Q2 2019 Earnings Call
Good day and welcome to the second quarter 2019, Zebra technologies earnings Conference call.
All participants will be any listen only mode should you need assistance. Please signal we conference specialist bypassing the Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Please note this event is being recorded.
I would now like to turn the conference over to Mike Steele, Vice President of Investor Relations. Please go ahead.
Good morning, and thank you for joining us today.
Before we begin I need to inform you that certain statements made on this call are forward looking and subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties.
Actual results could differ materially due to factors discussed in our filings with the Securities and Exchange Commission.
During this call we will make reference to non-GAAP financial measures as we describe business performance.
You can find reconciliations of our GAAP to non-GAAP results in today's earnings press release and at the end of the slide presentation.
This presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer, and Olivier Leonetti, Our Chief Financial Officer.
Anders will start with our second quarter highlights.
Olivier will then provide more detail on the financials and discuss our third quarter and full year outlook.
Anders will conclude with progress made on zebras enterprise asset intelligence vision.
Following the prepared remarks, Joe heel, our senior Vice President of global sales will join us as we take your questions.
Also throughout this presentation, unless otherwise indicated all references to sales growth our year over year on a constant currency basis and exclude results from the recently acquired Xplore technologies sometime and proper tech businesses.
This presentation is being simulcast on our website at investors that LIBOR dot com and will be archived there for at least one year.
Now I'll turn the call over to Anders.
Thank you Mike.
Good morning, everyone and thank you for joining us.
Our team executed well and drove strong profitable growth in the second quarter.
As you can see on slide four we reported net sales growth of more than 8% or 7% on an organic basis.
An adjusted EBITDA margin of 21.2% and 150 basis points year over year improvement.
And non-GAAP diluted EPS of $3 in two cents, a 22% increase from the prior year.
We continue to outpace the competition through our innovation unmatched scale and deep relationships with customers and partners.
Hi, mobile computing data capture and printing portfolios have never been stronger.
This has been accomplished through focused R&D investment.
To build upon our best in class offerings.
We saw a broad based global growth in Q2 with solid performance, both the direct and through the channel.
Operational discipline and cost efficiencies enabled us to accelerate the profit growth without compromising our investments in our employees and growth initiatives.
Enterprise mobile computing was a bright spot growing double digits as we continued to extend our lead in the industry through the broadest selection of Android powered solutions.
Enterprise workers are utilizing our mobile computers for a variety of new use cases.
We are also benefiting from the multi year transition to Android from the Windows operating system.
Organic investments in initiatives to diversify growth are paying off.
For example, our buddies solutions and our workforce connected software application, where additional bright spots in the second quarter.
We also continued to see acquisitions as a vector of profitable growth for the company.
And a way to penetrate attractive adjacent market opportunities.
In the second quarter, we announced and closed on the profit ticked acquisition.
Profit DECT is the leading provider of prescriptive analytics.
Which is an attractive growth opportunity for us.
And advances our position as a solutions provider as well as our enterprise asset intelligence vision.
Overall, our solid first half performance and leadership position in the market provides us confidence in our outlook for the year.
With that I will now turn the call over to Olivia to review, our financial results discuss our outlook and a new $1 billion share repurchase authorization.
Our strong balance sheet and cash flow generation afford us the ability to return capital to shareholders, while continuing to invest in our business.
Thank you on das.
Let's just start with the PNM as you can see on slide six net status grew 8.4% in the second quarter, which translated to 7% an inorganic basis before the impact of currencies and acquisitions.
We sold you've got to find growth in each of our reporting segments and most regions.
Enterprise visibility and mobility segment sales increased 9.2% led by particularly strong demand in mobile computing and support services.
I sat and teach and entered a chance and tracking segment saddens increased 2.9% with growth in printing supplies services and retail solutions.
Turning to our reagents.
In North America.
Says grew 7%, primarily driven by strength in mobile computing services and F. I'd.
We saw particular strength in retail and a cat and add some major competitive wins.
Yes, yes has increased 9% with the whole I teach strength in mobile computing and services.
We saw growth across most countries.
Retail and transportation and logistics were particularly strong we continued to track shedding that I'd.
Sadly in our Asia Pacific region were up 7%, which is why not keep strength in our mobile computing and printing categories.
We realized strong growth in Australia, Southeast Asia and China.
Latin America has with flat primarily due to lower census in Mexico due to continued geopolitical weakness.
Adjusted gross margin expanded 100% B 100 basis points from the prior period, primarily driven by go to market discipline as well as increased productivity and cost efficiencies, particularly in support services.
Consistent with one of our key operating principle.
Adjusted operating expenses as a percent of catch up in that sense improved 100 basis points from the prior year period.
We have a balance approach of driving operating leverage while continuing to make prudent investments in growth initiatives.
Second quarter 2019, adjusted EBITDA margin was 21.2%.
The 150 basis point increase from the prior year period.
We drove non-GAAP earnings that did you to check off treat the law and two cents a 22% yeah over yet increase.
Turning now to the balance sheet and cash flow highlights on slide seven.
We generated $165 million of free cash flow into first half of 2019.
This was $68 million lower than the prior year period.
Entirely due to the increased working capital usage in the first quarter, which we previously discussed.
Free cash flow generation in the second quarter was higher than the prior year period, and we expect a strong second half performance.
[noise] Oh were 1.8 times net debt to adjusted EBITDA ratio is below the midpoint of our target range of 1.5 to 2.5 times.
I tend to ask mentioned today, we announced that our board has authorized a one $1 billion share repurchase program.
Our strong balance sheet and cash flow profile enable us the flexibility to maintain our debt leverage target cringe, one investing in our business, including acquisitions and repurchasing up to approximately 2% of our shares outstanding annually.
Let us turn to our outlook on slide eight.
Were currently cycling our prior yeah third quarter exceptional performance that said net sales growth in Q3 2019 is expected to be between three and 5%, which assumes an approximately two pets, such as best and touch point.
Positive impact from recent acquisitions.
And then approximately one percentage point negative impact from foreign currency changes.
We believe Q3 2019, adjusted EBITDA margin would be approximately 22%, which has huge higher gross margin and operating expense leverage from the prior year.
non-GAAP diluted EPS is expected is expected to be in the range of $3.15 to treat the laws and 35 cents.
Women tightening our full year 2019, net sales growth to be between five and 8%, which assumes approximately two percentage point positive impact from recent acquisitions and approximately one percentage point negative impact from foreign currency rate changes.
Given that we are assuming about 50 basis points I'd should no adverse impact in FX from our prior guide we have effectively increased our organic growth guide by approximately 50 basis points.
For Yeah 2019, adjusted EBITDA margin is now expected to be approximately 22%.
So an improvement from 2018 and our prior guide.
Our team has been driving gross margin improvement and operating leverage at the end of our expectations.
We continue to expect that Ford, Yeah, 2019, free cash flow will exceed $625 million.
Unlike twinkie 18, we assume that working capital would be a use of cash in 2019.
You can see other Ford, Yeah, 2019 modeling assumptions on slide eight.
With that I will turn the call back to 'em dance to discuss the progress, we're making on our enterprise asset intelligence vision.
Thank you Olivia.
We are very pleased with our Q2 results and the momentum we see in our business.
Now turning to slide 10.
We are advancing our enterprise asset intelligence vision to enable every frontline acid and worker to be visible connected and optimally utilized.
The bright enables this vision by providing a digital view of the entire enterprise.
Our products and solutions sensor data from assets products and processes.
This information, including status and location is analyzed in real time to determine the best possible operational action to improve productivity and provide greater insight into business operations.
An integral part of our solutions ecosystem is Savannah cloud enablement platform that connects our devices and powers, our intelligent edge solutions.
Savannah benefits, our partners and customers by providing visibility of workflows at the front line of business.
In June we launched Savannah data services, which delivers sensory information data analytics and event triggers through application programming interfaces or APC eyes to enable workflow optimization.
Cabana supports developers through a self service web portal with Monetizable Apiay based data services, which empowers our partner community and customers to build secure scalable digital services with ease and speed.
It is a clear step forward in elevating our reputation as a solutions provider.
Enabling customers to enhance the analytics layer of the sense analyze act framework.
As a proof point.
Dawdle, a London based E Commerce service provider has been an early user of Savannah data services.
They have been leveraging prints from cloud a p. eyes to reduce the deployment time, albeit ship from store proposition.
Longer term they expect to use the blog block chain ledger of Savannah to distribute data across the supply chain to reduce return handling costs and get items back into inventory more quickly.
We've also been advancing our enterprise asset intelligence mission through acquisitions, the most recent being profitable in Q2.
Profitable complements our growing suite of other cebra software applications, including workforce connect motion works and our visibility services offering.
The additional profit takes offerings its technology and talented team expands our relevancy deeper and wider in global retail operations.
This solution identifies areas for improving inventory and pricing accuracy.
I don't stocks unsaleable merchandise and assortment discrepancies.
Overtime, we expect to leverage profit takes artificial intelligence and machine learning capabilities to address all of the vertical markets we serve.
We also intend to incorporate the profit takes functionality into Savannah to further build out the analyze and act layers. So the platform.
Benefiting both Cebra and our partners.
The acquisitions, we have made over the past year enable us to scale attractive existing categories, where we are underpenetrated.
And enter high growth new markets outside the core that advance us as a solutions provider.
In addition to profit picked tempt time has enabled us to expand our smart supplies offering into time temperature monitoring.
And explore has augment that our enterprise tablet for portfolio.
With best in class Ultra rugged to form factors.
We have made solid progress on our enterprise asset intelligence vision as we help businesses across many industries digitize their operations and gain a performance edge.
We are doing this by leveraging our deep knowledge of workflows and capitalizing on key technology Mega trends, including mobility automation cloud computing and the proliferation of smart devices and sensors.
All of which create opportunities for zebra.
Slide 11 highlights the range of vertical markets, we serve including health care.
Retail and ecommerce transportation and logistics and manufacturing.
As well as other attractive markets that broaden and diversify our growth opportunities.
In health care, our fastest growing vertical.
Our solutions translate into more efficient operations and increased patient safety.
We recently implemented a clinical mobility solution with Nemours children's health system that empowers it staff to improve operations at its two hospitals, including remote patient monitoring.
This customer a paste, it's small it's smartphone consumer devices used by nurses without health care purpose Tcfifty, one mobile computers to improve connectivity durability and collaboration.
We helped to provide a seamless bridge between the medical devices and electronic Health Records for 360 degree real time view of patient health and status for optimal care.
Our improved capabilities are as a solutions provider are moving us up the stack with health care providers like remorse.
In retail and E. Commerce, we are a trusted strategic partner with the leaders in this space.
We have found that most retailers see significant opportunity for improvement with their omni channel fulfillment capabilities as they stretch to meet consumers heightened expectations.
Our customers are deploying a wide range of increasingly complex solutions that can include RF I'd professional services and software applications such as workforce connect.
We're also seeing an increasing number of our customers equipping their associates and shoppers with our mobile computers that empower them with the real time information they need to successfully execute omni channel fulfillment and elevate the overall in store experience.
This increased level of tech investment delivers a high ROI to the customer and is necessary to compete effectively.
The prominent department store chain recently chose to upgrade its mobile computers in their stores with our latest Android powered tcfifty to model to enable their new omni channel strategy.
As this retailer rolls out our solution.
We are providing professional and support services to ensure a smooth transition.
We have seen many competitive takeaways like this one with prominent retailers E Commerce players who require a best in class enterprise grade solution.
In transportation and logistics, most customers site capacity utilization labor shortages and expedited delivery requirements as top challenges they face over the coming years.
By helping to drive increased productivity and efficiencies see Bakken helped bring their operations to higher level with the current workforce and resources.
The results of our recent warehouse vision study showed that more than three quarters of respondents say that augment the workers for technology is the best way to introduce.
Automation in the warehouse.
As a thought leader and trusted advisor, we are demonstrating a number of proven ways to meet this need.
For example, Cebra, we'll be rolling out a solution with a global transportation and logistics customer over the next year.
We will be enhancing the effectiveness of parcel delivery in Europe with its solution featuring piece if the seven mobile computers.
Barriers professional and support services.
And the monitoring of the low density of the customers air cargo containers.
In manufacturing our customers are looking for trusted partners, who can increase that operational visibility and deficiency.
A notable example can be found with a major Asian contract manufacturer, who is rolling out our RF I'd solutions on its plant floor to increase accuracy and reduce costs.
Beyond our traditional verticals, we are excited about our opportunity in adjacent markets for example.
We are well positioned to make new inroads into the federal public safety market.
Our Tc 57, and TC seven to seven enterprise class mobile computers.
As well as our El pen and ex slate. Our 12 rugged tablets are now certified for use on the Firstnet network.
Our offering is ideal for a wide variety of mission critical applications inside and outside the four walls.
In summary, we are excited about the innovative solutions, we are implementing with a diverse set of customers worldwide to address their increasingly complex business priorities.
The success, we are realizing in the marketplace demonstrates the progress we are making with our enterprise asset intelligence vision.
We continue to focus our investments in solutions that extend our lead in the industry and drive shareholder value.
Now I'll hand, the call over to Mike.
Thanks, Anders will now open the call to queuing day, 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.
Thank you we will now begin the question answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
So first question today comes from Andrew.
This gagliano with.
Aaron Berg. Please go ahead.
Hey, guys. Thanks for taking my question.
Can you talk about so digging into your guidance here so.
Yep implies a fairly large ramp into Q4.
And Q3, yeah, it looks a little bit.
Muted can you talk about the you know within you know what.
Reflected in your guide and I get the sense you know your margins are strong, but you get a sense or holding back a little bit on the topline there so what what's.
How did you come up with that guide.
Good morning, Andrew.
So we are guiding at this stage following them in our growth of about 3% to 5%.
That would translate into a two to four on an organic basis.
And if you remember last year in Q3, we had a very strong growth about 15%. So you have to take.
These guide to a into context off a tough compare and twin speak more specifically to your question.
At this stage, we are not planning and.
Two of growth across our portfolio either from a product standpoint, all region those time points.
And we feel good about the guide we are presenting to you today based upon our ability today to cough, a key trends in the in the market.
From a profitability standpoint, I would guide includes leverage on the EBITDA line.
It's about 22% that would be about 100 basis point improvement in time off a profitability and as you have seen now for a few quarters, who are we believe we are opex all gross modeling gross munching leveraging the PNM due to the operational discipline, we have in the company and that is also reflected in our guide.
Got it.
And I think it's a little bit of confusion.
With regards to when your bigger competitors.
Having substantially weaker results.
Well yeah.
I guess can you comment on what you're seeing do you think your.
Do you guys think you're gaining share generally what what are you seeing in the channel.
And Yag, if you could talk a little bit more about you know.
Inventories at distributors.
Yeah first I.
Yeah, I won't be able to comment on on other competitors.
Results or anything like that but we feel good about where we are.
We have a strong and compelling vision for the company that we have been executing diligently on over the last several years specifically here in Q2, I think we executed very well and drove strong profitable growth across across the company.
We had solid performance in Asia, Pac EMEA, and North America, both direct and through our channel.
We saw from a product perspective particular strength in the in our mobile computing portfolio and services and from a vertical perspective.
Retail E Commerce, this wireless transportation logistics or strong performers, but all our verticals were up for the first half and yeah. We have is today, we have a strong competitive position basically on the base of.
The strength of our product portfolio.
And I think also our value propositions are.
Resonating very well with our customers.
And specifically on the inventory position, let's say.
You know we manage.
Channel inventory very carefully.
Every quarter all the time.
We continue to have the the shadow inventory be within comfortably would be within the band of what we consider to be normal.
So there is nothing unusual for us in that area.
Okay.
I made a sale so we compensate our sales people on the sales out.
So there is no.
No incentive to drive sales.
Overstocking of the channel.
Okay got it thanks guys.
The next question comes from Jim recruit high with Needham and company. Please go ahead.
Thank you good morning, I'm wondering as we look out at the second half guidance.
What is that.
Soon for larger deals I Wonder can you characterize your larger deal pipeline you clearly had some sounds like some competitive wins, thus far this year.
So we are not planning an abnormal amount of large deals.
Down not totally contemplated in the guide we are putting putting full launch and then maybe Joe can compliment.
Yeah.
Large deals has become.
An important part of our portfolio and in the second half we expect a number of large deals, but as Olivier says not unusual for that part of the year. In particular Q4 is usually a large deal quarter and we don't expect an unusual number of large deals in in this year relative to previous years.
Thank you and just my follow up question just as it relates to the macro environment. It seems like you're seeing pretty good strength in your core markets, but.
Where are you at all seeing signs of potential caution from the customer base are you seeing it and yeah. The smaller markets like manufacturing, which you know is very fragmented, but still a reasonably sizable part of your business.
Well I'd start by saying that our solutions have become much more foundational to our customers strategies. They are a customer so much more dependent on our type of technology to be able to execute on their top priorities you know things like we help them increase workflow efficiencies.
Particularly important in tight labor markets, we provide real time guidance to the frontline or their employees and enhance the customer patient experience.
And we do all this through our partner ecosystems. So a business you know weve worked hard on making sure that we have a diversified our business as much as we can across geographies products and verticals and I think that is that is helping us.
Every.
Every quarter, we will see some some countries or some verticals have some ups and downs you know this is no different last year. It was maybe a little space.
Unusual in that it was very broad based but.
We mentioned last last quarter and it still holds true that Mexico would be little soft based on geopolitical environment.
But generally we saw a strong performance across most of our sub regions.
Across the world.
Thank you.
Our next question today comes from Paul Coster with JP Morgan. Please go ahead.
Yes, thanks for taking my question.
So and this I know many investors are concerned that the.
The so called Android upgrade cycle might be peaking can you give us your latest thoughts on on where we stand in the replacement of Windows CE and Windows Mobile and why you believe that you know the the growth might persist beyond this year.
[noise], Yeah first I'd say from a broader perspective, I would say that we are seeing our broad and innovative portfolio products and solution more broadly across the entire portfolio driving solid growth across the business. So Android and mobile computing is one aspect, but this is something that's much broader for us and one product line.
Yeah again I go back to.
Some of the things that I think differentiates us in the market of some things like our deep understanding of workflows and the giving customers the ability to leverage data at the edge to take more.
Good real time decisions to have to optimize and drive their businesses.
So we're very excited about the opportunities in all our product lines and the risk there are several mega trends that support support the growth like the on demand economy.
Now specific into mobile computing.
Yeah, we have seen.
Great growth over.
Several years now and we started very excited about the progress we have made and the outlook we have for that business.
There are several drivers for.
For the growth we've seen there's things like a number of new use cases that are being deployed.
That's a you know underpinned by the strong portfolio of software capabilities that we have developed for our mobile computing portfolio.
So these new use cases, I think of as being long term growth drivers.
A couple of examples you know a lot of our customers are looking to consolidate multiple devices or multiple applications onto our mobile computers.
One example will be many.
Verticals are many customers are you seeing or have you started to use the dedicated PBX or wireless PBX phones for for people.
Now with our workforce connect application, we can consolidate that that device and that use case onto our mobile computers.
And now the trend we're seeing is that our customers are.
Looking to put more and more technology in the hands of all their people so pushing technology for the into the organization.
So the trend of having a device for everybody is gaining a lot attraction.
And I'd say also.
Our big screen portfolio of mobile computers tablets and vehicle mounted computers.
We're seeing a lot of new use cases and the interest also.
Now specifically to the Android transition it clearly has been a catalyst for growth for us we.
Still has have over 60% market share in Android and the overall market.
Mobile computing market is now more than 50% made up of Android devices.
We still think that theres lots of potential in this market, we anticipate or where you all before we.
We forecast that Theres still about approximately 10 million legacy windows devices in the market.
And these devices are not all going to be converted to Android, but by 2021.
Microsoft stop supporting their older mobile operating systems. So this conversion cycle will take longer.
But we see good good drivers are.
Software continues to be great driver and new new devices. We recently released some new devices, specifically to capitalize on the warehouse transition thats ramping up now so our M.C. 33, and MC 93 products.
So.
Sandro just clearly a great driver, but it is only one of several long term drivers for our mobile computing business.
Quick follow up the you're obviously investing a lot in software you're acquiring your way into software data services cloud applications say pure license on how is this expressed in your business mobile because you know I know some folks looking.
In volume for the software low I mean, it's not bad so which is it just translate into margin improvement on the hardware side.
But.
First Oh.
Give me a couple of thoughts around our software business sense and the strategy for it we've gone from.
Having kind of made historically say dumber devices to smarter devices are now more smart infrastructure. So very much focused on driving a performance edge for our customers and it's the entire portfolio and software has become a great differentiator for us our software.
DNA layer makes it easier for our customers to integrate and manage and.
That their suite, so overall see abrupt products.
And so the.
Specifically I mean, we launched the Savannah data services, that's a great new capability for us that enables zebra and our partners and our customers to more easily access data as well as enable.
See brought to monetize that data.
It also helps demonstrate thought leadership for us and moves us up the stack as a solutions provider.
And that will help pull through a broader solutions as well.
Yes software is still a modest part of our overall business, but it is softness as a differentiator is something that's embedded into all of our AR devices also but we do expect it to continue to be a bigger and bigger part of our business.
And to compliment port on the on the business more than impact clearly the strong gross margin performance of the company, which we have Paul said now for several quarters.
He is also due to the strength of the software offering and you don't see that necessarily in the software line into PNM Bates reflected also in the strong gross margin, we have full aren't where as I said on the ascent and these software offering their lows as too sad based coupon on a return on investment basis, rather than just speed and feeds and we are as a result perceived as a thought leader in the industry and that is reflected in the way we price.
Thank you.
The next question today comes from Brian Drab with William Blair. Please go ahead.
Hi, Good morning, I was wondering if we can just to maybe drill into slide six a little further and I'm just curious on the 3% growth in AI TV.
Can you talk about maybe just specifically within that segment first in terms of end markets retail manufacturing TNL.
Which were above or below 3% and then it'd be great to if you could mention in terms of geography is for AI team, which were.
Above or below 3%. Thanks.
Yep.
I will start here.
So first.
We so to speak.
Assay grew in Q2.
We we did see fewer large deals in Q2 2019 versus last year. So we were not able to replicate all of the large deals that we saw last year and they were.
Mostly in retail, but also some other ones.
In the <unk> within our printing portfolio I'd call out or if any printers as a particularly strong growing.
Segment of our portfolio.
But overall, our printed portfolio overall, yeah, t. portfolio is positioned very well and we like the gross growth prospects. We see in the market here, we do have a strong and fresh portfolio of smart connected printers, with which has really an unrivaled manage ability through our linco us and thats a great differentiator.
From a.
Regional portfolio.
We saw good growth from printing in the.
Asia Pac.
And we we saw it in Europe , particularly I think I would call out those two estee.
This is the strongest areas for us.
You know, even China had good growth for us, which is a good printing market. So we were up high single digits in China as well. So we have we are offsetting some of the discrete electronics manufacturing by penetrating other manufacturing sectors in China like automotive and other heavier manufacturing.
Does that answer your question.
Hi.
Yeah I mean.
I was hoping maybe yes, that's all helpful. Obviously, but I was hoping maybe.
More specifically like I guess, you're saying retail was below 3% and manufacturing and 10 hour above I mean, I still feel like I'm, Keith I'm guessing it specifically answered my question.
Trying to read between the lines and I guess, so so 3% from the other regions are below I mean, some are below above and below I'm just trying to.
Im trying to reconcile this with what we're seeing from some of the Capex trends in these end markets.
The way the way we moved that into our printing business is is actually we're not seeing today any key outliers as on Das and Joe mentioned earlier.
You could have a vastly color that you can a country being an outlier into in a particular quarter, but we would characterize printing as being strong across the majority of the portfolio and that was the case in Q2 and Thats also our assumption in the rest of the year No particular apply is really Brian .
Okay. Thanks, and then just.
Follow up on a different topic so the.
Android business is doing very well and these products are relatively new in your portfolio and whenever there's a new products, obviously theres opportunity to.
It takes some of the manufacturing cost.
Out overtime, but I'm wondering is that a key lever that you might be able to pull over time is kind of.
Optimizing the cost to manufacture these android products.
So yeah, we always look at doing or we do value engineering and routinely as part of our product Roadmaps and look at bringing out costs and based on volume, we renegotiate the pricing without.
Our suppliers.
And I would say that I hear that.
We have.
We have been actively doing this for some time.
And the cost the margin position, our Android products are very much in line with the margin position on our legacy Windows devices. Just so we that this is not something that we have haven't done. This is something we've been doing actively for for some time.
Right. Okay. Thanks, that's helpful.
Thank you.
The next question comes from Keith Housum with Northcoast Research. Please go ahead.
Good morning, guys question for you know the VA when you're walking through the geographical growth it sounds like retail and health care continues to be a significant driver of that growth.
Quite honestly, it's been several years, we're seeing that and we're expecting to perhaps the TNL in warehousing and manufacturing, perhaps contribute more to that growth here. This year and perhaps into next year can you provide a little bit more color on any other growth you're seeing in those segments.
And are they jumping onto the Android train or is there still a little bit time before you see it happening.
So oh.
Take that for you here, but first let me answer you ask me about CNL and manufacturing in any other kind of vertical for us but.
Transportation logistic goes up very strong in Q2 up double digits in Q2, it tends to have a very.
Solid growth profile. If you look at the last the 18 months TNL has done very well.
There is some strong secular trends that supports that.
You see.
Tino providers are facing expedited delivery times labor shortages and number of new economics that comes with delivering one box to every household versus.
So a number of boxes to corporations.
So all of those things are.
You can have been good good backdrop for us to talk about how we can help introduce automation and technology to help address those issues and I think we are uniquely positioned in many ways to help help pitino customer trying to drive those or capitalize on those those issues.
They in in transportation logistics the.
Android is having particular.
Right now in the in the warehouse transition the warehouse is now.
Starting to really ramp moving from from Microsoft Twoq to Android.
And we see our intelligent edge solutions, so smartpak location solutions.
Steve and so forth.
To also be particularly well suited for Latino space, and the warehouse and giving us a.
Thought leadership position also.
If we then moved to manufacturing.
Manufacturing was not quite as robust in Q2, but it has performed very well over the last.
18 months or so.
We outperformed portfolio is increasing enabling industry forward at all so we.
We see manufacturing is a sizeable market opportunity for us.
Manufacturers are looking for increased visibility into their supply chain and.
The Android transition is.
Accelerating within manufacturing.
And also.
Yes location solutions has manufacturing as as its primary vertical market.
Okay I'd like to add one more thing this is Joe heel and we spoke before about the fact that of the legacy windows device about 10 million.
We think remain to be replaced in the market and if you look in more detail into that remaining installed base. We believe the majority of that is in the warehousing and manufacturing space for variety of reasons those customers have been slower to adopt those technologies, but we do expect that that adoption will now pick up and you see this reflected in the fact that we've released.
Just in the past quarter, the M. Cdthirty, three and the MP 93, I apologize and before that the MC 33, which are the flagship devices that serve that warehouse in manufacturing market and we're seeing good adoption in that space as evidence of the entry transition now focusing heavily on warehousing manufacturing going forward.
Great very helpful.
I guess this question often I know, it's a very imprecise science here, but the nine to 10 million mobile computers that we think still have our installed at the Windows. You know that number really hasn't moved probably over the past year or maybe even 18 months that we've been talking about it.
Is there any more precision that we can get a you guys are getting to that number to say that that number is still remains at roughly that same range or is it still just you know this is our best guess based on incomplete data that's out there.
It is the incomplete data I guess in that the we know we can't go and identify each and every one of those 10 million devices, but what it has come down in the numbers Weve used on our calls over the last 18 months has come down but.
I'd say the the reason hasn't come down may be faster is that.
There was only last year that the markets.
Let me switch to be more over 50% Android from from.
For Microsoft So there's still a substantial amount of legacy windows devices being sold into the market. So while we are safe eating into the the installed base them on one hand, we are adding to it that the industry is adding to it on the other hand with like in your new legacy devices.
Yeah, good good morning.
I think the.
The one dynamic that has perhaps surprised us a bit as well is that in those segments that have very high penetration of windows mobile computers.
Customers have continued to behind mobile computers at at relatively high rates there are some markets.
Around the world, where more than 50% of the mobile computing revenues are still.
In the Windows category, So thats prolonged.
The windows existence, and we'll also prolong the transition cycle to Android.
Yes, Michael So they've had a couple of questions that kind of talks about Android being.
Having peaked or being close to peaking we certainly don't see that we'd expect Android the Android transition to continue for some time and when you then couple that with the.
Proliferation of new use cases and.
Deeper penetration of the.
Devices into corporations.
We believe mobile computing is going to be a good growth business for some time.
That's a good point, if I could just squeeze one more in here in terms of the share repurchase did I hear you guys say that you guys are going to cap the share repurchases at 2% of the shares outstanding annually. And then are you guys want to take on additional debt you know to be opportunistic with the share repurchases.
So Keith you summarized it well in term of what we're putting to do so let me give you a bit of background on why the buyback. So one we have achieved now all the buff Tom Mcfall, our leverage range of about one and a half wouldn't achieve that.
In the third quarter stop the of the fourth quarter. That's why we believe that buyback should be on the table and we believe that the strength of the cash flow of the company would allow us to invest in the business.
And best in M&A, and still do a buyback and to your point, we plan to to buy back within.
12 months pay adds about 2% of the shaft standing would we go hi, Yeah optimistically.
We would see.
Great and so you are you willing to take on additional debt in order to fund those share repurchases.
We don't think we need to do that the strength of the cash flow will we didn't know us to to to finance buyback with the cash at the company.
Great. Thanks, guys I appreciate it.
The next question comes from Richard Eastman with Baird. Please go ahead.
Yes, good morning.
Good.
Olivier.
For Anders could you just speak to pricing and price capture in the quarter and what actions were taken if any.
On pricing.
In both the channel and quite frankly, I know on the larger projects. You know it is a bid process, but has has pricing inched up on the on the large.
Bid opportunities as well.
So we're we you know we work in a competitive environment. We've had we have strong competitors and it's always been competitive market.
We've been able to.
Focused very much on our attention on making sure that we have.
Very compelling.
The portfolio of solutions that are attractive to our customers and we are.
Certainly looking to see.
US getting a premium in the market and I think we have been able to to to achieve that for for a long time.
Obviously, we have to compete indication for for for deals, but we have so far been able to do that well.
Offsetting any price pressure with the additional.
Cost reductions to maintain or even now increase our gross margins.
But I wouldn't characterize that the.
The price pressure or the competitiveness of the market is particularly different being bid today than it was three months ago or six months ago, and maybe Joe you have any further comments.
Our margin Petrobras has two parts, we already talked about the large deals and are just described that very well and the other part is what happens in our run rate, which is the pricing of the transactions. It goes primarily in smaller quantities to distribution and Weve developed I think a very good level of expertise to work closely with our distributors and partners to understand exactly where the marketplace price is and to price stack in a competitive way. So that we can continue to grow and we've been pleased with our ability to realize a good pricing in that segment, while continuing to gain share.
Correct.
And just to put some clarity on that one when I look at the adjusted gross margin.
Year over year, I think it's up 100 bps 100 basis points.
Is there a price capture.
Piece of that did price year over year on a consolidated basis with the channel with the products.
Due to add 20 basis points to that gross margin improvement or is there a.
Is there a number Olivier that you could just slice out of that and say look on a consolidated basis, both through the channel through direct.
That were capturing you know so many basis points of that 100 as price.
It's difficult to answer with precision.
We the strength of the margins is due to multiple drivers the way we price.
The value of what we offer and also the supply chain efficiencies that I mentioned earlier I wouldn't point to one in particular and it's very difficult to pass all the Pcs Richard.
Okay.
Yes.
Sorry.
I was going to say.
We mentioned earlier softer becoming a.
Hey, good part of our portfolio that's helpful.
I should also mention surfaces has been able to improve margins quite that much.
Quite nicely in Q2, and we expect that to continue to be a strong margin contributor.
Okay, and then could you could I ask again, just against a consolidated 7% core growth for the for the quarter.
Did the channel growth.
At or above that and the direct business I think you alluded to some of the retail wins, maybe not as great. This quarter.
But just a growth rate on large direct wins.
Versus the channel how did it look relative to the 7% core.
So one it does change quarter to quarter in Q2, our direct sales were stronger than the growth in the channel, but in Q1, we saw some of the other way there the channels are stronger than that the the direct sales or the large deals.
Okay, Okay, and just say just my last question.
I'm looking at maybe maybe explore revenue was a little bit below where I thought it might come in no arguably we just a straight line the acquired revenue per quarter, but I'm curious if you could maybe just speak a little bit too.
The explore acquisition and maybe whats, how you're maybe repositioning or investing in their product portfolio to whether your whether you are expanding their adjacent markets or.
What's the what's the investment strategy it explore and whats the hope for benefit there going forward.
Yes, as a reminder, first we bought explore to really help strengthen our broader big screen mobile computing portfolio.
And that includes explore our eeighty five the portfolio of tablets and our vehicle mounted computers and this portfolio as a whole has been growing very nicely.
That includes Q2, we had very good growth across the portfolio in Q2 and since we acquired to explore it has really helped us cement us as the clear number two in the rugged tablet space, we think to be continue to think of that as a very attractive market.
Our new explore products have been very well received and we have our first.
Android powered explore tablet is now available in the market and the integration is going well and we are now working on really optimizing the go to market to help drive scale and efficiencies we've gotten all the puts this extortion now available for all our partners to resell.
And we're looking to see how do we capitalize on some of the near Adjacencies for Xplore has.
Some strength that hasn't been historical strengths of zebra and Joe can hope, yes. So perhaps you asked about where are we investing in as you said repositioning and I would.
Specifically identify two things the first Anders just identified which is.
The.
Tablet.
Market has additional vertical depth that.
Outside of the core verticals that we've been talking about a deeper for for many quarters now.
Things like.
Government.
Public safety and utility segments would be examples of such areas and we are repositioning and investing in penetrating those segments number one and number two would be.
The announcement that we just need to launch the L. 10, Android version I think its a very important additional investment why is that because it enables us to leverage that strength that we talked about earlier, our software capabilities, our mobility DNA capabilities.
In Android, we can now leverage that into tablet space and we think that will differentiate us. So those are two areas of investment we think.
Okay very good thank you.
The next question comes from James Faucette with Morgan Stanley . Please go ahead.
Hi, Ryan this is Eric on for James Thanks for taking the question.
You mentioned, the global customer rollout in transportation and logistics, including low density monitoring just wanted to ask is this including or Smartpak solution and maybe on that if you can talk about how trials have been progressing if you have more color on just timing to prove out of ROI there.
Yes, so thats specific reference was to Smartpak.
And our broader portfolio of.
It would be cool intelligent edge solutions, the Smartpak smart lens RF by the location solutions and so forth is.
Is progressing nicely.
We have.
The growing pipeline all the pilots and we certainly are working hard to make sure. We can convert all of those pilots into.
Proper.
Commercial rollouts overtime, but we feel we are making good progress and it's I'd say it's also.
Truly helping us.
Positioned zebra as a thought leader and.
It pulls through a lot of our other products as well.
And Joe Joe will have more comments Kumar sort of flavors of color here you can think about the expansion first in the way that Anders mentioned going from smaller trials, where we're really trying to prove the technology and also prove the ROI of the solution to the customer to rollout that include hundreds or thousands of doctors, where we now monitored the loading and we now have multiple customers, where we are rolled out in that sense and we see that continue to expand the other direction of expansion is there are multiple use cases within this solution. So you can monitor not only the loading of trailers, but you can also monitor the loading of air cargo containers. For example, and there are other examples of how this technology and the solution can be expanded we are doing so in both of these directions.
That's great. That's really helpful. Thank you and then maybe just if you could help us get a sense of how you're thinking about your capital allocation strategy given the newly.
Announced share repurchase program and if that potentially impacts any plans for M&A and your strategy there.
So the priority.
For us is to invest in our business either organically and Inorganically Inorganically and we believe that M&A we'd be.
A strong vector of growth for the company.
And we believe that based upon the strong cash flow off of zebra that we can invest in the business and see return excess cash to buyback so no big change.
At this stage and ache and as we have reached now the bottom of our targeted leverage range. We believe we can do the three investments I've mentioned organic inorganic and buy back.
That's great. Thank you.
Our last question today comes from Jeffrey Kessler with Imperial. Please go ahead. Thank you and thank you for getting me on the call.
I want to I want to do you alluded to a little bit to the institutional market before I want to know if if you could.
Update us a little bit.
On.
Penetration into not just.
We will call safe cities government civil projects, but also.
But also the education market.
K through 12, and colleges, which seems to be.
In other areas of security in other areas of security and tracking and do you see we are seeing a lot of growth in that specific.
In that specific market simply because it's been just stating for so long.
Yeah, I'll start and then Joe will provide some extra color, but first on the public safety market that said, we just talked about that on the call today.
We think that is a attractive market opportunity for us in this in the range of several hundred million solve dollars.
And.
I think it's I think it's a market is poised to grow materially.
As rugged computers becomes a valid choice and enables new use cases there.
Historically.
The public safety market has been made up of either kind of traditional dedicated.
First respond to devices that you're all familiar with but also there's been a lot of consumer devices in that space and we think that there is room for our mobile computers as well as a good way of the.
Augmenting that market and providing growth for zebra and maybe some some other thoughts from Joe here.
Yes, if you look at the public sector opportunities.
Including education, I think we would say we see the majority of the opportunity in the.
Public safety first and in government second I think thats would be sort of our our order of opportunity priority at the moment.
Okay.
And.
Secondly, I'm I'm wondering if you or have you taken into account.
Have you take into account the.
With regard to.
Sure with Forex.
Guidance.
The possibility that.
Forex could be could be better or worse than expected in particularly places like.
Like the UK if things.
Things.
Duncan.
Don't get organized there.
Is that in the guidance already.
It is and by the way FX had a momentous event and when and as we have said before we have never keep or leave us to manage the pineda up the company and we believe that we can manage FX.
As.
As well.
All right excellent.
Thank you.
Go ahead I'm sorry.
That's why I said, Jim Furyk Okay.
Okay. Thank you very much.
Okay.
This concludes our question and answer session I would like to turn the call back over to Mr. Gustafson. Please for any closing remarks.
Thank you.
Yes, as we wrap up I want to thank the zebra team and our partners for another quarter of excellent execution and for delivering strong financial results.
I also want to welcome the profit tech team to see Brown.
Have a great day everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.