斑馬技術公司 (ZBRA) 2010 Q3 法說會逐字稿

Good morning and welcome to the Zebra Technologies third-quarter 2010 earnings conference call. Joining us from Zebra Technologies are Anders Gustafsson, CEO; Mike Smiley, CFO; Mike Terzich, Senior Vice President, Global Sales and Marketing SPS; 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 questions. At the request of Zebra Technologies, this conference call is being recorded. Should anyone have any objections, please disconnect at this time.

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

Thank you. Good morning and thank you for joining us today.

Certain statements made on this call will relate to future events or circumstances and therefore will be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Words such as expect, believe, and anticipate are a few examples of words identifying a forward-looking statement.

Forward-looking information is subject to various risks and uncertainties which could significantly affect expected results. Risk factors were noted in the news release issued this morning and are also described in Zebra's 10-K for the year ended December 31, 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 announced its fifth consecutive quarter of sequential sales growth. Third-quarter sales were $246.5 million, up 5% from the second quarter and 23% from a year ago. All geographic regions contributed to this performance, driven by stronger than expected activity with large customers and a consistent run rate business through channel partners during the quarter.

We delivered record GAAP earnings of $0.46 per share as a result of higher gross margins and effective expense management which generated solid operating leverage. Our third-quarter results demonstrate that our investments in product, sales and channels are paying off.

The strength of our brand and global industry leadership, supporting a broad range of initiative -- sorry, innovative solutions has resulted in greater success in serving more of our customers' asset [high] needs. At the same time we have lowered product costs and maintained quality through outsourcing.

These actions have positioned Zebra well across several dimensions -- products, technology, customers and channels -- to deliver increasing shareholder returns over the long term. During the third quarter we made further progress in several strategic initiatives.

Specifically, our decision to expand geographically over the multiyear time horizon has been well-timed. The additional sales resources hired in emerging markets, most recently in Brazil, Turkey and China, have produced incremental business. The expanding go to market channels that are a result of these investments are generating new opportunities in targeted verticals, such as manufacturing, government, transportation and logistics, and healthcare.

In addition, our third-quarter results reflect the further abatement in supply chain constraints for components, which led to greater product availability, lower freight charges and an improved ability to full-scale demand. Our activities to drive increasing returns were also evident as we continued to deploy resources through share buybacks.

During the third quarter, we used $21 million to repurchase more than 750,000 Zebra shares. So far this year, we have used $67 million to buy back 2.5 million shares, or 4% of shares outstanding as we still view share repurchases this as one of the best investment activities for our cash on a risk-adjusted basis along with funding further organic growth opportunities.

Our share repurchases during the past 12 months have contributed approximately $0.02 to EPS.

Let me briefly cover some of the highlights for the quarter in specialty printing and enterprise solutions. Our Specialty Printing Group or SPG delivered a solid quarter on all fronts. Sales advanced more than $10 million or 5% in the period we typically experience as seasonally flat with the second quarter. All geographic regions contributed to the growth with a rich mix of business across products and verticals as customers continued to invest in solutions that help them improve asset visibility across the supply chain.

Better than expected product sourcing enabled us to fulfill more orders than anticipated. Strong growth in Korea and China drove record sales in Asia-Pacific for SPG and on a consolidated basis, including robust sales of high-performance printers to manufacturing customers.

During the quarter, we brought on 30 new retailers in this region to help us more deeply penetrate targeted verticals and provide longer run rate for growth in the region.

In Latin America, an excellent quarter for mobile printer shipments to customers in retail, contributed to record sales in this region as well. In addition, healthcare labs deployed Zebra desktop printers to increase the accuracy of specimen labeling.

We also fulfilled a sizable order from a major electric and gas utility for kiosk printers to provide customers the ability to pay bills and perform other transactions more easily on a self-service basis. EMEA continued to excel as well. Third-quarter sales exceeded the second-quarter level in this region for the first time in Company history.

Improved product flow from Jabil, in addition to our investments in the emerging Eastern Europe, Turkey and the Middle East sub regions, moderated the usual seasonal business decline in Western Europe. Robust business occurred in several areas in the region -- mobile printers to improve retailing, government and postal operations, card printers for personal ID in retail and high-performance printers for manufacturing.

In North America, key wins with customers in the retail vertical supported performance in the region. We completed shipment of a significant order for Zebra RP4T Mobile RFID printers into a major retail-based apparel application during the quarter.

Since the last quarter, we have seen increased interest from retailers in passive RFID for icon level apparel tracking both at the in-store level and for source tagging.

During the third quarter, we introduced the RXID -- RXi4 RFID printer encoder, targeted at advanced item level tagging. Building on the Zebra brand, this innovative, highly differentiated product incorporates on pitch encoding for the ability to print and encode small tags placed very close together. Customers are increasingly interested in Zebra RFID printer encoders because our on pitch encoding and other proprietary technologies help them save money on media and improve throughput for lower total cost of ownership and a superior value proposition.

In addition to retail, suppliers to the US Department of Defense have expressed greater interest in RFID technology and solutions to meet various military asset identification needs. Recently, industrial manufacturers and companies in aerospace and defense have focused greater attention on RFID, particularly core applications for high-value assets that require chain of custody and maintenance history documentation.

While we are pleased with the recent progress in RFID, I would like to emphasize that RFID currently represents a small part of Zebra's business. And we are unable to accurately predict the rate of adoption for this technology.

Our support for Auto ID Solutions incorporating smart phones [grew] as well. During the quarter, we introduced Zebra Utilities, the first application that enables the user to print labels and receipts and encode RFID tags directly from the iPhone, iPAD, or iPod Touch to a Zebra printer. Zebra Utilities is now available at no charge at the iTunes app store or at Zebra.com/SDK.

Currently we are working on versions for Windows CE and Android for release later this quarter, which will complement the BlackBerry applications we released earlier this year. Let me now turn to Zebra Enterprise Solutions or ZES.

Revenues of $24 million exceeded the upper end of our guidance range and bookings for [out of market lead]. Quarterly gross margin was lower than expected due to product mix, services' underutilization, and some delayed starts on maritime projects which are now scheduled for the first part of 2011. The deal pipeline continued to grow for location solutions to track high-value assets as customers in automotive and manufacturing reengaged further to refresh solutions and add new ones.

These deals include a substantial order from a big three auto manufacturer who [work off] Active RFID Tags to track stamping racks through the Company's internal supply chain. We also announced several new deals after a recent Zebra Enterprise Solutions world event. More than 400 customers attended this conference, and we secured more wins for our maritime's sparks and for terminal operating systems.

With the introduction of our newest generation of ultra wideband RFID technology, we are seeing growing interest in high-precision personal safety systems for use in oil and gas and other process industries.

In an entirely different environment, a UK university is installing this solution to track students and teachers across two campuses to monitor class attendance. While currently only a small part of our overall business, we continue to view ZES as a growth business. And we remain focused on making the appropriate level of investment to achieve attractive returns over time.

During the past two years, Zebra has systematically pursued activities to extend our industry leadership by delivering innovative solutions that help our customers identify, track, and manage their Crystal assets in an ever more complex and interconnected world.

Increasingly, companies in other organizations around the world have turned to Zebra as a strategic partner to help them achieve key improvements in safety and security, squeeze costs out of their supply chains, and enhance their customer's shopping experience. At the same time, we continued to look for opportunities to improve operational efficiency to deliver increasing returns as business conditions improved.

Our third-quarter results demonstrate the effectiveness of our actions and give us increased confidence about Zebra's future.

I would now like to turn the call over to our CFO, Mike Smiley, to provide a detailed review of third-quarter results and guidance for the fourth quarter of 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 third-quarter financial performance.

First, sales growth resulted from a steady run rate business and better than expected large-deal activity. All geographic regions contributed to the year-over-year and sequential growth.

Second, gross margin increased from last year on improved product mix and lower material costs, while lower freight charges were an important factor in the increase from the second quarter.

And third, the combination of higher gross margin and controlled expense growth resulted in solid operating leverage and a boost to operating margin. Let's take a look at sales.

For the quarter, sales were up 22% from $201 million last year to $247 million. By business unit, sales increased 23% for [SPG] and 18% for ZES. On a constant currency basis, sales were up 26% as a strong US dollar against the euro had an unfavorable impact of $7 million on sales from a year ago. By region, sales in EMEA and a record in Asia-Pacific each increased more than $14 million from a year ago for respective growth of 22% and 70%.

EMEA sales on a constant currency basis increased 31%. Record Latin American sales were up 28%. All international regions began to benefit from the sales resources we added in the first half of this year. North American sales were up a solid $11 million or 12% from a year ago.

By product category, hardware sales increased 37% year over year in growth in all major printer product lines and in aftermarket parts. We achieved record sales of RFID in mobile printers.

Supply sales declined 4% from a year ago. North American supply shipments were down from last year due to a spike in sales a year ago from a large order and our decision to pare back lower margin business. This decline in North America offset growth in international regions.

ZES sales of $24 million exceeded our guidance range and pipeline activity in bookings improved. As Anders mentioned, the mix of business moved against us. A higher proportion of hardware sales, lower utilization levels and services, and customer-driven project delays in maritime caused a decline in gross margin and a larger than expected cash loss of $2.2 million.

We have taken steps to help address this issue including the consolidation of ZES hardware manufacturing with Jabil. The steps we are taking and the overall outlook for the business evidenced by good bookings levels gives us confidence that gross margin in the 55% to 60% range is realistic.

Consolidated gross margin of 48.2% was up 250 basis points from a year ago. The benefits of higher volumes, material cost savings on printers from the move to Jabil and favorable product mix more than offset the unfavorable movement in foreign exchange rates and higher freight shipping expense.

A decline in freight expense from the second quarter to a more normalized level is an important factor in 1% -- in the 1 percentage point increase in gross margin on a sequential basis. We expect to maintain this normalized freight level in the fourth quarter.

Operating expenses of $80 million were in line with expectations and up 4% from a year ago. A decline in G&A expenses partially offset increases in engineering costs, related to new product development and in sales and marketing per promotion and sales.

Zebra's growth in higher profitability resulted in a 70% improvement in operating margin from last year's pro forma 9.5% to this year's 15.8%. Adding back $2.4 million in amortization and $5.2 million in depreciation to $39 million of operating income results in $47 million or 18.9% of sales. This compares with $24 million or 11.8% of sales in the same year ago period.

With an income tax rate of 32.9%, GAAP net income came in at a record $0.46 per share on 57 million average shares outstanding. At October 2, we had 56.5 million shares outstanding. Third-quarter free cash flow totaled $26 million and we used $21 million to buy back 765,000 shares of Zebra stock. The average price of the third-quarter purchases was $26.96 per share.

Year-to-date free cash flow totaled $78 million. Day sales outstanding [fell] slightly to 61 days from 58 days for the second quarter. Inventory turns also fell slightly from 6.0 times to 5.7 times. Inventories increased approximately $11 million as an easing of the supply-chain constraints enabled greater production and a greater proportion of ocean shipments which increased our level of finished goods.

The additional inventories will be used to more fully stock Zebra warehouse and configuration centers. So we will be able to be more flexible in responses to customer product demands.

We ended the quarter with $262 million in cash and investments. Now let's look at our fourth-quarter forecast.

We are forecasting sales of $240 million to $252 million, with SPG sales in the range of $220 million to $230 million and ZES sales between $20 million and $22 million. Our forecast assumes consolidated gross profit margin in the range of 48% to 49.5%, reflecting rate charges at a normalized level consistent with our experience in Q3.

We expect GAAP operating expenses between $79 million and $82.5 million. We also expect GAAP earnings in the range of $0.44 to $0.51 per share and the income tax rate will be 32%.

That concludes my formal remarks. I thank you for your attention. Now here is Anders for some concluding comments.

Thank you, Mike. During 2010, it has become increasingly evident that our investments to extend our industry leadership and generate higher returns have been well-placed.

We entered the fourth quarter and looked to 2011 with increased confidence in our business and our future. As the world becomes more globalized, and supply chains are becoming longer and more intricate, companies are demanding greater visibility into their critical assets.

Zebra is well-positioned to capitalize on these [macro plans]. With the great diversity of our business across geographies, the industry's broadest product line and an expanding array of asset tagging technologies. Our multifaceted strategy will continue to concentrate on those areas that provide attractive returns, including first, investing in emerging markets where we can win; second, continuing to develop channel partnerships and moving up the value chain with independent software vendors; third, improving on our already solid product development to expand the range of applications and markets we serve; and lastly, capitalizing on important emerging opportunities that complement our business model.

Our most recent investments in emerging markets have already made an incremental contribution to growth. Guided by primary research, we are maximizing the return on our investment by identifying the best market opportunities in each region, including the most attractive verticals and optimal go-to-market strategies.

For example, we are taking advantage of multiple card opportunities in Brazil, one of our targeted geographic expansion areas. We believe this greater sales presence will deliver enduring benefits to Zebra as we finalize further expansion plans for 2011 and beyond.

Ongoing channel development remains a cornerstone of Zebra's success to reach more customers in attractive vertical markets around the world. While we continue to strengthen our VAR network, especially in emerging markets, our focus in North America has also been on cultivating relationships with large system integrators.

These ties position Zebra to become a more valued strategic partner to important customers with complex asset tracking challenges. In addition, we will introduce new programs to recruit independent software vendors or ISVs to make Zebra products and solutions easier to integrate and use.

We are leveraging our expanded global channels with an increasingly successful product development program. During the third quarter, we introduced the RXi4 RFID printer encoder. We will also introduce printed products in multiple categories -- card, mobile, and kiosk -- later this quarter and in early 2011. These products also include printers designed to meet region-specific needs now under development in our China Development Center.

Opened earlier this year, this Center now hosts -- houses approximately 35 engineers. The products currently under development like the ones introduced over the past two years are targeted at opening new application opportunities for Zebra.

The effects of rising distance complexity bode well for solutions provided by ZES. In the future, we envision a more instrumented and interconnected world that enables us to operate more intelligently.

Companies continue to focus on operational speed and flexibility, which means they need increased visibility into their supply chains in real time. Tools that enable supply chains to be more agile and have greater dexterity will be in high demand. Investment and innovation in solutions that offer this flexibility, such as the real-time location solutions we offer through ZES will arise. There are exciting benefits on the horizon in terms of how technology can help make our businesses more efficient.

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

(Operator Instructions). Reik Read. Robert W. Baird.

Good morning. If I could just start with ZES and, Anders, I think in the last couple of calls, you actually talked about the bookings in the pipeline being up very nicely. Could you maybe give us some context for how much that is increasing and also talk a little bit about the conversion of those bookings and what the timing is, in terms of being able to put that forward as revenue?

Yes. We've seen good bookings. Bookings numbers have been -- book to revenue has been substantially above 1 for the last several quarters. We feel very good about that. The hardware revenue side has performed very well for us.

The one thing to remember with ZES, though, is that the time to convert an order into revenue is much longer for ZES. So it tends to be a more dampened curve as far as new orders coming in and translating to revenue or -- or currently we say when we had went into the recession, it was much slower decline in revenues there.

Could you also just talk a little bit about and maybe this goes hand-in-hand with that is with the timing, why would the revenues be down in that business if you are guiding a little bit lower than what you just reported? Just given that you continue to see those bookings over a reasonably long duration now continue to pick up?

Yes. We're just looking at what the -- what projects are going on and which ones we expect to start. And partly, there are some of our kinds that are -- have some other constraints in how quickly they can roll out their projects with the networks. So that's really the main issue for that.

Yes. I think the third quarter, we had a lot of hardware sales at ZES. We don't -- we expect -- as we talk about the margins, we expect to see improvement in ZES and what that means is there is going to be a flip, a little less hardware, a little bit more license revenue and so as it goes, that flip is going to have a better margin for us.

Okay. And then just also on the margin, Mike, you talked about some service utilization issues. Can you just talk about what may be the cause behind that?

Sure. That's you know -- we talked about the fact that on some of the maritime projects there's been some customer push outs and such that made it so that the services weren't as effectively utilized as it has been some other quarters.

On gross margin, we are doing quite a lot of things to ensure the improved gross margin for ZES over the next several quarters. And we expect it to come back up to a more normalized level. So we're -- a couple of one or two quarters. The one thing is we are moving all of our hardware manufacturing to Jabil in China and that will yield pretty good cost reductions that should result in good improvements to our gross margin. And our service utilization will come back up much higher in Q4 and into 2011. And we are taking some other steps to reduce our OpEx to also make sure we start improving the operating income line as well.

Okay. Great. And then, I just want to ask also on Asia and Latin America, you've just seen such very good growth there. Why is that acceleration occurring in front of having, really, the new product sets that you're talking about which are the correct sets for those regions?

Well, I think that the -- the [common] activities in those regions are probably the strongest of any regions we have around the world today. We have still very good solutions and very good positions in many of those markets. If we look at the -- Asia-Pac manufacturing has been a very strong vertical for us so far this year. The manufacturing or the outsource manufacturing and the export manufacturing from China and the rest of Asia has been growing very substantially. And that's been a real strong position for us.

And in Latin America, they continue to I will say highlight the one vertical probably on the mobile workforce, lay out more and more route accounting type of deals. And we have been very well -- we been doing very well, winning some of those.

And I would take it that many of the programs that you talk about there are really more the higher end products and that is probably why your ASPs have held relatively steady?

That's absolutely true and we think that the new products that are coming out in the beginning of next year, specifically for emerging market in China, they will give us their help -- they will enable us to go after some underserved markets for us. So it is more the low end where we don't have the same market position as we do at the higher end. And you know, from an [AUP] perspective you know they will have a slight negative impact, but it is going to be a small part of our overall business.

But we worked really hard to make sure that the gross margin position on those products is going to be within the range of normal for us.

Paul Coster with JPMorgan.

Good morning. I thought since there's a change here, it feels like the your customer base particularly the large customers are going from survival mode and just sort of upgrade and replacement cycle activity into sort of investment mode again to -- you know, with the objective of innovating their supply chains and their inventory management systems and so on. Do you think that that is what is happening here?

First, you know, I think that we have been in a very fortunate position that, while the overall economy has been -- at least in the US and Western Europe has been okay, but not great. Most companies have had good cash flow and strong cash positions and I think opportunity -- projects which are focused on improving their operations, driving greater efficiencies, have had a much easier time to get funded.

So I think from that perspective, projects that we are involved with, the stuff that we do has actually been easier than many other things to get funded, I think, for our customers.

So it has not actually changed, it's just that I've not really sort of recognized that there has been this stable investment process going on throughout this downturn and into the early recovery?

Well, I think that the -- it is probably since the early recovery. I think that that did not happen in the, say, in the throes of the recession. But since Q2 of -- or at least Q3 of 2009, I think we felt the companies were starting to make investments to drive operational efficiencies. [To say], normal expansions are a little harder, but efficiencies are easier.

The reason I mention it is that suddenly a little bit of interest in RFID and you saw one of your older customers come back with a pass -- an active RFID solution. That kind of felt a little bit like a sort of '07, '08 type story.

Yes and our large automaker automotive customers, they have -- they took probably the most severe beating in 2008, early 2009. So they -- but they never stopped using our solutions. It was just that they weren't expanding them. And now as they are coming back and introducing new models and more expanding their business, they are really looking to see how they can leverage technology and we've been fortunate to see some reasonable orders come through our way.

In your prepared remarks, you said that some of the larger customers, there was a stronger than anticipated demand from some large customers. Can you provide any sort of color around what it was that happened at those customers?

It varies by region. So in North America, we saw retail as being the vertical with where we have the most large deals from our larger customers. Asia-Pac was more around manufacturing.

Europe was a bit more mixed. There was some government, some retail and some also some manufacturing. Europe is a large country -- large continent for us and we see say, you know, the UK as being, doing well. Not phenomenally well, but doing well. Southern Europe is still a little depressed, I guess, we are a little slower. But say, the Germanic areas are doing really well for us which is a lot of exports coming out of the high-end products, and then the investments we've made into more the emerging parts of Eastern Europe and Middle East have done very well for us.

Okay. Finally, how many -- what is the status of the share buyback program? How many shares are you authorized to buy? And what is your projected tax rate for 2011, if you are in a position to share that?

Last question first. You know, we don't give out 2011 projections, but I wouldn't expect it to be a tremendous difference from what you are seeing in 2010. As far as the share buybacks, yes, it's in the press release, the details there. If you just go back there it tells you what the remaining authorization is.

It's about 2.5 million shares.

Yes.

Andrew Abrams with Avian Securities.

Hello. Congratulations on the quarter.

Two questions. First, just a little more color on the North American business. Are we talking about the kind of retail business that you might normally expect in a normal cycle to be in second and third quarter and then the slower fourth quarter? Is this that kind of normal business, normal increase in business? Or is this something that you might consider different than that, meaning there's been a lack of business in pent-up demand and now it is starting to come through regardless of what the seasonality of the business is?

Let me address that. Our business in North America in the quarter, I would characterize North America as we were very steady through a broad range of vertical markets through our channel business. And overlaid on top of that was some larger opportunity that had more of a retail-centricity to it.

So we talked in the prepared remarks relative to the RP4T order that we concluded in the quarter. That was centered in North America on the retail side of the business.

What's been happening in the retail sector, specifically, is with all of what has taken place economically, there has been some shifting of consumer loyalty to various streams of retail. So the retailers are at a point where they have been making some investments on technology to retain that customer base to better improve that customer experience that has been filling some project opportunities for us in North America.

You know, the other vertical markets in North America, we saw some refresh opportunity in the manufacturing sector. So while manufacturing was really principally carried in Asia, in North America, there was quite a bit of activity where people were refreshing some of what would be considered older generation product. And I think that is a sign where people have a little bit more confidence now that they've gotten past perhaps the worst part of the economy and manufacturing, and inventory levels have been ratcheted up and things have been stabilizing there a bit.

So that's really been a combination of what we have been seeing in North America.

Got it. And just quickly on ZES, the investment level that you guys are putting into this, would you characterize this as it -- going into fourth quarter, would you characterize this as higher, lower, or the same as it's been for the last maybe two quarters or so?

It's very similar to what we had in the last couple of quarters. There is no meaningful change up or down. A little bit lower, actually.

Right. And just lastly on the DOD side and the little bit of RFID that you were talking about. Is the DOD actually ordering things or is this RFP activity and the DOD has been relatively quiet over the last couple of quarters. Is this actual conversations or paperwork or is this still in the 'we are thinking about doing this maybe sometime next year?'

I think the real orders are more to come, I think, for the most part. We have seen great -- a lot of interest from the DOD and from suppliers to the DOD to ensure that they have technologies to help [sum] this up that we talked about has been around tracking large important and costly tools, having chain of custody as to deliver parts between vendors and certainly making sure that they have good maintenance history documentation. And also general asset management type applications to keep track of all the assets different departments have.

Ajit Pai. Stifel Nicolaus.

Good morning and congratulations on the solid quarter. Couple of quick questions.

The first is just looking at your Asia-Pacific business, I know you provided some color as to the products that are driving it, etc. But you also mentioned in your prepared remarks that you had actually created some additional sort of reseller distribution agreements there. So wanted to understand that slightly better and also whether you know is it sell-through or sell-in in Asia-Pacific right now?

And also the nature of the margins of that business. You did mention that there are very solid margins for the new products that will be coming in. But for your traditional products when you are looking at the margin structure there, usually in Asia, your gross margins from a number of other companies is lower, but the operating margins are higher. Do you plan to see the same thing as the Asia-Pacific business scales?

First, I'll start at the end, I guess. Our margins in Asia-Pac are very healthy. You know, we have -- we sell a very high proportion of our high-end manufacturing printers. So those are very attractively priced and we do have global pricing. We are very sensitive to not creating a gray market where we sell at a very, say, low pricing in some areas and have them re-exported to others. So our gross margins in Asia and China are very healthy.

The second part of the question you asked about the resellers we've signed up. So as part of our expansion activities into a select few high potential emerging markets, there we've also backed it up by doing real primary research to ensure that we've identified the most attractive sub regions, the most attractive vertical markets for us to do and also the most attractive partners. So we've been going out and being much more selective in these sort of people (sic) that we want to work with in order to really drive our business going forward.

And those are the types of partners we've signed up and it's still very much a sell-through type of model, so we are helping them sell. We are creating the programs and the structures to make them successful. We are going to value the channels.

Right, so the inventory risk right now, is it yours or is it your -- the reseller or the distributor?

So the inventory risk will stick with our distributors largely and then you know, we are -- over the last, I guess, two years or so we shifted some of our distribution models to be more reliant on distributors and having the VARs source more from the distributors and us hold that inventory ourselves.

Let me just add a little color to that point. When you look at the business in Asia for the quarter, it was very solid. You know, we tend to kind of bias all of our conversations around China, but I will tell you that just about every sub region in Asia had solid numbers. Outside of China, the -- you know, China, we do rely quite a bit on distribution.

But outside of China we still have a very much of a mix model where we have a lot of resellers that are buying directly from Zebra. So that is tied to sell-through. So those guys do not procure product unless they have some project based to it.

So when you look at our business in places like Korea and Singapore and Malaysia and Thailand, it has been very, very good and it is driven by very specific projects. So the inventory, the level of inventory that exists today is pretty normalized relative to the activity we see. We are not sitting on any inventory.

No one in the channel is sitting on inventory either. This is not stuff that's gone into the channel, this is stuff that's actually [in sourced]?

Right.

Right.

We keep very close tabs to sales in and sales out data. It is not in our interest to build inventory in the channel. That just comes back and bite us later and they don't want to have that either because it doesn't help their ROIC calculation. So, for us you know, we took inventories up this quarter because we had too little before. We had airfreight a lot more.

So we now have more inventory, which enables us to put a lot more of our finished goods coming out of Jabil on a boat to the US or to the (multiple speakers).

Yes. But the new suppliers or new resellers, their inventory then, they didn't have any so they had to build some, right?

No. They don't really sit on inventory. They tend to get an order and then they give us a PO and we fulfill that order on short notice. But they do not just sit on any inventory.

And then the second question is just looking at the supplies business. That was a little soft in the quarter, overall, when you look at supplies. Now is that picking up -- a couple of years ago you were acquiring supply company and you wanted to build that business. Is that still a strategic interest to continue to consolidate in that space? What happened to the supplies business in this quarter?

Let me handle that. The business at an aggregate level was a little soft, but principally due to a very large piece of business we took in the third quarter last year with the US government, it was a multimillion dollar piece of business that was not replaced effectively in the third quarter of 2010.

You look outside of that, we had solid growth in North America -- or, I'm sorry, solid growth in EMEA as well as Latin America. Our strategy has evolved to where we are focusing more of our concerted effort -- selling effort and marketing effort -- on focusing on specialty media. This is the higher margin media that is used a little bit more back stream in the manufacturing process where the tag has higher value so we don't have to compete with the commodity players on paper.

And that strategy is, we are continuing to evolve that strategy. We see opportunities in the international markets in Asia and in Latin America to have a stronger presence in the local market. And we are evaluating a couple of different routes on how we could achieve that.

But by and large, business was very good outside of the US, and US was healthy outside of the replacement of the large order.

(Operator Instructions). Tony Kure. KeyBanc Capital Markets.

Good morning. This is Karl Ackerman filling in for Tony Kure. I was wondering if you could talk about how maybe international bookings trended in the third quarter? And if you've seen a pickup in the -- maybe in the latter months of the quarter?

Actually we had a very steady bookings stream throughout the quarter. So we've mentioned Europe, specifically, as the first time in the history of the Company that we actually had an up Q3 versus Q2.

So we actually saw a very steady stream of orders. They did not really fluctuate much through the quarter. It was steady.

Okay. And then a question kind of on average selling prices. Is there typically a seasonal aspect of the average selling price in printers? Or are maybe ASPs more directly influenced by the greater growth of mobile products and desktop printers, relative to maybe some of your core tabletop printers that you realized in the last quarter?

So AUPs tend to be -- first, like I said there's not really any seasonal impact on AUPs. It tends to be driven by predominant levels, say, two things.

One is mix, so how much of the various products we sell. The other one tends to be foreign exchange rates. So when the euro is stronger that helps AUP and when the euro is weaker obviously that hurts and in the year-over-year, the euro was actually down a bit. So that had some negative impact on AUP, but we still had AUP higher than the year ago period.

Okay and just one final question, regarding R&D expense. If we assume incremental volume growth in ZES for the remainder of 2010, and presumably for 2011, and assuming most of the R&D as it relates to launch of new printer products in the fourth quarter and 2011 is maybe mostly complete, is it possible for R&D as a percent of sales to trend back towards the historical average of the 8% to 9% you initially bought, say, as a ZES business?

Well, just for the third quarter we did spend a little bit more than we anticipated in helping qualify some products that are coming out. So I think the third-quarter run rate is a little bit high and you'll see that come back to a more normalized level that you are talking about.

So it would be incorrect to assume kind of a linear relationship heading in the fourth quarter?

Yes.

Reik Read. Robert W. Baird.

I just wanted to go back to North America and Mike Terzich had mentioned manufacturing starting to come back. It has been fairly dormant other than, maybe, some onesies and twosies.

Is that coming back in terms of small projects or are you actually starting to see folks deploy some capital and maybe starting to add on at this point? Or is that on the horizon?

You know, the contrast between clearly there's been a lot of the heavier industrial manufacturing shift as a curve, relative to move into Asia. So that is where you see our XI business and our midrange being very strong in China and Korea.

In North America, you don't want to lose sight of the fact that the manufacturing installed base is very large and so there's two things going on. One is you have small project refreshes that are occurring where people are replacing or perhaps adding to a manufacturing line as manufacturing is moving a little back online.

And so the projects tend to be, I would characterize them as small and midsize. Nothing relative to the scale of what you see with new plant openings and expansion in Asia, but it has been very healthy.

But it does sound like it is a little bit beyond simple refreshes. That there are some conditions being put on.

Yes. I can tell you in the automotive -- you know, we talked about automotive a little earlier and I don't know if you saw the release earlier this week, but even GM's business improved. And so folks are putting a little bit more investment back into their plants and we are benefiting from it.

Okay. And then just a follow-up on RFID. With the VICS GS1 announcement earlier this week with a number of players that have been previously questionable in terms of how much they really want to go forward with RFID now indicating a fair amount of support, how much do you think that that benefits you guys over the course of the next year in terms of gaining more traction? Is that an important event or is it more of the same?

I think it is a little hard for us to give you a good sense of that today. We consider it to be kind of a net positive, but we don't think it is going to be a huge driver for us.

Tim Mulrooney with William Blair.

Good morning. I'm calling in for Brian Drab. We were just wondering -- you're forecasting pretty strong gross margin in the fourth quarter here. We were wondering is that mostly due to the fact that you are expecting more normalized freight rates or is it also a function of the way you are thinking about product mix, material costs? Can you talk about that for a second?

Yes. Just real quickly. We are sort of seeing the SPG business being fairly constant quarter to quarter. We already hit in the third quarter what we think to be a fairly attractive freight level. We don't expect a further improvement in freight.

What we're really seeing in our gross margin is ZES's gross margin getting back to more of a normalized level. That is the big mover for the quarter-to-quarter change -- (technical difficulty) in our gross margin.

Great and sticking on ZES for a second, in your last call, you guys mentioned that you expected 2011 to be flat to cash flow positive. Is that still something that you are expecting for this segment?

I don't think -- I don't recall us having given the 2011 expectation. We said I think that we expect to continue to expand the business and growing and become healthier, but I don't think we gave any specific metrics.

Yes, I think the point that we would say in ZES is that the deals we get into are profitable and getting the cash is primarily a function of volume and building that business. As that business builds, we will see that come through to the bottom line.

We see a good trend in that. There's more and more larger software applications that are looking for more real-time, on-demand type of information about what goes on within the supply chain or within that statistical world.

And we see that we have many good opportunities, many new applications coming out that we hadn't necessarily thought of before. So we do believe that there is very good opportunities for us to continue to expand our position and grow that business. I mean, one we mentioned in our prepared remarks the UK University that starts tracking all the students and teachers in order to look at grades and look at also funding for different courses.

We hadn't quite anticipated that, but that was a great win for us and clearly shows the value of being able to have much more real-time dynamic data about what goes on in the physical world.

Ajit Pai. Stifel Nicolaus.

Yes. Just about your M&A strategy, I know you have been focused recently in buying back your own stock, but from an M&A perspective, you are still looking at being a consolidator within the industry and you talked about how you are thinking about supplies. But is that maybe [interest] service that is going to be ZES or is it you are now going to be more on the traditional business? Could you give us some color there?

So I think what we said on previous calls are still very much the same direction we have. We are interested in being a consolidator of our industry, but first and foremost, we are looking to make sure we allocate our capital to those activities with the highest risk-adjusted returns.

And in the past several quarters, we have seen, you know, investing in organic growth and buying back shares as being those. But we keep looking at potential acquisition opportunities to make sure that we are aware of what they are and if it looks -- assessing the potential value we can drive from those. They tend to be very close to our core.

We believe that is where we can add the most value and our supply space in this would -- I would say is probably not quite as close to the core as we intend.

This brings us to the end of our Q&A session. I would now like to turn the floor over to Mr. Doug Fox for your concluding comments.

Thank you, everybody, for joining us today. Just to make a note, our next scheduled quarterly conference call for the fourth quarter of 2010, we will hold that on the 15th of February, 2011. Thank you very much. Have a good day.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.