斑馬技術公司 (ZBRA) 2015 Q2 法說會逐字稿

Good morning and welcome to Zebra Technologies' second-quarter 2015 earnings release conference call. Joining us from Zebra Technologies are Anders Gustafson, Chief Executive Officer; Mike Smiley, Chief Financial Officer; Joe Heel, Senior Vice President of Global Sales; and Dean Lindroth, Vice President of Finance.

(Operator Instructions)

At the request of Zebra Technologies, this conference call is being recorded. Should anyone have any objections, please disconnect at this time. And at this time, I would now like to introduce Mr. Dean Lindroth of Zebra Technologies.

Sir, you may begin.

Thank you.

Good morning. Thank you for joining us today. Today's call will include prepared remarks from Anders Gustafson and Mike Smiley. Joe Heel will join for the Q&A portion of the call. A replay of this call will be available on our website approximately two hours after the conclusion of the call.

Certain statements made on this call will relate to future events or circumstances and therefore be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Words such as expect, believe, anticipate, and outlook are a few examples of words identifying a forward-looking statement. Forward-looking information is subject to various risks and uncertainties which could significantly affect expected results. Information about risk factors that could impact our results is noted in the press release we issued this morning and is also described in Zebras' latest 10-K, which is on file with the SEC.

Finally, we will be making references today to both GAAP and non-GAAP measures. You can find reconciliations of our GAAP to non-GAAP results in today's press release. In addition, year-over-year sales growth references for Enterprise and total Zebra will be on an estimated historical basis.

I will now turn the call over to Anders.

Thank you, Dean.

Good morning, everyone.

This morning we reported another strong quarter of revenue growth. Broad-based demand in Mobile Computing, Scanning, and Printing, and solid execution drove second-quarter sales to $894 million, excluding purchase accounting adjustments. This represents 11% year-over-year growth on a constant currency basis. We are seeing the impact of our focus on strengthening the Enterprise business, and the benefits of being one Zebra. Non-GAAP earnings per share were $1.05, up 14% from a year ago; and adjusted EBITDA was $132 million.

While sales were near the top end of our prior guidance range, earnings were at the lower end, as a result of two main drivers that impacted gross margin. First, we had approximately a 1-percentage-point impact related to one-time factors, which Mike will comment on in a moment. Second, our success in winning large deals, particularly in Mobile Computing, was higher than we anticipated, resulting in an adverse impact to gross margin percentage. Importantly, while rapid growth in sales of customer-facing and field mobility devices has put some near-term pressure on over computing margins, we believe this will be mitigated by an increased mix of higher margin, run rate business, product cost reductions, and continued strong growth in our task-oriented and industrial class devices.

I will now share some highlights of the business for the second quarter. Our focus on the customer, execution in the channel, and an industry-leading product portfolio are clearly differentiating Zebra in the marketplace. Enterprise sales increased 2% or 9% in constant currency. Pre-transaction Zebra sales grew 11% or 17% in constant currency. From a regional perspective, we delivered solid growth in our three largest regions. Quarter-over-quarter growth was 7% in North America, 16% in constant currency in EMEA, and 20% in Asia-Pacific. Latin America was essentially flat. In North America, sales in Printing and Mobile Computing were strong, particularly with large retail customers.

In the quarter we were also successful in securing two highly-contested retail orders. The first was a multi-million dollar deal, in which we will displace incumbent consumer devices and printers, as well as provide Zebra OneCare services. The second was one of the largest Mobile Computing orders in our history, where the runner-up was a leading consumer device. These are both strong examples of Zebra's ability to successfully demonstrate the benefits of our commercial class devices over consumer devices. These include higher durability, lower total cost of ownership, superior device management and security. In healthcare, we saw a strengthening pipeline and solid demand, particularly in Printing, for patient care and productivity improvements.

In EMEA, results in the quarter were driven by an outstanding sales effort and strong execution in the channel. Sales growth in both Enterprise and Printing was broad-based geographically, with particular strength in large customer accounts in postal, transportation and logistics, and retail. This was supported by growth trends in e-commerce, applications around parcel labeling and tracking, and personal shopping.

In addition, we displaced a major competitor by winning a significant multi-year award with the Royal Mail in the UK. We will provide 76,000 of our new TC75 mobile computers, which feature a unique touch screen display, enhanced battery life and signature capture. Once deployed, this solution for field service and delivery applications will increase staff mobility, operational efficiency, and quality of service.

In Asia-Pacific, the Enterprise business continued to regain share from pre-transaction levels. By leveraging Zebra's historically strong relationships, together with a focus on operational execution, we are building a healthier and stronger channel, as well as an increased partner confidence. As a result, we are seeing the emergence of valuable cross-selling opportunities in China and across the region. E-commerce and online shopping continue to drive growth in transportation and logistics, which resulted in strong demand, particularly for desktop and tabletop printers. In retail, solid demand in scanning is being driven by e-commerce and mobile payment trends, particularly in China.

Our sales growth demonstrates that our innovative product portfolio is enabling us to take full advantage of the trends in cloud computing, mobility, and the Internet of Things. For example, the large installed base of aging legacy CE and mobile products, and the acceptance of Android, is driving demand for mobile devices with more up-to-date operating systems. To address this opportunity, we remain OS-agnostic, and are investing in both the Android and Windows platforms. By engaging early, we have established a leading position with the broadest Android-based product line-up in the industry.

Our objective is to secure as much of the early adopter business as possible. After an increase of over 400% in bookings last year, this year's bookings through the first half have exceeded all of 2013 and 2014 combined. While this has been driven primarily by a number of large deals for customer-facing and field mobility devices, it has put some pressure on near-term margin. However, we believe this strategy will help us drive share and lead to higher margin run rate business for Zebra going forward.

Our portfolio also includes a wide array of mobile computers and wearable products that have more task-oriented or industrial-based applications, for which demand was also strong. These products generally carry higher margin and are expected to continue to contribute meaningfully to our overall mix. In addition to Android, we expect continued strong demand from Windows-based products and are investing in those opportunities. As a result, we will be introducing a number of new devices on Windows 8, which will be fully upgradeable to Windows 10.

These will include 8-inch and 10-inch tablets to address one of the fastest-growing segments in Mobile Computing. Use cases include field sales and service, retail front of store, and assisted selling applications. Available with either Windows or Android, our tablets will provide several benefits over consumer devices, including scanning functionality, increased durability, and more processing power.

Omnichannel also continues to drive demand. In retail and transportation and logistics, customers are seeking solutions for everything from growing online commerce to order fulfillment by our traditional brick-and-mortar stores. As a result, growth in mobile printers and 2D scanners is accelerating. In Printing, we have established a competitive differentiator with Link-OS, a software platform that makes printers easy to integrate, manage, and monitor from any location.

This Enterprise asset intelligence solution benefits customers through improved actionable information about their operations and the performance of their assets from any location. Bookings in the second quarter included a multi-million dollar order by a national food company for 5,000 printers, supplies, the Link-OS platform, and Zebra OneCare services. The customer's objectives were to reduce costs, implement device management, and improve efficiency.

In wireless LAN, we are investing in a path to growth. This year we have added internal sales resources, expanded our channel network by over 100 partners, and focused heavily on building our pipeline. Recent results include strong demand for our 802.11ac product and an increase in several brand awareness and lead-generation metrics. In services, we made solid progress on integrating resources and creating one global service organization. The team is focused on serving our customers and improving performance and repair turnaround time, quality management, call handling, and case cycle times.

In EMEA and Asia-Pacific, we are now delivering at much higher levels of performance, as on-time repairs have stabilized. In North America and Latin America, we have increased service levels as well but have more to do. Operational improvements, along with improved alignment between services resources and channel teams, and the launch of Zebra OneCare, have begun to improve attach and renewal rates. In managed services, bookings are trending up with encouraging levels of orders and pipeline growth for our recently-launched asset visibility platform and operational visibility subscription services..

The growth that we have delivered in the quarter and since the acquisition of the Enterprise business validates our strategy. It also demonstrates our ability to execute on our continuing commitment to meeting our customers' needs for asset visibility solutions.

I will now turn the call over to Mike, who will provide more details on our financial results and the outlook for the third quarter. I will then return for some closing remarks.

Thank you, Anders.

Total GAAP sales for the Company were $890 million. Enterprise sales, excluding the impact of purchase accounting, were $573 million, up 9% on a constant currency basis, primarily due to higher sales of Mobile Computing and Scanning products. Pre-transaction Zebra sales were $321 million, up 17% on a constant currency basis. In addition to solid growth in Printing, sales of location solutions were up significantly from a year ago. This reflected growth in the industrial vertical, and the continued rollout of our Motionworks tracking solution for the NFL.

Sales of Hart retail inventory solutions were comparable to a year ago and seasonally lower than the first quarter. In North America, sales were up $418 million. Excluding the impact of purchase accounting were up 7% year-over-year. Growth in Printing, Mobile Computing, and Scanning was offset partially by lower sales in services and wireless LAN. In Mobile Computing, our success with several large retail customers resulted in the sale of a higher proportion of MC40 and TC55 devices than we have seen in recent quarters.

EMEA sales were $303 million, up 16% year over year on a constant currency basis. This reflects strong demand across the region. From a product perspective, sales increased significantly in Printing, Scanning, and Mobile Computing. Sales in Asia-Pacific were $117 million, up 20% year over year. Sales of Enterprise products grew substantially, as we continue to gain traction from improvement in operational efficiencies and channel management compared to a year ago. Sales of Printing and supplies were also up significantly.

In Latin America, sales were $55 million, roughly flat compared to a year ago. Continuing macroeconomic challenges have pressured sales in Brazil, which we have offset with modest growth across the rest of the region. Gross margin for the quarter was 44.2%. This reflects the impact of purchase accounting and one-time accounting adjustments related to Enterprise that adversely affected results.

Additionally, we incurred expenses associated with the rebranding of products containing the Motorola marks. Product rebranding activities will continue according to the staggered cutover schedule through the end of next year. However, we expect the majority of this effort and the associated costs to be completed by the end of this year. Excluding these factors, gross margin would be approximately 45.3% and 42.8% for total Zebra and Enterprise, respectively. Gross margin for the pre-transaction Zebra business, which is unaffected by these items, was 49.9%.

Enterprise gross margin was also impacted by the Mobile Computing product mix. While we saw solid growth in our task-oriented industrial products, there was margin pressure associated with the high levels of sales of customer-facing and field mobility devices to large retail and postal customers. Fluctuations in mix can be a challenge to predict in the near term as we address the OS migration opportunity and balance our growth with higher margin run rate business. Finally, in the Services business, the results of which are included in our segment results, gross margin improved sequentially due to lower repair costs and was in line with our expectations.

Operating expenses for sales and marketing, R&D, and G&A were $293 million, including $8 million of stock-based compensation expense. The increase compared to the first quarter of the year is primarily the result of higher marketing expenses and the impact of our annual merit increase. To date, with our focus on our cost synergy programs, improvements in operating leverage, we have captured approximately $60 million of savings and remain on track to achieve our target of $150 million of run rate savings by the end of 2016. In addition, we believe that there's potential to achieve further operating leverage beyond the two-year time frame.

Other operating expenses in the quarter included amortization of intangible assets of $63.7 million, and acquisition and integration and exit restructuring costs of $49.1 million. In the quarter, we recorded an $11.3 million foreign exchange gain. Recently, we added Enterprise business activity to our balance sheet program, hedging program, which is expected to reduce the volatility of foreign exchange movements on net monetary assets. We also plan to incorporate Enterprise into our Cash Flow Hedging program during the third quarter.

Interest expense is $49.3 million, including $5.1 million for amortization of debt issuance costs. The GAAP net loss per share was $1.50, and includes income tax charges associated with our ongoing legal entity rationalization strategy. On a non-GAAP basis, earnings per share were $1.05, compared to $0.92 in the second quarter of last year.

Adjusted EBITDA was $132 million or 14.8% of sales. While we remain committed to achieving the 18% to 20% long-term EBITDA margin target we established when we announced the deal, second-quarter EBITDA margin was nearly 19% on a constant currency basis.

Turning now to cash. We ended the quarter with $205 million in cash, including $156 million held outside the US. During the quarter, we made total loan repayments of $80 million, bringing the total repayment so far this year to $130 million.

Next I will provide some perspectives on the second half and our guidance for the third quarter of 2015. As we look ahead to the balance of the year, we expect sales momentum to continue. However, growth rates in both Enterprise and Printing will moderate compared to the first half, given the strong results in the third and fourth quarters of a year ago.

From a margin perspective, we expect a continuation of large deal activities, as we drive the OS transition, and additional expenses associated with the Enterprise product rebranding activity. We also will begin to see the impact of price increases in certain international markets, including Europe, and cost synergy benefits. This is expected to result in gross margin generally consistent with the second quarter, excluding one-time adjustments.

For the third quarter, we expect total sales in the range of $900 million to $930 million, flat to up 2.5% year over year, and up 4% to 7% on a constant currency basis. We expect non-GAAP earnings in the range of $1.10 to $1.35 and adjusted EBITDA in the range of $135 million to $150 million. Gross margin is expected to be in the range of 44.8% to 45.8%.

Operating expenses for sales, marketing, R&D and G&A are expected to be in the range of $293 million to $298 million, including stock-based compensation expense of $8 million. On a sequential basis, the increase is primarily related to investments in Mobile Computing. We anticipate cash interest expense of $45 million, and assume an annualized non-GAAP tax rate in the range of 22% to 24%.

I will now turn the call back to Anders for his closing remarks.

Thank you, Mike.

On our last call, I talked about the priorities that we believe will drive the continued success of the business and shareholder value. They are growth, execution, and cultural and business transformation. I would like to provide you with a brief update on each.

Beginning with growth, we are engaging more deeply with strategic accounts, developing cross-selling opportunities, enabling the OS transition, and strengthening our services and wireless LAN businesses. Better together is also showing results. In addition to North America, to the North America retail deal I mentioned earlier, there have been a number of other important wins. These include a retail award in Asia-Pacific that incorporated mobile computers and mobile printers, and a customer in EMEA who purchased an asset-tracking solution involving mobile computers, scanners, and printers. All of these wins further underscore the strength of our end-to-end solutions.

In addition, we are capitalizing on several market trends. These include the need for customers to upgrade technology, including updated operating systems, as well as a deeper penetration of technology into the Enterprise. There's also significant opportunity in Enterprise asset intelligence applications that are currently in the early stages of adoption. Use cases include inventory monitoring to enhance security and availability, order fulfillment to improve customer delivery times, improved manufacturing process controls, and clinician mobility and workflow. With this momentum, combined with an industry-leading portfolio, I'm confident in our ability to continue to grow this business.

From an execution perspective, we are focused on improving operational efficiency and effectively managing our investments for future growth. Our services and channel improvements are two examples, as well as the early termination of several transition service agreements with Motorola Solutions. To improve efficiency and reduce costs, we have exited 14 sites so far this year. We will be exiting or consolidating others, as we continue our integration activities. This includes the consolidation of our North American distribution centers, which should be completed before the end of next year.

From an investment perspective, our priorities continue to be top-line growth, product innovation, strengthening the team, and extending our leadership position. Finally, significant business and cultural transformation is taking place within the Company. For example, since we acquired Enterprise, we have had three specific objectives in our sales organization. First, quickly unify the teams and present one face to the customer. Second, be partner-centric in our go-to-market strategy, which includes improving our effectiveness in the channel, expanding our partner network to enhance our reach, and implementing a best-in-class partner program. And third, begin to transform to a more solutions-based sales organization.

As you are aware, the two sales teams were unified into one global team almost immediately following the acquisition. More recently, we migrated the team onto a single customer relationship management system, which will result in a meaningful improvement in efficiency. We are also well underway with our second objective. More partners have come on board since the start of the year, and we will launch a unified channel program early next year.

As for transformation, we continue to build on a foundation of strong partner relationships and a broad portfolio. Recently, we launched a skill-building initiative focused on further strengthening our sales force's knowledge of the full Zebra portfolio and enhancing our solution selling capabilities. Collectively, achieving these three objectives will enable us to continue to move up the value chain and deliver differentiated solutions to our customers.

Finally, we believe that culture is an enabler. And we are being very thoughtful about how we shape the culture and organization design to support our long-term strategy. I am very pleased with the progress that we made.

In closing, we believe that with the commitment and dedication of our team, together with the trends in mobility, the cloud and Internet of Things, we are well-positioned to deliver on Enterprise asset intelligence and meet the needs of our partners and customers. Thank you for your continued support of Zebra.

I also want to thank our employees for their considerable efforts to realize our One Zebra mission, and hard work to satisfy our customers every day.

And now I would like to turn the call back to Dean 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.

Operator, can you provide our callers with instructions on how to ask a question?

Thank you.

(Operator Instructions)

And our first question comes from Richard Eastman from Robert Baird.

Yes. Good morning.

Hey, Richard.

Just a first question. Could you speak to, now with a couple quarters of Enterprise consolidated here, could you maybe speak to the orders in the quarter for Enterprise? And potentially, what the book-to-bill looked like, and how comfortable you feel now with the visibility that you're gaining on the Enterprise business, and is it more of a backlog-driven business?

Yes, so we feel good about the progress we've seen in the business so far. Generally, we only enter a quarter with about 20% booked, before we -- at the beginning of the quarter, so we really have to win the business in the quarter. But we put a lot of emphasis on pipeline management, and being very disciplined in how we build up our forecast, our pipelines, and the opportunities that we go after. And we feel quite good that we have a much better visibility into the outlook, and we manage it on a weekly basis, basically to ensure that we stay very close to it. And I'll ask Joe Heel also to give some extra color on that.

Yes, sure. Hi, Joe Heel here. In terms of the pipeline management as Anders said, we have added -- lifted our sights a little bit in terms of the duration that we look out ahead. We now plan our pipeline one or even two quarters ahead. That's given us a lot better visibility. We have worked -- also worked very hard on what we call the run-rate, which is the business that goes through distribution that's not in large deals, and increasing that in the Enterprise business is our focus, and has been quite successful for us since we made the acquisition.

Okay. And then, just a second question, maybe for Mike. Could you address the free cash flow year-to-date? And maybe there's a couple big tax payments made in each of the quarters, if that continues. But how does the -- can you give us any sense of what the free cash flow should look like for the full year?

Yes. I guess, the big thing I would say is that, we certainly have big tax payments that go out in the second quarter, so that affected our cash flow. The other thing is, if you -- if we can get you to come visit us here in Lincolnshire, we moved into a new consolidated business which drove some leasehold improvements, which is more or less a lot of it's behind us, which drove some of the CapEx numbers.

So generally -- and as we go forward, I would say we will continue to invest in integrating the Company, that's primarily from an IT standpoint. So I would expect, though the first half had a meaningful part of leasehold improvement, the second half we will continue on with ERP integration activities. So again, I don't expect that the tax payments to be as meaningful as it was the second half. I would expect cash -- the CapEx to be somewhat, maybe a little bit lower in the second half than the first half, because of the building leasehold improvements we made in the first half.

Is there any range, or forecast on free cash flow for the full year you would be willing to offer?

No, we don't do that. But I would say, that you saw that we repaid another $80 million of debt in the second quarter, bringing the total to $130 million. We continue to see good cash flow in the second half, and I think we're on track for our goal of 3 times debt to EBITDA at the end of three years. So I am feeling really good about the management of our cash flow, and getting us to the targets we committed to, at the time of the acquisition.

Okay. Thank you.

Yes.

Next question, please?

Our next question is from Keith Housum from Northcoast.

Good morning, gentlemen. Let me ask a question, I think it's probably going to be a pressure point for you guys today, and it's going to be on your guidance for the third quarter, most particularly the gross margins. Mike, can you give me a little bit more color on how you guys are looking at -- I think you said 45.3% without the one-time costs. But give us a little bit more idea about what the rebranding costs will be in the third and fourth quarter? And is there any more color you can give us on exactly the impact that the large deals have on the gross margin, compared to say, your runway business?

Yes. So I guess, on the -- first of all, just to start out, the margin obviously is at the lower end of what we were expecting when we gave guidance. I will say, I am pleased with the success of the deals that we have, because it put our sales at the top end. And that I think Anders, at some point will talk about the fact Android has been extremely well-received. We won some very large deals. So generally those large deals have -- I think for the business demonstrated that we're successful against consumer grade devices, and there were also the strong pickup of Android.

Be that as it may, roughly 1% of our gross margin hit in the quarter was associated with what I would call unusual items, so a piece of that is rebranding. So with the Motorola transaction, we have the ability to use the Motorola brand for a certain period of time, and that's staggered. So we would expect $2 million to $4 million per quarter through the rest of this year, sort of trailing off next year, affecting our gross margin. We've incorporated that into our guidance for the third quarter.

We also have -- we also had a number of units that we sold to MSI consistent, based on our purchase agreement were at very, very favorable pricing which affected our margin. That stops this quarter. We also -- I would say we had a -- as you go to the grocery store, and you buy milk real cheap, so you buy all the other stuff for a lot, we had some sales went through in the second quarter which was low margin profitability, which will benefit us as we go forward. So there's a number of things, on the unusual one-time items that are go-forward.

So as you look at it in the second half, I would say the reason we have the guidance that we do, is that we have an expectation for continue to be successful in some large deals, which is going to dampen some of our margin reflected in our guidance. We still have the rebranding efforts going forward, which again is $2 million to $4 million as we guess it right now. That's offset by the price increases that we talked about in Europe.

I think that as the year goes on, those price increases will continue to have some modest benefit for us. And then, we also have some cost synergy benefits which are generally on track with what we said from our synergy capture assumptions. So with that, we're expecting second half, again because of primarily because of large deal activity, to be in line with our Q2, excluding one time items.

So it sounds like your fourth quarter should be much better then, from a gross margin perspective than the third quarter? Is that a good take on that?

No. The thing is we -- the what -- and I know Anders will talk more about this, but this OS migration provides a huge opportunity for customers to reconsider what solutions they want going forward. I would call this a huge jump ball, where it provides an opportunity to grab more market share, than perhaps we've been able to do over the last several years. As a result of that, there are large deals coming, very attractive large deals, that as we are successful with, again with our Android portfolio and such, that we should be able to capture those deals. And so, that's where we would say in the second half, we expect to continue to be successful with that -- with the large deals. I don't know, Anders, if you want to give some more color?

Yes, I think we believe that it's very important for us now to take advantage of this discontinuity you can call it, in the marketplace, and really focus on extending our leadership, and pursue these large deals very aggressively. This OS migration is something that happens probably once every decade or something, and we have a product portfolio that's now very well-positioned for this. And our customers are -- also we're very well-positioned with customers to do this. So we want to make sure we get as many of these orders as we can.

But we also, and recognize and our history has shown, that once we get these deals, we will start working the cost side of these things. We will start cross-selling other opportunities into them. We will expand our footprint within those accounts, and margins will improve based on that. It will be a very attractive business over the longer term.

Yes, and just to follow up real quick. I also think, as we win these large deals and gain market share, it will later on build our run-rate business, which comes with a -- which naturally comes with a higher margin for us. So I think winning this jump ball right now is important for our future, building that run-rate higher margin business.

Okay. So it sounds like for this year, the EBITDA margins of 18% to 20% is not likely, but you're planning on being able to reach that goal next year?

Yes, we had talked about our goal was more, at the end of roughly two or three years. So given -- I mean, the one thing I would highlight is, that gives me some comfort is that, if we did a constant currency adjustment for EBITDA margin, we would effectively be at the target we had hoped for three years ago, or that we hope for in a couple years.

So I think we are operating the business in a good way. We obviously have more foreign exchange headwinds than when we closed the deal. Even with those headwinds though, we still think in two or three years, or two or three years from the time the transaction closed, we will hit the 18%, 19%, 20% EBITDA margin that we had told investors. So I think that's pretty good, considering the fact we have the FX challenge.

Okay. And sorry to ask another question, but I guess, last one. For the current quarter, what impact did FX have on your EPS line?

From our guidance, really virtually nothing. If you look at it from a year-over-year standpoint, our gross margin would have been 3 points higher than we reflected. So again, that's a huge impact to our profitability year-over-year.

All right. I'll jump back in the queue. Thank you.

Next question, please?

Our next question is from Tim Mulrooney from William Blair.

Good morning.

Good morning.

You guys announced the Royal Mail win in the UK in June. Can you give us any sense for the amount of revenue associated with that deal, and are you selling any other product or service as part of that deal other than the TC75?

Yes. We, unfortunately we can't talk about revenues for this. We got to have permission from our customers, about what we share. But we are -- we have shared that the TC75 is by far the largest product in that contract, but it also includes some wearable computers, some ring scanners, also a number of services. So it's a much broader portfolio, and we can already see that having [beating now] -- [having beat the] -- or [broad mail asset] customer, we are positioned to be able to pursue all sorts of other opportunities that are coming along. So Joe any further?

Perhaps the other thing that's important and a trend that we see is, together with our partner, which is [Bridge Telecom] in this case, and our ISV partner, [Pocket Mobile], this was sold as a managed service to Royal Mail, which is I think the way that our customers are increasingly interested in consuming these solutions.

Okay. I know Honeywell won the US Post Office PDA business in 2014. I assume they competed for the Royal Mail business as well. Are there any key differentiators in your product or service offering that you can point to, that you think really helped you win this Royal Mail business?

Yes, Joe Heel, again. In this case, we know that the selection process had several levels, and we know that Honeywell didn't proceed, based on the product portfolio. So the product portfolio in this case, our breadth of Android capabilities was very instrumental in our ability to secure [the business].

Got you. Stepping away from the large deals, I'm wondering if we can talk about how the run-rate business performed in the second quarter?

The run-rate business was actually very strong. It grew quite nicely. It didn't grow quite as fast as the large deals, but the run-rate business grew very well. Our printer business, our data capture business and a good chunk of our mobile computer business really is a run-rate business. And that performed very well across the board, across all geographies.

Was it up year-over-year?

Yes, it was up healthily.

Okay. Got you. Thank you. And then the last one, this one's probably for Mike. I'm wondering if, Mike, you gave us an understanding of what we should expect for the cost-cutting targets for 2016. What do you expect to be at on a run-rate basis by the end of 2015? Thank you.

I think if you look at our guidance for the third quarter, that would give you an indication, although I think the synergies will continue to improve even in the fourth quarter. The challenge is -- so a lot of this selling synergies have already been captured in our expense, and reflected in our forecast. The procurement benefits that we've talked about are primarily going to roll out more in the fourth quarter as we go forward. So the guidance I think we gave for the third quarter is, it gives you an idea about where we expect margins to be generally towards the back half of the year.

We'll take our next question, please?

Our next question is from Andrew Spinola from Wells Fargo.

Thanks. I wanted to ask -- just more high level on the OS transition that you've been mentioning during the call. We've been trying to figure out what's driving the strong growth that you've shown for the last six quarters, and guided to here in Q3. And I know part of it has been the OS transition. But it sounds to me while listening to you, that maybe we're a little bit earlier in this OS transition than I thought. Can you maybe give us a sense of what inning we are, and what growth you can see in 2016 and beyond from the OS transition?

Yes, first I'd say, the growth that we've seen has come from basically all our product lines. Printers which is not really tied to any OS upgrade has grown very nicely. Our data capture portfolio has been growing very nicely. The OS migration is really exclusively an issue for our mobile computer business, and but even there, we have seen a lot of growth that are not tied to that. So the growth drivers that we have seen has been very substantial. I'll just go through a couple of other growth drivers, before I'll touch on the OS migration.

But I think the whole better together for Zebra is paying results. We are seeing many more cross-selling opportunities. We are selling -- say if you have installed account, installed base account with one product, we are now -- have much better success of selling one or two more products into that account. We are seeing our channel partners being much more eager to sell the entire portfolio of products. So we see very good overall performance of growth, and how we are executing on the strategy that we set out.

Now the OS migration is somewhat unique. It's driven by some of the older existing OSs today that are very widely deployed, they are going to be taken out of service for -- in some years. This means that basically a lot of our customers will need to find an upgrade path between now and the next several years. And our approach to this is make sure that we are OS agnostic. We want to work with our customers to figure out what is the best upgrade path for them.

But for all intents and purposes, they have two upgrade paths. They can go to Windows 10 or they can go to Android. We now have a strong lead with Android, and we trying to capitalize on that. But we are also working very hard to make sure we have the full portfolio of products to engage with our customers. And I'll also ask Joe to fill out -- fill in a few more bits here.

Yes, perhaps on the growth driver around mobile computing and the OS migration that's occurring there, the book end of the time line is really the end of service that has been announced for Windows E and Windows Mobile, which over 90% of the installed base today is on, as an operating system. That's in 2020. Based on that, we're seeing -- to use your baseball analogy, maybe we're sort of in the third inning.

They're clearly some early adopters that have already made the migration that Anders described. But the bulk of the migration, we believe is still ahead of us. In total, we think there's over 15 million of these mobile computers out there that are installed, and perhaps 10% of them have migrated so far. So that gives you a little bit of an idea of the timing.

Thanks. That's helpful. And one question for Mike Smiley. You mentioned earlier in the call that on a constant currency basis, the business would have done a 19% EBITDA in the quarter. And I know there's a lot of adjustments that occur throughout the end markets and the supply chain when FX changes, but longer-term with the price increases and other things on the cost side, how much of the FX impact can you reverse? So is 19% a relevant number, because you can get back to that in time, or does the FX impact remain as long as the dollar stays here? Thank you.

So just as a reference point, so when we announced the deal, the euro was basically $1.33 and we're at [a base] roughly $1.10 up to $1.08. So as you can imagine it, has a big impact on our top line and our profitability. That said, we still expect at the end of three years, which is when we said we announced the deal, that we would get to the 18% to 20%.

So my point would be is, even with that FX, we feel confident with the synergies that we're doing, with leverage on the business -- in other words, our OpEx is going to grow at a slower rate than our revenue. And that's because of a lot of integration efforts that are going on, we still feel comfortable with the 18% to 20% that we quoted, when we announced the deal, even with the FX.

Yes, one point to add maybe here. Most of our competitors are dollar-denominated companies. And I would say, pretty much everybody's supply chain is predominantly dollar-denominated. So there's nobody who really gets a windfall by having a lot more costs in Europe, say. There's certainly some who have more costs in Europe. But it's on the margin, so I think that everybody is more or less in the same boat.

To that point, as again we mentioned a quarter or so ago, that we increased the prices in Europe. Nice thing is our business continues to grow very strongly even with those price increases. So I think that's another positive thing for our ability to drive towards the 18% to 20% EBITDA margin.

Thank you.

Next question, please?

Our next question is from Holden Lewis from Oppenheimer.

Thank you. Good morning. Maybe -- switching over to the SG&A line. I think at the end of Q1, you said you were at a $50 million run-rate in terms of the synergies. That equates to basically $12.5 million down per quarter.

In Q2, you were at the same revenue stream -- same revenue level as Q1. The costs were actually up a little bit. So I guess, I am trying to get a sense of -- where did all those savings go? How come I can't see them a little bit more in the model?

Well, I think a couple things. Number one is in the first quarter and the second quarter, we had a fair amount of costs that didn't come over. So for example, we didn't have a full complement of finance people. So when you look at our expense, even though some of these areas will increase as the year progresses a tad, relative to what the baseline was when we acquired the business, it's still below what that baseline was, that pro forma number.

The other piece is our top line continues to grow at a rate much faster than our OpEx. So that by definition gives us our -- helps us drive our margin improvement. I think one thing we're trying to be clear on, is that we're driving towards net synergy improvement. So if you really look at it gross, we're doing very well in things we have identified, but we need to make sure that after the increases that we're still net $150 million of savings in year two. So that's why you're seeing not the savings in absolute dollars from the first quarter, because some of those costs really didn't come over when we acquired the business.

Okay. And then, I guess you kind of touched on my second question. Obviously, you're spending on various elements of the business. You've been open about that.

But when you talk about that $150 million, you are referring to that as being a net number to the bottom line, right? You're not talking about that being a gross number, and then you plan on spending some of the windfall, if you will, so the net number is more like $75 million or $100 million? Just want to make sure I'm clear on exactly how you plan to utilize that $150 million?

The net number is what we expect to pull out of the business, and the target I would suggest you focus on is the EBITDA margin of 18% to 20%. So the point would be is, as we drive and are more successful in some of these synergies, we really want to invest IT in the business. So for example, we're continuing to invest in our mobile computer business to expand Android, be able to provide good Windows solutions. So it's not like everything comes down necessarily to the bottom line in terms of dollars, but when we get the EBITDA margin of 18% to 20%, that's sort of the hard target, I think as an investor you should focus on.

Okay. Thank you.

Next question, please?

Question is from Paul Coster from JPMorgan.

Yes, thanks. Mike, perhaps you could just give us some sense of where you stand, from a debt to EBITDA ratio level now? And some investors are looking to see whether you might perhaps start to allocate some capital to buybacks again? Under what circumstances, would you do that?

Our debt to EBITDA has improved modestly from, obviously when we did the deal. Again, we paid down $130 million. We see the second half that we'll continue to generate strong cash flows to further pay down our debt. But as far as buying back shares, I think we're -- I don't want to say I think, we are absolutely committed to reducing our leverage to 3 times debt to EBITDA over the next three years. So I don't think anybody should expect us to be buying back stock for the near-term.

Okay. I think Anders, you mentioned that you went head to head against some smartphones for some contracts, and of course, we're pleased that you won. But of course, it also raises the question of how close was that? What is it that separates your mobile computing solutions from the smartphone off-the-shelf solutions?

So there's a lot of things that separate those. One of the accounts we talked about was actually a win-back, that had already installed a very prominent smartphone, and we were able to win them back to our platform. So it was not say, an incumbent Zebra account. The reason they did that, was they recognized that our total cost of ownership turns out to be much better.

Our devices are much more designed for the use cases that these customers have, particularly within the Enterprise. So a greater control of the operating system environment, much greater security. You can control the applications they use. The ruggedness of the device. You have battery life that lasts the entire shift. Many of these customers are also heavy scanners -- use the device for scanning, and our scan capability is much improved, compared to any consumer device. So we have probably 10 different features or functions that really distinguish us, compared to our smartphone competitors.

I would add two more. Especially as --for those customers who consider Android, remember there are two choices, Windows 10 and an Android. For those customers that consider Android, we've invested heavily in extensions to Android that ensure the security and the longevity of the platform. And those are key factors when people make decisions that they don't find to the same degree on consumer devices.

Okay. My last question is I know that you still have number of transfer service agreements, I think they may be called, with Motorola and your [Kingsgate software]. Any dependencies there from an operational perspective? What is the status now?

We're making good -- we're making very good progress. I think one thing we recently completed was implementing CRM program that's supporting the sales group, it gives Joe and his team visibility to the pipeline. So as Joe was talking about visibility, I think one thing is we [have an] integrated tool, that was his plan. I think, generally everything is on plan. We realize that this is a big task, but we have the right people working on it. So I think we're generally on task for what we're looking to accomplish.

Okay. Thank you.

(Operator Instructions)

We do have a question from Keith Housum from Northcoast.

Hey, guys. I appreciate the opportunity for a follow-up. Mike, just a little bit more clarification on the guidance on the revenue line. I think on an organic base as constant currency, you're talking revenue growth of 4% to 7%. In the quarter, we saw Enterprise up 9%, and printers up 11%. And I think you got an easier comp in Asia, and you have at least part of the Royal Mail deal going into the third quarter. I guess, help me understand why the revenue guidance isn't a little bit higher in the third quarter?

As a percentage of growth, obviously the third quarter last year was much stronger. So as we mentioned, the second half as far as year-over-year growth is going to be a little bit more difficult than first half as we go forward. I think we give a range, because we know that some of these large deals are very binary, you either win them or you lose them. I think in the second quarter, we ended up winning a deal, which by the way the customer requested.

I don't want to use the word demanded, but they strongly requested that we deliver in the quarter, which was different than our forecast. So a lot of this stuff is very lumpy. I don't know Joe or Anders, if you have any more color on the back half?

I think, we believe that -- we started off with a very strong backlog. We had good backlog going into Q3, and the bookings trends certainly support the guidance we've given. But you also got to remember that Q3, particularly Q3 last year from an enterprise perspective, there was a big bounce-up from Q2. So the two comps are a little bit harder, but we still feel we have very good sales momentum.

The pipeline is very good for Q3 and for Q4 and beyond. So we feel good about where we are from a revenue perspective. And if we go back to when we first combined the businesses, I think that was one of the big concerns that, could we get growth out of the business? And I feel good at what we've been able to achieve so far, and the trajectory we are on, that we are growing healthily. We are able to compete against consumer devices, and create the very solid, very profitable business.

Okay. One follow-up to that. Anders, I think you said before, that traditionally your pipeline was like you saw 20% of your pipeline going into the quarter. Is that number greater in the third quarter? And I guess, what could you say that is?

It was a little stronger than what we would normally see. But we still have to win the majority of the business in the quarter. It's not like it's orders of magnitude -- the difference.

Okay. All right. Thank you.

And we have no further questions. I will now turn the call back over to Dean Lindroth for closing comments.

Thank you. This concludes our call for today. Thank you for joining us.

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