Zebra Technologies' CEO Discusses Q2 2011 Results - Earnings Call Transcript

Aug. 4.11 | About: Zebra Technologies (ZBRA)

Zebra Technologies Corp. (NASDAQ:ZBRA)

Q2 2011 Earnings Call

August 4, 2011 11:00 AM ET

Executives

Douglas Fox – VP, IR

Anders Gustafsson – CEO

Michael Smiley – CFO

Analysts

Paul Coster – JPMorgan

Michael Terzich – SVP, Global Sales and Marketing

Karl Ackerman – KeyBanc Capital markets

Keith Housum – Northcoast Research

Tim Mulrooney – William Blair

Jason Rodgers – Great Lakes Review

Anthony Kure – KeyBanc Capital Market

Operator

Good morning, and welcome to the Zebra Technologies 2011 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. Instructions will be given at that time in order to ask a question. At the request of Zebra Technologies, this conference call is being recorded. Should anyone have any objections, please disconnect at this time.

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

Douglas Fox

Thank you. 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, 2010, 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. Today, Zebra reported another quarter of solid operating results. Specifically, we delivered 58% growth in earnings from continuing operations to a record $0.60 per share and $0.12 growth in sales to $245 million, also a record. The second quarter marks Zebra’s eighth consecutive quarter of sequential sales growth. We achieved improved operating leverage with continued high gross margins and effective control over operating expense growth.

Further, we maintained our aggressive buyback programs with a repurchase of 1 million shares of Zebra stock. The increasing success of our investments, strategic investments was complemented by a continuing favorable environment for solutions driving greater efficiencies in global supply chain. Zebra’s growing presence in emerging regions or step-up cadence or new product introductions together with expanded relationships with new channel partners enable Zebra to reach more customers more broadly and deeply in targeted vertical industries around the world.

This progress is built on Zebra’s scale and leading global brand. It has positioned the company for further shareholder value creation by fortifying Zebra’s competitive advantages and enhancing our ability to serve more of our customers’ needs for greater visibility with actionable outcomes, improved operational efficiency and enhanced customer loyalty.

I would now like to provide an overview of the highlights for the quarter. Now with 60% of sales outside North America, all international regions experienced strong growth. Participation was broad with 17 countries registering year-over-year sales increases of 20% or more. Our geographic expansion efforts paid off several countries across new sales thresholds aided by the additional Zebra sales representatives placed in emerging regions over the past year and the tight strategic alignment between sales and marketing.

Sales in those regions with this increased representation were up an aggregate 25% for the second quarter. In Asia-Pacific, we are clearly seeing the upside of our investments with 50% of growth in the second quarter. Our success in China included a positive impact of our expansions to also serve customers in Western China. We also had strong growth in South Korea, India, Australia and Southeast Asia.

Every subregion posted the year-over-year sales growth as Zebra’s broad range of printers met customer needs in manufacturing, retail and government. With 25% growth, Latin America experienced a short rebound as sales reached an all-time record. Improved sales to manufacturing customers in Mexico complemented ongoing positive momentum in Brazil.

We also had marked improvement in sales in the rest of the regions including Puerto Rico, Colombia and Argentina with important figures for mobile and desktop printers. We have also seen growing interest in Zebra card printers from financial institutions for on demand printing and issuance of credit cards. This solution is a promising opportunity for Zebra in Latin America as well as other emerging regions.

In EMEA, the strong run rate business led to solid growth in nearly all subregions. Demand from manufacturing customers supported healthy sales in Germany. In Eastern Europe, our fastest growing subregion in EMEA, we also benefited from the robust manufacturing sector as well as increased shipments to customers and retail. We continue to look to Eastern Europe as a source of growth as our expansion initiatives include the focus on building a greater presence in Russia, where we are opening a new office with further head count investments to follow.

In North America, strength in Zebra’s traditional base in manufacturing and warehousing led to a regional mix of high performance and midrange printers, and a run rate business through distribution remained robust as well. These stable reference helped to offset the sluggish second quarter in the retail sector against the year-ago when we shipped several large retail orders.

We remain encouraged about the outlook in North America. The pipeline looks good and we continue to see healthy demand from manufacturers, the benefit of our large installed base. In addition, interest in direct store delivery and other mobility solutions is strong driven by a focus on improving wealth management in light of raising fuel prices. Longer-term, Zebra has programs under way to tap additional sources of business by penetrating established verticals more deeply with more applications.

Global demand for Zebra products and solutions remain high and deal activity is good. In addition to established printers, customers and channel partners, we are expecting considerable interest in our recent integration products, which are representative of our intensified focus on innovation and consistent with our growth strategy.

During the second quarter, we fulfilled our first major order for our new low-cost receipt printer, which is designed with the features and price points needed for certain applications in the emerging markets and industries. We also launched the QLn wireless mobile printer during the quarter with several hardware and design upgrades that set new levels of performance for our customers.

Smart battery technology delivers improved battery performance and the larger liquid crystal display provides easier navigation with Zebra’s new standardized user interface. The new Ethernet cradle option makes it easier to set up and manage and to universally design that accommodates future radio technology advancements. Additionally (inaudible) of this exciting new product platform are scheduled for introduction later this year.

Interest is also growing for our new ultra-high frequency RFID card, which is designed for long-range ID applications. Customers in the entertainment and the leisure industries in particular are exploring several emerging applications that links together personal identification with social, media and direct marketing, all new areas of opportunities in RFID for Zebra.

Interest continues to grow steadily for other passive RFID solutions as well. During the quarter, we saw greater proliferation of pilot programs in a broad range of industries. In retail, we made excellent progress in source tagging of apparel at the manufacturing level. In addition, RFID began moving beyond current apparel labeling applications. Zebra RFID printer and coders are now being used for more effective inventory management of automobile payors and other context product category for retailers.

Finally, we were pleased with the progress in Location Solutions. We met our sales goals with this active RFID based product line with shipments to customers in the automotive, industrial and government sectors. Overall, our second-quarter results demonstrates the strength and resiliency of Zebra device from its business diversity. We continue to implement that strategy of developing products and solutions that can be applied broadly across many industries to maximize long-term growth opportunities.

In fact during the quarter, we surpassed 10 million cumulative printer shipped the major milestone that positions Zebra for further growth on the largest installed base in the industry. Our results highlighted the success of our investments supporting product costs for growth and high returns in an attractive industry.

This gives me confidence in our strategy, which is supported by a foundation of multiple competitive advantages including financial spilling, the industry’s broadest line of innovative products and solutions, and the global presence with strong trends towards smarter operations and supply chains. We are using these advantages to meet more of our customers’ needs for greater visibility into their operations enabling them to act in an increasingly competitive and complex world.

I would now like to turn the call over to our CFO, Mike Smiley, to provide a detailed review of second quarter results and guidance for the third 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 results for the second quarter. Our comments will principally focus on year-over-year changes and the performance of Zebra’s continuing operations, which have been adjusted for the sale of Navis in the first quarter of this year. First, sales came in at the midpoint of our guidance range and brought strengthening in international regions.

Second, the gross margin improvement of 4.1 percentage points resulted primarily from lower material and freight costs and favorable foreign exchange rates. Third, we achieved further operating leverage with a lower growth rate in operating expenses and sales growth. And fourth, we brought back 1 million shares of stock.

Let’s take a look at sales. For the quarter, sales were up 12% from $219 million last year to roughly $246 million. On a constant currency basis, sales increased 8%. By region, Asia-Pacific sales advanced 50% for the quarter aided by the broader coverage of more Zebra sales representation in the region. Sales to customers in manufacturing, retail and government were particularly strong.

The key region has been an important element of the Zebra growth story. The region accounted for more than 15% of total sales for the second quarter, up from 9% only five years ago. In EMEA, nearly all subregions contributed to the 20% rise in sales. The territories saw a continued strong channel demand including sales of high performance tabletop printers for manufacturing applications in Germany. Large deals in the retail, healthcare and government applications augmented this robust run rate business.

Latin-American sales also maintained a favorable growth profile of 25% from a year-ago. A rebound of manufacturing in Mexico complemented continued growth in Brazil. The other parts of the Latin American region, Central America and other countries in South America were the fastest growing area in the region, as the broader channel network is driving more new business including mobile and card applications.

North American sales were down 5% from a year ago is including sales to manufacturing customers partially offset the decline in sales to refill customers against the surgeon shipments last year. By product category, hardware sales were up 12% on the strength of record sales in tabletop printers. Supply sales advanced 14% to $50 million, also a record.

Shipments of higher value specialty labels using high-performance material for manufacturing applications helped drive this favorable growth.

Our proprietary risk advanced for positive patient ID also had strong sales growth. Consolidated gross margin of 49.6% was up 4.1 percentage points to the midpoint of our guidance range. As expected, gross margin was down 100 basis points from the first quarter largely because of mix in overhead. The operating expenses up 12% from a year-ago substantially reflect higher employee-related compensation, payroll and benefit costs, in part related to our geographic expansion and other growth initiatives.

Our record results for the quarter included approximately $2.7 million cost from some components supply constraints related to the Japan catastrophe. The net impact of these issues on sales has been negligible to date as we quickly adopted by addressing these issues. All combined, our performance led to a 46% improvement in operating income with an operating margin of 19%, up from 14.6% in the second quarter of 2010. Adding back $6.2 million in depreciation and amortization to the $46.7 million operating income totaled $52.9 million of cash earnings or 21.5% of sales, up from 17.4% last year.

The income tax rate for the second quarter was 28.3%, which reflects the growing impact of Zebra’s business in low-tax regions. GAAP EPS from continuing operations were a record $0.60 per share on 55 million average shares outstanding. At the end of the second quarter, we had 54.2 million shares outstanding.

In the second quarter, we bought back 1 million shares of Zebra stock, the weighted-average purchases is $40.82 per share. So far this year, we have returned 82.4 million to shareholders with the repurchase of two-point million shares of Zebra stock, which represents 4% of the shares outstanding at the end of 2010. We had 2.750 million shares left in the current buyback authorization.

The days sales outstanding inched up to 50 days from 49 days for the first quarter of 2011. Inventory turns rose slightly to 4.2 times from 4.0 times in the first quarter with inventories decreased $2.4 million from the first quarter. Quarterly free cash flow totaled $5.3 million for the second quarter. Historically, free cash flow is most challenged for Zebra’s second quarter, which includes two federal tax payments. This year total tax payments amounted to $32 million, which included tax payments on the gain on the sale of Navis. At the end of the quarter, we had $343 million of cash investments on hand.

Now let’s look at the third quarter forecast. We are forecasting 2011 third quarter sales of $245 million to $255 million. Earnings from continuing operations were expected to grow 19% to 33% to $0.57 to $0.64 per share. Our forecast is in terms of consolidated gross margin in the range of 48% to 49% including the impact of an estimated $5 million or 150 basis points in higher freight and other expenses related to supply chain constraints. We expect these incremental charges to primarily affect the third quarter. GAAP operating expenses are forecasted between $74 million and $76 million. The tax rate is estimated to be 29.5%.

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

Anders Gustafsson

Thank you, Mike. Results for the second quarter and first half of 2011 demonstrated the success of our strategy to drive higher growth and increasing returns. Most recently, we accelerated the placement of Zebra sales personnel in territories that offer the highest risk adjusted growth opportunities based on big market research and analysis.

We supported these investments with new innovative products that are expanding the range of applications in which we can enable mission-critical information of our assets, people and transactions. Finally, we focused our business on core printing, RFID and location solutions to build on the multiple competitive advantages that has led to clear industry leadership.

Our success to date gives us confidence in Zebra’s future and that the strategies we are pursuing will lead to creating greater shareholder value. As we look through the second half of 2011 and into next year, we will continue to invest in those areas of our business that will deliver the highest risk adjusted returns.

Mainly first, driving growth by more deeply penetrating North America and parts of Europe in key verticals with new applications. Second, maintaining our intensity on product innovation and superior product development. And lastly, expanding into emerging regions around the globe or into a business intelligence that aligns the most promising industries and applications with a correct channels, sales and marketing strategies.

Let me elaborate. We will continue to develop stronger and broader relationships with channel partners to serve more customers in targeted verticals around the world. At the same time, we have programs under way that are designed to penetrate verticals more deeply with a broader set of applications in established regions such as North America.

We are building on our early efforts with independent software vendors or ISVs to be coming to the fact of standard printers solution for a broad range of applications. To-date, approximately 75 ISVSs, many in North America, have joined our program that we launched earlier this year. In addition, our focused work with system integrators will position Zebra as a closest strategic partner with large companies that have complex supply-chain challenges.

We will also maximize Zebra’s long-term growth opportunities with new products and solutions that can be applied across many industries. Today, Zebra has the broadest range of thermal printers in the industry. The depth and breadth of our product line are important competitive advantages as they enable us to meet more of our channel partners and customer’s needs.

Specifically, we see exciting growth opportunities in kiosk, mobile and card printers. We also see potential for more products that meet the unique regional and vertical needs such as the printers we introduced in China early in the second quarter. We also have growing optimism for the future of solutions incorporating passive and active RFID technologies.

Finally, success of our geographic expansion program is evident with the high growth we have seen in China and other regions. We are developing market economies and the growing middleclass to support attractive business opportunities. During the first part of this year, we made further investments in Zebra sales resources in India, Russia, China and countries in Southeast Asia. These investments will add to the growth already generated by the personnel faced in country last year.

Zebra’s financial position gives us the ability to sustain this phase of investment. Together with a disciplined approach to delivering solid risk adjusted returns, this foundational strength gives us important flexibility how we run the business for the long-term benefit of our shareholders.

In addition to funding internal growth, share buybacks continue to be an attractive use of our excess cash. This concludes our prepared remarks and I will thank you for your attention this morning.

I would now like to turn the call 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 and I will be available after the call for any further discussions. Finally, please mark your calendar for the next quarterly conference call which is currently scheduled for Tuesday, November 8. Okay, we are now ready for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Paul Coster with JPMorgan.

Paul Coster – JPMorgan

Thank you. Good morning. I think most of your – so approximate competitive advantage have been posting growth in North America or even associated with Rico market. So I think that’s what folks are going to focus on say from a negative perspective. As much let’s get out of this quarter admittedly. But can you elaborate please on what happened a year-ago and why it’s down and what gives you the confidence of North America is back on track. I mean the underlying concern here is that maybe to focus on internationally (inaudible) goes through our – focus on Internet domestically and perhaps your losing some using market share?

Anders Gustafsson

Well, first in North America, we have the great strength in our traditional markets of manufacturing and warehousing. That led to very rich mix of tabletop printers. We had record revenues of high-end printers into US. Sales through our distribution partners continue to be very robust.

And this favorable trends are offset by a weakness in retail. But even so we had a healthy deal activity throughout the quarter. We just didn’t have as many large deal as we would normally see. And in retail, we will say that the high-end retailers continue to outperform most of the other one. And we are quite confident that we are maintaining and expanding our lead in the industry and not losing any share.

If you look at little more on the outlook for North America than for us, we have developed a robust set of growth strategies for the region that we feel are all very compelling. We are building a more strategic sales capability. We are developing new types of partnerships that can take us into new verticals or new applications through ISVs and system integrators.

Over the last several years, I guess the backdrop in North America has been there. There has been a big shift from the manufacturing jobs or manufacturing opportunities for us outside of the US to Asia. So fortunately, they landed with us in those regions. We certainly pick them up there. But we have seen a substantial shift in our business where the breadth of our product lines, channels and so forth has really helped us grow very, very healthily in new markets like health, government, direct store delivery even retail.

And into the second half of the year, we feel that our pipeline in North America is promising and we are working very hard to make sure we can deliver consistent growth trajectory for the region that is clearly one of four priorities.

Paul Coster – JPMorgan

So your business, so your hardware business lease is pretty cyclical and were all picking up this negative points at the moment. Can you just comment on what you are seeing from your customers in terms of the economic cycle and the risk associated with the slowdown?

Michael Terzich

Paul, this is Mike Terzich. That question specific to the North American market?

Paul Coster – JPMorgan

No. It’s more generic.

Michael Terzich

Well, I think generically speaking, I think our business – I think the diversity of our business and from both the global perspective and the application perspective has been very healthy. And clearly when you look at all of the news that is around at those at the current place and timing. So little bit we’re sensitive to it. We haven’t seen that reflected in the base of our business. I want to reinforce one of the principles of the technology that we felt which is we are in efficiency, productivity technology.

And we intend to be a little less sensitive to the immediacy of the macroeconomic indicators in the marketplace. People deploy our technology to improve productivity, efficiency of their business. When they have economic challenge in their business, they deploy our solution. So we have been a little bit less – we have been more insulated for some of that. And we expect that, we can’t predict the future but in the short-term I think the general state of our business has been pretty healthy.

Paul Coster – JPMorgan

All right. Thank you.

Operator

Your next question comes from the line of Anthony Kure with KeyBanc Capital Markets.

Karl Ackerman – KeyBanc Capital markets

Good afternoon, gentlemen. This is Karl Ackerman filling in for Tony.

Anders Gustafsson

How are you?

Michael Smiley

Hi, Karl.

Karl Ackerman – KeyBanc Capital markets

Good. Yeah, I was just curious as ScanSource continues to add the international footprint, do you see Zebra utilizing them at the same penetration rate and say, Europe and Brazil as much as North America?

Michael Terzich

Karl, this is Mike Terzich. I will take that. The business does materially change in the international market I’ll try to explain. Certainly in North America, it’s a homogeneous market. They have very strong position, they curved out a strong position in Europe as well. One of the challenges in the European market and in the balance of the international markets, four broadline distribution is that there is a fair amount of regional royalty that occurs with the distributors and reseller relationships they have.

So they certainly bring scale to the international business but at the same time there is a lot of local loyalty. The bottom line is the Italian resellers and France resellers like to buy through some local distribution and that has always been a place in the market. So I think as they continue to scale, they are going to continue to be effective for us and we expect that relationship will continue to be successful, but it’s a different market internationally because of the local culture and the local customs and the local relationship.

Karl Ackerman – KeyBanc Capital markets

Okay. And just one more question. I noticed that you know you guys did have 75 ISVs joining the program today and that’s great. You’re continuing to accelerate the build of your go to market channels. Just wondering if you could provide some color on those – are those primarily concentrated within emerging markets. And then also, how long it will inevitably take some of them to come on board and then may be considered fully productive?

Anders Gustafsson

First the ISVs that we have signed up so far has primarily been in our more developed markets, so in North America and Western Europe. It is a wide variety of vertical focus or application focus. So they give us a much better breadth as they emphasis. And they help us really get into new areas that we otherwise wouldn’t really have the same penetration. And we can compete by getting designed into the application versus having to compete at the tailend by speed some price.

How long it takes to ramp, it those text it varies quite a bit. Some of them are already most familiar with our space and what we do. They can be up and running very quickly and some of them takes a bit longer to figure it out. But I would say on average, it’s probably maybe fee bonds or so to get through that.

Karl Ackerman – KeyBanc Capital markets

Great. Thank you, gentlemen.

Operator

Your next question comes from the line of Keith Housum in Northcoast Research.

Keith Housum – Northcoast Research

Thanks, guys. Thanks for taking my call. And my question pertains to the foreign exchange benefit, if you guys just discussed a little bit about where the foreign currency translation benefit was originated. If there’s more on EMEA region or Latin America? And perhaps secondary, how much of that perhaps stops the bottom line.

Michael Smiley

What we had – this is Mike Smiley. Just give you an answer that we had look over year-over-year, we had basically about $7 million – just sort of $7 million operating profit benefit from the foreign currency. And it’s basically a whole lot of EMEA. Of all intend and purposes, we sell almost entire US dollar except in EMEA where we’re selling dollars, pounds and euros.

And so the primary impact to our P&L is in Europe and it is an euro. So it’s basically – again the growth rate would have been 8% versus the 12.3 for the year-over-year and we had the benefit about $7 million – just assured $7 million to our operating income from that.

Keith Housum – Northcoast Research

Okay. Thanks.

Michael Smiley

Yep.

Operator

(Operator Instructions). Your next question comes from the line of Tim Mulrooney with William Blair.

Tim Mulrooney – William Blair

Yes. Good morning, gentlemen. My question is regarding ASP. I have noticed that ASP was up 10% year-over-year and also up sequentially. I was wondering if that was a function of new product introduction or what’s driving that?

Anders Gustafsson

That is a really good question. We do put out the ASP statistic, we have done that historically. To be honest, this is a challenge that numbers is really a function of mix. And so, depending upon the period like I think we mentioned earlier, tabletop is higher. Tabletop products sell at a much higher ASP.

So depending upon the mix that will change that, so I would not look at that too closely to sit there and try to get an indication of how the business is going because balance of the year pricing has been really, really stable. We don’t, we are not seeing a lot of price pressure – we see very little price pressure to be honest. So it is not really an indication of price pressure, its mix.

Tim Mulrooney – William Blair

Okay. That’s very helpful. Thank you. And then secondly, in terms of your G&A, I’ve noticed that’s down about 2 million from the first quarter to the second quarter. Is that a function of seasonality or how should we think about that going forward?

Anders Gustafsson

It’s primarily related – it is seasonality in the sense that when you come to the top where you top up 401K type stocks and both security types of stock, vacation or those types of things. So you will see that in the back off of our yearly benefit from that kind of stuff versus the first half. So when we have this call at the end of the fourth quarter, and we will tell you the first quarter is going to step up, it is going to be the offset of the situation we’re experiencing here.

Tim Mulrooney – William Blair

Okay. Thank you.

Anders Gustafsson

Yep.

Operator

(Operator Instructions). Your next question comes from the line of Jason Rodgers with Great Lakes Review.

Jason Rodgers – Great Lakes Review

Hi, guys.

Anders Gustafsson

Hi, Joe.

Jason Rodgers – Great Lakes Review

Just a follow-up on the ScanSource, do you have a percentage of sales that ScanSource was through the quarter?

Anders Gustafsson

We do have 19% which is about consistent with our last quarter.

Jason Rodgers – Great Lakes Review

Okay. And looking at North America, are you facing the tough comparisons in retail for the third and fourth quarters as well?

Anders Gustafsson

Not (inaudible) something, we are more normal I think if you go forward. Q2 was a more tougher comparator. Q3 and Q4 I think are – let me consider a more normal.

Jason Rodgers – Great Lakes Review

Okay. That’s helpful.

And then just to be clear on the component cost related to the Japan situation, you expecting them to pretty much double in the current quarter and then I guess, tail offer and following it.

Michael Smiley

Yeah, we I think – that sort of two areas where we have the primary costs associated. One is, we are reintroduced to the market, our desktop printer that we have been selling in the past to help alleviate the demand for another printer that’s was using a certain – some components by the Japan. And to encourage that transition to the newly introduced product we’re giving more of a prior rebase not extraordinary. And the other thing is we’re using – we’re spending a lot more, not a lot more but more in freight as the air freight start to meet customer demand. So it is stepping up.

So actually I’m glad you asked that question because if you really take the impact of roughly $5 million of the Japan crisis in most of that goes to gross margin. And you adjust our gross margin projection for that 5 million, you’re going to say, we have a very robust gross margin sort of, I will call it a pro forma number, if we didn’t have the Japan thing. But even work to Japan, we have a very strong gross margin.

So this goes back to the question of our price. Our prices are good. Business is going well. We’re just reacting to the situation in Japan and trying to not trying, but we are addressing our customer’s needs by these actions.

Jason Rodgers – Great Lakes Review

Okay. That sounds good. And then looking at the ERP implementation, just wondering how that is progressing?

Anders Gustafsson

Its progressing well. We went live in Europe, in Q1 at the end of January in Q1. We had no major system issues. We worked for the last five, six months to optimize the system to make sure all the people are using it are properly trained. And I think it is a big change to implement the new ERP system like as for the – effort along training and other things has been substantial. So we feel we’re making good progress on that and are on plan to go live in North America beginning in next year.

Jason Rodgers – Great Lakes Review

Okay. And then finally, what are the expectations for CapEx and D&A for the year?

Michael Smiley

It’s – I would say it is going to be down a bit. We typically don’t give beyond the quarter but we expect sort of the third quarter to be similar to the second quarter as far as CapEx goes.

Jason Rodgers – Great Lakes Review

Okay. Thank you very much.

Operator

Your next question is a follow-up from the line of Paul Coster with JPMorgan.

Anders Gustafsson

Hey, Paul.

Paul Coster – JPMorgan

Talk a little bit about the direct door delivery and mobile solutions opportunities that lies ahead of you? Obviously, you provide the printing part of the solution. Are there any partners, you’re going to market with where you have the other products and solutions whether it’s the GPS technology or the data capture technology. And all your disadvantages by not having a sort of complete set of solutions there?

Anders Gustafsson

No, we don’t think we disadvantaged. We have some very strong value to resellers and other partners that are focused on this space. They tend to pull in other hardware or software vendors to offer that complete solution. And we tend to be a very prominent investments. I think our market share in that area is very good.

Paul Coster – JPMorgan

Okay. Thank you.

Operator

(Operator Instructions). Your next question is a follow-up from Tony Kure with KeyBanc Capital Market.

Anthony Kure – KeyBanc Capital Market

Hello, gentlemen. Yes, I was just wondering if you can provide any commentary around what you’re seeing from a demand perspective within distribution. You said that was relatively stronger in the quarter. I’m not sure of – it appears that some peers have said there was a modest build in this recent channel. I just wondered if you have missed the any trends in that in the latter part of the quarter.

Michael Terzich

Tony, it’s Mike Terzich. We will break this into two pieces. North America, we measured our distribution on a number of metrics. We recorded revenue on a sales out basis. We watched very closely their performance on a sales out basis, we watched their inventory levels very closely. I can tell you that on our salesout basis, the business was healthy in Q2. It was a nice business resolved, which for us is important because that the distribution channel is really a parameter for broader health of our North America business. It crosses multiple verticals, multiple application spaces.

So we like the result inventory levels right where we want them to be very consistent to what we’ve seen in the past. Internationally, our business was very strong internationally. So our distribution results are (inaudible) were better than they were in the US, which was very good. So again, the quarter was a quarter that I would characterize as very strong run rate business, which is typically aligns well with a distribution performance. And we’re a little bit lighter globally on some of the large deal opportunities besides of the last deal. So the distribution channel have performed very well for us.

Anthony Kure – KeyBanc Capital Market

Okay. If I may just piggyback on the last comment. You did not witness may be some of the larger deal activities that you normally would. Are those primarily concentrated in manufacturing in Asia Pac and may be retail in the US or the other end market verticals that maybe you didn’t notice service amount of large deal activity that you may normally would.

Michael Terzich

Well, what we saw was deal activity. The volume of deal activity was consistent to what we have seen in the prior quarters. The value of the deals tended to be a little lighter in the second quarter. And because of the global reach and the diversity of our business, we look at deal activity. It’s generally well balanced between manufacturing some of the field mobility applications that we talked about earlier as well as the retail space and the government space particularly outside the United States for government.

Anthony Kure – KeyBanc Capital Market

Great. Thank you very much, gentlemen.

Anders Gustafsson

Yep.

Operator

And there are no further questions at this time.

Anders Gustafsson

Okay. Well, everybody, thank you very much for joining us today. Again our next regularly scheduled conference call for the quarter will be on Tuesday, November 8. And Mike Smiley and I will be available for the rest of the day, if you have any further questions. Have a good day. Thank you very much.

Operator

This concludes today’s Zebra Technologies second quarter 2011 earnings release conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!