Transcript of
Zebra Technologies
Corporation (ZBRA)
Second Quarter 2009 Results
Conference Call
August 4, 2009
Executives
Douglas A. Fox, Vice President Investor Relations - Zebra
Technologies Corporation
Anders Gustafsson - Chief Executive Officer - Zebra
Technologies Corporation
Michael C. Smiley – Chief Financial Officer – Zebra
Technologies Corporation
Mike Terzich - SVP of Global Sales and Marketing -
Specialty Printer Group – Zebra Technologies Corporation
Analysts
Brian Drab – William & Blair
Company
Chris Quilty – Raymond James
Reik Read – Robert W. Bear
Mark Strauss – JP Morgan
Anthony Kure – KeyBanc Capital
Markets
Andy Young - Thomas Weisel
Partners
Richard Davis – Richard W. Davis
Greg Halter - Great Lakes Review
Operator
Good morning and welcome to Zebra
Technologies 2009 Second Quarter earning’s release conference call.
Joining us from Zebra Technologies are Anders
Gustafsson, CEO, Mike Smiley, CFO, and Douglas 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 the
questions. 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.
Douglas Fox of Zebra Technologies. Sir, you may begin.
Douglas A. Fox, Vice President
Investor Relations - Zebra Technologies Corporation
Thank
you, and good morning. Thank you for joining us today. Certain statements made
on this call will relate to future events or circumstances, and therefore will
be forward-looking statements within the meaning of the Securities Litigation
Reform Act of 1995.
Words such as expect, believe, and anticipate,
are a few examples of words identifying a forward-looking statement.
Forward-looking information is subject to various risks and uncertainties,
which could significantly affect expected results. Risk factors were noted in
the news release issued this morning, and are also described in Zebra's 10-K
for the year ended December 31, 2008, which is on file with the SEC.
Now, let me turn the call over to Anders
Gustafsson for some brief opening remarks
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
Thank you, Doug and good morning everyone.
Here in the room with me are Mike Smiley our CFO, and Mike Terzich our SVP of
Global Sales and Marketing for the Specialty Printing Group.
Today we reported second quarter sales of $188
million and EPS excluding exit and restructuring costs of $0.19, both within
our guidance range. We delivered solid performance by maintaining effective
control over operating expenses, working capital, and sales execution. Although
the business climate remains challenged, we began to see signs of stabilization
during the quarter. Larger deal activity resumed and pipeline levels and conversion
rates also improved. We are well positioned to benefit from this environment
both in the near and long term.
Our global industry leadership across
multiple dimensions gives us the ability to gain share and capture ample profitable
growth opportunities as we position Zebra for significant earnings leverage
when business conditions improve.
Overall I was pleased with how Zebra
employees continued to prudently operate the business by executing well in the
areas within our control. We continued to reduce operating expenses. We also
did a great job managing inventories and receivables that allowed us to deliver
strong free cash flow.
Zebra Enterprise Solutions, also known as
ZES, achieved adjusted EBITDA or cash earnings breakeven for the second
consecutive quarter and we continue to expect ZES to achieve cash earnings
breakeven for the full year.
In addition, our manufacturing outsourcing
and ERP projects are progressing on target and within budget and we expect to
achieve the operational efficiencies and cost savings outlined earlier. In the
Americas we saw a return of some large deal activity, a sign that customers
are willing to commit to projects that have rapid, quantifiable paybacks.
Latin America and Asia-Pacific had positive sequential growth, but Europe remained more challenged. In addition, distributors around the world continued to
type in inventories particularly in Asia, and our runrate business remained
weaker than this time last year.
We ended the quarter however, with an
improving backlog which gives us increased confidence that the business
environment is stabilizing. We had a healthy diversity of wins in key
verticals including retail, healthcare, direct store delivery and logistics. We
are pleased with the increasing demand for our HC100 Wrist Band Printer, which
continues to gain traction for improving patient safety in hospitals and other
healthcare venues. In addition, we had some rewarding wins in retail including
further deployments of Kiosk Printers. We also won a strategically important
piece of business for our rugged RW Series of mobile printers with a major food
distributor this quarter. As we noted in the first quarter the global slowdown
in manufacturing resulted in a proportionately greater decline in sales of high
performance and mid range printers. This change in product mix continued to
put pressure on gross margins. There is nothing permanent however, about the
gross margin reduction. We remain confident that gross margins can and will
return to historical levels as mix and volume return and the benefits of
outsourcing kick in.
While we protect the key investments that
drive long term sales and profitable growth we continued to pursue further
expense reductions to align costs with business activity. In the second
quarter operating expenses declined 24% from a year ago and an additional 3%
from the first quarter. We will continue to look at ways to adjust our cost
structure to drive long term structural changes in the business and reallocate
resources to activities with the highest risk adjusted returns. Operationally
our supply chain transformation remains on track to realize 2.5 to 3 percentage
points in gross margin improvement in 2010. In our Q1 call we discussed that
we had moved 59% of our printer production to Jabil. As of today that number has
increased to 90%. Over the next two quarters we will be ramping down our US manufacturing infrastructure before the full financial benefits of the project are
realized. We have already begun to realize some operational benefits of our
ERP implementation, which continues on schedule and within budget.
During the first half of 2009, we implemented
modules for payroll, human resources, procurement and payables and portions of
our general ledger. Both the outsourcing and ERP projects would help Zebra
deliver better customer service and greater operational efficiency. Turning to
Zebra Enterprise Solutions, I am pleased to report we continued to make good
progress in achieving the milestones that we provided earlier this year. For
the second quarter we had a strong sequential increase in sales into industrial
manufacturing and government, a result of more concentrated efforts to
diversify our base of industrial customers beyond the automotive sector. Again
we are on track to achieve our stated goals for ZES. During the second quarter
we had 18 major “go lives” with customers around the world bringing our
year-to-date number to 30 against our goal of 50. We signed five new channel
partners in Q2, which brings our total to eight against our goal of 20. For
the quarter more than 35% of bookings in the automotive and the industrial
manufacturing sector were partner generated deals. Integrators remain highly
interested in participating in our channel program and we are confident in
meeting our goal of signing 20 for the year.
Lastly, we had four new cross-sales into
adjacent markets bringing our total for the year to 11, on schedule to achieve
this year’s goal of 25. These are all the encouraging results and we are
confident we will meet our goals for the year. We also remain focused on our
disciplined capital allocation strategy to deliver the highest risk adjusted
returns on our investments, to build enduring shareholder value. Our highest
priority continues to be maintaining financial strength and flexibility to
navigate effectively through this challenging environment. We have also
continued to repurchase shares as our stock remained attractive on a risk
adjusted basis. During the second quarter we used $13 million to buyback
600,000 shares. Since the beginning of 2008 we have deployed $200 million to
buyback 8.3 million shares with 12.5% of our shares outstanding.
In conclusion, at this half way point in 2009
we are encouraged by the signs of stability within the current business
environment. Customers are once again willing to engage in discussions about
larger business improvement projects that offer rapid, quantifiable paybacks.
However, we are mindful of the ongoing challenging business conditions and will
maintain our aggressive approach to sustain financial strength, align expenses
with sales, and position the company for improving returns and earnings
leverage when market conditions improve. Looking beyond this quarter we see
long term prospects for Zebra as excellent. Significant opportunities exist to
extend our global leadership in speciality printing and other asset tracking
technologies that offer real business improvement benefits. With the industry’s
leading brand, strongest channels, broadest product line and global presence we
have continued to invest prudently through this downturn to position Zebra for
accelerating sales and improving profitability. These investments are focused
on expanding our product line, building even stronger channels and extending
Zebra’s already considerable global reach into key markets. All of these
objectives will help us continue to move up the value chain and become a more
strategic business partner as well as improve our overall competitive position.
I would now like to turn the call to our CFO
Mike Smiley to provide a detailed review of our second quarter results and guidance
for the third quarter of 2009. After Mike’s remarks I will return for some
brief closing comments on our outlook.
Michael C. Smiley – Chief Financial
Officer – Zebra Technologies Corporation
Thank you, Anders. Let me highlight the key
financial year-over-year drivers for the quarter. The story is much the same as
for the first quarter. Sales were down comparably on a percentage basis in all
regions against peak sales in the second quarter of 2008. Gross margin was
affected by mix and volume which affected overhead absorption. Operating
expenses decreased in line with the sales decline, with the biggest reductions
in sales and marketing and amortization of intangibles. We did a great job
managing working capital with sequential declines in inventories.
Let’s take a look at sales. For the quarter
sales were down 26% from peak sales a year ago and down 3% from the first
quarter. Sales in the Specialty Printer Group were down 27% from a year ago,
but down only 2% from the prior quarter. As Anders mentioned large deal
activity began to return in North America with mobile business in mobile
workforce solutions, healthcare and government. Even with the slowdown we are
comfortable, we maintained or extended our global leadership position. Enterprise solutions sales of $20 million were at the high end of our guidance range. Let’s
take a look at sales by product line. The brunt of the sales decline occurred
in hardware which was down 33% to $125 million from last year and represented
67% of total sales. Sequentially hardware sales were up less than 1%. On a unit
basis printers shipped declined 14% from a year ago, so we are up 3% from the
first quarter. Supply sales of $36 million were down 19% and comprised 19% of
the total sales, which is up from 17% of total sales a year ago. Service and
software revenue continued to increase as a percentage of sales reaching 14%
for the second quarter up from 11% last year. By region we had comparable
sales decline between 25% and 30%. Foreign exchange had an unfavorable impact
on sales of $3.4 million or 1.3% from a year ago with an average euro rate of
1.38 for the quarter versus 1.56 last year.
As Anders commented we had greater weakness
in our higher priced high end and mid range printer lines from the extreme
slowdown in manufacturing across the globe. This mix change with relatively
better sales performance from desktop and mobile printers along with a greater
proportion of supply sales put downward pressure on gross margins.
Consolidated gross profit margin of 43.6% was down from a peak of 50.3% a year
ago and 44.6% in the first quarter. Effective mix in lower volumes which
negatively affected overhead absorption primarily drove lower gross margins in
the quarter. For the quarter especially printing group gross margin came in at
41.6% down from 40.5% a year ago and 40.31% for the first quarter. We view
this decline as temporary and expect margins to rebound as volumes increase,
product mix improves and our outsourcing is completed.
ZES margins however had a healthy increase
moving to 49.1% a year ago and 55.6% for the first quarter to 60% in the
current period. Better margins on services and on improved mix of business
helped to further push up profitability of this segment. We maintained
excellent control over operating expenses. Second quarter total operating
expenses were down $21 million or 24% from last year. They were down an additional
$2.3 million or 3% from the first quarter. Year-over-year the biggest changes
in operating expenses occurred in the areas of payroll and other
employee-related expenses from the cost actions we have taken over the past
year. The decline includes reduction in payroll cost as employees were
encouraged to start the summer by taking Fridays off in May as vacation, the
cost of which was previously accrued. Lower costs for business development,
legal fees, travel and entertainment and project expenses also contributed to
the downward move in operating expenses from a year ago. Amortization
decreased $2.1 million, the result of impairment charges taken in the fourth
quarter. For the year in investment portfolio -- for the quarter, the
investment portfolio had an annualized return of 4.5%. Year-over-year
investment income was down principally because of lower interest rates and cash
balances from the buyback of Zebra stock.
Net income excluding $0.4 per share in exit
and restructuring cost came in at $0.19 per diluted share on $59.4 million
average shares outstanding. Stock buybacks continued to push down the number of
shares of Zebra stock outstanding. During the second quarter we bought back
600,000 shares of Zebra stock at an average price of $18.4. The volume
repurchase was down from previous periods largely because of the tighter cash
flow we experienced in the first quarter. We now have 3.1 million shares
remaining authorized for repurchase. We ended the quarter with 59.1 million
shares outstanding. Net receivables were up slightly from the first quarter due
to the timing of shipments and collections. Still the day sales outstanding
were at a comfortable 67 days compared with 65 days for the first quarter.
Inventories declined 8 million from the first quarter with churns increasing
from 4.2 to 4.4 times. Finally, we ended the quarter with 207 million in cash
investments up from 189 million at the end of the first quarter. This was also
a very good cash generating quarter for Zebra. Free cash flow amounted to $28
million. In addition to effective control over working capital, capital
expenditures totaled approximately $6 million, which is down from previous
quarters and closer to a more normalized rate, now that we are largely past the
elevated expenditures for our ERP and outsourcing projects.
Let me turn for a moment to capital
allocation. Like all companies Zebra has five potential uses for excess
resources to build shareholder value. Less internal projects, reduced staff,
pay dividends, make acquisitions or buyback stock. Given the current business
environment our highest priority is to maintain sufficient liquidity and
balance sheet strength to insure we can support our business objectives under
any economic scenario. At this juncture, share repurchases remain as our highest
returning investment alternative on a risk adjusted basis. In addition, our focus
continues to be increasing the returns at ZES before we have any more
acquisitions in this area.
Now let us look at our third quarter
forecast. We are forecasting sales of $186 to $198 million. This forecast
consists of expectations for Zebra, especially printing group sales in the
range of $168 million to $178 million and Zebra Enterprise Solutions sales
between $18 and $20 million. The forecast reflects the seasonally slow third
quarter particularly in Europe, in corporates, and average US Dollar-Euro
exchange rate of 1.4 compared with 1.38 in the second quarter. Our forecast
assumes gross profit margin in the range of 44.3% to 46% reflecting a portion
of the benefit of outsourcing and a modest improvement in product mix. We
expect GAAP operating expenses at 71 to 74 million. This is up slightly from
Q2 as we do not expect to see as much of a benefit from employees taking a vacation
like we experienced in the second quarter. GAAP earnings are expected in the
range of $0.14 to $0.21 per share. We are estimating exit, restructuring and
integration expenses to have a $0.3 per share impact on EPS. The income tax
rate will be 32%. That concludes my formal remarks. Thank you for your
attention. Now here is Anders for some concluding comments.
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
Thank you, Mike. In challenging times it is
even more important for companies to understand their growth opportunities and
the pathways for increasing shareholder value. During this downturn we have
increased our dialogue with end users and channel partners and we have
reconfirmed the soundness of our business strategy. We are even more confident
in the opportunities for profitable growth in speciality printing, and we are
making the right moves to drive future success of Zebra Technologies. In this
turbulent environment customers are consolidating their relationships with
companies that can meet more of their needs. We are well-positioned today and
we will become stronger by selectively investing in areas that will enable us
to gain share and build on our industry leading customer base as business
recovers.
Geographic expansion continues to be a top
priority. Asia is one region which we have an opportunity to penetrate more fully
over the next 12-18 months. We have added more than a dozen sales and
marketing employees to the region over the past year and we intent to add
more. We continue to invest in growth through expansion of our channel-centric
model to facilitate the placement of Zebra products with more customers around
the world. We are focusing on growing our global base of value added resellers
and on building relationships with large system integrators and independent
software vendors or ISVs, which are a natural extension of our channel model.
This group of partners will help Zebra move further up the value chain with
large enterprise customers, penetrate existing targeted verticals more deeply,
and enable entry into new areas of opportunities more quickly and efficiently.
Ultimately strengthening our channels will help us serve our current base of
customers more effectively as well as expand the number of customers we serve.
Zebra consistently ranks among the highest in the industry in terms of customer
satisfaction and loyalty as measured by net promoter scores. This loyalty has
led to a high level of repeat business. Broader channels help Zebra serve an
increasingly diverse range of customers from value users of thermal printing to
those who placed a premium on innovation, software and connectivity to track
assets in a smarter way.
With signs of stabilization in a still
challenging business climate we will continue to balance two key priorities,
for serving near term profitability with pursuing long term opportunities. Our
results demonstrate the effectiveness of our actions. We are using our
financial strength and flexibility, industry leadership and focus on the
customer to drive greater success and create shareholder value by directing our
resources to areas that have the highest risk adjusted returns. Our Zebra
employees continue to do an excellent job in maintaining global leadership by
capturing more available opportunities through meeting customer needs. This
concludes our prepared remarks. We would now be happy to take your questions.
Operator
Thank you. We will now be conducting a question
and answer session. If you would like to ask a question, please press *1 on
your telephone keypad. A confirmation tone will indicate your line is in the
question queue. You may press *2 if you would like to remove your question
from the queue. For participants using speaker equipment, it may be necessary
to pick up your handset before pressing the * keys. Our First question is from
the line of Brian Drab with William & Blair and Company. Please state your
question.
Brian Drab – William & Blair
Company
Good morning guys.
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
Good morning.
Michael C. Smiley – Chief Financial
Officer – Zebra Technologies Corporation
Good morning.
Brian Drab – William & Blair
Company
Good morning. First question is just around
the market share gains or potential market gains that you think you might be
seeing globally. Could you talk about that a little more in detail, within
specific geographies and markets and product lines where you think you might be
gaining some share?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
I think overall we believe that we are pulled
in or extending our share in our product lines across the world. One area that
we have put more emphasis on has been mobile workforce. We believe that we
have been doing quite well there for the last while. Healthcare is a market
that we believe we are also doing well in today and growing and I would say
government is another market for us that we believe we are doing quite well in.
Brian Drab – William & Blair
Company
Okay great, and within specific geographies,
any particular geographies you think you are doing better than others?
Mike Terzich - SVP of Global Sales and
Marketing - Specialty Printer Group – Zebra Technologies Corporation
This is Mike Terzich.
Brian Drab – William & Blair
Company
Hi, Mike. How are you doing?
Mike Terzich - SVP of Global Sales and
Marketing - Specialty Printer Group – Zebra Technologies Corporation
Specific to geography the mobile workforce
opportunities have been prominent for us in North America and in Latin America. Healthcare has been very solid both in North America and in Europe and the
government has been also concentrated in North America and Europe, government
inclusive of some of the postal opportunities in Europe and through the armed
forces department of defense in the United States.
Brian Drab – William & Blair
Company
Okay great and sir, one more question, at the
end of first quarter a sense that you gave us I believe was that inventory
reductions, that your distributors had pretty much played out and you didn’t
think you’d feel the effects of that to any great extent in the second
quarter. What effect did inventory reductions at distributors have on your
sales in the second quarter?
Mike Terzich - SVP of Global Sales and
Marketing - Specialty Printer Group – Zebra Technologies Corporation
There was some impact of inventory reductions
in the second quarter. I think sales out of some of our distributors on a
worldwide basis continued to reduce a bit but they also increased the inventory
return targets they had, so we believe that at this stage the inventory correction
is really behind us and at this point we should see nice flow for the orders as
they receive them.
Brian Drab – William & Blair
Company
Hey great. Thank you.
Operator
Thank you. Our next question is from the
line of Chris Quilty with Raymond James. Please state your question.
Chris Quilty – Raymond James
Good morning gentlemen. I was hoping that
you could help us quantify a little bit better this cumulated cost savings we
should be seeing by next year in two areas, one on the manufacturing side, I
know you had talked about incrementally picking up $20 million or more once the
US base manufacturing is shut down? That is the first one. The second one
would be the ERP spending, when that will tail off and what the incremental
pick up might be for next year?
Mike Terzich - SVP of Global Sales and
Marketing - Specialty Printer Group – Zebra Technologies Corporation
First of all on the growth margin, I think we
mentioned that from second quarter to our third quarter forecast we are seeing
a little bit of the benefit of the outsourcing and the improvement of that
gross margin. We expect if you look at from Q2 to what we are going to see on
2010 you know, the figure we have given you before still remains intact. Again
you know as volumes increase the savings will increase, as volumes decline,
savings goes down, but at this level we are sort in the ballpark of what we
have been telling you all along.
As far as the ERP spending I think if you
look at our capital expenditures you can see that for the quarter they were
down. I think a lot of the heavy cash flow has -- already went through a lot
of it for 2008 and we expect sort of the current levels roughly to be sort of
where we see ourselves going forward. Again 2008 had both the ERP implementation
and some CapEx associated with the outsourcing. So we will again I think in
2009, and we are not quantifying this, but in 2009 we are in some respects
carrying two sets of ERPs, because we are not sort of switching one off and
turning one on at the same time, we are trying to take something that’s a
little bit less risky, so as a result going through our P&L, we have
software cost and maintenance on legacy systems as well as new systems. And so
at the end of 2011 we will sort of see ourselves through most of the ERP
implementation.
Chris Quilty – Raymond James
Okay, and have you quantified any tax, cost
savings from the offshoring and not that the administration might not take
those away but…?
Mike Terzich - SVP of Global Sales and
Marketing - Specialty Printer Group – Zebra Technologies Corporation
Well the 32% rate is meant to reflect sort of
the potential tax benefits of outsourcing for this year. We have not really
computed -- I think it is, you brought up – you bring up a very good point. It
is difficult to know how the administration is going to affect our tax benefits
in 2010 and going forward, so at this point we are not really giving a figure
out for that.
Chris Quilty – Raymond James
Okay, thank you.
Operator
Our next question is from the line of Reik
Read with Robert W. Bear. Please state your question.
Reik Read – Robert W. Bear
Good morning.
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
Good morning.
Michael C. Smiley – Chief Financial
Officer – Zebra Technologies Corporation
Good morning.
Reik Read – Robert W. Bear
Good morning, Anders in your comments you had
mentioned that the pipeline is building and just could you clarify that a
little bit, I know it looked that the printing business is one of our turns
business with minimal pipeline and may be in the Enterprise Solutions group
there is more of a pipeline but could you just clarify what you mean there?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
The number of activities, the number of deals
that we see in our pipeline has been increasing, so you know, that gives us some
better confidence about the outlook. We have also seen better conversion rates
of deals, the actual deals that end up in our pipeline or have a higher
proportion of getting closed, and third I would say as we entered the third
quarter we actually had the healthiest backlog that we have seen in the last
year.
Reik Read – Robert W. Bear
And when you talk about a backlog and
pipeline, are these deals that your sales force is going out and earning and
they may be fulfilled to the channel in some quick fashion?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
Yeah. These are deals that we and/or our channel
are working on. So we are aware of the number of deals that our channel works
on that we aren’t necessarily involved with directly ourselves, but we are also
helping doing a high touch model with our sales channel partners to ensure that
they get the full support, as much benefit as they can, from our resources.
Reik Read – Robert W. Bear
Okay, and with respect to your guidance can
you talk a little bit about what your assumptions are for hitting the 186
number versus the 198, i.e. the low and the high end of the range?
Michael C. Smiley – Chief Financial
Officer – Zebra Technologies Corporation
So we are in the third quarter which is a
little bit, you know, I think, given what Anders was saying about the pipeline,
saying that we felt good, I think the hard part about predicting the forecast
is we are going into what is you know, in Europe, holiday season, so we are
trying to balance sort of the – on one hand knowing that we have a holiday,
somewhat like going around the moon on Apollo 13, on the back side for Emia,
so we are trying to balance the fact that we don’t know exactly how the holiday
will affect us, but we are also sort of seeing right now, things are looking
attractive and so that is how we have tried to balance that range.
Reik Read – Robert W. Bear
And you mean attractive in Europe as well as North America?
Mike Terzich - SVP of Global Sales and
Marketing - Specialty Printer Group – Zebra Technologies Corporation
Reik, this is Mike Terzich. Yes, that is
what it means, you know, the July we felt pretty comfortable with July, but we
recognized that typically August is the month of European holiday and with the
broader economic situation still prevalent, it was just not certain how that
holiday season is going to play out, but we liked the way July looked and we feel
pretty comfortable with the range.
Reik Read – Robert W. Bear
Okay and then Mike since we have you on the
phone, could you maybe give us just a little bit of an update on some of the
key vertical markets, manufacturing, transportation, logistics, and retail and
what you are just generally seeing in the marketplace?
Michael C. Smiley – Chief Financial
Officer – Zebra Technologies Corporation
Well I think in Anders earlier comments, I
think with certainty the manufacturing, the extended manufacturing supply chain
including the transportation sector has been the most challenging market that
we are seeing, and that kind of on a global basis, not only in the West but
also in just about every one of the export dependent international markets as
well. Where are the opportunities – where we have seen opportunities including
the pipeline comment that Anders made earlier, is in a couple of markets
particularly in what we call mobile workforce, which is a lot in the direct
store delivery space, as an example where the efficiency of our solutions even
in tougher economic environments, there is quite a bit of interest right now
for the folks that are delivering goods and services in the field to streamline
printing solutions, so that has created some opportunity. Healthcare has been
very good and continues to be pretty robust for us globally, for that matter we
are really well-positioned there with the partners and the solutions we have.
And the retail space is a bit hit or miss right now, and what I mean by that is
you look at the high branded goods retailers and their business obviously is
soft, they feed, offers the same store sales as a key metric for IT solution
deployment, the box retailers, the discount retailers, you know, that business
has been good, and so we are seeing some interest in some of the larger project
deployment to serve that space, so it is really a mixed bag.
Reik Read – Robert W. Bear
And just real quickly two follow-ups on what
you just said, one on the retail side of things. Can you just talk a little --
you guys have been talking about trying to diversify that retail space for a
while, to what extent is that helping to offset some of the more general
weakness and then on the healthcare front, if you look at the stimulus spending
and I know that that is going to a lot of different spaces, but there is $23
billion that are floating out there for IT in healthcare, how much of that can
you guys capture.
Michael C. Smiley – Chief Financial
Officer – Zebra Technologies Corporation
As far as the diversification strategy, that
is working well. We actually look at that from two dimensions. The first
dimension is diversification of selling a broader range of solutions into our
existing retail customers, and then the second dimension is adding retail
customers. And I can tell you, in the second quarter that has served us well
in both marks. We have introduced, for example, we have introduced some kiosk
printing solutions into some of our traditional retail customers, and that was
meaningful relative to the contribution in the second quarter and we have added
some new retail accounts as well, both here in the United States and in the
international markets. On the healthcare front, I think, you know, it is what
you said, I think, there is some surge in bringing AIDC technology into the
healthcare space. We have been well-positioned there for a number of years,
and we had a number of large hospital related patient safety applications that
we closed in the second quarter and the pipeline for the third quarter looks as
robust.
Reik Read – Robert W. Bear
Okay great. Thank you guys.
Michael C. Smiley – Chief Financial
Officer – Zebra Technologies Corporation
Thanks.
Operator
Our next question is from the line of Paul
Caster with JP Morgan. Please state your question.
Mark Strauss – JP Morgan
Hi, good morning, it is actually Mark Strauss
on behalf of Paul. Apologies if we missed this earlier, but can you just
remind us how far along we are in the outsourcing initiative?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
Outsourcing we have now moved 90% of our
production capacity to Jabil in China. So the focus now is to oversee to
complete the last 10% but over the next two quarters we have ramped down the
remaining capacity we have in the US. So if you remember our strategy was to
start up the line in China, ramp it and prove that if we had the supply chain
working properly and was being robust, and basically run our North America and
our Chinese product lines in parallel for about six weeks. So now we are 90%
up, we started to really focus on ramping down the benefits -- or the product
lines in the US. We have also now started to - in July really to be able to
reduce our headcount within the supply chain organization, with some well over
200 people have actually been leaving the organization now, many of them
indirect employees, so obviously more the expensive part. So that is a
difficult part of outsourcing but that is also one that is going to help us
drive the benefits in the third quarter here now. And we still feel confident
with the guidance we have given earlier about 2.5% to 3 percentage points of
gross margin improvement in 2010.
Mark Strauss – JP Morgan
Got it thanks, and then can you just tell us
how the maintenance revenue has been trending as a function of customers
delaying their new final orders?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
For the after market revenues?
Mark Strauss – JP Morgan
Right.
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
Yeah. After market revenues have been
holding up much better than the new product sales, as customers have been
repairing older printers, they have been buying new spare replacement print
heads and other things like that.
Mark Strauss – JP Morgan
Yeah, okay. Thank you very much.
Operator
Our next question is from the line of Mark
Tulvale of Spectrum. Please state your question.
Mark Tulvale - Spectrum
Good morning. I was wondering if you could
give us a little insight into the progress of the Enterprise Solutions business
and could you address as part of that, the question of whether you are
jeopardizing any of your channel relations by this project?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
First our progress on to business, you know,
one of the big objectives for this year was to make sure we got the ES to cash
earnings breakeven and we have now done that two quarters in a row and we
expect that we will continue to achieve that for the full year. We have laid out
three different priorities or three different objectives; one was to achieve 50
new large “go lives” for ZES and we are now at 30 for the half year point. We had
said we wanted to sign up 20 new channel partners and we are now at 8 for that
and the majority of those are SPG, traditional SPG partners and the last one
was that we were looking to drive more of cross sales into new verticals or new
products into existing customers and now we have done 11 of those out of a goal
of 25. So I think we are tracking quite nicely on the objectives we set out,
so we feel quite good about that, but this is a tough environment, obviously
for the (indiscernible) as a whole and for ZES, you know, the automotive was
the largest single market for the WhereNet acquisition that we did and container
traffic is down for the first time, I think, in the history of container, so it
is not like those industries have been spared, but I think we have been dealing
with that quite well. With respect to the second part of your question, whether
or not any of our traditional SPG partners will be concerned about the ZES. I
don’t believe so, I think that we are working closely with a number of them to
enable them to become also resellers for our ZES organization and for the most
part our traditional partners don’t have contacts or relationships or even
capabilities to say to market terminal operating systems into marine terminal
operators. So I think that we have a good situation with our current SPG
partners and many of them are working with us to become partners for ZES also.
Mark Tulvale - Spectrum
Thanks Anders. Bye.
Operator
Our next question is from the line of Anthony
Kure with KeyBanc Capital Markets. Please state your question.
Anthony Kure – KeyBanc Capital Markets
Good morning, just wanted to touch on the mix
that we are facing with the larger printers versus the smaller printers. Can
you just give me an indication of what kind of historic mix you may have experienced
in the higher margin days for these types of printers or with the larger
printers that are more of the 50% unit sales or less than 50%? I was just
trying to gauge the magnitude at which you are being impacted here?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
For the last five six years the mix of our
high-end sort of table top printer lines have been around 30% of our printer
revenues, and that has come down a base of 25% now and this is largely driven
by you can say manufacturing being down very substantially around the world.
If you look at many markets where we have strong positions like in Asia, there
is very much export oriented and exports have gone down substantially so
manufacturing lines are not being utilized to the same extent they were, but we
believe that we have a very strong market share in that area and we are holding
our share if not gaining share, and we have a number of new products in the
pipeline at the high-end that we believe will help stimulate demand over the
next many months, so in the fall we are coming out with our new Xi IV printer
which is a new high-end, high performance printer for us, we also have a
retransfer printer in the acquired business and earlier next year we will come
out with a high performance and security printer for our acquired business
also. So we are doing a number of things to make sure we have a very healthy
and vibrant product portfolio that will help stimulate demand in that space for
us also.
Anthony Kure – KeyBanc Capital Markets
Okay. And I think you mentioned when the
historic mix continues or returns to normal, you get to a sort of margin, when
you say, because I do want a quantifier or get an idea of what historic
timeframe we are talking about, are we talking about historic operating margins
and in that light would that be sort of the low 20s, is that what you are
referring to by historic margins?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
We were talking about gross margins and I
think that you know, historically we have been sort of in the 47%-48% range and
I think that is sort of what we are talking about right now.
Anthony Kure – KeyBanc Capital Markets
Okay. And the last one – I didn’t catch the
full comment on the impact of the employees taken the day off and the impact of
accruals. So could you just Mike could go through that portion of your
comments again?
Mike Terzich - SVP of Global Sales and
Marketing - Specialty Printer Group – Zebra Technologies Corporation
Well we are not really disclosing exactly how
much the percentage is, let me tell you it is a meaningful part of the
difference from quarter-to-quarter.
Anthony Kure – KeyBanc Capital Markets
Of which piece -- of the G&A?
Mike Terzich - SVP of Global Sales and
Marketing - Specialty Printer Group – Zebra Technologies Corporation
Yes.
Anthony Kure – KeyBanc Capital Markets
Okay. All right. Thank you.
Operator
Our next question is from the line of Ajit
Pai with Thomas Weisel Partners. Please state your question.
Andy Young - Thomas Weisel Partners
Good morning. This is Andy Young standing in
for Ajit Pai.
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
Good morning.
Andy Young - Thomas Weisel Partners
Good morning. First a couple of questions
regarding the Enterprise Solutions group. I believe this is the first sales
decline for this segment on a year-over-year basis and can you give us some
colors on end market conditions given your pipeline, did you see improvement in
the segmentsin the coming quarters?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
This is correct; this is the first
year-over-year decline for ZES. So you can say from that perspective ZES has
done well by hanging in there for as long as it has. Obviously the markets ZES
is operating in are tough and exposed to the economic downturn, no less than
the economy as a whole with automotive and containment of shipping
volume being two big drivers for us. That being said, I believe we are well
placed in a number of attractive markets here and we do expect that we will be
able to hold and expand our share and we are focusing very much on being able
to expand particularly in the industrial manufacturing area and government through
leveraging channel partners, which will be more a cost effective way for us to
go to markets.
Andy Young - Thomas Weisel Partners
Okay. And also for the same segment you
mentioned that segments actually achieved cash breakeven and given the cost reductions
in restructuring that you have implemented so far, what is the sales breakeven
level for the segment now, is it going to be roughly $20 million for the
quarter or are you aiming for even lower purchasing volumes?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
It is roughly 20 million for the quarter and
I think that is -- we think that is a good target for us to have at this stage.
Andy Young - Thomas Weisel Partners
Okay great. One final question, you
mentioned that you know, the mixed share and lower sales volumes were the main
driver for lower growth margins this quarter, but do you see any increase in
pricing pressure in the end market given the current economic environment?
Anders Gustafsson - Chief Executive Officer
- Zebra Technologies Corporation
Well I think we have talked about the fact
that historically that when we see large deals we will see a number of
competitors that will chase those deals, you know and so quarter to quarter the
lowest deals will be pricing up and down, we don’t see anything terribly
abnormal about this quarter’s results in regards to pricing, but we will see
again is big deals pop up or it will attract a lot of competitors and the
pricing will be more competitive.
Michael C. Smiley – Chief Financial
Officer – Zebra Technologies Corporation
Just one more point on that, when you look at
the press release you can see AUPs have declined and that is really driven by
mix shift, not by actual price decline within the product families. So pricing
within product families is very, very stable. The only area where we see some
extra -- modest price pressure is on larger deals where competition is somewhat
tougher.
Andy Young - Thomas Weisel Partners
Got it. Thank you.
Operator
Our next question is from the line of Richard
Davis with Richard W. Davis. Please state your question.
Richard Davis – Richard W. Davis
Along the lines of the enterprise area it
looks as though there is a terrific improvement in either gross margin and
operating cost looking at the numbers, could you give us some color on that?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
There is a meaningful improvement in both
gross margin and operating costs. We have worked very hard for the last year
or two to really get our cost structure in place to enable us to be top rate at
the cash earnings breakeven point. On the gross margin we have worked really
hard first to improve the services gross margin, that is one big component of
this, and the other one is that we have a more healthy mix in this quarter and
we also expect that to be the case for the next quarter, and then we have been
driving some very substantial structural changes to the organization which has
reduced the operating expense by several million dollars per quarter.
Richard Davis – Richard W. Davis
I see. Thank you.
Operator
Our next question is from the line of Greg
Halter with Great Lakes Review. Please state your question.
Greg Halter - Great Lakes Review
Thank you, good morning. I didn’t hear the
figure for new product introduction as a percentage of sales and I wonder that
that is and Anders I think you have discussed a couple of the new ones, about
what your prospects are there going forward?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
Yes, new product revenues for the quarter was
7.5% so in line with our prior quarter and we have as I said a number of new
attractive products coming up in the second half of 2009 and into 2010 that
should help to give that a nice boost.
Greg Halter - Great Lakes Review
Okay, and what percentage of your sales now is
Scan Source accounting for?
Mike Terzich - SVP of Global Sales and
Marketing - Specialty Printer Group – Zebra Technologies Corporation
I’ll look that up here. It has not changed
meaningfully from last quarter.
Greg Halter - Great Lakes Review
We are still around 15%...?
Mike Terzich - SVP of Global Sales and
Marketing - Specialty Printer Group – Zebra Technologies Corporation
Yes.
Greg Halter - Great Lakes Review
Okay, have there been any changes in the
investment portfolio composition?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
Our investment portfolio?
Greg Halter - Great Lakes Review
Yes.
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
No, not at all.
Greg Halter - Great Lakes Review
Okay. And I know Mike you have touched on
the receivables and so forth, but just wanted if you could expand on your
thoughts as to the quality that you are seeing there and if you have any issues
in terms of collectability and so forth?
Michael C. Smiley – Chief Financial
Officer – Zebra Technologies Corporation
You know this has been – sort of to add
another point, our working capital over the last couple of quarters we have
been very presently -- not surprised, but we are pleased with where things are,
so that the receivables, we have not had any meaningful customer inability to
pay or anything like that, so the quality of our receivables we feel are very
good. I said the other piece which I haven’t amplified much in is that
actually for our inventories to have moved in the direction that they did, given
we are in the middle of outsourcing. I think our operations team have done a very
good job of trying to manage that. I think at the beginning of the quarter I
would have told you that I expected inventory to increase a little bit and
actually for it to decline in the middle of what we are going through we felt
good about that.
Greg Halter - Great Lakes Review
Okay that is good. And again regarding the
backlog you have made some comments about that, but is there any directional
figures that you could provide if it is you know up 10%, or 20% or 50%
year-over-year?
Michael C. Smiley – Chief Financial
Officer – Zebra Technologies Corporation
I think we would be comfortable to just
reiterate what we said earlier that it is the healthiest we have had in the
last twelve months.
Greg Halter - Great Lakes Review
Okay. I thought I would give you a chance.
Thanks.
Operator
As a reminder ladies and gentlemen, if you
would like to ask a question please press *1 on your telephone keypad. Our
next question is from the line of Reik Read with Robert W. Bear. Please state
your question.
Reik Read – Robert W. Bear
Just with respect to the ESG business, the
automotive segment, or the automotive industry is showing some signs of
stability and obviously there is a lot of cash being infused by governments
around the world to stabilize that. Does that suggest that there may be some
returning opportunity or is that something that is just going to stay dormant
for a while?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
We believe that there is opportunities to do
more in automotive. We actually had an increase in automotive and industrial
manufacturing orders quarter-over-quarter, so second to second quarter was up
from the first quarter. We have a very strong position in automotive and I
think that we are certainly well-placed to be able to capture additional
budgets that the automotive manufacturers may invest in. And as the automotive
manufacturers are starting to get out of bankruptcy for some and improve their
financials in other areas, we would expect that they will continue to really
drive hard to improve the efficiencies of their operations, and our products
have a very quick payback and is very well respected by the users within the
automotive community. So we are expecting to see improvement in that side of
the business.
Reik Read – Robert W. Bear
Are you – Anders at this point are you having
those discussions with them or is it still kind of a wait and see, given
everything that they have gone through?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
Obviously there is a lot of different
manufacturers out there, and some of them are more active in discussions than
others, but we had a number of new automotive wins in the second quarter.
Reik Read – Robert W. Bear
Okay. And the just one follow-up on the
specialty printing group, the operating margin, if I factor out the one time
items, declined by about 100-basis points sequentially, the revenue was down
modestly less than 2%, what would have driven that decline given all the
positive things that you have going on?
Anders Gustafsson - Chief Executive
Officer - Zebra Technologies Corporation
Obviously we walked through the gross margins
quarter-over-quarter. We’ve talked about the fact that we have the vacation
benefit, but there is not -- we did not really have any huge changes in our
OpEx quarter-to-quarter besides the items that we have talked about.
Reik Read – Robert W. Bear
Okay. Thanks.
Operator
Thank you. There are no further questions at
this time. I would like to return the call back over to management for closing
comments.
Douglas A. Fox, Vice President
Investor Relations - Zebra Technologies Corporation
This is Doug. First of all thank you all for
attending our conference call today. Just put on your calendar our next
quarterly conference call will be on Wednesday, November 4, third quarter
conference call. Also if anyone of you wants to follow-up Mike Smiley and I
will be around to answer your questions all day today. Thank you very much.
Operator
This concludes today’s teleconference. You
may disconnect your lines at this time. Thank you for your participation.
