Zebra Technologies Corporation (ZBRA) Q3 2011 Earnings Report, Transcript and Summary

Good morning, and welcome to the Zebra Technologies 2011 Third 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. Doug Fox – Vice President, Investor Relations: 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 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 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 – Chief Executive Officer: Thank you, Doug, and good morning, everyone. Today, Zebra reported record third results with strong execution across the board. This performance represents our fifth consecutive quarter of sequential growth in earnings from continuing operations and our ninth quarter of sequential sales growth. For the third quarter, we achieved earnings of $0.84 per share, including a record $0.64 per share from continuing operations and a gain of $0.20 per share on the sale of proveo. Our results for the quarter underscore the success of our investments to diversify our business by entering new high growth geographies and verticals, expanding our customer base, broadening and deepening our partner channel, and developing innovative products and solutions. Zebra scaled multiple competitive advantages and growing industry leadership support these strategic investments. These investments have yielded solid results and have strengthened our long-term growth opportunities. Our revenues increased 10% year-over-year to a record $253 million. All regions performed at high levels. We penetrated more deeply into targeted verticals as a result of successful strategies to take share and further diversify our customer base. Tabletop and desktop printers set new sales records and our card printers experienced improved traction as a direct result of our engineering efforts to strengthen and innovate in this important product line. In addition, new printer products targeted at opportunities in emerging markets gained momentum. We further strengthened operating leverage based on a solid gross margin and modest expense growth. We also took advantage of the beneficial stock price to accelerate repurchases by buying back 1.8 million shares. I would now like to provide an overview of the highlights for the quarter by region. In North America, sales increased 2.4% year-over-year and 8.4% sequentially, an increase in large deal activity complemented an ongoing solid run-rate business through distribution. Larger sales included shipments of our recently introduced QLn wireless mobile printers to retail customers, which are used for price markdowns and other in-store applications. We also won new deals with a number of customers in manufacturing and small package delivery. Card shipments included sales of our innovative P330i RFID card printer to put a lot of ski resource for season passes which helps speed lift lines and provide valuable information to skiers. North America also benefited from sales of location solutions, the customers in the automotive, retail, aerospace and postal industries. Our focus, attention and capacity to invest in strengthening our product offerings resulting in expanded sales opportunities. Our large deals in North America was spread across a range of retail and non-retail customers. This quarter’s performance reflect the success of our diversification efforts and take share activities across multiple dimensions. In addition, channel partners had confirmed that Zebra products are winning a growing share of their business and the strength of our value proposition including the industries leading channel programs and broadest product line. System integrators and the dependent software vendors increasing the Zebra’s innovative product, that’s an important part of the solutions they put together for end users. Asia-Pacific led our international regions with 21% growth. The third quarter was the six consecutive quarter of record revenues for that region. Contributions to this growth came from several sub regions and verticals. Shipments to retail customers, supported growth in Australia and Zebra high performance printers fulfilled strong demand for manufacturing customers in China and Korea. We also had solid result in India, as we have focused increasing investments in this important emerging market. Throughout the Asia-Pacific region, our growing business with retail customers is fueled by the growing consumption of goods and services. Asia-Pacific region is also seeing greater interest in RFID and location solutions. Recent installations include a leading regional bank, which is relying on Zebra Solutions to track IT assets. In addition, the location of subway police in a major Chinese city is now being monitored with the help of Zebra High Precision Ultra-Wideband products. In Latin America, consistent business throughout the quarter delivered solid 16% growth over last year. Improved regional sales coverage lead to shipments of card printers for on demand credit card printing in Venezuela, as well as mobile printers for beverage distribution and table top printers for higher manufacturing activity in Mexico. In EMEA, sales in the third quarter increased 15% on continued strength in Germany from its manufacturing sector as well as Spain, the Middle-East and Scandinavia. Our run rate business remained firm for the quarter. A critical element to Zebra’s execution is the strength and vitality of it’s global channel network. Shortly after the end of the third quarter, we hosted our global partner conference were more than 500 distributors, VARs, ISVs and system integrators from 60 countries attended. This forum is an important investment in developing stronger relationships with our global channel partners. And that helped us to achieve greater alignment around common goals. The diversity of our company across multiple dimensions continues to provide a strong foundation to Zebra’s ongoing pursuit of shareholder value creation. Zebra’s third quarter results demonstrate the value of this diversity and the growing impact of our capital deployment in product innovation, geographic reach and channel development. We have been able to benefit from our continued financial strength to gain share by penetrating targeted verticals more deeply and extending the range of potential business opportunities with a broader set of high value products and solutions. This increased diversity as well as our financial strength moderates the impact of possible effect of an uncertain economic environment for Zebra. Today Zebra is well-positioned with more sales representation in high growth regions, a fuller, more innovative product line, or robust strategic plan for North America and stronger more engaged market channels. These enhanced capabilities enable us to meet more of our global customers needs. I’d now like to turn the call over to our CFO, Mike Smiley to provide a detailed review of third quarter results and guidance for the fourth quarter of 2011. After Mike’s remarks, I will return for some brief closing comments. Mike Smiley – Chief Financial Officer: Thank you, Anders. Let me highlight some of the key components of Zebra’s results for the third quarter. My comments will principally focus on year-over-year changes in the performance of Zebra’s continuing operations which have been adjusted for the sale of Navis in the first quarter of this year and prevailed in the third quarter. First, sales came in at the upper end of our guidance range on a sequential pick-up in North America and broad strength in international regions. Sales growth in emerging markets increased 16%. Second, gross margin was up 1.2 percentage points on lower component costs and favorable foreign exchange rate, partially offset by a less favorable product mix. Third, operating leverage pushed profitability higher with lower growth in operating expenses. And fourth, we accelerated our buyback program with the repurchase of 1.8 million shares of stock. Let’s review sales. For the quarter, sales increased 10% from $230 million last year to a record $253 million. On a constant currency basis, sales increased 8%. By region, performance in North America stood out, up 2.4% from last year’s strong performance, but up 8.4% from the second quarter of this year. As Anders mentioned, North America benefited from continued strong run rate, complemented by a pick-up in large deal activity. The sales results demonstrate the success of our customer diversification and take-share strategies. We are pleased with the progress we’re making on further strengthening Zebra’s formidable position in North America. More than any other region, North American sales are influenced by large deal shipments in any given quarter and will exhibit higher levels of volatility. Asia-Pacific sales advanced 21% to another quarterly record. Broader sales coverage aided growth in several sub-regions to customers in retail, manufacturing and government with particular strength in tabletop and desktop printers and supplies. Latin American sales, up 16% also maintain growth with sales to customers in financial services, utilities and retail among others. Desktop card and tabletop performed particularly well in the region. In EMEA, shipments of desktop, tabletop and kiosk parts led to the region’s 15% growth. On a constant currency basis, the region sales increased 7% on continued strength in Germany, Spain, Middle East and Scandinavia, but with some softness in Italy, the U.K. and Eastern Europe. By product category, hardware sales were up 10% on this strength of several printer product lines plus aftermarket parts. Supply sales increased 13%. Consolidated gross margin of 48.8% was 1.2 percentage points higher from a year ago and is the upper end of our guidance range. As expected, gross margin was down 0.8 percentage points from the second quarter, largely from a favorable movement in freight charges, foreign exchange and mix. Operating expenses increased 8% from a year ago, but were down slightly from the second quarter to provide operating leverage in the P&L. Third quarter results include approximately $3.8 million in costs for some component supply constraints related to the Japan catastrophe in the form of higher component costs, rebates, and freight charges. These expenses were slightly below our expectations. We expect these higher charges to continue in the fourth quarter after which they should abate. We do not expect any material disruption or higher costs associated with the recent flooding in Thailand. Taken together, we generated 21% improvement in operating income with an operating margin of 19.3%, up from 17.5% a year ago. Adding back $5.8 million in depreciation and amortization to the $48.9 million in operating income totaled $54.7 million of cash earnings or 21.6% of sales, up from 20% last year. The income tax rate for the third quarter was 28.8%, which was in line with our guidance and expectations. GAAP EPS from containing operations were record $0.64 per share on 53.6 million average shares outstanding. At the end of the second quarter, we had 52.6 million shares outstanding. Third quarter results also include a net gain of $10.8 million or $0.20 per share recognized on the sale of proveo. The gain was principally generated from recognition upon the sale of a tax deduction on the impairment previously taken on the business. Similar to Navis, which we sold in March, proveo did not fit well with our long-term business strategy. In third quarter we bought that 1.8 million shares of Zebra stock. The weighted average price of the purchases was $35.06 per share. These purchases bring year-to-date total number of shares purchased to 3.9 million shares returning $1.46 million to shareholders. The day sales outstanding increased slightly from 50 days for the second to 52 days. Inventory turns increased from 4.2 times to 4.4 times for the third quarter, even as inventories increased 2.4 million from the second quarter. Quarterly free cash flow totaled $20.3 million for the third quarter, at the end of the quarter we had $299 million of cash investments on hand. Now, lets look our fourth quarter forecast. We are forecasting 2011 fourth quarter sales of $242 million to $255 million. This guidance reflects our concerned outlook given greater economic uncertainty particularly in Europe. Earnings from continuing operations are expected at $0.56 to $0.64 per share. Our forecast assumes a consolidated gross margin range of 47.5% to 48.5% from an expected unfavorable movement and foreign exchange rates, higher direct cost and a less favorable product mix. The quarter includes approximately $4 million impact from the Japan catastrophe as previously mentioned. GAAP operating expenses are forecast between $76 million and $78 million and include a one-time expense of $1.5 million for the global partner conference. The tax rate is estimated to be 26% also reflecting some one-time adjustments. That concludes my formal remarks. Thank you for your attention. Now here is Anders for some concluding comments. Anders Gustafsson – Chief Executive Officer: Thank you, Mike. Over the past several years, Zebra has continued to become a more resilient, more focused company, both financially and strategically. Our investments in infrastructure and market development have created the capacity for higher returns with a greater ability to meet more customer needs into the future. Our global distribution and outsourcing model in which we invested through the last downturn has given us a more variable cost structure while improving gross margin in responsiveness to customer needs. At the same time, we increased Zebra sales coverage in targeted high growth regions such as China, Brazil, Turkey and India. Today approximately 60% of Zebra sales are derived from international markets, compared with less than 50% only a few years ago. All of these targeted activities have also substantially strengthened Zebra’s operating leverage and has delivered more money to the bottom line. Our focus on capital return has also led us to accelerate stock buybacks. Since 2005, we have invested nearly three quarters of a billion dollars to reduce the number of Zebra shares outstanding by $20 million or 37%. Zebra’s board of directors has recently authorized an additional 3 million shares for repurchase. Let me elaborate a bit more on our future direction. Looking ahead, we will continue to invest in building on our core competencies through product developments and channel management with initiatives that deliver the highest risk-adjusted returns. On the product front, the cadence of new product development has increased and this year we are on target to introduce at least a dozen innovative printer products and other identification solutions that enable our customers to make smarter decisions through greater visibility into their operations and supply chains. The flexible user interface built into our QLn mobile printer, enables easy user customization and is an effective bridge into new retail applications, where customization had previously been a barrier. And our line of low priced printer products introduced earlier this year for emerged markets give Zebra a high growth platform in value-based printing applications. Most recently we announced an important product development in our line of location solutions. Last week, we introduced the WhereLAN III Location Sensor for use in real-time locations systems, which give customers more precise accuracy down to one meter as well as a lower total cost of ownership. These benefits are applicable to wide range of industries, such as automotive, shipping, and distribution. Geographic expansion and channel development also remain keystones to our continued growth and we will focus on extending Zebra’s geographic reach in underserved regions. In addition, further developments of relationships with system integrators and independent software vendors, which are complementary to our traditional VAR channel, better position Zebra to serve larger organizations with more complex global supply chain needs. Zebra is increasingly viewed as a strategic business partner as the value of our unmatched portfolio of products and solutions is helping our customers gain visibility into their operations by giving their assets a digital voice. Zebra has identified many important opportunities to further invest to extend leadership and deliver profitable growth. We will continue to deploy our resources, where they can earn the highest risk-adjusted returns. In addition to maintaining investments, supporting organic growth, we will carefully consider appropriate acquisition opportunities as they arise. First and foremost, we will continue to invest in our business as appropriate and we will continue to remain agile and responsive. This concludes our prepared remarks and I thank you for your attention this morning. I’d now like to turn the call over to Doug for Q&A. Doug Fox – Vice President, Investor Relations: 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. Operator, we could take the Q&A now.

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

Hey, Brian.

Hi, Brian. Brian Drab – William Blair: First question, just on the divestiture of proveo and at this point do you have any other plans for the other companies that are part of the former ZES, particularly WhereNet?

No. When we first announced the Navis divestment, we put some other operations in discontinued operations and that was really proveo. So, with the sale of proveo, we no longer have anything else sitting in discontinued operations and no plans for further divestments. Brian Drab – William Blair: Question is to WhereNet, on the RFID space in general, can you give us an update on the growth area? I think it was about this time last year when we talked about significant sales to retail customer and I think the highest level of sales you’ve seen in RFID in the Company’s history, how is that progressing at this point?

So, I think the part what you might be referring to is probably a passive RFID into a retail customer last year. I think there was a passive RFID opportunity. Brian Drab – William Blair: Right. I’m just saying RFID in general. I understand it’s so different.

Okay. Yes. So, first on passive RFID, we continue to see good growth opportunities in passive RFID. It is still somewhat smaller part of our overall business, so it’s bit more lumpy. But we see good opportunities to continue to expand passive RFID applications into a number of industries. So, far retail has been the largest customer allows for this and from a passive RFID prospect is holding and so forth. And on the active RFID side, we continue to expand the industries we serve and the customers we have. We had nice growth this year. This quarter we talked about some new applications in emerging markets in Asia around; one, is attract police officers in the subway to ensure that they always can see where they are, and we have another one around tracking IT assets. We also do an animal tracking, livestock tracking in Europe. So, you can see its aerospace in the U.S. So, it’s getting to be a pretty comprehensive list of applications in industries that we serve. Brian Drab – William Blair: Okay, thank you and congratulations on a solid quarter.

Thank you.

Thanks.

Your next question comes from Paul Coster with JPMorgan. Paul Coster – JPMorgan: Yes, thank you. Just housekeeping-wise, can Mike just so disclose what the revenues associated with proveo were on a quarterly basis? However, my main question is really, with EMEA specifically in mind, but also sort of government customers as well. Can you just talk to us about the most recent order trends and your preliminary thoughts as we approach 2012?

So, your first question was related to revenue per proveo, which is very, very small, but it would have been reflected in discontinued operations, so you’re not going to see that in the continuing operations P&L. Paul Coster – JPMorgan: Okay.

But I think you had a second part of that question that was more broadly across the business. Could you repeat that? Paul Coster – JPMorgan: Yeah, so, with Europe and the government sector in mind, there obviously the biggest risk across geographies and verticals. What are your preliminary thoughts as we head into 2012? Do you believe that we can – we’ll see growth out of the Company and have you any specific comments regarding the most recent order trends in those segments or geographies?

So that’s a pretty broad question here, but we’ll give it a go. First, I’d go back and talk, I think about our – what we see as our really strong competitive position, very strong strategic position that we built up over the last several years. We have strong results, strong growth that we’ve seen over the last couple of years also here, and we’ve been able to continue to extend our leadership, gain more market share in the industry. And we’ve done this in good times and in more challenging times so, our business model kind of works for us in that respect. And we particularly, we’re fortunate in our applications, our value propositions; they do work in good times and in bad times. In good times, companies are expanding by building more factories or opening more stores. In tougher times, it’s more focused on driving efficiencies and our equipment has a very short and very definite payback time. So, we see good opportunities to continue to do well in, irrespective of the economic environment, but obviously we prefer a more positive environment than not. And specifically to Europe, we think it’s a bit early to give you a real good sense of what 2012 is going to look like, but we, in Q3 as an indication at least, saw solid strength, solid growth in most – all of Europe was up 15% or 16%. We saw great growth in Germany, Scandinavia, France, Middle East, but we did see some weakness in countries like Italy, Greece – but that’s a very, very small part of our business, and the U.K. So, it’s obviously a little more uncertain as far as the outlook in Europe, but we continue to invest in our business to make sure that we position ourselves for the best possible long-term outcomes and we see continued number of good opportunities for us to invest in and to gain share and to make sure we do the right things to build the business for the long-term. Paul Coster – JPMorgan: Okay, thank you.

Your next question comes from Ajit Pai with Stifel Nicolaus. Ajit Pai – Stifel Nicolaus: Yeah, good morning and congratulation on a very solid quarter.

Thank you, Ajit.

Thank you, Ajit. Ajit Pai – Stifel Nicolaus: Yeah, a couple of quick question I want to made, the one question and then the one follow-up. But just looking at your guidance for the December quarter, I go back and look at Zebra’s history and only twice I think in the past 15 years have you actually had result for the December quarter that’s below sequentially relative to the September quarter, I think in 2008 and then back in 2000. So just given your positive commentary, I just wanted to ask whether you’re seeing something in your business conditions right now that is making you as cautious as those peers, which are almost unprecedented or are you just being overly cautious given the headline that you’re reading in the newspaper?

We still believe that we have good opportunities in Q4 and particularly looking at the momentum we’ve been able to build through the year and into Q3, where we had very, very strong performance and our competitive position is as strong I think as it ever been. So, we feel very good about that. We do read the same headlines as you do. Clearly, there is uncertainty out there. Our customers read the same headlines too. So I think perhaps it's prudent for us to have a slightly more cautious outlook to the fourth quarter. Some of the specific thinks though will be around Europe. Now also in North America, retail tends to be strongest in Q3. Our retailers tend to go into more execution mode in Q4 to prepare themselves for the Christmas season. And also Asia tends to have its strongest quarter in the third quarter, that's for the entire year. So, I think the traditional seasonality that we've seen over maybe for long time are getting a little bit more muted. Ajit Pai – Stifel Nicolaus: Right, but there is nothing in your business conditions right now outside of DC is now really changing over the period of time because of your business mix in terms of geography and end markets. There is nothing that has made you, you are being more cautious than what your business conditions suggest based on the headline is that fair?

Yeah. Some other things naïve towards high level be FX. FX has been a little lower and bit more volatile, but those are kind of in the margin. So, we feel good about where we are with the business and our competitiveness is very good. But we just want to make sure that we don't get up. Ajit Pai – Stifel Nicolaus: Got it. And then in your prepared remarks, you talked about the priorities of cash for the Company and that you're going to be buying back shares. You also are looking at potential acquisitions as they become available. Could you give us some color as to how that acquisition environment has changed especially with the broader economy showing signs of slowing down? Whether we can expect a greater number of acquisitions over the next 12 to 18 months and what the rough nature of these acquisitions are likely to be?

That's a tough question because it's more based on individual companies and then we're not that ferocious acquirer that has some several deals a quarter. So, it's more specific to the individual companies that would be of interest to us than it is on the overall environment. But I'd say, generally speaking, it tends to be that more deals get done at the top of the market and at the bottom of the market. So I don't think that's going to be that that many new deals will get done in the next year for us or the industry. But we do continue to look at acquisitions as a way of strengthening our business and take advantage of our strong financial strength. The first filter is to make sure it’s a good strategic fit that it does augment and benefit our traditional core business and enhance our capabilities in that area. The second filter is around our financial metrics and make sure that it’s something that that adds value to the business as we go forward. As far as the size and so forth, it may be closer and acquisition target will be to our core business. The really more confident we will be to put a bit more money to work and something that's a bit more adjacent to us, we would be much more cautious to about how much money we would put to work there.

I think certainly in the press release we mentioned, we have authorization for another 3 million shares for buyback. And as we said in the past, we view ourselves to be more aggressive in buying back shares when we think that the price is more attractive. And so obviously 1.8 million shares, I think that's meant, hopefully investors look at that and sort of see that as opportunistic with a good value in the market for us, that’s why we bought as much. I don’t know it will always be as aggressive depending upon where the valuations are. Ajit Pai – Stifel Nicolaus: Got it. Okay, thank you and congratulations on a very solid quarter. Thank you.

Thank you.

Your next question is from Tony Kure with KeyBanc. Tony Kure – KeyBanc: Good morning gentlemen, how are you today.

Great, and thanks Tony. Tony Kure – KeyBanc: Good, just wondering if you could maybe breakdown on the growth side of the equation. Have you ever been able to estimate how much growth that you're getting comes from market share gains versus what the market is growing? I would expect there is more market share gains in Asia, but maybe I am wrong on that. Could you, maybe talk a little bit by region what is market share gains versus end demand growing?

It's really very difficult for us to quantify how much is market share gain versus market growth, we cannot. We spend a lot of effort trying to grow the market. And I would say in Asia-Pac, our growth is probably mostly from growing the market, but market share gains are probably more prevalent in the more mature markets where you have more established companies. But I'm going to refrain from trying to speculate about, how much of this is actual market share gain versus market growth gain. Tony Kure – KeyBanc: Okay. Just to sort of follow-up on that, given the high growth potential in India, Russia, China that we have been talking about, can you maybe gauge or take a shot at the market sizes, the addressable market sizes for Zebra in those emerging markets and your penetration rate their versus the size of the European market and the size of the North American market?

I don’t have any of those numbers with me here. So, I think I will – we can probably take that offline if you like, but the overall market size in a place like India say or Russia, which are fast growing high potential ones today though is much, much smaller than the actual business volume that you get in Europe.

Right. And Tony, this is Mike Terzich, let me just add a point to Anders point here, which is when you look outside the U.S. and Western Europe and you look in the emerging market in general, the penetration of the technology is at very low levels of adoption and you got two factors that are kind of coming into play. One is the advancing of multinational manufacturing in the region and the creation of middle-class consumption, right, which is then feeding the retail side in those emerging regions. So, the business takes on a little bit different shape. It starts with a foundation of manufacturing distribution which is core to the company and then we get the added benefit of the retail expansion as people there are looking for efficient ways to serve their customer base. So, from a penetration standpoint, it’s very lightly penetrated in some of those markets and there are very large populations of people and so the upside opportunity for us is pretty significant. Tony Kure – KeyBanc: Okay, great. If I can really just squeeze in one more operational, just Andy what was the operating profit impact for OpEx during the quarter?

The operating profit impact we had about $4 million. Tony Kure – KeyBanc: Okay, thank you.

Yeah.

Your next question comes from Andrew Abrams with Avian Securities. Andrew Abrams – Avian Securities: Hi. Just a couple quick ones, can you kind of walk us through any changes that you might see in the mix for fourth quarter or are things going to stay roughly the same mix wise or I mean I know it varies from quarter-to-quarter. Can you give us some guidance there?

Sure, Andrew, this is Mike Terzich. The fourth quarter what we expect to see and Anders had made this comment earlier is that the retail business will be a little bit softer relative to deployment as they hunker down to serve the holiday season. So, we’ll see less contribution from the retail space which tends to be more correlated to some of our mobile solutions. In the rest of the world, you are going to see pretty consistent performance relative to the mix that we have basically enjoyed over the last two or three quarters, which is distribution business in North America, manufacturing business in North America, the business in Asia, which is predominantly some of our tabletop, desktop product lines. We are going to continue to see contributions. So, when you net it all together, it doesn’t materially look much different than what we have experienced albeit a little later in the retail with mobility. Andrew Abrams – Avian Securities: Got it. And on the shortages side and maybe on the transportation cost side just any detail you can give there? Are you seeing any shortages on components and do you expect too in fourth quarter and on the transport side, at times things have been kind of rushed and not rushed, can you kind of give perspective there a little bit?

So, first on the components shortages we have highlighted the impact of the Japanese earthquake earlier and now all products are back to full manufacturing. So, we had the last big components that was on short supply on long lead times become readily available basically at the end of the third quarter. So, we are now just basically catching up on some of the inventory position. We are shipping more of that to our distribution partners, but at this time we see no longer lead times, no particularly tightness in the supply chain from that perspective.

In regards to additional cost, I think I mentioned that in Q3 we had just short of $4 million of additional cost going to our P&L, of that roughly $2 million of it is for freight and we are effectively estimating Q4 to have that same elevated number. So, as we go into Q1 next year, we won’t have those elevated costs in our P&L. Andrew Abrams – Avian Securities: Got it. Thanks very much.

Your next question comes from Jason Rodgers, Great Lakes Review. Jason Rodgers – Great Lakes Review: Hi guys, looking at CapEx, I was wondering if you could provide an estimate for the year and the early thoughts for 2012?

Yeah, we are sort of looking at CapEx being roughly for the, we are running right now year-to-date about $23 million, so we're talking about $30 million or so for the full year. I'm sorry, I apologize we are running about $18 million right now. So, we are probably going to be around $23 million or something like that when the year is over. Jason Rodgers – Great Lakes Review: Okay, and next year?

I couldn’t tell you right now. We’re you can imagine, we're like everyone else trying to put together our budget based on sort of current economic conditions, we're still in the middle of that. Jason Rodgers – Great Lakes Review: Looking at your receivables and inventory, both year-over-year greater than sales increase. I wonder if you could just provide some thoughts there.

Yeah, a couple of things. One on the accounts receivable is our international sales growth which now I’d say as we successfully grow that business, the terms are longer than they are in the U.S. so that causes a little bit of problem. We had a couple of customers that paid early in the fourth quarter.

Second quarter.

Well, it paid early in the second quarter and they paid late into the fourth quarter, so they're exacerbated, so I wouldn't call that a problem per se. Inventories are primarily because as you're trying to work to the Japan catastrophe, you're trying to guess which products are going to sell and sometimes you guess long one way or the other, it's not a major trend, products are very saleable. We have a very good reserve on our balance sheet for that. So, I wouldn’t look at the numbers and suggest it’s a trend of something. It’s really just...

We took advantage of basically interest rate costs are very low, and we had the cash. We felt it was good investment for us to keep more inventory on our shelves to be able to respond to varying demands and use that as a way of taking share, and I think it's worked well for us. Jason Rodgers – Great Lakes Review: Finally, it looks like the opportunities at least presently are greater in the active RFID space and the passive. Do you see that changing at some point in the future with these tag cost coming down that at some point the passive may work the opportunity in the active for you guys?

We see both of them are being very attractive. I don't think people will say that one is substantially bigger than the other or so. And we see more of them becoming complementary, so that more solutions are weaving in a component of passive and active technology in the same solution. So, we think that active or both RFID technologies are going to be nice addition to our growth story. Jason Rodgers – Great Lakes Review: Thank you very much.

John Barta – Northcoast Research: This is actually John Barta on the line for Keith. I just had a quick question on sales throughout the quarter. Could you just comment on the large and the small deals? Did you say that in North America you saw more large deals in the quarter?

John, this is Mike Terzich. Well, it deferred by geographic region. I would say that in North America the quarter actually was pretty steady throughout, but we did pick up some momentum in the second half as we entered into the fourth quarter. Europe was a little bit different. It was typically the third quarter is the holiday season in Europe, and the front half of the quarter usually starts a little softer because of that. And the second half usually we see a surge and we didn't see the bounce-back to the degree that we've seen historically in the second half of the quarter which gave us a lift bit of which is somewhat reflected in the Q4 outlook as Anders had mentioned. And then, in the other regions, it was a nice steady state stream of business throughout, so we really didn't notice any shift in the demand patterns in Latin America or Asia-Pacific. John Barta – Northcoast Research: Okay. And then one follow-up, could you just comment on the large and the small deals? Did you say that North America you saw more large deals in the quarter?

We did, what actually what was good to see in North America is the diversity of our business in North America is stronger than in any other region and what was particularly pleasing for us was that retail deals in the quarter were really from some of the non-big-box retail accounts, and so it really helped in combination with some opportunities we saw in the mobility route space as well in the distribution and transportation space. So, it was a solid large deal quarter for us in Q3 in North America. And as we have mentioned, North America perhaps more than any other region for us is most susceptible to large deal activity and that’s where you see a little bit more volatility quarter-to-quarter from that region, but it was very good for us in Q3.

Just in North America, our run rate business is probably about two-thirds of the revenues and deals are about one-third, so that really is the reason for why you see somewhat more volatility on a quarterly basis in our revenues. John Barta – Northcoast Research: All right, thank you. Congrats on the quarter.

Thank you.

Your next question comes from Chris Quilty with Raymond James. Chris Quilty – Raymond James: Good morning gentlemen. I guess I am going to follow up on an earlier question about the fourth quarter outlook, which going back I guess, 10 years or more Q4 was traditionally the strongest quarter of the year. Retailers didn’t necessarily deploy equipment, but they spent their end of the year capital budget. And if I remember last year, Q4 was a little disappointing for you and it turned out Q3 was some relative strength? Do you think this is a new buying pattern by customers or is it specific to the economic environment we are in?

First, I think Q4 last year was a very good quarter. I don’t think we saw any – we are certainly up from Q3. North America, I can’t remember if that’s the question specifically for North America, but generally, I would say, that the traditional quarterly seasonality that we have seen over many years is getting somewhat diluted as we get a more global business. So, Q3 tends to be the strongest quarter in Asia-Pacific. Europe tended to have a very weak Q3 historically, but where Western Europe take a lot of their vacations, but as we have expand our business into Eastern Europe and Middle East and Africa, the vacation pattern is not quite as pronounced there. So, they can smooth out the quarters a little bit more. And I think in this particular year, we also, I think, expect in that the historical kind of budget flush that you sometimes get in Q4 might be little lower than what we normally would see… Chris Quilty – Raymond James: Okay.

As companies are a little bit cautious about the outlook. Chris Quilty – Raymond James: Yeah, I should have quantified, I did mean North America in specific. Also Q3, your revenues came up towards the high end of your guidance and again I might not have been able to define it from your statements, but where specifically did you see upside in terms of end markets relative to your expectations for the quarter?

I would say, Chris in the third quarter we had a strong North America performance. Asia was pretty much – Asia and Latin America were pretty much where we expected them to be and we did see a little bit of that softness in the second half of the quarter in EMEA that we mentioned earlier. Chris Quilty – Raymond James: Okay. And I know you give this is in the 10-Q, but product versus service gross margins, were there any unusual trends there?

No. Chris Quilty – Raymond James: And final question, ScanSource as a percent of sales?

It didn’t change dramatically from the prior quarter, but why don’t we continue on with the next question before we hang up. I’ll share that wonderful number with you I got it in here. Chris Quilty – Raymond James: Okay.

Your next question is from Paul Coster with JPMorgan. Paul Coster – JPMorgan: Yeah, thank you. I know you have highly diversified, but do you have some sense of what revenues came from the government sector this quarter?

I think that we probably don’t want to comment on that, because it is very difficult for us to know. Also, it depends on how you define government because it includes state and local government. That goes through different channels that aren’t necessarily government related, but we did have some attractive orders from various government-type entities. Even in Europe some nice postal wins in Europe this past quarter and postal business in the U.S. as well.

Just to make sure Chris doesn’t feel like we don’t love him, the customer A, which would be our largest customer was 22% of our revenue in this quarter, whereas a year ago, it was 19.7%. So, it’s up a little bit. Paul Coster – JPMorgan: And my follow-up and this is related to the statement around acquisitions, is that – the intent to make acquisitions is that sort of new and can you just talk to us about what kind of acquisitions you are likely to make and what you are not likely to do. I mean, obviously with U.S. in mind, I guess, you don’t really want to revisit the vertical solutions approach.

So, first our strategy with respect to acquisition hasn’t really changed. I think in the last several calls we have had a sentence in there to say that we are interested in doing acquisitions. So, we don’t surprise anybody if we do, but there is no real change to our approach. And what we are looking to do is first and foremost we would like to acquire something that is close to our core business, something that has the similar kind of horizontal business model as we do today versus more of say vertical model, but we are also interested in finding things that are near adjacencies that help us build capabilities into some new markets. So, those are kind of the areas. We are not totally looking to be overly advantageous or adventurous I guess is the word here, but staying pretty close to home. Paul Coster – JPMorgan: Okay, thank you.

(Operator Instructions) And there are no additional questions at this time. I would like to turn it back over to presenters for any closing remarks. Doug Fox – Vice President, Investor Relations: This is Doug. Thank you very much for spending an hour with us today. Our next regular scheduled quarterly conference call will take place in February. Have a good day.

Thank you, ladies and gentlemen for attending today’s conference call. You may now disconnect.