斑馬技術公司 (ZBRA) 2016 Q4 法說會逐字稿

Good day, and welcome to the fourth-quarter 2016 Zebra Technologies earnings conference call.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Mike Steele, Vice President of Investor Relations. Please go ahead.

Good morning 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 Olivier Leonetti, our Chief Financial Officer. Anders will begin by discussing our fourth-quarter highlights and key drivers of the results and progress made in 2016. Olivier will then provide more detail on the financials and discuss our outlook for 2017. Anders will conclude with discussion of Zebra's strategic priorities. Following the prepared remarks, Joe Heel, our Senior Vice President of Global Sales, will join us as we take your questions.

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 and at the end of this slide presentation.

Also our financial results include the divested wireless LAN business through October, 2016. In this presentation, our references to organic sales growth for the consolidated Company, the enterprised segment, our services business and all regions are on a constant currency basis and exclude the sales results from the wireless LAN business in both 2016 and the prior year. Now I'll turn the call over to Anders.

Thank you Mike. Good morning, everyone, and thank you for joining us.

As you see on slide 4, we delivered solid results in the fourth quarter, thanks to strong execution by our Team and disciplined cost management. For the quarter, we reported net sales of $944 million at the high end of our guidance range with organic growth of 3.5%.

We drove gross margin expansion and reduced operating expenses and we achieved a 19% adjusted EBITDA margin, reflecting a 310 basis point improvement over the prior year, resulting in non-GAAP EPS of $1.93, a 48% increase from the prior-year period.

A few additional highlights during the quarter include solid growth in our largest region, North America, led by strength in retail. A record quarter in our mobile computing, led by the strongest product launch in our history with our new TC51 Mobile Computer. A return to growth in our printing business and sales growth in our Latin America region, in a very challenging macroeconomic environment.

For the full year, we have paid down $382 million in debt, significantly exceeding our goal of $300 million. This was driven by increased earnings, excellent working capital management, and proceeds from the sale of our non-core wireless LAN business. As a result, we are well on our way to exceeding our two-year goal of $650 million in debt paydown.

We have seen a steady improvement over the past year. We returned to organic sales growth in the fourth quarter after a challenging start to 2016, while also driving improved profitability and cash flow. At the same time, we have been extending our leadership position by continuing to deliver innovative solutions that create value for our customers.

As shown on slide 5, our improved performance was a direct result of the successful execution of our strategic priorities in 2016. First, we gained market share and grew margin and profits in an improving global environment while also prudently managing our cost structure.

While we have seen pockets of elevated promotional activity, we have remained disciplined, yet flexible, in our approach. In our services business, we delivered solid gross margin expansion and low single-digit organic sales growth by successfully executing on our operational plan.

Zebra's positioning with customers and partners remains unmatched. We announced a number of new offerings that further differentiated us as the leader in Enterprise Asset Intelligence, or EAI.

Key introductions throughout the year include refreshed and strengthened mobile-computing and data-capture devices for warehouse, storefronts, and the field mobility use cases. These devices have enhanced capabilities in applications that enterprises require to optimally run their operations.

Our mobile devices are supported by Zebra's Mobility DNA Suite, which layers enterprise-rich features on top of the standard Android platform. As a result of our early strategic investments in Android, we are ahead of the competition and have the broadest portfolio in the industry. Today, nearly half of our mobile computing shipments our Android-based devices.

With more than 14 million legacy Windows-enabled mobile computers in the market today, Zebra has a significant opportunity to gain additional share over the next several years as Microsoft faces out support of its legacy mobile operating system.

In 2016, we launched Asset Visibility Services, or ABS, as an extension to our one-care managed service portfolio. Designed to increase mobile computer and printer performance, ABS offers insight into device help, utilization and availability, resulting in increased productivity and operational efficiency.

We also introduced Trailer Load Analytics, which enables our customers in the transportation and logistics space, to monitor and optimize load efficiency.

Second, we continue to successfully manage our overall cost structure through tight controls on spending. With regard to our investment in the business to drive growth, we have employed a discipline R&D process focused on identifying opportunities with the highest potential to strengthen our core portfolio and EAI solutions.

Third, we made excellent progress on improving free cash flow, lowering operating cash levels, and retiring debt balances.

Finally, we are harnessing the strength of the Zebra brand to further extend our leadership position in EAI, and we are delivering on our financial objectives. Upon execution of our global ERP implementation, which is scheduled for midyear, our transition to One Zebra will be complete.

With that, let me now turn the call over to Olivier to review our financial results in greater detail and provide our 2017 outlook.

Thank you, Anders. It is a privilege it to be part of the Zebra Team and its long successful history. I am excited about the opportunities in front of us.

As a reminder all references to organic sales growth for the consolidated Company, the enterprise segment and all regions are on a constant-currency basis, and exclude the sales results from the wireless LAN business in both 2016 and the prior year.

Let us begin with a walk through the P&L. As you can see on slide 6, adjusted net sales in the fourth quarter were $944 million, up 3.5% on an organic basis. Solid fourth-quarter sales performance was driven by our innovative portfolio, resulting in strength across most regions.

Enterprise segment sales of $617 million increased approximately 4% on an organic basis. Sales on mobile computers increased due to strength in retail and demand for our new devices. Pretransaction Zebra sales were $327 million, up approximately 3% on a constant-currency basis. As Anders highlighted, we return to growth in printing in Q4, led by solid growth in mobile printing. Sales of supplies were higher, while sales in our location solutions business were lower.

Turning to our regions. Organic sales growth in North America was 6%, driven by strength in mobile computing, mobile printing and services. We saw particular strength in retail.

EMEA sales decreased 2% from a year ago on an organic basis. While underlying trends were solid, we cycled the significant sale in the prior-year period to a large customer in the UK. Sales in Asia-Pacific were up 5% on an organic basis, including the adverse impact of the previously communicated printer price concessions of nearly $2 million. We also continued to see strong growth trends in China.

As Anders highlighted, Latin America sales increased 12% on an organic basis, which was a sharp reversal from the steep year-on-year decline during the first three quarters of the year. This was driven by strong growth in Mexico, resulting from our Team's efforts to stimulate growth in a very challenging environment.

Adjusted gross margin of 46.1% was 90 basis points higher than the prior-year period. We benefited from our continued focus on cost reduction and additional improvement in services margin.

Adjusted operating expenses declined by $24 million, primarily due to the benefit of our productivity initiatives and expense controls, as well as the sale of our non-core wireless LAN business. Fourth quarter 2016 adjusted EBITDA margin was 19%, with 310 basis point increase from 15.9% in the prior-year period. This was driven by higher gross margins and disciplined operating expense management, partially offset by approximately 10 basis points due to foreign-currency impacts.

Finally, it is worth highlighting that our full-year 2016 EBITDA margins would have been approximately 3 percentage points higher using currency rates as of the enterprise acquisition in 2014.

Non-GAAP earnings per diluted share increased to $1.93 in the fourth quarter compared to $1.30 in the prior-year period. The lower tax rate impacted by tax adjustments and changes in profitability mixed by jurisdictions, positively impacted fourth-quarter 2016 non-GAAP EPS by approximately $0.16.

Acquisition and integration costs related to the enterprise acquisition declined throughout 2016. We expensed $27 million in Q4 and expect continued sequential declines in spending through the first half of 2017 as we complete the integration. For the second half of 2017, we expect integration expenses to be minimal.

Turning now to the balance sheet and cash flow highlights on slide 7. We ended the fourth quarter with $156 million in cash, which includes $98 million held outside the US. Zebra has strong liquidity and no borrowings on our $250 million revolving credit facility.

At year end, we add $2.6 billion of long-term debt on the balance sheet, which is 65% fixed rate including nearly $700 million of floating to fixed LIBOR swaps against our term loan. In December, we successfully completed our second repricing of the year on our $1.7 billion term loan, reducing the spread by an additional 75 basis points and saving approximately $13 million of annualized interest expense.

Strong cash flow, at the creation of international cash and net cash proceeds from the sale of the wireless LAN business, enabled $282 million in principal payments on our term loan during 2016. Our net debt to adjusted EBITDA ratio decreased to four times as of year end down from 5.1 times as of the close of the enterprise acquisition.

Capital expenditures were $77 million for the full year 2016, down from $122 million in 2015, primarily due to lower spending on integration and real estate. We generated $295 million of free cash flow in 2016, which was a significant improvement from the prior year.

The key drivers of this improvement were working capital optimization, reduced integration and restructuring costs, improved margins, and lower capital spending.

With respect to the wireless LAN transaction, we netted $29 million of cash proceeds in the fourth quarter after transaction fees, escrow, taxes, and other adjustments.

With respect to foreign exchange, for 2017 we implemented a holding four-quarter program to add the euro in order to mitigate the impact of exchange rate volatility. As a reminder, approximately 1/4 of our total company sales at denominated in euros and it is the only currency where we have material exposure to sales, profitability and cash flow.

Slide 8 shows our past to financial deleveraging. We expect to exceed our original goal of $650 million of debt pay down for the 2016 and 2017 two-year period. Our top priority for cash flow and excess cash balances is to aggressively pay down the acquisition debt to achieve an investment-grade credit rating.

We entered the first quarter of 2017 with a solid sales backlog and [healthy] pipeline of opportunities. These facts, along with the assumption of the continuation of a gradually improving macro environment, give us cautious optimism for our outlook.

On slide 9, you will see that for the first quarter of 2017 we expect the change in adjusted net sales to be between negative 2% and positive 1% on a nominal basis. Organic sales growth is expected to be between 3% and 6%, which excludes the adverse impact of four percentage points from wireless LAN, as well as the adverse impact of one percentage point from changes in foreign currency rates.

We expect organic sales growth to moderate through the balance of 2017 considering the year-over-year comparisons to our improving reserves through 2016.

First-quarter 2017 adjusted EBITDA margin is expected to be approximately 17%, which assumes flat to higher gross margin and lower operating expenses relative to the fourth quarter of 2016.

Non-GAAP diluted EPS is expected to be in the range of $1.20 to $1.40. For the full year 2017, we expect low single-digit organic sales growth. This outlook excludes the adverse impacts of three percentage points from wireless LAN as well as the adverse impact of one percentage point from changes in foreign currency rates.

Full-year 2017 adjusted EBITDA margins expected to be in the range of 18% to 19%, including an 80 basis point adverse impact from year-on-year foreign-currency changes. Our full-year outlook assumes slightly higher gross margin rates compared to the prior-year period due to continued productivity improvements offset by impacts of foreign currency changes.

We also expect lower operating expenses due to cost efficiencies as we complete the integration of the Company as well as from the sale of the wireless LAN business. For 2017, we expect debt pay down to exceed free cash flow and to be back-end loaded in the year.

Our goal is to pay down at least $300 million of debt which is supported by higher EBITDA, lower integration expenses, lower interest costs, and reduced cash balances required to operate the business. Our Teams made great progress in 2016 to optimize cash conversion metrics. However, we do not expect working capital to be a source of cash this year.

Please reference additional full-year 2017 modeling assumptions on slide 9. With that, I will turn the call back to Anders.

Thank you, Olivier.

In 2016, we successfully completed our planned integration milestones executed in a challenging global environment, extended our market leadership, and ended the year in a position of strength. We are staying ahead of an evolving technology landscape through focused investment and close collaboration with our customers and partners. Building on this strong foundation, we are focused on several areas to further solidify our leading positions globally and to drive growth.

First, we are leveraging our scale, innovation and relationships with customers and partners to extend our leadership with the most innovative portfolio of enterprise solutions and sensing technologies in the market.

Second, we are advancing our Enterprise Asset Intelligence vision by capitalizing on key technology trends and leveraging Zebra's deep knowledge of the markets we serve.

Third, we are executing on the final phase of the enterprise integration which includes harmonizing and streamlining back-office systems and processes.

And fourth, we are enhancing Zebra's financial strength by increasing profitability, improving cash flow and optimizing our capital structure.

Now turning to slide 11. Connecting the physical and digital worlds to increase visibility into business operations and workflows is the essence of the intelligent enterprise. We are uniquely positioned to capitalize on this opportunity by leveraging our deep market expertise and key megatrends such as mobility, cloud computing, and the proliferation of smart devices.

According to industry experts, within three years, 30% of hospitals will be running on real-time healthcare systems that will leverage location, identification, and mobility for clinicians, patients and assets. 15% of global retail sales will occur online requiring new fulfillment solutions, such as our industry-leading wearable computing and clicking solutions.

More than 40% of the global manufacturing workforce will be comprised of mobile workers that need real-time data to run their operations. And 15% of shipments within T&L will be instant delivery requiring new levels of visibility throughout their transportation networks. Our solutions directly address these trends and will provide a significant source of growth for us.

Slide 12 highlights the key industries we serve. In 2016, we launched a number of solutions that transformed the way our customers do business to enable a more intelligent enterprise. Our software, services, analytics and hardware are used to connect customers' assets, systems and people giving their entire operation a digital voice.

As a result, we have increased strategic engagement with customers which is translating to new growth opportunities for Zebra. For example, in retail e-commerce, we are seeing transformation driven by several trends including mobility, inventory visibility and multi-channel fulfillment. These trends have the common thread of delivering on increased customer expectations.

Both online and brick and mortar retailers realize the vital need to invest in technology that provides the improved levels of visibility and functionality necessary to thrive in an evolving environment.

A recent favorite survey highlighted the increasing demands of the retail shopper. We found that nearly 2/3 of shoppers are willing to make purchases from stores that provide better customer services. And more than 40% of shoppers agree that they have a better experience in stores where sales associates use the latest technology to assist customers.

This means retailers need to delight their customers and equip their associates with the tools necessary to provide better in-store experiences including real-time inventory visibility. Our solutions are doing just that.

At the National Retail Federation Trade Show in January, we launched a revolutionary new EAI solution for the retail sector, called SmartSense. This solution leverages multi-technology sensors, a data analytics engine, and applications to identify and track the journey and the location of merchandise, as well as associates and shoppers.

SmartSense enables our retail customers to increase sales, deliver a superior omnichannel experience, and reduce shrink, theft, and operational costs.

Outside of retail, Zebra's recent Warehouse Vision Study found that more than 40% of respondents cited the need to reduce delivery times as a top driver of investment in their supply chain. This could include a wide variety of Zebra solutions.

In healthcare, patient identification and timely treatment are critical success factors. Smart, noninvasive technology that provides hospitals real-time tracking, evaluation, and feedback is crucial to enable better patient outcomes.

In closing, our 2016 performance underscores our ability to extend our leadership into market in any macro-economic environment. The real-time visibility that Zebra's solutions provide is a key competitive differentiator for us. They enable our customers to improve their operating efficiency, comply with regulations, and deliver a superior level of customer service.

We are well-positioned to meet our objectives in 2017 and beyond. We are excited by the opportunities ahead to drive value to our customers and for our shareholders. Finally, I would like to conclude by thanking our Employees for their strong commitment and many contributions to help us realize our One Zebra vision.

And with that, I'll hand the call back to Mike Steele.

Thanks, Anders. We will now open the call to Q&A. We ask that you limit yourself to one question and one follow-up so we can get to as many of you as possible. Operator, please instruct our callers on how to ask a question.

(Operator Instructions)

Jeremie Capron, CLSA. Jeremie, please go ahead. Jeremie, your line is now open.

James Faucette, Morgan Stanley.

Thank you very much. I just had a couple questions.

First, it seems like the business is accelerating pretty nicely, or at least showing good on December quarter and initial outlook for both the hardware and printing businesses on the back of new products and initiatives. Can you talk about how you are thinking about the evolution of that growth? And prospects as we go through 2017? I'm trying to understand what is built into your guidance and formulation of it. And the second question is: longer term, how are you thinking about the need, or if there is a need, for you to increase your investment in software and services to better deliver more complete solutions to your customers? Thanks.

Sure. I'll start.

First, on the outlook. We ended 2016 on a position of strength. We saw great momentum build throughout 2016. We had a tough start but momentum continued to grow and 2016 ended strongly. That momentum has been continuing into the first part of 2017. All four regions did perform very well in Q4, and our products, also all our product families performed well. And I think we are well positioned to continue to drive growth here. So I think we entered 2017 with the strongest product portfolio we have had in a very long time. I feel very good about the competitiveness of our solutions. And we are getting very good feedback from our customers and partners on both the lineup of solutions that we have as well as the progress on integration as we our working our way through that.

As we entered 2017, we also had a higher backlog than we had last year, so that gives us extra confidence and robust pipeline of new opportunities. So based on all that, I feel that our 2017 outlook is prudent as we see things today. And as you look through the year, when the comps get the little tougher, we feel this is a prudent and good outlook, but we also see that we have a very strong foundation from which we can grow and continue to extend our leadership.

This is Joe Heel speaking. Your second question was around the software and services?

Yes. I was going to say on that one -- we certainly recognized that software is becoming a more prominent part of our portfolio. So far, we have created a software organization, a software [bee] within the Company. It is a smaller organization today but we are looking to make some smart investments to both gain some greater knowledge and put some investments behind some very compelling opportunities. We are certainly looking -- if you think of our mobile computing platform around Mobility DNA, as an example, also we are doing a lot of things around software to make sure that our devices are as smart and connected as they can be so we can use them to both generate data to fuel other type of applications and use cases. And on the printing side, I'd say one of our biggest differentiators is Link-OS, which is our real-time operating system which makes the printer a smart and intelligent device and network citizen. So we are working on developing more use cases or more applications that we can satisfy that are closely related to our devices.

And perhaps to add and point out some of the things that were mentioned earlier that are proof points of the importance of software and services as we evolve toward solutions around Enterprise Asset Intelligence. We mentioned the launch of OVS and AVS, which are services that we are now providing to give visibility to the status of our devices, which enables our customers to manage them in a much more effective way. We also mentioned the SmartSensing solution, which was launched at NRF which is a combination of hardware, software, and services needed in order to provide retailers with visibility. And another example was the TLA solution that we are providing to logistics customers. Again, one that includes hardware, software, and services needed to optimize [doctor] operations. So those are some examples of how we think that software and services are central to our long-term targets for growth.

Thanks.

Richard Eastman, Robert W. Baird.

Just the first question just is around EMEA. Could you speak to where we ended up in local currency or constant currency for the full year in EMEA? And then maybe speak to the tone of business, tone of demand there? The macro picture seems to be continuing to improve. And I am just curious, as you move into 2017 what your expectations might be for that region?

I will start first with the setting, the context around EMEA. And then Olivier will follow-up with the specific numbers for you.

The underlying trends in EMEA has been very positive. We had a rich mix of wins with existing and new customers in Q4. Retail was strong. TNL was also strong. The TC51 Mobile Computer launch went very well in Europe and we had some big wins with important customers there. As we look at 2017, we do expect to continue to see positive trends as we go out the year and continue to drive growth from Europe.

And in term of performance for EMEA in local currency, it would have been a decline, a slight decline maybe in the range of 0% to 1%.

When we look into 2017, I am curious. The local currency, with all adjustments for the wireless LAN business, the thought is, low single-digit revenue growth for 2017 is maybe what the thought process is now. Anders, if you were to identify two upsides to that, what might those be? For instance, would that be US retail spending? How could we see some upside to that low single-digit adjusted outlook -- revenue outlook.

Let me start by giving you a sense of maybe a more broader, maybe on the outlook here. We ended 2016 strong and we see that momentum coming in well. We are well-positioned for growth across our regions and with our products. The business is quite diversified and we have a number of different avenues or levers to pull to achieve growth. There are areas of the business that I consider to be somewhat underpenetrated. I would call supplies, services, and healthcare to be some of those. And I would say also, our Enterprise Asset Intelligence vision -- that is something that is compelling to customers and it generates a lot of interest and we have a number of new, attractive offerings in that area.

Now, when we go back and look at the 2017 outlook, I think it is prudent, based on everything we know today. There is always some level of upside or downside that can happen. As we see things today, we think that this is a prudent outlook.

Okay. Thank you.

Jason Rodgers, Great Lakes Review.

Question on the organic growth forecast for the first quarter. It seems like you are looking for a little bit of acceleration from the fourth quarter. And I wonder if you could talk about where you are seeing that? Is it anywhere in particular? Or just across the board?

Q1 outlook is strong for all regions and all product families. I think the strong momentum we had in Q4 is carrying into the first quarter here also. The strengthening on a percentage year-over-year growth also has to do a little bit -- we had a weaker compare in Q1 of last year.

And I wonder if you could comment on your distributor inventory levels and the progress you are making with the new channel program?

First, PartnerConnect, we launched PartnerConnect, a new channel program, in Q2 of last year. It has now been basically working for nine months or so. We are very pleased with how it has gone. It has been well-received as a good structure, good program. We were able to gain share wallet with our channel partners through 2016. I am quite pleased with that, because going through all the complexities of our integration and be able to gain share at the same time, I think it's quite an achievement. So the channel program is working very well.

Second part -- I forgot the second part of the question.

The inventory levels.

The inventory levels.

Inventory levels, yes. We target about 50, 55 days of inventory with our channel partners. We have stayed close to those targets for the year. And we entered 2017 with an appropriate inventory position with our distribution partners across the world. We feel that is healthy. It is good.

And then, just looking at the synergies, you're at $50 million in 2016 from ES. Is $20 million still the target for 2017? And is there any thing additional that you can realize in 2018?

That is correct. $20 million [in lending cogs] is what would we believe we will realize. We have a fair amount of line of sight of that number. And in addition, as we implement our new ERP system, and we do that in the middle of this year, we believe we will have further opportunities to increase operational leverage in the Company.

If I could just squeeze one more in. You mentioned during the prepared remarks about pockets of elevated promotional activity. Is that something new that you have seen from past quarters? And maybe if you could say where you're seeing that, and what are you doing to address it? Thank you very much.

Our markets have always has been competitive. That is not new. I think we have mentioned we have had the same concept of some pockets of elevated promotional activities in earlier calls, also. And our approach continues to be one where we are trying to respond in a very disciplined way. We want to have flexibility to go after deals that we think are worth winning and that we need to win, but we do it with a strong focus on driving profitable share gains. We gained share in the past year, but the one metric side that are really trying to maximize is to drive profitable growth and maximize the value of the enterprise over the long term. So we want to make sure that we are prudent in how we pursue those things and disciplined in our approach.

Thanks very much.

Saliq Khan, Imperial Capital.

Good morning, Anders.

Good morning.

Anders, when you were at NRF, what gave you confidence that the retailers are wanting to open up their wallets and invest in these new retail technologies over the next 12 to 18 months?

Retail has always been a strong vertical for Zebra. And I think we are very well-positioned to capitalize on the transformation that's currently going on, driven by e-commerce and omnichannel. Our traditional brick and mortar customers are recognizing the need for them to invest more in our type of technologies to drive improvements and enable them to compete against e-commerce. Investments to drive the greater customer experiences enable different delivering modalities, such as buy online and pick up in-store. But also to drive against greater efficiencies to enable them to compete on price with others.

We also had several large retailers in the US publicly talk about their strategy of stepping up investments in technology to do just that. We have also seen traditional e-commerce players investing meaningfully in our type of solutions to enable them to scale efficiently and also to be able to offer new cross-customer offerings. So I think that bodes well for us.

And our portfolio to address retail, both brick and mortar and e-commerce, is very strong. The TC50 fund, Mobile Computer, that we launched in Q4, that was the fastest ramping product in the history of the Company. It was a great success for us; and at NRF, we also showed a couple other products that you might have seen. Like [MP]7000, the flatbed scanner that is very competitive that is coming out this year. And the SmartSense solution that Joe also referred to here. Also, I would say we feel good about being able to add additional customers through the years. In 2016, we added a lot of new customer names, both traditional brick and mortar customers, as well as e-commerce customers. And this all gives us confidence that momentum will continue into 2017.

Anders, as you walked around the booth at NRF, one of the things that you saw the last couple years was, there are payment solution providers, as tracking solution providers, or scanners and printers solution providers that were out there. Where do you believe that Zebra Technologies ranks in the purchasing priority for the retailers? And wherever you believe it ranks, how do you actually improve that ranking as well? So they are more likely, retailers are more likely to go and adopt the Zebra Technologies as opposed to the payment solution technology that is out there.

I think I would say that we have -- we are essential for retailers. If retailers want to implement an omnichannel type of strategy, I think that getting that increased visibility into their in-store visibility, being able to effectively guide people to do the pickup and the self checkouts in the store, are capabilities that are essential for them to have and we do offer that. Now many things that retailers do are broader projects. And we are not the only thing that is in it, so there are certainly other solutions that go into that too. But I do believe that we are considered to be a strategic partner to many of our largest retail customers because they see the value in the essence of what we do.

Also, bear in mind that our go-to-market strategy inherently is one of partnering. So you'll find us, in many cases, partnering with many of those solution providers that either provide checkout solutions or payment solutions. And indeed, if you look at many of the most prominent solutions that were showcased at NRF, you will see there is either a Zebra inside or there is a Zebra partnership involved there. That is deliberately part of our strategy.

One last question on my end. To get to the organic growth outlook of 3% to 6%, could you break down what the outlook looks like for the different geographies?

No, for Q1, I think we tend to give you an outlook for the Company and we give you some color for each of the regions. I think we have gone through some of the regions here already this morning and for the products, but we don't really break it down by all its components.

Great, thank you.

Brian Drab, William Blair and Company.

Good morning, and thanks for taking my questions.

I just wanted to start with a quick question on OpEx for 2017. I guess we should be modeling OpEx in terms of dollars to be down in 2017. I was wondering if you could give us a better sense for how much those dollars should be down? And how it breaks down in terms of benefits from restructuring and productivity versus how much OpEx was associated with the wireless LAN business?

Good morning, Brian.

We gave you two numbers on purpose. One which is a gross margin number. We believe that this gross margin number was slightly increased in 2017. And we also gave you an EBITDA number of 18% to 19%, so you can predict what the OpEx is, And we did it this way for a reason. We want to adjust the OpEx of the enterprise based upon the trajectory of the business. That is why we model it this way. However, the integration effort is actually well on its way. We believe that we're going to hit our various commitments. And in addition, the implementation of our new ERP system midyear will give us the opportunity to deliver additional operational leverage.

Okay, great. That is helpful. Thanks.

I guess this is just theoretical at this point, but there is a lot of discussion around tax policy changes, of course. And I was wondering if you could just give us an update in terms of how much of your manufacturing is done overseas? I know the legacy Zebra business manufacturing went to [JBL]. How much of the Motorola enterprise business is done overseas? And just the total -- if you look at your total manufacturing footprint -- what percent of that is overseas?

Let me answer indirectly to your question, Brian.

We don't know for sure what the new tax reform will include. So we've spent, actually, a fair amount of time with our teams internally, with our business partners, with our various advisors. And we believe that we have the ability to mitigate the impact of a new tetra form. Looking at the way the supply chain is structured is one lever. That is not the only lever.

So I understand that is not the only lever. I am just wondering could you help us at all? If we did focus on this one lever for a second -- how much of the manufacturing is done overseas? I guess I understand that the legacy Zebra, most of it, is done at JBL, but do you reveal how much of the Motorola business -- I'm just not as familiar with that side of the business in terms of the manufacturing footprint.

We have not disclosed how exactly, on purpose. It is obviously competitive information. And we could restructure the supply chain in order to achieve our goals, which is to make a tax reform neutral. There are a few things we can do. We don't want to be definitive for obvious reasons. We don't know really what the tax law is going to be. But we have various scenarios, and all of them, we believe, will be a -- will lead to a neutral impact for the new tax reform.

To give you a little bit more color, maybe just a -- our supply chain is probably very similar, I suspect, to most electronics supply chains.

So we have a significant footprint of manufacturing assembly in Asia. But we also have it in Mexico and we have all our converting and a lot of our services activities in the US. But that only gives the current footprint. There are certainly things that we can do to mitigate any impacts on any border adjustment taxes, but we still don't know what they look like or anything. We are working on how would we respond to various scenarios.

Okay. Thanks very much and congrats on the solid quarter.

Thank you.

Matt Cabral, Goldman Sachs.

It sounds like the TC51 is off to a pretty good start. Can you just talk little bit about where you have seen the biggest traction so far? And if you think there was any meaningful amount of pent-up demand that you had heading into the launch of that product?

So the TC51 -- we think of it as a midrange Android all-touch device. It certainly met an unmet -- or satisfied an unmet need in the market, because otherwise we would not have had that kind of launch or that kind of ramp, right? I think we got it right from a form factor, from a functionality perspective; we got the latest and greatest operating system drop with chipsets and so forth in there. It was a very compelling product when it came out and we are still seeing very good feedback from customers about it. We were down at HMS this past week, also, which is the healthcare show, and had a great interest from healthcare providers in that product and we are coming out with a special healthcare version of the TC51. But the Q4 launch was primarily aimed at retailers. So mostly, say, brick and mortar retailers who are working on omnichannel type of solutions and also to help them have a more compelling customer experience by arming their sales associates with better tools to engage with their customers.

I would add two things in terms of the pent-up demand opportunity, which I think TC51 squarely hit. On the one hand, retail and the need to compete with e-commerce that this device enables in a number of different directions. On the other hand, bear in mind this transition of operating systems which is still ongoing. And many of our customers, whether they are in retail, healthcare, or other verticals are looking to make that transition and are waiting, or have been waiting, for the compelling opportunity to do that. And TC51, I think, struck that nerve and hit that opportunity squarely, which is why it has been such a successful launch.

Maybe one more point to say.

There has been a lot of conversations or concern over the years around consumer encroachment. And the TC51 certainly -- I think the first customer we had was a very large consumer device user, where we were able to basically win them to switch over to our devices. So this is a great way for us to compete against the consumer devices, also.

Great. And then as my follow-up, I hate to ask a question on tax rate. But I guess just given the magnitude of the difference, can you give us a little bit more detail on what drove the benefit in the fourth quarter? And the right level that we should be thinking about on an ongoing basis as we go through 2017?

Absolutely. At the end of Q3, we were planning a tax rate for the year of 26%. That was an estimate. That was based upon a forecast, assuming a mix of profit by legal entities or tax jurisdictions. When we closed the year based upon the mix of the profit, based upon additional work we did as part of the year-end process, the tax rate for the year moved from 26% to 23%, and we had to [book] the full impact in the Q4 quarter, which was about $0.16.

Now to answer to your second question, in terms of tax rate for 2017, we believe that low- to mid-20s will be a good planning assumption.

Thank you.

Keith Housum, Northcoast Research.

Good morning, gentlemen. Thanks for taking my question. Congratulation on the execution during the year.

Anders, can you revisit your long-term growth rate of 4% to 5%? Obviously, printers came off of an incredible stretch here in 2015, double-digit growth for several years. But since then, it looks like the growth rate has been much lower. Do you still think the $0.04 to $0.05 long-term growth rate over the cycle is the right way to be thinking about it?

We still think 4% to 5% growth rate or a target is an appropriate target for us over a cycle. If you look at our performance over the last two years, we have actually hit that level. It did not come exactly the way we had expected. So we had almost 10% in constant currency growth in 2015 and we were just a tad of growth in 2016. So our business is a bit more cyclical than we might enjoy. It tends to drive it towards a good number over time.

Again, we feel we have a good diversified business with many avenues and levers to pull in order to achieve our growth. And we generated the kind of growth we did in the last two years while we were going through a very complex integration. I think it's a testament to our execution, and we still feel that, that's an appropriate target for us. And that's what we're going for.

Great, thanks.

And if I could follow up, I think you guys addresses this a little bit in the previous question, regarding the TC51. The mobile -- the Microsoft operating systems, now the Internet of Things, and all the operating systems out there. You still have the legacy system, which is, it will be end of life in 2020. Obviously, you guys have a huge advantage with the Android portfolio. Are you seeing a shift now, where the retailers and the other companies, who are hesitant to move towards Android? Are they now making the evaluation and starting to make a move? Can you just speak to the operating system environment for mobile computers?

I'll start. And then Joe can help out here also, who talks to customers even more frequently.

I would say the momentum around the Android migration is continuing strongly or strengthening. Remember, two years back when we first merged our businesses, at that point there was the largest most advanced customers that were doing it. I think now we see, depending on the vertical, but retail; I would say all large deals in retail tend to be Android today. Healthcare is very much moving in that direction. So we are seeing greater traction in our channel with Android. We always talked about how the largest, most advanced customers would be leading the charge. And that smaller customers won't have necessarily the resources or the know-how to switch as quickly.

That is still the case. If you go down into smaller companies, they are probably more likely to continue to buy what they have already have. But we are putting together a different type of both educational material and other offers to make it as easy as possible for customers to switch. If you go back to the TC8000 device that we launched for a warehouse application in the beginning of 2016, that was the first generation of Android device in that environment. That means that our customers have to rewrite and [pour] some of their applications to run on that device. So it is a little bit of a barrier to -- early adoption is a bit higher. But once you start having -- move your applications over, now it's much easier to just continue to expand and have a greater -- we use a broader part of our portfolio in those areas.

Another viewpoint on the opportunity is, if you go back two years ago, we said there is about 15 million mobile computers out there that need to make the transition from legacy operating systems to either Android or an alternative. And you can do the math of what has been sold in the meantime, but our synthesis would be that the majority of that opportunity is still out there. And we think that there are at least two, but probably two critical things needed to unlock that opportunity. One of which we think we have hit with products like the TC51.

We need a compelling offering in value proposition that gets customers over that hurdle. And things like TC51, which is surrounded with the types of software and services that people expected from the legacy operating systems -- those are now in the market and present and giving customers the confidence to move that way. The other one, though, that is important and that is the focus of our growth opportunity this year, is that our channel partners, which are the majority of the way that we sell, they need to embrace this solution as well. And they need to either take their customers along, and in some cases take their applications, many of the applications that customers run come from those channel partners, and they need to move those over to Android. That is the focus for us this year, and we see a lot of growth opportunity ahead of us from that.

Thank you.

Paul Coster, JPMorgan.

Just one question: Olivier, when you run Zebra, what will actually happen in terms of the TSAs? And should that be a step function, reduction in OpEx in the second half once you cross that threshold?

I am not too sure we will speak about step function, but clearly the implementation of one ERP will allow us now to be really focused on optimizing the P&L further. If you look at the kind of synergies we have generated to date, there were the obvious one -- adjudication in product road maps, supply chains. But we believe as a Management Team that we could go to another level in the second half of the year, gradually, and then forward.

Okay, and will all of the TSAs be eliminated by the second half of the year?

The vast majority will be, correct. Yes.

Thank you.

Michael Morosi, Avondale Partners.

Thanks for taking the questions.

First, with respect to deleverage. It looks like this year you are targeting another half turn or so, in terms of net debt to EBITDA. Longer term, you've talked about being investment-grade, but I wondered if you could give a little bit more color in terms of those leverage targets? And once you are there, how does that change your cash allocations thought process?

So you are right. We believe we should be going down by half a turn between the end of 2016 and the end of 2017. Our target is to reach investment-grade rating as soon as possible. We believe that we will achieve that rating once we have a ratio of debt-to-EBITDA ratio of about three. Once we achieve that level we want to look at the best options to maximize return for our shareholders. That can take various forms: repaying more debt or allocating excess cash to shareholders in other ways. So we want to keep options open based upon what will be best for our shareholders.

Very good. And then, a little longer term, we are looking at the automation of supply chains and distribution centers and having an impact on headcounts. How do you view that as both a challenge and an opportunity? And how does Zebra's EAI fit into that broader automation trend? And longer term, how would that impact your mix of hardware and software analytic sales?

We see that as an opportunity for Zebra. Today in some conversations around retail, where they have been trying to do certain things and automate certain things. And when that has happened, it has invariably led to more use of our type of technology in order to enable that kind of automation. So we see that we are an essential part of enabling a warehouse or a factory, whatever that is, to be much more automated. Some of the things we are working on for release later this year or in 2018, are specifically aimed at making people much more effective and efficient in how they do their jobs in those types of environments.

That is very good. Thank you.

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

Thank you all for participating on our call today. We look forward to speaking with you again soon.

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