斑馬技術公司 (ZBRA) 2013 Q2 法說會逐字稿

Good morning and welcome to the Zebra Technologies' 2013, second-quarter earnings release conference call. Joining us today 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. Instructions will be given at that time in order to ask a question. At the request of Zebra Technologies, this conference call is being recorded. Should anyone have any objections, please disconnect that this time. At this time I would like to know introduce Mr Doug Fox of Zebra Technologies, sir you may begin.

Thank you, good morning and thank you 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 effect expected results. Risk factors were noted in the news release we issued this morning, and are also described in Zebra's 10K for the year ended September 31, 2012, 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 second-quarter sales of $253 million and earnings of $0.63 per share, excluding $0.03 per share in [accident] restructuring costs, and acquisition expenses. Sales increased 2.5% from a year ago and $60 million or 7% from the first quarter. Sequentially, sales increased in all geographic regions. Second-quarter revenue growth reflects the positive impact of Zebra's ever sharper focus on serving the needs of our customers, as well as the modest improvement in business conditions. All be it, still challenged by uneven global economic growth.

Our sales also reflect the small continuation of inventory decline at the distribution partners. Second-quarter results further demonstrate our ability to capitalize on Zebra's scale, financial strength and industry leadership, by aggressively advancing important business objectives with the Company's long-term success. We pursued and won key new business with strategic customers, and targeted verticals in an environment still challenged with a low level of large enterprise deals. While these wins temporarily affected gross margin, they secured important long-term relationships with key customers for Zebra. During the quarter, we temporarily increased spending to capture targeted emerging business opportunities with exciting new applications for sports and recreation. This move has positioned Zebra in an important new market, with innovative solutions incorporating greater software and services contact.

It is one of several key growth initiatives that build on our Internet of Things strategy, and will generate incremental revenue growth for Zebra in adjacency's to our core business. While modest during the early stage, we expect revenues from these new initiatives to begin developing in the second half of 2013 and accelerating in 2014. Overall, our diversity across geographies, products and customers continued to benefit Zebra in the second quarter. In North America, strength among customers in transportation and logistics, healthcare and manufacturing, offset slower sales to customers in retail. In e-mail, the majority of the subregions demonstrated year-over-year sales improvements. High growth in the UK was supported by increasing shipments to customers in retail.

In Italy strong growth was led by sales to the Italian Post and customers in T&L and manufacturing. In Latin America, improvements in Brazil offset weakness in Mexico and other parts of the region. And in Asia-Pacific we were encouraged by improving trends in South Korea, China, Australia and Southeast Asia. In this region we experienced improved diversification of Zebra's business in government, retail and T&L together with an uptick in shipments to in-country manufacturers for some product refreshes.

As we have noted in the past, we continue to pursue our vision and drive growth through five strategic pillars. First, intensify innovation. Second, expanding the new markets. Third, penetrate further into existing markets. Fourth, maximize operational effectiveness, and lastly inspire our people and culture. Let me now highlight some areas of progress in the second quarter relative to our strategy. The cadence of innovation, a corner stone of Zebra's strategy remains high. During the second quarter, we completed the refresh of our family of security and ID card printers with the introduction with the light-duty ZXT1 and enhancements to our CXP3 card printers. These introductions follow the first-quarter launch of the CXP7, which has received excellent response from customers and channel partners and is building a healthy pipeline.

Enhancements to the CXP3 include the addition of Zebra's Print Touch Near-Field Communications Module. This innovative feature enables easier printer setup, operation and troubleshooting, to enhance the user experience. We also further strengthened our innovative mobile printer line, with the next generation of our EM220 mobile receipt printer which supports our mobile point of sale applications. It works with the latest smart phone and tablet operating systems, including Apple IOS, Android, Windows mobile and BlackBerry. During the second quarter we further extended our presence in sports and recreation. Zebra card and receipt printers are already in use in multiple sports venues around the world. Including RFID card printers, on the ski slopes of Vail and mobile printers in baseball stadiums for ticket and receipt printing. Last week we introduced MotionWorks sports software. A new and exciting player tracking solution, by combining our ultra-wideband realtime location system with our proprietary MotionWorks sports software. This innovative solution identifies and tracks players on the field in realtime to within a few centimeters providing for the industry's highest level of accuracy. The MotionWorks software enables visualization capabilities and data along XYZ axis, on such information as distance traveled, speed and vertical leap.

Our superior athlete tracking capability and realtime analytics clearly set us apart from the competition. In 2012 we began testing our realtime location sports solution, and we are now expanding to pilots. The solution is ideal for team sports such as football, soccer, hockey and basketball as well as individual and motors ports. Zebra's realtime location sports solution is an exciting example of how we are positioned to benefit from the major Internet of Things technology trends such as big data, cloud computing and next generation analytics. During the second quarter, we also advanced activities to further penetrate the existing markets we serve. In North America, Zebra continues to identify improved ways to serve our retail customers. To this end, we announced last week the creation of the Zebra commerce brand. Zebra commerce is a coordinated approach to delivering Zebra solutions and services, along with those of our strategic partners, to meet more of our customer's needs in retail and mobile enterprise. The acquisition of StepOne Systems late last year brought to Zebra a suite of in-store mobility software applications. Price management, escorted gift registry and stockroom management are some of the software applications that StepOne has installed with retail customers. Through Zebra commerce we will be offering these and other applications along with Zebra hardware and services.

In EMEA we are serving more customers in healthcare, our efforts include expanding sales resources with Zebra's LaserBand product line. Supported by Zebra's distribution capacity in the region, the additional sales resources are enabling us to reach more hospitals and other healthcare institutions across the region. Printed wrist bands are increasingly essential as healthcare organizations invest in technology to connect patient information with electronic healthcare records, for improved patient safety and increased operational efficiency. We remain pleased with growth of the LaserBand product line, and the contribution of our new team members since acquiring the Company last July.

In Asia-Pacific we continue to make progress in diversifying our business in China with more wins in government, healthcare and T&L. The products we introduced over the past two years, are helping us gain new customers and build further brand leadership in the region. The success of these efforts makes us optimistic about further growth in Asia-Pacific.

Zebra enters the second half of 2013 with extended leadership in its core business, and better positioned to benefit from the investments in new growth initiatives. Our strategies for long-term success remain intact, and we continue to invest in those areas that position Zebra to deliver a broader range of solutions, that enable our customers to gain greater visibility into their value chain. Now, I will ask our CFO, Mike Smiley to provide a detailed review of second-quarter results and guidance for the third quarter of 2013. 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' results for the second quarter. My comments will principally focus on year-over-year changes in performance of Zebra's operations. First, we had sales growth in three out of four geographic regions. Second, gross margin was affected by product mix, decisions to pursue select large business opportunities and price reductions to reduce old inventories. Third, operating expenses include an acceleration of investments to expand further into sports and recreation, as well as exit restructuring and acquisition costs. Let's take a look at sales.

For the quarter sales increased 2.5% from $247 million last year, to $253 million of this year's second quarter. Impact of foreign exchange net of hedges reduced sales by $1.7 million year-over-year or $0.02 per share. In EMEA sales increased 4% the growth was supported by sales to customers in a broad range of industries. Sales for North America increased 2.8% from a year ago. In the region strong growth in supplies offset a modest decline in hardware sales.

Latin America down $1 million or 4% had softer sales during the quarter to customers in Mexico and other parts of Latin America. This softness was partially offset by growth in Brazil. Sales growth of 3% in Asia-Pacific was broad-based with nearly every subregion contributing to the improvement. By product category hardware sales declined 3%, with small sales declines in most printer categories. The decline in hardware sales was more than offset by 20% growth in supplies. In addition to the contribution from the LaserBand product line, sales of thermal based wrist bands, labels and receipts increased. Revenue from services also advanced for the quarter up 7%.

We expect further growth in service revenues over time as we roll out more service initiatives worldwide. Average printer unit prices declined from $471 to $462 in the second quarter, principally because of mix and selective pricing on some large deals. For the second quarter, gross margin was 47.8% compared with 48.7% last year. Product mix, including proportionally more supplies and pricing, had the largest impact on gross margin. Also to a lesser degree, profitability was temporarily affected by incentive pricing to move inventories of older versions of recently updated printers. Total operating expenses increased 4% from a year ago. A portion of the SG&A expense increase related to the LaserBand and StepOne acquisitions, which occurred in the second half of last year. In addition, we had an incremental $1.1 million of amortization and $1.1 million in exit and restructuring costs. Total operating income of $36.6 million plus depreciation and amortization of $7.7 million, totaled $44.3 million of cash earnings, or $0.86 per share of cash EPS. Second-quarter results include a $1.6 million favorable litigation settlement which is related to an investment loss that was recorded in prior years.

The settlement is recorded in other income. The effective income tax rate for the second quarter was 19%. The rate reflects the impact of a greater portion of our income that is generated in regions with lower tax rates. Earnings totaled $0.60 per share, including a reduction of $0.03 per share for acquisition expenses and exit and restructuring costs on 51.3 million average shares outstanding. At the end of the second quarter we had 50.8 million shares outstanding. More effective management over our working capital contributed to a strong $60 million in free cash flow. For the second quarter inventories declined $7 million bringing the total decline year-to-date to $14 million. From its peak in the fourth quarter of 2011, we have reduced inventories by $24 million. This reduction is slightly more than desired, is also a direct result of improving efficiencies we have achieved in our extended supply chain operations. Cash flow was also positively affected by a $12 million increase in payables as part of a more deliberate and strategic approach to managing working capital.

On receivables which were largely unchanged from the first quarter, the days sales outstanding for the second quarter were 59 days compared to 63 days. During the quarter we returned $25 million to shareholders with the buyback of approximately 540,000 shares of Zebra stock at a weighted average price of $45.71 per share. We ended the period with $454 million in cash and investments, with $200 million held in foreign accounts. Now let's look at our third-quarter forecast. We are forecasting 2013 third-quarter sales in the range of $253 million to $263 million. This outlook incorporates usual summer seasonality and EMEA. Earnings are expected in the range of $0.61 to $0.71 per share. Our forecast assumes a consolidated gross margin in the range of 47.5% to 48.5%. Projected improved product mix is expected to be offset by higher freight costs to address some of the lower than desired inventory levels. Operating expenses are forecast between $81 million and $83 million. The forecast also assumes an effective income tax rate of 19.5%. That concludes my formal remarks and thank you for your attention. Now here is Anders' for some concluding comments.

Thank you Mike. By using our considerable competitive advantages, Zebra extended industry leadership in an environment still facing various global business challenges. We secured stronger relationships with strategic customers, and made further progress against the five pillars of our strategy for growth and long-term success. We accomplished this by first introducing more innovative printers and asset tracking solutions to serve more of our customer's visibility requirements. Second, entering new markets with attractive growth opportunities. Third, penetrating more deeply the existing markets we serve, and lastly, driving for greater excellence across the board to deliver improved customer service and optimize Zebra's operational efficiency.

While pursuing our growth goals, we will continue to carefully maintain effective control over operating expenses, and we will also direct our resources to those areas that will deliver the highest returns on our investments, for the long term benefit of our shareholders. At the same time, we will continue to execute stock buy-backs and pursue acquisitions. Zebra will continue to benefit from its great diversity across products, customers, markets and geographies. Bright spots for the second half of 2013 include growing our business in retail, healthcare and government in Asia-Pacific, as well as healthcare and supplies in North America and EMEA. We are optimistic about achieving increasing returns on our investments in growth platforms. These adjacent areas build under strength and brand of our core business and our expanding the total available market for Zebra's products and solutions. Zebra commerce with its broad suite of solutions for retail including mobile POS, is one of those areas. Following the trials currently underway, we expect to build momentum in the sports vertical as well. Importantly, these and other initiatives are building greater software and services content into Zebra's revenue mix. Over the past year, we have expanded our global service capacity primarily in the area of product repair. With our new facilities in Brazil, China, Australia and several locations in Europe, our Zebra owned and independent contract service operations, are supporting our customers for improved overall service.

Let me finish by adding that we are confident in our business and the proven strategy we are following to create shareholder value. Zebra, together with our partners, is building a smarter, more connected global business community. The results of our actions also demonstrate that the Internet of Things and other emerging technology trends are creating a new incremental revenue opportunities for Zebra. Stronger relationships with strategic customers, and better penetration of established and new industries make us optimistic about our core business as well. Thank you for your attention today. I would now like to turn the call back to Mike for Q&A.

Thank you, thank you Anders. Before we open the call for your questions, let me ask you to limit yourself to one question and one follow-up. In addition, Doug and I will be available after the call for any further discussions.

(Operator Instructions)

Andrew Spinola.

I was wondering if we could drill down a little bit on the gross margin in the quarter? And also specifically, I am thinking about your guidance for Q3, 47.5% to 48.5%. I am wondering if you expect to see any of the similar impacts that you saw in Q2 also in Q3?

Yes, this is Mike. First of all for Q2, I think one thing you have to understand is, that we -- when you look at what we ended up with, with revenue, we were really pleased to hit our revenue target and partly we were able to achieve that because we were pursuing larger government deals. Those government deals, typically on the hardware sales, slightly lower margins but they have a higher proportion of service attach rate which over time will benefit our P&L. So it's a decision we chose to help build our business. But, I think the other thing is that it provides us inroads into the government the longer-term which is something as a Company we don't have as great of a market share as maybe some others in the business.

We also have the mix of our sales was towards the lower end, with supply. So it is a little bit of a mix shift. One thing you'll see is, in our business there's time where we are selling a higher margin business more strongly, certainly in 2010 or so, our margins were much stronger because of mix and then in this year it's been a little bit more of the lower margin stuff that sells. So it comes and goes depending on geography or depending on industry that we are serving. I think the thing that pleases me with our margin is that this again reflects the diversity of our business. Although perhaps retail was a little bit lower than we had hoped for. We are able to overcome that with higher government and T&L which affected our margin for the quarter. So I think, in the longer-term, we expect to continue to be in the 48% to 50% range. Maybe Anders can give a little more color on that?

I think over the longer-term we still feel that the target we have laid out the 48% to 50% gross margin is appropriate. That is what we are working towards and those are the goals that we have set ourselves. But in any quarter, we expect to see some shift in mix between products or geographies. We have many quarters where we have more positive things, things break our way more. In Q2 we had a bit more pressure. We're also putting a lot of effort into making sure that we improve both the price points of our products, the type of products we sell to drive improved margins, as well as significant effort on driving material cost structures. To reduce our cost of materials. So, over time, over the long frame, we do expect we will also see a higher proportion of software and services revenue from our Internet of Things related activities.

Got it. Great. That's very helpful. Thanks. Just one follow-up for me, would be, Anders, you called out some pressure on revenue in the quarter from further reductions of inventory distributors. I'm wondering what you're seeing in terms of that possibly in Q3 and going forward? Do you expect your distributors to continue working down the inventory?

Our expectation is that they will be neutral. Sales in and sales out should be equal, so we don't expect that to be a further reduction.

Okay. Thank you very much.

Brian Drab.

First questions, the follow up on that last point regarding inventory. Can you quantify what you saw in terms of the inventory decline at your industry partners? And if you don't want to quantify it specifically, can you just say directionally, was it higher, lower, less of an impact than it was in the first quarter?

We don't want to quantify it particularly, but we can say it was somewhat less than they were in the first quarter, yes, in the first quarter.

Okay. Less than half of the impact in the first quarter or just a little bit less than the first quarter?

A little bit less than in the first quarter.

Okay, so still a pretty significant headwind in this period?

Yes.

Okay and then just looking at the top line, can you help us understand what revenue did on an organic basis adjusting for the LaserBand acquisition? I know it was a $24 million revenue business in 2011, I imagine that contributed what, about $7 million in sales in the quarter?

Yes, I don't think we break out in detail, but it is always a very small part. It would be less than 1%.

Okay. What I'm trying to get to, is it fair to say that on an organic basis, taking the acquisitions out of the pitcher that revenue is flat to maybe down 1% on an organic basis? In the second quarter year-over-year?

You know, again, we are not quoting. We have not been breaking out the LaserBand revenue. I think though that you have sort of two competing things. One we had FX year-over-year negatively affecting us by the tune of about $1.3 million, offset by the LaserBand stuff. So I think we had a little bit of come and go. Obviously, LaserBand helped a little bit in the quarter relative to the year ago.

Okay. I guess I'm not supposed ask anymore questions, but I just wanted to see if you could elaborate a little bit more on the strength that you saw in Europe and just hope you could talk a little bit more about what you saw in Italy, and UK retail because it looks like that was a great source of strength that you guys are doing very well there? But, thank you.

In Europe the majority of our subregions were up in Europe. I think it was 9 out of 13 subregions that were up. We saw particular strength in Germany, UK and Italy which has been historically our strongest and largest markets. I would say over the last year, Q2 of last year was a difficult quarter for Europe, but since then the volatility in the region is much lower actually and we have seen a slow but steady improvement. So I feel cautiously optimistic about Europe as we look into the second half of the year. Q3 is obviously always a traditionally slower quarter with vacations and other things in Europe. But our pipeline is improving and our team in Europe is very engaged and very solid, we have some quiet confidence for the second half. Maybe Mike Terzich would like to add some color?

Okay sure. Thank you. Brian, the only point I would add to what we are seeing in Europe, is from a retail perspective. We certainly have seen some stabilization in particular. I think we are still benefiting from some strategic shifts. We are going to go back to a lot of what we have been able to deliver to retail has been efficiency productivity solutions and they're still making those investments. So, that tier two retail climate, particularly emanating out of the UK was strong for us. But then we're also seeing that middle class phenomenon in pockets, smaller pockets of Europe today. Namely out of the Eastern Europe part of the Russia territory where we are seeing a lot of retail lift. So, things look pretty good relative to what we foresee for the third quarter as well.

Thanks very much.

Michael Kim.

Anders, you talked a little about today opportunities in the sports and recreation vertical. Hoping you could spend a moment just talking about the characteristics that make this vertical particularly attractive and an appropriate area for investments? And if you could speak to the upgrade cycle of certain categories or if it is a multi-product opportunity and how you're pursuing in terms of your go to market strategy?

Yes, we have announced -- we announced the MotionWorks sports solution last week, but even before that we have had a number of installations and product in different sport's verticals. For instance, we have RFID card printers in a number of ski resorts, including Vail to improve the efficiency of the lift systems but also to provide enhanced customer experience, user experience for having much more access to much greater data about the ski experience. But we also have our mobile printers particularly in all sorts of stadiums for ticketing and receipt printing. The MotionWorks sports software they announced is an enhancement to existing products. It really builds on our you UWB realtime location systems that we acquired from MSSI a few years back. The majority of the location software comes from our WhereNet acquisition. Before we actually put on the MotionWorks new software piece, has been installed in soccer teams and ice hockey teams outside of the US.

But now we have developed what we call the MotionWorks sport's software functionality which really is the way to much better provide visualization and to do much better realtime analytics about the movement of players or whatever you want to track in a sports arena. So this has great opportunities, or great benefits for sports. It helps both in the sense of providing much more granular information that can be used for practice. You can do replays of the game the night before, you can look at specific plays. You can look at using this when you are doing recruiting. But also maybe the biggest improvement is it comes to the fan experience. We can now offer fans the different experience with replays and tracking how all the individual players move on the field in realtime and track all of the statistics with this. It really helps to diversify our business away mostly from hardware to much more focus on services and software.

Great, and as a follow-on, would some of the acquisitions contributing to sports and recreation vertical, and LaserBand, that acquisition being about one year under the belt. Can you talk a little bit about where your focus is turned, strategic opportunities, where you're focusing your attention? Is it in this vertical, healthcare? And maybe you could expand a little bit about some opportunities that you're focused on.

Yes, I will start and then I will hand it over to Mike Terzich afterward. But for LaserBand specifically, the focus is really around healthcare. We still feel that, that's -- the solution is particularly well suited for healthcare and there is a new fast-growing market that we want to make sure we capture as much market share from as possible in the early stages. But we also see opportunities to offer LaserBand solutions into entertainment, hospitality and other verticals like that.

Yes, that's right. Michael, a couple of other points, with LaserBand specifically. What it does for us, is -- Zebra has always been very passionate about thermal printing technology, obviously LaserBand is a laser printing technology, particularly in some of the global international markets. It actually lowers the IT entry cost of healthcare to introduce wrist banding as part of a patient safety initiative. Primarily due to the fact that hospitals employ large installations of laser printers today, and that gives us a drop in tray replacement opportunity. In addition to the thermal bands where we see them coexisting. And both the thermal and the laser printed band, we are seeing a lot more interest, to Anders point, in the recreational and in the hospitality space.

When you think about access to theme parks, recreation centers, swim with the dolphins, et cetera. There is a lot of control that those entities want to place to make sure that the people that are frequenting the facility have paid their fair share at the gate as well as a lot of other extending hospitality applications with travel and leisure in the portfolio. From both a thermal banded solution as well as a laser banded solution is by far the best in the marketplace and we are very well positioned to take advantage of the trends we're seeing in those applications.

When you think about your product portfolio or technology offerings do you see an area where there might be a follow-on strategic consolidation opportunity to augment LaserBand, or build out capabilities in travel and leisure, healthcare, sports and rec? Any portfolio additions that you see filling out over the next year or so?

One area that we have talked about consistently has been around supplies. LaserBand is part of our supplies portfolio, and we see that as being an attractive area for investments. It offers a nice annuity with attach rates to our printers, particularly internationally where we today have a very low presence of supplies business.

Great. Thank you very much.

(Operator Instructions)

Keith Housom.

Question for you on the supplies business, perhaps I missed this, can you guys narrow down a little bit more perhaps on where the strength from the supplies business is coming from? Was it coming from the healthcare sector? Second, with a more geographical strength in one sector -- one segment of the country, or world I guess for lack of a better word, than another?

Generally our supplies business did well globally where we are, but obviously it will be much stronger in North America and in Europe. The healthcare was a big part of this, we saw great strength there and we also saw strong performance from the higher-quality, more synthetic type labels that are used in manufacturing, higher-margin products also. Overall I think it was a very strong broad-based performance from our supplies business and Mike Terzich can also supply some further details.

Yes, Keith, our business, we have strategically located roughly a half a dozen converting locations around -- four in the United States, two are present in Europe and those converting locations to date are serving that manufacturing, what we call the specialty manufacturing market. And where Zebra tends to focus and where we differentiate, to Anders point is on high-end specialty materials. These are materials that are typically used in-line in manufacturing, labels that can withstand lots of harsh environments, high temperature in manufacturing processes, circuit boards, et cetera. So, that allows us to play in a space that generally is higher margin, very specialty and it differentiates us from lots of little converters that provide local supply to their customer base.

The second part of our market segment has been the growing -- and that manufacturing base by the way is growing, we think that there's a fair amount of consolidation going on in the vendor community over the course of time. Zebra has certainly grown at a rate that is much greater than the material management forecast for specialty materials, that are being produced in the marketplace. That second leg to our growth strategy has been around healthcare and the expansion of patient safety initiatives, but we are also leveraging that healthcare team into selling into the healthcare institution across the pressure sensitive label business as well. So as you can imagine, in a hospital a lot of label use, a lot of it being very specialty, resistance to chemicals, bloods, et cetera is creating some more opportunity for us from a direct sale into a hospital fulfilled through our telesales organization that we acquired with LaserBand.

Okay great. As a follow-up, in the exit and restructuring cost you have for the quarter are $1 million or so. I am assuming that was further related to the Chinese supply chain. Please correct me if I'm wrong. Second, when should we start to see some of the benefits of that I guess to the margins?

So the first question, certainly a good chunk of the exit restructuring has to do with the manufacturing or supply chain shift to China. The second question, could you repeat that real quick?

I guess when can we expect to see some of that come through to the margins? Should we see it coming through immediately or is that going to be more built in over time?

It will be more built in over time. There's a transition that happens as you end up with people passing on knowledge and stuff going from point A to point B. It will eventually manifest itself. To Anders' point about our -- as we talked about margins, in part we have raw material cost reductions that we're benefiting from. Then our operating group is not only working really hard to manage our inventory better, but they are also doing it more efficiently. So, we are using that in part to help deal with some of the pricing pressure we do periodically see.

Great. Thanks.

Paul Coster.

Anders, how much revenue are you driving from software sales today, and what is the growth rate associated with that?

I have to look that up here. I don't have that exactly at my fingertips. But it is a small number. It has being growing but it is a relatively modest number. But we put much more effort over the last couple of years to develop new solutions that have a much higher software content. We talked about Link-OS as one of those as the new operating system for our new printers. That is going to be helpful. I think the MotionWorks sports vertical applications, Zebra commerce for our retail areas, and we have some other things that are going on also that we think will be very attractive to us. Maybe Mike can do the specifics?

The software revenue for the Company is less than, less than $2 million. It is not very large. I think the thing at this point as Anders is talking about is as we start selling more of the LS solution there will definitely be much more of a software content. I think the other thing we have been talking -- which will help us move towards Internet of Things type of solution. I think the other thing we talk about is that our -- the content of our products have a larger software component in them. So for example, our printers have a much greater degree of software in that product then there was five or six years ago. So it is a combination of software in our hardware solutions and specific software sales that we expect to see through our move into the Internet of Things.

Okay. Anders, the retail outlook is going to be quite good globally, but domestically it wasn't quite what I was looking for. Maybe it is more noise than reality, but I am hearing a lot about this upgrade of point of sales in small to medium-sized retail using iPads and other mobile platforms. It just seems like you should be benefiting from that. What is going on there and can you sort of project out a little way as well as to what you think will happen?

Generally we had a stronger performance of retail outside of North America. North America was the weaker side but we had good growth with retail outside of North America. And in North America the tier two retailers were particularly strong and as we look into the second half of the year we also expect our tier two retailers to grow the fastest. The retailers, two trends that are holding back retail spend today. One is just an overall modest economic activity. So, they are all very nervous about making larger capital commitments, so they tend to divide their projects into smaller pieces and spread them out over a longer period of time so we don't get as many of the larger enterprise deals as we used to.

The other one is the point that I think you were referring to, that retailers are making a lot of analysis today around how are they going to transition to a mobile point of sale solution. How are they going to make sure they are chip and pin compliant, so compliant to the ENB2 standard. I think those things are preoccupying retailers, and they are holding off investing to some degree until they have a better handle on exactly how they're going to roll out those solutions. But we are now trying to make sure we can position ourselves well to participate in some of those new areas. It really reinforces our focus on Internet of Things-like technologies. As we have with the Zebra commerce. Specifically for the second half of the year, our pipeline is -- has been growing quite nicely. We have more confidence that retail will be performing better in the second half than in the first half.

Okay. Thank you.

Andrew Spinola.

Thanks, I just wanted to follow-up on your comments on your own inventory that you made. It sounds like your inventory has gotten lower than you expected it to? I was wondering, what would be the driver of that? Is it possibly a pickup of demand near the end of the quarter or maybe just sort of late shipments on new products?

This is Mike Smiley, it is primarily a fact that, as we mentioned, we had a stronger demand for meeting customers in our government and transportation logistics vertical than we anticipated, less in retail. So, effectively the mix we forecasted for products was a little bit different than what was actually resulted in. As a result we ended up using more of one skew than we expected of other skew, and so the inventory ended up being a little bit lower than we anticipated. I think this is something that is just normal in the business. Sometimes you're good at guessing where it is, sometimes not. The only reason we really bring it up is just to let you know that when we go into the third quarter, our gross margin looks relatively -- we are forecasting relatively flat gross margins in the third quarter relative to the second quarter and that is because in part we expect to have to pay more in freight to build up some of those inventories to levels that will allow us to continue to serve our customers the way we want to.

Got it. Last question for me, we heard some companies talk about sort of developing weakness in China. I was wondering, it sounds like your business has actually gotten better there, so maybe you could give us a little more color on that market? Thanks.

Yes, China was improved for us quite nicely in the second quarter. We saw manufacturing come back a bit because that has been a weakness in China for us. We have been so exposed to manufacturing over the years, but over the last two years we put the real effort into diversifying our business away from manufacturing, making us less dependent on manufacturing. And we have seen really nice growth in our business in healthcare, in retail and government. So, we have a much better balance to business today than we have had before. And that gives us also some better confidence that we will be seeing more growth as we go forward from China.

Thank you.

(Operator Instructions)

I am showing no further questions at this time.

Okay. With that, thank you all for joining us today. I would like to let you know that our next regularly scheduled conference call will be for our third-quarter earnings, which is currently scheduled for November 5. Have a good day.

Thank you for attending today's conference. You may now disconnect.