Zebra Technologies Corporation (ZBRA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Bernstein's Strategic Decisions Conference and our fireside chat with Zebra CEO, Anders Gustafsson. Before we start, I just had a couple of housekeeping items. So we do have interactive Q&A as part of the SEC. It's with a technology called Pigeonhole. There's a link on the left-hand side of your screen to access Pigeonhole. When you click on that, it will open up a new window in your browser and you can submit questions that way. You can also vote on questions that have been submitted via Pigeonhole. There are several questions that are up there already. So please go ahead and click on that link now, and feel free to submit questions or vote on questions. The second thing I wanted to highlight is we are working with a partner called Procensus to deliver live polling of investor views for each company at the SEC. There's also a link to Procensus on the left-hand side of your screen. And at the conclusion or towards the end of the fireside chat, I'd like you to literally just take a minute or 2 to complete your -- complete the poll on your view of Zebra, and you will be able to see, in real-time, the results of that poll and what others are thinking. So it's a really useful tool, and we also encourage you to use that at the conclusion of the event. So without further ado, I want to welcome Anders. I think this is your third Strategic Decisions Conference. Always a pleasure to have you, Anders. You're a straight shooter. Your company has done really well. So congratulations to you, and thank you for your support of Bernstein Research.

Thank you. Very pleased to be here. This is my first conference also doing this virtually, but it seems to be going all right.

So far, so good. So maybe we can punch right into it. COVID-19, obviously, is the hot topic, and it's impacting your business today. You guided for revenues to be down 11% to 17% in the current second calendar quarter. Maybe you can provide some color by geography and end market in terms of what you're seeing in terms of COVID?

Yes, I'll start by -- maybe talk about the verticals because we've probably seen more -- well, we've seen differences based on geography and verticals. But from a vertical perspective, I'd say each of our 4 verticals that we talk about mostly are, we've seen some customers that have not missed a beat or who are even doing better, and we've seen some who are not doing quite so well. If you start with retail, which is our largest vertical, e-commerce and grocery customers have been doing particularly well. Grocery -- I say grocery has been well covered by the press that it's been up quite a bit in the overall terms. But the omnichannel part of this, the buy online pick up in store or pickup curbside has been up many hundreds of percent. So we've -- and the CIOs I talk to, they feel that, that's a new buying behavior that consumers like. And when COVID-19 goes away or we pass the crisis that consumers will still like to continue to buy that way. So we see that that's been a great trend for us. We've seen a lot of activity with grocery and e-commerce type customers. But on the other hand, we have also a number of customers that are department stores or general merchandise that have shut down their stores. So obviously, their activity is not quite as attractive. On -- in manufacturing, I'd say we've seen discrete manufacturing. So airlines or airplanes, cars and so forth to be having quite a strong downturn, although we are helping many of the car manufacturers and some others to use idle facilities to make ventilators. Maybe most of that is behind us now, but we were part of staffing or putting equipment into those facilities to help them. But when it comes to more process industries, the pharmaceuticals and food, that's been -- activity there has been quite healthy. Transportation and logistics, I'd say, anybody who has kind of a courier service to delivering packages to consumers have been doing quite well and a lot of volume and activity. People who are more focused on B2B supply chain deliveries, so 3PLS and so forth. There have been less activity. And lastly, in health care, we've seen, particularly in the early part of the virus, huge spike in activity around acute care. So anything to do with the pop-up hospitals, test facilities or just enabling regular facilities to ramp up capacity to deal with their expected patients has been very busy. But we've seen health care providers sort of stop and halt elective care, and also any large [new] IT implementations like putting a new health care management information system solutions like Epic or Cerner have been put on hold. And so those have been kind of headwinds for us. But overall, there's some of our markets that are doing particularly well and some not quite so well, and that led us to our guide for Q2.

And should we think about your business as really a GDP-driven business? So when GDP weakens, upgrade rates kind of extend, and that's sort of what you were seeing. I went back and I looked in 2009. And at that time, the printer business revenues fell 19%, 18% and I think over 20% in the first half. And then you didn't have the Symbol Motorola business at the time. But when I went back and looked at Motorola's Enterprise business, revenues fell 13%. And obviously, you had weak GDP then. So is that how we should think about it that when -- basically when GDP and the economy are worse, given that you sell into a diverse set of industries, you will be impacted commensurately? And should we be thinking about if GDP or unemployment numbers are similar to what we had last time, we should see similar kinds of pressure on your business this time around?

So I'd say, first, our value proposition is, work in good times and bad times. So in good times -- we like good times better. In good times, people are expanding their facilities, they're hiring more people and so forth. But in tougher times, people are trading OpEx for Capex. So we help drive greater efficiencies in their operations. So we do have kind of a good market or good -- can offer good ROI to our customers in both scenarios. Now clearly, we are exposed to or we are benefiting from a good healthy economic environment. So if GDP is growing at a good clip, we are growing at a good clip. I think that we are -- some of our portfolio, at least was more true, I think, in 2009 than today, were discretionary in the short term, but not necessarily in the long term, but you could push off procure purchase of our printers, say, in 2009 by a quarter or 2 without harming your business necessarily, but you couldn't push it off for years. Today, I think we are a bit more tied into some bigger themes or trends that are less easy for our customers to dial up and down kind of based on quarterly performance. So if you take -- go back to retailers or say -- or any of our industries, digitization is a big trend generally. And in retail, enabling our retail customers to offer omnichannel capabilities, to enable them to have really good insights into their in-store inventory are things that are more important today than before. And I think that our customers see that as kind of essential to their long-term strategy, and they have a lot of people involved in helping them, bigger system integrators and so forth. They can't just dial up and down very easily. So I think we are more resilient today than we were back then.

Okay. Yes. I mean, historically, we found there to be a pretty strong correlation between global IT spending and global GDP. And clearly, a rising or falling tide lifts all boats. But your perspective is, look, we probably moved up the stack in terms of strategic relevance. And so of course, that rising tide impacts us, but hopefully, not as much. Is that kind of fair to say?

Yes. That will be our expectation.

Right. And do you have a view on sort of beyond macroeconomically, given that you see a broad path of end markets, about whether you feel your customer set or the economy is likely the bottom in Q2? I mean, do you see sort of early demand signals that are encouraging that perhaps the worst is behind us? Or is that still very uncertain to you?

Yes. I don't want to give, say, implied guide for Q3 here now. I think that's a little too early. We are certainly tied, as I said, to GDP generally. So if the overall economy is bottoming in Q2 and start growing in Q3, I would expect that we would certainly track alongside that. But I'm not sure if I can say that we have clear signals one way or another that will be appropriate to share today. But we do see certain markets that were -- that entered the, say, coronavirus pandemic earlier, like China, coming out of it. And when they come out of it, the business does pick up. So it's been a pretty good, healthy pickup in some markets in Europe that were early and in China, too.

Okay. Just even before the coronavirus, your organic growth rate was double digits in '18, about 6% in '19. And before the virus, you had guided for 4% to 6% for 2020. Was the deceleration due to a slowing market or slower share gains or was 2018, sort of an exceptional year? If we put coronavirus aside and just think about the trajectory of growth, how do we think about '18, '19, '20, if you drew the naive 3-point trend that would say down, but we're being very selective in endpoints there. So maybe you can comment a little bit about that?

Yes. '18 was a very strong year. That was a bit outside of our, I'd say, normal expectation for growth. And I think that was a strong year for many IT companies or companies that do similar type of solutions as we do. We saw '20 here. Our expectations for '20 was that there will be a somewhat more moderated growth rate in the global economy. And -- but we didn't see that our share gains or our solutions will be any less relevant or that we will be less competitive.

Okay. How do you think about end market growth? We'll talk a little bit about share gains, which you've done well. But how do you think about end market growth for each of your main businesses, if you think about the printing business versus the smartphone business, broadly speaking, how do you think about market growth for those on a sort of 3- to 5-year basis?

Yes. On mobile computing first, is our largest segment. We have overall market growth -- we have outpaced overall market growth pretty healthy. But I think there's also been a fairly robust market growth for that segment. The use cases for mobile computers have expanded. So if you go back to, say, retail, health care, T&L, the dependency on connectivity of employees being connected in a variety of ways, being able to get real-time actions, digest data, engage with consumers or cut their customers. All of those things, I think, have driven a larger acceleration of the mobile computing space. Android has been also a big driver in that it was a lot of Microsoft devices that needed to be upgraded, and we're into that now, but it's still probably about 10 million devices out of 15 million when we started that are left to be upgraded. But I'd say for mobile computing, the biggest thing has been the expansion of the market. And Android enabled that to large [three]. When we came out with all touch devices. We've gone from having, say, in a large supercenter store, maybe high single-digit devices to today, maybe 60, 70 devices, but still only maybe 1/3 of employees have devices, and our customers are eager to enable everybody to be connected and have access to -- to be able to interact with their systems and customers. So that's been a big driver for mobile computer. The examples I gave are retail, but I can give similar examples in other verticals. Printing hasn't had the same transformation, but we see big trends, though, generally around track and trace that if you -- in order to have great visibility into supply chains, our customers want to be able to track and trace more subassemblies, components, not just the finished goods. And e-commerce is a big driver, too, that you have, every box that gets shipped has to have a unique label on it that identifies that it's going to you and your house, not to somebody else's house. And similar with omni-channel, you've got to label every bag from a grocery store now with your name on it, so that the -- where before you packed your own bag and there was no need for that. So there are good trends around printing, too, but not quite as strong maybe as mobile computing. And on scanning, we benefited from being part of upgrading a lot of the installed base from 1D laser scanners, sort of traditional barcodes to 2D barcodes, which can read a lot more data and more future-proofing it. So there's been good tailwinds in each of our 3 main product categories, and we expect them to continue.

So Anders, if I could, and third-party research is fine if you want to cite that. But if you were to sort of talk about what you think a market growth rate is, we'll talk about your share in a little bit. But if you were to think about what end market growth is for those 3 major businesses, a 3 to 5 year sort of normalized growth, what would it be? And then is the growth being driven by new applications? Or is it being driven by shorter replacement cycles in the installed base, again, for maybe each of the 3 businesses? That would be helpful.

Yes. I think that we -- when we talk about market growth rates, we like to talk about independent market research because we think that's a -- there's certainly a level of integrity in those numbers. And they tend to talk about 3% to 40% growth for our product categories. The -- again, I'd say the replacement cycles for mobile computers have accelerator. I'd say they were probably 5, 6 years in the Microsoft days. And I'd say they're probably at least a year faster today with Android. And the level of innovation around the Android platform is driving that. If you look at just the microprocessors we had in our devices 4, 5 years back, they are no longer -- they don't have the horsepower to drive the latest versions of Android. And also, our customers are putting so many more applications on their devices. So there used to be, in the Microsoft days, maybe 3 applications on average on the device. Today, we have many customers with around 60, 70 applications on the device. So the amount of memory and processing power gets to be much higher. So clearly, the combination of technology innovation and new use cases have been driving a lot of the growth in mobile computing. In printing and DCS, it's probably more similar as it was historically from a device expected economic life. But it depends on the application and the type of products. So if you have, say, mobile printing versus tabletop printing, mobile printers tend to refresh more quickly because they get banged around much more and also the applications get to be more demanding. But from an overall growth for Zebra, I'd also like to expand on -- we talked about our core markets of about $10 billion for these 3 product categories. We've talked about a 15% kind of expansion market, which are more near adjacencies. And then we have markets that are not necessarily sized by independent market research around our Intelligent Edge Solutions. So we see a lot of growth coming from new markets that are -- that we are entering or that are outside of our core markets.

Okay. Maybe we can talk just a little bit about competition. Your market share has increased from 40% to over 50% in mobile computing over the last 5 years. And I think you're like 2 to 2.5x the size of your largest competitor. What has driven these market share gains? And what do you think you've done differently from competitors?

Yes. So we've always had a strong focus on growing faster than the market. So if you look at the printing business, which is kind of the history of Zebra, I joined 12, 13 years back. And I think since then, we've gained on average 1% of share per year. So it's always been a big, big focus for us that we can't control market growth, but we can control kind of our growth relative to market. With respect to mobile computer, there are some specific things that have helped us there and starts with -- we were the first one, I would say, that kind of really invested in Android for the enterprise. And when we did that, there was not -- it wasn't clear that Android would be, but there was certainly a lot of concern from the Enterprise side that Android had the security and other things. And Microsoft 10, Windows 10 was expected to be a factor. Now we were somewhat fortunate in that Microsoft decided to abandon Windows 10. And we were then way ahead of our competition on Android. And we invested in building meaningful software capabilities. So we have what we call Mobility DNA, where we originally did a lot of, say, security applications and other things to add capabilities to have -- to make Android enterprise-class and make it easy for our customers to deploy, manage their devices. And there, I think we have -- on the software side, there's great scale benefits that's playing out. If you look at -- people talk about Google and Facebook as having great scale, platform scale benefits, but we have -- not the same scale, but we have similar scale benefits that if you -- we can reuse 90% of our software from device to device. And we've platformed our devices to make that easy. Our competitors don't have the platforming, so they don't have as much reuse, and they don't have the revenues to amortize, say, the investment across either. So we started earlier and we've been able to invest meaningfully in our software capabilities. So I think it's very hard for our competition to catch up on the software side. And for us, a lot of the value is in the overall solution and in the software, not necessarily in the hardware.

So a question from [Pigeon] kind of fits nicely with this topic. Which of your competitors are you most concerned about today? And what do you respect most about the sided names of Panasonic, Honeywell, SATO, Datalogic, I would add maybe even Samsung. So which ones are you most concerned about? What do you respect most about them?

Yes. I don't want to be overly specific about named competitors. But I'd say, first, SATO is a printing competitor and Datalogic is primarily a scanning competitor. The other ones are mobile computers. I think from our traditional competitors, we don't try to act based on what we think they will do or not. We try to have our own vision about where we think the market is going and what needs to be done and not get too distracted with what our competitors are doing. I think that served us well so far. I'd say the scale benefits we have compared to our traditional competitors also makes us a little less concerned about the traditional competitors in that respect. I'd say the -- there might be some differences on the value tier. If you go to the kind of the very low end, where maybe software isn't quite as important, there tend to be more competition on price. But we're coming out with a good suite of value to your products this year to enable us to both offensively go after new use cases and enable our customers to deploy devices deeper into their organization, get more devices in the hands of their employees, but also defensively putting up a fight with other low end competitors so that they don't have a haven where they can make a profit they can reinvest in either expanding their portfolio or expanding their go to market. So hopefully, that helps.

Yes. I just -- maybe I could follow-up on sort of the value segment, and you talked about introducing new products. How offensive versus defensive is that move? And shouldn't we expect lower margins on value tier products?

Yes. So value tier products, for us, we think -- say value tier in the U.S. will be more focused on expanding the market. If somebody has now given x percent of their employees a device that they can penetrate much deeper and give many more people that device. For some of those offerings, we're looking at as a service that we will bundle the device, but also our Workforce Connect communications software offering and some other software applications with that to be able to sell it as a service. But generally speaking, I'd say that the value tier would probably have a below average margin profile, but it's still a very profitable part of our business.

Right. And just as it relates to sort of margins, what have you seen on the pricing front in recent years? And in a downturn, does price competition inevitably not escalate. I think in February, you indicated that there have been some large deals where you had made some price concessions. So A, generally, how have you thought about pricing that you're choosing to move to a value tier so that may impact on your ASP? But just more broadly, what has pricing been like in recent years? And how do we think about pricing in the downturn? Should we continue to expect concessions?

Yes. We -- so we have, I'd say, very disciplined and analytical approach to pricing. We look very hard at price curves and trying to make sure we are thoughtful about pricing kind of like-for-like volumes and similarly. From -- since we are the market leader also, we have an ability to guide pricing a little bit more. We don't -- we're not trying to drive out competition by being super aggressive on price across the board. We try to be very selective. So if there are larger customers with bigger volumes, they also tend to be more sophisticated from a negotiation perspective. They tend to also get better pricing. Our run rate kind of the business that just goes through our partners tends to be much smaller volumes than the price -- the power -- the pricing power there for us is greater. We focus very much on making sure we offer the right value proposition, not just to the customer but also to our reselling partners so that they have enough to compete and be -- find it attractive to work with us. Overall, our pricing have been eroding at a low single digits, maybe mid-single digits for some products per year, but we would have been able to offset that by both cost reductions and introducing new functionality that we can charge a premium for.

Right. And then just on pricing in a recessionary environment, Anders, can you comment on that, please?

Yes. Our markets aren't terribly elastic in that respect that the people aren't going to go buy more mobile, computers or printers just because they are on discount. So -- and our reselling partners say they -- gross margin dollars put food on the table, gross margin percentages doesn't really do that. So for them, there is an incentive not to discount too much. So generally, we see price competition maybe flare-up in the beginning when people are trying to figure out what to do. But I'd say today, our -- the pricing environment is -- it's competitive, it's aggressive, but it's not different from what it was at the end of last year.

Okay. I think a couple of years ago at our conference, you told us that there were 10 million Windows, mobile devices out there. I think that's still a number that you're throwing out there as many customers are still buying Windows devices despite the end of support. Do you expect this number to go to 0 at some point or to decline materially? And how should we think about the relative size of the Android device installed base today?

Yes. So we started to talk about the Microsoft installed base back in 2015, '16. And we then said, I think it was 15 million devices. So it has come down, say, 5 million devices, so 1/3 over the last 5 years. And beginning of this year, they went -- these devices went out of support, and most of them were out of support. It's fair to say that in 2015, my expectation was that we would have had much less than 15 -- $10 million -- 10 million Microsoft devices left in the market. We've shipped more than 5 million Android devices, I think, by ourselves. But as we cannot eat in on 1 end of the installed base, it's being replenished by selling more Microsoft devices into the installed base by us and others on the other side, right? So -- and some customers who are not switched yet is that primarily, I'd say, it's because of their software applications. So they have older software applications that are -- the people who wrote those have left the companies, and they don't -- it will be a big lift for them to upgrade. Now they, most of them I'd say are. The warehouse space was a late convert to Android, but started last year to ship meaningful volumes. So I do expect Windows devices to continue to decline. I think it will be a long tail. So I would say, 0 is probably going to take a while. But the biggest difference though maybe to how we thought of the market back in 2015, '16 to today is the expansion of the market enabled by Android. So the replacement of installed base Microsoft devices is certainly a piece of it. But as I mentioned earlier, if you take a large supercenter retail store having gone from high single digits to 60, 70 devices, that is a change in the market sizing enabled by Android, and the number of applications used. So it's much more of an issue of how we've been able to work on expanding the market than it is a replacement market of Microsoft today.

Right. So we shouldn't really think about the Windows market if they're being a galvanized force that we should think about sort of a steady longer-term replacement of that Windows market rather than a galvanizing force that you might see at some point in time where you could get sort of discontinuous growth?

Yes. I don't expect that there will be a step function type of situation where, like I say, year 2000, year 2k event where everybody says, so overnight, they got to make a change. So I think this will be a steady support kind of in the background for the next several years. I'm not sure I'd say 10 years, but in the next several years. But the -- how we've been able to expand the market is, today, a bigger driver than the Microsoft replacement.

Okay. And just on replacement, there's a question on Pigeonhole that I think you've said that Android replacement cycles are shorter, 4 years, maybe 3, 4 years, Windows is longer than that. But that would mean that your earliest Android computers are now up for replacement. And so do you feel like this has been playing out as expected?

Yes. By and large, I think we have already been replacing some of the earliest versions of -- some of the earlier models and earlier versions of existing models with larger customers here.

Okay. If we think about sort of your financial model, you had targeted 20% adjusted EBITDA margins for a while, and now you're there and even then some a little bit last year. How do we think about margins going forward? You are introducing value to your products. That could be a headwind. On the other hand, you're continuing to improve the solutions breadth, made some software acquisitions, that's clearly a focus. So how do we think about [indiscernible] to margins, do you expect margins to continue to go up? Or are those sort of somewhat offsetting forces? And so why don't we start with that?

Yes. So we don't have any, say, new margin targets per se to communicate, but we don't -- we certainly don't see that there's an upper limit to our margins. And as you say, our solutions are evolving in a number of different ways. So value tier might be somewhat lower gross margin. But the softer content we're putting into our solutions. So one thing that investors often ask is about kind of the hardware versus the software. And I say that's a little bit of a false choice for us. For us, the value is really in the solution. We have purpose-built devices that has a lot of software to solve unique use cases for our customers. So this is where -- you asked about consumer devices before Samsung and others, now this is where some of those guys will probably struggle, in that we -- it's more of a niche market, where we have to solve very specific use cases. And we do that largely through software content model. That's why we have been able to expand our margins within the device portfolio. But then we also have other new software applications like, say, Workforce Connect, our voice communication solutions that ride on our devices. So they are connected, but we sell that as a stand-alone software solution. And third, we have like Profitect or the Zebra Prescriptive Analytics software acquisition we made last year. That is a stand-alone Software-as-a-Service offering but it can augment the value of that by either getting data from our mobile devices to inform the analytics on Zebra Prescriptive Analytics solution or it can assign actions to users based on either specific user in a location that go do something in IL-5. And this user -- this person is closest to IL-5 or it can be by user group. So somebody who has this particular profile should have this action. So we're trying to make sure that we tie it all together as much as we can. And we see good opportunities for us to continue to kind of migrate up the value chain and as part of that, get better margins. But we look to drive basically leverage through every line item in the P&L.

Is there sort of a target percentage of software, software and services to aspire to do going forward?

No, not really. We always -- we want -- it's fair to say we wanted to expand and increase. We want that part of the business to grow faster than the core traditional business. But we don't -- we haven't set a specific dollar target or growth target for it. We're more looking at specific solutions and trying to drive the individual solutions as much as we can.

Okay. But if I try and sort of gather, if I think about the sort of financial value proposition for investors, you believe your core markets grow kind of [3%], [4%], you believe you can gain share and you believe there's opportunity to improve margins. Has that sort of been your historical playbook? Is that realistic to continue to believe that, that should be the case going forward?

That is certainly our objective. I'll add 1 more thing to that, though, and that is the -- I mentioned earlier, we have our core market, and we have kind of expansion markets. So we are doing more things in new markets that are outside our core. So large markets, faster-growing markets, so we think those can be an adder to our growth rates or our core market growth rates, you can say.

Okay. Now in terms of your software and services business, those margins collectively are maybe not as high as some people would think. I know you've talked about, well, our break/fix margins aren't that good. I guess the question is, why aren't they that good? I cover hardware companies. I cover IBM and Hewlett-Packard, and the margins are phenomenal on those businesses. And so why is your break/fix margin not better on your services side? Or are there other parts of the services business that might be negatively impacting it? And what opportunities do you have to drive improvement in that -- in those margins?

Yes. So I can't talk to the other companies in your coverage universe there, exactly what numbers they have. But for us, our break/fix business has -- we've improved the margins meaningfully over the last couple of years. And I think we still have opportunities to continue to do that. We have made meaningful investments in platforming a lot of the software we use to manage the business. We have a new outsourced partner that's giving us much better productivity and pricing. And our value proposition, I think, becomes stronger. We do have competition from some third-party suppliers that we try to make sure that we can keep in check, of course. So from a break/fix, I think we -- it's a good business. We've been expanding the margins. But it is very different, obviously, from the software side. And today, our software revenues are not quite of the size as our break/fix business. So the profile of the business is it looks more like the break/fix than it does the software business.

Right. How are you thinking about acquisitions? You've made a few over the years, recent ones have been in software. Is that the exclusive focus? And is there a size limit in terms of either how big a transaction or what percent of your cash flow you would direct towards M&A?

So we think of M&A as a way for us to accelerate our vision, accelerate the solutions kind of Intelligent Edge Solutions that we have. I would not expect us to do acquisitions in our core. I don't feel that we have a particular gap, say, in our portfolio there. So we've done acquisitions in kind of near adjacencies. So this is to augment that we bought Xplore, which is a tablet company that we felt tablets were basically a different form factor from mobile computer, and we had similar customers in that. So that was an example of that. But the last 2 ones were more on the Intelligent Edge Solutions side. So pure software. We have a lot of focus on trying to identify these new solutions or use cases or companies that can accelerate us to get to those where we can drive this intelligent automation for our customers. From a size perspective, we've talked about -- our target debt-to-EBITDA level is between 1.5 and 2.5. So that sets some expectations about kind of the size of the transaction. So in the last couple of years, we've made some, I would say, on the smaller size, but we don't expect that we will do an acquisition that's on the scale of the Motorola Enterprise business that -- when we did that in 2015.

Right. But could you imagine doing $1 billion acquisition?

Yes, we could. And I said the larger the acquisition, the higher the hurdle rate would be for us. So we would try to make sure that we discount it. But our market cap is what is now, $13 billion, $14 billion or something. So $1 billion is obviously a lot of money. But from a relative size perspective, it's not huge.

And maybe you could just talk a little bit about your sourcing strategy. Obviously, very China-centric historically. As tariff issues crept up, you've, I think, begun to diversify. So what percentage of your products are made in China today? And what kind of progress have you made on diversification?

Yes. We -- as you said, our supply chain was very China-centric, as, I would say, most discrete electronic manufacturing company had, totally outsourced those. So we don't have any facilities that are Zebra-owned. They're all based on our -- owned by our JDMs or EMS partners. 2 years ago, when tariffs first cropped up, we started looking at how do we now diversify their footprint. We've kind of picked our partners and the locations early last year, and we started to ramp up the volumes a little bit in the -- towards the end of last year and more in Q1 and more so then in Q2 of this year. So we -- basically, our expectation is that we will be having half of our -- 50% or so of our volume will come out of non-China manufacturing facilities, and that volume will be primarily directed towards the U.S. with tariffs.

And is there a time frame for reaching that goal, Anders?

Yes. The -- what -- so we had said we would be largely being able to mitigate tariffs -- largely able to mitigate tariffs by the end of Q2, so once we get into Q3. I think we've seen some modest delays in -- with coronavirus that Malaysia had to shut down for a little bit. So we're not quite at the same pace, but it's -- we are off by maybe a month or so versus the original schedule.

Okay. So Anders, I'd like to just conclude with a unifying question we're asking of CEOs, which is as you kind of think through and beyond the pandemic, how do you expect your priorities to shift, especially as they relates to cutting costs or increasing level of investments?

We're just starting our strategic planning process now, and we're certainly looking at what do we think will be the biggest themes kind of relevant to us for the next 3 years. We are taking a look at what corona has done to those -- our trends, say, and what it hasn't. I don't want to overread too early here about what -- how the world will change. But I think that for us, we can say, I -- certainly an expectation that the trend towards automation will continue. Digitization and automation will pick up steam. Things like omnichannel, pickup, buy online, pick up at store. In health care, being able to facilitate the patients flow through the hospital or bedside care, all of these things are becoming more and more digitized. And I think our customers are seeing that as great, stronger -- having stronger momentum behind them today than they had before. And we have some unique solutions that we're now just launching for how to enable our customers to bring back workers to their offices or to their facilities safely quicker. So some proximity sensing and contact tracing type of solutions.

And in terms of how Zebra operates, any views on how that might be different post the pandemic?

I would say travel and entertainment has been a big line item in our P&L. And as we go forward, I would expect that to be a little less pronounced. We've had a very high-touch engagement with customers and even internally. I think we've all learned how to be more comfortable on digital platforms like we are today. So my expectation is that we will probably not go back to quite the level of travel we did prior to. But otherwise, I wouldn't expect there to be a big change in how we operate. Now the other thing, which is a little less corona-related, but it is to some degree, the diversification of our supply chain, I think will -- we will continue to make sure that we have a robust and resilient supply chain for any kind of mishap.

Right. Okay. Well, Anders, thank you very much for your time. I want to remind investors that we are doing the slide polling with Procensus. You can click on that link on the left-hand side of your screen. You get a very brief 60-second survey to comment on Zebra and then see how fellow investors are thinking along the same dimensions. Thanks, everyone for your participation. Anders, great to see you. I'm sorry, we can't press the flash. But maybe next year, if you're not too used to this digitization, we'll be back in person. Okay. Thanks very much.

Yes. Thank you. I very much enjoyed it.