斑馬技術公司 (ZBRA) 2010 Q4 法說會逐字稿

Good morning and welcome to the Zebra Technologies Corporation fourth-quarter 2010 earnings release conference call. Joining us from Zebra Technologies are Anders Gustafsson, CEO, Mike Smiley, CFO, Mike Terzich, Senior Vice President, Global Sales and Marketing, for the Specialty Printing Group, 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 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, SVP of Global Sales and Marketing. Zebra's fourth-quarter results provide a solid conclusion to an outstanding year in which Zebra gained market share, diversified and expanded its international business, and further strengthened its leading brand position. We capped the year with earnings of $0.50 per share, representing Zebra's second consecutive record quarter. We also realized 12% year-over-year sales growth with fourth-quarter sales of $248.2 million. The consistent run rate business through channel partners, together with increased strength in international regions, enabled us to deliver our sixth consecutive quarterly sales increase as well as the second highest quarterly level of sales in Zebra's history. In addition, higher gross margin and a continued focus on expense management drove further improvements in profitability and strong free cash flow.

Zebra's performance in the fourth quarter and throughout 2010 further demonstrates the effectiveness of our actions to extend industry leadership and serve more of our customers' asset tracking needs. During the year, we continued to build on this leadership by adding 40 new Zebra sales representatives in high growth emerging territories, including China, Brazil, and Turkey. We strengthened customer loyally by leveraging our financial strength to deliver innovative products in a constrained supply chain environment. We are also now fully benefiting from the outsourcing of printer manufacturing. We have continued to position Zebra to capture more opportunities in large complex supply chain situations through broader, go-to-market channel partners, including system integrators and independent software vendors. We also introduced innovative new products during the past year to expand the range of applications we serve. Most notably, the ZXP Series 8 retransfer card printer for secure on demand instant issuance card printing as well as the RXi 4 RFID printer and coder for advanced item level tagging with Zebra's proprietary near-field encoding. We continue to view share repurchases as one of the most attractive uses of our cash on a risk adjusted basis, in addition to funding key organic growth opportunities. During 2010, we deployed $102 million to buy back 3.3 million Zebra shares, including 900,000 shares in the fourth quarter.

Let me briefly cover some of the highlights of the quarter. Meaningful sales contributions for most of our product lines, most notably our high end, mid-range, and desktop printers drove growth in our Specialty Printing Group or SPG. In addition, our international regions maintain strong momentum aided by the investments we made in geographic expansion. For those countries and regions where we added Zebra sales personnel, sales grew 39% for the fourth quarter and 54% for the full year. We enjoyed a record sales in Latin America, including shipments to an increased number of manufacturing customers as well as a large number of smaller deals. On-going positive performance in Brazil and Mexico, our two largest countries in the region, was supplemented by improved results in other parts of central and South America. In EMEA, business momentum carried through the fourth quarter with a combination of on-going run rate business and significant new wins. Postal and grocery applications highlighted strong demand across nearly all sub-regions. The impact of our expansionary investments was also evident as sales increased 90% in Turkey and more than 30% in the Middle East sub-region. Zebra's investment in these markets will enable further penetrations into these key growth regions.

Our Asia-Pacific region surpassed $100 million in annual sales for the first time. Robust economies in combination with a rebound in export manufacturing and increased local consumption supported growth in just about every sub-region throughout Asia. As strategic expansion placed more sales representation in China, India, Malaysia, and Thailand, has proven to be a well-timed investment and provides solid foundation for further growth. Healthy channel recruitment from our expanded sales forced added 35 new resellers during the fourth quarter out of a total of more than 150 new resellers per year. Effective sales activities focusing on key strategic accounts resulted in important new contracts with customers in the retail and public safety sectors, among others. In North America, the heavy retail business that we enjoyed for the past few quarters lightened as retailers focused on the holiday season. The softer retail environment was partially offset by the return of various manufacturing, warehousing, and transportation and logistic verticals which enhanced sales of the high performance table top printers. Overall, we maintained a steady run-rate business and the deal pipeline for 2011 is healthy.

In addition, the environment for RFID continues to improve. Zebra is now engaged in an increasing number of pilots and discussions with customers in the retail, aerospace, and other industries. The depth and breadth of the Zebra RFID printer and coder product line as well as our deep expertise in the technology are proving to be clear competitive advantages. A number of the pilots in which we are engaged are using the Zebra RXi4, which we introduced last year. Others incorporate our Zebra RZ 400 mid-range printer and coder, and our unique proprietary, RP14 mobile printer and coder is also proving itself in the field every day. In the fourth quarter, we made further important progress on our strategic plans to focus the business on those core areas that we have identified to provide the highest return to Zebra over the long term. As part of our strategic focus, we formerly announced on January 31 that we entered into a definitive agreement to sell Navis and a small related marine terminal product line from Warenet to Cargo Tech for approximately $190 million in cash. For more than 25 years, Zebra's strategy has been focused on developing and delivering products and solutions that can be applied across many industries. With industry specific solutions requiring deep domain expertise, Navis' offerings are more limited in how broadly they can be applied.

By divesting Navis, Zebra can more effectively direct its resources to core opportunities in speciality printing, RFID, and location solutions. Our current suite of products and solutions insure that Zebra continues to be the clear innovation leader in our industry and is well positioned to benefit from the trend toward smarter enterprise business operations and logistics. With the divestiture, we will be consolidating the Locations Solutions business of ZS into Zebra. Location Solutions are much more closely aligned with our asset tagging strategy and offer an attractive opportunity for Zebra broadly across vertical industries. We exited the year with strong bookings for Locations Solutions, including yard management solutions for the US Postal Service and a large domestic retailer to improve yard throughput. We also closed several exciting automotive deals as the health of the automakers and suppliers improved and interest in productivity solutions returned.

Our redefined focus will further enable Zebra to build on its multiple competitive advantages to grow sales, profitability, and shareholder returns. These competitive advantages include; first, the world's first or its largest installed base of thermal printers; second, the highest level of investment in product development for thermal bar code label and card printers in the industry; third, unmatched depth and breadth of products and channel relationships; and lastly, the industry's premium brand that is most selected by top companies around the world. Today, more software applications and solutions, including leading ERP and WMS systems support Zebra printers compared with any competing brand. New products and solutions, including our portfolio of passive and active RFID, even broader channel partnerships, and a competitive cost structure through scale and outsourcing continue to add to Zebra's competitive advantage and provide a platform to further extend industry leadership.

I would now like to turn the call over to our CFO, Mike Smiley to provide a detailed review of fourth-quarter results and guidance for the first quarter of 2011. 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 fourth-quarter financial performance, principally compared with the fourth quarter of the prior year. First, both SPG and ZES sales were within our guidance range. On a consolidated basis all regions had a solid run-rate business with international regions posting strong year-over-year growth. Second, gross margin increased from last year substantially on the increase volume along with material savings and lower overhead and freight charges, offset by an unfavorable move in foreign exchange rates. And third, the business demonstrated attractive operating leverage and an increase in operating margin.

Let's take a look at sales. For the quarter, sales were up 12% from $220 million last year to $248 million. By business unit, sales increased 12% for SPG and 8% for ZES. On a constant currency basis, sales were up 14% as a stronger US dollar against the euro had an unfavorable impact of $6 million on sales from a year ago. By region, we had year-over-year strength in Asia-Pacific sales which were up $13 million or 57%. The region was led by 60% growth in China with healthy sales activity in all sub-regions and all major printer product categories. Robust activity in nearly all sub-regions contributed to EMEA's 12% sales growth. On a constant currency basis, EMEA sales increased 19% year-over-year. Latin America achieved record sales for the second quarter in a row, up 15% to $23 million. North American sales were up 1% on the continued strength in our run-rate business and a pick up in sales to manufacturing customers offset by retail customers completing much of their purchases early in the year. Overall, sales to our top retail customers in North America were up a healthy 39% for the full year.

By product category, hardware sales increased 15% on growth and all major printer product lines and aftermarket parts. Supply sales advanced 7%. Consolidated gross margin of 49.8% was a 420 basis point improvement from a year ago, and up 170 basis points from the third quarter. As I mentioned earlier, increased volume, favorable product mix and material savings, and lower freight costs all contributed positively to the year-over-year improvement. The increase in the third quarter resulted from more favorable FX rates, higher volumes, material savings, and rebound in gross margin for ZES from 48% to 56% from an improved product mix and service delivery efficiencies.Operating expenses of $83 million were up 11% from a year ago and reflect higher compensation and incentive costs, increased spending on engineering projects, and travel and entertainment expenses. The expenses included $1 million in exit restructuring integration costs related to the Navis divestiture and integration of Locations Solutions into Zebra as a whole.

We also recognized $1 million in the favorable escrow settlement associated with prior acquisitions. The higher sales and gross margin and moderate growth in operating expenses delivered a 54% improvement in operating income and 16.3% in operating margin for the quarter. Adding back $2.4 million in amortization and $5.1 million in depreciation to the $40 million of operating income resulted in $48 million of cash earnings or 19.3% of sales. The income tax rate of 29.9% for the fourth quarter reflects several items, most notably the extension in US R&D tax credits that occurred in December and the ongoing shift in Zebra's business in countries and regions with lower income tax rates. GAAP net income came in at a record $0.50 per share on 56.7 million average shares outstanding. On December 31, we had 55.7 million shares outstanding. For the fourth quarter, we used the entire free cash flow of $32 million to buy back 900,000 shares of Zebra stock, up from 765,000 shares in Q3. The average price of the third-quarter purchases was $38.56 per share.

Zebra generated $110 million in free cash flow for the year or 11.5% on sales; this is up from $81 million or 10.1%, 2009. The days sales outstanding improved to 57 days from 61 days for the third quarter. Inventory turns fell to 4.8 times from 5.7 as inventories decreased by 18 -- increased by $18 million. With the easing of the supply chain constraints, normalized production is enabling us to take advantage of lower costs ocean going shipments. The increase in inventories largely reflects more products in the supply pipeline, including the number of printers we have on the water. The additional inventories are important in our new outsourcing model to ensure that we have sufficient product on hand to meet customer demand. We ended the quarter with $260 million in cash and investments.

Now, let's look at our first-quarter forecast. As we stated earlier, we expect the Navis transaction to close in the first quarter of this year. Going forward, we'll be consolidating Locations Solutions into Zebra as a whole. Navis and related assets will be designated as assets held for sale and discontinued operations until it is sold; therefore, the fourth quarter is the last period in which we provide segment results. We'll be revising last year's financial results for the discontinued operations and have the quarterly figures available by the first quarter's conference call. We are forecasting 2011 first-quarter sales of $224 million to $235 million reflecting the designation of Navis and related assets as a discontinued operation. For Q1 2010, the revenue from the businesses to be classified as discontinued operations generated roughly $15 million of revenue.

Earnings from continuing operations are expected at $0.41 to $0.47 per share including $0.02 per share for restructuring charges related to the consolidation of Locations Solutions into Zebra. Our forecast assumes a consolidated gross margin in the range of 48% to 49%. GAAP operating expenses are forecast between $74 million and $77 million, including the aforementioned $2 million in restructuring charges associated with the consolidation of Locations Solutions into Zebra. The tax rate will be 31%, which we expect for all of 2011. That concludes my formal remarks.

Now, here's Anders for some concluding comments.

Thank you, MikeDuring 2010, our investments to extend industry leadership and generate higher returns were well placed. We secured a greater presence in key regions around the globe where developing market economies and local wealth creation support attractive profitable growth opportunities. With a sharper business focus and a clearer vision for the future, we enter 2011 with a high level of confidence. Zebra's multiple, competitive advantages position us well to benefit from attractive global trends, driving greater demand for tagging high value assets to gain increased visibility into the supply chain.

Our multi-faceted strategy will continue to concentrate on those areas that provide proven low risk high returns, including investing in emerging markets where we can win; continuing to develop channel partnerships and moving up the value chain with independent software vendors; improving on our already solid product development to expand the range of applications and markets we serve; and, capitalizing on important emerging opportunities that complement our business model.

We continue to prioritize and invest in three key areas that have delivered success for Zebra over the long term, markets, channels, and products. For 2011 we will maintain our global channel expansion program. As the Zebra sales representatives placed in field last year become increasingly productive, we will supplement their efforts with more feet on the street to develop additional stronger channel relationships in China, Malaysia, Vietnam, and Russia, among other important regions. Channel development is also moving forward with Independent software vendors, or ISVs. Later this week, we will be announcing the rollout of a new program supporting ISVs, including development tools and a dedicated website. At the same time, our plans call for leveraging Zebra's brand strength to expand our strategic focus on enterprise customers, where we can offer the entire portfolio of Zebra products and solutions.

As for any technology company, the success of our global and channel expansion activities depends on how well we meet our customers' needs with innovative and superior products and solutions. In 2011, our plans call for the introduction of new products and the card, mobile, and kiosk categories. Currently under development in our China engineering center, we are also working on designs for products to meet region specific needs. Zebra's financial strength provides us great flexibility in how we run the business for the long term benefit of our shareholders. We have identified multiple investment opportunities within the Company that will deliver solid risk-adjusted returns. In addition, share buybacks remain an attractive use of our excess cash. At the same time, we are continuing to evaluate potential acquisitions that will enhance our core offerings. This concludes our prepared remarks.

I'd now like to turn -- and thank you for your attention this morning. I'd now like to turn the call over to Doug for Q&A.

Thank you, Anders.Before we open the call to your questions, let me ask that you limit yourself to one question and one follow up. In addition, Mike Smiley and I will be available after the call for any further discussions. Operator, please give instructions for the Q&A.

(Operator Instructions)

Your first question comes from the line of Chris Quilty .

Question for you on the retail market. It sounds like there was a little bit of a slowdown perhaps compared to the traditional Q4 period where retailers spend the bulk of the remaining CapEx. Is that a fair characterization?

Chris this is Anders. We've had very strong retail performance over the last several quarters and it just eased, I would say, a little bit as they moved into more of a execution mode for the fourth quarter. But, the pipeline for retail is good when we look into 2011.

Just regarding the pipeline, the last big retail refresh cycle by my pencil was back in 2004, which would mean we're almost two years overdue for a cycle. What do you think is the potential for the seeing another cycle here in the next 12 to 24 months?

I think our expectation is that retail will continue to be a good solid contributor, but maybe not with the same one-time refresh cycle as we saw in 2004. That refresh is going to take place more continuously over the next one or two years. Mike, any extra comments?

Chris, it is Mike Terzich. A couple other points on the retail space. Retail has grown in significance for the business on two dimensions. One is, what was historically very concentrated in North America has been well adopted in every one of our international markets, so our retail results, while they were a little softer in North America as people prepared for the holiday season, executed their holiday season, we saw a good retail results across the international markets.

Secondly, today retail is probably the only vertical market we have, where we can leverage the entire Zebra portfolio, so what was traditionally a lot of mobility in retail has extended itself into desktop, table top solutions in the distributions centers, kiosks in the store, RFID in the yard as well as in some of the garment applications. I don't think you're going to see the big pop of refresh like you have historically seen. I think it is going to be a steady state business in all four geographies for us in 2011.

Okay, thank you.

Your next question is from Ajit Pai with Stifel Nicolaus.

Good morning. The one question and the one follow-up. The question itself is looking your channel strategy that you just talked about. Can you give us some idea as to what you believe your share in Asia is right now, and over the next three to five years whether you expect it to get (inaudible) in the US and western markets?

So, first you asked about our share and Asia? And then for North America and Europe --

What do you think that share is today and where it could get to the next three to five years based on your view of the channel strategy that you're embarking on?

I think that first, we believe that we have a very strong market share position in each of the four regions, and we will tend to rely on BDC data for what that is. But, we do believe we're very well placed to continue to extend our lead and gain further share as we get our new channel programs, expanded channel programs and geographic investments to really become productive.

In many of these new emerging markets, also we see a strong performance for our high end tabletop printers for manufacturing, which is good from a market share and from a profitability perspective. And, the market itself then is growing in these areas also as we, one, expand from our traditional western companies that have extended into emerging markets to more of the local competitors as the local economies strengthen; and also in western Europe and the US we expect to continue to expand to near adjacency's like health care, for instance.

Got it.

The second--follow on question, is just looking at -- you now have cash on your balance sheet documented and a solid balance sheet, you're generating cash, and you also mentioned, that you're going to be prioritizing acquisitions. Could you give us some thoughts as to how rich the pipeline is right now and put some color -- you don't have to give any specifics, but some color on the nature of those acquisitions.

First, I think we weren't really trying to say that we are accelerating or enhancing our view on acquisition. That's one of several uses of cash that we look at. Our acquisition strategy has not changed from before. We continue to evaluate all our investment opportunities against the other opportunities on a risk adjusted basis.

The first main hurdle, though, is to make sure that acquisitions have a good strategic fit and really complement our core business, and we will continue to be very disciplined in what we pursue. We have had opportunities over the last year or two to make acquisitions, but we have so far refrained from that, either because those didn't fit our strategic focus or the financial hurdles -- they didn't meet our financial hurdles.

Got it.

But from an acquisition perspective, is there one area that you're more focused in than others? For example, is supplies becoming a more relevant part of your thinking? Or is it still focused on the traditional areas you've looked at?

I think we would say our focused area is primarily around our core business and how we can strengthen and expand that.

Got it. Thank you.

Your next question is from Tony Kure with KeyBanc Capital Markets.

Good morning gentlemen, how are you today?

Just fine. How are you doing Tony?

Pretty good. A couple questions. If we were to exclude Navis now going forward -- I guess we are excluding Navis going forward, the remaining business, would that contribute now positively to operating income and growth or would that be, without Navis in the picture, still operating at a loss. Could you just speak to how that, on an operating income basis would impact the P&L going forward?

Yes, this is Mike Smiley. Basically, the -- if you look over the year for 2010, the business that will be reflected in discontinued operations is basically a break-even business from an operating income standpoint, so you can take that and realize that the rest of the economics that flow through ZES is related to location. I think with Location Solutions, we feel good about the fact it has very strong strategic fit with the rest of SPG, and we also see that, that business that we're retaining had top line growth north of 20%. We expect robust growth in 2011.

And we also see the fact that we have in 2011, because we are moving that location business into the greater Zebra business, we have the ability to improve the cost model, taking costs out. We're also outsourcing some of our products in that, like to Jabil and such, which will enhance our gross margin. All those things, as you look at the economics of the business that we're holding, we feel like it's got a great opportunity, it's core to what we're doing. That's how I'd put it.

Just to make sure I understood, you said, as you look at 2010, it was basically a break-even business. Did you mean excluding Navis it was a break even business?

No, I'm saying it is the business that we're putting in discontinued operations is break even. So the business that we are holding on to is most of the operating loss that you saw for 2010.

Okay. And then -- great, thank you.

As far as the sequential strength in EMEA, looked like it was up about 11% and Latin America up 4%, sequentially. Could you talk about what's going on in those markets and then contrast that with the sequential decline? In North America you talked to the retailers, but Asia was down sequentially, also, if you could make speak to that.

Yes so--first on Latin America, we had a record quarter in Latin America. The second consecutive record for Latin America on a quarterly basis. And I would say for Latin America, EMEA, there was similar performance. It's very broad based. It was not one country or one vertical or one product that stood out.

In Europe it was all but one of our sub-regions generated growth, and similarly in Latin America, they all generated growth. A broad variety of different industries, so manufacturing, retail, transportation logistics, self-service all had good wins in those regions. For Asia PAC, Q3 tends to be the strongest quarter for Asia PAC, so Q4 was just--I would say normal seasonality and it was just a fraction lower than in Q3. And in Q3 it was a record quarter for the Asia PAC, historically.Q4 was our second--or number two on the record list. We thought that those are very good results and in North America, we had good growth year-over-year of 12.5%, but a little lower in Q4 and that was primarily driven by the strong retail business we've had, taking a little bit of a breather as the vertical focused more on executing their Q4 plans.

Okay, great. Thank you, that's helpful.

Your next question is from Charles Murphy with Sidoti & Company LLC.

Good morning guys.

Good morning.

I was wondering, given the Navis divestiture, could you give us a ballpark of what we should expect from gross margins in the first quarter of '11 and kind of for the full year.

I think we in the -- in my comments I quoted where we thought the gross margin would be which is I think 48% to 49%.

Okay. Sorry, I didn't catch that.

That's okay.

Okay. And another question was, in terms of what's left for Location Solutions, could you go back through what the products are, what their fit is with the Specialty Printing Group, and is anything going to be pruned within the portfolio there?

The Locations Solutions is really made up of our realtime locations systems, so that is the active RFID portfolio. That has, we believe, much stronger synergies with our Specialty Printing Group. Those products can be applied across a wide variety of vertical markets and applications, so they do suit our horizontal business model. And we believe that they have very good, very solid growth opportunities over the next several years as we grew 20% last year, north of 20% and we expect to have no less than that in growth for this year.

And the remaining parts of our business then is really Navis and the related WareNet product line that we are divesting to Cargo Tech; and we're also considering then some other smaller product lines that may not fit, but they are immaterial to the overall picture.

Would the active RFID and such be sold through the same channels as your printers now or?

Charles, it is Mike Terzich. Let me take that.

Yes, in part. There's also some opportunities for us to work very specifically with some of our larger strategic accounts. A good example of the synergy that we have between the LS product portfolio and the traditional SPG portfolio is in the last quarter. We have significant amount of business opportunity with one of the bigger box retailers. I'll just say it's in the hardware space. We'll leave it at that.

It presented an opportunity for us both at the yard management side of the business, which is where the LS solution , the realtime active RFID solution was deployed and we've been doing quite a bit of work on the in store side. That business is typically carried by a combination of channel partners and portions of that business and also on some direct sales opportunities when they present

Got it. Thanks.

Your next question is from Paul Coster with JPMorgan Chase & Company.

Thank you, Mike, I'm wondering if you'd be kind enough just to comment a little bit on input costs and the impact that may have on gross margins. I'm thinking here in senses of inflationary pressures and in China and component costs and resin costs and so on.

Good question. I think that we have been seeing some small amount of price pressure on some of our raw materials. However, I think again one of the benefits of working for a company with the financial resources, we are making R&D investment that's helping us value engineer our products, and we also feel like we have the ability to continue to year-over-year negotiate more favorable pricing. Although we will experience the pressures of some of the higher costs, we think that net, net, we'll actually in the long run benefit from the activities we're working on, so we'll overcome the impact of the cost pressures that we have.

And my follow-up, I just want to check here. The intention moving forward is any acquisition is to -- should be of a -- of horizontal benefit across all markets. There's no more focus on verticals?

No, we will be trying to make sure that we -- acquisitions support our core strategy and business model of working horizontally across many markets, and we don't perceive that we are very well placed to have deep vertical expertise in any industry. Therefore, our leverage comes from being able to provide solutions that can work across many.

Sorry, just one question then. Did you retain any of the industry know how that was in the Navis team? Did you just let go of everything there or did you retain certain strategic assets that help you at least stay fairly close to some of those industries that Navis serves?

Navis was really focused on the marine terminal market. That is a very modest market for the remaining part of Zebra, so we didn't see a need for that. But, we will retain Navis as a channel partner for selling our other products and solutions into those marine terminal customers.

Got it. Thank you.

Your next question is from Andrew Abrams with Avian Technologies.

Hello, I wonder, could you just talk a little bit about the non-retail pipeline, what you're seeing there in terms of the enterprise customer. Are you still confident that the enterprise customer is there for the next couple of quarters, and that you've seen that improvement that we've seen over the last quarter or two continue through in that customer side? Or is a lot of your confidence coming out of the run rate, the direct run--the normal run-rate business that you're used to seeing on a quarter over quarter base?

Andrew, this is Mike Terzich. I'll take that question. This is -- I can give you a really comprehensive answer, but I think one of the broad-based strengths of Zebra has been the diversity of our vertical markets and our geographic focus, so I'm going to try to paint a little bit of a picture for you. In North America, we saw the return of some of the traditional manufacturing business. That's really a big core to the North America market. We saw a return in manufacturing and in some of the warehouse and P&L space, particularly driven by the automotive tier one, tier two suppliers for automotive. I think they're more bullish on their near term outlook and that's resulting in some CapEx spending for our equipment.

When you get outside the United States, manufacturing is the predominant vertical market for us for the multi-nationals in places like Asia and even in places like Mexico and in eastern Europe. In addition, we've extended ourselves vertically, and there's a lot of enterprise opportunity in what we're qualifying as field mobility. We've been talking about this over several quarters, now. When you look at macro economic trends and the pressure being put on the whole work forces around the globe, it's really introduced us to quite a bit of opportunity in every geographic region and this is the folks that deliver Pepsi and beer, et cetera, beverages to a variety of retail locations. The folks that do field service whether it's the washing machine repairman, et cetera. It's created a lot of opportunity as petroleum prices continue to increase, putting more pressure on labor and the efficiency of that labor.

Then, I think the last piece of this for us is we've started to extend ourselves a little deeper into some spaces where we could leverage parts of our product line that are perhaps less obvious to everyone and that would be in the area of financial services. We've seen an increase. We took a piece of business in the fourth quarter with a large bank in Latin America where instant issuance of debit cards and credit cards are beginning to find their way into some opportunity for our retransfer product and some of our direct-to-card products. The diversity of our vertical focus and the diversity of our geographical focus has really been one of our great strengths and it's allowed us to buffer in some cases where there may be a short term blip or a little softness like fourth-quarter retail in North America. Hope that helps.

That's great. I appreciate it.

Just one other question on margins. 48%, 49% for first quarter. Should we look the rest of the year the same way now that Navis is gone and I assume is out of that number? Would we continue to see those kind of margins for the rest of the year? Or are we looking for something different?

I think the high 40% that we've been quoting is probably a reasonable expectation for the year. But, exchange rates will effect us. Product mix will affect us. Those things will drive us one way or the other, but I think, we're pretty confident we're going to stay at the higher range that we have been experiencing for a little while.

Terrific. Thanks, guys.

Your next question is from Greg Halter with Great Lakes Review.

Hello good morning.

Good morning.

You've obviously bought stock in 2010, including the 900,000 shares you mentioned in the quarter, but your cash is still rising and even more, pending the sale of Navis. Just wondering what your thoughts are in regards to an even more aggressive share repurchase, a one time dividend or a dividend that you may implement and increase on an annual basis given your strong cash flow?

So at first--yes it is just that we have been quite active and aggressive in buying back shares over the last couple of years, three years at least. Last year, we bought back $102 million worth of shares, 3.3 million shares. We will continue to evaluate share repurchases on a risk-adjusted basis and our view is that, that is still a very attractive investment for us.

We have looked at dividends -- one time dividends, and we feel with respect to dividend that most of our investors seem to be favoring continued buybacks as it gives us more flexibility to step it up if there's a little dip in share price and continue to be active in the market more consistently. That also goes for a one time buyback that we perceive that it is more attractive for us to average into price versus picking a specific price and showing consistency by being active over a longer period of time. We do expect that we will be buying back at elevated levels compared to prior years.

Okay.

And one follow-up for you back on the Navis. I just want to make sure I heard this correctly; if I do the math, it looks like there was an operating loss for ZES of about $19.6 million for the year. If you back out the sales -- and I'm presuming $15 million a quarter which will give you $60 million. That's a loss of almost $20 million on sales of $25 million, and that's the piece that will be kept. Obviously, it will be melded in with the SPG. You're doing quite well on your gross margin and your profits even with that. I'm just wondering at what point if that business were separate if we would see it break even or even turn into the green?

Well, obviously, the intent is to make that happen. We don't expect it to be in 2011. But again, let me just go back and reiterate why we're keeping it and why we're excited about that business. It does have a very good strategic fit with our overall strategy of trying to build a broad set of solutions around how to do asset tagging on high-valued assets and inventories across a broad range of industries.

We see great synergies in how we take this to market by having a more integrated organization. We've already moved the sales organization to be part of Mike Terzich's organization to create better opportunities for us to cover large enterprise customers with entire portfolio of products. We have integrated the supply chain and the engineering organizations with Hugh Gagnier, who runs our worldwide development and operations team, so we are taking full advantage of the -- of those integration synergies.

In 2010, we had well over 20% growth which we think is very attractive business for us to be in, and we believe that, that growth will continue at that level or higher for 2011 and beyond. We are doing a lot of things to improve the cost structure. We outsourcing our active RFID products to Jabil in China, and we're seeing similarly as we did on the SPG side good gross margin improvements; and we are eliminating overhead functions that we no longer need to duplicate by folding this organization back into Zebra. So, we certainly expect that for 2011 the profitability will be much improved, while we also expect it to have very high growth to take us to 2011 and beyond.

Okay, thank you.

(Operator Instructions)

Your next question is from Keith Housum from North Coast Research.

Good Morning, guys. Thanks for taking my call. I was hoping maybe you could you spend a little bit of time on the selling and marketing expense in the fourth quarter and, obviously, the increase over the prior quarter? Is it more one time items in there or would we expect that to be creeping up just a little bit based on your exploration into the emerging markets and so forth?

I think you're seeing a couple things happen. First of all as we went into the quarter, we don't want to brag, but we thought we had a great year, and as a result of that, the commissions were higher to our sales force. As they hit certain levels, there'd be accelerators on some of those commissions, which is in the first -- fourth quarter.

The other thing is, we are building on this geographic expansion which, again, as Anders has quoted, we've had -- in those areas where we've added head count, the growth in top line from those areas have been dramatic and we feel like those have been wise investments. The two big things, again, I would say would be primarily commissions, the geographic expansion, and then a little bit of additional marketing expense that we spent in the fourth quarter.

Overall, most of it is more one time items as opposed to going forward, an increase in that rate?

The geographic expansion, we didn't hire the people to let them go, so that stuff will stay. The commissions, again -- because we did exceed some of our expectations that stuff is elevated.

Okay. Thank you.

You have a follow-up question from Greg Halter of Great Lakes Review.

Yes, one of the hallmarks of the Company has historically been a percentage of products from new-- sorry percentage of sales from new products and that had trailed off due to [role house] and some of the other issues. Just wondered where that figure stood for 2010, if you have it and where you would like to see that go?

Well, we used to comment on that every quarter. We've really stopped doing that. In Q4, our revenue from new products was 17.5%, it was up about 4% from the prior year.

Okay. That's excellent.

Regarding one of your big customers, how much did Scan Source represent of either the quarter's or the full-year's sales.

I think it was roughly 18% for the year.

Okay.

One last one. You mentioned, Mike, about the gross margin and then impact from currency being a negative. Any idea what that was in terms of basis points?

So basically, if it wasn't for exchange rate, we would have been closer to 50.8% versus 49.8%.

Okay, great. Thank you very much.

That's 1%.

Yes, thanks a lot.

Your next question is from Marty Mozer from Northwestern Mutual.

Hello.

Hello Marty.

I did -- just sort of a big picture where we are in the CapEx cycle?What's a normalized growth rate for the Zebra on a top line now that we've gotten back to the core business here for -- after the bounce back from bad numbers in '09 and then the recovery in '10?

That's a broad big picture question. I think we feel that the global economies are -- have stabilized quite nicely over the last six months. In the fall we were wondering a bit more what 2011 would look like if the economies would have the momentum to drive through 2011. I think we feel, based on conversations with our channel partners and end users, that they're seeing better pipelines and more business opportunities and the overall tone of the commentary on the economy is better.

We feel that the economic situation is improving and we still are in a recovery cycle, compared to a few years back. As far as our growth rates going forward, we would probably base that off publicly available data like BDC's market growth data which tends to be in the mid-to slightly over midpoint single digit growth rates and we would like to see us take some share off that, so slightly higher growth rates for Zebra.

Okay, that's reasonable.

A previous caller mentioned the $19.6 million loss that you're on an operating basis for what's left. Is that a reasonable starting point? Or were there some charges in there and you're also going to off set that with some efficiencies by folding it in? If you could just give us -- ?I'm trying to figure what that stub run rate is for operating loss?

There is restructuring charges in there. You can pick that out from the quarterly returns. I'm guessing about $1 million. I'm not -- have to double check. There is some restructuring in that $19 million.

And again, as we do the outsourcing on the -- on some of the products to Jabil, we expect that to improve our gross margin. Also we have some cost reductions that Anders is talking about, so I would expect a nice improvement in 2011, although we're not quoting longer term type view on that, but I think it is going to improve nice--in a good fashion.

Okay, and then if I could, one more follow-up just on retail. Does it feel like that was just a pause and things will be normal, steady growth rather than a big pop on a refresh cycle going into 2011 and 2012?

Marty, this is mike Terzich. I think the real take away for retail is that to my earlier comments, it's become increasingly more important to us globally, so beyond just the North America markets, we're seeing a steady growth in that business. And because the application diversity is much greater than what it used to be, historically. When we used to talk about retail in the past years, there was a certain lumpiness to our business which was very concentrated in North America, so my point is that I think retail will have another good year in 2011.

The application diversity is going to be very broad for us across those product platforms I mentioned earlier, and it's growing in consequence in some of the international markets as well as those economies strengthen and people are gainfully employed and they have demand for western goods and services, so to speak.You won't see -- I don't think you'll see the big, the volatility and the big pops in our retail business, but it will be a steady growing contributor, overall.

Specifically, North America, any comments going forward on that?

We expect that in 2011, we're going to have another healthy year in North America. If you look at the CapEx spending for retail, the projections are--they are solid, not as spectacular as perhaps the 2010 numbers were, but still ,nonetheless, very good.

Thank you very much.

You have a follow-up question from Greg Halter with Great Lakes Review.

Hello again and thanks for taking it. You had almost $31 million in CapEx spending in 2010. Just wondered what your thoughts may be for 2011 -- if there's any singular big projects in there as well?

The 2010 number was elevated as we were doing and ERP implementation and went live on that, and so we expect that it'll probably go down by .33 in 2011 from the $33 million. Take a third off that would probably be a good guess for 2011.

Since you brought it up, on the ERP, how has that gone for you in terms of going live?

It's gone really well for us. We started this project two or three years back. We have had a phased approach. We're now in the third wave, and we had, basically, the largest single event go live event in the entire program, two weekends ago, I guess it was, in Europe.

We had no major issues. Lots of smaller things to clean up and all the functionality works, all the program works. We feel very good that we are having a well-managed, well-controlled program that's going to deliver the benefits and the synergies that we expected.

Any more waves to the implementation or is this it?

This was the basically order to cash implementation, and we did that in Europe first, and we're going to do -- implement it in North America later in this year. That will be the last big wave. We are going to continue to, obviously, do other new software programs and stuff, but it probably won't be called (inaudible) unless the overall ERP implementation, it will just be more one-off type of implementations.

Okay great. That sounds good. Thank you.

There are no further questions at this time.

Okay. Well, with that, thank you everybody for joining us today.

Just mark your calendar for May 4 for our next scheduled conference call for our first-quarter financial results. Have a good day.

This does conclude today's conference call. You may now disconnect.