Zebra Technologies CEO Discusses Q4 2010 Results - Earnings Call Transcript

Feb.15.11 | About: Zebra Technologies (ZBRA)

Zebra Technologies Corporation (NASDAQ:ZBRA)

Q4 2010 Earnings Call

February 15, 2011 11:00 AM ET

Executives

Douglas Fox – VP, IR

Anders Gustafsson – CEO

Michael Smiley – CFO

Mike Terzich – SVP, Global Sales and Marketing for the Specialty Printing Group

Analysts

Chris Quilty – Raymond James & Associates

Ajit Pai – Stifel Nicolaus

Tony Kure – KeyBanc Capital Markets

Charles Murphy – Sidoti & Company LLC

Paul Coster – J.P. Morgan Securities

Andrew Abrams – Avian Securities

Marty Moser (ph) – Northwestern Mutual (ph)

Greg Halter – Great Lakes Review

Keith Housum – Northcoast Research

Operator

Good morning and welcome to the Zebra Technologies 2010 Fourth Quarter Earnings Release Conference Call. Joining us from Zebra Technologies are Anders Gustafsson, CEO, Mike Smiley, CFO, Mike Terzich, Senior Vice President, Global Sales and Marketing for the Specialty Printing Group and Doug Fox, Vice President – Investor Relations. (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 like to introduce Doug Fox of Zebra Technologies. Sir, you may begin.

Douglas Fox

Thank you and good morning. Thank you for joining us today. Certain statements made on this call will relate to future events or circumstances and therefore will be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995.

Words such as expect, believe and anticipate are a few examples of words identifying a forward-looking statement. Forward-looking information is subject to various risks and uncertainties which could significantly affect expected results. Risk factors were noted in the news release issued this morning and are also described in Zebra’s 10-K for the year ended December 31, 2009 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. Here in the room with me are Mike Smiley, our CFO, and Mike Terzich, our SVP of Global Sales and Marketing. Zebra’s fourth quarter results provide a solid conclusion to an outstanding year in which Zebra gained market share, diversified and expanded its international business and further strengthened its leading brand position.

We capped the year with earnings of $0.50 per share, representing Zebra’s second consecutive record quarter. We also realized 12% year-over-year sales growth with fourth quarter sales of $248.2 million. The consistent run rate business through channel partners together with increased strength in international regions enabled us to deliver our sixth consecutive quarterly sales increase as well as the second highest quarterly level of sales in Zebra’s history. In addition, high gross margin and a continued focus on expense management drove further improvements in profitability and strong free cash flow.

Zebra’s performance in the fourth quarter and throughout 2010 further demonstrates the effectiveness of our actions to extend industry leadership and serve more of our customers’ asset tracking needs. During the year we continued to build on this leadership by adding 40 new Zebra sales representatives in high-growth emerging territories including China, Brazil and Turkey. We strengthened customer loyalty by leveraging our financial strength to deliver innovative products in a constrained supply chain environment.

We are also now fully benefiting from the outsourcing of printer manufacturing. We have continued to position Zebra to capture more opportunities in large, complex supply chain situations through broader multi-market channel partners including system integrators And independent software venders. We also introduced innovative new products during the past year to expand the range of applications we serve, most notably the ZXP Series 8 with transfer card printer for secure on-demand instant issuance card printing as well as the RXI4 RFID printer and coder for advanced items of tagging with Zebra’s proprietary neoprene and coding.

We continue to view share repurchases as one of the most attractive uses of our cash on a risk adjusted basis in addition to funding key organic growth opportunities. During 2010, we deployed $102 million to buy back 3.3 million Zebra shares including 900,000 share in the fourth quarter.

Let me briefly cover some of the highlights of the quarter. Meaningful sales contributions from most of our product lines, most notably our high-end, midrange and desktop printers drove growth in our Specialty Printing Group or SPG. In addition, our international regions maintained strong momentum aided by the investments we made in geographic expansion. For those countries and regions were we added Zebra sales personnel, sales grew 39% for the fourth quarter and 54% for the full year.

We enjoyed record sales in Latin America, including shipments to increased number of manufacturing customers as well as a large number of smaller deals. Ongoing positive performance in Brazil and Mexico our two largest countries in the region was supplemented by improved results in other parts of Central and South America. IN EMEA our business momentum carried through the fourth quarter with a combination of ongoing run rate business and significant new wins.

Post and grocery applications highlighted strong demand across nearly all sub-regions. The impact of our expansionary investments was also evident of sales increased 90% in Turkey and more than 30% in India’s sub-region. Zebra’s investment in these markets will enable further penetration into these key growth regions.

Our Asia-Pacific region surpassed $100 million in annual sales for the first time. Robust economies in combination with the rebound in export manufacturing and increased local consumption supported growth in just about every sub-region throughout Asia. Our strategic expansion, which displaced more sales representation in China, India, Malaysia and Thailand has proven to be a well-timed investment and provides a solid foundation for further growth, help this channel recruitment from our expanded sales forces added 35 new resellers during the fourth quarter out of a total of a total of more than 150 new resellers per year.

Effective sale activities focusing on key strategic accounts resulted in important new contracts with customers in the retail and public safety sectors among others.

In North America the heavier retail business that we enjoyed for the past two quarters lightened as retailers focused on the holiday season. The softer retail environment was partially offset by the return various manufacturing, warehousing and transportation and logistics verticals, which enhanced sales of our high performance table-top printers. Overall, we maintained a steady line rate business and the deal pipeline for 2011 is healthy.

In addition, the environment for RFID continues to improve. Zebra is now engaged in an increasing number of pilots and discussions with customers in the retail, aerospace and other industries. The depth and breadth of the Zebra RFID printer and coder product line as well as our deep expertise in the technology are proving to be tier competitive advantages. A number of the pilots in which we’re engaged are using the Zebra RXi4 which we introduced last year. Others incorporate our Zebra RZ400 mid-range printer and coder and our unique proprietary RP4T mobile printer and coder is also proving itself in the field every day.

In the fourth quarter we made further important progress on our strategic plans to focus the business on those core areas that we have identified to provide the highest returns to Zebra over long term. As part of our strategic focus we formally announced on January 31, that we entered into a definitive agreement to sell Navis and a small related marine terminal product line from Warenet (ph) to Carbotek (ph) for approximately $190 million in cash.

For more than 25 years Zebra’s strategy has been focused on developing and delivery products and solutions that can be applied across many industries. With industry-specific solutions requiring deep domain expertise Navis’ offerings are more limited on how broadly they can be applied. By divesting Navis, Zebra can more effectively direct its resources to core opportunities and specialty printing, RFID and Location Solutions. Our current sweep of product and solutions ensure that Zebra continues to be the clear innovation leader in our industry and is well positioned to benefit from the trend toward smaller enterprise business operations and logistics.

With the divestiture, we will be consolidating the Location Solutions business of RE F (ph) into Zebra. Location Solutions are much more closely aligned with our asset-tagging strategy and offer an attractive opportunity for Zebra broadly across virtual industries. We exited the year with strong bookings for Location Solutions, including yard management solutions for the U.S. Postal Service, and a large domestic retailer to improve yard throughput. We also closed several exciting automotive deals, as the health of the auto makers and their suppliers improved and interest in productivity solutions returned.

Our redefined focus will further enable Zebra to build on its multiple competitive advantages, to grow sales, profitability and shareholder returns. These competitive advantages include: first, the world’s largest install base of thermal printers. Second, the highest level of investment in product development for thermal and barcode-labeled and card printers in the industry. Third, unmatched depth and breadth of products and channel relationships; and, lastly, the industry’s premium brand that is most selected by top companies around the world.

Today, more software applications and solutions, including leading ERP and WMS systems, support Zebra printers compared with any competing brand. New product solutions, including our portfolio of passive and active RFID, even broader channel partnerships, and a competitive cost structure through scale and outsourcing, continue to add to Zebra’s competitive advantage and provide a platform to further extend industry leadership.

I would now like to turn the call over to our CFO, Mike Smiley, to provide a detailed review of fourth quarter results and guidance for the first quarter of 2011. After Mike’s remarks, I will return for some brief closing comments.

Michael Smiley

Thank you, Anders. Let me highlight some of the key components of Zebra’s fourth quarter financial performance, principally compared with the fourth quarter of the prior year. First, both SPG and ZES sales were within our guidance range. On a consolidated basis, all regions had a solid run rate business, with international regions posting strong year-over-year growth.

Second gross margin increased from last year substantially on the increased volume along with material savings and lower overhead and freight charges. All offset by an unfavorable in foreign exchange rates. And third, the business demonstrated attractive operating leverage and in increase in operating margin.

Let’s take a look at sales. For the quarter, sales up 12% from 220 million last year to 248 million. By business unit, sales increased 12% for SPG and 8% for ZES. On a constant currency basis sales were up 14% as a stronger U.S. dollar against a euro had an unfavorable impact of $6 million on sales from a year ago. By region we had year-over-year strength in Asia Pacific sales, which were up $13 million or 57%.

The region was led by 60% growth in China, with healthy sales activity in all sub-regions in all major printer product categories. Robust activity in nearly all sub-regions contributed to EMEA’s 12% sales growth. On a constant currency basis, EMEA sales increased 19% year over year.

Latin America achieved record sales for the second quarter in a row, up 15% to $23 million. North American sales were up 1% on the continued strength in our Run Rate business, and a pickup in sales to manufacturing customers, offset by retail customers completing much of their purchases earlier in the year. Overall, sales to our top retail customers in North America were up a healthy 39% for the full year. By product category, Hardware sales increased 15% on growth in all major printer product lines and aftermarket parts. Supply sales advanced 7%.

Consolidated gross margin of 49.8% was a 420 basis point improvement from a year ago, and 170 basis points from the third quarter. As I mentioned earlier, increased volume, favorable product mix and material savings and lower freight costs all contributed positively to the year-over-year improvement. The increase in the third quarter resulted from more favorable FX rates, higher volumes material savings and rebound in gross margin for ZES from 48% to 56% from an improved product mix and service delivery efficiencies.

Operating expenses of $83 million were up 11% from a year ago and reflect higher compensation and incentive costs, increased spending on engineering projects and travel and entertainment expenses. The expenses included $1 million in exit and restructuring integration costs related to the Navis divestiture and integration of locating solutions into Zebra as a whole. We also recognized $1 million in a favorable escrow settlement associated with prior acquisitions.

The higher sales and gross margin and moderate growth in operating expenses delivered a 54% improvement in operating income and 16.3% in operating margin for the quarter. Adding back $2.4 million in amortization and $5.1 million in depreciation to the $40 million of operating income resulted in $48 million of cash earnings or 19.3% of sales. The income tax rate of 29.9% for the fourth quarter affects several items, most notably the extension in U.S. R&D tax credits that occurred in December and the ongoing shift in Zebra’s business in countries – in regions with lower income tax rates. GAAP net income came in at a record of $0.50 per share on 56.7 million average shares outstanding. At December 31, we had 55.7 million share outstanding.

For the fourth quarter we used the entire free cash flow of $32 million to buy back 900,000 shares of Zebra stock, up from 765,000 shares in Q3. The average price of the third quarter purchases was $38.56 per share. Zebra generated $110 million in free cash flow for the year or 11.5% on sales. This is up from $81 million or 10.1% in 2009.

The days sales outstanding improved to 57 days from 61 days for the third quarter. Inventory turns fell 4.8 times from 5.7 as inventories increased by $18 million. With the easing of the supply chain constraints normalized production is enabling us to take advantage of lower cost ocean-going shipments. The increase in inventories largely reflects more products in the supply pipeline including the number of printers we have on the water. The additional inventories are important in our new outsourcing model to ensure that we have sufficient product on hand to meet customer demand. We ended the quarter with $260 million in cash in investments. Now let’s look at our first quarter forecast

As we’ve stated earlier, we expect the Navis transaction to close in the first quarter of this year. Going forward, we’ll be consolidating the Location Solutions into Zebra as a whole. Navis and related assets will be designated as assets held for sale in discontinued operations until it sold. Therefore, the fourth quarter is the last period in which we provide segment results.

We’ll be revising last year’s financial results for the discontinued operations, and have the quarterly figures available by the first quarter’s conference call. We are forecasting 2011 first quarter sales of $224 to $235 million reflecting the designation of Navis and related assets as a discontinued operation. For Q1 2010 the revenue from the businesses to be classified as discontinued operations generated roughly $15 million of revenue.

Earnings from continuing operations are expected at $0.41 to $0.47 per share, including $0.02 per share for restructuring charges related to the consolidation of Location Solutions into Zebra. Our forecast assumes a consolidated gross margin in the range of 48% to 49%. GAAP operating expenses are forecast between $74 million and $77 million, including the aforementioned $2 million in restructuring charges associated with the consolidation of Location Solutions into Zebra. The tax rate will be 31%, which we expect for all of 2011. That concludes my formal remarks, and now here’s Anders for some concluding comments.

Anders Gustafsson

Thank you, Mike. During 2010 our investments to extend industry leadership and generate higher returns were well placed. We secured a greater presence in key regions around the globe where developing market economies and local web creation support attractive profitable growth opportunities.

With a sharper business focus and a clear vision for the future, we enter 2011 with a high level of confidence. Zebra’s multiple competitive advantages position us well to benefit from attractive global trends driving greater demand for tagging high-value assets to gain increased visibility into the supply chain. Our multi-faceted strategy will continue to concentrate on global areas that provide proven low risk high returns, including investing in emerging markets where we can win, continuing to develop channel partnerships and moving up the value chain with independent software vendors, improving on our already solid product development to expand the range of applications in markets we serve and capitalizing on important emerging opportunities that complement our business model.

We continue to prioritize and invest in three key areas that have delivered success for Zebra over the long-term: markets, channels and products. For 2011, we will maintain our global channel expansion program. As the Zebra sales representatives placed in fields last year become increasingly productive, we will supplement their efforts with more feet on the street to develop additional and stronger channel relationships in China, Malaysia, Vietnam and Russia, among other important regions.

Channel development is also moving forward with independent software vendors or ISVs. Later this week we will be announcing the rollout of a new program supporting ISVs, including development tools and a dedicated Web site. At the same time, our plans call for leveraging Zebra’s brand strength to expand our strategic focus on Enterprise customers, where we can offer the entire portfolio of Zebra products and solutions. As for any technology company, the success of our global and channel expansion activities depends on how well we meet our customers’ needs with innovative and superior products and solutions.

In 2011, our plans call for the introduction of new products in the Card, Mobile and Kiosk categories. Currently under development in our China engineering center, we are also working on designs for products to meet region-specific needs.

Zebra’s financial strength provides us great flexibility in how we run the business for the long-term benefit of our shareholders. We have identified multiple investment opportunities within the company that will deliver solid risk-adjusted returns. In addition, share buybacks remain an attractive use of our excess cash. At the same time, we are continuing to evaluate potential acquisitions that will enhance our core offerings. This concludes our prepared remarks, and thank you for your attention this morning. I would now like to turn the call over to Doug for Q&A.

Douglas 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 Smiley and I will be available after the call for any further discussions. Operator, please give instructions for the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). We’ll pause for just a moment to compile the Q&A roster. Your first question comes from Chris Quilty.

Chris Quilty – Raymond James & Associates

Hi, Gentlemen.

Michael Smiley

Hi, Chris.

Chris Quilty – Raymond James & Associates

Hi. A question for you on the retail market. It sounds like there was a little bit of a slowdown, perhaps, compared to the traditional Q4 period, where retailers spend the bulk of their remaining Cape? Is that a fair characterization?

Anders Gustafsson

Chris, this is Anders. We’d had very strong retail performance over the last several quarters, and it’s just east, I would say, a little bit as they kind of moved into more of an execution mode for the fourth quarter. But the pipeline for retail is good when we look into 2011.

Chris Quilty – Raymond James & Associates

Okay. And just regarding the pipeline, the last big retail refresh cycle by my pencil was back in 2004, which would mean we’re almost two years overdue for a cycle. What do you think is the potential for seeing another cycle here in the next 12 to 24 months?

Anders Gustafsson

Our expectation is that retail will continue to be good, solid contributor, but maybe not with the same one-time refresh cycle as we saw in 2004, but that refresh is going to take continuously over the next one or two years. Mike, do you have comments?

Mike Terzich

Chris, Mike Terzich. A couple other points on the retail space. Retail has grown in significance for the business on two dimensions. One, what was historically very concentrated in North America has been well adapted in every one of our international markets. So our retail results, while they were a little softer in North America as people prepare for the holiday season, executed their holiday season, we saw good retail results across the international markets.

Secondly, today retail is probably the only vertical market we have, where we could leverage the entire Zebra portfolio. So what was traditionally a lot of mobility in retail has extended itself into desktop, tabletop solutions in the distribution centers, kiosk in the store, RFID in the yard as well as in some of the garment applications. So I don’t think you’re going to see the big top of refresh like you’ve historically seen. I think it’s going to be a steady state business in all four geographies for us in 2011.

Chris Quilty – Raymond James & Associates

Okay. Thank you.

Mike Terzich

Okay.

Operator

Your next question is from Ajit Pai with Stifel Nicolaus.

Ajit Pai – Stifel Nicolaus

Yeah. Good morning.

Michael Smiley

Hey, Ajit.

Anders Gustafsson

Good morning, Ajit.

Ajit Pai – Stifel Nicolaus

A couple of prior for me. I have one question and the one follow-up. The question itself is just looking at your execution channel strategy that you just talked about, could you give us some idea as to what you believe your share in Asia is right now? And over the next three to five years whether you expect to get the R-ez (ph) share in the U.S. and western markets?

Anders Gustafsson

So first you asked about our share in Asia and then for North America and Europe? I’m not sure what else.

Ajit Pai – Stifel Nicolaus

When – so yeah. What do you think that share is per day and where it could get over the next three to five years based on your view of the channel strategy that you’re embarking on?

Anders Gustafsson

Yeah. I think that first we believe that we have a very strong market share position in each of the four regions, and we will tend to rely on VDC (ph) data for what that is, but we do believe that we are very well placed to continue to extend our lead and gain further share as we get our new channel programs, our expanded channel programs and geographic investments to really become productive and in many of these new emerging markets also we see a strong performance for our high-end tabletop printers for manufacturing, which is good from a market share and a from a profitability perspective.

And the market itself is growing in these areas also as we one, expand from our traditional, say, western companies that have expanded into emerging markets through more of the local competitors as the local economies strengthen. And also in Western Europe and the U.S. we expect to continue to expand into near adjacencies like healthcare for instance.

Ajit Pai – Stifel Nicolaus

Got it. The second follow-on question just looking at you now have cash on your balance sheet designated and a solid balance sheet, you’re generating cash, and you also mentioned that you’re going to be prioritizing acquisitions. Could you give us some color as to how rich the pipeline is right now? And sort of some color, you don’t have to give us any specifics but some color on the nature of those acquisitions.

Anders Gustafsson

Look, first I think we weren’t really trying to say that we are accelerating or enhancing our view on acquisition. We’re just saying that’s one of several uses of cash that we look at. Our acquisition strategy has not changed from before. We continue to evaluate all our investment opportunities against other opportunities on a risk adjusted basis.

And the first main hurdle, though, is make sure that acquisitions have a good strategic fit and really complement our core business, and we will continue to be very disciplined in what we pursue. We have had opportunities over the last year or two to make acquisitions, but we have so far refrained from that either because those didn’t fit our strategic focus or the financial hurdles were – they didn’t meet our financial hurdles.

Ajit Pai – Stifel Nicolaus

Got it. But from an acquisition perspective, is there one area that you are more focused in than others? Like for example, is supply becoming a more relevant part of your thinking or is still focused on the traditional areas you’ve looked at?

Anders Gustafsson

Yeah. I think we were saying our focus area is primarily around our core business and how we can strengthen and expand that.

Ajit Pai – Stifel Nicolaus

Got it. Thank you.

Anders Gustafsson

Thank you.

Operator

Your next question is from Tony Kure with KeyBanc Capital Markets.

Tony Kure – KeyBanc Capital Markets

Good morning, gentlemen. How are you today?

Michael Smiley

How’re you doing, Tony?

Tony Kure – KeyBanc Capital Markets

Pretty good. A couple of questions, if we were to exclude Navis now going forward, or I guess we are excluding Navis going forward, the remaining business, will that contribute now positively to operating income and growth? Or would that be sort of, without Navis in the picture, still operating at a loss? If you could just maybe speak to how that on an operating income basis will impact the P&L going forward?

Michael Smiley

Yeah. This is Mike Smiley. Basically if you look over the year of 2010, the business that will be reflecting discontinued operations is basically a break-even business from an operating income standpoint. So you can sort of take that and realize that the rest of the economics that flow through ZES is related to Location.

I think with Location Solutions, we feel good about the fact it has very strong, strategic fit with the rest of SPG, and we also see that that business that we’re retaining had top line growth north of 20%. We expect robust growth in 2011, and we also see the fact that we have in 2011, because we are moving that Location business into the greater Zebra business, we have the ability to improve the cost model, taking costs out. We’re also outsourcing some of our products in that, like J-Bill (ph) and such, which will enhance our gross margin. So all those things I think as you look at the economics of the business that we’re holding, we feel like it’s got a great opportunity. It’s core to what we’re doing. So that’s how I’d sort of put it.

Tony Kure – KeyBanc Capital Markets

Okay. Just to make sure I understood, you said if you look at 2010 it was basically a breakeven business, did you mean excluding Navis it was a breakeven business?

Michael Smiley

No. I’m saying it’s a business we’re putting in discontinued operations is breakeven. So the business that we’re holding onto is most of the operating loss that you saw for 2010.

Tony Kure – KeyBanc Capital Markets

Okay. Great. Thank you. Then as far as the sequential strength in EMEA, it looked like it was up about 11%, and Latin America up 4% sequentially. Can you just maybe talk about what’s going on in those markets? And then contrast that with the sequential decline? Well, I guess in North America you talked to the retailers, but Asia was down sequentially also, if you could maybe speak to that?

Anders Gustafsson

Yeah. So first on Latin America we had a record quarter in Latin America, the second consecutive record for Latin America on a quarterly basis. I will say for Latin America and EMEA there was similar performance. It was very broad based. There was not one country or one vertical or one product that stood out. In Europe there was I think all but one of our sub-regions generated growth and similarly in Latin America they all generated growth. A broad variety of different industries, so manufacturing, retail, transportation, logistics, self-service all had good wins in those regions.

For Asia-Pac, Q3 tends to be the strongest quarter for Asia-Pac. So Q4 was just I would say a normal seasonality and it was just a fraction lower than it was in Q3. And in Q3 it was a record for Asia-Pac historically. So Q4 was our second – or number two I guess on the record list. So we felt that those were very good results. And in North America we had good growth year over year of 12.5%. But it was lower in Q4 and that was primarily driven by the strong Retail business we’ve had taking a little bit of breather as they – that vertical focused more on executing their Q4 plans.

Tony Kure – KeyBanc Capital Markets

Okay. Great. Thank you. That’s helpful.

Operator

Your next question is from Charles Murphy with Sidoti & Company LLC.

Charles Murphy – Sidoti & Company LLC

Good morning, guys.

Anders Gustafsson

Morning.

Charles Murphy – Sidoti & Company LLC

So I was wondering given the Navis divesture could you kind of give us a ball park of what we should expect from gross margins in the fourth quarter of ‘11 and kind of for the full year?

Michael Smiley

Well I think we – in the my comments I quoted where we thought the gross margin would be, which is I think 48% to 49%.

Charles Murphy – Sidoti & Company LLC

Okay. Sorry didn’t catch that.

Michael Smiley

No. It’s okay.

Charles Murphy – Sidoti & Company LLC

Okay. And then another question was in terms of what’s left for Location Solutions could you kind of go back through what the products are? What their fit is with I guess the Specialty Printing Group and is anything going to be pruned within the portfolio there?

Anders Gustafsson

The Location Solutions is really made up of our real-time location systems so that’s the active RFID portfolio. That has, we believe, much stronger synergies with our Specialty Printing Group. Those products can be applied across a wide variety of vertical markets and applications. So they do suit kind of our horizontal business model. And we believe that they have very good, very solid growth opportunities over the next several years.

As we grew 20% last year, North of 20% and we expect to have no less than that in growth for this year. And the remaining parts of our business end is really Navis end related Warenet (ph) product line that we’re divesting to Cargo Tech (ph). And we’re also considering then some other smaller product lines that may not fit. But they are immaterial to the overall picture.

Charles Murphy – Sidoti & Company LLC

So would the active RFID and such be sold through the same channels as your printers now? Or?

Mike Terzich

Charles, it’s Mike Terzich. Let me take that. Yes in part. There’s also some opportunities for us to work very specifically with some of our larger strategic accounts.

And a good example of the synergy that we have between the Ellas (ph) product portfolio and the traditional SPG portfolio is in the last quarter we had significant amount of business opportunity with a one of the bigger box retailers. I’ll just say it’s in the hardware space. We’ll leave it at that.

But it presented an opportunity for us both at the yard management side of the business which is where the Ellas Solution (ph) the real time active RFID solution was deployed. And we’ve been doing quite a bit of work on the in store side.

And that business is typically carried by a combination of channel partners in portions of that business and also on some direct sales opportunities when they present themselves.

Charles Murphy – Sidoti & Company LLC

Got it. Okay. Thanks.

Mike Terzich

Okay.

Operator

Your next question is from Paul Coster with J.P. Morgan Securities.

Paul Coster – J.P. Morgan Securities

You. Mike, I’m wondering if you’d be kind enough just to comment a little bit on input costs and so the impediment they may have on gross margins. I’m thinking here in terms of inflationary pressures in China and component costs and resin costs and so on.

Mike Terzich

Yeah. Good question. I think that we have been seeing some small amount of price pressure on some of our raw materials. However, I think again one of the benefits of working for a company with the financial resources we are making R&D investment. It’s helping us value engineer our products. And we also feel like we have the ability to continue to year-over-year negotiate more favorable pricing.

So although we will experience the pressures of some of the higher costs we think the net will actually in the long run benefit from the activities we’re working on so overcome the impact of the cost pressures that we have.

Paul Coster – J.P. Morgan Securities

And my follow-up I just want to check here that the intention moving forward is any acquisition is too it should be of the of horizontal benefit across all markets. That there’s no more focus on verticals.

Anders Gustafsson

No. We will decline to make sure there’ll be acquisitions support our core strategy and business model of working horizontally across many markets. And we don’t perceive that we are very well placed to have deep vertical expertise in any industry. And therefore, our leverage comes from being able to provide solutions that can work across many.

Paul Coster – J.P. Morgan Securities

Sorry. Just one question then. Did you retain any of the sort of industry know how that was in the Navis team? Did you just let go of everything there? Or did you retain certain sort of strategic assets that help you at least sort of stay fairly close to some of those industries that Navis serves?

Anders Gustafsson

Navis was really focused on the marine terminal market. That is a very modest market for the remaining part of Zebra. So we didn’t see a need for that, but we will retain Navis as a channel partner for selling our other products and solutions into those marine terminal customers.

Paul Coster – J.P. Morgan Securities

Got it. Thank you.

Operator

Your next question’s from Andrew Abrams with Avian Securities.

Andrew Abrams – Avian Securities

Hi. I wonder if you could maybe just talk a little bit about the non-retail pipeline. What you’re seeing there in terms of kind of the enterprise customer. Are you still confident that the enterprise customer is there for the next couple of quarters and you’ve seen that improvement that we’ve seen I guess over the last quarter or two continue through in that customer side? Or is a lot of your confidence coming out of the run rate, the direct, the normal run rate business that you’re used to seeing on a quarter-over-quarter basis?

Mike Terzich

Andrew, this is Mike Terzich. I’ll take that question. This is – I could give you a really comprehensive answer, but I think one of the broad-based strengths of Zebra has been the diversity of our vertical markets and our geographic focus. So I’m going to try to paint a little bit of a picture for you.

In North America we saw the return of some of the traditional manufacturing business, that’s really a big core to the North America marketplace. We saw a return in manufacturing and some of the warehouse and T&L space, particularly driven by the automotive tier one, tier two suppliers for automotive. I think they’re more bullish on their near-term outlook and that’s resulting in some CapEx spending for our equipment.

When you get outside the United States, manufacturing is the predominate vertical market for us for the multi nationals in places like Asia and even in places like Mexico and in Eastern Europe. In addition, we’ve extended ourselves vertically, and there’s a lot of enterprise opportunity in what we’re qualifying as field mobility. This is – we’ve been talking about this over several quarters now, but when you look at macroeconomic trends and the pressure being put on this whole work force around the globe, it’s really introduced us to quite a bit of opportunity in every geographic region and this is the folks that deliver Pepsi and beer, et cetera beverages to a variety of retail locations. The folks that do field service, whether it’s the washing machine repairman, et cetera, and it’s created a lot of opportunity as petroleum prices continue to increase putting more pressure on labor and the efficiency of that labor.

And then I think the last piece of this for us is we started to extend ourselves a little deeper into some spaces where we could leverage parts of our product line that are perhaps less obvious to everyone. And that would be in the area of financial services. We’ve seen an increase. We took a piece of business in the fourth quarter with a large bank in Latin America where it issued an issuance of debit cards and credit cards are beginning to find their way into some opportunity for our re-transfer product and some of our direct-to-card products. So the diversity of our vertical focus and the diversity of our geographical focus has really been one of our great strengths and it’s allowed us to buffer in some cases where there may be a short-term blip or a little softness like fourth quarter retail in North America. Hope that helps.

Andrew Abrams – Avian Securities

That’s great. I appreciate it. Just one other question on margins 48, 49 for fourth quarter. Should we kind of look the rest of the year the same way now that Navis is gone and I assume is out of that number? Would we continue to see those kind of margins for the rest of the year or are we looking for something different?

Anders Gustafsson

I think some of the high 40s that we’ve been quoting is probably a reasonable expectation for the year. But I’ll tell you there’s – exchange rates will affect us. Product mix will affect us. Those things will drive us one way or the other. But I think we’re pretty confident we’re going to stay at sort of this higher range that we’ve been experiencing for a little while.

Andrew Abrams – Avian Securities

Terrific. Thanks, guys.

Operator

Your next question is from Greg Halter with Great Lakes Review.

Greg Halter – Great Lakes Review

Hello. Good morning.

Anders Gustafsson

Hey, Greg.

Michael Smiley

Good morning.

Greg Halter – Great Lakes Review

You obviously bought stock in 2010 including the 900,000 shares you mentioned in the quarter, but your cash is still rising and even more pending the sale of Navis. Just wondering what your thoughts are in regards to an even more aggressive share repurchase, a one-time dividend, or a dividend that you may implement and increase on an annual basis given your strong cash flow.

Anders Gustafsson

So at first, yeah, as we said we have been quite the active and aggressive in buying back shares over the last couple of years, three years at least. Last year we bought back $102 million worth of shares that 3.3 million shares. We will continue to evaluate share repurchases on a risk adjusted basis, and our view is that, that is still a very attractive investment for us.

We have looked at dividends and one-time dividends, and we feel or with respect to dividend that most of our investors seem to be favoring continue with buy backs as it gives us more flexibility to step it up if there’s a little different share price and continue to be active in the market more consistently. And that also goes for the one-time buy back that we perceive that it is more attractive for us to average enterprise versus just picking a specific price, and showing consistency by being active over a longer period of time, but we do expect that we will be buying back at elevated levels compared to prior years.

Greg Halter – Great Lakes Review

Okay. And one follow up for you back on the Navis. I just want to make sure I heard this correctly. If I do the math, it looks like there was an operating loss for ZES of about $19.6 million for the year. If you back out the sales and I’m presuming $15 million in the quarter, which will give you $60, that’s a loss of almost $20 million on sales of $25 million. And that’s the piece that will be kept and obviously it will be melded in with the SPG. You’re doing quite well on your gross margin and your profits even with that, but I’m just wondering at what point if that business were separate, if we would see it breakeven or even turn into the green.

Anders Gustafsson

Well, the intent is to make that happen but I don’t expect it, we don’t expect it to be in 2011. But, again, let me just go back and reiterate why we’re keeping it and why we are excited about that business. It does have a very good strategic fit with our overall strategy of trying to build a broad set of solutions around how to do asset tagging on high valued assets and inventories across a broad range of industries. And we see great synergies in how we take this to market by having a more integrated organization.

We’ve already moved the sales organization to the part of Mike Terzich’s organization to create better opportunities for us to cover large enterprise customers with the entire portfolio of products. We have integrated the supply chain and the engineering organizations with Hugh Gagnier, who runs our worldwide development and operations team. So we are taking full advantage of those integration synergies, but in 2010 we had well over 20% growth, which we think is very attractive business for us to be in.

And we believe that, that growth will continue at that level or higher for 2011 and beyond. We are doing a lot of things to improve the cost structure. We are outsourcing our active RFID products to J-Bill (ph) in China, and we’re seeing similarly, if you look on the SPG side, good gross margin improvements, and we’re eliminating overhead functions that we no longer need to duplicate by folding this organization back into Zebra. So we certainly expect that, for 2011, the profitability will be much improved, but we also expect it to have very high growth to take us into 2011 and beyond.

Greg Halter – Great Lakes Review

Okay. Thank you.

Operator

(Operator Instructions) Your next question is from Keith Housum from Northcoast Research.

Keith Housum – Northcoast Research

Good morning, guys. Thanks for taking my call. I was hoping you might spend a little bit of time on the selling and marketing expense here in the fourth quarter, and obviously the increase over the prior quarter. Is there more one-time items in there, or would be expect that to be creeping up just a little bit based on your exploration into the emerging market, and so forth?

Michael Smiley

Yeah. I think that you’re seeing a couple of things happen. First of all, as we went into the quarter, we don’t want to brag, but we thought we had a great year. And as a result of that, the commissions were higher for our sales forces. They hit certain levels, there’d be accelerators on some of those commissions, which hit us in the fourth quarter.

The other thing is we are building on this geographic expansion, which again, as Anders just quoted, we’ve had – in those areas where we’ve had a head count to growth in top line from that in those areas have been dramatic, and we feel like those have been wise investments. So the two big things, again, I would say, would be primarily commissions and geographic expansion, and then a little bit of additional marketing expense that we spent in the fourth quarter.

Keith Housum – Northcoast Research

So overall, most of it’s more one-time, as opposed to going forward and increasing that rate?

Michael Smiley

Well, again, the geographic expansion, we didn’t hire the people to let them go. So that stuff will stay. But the commissions, again, because we did exceed some of our expectations, that stuff is elevated.

Keith Housum – Northcoast Research

Okay. Thank you.

Operator

You have a follow-up question from Greg Halter of Great Lakes Review.

Greg Halter – Great Lakes Review

Yes. One of the hallmarks of the company has historically been percentage from new – sorry – percentage of sales from new products, and that had trailed off due to Rolehaus (ph) and some of the other issues. Just wondered where that figure stood for 2010, if you have it, and where you would like to see that go?

Anders Gustafsson

It’s – we usually comment on that every quarter. We’ve really stopped doing that, but in Q4, our revenue from new products was 17.5%. It was up about 4% from the prior year.

Greg Halter – Great Lakes Review

Okay. That’s excellent. And regarding one of your big customers, how much did ScanSource represent of either the quarter’s or the full year sales?

Michael Smiley

I think it was roughly 18% for the year.

Greg Halter – Great Lakes Review

Okay. And one last one, you mentioned, Mike, about the gross margin and then impact from currency being a negative. Any idea what that was in terms of basis points?

Michael Smiley

So basically if it wasn’t for exchange rate, we would have been closer to 50.8% versus 49.8%.

Greg Halter – Great Lakes Review

Okay. Great. Thank you very much.

Michael Smiley

That’s 1%.

Greg Halter – Great Lakes Review

Yeah. Thanks a lot.

Operator

Your next question is from Marty Moser (ph) from Northwestern Mutual (ph).

Marty Moser – Northwestern Mutual

Hello.

Anders Gustafsson

Hello, Marty (ph).

Marty Moser – Northwestern Mutual

I did – just sort of a big picture, where we are in sort of the CapEx cycle, what’s sort of a normalized growth rate for Zebra on a top line, now that we’ve sort of gotten back to the core business here after the bounce back from bad numbers on ‘09? And then the recovery in ‘10?

Anders Gustafsson

Yeah. That’s a broad, big picture question. I think we feel that the global economies have stabilized quite nicely over the last six months. In the four we were wondering a bit more what 2011 would look like if the economies would kind of have the momentum to drive through 2011. I think we feel based on conversations with our channel partners and end users that they’re seeing better pipelines and more business opportunities. The overall tone of the commentary on the economy is better. So I think we feel that the economic situation is improving, and we still are in a recovery cycle compared to a few years back.

As far as our growth rates going forward, we would probably base that off publicly available data like VDC’s (ph) market growth data, which tends to be in the mid to slightly over midpoint single digit growth rates, and we would like to see us take some share off that, so slightly higher growth rates for Zebra.

Marty Moser – Northwestern Mutual

Okay. That’s reasonable. And then a previous caller had mentioned sort of a $19.6 million loss that you’re sort of kind of operating basis for sort of what’s left. Is that a reasonable starting point or were there some charges in there? And then you’re also going to offset that with some sort of efficiencies by folding it in? If you could just give us – I’m trying to figure what that stud run rate is for operating loss?

Michael Smiley

There is restructuring charges in there. You can sort of pick that out from the quarterly returns. It’s probably about, I’m guessing about $1 million. I’d have to double check there, but there is some restructuring in that $19 million. And, again, as we do the our sourcing on the – on some of the products to J-Bill (ph), we expect that to improve our gross margin. Also we have some cost reductions that Anders is talking about. So I would expect a nice improvement in 2011, although we’re not quoting sort of longer term type view on that, but I think it is going to improve in a good fashion.

Marty Moser – Northwestern Mutual

Okay. And then if I could one more follow up just on retail. Does it feel like that was just a pause and things will be, I think you sort of said sort of normal, steady growth rather than a big pop on a refresh cycle going into 2011 and ‘12?

Mike Terzich

Marty (ph), this is Mike Terzich. I think the real take away for retail is that, to my earlier comments, it’s become increasingly more important to us globally. So beyond just the North America markets, we’re seeing a steady growth in that business, and because the application diversity is much greater than what it used to be historically. When we used to talk about retail in the past years, there was a certain lumpiness to our business, which was very concentrated in North America.

So my point is that I think retail will have another good year in 2011, and the application diversity is going to be very broad for us across those product platforms I mentioned earlier. And it’s growing in consequence in some of the international markets as well as those economies strengthen and people are gainfully employed and they have demand for western goods and services, so to speak. So you won’t see, I don’t think you’ll see the big, the volatility and the big pops in our retail business, but it will be a steady, growing contributor overall.

Marty Moser – Northwestern Mutual

And specifically North America, any comments going forward on that?

Mike Terzich

We expect that in 2011 we’re going to have another healthy year in North America. If you look at the CapEx spending for retail, the projections are- they’re solid, not as spectacular as perhaps the 2010 numbers were but still nonetheless very good.

Marty Moser – Northwestern Mutual

Thank you very much.

Operator

You have a follow-up question from Greg Halter with Great Lakes Review.

Greg Halter – Great Lakes Review

Hello, again, and thanks for taking it. You had almost $31 million in CapEx spending in 2010. Just wondered what your thoughts may be for 2011, if there are any singular big projects in there as well?

Michael Smiley

Yeah. The 2010 number was elevated as we were doing an ERP implementation and as we went live on that. So we expect that it will probably go down by one-third in 2011 from the 33 million. So take one-third off of that, that would probably be a good guess for 2011.

Greg Halter – Great Lakes Review

And since you brought it up on the ERP, how has that gone for you in terms of going live?

Anders Gustafsson

It’s gone really well for us. We started this project two, three years back, and we have had a phased approach. So we’ve gone – we’re now into basically the third wave, and we had basically the largest single go-live event in the entire program, two weekends ago I guess it was in Europe, and we had no major issues. Lots of smaller things to clean up and stuff, but all the functionality works, all the program works. So we feel very good that we are having a well-managed, well-controlled program that’s going to deliver the benefits and the synergies that we expected.

Greg Halter – Great Lakes Review

And are there any more waves to the implementation or is this it?

Anders Gustafsson

This was basically the order-to-cash implementation, and we did that in Europe first. And we’re going to do the implement in North America later in this year. So that will be the last big wave, then we’re going to continue obviously to do other new software programs and stuff, but it probably won’t be called Merlin as we call the overall European implantation. There will just be more one-off type of implementations.

Greg Halter – Great Lakes Review

Great. That sounds good. Thank you.

Operator

There are no further questions at this time.

Douglas Fox

Okay. Well, with that, thank you everybody for joining us today. Just mark your calendar for May 4 for our next scheduled conference call for our first quarter financial results. Have a good day.

Operator

This does conclude today’s conference call. You may now disconnect.

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