斑馬技術公司 (ZBRA) 2015 Q4 法說會逐字稿

Good morning and welcome to the Zebra Technologies Corporation fourth-quarter and full-year 2015 results conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mike Steele, VP, Investor Relations. Please go ahead.

Good morning and thank you for joining us. Today's conference call and slide presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer, and Mike Smiley, our Chief Financial Officer. Anders will begin by discussing our 2015 accomplishments. Mike will then provide more detail on the financials and introduce our 2016 outlook. Anders will conclude with an overview of our strategic priorities in 2016 and elaborate on our outlook. Following the prepared remarks Jo Heel, our Senior Vice President of Global Sales will join us as we take your questions. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year.

Before we begin I need to inform you that certain statements made on this call include forward-looking statements which are subject to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect the Company's current expectations concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the Company's filings with the Securities and Exchange Commission. During this call we will make reference to non-GAAP financial measures as we describe business performance. You can find reconciliations of our GAAP to non-GAAP results in today's earnings press release. In addition year-over-year sales growth references for Enterprise which was acquired in October 2014 and for total Zebra will be in an estimated historical basis.

Now I will turn the call over to Anders.

Thank you, Mike. We are excited to have you on the team. Good morning everyone and thank you for joining us.

I am pleased to report fourth-quarter sales and non-GAAP EPS in line with our guidance. For the quarter we reported sales of $956 million adjusted for purchase accounting reflecting 4% year-over-year constant currency growth. And non-GAAP EPS of $1.51.

After completing our first full year with the acquired Enterprise business we delivered 2015 sales growth of 8% on a constant currency basis. Adjusted EBITDA margin of 16.6%. This transformative combination has positioned Zebra as the global leader in Enterprise Asset Intelligence. This means delivering visibility solutions to help companies improve productivity and deliver better experiences for their customers.

Our solutions enable our customers to sense, analyze and act. With sensing, we enable real-time operational visibility into people and things such as packages moving through the supply chain, merchandise in the store, workflows in a medical facility. Analyzing this operational data which can include status, condition, and work location, results in actionable insights. This gives our customers the ability to make smarter decisions and act on those insights anytime and anywhere.

Zebra's deep expertise and portfolio of innovative solutions have enabled us to be a strategic and trusted advisor to leading Enterprise customers and partners. Our breadth and depth of products, services and technologies is unmatched in the industry. In short, as One Zebra we are well positioned for success.

On slide 5 you will see the solid progress we made last year against our four strategic priorities. We have delivered profitable growth, our first strategic priority by capitalizing on secular growth trends through innovative solutions, solid execution, and cross-selling opportunities. As I mentioned, we finished a very successful year with total Company sales growing 8% on a comparable constant currency basis. This includes 13% legacy Zebra growth and 5% growth for Enterprise.

Sales of mobile computers, printers and scanners were particularly strong as we extended our global market leadership in these product categories. With Enterprise now part of Zebra, 2015 was the first year in which organic Enterprise sales have grown since 2011.

In services and wireless LAN, sales were lower than a year ago. We are focused on improving execution, launching new products, and developing our sales pipelines.

In our overall business, solid growth in North America, EMEA, and Asia-Pacific more than offset weakness in Latin America especially Brazil. From a vertical-markets perspective, we saw strong sales growth in retail, transportation and logistics, and healthcare. Our customers continue to invest in technology to improve efficiencies and in turn profitability. A trend that benefits Zebra in both good times and bad.

For example we improved our win rate against consumer mobile devices in 2015 as customers realized the inherent advantages of our devices that can be tailored to specific work environments. We saw 150% growth in Android-powered devices as our broad offering resonated with customers' needs.

We have also made great progress on our second strategic priority of realizing cost synergies. We realized approximately $130 million in the full-year 2015 and remain on track to achieve $200 million of annualized cost synergies from the Enterprise acquisition by the end of 2016. We saw most of this benefit in operating expenses as we integrated and rationalized our sales marketing and engineering teams.

Our third strategic priority has been to delever our balance sheet. We are pleased to report the pay down of $165 million of debt associated with the acquisition in 2015. We are on track to decrease our financial leverage to less than three time net debt to adjusted EBITDA by the end of 2017.

And finally, our fourth priority has been to operate effectively as One Zebra. Today our customers consider us a more strategic partner. Our ability to provide solutions to meet our customers' long-term business objectives will further enable us to deliver the full value of the combined business.

As an example, we won the business of a leading national food and beverage company through our Better Together value proposition, displacing a major competitor. We were able to leverage the strength of our printer solutions to subsequently secure their mobile computing business with our TC70 Android device and provide services to help them transition their legacy applications.

Regarding our integration work we are pleased with the progress we have made however we still have more work to do. To date we have unified our organizational structure and have begun to establish a strong common Zebra culture. We have migrated and consolidated engineering systems, implemented sales tools, rebranded the Company, and reduced a number of real estate sites.

Turning now to the fourth-quarter highlights on slide 6. As I mentioned sales of $956 million for the quarter translated to 4% growth in constant currency. Continued strength in North America and Asia-Pacific more than offset softness in EMEA and a decline in Latin America. The under performance of EMEA was primarily driven by macro factors with particular weakness in Russia, Turkey, France and the Middle East. However we saw solid demand in Germany and the UK. Asia-Pacific growth continued to be propelled by the business in China.

From a product perspective, sales were higher in mobile computing, larger companies continued to be early adopters of Android. This is laying the foundation of our run-rate business as smaller customers who have traditionally been served by our channel partners determine how they will transition to next-generation operating systems. Both data capture and printing performed well in the fourth quarter. The strength within our data capture business was broad-based and continued to be bolstered by 2-D imaging. The printing business continued to be a strong performer in all product categories with notable growth in mobile printing and the Link-OS software platform for device management.

We had a strong fourth-quarter adjusted EBITDA margin of 17.3%. We continued to balance investments for growth with prudent expense control while realizing acquisition costs synergies. With this continued focus, we are confident in our ability to further expand margins over time.

With that I will turn the call over to our CFO, Mike Smiley, to review our financial results in more detail, our integration progress, and to introduce our 2016 outlook.

Thanks, Anders. Before I discuss fourth-quarter results shown on slide 7, I would like to remind you that we completed our acquisition of Motorola's Enterprise business on October 27, 2014. As a result with the exception of certain sales growth references, 2014 information reflects the financial results for the Enterprise business for the last two months of the year.

Total GAAP sales for the fourth quarter were $953 million, excluding the impact of purchase accounting, total sales for the fourth quarter were $956 million. Enterprise sales excluding purchase accounting adjustments were $636 million, up 2% year over year on a constant currency basis inclusive of estimated 2014 Enterprise sales.

Data capture and mobile computing sales grew and sales of wireless LAN and services declined. Pre-transaction Zebra sales were $321 million, up 7% in constant currency. Demand remains strongest in retail and transportation and logistics verticals. Momentum in healthcare also continues to grow. Top-growth drivers again include e-commerce, mobility, share gains associated with the OS migration in mobile computing, the transition from scanning to 2-D imaging and data capture and the continuing refresh cycle in printing.

From a regional perspective on a comparable basis, sales in North America grew 7%. We experienced the strongest growth in the data-capture business. Mobile computing continued to be driven by strong growth in our Android portfolio. Printing, tabletop and mobile computers were out-performers. EMEA continued to experience softness and was up 1% from a year ago on a constant currency basis. Scanning and printing sales grew, offset by lower mobile computing sales.

Sales in Asia-Pacific grew 9%. The region continued to be led by strong performance in China. Growth in mobile computers were driven by retail and transportation logistics both supported by trends in e-commerce. The printing business also performed well with mobile printers posting very strong growth.

In Latin America sales declined 12% as a result of a difficult macro economic environment. The region experienced growth in printing but currency devaluations continue to drive local currency prices higher adversely impacting the overall demand environment. The region is stabilizing and we remain focused on pursuing selective opportunities and improving demand generation.

GAAP gross margin for the quarter was 44.9%. Excluding the impact of purchase accounting gross margin was 45.1% consistent with our guidance. Normalized for currency gross margin with comparable to third-quarter 2015 gross margin of 45.5%. Enterprise gross margin of 42.3% was down slightly compared to the third quarter. Improved services margin resulting from operational efficiencies was offset by the impact of a large mobile computing deal and currency changes.

Pre-transaction Zebra gross margin was 50.7% compared to 49.7% in the fourth quarter of 2014. The impact of currency has been offset by lower product sales in hardware and supplies, the price increase in Europe and the benefits of our hedging program. Operating expenses for sales and marketing, R&D and G&A were $291 million including $6 million of stock-based compensation expense.

Operating expenses were favorable to our prior outlook due to good expense control and lower stock-based compensation expense. Other operating expenses include acquisition and integration and exit and restructuring cost of $54 million and amortization of intangible assets of $61 million. In the quarter the net loss per share on a GAAP basis was $0.13. Non-GAAP earnings per diluted share were $1.51 compared to $1.22 in the fourth quarter of 2014. Adjusted EBITDA increased 14% year over year to $165 million or 17.3% of sales.

Turning now to the balance sheet and cash-flow highlights on slide 8. We ended the year with $192 million in cash which includes $166 million held outside the United States. In the full year of 2015 Enterprise -- cash was negatively impacted by significant integration costs associated with the Enterprise acquisition. This includes $51 million of working capital settlement payments to Motorola Solutions associated with the acquisition and $34 million of real estate capital expenditures primarily related to the buildout of a leased facility to accommodate our Illinois-based employees.

As of year end we had $3 billion of long-term debt consisting of $1 billion of senior notes due in 2022 and a $2 million term loan maturing in 2021. The debt was used to finance the October 2014 Enterprise acquisition and we have been paying it down aggressively. With $165 million in total principal payments in 2015, year end net debt to adjusted EBITDA ratio was approximately 4.7 times. Subsequent to the end of the year we made an additional $80 million in debt payments.

For the full-year 2015 we generated $103 million to cash flow from operations and made capital expenditures of $114 million. In 2016 we expect a significant improvement in free cash flow primarily driven by sales growth in EBITDA expansion, approximately $90 million to $100 million less integration and restructuring costs, at least $75 million improvement in working capital, as well as approximately $30 million lower non-integration related capital expenditures. We also expect to reduce our minimum target operating cash level by approximately $50 million. As a result we are confident in our ability to reduce debt by at least $300 million this year.

Roughly one-quarter of our total Company sales are denominated in euros. Given continuing elevated levels of currency fluctuations, we have been evaluating the options to cost effectively mitigate earnings and cash flow volatility associated with foreign exchange rates. As a result of that review in January we implemented a hedge of approximately 80% of Zebra's net euro cash-flow exposure for the entire year effectively locking in $1.09 euro rate.

Finally, in light of the external focus over uncertainties on the macro economic environment I would like to point out that our liquidity levels are solid. We have no near-term debt maturities and an untapped $250 million revolving credit facility with no financial covenants triggered on our long-term debt unless we draw down more than $50 million.

Before moving on to our guidance I want to review our Acquisition Synergy Program on slide 9. As we discussed last quarter we have a stated goal to achieve $200 million of cost synergies on a run-rate basis by the end of 2016. In 2015 we recognized significant synergy benefits and improved our operating leverage from a combination of organizational realignment, real estate consolidations, and other cost reductions. We realized approximately $130 million in cost synergies in 2015. We expect our P&L to benefit from realizing an incremental $50 million in cost synergies during 2016, $30 million of which will improve our gross margin and $20 million to reduce operating expenses.

Finally for 2017 we anticipate realizing an incremental $20 million of gross margin synergy benefits after reaching full run-rate benefit as of the end of 2016. We are very pleased with the integration efforts thus far. As we said in the past, given the size and scope of the transaction, the integration of the IT systems is very complex.

Modernizing, simplifying and integrating these systems into Zebra's IT network will increase efficiency and meet the demands of our growing business. It will also enable us to conclude our transition service agreements with Motorola Solutions.

Consistent with our prior outlook the rationalization and modernization of Zebra's IT platform and ecosystem will result in a remaining $130 million to $150 million of integration related costs over the next two years of which approximately 20% will be in the form of capital expenditures. We expect the vast majority or roughly 80% of the remaining total-integration cost to be incurred this year. The expense portion of these costs are one-time in nature and will be excluded from our non-GAAP, P&L results. These efforts are expected to drive additional operating expense efficiencies and reduce our ongoing capital expenditures once completed.

I will now review our 2016 outlook and in a few minutes Anders will provide further perspective.

Given the quarter-to-quarter volatility of our business, in addition to the quarterly outlook we are providing an annual outlook to provide a longer-term view of our business. On slide 11 you will see that for the first quarter we expect net sales excluding purchase accounting adjustments to be flat to down 3% from the comparable net sales of $899 million in the first quarter of 2015. This expectation reflects a range of a negative 1% decline to positive 2% growth on a constant currency basis.

First-quarter 2016 adjusted EBITDA margin expect to be in the range of 16% to 17%. Non-GAAP earnings are expected to be in the range of $1.19 to $1.34 per share. Compared to the first quarter of 2015 this outlook reflects growth in Asia-Pacific and EMEA offset by a decline in North America. While North America remains strong in the fourth quarter, we did experience some softening in December as a typical benefit we received from the year-end budget flush was not as significant as in past years. This softening was driven by a cautious tone around capital spending resulting in a lower backlog as we entered the first quarter.

In addition we had an exceptionally strong first quarter of last year with North America sales growth of 13% year over year, resulting in a challenging comparison for the first quarter of 2016. Our outlook also reflects a lower gross margin as compared to the first quarter of 2015 primarily due to a negative FX impact and changes in product mix. However the gross margin should be higher than the fourth quarter. Operating expenses are expected to be flat to slightly lower in than the prior-year period.

The full year the company expects net sales excluding purchase accounting adjustments to grow 1% to 4% from the comparable net sales of $3.7 billion for the full-year 2015. This reflects an expectation of year-over-year growth of 2% to 5% on a constant currency basis. Adjusted EBITDA margin is expected to be in the range of 17% to 18% for the full year of 2016 driven primarily by a higher gross margin in improved operating expense leverage compared to 2015.

For the full-year 2016 we have also assumed the following shown on slide 12. We expect capital expenditures of $70 million to $75 million including $15 million to $20 million related to acquisition integration. Depreciation and amortization expense of $310 million to $315 million. Interest expense of $195 million to $200 million including amortization of debt-issuance costs of $18 million to $20 million. Share-based compensation expense of $33 million to $35 million, a non-GAAP tax rate of approximately 22% to 24% and cash taxes of approximately $50 million to $60 million.

I will now turn the call back to Anders.

Thank you, Mike. As we kick off 2016 we remain focused on extending our leadership within Enterprise Asset Intelligence by executing on our four strategic priorities shown here on slide 12. I am confident that we can continue to deliver profitable growth for the full-year 2016 as we capitalize on secular growth trends and prudently manage our cost structure. This confidence is supported by customers in all verticals recognizing the importance of technology in achieving their long-term strategic goals.

We believe this focus will continue to be critical for customers whether they are investing for growth or looking to streamline their operations and improve efficiencies. As we drive solutions-based selling you can leverage our expertise and expand our share in key verticals such as healthcare as investments by customers within this vertical continue to accelerate.

The dynamics of the retail industry, our largest vertical historically, are evolving as e-commerce and Omnichannel are now top priorities. These initiatives require retailers to meet shoppers' growing expectations and provide product when, where and how customers want it. This, in turn requires further investments in technology to receive accurate and timely data on inventory availability.

As e-commerce plays an increasingly more vital role in their businesses, Zebra is the trusted partner helping them with the tools to drive productivity and efficiencies. As a related benefit to the evolution of retail we are in a position to benefit from the extension of this trend in T&L as the increased number of packages from retailers to consumers drives the need for additional investments in technology by package-delivery companies. We feel very optimistic about the opportunities today and in the future within retail and T&L.

We are excited about our healthy pipeline of innovative products and solutions. For example, we launched our new mobile computer the TC8000 which enables users to be 14% more productive through improved ergonomics and versatile capabilities. In addition our new cartridge-based tabletop printer the ZD420 has an ultra compacted design and provides Zebra an annuity revenue stream of aftermarket supplies. These high margin, high volume products demonstrate our ability to build on well-established staples within our portfolio and reinvent them to meet the changing needs of our customers. Both products contributed to very strong customer engagement and heavy booth traffic at the National Retail Federation Trade Show last month. In 2016 we are also investing in Windows 10 solutions as legacy Windows Mobile Operating Systems are expected to go end-of-life by 2020.

In our services business, we strengthened the leadership team and made changes that will make us more competitive and support meaningful improvements in 2016. For example, we are starting to benefit from increased attached and renewal rates on our product support plans. As we move forward and maintain our focus on increasing efficiencies, cost reductions, and pricing, we expect to drive margin expansion in services. While we continue to invest in R&D to further extend our leadership position, we will also maintain prudent management of our cost structure as we further improve operating expense leverage. As Mike discussed in detail earlier, we expect to realize $50 million of incremental cost synergies in 2016, the majority of which will positively impact gross margin.

Another top priority for us is to improve free cash flow in 2016 and 17 and delever the balance sheet. Lastly, we will continue to make meaningful progress on our transition to One Zebra as we execute the remaining steps of our integration and leverage the Zebra brand.

Our teams are performing extensive IT systems integration work including the start of our ERP system transition next quarter. We have the appropriate expertise and resources to execute well through the 2017 integration timeline. In addition, a key customer facing initiative is the implementation of our new Channel Partner Program. This program is scheduled for a second quarter launch which will simplify program administration for our partners, align our goals with theirs, and ultimately enable growth for Zebra and our partners.

And now I would like to offer an additional perspective on our 2016 sales and EBITDA outlook. For the full-year 2016, we are expecting sales growth of 2% to 5% on a constant currency basis. While our annual guidance does assume some continued headwinds from a macro perspective, we are not anticipating a meaningful change in the environment. As we have indicated for the first quarter, we are expecting approximately flat sales year over year on a constant currency basis due to lower sales in North America. However, we have a healthy global pipeline in our core markets and consistent expectation of growth from across our reseller network.

In North America we expect growth beginning in the second quarter and through the end of 2016. We expect the strongest growth this year in Asia-Pacific driven by ongoing momentum in China and India particularly in retail and T&L. In EMEA we expect continued solid growth in Germany and the UK, while Russia, Turkey and the Middle East will likely remain soft. Latin America is stabilizing and we could see some modest growth in the region.

As a result for the full year, we feel confident in our expectation to continue to grow the business. With expanding margins, managing our overall cost structure and increasing working capital efficiencies, we will generate increased free cash flow and reduce leverage.

In conclusion, our business is performing well. We are positioned for long-term success and are reiterating our long-term financial goals as shown on slide 13. We continue to see sales growth of at least 4% to 5% over a cycle which is faster than the market rate of growth. We also expect to achieve adjusted EBITDA margin of 18% to 20% by the end of 2017 driven by growth, gross margin expansion, and operating margin leverage. This also assumes no material change to the recent global currency change environment. Finally we expect to achieve net debt to adjusted EBITDA of less than three times by the end of 2017. This will be driven by a total of at least $650 million of debt pay down over 2016 and 17.

And with that I will hand the call back to Mike Steele.

Thanks, Anders. We reserve the balance of the (technical difficulties) Q&A. We ask that you limit yourself to one question and one follow-up so that we can get to as many of you as possible.

Operator, please let our callers know how to ask a question.

(Operator Instructions)

Richard Eastman, Robert W. Baird.

Hi. Just -- Anders, as we look out to 2016 against your constant currency growth forecast of 2% to 5%, could you just speak to the product lines and where you would expect the continued growth to come from -- from multiple printer -- just line them up relative to that LC growth rate? And then I have one follow up.

Yes, first we feel confident about the full-year growth expectations that we have and we had a very strong 2015 and we built a lot of momentum across the business there. Our portfolio did very well in 2015. We gained share in most of our product lines globally. Three of our four regions had solid growth.

We launched some new products in the beginning of 2016 that we are very excited about. The TC8000 is a great example of the new -- one of our highest running products that we reinvented in the new fashion. We got great feedback on that product at the NRF and since. We also launched a new tabletop printer. That is the highest volume of our printer portfolio which has also a cartridge-based model so you can make it very easy for customers to load ribbons and that drives an annuity-based revenue stream for us.

As the year goes on we have a number of other attractive new product releases. Our pipeline is very healthy. We have a very detailed approach to build up the pipeline both based on individual customer accounts but also looking at product and so far we feel that we have a very solid outlook for the year.

Okay. And then just one last question. There has been a -- as a follow up. There has been a number of additions here to the marketing team, to the global marketing team. All of which are right in front of the Channel program adjustments that you are going to put in place in the second quarter. Could you just walk through the structured there? Maybe what the additions are intended to accomplish?

Yes. We announced I think it was early this week, right, that Jeff Schmidt would become our new senior vice president and chief marketing officer, so he will lead the overall marketing organization. So he joined us on Monday officially. He also visited with us at one of our sales kickoff meetings to get a good view of what the entire business looks like. We are very excited to have Jeff on board. We think he will be a great addition to our team. Under Jeff he has a number of different functions. One of those is a Channel operations team. That Channel operations team is the one to really own developing the Channel program and make sure we work with the regions to launch it effectively into each of the regions. So, Jeff has the team that owns the development and implementation of the new Channel program but clearly they also work very closely with the regional sales teams to make sure that the region is ready to engage with the partners and be off to a good start.

Okay. Thank you very much.

Saliq Kahn of Imperial Capital.

Thank you all. Hi Anders. Hi Mike.

Hi.

Hi.

Hi guys. As I take a look at the overall product portfolio and the changes that you have made to it, you certainly have brought a lot of sleekness and change to your ergonomics altogether to bring about a lot more ease to end customer. However if I take a look at what your competitors are doing and I take a look at your product portfolio, are you merely trying to keep up with them or are you trying to find a way to become a lot more competitive, take customers away from them and increase theoretically your market share?

Well, so if you look our performance in 2015, we gained market share in most of our large product lines. We believe that we have more competitive product lineup. We take great pride of the strength of our products and the innovation of our products. As we look into 2016 there is a lot of new and very attractive extensions of existing products but also some new product concepts that we are very excited about. So we feel we are very dependent on having a vibrant product portfolio in order to demonstrate value to our customers and we feel that the portfolio we have should enable us to continue to gain market share and extend our leadership position in the industry.

As my follow up -- what you just noted included was the fact that the business operations, the integration, and the rebranding initiatives that you have been working on throughout 2015 and it was very evident at the NRF conference as well. How does this improve your overall sales cycle and how does it help you go ahead and have a more deeper and more of a integrated conversation with your end customer?

I'll start and then let Jo Heel add to this. Our customers when we talk to our customers, we hear two themes quite regularly. One, they feel that the combined business, the combined Zebra and Enterprise businesses, is more strategic to our customers. They say that the lineup we have now, the capability and competencies we have now and the vision we have make us a more strategic partner to them and they tend to invite us in to be part of their more long ranging plans to make sure that we can develop the right solutions for their needs.

The other thing they have been saying goes more to your point about rebranding, that from their perspective the integration has been quite seamless. They have not seen a lot of challenges from the integration or missteps in the integration. They feel that we have actually been handling this quite well. Both of those things I think are making us a much stronger partner with our customers and have access to more of their longer-term thinking. Maybe, Joe, you have some more thoughts?

From a sales perspective we see the benefits in many areas, but three that I would perhaps call out. The first is the confidence that the new brand and the new presence gives our customer is really essential to driving changes like in our larger single opportunity around operating systems migration. That is what customers need. They need that confidence to interact with us and we are projecting that now and we're seeing that with our customers. They have that confidence as Anders was saying to elect us to be a strategic partner for them.

The second is that the customers are feeling the better together that we're bringing to them. The fact that we can bring the full portfolio of our capabilities to them. Anders was mentioning one of our large package goods customers have elected to go with us for precisely that reason and we are seeing more and more of those opportunities.

And the third one and I am particularly excited about this, is our ability to bring solutions to the market and customers are really believing that and seeing that now in some of the things that we are doing. Where we are solving their business problems and they have confidence that we can do that.

Thank you guys. I look forward to speaking with you later on.

Thank you.

Jason Rodgers, Great Lakes Review.

Hi. Good morning.

Good morning.

Good morning.

I was wondering if you could talk a little bit more about that ERP consolidation, if that's going as anticipated and if you expect to remain on track as far as (inaudible).

The EOP integration is going as planned. We feel that it is going well. We have a strong team of people who have been working on this for quite some time now and we have a robust product plan or project plan with lots and lots of detail behind it. We track it on an hourly basis or a daily basis as far as what progress and what deliverables we have.

We are looking to implement the first phase of the ERP conversion in Q2 in Asia and then we will go live with the full global entity middle of 2017. So we get a chance to road test it and then add some additional functionality for the full-year roll out. We get great benefits from this. We get a much more of a rationalized modern IT platform. What we have had so far has been a lot of disparate IT systems which drives a lot of inefficiencies. So if you have to enter data on two systems or sometimes three systems and they don't transfer data between them very well. So this provides a much more robust and streamlined IT platform for us and that will drive also great cost benefits as we go into the future.

And as a follow up did any large mobile computer deals have an impact on the fourth quarter and what is the expectations for Q1?

Every quarter we have large deals. It would be bad if we did not have large deals every quarter. So we had large deals in fourth quarter. I would not say that they were different from any other quarter particularly.

Mike Smiley. I think one thing is actually our fourth-quarter results were very comparable to the third-quarter excluding FX so it was really in line with our guidance. The euro was basically in Q3 about 111 versus 109 in the fourth quarter. We had service -- our service business had margin improvements offset by some of the large deals that Anders talked about and our Legacy Zebra printing margins were flat sequentially. So generally the fourth-quarter margins were really what we expected.

Okay.

Mr. Rodgers, do you have anything else?

No. I'm just following up with that so Q1 there was no major mobile deals out there that are larger than normal that would impact margin?

No. I think the outlook for Q1 is also for normal rate or normal volume of larger projects. There is nothing that sticks out as particularly bigger than normal. But we had a good pipeline for large deals for the full-year.

Got it. Thank you.

James Faucette, Morgan Stanley.

Thank you very much. Just a couple of questions from me. First, the strength in Motorola and I think you mentioned this but wanted to make sure is that, is that from new products and are we expected to gain steam as we head into 2016? And then talking about specific geographies, obviously you had a big pickup in results this quarter with a bit of a downtick in North America and you spoke to some of the dynamics there but I am wondering how much of that maybe attributable to a couple of big customers or is this is something more -- I guess more broad based and widespread?

So the first question was around the strength of the Enterprise business and the second about the softness at the end of Q4, is that right?

That's right. Yes.

The strength of the Enterprise business I think is multi faceted. We have worked hard on making sure we have a very competitive product lineup. Android has been a strong growth driver for us so far. We have by far the broadest portfolio of Android products of anybody in the industry and our win rate in Android is very high. Higher than the overall win rate, say it is for us across all operating systems.

But I would say it is more than product. I think the integration, the combination of our two companies have helped both sides. I think the better together story is very much resonating with customers. We have seen many examples where we mentioned one on the script here where printing led the way and got into new account first but then we were able to pull in mobile computing afterwards. But we have many examples of where we have done it the other way.

Part of the growth is the Better Together and I would say also we have executed well. We have improved on our services performance which was a bit of a drag before and we -- I would say the culture of the combined company is good. People are -- I don't hear much talk about us versus them and things like that. It is very much we are all in this to try to get make the company as successful as we can.

I will let Joe expand a little also.

I might support what Anders is saying in terms of the strength of the Enterprise business with two specific points.

One, I already touched earlier, on the subject of the OS migration which is really where we have a leadership position and we have been quite successful in 2015 and we see that continuing here in the first quarter. As we are driving that migration from Legacy Windows operating systems to Android and to a certain extent also into Windows.

And the second one as we saw really a broad strength in our scanning business as well. Our scanning business, as you probably know, is undergoing a transition in technology from 1D to 2D and we have assumed a leadership position in that transition as well. And what is fundamental about that is that the Android transition is largely driven by large deals where as these scanning transition is also broad based in the channel. So we are really seeing the strength on the Enterprise business in two dimensions.

Maybe just to expand one more point on this. I think the -- we talked -- most of these comments were kind of North America centric but if you look at the Enterprise business performance in 2015, the international markets were very strong. Asia was particularly strong and we had several large wins for mobile computing in Europe. So this is very much a diversified business like Zebra's Legacy business where we have board portfolio products, selling to a diversified set of vertical markets and geographically also very diversified.

That scanning growth I was talking about --

Yes.

Our biggest contribution came from China for example. So it is broad-based.

Yes. Broad based. Yes.

And then as far as -- I'm sorry as far as looking at North America and in any weakness there was that related to specific customers or was that more broad based?

It was more broad based -- we talk about budget flushed. That tends to be from many customers. If there was more I think a general cautiousness among our customers and they were I suspect looking at what was going on with their share prices and wondering what there was meaning for 2016 and being a little bit more cautious on capital spend but it was not anything specific to anyone customer or any large customer.

And have you seen that persist early in the year?

I think the start of January is always a bit weak and I think there was commensurate with normal seasonality. As we look at the guidance we gave for the full-year also, we expect basically normal seasonal increases, quarter over quarter for the year. So we are not assuming that there will be some form of heroic recovery. This is just based on looking at the last five to seven years of how much of our revenues come in Q1 versus Q2, Q3, Q4 and looking how that should play out.

Thanks.

Keith Housum of Northcoast Research.

Good morning, gentlemen. I was hoping you would spend a little bit of time talking about the supplies and services. As I look at perhaps what we were expecting and what you guys have done in quarters past, it looks like both of those have lagged a little bit here in the fourth quarter. What is your expectations and your thoughts going into FY16?

Services is a scenario that we have spent a lot of effort to strengthen. We believe services should be a good growth driver for the business. We brought in some extra leadership, some new leadership in the business to augment the team we had, so we could have more focus on both driving the sales side but also driving operational side. We made I think great improvements in our execution. The customer facing performance of break fix repair return statistics are much better than they were when we first assumed the business. We have reduced the cost basis for most of these services and we have seen an increase in tax rate for new services.

We feel quite good about where we are and we feel confident that we should see good growth in 2016 from services. I would like Jo to add on that.

From a sales perspective, of course, you know that services is one of those that benefits from bookings that then deliver revenues over a longer period of time. So what we have been very focused on and I think successful with in 2015 is on the support side increasing our attach and renewal rates. Those will deliver increasing revenues this year. On the managed and professional services increasing our bookings and we actually had an exceptional year in terms of increasing our booking last year in managed and professional services. That continues here in Q1.

We have also been focused on migrating our managed and professional services to more higher value types of managed and professional services, ones where we have some unusual IP or unusual value added and that's been the focus of that which will help us with the margins that we can deliver from those services in addition to the cost reductions that we are taking. I also wanted to make sure I heard you talk about services and supplies. Did I hear that correctly?

Yes, the supplies were down 8% in the quarter year over year.

I think supplies now -- for the year supplies was up I think it was 8% in constant currency. In Q4 I don't know, I don't have that data off the top of my head, but constant currency was a lot better. So supplies has a high proportion of supplies in Europe than we have for our normal products. So Europe is a very large part of our overall supplies business. Let me see if I can find a number here. I don't see --

I can follow up with that off record.

Yes. We can follow up off line.

I did not want to lump that in with services.

Yes. Supplies are --

I will follow up. That's fine.

Supplies for the full year, by the way, are up 1.2% nominal currency -- by the way I would also argued in 2000 -- we have been seeing very strong growth in supplies. I think that in 2015 we recognized the benefit of wristband products that, I think makes the 15 to 14 comp a little bit more difficult.

And profitability of supplies have gone up as we have in sourced some more of our wrist band manufacturing, so we have seen a great improvement in margins.

Thank you. If I could just follow-up on a previous question regarding some of the cautious commentary as you exited fourth quarter. As you look at the demand going into FY16 your expectations that you are hearing from the customers regarding your large projects, is there a hesitancy with people moving forward or anybody talking about deferring pricing out in response to the macro demand?

At the high level I would say that we are not expecting any material changes to the macro environment or how our customers behave. We have very good feedback, very encouraging feedback from our reseller communities. They certainly believe that 2016 should be a good year with good growth. I think the issues we saw in the end of Q4, beginning of Q1 were more isolated and we believe temporary, in that there was more, I think, driven by people looking at the stock market and getting cautious about what that meant for the business and did not want to lean in to the same extent, so budgets gets pushed out a bit. It takes a little longer for companies to hand out operating budgets to their different divisions and CapEx but once that happens things go back to more normal, we believe.

We have seen from end of last year some deals got pushed from Q4 into all of 2016 and some customers may have looked at some larger deals and instead of giving us one PO they gave us one PO for P1 and P2 -- or Q2 and so forth but you should remember also, that our value proposition is one that really works in good times and bad times. In good times our customers are working with us to expand into new retail stores, new factories. In tougher times they use our equipment to trade OpEx for CapEx. We have very short and well defined return on investment calculations so normally our products proven to have an ROI of less than one year to upwards of maybe two years and even in tougher time companies tend to be comfortable with those types of paybacks.

One other thing that -- or maybe two other things that give us a perspective on this cautiousness that we may have seen at the end of Q4 is number one, our pipelines for Q2 and the rest of the year are very strong. That gives us a lot of good confidence. Also as we speak with our reseller partners they reflect a lot of confidence to us in terms of the growth prospects that they see for the year. That puts in perspective I think what we have seen.

Great. Thank you.

Josh Berman, William Blair.

Hi. Good morning.

Good morning.

Just two quick ones. One, I know you gave some of the components that go into free cash flow but I was wondering if there is a certain dollar amount that you are targeting for 2016?

I think our goal is to pay down $300 million of debt. We are confident in our ability to do that. Again we expect some improvement from our EBITDA margin expansion and just regular business growth. We also know that we have improvements in our working capital which should drive at least $75 million of additional cash flow from what we had last year. We will have $90 million to $100 million less integration spent from 2015. We also have our CapEx that is not related to integration down by about $30 million. I think Anders mentioned the fact that we had some spending in Illinois to bring the facilities together for the two companies.

We also expect to reduce our cash levels by about $50 million. So when you put it all together, we are very confident in reducing our debt by $300 million in 2016 and $350 million in 2017. Again, to get our leverage below three times debt to EBITDA.

Alright. And then switching topics, I was wondering if you could dive a little bit more into the Windows 10 opportunity? Maybe how big is that? Especially relative to the Android transition?

There are no Windows 10 mobile products on the market at the moment. But I will put it in context maybe of what is more going on from an OS migration perspective. Today, virtually all our customers or certainly most our customers are well aware of the need to migrate to newer, more modern operating systems. Android has been the primary beneficiary of this so far. We were early investing in android and saw that as a great opportunity for us.

Microsoft is planning on coming out with Microsoft Windows 10 later on this year and there will be some customers who believe that are very loyal to Microsoft and would like to have Microsoft 10. We have some Microsoft 8 products today but which we would upgrade to 10 and then come up with some more products later on in the year and we want to be, basically operating system agnostic when we talk to our customers. We don't want them to feel that we are only supporting one operating system. We want to be able to go in and have a conversation with them about their unique situations and be able to offer the right type of solutions for them. Maybe, Joe, you have some?

What I would say is first we should recognize that still the majority of our revenues today come from Windows based operating systems. The transition to Android is happening very fast as Windows 10 Mobile -- the mobile version of Windows 10 had not been released for a very long time. With that now happening we do see some customers and it is very specific to the needs of individual customers. Logistics is a vertical where we see a bit more of it than others, express a need and a desire, in fact, to be on a Windows 10 mobile platform. And as such we are developing those devices and we will see that they will occupy a significant portion of the market.

Great. Thank you.

Paul Coster, JPMorgan.

Hi, Paul.

Hi. This is Paul Chung on for Paul Coster. Thanks for taking my questions. Question on the core printing business. It has grown nicely really ever since 4Q of 2013. You mentioned upgrade cycles have been a strong contributor. How much of that growth has been from existing customers, how much from market share gains in business and finally can you confirm how cross selling initiatives with the Enterprise business have been going? Has it been a material contributor? Thanks.

I think that the strength of the printing business is really driven I think by a number of different factors. Ultimately, I will bring it back to, I think we have just executed well on our overall print strategy over many years. We have gained a lot of shares, so this upgrade or refresh cycles but we also gained a lot of share.

I think according to VDC we have gained about a percent of market share per year for the last several years. And I would attribute that to us having a very compelling and competitive product lineup. Some of the new things we had talked about like [Linkquest] is one that unifies the look and feel and the user interfaces and how you interact with the printer across our entire portfolio. Some things are very difficult to replicate for smaller suppliers. I think the way we engage with the Channel also gives us some benefits with the scale that we have there and how we can provide very compelling value propositions to our Channels and our end users. So I would say it's not really one thing that is driving the strength in the printing business. It is really a number of different things. Joe might have some more comments?

Yes. I would say we have seen a market share expansion in the printing business and I would attribute at least a part of that, a significant part of that, to the Better Together to the ability to operate and cross sell between them. I'll give you a generic example of that. The strongest vertical for the Enterprise business was -- and is retail, right, in which we have mobile computers and scanners which we deploy and there are applications such as when you change the pricing at the retail level, where you would like to not only scan and understand the pricing on an item in the store as it is, but change the label immediately. This plays right into our technology of mobile printing which goes very well with that scanning capability that we already have on the retail floor. So we have seen an expansion of solutions like this where we are able to put the two technologies together to a solution to solve a problem like price mark downs and changes.

Great. Thanks.

This concludes our question and answer session. I would like to turn the conference back over to Mike Steele for closing remarks.

Thank you all for your questions. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.