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Executives

Bob Joyce - IR

Rob van der Merwe - President and CEO

Ray Andrews - SVP and CFO

Analysts

Torin Eastburn - CJS Securities

Ajit Pai - Thomas Weisel Partners

Jerome Lande - Millbrook Capital

Presentation

Checkpoint Systems Inc. (CKP) Q1 2008 Earnings Call May 7, 2008 10:00 AM ET

Operator

Good morning. My name is Kadeisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Checkpoint Systems first quarter 2008 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remark, there will be a question-and-answer session.

(Operator Instructions) Thank you. Mr. Bob Joyce, you may begin your conference.

Bob Joyce

Thank you operator. Good morning, and welcome to Checkpoint System's first quarter 2008 results conference call. Joining us from the Company are Rob van der Merwe, President and Chief Executive Officer, and Ray Andrews, Senior Vice President and Chief Financial Officer. If you have not yet received a copy of this morning's results release, please call FD at 212-850-5600, or you can get a copy off the Investor Relations section of the Checkpoint website. An archived version of this conference call will also be available through that website.

Statements in this conference call reflecting our future plans and strategies are forward-looking statements that are based on current expectations and assumptions. These expectations and assumptions are subject to risk and uncertainty, which could affect our future plans. Checkpoint's actual results and the timing and occurrence of expected events could differ materially from our plans and expectations due to a number of factors such as changes in overall economic conditions, changes in the legal environment, as well as those factors disclosed in the results release and in our filings with the Securities & Exchange Commission. You should also be aware that all information in this discussion is as of May 7, 2008. Checkpoint undertakes no duty to update any forward-looking statements to conform the statements to actual results or changes in the company's expectations.

At this time, I would like to turn the call over to Rob van der Merwe. Please go ahead, Rob.

Rob van der Merwe

Thanks, and good morning everyone. Thanks for joining us today to review our first quarter results. I'll briefly touch on results in general and then Ray will provide more detail on the numbers. Finally, I'll provide my perspective regarding my first 100 days as President and CEO of Checkpoint and discuss our outlook for 2008. And then we'll be happy to take your questions.

I have four key messages for today. Number one, our first quarter revenue results reflected a continuation of the momentum we saw in 2007. Two, integration of recent acquisitions is progressing well. Results from the ADS acquisition are improving nicely as planned. Three, we are on track to achieve our financial goals in 2008 despite the uncertain economic environment. And finally, this company has tremendous potential to grow profitably, and I am even more confident of that now that I have completed my first 100 days.

I'd now like to touch on our revenue performance in the first quarter. Our first quarter revenue reflected a continuation of the momentum we saw in 2007 as I said and was up over 22% versus the prior year period. These results were driven by our recent acquisitions, currency effects from overseas operations, and organic growth as you saw from the announcement this morning. Now what's important here is that there is no doubt that we gained market share this quarter in our core shrink management solutions businesses in Europe and Asia and in our CCTV business here in North America. We are also gaining share in our CheckNet service bureau business, particularly here in the U.S. this past quarter.

The Shrink Management Solutions segment, which is our core security business, was up over 33% in the first quarter versus the year-ago quarter and we continue to take market share in that business. We signed a five-year deal with a key customer for over $80 million this quarter, and we signed some major deals in Europe, as well, with two blue chip customers. Now, what's important about this is that it's an indication that the trend to RF is strong and continuing in our favor.

The Alpha S3 acquisition continues to open new account doors for us. Alpha sales this quarter were essentially flat year-over-year, slightly down in the U.S., but this is following a record quarter results that we saw in the fourth quarter. And given the seasonality in the order pipeline we see, we expect Alpha results to significantly strengthen sequentially each quarter for the remainder of 2008.

Our new product launches, which include the Evolve family of products, are going exceptionally well in the U.S. and across Europe. Incremental launch costs related to this activity approaching $1 million are included in the first quarter results. As you know, we are committed to offering customers highly innovative loss prevention products such as the Evolve family, which provides options for increased detection capability, wider aisles, and a very clear RF pathway to RFID. We will report on new product performance as results become more meaningful during the year. We saw some softness in EAS labels and the niche retail display systems business in Europe this quarter, which we are continuously monitoring. I expect results to improve in that area going forward. And just a comment on the softness in EAS sales, that was attributable as far as we can see to a variety of non-related factors, some customer related, some pricing, and so on. So, there's no specific negative trend visible in EAS label sales at this time.

Turning to margins -- in the first quarter this year we saw some margin expansion. I would like to see that accelerate into the second quarter. This past quarter reflected higher than normal warranty costs in the CCTV business in North America, mostly flowing from the record sales volumes achieved late last year. However, these warranty cost should return to normalized levels during the second quarter. ADS results in the UK and Asia are improving nicely and we expect that that business will move from a loss in 2007 to a profit in 2008. Alpha margins were a little soft in the first quarter due to the mix of European based inventory holdings on our books at the time of the merger, so I expect that that will work itself through during the months ahead and we'll get back to more normalized margins there.

As far as comments on other expenses in the balance sheet are concerned, Ray will obviously take you through the financials and explain the various changes, but overall, the message is that ongoing SG&A spending is aligned with revenue, once you strip out the one-time adjustments and the impact of acquisitions, and the necessary controls to manage spending are in place. As far as working capital is concerned, our inventory is higher than it should be and this is primarily related to a need for an improvement in internal planning. I touched on that last quarter. We can do a lot better there and we are working to make sure that our sales forecasts are much more accurate. New systems and processes are being installed this year to help us free up at least another $10 million in cash by year end.

Ray will now take you through the financial details and then I'll address my 100-day observations and also the outlook for 2008. Ray?

Ray Andrews

Okay. Thanks, Rob. Before I review the first quarter results, I'd like to briefly review the change we made in segment reporting. As discussed during our last call, we have realigned our segment reporting to match our global and regional line of business management structure. Beginning with the fourth quarter of 2007 results that we announced earlier this year, our three segments are shrink management solutions, intelligent labels, and retail merchandising.

Shrink Management Solutions is our largest segment and includes our EAS Systems business, the CCTV fire and intrusion business, the Alpha S3 secured merchandising product portfolio acquired in 2007, and RFID systems. The EAS Systems business includes the EAS antenna and deactivator, software, and reusable hard tags. The EAS Systems activity of SIDEP acquired in November 2007 is also reported in this segment.

Intelligent Labels is our second largest segment and includes EAS labels and one-time use hard tags, our CheckNet ADS service bureau business, library patron services, and RFID tags and labels. The EAS tags and labels activity of SIDEP and Asialco, which we acquired in November 2007, is also reported in the Intelligent Labels segment. EAS labels and one-time use hard tags are part of our source tagging program and are being sold through our CheckNet ecommerce platform at an increasing rate, which supports the alignment of EAS labels and service bureau businesses in the same reporting segment.

The retail merchandising segment is essentially unchanged from past reporting and continues to include our handheld labeling systems and retail display systems products. A small part of the former retail merchandising segment has been reassigned to shrink management solutions and intelligent labels. Yesterday we submitted a Form 8-K that furnished the revenues and gross profits that align with the new segment reporting for each of the 2007 quarters.

Now I will review first quarter results. Revenue for the first quarter was $209.6 million as compared to $171.2 million in the first quarter of last year, a 22.4% increase year-over-year. Foreign exchange had a positive impact on revenue of approximately $14.8 million, or 8.7% of the growth in first quarter 2008.

Revenue from the Alpha S3 SIDEP and Asialco businesses, which were acquired in November 2007, accounted for approximately 9.2% of the overall sales growth in the quarter. We achieved 4.6% in organic growth with the key contributors being shrink management solutions, CCTV, and EAS businesses. Gross margins in the quarter were 41.3% compared to 41.1% in the comparable period of the prior year. Our first quarter 2008 gross margins were positively impacted by improvements in CheckNet, EAS Systems, and handheld labeling systems margins along with a positive impact from the Alpha S3 acquisition.

Now, I'll walk through the results for the segments and geographies. For the first quarter of 2008, the shrink management solutions segment reported an increase in revenue on a constant dollar basis while intelligent labels and retail merchandising segment revenues declined when compared to the first quarter of 2007. Our shrink management solutions segment generated revenue of $126.3 million in the first quarter of 2008 or 60% of total company revenue. This represents a year-over-year increase of 33.2% on a constant dollar basis. The growth in this segment was led by the Alpha S3 acquisition, which contributed $13.5 million in revenue in the first quarter, as well as growth in our U.S. CCTV systems integration business and our European Alpha -- I'm sorry, European and Asia-Pacific EAS Systems business.

The seasonal impact on revenues normally experienced by CheckPoint with revenues weighted towards the second half of the year was even more pronounced for the Alpha S3 business. We expect to see sales contributions from this business significantly increase sequentially as we move through the year. The November 2007 acquisition of SIDEP contributed $3.2 million to the revenue growth in this segment. The gross profit margin for the shrink management solutions segment was 38.7% as compared to 38.6% in the same quarter in 2007. The increase in gross profit margin attributable to EAS Systems and the Alpha S3 business was partially offset by a decline in CCTV gross profit margin. The decline in CCTV is attributable to the competitive nature of the business coupled with increased warranty expense associated with the increased volume of installation activity we experienced in the second half of 2007. As Rob mentioned earlier, we expect warranty costs to return to normal levels during the second quarter.

Our intelligent labels segment reported revenue of $59.9 million for the first quarter or 29% of total company revenue. This represents a decrease in revenue of 4.2% on a constant dollar basis. Reductions in EAS label revenue in the U.S. and Europe and in our library patron services business were partially offset by strong growth in our CheckNet service bureau business in the U.S. Revenue in the intelligent labels segment for the first quarter of 2008 also includes $1.7 million in EAS labels revenue from the November 2007 acquisition of SIDEP and Asialco. The gross profit margin in intelligent labels was 42.4% compared to 41.4% in the comparable quarter of a year ago with the increase in margins attributable to our CheckNet ADS operations. ADS is showing progress in addressing the manufacturing inefficiencies and competitive pricing pressures that we experienced in 2007.

And finally, our retail merchandising segment reported $23.4 million for the first quarter or 11% of total company revenue. This represents a decrease in revenue of 14.1% from the prior year on a constant dollar basis. The decrease comes primarily from our retail display systems business with our handheld labeling systems business contributing to the decline. The gross profit margin in retail merchandising segment was 51.8% for the first quarter of 2008 compared to 49% for last year. We expect that the trend of declining revenue we've experienced in the years prior to 2007 will be evident in 2008, although not at the rate we were experiencing in the first quarter. While we hold a strong position in the handheld labeling systems market in Europe, this is a niche business for Checkpoint.

In our geographies, our European operations reported revenue of $106 million for the first quarter or 50% of total company revenue. Europe revenue increased 3.4% on a constant dollar basis over the prior year, including the benefits of the November 2007 acquisitions of Alpha and SIDEP. On a constant dollar basis, Europe reported 23% growth in their shrink management solutions business with the growth in the segment largely attributable to the Alpha and SIDEP acquisitions. This was partially offset by a 9% decline in the intelligent labels business and a 14% decline in the European retail merchandising segment.

The U.S. operations reported revenue of $75 million or 36% of total company revenue. This represents a 29% increase in revenue over the first quarter of 2007 and is attributable to the November 2007 acquisition of Alpha and strong year-over-year results from the U.S. CCTV systems integration business, which delivered 34% growth in the quarter. The Asia-Pacific region reported revenue of $22 million or 11% of total company revenue and generated 27% in constant dollar revenue growth in the quarter, primarily attributable to EAS Systems, including revenue from the acquisition of SIDEP and strong growth in CCTV installations in the region. And finally, the International Americas region, which represents 3% of total company revenue, reported a 6% decrease in the quarter excluding the impact of foreign exchange.

During the first quarter, we spent $5.2 million or 2.5% of revenue on research and development, which is an increase from the $4 million we spent on R&D in the first quarter of 2007. On a constant dollar basis, research and development spending increased about $900,000 with about $700,000 of this increase attributable to the acquisitions of Alpha and SIDEP.

Our selling, general, and administrative expenses for the first quarter were $73.9 million or 35.2% of revenue compared to 59.8% -- I'm sorry, $59.8 million or 34.9% of revenue for SG&A in the prior year. Foreign exchange increased selling, general, and administrative expenses by approximately $4.9 million compared to the prior year. On a constant dollar basis, the remaining $9.2 million increase in selling, general, and administrative expenses is primarily the result of approximately $5.5 million of expenses generated by the recently acquired Alpha, SIDEP, and Asialco businesses, an increase in bad debt expense of $1.4 million in the first quarter of 2008 on a constant dollar basis. And the increase is due to a general increase in the age of accounts receivable, primarily attributable to customers outside of the U.S., and the recognition of uncollectible accounts receivable from a distributor in Iran. We are working with customers to improve the timeliness of collections and reduce our exposure.

Other sources of the increase in selling, general, and administrative expense include incremental marketing costs associated with the launch of our Evolved product line that exceeded $600,000 and a prior period of adjustment of $1.4 million related to errors in accounting for deferred compensation arrangements that were executed prior to the year 2000. We have determined that the prior period adjustment is related to the fiscal years 2000 through 2007 and is immaterial to all of those periods. Without the prior period adjustment, selling, general, and administrative expense was 34.6% of revenue in the first quarter of 2008, a reduction of 30 basis points from the first quarter of 2007.

During the first quarter, we used $6 million in cash from operating activities compared to generating $10 million in cash in the first quarter of 2007. Reductions in accounts payable and other current accrued liabilities were significant factors in the shift. We continue to expect free cash flow for the year to come in between $60 million and $70 million, excluding the impact of future restructuring charges. Our days sales outstanding were 89 days and our days in inventory were 119 days at the end of the first quarter. We are working to improve balances in accounts receivable and in inventory, both of which finished the quarter at higher levels than expectations.

Our capital expenditures in the first quarter were $3.8 million. Interest expense of $1.3 million was partially offset by interest income of $641,000 for the quarter. For the first quarter of 2008, other losses were $1.2 million, primarily due to foreign currency exchange losses resulting from currency movements within Europe. Our income tax rate for the first quarter was negative 2.4%. Income tax expense for the first quarter of 2008 included a $1.1 million decrease in unrecognized tax benefits related to the favorable conclusion of an Australian tax audit. Also included in income tax is an $800,000 tax benefit related to restructuring and deferred compensation expense. For the year, we continue to expect an annualized tax rate of 24%.

Turning to the balance sheet, as of March 30, 2008, cash and cash equivalents were $91 million. Working capital was $285 million and total debt was $92 million. The weighted average number of shares outstanding on a fully-diluted basis was 40.9 million shares at the end of the first quarter -- for the first quarter, excuse me, and in the first quarter of 2006, our Board of Directors approved a share repurchase program that allows for the purchase of up to 2 million shares of the company's common stock. During March 2008, we repurchased 673,000 shares of common stock at an average cost of $25.63 per share, expending $17.3 million. Prior to the first quarter of 2008, no shares were repurchased under this plan. Overall, this was a solid first quarter. We are positioned with the financial strength to continue executing our strategy and investing in our future.

Now I'll turn the call back over to Rob.

Rob van der Merwe

Thanks, Ray. I've completed my first 100 days as Checkpoint's President and CEO, as you know, and I reported my observations and some recommendations to the Board last week. I will just provide you with a few comments. One, Checkpoint's core business definitely has the potential to grow significantly. There is a significant opportunity to increase value for our shareholders by growing both organically and through acquisitions, both of which, in my opinion, are very feasible. Now, our long-term goals for growth and the pathway to achieving them will be shared with you during an investor day, which we are planning for December. We still need to finish up on strategy development and planning for each of the business segments and we're going to work on that into the summer.

Secondly, in the near term, we will be focusing on four key areas of our business where we see opportunities to further differentiate our solutions and further drive growth. We will be working on each area during the summer, as well, to scope out the resources needed and the results we should expect from either a refocus of current spending or incremental investment to drive growth. I'll provide you with updates during our quarterly investor calls, but the key focus areas are going to be one, customer management. I see this as a source of further organic growth and market share gain. Here, I'm talking about focusing on key account strategy, key account management, and becoming more -- how can I say -- more developed in our channel strategy thinking, going off to the various markets that represent opportunity for us, said another way.

The second area will be innovation. This is obviously an area for share growth and margin expansion and it's going to be a key driver of our success going forward. We've introduced a wonderful array of new products and solutions this year and we need to plan to do that each and every year going forward, so we'll work on that area. The third area is information, and it's obvious that we want our teams to win in the market and so we need to make sure that the information we provide them through our ERP systems is relevant to the task and we have work to do there. But also we need to extract the benefits from the investments we've made in our ERP systems to date, and there is significant opportunity to streamline going forward in the back office and make sure we extract the benefits from those ERP systems.

The next area, or the fourth area, is talent. We're going to be investing in and developing our leaders, leaders that we have today and our future leaders, to drive results. Finally, we need to further reduce our overall cost base. We must streamline and standardize our back office systems and in all key business process areas, frankly. Clearly, there is a positive payback to doing all of this well. Our cost improvement is obviously important to drive improved returns while still being able to afford the resources necessary to drive and to sustain profitable growth going forward.

So, I look forward to providing you with more details on how we plan to reduce costs further on our second quarter conference call. Additional insight regarding our acquisition strategies and how we go forward will be provided to you later in the year when we take you through the overall growth plan. We're currently searching for a Vice President of Investor Relations, and we hope to make that appointment in the months ahead. As I said, we are planning for our investor day in December to be held in New York City where we will showcase our vision, our strategies, our technologies, which are very exciting and, of course, the management team. And I know you folks are going to be very, very impressed with what we have to show you.

I would now like to turn to the outlook for the remainder of 2008. Looking forward, we continue to be mindful of the economic climate. Our cost management and procurement programs are already underway to mitigate inflation and expand margins further, as you know. In addition, I am satisfied that the necessary controls to contain expenses and effectively manage risk regarding things like bad debt, for example, are either in or are being installed across the company. In my opinion, it is necessary to continue to keep expectations for continued organic revenue growth at a prudent level, which we're suggesting you plan for as flat to modest for the rest of 2008 when you do your models. Now, while some retailers are selectively slowing new store openings and cutting back expenses, especially in the U.S., others are still anticipating they will spend their loss prevention budgets. What is very interesting, however, is that many are increasingly energized by our new products that deliver more benefits and excellent paybacks via shrink reduction.

So, as we move into quarter two looking at our order book and looking at results from these new product introductions, those results will become instructive as far as what our prediction will be for the rest of the year in the revenue area. And we'll be able to do that more accurately, said another way, at the end of quarter two. In Europe, we're seeing a mixed economic bag by country. Checkpoint's order activity, however remains reasonably healthy at this stage given the economic circumstances. As you know, half our sales occur in the European region, which we expect will mitigate the effects of the uncertainty in the U.S. economy, at least in the immediate near future.

Now, we anticipate continued growth from past acquisitions for fiscal 2008 versus the full year 2007 as Ray suggested. And currency at current rates obviously will help drive top line since a large proportion of our sales occur offshore.

In summary, we still expect to grow the top line by at least 10% year-on-year, even if we have more economic headwinds. Now, while we don't provide quarterly guidance, I will say that our revenue profile on a quarter-to-quarter basis, including recent acquisitions, is expected to build steadily each quarter with over or about 55% of the business typically occurring in the second half due to seasonality. I expect gross margins to continue to expand and expenses to continue to remain under control for the rest of 2008, assuming no new big surprises. We're still shooting for a 10% operating income return for 2008. Now, as you saw in our press release today, for the year we are reaffirming previous guidance for earnings per share in the range of $1.65 to $1.75, and this assumes an effective tax rate of 24% as you heard from Ray.

So, in conclusion, messages I want to share with you are we had a good revenue momentum taking place in the first quarter of 2008 following a great 2007. I think that's good news. Secondly, acquisitions are going to plan so far and the ADS results are improving as we predicted. And thirdly, we're reaffirming our EPS guidance at $1.65 to $1.75 for the full year.

Finally, having completed my 100 days, I will tell you that we're going to continue focusing on the company's uniqueness and product distinctiveness in the market as a source of growth going forward. We're gaining share. We want to keep that momentum going, and this company has a very, very exciting future ahead of it.

Operator, we will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Bob Labick with CJS Securities.

Torin Eastburn - CJS Securities

Hello. Good morning. Congratulations on a strong quarter.

Ray Andrews

Thanks, Bob.

Rob van der Merwe

Thanks, Bob.

Torin Eastburn - CJS Securities

This is Torin Eastburn filling in for Bob. I was hoping you could give us guys -- give us an update on the Alpha integration and the potential sales synergies you see there. I don't know if you've identified any new accounts or cross-selling opportunities that you can speak to us about.

Rob van der Merwe

Well, as I indicated, I think that Alpha does open new doors for us. Checkpoint's historical footprint as a result of AM technology dominating in apparel has resulted in us not exploiting those markets as strongly as we would've liked. We're seeing them open doors in the apparel sector, which is exciting, and I think by virtue of the growth path that they've been able to demonstrate, the innovations and unique products that they continuously come out with. I would just expect that trend to continue. As I indicated and as Ray indicated, we expect results from Alpha to continue building sequentially quarter to quarter reflecting what's sitting inside the order book, which is very positive. And more than that, I probably wouldn't want to comment on. I can provide you more color as each quarter occurs.

Torin Eastburn - CJS Securities

Okay, great. Thank you. And, my second question relates to your free cash this year. Do you have any sort of more S3 type acquisitions on the horizon and if so, what would the criteria or goals there be? Are you targeting any geographies or products specifically?

Ray Andrews

Well, on the area of acquisitions, other than some very small, immaterial ones related to what we're doing in banking in the Southeast region, we don't have anything currently in sight, but we see something that matches with Rob's overall strategy that he's been working on. As that evolves, if that's an opportunity, we'll seriously look at it.

Torin Eastburn - CJS Securities

All right, great. And lastly, with the launch of Evolve, what are your target customers saying and kind of what has the reception been? And maybe if you could speak a little bit on the economics of that product on prices or margins, that would be great also.

Rob van der Merwe

I'll start with the second part first. The payback on some of those products in the long term as far as total cost of ownership is concerned is very, very positive. Secondly, as I mentioned earlier, the new range provides an opportunity to install our products in apparel, accounts where they require wider aisles. There's an increased detection rate with the phased array technology we use, and this has been one of the issues that we've struggled with to break into the AM accounts historically. So, we're starting to open those doors now, and customers are energized by that. The products are a lot more aesthetically pleasing, as well, which is giving us access to a number of accounts that historically we're talking more to the competitor. So, I think we, at this stage, are also seeing with the economic climate customers continue to spend their loss prevention budgets and increasingly become energized by some of the paybacks and propositions that these products offer, which is a very, very good sign.

Do you want to build on that?

Ray Andrews

Yes. I'd just mention that these are, then are also capable for EPC, electronic product coding, reading, so it's a step up from the typical RF antennas.

Rob van der Merwe

Yes, I think customers that are looking for a pathway to RFID, and where there's connectivity required between the various systems so that they can generate more data for loss prevention, managers are excited by it.

Torin Eastburn - CJS Securities

Thank you. I will get back in queue.

Operator

Your next question comes from the line of Ajit Pai with Thomas Weisel Partners.

Ajit Pai - Thomas Weisel Partners

Yeah. Good morning.

Rob van der Merwe

Hi, Ajit.

Ajit Pai - Thomas Weisel Partners

Couple of quick questions. The first is about your Evolve platform, your new shrink management platform. Does the name suggest that you're looking at this only as a sort of interim solution and it's going to actually evolve to something else in the future? And how do you see the -- how do you sort of quantify the size of this particular market? Do you have any significant folks that have already signed up?

Rob van der Merwe

We do have significant folks that have signed up and they're increasingly signing up. The platform, as its name indicates, is intended to provide customers with a pathway to doing more to help them reduce shrink and link in some of the historically separate activities in their store to providing a kind of more integrated approach to loss prevention. And so, it's an evolving platform into which we will build more and more capability. One example is taking traditional EAS into RF and then RFID, but you can just imagine that when you get into that world, you're starting to deal with pretty well-integrated software solutions and that's what's exciting management in our accounts. And, so we're talking to a much broader array of accounts.

Ajit Pai - Thomas Weisel Partners

Right. And the Evolve solution that you offer, is it fully integrated with your CCTV applications and also does it connect with the sort of transaction processing system, as well right now?

Rob van der Merwe

Some yes, but progressively definitely as we go forward. That's the world into which we are going. And that's why I'm excited about Checkpoint because, as far as shrink management is concerned, providing a robust set of solutions that really get at the heart of where our customers are losing money today, that's -- we're a company that can do that. And there are very few companies out there that provide that broad range. The Evolve platform allows us to grow and introduce more capability at the pace that our customers can handle. Not all customers want to do all the nine yards immediately. They want to start off more simplistically. And so we can put that puzzle together, so to speak, depending on the customer needs, and every customer's needs are different.

Ajit Pai - Thomas Weisel Partners

Got it. And then, when you're looking at the top five customers that you have, not potential customers, the folks that have already signed up, if you can name a few, that's great, but if not, could you just give us a rough size of the largest order and the rough size of the smaller order for the solutions right now?

Rob van der Merwe

Well, as I indicated earlier, Ajit, we just signed a $5 million -- over $80 million deal with one customer for the next five years. So the deals get pretty big and the deals that we talked about last year and the year before in Europe, with the METROs, the Carrefours and so on and so forth, are meaningful and in the order of magnitude $50 million to $100 million deals. Now, we clearly want to do more of those, and the prospects suggest that we can. We're taking share as a result.

As far as naming them, I would tell you that they are the blue chip accounts. We're not doing as much in the apparel area as we would like because that's where AM technology has been traditionally, but we're making some significant inroads and we'll see more of those accounts come our way in '08 and '09.

Ajit Pai - Thomas Weisel Partners

Got it. And then, from a broader sort of perspective, when you look at the two businesses you have, the security business, as things slow down and economically get challenged, there is more test. So, the drivers for the security business actually become more significant. But have you done some work looking back at previous economic cycles when things get worse whether your customers actually spend more on these shrink management solutions and EA solutions, or whether it also gets impacted by the revenues?

Rob van der Merwe

Ajit, what I can tell you at this point is that, you're right, typically, shrink goes up when you get into tough economic times. Each customer's experience is different. Some of them have spent more and got more results and others haven't really paid attention to it when you go back four or five years. They're becoming much more sophisticated. I think loss prevention is becoming more front and center. Shrink management as a subject is much more front and center now than it was five years ago and retailers are paying attention to that. The new products that we have, not just on Evolve, but what we're selling through the Alpha range of products, have incredibly fast paybacks.

And so, we're finding that you really have to get in front of customers. You have to demonstrate those paybacks. Once you can, they come on board pretty quickly. We do see pressure -- we see people slowing new store openings and being prudent -- selectively prudent in how they manage into the tough times. Loss prevention budgets are the ones we watch carefully, but when they start to see fast paybacks in the order of three months, six months, nine months, it's very -- and the benefits are substantial -- it's very difficult to, as a loss prevention manager, not be able to convince your managers to get into buying new products and services regardless. It's up to us to get in front of the customers and demonstrate that.

Ajit Pai - Thomas Weisel Partners

Got it, and do you expect, like if you do go into a macro environment that gets quite challenged, do you expect the sort of growth in the EAS markets and shrink management solutions to offset any slowdown in the CheckNet business?

Rob van der Merwe

I think that's -- on the CheckNet business, I think -- you remember, we're not as exposed in apparel as some of the other players are out there. Apparel's going through a hard time. We're a little more broadly based and we're off a small base. So, I would expect that regardless, particularly given some of the tools that we have in the CheckNet area that business will continue to grow. Coming off a small base and being one of the small players out there, I think we've got an opportunity to continue that growth path, regardless.

Ajit Pai - Thomas Weisel Partners

Got it. Thank you so much.

Rob van der Merwe

Thank you.

Operator

(Operator Instructions.) Your next question comes from the line of Jerome Lande with Millbrook Capital.

Jerome Lande - Millbrook Capital

Good morning. Two questions, both kind of related to the guidance. The first is the tax rate in the quarter was virtually nil. Was that anticipated and do you, therefore, expect to ramp at a higher rate in the next three quarters to get to the full year? I think it was 24% you estimated, Ray, or was this a surprise?

Ray Andrews

No, it wasn't a surprise. In fact, we had announced that as a type two subsequent event, that's Australian tax settlement in our Q -- I'm sorry, in our 10-K, so that was not a surprise. We expect 24% normalized for these discreet items that we mentioned over the course of the year.

Jerome Lande - Millbrook Capital

Okay. So, in other words, second, third, fourth quarter, you expect to be around 24%?

Ray Andrews

Correct.

Jerome Lande - Millbrook Capital

Okay. Secondly, on Europe and the full-year guidance, you're obviously reiterating here today, Rob, you feel pretty strongly about the products that you're getting acceptance on there. But, the retail sales numbers that came out this morning were incredibly bad. The comments by Carrefour have just been really, extremely negative. I'm just wondering what's your perspective on that and then secondly, what kind of European economic environment have you built into the guidance that you're reiterating?

Rob van der Merwe

Well, I think, as I said on the earlier part of the call, Jerome, we're going to continue to be prudent in our guess around organic growth. I mean, we saw 4% organic growth in the first quarter. We're going to call that down for guidance purposes. Obviously, internally we're shooting for -- if I look at the order -- for a higher number, if I look at the order book it's healthy and just as robust generally as it was this time last year, which is kind of interesting. Now, we don't know -- when we see 55% of the sales occurring in the second half of the year typically, I just want to be cautious and not call it too early. I think, the second quarter will be insightful. We do have some very big deals in the pipeline that if we close them I think we'll be home and dry, and maybe we'll have some more news on that in the second quarter.

As far as what's built into the guidance is concerned, it's just that. I think we've been very, very conservative in terms of calling the organic growth. The acquisition growth should be there. If you take current rates, $1.50 something, that's euro dollar, and project those forward, we should still see some good tailwinds on the currency side, which will break us through that 10% mark on revenue. I'd say we're tending to, based on the first quarter, having to come back to you and say we have to up our guidance on revenue, but I really just don't want to do that at this point. I think, it's too early.

Jerome Lande - Millbrook Capital

Understood. Thanks a lot.

Operator

There are no further questions at this time. Management, do you have any further remarks?

Rob van der Merwe

No, we don't have any further remarks. I just want to thank everyone for attending. I know you guys are busy with lots of announcements coming out today and I appreciate it and we look forward to talking to you soon. Thank you.

Operator

This concludes today's conference. You may now disconnect.

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