Zebra Technologies Corporation (ZBRA) Earnings Call Transcript & Summary

While they're trying to turn on the lights, I want to welcome Anders Gustafsson in, who's the CEO of Zebra Technologies and has been a longtime attendant at the Bernstein SDC, for which we're very grateful. Anders has been CEO since September 2007, and he's greatly expanded the breadth and scope of the portfolio of offerings at Zebra over time. And the stock price is up tenfold since he took over in 2007, largely a reflection of his vision and his efforts. So we're grateful for your attendance.

Thank you.

Thank you for being here. We also overlapped at business school, which is also kind of fun to reconnect to. Anders was in the same section ironically as my sister and brother-in-law. and so we have this familiarity as well.

So Anders, let me start a little bit and just talk about how the pandemic impacted Zebra in demand patterns. So I think revenues were down 1% in 2020. They were up 26% in fiscal '21. You're guiding for 3% to 7% this year. Maybe you can explain the dynamic that happened? Did people stall and then overcompensate? Do you think you're at normalized demand? How do we think about what happened and the impact on the EMV and AIT businesses?

Yes. I'd say, first, the trends and the themes that we saw kind of, it really take group in during COVID were themes that we had talked about for a long time. So how companies look to digitize and automate their operations. It's something we've talked about since 2014, I think when we came up with our Enterprise Asset Intelligence division. That's very much what our vision is to help our customers digitize and automate. When COVID happened, we saw a sharp contraction. In Q2 2020, we were down, I think, 12%, and we were flat in Q3, and we were up in Q4. So we ended the year, minus 1%, but it was very kind of short-lived contraction. Demand at that point changed. It was some -- there were certainly winners and losers from a demand perspective. We saw kind of essential businesses pick. Retail grocery, as an example, was very strong for us, but it was also driven by how people wanted to shop, how people wanted to engage. So buy online, pick up at store was, as an example, a use case capability, mostly large retailer had, but it was not something that had rolled out. They had it in some stores for a few people, so it was very much kind of something they were experimenting with. Overnight that became the go-to way of shopping, as an example. And we then saw -- for a retailer to implement buy online, pick up at store, they really do have to use our type of solutions. So we saw a great boom from e-commerce, from grocery, any kind of retailer that was still open, I'd say, and transportation logistics, last-mile delivery, as examples. But then on the other hand, there was a manufacturing. There was a lot of manufacturing customers to shut down. So they did -- there's very little there. And if you then go forward to 2021, which was a great year for us, 26%, 27% growth is not what we have -- we never talked about as being the new normal. People have asked us how much of that will be pulled forward. I don't think it's a lot of it was pull forward. I think it was just -- the world changed very rapidly. And I would say, across all our verticals, we talk about retail, health care, transportation, logistics and manufacturing. Through all those 4 verticals and geographically, our customers are very focused on digitizing and automating their businesses. The drivers are a little different. It became also part of couldn't find labor, had to pay much more for labor. So the ROI of our solution became much more attractive. So automation solutions became much more prevalent. So in 2021, manufacturing was our fastest-growing vertical. That was partly definitely catch-up, not pull forward but a catch-up, of demand that was delayed from 2020.

And so do you think you -- because you could sort of do the -- now you've done my analyst math and say, okay, well, minus 1% and 26%, I average out at 13% and above your long-term model.

Yes. That's right. Yes.

Did you pull forward -- or did you -- so do you feel you just saw deeper kind of account penetration as opposed to kind of an accelerated replacement cycle because the latter might be more worrisome, the former...

We -- so we certainly did the same analysis and said, looking at the long-term trend line, and we were below that in 2020, then we more than made up for it in '21. I think that the retail is the easiest one to talk about because one, it is a large vertical for us, but it's also one that everybody can relate to that. How brick-and-mortar -- how e-commerce grew and how brick-and-mortar retailers are responding is -- I don't think it is certainly not a pull forward. I think it's just a fundamental change in their operations, building out an omnichannel capability where you're trying to create a capability you didn't have before, but that's how consumers want to shop. That, I think, is a -- that's been a trend since probably 2015, but it accelerated substantially during COVID.

Right. Another issue that you faced particularly this year, maybe you can just update the group, and it's just the whole supply issue. I think you're looking for a $200 million impact for the year from supply chain. I think some of it's components, some of it is delivery. Can you discuss, a, what that is? Whether it's alleviating? And why to some degree you haven't been able to get ahead of it with your price increases? I think there have been 3 price increases.

Yes.

And so -- maybe we can start there.

Yes. So the -- so yes, the $200 million of increased costs, the net increased costs that we have are made out from roughly half, I think logistics. So getting things from our manufacturing facilities to our customers and from paying premium for secure and semiconductor parts. The logistics charges came out of COVID, where a lot of air traffic capacity, particularly was taken out of the system and prices went up. And we -- yes, those prices are still elevated. They have come down from where they were in Q4. So they are kind of developing in line with our expectations. They were down meaningfully from Q4 and Q1. We've kind of forecast, we said we're modeling that they're going to stay pretty much flat for the rest of the year. But we would expect that to continue to come down when there's less restriction on air travel, and there's more -- less congestion in ports. Huge part of the world's container fleet has been moored waiting to be either loaded or unloaded. So we expect them to continue to come down as we see them as largely transitory. They probably won't go to exactly what it was pre-COVID, but we certainly should be much lower, is the pricing today has nothing to do with cost. It's all about demand. And then on PPV, the semiconductor industry has been in -- has been unable to meet demand for the last year or so, I guess. And we -- it's been -- it has improved from, I think, Q4, Q1 were the toughest. We do see it being better in Q2, but it's not going to bouncing back to where it was. The number of suppliers that are -- that we are kind of chasing is much fewer -- many fewer today than it was 3 months back, but it's a limited number of people now. And we've had -- we've signed long-term supply agreement with some to make sure that we get access to components. We have designed -- our engineering team has been working on redesigning our products to alleviate the need for long lead time parts. So we've designed out a lot of our parts. We've been buying off the secondary markets and stuff, which tends to be very expensive. So we prioritized customer commitments, customer delivering so far. We think that's more important that we protect our market share and our reputation with our customers. We do expect it to also go back to more normal levels over time, but it's not -- it's going to probably take through this year before we see that happening.

And which semis specifically have you been -- or do you continue to be constrained on? And why have price increases not been able to keep pace with the overall logistics increase and semi increase?

I will respectfully take a pass on which parts. I don't want to name and shame, quite that our vendors that will not be...

Well, not necessarily vendors, but are they still sort of -- we hear of sort of mundane parts like cables, power supplies, et cetera, and nonleading edge ICs. I don't know if that's consistent with what you're seeing or...

I think -- or so 3 months ago, I think it was very broad-based. It could be a semiconductor powered chip that powered one of our motors and the printer. I think to a large degree, that has -- we've been able to solve for those alleviate those. It is, I would say, mostly advanced but not leading edge parts, tends -- we tend not to be on the 8-nanometer or something like that, we're probably more in the 27-nanometer, 18-nanometer-type gauges, I think. But it's, I would say, advanced but not leading-edge components.

Right. And then on the pricing?

But -- yes. So we've raised prices 3x. We -- when we do it, we've looked across globally by -- so in the U.S., in China, in Europe and competitively, what is -- how do we feel we're stacking up against others? So where do we have some pricing power? Or where do we feel we have a harder time raising prices? So we've been very surgical in where we apply our pricing because some competitors will be more exposed to this than others based on where they're manufacturing and what products they have. So we have few reasons, I guess, why that has taken long -- why you don't see an instantaneous kind of response in pricing. One, we do have contracts with a lot of our customers. So they -- we've signed an agreement, and we can't deliver raised prices to them. We have to negotiate to do such things. So that's part of it. We do also have to -- in competitive situations, we are bidding against others. We have to just bid what we -- what the market -- where the market is. So we haven't been able to pass on the full amount of them, and we have been -- also as the market leader a little reluctant to lead with price. We don't want to feel that we are taking advantage or abusing our -- the strength that we have. So we've been holding back and being more of a fast follower rather than a lead in that area.

Anders, just to follow up on those. So typically, let's say, in a given quarter or time frame, what percentage of your products are kind of coming out of backlog versus sort of transaction within the quarter? I'm just trying to get a sense of how big that contractual portion of your business is over a given time frame? And then secondly, I -- is the fact that -- or part of the reason you haven't been able to raise prices aggressively really as others because in other industries that I follow in sort of traditional hardware, we've actually seen pretty uniform price increases, and it's actually been helping margins. And if anything, you may be seeing the opposite. And so the question is, were you uniquely disadvantaged do you think in your supply chain? Or why wouldn't the industry, especially since they are looking to accelerate their digitalization and automation, like why wouldn't you be able to take price? So 2 separate questions once again. I am a sell-side analyst, so multipart question is -- it comes naturally to me.

The -- I have to remember them, that's a problem. I think the -- so a couple of points. One, on the -- how much of the -- how much backlogs are we going into the quarter? Historically, we will be, say, 1/3. But now we're going in fully loaded to a quarter. So we certainly have -- there's enough demand there. There's -- we are supply constrained, not demand constrained. From a contract perspective, though, that's -- our customers don't necessarily have long-term orders on us, they have a contract that can buy when they need and how much they need or certain prices. So -- and we are -- our business, we are very strong with the largest, more sophisticated customers. So they tend to be the ones that also have the longer, more fixed prices. If you're -- some of our other smaller competitors say they will probably live more on what we call run rate, which is customers that don't have the same ability to negotiate pricing. So that's probably been from an ability to quickly raise prices. Now the good news in -- if there's a good news in the story, most of our -- everybody is well aware of the kind of the inflationary environment they can see in their own operations. So we've had a reasonably good luck, I'd say, in getting customers to accept it. But it's our industry. We -- I think we've raised prices similarly to what others have done. We haven't done more or less. But I can't really comment on why others may have done more. From a supply chain perspective, I think we -- our supply chain was more resilient and performed better early on. We had more inventory. We had ability to source better. We took a lot of share in the first part of 2020. Then we sold a lot more than we had expected, and it's proven to be harder to then backfill some of those orders. So we might have been a little slower to recognize the depth and severity and the longevity of the supply chain -- of the semiconductor issues than maybe some other people who started earlier.

Right. I mean you haven't had manufacturing and assembly issues related to China to any substantial degree?

No, not really. When the U.S. introduced tariffs on Chinese manufacturing goods, we moved basically all U.S. bound volume out of China, that were in China before, out of China. So we've had the ability to flex a little bit between different countries based on that. In Q2 here, where China was in a substantial lockdown, we certainly saw impact on that early in the quarter, but China has opened up more or less in line with our expectations, let's say.

Anders, there's been increasing noise about the health of Europe in particular, in light of the conflict and war there. What are you seeing from a demand perspective and more broadly between Europe, U.S. and let's say, China? And are you seeing changes there? And maybe you can also let us know how you're thinking about verticals as well?

Yes. So Russia and Ukraine were a modest part of our business, about 2% or less than 2% of our revenues. So -- and obviously, not helpful, but not a particularly large part of our business. And in this environment, there is strong demand generally. So we've been able to -- in Q1, we were able to offset the impact of that. And the business in Europe -- or globally, I'd say, we haven't seen indications yet of any slowdown. We're certainly looking for evidence or signs that there is such a thing. But so far, our customers have continued to execute on the plans that they had. So yes, we have not seen an impact or signs of over change in the environment.

Okay. So no -- I was -- IBM has sort of said they're starting to see somewhat longer evaluation periods in Europe. HP last night said that they were starting to see a little softness in Europe, although I think that was more consumer-related rather than enterprise. So from your perspective, you're not -- I understand the contractual business not having sort of cancellations per se, but you don't think decision-making, there's no incremental hesitancy or scrutiny on budgets from what you can see?

Yes. I can't think of any customer that has delayed a project or taking longer than we expected because of any financial issues to make decisions.

Okay. And just you talked about how your backlog is elevated. Is that principally in your AIT business? And when do you expect backlog to kind of return to normal levels in your businesses?

Yes. It's across the board. So all our product categories have seen a higher degree or better -- stronger backlogs. I think it's driven by 2 things. I'd say, one, overall high demand. So these trends of digitization and automation are causing our customers to lean in and grow. The other part is with the longer lead time we have, people want to put in orders earlier, not necessarily earlier delivery, but they want to put in to order early so that they can kind of secure their stock. If they want it in August, they want to put in the order to make sure they don't come and expect the normal lead times, the one we're going to work with the lead times we have. So that -- those are the 2 drivers for the higher backlog. The -- when they will go back to normal, I think that the, one, when lead times do go back to more normal, I think that customers will also be able to work more with us traditional lead times for how they place orders, when they place orders. So we would expect it to come down. I hope that we will be able to hold on to some of this. It's certainly nice to have a -- going to a quarter with a stronger backlog covered.

Right. But if you think like some companies have said, well, even by the end of the year, we're not really sure we're going to have backlogs kind of back to normal levels...

Yes. I don't think it's going to be by the end of this year. I think it will take longer before backlogs go back to what -- come down, but I do think that they will probably -- I expect, I hope they stay a little bit elevated for longer. I think we saw it before, lead times start to extend, we did see a higher backlog based on just stronger demand.

And could some of that timing of ordering, Anders, be distorting demand in any way? Like I know I needed a new car, so I put the order in last September. I still haven't gotten it. And -- but -- so it's a delivery that has shifted demand. Is that something that you think about, monitor, worry about that you are having people sort of ordering for '23 in '22, and therefore, there could be a lull in '22?

We certainly pay attention to that and try to make sure we don't let that happen. I don't think that that will be a big -- I know it's not a big factor. I can't say there's nobody who ever does that. But the 2 reasons for that will be our largest customer, we tend to know their projects quite well. And we are today delivering what they need, but not necessarily what they would like in that respect. So they may want to have a bigger buffer for future. But we will say, here's what we -- we will not hold up your projects. We guarantee you we will do that. Then we -- our distribution partners, we look very carefully at what they have in inventory, and that they aren't -- we don't want them to compete on the availability side. So we want to make sure that they are -- we deliver to them only what they need. We don't want the channel to get overstocked, so that's not helpful for us.

Right. Last kind of macro question before we talk about sort of your long-term model and the new businesses you're expanding to. If there were to be a recession, I'm not asking you to kind of call that either way. Zebra is largely a transactional business. How do we think about Zebra in the event of a recession? And are there things that you can share with us either about the nature of your contracts and what might happen to them in a recession that might mitigate the impact? Or should we really just think of it, obviously, 17% of your business is software and services. So there's something that may be recurring in nature. But if you were to inform us on how to think about Zebra in the event of a recession, what happens?

Yes. I think if you compare Zebra to date to what Zebra looks like, say, 8 years before we did the large Motorola Enterprise transaction. I think we are less cyclical today. We are not immune to cyclicality, but we are much more diversified geographically, product solutions-wise and vertically. But I think maybe the bigger factor would be that I think we -- our customers viewed us more as a tactical productivity tool, more transactional side some years back. Today, our solutions are much more a key enabler of their strategic objectives. So you talked about retail earlier and building an omnichannel capability or buy online, pick up at store, these are capabilities. These are core strategies of our customers that we are helping to enable. And they are not programs that you can easily kind of dial up and down, say, we had -- last quarter was not very good, we're going to pull back and send everybody home. And next quarter, we're going to ask everybody to come back and start over again. So they tend to be more like an ERP implementation, where you have to continue kind of at a reasonable pace. You can maybe dial up or down a bit, but it's not like you can stop and start. So I think we are -- that we have probably about 25% recurring revenue like revenues, starting with proper software-as-a-service revenues to our, say, service contracts where customers pay us monthly for whatever repairs they may have and to our supplies business, which are much more of a consumption model based on how much go through -- how many labels go through a printer.

Okay. Maybe we can talk a little bit about your long-term model. You've just articulated a model of kind of sustained 5% to 7% revenue growth going forward. Part of that was the core, which is your traditional mobile compute and printing business at sort of 4% to 5%. Do you think about both those businesses growing at that rate, 4% to 5%? And I think sort of the historical metric was, maybe the end market grows a little slower, you've typically gained a little bit of share each year. Is that the right way to think about it going forward? Or you do have like 50% plus share in mobile compute now and I think, 40s in printing? So does that become more difficult going forward? Or what's the model to get in the 4% to 5%? And is it the same for mobile and for printing?

Yes. So I think it's very similar between print and mobile computers. 4% to 5% is the kind of the growth rate that independent industry analysts have pegged for those markets. So it's not us expecting that. But we do expect that we will continue to be able to gain some share. There's still 50% to go for mobile computers. So it's still a big market there. And I think we have great economies of scale. And from an innovation perspective, we can -- we have, by far, the broadest portfolio, the most innovation. And we are expanding, say, more horizontally also in our solutions that where, I think our customers are able to work with us across many more solutions to address their needs. And I was in a customer a couple of -- a month back or something, we talked about how they are considering to basically standardize on Zebra because it will be easy to work with 1 partner versus trying to go and have in-depth discussions by each component because -- and be able then to have a relation with us where we can co-innovate. So we would work with them to talk about where the future is going, what the future holds and how we can bring new solutions to them in connection with them -- collaboration that would be helpful. So not an insignificant part of our customers' decisions around buying our core products is based on the vision we have and where we're going and how they feel that that's a compelling vision.

And the 4% to 5%, particularly on the mobile compute side, is that sort of a stable replacement cycle plus sort of new account penetration? Or I know in the past, we've talked about Android devices over time having shorter replacement cycles and therefore, you can get growth out of a shortening replacement cycle. So if we're to kind of decompose the 4% or 5% growth in mobile computing, is most of it a shortened replacement cycle, is it most of it just incremental share gains or new accounts? Or how do you think about that?

Yes. I think we have evidence of -- we've been in the Android business for long enough that we can see there is a shorter replacement cycle. So that is a factor. But I think that the bigger part is the expansion of the market. So if you look at -- like go back to retail, as an example, a large supercenter store would -- 6, 7 years back would have had maybe 8 mobile computers. Today, there will be routinely, say, 80. And most of our customers have an objective and desire to have a device in the hand of every associate that helps in the customer service side, helps in their productivity. So we estimate that it's probably today 1/3 of all associates would have a device. So we think there's substantial opportunity to continue to penetrate deeper into the markets. And there's new form factors of products. So today, we largely think of our mobile computers as kind of handheld smartphones. But you look at if you're going to have a buy online, pick up at store, having a ring scan is something that makes you -- you have both hands free, you can be much quicker, the picks per hour, it's much higher. So there's other ways we can innovate within mobile compute to drive greater value add for our customers. So I see the market expansion as the biggest factor there. Or, yes.

And is it likely to have a similar margin profile on expanded products? Like I often think if you expand the TAM to every employer, maybe it needs to be less ruggedized. It can be more simple, maybe it's a lower margin, less differentiated product. Is that untrue? Or how do you think of the margin profile of kind of new offerings and expanding that TAM?

So if you think of the kind of going from, say, today, 1/3 of associates, so 100% of associates, that would in many situations, I suspect involve maybe a more volume-based product. So slightly lower pricing and similar or what's -- or similar or slightly lower margins possibly. But when you look at the innovation side of it, so like coming into ring scanners, and I think you would expect that to be a higher margin. So -- and this trend that we've had for forever. So we've always had a modest price erosion in our products. Over time, we've offset that by introducing new products with new functionality at the higher price and cost reductions. So we've taken our margins up very consistently over -- from even public.

No, I remember when we had our first conversation 6 years ago or 7 years ago, I wasn't that familiar with Zebra, and I was astonished at how good your margins were. And you said, look, they're a differentiated product, and we're adding more functionality and we're taking out costs. And I think margins can go up, and I probably would have taken the under on you, Anders, incorrectly 6 years ago, and you've done a nice job with that.

Yes. There's one thing that we're -- I think investors try to want to pigeonhole companies into, it's a hardware company or a software company. And I think it's a forced distinction. We're a solutions company or a systems company. You think of our printers, more than half our engineers working on our printers are software engineers. So the platforming we've done, the ease of use that we're introducing, a lot of those things, the value add comes from software. A lot of that software drives the margin. And that's where we had a great scale advantage because we can develop that software platform kind of once. And if you're 1/3 of our size, you still have to make roughly the same investment in software to get to the capability.

Right. And unlike other printing companies, you actually make money on the hardware and supply.

Yes, yes.

And are the growth rates of those 2 businesses relatively similar?

Yes. We believe that they historically have been relatively similar, and we expect them to continue to be there.

Maybe you can talk a little bit about your new expansion markets, autonomous mobile robots, machine vision, workflow optimization software. Why don't I leave it open and jump in after that.

Yes. So we're very excited about those expansion markets. We work for a long time to kind of developing or thinking about where do we have a strong right to play, where do we see that we can bring -- our existing portfolio, existing capability brings value, and we would have existing relationships where they would think of us as a natural player here. If you start with the autonomous mobile robots, warehouse automation space there. We developed organic solutions there, but we augmented that with the acquisition of Fetch Robotics last year. And we've been in the warehouse automation space for a long time by providing technology to the frontline worker, the picker in the warehouse. We try to optimize the effectiveness of that frontline worker. All the mobile robot companies, they were similarly working on optimizing the robot. We'll make the movement of the robot to say. But we're having both the robot and say, the technology for the picker, we can optimize the entire workflow. So think of it as, you send a robot out to perform a task in the warehouse. So we'll sit there, go to aisle 2, bin 6, whatever. We will wait for somebody to come and either pick something from the robot to put it on the shelf or to take something from shelf and put in a robot. We can and at the same time, as we dispatch the robot, we can send an alert to a frontline worker, intercept a robot when it gets here. So the robot is working the whole time. Otherwise, if you think yourself in a big warehouse, you have these canyons of shelving and you may not see the robot sitting somewhere waiting. So they can sit there for a long time without knowing it. And we've looked at the pick rates per hour, which is the traditional productivity measure that warehouses have and we can drive much greater productivity by being able to orchestrate the entire workflow like this. So we feel we have a very strong differentiated value proposition here. Then if you look at the fixed industrial scanning machine vision side, we have had a strong position in scanning, barcode scanning, RFID reading for a long time, but we moved that into fixed industrial scanning now with the Matrox acquisition machine vision. So it's a natural expansion of our current capabilities. We focus very much on value purposes around 2 areas initially. One was east of use. So if you take -- machine vision tends to be very complicated to install and also have to have a Ph.D. in machine vision to do these things. We did a bake-off with a competitor a few weeks back, and it took us 2 hours to install our system, and it took them over a day to do theirs. So we did an acquisition of a company called Adaptive Systems to help...

And this is our pre-Matrox, you haven't closed out?

This is pre-Matrox. And with Matrox now we get to be one of the leaders in a quite fragmented industry early -- from the beginning. So we accelerate our position here quite a bit. We get a much broader portfolio. And we have -- we've always been quite a partner-centric organization. There's a -- we can now offer our partners to -- they can work with us to address a large part of all the opportunities they see. And we think it's a great opportunity for us to leverage their market knowledge and access and our technology to accelerate growth in that way also. So we see that we have a good opportunity. And that's a large, well-established market where we feel that we have a right to pay. And lastly, on the workflow software, largely focused on retail, trying to combine kind of the planning and execution functions to some degree. So it will take workforce planning and task execution and also leveraging the -- our devices. So we can use our devices or our other sensors that we have in an environment to provide more information to the software applications so they can make smarter decisions and then also enable the execution or enable our customers to act on that information by knowing who has been through a mobile device, who is close to where task needs to be currently not occupied or something like that. So we see this as a great way for us to put together more of a vertical workflow solution that leverages our devices and the software to create a more value-added solution.

And Anders, you talked about distribution. I mean for each of these, do you have -- are existing distribution partners actually distributing competing products within these categories? Or is this a new category for them? And similarly, are there different sets of resellers that ultimately are more specialized in these categories?

Yes. It's a bit of a Venn diagram, I'd say. So you have...

It's certainly the workflow software feels different to me.

Yes. That's fair. Those are largely today different. There's some overlap, but it's largely different and largely direct sale. We are signing up new ISVs. So we have some backup system. So when we talk about partners for Zebra, there we have our traditional resellers to what I think you think about referring to, which is the broadest category, the biggest category, but we have other categories of partners. We have ISV programs. We have thousands of software partners that we certify to work with our devices. We do lead sharing and so forth, and we co-sell. We are recruiting many new and larger partners to help us with selling these software solutions. We signed an agreement with Microsoft Teams. So we will have -- reflects this as part of the Teams platform. So you can kind of get in and do -- some part of the functionality will be available through that also. So we have a broad portfolio of different types of partners. If you look at machine vision, barcode resellers. There are some of the barcode resellers who are very advanced and also in that space, but there's also a number of new partners that we don't know, but we have -- we already signed up well over 100 partners in that space.

Got it. And are these -- will the new initiatives also be more direct distribution ultimately? Or given there may be a higher value component to their sale and a more solution-oriented component to their sale. What is direct today as a percent? And I realize fulfillment can be different from the sales part. But the sales part, what percent is direct today? And for the expanded markets, how do you see that different?

So I think the -- first, today, we -- 20% of our revenues, we sell direct, we fulfill direct. This tends to be our largest, most advanced customers. although our largest customer is actually not fulfilled through a partner. Then we have about 30% where we you can say, co-sell. The partner might identify the opportunity to qualify it, and we come in and we help with the, say, the more technical part of the sale. And then a lot of the fulfill would come from the partner. And then half of the revenues would come from all partners. We look at that newer solution, what often happens is that our partners are -- they're not going to necessarily make a market. So we often have to invest in the go-to-market capabilities for new solutions and proving that there is a market for them. And also, we need to have much closer feedback on what works, what doesn't work and so forth. So we tend to start by being more direct, but we work actively with partners to bring them along. We want to make sure that the partners see the opportunities for them to grow with Zebra. And there's going to be a number of different -- some partners will say this is fantastic. We want to invest and we want to grow. We want to build software capabilities. We're going to build new capabilities to be more successful in the future. And we have other partners that probably will say, we're happy doing what we do. We will focus on that, and we may not participate in that, but we have thousands of partners. So there's certainly room for all, but we would expect that it starts with relatively few partners who are most advanced, who adopt this and really get -- help drive it. But as time goes on, we will expand into more of our partner community.

And organizationally, you've acquired Matrox, Fetch, Advanced Vision, Reflexis. Are these being completely subsumed within your organizational structure? Or are they large -- are they kind of separate organizationally and you retain the option to have these as an integrated separate division within the company going forward?

Yes. So we look at each acquisition in and of itself and see how -- why did we acquire it? What is -- how do we drive value with this. And I'll give you a couple of different examples. But one would be, we didn't -- we bought the tablet company a few years back, Explorer. We thought of that is basically a mobile computer and a different form factor. That was a hard functional integration. So there's one mobile computing development team, product management team and so forth. So there's no stand-alone Explore organization per se. If you look at the newer ones, these expansion markets, we don't have the same level of expertise or organization to integrate it into, which will try to create new things. So we've -- for software, we've created a new software business unit. We hired a software leader for that from outside who knows software. We put all the software assets in there, some of the organic ones, some of the acquired -- pretty much all the acquired ones and some of the organic ones. On the sales side, we've then set up an overlay sales team today. So we have a separate SaaS software team that work with our, say, general sales organization to take advantage of access and so forth, but they know -- they understand the software solutions, they understand how to talk about them, and it is a separate organization. And we've done the same with machine vision, same with the robotics business, the warehouse automation business.

Okay. We have about 5 minutes left. So we'll go into the lightning round, which we typically do at the end of these sessions. So is there any -- you have a 5% to 7% revenue growth target. You historically had talked about an EBITDA target, about 20%. I don't think you've really commented on profitability. How do -- how should investors think about either a growth rate for profitability or target profit number or EPS growth or EBITDA on a go-forward basis?

Yes. So first on the revenue growth rate of 5% to 7%, that's the range we communicated in few months...

Longer term, 8% to 7% for this year.

Longer term. Yes. If you look back the last 8 years, we've achieved -- we've been at the higher end of that 5% to 7%. So we don't think it's a particularly stretchy target. We think it's very achievable. On the margin side, we haven't communicated specific margin targets because we don't see, if there's not a upper limit per se. We've said we look at driving profitable growth and margin expansion, and we pretty much at every line item in the P&L. So -- and if you look at our EBITDA margin pre-COVID to what we guided for, for this year. We're still up 1% for this year with the $200 million of supply chain costs included. If you look at our expansion markets as examples, they tend to be higher gross margin markets. SaaS certainly has much higher gross margins, but even warehouse automation or the robotics parts or machine vision or high gross margin markets. And we are you can say, an investment in growth phase, investment phase. So the EBITDA margins for those are -- some are accretive, but some are not accretive to our margins today. But as we scale those businesses, we do expect them to be margin accretive to us. So we're certainly working hard on always driving profitable growth and heavy margin expansion, operating leverage in the P&L.

And just on the software and services, it's about 17% of revenues today. I presume the majority of that is kind of support services, repair services for existing products. Is that the right way to think about it? And is -- and I presume most of that is contractual and recurring by nature and then the software has some license and some subscription maintenance support to it as well. I'm just trying to back in again to kind of the recurring nature and the profile of the assets.

So yes, the majority of our software and services business is the repair business. I think the software part of it, we say is mid-single digits. The repair business is -- the vast majority will be on the contract. So it is a recurring revenue stream. And the vast, vast majority of the software business is on our software-as-a-service model. So it's on a monthly charge rather than a license fee.

Got it. And just on capital allocation, you're less than 1x net debt to adjusted EBITDA, lower than your targeted range of 1.5 to 2.5. What is the capital allocation strategy going forward? And you've pretty methodically done a number of smaller deals, Matrox a little bigger. Would you consider another larger deal, a Symbol type deal, a $5 billion deal?

So first, from a capital allocation perspective, our top priority is investing appropriately in organic growth to make sure we have the right portfolio to drive long-term growth. And then second has been looking at how we can accelerate the execution on our Enterprise Asset Intelligence vision through acquisitions, through inorganic activities. We have strong -- very strong cash flow performance. And we have had the ability to also return capital to shareholders through buybacks. So in -- so far this year, we bought back over $0.5 billion worth of shares. So we feel we have the ability to provide a good balance between investing in the business and returning capital to shareholders. We exited Q1 with 0.8x debt to EBITDA. With Matrox, we will take that up a bit and some of the buybacks. But we have a very strong cash flow performance that we will be able to pay down debt quite quickly and have ample ammunition for either more buybacks or acquisitions.

Is there a size limit to a deal that you would do?

We tend to look at mostly from a business, what does it -- how does it drive the business? How does it accelerate the vision? We don't say that we can't do anything that's above a certain number, but the hurdle rates we will put in will be higher. The risk would be higher. We would then bake that into how we would look at returns. When we did the Enterprise deal in 2014, Zebra, we had $1 billion of revenue, and that was $2.5 billion of revenue. So substantially larger than Zebra. I don't expect that we will do anything at that scale going forward. But something that's bigger than Matrox, which was $1 billion, and it's a relatively -- probably be categorized as a tuck-in from a market cap perspective, I think we can do that.

Got it. Anders, thanks very much for your participation and time.

Thank you.

I appreciate it.

Thanks so much.