Zebra Technologies Corporation (ZBRA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome. We're super pleased today to have Bill Burns, the relatively new CEO of Zebra Technologies join us. Just one housekeeping item. I do have a pretty full list of questions for Bill. If there are questions that you have, you can submit them via the Pigeonhole application. [Operator Instructions]

So without further ado, we'll punch right in. So you became CEO officially in '23. It was obviously a planned transition. You've been at Zebra since 2015. Anders set a tough precedent. I think the stock is a 10-bagger during his tenure. So maybe you can just talk a little bit about what might be different under your tenure, what you think are kind of the principal areas of focus for you?

Yes. As you said, I've been with Zebra 7 years leading the product and solutions team. So all the engineering teams and product management that really innovate and continue to invest not only organically but through expansion in new markets. From a Zebra perspective, we really think about empowering our customers to thrive in an on-demand economy, right? And I think that that's not going to change. We think about digitizing and automating the environments our customers are in. 86% of the Fortune 500 customers or businesses are our customers today. We serve those. You see our products in everyday life. The scanners at front of store sales point of sale. You see us mobile devices being used for parcel delivery. You see our devices being used in hospital environments where we're printing hospital risk bands or we're scanning patients or medication. So everyday life Zebra has used each and every day, that's not going to change. We've invested in some new areas. So robotics, autonomous mobile robots, machine vision, fixed industrial scanning and our retail software. So we layer that on top of our mobile devices, our scanners, our printers, our tablet portfolio, RFID and these 3 new expansion areas. From my perspective, my focus is -- where you'd expect, first and foremost, our customers and partners. About 80% of our business today is done through our channel partners around the globe and through 2-tier distribution, continue to focus on them. They're really important to our success. Second is driving the growth of the portfolio. So profitable growth across the portfolio, which means our core businesses continue to grow. These adjacencies I talked about grow a bit faster and then these expansion businesses and really taking them from a small piece of Zebra's revenue to much larger. And then as you'd expect, talent and culture, right? And we've got a great culture at Zebra. As you said, Anders is only the second CEO of a 50-year history at Zebra, I'm the third. We've got a great culture, a great team around the world and how do we continue to attract and maintain and grow the best talent we can around the globe. And inclusive and diverse nature is really important to us as a company. And I think that if we do that, we'll continue to drive profitable growth for the company.

Great. You just reported earnings at the beginning of May, and you did lower your earnings outlook for the upcoming fiscal Q2 and for fiscal '23. Maybe you can talk a little bit about what you're seeing and what changed over the course of the quarter to lead to that change in outlook and maybe start just kind of macro, either sectors, geographies, et cetera?

Yes, sure. So I think what we saw in -- going into the year is that we we're seeing a trend that, ultimately, our run rate business continued to be strong in the first quarter. Think of that as orders through distribution ultimately below $1 million. We saw projects continue to develop within our customer base and some projects move ahead in first quarter. The verticals we serve are retail, transportation, logistics, manufacturing and health care. Across most of our retail customers towards the end of first quarter, we saw their larger projects kind of being pulled back. And I think our Chief Revenue Officer described as well on our first quarter call. You take a retail customer. They ultimately are going to spend X amount of dollars within the year. They have -- they spend $5 million with you in the first quarter as their budgets kind of get released, they move ahead with their capital program. As we got towards the end of second quarter, our lead times have come into more normal levels. So kind of 4- to 6-week delivery, our sales team sit down with the end customers and said, okay, that $20 million projects, you're going to move ahead within second quarter. Your time to kind of move ahead with those. The customer says, well, we're cutting back on our CapEx spend. I'm going to move ahead with $10 million of those projects, but the other project I'm going to hold off on. And we say, okay, does that still make sense? Is this still going to move forward? Do you see it happening is? Yes, it has an ROI. There's a strong ROI. It's something we want to go ahead with, but I just don't have the capital dollars today to go do that. We're cutting back from an expense perspective as we're seeing our top line slow. So when? And the question that ultimately becomes when is the next $10 million come back? Well, if I get year-end money from a CapEx perspective, I'll move ahead with the project. If not, we'll move ahead in 2024, but it's that visibility. It's been challenging for our sales team. And we saw that most pronounced in retail towards the latter half of first quarter. In first quarter, we saw transportation logistics, manufacturing, health care, all grow within the quarter. But as we got towards the end of Q1, we started to see the run rate continue to moderate a bit, which tells us the other verticals are slowing a little. So I think also what we see is because we sell through 2-tier distribution, what we see is that if the end demand slows, this run rate business, we see an oversize effect immediately from our distributors. Meaning, the inventory that they hold, they have to hold the same amount of inventory, but they're selling less out, so they have to buy less from us, which is really what our revenues counted on is sales into distribution. So you see an outside effect associated with that, which is really the impact you're seeing on Q2 is this large order delays that I described, and some of the run rate slowing, which is causing our distributors to say, okay, I have the right level of inventory, I'm selling less out, so I don't have to buy as much from Zebra. Zebra's delivery intervals have come down, so I don't need to hold as much inventory because I can get the product for much, which is a good thing for customers ultimately, but bad for us in the short term. And my cost of capital is higher. So I don't want to hold excess inventory, if I don't have to. So I think what we're seeing is in Q2, an oversize effect on distribution pulling back and these large orders delayed, and then that impacted the full year guide as well. I think the biggest challenge we have at the moment is visibility. It's primarily in retail today. We see some slowing in the other vertical markets. But to date, they've been holding up better. And I think it's primarily because the projects in retail were kind of smaller nature, large T&L projects, larger manufacturing projects. When a project started with Zebra, it doesn't get canceled. It just gets -- new projects aren't started as quickly. Retail is kind of the $5 million to $8 million to $10 million projects. We're in manufacturing or T&L, you see larger projects and they continue to roll out, so.

And Bill, you mentioned the U.S. What were you seeing outside the U.S.? Did you see the same kind of phenomena? Or were Europe and Asia Pacific less impacted in terms of the slowdown that you saw in retail and perhaps...

Yes. I think we saw about the same in retail across both Europe and North America. I would say, Asia is a little bit different where we -- we're hoping for a bit more rebound coming out of China from a COVID perspective that we haven't quite seen. I think we've seen others kind of comment on that as well. We are hoping for a stronger recovery in the China market that we haven't quite seen yet. We've seen some recovery, but not, I think, the level that everyone would like to see. Latin America had some tough compares from the prior year. So I would say, predominantly retail and predominantly in North America and Europe.

And when you talk about customers placing orders, typically, are you -- how much of your business is backlog driven? And at any big -- how do we think about that backlog level relative to historical levels?

Yes. So I think in COVID, we clearly saw backlogs significantly increases our lead times grew. Customers, typically, we have visibility, 3-month, 6-month larger projects, even longer than that in our customers' planning environment. So ultimately, they're going to move ahead with larger projects depending on the size. We have a fair amount -- we have tight customer relationships, either direct or through our channel partners with the end customer. So we have visibility to those projects. The orders for those projects don't need to be placed until 4, 6, 8 weeks, 12 weeks before those projects. Some of the projects are ordered and then delivered over time. So if I'm doing a full rollout of retail stores or manufacturing facilities or warehouses, I may take delivery of that order over a 12- or 18-month cycle as I go roll it out. So typically it's not as much about the backlog. We hold back backlog today in more normal levels. It's kind of grown very high during COVID come back to more normal levels. I think it's more the visibility of the end customer orders, which is the 6 to 8 weeks. We have visibility to the project, but as example that I gave earlier, in the past, we were fairly confident that project was going to go through. They were going to spend that $5 million in the first quarter and they were going to spend that $20 million in second quarter. And now it's -- I'm going to spend $10 million instead. And that's the dynamic I think we see typically in a tougher macro environment. The visibility is there of the project, but they don't always move forward.

Right. So the project is visible to you, but not contract?

That's right. Correct. Not a word.

Right. And is -- I mean, typically, do you believe your business is correlated with -- historically, IT spending at the corporate level is correlated with corporate GDP and corporate earnings.

Yes.

And is that ultimately what you see that it's correlated with those factors? Or is it more correlated to employment? Or is it more correlated with some other factor?

Yes. I mean, we use a number of factors to kind of look at predicting the future of the business, a lot of which is just our solid customer relationships and conversations with them. That's where it starts. From a broader perspective, GDP, obviously, is a factor we look at. Across our mobile computing, our mobile device portfolio, we look at IT device spend. That's -- CapEx spend of our customers, that's another indicator, clearly. What our customers typically say publicly is what they typically go do. We've seen the largest e-commerce supplier in North America publicly say, I'm pulling back on my spending I overbought. They were one of the few that actually overbought. Most have bought the right amount of inventory. They're just cutting back on what they're spending. So IT device spend correlated to what we do, GDP, a bunch of other factors, CapEx spend of our customers. Clearly, the top line is influenced as well. I mean, you've seen some of the home improvement retailers be challenged on the top line and then they've ultimately become more conservative about what they want to spend.

Right. So in response to a more sluggish demand environment, what are you able to do either from a demand stimulation perspective or from a cost-cutting perspective?

Yes. We're focused on both. I think the only positive of kind of a downturn from a macro perspective is it makes you kind of look at your business a bit harder in both areas, right? Is there areas where I can get more share of wallet? Or are there areas in which I could do more business that I'm not doing today? From a vertical market perspective, government is a good area where our sales teams are focused more on government spending than they have in the past. There's markets such as Japan and Asia, it's the second largest market for our products and solutions, but we have very little share around the globe for printing in mobile computing. We have about 50% share in Japan. Overall, I have 4% share. It's grown to 6% share. But we've addressed that market in a different way now. We've partnered with larger Japanese partners like DOCOMO and Sharp, and we've won the largest retailer and a large postal opportunity most recently in Japan. So I think that we're staying close to our customers, really understanding when that buying signal is going to come back, when they're going to have more CapEx to spend. How do I sell them more? How do I analyze it across my business where I have different shares in different geographies or different vertical markets? Am I selling to have large share in manufacturing in one geography, but less scanning portfolio because I compete many times around the world with the same competitors. So there's no real reason why I should have different share rather than kind of focus of the sales team. So how do I do more with my current customers? I think from a cost perspective, I think that we -- overall, we have a bit of variable cross structure around things like incentives and others that come down, obviously, if we're selling less and not meeting where we want to be at from a business perspective. We've tightened hiring and really have looked at only critical requisitions and hiring. There always some critical positions you need to hire, but for the most part, we've slowed down hiring. Real estate, all the things you'd expect. We're looking across the portfolio and saying, are there places ultimately that we could be more thoughtful about spending in the short term. I think we have conviction around the long term, really around the idea of digitizing and automating environments, it's something our customers need to continue to do. We feel good about the investments we're making across the core, the adjacencies in these new expansion areas. So we want to be thoughtful about what we do on the expense side of things, but we're clearly going to bring down our expense levels in the short term to marry with the top line is doing.

Right. And do you -- I mean, you have relatively high gross margin. So do you think about marginal contribution the way up and way down? And so do we think about marginal contribution being like 30% or 35% on the incremental dollar either gained or lost? And if so, can you really get expense out quickly enough so that you don't have more asymmetric pressure on operating profit and EPS?

I mean, it's always easier to be growing on the top line and scaling expenses along with it versus the reverse side of that. So you can't take -- you can't save your way out of the environment we're in today. We certainly can be very cautious and thoughtful around spending, and we're going to go do that, and we have a history of doing that. But we've also seen recovery come very quickly. And the most recent example is during COVID, we were down -- we're flat in the first quarter, down 10% in second, flat in the third and up 10% in fourth quarter in the same year, right? And I'm not saying that's the same environment we're in today because I think this is more pronouncing a bit longer. But we will see our customers come back and spend. They need to go move forward. The biggest challenge to gross margin has been really the supply chain challenges, is freight and costs which were $180 million a year ago, down to $40 million this year, that's helping gross margin. And then, of course, we're being cautious on the expense side. So gross margins coming our way for other factors other than macro. We've had some price increases put through primarily as our costs have gone up. There -- we're seeing those flow through in second half of the year as well. So you would think that's kind of counter to what's happening from a macro environment, but I think we've seen our competitors and us pass on some of the costs that we're seeing from an increased perspective, there's no cap on EBITDA margin necessarily. I think that we see as our expansion businesses continue to be a bigger part of the business, they have higher gross margin areas, software, for instance, our retail software portfolio, machine vision and fixed industrial scanning; our robotics really as a service revenue has higher gross margin than our core. So as they become a bigger piece of the business, we see EBITDA expansion opportunities as well.

So you have a longer-term growth target of 5% to 7%. Just going back to '23 -- sorry, '18 to '23, you've grown 30%, that would be a CAGR of 5.3%. So you're kind of in that ZIP code. Are you still confident with that revenue target? And how do you think about it between your AIT business and your EVM business in terms of which -- what each of those grows? And then kind of how do you layer in the new opportunities? So what's the waterfall build to 5% to 7%?

Yes. Yes. So I think that we've -- for a long time, we said the long-term growth rate was 4% to 5% we -- since the acquisition. So the history is $1 billion specialty printing business and Zebra acquired $2.5 billion revenue stream in the Symbol business from Motorola back in November of '14. Since then, $3.5 billion business grows to $5.8 billion. The growth rate through that cycle, we've exceeded the 4% to 5% growth rate. That's why we moved it up to 5% to 7%. But we believe the portfolio supports that. Ultimately, we believe that the core portfolio of products, our rugged mobile devices, our scanners that you see -- everything from retail to industrial applications and our industrial printing portfolio, all of which were the #1 market share leader by far across the globe in those 3 areas, continue to grow at this 4% to 5% level. And then we layer on top of it if you think of the waterfall...

And do you think of each growing at the same? Or do you think of your device business growing fast?

Yes. I mean, there's always variation across it. Our largest portfolio is our mobile devices. But we've seen -- most recently, you've seen a lot of variation in growth rates because of supply chain challenges of a year -- over the last 1.5 years or so, but all of which have opportunities to grow in that range. As we continue to see market growth rates but opportunities that still take share even higher than we have today across the portfolio, across different geographies, we believe all those product segments can pretty much grow at that rate. We think of high single-digit growth rates for some of the adjacent areas. So think of rugged tablet. I go back 4, 5 years ago, we had no real tablet, rugged tablet portfolio even though we had mobile devices. People wanted to use larger screens. Think of a manager in a retail store, think of somebody doing dock walks inside T&L, they want a larger screen format. We just didn't have a portfolio there. So we made an organic -- we actually OEM-ed a tablet initially. They made organic investment, then acquired Explorer. Now we're the leader in rugged tablets. So if we put our mind to something, we can go win share in those markets. They grow at high single digits. So think of RFID technology, think of rugged tablets, optic scanning is in other markets. So flatbed scanning, you see in supermarkets. We weren't in that market at all 7 years ago. Now we're the market leader. Our supplies business that go along with our print grows at outside growth beyond our printing portfolio. So we think those adjacencies growing high single digits. And then going even faster than that, but much smaller businesses for us today are the 3 new expansion areas. So machine vision, fixed industrial scanning, our retail software that ties those mobile devices inside the hands of the associates in retail, and then our autonomous mobile robots, which really is infancy today. All of those grow outside growth, but are a smaller piece of the portfolio, but create a tremendous opportunity for us moving forward. When we marry all that together, we come to about a served market of about $30 billion. So it's an interesting market for us.

And if we think about the core businesses, I mean, you have been a share gainer. I think you have greater than 50% share in the mobile and health. That would sort of imply that the core markets themselves probably aren't really growing much, right, because you're gaining share and then you're growing at kind of 4%, 5%. So does continued growth feels predicated on continued share gains? And how do you feel confident, particularly as you start to get to those dominant market positions that you can continue to gain share?

Yes. I mean, we see the share of our core portfolio -- sorry, we see the market growth rates of our core portfolio really being kind of 3% to 4% growth and then we layer a point of share on top of them, right? So that's how we think about it. Market share doesn't come easily even though we are the market share leader and we've continued, even in down markets, continued to maintain or gain share. So clearly, this is about macro in the short term. But we think it has been growing 3% to 4% and then layering a point of share on top of that. We don't need all share gains to go grow our core portfolio at that rate. Some of the new expansion businesses grow faster. Machine vision and fixed industrial scanning, we're a very small business in that case, we're #10 in the market today, both through an organic investment and the acquisition of Matrox and Adaptive Vision, but we see a tremendous opportunity to take some of that growth away and actually go compete in that market, which is fairly fragmented today. People think of the leaders, but we have an opportunity where we put our minds on something to really take share.

And in your core handheld business, like which competitors do you think most about? I mean, there are a lot of players in it, Panasonics, the Honeywells, the Data Logics, et cetera, et cetera. Like is there an emerging competitor that -- or how do you describe the competitive environment?

Yes. Today, inside rugged mobile devices, I've got 50% share today. The largest competitor is probably at 15% share and then lower from there. So we clearly are the market share leader. I think we continue to spend the most in R&D across the portfolio. We continue to look at tiering the portfolio, good, better, best to make sure we're serving the markets around the globe. So more value-conscious buyers in China and India and in locations like that, Latin America, continue to have the high end of the portfolio for buyers ultimately that want more rugged designs, want more memory, faster processing speeds, bigger screens, those kind of things. So we think a lot about the portfolio and then how we continue to enhance that. We developed some specific products for the Japanese market that I mentioned before that ultimately allows us to compete in markets that we weren't in today. So we're very thoughtful across the portfolio, and we see -- we're always going to have competitors. But as the market leader, we spend more on research and development, we have more advances across software and hardware, we've got the more resources to blend gross margin around the world, so we can be more aggressive on price where we need to be. I think that's all an advantage for us.

Right. I mean, I've -- when I first looked at Zebra 6 or 7 years ago, when Anders came to the conference, I was struck by how high gross margins are in that business. And I'm a hardware analyst, PCs have 10% gross margins, tablets have like 15% gross margins, your products have 45% gross margins, right? And you talk about growth in emerging markets where price points probably are lower. Why has this business or why won't this business, I guess, going forward, particularly in emerging markets, move to lower price points and lower margins going forward?

Yes. I think we've seen -- I think we have seen some markets where we've tiered the portfolio move to a lower ASP type device, but we've been able to maintain same level of gross margin. So prior to COVID...

Even at same level because typically the rule is, the higher the ASP, the higher the gross margin percent, right?

Yes, not necessarily, right? So I mean, obviously, you get less amount of dollars, but we try to get the same amount of gross margin dollars where we -- sorry, percentage where we can. Can you always get that? No, right? There's other markets that are price sensitive. But I think as the global leader, it allows you to be able to balance gross margin and profitability around the globe. So I can go compete where I need to go compete. Largest customers get the biggest discounts, right? And then some markets are more price sensitive than others and we spend a lot of time understanding pricing of both our pricing into the market, our competitors pricing into the market. And ultimately, we look at it not just at end pricing in the market, but also what's the amount of money that our partners are making on each sale, both distribution and our end partners, because it's really important that we want them to sell our product versus our competitors. So we spend a lot of time on pricing really understanding price in the marketplace. We've been cautious around raising price as the market leader to be -- but despite that, we have raised pricing and that has made sense. But we've been able to -- there's no reason why gross margins prior to COVID were reaching almost 50%, 49.5%. There's no reason why supply chain challenges abate as FX comes our way a little bit. As we get back to our supply team teams really working with our suppliers to lower cost versus raise them and pay premiums for parts to go get them that we couldn't see gross margin go back to what it was pre COVID, there's no reason why not.

Right. Yes. No. I mean, it's to your credit the margins have gone up and historically, this is -- hardware is not a business no one is able to differentiate....

And I think -- the value is really in our software as well, right? I mean, we have a lot of -- on top of those rugged mobile devices, first of all, they're mission-critical in our customers' environments. They -- we layer a layer of security on top of those devices, usability on top of those devices. We layer software that allows them to provision those devices and put them in the environment, right? There's a lot of value we bring to our end customers that ultimately is really software related. The predominant number of our engineers are really software. I've got very small hardware teams, quite honestly, compared to the amount of hardware...

The third parties can write to that platform, right? And typically, when you have hardware where third parties can write to that, it becomes more difficult to capture that software premium?

Yes. And I think we layer on our mobile devices on top of Android. We've got a close working relationship with both Google and Qualcomm. So we're on the forefront of chipset development. We're on the forefront of Google Android releases. We're first to market in technology, right? So first to market on 5G devices, WiFi 6 is the emerging of technology moves forward, how do I go to faster speeds to support more applications. There's a lot to being the market leader and maintaining that, and we have a great product management team that really understands our end markets and keeps us ahead and leverages those relationships we have with our partners like Google and Qualcomm to really bring the best to market.

Right. And this is principally a replacement business. There's obviously new customers, new geographies that you talked about. How do you think about the replacement cycle? And to the degree that the products are becoming better and more durable and software is upgradable, what have you seen with replacement cycles? And do you worry about lengthening replacement cycle? Clearly, something on the consumer handset side, we've seen that play in PCs?

Yes. I think that -- a large portion of the business clearly is replacement and the idea that we have customers of all size, from mom-and-pop retail customers to small transportation logistics customers to the large postal customers to the largest manufacturers and T&L customers in the world. As I said before, 86% of the Fortune 500 are customers, but all -- so are a lot of small and medium businesses across that. So a lot of our businesses -- repeat business or refresh business across the portfolio, but there's also new hands to be served. You think of retail stores and a device in the hands of every retail associate. That takes place today in the largest retailers in the U.S., it doesn't take place in a lot of other retailers. And you think of inside a retail store, now [indiscernible] and collaboration across the associates is ever more important. Some of our retail customers would tell us if you and I are working 2 or 3 hours apart, we may as well be in a forest away from each other. That doesn't cause camaraderie or be able to have communication between the 2 of us that makes me actually feel like I'm engaged and involved and have camaraderie in my counterparts in the store, how do I engage those associates? The #1 thing set in a retail store across a walkie-talkie is, Bill, where are you, right? So things like communication and collaboration software drive the need for devices in the hands of every retail associate. Think of a hospital environment where nurses has devices today, but what about cafeteria workers and what about the cleaning staff that's turning over rooms that are very expensive to leave empty, right? So there's lots of other unserved hands that we could see mobile devices being used within. We think this trend to digitize and automate environments drive other aspects of our business like RFID. So not just how do I have a barcode label, but how do I have electronic label ultimately that does more automation to allow me to tell where something is in the environment without having to scan a barcode. And how do I do that in a more scaled way overall? So I think we're seeing other elements of our business, not just more served hands within mobile devices but also new applications like RFID driving our business.

And I appreciate that opportunity. But just back on the replacement cycle, what is the -- how do you think about -- what do you think is kind of length now? Is there a risk that it could structurally elongate or structurally shorten...

Typically -- so the typical upgrade cycle or refresh cycle would be 3 to 5 years, it could be a bit longer on printing in that area. But think of it as kind of 3 to 5 years across large deployments. But across a large deployment, a customer typically would buy 30,000 devices to roll across retail or warehouse complex or T&L drivers or others, then they continue to buy along the way. So they probably buy another 25%, 30%, maybe more of devices over that time period. So they don't just stop buying. They replace devices that get lost or stolen or broken or others within their environment, they have new employees coming on. They open new warehouses or new stores. So we continue to see that ongoing refresh of what they have. We track the largest customers. And ultimately, when their refresh cycles come in, they're all on a different cycle of when they're deploying products across the different verticals and others. And that gives us -- right now, we're seeing the challenge is certainly around retail and people holding back from a macro environment. But typically, you see kind of a cycle where each different customer across each one of the vertical markets, which makes us less cyclical even though we're seeing clearly cyclicality now in retail, less cyclical as a business when you take it across transportation, logistics, manufacturing, health care, retail and then you have different deployment cycles or refresh cycles across those.

But what's the catalyst for upgrading. And again, part of the reason I harp on this is, obviously, if you go from a 4-year average replacement cycle to a 5-year average replacement cycle that really changes your growth rate. And we've recently seen enterprises extend depreciable lives on servers from 3 to 4 years, we saw significant extension in PC life cycles over time, right? So it's structurally like a really important question which is why I'm trying to get a...

Yes, yes. No, that's fine, that's fine.

What -- like today, is it because it breaks? I mean, the software is continuously updated, I believe, or some of your software is not compatible with -- newer software not compatible with older versions of Android, but the devices can't be upgraded to or what ultimately is a catalyst for people to upgrade and...

Yes. So it's a combination, as you'd expect, of both technology moving on, first and foremost, right? So it's -- I need to move -- I want to move to 5G, right? I've got WiFi 6 deployments. So it's technology. Second would be, I want a different form factor of the device, larger screens, smaller screens, I want to move to tablets in the specific applications. So it's technology deployment, first and foremost. Second -- and driven many times by putting more applications on those devices. So I need more memory, I want faster processing. I want private 5G networks. I want to use faster speeds of WiFi. So typically driven by applications being used on the devices, which are becoming more and more, as I said, collaboration, task management, workforce management from Zebra alone, but the applications of point-of-sale, applications of payment on those devices are all driving the need for more upgraded technology. Second is OS. So the moving ahead, as I mentioned before, our tight relationship with Qualcomm and Google allows us to get to the forefront of both chipset rollout as well as Android release rollout, but there still comes to a time ultimately where there's patches aren't available for those customers. And ultimately, we extend the life and pick the chipsets and the Android releases we want to go to get on the forefront of that. But eventually, that will run out. So security and upgradability of OS drives the cycle as well. I think ultimately, breakage, loss, all those things are turning to more run rate business for us of those customers. So I don't see -- could somebody sweat the assets a little bit better and a little longer in a tougher economic environment? Sure. But I think we're seeing that's not going to elongate from 3 to 4 years to 6 to 7 years. Those devices just become older in their environment.

Right. Bill, maybe we can talk a little bit about software, which you alluded to, higher margin business, everyone loves software. So I think it's 14% or 15% of your revenues today. Do you have an explicit aspiration for what that number should be 5 years from now? And can you -- so question one. Question two, is it sort of your traditional -- is it more subscription or traditional license plus maintenance? And number three, what are the biggest software opportunities for Zebra?

Yes. So the mid-teens is really our software and services business combined. So it's a recurring revenue of our SaaS business as well as recurring revenue across services.

And those are principally break fixed maintenance contact services?

That's correct, yes. And a combination of OS upgrades from a security perspective, right? So software upgrades as well as kind of break fix. So about 15% of the business is recurring. We think of our supplies business is another 10%, which is quasi recurring, kind of recurring, right, meaning that they continue to buy supplies from us. It's not under contract, but it's about 25% recurring. The software assets we have predominantly today are focused on retail, retail associate enablement, so leveraging the mobile device in the hands of the retail associates. So communication, collaboration, task management, workforce manager, I mentioned before, planning, so retail planning software that ties back to execution, prescriptive analytics, does analytics of the data within a retail environment then drives the task to associate, it has the highest value. Those are really focused on -- and the reason we acquired those assets or developed some organically ourselves was to leverage that mobile device in the hands of a retail associate. We would obviously, like many other businesses, to have more recurring revenue. That's a focus for us. There are some areas that we do have in the assets we acquired that have more software revenue content. So our machine vision business, about 15% to 20% of their revenue is software, machine vision software that they ultimately sell. Our robotics business, while it's very small today, one of the key value propositions is our Fetch core software that controls in the cloud, a whole series of robotic applications. So that drives more software content today. We continue to be inquisitive in the market around software assets that would make sense that are within kind of the orbit of what we do today, right, closely adjacent, selling to the same customer bases, maybe a different persona within the customer. We've got to go to -- reach out a little further than we sell to today. But it would make sense from a software perspective. And we continue to look and see what's out there from that perspective. But we -- our focus is grow that software base we have in the retail, grow our machine vision software base, grow our Fetch core software base. We've got software on the mobile devices, but most of that's embedded today and comes along with the device, but we love to have more recurring revenue, and that's a focus for us.

Right. And so do you have an explicit target or a growth premium for the software and services business?

No. I mean, we haven't specifically come out and said, I wanted this piece of the business. The challenge there is always we continue to see growth opportunities across our core and adjacent markets that are more hardware oriented. And sure, we can have a higher percentage content of software, but that means the growth in those areas slow and we don't see that happening. The software business grows faster than that, but it doesn't quite catch the hardware side of the business. So we clearly see an opportunity to add software content to our offerings, but we also continue to see strong growth opportunities within our core energy scenarios.

In the spirit of kind of recurring revenue, have you or do you offer Device as a Service type offerings? And if not, why not?

Yes. In some cases, we do. In robotics, in autonomous mobile robots, we're seeing more opportunities to do that where you're marrying kind of robotic software and applications along with robots and the software associated with it. In the mobile device side, we've seen a little bit of it, but not a lot. And the primary reason is that end customer, say, a store operations manager, it sounds good that I don't have to go get CapEx approved for a big project to spend more CapEx to reoutfit my store and do an upgrade or refresh within the environment. Ultimately, when it comes down to the CFO, it's -- that's really a lease, right? Ultimately, let's go spend the capital. We have the capital dollars to go spend. So we've seen less interest in that. They want to buy the devices as capital expenditure, they're layer on a software service agreement with us for, like you said, break-fix as well as software on top of that, but less so on a Device as a Service, some but not a lot.

Maybe I could ask you about AI broadly?

Yes.

So is there a role for AI and Zebra product offerings? And is there a role for AI within Zebra itself in a way to improve effectiveness or efficiency?

Yes. So I think across the product offering, we think of it as machine learning kind of first and foremost and then leveraging AI. So learning across our retail software, we leverage AI and machine learning around our workforce management software, preferences of employees and others to -- in the workforce and what shifts that they want to work, where do they want to work, those kind of things, basic applications. We're using machine vision and AI inside our machine vision portfolio, right, to learn an environment and train models more quickly. Ultimately, we're using it in areas like product recognition. So think of identifying fruits or vegetables at the front of store and a self-checkout so that it makes it easier for the consumer to ultimately -- so using algorithms that ultimately learn what an apple looks like and then ultimately say, this is an apple, right? So more applied. We see AI being used in a combination, not just in the cloud, but at the edge as well, which we believe will drive more mobile device sales moving forward, again, this upgrade cycle around technology, faster processing, more memory, more use within those applications on those mobile devices because there's things that will have to be done in the cloud that will have high processing power needs, but there will also be product recognition and things that could happen on the device that ultimately, you won't have the connectivity from everywhere to be able to go back to the cloud and get the answer faster enough. So we think kind of AI at the edge. We use AI as well in our demand planning software today. So think of taking in weather and past forecast, social media and others as we provide demand planning software for our customers. So multiple different pockets. We're leveraging machine learning and AI within our offerings today. And I think that continues to grow and it creates an opportunity for us, especially the upgrade cycle within mobile devices. Across our business, I think like everyone else, we're trying to figure out beyond the hype cycle of AI, how do you go leverage it within the business, whether it's leveraging code writing or just specific jobs that can be done in a different way. And I think like everyone else, we're thinking -- figuring out how to sort that out and figure what that really means to our business overall.

Right. And if we come back here 10 years from now, I might be too old, but is there a business that you think could really be a substantial part of Zebra today? I mean, whether it's robotics or machine vision that you think you're well positioned given your incumbency with your existing customers at retail, et cetera, and given technology advances that you think could be a significant part of your business, 10% or 15% of revenues or more?

Yes. I mean, I think we're excited about all 3 of the expansion areas around retail software primarily because we have the devices in the hands of the retail associates today and how do we continue to leverage that. Robotics, I think, ultimately, are still in their infancy. So I think that we're still focused on 2 primary applications: goods transport and then fulfillment within e-commerce. So we find that as a very interesting area for us to drive growth, but it's a much smaller business today.

And is it the most competitive of the 3?

I wouldn't say it's -- there's a fair amount of competitors in this space, but no one large formidable enough to say anybody secured this space yet. So I think there's lots of opportunity. In machine vision, fixed industrial scanning, I would say that, that is -- software is the largest of those and fixed industrial scanning and machine vision are second largest. I think we're excited about that portfolio overall, both through organic investment and our acquisitions that we've made of Matrox and Adaptive Vision. And the reason is, I see that in that case, we've got -- we invested in the low end of the portfolio which is really tightly coupled to our scanning business today and we acquired the Matrox assets which were really at the high end of the market, the high end of vision systems. And we're marrying those 2 areas from the low end of the portfolio and high end of the portfolio together across the entire smart camera marketplace and stitching that together. We're growing channel partners. We're doing a lot in that space as well. So we're excited about all 3. I would say, in the short term, we're really excited about fixed industrial scanning and machine vision, but all 3, I think, created a great growth opportunity for us. But I think if you said pick one, you're really excited about, I think that machine vision and fixed industrial scanning and...

And is that ultimately what drives your kind of M&A agenda going forward? Or do you see new adjacent market opportunities?

Yes, when we think about capital allocation, we like to organically invest first. We see tremendous returns associated with that. Many times, we'll make an organic investment first before we go acquire something or if we don't want to make an organic investment, we'll make a venture investment before we acquire something. And we don't always acquire the things we have venture investments in. But we look at it as ways to learn about the business. In the case of robotics, we had an organic investment first and then we ultimately put a venture investment into Fetch and then acquired them. Inside retail software, we had our investment and collaboration software and then a venture investment into Reflexis and then acquired the business. Inside machine vision, we made our organic investment into the low end of the market, which was closely adjacent to what we do today, which is really focused in T&L and fixed industrial scanning. We stepped a bit in the machine vision and then we acquired the Adaptive Vision assets to give us machine vision software for those smart cameras. And then we -- as we learned more, as we talked more to our partners, as we -- they said to us, look, it'd be really nice if you had the whole breadth and depth of the portfolio, then we went out and acquired the Matrox asset. So we're very thought across what we do. We make sure that those acquisitions will increase our time to market. They align our asset intelligence vision of really digitizing and automating customers' environments and really focused on the front line and giving every worker and asset visibility and connectivity and how it ties to the portfolio. But I think that across all of those, we're very thoughtful and organics first venture to learn and we're still inquisitive about M&A where it will lead to faster time to market or give us a bigger piece of the pie in a market that we're excited about.

And what is the likelihood of larger transformational M&A at Zebra?

Yes. I mean, I think that we're looking at things that are large and small, right? I think ultimately, we're committed to continue to grow the business organically first and foremost. And if we found something that was attractive at a larger size, we'd be interested in it, but we don't have anything right now that...

Right. Because Symbol -- that's really galvanizing acquisition for the organization?

That's right. I mean, I think that -- the acquisition could not have gone better, right? As I said before, $3.5 billion to $5.8 billion, 7 years later. And I think that would we do something that big in the future? Probably not, but who knows.

Maybe you could just talk about China, both as an end customer, country and also as a manufacturing country and what opportunities and risks China brings?

Yes. I mean, I think that we're still committed to the China market. We sell a lot of products and solutions into the China market, both local Chinese companies as well as international companies manufacturing in the China market. So that's an important market for us overall. It is more price sensitive. So we have our value tier products into that market, but we saw a lot of our higher-end products as well. And like I said earlier, we were hoping for a bit more rebound in the short term, but it's a market ultimately that despite all the noise around the geopolitical perspective, we find it as a continued important market for us as an end customer. Like others, we're continuing to build out resiliency of our supply chain. Initially, I think like others, we look at that more in the area of U.S. tariffs and we've diversified our manufacturing not just in China, but also in Vietnam and Malaysia as well, but we still did the predominance of our manufacturing within China with our JDM and contract manufacturing partners, that's where they're based. I think to totally extract yourself from China is very, very difficult.

So what would happen if there was some political situation that effectively put China manufacturing on the entity list or whatever it might be, like what are the...

Right. I think we continue to build out our resiliency across manufacturing, but I think like others, it's hard to totally extract yourself from China, even to places where you manufacture outside of China, parts are still coming from China predominantly. And it's difficult. Could you get parts somewhere else outside of China? Yes, but likely not in the volumes in which all of us as electronic manufacturers would need. That's a difficult...

All right. Bill, we're just at the end of the 50 minutes, any last comments you'd like to make about...

Yes. I would say, we're excited about the long-term growth aspects of our business. Clearly, we're being impacted by the macroeconomic environment in the short term. And the secular trend of digitizing and automating our customers' environments is where we're focused. And I think we've got great customer relationships around the world across all of our vertical market segments, and we're excited about our business.

Great. Thanks very much for coming.

Thank you.