ZBRA
#We see a lot of, first, strong secular growth trends that we are trying to capitalize on.
We're starting, from a vertical perspective, in healthcare.
Healthcare has been a strong growth vertical for us for several years.
And really the catalyst has been the electronic health records.
And we expect that there's still plenty of untapped potential within that vertical.
Particularly in the US in the short term, but over time we expect that to become more global.
Transportation logistics has been a good vertical for us also over time.
I think e-commerce continues to be a good driver.
And we are, for T&L, also developing a lot of new and exciting solutions that are uniquely suited for T&L and to help drive more value for them.
On the retail side, every retailer that we talked to has a big program around how to drive omnichannel or enable omnichannel.
In our view, omnichannel will be at least a neutral driver for us over time.
But it might be a little more choppy in the short term, as some retailers have more opportunities to invest than others.
But we are seeing a lot of good opportunities to ---+ or a lot of growth already from retailers that are adopting omnichannel-type of strategies.
So if you think of ---+ if you do click-and-collect or something like that in the store, it drives a totally different level of technology intensity around our products.
And, say, maybe on a geographic perspective, Asia Pac continues to do very well for us.
We think it's a ---+ we have good opportunities to continue to do well there.
We believe we're very well positioned in Europe and the US also.
And our program to reinvigorate growth in Latin America feels like it is also starting to pay off.
And as a backdrop, I would say we are very excited about the new types of solutions we are developing around Enterprise Asset Intelligence to really help our customers get greater visibility into their operations to drive productivity improvements and enhancements to their service levels.
This is <UNK> <UNK>.
I'd like to add one more dimension to the sources of growth.
And that is that we continue to be in the middle of, and in fact driving, technology transitions in three major areas.
The first one is the transition in mobile computing from legacy operating systems that requires a migration of operating systems.
There's over 15 million mobile computers that need to migrate off Windows CE and Windows mobile platforms by the end of 2020.
And as you know, we are leading that transition.
We had a very strong market share position in that transition in the first half, and even in the last year.
The second is in scanning where the transition from 1D to 2D scanning is one that we are now leading.
And the third is in printing where the transition from ---+ where the expansion into mobile printing is providing lots of new growth opportunities for us.
Yes, I think it's a few different reasons for that.
I'd say in Q1 it was a lot to do with budgets hadn't been fully allocated out to the business units.
They weren't necessarily in a position to go forward with some of those projects.
In Q2 I would say it was more that many of our customers are saying there were a lot of things going on and they needed to pull back and be more focused.
They didn't want to take on more projects than they felt they could realistically execute on.
So they were being more, I guess, diligent about which ones they picked and focused on.
And I would say that it was probably more from a retail perspective where there was a lot of things going on within retail around omnichannel activities.
So those would be the ---+ probably the top priority thoughts around that.
If I could correlate it with you.
If you looked at the holiday season, which is of course the key season for retailers last year, it really was a very mixed season with some clear winners and some clear losers, if you can say, retailers that struggled to keep up.
As a result as they entered into Q1, some of these retailers then went into introspection and reconsidered their plans for the coming year.
That is not unusual, but because the Christmas season was so split in performance I think it led to the reconsideration of some of the spending plans in Q1 in particular.
Some of it is spilling over into Q2 and the rest of the year.
No, it was definitely stronger.
We saw good improvement, sequential improvement, particularly in North America, and it was both around traditional brick-and-mortar retailers as well as e-commerce.
And we start to see e-commerce as a category to become more and more prominent within our overall retail category.
Yes, so the full integration is expected to be completed in the middle of next year.
I would say that we talked about the fact that at the beginning of the year we saw $50 million of synergies coming through of which $30 million was going to be cost of goods sold and $20 million was operating expense.
Operating expense is primarily a full-year impact of the things that were done last year.
The cost of goods sold, as we said, a good chunk of it was realized in the first half and we'll still realize some in the last half.
Obviously our gross margin in the printing business is always ---+ has always ---+ has been traditionally higher than it has been in the Enterprise business.
If you look at it, what we do is we do ---+ you will see the Q, and the operating income will come in that area going forward.
I think one thing we want to make sure you realize is that we're very pleased with the gross margins and those trends.
We're realizing the benefits of the cost reduction initiatives, associated procurement, design to value, service margin improvements, more favorable sales mix.
We also have ---+ gross margins within mobile computing were particularly strong.
These are result of obviously multiple quarter efforts.
And we expect the trend to trend positively.
I will say that we did see sequential improvement in the gross margin on the Enterprise business, which I think was favorable.
Yes, I think it's going to be probably closer to 25%-ish long term.
But it has not changed dramatically.
Yes.
Yes, it will go up sequentially every year.
I think the ---+ printing was slightly weaker from a revenue year over year, but it was due to really tough comp last year.
There was one particular deal that we couldn't replicate.
If we had been able to replicate that, we would have seen growth, but the margin profile across the business, though, is quite steady.
With the improvements we see there, it really goes back to all the efforts we put into driving improvements in gross margin, or reductions in cost of goods sold.
We've had a very deliberate initiative around procurement and design to value also for printing, but also for our Enterprise products since we closed on the transaction.
And we're now starting to see those programs or initiatives starting to bear fruit.
Services is another area that we put a lot of emphasis on improving margins, which is also nice to see that that's now coming through.
Yes, I'll start and I'll ask <UNK> to help out also here.
I'd say we have seen lots of good opportunities for our better together story resonating.
You can go from a high level, I'd look at healthcare.
That has been a focus area for Zebra for a long time but not so much for Motorola.
We have made healthcare a focus vertical for the entire business.
And we've seen great growth for both mobile computing and scanning in there.
I'd say similar in retail, we are seeing new wins for printing in retail where we didn't have before.
That's how the strength we have from one part of the Company across other verticals are helping to pull through business.
I'd say also the examples that I went through in my prepared remarks, each of those examples are utilizing a number of different products, and all including both Enterprise and the pre-transaction Zebra printer products.
<UNK> <UNK> speaking.
I would add, we put a lot of emphasis early on in cross-training the sales force in order to be able to sell the entire portfolio and to implement initiatives and incentives that would indeed incentivize the cross-selling.
I think it is fair to report that we are seeing good traction on that, not only in the examples that <UNK> included in the prepared remarks, but throughout our business we regularly see deals where both printing and our Enterprise products are included.
We are moving ---+ in fact I would say beyond that now ---+ to where we have ---+ to where we are implementing solutions in our customers where we integrate those combinations of product into more of a solution.
Indeed, some of the things that <UNK> described are examples of that.
One other thought on the cross-selling.
Of course, I mentioned earlier that 83% of our sales goes through partners.
So in order for us to be successful at the cross-selling, it isn't enough that our own sales force does this but also that our partners do this.
And the new PartnerConnect program is in fact helping us to do this.
If you look at the elements of the program, it provides incentives for cross-selling.
It provides certifications for partners to acquire capabilities across our entire portfolio.
And of course we only launched it in April, but we're quite confident that it will help us in that ability to cross-sell.
We're doing a lot of things to integrate the products, product families, to work better together.
Initially you can say there was almost like two separate products that were sold together as a bundle, but now we have done things around how to make it easier to pair products.
But also we now integrating our printer products into the OVS, our services ---+ cloud-based services platform ---+ to make sure that we can manage all products, irrespective of the history of them from one platform.
Yes, we are very pleased with the progress on expanding our Android business.
We have the industry's most comprehensive lineup of products for that, and we are getting a lot of recognition for product superiority in that area also.
I'd say the largest, most sophisticated customers are the ones that are leading the charge.
They have their own IT department to understand what is going on with Android and Microsoft and other operating systems, and can make their own decisions about what's really in their best interest over the longer term.
And so we ---+ I'd say we almost exclusively see larger tenders be for Android devices.
Further down, if you look into more the smaller deals, run rate type of business, there I think it's a bit more inertia, that people know the products they have.
They have written applications around those, that they don't necessarily have the resources in house to migrate those off a legacy operating system to an Android, say.
So we expect it to be a lag before that happens.
But we are seeing Androids having more and more traction deeper down in the pyramids.
So it is working.
And we are having a number of plans for how to engage with ---+ both directly with end users as well as through our distribution and reseller partners to educate and train both resellers and end users on these things.
Then lastly on the margins, if you look at ---+ if you compare a large deal, say, for Android versus a large deal for a legacy operating system, the margins tend to be very similar.
If you compare a run rate type of deal for Android versus a legacy operating system, they again would be very similar.
The difference we've seen in margin profile between Android and legacy operating system has been much more driven by the proponent or the portion of the total revenue that comes from large deals versus run rate.
This is <UNK> <UNK>.
I will answer that one.
We were ---+ are very pleased with the fact that the deals that pushed out from Q1, we were able to close a majority of those.
I don't have an exact percentage for you.
But we were able to close a large number of those deals.
That said, we do continue to see the caution that <UNK> mentioned, in particular in the retail sector.
And we've talked about it in some of the earlier questions.
We do see some of that caution persisting.
So some deals in Q2, we saw push out to Q3.
And so we see some of that caution continuing.
But we're quite confident, to your point, that it is a matter of timing and that it isn't that people are fundamentally reconsidering their architecture and their approach.
I think they are weighing the project in the context of an altered economic environment for themselves and an altered budgeting cycle that they perhaps find themselves in.
Good morning.
This is <UNK>.
A couple things to your point.
We have achieved a number of significant milestones thus far.
Again, the Asia Pac go-live went successfully, as well as the PartnerConnect.
Keep in mind that as we went through those, within the region we had a 10% growth.
I think that speaks to the fact we had good execution.
We've also rolled out aspects of our services program.
All those have been executed well.
We look at the integration spend in two buckets.
One is IT related, which is hooking up the systems to run the business.
The other is non-IT, or integration costs.
The IT piece is on track and on budget at this point.
And the non-IT expense was running about $20 million higher in the first half of 2016.
We wanted to make sure that there was smooth execution.
I think we've demonstrated that in the results that we have.
We want to make sure that ---+ these things include the operating model by which we run the Company.
The legal entity structures.
Again, this is a carve-out, very complex.
Structuring the PartnerConnect program to accomplish the things that are important for both us and our partners.
We also had corporate rebranding as we move from a Motorola name to a Zebra name, consolidated, those types of things.
I think it is important to [note], these additional costs that are non-IT are behind us.
The integration expenses have peaked.
We expect to step down going forward.
And we remain committed to a debt pay down goal of $300 million in 2016 and $350 million in 2017.
China has been a fast growing market for us for a long time.
And we have a very strong team, I think, in China.
We're putting a lot of emphasis, a lot of effort, into making sure that we have the right strategies for the long term, including making sure we have the products to support the Chinese customers.
We are very excited about what China can do for us and how we can continue to grow in China.
We've definitely seen our footprint expand over time.
So when we first entered China it was very much based on really Western manufacturing companies.
But over time we moved into a lot of local manufacturing.
But over the last few years, we have seen a lot more retail, particularly e-commerce, as well as T&L.
Of course, all those e-commerce packages need to be delivered somewhere.
We've also seen actually quite strong healthcare growth.
So the portfolio of products we sell in China is now much broader.
It starts to be much more similar to what we would see in the US or Europe, as examples.
I'd add two other opportunities for growth that we're pursuing, and have been pursuing, in China.
It's been really a growth story that's extended over many quarters for us now.
The two others are ---+ is cross-selling.
We talked about that a bit earlier.
We have strength in different sectors between the pre-transaction Zebra and the Enterprise business.
Enterprise, as <UNK> was saying, having charged into the retail segments, the e-commerce segments, fast growing areas where the printing was very strong traditionally in manufacturing.
We now have the ability and are in fact cross-selling between those two.
That is one very nice source of growth.
And then the other one is we have the opportunity to expand geographically within China.
So you have multiple tiers of cities.
We're quite present already in the larger cities like Shanghai, in Guangzhou, in Beijing, but the second and third tier cities are ones we are in the process of penetrating and staffing.
So we have lots of growth in that dimension as well.
Absolutely.
This goes into the broader initiative we have around gross margin improvements.
We're working on both the regular procurement activities.
So working very closely with our contract manufacturers, or JDM partners, to make sure that we get the lowest product cost we can, from that perspective.
But we also having a number of what you call designed to value initiatives going on.
This is where we take an existing product and look at ways to how we can redesign it to design cost out of the product, to reduce the product cost and improve margins.
Both of these initiatives were meaningful drivers for the gross margin over-performance that we had in Q2 here, and are included also on Android devices.
So we see clearly working very hard to make sure that we are very thoughtful and focused on improving margins in our Android portfolio.
Yes, I think that as you look at that, we tend to look at ---+ we obviously have a bottoms-up detail.
And we'll end up with, for example, adjustments to stock-based comp and stuff like that that sort of goes up and goes down.
We tend to look at the ---+ as we look for reasonableness, we tend to look at it for a total OpEx trend.
I think in Q3 we are seeing things that are driving our total OpEx going up a little bit, as we have some duplicative IT costs that are going through G&A where, for example, you have two systems that have to work at the same time until you get off the old one.
We have higher litigation expense.
We also have some higher healthcare costs.
Absent these costs, our total OpEx would be lower year over year.
I don't know that giving you definition of OpEx for sales and marketing and all those other things would necessarily be helpful at this point.
Probably through this year.
It is just related to some of the litigation associated with the acquisition of ---+ as we did the acquisition, we ended up with ---+ assuming some of the responsibilities for some of those items.
And it is just ---+ it's not huge, but it is several million dollars quarterly.
Yes.
Again, we had said, I think, around $130 million to $150 million for the full year.
Our integration expenses have peaked.
We said that our expenses for the year are about $20 million associated with the non-IT related spend.
Again to your point, we expect a big step down going forward.
And we certainly remain committed to the $300 million debt pay down in 2016.
Thank you all for participating.
Have a great day.
