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Zebra Technologies Corporation (NASDAQ:ZBRA)

Q2 2014 Earnings Conference Call

August 5, 2014 11:00 AM ET

Executives

Doug Fox – VP, IR

Anders Gustafsson – CEO

Mike Smiley – CFO

Mike Terzich – SVP, Global Sales and Marketing

Analysts

Andrew Spinola – Wells Fargo

Keith Housum – Northcoast Research

Brian Drab – William Blair

Michael Kim – Imperial Capital

Greg Halter – Great Lakes Review

Operator

Good morning and welcome to the Zebra Technologies 2014 Second Quarter Earnings Release Conference Call. Joining us from Zebra Technologies are Anders Gustafsson, CEO; Mike Smiley, CFO; Mike Terzich, Senior Vice President, Global Sales and Marketing; and Doug Fox, Vice President, Investor Relations. All lines will be in a listen-only mode until after today’s presentation. [Operator Instructions]. At the request of Zebra Technologies, this conference call is being recorded. Should anyone have any objections, please disconnect at this time.

At this time, I would now like to introduce Mr. Doug Fox of Zebra Technologies. Sir, you may begin.

Doug Fox

Good morning. Thank you for joining us today. Certain statements made on this call will relate to future events or circumstances and therefore will be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Words such as expect, believe, and anticipate are a few examples of words identifying a forward-looking statement.

Forward-looking information is subject to various risks and uncertainties, which could significantly affect expected results. Risk factors were noted in the news release we issued this morning and are also described in Zebra’s latest 10-K which is on file with the SEC.

Now, let me turn the call over to Anders Gustafsson for some brief opening remarks.

Anders Gustafsson

Thank you, Doug and good morning everyone. I’m pleased to report that Zebra achieved another quarter of record sales $288.4 million up 14% over a year ago and at the upper end of our guidance range. Non-GAAP net income of $0.84 per share was up 35% from $0.62 per share for the second quarter of 2013. We maintained strong gross margins and generated $55 million in the free cash flow.

All around the second quarter was another very solid period for Zebra. Our sustained success demonstrates strong execution capabilities against the proven growth strategy, virtually all facets of our business met or exceeded our performance expectations as we further penetrated targeted industries more deeply and maintained our focus on delivering more innovative solutions to our customers.

We also made solid progress on integration planning for day one readiness our first priority for the acquisition of the Motorola’s Solutions enterprise business as we lead up to closing. Ongoing strength in our core run rate business and further improvements in large enterprise deals characterized second quarter activity.

All geographic regions contributed to the sales growth. In North America shipments to customers in retail and transportation and logistics remained buoyant. An uptick in core printer shipments, partially offset the expected seasonal decline in revenues from Hart Systems.

In Europe further improvements in economic activity lead to our third consecutive quarter of record sales propelled by strength in the UK and Germany. And in Asia further diversification of our customer base supplemented improved shipments to manufacturing customers.

We also made good progress on integration planning for the acquisition of Motorola’s enterprise business. Since announcing the deal on April 15, we established and staffed our integration planning office with teams across all business disciplines fully engaged in activities to prepare for day one as a combined entity.

Our first priority has been and will continue to be the ongoing success of our combined organization. We have worked diligently to identify and start to address all critical areas of improvement and change needed to ensure this objective.

We are very pleased with the progress we are making on the complex process of acquiring carve our business. In addition, we recently announced the passing of the HartScott-Rodino review waiting period, a key milestone. We expect to complete the transaction by year end.

Let me now highlight some areas of progress in the second quarter. In all geographies Zebra has benefited from deeper penetration of targeted verticals. We continue to forge tighter, more strategic relationships with established and new customers. We increasingly look to us for products and solutions that help them gain greater visibility into their business operations.

To this end both new and established Zebra products gained attraction. In North America, we had 16% sales growth with notably strong sales of mobile printers. Large deal activity included shipments of our popular QLn320 Mobile Printer and our PS4000 wireless print server to retail customers.

Our innovative location solutions product also had a solid quarter with improving shipments to industrial customers who are increasingly taking advantage of the power of active RFID for asset location and motion management.

In EMEA, nearly all sub-regions experienced sales growth which led to 16% growth in this region as well. Large deal activity included shipments of our compact MZ 320 mobile printer into postal applications.

For a particular note, we had a very successful launch of our new ZT400 series midrange tabletop printer in the region with good uptick by retail and manufacturing customers. Healthcare also stood out with strong sales of our HC100 Thermal Wristband Printer as did our broad range of thermal and laser wristband products.

In Latin America, we had modest sales growth of 4%, in part due to a challenging economic and political landscape in several countries. Growth in Brazil, was the most challenged with some impact from the World Cup. This performance does more than offset by growth in Mexico and other parts of Latin America.

The region continued to be an area of strength for our card printer products supported by some nice wins in Argentina and Ecuador for financial services applications. Our custom applications group was particularly helpful in working with the Latin American channel partner to tailor our card printers for these applications.

We also had robust growth of supplies in the region. Large deal activities picking up supplementing a steady run rate business and providing for a favorable outlook for the second half of the year.

Asia Pacific also registered another strong quarter with sales up 9% on broad strength across the region including a pick-up in large deal activity. In India, card printers are supporting board of registration activities.

In South Korea, the manufacturing recovery along with favorable trends in transportation and logistics and healthcare generated high demand for mid-range and desktop printers. In China, an improving manufacturing sector led to increased shipments of high performance printers for mission-critical applications.

In addition, our diversification into the parcel delivery sector generated several deals for our desktop printers specifically designed to meet the needs of customers in emerging markets.

Solid execution on a proven growth strategy remains the foundation for Zebra’s ongoing success. Our second quarter results demonstrate how we continue to extend our leadership through our focus on innovation to meet growing customer needs for asset visibility.

Zebra is well positioned to benefit from the drive by enterprises for greater efficiencies in their supply chains by taking advantage of the Internet of Things and data analytics. The acquisition of Motorola’s enterprise business will enable Zebra to play anything greater more strategic grow in enterprise asset intelligence and mobility.

Now our CFO Mike Smiley will provide a detail review of second quarter results and guidance for the third quarter of 2014. After Mike’s remarks, I will return for some brief closing comments.

Mike Smiley

Thank you, Anders let me highlight some of the key components as Zebra second quarter results. First we had record sales was strong organic growth and increases in all four geographic regions. Second, adjusted EBITDA increased by 38% and third results were favorably affected by lower income tax rate.

Now let’s take a look at sales performance. For the quarter, sales increased 14% from $253 million last year to a record $288 million. On organic basis, sales increased 12.5% with Hart contributing $3.6 million to the quarter as expected. Foreign exchange had a positive impact on sales were approximately $3.5 million net of hedges year-over-year. Sales for North America increased 16% to $129 million, in addition to the modest impact from Hart Systems the result primarily reflects strong growth in hardware with mobile printers for refresh and new applications performing best.

We also had growth in desktop and tabletop printers. In EMEA, sales increased 16% as well to a new record of $94 million. The improving economic picture in Europe led to a great number of large projects to compliment an ongoing strong run rate business. While broad-based shipments to retailers in the UK, manufacturing in Germany and postal in Italy highlighted the quarter.

Latin America’s sales growth of 4% reflects some weakness in Brazil, Argentina and Venezuela which was offset by growth in other parts of the region. In Asia Pacific, we had solid 9% sales growth with increases across nearly all sub-regions and in broad range of customers and verticals as a result of our ongoing activities to diversify our business in the region.

Underscoring the diversity of Zebra’s business by product category, sales of hardware increased 14% and supplies advanced to 10%. Services and software revenue growth of 39%, reflects the impact of the revenues from the Hart Systems acquisition in addition to the organic growth of 11%.

For the quarter – for the second quarter, gross margin was 49.3% up from 47.8% a year ago. As I mentioned, the higher gross margin reflects the impact of higher volumes, lower inbound freight cost and lower product cost. Net of hedges favorable currency movements increased second quarter gross profit by approximately $2 million year-over-year.

Sales and marketing, engineering and administrative expenses increased less than 6% from a year ago compared with the 14% growth in sales. The growth in operating expenses was primarily related to higher compensation expenses including those from the Hart acquisition. Hart accounted for approximately $3 million of the $5 million of year-over-year growth.

Total operating expenses also include $20 million in acquisition and integration cost which lowered GAAP earnings by $0.30 per share. The amount was principally for professional fees and integration activities associated with the pending acquisition of the enterprise business.

Also included in the quarter is a loss of $2.4 million in interest rate swaps. During the second quarter, we entered into a series of hedges to fix the portion of the interest cost associated with the anticipated floating rate borrowings for funding the acquisition.

Interest rates decreased slightly since entering into the swaps. The effective income tax rate for the second quarter was 11.1% the low rate reflects the impact of the acquisition and integration cost, which lowered income in the U.S. and increased through a portion of Zebra’s income from lower tax jurisdictions.

Excluding these items, the effective tax rate is roughly 20%, because of these changes and in anticipation of the acquisition which were likely increased amortization, we’ve introduced non-GAAP measures to help investors gain a better understanding of underlying company performance.

For the quarter non-GAAP net income totaled $0.84 per share up from 35% from $0.62 per share for the second quarter of 2013. Quarterly adjusted EBITDA was $69.4 million or 24% of sales compared with $50.4 million or 20% of sales last year. For the second quarter, inventories increased $6.7 million from the first quarter.

Inventory churns increased from 4.7 times for the first quarter to 4.8 times for the second quarter. Net receivables declined $16.2 million from the first quarter. The day sales outstanding declined from 56 days to 52 days. We ended the period with $529 million of cash in investments with approximately 60% held in foreign accounts, all of which are invested in U.S. dollar denominated securities.

Now let’s look at our 2014 third quarter forecast. We are forecasting third quarter sales in the range of $285 million to $295 million, which represent an increase of roughly 10%. The forecast reflects the company’s typical seasonality taken into account the summer slowdown in Europe.

Third quarter non-GAAP earnings were expected in the range of $0.81 to $0.91 per share. Our forecast assumes consolidated gross margin in the range of 49% to 50%. Operating expenses for the third quarter, our forecast between $88 million and $89 million excluding the acquisition expenses.

The forecast also assumes an effective income tax rate of 20% which we use for our non-GAAP calculation.

That concludes my formal remarks. Thank you for your attention. Now here is Anders for some concluding comments.

Anders Gustafsson

Thank you, Mike. Sharp execution across Zebra’s business led to our strong second quarter results. We continue to demonstrate excellent progress against our strategic goals to drive profitable growth and position Zebra for long-term success. Our focus on innovation in a broader range of products and solutions is making Zebra a more important strategic partner to customers for their critical asset visibility needs.

Customers in retail, manufacturing, healthcare, sports and entertainment and targeted industries are increasing to seeing the value in working with the industry leader with the strongest brand and global go-to-market channels.

The foundation for Zebra’s enduring success remains with our products and solutions. Our reputation for liability, durability and value continues to enhance our leading global brand and set the industry standard. During the first half of 2014, we introduced nine printer-related products to maintain a high cadence in this vital area.

We are on target to release an additional 6 to 7 products in the second half of this year. In addition to the successful launch of the ZT series of tabletop printers, we announced two new mobile printers specifically designed to meet the needs of healthcare professionals. The QLn220 and 320 mobile printers are built with disinfectant, tolerant plastics for easy cleaning after each side use.

The printers incorporate Zebra’s link Link-OS environment and have a multi-platform software development kit to enable easy compatibility with a variety of operating systems and other mobile devices. Healthcare remains an attractive growth market for Zebra has we continue to expand our offerings of printers, wristbands and labels to improve patient safety and help providers deliver healthcare more efficiently.

Our proprietary Link-OS environment is now embedded in 14 Zebra printer models since its introduction two years ago more than 100 apps have been created to run on Link-OS by Zebra and a growing number of independent software vendors. Our retail and healthcare customers in particular received great value in Link-OS as an easy and secure way to centrally manage their wireless Zebra devices.

This is one example of how Zebra is moving beyond the printer to allow our customers to easily embed our technology into the business processes, which will enable them to realize greater efficiencies and make smarter decisions about deploying to assets.

Another area of growing opportunity beyond the printer is in RFID. Lastly our location solutions business reached an important milestone, building on the successful pilot last year, we recently announced a partnership with a national football league to install Zebra’s real-time location solution in 17 stadiums for the 2014 NFL season.

Our sport solution using our proprietary motion works software will provide next gen stats on players feed, position and acceleration in real-time. The data can then be used to generate new experiences such as broadcast overlays of action on the field to enhance the fan experience.

Our announcement with the NFL follows our announcement in May with Michael Waltrip Racing to deploy Zebra MotionWorks Motor Sports Solution, first-of-its-kind pit crew evaluation system. The value of motion management with high quality real-time information is clearly under rising sports.

Zebra is well positioned with proprietary systems to help professional collegiate and other teams in practice and on game day.

These solutions are excellent examples of how innovation is extended our core technology to have greater applicability across the broader range of solutions and verticals.

As we plan for the integration of the enterprise business, we will use our existing Zebra strategic framework as the foundation to drive improvement. Since announcing the transaction in April, we have been able to make to take a deeper look into possible synergy opportunities. Based on our analysis, we now expect to achieve run rate across synergies of $150 million by the end of 2016.

We will ensure laser focused execution on the integration and management of the combined entity to create value for our customers and shareholders. The acquisition of the enterprise business will secure Zebra’s leadership in enterprise asset intelligence. We will have the capacity to provide complete end-to-end solutions for our customers with leading global brands in scanning, mobile computing and thermal printing.

With our broad range of solutions, including RFID, wireless LAN and location solutions, Zebra will be well positioned as the company of choice for mobile solutions that enhance the visibility of assets within the enterprise and across the supply chain. Zebra will play an increasingly important role in helping businesses get the data that lead to better informed decisions.

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

Thank you for your attention today. I would now like to turn the call over to Doug for Q&A.

Doug Fox

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And our first question comes from Brian Drab from William Blair. Please go ahead. Brian your line is now open. And we’ll go on to the next question. Our next question comes from Andrew Spinola from Wells Fargo. Please go ahead.

Andrew Spinola – Wells Fargo

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

Anders Gustafsson

Yes, so we have had sometime to look at those numbers, and we were aware of what Motorola’s we’re going to say I think generally on their call. The underperformance as far as we can understand is driven by some performance issues around supply chain execution, some other integration execution issues around [indiscernible] and sales execution in Asia with some demand whereas they see it.

We’ve looked at those issues stay, they do seem to be something that are fixable with a good amount of focus and, we obviously have we will apply our singular focus to the business of being, a larger company in the enterprise asset intelligent space. And we believe the underlying markets are performing quite well and Q3 should be a stronger quarter, they mentioned I think on their call that they have better backlog had a lot of new good wins particularly on the android devices to the – at the beginning of the quarter.

So, we remain very excited about the overall acquisition and confident in our ability to generate good attractive returns for shareholders.

Andrew Spinola – Wells Fargo

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

Anders Gustafsson

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

Operator

Our next question comes from Keith Housum from Northcoast Research. Please go ahead.

Keith Housum – Northcoast Research

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

Mike Smiley

Yes, so the – this is Mike Smiley. First of all, I think as we’ve had some time to sort of dig into the numbers. We’ve been able to spend sometime on the cost of goods sold and we are – as a result of that we see ourselves going from the 100 million to 150 million. I would say also we’ve been spending a lot more time sort of thinking through our plans of how we execute on those synergies.

And as a result, we think that the run rate when we get into 2017 will be roughly as $150 million better half than they were in 2013. So that sort of the direction that we’re putting together and feel – we feel confident about that.

Keith Housum – Northcoast Research

Okay. And then can you remind me about the closing, I think I heard you I say you expected the deal close by the end of the year, but I thought I recall from some conversations perhaps with you guys, perhaps with investors that they were thinking time will be closer to the beginning of the fourth quarter. What’s the application for when the deal to close?

Mike Smiley

So, we’ve said the second half of the year is we’ve working very hard in closing that transaction, our first priority and I think Mike will talk, Mike Terzich can talk to that is to make sure that we are able to continue to satisfy our customers when we close that acquisition and so as we do that we’re trying to be focused in having a clean close. And so we said that second half of the year and we’re confident that’s what we’ll do.

Anders Gustafsson

Mike do you want to add any color on that.

Mike Terzich

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

Operator

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

Brian Drab – William Blair

I hope you can hear me now.

Mike Smiley

Yes.

Anders Gustafsson

Exactly Brian.

Brian Drab – William Blair

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

Anders Gustafsson

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

Mike Terzich

Brian now I think Anders is right on the market. It’s about 25% globally it’s different in each of the geographic regions. We’re enjoying certainly a very robust retail outlook and performance in North America, we’re seeing Europe come back online and the smaller regions Asia Pacific, Latin America it’s a little bit much more of a trailing effect, little bit of lift in Asia given the rising little class phenomenon that’s underway.

As far as the application space a lot of what we’re seeing has been more in line with the traditional applications where Zebra has been a little bit more in the isle backup store, backup room there has been a long overdue somewhat boring out the necessity requirement to refresh some ageing technology. And that certainly has been put into play and I think that’s what we’re seeing in the numbers.

Brian Drab – William Blair

Okay thanks that’s helpful. And then just given the recent press release on the NFL and first of all thanks for giving us some technology to make the NFL season even more fun. And can you talk a little bit about that and is this going to be meaningful in terms of revenue, are the broadcasters potentially going to mentioned Zebra as you’re name going to appear during the games and once the revenue, I know this is a lot of question. So when might the revenue hit, second quarter, third quarter and can you talk it all about opportunity per stadium, I know you’re putting sensors and all the – these columns throughout the stadium?

Anders Gustafsson

Yes, the – so first we’re very excited about the opportunity. We think it’s a great example of highlighting the Internet of Things or enterprise asset intelligence for us, and how we can really bring this ability to operations, which is a physical world and tie that back into applications and internet. So the – we’ve been working with NFL for a quite a long time to pilot the systems last year and then start rolling it out this year, the initial agreement here is to implemented in 17 stadiums. So it’s first and foremost al the stadium that have Thursday football night games, but all teams would be part of that so this is put in that they’re widened. Our expectation is that we will rule it out for all the 31 stadiums later for this year also. We aren’t going to comment on the commercial terms particularly here, but we are excited about the opportunity and the revenue will start hitting second half of this year. The process I think the big opportunity to take this beyond the NFL. We have already made an announcement about Michael Waltrip Racing in May for NASCAR, they use it both for practice and for pit crew for evaluating pit crews and get more efficiency at the pit crews.

But, we also have it on a ladies soccer team in China, Hockey team in Russia. We have lots of conversations now with basically all major leagues to see how they can take advantage of our sports analytics packages. So, I think that there will be lots of other types of sports doing this and going after also the practice fields for NFL and I would say one of the biggest themes that I hear when I – we talk to professional football leagues particularly is around how to get more people to attend the games and when they do attend the games and provide some enhanced value. So, part of what we can do with our solution is that we can provide new experiences for people who are at the games and we can also allow fans to engage with their teams in between games.

So, you can do a fantasy football or other things that can be shared in a totally different way. So, I think from a sports franchise perspective, this is a great way of really having a much closer relationship with their fans and help that to improve their franchises.

Operator

[Operator Instructions]. And our next question comes from Michael Kim from Imperial Capital. Please go ahead.

Michael Kim – Imperial Capital

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

Anders Gustafsson

So, I’ll start and then I’ll ask Mike Terzich to amplify a little bit here. First on the channel inventory, it’s very healthy today. There is no abnormalities, I guess to say, our channel inventory, we feel it’s an appropriate level across the globe. Large deal activity has been and run rate business continues to do well. Our run rate business is strong, whereas the majority of our business, large deal activity has obviously picked up quite nicely this year, it will be started in the second half of last year and continue through the first half and we see strong pipeline across the globe for the second half of this year. So, we feel the business is in good shape and we comparatively very well positioned also.

Mike Terzich

Michael, just couple other points on that. That is correct. I think the pipeline has increased in both value and volume in every geographic regions that we serve, most notably North America and Europe, but we also have a very strong pipeline that has been evolving in Asia Pacific, specifically Asia more around manufacturing vertical and the TNL market has been very robust in Asia as it continues to expand.

In Europe it is nicely balanced that pipeline has some opportunity in the retail space, in the TNL space and in healthcare and in North America as we said earlier on the call it’s been driven by quite a bit of retail refresh, but also the TNL spaces got the nice opportunities as well. So, we’re feeling at this stage in the year, we’re in really good shape and to Anders earlier point run rate remains solid in all geographic regions and inventory levels are in very good position.

Michael Kim – Imperial Capital

Okay, great. And then just specifically on the Latin America region, can you remind us, how important Brazil is it a country market and if you see an opportunity to sort of turn that positive, now that we have passed the World Cup period?

Anders Gustafsson

So, Brazil is an important point of that America, but Mexico is the largest country for us in Latin America with Brazil being the second one. I would say over the last several years, the Latin American market has become more diversified for us, we’ve seen great growth in countries like Columbia. Chile has been another one. So, other markets are growing faster than some of the largest markets and that’s being very nice to see.

Brazil has always been a bit more volatile for us, last year we had a tougher comp. We had a large deal that didn’t repeat itself in this quarter. And our belief is that the World Cup didn’t help the business momentum in Brazil, but we still believe Brazil is a good market for us and that there’s going to be a lot of demand for our products there.

Operator

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

Andrew Spinola – Wells Fargo

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

Mike Smiley

Yes, this is Mike Smiley. I don’t think we have, we’re still working on exactly when that’s going to fall out. We do think that there is a meaningful portion that comes in the first year, but maybe more towards the back-half of the first year. But, again, I think the big reason for the increase from 100 to 150 is again, because of looking at our raw material cost. And then the other piece is the fact as we look through the activities that help us achieve the 150 outside the parts cars.

We the ability to do those a little sooner than we had expect, I will tell you, when we did the $100 million, that was our best estimate at that time. So, I think the 150 is a more studied view today. But we’re – it’s a little bit premature to give you a better view as exactly when that’s going to fall out year-to-year.

Andrew Spinola – Wells Fargo

Fair enough, thanks. And then just on supplies that business continue to do quite well, it sound like the environment, which is generally pretty good in your end markets. Do you think that this business can continue to run at rates close above the corporate average sort of around 10% maybe going forward?

Anders Gustafsson

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

Operator

[Operator Instructions]. And our next question comes from Keith Housum from Northcoast Research. Please go ahead.

Keith Housum – Northcoast Research

Hey my question is for Mike Smiley, I just want to follow-up. Mike, can you just help us drill down for about 150 million synergies. Is that coming from the number that investors come back into off of Motorola’s 8-K or is that numbers that provided with the April 15, 8-K when the deal was announced?

Mike Smiley

So, are you talking Keith about standard cost?

Keith Housum – Northcoast Research

Yeah. There is a little big question about what exactly you guys are inheriting in terms of operating expenses and things of that nature. And we try to back into the numbers and look at – I think we look at two different scenarios. So, I just want to understand what our starting point is?

Mike Smiley

I guess Keith what I don’t want to do and I can’t really tell you exactly the math that makes up the $100 million that something you have to ask MSI on. But, and so our numbers is basically looking at the starting point of what we see for 2013 and looking for what we see as an optimal organization going forward as well as understanding opportunities in reducing the cost of our material.

So, it’s not really reconciled off of the $100 million that MSI gave us and by the way, I think standard cost is a definition, which sometimes can give the idea that these are cost that our and our business and we’re going over. But, some of these costs were really never coming over and not sort of expected to be a burden to our P&L. So, I think if you try to reconcile those two numbers that maybe difficult to do.

Keith Housum – Northcoast Research

Okay. I appreciate the commentaries there. And then if I just come back to the core business, it sounds like in past quarter as a little more conversation was focused on the refresh cycle, where if I understood, stand from today’s script it’s more driven by the penetration in the vertical that you play in. Is that a correct understanding or do you think the mix of the volume growth has more equalized between both the refresh cycle and increased penetration?

Mike Terzich

Keith this Mike Terzich. I think you’re correct, I think certainly in the past quarters we talked to the point of the refresh cycle. From an experience perspective, we know that the cycles labs hard to say, hard to predict how long they run. Historically they’ve run longer, than the one we’re in right one. But we also know that market dynamics have changed a little bit relative to some of the globalization and some of the competitive issues.

So at this point, I would say that the balance in the quarterly performance shifted on us, a little bit away from the run rate and a little bit more towards the deal opportunity, which is not uncommon, if you look at the surge we’ve seen in the Europe and the robust outlook we have in North America. We’re enjoying the deal activity on top of the run rate, but we seen a little moderation in the run rate.

Mike Smiley

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

Operator

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

Greg Halter – Great Lakes Review

Yes good morning and congrats on the excellent results.

Anders Gustafsson

Thank you.

Greg Halter – Great Lakes Review

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

Mike Smiley

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

Greg Halter – Great Lakes Review

All right, and as I understand the MSI piece works with them as well?

Mike Smiley

Yes.

Greg Halter – Great Lakes Review

And one last one for you on the product innovation side, the Zatar integration iBeacon just wondered if you could comment on how that’s going? Thanks.

Mike Smiley

And so Zatar in general we continue to be very excited about the opportunity that it offers. Our pipeline is growing and we continue to work on expanding our the functionality of Zatar. Beacon is one application that we’ve seen a lot of interest around, it’s primarily I would say two used cases, one is in retail where the beacon and it can be used to do locationing of shoppers in the store and help push couponing and other things to them. And we can do that with Zatar in different ways, you can either use your smartphone for this, which is how beacon solutions work or we can put it up on a more common screen, which is quite unique what we can do.

We also see in used cases whether it’s in healthcare to pour, say helping to direct somebody who comes in at the to general incur desk and when I find radiology and they can use a beaconing technology to guide them to how to walk through the maze of the hospital.

Operator

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

Doug Fox

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

Operator

Thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating.

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