Zebra Technologies Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2022

Key Takeaways

  • Positive Sentiment: In Q1, Zebra delivered 5.4% organic sales growth and a 19.9% adjusted EBITDA margin, with non-GAAP EPS of $4.01, outperforming the high end of guidance.
  • Negative Sentiment: Premium supply chain disruptions incurred $69 million in incremental costs in Q1 and are expected to total about $200 million for 2022, significantly pressuring gross margins.
  • Neutral Sentiment: Mobile computing strength drove broad-based growth (APAC +28%, LATAM +31%), but printing products faced supply constraints that limited order fulfillment.
  • Negative Sentiment: Zebra reiterated its 2022 outlook of 3–7% sales growth, 22–23% adjusted EBITDA margin, and at least $800 million free cash flow, but trimmed margin guidance by 100 bps due to higher supply costs.
  • Positive Sentiment: Secured the $875 million acquisition of Matrix Imaging to expand machine vision and deep-learning capabilities, expected to close mid-year and accelerate automation offerings.
AI Generated. May Contain Errors.
Earnings Conference Call
Zebra Technologies Q1 2022
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good day, and welcome to the Q1 2022 Zebra Technologies Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to Mike Steele, Vice President, Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Good morning, and welcome to Zebra's Q1 conference call. This presentation is being simulcast on our website at investors. Zebra.com and will be archived there for at least 1 year. Our forward looking statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially due to factors discussed in our SEC filings.

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 are year over year on a constant currency basis and exclude results from recently acquired businesses for the 12 months following each acquisition. This presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer and Nathan Winters, our Chief Financial Officer. Anders will begin with our Q1 results.

Speaker 1

Then Nathan will provide additional detail on the financials and discuss our revised 2022 outlook. Anders will conclude with progress made on advancing our Enterprise Asset Intelligence vision. Following the prepared remarks, Joe Heel, our Chief Revenue Officer will join us as we take your questions. Now let's turn to Slide 4 as I hand it over to Anders.

Speaker 2

Thank you, Mike. Good morning, everyone, and thank you for joining us. Our team delivered solid first quarter results In an exceptionally challenging macro environment, for the quarter, we realized adjusted net sales growth of greater than 5%, An adjusted EBITDA margin of 19.9 percent, a 5.40 basis point decrease and non GAAP Diluted earnings per share of $4.01 a 16% decrease from the prior year. Customer demand remains strong for our solutions that digitize and automate workflows. We realized sales growth across all four regions, supported by exceptional strength in mobile computing with particularly strong growth in Asia Pacific and Latin America.

Speaker 2

Our teams have continued to manage supply chain constraints as we navigate significant global macro uncertainty, including COVID-nineteen lockdowns across Asia. We were able to secure more supply in mobile computing and scanning than we originally anticipated, which more than offset the impact of suspending shipments to Russia in early March. However, we were unable to fully satisfy customer demand, particularly for our printing products. Supply chain costs were greater than our expectations and significantly weighed on gross margin, which was partially offset by higher service and softer margin. Operating expenses as a percentage of revenue increased due to acquisitions in our expansion markets and resuming in person events.

Speaker 2

Overall, we are pleased that our Q1 sales and earnings performance exceeded the high end of our guidance ranges despite extreme supply chain challenges, including transitory costs that were higher than our expectations. With that, I will now turn the call over to Nathan to review our Q1 financial results in more detail and discuss our revised 2022 outlook.

Speaker 3

Thank you, Anders. Let's start with the P and L on Slide 6. In Q1, adjusted net sales increased 6.1%, including the impact of currency and acquisitions and 5.4% on an organic basis as we successfully secured a greater supply of mobile computers and data capture products than we had anticipated. Our Asset Intelligence and Tracking segment, including printing and supplies, declined 8.1% Due to significant supply constraints on our printing products as well as cycling strong prior year results, Enterprise Visibility and Mobility segment sales increased 11.6% driven by exceptional growth in mobile computing. We continue to drive solid growth across services and software with strong service attach rates and expansion of our software offerings.

Speaker 3

We recognized growth in all four regions. North America sales increased 2% with strength across the portfolio With the exception of printing, EMEA sales increased 2% driven by strong growth in mobile computing. Asia Pacific sales grew 28% with strength across all major geographies including China. And in Latin America, sales increased 31% with exceptional growth in Mexico. Adjusted gross margin declined 430 basis points to 44.6 percent due to unprecedented premium supply chain costs And unfavorable product mix, partially offset by higher service and software margins.

Speaker 3

We will discuss our supply chain expenses further in a moment. Adjusted operating expenses as a percentage of sales increased 100 basis points, primarily due to new business acquisitions in our expansion markets, as well as increased marketing activities and employee travel costs as we return to in person events. 1st quarter adjusted EBITDA margin was 19.9%, a 540 basis point decrease from the prior year period, primarily due to negative gross margin impact of unprecedented supply chain costs. Non GAAP earnings per diluted share was $4.01 a 16.3% year over year decrease. Turning now to the balance sheet and cash flow highlights on Slide 7.

Speaker 3

Our balance sheet remains strong. From a debt leverage perspective, we ended the quarter at a modest 0.8 times Net debt to adjusted EBITDA leverage ratio, which provides us ample flexibility. In Q1, we generated $40,000,000 of free cash flow, which was lower than last year, primarily due to higher incentive compensation payments given our exceptional 2021 performance and a higher use of working capital as sales volume shifted to later in the quarter. We also made $305,000,000 of share repurchases as we've been opportunistic in a volatile market. On Slide 8, we show the impact of transitory costs related to industry wide supply chain disruption caused by the pandemic.

Speaker 3

Our team continues to work all avenues to satisfy strong customer demand, including product redesigns, long term supply agreements, buying critical components in the spot market, along with expediting component parts and finished goods meet our commitments to our customers. In Q1, we incurred incremental premium supply chain costs of $69,000,000 as compared to the pre pandemic baseline, which was higher than we had anticipated in our prior outlook. In total, transitory items had a combined unfavorable gross margin impact of $57,000,000 year over year. Over the past year, these elevated supply chain costs have continued to evolve. At this point, approximately one half of the impact is associated with buying critical components on the spot market at elevated prices and expedited shipping of our printing products via air versus ocean.

Speaker 3

We expect this portion of the impact to improve throughout the year based on committed volumes from our key suppliers. The remaining half of the impact is associated with elevated freight costs. In Q1, we saw shipping cost per kilo improve and we assume March pricing holds through the remainder of the year. The war in Eastern Europe and lockdowns at manufacturing sites in China have elevated our supply chain costs above our prior expectations and delayed the improvement we had expected. We now anticipate approximately $200,000,000 of premium supply chain costs for the full year.

Speaker 3

This impact is net of the anticipated impact of a price increase announced last week across our product portfolio that will become effective as we enter the second half of the year. Let's now turn to our outlook. We entered the 2nd quarter with a strong order backlog and healthy sales pipeline supported by broad based demand for our solutions. Our expected sales growth of 3% to 7% is limited by what we can deliver to our customers due to extended lead times and limited availability of component parts amplified by COVID-nineteen lockdowns across China. Our guide assumes steady improvement and Chinese manufacturing output.

Speaker 3

Our outlook also assumes a neutral impact from acquisitions and foreign currency changes. We anticipate Q2 adjusted EBITDA margin to be between 20% 21%, which assumes gross margin from the prior year due to unfavorable sales mix and expected premium supply chain costs of $60,000,000 which translates to an approximately 260 basis point decremental margin impact as compared to the prior year period. We also expect increased operating expenses as a percentage of sales primarily due to our entry into multiple expansion markets since last spring and resuming in person events. Non GAAP diluted EPS is expected to be in the range of $4.05 to $4.35 For the full year 2022, we are reiterating our outlook of adjusted net sales growth between 3% 7%. Demand continues to be robust and product supply is improving, which offsets the headwind of 1 to 2 points of sales into Russia and global macro uncertainty that has escalated since our prior outlook.

Speaker 3

This sales growth outlook now assumes a 50 basis point detrimental net impact from foreign currency and business acquisitions due to the significant move in the euro since our prior update. We now anticipate full year 2022 adjusted EBITDA margin of approximately 22% to 23%, which is 1 point lower than our previous guide due to our revised expectation of supply chain costs, which are $60,000,000 higher than the impact we realized in 2021. We now expect our free cash flow to be at least $800,000,000 for the year, which we have reduced due to the increase in expected supply chain costs, as well as the anticipated increased use of working capital due to the timing of sales and inventory replenishment. Note that our outlook excludes the pending acquisition of Matrix Imaging, which Anders will cover in a moment. Please reference additional modeling With that, I will turn the call back to Anders to discuss how we are advancing our Enterprise Asset Intelligence vision.

Speaker 3

Thank you, Nathan.

Speaker 2

I am encouraged by the strong demand across our business and the bold actions our teams are taking to navigate the supply chain challenges and the uncertain global environment. Slide 11 illustrates how we digitize and automate the frontline of business By leveraging our industry leading portfolio of products, software and services, by transforming workflows with our proven solutions, Zebra's customers can effectively address their complex operational challenges, which have been magnified by the pandemic. We empower the workforce to do their jobs more efficiently by navigating constant change in near real time, utilizing insights driven by advanced software capabilities such as prescriptive analytics, intelligent automation, and Machine Vision. We were very excited to resume active participation in trade show events. At MODEX 22, the world's premier supply chain show, Zebra showcased our solutions, which provide intelligent automation to help warehouses increase their productivity as e commerce accelerates.

Speaker 2

Attendees were interested in the dynamic between our autonomous mobile robots and warehouse associates equipped with our wearable technology, which significantly increases Pick productivity. Zebra also demonstrated how our fixed industrial scanners and autonomous mobile robots Worked together to increase efficiency and reduce costs in warehouse operations. At HIMSS, the leading global healthcare conference, Customers were excited to see how our solutions are designed to connect critical equipment, patients and caregivers to address challenges across their operations ranging from patient identification to pharmaceutical supply chain visibility. Our booth featured track and trace technologies, including scan and print solutions that increase the accuracy of inventory supply management To improve throughput, reduce waste and inform sourcing decisions, we also highlighted how Zebra's RFID solutions can further improve healthcare operations and patient safety. Earlier this year, we raised our long term organic sales growth to 5% to 7% and provided a refreshed view of our served markets as noted on Slide 12.

Speaker 2

These expectations are supported by megatrends, including the on demand economy, asset visibility, Mobility and Cloud Computing and Automation. These trends have become increasingly important to our enterprise customers and are now a higher priority as labor shortages and cost inflation continue to bring more challenges. Our announcement in March to acquire Matrox Imaging, a recognized leader in machine vision, underscores Building on our smart camera product launch last year and augmenting our growing expertise in software and deep learning. Matrix brings a complementary offering of products and solutions, including advanced smart cameras, vision controllers and 3 d sensors, as well as one of the most sophisticated software imaging libraries in the market. These solutions capture, inspect, assess and record data from industrial systems in factory automation, Electronics, Pharmaceuticals and Semiconductor Industries.

Speaker 2

Customers benefit from increased productivity and improved product quality. With this acquisition, Zebra will become even better positioned to serve our customers increasingly complex needs regardless of where they are on their automation journey. Matrix generates annual sales of approximately $100,000,000 With a higher profit margin profile than Zebra, the $875,000,000 acquisition is expected to close mid year. Now turning to Slide 14. Businesses partner with Zebra to help optimize their end to end workflows As they strive to meet increasing demands of consumers, I would like to highlight several recent key wins across our end markets.

Speaker 2

A truck stop operator in North America recently began rolling out our task management and prescriptive analytics software solutions to its more than 700 locations. We are addressing this customer's need to track and optimize its internal supplies and retail inventory levels in real time, while prioritizing and directing employee resources to the highest value opportunities. The feedback loop on task execution is critical as they aim to maximize productivity and customer satisfaction. The large supermarket operator in Europe has expanded its use of Zebra products, including mobile computers and scanners to address click and collect use cases for buy online, pick up in store transactions, Price checking, loss prevention, inventory reallocation among stores and improved product availability. This expansion win demonstrates the productivity benefit of a more connected and empowered workforce.

Speaker 2

One of the largest railroad freight companies in North America is deploying our TC-fifty 7 mobile computers to its train conductors and employees Working in the rail yards, they use the devices to ensure cargo is onboarded to the correct train or truck for the next leg of its journey and to automate time and attendance tasks and daily activity of the train crew. The ruggedness and productivity of the Zebra solution was a key differentiator in this competitive win against the consumer device. In another recent win, a regional healthcare system Expanded their use of Zebra solutions, replacing desk phones with our TC-twenty one mobile computers and deploying TC-fifty two mobile computers with our Workforce Connect application for instant clinical communications, including secure texting and calls. We continue to collaborate with this customer to explore additional solutions that can further optimize their operations. We were also very pleased that Rakuten, a large third party logistics provider selected Zebra's autonomous mobile robots to This fulfillment solution will improve picking efficiency, Eliminating unnecessary steps for its frontline workers, the connectivity of the associates through wearable technology increases the ability to share prioritized tasks in real time to create additional efficiencies.

Speaker 2

In closing, we continue to be very excited about our growth prospects. The pandemic has accelerated trends that drive Zebra's vibrant markets, including digitizing the healthcare patient journey, e commerce adoption and real time track and trace across the supply chain. We are working diligently to navigate through near term industry wide supply chain challenges and to satisfy strong customer demand for our solutions.

Speaker 1

Now, I'll hand the call back over to Mike. 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 many of you as possible.

Operator

And ladies and gentlemen, today's first question comes from Tommy Moll with Stephens. Please go ahead.

Speaker 4

Good morning and thank you for taking my questions.

Speaker 2

Good morning.

Speaker 4

Anders, I wanted to start on the topic of some of the pricing actions you've announced. I'm just looking back through notes here and I think there was one in September, another one in February and now it sounds like one in April. So what can you tell us there about how realization has gone thus far? What feedback or pushback, if any, you've gotten When these have been announced and if you're able to quantify for your full year revenue outlook, how much you think you'll realize On a year over year basis that would be helpful to know as well. Thank you.

Speaker 2

Yes. I'll start and then I have some of my colleagues here I'll add to this also, but we continually assess and address pricing issues based on competitive environment and the inflationary environment as well. As you mentioned, we've implemented targeted price changes in September of last year February of this year. That was across the product portfolio and the intent for those was to substantially offset The realized component cost increases that we have seen. We implemented the latest price increase last week, which was intended to partially mitigate the premium shipping costs that we've experienced.

Speaker 2

And we will continue to assess these pricing our pricing environment and make sure that we do what we can to offset The increased costs that we are experiencing. And I'll let Joe Hill talk a little

Speaker 5

bit more about the impact on customers here. Yes. Tommy, we've been quite pleased with the impact that the pricing Increases have had so far in the market and the way they've been accepted by our customers. Our larger customers have generally received them with understanding as they price increases elsewhere in their business as well and have accepted them. And in our run rate, we've been pleased with the resiliency that we've seen as the run rate has grown despite the fact that we've increased the prices.

Speaker 5

So overall, we're quite pleased with the realization. And Tommy, this

Speaker 3

is Nathan. Just the last point of your question. So if you aggregate the 3 price increases, it's nearly 2 points of sales growth contribution for the full year. So again, just to remind us, not a general increase, but they were targeted across product families and regions. And each one has a lag before you feel the full impact In the P and L as we honor committed pricing on specific deals and other contracts we have with certain customers.

Speaker 4

That's all very helpful. Thank you. On Matrix, I wanted to shift gears here. I guess to start, Anything you can share just in terms of P and L, revenue CAGR historically or prospectively and Maybe in terms of the market margins you've called out as accretive to Zebra, there are at least a couple public peers with substantially higher margins both at the gross and operating margin lines. I know you probably can't give us exact numbers, but anything you can do to just situate us on what profile looks at Matrix would be helpful, but maybe at a higher level as well, just help us situate the Matrix platform with your existing Vision platform that you built organically and what avenues are opened to you through Matrix that weren't previously?

Speaker 4

Thank you.

Speaker 2

I'll start and then I think Joe will help out here also. First, we announced our intent to Biomatrox Imaging back in March and they are a recognized leader in machine vision and I think that underscores our commitment This important expansion market for us, you might remember we launched our own fixed industrial scanning portfolio last year and Matrix very much complements our fixed industrial scanning by being a clear one of the clear leaders in machine vision. So we are certainly very excited about what this combination can bring to us. It sort of helps us Scale our business much faster and creates a very comprehensive product and solutions portfolio. And I'd say here also, Matrix has one of the absolutely most sophisticated software libraries For Machine Vision in the industry, and we're very excited about what we can do with that together.

Speaker 2

So we feel we have a very strong platform That we can now grow off. And I think the acquisition will help Zebra to serve our customers' needs better, whether they are Just beginning on their automation journey or have very complex needs. And with Zebra, we've already Recruited over 100 channel partners in this space. So we feel that we are able to bring the best of Zebra and the best of Matrix to bear here. Very complementary product offerings, very complementary go to market activities where we are leveraging our Channel centricity and able we're able to bring that expertise to Matrox to help accelerate their growth.

Speaker 2

Perhaps the only thing I'd add on the go to market side is that recruiting channel partners is the primary thrust for developing the go

Speaker 5

to market opportunity, but we also see a good opportunity in bringing machine vision applications to our existing large Customers think in particular about our T and L and our manufacturing customers are looking to automate warehouses and production facilities. And we already are seeing good traction, as those customers have engaged with us on the fixed industrial scanning side with our existing portfolio. And as they have heard about our announced acquisition of Matrix, they're very eager to engage with us on the machine vision side as well. So we see a lot of good

Speaker 3

Yes, Tommy. So I guess a 3 headed answer here. But as we said, dollars 100,000,000 run rate, It's an attractive market that's growing high single digits and we'd expect that to for us to participate in that. And from a margin standpoint, it is accretive to our overall Zebra's EBITDA rates, but not quite to maybe some of the other competitors in the market just based on size and scale of the company and where it's at today.

Speaker 4

Three headed answer, but a multipart question. So thank you for indulging me.

Operator

Thank you. And ladies and gentlemen, our next question today comes from Keith Halsam with Northcoast Research. Please go ahead.

Speaker 6

Good morning, guys. Anders, looking at the supply chain issues, which is obviously very Fluid in China today. Can you perhaps describe where Zebra is right now in terms of working with your key vendors and getting the I mean, is it still a matter of uncertainty or do you feel like the worst has passed and things are even better for you guys? Yes.

Speaker 2

I think we believe that the situation improved through Q1 and we see it Has continued to improve improving over the year, but not a snap back into say pre COVID situations. We've been building more and more resiliency into our supply chain over the last several years. When tariffs happened, we set up new facilities in Malaysia, Vietnam, Taiwan, Mexico and so forth. So we are much less dependent on China as an assembly facility. We've We worked hard on signing up long term supply agreements with both new and existing suppliers and that is beginning to benefit us Given the strong performance we had in Q1 on revenues and the solid guide we gave on Q2 The outlook here, we are also continuing to buy critical components on the spot markets.

Speaker 2

That's helping to optimize our allocation with suppliers and we have been dedicating now For quite a long time, a substantial part of our engineering resources to product redesigns to minimize the impact of these long lead time components. So I think we feel we have better visibility today, better supplier commitments and then couple that with The product redesigns, which eliminates the needs for some of these long lead time components, we feel we're in a better in a gradually improving environment throughout this year.

Speaker 6

So just to be clear, the ongoing issues with shutdowns in Shanghai over the past month and the threat in Beijing are not impacting your supply chain Issue is correct now. Is that correct?

Speaker 2

We don't expect them to impact us on for the quarter. There's been our main Tier 1 assembly facilities in China are up and running, but there are some Tier 2 facilities or Tier 3 facilities that are still impacted. But based on our latest data, we expect them to be able to come online and produce what we need for the quarter.

Speaker 6

Great. I appreciate that. And then just coming back to the price increases, I thought about Tami's question. I think if I remember historically, you guys were trying not to pass on through price increases The impact from the higher freight, with the most recent price increase, are you guys now attempting to do that Because the cost becomes so high, is that the issue?

Speaker 3

No, that's right, Keith. The first two were more really focused around the component increases. And this last one is really targeted at the premium shipping costs. Primarily, if you look at the cost per kilo that we're paying, the rates have come down quite a bit from the Q4 to what we're seeing in March, but we don't expect those to we're holding that constant in our forecast for the full year, but it's going to take some time we get back to pre pandemic levels given the current environment.

Speaker 6

Great. I appreciate it. Thank you.

Operator

And ladies and gentlemen, our next question today comes from Andrew Buscaglia with Berenberg. Please go ahead.

Speaker 2

Good morning, guys. Good morning.

Speaker 7

So maybe just flipping to the demand side a bit. So you're able to ship product to customers and you're able to get that fulfill that demand, which seems to be intact. But you're hearing some of these larger e commerce companies talk about perhaps some lower spend on capital projects this year. I'm wondering for the remainder of the year, what is your assumption on where that demand is coming from? Do you see I think last quarter you still talked about some optimism around some large product projects moving forward or that's not in your guide, but maybe talk about the dynamics you're seeing and type of demand you're seeing from individual customers?

Speaker 2

Well, first I'd say that the demand environment is very strong. The particularly, say, you talked about retail, but I think it goes to all All verticals for us. The digital transformation is continuing at a fast pace and that's driving strong demand for our type of solutions. And we performed above the high end of our outlook here despite these supply chain challenges and having to suspend shipments into Russia in March. So overall, the supply was more favorable to us In Q2 in Q1, but we are and we expect demand to continue to kind of outpace or certainly in Q1, the demand Outpaced our supply and that was particularly true for printers.

Speaker 2

But we did see strong growth Across all regions, but particularly so in Latin America and Asia Pacific and mobile computing was The strongest performer on the product side. It's hard for us to comment now specifically on individual customers, but We have a number of large customers. They tend to have go through buying cycles. And At this stage, I think we feel we can certainly offset any weakness that we've seen so far due to this overall Strong demand from the broader business and we highlighted also here the strength of the run rate in Q1. Joe, do you want to add?

Speaker 5

Yes. I would add that we are seeing, especially in the Smaller transactions and that's a segment of the market that has shown remarkable resiliency, Especially recently, and so we're expecting that will continue through the rest of the year. Manufacturing and P and L Have been quite strong as well for us as those sectors have been renewing a lot of their technology And there's interest in new technology areas there that drive greater productivity and efficiency, which will be needed by those factors In the economic environment that we're in, so think about things like automation and RFID, Those are areas that we're seeing good demand come in and help us in the second half.

Speaker 7

Okay. That's helpful. So maybe just one other one on capital allocation. Just given how the stocks So is share repurchase becoming more of an interesting use of cash here and are you still sort of more so committed to M and A?

Speaker 3

Yes. So I think from a capital allocation, as we said in the prepared remarks, we ended Q1 at Just below one point from a net debt leverage perspective. So obviously comfortable with where we're at. It gives us a lot of flexibility To do both, to continue to look for attractive M and A opportunities as well as to be active from a share repurchase perspective. And We were in Q1 with over $300,000,000 of share repurchases.

Speaker 3

We've been active here in Q2 with more than $100,000,000 of share repurchases so far. So I think the balance sheet flexibility and this free cash flow for the year gives us that ability to do both. And again, even with the Matrix acquisition, if there is opportunities that come along, we're still active in the market.

Speaker 2

Okay. Thank you.

Operator

And our next question today comes from Jim Ricchiuti of Needham and Company. Please go ahead.

Speaker 8

Hi, good morning. I just wanted to go into the outlook for the AIT As you look at Q2 in the second half, are you assuming some easing of the supply chain pressures that It potentially will help the top line in that part of the business where clearly you've been probably a little bit more heavily disrupted as well on margins.

Speaker 2

Yes. First, a little bit more broadly across all our product categories. We continue to drive a lot of innovation across the Folio of our solutions and that are helping to digitize and automate frontline workflows and those are increasingly important areas of investment for our customers. And I'd say our synergistic portfolio of software and services and products are solving some very critical challenges for our customers. For the printing business, Yes, we start to saw some supply chain challenges across most of the printing portfolio In Q1, that was driven by some actually a few key components.

Speaker 2

So it wasn't so widespread, but it's a few key components that we needed. North America and Europe was disproportionately impacted by those challenges, but it was more a global thing. But we have succeeded in securing more of those components, particularly late in Q1.

Speaker 3

And We see

Speaker 2

then the combination of having more of those components and some of these redesign activities we've done to ease the need for or to enable us to get more Supply and we expect to see a good sequential uptick in our printing business in Q2. And I'd say sort of the underlying demand for our printing business is very strong.

Speaker 8

Got it. Thank you. And just as it relates to EMEA Europe, Clearly, there's some impact from supply chain on the printing business that you've seen. But I'm just wondering, are Have you seen any change in demand since we've seen the conflict In Ukraine, in Western Europe from either some of the increased macro uncertainty, are you seeing Any shift in the demand that you're seeing from some of your customers in end markets there?

Speaker 2

I'd say, so far, Europe has been resilient and we've seen we had a very strong demand in Q1. We obviously have been impacted Russia and Ukraine. So we have about 1% to 2% of our revenues coming out of Russia and Ukraine, particularly Russia. But so far, I'd say, I'd ask Joe to comment here also that our European customers have been quite resilient and we haven't seen them Go back. You might have individual customers, but not across the board.

Speaker 5

Yes. I can only echo that. We have seen outside of the fact that we've discontinued our Sales into Russia and just halted into Ukraine as well, we have not seen an adverse impact On the sales in the rest of Europe, neither in our large customer business nor in our run rate.

Speaker 8

Got it. Thank you.

Speaker 2

I think, yes, you just mentioned that with the tight labor market that you see in the U. S. And Europe, Our solutions become more important, right. This is our solutions help mitigate the need for adding workers. Basically, the same workforce It can be it can add productivity, it can be more productive by utilizing our type of solutions, mobile computers, printers, Robots, basically all our portfolio.

Operator

And our next question today comes from Meta Marshall with Morgan Stanley. Please go ahead.

Speaker 9

Great. Thanks. Maybe a couple of questions for me. In the past, you've given a view that about a third of Retail representatives or representatives kind of have mobile devices today and that's kind of a great opportunity for growth for you guys going forward. Just as we kind of emerge from a COVID environment, just any update to that view of Where we are or where we or where organizations are looking to get to as far as penetration of devices?

Speaker 9

And then second question for me, just any update On kind of the healthcare market, particularly as they move past kind of COVID use cases to more just kind of turning to their own transformation? Thanks.

Speaker 2

Yes, I'll start and then we'll see if Joe wants to add something here also. But first, starting on the mobile computing side, which is the device for all. First, we had strong growth this past quarter supported by very broad based demand across all regions. And I'd say here we had a projected bright spot around rugged tablets, which we don't talk to about as much, but we were up double digits and definitely taking share in that space. We also announced the new WS50, which is the world's smallest all in one Android wearable And that's going to be available for shipment now in Q2.

Speaker 2

And then more specifically to your question about Empowering every worker with a device, that is clearly a strong theme for our customers. We estimate that in retail, Less than 1 third of all workers are currently equipped with a device. But we are now seeing we work with several Large retailers today who are deploying our devices as to every one of their associates. So this trend is definitely alive and progressing. Also, I'd say the partnership that we have with Microsoft Teams It provides another strong collaboration platform that is aimed at frontline workers and that's helping to drive momentum.

Speaker 2

And Then I'll go to Healthcare and then I'll Oli do you want

Speaker 5

to Yes, before you go to Healthcare, let me just add one thing to that point, because I think this last point is quite important. We're beginning to see elements of the strategy that have both devices and hardware and software and services applications Come together bear fruit by showing synergies in both directions. And what do I mean by that? We have Already been pursuing looking at our device customers where we have a very strong market share and offering them some of the applications like our Workforce Connect, voice Communication capability or our Reflexus task management capability and have seen good opportunity for synergies in that direction. But what we're seeing now is customers are thinking about those applications that really have their workforce collaborate.

Speaker 5

The teams example that Anders gave, But also voice communication like Workforce Connect requires a workforce to be fully equipped, otherwise they can't collaborate. And that's what we're now seeing is customers saying in order to deploy this workforce connections solution or the Teams solution, I need to get a device for our workers. We have several examples of now of where that, if you will, reverse synergy has taken place. And that's a really good Driver of momentum for us into that other 2 thirds of workers that we've been looking for.

Speaker 2

Then a couple of words on healthcare. So, yes, healthcare continues to be a very attractive growth opportunity for us as we help the healthcare industry transform. Our purpose built solutions are critical for improving patient the patient journey and to drive Productivity of healthcare providers more broadly. We also enhance caregiving to Better address patient demands and we accomplished this by automating workflows As well as connecting assets, patients and staff from a physical to digital perspective, We see also a number of new attractive growth opportunities, such as tablets for telehealth. There's more interest around locationing of equipment.

Speaker 2

And I'd say our broad portfolio of supplies is playing very well in healthcare. And lastly, our solutions are also used, as we talked about in our earlier call, for global vaccine distributions such as for polio, COVID-nineteen or malaria. So we certainly see healthcare as being a very attractive growth market for us as we go forward.

Speaker 9

Great. Thanks.

Operator

Today's next question comes from Joseph Donahue with Baird. Please go ahead.

Speaker 10

Hey guys, thanks for taking the question. Could you talk about the demand you're seeing for RFID? I know some large companies have announced projects, is that trickling down, is it broad based?

Speaker 2

Yes. RFID is a very attractive market for us here now. It's been commercialized for some 30 years, but we now see strong demand around Apparel in store inventory accuracy was the first driver and we've seen a few large public Customer announcements in the last months or so, both from Walmart and UPS, which I think I'm not talking about our participation in this program. So I'm just talking about the commitment they show to RFID and how Many of the suppliers and partners of those companies will also have to You figured out how to deliver solutions that are compatible with their processes now. So we've seen strong growth In our RFID portfolio, it was somewhat more hamstrung by supply chain constraints in First 1, but The backlog and the momentum for us is very strong and we have a leading portfolio of mobile reader, RFID readers, fixed readers And our printer encoders.

Speaker 7

Yes.

Speaker 5

I think in particular, if I may add, this is Joe Hill, that A mandate like Walmart's where they're asking their suppliers to tag the product going into their stores requires not only The readers that we often think of first, but it also requires printing all of those tags and getting the tags. So we're seeing A lot of increased demand now for both printers and tags in addition to readers. So there's a good momentum in RFID. This is a Technology that will drive growth for some time.

Speaker 10

Okay, great. And then just to switch it up, you guys talked earlier about redesigns. Are those factoring in mostly now or should the effects be seen later in the year?

Speaker 2

Redesigns. Yes, we've been redesigning A number of our products starting from last summer to now. So some of them are already in effect and working and that was Part of what helped us in Q1, others are just coming online and some are going to be completed, I think, more later in Q2. So This is a dynamic environment and we have to adjust and react to feedback we get from the market about Different components. So some components might have been okay in Q3 of last year, but they were became long lead time components say in Q1.

Speaker 2

So it is An ongoing program for us, but we are seeing less and less need for it. So The resources we have dedicated to it have we've been able to release some of those back into regular product developments. It is helping already and I expect that it will continue to incrementally help us as we go through the year.

Speaker 10

Got it. Thanks.

Operator

And our next question today comes from Damian Karas with UBS. Please go ahead.

Speaker 11

Hi, good morning everyone.

Speaker 2

Good morning. Good morning. Good morning.

Speaker 11

So I'm late, Late to join here, switching over for another call. Apologies if I repeat anything you might have already mentioned. But I wanted to ask you first about the sales trajectory and guidance. I think you're coming in above I think you're coming in above expectations for the Q1. And Looking at later this year, the comps do get easier.

Speaker 11

So I'm just wondering if you could maybe comment Provide sort of on the run rate for orders as you exited the quarter?

Speaker 3

Yes. So if you look at our full year guide of 3% to 7%, I'd start to saying, you've heard earlier, which is we're as confident as ever about the business. Strong backlog, solid orders, booking momentum here in the 1st part of the year, and we're seeing our pricing actions Taking hold, which is giving us a benefit, as well as continued improvement in supply visibility. But this is Also helping offset the assumed headwind of 1 to 2 points of sales into Russia, that we're offsetting for the full year, as well as taking a cautious view on the Half assumptions given the broader macro uncertainties as well as the FX volatility. So I think it's the strong momentum definitely plays a part, but Offsetting 2 significant headwinds between Russia, the macro uncertainty and FX.

Speaker 11

Okay, understood. And then I wanted to ask you about working capital, more specifically inventory. Sequentially inventory did move lower. Just wondering how you're positioned in terms of any raw materials work Process that you might have on hand that kind of satisfy your near term demand. And wondering if you'll be looking to build raw materials or WIP to ensure you don't have a short For phone supply going forward?

Speaker 3

Yes. So we did see a slight decrease in inventory here in the Q1 as we were able to ship More than what we expected driving the sales beat in Q1 ahead of our guide. And that is the expectation for the remainder of the year is that we could Slowly build back inventory both from a strategic reserve, whip at our Tier 1 and Tier 2 Suppliers as well as ultimately building back our finished goods stock in our own warehouses. But I think you won't really see the full effects of that Until later in the year and early part of next year. But that's part of the reason for our full year free cash flow guide was to give us some flexibility If we have if we can build inventory later in the year that we can do that.

Speaker 11

Got it. Makes sense. Appreciate the color. Best of luck, guys.

Speaker 2

Thank you.

Operator

And then ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Gustafsson for any closing remarks.

Speaker 2

So to wrap up, I would like to take a moment to say Our thoughts are with all those affected by Russia's invasion of Ukraine, particularly our colleagues in the region and those with loved ones who have been impacted. I would like to thank our employees and partners for their extraordinary efforts to serve customers and deliver better than expected Q1 results. We continue to focus on prioritizing our customers' needs in a supply constrained environment And we look forward to welcoming the Matrix team once the acquisition closes. Thank you, everybody.

Operator

And ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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