, but also geographically moving to like in China, some of the tier two, tier three cities, not just stay in kind of the highest more prominent coastal regions.

Right. And the ASP on a go forward basis to get further penetration there, are they going to be comparable with your current ASPs?

We believe that the ASPs will be comparable to our current ASPs on a global basis but as we move further into tier two cities, there might be we see more of the desktop products rather than high end products.

Got it.

And we're in the family we expect it to be comparable.

Got it. And then just looking at your enterprise solutions group, you developed a pretty solid gross margin on revenues that were actually down quite a bit year over year and up only very modestly. Is that new margin that you have attained right now, is that sort of sustainable? There were any sort of one time issues that helped the margin the third quarter and structurally on a go forward basis as you get some operating leverage on that business and revenue starts coming in can you expect the margins on the growth side to actually improve further?

The gross margin in Q3 were healthier than with we think is kind of the ongoing run rate we think is going to continue to be more in the high 50s, 60% gross margin range. This was driven by mix largely, but as we go forward and we start seeing revenue ramp we do expect to see good earnings leverage as we've been very diligent in bringing down our operating expense levels, but also make sure that we have, you know, good control of our services organization to really get good gross margins out of services which is a big part of that organization.

Got it. And then the last question is just looking at your overall comparable gross margins, if I heard you right, I think you expect to get some benefit from shutting down redundancies in the next quarter. In this quarter itself you got about 100 basis points of benefit from the outsourcing to Jabul already but if I heard you right do you say that you expect a total of 200 to 300 basis point further improvement beyond the third quarter on your overall comp for gross margins from removing the redundant activities and 100 basis points approximately or so that you capture in the fourth quarter and rest over the next few quarters?

No. We said that -- all along we've said outsourcing we expect that to generate between 2.5 and 3 percentage points of gross margin. We had, one percentage points of gross margin improvement in the third quarter and we expect another 80 basis points improvement in the fourth quarter. So, you know, we have basically the difference left than to get to 2.5 to 3% of total improvement in 2010.

Got it. And this improvement should flow through all the way to the operating income line. You're not investing or stepping up the investment from this gross margin improvement on the -- your investments overseas, et cetera, right?

All other things being equal the answer is yes. I mean there's always question of mix and volume and fundamental business that drives businesses but all things being even, the answer is yes.

Got it. Okay. Thank you so much.

Thank you.

Thank you. Our next question is from Anthony Kure from KeyBanc Capital Markets.

Good morning, gentlemen. A couple questions regarding fourth quarter guidance, just looking at the sequential increase. How much would you say is factored in? How much is that factored into the growth?

We're using for our forecasts we're using sort of current spot rates and how we put that together.

Okay. So a point or so --

Not much difference, very little. Not much from the third quarter.

Okay, okay. If I look at the geographic mix that we've been talking about here today and, you know, I see Asia and Latin America together combining, 19% or so of your total sales in the third quarter up from earlier in the decade when it was about 15%, you know, going forward as a business initiatives move Overseas, do you think that that or the of 80/20 mix is more the way to think about things than the 85/15 or so? Are we going to see a permanent mix shift out there?

Our expectation is that we will see continued growth in Latin America, Asia-Pacific and that we expected it to move above the 20% range over the next, you know, few years. Look at Latin America, Brazil has now the, you know, World Cup and the Olympics coming. We think that's going to drive certainly investment in Brazil. Asia-Pacific, is getting to be a bigger part of the world economy and our solutions should work very well for them, also to help improve efficiencies and maintain control of their production lines. So we believe that both of those regions will continue to become a bigger part of our revenue stream.

Okay. And just for 2010, I know we've already talked about the improvement on the gross margin line from the outsourcing, but, through the 2009 time period, we've been taking costs out somewhat and I'm wondering what if you would care to comment on the net benefits you expect in 2010, if any, from the cost reduction activities outside of the outsourcing that you took in 2009.

I think we can talk maybe more about what we are doing to drive improving gross margin rather than necessarily give you a gross margin forecast. The first step always is to finish out the original outsourcing project, but we also launched a second phase of that really optimize the supply chain. We think that more things we can do around the supply chain, not just with the assembly of our products. We are also going to be launching more new high end products that really stimulates the demand in the high end and with the better gross margin profiles than our normals average portfolio. The XI4 and the retransfer printers are two examples of that and also the third piece I would say is a stronger focus on value engineering to make sure we continue to really look at the cost points of our products and they have very long life and it makes sense for us to continue to work on the cost positions to make sure we maximize the gross margin over the life of the product.

Okay. Thanks. Just last question, does the guidance for the fourth quarter assume breaking that threshold through a profitable on an operating basis for ESG?

Well, we set a goal for 2009 for ESG to be cash earnings break even and we're feeling really good that's going to happen. I'm going to tell you that ZES is a lumpy business. You can still see that in the margins of 64.4%. So we're seeing that ZES is going to do -- we're going to hit our goal, but I wouldn't say in the forth quarter all of a sudden we're forecasting a dramatic change from current levels.

Okay. Thanks, guys.

Yes.

Thank you.

Thank you. (Operator Instructions). Our next question is coming from Chris Quilty from Raymond James & Associates.

Hey, guys. Excuse me if this question has already been asked, but looking at the ZES business, it looks like you've gotten down to about a level operating expense. Should we assume that you've kind of hit rock bottom on the operating expense there, and in order to get that back to profitability, it's just going to have to grow on the top line, and I guess in addition, what would be your estimate of what the sort of break even revenue rate needs to be in that business?

Well, I think on the break even rate we believe that, we are at the level that makes sense for us going forward, probably in the 18, $19 million, as far as what cost actions we have, I think here's more looking at how we can optimize our resources. So it's not on much that we are looking to take more resources out of that organization. We're looking to optimize the resource allocation and put the resources we have on the best highest yielding opportunities. So that might mean we shift resources between different organizations to some degree.

Okay. And just for Mike, is fourth quarter going to -- should be the last quarter for the restructuring and exit charges?

Yeah. I'm sorry, for -- we have -- be careful about that. We have for ZES we have integration charges and that should be the end of the fourth quarter will be the last we see that. I do think there will be some dribble off on the exit stuff or outsourcing as we move out of some of those lines and that will continue on for a little bit.

Okay. And what are your thoughts I mean typically Q4 is a pretty good budget flush. At this point in the quarter are you having any sense, given the fact that a lot of your customers have been cautious with their CapEx spending as to whether this might be sort of a normal worse than normal or better than normal and when might you get the visibility on that?

Yeah. I think our view or the fourth quarter is kind of reflected in our guidance. We think Q4 is going to be, you know, reasonably normal. I think that's what's reflected in our guidance. We don't think that there's going to be a huge budget flush at the end of the year here because I think budgets were much tighter to start with, but we do expect improvement in the quarter compared to the previous quarter.

Okay. Very good. Thank you, gentlemen.

Thank you.

Thank you. Our next question is coming from Reik Read from Robert W. Baird.

Hi. Just a couple of quick follow-ups. Anders, on the launch of the new high end products, do you have a time frame of when those would come out?

The XI4 we did launch in the third quarter, so that is out and available. The retransfer printer we launched in October and we are taking orders for that, also.

Maybe I just misunderstood you. Are there products in addition to those that are coming out or is that what you were referring to?

No. We also have other high end products coming out next year but I think we haven't launched them yet. We haven't made them -- made our channel partners and others aware of them. So I think we'll have to hold off on specific dates.

Okay. Fair enough. And then just going back to the Enterprise Solutions Group, maybe looking at this big picture-wise, how is the pipeline today and I guess the other question is what's the conversion rate and I understand what you were saying about marine, aviation and auto being weak markets, but have those bottomed out and are you maybe getting a little bit more traction than you once had?

Yes. I think we feel some of these things are more longer term cycles. So the maritime side is obviously a lot long lead time, long cycle time for them to make investment decisions like this because this takes a year or so to implement but we've seen the strengthening in our N4 platform wins, so a new software package that's up to 20 for the year now. We also have seen I think good activity around our realtime location systems both for the 24730 applications but also maybe primarily for the UWB side, which is encouraging and those are what quicker turnarounds. So I think we do feel that it's certainly stabilizing, and we compact to see some increases as we go into 2010 in our business activities.

And would you expect -- I'm taking it from your comments that the ultra wide band is where you're seeing more activity. Not that there's no activity in the other space, but it just seems like there's more there. Is that trend likely to continue?

Yes. We believe so, but, the ultra wide band side is one of the areas where the price points are a little lower, but the conversion rate is quicker, but we do believe that the active RFID including both the UWB and, you know, the 24730 as well as GPS are seeing new opportunities and strengthening of the pipeline.

Okay. Great. Thank you.

Thanks, Reik.

Thank you. Our last question is coming from Brian Phillips from Phillips Ray Capital Management.

Yes, thank you. I'm just curious. Since you're having some difficulty delivering printers on a timely basis, and losing out to some competitors due to problems getting parts from your suppliers, how long do you think it will take for you all to kind of fix these issues and be able to meet stricter delivery times?

So first, we haven't really had any problems delivering products to our partners. Lead times have been pushed out somewhat, but I think that's something, fairly general to industry as a whole and certainly I don't think we've been losing business because of this. We started early before we saw the actual forecast pick up as we can sense that the markets were coming back to give orders to our long lead time suppliers and we've been working very diligently with them to pull in deliveries of those products. We expect that delivery -- lead times will be tight in Q4, but, , that's reflected in our forecast,

All right. Thank you very much.

Thank you. At this time we have no further questions. I'd like to turn the call back over to the speakers for any closing comments.

This is Doug. Thank you for joining us today. The next call for Zebra will be on February 9th for our fourth quarter conference call. Thank you very much.

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