Good day, and welcome to the Q3 2019 Zebra Technologies Earnings Conference Call. All participants will be in a listen only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.I would now like to turn the conference over to Mike Steele, Vice President of Investor Relations. Please go ahead.

Good morning. Thank you for joining us today. Before we begin, I need to inform you that certain statements made on this call are forward-looking and subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially due to factors discussed in our filings with the Securities and Exchange Commission.During this call, we will make reference to non-GAAP financial measures as we describe our business performance. You can find reconciliations of our GAAP to non-GAAP results in today's earnings press release and at the end of the slide presentation.This presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer; and Olivier Leonetti, our Chief Financial Officer. Anders will start with our third quarter highlights. Olivier will then provide more detail on the financials, discussing our fourth quarter outlook and our decision to diversify our global sourcing footprint. Anders will conclude with progress made on Zebra's Enterprise Asset Intelligence vision. Following their prepared remarks, Joe Heel, our Senior Vice President of Global Sales will join us, as we take your questions.Also throughout this presentation, unless otherwise indicated, our references to sales growth are year-over-year on a constant currency basis and exclude results from the recently acquired Profitect, Xplore Technologies, and Temptime businesses. This presentation is being simulcast on our website at investors.zebra.com, and will be archived there for at least one-year.Now I'll turn the call over to Anders.

Thank you, Mike. Good morning, everyone, and thank you for joining us. Our team executed well and drove profitable growth in the third quarter. As you can see on Slide 4, we reported net sales growth of 3%, which was on top of 15% growth in the prior year period. And adjusted EBITDA margin of 22.7%, a 160 basis points year-over-year improvement. And record quarterly non-GAAP diluted earnings per share of $3.43, a 19% increase from the prior year.Growth in our North America and EMEA regions was partially offset by soft spending environment in China. However, our diversified business is enabling us to successfully navigate an uneven global macro economy. We continue to extend our lead in enterprise mobile computing through the broadest and deepest portfolio offering. Enterprise workers are utilizing our mobile computers for an increasing number of use cases. We are also benefiting from leading the multi-year transition to Android from the Windows Operating System.Services was a bright spot, growing double digits, as we realized higher support and repair attach rates. RFID, location solutions, and Zebra Retail Solution also performed particularly well in the quarter. Operational discipline and cost efficiencies enabled us to drive profitable growth without compromising investments in our organic growth and in our employees.Also of note, we confirmed our decision to diversify the sourcing of most of our U.S. volumes out of China. This work together with other actions we have taken is expected to substantially mitigate the recently enacted Section 301 List 4 tariffs by mid-2020.Overall, we are pleased that our value proposition and industry leading portfolio of products and solutions is resonating with customers worldwide. Our team is winning business with a broad range of leading enterprises, including our largest win in Zebra's history with the U.S. Postal Service, which we announced this morning. We have solid momentum in our business as we finish the year and enter 2020.With that, I will now turn the call over to Olivier to review our Q3 financial results and discuss our Q4 outlook and the initiative to diversify our product sourcing footprint.

Thank you, Anders. Let us start with the P&L. As you can see on Slide 6, net sales grew 3.5% in the third quarter, which translated to 3% on an organic basis before the impacts of currencies and acquisitions. We saw growth in each of our reporting segments.Enterprise Visibility & Mobility segment sales increased 2.7%, led by growth in mobile computing and support services. Asset Intelligence & Tracking segment sales increased 3.5% with growth in printing, services, location solutions and Zebra Retail Solution.Turning to our regions. In North America, sales grew 6%, primarily driven by strength in mobile computing, services and every RFID. We saw particular strength in healthcare, retail and transportation and logistics. EMEA sales increased 2% with quality strength in data capture, printing and services. We saw growth across most countries.Retail and transportation and logistics were particularly strong and we saw continued traction in RFID. Sales in our Asia Pacific region declined 5%, entirely due to macro softness in China. Latin America sales declined 2%, due to fewer large orders in Mexico.Adjusted gross margin expanded 130 basis point from the prior year period, primarily driven by go-to-market discipline, cost efficiencies, and favorable business mix, all of which was partially offset by 20 basis point net impact from List 4 tariffs.Consistent with one of our key operating principles, we drove operating leverage, while continuing to make prudent investments in our growth initiatives. As a result, adjusted operating expenses as a percentage of net sales improved 70 basis points from the prior period.Third quarter 2019 adjusted EBITDA margin was 22.7%, a 160 basis points increase from the prior period. We drove non-GAAP earnings per diluted share of $3.43, a 19% year-over-year increase, which includes a $0.03 EPS impact from List 4 tariffs.Turning now to the balance sheet and cash flow…

Thank you, Olivier. We expect to finish the year strong despite an uneven macroeconomic environment and incremental tariffs.Now turning to Slide 11. We are leveraging our deep knowledge of workflows to help businesses across many industries digitize their operations. Technology mega-trends including mobility, automation, cloud computing and the industrial Internet of Things are enabling us to drive new use cases and transform the workflows of our customers. We serve a wide range of vertical markets including retail and e-commerce, transportation and logistics, manufacturing, and healthcare, as well as other attractive markets that diversify our growth opportunities.Retail continues to be a vibrant vertical end market according to third party research firm IHL Group. There's also significant investment by retailers to improve omni-channel capabilities to meet increased customer expectations. We are a trusted strategic partner with many of the leading retailers and e-tailors. Recently a major U.S. grocer selected Zebra to roll out 39,000 of our TC52 mobile computers over the next two years. Store managers, department heads and associates will utilize them for multiple in-store applications, including customer service, inventory management, out of stocks, planner brand compliance, backdoor receiving and store audits.Another solution that is enabling retailers to drive a higher level of inventory accuracy is RFID, which we have been deploying to improve our customers' omni-channel capabilities. In the transportation and logistics space, we are seeing particularly strong demand for our solutions. For most IT and operational decision makers, labor recruitment and productivity are top challenges in the increasingly on-demand economy. With innovative solutions to drive increased productivity and efficiencies, Zebra can bring their operations to higher level with their current workforce and resources.We have secured a substantial number of global business wins recently, including our largest deal of all-time with the U.S. Postal Service, where we will help them…

Thank you, Anders. We will now open the call to Q&A. We ask that you limit yourself to one question and one follow-up so that we can get to as many of you as possible.

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from James Ricchiuti of Needham & Company. Please go ahead.

Thank you. Good morning. I was wondering if your Q4 guidance reflects, perhaps reflects a larger than normal contribution from large projects?

Our expectation for Q4 is that we will have a fairly normal distribution of large deals. We certainly don't expect it to be a higher proportion of larger deals than normal.

Okay, that's helpful. And you cited a couple of times the strength in RFID. And I'm wondering if there's any way you can provide a little bit more color on that the type of growth you're seeing maybe where you're getting traction in RFID and just your general view of that market? Thank you.

Yeah. RFID is enabling our customers to gain real time visibility into their supply chains. And we're seeing an acceleration of growth in RFID, due to now being able to lower the cost of implementation having improved level of accuracy and enhanced software capabilities for RFID generally. Companies are also much more eager to innovate around their supply chains. So that's all driving a stronger adoption for RFID. And we've invested in both the product and the go-to-market side, so we have strengthened in our go-to-market capability to have greater reach and more skillsets in that area. And we are seeing strong double digit growth in our portfolio, which includes now strong performance in our fixed readers, but also our handheld readers, as well as industrial and mobile printers. We also have our location solutions activities within our LS, we talked about that as being up nicely in Q3 and some other newer solutions like SmartLens that level RFID to be able to always be able to sense inventory in a retail store as an example. So, overall RFID solutions are getting much more traction, interest from our customers and we’re participating nicely in that growth.

Thanks. One quick one. Was that UPS contract that you announced congrats on that by the way, were you be incumbents or was that a competitive win?

So the contract was USPS, and we were not being incumbent.

Thank you.

And our next question will come from James Faucette of Morgan Stanley. Please go ahead.

Hi. Erik on for James. Thanks for taking our question. Maybe just quick. During the quarter, you had released a couple press releases on wins in the public safety market. Is that becoming an interesting end market for you to focus on? Maybe anything we should be thinking about there?

Yeah, I’ll start and then I’ll ask Joe Heel to add some extra color. But yeah, we think the public safety markets and first net as an example to be good, incremental growth opportunities for us. Those are several hundred million dollar markets that are today served predominantly by either very unique purpose built devices or consumer devices. And we believe that there’s a good opportunity to introduce our type of solutions in that market. And as you’ve seen, we’ve had a few press releases where we’ve been able to secure wins for our explore tablets and mobile computers and printers. So, we see that as an attractive new growth market for us.

And I would add – excuse me – that we’ve invested in resources dedicated specifically to serving the federal and state and local government entities in the United States, but also have added resources and other countries around the world to serve the market. The explore acquisition has brought to us some of those resources because explore, as you may know, already had a footprint in that particular area. And combined those resources are a push for us into this attractive new segment.

Thank you, it’s really helpful. And then maybe just on some of the strength you’re seeing in T&L, how much of an impact are newer solutions like SmartPack having on that?

So, first, I’d say our value propositions are resonating across all our vertical markets. And all our vertical markets are up year-to-date, so we’re seeing good growth across all of them. But number of the challenges that customers are seeing around having to drive increased workflow efficiencies in tight labor markets being able to provide real time guidance to the front line of their business, and enhancing customer and patient experiences. All of those, our solutions here are much more foundational to us being able to help our customers execute on their strategies, specifically to T&L. Q3 was a particularly strong quarter for T&L Plus, we’re up double digits, strong double digits.We’ve seen very healthy secular trends that are helping to drive our growth, expedited delivery, labor shortages, ecommerce overall with the share volume of deliveries are great drivers. And the T&L industry, they’re introducing a lot of automation and technology to help address these challenges. And I’d say we are uniquely positioned to help them with these needs. The warehouse transition to Android is a great driver also in the T&L space as they have lots of warehouses obviously, and I’d say in the last year, we’ve actually won a number of very attractive postal contracts with the USPS being the most recent one. Our – you asked about some of our other solutions, so I would say our Intelligent Edge solutions like SmartPack, location solution, RFID wearables, they are all happy to demonstrate our thought leadership in the industry and office smaller base, they’re growing quite nicely.

Great, thank you.

Our next question will come from Brian Drab of William Blair. Please go ahead.

Good morning. Thanks for taking my questions. First, I’m just looking at the tariffs and the guidance that you gave for the first quarter and in 2020. And my thinking about this correctly, if I should do the simple math and if you have a 20 million impact in the first quarter that we’re going to see maybe 170 or 200 basis points impact on gross margin and maybe around a $0.25 or $0.30 EPS impact. I don’t know, Olivier, if you could help put a finer point on that impact.

That’s correct, Brian. Your math is correct. At the midpoint 20 million would be a good estimate.

Okay. Okay. Thanks. And then just on the USPS project, congratulations on that. And over what time period do you think that those 300,000 would be deployed?

Yeah, firstly, we’re very pleased and proud of the trust that the USPS has placed in us to be that partner on this project. This project augments our relationship with them. USPS was already a customer of other products and solutions from Zebra. This is a multiyear contract. It’s the largest in our history. So, we are obviously very pleased with that. The social involves us rolling out 300,000 TC77 mobile computers, also the full suite of our mobility DNA software tools, other more customized software solutions as well as managed and professional services. This is a multiyear contract, so we would expect delivery to start ramping up in the first half of next year and go on for a couple of years, two years.

Okay, thanks a lot.

The next question will come from Paul Coster of JP Morgan. Please go ahead.

Yeah, thanks for taking my question. I’d like to sort of take Brian’s question a little bit further on the tariff mitigation. And it looks to me like your intention is to slowly one down the impact over the course of 2020. Would it be fair to say we’ve got something like $50 million hit to gross margins over the course of the year and by the fourth quarter, when you’re lapping the effects of this quarter’s action will have no year-on-year degradation in gross margins?

Good morning, Paul. Actually, we believe that we will have mitigated substantially the impact of tariff by midyear next year. So, as we discussed earlier, we would more than 15 to 25 impact in Q1. The impact in Q2 will be lower and pretty much immaterial in the second half of the year.

As you sense that the cost structure that you’ve achieved in reconfiguring the supply chain will be equal to or better than that which you originally had in China tariffs aside?

On in aggregate, it will be about the same cost structure.

Okay, thank you.

And the next question will come from Keith Housum of Northcoast Research. Please go ahead. Pardon me, Mr. Housum.

Sorry, I’ve had on mute. Good morning, guys. In terms of understanding growth in the quarter, do you understand how much of that growth came from some of your more tangential products, so we’re talking about growing the proper folio? How much of that coming from the newer products or the non-core products?

Well, first to say, I think we executed very well in the third quarter. We had, 30% growth but that was on top of 15% growth in the Q3 2018 timeframe. We did see solid performance in North America and EMEA, which is partially offset by software spending environment in China, which really attributed to the entire shortfall. We did see particular strength in our mobile computing portfolio and services and from a vertical perspective healthcare T&L we’re very strong, but all verticals are up-to-date. And our new solutions, they’re smaller base but they are growing quite nicely overall. So, we were quite pleased with how we are progressing with our intelligence Intelligent Edge solution set.

Got it. As a follow-up. The move with the supply chain outside of China, can you help us understand I guess the experience you guys have done with your contract manufacturers, and should we can be concerned at all with the risk that might be associated with issues that may popup that may either with ultimate additional costs or perhaps delays in the supply chain?

So, we have a long relationship with these partners that it’s a handful of companies that we have worked with to assemble our printers, mobile computers in China so far, and we have been sustained with the same partners moving to other locations in Southeast Asia. We are obviously focusing very much on both speed and making sure we can continue to have excellent quality. We’re doing a number of things to minimize the risk of any disruption. So we are not changing the supply side, most things we are just changing the assembly locations. We have a lot of experienced managers from these companies that we will augment with our own team to ramp up these facilities. So, we think that this is very doable and compared to, when we’ve outsourced our supply chain printers back in 2010 timeframe. This would be a somewhat less complex undertaking.

And Keith, two additional points if I may. First, the countries where we being to go on not Greenfield countries, that’s point number one. And point number two, we’re duplicated lines, meaning we could always at any time keep supplying the U.S. market from our plants in China, if needed.

Great. Thank you.

Our next question will come from Richard Eastman with Robert W. Baird. Please go ahead.

Yes, good morning. Perhaps you could just touch on maybe the role price plays here going forward kind of covering the delta between tariff costs and supply chain mitigation efforts. Just a thought maybe around one price, any price increases become effective. And then is there a price contribution, is it a point or two that plays into the fourth quarter revenue guide?

So, by far the main aspect of our tariff mitigation strategy is to move the supply chains out of China to avoid tariffs overall. We have announced some modest price increases, but the vast majority of the savings and the effort goes into the moving of the lines. We want to make sure that we compete for the long term and that we will be able to continue to gain share and have a competitive position in the market and continue to earn our customers trust. So, we’ve been very selective in how we’ve applied price increases. So, it’s a modest part of the overall mitigation. It is somewhat mitigating the impact, but it is not offsetting the impact.

Okay. And as a component of the fourth quarter revenue guide, is it as much as a point or is it just any order of magnitude there?

It would be [indiscernible] in that Rick.

Okay. Okay. And then just a question around the U.S. Postal contract. Given the accessories and the device management software and the support there, is that – are the mobile computing sales, are the gross margins on that contract going to be similar to what we’re currently delivering in EVM?

Obviously, the USPS contract was a competitive process and we had to compete on both offering the best overall value to our customers, which include a superior product but also competitive price. So, we are not able to explicitly talk about the margins on specific individual deals, but rest assured that this is a creative accretive to our P&L and add shareholder value to us.

And was that a competitive advantage against some of the device management software and was there a competitive advantage in the bidding process for that contract that goes beyond just the hardware mobile computing product?

Yes, I think the USPS and I would say virtually all our customers are looking at the overall offer and software thing a bigger part of that, that’s a differentiator and something that they can leverage to minimize the cost for implementing maintaining and supporting the fleet after this has been deployed.

Good. Okay. Thank you.

And our next question will come from Jeff Kessler of Imperial Capital. Please go ahead.

Thank you. Thank you for taking my question. First question is about on your – I guess on your fourth quarter and year beginning call, you talked about how your consultative process had begun to grow to about quarter about 8% or so, of revenues were generated by deals that were actually negotiated almost entirely at the C-Suite level. And I’m wondering if you could give us an update on the ability on what you’ve done over the course of the year, in basically getting a top down on the omnibus type of contracts, just because of a longer a longer live relationship that seems to be developing?

Yeah, I don’t necessarily remember the specific numbers you’re quoting there, but we do have a lot of excellent relationships with executives of many of our customers. I think that goes back to our ability to help them solve their biggest issues, their priorities. We can help them implement their strategies much more. So, they see us as a much more valuable partner and therefore want to understand what we have to offer and how we can work together over a longer period of time, not just over delivering a specific project. So, our vision, our solutions ability to help our customers deliver on their priorities are great drivers for establishing what executive level relationships.

I would add two things. This is Joe Heel. Over the last few years, large deals, deals that are over a million dollars have been the fastest growing segment of our business overall. And those deals generally require that we have relationships at all levels of the organization, including at the senior levels. And so we’ve been developing a both our sales force, our partner relationships, and our relationships with our customers in such a way that they can support us winning those types of deals. And we think we’ve been somewhat successful in that.The other piece that’s played into that is that many of the newer solutions that we’ve spoken about and that Anders mentioned earlier, things like SmartLens or SmartPack, those are solutions aimed at solving a particular business problem and those are generally business problems center of our customer strategies and therefore have the attention of senior decision makers in those companies. And they help us in order to build those relationships, but also to address those needs and then be successful with those types of sales.

My follow-up is, when we’re looking at some of the newer, smaller, faster growing businesses, some obviously healthcare comes to mind and certain areas of the T&L, certain specialty areas of the T&L area. Can you talk about where gross margins had been and where they are now relative to the rest of the company? Are they at company level yet or is this the type of thing where we’re going to see, hopefully going to see an improvement going that reaches or perhaps exceeds the average GM of the company?

So Jeff, few things. One does new solutions; despite being expanding are growing at a much higher great rate than the company average. So faster growth. And the gross margin profile of those new solutions is higher than the company average, because of – as Anders and also Joe mentioned because of the value we’re providing the economics for both parties, our customers and ourselves are better.

Okay. Thank you very much. I appreciate it.

Our next question will come from Andrew Buscaglia of Berenberg. Please go ahead.

Hey, guys. Can you talk a bit about the use of your initiative to drive sales from the supplies market? Has that helped your margins this quarter and in generally with the USPS contract as you deliver more sales related to ancillary products, should that help your margins longer term?

So, estimate supplies and USPS, I think. So first on supplies, that’s you know, one of our adjacent markets that we put a fair bit of effort behind to make sure we can drive attractive growth. It's been growing nicely over the last several years. And we're focusing both on adding new capabilities, new differentiation that are more in line with our Enterprise Asset Intelligence vision. I would highlight that we've in-sourced the capability of supplying RFID tags, so smart tags, as well as our Temptime labels, which can indicate exposure to temperature over either short or longer periods of times.From a margin perspective, the overall margin profile of our supplier’s businesses a little lower than our corporate average, but not much. And we obviously working hard to make sure that we improve both the growth rate and the margin rate for that. For USPS, you know it's a complete contract and includes accessories and other products. I'm not really in a position to comment specifically on the margin profile of the different sub components of the contract. But you know, again, it's accretive to our bottom line and to drive attractive shareholder value.

Okay. And then really, you know, with that USPS contract, you said it was the biggest one in your history, I believe. Are there other deals out there like this that you see as potentially moving forward over the next 12 to 18 months?

So, there's not a lot of contacts that are in one signed contract gets to be this large, but we have a lot of customers that have very large install basis, but they tend to buy more over time versus having a one contract. So there's a number of customers that have substantial installed basis that are in the same ballpark as USPS,

Okay, thank you.

Our next question will come from Jason Rodgers of Great Lakes Review. Please go ahead.

Yes, just wanted to ask about the share repurchase, what level you have implied in your 4Q guidance. And with then at the bottom of your ranger very close to the bottom, what are your thoughts to accelerating share repurchase to help offset the tariff impact in the first half of next year? Thanks.

So, Jason, we are not assuming buyback – the impact of buy backing our EPS wrench. The reason for this is we believe is the best way to really describe the operational performance of the company. Having said that, we expect to be in the market in Q4 to our buyback program. And our level of participation will depend on stock price levels. But again, no buyback impact in EPS guide.

Okay, thank you.

And our next question will come from Paul Coster of JPMorgan. Please go ahead.

Yeah, thanks for taking my second question. Just wanted to look at the Windows to Android upgrade cycle where it stands, how the competitive landscape has changed if at all this year? And what the duration of the upgrade cycle remains to be in your opinion?

Yeah, first, our mobile computing business continues to perform very, very well. You know, we had a strong quarter in Q3 and that was on top of an exceptional quarter last year. You know, we have several drivers that are supporting that growth, you know. The number of new use cases continues to expand. I'd say, our software capabilities is a great driver for this. We're also seeing, you know, consolidation of multiple devices or applications on top of our devices. Workforce Connect is a good example of that where our employees used to carry a mobile computer and a say PBX wireless phone that's now been consulting to one device, one Zebra device where running a bulls app. You know, the trend of having a device for every worker is also a big driver. We've seen lots of our customers want to make sure that as many of their workers are connected as they can. And today, we estimate about a third of eligible employees do have a device, so we see great opportunity to continue to drive penetration deeper into our customer accounts.Specific to the Android transition, that that continues to be a great catalyst for us. We still estimate about 10 million legacy Windows devices in the market. And we continue to also still enjoy over 60% market share of Android in the enterprise. The tail side of those 10 million devices, legacy Windows devices being upgraded or refreshed to Android will probably be longer than what we had originally expected. [Technical Difficulty]So thanks to Zebra team and our partners for delivering another quarter of strong profitable growth. I also want to acknowledge that this week, we celebrated the fifth anniversary of the highly successful enterprise acquisition. Our team has transformed our organization and the industry. And we have a tremendous opportunity ahead of us. I appreciate everyone's dedication as we continue our journey. Have a great day everyone.

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