斑馬技術公司 (ZBRA) 2014 Q1 法說會逐字稿

Good morning and welcome to Zebra Technologies 2014 first-quarter earnings release conference call. Joining us from Zebra Technologies are Anders Gustafsson, CEO; Mike Smiley, CFO; Mike Terzich, SVP Global Sales and Marketing; and Doug Fox, Vice President of Investor Relations.

(Operator Instructions)

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. Doug Fox of Zebra Technologies. Sir, you may begin.

Thank you. Good morning. Thank you for joining us today. 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 and anticipate 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. Risk factors were noted in the news release we issued this morning and are also described in Zebra's latest 10K, which is on file with the SEC.

Now let me turn the call over to Anders Gustafsson for some brief opening remarks.

Thank you, Doug. And good morning, everyone. I am pleased to report that Zebra achieved record first-quarter sales of $284 million, and earnings of $0.82 per share, including acquisition costs that reduced earnings by $0.09 per share. Earnings per share increased 78% year over year on sales growth of 22%.

All geographic regions contributed to the sales growth. Improvements in large enterprise deals and the incremental contribution from the Hart System acquisition drove record sales in North America.

In Europe, more sustained economic growth in the UK, Germany and other large countries helped us achieve record sales in this region as well. Overall, the record results also reflect sharp execution of an effective business strategy and broad-based strength across our diverse business.

For the quarter, the improvement in large deal activity complemented an ongoing strong run rate business through distribution partners. Sales were robust across all product lines. The notable increase in service and software revenue reflects the impact of our acquisition of Hart in December. We also saw improving profitability as our gross margin exceeded 51%.

The growth in sales improved gross margin, and leverage on operating expenses contributed to first-quarter free cash flow of $47 million. As most of you are aware, a few weeks ago we announced our definitive agreement to acquire Motorola's Solutions Enterprise Business, excluding iDEN. Zebra gives physical assets a digital voice to drive business value. This is what we refer to as enterprise asset intelligence.

This transaction will create the largest player in enterprise asset intelligence, while complementing and accelerating Zebra's transformation into a company that provides the necessary building blocks for a truly smart enterprise in this Internet of Things world. The initial response to the announcement from customers, channel partners and employees has been overwhelmingly positive.

We further believe the combination of the two leading companies in our industry will create a highly appealing financial proposition for our shareholders from our increased scale, significant synergies, and greater participation in attractive secular trends. Now more than ever we believe Zebra is well-positioned to extend our industry leadership.

Let me now highlight some areas of progress in the first quarter. Product innovation remains a cornerstone of Zebra's strategy. We continue to have a strong cadence of product introductions, enhancing our value proposition with customers in targeted industries.

During the quarter we expanded the capabilities of our Zatar platform with the ability to integrate iBeacon technology to customize in-store displays. We also recently announced our first commercial agreement with an important reseller to take advantage of the platform to offer their customers a new range of services. And we are now working with a strategic healthcare partner which is using Zatar to remotely manage and support printers through cloud-based infrastructure, as well as to manage RFID-tagged pharmacy trade within the hospital.

This week we are excited to be announcing a great leap forward in innovation with our new ZT400 family of mid-range tabletop printers. Designed for maximum feature flexibility, the ZT400 is easier to integrate with best-in-class connectivity options. It gives customers faster print speed and quality.

And it is easily configurable for connectivity, communications and media handling to address a broad range of applications, including RFID. With Link-OS and NFC communications, the ZT400 will be easier to manage over the cloud, and obtain powerful web-based support.

From a vertical perspective, we will soon be introducing the QLn healthcare solution series. These innovative mobile printers expand the capabilities of our popular QLn mobile printers to ensure patient safety, and lower the risk of specimen mislabeling. The printers meet national specimen labeling standards. Among several innovative features, they are built with disinfectant-ready plastics that allow healthcare workers to safely and easily clean the printers to reduce contamination risk.

During the first quarter we also advanced activities to further penetrate the existing markets we serve. In North America, we had record sales for the third consecutive quarter, with further improvements in large enterprise deals, and a steady high run rate business.

Printer shipments to strategic accounts in retail and small package delivery were particularly strong as customers refreshed legacy products and implemented new applications. The improved pace of large deal activity has continued and the business pipeline is strong going into the second quarter.

For the quarter, Hart Systems generated incremental revenue of $12 million, substantially all in North America. The acquisition of Hart bolsters our leadership within retail, and serves to address vital customer needs in a rapidly changing retail business environment.

In EMEA, the continued improvement in the Eurozone economy contributed to our record sales performance in this region. Nearly all subregions experienced year over year growth, with particularly strong demand in the UK, Germany, the Nordics and Spain. With a solid number of smaller deals, product shipments were notably strong to customers in retail, postal and rail.

We also had robust growth in healthcare with thermal wristbands helping to support strong growth in supplies. Looking ahead, we have improved confidence in our EMEA business based on the continued strong deal pipeline.

In Latin America sales increased 11%, driven primarily by solid run rate activity. Continued challenges in Argentina and Venezuela were more than offset by strength in other parts of the region. In addition to the strong run rate business, we had continued success with the deployment of card printers. Our supplies business was also strong, supporting manufacturing customers in Mexico.

Finally, in Asia-Pacific sales were up a solid 15%, with broad strength in the region. We had robust shipments to retail customers in Australia.

Further, manufacturing-heavy Korea contributed to growth in the region as did growth in shipments to customers in China during a traditionally slower period because of the Chinese New Year. We expect the positive business momentum to continue in the second quarter.

Overall, Zebra's record first-quarter results demonstrated continued improvement in business conditions, and the strong global demand for our products and solutions. Our commitment to innovation enables Zebra to help our customers gain greater visibility into their extended value chains, to improve critical business processes. Our deeper engagements with customers across industries and geographies, coupled with our recently announced agreement to acquire the Enterprise business of Motorola, will enable Zebra to play a greater role in the important trends of enterprise asset intelligence and mobility.

Now our CFO Mike Smiley will provide a detailed review of first-quarter results and guidance for the second quarter of 2014. After Mike's remarks I will return for some brief closing comments.

Thank you, Anders. Let me highlight some of the key components of Zebra's first-quarter results.

First, we had record sales with increases in all four geographic regions. Second, operating leverage enabled EPS growth of 78%. And, third, Hart performed strong, in line with our expectations.

Before reviewing our financial performance for the first quarter, let me quickly review the details of our recent announcement to acquire the Enterprise business from Motorola. As a reminder, we are not acquiring the iDEN business. The purchase price of the transaction is $3.45 billion in cash, which represents a multiple for the business we are buying of approximately 10.9 times adjusted EBITDA to the 12 months ended March 31, 2014, or 8.3 times EBITDA when you include expected synergies estimated at $100 million.

We intend to fund this transaction through a combination of $3.25 billion of new debt and $200 million of cash on hand. As structured, the transaction will make efficient use of our offshore cash holdings.

Now let us take a look at sales performance for the first quarter. For the quarter sales increased 22% from $237 million last year to a record $288 million.

On an organic basis, sales increased 17%. Foreign exchange had a positive impact on sales of approximately $3 million net of hedges year over year.

Sales for North America increased to a record $133 million, up from 29% a year ago. In addition to the impact from Hart Systems, the results reflect strong growth in hardware, with mobile printers performing best. We also had growth in desktop and tabletop printers. Sales on an organic basis, exclusive of Hart, were up also 17%.

In EMEA sales increased 18%, also to a new record. Nearly all of our 13 subregions had year over year growth. The region had strong growth in retail, postal and rail, in addition to healthcare, with strong growth in thermal wrist bands.

In Latin America, sales increased 11%. Higher shipments to customers in Mexico and Brazil offset ongoing weakness in Argentina and Venezuela from the economic and political challenge in those countries. In Asia-Pacific, sales increased 15% with growth in nearly every subregion, with notable shipments to customers in retail and manufacturing.

Underscoring the diversity of Zebra's business by product category, sales of hardware increased 18% and supplies advanced 11%. Services and software revenue grew 123%, which reflects the impact of the revenues from the Hart Systems acquisition, resulting in organic growth of 22%.

For the first quarter, gross margin was 51.3%, up from 47.7% a year ago. The higher gross margin reflects the impact of higher sales, the reductions in freight costs, and the positive contribution of the operations of Hart. Net of hedges, favorable currency movements increased first-quarter gross profit by roughly $2 million year over year.

Sales and marketing, engineering and administrative expenses increased 8% from a year ago. The growth is primarily related to higher employee-related expenses and increased expenditures for outside professional services. Hart accounted for approximately $1.9 million of the $6 million of year over year growth.

The operating expenses, which are up 11% over a year ago, included about $5 million in acquisition costs. The increase in acquisition costs was principally associated with the Company's agreement to acquire the Enterprise business of Motorola.

Quarterly operating income of $53 million, plus depreciation and amortization of $9 million and $5 million of acquisition exit and restructuring costs, totaled $68 million of adjusted EBITDA. This compares with $38 million in adjusted EBITDA for the prior-year quarter.

As a result of the announced acquisition, we have started to present adjusted EBITDA in our press releases. We believe this measure will help investors better understand the fundamental performance of our business.

The effective income tax rate for the first quarter was 22.3%. The rate reflects the impact of approximately $4 million of acquisition costs that were not deductible for tax purposes.

Earnings totaled $0.82 per share, including a reduction of $0.09 per share for acquisition expenses on 51 million average shares outstanding. At the end of the first quarter we had 50.5 million shares outstanding. Financial results for the first quarter of 2013 included exit, acquisition and restructuring costs of $0.04 per share.

For the first quarter inventories decreased $1.7 million from the fourth quarter. Inventory turns increased from 4.1 times for the fourth quarter to 4.7 times. Net receivables were up $4.7 million from the fourth quarter.

The days sales outstanding declined from 65 days to 56 days. We ended the period with $468 million of cash and investments, with approximately 60% held in foreign accounts, all of which are invested in US dollar-denominated securities.

Now let us look at our 2014 second-quarter forecast. We are forecasting second-quarter sales in the range of $280 million to $290 million, which represents an increase of approximately 13% year over year. The forecast reflects the Company's historical seasonal increase in the printer and supplies business, offset by the typical sequential decline in revenue from Hart Systems.

Second-quarter earnings are expected in the range of $0.74 to $0.84 per share, excluding acquisition costs, up 25% from last year's EPS of $0.60 per share, excluding $0.03 per share of exit restructuring costs. Our forecast assumes a consolidated gross margin in the range of 48.5% to 49.5%, also reflecting the seasonal lower contribution from Hart Systems.

Operating expenses for the second quarter are forecast between $88 million and $90 million, excluding acquisition expenses. The forecast also assumes an effective income tax rate of 20%.

That concludes my formal remarks. Thank you for your attention. Now here is Anders for some concluding comments

Thank you, Mike. Zebra's strong first-quarter results demonstrate the success of our strategies to drive profitable growth. Our investments in product innovation, emerging technologies, channel development, and geographic expansion are making Zebra more strategic to more customers in new ways.

Our business diversity, the global strength of the Zebra brand, and the sustainable competitive advantages we continue to possess will enable us to extend our industry leadership. We see multiple avenues for growth and high returns as we diversify and expand our business to leverage opportunities from emerging technology trends.

Through the acquisition of Motorola's Enterprise business, we will have the ability to offer smart solutions, enabling companies to identify, track and manage their assets, transactions and people. These emerging technologies include data sensing, tracking and capturing devices; the transmission of those resulting data streams via secure wireless and wireline networks; flexible cloud-based application platforms; and big data analytics to mine the data streams for actionable business insights.

Looking ahead, the new Zebra will be a clear leader at the forefront of innovation in enterprise asset intelligence solutions, with an extensive R&D platform and a significant patent portfolio. Our expertise in RFID technologies, mobile enterprise computing, scanning, specialty printing, wireless LAN and location solutions will not only give us scale in procurement, manufacturing and logistics, it will vastly expand our distribution reach and deepen our network of value-added channel partners. All of this will come together within a global organization that has a deep history of well-established brands and innovation.

Finally, the great diversity of our business, our financial strength and continued industry leadership provide us the resiliency to pursue multiple growth opportunities. And our recent investments are critical high-return activities that help Zebra penetrate existing markets more deeply, as well as expand our presence in new exciting areas of growth. All of this gives us great confidence and optimism in Zebra's future.

Thank you for your attention today. We look forward to providing you with regular updates on our progress through 2014. I would now like to turn the call back to Doug for Q&A.

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. In addition, Mike and I will be available after the call for any further discussions.

(Operator Instructions)

Brian Drab, William Blair.

Good morning, it's Brian Drab. Mike, really quickly, to clarify, you said 22% organic revenue growth. And I missed what that was for. Was that for the service and software segment?

The difference would be for Hart. So, we had about $12 million of revenue for Hart that we didn't have a year ago.

Okay. So, $12 million. And so the growth in North America of 29%, given Hart is -- I guess it's about 90% in North America, maybe more?

Yes.

So you have high teens, maybe 17%, 18% organic revenue growth in North America?

17%.

Okay. Sorry if I missed that. Okay, so 17%. So, very strong organic revenue growth rate.

And I am trying to just drill down into, if you look of the first three quarters of last year, with average of around 2% revenue growth in North America. You've talked about the step up in large deal activity but also a step up in the run rate business. You mentioned the small package industry is going through a refresh cycle.

Can you just talk about what is driving that refresh cycle? Is it really just focused on one industry or is it more broad? And are you seeing more -- as a proportion of sales, are you seeing more large deal impact than you did last year?

I will take the first part of that and then I will hand over to Mike Terzich for the follow-up. Q1 was a very good quarter for us overall in North America, with a strong run rate business. But it was very much complemented by large deal activity, which has really ramped up over the last three quarters for us.

North America is the most diverse region we have from a vertical perspective. And we saw particular strength in retail, T&L and healthcare.

And when we look forward we see more of the same. We have good momentum in the business today. The pipeline for large deal continues to look very healthy. And the run rate is performing very well, also.

So, now Mike Terzich.

Brian, just a couple of added points to what Anders articulated here. In North America we enjoyed a particularly strong quarter in retail. The large deal activity has come back.

I think retail has been somewhat on the sidelines over the past couple of years. There's been a lot of stuff going on in the retail dynamics from a project perspective, but there is quite a few projects that have been put back into play -- healthcare, as Anders noted.

And I think the other piece to this is historically we have been seeing some refresh rate in North America. This has probably been the market where, when you go back to 2008, 2009, when things reset after the economic challenges of that period, North America was still the one market that I think has been a little absent of some of those refresh cycles. We may have actually missed the refresh cycle at some point. And we are seeing a surge that is supporting that run rate business.

So, we have got the best of both worlds right now. We have got the return of large deal activity, principally centered in retail and some of the T&L space, combined with a strong refresh run rate through the traditional distribution channel.

Okay, thanks very much.

Paul Coster, JPMorgan.

Thanks very much. Appreciate you taking the questions. I just want to follow-through on Brian's questions here.

The visibility seems to be improving, largely as a result of these bigger deals. So, the bigger deals, are they more deals? Are they bigger?

And are they also of a more extended time line? Perhaps you can just give us some sense of all three of those metrics and how they are evolving.

Specifically for North America, it is all of those. We have more large deals. They have become somewhat larger.

Or, the average is probably similar to what it was before but we probably have a few more larger deals. And some of those larger deals do span more than one quarter.

Are they generally taking the products off the shelf? Or is there any project monitoring for revenue associated with these that helps you -- and maybe there's some cost attached to it -- but that gives you even more confidence around the time line? Because you know what your project deliverables are?

Most of our products in these larger deals use more standard products. But we do have more custom software applications that we put on them. So, some specific things for communications or integrations or other things to make them more easily integrated into our customers' networks. We do have some of that but that is a pretty light touch, for the most part, as far as how much customization we do on our products.

Okay. Last question on Hart.

Can you talk just a little bit about the growth opportunity there? Is it international or is it cross-selling into your existing US base -- or is it both? Any color there would be helpful

Just a little bit of a refresh, and then I will turn it back to Anders to talk about. Basically half of Hart's revenue comes in the first quarter of the year. So, as we go forward, Hart will become less significant in quarters two through four.

But being it is so significant we called it out a little bit more in our call. I think Anders can talk a little bit about the growth opportunities.

Yes, I think there's lots of growth opportunities in North America and in the international markets. Market share of Hart's approach of more of a self-service inventory solution is still pretty low. So, there's lots of opportunities to go after the more traditional heavier workforce implementations that most retailers use. There has been good progress on a couple of nice wins in the first quarter, and some good pilots that they are doing.

If you think just about the whole omni-channel activity, for instance, that is a big driver for having greater inventory accuracy. So, more and more retailers are looking to be able to ship a customer's order or customer requests from any store or from any warehouse. So having, then, when you take an order and do that, you've got to have more confidence that you have an accurate view of your in-store inventory or warehouse inventory.

So, that is something that Hart very much helps retailers do. So, I see it as a market which is still very low penetration. And it plays to some strong secular trends in retail.

Thank you.

Keith Housum, Northcoast.

Thanks, gentlemen. I appreciate you taking the call. And great quarter this quarter.

As we look into the growth, hardware had a fantastic quarter year-over-year. Can you provide a little bit more color on, is that growth coming from the refresh cycle? Or perhaps a little bit of color on new verticals that you guys are in, or expanded product entry, that has gotten you business this cycle that perhaps you did not have last year or even the last refresh cycle that we saw?

The strength in the hardware business -- first, I will say I'll give the intro and then I will hand over to Mike Terzich again. I would say the strength in the hardware business is broad-based.

Clearly the refresh cycle is giving an extra boost to it because the refresh is printer-centric. It is very hardware-centric. But it comes from the refreshes, it comes from the work we have done to penetrate new verticals like healthcare, parcel deliveries in Asia-Pacific. There are lots of things that have contributed to it.

But for the quarter, I would say large deal activity was maybe the largest single contributor to the increase. Mike, any further thoughts?

Keith, yes. I would say the characterization of the hardware performance goes back to some of the prepared comments that Anders made earlier, which is we're really enjoying the diversity of our business. When you look at the geographic diversity and you look at the vertical market diversity, it is really playing very favorably for us.

We are enjoying the very large deal activities that have been primarily associated with the retail and the T&L space. We are seeing refresh, which has been driven in multiple geographies. Asia is a big manufacturing corridor for us now.

So, we are enjoying refresh in Europe and in Asia. And even in North America some of the warehousing applications, we're seeing some refresh on some of the heavier side of our hardware business.

And then we're getting the emerging growth opportunities that are coming up from the spaces like healthcare. And we've obviously got some purposely built design products that are going to be entering that space. We're starting to see some hardware demand even in those emerging verticals. So it is diversity that is really working for us across the business right now.

I appreciate that. And if I could just -- this is probably for Mike Smiley -- just go down on the gross margin for the quarter. Obviously Hart was a contributor and I heard the lower freight costs.

I tried to understand a little bit more about the Hart business. Would it be safe to assume that maybe the increase in the gross margin was 50% attributable to Hart, or is that perhaps too little too small?

I'm sorry -- are you saying 50% of the gross margin? Explain that again.

Gross margin improvement compared to last year, would 50% of that improvement be attributable to Hart?

I don't know that it would be 50%. But I'm going to tell you the gross margin -- again, we had about roughly $12 million of revenue from Hart. The gross margin on Hart is meaningfully higher than the Company average. So, on $12 million it helps. It doesn't, certainly, explain everything.

We also had the higher volumes. We were able to spread more of our overhead over a greater number of units. I would call that better absorption.

I will also say our operations team basically hit on all cylinders this quarter, really performing extremely well. They've been investing a fair amount of time and energy in projects that help us to run that part of the business better.

We are not planning for exceptional performance every quarter. And I think our second-quarter gross margin forecast gives ourselves something closer to the average. But we certainly performed extremely well in the first quarter.

And then the other pieces obviously benefited a little bit from foreign exchange. So, those would be the -- Hart, better absorption, lower overhead, and then foreign exchange are the four primary drivers that we'd point to.

But Hart would be a little less than -- it would not be as much as 50% of the gross margin improvement. It is less than that.

Yes.

Got it. Appreciate it, thank you.

Michael Kim, Imperial Capital.

Good morning, guys. When you're looking at your sales pipeline, do you continue to see the hardware mix as broad-based? Or do you see opportunities driven by either geographic or vertical opportunities? And how do you see ASPs and margins trending, given that pipeline?

I will start again and then ask Mike to provide some more detailed color. But I think similar to how we answered the previous question, the diversity of our business is really helping us. We have seen strong performance, a strong pipeline for, I would say, all regions and all verticals.

So, this is not a one vertical, one region type of thing. This is very much demonstrating the strength, the broad strength of our business.

The price points and margin outlook we have -- our business tends to be quite steady. We are very disciplined in our pricing approach. We don't expect there to be any material difference in pricing or margins based on the larger deals.

Michael, just a couple of other points on this. I would say that we have certainly, within the business, we have put a lot of focused emphasis on improving our large deal pipeline, from a visibility and from a validity perspective. And that has been an internal initiative that is really starting to pay more dividends and our confidence to look into the pending quarter and gain some confidence on what is transpiring.

And I think, along the lines, the larger deal opportunities for us tend to be oriented towards our mobile printer devices and, to a lesser extent, on some of our desktop product range and some of our card printing product ranges. To the degree that we see more activity in that space, they generally come from a mix of our product that is away from some of the traditional big-iron, higher-margin product. But we have been able to offset that -- to Mike's point -- by all the good work we have been doing on the supply chain side, and getting scale out of a lot of our electronic design architectures

Great. And then, when you think about the refresh cycle and the new products and the improvement in EMEA, how are you guys thinking about balancing investments versus the operating leverage that you saw in the quarter, just given all the opportunities that you are seeing in the pipeline?

We are obviously carefully assessing how we balance our investments in the business versus probability. But, first and foremost, we want to make sure we invest in our core business to make sure we can continue to extend our leadership position in the industry. We think that generates lots of long-term benefits for the business as far as having product leadership, getting the market share and the scale benefits. So that is very important to us.

But we obviously are mindful that we also need to deliver healthy returns to our shareholders. At the moment I feel we have been able to strike a fairly good balance in that respect.

And obviously with the pending acquisition with Motorola's enterprise business, are you already in your planning process of integrating that organization with your investment spend on either R&D or you selling and marketing activities?

It is probably a little early to start talking about the specific investment profiles different parts of the organization will have. But from an integration perspective I feel we are where we would expect to be, being three weeks into this transaction. Actually it's three weeks today since we announced it, right?

The point that Mike Terzich was on the phone to be the lead integration officer, he has very good experience, long experience with us, obviously. But also being the champion for our relationship with Motorola for many years. We have started to ramp all of the activities around our integration management office.

We have had a number of meetings with our combined teams -- so, both the Zebra teams and the Motorola teams. We have identified the functional team leaders for the different work streams that we have to perform. We are largely done populating those teams with the individuals who will do the work. And we are now in the work, in the process of scoping the actual work streams for all the things we have to do there.

So, early in the process, but I feel good about where we are. I think we are on target. And I would say, also, since we have had such a long history with Motorola, and it is a very complementary solution set, the working teams, they know each other well, there's a lot of comfort with getting along.

So, I would say all the working teams are getting along very well and working well together based on having a good family heritage with each other. And, Mike, maybe a few extra words from you?

You know, I think it is pretty much in line. I think we are where we need to be at this stage. We have been very complementary selling at different ends of the solution spectrum.

So, it is a very friendly acquisition, so to speak, and so we have a very high esprit de corps with the work teams. But the heavy lifting is really just beginning. But we feel we have put our best people in charge of some key work streams and we are marching towards a flawless day one close.

Terrific. Good luck with that. And thank you very much.

Greg Halter, Great Lakes Review.

Thank you and congrats on the excellent results. I wonder if you could detail your large customers in the quarter. I think there have been three of them. And also how that dynamic may change once the acquisition is consummated?

By the way, when you look at it, again the three large customers I think you're referring to are distributors. And when you add the three up, they're about the same -- the percentage sales for the top three are about the same as they were a year ago, although there has been some mix change between them. I don't know if you want to give any more color.

I think that is exactly right. The three largest are distributors. And we are pretty confident that when we close on the transaction the three largest will remain those distributors. I do not think it necessarily will change who is represented in that list.

We will clearly become a larger piece of business to those respective distributors. And that is certainly worth noting, I think, from our perspective. Those are important relationships.

They've been important relationships to both Motorola and to Zebra. And we do not envision that that is going to change. And we're excited about the opportunity to leverage the combined businesses and put forth what we think will be ultimately a very exciting channel program and channel proposition that will just further cement opportunities for us in the broader market.

I would just add also that we've obviously spoken at length with these three distributors but also many other resellers. And the feedback we have had has been very positive. People see this as a great combination that will drive some more innovation in the industry, reinvigorate the industry, to some degree. And people have been very supportive of the transaction, and not expressed any particular concerns.

Okay, sounds good. And then on the guidance, the EPS guidance, Mike, that you provided, the $0.74 to $0.84, is that including or excluding costs?

It includes most costs but it is excluding the acquisition, exit and restructuring that we normally exclude when we quote our number.

And what do you envision that amount to be?

That is a number -- we announced the transaction three weeks ago and so we are putting that together right now. We really do not have as good a visibility into that as we need, as we're trying to put together the right teams and resources to make sure we are effective. So, we're working through that right now and I don't have any better color to give you.

We have been trying to make sure that we really focus on getting integration done right. And make sure the teams feel that they can get the right type of resources and advisors to augment both competencies and just the strength of the teams. So, we do not want to be penny wise and pound foolish here, so we want to make sure we do this right and get the right outcome, and get off to a very good start when we do close the transaction.

Okay. But there is no other exit, acquisition or restructuring costs from Hart or any other transactions in that number?

Not of any consequence.

Okay, thank you.

(Operator Instructions)

Andrew Spinola, Wells Fargo.

Thank you. Mike Terzich made the comment before that Zebra and Motorola are at opposite ends of one solution to the enterprise market.

Knowing that, it seems somewhat surprising that there is such a big gap between the growth rate in your hardware business, up 18% year-over-year, and Motorola down 1%, ex iDEN. And I'm just wondering how you reconcile those differences, and how you think about how these two businesses are executing, market share gains and losses? And how that all plays into your guidance of 4% to 5% going forward.

First, I think that we believe there are significant opportunities for the combined business. We have had great response from all stakeholders, I would say -- certainly customers who will ultimately determine the success of the combination.

We do have early indications of our thesis that we will have more relevance with CIOs. We can now provide broader solutions. We will have a larger spend and to be more strategic, more important to them.

We see great opportunities for cross-selling our solutions, particularly in the work to market side where we are very strong in healthcare and manufacturing. We believe we can pull in some Motorola solutions there. And there, Motorola is very strong in retail and T&L and can help us in that area.

I think there are a few things that I believe have held back growth on the enterprise side. I think the Microsoft OS issues appear to be an irritant to customers. Microsoft has been somewhat vague in expressing or specifying what the road map for their operating systems look like in the future. But Motorola has made a strong commitment to Android, which I think is playing out very well for them, also, and expands the market quite a bit.

The Motorola business has also been quite cyclical. Like ours. But I think we got out of our cyclical downturn a little earlier. But I believe that they are coming out of their downturn, also.

I would say we did a lot of work while we were doing due diligence on the transaction to really understand and get comfortable with what the underlying growth rate for the industry was. What was the competitive positioning, the risk of customer device encroachment. And all of those things baked together, we concluded we should be able to achieve a longer-term growth rate of 4% to 5%.

I think, also, when we look at the longer term, there are certainly a number of very attractive secular trends that I think will support the business. Mobility being probably the most prominent one. We have a strong mobility play. Motorola is really all about mobility.

All companies are trying to make their employees and workers more mobile, less tethered. But they also, then, need to have the right tools to drive the productivity in the field, so that very much plays to what we do.

Then you have Internet of Things. We are generating a lot of real-time data by what is actually happening in our customers' operations, be that a retail store or assembly line or a healthcare facility. And enabling our customers to take advantage of that and drive that into cloud computing.

If you move a worker from being an office employee to a field worker, you need to also then, as I said, drive the same level of tools and other things to enable them to be productive. And what happens then is you start migrating your desktop applications to the cloud and have the user interface on a mobile device. So, we see a lot of opportunities for us to be able to drive growth and continue to make this a very accretive business.

Thanks, that is very helpful. Just changing directions a little bit.

On the supplies business, I had thought that that business might slow down a little in Q4 after you annualized the LaserBand acquisition, but yet you've grown double digits in both Q4 and Q1. And I'm wondering, do you think about that business as having that type of growth profile going forward? And is it all coming out of healthcare? Or what kind of color can you give us on how to think about that business and what is driving growth?

I will start and then I will ask Mike Terzich to provide some further color here. First, the supplies business supplies the marketplace. It is a huge marketplace, much larger than the barcode printer market space. And we have a very low market share.

So, for us, we're still just scratching the surface of where we are from a market share perspective. We are one of the largest market share player, but it is a very fragmented industry.

What we have done internally, I would say, apart from the LaserBand acquisition, is we have to put a lot more emphasis and focus on driving supplies revenues. I think our sales teams today see that the only way for them to really make their numbers is to also sell supplies. They see that as being a very additive part of our portfolio to their quotas.

So, we're managing it more differently. We're putting much more focus and emphasis on it than we did some years back probably.

And maybe with that, Mike, maybe you can add a couple of comments.

Yes, just a couple more, Andrew. It has really become -- it is really a gem of a business for us.

And to Anders' point, our focus has been in the specialty media spaces where the customers are marking, tagging a variety of critical assets. Those could be as basic as patients in a hospital, but they could be very high-priced assets in a supply chain.

And it really speaks to the growing opportunity in big data and some of that insight that we're helping customers drive through their value and their supply chain. So, we tend to play in the higher margin specialty space. It is less competitive.

To Anders point, it is a very large market but there is a big cross section of the market that is plain paper labels going on cardboard boxes, which is very commodity. And the label has to last the life of the parcel shipment. That is not where we want to play. We want to play on the high-end specialty, where the information and the ability to read that information multiple times, and sometimes over multiple years, becomes of high value.

That has allowed us to separate ourselves from a lot of the commodity players. We have the financial strength to carry a lot of this high-end raw material in inventory, and convert that specifically to a customer. And then we have been able to do that by expanding or converting locations, and getting closer to that customer base.

And the Zebra brand is actually a very relevant piece to that equation. We have been clearly outperforming the broader supplies market. We have been taking share. And we really like the way we are positioned in that business.

This is Mike Smiley. One last comment.

One reason I like this business is it is a fairly stable, almost like an annuity-type business, which again supports the stability of our cash flows. It's one of the reasons makes Zebra feel very attractive or be very attractive.

That is great. Thanks very much.

We have no further questions at this time. I will now turn the call back over to Doug Fox for closing remarks.

Thank you. Again, thank you for joining us today. I want to let you know that our next regularly scheduled quarterly call will be on August 6. And with that, on behalf of the Zebra Management team, thank you for joining us today.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. And you may now disconnect.