斑馬技術公司 (ZBRA) 2010 Q2 法說會逐字稿

Good morning and welcome to the Zebra Technologies 2010 second quarter earnings conference call. Joining us from Zebra Technologies are Anders Gustafsson, CEO; Mike Smiley, CFO; Mike Terzich, Senior Vice President, Global Sales and SPG; 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 results that well exceeded expectations. Sales of $235.7 million established the fourth consecutive quarter of sequential sales growth, and were up 4% from the first quarter and 26% from a year ago. Broad-based demand in all regions and all major industries helped drive this favorable performance. Globally, further improvements in large deal activity complimented an ongoing firm run rate business. At $0.39 in GAAP EPS, we sustained high gross margins and operating profits, aided by benefits from our outsourcing initiative.

Over the past two years, we have developed and executed an integrated strategy to build stronger customer relationships, lower product costs, capitalize on growing opportunities in emerging regions, and improve operational efficiency. Our our second quarter performance is due in part to this strategy. Our scale and execution are extending Zebra's industry leadership and making us a more strategic partner to our customers. All of this has positioned Zebra for further profitable growth and greater shareholder value creation.

During the second quarter, we continued to make progress on our strategic initiatives to deliver shareholder value. We substantially completed this year's investments in geographic expansion, with the addition of Zebra sales people in emerging markets and the opening of new sales offices in Brazil, Turkey and China. In addition, our second quarter results reflect a 360 basis point improvement to gross margin from outsourcing, exceeding our 250 to 300-basis point target. At the same time, we began positioning Zebra higher in the value chain by enriching our go-to market channels by building stronger relationships with system integrators and independent software vendors. Our product development activities have also enabled us to continue to create an increasingly compelling product line to meet more regional and vertically specific needs.

In addition to our internal activities, investments to drive organic growth, we continue to deploy our resources in other activities, with the highest risk-adjusted returns. During the quarter, we invested $26 million, nearly all of the quarter's free cash flow, to buy back nearly 1 million shares of Zebra stock. As we disclosed in this morning's press release, we completed the repurchase of all 3 million shares under the previous authorization, and the Board has approved an additional buyback of 3 million shares. Since 2005, we have returned more than $520 million of shares to shareholders by buying back a total of 15 million shares, or 20% of shares outstanding. We believe that repurchasing Zebra shares continues to be an attractive investment at this time.

Let me briefly cover some of the highlights for the quarter in specialty printing and Enterprise Solutions. In Specialty Printing, or SPG, all geographic regions performed well across a wide range of industries and products. As further indication of Zebra's market and brand strength, sales increased $5 million from the first quarter. These results were driven by particularly strong performance in North America. The pace of North American bookings were strong, with sales into retail, food service, and small package delivery, of mobile, kiosk and desktop printers.

During the quarter, sales of wrist bands exceeded $1 million for the first time, an indication of the growing traction of our HealthCare Solutions. Furthermore, we secured another new and exciting pilot for our innovative IQ color labels, which enables spot color on thermal printing. We also launched a pilot that pairs Zebra mobile printers with SmartPhones, enabled by Zebra-developed SmartPhone printer drivers. We are beginning to see an increase in SmartPhone applications in the AIDC market, and we believe Zebra is well positioned to benefit from this important trend.

Our RFID printer encoder sales reached an all-time quarterly record in Q2. Shipments for the period include a significant order for Zebra RP4T Mobile RFID printers, into a retail based apparel application. As the leader in passive RFID, Zebra offers its customers unique printing and encoding technologies. The Zebra RP4T is ideally suited for in-store applications as the world's first mobile thermal transfer printer with RFID printing and encoding capability.

Further, our table top printer and encoders incorporate our patented on-pitch or near field encoding, which facilitates accurate encoding of closely-spaced labels at high speeds. This capability means customers reduce waste, improve productivity and ultimately save money. All of these benefits lead to higher return on their RFID investments. Zebra has the industry's broadest range of RFID printer encoders to serve more of our customers on demand labeling needs. We are seeing growing interest in RFID applications. We believe the current developments in retail to implement marketing will stimulate greater interest in RFID and we have stepped up our marketing activities to take advantage of these emerging opportunities.

In addition to North America, all international regions remained strong and steady throughout the quarter. In EMEA, nearly all subregions performed well, with France, the Middle East, and central and eastern Europe posting notable growth. Here again, retail, along with government and healthcare were favorable industries for Zebra. Further economic recovery in Asia-Pacific led to record SPG and consolidated sales in the region.

We view these results as a positive confirmation of our recent decision to add resources in this region. We continue to experience strong demand for high performance printers, from the manufacturing sector, as well as increased penetration into government, healthcare, and retail. In Latin America, card applications for driver's licenses in Argentina and national ID cards in Ecuador complemented sales of high performance printers for manufacturing. Continuing its high rate of growth, SPG sales in Brazil increased more than 130% year-over-year for the second quarter.

Let me now turn to Zebra Enterprise Solutions, or ZES. At $23 million, ZES's revenues exceeded expectations. Bookings were also strong. Momentum and the deal pipeline grew for location systems to track high value assets, as traditional customers in automotive and manufacturing began to reinvest in our solutions again.

On the supply chain logistics operation side of ZES, we had some significant deals for our maritime N4 system. Terminal operators around the world continue to rely on ZES solutions for state of the art software and hardware that optimized their business operations. We also made solid progress with our channel market. ZES enhanced its programs with go-to-market training, to strengthen partner relationships and selling effectiveness. We secured an increased number of active RFID contracts through our channel partners for customers in manufacturing, healthcare, and retail. In addition, we have seen increased interest in our personal safety systems. Designed to track personnel and assets in petrochemical and other process industries, the system was developed around our proprietary ultra wide brand radio technology for high precision realtime location systems in hazardous environments.

In conclusion, Zebra's results for the second quarter and first half of 2010 demonstrate the effectiveness of our strategy to serve global customers with innovative solutions through superior growth in market accounts. We are confident that the programs under way to extend our global reach will build a more robust product pipeline and develop stronger channel relationships will all enable us to gain share and continue to deliver increasing shareholder value. Our results demonstrate that customers are increasingly turning to Zebra as the strategic partner to more effectively identify, track, and manage assets through the supply chain and across the enterprise in a smarter and more connected world.

I would now like to turn the call over to our CFO, Mike Smiley, to provide a detailed review of second quarter results and guidance for the third 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 components of Zebra's second quarter financial performance. First, we had double-digit year-over-year sales growth in all geographic territories, record sales in Asia-Pacific, and strong sequential sales growth in North America. Second, we maintained high gross margins of 3.6 percentage points from a year ago, including the effect of unfavorable foreign currency translation, and continued higher than normal expediting freight charges in a constrained supply chain environment. And third, operating expenses of 14% year-over-year were within our guidance range.

Let's take a look at sales. For the quarter, sales were up 26% from $188 million last year, the low point during the downturn. SPG sales increased 27%. ZES sales of $23 million were up 14% from a year ago, with a stronger US dollar against the Euro, foreign exchange had non-favorable impact of $5 million on sales. On a constant currency basis, sales grew 28% year-over-year. Sequentially, net sales increased 4%, including a $5.7 million unfavorable impact from foreign exchange.

On a consolidated basis, all geographic regions contributed to the year-over-year growth. North American sales, up $22 million, were the largest contributor to the increase, with a consistent pace of bookings, including the further return of large deal transactions concentrated in retail and mobile work force. Asia-Pacific sales, up 44%, reached a new quarterly record of $29 million, a notable strength in manufacturing in China and south Korea. Favorable business activities across nearly all subregions enabled EMEA sales to advance $12 million, or 17%, including a negative impact of foreign exchange. Latin American sales were up 38%.

By product line, hardware sales were up 31% year-over-year, while sales of all major printer categories were up from a year ago, sales of high performance and midrange table top models were restricted by component shortages in the extended supply chain. Overall, however, our printer supplier worked extremely well to get us product to fulfill customer orders. Supply sales were also strong, up 22% from a year ago, and 7% from the first quarter. In addition to the favorable sales trends, we were successful in improving profit margins in this category by focusing more on proprietary products such as wrist bands and running operations more effectively.

The Zebra Enterprise Solutions sales of $23 million, up 22% from the first quarter exceeded our guidance range. As Anders mentioned, pipeline activity activity in bookings improved along with sales. In addition, the cash earnings loss narrowed considerably to $800,000, from $2.8 million in the first quarter. Consolidated gross margin of 47.2%, up 3.6 percentage points from a year ago, was comparable with the first quarter margin. On a sequential basis, material savings, largely from outsourcing, along with volume improvements in mix offset the 1 percentage unfavorable impact from foreign exchange.

Freight charges to expedite shipments necessary because of continued supply chain constraints declined modestly as anticipated from the first quarter, but remain elevated by approximately $3 million, or 140 basis points of margin over normal levels. Operating expenses of $78 million, in line with expectations, were up 14% from a year ago, and 4% from the first quarter. Bonuses and commissions were the primary reasons for the increases, both year-over-year, and sequentially. Business development expenses, marketing events, PR, and marketing development funding also contributed to the increases. Employee-related benefits also had an impact on the increase from a year ago.

The sales growth, gross margin, operating expenses, combined to generate 150% increase in operating income to $33 million for a 14% margin. Adding back $2.3 million in amortization and $5.9 million in depreciation to the $33 million of operating income resulted in $41 million of earnings before interest, taxes, depreciation, and amortization, and was 17.4% of sales, up from 11.3% last year. With an income tax rate of 32%, GAAP net income came in at $0.39 per share, on 57.7 million average shares outstanding. At July 3, we had 57.2 million shares outstanding.

Second quarter free cash flow totaled $28 million. $26 million of which we used to buy back 935,000 shares of Zebra stock. The average price of the second quarter purchases was $27.76 per share, which is the same as in the first quarter. For the first half of 2010, free cash flow amounted to $52 million. The day sales outstanding improved from 59 days for the first quarter to 58 days. Inventory turns increased to 6 times from 5.9 and we ended the quarter with $255 million in cash and investments.

Now let's look at third quarter forecast. We are forecasting sales of $230 million to $244 million in a period that is seasonally flat to down from the second quarter. We expect SPG sales in the range of $210 million to $222 million and ZES sales between $20 million and $22 million. Our forecast consolidated gross profit margin in the range of 46.5% to 48%, including an assumption for continued elevated freight charges related to ongoing supply chain constraints. GAAP operating expenses are expected between $77 million and $80 million. GAAP earnings are expected in the range of $0.36 to $0.43 per share and the income tax rate will be 32%.

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

Thank you, Mike. Our second quarter and first half results demonstrate Zebra's industry leadership, global scale, and business diversity, are enabling us to help more customers solve more asset tracking and management challenges. Our strategy of investing, from investment to strengthen customer and channel relationship, capitalize on high growth regions across the world, improve operational efficiency, and lower product costs are all proven low risk high return activities. They will continue to pay off in improved sales and earnings growth and will provide considerable benefits to the company and our shareholders well into the future.

Our multifaceted growth strategy includes the following areas. Investing in emerging markets where we can win. Continuing to develop channel partnerships and moving up the value chain with large system integrators and independent software vendors. Improving on our already solid product development to expand the range of applications in markets we serve and capitalizing on important emerging opportunities that makes sense with our business models.

Our most recent investments in emerging markets are beginning to achieve very good results. As local channel partners appreciate the improved coverage from an increased number of Zebra sales representatives in high growth territories. We are maximizing our return on investment in geographic expansion by conducting primary research to identify the best market opportunities. In this way, we are able to identify the right verticals to pursue and develop appropriate go-to-market channels. During the second half of 2010, we will complete the remaining office openings planned for this year, which are all located in Asia-Pacific.

Further development of channel partnerships also enables us to reach more customers. In addition to expanding VAR channels overseas and ensuring top-level channel programs in North America, stronger relationships with large system integrators are positioning Zebra to become a better valued strategic partner to important customers with complex asset tracking challenges. Improving programs with independent software vendors or ISVs will facilitate easier integration of Zebra products and solutions and create more touch points with end users. More effective development of new products expand the range of applications we serve as another cornerstone of our growth strategy. Over the past two years, we have focused on introducing highly differentiated products that open new application opportunities to great success. The RP4T RFID printer is an excellent example of this program. Our ZXP retransfer printer is another example, which we began shipping in the first quarter of this year.

We followed this introduction with the laminator module for the transfer printer in the second quarter, and we are actively executing on a number of product road map enhancements to refresh the entire printer line in 2011 and bring new levels of performance and value to the market. We have other exciting products planned for introduction next year that will continue to place Zebra at the forefront of innovation in our industry. NZS new location opportunities are also emerging. Last quarter we told you about the introduction of the Zebra Location Appliance, or ZLA, a dedicated unified server platform for the broad range of identification solutions available for asset tracking, such as bar codes, ultra wideband, GPS, active and passive RFID and others. The ZLA is targeted at enabling channel partners to sell and implement ZES solutions more easily, and provides customers the ability to enhance business applications with location and telemetry data.

During the second quarter, ZES introduced a new generation of ultra wide band active RFID tags that deliver new, higher levels of performance. These tags make our solutions more attractive for personal safety solutions, and enable us to pursue opportunities in Europe. Finally, we will continue to focus on enhancing shareholder value by deploying Zebra's resources where they deliver the highest risk adjusted returns. Our investments in developing our core business are clearly paying off. With the recent completion of our 3 million share buyback, the Board demonstrated its continued confidence in the company's future, with the approval to repurchase an additional 3 million shares.

This concludes our prepared remarks. Thank you for your attention. We would now be happy to take your questions.

(Operator Instructions) Thank you. Our first question is from Reik Read with Robert W. Baird. Please proceed with your question.

Good morning. Could you talk further about what you're seeing with improving large deal activity? You talked about retail. Is it expanded into other verticals as well and then maybe could you talk about what may be driving that at this stage of the game?

So we see it more broadly across many industry verticals. We've seen it in retail. We've seen it in DOD, or direct store delivery. We've seen it in manufacturing, transportation and logistics. So it's really gone across most of our large verticals. I think this just goes back to our customers now feeling a bit better about the economic outlook as they are investing to improve their operations and our solutions really do help them improve their ROI and make their -- streamline their business operations.

Is this a case where they are confident enough that they are deploying capital to expand their own operations and that's why these larger deals are kicking in, or is this just increased volume in their ordering, you know, more one sees and twosies?

I think it's more -- the first. It's not so much the ordering onesies and twosies for the large deals, it tends to be more that they are either refreshing older installations or expanding their facilities.

Reik, this is Mike Terzich. Let me add a little color to this. When you look at the large deal opportunities, as Anders mentioned, we're really well balanced geographically right now, and it was good to see some return of that activity, primarily in North America over the last quarter, but a lot of it is centered in mobility applications, where that refresh rate on mobility, as we've talked about in the past is about every three or four years, that product gets pretty beat up in the application space. So it's a combination of some retail applications, direct store delivery applications where we're entering some refresh cycles, as well as some expansion of applications by those end users to improve the efficiency or the customer experience of their business.

Thank you for that. And then just going back to Asia, you just had some very strong sequential growth there for a number of quarters now. How much of that is you guys called it recovery in your remarks. How much of that is the market just simply improving, and how much of that is due to your sales initiatives, and then can you also let us know in the back half of the year how many more salesmen you intend to add in that area?

It's hard for us to really separate out how much the economy versus how much our activities, our strategies are driving the growth, but clearly there is strengthening particularly in the high end manufacturing sector in China but we have also put a meaningful number of sales people into China already, about 40 for all the emerging markets. China getting the largest share and the majority of those are already on the ground and we are actively recruiting channel partners and pursuing new opportunities. I would think that the meaningful part of the increase is coming from our actions, and we believe that we are positioning ourselves very well in emerging markets in China.

Okay, great. Thank you, guys.

Thank you. Our next question is from Brian Drab with William Blair and Company. Please go ahead with your question.

Good morning. Congratulations on a great quarter.

Thank you, Brian.

Just on the more begins, Anders, you pointed out great gross margin improvement year-over-year, exceeding the goal of 360 basis points expansion. Going forward, given you've put up two quarters of 47% plus gross margin, is this a rate that you feel, or a level of gross margin that you feel is sustainable, you know, even through 2011 and beyond?

Yes, Brian, this is Mike Smiley. I think we have a couple of things we talked about. Number one is we still feel like we have room in the sense of when we were carrying elevated freight. So when we're able to address the supply constraint challenges that we have, we think we'll be able to get the product to our end customers more cost effectively and that will help us. We also think that as the business continues to grow, that will also help increase our margins. I will tell you that our margins are effected by FX. This quarter, they negatively impacted We're also working on trying to improve some of our efficiencies in our supply chain, even though we've moved most all of our printing outsourcing to China, we're still trying to, as a team, figure out how to work as efficiently as possible. So we have a number of things that we think we have opportunities to at least maintain, certainly improve from where we are.

But we were clearly very pleased to see that the improvements from outsourcing came into 360 basis points. That was above the targeted range we had set ourselves of 250 to 300. So we feel very good about how we've executed on that program.

Yes, certainly. And my second question is on the Zebra Enterprise Solutions group, as you look out to 2011, what are your goals for 2011 for 2011 and do you think we'll be beyond -- better than your break-even on a cash basis?

I think we are comfortable staying with forecasts for the next quarter. I can talk a bit more directionally how we feel about the future and for both ZES and for the company. I think that we feel that we are well positioned across the board with all the initiatives and the strategies we put in place. We've seen good traction in a number of new areas for us with ZES. We have a new ultra wide band tag for really aimed into Petrochemical or other hazardous work environments that's also been certified for Europe, which it wasn't before. We've seen many of our traditional strong customers in automotive and manufacturing come back again after, you know, obviously a very difficult year in 2009. And we're starting to continue to develop our channel programs and we've had more deals come through in the channel in this quarter again. So we think that there's a number of good initiatives that's going to yield fruit as we move into 2011 also.

Okay, great. Thank you. Congrats, again.

Thank you.

Thank you.

Thank you. Our next question is from Paul Coster with JPMorgan Securities. Please proceed with your question.

First of all, regarding RFID, you mentioned the strength in that business. So I was wondering, where do you see -- where is that business in terms of percent of revenue and where do you see it going in the future? And then along the same lines, given Wal-Mart's announcement regarding relaunching EPC RFID effort, do you think we'll see a second wave of adoption for in-store retail applications?

First, we don't really break out our individual product lines. We did mention on the call that we had our best quarter ever for passive RFID. So obviously we feel much more encouraged about where we are with our passive RFID today, but it is still a very small part of the overall business. But overall, much more encouraging than what it was a year ago. So we'll take some credit or pleasure in that, I guess. We have seen more pilots and more activity across our customer base today. I think we feel very encouraged by having the broadest product portfolio for RFID and we have some unique patented technologies or solutions that really enables our customers to get higher ROIs on our printer, by being able to print on much more narrow labels and not waste as much paper. So overall, we think that the next couple of quarters, the outlook looks quite good with sales activity, more pilots and a better pipeline, but again, we've got to be a little cautious about the adoption rate, as we go forward. It's proven to be slower in the past. We think this is a great shot in the arm for the industry and we certainly want to be here to help nurture it along.

Then regarding the SPG group, to what extent where the results a consequence of pent-up demand, and to what extent will that normalize rather than new market penetration? Thank you very much.

I think that pent-up demand includes a lot of different things. We don't think that there's much of any channel development, channel inventory restocking, we think that happened much earlier in the cycle, so this is really end user demand that we see. There are probably some refresh cycles going on Mike mentioned in the mobile side. I think there's probably also a bit of a refresh cycle at the high end. But generally I think this is based on customers being confident of the investing in their business and expanding and taking advantage of our technology to further streamline and improve the efficiency of their operations.

Okay. Thank you very much.

Thank you.

Our next question is from Chris Quilty with Raymond James & Associates. Please proceed with your question.

Good morning, gentlemen. I think you mentioned that you're seeing good demand across most verticals, but I just wanted to probe a little bit on the retail segment,which historically has been a more important vertical for you. Typically what happens in multiyear refresh cycles and arguably it's long overdue. A, do you sort of agree with that synopsis, and, B, are you seeing any signs that some of the larger deal refresh activity might be on the horizon?

Chris, this is Mike Terzich. Let me address that. I think generally, we see a similar person. I mean, as you mentioned, the retailers are typically a little bit lumpier relative to the schedule for refresh. And what drives that is a number of factors. And part of that is the age of the equipment, the use of the equipment in operation. Their near-term profitability, their outlook obviously on the state of their business. There's a lot more emphasis being put on a store efficiency, a lot more emphasis on self help in retail. So we're seeing lots of interest in the kiosk space, in the, in that mobility space.

So our pipeline for retail, and that's retail beyond even the United States, has been, has been growing and it's really well balanced across a range of applications, both new applications for retailers to improve that efficiency or that customer experience, if you will, and the replacement of some aging technology often times driven by changes in wireless security protocol and some other stimulus that forces them to refresh with newer technology. So we feel really good about the near term prospects of retail.

Okay, and second question, you talked about the ZLA solution and more generally about some of the active tracking. To what degree might the ZLA be viewed as competing with your customers who often provide, your systems integrators, provide software-based solutions, or is it truly something that helps them in winning larger transactions, and are you seeing any kind of a, a break in terms of directionally what's happening with technology? There's been for too many years, too many different standards out there of Wi-Fi-based or ultra wide band technologies, or is this just a market application where you need a potpourri of solutions?

Yes, first, on the ZLA, I think that's really meant to help other partners of ours, like ISVs that have software applications on their own. So, historically our ZES solutions have been more vertically integrate, so we've had a software application for automotive or various industries that has been very much tied to our specific hardware. Here the ZLA really enables us to create kind of the middleware layer that we can open up and put more standardized interfaces on so that other ISVs or application developers can more easily incorporate the location technologies in their solutions going forward. So we see it as a way for us to work more effectively with partners and give them a chance to participate in the growth of the industry.

With respect to the technology and being so many of them, this is we don't expect to see a reduction, say, in the different types of technology here. I think they all have a specific benefit for certain environments, they are particularly well suited. So the ultra wide band RFID solutions, they are particularly well suited for indoor applications or where there's a lot of metal or other interference. The 24730, the old ware nets type of active RFID solutions, they had better ranges, much more cost effective outside. And GPS can be very effective, too, over larger areas and we don't then have to implement the infrastructure to support the location. So I think that there is going to be a number of different technologies that will be part of a portfolio to most optimally be able to support our customers. And I think that for us, it's a benefit for us to have these, this portfolio that we can be much more specific in how we address our customers needs and we don't have to kind of force fit our solution into their needs.

And does that suggest that there's perhaps other targeted technology acquisitions that you might need to make over time?

At this stage, I think that we believe that the portfolio we have is sufficient. We think we have lots of good runways with the solutions we have and we would like to make sure we commercialize those and get the good business return on them before we step into new technologies.

Great. Thank you.

Thank you.

Thank you. Our next question is from Ajit Pai with Stifel Nicolaus. Please proceed with your question.

Yes, good morning, and congratulations on a very solid quarter.

Thank you.

Couple of questions. One is just looking at the acquisition pipeline and strategy for uses of cash. You bought back your shares. You've also said that you don't need anymore for ZES. But overall, can you just walk us through how you're prioritizing further acquisitions right now and then we can sort of ask the others?

Well, first, when we talk about acquisitions, we got to go back to our capital allocation strategy. We're very disciplined in looking at making sure we invest in, in opportunities with the highest risk adjusted returns. That being said, we do engage in looking at various types of acquisitions. We certainly want to make sure that we are aware of what goes on, and particularly looking at things that are close to our core and could be, say, smaller tuck-ins. But it has to have a good return and be very much fit our strategy.

Right, but the pipeline is still rich right now in terms of acquisitions you can make?

I don't think we -- I don't think we want to characterize the pipeline at this stage.

Okay. Okay. Second, just looking at your gross margins, while you've shown some pretty incredible improvement development over the past several quarters, you've talked about cost improvement, et cetera. It's still substantially below where your gross margins are trending in the 2003 through 2005 kind of range, in order of 50%. You've also acquired higher gross margin businesses on the enterprise side, the DES side, so is there a sort of target that you have a couple of years out where your gross margins could get back about 50% and similarly on the operating margin side, I think you did answer a question when someone asked you directionally that you expect that to actually become profitable in 2011, positive, or is it 2012 or further out? Is the focus on investing in the business to drive greater scale or do you think that it could reach break-even at some point next year?

That's a good question. I will take the first half, and Anders will take the second half. On the gross margin, I just want to make sure you're aware, when you look at some of the historical quarters that we quote north of 50%, we had some one-time adjustments to those numbers, so I would say the more robust gross margins we had historically were in the high 40s, I wouldn't say they were 50s. I would argue that we talked about a couple of things already that we think are, we feel encouraged about in regards to our gross margin. Going forward, we talked about the fact that volumes will continue to benefit us, we also know that we're carrying extra freight right now, and we do think we have ability to continue to improve some of our efficiencies in some of the processes that we're working with that will help us move, so right now, it's been good, we still feel like we have room to improve that. So what we would probably say is probably in the high 40s is probably a good target to sort of keep yourself focused on. That will be more like an average rather than every quarter.

I also tell you with ZES for this quarter, we were hampered by a couple of small things, number one, our services margins were a little bit low because volume for services was a little bit lower than we had anticipated. ZES also had some third party hardware sales that were low margin that also negatively affected our gross margin in the quarter. And then the other thing, too. There's obviously plays plus or minus, and this quarter, we were negatively affected by FX this quarter.

And with respect to ZES's profitability in 2011, we don't really want to start forecasting into the 2011, but our expectation is that we will be able to continue to guide the business forward and get to cash flow break even to cash flow positive in 2011.

Got it. I'll get back in queue.

Thank you. Our next question is from Anthony Kure with KeyBanc Capital Markets. Please proceed with your question.

Most of my questions have been answered already, but I was wondering, taking back on the gross margin question previously. I think as you generate a larger part of your overall sales by comparing your geographic footprint to Latin America and Asia Pacific. How should we think about the sustainability of your average selling price of total printer ships going forward.

First, since our products are global in nature, our prices are very much the same across the world. So we can't go and sell one product for much lower in one region and higher in other ones. Then we have a gray market and products flowing from different regions. So we have a very disciplined approach to how we price our products.

Particularly in Asia, we do a lot of high end products for the manufacturing sector there and they tend to have very good price points and margins. But as we become more focused on starting to penetrate the more local economies, we will probably have more lower end product that will probably be on the gross margin side slightly lower than the average, but it will be a smaller part of our business also. So we believe we are in good position to drive the gross margins as Mike Smiley said earlier.

Okay, great. And just one final question. Your recent share authorization, you anticipate the pace of share buybacks to continue from recent levels?

We don't forecast our share buybacks, but, I think that if you can look at us over the last three or four quarters, you can see that's probably realistic for a view going forward, but I will tell you that we are price sensitive, so when the shares are a little -- when the company valuation feels a little bit more attractive, we will be more aggressive and if we feel it's less attractive, we'll be less aggressive.

Okay. Great. Thank you, guys.

Thank you.

Our next question is from Greg Halter with Great Lakes Review. Please proceed with your question.

Yes. I would like to delve into the comments that you made, Anders, about the apparel side on the RFID. I presume that's maybe Wal-Mart and some others there. Just one wondering if you could elaborate on what you're doing there specifically for that customer or those customers and how far along you are in the process.

So I don't think we can expand too much on the specific applications of what we do, but this is an active rollout. I guess we can say that. We have delivered products to the customer for that application.

Okay. And relative to the component shortages that you've seen in the higher freight, has that caused you to lose any sales to any competitors that you're aware of?

The supply chain environment has been very tight over the last several months. But I think we've been very diligent and executed very well by working by ourselves and with our other supply chain partners like Jabil to make sure we get an appropriate volume of parts. And we actually shipped more printers in Q2 than we have done in any other particular quarter historically. We've still got lots of volume and material out. And I think we took the step of continuing to air freight a much higher proportion of our volume in order to make sure that we protected our market share and protected our brand. I think that's been very well received. We have extended our lead in our industry by doing this. I'm sure there's a few deals that we've lost, but on net balance, I would say we've won more than we've lost.

Okay. That's excellent. Thank you.

Our next question is from Andrew Abrams with Avian Securities. Please proceed with your question.

Hi. Just two questions. There's been some questions about EMEA both on a seasonal basis and on the financial side slowing a bit in third quarter, and this is more expectation than anything else. Given your guidance, it doesn't seem like you guys are expecting anything from that sector to slow down at all. Is this a function of the fact that the channel is just remaining strong, or is this something more particular to you guys both on the enterprise side and the channel.

A few months back there was I think a lot of speculation in the press and TV and stuff about the European economy, largely driven I guess by Greece. And Greece is about 2% of the Eurozone GDP. But over last few weeks, I think the news we've seen has been much more encouraging and settling down much better. I think we've seen some of the larger export oriented regions of Europe do very well. Germany and Central Europe are doing very well economically, and I think they're doing very well with us. And our sweet spot in Europe is really around the central Europe region for export-oriented companies. And the weakening of the Euro is giving a boost. We should see some unit volume decreases to offset some of the weakening of the Euro.

So far, we have not seen any indication that Europe is slowing or there is a change in economic outlook for it. But it is something we're paying a lot of attention to as there is obviously an important factor for us. I would also like to go back and say we have the ability to react quickly to changes in the economic environment when the recession started, I think we were pretty quick taking steps to adjust for that and equally as we were kind of coming out of the recession, we took steps to invest appropriately in the business to make sure we can really come out strongly and gain share as we did that. So I think we feel that Europe looks good today and we are well positioned there. But I'll let Mike give you some extra insights maybe for Europe.

Andrew, a couple other things that I think are worth mentioning. One is that from a seasonality perspective, historically that third quarter in Europe is always a bit of a softer quarter because of the heavier holiday schedule that Western Europe typically enjoys. But quite frankly, over the last several years, our expansion strategy has been in areas in eastern Europe and the Middle East and Saudi Arabia, Turkey, so you look at what has taken place. And in those regions, we have seen the continuation of business. They don't fall in line with the traditional Western Europe holiday schedule and it's kind of smoothed out that seasonality effect. I would postulate that some of our investment strategy over the last couple of years, particularly in those emerging areas of Europe has helped stabilize a little bit of the seasonality effect.

Great. Thank you. Also, just a quick question on the SmartPhones, you guys have a SmartPhone solution. Are you seeing a large amount of traction with SmartPhones, or are you just filling a, a need that was already there? Are you seeing additional smart phones being used in, you know, package delivery or whatever it happens to be, or is this just you meeting the demand that was already there?

Well, I think we see this as a growing trend. It's also a very small base, but it is a growing trend. And we have developed drivers for our printers to work with BlackBerry, Android, Windows CE, and iPhones. We believe it's an important strategy for us to kind of expand our addressable market into some application where we otherwise might not be considered.

Got it. Thank you. And congratulations on a good quarter.

Thank you.

Thank you. Our next question is a follow-up question with Reik Reed from Robert W. Baird. Please proceed with your questions.

Could you just talk about the improved mix as part of your comments, Mike, year-over-year, but the ASP is roughly flat. Is there an offset in there that you would highlight, is it pricing, or is it something else?

Couple things. First of all, there is FX that affects us. The other thing I'll tell you is that we talk about mix, there's some products that aren't really captured in the printer side, so for example, you have some aftermarket parts or something like that, which, volumes change has a major impact on some of our margins.

Okay. And then I guess a similar question, just why is the ASP down sequentially, just if you can talk about what maybe drove that and what the outlook may be or the general trend may be from here?

It's interesting, because sequentially I think, you know, it's again, you've got some strong demand on some mobile products that sort of, in desktop actually that's been driving that. We do talk about I think longer term trends in our business, one thing that will affect our gross margins is the relative growth rates of certain product lines. And I would say that, our historic core table top printers is something that probably we don't foresee growing quite as dramatically as more as the desktop, mobile-type printer card applications going forward. So as a result, that mix will change things overtime, but again, we feel good about the gross margin dollars that we're generating as we continue to expand the business.

And if you were to look at the AUPs within product families, that's been much more stable.

Yes. Very stable across product families.

Okay, great. And then just a follow-up on the Enterprise Solutions group, you guys sound more positive than I guess we've heard in a long period of time, the bookings are there, the pipeline is good. And just trying to understand that the guidance there, which is basically flat to down sequentially, is that some conservatism, or are there still some issues that you know about that you're battling, and if you could comment on that.

Well, I think the guidance is, as we said, kind of flat through the prior quarter. We think that there is certainly an improvement in our pipeline. We have -- we see more activity, but also we know that the sales cycle is much longer, so we don't want to get ourselves overly enthused about the improvements we're seeing in one quarter. We want to make sure we can put some quarters behind us before we start getting really bullish on this.

And the other thing, too, is the actual time between bookings and revenue recognition is a little bit longer. So even though we have good bookings in this quarter, it doesn't really roll out to the P&L for a little while.

Okay. Perfect. And then just one last question, a follow-up on the RFID side, is what you're focused on primarily the jeans and the undergarments, or are you seeing broader expansion to other categories, subcategories, within the apparel market?

Reik, it's Mike. Initially a lot of that work effort is around apparel tagging in retail, and clearly there are different retailers with different levels of progress relative to their own view of where the opportunity is. We feel that it will extend itself beyond apparel into other, what would be qualified as complex SKUs, so we can see it finding its way into other parts of the in-store retail experience, where that inventory visibility is critical to not only revenue, but the service level capability of the retailer.

And I understand that, Mike, but I guess part of the question I'm asking is, is it just in those subcategories of apparel that the jeans and the undergarments, or are you expanding to other subcategories within the apparel segment?

Over time, I think it's directionally going to go to other apparel subcategories.

Okay.

Beyond the jeans and the garments that you're noting.

And most of the applications, it sounds like what you're saying, are with the mobile products right now and not so much with table tops and the distribution centers?

Correct. But I think, I think ultimately what happens is over the course of time, the back room tagging is going to increase in opportunity and we're really, as you know, we're really well positioned there from product line standpoint.

And as things go to source tagging at manufacturing, what type of opportunity is that for you?

Well, I think it depends. I think if, there's a lot of that source tagging that's being done in very large volume, bulk, if you will today, and that's not necessarily an immediate opportunity for us. I think where the opportunity is, a lot happens between the source of where that tag is applied and the condition of those tags when they come into the distribution center. So there's an opportunity, a fair amount of, I call it moderate volume retagging that will take place at the distribution centers. And that's where some of that stationery product will come into play and then obviously in the store is another retagging opportunity. And that's where we're very uniquely positioned as the only provider of a mobile RFID device today.

Guys, thank you very much for the time.

Thank you.

Our next question is a follow-up question from the line of Ajit Pai with Stifel Nicolaus. Please proceed with your question.

Yes, just wanted to address the sort of competitive environment on the printer group side. The traditional backward printers. there's been consolidation in that space and intensity of competition was getting better, but as you've gone into Asia, have you seen any new competition, anyone that's been far more aggressive there as you've been growing your business over there? And, you address some of the reasons for the sort of decreasing ASP in printers. And historically you said it's much more of a mix shift in your business, greater mobile, all of that, than anything else. Have there been any changes in the pricing environment there? Is pricing getting better, worse, or has it been the same trend over the past several quarters?

So I guess first on the traditional competitive side, we haven't seen any big changes to that. We feel that we are competing well. We believe we have extended our lead in the industry from a price perspective. We haven't seen any increased pressure, say, on price, particularly in this supply constrained environment. We haven't had to lead with price much.

When we get into Asia, there's always a number of other smaller competitors. We do see more of them. Part of what we are doing has to ensure that we can compete very effectively with them, has been to identify three new printers that are going to come out beginning of next year. We're focused on the low end in Asia. And we've been, with moving our supply chain to Asia, and also setting up a development center in China to be able to leverage some of the same resources there.

So we think that we have quite the comprehensive strategy to make sure that we can engage with them. It's both an offensive and a defensive strategy. From an offensive perspective, we're going into some markets where we haven't had the same market share as we had before. So there's a net incremental revenue and margin for us. And from a defensive side, we are trying to make sure that those competitors, those Chinese or Asian competitors are having to fight with us at the low end and not get a chance to build their business to come up, higher up in the value chain.

Right. So now, those products that you're introducing, just from understanding the impact on the income statement, I know it's going to be a base to your business, but in the way you're thinking about it, while the ASPs might be lower, is that a possibility of the gross margins being equal to better than your corporate average, or will it also have lower gross margins?

We've developed these printers very specifically for these markets. And we haven't even decided if they are going to be introduced in outside of emerging markets. So the cost points is much lower. Our expectation is that they will be slightly below our corporate average from a gross margin perspective, but not, not materially so.

They are also coming off a very small base. So it's not like it's all of a sudden once they get introduced, it's going to--

Got it. Okay, thank you.

Thank you.

There are no further questions at this time. I would like to turn the floor back over to Mr. Fox for any closing remarks.

Thank you for joining us today. Have a great day. Just as a reminder, our next conference call is currently scheduled for November 4. If you have any further questions, both Mike Smiley and I will be around for the rest of the day. Don't hesitate to give us a call. Thank you very much.

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