Q1 2021 Zebra Technologies Corp Earnings Call
[music].
Good day and welcome to the first quarter 2021, Zebra technologies earnings Conference call.
All participants will be in a listen only mode.
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After todays presentation, there will be an opportunity to ask questions.
Please note this event is being recorded.
I would now like to turn the conference over to Mike Steele, Vice President Investor Relations. Please go ahead.
Morning, and welcome to Zebra as first quarter Conference call. This presentation is being simulcast on our website at investors that zebra dot com and will be archived there for at least one year.
Slide to convey is that the forward looking statements. We make today 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 SEC filings.
During this call we will reference non-GAAP financial measures as we describe our business performance you can find reconciliations at the end of the slide presentation and in today's earnings press release.
Throughout this presentation unless otherwise indicated our references to sales growth are year over year on a constant currency basis and exclude results from recently acquired businesses for the 12 months following each acquisition.
This presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer, and Nathan Winters, Our Chief Financial Officer.
Anders will begin with our first quarter results.
<unk> will provide additional detail on the financials and discuss our revised 2021 outlook.
Anders will conclude with progress made on advancing our enterprise asset intelligence vision.
Following the prepared remarks, Joe heel, our chief revenue officer.
He will join us as we take your questions.
Now, let's flip to slide four as I turn the call over to Anders.
Thank you Mike.
Good morning, everyone and thank you for joining us.
Our team delivered exceptional first quarter results with strong performance across the business, resulting in record sales and profit.
For the quarter, we realized adjust.
Adjusted net sales growth of 28% or 25% on an organic basis.
And adjusted EBITDA margin of 25, 3%.
620 basis point year over year improvement.
Non-GAAP diluted earnings per share of $4 79, a.
79% increase from the prior year.
And strong free cash flow.
Our teams executed well to satisfy a stronger than expected recovery demand from smaller customers through our distribution channel.
Continued strong demand from large customers to digitize and automate their workflows in an increasingly on demand economy.
We realized strong broad based demand with double digit sales growth across our four regions.
<unk> major product and solutions category.
Well as in all of our vertical end markets.
We also significantly expanded profit margins driven by favorable business mix and lower travel expenses, while at the same time, we continued to invest in initiatives to drive sustainable profitable growth.
Given our momentum and pace of innovation, we are increasingly confident in our growth prospects.
With that I will now turn the call over to Nathan to review, our Q1 financial results in more detail and discuss our improved 2021 outlook.
Thank you Anders let's start with the P&L on slide six.
In Q1, adjusted net sales increased 28, 3%, including the impact of currency and the reflects this acquisition and 25% on an organic basis.
Reflecting broad based demand for our solutions.
Direct sales to large customers grew double digits, and we saw even higher growth from smaller customers through the channel, partially driven by pent up demand.
Our asset intelligence and tracking segment, including printing and supplies grew 21, 4%, while enterprise visibility <unk> mobility segment sales increased 26, 8%.
Driven by exceptional growth in enterprise mobile computing.
We realized strong double digit growth in services and software and also had strong growth in our RFID solutions, which is beginning to rebound from the depths of the pandemic.
We recognized a double digit growth in all regions in North America sales increased 28% with mobile computing printing services and supplies each growing double digits.
In EMEA sales increased 22%.
With solid growth across all sub regions and solutions offerings.
APAC returned to growth with sales up 19% led by strength in China, Australia, and New Zealand and India.
Latin America also returned to growth in all sub regions with sales increasing 31%.
Adjusted gross margin expanded 370 basis points to 48, 9%.
Primarily driven by favorable business mix and higher service and software margin.
The favorable year on year impact from China tariffs was offset by $11 million of incremental premium freight charges.
Adjusted operating expenses as a percentage of sales improved 280 basis points.
We have been accelerating high return investments in the business, while prudently managing discretionary costs.
First quarter adjusted EBITDA margin was 25, 3%.
620 basis point increase from the prior year period, reflecting higher gross margin and operating expense leverage.
We drove non-GAAP earnings per diluted share of $4 79.
A $2.12 or 79, 4% year over year increase.
EPS growth also benefited from lower interest expense and a lower share count partially offset by a slightly higher tax rate.
Now turning to the balance sheet and cash flow highlights on slide seven.
We generated $214 million of free cash flow in Q1.
This was $119 million higher than the prior year, primarily due to increased profitable growth.
In Q1, we had $13 million of venture investments in two companies that provide real time asset visibility and artificial intelligence solutions.
Our balance sheet remains strong from a debt leverage perspective, we ended Q1 at a modest 0.9 times net debt to adjusted EBITDA leverage ratio.
Let's now turn to our outlook.
We entered Q2 with a strong order backlog and healthy channel inventory levels.
We are encouraged by the broad based robust demand, we're seeing across virtually every dimension of our business as.
As customers step up their plans to invest in digital transformation.
This momentum along with our sales pipeline gives us the confidence to provide a strong Q2 guide and to substantially raise our full year outlook.
In Q2, we expect adjusted net sales to increase between 38 and 42%.
This outlook assumes a 450 to 500 basis points additive impact from the acquisition of reflects us and foreign currency changes.
We anticipate Q2, adjusted EBITDA margin to be between 21 and 22%.
Which assumes gross margin expansion and operating expense leverage.
It also assumes approximately $18 million of premium freight expense, which is roughly the same gross profit impact we realized in Q2 2020 from the combination of premium freight co.
COVID-19 mitigation and China tariff impacts.
Non-GAAP diluted EPS is expected to be in the range of $4 to $4 20.
For the full year 2021, we are raising our guide for adjusted net sales growth to be between 18% and 22%, which reflects our increasing optimism for solid growth in the second half of the year, despite supply chain constraints from certain product components.
This outlook assumes an approximately three percentage point additive impact from the acquisition of reflects us and foreign currency changes.
We have raised our expectation of full year 2021, adjusted EBITDA margin to be between 22 and 23%.
Which assumes operating expense leverage and meaningful gross margin expansion from the prior year.
Despite an expectation for premium freight charges of $50 million to $60 million as we work to mitigate global supply chain challenges.
We now expect free cash flow to be at least $850 million per the year due to our revised outlook for increased profitable growth.
Please reference additional modeling assumptions shown on slide eight.
With that I will turn the call back to Anders to discuss how we are advancing our enterprise asset intelligence vision and the markets we serve.
Thank you Nathan.
I am encouraged by the strengthening demand across our business, which allows us to increase our 'twenty to 'twenty one outlook.
Our team has done an outstanding job navigating us through the pandemic.
Slide 10 illustrates how we are working with our customers and partners to advance our enterprise asset intelligence vision.
By leveraging <unk>, leading portfolio of product solutions software and services our customers can overcome some of their most complex operational challenges and transform their frontline workflows to achieve higher levels of performance.
Businesses across all industries are adopting solutions that digitize and automate their operations at the edge to help them compete more effectively in today's increasingly on demand economy.
With our innovative solutions, our customers frontline associates can now anticipate and react in near real time, utilizing insights driven by advanced software capabilities, such as machine learning prescriptive analytics and computer vision.
We have been making solid progress integrating with Texas market, leading workforce management and real time task management solutions with our existing software applications to optimize the experience for frontline workers.
As well as reduce complexity for the corporate teams that support them.
Our value proposition is to ensure the best next action for every worker is easily identified assigned and completed leveraging artificial intelligence gathered from real time inventory or point of sale data.
We are receiving very positive feedback from customers on the software portfolio enhancements, we have planned for this year.
Will enable a unified experience across labor planning tasking and workforce communications.
We also continue to invest to accelerate the go to market attraction of a growing suite of solutions.
Slide 11 highlights how the pandemic has accelerated trends that have been driving our business.
Consumers have been racing their service level expectations in this on demand economy.
Enterprises are investing in zebra solutions with an increased sense of urgency due to a significant increasing omni channel shopping.
Our cash for global E Commerce sales and parcel shipping volume to double over the next several years.
Second trace becoming increasingly important for a wide range of use cases.
Health care patients seeking a more digital experience.
Automating strained workflows with proven technology provides an attractive return on investment.
The benefits to the enterprise also include increased productivity and efficiency as well as higher customer and patient satisfaction.
These opportunities are not exclusive to large enterprise customers.
We are seeing similar trends with small and medium sized businesses.
To capitalize on the favorable e-commerce trends I just mentioned.
Yesterday, we announced the launch of <unk> first cloud connected label printer designed specifically for the small business home office customer fees.
Featuring eco friendly cartridges and mobile application software to easily design and print labels from anywhere.
With the launch of the VSP series printer, we enter an approximately $400 million market within attractive recurring supplies revenue stream.
We have been innovating at a record pace. Despite the pandemic and this sohu label printing offering is a proof point of our focus on expanding into attractive adjacent markets, where we can provide a differentiated offering.
Now turning to slide 12.
We understand the operational challenges our customers face in the increasingly on demand economy.
As a trusted strategic partner businesses of all sizes in a variety of end markets turn to Seabra to help optimize end to end workflows.
In retail there has been a sharp increase in omni channel and online shopping.
Attained business retailers need to deliver goods in a timely manner will make them available for pickup when promised.
This challenge a wide range of retailers have been prioritizing investment in <unk> solutions that provide higher inventory accuracy and utilize their labor more effectively.
For example, a leading UK supermarket chain recently purchased over 5000, Zebra Z 610 mobile printers.
Nearly 1400 stores and added thousands more TC 50, twos pieces Seventy-seventh N P. S twenties, who their existing zebra fleet of devices to enable inventory management omni channel fulfillment and other critical use cases across their operations.
They are also evaluating <unk> workforce management and scheduling software applications, we use across all of their stores.
Additionally, we have received very positive feedback from a large fashion accessories retail customer who has adopted a new option for seabra prescriptive analytics to feed directly into our reflects this workforce and task management software offering.
At the retail customers are planning to adopt this capability soon to leverage the synergistic benefits.
In transportation and logistics strong E Commerce adoption continues to drive exponential growth in parcel volumes, putting pressure on supply chains, even as they hire more workers.
This is one of many reasons a wide variety of companies are attempting to digitize their operations with our technology.
As large car rental company recently began deploying thousands ETP six rugged tablets at their airport locations to enable mobile associates to perform point of sale chicken for improved customer service.
In healthcare the need for real time visibility into the entire patient journey as well as the demand for technology that ensures safe and efficient care continued to make health care, our highest growth and market opportunity.
The top ranked U S Hospital system recently selected <unk> mobile scan and print solutions to integrate with their new electronic health record software application, where patient bedside care, which enables positive patient I'd specimen.
Collection and medical medication verification.
<unk> easy to use mobility solution and device management applications allows this customer to streamline clinician workflows increase accuracy and enhanced safe patient care.
Although the manufacturing sector has been hardest hit in 2020 sales rebounded to double digit growth in Q1.
We are focused on increasing automation and workflows for our customers and have been recognized as a thought leader in this market.
We recently secured a takeaway win with a global food manufacturer, who purchased more than 1000, Zebra <unk> 93, mobile computers, and <unk> 51 tablets.
This customer has been equipping an increasing number of associates with technologies to enhance their manufacturing shipping and receiving workflows.
Of use functionality lifecycle management and support were notable selection criteria cited by this customer.
In closing.
We are performing well in our primary end markets and we are excited about the emerging prospects, we see in newer markets to digitize and automate workflows.
Now I'll hand, the call back over to Mike.
Thanks, Anders 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.
Yeah.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
You're using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two and again, please limit yourself to one question and one follow up if you have additional questions you may reenter the question queue.
This time, we will pause momentarily to assemble our roster.
And the first question today will come one day.
Tariffs with UBS. Please go ahead.
Hi, good morning, everyone congrats on the quarter.
You.
Thank you.
So you had mentioned that.
Some of the first quarter sales strength was.
On pent up demand from your smaller customer base.
But just thinking about the current order strength youre seeing as you progressed through the second quarter would you still characterize some of that is pent up.
Demand or are we kind of past that at this point and it's really more reflective of your underlying run rate demand if you will.
But first we are very pleased with our first quarter results here in the outlook. We could provide we the business is supported by some strong secular trends that are.
Have accelerated during the pandemic like omni channel and so.
Most companies today are very focused on automating and digitizing their businesses.
For us debt that resulted in double digit growth across all regions.
Across all products and solutions as well as all verticals, so very broad based demand for us.
And we did see particularly strong growth from small and medium sized customers and that was partly driven by pent up demand, but it's only partly driven by pent up demand.
But we'd also saw strong demand from our large customers are larger strategic accounts and I think another factor here was that based on our performance.
I certainly expect that we continue to take share in the market.
Nathan do you want to add something yes. So just on the pent up demand I think you're one is it is an estimate so this isn't a precise deal reconciliation and we think of it as recovering most of our 2020 Miss to our original plan and guidance last year.
And recovering that here in the first half of the year, which is contributing low double digits. Both in the first and second quarter.
Okay that makes sense.
And then.
I think you spoke in the past debt.
Yeah.
Sort of later in the year is when you start seeing sort of the larger projects. If you will larger orders.
Got it.
At this point do you have some visibility there.
Kind of baked that into your guidance in the back half or.
Or should we still expect that there could be some some larger projects that havent taken hold yet.
I think what they have said it tends to be that our visibility into the larger deals or into our pipeline overall increases with time, so they're closer the further into the year, we get better visibility, we'll have to be to the second half into in Q4.
So part part of what Youll see today is that we have gained some better visibility into.
Both both.
We expect the run rate to progress, but also on some other larger deals.
But we don't have perfect visibility. These are clearly that there are various opportunities for.
Deals that we don't necessarily have.
Sport as high.
High likelihood in our pipeline today.
Joe do you want to add something to this.
Yeah, I would say that the.
Large deal momentum has continued.
Evenly throughout the year and we have prospects for large deals in the second half just as we did in the first half.
One of the large deals that youre aware of is the USPS deal, which is of course contributing to our Q2 and Q3.
Great very helpful color, Thanks, guys I'll pass it along.
And the next question will come from Tommy Moll with Stephens. Please go ahead.
Good morning, and thanks for taking my questions.
Good morning.
Or is it sounds like compared to a quarter ago, when when we talked.
Both in terms of geography and end market it sounds like.
Everything or nearly everything is.
It's better than expected a quarter ago.
But if you had to pinpoint maybe.
Maybe one geography or one end market that's improved the most of.
Just as a driver for the raised revenue guidance.
What would you point us to and if I'm mistaken and if there is any geography or end market. That's that's gotten a little weaker over the last quarter that that'd be good to know although maybe it's.
Just based on your tone and comments today it sounds like there weren't any.
And this is a hard question today because.
Sorry, how broad base.
Demand.
We've ever had a quarter, where we've had each of our four regions each of our verticals in each of our main product categories, all growing double digits. So it's hard to.
Pik.
Who stand out as particularly strong or weaker but I love.
Probably just highlight maybe North America is particularly strong as being one of our largest.
Region here, we grew by 28%. So we saw very broad based demand.
So across basically all of our portfolio.
<unk> the entire portfolio, but printing supplies mobile computing RFID services software they were all up double digits and.
And we had strong wins across all all other vertical markets in North America, and our newest vertical the government vertical also demonstrated good good growth.
And I.
I think demonstrates that the investments we've made in both product and the go to market for the government vertical are paying off here now.
On a from a vertical perspective.
Maybe health carriers to want to highlight that it's been our fastest growing vertical for some time and we expect it to continue to be the fastest growing one.
It had a very nice performance in in Q1.
I think the transformation in healthcare is accelerating it started off in acute care, but it's moving into other areas like ambulatory care contact tracing even remote patient care.
And.
Health care patients are now.
Expecting are demanding a more digital experience that they prefer that also.
And our purpose built solutions are critical for health care providers to be able to improve the overall patient journey to.
To drive and to drive greater productivity for the health care providers across their operations.
And some of our solutions in health care also use specific with flow COVID-19 response like drive through testing and.
Vaccinations cold chain logistics and so forth.
Maybe I can add something too if you.
If you look at debt the region's nominally the one that swung the most from last quarter was Latin America.
Latin America was the one that was hardest hit and the pandemic and has rebounded the most but it's also our smallest region.
And in terms of verticals. Another one debt is notable as manufacturing, which was hit very hard independent make as well and we're seeing.
Some good rebound in that area.
I think that the biggest swing that we haven't mentioned yet is one of deal size and customer size right. So notably.
Our run rate and the purchases by small and medium businesses have accelerated and are catching up now to what was the big driver in past quarters of the larger customers investing in.
E Commerce and Digitization, we're now seeing that in the small and medium business, which of course manifest in our run rate.
Thank you both that's very helpful.
If I could ask one follow up Anders.
I Wonder if you could update us on some other pilots you have with retail customers, where all are or at least a lot more of the store associates are carrying one of your devices, what's the progress there.
Are you, making the ROI case to the potential customers.
To what extent does reflects this factor into the strategy there.
Yes, the device for pork for all of us.
It's a big opportunity for us we're very excited about how that's progressing.
We see.
The theme around how most companies wants to automate and digitize their operations S playing a big role in driving this.
Across every every vertical I would say our customers are looking to put technology in the hands of more of their employees and be able to have them be connected and be able to both enter data as well as a react to data.
And we see the ratio reflects this is very synergistic and debt. If you have a mobile device you can now.
Look at inventory stock outs or other information and upload that to their fixes task engine, which now can make smarter decisions can prioritize the highest ROI action and then mobilize that to the right worker at the right time.
Through somebody who then is carrying a mobile device. So it's a very strong synergistic portfolio of debt that adds basically is kind of in that network effect. It adds to the value of both devices both solutions by having both having both under one roof.
Yeah, the progression on deeper penetration is also progressing.
If you go back.
Seven eight years or something large supercenter in retail might've had seven or eight devices and today. They routinely would have maybe 70 or 80, but they may have several hundred employees and we think that having a shared device.
For the for those.
Associates when they're in the store is.
Big objective for let's say the vast majority of our customers and.
That's progressing we have some good examples of where we've provided expanded our portfolio to provide the full range of.
Devices across the price performance curve, and where we've combined and software and devices.
Devices to really enable a much deeper penetration and Joe maybe you want to share. Some examples of this.
Yeah, I'll give you one example.
The connection of our device for all and our SaaS software.
One of the largest retailers in Australia is using our EC 30 devices together with workforce connect to enable their associates to do tasks in the store, but also communicate with one another and that's one of the key use cases, which is by the way also enabled by reflective in the future.
Is to have the associates be able to interact with each other which requires that all of the associates have the device. So I think thats a pretty good example of it.
Great. Thank you both will keep keep our.
Our eyes out for more progress on all those fronts, but I'll turn it back for now thank you.
And our next question will be from Andrew Buscaglia with Aaron Berg. Please go ahead.
Okay.
Hey, guys I was hoping you could talk a little bit more on gross margins in the quarter, which were obviously very strong.
Can you break out what.
You mentioned software and then that reflects this are just acquisition acquisitions in general helping can you break out what that contributed in the quarter.
Yeah, and just as Nathan.
First of all our teams have been executing very well on what we can control and you see that through the gross margin improvement year on year up 370 basis points.
Two thirds of that is related to business mix as well as volume leverage we had in <unk>.
Especially high mix of non large orders due to the recovering small and medium business that Joe mentioned earlier and about a third of that was from expansion of our service margins as.
As well as the reflects us acquisition and most of that coming from expansion within our service our service business.
The one thing to also note as we stated last year, we look at our underlying gross margin trends remained healthy throughout 2020.
We expected the overall margin and we're seeing that play out to improve as the mix has returned.
Got it and <unk>.
<unk> had a particularly very strong gross margins.
49% is that sort of the run rate, where we're looking at going forward I know you have those.
<unk> expenses coming in but.
Yeah.
Is this sort of kind of the path, they're taking a day you think it can grow.
Our expand margins even from that kind of elevated level given some of this.
Software and services integration.
So I think overtime, we do expect for our margins to improve I'd say Q1.
Was it, especially favorable due to the strong mix of small and medium size business, but I think as that as that normalizes to more of a normalized level as we move forward we do expect.
EBITDA margins to improve over time, particularly as you mentioned with the growth and expansion of our software solutions.
Okay, and then maybe this last one because Q2, it's tough getting to that guidance unless you.
I assume.
That's a pretty big ramp in SG&A. So do we expect a step down in gross margins just in Q2 for some reason or given you know given the freight expense.
Yes. So if you look at our Q2 EBITDA guide of 21% to 22%.
It is up nearly three points year on year due to favorable business mix from 2020.
Sequentially. It is down four points most of that is due to lower gross margin as.
As we said as deal size I'd say kind of comes back from the exceptionally high level yet.
Here in Q1, you also have the CRF seasonality.
Tariff recovery in the first quarter, all while lowering gross margin sequentially as well as we do expect higher opex.
As we continue to accelerate investment in our new solutions, both in R&D and go to market.
Okay. Thank you.
And the next question will come from Jim Ricchiuti with Needham <unk> Company. Please go ahead.
Hi, good morning, just.
Wondering if.
What kind of headwinds you might be seeing or anticipating for the full year just as it relates to what we've all been hearing about component constraints higher raw material prices and just along those lines.
Do you anticipate potentially having to take any pricing actions.
Going forward, just given given the supply chain issues.
Yes, I would first characterize the supply chain issues that we're working on is in two categories. One is kind of a logistical bottlenecks and the other one is around the industry wide semiconductor shortages, that's been into price quite a bit lately.
First on the logistical bottlenecks.
That's really caused by an increase a combination of increase in demand.
We combined with a.
A reduction in commercial air traffic. So there are fewer commercial airplanes, which used to cover carry a lot of the commercial.
Freight also.
Then you have add on a little bit of container shortages and port congestion on top of that but.
This has resulted in air and ocean rates pretty much on all our key routes having increased by a factor of two since the start of the pandemic. So.
So we are incurring premium freight cost as a result of this.
And we are prioritizing.
Customer meeting customer expected delivery dates that we have been using leveraging all modalities, so afraid to get our devices and products to our customers, including chartering flights from Europe.
Kinda to Europe, and the U S.
But this has had a negative a negligible impact on.
On revenues and I would say our supply chain team has done an outstanding job of being able to manage this and minimize the impact on the business.
The other issue surround them to semiconductor shortages.
And this impact some of our products more than others.
Our teams are have been doing a great job of managing all angles of optimizing allocations for us.
We have a history of thoughtful contingent contingency planning, which I think is helping us here.
We tend to qualify multiple components, when we can and even has multiple suppliers when practical.
We have seen.
Again modest increases in surcharges related to sourcing these components.
But despite the both of these issues that are not mentioned we are confident in the full year sales outlook that we gave.
The outlook incorporates both of these points and lastly, then on.
On the price.
Action you asked about.
Continuously assess pricing based on the competitive environment. So we always look at that but there's we have no.
No imminent plan of addressing or having just a broader price increase to it to address the supply chain issues.
Thank you and the follow up just on the AI business Anders I'm just wondering how.
What youre seeing in the market in the legacy this legacy part of your business compares with previous recoveries and other economic cycles.
Yeah, we are we had an exceptional quarter for print.
Growth rates for well above average corporate average share.
We saw growth across the portfolio and certainly pent up demand had been an issue here.
Smaller customers.
Through the channel it was recovering quite quite nicely and you'll be also over the last year or so taken some steps to strengthen our go to market around our eco channel channel ecosystem and I think that's made us more competitive and we've been able to accelerate some share gains.
Our printing RFID printing business was also particularly strong and.
Even the supplies business was doing very well.
<unk> was up double digits. So it was a very strong performance across the board maybe also highlight that.
Joe mentioned earlier that manufacturing was up.
Very strongly in Q1 after having had a meal.
Tougher go in 2020 and EBIT beyond that also further debt.
<unk> printing is the most exposed to manufacturing so in manufacturing goes up that that would have a disproportionate impact on our printing business.
Alright, thank you for that congrats on the quarter.
Thank you.
The next question will come from meta Marshall with Morgan Stanley. Please go ahead.
Great. Thanks.
A quick question and some of these smaller customers come back and what are they asking you for that may be different from what they were asking you from before clearly they still kind of faced some challenges in the competitive environment. Just wondering what they're asking you for in particular and then maybe on the health care opportunities just as he move pass.
Some of these kind of COVID-19 boosted use cases, where you're seeing the most traction in use cases there. Thanks.
Yeah, I will start and then I'll ask Joe to also provide some color here.
Sure.
So first on smaller customers and what we are seeing what's different I.
I would say.
Two things Mike.
One is you know.
Irrespective of size I would say pretty much all customers across all verticals are looking to figure out how can they digitize and automate their businesses more and they.
They do look to our type of solutions too.
To connect the physical world to the digital world to really help them connect that physical work flow those workflows into applications and automate them better so that is.
Broad based theme across basically all sizes of customers and verticals.
The other point.
Point that would be.
Our larger customers, who are generally able to.
You know pivot to a COVID-19 operating world better that we're generally seem to be.
Essential businesses are deemed to be essential business, while many of our smaller customers many of them or in manufacturing.
To shut down.
Now as they come back I think they are looking to.
Make investments debt and enables them to compete with some other larger brethren who have made.
Made moving more.
Who have invested earlier in those digitization and automation themes.
Joe do you want to add anything to this.
I think you said it well on the small and medium businesses.
Clearly the pent up demand portion of.
We're still most pronounced among the Smbs I would say in there.
Catching up more on their pent up demand, but beyond that it is really.
Those small and medium businesses going to the next level of digital transformation. Just is there a larger rather than have you also asked about health care and health.
Health care beyond.
COVID-19 use cases.
We're seeing in.
An expansion as Andrew mentioned in the prepared remarks into new <unk>.
Areas of health care like ambulatory care.
Like remote patient care. So the use of tablets for example in order to enable remote.
Patient care.
It is a big use case.
On occasion of course is a big use case and one that we're also seeing a lot of interest in these assets and people tracking in hospitals locating the right person.
We're locating the right assets for a particular procedure those are new use cases and are driving some of that accelerating demand we've exited.
Great. Thanks.
And the next question will come from key Hussam with Northcoast Research. Please go ahead.
Good morning, guys and congratulations on a great quarter and solid guidance.
Unpack the gross margin growth again, just a little bit more of a software and services, obviously had a great step up compared to <unk>.
Fourth quarter or the first quarter last year.
And I understand last year's step up with due to the European services improvement it sounds like again further improvement this time around.
This 47% roughly gross margins is that sustainable going forward is this a new normal for you.
Yes, so just the first part of your question so the.
The growth in both our service and software and we're again seeing on both ends right with the addition of reflects us the gross margin.
Higher than the company average is helping but also from an organic basis up nearly seven points year on year from our from our core service business.
And.
Part of that is due to the actions we took over the last several years to improve efficiency and.
Streamline the repair operations and the teams continuing to work that and then the other is now with double digit revenue growth.
Seeing that volume leverage flow through the P&L is the other big driver of the margin improvement and we do expect that to.
Continuing to growth year on year, as we grow the top line as well as improve efficiency in the operations.
Alright, Barry here.
And then in terms of overall growth I understand there's multiple drivers of your revenue growth, but can you touch on perhaps the growth that's being contributed from the new products and perhaps expansion into new markets that you, perhaps were not doing as well and before just trying to dimensionalize some of the growth aspects there.
Yeah. So.
When you say new products, you mean, new new types of solutions or or just new products more generally.
Any more types of new solutions looking for new customers, new use cases that perhaps your prior generation of products or theyre not previously addressed.
Yeah, I'll start and Joe you can provide some similar work in AD sales so.
I would say.
We did see RFID, having a very strong quarter in Q1.
RFID.
We had a tough tough going last year, but it was really started in Q2 so Q.
Q1 last year was more of a mill was pretty reasonable quarter. So this is a strong rebound for RFID and we see.
These types of solutions, which are more contactless is having a great.
B being in demand and see more more deployment over them.
I would say all of our software solutions are having great traction.
The combination of the reflects this zebra prescriptive analytics and workforce connect provides a very differentiated value proposition for us and each of those offerings by them in and of themselves.
Are performing very well, but when you then combine it with <unk>.
The suite and then look at the how how they interact with our mobile devices.
<unk> is a very compelling offering, which we see having great great opportunities for us to continue to grow.
<unk>.
And some other other intelligent edge solutions are still probably.
Little slow in ramping as to as we've had still have we don't have access to our customers' facilities to the extent we used to.
Do pilots and proof of concepts and other types of engagements like that but we expect that too to ease up here as we get through COVID-19 and get back into more normal way of operating with our customers.
Joe.
Yes, I'll, let maybe add a couple of things that could be helpful.
In terms of the mobile computing segment, we talked about the device for all and.
As Andrew said previously described we're seeing a an expansion of this this isn't necessarily always the big Bang, where someone just rolls out devices to everyone, but an expansion to additional sets of people right. Now you use it per transport in the hospital not just for nurses for example.
That's been a big expansion, but we've also had some very innovative use cases, one of them. We recently published in net.
In the.
Press release for a tier change that is now using our devices to not only.
Keep track of the tires in the inventory, but also measure the tread depth and offer a new service to a customer that type of innovation I think is.
<unk> is going to be providing new use cases, as well and I'm also quite proud of.
Our ability to grow the tablet segment.
Net.
We accelerated through the acquisition.
Explore some time ago and took combined with our own <unk> tablets, and we have some very good traction there.
From a vertical perspective.
To that I would call out.
Is the debt.
Government and healthcare segments, the healthcare segments have seen a good acceleration internationally.
We had a reasonably strong position in North America, but now were seeing deals in Japan and Australia.
In.
In the U K debt are sizable right, where these institutions are modernizing their infrastructure globally and government. As we've mentioned is an area not just in the U S. But also in other countries again around the world. We've made substantial go to market investments and we're now seeing accelerated growth.
Most of the mobile computing, but also some some.
Printing opportunities with governments around the world.
Great. Thank you very much.
Yeah.
The next question is from Richard Eastman with Baird. Please go ahead.
Yes. Good morning, just very quickly on the gross margins did the chair the China tariff benefit did that all fall into the <unk>.
Gross margin.
It would've fallen between both <unk> and printing so we had both.
I don't have the exact split off top my head, but it was okay.
Equally our proportionately weighted between <unk> and <unk>.
Okay, and then just is there any visibility on that.
Going forward Q2 through Q4.
Is that benefit continue.
We do expect the benefit to continue we have not included that into our guidance for the quarter or the year in terms of incremental benefit as quite.
Quite frankly, it's very hard to predict wind.
And how the claims we've processed will be approved and paid but something we continually work and are actively manage but yeah. That's it's pretty tough to predict the timing of when we expect to get the recovery from the government.
I see Okay, and then just just maybe as a second question around the core growth in the quarter was 25% I believe could you could you just speak to what the growth relative in the channel was versus direct and does the U S. Postal service fall into direct piece that youre going to.
Hopefully define for me.
Yeah, I think Joe can probably provide most color on this but your best guess would be the channel customer.
Thank Joe and second our channel business ahead of fantastic quarter.
I believe stronger growth than what we had in our direct accounts Joe.
Yes, I can confirm that so our strategy has and remains to be channel centric.
With the vast majority of our revenue growth through the channel and.
I am happy to report that our channel has once again grown faster than our business overall and has therefore expanded the portion of revenue that goes through the channel.
And just lastly and related to this.
I've got a question on just the press release that came out.
A little bit ago here, but kind of mid mid April but you talk about this partner connect alliance track and it's complementary to the independent software vendor track, but just talk about maybe this expansion of non selling via partnerships.
And just just what that brings to the table here and is that Theres an investment made in those channels.
But just maybe just speak to that how that expands the opportunity set for zebra.
You want me to take that on this yes.
Yes, please yes.
Yeah. So.
Yes.
Of course.
<unk> has been the core of our partner connect program, we've added Isps, especially in the Android transition because of the importance that the software that runs on our devices has and how the customer comprehends that as an integrated solution and wants to buy it that way. So we've recognized Isps as influencers.
The customers aligned ourselves closely with those and are proud to have some of the largest <unk>.
In.
In our program, but we've also recognized that there are other.
Other important Influencers I'll give you an example, too to me.
This real which is if you think about network equipment providers people that provide Wifi infrastructure for example for a customer.
Almost similar too.
Two the isds.
They are looking to provide solutions to customers like for example location and capabilities right within the environment that the outfit and by working with us they can enable such solutions and.
We recognize that and created this alliance track in order to.
To allow us to work more effectively with those kinds of partners and its paying off very nicely for us.
So it's basically lead generation.
Is that where you look too at these other influencers around it.
Product it as lead Gen or I'm, sorry go ahead.
No.
My question Yeah.
Is lead generation, but it is perhaps even more effective in allowing us to close the opportunities.
When a customer sees that we are aligned and that we are working together, we have a greater chance of winning.
Okay. Okay very good thank you.
Yeah.
The next question will be from Brian drab with William Blair. Please go ahead.
Alright, Thanks for taking my questions just.
First on the EBITDA margins I guess the the.
Our full year guidance implies.
Implies that the.
First of all you gave us the 'twenty, one and a half at the midpoint for the second quarter, but then.
Our full year guidance implies the same kind of 'twenty, one and a half level for the third quarter and fourth quarter.
I'm wondering if that's kind of.
Fair to assume that.
That will be the run rate for the balance of the year and no big swings between third and fourth quarter and also.
It is the premium freight headwind something that will persist or is that.
Can that can that fall off maybe later in the year end.
I'm, just wondering how much conservatism might be baked into that 'twenty, one and a half after.
Up 25, and a half almost in the first quarter.
So if you look at our.
Full year guide of 22% to 23% do you expect gross margin in that to improve year on year.
And.
Particularly as our software solutions grow and we do expect premium freight cost of $50 million to $60 million, which we've raised by $20 million.
Most of that coming in the second half.
You really don't see any change in those expectations from what we're seeing here in the first half or at least it's hard to predict when the particularly the supply side will.
We will come back around commercial air travel.
That's also a 20 million higher than.
All of our 2020 transitory costs, including.
Including tariff.
And we also expect to continue to invest and grow opex as we accelerate investment in some of the highest ROI opportunities and including the continued integration of our software offerings with reflects us.
Okay. Thanks, and then can you.
Provide some details on the competitive environment as Youre seeing it.
Anything you can share in terms of you know.
No.
What your share of the mobile computer market is now from your perspective or from what your share of the Barcoding.
Equipment market is just so.
So much has changed in the last year with the industry just exploding.
And then also within within mobile computing.
Talk about what what percent was Android versus windows space in the quarter. Thanks.
Alright, I'll start then we will see here, if I Miss anything but.
So competitive environment first I'd say, we're very confident in our competitive positioning.
I would say is confidence as we've ever been probably.
Coming out of COVID-19, with good momentum and has provided we've actually gained share as we've gone through.
Last 2020 here, we took the Katanga.
The attack of all the.
Continuing to invest in new solutions and E staying as close as we could with customers. We have launched more new products last year than we've done in any other year into his treatment I think that's coming back to benefit us here now.
Our markets are we think very attractive.
Some strong secular growth trends I mentioned kind of day to transfer on digitizing and automate automating workflows as a broad theme that I think that's something that's very broad based and very we believe will be.
Something that companies will invest in for for several years.
The we have some strong advantages also we have our scale our net.
Our go to market network the ecosystem, we have there.
So theres a number of things that will make us a formidable competitor from the from that perspective, and then lastly, I'd say are our vision of enterprise asset intelligence something that differentiates us from our competitors when our customers look talk to us. They are they are not looking to just buy device for the here and now they're looking to see how they can get.
Partner with somebody who can help them drive that digitization and automation of their operations into the future.
From a share perspective.
Get share data from them.
Independent source system, they tend to lag. So we only have Q4 data, but we had a record share in mobile computing over I think it was up over 50%.
On print.
Two I think as I believe 12%.
Certainly directionally in that area.
On print, we have low 40%, 43% I think it is and yes.
Our net second competitors low double digits, I think also about 12% and in.
Scan we have about 30% were second largest is more like 24%. So we have strong strong position across our business and your last question was about the mix of Android and Mike.
Mike Windows, and we now have over 85% of our mobile computing sales are Android.
Thank you.
Please proceed Mr Hill, if you needed to entertain your questions.
Yes.
Our share on Android remains particularly strong.
We probably have approximately 60%.
Sure Android.
So, we're particularly strongly back Android element.
Yes, that's a good day.
And the final question will come from Blake Gendron with Wolfe Research. Please proceed.
Hey, good morning, Thanks for squeezing me on here I wanted to start with cash flow so relative to the wording of at least $700 million in the prior guidance. The current guide is appreciably higher.
So I'm wondering how we can think about free cash conversion in the context of both number one growing software mix and number two the healthy channel growth that you mentioned I would imagine that hardware led pent up demand recapture would see some working capital drag in 2021, but as we look into 2022 and beyond is there a way we can think about free cash conversion, that's perhaps structurally different.
From what it's been in the past.
So the first part of your question just in terms of the full year guide of greater than $850 million really just aligns to the increased profitable growth outlook for the year. So no notable changes in from a working capital.
Perspective relative to our last guide.
And you know what are our target youre in Youre in and your albeit at a 100% free cash flow conversion. This year will be slightly lower than that just because of the strength. We had in 2020, but we don't see that noticeably changing something we can achieve over time as we look as we move forward.
Okay. That's helpful. And then one quick follow up here interesting win with the tier customer and that application seems like if all of the machine vision.
There was a large machine vision competitor that has a small handheld scanner device.
Business somewhere in zebra per view Theres, a little bit of overlap do you think that this overlap increases, particularly in the manufacturing realm is there any M&A to do here a lot of what we're hearing in terms of automation AI deployment within the manufacturing facility is coming from the machine vision customers, which seems like it's on the periphery of what what zebra does but that would be.
Helpful.
Perspective.
Yes, no machine vision is a very very exciting.
Sensing and data acquisition technology for us debt.
Helps us enable intelligent automation solutions.
We've already incorporated machine vision into a number of our solutions like Smart Pak Smart site.
Our MP 7000, flatbed scanners with the colored camera.
So we should see great opportunities to continue to.
Leverage machine vision to create unique solutions for our customers.
The tire.
Depth sensor that isn't it.
Accessories that we put on our mobile computers to be able to do but it's another example of how we're trying to to.
Find use cases, where we feel that we have a strong right to play and where we can be where we can be competitive.
And I expect that.
Machine vision is going to be.
Continued area for us to to invest we acquired a company called <unk> about 18 months back I think it is now.
That was basically is an engineering team that had deep expertise into machine vision.
They're focused on figuring out how to extract useful information from digital images and video and we put that put their being Great addition to our team in helping our other solutions accelerate the deployment of our other solutions.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Mr. Gustafsson for any closing remarks.
Yeah, so to wrap up I would like to thank our employees and partners for their focus dedication and resiliency leading to exceptional Q1 results and an improved outlook for 2021, our top priority continues to be protecting the health and wellbeing of our employees partners and customers as we recover from the pandemic.
Stay safe everyone.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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