Zebra Technologies Corporation (ZBRA) Q3 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to Zebra Technologies Third Quarter 2015 Earnings Release Conference Call. Joining us from Zebra Technologies are, Anders Gustafsson, Chief Executive Officer; Mike Smiley, Chief Financial Officer; Joe Heel, Senior Vice President, Global Sales; and Dean Lindroth, Vice President, Finance. All lines will be in a listen-only mode until after today's presentation. Instructions will be given at that time in order to ask a question. At the request of Zebra Technologies, this conference call is being recorded. Should anyone have any objections, please disconnect at this time. At this time, I would like to introduce Mr. Dean Lindroth of Zebra Technologies. Sir, you may begin. Dean Lindroth - VP-Finance & Investor Relations Contact: Thank you, and good morning, for joining us today. Today's call will include prepared remarks from Anders Gustafsson and Mike Smiley. Joe Heel will join us for the Q&A portion of the call. A replay of this call will be available on our website approximately two hours after the conclusion of the call. Certain statements made on this call will relate to future events or circumstances and therefore, will be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Words such as expect, believe, anticipate and outlook are a few examples of words identifying a forward-looking statement. Forward-looking information is subject to various risks and uncertainties, which could significantly affect expected results. Information about risk factors that could impact our results is noted in the press release we issued this morning and is also described in Zebra's latest 10-K, which is on file with the SEC. Finally, we will make references today to both GAAP and non-GAAP measures. You can find reconciliations of our GAAP to non-GAAP results in today's press release. In addition, year-over-year sales growth references for Enterprise and total Zebra will be on an estimated historical basis. Now, I'll turn over the call to Anders. Anders Gustafsson - Chief Executive Officer & Director: Thank you, Dean, and good morning, everyone. We recently celebrated the one year anniversary of Zebra's acquisition of Motorola Solutions' Enterprise business. I have long believed that these two businesses would be better together and today, I'm more convinced than ever. Before I discuss our results for the third quarter, I would like to review the strategic priorities that we set last year and our progress to date. These priorities are the foundation for Zebra's transformation and delivery of our value proposition. Our priorities include; first, growing the business particularly in Enterprise through renewed focus, leveraging complementary strength, capitalizing on cross-selling opportunities and increasing our strategic importance to customers; second, expanding our market opportunity by creating solutions to enable Enterprise Asset Intelligence; third, improving execution, particularly in the channel, service delivery and customer experiences; fourth, realizing cost synergies; and finally, differentiating ourselves with our leadership in technology, channel relationships, partner ecosystem and brand. Executing on these priorities will enable us to capitalize on the opportunities being created by the secular trends in mobility, the cloud, and the Internet of Things. The proliferation of the connected devices, the explosion in mobile apps and e-commerce as well as the expanding mobile workforce are all generating exciting growth opportunities for Zebra and our partners. Other key growth drivers are technology advances including the operating system migration in mobile computing and the data capture transition from 1D scanning to 2D imaging. One year into the merger, I'm very pleased with our progress. We have returned to Enterprise to growth with sales through September, up 6% year-over-year in constant currency. Part of this achievement is the result of increasing our win rate against consumer devices in retail to nearly 80%, compared to 50% last year. Win rates in transportation and logistics and manufacturing are also higher. This was accomplished with an expanded portfolio of differentiated enterprise grade devices that deliver a superior value proposition in our target market segments and use cases. We have improved Enterprise execution in the channel, particularly in China where we have begun to regain ground and have increased sales year-to-date by 60%, compared to last year. With an early investment in Android, we have demonstrated a high level of success in the operating system of migration in mobile computing by growing Android sales through September by 170%, compared to last year. In the original Zebra business, we have grown sales year-to-date by 12% in constant currency, with double-digit increases in printing, supplies and location solutions. Finally, our growth is also attributable to a stronger, more recognizable Zebra brand, and an unrivalled partner network. With these achievements, we have delivered a nine-month adjusted EBITDA margin of 16.3%. On a constant currency basis, this is nearly 20%, compared to a 2013 pre-merger estimate of 15.6%. We have more work to do in areas that include launching our new channel program, growing services, expanding gross margin and cross-selling. That said, our results underscore the potential of the strategies we are pursuing and the value of bringing together Zebra and the Enterprise business. They also demonstrate that we have accelerated Zebra's transformation into a globally diversified industry leader that is well positioned for the opportunities ahead and to achieve our long-term financial targets. And now turning to our results for the third quarter. Sales were $919 million, excluding purchase accounting adjustments. In constant currency, this represents 6% year-over-year growth, including Enterprise growth of 5% and pre-transaction Zebra growth of 8%. Non-GAAP earnings per share were $1.39, up 71% from a year ago. From a sales perspective, we continue to grow in our three largest regions. Year-over-year growth in the quarter was 8% in North America, 3% in constant currency in EMEA, and 23% in Asia-Pacific. Demand remains strongest in retail and transportation and logistics. Momentum in healthcare also continues to grow. Top growth drivers, again, included e-commerce, mobility, the OS transition and the continuing refresh cycle in printing. In North America, mobile computing sales reflected strong demand for our Android product line, particularly in retail. From a new order perspective, wins in retail and manufacturing included several mid-to-small sized accounts, which came through the channel. In data capture, growth was particularly strong in our OEM vertical, and we continue to see increasing momentum in the transition to 2D imaging. Printing growth was led by increases in sales of tabletop and desktop product lines. In EMEA, as we anticipated, growth in constant currency moderated from first half levels. This included a more typical summer slowdown in Europe in contrast to the unusually strong summer last year. Momentum in mobile computing remained solid in Europe, particularly in the UK and Germany, where orders included new wins in manufacturing, retail, and government. Sales in Africa and the Middle East slowed due to the low price of oil impacting industrial customers. Sales in Russia and Turkey declined due to current geopolitical challenges. With respect to the April price increase in – on euro-priced products, demand does not appear to have been negatively impacted. In the third quarter, the price increase gained traction, particularly in printing. Compared to the third quarter, we expect a sequentially higher benefit in the fourth quarter resulting in an annualized benefit of $25 million to $30 million. In Asia-Pacific, we continued to see solid growth across the region, particularly China, India, and Southeast Asia. While manufacturing remains challenged, retail upgrades and e-commerce are driving strong growth in both mobile computing and scanning. Solid printer growth, particularly in desktop continued in transportation and logistics and healthcare. Aftermarket sales were also up significantly as a result of our ongoing effort to address an underserved market. Sales in Latin America – in the Latin America region declined 16% as a result of a difficult macroeconomic environment. Currency devaluations and the decline in purchasing power have led to postponement or cancellation of opportunities across the region. To position ourselves for a return to growth when the regional economies improve, we are using this opportunity to strengthen our go-to-market strategies. One of the contributors to our sales growth this year is the operating system migration in mobile computing. We believe that there are approximately 15 million units in the field with legacy operating systems. We expect that the majority will be replaced by the end of 2020 with devices featuring a modern operating system. Typically, with technology transitions, the largest customers lead the way, winning this early adopters is critical to establishing a beachhead and paving the path for future growth and profitability. These large accounts are strategic, profitable and drive significant levels of business. Some due to their scale yield a lower than average initial gross margin. Over time, margins in these accounts improve as we reduce product cost and cross-sell other higher-margin products and services. Most importantly, these accounts provide key reference points in the marketplace, which are necessary for broad-based technology acceptance. This in turn, expands partner support and fosters adoption by mid-sized and run rate channel customers, which generally yield a higher than average margin. In our mature Windows device business, for example, our highest margins come from mid-sized deals and run rate business, which represents over 80% of Windows-based sales. Currently in Android, large customers are leading the OS transition. Sales from mid-sized customers and run rate business represents only 40% of Android sales. As we grow our Android business and shift the sales mix toward the Windows sales mix we expect the gross margin across our Android portfolio to improve. Other margin improvement plans include product redesign and supplier cost reductions. In addition, our synergy program will have a more meaningful impact on product costs next year, including further reductions in material, freight, and overhead costs. I'm pleased with our results in the quarter and year-to-date. We are executing on our strategies and capitalizing on the opportunities in the marketplace. We remain confident that we will achieve further success through consistent execution and satisfying our partners and customers with technology to enable this smart connected enterprise. I will now turn the call over to Mike to provide more details on our financial results, and the outlook for the fourth quarter.

Thank you, Anders. Total GAAP sales for the company were $916 million, Enterprise sales, which exclude the impact of purchase accounting, were $605 million, up 5% on a constant currency basis, primarily due to strong growth in mobile computing and data capture products. Sales of wireless LAN and services declined from a year ago. Pre-transaction Zebra sales were up $314 million, up 8% in constant currency with solid growth in printing, supplies, and location solutions. GAAP margins for the quarter were 45.2%. Excluding the impact of purchase accounting, gross margin was 45.5%, up slightly from our adjusted second quarter gross margin of 45.3%, and consistent with our guidance. Enterprise gross margin was 42.5% compared to the second quarter adjusted margin of 42.8%. Sequentially, margins reflected product costs, and warranty expense reductions, some of which were one-time in nature, and our European price increase. This was offset by increased excess and obsolescence reserves on various product and service parts inventory, primarily also one-time in nature. Pre-transaction Zebra gross margin was 51.2%, compared to 50% in the third quarter of last year. Compared to a year ago, the impact of currency has been offset by lower product costs in hardware and supplies, the price increase in Europe, and the benefits of our hedging program. Margins were also up sequentially due to higher pricing in Europe and lower product costs. Operating expenses for sales and marketing, R&D and G&A were $288 million, including approximately $8 million of stock-based compensation expense. Expenses declined from the second quarter due to the timing of expenses from market development programs, and non-integration-related IT projects. G&A costs declined due to lower than anticipated employee-related benefits costs. Other operating expenses included acquisition and integration, and exit, restructuring costs of $43 million, and amortization of intangible assets of $58 million. In the quarter, the net loss per share on a GAAP basis was $0.57. Non-GAAP earnings per share were $1.39 compared to $0.81 in the third quarter of last year. Adjusted EBITDA was $159 million, or 17.3% of sales, up from 14.7% in the second quarter. Turning now to cash. Free cash flow in the quarter was $58 million and we ended the quarter with $258 million in cash. This includes $170 million outside the U.S. Subsequent to the end of the quarter, we made $65 million in scheduled interest payments and a $20 million principal payment in our term loan. This brings the total principal payments this year to $150 million. Our current net-debt-to-adjusted EBITDA ratio is 4.8 times. Through nine months, cash flow has been impacted by significant expenditures associated with the Enterprise transaction. This includes non-recurring expenditures of $51 million in working capital settlement payments to Motorola Solutions, and $32 million in real estate expenditures, primarily related to the building out of a leased facility to accommodate our Illinois-based employees. With these expenditures behind us, growth in the business and working capital management, we expect a significant increase in cash flow generation next year. With this improvement, we anticipate additional debt reduction next year of $300 million or more. Before moving onto guidance, I want to provide an update on our synergy program and overall cost structure. We targeted a synergy opportunity of $150 million associated with the integration of the two businesses with the ultimate objective of achieving an adjusted EBITDA margin of 18% to 20% by the end of 2017. We have pursued this synergy opportunity while we restructure and staff the organization and grow the business. Compared to the pre-merger 2013 baseline we established, we'll realize this year approximately, $120 million of operating expense synergy benefit from actions implemented in 2014 and 2015 and costs not transferred from Motorola Solutions. This includes $60 million in sales and marketing and $25 million in engineering, primarily a result of staff reduction. We'll also incur this year, approximately $30 million of incremental operating expenses, associated with the transaction. These include resource and efficiencies of operating in two separate IT systems, filling critical positions not transferred from MSI that are necessary to support the business and support and advisory costs, particularly in finance. Finally, the business continues to grow, requiring the appropriate level of reinvestment as well as compensation related cost increases such as merit and incentive pay totaling $60 million, compared to the baseline in 2013. In aggregate, we expect an absolute reduction operating expenses this year of approximately $30 million or 3%, compared to 2013 levels. Constant currency sales growth over the same period is approximately 10%. Measured as a percent of sales operating expenses will decline this year to 32%, compared to a currency-adjusted 36% in our baseline year, a 400 basis point improvement in our cost structure. Finally, on a run rate basis, the operating expense synergies I've mentioned combined with $50 million of targeted cost of goods sold reductions, resulted in approximately $200 million of total gross run rate synergy benefits by the end of next year, compared to our goal of $150 million. Looking ahead with some potential or further operating cost savings prior to completing our IT integration, balanced with investment to grow the business we plan to tightly manage net growth in our operating expenses. This is expected to result in further operating expense leverage in the range of 200 basis points to 250 basis points over the next two years. With respect to our fourth quarter outlook, our guidance reflects the recent further reduction in the U.S. dollar against the euro. We expect continued growth in the business resulting in sales of $945 million to $975 million. This represents year-over-year growth of 3.6% to 6.9% on a constant currency basis. Non-GAAP earnings per share are expected to be in the range of $1.38 to $1.63 and adjusted EBITDA in the range of $155 million to $170 million. We expect gross margin in the range of 44.5% to 45.5% – 44.5%. On a sequential basis, we anticipate increased benefits from European price increase and cost reduction offset by the impact of a large mobile computing deal. Operating expenses for sales, marketing, R&D and G&A are expected to be in the range of $293 million to $298 million including stock-based compensation expense of $8 million. The increase in the third quarter is primarily related to typically higher fourth-quarter expenses from marketing programs, sales commissions, and employee benefit costs. IT cost will also be higher as we begin to implement and support parallel business applications in preparation for certain TSA exits. We expect interest expense of $48 million to $50 million, and a non-GAAP tax rate in the range of 22% to 24%. Compared to the third quarter currency environment, the impact of the recent strengthening of the U.S. dollar against the euro has reduced the high and low end of these ranges by approximately $6 million on sales and $5 million on adjusted EBITDA, 30 basis points on gross margin percentage and $0.05 per share on non-GAAP EPS. I will now turn the time back to Anders. Anders Gustafsson - Chief Executive Officer & Director: Thank you, Mike. In addition to satisfying customers, introducing new products, and pursuing new opportunities, we have been hard at work integrating the company. Since the closing in October of last year, the integration program has progressed well with accomplishments in organizational design, and culture development, real estate consolidation, implementation of tools for our sales team, engineering system migrations, and a global brand to transition. This works includes the elimination of over 250 Enterprise IT applications, closure of over 200 Motorola transition service agreement items and exits of over 20 real-estate sites. The team has accomplished a lot in the past year, but we have more to do. Future integration efforts will primarily focus on implementing – on the implementation of the IT infrastructure and business systems and enable us to conclude all remaining support services from Motorola Solutions. In doing so, we will modernize and right-size our business processes and ecosystem by transitioning Enterprise on to new or upgraded Zebra systems. The result will be a more efficient and cost effective IT architecture and ecosystem of applications, lower operating costs, and lower ongoing capital expenditure requirements. Further progress in our efforts will be marked by several milestones next year. In the first quarter, we will complete several additional engineering system consolidations, the phased implementation of the systems for our services business, and our integrated ERP will start in the second quarter. Systems supporting our new channel program, will also begin to rollout in the second quarter. In the third quarter, we will launch our distribution center consolidation initiative with the outsourcing of our North America printing operation to a third party logistics provider. We expect to complete the systems migration and be entirely off Motorola supported IT systems before the end of 2017. The remaining costs to complete the overall integration program, including capital expenditures are expected to be approximately $180 million to $200 million through 2017. Looking ahead, our strategies remain anchored in capturing growth, improving execution, and differentiating ourselves. Our top-line results demonstrate that customers are increasingly turning to our technology to gain a competitive advantage, reduce costs, and improve productivity in an expanding array of applications, including e-commerce, omni-channel, workforce mobility, and workflow, and delivery of real-time actionable data. Solid execution is improving customer experiences, and performance in the channel. We are differentiating ourselves with innovative products, deep-channel relationships, and a global ecosystem of more than 10,000 partners, and a highly trusted brand. Our progress this year, along with secular growth drivers and Zebra's differentiators, underpin our confidence in achieving long-term sales growth of at least 4% to 5% over a cycle. With the strength of our mobile computing portfolio, we believe that we can exceed that range if the pace of the operating system migration in mobile computing accelerates. As we grow the business, we continue to expect adjusted EBITDA margin expansion to 18% to 20% by the end of 2017, assuming a currency environment consistent with the third quarter. Over the next two years, we expect to achieve our adjusted EBITDA margin target with gross margin improvement in the range of 50 basis points to 100 basis points as we introduce more innovative products, reduce product costs, and services cost, and grow our Android mobile computing sales, particularly through the channel. In addition, we expect further cash operating expense leverage in the range of 200 basis points to 250 basis points as we manage our cost structure, and realize the efficiency benefits of our IT migration. The increased cash flow generation from margin expansion and other actions will enable us to further reduce debt by at least $650 million and reach net-debt-to-adjusted EBITDA ratio of less than 3 times by the end of 2017. In closing, Zebra has a history of consistent execution and we intend to extend that track record by capitalizing on the opportunities ahead and delivering on the targets that we have set. Thank you for your continued support of Zebra. Now, I would like to turn the call back to Dean for Q&A. Dean Lindroth - VP-Finance & Investor Relations Contact: Thank you, Anders. Before we open the call to your questions, let me ask that you limit yourself to one question and one follow-up. Operator, can you provide our callers with instructions on how to ask a question?

Thank you. And our first question comes from Keith Housum from Northcoast Research, please go ahead.

Good morning, gentlemen. Thanks for taking my question. A question for you guys on the gross margins, if I can just hone in on the Enterprise margins. If I understood that correctly, the Enterprise margins were 42.5% versus 42.8% last quarter. I guess, Anders and Mike, how does that compare to, I guess, historical averages for Enterprise margins? And then if you could just drill down more on the one-time items, like the obsolescence write-off that you guys took, and how that may have impacted it this quarter?

Yeah, Keith, this is Mike. So, I think a couple of things on the one-time items. I think, first of all, the excess and obsolescence was – the higher level of that – a lot of that was related to services, wasn't so much on mobile computing. We had within the mobile computing a number of sort of beneficial things – one-time things going both ways, so net-net it really didn't have a big impact on our gross margin. So, some of the E&O was related to enterprise mobile computers offset by – as we've talked about before working with our suppliers and vendors to reduce some of our product costs one-off. So, when you look at it there wasn't a big net-net benefit or change in our gross margin for the enterprise mobile computers.

And how does this compare to, like, historical cycle that you guys are in, when you guys are launching new products, is it historically average, or is it a little below average?

Actually, as you look at this, I think the – obviously, the Android is the new product area you're focused on. And as we look at the large deals that we're getting for Android products that are very similar to the large deals we'd win in Windows, so we're really encouraged that to build that market share, we're doing it at very consistent margins that we had had before. However, as the business grows in the Android, as Anders mentioned, we will expect to see more channel run rate business, which will come at a higher margin going forward. Also encouraging is the fact that as we continue to develop those products with – at a lower cost point, we would expect margins to be – continue to be favorable.

So the 42.5% that you guys compare to like historically, three years or four years or five years ago, is that historically average, or how does that compare to historical numbers? Anders Gustafsson - Chief Executive Officer & Director: I think we'd – if you normalize that for FX, we would expect that to be very similar to what we've seen before.

Okay. Anders Gustafsson - Chief Executive Officer & Director: And maybe, if I was to reiterate at one point Mike said, which I think may have been misunderstood by the markets maybe is that if you look at the margins we get on our large Windows based deals, it is very consistent with the margins we get on our large Android deals. So there is no difference really in the price points and margins on large deals either Android or Microsoft.

Yeah, the other thing, just to go back to FX, I mean if you look at our EBITDA margin, we would have been, FX adjusted, we would have been 20% EBITDA margin for the quarter. So FX has a very meaningful impact on our profitability.

Okay. I appreciate that. If I may ask one more, Mike, you went through the synergies really quick. But I guess in a nutshell, should we think of synergies, you guys had actually increased your guidance from operating synergies from $150 million to $200 million?

Over a three-year period, yes. And I think a couple of things that happens, sources of that are, as we talked about some of the dis-synergies associated with the transaction that we're incurring we expect that to moderate substantially, we expect the IT systems to allow us to be more efficient as we go forward. So there's a number of things that we would expect over a three-year period to help us to go from $120 million we've already realized eventually to $200 million over the next several years. Dean Lindroth - VP-Finance & Investor Relations Contact: So take our next question, please.

And our next question comes from Holden Lewis from Oppenheimer. Please go ahead. Holden Lewis - Oppenheimer & Co., Inc. (Broker): Great. Thank you. Good afternoon – or good morning. On that synergy question, I guess, the $120 million that you're talking about, I mean, what are you expecting to actually sort of realize in 2015? And what's sort of the incremental that you expect to realize in 2016? How does this sort of the incremental realized dollars playing out at this point going forward?

So I think one of the neat things about our business is the topline is growing. So effectively on a constant currency basis, our revenue is grown by 10% from the last since 2013, yet our operating expenses net have gone down by 3%. So basically that's 13%, what I would call operating leverage. When you try to determine or as far as how that net-net happens, we have $120 million of realized synergy in our P&L in 2015 for the full year, which is big buckets again are R&D and sales and marketing. And then we have cost increases of roughly $30 million, which is associated with, again the inefficiencies of putting the two businesses together, ERP that related stuff, offset by what you would expect is normal OpEx growth as the business grows by 10% on a constant currency basis. So net-net we're $30 million lower in OpEx 2015 to 2013. So again, with the plans we have going forward, we still expect to hit the 18% to 20% EBITDA margin reflecting exchange rates we saw in the third quarter. Holden Lewis - Oppenheimer & Co., Inc. (Broker): Okay. And then with respect to – it looks like the core Zebra business is somewhat slower. I know that your revenues were in line sort of with the guide. So the first time or couple quarters that you didn't come in at the high end. I guess, but does that reflect a little bit of weakening in the market? And if it does, can you talk about what triggers you may have to pull related to the acquisition and integration, where if the macro does slow you could perhaps mitigate it with some specific initiatives that could offset? How do I think about your ability to perform at the top line, in maybe a weakening macro environment? Anders Gustafsson - Chief Executive Officer & Director: First, we had, I think, signaled all along that the very strong growth rates we had on the printing side in the first half would start to moderate a bit based on kind of lapping ourselves, having very strong growth rates in the second half of 2014. So I think the growth rates are actually very solid I thought in Q3. The only one that kind of stood out in that case quarter-over-quarter would be the European one. But Europe tends to have, historically has had, a slight decline in Q3 as good chunk of Europe goes on vacation. Last year we did not see that. We actually had a very strong quarter; we had growth in that piece. So we feel good about where we are, we have been able to gain quite a lot of market share over the last couple of years and with our portfolio, with our sales team and the support of our channel partners, we do believe that we should be able to continue to gain share and grow faster in the market. And I'll let Joe Heel, he'll also make some comments.

This is Joe. I'll add specifically to your question about initiatives and levers that we have to continue to drive growth. On top of what Anders said, I would point specifically to the operating systems migration. This is an area where we do have targeted initiatives underway. The installed base is an area that we are very actively and very systematically pursuing. And the second one is the transition from 1D to 2D in scanning also an area where we are very actively taking the opportunity to systematically go through installed base and take share. Holden Lewis - Oppenheimer & Co., Inc. (Broker): Okay. Thank you. Dean Lindroth - VP-Finance & Investor Relations Contact: Next question, please.

And our next question comes from Andrew Spinola from Wells Fargo. Please go ahead.

Just looking at your operating expense commentary, off the base of 2015 instead of 2013, did I hear it correctly that, Mike, you think that expenses will grow, but at a slower pace essentially than revenue in 2016 and 2017? Is that the right way to think about it?

Absolutely. What we're looking to do is manage our operating leverage. We expect to see some nice improvement as our top-line grows and our OpEx will grow substantially lower. And so, when you net it out, we see a 200 basis point to 250 basis point improvement between now and end of 2017 to get us to the 18% to 20% EBITDA margin.

Understood. And just a clarification. I think, Anders, you made the comment, that there's another $180 million to $200 million of integration and acquisition spend between now and 2017, did I catch that correctly? Anders Gustafsson - Chief Executive Officer & Director: That's correct. That includes then, all the IT spend, including CapEx also. And we also said that that would help yield substantial efficiencies past the 2017 date. So as we get into 2018 and so we expect to drive further operating leverage based on those investments.

Understood. Just stepping back from my perspective, it does seem like – I'm a little surprised the acquisition and integration spend was the highest this year in the third quarter. I guess, I would have thought it would be stepping down. And then, the fact that there's another $180 million to $200 million sounds like a good bit more than I was looking for. And so, I'm just wondering, did it turn out that there's more opportunities for things that you could optimize? Or maybe on the flip side, it turned out that Motorola needed more investment than was initially expected? Anders Gustafsson - Chief Executive Officer & Director: But first we're very pleased with the efforts to date on integration. We feel that the integration has gone very, very well for us. If you look at the things like the – how we designed and integrated a new sales organization, I think that was done very, very well. There we had a basically a blank sheet of paper that we started with and we didn't really merge the organizations, but that was pretty stressful as we went through it, but looking back, I think we very quickly got the right team, knowing their roles and be out focusing on selling. We've done a lot of work around culture, we feel that culture is one thing that can derail an acquisition like this, so we've had 250 of our most senior people come together in various workshops to work on how to create a common culture across the entire organizations, and I'd say, the organization has responded really, really well to all of those things. But on the negative side, I'd say the complexity of the IT systems has been greater than we had expected, Motorola had a bit of a patchwork of systems. A lot of customization, they didn't necessarily all talk to each other. So as we pull this together, we're looking to see how we can create the platform that's across all of Zebra to drive the right level of efficiencies to then continue to generate great operating leverage benefits after we done with it.

And as far as the third quarter, up until the third quarter, a lot of the energy on the IT integration stuff was really on planning. And so, we're starting to put a lot more resources and actually executing on those plans, so that's I think a little bit of impact on the timing of the cash flows for that work.

All right. All makes sense. I was just curious. Thank you very much. Anders Gustafsson - Chief Executive Officer & Director: You're welcome. Dean Lindroth - VP-Finance & Investor Relations Contact: Next question, please.

And our next question comes from Brian Drab from William Blair. Please go ahead. Brian P. Drab - William Blair & Co. LLC: Hi. Good morning. Congratulations on the solid results. Anders Gustafsson - Chief Executive Officer & Director: Thank you. Brian P. Drab - William Blair & Co. LLC: First question, I just want to make sure that I have this clear. Is the expected restructuring savings amount now $200 million by the end of 2018? Anders Gustafsson - Chief Executive Officer & Director: 2017? Just yeah. Brian P. Drab - William Blair & Co. LLC: By the end of 2017? Anders Gustafsson - Chief Executive Officer & Director: Yeah. So, the run rate, as we exit 2017, will be that. So, you should realize it in 2018. Brian P. Drab - William Blair & Co. LLC: Got it. Okay. Thanks. And then the $30 million in expenses, the incremental expenses, that's an offset to that $200 million? Or is that $200 million number a net figure?

(40:17 – 40:27). Brian P. Drab - William Blair & Co. LLC: I don't know if it's just me, but it's very hard to hear, Mike, if that's Mike.

Sorry about that. So, the $30 million is in relation to 2013 versus 2015. So, again, we've had $120 million, we realized in 2015 in our P&L. We've had a $30 million in 2015, with cost increases associated with the transaction and additional normal expense growth of $60 million. That $30 million we would expect to decline over the next year or so, because obviously, some of the work associated with the integration will go away. So, for example, some tax stuff, consulting and such, so the $30 million will go down, which is in part one of the reasons why we have some of the synergies we expect to achieve as we go forward. Brian P. Drab - William Blair & Co. LLC: Okay. Okay. Thanks. So some of the $30 million stays, some – but a significant portion of that will go away?

Yes. Over time. Brian P. Drab - William Blair & Co. LLC: Okay. And then, can you just break down your sales? I don't know if you can just do this roughly maybe, but in a couple different ways. First I'm curious about the percentage of sales in the third quarter that was associated with large deals? And also, if you could give us any sense percentage of large deals that have been Android versus Windows in the third quarter? Anders Gustafsson - Chief Executive Officer & Director: I'll start, and I'll hand over to Joe, but generally we can't really share with you all that detail. But, large deal is not a new phenomenon for us, we've had large deals forever. As I mentioned before, the margins on large Windows based deals is very much in line with the margins on large Android based deals. So, the pipeline for large deals is healthy and growing. We certainly hope to have some more things to announce in the next couple of months. But we're also spending a lot of effort trying to make that we get Android into the channel, and we get the channel business to really pickup as much as possible so we can get the run-rate of high margin deals there. Brian P. Drab - William Blair & Co. LLC: Okay.

And perhaps the only thing I would add just to emphasize what Anders said. Large deals with larger customers are nothing new and different. What's happening here is, discontinuity of operating systems is creating an opportunity for us to take share. And I think that's what we've been very successful at in the last year, and we see an opportunity to continue to do that as this migration cycle continues, and the large deals will be the most prominent ones where this manifests itself.

And our next question comes from James Faucette from Morgan Stanley. Please go ahead. James E. Faucette - Morgan Stanley & Co. LLC: Thank you very much. I had a couple of follow-up questions. First, in terms of the European performance in the quarter, you indicated that it was kind of a difficult comparison, or at least last year you saw growth, whereas this year you looked at there was more normal seasonality. I'm just wondering, if you have any sense for how much price changes in that market may have impacted – may have impacted the demand there, and getting a sense for your view of price elasticity there? And then also, in a similar vein is if the currency remains weak there, or to weaken further, do you think that you'd be moved to make additional pricing adjustments? And at what point are you able, or will you be unable to make continued pricing adjustments there based on competitors? And then my last question, was kind of a follow-up to the question – the previous question, just on large deals. Did – at the time the large deals were announced last quarter, you talked about follow-on sales and the like, and I would imagine those probably take time. But I'm just wondering if we're getting any incremental indications of follow-on deals, either of people trying to emulate solutions that were put in place, or did those customers themselves are preparing to come back and buy? Thank you very much. Anders Gustafsson - Chief Executive Officer & Director: Just quickly, what was the first one again. To make sure I answer the right ones in the right order. James E. Faucette - Morgan Stanley & Co. LLC: Sorry. Yes, yes. Sorry. Just asking if the pricing changes in Europe exacerbated any seasonality in that market? Anders Gustafsson - Chief Executive Officer & Director: So, yeah, to the best of our analysis, we don't believe that the price increase has had any negative impact on volume. We don't think that we lost business because of that. If there was one possible thing, there will be that some of our partners stacked up a bit more in Q2 and it took them a little longer to burn off that inventory – bought stuff before the price increase, basically, and it took long to burned that off, but now we started to see good improvement in margin based on this. And we said it, from Q4 now, where we think we are basically gone through all the possible changes from Q2. We expect to see an annualized margin benefit of $25 million to $30 million based on that price increase. Now, you also asked, I think, the next question about so what happens if foreign exchange continues to deteriorate? And it's obviously hard to answer that in an abstract, because we raised our prices in May or April by 12%, but that was also done in conjuncture with many of our competitors. So, many other technology companies did something similar. I think it's hard for us to by ourselves go out and do something like this, but we obviously keep all our tools available for us and we have the ability to raise prices more, we also have the ability to be more restrictive with price concessions and other things to make sure that the price points are higher. A lot of our large deals are going to go through the channels, so they are bid on an individual basis, and when we bid them we always look at the gross margin and the profitability of that overall deal. So, there, we have a very immediate impact or ability to impact margins even in a deteriorating FX environment. And maybe, Joe, do you have any more comments on that?

(47:21 – 47:41). James E. Faucette - Morgan Stanley & Co. LLC: Sorry, I think once again, somebody's mic is off.

Yes. I'm sorry. That was mine. So, I was on the third point. The question was whether the large deals are beginning to lead to follow on sales in the medium and small categories, if I understood it correctly. And indeed, we are beginning to see this on the Android side in particular. If I look back to the beginning of this year, we can say that the vast majority of the deals if not all of them were ones where our direct sales force was driving, and leading the sale, they were all large in nature. As we now come towards the end of this year, we're seeing a much more significant portion of deals come without much of our intervention from the channel and the mix is including now a large proportion of these medium and small-sized deals, which we think is healthy and beneficial the way that such migrations typically evolve. Anders Gustafsson - Chief Executive Officer & Director: Maybe one example of one large deal that we won for mobile computing some other products and services that we have been able to sell to them now include wearable devices, which are very high margin, a lot more services, which we also have a very sticky and – or with us for a long time. We also now understand that they have started to offer some of their customers Zebra printers, which they didn't do before. And we're in talking to them about other more longer range newer type of solutions. So, clearly we now have gone from being somebody who was kind of on the outside, to have a chance maybe to bid on a RFQ at times to somebody they think of as a trusted advisor, a technology partner and come to us to seek our thoughts and opinions about how we can best help them develop their technology portfolio? James E. Faucette - Morgan Stanley & Co. LLC: Great. Thanks. Dean Lindroth - VP-Finance & Investor Relations Contact: Next question, please.

And our next question comes from Paul Coster from JPMorgan. Please go ahead.

Thanks. This is Paul Chung on for Paul Coster. Thanks for taking my question. For the 80% win rate in retail, can you elaborate on the drivers behind these wins, besides the migration of the operating systems? Anders Gustafsson - Chief Executive Officer & Director: Yes. These were specific to wins against consumer devices. Now in the prior calls we've had some concern by investors that the consumer devices are going to encroach on our space. And I think is fair to say that back in 2011, 2012 or so when consumer devices first appeared on our radar screen, we were caught maybe a little flat-footed; we didn't really have any devices that could compete with them. Now, we have a very compelling portfolio of new devices that are – have all touchscreens, they're ruggedized, but they have modern operating systems. So they feel much more like the traditional phones, and our customers' users are able to much more quickly get comfortable and use those, but they are purpose built for the use cases of our customers. So with those devices, we now have something where we can compete, and we're winning probably more than our fair share of those devices, but is really driven by new innovative products that we've been able to launch.

I would add, Joe Heel speaking again, that over the last roughly three years there have been many customers who have tried and experimented with consumer devices in the application in the Enterprise. And as they have made their experiences, we have been able to now win a lot of these deals based on the Enterprise-grade features of our devices, in addition to the adaptation of the form factor that Anders mentioned and the functionality. So things like battery life, stability of operating system, ruggedness, some are key factors that are helping us to win these deals.

Okay. Thanks. And what kind of visibility do you have with large deals in the pipeline in the next 6 to 12 months?

Joe Heel, again. We are very confident about our ability to continue to drive large deals. And also to supplement them with the medium and small-sized deals to really build out a pipeline that is very balanced. But we feel strong about the large deals.

And then, I don't know if you mentioned it or, what was your 2015 CapEx guidance and are you giving guidance for 2016 and 2017?

Yeah. We're not giving guidance for 2016, at this point. The CapEx for 2015, I would expect the fourth quarter to be a little bit softer than the third quarter, but not dramatically different.

Okay. Thanks, guys.

And our next question comes from Matthew Gall from Barrington Research. Please go ahead.

Good morning. Thank you for taking my questions. A lot of the topics that have been asked, to review as far as OpEx synergies and things like that on follow-up. But maybe just from a broader scale, there's been some new product launch announcements recently, and you're expressing some larger mobile computing deals that are in the pipeline. But if you could just touch on maybe some of the new product launches like the ET50, ET55 tablets, where you're seeing some success there? And then as we look out, kind of a cadence of new product launches, both within mobile computing, and then maybe along some of the other data capture or printing lines as well for hardware? Anders Gustafsson - Chief Executive Officer & Director: Yeah. So I'll start on the tablet side here. We won't talk about new products that we haven't launched yet, because we want to do that kind of properly in the markets. But on the tablet side, we see a lot of our customers use tablets in different form factors and we felt that there was an opportunity for us to have a presence, a bigger presence than we had before. And it's one where we feel that having that broader portfolio will also position us better to be able to win the entire fleet of products that they have. Early indications from the launch, which is only about a month back now I think, has been very positive. I'm not sure we have any big announcements to make quite yet, but we feel good about where we are after a month. And Joe has some further comments here.

Okay.

Yeah. We have some very nice deals that are coming together on our new ET50 and ET55 tablets. We're excited about this product from two perspectives. On the one hand, this is the one area where consumer products had made some inroads and we didn't have a product to properly counter them, which we now have. And our customers have been very eager to have a product that meets those same enterprise grade specifications that we have in our handheld devices that we can now bring to the tablet market. So we feel that both from an offensive and defensive perspective, this is really a terrific product for us to have in the market, and we have some early successes that we're quite proud of.

Great. Thanks for providing more color on that. And then, I know you may be touched it on the opening remarks, but as far as the rebranding efforts, where are you on that and is it moving as expected? And then, as far as any of the costs associated with that, is there a guideline of maybe when that should flow through the P&L and we should see the rebranding costs be removed from the P&L? Anders Gustafsson - Chief Executive Officer & Director: So, at the end of this year, we expect that the majority of the rebranding should be done. There is a long tail though, so they will continue to stay with us for 2016, but from an intensity of the effort,. 2015 is really where most of these things happen. So, for Q4 I think we have a slightly, that we have a bit more rebranding expense in our forecast than we had in Q3. So that's one kind of miscellaneous item that's hitting the Q4 gross margin that we saw last time in Q3?

Yes, but to Anders' point, it's not a huge number for the fourth quarter, but it is a little bit of a headwind.

Okay. Thank you very much, guys. Dean Lindroth - VP-Finance & Investor Relations Contact: Take a next question, please.

And our next question comes from Jason Rodgers from Great Lakes Review. Please go ahead.

Good morning. Anders Gustafsson - Chief Executive Officer & Director: Good morning.

Just to follow up on the large mobile deals, I wondered if you're seeing any change in competition – when you compete against those deals, if you're seeing other companies introduce more Android-based devices? As well as if the pricing on these large deals has changed, if you've actually walked away from any, just because the pricing didn't make sense? Thanks. Anders Gustafsson - Chief Executive Officer & Director: Yeah. First the competition for this large deal is by-and-large the same as for mid-sized deals, the competition is probably more determined based on the vertical. So, if you're competing in retail versus manufacturing, you probably have some more differences there, but we tend to see our traditional competitors, but we also see some consumer grade competitors as well, and some lower price or lower quality competitors from Asia, China and Korea particularly. So, it is a largely the same group of people. I think we have a pretty good understanding of their offerings and how to compete against them. We feel we are certainly holding our own and I would say this year, we've been gaining share in the new wins, both on the larger deals and the more normal run rate business. The pricing environment seems to be consistent with what we've seen historically. So, as we mentioned on the call, the margins we see on our large – on large deals for Windows based devices is actually the similar or the same as the margin we see on large deals for Android devices also. So, I don't think that we see a big difference in that area. Joe, any further comments?

No.

Thank you.

And we do have a follow-up question from Holden Lewis from Oppenheimer, please go ahead. Holden Lewis - Oppenheimer & Co., Inc. (Broker): Thank you. On the pricing, just so I understand, you said that the impact of pricing could be $25 million to $30 million. Is that the sales impact, is that a profit impact? What number is that? Anders Gustafsson - Chief Executive Officer & Director: So that – say if we raised the prices by $25 million to $30 million annualized, there is no cost associated with that. So, basically you get the revenue, but it flows straight through to the bottom line. Holden Lewis - Oppenheimer & Co., Inc. (Broker): Okay. And then, if that is an annualized full-year number, can you tell me how much you're realizing in Q3 and for full year 2015, so we have a sense of what the incremental impact will be next year? Anders Gustafsson - Chief Executive Officer & Director: Yeah. I think we expect that we will be – basically in the run rate now for this in Q4, so you can take basically a quarter of that for the fourth quarter. Holden Lewis - Oppenheimer & Co., Inc. (Broker): Okay. So you don't think that you realized much of that in Q3 at all? Anders Gustafsson - Chief Executive Officer & Director: We did realize some of that in Q3, not the full run rate, but we realized some of that. Holden Lewis - Oppenheimer & Co., Inc. (Broker): Okay. So $7 million give or take in Q4, and some smaller number than that in Q3, and then the rest will be realized incrementally next year? Anders Gustafsson - Chief Executive Officer & Director: That's correct. That's how we think about it. Holden Lewis - Oppenheimer & Co., Inc. (Broker): Okay. Great. Thank you. Anders Gustafsson - Chief Executive Officer & Director: Thank you.

And we have no further questions. I will now turn the call back over to Dean Lindroth for closing comments. Dean Lindroth - VP-Finance & Investor Relations Contact: Okay. Thank you. Thank you, everyone, for joining us today. That concludes our call.