Q4 2019 Earnings Call

Good day and welcome to the Q4 and full year 2019 zebra Technologies earnings conference call all participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions. Please note this event is being recorded. I would like to turn the conference over to Mike Steele vice president investor relations, please go ahead good morning and thank you for joining us today before we begin I need to inform you that certain statements made on. This call are forward-looking and subject to the safe harbor provisions of the private Securities litigation Reform Act of 1995. These statements are based on current expectations and assumptions and are subject to risks and uncertainties actual results could differ materially due to factors discussed in our files.

with the Securities and Exchange Commission

During this call. We will make reference to non-gaap financial measures as we describe our business performance. You can find reconciliations of our gaap to non-gaap results in today's press release and at the end of this slide presentation.

This presentation will include prepared remarks from Andrews Gustafson our chief executive officer and Olivier leonetti. Our Chief Financial Officer Anders. Will Begin by discussing our fourth-quarter and full-year life's then Olivier will provide additional detail on the financials and discuss our 2020 Outlook.

And this will conclude with recent progress made on advancing. Our Enterprise asset intelligence Vision following the prepared remarks. Our senior vice president of global sales will join us as we met your questions throughout this presentation unless otherwise indicated are references to sales growth. Are you over year on a constant currency basis and exclude results from the recently-acquired court exaco temp time and profitec businesses for the 12 months following each acquisition. This presentation is being simulcast on our website at investors. Zebra. And will be archived there for at least one year now. I'll turn the call over to Anders.

Thank you, Mike. Good morning, everyone.

Thank you for joining us.

Team drove profitable growth in the fourth quarter as you can see on slide for we reported net sales growth of 4.6% adjusted ebitda margin of 21.4% which expanded by 30 basis points and non-gaap diluted earnings per share of $3.56 at 15% increase from a year.

We posted a record level of ETS. Although it was at the lower end of our guidance range due to tariff expenses at the high end of our expectations and prioritizing a higher mix of mobile Computing year and budget orders Each of which impacted gross margin.

Diversified business is enabling us to post solid growth despite an uneven Global macro economy. The continued soft environment in China was more than offset wage growth in our North America and email regions.

We grew.

all our major verticals led by Healthcare retail and transportation and Logistics

We drove double-digit growth in our Enterprise Mobile Computing portfolio, which kept another exceptional year.

A customer's utilize our mobile Computing solutions for new use cases on the Android platform as we benefit from our leadership in the transition from the Sun setting Windows operating system.

We also continued to drive higher Service attached rates on our product sales. Which bodes well for future quarters.

All right, buddy was another bright spot in the quarter growing strong double digits.

Lower operating expenses enabled us to expand ebitda margin despite transitory tariff expenses that weight on gross margin.

By mid-year, we will have a more Diversified sourcing footprint which will enable greater operational flexibility and mitigate the tariffs.

In Q4, we acquired cortex account Vision systems to accelerate our computer vision capabilities, which I will discuss later on the call.

For the full year, she but delivered solid results with 5.5% sales growth 90 basis points of adjusted ebitda margin expansion 18% off a p p s growth and 624 million dollars of free cash flow.

We continue to build Upon Our industry-leading offerings by investing in Innovative Technologies that elevate our role in enabling the intelligent Enterprise.

We are entering twenty-twenty with a solid order backlog and we are optimistic that we can drive another record year of performance.

With that I will now turn the call over to Olivia to review our Q4 Financial results and discuss our 2020 Outlook. Thank you. Hun, Das let us start with the p&l as you walk inside 6 net sales grew 4.8% in the fourth quarter which translated to 4.6% on an organic basis before the impacts of currencies and Acquisitions. We saw growth in each of our reporting segments.

Enterprise visibility and Mobility segment sales increased 6.3% led by growth in Mobile Computing and support services are set intelligence and tracking a sales increased 1.2% with relative strength in services and zebra retail Solutions turning to our Region's in North says 8% primary driven by strength in Mobile Computing Services and every Friday, we saw broad-based strength across our primary vertical give me a status increase 4% with relative strength in Mobile Computing and services eastern and southern Europe where bright spots in the quarter off.

Says, you know asia-pacific region declined 8% primarily due to continued Microsoft in China due to trade tensions. Latin America sales rep not adjusted gross profit increased nearly 1% from the prior. Adjusted gross margin contracted 186 basis points to 45.8% primarily driven by a nearly full percentage Point net impact from least for tariffs and an infrared sales mix of large and budget orders review this Q4 rate as exceptional and not a new normal.

I just

Said operating expenses declined twenty million dollars from the prior. And improved 230 basis points as a percentage of sales. This Improvement was primarily due to reduced project spend and lower incentive compensation expense partially offset by the inclusion of expenses from recently acquired businesses that we would continue to drive a balanced approach of driving operating leverage while making prudent investments in growth initiatives.

Fourth quarter 2019 adjusted ebitda margin was 21.4% the 30 basis point increase from the prior. Including off the temporary one point negative impact from tariffs. We drove non-gaap earnings per diluted share of $3.56 down 15% year-over-year increase which includes the $0.16 negative impact from least four types.

Now to the balance sheet and cash flow highlights on slide seven. We generated 624 million dollars of free cash flow for the full year 2019. This was lower than the prior. As expected primarily due to the timing of working capital items.

We paid down $212 of debt in 2019 after the funding of Acquisitions and Venture Investments. When that the year with one page three times net debt to adjusted ebitda ratio, which is the lowest level since the acquisition of the Enterprise business more than 5 years ago.

We repeat chest $47 of shares in 2019. I was strong balance sheet and cash flow profile provide a sample flexibility to invest strategically and return excess Capital to shareholders.

On Sunday 8 we provide an update on the anticipated impacts 2 zebra from the section 301 tags on products imported to the US.

We on track to diversify our Global sourcing footprint which will mitigate least for parents that became effective in September impacting our mobile computers, printers. We continue to work with our contract manufacturing Partners to replicate lines in order to move most of the US volumes to broader Asia.

These actions expected to result in up to an additional twenty-five million dollars of one-time pay tax charges to me 20 20 plus 10 to 15 million dollars of capital expenditures.

These supply chain actions we expect to substantially mitigated by mid 2020 in the first quarter. We expect these terrorists to negatively impact gross margin by approximately ten million dollars and declined to five million dollars into two as we launched item eight sources of Supply or outside of China.

System to our outlook on flight nine. We enter 2020 with a higher than expected or the backlog and solid pipeline of opportunities.

Well with contract manufacturers and other areas of our supply chain in China, I've experienced delays as worker returned from the new year later than usual due to do Corona virus outbreak our Outlook incorporates our best view of the coronavirus impact.

We expect net scroll think you want to be between four and seven per-cent. This assumes an approximately 1 percentage-point positive impact from recent acquisitions. And then approximately 1 percentage-point negative impact from foreign currency changes.

We Believe q1 adjusted ebitda margin would be approximately 20% Which assumes improve operating expense leverage and the lower gross margin attributable to age ten million dollar impact from least four types and approximately four million dollars of additional freight cost you to do to the supply chain delays from Corona virus off

Godzilla tdps is expected to be in the range of $2.90 to $3.10.

Yes, she mated negative impact from tariffs and additional freight cost is approximately $0.22.

We assume a negligible impact from Cher approaches that said we would continue to be opportunistic with our share buyback program. Also, we expect made that we could have an additional zero two fifty million dollar impact two cells related to the Nile virus outbreak if the situation becomes meaningfully different than expectations.

We expect for year 2020 net growth to be between four and six percent which assumes an approximate 30 basis-point positive and back from recent acquisitions and and approximately one percentage Point negative impact from foreign currency changes.

Yeah, I just studied imagine is expected to be psych slightly higher than 22% an improvement from 2019 as we work to drive gross margin expansion and operating leverage. We do not believe that a cohort virus outbreak as we understand its potential impact today. We have a material impact on our full-year Outlook.

We believe the risk to be Mindy in timing of all the Fulfillment in near term.

We expect that for your 2020 free cash flow will exceed $700 a substantial increase from 2019. You can see other four year 28 modeling assumptions on Sligh 9 with that I will turn the call back to undress to discuss the progress. We are making on our Enterprise asset anticipation. Thank you, Olivia.

Optimistic about our business as we enter twenty-twenty and we believe we can continue to successfully navigate an uneven global macro-economic environment.

Now turn slide 11.

We collaborate closely with customers to transform their work clothes so that they can achieve their strategic goals the value proposition. We bring to the market has translated to age group and each of our primary verticals for Q4 and the full year.

In healthcare our fastest-growing vertical we are addressing a broad set of challenges that Hospital systems are pasting across their operations these challenges range from Bed Bath chair to the management of medical supplies and equipment throughout their supply chain.

As an example. We have been rolling out mobile Computing solutions to the National Health System in the UK enabling digitization at the bedside to treat patients which improve the level of safety and generates real-time actionable data to optimize the entire supply chain.

Manufacturers zebra addresses their needs across their business these include plant floor productivity enabling the Smart Warehouse and optimizing field operations team.

Our Solutions are resonating with customers because we can demonstrate that positive Roi for our Solutions even in a challenging environment.

We are excited that multiple prominence manufacturers in North America recently deployed multimillion-dollar Android mobile Computing and printing solutions to help maximize their productivity in B2B workflows including direct store delivery.

In the transportation and Logistics base a customer staff are overextended and their end customers expect service and information instantly in an increasingly on demand off to me.

The success we are seeing in this vertical is attributable to the real-time visibility. We are bringing to our customers supply chain which enables them to increase productivity.

I would like to call out our team's success in becoming a partner of choice for nearly all of the largest postal systems around the globe including the US Postal Service, which will begin to deploy. Thursday will be computers in the second quarter. We Empower postal carriers with the mobile technology to increase productivity by scanning tracking and tracing packages across their own network with high level of data security.

In retail and e-commerce omni-channel fulfillment is a critical area where retailers are making significant Investments.

RFID has become an increasingly important option to improve omni-channel capabilities because it can deliver close to one hundred percent inventory accuracy.

It's more and more items are sourced tagged at the point of manufacture or if I need gains momentum.

We are currently deploying an RFID solution to several hundred stores for a major retailer. This customer conducts daily scans of the entire store with Hancock or if I need devices in less than one hour, which is driving increased sales uplift and lower inventory shrinkage.

Has also purchased several thousand of our combination or if ID reader and bar code scanners for their point of sale transactions.

We are pleased with the Strategic relationship. We have forged with this customer as we collaborate on proofs of concept to address additional in-store use cases that that can improve their talk bottom-line results.

Now turning to slide twelve. It's a trusted strategic partner. We orchestrate the end-to-end were closed for customers in the primary virtues that we serve last month at the national retail Federation Expo. We showcase how we accomplish this in retail and e-commerce through a full Suite of innovative solutions.

Solutions address many operational challenges our customers space as they reinvent their business models prescriptive analytics machine learning computer vision and move computers for all the associates are a few key enablers who intelligent retail that we featured at the show.

Advancements in technology now allow retailers to generate an unprecedented amount of front-line data on their stores through mobile automation systems shall fetch cameras on a computer scans inventory point-of-sale RFID and other sources.

It's heavy flow of information is actionable in real time with our software solution. Zebra prescriptive analytics formally known as profitect can analyze massive damage dreams utilizing machine learning to identify variations in the data in real-time.

The most impactful recommendations or instantly prioritized and sent directly to workers mobile devices to take action for optimal outcomes. We have deployed our product offering with many leading retailers including the Home Depot Wallgreen's Family Dollar asked REI ahold delhaize and many more.

Computer vision capabilities are becoming an increasingly important component of our offering in retail and other vertical markets Reserve.

In Q4 to further accelerate our capabilities in this area required london-based cortex Vision systems who's talented engineering team has been developing Vision Beijing Olympics and artificial intelligence solutions that include object recognition through machine learning image and video analysis and visual search.

At the NRF Expo we introduced Solutions with our Innovative computer vision capabilities, including a flatbed scanner that can visually identify fruits and vegetables off as well as our new intelligent automation solution smart site that teaches a robotic Vision system which rolls through store aisles.

The system can identify critical issues such as stock-outs or Price discrepancies in direct a worker through a mobile computer to correct the situation.

And to leverage our enhanced computer vision capabilities in next-generation offerings to address emerging use cases in markets that we believe represent a multi-billion-dollar opportunity.

We were proud to feature Office Depot at our booth this year. They demonstrated how they have deployed zebras purpose-built mobile Computing solutions to empower their Associates to transform the customer experience and improve operational efficiency across their stores and distribution centers.

their solution includes our Workforce connect software application for efficient collaboration among Associates

There's a strong and growing Trend that many retailers to equip all their Associates with mobile devices that enable collaboration with coworkers and customers.

We are ensuring that we have the appropriate purpose-built portfolio of mobile computers for our Enterprise customers to empower their entire Workforce.

repeat

Through some of these NRF and we expect to rollout additional offerings later this year.

In closing our core product offering continues to resonate well in the market. We are broadening our role as a strategic Solutions provider partnering with our customers see sweet home and we are continuing to invest in capabilities that digitized and automate Enterprise operations.

We've opened large new attractive Market opportunities for zebra, including intelligent Automation and computer vision applications new point-of-sale Solutions and mobile devices for all.

No, I've had to call back over to Mike Sanders will now open the call to Q&A. We ask that you limit yourself to one question and one follow-up so that we can get to as many of you as possible.

We will now begin the question-and-answer session to ask a question. You may press the star then one on your touchtone phone. If you were using a speaker phone, please pick up your handset before pressing keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

The first question will come from Jim of Needham & Company.

Hi, good morning. Thank you. Two questions. First wanted to just talk a little bit about the strengths you're seeing in the order book entering twenty-twenty. I'd like to know particularly which areas of the business and geographies, and then I have a follow-up question as it relates to some of the color you're providing with respect to the front of the Box risk. So just on first on the areas of the business where you're seeing the strength sounds like good strength in RFID, but I wonder if you could talk a little bit more about it and the sustainability of that string. Thank you.

Yeah, thank you. First I think we you know our team executed very well in Q4. We were up almost 5% and that was on top of a 9% growth in for 2:18. So we had buried you know, tough compared. We saw very solid performance in North America and email that was offset by you know, software spending environment particularly in China. We did see the uh, particular strength in our mobile Computing portfolio, but also in services and RFID as you mentioned, we grew all our vertical Market verticals that we serve led by Healthcare as the fastest. We'd strong double-digit growth followed by Retail transportation Logistics and and Manufacturing and for the full year 2019 off all verticals were up also so we have, you know, very Diversified business, which is enabling us to post solid growth despite now being in the in the more uneven global macro-economic environment and wage.

I guess last to be quite calm.

And that we grew share in 2019.

And so you you see those Trends as with respect to your guidance those same Trends are playing out in queue your q1 outlook. Yeah, I think we we, you know, we have a good outlook for for the first quarter of 47% growth. And that's a over in 8% growth of last year. We entered a year with a solid backlog, uh, you know, we have helped the inventory levels in the channel. And so we expect now faster year-over-year, you know growth starting to to to to log in here fascinating and Q4 and we continue to see North America and email as the strongest geographies for us. But we also expect China to continue to show softness on our go-to-market side. I think we have good discipline around our offerings and and pricing and yep.

You know our value proposition.

Continues to to resonate well for the first, you know for the first quarter though, we we aren't expecting USPS to participate. You know, that role that will start in Georgia. Okay, and thank you for that and just with respect to the coronavirus. I think we all appreciate the challenges of trying to forecast the business with this fast-moving developments, but I'm wondering as you see the business now are you does your guidance for q1 anticipate any Revenue potential shifting out into I mean you've highlighted some additional Freight expense and then it the zero two fifty million impact that you you identify on sales is that I wonder if you could talk a little bit about whether that is more supply chain related or potentially demand related that you're anticipating. Yep.

Let me answer to this question Jim. So as you indicated the situation is is obviously very afraid we have news every day our base-case off the 47% growth of one assumes the impact of the coronavirus as we know it. So, for example, we have reflected shifting back and lowered the man in China additional freight cost and and to give you a bit more colors on what is going on with our supply chain. Our teams are taking a pretty much multiple times a day all over to cheer ones are our TV partners are back to work and ramping Productions our cheer to suck and there's a largely back to work and ramping production every day and our supply chain is operating with some manageable bottleneck. So the situation is dead.

Ridge uh

And and we believe we can manage the the impact of virus as we know it if we were to have an impact in q1. We don't think it would be the case on top of what we put in the guide month. We believe that the impact would be timing and that our full-year guide would be intact. Now, let me comment on the additional zero two fifty million additional potential risk on the top line again, that's not our expectation. Our expectation is that we would be able to mitigate the impact of the terrorists as we know it but it off the ramp of our production was not to be as part of our expectation. We wanted to give you some bookends about the potential impact and resize the impact to zero to fifty dollars again would be timing if that unlikely scenario was to materialize

You know just wanting to to add to that, you know, we we talked an earlier calls about our supply chain diversification strategy to mitigate the impact of tariffs. So our money factoring in Vietnam and Malaysia for printing and mobile Computing is now ramping up and we'll have an impact on on the court also.

Thank you.

The next question will come from a met a marshall of Morgan Stanley.

Great. Thanks, you know maybe first question just on you know, you mentioned the deal coming in in the second quarter and just you know, maybe what explicit you've built into the year as far as of that deal just given given to size and magnitude and then maybe second question. Just you know, you're below kind of your net debt targets at this point. So just how you know and are going to generate wage meaningful amount of free cash flow in the next year or so. Just how are you thinking about use of of free cash? Thanks. So yeah, thank you. I'll start with the USPS part supposed to be very proud of our USPS win. You know, that's a big big win for us and it augments the relationship we had with USPS. They were already customer of our our other products and solutions before thumb the specific solution. You helps the USPS optimize the visibility of of package delivery and also the execution across their carrier Network. This is

Is a multi-year contract it's the largest in the history of the company and I think it highlights the strength of our value proposition here.

Keyboard includes rt77 mobile computers Mobility DNA some custom software as well as managed and Professional Services off. The ramp up is store is it will start in Q2 and the Outlook assumes the majority of orders will be deployed in 2021. We've taken a prudent view here and only included the the orders that we have disability to into our 2020 Outlook, you know as the u.s. 3D cell service providers will be ending 3-g service at the end of twenty Twenty-One, you know that is a definitely a consideration for the rollout Cadence and we expect that the USPS wage basically be done by with the entire roll out before the the end of 2021 to make sure that they have devices that can work on on on the 4G network. I said, yep.

Back to the later, but we want to know a lot of other good Postal Service wins that you know joking pick up on.

Yep.

I'm just as additional context right postal services around the world are making the transition that many of our customers are making from windows-based to android-based devices off. We've been fortunate to participate in and win the largest Tenders in each of the four regions. We participate in in Asia. We won the largest deal which you know about with Australia Post Office, um in Latin America earlier in 2019, we won the largest deal there and recently we've also won the largest deal in the European Postal System, all of which may have transitioned to our Android computer. So postal service is one of those areas of strength for us at the moment. Let me cover your cash allocation question. So as you had indicated as you related to our leverage ratio at the end of the year was one point three ex net debt-to-ebitda the lowest since the Enterprise akwid.

and I would

Business has a strong cash flow generation. We would be investing in a business organically, but also deploy our cash through m&a and also investments in our Venture fund. We also will deploy cash to a buyback program as a reminder. We have we had an authorization for 1 billion dollar buyback authorization. We bought to date about forty-seven million dollars and we would be in the market this year. We believe that took over the year with bike will buy back about 2% of the market cap cap of the company and we will be more opportunistic in a particular quarter based upon the behavior of of of our stock price, but the guide for EPS in q1 does not assume any impact from buyback dead.

Got it. Thanks guys.

The next question will come from Brian of William Blair.

Hi, good morning. Thanks for taking my questions. I just wanted to ask you know, following those comments unders about the about the majority of orders. You said would be delivered in 2021. This is well, you know public knowledge that. This is a $570 million contract. It doesn't seem like it's impacting the the twenty twenty years as much as at least I was expecting. I mean I was I was thinking maybe this is like a hundred and fifty million a year and would add, you know, three points to the growth rate, you know in in twenty-twenty doesn't look like you've Incorporated that much in the 2026 and starting the second quarter. But when when you say the majority in 20 21 in the contract should be those devices should be delivered by the end of twenty twenty one month.

I think you know some people.

Including me, you know, I'm being left with the impression that maybe this could be like four hundred million or you know, three hundred million plus in Revenue in 2021 just from this contract and I can you just help us reconcile that if I'm way off.

But first the We have basically looked at the delivery schedule that we have received from the USPS, which is the you know, based on we have for what we have in clubs in 2020 and that assumes that the majority of orders will be delivered next year. Now, they're certainly an opportunity that we get some of that can be found in. Uh, but that's not part of our base case. We want to you know, our basic is is that whatever they have told us today will be the SD as they're you know, projected delivery schedule is what we put in the in our in our guide and an outlet, but there's no there's opportunities can be better.

But yeah, we we would consider the whole up assumptions. We have factored in the guy to be prudent.

I need I'm looking for more specifics than than just you know than that. You know what I mean? I I think that if you say what you said so far in the call, I I guess I would reasonably model like four thousand million in Revenue.

Yeah, that's the best information we can contract is that is there any shipment to this contract? Do you think Beyond twenty Twenty-One or or it's pretty much you said it's done really with deliveries page 21 in the you know, there's there that can be delivered afterwards to their includes. Also, you know other parts of it repairs and and other services that could come with it off and they have the opportunity to continue to replace damaged devices or by you know beyond what they have initially said so the contract doesn't end at end of 2021 and that's the number they have put out in the in in in in the the doctor total dollar volume put up by the USPS envisions that this is not a 2 year contract, but the longer, correct.

Is it is it possible?

You could have deliveries that total more than three hundred million in Revenue to this contract in 2021. I don't think we want to comment on the specific dollar amounts for this contract. You know, we we we can you know, we can kind of we've tried to share what we know today. And what we think is a prudent outlook for 2020. And and I think we have to leave it at that page Brian. We have uh also a few large account as part of the bottle free as well. So USPS is obviously one of them but not the only one right? It's the only one that I took a $570 million figure associated with that's why I'm asking about it and it's largest in the company's history is Andres just mentioned. So and then just let where are you at the 15? We're we're home free with the 15 million figure, you know in terms of the upgrades. What's your latest view or comment on on that things? Yeah. So the the dog

on Android broadly said we have

A number of good drivers for for for the Android business and let's have three clear strong drivers first. You'll be around new use cases, you know, if you go back and look at the the number of applications or use cases our customers use mobile computers for say five years back. It was probably you know mid single-digits today, you know, most of our larger customers have probably more like Fifty sixty different use cases and applications and we think that is going to continue to expand so that's been a great driver the you know, the Android transition from home from the you know, Legacy Windows operating systems, you know continues there were several of the older Windows OS versions that went out of support the end of January this year. Our best estimate is that they're still approximately 10 million Legacy Windows devices in the market that needs to be upgraded, you know our market share in Android.

continues to be very strong at

You know 60 plus percent and the warehouse migration there is still you know, gaining momentum. Let's say and a great opportunity for us at the office second half of last year certainly true for we did start to see also like I say because a new new driver and that's Android refreshes. So it's now five years. We started shipping Android and some of those devices are now getting ready for it for a refresh the earlier devices. We had don't have the memory or or processing capabilities to support all the different use cases all the different applications. Our customers are putting on it as well as the you know, processing requirements required by to run the newer the most recent Android version and lastly. I say also it's a it's a new trend we're seeing is our customers are looking for to deploy mobile computers much more wage.

Castillo deeply into their organizations they're looking to have a basically a device in the hand.

Of every employee particularly in healthcare and Retail we are you know, expanding our portfolio of solutions to enable that customer to have the the right device for the right, uh, uh worker where we can then generate a positive Roi for them in those areas. We have had a break-in or during Q4 from the large US retailer which included a new ec30 device which was intended to be basically deployed to all their uh, all their employees and that drives also a lot of work force connect applications cuz most of those applications are use cases are are predicated on driving greater collaboration between you know, store employees wage or store employees and customers. Okay. Thank you for that. All that detail. Appreciate it. Yeah.

The next question will be from Keith husam of North Coast research.

my guys I was hoping a little bit more color on the

If it looks like the full-year guide is actually a little more conservative than the first quarter. Especially I can appreciate the fact that the postal service will be more back-end loaded 20 21 Club, you know, perhaps a few points of growth for the third and fourth quarter and you have easier cos you're going against so what are you seeing on the horizon? I guess that you know gives your full year guidance and perhaps a little bit lower than what we make a call back. My first year guidance first quarter guys.

So we we believe so as you indicate that most of the USPS or older will be deployed next year. We believe that for the remaining of the that this Outlook is is present. Uh, it's good to be a more than respectable growth, uh, based upon what we see in the market based upon the strength of our go-to-market based upon the strength of product and solution offering we believe that we should be able to to to deliver this this President Bush of the uh, guide keys. So are you forecasting practice the the overall demand Market to actually be decreased or are they kind of me get a little worse? Is that part of your expectations for growth?

That's not the case.

It's uh so far if you look at the performance of zebra Q4 of 2019 was stronger than Q 3 Q one guide is going to be stronger than before. So we see an acceleration of the business but based upon the various Mac events and all the phenomenon happening Market, we believe it's the most prudent approach to guide in the way. We did a follow-up question for you on operating expenses, you know, R&D was up sales and marketing was up perhaps a bit more than I thought are those increases I guess quarter-over-quarter. Is that more due to Acquisitions or was there a perhaps a change in intent and are indeed, you know increase investment their wage. So if you look at opec's as a proportion of hover new we have been scaling that ratio significantly every quarter actually even month.

in into

Cool, if you look at the only line with indeed add the impact of Acquisitions playing out in in the quarter, but the same principle we have in mind as we manage. The payment of the company is to scale effects of the proportion of Revenue rather than looking only at a topic said we have been able to do that every quarter million to factory.

All right. Thank you.

The next question will confirm Richard Eastman of Robert W Baird. Yes. Good morning, Olivia. Could you just double back for a second to the gross margin wage degradation? We saw in the quarter and maybe just provide a little bit of color around both a i t and the evm decline year-over-year and basis points. If if you could just sift through that a little bit we did we you mentioned tariffs you mentioned this large order was that in the mobile Computing side and just maybe sift through that a little bit just to give us a sense of maybe that you know, it's it's an unusual number here and not to not to model that kind of going forward.

absolutely, so

As you indicated and I would go through through the details in the second. The Q4 margin profile was was exceptional and the guide for q1 and the full year of 2028 implies as going back to normal. So going back into the details Richard, we whole achieve to the implied, uh guide we had four for our margin rate was wrong about the point as indicated my in my prepared remarks this one point. Uh, the gradation is due to large marching orders that we are to shift to meet our customer and budget demands that impacted TV em, but mainly mobile computers and if I was to go through the various elements of impact for trying to bridge the point the lower point, we had a margin relative to our guide the impact of higher wage.

Takis the next

Citations we're about forty basis point the impact of higher Freight as we have to expedite those large orders the impact took about 20 basis-point and the lower-margin due to the mix of large orders was about forty basis points. So you see the the the food break of of of of the one point now, we are working all the time on initiatives to improve, uh, Mohnton. We believe we have an SC set of activities. We will launch in twenty-twenty to improve gross. Margin. We could go into the details if you want to check and we feel definitely that was an exceptional Point. Could you when you look out to 20 for the full year in 20 and you look at the gross margin wage?

perhaps, uh

Yer over year would you expect you're taking out some of the cost of the of the Tariff and the supply chain that comes out of the adjusted number so should we expect to see you know twenty to forty basis points of gross margin Improvement, you know for the for the full year when we look out the 2020 so we believe that wage increase gross margin 20/20 of a 2019 net of the elements you mentioned so Tarif and exceptional freight cost and what am I saying. Let me give you maybe a few examples of the of the livers we are using so from a pricing standpoint for example, we have been addressing more and more reach home that's also part of the market as being one of them, for example, we've been deploying resources to maximize this vertical does not the only one the segment mixing yep

Mint will drive margin up that will.

B1 we're also launching YouTube have been piloting these tuna for about a year the usual for pricing Transit transactional orders using machine-learning is being launched long as we speak. We believe that that will improve our margin profile as well and from a cost standpoint very quickly. We are designing to value our products that has been a constant with platforming also our our various products. So using the same platform across various product lines and one which will have also change fairly impact on the mountain profile for for for 2020 is that we have reset our service network outside North America and that will significantly improve the margin of our service business and I'm also a material impact on the margin of zebra overhauled. So again a nice set of activity log

to keep improving the matching profiles

The business as we have done now for a number of years and just maybe just one last question along similar lines here, but as we have moved production out of China into Vietnam, I think you mentioned in Malaysia cuz number one does that is that mostly mobile computers and printers or are there scanners being done there? And then just by definition of that movement to Vietnam and Malaysia, do you pick up some basis points of you know, gross margin or lower cogs on that movement out of China just structurally

So I'll take this one. So first, you know, the the objective here is to move us bound volume out of China to ensure we can mitigate Thursday. We are moving our printing volume to Vietnam and most of our mobile Computing volume to Malaysia, but also going to some other countries on the the scanning side that was already outside of China that was in that we manufacture our scanners in Mexico and in Taiwan primarily, but you know with these took Graham's looking to wrap up by middle of this year. We we would expect to you know, a large communicate all the Tariff impact from a an ongoing gross margin perspective. We we think of them as neutral today while say labor cost might be a little lower in Vietnam early on we will have a little bit more freight cost moving dead.

These parts and other components, you know into into Vietnam but over time.

We will work on making sure that we get that to be, you know an improvement to our gross margins. Okay? Excellent. Thank you.

The next question will come from Paul Coster of JPMorgan.

Hi, this is Paul Chang on for customer. Thanks for taking my questions. So just to follow up on on mobile computers. Are you still kind of selling windows-based mobile computers? And is that kind of keeping the opportunity at ten million units and then you mentioned you're seeing more, you know Android refresh page refreshes happening suggesting maybe a life cycle five years is this is this kind of a shorter life cycle than your legacy products and you know, what are the main factors kind of driving that refresh assume this contribution is quite low at the moment kind of relative to you know, your your new deployments if you could confirm that as well and I have a follow-up. All right, see if I hope I can remember I'll start with the the you know, if we're selling Microsoft devices into the market still the answer is yes.

you know, we we

I think it was 2017 for us where we switched over to make Android the highest volume of our of our business, but we do still sell and support our customers who have existing deployments of Microsoft devices, but it's fair to say that I don't I can't think of a large new customer that have selected Windows. It is basically to service the existing install basic or all of those accounts and over time. They are I would say they all looking to migrate to Android now, you know, we have the lounge I said highest proportion of our volume in Android. So if you look at other players in the industry, they are still selling more windows devices and some of them selling more windows than even and if you look at some markets like like Asia Windows is still a quite a strong platform there. It might seem a little you know, counterintuitive as wage.

some of those software

Which is have gone out of out of support, but that is what what we're seeing. So on the one hand, you know, we are eating into the ten million Legacy devices by shipping new home new new Android devices, but on the other end of that that that volume, you know, there there's there we and others are adding new windows devices also off and just to complement we see that as a positive trend we've been able to pass a strong sales performance in Mobile Computing despite the market still buying a lot of Windows do to as we said earlier new use cases and and and also a device for Hall being a new trend in this part of the mark and also touched on the Android refresh and then I'll ask Joe he'll here to to add in some more color, but on Android refresh here, we we we started shipping birth.

the t 55

MC forties about give or take 5 years back from those devices may have both from the say longevity in the market wear and tear but maybe more more so based on the memory capacity, you know process processing speed and so forth are no longer able to support our customers objectives, you know, our customers are looking deployed many more applications which all used the memory and and processing speed. And also if you're looking to upgrade to newer current Android versions, they all require more memorable processing speed so and I think this is a fair comment around Android overall that the refresh rate will be higher than four windows down. There's a lot more Innovation going on around the Android platform than than there was historically, you know, even when Windows was say a threat fresh and the the default. Uh, yep.

System platform for the industry. So we we do expect to see a

A higher level of Android refreshes than we did on or shorter life life cycle for our Android devices than we did for Windows. Yeah at perhaps there's some additional color on that. Thank you. You are seeing five-year life cycles at this point, but we do see customers making their Roi calculations often with three year time Horizons now, so we do expect that the life expectancy that our customers will have will Trend in that direction. And if you think from the customer perspective, you'll we would say we would cite three things that customers are saying our drive through them to these refreshes one is applications. There's a significant increase in applications that customers are putting on our devices where they originally may have used it just for inventory management. Now the use it for a customer application that use it for voice Communications. There's a significant increase of those applications. Number two with those applications. Come new demands on the technology dead.

the the Technologies need more memory as a nurse was saying in addition to the

Technology requirements driven by the ongoing Android upgrade Cycles, right? Those are on very short eighteen months or so intervals. And then the last piece is you use cases. They may be put on devices all the time where they're being used for purposes that five years ago were not even being envisioned. So all three of those are driving the increased I refresh shorter refresh cycle and increased refresh values. Thanks for that. And then on the Switching gears on new products, you know, particularly the new automated robots. You were showcasing at NRF. Do you have any kind of customers piloting that solution in groceries? And you know, are you see any kind of actual demand to you know, deploy these Solutions or are we kind of bit early and then if you could also provide an update on Smart pack solution for trailers

See any momentum. They're just kind of want to get a sense for Solutions in the pipe.

Mine kind of newer Solutions. And which ones do you think will have the biggest impact in you know in the near-term. Thank you your first let's say that our new Solutions is going to be intelligent Edge type Solutions have been growing very nicely for the last several years. So obviously off of a smaller base, but the growth rate has been quite attractive and and the method our internal expectations for for 2019 at NRF. We we showcase the number of new new Solutions. We had our smart site solution with our Emma robot. We both had our empty 7,000 flatbed scanner with a color camera. We had smart edge with a heads-up displays. So you saw a number of new home solutions that are quite different from you know, the the type of solutions that industry has offered before on Smart side first, you know the wage

We've been developing that Force for several years. We have it in in in Pilots with some large customers. So we certainly expect it to be demand for it. We we working with a number of our customers to figure out how long how you know, how can we be best get introduced into their into their environments? Um, and you know, the are smart Edge where the heads-up display that's a I think in very often attractive solution it helps to come to really modernize the whole interface with uh, warehouse management systems and drive great productivity improvements and the heck. This place is one way that we can render those those benefits, but they can be done in in in the variety of other ways also and I think Joe can add some additional value how we could do with customers on these sure, so uhm. First of all with the you also asked about SmartPak SmartPak is one of the solutions we have a great expectations for and we introduced that with a large US wage.

Need the customer.

Where we have a very broad deployment with tens of thousands of doctors deployed and we now have several other customers that are piloting this in an advanced mode and we have 1,000 customer now in Europe, which is a significant Milestone to take this to another continent that is broadly deploying this across their European network of thousands of doctors. So, we're we're confident about the smart pack solution being one of the successful ones the other two that are worth mentioning in our uh, i e s portfolio of solutions are or ID RFID we've had this in the prepared remarks has been extremely strong for us for for quite some time. We believe this solution has reached a Tipping Point. The the other one we would mention is Workforce connect as a solution for collaboration that is leverages. Our mobile computers has also been a very strong.

solution for us in a

multiple large customers

Thank you very much.

The next question will be from Andrew but Scalia of berenberg.

Hey guys a question on so you you made the comment that you saw some more share gains in 2019, which is you know, I think that's a fairly well-known but it's sort of a double-edged sword in that. I'm trying to get a sense on your pricing and your pricing power this year's you do you do you have concerns that your competition will maybe use pricing a lever and I guess what fortifies you from from sidestepping that so if I understood you correctly you asking if competition is using pricing as a laborer it against us. Yes, and there's or if that is a concern of yours giving your jeans. Yeah. Well, you know, it's a first it's competitive market, you know, we we are working. In fact, I'm very attractive a competitive markets and prices definitely a factor now, that's not new. I wouldn't say that pricing is any more competitive today?

It has been historically.

You know, we we try to differentiate ourselves by making sure that we have the the best Solutions first and foremost and we tend to win with a premium over over our competitors wage. So, you know, we we I think our variety of reasons, you know, the breadth of our Solutions the The Innovation around us Solutions and and some of the you know uniqueness that we have that others can't match enables us to get that extra premium. It's not internet but it is a meaningful premium and Joe maybe I'll add two things. So we do pay significant attention to the issue of pricing. I'll give you to a specific examples of data points one is in the mobile Computing area where we have the majority of we have we have had some of these jobs are gained speed we talked about earlier. The majority of those deals are done on what we would call the price concession. So a special prices given to a customer's and you have a great discipline within the company that manages

those price concessions

And so we pay a lot of attention to that from a Sales Management perspective the second thing you heard in the prepared remarks that we're introducing some capabilities in the pricing are dead. And there we are deploying some software and capabilities that allow us to manage pricing and a very granular level precisely because this is a very important level for us.

Got it. Okay, that's helpful and Olivier you mentioned, you know, pushing more into the software and services. It's obvious. You know, that's kind of the range or you guys are going on term, but do you care to talk about or do you have an internal Vision or Target of where you see that in percentage of your portfolio? And then I guess what's the strategy you still want to hang out with more product like more more things like smart side before you really go all-in focus on that side of the business or what we continue to see software kind of roll out in tandem with. So, if you look at the the service and software part of the portfolio, it has been particularly this year growing at a higher rate than the overall company average. The reason for this is you start to have a sense is based upon all the new capabilities we are we're launching and and being as a company through

orchestrator of our customers, uh, work flows and and that drives

When increasing in the oven you for this part of the market, but also an increase in the profile for matching profile for the company overhaul because of this month when that could go those markets are large and we excited about our ability to win and play in those markets.

All right. Thanks guys.

This concludes our question-and-answer session. I would now like to turn the conference back over to mr. Gustafson for any closing remarks thank you know, we are committed to supporting our employees customers and partners as we work through the coronavirus situation. We are optimistic about 20 20 and we see much opportunity head. I am grateful and excited that are seba team and Trust Partners have positioned us for continued success. I would also like to welcome the cortex get team and the talent they bring to our organization. Have a great day everyone.

Thank you for calling France is now concluded.

Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.

Monday