Zebra Technologies Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2021

There are 12 speakers on the call.

Operator

Good day, and welcome to the Seadrill Second Quarter 2021 Earnings Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to Mike Steele, Vice President, Investor Relations. Please go ahead.

Speaker 1

Good morning, and welcome to Zebra's 2nd quarter conference call. This presentation is being simulcast on our website at investors. Zebra.com and will be archived there for at least 1 year. Slide 2 conveys that the forward looking statements we make today are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially due to factors discussed in our SEC filings.

Speaker 1

During this call, we will reference non GAAP financial measures as we describe our business performance. You can find reconciliations at the end of this slide presentation and in today's earnings press release. Throughout this presentation, unless otherwise indicated, our references to sales growth Our year over year on a constant currency basis and exclude results from recently acquired businesses for the 12 months following each acquisition. This presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer and Nathan Winters, our Chief Financial Officer. Anders will begin with our 2nd quarter results, then Nathan will provide additional detail on the financials and discuss our revised 2021 outlook.

Speaker 1

Anders will conclude with progress made on advancing our Enterprise Asset Intelligence vision. Following the prepared remarks, Joe Heel, our Chief Revenue Officer, We'll join us as we take your questions. Now let's turn to Slide 4 as I hand it over to Anders. Thank you, Mike.

Speaker 2

Good morning, everyone, and thank you for joining us. Our team delivered exceptional second quarter results with strong performance across the business, resulting in record sales and profits. For the quarter, we realized adjusted net sales growth of 44% or 40% on an organic basis, an adjusted EBITDA margin of 23.6%, A 530 basis point year over year improvement. Non GAAP diluted earnings per share of $4.57 A nearly 90% increase from the prior year and strong free cash flow. Despite ongoing industry wide supply chain challenges, our teams successfully satisfied stronger than expected demand from customers, both direct and through our distribution channel.

Speaker 2

Similar to Q1, we realized robust broad based demand with double digit sales growth across All four regions, each major product and solutions category, as well as in all of our vertical end markets. Our customers continue to digitize and automate their workflows with a sense of urgency in the increasingly on demand global economy. We also significantly expanded profit margin across our business, more than offsetting escalating global supply chain costs. We also continued our balanced approach to scaling operating expenses, while investing in initiatives to drive sustainable profitable growth. With that, I will now turn the call over to Nathan to review our Q2 financial results in more detail and discuss our improved 2021 outlook.

Speaker 3

Thank you, Anders. Let's start with the P and L on Slide 6. In Q2, adjusted net sales 44.4%, including the impact of currency and acquisitions and 39.8% on an organic basis, Reflecting broad based demand for our solutions from customers of all sizes. We realized particularly high growth from our run rate business Through the channel, partially driven by pent up demand, while continuing to see strong growth in direct sales to large customers. Our Asset Intelligence and Tracking segment, including printing and supplies, grew 51.2%, While Enterprise Visibility and Mobility segment sales increased 35.1%, driven by exceptional growth across all major categories, including enterprise mobile computing and data capture.

Speaker 3

Note that we also realized double digit growth in services and software, along with very strong growth in our RFID solutions, for which deployment activity has snap back as customers recover from the pandemic. We recognized double digit growth in all regions. In North America, sales increased 39% with all major categories growing double digits. In EMEA, sales increased 44% with solid growth across subregions and solutions offerings. APAC again realized strong growth with sales up 20% led by strength in China, Australia, India and Japan.

Speaker 3

Latin America also continued its recovery points to 48%, primarily driven by favorable business mix, a $12,000,000 recovery of Chinese import tariffs, Higher support service margins and contribution from our recent high margin acquisitions. These benefits were partially offset by higher premium freight which we will discuss further in a moment. Adjusted operating expenses as a percentage of sales improved 180 basis points. We continue to scale OpEx while prioritizing high return investments in the business. 2nd quarter adjusted EBITDA margin was 23.6%, a 5 30 basis point improvement from the prior year period, reflecting higher gross margin and operating expense leverage.

Speaker 3

We drove non GAAP earnings per diluted share of $4.57 a $2.16 or 89.6 percent year over year increase. EPS growth also benefited from lower interest expense, partially offset by a slightly higher tax rate. Turning now to the balance sheet and cash flow highlights on Slide 7. We generated $514,000,000 of free cash in the first half of twenty twenty one. This was $192,000,000 higher than the prior year, primarily due to increased profitable growth.

Speaker 3

In Q2, we acquired Adaptive Vision for $18,000,000 to advance our machine vision solutions and made $4,000,000 of venture investments. In addition, we also repurchased $25,000,000 of Zebra shares. Our balance sheet remains strong. From a debt leverage perspective, We ended Q2 at a modest 0.6 times net debt to adjusted EBITDA leverage ratio, which affords flexibility to invest in attractive business acquisitions. On Slide 8, we show the multi year impact of transitory costs Primarily related to expedited freight due to supply chain bottlenecks caused by the global pandemic, as well as tariffs on China imports.

Speaker 3

For the second half of the year, we now expect the year on year unfavorable impact from these items to be approximately $85,000,000 which translates to a 3 percentage point negative gross margin impact. Our supply chain team has been taking extraordinary actions to satisfy Freight as well as increased cost to expedite component parts to our Tier 1 manufacturers in order to meet customer commitments. We expect premium freight costs to abate once component supply and freight capacity improves. Let's now turn to our outlook. The pandemic has accelerated trends that have been driving our business, including omni channel shopping adoption, The desire for track and trace across the supply chain and the need for more digital healthcare experience.

Speaker 3

We entered Q3 With a strong order backlog and we continue to see broad based robust demand across virtually every dimension of our business. This momentum along with our sales pipeline gives us the confidence to provide a strong Q3 guide and substantially raise our full year outlook. In Q3, we expect adjusted net sales to increase between 21% 25% year over year. This outlook assumes a 3 percentage point additive impact from the acquisitions and foreign currency changes. We anticipate Q3 adjusted EBITDA margin to be between 20% 21%, which assumes gross margin expansion And operating expense leverage from the prior year.

Speaker 3

It also assumes approximately $45,000,000 of premium freight expense, which is $37,000,000 higher than last year. We are also experiencing higher product component costs, which we expect to largely offset with recently announced price increases. Non GAAP diluted EPS is expected to be in the range of $3.90 to $4.10 For the full year 2021, we are raising our guide for adjusted net sales growth to be between 23% 25%, which reflects our increasing optimism for strong growth in the second half of the year Despite significant industry supply chain constraints for certain product components as well as transportation bottlenecks. This outlook assumes an approximately 3 percentage point additive impact from acquisitions and foreign currency changes. Despite our significantly increased expectation for transitory premium freight charges that we just highlighted, we are maintaining our expectation of full year 2021 Adjusted EBITDA margin to be between 22% 23%, which assumes operating expense leverage and gross margin expansion from the prior year.

Speaker 3

We now expect our free cash flow to be at least $900,000,000 for the year due to increased profitability. Please reference additional modeling assumptions shown on Slide 9. Note that our outlook does not include any projected results from the pending acquisition of FETCH Robotics. Anders will discuss the strategic acquisition in a few moments. With that, I'll turn the call back to Anders to discuss how we're advancing our enterprise asset intelligence vision in new and existing markets.

Speaker 3

Thank you, Nathan.

Speaker 2

I am encouraged by the strengthening demand across our business, which allows us to further increase our 2021 outlook. Slide 11 illustrates how we are working with our customers and partners to advance our enterprise asset intelligence vision. By leveraging Zebra's industry leading portfolio of products, solutions, software and services, our customers can overcome Some of their most complex operational challenges and transform their frontline workflows to achieve higher levels of performance. We help businesses across industries implement tailored solutions that digitize and automate their operations, enabling them to compete more effectively. With our innovative solutions, our customers' associates Such as artificial intelligence, machine learning, prescriptive analytics and machine vision.

Speaker 2

Now turning to Slide 12. As a trusted strategic partner, businesses in a variety of end markets turn to Zebra to help optimize End to end workflows. I would like to highlight several recent wins across our end markets, which demonstrate how Zebra's solutions are improving productivity, customer service and patient care. The large European Postal Service We'll be deploying approximately 80,000 TC-57s to their carriers. Continuing a long standing relationship, they are upgrading to the latest Mobile computing solution, which will enable them to more effectively handle increased parcel volumes and a broad range of use cases.

Speaker 2

It's another proof point of successful collaboration with Post and Parcel Services around the globe, including our current business with the United States Postal Service. We are also helping a large North American steel manufacturer to optimize and digitize its operations. This customer is adding more than 1,000 of our ET-fifty six tablets to their operations, which will allow them to eliminate manual paper by implementing electronic proof of delivery to automate and expedite the invoicing process. This solution will also improve the customer experience by providing advanced notification of delivery. Large public sector hospital system in the U.

Speaker 2

K. Is utilizing our mobile computers, printers and wristbands to enable real time visibility into the entire patient journey and ensure safe and efficient care. This customer is using our solutions for specimen tracking, patient monitoring and blood transfusions in emergency and operating rooms. Their employees also use our mobile computers for physical security access. The regional U.

Speaker 2

S. Supermarket operator Recently decided to implement our Flexus workforce management tool for labor scheduling and employee self-service to more efficiently manage their resources across more than 100 locations. The solution also frees up Their associates to focus more on customer service versus administrative tasks. More broadly in retail, The sharp increase in omnichannel and online shopping requires retailers to deliver goods in a timely manner and make them available for pickup when promised. To address this challenge, a wide range of retailers have been prioritizing investment in Zebra solutions that provide higher inventory accuracy And utilize their labor more effectively.

Speaker 2

Slide 13 highlights significant recent investments we are making in advance to advance our enterprise asset intelligence vision in the warehouse and in manufacturing. In May, we announced The launch of our fixed industrial scanning and machine vision solutions to increase efficiency and quality inspection in our customers' operations. We complemented this product launch with the acquisition of Adaptive Vision, whose software enables customers to easily build machine vision and deep learning applications. We are excited about our opportunity to penetrate this high growth fragmented market And we are actively recruiting channel partners to scale the business. In July, we announced our intent To acquire Fetch Robotics, which has the broadest portfolio of autonomous mobile robots in the industry, powered by a cloud Software platform that can be deployed standalone or integrated with warehouse management systems.

Speaker 2

Our vision is to orchestrate Both robots and technology equipped frontline workers through software in the cloud to optimize material transport and order fulfillment workflows. As a venture investment, TETCH has been a trusted partner to Zebra and we are excited about the prospects for our combined businesses. In closing, we are confident in our growth prospects given the momentum we are experiencing in the business and our heightened pace of innovation. We are energized by our vibrant core markets as well as the emerging prospects we see in newer markets to digitize and automate workflows. Now I'll hand the call back over to Mike.

Speaker 1

Thanks, Anders. We'll now open the call to Q and A. We ask that you limit yourself to one question and one follow-up, so that we can get to as view is possible.

Operator

We will now begin the question and answer session. The first question comes from Damian Karas with UBS. Please go ahead.

Speaker 4

Hi, good morning everyone.

Speaker 2

Good morning.

Speaker 4

So I just wanted to ask you a little bit about the Component shortages, obviously, still, we're able to drive some pretty strong growth in the second quarter And expecting to see that in the Q3 as well. But would you be able to quantify how much of a drag, if Any of the component shortages are on your sales this year?

Speaker 2

Yes, I'll start and then I'll have It also help out here. So the first, I'll start on the kind of industry wide semiconductor shortages. They've been very well documented by the press, obviously, over the last few months, and we are impacted. I said the impact though is not uniform across all components. Some components are impacted much more than others, but it's Much larger number of components that we're kind of working than we would in a normal quarter.

Speaker 2

But I'd say our team is doing a great job in Working all angles to optimize our allocations, and there's been great collaboration between our sustaining engineering groups To ensure we can qualify new alternative components that have less lead time, so to ensure we get as much available product to provide our customers as we can. We did raise prices here recently to mitigate some of the impact of the increased component costs. And I said despite these shortages and the price increases that we have increased, we are We are quite confident in the increased full year outlook that we announced today.

Speaker 3

And Damian, just To answer the question on the both the Q3 and full year guide, I think the risk associated with the shortage have been incorporated in our outlook, But it'd be really tough to quantify. I don't think it'd be really constructive to speculate on what that number could be unconstrained.

Speaker 4

Okay. That's really helpful. And then, I wanted to ask you a little bit about the freight headwinds. I Q2, despite having those, I think you were able to outperform on the margin front. So just curious Why we shouldn't but you're expecting a pretty abrupt drop here, 300 basis points in the second half.

Speaker 4

Why Shouldn't we expect you to kind of be able to manage those as you were in the second quarter? And I guess additionally in the should we be thinking that next year you will be you kind of completely reverse these premium freight expenses?

Speaker 3

Yes. So maybe if you Take us to back on just where we're seeing the bottlenecks because there's really 3 different areas in terms of in the incremental cost. One, which we've seen earlier in the year, and we've talked about in our previous calls around the lower international commercial air travel, container shortages, Port congestion, so we're on the supply side of it. That's where we're seeing our air and ocean rates 2x to 3x since the start of the pandemic. And those really have not come down over the last several months.

Speaker 3

If anything, ocean has gone up, air rates have stabilized. In addition, because of the global supply constraints, along with the increased global demand, we're now expediting component parts from our Tier 1 and Tier 2 manufacturing partners, Along with shipping a higher percentage of printing perspective or in particular, via air versus ocean. So those are also really driving the step change in terms of the transitory costs from Q2 into the second half. In addition, you have the manufacturing shutdowns in parts of Southeast Asia, in particular for us Vietnam and Malaysia, due to COVID that had further constrained Supply. So as we see today, you're expecting the impact to persist at least through the end of the year.

Speaker 3

It's hard to say when those will Abate into next year, but again, the team is doing a great job of managing the impacts, with our customers, really through extraordinary actions and communicating the So as you look at our second half guide, I think there's 2 things to think of. 1 is the step change increase in terms of the incremental cost. And in Q2, we also had $12,000,000 of China tariff recovery that we don't expect to repeat in the second half that was an offset in the second quarter.

Operator

Our next question comes from Tommy Moll with Stephens. Please go ahead.

Speaker 5

Good morning and thanks for taking my questions.

Speaker 2

Yes.

Speaker 5

Anders, you've talked about a robust backlog and pipeline. Any comments you could give to augment there would be helpful. Do you have any sense of whether the Is sustainable through the year end and even into next year? And any comments you could give us on channel inventory levels as best you understand them would be appreciated as well? Thanks.

Speaker 2

Yes. I will start here and then I'll ask Joe Eel to also provide some color. First of all, we're obviously very excited about and pleased with We had in the Q2. We exceeded the high end of the guidance range here. And to the previous question, we Extraordinary collaboration between our supply chain and sales teams to satisfy very strong demand in a supply constrained Environment.

Speaker 2

The strong secular trends that have been supporting our business for a long time, they have accelerated through COVID and we don't see any abatement in those trends. They're continuing to build. I'd say our customers across pretty much all our vertical markets are prioritizing kind of digitizing and automating their workflows. I think omnichannel is probably the best example in retail of the retail vertical or most retailers are investing Meaningfully in building out their omnichannel capabilities and digitizing their operations that way. We did see double digit growth in all regions as well as across all our product and solutions categories as well as across our Four main vertical markets.

Speaker 2

We did see our small and medium sized customers Doing particularly well. So the growth we saw here was definitely partly to a large degree driven by our small and medium sized And that was partly, I think, a result of pent up demand, but we see that largely being behind us at this stage. But even our large Strategic accounts performed very well with strong growth. And based on this performance, I do expect that we will continue to Take share in the market. Our inventories are Healthy in the channel today, but maybe at the lower end of our expected ranges.

Speaker 2

Joe?

Speaker 6

Yes. I think that's fair. I mean on the inventory side, we're working hard with our distribution partners to Keep our inventory at the levels that we need to sustain the demand, but at the same time to serve every possible demand, Which is at the moment as you can tell very, very strong and we're trying to serve all of the demand we can and taking our inventory To the lower end of our what we consider our healthy range. When it comes to the backlog and the pipeline, it is Very strong as you're seeing. And what I can underscore what Anders was saying, this pandemic has definitely triggered A wave of digitization and automation in our customers that is leading to projects and demand that we did not see before the pandemic.

Speaker 6

So That is a sustained driver of momentum that we see and we also are enjoying Because customers are aware of the supply shortages, we're enjoying good pipeline visibility. Our Customers are working with us to give us that visibility far in advance and that gives us confidence for continued growth into the next year.

Speaker 5

Thank you both. Those are helpful answers. Anders, I wanted to follow-up with a question on Adaptive Vision and your entry into the fixed industrial scanning and machine vision A couple of part question here. Just any context you could give us around any prior relationship you had with Adapt division or how you came to know the asset? Anything you can do to frame the size of the market opportunity where you think you've got a good shot at competing?

Speaker 5

And then What advantages you bring in those markets? They're adjacent to markets where you currently play and have substantial share, but What advantages do you bring in these new markets? Thanks.

Speaker 2

Yes. I'll try to summarize this here. But First, we're excited about our entry into the fixed industrial scanning and machine vision market. These are Solutions that really accelerate our Enterprise Asset Intelligence vision. This is more on the SENSE Side of the SENSE Analyze Act framework, but it helps us provide some new ways of capturing data that we can then analyze Enable our customers to act on.

Speaker 2

This is a very attractive market we see, but it's quite fragmented. It's a multibillion dollar market that our new portfolio then can address, although we are not addressing the entire market On day 1, but we are continuing to invest in it to add functionality, to add capabilities that we can go after a bigger and bigger of the market, but we really are focusing initially mostly on the fixed industrial scanning market. Our value proposition, we believe, is very strong and that focuses On the ease of use of these types of solutions as well as the ability to upgrade cameras and devices in the field. So those are we believe 2 strong differentiators that we have. The Adaptive Vision is a great way for us to augment the cameras that we The software we had developed, it's a way for our customers to more easily be able to Develop and build and implement applications for how to basically engage in Machine vision or fixed industrial scanning or incorporate machine vision and fixed industrial scanning into their workflows.

Speaker 2

And We've been familiar with Adaptive Vision for some time and we've been looking at Ways to augment our own internal software development in that area to make sure we can come up with a really strong offering and we felt that Adaptive Vision had A very attractive solution, very strong solution and it was a nice fit with Zebra.

Speaker 5

Thanks, Anders. I'll turn it back.

Operator

Our next question comes from Jim Ricchiuti with Needham and Company. Please go ahead.

Speaker 7

Hi, good morning. Thanks for the additional color on some of the cost issues that you're incurring in terms of freight And components. I wonder if you could spend a few moments talking about OpEx, both sales and marketing, G and A up By a healthy amount sequentially, admittedly with significantly higher sales. I'm just wondering how we might be thinking about OpEx in the second half of the year. And I have a follow-up, Anders, for you on some of the acquisitions.

Speaker 2

Yes. So I

Speaker 3

think if you from an OpEx perspective, if you look year on year, there's a couple of major drivers in terms of the overall increase that really impact Every quarter. The first was last year, we took some actions mid year around salary reductions in the peak of the pandemic to help offset The impact, as well as on lower incentive comp as we're obviously below our planned and targets for the year. So those 2 alone are drive a significant increase Year on year, along with the full year of Reflexus in the P and L and starting to again invest particularly in R and D and go to market, with some of the discretionary cost increases. So if you look at the second half of the year, I'd say The ramp in the first half will continue, but I wouldn't expect to see a real step change increase from where we saw spending in the second quarter. Again, the year on year increases are all pretty consistent for each quarter.

Speaker 7

Thanks, Nathan. Anders, you talked about The acquisitions both Adaptive and Fetchy you talked about I think is being a fragmented market. And I'm wondering to what extent Mike, we see you in addition to internal development of these technologies look at Potential additional M and A to expand your footprint.

Speaker 2

Yes. It's obviously hard for me to comment on specific opportunities here, but we are excited about both of these markets, The fixed industrial scanning and the partners mobile robot markets and we have had long standing organic development activities We now have augmented by the acquisitions of Fetch and Adaptive. But I'd say first, more generally about M and A, we are First, we're very excited about our business and the outlook for our business. And we do see M and A as a vector for growth. I think the Adapt division and the Petrobratics acquisitions are we're excited about them.

Speaker 2

We think that we can deliver good growth and good returns on those. But we do look at all M and A opportunities as a way for us to accelerate In advance, our EEI vision, we're targeting selective bolt on acquisitions that also have high growth. And look at around what I talked earlier about the customers' Need an interest in digitizing and automating a number of workflows across all of their supply chains. So That provides good opportunities for us to continue to add to our capabilities. And so we do look at M and A as a way for us to accelerate that growth.

Speaker 2

And we have a strong balance sheet that can support M and A activities also.

Speaker 7

And your pipeline

Speaker 8

We're on today.

Speaker 2

Yes. We obviously have a team that looks at scans kind of the market broadly around Our target areas that we where we have particular interest, there is a we have a good healthy pipeline of You never know what will work out, where we'll come to terms or not, but we do have a healthy pipeline of opportunities.

Speaker 3

Thank you.

Operator

Our next question comes from Hall Chung with JPMorgan. Please go ahead.

Speaker 8

Hi, thanks for taking my questions. So Just another follow-up on machine vision, fixed industrial scanner. So how large is this business today? And will the solution Eventually kind of be led with software similar to your peers, kind of resulting in very accretive margins. What is the strategy Kind of take share from larger players in the industry, maybe competitive pricing.

Speaker 8

And then another On M and A in general, very strong free cash flow, high quality earnings provides you kind of a nice cushion for Broader opportunities. Should we expect kind of continued preference for software solutions over time and resulting kind of Higher margins longer term?

Speaker 2

Yes. I will start and I will also ask Joe to comment on this here. But I think your first question was around the fixed industrial scanning machine vision market. We believe it's a very attractive market. It's We are adjacency to what we do and it's quite a fragmented market.

Speaker 2

If you looked at the market share Table there, there's 1 or 2 players that have reasonable share, but then it's a lot of a long tail of smaller players. We are entering the market primarily through our or initially with our fixed industrial scanning portfolio, which is Closest to our core competencies and use cases where we have a very strong right to play, but we are adding both Say on the capabilities both on the hardware side, on the camera side, but primarily here on the software side to be able to And address larger part of that market. Software is a Big differentiator in all our devices, right? If you look at mobile computing print and scan, the majority of our engineers, Huge part of the differentiation in the value add comes from the software and we certainly expect that to be the case here also. So we are Building more of that software capability, Adapt division was an inorganic way to accelerate some of that, but we also do that Organically.

Speaker 2

From a we should also not underestimate or minimize the importance of investments we're making in the go to market, I mentioned earlier, I think that we are putting in a specialized track in our Partner Connect reseller program to specifically address recruiting fixed industrial scanning machine vision partners Help accelerate that growth and maybe Joe you can expand on that a little bit.

Speaker 6

Yes, exactly. I was going to comment specifically on the your question around what's our strategy to take share. So you know that we have the fixed industrial scanning and the machine vision parts of this. The fixed industrial scanning is a natural extension Of the leadership that we have in the scanning part of the market and we're of course translating that technically to succeed in the machine vision part that's The software piece is essential and the acquisition of Adaptive now gives us industry leading software capability. So we fully expect to translate that into share gains, but there's more to it than that.

Speaker 6

We specifically want to use the software To enhance that ease of use value proposition, that's critical to these customers. How easy is it to use and to deploy? And that's also important for the second part of the strategy to win, which is using partners as a way to compete in this market. All of these solutions are deployed through partners for us. We're a very partner centric company as you know and that is also what we're going to use To compete and win in the machine vision space and making our software easy to use is a value proposition not just to the end users but to those partners So hopefully that's helpful.

Speaker 8

Yes, very much. And lastly on Fetch, Robust, I know it's early days, but if you could talk about How you see this business ramping, how material revenues can be over time kind of from a small base, the margin outlook, competitive environment, all that good stuff, Some key customers you hope to get, some cross selling opportunities and if you could expand on kind of use cases beyond warehouses and fulfillment centers? Thank you.

Speaker 2

Yes. That's a broad question that can take a while to answer all of it. I gave you tried to give you a high level response here. But first, we haven't closed on the acquisition yet, but we are certainly excited about it. We have worked with That's a venture investment for quite some time.

Speaker 2

So we believe we understand the market, we understand the team and we see great opportunities to Leverage the Fetch's broad portfolio of AMRs. They have the broadest portfolio of autonomous mobile robots in the industry And they have a very strong, very capable cloud based software platform for how to deploy and manage these robots. And then Neil, Zebra, we've been more focused on technology enabled the workers in warehouses and By combining those 2 to be able to control and optimize both the flow of robots and the workers, We think we can offer a superior ROI to customers in manufacturing, in warehouses and a number of these use cases. Fetch has originally say initially been mostly focused on the campaigns markets, so more movement of goods, But we see there's a number of other use cases that are also growing fast where they have Solutions that are very well suited to pursue those also. And here's another area where I think our The strength that we have in our go to market organization, I'll ask Joe to comment on this also, will augment as well.

Speaker 2

We Virtually all of these large customers in transportation logistics, in manufacturing, retail, whatever industry or vertical we're going after And we can help I think with providing those introductions and position our broader workflow automation workflow solutions with those customers.

Speaker 6

Yes. A particular attribute of the market that we're focusing on is that we're targeting those areas where humans and robots work Together. And so the notion of a cobot, right, the collaboration between the two is at the heart of the strategy. So that means we're targeting use cases like Person to goods picking and conveyance. And those use cases allow us to take advantage of a broad installed base we already Workers in warehouses have mobile computers and they're now being augmented by robots.

Speaker 6

So this means That we can take advantage of the orchestration between the 2 and there's really no one else in the market that can do that to the extent that we can. And as a result, we're taking this strong platform capability that Fetch has with robots that can go across A broader range of use cases than anyone else and can deliver products with safety and speed That no one else can and combining it with the orchestration of humans to achieve overall productivity improvements that are unequaled. And that's really the strategy.

Speaker 1

Thanks so much.

Operator

The next question comes from Natasha with Morgan Stanley. Please go ahead.

Speaker 9

Great. Thanks. On the price increases you guys noted, can you just give a sense of the degree or how broad they were and How much like are you expecting those prices increases to be transitory so the channel may hold less inventory in the near term? Just How you see that interaction? And then just maybe second question, just getting the sense of if the Postal Service Concentration this year or the USPS deal is still expected to be primarily Q2, Q3 this year?

Speaker 9

Thanks.

Speaker 2

Yes. I'll start and then I'll ask Nathan to comment here also. But first on the price increases, pricing is obviously something that is Very important to us and something we continue to assess and address. We do regular checks to make sure that We are our solutions are priced competitively to the end users as well as that the our partner community have the right profitability It's part of our overall go to market activities here. The Competitive actions or competitive positioning is obviously a key part of how we assess pricing here.

Speaker 2

And we believe that the price increases that we have now announced are appropriate. They respond to Some of the competitive competitors who have also announced price increases, but everybody hasn't. We believe that we have assessed this based on very granular based on products and geographies to make sure that We don't put ourselves at any competitive risk with these. We see the cost as being transitory And we want to play the kind of a long term game here though of making sure we maximize the value of the corporation longer term. We don't want to seed market share in the short For that either.

Speaker 3

And then on the from USPS perspective, the rollout is progressing as expected and as we communicated earlier in the year, This is for the current rollout of the full EMC solution of 300,000 units to the carriers and with the goal of completing largely completing here at the end of the third

Speaker 9

Great. I mean just coming back to the price increases, like is there just a range we should think of Kind of on the just on the top line of what that impact is across the portfolio? Or is that just Too difficult to assess kind of at this point.

Speaker 3

I'll take that. So we just rolled the price increases out last week. And I would say from a full year perspective, it's within the margins from the full year revenue.

Speaker 4

Okay. Great.

Speaker 2

With the rollout price increases, there's a lag time between us announcing and being effective in the market. So you can see that this will be impacting our Q4 business rather than Q3.

Speaker 9

Okay, great. Thank you so much.

Operator

The next question comes from Keith Housum with Northcoast Research. Please go ahead.

Speaker 6

Good morning, guys, and congratulations on a great quarter. Just looking at the, I guess, cost of goods sold here and the transitory cost, that being the premium freight cost, Is there anything in the adjusted EBITDA margin guidance and thought process that suggests that some of the impact will be perhaps longer term? For example, increased labor costs or anything else in there that again will perhaps go on beyond the rest of this year?

Speaker 3

Yes, Keith, the way I between the two buckets, if you look at the, say, labor costs or the raw material cost increases, That's what the price increases we've taken is meant to largely offset that. So if we think about from a mitigation of the Inflationary prices, I think that's as we go into the Q4 and into next year, those will be largely mitigated with the price actions we've taken. The logistical bottlenecks are the one that from the timing, I think, is still to be played out. Again, I think we expect no changes between now and the end of the year. But really we're taking kind of 1 quarter at a time and reacting accordingly to optimize and maximize profitability as best we can.

Speaker 2

Okay. Fair enough. Maybe just build on that a little bit. So the logistics and the semiconductor component Cost, we consider those to be transitory. On the labor side, there's always some upward movement in labor rates.

Speaker 2

But if you think of the Amount of labor that goes into our cost of goods sold, it's very small. That is not a single digits, I think high single digits part of our value add is from labor. So it's not something that meaningfully changes the P and L.

Speaker 6

Got it. Got it. And if I look at your full year guidance, Anders, historically, you guys have always had a very strong Q4 and sequentially a big uptick the second and third quarter, the guidance you're providing here suggests perhaps even roughly a flat 4th quarter. So is there the thought process that business that kind of pulled ahead during the year? Or how are you thinking about the Q4 and any potential upside to that?

Speaker 2

Well, I think the Q4 was the implied guide for the Q4 that we had in our full year number here, we certainly would indicate this growth, Not as strong growth as we've had in the first half or in Q we guided for Q3. But Q4 was a Very strong quarter last year. So there was we saw a great recovery in the 4th quarter. But we do see continued strong demand from our customers. The momentum is very strong.

Speaker 2

We don't see that abating. This is more of a Tough to compare than anything. I don't know if Nathan, you want to or Joe, you want to add anything? Yes.

Speaker 3

I think just from a sequential standpoint, Keith, in terms of the typical update from Q3 to Q4, I don't think it reflects anything from a weakness in the Q4 as much as just strength Seeing here in the Q3 and as we noted earlier, when you look at our days on hand inventory and the strength, I wouldn't say sales pull ins are not a major factor, it's really That acceleration of investment from our customer base and if anything, the where we're getting the visibility is in the backlog and funnel, as Joe mentioned, And in terms of giving us confidence in the full year, particularly the Q4 guidance.

Speaker 6

Okay. Thanks. I appreciate it.

Operator

The next question is from Andrew Buscaglia with Berenberg. Please go ahead.

Speaker 10

Good morning, guys.

Speaker 2

Good morning.

Speaker 10

So I wanted to ask on R and D. You're spending this year on track to spend about $560,000,000 or so. And I'm wondering how much Of this or over the last, call it, 12 months is related to this vision in AMR kind of push. And then secondly, at what point can you start to really leverage that R and D line? Do you need to be spending $550,000,000 a year going forward.

Speaker 2

Well, first, I'd say, R and D investments is a key activity for us. That is what really drives our longer term growth. I would say if you look back over the last several years, investments we've made in product development and R and D has Had a great return for us. So we want to make sure that we have a portfolio of fresh solutions that offer real value to our customers We can compete and grow the business. We look at our R and D investments across Number of horizons, you can say, investments in our core that would have a very short term Return, kind of the near adjacencies, which would have a little bit longer returns, say a couple of years, 2, 3 years, and then More innovative new solutions, more of the enterprise asset intelligence type of solutions here, which we have a little longer term Payback as they are more ground up innovations.

Speaker 2

In many areas, let's say you mentioned Fetch specifically. We developed our own robots with SmartSide before. So there's certainly been a way for to both learn the industry, but there's also attractive ways for us to leverage those investments across. So When we do make acquisitions, we see that as a great way for us to augment our own internal programs and Drive us into new high growth adjacencies where we can make a difference.

Speaker 6

That answers your question.

Speaker 10

Yes, no, that's helpful. And if I heard correctly, You had a nice healthcare award this quarter. I feel like that area is taking kind of a backseat to all excitement going on in retail and e commerce and logistics.

Speaker 2

Can you update us on

Speaker 10

healthcare in terms of are you still seeing that narrative play out post COVID where People are accelerating investments in automation there?

Speaker 2

Yes. I'd say it's across all our verticals first. I mean, COVID Has accelerated these secular trends that we've talked about around our all our end markets are driving Solutions that help to digitize and automate their workflows and empower frontline workers to be connected and Optimally kind of utilized. Each of our primary vertical markets grew double digits In the Q2, and we continue to invest in expanding each of these ones. Specifically for healthcare, I'd say, Yes.

Speaker 2

We saw healthcare our healthcare markets, they started in more acute care, But it's been moving into other areas like outpatient, remote patient care, COVID testing, vaccine distribution. So Our efforts in healthcare continues to expand into new areas. It's also expanding geographically. So the win we talked about today was in Europe. And I think here also the healthcare patients are Taking a book out of their e commerce or kind of online shopping activities also.

Speaker 2

They're seeking a more digital experience, which is Putting some extra pressure on healthcare providers to make sure they can offer similar type of experiences for the patients. And our I'll say here our purpose built devices and solutions are critical for healthcare providers, not only to improve the patient journey, but also to drive greater Productivity for the healthcare providers.

Speaker 6

Yes. I might add that in healthcare there's 2 other phenomena that We'll drive continued growth. One is that, we know that healthcare systems and depending on where in the world you are, this is in a different stage, Have pulled back on some of their spending, because they didn't have income from the elective procedures that they usually enjoyed. And as we come out of the pandemic, we see more of that income returning to for profit hospitals and then Their ability to spend on these solutions returns as well, and we've seen that. And the international growth It's another big dimension.

Speaker 6

Andres mentioned the European piece, but we also see significant interest in different parts of Asia That we hadn't seen to that extent before. So there are the 2 more growth factors that we expect.

Speaker 2

I just want one more comment on this will be, I expect the healthcare to continue to be our fastest growing vertical over the longer term, but it's great to see that We have this diversity in the business across our main four verticals and some other newer ones coming up. But in Q2 here, manufacturing, which was our fastest growing vertical, manufacturing was the one that was hardest hit by COVID-nineteen and the macro was a bit Tougher going into that with tariffs and other things, but the opportunity to increase automation in workflows through wearables and heads up Sourcing components at sub suppliers through assembly all the way through distribution is putting providing great opportunities for us. So All our vertical markets performed very well, but manufacturing was actually the strongest one for us in Q2.

Speaker 10

Okay. Thanks, Anders.

Operator

Our last question is from Rob Mason with Baird. Go ahead.

Speaker 11

Yes. Good morning. Thanks for the question. Anders or Joe, wanted to get your thoughts on how quickly you thought you could Pull together the channel, the partners to be able to sell your fixed industrial scanning and machine vision products. And Curious also if you envision those being 2 separate channels or both products will go through the same channel?

Speaker 11

And then also relatedly, I guess maybe what percent of your existing channel is suitable

Speaker 1

to sell those products?

Speaker 2

Yes. I'll start and Joe can provide some extra color here also. So the We have worked on our go to market strategy and our channel engagements, basically since we started working on Product and solutions. So this is not something we cannot doing serially. This has been something we've done in parallel to a large degree.

Speaker 2

So we you can say there's a Venn diagram of partners out there. There are partners who we currently have, who are also In the fixed industrial scanning machine vision space that we are obviously having a great already have a relationship with and with easy expansion to add Our fixed industrial scanning and machine vision capabilities to their portfolio, but also recruiting new partners That are not necessarily Seabra partners today, but they're strong in that space. And we've seen good Interest and response rates for them from them. And I think they have been impressed with our solutions and they see how we can add value to them. So this is obviously a big part of what we need to do now and for the next year to ensure that we Deliver the revenue growth that we are intending or planning for.

Speaker 2

But so far, I'd say that the response from the channel has been very positive.

Speaker 6

Yeah. I appreciate that you're asking this question because channel is central to our go to market strategy. We're a very channel centric company. And as we were designing this go to market approach, this we spent a lot of time on this. First, we Created a dedicated track in our Partner Connect program, which is very important to serve the needs of these particular partners.

Speaker 6

A Percentage of our current partners are also machine vision distributors and sellers. I would estimate that that's a small The majority of machine vision partners we do need to create we need to recruit, I'm sorry. And we have Made great progress in recruiting these partners already. We have a very strong group of partners that have Already signed up to sell this for us and that's because of what we were talking about earlier that we've designed the product with a We think that's critical to success and that's essential in how we've designed the product. So we're very pleased With both the number of partners we've already been able to recruit, the pipeline of additional partners that we have that is interested in selling our product.

Speaker 11

Very good, very good. Just one follow-up. Nathan, the China tariff It was a nice contribution in the Q2. What's assumed in the Q3 or second half for that or the potential for that to recur?

Speaker 3

Yes. So we have no incremental amount assumed in the second half guide. Our total claim was just over $30,000,000 and we've recovered $27,000,000 to date. So, and I'd say the large majority that's left is in reconciliation. So I would expect The amount that's left to go is fairly small and we the timing of that's a little bit unknown just as we reconcile those last few batches of Transactions.

Speaker 11

I see. I see. And just to clarify as well in your guide, you've assumed nothing for Fetch Because it hasn't closed, but just how should we think about the profit impact? Small business, I know, but So you're planning to invest fairly heavily or aggressively and would that be material in the second half or fourth quarter?

Speaker 3

That's right. So it is not assumed in the guide since we haven't closed. And it's about a $10,000,000 run rate revenue business And unprofitable at this time as it scales, but I'd say not material within the margins of our overall guide.

Speaker 11

Okay, very good. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Anders Gustafson for any closing remarks.

Speaker 2

So just to wrap up, I would like to thank our employees and partners for going above and beyond to serve our customers as they stretch to meet heightened expectations in the increasingly on demand economy. While we are focusing on maximizing profitable growth in the business, Our top priority continues to be protecting the health and well-being of our employees, partners and customers as we recover from the Pandemic. We're also looking forward to welcoming the Fetch Robotics team once we close the transaction. Thank you and have a great day everyone.

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Earnings Conference Call
Zebra Technologies Q2 2021
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