Zebra Technologies Corporation (ZBRA) Q4 2018 Earnings Report, Transcript and Summary

Good day, and welcome to the Fourth Quarter and Full Year 2018 Zebra Technologies Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Steele, Vice President of Investor Relations. Please go ahead.

Good morning. Thank you for joining us today. Before we begin, I need to inform you that certain statements made on this call are forward-looking and subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These 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 filings with the Securities and Exchange Commission. During this call, we will make reference to non-GAAP financial measures as we describe our business performance. You can find reconciliations of our GAAP to non-GAAP results in today's earnings press release and at the end of the slide presentation. This presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer; and Olivier Leonetti, our Chief Financial Officer. Anders will begin by discussing our fourth quarter and full-year highlights. Olivier will then provide more detail on the financials and discuss our 2019 outlook. Anders will conclude with progress made on Zebra's strategic priorities. Following the prepared remarks, Joe Heel, our Senior Vice President of Global Sales, will join us as we take your questions. Also, throughout this presentation, unless otherwise indicated, our references to sales growth are year-over-year on a constant currency basis and exclude results from the recently acquired Xplore Technologies business. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year. Now, I'll turn the call over to Anders.

Thank you, Mike. Good morning, everyone, and thank you for joining us. Our team delivered exceptional fourth quarter results. We executed well driving strong profitable growth across the business and extended our lead in the market. Sales, EBITDA margin, and earnings per share all exceeded our outlook. As you can see on Slide 4, we are pleased to report net sales growth of nearly 11% or 9% on an organic basis; and adjusted EBITDA margin of 21.1%, a 120-basis point year-over-year improvement; non-GAAP diluted EPS of $3.10, a 33% increase from the prior year; and free cash flow of $309 million. We achieved strong performance across our business, including double digit sales growth in North America, Asia Pacific and Latin America. We grew each of our major product and service categories, including mobile computing, data capture, special printing, supplies and support services. Demand was solid through the channel and from our direct customers. We say particular strength in healthcare, manufacturing, and retail and e-commerce. Our record Q4 results cap an outstanding full-year financial performance of 11% organic sales growth, 20.7% adjusted EBITDA margin, and $721 million of free cash flow. We continue to build on our industry leading offerings by investing in our people, operations, and technology to drive a sustainable growth. We have strong momentum entering 2019, supported by our order backlog and pipeline of opportunities. With that, I will now turn the call over to Olivier, to review our financial results and to discuss our 2019 outlook.

Thank you, Anders. Let us begin with a walk through the P&L. As you can see on Slide 6, net sales grew 10.8% in the fourth quarter, which translated to 9.1% on an organic basis before the impacts of currencies and acquisitions. We saw solid growth in each of our reporting segments and across all regions. Enterprise Visibility & Mobility segment sales increased 11.6%, led by especially strong demand in data capture and mobile computing products. Asset Intelligence & Tracking segment sales increased 4.3%. Turning to our regions. North America sales grew 11%, driven by double-digit growth across our mobile computing, data capture, and printing categories. We saw particular strength in healthcare, retail and e-commerce, and manufacturing. Sales growth to small and mid-sized accounts was exceptional. EMEA sales increased 6% with relative strength in data capture, mobile computing and printing supplies. Sales in our Asia-Pacific region were up 12% with strength across major product and service categories. Our China business grew mid-single digits and most countries grew double-digits. Latin America sales increased 10% as economic and political conditions stabilized. We saw particular strength in printing solutions. All sub-regions grew, including Brazil. Adjusted gross profit increased $72 million or 15%. Adjusted gross margin increased 190 basis points, primarily driven by continued improvement in our go-to-market execution, favorable business mix shift in the EVM segment, and favorable foreign currency exchange impacts. Adjusted operating expenses as a percentage of net sales increased 10 basis points from the prior period reflecting higher incentive compensation expense, due to improved business performance. Fourth quarter 2018, adjusted EBITDA margin was 21.1%, a 120-basis point increase from the prior year period. In addition to EBITDA margin expansion, the decreased tax rate and lower interest cost from our debt restructurings drove non-GAAP earnings per diluted share to $3.10, a 33% year-over-year increase. Turning now to the balance sheet and cash flow highlights on Slide 7. In 2018, we paid down $657 million of debt principal supported by strong free cash flow of $721 million. The $293 million increase in free cash flow as compared to 2017 was primarily driven by increased operating profitability, lower acquisition and integration cost, and exceptional working capital management. We ended this year with $1.6 billion of debt on the balance sheet. Slide 8 shows the path to our 1.8 times net debt to adjusted EBITDA ratio as of year-end. We reduced the leverage ratio by approximately 1.4 terms in the past year leaving us well-position to continue to invest in the business. We have updated our target range for net debt leverage to be between 1.5 times to 2.5 times. This expands the lower end of the range by [indiscernible] to allow for additional flexibility in our capital structure. Let us turn to our outlook on Slide 9. We entered 2019 with a solid order backlog and strong end market demand for our leading portfolio of solutions. We expect Q1 2019 net sales growth to be between 6% and 9%, which assumes an approximately 1.5 to 2 percentage point positive impact from the acquisition of Xplore Technologies and approximately 1 percentage point negative impact from foreign currency changes. We believe Q1 2019 adjusted EBITDA margin would be approximately 21%, which assumes operating expense leverage offset by lower gross margin as compared to especially favorable gross margin in the prior year period. Non-GAAP diluted EPS is expected to be in the range of $2.75 to $2.95. We expect full-year 2019 net sales growth to be between 4% and 7%, which assumes an approximately 1 percentage point positive impact from the acquisition of Xplore and approximately 50 basis point from negative impact from Foreign Currency changes. Full-year 2019 adjusted EBITDA margin is expected to be slightly higher than 21%, an improvement from 2018 as we continue to drive operating leverage in the business. We believe that full-year 2019 free cash flow will exceed $625 million. We expect to drive higher EBITDA than 2018, and unlike 2018, we are assuming that working capital will be a use of cash in 2019. Also note that our 2019 outlook assumes a modest level of tariff on certain products, accessories, and components that we source from China. It’s a freed situation and our teams have been working diligently to address the types that have been enacted to date. You can see other full-year 2019 modeling assumptions on Slide 9. Note that our 2019 outlook does not include any projected results from the acquisition of Temptime Corporation, a recently announced transaction that we expect to complete soon this quarter. Temptime’s annualized sales exceeded $40 million. The acquisition is expected to generate approximately $0.15 to $0.20 of annualized adjusted EPS accretion. Anders will discuss the acquisition in a few moments. With that, I will turn the call back to Anders to discuss progress on our strategic priorities.

Thank you, Olivier. We are very pleased with the progress we made in 2018. Slide 11 shows our key strategic areas of focus. Successful execution of these priorities drives our industrial leadership and value for all stakeholders. First, we continue to drive market share gains through our innovation unmatched scale and strong relationships with customers and partners. We saw exceptionally strong broad-based demand for our products and solutions in 2018. We are capitalizing on technology trends in the industry, including the transition to the android operating system in mobile computing and ongoing transitions in data capture to 2D and RFID. We are also addressing underpenetrated market segments and geographies. We had a record number of launches across our product and solutions categories in 2018. Our mobile computer, data capture, and printing portfolios have never been stronger. This investment will continue to benefit us in 2019 and beyond. Second, we are focused on driving growth in attractive markets where we can leverage our competitive advantages. We plan to scale existing categories where we are underpenetrated and at the new markets that advance us as a solutions provider. We expect to gain traction in these markets through both organic and inorganic investments. This includes highly selective acquisitions that will accelerate our strategy to advance our enterprise asset intelligence vision. We target high growth near adjacencies where we have a right to play seeking businesses with a differentiated value proposition, which can transform work flows. As a proof point, on January 28, we announced our intention to acquire Temptime Corporation. Temptime is the leader in designing and manufacturing a time temperature monitoring portfolio that meets the strict specifications of the largest global health organizations vaccination programs. This acquisition is a great fit and will advance the integration of smart supplies into our enterprise asset intelligence vision as we incorporate these new capabilities. We have the unique ability to scale this technology deeper into the healthcare industry, as well as drive it into other key opportunities such as food safety that can benefit from increased asset visibility. Third, we are advancing our enterprise asset intelligence vision to enable every frontline asset and worker to be visible, connected, and optimally utilized. Our expertise in workflow solutions across our primary vertical markets enables us to continue to strengthen and expand relationships with our customers and partners. I will elaborate further in a minute. Lastly, we have enhanced Zebra’s financial strength and flexibility by increasing cash flow and optimizing our capital structure. Our financial flexibility remains a key priority as we invest in the business to accelerate our traction in high growth adjacent areas. Now turning to Slide 12, Zebra provides a digital view of the entire enterprise to enable enterprise asset intelligence. Our products and smart infrastructures sense information about assets, products, and processes. The information, including status, location, and condition is then analyzed in real time to determine the best possible operational action. The result is reduced friction in work flows, improved productivity, and greater insight into business operations. I like to spend a minute on how hardware, software, and the Cloud are essential to our solutions. Our products are ultra-rugged and reliable with purpose driven designs that are tailor made for the frontline and its work flows. There is no one size fits all solution. Every device specification is designed to maximize productivity and safety for a particular use case. In addition to the hardware, software is a critical differentiator for us. Our products include software that make them easy to integrate and intuitive to manage. We call this our DNA software layer, which is integrated across our mobile computing, data capture, and printing portfolios. Additionally, we have been developing new software applications and tools that improve automated data collection and analysis, maximize device security, and enhance ease of use, all of which are increasingly critical to our enterprise and government customers. The innovation starts with our team, nearly two-thirds of our engineers specialize in software systems and user interface development. Our growing team continually works to enrich our portfolio of smart products and solutions. Another integral part of our solutions ecosystem is Savanna, which is our intelligent edge platform that powers our Cloud-based data driven solutions such as motion works, SmartPack trailer, and work force connect with real time data. We have been collaborating with an increasing number of our independent software vendor partners to accelerate the use of Savannah to deploy new solutions that solve problems for our customers and improve their performance edge. As a thought leader in our industry, we are at the forefront of this opportunity. Just as we have been with other key transitions, including enterprise, Android adoption, Cloud-based printing, RFID, and 2D barcode scanning. We are seeing evidence of our EAI vision as we help businesses across many industries digitize their operations. We are a driving force in advancing key technology megatrends, including Cloud computing, mobility, automation, and the proliferation of smart devices; each of which are critical components to this transformation. Slide 13 highlights the primary vertical markets that we serve, manufacturing, healthcare, transportation of logistics, as well as retail and ecommerce, which all grew double digits in 2018. We are leveraging our strong commitment to innovation and deep industry expertise to deliver innovative end-to-end solutions for customers to compete effectively in an evolving marketplace. In manufacturing, our customers need to know where their equipment, material, and people are in real time across their supply chain. They are looking for trusted partners, who can increase their operational visibility, while reducing cost and complexity. Recently, a global automotive manufacturer purchased a wide variety of our latest generation mobile computers and tablets for their assembly line warehouse and quality control processes. Data security and product life cycle management were the customers other key considerations as they’ve transitioned to an all Android enterprise operating system environment. Our ability to facilitate seamless system integration and guarantee operating system upgrades and security patches for the life of our products or differentiators that helped us win this business. In healthcare, our solutions track essential clinical equipment and enable care providers to monitor patients, while being mobile, which translates into increased patient safety and reduced cost. We recently received our largest healthcare order ever from one of the most prominent healthcare organizations in the world. This customer will be using our purpose-built TC51 mobile computer to consolidate various communications tools to streamline collaboration and provide an improved level of patient care. In the transportation and logistics business, our offerings provide real time visibility of assets at every point in their supply chain, including the loading dock, warehouse, and point of delivery. The increasingly on demand economy and shortage of labor has pressured enterprises to investing in innovative solutions to drive productivity. We recently expanded our relationship with a long-time global customer by implementing a locationing solution that compliments their existing SmartPack installation. The total solution assesses real time aircraft container utilization and facilitates more efficient staging and loading of shipments. In retail and e-commerce, we have been driving transformative solutions to address increasingly complex challenges. Last month, at the National Retail Federation Expo, we showcased 20 innovative solutions that help retailers execute on omnichannel fulfilment, sales floor effectiveness, and elevate the overall in-store experience. Walgreens had a prominent presence at our booth this year as they are in the process of rolling out our ET50 tablets and TC51 mobile computers to all of their U.S. stores. This initiative complements their existing ecosystem of Zebra scanners and printers. And our booth, Walgreens demonstrated how it’s assisted selling and inventory management applications run on Zebra’s products to boost productivity and improve the customer experience, while connecting its associates and customers nationwide. We are seeing a trend at Walgreens and many other retailers to equip all of their associates with mobile tools that empower collaboration and with co-workers and customers. In summary, we are helping enterprise customers to successfully address their increasingly complex business challenges. Now, I’ll hand the call back over to Mike.

Thanks Anders. 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 Instructions] And our first question comes from Jason Rodgers of Great Lakes Review. Please go ahead.

Good morning. Wanted to ask a question about the EBITDA margin guidance, you beat last year's guidance by over a point and your initial guidance for this year is actually targeting less margin improvement then you're forecasting a year earlier. So, wonder if you could discuss why that is and factors that could lead to similar outperformance in the margin for 2019?

So, good morning, Jason. So, we are planning indeed to have for the full-year a higher EBITDA margin, slightly higher EBITDA margin, and we’re guiding Q1 at about 21%, you have some mix elements, which could impact one performance in a particular quarter, but as we have demonstrated over now, a number of quarters, we believe we have the ability in the year to leverage OpEx, but also to leverage a gross margin, but you could have an anomaly in one quarter and another. So, nothing specific in terms of trend Jason.

And then just looking at the top line. As far as your guidance, you have the first quarter there, but you will be facing increasingly difficult comps as the year progresses. Do you think you can continue at that mid-to-high single-digit organic growth rate as you look past the first quarter?

We feel good about the business. We have been driving profitable growth for a long time now and our solutions have moved from being more viewed as tactical productivity tools by our customers to more enablers of our customer strategies. So, I think we’re moving up in the kind of hierarchy of importance for our customers. We have a strong track record of execution and I think the output outlook is prudent. So, we feel that we are well-positioned for 2019. We entered a year with good momentum. A solid portfolio of products and solutions it’s the most competitive portfolio I think we’ve ever had and we continue to gain share in the markets. So, we feel pretty good about where we are.

And let me give you a bit of additional colors on the year. So, we have obviously a strong Q1 guide. We have more visibility for Q1. We are well within the quarter. We entered the quarter with a solid backlog. And regarding the full-year, we would consider this guide as actually being prudent based upon the visibility we have regarding our business. And an important point Jason, this is not different than another year. And we feel confident about our end markets and our ability to compete.

And if I could just squeeze one more in. Just the outlook for the large deals on a mobile computing side and your latest estimate for how many devices are still left in the field that need to convert?

Yes, we still see approximately 10 million legacy android devices to be in the field today waiting to be refreshed and upgraded to android. In the last several years, we have had a strong performance of our larger deals, but if you look at 2018, I’d say we had a balanced portfolio there. We saw good growth from our larger deals, but we also saw good growth from our channel. We saw also good growth from our small and medium businesses now. So, we certainly have many different avenues to pursue in order to drive that growth. Joe any assumptions?

Yes. I would add. Especially in the visibility towards large deals, you are right. We had a substantial number of large deals in particular in the retail space in 2018, but we do in those 10 million legacy devices that are still out there, we see opportunity for continuing momentum in areas such as logistics and warehouse coming up in the next months and year, as well as new used cases that our customers are beginning to realize can be deployed on our devices such as; consolidating multiple technologies they have today onto our device or expanding used cases from the handheld form factor to other form factors like tablets and larger screen. So, we see continued opportunity for large deals Jason.

Very good. Thank you.

Our next question comes from Jim Ricchiuti of Needham & Company. Please go ahead.

Hi, good morning. Thank you. Looking at your R&D spend, the last couple of quarters, and we’re seeing a little bit of a bump up in that area, and I wonder if you could comment on that as it relates to new product development if we're going to be seeing a faster pace in terms of product introductions? Thank you.

Let me take the first part and then Andres and Joe would take the other one. So indeed, we have increased the level of spending in R&D and the composition of the R&D spend is – has changed some. We are investing more if you were to look into the details into also future capabilities. And we believe that this investment has paid off for the company and part of the gaining shares top line performance is a result of this investment.

Yes. I think that we certainly feel that we have made a very productive investments in R&D. Our products portfolio or solution portfolios are the most competitive that have ever been. We launched more new products in 2018 than we’ve done in any other year in the history of the company. So, I think we feel very confident that the investments we made in R&D are delivering a solid ROI. It has been supporting our growth. It’s been supporting our market share gains.

And my follow-up question just to relates to EMEA, it appears that you’re seeing some moderation in the growth rate there, and I’m wondering is that a case of just tougher comps, tougher comparisons or are you seeing any signs of slowing which some companies have alluded to?

So first, starting a little bit broader, we had strong broad-based strength across all our product segments, regions, vertical markets in Q4. Asia-Pac, North America and Latin America were each double digits in Q4, but all regions, including Europe was up double digits for the full-year. We saw – all major product categories were up. Healthcare, retail, manufacturing, they were all up double digits, and all four vertical markets were up double digits for 2018. So, I think it's very broad-based performance there. In Q4, we continued to execute very well and we’ve – from everything we’ve seen, we believe we continue to extend the lead in the market that we have, and our competitive position is strong and getting, I would say, stronger based on the strength of our portfolio. And end markets were strong, you know, both channel and direct for – on the back of our valuable proposition, which resonates with our customers. Specifically, to Europe, I think we would consider it to be a solid growth. It had moderated a little bit from earlier part of 2018, but it was still good growth, and we see that momentum carrying on into 2019. We saw particular strength in Europe on our scanning portfolio and mobile computing, as well as supplies. And retail continues to be the strongest vertical for us in Europe, and our personal shopping solutions are a big driver for that.

Thank you. Congratulations on the year.

Thank you.

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

Hi, good morning. Maybe this will be a waste a question, but I’m just thinking about the 10 million figure, and you know, the last three quarters, you’ve said it's been about 10 million, but I was wondering if you could just give us some insight or maybe a more specific estimate there? How many devices are selling annually in the marketplace, you know, across the industry? And how, you know, what percentage of those roughly are Android? And shouldn’t we be getting kind of somewhat below 10 million at this point?

So, I think we – few years back, we started talking about, I think about 17 million, I’m going off memory now, 17 million devices, so we’ve always been able to convert a number of those. But the reason is not going down faster, is that – on the one hand, you know, we are shipping a lot of Android devices. You know, the vast majority of our devices are now Android, but it’s still a meaningful amount of Microsoft devices that we are shipping too, but our – I’d say most other industry players are still predominantly shipping Microsoft devices. So, while we kind of eat into the 10 million from one end, it’s getting replenished on the other end from other players. So, it’s not going down as fast as you might perceive, it should do based on the volume of devices we ship, but, you know, its – there’s still a good amount of devices to go after here, and we expect that by – you know, the vast majority of these devices will be upgraded to Android by 2020 or late 2020.

Okay, alright. I’ll follow-up more later on that one. And then for my second question, you know, maybe I’ll make it a two-part question, if I could? So, with respect to your guidance, could you possibly rank order how you’re thinking about end markets in terms of contribution to the growth rate in 2019, you know, retail, manufacturing, healthcare, transport? And then, maybe the second part of the question, could you do the same, take a stab at rank ordering where you're expecting the most growth out of the product lines in terms of data capture and mobile computing printers? Thank you.

It’s still hard to rank order each of these, but I can give you some indications or where we see particular strength or if there's anyone we feel would be – maybe lagging here. So, on the vertical markets, which was I think your first question, you know, healthcare grew the fastest for us in Q4. I would expect healthcare to be over to – not just 2019, but over the next several years, the fastest growing vertical market. But we do see a fairly similar growth rates across the – you know, our four verticals. If you look in 2018, we had double-digit growth in all four of our verticals. So, we don’t expect that any one of them will kind of standout and carry the load for the company. You know, a few years back, retail was maybe more pronounced as the driver, but now we see it more balanced. You know, manufacturing was a little weaker earlier, but we see the Android adoption to kind of pickup in manufacturing this coming year, particularly around the warehouse. And from a region’s perspective, again, we had, you know, double-digit growth in all four regions this past year. So, we see them all performing well. Asia-Pacific will be the one we would expect to grow the fastest over the kind of the foreseeable future, not just the next quarter or a couple of quarters, but over longer-term. It can be a bit variability within quarters, but you know, North America has performed very well too. Europe was a little weaker than the average in Q4, but we still see good growth for Europe as we go into 2019. I hope that helps.

Okay. Yes, thanks. And I’ll follow-up more later, but congratulations on a great 2018.

Thank you, Brian.

Our next question comes from Richard Eastman of Robert W. Baird. Please go ahead.

Yes, good morning Anders.

Good morning.

And Mike. Just – and Joe. Just a quick question, first question, it was around gross margins. I mean again, if you look certainly in the quarter and for the full-year, both the AIT and EVM segments saw 100 plus basis point of gross margin improvement for the year, and I'm curious how you view that? You know, how structural is that that the gross margins here in both segments is it, you know, are you thinking that as somewhat of a baseline here moving forward? And maybe you could just give a little bit of color around both pieces as to how and – you know, you deliver that gross margin from is quite impressive.

So, we have been increasing gross margin significantly, as you said, year-on-year by about a point. We have been highly focused as a team on gross margin. Every element of the value chain add a role, manufacturing, procurement, product design, go-to-market, and we believe that that would keep being the case going forward. We believe we have the ability to increase gross margin as a business, and we actually don't think we play – we’re playing our best game today. And we think that the two main segments should follow directionally the same pattern and have the ability to expand gross margin rate.

As Olivier said, you know, this is a company-wide activity. I think if there's one number or ratio that is deeply ingrained in our culture, it’s – [or two, growth and gross margins], so it’s something that the entire company is paying attention to and working on.

Did price play a significant factor in either of the two segments?

Yes, I would say, our commercial discipline has improved. We are paying more attention to what appropriate commercial terms would be. So, I think we’re a little bit more scientific in how we go about doing that.

Mix is a play – mix, sorry to interrupt Richard, mix would be a play and also us being able to add solutions to our offering is also a driver of enhanced gross margin performance.

Awesome. I mean, just a quick question as a follow-up, my follow-up is just as it relates to the EBITDA improvement that you're kind of forecasting for 2019, I think in difference to the first question, again, it appears as though maybe you're looking for, you know, 50 basis points of adjusted EBITDA improvement. So, you know, putting that together in the same equation with the gross margin maybe plus 100 bps, is the thought here that, you know, we drive gross margin up and redeploy into, you know, R&D and maybe feed on the street or the channel? And are we kind of settling into, you know, the – Zebra’s business model maybe being a 50 basis point a year type of target for EBITDA margin improvement?

No, no, indeed. So again, Richard, our ability to improve both gross margin rate and OpEx, including – by the way as we invest dollar in R&D, we believe we are good to be able to scale R&D dollars as a proportion of revenue dollars. We are prudent as a company, and the improvement we have in term of EBITDA rate in the year we believe is in the category of being balanced and prudent. I’m not too sure I would necessarily agree with the flaws and so on you’re mentioning.

As Olivier mentioned earlier, having leverage across the P&L is a key part of our philosophy and how we manage it. So, we want to drive improvements in gross profit, we want to see leverage in the OpEx side and certainly we want to see that translate into higher EBITDA margins.

Alright, great, well thank you and tremendous year.

Thank you.

Our next question comes from Paul Coster of JP Morgan. Please go ahead.

Yes, thanks for taking my questions. So, backlogs, our pipeline is up as well, can you give us some sense of how much visibility the backlog gives you either in sense of the quarter or even the year, and as for the overall backlog plus pipeline, what’s in the mix that points to trends in your business? Thank you.

Yes. The pipeline that we have as we enter a quarter gives us obviously much better visibility into the quarter. It doesn’t necessarily tell us much about the second half of the year. But having a bigger backlog as we go into quarter gives us a lot more confidence obviously about the outlook. The pipeline is more what drives the longer-term outlook and we have a very diligent and disciplined process to work with our sales teams and our direct customers, our channel partners to develop pipelines for all the direct customers, but also for different segments and doing bottom up and top down and triangulate in a variety of ways. So, that’s what gives us more of the visibility for the second half or the out quarters and maybe Joe Heel want to add something.

Yes. Both our backlogs, which we have continuously building and have contributed significantly to the success we had in 2018, as well as the pipelines have geared towards the visibility of about two quarters at a very granular level. To give us visibility beyond that, we have expanded for our largest customers and for large deals in particular visibility to three years, where we look at how we expect our business with individual customers to evolve over a three-year time period. So, that gives us a longer-term although it’s more of a qualitative view of where things are evolving. If you look at trends that we can see in that, one of the trends that we already talked about earlier is the fact that those remaining 10 million devices that we see out there, a significant portion of them are in the logistics warehouse and manufacturing space. We also see in terms of trend, the opportunities in areas that we call adjacencies in the earlier comments, things like tablets and RFID are showing up quite prominently in that visibility we’re getting from that pipeline discipline.

Excellent. The other question I have is, it sounds like the small-to-medium size customers are even stronger in North America than the enterprise customers, can you comment on that why that might be?

A similar trend that we just talked about in terms of manufacturing and T&L, there’s a correlation between these is that the first adopters of the Android solutions that we put out were large customers, and now medium size and smaller customers are adopting those solutions as well. Now, Android is only one example in the area where this takes place, this is also true for some of the other innovations that we’ve brought to market, some of the solutions we’ve brought to market. And I think we’re seeing now that some of these solutions are well established in the market that are SMB customers supported by our channel partners and our channel ecosystem are now gaining the confidence to also adopt those solutions, which is giving us a second wave of growth for many of those.

I would just emphasize that the strength in the SMB market didn’t just happen to us. No, that’s a consorted effort. We have developed a number of initiatives to help boost our business at the lower end of our market to help penetrate that more deeply, because that was an area that we felt we were not as well penetrated as we were in some of the higher-end markets.

Thank you.

Our next question comes from Keith Housum of Northcoast Research. Please go ahead.

Good morning, guys. I appreciate the opportunity and congratulations on the call, on the quarter and the year. Can you guys – is it possible to prioritize, I guess, some of the growth drivers are for, you know, not necessarily the mobile computer business, but they did a capture in the printing business? I think you guys covered a lot of the growth drivers in the mobile computers, but I want to understand how the other two segments are still growing very strong as well?

Yes, there is a number of, you know, I’ll start by just some strong secular growth trends that are driving growth across all our product lines. You know, the e-commerce is one, you know, the omni-channel piece, the on-demand economy, those are all broader secular trends that are requiring more track and trace type technologies, so it helps us under the mobile computing side, but it also helps us on printing, on scanning, you know, supplies, so all of those areas. Then we see when we get into these, say, newer areas that once we deploy our first roll-out, the customers sees the flexibility of many of our new products by being so much more connected. So, if that’s a mobile computer or a printer, you know, they can do a lot more with it. So, they see more and more new used cases that they can apply. You know, if I go back again to the old Microsoft days, you know, I think that an average mobile computer will probably run a couple two, three applications. You know, today, we routinely see customers running 30 applications on one of our devices. So, those are great drivers for it, and I will say the competitiveness of our portfolio is very strong today. You know, we launched more new products in 2018 than we’ve done in the history of the company, and they’re all ramping up nicely, and helping us to extend our lead into markets and driving growth.

Great, thanks. In my follow-up, you know, Olivier can you just kind of share us some of your logic in terms of expanding the range for your leverage target from 2 to 2.5 down to 1.5 to 2.5?

We want to have flexibility to manage our cash. We want to invest in priority in the business either organically, we mentioned R&D, go-to-market would be another one, or through M&A, and we are in the process of finalizing a new acquisition with Temptime after Xplore. Another one we discussed, Keith, in prior calls, once we reach the bottom of our range, we believe that share buyback would become a consideration. So, that's a bit of a rationale for the range as it is set up now.

Great, thank you.

Thank you, Keith.

Our next question comes from James Faucette of Morgan Stanley. Please go ahead.

Great. Thank you very much for the frank conversations this morning. I wanted to dig in really quickly a little more on pipeline and invisibility. How would you compare the visibility in pipeline that you have today versus, say, a year ago, both in terms of [REIT], but also in terms of make up? It seems like there’s been a lot of conversation about more small and medium-sized businesses. Are they also making up a greater proportion of your pipeline and visibility? And I’m just trying to get a little bit color on how it may vary today versus a year ago?

So, I’ll start, and then I’ll have Joe provide some more detail. But I’d say, the overall visibility from our pipeline is probably similar to what it was a year ago, may be a little better, but it's more balanced and will probably be the biggest change. We were going into 2018, I’d say, our mobile computing and retail segments were – we were more dependent on those pipelines to support kind of the growth. Today, the – it’s much more balanced. You know, we expect our scanning portfolio to have a very good year, you know, printing to a very good year as well, not that they didn’t have it last year, but we have a stronger pipeline for those areas. So, similarly across the vertical markets, we ended up with a very balanced growth in 2018, and we see healthcare, T&L, manufacturing driving more growth this year and equally on the geographic side, we’re very diversified and we have a good pipeline for each of our geographies that supports the outlook. Maybe Joe?

Yes, I would say, from a sales perspective, increasing pipeline visibility is an ongoing quest, and one that we've invested in quite significantly in the last year to improve our capabilities on a number of dimensions. One dimension is to improve visibility, in particular, in the printing and scanning areas where the deals are smaller, to get that visibility sooner and at a more granular level. And second would be to get more visibility out to longer term, right. With the growing importance of large deals in our business mix, having visibility to those is extremely important for both our planning purposes internal, as well as guidance we give and other things like that. So, we have invested in both of those and it is helping us.

I mean, James, an additional color yet if I may, we have been very intentional over the last more than two years to really diversify the business, and you see this diversification being reflected in the financial performance of the company, and in the guide as well.

Great, I appreciate that Olivier. And then, just a follow-up question for you Olivier. And when you look at – I appreciated, and I think we all appreciate the clarity as to the type of headwind you're expecting from FX. But can you give us a little bit of insight into how you formulate that, kind of what the exposures are, and then, what you're using as reference points to come up with your expected headwind for this year?

So, FX in the second half of 2018 started to be neutral to the financial performance of the company. It would be a slight headwind in 2019. The reason for this is that we’re edging against the euro, which is the only currency really against which we have some exposure. But we have many levers to manage our P&L. FX is one of them, and we believe that we have enough levers to be able to adjust to different effects and still deliver a good financial performance.

That’s great. Thank you so much.

And our last question will come from Saliq Khan of Imperial Capital. Please go ahead.

Great, thank you. Hi Anders, Olivier. Guys, two quick questions on our end. First one being is, what did you hear at the NRF conference that gives you a bit more confidence that many of these retailers are willing to open up their wallets, invest in new retail technologies? Are you seeing improved purchasing decisions on their part as well?

You know, I think we saw – first, maybe I think NRF was a great show for us this year. We had a very exciting booth and we had record traffic through the booth; we had record number of meetings with customers; and the feedback we got was very, very good. So, we certainly felt that was a great show and it helped to give us some confidence for the year. I’d say, the larger retailers, particularly say in the US, have largely been committed to an omni-channels e-commerce type strategy for the last couple of years, and we've seen quite a few orders from that. But what we are seeing is the – that trend is moving kind of further down into tier 2, tier 3 retailers, so we see more customers, more retailers wanting to make this – a kind of similar type of investments in new solutions to enable them to execute on their omni-channel strategy and compete against e-tailors. So – and the – I think our types of technologies are, you know, essential to their thinking. You know, they see us as a partner who can help enable them to pursue those strategies and help them realize those strategies. So, it was a great show from all aspects for to us and Joe.

Yes, I might add, you know, some of the things we mentioned earlier were very prominent at NRF, and did give us a lot of confidence. For example, what we talked about already with the new used cases that we’re seeing, retailers are embracing those. For example, the voice collaboration between their associates since one of those giving a device to everyone of their workers, not just a few selected that are involved in inventory management. Those types of trends give us confidence. And another important trend that we see support for is that the first wave of adopters who went into deploying mobile computing solutions on an android operating system are early on, for example with our MC40 device are thinking of refreshing those at this point. So that means there is longevity and continued opportunity in the retail space.

Got it guys and thank you, and this was my follow-up to that. What did you change over the past year within your either sales or your channel strategy, especially in this type of growth rate, are you seeing a faster service and software versus hardware sales as well within that article?

Generally speaking, we saw faster service and software revenue growth in Q4 than we’ve done before. There was a very – we’re very pleased with the performance we saw there. Generally, the software content in our solution is going up and up and up. If you think of the history of the company, we started off with say relatively dump devices that could read a barcode and transfer that information to another system that would do something with it to our android devices where you read it. You can manipulate the data, you can gain actions from it. You can do a lot with that. Next step now is to have much more smart infrastructure. So, things that can automate the data capture that can automate the dispensing of actions too. So, software is becoming a bigger and bigger part of what we do and how we develop new solutions to that more and more value to our customers.

A few additions to things we’ve changed and done in our sales and channel strategy over the course of the last year. One is, we have invested some of the improvements that we’ve had in our economics. We have reinvested those into a go-to-market resources, both internally, as well as with our channel partners. Our commitment to our channel has continued to expand and the importance of our channel program has only increased as we have expanded the benefits and membership in that program. The membership in our program is growing quite significantly over the last year. We’ve also invested structurally in the organization in sales and go-to-market in a dedicated solutions group, sellers that are specialized and focused on selling the solutions that make up the core of our intelligent edge to realize or EAI strategy. So, we have a dedicated group of that now in every one of our regions. So, those are some of the highlights of changes.

Perfect. Thank you, guys.

This concludes our question-and-answer session. I would like to turn the conference back to Mr. Gustafsson for any closing remarks.

Thank you. As we wrap up, I want to thank the Zebra team and our partners for another great quarter and an exceptional 2018. We’re off to a strong start to 2019 and see a solid year ahead. We look forward to welcoming the Temptime team once we close the transaction. Have a great day, everyone.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.