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Infonet Services Corporation (NYSE:IN)

Q2 2009 Earnings Call

July 30, 2009 05:00 PM ET

Executives

Kevin P. McCarty - Director of Investor Relations

Patrick J. Byrne - President and Chief Executive Officer

Robert J. Driessnack - Senior Vice President and Chief Financial Officer

Analysts

Reik Read - Robert Baird & Company

Chris Quilty - Raymond James & Associates

Ajit Pai - Thomas Weisel Partners

Eli Lustgarten - Longbow Securities

Andrew Abrams - Avian Securities, LLC

Justin T. Patterson - Morgan, Keegan

Chuck Murphy - Sidoti & Company

Operator

Hello and welcome to Intermec Second Quarter 2009 Earnings Call. All lines have been placed on listen-only mode until the question and answer session. This call is being recorded if anyone has any objections you may disconnect this time.

I would now like to turn call over Mr. Kevin McCarty, Director of Investor Relations. Sir, you may begin.

Kevin P. McCarty

Thank you, Kim. Good afternoon everyone and welcome to Intermec second quarter fiscal year 2009 earnings release conference call. With me on the call today is Intermec President and Chief Executive Officer Patrick Byrne and Senior Vice President and Chief Financial Officer Bob Driessnack.

In a moment, Pat will discuss our quarterly overview and Bob will provide a summary of our operating performance and guidance. Subsequent to those discussions, we will begin our question and answer period.

Now let me quickly cover our Safe Harbor statement. Today's discussions may include predictions, estimates or other information that might be considered forward-looking under the Private Securities Litigation Reform Act of 1995. Some of those statements, we make today may be considered forward-looking, including but not limited to Intermec's expected financial performance as well as Intermec's strategic and operational plans, along with additional examples that are set forth in today's release.

These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise or publicly release those results of any revision to those forward-looking statements.

In addition, we will describe certain non-GAAP financial measures. These should be considered in addition to and not in lieu of comparable GAAP financial measures. Please refer to today's earnings release which shows our reconciliation from GAAP to non-GAAP net earnings.

And for a more detailed description of our risk factors that may affect our results, please refer to our SEC filings, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Copies of those reports can be obtained by contacting the SEC or our Investor Relations section of our website.

With that, it's now my pleasure to turn the call over to Pat.

Patrick J. Byrne

Thanks, Kevin and good afternoon, everyone. Intermac delivered second quarter operating results inline with guidance provided in April. Managing expenses well, lowering our breakeven as planned and generating cash.

In challenging market conditions, we generated revenues of $158 million and adjusted EPS loss of $0.03. Through effective working capital management, we extended our cash balance to $227 million in spite of an operating loss and restructuring expenses

Bob will be reviewing our financial results and some details and then I'll provide an overview of market conditions, new products and channel progress. Now, I'll turn it over to Bob.

Robert J. Driessnack

Thank you Pat. Intermec's second quarter revenue of 158 million represented a 28% decline over the prior year's second quarter. On a constant currency basis, revenues declined 23% year-over-year. Our second quarter loss per share was $0.11 compared to earnings of $0.13 in the comparable quarter of 2008.

Included in the $0.11 loss with the impact of restructuring cost of 7.3 million were approximately $0.08 per share in the second quarter. On a non-GAAP basis excluding restructuring charges, our adjusted earnings per share loss was $0.03.

Second quarter revenues on a regional basis were as follows. In North America revenues declined 22% from the prior quarter. Europe, Middle East and Africa or EMEA were down 36% in the quarter. 12 percentage points of the decline was due to currency. EMEA did see an increase of 24% sequentially from the weak first quarter. Latin American revenues were down 34%, and Asia-Pacific declined 21% both versus a year quarter.

Reviewing our product line performance, systems and solutions revenues declined 33% over the second quarter of 2008 to $86 million. Printer and media revenues of 37 million declined 28%, year-over-year but increased quarter-over-quarter by 4%. Service revenues of 34 million were down 9% over the prior year quarter and up 1% from the first quarter 2009. Total gross margin was 36.2% for second quarter as compared to 40.7% a year ago, representing a 4.5 percentage point decline.

Second quarter product related gross margin was 34.4%, a 5.6% percentage point decline from the year-ago margin of 40%. In the quarter, our product gross margins were impacted significantly by lower volumes and by a number of items including competitive pricing in the current economic environment. The impact of currency particularly in EMEA and less favorable products and geographic related mix. To improve margins we are focused and driving top line growth with pricing discipline and channel management.

We continue to simplify and streamline our supply chain. We expect our gross margins will reflect these positive efforts as this year unfolds and the markets strengthen.

Service gross margins were 42.7% in the second quarter, a decrease of 1.3 percentage points compared to 44.0% in the prior year quarter. The decline was due to lower volume.

On a sequential basis, our service margins increased 210 basis points from the first quarter of 2009. Operating expenses, excluding restructuring costs were 60.1 million or 23% below the 77.7 million reported in the second quarter of 2008, and were down 10% sequentially from the first quarter.

We have made great strides in tightening our expense controls and reducing the level of spending inline with lower near-term volume expectations.

At the same time, we are aiming our spending on key new products, evidenced by our recent product introductions, while investing in sales and marketing efforts to win where the markets are the strongest. We are using deeper insights gained from customers to enhance the effectiveness of our investments and open innovation including outside partner resources to leverage the dollars invested in product development.

Next, let me provide a quick update on our goal of reducing our annual breakeven level as we exit 2009 by more than 150 million from our 2008 level. As a point of reference, in 2008, the company's breakeven point was approximately 760 million. In the second quarter, we made significant progress lowering our annualized level to approximately 665 million.

Our objective is to be profitable exiting 2009, even if the economy does not recover. We expect that when the economy recovers and the markets pick up, we will realize strong operating leverage.

Looking at the balance sheet, we made a substantial reduction in total net inventories which where about $15

Million down from the first quarter of 2009 and 45 million lower year-over-year, driven by the outsourcing initiative and continued management focus along with improved forecasting processes with our contract manufacturers.

We continued to manage receivables well during the quarter which declined roughly 2 million sequentially and 32 million from the 2008 year-end levels.

In the second quarter, we generated positive operating cash flow of almost $8 million, which includes the impact of 4 million of payments related to restructuring costs.

At quarter end, our cash and cash equivalents increased to 227 million. The company is very focused on managing our costs inline with economic conditions and continuing to drive strong working capital management to generate cash. With no debt on our balance sheet, the company continues to be in solid financial position.

As we look to the third quarter of 2009, the current state of the global economy continues to show significant weakness and uncertainty. Revenues are expected to be within a range of 165 to 175 million. Earnings or loss per share is expected to be within a range of a loss of $0.08 to a loss $0.03 per diluted share, including the expected impact of a minus $0.06 for the restructuring plans announced during 2009. Excluding these restructuring charges, the non-GAAP adjusted earnings or loss per share is expected to be a within a range of a loss of $0.02 to earnings of $0.03 per diluted share.

We anticipate the effective tax rate for the third quarter to be approximately 37%. Our earnings per share guidance assumes a diluted share count of approximately 62 million shares for the third quarter.

And with that, I'll turn the call back to Pat.

Patrick J. Byrne

Thanks, Bob. I will now highlight what we are seeing in the market and our key priorities going forward. We believe that the overall market conditions have stabilized and are showing some signs of improvement, compared to the first quarter, but they are still well below a year ago. Most end-markets have lower capital spending plan throughout 2009 and appear to be holding to those reduced budgets.

Customers are focused on extending the useful life of their current assets and engaging in evaluations of new technologies. The overall level of bookings in Q2 was a modest improvement compared to Q1 and our sales funnel has grown sequentially.

We believe these are early signals of a gradual recovery lead by the phasing of these new deployments. We are staying engaged under larger enterprise deployments in anticipation of market recovery, mobility investments with the cellular network is leveraged as an enterprise platform remains the top operational priority for the customers.

Mobile workforces are becoming the focus in many companies and industries and our new products are reaching these new applications.

Our rugged mobile business solutions enable customers to increase revenue, lower their costs, deliver better experience to their customers, while also improving the productivity of their mobile workforces.

Our priorities in this environment are to introduce compelling new products, expand the addressable markets for our technologies to channel engagements and stay actively and aggressively engaged in new deployments.

We plan to continue to lower our breakeven point in order to conserve cash in the short-term and to enable strong operating leverage when the markets recover more fully.

During the quarter, we introduced several significant new products which offer compelling value and represent highly innovative technologies.

Our new CN4 is lightweight and fully rugged 3.5G mobile computer build from the successful CN3 platform. The CN4 is designed to perform in the most demanding work environments. With the six-foot drop specification, a compact internal antenna design in IP64 sealing, the CN4 reduces worker downtime and the risk of critical data or revenue loss.

We also introduced the CN50, a high performance rugged 3.75G mobile computer that is optimally designed for a hold and carry environment and direct customer interactions. We anticipate that the CN50 will bring new customers to our business, especially in field service related applications.

These mobile workers require speed and accuracy on data intensive applications and a single convenient device. The CN50 at 11 ounces and in a smaller package is a gain changing product. It fills the gap between a fully rugged device and simpler and more vulnerable commercial products, while also delivering new technologies that can transform the mobile business process.

The CN50 features numerous innovations including a flexible network radio that can be repositioned to a different network as business needs or coverage options evolve. This capability enables customers to deploy a single hardware platform on the wireless network offering the best cost in geographic coverage. A built-in accelerometer can be used in applications, for example a digital compass that allows the user to track position, direction and movement.

This means in addition to combining computing communications, location and identification technologies in to our products, with the CN50 we have effectively build sensor technologies in the rugged mobile solutions as well.

We also have included a 3 megapixel camera, advanced imaging technologies and Voice over IP and Push-to-Talk capabilities. The CN50 is the industry's most advance rugged mobile computer. The CN4 and CN50 are both available with new Intermec innovation, Enhanced Mobile Document Imaging or eMDI. This new capability provides mobile workers with a fast reliable way to convert the full page paper documents into electronic documents at the point of transaction.

With eMDI enabled devices, mobile workers now have the ability to transmit high quality document images captured in all lighting conditions to back-office applications in real time as part of their mobile business process.

We are very excited about these two compelling new products and are in a shipment position at this time. The sales funnel is robust and we expect them to begin to have an impact on the business in the second half of 2009. Recently, Intermec also added five new rugged mobile label and receipt printers to its PB product family. The PB21 and 22, PB31 and 32 and the PB51 as well as and upgrade to the PB50.

The new printers feature two times more memory, print 20 to 30% faster than computing solutions and are the industry's only smart rugged mobile receipt and label printers. Smart printers lower the total cost of ownership by putting more computing power inside the printer.

These products are focused on router accounting, transportation and logistics, retail and field service applications in the case of receipt printers and retail warehousing distribution centers and factory maintenance in the case of the mobile label printers.

Next, I want to make some comments on our regional performance and outlooks. As I mentioned, enterprise businesses. In the North America, we saw the expected decrease, sequentially in U.S. governmental business due to the expiration of the Department of Defense or DoD AIT-III contracts.

This week we announced that Intermec has been awarded a contract for the AIT-IV. The contract has a three year period for the possible expansion of another six years. We have a long history of successful engagement on the AIT contract with DOD and we believe that the incumbent that we are well positioned to win with our strong product line up. We anticipate this contract beginning to create business later this year.

As, I mentioned enterprise business is still at lower volumes compared to a year ago. But in Q2 we did win a number of important transportation and logistics deals as well as in warehousing with our new CK3 product. We also saw improvement in printer business in the quarter with sequentially stronger bookings.

One of our key strategies is to expand the business with the channel. In Q2, we made progress in the channel recruiting approximately 80 new bars in the Americas, focused on a number of areas including growth rate, utilities and mobile healthcare.

We anticipate new business opportunities in this field service and mobility applications especially with our new products. As an example, we delivered a solution with the partner in a healthcare distribution application where our customer wanted to implement a voice directed picking process to improve productivity using the CK trade.

The sales panel in North America has grown well in Q2 and we believe we are well positioned to capture the growth in the future. We expect that the combination of new products, channel expansion and new technology deployments will be catalyst for continued share gains in the region.

In Latin America, we are seeing an expansion of the channel activities and some restoration of the transportation and logistics business. As well as, improvements in the consumer package goods market, a strength for Intermec in the region for many years.

In Europe, Middle East, and Africa or EMEA, we grew 24% sequentially from a weak Q1. But it is still down compared to a year ago. Many of the transportation logistics rollout has been delayed due to the capital spending reductions. We have seen strengthen some of the retail segments especially, food and consumer staples. Overall in this region the sales panel has grown since Q1.

During Q2, we had success and post to mobility with a significant order from Hermes, a provider home delivery services using a network of over 7500 couriers in the UK. This solution is based on the CN3 with GPS capabilities and highlights the positive leverage we have from our successful deployment with Royal Mail last year.

Hermes is replacing existing paper systems with our rugged mobile solution. Hermes plans to complete the deployment over the next several months. There are several other European postal projects in the planning stage and we anticipate to the business is starting in 2010.

Another area of strong activity in Europe is the government sector especially related to revenue generating activities in municipality, for example in meter reading, traffic police, security applications and environmental regulations. These mobile work forces are off and under served and Intermec along with partners can expand the business with new rugged global business solutions. We believe our new products do well in Europe and this region has a historically been an early adapter driving new Intermec technologies into the industry.

In the second quarter, we added Ingram, Micro and BlueStar as complimentary distribution partners and parts of EMEA and we anticipate these partnerships helping us to reach previously underserved markets.

In Asia-Pacific, we saw some strength in China infrastructure projects and consumer package goods to extra delivery. In Australia, New Zealand the transportation logistics sector remains strong and during the quarter, we provide a new rugged mobile business solution to major personal delivery company.

In summary, we believe our markets are improving albeit gradual recovery, lead by new deployments and newly addressable mobile workforces.

Our priorities are to gain share with our new products and channel expansion and to stay engaged on these new deployments of rugged mobile business solutions. Our products and services provide excellent value to current and new customers for Intermec which we believe, positions us for the future.

We continue to lower our breakeven point while we keep these new products and channel efforts on track. We expect this will provide significant operating leverage when the markets recover more fully.

I am confident of this business plans delivering strong long-term shareholder returns and we appreciate the support of our employees, customers, partners and investors.

This concludes my formal remarks. I'll now turn it back to Kevin for question and answers.

Kevin P. McCarty

Thanks, Scott. Kim, we'd like to now open up our call for our question and answer period, please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Reik Read with Robert Baird & Company.

Reik Read - Robert Baird & Company

Thanks, good afternoon guys. Just in terms of the product gross margins, they were down just a little bit over 200 basis points sequentially. I understand the revenue was down, but wasn't down that much. Can you help us understand what else might be putting some pressure on those margins? And you had mentioned competitive pressure in your, in your script. Could you comment on that?

Robert Driessnack

Thanks Reik. This is Bob. Couple of comments, we are seeing a continued impacts, sort of the economic environments and the overall impact on volumes which is were down just a little bit. Our outsourcing model is working well; we are seeing the cost savings and things there. I do have some fixed cost but still causes to de-leverage a little bit. Competitive pressures, really it starts with bio-power in this environment and across all over markets. We are focused on winning business that is our business in many cases.

Also from the product geographic mix, while Europe was up sequentially from the first quarter to second quarter it's still down substantially from the prior year. And as Pat, I think, has commented a couple of times Europe historically has been one of our better or our best margin region overall.

Product mix also came into play with just certain products that carry a little bit higher gross margin being a smaller share of our mix in the second quarter.

Reik Read - Robert Baird & Company

And when we look at the new products that you guys have now released, is there some margin weakness that will occur is those ramp?

Patrick Byrne

Reik this is Pat. I would expect these new products to establish strong pricing power as a result of having unique technology as I mentioned the CN50 is the most advance rugged mobile computer in the industry. So, we have established those pricings and there are margin objectives as we launched these products. I think there is natural transition point occurring as these products get introduced in some cases replacing the volumes that we had in our older I mean our more established products. So I would expect overall that these would add to the margin profile in the future.

Reik Read - Robert Baird & Company

Okay and then just on the operating expense, expenditures which was showed real time decline sequentially. Can you guys talk a little bit about what's specifically kicked in with the programs that you had underway, was there any time things in there that it might recur and how much more would we expect throughout the rest of the year or are you done?

Robert Driessnack

Reik this is Bob, as we talked about with our breakeven, we are trying to substantially reduce the cost structure and get to sustainable going forward run-rate. We made substantial progress, as you noted, in the quarter. Really, the first thing was we did have headcount savings. So the actions we announced in January and April, there was impact in savings from that as we had planned. We did make good progress in controlling discretionary spend. And I think we've made better than expected progress to date. I am looking at how we attack indirect savings in certain categories of spend.

The other thing that probably helped us a little bit, year-over-year not so much sequential first to second quarter, was lower foreign currencies and the translation impact. So I think we are solidly on track. We are looking for additional savings in the second half of the year. We've actually made substantial progress here in the second quarter. I'd say on expenses we're a little bit ahead of where we had originally planned. And we also managed very aggressively given the continued top line pressure and some of the margin challenges that we have talked about.

Reik Read - Robert Baird & Company

Is it fair to say that with you continuing that to get your break, that breakeven target more of that will come out of cost of sales than operating expenses or is that not right?

Robert Driessnack

I think improving margins is a good exemption whether that is cost reduction there is certainly would be some of that above the gross margin line but also expansion of the margins with pricing new product mix and the other items that Pat alluded to here.

Reik Read - Robert Baird & Company

Okay and just one last question again just kind of going to what sounds like it might be a little bit more of our price competitive market, you guys said you plan to remain disciplined, can you talk a little bit about if that discipline cost given the quarter?

Patrick Byrne

This is Pat. I don't think Wright that the pricing discipline that we have established have done a materially impacted our top-line I think we're on good track of winning business, we made significant progress in the channel. But, this is an important discipline to have through this recessionary period, because it establishes the capabilities for company to get the operating leverage when the markets recover.

Reik Read - Robert Baird & Company

Okay, great. Thank you, guys.

Patrick Byrne

Thank you, Rick.

Operator

Our next question comes from Chris Quilty with Raymond James and Associates.

Chris Quilty - Raymond James & Associates

Evening, gentlemen. A lot of new products in the last month or two. I was hoping, could you give us perhaps Pat, some metrics on the percentage of products or excuse me, percentage of sales from new products, where you are at now and on a historical basis, what that would indicate and how you think it's going to look on a go-forward basis?

The second part of the question is, what are you expecting in terms of the margin contribution on these new products, related to the products that they're replacing?

Robert Driessnack

Our revenues, again we have to look at the product revenues, and our service revenues are about 20% of the company. But under product revenues, we typically have these products last about five years. So, you typically see 20% or so of revenue from new products. That has been... last several quarters we've been in that kind of range as these products were anticipated in the market that declined a little bit recently. But, I would expect it to pick up to be above 20%, going forward as these products were adopted in the marketplace.

And as we especially pursue new applications that's going to be net new business and that would make a substantial progress or contribution to our new product revenue. The second question had to do with margin contribution. Is that right?

Chris Quilty - Raymond James & Associates

Yeah.

Robert Driessnack

The margin contribution in our goal as I outlined before is that the new products would have 5 to 8 points higher gross margin than the products that they are replacing in the marketplace and that remains our goal.

Chris Quilty - Raymond James & Associates

Okay, do you think the announcement of some of these new products, some of which have not shipped, and you mentioned the anticipation, was there an impact in the current quarter, fall off in sales because the timing of new products and the sudden setting of all products?

Patrick Byrne

Well, I would say that we are with the anticipation with CN4, CN3 has been very successful. We have a very robust CN3 funnel and a very large installed base and it's an outstanding product. I think the impact on the CN3 was modest in the quarter we just finished. And I do think these are products are additive. The CN50, I think will be substantially, will substantially contribute to growing the business at the same time there's a natural transition point of one product declining and another product growing.

So, I don't think in summary that there was a significant impact in Q2 on the anticipation of these new products, but that probably was down.

Chris Quilty - Raymond James & Associates

Okay. And Bob, just real quickly on the SG&A, I mean very good sequential performance here, can give us an idea, are those levels sustainable going into the back half of the year or should we expect some upward migration?

Robert Driessnack

Chris, I think the stability and the ability to sustain them is very strong. Actually, there was one part of Rex's question I didn't answer, which was in the one time-items. We have less than $million, probably 0.5 million to $1 million of items that would not be easily repeatable in the second quarter. So, therefore, the only thing that I would expect to drive those up would be volume increases and any variable cost related to that. I do think there are some additional actions that we have already begun that would give us an opportunity to keep that at about the same level near term now.

Chris Quilty - Raymond James & Associates

That's great. Thank you.

Operator

Thank you. Our next question comes from Ajit Pai with Thomas Weisel Partners.

Ajit Pai - Thomas Weisel Partners

Yeah. Good afternoon

Patrick Byrne

Hi, Ajit.

Ajit Pai - Thomas Weisel Partners

A couple of quick questions. I think, the first is about AIT-IV, could you give us some color as you've given us the size of the contract, but how many of your competitors for your key products also have won the contract?

Patrick Byrne

So, we don't have complete visibility into this, but we believe that this will be... will remain competitive and from what we can tell that there are key competitors that are in this, we know of at least one. But, we don't know of anymore than that.

Ajit Pai - Thomas Weisel Partners

And who is the one?

Patrick Byrne

I would not be saying that.

Ajit Pai - Thomas Weisel Partners

Okay. But, is it on the printer side or is it on the sort of more on the mobile computing side?

Patrick Byrne

I think it's on both.

Ajit Pai - Thomas Weisel Partners

On both sides, okay. Okay, and then when you... what's the share that you expect between you, between Intermec and the other competitor, do you expected it to be 50-50, do you expect to have greater than 50% less than 50%?

Patrick Byrne

Well, I would say, it's a large multi-year contract. You've seen in the press release how large it is.

Ajit Pai - Thomas Weisel Partners

Yeah.

Patrick Byrne

For three years with an extension, possible extension of six years. We're in a very strong position because of our incumbency. We've excellent new product line up. So, I think we are well positioned, I wanted to predict the future market share of that, but I think we did very well in AIT-III and we anticipate strong result on AIT-IV.

Ajit Pai - Thomas Weisel Partners

And on AIT-IV it's only dual so as to the best of your knowledge it's not triple source for each category?

Patrick Byrne

We believe that there are three winners or people of pointed awarded with the contract. This has to do with how many people are priming the contract and how many sub-suppliers there are. So there are three awardees. We don't believe that means that there is three winners in each product category underneath that.

Ajit Pai - Thomas Weisel Partners

Got it. So, your belief is that it's going to be a dual source right now based on what you know for each category, but not three people supplying each category. Is that correct?

Patrick Byrne

I think that's a fair assumption, but I think that... as I said, three awardees we're one of the winners and there are other product companies that are providing to the other two. I think speaking about it in terms of dual source of individual components within the solution is reasonable.

Ajit Pai - Thomas Weisel Partners

Okay. Sir, then pricing should not be deteriorating materially on this. I mean at fixed pricing you already take all of that as agreed on already?

Patrick Byrne

Yeah. The way that this AIT is designed is compared to AITs, this really provides a basis for winning individual requirements of deployments through the lifecycle. So, I believe we're in a strong position with the technologies. We have the products were established, I think will have good pricing as a result of it. We are the only one of the suppliers that primes this. And so, we have a prime position and we're the only one among our competitors that's in that position. I think that puts us in a strong position that contribute to the customer and, therefore, earn pricing power.

Ajit Pai - Thomas Weisel Partners

Got it. And then when you look at the CN4 and the CN50, the new products I think you have talked a little bit about the margin impact, but could you tell us from a pricing perspective, how these products manage to get a premium in terms of pricing related to their predecessors?

Patrick Byrne

The pricing is of course public information on these products and they are good margin products. If you look at the pricing of these products, they're similar to or above our current prices of existing products.

Ajit Pai - Thomas Weisel Partners

Right. But, were they similar or higher than when the products are first introduced? Is the CN4 price higher than the original pricing for the CN3?

Patrick Byrne

The CN4 is priced above the CN3. The CN3 price has not changed substantially.

Ajit Pai - Thomas Weisel Partners

Okay. And then the CN50, what kind of price point of that, what's the list price?

Patrick Byrne

The CN50 is priced around where the CN3 is priced currently. CN4 being above the CN3, the CN50 being similar to the CN3.

Ajit Pai - Thomas Weisel Partners

And what are the differences in the targets, like who're you targeting the CN4 with and then who are you targeting the CN50 with in terms of verticals and kind of customers?

Patrick Byrne

Yeah. So, the CN4 is fully rugged device. It is the most rugged, rugged mobile computer. And so for those environment, transportation and logistics, for example will be a significant opportunity for the CN4 more than traditional CN3 markets. The CN50 of course, will also go into some of those, but I think it's growth opportunities are in these other mobile work forces.

Field service applications, mobile maintenance and repair, some healthcare applications, those kinds of places where a smaller device at 11 ounces, it's a smaller product will allow us to reach some of those of new applications, broadly speaking I think in the field service applications.

Ajit Pai - Thomas Weisel Partners

Got it and then the last question would be just looking at some of the postal efforts that you've made and some of your wins, especially in the second half of last year, some of your deliveries there. On a global basis, penetration is pretty low in that market, and there're lots of postal workers there, are you seeing just given the sort of taxes falling globally, tax revenues for governments and the postal departments coming under pressure globally because of lower traffic. Are you seeing any increased interest in that vertical, are you seeing none in that vertical, are you seeing folks delaying?

Patrick Byrne

What I would say is that the transformation of the postal business model, using this technology as a key priority for many postal agencies. Since these are larger organizations with large workforces. And I didn't mention that but the CN50 we believe, we'll be well accepted into postal applications for more mobile workforces. And so the interest is very high in these technologies. The Royal Mail example, it's an example well known in the postal industry, the success of that deployment. And we see a lot of strong interest moving forward as that business model is shifting and there is more competition and new opportunities for revenue generation as well as, I mentioned. That's one of the key attributes of these products is enabling this mobile workers to add more to the business and really turn a transaction into an interaction.

Ajit Pai - Thomas Weisel Partners

Got it. Okay. Thank you.

Robert Driessnack

Thank you, Ajit.

Operator

Thank you. Your next question comes from Eli Lustgarten with Longbow Securities.

Eli Lustgarten - Longbow Securities

Well. Good afternoon.

Patrick Byrne

Hi, Eli.

Eli Lustgarten - Longbow Securities

Couple of quick questions starting on one, foreign currency, it gave us a impact on sales, do you have impact on profitability from the foreign currency pressure?

Robert Driessnack

It's always the sales percentage tends to track down the gross margin that a pretty high rate and why operating expenses obviously have benefited year-over-year from the currency. It's in neighborhood of 4 to 5% as well, both of them.

Eli Lustgarten - Longbow Securities

Impacted by a reasonable amount of money by negative currency, what I'm saying is currency and in third quarter you have similar currency plan, but currency trend is positive towards the end of the year, these comparison at current rate?

Robert Driessnack

NFG, there is an interesting dynamic coming as we compare year-over-year in currency. Third quarter currency last year was about at its peak. For the euro, the pound and a number of currencies, as you noted. My expectation is, if I compare to the current rates, it's going to be more than 12% revenue impact in the third quarter year-over-year. However, in the fourth quarter, currencies weakened substantially and I am not going to predict that this time where I think currencies will end this year.

Eli Lustgarten - Longbow Securities

Byrne, I'm just saying that, but one of the things that can drive you very quickly to profitability in the third and fourth quarter is just the changing currency. Is that a fair -- I mean you're talking a third quarter breakeven wasn't even equal the fourth quarter will be positive on the currency side? Still stays in current rates?

Patrick Byrne

I think certainly the current situation has created a certain amount of pressure and if that current moves in the opposite direction do anticipate that could help though there is plenty of other activities and options revenue to work on as well to that drive that result.

Eli Lustgarten - Longbow Securities

IT Sales in '08 and how much you are seeing in '09 you quote in the contact?

Patrick Byrne

We don't disclose the AIT revenue within the America, its part of the Americas number, it's a substantial amount of our, it's a meaningful contribution to our America's revenue one of our largest customers bases it has been proved several years and so would say you know we would anticipate that business would be strong this year as result of AIT-III finishing AIT-IV starting up but this is sort of a transition year as AIT-III wrapped up and as AIT-IV starts to ramp.

Eli Lustgarten - Longbow Securities

Is it down year-over-year in the first half ?

Patrick Byrne

Yeah it is

Eli Lustgarten - Longbow Securities

And the $418 million contact, the three year to six year option extension, is that 418 to cap on nine years or on the -is it at the cap of nine years, isn't it?

Patrick Byrne

It's cap on the total contract, right. So the three year contract with the possible extension of six years. So it was extended the entire extra six years. And that would be nine years. But as I said, it's three years of the possible extension of tax.

Eli Lustgarten - Longbow Securities

Yeah. And before I come back to the thought over nine year to the went that far?

Patrick Byrne

If it went that far.

Eli Lustgarten - Longbow Securities

Right. And..

Patrick Byrne

The thing is the IT contracts have not gone that par.

Eli Lustgarten - Longbow Securities

You have you gave the sort of measurement of what's the difference between 2010, 2009 could be from having a new contract is there incremental magnitude that you could expect?

Patrick Byrne

Well. I think that part of this just depends upon the on with the macroeconomic conditions and spending environment is I think that we'll have the entire contract for whole year in 2010 and these are new products that the AIT contract is 75.

In 2009 was relatively lower than 2008, so, I would expect that again we don't give guidance for 2010 at this point, so I would anticipate the 2010 we would able to grow the business compared to 2009.

Eli Lustgarten - Longbow Securities

Okay. But a meaningful amount is over I guess in driving term?

Patrick Byrne

Right, I think it's too early to say that.

Eli Lustgarten - Longbow Securities

Yeah, but the potential business

Patrick Byrne

Yeah this is the substantial contract and will have a full year in 2010.

Eli Lustgarten - Longbow Securities

No, as you stock market everything -- during today -- impact of pricing on the quarter about this year you have a measurement of how much down price in this one?

Patrick Byrne

We don't know, don't breakout the impacts specifically on pricing in a period.

Eli Lustgarten - Longbow Securities

Okay. What's your expecting for the year, kind of pricing pressures I mean is that a fair way at it looks like will that be a couple of percentage pricing of that?

Patrick Byrne

There is certainly an impact as I talked about from the economy, the bio-power and then certainly the competitor pressures and you think there is some impact on pricing. We don't break out with that exact impact is.

Eli Lustgarten - Longbow Securities

Have you see any change in the pricing environment and some stabilization and now it seems things sort of stabilizing in the market place and the economy at this point. That translate into pricing. ...new products to require that?

Patrick Byrne

Well, certainly the new products we anticipate having significant pricing power because the new technologies that we have to bring to the market. That's really our objective. One I think a new color commentary I would add to the pricing environment is that there're not as many big deals out there. There're not as many deals that are 10,000 units on a regular basis in a single deployment and as a result there is more competition for more modest size or medium size deals, there may be would have been the pricing environment previously for a larger ones, just because there is less of the larger ones out there right now.

Eli Lustgarten - Longbow Securities

And do you have -- can you give some idea when these new products will really begin to be available for any quantities?

Patrick Byrne

Well, these products are available shipping now, I said that earlier. And what I also said was that they would begin to have a positive impact on the business in the second half. So we have a robust sales funnel. We're in a shipment position. The products will be shipping this quarter, the quarter that we are in and Q4 will be the first full quarter of shipment. But it will be still ramping. We anticipate it's still ramping for the remainder of 2009.

Eli Lustgarten - Longbow Securities

So, it's really next year before we get really full impact?

Patrick Byrne

Well as I said, we'll ramp it this quarter. It will begin shipping this quarter. We'll have a full quarter of shipments in Q4. But we anticipate that they will still be ramping as in terms of volumes really through the rest of this year and into the beginning of 2010.

Eli Lustgarten - Longbow Securities

Is there much cannibalization between new products in the CN3?

Patrick Byrne

We think about this as the CN3 plus the CN4 is going to grow that business, that overall business. It's advance radio technology. It's very rugged product. It's a very competitive. And also allows customers who are in the install base the CN3. They have a migration path to the latest technologies. So we think about the CN3 plus CN4, building the business as a result of having both products. And the CN50 is goes after some of that to compliment those products with the different form factor, different weights, with advanced technologies, but also representing growth in the business. The CN50 is also pursuing new applications, as I mentioned, field service applications and so on. That's the way to think about it.

Eli Lustgarten - Longbow Securities

Okay, one final question. You mentioned enterprise there have been many big projects in the first half of the year. But -- sort of indication if you starting to see some of the market place circulatory and some big enterprise program or so, can you give us a magnitude of what maybe talk about on the rise of over the next six to twelve months, really it's timetable that to get but?

Patrick Byrne

The way I would print that out this but I said there is two kinds here. The first one are is the replacement cycle. Technologies that are 4,5,6 years old that have been out there, those represent opportunities to upgrade those. As these technologies reach the end of there useful life then and our customers are looking for opportunities to upgrade those. Those large install basis, there is a number of those and there tens of thousands of units that are out there. Now those get upgraded over a period of time, they don't get all upgraded all in one period. And then there is a number of deals in our funnel that are thousands of units. There are some that look like they maybe larger than that. Those tend to be further out as people are looking at how are they going to set their 2010 capital budgets.

Eli Lustgarten - Longbow Securities

Okay. But, most of this Pat, we don't expect to see anything new share at this point, I recognize that. I am just trying to know if there is a magnitude of 2010 versus 2009 on the shelf that may show up. We're just trying to get magnitude of improvement?

Patrick Byrne

I think one of the key things here is what's the macroeconomic environment and what happens to the capital spending. Because that is one of things, as I said in my prepared remarks that in 2009 people reset their capital spending, early in the year as the recession, it looked like people are trying to see, when it's stabilized and so on. And so in 2010, people will look at the overall economic environment and see where they need to set their 2010 budgets. And as a result the piloting, the phasing, the evaluation of new technologies in the next six months, is an important step towards being prepared for in anticipation of increased capital spending in 2010. That's the way that I would think about that.

Eli Lustgarten - Longbow Securities

All right.

Patrick Byrne

There is enough activity out there. These mobile work forces are important. These product refreshes are coming up, the overall macro environment, I think will set the overall spending environment.

Eli Lustgarten - Longbow Securities

All right. Thank you.

Patrick Byrne

Welcome.

Robert Driessnack

Thank you.

Operator

Our next question comes from Andrew Abrams with Avian Securities.

Andrew Abrams - Avian Securities, LLC

Hi, guys. I just wanted to get a little more color on the enterprise side. If I remember last quarter, or even a little earlier than that, it was conversations were basically at zero, and now it seems like not only your conversation is happening, but some of the orders are actually coming through. If you could characterize how the enterprise guys are looking at things, from their perspective, especially is it, Gee, if had a big order, I'm not going to the big order, the order going to be smaller than that and it's going to play out this way over the next six months or is it the same size order just extended out a little further than may be normal. I mean, if there's some characterization you could give on the enterprise side?

Patrick Byrne

Yeah. What I would say is that the, is that just as I mentioned one and two quarters ago, people are looking in investment environment for returns that are six to nine months ROI. That's still the overall spending environment, so people are looking for solid returns. The good news is our products are operational tools. They lower cost, they improve customer experience and so on. So, they are priorities even when the return cycle is that, that short-term.

So, what is really emerging in the last three to six months, is that people are... their businesses have stabilized. Many companies know what their breakeven point is, what their cash flow is. They believe that they understand more about the overall demand environment and how do they need to build their distribution systems, their warehousing systems. And so they are beginning to look at what are the new technologies that I should be evaluating and preparing for and beginning deployments of, either a portion of the deployment. So they can get started on proving it out in the environment or the evaluation, so that when they have larger capital budgets, they can spend it.

And I think both of those were the case. The key thing to me is that it seems to be less now about safe capital with any cost into more rich plan on how we're going to come out of the... when this market does recover in a stronger way. And either doing part of the deployment or planning it carefully, so that when capital budgets are available, they can accelerate those. That's our reason for these key strategies of channel engagement, new products and deployments engagement, so that we're well prepared on both current and future applications.

Andrew Abrams - Avian Securities, LLC

Now, have you seen any characteristic that you can point to on the VAR side through the channel. I know you don't have quite the visibility that you would on the enterprise side, but is it the small guys still doing very small deals, the ones and twos and fives and tens or is there some kind of traction coming out of the VAR channel a little bit more than it was a quarter or so go?

Patrick Byrne

I would say that there is less business for everybody right now. And so the many VARs along with ourselves are insuring that we are engaged on projects that have a real traction. Partial deployments, engaging under the longer and ensuring that they have service and solution revenues that will keep their businesses strong in the midst of this recession, because there is fewer large deployments going on. I don't think there is significant changes to the channel profile based on what we see, but certainly active engagements in the next projects and looking for and pursuing value added solutions. It's one of the things we believe we provide very well is the ability for these value added resellers to add value on top of our products. Thereby, building a business model that has ongoing revenue streams.

Andrew Abrams - Avian Securities, LLC

Just one last question on the new products, the 50 and the 4. Is the revenue that's going to come in the third quarter coming from your beta testers or are you actually pulling in new customers. And if it's the latter, what does it look like in terms of the kind of let's kick this around for a while before we place a real order. We'll take a couple and see how they work? What's that cycle time look like?

Patrick Byrne

Well, I think that they are at the beginnings of significant deployment. There's also customers looking at this for their mobile workforce enablement and so they're evaluating the technology, because it reaches this new functionality. This new form factor and capability. Some of these organizations haven't implemented these mobile solutions before and so they're getting going those deployments and I think it's a mix of those.

If I think of the sale funnel, we have a combination of existing customers that we're engaged on during the beta development and they're adopting it, but also new customers through the channel and new applications and both of those, I think will make a contribution in the second half.

Andrew Abrams - Avian Securities, LLC

Thanks.

Operator

Your next question comes from Tavis McCourtwith with Morgan, Keegan.

Justin Patterson - Morgan, Keegan

Thanks guys. This is Justin Patterson on behalf of Tavis. Just comparison on the --.

Patrick Byrne

Hey, Justin.

Robert Driessnack

Hi, Justin.

Justin Patterson - Morgan, Keegan

Hi. Just a quick one regarding linearity for the quarter. Can you comment just from a geographic perspective how bookings trended throughout the quarter? The things just got incrementally better progressively or was it just kind of volatile from same month-to-month?

Patrick Byrne

What I would is that April was better than January, May was better than February, and June was better than March which is that Q1 was weak in terms of bookings momentum. And if you just compare those first months, there is various linearity through the quarter. If you just compare the comparable months in the quarter, we saw a progress throughout Q2.

Justin Patterson - Morgan, Keegan

Okay. And with respect of regions, was there any geographies, I would say, dramatically better or worst than you had expected?

Patrick Byrne

No. I would say that the regions performed according to the relative ratios that we expected at the beginning of the quarter.

Justin Patterson - Morgan, Keegan

Okay.

Patrick Byrne

As we had outlined, we'd said that we... that the North America region would see a sequential decline, for example in Q2 because some previous, some revenues in Q1 that had been booked a while ago scheduled for shipments in Q1. And that's the in fact what we saw, we saw a substantial improvement in the EMEA business. As Bob had outlined 24% sequential improvement. That's what we anticipated and that's what got delivered.

Justin Patterson - Morgan, Keegan

Okay just then shifting gears to the product side of things. Obviously, the new products sound like they are generating quite a bit of interest. When you are talking about new customer wins here or new customer interests, are you primarily talking about say ones that might be first time, I guess industries for Intermec here or are we talking about say kind of your existing verticals more competitive win type of things?

Robert Driessnack

What I would say is that when we talked about new customers, we talked about two things. One is new vertical applications in deployment environments. There is a number of those. And there is also portions of the mobile workforce in our current clients. And we're, because of the capabilities, for example the CN50, while also retaining a very strong fully rugged product, there is more of their workforce that can now access Intermec technologies as part of their overall rugged mobile business solution. And so both of those, we expect would occur as result of having both of these product families in the marketplace.

Justin Patterson - Morgan, Keegan

Right but I guess it goes right now, have you seen sort of ask you toward one or the other?

Robert Driessnack

What I'd say is right now is that there is, on a relative basis there is more interest in the total funnel associated with some new applications and but it is in the 70:30, 80:20 kind of thing. It's a good balance between the two, there is a substantial amount in our existing customers, we're looking a new mobile workforce is be enable but I would say that in balance, there is probably slightly more in new application areas, new customers, new deployment environments where the CN50 and its value proposition is compelling to provide sometimes the first rugged mobile business solution that the customer will have used.

Justin Patterson - Morgan, Keegan

Okay, got it. So kind of a decent mix between the two.

Robert Driessnack

Yeah, there are also some places in this where -- in the CN50 funnel, again this is we're looking into the future trend and try to give you some perspective of what's possible here. They are replacing Smartphone deployments where the total cost of ownership is lower for our solution. Because when you deploy these Smartphones in a rugged environment their capability, their uptime, their physical ruggedness, the total cost of ownership is expected to be lower using Intermec products.

And that's not an insignificant portion of the sale slump. So we expect that we would actually generate some substitution revenue for other categories.

Justin Patterson - Morgan, Keegan

That's interesting that you buy Smartphones. So you look at that market right there, is that something that you kind of view as kind of long-term opportunity here as the CN50 is kind of new added product for Intermec here. Can you guys or you at least thinking about transitioning more toward kind of Smartphone I guess new hype about market opportunity here, where you can get more of those substitution effects overtime?

Robert Driessnack

Well I'll make a few comments about the Smartphone trend. First thing is that the Smartphone, I mean that whole phone dynamic is a key economic and use case catalyst for our technologies because the sale of infrastructure has been deployed, driven by consumer voice and data traffic and so this is a very significant economic and used case catalyst for our business to grow and provide the solutions into rugged mobile products. And that's the first thing is that this is a something that helps enable this products to be productive for noble workforces. The second point I make is that we are leveraging technologies from the Smart phone. We had an announcement earlier today that we've have a partnership on the CN50 with Qualcomm which is obviously a major supplier into the wireless industry. So from the technology and infrastructure point of view the Smart phone industry is something that we strongly leverage and utilize.

We anticipate our products and our solutions because they enable the productivity this noble workforce and is able to offer a compelling total cost of ownership to be a robust industry and as the cell phone, the Smart phone business is also a robust industry. So we see them as complementary.

Justin Patterson - Morgan, Keegan

Okay. Great. Thank you.

Robert Driessnack

Thanks Justin.

Operator

And our next question comes from Chuck Murphy with Sidoti & Company.

Chuck Murphy - Sidoti & Company

Good afternoon, guys.

Patrick Byrne

Good afternoon, Chuck.

Chuck Murphy - Sidoti & Company

I'll try to keep it quick. Then I would dragging on while here. Two questions, first regarding the third quarter guidance. Anything different you're expecting from mobile computers versus printers and service?

Patrick Byrne

I think we will be expecting I think, overall obviously sequential increase of... perhaps up to 10%, 5 to 10% but it should be across the different categories. We haven't really guided and not ready to guide whether it's more in one versus the other.

Chuck Murphy - Sidoti & Company

Okay. As it can say regarding the end markets industrial versus retailer transportation logistics?

Robert Driessnack

In our forward-looking picture, we're not expecting a significant turnout and in the overall buying environment. As I said, the 2009 capital budgets are set as some of these industries, industrial transportation logistics were hit pretty hard as a result. We think that combination of our new products and our channel expansion pursuing no upgrades to the refresh cycle of our current customers as well as competitive accounts that we can after combined with these new applications will give us probably a broader mix looking forward of the industries we participate in.

We were not expecting a turn up in the significant economic condition of these industries with historically I think they have stabilized and new technologies will be deployed but we don't expect some significant purchasing catalyst.

Chuck Murphy - Sidoti & Company

Okay. Alright and then the question was the sales guidance for 165, 175 million. On that basis what would be the ball part for gross margin?

Patrick Byrne

I'd expect gross margin to be up sequentially over there from the second quarter but not substantially improved. Chuck.

Chuck Murphy - Sidoti & Company

Okay and I mean would it going to stay at run rate for a while or is it improving thereafter?

Robert Driessnack

I think the point that Pat just made where we don't see a substantial change in the markets overall I think that's also what we drive kind of the near term margin expectations. There is no catalyst near term to change that other than additional discipline and things that we want to bring.

Chuck Murphy - Sidoti & Company

Okay, that's all I had, thank you

Robert Driessnack

Thank you

Operator

We got a last question comes from Chris Quilty with Raymond James and Associates.

Chris Quilty - Raymond James & Associates

Two quick questions, first service revenues I guess as expected has held up better than the product sales. But is there some point in the future when may be the benefit you are seeing from customers fixing stuff, shifts over to people buy a new stuff and we you get a big drop off in the service or how much of the service that service prepare shifted out to the channel.

Robert Driessnack

Well we are, our service revenues as you said are relatively flat. It really in servicing the install base and so as that install base and we saw a significant a material increase in unit volume, unit shift in 2008 compared to 2007 as the 2008 volume moves in the service life that would be revenue in the service business.

So, I would expect in the first quarter that the service business has goes up and down with the overall business but is the slower moving function. I don't think it has a substantial disruption from what can we say in the future.

Chris Quilty - Raymond James & Associates

Okay. And second question you guys have had a sort on again, off again thing with the retail market? Can you talk about whether the current or new product portfolio, gives any better leverage into that channel because I consistently hear from all over the channel partners that seems to be one of the vertical that's probably most in need of upgrading replacement.

Robert Driessnack

So, we would anticipate first of all the CK III has had a number of best product we introduced by nine months ago and has had a number of important noble retail applications wins and warehouse applications and some other places in retail. We anticipate that the CN50 would also find applications in the retail market and we see some of the same dynamics that you're talking about which is that the age of the assets and there're some significant opportunities that were looking at, in that refresh cycle that you mentioned.

Chris Quilty - Raymond James & Associates

Great. Thanks very much.

Robert Driessnack

You are welcome.

Patrick Byrne

Thanks Chris.

Operator

Thank you. This concludes the question-and-answer session.

Kevin McCarty

Great. Thanks Kim. That will conclude our call for this afternoon. We really appreciate you joining us and have a pleasant evening.

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Source: Infonet Services Q2 2009 Earnings Transcript

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