斑馬技術公司 (ZBRA) 2009 Q4 法說會逐字稿

Good morning and welcome to the Zebra Technologies 2009 fourth quarter earnings release conference call. Joining us from Zebra Technologies are Anders Gustafsson, CEO, Mike Smiley, CFO, Mike Terzich, Senior Vice President Global Sales and Marketing SPG and Doug Fox, Vice President Investor Relations. All lines will be in 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 call is being recorded. Should anyone have any objections, please disconnect at this time.

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

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

Thank you, Doug, and good morning to you all. 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 fourth quarter results that were well ahead of our expectations as well as a favorable first quarter outlook. Surging customer demand in all geographies and across several verticals and product lines drove an 11% sequential improvement in sales to $222 million. The renewed sense of confidence among our customers generated the sales growth as signs of an improving global economy, coupled with thawing capital budgets led to an increase in customers investing in new projects. Equally encouraging, we experienced exceptional earnings leverage with 72% sequential growth in operating income and 58% growth in GAAP EPS from ongoing expense control and our aggressive share buy back program. This improvement is a direct reflection of our decision to move early and swiftly when we saw the environment deteriorating, as well as our disciplined approach to position Zebra as a leaner, stronger Company.

The order surge, much of it in the late quarter, stress tested our supply chain. Our supply chain, however, responded with agility to this rapid rise in business activity, but with the added cost of $6 million in temporarily higher expedited freight charges that were necessary to fulfill customer orders. I'm extremely pleased with how our extended supply chain responded this quarter to enable us to take care of our customers' needs. Our supply chain transformation, which is now substantially complete, is delivering its intended benefits. In addition, we are offering more applications with an extended and refreshed product line. We have continued to invest in product development and geographic expansion activities that are vital to extending Zebra's global leadership and build value for all Zebra shareholders.

Let me briefly cover some of the highlights for the quarter in our specialty printing and enterprise solutions segments. In specialty printing or SPG, sales increased by more than $22 million or 12% from the third quarter. All areas of the business, geographies, channels, product lines and verticals contributed to the growth. All four geographic regions are up from the third quarter and three out of the four had increased sales from last year. Our EMEA region had particularly good performance with consolidated sales for the region up $14 million or 21% from the third quarter. The sales improvement was broad based with a robust run rate business, a pickup in sales to large enterprise customers and some inventory restocking by distributors. Better sales of high performance and mid-range tabletop printers contributed to an improved product mix as customers in manufacturing refreshed production lines in response to more favorable business conditions. In addition, customers in retail, health care and government implemented mobile card, kiosk and other Zebra solutions to improve business processes and become more competitive.

New products also helped us serve customers better. During the quarter, we began shipping our first retransfer card printer, which has enabled us to deliver photo quality imaging for more security and government opportunities. Channel partners and end users tell us they are impressed with the combination of speed, print quality and value in this product, which has set the new standard in on-demand card printing. Sales of our new XI 4 high performance printers also introduced in the fourth quarter are keeping Zebra as the supplier of choice for mission critical printing solutions. During the quarter, we also began shipping updated two-inch plus models of our leading light duty desktop printers as well as innovative new IQ color labels. This break through product enables customers to print spot color on predetermined areas of a label using any Zebra thermal label printer to enhance readability, increase business efficiency and improve safety. All of these products are examples of how Zebra is driving greater innovation to set them apart from the competition.

Let me now turn for a moment to Zebra Enterprise Solutions. Like SPG, the budget log jams in the verticals most served by ZS, (mayor) time and auto began to see some easing during the fourth quarter and the pipeline of deals improved. The ZS team did an outstanding job this past year. In 2009, we substantially improved financial performance generating cash earnings or adjusted EBITDA break even from a $7 million cash earnings loss for 2008 on lower revenues.

In addition, I am pleased to report that we met all of our stated financial and operating goals for this business unit. We achieved cash earnings break even for 2009 as a whole. We signed 25 new channel partners against our goal of 20. We achieved our goal of 25 cross sales into adjacent markets which met our goal of 25 for the year and we achieved 57 go lives with customers around the world in 2009 against our goal of 50. These results, which were by no means easy, demonstrate that ZS solutions deliver real value for our customers. We are also demonstrating our commitment to executing on the strategy we outlined in early 2009. Our ZS team deserves much credit for these achievements in a very harsh business environment.

Finally, for overall Zebra, we continued to generate strong cash flows, bought back stock and ended the year with solid cash balances. Over the past three years, we have returned more than $330 million to shareholders through stock buy backs. The financial strength that has enabled us to buy Zebra stock at attractive prices during challenging times has also given us the ability to extend Zebra's global leadership through building stronger relationships with more channel partners, staying committed to product development and extending global reach, all activities that will serve Zebra, its shareholders and customers well long into the future.

In conclusion, 2009 began as a very challenging year, recognizing the downturn early, we started in the third quarter of 2008 to trim and shape Zebra for improving performance as business conditions strengthened. Zebra has had a -- has been quick to move from defense to offense as well. We worked hard during the year to complete the outsourcing program and supply chain transformation for printers on time. We have also made progress on our new ERP implementation which remains on track. At the same time, we remain committed to a program of developing a new generation of distinctly superior products and solutions that will continue to set Zebra apart from the competition. Our results in the second half of 2009 are an early demonstration of the success of our actions. We captured more opportunities as customers around the world continue to standardize on Zebra as a strategic partner in asset tracking and supply chain management.

I would now like to turn the call over to our CFO, Mike Smiley, to provide a detailed review of fourth quarter results and guidance for the first quarter of 2010. After Mike's remarks, I will return for some brief closing comments on our outlook and some details on our growth and profit initiatives.

Thank you, Anders. Because it's most relevant, let me focus on some of the important sequential drivers for the quarter. First, all four geographic regions experienced sales growth. Second, for gross margin, improved product mix along with an incremental 80 basis point contribution from outsourcing and favorable movements in foreign exchange were offset by higher inbound freight costs to meet customer demand and, third, operating expenses are well within our guidance range. Sales were up 11% from the third quarter. Foreign exchange net of hedges had a favorable impact of $2 million on the sequential change. Sales were down 4% from a year ago, with a $7 million favorable impact from foreign exchange. Sales from the Specialty Printing Group were down 3% from a year ago, but up 12% from the third quarter.

All regions experienced a pickup in their channel run rate business and large enterprise deals. Business and EMEA was up the sharpest, increasing $14 million or 21% over the third quarter. Leading the way from a growth perspective were the UK, central Europe and Spain. We had notably strong sales of card printers as well as supplies fueled by the continued uptick in our HC100 wrist band printer supplies. This increase in wrist band printer supplies demand is due primarily from UK health advisories on hospital patient identification. EMEA also had larger sales in retail, postal and government. In North America, sales were up 3% from the third quarter. The sequential increase was due to a continued pickup in enterprise sales and an improved run rate business to supply customers through channels and also for inventory builds with distributors. From a year ago, North America sales were down 13% because of a certain large deal that shipped in the fourth quarter of 2008.

Let's take a look at sales by product line. Hardware, which is most affected during the downturn experienced a 19% sales growth from the third quarter. Product mix improved with a greater percentage of high margin, high performance in mid-range printers shipped as manufacturing customers refreshed product lines. After-market sales of higher margin print heads also contribute to the better product mix. The percentage of printer sales from new printer products also moved upward to 13.2% of printer sales, with shipments of our retransfer card printer, XI 4 high performance printers and updated plus desktop printers. This percentage is up from 7.3% for the third quarter.

Supply sales were down 10% from the third quarter, mainly because of a large order that shipped in the prior quarter. During the second half of 2009, we also culled some of our low margin supplies business to help improve the profitability of these operations. Consolidated gross margin of 45.6% was comparable to the third quarter's margin and down from last year's 47.7%. Stripping away the temporary items, we are increasingly confident the gross margin can and will return to historical levels in the high 40s with variants driven by FX. The major factors affecting fourth quarter gross margin are, one, outsourcing contributed an additional 80 basis points. With the 1 percentage point improvement generated in the third quarter, we are on target to meet expectations in achieving the full 2.5 to 3 percentage points in higher profitability from outsourcing. We expect to get the remaining portion by the middle of the year as we shut down the rest of our printer assembly operations in the US and remove the remaining supply of parts from vendors in the US to Asia. Two, the improved product mix had about a 1 percentage point favorable impact and, three, freight charges were approximately $6 million greater than normal and reduced gross margin by approximately 3 percentage points. We expect freight costs to remain at higher than normal levels in the first quarter as demand for printers, particularly high end and mid-range printers remains elevated and as our volumes ramp at our sub suppliers. We expect more normal shipping patterns and freight charges beginning in the second quarter.

Operating expenses of $75.2 million were down $1.3 million from the third quarter. The most significant changes include decreases in employee benefits offset by increases in commissions, travel and entertainment and marketing costs. Operating expenses declined $10.4 million from a year ago, excluding the $158 million in asset impairment charges that occurred in the fourth quarter of 2008. For ZS, the addition to certain reserves and some increased operating expenses resulted in negative cash earnings of $1.5 million for the fourth quarter even as we achieved our goal of reaching cash earning break evens for the year. Investment income of $695,000 was down from $813,000 for the third quarter and $1.3 million for the fourth quarter of 2008. Lower short-term interest rates and lower cash balances in part because of cash used for stock buy backs have been the primary reasons for the decline.

Net income excluding $0.03 per share and exit restructuring and integration costs came in at $0.33 per share on 58.8 million average shares outstanding. The income tax rate of 35.1% versus the year's normalized tax rate of 32% reflects some one-time year end adjustments to our tax calculation and reduced our earnings by another $0.02 per share. During the fourth quarter, we used $16 million to buy back 594,000 shares, a pickup from our 327,000 shares acquired in the third quarter. The average price of our fourth quarter purchases was $26.68. For the year, we bought back 3.2 million shares for $65 million. Approximately 2.2 million shares remained authorized for repurchase at year end. At December 31st, we had 58.3 million shares outstanding.

The day's sales outstanding declined to 62 days from 66 days. We are very pleased to have weathered this recession without meaningful writeoffs. Inventory turns increased from 51 times for the third quarter to 6.1 times for the fourth. We ended up the fourth quarter with $247 million in cash and investments, up from $222 million at the end of the third quarter. Quarterly free cash flow totaled $37 million to bring the annual total to $80 million or 10% of revenues.

Now let's look at our first quarter forecast. The period when we normally see a seasonal decline from fourth quarter sales, we are forecasting sales of $217 million to $230 million. This forecast consists of expectations for SPG sales in the range of $198 million to $210 million and ZS sales between $19 million and $20 million. Our forecast assumes gross profit margin in the range of 45.5% to 46.5% reflecting continued cost reductions and some improvement in freight costs, offset by our less favorable foreign exchange rate. We expect GAAP operating expenses of $77 million to $80 million, which includes a reinstatement of certain employee benefits and other incentive accruals as well as investments in our growth initiatives. GAAP earnings are expected to be in the range of $0.25 to $0.32 per share. We're estimating exit and restructuring expenses to have a $0.02 per share impact in EPS and 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. As our fourth quarter results and first quarter outlook demonstrates, the aggressive actions we took during the downturn have positioned Zebra for improved financial performance and greater shareholder value creation. We took advantage of our financial strength and tremendous cash flow generating capabilities to improve capital returns and extend global leadership in an industry with very attractive global trends. I am confident that we are now well positioned to capture even more business opportunities as global economic conditions improve.

Going forward, we are focused on four strategic imperatives. First, we will continue to expand our core business by aggressively taking shares through alliances with global partners and independent software vendors. Second, we will further penetrate near adjacencies where we can win by accelerating expansion in developing countries and driving innovation and product development in terms of performance, features and integration. Third, we will continue to build a lean, world class operations through the expansion of our outsourcing initiatives, improved distribution and other IT initiatives, and finally, by building on our history of high performance team work, collaboration and people development. We are already making progress on these initiatives.

In North America, we streamlined sales and marketing processes to simplify the organization and build stronger customer relationships in the region as we expand our core. Specifically, we eliminated inefficiencies within our teams to improve clarity, reduced territory sizes to increase customer contact and increased resources dedicated to channel partners. At the same time, we recognized the success we have had over the years through a geographic expansion. We are now building on that tradition by committing more resources in key territories we have identified as having the highest potential for profitable growth.

In Asia Pacific, Latin America and EMEA, we plan to add as many as 40 sales and sales related people in 2010. Our plans call for establishing a presence in as many as five new cities in Asia, as well as greater representation in Turkey and the Middle East. And lastly in Brazil, we plan to add employees and establish a presence in one new city. Adding new sales professionals supported by enhanced country specific marketing is a proven high return, low risk activity that will begin to generate channel support and more business later this year. Likewise, we are confident that our plan to develop printers, specifically focused on meeting regional requirements, will result in higher sales internationally.

In ZS, we enter 2010 with improving momentum in pipeline activity. Specifically, we are seeing renewed interest in auto related solutions to improve inventory management and in defense applications for tracking assets and people. Further growth opportunities are also developing internationally, much like in SPG, our ZS customers increasingly understand the business advantages of working with a single dedicated strategic partner such as Zebra for their location solutions for supply chain logistics and operations. We are devoting modestly more resources in ZS to areas showing the greatest traction. These initiatives include launching a new partner program, along with new products explicitly designed for channel sales. The incremental amount of additional resources we're committing to ZS is good business. They offer high returns in very promising growth areas. While the additional expenditures may result in slightly negative cash earnings for ZS for the first quarter, they will produce a larger pay off with higher sales growth and improved profitability as we move through the year.

Throughout our planning for 2010, we have focused on generating the highest risk adjusted returns on our investments. As in 2009, this principle will continue to guide us as we evaluate the potential for further capital deployments as the year progresses, whether in additional share buy backs, strategic acquisitions or further geographic expansion and product development. Zebra's future is bright. We completed 2009 on a favorable note and entered 2010 with positive momentum. Our success has been and continues to be the result of our more than 2000 employees around the world dedicated to meeting our customers' needs. By taking advantage of our financial strength during the downturn, we are now well positioned to win more business as economic -- global economic conditions improve. Our focus on our four strategic imperatives will guide us in 2010 and beyond.

We worked hard during 2009 to reduce costs and optimize resource deployment. Phase one of our outsourcing initiative is now virtually complete and generating the intended benefits. In addition, we strengthened channel relationships, introduced new innovative products and held the gun to extend our geographic reach further. All of these initiatives have a lasting positive impact on building shareholder value. Zebra is unique in the breadth of asset tracking and supply chain solutions that we can provide to our customers. Increasingly, our customers are turning to Zebra as a strategic partner to help them improve their business processes. Zebra solutions are increasingly necessary elements in our customers' operations and we look forward to reporting on our progress as the year continues.

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

Thank you. We'll now be conducting a question-and-answer session. (Operator Instructions). Thank you. Our first question is coming from the line of Reik Read with Robert Baird. Please go ahead with your question.

Good morning. Just start on the gross margins for the first quarter, how much freight impact will -- above normal will still exist in the first quarter and can you also talk about are you having to pay any higher component prices for raw materials right now?

We'll see -- as we said, we spent about $6 million above normal. We think that that will probably see an improvement, maybe $3 million or so in the first quarter better than it was in the fourth quarter, but that still will be an elevated level from what we think we'll see in the long run.

And on component prices, we've seen greater than expected savings on our material costs and component costs as we move to China and that trend continues to hold.

But you're not seeing anything short-term with component availability?

No. We have not seen any issues on pricing in the short-term or based on allocations or anything like that. Actually, this is an area where I think our scale is quite beneficial to us and we are the largest player in our space and that gives us more pull with our sub suppliers.

Okay. And then, Mike, on -- again, on your comments on gross margin in the first quarter, the FX impact, is that just directly from European currencies or is there anything else embedded in there?

It's European, all European.

Okay. And just with respect to, Mike, your comments on getting more improvement by mid year, can you just help us understand all of the puts and takes that are in there. I guess the way I would have thought about is that you largely completed that transition to [inaudible] the remaining facilities would be shutdown and it seems like that would happen in pretty short order. Is there a delay in there or are there other initiatives or what causes the comment for mid-year?

There's a couple of things. First of all, we still -- although we have 99% of our printers are manufactured in China, we still have less than 1% that are still -- that are still being manufactured here because they're perhaps new lines or something that are coming up and that's going to take us the first part of the year to sort of completely ramp down and then to pull ourselves out of those operations. The other piece is although we've moved a substantial number of our sub suppliers from the US to Asia, there still is more to be done. So that's -- those two things are sort of making it so it's more like mid-year when we'll see hitting that target.

I'm sorry, so you said those were newer products that you're just more comfortable making them here until you get it stable?

Just for the time being. It's not a long run thing, yes.

Okay. And can you also talk about the ASPs were down and they were down 4%, which is pretty normal for this quarter, but you guys had talked about pricing and mix being stable or mix even getting improved a little bit. Is there an offset there in terms of incremental price pressure or what would account for that?

This quarter we didn't see any particular price pressure. Since we were -- I think we had -- most of the players in the industry somewhat challenged on the supply chain side. We certainly weren't leading with price. I see we saw very stable pricing within our price -- within our product families and we saw an improved mix, so we were pleased with the pricing environment we had.

Okay. Thank you, guys.

Yes.

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

Good morning.

Good morning.

Just wanted to begin by focusing on Europe. Great sequential growth there, 22% by my calculation and I was wondering if you could just drill in a little bit deeper into what you saw in Europe in the period and across the different countries within Europe.

Europe was strong generally across the entire geography. We saw particular strength in Spain and the UK and Eastern Europe and also some in the Middle East. In the UK we talked a bit about the health care sector being particularly strong. One thing that we didn't see so much in Europe was a return of larger deals. So I think that's something we still have coming.

And were government incentives in the UK something that drove growth in that region?

Government was a good contributor, but it didn't stand out, I guess, as phenomenal success.

Okay. Great. And next question just about product mix, I know the product mix is improving, shifting sequentially toward some of the higher margin equipment. Where does that mix stand now compared to where you'd hope it would be ultimately or where it was at the peak?

The -- so this is two -- two questions, I guess. First how does it stand compared to the peak and how does it stand compared to middle of last year. So it's substantially higher than it was in the middle of last year, but it is still somewhat lower than the peak and I think, peak going back to 2006 time frame, maybe, or so and that -- part of that is that, we have seen some other product families growing faster. So like mobile and desktop and kiosk have had higher growth rates than the -- our tabletop product lines.

Okay. That's helpful. Thank you.

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

Thank you. I'd just kind of like to go a little bit further into what you're seeing at the moment and whether there's any underlying trends there. It sounds like everything pops up a bit, but you've got in the pipeline some big deals. Perhaps you can just sort of give us a sense on why those take a bit longer to come to market and, also, what's behind mobile, desktop and kiosk, sort of the mix shift towards those segments? What kind of drivers are happening in retail or other segments that might account for that growth?

The large deal that -- did you speak particularly to Europe or was that more generally?

You mentioned that you'll see large deals soon and that you didn't see them in this quarter. Why are they a little bit later on in the cycle?

I was specifically talking to Europe at that point.

Oh, I'm sorry.

We did see larger deal flows in North America, Latin America and Asia Pacific, so there was more specific to Europe that we didn't see it and we expect that we will continue to see a decent flow of larger deals. And I think that was driven by basically the underlying economy strengthening, giving our customers more confidence so that, a lot of projects that had proven good ROIs had been, say, frozen for some time as customers were more focused on managing their capital or their cash flows and as they gained some more confidence, they start letting those flow through. With respect to mobile desktop and kiosk, I think that there's good trends for each of those products to have higher growth rates, on the kiosk side particularly, say there's a huge trend towards self service. You go to the airport, you go to hotels, you go to your local supermarket, there's a lot of kiosk type applications and that's obviously a much smaller market segment today, but it is one that's growing faster and similarly with mobile, there is, I think, a big trend globally around having more untethered workers. So mobile work force and other applications like that is a big secular trend that we're trying to make sure that we tap into. And desktop just has a much broader set of applications. You can go into my local cobbler to almost any kind of logistics and transportation company, it fits into lots of different kinds of environments, so there as good underlying growth drivers for each of those projects.

Got it. Mike, can you just comment a little bit on the tax rate and capital investments in 2010?

Yes, we're going to see 32% for 2010. We spend around $24 million to $25 million in CapEx in 2009. We expect that to go down maybe about $5 million in 2010 as we -- as the spending levels for some of the ERP implementation and outsourcing goes down.

Finally, the operating expenses are a little bit higher perhaps than we expected anyway in the first quarter, but it sounds like you answered the reason for that, that was the building up of the sales force in new geographies; is that correct?

There was basically two components to that. One is that we entered the new year, some of the cost containment actions we had taken started to come back, so we are now accruing for -- or having our 401k match is back, we are accruing for target bonus and we -- also in the beginning of the year, you have more benefits, so people who do 401k payments, there are taxes and other things that come with that. That's the majority of it. And then the remaining part is a modest more investments in some of our growth initiatives that we have high confidence will pay off well.

Okay. Thank you very much.

Our next question is coming from the line of Chuck Murphy with Sidoti and Company. Please go ahead with your question, sir.

Good morning, guys.

Good morning.

Just wanted to come back to the gross margin for a second just to make sure I'm clear. In terms of the higher freight costs, I mean is it a matter of you guys needing kind of rush delivery? What exactly about freight was different this time around?

As we had to ramp up our supply chain, it takes -- as I mentioned, there are some long lead time item components in a printer and that puts some -- they extended our delivery times from beyond what we would normally see as our traditional times and in order to make sure that we could really serve our customers and not lose market share and protect our reputation, we did air freight more printers to -- through the quarter and, also, this was exasperated by a surge in the tabletop side the big printers, they are much more heavy and they cost a lot more.

Got you. Thanks. And then my other question was just for ZS, I mean, down a little bit sequentially for the fourth quarter, kind of flattish in the first quarter. I mean what are your thoughts for the remainder of 2010? I realize it's just early, but will it see much of a ramp for the remainder of the year?

Well, fundamentally, to start with, the applications and the solutions that ZS offers its customers have very high ROIs, very high returns for their customers and I think we made great progress during the year by hitting all our metrics, all our targets. I think we position ourselves now for some modest incremental investment to really, you know, take advantage of some growth opportunities that we see. And, we felt that really building up a stronger channel competency, which very much leverages the core competency we have in SPG is a good area for this and we've also come up with some new products that are specifically designed for the channel. So, we feel good about where we are in this respect. We think that, as the year progresses, these investments will drive higher revenue growth and improved profitability throughout the year.

And in terms of quoting activity or just general customer interest, I mean have you seen that improve for enterprise solutions recently?

Yes. Our pipeline activity for both the maritime side and automotive, industrial manufacturing side was increasing in the fourth quarter.

Okay. Got you. Thank you.

Thank you.

Thank you. Our next question is from the line of Jay Meier with Feltl and Company. Please go ahead with your question.

Thanks a lot for having me on. My question is really about the new retransfer printers. I'm curious if you could give some color around that market and how big of a revenue stream you think that could be maybe -- what's your goal in terms of percentages going forwards?

Yes, we generally don't give individual product line revenue forecasts, but the retransfer market is a meaningful sized market within the cart market and it's -- for us, it's a new market segment that we did not print in before. So we -- and we believe that we can get an attractive share of that market. The feedback we've had from all our channel partners and end users who have seen the product have been very impressed by the color acuity and the speed we can print at. Now, this is more of a project-related printer, so it's not one that has kind of the normal run rate business through distribution. This is more into larger security or other types of deals, but we've been very encouraged by the reception that this product has had and it performed well for us in the fourth quarter. It met its expectation. Mike, any comments from you?

Jay, a couple of things. One, the market for this product is in the identification card and also in the drivers license side of the business. Also, because of the image quality, the photo quality capability of retransfer, we feel that we could really leverage some of our retail -- our legacy retail customer base and extend it into some loyalty card applications and lastly, it gives us some potential opportunities to extend into some new market spaces in some of the financial services sector where we traditionally haven't played and as more and more movement goes towards a decentralization and an instant issuance of some cards, we think that ultimately we can extend ourselves into some new space.

And do you think that your competitive advantage there is on price or in yield or the quality of the system?

It's really all of the above. We have -- we believe we have a superior imaging processor, so the photo quality is superior. The speed of print is superior and we are able to offer this at a competitive rate. We are not leading with price, per se, but we are not the first to the market, so we recognize that we need to have a very attractive package.

I understand. Thank you.

Thank you.

Thank you. (Operator Instructions). Our next question is from the line of Anthony Kure with KeyBanc. Please go ahead with your question, sir.

Good morning. Thanks for having me on. Quick question, Mike, could you just mention again the one-time impact to the fourth quarter for the ESG profitability? What was that again?

It was a combination of some additional expense and some reserves that we took in the fourth quarter. They weren't huge.

You said it was about $1.5 million impact or so?

Well, the cash earnings loss for the quarter was minus $1.5 million.

Oh, okay. I see. I see. So if we back that out, is it fair to say -- I mean with the GAAP operating loss of $5.4 million or so, if we back out those types of expenses recurring in the first quarter, what's sort of the expectation that's factored into your guidance for -- I assume it's a loss for the first quarter; is that correct?

Yes.

And will it be the -- I mean range of that, are we looking at about a similar level of loss or a little bit better, am I right in thinking that it should improve from a -- the loss of the fourth quarter?

I got to tell you, it's a small business and so there's always a little lumpiness here and there, so it's hard to really guide tightly, but I would say the first quarter is going to feel like the fourth quarter.

Okay. And then FX and sorry if I didn't get catch this, what is the FX for the first quarter guidance total company?

Right now the exchange rate is around 136, 137, so our forecast bakes into that. Obviously in the first month it was running a little higher. We've taken into consideration January actual rates and sort of the current spot rate going forward.

Okay. And then finally, the cash and building up through 2009 and just looking increasingly, are you looking increasingly at any acquisitions or is it -- do you think the share buy back is probably the best use of the risk adjusted cash usage at this point?

Well, we will continue to look at all options that we have available for capital deployment, but as we've reiterated over the last couple of years, I guess it is now, we very much are focused on making sure we deploy our capital to the highest risk adjusted return opportunities. We do perceive that there are -- might be acquisitions out there, but we always looked at those, although we've said for ZS, we are not considering anything there until we've been able to prove that business model going forward. But also we have lots of good internal organic investment opportunities that we want to pursue. And buy back is something that, we bought back $65 million worth of shares in 2009, which was a really tough year for the industry. We expect that we will continue to buy back shares.

Okay. I'm sorry, one more question. Just house keeping. Did you mention the gross margins for ESG in the fourth quarter or, if not, can you?

No. We just give companywide gross margins.

Okay. Thanks.

Thank you.

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

Yes. Good morning and thanks for taking the call.

Good morning.

Good morning. Wanted to delve into the investment portfolio a little bit further in terms of the composition in terms of what it's invested in and the location, I guess, by geography of the funds.

They're in the US and it's all -- it's very high grade government municipal backed securities.

Okay.

It's a very short duration. It's all very, very stable short duration securities.

And you don't have any of the auction rates or any of that other crazy stuff?

We have a small amount, but we've already taken the affect of those through our balance sheet, so that's reflected in the value there.

Okay. And what was scan source in terms of a customer for the quarter and for the full year?

It's been 16%. It goes up and down a little bit, but it hasn't been a big change in the quarter.

Okay. And Anders, I believe you were speaking about go lives and so forth. I think you had a goal to reach 20 new channel partners in 2009. I don't know if you mentioned that or not in the prepared remarks.

Yes. I mentioned we had three operating metrics, one was the -- reaching the goal of 20 channel partners. We actually achieved 25. We had another goal, which was to have 25 cross sales, so basically taking our products and bundling with other products or taking them into a new virtual market and we were able to achieve that. We ended up right on the money at 25 and then we had said we were going to 50 go lives for major projects and for that we achieved 57. So I think that's great progress for us and, I'm -- I was actually surprised to see how close we came to each of those and I think that indicates we set pretty good targets.

Yes. Definitely. That's great and congratulations on that. I wanted to give you the chance to offer up any goals you may have for 2010 in each of those three areas.

We figure that we wouldn't set any public goals like that now. We obviously have lots of goals internally for how to drive the business, but -- so we feel that we are now in a position to just build on the strengths we had in 2009. We've highlighted some of the areas that we're focusing on with channel and some new products and we feel good about all the activities and all the progress we made in 2009.

Okay. Great. Thank you.

Our next question is from -- a follow-up from the line of Reik Read with Robert Baird. Please go ahead with your question.

Thanks. Could you just go back to Europe and the health care program that you're seeing in the UK with wrist bands, is that -- it sounds like you're calling it out because it's meaningful. Is that something that's sustainable or are there other follow on programs that may be kicking in as well?

So in the UK, the NHS, the National Health Service, has issued a recommendation for all of their hospitals to use more patient ID technology and so we've seen for the last year a material improvement or strengthening of our business to NHS hospitals. Now, we are working with others in that space to make sure we can replicate that into other countries and make that a much more of a movement across the entire European continent as well as the rest of the world.

Okay. And then just in the retail vertical, can you guys make some comments there in terms of are you seeing the market begin to improve and I guess I ask market versus also how you're doing because it seems in the last couple of quarters you have gained incremental customers and so you have tended to outpace the market. Can you give us a sense as to what's happening there?

Reik, this is Mike Terzich, I'll take that. We've seen a improvement in our retail performance. Specifically, parts of the Europe have actually performed well. The UK historically has been a strong market, so we did see some recovery in the fourth quarter in UK marketplace and domestically, in the United States, retail has finished the year very strongly for us and I think what's important here is the tier two retail channel for us specifically, so if you get beyond the tip of the pyramid so to speak, you get down to the next level of retail, everybody is looking to increase some of that efficiency productivity within the store. This goes back to Anders' comment. This is where kiosk is starting to have an impact for us in multiple retailers and through our mobile solutions. So we feel pretty good as we go into 2010, that outlook is improving.

Okay. Great. Thanks. And then just the operating expense guidance, Mike, that you gave, can you repeat it and tell us if the charges are included in that or not?

That would be -- that would include -- so the numbers that we gave were including restructuring in there, so that would be in there.

Okay. Great. Thank you.

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

Thank you, everybody, for joining us today. Just to let you know, our next call is on May 4th for the first quarter earnings announcement and we will certainly be around to answer any of your questions offline. So thank you very much, have a good day.

Thank you.

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