Zebra Technologies Corporation (ZBRA) Earnings Call Transcript & Summary

Okay. Good morning, everyone. Thanks for coming. I'm Mark Newman, Bernstein's IT hardware analyst. And great to welcome Bill Burns here, CEO of Zebra Technologies. Just a brief intro of Bill. Bill was named CEO of Zebra Technologies in March '23. He's more than 30 years' experience in the technology sector and joined Zebra Technologies in 2015. In his prior role as Chief Product and Solutions Officer, he oversaw strategy, investments and development of Zebra's portfolio of products and solutions. And during this time, Bill extended Zebra's market share leadership across its core businesses while entering adjacent and expansion markets. You also delivered on the company's Enterprise Asset Intelligence vision and strengthened Zebra's strategic relationships with its customers and partners. And before joining Zebra, Bill was CEO of Enbrain and previously before that, CEO of Spirent Communications. Thanks so much, Bill, for joining us today.

Thank you. Great to be here.

So I think just to start off, Bill, if you could just give us a brief intro of your company, just to start us off. And then we're going to go into some prepared questions that I've got. And then we've just a reminder for everyone, we've got Pigeonhole. You can submit your questions or vote on questions, and I'll be looking to take some questions from the audience from the pigeonhole towards the end.

Maybe, Mark, maybe I'll start with Zebra's vision, right? It's the idea that every asset and worker at the front line of business, think of where work gets done is visible, connected and optimally utilized. And what I mean by that is that we think of -- you see Zebra in everyday life. So scanners at the front of checkout in retail, you see us in mobile devices being used for parcel delivery and e-commerce. You see us in hospital risk bands that identify patients and hospitals. And we serve retail, transportation, logistics, health care, manufacturing as our core markets ultimately. We've invested in new areas beyond barcode scanning, reading, printing our core areas into new adjacent areas inside retail software, including some recent AI offerings in that area. Inside robotics and machine vision are new areas in which we've invested across the portfolio. Today, we're $5 billion-ish in revenue, ultimately have a broad range of our portfolio of products. The 80-plus percent of Fortune 500 customers or companies are our customers today, along with all the way from there down to the mom-and-pop retailer or transportation of this company or others around the world. We're truly global. And the breadth and depth of our technology, our customer relationships, the idea that we're a trusted partner to those customers around the globe gives us an opportunity to continue to expand our presence in our customers' environments and work with them as truly a trusted partner as they deploy new technologies, including AI moving forward.

Thanks very much for the intro, Bill. And so just going into the questions, Zebra saw a pandemic period surge followed by digestion period and demand characteristics for Zebra solutions have started to improve again. Can you discuss what that means across your end markets? And is this different from what you saw 4 to 5 years ago? And has this also been relatively broad-based? Or are you seeing more strength among different end markets, customer segments, regions or deal sizes?

Yes. I would say that across our customer base that our products and solutions are mission-critical to what they do, picking an e-commerce warehouse, delivering a parcel and transportation logistics, serving a customer in retail, treating a patient within health care. So our products and solutions are mission-critical to what our customers need. We've seen broad-based growth across the portfolio. And we've seen that during the pandemic, we saw a large build-out of capacity within our customers, whether that's transportation logistics or e-commerce or inside retail that then saw them pull back in spending in 2022 or '23, but return to growth in 2024, and that trend continues. We saw in Q1, broad-based growth across the portfolio, across each of our vertical markets I mentioned before. We've seen it across all geographies. Obviously, some caution on the point of our customers of their thinking around what's the global trade environment mean to them. But we haven't seen a change in buying behavior. We've seen them actually continue to buy -- continue to move ahead with their projects. We continue to see them move forward with the areas in which we're working with them. And we think that's a good sign across the business. The global environment certainly is on their minds, but it hasn't changed their buying behavior. And I think we're glad to see kind of this broad-based growth. I'd say manufacturing lags a bit as that segment is still recovering. So still double-digit growth in first quarter, but lagging the other segments a little bit as we're still seeing manufacturing recover around the globe.

Any specific additional comments on pipeline?

I would say that we feel good about where we're at with our customers today. I mean I think that we've we guided to Q2 that -- and where we're at for our overachievement in Q1. I would say our guide to Q2, FX moving in the right direction, a small acquisition we did ultimately would have led us to typically up our guide for the full year in Q1, but I think the global uncertainty around trade, we stuck with our full year guide. So I think we feel good about where we stand today with the pipeline of opportunities in our customers and what we've delivered in Q1, our guide for Q2 and then ultimately, what we see moving forward.

Okay. And how are you thinking about your 5% to 7% long-term growth algorithm? What gives you confidence in that? And how would you frame your customers' refresh cycles now?

Yes. I would say that the 5% to 7% growth rate is what we talked about through cycle across the business. That's kind of made up of our core product portfolio, which grows at about 4% to 5% as we kind of see it across our mobile device and mobile computing portfolio, across our scanners, across our print portfolio, and we continue to take share in our core markets. We think of adjacent markets that we're invested in. So think of RFID technology growing much faster. Our tablet portfolio, we're seeing new opportunities across tablets as a way to a larger screen in environments that we hadn't seen mobility in the past. So Manufacturing is a good example of that, where you're moving from kind of fixed screens in manufacturing to manufacturing associates having tablets as their form factor to be able to communicate, collaborate, get more information than just looking at fixed screens around production. So we're seeing the tablet portfolio, for instance, grow faster. Our supplies business that ties to our printing portfolio overall grows a bit faster. So we see faster than 4% to 5% growth across those areas of the portfolio. And then we've got new expansion businesses around machine vision, which is -- in fixed industrial scanning, which applies to transportation, logistics and manufacturing customers. And again, grows faster than our core. Most recently, it's kind of lagged behind, right? We've seen this in the manufacturing sector and the lack of investment in T&L coming out of COVID, but that market will be a very attractive market in machine vision as it returns to growth. Our retail software ties to the mobile devices that we sell inside retail associates. So think of a retail associate communication collaboration across the store or how do I send tasks from a corporate or a manager to an associate in the store. So we think of our software offerings that go along with our mobile computing area as expansion areas for us. And then lastly, robotics, still at its infancy, but think of the idea of e-commerce warehouse picking where robots and people work together to do that pick. So those areas grow much faster, but are very small today in the portfolio overall. When we marry all that together, our core portfolio, these expansion areas that grow faster, we come to this 5% to 7% growth rate through cycle, and we feel good about delivering that and continue to increase profitability along the way. So we think about really as profitable growth across the portfolio.

Right. So 4% to 5% growth in the core businesses and then there's additional growth areas to get to that 5% to 7%.

That's correct.

And how do we think about that in light of 2015 to 2014 CAGR being closer to 33.5%?

Say it again.

So 2015 to '24 CAGR was actually closer to 3.5%. So maybe just frame it like in terms of [indiscernible]?

Right, compared to the 5% to 7% Yes. So I think that if you look at the CAGR in the past, I think the challenge has been the pandemic, right? I think ultimately, when you saw the -- back in -- we saw significant growth from the enterprise acquisition, the Zebra specialty printing business acquiring the assets from Motorola and the enterprise business, $3.5 billion in November of '14, growing to $5 billion in 2020 and then 2019, flat in 2020, a large spike upwards in '21 and '22, really driven by the pandemic, right? Buy online, pick up in store, home delivery, e-commerce, all the things that our customers thought were going to continue to grow at those growth rates and then a decline in '23. So you've seen a lot of variation in the growth, including the spike up in the decline in '23 that's put a lot of -- it's hard to measure the business in CAGRs these days across that time frame. But I think as we think about 2023 moving forward, there's no reason why we shouldn't be able to deliver the 5% to 7% growth rate.

Okay. Great. And can you talk about how that translates into EPS growth and free cash flow. I think you talked about double-digit EPS growth. Can you just talk about that and free cash flow conversion?

Yes. I think that as we see -- as I said, it was really focused on profitable growth. As we grow the top line of the business, we would expect probably about a 30% drop-through to the bottom line and profitability. We've got to invest more in the business, obviously. So we're going to invest some of that across R&D as we enter new areas in sales and marketing, continue to extend our lead in the market and enter new markets. But I think you'll see a drop-through of profitability as we grow top line revenue. From a free cash flow perspective, we think of 100% free cash flow conversion is where we target across the business. So the business generates a lot of cash. And ultimately, we see free cash flow conversion as being an important metric for us to continue to track.

Okay. Great. Shifting gears slightly on the competitive landscape. Has that been more challenging recently, are lower-cost competitors a bigger risk now versus before?

Yes. I would say that the competitive dynamic is about the same. I think we haven't seen much difference certainly in markets around the world. There's always going to be formal competitors that we have in the markets, and we have new competitors in these new expansion areas that we're investing in today. I think that from an Asian competitor perspective, I think that we've seen that dynamic not change much. Ultimately, it represents kind of the value tier to low end of the portfolio. We've spent a lot of time across the portfolio, tiering the portfolio. And what that -- early on, I would say, 10 years ago, we thought that having a value tier product or a lower-tier products would take away from the average sell price of our products and bring down the average sell price to our customers. It's actually done the opposite. It's given us a portfolio of product of kind of good, better, best. It's allowed us to have conviction around the top end of our product portfolio. So customers who ultimately want the fastest device, the largest screens, the most durability, the best service around those devices will pay a premium for those ultimately. And then those who want to buy a lower-cost device in -- especially in countries like India or some place in Latin America inside the China market, we've developed products specifically for those markets that quite honestly, don't have the same specifications as our higher markets aren't covered on the same service delivery vehicles and others. And it's allowed us to maintain kind of conviction and price at the high end of the product portfolio. So competition hasn't really changed, and we've tiered the portfolio to match the different market segments in which we're playing in today.

And so how should we think about installed base on pricing power? How much risk is there a structural replacement cycle elongation?

Yes. I would say that there's a lot of talk about a significant portion of our business are customers that are buying from us today, right? When you've got 80-plus percent of the Fortune 500 and almost anybody who's a retailer, a transportation logistics company, a manufacturer around the world is our customer in some way, there's refreshes and product cycles around those. We see those being varying degrees typically in mobile devices. It's kind of 4 to 5 years, maybe about the same in scanning, a little elongated beyond that in the printing portfolio. But our customers continue to refresh their portfolio of products that they have deployed today. I'd say a couple of things around that. When a customer refreshes or buys, especially if you think of front-of-store retail, maybe 5 years ago, they bought 40,000 devices over the next 5 years, they're buying more and more devices. So let's say the refresh cycle comes up again, it's about -- it could be 60,000 devices. So there's -- the refresh cycle isn't the same amount of devices. There's more associates, there's more stores. There's more applications they're using our devices. They're putting devices in the hands of more associates within the store to do more jobs. So that creates an opportunity for us beyond refresh is this idea of unserved hands. So if we think about across the verticals we serve, not everyone is equipped with a mobile device today. And that's becoming ever more critical, especially in the area of things like AI, right? The idea that says we think of this framework at our customers' environment around sense, analyze and act. It means that you sense what's happening at the point of productivity. So you give an asset a digital voice by reading a barcode tag. You read an RFID tag. You've got an associate with a mobile device in their hand. And ultimately, you do analytics around to say, where is the pallet, where is the forklift, where is the employee? And ultimately, where do I go to move that pallet to, to put it on this truck. So I sense what's happening in the point of productivity. I analyze it and AI enhances that analytics capability across the environment. And then I got to take an action. I've got to go pick up that pallet and I've got to move it to the truck to ultimately get efficiency within my environment and then I drive an outcome. I get the right pallet to the right customer on time ultimately. And we think of our entire portfolio as being kind of tied to that is ultimately how do we drive more analytics through AI? How do we drive more devices in the hands of associates, whether that's across all of our verticals because this analytics become ever more important, communication collaboration to that employee and how do I take the analytics and the only way to actually get an action taken is by having an employee having a mobile device to be able to communicate to them, which drives this unserved hands opportunity for us beyond just the refreshes.

Got it. You also entered several new markets like machine vision and robotics. Can you talk about why Zebra can be successful in these areas?

Yes. I think that we think about organic investment always first. So machine vision is a good example where our handheld scanning product, think of the scanners you see every day in the supermarket that scans your water or the flatbed scanners that scan your groceries. We're the market leader in that space. The machine vision market, the low end of machine vision is really fixed industrial scanning, which really fits into transportation logistics, which is a market that we do a lot of business in today around scanning and mobile computing and printing across our portfolio. And the fixed industrial scanners are just like a handheld scanner only it sits above conveyance systems. It decides on sortation of parcels and others. So it's used in an environment in picking where I have packout stations and I'm ultimately scanning where I don't want to hold a handheld scanner. So it's kind of a very closely adjacent space to us. Machine vision is a step-up from that. And you just don't just read the barcode, you actually use vision systems to say, is the parcel damaged? Is the -- in manufacturing, is the label on correctly? Are all the cashews whole, all the inspection you do within manufacturing. So you go from kind of handheld scanning, which we have -- we're the market leader in today to fixed industrial scanning to machine vision. They're all vision systems, and they go an increasing capability associated with it. So we think of extending the portfolio through acquisitions in areas in which they are closely adjacent to what we do today. I mentioned software today. Today, in the predominance of retailers around the world are using our mobile devices in the hands of the retail associate. -- our customers would tell us that 2 retail associates in a large big box retailer, if they're 2 aisles apart from each other, they may as well be a forest away from each other, meaning they want engaged associates, but if they're working by themselves all day, then you don't have an engaged employee. So they want to be able to communicate, collaborate with their manager. They want to be able to communicate, collaborate with each other. When do you want break? Do you want to go grab lunch, those kind of things. But they don't want the associates using their personal mobile devices because it distracts them. So how do you get communication collaboration on those mobile devices, that's software we offer. How do I take tasks from corporate and send it down to the store to individual associates. So it's Memorial Day weekend, and I got to put the Pepsi EnCap on or the Oreos EnCap for the weekend. How do I send that task down to 3,000 stores to have them go put the end cap on for the holiday weekend? Well, I do that through task management software, which is software that we offer to our customers. How do I take a task from a manager and send it to an employee? How do I take an online order and send it to an employee to go pick that order within the store? So workforce management, how do I plan the workforce in a do-it-yourself retailer? I need somebody in plumbing, I need somebody in labor. I need somebody at the customer service department. That's software. And then I ultimately want to be able to set my schedule. So I got a mobile device in my hand in the store from Zebra. Now I can set my schedule associated with it or request a change in schedule, those kind of things. So the software is closely adjacent to the mobile devices, and it sits on top of those mobile devices. So we think of the acquisition strategy is things that are closely adjacent that we do today and that we have a right to play in because ultimately, we have customer relationships or we have a portfolio that's really close to it from a technology perspective.

Got it. Great. That's very helpful. And could you also now speak a bit about RFID which is, I think, gaining traction again. Do you see that as a threat to your traditional barcode tracking?

Yes. I would say that RFID is complementary to barcodes. I would say the ubiquity of barcode reading today is across all industries and all segments today, and it's not going away. I would say that, in fact, there's enhancements to barcode reading today that new regulation that's driving more track and trace capability across 2D barcodes around the world that's new standards that are coming in place. But RFID technology is an exciting technology is around the automation. This idea of having an enhanced digital voice associated with starting in retail, really in apparel more than anything else as I was trying to -- customers were trying to track inventory better, especially in things that have lots of different sizes, lots of different styles and others. So think of Blue Jeans, for instance. has moved into broad mainstream use within apparel inside, especially fast fashion and across the retailers, but now has moved across the entire supply chain. So you think of this idea of track and trace across the entire supply chain and getting more visibility, I can use radio frequency tags. They've come down in price considerably, and they've been enhanced from a technology perspective to work in more environments and to be able to attach to more goods overall. And we're seeing it being used all the way through the supply chain. So fast fashion would have been a good example early on. They control their supply chain. So ultimately, they said, I'm just not going to use it in the store. I'm actually going to use it in my distribution center. I'm going to actually have my suppliers tag everything that comes from them so that I can use it through my distribution center in my store and then at my point of sale, so I can also use it to track things like loss prevention. Now we're seeing it being used across things like transportation logistics vendors. So UPS has made a lot of announcements around RFID technology. So putting an RFID tag on every parcel to make sure ultimately, you get the right parcel on the right truck to basically use to get more efficiency across their operations. So if I can give something a digital voice, and it doesn't matter whether it's a printed label, it's a barcode or it's an RFID tag. Once it has a digital voice, ultimately, then I can automate what I'm doing in my customers' environments. And that's why we talk about the long-term trend of digitizing and automating the environment. And today, what we're seeing ever more is this idea of using AI to do that analytics. which will drive more analytics. And we think about it is the idea of using the data we collect, an RFID tag, a barcode scan, a mobile device in the hands of an associate knowing where a tool is an IV pump or a forklift. If I have data in real time, and I can make real decisions in real time, I can impact productivity. So it's not from the idea the data we collect can be used as big data. They can be used as analytics after the fact. But the most advantageous thing to go do is use it in real time and say, what's the next best action that needs to happen. So our customers in retail would say, it's not enough to tell me the shelf is empty. You need to be able to tell me that the shelf is empty and associate has to go move top stock down to the shelf because I don't get an outcome. I don't sell anymore unless it's actually on the shelf where somebody can buy it. If it's not on the top stock, isn't in the back room. So how do I direct the task to a worker to go move it from the backroom on to the shelf. If it's not in the backroom or not on the shelf, then ultimately, how do I automatically reorder from my distribution center to get it into the store. So it's a sense analyze A framework that ultimately says, if I can give things a digital voice with RFID does, and ultimately, I can automate the environment, then I became more effective and more efficient. And with AI today, that analytics becomes ever more important.

So you talked about AI there and how it's actually incorporated into your own solutions. But obviously, AI is a very, very hot topic. And I mean, can you talk more broadly about how you're leveraging AI? Are you talking about within your own products, but also potentially in your firm? How are you thinking about AI for increasing efficiencies internally? How are you thinking about AI in general?

Yes. So I think the first and foremost, what I talked about already is the idea of digitizing the environment that feeds AI models. And I think that's what we do. We give visibility across the entire supply chain to assets and people and workers, visibility and connectivity inside the environment, and we're going to feed the data into those models. So I think that's the core of what we do. The second area, I think we see as a large opportunity is the idea of leveraging our mobile devices in the hands of frontline workers to ultimately improve productivity using AI. So I'll use a retail example. a retail associate as somebody wants to return an item and ultimately has an AI model running on the mobile device itself. So we're working with Qualcomm and Google and our own technology to be able to be able to run the large language model on the device, so I don't need connectivity always to the cloud, which is expensive and a lot of our customers don't have strong connectivity out of things like retail stores. The associate says in plain text in local language, what do I do if a customer wants to return an item that's over 90 days old? What do I do if a customer wants to return an item that they want cash back, but they paid a credit card. What do I do if I want to return an item that's damaged. And ultimately, having the store operating procedures available to that retail associate today to be able to go make the decisions to know and guide that associate. Over time, what we see happening is that happening automatically, meaning that the associates takes an image of the actual receipt and what comes back and says, okay, that item can be returned. It's less than 90 days old. It's not -- is it damaged anyway? No. And then ultimately says I can return the credit on the customer's credit card, would you like that, Mr. Customer? So the transaction is taking place in the background by using image to be able to just scan the receipt as opposed to the associate asking the question, Agentic AI and the transition to more directed work taking place behind the scenes. So we think the mobile device as a key to a digital assistant. What do I do inside manufacturing when production is out of specification. What do I do when the red lights on, on the production, this area, the production area and how do I go fix it? What do I go do? That's why the idea to move to tablets inside manufacturing is an example. So this idea of a digital assistant, somebody a companion with a frontline worker being able to be able to query and drive information today, but moving to a genic AI where there's actually decision-making and things happening in the background that then come back to the workers saying, I've done all that. I've done all the work for you and the idea of saying, it's less than 90 days old, yes, they can get a credit card, no, it's not. Yes, it's returnable. So I think that's what we see is a big opportunity for Zebra is leveraging that mobile device. Internally, we're doing many things that others are doing. We're leveraging AI across our code writing. We're leveraging it across our customer service teams. We're leveraging across marketing. So we've had an opportunity where we've got our own internal AI tools available to all of our employees and then specific projects that we're working on to drive efficiency internally. But we think the biggest opportunity for us is digitizing the environment and this idea of a digital companion using our mobile devices.

And do you see software and services becoming a bigger focus for you?

I would say today that our software services and our supplies portfolio, which really is recurring like, represents about 25% of the business. I would say that -- so that's predominantly recurring revenue for Zebra. And I think that that's a focus of all businesses, how do you get more recurring revenue into the business. So I think we're looking for continued new ways to generate more recurring revenue. Software is a focus for us, as I said, within retail today. I think AI creates an opportunity for more software content. Our services business is a high level of attach to our mobile devices, especially as customers want latest and greatest software releases, software patches and others and break fix across the portfolio. And then our supplies business really tied to our printing business is really recurring like. So I think that about 25% of the business today is recurring, and we feel pretty good about that, and we'd like to continue to grow it.

And talking about R&D a bit, you invest about 10% of your 10% of revenue into R&D. How do you determine where those investments go?

Yes. I think that across the portfolio, we are the global leaders in rugged mobile devices. We're the global leader in barcode scanning, handheld scanning. We're the global leaders in industrial printing. And we're challengers in some other new markets that we've entered. So I think we think about investing in our core portfolio to continue our leadership in those areas because that's important to our customer base. And then we've shifted more of our R&D dollars into these new growth vectors. So places like RFID, places like robotics, places like our retail software and machine vision, where we're shifting more of our R&D dollars today to be able to enter those new markets where we believe we've got -- they're a bit faster growing than our core portfolio, but it's important that we invest in both. I think we take a strategic view on an ongoing basis to make sure that we're investing in the right areas across the entire portfolio, both in market segments -- or sorry, product portfolio segments, but as well as horizons, meaning how we take an investment and balancing between today's portfolio and AI in the future as an example.

And how do you think about priorities for your capital structure? Are acquisitions going to be more bolt-on? Or could they be more transformative?

Yes. I think that we think first and foremost about our organic investment across the portfolio. We get significant returns in investing organically our R&D dollars and then in our go-to-market resources around the world. And -- and so first and foremost, it's organic. I would say, second, we make venture investments in times into companies that ultimately we're inquisitive about, want to know more about, but aren't convinced yet that, that's a technology or a segment or an area in which we want to learn more, but we're not convinced yet. And we leverage M&A in areas where that many times we make an organic investment first to learn more about the market, and then we'll go make an acquisition in the space. So machine vision is a good example of that. We took our core assets around handheld scanning I described before. We turned them into fixed industrial scanning, the low end of the machine vision market and entered that market, learned more about it and then did an acquisition at the very high end of the machine vision market with a Matrox acquisition and now we have married a couple of smaller acquisitions around that, Adaptive Vision and most recently, Photoneo. So our preference is organic because we've got great teams of software engineers today that ultimately have tight relationships with our product management teams with our customers. We have understand the market segments and the verticals we play in. But M&A accelerates our growth into specific areas that are adjacent. We think it's an important piece of what we go do. So we continue to be inquisitive about M&A opportunities. At the same time, we're returning cash to investors through share buybacks. We bought about $200 million in cash back between Q1 and the beginning of Q2 when we had our earnings announcement. We'll continue to return capital in that way as well.

Bringing things forward a bit to today's environment, can you speak a bit about what the recent global trade policy dynamics mean to you from a demand perspective? And are you incorporating some of the tariff impact into your full year guide? And also, have you been working your own supply chain or price structure to mitigate some of these issues?

Yes. I would say that, as I said earlier, we haven't seen a demand impact from the uncertainty around global trade from a customer perspective. I think they're still moving ahead. They are moving ahead still with the projects they had planned for the year. So from a demand perspective, I think at the moment, I think while it's on their minds, while there's concern about what's going to happen in the second half of the year from an economic perspective, I think they have an overall belief that some way somehow this will get sorted and the world will move forward. And I think that that's likely what will happen some way somehow. What that looks like and in what time frame is still a question, but I think that our customers believe this has to get sorted out and it will. And therefore, they feel good about their businesses and continue to move ahead. I'd say from the impact on our business, we outlined in our first quarter earnings release that it's about a $70 million impact in our business at the tariffs that were in place at that time. And that obviously would change depending on the dynamics around the tariff environment. As things change, we'll continue to update here in second quarter as to what the impact is on our business. I think in second -- in first quarter, it was about $3 million, about $25 million profit impact, $25 million to $30 million we said for Q2. That will ultimately play out just because the tariffs that are in place today, they were already there when we called Q2. And we've raised price to mitigate. We are continuing to work to move our supply chain. Our shipments into the U.S., we had about 85% of our shipments into the U.S. a number of years ago came from China. By midyear this year, it will be about 35% of what comes into the U.S. comes out of China. And otherwise, it's manufactured outside of China. We use contract manufacturers, which give us opportunities to move production fairly quickly overall.

Where's that moving to?

That's the question ultimately. So today, we manufacture in China, in Vietnam, Malaysia and in Mexico, but additional moves across more certainty around what the tariff rates are to do additional moves. So I think that we're in the same position most other companies are, is moving production at the moment to other locations without clarity around what the tariffs are is a difficult.

Everyone is facing the some dilemma at the moment. How should we think about disruption risks like a QR code instead of barcodes or on phone checkouts?

Yes. I mean they're the same. I think that the -- today, the 2D barcodes are read just the way traditional barcodes were read. It's made by vision systems and cameras that basically the technology today. So I think you're seeing -- that's why you see this move from where handheld scanning and fixed industrial scanning and machine vision are the same imaging systems, just higher processing power, more resolution, those kind of things. So the QR code or the 2D barcode is continuing to emerge because of things like regulation and new scanards and others, that can hold more information than a traditional barcode. So it will play an ever more important role, but it's the same readers that read both today in our customers' environments. The idea of laser scanning of barcodes is well beyond us and the images are what's used today. And that's used in mobile devices. It's used in our scanners today. And I think it -- what it really shows is the enhancement of the 2D barcode and the enhancements around regulation around it and including more information around track and trace and be able to track from the point of manufacturer or the point of where something is produced in others allows -- creates ever more important opportunity for the barcode reading.

Great. So just one last one for me, and then I'm going to go to some audience questions because we've got a few audience questions here. What is it about Zebra that you think is most important for investors to understand?

Yes. I would say that we've got strong customer relationships around the world, and we're truly a trusted partner to our customers. So whether you're in retail or transportation logistics or manufacturing or health care, ever so more government opportunities, especially here in the U.S. and what we're doing in Europe, our customers come to us as a strategic technology partner to them. So we do business with them in many areas today. We've got close relationships with them. We lay out our vision for those industries to them and where we see them -- where we see the industry going overall. So as an example, in retail, we see the most important things to retailers today as being engaged associates within their stores. And we see it being inventory management, making sure you have the right inventory in the right place. We see customer engagement as a critical aspect of what retailers do. And that vision and how we leverage technology, hardware, software solutions across those priorities of retail is what we talk to our customers about, and we engage with them in. It's not just about a mobile device or it's not just about a scanner or a printer or robotics inside e-commerce warehouse or a piece of software. We talk about their entire environment and how do they have better engaged associates, how do they have inventory in the right place and how do I engage customers better -- and when you change the conversation around that, then you're given more opportunities in your customers to do more and more for them that they reach out to us saying, I've got a business problem to solve. I've got a technology problem to solve. Zebra, can you work with me in that area? And I think that, that trusted partnership we have with our customers around the world gives us an opportunity to continue to grow our business, not just in our core markets, but in the adjacencies and areas where we've invested in. It creates a tremendous opportunity for us.

[Operator Instructions]. We can vote on questions. There's about 5 I see here. I'm just going to go through. We've got about 11 minutes left. So we're going to see how many of these we can get. So first question, what is customer onboarding time? And how much time and cost is moving around. What is customer onboarding time and how much time and cost would it take them if they want to switch to another competitor?

Yes. I would say that the majority of our customers are deploy and make decisions around a single vendor in a specific solution area. So -- and the products are very sticky over time, meaning that life cycle of these products are 5 years on let's use mobile devices for a minute. Once a customer decides on a device for a specific area, then ultimately, they make a large decision or purchase upfront, then they continue to buy additional products over the life of that product to replace products that have gotten broken or lost or others or to enhance and have new applications associated with them, which they continue to buy from us. The next time they come to refresh that product portfolio, they typically come back to us. They're already having conversations with us of what's the next-generation device? What's the latest technology enhancements? Have you added RFID to a mobile device? What's the position around AI and how can I use the device more in an AI area? How can I -- is there a different form factor that ultimately makes a certain portion of my business more efficient? So think of wearable devices for hands-free operations. So we're having these conversations with our customers all the time. So we're pretty confident once we're into a customer's environment and they're deploying our technology that we will ultimately win the refresh within that environment.

With RFID, can you talk through the process of customer adoption? Is there a bottleneck in that customers need a modern tech stack before first deploying the technology?

I would say that from an RFID perspective, there's multiple aspects that people look at. First is source tagging. So the -- inside transportation logistics, that source tag is done either when they bring the parcel into their facility or now the T&L carriers are looking at source tagging when they pick up the parcel at their customers. So how do they tag it at that point. In retail, the source tagging is done at manufacturing. So I think that's the first element of adoption is that you have to be able to source tag at manufacturer or at the place in which you take receipt of the goods. You can't do that afterwards. It's just too expensive to take items and actually tag them inside a retail store if they're not tagged at retail or to tag them somewhere along the process within transportation logistics. You have to take them right at point of egress into the system. I think that's the biggest barriers. Tags and we're seeing what people are really excited about is the number of tags being projected over the next couple of years is very significant uptick in tags or items being tagged. I think ultimately, then you need to have the readers in place, and it's a journey, right? It starts with many times customers using handheld devices to read RFID tags. And then they move to portals, meaning is it in this room or is it out in the lobby area. So I walk through a doorway and I tell where the RFID tags. The next step in the journey is perpetual reading, meaning devices in the ceiling that ultimately tells you the device is not only or the item is not only in this environment, but kind of where it is within about 3 feet or so, you can tell today in environments where an item is, so you can direct somebody to where it is. And perpetually, I can tell that the inventory is actually here because I can see it with the RFID tag. So it's a bit of journey from a technology perspective, from a reader perspective. And then ultimately, there is the software element associated with it. And I wouldn't call it a modern tech stack as much as I think about it as taking location reads of what you want to do. You want to just know simply is the item here or is it in the lobby? Or do I want to know where it is here and then ultimately taking those location reads, be able to fill those and to be able to filter that information and then ultimately feed it into your inventory management system. or feed it into a decision-making system that says what's the next best move in the business ultimately. So there's software clearly involved in that and it's application software. And we work with a whole series of independent software vendors that have applications today across retail, across transportation logistics, across quick-serve restaurants, across different applications today. We have our own application that we use within the NFL today to track players, cleats and shoulder pads and helmets, for instance, in every time they leave a locker room. So think of it the idea of this portal reader. So those software exists today, and it's either developed internally by our customers. Our largest customers have developed software on their own, but the majority would buy software solutions from the independent software vendors that we work with each and every day.

Another question here for [indiscernible]. So can you help us understand who is your core customer and what is the product suite that -- which has the highest market share?

So our core customers range across retail, transportation, logistics, manufacturing, health care, no matter where you are in the world, you're likely a customer of ours in some way. We're the global leaders in rugged mobile devices. We're the global leader in handheld scanning. We're the global leader in industrial barcode reading today across the portfolio. We're a leader in RFID reading technology and printing technology, both. And across the rest of the portfolio, we have different varying market share positions in new areas we've entered, we have lower market share as an example. But in our core markets, we are the market leader.

Given your competitors are facing difficulties, and there's so much uncertainty, how are you thinking about continued market share gains? And any threat from Asian or Chinese competitors?

Yes. We continue to look at market share as an important piece of what we do around the globe and being the market leader. We continue to invest across the portfolio, as I mentioned before, to continue to be that market leader. We also work closely with our customers to make sure that we're really understanding their next-generation needs across the portfolio. So we remain as that market leader. I think that you've seen other competitors struggle in the market, and we've continued to take share against our traditional competitors across our core portfolio. I think you're always going to have competitors. The Asian competitors have been around for a long time. I think that, as I said before, we kind of work to tier the portfolio to make sure we've got an answer for lower-cost competitors in the market. We call it value tier, kind of a good, better, best scenario. And I think that ultimately, we've been taking share in that area around the globe. So if you look at this value tier portfolio, there's a market segment that's very, very low end in some of the Asian markets that we've never really played in. It doesn't really make sense for us to go do that. But for the majority of areas where someone wants a lower-cost product with a lower specification than our premium or mid-tier product, we've got a product offering from them at a competitive price, at a competitive offering to any competitor around the world.

And how mature are the AI features that you've demoed what kind of time line are you thinking about in terms of moving from pilot projects to deployment?

Yes. I would say that the AI opportunities today that we've demoed some of the largest trade shows are in pilot today, I would say, at our largest customers. So the largest customers, especially in retail, are leading the way where they have their own applications within the device themselves, and they've got development teams working on these applications. They've got models where they've created digital assistance for their associates and they're leveraging our devices to be able to manage those in their environment. So I'd say the early ones of those are the leaders in the market. It's that next tier down that I think we see the opportunity for us to leverage more of our software offerings to our customers. But early pilots today, I would say, more so than anything else.

So the next question here is what is the total software revenue TAM market size for every of hardware sold and which companies are currently part of this value chain?

I think there's -- I don't know the TAM associated with like the surrounding our device, right? It would be an interesting number. But I think that there's a tremendous amount of software that resides on our mobile devices today. So you think of some of the retailers today, they would have upwards of 30 to 40 applications sometimes on a mobile device in their environment. So there's a significant amount of software on those devices today that allow associates to do their job within retail or transportation or others. So think about it really is a smartphone device with the scanning engine built into that device, and our customers are using a broad base of different technology, some of which from Zebra, as I said, communication collaboration, task management, workforce management, all those offerings, but also their inventory management systems, their systems internally to manage the store ultimately and monitor things like refrigeration and others, their engagement software with their customers to be able to merchandise and others. So I'm not sure the TAM, but there's tremendous amounts of software used and leveraged on those devices today.

Great. Thanks, Bill. I think we're just about out of time. I just wanted to see if you give you a last moment for a few quick comments to leave us with?

Yes. I would just say that we're excited about the opportunity ahead of us. Our customer relationships are incredibly strong today. We see our customers continue to invest in their portfolio of products and solutions from Zebra. And thanks for your time.

So thanks very much for joining us. Thank you, everyone.