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Executives

Douglas A. Fox – Vice President, Investor Relations and Treasurer

Anders Gustafsson – Chief Executive Officer

Michael C. Smiley – Chief Financial Officer

Michael H. Terzich – Senior Vice President, Global Sales and Marketing

Analysts

Brian Drab – William Blair & Company

Michael Holt – Morningstar Equity Research

Anthony Kure – KeyBanc Capital Markets

Chris Quilty – Raymond James

Keith Housum – Northcoast Research

Jason Rodgers – Great Lakes Review

Marc Heilweil – Spectrum Advisory Services

Zebra Technologies Corporation (ZBRA) Q1 2012 Earnings Call April 27, 2012 11:00 AM ET

Operator

Good morning. And welcome to the Zebra Technologies 2012 First 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 A. Fox

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

Words such as expect, believe and anticipate are a few examples of words identifying a forward-looking statements. Forward-looking information is subject to various risks and uncertainties, which could significantly affect expected results. Risk factors were noted in the news release we issued this morning and are also described in Zebra’s 10-K for the year ended December 31, 2011 which is on filed 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 sales of $244 million and earnings per share of $0.58, both within our guidance range. Strong execution across our business grew year-over-year sales growth in all geographic regions. We further extended our industry leadership with our scale, diversity and targeted business strategies.

At the same time, our operational discipline helped to deliver continued strong profitability with gross margin exceeding 49% and sequential increase in operating margin to 17.2%. We also successfully launched the latest and most complex module in our new companywide ERP system, which will generate greater operational efficiency well into the future.

While maintaining investments in activities that will drive further growth in high returns, we generated $42.7 million in free cash flow. For the quarter, we repurchased 265,000 shares. Within the constraints of a more challenging business environment in Asia-Pacific and EMEA and a seasonally slower period, our strong performance underscores the continued effectiveness of our strategic focus.

Zebra continues to outgrow and out execute its competitors. Companies around the world want to see more and do more with their valued assets across their supply chains. And Zebra is well positioned to deliver more high value products and solutions to meet our customers growing asset visibility needs.

As we outlined at our Investor Day in February, Zebra together with our partners is working to create a smarter, more connected business community. We are pursuing this vision through five strategic pillars. First, penetrate existing markets further. Second, expand into new markets. Third, intensify innovation. Fourth, maximize operational effectiveness. And lastly, inspire our people and culture.

Now let me highlight a few of our successes from the quarter. To further penetrate existing markets, our work is ongoing to develop deeper, more strategic customer relationships. We are executing on these opportunities by investing in relationships with key influencers such as system integrators and independent software vendors.

With our expanding set of channel partners coupled with the development of our own high touch sales capability, we are developing meaningfully tighter engagements, which with strategic customers in important sectors including small package delivery, retail and aviation and aerospace. Take share strategies with key customers are also resulting in solid wins including growing success in displacing installed competitor products as well as an increase in pipeline of opportunities.

Our expansion into new markets is paying off as well. Our focus on building a greater presence in the brick countries, Brazil, Russia, India and China has helped us grow in the past, and we contribute to our success in the future. The growing middle class and increasing adoption of AIDC technologies will continue to drive growth in these regions.

In addition to supporting established manufacturing customers, we are increasing the engagement with customers in government, healthcare, retail, and financial services. The region specific products we introduced last year together with our growing in country service capabilities demonstrate our commitment to supporting our customers and channel partners. And further strengthen Zebra’s competitive position.

Finally, innovation has been and continues to be core to Zebra’s long-term success. Today, Zebra out invest its competitors more than four to one in product development. More importantly, our focus is driving innovation throughout the product line. The strong growth of our card printers, which underwent a significant transformation over the past two years, demonstrates the success of these efforts. We increased the cadence on new product introductions as well as enhanced the efficiency of our product development activities.

Separately, we also made progress in location solutions. Most recently we upgraded our awareness family of product to the new IPv6 standard ahead of schedule. This ability to stay current on the evolving standards has already resulted in new bookings; in this case, for a department of defense application, a targeted growth area for Zebra.

In addition, we delivered vehicle tracking solutions to broader range of automotive customers. These deployments include a realtime tracking solutions for Audi, in conjunction with system integrator IBM. We also closed multiple Ultra-Wide Band system deals for a variety of high precision tracking applications with our dark product family such as tool and Park tracking in aerospace and emerging industry for these solutions.

In the first quarter, Zebra also became a location solutions customer. With the implementation of our own ERP system, we installed a dynamic staging solution that we developed internally. This system is meaningfully improving the facility our burner hills warehouse and configuration center with an integrated messaging and high precision real time location system, utilizing awareness and dark products.

From a regional perspective, we continue to see more examples of the successful execution of our strategy. In North America, business activity exhibited increasing strength for a third consecutive quarter. We further saw the rising return of domestic manufacturing, including customers in the automotive supply chain.

Shipments to retail accounts remained strong as well with the ongoing push to put more technology in stores to enhance the customer experience. As an example, we worked with major department store retailers on several inventory of this ability projects employing multiple Zebra products, including Zebra RFID printer/encoders.

We are also pleased with the progress of our strategic account focus. This initiative is generating great customer diversification, while lessening the volatility we have with a few large retail accounts. Sales growth to this group excluding our primary discount retail customer increased 30% year-over-year. Solid business trends are in placed in North America and we’re confident of further growth in the region as the year progresses.

In EMEA, the diversity of our business, brand strength, and ongoing investment in channels, products and people drove share gains and growth. During the quarter, we shipped card printers to Angola for its National ID Card Program. Desktop printers to Turkey for a retail application; and ruggedized mobile printers to enhance service productivity for a large national automobile glass replacement company in the UK. The pipeline for additional large deals is developing nicely in EMEA, but we are taking a more cautious stance on the outlook, given the current economic climate in Europe.

In Asia-Pacific, we expanded the distribution of the Zebra printer products that we introduced last year for the emerging markets. Our larger, more robust sales organization also enabled us to penetrate targeted verticals more deeply. By engaging with more customers in retail, healthcare and government. These activities led to a record opportunity pipeline at the end of the quarter, and an improving outlook for the region. In Latin America, greater business opportunities have developed in government and retail from new channel partners and distributors, as a result of our expanded sales team.

During the second quarter, we will be supporting our customers and providing better coverage with the opening of a new spare parts and repair depot in Brazil, a country with continued significant business opportunities in multiple industries. Zebra’s first quarter results benefited from investments to extend leadership, improve growth and enhanced capital returns.

By investing ahead of our competitors, we have consistently taken share and expanded the range of business opportunities by penetrating existing markets more deeply, expanding into new markets and working to maximize operational effectiveness. A broad range of innovative products and solutions enables Zebra to serve more customer needs to improve their visibility and therefore enhance business performance.

I would now like to turn the call over to our CFO; Mike Smiley to provide a detailed review of first quarter results and guidance for the second quarter of 2012. After Mike’s remarks, I will return for some brief closing comments.

Michael C. Smiley

Thank you, Anders. Let me highlight some of the key components of Zebra’s results for the first quarter. My comments will principally focus on year-over-year changes and the performance of Zebra’s operations. First, sales came in within our guidance range on year-over-year growth in all geographic regions; second, gross margin, the top end of the guidance range declined from the very high level of the year-ago, principally because of mix; and third, operating expenses increased 5.6%.

Let’s review sales. For the quarter, sales increased 2.8% from $233 million last year to $244 million this year. The impact of foreign exchange net of hedges, was not material to our sales growth. Sales growth for North America, EMEA and Latin America each range to be 1% and 2% with some variations in the product mix. At a high level, shipments of card printers were particularly robust, demonstrating the successful outcome of product development to strengthen this product line as previously mentioned by Anders.

Supply sales also stood out as a significant area of growth of 12% to a record $50 million. Shipments of specialty printer labels and ribbons were notably strong to establish the new customers in North America and EMEA. We also had a surge in ribbons for card printers demonstrating the pullthrough of consumables for this product line. More specifically in North America, printer sales benefited from strong and steady shipments for distribution, an excellent indicator of the region’s health and vitality. In EMEA, ongoing strength in Germany, France, Spain and the Middle East and Africa offset some weakness in Italy.

Asia-Pacific had pockets of strength including China and India where investments in greater sales representation continued to generate growth. This activity offset softness in Australia, where we shipped a large deal a year-ago and softness in Korea with the export oriented manufacturing sector is down. In addition to year-over-year sales growth, Asia-Pacific sales increased 2% on a sequential basis.

And finally, our investments in sales resources in Latin America drove strong growth. We had strong broad-based quarter in Mexico, strong broad-based quarter in the region except for some softening in Brazil. Sales for the region increased to 11% year-over-year and 3% from the fourth quarter of last year.

Looking at profitability, we maintained a high gross margin of 49.1% down from a year-ago, but unchanged from the fourth quarter of 2011. Operating expenses increased 5.6% from a year ago and was down 2% sequentially. Compared with last year, higher wages and salaries, largely from personal addition over the past year supporting our growth initiatives for the increase.

Product development expenses declined from a year-ago to the timing of expenses related to various projects. Quarterly operating income of $42 million delivered a 17.2% margin down from 18.7% in year ago and up from 17% for the fourth quarter of 2011. Adding $6 million in depreciation and amortization to the operating income totaled $48 million of cash earnings or 19.7% of sales. The income tax rate for the first quarter was 28%.

GAAP earnings per share was $0.58 per share and $52.3 million average shares outstanding. At the end of the quarter, we had $51.9 million shares outstanding. In the first quarter, we purchased 255,000 shares of Zebra’s stock. The weighted average price of the purchases was $36.95 per share. We have noted in the past that Zebra would be sensitive to the price of the stock and become less aggressive in our buyback at higher prices.

The days sales outstanding declined from 49 days for the fourth quarter of 2011 to 48 days. Inventories declined $7 million from the fourth quarter of last year. Quarterly free cash flow totaled $42.7 million including $14 million we received from the Navis divestiture escrow. At the end of the quarter, we had $352 million of cash investments on hand with all capital expenditures and high profitability; Zebra has been a consistent generator of high levels of free cash throughout its history as a public company.

Now, let’s look at the second quarter forecast. we are forecasting 2012 second quarter sales of $250 million to $260 million, for a $6 million to $16 million sequential increase over first quarter sales. Earnings are expected at $0.58 to $0.63 per share. Our guidance reflects continued concern of our economic headwinds particularly in Europe. Our forecast assumes consolidated gross margin in the range of 48.5% to 49% due to an expected slightly less favorable product mix.

GAAP operating expense is our forecast between $79 million and $82 million. We expected increase in the first quarter including some planned higher spending and research and development and miscellaneous project expenditures, which should moderate in the second half of the year. The tax rate is estimated to be 27.5%.

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

Anders Gustafsson

Thank you, Mike. First quarter results demonstrate the value of excellent execution and an innovation. During the quarter, Zebra’s market leadership increased. The investments made to quantify business have resulted in deeper engagements with strategic accounts in attractive industries, a larger global footprint to serve customers in the high-growth markets and a demonstrably more competitive and innovative product line.

All of these make Zebra an even greater force in the industry, and give the company additional leverage with the capacity for higher growth and greater shareholder returns. As we look to the remainder of 2012, our focus remains on driving performance through the successful execution of our five strategic pillars. We are well positioned to outperform our competition irrespective of business conditions. we have proven our ability to operate and manage the business effectively through changing business conditions. We will remain agile and responsive in the current business climate, as we continued to invest prudently to successfully extend leadership increased profitability and core capital returns.

Our focus on creating valued solutions for our customers remains a priority. Advanced technologies is driving greater demand for information and knowledge about our customers assets within the enterprise and the longer supply chain. Zebra is well positioned to benefit on these trends as a leader providing a vital link between the physical and digital worlds, barcodes, passive RFID and active RFID.

Our technology collaboration agreement with Oak Systems announced early in the first quarter is already bearing fruit with an enhanced platform for integrating multiple (inaudible) technologies. This ability platform makes it easier for Zebra customers to use active RFID, passive RFID and bar coding across the enterprise for greater visibility into a wide range of assets. We have received much positive feedback on this innovation and we are already deploying it in a pilot firm MRO tracking system with a large transportation company.

Finally, maintaining our discipline on driving innovation through our product design process is the key component to our success. More standardized design in 2011, led to the introduction of 13 new printer products and 10 software and hardware updates for location solutions. These trends are continuing through 2012. Within the next month, we will be introducing an exciting new table top printer family. This year mid range printers features superior ergonomic design, optimum print quality and elegant space saving design. All features that make our printers easy to integrate, easy to use, and easy to maintain. These printers will set a new standard of performance and value in this category.

The outlook for our company is bright and we remain confident about Zebra’s future. The great diversity of our business, our financial strength, and our continued industry leadership provide us the resilience and to pursue multiple global opportunities. Investing in the highest risk adjusted returns continues to be a priority.

In addition to internal growth, we will support our strategic vision by carefully considering potential acquisitions. Share buybacks will remain another important occurrent in our capital deployment positions. This concludes our prepared remarks and I thank you for your attention this morning.

I would now like to turn the call over to Doug for Q&A.

Douglas A. 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 discussions. Also our next regularly scheduled conference call is currently scheduled for July 31. Let’s begin the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from Brian Drab with William Blair.

Brian Drab – William Blair & Company

Good morning.

Anders Gustafsson

Good morning Brian.

Michael C. Smiley

Good morning Brian.

Brian Drab – William Blair & Company

Sorry if I missed the – I missed the first few minutes of the call, sorry if I missed some information that I'm going to ask. But I know that FX was negligible in the quarter, but including any divested businesses, what was organic growth, revenue growth in the first quarter.

Michael C. Smiley

Well basically it’s the entire growth was, it is organic in a sense we didn’t have (inaudible) in the year ago numbers, continued operations, so basically the growth was 2.8% for the year-over-year.

Brian Drab – William Blair & Company

(Inaudible)

Michael C. Smiley

3.5.

Brian Drab – William Blair & Company

Okay, thanks. And then R&D expense was a little bit below our estimate, what direction should we expect to go from year-end and why? What was the main growth drivers?

Michael C. Smiley

The R&D has a fair amount of say project expense when projects comes to an end, so it’s a matter of timing and so the first quarter was a little bit low because of again timing we expect the our second quarter to be up and that speaks to a big piece of our operating expense increase from Q1 to Q2.

Brian Drab – William Blair & Company

Okay, I’ll get back in line, thanks.

Operator

Your next question comes from Michael Holt with Morningstar.

Michael Holt – Morningstar Equity Research

Good morning thanks for taking my question. I just want to follow up on gross margin and the product mix you referred to. Should we be thinking about this as reflecting slowdown in manufacturing versus some of the other higher growth areas or more in terms of higher geographic mix is trending or how should we think about this product mix going forward, it is a permanent sort of structural change or more of a temporary cyclical feature?

Michael C. Smiley

Well, Mike, I don’t think that it’s a cyclical change to the structure of our business, the performance of our business. Our manufacturing was a performed well for us across the globe. It was as high growth as it was maybe a year or two ago, but it was still a nice growth business and particularly I would say manufacturing did very well for us in North America. But there is a mix shift between within product families and between families, which is basically causing the a [PV] kind that you saw, but there is no real price pressure on individual product.

Anders Gustafsson

And I would know, 49.2% gross margin that’s a very consistent with the long term guidance we can providing every while where we think it’s the long term (inaudible), 50.6% a year ago was very high.

Michael Holt – Morningstar Equity Research

Okay that makes sense and just a quick follow-up it’s on gross margin, you mentioned how a lot of the supplies business, the cards, the risk bands, the custom labels those are growing quite nicely, should we think about those sort of neutral to that gross margin or another printing business something supply to quite high end margin.

Anders Gustafsson

Card printing business has done very well for us over the last year, we spend a lot of efforts and invested quite a lot in rejuvenating and coming out with new innovative products in that category for the last two years, and that’s been helpful to support the top down end to the margin for the card business, while the [supply] business tends to be slightly lower, but we also there would like to have to think likely to think about in two categories really. We have our labels and the labels that we actually print on so that tends to be a little lower that we have a lot of supply, so really think they go through it and in predicting the card business a lot of dedicated supplies that only that are required to produce our printers. Those have much higher margins and are very much comfortable to our margin profile that was having our overall business.

Michael C. Smiley

And you’re asking although the gross margin some areas is a little bit low, there is no R&D associated with debt activity, so it’s operating income standpoint still very attractive.

Michael Holt – Morningstar Equity Research

Great thanks.

Operator

Your next question comes from Anthony Kure with Keybanc.

Anthony Kure – KeyBanc Capital Markets

Hey good morning guys thanks for taking my question.

Anders Gustafsson

Hi, good morning.

Anthony Kure – KeyBanc Capital Markets

Just then maybe I didn’t quite catch it I apologize to, can you go back to this question on the mix for the gross margin. Could you maybe specify one more time what is causing the mix headwind here going forward?

Michael H. Terzich

Anthony this is Mike Terzich, I’ll take that. When you look at Q1 across the broad product platform, we had a very strong quarter as we noted in the prepared remarks, in the area of supplies, also very strong quarter in the area of card printers. All other product lines we saw more moderate growth across each of those lines and they effectively all grew in each of the geographies, so principally driven by mix. So while we were a little bit more moderate in some of the high end product, it was offset by growth in the card business, we’re a little bit more moderate in the desktop and in the mobile, which are also very much tied to large deal opportunity, and in any given quarter that deal opportunity tends to be a little bit more volatile, so which principally a mix issue and as Anders noted it was not cyclical, it’s just it’s a matter of time.

Anthony Kure – KeyBanc Capital Markets

Okay, and actually those are – leads into my next question about large deal opportunity, if you just talk about the mix of large versus small deals in the quarter, anything out of the ordinary or is it pretty much pretty normal.

Anders Gustafsson

We’ll talk Q1 as a solid run rate business, we have very good run rate fields going through. The larger deals were the volume of large deal was not as high as it would normally be. We saw larger deals kind of get subdivided into two smaller pieces so that it broken into smaller projects. There are still deals there and I was really on it global basis and across all industries so that was in the U.S. and there was in Asia, but it we still feel that we very well positioned to continue to win large deals and win break into new customers as we go forward.

Anthony Kure – KeyBanc Capital Markets

And just sneak one more and Europe I mean up year-over-year that’s given what’s going on over there, it’s pretty impressive just if you guys just comment on if you think that mostly comprise of gaining share or is the market actually holding up and actually, still growing a little bit in Europe.

Michael C. Smiley

We really careful to say exactly what we think the market is doing before we see independent analyst research, but I think we feel we have a very strong position in Europe and we have gained share. So we’re certainly going faster than the market in Europe. We saw great strength in Germany, France, in our Eastern European countries, in the Middle East, but we did see weakness in (inaudible), no surprise. But overall, we feel that we have a very strong position in Europe and that’s helped us perform quite well in Europe given the economic situation we have there.

Operator

Your next question comes from Chris Quilty with Raymond James.

Chris Quilty – Raymond James

Good morning, gentlemen. I wanted to follow up on the supplies business, which is in the past been a bit of a leading indicator. First of all, just to want to confirm with Mike that you view that as a leading indicator and second, is that primarily just reflecting North American market, because as a member you don’t have huge consumables business located outside the U.S.?

Michael H. Terzich

Okay. Chris its Mike Terzich. The business with strong and essentially it’s actually strong in three regions. We’re strong in North America; Asia Pacific was the region where we don’t have effectively underground converting capability. EMEA was very strong. In Latin America, we actually serviced Latin America most of it from Mexico through two of our facilities in North America. So we were very strong in three regions, and obviously, not much of a contribution out of Asia. But peeling back the layer on the business going back to a little bit of what Anders said, the business is really made up of three components. It is made up of barcode, label, and ribbon, which was very healthy in all geographies, which is a leading indicator for us. So, labeling and demand for labeling continues.

We had a very strong quarter in card printer sales, hardware sales and usually what happens is, we get the 100% annuity attached to the ribbon that goes with that product. So we saw an increase in demand in the ribbon for card, ribbon on the card business is very good margin for us, and then the third piece of it for us is in the area of wrist band and the cartridges that those wrist bands are produced through, and that is also very high margin business for us. And the healthcare side of our business continues to expand in all four geographies, but some of that is what’s driving a pretty healthy robust supplies business in total.

Chris Quilty – Raymond James

Great. Good color. Thank you very much.

Michael H. Terzich

Okay.

Operator

Your next question comes from Keith Housum from Northcoast Research.

Keith Housum – Northcoast Research

Thanks, gentlemen. I appreciate you taking the call. Could you guys provide a little bit color on the location services group? It’s probably been a few quarters since I [looked] at that, how, and I think a lot of it sounds. And I just wanted – profitability and since the growth rate what are you guys expecting there and what you’re seeing?

Anders Gustafsson

We now have a location solution that’s the part of our global P&L for about a year. The basis I think doing well for us, we’ve continued to come out with new innovative product that have enabled us to win a nice new contract and expand it in number of partners we work with. I mentioned in my script that we won a nice contract with Audi, by working with IBM as a system integrator. IBM has also won some other nice deals for us in mining.

We signed a nice licensing agreement with Oak System beginning of the year, which really gives us a unique capability of providing visibility into a common system for barcodes, for passive RFID and active RFID. So we’re doing well and we’re coming out with new innovative solutions for this. And I think that we are – we see that we are well positioned and that business should have good growth opportunities over the coming years. But it is still a small part of our overall business, it’s only a few percent of our overall revenues.

Keith Housum – Northcoast Research

Got it. Okay. Thank you. And then a follow-up question back to the supplies business, obviously it's a common theme today, based on a good result in the quarter. Is the growth that we saw this quarter is indicative of what we may see in future quarters? I mean, you think what the card printer is gaining attraction and they have, there are going to be a concluding factor till we are seeing some good supplies growth.

Michael H. Terzich

Yes, Keith its, Mike Terzich. I think the indicators are good. We’ve got a healthy hardware business on the card side and as I mentioned, we get the annuity of cash that are driven. Healthcare as this rising middle class expands globally, people are having higher demand for improved healthcare services and that is beating that healthcare business. And obviously, we have strategic plans to continue to expand in the barcode, the core barcode labeling and ribbon business. And that is really driven by the diversification of our solutions across both labeling and receipt printing in all of our geographies, and we don't see that slowing down. As a matter of fact, if you look at our performance overall, we are gaining share in the supplies business. And if you look at converting industry as a whole, our growth is – I would say, it’s a significant [outlier] to what you would see traditionally in that space.

Keith Housum – Northcoast Research

Great. Appreciate the color. Thank you.

Michael H. Terzich

All right.

Operator

The next question comes from Jason Rodgers with Great Lakes Review

Jason Rodgers – Great Lakes Review

Looking at the general and administrative expense for the quarter of 8% year-over-year is that due to the new personnel?

Anders Gustafsson

A good chunk of that is, it’s also a function of the fact that we have – as we implemented our new ERP system we had some greater levels of support for that implementation. When you look at the second quarter, we’re expecting that there is a little bit of a burn there as we continue to what we call stabilize the ERP. So there is, it’s primarily people related, and its depreciation related with that ERP system is in there too.

Jason Rodgers – Great Lakes Review

So, is that a good number to use for the remaining quarters of 2012 or do you expect that to come down a little in the second half?

Anders Gustafsson

Yeah, we expect it to moderate total, or come down a tad.

Jason Rodgers – Great Lakes Review

Okay, thank you.

Operator

Your next question comes from Marc Heilweil with Spectrum Advisory.

Marc Heilweil – Spectrum Advisory Services

Hi. I realize it’s a sensitive question, but can you give us any feedback on how the outsourcing to Jabil has worked out for you considering the changes in China that have taken place and to reach that agreement, first question.

Anders Gustafsson

I don’t think that’s a particularly sensitive question for us. We started outsourcing the project in the beginning of 2008, and I think we were basically down by the end of 2009. So it took us 18 months or 2 years and we’ve got benefits through that process, but we set out to – about 3.5 percentage points of gross margin improvement. We’ve communicated – we have gotten more than that as we’ve gone through this process. We’ve gotten, I think a good support from Jabil. We’ve been (inaudible) in new competencies for how to source and manage a number of vendors in China. I think we needed to build a more responsive global logistics network because of this. So, from our perspective it’s been a very good success.

Marc Heilweil – Spectrum Advisory Services

That's good to hear. Here is my other question. I know Avery Dennison is using their inlays in connection with a smart pill for communicating information about the condition of the patient. Are you aware of that and are there any opportunity to Zebra in that [positive] healthcare business.

Anders Gustafsson

I’m not sure that I fully understood the question.

Marc Heilweil – Spectrum Advisory Services

I think, well you may not be familiar. It’s a small project. Avery Dennison has an agreement in which their inlays are being used to in conjunction with a smart pill to communicate the information to a cellphone.

Anders Gustafsson

I can’t comment on the specific project, but we do (inaudible) labels. So the application is definitely something we could do. I’m not familiar if we are involved with that particular customer.

Marc Heilweil – Spectrum Advisory Services

Okay. All right. Thanks guys. Bye-bye.

Anders Gustafsson

All right.

Operator

(Operator Instructions) And at this time, you have no further questions.

Anders Gustafsson

Okay. With that, thank you very much for joining us today. Just as a reminder again, our next regularly scheduled conference call will be on July 31. Thank you again for participating.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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