Transcript of
Zebra Technologies Corporation
(ZBRA)
Fourth
Quarter 2009
Earnings
Conference Call
February
9, 2010
Anders
Gustafsson, - CEO – Zebra Technologies Corporation
Mike
Smiley – CFO – Zebra Technologies Corporation
Mike
Terzich – Senior Vice President – Global Sales and Marketing
Douglas
Fox – Vice President – Investor Relations
Operator
Good morning and welcome to the Zebra
Technologies 2009 Fourth 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 SPS, and Doug Fox,
Vice President Investor Relations.
All lines will be in 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 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.
Douglas
Fox – VP – Investors Relations
Thank you. Good morning and 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 10K 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, - CEO – Zebra
Technologies Corporation
Thank you, Doug and good morning to you all.
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 are pleased to
report Fourth Quarter Results that were way ahead of our expectations as well
as a favorable first quarter outlook. Surging customer demands in all
geographies and across several verticals and product lines drove an 11%
sequential improvement in sales to $222 million. A renewed sense of confidence
among our customers generated the sales growth as signs of an improving global
economy coupled with thawing capital budgets led to an increase in customers’
investing in new projects.
Equally encouraging, we experienced
exceptional earnings leverage with 72% sequential growth in operating income and
58% growth in GAAP EPS from ongoing expense control and our aggressive share buyback
program. This improvement is a direct reflection of our decision to move early
and swiftly when we saw the environment deteriorating, as well as our
disciplined approach to position Zebra as a leaner, stronger company. The
order surge, much of it in the late quarter, stress-tested our supply chain.
Our supply chain however responded with agility to this rapid rise in business
activity but with the added cost of $6 million in temporarily higher expedited freight
charges that were necessary to fulfill customer orders. I’m extremely pleased
with how our extended supply chain responded this quarter to enable us to take
care of our customers’ needs.
Our supply chain transformation which is now
substantially complete is delivering its intended benefits. In addition, we
are offering more applications with an extended and refreshed product line. We
have continued to invest in product development and geographic expansion
activities that are vital to extending Zebra’s Global Leadership and build
value for all Zebra shareholders.
Let me we briefly cover some of the
highlights for the quarter in our specially printing and enterprises solution
segments. In specially printing or SPG, sales increased by more than $22
million or 12% from the third quarter. All areas of the business- geographies,
channels, product lines, and verticals contributed to the growth. All four
geographic regions were up from the third quarter and three out of the four had
increased sales from last year. Our EMEA region had particularly good
performance with consolidated sales for the region up $14 million or 21% from
the third quarter. The sales improvement was broad-based with a robust run
rate business, a pick-up in sales to large enterprise customers and some
inventory restocking by distributors. Better sales of high performance and
midrange tabletop printers contributed to an improved product mix, as customers
in manufacturing refreshed production lines in response to more favorable
business conditions.
In addition, customers in retail, healthcare
and government implemented mobile, card, kiosk and other Zebra solutions to
improve business processes and become more competitive. New products also
helped us serve customers better. During the quarter, we began shipping our
first re-transfer card printer which has enabled us to deliver photo quality
imaging for more security and government opportunities. Channel partners and
end-users tell us they are impressed with the combination of speed, print
quality, and value in this product which has set a new standard in on-demand
card printing. Sales of our new XI-4 high performance printers also introduced
in the fourth quarter are keeping Zebra as the supplier of choice for mission-critical
printing solutions.
During the quarter we also began shipping
updated 2-inch plus models of our leading light duty desktop printers as well
as innovative new IQ color labels. This breakthrough product enables customers
to print spot colors on predetermined areas of a label using any Zebra thermal
label printer to enhance readability, increase business efficiency and improve
safety. All of these products are examples of how Zebra is driving greater
innovation to set them apart from the competition.
Let me now turn for a moment to Zebra
Enterprises Solutions. Like SPG, the budget logjams in the verticals most
served by ZES, Maritime and auto began to see some easing during the fourth
quarter and the pipeline of these have improved.
The ZES team did an outstanding job this past
year. In 2009, we substantially improved financial performance generating cash
earnings or adjusted EBITDAR breakeven from a $7 million cash earnings loss for
2008 on lower revenues. In addition, I am pleased to report that we met all of
our stated financial and operating goals for this business unit. We achieved
cash earnings breakeven for 2009 as a whole. We signed 25 new channel partners
against our goal of 20. We achieved our goal of 25 cross-sales into adjacent
markets which met our goal of 25 for the year and we achieved 57 go-lives with
customers around the world in 2009 against our goal of 50. These results,
which were by no means easy, demonstrate that the ZES solutions deliver real
value for our customers. We are also demonstrating our commitment to executing
on the strategy we outlined in early 2009. Our ZES team deserves much credit
for these achievements in a very harsh business environment.
Finally, for overall Zebra, we continued to
generate strong cash flows, bought back stock and ended the year with solid
cash balances. Over the past three years, we have returned more than $330
million to shareholders through stock buybacks. The financial strength that
has enabled us to buy Zebra stock at attractive prices during challenging times
has also given us the ability to extend Zebra’s global leadership through building
stronger relationships with more channel partners staying committed through
product development and extending global reach, all activities that will serve
Zebra, its shareholders and customers well long into the future.
In conclusion, 2009 began as a very
challenging year. Recognizing the downturn early, we started in the third
quarter of 2008 to trim and shape Zebra for improving performance as business
conditions strengthened. Zebra has been quick to move from defense to offense
as well. We worked hard during the year to complete the outsourcing program supply
chain transformation for printers on time. We have also made progress on our
new ERP implementation which remains on track. At the same time, we remain
committed to a program of developing a new generation of distinctly superior products
and solutions that will continue to set Zebra apart from the competition. Our
results in the second half of 2009 are an early demonstration of the success of
our actions. We captured more opportunities as customers around the world
continue to standardize on Zebra as their strategic partner in asset tracking
and supply chain management.
I’d now like to turn the call over to our CFO,
Mike Smiley, to provide a detailed review of fourth quarter results and
guidance for the first quarter of 2010. After Mike’s remarks, I will return
for some brief closing comments on our outlook and some details on our growth
and profit initiatives.
Mike
Smiley – CFO – Zebra Technologies Corporation
Thank you, Anders. Because it’s most
relevant, let me focus on some of the important sequential drivers for the
quarter. First, all four geographic regions experienced sales growth. Second,
the gross margin, improved product mix along with an incremental 80 basis point
contribution from outsourcing and favorable movements in foreign exchange were offset
by higher inbound freight cost to meet customer demand. And third, operating
expenses were well within our guidance range. Sales are up 11% from the third
quarter. Foreign exchange net of hedges had a favorable impact of $2 million
on a sequential change. Sales were down 4% from a year ago with a $7 million
favorable impact from foreign exchange. Sales from the specialty printing group
were down 3% from a year ago but up 12% from the third quarter. All regions
experienced a pickup in their channel run-rate business and large enterprise
deals. Business in EMEA was up the sharpest, increasing $14 million or 21%
over the third quarter.
Leading the way from a growth perspective were
the UK, Central Europe, and Spain. We had notably strong sales of card printers
as well as supplies fueled by the continued uptake in our HC100 wristband printer
supplies. This increase in wristband printer supplies demand is due primarily
from the UK health advisories on hospital patient identification. EMEA also had
larger sales in retail, postal, and government. In North America, sales were
up 3% from the third quarter. The sequential increase was due to a continued
pickup in enterprise sales and an improved run-rate business to supply
customers through channels and also for inventory builds with distributors. From
a year ago, North America sales were down 13% because of a certain large deal
that shipped in the fourth quarter of 2008.
Let’s take a look at sales by product line.
Hardware which was most affected during the downturn experienced a 19% sales
growth from the third quarter. Product mix improved with a greater percentage
of high margin, high performance in midrange printers shipped as manufacturing
customers refreshed product lines. After market sales of higher margin print
heads also contributed to the better product mix. The percentage of printer
sales from new printer products also moved upward to 13.2% of printer sales
with shipment of our re-transfer card printer XI-4 high performance printers
and updated “Plus” desktop printers. This percentage is up from 7.3% for the
third quarter.
Supply sales were down 10% from the third
quarter mainly because of a large order that shipped in the prior quarter.
During the second half of 2009, we also culled some of our low-margin supplies
business to help improve the profitability of these operations. Consolidated
gross margin of 45.6% was comparable to the third quarter’s margin and down
from last year’s 47.7%. Stripping away the temporary items, we are
increasingly confident the gross margin can and will return to historical levels
in the high 40s with variance driven by FX. The major factors affecting fourth
quarter gross margin are 1) Outsourcing contributed in additional 80 basis
points. With a 1 percentage point improvement generated in the third quarter,
we are on target to meet expectations in achieving the full 2-1/2 to 3
percentage points and higher profitability from outsourcing. We expect to get
the remaining portion by the middle of the year as we shut down the rest of our
printer assembly operations in the US and move the remaining supply of parts from
vendors in the US to Asia. 2) The improved product mix had about 1 percentage
point favorable impact. 3) Freight charges were approximately $6 million
greater than normal and reduced gross margin by approximately 3 percentage
points. We expect freight costs to remain at higher than normal levels in the
first quarter as demand for printers, particularly high end and mid-range printers
remain elevated and as our volume ramp at our sub-suppliers. We expect more
normal shipping patterns and freight charges beginning in the second quarter.
Operating expenses of $75.2 million were down
$1.3 million from the third quarter. Most significant changes include
decreases in employee benefits offset by increases in commissions, travel and
entertainment, and marketing costs. Operating expenses declined $10.4 million
from a year ago excluding the $158 million in asset impairment charges incurred
in the fourth quarter of 2008. For ZES, the addition to certain reserves and
some increased operating expenses resulted in negative cash earnings of $1.5
million for the fourth quarter even as we achieved our goal of reaching cash
earnings breakeven for the year. Investment income of $695,000 was down from
$813,000 for the third quarter and $1.3 million for the fourth quarter of
2008. Lower short term interest rates and lower cash balances in part because
of cash used for stock buybacks have been the primary reasons for the decline.
Net income excluding $0.03 per share and exit restructuring and integration
costs came in at $ 0.33 per share on $58.8 million average shares outstanding.
The income tax rate of 35.1% versus the years’
normalized tax rate of 32% reflects a one-time year-end adjustment to our tax calculations
and reduced our earnings by another $ 0.02 per share. During the fourth
quarter, we used $16 million to buyback 594,000 shares, a pickup from our
327,000 shares acquired in the third quarter. The average price of our fourth quarter
purchases was $26.68. For the year, we brought back 3.2 million shares for $65
million. Approximately 2.2 million shares remained authorized for repurchase at
year-end. On December 31, we had 58.3 million shares outstanding. The days
sales outstanding declined to 62 days from 66 days. We’re very pleased to have
weathered this recession without meaningful write-offs.
Inventory turns increased from 5.1 times for
the third quarter to 6.1 times for the fourth. We ended up the fourth quarter
with $247 million in cash investments up from $222 million at the end of the third
quarter. Quarterly free cash flow totaled $37 million to bring the annual
total to $80 million or 10% of revenues.
Now, let’s look at our first quarter forecast.
The period when we normally see a seasonal decline from quarter sales, we are
forecasting sales of $217 million to $230 million. This forecast consists of
expectations for SPG sales in the range of $198 million to $210 million and ZES
sales between $19 million and $20 million. Our forecast assumes gross profit
margin in the range of 45.5% to 46.5% reflecting continued cost reductions and
some improvement in freight cost offset by a less-favorable foreign exchange
rate. We expect GAAP operating expenses of $77 to $80 million which includes a
reinstatement of certain employee benefits and other incentive accruals, as
well as investments in our growth initiatives. GAAP earnings are expected to
be in the range of $ 0.25 to $ 0.32 per share. We’re estimating exit and restructuring
expenses to have a $ 0.02 per share impact on EPS and the income tax rate will
be 32%.
That concludes my formal remarks. Thank you
for your attention. Now, here’s Anders for some concluding comments.
Anders Gustafsson, - CEO – Zebra
Technologies Corporation
Thank you, Mike. As our fourth quarter results
and the first quarter outlook demonstrate, the aggressive actions we took
during the downturn have positioned Zebra for improving financial performance
and greater shareholder value creation. We took advantage of our financial
strength and tremendous cash flow generating capabilities to improve capital
returns and extend global leadership in an industry with very attractive global
trends. I am confident that we are now well-positioned to capture even more
business opportunities as global economic conditions improve.
Going forward, we are focused on four
strategic imperatives. First, we will continue to expand our core business by
aggressively taking shares through alliances with global partners and
independent software vendors. Second, we will further penetrate near
adjacencies where we can win by accelerating expansion in developing countries and
driving innovation in product development in terms of performance, features and
integration. Third, we will continue to build lean world class operations
through the expansion of our outsourcing initiatives, improved distribution and
other IT initiatives and finally, by building on our history of high
performance team work, collaboration and people development. We are all ready
making progress on these initiatives.
In North America, we streamlined sales and
marketing processes to simplify the organization and build stronger customer
relationships in the region as we expand our core. Specifically, we eliminated
inefficiencies within our teams to improve clarity, reduced territory sizes to
increase customer contact and increased resources dedicated to channel
partners. At the same time, we recognize the success we have had over the
years through a geographic expansion. We are now building on that tradition by
committing more resources in key territories we have identified as having the
highest potential for profitable growth. In Asia Pacific, Latin American EMEA,
we plan to add as many as 40 sales and sales-related people in 2010.
Our plans call for establishing a presence in
as many as five new cities in Asia as well as greater representation in Turkey
and the Middle East and lastly in Brazil, we plan to add employees and
establish a presence in one new city. Adding new sales professionals supported
by enhanced country-specific marketing is a proven high return, low risk
activity that will begin to generate channel support and more business later
this year. Likewise, we are confident that our plan to develop printers specifically
focused on meeting regional requirements will result in higher sales
internationally.
In ZES, we entered 2010 with improving
momentum in pipeline activity. Specifically, we are seeing renewed interest in
auto-related solutions to improve inventory management and in defense applications
for tracking assets and people. Further growth opportunities are also
developing internationally. Much like in SPG, our ZES customers increasingly
understand the business advantages of working with a single dedicated strategic
partner such as Zebra for their location solutions, for supply chain logistics
and operations. We are devoting modestly more resources in ZES to areas
showing the greatest traction. These initiatives include launching a new
partner program along with new products explicitly designed for channel sales.
The incremental amount of additional resources we’re committing to ZES is good
business. They offer high returns in very promising growth area.
While the additional expenditures may result
in slightly negative cash earnings for ZES for the first quarter, they will
produce a larger payoff with higher sales growth and improved profitability as
we move through the year. Throughout our planning for 2010, we are focused on
generating the highest risk-adjusted returns on our investments. As in 2009,
this principle will continue to guide us as we evaluate the potential for
further capital deployments as the year progresses, whether in additional share
buybacks, strategic acquisitions or further geographic expansion and product
development. Zebra’s future is bright. We completed 2009 on a favorable note
and entered 2010 with positive momentum. Our success has been and continues to
be the result of our more than 2,000 employees around the world dedicated to
meeting our customers’ needs. By taking advantage of our financial strength
during the downturn, we are now well-positioned to win more business as global
economic conditions improve. Our focus on our four strategic imperatives will
guide us in 2010 and beyond.
We worked hard during 2009 to reduce costs
and optimize resource deployment. Phase one of our outsourcing initiatives is
now virtually complete and generating the intended benefits. In addition, we
strengthened channel relationships, introduced new innovative products and have
begun to extend our geographic reach further. All of these initiatives have a
lasting positive impact on building shareholder value. Zebra is unique in the breadth
of asset tracking and supply chain solutions that we can provide to our
customers. Increasingly, our customers are turning to Zebra as their strategic
partner to help them improve their business processes. Zebra solutions are
increasingly necessary elements in our customers’ operations and we look forward
to reporting on our progress as the year continues.
This concludes our prepared remarks and we
would now be happy to take your questions.
Operator
Thank you. We’ll 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.
One moment please while we poll for
questions.
Thank you. Our first question is coming from
the line of Reik Reed with Robert Baird. Please go ahead with your question.
Reik Read – Robert Baird
Hey, good morning. Just start on the gross
margins for the first quarter, how much freight impact above normal will still
exist in the first quarter? And can you also talk about - are you having to
pay any higher component prices for raw material right now?
Anders Gustafsson, - CEO – Zebra
Technologies Corporation
You know, at this time we spend about $6
million above normal and think that we’ll probably see an improvement of maybe
$3 million or so in the first quarter, better than it was in the fourth quarter
but that will still be enough elevated level from what we think we’ll see in
the long run. And on the component prices, we’ve seen greater than expected
savings on our material costs and component costs as we move to China and that
trend continues to hold.
Reik Read – Robert Baird
But you’re not taking anything short term
with component availability?
Anders Gustafsson, - CEO – Zebra
Technologies Corporation
No, we have not seen any issues on pricing in
the short term or based on allocations or anything like that. Actually, this
is an area where I think our scale is quite beneficial to us in that we are the
largest player in our space and that gives us more pull with our sub-suppliers.
Reik Read – Robert Baird
Okay, and Mike, again, your comments on gross
margin in the first quarter, the FX impact, is just as directly from European currencies
or is there anything else embedded in there?
Mike
Smiley – CFO – Zebra Technologies Corporation
It’s European, all European.
Reik Read – Robert Baird
Okay. And then just with respect to Mike your
comments on getting improvement by midyear, can you help us understand all of
the puts and pegs that are in there? I guess the way I would have thought about
it is that you’ve largely completed that transition to GABEL the remaining
facilities would be shut down and it seems like that would happen in pretty
short order, is there a delay in there or are there other initiatives or what
causes the comment for midyear?
Mike
Smiley – CFO – Zebra Technologies Corporation
There’s a couple of things. First of all -
although we have 99% of our printers are manufactured in China, we still have
less than 1% that they’re still being manufactured here because they’re perhaps
new lines or something that are coming up and that’s going to take the first part
of the year to sort of completely ramp down and then to pull ourselves out of
those operations. The other piece is, you know, although we’ve moved a substantial
number of our sub-suppliers from the US to Asia, there still is more to be
done. So, those two things are sort of making it so it’s more like a midyear
and we’ll see hitting that target.
Reik Read – Robert Baird
Oh I’m sorry, so you said those are newer
products that you’re more comfortable making them here until you get kind of
stable?
Mike
Smiley – CFO – Zebra Technologies Corporation
Well. It’s just for the time being. It is
not a long run thing.
Reik Read – Robert Baird
Okay. And then could you also talk about the
ASP’s were down and they were down 4% which is pretty normal for this quarter
but you guys have talked about pricing and mix being stable or mix even getting
improved a little bit. Is there an offset there in terms of incremental price
pressure or what would account for that?
Mike Smiley – CFO – Zebra Technologies
Corporation
This quarter, we didn’t see any particular
price pressure. Most of the players in the industry somewhat challenge on the
supply chain side. We certainly weren’t leading with price. We saw very
stable pricing within our product families and we saw an improved mix. So, we
were pleased with the pricing environment we had.
Reik Read – Robert Baird
Okay. Thank you guys.
Operator
Our next question is in the line of Brian Drab
with William Blair. Please proceed with your question, Sir.
Brian Drab – William Blair
Good morning, I just wanted to begin by
focusing on Europe, great sequential growth there 22% by my calculation and I
was wondering if you could just drill in a little bit deeper into what you saw
in Europe in the period and the cost of the different countries within Europe.
Mike
Terzich – Senior VP – Global Sales and Marketing
Well, Europe was strong, it would generally cross
the entire geography. We saw particular strength in Spain, in the UK, and
Eastern Europe, and also some in the Middle East. In the UK, we talked a bit
about the healthcare sector being particularly strong. One thing that we
didn’t see so much of in Europe was a return of larger deals. I think that’s
something we still have coming.
Brian Drab – William Blair
And were government in the something that
virtual growth on that, in that region?
Mike
Terzich – Senior VP – Global Sales and Marketing
The government was a good contributor but it
didn’t standout as a phenomenal success.
Brian Drab – William Blair
Next question, just about product mix, I know
the product mix is improving, shifting, sequentially toward some of the higher
margin equipment. Where does that mix stand now compared to where you’d it
would be ultimately or you know where it was at the peak?
Mike
Terzich – Senior VP – Global Sales and Marketing
So, this is two questions, I guess. First is
how does it stand compared to the peak and how does the stand compare to the
middle of last year. So it’s substantially higher than it was in the middle of
last year but it is still somewhat lower than the peak. I think the Peak going
back to 2006 timeframe, part of that is that we have seen some other products with
growing faster. So like mobile and desktop and Kiosk have had higher growth
rate than our tabletop product lines.
Brian Drab – William Blair
Okay. That’s all. Thank you.
Operator
Next question is in the line of Paul Coster with
JP Morgan. Please go ahead with your question sir.
Paul Coster – JP Morgan
Yes, thank you. Andes, I’d just like to kind
of go a little bit further into what you’re seeing at the moment and whether
there’s any underlying trends there. It sounds like everything pops up a bit
but you’ve got in the pipeline some big deals, perhaps you can just sort of give
us a sense on why those take a bit longer to come to market and also what’s
behind mobile, desktop and kiosk sort of the mix shift towards those segments? What
kind of drivers are happening in retail or other segments that might account for
that growth?
Anders
Gustafsson, - CEO – Zebra Technologies Corporation
The large deal – you do speak particularly to
Europe or was that more generally?
Paul Coster – JP Morgan
Well, you just mentioned that you’ll see
large deals soon and you didn’t see them in this quarter. Well, why are they a
little bit later on in the cycle?
Anders
Gustafsson, - CEO – Zebra Technologies Corporation
I was specifically talking to Europe at that
point. I think we did see larger deal flows in North America, Latin America
and Asia Pacific. So, it was more specific to Europe that we didn’t see it and
we expect that we will continue to see a decent flow of larger deals and I
think that was driven basically the underlying economy strengthening, giving
our customers more confidence so that a lot of project that had proven good otherwise
had been say frozen for some time as our customers were more focused on
managing their capital or their cash flows and as they gain some more
confidence, they start letting those flow through. With respect to mobile,
desktop and kiosk, I think that there’s good trends for each of those products
to have higher growth rates in the Kiosk side particularly. There’s a huge
trend towards self-service, you know, you go to the airport, you go to hotels,
you go to your local supermarkets, there is lot of Kiosk-type of applications
and that’s obviously a much smaller market segment today but it is one that is
growing faster.
Similarly with mobile there is I think a big
trend globally or around having more untethered workers. So mobile workforce
and other applications like that is a big secular trend that we’re trying to
make sure we tap into and desktop just has a much broader set of applications.
You can go into my local cobbler to almost any type of logistics and transportation
company, it fits in, lots of different types of environments. So there’s good
underlying growth drivers for each of those products.
Paul Coster – JP Morgan
Got it. Mike, can you just comment a little
bit on the tax rate and capital investment in 2010?
Mike Terzich – Senior VP – Global
Sales and Marketing
Yeah. We’re going to see 32% for 2010. We stand
on $24.25 million in CapEx in 2009. We expect that to cut down maybe about $5
million in 2010 as the spending levels for some of the ERP implementation and
outsourcing goes down.
Paul Coster – JP Morgan
Okay, Anders, the operating expenses are a
little bit higher I think perhaps than we expected anyway in the first quarter
but it sounds like you’ve already the reason for that that was the building up
of the sales force in new geographies, is that correct?
Anders Gustafsson, - CEO – Zebra
Technologies Corporation
There was basically two components to that.
One is that as we entered the New Year, some of the cost containment actions we
had taken started to come back so we are now accruing for not having our 401K match
is back. We are accruing for target bonus and also in the beginning of the year
you have more benefits so people who do 401K payments, there’s taxes and other
things that come with that. That’s the majority of it and then the remaining
part is a there’s more investments in some of our growth initiatives that we
have high confidence would pay off well.
Paul Coster – JP Morgan
Okay. Thank you very much.
Operator
Our next question is coming from the line of
Chuck Murphy with Sidoti & Company. Please go ahead with your question,
Sir.
Chuck Murphy – Sidoti & Company
Good morning, guys. I just wanted to come
back to the gross margin for a second just to make sure I’m clear. In terms of
the higher freight cost, I mean, is it a matter of you guys needing kind of rush
delivery? What exactly about freight was different this time around?
Anders Gustafsson, - CEO – Zebra
Technologies Corporation
As we had to ramp up our supply chain, it
takes, as I mentioned there’s some long lead time item components in a printer
and they extended our delivery times from beyond what we would normally see as
our traditional times and in order to make sure that we could really serve our
customers and not loss market share and protect our reputation, we did
airfreight more printers through the quarter and also this was exacerbated by a
surge in the tabletop side, the big printers, they’re much more heavy and they
cost a lot more.
Chuck Murphy – Sidoti & Company
Got it, okay, thanks. And then my other
question was just for ZES, I mean, down a little bit sequentially for the
fourth quarter, kind of flattish in the first quarter, and what are your
thoughts for the remainder of 2010? I realize it’s just early but will it see much
of a ramp for the remainder of the year?
Anders Gustafsson, - CEO – Zebra
Technologies Corporation
Fundamentally to start with that, the
applications and the solutions that ZES offers its customers have very high ROIs,
very high returns for their customers and I think we made great progress during
the year by hitting all our metrics, all our targets. I think we’ve positioned
ourselves now for some modest incremental investment to really take advantage
of some growth opportunities that we see and we felt that we’re building up a
stronger channeled competency which very much leverages the core competence
that we have in SVG, it’s a good area for this and we’ve also come up with some
new products that are specifically designed for the channel. So, we feel good
about where we are in this respect. We think that you as the year progresses
these investment will drive higher revenue growth and improve profitability throughout
the year.
Chuck Murphy – Sidoti & Company
And in terms of quoting activity or just general
customer interest, I mean, have you seen that improve for enterprise solutions
recently?
Anders
Gustafsson, - CEO – Zebra Technologies Corporation
Our pipeline activity for both the maritime
side and the automotive industrial manufacturing side was increasing in the
fourth quarter.
Chuck Murphy – Sidoti & Company
Okay, got it. Right, thank you.
Anders
Gustafsson, - CEO – Zebra Technologies Corporation
Thank you.
Operator
Our next question is from the line of Jay Meyer
(ph) with Fayetteville (ph) & Company. Please go ahead with your question,
sir.
Jay Meyer – Fayetteville & Company
(ph)
Great. Thanks a lot for having me on. My
question is really about the new re-transfer printers. I’m curious if you
could give some color around that market and how big of a revenue stream you
think that could be maybe, what’s your goal in terms of percentages going
forward?
Anders
Gustafsson, - CEO – Zebra Technologies Corporation
We generally don’t give individual product
line revenue forecasts but the retransfer market is a meaningful size market within
the card market but for us it’s new market segment that we did not print in
before and we believe that we can get an attractive share of that market. The feedback
we’ve had from all our channel partners and end-users who’ve seen the products
have been very impressed by the color acuity and the speed we can print out.
Now this is more of a project-related printer so it’s not one that has kind of
the normal run rate of the business through distribution. This is more into
larger security or other types of deals but we’ve been very encouraged by the
reception this product has had and if it performs well for us in the fourth
quarter it matches expectations. Mike, any comments from you?
Mike
Terzich – Senior VP – Global Sales and Marketing
Jay, a couple of things. One, the market for
this product is in the identification card, and also in the driver’s license
side of the business. Also, because of the image quality, the photo quality
capability retransfer, we feel that we could really leverage some of our
retail, our legacy retail customer base and extend it into some loyalty card
application and then lastly, it gives us some potential opportunities to extend
into some new market spaces. In some of the financial services sector where we
traditionally haven’t played and as more and more movement goes towards a
decentralization and an instant issuance of some cards, we think that
ultimately, we can extend ourselves into some new space.
Jay Meyer – Fayetteville & Company
(ph)
And do you think that your competitive advantage
there is on price or in yield or the quality of the system?
Anders
Gustafsson, - CEO – Zebra Technologies Corporation
It’s really all of the above. We believe we
have superior imaging processor so the photo quality is superior. The speed of
print is superior and we are able to offer this at a competitive rate. Now, we
are not leading with price per se but we are not the first in the market so we
recognize that we need to have a very attractive package.
Jay Meyer – Fayetteville & Company
(ph)
I understand. Thank you.
Anders Gustafsson, - CEO – Zebra
Technologies Corporation
Thank you.
Operator
Thank you. As a reminder ladies and
gentlemen, if you would like to ask question you may press *1 on your telephone
keypad.
Our next question is from the line of Anthony
Kure with KeyBanc, please go ahead with your question, sir.
Anthony Kure – KeyBanc Capital Markets
Hi, good morning. Thanks for having me on.
Quick question. Mike, could you just mention again the one-time impact to the
fourth quarter for the ESG profitability, what was that again?
Mike
Terzich – Senior VP – Global Sales and Marketing
It was a combination of some additional expense
and some reserves that we took in the fourth quarter. They weren’t huge.
Anthony Kure – KeyBanc Capital Markets
You said it was about $1.5 million impact or
so?
Mike
Terzich – Senior VP – Global Sales and Marketing
Well, the cash earnings loss for the quarter was
minus 1.5.
Anthony Kure – KeyBanc Capital Markets
Oh okay, I see, I see. So, if we back that
out, is it fair to say, I mean with the GAAP operating loss of $5.4 million or
so, if we back out those types of expenses recurring in the first quarter, what’s
sort of the expectation that’s factored into your guidance for – I assume it’s
a loss for the first quarter, is that correct?
Mike Terzich – Senior VP – Global
Sales and Marketing
Oh yeah.
Anthony Kure – KeyBanc Capital Markets
And will it be the - I mean the range of that,
are we looking at about a similar level of loss or a little bit better? Am I right
in thinking that it should improve from the loss of the fourth quarter?
Mike Terzich – Senior VP – Global
Sales and Marketing
I’ve got to tell you it’s a small business
and so there’s always a little lumpiness here and there so it’s hard to really
guide tightly but I would say the first quarter is going to feel like the fourth
quarter.
Anthony Kure – KeyBanc Capital Markets
Okay, and then FX and I’m sorry if I didn’t catch
this, what is the FX assumption for the first quarter guidance total company?
Mike Terzich – Senior VP – Global
Sales and Marketing
Well, right now the exchange rate is around
136 to 137. So our forecast based in obviously the first month it was running
a little bit higher so we’ve taken into consideration January actual rates and then
sort of the current spot rate going forward.
Anthony Kure – KeyBanc Capital Markets
Okay, and then just finally, the cash building
up through 2009 and just looking increasingly – are you looking increasingly at
any acquisitions or do you think the share buyback is probably the best use of
the risk-adjusted cash usage at this point?
Anders Gustafsson, - CEO – Zebra
Technologies Corporation
We will continue to look at all options that
we have available for capital deployment but as we’ve reiterated over the last
couple of years, I guess it is now, we’re very much focused on making sure we deploy
our capital to the highest risk adjusted return opportunities. We do perceive
that there might be acquisitions out there but we always look at those although
we said that for ZES we are not considering anything there until we’ve been
able to prove that business model going forward but also we lots of good
internal organic investment opportunities that we want to pursue and buyback is
something that - we bought back $65 million worth of shares in 2009 which was
really a tough year for the industry. We expect that we will continue to
buyback shares.
Anthony Kure – KeyBanc Capital Markets
Okay. I’m sorry. One more question, just housekeeping.
Did you mention the gross margins for ESG in the fourth quarter? Or if not,
can you?
Mike Terzich – Senior VP – Global
Sales and Marketing
No. We just gave company-wide gross margins.
Anthony Kure – KeyBanc Capital Markets
Okay. Thanks
Operator
Our next question is from the line of Greg Halter
with Great Lakes Review, please go ahead with your question.
Greg Halter – Great Lakes Review
Oh yes. Good morning, thanks for taking the
call.
Anders Gustafsson, - CEO – Zebra
Technologies Corporation
Good morning.
Greg Halter – Great Lakes Review
I wanted to delve into the investment
portfolio a little bit further in terms of the composition, in terms of what
it’s invested in and the location I guess by geography of the funds.
Mike Terzich – Senior VP – Global
Sales and Marketing
They’re in the US and it’s very high grade
government municipal-backed securities. It is a very short duration, it’s all
very, very stable short duration securities.
Greg Halter – Great Lakes Review
And you don’t have any of the auction rates
or any of other crazy stuff?
Mike Terzich – Senior VP – Global
Sales and Marketing
We have a small amount but we’ve already taken
the effects of those through our balance sheet so that’s reflected in the value
there.
Greg Halter – Great Lakes Review
Okay, and what was scan source in terms of a
customer in the quarter and then for the full year?
Mike Terzich – Senior VP – Global
Sales and Marketing
It’s been 16%. It goes up and down a little
bit but it hasn’t been a big change in the quarter.
Greg Halter – Great Lakes Review
Okay, and Anders, I believe you were speaking
about go-lives and so forth, I think you had a goal to reach 20 new channel
partners in 2009. I don’t know if you’ve mentioned that or not in your prepared
remarks.
Anders Gustafsson, - CEO – Zebra
Technologies Corporation
I mentioned we have three operating metrics.
One was reaching the goal of 20 channel partners, we actually achieved 25. We
had another goal which was to have 25 cross sales and so basically taking our
products and bundling with other products or taking them into a new virtual market
and we were able to achieve that. We ended up right on the money at 25 and then
we said we were going for 50 go-lives for major projects and for that we
achieved 57. So, I think that’s great progress for us and I was actually
surprised to see how close we came to each of those ones and I think that
indicates we set pretty good targets.
Greg Halter – Great Lakes Review
Yes, definitely. That’s great and
congratulations on that. I wanted to give you the chance to offer up any goals
you may have for 2010 in each of those in three areas.
Anders Gustafsson, - CEO – Zebra
Technologies Corporation
We figures that we wouldn’t set any public
goals like that. Now, we obviously have lots of goals internally for how to
drive the business so we feel that we are now in a position to just build on
the strengths we had in 2009. We’ve highlighted some of the areas that we’re
focused on with that channel and some new products. We feel good about all the
activities and all the progress we made in 2009.
Greg Halter – Great Lakes Review
Okay. Great. Thank you.
Operator
Our next question is a follow up from the line
of Reik Read from Robert Baird; please go ahead with your question.
Reik Read – Robert W. Baird
Thanks. Could you just go back to Europe and
the healthcare program that you are seeing in the UK with wristbands, it sounds
like you’re calling it out because it’s meaningful? Is that something that’s
sustainable or are there other follow-on programs that may be kicking in as
well?
Anders
Gustafsson, - CEO – Zebra Technologies Corporation
In the UK, the NHHS, the National Health
Service have issued a recommendation for all their hospitals to use more
patient ID technology and so we’ve seen for the last year material improvement
or strengthening of our business to NHS Hospitals. Now, we’re working with
others in that space to make sure we can replicate that into other countries
and make that much more of a movement across the entire European continent as
well as the rest of the world.
Reik Read – Robert Baird
Okay. And then just in the retail vertical,
can you guys make some comments there in terms of are you seeing the market
begin to improve and I guess I ask market versus also how you’re doing because it
seems in the last couple of quarters you have gained incremental customers and
so you have tended to outpace the market. Can you give us a sense as to what’s
happening there?
Mike Terzich – Senior VP – Global
Sales and Marketing
Reik, this is Mike Terzich, I’ll take that.
Yes, we have. We’ve seen an improvement in our retail performance,
specifically parts of Europe actually performed well. The UK historically has
been a strong retail market so we did see some recovery in the fourth quarter in
the UK retail marketplace and domestically in the United States, retail has
finished the year very strongly for us and I think what’s important here is the
tier 2 retail channel for us specifically so if you get beyond the tip of the
pyramid so to speak, you get down to the next level of retail. Everybody is
looking to increase some of that efficiency productivity within the store.
This goes back to Ander’s comment. This is where Kiosk is starting to have an
impact for us in multiple retailers and through our mobile solutions. So, we
feel pretty good as we go into 2010 that outlook is improving.
Reik Read – Robert Baird
Okay. Great, thanks. And then the operating
expense guidance Mike that you gave, can you repeat it and tell us if the charges
are included in that or not?
Mike Terzich – Senior VP – Global
Sales and Marketing
That would include – so the numbers that we
gave were including restructuring in there so that would be in there.
Reik Read – Robert Baird
Okay. Great, thank you.
Operator
Thank you. There are no further questions at
this time. I would to turn the floor back over to management for closing
comments.
Anders Gustafsson, - CEO – Zebra
Technologies Corporation
Thank you everybody for joining us today.
Just to let you know, our next call is on May 4th for the first quarter earnings
announcements and we will certainly be around to answer any of your questions
offline. So thank you very much. Have a good day.
Mike Terzich – Senior VP – Global
Sales and Marketing
Thank you.
Operator
This concludes today’s teleconference. You
may disconnect your lines at this time. Thank you for your participation.
