斑馬技術公司 (ZBRA) 2010 Q1 法說會逐字稿

Good morning and welcome to the Zebra Technologies 2010 first quarter earnings release conference call. Joining us from Zebra Technologies are Anders Gustafsson, CEO, Mike Smiley, CFO and Doug Fox, Vice President Investor Relations. All lines will be in a listen only mode until after today's presentation. Instructions will be given at that time in order to ask a question. At the request of Zebra Technologies, this conference call is being recorded. Should anyone have any objections please disconnect at this time. At this time I would like to introduce Mr. Doug Fox of Zebra Technologies. Sir, you may begin.

Thank you and good morning. Thank you for joining us today. Certain statements made on this call will relate to future events or circumstances and therefore will be forward-looking statements within the meaning of the 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, 2009, which is on file with the SEC. Now let me turn the call over to Anders Gustafsson for some brief opening remarks.

Thank you, Doug, and good morning, everyone. 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, Zebra reported year over year improved gross margin, earnings that were well ahead of expectation and our third consecutive quarter of sequential sales growth. Strong demand in international territories, improved sales of high performance and mid-range table top printers and lower than expected operating expenses helped drive the 18% year over year improvement in sales to $226 million and $0.42 in GAAP EPS.

Momentum continued to build during the quarter as manufactures, retailers and others responded to improving business conditions. Our initiatives over the past 18 months to improve operational efficiency and extend our leadership enabled Zebra to capitalize on growing economic confidence.

Our financial strength provided us the capability to respond to increased demand by expediting product delivery in the constrained supply chain environment to meet customer needs. Our actions in this regard led to more orders with more customers and stronger channel relationships that would deliver ongoing benefits well into the future.

During the quarter, we made solid progress on several key initiatives that support growth, profitability and shareholder value creation. Our geographic expansion activities extended Zebra's global reach into underserved, high growth regions. We are also pleased with the growing pipeline of new products under development to meet more regional and vertical specific needs. We have now met our target of achieving at least 250 basis points of gross margin improvement from printer outsourcing.

Further, we used our cash reserves and $24 million in free cash flow for the quarter to buy back additional shares of Zebra stock demonstrating our continued discipline in deploying our resources in those activities with the highest risk adjusted returns. The results for the first quarter, combined with our actions to extend global reach, introduced new products and build stronger more robust channels give us confidence that we are on the right path to building greater shareholder values.

Let me briefly cover some of the highlights for the quarter in our specialty printing and enterprise solution segments. In specialty printing or SPG, sales were up by nearly $5 million from the fourth quarter in a period that is normally down on a seasonal basis. International territories drove SPG's 22% growth from a year ago.

The ongoing recovery continued to be broad-based across the diversity of Zebra products, customers and geographies, the historical foundations of our long-term success. In EMEA the large manufacturing regions of France, Germany and Central Europe led the region in a strong, steady quarter. Favorable business conditions also prevailed in the UK with some significant rollouts of Zebra kiosk and mobile printers with retail customers. EMEA also maintains strong sales of Zebra -- Zebra branded wrist bands for patient identification in hospitals in support of the 2009 recommendation by the UK's National Patient Safety Agency.

We are pleased to report that we have now sold more than 100 million wrist bands world wide since introducing this product 5 years ago. We remain optimistic about the future of our innovative health care solution which includes the wrist bands and the related HC100 wrist band printer. This solution is beginning to generate broader interest in several other countries as well.

Sales momentum also accelerated in Asia Pacific. Solid growth in all sub regions was highlighted by increasing demand in the manufacturing sector in greater China. With particular strong growth in high performance printers as well as card printers for a number of government applications.

In Latin America, mobile and cart applications helped propel the regional sales to a new first quarter record, including better than 200% sales growth of SPG products in Brazil and more than 50% growth in Mexico. In North America, large enterprise deals maintained a strong pace of bookings throughout the quarter. New sales opportunities also developed in high growth sectors, including printers for mobile work force applications, kiosk for retail sales service, and printer encoders for RFID asset tracking. The quarter also included a healthy run rate business.

Companies across the electronics industry have had difficulty sourcing components making it very challenging to manufacture products to meet customer demands. While our supply chain was constrained along with others, Zebra worked hard to ensure that the distributors and VARs had adequate inventories of Zebra product. These efforts included expediting product shipments to meet customer demands. While this means we incurred higher shipping costs in near term, we strengthened customer and partner relationships resulting in more business.

We believe this long-term view and our ability to leverage our financial strength to support our customers will pay dividends well into the future for the benefit of Zebra, our employees and shareholders.

Let me now turn to Zebra Enterprise Solutions or ZES. During the quarter we substantially maintained our investments in product and channel development which we outlined in our fourth quarter call. Because we believe they will deliver higher revenues and returns in future quarters.

Some project delays, however, affected the recognition of revenue and resulted in slightly lower than expected top line performance of $18.5 million. In 2009, we recruited 25 new channel partners for ZES solutions. In 2010, we are moving from recruitment to partner enablement with more resources devoted to this group. This investment is already paying off.

We have doubled our deal pipeline and partners are becoming more familiar with our location technologies and solutions. Our support for the channel includes recent development of the Zebra Location Appliance or ZLA, a dedicated unified server platform for the broad range of identification solutions available for asset tracking. Bar codes, ultra-wideband, GPS, passive RFID, active RFID, and others. The ZLA enables channel partners to sell and implement ZES solutions more easily and enhances customers' ability to enrich business applications with location and telemetry data.

This innovative tool recently completed beta testing and will soon be available for general purchase. Other ZES initiatives include the introduction of a personal safety system, developed around our ultra-wideband radio technology this automated high precision realtime location system is designed to track personnel and assets in process manufacturing industry, including oil and gas, steel and chemicals.

During the quarter, we also announced the introduction of a new Navis Argo terminal operating system for lower volume terminal operations. Designed with many of the features that made Navis the world standard for terminal operating systems, Argus targeted at the more than 200 smaller terminals, those that handled fewer than 120,000 containers a year, a largely untapped market for terminal automation systems. Due in part to our focus on the direct and indirect channel pipeline, we had a marked improvement in the number and depth of discussions with customers. While the sales cycle for ZES solutions is longer, this level of activity gives us optimism that our recent investments would drive improving results in future quarters. We maintain our expectations that ZES will return to cash flow break even by the fourth quarter of 2010.

In conclusion, Zebra's financial strength helps us extend our global leadership and create opportunities for even more profitable business in the future. Zebra's strong start in 2010 is a result of its enduring legacy of industry leading products, superior channel relationships and unmatched global reach. We continue to build on this foundation with an expanding array of innovative solutions that help our customers to identify, track and manage their assets more effectively.

A business with attractive long-term prospects. I'd now like to turn the call over to our CFO, Mike Smiley, to provide a detailed review of first quarter results and guidance for the second quarter of 2010. After Mike's remarks, I will return for some brief closing comments.

Thank you, Anders. Let me highlight some of the key drivers for Zebra's first quarter financial performance compared with a year ago. First, all four geographic regions experienced sales growth from a year ago with our three international territories posting sequential sales gains as well. Second, gross margin was up nearly 3 full percentage points. Third, operating expenses were below our guidance range and fourth, overall earnings were ahead of guidance in part because of a favorable adjustment to income taxes.

Sales are up 18% from the first quarter of 2009. Foreign exchange had a favorable impact at $4.3 million on the year over year change. Sales were up 2% from the fourth quarter of last year, including a $4.6 million unfavorable impact from foreign exchange. Zebra Enterprise Solution sales of $18.5 million were down about $3 million or 15% from a year ago.

While pipeline activity and the outlook remain on track the issues in the first quarter were the timing of bookings and revenue recognition. An adjusted EBITDA loss of $2.9 million was a bit more than expected largely because of the revenue level.

Operating expenses and our investments in the business remained on track to support the operation and our targeted investments in product and channel development. Sales in the specialty printing group were up 22% from a year ago and had its third consecutive quarter of growth. On a consolidated basis, all regions maintained strong sales momentum with international regions experiencing strong steady business throughout the quarter. Sales growth was strongest in Latin America up 61% with notable sales of card and mobile printing solutions.

In Asia Pacific, up 31%, broad economic improvement, including manufacturing centers in China and South Korea drove demand for high performance, mid range, card and desk top printers for manufacturing, government and aviation applications. EMEA sales were up 12% on consistent steady growth in nearly all sub regions. In North America, consolidated sales were up 13% from last year. A continued pick up in enterprise deals paced activity in the quarter. We also worked hard and were successful ensuring that distributors maintained full inventories of Zebra product to fulfill run rate demand during this period of supply chain constraint.

Let's take a look at sales by product line. Hardware sales were up 27% for the quarter, the first comparable increase since the third quarter of 2008. This growth was accompanied by a further improvement in product mix including accelerated sales of high performance and mid range table top printers and aftermarket parts. Printer units sold increased 23% from 199,000 a year ago to 244,000 in Q1. Printers and UP's likewise increased to $547 per unit from $517 per unit a year ago.

It was a good quarter for supplies as well, up a healthy 7% over last year lead by continued strong sales of wristbands. Shipments included initial sales of our innovative IQ color labels that enable users to print spot color from a thermal printer.

Consolidated gross margin of 47.4% was up nearly 3 full percentage points from a year ago, nearly 2 percentage points from the fourth quarter. The major factors affecting the first quarter gross margin from a year ago are one, the higher volume and richer product mix. Two, foreign exchange which had a $3.7 million favorable impact on gross margin. Three, lower material costs which contributed to an incremental 70 basis points to the gross margin improvement. The cumulative outsourcing benefit on gross margin is now at our goal of 250 basis points. While pleased with achieving this improvement, this important milestone we will continue to work to achieve even more savings over the course of this year and into the future. Four, extra freight charges to expedite shipments totaled $4 million and reduced gross margin by approximately 2 percentage points.

Operating expenses of $75.6 million were up 6% from a year ago but comparable to the fourth quarter $75.2 million. The most significant increase occurred in selling and market expenses and were principally related to higher commissions, travel and entertainment and advertising and direct marketing expenses as business activity picked up.

The income tax rate of 23.7% includes a $2.8 million reduction of federal taxes related to prior year's adjustments, current Company profit and ending inventories. This adjustment added $0.04 per share to EPS. Excluding this adjustment, the income tax rate would have been 32.3%. GAAP net income came in at $0.42 per share on 58.3 million average shares outstanding. Quarterly free cash flow totaled $24 million.

During the first quarter, we bought back 750,000 shares of Zebra stock using $20.8 million or 85% of first quarter free cash flow. The average price of the first quarter purchases was $27.76 per share. Approximately 1.4 million shares remained authorized for repurchase in the quarter.

At April 3rd, we had 57.7 million shares outstanding. The day's sales outstanding declined from 62 days for the fourth quarter of 2009 to 59 days. Inventory turns were 5.9 times for the first quarter down slightly from 6.1 times for the fourth. We ended the first quarter with $254 million in cash and investments.

Now let's look at our second quarter forecast. We're forecasting sales of $219 million to $233 million. We expect SPG sales in the range of $200 million to $212 million and ZES sales between $18 million and $21 million. Our forecast assumes gross profit margin in the range of 45.5% to 47% and GAAP operating expenses in the range of $77 million to $80 million. GAAP earnings are expected in the range of $0.26 to $0.34 per share. We're estimating exit and restructuring expenses to have a $0.01 per share impact on EPS. The income tax rate will be 32%.

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

Thank you, Mike. Zebra's strong beginning to 2010 was due in large measure to the diversity of our business across several dimensions, product, geographies, customers and technologies. Our leadership in product innovation, channel partnership and international coverage enabled us to respond to the increased global demand for Zebra products as companies accelerated investments in solutions to help them identify, track and manage assets more effectively.

As we look to the second quarter, business trends remain favorable. Within this environment, our guidance takes into account a stronger dollar against the euro and somewhat less favorable product mix. In addition, distributors which have been building inventories of Zebra products over the past two quarters are now at levels appropriate for current sales volumes. On the cost side, we're expecting higher freight charges to continue as we work through the global supply chain constraints on electronic components.

Second quarter operating expenses also include annual Company-wide increases as well as expenditures supporting ongoing geographic expansion and other initiatives. Our ability and willingness to maintain investments in our business will have a long-lasting cost effect on building shareholder value. While we are cautiously optimistic that business conditions will continue to improve, we are confident that making these key investments in our future in the three major areas are the right thing to do.

First, geographic expansion to extend our reach in underpenetrated high growth regions. Second, new product innovation to ensure we stay ahead of the competition in meeting customer needs. And third, building stronger partner relationships to reach a broader customer base.

We are already seeing early benefits from our stepped up pace of geographic expansion activities. We are now more than half way to our goal of adding 40 sales and marketing professionals to our emerging regions. Customers are responding positively to our investments in additional regional resources by awarding us with more new business. This early validation, increases our confidence that geographic expansion continues to be low-risk, high return activity for Zebra.

The development of new product with distinctly superior features, functionality and performance, complements our geographic expansion activities. In April, we announced the introduction of our latest kiosk printer, the KR 403 to capitalize on growing opportunities in self-service solutions such as coupon and receipt printing. Built with our proprietary Zebra programming language among other innovative features, the KR 403 is attractive to Zebra channel partners because of its easy integration into the Zebra install base.

To achieve the greatest success for these important activities, we are working to optimize the product development process. As part of this initiative, last week we opened our new China research and development center. Located in Guangzhou, our employees at this center are focused on engineering accessories, product extensions and follow on products. This will enable our teams in the US to prioritizing, design of new innovative products and product platforms that deliver superior value, functionality and performance.

Equally promising are our ongoing activities supporting further channel expansion. New products such as our recently introduced retransfer card printer have also attracted new channel partners. We also expect our ongoing efforts to develop a stronger channel for ZES Solutions as well as stronger ties with independent software vendors and system integrators to begin to pay off later this year.

Finally, we will continue to focus on generating the highest risk adjusted returns on our investments. This principle will guide us as we evaluate the potential for further capital deployments as we progress through 2010. Whether in additional share buybacks or through strategic acquisitions, continued investment in geographic expansion and protect development. This concludes our prepared remarks. Thank you for your attention and we would now be happy to take your questions.

Thank you. We will now be conducting a question and answer session. (Operator Instructions) One moment please while we poll for questions. Our first question comes from the line of Brian Drab with William Blair. Please proceed with your question.

My first question is related to your primary supplier or your number -- sorry, your number one distributor who in a recent report said that their sales were down about 10% in the bar code business sequentially from the fourth quarter and attributed that in large part to part shortages far up the supply chain. So my question is did Zebra suffer from some part shortages in the quarter and resulting in, you know, any failure to deliver product?

Brian, Mike Terzich, I'll take that question. You know, in the quarter we did, like others, have some supply chain constraints, but as we mentioned in the prepared remarks, we worked pretty tirelessly to overcome that and so for us, we were able to leverage our financial strength, we air freighted quite a bit of product in and I can tell you with our distributors in particular in North America, we received some positive comments throughout the quarter that we worked very hard at keeping them in product and we did that by making the air freight investments we needed to make to get the product to them in time for them to conduct commerce, so I don't think we were a material -- we had a material impact on the distributors' financial performance in the quarter.

Maybe expand on that a little bit, I think our supply chain responded better than we had anticipated to the constraints that we saw in the components supply. We were able to expedite products from China to our customers in the US and the rest of the world and I think largely mitigated the impact of the tighter supply chain. And I think we believe that we extended our lead in the industry doing this. There are probably some deals that we lost but net, net we believe we won more deals than we lost because of our ability to expedite and supply products on a timely basis. And we believe our distributors have the appropriate level of inventory for the business volume we see.

Okay. Great. Thank you. And just one more question on the ZPS group. You mentioned that there is some ongoing project delays but sounds like there's some very interesting products and systems in development. I'm wondering, do you have a pretty good view towards the pipeline of projects that you're developing those product for? And is there some pent-up demand here for these products and systems in the latter half of this year?

The project delays were largely in the maritime side where implementing a new system takes anywhere between 12 to 18 months and it includes a lot of on-site development and customization and sometimes that takes a bit longer than expected. We believe that we have a very healthy pipeline of new applications and products that we can develop that will support primarily our new strategy of really leveraging our channel partners to penetrate new markets or give a greater reach than we would otherwise have.

I think we see a general strengthening of the activities in RFID where I think if you go back six months, 12 months, we would say most of the trials and pilots were more to test the technology and today we probably see more trials and pilots which are testing the RY of the application. So I think that's a step forward for us. We continue to be optimistic about the opportunities we have in front of us for ZS. The ROI -- the customer ROI for our solutions is very healthy and early in the product life cycle, it is takes longer to develop that, the market.

Okay. Congratulations on a very solid quarter. Thank you.

Thank you.

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

Thanks, good morning. Just a follow-up on your comments Anders, is the delay really a result of customers not being able to provide the CapEx and so it's slowing down these products or is there a development issue that is slowing them down?

It's not really based on any delay or difficulty of our customers to get funding for these projects. These are projects that are under way. It is more the, you know, you decide that you want to automate another process or you want to do some other customizations that weren't part of the original scope, that tends to add a little bit of work to the project, but makes it more suitable for the customer in the end, so that tends to be the biggest driver for some of these delays.

Okay. And given that those get rectified and you said you basically doubled your pipeline, does that suggest that that business continues to get better throughout each quarter of the year or are there other constraints?

Yes, the pipeline comment was focused on our location solutions, so they'd be [hardware active RIFD] solutions not necessarily on the maritime applications which are the ones where we have some of the delays but we do believe that the locations solutions will see continued growth as we go through the year.

Okay, great. And then just a question on the specialty printing side of things, you guys had mentioned as part of your comments that the enterprise business was looking pretty good. Can you give us a sense for what that means in terms of project sizes? Are these mostly smaller enterprise projects that are getting going or are you starting to see some of these larger projects that you've seen historically and are there any verticals that are bucking the trend one way or the other?

Reik, Mike Terzich, on the enterprise side what has been particularly good has been the return of some larger projects, these are multi million dollar projects in scale relative to the retail marketplace tier 1, tier 2 retail, in North America and in Europe, and then secondarily the space of direct store delivery, the mobility market has also seen a nice set of opportunities relative to serving mobility solutions for those end users that are delivering, that have a high volume of routes delivering cola and snack foods into restaurants and retail locations. So, those are the two that principally right now have been -- have been ramping up.

Anything on transportation logistics, those end markets seem to be getting healthier. Are they releasing capital?

When you look at the results of the quarter, there was two pieces. One was the resurgence of what I would call manufacturing supply chain, which was the manufacturing piece and inherent in that is some of the warehousing and some of the transportation space that goes along with that, so that was a steady state business and tends to be smaller projects, more opportunities to leverage our large install base and then when you overlay on top of it some of the enterprise business we saw that pretty much constitutes the fabric of the quarter that we just experienced.

Okay. Then just one question for Mike Smiley on the operating expenses, lower than you expected in the first quarter, seems like sequentially they're bumping up quite a bit, is there -- you mentioned the merit increases, Does the merit increases account for all that bump-up or is there some timing issues as well?

Yeah, good question. A piece of it is merit but another piece is just the investment and some of these initiatives that Anders talked about with the geographic growth extending our resources in channel development, so a lot of it is sales and marketing related and a little bit of engineering, but a piece of it is merit.

So we should think about those progressing throughout the year and you don't have a drop back down?

I think that might be -- you can think of them as steady but a slight pull back possibly. There's a number of project-related expenses in the second quarter related to new products also but I don't think it will be a major difference.

No, no.

Okay. Great. Thank you very much, guys.

Thank you. Our next question is from the line of Charles Murphy with Sidoti and Company. Please proceed with your question.

Morning guys.

Hey Charles.

Good morning.

Just a couple questions regarding guidance as well. You know, usually the June quarter is a little bit better sequentially and, you know, mid point of your guidance is kind of flattish. Just wondering if there was a specific reason for that or if you're just king of playing it on the safe side for right now?

Well first I think our business remains very healthy. You know, we've had two very solid quarters here with Q4 and Q1. You know, we were sequentially up in Q1, which is, you know, quarter that normally is down based on seasonality, so when we look at into Q2 we continue to expect business to remain healthy, to remain strong but you know, a couple of things that are -- somewhat going against us a little bit, one is that the FX is moving against us pretty steadily here in the last quarter and that has a big impact on us. We also see some constraint in the supply chain. Makes us a little cautious about how quickly we can turn around things if we don't get exactly the order pattern we expect. And the -- that also has a little impact on supply, on the freight charges. But generally, you know, we think that our Q2 is very strong, very good. It's just that we had a really, really strong Q1.

Got you. Then for the gross margin guidance a little bit down sequentially is that just a matter of product mix?

It's a combination of things, product mix is one of the big items. FX is another item. We also had a couple of small unforecasted benefits in some of our accruals which we don't expect to continue as we look at E&O and those types of things that benefited the quarter. So you've got some give and takes but product mix and FX are big players there.

Got you. And then lastly, for the OpEx guidance of $77 million to $80 million is that including amortization in the restructure or excluding?

That's including.

Okay. All right. Thanks.

Thank you.

Thank you. Our next question comes from the line of Paul Coster with JPMorgan Securities. Please proceed with your question.

Thank you. Most of my questions have an answered, however, on the OpEx side as we project forward the growth should be tilted slightly toward sales and marketing? Is that correct given the headcount increases there?

Yes, slightly towards sales and marketing a little less towards engineering. Those would be the two areas. We really are in a product development and increasing our relationships with the channel partners is important for us. That's where we're making some investments.

As you at 40,000 marketing focus to the mix, presumably less than that going forward, are you recruiting sort of, you know, immediate quota carrying people and are they coming from competitors?

We are recruiting them -- background varies on people. You know, they usually have sales experience or technical experience. They're generally not from our competitors. We tend not to recruit from competitors. We find other people who have good solid experience in related spaces. We think that works out best for us. And as you know, they -- by and large should be on board by, you know, later this quarter.

Okay. Mike, I've just got one little technical question on the ZS funds, it sounded like there was a revenue recognition issue or not issue but revenue was delayed and recognition was delayed. Was it delayed into the second quarter or is it of indeterminate delay?

Well, you're absolutely right, let's make sure it's clear that you know, it was delayed because of customer implementation, it's not a revenue recognition problem per se.

Okay.

And that is, you know, delay. Now whether that's Q2 or Q3, our forecast reflects are what we think are appropriate given when we think these things will come to pass.

Okay. Great. Thanks very much.

Thank you.

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

Mike, just a further follow-up there on Paul's question. Once those projects come back into the flow, where do you think you'll be in sort of a revenue range within VES in the back half of the year?

You know, we -- you know, obviously we go out a quarter. I would say, you know and we're not getting back at estimates, I would just refer you back to Anders' comments about how he felt about the business is perhaps the best tone to sort of consider going forward.

Okay. How about this, a qualification here if you're looking for cash flow break-even by the fourth quarter of 2010, what does that mean in terms of the actual operating loss or I should say I've lost track what the D&A is running giving the various write-downs in the business.

Yeah, we have about the amortization is running about $1.7 million a quarter. It's sort of where we're at right now.

Within ZES?

Yes.

Okay. And I assume that depreciation is not a significant number?

It's not huge. I can give you the details later on that, but it's not a -- it's not a big number. It's running roughly $2 million in the year, something like that.

Okay. And tax rate on a go forward basis?

32%.

For the second quarter, but are there any other one-time items that may pop up in the back half of the year or is that a good run rate on a going forward basis?

It's a good rate to use going forward.

And that of course reflects the benefits of the off-shore manufacturing or are there further tax savings that you're yet to capture there?

No. That definitely reflects what we think is sort of the -- our tax position and situation is for the year, so.

Okay. And inventory levels, you know likewise they've come down real nicely, again sort of a permanent reflection of the off-shoring?

Yes, they've come down quite substantially over the year. Over the last year plus. I think we would like to see them come up a little bit in the Q2 and Q3. Partly to enable us to be better prepared for any other supply chain constraints that we might encounter, but we can always, you know, be in a position to satisfy the demand we see from our customers.

That will also help with our freight, you know, as we go through gross margin. Right now we're sort of dealing with a low inventory offset by freight.

Okay. And final question I think you kind of alluded to an improved retail vertical on the demand side, but, you know, it's still we're a year removed from what should have been a pretty big up-cycle in that vertical, obviously delayed by the recession. Are you seeing any indications of, you know, larger deals building in the pipeline and might this year be the year where they finally play catch-up?

I think we can comment on what we've seen so far and you know, retail has come back as a strong vertical for us, both in the US and Europe. And we've seen more larger deals out of retail, so our outlook for the year is quit good for retail.

Chris, this is Mike, one thing that's fuelling some of the retail optimism is while the sales, retail sales are improving slightly, they've done a much better job of managing their own inventory, so they had -- they did not have to go through such dramatic price reduction with their inventory, so their profitability from relatively flat to slightly positive revenue results is what's fueling a lot of the project pipeline.

Got you. Great. Thank you, gentlemen.

Thank you.

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

Good morning.

Good morning, Ajit.

A couple of quick questions. I think the first one is just looking at the color that you provided on retail and looking at some of the large enterprise spending over there improving, what is the spending on?

Well, they're spending on a variety of applications. A couple that we could name here, one is a high level of interest in self-service in the store, so that would be associated with some of our kiosk product line and obviously with the labor constraints that they have in their driving influence of improving the customer experience we're finding particularly in North America and in Europe a high interest in kiosk applications. And then the other is in the area of mobility, in-store mobility, so a variety of applications where they can continue to do on-demand labeling, price markdowns relative to their store environment.

Got it. And then just shifting over to the enterprise solutions group. I mean from an overall revenue perspective with the sales quite weak you talked about some encouraging trends in various markets over there but and strengthening through the end of the year but you said that the maritime application was still not showing any kind of strength. So could you give us some color as to over the past two years how much that's fallen, what's the drivers of reinvestment in that particular category would be and what do you expect you know, is it a 2010 event? Is it a 2011 event? When do you expect that business to come back and whether it will be shared losses or shared gains over there and whether you're still the best positioned company in that space.

For the maritime side, you know, I think we may not have communicated very clearly. What I said was that the pipeline position for our location services solutions have improved and strengthened. I didn't mention really anything about the pipeline position for our maritime business. That is still very healthy. You know, we don't break out the individual segments within ZES, but the maritime business has been more stable than the rest. It has longer sales cycles, longer implementation cycles, so it's more of a moderated curve. And we believe that we've continued to gain some share in that market as we've been in a strong financial position and we've come up with now a new product this past quarter, the Argo, which is really targeted a new market segment that we haven't otherwise been able to participate in. The really smaller terminals with less than 120,000 TU's.

Got it. So, when you're looking it the revenue itself. It's the lowest revenue in that segment in about nine quarters was most of that driven by reducing the past two three quarters the back log has gone down and you are just depleting back log or was some of that weakness related to, you know, capital constraints, you know, across orders that you already had but just people pushing out deliveries?

It was not really, you know, people who had orders that pushed out deliveries. I can't think of any -- any examples of that. It was more that, you know, some of the larger projects that were going on had some delays as they asked for some additional work to be done to complete it. Automating some new processes or new procedures that really, you know, optimizes the use of the software packages once they are implemented. So, you know, the business environment is getting better. It's not back to what it was before the recession but it's certainly getting better across all of those verticals but I think particularly so on the hardware side.

Got it. And overall the operating model of that business hasn't changed which is based on your new cost structure of $25 million quarterly run rate, you will be break-even in operating income. Is that fair?

Yes. That should be fine.

That should be fine. Okay. And then you also mentioned in the opening remarks that you know towards the end of your commentary, the M&A environment, you know, you are looking at that as a potential deployment of cash. Could you give us some color as to what kind of opportunities they're looking at, you know, for which businesses, you know, just broadly and whether you're seeing that pipeline increase or potential acquisitions or you're watching the valuations having gone up recently it's becoming more difficult to find potential acquisitions.

You know, as we -- we talked about acquisition strategy, we start by talking about our capital allocation strategy and we are still committed to making sure that our investments generate the -- are in areas that generate the highest risk adjusted returns and we've always continued to look at potential acquisition targets. Over the last year, year and a half or so, we have prioritized returns capital shareholders through buy backs. You know, we've done this pretty much exclusively and very aggressively. But we also said, on a normalized basis over a longer period of time that we would expect to have more equal balance between investing in the business and acquisitions and buy-backs. At this point, I think, you know, the first priority, the top priority for acquisitions are they have to have a good strategic fit and then they also have to meet all our financial hurdles. And you know again, nothing has changed from our earlier quarter calls where we said that we are at this point not considering making acquisitions into ZES. So there's really nothing different than what we talked about on earlier calls.

Got it. Is the pipeline richer or the same as previously or is it much less?

I'm not sure if I can comment on that Ajit. You know, we continue to look at things, but you know, until we find the right thing, we are not going to do anything.

Very binary.

Yes, gets to be very binary.

Got it. Okay. Thank you so much.

Thank you. Our next question comes from the line of Jay Meyer with Settle and company. Please proceed with your question.

Yes. Thank you. Just a couple followups. You talk about your ability to deliver product into the channel and it sounded like especially in North America through some expedited shipping and I read that to mean that you gain share inside the channel. And as your competitors had capacity constraints, you also mentioned that you believe your inventory level in the channel is proper for current business conditions, but does that outlook imply that you anticipate maintaining this share and how should we think about that as those capacity constraints lighten up?

Well, I guess first we -- our objective is to continue to gain share. You know, that's why we are in business. But we do believe that we have a good inventory position with our channel partners today. The overall -- the longer supply chain is going to continue be constrained, I think for at least the next three months, so we expect to see some higher freight charges or expedite charges but we believe that we are well-placed to be able to capitalize on the overall, you know, constraint in the supply chain as we believe the very competitive and dynamic supply chain and we are willing and able to expedite orders for customers.

I understand. Okay. That's fine. And as far as the markets are getting beat up a little bit today because of some skittishness around Europe and the potential for that economic region to degrade. Are you starting to sense any skittishness out there? I mean, how are you viewing Europe and maybe Asia? There's been some comments about China as well.

Starting with Europe, I think Europe has, you know, Europe was steady in Q4 steady in Q1, we haven't seen any indication of the Greece credit situation to have impact on our pipeline. We do pay attention to it though from the perspective of what the euro is going to do compared to the dollar and that's obviously been weakening which is not helpful. In Asia, you know, we've seen particularly in China and Asia as a whole to come back quite strongly in the last two quarters and we have seen no sign of any disturbance or anything like that there, it looks pretty healthy.

Okay. That's fine. And last question, what is your view of the DOD and their spending trends and in particularly with AIT 4. Did you receive any task orders during the quarter or are you under the impression that's been slowing?

Jay, this is Mike. The -- you know, we're a sub supplier on that AI T contract, so for us, the contribution we get from that business has never been significant. But we have seen that there has been a slowing pattern with the Department of Defense, and some of their requirements through purchase orders, but nothing that we can specifically point to on our end.

Okay. So AIT 4 hasn't been a big contributor but I have been under the impression that DOD has been a pretty good consumer of Zebra products over the years? Is that --

You know on a relative basis, we have a nice business with the DOD, but it's -- but it has not been significant.

On the Zebra Enterprise Solution side we also have a government business and that was steady, it was you know, strong in the first quarter, so but that's not an AIT 4 project.

I understand. Okay. Thank you very much.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Andrew Abrams with Avian Securities. Please proceed with your question.

Just a quick question on the location solutions, can you talk about any changes in customer type over the last six months or so or are you beginning to see automotive come back, you know, is there some kind of customer mix that's returning or maybe has changed permanently and now you're focused in a different area?

Over the last you know, 18 months or so, we've expanded our customer base in location solutions, automotive was -- automotive and maritime were the two largest vertical markets for that -- those solutions earlier, and automotive is still a you know, the main contributor. It was up in the 1st quarter, but certainly not up to the levels we had seen earlier. But we've also been able to penetrate some new markets, the DOD and the government is one of those, and we -- as we are leveraging more channel partners, we have a chance to really get into more other types of verticals that we didn't have access to with our own sales force, particularly around industrial manufacturing generally, so expanding the automotive into other discrete manufacturing processes. But also looking at some other ones, so we're not quite ready to announce any yet but looks like they have some good applications for location technologies.

Thanks. And also I missed part of your comment on the supply chain and I think you filled it in a little bit, but I was -- I was curious about why the continued air spending if you're looking for the supply chain or your inventory levels at your I guess at the distribution side to be more normal. Is this in order to take share, kind of beat out the competition or is there still a necessity to fill demand that has light inventory from your perspective.

It's more based on you know, making sure we have the right products for the right opportunities. So particularly as we see larger enterprise deals come in, they may not be fully forecasted or inventoried at our distribution partners, or if we get more orders for low volume models that we don't sell as much of normally, it's more to be sure we have the flexible to meet the order pattern that comes in.

Also in that same regard, has there -- because of the shortages that have popped up there, have you seen any changes in pricing at all at the distribution level? Has there been any price competition in order to win back business that might have been lost because of -- because of a shortage?

No, I think as most vendors are somewhat supply constrained, I don't think that the price competition certainly has not been any higher any more severe than it normally is, so we think our -- as Mike mention in his opening comments our AEP's were up in the quarter and that would indicate we didn't really have to compete on price. There was some supply constraints.

Price wasn't a big player. You know, Andrew, what you have seen with the distributors is then competition among the distributors for a valuable product. So if one has it and the other does not, they're seeing some somewhat between their customers relative to where they source that product from.

Got you. Thank you very much. Appreciate it.

Thank you. Our next question comes from the line of Dick Davis with Richard W. Davis and Company.

Congratulations on a fine quarter. The question I would have is, can you give was breakdown of the various geographical areas as to what their contribution to what revenue was?

I think if you look at the earnings release, you can see that basically we have for the quarter about $97 million was in North America, $84 million was in EMEA, $25 million was in APAC and $21 million was in Latin America out of the $226 million. Those are dollars. You can calculate the percentages. Or I can give you the percentages; 43% for North America, 37% for email, 11% for APAC and 9% for Latin America.

Okay. And give us a little color on EMEA because of the currency problems there with the euro. I mean that's a very good report you guys did. No doubt at all. Does some of that strength come from Eastern Europe or is it some from the UK which is not on the euro?

Well, Dick, this is Mike Terzich, the strength we saw in Europe was in several areas and principally around a lot of our manufacturing-centric sub regions, so Germany, France and the region we call Central and Eastern Europe which has a lot of manufacturing opportunity, contract manufacturers so Eastern Europe, Poland, we saw some really nice growth in those regions which was good to see because that's where a lot of core manufacturing-centric products, some of our higher end products are sold. Retail was improved as well, but a little more isolated. It wasn't pan European in its construct, it was a little more centered around the UK, so we saw some rebound in the UK market as well.

The growth included the Eurozone. It was not from outside the Eurozone particularly.

Very good.

Any more?

Thank you. Our next question comes from the line of Anthony Kure with Key Banc Capital Markets. Please proceed with your question.

Hi guys. Thanks for taking my question. Just a little bit more talk about pricing competition, I understand average unit price went up sequentially but more in general, at least historically, could you kind of breakdown the pricing profile of each region and how it might be more or less competitive?

Our pricing profile by region is pretty stable. We -- our you know, we sell through very robust reseller programs, so we have a lot of discipline in how we price and how we offer pricing and you know, our products are also otherwise -- they have a tendency to become gray market products. It's important for us we keep a steady price profile. Normally you would expect maybe Asia to be the most price aggressive, but since we have a substantial part of our business there from the multinational companies, you know, we see Asia being very much in line with the rest of the world.

Okay. Great. Thank you. And then just a clarification on that depreciation comment I think, Mike, when you were talking about $1.7 million of amortization per quarter in ZES and I think you said depreciation wasn't huge and said something like $2 million, was that D&A together at $2 million?

Depreciation is about $2 million for the full year.

Okay. Great. Thank you.

Thank you. Our next question comes from the line of Greg Coulter with Great Lakes Review. Please proceed with your question.

Hello, guys. Relative to the freight costs, I think they were $6 million in the fourth quarter; $4 million this, and you're indicating that should continue to be higher. Do you gradually expect that to work its way down to a flat figure at some point in 2010?

Yes. The short answer is yes. We were up almost $2 million or down $2 million for the fourth quarter and we expect that to go down a tad more in the second quarter, but really it's a function in part about how you know, the end suppliers are able to provide components. So if all of a sudden they're not able to sort of pick up capacity, we could be having more freight. We're only giving you a view out a quarter but we would expect that these end suppliers will be able to start delivering and we'll be able to build up our inventory and reduce the freight.

Okay. And I believe you are targeting a CapEx number around $20 million and with your business improving so far this year, do you expect that to change at all for any needs you have?

No. It's pretty -- we have at lot of leverage in CapEx as far as business growth goes, so that's not going to change.

Okay. And what were your new products to revenues, that metric you often cite?

So new products, it's a very important part of our business. You know, it's a -- it's really the life blood over time to make sure we have a healthy pipeline and new products, but what we have seen over the last you know, first -- last nine months, we come up with a number of attractive new products like XI4, the high end printers, we have a retransfer card printer and the new KR 403 kiosk printer that I talked about on the script also, so we have had a number of new attractive products come out. And we have a good pipeline for the future. We are shifting our investments slightly to really focus on printers that open up new market segments for us. So you can say clearly the retransfer card printer was one of those and HP100 printer was another one of those. Takes longer for those printers to really come into their own. 18 months is not enough to really get them up to full capacity, so we think this is an important metric but not necessarily the way it's structured today. So, I think we're working on figuring out how we can come up with a metric that really captures the new innovative aspects of our new product portfolio better. So we are really not tracking that to the same extent anymore.

Okay. Would that necessitate an increase in your R&D expense or do you expect it around the same level it's been running at, what, 10%?

We expect that to run the same. This is just more of a prioritizing the projects we do.

Okay. And one last one on the ScanSource, I think they're still your biggest customer, any indication on what size they were of your total sales in the quarter?

Yeah, I think that's around 17% for the quarter. It will be in the Q. but around 17%.

All right. Great. Thank you.

Thank you.

Comes from the line of Reik Read with Robert W. Baird. Please proceed with your question.

Just two quick follow-ups, I think with respect to the outsourcing, I think that you guys had said all of the transfers would be complete by June is that still the case or are those closing down ahead of schedule?

No, I think that by June that's still what we're planning.

And again just on the RFID side, not necessarily the VES, but the Jen 2 stuff. With all the apparel opportunities that are starting to click in, is that providing an opportunity for you guys with some of the printer encoder business, would that be material or is that still too small?

Well, so you know, our RFID business on the [SPG] has seen an in the last couple of quarters. We had a nice deal from the government for our RP14 so or for the enabled mobile printer in the first quarter and see the pipeline looking for Q2. But we can't really comment on specific enterprise deals. But we do see renewed confidence I guess around RFID and here also as when I talk about the ZF side we've seen trials and pilots that are moving from testing to really start to move from testing technology to test the application. So, I think that's good indication that there will also be some more contracts, some more projects going forward.

Would you agree that it's in a general sense it's really apparel and asset management that are driving it?

Itemized apparel tracking seems to be a big application today.

Okay. Thank you.

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

Thank you all for attending. I apologize, we ran a little late. Just for your information, our next conference call for earnings will be on scheduled for August 5th. So thank you very much. Have a good day. Bye bye.

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