Zebra Technologies Q1 2022 Earnings Call Transcript

Participants

Corporate Executives

• Michael Steele, Vice President of Investor Relations
• Anders Gustafsson, Chief Executive Officer And Director
• Nathan Andrew Winters, Chief Financial Officer
• Joachim Heel, Chief Revenue Officer

Analysts

• Thomas Allen Moll, Stephens
• Keith Michael Housum, Northcoast Research Partners
• Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co.
• James Andrew Ricchiuti, Needham & Company LLC
• Meta A. Marshall, Morgan Stanley
• Joseph, Robert W. Baird
• Damian Karas, UBS Investment Bank

Presentation

[Operator]

Good day. and welcome to the First Quarter 2022 Zebra Technologies Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Mike Steele, Vice President, Investor Relations. Please go ahead, sir.

[Michael Steele, Vice President of Investor Relations at Zebra Technologies]

Good morning, and welcome to Zebra's first quarter conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one 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. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of the 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 first quarter results. 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 four as I hand it over to Anders.

[Anders Gustafsson, Chief Executive Officer And Director at Zebra Technologies]

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%, and adjusted EBITDA margin of 19.9%, a 540 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. Our teams have continued to manage supply chain constraints as we navigate significant global macro uncertainty, including COVID-19 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 software margin. Operating expenses as a percentage of revenue increased due to acquisitions in our expansion markets and resuming in-person events. Overall, we are pleased that our first quarter 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.

[Nathan Andrew Winters, Chief Financial Officer at Zebra Technologies]

Thank you, Anders. Let's start with the P&L on slide six. 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 & 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. 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% due to unprecedented premium supply chain costs and unfavorable product mix partially offset by higher service and software margins. 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. First 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 seven. 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 million 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 volumes shifted to later in the quarter. We also made $305 million of share repurchases as we have been opportunistic in a volatile market. On slide eight, we show the impact of transitory costs related to industry-wide supply chain disruption caused by the pandemic. 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 to meet our commitments to our customers. In Q1, we incurred incremental premium supply chain costs of $69 million 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 million year-over-year. Over the past year, these elevated supply chain costs have continued to evolve.

At this point, approximately 1/2 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. 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 improved, and we assume March pricing holds through the remainder of the year. The war in Eastern Europe and lockdowns in 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 million of premium supply chain costs for the full year. 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 second 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-19 lockdowns across China. Our guide assumes steady improvement in Chinese manufacturing output. Our outlook also assumes a neutral impact from acquisitions and foreign currency changes. We anticipate Q2 adjusted EBITDA margin to be between 20% and 21%, which assumes gross margin contraction from the prior year due to unfavorable sales mix and expected premium supply chain costs of $60 million, 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% and 7%. Demand continues to be robust, and product supply is improving, which offsets the headwind of one to two points of sales into Russia and global macro uncertainty that is escalated since our prior outlook. 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 one point lower than our previous guide due to our revised expectation of supply chain costs, which are $60 million higher than the impact we realized in 2021. We now expect our free cash flow to be at least $800 million 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 Matrox Imaging, which Anders will cover in a moment. Please reference additional modeling assumptions shown on slide nine.

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

[Anders Gustafsson, Chief Executive Officer And Director at Zebra Technologies]

Thank you, Nathan. 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 front line 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 2022, 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.

Attendees were interested in the dynamic orchestration 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 work together to increase efficiency and reduced costs in warehouse operations. At HIMSS, the leading global health care 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 health care operations and patient safety. Earlier this year, we raised our long-term organic sales growth expectations to 5% to 7% and provided a refreshed view of our served markets, as noted on slide 12.

These expectations are supported by mega trends, 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 our commitment to scaling into these expansion markets. Slide 13 illustrates how the Matrox acquisition will enable us to create a comprehensive portfolio of fixed industrial scanning and machine vision solutions, building on our smart camera product launch last year and augmenting our growing expertise in software and deep learning. Matrox brings a complementary offering of products and solutions, including advanced smart cameras, vision controllers and 3D 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. 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. Matrox generates annual sales of approximately $100 million with a higher profit margin profile than Zebra. The $875 million acquisition is expected to close midyear. 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. A truck stop operator in North America recently began rolling out our test 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. A 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. One of the largest railroad freight companies in North America is deploying our TC57 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 health care system expanded their use of Zebra solutions replacing desk phones with our TC21 mobile computers and deploying TC52 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 improve the productivity of their warehouse operations. 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. 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 health care 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.

Now I'll hand the call back over to Mike.

[Michael Steele, Vice President of Investor Relations at Zebra Technologies]

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

Questions and Answers

[Operator]

[Operator Instructions] And ladies and gentlemen, today's first question comes from Tommy Moll with Stephens.

[Thomas Allen Moll, Analyst at Stephens]

Good morning, and thank you for taking my questions. Anders, I wanted to start on the topic of some of the pricing actions you've announced. 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.

[Anders Gustafsson, Chief Executive Officer And Director at Zebra Technologies]

Yes, I'll start and then I have some of my colleagues here add to this also. But we continue to 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 and February of this year. It 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. 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 Heel talk a little bit more about the impact on customer share.

[Joachim Heel, Chief Revenue Officer at Zebra Technologies]

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 see 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. So overall, we're quite pleased with the realization.

[Nathan Andrew Winters, Chief Financial Officer at Zebra Technologies]

And Tommy, this is Nathan. Just the last point of your question. So if you aggregate the three price increases, it's nearly two 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&L as we honor committed pricing on specific deals and other contracts we may have with certain customers.

[Thomas Allen Moll, Analyst at Stephens]

That's all very helpful. Thank you. On Matrox, I wanted to shift gears here. I guess, to start, anything you can share just in terms of P&L, revenue CAGR historically or prospectively and maybe in terms of the market? Margins you've called out is 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 the profile looks at Matrox would be helpful. But maybe at a higher level as well, just help us situate the Matrox platform with your existing vision platform that you built organically. And what avenues are open to you through Matrox that weren't previously?

[Anders Gustafsson, Chief Executive Officer And Director at Zebra Technologies]

I'll start, and then I think Joe will help out here also. First, we announced our intent to acquire Matrox Imaging back in March, and they are a recognized leader in machine vision, and I think that underscores our commitment to this important expansion market for us. You might remember, we launched our own fixed industrial scanning portfolio last year. And Matrox very much complements our fixed industrial scanning by being a clear -- one of the clear leaders in machine vision. So we're certainly very excited about what this combination can bring to us. It just sort of helps us scale our business much faster and creates a very comprehensive product and solutions portfolio.

And I'd say here also Matrox 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. 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 at 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 Matrox to bear here. So very complementary product offerings, very complementary go-to-market activities, where we are leveraging our channel centricity, and we're able to bring that expertise to Matrox to help accelerate their growth.

[Joachim Heel, Chief Revenue Officer at Zebra Technologies]

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-to-market opportunity, but we also see a good opportunity in bringing machine vision applications to our existing large customers, I think, in particular, about our P&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 Matrox, they're very eager to engage with us on the machine vision side as well. So we see a lot of good traction on the go-to-market front.

[Nathan Andrew Winters, Chief Financial Officer at Zebra Technologies]

Yes, Tommy, so I guess, a three-headed answer here. But as we said, $100 million run rate, it's in 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 rate, 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.

[Thomas Allen Moll, Analyst at Stephens]

Thank you.

[Operator]

And ladies and gentlemen, our next question today comes from Keith Housum with Northcoast Research.

[Keith Michael Housum, Analyst at Northcoast Research Partners]

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 supplies you need? I mean is it still a matter of uncertainty? Or do you feel like the worst has passed and things are getting better for you guys?

[Anders Gustafsson, Chief Executive Officer And Director at Zebra Technologies]

Yes. I think we believe that the situation improved through Q1, and we see it as continue to improving over the year but not a snapback into say, pre-COVID situations. We've been building more and more resilience 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 much less dependent on China as an assembly facility. We've also 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 outlook here.

We're also continuing to buy critical components on the spot markets. 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 are in a better -- in a gradually improving environment throughout this year.

[Keith Michael Housum, Analyst at Northcoast Research Partners]

Just to be clear, the ongoing issues with shut downs in Shanghai over the past month and the riots in Beijing are not impacting your supply chain issues, correct now. Is that correct?

[Anders Gustafsson, Chief Executive Officer And Director at Zebra Technologies]

We don't expect them to impact us on for the quarter. There's been -- our main Tier one assembly facilities in China are up and running. but there are some Tier two facilities or Tier three 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.

[Keith Michael Housum, Analyst at Northcoast Research Partners]

Great. Appreciate that. And then just coming back to the price increases, a follow-up on Tommy'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 costs have become so high? Is that the issue?

[Nathan Andrew Winters, Chief Financial Officer at Zebra Technologies]

No. That's right, Keith. The first two were more really focused around the component increases, and this last one has really targeted 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 fourth quarter to what we're seeing in March. But we don't expect those to -- we're holding that content in our forecast for the full year, but it's going to take some time before we get back to pre-pandemic levels given the current environment.

[Keith Michael Housum, Analyst at Northcoast Research Partners]

Great. I appreciate it. Thank you.

[Operator]

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

[Andrew Edouard Buscaglia, Analyst at Joh. Berenberg, Gossler & Co.]

Good morning, guys. 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 are -- 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 projects moving forward or that's not in your guide, but maybe talk about the dynamics you're seeing and what type of demand you're seeing from individual customers.

[Anders Gustafsson, Chief Executive Officer And Director at Zebra Technologies]

Well, first, I'd say that the demand environment is very strong. Particularly, say, you talked about that retail, but I think it goes to 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, demand outpaced our supply, and that was particularly true for printers.

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 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?

[Joachim Heel, Chief Revenue Officer at Zebra Technologies]

Yes. I would add that we are seeing, especially in the second half, growth opportunities in the following areas. One is our run rate. Remember that our business has at least 1/3 of it in the run rate, which is 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&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 sectors 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.

[Andrew Edouard Buscaglia, Analyst at Joh. Berenberg, Gossler & Co.]

Okay. No, that's helpful. So maybe just one other one on capital allocation. Just given how the stocks act this year amongst a tough market, and I noticed you lowered your cash flow expectations for the year. So is share repurchase becoming more of an interesting use of cash here? And -- or are you still sort of more so committed to M&A?

[Nathan Andrew Winters, Chief Financial Officer at Zebra Technologies]

Yes. So I think from a capital allocation, as we said in the prepared remarks, we ended Q1 at a 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&A opportunities as well as to be active from a share repurchase perspective. And we were in Q1 with over $300 million of share repurchases. We've been active here in Q2 with more than $100 million of share repurchases so far. So I think the balance sheet flexibility and the free cash flow for the year gives us that ability to do both. And again, even with the Matrox acquisition, if there is opportunities that come along, we're still active in the market.

[Andrew Edouard Buscaglia, Analyst at Joh. Berenberg, Gossler & Co.]

Okay. Thank you.

[Operator]

And our next question today comes from Jim Ricchiuti of Needham & Company.

[James Andrew Ricchiuti, Analyst at Needham & Company LLC]

Hi, good morning. I just wanted to go into the outlook for the AIT business as you look at Q2 in the second half. Are you assuming some easing of the supply chain pressures that 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?

[Anders Gustafsson, Chief Executive Officer And Director at Zebra Technologies]

Yes. First, a little bit more broadly across all our product categories. We continue to drive a lot of innovation across the portfolio of our solutions and they 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 service system products are solving some very critical challenges for our customers. For the printing business, we certainly saw some supply chain challenges across most of the printing portfolio in Q1. That was driven by some actually a few key components.

So it wasn't so widespread, but there'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. And we see then the combination of having more of those components and some of these redesign activities we've done to ease the need for -- 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.

[James Andrew Ricchiuti, Analyst at Needham & Company LLC]

Thank you. And just as it relates to EMEA, Europe, clearly some impact from supply chain on the printing business that you've seen. But I'm just wondering, are you seeing -- 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?

[Anders Gustafsson, Chief Executive Officer And Director at Zebra Technologies]

I'd say, so far, Europe has been resilient, and we've seen -- we had a very strong demand in first quarter. We obviously have been impacted by 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 ask Joe to comment here also, that our European customers have been quite resilient, and we haven't seen them pull back. We might have individual customers but not across the board.

[Joachim Heel, Chief Revenue Officer at Zebra Technologies]

Yes, I can only echo that. We have seen outside of the fact that we've discontinued our sales into Russia and have 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.

[Anders Gustafsson, Chief Executive Officer And Director at Zebra Technologies]

I think yes, as mentioned, 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 can be -- can add productivity, 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.

[Meta A. Marshall, Analyst at Morgan Stanley]

Great. Thanks. Maybe a couple of questions for me. In the past, you've given a view that about 1/3 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 organizations are looking to get to as far as penetration of devices? And then second question for me, just any update on kind of the health care market, particularly as they move past kind of COVID use cases to more kind of turning to their own transformation? Thanks.

[Anders Gustafsson, Chief Executive Officer And Director at Zebra Technologies]

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 particularly bright spot around rugged tablets, which we don't talk about as much, but we were up double digits and definitely taking share in that space. We also announced a 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. And then more specifically to your question about empowering every worker with the device, that is clearly a strong theme for our customers.

We estimate that, in retail, less than 1/3 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 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 provides another strong collaboration platform that is aimed at frontline workers, and that's helping to drive momentum. And then I'll go to health care. I don't know, Joe, do you want to?

[Joachim Heel, Chief Revenue Officer at Zebra Technologies]

Yes. Before you go to health care, 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 Reflexis 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.

The team's examples 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 team's solution I need to get a device for all workers. We have several examples 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 2/3 of workers that we've been looking for.

[Anders Gustafsson, Chief Executive Officer And Director at Zebra Technologies]

Then a couple of words on health care. So yes, health care continues to be a very attractive growth opportunity for us as we help the health care industry transform. Our purpose-built solutions are critical for improving patient -- the patient journey and to drive productivity of health care 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. And I'd say our broad portfolio of supplies is playing very well in health care. And lastly, our solutions are also used, as we talked about in an earlier call, for global vaccine distribution, such as for polio, COVID-19 or malaria. So we certainly see health care as being a very attractive growth market for us as we go forward.

[Meta A. Marshall, Analyst at Morgan Stanley]

Great. Thanks.

[Operator]

[Operator Instructions] Today's next question comes from Joseph [Indecipherable] with Baird.

[Joseph, Analyst at Robert W. Baird]

Hi, guys. Thanks for taking my question. Could you talk about the demand you're seeing for RFID? I know that some large companies have announced projects. Is that trickling down? Is it broad-based?

[Anders Gustafsson, Chief Executive Officer And Director at Zebra Technologies]

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 as it was the first driver. And we have seen a few large public customer announcements in the last months or so, both from Walmart and UPS, which I think talks -- 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 figure out how to deliver solutions that are compatible with their processes now. So we've seen strong growth in our RFID portfolio, somewhat more hamstrung by supply chain constraints in the first one, 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.

[Joachim Heel, Chief Revenue Officer at Zebra Technologies]

Yes. I think in particular, if I may add, this is Joe Heel, 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.

[Joseph, Analyst at Robert W. Baird]

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?

[Anders Gustafsson, Chief Executive Officer And Director at Zebra Technologies]

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 it can -- 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. So it is an ongoing program for us. But we are seeing less and less need for it. So it's -- the resources we have, they're dedicated to it have -- we've been able to release some of those back into regular product development. But it is helping already, and I expect that it will continue to incrementally help us as we go through the year.

[Joseph, Analyst at Robert W. Baird]

Got it. Thanks.

[Operator]

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

[Damian Karas, Analyst at UBS Investment Bank]

Hi, good morning, everyone. So I'm late to join here, switching over from 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 expectations for the first quarter. And looking at later this year, the comps do get easier. So I'm just wondering if you could maybe comment on why growth rate wouldn't pick up later this year. And just maybe any color you could provide sort of on the run rate for orders as you exited the quarter.

[Nathan Andrew Winters, Chief Financial Officer at Zebra Technologies]

Yes. So if you look at our full year guide of 3% to 7%, I started saying you've heard earlier, which is we're confident as ever about the business. Strong backlog, solid orders booking momentum here in the first 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 one to two points of sales into Russia that we're offsetting for the full year, as well as taking a cautious view on the second 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 two significant headwinds between Russia, the macro uncertainty and FX.

[Damian Karas, Analyst at UBS Investment Bank]

Okay. Understood. And then I wanted to ask you about working capital, more specifically inventory. So sequentially, inventory did move lower. Just wondering how you're positioned in terms of any raw materials, work in 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 shortfall on supply going forward.

[Nathan Andrew Winters, Chief Financial Officer at Zebra Technologies]

Yes. So we did see a slight decrease in inventory here in the first quarter 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 would slowly build back inventory both from a strategic reserve WIP at our Tier one and Tier two 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 can build inventory later in the year that we can do that.

[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.

[Anders Gustafsson, Chief Executive Officer And Director at Zebra Technologies]

Yes. 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 Matrox team once the acquisition closes. Thank you, everybody.

[Operator]

[Operator Closing Remarks]