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Edited Transcript of ZBRA earnings conference call or presentation 30-Jul-19 12:30pm GMT

Q2 2019 Zebra Technologies Corp Earnings Call

LINCOLNSHIRE Aug 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Zebra Technologies Corp earnings conference call or presentation Tuesday, July 30, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Gustafsson

Zebra Technologies Corporation - CEO & Director

* Joachim Heel

Zebra Technologies Corporation - SVP of Global Sales

* Michael A. Steele

Zebra Technologies Corporation - VP of IR

* Olivier C. Leonetti

Zebra Technologies Corporation - CFO

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Conference Call Participants

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* Andrew Edouard Buscaglia

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Brian Paul Drab

William Blair & Company L.L.C., Research Division - Partner & Analyst

* Erik Taylor Lapinski

Morgan Stanley, Research Division - Research Associate

* James Andrew Ricchiuti

Needham & Company, LLC, Research Division - Senior Analyst

* Jeffrey Ted Kessler

Imperial Capital, LLC, Research Division - MD

* Keith Michael Housum

Northcoast Research Partners, LLC - MD & Equity Research Analyst

* Paul Coster

JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies

* Richard Charles Eastman

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Second Quarter 2019 Zebra Technologies' Earnings Conference Call. (Operator Instructions) 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.

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Michael A. Steele, Zebra Technologies Corporation - VP of IR [2]

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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 and 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 our business performance. You can find reconciliations of our GAAP to non-GAAP results in today's earnings press release and at the end of 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 Zebra's 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, our references to sales growth are year-over-year, on a constant currency basis and exclude results from the recently acquired Xplore Technologies, Temptime and Profitect businesses. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least 1 year.

Now I'll turn the call over to Anders.

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [3]

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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 4, we reported net sales growth of more than 8%, or 7% on an organic basis; an adjusted EBITDA margin of 21.2%, a 150 basis point year-over-year improvement; and non-GAAP diluted EPS of $3.02, 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. Our 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 direct and through the channel. Operational discipline and cost efficiencies enabled us to accelerate profit growth without compromising our investments in our employees and growth initiatives.

Enterprise mobile computing was a bright spot, growing double digits as we continue 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 multiyear transition to Android from the Windows operating system. Organic investments in initiatives to diversify growth are paying off. For example, RFID solutions and our Workforce Connect software application were 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 Profitect acquisition. Profitect 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 Olivier to review our financial results, discuss our outlook and our 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.

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Olivier C. Leonetti, Zebra Technologies Corporation - CFO [4]

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Thank you, Anders. Let us start with the P&L. As you can see on Slide 6, net sales grew 8.4% in the second quarter, which translated to 7% on an organic basis before the impacts of currencies and acquisitions. We saw diversified growth in each of our reporting segments and most regions. Enterprise Visibility & Mobility segment sales increased 9.2%, led by particularly strong demand in mobile computing and support services. Asset Intelligence and Tracking segment sales increased 2.9% with growth in printing, supplies, services and retail solutions.

Turning to our regions. In North America, sales grew 7% primarily driven by strength in mobile computing, services and RFID. We saw particular strength in retail and health care and at some major competitive wins.

EMEA sales increased 9% with relative strength in mobile computing and services. We saw growth across most countries. Retail and transportation and logistics were particularly strong with continued traction in RFID. Sales in our Asia Pacific region were up 7% with relative strength in our mobile computing and printing categories. We realized strong growth in Australia, Southeast Asia and China.

Latin America sales were flat primarily due to lower sales in Mexico due to continued geopolitical weakness. Adjusted gross margin expanded 100% -- 100 basis points from the prior period primarily driven by go-to-market discipline as well as increased connectivity and cost efficiencies, particularly in support services.

Consistent with one of our key operating principle, adjusted operating expenses as a percentage of net sales improved 100 basis points from the prior year period. We have a balanced approach of driving operating leverage while continuing to make prudent investments in growth initiatives. Second quarter 2019 adjusted EBITDA margin was 21.2%, a 150 basis point increase from the prior year period. We drove non-GAAP earnings per diluted share of $3.02, a 22% year-over-year increase.

Turning now to the balance sheet and cash flow highlights on Slide 7. We generated $165 million of free cash flow in the 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. Our 1.8x net debt-to-adjusted EBITDA ratio is below the midpoint of our targeted range of 1.5 to 2.5x. As Anders mentioned, today we announced that our Board has authorized a $1 billion share repurchase program. Our strong balance sheet and cash flow profile enable us the flexibility to maintain our debt leverage target range while 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 8. We are currently cycling our prior year third quarter exceptional performance. That said, net sales growth in Q3 2019 is expected to be between 3% and 5%, which assumes an approximately 2 percentage point positive impact from recent acquisitions and an approximately 1 percentage point negative impact from foreign currency changes. We believe Q3 2019 adjusted EBITDA margin will be approximately 22%, which assumes higher gross margin and operating expense leverage from the prior year.

Non-GAAP diluted EPS is expected to be in the range of $3.15 to $3.35. We're maintaining our full year 2019 net sales growth to be between 5% and 8%, which assumes approximately 2 percentage point positive impact from recent acquisitions and approximately 1 percentage point negative impact from foreign currency rate changes. Given that we are assuming about 50 basis points additional adverse impact in FX from our prior guide, we have effectively increased our organic growth guide by approximately 50 basis points.

Full year 2019 adjusted EBITDA margin is now expected to be approximately 22%, an improvement from 2018 and our prior guide. Our team has been driving gross margin improvement and operating leverage at the high end of our expectations. We continue to expect that full year 2019 free cash flow will exceed $625 million. Unlike 2018, we assume that working capital will be a use of cash in 2019. You can see other full year 2019 modeling assumptions on Slide 8.

With that, I will turn the call back to Anders to discuss the progress we are making on our Enterprise Asset Intelligence vision.

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [5]

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Thank you, Olivier. 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 front-line asset and worker to be visible, connected and optimally utilized. Zebra enables this vision by providing a digital view of the entire enterprise. Our products and solutions sense 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 Savanna, our cloud-enablement platform that connects our devices and powers our intelligent edge solutions. Savanna benefits our partners and customers by providing visibility or workflows at the front line of business. In June, we launched Savanna Data Services, which delivers sensory information, data analytics and event triggers through application programming interfaces, or APIs, to enable workflow optimization. Savanna supports developers through a self-service web portal with monetizeable API-based data services, which empowers our partner community and end 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, Doddle, a London-based e-commerce service provider, has been an early user of Savanna Data Services. They have been leveraging print-from-cloud APIs to reduce the deployment time of its ship-from-store proposition. Longer term, they expect to use the [broad] blockchain ledger of Savanna to distribute data across their supply chain to reduce return handling costs and get items back into inventory more quickly.

We've also been advancing our Enterprise Asset Intelligence vision through acquisitions, the most recent being Profitect in Q2. Profitect complements our growing suite of other Zebra software applications, including Workforce Connect, MotionWorks and our Visibility services offering. The additional Profitect's 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, out of stocks, unsellable merchandise and assortment discrepancies. Over time, we expect to leverage Profitect's artificial intelligence and machine learning capabilities to address all of the vertical markets we serve. We also intend to incorporate Profitect's functionality into Savanna to further build out the analyze and act layers of the platform, benefiting both Zebra 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 Profitect, Temptime has enabled us to expand our smart supplies offering into time-temperature monitoring, and Xplore has augmented our enterprise tablet portfolio with best-in-class ultra-rugged 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 work flows and capitalizing on key technology megatrends, 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 e-commerce, 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 its staff to improve operations at its 2 hospitals, including remote patient monitoring. This customer replaced its smartphone consumer devices used by nurses with our health-care-purposed TC51 mobile computers to improve connectivity, durability and collaboration. We helped provide a seamless bridge between medical devices and electronic health records for a 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 to stack with health care providers like Nemours.

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 omnichannel fulfillment capabilities as they stretch to meet consumers' heightened expectations. Our customers are deploying a wide range of increasingly complex solutions that can include RFID, professional services and software applications such as Workforce Connect. We are 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 omnichannel 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. A prominent department store chain recently chose to upgrade its mobile computers in their stores with our latest Android-powered TC52 model to enable their new omnichannel strategy. As this retail 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 retail and e-commerce players who require a best-in-class enterprise-grade solution.

In transportation and logistics, most customers cite 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, Zebra can help bring their operations to higher level with their current workforce and resources. The results of our recent warehouse vision study show that more than 3/4 of respondents say that augmenting workers with technology is the best way to introduce automation in the warehouse. As a thought leader and trusted adviser, we are demonstrating a number of proven ways to meet this need. For example, Zebra will 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 that solution featuring TC57 mobile computers, various professional and support services, and the monitoring of the load density of the customers' air cargo containers.

In manufacturing, our customers are looking for trusted partners who can increase their operational visibility and efficiency. A notable example can be found with a major Asian contract manufacturer who's rolling out our RFID 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 TC57 and TC77 enterprise-class mobile computers as well as our L10 and XSLATE R12 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 4 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.

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Michael A. Steele, Zebra Technologies Corporation - VP of IR [6]

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Thanks, Anders. We'll now open the call to Q&A. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Andrew Buscaglia with Berenberg.

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Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [2]

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Can you talk about -- so speaking at your guidance, so -- implies a fairly large ramp in Q4, and Q3 looks a little bit more muted. Can you talk about the -- what's in -- what's reflected in your guide? And I get the sense your margins are strong, but I get a sense that you're pulling back a little bit on the top line there. So what's -- how did you come up with that guide?

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Olivier C. Leonetti, Zebra Technologies Corporation - CFO [3]

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Andrew, so we are guiding at this stage for nominal growth of about 3% to 5%. That would translate into a 2% to 4% 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 this guide in the context of a tough compare. And to answer a bit more specifically to your question, at this stage, we are planning to have growth across our portfolio, either from a project standpoint or regional standpoint, and we feel good about the guide we are presenting to you today based upon our ability today to cover key trends in the market. From a profitability standpoint, our guide includes leverage on the EBITDA line at about 22%. That would be about 100 basis point improvement in term of profitability. And as you have seen now for a few quarters, we believe we have OpEx or gross margin leverage in the P&L due to the operational discipline we have in the company, and that is also reflected in our guide.

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Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [4]

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Got it. And I think there's a little bit of confusion with regards to one of your bigger competitors having substantially bigger results. What -- I guess can you comment on what you're seeing? Do you think you're gaining share generally? What are you seeing in the channel? And yes, if you could talk a little bit more about inventories and distributors.

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [5]

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Yes. First, I won't be able to comment 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 the company. We had solid performance in Asia Pac, EMEA, North America, both direct and through our channel. We saw, from a product perspective, particular strength in our mobile computing portfolio and services; and from the vertical perspective, retail and e-commerce as well as transportation logistics were strong performers. But all our verticals were up for the first half. And yes, we have a -- 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, we manage channel inventory very carefully every quarter all the time. We continue to have the channel inventory be within -- comfortably be within the band of what we consider to be normal. So there's nothing unusual for us in that area. In sales, we compensate our sales people on the sales out. So there's no incentive to drive overstocking of the channel.

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Operator [6]

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The next question comes from Jim Ricchiuti with Needham & Company.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [7]

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I'm wondering, as we look out at the second half guidance, what is that assume 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.

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Olivier C. Leonetti, Zebra Technologies Corporation - CFO [8]

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So we are not planning an abnormal amount of large deals. They are not totally contemplated in the guide we are putting forward, Jim. And maybe Joe can complement.

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Joachim Heel, Zebra Technologies Corporation - SVP of Global Sales [9]

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Yes. Large deals have 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, which usually a large-deal quarter. We don't expect an unusual number of large deals in this year relative to previous years.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [10]

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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, if at all, seeing signs of potential caution from the customer base? Are you seeing it in the smaller markets like manufacturing, which is very fragmented, but still a reasonably sizable part of your business?

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [11]

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Well, I'd start by saying that our solutions have become much more foundational to our customers' strategies. They are -- our customers are much more dependent on our type of technology to be able to execute on their top priorities. Things like we help them increase workflow efficiencies, particularly important in tight labor markets. We provide real-time guidance to the front line of their employees and enhance the customer patient experience. And we do all this through our partner ecosystems.

So our business -- we work hard on making sure that we have diversified our business as much as we can across geographies, products and verticals. And I think that is helping us. Every quarter, we'll see some countries or some verticals have some ups and downs. This is no different. Last year was maybe a little unusual in that it was very broad-based. But we mentioned last quarter and it still holds true that Mexico would be a little soft based on geopolitical environment. But generally, we saw strong performance across most of our subregions across the world.

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Operator [12]

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The next question today comes from Paul Coster with JPMorgan.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [13]

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So Anders, I know many investors are concerned that the so-called Androids upgrade cycle might be peaking. Can you give us your latest thoughts on where we stand in the replacement of Windows CE and Windows Mobile and why you believe the growth might persist beyond this year?

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [14]

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Yes. First, I'd say -- from a broader perspective, I'd say that we are seeing our broad and innovative portfolio of products and solution more broadly on -- 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 than one product line. 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 work flows and giving our customers the ability to leverage data at the edge to take more good, real-time decisions to help to optimize and drive their businesses. So we're very excited about opportunities in all our product lines. And there are several megatrends that support the growth like the on-demand economy. Now specifically to mobile computing, we have seen great growth over several years now. And we're certainly very excited about the progress we've made and the outlook we have for that business.

There are several drivers for the growth we've seen. Now there's things like a number of new use cases that are being deployed that's underpinned by the strong portfolio of software capabilities that we have developed for our mobile computing portfolio. So these new use cases, I think the best being long-term growth drivers. A couple of examples, a lot of our customers are looking to consolidate their multiple devices or multiple applications onto our mobile computers. One example will be many verticals and many customers are using or have historically used the dedicated PBX or wireless PBX phones for people. Now with our Workforce Connect application, we can consolidate that device and that use case onto our mobile computers. Another 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 further into the organization. So the trend of having a device for everybody is gaining a lot of traction. And I'd say, also, our big screen portfolio of mobile computers, so tablets and vehicle-mounted computers are seeing a lot of new use cases and interest also.

Now specifically to the Android transition, it clearly has been a catalyst for growth for us. We still 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 there's lots of potential in this market. We anticipate or we forecast that there is still about approximately 10 million legacy Windows devices in the market. And these devices are not all going to be converted to Android by 2020 when Microsoft stops supporting their older mobile operating systems. So this conversion cycle will take longer. But we see good drivers. Our software continues to be a great driver. And new devices, we've released some new devices specifically to capitalize on the warehouse transition. That's ramping up now, so our MC33 and MC93 products. So I'd say Android is clearly a great driver but is only one of several long-term drivers for our mobile computing business.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy & Applied and Emerging Technologies [15]

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A quick follow-up. The -- you're obviously investing a lot in software. You're acquiring your way into software data services, cloud applications, APIs and some. How is this expressed in your business model? Because I know some folks are looking in vain for the software line, and it's not there. So just translate into margin improvement on the hardware side.

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [16]

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First, I'll give you a couple of thoughts around our software business system and the strategy for it. We've gone from having kind of made historically, say, dumber devices to smarter devices and now more smart infrastructure. So very much focused on driving the performance edge for our customers. And it's an entire portfolio. And software has become a greater differentiator for us. Or software DNA layer makes it a lot easier for our customers to integrate, manage and [adapt] their suites of Zebra products. So the -- specifically, we launched the Savanna 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 Zebra to monetize that data. It also then helps demonstrate thought leadership for us and moves us up the stack as a solutions provider, and it will help pull through our broader solutions as well. Software is still a modest part of our overall business, but it -- software as a differentiator is something that's embedded into all our devices also. But we do expect it to continue to be a bigger and bigger part of our business.

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Olivier C. Leonetti, Zebra Technologies Corporation - CFO [17]

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And to complement, Paul, on the business model impact. Clearly, the strong gross margin performance of the company, which we have posted now for several quarters, is also due to the strength of the software offering. And you don't see that necessarily in the software line in the P&L, but it's reflected also in the strong gross margin we have for hardware, as Anders said. And this software offering allows us to sell based upon 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.

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Operator [18]

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The next question today comes from Brian Drab with William Blair.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [19]

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I was wondering if we could just maybe drill into Slide 6 a little further and just curious on the 3% growth in AIT. Can you talk about maybe just specifically within that segment, first, in terms of end markets, retail manufacturing, P&L, which were above or below 3%? And then it'd be great too if you could mention in terms of geographies for AIT, which were above or below 3%.

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [20]

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Yes. I will start here. So first, AIT grew in Q2. 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 -- within our printing portfolio, I'd call out RFID printers as a particularly strong growing segment of our portfolio. But overall, our printed portfolio -- our overall AIT 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 manageability through our Link-OS, and that's a great differentiator.

From a regional portfolio, we saw good growth from printing in Asia Pac, and we saw it in Europe particularly. I think I would call out those 2 as the strongest areas for us. 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 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?

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [21]

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Yes. I mean I was hoping maybe -- yes, that's all helpful, obviously. But I was hoping maybe more specifically like -- and I guess you're saying retail was below 3% and manufacturing and T&L were above. I mean I still feel like I'm guessing at the specific answer to my question. I'm trying to read between the lines, and I guess 3% from the other regions were below -- I mean some are above and below. I'm just trying to reconcile this with what we're seeing from some of the CapEx trends in these end markets.

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Olivier C. Leonetti, Zebra Technologies Corporation - CFO [22]

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The way we model our printing business is -- actually, we are not seeing today any key outliers. As Anders and Joe mentioned earlier, you could have a vertical or a particular country being an outlier in a particular quarter. But we would characterize printing as being strong across the majority of the portfolio. That was the case in Q2, and that's also our assumption in the rest of the year. No particular outliers really, Brian.

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Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [23]

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Okay. And then just a 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 product, obviously, there's opportunity to take some of the manufacturing costs out over time. And I'm wondering, is that a key lever that you might be able to pull over time as kind of optimizing the cost to manufacture these Android products?

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [24]

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So we always have looked at doing -- we do value engineering routinely as part of our product road maps and look at bringing out costs. And based on volume, we renegotiate pricing with our suppliers. I would say here that we have been actively doing this for some time. And the cost -- the margin position now on Android products are very much in line with the margin position on our legacy Windows devices. So we -- this is not something that we haven't done. This is something that we've been doing actively for some time.

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Operator [25]

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The next question comes from Keith Housum with Northcoast Research.

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Keith Michael Housum, Northcoast Research Partners, LLC - MD & Equity Research Analyst [26]

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A question for you, Olivier. When you're talking 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 that, perhaps, say, T&L and warehousing and manufacturing perhaps contributing more to that growth here this year and perhaps into next year. Can you provide a little bit more color on the 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 that happening?

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [27]

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So I'll take that for you here. But first, as you asked basically about T&L and manufacturing and any other kind of vertical for us, but transportation and logistics goes up very strongly in Q2, up double digits in Q2. It tends to have a very solid growth profile. If you look at the last 18 months, T&L has done very well. There's some strong secular trends that supports that. You see T&L providers are facing expedited delivery times, labor shortages. A number of new, say, economics that comes with delivering one box to every household versus a number of boxes to corporations. So all of those things are kind of being 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 T&L customer drive those or capitalize on those issues. The -- in transportation logistics, the Android is having particular play now in the warehouse transition. The warehouse is now starting to really ramp moving from Microsoft to Android. And we see our intelligent edge solutions, so SmartPack, location solutions, RFID and so forth to also be particularly well suited for the T&L space and the warehouse and giving us thought leadership position also.

If we then move to manufacturing. Manufacturing was not quite as robust in Q2, but it has performed very well over the last 18 months also. We -- our portfolio is increasing, enabling industry 4.0. So we see manufacturing as a sizable market opportunity for us. Manufacturers are looking for increased visibility into their supply chain. And the Android transition is also accelerating within manufacturing. Also, our location solutions has manufacturing as its primary vertical market.

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Joachim Heel, Zebra Technologies Corporation - SVP of Global Sales [28]

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I'd like to add one more thing. This is Joe Heel. We spoke before about the fact that of the legacy Windows devices, about 10 million, we think, remain to be replaced in the market. And if you look in more detail into that, our remaining install base, we believe the majority of that is in the warehousing and manufacturing space. For a 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 MC33 -- the MC93, I apologize, and before that, the MC 33, which are the flagship devices that serve that warehousing manufacturing market. And we're seeing good adoption in that space as evidence of the Android transition now focusing heavily on warehousing manufacturing going forward.

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Keith Michael Housum, Northcoast Research Partners, LLC - MD & Equity Research Analyst [29]

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Great. Very helpful. And I get this question often, and I know it's a very imprecise science here, but the $9 million to $10 million mobile computers that we still think have or installed Windows, that number really hasn't moved probably over the past year or maybe in 18 months that we've been talking about it. Is there any more precision that we can get on -- are you guys are getting at a number to say that, that number still remains at roughly that same range? Or is it still just this is our best guess based on incomplete data that is out there?

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [30]

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It is incomplete data, I guess, in that we can't go and identify each and every one of those 10 million devices. But it has come down, and the numbers we've used on our calls over the last 18 months has come down. But I'd say the reason it hasn't come down maybe faster is that it was only last year that the market switched to be more -- over 50% Android from Microsoft. So there's still a substantial amount of legacy Windows devices being sold into the market. So while we are, say, eating into the installed base from one end, we are adding to it or the industry is adding to it on the other end with new legacy devices.

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Joachim Heel, Zebra Technologies Corporation - SVP of Global Sales [31]

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Yes. And I think the one dynamic that has perhaps surprised us a bit as well is that in those segments that still have very high penetration of Windows mobile computers, our customers have continued to buy mobile computers 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 that's prolonged the Windows existence and will also prolong the transition cycle to Android going forward.

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [32]

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Yes. So maybe I 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 expect 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 devices into corporations, we believe mobile computing is going to be a good growth business for some time.

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Keith Michael Housum, Northcoast Research Partners, LLC - MD & Equity Research Analyst [33]

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Got you. Good point. And then if I could 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 going to take on additional debt to be opportunistic with the share repurchases?

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Olivier C. Leonetti, Zebra Technologies Corporation - CFO [34]

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So Keith, you summarized it well in term of what we're planning to do. So let me give you a bit of background on why the buyback. So one, we have achieved now our -- the bottom of our leverage range of about 1.5. We will achieve that in the third quarter, start 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 will allow us to invest in the business, invest in M&A and still do a buyback. And to your point, we plan to buy back within a 12 months' period about 2% of the shares outstanding. Would we go higher opportunistically? We would see.

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Keith Michael Housum, Northcoast Research Partners, LLC - MD & Equity Research Analyst [35]

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Great. And so are you willing to take on additional debt in order to fund those share repurchases?

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Olivier C. Leonetti, Zebra Technologies Corporation - CFO [36]

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We don't think we need to do that. The strength of the cash flow will allow us to finance buyback with the cash of the company.

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Operator [37]

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The next question comes from Richard Eastman with Baird.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [38]

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Could -- Olivier or 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, it is a bid process. But has pricing inched up on the large bid opportunities as well?

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [39]

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So we work in a competitive environment. We've had -- we have strong competitors. And it's always been a competitive market. We've been able to focus very much our attention on making sure that we have a very compelling 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 achieve that for a long time. Obviously, we have to compete on occasion for deals, but we've so far been able to do that well and offsetting any price pressure with additional cost reductions to maintain or even now increase our gross margins. But I wouldn't characterize that the price pressure or the competitiveness of the market is particularly different today than it was 3 months ago or 6 months ago. And maybe, Joe, you have any further comments?

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Joachim Heel, Zebra Technologies Corporation - SVP of Global Sales [40]

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Well, our margin picture always has 2 parts. We already talked about the large deals. Anders 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 we've developed I think a very good level of expertise to work closely with our distributors and partners to understand exactly where the market price is and to price that 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.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [41]

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Could I -- and just to put some clarity on that. 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? The price year-over-year on a consolidated basis with the channel, with the products, did it add 20 basis points to that gross margin improvement? Or 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 we're capturing so many basis points of that 100 as price?

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Olivier C. Leonetti, Zebra Technologies Corporation - CFO [42]

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It's difficult to answer with precision. We -- the strength of the margin 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 parse all the pieces, Richard.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [43]

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Okay. Is -- sorry.

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [44]

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I was going to say, we mentioned earlier, software becoming a bigger part of our portfolio. That's helpful. I should also mention, services has been able to improve margins quite nicely in Q2. And we expect that to continue to be a strong margin contributor.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [45]

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Okay. And then could I ask you again, just against that consolidated 7% core growth for the quarter, did the channel grow at or above that in 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?

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [46]

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So the -- 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 it the other way. There, the channel was stronger than the direct sales of the large deals.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [47]

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Okay. Okay. And just my last question. I'm looking at maybe Xplore revenue was a little bit below where I thought it might come in. Now arguably, we just straight line the acquired revenue per quarter. But I'm curious if you could maybe just speak a little bit to the Xplore acquisition. And maybe what's -- how you're maybe repositioning or investing in their product portfolio to whether you're expanding their adjacent markets or what's the investment strategy at Xplore? And what's the hoped-for benefit there going forward?

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [48]

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Yes. As a reminder, first, we bought Xplore to really help strengthen our broader big screen mobile computing portfolio, right? And that includes Xplore, our ET5 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 Xplore, it has really helped us cement us as the clear #2 in the rugged tablet space. We think -- we continue to think of that as a very attractive market. Our new Xplore products have been very well received, and we have our first Android-powered Xplore tablets now available in the market. The integration is going well. And we're now working on really optimizing the go to market to help drive scale and efficiencies. We've gotten all the -- this is -- Xplore is now available to all our partners to resell. And we're looking to see how do we capitalize also in some of the near adjacencies where Xplore has some strength that hasn't been historical strength of Zebra. And Joe can help...

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Joachim Heel, Zebra Technologies Corporation - SVP of Global Sales [49]

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Yes. And so perhaps you asked about where are we investing and, as you said, repositioning. And I would specifically identify 2 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 at Zebra 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 made to launch the L10 Android version. I think it's 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 2 areas of investment we've made.

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Operator [50]

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The next question comes from James Faucette with Morgan Stanley.

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Erik Taylor Lapinski, Morgan Stanley, Research Division - Research Associate [51]

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This is Erik on for James. You mentioned the global customer rollout in transportations and logistics, including low-density monitoring. Just wanted to ask, is this including your SmartPack 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 ROI there?

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [52]

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Yes. So that specific reference was to SmartPack. And our broader portfolio of what we call intelligent edge solutions, the SmartPack, SmartLens, RFID, location solutions and so forth, is progressing nicely. We have a growing pipeline of pilots. And we're certainly working hard to make sure we can convert all those pilots into proper commercial rollouts over time. But we feel we're making good progress, and it's -- I'd say, it's also truly helping us position Zebra as a thought leader, and it pulls through a lot of our other products as well. And Joe, you have some more comments.

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Joachim Heel, Zebra Technologies Corporation - SVP of Global Sales [53]

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Yes. Two more 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 rollouts that include hundreds or thousands of backdoors where we now monitor 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 the 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 this solution can be expanded. We are doing so in both of these directions.

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Erik Taylor Lapinski, Morgan Stanley, Research Division - Research Associate [54]

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That's great. That's really helpful. 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.

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Olivier C. Leonetti, Zebra Technologies Corporation - CFO [55]

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So the priority for us is to invest in our business, either organically and inorganically. We believe that M&A would be a strong vector of growth for the company. And we believe that based upon the strong cash flow of Zebra, that we can invest in the business and still return excess cash through a buyback. So no big change at this stage, Erik. And as we have reached now the bottom of our targeted leverage range, we believe we can do the 3 investments I've mentioned: organic, inorganic and buyback.

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Operator [56]

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And our last question today comes from Jeffrey Kessler with Imperial.

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Jeffrey Ted Kessler, Imperial Capital, LLC, Research Division - MD [57]

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I wanted -- you alluded a little bit to the institutional market before. I want to know if you could update us a little bit on penetration into not just what you call safe cities, governing civil projects, but also the education market, K-12 and college, which seems to be other areas of security and tracking. In AIDC, we're seeing a lot of growth in that specific market. Certainly, it's been gestating for so long.

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [58]

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I'll start and then Joe will provide some extra color. But first, on the public safety market, that's -- we talked about that on the call today. We think that is an attractive market opportunity for us in the range of several hundred million sub dollars. And I think it's a market that's 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 responder 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's room for our mobile computers as well as a good way of augmenting that market and providing growth for Zebra. And maybe some other thoughts from Joe here.

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Joachim Heel, Zebra Technologies Corporation - SVP of Global Sales [59]

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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 that would be sort of our order of opportunity priority at the moment.

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Jeffrey Ted Kessler, Imperial Capital, LLC, Research Division - MD [60]

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Okay. And secondly, I'm wondering if you -- have you taken into account the -- with regard to your ForEx guidance, the possibility that ForEx could be better or worse than expected in particularly places like the U.K. if things don't get organized there? Is that in the guidance already?

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Olivier C. Leonetti, Zebra Technologies Corporation - CFO [61]

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It is. And by the way, FX, at the moment, is a headwind. And as we have said before, we have multiple levers to manage the P&L of the company. And we believe that we can manage FX as well.

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Operator [62]

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This concludes our question-and-answer session. I would like to turn the call back over to Mr. Gustafsson for any closing remarks.

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Anders Gustafsson, Zebra Technologies Corporation - CEO & Director [63]

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Thank you. So 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 Profitect team to Zebra. Have a great day, everyone.

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Operator [64]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.