斑馬技術公司 (ZBRA) 2014 Q3 法說會逐字稿

Good morning, and welcome to the Zebra Technologies Third Quarter 2014 Earnings Release Conference Call.

Joining us from Zebra Technologies are Anders Gustafsson, CEO; Mike Smiley, CFO; Mike Turzich, Senior Vice President, Global Sales and Marketing; and Doug Fox, Vice President of Investor Relations.

All lines will be in a listen-only mode until after today's presentation. Instructions will be given at that time in order to ask a question. At the request of Zebra Technologies, this conference call is being recorded. Should anyone have any objections, please disconnect at this time.

At this time, I would now like to introduce Mr. Doug Fox of Zebra Technologies. Sir, you may begin.

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 10-K, 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 15% sales growth to a record $303 million for Zebra's third quarter, on record sales across all geographic regions, and multiple product lines. Pipeline activity throughout the quarter generated several large deals, in particular in particular to customers in retail and small package delivery.

A consistent and robust run-rate business also continued throughout the period. Non-GAAP net income of $0.93 per share increased 21% from $0.77 per share for the third quarter of 2013.

Zebra's sharp operational execution against a proven growth strategy generated share gains, strong relationships with strategic customers and targeted industries, and more innovative solutions that deliver improved asset visibility. Continued strong execution in a healthy business environment was also reflected in the enterprise business we acquired from Motorola solutions on October 27. Third-quarter sales for the Enterprise business were up 2% from a year ago, and a sharp 8% from the second quarter of 2014.

Our positive momentum gives us great optimism for Zebra's future. The combination of the enterprise business's deep capabilities in data capture, mobility, wireless, and services, together with Zebra's industry-leading tracking and monitoring solutions, provide the combined entity with the key building blocks for Internet of Things solutions in a category we call enterprise asset intelligence.

Our innovative offerings will provide organizations with the tools they need to gather and share real time information about their critical assets. Our efforts are supported by superior global go-to-market channels, leading global brands, and the most talented people in the industry.

Let me now provide some third-quarter highlights. Zebra's consistent investment in core sales and marketing activities resulted in double-digit growth in three of our four geographic regions. More customers in targeted verticals turn to Zebra for products and solutions that offer greater visibility into their business operations.

In North America, record distribution sales and further growth in shipments of large deals supported our second consecutive quarter of 16% sales growth. During the quarter, we had a surge in shipments of mobile printers to retail customers in advance of the fourth quarter holiday season. We also had notable shipments of desktop and tabletop printers to customers in small package delivery. Sales to government customers supporting key supply chain applications also strengthened. Demand in the fourth quarter remains strong, and the pipeline of new business is healthy, as we develop deeper, more enduring relationships with strategic accounts in the region.

Positive trends also continued for location solutions. Our MotionWorks sports solution is now up and running in 17 NFL stadiums. Since the announcement at the end of July, we have received a large number of qualified leads from companies across multiple industries, interested in exploring how real time location solutions can help them gain greater insight into their enterprise operations. We also experienced improving shipments to industrial and retail customers who increasingly see the value of active RFID solutions for asset location and motion management.

EMEA's sales growth of 19%, the highest of any region this quarter, occurred in the seasonally slowest period for the geography. Product performance was strong across the portfolio. The quarter included shipments of mobile and desktop printers, in part due to deeper penetration of the postal and parcel markets.

We also had favorable shipments of products to retail customers. More effective geographic coverage and improved penetration of second-tier distribution partners are both important contributing factors to increasing strength and gaining share in the region.

During the quarter, we also had notable shipments of card printers for national insurance card programs in Ghana, and strong sales of wrist bands for improved patient identification. While mindful of recent economic news in the region, we are optimistic about the fourth quarter for EMEA, given a strong beginning backlog, a growing pipeline, and a growing number of large-deal opportunities.

In Latin America, sales growth of 11% benefited from improved geographic coverage and large shipments of products to retail customers. The breadth of sales in the region also included shipments of card printers to financial institutions for on-demand credit card printing, as well as to motor vehicle agencies for drivers licenses. During the quarter, we closed notable mobile printer deals for transportation and direct-store delivery applications.

Sales in Asia-Pacific were up a solid 9%, as our planning, strategy, and strong execution led to more diversified business across multiple dimensions. Focused sales resources in China led to high growth of mission-critical tabletop printers to manufacturers.

We also had increasing success in transportation and logistics with our printers designed specifically for emerging markets. We were pleased with card printer sales for Social Security applications in China, as well as continued support of voter registration activity in India. Like many large deployments, Zebra products proved to be the performance winner against competitive offerings.

Innovative products and solutions, a proven growth strategy, and a continued focus on operational excellence remain a critical combination to Zebra's enduring success. Our results for the third quarter demonstrate Zebra's ongoing ability to extend leadership in an attractive industry. Our combination with the enterprise business makes us an even more potent force, offering a more comprehensive product line with the ability to deliver innovative, end-to-end solutions to our customers.

Now, our CFO Mike Smiley will provide a detailed review of third-quarter results, and guidance for the fourth quarter of 2014. After Mike's remarks, I will return for some brief closing comments about Zebra, as we look towards 2015 and our integration of the enterprise business.

Thank you, Anders. First, please note that my comments refer primarily to non-GAAP financial results, which we have provided in the press release we issued today.

Let me highlight some of the key components of Zebra's third-quarter results. First, strong organic growth led to record sales in all four geographic regions and multiple product lines. Second, we sustained high gross margins and operating profitability. Third, adjusted EBITDA increased by 28%.

Let's take a look at sales performance. For the quarter, sales increased 15% from $264 million last year, to a record $303 million. On an organic basis, sales increased 13.2%, with [HAR] contributing $4.9 million to the quarter, a solid result for this business.

Foreign exchange had a positive impact on sales of approximately $2.9 million, net of hedges, year over year. Sales for North America increased 16% to a record $134 million. Strong growth across multiple product lines resulted from record shipments through distribution, in addition to robust activity with large customers.

In EMEA, sales increased 19% to a new record $94 million, with growth in 10 out of 13 sub-regions. Particularly strong growth occurred in Germany, the UK, and Italy during the period that normally experiences a seasonal slow-down. Several large deals supplemented strong growth through distribution partners.

Latin American sales increased 11%. Strength in Mexico and other parts of Latin America more than made up for weakness in Brazil. In Asia-Pacific, 9% growth also led to a record, with strong growth in most sub-regions. We continued to execute well on our business plan to build on our manufacturing base in the region, with business in retail, transportational logistics, health care, and government.

By product category, hardware sales increased 16%, with a record 405,000 printer units shipped during the quarter. Supplies advanced 6% to an all-time record, including strong growth in Asia-Pacific, where we are building a solid base of business, serving our customers with high-quality, Zebra-branded products.

Services and software revenue growth of 39% reflects the impact of the revenues from the Hart systems acquisitions in addition to organic growth of 16%. We see services as a key area of growth post-acquisition, as we take advantage of the services infrastructure enterprise brings to the business.

Third-quarter gross margin was 50%, up from 48.8% a year ago. The higher product volume and lower in-bound freight costs were the primary reasons for the increase. Net of hedges, favorable currency movements increased third-quarter gross profit by approximately $1.7 million year over year.

Non-GAAP operating expenses of $89 million were within expectations. The growth is primarily related to higher incentive compensation and expenses from the Hart acquisition. GAAP operating expenses include $35 million in acquisition and integration costs. The amount was principally for professional fees and integration activities supporting our work to prepare for the acquisition.

The effective non-GAAP income tax rate for the third quarter was 23%. An adjustment of $8.5 million from the GAAP income tax rate reflects an impact of a change in UK tax law. We expect a reversal of this adjustment in the fourth quarter. For the quarter, non-GAAP net income totaled $0.93 per share, up 21% from $0.77 per share for the third quarter of 2013. Quarterly adjusted EBITDA was $74 million, or 25% of sales, compared with $58 million, or 22 percent of sales last year.

For the third quarter, inventories increased $13 million from the second quarter, as we took advantage of lower-cost ocean shipping. Inventory turns were effectively unchanged at 4.7 times. Net receivables of $187 million were up $22 million from the second quarter, reflecting the higher level and timing of business during the third quarter. The days outstanding were 55 days, compared with 56 days in the prior quarter.

We ended the quarter with $542 million of cash and investments, with approximately 60% held in foreign accounts, all of which were invested in US-dollar-denominated securities. Subsequent to the end of the quarter, we liquidated substantially all of our foreign investments to help fund $3.45 billion -- the $3.45-billion enterprise acquisition. We now have $3.25 billion in debt on the balance sheet, with a weighted average interest rate of 5.6%. Our starting leverage ratio is approximately five times adjusted EBITDA. We expect to reduce this debt burden to less than three times within three years.

Now let's look at our 2014 fourth-quarter forecast. For the pre-transaction Zebra business, we expect sales in the range of $300 million to $310 million, or up 7% from a year ago. With ongoing favorable business conditions in all geographies, the sale comparison is against a very strong fourth quarter last year, and the strong shipments of large deals that occurred in third quarter this year. The mid-point of the guidance range would bring Zebra's sales growth for the full year to 14%. We expect gross margin within historical range of 48.5% to 49.5%, which reflects the mix of business we expect for the period.

Non-GAAP operating expenses are forecasted in the range of $90 million to $91 million. This forecast brings pro forma operating income to $55 million to $63 million, compared with $54.8 million from last year's fourth quarter. Our forecast assumes a steady US dollar Euro exchange rate at the current level. We expect interest expense of approximately $35 million for the quarter.

Looking at the enterprise business, we are encouraged by the improving trends in the business and the outlook for the fourth quarter. We expect the usual seasonal improvement with pro forma sales for the fourth quarter, in the range of $640 million to $660 million. This quarter represents a sequential increase to 7% from the third quarter. The adoption of Zebra's revenue recognition policy, and the potential impact of purchase accounting, however, could have a significant effect on the reported number.

Because of the timing of the acquisition, which occurred at the end of October, our consolidated financials for the fourth quarter of 2014 will incorporate two months of enterprise sales. We estimate that 70% to 75% of sales will occur in the last two months of the quarter. The timing of the transaction and multiple post-close accounting adjustments make it impractical to provide a reasonable accurate forecast for the full P&L.

During the 2014 fourth-quarter conference call in February, we expect to provide the details Zebra historically gives for the combined entity. We will continue to maintain our policy of solely providing quarterly guidance. That concludes my formal remarks. Now here's Anders for some concluding comments.

Thank you, Mike. Zebra enters the fourth quarter with increasing confidence in the long-term profile of our new combined Company. With a fuller complement of products and solutions, we will work towards building stronger customer relationships to make Zebra the first Company CIOs turn to for their asset intelligence needs.

Now, with more than 7,000 dedicated employees, we have significantly expanded our geographic reach to provide even more opportunities to deliver Zebra products and solutions to our customers worldwide, through the strongest go-to-market channels in the industry. No other Company has the scale and resources to deliver solutions that offer enterprise customers the real time visibility into critical assets they need to make better business decisions.

By the time of closing, we successfully completed a complex cut-over to the ERP system supporting the enterprise business in a short amount of time. Our hard work ahead of the close enabled us to take orders and ship products at volume from day one.

We have already made significant progress on integrating the enterprise business. Shortly after our announcement of the acquisition in April, we established our integration management office to ensure a smooth transition for our customers and employees. We welcome all of our employees to the new Zebra, and congratulate them for their hard work on integration planning while maintaining high performance levels in the business.

With the closing of the transaction we have announced the new senior regional and global leadership of our organization. As part of this leadership, we welcome Girish Rishie as our Senior Vice President of Enterprise Solutions, and Tom Collins as our Senior Vice President of Supply Chain Operations, both reporting to me.

Additional appointments include Joe Heel, our new Senior Vice President of Global Sales. Joe will play a key role in maximizing the value of the combined business to our customers and channel partners. This appointment will allow Mike Terzich, our Chief Marketing Officer, to focus his efforts on integration activities as head of the integration management office, and building a global marketing organization, another critical area for success.

For the two months remaining in 2014, we will operate as two distinct businesses from a sales perspective, to ensure continuity for our customers. At the same time, we will be implementing plans to work towards operating as a single organization early in the first quarter of 2015. We expect to announce the next several tiers of the sales organization by year end, so we are ready to engage our customers as one Company.

As we go to market as a combined organization, Zebra's historical focus on channel development, together with enterprise's strength in strategic account management, will create significant multiple near-term opportunities. Many large customers have already expressed an interest to standardize on our combined solutions portfolio, to reduce the inefficiency and cost of managing multiple vendors. We also have seen strong initial interest in additional services, given the large number of deployed devices from the combined Company.

In addition, we will be accelerating channel partner development, followed by the introduction of a new, integrated channel program in the second half of next year. Advisory councils of our channel partners we formed earlier this year will work with us in creating the next generation of our award-winning channel program.

Looking beyond the sales organization, we have identified staffing roles in areas of likely investment to fill gaps in certain functions. I am excited about the progress we have made in outlining new organizational structures, and implementing programs to effectively merge our corporate cultures. We will continue to drive momentum and maximize the strength of the new Zebra, as we create the most formidable provider of asset intelligence solutions worldwide.

At the same time, we are committed to creating shareholder value through achieving $150 million in cost synergies. We expect $100 million of these savings to be realized in operating expenses and $50 million in cost of goods, as we streamline the purchasing of common components and rationalized vendors. Our current plan calls for exiting 2015 with [$50] million to $75 million in captured synergies on a run-rate basis, with the remainder achieved the following year.

As a combined Company, we now have the ability to discover additional sources of revenue and profit. We will pursue these opportunities thoughtfully and deliberately, in order to preserve and enhance customer relationships, employee engagement, and industry leadership. While encouraged by the outlook for our business, we are also aware of the need to remain nimble to ensure that we quickly respond to evolving business conditions.

The future for Zebra is bright. No other company possesses the scale, resources or focus to deliver the vital solutions that enable our customers to gain greater visibility into their most critical assets. With enterprise, we are now even better positioned to benefit from important technology trends in mobility, cloud, and the Internet of Things.

We will continue to work on introducing innovative products and solutions for greater enterprise asset intelligence, while pursuing operational excellence for the benefit of our customers, employees, and shareholders.

Thank you for your attention today. 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.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Andrew Spinola, Wells Fargo.

Thanks. I wonder if you could just comment on the Q3 Motorola results. They obviously bounced back quite significantly from Q2. I think you were expecting a number of the impacts that impacted Q2 to weigh on Q3. I'm wondering if you could talk about how some of those one-time issues might have weighed on Q3?

Yes, the enterprise business was up 8% sequentially. We had strong growth in North America, Latin America, and Europe, but it was offset by a significant decline in Asia-Pac. Some of the highlights I would draw your attention to would be several large wins of Android devices. This year we've seen Android becoming a much stronger factor in the retail and T&L space.

Hardware actually grew by double digits in the quarter, so that was very nice sequentially. We did see some of those operational issues that we highlighted three months back to subside. I would say we saw great sequential performance from Scion; was up more like 50%, still down year over year, but that was a big improvement. The supply chain issues we had experienced there I expect will be completely resolved as we enter 2015.

We had other supply chain issues more largely around the introduction of warehouse management systems for the distribution centers. I would say they were also largely resolved in the quarter. After we cut over to the new ERP system as our integrated Company now, we were up and running and shipped in volume already at the end of last week, so at the end of the first week. I think that was a good testament to the integration activities there.

Lastly in China, obviously China is continuing to perform poorly, but we worked with the enterprise business, or guided them to some activities to help stabilize the business, particularly taking some channel management actions to improve relationships and other things there, to position ourselves for forge growth as we go forward.

We have a lot of work to do on the talent side, but I would say here now as we close, we get the benefit of the Zebra team to -- who has a lot of experience in China, and a proven track record to also help in driving that. We're looking to leverage the Zebra leadership as we come together. But I do expect it will take some time before China becomes the humming part of our portfolio. Maybe lastly as we come together as a single face to our customers in 2015, I do have increased confidence in the combined business.

Got it. One follow-up. The $640 million to $660 million that you expect in Q4 from MSI Enterprise, I think that my numbers are correct, down maybe roughly 5% year over year. I'm just wondering if that is sort of the run rate trend you see in that business now? The growth rates have been jumping around here in the last few quarters What is your sense on that?

I think Q4 of last year was a particularly strong quarter for the enterprise business. If you are on a constant currency base, it will likely be down more like low- to mid-single digits. Again, if you look at the regions, you will see good performance in Europe, North America, and Latin America, and Asia-Pac, bringing performance down quite a bit for the entire group. But I expect as we start getting into more improved execution, we will be able to get more predictable results, and as the integration comes together, find some more near-term opportunities to help drive growth. We still feel comfortable with our long-term guidance of having the business grow by 4% to 5% through cycle.

Thank you.

Tim Maroney, WIlliam Blair.

You mentioned a surge in large deals during the quarter. Can you talk about what was the source of those large deals? Was it more brick-and-mortar stores, or was it on the e-commerce side?

Tim, this is Mike Terzich. I'll take that. It was actually both. We had a strong quarter. The large-deal pipeline was pretty robust. As we typically see in the third quarter, we see some advanced placement of some technology solutions, primarily to serve retail. But our retail business has expanded over the last couple years, both at the tier one level, which everybody has heard from us off and on, as well as in the tier two.

We've also over the course of the last five years built some pretty solid relationships with the e-tailer side of retailer business. We've seen material investments in all three of those areas -- large deal, mid-market deal, and the e-tail side of retail.

Okay, thank you. I know on your call sometimes you talk about customer concentration. You give the top three customers as a percentage of sales. I'm wondering, could you talk about how customer concentration will change following the combination with MSI Enterprise?

I can talk about that. I think Mike Smiley's going to grab the concentration figures for you. Essentially, our go-to-market models are much -- they're mirror images of each other, so we don't think that large customer concentration will actually change in a material way. We still deal with the same large set of distributors. Both businesses deal with the same set of distributors. While we have meaningful end-user relationships, none will be of a level that is a 10% customer.

Basically, we're not seeing -- as far as concentration, it's very similar to a year ago. It really hasn't changed meaningfully from prior year.

Okay, thank you.

Paul Coster from JPMorgan.

First, just a housekeeping question. You have been kind enough to provide us with some idea of what the revenue might look like on a pro rata basis for the enterprise business in the fourth quarter. You haven't done so for the expenses. Can you just explain why that is, so that we can sort of understand what the process is that you are going through?

Good question. I think there's a couple things that go on. First of all, there's purchase accounting that's going to have to flow into our P&L. Along with that, we're still getting our hands around how we will migrate off of transition service agreements, how that will result in actual expenses going forward. There's a lot of moving pieces in coming together with fourth quarter type expense numbers. We will, as we discuss our fourth-quarter results, we'll give a full view of what we see them to be in the first quarter.

Okay. Going back to this large deal narrative, it seems to be threading through, not just now with Zebra, the traditional business, but with the enterprise acquired business. Does this yield more visibility, or does it make your business ultimately a little bit more lumpy than it's been in the past?

I think the -- it probably makes it a little bit more lumpy. I think when you see -- look at the range of forecast guidance that we will give in the future, it might be a little wider than what we would have had for the traditional Zebra business. As the large deals, if you do get them, you get the big bump. But if you don't get it, also of course impacts the other side. It will likely mean we will be a bit more bumpy -- lumpy.

Just as a follow-on point to that, I also think the trend of revenues through the years will be different in the combined business than they have been for just the Zebra business. As we've talked about, there is more retail in the Motorola -- the enterprise business. That drives more of a third-quarter sale than a fourth-quarter sale. Again, the trend will be a little bit different on the combined business as we go forward.

Got it. Thank you.

Keith Housum with Northcoast Research.

Good morning. Congratulations on a good very strong quarter again. If I get drilled down more into the fourth-quarter guidance, Anders, it sounds like outside of FX and perhaps the Asia-Pacific decline in China, are you expecting relatively flat year-over-year sales for the Enterprise group?

Well, I'll give you guidance for both businesses here, so Zebra first. We have in our outlook, we see still continue to see very favorable business conditions. We are poised to have a very strong finish to the year. Fourth quarter is going to be up approximately 7% year over year. The 2014 is looking to be up about 14% year over year. We consider this to be very good results. We feel very about --

Absolutely.

3Q was a very strong quarter for us. All four regions had record revenues. We had record product revenues in our tabletop category, mobile, card, and our labels. It's rare that we get that many records in one quarter. We certainly feel that we expanded our leadership position in the industry in the quarter, or through the year. We feel quite confident in our outlook for the combined business here.

On the enterprise business, I would say we expect continued momentum as we exit Q3 into Q4. The business will be down year over year some 6%, 7% in absolute terms, but probably about 3% to 5% in constant currency. We will be up or slightly up, I would say, year over year in all regions, with the exception of Asia. It is -- the issues we are experiencing are fairly well defined, around Asia, China, and Australia, particularly.

I expect that we will start seeing improvements in the enterprise business, from renewed focus on execution and being really -- everybody living and breathing and owning one business. We certainly are going to be very thoughtful and deliberate in how we go about integrating the business, to make sure we get the benefits but we don't stub our toe on anything we can avoid.

Okay, I appreciate the color. Inside Asia, if we can just drill down a bit more there, is it more than beyond the change in management, which was required there as part of the separation, or is there greater issues happening down in Asia?

This is Mike Terzich, I'll take that. A couple of things on that, Keith. Particularly, one is that Asia business was originally structured in a way that there wasn't a defined leader for the business. It remained with the government business in Motorola. We've had a combination of some leadership transitions with the combination of some channel management dynamics that have went on in the business. Our view on this has been to the degree that we provided some insight and some perspective.

We think we got our hands around what the issues are. We have put forth some retention on some of the key talent. We know the distribution and the reseller relationships that business primarily flows through channel in the geography. As we exit the year, we're pretty confident we can leverage Zebra's leadership -- our team. We've got a lot of experience on the ground in the region, and we think we can get that stabilized. But to Anders' point, we are sorting our way through a couple quarters of some pain. That certainly does have some consequence to the fourth-quarter outlook.

Okay. The channel dynamics, it's not market-demand-related issue, or is it more -- it's more execution-related issue?

Yes, it is more on the execution side from our perspective.

Okay. Then if I can be so bold to ask one more question, can you break down the Motorola business more in terms of the scanners and computer in that list, local access network business, and perhaps talk about the trends that you are seeing in there, and how you are performing?

Yes the -- again, if you were to look at it through the lens of the geographic regions, also. I would say the data capture and mobile computing services have been doing well in the three main regions. Asia is obviously pulling everybody down there. The wireless LAN business tends to be a bit more choppy. They can have a good quarter but next quarter can be more weak. I think we have more work to do to make sure that we position the wireless LAN business for more consistent performance and consistent growth.

In mobile computers, I'm sorry?

Mobile computers and data capture have been performing well in the three main regions. The performance has been pulled down say by Asia, but if you exclude Asia, all those product categories will be doing well.

Great, thank you.

Michael Kim, Imperial Capital.

Good morning. Could you talk a little about the integrated product road map with the Motorola enterprise business, and when we might be able to see some of the initial solutions or integrated solutions. Lastly, where do you see some of the key opportunities for revenue synergies as you combine the go-to-market organization?

Yes. I'll start at the high level here, and then we'll get into a bit more detail for you. But I would say first, as we start looking at the integration now, our priorities start with growth, making sure we get the combined business back to growth, particularly the enterprise business to consistent, steady growth rates.

The second priority is around execution. We're now putting two large organizations together, and as we do that, we need to make sure we can really execute very crisply, very tightly. We're going to have a lot of attention on the integration activities and how we roll out new programs to make sure we can really demonstrate our excellence in execution.

The third priority will be around how we can create a common culture for the organization. We're looking very much to make sure that's an externally oriented culture, so very customer-centric, where our customers provide the true north star for us as to the direction.

More specifically than to what the more shorter-term opportunities are for the combined business, I would say. First we expect to go deeper and wider within our enterprise accounts. I think with the combination of our broader portfolio now, we are going to have some accounts that are predominantly, say, a Zebra account, and some are predominantly an enterprise account. Now we get a chance to go and expand the total footprint with those.

We also believe that we have opportunities to take share in the channel. We have two good channel programs, and I think with tighter execution around the channel, we should be able to gain some ground there, also. We also believe that we have good opportunities to expand both vertically and geographically, but maybe particularly vertically in the short term, where the Zebra side we have very strong positions in health care and manufacturing, stronger than the enterprise business.

But on the other hand, the enterprise business has stronger positions in retail and transportation logistics than us that we think we can benefit from. Lastly, we will put a lot of focus on services and service attach rate, annuity attach rate, services and supplies, to make sure that we provide a broader offering to our customers, which seems to resonate well with them in our work, so far.

Mike, if you want?

One other point I think that you raised Michael, which was on the road map side of the business end. Both organizations, this has been core to both companies' innovation. We've got very robust R&D deployments on both sides. We do have some longer-term plans. I would say that I would characterize them as more in the mid-term. Right now those product road maps have been pretty much set for 2015. Products are in development and on their way, so to speak.

But we will have an opportunity to integrate the portfolio in some meaningful areas, particularly around mobility, and where enterprise mobile computing, rugged mobile computing, and mobile printing can come together. We think there is really interesting ideas to enhance the performance proposition that those devices can have in the market place. But that's going to take a little longer to sort out.

If I could sneak one more question in. Perhaps on a global basis, are you typically finding the purchasing cycles are pretty aligned with the legacy Zebra business, or are they slightly offset? How should we think of upgrade patterns on an end-customer base?

I think it varies, I wouldn't say, though, that they are particularly aligned. Take retail, as an example, where we both have strong positions. The way retailers buy is often they buy one device before the other. They may evaluate in parallel. Often they do buy one, and then go on to the other one. I wouldn't expect we would have a perfect synchronicity between the different product portfolios that we have in the various industries. But over a global basis, I certainly would expect there would be a -- we will get the benefit of being very diversified across geographies, products, and verticals.

Maybe the take-away would be that implies maybe a little less oscillation in the business on a longer term, or through the cycle basis?

Our aspiration clearly is by combining the two businesses, we should have -- we should get the benefit of the diversity we have, of the greater diversity we have.

Michael, that point that Anders made earlier, selling deep and wider into those enterprise accounts, this is a trend we have certainly seen for the last several years. We have talked about it on previous calls, which has been IT-led standardization across technology platforms, brands, architectures. We think we're going to be able to take advantage of that. As more and more of the decision is made by IT organizations, and they set standards for the technology they want to deploy, the Zebra and the enterprise-branded products are top in class, and we think we're going to have an advantage in the market place.

That's great. Thank you very much.

Jason Rodgers, Great Lakes Review.

Looking at the product side, just wondering if you have any plans to rationalize any of the products at the enterprise solutions business, or is the focus more on just growing those products?

I think we will look at the overall portfolio, and we certainly will look at say, SKU rationalization. We have on the Zebra side, we have worked on that for years, trying to make sure we rationalize and reduce the number of SKUs to make it easier for us to manufacture and keep inventory, and still serve our customers right.

I think we have a similar opportunity to do that also with the enterprise business, to simplify the portfolio a bit. But obviously we also want to make sure we do grow it. That is the primary purpose of this whole thing.

Jason, one other point on that, and we talked about this in the past, the product lines today are complementary to each other. They're not competitive to each other, right? We have leading positions with each of our product categories. While there is some rationalization, we could simplify some things for the channel community. By and large, those product lines don't compete with each other.

Okay. Looking at Europe, definitely a strong quarter. I wanted to get your thoughts on how sustainable that improvement is?

Yes, Europe had very broad-based strength. We were up in 10 out of 13 sub-regions, particularly encouraged to see strong growth for many of the southern European markets, Italy, we mentioned particularly, along with UK and Germany. But there are also some choppy head winds that we see from -- I would say primarily today from FX. The Euro has declined against the dollar quite a bit. But also, some of the political activities in the far eastern reaches of Europe. Overall, we see very solid growth for both Zebra and the enterprise business as we go forward. The pipeline looks good. The run rate continues to be good and have good momentum.

Also for our forecast, the -- our revenue is negatively affected by about $2 million as a result of FX. Some of that forecast is muted because of that.

Finally, any guidance as far as what the tax rate might look like next year on a combined basis?

I think what we've been talking about is that we'll be mid-double, between 10% and 15% on a GAAP basis, but we'll be closer to 30% to 35% on a cash basis next year. I think that is our view. What will happen is both of those rates will converge to about 20% at the end of five years. That is our view. Obviously, we're still pulling a lot of information together to get to where we want. I think the nice thing is at the end of five years -- and throughout the entire time, we'll be able to repatriate cash without negative tax consequences, so that the cash will be available to repay debt, which will increase bottom-line earnings.

That is helpful. Thank you.

Andrew Spinola, Wells Fargo.

Thanks. I'm sorry if I missed this, but did you give any color, or could you provide the EBITDA margin in the MSI business for Q3?

No, we can't. That's something that's -- those are Motorola numbers, and so I think -- keep in mind those Motorola numbers are for discontinued operations. There's things like allocation and accounting for discontinued ops that makes those numbers difficult to translate to sort of a pro forma view. The answer to that right now is no.

Fair enough. Do you -- how do you feel about the 18% to 20% EBITDA guidance next year, now that you've had more time with the business? I'm sorry, 18% to 20% long-term guidance.

Yes (laughter), you startled me there a bit. No, we are feeling good about that. I'd say we're really confident in the model that we've given. At this point, we don't have anything that would suggest they should be different than we have been talking about for the last six months.

Got it. Maybe a question for Mike Terzich. This cycle has been a little unusual, at least for someone who hasn't followed this industry for a long time. But you had gone like seven or eight quarters of at best 2% growth, and now you've done four quarters of strong double-digit growth. I'm wondering how does the business usually react following periods like this? Is this a normal cycle? What were we missing back in September of 2013 that has changed so much in the last four quarters in your legacy business?

It's a good question. I wish I had all the insight to answer it. But I would say that based on my long history, we've seen cycles like this before. We're six quarters in. I think we've had six consecutive quarters of sequential revenue growth on the Zebra side of the business. That's not unusual for us.

I would say that perhaps what's taken place of late is, we've had a very robust business in North America. I think it's fair to say that back in 2008-2009, we may have missed a refresh cycle in North America that resurfaced last year and into this year. Last, I do think that there is a changing business landscape, where I think there is a greater appreciation, quite frankly, for the efficiency productivity technology solutions that we offer businesses. I think it's getting a bigger piece of the investment pie. We've had a lot of momentum, and lots of people see the solutions as delivering a hard ROI. I think there may be a little bit of a landscape change here on a go-forward basis.

Just to add one thing to that. One thing that I believe is more accentuated in this cycle than prior ones is that I believe we have been able to extend our leadership position in the industry, at a greater pace than we have historically. We have talked about the diverse bifurcation of the competitive landscape a bit. I think that's still the case, that we are continuing to grow faster than the market at the high end, and some of the people at the very low end are probably also growing a bit faster than the market. But the people in the middle I think are feeling the pressure, and probably not growing quite as fast.

The last thing I would say is, as we go forward, we haven't really included revenue synergies in our model. We really see an increased attach rate of our printers to Motorola solutions going forward. Again, to Anders' point, I think we'll continue to take that trend of expanding our leadership as we move forward.

Thanks. One last one for me. The quarter for service and software was quite strong, up $2.2 million sequentially. I'm just wondering is there anything one time in there, or does this reflect strength in MotionWorks? Can we see this continue going forward? Thanks.

Actually, it's just fundamental run-rate business. We did mention that Asia-Pac has done well for us. At this point, there's no large one-time things in those numbers at this point.

Just to clarify, it's -- what piece of the business in Asia is helping there? It's not Motion Works?

No, MotionWorks is really a North America solution today with the NFL. In Asia, I think here we would see supplies as the big piece, and also some service maintenance activities, as we go after repairs and other type of service offerings. The one thing that we also have in there is retail solutions, the Hart System acquisition, which does also provide a benefit.

From a vertical standpoint, health care, obviously, for a while has been very strong in supporting our supply sales.

Got it. Thank you.

Paul Coster from JPMorgan.

Thanks for taking my follow-up. I just want to drill into the Motorola enterprise business a little bit. Can you give us some sense of the break-down between data capture and mobile computing, in terms of proportion of revenues? Do you see the same growth rate for both moving forward?

I'd say the -- we don't break out the specific product lines. We won't for traditional Zebra, and I don't think we will start breaking out the individual product lines here, also. I think we've seen both mobile computing and data capturing grow at similar rates over the last several years. It's not been a big diversion between them. No big difference.

Maybe one thing I would just go back and talk a little bit about, say the Q4 outlook here. Q4 last year for the enterprise business was particularly strong. That was driven by a number of things, but I would say one specific thing that drove a very strong sales for Q4 of last year was that Motorola did a reorganization at the end of the quarter, where all the sales people got new territories, which really put great incentive to make sure they didn't leave any leads behind. I think that pushed up revenue a bit, and probably left the pipeline a little weaker for the beginning of the year.

I do think we would say the mobile computer for the quarter was a little bit stronger than we expected walking into the quarter.

Right, and that was because of the Android upgrade cycle. These are mature businesses, but you see growth. In the case of mobile computing at the moment, Android was a catalyst near term. I'm sure there's others coming up. What would be the types of catalysts we would expect on the data capture side?

On the data capture side, there is 2-D bar coding is a big trend. A lot of installations around the world are upgrading from 1-D to 2-D bar code readers. They also -- the enterprise business also released a new flatbed scanner, the bioptic scanner, that has had good traction here in the early days. There's a few new products that are opening up new categories for the enterprise business, also.

Okay, thank you.

We have no further questions. I will now turn the call back over to Doug Fox for closing comments.

Thank you very much, and thank you everybody for joining us today. Our next regularly scheduled conference call will be at our fourth-quarter earnings call, sometime in February. Thank you very much, and have a great day.