斑馬技術公司 (ZBRA) 2011 Q3 法說會逐字稿

Good morning, and welcome to the Zebra Technologies 2011 third-quarter earnings release conference call. Joining us from Zebra Technologies are Anders Gustafsson, CEO; Mike Smiley, CFO; Mike Terzich, Senior Vice President, Global Sales and Marketing; and Doug Fox, Vice President, Investor Relations. All lines will be in a listen-only mode until after today's presentation. (Operator Instructions) At the request of Zebra Technologies, this conference call is being recorded. Should anyone have any objections, please disconnect at this time.

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

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, 2010, 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. Today, Zebra reported record third-quarter results, with strong execution across the board. This performance represents our fifth consecutive quarter of sequential growth in earnings from continuing operations, and our ninth quarter of sequential sales growth. For the third quarter, we achieved earnings of $0.84 per share, including a record $0.64 per share from continuing operations and a gain of $0.20 per share on the sale of proveo.

Our results for the quarter underscore the success of our investments to diversify our business by entering new high-growth geographies and verticals, expanding our customer base, broadening and deepening our partner channel, and developing innovative products and solutions. Zebra's scale, multiple competitive advantages, and growing industry leadership support these strategic investments. These investments have yielded solid results and have strengthened our long-term growth opportunities. Our revenues increased 10% year over year to a record $253 million.

All regions performed at high levels. We penetrated more deeply into targeted verticals, as a result of successful strategies to take share and further diversify our customer base. Tabletop and desktop printers set new sales records, and our card printers experienced improved traction as a direct result of our engineering efforts to strengthen and innovate in this important product line. In addition, new printer products targeted as opportunities in emerging markets gained momentum. We further strengthened operating leverage, based on a solid gross margin and modest expense growth. We also took advantage of the beneficial stock price to accelerate repurchases by buying back 1.8 million shares.

I would now like to provide an overview of the highlights for the quarter by region. In North America, sales increased 2.4% year-over-year and 8.4% sequentially. An increase in large-deal activity complemented an ongoing solid run rate business through distribution. Larger sales included shipments of our recently introduced QLn wireless mobile printers to retail customers, which are used for price markdowns and other in-store applications. We also won important new deals with a number of customers in manufacturing and small package delivery. Card shipments included sales of our innovative P330i RFID card printer, [in Colorado] ski resorts for season passes, which helps speed lift lines and provide valuable information to skiers.

North America also benefited from sales of location solutions to customers in the automotive, retail, aerospace, and postal industries. Our focused attention and capacity to invest in strengthening our product offerings is resulting in expanded sales opportunities. Our large deals in North America were spread across a range of retail and non-retail customers. This quarter's performance reflects the success of our diversification efforts and take-share activities across multiple dimensions. In addition, channel partners have confirmed that Zebra products are winning a growing share of their business on the strength of our value proposition, including the industry's leading channel programs and broadest product line. System integrators and independent software vendors increasingly see Zebra's innovative products as an important part of the solutions they put together for end users.

Asia Pacific led our international regions with 21% growth. The third quarter was the sixth consecutive quarter of record revenues for the region. Contributions to this growth came from several subregions and verticals. Shipments to retail customers supported growth in Australia, and Zebra high-performance printers fulfilled strong demand from manufacturing customers in China and Korea. We also had solid results in India, as we have focused increasing investments in this important emerging market.

Throughout the Asia Pacific region, our growing business with retail customers is fueled by the growing consumption of goods and services. The Asia Pacific region is also seeing greater interest in RFID and location solutions. Recent installations include a leading regional bank, which is relying on Zebra solutions to track IT assets. In addition, the location of subway police in a major Chinese city is now being monitored with the help of Zebra high-precision ultra-wideband products.

In Latin America, consistent business throughout the quarter delivered solid 16% growth over last year. Improved retail sales coverage led to shipments of card printers for on-demand credit card printing in Venezuela, as well as mobile printers for beverage distribution and tabletop printers for higher manufacturing activity in Mexico. In EMEA, sales in the third quarter increased 15% on continued strength in Germany from its manufacturing sector, as well as Spain, the Middle East, and Scandinavia. Our run rate business remained firm for the quarter.

A critical element to Zebra's execution is the strength and vitality of its global channel network. Shortly after the end of the third quarter, we hosted our Global Partner Conference, where more than 500 distributors, bars, ISVs and system integrators from 60 countries attended. This forum is an important investment in developing stronger relationships with our global channel partners, and has helped us to achieve greater alignment around common goals. The diversity of our Company across multiple dimensions continues to provide the strong foundation to Zebra's ongoing pursuit of shareholder value creation. Zebra's third-quarter results demonstrate the value of this diversity and the growing impact of our capital deployment and product innovation, geographic reach, and channel development.

We have been able to benefit from our continued financial strength to gain share by penetrating targeted verticals more deeply, and extending the range of potential business opportunities with a broader set of high-value products and solutions. This increased diversity, as well as our financial strength, moderates the impact of possible effects of an uncertain economic environment for Zebra. Today, Zebra is well-positioned, with more sales representation in high-growth regions; a fuller, more innovative product line; a robust strategic plan for North America; and stronger, more engaged go-to-market channels. These enhanced capabilities enable us to meet more of our global customers' needs.

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 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 results for the third quarter. My comments will principally focus on year-over-year changes in the performance of Zebra's continuing operations, which have been adjusted for the sale of Navis in the first quarter of this year and Prevail in the third quarter. First, sales came in at the upper end of our guidance range, on a sequential pickup in North America and broad strength in international regions. Sales growth in emerging markets increased 16%. Second, gross margin was up 1.2 percentage points on lower component costs and favorable foreign exchange rate, partially offset by a less favorable product mix. Third, operating leverage pushed profitability higher, with lower growth in operating expenses. And fourth, we accelerated our buyback program with the repurchase of 1.8 million shares of stock.

Let's review sales. For the quarter, sales increased 10% from $230 million last year to a record $253 million. On a constant currency basis, sales increased 8%. By region, performance in North America stood out, up 2.4% from last year's strong performance; but up 8.4% from the second quarter of this year. As Anders mentioned, North America benefited from continued strong run rate, complemented by a pickup in large-deal activity. The sales results demonstrate the success of our customer diversification and take-share strategies. We are pleased with the progress we are making on further strengthening Zebra's formidable position in North America. More than any other region, North American sales are influenced by large-deal shipments in any given quarter, and will exhibit higher levels of volatility.

Asia Pacific sales advanced 21% to another quarterly record. Broader sales coverage aided growth in several subregions to customers in retail, manufacturing and government, with particular strength in tabletop and desktop printers and supplies. Latin American sales, up 16%, also maintained growth, with sales to customers in financial services, utilities, and retail, among others. Desktop, card, and tabletop performed particularly well in the region.

In EMEA, shipments of desktop, tabletop, and kiosk products led to the region's 15% growth. On a constant currency basis, the region's sales increased 7% on continued strength in Germany, Spain, the Middle East, and Scandinavia; but with some softness in Italy, the UK, and Eastern Europe. By product category, hardware sales were up 10% on the strength of several printer product lines, plus after-market parts. Supply sales increased 13%. Consolidated gross margin of 48.8% was 1.2 percentage points higher from a year ago, and at the upper end of our guidance range. As expected, gross margin was down 0.8 percentage points from the second quarter, largely from unfavorable product movements -- unfavorable movements in freight charges, foreign exchange, and mix.

Operating expenses increased 8% from a year ago, but were down slightly from the second quarter to provide operating leverage in the P&L. Third-quarter results include approximately $3.8 million in costs for some component supply constraints related to the Japan catastrophe, in the form of higher components costs, rebates, and freight charges. These expenses were slightly below our expectations. We expect these higher charges to continue in the fourth quarter, after which they should abate. We do not expect any material disruption or higher costs associated with the recent flooding in Thailand.

Taken together, we generated a 21% improvement in operating income, with an operating margin of 19.3%, up from 17.5% a year ago. Adding back $5.8 million in depreciation and amortization to the $48.9 million operating income totaled $54.7 million of cash earnings -- or 21.6% of sales, up from 20% last year. The income tax rate for the third quarter was 28.8%, which was in line with our guidance and expectations. GAAP EPS from continuing operations were a record $0.64 per share on 53.6 million average shares outstanding. At the end of the second quarter, we had 52.6 million shares outstanding. Third-quarter results also include a net gain of $10.8 million, or $0.20 per share, recognized on the sale of proveo. The gain was principally generated from recognition upon the sale of a tax deduction on the impairment previously taken on the business.

Similar to Navis, which we sold in March, proveo did not fit well with our long-term business strategy. In the third quarter, we bought back 1.8 million shares of Zebra stock; the weighted average price of the purchases was $35.06 per share. These purchases bring the year-to-date total number of shares purchased to 3.9 million shares, returning $146 million to shareholders. The days sales outstanding increased slightly, from 50 days for the second quarter to 52 days. Inventory turns increased from 4.2 times to 4.4 times for the third quarter, even as inventories increased $2.4 million from the second quarter. Quarterly free cash flow totaled $20.3 million for the third quarter. At the end of the quarter, we had $299 million of cash and investments on hand.

Now, let's look at our fourth-quarter forecast. We are forecasting 2011 fourth-quarter sales of $242 million to $255 million. This guidance reflects our conservative outlook given greater economic uncertainty, particularly in Europe. Earnings from continuing operations are expected at $0.56 to $0.64 per share. Our forecast assumes a consolidated gross margin in the range of 47.5% to 48.5%, from an expected unfavorable movement in foreign exchange rates, higher direct costs, and a less favorable product mix.

The quarter includes approximately $4 million impact from the Japan catastrophe, as previously mentioned. GAAP operating expenses are forecast between $76 million and $78 million, and include a one-time expense of $1.5 million for the Global Partner Conference. The tax rate is estimated to be 26%, also reflecting some one-time adjustments. That concludes my formal remarks. Thank you for your attention. Now, here's Anders for some concluding comments.

Thank you, Mike. Over the past several years, Zebra has continued to become a more resilient, more focused Company, both financially and strategically. Our investments in infrastructure and market development have created the capacity for higher returns, with a greater ability to meet more customer needs into the future. Our move to global distribution and outsourcing model, in which we invested through the last downturn, has given us a more variable cost structure while improving gross margin and responsiveness to customer needs. At the same time, we increased Zebra sales coverage in targeted high-growth regions such as China, Brazil, Turkey, and India.

Today, approximately 60% of Zebra sales are derived from international markets, compared with less than 50% only a few years ago. All of these targeted activities have also substantially strengthened Zebra's operating leverage, and has delivered more money to the bottom line. Our focus on capital returns has also led us to accelerate stock buybacks. Since 2005, we have invested nearly $750 million to reduce the number of Zebra shares outstanding by 20 million, or 27%. Zebra's Board of Directors has recently authorized an additional 3 million shares for repurchase. Let me elaborate a bit more on our future direction.

Looking ahead, we will continue to invest in building on our core competencies through product development and channel management, with initiatives that deliver the highest risk-adjusted returns. On the product front, the cadence of new product development has increased. And this year, we are on target to introduce at least a dozen innovative printer products and other identification solutions that enable our customers to make smarter decisions through greater visibility into their operations and supply chains. We are utilizing our financial strength to develop products and features that deliver greater value to our customers and strongly position Zebra to pursue more business opportunities. Few companies can match Zebra's pace of innovation, which includes retransfer printers that have led to applications for debit and credit card printing.

In addition, the development of printer drivers for smartphones and tablets makes it easier for customers to use Zebra printers as they migrate to these technology platforms. The flexible user interface built into our QLn mobile printer enables easy use of customization and is an effective bridge into new retail applications, where customization had previously been a barrier. And our line of low-priced printer products introduced earlier this year for emerging markets give Zebra a high-growth platform in value-based printing applications.

Most recently, we announced an important product development in our line of location solutions. Last week, we introduced the WhereLAN III location sensor for use in realtime location systems, which gives customers more precise accuracy down to one meter, as well as a lower total cost of ownership. These benefits are applicable to a wide range of industries, such as automotive, shipping, and distribution. Geographic expansion and channel development also remain keystones to our continued growth, and will focus on extending Zebra's geographic reach in under served regions. In addition, further developments of relationships with system integrators and independent software vendors, which are complementary to our traditional bar channels, better position Zebra to serve larger organizations with more complex global supply chain needs.

Zebra is increasingly viewed as a strategic business partner, as the value of our unmatched portfolio products and solutions is helping our customers gain visibility into their operations by giving their assets a digital voice. Zebra has identified many important opportunities to further invest to extend leadership and deliver profitable growth. We will continue to deploy our resources where they can earn the highest risk-adjusted returns. In addition to maintaining investments, supporting organic growth, we will carefully consider appropriate acquisition opportunities as they arise. But first and foremost, we will continue to invest in our business as appropriate, and we will continue to remain agile and responsive.

This concludes our prepared remarks, and I thank you for your attention this morning. I would now like to turn the call over to Doug for Q&A.

Thank you, Anders. Mike and I will be available after the call for any further discussions. Operator, we can take the Q&A now.

(Operator Instructions) Brian Drab, William Blair.

First question -- just on the divestiture of proveo. At this point, do you have any other plans for the other companies that are a part of the former ZES, particularly WhereNet?

No. When we first announced the Navis acquisition -- or divestment, sorry, we put some other operations in discontinued operations. And that was really proveo. With the sale of proveo, we no longer have anything else sitting in our discontinued operations, and no plans for further divestments.

Okay, thanks for clarifying that. And then, I guess a related question is -- to WhereNet, on the RFID space in general. Can you give us an update on the growth -- I think it was about this time last year when we talked about significant sales to retail customer, and I think the highest level of sales you had seen in RFID in the Company's history. How is that progressing at this point?

I think the part what you might be referring to is probably a passive RFID into a retail customer last year. I think that was a passive RFID opportunity.

Right, right. I'm just saying RFID in general. I understand [it's a different -- okay].

First, on passive RFID, we continue to see good growth opportunities in passive RFID. It is still a somewhat smaller part of our overall business, and so it's been more lumpy. But we see good opportunities to continue to expand passive RFID applications into a number of industries. So far, retail has been the largest customer of ours for this. And from a passive RFID perspective, you definitely have strong competitive advantages in our product line, with [on pitch and coding] and so forth.

And on the active RFID side, we continue to expand the industries we serve and the customers we have. We had nice growth this year. This quarter, we talked about some new applications in the emerging markets in Asia, around [tracking] police officers in the subway, to ensure that they always can see where they are. And we have another one around tracking IT assets. We are also doing animal tracking, livestock tracking, in Europe. So, you can see -- aerospace in the US. So, it's getting to be a pretty comprehensive list of applications and industries that we serve.

Great. Thank you, and congratulations on a solid quarter.

Thanks.

Paul Coster, JPMorgan.

Just housekeeping-wise -- can Mike disclose what the revenues associated with proveo were on a quarterly basis? However, my main question is really with EMEA, specifically, in mind, but also with government customers as well -- can you talk to us about the most recent order trends and your preliminary thoughts as we approach 2012?

Your first question was related to revenue for proveo, which is very, very small. But it would have been reflected in discontinued operations, so you're not going to see that in the continuing operations P&L.

Okay.

I think you had a second part of that question that was more broadly across the business. Could you repeat that?

Yes. With Europe and the government sector in mind, they are obviously, the biggest risks across geographies and verticals. What are your preliminary thoughts as we head into 2012? And do you believe that we can -- we will see growth out of the Company? And have you had any specific comments regarding the most recent order trends in those segments or geographies?

That's a pretty broad question here, but we'll give it a go. First, I'll go back and talk about what we see as our really strong competitive position -- very strong strategic position, that we have built up over the last several years. We have strong results, strong growth that we have seen over the last couple of years. And we have been able to continue to extend our leadership -- gain more market share in the industry. And we have done this in good times and in more challenging times. So, our business model works for -- in that respect.

And particularly, we are fortunate in that our applications, our value propositions, they do work in good times and in bad times. In good times, companies are expanding by building more factories or opening more stores. In tougher times, it's more focused on driving efficiencies; and our equipment has a very short and very definite payback time. So, we see good opportunities to continue to do well in, irrespective of the economic environment; but obviously, we prefer a more positive environment than not.

Specifically to Europe, I think we -- we think it's a bit early to give you a real good sense of what 2012 is going to look like. But we -- in Q3, as an indication, at least, saw solid strength, solid growth, in most -- all of Europe was up 15% or 16%. We saw great growth in Germany, Scandinavia, France, Middle East. So, we did see some weakness in countries like Italy, Greece. But that's a very, very small part of our business -- and the UK.

So, it's obviously a little more uncertain as far as the outlook in Europe. But we have continued to invest in our business to make sure that we position ourselves for the best possible long-term outcomes. And we see a continued number of good opportunities for us to invest in and to gain share, and to make sure we do kind of divide things to be able to build the business for the long term.

Okay, thank you.

Ajit Pai, Stifel Nicolaus.

Congratulations on a very solid quarter.

Thank you, Ajit.

Couple of quick questions -- the one question and the one follow-up. Just looking at your guidance for the December quarter, I go back and look at Zebra's history, and only twice, I think, in the past 15 years have you actually had a result for the December quarter that's below, sequentially, relative to the September quarter. I think in 2008 and then back in 2000. So, just giving you a positive commentary, I wanted to ask whether you are seeing something in your business conditions right now that is making you as cautious as those periods, which are almost unprecedented? Or are you just being overly cautious, given the headlines that you are reading in the newspaper?

We still believe that we have good opportunities in Q4, particularly looking at the momentum we have been able to build through the year and into Q3, where we had very, very strong performance. And our competitive position is as strong, I think, as it's ever been. So, we feel very good about that. We do read the same headlines as you do. Clearly, there is uncertainty out there. Our customers read the same headlines too.

So, I think for us, it's prudent for us to have a slightly more cautious outlook to the fourth quarter. Some of the specific things would be around Europe; and also in North America, retail tends to be strongest in Q3. Our retailers tend to go into more execution mode in Q4 to prepare themselves for the Christmas season. And also, Asia tends to have its strongest quarter in the third quarter, for the entire year. So, I think the traditional seasonality that we have seen over -- maybe for a long time are getting a little bit more muted.

Right. But there's nothing that you are -- in your business conditions right now, outside of the seasonality changing over a period of time, because of your business mix in terms of geography and end markets -- there's nothing that has made you -- you are being more cautious than what your business conditions would suggest, based on the headlines. Is that fair?

Yes, we have some other things at a high level. The FX has been a little lower and a bit more volatile, but those are kind of in the margins. So, we feel good about where we are with the business. And our competitiveness is very good, but we just want to make sure that we don't get --

Got it. And then, in your prepared remarks, you talked about the [proprieties] of cash for the Company and that you are going to be buying back shares. You also are looking at potential acquisitions as they become available. Could you give us some color as to how that acquisition environment has changed, especially with the broader economy showing signs of slowing down, whether we can expect a greater number of acquisitions over the next 12 to 18 months, and what the rough nature of these acquisitions are likely to be?

That's a tough question. It's more based on individual companies. And then it is -- we are not so ferocious an acquirer that has several deals a quarter. So, it's more specific to the individual companies that would be of interest to us than it is on the overall environment. But I would say, generally speaking, it tends to be that more deals get done at the top of the market than at the bottom of the market. So, I don't think it's going to be that that many new deals will get done in the next year for us or the industry. But we do continue to look at acquisitions as a way of strengthening our business and take advantage of our strong financial sense.

The first filter is to make sure it's a good strategic fit, that it does augment and benefit our traditional core business and enhance our capabilities in that area. The second filter is around our financial metrics, to make sure that it is something that adds value to the business as we go forward. As far as the size and so forth, the closer an acquisition target would be to our core business, the more willing, the more confident we would be to put a bit more money to work in something that's a bit more adjacent to us, we would be much more cautious about how much money we would put to work there.

Yes, I think -- certainly, in the press release, we mentioned we have authorization for another 3 million shares for buyback. And as we have said in the past, we view ourselves to be more aggressive in buying back shares when we think the price is more attractive. And so, obviously, 1.8 million shares, I think that's meant -- hopefully, investors look at that and see that as opportunistic, with good value in the market for us. So, that's why we bought as much -- I don't know if it'll always be as aggressive, depending upon where the valuations are.

Got it. Okay, thank you, and congratulations again on a very solid quarter.

Thank you.

Tony Kure, KeyBanc.

Just wondered if you could maybe break down on the growth side of the equation. Have you ever been able to estimate how much growth that you are getting comes from market share gains, versus what the market is growing? I would expect there's more market share gains on Asia, but maybe I'm wrong on that. Could you maybe talk a little bit by region what is market share gains versus end demand growing?

It's really very difficult for us to quantify how much is market share gain versus market growth. We spend a lot of effort trying to grow the market. And I would say Asia Pac, our growth there is probably mostly from growing the markets. Market share gains are probably more prevalent in the more mature markets, where you have more established companies. I'm going to refrain from trying to speculate how much of this is actual market share gain versus market growth gain.

Okay. Just to follow up on that, given the high growth potential in India, Russia, China, that we've been talking about, can you maybe gauge or take a shot at the market sizes, the addressable market sizes for Zebra in those emerging markets? And your penetration rate there, versus the size of the European market and the size of the North American market?

I don't have any of those numbers with me here. We can probably take that offline, if you'd like. But the overall market size in a place like India, say, or Russia, which are fast-growing, high-potential ones, today, though, is much, much smaller than the actual business volume that you get in Europe.

Right. And Tony, this is Mike Terzich. Let me add a point to Anders' point here, which is -- when you look outside the US and Western Europe, and you look in the emerging market in general, the penetration of the technology is at the very low levels of adoption. And you have two factors that are coming into play -- one is the advancing of multinational manufacturing in the region and the creation of middle-class consumption, which is then feeding the retail side in the emerging region.

So, the business takes on a little bit different shape. It starts with the foundation of manufacturing and distribution, which is core to the Company; and then, we get the added benefit of the retail expansion, as people there are looking for efficient ways to conserve their customer base. So, from a penetration standpoint, it's very lightly penetrated in some of those markets, and there are very large populations of people, and so the upside opportunity for us is pretty significant.

Okay, great. If I could squeeze in one more operational -- what was the operating profit impact from FX during the quarter?

The operating profit impact, we had about $4.3 million, $4 million.

Okay, thank you.

Andrew Abrams, Avian Securities.

Just a couple of quick ones. Can you kind of walk us through any changes that you might see in the mix for fourth quarter? Are things going to stay roughly the same mix-wise or -- I mean, I know it varies from quarter to quarter. Can you give us some guidance there?

Sure, Andrew, this is Mike Terzich. The fourth quarter -- what we expect to see, and Anders had made this comment earlier, is that the retail business will be a little bit softer relative to deployment, as they hunker down to serve the holiday season. So, we'll see less contribution from the retail space, which tends to be more correlated to some of our mobile solutions. In the rest of the world, you're going to see pretty consistent performance, relative to the mix that we have basically enjoyed over the last two or three quarters, which is -- distribution business in North America; manufacturing business in North America; the business in Asia, which is predominant in some of our tabletop, desktop product lines, we're going to continue to see contributions. So, when you net it all together, it doesn't materially look much different than what we have experienced, albeit a little lighter in retail with mobile.

Got it. And on the shortages side, and maybe on the transportation cost side, just any detail you can give there -- are you seeing any shortages on components? And do you expect to in fourth quarter? And on the transport side, at times, things have been kind of rushed and not rushed. Can you kind of give perspective there?

First, on the component shortages, we have highlighted the impact of the Japanese earthquake earlier, and now they will -- all products are back to full manufacturing. So, we had the last big components, that was on short supply, and long lead times become greatly available, basically, at the end of the third quarter. We are now catching up on some of the inventory [distribution], we're shipping more of that to distribution partners. But at this time, we see no longer lead times, no particular tightness in the supply chain, from that perspective.

In regards to additional costs, I think I mentioned that in Q3, we had just short of $4 million of additional costs going to our P&L. Of that, roughly $2 million of it is for freight, and we are effectively estimating Q4 to have that same elevated number. So, as we go into Q1 next year, we won't have those elevated costs in our P&L.

Got it. Thanks very much.

Jason Rogers, Great Lakes Review.

Looking at Cap Ex, I was wondering if you could provide an estimate for the year, and any early thoughts for 2012?

Yes, we're sort of looking at CapEx being roughly for the -- we are running right now, year to date, about $23 million. So, we're talking about $30 million or so for the full year -- no, I'm sorry, I apologize. We are running about $18 million right now, so we're probably going to be around $23 million, or something like that, when the year is over.

Okay. And next year?

Couldn't tell you right now. As you can imagine, we are like everyone else, trying to put together our budget based on current economic conditions. We are still in the middle of that.

Okay. And looking at your receivables and inventory both up year over year, greater than the sales increase, I wonder if you could provide some thoughts there?

Yes, a couple things -- one, on the accounts receivable, is our international sales grows, which, as we -- I'd [like to say] as we successfully grow that business, the terms are longer than they are in the US. So, that causes a little bit of a problem. And we had a couple customers that paid early on in the fourth quarter -- they paid earlier in the second quarter, and they paid late into the fourth quarter, so they exacerbated the DSO. So, I wouldn't call that a problem per se. Inventories are primarily, because as you are trying to work through the Japan catastrophe, you're trying to guess which products are going to sell, and sometimes you guess wrong one way or the other. It's not a major trend -- the products are very sellable, we have a very good reserve on our balance sheet for that. So, I wouldn't look at the numbers and suggest it's a trend of something. It's really just --

We took advantage of -- the interest rate costs are very low, so we had the cash. We thought it was a good investment for us to keep more inventory on our shelves, to be able to respond to varying demands and take -- use that as a way of taking share. And I think it has worked well for us.

And finally, it looks like the opportunities, at least presently, are greater in the active RFID space than the passive. Do you see that changing at some point in the future, with these tag costs coming down, that at some point the passive may dwarf the opportunity in the active for you guys?

We see both of them are being very attractive. I don't think people say that one is substantially bigger than the other or so. And we see more of them becoming complementary, so more solutions are weaving in a component of passive and active technology in the same solution. So, we think that active -- both RFID technologies are going to be nice addition to our growth story.

Thank you very much.

Keith Housum, Northcoast Research.

This is actually [John Barda] on the line for Keith. I had a quick question on sales throughout the quarter -- the economic uncertainty early on, was it more back-end loaded at all, or did you see a longer sales cycle?

John, this is Mike Terzich. Well, it differed by geographic region. I would say that in North America, the quarter actually was pretty steady throughout, but we did pick up some momentum in the second half as we entered into the fourth quarter. Europe was a little bit different. It was -- typically the third quarter is the holiday season in Europe, and the front half of the quarter usually starts a little softer because of that. And the second half, usually, we see a surge. And it was -- we didn't see the bounceback to the degree that we have seen historically in the second half of the quarter, which gave us a little bit of -- which was somewhat reflected in the Q4 outlook, as Anders had mentioned. And then, in the other regions, it was a nice, steady state stream of business throughout, so we really didn't notice any shift in the demand patterns in Latin America or Asia Pacific.

Okay. And then, one follow-up -- could you just comment on the large and the small deals? Did you say that in North America, you saw more large deals in the quarter?

We did. We actually -- what was good to see in North America is, the diversity of our business in North America is stronger than in any other region. And what was particularly pleasing for us was that retail deals in the quarter were really from some of the non-big box retail accounts; and so, it really helped, in combination with some opportunities we saw in the mobility route space, as well in the distribution and transportation space. So, it was a solid large-deal quarter for us in Q3 in North America. And as we have mentioned, North America, perhaps more than any other region for us, is most susceptible to large-deal activity. And that's where you see a little bit more volatility quarter to quarter from that region. But it was very good for us in Q3.

In North America, our run rate business is probably about two-thirds of the revenues, and deals about one-third. So, that really is the reason for why you see somewhat more volatility on a quarterly basis in our revenues.

All right, thank you, and congrats on the quarter.

Thank you.

Chris Quilty, Raymond James.

I guess I'm going to follow up on an earlier question about the fourth-quarter outlook, which, going back, I guess, 10 years or more, Q4 was traditionally the strongest quarter of the year. Retailers didn't necessarily deploy equipment, but they spent their end-of-the-year capital budget. And if I remember last year, Q4 was a little disappointing for you, and it turned out Q3 was some relative strength. Do you think this is a new buying pattern by customers, or is it specific to the economic environment we are in?

First, I think Q4 last year was a very good quarter. I don't think we saw any -- it was certainly from Q3. And North America, I can't remember if that's the question -- generally, I would say that the traditional quarterly seasonality that we have seen over many years is getting somewhat diluted as we get a more global business. So, Q3 tends to be the strongest quarter in Asia Pacific. Europe tended to have a very weak Q3 historically, where Western Europe take a lot of their vacations. But as we expand our business into Eastern Europe and Middle East and Africa, there's less -- the vacation pattern is not quite as pronounced there. So, that kind of smoothed out the quarter just a little bit more. And I think in this particular year, we also expect that the historical kind of budget flush that you sometimes get in Q4 might be a little lower than what we normally would see.

Okay.

As companies are a little bit more cautious about the output.

Yes, I should have quantified, I didn't mean North America specific. Also, Q3, your revenues came up towards the high end of your guidance. And again, I might not have been able to divine it from your statements, but where specifically did you see upside in terms of end markets relative to your expectations for the quarter?

I would say, Chris, in the third quarter, we had a strong North America performance. Asia was pretty much -- Asia and Latin America were pretty much where we expected them to be. And we did see a little bit of that softness in the second half of the quarter in EMEA, that we mentioned earlier.

Okay. And I know you give this in the 10-Q, but product versus gross margins -- are there any unusual trends there?

No.

And final question -- scan source as a percent of sales?

You know what? It didn't change dramatically from the prior quarter, but why don't we continue on with the next question? Before we hang up, I'll share that wonderful number, [if I have it] in here.

Okay.

Paul Coster, JPMorgan.

I know you are highly diversified, but do you have some sense of what revenues came from the government sector this quarter?

I think I probably don't want to comment on that, because it is very difficult for us to know -- it depends how you define government. If you include state and local government, that goes through different channels that aren't necessarily government-related. But we did have some attractive orders from various government-type entities, even in Europe -- some nice postal wins in Europe this past quarter, and postal business in the US, as well.

Just to make sure Chris doesn't feel like we don't love him, the customer A, which would be our largest customer, is 22% of our revenue in this quarter, whereas a year ago, it was 19.7%. So, it's up a little bit.

And my follow-up, and this is related to the statement around acquisitions -- is that -- the intent to make acquisitions, is that sort of new? And can you just talk to us about what kind of acquisitions you are likely to make, and what you are not likely to do? Obviously, with ZES in mind, I guess we don't really want to revisit the vertical solutions approach.

So, first, our strategy with respect to acquisition hasn't really changed. I think in the last several quarters, we have had a sentence in there to say that we are interested in doing acquisitions, so we don't surprise anybody if we do. But there's no real change to our approach. What we are looking to do is, first and foremost, we would like to acquire something that is close to our core business. Something that has a similar and horizontal business model as we do today, versus more of a, say, vertical model. But we are also interested in finding things that are -- near adjacencies that help us build capabilities into some new markets. So, those are kind of the areas -- we are not looking to be overly advantageous or adventurous, I guess, is the word here, but staying pretty close to home.

Okay, thank you.

(Operator Instructions) And there are no additional questions at this time. I would like to turn it back over to the presenters for any closing remarks.

This is Doug. Thank you very much for spending an hour with us today. Our next regularly scheduled quarterly conference call will take place in February. Have a good day.

Thank you, ladies and gentlemen, for attending today's conference call. You may now disconnect.