Q3 2021 Zebra Technologies Corp Earnings Call
Good day and welcome to the third quarter 2021, Zebra Technologies earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal our conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
I'd now like to turn the conference over to Mike Steele, Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to Zebras third 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.
Our forward looking statements are based on current expectations and assumptions and are subject to risks and uncertainties.
Actual results could differ materially due to factors discussed in our 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 third quarter results, then Nathan will provide additional detail on the financials and discuss our fourth quarter outlook.
Anders will conclude with progress made on advancing our enterprise asset intelligence vision.
Following the prepared remarks, Joe heel, our chief revenue officer will join us as we take your questions.
Now, let's turn to slide four as I hand, it over to Anders.
Thank you Mike.
Good morning, everyone and thank you for joining us.
Our team delivered exceptional third quarter results that exceeded our outlook.
Supported by robust broad based demand for our solutions.
For the quarter, we realized adjusted net sales growth of 27% or 23% on an organic basis.
And adjusted EBITDA margin of 21, 7%.
A 140 basis point year over year improvement.
Non-GAAP diluted earnings per share of $4 55.
The 39% increase from the prior year.
And strong free cash flow.
Our customers are prioritizing investment in our solutions to digitize and automate their workflows in an increasingly on demand global economy.
We realized double digit sales growth across all four regions with particularly strong growth in EMEA.
Favorable business mix and higher service and softer margins enabled us to expand our gross profit margin despite escalating freight costs.
Our teams have been diligently leveraging alternative modalities, so transport and expediting shipments.
To mitigate the impact of continued industry wide supply chain challenges.
We also scaled operating expenses, while continuing to invest in initiatives to drive sustainable profitable growth.
With that I will now turn the call over to Nathan to review, our Q3 financial results in more detail and discuss our Q4 outlook.
Thank you Anders let's start with the P&L on slide six in.
In Q3, adjusted net sales increased 26, 6%, including the impact of currency and acquisitions and 23, 2% on an organic basis, reflecting broad based demand for our solutions from customers of all sizes.
Our asset intelligence and tracking segment, including printing and supplies grew 12, 1%, while enterprise visibility <unk> mobility segment sales increased 27, 9% driven by exceptional growth in mobile computing.
Note that we also realized double digit growth across services and software.
All four regions grew double digits.
North American sales increased 14% with particular strength in mobile computing supplies and services.
EMEA sales increased 39% with strong growth across all major solutions offerings, particularly mobile computing.
APAC sales grew 17% with strength across most geographies, including China.
And in Latin America sales increased 41% continuing its strong recovery with double digit growth in all major offerings.
Adjusted gross margin expanded 130 basis points to 45, 1%, primarily driven by favorable business mix and higher service and software margins.
These benefits were partially offset by significant premium freight charges, which we will discuss further in a moment.
Adjusted operating expenses as a percentage of sales improved 30 basis points as we continue to prioritize high return investments in the business.
Third quarter adjusted EBITDA margin was 21, 7%.
A 140 basis point increase from the prior year period, reflecting higher gross margin and operating expense leverage.
Drove non-GAAP earnings per diluted share of $4 55.
$1, 28, or 39% year over year increase which benefited from lower interest expense and a favorable tax rate.
Turning now to the balance sheet and cash flow highlights on slide seven.
We generated $798 million of free cash flow through the first nine months of 2021.
This was $316 million higher than the prior year, primarily due to increased profitable growth.
Our balance sheet remains strong from.
From a debt leverage perspective, we ended Q3 at a modest 0.5 times net debt to adjusted EBITDA leverage ratio, which provides us ample flexibility.
And the first nine months of 2021, we invested more than $300 million to acquire <unk> robotics, and adaptive vision to advance our intelligent automation solutions and manufacturing in the warehouse.
We made $24 million of venture investments in four portfolio companies.
In addition, we made $38 million of capital expenditures and $25 million of share repurchases.
On slide eight we show the multiyear impact transitory costs, primarily related to expedited freight due to supply chain bottlenecks caused by the pandemic as well as tariffs on China imports.
Our supply chain team continues to take extraordinary measures to satisfy customer demand and an exceptionally challenging environment.
Global freight costs are elevated for all modalities of delivery across our supply chain.
This includes higher shipping cost per kilo.
Significant shift from Ocean to air freight as well as increased cost to expedite component parts to our tier one manufacturers to meet customer commitments.
In Q3 compared to pre pandemic rates.
We incurred incremental premium freight costs of $44 million, which.
Which were $36 million higher than the prior year.
For Q4, we now expect approximately $55 million of premium freight costs based on the higher spot rates, we are seeing in the market.
Which translates to a four percentage point negative gross margin impact.
We expect premium freight costs to abate as component supply and freight capacity improves.
Let's now turn to our outlook.
Our robust sales pipeline and strong order backlog is supported by broad based demand for our solutions as enterprises look to automate their operations to satisfy increasing consumer expectations.
Despite extended lead times and uneven inventory availability.
We expect fourth quarter, adjusted net sales to increase between 8% and 12% year over year.
This outlook assumes a two percentage point additive impact from acquisitions and foreign currency changes.
We anticipate Q4, adjusted EBITDA margin to be slightly higher than 21%.
Which assumes gross margin contraction from the prior year due to significantly higher premium freight expense, which I discussed earlier.
We are also experiencing product component inflation, which.
Which we expect to largely offset with price increases that became effective in September.
Non-GAAP diluted EPS is expected to be in the range of $4 20.
To $4 50.
We have increased our free cash flow outlook to be at least $950 million for the year due to higher than expected profitability.
Please reference additional modeling assumptions shown on slide nine.
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 with spotlights on our acquisition of Intuit and our health care vertical.
Thank you Nathan.
I am encouraged by the strengthening demand across our business and the bold actions. Our teams are taking to navigate the supply chain challenges.
Slide 11 illustrates how we digitize and automate the frontline of business by leveraging our industry, leading portfolio of products solutions software and services.
By transforming workflows zebra customers can address complex operational challenges to achieve higher levels of performance.
By closely collaborating with our partners and customers, we help businesses across a variety of end markets to implement solutions that maximize their return on investment.
Human labor is a scarce resource.
Our innovative solutions empower their workforce to do their jobs more effectively by navigating constant change in near real time, utilizing insights driven by advanced software capabilities, such as machine vision prescriptive analytics and artificial intelligence.
In October we acquired <unk> for approximately $145 million to further advance our enterprise asset intelligence vision.
This high margin software as a service business generated sales of approximately $27 million in 2020, nearly doubling over a three year period.
Slide 12 illustrates how the AI powered demand forecasting solution ensures that its retail and consumer product customers have the right inventory at the right time at the optimal price.
Whether it's fulfilled through online ordering or in store shopping.
And two its cutting edge offering complements our suite of workflow software solutions, including reflects this zebra prescriptive analytics.
Workforce connect and smart count.
Which works together to increase the performance of labor and inventory across the integrated supply chain.
Our growing software suite will help our customers breakdown silos between planning and execution, giving them a competitive advantage that can increase revenue and margins as they navigate the increased demands of omnichannel fulfillment.
Now turning to slide 13.
Business is partner with zebra to optimize their end to end workflows.
I would like to highlight a few recent key wins across our end markets that demonstrate how <unk> solutions are improving productivity and service levels.
In retail <unk>, enabling improved execution of omnichannel fulfillment as more consumers shop online.
We recently secured our largest win to date in India, providing TC 21, mobile computers and printers to help a local retailer compete more effectively against its larger omnichannel and E Commerce global competitors.
We are also enabling a Japanese supermarket chain to provide an improved customer experience with our EC 55 personal shopping mobile computing solution.
Over the next several quarters, a leading home improvement retailer will be deploying 90000, TCP up to two mobile computers to a broader number of associates in their stores.
Key use cases include item location.
First in class long range imaging mobile point of sale and E Commerce functionality.
Competitive differentiators for this win included our seamless network connectivity best in class noise cancellation and enterprise leading durability.
Our mobile computers will also have full desktop functionality when inserted into workstation cradles.
This retailers also deploying our workforce connect software as a service solution, which enables associates to associates instant collaboration.
As well as associated to group and store to store communication.
A leading north American transportation and logistics company is deploying 9000 pieces to seven to seven mobile computers to their truck drivers for loading and delivery use cases.
The solution will increase productivity improve inventory accuracy log driving times and track regulatory compliance.
Turning to slide 14.
We highlight how health care providers are using zebra solutions to digitize and automate the patient journey and address labor challenges.
A recently published <unk> study highlights that 95% of decision makers expect to increase spending in health care IP and clinical mobility into next year.
We have some exciting recent strategic wins that demonstrate our value proposition.
We recently secured a takeaway win of a leading U S health care provider with more than 150 hospitals and approximately 2000 sites of care.
This customer selected zebra to provide a multi year rollout of 85000 scanners for a wide range of use cases, including bedside nursing surgery pharmacy and inventory management.
They also recognized our unique software tools that enable real time event tracking to prioritize patient care.
The large eastern European Public Hospital system recently placed an order to provide 19000, PC 25 mobile computers to nurses across 100 hospitals.
Hospitals are facing labor shortages made worse by the pandemic.
Which puts patient safety at risk.
The breadth of solutions, including printers, and Wristbands reduces the administrative burden on the nursing staff and allows for more efficient patient care.
Our value proposition to this customer also includes real time tracking of costs of supplies equipment and medicine.
Yeah.
Additionally, <unk> growing our long standing relationship with GE healthcare.
Solution encompass utilizes <unk> Bluetooth Beacon technology for medical equipment asset management.
This solution improves asset utilization and prevents unnecessary equipment replacement purchases.
Caregivers also benefit by reduced time searching for medical equipment, which can increase time dedicated to patient care.
In closing.
The pandemic has accelerated trends that have been driving <unk> business, including Omnichannel shopping adoption to decide for track and trace across the supply chain and the need for a more digital health care experience.
Our core markets are vibrant and our prospects to scale newer expansion markets Albright.
We are steadily navigating through significant transitory industry wide supply chain challenges.
That said, we continue to be as excited as ever about our long term profitable growth prospects.
Now I will hand, the call back over to Mike.
Thanks, Andrew we'll now open the call to Q&A, we ask that you limit yourself to one question and one follow up so that we can get to as many of you as possible.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing the keys.
Your question. Please press Star then two.
This time, we will pause momentarily to assemble our roster.
The first question today comes from Tommy Moll.
With Stephens. Please go ahead.
Good morning, and thanks for taking my questions.
Good morning.
<unk> I wanted to start on your Intuit acquisition.
I wondered if you could highlight a couple of ways in which it might be synergistic with your portfolio and I really had two buckets in mind.
In terms of scale, you've got more robust go to market capabilities more robust R&D dollars you can put against it. So what would you highlight for US there, but also just in terms of the portfolio and fit.
So if I'm a customer.
What augmented capabilities will you be able to deliver with the software platform given you've got other software adjacencies in.
And hardware opportunities to deliver a solution versus what.
What the portfolio or rather what intuit would've have done as a stand up as a pure standalone business.
Yes, I'll try to go through and give you some inside each of those points, but first.
Help us in our.
To augment our solutions around.
Improving retail store execution for our customers as well as for.
For consumer products companies.
It is very synergistic with our enterprise asset intelligence vision, and we talked about our sense analyze act framework here and this is very much around the analyze and act part of this enabling our customers to to sense, what's happening in the <unk>.
Real World and lastly, this information and act on it in real time.
The solution that.
<unk> offers us the demand sensing solution. This call this group, but that they take in lots of different data feeds.
Anything from in store sales too whether social media.
And.
You use that to determine basically what demand trends will be and there can be very quick can do this much better than say traditional models. If you take an example, like when Covid happened.
And towards algorithms, we're able to better and quicker.
Just to this new environment.
And it's very.
Say synergistic with our other offerings, particularly say on the software side, where say take with Texas, where and to its insights will be.
We'll generate actions for.
Power reflects his task management solution. So it can be to go and replenish something move inventory from.
No tobacco store to the front of store or.
The other parts of the of the supply chain.
So it is very much kind of works synergistically with our broader software solutions as well as with our devices. So our.
Mobile computers will generate insights that intuit can analyze and put into it.
AI algorithms to drive derive.
Insights from.
<unk>.
With this broader set of solutions and we positioned zebra to be more of a strategic solutions partner to our customers and we have access to more.
More executives or more customers in more executive level.
People at our customers then entered would have individually. So therefore, we think that this fits very well with our broader strategy.
One. Other addition, this is Joe heel if you think about the customers that you had mentioned go to market.
That intuit targets. It is primarily merchandising executives in retail and in packaged goods of course that retail is a very strong segment for us so that should give us the ability to leverage our scale to the benefit of intuit's offering and Conversely, we have a position in.
Packaged goods and two it will give us a stronger offering to further expand our offerings in general not just add to it.
Wake Andrew's described into packaged goods.
Thank you both that's that's very helpful.
I wanted to pivot for my follow up to the margin.
And again, we appreciate the transparency.
Offered around the premium freight headwinds and the trajectory there.
So we're looking at 55 million for Q4 and my question really is the following if you think about how the fourth quarter is progressing both in terms of.
The realization of some of the pricing actions you've taken and then also you've got on the on the cost side that it's dynamic and presumably changing on a day to day or week to week basis.
If you think about where you will likely end the quarter once all of that rolled through.
Versus the full quarter outlook, you gave I think it was above 21% for the quarter.
Does it feel like the exit rate is probably a little better than that average or how do you see things shaping up here in real time.
And Tony maybe just to start with the fourth quarter.
As you mentioned you will be slightly above 21%.
That is down from prior year.
But over two points so four points, that's the premium freight but.
But offset by favorable business mix as well as improved service margin as well as improvement just in the underlying.
Product margin and as you mentioned, we have raised prices to offset the component pricing.
So the unit price.
I think so.
It's something we're continuing to monitor necessity is how's the transitory impacts play out I.
I would say from a logistics and freight perspective.
We do expect that to moderate through the first half of 2022.
But I'd say, it's something we're managing day to day week to week, we will see how the quarters play out in terms of when we start to see.
A meaningful benefit from where we're at today.
Nathan just to make sure I'm tracking your here it sounds like the pricing actions are really more targeting the product <unk>.
Aspect of input inflation, rather than the freight am I hearing you if thats correct. Okay. That's correct, we have not raised prices to offset the <unk>.
Transitory premium freight expenses, but that's something we'll continue to assess.
As this plays out.
Great I appreciate the insight and I'll turn it back.
Our next question comes from Andrew Buscaglia with Baird. Please go ahead.
Hey, guys just on that.
Question around margin.
Are you able to manage sort of a supply constraint issue in securing parts for your products.
And it seems broadly.
Broadly across most of.
Industrial customers in the industrial companies.
Companies in general.
These constraints will continue into next year so.
I guess, what are you doing on that side of thing to manage.
You talked about the freight costs, but I'm just wondering in terms of security securitization of part.
Yes, so I'll start kind of.
Higher level here.
Look at the broader backdrop demand is wrapped ramped very fast over the past year, and we have now prioritized meeting our customer needs and commitments.
And while we are not.
Always able to meet our traditional lead times due to these industry wide supply chain challenges, we have been working with our partners and customers to make sure that we can deliver very strong double digits year over year growth and I'd say based on feedback from our customers and partners we have been.
Managing this better than our competition.
Specifically for how to.
Secured parts, we are looking at the semiconductor industry shortages.
That has impacted.
The availability and pricing of some parts more than others or some of our devices than more than others. This is a highly dynamic environment then we get so.
We sold out and get good news on some parts of it next day, we'd get some somewhat challenging news on other parts. So it is kind of very much of a dynamic environment for us, but I would say our teams have been working very well done exceptional job of working all angles to figure out how to.
Mitigate these issues starting with we've been built more resiliency in our supply chain by putting in new assembly plants across southeast Asia. So we're less dependent on any any particular plant than in Q3 for instance, we had to move.
Volume between plans based on Colgate outbreaks. So that was a great great way for us to leverage test. We also worked really hard to engage with our semiconductor suppliers to make sure that we get our fair share. So we get a appropriate allocations of.
Parts and having a large part of our engineering team working on redesigning our devices to qualify new alternative components that are not as exposed to or limited.
Supply so we.
We're doing all of these things to ensure that we.
Can meet our customer needs as well as possible here.
But as I said.
The dynamic environment that is difficult to predict how.
How exactly it's going to play out but based on our conversations with our suppliers I would say, we expect the gradual improvement by mid 2022 on the component side.
Okay, Yeah, that's helpful I.
You do stand out as someone who has managed.
These constraints well very well and you are right in the line of fire.
That issue so I thought it does sound like.
You have.
The capabilities in place to keep that going I think.
Yes.
On the demand side I thought that.
Your AI T cells would be a little bit higher how much of that is related to that supply constraint issue or are you seeing any sort of moderating in demand.
Well first I'd say, we continue to drive innovation across the entire portfolio of products and solutions.
Helping our customers digitize and automate their operations and the core business is very vibrant and we are very excited about.
Adjacent expansion opportunities that we have now specifically for printing we had a very solid.
Delivered very solid growth across across the regions in printing printing was up across most of its portfolio. We.
We had particular strength in manufacturing which tends to.
Deploy mostly tabletop printers, we also saw strong.
Strong strong run rate or smaller business through our channel.
But it's fair to say that printing was.
Disproportionally impacted by supply chain challenge system that wasn't that includes both.
The component issues, but also.
Yes.
Our main assembly plant in Southeast Asia had to re sale almost shut shut down based on Covid and we had to.
Shift a lot of the volume from Vietnam to China. So that took some capacity out of the quarter, but it was still it was a very good quarter for printing, we could've done probably a little bit better, but we still believe that we continue to gain share certainly year to date, but gained a lot of share in printing.
And.
Also in the segments here, we had very strong growth in supplies across all regions and that includes our 10th time portfolio.
And.
We in Q2, we launched our new Soho printer.
Very excited about that that's off to a good start.
Thanks Anders.
Our next question comes from Jim Ricchiuti with Needham <unk> co. Please go ahead.
Hi, good morning.
I'm wondering if you could how you would characterize your large projects business. Andrew you highlighted a few nice wins and I'm also wondering to what extent.
That business is being impacted by the component constraints, the logistics challenges whether customers are themselves being.
Impacted by bottlenecks elsewhere in their supply chain.
Affecting the timelines for when these projects are going to go forward.
Yes.
Let's start with our.
Our large customers are larger projects are continuing to do well we saw growth in that year over year.
But the mix between kind of our run rate business and large customers.
Moderated gone back to a little bit more what we would see a historically normal rates versus what we saw a year ago.
I don't think we can say we've seen any.
Any impact on our customer's rollout schedules based on supply chain issues and we clearly worked really hard with our large customers as well as our channel partners to make sure that we understand what is.
True demand.
Our customer truly need to have in order to run their business versus what they might want to have or think of us as more risk risk buys. So we can we can satisfy.
All of our customers, but predict particularly our larger customers here.
But it did.
Demand from them continues to be strong and.
In line with what we've seen previously and maybe Joe heel do you have any additional color here.
Yes, I would echo what you said, we have not seen any delay and barge businesses due to bottlenecks on our customers' parts elsewhere.
And we have had some extraordinary wins even in this past quarter.
As you know the large projects.
Are somewhat lumpy.
Here and there, but we had double digit growth nearly in the large projects business as well, including some extremely nice wins in multiple geographies. So we're very pleased.
Got it and a follow up just.
The color on.
Your expectations looking out to the first half of next year as it relates to come.
Components.
And some of the unusual freight costs, you're incurring I'm wondering how we.
Should be thinking about your operating expense levels over the next several quarters only because things are beginning to normalize we have presumably tradeshows starting to occur again and I'm. Just wondering if we need to be mindful of some temporary cost savings.
Might have.
Benefited from this year being layered back in over the next several quarters.
Yes, I think it's I think it's fair to say that as we go into next year, we do expect some of the discretionary spend particularly around travel and trade shows to pick up but.
I'd say it's <unk>.
No different than any other variable, we manage within the year and the pluses and minuses and still expect to.
To grow despite.
Some of those incremental costs that we'll incur in <unk>.
As usual, we'll find offsets and efficiencies to mitigate mitigate that impact as we go into next year.
Got it thank you I'll jump back in the queue.
Our next question comes from meta Marshall with Morgan Stanley. Please go ahead.
Great. Thanks.
I wanted to maybe first ask a question just on kind of seasonality.
Our retail customers.
Tend to be as active in Q4, but we're also kind of dealing with the labor shortage. So just any kind of perceptions of what youre seeing as far as seasonality into Q4, and then maybe a second question clearly are highlighting our success within health care.
And this has been a continued area of success for you guys.
Are you able to use kind of your traditional go to market.
Partnerships that you think you can explore that what kind of further accelerate that opportunity. Thanks.
Yes. Thank you.
I'll start and then I'll ask Joe heel to provide some extra color here also but first on seasonality I think.
Seasonality. This year has been similar to what we've had would normally have seen.
<unk>.
Slight increases quarter over quarter in Q3 and into Q4.
So not a huge.
Difference from that perspective.
Obviously demand has been strong and very broad based so.
That certainly helps on the overall.
Right.
<unk> pro.
File, but I don't think that that would be.
The seasonality has meaningfully changed in.
Joe can comment on that in the second on the other part on health care.
Health care has been our fastest growing vertical if you look over the last several years and we I would expect it to continue to be our fastest growing vertical not necessarily every quarter, but over over a longer period of time.
And we have built up a.
We said first we are leveraging our traditional.
Sales team, but we have a dedicated healthcare sales team within our sales organization and we have largely dedicated.
Healthcare partners.
If it takes somebody who's expert in manufacturing and send them to a hospital.
Language is different the solutions are different so it's really the warrants to have.
More specialized partners and we have a large number of specialized both regular resellers, but also <unk> and other partners to help us.
Make sure that we have a robust go to market organization capability as we can.
Joe.
We loose job.
Alright, I'm sorry, Eli this is Joe heel.
I would add to each of those points respectively. The following on the seasonality.
One additional thing we have seen is that retailers have been ordering further in advance right. They're seeing of course, the shortages that are that exist in the supply chain and are working with us to anticipate though so that means that we can plan our supply to them further in advance.
So our reflection that there is seasonality to sort of pulled forward in that regard in terms of health care.
The go to market that we use there as Andrew said, yes, we have specialized partners in those areas that we have been building out over the last few years at two other things I think characterize our go to market routes to market. In particular, one is we have a higher than average investment of our own resources.
<unk>.
Learned and determined that being present in those hospitals, which is of course, a more fragmented customer seat.
Customer set.
Important and therefore, we have made more investments in our own resources in those areas and we are more present together with our partners of course and then the second is that we've also learned that we need to expand our partner set to more let's say non traditional partners, which would include in particular Isd.
They are very important.
These for electronic Health Records.
We need to form partnerships with Oems there are important Oems.
That participate in this in the healthcare segment and we have formed some very strong alliances with with those as well and that has helped us with our growth in health care.
There's not one great one more point.
<unk>.
Yes, we have.
Work with our customer the customers now.
Joe mentioned retailers, we have a greater visibility to supply chain constraints that we have.
Enable us to get greater visibility into their requirements and our pipeline is more robust than we entered the quarters.
Greater greater backlog than we normally would but it's.
They've been pulling forward demand, but if you look at look into the future.
Moreover, <unk> pipeline and backlog gives us better visibility as we look into next year.
Great. Thank you.
Our next question comes from Paul Chung Jpmorgan. Please go ahead.
Alright, Thanks for taking my questions. So just a follow up on margins you know if we think about EBITDA margins kind of ex freight costs. Maybe you are kind of in that mid Twenty's percent range you mentioned, maybe some temp.
Temporary costs come back but.
Is this kind of a more normalized margin profile.
Expect maybe and I don't know second half 'twenty two when some of these costs fade a bit and.
As your software product newness continues to accelerate can we see further expansion there that I have a follow up.
Yes.
So I think if you look back at our track record of driving we have a track record of driving profitable growth.
We will exit the year around 23% and Thats, a 150 basis point improvement from where we exited 2019. Despite the the transitory cost increase we do believe EBITDA margin can go higher but many levers to achieve that.
You mentioned, what you're scaling new markets that have traditionally Richard gross margin, whether it'd be software.
Or the fixed industrial machine vision markets were entering.
Along with the team continuing to driving higher margin productivity through the operational efficiencies across the business, which we've always done so again.
We do expect margins EBITDA margins to improve.
This year, a particularly as the transitory afraid abates.
Thanks, and then and then your free cash flow in the quarter pretty much paid for fetch.
So your flexibility to continue kind of inorganic expansion is really quite good debt levels in a good place where are you looking to kind of expand the portfolio and what leverage levels are you comfortable with.
Reflects this and Twitter.
Driving higher margin software mix, we like.
Continue to expect priority on software kind of moving forward as well and then you mentioned the top division as well if you could provide an update on how that business is going.
Yes.
Yeah I'll start on the on the kind of the M&A side of this M&A continues to be a priority for US. We are certainly very excited about the outlook for the business and we do see M&A as a vector for growth.
We are quite pleased with the recent acquisitions of <unk> and two it and adapt edition as well.
We look at M&A as a way for us to accelerate our strategy to advance our enterprise asset intelligence vision, and we're targeting select bolt on acquisitions as well as some high growth acquisitions that would truly advanced AI vision.
We see opportunities in.
Digitizing and automating supply changed and workflows more broadly.
And as you said, we have a strong balance sheet that can support.
M&A opportunities.
Then on adapt division that's part of our.
<unk> vision fixed industrial scanning.
Solution set.
We acquired <unk> back in Q2 and they provide.
Software solutions that helps.
Our customers to design in machine vision of fixed industrial scanning.
Solutions in their workflows and to be able to.
More easily extract useful information from their digital images that they take and so its an integral part of our machine vision solution and helps to make sure that it is our solutions.
Are easier to implement than our competitors. So it's one of our value propositions and so far we are very excited about the overall.
Entry into that market.
Thank you.
Okay.
Our next question comes from Brian Drab with William Blair. Please go ahead.
Hey, good morning.
Had such great momentum in a number of end markets I'm wondering Andrew are there.
Any end markets, where the impact of.
Covid related sales.
Sales stimulated by the pandemic has been delayed.
And.
And markets, where it's not going to be.
Really a headwind for like a tough comp from 2022, where you maybe it's the rental car market.
Or.
Health care market that.
Just kind of took a while to get going.
And do you see any end markets that.
Just have yet to really drive growth as it relates to the pandemic, where we'll see incremental growth in 'twenty two.
The pandemic has really accelerated in a number of secular trends supporting our business and.
Helping to drive.
Enterprises to implement our type of solutions.
The themes around how to digitize and automate our customers' businesses is a let's say a high priority across all our vertical markets across all the end markets and geographies.
How to improve.
Frontline worker efficiency and.
To reduce friction from those workflows. So I don't think theres any I cant think of any meaningful market that would be.
Hampered by.
This environment or kind of really lagging from this this is a pretty broad based.
The picture we did see early on in during Covid say that healthcare was was hit hard.
<unk>.
Traditional acute care business was.
For health care providers, largely shut down and if it wasn't truly acute they wouldn't admit patients under became only.
Taking care of Covid, but that has rebounded and we now.
Passing 2019 levels.
So Andrew.
Andrew July Interject, and just say just.
Think I asked the question as clearly as I want it to but do you see any end markets, where you look at the end market right now and say, okay. That's starting to kick in.
It Hasnt to date.
Youre excited about incremental growth going forward.
Andrew would you like me to.
That's something I'll take it.
Couple of comments on this and see.
Areas, then Joe heel you can provide some extra color I'll just highlight one market I think that we can see that that.
Starting to kick in and that will be hospitality.
Hospitality was largely shut down for most part of Covid and Thats coming back and we do see.
A number of our pipeline for opportunities within the hospitality segment is recovering nicely.
While we may use some of the other ideas.
It was going to mention that three of one perhaps that you might not expect hospitality is one another one that has sort of a longer occur.
Our curve, where we expect benefits to continue with manufacturing.
Which has been recovering really nicely and you saw that already this quarter, but we expect that to continue there is much to be recovered there and a third one that you might not think of would be Japan.
<unk> has been a.
Market that has been on the sidelines for a bit.
In particular during the pandemic.
But.
Many of the Japanese customers have not yet migrated to Android.
And now that they.
We are seeing the recovery from the pandemic theyre doing that so there is.
Our market opportunity there that is extending.
Strongly we believe into the next year.
What percentage of revenues in Japan, roughly today.
It's a small part of our revenue stream today, but it is a nice upside opportunity for us right.
Alright.
Okay and then just the last question on software or are you able to give us.
Update since there's been so many acquisitions and growth in software and you're making the comments that the margins are being aided by higher marks in the overall margin being aided by higher margin than software.
Where are you in terms of the.
The size of that software business.
You don't kind of shy away from same percentage of total.
Total revenue historically from software but.
Just curious if you could give any comment on that or like what when do you envision software being 5% or 10% of sales down the road any any quantification or clarity on that would be helpful.
Okay.
Yes, sorry.
If you look at our software SaaS portfolio the business it's still.
Small mid single digit as a percent of the company and we haven't we haven't stated a target or an aspiration in terms of what's the right mix obviously.
Area of the business, we expect to grow organically faster than the core business over time.
And it's a priority from an M&A perspective, but in terms of we haven't we don't have a set date in terms of what percentage of sales we want to get too.
By a particular year, except for them again to continue to build out the <unk>.
<unk> offerings, we have and turn it into a driver of organic growth.
Thanks for taking my question.
Our next question comes from Keith <unk> with Northcoast Research. Please go ahead.
Good morning, guys and congratulations on a good quarter.
I wanted to revisit the supply chain challenges. Once again is there a feeling that the supply chain challenges are kind of peaking now and where perhaps.
So the way to recovery or we're not quite sure if a peak quite yet and we still have to work through it.
There are different parts of it.
Supply chain challenges here now I talked a little bit about the semiconductor issues. We also have more more logistics issues around ocean freight and air freight.
I would think that on the freight side.
I would expect.
Quicker recovery and we would expect that to moderate as we get into the first half of 2022, So I think we probably add to it.
Peak rates.
And capacity constraints, but not that there will be a kind of a binary improvement in this area that it goes from whatever it is today to what it was prior to Covid that will be a gradual improvements I think.
On the on the component side I think we are.
Yeah.
We wouldn't expect it to get any worse, but.
Yes, I think again.
And earlier, we would expect kind of a gradual improvements by mid 2022.
Does that how great. It does and then the component side is it primarily with chips or does it seem like the issues are popping up and it's kind of playing whack a mole and you've got one issue here that it may resolve we go to a different issue.
I think it's.
Largely on the semiconductor side, but it does move around so we.
We secure.
Backing up on steps, even before Covid, even before this every quarter. When we started we would have certain parts that were.
On allocation or that we need to define more but so that's a normal part, but the number of parts today is much higher and we.
We work on solving.
For one part.
Next week, some other part Pops up so the frequency and the number of parts that are on allocation.
Longer lead times is greater but we tried to make sure that we work very closely with our semiconductor suppliers too.
Let them know what our required true requirements are and we've signed long term supply agreements price price agreements and so forth to make sure that we get.
Proper consideration when they do allocate the parks.
But it's it's.
It's a complex process, but I think we've been managing it very well so far.
Great I appreciate it and then move over to the software again, you got to flex is now.
At least a part for a year in terms of the approach to the sales is it still a direct primarily as a direct deal and at the same as your regular sales force or do you have a different software sales force and then how does <unk> go to market.
How do you envision starting lease things together going forward.
So I'll start and then Joe heel can provide some exchange sides here also but.
Four reflects this.
Our broader software portfolio, we have set up dedicated.
Software sales teams within our broader go to market organization. So you can think about our traditional account management teams would.
Be able to to start a conversation qualify an account to some degree and then bring in our software experts to to do a lot of the.
The more technical part of the selling activities.
But with that is it.
More dedicated part of the organization to make sure we have the right level or depth of knowledge and insights.
We are doing this largely direct today, but we are also working with expanding our portfolio of partner portfolio here and Theres a number of.
Other type of resellers and system integrators, who are interested in working with us to to be able to represent us and participate in predict doing implementation services.
And add to it.
Specifically, we would add to it here now we are initially keeping the answer its sales team somewhat separate.
We want to make sure we keep the focus and dedication to that but leveraging again the.
The account teams access to accounts as well as the broader expertise we have in our software go to market side.
Joe.
I think you said it well I have nothing to add.
Okay great.
Great. Thanks, guys I appreciate it.
Our next question comes from Jamie crossed with UBS. Please go ahead.
Hey, good morning, guys.
Good morning.
I think you've covered a lot of ground.
Good highlights.
Particular strength in mobile computing.
I think most notably in Europe.
Maybe you could just elaborate on what you are seeing thats driving that.
To summarize it's a matter of Europe, just catching up.
Are there any particular end market.
Customers are <unk> projects that are driving that mobile continuing strength in Europe.
Yes, I'll start again, and then Joe can also add some extra color on Europe.
First I'd say, we were very pleased through Q3 is overall, we've seen great great demanded.
<unk> been able to drive.
Our revenues to exceed the high end of our guidance range.
Our customers are aggressively pursuing it digital enterprise transformation strategies, which which is.
Costing.
Us to basically.
Exceed our expectations as far as revenue growth this year.
We talked about the supply chain issues as being.
Moderator on this but we've still been able to deliver double digit growth across all the regions in each of our.
Product segments, and we continue to see strong growth from both our smaller customers as well as our large strategic accounts.