Q2 2020 Zebra Technologies Corp Earnings Call
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Okay and welcome to the second quarter 2020 deeper technologies earnings Conference call. All participants will be in listen only mode should you need assistance. Please take note conference specialist by pressing star key followed by zero.
After today's presentation, there will be an opportunity to ask a question.
Please note. This event is being recorded I would now like turn the conference over to Mike Steel Vice President Investor Relations.
Please go ahead.
Good morning, 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 <unk>.
These statements are based on current expectations and assumptions and are subject to risks and uncertainties.
Actual results could differ materially due to the factors discussed in our filings with the Securities and Exchange Commission.
During this call 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 earnings press release and at the end of this slide presentation.
This presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer, and Olivier Leonetti, Our Chief Financial Officer.
Anders will begin with our second quarter results, then Olivier will provide additional detail on the financials and discuss our outlook Anders will conclude with progress on advancing or enterprise asset intelligence vision and trends, we're seeing in or end markets.
Following the prepared remarks, Joe heel, our senior Vice President of global sales will join us as we take your questions.
Also throughout this presentation, unless otherwise indicated our references to sales growth our year over year on a constant currency basis and exclude results from recently acquired businesses for the 12 months following each acquisition.
His presentation is being simulcasts on our website and investors that zebra dot com 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 and thank you for joining us.
First I would like to emphasize that our top priority continues to be the health and wellbeing nobody employees customers and partners.
I am, particularly grateful for all of the frontline workers, including medical professionals, who continue to serve our communities and keep us safe.
The bright and many of our customers workplaces have commenced reopening plans and I am.
Very proud of the ability of our teams to effectively serve our customers and partners, while working remotely through to peak of the pandemic.
In Q2, our teams remain agile and executed very well through depend damage.
Good that's been inspiring for me to see our employees rallied to keep the business and each other moving forward.
Although the financial results, we published this morning to reflect a challenging second quarter environment as we navigated through the peak of the crises.
See Brasil longer term prospects have strengthened as secular trends to digitize, an automated workflows have accelerated with the pandemic.
In Q2, we realized a net sales decline of 12%.
Adjusted EBITDA margin of 18.3%, which contracted by 290 basis points and non-GAAP diluted earnings per share over $2.41.
20% a decrease from the prior year.
As the virus virus spread <unk> end market weakness affected all of our major geographies, particularly our Asia Pac and that in America regions.
The impact was most pronounced in our run rate business, which required our distributors to reduce their inventory levels.
However sales growth in surfaces was a bright spot.
And enterprise mobile computing relatively outperformed.
Well go premium shipping costs due to the pandemic impacted gross margin more than we had anticipated.
We diligently managed discretionary costs across the company to preserve profitability and cash flow.
Despite the challenging environment, our enterprise customers have been prioritizing spend with zebra.
Our solutions are a key enabler of their strategy to digitize their operations as well as supporting a central use cases do independent make.
Large order volume was strong across vertical markets increasing over the prior year.
I would like to highlight some notable Q2 wins from large customers supporting critical use cases.
The leading home improvement retailers expanded their relationship with us by purchasing 10000 of our printers to address multiple front of store used cases, including curbside pickup and in Iowa labeled printing.
They are shift to mobile on demand printing is expected to significantly improve worker productivity and replaced a competitor's stationary printers.
We also secured a competitive take away when we'd a federal retail commissary to deploy more than 7000 mobile computers.
Our solution enables this customer to satisfy multiple use cases, including curbside pickup.
We were pleased to support a large healthcare organization by providing a wide range of mobile computers scanners and printers to.
To quickly ramp their point of care and clinical communication needs as they added 4000 hospital beds to treat koby patients.
Additionally, as expected we began deploying TC seven series mobile computers to you Sps postal carriers in late Q2.
We expect the majority of the deployment to occur in 20 to 21.
We continue to collaborate with these customers to support their essential needs and drive it further improvement in their workflows.
I am pleased that we have substantially completed our global product sourcing diversification initiative, despite modest delays due to depend demick.
Replicating production lines outside of China into broader Asia, mitigates supply chain risk and enables us to avoid tariffs on as you as imports.
With that I'll now turn to call over to alleviate to review our Q2 financial results and discuss our outlook. Thank you on Das let test walk to the PNNT on slide six net sales declined 12.9% in a second quarter.
Which is 12%.
Before the impact of currencies in acquisitions.
Despite our sense decline, we believe that we continue to perform Dimmock cat in these challenging environment.
I haven't Das mentioned large order volume was stronger than to private pay it off.
Our performance was entirely due to a sharp decline in small and midsize business to the channel, which disproportionally impacted printing and data capture.
We are encouraged that distributor inventory levels are empty and sense out trends have been improving.
Our enterprise visit DTN mobility segment has decreased 5.4%.
We grew seven seas revenue and mobile computing on achieved the outperformance.
Our asset entity sheds and tracking segment has been most impacted by the grow by recessionary environment, We sat is decreasing 24.9%.
Printing and supplies each declined double digits seven seas, why so hard to achieve outperformance.
Match and professional services performed particularly well with the growth driven by strong product attach rates over the past 12 months.
Our location solutions and see bribery 10 solutions offerings were extremely soft due to opposing projects activity due to the pandemic.
Turning to our regions in North America sales declined 7%.
Devotees grew and mobile computing was a whole achieve outperformer.
Yeah. When you said, it's declined 13%, we achieved solid growth in services and slight growth in mobile computing, we saw strength in central and northern Europe.
Centers in our Asia Pacific region declined, 21% driven by Koby 19 impacts.
China improved sequentially from Q1 Bell was the largest contributor to the recent our sense decline.
Japan, and Korea wed bright spots in the quarter, where our go to market than investments are delivering results.
Latin America has been hit, particularly hard to bite and then make and macroeconomic factors and declined 33%.
Or geographies declined double digits with the exception of Mexico.
I just had gross margin contract at 360 basis points to 44.1% driven primarily by two points of impact from and favorable business mix.
Two points off impact from premium freight cost updip could beat mitigation and China and pop tart Afes.
Sure to offset by improved services margin.
Adjusted operating expenses declined $44 million from the prior yet.
Improved 50 basis points as a percentage upsells.
This improvement was primarily due to prudent cost management and lower incentive compensation.
We were able to encompass to accomplish this while preserving our research and development projects.
Second quarter EBITDA margin was 18.3% at 290 basis point decrease from the prior period, driven untidily by lower gross margin.
We drove non-GAAP earnings per diluted shares off to do law and 41 cents.
61 cents or 20% year over year decrease which is inclusive of 27 cents negative impact from the transitory effects of paying them freight expense.
And tablets.
Turning now to the balance sheet and cash flow highlights on slide seven.
We generated $222 million of free cash flow into first half twentytwenty.
This was more than doubled the prior period, primarily due to a lower use of working capital and our extended accounts receivable factoring program.
Additionally, in Q2, we made a $31 million incremental investment in locus Orbotechs a market leader in autonomous.
More by robots for 44.
We'll feel meant warehouses.
From a debt leverage perspective, we ended the quarter. After Modesto 1.3 times net debt to adjusted EBITDA ratio.
Which provides us ample financial flexibility.
Turning to slide eight.
We have been successfully navigating this unprecedented global environment.
As I just mentioned.
Our balance sheet is in excellent shape, we lowered that levels and $950 million of availability under our revolver bellowing ample capacity for business investment.
Our capital light business more data flexible cost structure and strong free cash flow profile allows us to present profitability and cash flow in challenging times.
The reliable cash flow generation gives us a competitive advantage as we prioritize and investment in this Nash.
Any environment.
Let's turn to our outlook.
We believe Q2 was the peak impact to zebra from the pandemic.
We remain in the recovery phase and expect sense trends and profitability to improve in the second half of the yet.
We entered the third quarter, we start with a solid backlog.
We have seen an increasing business activity in our deal pipeline is building nicely.
Based on these factors, we expect to treat Q3 net sales to decline between tweet and 7%, which has a meaningful sequential improvement from Q2 trend.
This outlook assumes an approximately 50 basis point negative impact from foreign currency changes.
We will continue to provide preserve profitability what doing no onto the business.
This enables us to prioritize strategic investment so thats, we imagine stronger as the market rebounds.
We believe Q3, adjusted EBITDA margin would be approximately 19%, which has shoes lower operating expenses and a lower gross margin, reflecting high end large order mix and approximately $9 million of transitory premium freight expense.
Non-GAAP diluted EPS is expected to be in the range of $2.65 to tubular and 95 cents.
The premium freight cost expectation equates to 14 cents EPS impact.
You can hear of them modeling assumptions on slide nine.
Not that our outlook does not include any project that reached reserves from the pending acquisition of Texas.
On Das who will discuss the strategy acquisition in a few moments.
With that are we've turned the court back to under us to discuss our enterprise asset intelligence vision and end market trends.
Thank you Olivia.
We are excited to announced the acquisition over Texas. This morning.
Which we expect it to close by early Q4.
Reflects it is a leading provider of intelligent workforce management task execution and communication solutions for the retail foodservice hospitality and banking industries.
Combining reflects this market leading platform Weve cbres complimentary software offerings, including Cebra prescriptive analytics and workforce connect provides us the unique opportunity to unify the store associate experience.
We also expect that Cebra scale vertical market expertise in go to market footprint will drive substantial synergies not only in retail but in other key vertical markets such as healthcare.
Reflects is a high growth recurring revenue business with sales of $6 million to $6 million in 2019.
Which doubled over a three year period.
And the gross margin profile, approximately 20 points higher than Cbres corporate average.
The next slide illustrates how this acquisition fits into our broader vision.
Slide 12 highlights how we are building our capabilities as the solutions provider.
Our deep understanding of workflows and unmatched access to frontline operational data from our vast installed base uniquely positions us to solve complex challenges at the edge.
It is our top priority to invest in software solutions and services that help our customers leverage real time data to better orchestrate their workflows and gained a performance advantage.
Methods for sensing analyzing and acting on operational data from the front line of business are transforming with emerging technologies, such as computer vision and machine learning.
Increasingly large volumes of data or generated and captured from our products.
Enterprises are asking us to help them put that data to work by amassing disparate points of information to drive actions to their frontline workers in near real time.
Our intelligent edge solutions, including our smart X and Motionworks offerings demonstrate how we are enhancing the value proposition for our customers by addressing a wide variety of use cases across their business.
This evolving suite of solutions enables as zebra to fuel our customers workflows, we data so they can be fully optimized.
Reflects his capabilities will be enhanced when they are combined with cebra prescriptive analytics.
Work through collaboration and physical inventory software solutions.
For example reflects this can provide dynamic prioritization of tasks extending across a broader set of data driven activities such as stocking shelves, receiving your truck well delivering an order curbside when integrated with our zebra prescriptive analytics and workforce connect applications.
Ultimately through this acquisition, we expect to customers to find even greater value in equipping all of their associates with mobile computers.
On slide 13, we highlight the primary vertical markets that we serve.
We are excited about our longer term opportunities in our end markets as customers are driven to improve their technological capabilities in an increasingly on demand economy.
Since our last quarterly update we are seeing improvement in this challenging global environment. Although it is still a mixed picture depending on the sector.
In health care, our fastest growing vertical clinical care remains critical and is the primary areas Cebra serves.
Our healthcare solutions help hospitals flex their capacity needs as the pandemic evolves.
Our solutions are being used in labs and drive through testing facilities to provide safe and efficient care.
Non critical care in elective procedures are assuming.
Longer term, we believe the need for increased visibility into the entire patient journey will drive increased demand for our solutions.
Approximately two thirds of our business in retail is to mass merchants grocers and retailers, who have been prioritizing investment in our technology for their omni channel fulfillment.
Ecommerce and buy online pickup at store transactions have increased dramatically through dependent make.
Department stores and apparel retailers have been re opening the doors, which has been critical to dose heavily reliant on brick and mortar sales.
In the transportation and logistics space strong E Commerce growth continues to drive parcel volumes and last mile delivery, which is favorable to cebra.
Conversely, passenger airlines rental car providers and parts of the distribution industry, our resuming activity.
Yet for firm capacity.
The manufacturing sector continues to be the most impacted in the current environment with Cobiz 19, and global trade attentions.
Discrete manufacturers in aviation auto and discretionary specialty goods has been particularly challenged during the heart of the crises.
Many segments within process manufacturing, such as food and pharmaceutical companies have been less impacted.
In closing, we our success successfully navigating through this challenging environment and are confident that our business fundamentals and strategy our sound.
By continuing to focus on advancing our enterprise asset intelligence division and addressing our customers' needs, we expect to to emerge from this crisis in the stronger competitive position.
We continue to be very optimistic regarding our longer term prospects as secular trends to digitize and automate workflows accelerate with a pandemic.
Now I'll hand, the call back over to Mike.
Thanks, Anders will now open the call the Q anyway, 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 answer session.
Good question you May Press Star then one on your touched on.
If you are using a speakerphone please pick up your handset before pressing a key.
Withdraw from the question Q. Please press Star then Q.
The first question comes from Andrew Scalia Berenberg. Please go ahead.
Hey, guys.
Dig into your guidance a little bit.
They are tied with your guidance for Q3 and getting to that.
8% EBITDA margin in that I I feel like it it could be higher so I'm wondering your with your topline South our guide where it was or where it is.
Much better than expected.
It really applies not much expansion that gross margins, if thats, what Adam if I'm correct dedicate bricks.
Confirm that and talk a little bit about why like you heard about why wouldnt expect it looked better their margin.
Good morning, I really don't breakout.
There.
Yes, good good morning, Andrew So so you're right we expect in the quarter.
EBITDA margin to be around 19%, so opex as a portion of whole venue will decline year on year and gross margin should rates should decline due to two factors first.
Platinum freight that would be about the point of impacting the quarter, but also I many high level of large deals in the quarter.
We have mentioned that now for two quarters, our business large deal business is doing very well actually coined yelling Yang expected to grow in Q3, and any Q2 and ill hand, the height business as being impacted mainly by the pandemic.
We believe that these trend we not plath.
Spot number one we believe that all run rate is starting to increase.
And we'll keep increasing and an important point on the like for like basin.
Launching as been improving.
Okay.
Okay. So.
So there's margin sequentially will be up.
Correct.
And that if you could just talk about your.
Backlog it sounds like you have a strong backlog anyway, you can quantify that like what is it is about.
Q3, they're very much since a large orders are.
Okay got you some potentially larger orders is provides.
Additional commentary on that.
Yes, the we entered Q3 with a solid backlog position.
It was so.
Quite quite strong considering the overall environment, but I was driven by the high proportion of larger deals. So we've seen a lot of our larger customers.
Particularly in retail and TNL.
Accelerate their investments and they also then in this case gave us the orders prior to the start of the quarter.
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And that gives us obviously, a great deal of confidence in the outlook, we gave for Q3.
Joe I don't know if you have any further comments here.
While we have.
Strong backlog position as Sanderson order you said.
Some of the project some multi quarter. So we do have some backlog already building for future quarters, but it's too early to determine how strong relatively our future quarter backlog Toby.
Got it but just great. Thanks.
The pipeline for for.
Q4 is good.
So we were we feel encouraged about kind of David.
The way that the market seems to be recovery and the final comment on who were not giving of course a guide for Q4.
Too many uncertainties at the moment for obvious reasons, but we believe that Q4 from a whole venue standpoint, and profitability standpoint will be an improvement a whole lot youve to treat.
All right here.
Your next question is from January City, as Needham and company. Please go ahead.
Hi, good morning.
Actually I have is just.
As we've gone through the pandemic and seeing the impact on brick and mortar retail E. Commerce Im wondering if you can talk a little bit about the changes in customer behavior. I mean, you're you're you. If you could talk in terms of things that you see changing in them.
Market as we start coming out of this what do you see it doing to the to the business.
I assume you're seeing some early indications of this things like ship from store and whatnot.
Yes, I'd say in this environment, our solutions have become even more critical for our customers than they were before and we are uniquely positioned to empower frontline workers across all our end markets and so that the I'd say the crisis has been accelerating a number of secular trends.
Around digitization and automation and.
Think that probably spans all our vertical markets all four key vertical markets.
If you dig in a little bit deeper on the retail I'd say.
Sure.
Rick Grocers, which were.
Certainly our.
Large part of our customer base before Etailers brochures mass merchants are about two thirds of our business but.
The gross growth in just grocery revenues, but particularly buy online pickup in store has been quite significant and.
We've seen grocer group grocers across the particularly in the U.S., but of course across certainly Europe and to us invest materially in enabling scaling up their ability to do.
Omni channel, particularly buy online pickup at store. So that has been a a big big change I think byline pickup at stores gone from being more of the and niche application before to now mainstream.
And I'd say.
Across the board in retail that the.
Customers, who who say were in segments that were struggling a bit more before or during the downturn I think everybody recognizes now that they they can't be a 100% reliant on.
In store purchases that omnichannel and the ecommerce sites of their businesses needs to.
Grow or expand.
So if we see people spending more more more more to give me more attention to kind of omnichannel part of their business on health of able to to respond to.
Situations like Dawn, we have in Q2.
Maybe I can add one or two things.
That was the Jo mill speaking.
Generally speaking I'm besides.
The byline pickup in store productivity and resiliency are at a premium for retailers and think not only at the store, but also the warehouses.
So the types of solutions that we have.
Improving productivity warehouses, where theres less reliance on workers to do tasks, including things like the investment that we made and locus robotics are going to be an increasing trend in retail, which also helps improve their resiliency when there are.
Incidents for example in a warehouse and this also extends to contact free solutions. One of the features of BOPUS is that its contact free and there are other contacts the elements of the retail interaction that we think will be here to stay for example payment transactions or contracts, we kiosks as opposed to.
Interaction with set with workers. So those are a few other trends that we're seeing that generally benefit us retail.
And my follow up question is on reflects is how long have known them and is this acquisition.
Does it feel in some areas of your solution set that maybe where you had some holes and is the is there any customer concentration with and reflects us that you can talk to thank you.
Yes. So first we were very excited about the addition of the reflects this team to to see brand and that business. We've known each other for quite a long time reflects this has been a premier IC Park partner, obviously bras and.
We have been.
In dialogue with them about this transaction for for some sometime.
The.
Transaction very much helps to augment our enterprise asset intelligence vision.
Of empowering every worker at the edge with insights that drive real time action.
So this is.
Entirely consistent with our broader vision and it leverages.
Our existing software assets and some of our hardware. So if you think of see about prescriptive analytics, which.
Looks at all sorts of data sources to to glean insights and drive actions that can now fuel.
Reflects this actually help.
Engine of driving actions to and.
Our workforce connect can be one other ways that we augment the reflects this platform to have a more efficient way of communicating between.
Employees and workers to to ensure the right person get the white action that the lifetime.
And it Tim of customer concentration gene.
Asset Thats, a lower level of concentration upsells towards a few customers and for next season has been performing extremely well doing dependent make.
Yes, it's obviously, we serve most retail customers to there's lot of overlap and we think theres great opportunities for us to do some cross selling and upselling across the portfolio. If you look specifically at how the customer base of affects US has performed during the locked down.
Two thirds of of their customers were opened and operated like normal.
About one fixed.
It had to some partial shutdown so slowdowns and one six were fully shutdown, but I'll now open.
Your next question it from Paul Coster with JP Morgan. Please go ahead.
Hi, Good morning. This is Paul Chung on for cost Sir Thanks for taking my questions.
So just a follow up on on reflects this is it's kind of somewhat of a departure from there.
Your typical acquisition as it's mostly software.
So we kind of expect a shift to the software to continue and if so if we think about gross margins longer term would you know should we expect kind of a structural step up to your current gross margins of 47% Azure strategy evolves I've a follow up.
So first I think the.
The acquisition of reflects is very consistent with our.
Broader approach that we've talked about for some time to two lined with our strategy of either.
Dr. driving growth in our core identifying try and companies that expand our leadership into core.
Or rapidly grow in the near adjacent Ses or accelerate the enterprise asset intelligence vision.
And the effects is fits into the accelerating be enterprise acid.
Intelligence Division.
I don't think we don't think of it as a big departure from how we have the thought about the business or how we have.
Executed over last few years softer has become a bigger and bigger part of it.
The last three acquisitions now including.
Reflects this have been pure software acquisitions, although I'm, not saying that that by any means is going to be.
Yes, that's the only thing we're focusing on for for the future, but we are building more and more softer assets and software capabilities and even internally more than two thirds of our engineers are software engineer. So software. So clearly a very important part of how we deliver value to our customers. Even if that is as a standalone software offering or essay.
More integrated solution between hardware and software.
We believe that the assets will indeed increase the overhaul monitoring of the business I mean, not only because it's it's software, but also because of the impact between AV on the hardware part of the business as well so very synergistic from a revenue and margin standpoint.
Okay, Great and then just on your your SMB channels or you are you starting to see.
Demand pickup in July you know as business start to to reopen.
Have you also kind of seen some consolidation in the channels, maybe some of the smaller players kind of given some liquidity concerns. We've we've been hearing about and how does that kind of impact your pricing over time in your view. Thank you.
Yes.
Joe comments here also after is but we have seen the I guess first stabilization and.
You saw signs of improvement in our run rate business into which we tend to kind of talked about them as a run rate and SMB as being the same but are not necessarily the same but.
It was I think the.
To be segment was harder hit by the short shutdown most SMB companies were not deemed essential and.
Therefore, we're Qatar shutdown harder and we have also more manufactures that's part of our SMB or run rate business.
But we are seeing them.
Returned to two more more healthy outlook and sequential growth.
Results say that are.
We worked hard to make sure that we maintained healthy inventory levels within our channel. So I when sales out numbers went down little bit in Q2, two sales in went down more so the end markets were somewhat healthier than our sales numbers would indicate.
Now we run it positions to start growing with with them as the economy expands.
Two to two additional comments.
Remember that nearly half of our businesses outside the U.S. and in regions.
Including Asia as well as in Europe.
We are seeing the run rate business improve whereas in the U.S., it's still a bit too early to say.
But we have sustained improvement, but for example in.
Several countries in Asia, we are seeing growth in our run rate.
Second in terms of the channel themselves.
The it it's fair to say that our camera business among our larger partners.
Being stronger than it has been among our smaller partners.
It may be too early to speak of a consolidation that it could be but but at least that is what we're seeing.
Thank you.
The next question is from Keith Housum as Northcoast Research. Please go ahead.
Good morning, gentlemen, I'm glad to hear the the large deals are holding up strong I guess on this very secure are you seeing any large deals being pushed off because of the current environment or are you finding that the prioritization of these projects hold up better than I guess, where they might see for other products are projects.
Yeah, we have seen lot larger deals.
Push into future quarters.
More dependent than on the type of customer. So if you know some would be retailers that have to shutdown altogether in Q2 they they.
Tended to push if they had a bigger orders on the books into into future quarters.
Another example will be around say, RF, I'd, which often requires more in store.
Activities and also focused more on a.
Apparel or fashion retailers, so anything that had to do with where we had to go into our customers facilities to to.
Set up and the implemented solutions, what would it get pushed but.
That's been offset by other customers that were operating in have to really scale up there.
Our operations to deal with increased business that we're getting as part of the shutdown.
Great Thats see that and it is you look at.
Yeah, I guess intelligent AD solutions Gator can you discuss the progress you had with those solutions during the quarter versus the services growth I think if I heard right. The managed services were grew during the quarter, but unintelligible solutions do like Savannah, Most importantly.
Yes, I think are.
Many of our software solutions did very well.
If you look at the safest FEIBA prescriptive analytics as an example, we were able to win several new customers in Q2.
And we were able to to win and implement those customers without actually having to go on site. So that was one of the benefits of having a softer solution like like that.
But other intelligent edge solutions like that that require.
On site.
For concepts pilots and so forth they tended to be pushed out and.
We're not getting a growing the way we had expected.
Great. Thank you.
Your next question is from metal Marshall Morgan Stanley. Please go ahead.
Hi team. This is Eric on for me to thanks for taking our question, maybe we could just go back to the retail side.
Lastly, I mean, given some of the drivers you had noted do you expect any sort of digestion period with the ecommerce or grocery customers. Following the investments that they they have been making or or do you think that kind of those investments just continue to scale.
I've kind of the economy recovers.
Yes the.
I'd say the large you know the larger orders that we've seen in retail into last the last quarter plus.
Our really to help.
Existing customers scale their operations. So is that it's not they're not necessarily building ahead or anything like that so I don't see and need for them to say pause or catch or.
Deploying catch up on operations side with what they have deployed.
But you obviously, there's many many customers and some have different profiles than others, but generally they're just basically trying to.
Deployed devices into existing use cases, where they scale.
In line with the number of headcount they have with the revenues to half of those applications.
Got it that's very helpful. And then maybe just a quick follow up and and kind of returning to some of the gross margin impacts from the larger deals was was the initial shipments that kind of U.S.P.S. also a factor in there and then should we maybe be expecting a similar impact to gross margins just as of.
Those shipments really ramp up into the first half of next year.
So.
Q2 ad.
Yes, any Sps all the does all the was cheap that the ended the quarter so hard to achieve limiting your two to the quota.
Sps is ramping in Q3, but as we've said before.
Large multi tier U.S.P.S. all the would be shipped next year, probably in the first half of next year.
And I'm not willing to talk about margin of course of Sps today, but usually a large indians by lower margin then run rate so it would impact.
The company rate.
Got it that's helpful. Thank you.
Your next question from Brian Drab of William Blair. Please go ahead.
Hi, Thanks for taking my questions I'll just ask one question at the at the moment.
And I apologize if you've discussed this to some extent up there simultaneous calls going on but no you're expecting about 20 million and costs associated with a little the manufacturing out of China that our adjusted out of the.
Adjusted EPS figure, but.
You have other costs that you're incurring this year I guess, there's about 19 million a premium freight and other cost in the second quarter.
9 million in premium premium freight and that are coming in the third quarter and just as we're trying to assess.
This year that likely won't be present next year, what is the estimate for total premium freight and in 2020 and other costs in 2020 that likely won't be present in 21.
For example, like incentive comp maybe down this year that comes back next year and what I can't remember what what was the situation. The first quarter was their premium freight in the in the first quarter as as well.
So its let me try to cover the key points on on this so if you look at a going forward in time off transitory cost, we're now down and our supply chain did an amazing job diversifying our supply chain out of China. So this work is done and will.
Now going to have any impact due to time leaf going forward. So thats not part of Q3, and obviously for PNM. So that's point number one tandem the two working to have some impact due to planned I'm not freight in in Q3 I mentioned in my prepared remarks, that's about 9 million.
About 80 basis point worth of off of margin rate that will decrease towards the end of the yet and we believe that these trends should now stop going forward. So that would be a second high 10.
When he comes to Opex, we've been able to manage opex and adjust opex as I have a new was declining we keep doing that in India. Yeah. Now you are asking do we have some of those opex reductions, which are going to be permanent.
We believe so.
It will be premature to mention a number today, because we want to keep investing in the business as well.
Okay, but olivier affecting this follow up.
What I'm driving at is.
The transitory costs.
What's the total.
Estimate for 2020.
And then that we can model 21, you're not you called out 19 million in the second quarter you call. It 9 million in the third quarter, yet what those costs.
And also including terrible caught.
It seems like Theres going to be like 50 million like five euros or something like in that range of cost this year that.
We shouldn't expect and we shouldn't model for for next year.
And your numbers century.
Total yeah, Yeah, Youre number is about right I mean, if I want to give you and the phasing and maybe we can take that after the close of today.
He finpac in Q1 was about to point adapts is trying to treat entry to the impact of top Heath and premium freight was about two points.
I mean freight impacting Q3 would be about a point and we believe that all those transitory costs to a large extend would be gone by Q4 onwards, and we take the details after this call as well.
Sounds good Okay I'll talk to you later, thank you. Thank you.
Okay and if you have a question. Please press Star then one the next question comes from Richard Eastman of Robert W. Baird. Please go ahead.
Yeah, It's just a.
I'm looking kind of at the Decrementals kind of similar.
Line of thought here, but the decremental here in the in the second quarter at the adjusted EBIT line was about 40% and that's obviously absorbing.
Some of the the tariff costs, the freight cost probably offset by some opex reductions.
Is that is the 40% decremental kind of run into the third quarter.
And then presumably and maybe.
Fingers crossed your.
Decline in the fourth quarter with some of these transitory costs out of the number.
Youre right.
Rich if you look at today in Tim If you look at Q2 in Q3, we believe we're going to be able to scale opex as a portion of revenue in about the same level.
And Dan intend Mcmahon gene were going to have.
Overall does two quarters deep same impact of Ah.
Large bead mix, which will impact.
Gross margin at that we believe that largely those trends will we stop as we enter into the fourth quarter. That's why I indicated doing an earlier question that profitably key in in Q4.
We'll set than the increase harlots used to treat and Q2.
Okay. Okay, and then just maybe a quick thoughts around what appears to be maybe more cyclicality in the printer business in general.
T.
Thought being that is it just so that is that business impacted much more by you know as run rate business through the channel.
Or is it just simply easier to.
For a purchase over printer.
Given the given the payback on the printer just deferred for a couple of quarters I mean, how how do you kind of view that [noise].
On the on the printer so the business.
Yes, the printer business is a more going to heal has a much higher proportion of all the run rate as part of his revenue stream. It supports more SMB and manufacturing customers.
So you get the.
Profile of the customer base is it was more exposed to koby 19 shutdowns or slowdowns.
I'd say that dig into the printing portfolio, a little deeper our card printing business was particularly hard hit.
Our printed they do.
They support events UBS, they want a lot of events in Q2 batches for employees driver's licenses.
All sorts of things that were hit more harder, but we did start to see but it could manufacturing opportunities to resurfacing Asia Pac later in Q2.
And if you look at.
Our.
Supplies business come time had a very strong Q2 and grew its a vial monitoring solutions for for existing vaccines, and we were doing things being seen in emerging markets for Koby 19 test kits and that one once we get a proper vaccine that we see opportunities for that to continue to do well.
We we also worked here on on making sure that the channel had the appropriate inventory positions. So we did reduce inventory in the channel, but kept the days on hand.
Just the stable. So we are coming out of this with a healthy inventory position, where we can grow the business now in line with with the how the economy gross but yeah, we do.
We do believe that we actually gained share in printing in the first half of this year. So based on all our data points. We believe that we actually gained some share.
And one further data point just on that.
In China are printing business is rebounding faster than our other businesses. So that gives you an indication that.
There is a positive trend will likely come back at the end of this cycle.
Okay, Alright, very good thank you.
So last question comes from Jeff Kessler of an aerial capital. Please go ahead.
Thank you. Thank you for taking my question.
First firstly with regard to your Tam.
In a couple of years ago, you gave.
You gave a number with regard to some of your nine or $10 billion out of.
Out of out of the total market in the I'd see area clearly with some of the.
With some of the.
New software that you've developed internally, but also with some of these acquisitions.
You you've expanded the total available market to achieve that you can play is and also the that the niche if you want to call that niche that you are actually directly affecting can you speak to how.
Particularly this this last acquisition that you just announced.
Can you just the discussed the size of the marketplace that you are now affecting relative to where you were just a couple of years ago.
So.
Yeah, we've talked about our core markets being about $10 billion in size and that the we have.
We've had an incremental 15 billion market size in our adjacent markets right.
[music].
The the.
And some of those into adjacent markets that took us from 10 to 25 billion in total size we include tablets.
Supplies RF I'd.
Our many of our software solutions, our new and there is no this little difficult to save a Tam is because they.
You could calculated by safe every.
Retailer on on the plan is where to deploy it to 10 would be very very large.
It's not quite that today, but it is a substantial tam and its and its a higher grew faster growing market than our core markets. So clearly this this expands our addressable markets and as positions us to participate in additional high growth markets, where we also get attractive synergies by being.
It was across seven upset.
Okay.
Thank you and second follow up is.
Yeah, Weve, you've talked about the the recovery in your business.
But with that they're the fact remains is that at least in the United States, maybe not in Asia or in parts of Europe with it seems the recovery from the virus faster we seem to be still.
Somewhat of a state of a mess here.
And it may be some time before.
Before the virus.
I was business to operate.
At a more normal pace.
Yes, it's the improvements that you're talking about in the third and fourth quarter. How much of it is you know is the is basically based in the fact that.
That Asia, we parts of Asia, and and parts of Europe are actually recovering.
And hoping you and relative to the U.S. and is and as a percent as your is our year end use your geographic.
Hi, good when you shift at all.
In the second half of this year in perhaps into the first half of this year until there's a.
Some type of vaccine too.
More importantly, the U.S. kind of gets its Covance 19 Act together, if you want to call that.
I think you summarized it well and we see all the regions improving in Q3, and <unk> and Q4 correlative to Q2 Q2, but the main recovery is outside North America, you're absolutely right.
Okay.
Yeah.
Although I think in the second half we have a substantial number of large deal our North America centric.
North American customers having.
Increased demand for the products that they have been buying from us previously and and so I think our overall geo mix.
Well not shifts that much even though the recovery in particular on the run rate will be stronger outside.
Right right.
Thank you very much I appreciate it.
This concludes our question answer session I would like to turn the conference back over 10 minutes or so.
For any closing remarks.
Thank you so to wrap up I would like to thank our employees customers and partners who are working the frontline during this challenging time.
We're also looking forward to welcoming the reflects his team once we close the transaction.
Stay safe everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.