Q2 2021 Zebra Technologies Corp Earnings Call
[music].
Good day and welcome to D C for a second quarter 2021 earnings result conference call.
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I would now like to turn the conference over to Mike Steele, Vice President Investor Relations.
Go ahead.
Good morning, and welcome to Zebra second quarter Conference call. This presentation is being simulcast on our website at investors day, Zebra dot com and will be archived there for at least 1 year.
Slide 2 conveys 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 second quarter results, then Nathan 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 for.
Following their prepared remarks, Joe heel, our chief revenue officer will join US as we take your questions now.
Now, let's turn to slide for as I hand, it over to Anders.
Thank you Mike.
Good morning, everyone and thank you for joining us.
Our team delivered exceptional second quarter results with strong performance across the business.
Resulting in record sales and profit.
For the quarter, we realized adjusted net sales growth of 44%.
For 40% on an organic basis.
And adjusted EBITDA margin of 23, 6%, a 530 basis points year over year improvement.
Non-GAAP diluted earnings per share of $4.57 on.
Nearly 90% increase from the prior year.
And strong free cash flow.
Despite ongoing industry wide supply chain challenges, our teams successfully satisfied stronger than expected demand from customers, both direct and through our distribution channel.
Similar to Q1, we realized robust broad based demand with double digit sales growth across all 4 regions.
<unk> major product and solutions category.
As well as in all of our vertical end markets.
Our customers continue to digitize and automate their workflows with a sense of urgency and the increasingly on demand global economy.
We also significantly expanded profit margin across our business more than offsetting escalating global supply chain costs.
<unk> also continued our balanced approach to scaling operating expenses, while investing in initiatives to drive sustainable profitable growth.
With that I will now turn the call over to Nathan to review, our Q2 financial results in more detail and discuss our improved 2021 outlook.
Thank you Anders let's start with the P&L on slide 6.
Q2, adjusted net sales increased 44, 4%, including the impact of currency and acquisitions and.
And 39, 8% on an organic basis.
Reflecting broad based demand for our solutions from customers of all sizes.
We realized particularly high growth from a run rate business through the channel, partially driven by pent up demand, while continuing to see strong growth in direct sales to large customers.
Our asset intelligence and tracking segment.
Including printing and supplies grew 51, 2% while enterprise visibility in mobility segment sales increased 35, 1% for.
Driven by exceptional growth across all major categories, including enterprise mobile computing and data capture.
Note that we also realized double digit growth in services and software along with very strong growth in our RFID solutions for which deployment activity has snapped back as customers recover from the pandemic.
We recognized double digit growth in all regions.
In North America sales increased 39% with all major categories growing double digits.
In EMEA sales increased 44% with solid growth across sub regions and solutions offerings.
APAC again realized strong growth with sales up 20% led by strength in China, Australia, India and Japan.
Latin America also continued its recovery with exceptionally strong growth in all sub regions with sales increasing 79%.
Adjusted gross margin expanded 390 basis points to 48%, primarily driven by favorable business mix, a $12 million recovery of Chinese import tariffs higher support service margins and contribution from our recent high margin acquisitions.
These benefits were partially offset by higher premium freight charges, which we will discuss further in a moment.
Adjusted operating expenses as a percentage of sales improved 180 basis points.
We continue to scale Opex, while prioritizing high return investments in the business.
Second quarter adjusted EBITDA margin was 23, 6%.
A 530 basis point improvement from the prior year period.
Reflecting higher gross margin and operating expense leverage.
We drove non-GAAP earnings per diluted share of $4.57.
A $2.16, or 89, 6% year over year increase.
EPS growth also benefited from lower interest expense, partially offset by a slightly higher tax rate.
Turning now to the balance sheet and cash flow highlights on slide 7.
We generated $514 million of free cash flow in the first half of 2021.
This was $192 million higher than the prior year, primarily due to increased profitable growth.
In Q2, we acquired adapt division for $18 million to advance our machine vision solutions and made for millions of venture investments.
In addition, we also repurchased $25 million of Zebra shares.
Our balance sheet remains strong from a debt leverage perspective, we ended Q2 at a modest 0.6 times net debt to adjusted EBITDA leverage ratio, which affords flexibility to invest in attractive business acquisitions.
On slide 8 we show the multiyear impact of transitory costs, primarily related to expedited freight due to supply chain bottlenecks caused by the global pandemic.
As well as tariffs on China imports.
For the second half of the year, we now expect the year on year unfavorable impact from these items to be approximately $85 million.
Which translates to a 3 percentage point negative gross margin impact.
Our supply chain team has been taking extraordinary actions to satisfy customer demand and an exceptionally challenging global environment.
Global freight costs for virtually all modalities of delivery across our supply chain continue to escalate.
Impacts include higher global shipping cost per kilo.
A shift in modality from Ocean to air freight as well as increased cost to expedite component parts to our tier 1 manufacturers in order to meet customer commitments.
We expect premium freight costs to abate once component supply and freight capacity improves.
Let's now turn to our outlook.
The pandemic has accelerated trends that have been driving our business, including omni channel shopping adoption the desire for track and trace across the supply chain and the need for more digital health care experience.
We entered Q3 with a strong order backlog and we continue to see broad based robust demand across virtually every dimension of our business.
This momentum along with our sales pipeline gives us the confidence to provide a strong Q3 guide and substantially raised our full year outlook.
In Q3, we expect adjusted net sales to increase between 21 and 25% year over year.
This outlook assumes a 3 percentage point additive impact from the acquisitions and foreign currency changes.
We anticipate Q3, adjusted EBITDA margin to be between 20% and 21%.
Which assumes gross margin expansion and operating expense leverage from the prior year.
It also assumes approximately $45 million of premium freight expense, which.
Which is $37 million higher than last year.
We are also experiencing higher product component costs, which we expect to largely offset with recently announced price increases.
Non-GAAP diluted EPS is expected to be in the range of $3.90.
For $4.10.
For the full year 2021, we are raising our guide for adjusted net sales growth to be between 23% and 25%.
It reflects our increasing optimism for strong growth in the second half of the year, despite significant industry supply chain constraints for certain product components as well as transportation bottlenecks.
This outlook assumes an approximately 3 percentage point additive impact from acquisitions and foreign currency changes.
Spite, our significantly increased expectation for transitory premium freight charges that we just highlighted we are maintaining our expectation of full year 2021, adjusted EBITDA margin to be between 22% and 23%.
Which assumes operating expense leverage and gross margin expansion from the prior year.
We now expect our free cash flow to be at least $900 million for the year due to increased profitability.
Please reference additional modeling assumptions shown on slide 9.
Note that our outlook does not include any projected results from the pending acquisition of <unk> robotics.
Anders will discuss the strategic acquisition in a few moments.
With that I will turn the call back to Anders to discuss how we are advancing our enterprise asset intelligence vision, and new and existing markets.
Thank you Nathan.
I am encouraged by the strengthening demand across our business, which allows us to further increase our 'twenty to 'twenty 1 outlook.
Slide 11 illustrates how we are working with our customers and partners to advance our enterprise asset intelligence vision.
By leveraging <unk> industry, leading portfolio of products 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.
We help businesses across industries implement tailored solutions that to digitize and automate debt operations, enabling them to compete more effectively.
With our innovative solutions, our customers associates can now anticipate and react in near real time.
Utilizing insights driven by advanced software capabilities, such as artificial intelligence machine learning prescriptive analytics and machine vision.
Now turning to slide 12.
As a trusted strategic partner businesses in a variety of end markets turned to <unk> to help optimize end to end workflows.
I'd like to highlight several recent wins across our end markets, which demonstrates how <unk> solutions are improving productivity and.
Customer service and patient care.
A large European postal service will be deploying approximately 80000 TCP to sevens to their carriers.
Continuing a long standing relationship they are upgrading to the latest mobile computing solution, which will enable them to more effectively handle increased parcel volumes and a broad range of use cases.
It's another proof point of successful collaboration with post and parcel services around the globe.
Including our current business with the United States Postal service.
We are also helping a large north American steel manufacturer to optimize and digitize its operations.
These customers, adding more than 1000 of our EBIT 56 tablets to their operations.
Which will allow them to eliminate manual paper processes by implementing electronic proof of delivery to automate and expedite the invoicing process.
This solution will also improve the customer experience by providing advanced notification of delivery.
Large public sector hospital system in the U K is utilizing our mobile computers printers in response to enable real time visibility into the entire patient journey and ensure a safe and efficient care.
This customer is using our solutions for specimen tracking patient monitoring and blood transfusions in emergency and operating groups.
Day employees also use our mobile computers for physical security axis.
The regional U S supermarket, operator recently decided to implement our flexes workforce management tool for labor scheduling and employee self service to more efficiently manage their resources across more than 100 locations.
This solution also frees up their associates to focus more on customer service versus administrative tasks.
More broadly in retail the sharp increase in omni channel and online shopping requires retailers to deliver goods in a timely manner and make them available for pickup when promised.
To address this challenge a wide range of retailers have been prioritizing investment in <unk> solutions.
Provide higher inventory accuracy and utilize their labor more effectively.
Slide 13 highlights significant recent investments we are making in advance to advance our enterprise asset intelligence vision into warehouse and in manufacturing.
In May we announced the launch of our fixed industrial scanning and machine vision solutions to increase efficiency and quality inspection and our customers' operations.
We complemented this product launch with the acquisition of adapt division, whose software enables customers to easily build machine vision and deep learning applications.
We are excited about our opportunity to penetrate this high growth fragmented market.
And we are actively recruiting channel partners to scale the business.
In July we announced our intent to acquire fetched robotics.
Which has the broadest portfolio of autonomous mobile robots into industry powered by a cloud software platform that can be deployed stand alone or integrated with warehouse management systems.
Our vision is to orchestrate, both robots and technology equipped frontline workers through software in the cloud to optimize material transport on order fulfillment workflows.
As the venture investment catch has been a trusted partner to zebra and we are excited about the prospects for our combined businesses.
In closing we are confident in our growth prospects given the momentum we are experiencing in the business and our heightened pace of innovation.
We are energized by our vibrant core markets as well as the emerging prospects, we see in newer markets to digitize and automate workflows.
Now I will hand, the call back over to Mike.
Thanks, Anders will now open the call to Q&A, we ask that you limit yourself to 1 question on 1 follow up so that we can get to as many of you as possible.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your question.
If you're using a speakerphone please pick up your handset before pressing the keys.
<unk> your question.
Interest and would like to Victor on your question. Please.
At this time, we will pause momentarily to assemble roster.
The first question comes from gaining price, let's Melius. Please go ahead.
Hi, good morning, everyone.
Good morning.
So I just wanted to ask you a little bit about the component shortage is obviously.
Still we're able to drive some pretty strong growth in the second quarter and expecting to see that.
On the third quarter as well, but would you be able to quantify how much of a drag if any of the component shortages are on on your sales this year.
Yeah, I'll start and then I'll have also helped balance here. So the first I'll start on the.
Kind of an industry wide semiconductor shortages.
They've been very well documented by the press obviously over the last few months and we are impacted.
I'd say the impact, though is not uniform across all components. Some some components are impacted much more than others, but it's a.
A much larger number of components that we're kind of working than we would in a normal quarter.
But I'd say our team is doing a great job in working all angles to optimize our allocations and there's been great collaboration between our sustaining engineering groups to to ensure we can qualify new alternative components that have.
The less lead time to ensure we get as much available product to provide to our customers as we can yes. We did raise prices here recently to mitigate some of the impact of the increased component costs.
On.
And I said despite these these shortages on the price increases that we have increased we are.
We're quite confident in the increased full year outlooks that we that we announced today and Damien just to.
You answered the question on the on the Q3 and full year guidance I think the risk associated with the shortages have been incorporated in our outlook, but it'd be really tough to quantify not really constructive to speculate on what that number could be unconstrained.
Okay, that's really helpful.
And then wanted to ask you a little bit about the <unk>.
Freight headwind I mean.
The second quarter.
<unk>, having those thank you were able to outperform on the margin front.
So just curious.
While we share.
But you are expecting a pretty abrupt drop here 300 basis points on the second half.
Should we expect you to kind of.
To be able to.
Yeah.
Manage those that you are on the second quarter and I guess.
Additionally, in should we be thankful debt next year, you will be able to kind of completely reverse the premium freight expenses.
Yes, so maybe if you take a step back on just where were seeing the bottlenecks because theres really 3 different different areas in terms of and the incremental cost.
1, which we've seen earlier in the year and we've talked about on our previous calls around the lower international commercial air travel container shortages.
Port congestion so around the supply side of it that's where we're seeing our air and ocean rates 2 to 3 X since the start of the pandemic and those really have not come down over the last several months, if anythings oceans gone up error rates have stabilized.
In addition, because of the global supply constraints, along with increased global demand. We're now expediting component parts from our tier 1 and tier 2 manufacturing partners, along with shipping a higher percentage of of printing prospect for prospect or in particular via air versus Ocean.
So those are also really driving the step change in terms of the transitory costs from Q2 into the second half.
In addition, you have the manufacturing shutdowns and parts of Southeast Asia and in particular for Us Vietnam and Malaysia due to Covid that are further constrained supply. So as we see today you were expecting the impacts to persist at least through the end of the year.
It's hard to say windows.
Abate into next year, but again on the team is doing a great job of managing the impacts.
With our customers really for extraordinary actions and communicating the lead times. So as you look at our second half guide I think Theres 2 things to think of 1 is the step change increase in terms of the incremental cost.
And in Q2, we also had 12.
$12 million of China tariff recovery that we don't expect to repeat in the second half there was an offset in the second quarter.
Yeah.
Understood. Thank you very much for the insight.
Thank you.
Our next question comes from Tommy Moll with Stephens. Please go ahead.
Good morning, and thanks for taking my questions.
Yep.
Anders you've you've talked about a robust backlog and pipeline.
Any comments you could give to augment there would be helpful. Do you have any sense of whether the momentum is sustainable through the year and then even into next year.
And any comments you could give us on channel inventory levels as best you understand them would be appreciated as well. Thanks.
I will start here and then I'll ask Joe heel to also provide some color.
Well first might be obviously very excited about I'm pleased for the performance we had in the in the second quarter, we exceeded the high end of the guidance range here.
To repeat previous question Stakes.
Say extraordinary collaboration between our supply chain and sales teams to to satisfy its very strong demand in <unk>.
Supply constrained.
Environment.
The <unk>.
Strong secular trends that have been supporting our business for for a long time they have accelerated through.
Covid and we don't see any.
On the abatement in those trends continue.
Continuing to build.
Our customers across pretty much all our vertical markets are prioritizing, how digitizing and automated automating their workflows.
I think omni channel is probably the best example in retail of the retail vertical most retailers investing meaningfully in building out their omni channel capabilities digitizing their operations that way.
We did see double digit growth in all regions as well as across all of our <unk>.
Product and solutions categories as well as across our main for for main vertical markets.
We did see.
Our small and medium sized customers.
Do particularly well so the.
The growth we saw here was.
Definitely partly analysts day, 2 large ticket would be driven by our small and medium sized customers and that was partly I think a result of pent up demand, but we see that largely being behind us at this stage, but even our large strategic accounts performed very well with strong strong growth.
And based on this.
This performance I do expect that we will continue to take share in the market.
R R.
Inventories are high.
Fee income in the.
In the channel today, but maybe at the lower end of our expected ranges.
I think that's fair I mean on the inventory side, we're working hard with our distribution partners too.
Keep our inventory at the levels that we need to sustain the demand but at the same time to serve every possible demand which is at the moment as you can tell very very strong and we're trying to serve all of the demand we can and taking our inventory to the lower end of what we consider our healthy range when it comes to the.
The backlog on the pipeline. It is very strong as youre seeing and what I can underscore what Anders was saying this.
Pandemic has definitely triggered a wave of digitization and automation in our customers that is leading to projects and demand that we did not see before the pandemic. So that that is a sustained.
On a driver of momentum that we see and we.
We also were enjoying because our customers are aware of the supply shortages. We're enjoying good pipeline visibility our customers are working with us to give us that visibility for in advance and that gives us confidence for continued growth into the next year.
Thank you both of those are helpful answers.
Anders I wanted to.
Follow up with a question on adaptive vision and your entry into the fixed industrial scanning and machine vision markets. A couple part question here.
Any context, you could give us around any prior relationship you had with adapt division or how you came to know the asset.
Anything you can do to frame the size of the market opportunity, where where you think you've got a good shot at it competing and then what advantages you bring in those markets, they're adjacent to to markets, where you currently play and have substantial share, but what advantages do you bring in these new markets.
Yeah, I'll try to summarize this here but.
First of all we're excited about our entry into the fixed industrial scanning and machine vision market.
These are.
Solutions that really accelerate on enterprise.
Intelligence vision.
This is more on the sense side of the sense analyze act framework, but it helps us.
Provide some new ways of capturing data that we can then analyze and enable our customers to act on.
This is a very attractive market, we see it but it is quite fragmented.
It's a multibillion dollar market.
That our new portfolio, then Ken can address although we know what the addressing the entire market on day, 1, but we are continuing to invest in it to add functionality to add capabilities. So that we can we can go after a bigger and bigger part of the market and be ready for focusing initially mostly on the fixed industrial scanning market.
Our value proposition, we believe is very strong and their focus is on the ease of use.
Of these types of solutions as well as steep.
Ability to upgrade the cameras and devices in the field. So those are we believe too.
Strong differentiators that we have.
The.
That division is a great debt.
Wait for us to augment the say the cameras.
The softer we had developed.
It's a way for our for our customers to more easily be able to.
Hello, and build and implement.
Applications for how to how to basically engage in machine vision of fixed industrial scanning.
Incorporate machine vision of fixed industrial scanning into their workflows and.
We'd been familiar with adapt division for some time and we've been looking at.
Waste.
To augment our own internal software development in that area to make sure. We can come up with a really strong offering and we felt that the depth division had a very attractive solution very strong solution and there was a nice fit with zebra.
Thanks, Anders I'll turn it back.
Our next question comes from Jim Ricchiuti with Needham <unk> Company. Please go ahead.
Hi, good morning, Thanks for the additional color on.
Some of the cost issues that you are incurring in terms of freight and components I Wonder if you could spend a few moments.
Talking about Opex.
Both sales and marketing G&A up.
A healthy amount sequentially admittedly with with a significantly higher share. So I'm just wondering how we might be thinking about opex in the second half of the year.
And I have a follow up Anders for you on.
Some of the acquisitions.
Yes, so I think if you if.
From an Opex perspective, if you look year on year. There was a couple of major drivers in terms of the overall increase that really impact.
Every quarter. The first was last year, we took some actions mid year around <unk>.
Salary reductions in the peak of the pandemic to help offset the.
The impact as well as on lower incentive comp as we are obviously below our our planned targets for the year. So those 2 alone or drive a significant increase year on year, along with the full year of <unk>.
A reflection in the P&L and starting to again invest particularly on R&D and go to market with some of the some of the discretionary cost increases. So if you look for the second half for the year I'd say you know the ramp in the first half will continue.
But I wouldn't expect to see a real step change increase from where we sold.
Spending in the second quarter, but again the year on year increases are all pretty consistent.
For each quarter.
Got it thanks Nathan Anders.
Can you talk about.
The acquisitions, both the adaptive and said Gee, you talked about I think as being a fragmented market and I'm wondering.
To what extent might we see you. In addition to internal development of these technologies look at potential additional M&A to expand your footprint.
Yes.
Obviously hard for me to comment on specific opportunities here, but we are excited about both of these markets the fixed industrial scanning and the opponent as mobile robot markets.
And we have had a law.
Long standing organic development activities that we now have augmented by the acquisitions of fetch and adaptive.
I'd say first more generally about the M&A that we are.
First we are very excited about that business on the outlook for our business and we do see M&A as a vector for growth.
I think the.
The adapt division of the Petro Biotics acquisitions are.
We are excited about them, we think that we can we can deliver good growth and good returns on those but we do look at.
All M&A opportunities as a way for us to accelerate.
To advance our <unk> vision.
Targeting <unk>.
Selective bolt on acquisitions that also have high growth.
Look at around.
I talked earlier about the customers need.
We need an interest in digitizing and automate automating a number of workflows across all the other supply chain. So said thats that provides good opportunities for us to continue to add to our capabilities and for them. So we do look look at M&A as a way for us to accelerate that growth and we have.
A strong balance sheet that can support our M&A activities also.
In your pipeline.
For every day.
Yes, but you obviously.
If you have a team that looks at the scans kind of day market.
Broadly around.
Art.
Kind of the target areas that where we have particular interest.
There is.
We have a good healthy pipeline of opportunities you never know what will they work out the way, we will come to terms or not but we do have a healthy pipeline of opportunities.
Thank you.
Yeah.
Our next question comes from Paul Chung with Jpmorgan. Please go ahead.
Hi, Thanks for taking my question. So just another follow up on machine vision fixed industrial scanner.
So how large is this business today and will the solution.
Eventually kind of be led with software similar to your peers kind of resulting at very accretive margins.
What is the strategy to kind of take share from larger players in the industry, maybe competitive pricing and then another on M&A in general you know very strong free cash flow high quality earnings provide you kind of a nice cushion for broader opportunities.
Should we expect kind of continued preference for software solutions over time.
And resulting from higher margin.
<unk> longer term.
Yeah I'll start I'll also ask Joe to comment on this year, but.
Thank you first question Bose, we're on to fixed industrial scanning machine vision market.
Yeah.
So we believe it's a very attractive market, it's a near adjacency to what we do and.
It's quite a fragmented market if you looked at the market share table, there, there's 1 or 2 players that have.
Reasonable share, but then it's a lot of long tail of smaller players.
We are entering the market primarily through our initially with our fixed industrial scanning portfolio, which as you know.
The closest to our.
Core competencies and use cases, where we have a very strong right to play, but we are adding both.
Say on the on the capabilities both on debt on the hardware side on the camera side, but primarily here on the software side to be able to then address a larger part of that market.
<unk>.
Okay.
Software is a.
Big differentiator in all of our devices right. If you look at mobile computing print and scan.
The majority of our engineers.
Huge part of the differentiation on the value add comes from the software and we certainly expect that to be the case here also.
So so we are investing in building more of that software capability adaptive.
Adapt division was on inorganic way to accelerate some of that but we also do that organically.
From a.
Yes.
We should also not underestimate or minimize the importance of the investments we're making in the go to market.
And earlier I think in debt that we are putting in this specialized track in our partner connect.
The reseller program 2 to specifically address Ricky.
Recruiting fix.
Fixed industrial scanning machine vision partners to help accelerate that growth and maybe Joe you can expand on that.
Exactly I was going to comment specifically on the your question around what's our strategy to take share. So you know that we have the fixed industrial scanning and machine vision parts of fixed industrial scanning is a natural extension of the leadership that we have in the scanning part of the market and we're of course translating debt technically.
To succeed in the machine vision part, that's where the software piece is it.
Central and the acquisition of adaptive now it gives us a industry leading software capability. So we fully expect to translate that into share gains, but there is more to more to it than that we specifically want to use the software to enhance that ease of use value proposition that's critical to these customers.
How easy is it to use and to deploy and Thats also important for the second part of the strategy to win which is using partners as a way to compete in this market. All of these solutions are deployed through partners for us where a very partner centric company. As you know and that is also what we are going to use to compete and win.
In the machine vision space, and making our software easy to use is a value proposition not just to the end users but to those partners specifically so hopefully that's helpful. Yes.
Yes, very much and lastly on fetch robust I know, it's early days, but if you could talk about how you see this business ramping.
How material revenues can be over time kind of from a small base the margin outlook competitive environment all that good stuff.
Key customers you hope to get some cross selling opportunities and.
If you could expand on kind of use cases beyond warehouses and fulfillment centers. Thank you.
Yes.
As a broad question that it can take a take a while to to answer all of it. So I gave you tried to give you a high level high level response here, but first maybe we havent closed on the acquisition yet, but we're certainly excited about it we have worked with.
That's <unk>.
<unk> investment for for quite some time. So we believe we understand the market, we understand a team and we see great opportunities to leverage.
The.
That's just a broad portfolio of Amr's. They have the broadest portfolio of autonomous mobile robots in the industry and they have a very.
Very strong very capable cloud based software platform for how to deploy and manage these robots and then zebra we've been more focused on.
Technology enabled the workers in warehouses and by by combining those 2 to be able to control and optimize both the flow of robots and the workers. We think we can offer a superior ROI to customers.
Customers in manufacturing in warehouses and a number of these use cases.
<unk> has originally say initially been mostly focused on.
The campaign's markets, so more movement of goods, but we see there's a number of other use.
Use cases that are also growing fast where from.
They have a solution that solutions that are very.
Well suited to pursue those also and here is another area, where I think our strength that we have in our go to market organization and I'll ask Joe to comment on this also will augment as well we know them.
Okay.
Virtually all of these large customers and in transportation logistics and manufacturing.
<unk> retail wherever the industry vertical we're going after and we can help I think providing those introductions and positioned our broader workflow automation workflow solutions with those customers.
A.
Particular attribute of the market that we're focusing on is that we're targeting those areas, where humans and robots work together and so the notion of a co part right. The collaboration between the 2 is at the heart of the strategy. So that means we're targeting use cases like person to goods picking and conveyance.
And those use cases allow us to take advantage of our broad installed base, we already have where workers in warehouses have mobile computers, and theyre now being augmented by robots. So this means that we can take advantage of the orchestration between the 2 and Theres really no 1 else in the market that can do that to the.
The extent that we can and as a result, we're taking on.
This.
Strong platform capability that debt fetch has with robots that can go across a broader range of use cases than anyone else.
And can deliver products with safety and speed that no 1 else can and combining it with the orchestration of humans to achieve overall productivity improvements that are unequaled and thats really the strategy.
Thanks, so much.
The next question comes from <unk> Shah with Morgan Stanley. Please go ahead.
Okay, great. Thanks.
The price increases that you guys noted can you just give a sense of the degree or how broad they were and how much are you expecting those price increases to be transitory as for the channel may hold less inventory in the near term.
How do you see that interaction and then just maybe a second question.
Just getting a sense of if the postal service concentration this year or the USPS deal.
Expect it to be primarily in Q2 Q3 of this year. Thanks.
Yeah, I'll start and then I'll ask Nathan to commentary, so but first on the on the price increases.
Pricing is obviously something that is very important to us and something we continue to continually.
Yes, and address we do regular checks to make sure that we.
We are.
Our solutions saw price competitively to end users as well as debt the partner community to have the right.
Profitability.
Yeah.
It's part of our overall go to market activities here.
On the.
Competitive actions or competitive positioning is obviously a key part of how we assess our pricing here and we believe that the price increases that we have now.
Ounces are are are appropriate.
Respond to some of the competitive competitors, who have also announced price.
This increases.
Everybody hasn't so we believe that we have kind of assess this based on a very granular way based on products and geographies to make sure that we we we don't put it put ourselves at any competitive risk with these.
We see the costs as being transitory and we wanted to play that kind of a long term game here, though on that and making sure we maximize the value of the corp longer term and we don't want to cede market share in the short term for that either.
And then on the AR from USPS perspective, the rollout is progressing as expected and as we communicated earlier in the year. This is for the current rollout of the full EMC solution of 300000 units to the for the carriers and with the goal of completing largely completing here at the end of the third quarter.
Great.
And then just coming back for the price increases like is there just a range, we should think of kind of on.
Just on the top line of what that impact is across the portfolio.
Is that just too difficult to assess kind of at this point.
I'll take that so we just rolled the price increase was out last week and I would say from a from a full year perspective.
Within the margins from a from a full year revenue okay.
Okay, just all day on.
The rollout price increases there.
A lag time between us announcing and to be effective in the market. So you can see okay.
This will be impacting our Q4 business rather than Q3.
Okay, great. Thank you so much.
Your next question comes from Keith <unk> with Northcoast Research. Please go ahead.
Hey, good morning, guys from congratulations on a great quarter.
Looking at the I guess cost of goods sold here on the transport cost of ethane on the premium freight cost is there anything in the adjusted EBITDA margin guidance and thought process that suggest that some of the impact will be perhaps longer term for example increased labor costs or anything else on there that again will perhaps go on beyond the rest of this year.
Yes.
Between the 2 buckets, if you look at the labor cost or the raw material cost increases.
That's what the price increases we've taken is meant to largely offset that so if we think about from a mitigation of the inflationary prices I think that's yeah.
As we go into the fourth quarter and into next year, those will be largely mitigated with the price actions we've taken.
On the logistical bottlenecks are the 1 that you know from a the timing I think is still to be played out again I think we expect no changes between now and the end of the year.
Really we're taking it 1 quarter at a time and reacting accordingly to optimize and maximize profitability as best we can okay fair enough.
We just build on that little bit so the.
The.
Yes.
Yeah.
The logistics and the semiconductor component cost, we consider those to be transitory on the <unk>.
<unk> side, you know there is always some upward movement in labor rates, but if you think of the.
Out of labor that goes into our cost of goods sold is very small for that as you said.
That is not a single digits I think high single digits part of our value add is from labor. So it is not not something that meaningfully changes to P&L.
Got it got it.
Looking at your full year guidance and historically you guys have always had a very strong fourth quarter sequentially, a big uptick from the second and third quarter. The guidance Youre, providing here suggests they are perhaps giving a roughly a flat fourth quarter. So is there the thought process that business for the kind of pulled ahead during the year or how are you thinking about the fourth.
Quarter on potential upside to that.
Well I think.
The fourth quarter was <unk>.
<unk> guide for the fourth quarter that we had in our full year number here. We're certainly would indicate this growth not as strong growth as we've had in the first half ori or acute the guidance for Q3.
Q4 was.
Very strong quarter last year.
So there was the <unk>.
We saw a great recovery in the fourth quarter.
No.
But if we do see continued strong demand from from our customers. The momentum is very strong we don't see that abating is as more of a tougher compare than anything I don't know if Nathan do you want to.
Joe I.
I think just from a I think from a sequential standpoint, Keith you know that.
And in terms of the typical update from Q3 to Q4 I don't think it reflects anything from a.
Weakness in the fourth quarter as much as just strength, we're seeing here in the third quarter and as we noted earlier when you look at our days on hand inventory and the strength.
Say sales pull ins are not a major factor its really just that acceleration of investment from our from our customer base and if anything.
Where we're getting the visibility is in the backlog and funnel as Joe mentioned in terms of giving us confidence in the full year, particularly the fourth quarter guidance. Okay. Thanks I appreciate it.
Yeah.
The next question is from Andrew Buscaglia with Darren. Please go ahead.
Good morning, guys.
Good morning.
So I wanted to ask on R&D.
You're spending this year on track to spend about $560 million or so.
I'm wondering how much of this or last day I'll call. It 12 months is related to this vision.
And <unk> kind of push.
And then secondly at what point can you start to really leverage that R&D line do you need to be spending.
That caused $550 million a year going forward.
But first I'd say yeah.
R&D investments.
Yes.
A key activity for us that is what really drives our longer term growth and I would say if you look back over the last several years the investments we've made and in product development and R&D.
<unk> had a great return for us so we want to make sure that we have.
Portfolio.
Fresh solutions that offer real value to our customers. So we can we can compete and grow the business.
So we look at our R&D investments across.
Number of Horizons, who can say corp.
Investments in our core that would have a.
Very short term.
Return on.
For the near Adjacencies, which would have a little bit longer returns day, a couple of years, 2 or 3 years and then more.
For innovative new solutions more of the enterprise asset intelligence type of solutions here, which we have a little longer term.
Payback is there more.
Ground up innovations.
In many areas, let's say on you mentioned fetched specifically, we developed our own robots.
With smart sites before so there's certainly been.
A way for us to both learn the industry, but it has also helped.
Attractive ways for us to leverage those investments across.
So when we do make acquisitions, we see that as a great way for us to augment our own internal programs and drive.
Drive us into new high growth, Adjacencies, where where we can make a difference.
Okay. So to answer your question.
Yeah, No that's that's helpful.
And.
If I heard correctly, you got a nice health care award this quarter.
That era.
<unk> taken kind of a vaccine for all excitement going on retail on e-commerce on logistics.
Can you update us on health care in terms of Youre still seeing that narrative play out post co post COVID-19, where people are accelerating investments in automation there.
Yeah, I'd say, it's across all our verticals first may Covid has accelerated these secular trends that we've talked about that round out our oh.
While our end markets.
Driving solutions that help to digitize and automate their workflows and empower frontline workers to be connected.
Optimally utilized.
Each of our primary vertical markets grew double digits in the second quarter.
And we continue to invest in expanding each of these swaps specifically for health care I would say.
We we saw health care.
Our health care.
Markets. They started in more acute care, but it's been moving into other areas like outpatient remote patient care.
Testing vaccine distribution, so our efficacy in health care continues to expand into new areas is also expanding geographically.
The when we talked about today was in Europe.
And I think he also the.
Health care patients are taking your book out of their e-commerce or kind of online shopping.
Activity is also they are seeking a more digital experience which is.
Putting some extra pressure on health care providers to make sure. They can offer a similar type of experiences for the patients.
And let's say here our purpose built devices and solutions are critical for health care providers.
Not only to improve the patient journey, but also to drive greater productivity for for the health care providers.
I might add debt.
In health care, there's 2 other phenomenon that.
We will drive continued growth 1 is that we.
We know that our health care systems, and depending on where in the World. You are this is in a different stage have pulled back on some of their spending.
Because they didn't have income from the elective procedures that they usually enjoyed and as we come out of the pandemic, we see more of that.
Income returning to for profit hospitals, and then their ability to spend on these solutions or returns as well and we've seen that.
And the international growth is another big dimension Anders mentioned, the European piece, but we also see a significant interest in different parts of Asia that we hadn't seen to that extent before so there are 2 more growth vectors that we expect.
Just 1 more comment on this would be.
I expect healthcare to continue to be our fastest growing vertical over the longer term, but it's great to see that we.
We have this diversity in the business across.
For verticals and some other newer ones coming up but on into Q2 here manufacturing, which was our fastest growing vertical.
Manufacturing was still on that was the hardest hit by COVID-19, and the macro was a bit tougher going into debt with tariffs and other things, but the opportunity to increase automation in workflows through wearables and heads up displays and the need to track and trace.
Works are.
Component sourcing components.
At the sub suppliers through assembly all the way through distribution is putting.
Providing great opportunities for us so.
All other vertical markets performed very well, but manufacturing was actually the strongest 1 for us in Q2.
Okay. Thanks Anders.
Our next question is from.
Hang on.
Please go ahead.
Yes. Good morning, Thanks for the question Anders or Joe I wanted to get your thoughts on how quickly you thought you could.
Pull together the channel.
Partners to be able to sell their your fixed industrial scanning and machine vision products and I'm curious also if you envision those being 2 separate channels.
For those products will go through the same channel.
And then also Relatedly I guess, maybe what percent of your existing channel is suitable to sell those products.
Yeah, I'll start and Joe can provide some extra color here also so.
The.
We have worked on our go to market strategy and our channel engagements basically since we started working on the on the.
Product and solutions. So this is not something we kind of doing CRE. Elliot. This has been something we've done in parallel to a large degree.
So we you can say there is a venn diagram of partners out there. They are partners, who we currently have who are also in the fixed industrial scanning machine vision space that we are.
Obviously, having a great already have a relationship with and we're the <unk> expansion to 2 add on.
Our fixed industrial scanning and machine vision capabilities to their portfolio, but also recruiting duped.
New partners debt.
Not necessarily zebra partners today, but they are strong in that space and we've seen.
Good.
Interest in response rates for for them from them and I think they have been impressed with our solutions and they see.
How we can add value to them so.
This is obviously a big.
Big part of what we need to do now for the next.
Year, 2 to ensure that we deliver the revenue growth that we that we are intending or planning for.
But so far I would say that the response from the channel has been very positive.
Great that Youre asking this question because channel is central to our go to market strategy around for a very channel centric company and as we were designing this go to market approach. This we spent a lot of time on it.
First week created a dedicated tracking our partner connect program, which is very important to serve the needs of these particular partners.
A percentage of our current partners are also machine vision.
<unk> and <unk> and sellers.
I would estimate that that's a small percentage.
The majority of machine vision partners, we do need to create a renewed need to recruit I'm sorry.
We have made great progress in recruiting these partners already we have a very strong.
Group of partners that have already signed up to sell this force and that's because of what we were talking about earlier that we've designed the product with a particular value proposition geared towards partners. We wanted it to make easy for those partners to deploy and sell these solutions, we think that's <unk>.
<unk> 2 to success and that's essential in how we've designed the product and so we're very pleased with both the number of partners, we've already been able to recruit and the pipeline of additional partners debt. We have debt that is interested in and selling our product.
Very good very good.
Just 1 follow up on Nathan.
On the China tariff recovery.
Nice contribution in the second quarter whats assumed in the.
Third quarter or second half for that or the potential for that to to recur.
Yes.
No incremental amount assumed in the second half guide.
Our total claim was just over $30 million and we've recovered $27 million to date so.
And I'd say the large majority of that's left is in reconciliation. So I would expect that the amount. That's left to go is fairly small and we you.
You know the.
The timing of that's a little bit unknown, just as we reconcile on those last few batches of of transactions.
I see okay.
Just to clarify as well in your guide you've assumed nothing for fetch.
Because it hasn't closed, but just how should we think about the profit impact that small business I know, but.
I assume you are planning to invest fairly heavily or aggressively and it would that.
The material.
In the second half for fourth quarter.
That's right. So it is not assumed in the guide since we Havent closed and now it's about a $10 million run rate revenue business and unprofitable at this time as it scales, but I'd say not material within the within the margins of our overall guide.
Okay very good thank you.
This concludes our question and answer session I would like to turn the conference back over to Anders Gustafsson for any closing remarks.
So to just to wrap up I would like to thank our employees and partners for going above and beyond to serve our customers as they stretch to meet heightened expectations in the increasingly on demand economy.
While we are focusing on maximizing profitable growth in the business. Our top priority continues to be protecting the health and wellbeing of our employees partners and customers as we recover from the pandemic.
We are also looking forward to welcoming the <unk> robotics team once we close the transaction.
Thank you and have a great day everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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