斑馬技術公司 (ZBRA) 2014 Q2 法說會逐字稿

Good morning, and welcome to the Zebra Technologies 2014 second 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. Instructions will be given at that time in order to ask a question. At the request of Zebra Technologies this conference call is being recorded. Should anyone have any objections, please disconnect at this time. At this time I would like to introduce Mr. Doug Fox of Zebra Technologies. Sir, you may begin.

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 we issued this morning, and are also described in Zebra's latest 10-K, 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. I am pleased to report that Zebra achieved another quarter of record sales. $288.4 million, up 14% over a year ago, and at the upper end of our guidance range. Non-GAAP net income of $0.84 per share was up 35% from $0.62 per share for the second quarter of 2013. We maintained strong gross margins and generated $55 million in free cash flow. All around, the second quarter was another very solid period for Zebra. Our sustained success demonstrates strong execution capabilities against the proven growth strategy. Virtually all facets of our business met or exceeded our performance expectations as we further penetrated targeted industries more deeply, and maintained our focus on delivering more innovative solutions to our customers. We also made solid progress on integration planning for day one readiness, our first priority for the acquisition of the Motorola Solutions Enterprise business, as we lead up to closing.

Ongoing strength in our core run rate business and further improvements in large enterprise deals characterized second quarter activities. All geographic regions contributed to the sales growth. In North America, shipments to customers in retail and transportation and logistics remained buoyant. An uptick on core printer shipments partially offset the expected seasonal decline in revenues from Hart Systems. In Europe, further improvements in economic activity led to our third consecutive quarter of record sales, propelled by strength in the UK and Germany. And in Asia, further diversification of our customer base supplemented improved shipments to manufacturing customers.

We also made good progress on integration planing for the acquisition of Motorola's Enterprise business. Since announcing the deal on April 15, we established and staffed our integration planning office with teams across all business disciplines fully engaged in activities to prepare for day one as a combined entity. Our first priority has been and will continue to be the ongoing success of our combined organization. We have worked diligently to identify and start to address all critical areas of improvement and change needed to ensure this objective. We are very pleased with the progress we're making on the complex process of acquiring a carve-out business. In addition, we recently announced the passing of the Hart-Scott-Rodino review waiting period, a key milestone. We expect to complete the transaction by year end.

Let me now highlight some areas of progress in the second quarter. In all geographies Zebra has benefited from deeper penetration of targeted verticals. We continue to forge tighter, more strategic relationships with established and new customers, who increasingly look to us for products and solutions that help them gain greater visibility into their business operations. To this end, both new and established Zebra products gained traction. In North America we had 16% sales growth with notably strong sales of mobile printers. Large deal activity included shipments of our popular QLn 320 mobile printer, and our PS4000 wireless print server to retail customers.

Our innovative location solutions products also had a solid quarter with improving shipments to industrial customers, who are increasingly taking advantage of the power of active RFID for asset location and motion management. In EMEA, nearly all subregions experienced sales growth, which led to 16% growth in this region as well. Large deal activity included shipments of our compact MZ320 mobile printer into postal applications. Of particular note, we had a very successful launch of our new ZT400 series midrange table top printer in the region, with good uptake by retail and manufacturing customers. Healthcare also stood out, with strong sales of our HC100 thermal wristband printers, as did our broad range of thermal and last wristband products.

In Latin America, we had modest sales growth of 4% in part due to a challenging economic and political landscape in several countries. Growth in Brazil was the most challenged with some impact from the World Cup, this performance was more than offset by growth in Mexico and other parts of Latin America. The region continued to be an area of strength for our Hart printer products, supported by some nice wins in Argentina and Ecuador for financial services applications. Our custom applications group was particularly helpful in working with a Latin American channel partner to tailor our Hart printers for these applications. We also had robust growth of supplies in the region. Large deal activities picking up, supplementing a steady run rate business, and providing for a favorable outlook for the second half of the year.

Asia Pacific also registered another strong quarter, which W sales up 9% on broad strength across the region, including a pick up in large deal activity. In India, Hart printers are supporting voter registration activities. In South Korea, a manufacturing recovery along with favorable trends in transportation and logistics and healthcare, generated high demand for midrange and desk top printers. In China, an improving manufacturing sector led to increased shipments of high performance printers for mission critical applications. In addition, our diversification into the parcel delivery sector generated several deals for our desk top printers, specifically designed to meet the needs of customers in emerging markets. Solid execution on a proven growth strategy remains the foundation for Zebra's ongoing success.

Our second quarter results demonstrate how we continue to extend our leadership through our focus on innovation to meet growing customer needs for asset visibility. Zebra is well-positioned to benefit from the drive by enterprises for greater efficiencies in their supply chains by taking advantage of the Internet of Things and data analytics. The acquisition of Motorola's Enterprise business will enable Zebra to play an even greater more strategic role in enterprise asset intelligence and mobility. Now, our CFO, Mike Smiley, will provide a detailed review of second quarter results, and guidance for the third quarter 2014. After Mike's remarks, I will return for some brief closing comments.

Thank you, Anders. Let me highlight some of the key components of Zebra's second quarter results. First, we had record sales with strong organic growth and increases in all four geographic regions. Second, adjusted EBITDA increased by 38%, and third, results were favorably affected by a lower income tax rate. Now let's take a look at sales performance. For the quarter, sales increased 14% from $253 million last year to a record $288 million. On an organic basis sales increased 12.5%, with Hart contributing $3.6 million to the quarter as expected. Foreign exchange had a positive impact on sales of approximately $3.5 million net of hedges year-over-year. Sales for North America increased 16% to $129 million. In addition to the modest impact from Hart Systems, the result primarily reflects strong growth in hardware, with mobile printers for refresh, and new applications performing best. We also had growth in desk top and table top printers.

And EMEA sales increased 16% as well, to a new record of $94 million. The improving economic picture in Europe led to a greater number of large projects to complement an ongoing strong run rate business. While broad-based shipments to retailers in the UK manufacturers in Germany and postal in Italy, highlighted the quarter. Latin America sales growth of 4% reflects some weakness in Brazil, Argentina, and Venezuela, which was offset by growth in other parts of the region. In Asia Pacific we had solid 9% sales growth, with increases across nearly all subregions and a broader range of customers and verticals, as a result of our ongoing activities to diversify our business in the region.

Underscoring the diversity of Zebra's business by product category, sales of hardware increased 14%, and supplies advanced 10%. Services and software revenue growth of 39% reflects the impact of the revenues from the Hart Systems acquisition, in addition to organic growth of 11%. For the second quarter gross margin was 49.3% up from 47.8% a year ago. As I mentioned the higher gross margin reflects the impact of higher volumes, lower inbound freight costs, and lower product costs. Net of hedges favorable currency movements increased second quarter gross profit by approximately $2 million year-over-year.

Sales and marketing, engineering, and administrative expenses increased less than 6% from a year ago, compared with the 14% growth in sales. The growth in operating expenses was primarily related to higher compensation expenses including those from the Hart acquisition. Hart accounted for approximately $3 million of the $5 million of year-over-year growth. Total operating expenses also include $20 million in acquisition and integration costs which lowered GAAP earnings by $0.30 per share. The amount was principally for professional fees and integration activities associated with the pending acquisition of enterprise business.

Also included in the quarter is a loss of $2.4 million in interest rate swaps. During the second quarter we entered into a series of hedges to fix a portion of the interest costs associated with the anticipated floating rate borrowings for funding the acquisition. Interest rates decreased slightly since entering into the swaps. The effective income tax rate for the second quarter was 11.1%, the low rate reflects the impact of the acquisition and integration costs which lowered income in the US, and increased the proportion of Zebra's income from lower tax jurisdictions. Excluding these items, the effective tax rate is roughly 20%.

Because of these changes, and in anticipation of the acquisition which will likely increase amortization, we have introduced non-GAAP measures to help investors gain a better understanding of underlying Company performance. For the quarter -- $0.84 per share, up 35% from $0.62 per share for the second quarter of 2013. Quarterly adjusted EBITDA was $69.4 million, or 24% of sales compared with $50.4 million, or 20% of sales last year. For the second quarter inventories increased $6.7 million from the first quarter. Inventory turns increased from 4.7 times for the first quarter to 4.8 times for the second quarter. Net receivables declined $16.2 million from the first quarter. The day sales outstanding declined from 56 days to 52 days. We ended the period with $529 million of cash and investments, with approximately 60% held in foreign accounts. All of which are invested in US dollar denominated securities.

Now let's look at the 2014 third quarter forecast. We are forecasting third quarter sales in the range of $285 million to $295 million, which represents an increase of roughly 10%. The forecast reflects the Company's typical seasonality taking into account the summer slow down in Europe. Third quarter non-GAAP earnings are expected in the range of $0.81 to $0.91 per share. Our forecast assumes consolidated gross margin in the range of 49% to 50%. Operating expenses for the third quarter are forecast between $88 million and $89 million excluding the acquisition expenses. The forecast also assumes an effective income tax rate of 20%, which we use for our non-GAAP calculation. That concludes my formal remarks. Thank you for your attention. Here is Anders for some concluding comments.

Thank you, Mike. Sharp execution across Zebra's business led to our strong second quarter results. We continue to demonstrate excellent progress against our strategic goals, to drive profitable growth and position Zebra for long-term success. Our focus on innovation in the broader range of products and solutions is making Zebra a more important strategic partner to customers for their critical asset visibility needs. Customers in retail, manufacturing, healthcare, sports and entertainment, and other targeted industries are increasingly seeing the value in working with the industry letter with the strongest brand and global go-to-market channels. The foundation for Zebra's enduring success remains with our products and solutions. Our reputation for reliability, durability, and value continues to enhance our leading global brand and set the industry standard. During the first half of 2014, we introduced nine printer related products to maintain the high cadence in this vital area.

We are on target to release an additional six to seven products in the second half of this year. In addition to the successful launch of the ZT series of table top printers, we announced two new mobile printers, specifically designed to meet the needs of Healthcare professionals. The QLn 220 and 320 mobile printers are built with disinfectant tolerant plastics for easy cleaning after each bedside use. The printers incorporate Zebra's Link-OS environment, and have a multi-platform software development kit to enable easy compatibility with a variety of operating systems and other mobile devices. Healthcare remains an attractive growth market for Zebra, as we continue to expand our offerings of printers, wristbands, and labels, to improve patient safety and help providers deliver healthcare more efficiently.

Our proprietary Link-OS environment is now embedded in 14 Zebra printer models since its introduction two years ago. More than 100 apps have been created to run on Link-OS by Zebra, and a growing number of independent software vendors. Our retail and healthcare customers in particular perceive great value in Link-OS, as an easy and secure way to centrally manage their wireless Zebra devices. This is one example of how Zebra is moving beyond the printer, to allow our customers to easily embed our technology into their business processes, which will enable them to realize greater efficiencies, and make smarter decisions about controlling their assets. Another area of growing opportunity beyond the printer is in RFID. Last week our location solutions business reached an important milestone. Building on a successful pilot last year, we recently announced a partnership with the National Football League to install Zebra's realtime location solution in 17 stadiums for the 2014 NFL season.

Our sports solution using our proprietary motion works software will provide next gen stats on player speed, position and acceleration in realtime. The data can then be used to generate new experiences, such as broadcast overlays of action on the field to enhance the fan experience. Our announcement with the NFL follows our announcement in May with Michael Waltrip Racing to deploy Zebra motion works motorsports solution. The first of its kind pit crew evaluation system. The value a of motion management with high quality, realtime information is clearly on the rise in sports. Zebra is well-positioned with proprietary systems to help professional, collegiate, and other teams in practice and on game day. These solutions are excellent examples of how innovation is extending our core technology to have greater applicability across a broader range of solutions and verticals.

As we plan for integration of the enterprise business, we will use our existing Zebra strategic framework as the foundation to drive improvement. Since announcing the transaction in April we have been able to take a deeper look into possible synergy opportunities. Based on our analysis we now expect to achieve run rate cross synergies of $150 million by the end of 2016. We will ensure laser focused execution on the integration and management of the combined entity to create value for our customers and shareholders.

The acquisition of the enterprise business will secure Zebra's leadership in enterprise asset intelligence. We will have the capacity to provide complete end-to-end solutions for our customers, with leading global brands in scanning, mobile computing and thermal printing. With our broad range of solutions, including RFID, wireless LAN, and location solutions, Zebra will be well-positioned as the Company of choice for mobile solutions that enhance the visibility of assets within the enterprise and across the supply chain. Zebra will play an increasingly important role in helping businesses get the data that lead to better informed decisions.

Let me conclude by saying that we are very excited about the future for Zebra. We have multiple opportunities for profitable growth and high returns on investments. Zebra is well-positioned to take advantage of important global trends in mobility, data analytics, and the Internet of Things. We will continue to focus on maintaining the high performers of our current operations, as we plan for the integration with the enterprise business to deliver attractive returns for our shareholders. Thank you for your attention today. I will 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 and I will be available after the call for any further discussions.

Thank you. We will now begin the question and answer session. (Operator Instructions). Please wait while the questions register. And our first question comes from Brian Drab from William Blair. Please go ahead. Brian, your line is now open. We'll go on to the next question. Our next question comes from Andrew Spinola from Wells Fargo. Please go ahead.

Thank you. I was wondering if you could comment on the Motorola results today. I don't know how much time you had to look at them, but the enterprise business was down 8% versus roughly 1% in Q1. It sounds like Motorola thinks that it was mostly a one-time blip, and that the business should grow for the year. Have you had a chance to look at that, and are you comfortable with what they're saying is going on in that business, and the ability to return that business to growth?

Yes. So we've had some time to look at those numbers, and we were aware of what Motorola was going to say, I think generally on their call. The underperformance, as far as we can understand, is driven by some performance issues around supply chain execution. Some other integration execution issues around Zion, and sales execution in Asia with some demand, as I see it. When we looked at those issues they do seem to be something that are fixable, with a good amount of focus, and we obviously we'll apply our singular focus to the business of being a larger company in the enterprise asset intelligence space. And we believe the underlying markets are performing quite well, and Q3 should be a stronger quarter. They mentioned I think on their call that they have better backlog, had a lot of new good wins, particularly on the Android devices at the beginning of the quarter. So we remain very excited about the overall acquisition, and confident in our ability to generate good, attractive returns for shareholders.

So is it fair to say that given the time you've had to look at is that business, you're still comfortable with your 4% to 5% growth guidance for the pro forma business going forward?

Yes, we think that's a fair target for us. We believe, we are not prepared to change that at this stage. And we have, we believe we have a strong track record around execution, and how to really focus on execution and driving value, and that is certainly something we will be doing as we go forward.

Our next question comes from Keith Housum from Northcoast Research.

Thanks guys, great quarter. Thanks for taking my question here. I guess Anders and Mike, can you guys provide any detail about what drove the increase in the cost and energy exploitation from $100 million to $150 million? And then what's the starting point for investors to look at? Is it the number that was provided in the 8-K on April 15? Or is the number that we can back into based on the 8-K that Motorola provided last week?

Yes. So this is Mike Smiley. First of all, I think as we've had some time to sort of dig into the numbers, we have been able to spend some time on the cost of goods sold, and as a result of that, we see ourselves going from the $100 million to $150 million. I would say also we've been spending a lot more time sort of thinking through our plans of how we execute on those synergies. And as a result we think that the run rate when we get in 2017 will be roughly $150 million better off than they were in 2013. So that's sort of the direction that we're putting together, and we feel confident about that.

Okay. Can you remind me about the closing, I think I heard you say you expect the deal to close by the end of the year, but I thought I recall some conversations perhaps with you guys perhaps with investors, that they were thinking timing would be closer to the beginning of the fourth quarter. What's the expectation for the when the deal will close?

So we've said the second half of the year as we have been working very hard in closing that transaction. Our first priority and I think Mike Terzich can talk to that, is to make sure that we are able to continue to satisfy our customers when we close that acquisition, and so as we do that we're trying to be focused, and having a clean close, and so we said that second half of the year, and we're confident that's what we'll do. Mike, do you want to add any color on that?

No, I think the, I guess the only other point to that Keith is the second half is rapidly advancing, and a likely position for us is going to be fourth quarter on that close. And to Mike's point, we're hard at work right now in the middle of lots of detailed integration planning to make sure we could stand that business up, and run it effectively on day one.

And our next question comes from Brian Drab from William Blair. Please go ahead.

I hope you can hear me now.

Hey, Brian.

Okay. I don't know what happened there. My mike was on. So first question, just on the retail strength that you continue to see, can you tell us today what percentage of your revenue just for the legacy Zebra business is coming from retail, roughly? And then is this strength coming more on the e-tail side, meaning of course, like distribution centers for online retailers, or on the traditional brick and mortar retailer side, or both?

I think on a global basis we think about 25% of our revenues come from retail, so that's the broader number. It's been fairly steady. It's probably gone up a little bit this year, as we've seen retail being one of our strongest performing verticals. But it's not radically different from what it's been historically. And maybe Mike can provide some extra color on the warehousing and other things.

Okay. Brian, now I think Anders is right on the market, it's about 25% globally. It's different in each of the geographic regions. We're enjoying certainly a very robust retail outlook and performance in North America, we're seeing Europe come back online and the smaller regions, Asia Pacific, Latin America, it is a little bit more of a trailing affect, a little bit of lift in Asia given the rising middle class phenomena that is under way. As far as the application space, a lot of what we're seeing has been more in line with the traditional applications, where Zebra has been a little bit more in the aisle back of store, back of room. There has been a long overdue somewhat borne out of necessity requirement to refresh some aging technology. And that certainly has been put into play, and I think that's what we're seeing in the numbers.

Okay. Thanks. That's helpful. And then just given the recent press release on the NFL, and first of all, thanks for giving us some technology to make the NFL season even more fun, and can you talk a little bit about that? And is this going to be meaningful in terms of revenue? Are the broadcasters potentially going to mention Zebra, or is your name going to appear during the games? And I know this is a lot of questions. When might the revenue hit, second quarter, third quarter? And can you talk at all about opportunity per stadium? I know you're putting sensors in all of these columns throughout the stadium.

Yes, so we're very excited about the opportunity. We think it's a great example of highlighting the Internet of Things, enterprise asset intelligence for us, and how we can really bring this ability to operations. So to the physical world and tie that back into applications and the internet. So we've been working with the NFL for quite a long time to pilot the systems last year, and then start rolling it out this year. The original, the initial agreement here is to implement it in 17 stadiums, so its first and foremost all the stadiums that have Thursday football night games, but all teams would be part of that. This is for the NFL wide. Our expectation is we will roll it out for all the 31 stadiums later for this year also. We aren't going to comment on the commercial terms, particularly here, but we are excited about the opportunity and the revenue will start hitting second half of this year.

For us I think the big opportunity is to take this beyond the NFL. We have already made an announcement about Mark Waltrip Racing, it was in May for NASCAR, they use it both for practice and pit crew for evaluating pit crews and get more efficiencies out of pit crews. We also have it on a Ladies' soccer team in China, a hockey team in Russia. We have lots of conversations now with basically all major leagues, to see how they can take advantage of our sports analytics packages. So I think that there will be lots of other types of sports doing this, and going after also the practice fields for the NFL.

And I would say one of the biggest themes that I hear when we talk to professional football leagues is around how to get more people to attend the games. When they do attend the games, provide some enhanced value. So part of what we can do with our solution is that we can provide new experiences for people who are at the games. And we can also allow fans to engage with their teams in between games. So you can do fantasy football, or other things that can be shared in a totally different way. I think from a sports franchise perspective, this is a great way of really having a much closer relationship with the fans, and help that to improve their franchises.

(Operator Instructions). Our next question comes from Michael Kim from Imperial Capital. Please go ahead.

Hi, good morning guys. It sounded like a bit of a return in large deal activity, just curious if you could comment if you see that continuing through the balance of the year? Also on the run rate business, if you see the channel inventory levels sort of normalize from historical levels?

So I'll start and I'll ask Mike Terzich to amplify a little bit here. First on the channel inventory, it's very healthy today. There are no abnormalities I guess you could say in our channel inventory. We feel it is at appropriate levels across globe. Large deal activity has been, and the run rate business continues to do well. A run rate business is strong, the majority of our business. Large deal activity has picked up quite nicely this year. It really started in the second half of last year, and continued through the first half, and we see strong pipeline across the globe for the second half of this year. So we feel the business is in good shape and we are competitively very well positioned also.

Michael just a couple other points on that. That is correct. I think the pipeline has increased in both value and volume, in every geographic region that we serve. Most notably North America and Europe, but we also have a very strong pipeline that has been evolving in Asia Pacific, specifically Asia more around managing vertical and the T&L market has been very robust in Asia, as it continues to expand. In Europe, it is nicely balanced. That pipeline has some opportunity in the retail space. In the T&L space and in healthcare. And in North America, as we said earlier on the call, it's been driven by quite a bit of retail refresh, but also the T&L space has got some nice opportunities, as well. So we're feeling at this stage in the year we're in really good shape, and to Anders earlier point, run rate remains solid in all geographic regions, and inventory levels are in very good position.

Okay. Great, and just specifically on that Latin America region, can you remind us how important Brazil is as a country market, and if you see an opportunity to sort of turn that positive now that we're past the World Cup period?

Brazil is an important part of Latin America. Mexico is the largest country for us. In Latin America with Brazil being the second one. But I would say over the last several years, the Latin America market has become more diversified for us. We've seen great growth in countries like Colombia, Chile has been another one. Other markets are growing faster than some of the largest markets, and that's been very nice to see. Brazil has always been a bit more volatile for us. Last year we had a tougher comp, we had a large deal that didn't repeat itself in this quarter. And our belief is that the World Cup didn't help the business momentum in Brazil, but we still believe Brazil is a good market for us, and that there's going to be a lot of demand for our products there.

Our next question comes from Andrew Spinola from Wells Fargo. Please go ahead.

Thanks. Can I ask you to maybe drill down a little bit more on the synergies. Do you have a sense of maybe how the full $150 million you expect to be realized, sort of however you think about it, XYZ amount in 2015 and 2016, and/or just general does the $50 million come more front end loaded or back end loaded, the incremental $50 million? Thanks.

This is Mike Smiley. I don't think we have, we're still working on exactly when that's going to fall out. We do think that there's a meaningful portion that comes in the first year, but maybe more towards the back half of the first year. But again, I think that the big reason for the increase from $100 million to $150 million is again because of looking at our raw material costs, and then the other piece is the fact as we look through the activities that helped us achieve the $150 million outside of the parts cost, we see the ability to do those a little sooner than we had expected. I will tell you when we did the $100 million that was our best estimate at that time. So I think the $150 million is a more studied view today. But it's a little bit premature to give you a better view of exactly when that's going to fall out year-to-year.

Fair enough. Thanks. And on supplies, that business continues to do quite well. It sounds like the environment is generally pretty good in your markets. Do you think this business can continue to run at rates above the corporate average sort of around 10% maybe going forward?

Yes, we are very bullish on the supplies business. First, I would say it's a very, very large market, and we have a very small market share. In North America, we are the most penetrated, and it's been a high growth business for us here. But if you look at markets like Asia Pac and Latin America, we are just starting to work on Healthcare products there. And we had actually the strongest growth in the quarter for supplies was from Asian Pac and Latin America. Another area which we think still has lots of growth opportunities for us for supplies, is in Healthcare for wristbanding and other labeling for Healthcare.

(Operator Instructions). And our next question comes from Keith Housum from Northcoast Research, please go ahead.

Hey this question is for Mike Smiley just a follow-up. Can you help us drill down the $150 million synergies, is that coming from the number that investor can back into off of Motorola's 8-K, or is that from the numbers that were provided with the April 15th 8-K when the deal was announced?

Are you talking Keith about stranded costs?

Yes, because there's a little bit of question about what exactly you guys are inheriting, in terms of operating expenses and things of that nature. As we try to back into the numbers and look at them, I think we look at two different scenarios. So I just wanted to understand what our starting point is?

I guess, Keith, what I don't want to do, and I can't really tell you exactly the math that makes up the $100 million, that's something you have to ask MSI on, so our numbers is basically looking at the starting point of what we see for 2013. And looking for what we see as an optimal organization going forward, as well as understanding opportunities in reducing the cost of our materials. So it's not really reconciled off of the $100 million that MSI gave us. By the way I think stranded cost is a definition which sometimes can give the idea that these are costs that are in our business, and we are going over. But some of these costs were never really coming over, and not expected to be sort of a burden to our P&L. So I think if you try to reconcile those two numbers, that may be difficult to do.

Okay. I appreciate the commentary there. And if I come back to the core business, if we fast forward your guys conversation was a little bit more focused on the refresh cycle, where if I understood from what you said from today's script, it's more driven by the penetration in the verticals that you play in, is that a correct understanding, or do you think the mix of volume growth is more equalized between both the refresh cycle and increased penetration?

This is Mike Terzich. I think you're correct. I think certainly in the past quarter as we talked to the point of the refresh cycle, from an experience perspective, we know that the cycles last hard to say, how to predict how long they run. Historically they've run longer than the one we're in right now, but we also know that market dynamics have changed a little bit relative to some of the globalization, and some of the competitive issues. So at this point, I would say that the balance in the quarterly performance shifted on us a little bit away from the run rate, and a little bit more towards the deal opportunity, which is not uncommon. If you look at the surge we have seen in Europe, and the robust outlook we have in North America, we're enjoying the deal activity on top of the run rate. But we've seen a little moderation in the run rate.

I would say also the refresh, the large deals are often refresh but not always refresh. And we do penetrate more deeply into some of our existing accounts with large deals, and I will say this quarter we had some very nice large deals in manufacturing in China going into local domestic Chinese manufacturers who bought our high end XI printers, so we still are continuing to drive further penetration into all of our verticals on a global basis, and that provides a good growth opportunity for us.

Our next question comes from Greg Halter from Great Lakes Review. Please go ahead.

Yes, good morning and congratulations on the excellent results.

Thank you.

Just wanted to see if I could get your thoughts on how your three large customers did in the quarter, and what you're seeing going forward there?

Yes, this is Mike Smiley. I don't think we had huge changes in the top three. Keep in mind those are all vendors, distributors, and so they're not really representative sort of the three largest end customers. But we didn't see overall any major changes in those top three customers.

Alright. And as I understand the MSI piece works with them as well?

Yes.

One last one for you on the product innovation side, the Zatar integration with iBeacon, just wondering if you could comment on how that is going?

Zatar in general we continue to be very excited about the opportunity that offers, our pipeline is growing, and we continue to work on expanding the functionality of Zatar Beacon is one application that we've seen a lot of interest around, primarily I would say two use cases, one is in retail where the beaconing can be used to do locationing of shoppers in a store, and help push couponing and other things to them. We can do that with Zatar in different ways. We can use your smartphone for this, which is how other Beacon solutions work, or we can put it up on a more common screen, which is quite unique for what it can do. We also see in use cases for this in Healthcare, for say helping to direct somebody who comes in at the general inquiry desk and want to find radiology, they can use beaconing technology to guide them for how to walk through the maze of the hospital.

We have no further questions. I will now turn the call back over to Doug Fox for closing comments.

Thank you everybody for joining us today. Just as a reminder, our next scheduled quarterly conference call will be on November 4th. So everybody have a good day. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.