Good day, everyone, and welcome to the Q3 2016 Zebra Technologies earnings release conference call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please also note that today’s event is being recorded. At this time, I’ll turn the conference call over to Mike Steele, Vice President of Investor Relations. Sir, please go ahead.

Good morning. And thank you for joining us. Today, conference call and slide presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer, and Michael Smiley, our Chief Financial Officer. Anders will begin by discussing our third quarter highlights and key drivers of the results. Mike will then provide more details on the financials and discuss our outlook for the remainder of the year. Anders will conclude with an update on Zebra’s 2016 strategic priorities and progress on our vision of Enterprise Asset Intelligence. Following the prepared remarks, Joe Heel, our Senior Vice President of Global Sales, will join us as we take your questions. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year. Before we begin, I need to inform you that certain statements made on this call include forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect the company’s current expectations concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the company’s filings with the Securities and Exchange Commission. During this call, we will make reference to non-GAAP financial measures as we describe business performance. You will find reconciliations of our GAAP to non-GAAP results in today’s earnings press release. Also, unless otherwise indicated, all year-over-year and sequential sales movements will be referred to on a constant currency basis. Now, I’ll turn the call over to Anders.

Thank you, Mike. Good morning, everyone, and thank you for joining us. We delivered another quarter of solid results. Our teams are executing well during a period of rapid change and transformation at Zebra. Sales were in line with our expectations. We delivered higher gross margins and we managed operating expenses well. We achieved an 18.7% adjusted EBITDA, representing a 140-basis-point improvement over the prior year and adjusted EPS of $1.43, which was above the midpoint of our expectations. Stronger profitability and effective balance sheet management enabled us to pay down $90 million of debt during the quarter and we feel confident about achieving our $300 million debt paydown objective for the year. As we have been discussing this year, our results have been impacted by an uncertain macroeconomic environment combined with slower IT spending, which has affected customer purchasing behaviors. However, we are encouraged by the sequential improvement in the overall business, and particularly the strong reception to our new products and solutions. Zebra’s unmatched positioning with customers and partners has enabled us to further extend our market leadership this year. Although we have seen pockets of increased promotional activity in the market, we have remained disciplined, yet flexible, in our approach. We are very comfortable with our channel inventory levels, which are within our normal historical bands. I’d like to touch on some of the bright spots of the quarter. We saw increased momentum in our transportation and logistics vertical, fueled by our new and innovative solutions and e-commerce expansion. Our services business has returned to growth after several years of contraction and we are continuing to see improving margins. We have experienced strong traction with PartnerConnect, our new channel program. Our partners are seeing the benefits of this program, which focuses on simplicity, cross-selling and partner profitability.…

Thanks, Anders, for the kind words. It’s been an honor to serve as CFO at Zebra and I'm confident the company is well positioned for long-term success with Olivier as CFO. We have a strong finance team and look forward to working with him to help ensure an orderly transition. With that, as you saw in our announcement yesterday, we completed our financial restatement for the fourth quarter and full year 2015 and the first and second quarters of 2016, which corrected the cumulative impact of fiscal 2015 errors, primarily associated with the Enterprise acquisition. We previously disclosed approximately $11 million of these errors on our first and second quarter filings, which had increased 2016 expenses. As a result of the restatements, for 2015, when combined with corrections to income tax expense, the 2015 after-tax loss increased by $21 million. For the first six months of 2016, the after-tax loss decreased by $7 million. Note that the tax rate for non-GAAP purposes for the first six months of 2016 has been recast to align with our most recent full year 2016 estimated non-GAAP tax rate of approximately 26%. We have presented the non-GAAP impacts on the schedule posted to our investor relations website. Now, turning to our results, as you can see slide five, adjusted net sales for the third quarter were $906 million, approximately flat year-over-year price. Enterprise segment sales grew 1% to $605 million. Sales increased in data capture and services, while mobile computing sales were flat and wireless LAN sales were lower than last year. Pre-transaction Zebra sales were $301 million, down approximately 3%. Sales were lower in our locations solutions business and we provided a $7 million price concession to accommodate our distribution partners to minimize the impact of duties imposed this year on printers imported…

Thank you, Mike. We have made tremendous progress with integration to date and we have implemented several new programs focused on enhancing the combined business. As a result, I feel confident about the opportunities that lie ahead of us. As shown on slide nine, we continue to execute on our four strategic priorities to drive near and long-term growth and profitability. First, we remain focused on delivering profitable growth and extending our leadership as we capitalize on secular trends, drive sales and prudently manage our cost structure. In the last several months, we announced new offerings that better position Zebra as the leader in Enterprise Asset Intelligence. For example, we recently launched the TC51, our next generation handheld mobile computing device. As a mid-tier offering with an attractive price point, the all-new TC51 is proving to be another example of our leadership in the Android – in the transition to the TC51 operating system in our core use cases and verticals. It has a great form factor, including a large touchscreen, greater durability, better battery life, built-in enterprise grade scanning, and overall improved functionality. Zebra continues to enable Android for the enterprise environment with our software suite that simplifies device provisioning, lifecycle management, security, and operational visibility through our cloud-based platform. We are highly encouraged by the early interest we've received so far. Many customers are considering our enterprise-grade TC51 device to displace existing consumer mobile devices, which lack many of the key operational capabilities we offer. We also saw a return to growth in our services business with sales growth from increased service plan attach rates as well as gross margin expansion, stemming from our operational improvement strategies. Our services business had been underperforming since prior to the Enterprise acquisition two years ago. And new leadership in that business…

Before we go back to Mike, just a quick point, I mentioned that our full-year EBITDA margins are expected to exceed 17% for 2016. And that is actually up from 16.2% after the restatement from last year. So, it's an 80-basis-point improvement from 2015. Mike?

Thanks, Mike. And we’ll now open the call to Q&A. We ask that you limit yourself to one question and one follow-up, so that we can get to as many of you as possible. Operator, please instruct our callers how to ask a question.

[Operator Instructions] Our first question today comes from Richard Eastman from Robert W. Baird. Please go ahead with your question.

Yes. Anders, could you please expand a little bit on your commentary around the verticals. You did mention, I think, some strength in retail, but could you just kind of touch on T&L, industrial and retail?

Yeah. So, we saw, in Q3, particular strength in retail and T&L. Both of those were driven by e-commerce. There’s an underlying secular growth trend. T&L, we also saw great growth from some of our new solutions that we had introduced earlier this year. And both retail and T&L are very strong, I’d say, globally, but particularly North America, Europe and in Asia-Pac. Manufacturing, we've seen as a more flattish or slightly down in North America vertical this quarter, but we have a lot of new initiatives to help drive growth in manufacturing. As an example, we're looking to announce a relationship with Rockwell Automation where we are designing our products into their factory automation ecosystem much more closely, which will help both of us offer better solutions.

Okay. And then healthcare probably grew, but small?

Healthcare grew, but smaller this year. We had strong performance in printing, but we’re going through some product transitions on the EVM side, which held back growth a little bit.

And then, just as a follow-up, I’m just a little bit curious, Mike Smiley, you had mentioned, again, this discount on imports into China. Just a couple of things. I presume that that $7 million falls directly to the gross profit margin line. And then also, don’t we produce all of our printers in China?

Yes, good questions. So, the $7 million is really a – again, the $7 million is a duty that our partners are paying as they import printers into China. And so, what we’re doing is giving a price concession to offset that 8% charge that they receive. Now, as we mentioned, so when you look at how that falls in the P&L, you’d end up with – for whatever you sold, there would be – we sold $7 million less because of the price discount. And, obviously, that would affect our margin. We expect sort of – as you looked at the China duty, there was a one-year clawback that we had to pay. So, of that $7 million, roughly $5 million or so is related to the prior year. We really expect basically $2 million a quarter ongoing. And, again, the $5 million was a one-time in Q3. I don’t know Anders if you want to add any more color.

Yeah. We felt it was in our best interest of our customers to make the end users be neutral to this, so we wanted to basically mitigate the impact of the duties that our distribution partners pay. We are now working on ways to minimize the impact of these duties. So, on a going-forward basis, we expect them to be up to $2 million, but, hopefully, we can get them to be a little bit lower than that and we have a number of ways of doing that, including how we structure our own manufacturing in China.

So, Rick, to your question, we do manufacture in China, but it’s in a duty-free free trade zone. So, as a result, it’s effectively as if we were manufacturing outside of China from a duty standpoint.

I see. Okay. All right, very good. Well, thank you and nice quarter.

Thank you.

Thanks.

Our next question comes from Matt Cabral from Goldman Sachs. Please go ahead with your questions.

Yeah, thank you. Anders, I think I heard in your prepared remarks that channel momentum for Android is going well. Just curious if you could expand on that comment a little and give us an update for how Android is doing both within the channel as well as for larger deals. And I think in the past, you had given the split of how the Android business breaks down between the two. It would be helpful if you could provide that again.

Yeah. So, our market share, overall, for mobile computing, has increased a few percentage points this year and our market share for Android specifically is substantially higher and it's been stable at those levels. We see the majority of large deals today in mobile computing to be for Android-based devices – or Android-powered devices. What we have started to see now in the last couple of quarters is a nice improvement in what we think of as the run rate in the channel. So, these are smaller deals where our channel partners are primarily driving the – identifying those opportunities and closing those opportunities. So, the trend that we had talked about sometime back of – that, over time, Android becoming a bigger part of our channel revenue stream is starting to happen.

Got it. And then you guys had talked earlier in the year about some deal push-outs that you were seeing, just wondering how those projects are developing. And maybe more broadly, curious how the environment was for large deals, both in the third quarter and what you see ahead in the fourth quarter.

I think we had a healthy pipeline of large deals. I wouldn’t say there was a heavy type of environment, but it was certainly much more normal than what we saw in the first half. And as we look into Q4 and the pipeline into 2017, I think we are – the pipeline of opportunities for larger deals continues to be healthy. And maybe, Joe Heel, you want to comment also?

Yes. This is Joe Heel speaking. So, we did see some push-outs of deals as you were mentioning in the earlier quarters. In this quarter, that activity of push-outs has moderated a bit. We still see it, consistent with what we talked about earlier in terms of our expectations, but it has moderated. And it's also positive for us that the ones that have pushed out in previous quarters have all closed. So, we do see it as a delay, not a loss or decline.

Thank you.

Our next question comes from Jeff Kessler from Imperial Capital. Please go ahead with your question.

Thank you. Referring to your chart on page ten, can you tell us how far into the Enterprise Asset Intelligence – the vision that you have is relative to how far you've gone? You’ve got another year to go to or, let’s say, another nine months to complete the integration. How are the two measuring up, so that you’re going to speak with one voice and provide multiple products and multiple services to your end user clients?

Yes. I would probably separate the integration from the Enterprise Asset Intelligence vision and strategy. From an integration perspective, we are working on integrating our back-office IT systems. That's really primarily what is left of our integration activities. They have very little impact on our Enterprise Asset Intelligence vision. So, when it comes to EAI, I feel we're making very good progress. I think we have developed a compelling vision for it. It certainly resonates very well with our customers. I feel very confident in our EAI strategy overall. And as I say, we are clearly the leader in that space with an unmatched portfolio of products and solutions. We continue to drive a lot of value-adding innovation that is resonating very well with our customers. We are bundling product, software and services into solutions much more now than what we had done before. And our focus is very much on how we can leverage our Sense-Analyze-Act framework to help our customers transform how they operate, transform their workflows, improve their productivity, and drive much greater levels of service. And I’d say, at this stage, I don't think any other competitors can really offer that value proposition.

I’d like to add one thing. From an integration perspective, you probably have noticed that we integrated the customer-facing aspects of our business very rapidly. We integrated the sales force in January of the very first year. We integrated our partner program in April of this year. So, from a selling and customer-facing perspective, we have been in front of our customers with the Enterprise Asset Intelligence strategy very visibly. The remaining pieces of the integration are, as Anders said, back-office and our IT systems, which don’t impede us from realizing the strategy in the marketplace.

Related to the integration, how are you coming along? And, I guess, this is perhaps on some of them on the services side being able to take the information that you are gaining from your customers, analyze it, providing them with more feedback on their own needs and their own operations, so that you get this virtuous circle of, if you might call it, value proposition, so you can become – get more profits out of your customers.

We’ve done a lot of things to help get both more efficient in the execution of our services business as well as getting a more easy way of gaining insight into the data streams that we have. In Q2, we integrated the Asia-Pac services business on to one common systems, so we got off the Motorola system and we have been working there now for, I guess, about six months on a single platform. We've also more recently exited the Motorola platform for Latin America. And middle of next year, we expect to do the same for the rest of the world. So, we are now having the IT infrastructure around IT to enable us to take advantage of all the data that we have. We are looking at the number of other data streams or information in order to help be proactive in our sales activities and identify opportunities for upsell or when somebody's contract is about to expire. And I’ll ask Joe Heel to add some comments also.

Yeah. I think this is an excellent example of where we use some of the assets that we have to realize the Enterprise Asset Intelligence strategy early on. We have a platform that we've been building out aggressively since the early days of the integration, which was called our Assets Visibility Platform. And this platform is cloud connected to all of our devices, at least to the extent that our customers turn that on. They do have the option of doing that. And it allows us to gather data in real-time from all of those devices and use it both for the purposes of service; it also allows us to offer to our customers visibility, instant real-time visibility to all of their assets, which, as you can imagine, is quite valuable to them and is at the core of a strategy around offering managed services both on our part as well as on the part of our partners, who are, of course, in the business of supporting the customers’ estates. Our vision is that this platform of asset visibility can be used beyond just the provisioning of service to our own devices. You can imagine many other uses that it could serve in a customer’s data management strategy. So, this is a very central part and a key differentiator that we, in fact, have in Enterprise Asset Intelligence through services.

Yeah, that’s helpful.

Thank you. And have you just – obviously, you’ve just started on this. Do you have any definitive traction in this yet?

Yes, indeed. We do. So, we offer two types of services, which customers are actively buying today. We have many contracts on these today. One is called Asset Visibility Services and the other one is called Operational Visibility Services. And the way you can imagine it is Asset Visibility Services is a relatively light cloud-based dashboard that we can make available almost instantly to a customer if they buy our devices, and that goes for printers and mobile computers, by the way, that they can instantly get visibility on a simple dashboard. Whereas OVS is a more heavy service offering, in which we then can manage certain aspects of a customer's estate. For example, give them visibility to when batteries need to be replaced or print heads on a printer require renewal. That more intensive service-driven offering is called OVS. Both are in the market, being sold today to customers.

Okay, great. Thank you very much. Appreciate it. Thank you for taking my questions.

Sure.

Our next question comes from Brian Drab from William Blair. Please go ahead with your question.

Hi, thanks. First, just going back to the Android question. I might have missed it. But did you say what percent of revenue – in the third quarter, what percent of your mobile computing sales were Android?

We have not broken that out historically and I think it’s just – we said that it's been a growing part of our portfolio and it is – I guess, directionally, you can say it's getting towards being half of our revenues.

Okay, thanks. Am I incorrect in my notes here, on the last call, we said it was about a third of revenue in the second quarter, though.

I think that's probably correct.

Okay, thanks. And then I just wanted to see if we could get, from a high level, an update on this upgrade cycle that you’ve discussed extensively in the past. Going through 2020, I think, the feeling was that you have 15 million or so devices globally in the field that need to be upgraded. Is that, at this point, being pushed out a little bit or how are we progressing toward that type of a target?

I think the overall upgrade cycle that we talked about is progressing pretty much in line with our expectation. We started about a year-and-a-half ago to see more of the larger deals. Today, I think pretty much all our larger deals tend to be Android-based. But we also started to see now this trickle down into the run rate business that our channel is conducting. Will there be a tail that goes beyond 2020? I am sure there will be some customers that will not see the need to upgrade and they are just going to run those devices for as long as they possibly can. No upgrades to them, I think. But I would expect that that will be a very small subset. Most larger organizations, I think, will feel, they want to be on supported software platforms, so they can get both security patches and other upgrades to their environments. And so, broadly, I would say that the Android migration is progressing pretty much in line with how we expected it.

Yes. And Joe Heel speaking. I think the Android migration or operating system migration more broadly is a little bit unusual from other technology transitions because it's driven by an end-of-life of an existing predominant technology, right, Windows CE, Windows Mobile in 2020. Therefore, it doesn’t only depend on customer's perception of the new technology, it depends also on their expectation for how long they can continue with the existing technologies. So, as Anders said, it’s led to a massive wave of early adopters that you have seen and there is a second wave of adoption, which is the broader market, the market that has served predominantly to channels that is occurring right now. And we do see that pretty much as we had expected happening, as we speak, and it will continue over the course of these next three years.

Okay, got it. Thank you. And then, can I just ask, on RFID, for an update there in terms of roughly what kind of revenue that is today, how that is evolving, how the pricing has come down there and made it more economical for more applications?

Yeah. So, RFID continues to be a small, but healthily growing product set for us, solution set for us. Retail is the primary vertical to adopt RFID today. And the use case is primarily around in-store inventory visibility. So, retailers putting RFID inlays and chips on the merchandise. We are not really in that business much. That’s others to serve. But the price curve has been very aggressively coming down. And today, in volume, you can get a chip like that for between $0.05 and $0.07. We are focused on encoding those RFID chips with the right data as well as reading the data off those chips through either mobile or fixed infrastructure. And that's healthily growing, but it’s still a small part of our business.

Okay, thank you.

Again, our next question comes from Keith Housum from Northcoast Research. Please go ahead with your question.

Good morning, guys. And first off, Mike, good luck to you. I wish you the best of luck in your next endeavors.

Thank you.

Following up on the previous question regarding Android, I’m starting to see the Windows 10 mobile computers hitting the market. What’s the though in terms [indiscernible] evaluate the Android or how you think about Windows sequentially [indiscernible] with the market.

So, so far, I think Windows 10 has been primarily on the desktop, not so much on the mobile. There’s been some changes, I think, on the architecture that's been harder to – for customers to adopt a Windows 10 platform. But from our perspective, we want to have the right solution for our customers. So, we would also expect to have Windows 10 devices available when that makes sense, when the Windows technologies are ready. So, we see it as likely going to be one predominant, but a second technology or operating system available for enterprise customers and we want to serve both.

Okay. Go ahead, I’m sorry.

Well, I just wanted to mention if you look at our product lineup, you'll see that on the very high end of our mobile computing, on PC75, we now have a Windows 10 or Windows IoT, it’s also called, version now, and the same is expected on the tablet. So, you'll see that, in relevant parts of our portfolio, we will have Windows 10 for those customers who want it.

Got it. As a follow-up, Anders, you mentioned a promotional environment. Clearly, in one of your competitors, we saw more than that – than yourselves. Can you talk about where you saw the promotional environment and what part of the business and did you see that throughout the quarter or was it stronger at the beginning of the quarter versus end?

I think it was more steady. I don't think we saw it being particularly strong in any point in the quarter. So, it's more of a – something that's going on in – almost in the background. It’s part of the environment. And we are trying to take a very disciplined approach to how we respond to it, but we also want to be flexible to make sure that we do respond appropriately to win deals, but do it at the appropriate margins for us.

Was it heavier in the enterprise business versus printing?

Maybe a little bit.

Okay. Thank you. Appreciate it.

And, ladies and gentlemen, at this time, we’ve reached the end of today’s question-and-answer session. I would like to turn the conference call back over to Mr. Steele for any closing remarks.

Thank you all for joining us today. Have a great day.