Good day, and welcome to the 2nd Quarter 2018 Zebra Technologies Earnings Conference Call. All participants will be in listen only mode. 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 and thank you for joining us. Before we begin, I need to inform you that certain statements made on this call include forward looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect the company's current expectations concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the company's filings with the Securities and Exchange Commission. During this call, we will make reference to non GAAP financial measures as we describe business performance.
You can find reconciliations of our GAAP to non GAAP results in today's earnings press release and at the end of this slide presentation. This presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer and Olivier Leonetti, our Chief Financial Officer. Anders will begin by discussing our Q2 2018 highlights. Olivier will then provide more detail on the financials and discuss our Q3 and full year 2018 outlook. Anders will conclude with progress made on Zebra's strategic priorities.
Following the 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 and on a constant currency basis. This presentation is being simulcast on our website at investors. Zebra.com and will be archived there for at least 1 year. Now I'll turn the call over to Anders.
Thank you, Mike. Good morning, everyone, and thank you for joining us. Our team delivered excellent second quarter results. We executed well, driving strong and profitable growth and further extending our industry leadership. As you can see on Slide 4, we reported net sales growth of 13%, nearly 11% on a constant currency basis and adjusted EBITDA margin of 19.7%, a 200 basis point year over year improvement.
Non GAAP diluted EPS of $2.48 a 64% increase from the prior year and $150,000,000 of cash flow from operations. We achieved double digit sales growth in EMEA and North America. We also saw solid growth across all of our major product and service categories, including data capture, mobile computing, our specialty printing portfolio, supplies and support services. The investments we have been making in our best in class products and solutions are paying off. Our broad suite of purpose driven products enhanced with the smartest software and security features is resonating well with enterprise customers.
Our operational discipline and lean cost structure enabled us to significantly expand profit margins and drive improved operating cash flow. Our strong results and robust order backlog gives us confidence to significantly increase our full year outlook for sales and free cash flow. With that, I will now turn the call over to Olivier to review our financial results and to provide the details of our revised 2018 outlook.
Thank you, Anders. Let us begin with a walk through the P and L. As you can see on Slide 6, sales grew 10.6% in the 2nd quarter, driven by solid results in each of our reporting segments and across all major categories. Enterprise Visibility and Mobility segment sales increased 10.9%, led by strong demand in data capture solutions and mobile computing. Asset Intelligence and Tracking segment sales increased 9.9%, driven by strong growth in Printing Solutions.
Turning to our regions. Sales growth in North America was 11% driven by outperformance in our data capture, printing and supplies categories. We saw particular strength in our transportation and logistics and manufacturing verticals. EMEA sales increased 14% with broad based strength across all geographies and all major product categories. We saw especially strong demand in the transportation and logistics space as well as in retail as investments are made to improve omnichannel capabilities.
Sales in our Asia Pacific region were up 8%, driven by broad based strength across Asia including China. As a reminder, Asia Pacific sales in the prior year quarter were positively impacted by 3 percentage points related to the release of a reserve for price concessions related to previously imposed duties on printers in China. We had solid Q2 sales growth in China despite this challenging comparison. Latin America sales decreased 1%, primarily due to temporary softness in Mexico. Adjusted gross profit increased $60,000,000 or 15% from the prior year period on higher sales volume.
Adjusted gross margin increased 70 basis points, primarily driven by improved go to market execution, favorable business mix shift and the appreciation of the euro over the past year. Adjusted operating expenses increased $20,000,000 from the prior year period, primarily reflecting growth in the business, higher incentive compensation expense due to improved business performance and investment in growth initiatives. 2nd quarter 2018 adjusted EBITDA margin was 19.7%, a 200 basis point increase from the prior year period. This was driven by higher gross margin and operating expense leverage on higher sales. In addition to EBITDA margin expansion, lower interest cost and a decreased tax rate drove non GAAP earnings per diluted share to $2.48 a 64% year over year increase.
Turning now to the balance sheet and cash flow highlights on slide 7. In the first half of this year, we paid down $235,000,000 of debt principal, supported by strong free cash flow of $233,000,000 This $52,000,000 increase in free cash flow as compared to the first half of twenty seventeen was primarily driven by increased operating profitability and the absence of integration cost in the first half of this year. At quarter end, we had $2,000,000,000 of viable rate debt on the balance sheet, of which more than $500,000,000 is hedged with interest rate swaps for 2018. As a reminder, in late 2017, we locked in an incremental $800,000,000 of floating to fixed rate swaps that will become effective in December 20 18 for an overall notional swap value of $1,300,000,000 Due to the favorable timing of this transaction, we have realized $18,000,000 of non cash gains in the first half of the year, which we have excluded from our non GAAP results. Slide 8 shows our path to financial deleveraging.
Continued debt paydown and strong EBITDA growth enabled us to achieve a 2.5 times net debt to adjusted EBITDA ratio as of the end of Q2, which is the top end of our targeted range of between 2 and 2.5 times. In the Q2, we completed additional actions to restructure our debt, which have resulted in an annualized interest expense savings of approximately $4,000,000 to $5,000,000 These actions follow the comprehensive debt restructuring we completed during the second half of twenty seventeen, which drove more than $45,000,000 of annualized interest savings. Let us turn to our outlook on Slide 9. We had a strong backlog entering the Q3 and we expect Q3 2018 net sales growth to be between 12% 15%, which assumes an approximately 1 percentage point favorable impact from foreign currency translation. Q3 2018 adjusted EBITDA margin is expected to be between 19% 20%, assuming gross margin in line with the prior year and increased operating expense leverage.
Non GAAP diluted EPS is expected to be in the range of $2.50 to 2 point outlook and now expect net sales growth to be between 10% 12%. This includes an anticipated 2 percentage point favorable impact from foreign currency translation. Full year 2018 adjusted EBITDA margin is expected to be approximately 20%, assuming higher year over year gross margin and operating expense leverage. For the full year 2018, we now expect to exceed $525,000,000 of free cash flow. This increased outlook is primarily due to higher expected EBITDA.
You can see other full year 2018 modeling assumptions on Slide 9. Note that we have made modest adjustments to our assumptions on capital expenditures, interest expense, stock based compensation and tax rate. Note that our 2018 outlook does not include any projected results from the acquisition of Xplore Technologies, a transaction we expect to complete this quarter. Anders will discuss the acquisition in a few moments. With that, I will turn the call back to Anders to discuss progress on our strategic priorities.
Thank you, Olivier. We are pleased with the progress we made in the Q2 and the opportunity to raise our full year outlook. As you see on Slide 11, we remain focused on our key priorities to build upon our industry leadership in 2018 and beyond. First, we continue to extend our leadership through our innovation, unmatched scale and strong relationships with customers and partners. We saw strong demand for our products and solutions, both direct and through the channel.
Several areas that have recently been driving solid growth include our families of Android mobile computers, our best in class wearables, our tabletop and mobile printers, our next generation bioptic grocery scanner and our personal shopper solution. 2nd, we are focused on driving growth in attractive markets where we can leverage our competitive advantages. We continually evaluate organic and inorganic opportunities to strengthen or augment our position in near adjacencies as well as attractive businesses that advance us as a solutions provider. As a proof point, in July, we launched a tender offer to acquire Xplore Technologies, which will enhance our product lineup and provide a complete enterprise tablet portfolio. Xplore's offerings will serve existing vertical markets for Zebra as well as provide an inroad into new markets including oil and gas, utility, government and public safety.
The addition of Xplore will provide access to a great team and outstanding products in an attractive market that should enable us to grow our tablet sales double digits. 3rd, we are advancing our enterprise asset intelligence or EAI vision by leveraging Zebra's deep knowledge of workflows and capitalizing on key technology trends, including the Internet of Things, cloud computing and mobility. Our aspiration is to enable every frontline worker and asset to be visible, connected and optimally utilized. Lastly, we have enhanced Zebra's financial strength and flexibility by increasing cash flow and optimizing our capital structure. As Olivier mentioned, we have achieved the top end of our targeted leverage range after several years of EBITDA improvement and aggressive debt pay down.
Last week, we were excited to introduce a new brand positioning that highlights our EAI vision and how we enable our customers to succeed. On Slide 12, you see our brand essentials, which convey how Zebra delivers a performance edge to the frontline of business. First, Zebra innovates products and solutions with purpose driven designs that are tailor made for the front line and its workflows. Our products are ultra rugged and reliable, intuitive to use and easily integrated with other Zebra products to create a scalable platform. We also they also have enterprise grade security and are fully supported by Zebra through their lifecycle.
2nd, our smart products and infrastructures capture timely and relevant information creating data powered environments supported by Savanna, our data services platform. 3rd, we enhanced collaboration and workflows for frontline workers through mobile connectivity. With our tools and software applications, teams can communicate seamlessly and utilize location information to dispatch instructions to the appropriate employee. And lastly, we can analyze the operational data we collect through automated methods to provide real time guidance to the frontline worker. Together with our growing global ecosystem of partners, Zebra's solutions are used to intelligently connect company assets, data and people in collaborative mobile workflows.
In summary, these brand essentials highlight Zebra's differentiation in the marketplace and how we enable our enterprise customers to enhance productivity, improve customer service, ensure patient safety and comply with regulations. Across all of the vertical markets we serve, 5 megatrends have been transforming the needs of our customers. These include the proliferation of connected devices, mobility within the enterprise, cloud computing, the transition from task worker to knowledge worker and an increasingly on demand economy. We are helping companies across many industries digitize their operations and improve their performance to stay relevant and compete in today's marketplace. Slide 13 highlights the primary vertical markets that we serve, retail and e commerce, healthcare, transportation and logistics and Manufacturing.
Our intimate knowledge of operational workflows in each of these verticals is a key reason for our success. We see the pace of change accelerating and the use cases are evolving to address increasing demands. For example, in retail, our solutions have been traditionally used for inventory management, which remains a critical application for omni channel and e commerce fulfillment. More recently, we have been driving increased demand for our products and solutions in the front of the store as customers require a higher level of customer service, including more pickup and delivery options. With our technology, a store associate can immediately check inventory and complete a transaction without ever leaving the shopper side.
In the transportation logistics space, we are well known for track and trace and proof of delivery use cases. We are now providing real time visibility of parcels and equipment at every stage of the supply chain, including innovative solutions that maximize the load density of a trailer. In healthcare, we enable patient identification through wristbands and a variety of sensing technologies and we are expanding use cases by driving increased clinical collaboration. Our solutions now allow care providers to monitor patient conditions while being mobile. Additionally, enabling immediate communication among various care team members is vital for timely patient care and the best possible outcomes.
In summary, enterprise customers are working with us to solve their evolving business challenges. We see ample opportunity to for increased application of our solutions in our existing and new verticals.
With that, I'll hand the call back to Mike. Thanks, Anders. We'll now open the call to Q and 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.
Our first question comes from Jim Ricchiuti of Needham and Co. Please go ahead.
Thank you. Good morning. I was wondering, I have a question on the transportation and logistics and manufacturing markets. What I'm wondering is whether the strength you're seeing in these markets is the result of new capacity additions or increased investments going into existing infrastructure and facilities? And you may not have that clear pipeline into that, but I'm just wondering if that's what you might be seeing in those markets that's driving the strength?
Yes, thank you. I'd say first, our solutions are foundational to our customers executing on their strategies and digitizing their businesses across all our verticals. Across all the markets we serve, we help them increase workflow efficiency, provide real time guidance to frontline employees and enhance customer or patient experiences. And we deliver all of this through our specialized partner ecosystem. So specifically for the transportation logistics and manufacturing markets, I'd say, first with T and L, we have there's some strong secular growth trends that are in play there.
E commerce and the on demand economy are driving a lot of investments by T and L Companies. Historically, they've delivered many, say, many boxes to a few corporate enterprise customers. Today it tends to be much more few boxes to many consumers. So it puts a lot of strain on their supply chain. And that's translating into additional investments and business for us.
So our Android portfolio, our wearables, our printing, particularly mobile printing, are all seeing accelerated growth rates from the T and L space. And we see some of our new solutions like SmartPak and location solutions demonstrate their thought leadership within the TNL industry. So, it helps also provide a bigger umbrella from how we can operate with those customers. And in manufacturing, it's a strong growth vertical, particularly for printing. And we have released a number of new printers over the last several quarters, new tabletop printers and desktop printers, some new mobile printers too for that matter.
And they have been very well received in manufacturing. We also see manufacturing as being the highest Windows conversion opportunity, so Windows to Android. They've been so far I think the slowest to adopt Android, but we are having a lot of programs and solutions in place to help make that transition as easy for them and help accelerate that. Manufacturing is also the primary vertical for our location solutions business.
Got it. My follow-up question, Anders, is on M and A. Just with the successful integration of the enterprise business and now this announcement with respect to Xplore, I'm wondering if this signals that the company is going to be more active on the acquisition front and along those lines, what's the deal pipeline look like and maybe some criteria doing M and A going forward? Thank you. And congratulations on the quarter.
Thank you. Yes. Well, we now have been spent the last 3 years aggressively paying down debt, and that's giving us a lot of financial flexibility. So we now, as we said in our prepared remarks, at the high end of our targeted net debt to EBITDA range of 2% to 2.5%. We are seeing a number of good opportunities for us to invest in our business, both organically and inorganically.
And these opportunities would deliver attractive ROI for our shareholders. I think Xplore is a great example of this. It's the first acquisition we made since 2014, so it's basically 4 years. All our investment opportunities, organic or inorganic, have to drive attractive ROI and attractive growth rates for us both on the top and bottom lines. We always start by looking at the highest risk adjusted returns for shareholders.
So we consider all options when it comes to our capital allocation priorities. And things that will be investment opportunities that we will be particularly excited about would be things that would help advance us as a solutions provider that would bolster our sense, analyze and act value propositions. Also, opportunities to strengthen or augment our position in near adjacencies, which will be explore will be a case in point. So for us, M and A is a vector of growth, but we will always start with looking at the highest risk adjusted return for our investors.
Thanks very much.
Our next question comes from Keith Helvemann of Northcoast Research. Please go ahead.
Good morning, gentlemen. Congratulations on a good quarter. Anders, last quarter, I think you guys offered a little bit of commentary that the pipeline into large deals for the rest of the year just wasn't that great. Now that we weren't there, but you didn't have a great pipeline to it. Did things change over the quarter that large deal pipeline just seems to grow or you have more visibility there?
Yes. I'll start and then I'll have Joe Heel help out here also. But yes, when we started the year, I think we had limited visibility to larger deals and larger pipelines. That has we put a lot of emphasis on both driving our run rate business, which has also been growing very nicely over the year here, as well as making sure that we paid attention to larger customers and that we could win new refreshes or new deployments with them. And let's say over the last 3, 4 months, we've seen a meaningful improvement, a strengthening of the large deal pipeline also.
And that's also reflected in our Q3 guidance.
Joe? Not much to add. I think we have been pleasantly surprised by the ongoing momentum in terms of the conversion of Windows to Android, not only in retail, but as we mentioned earlier, also in other segments like T and L. And we have seen an ongoing trend by our customers to make those transitions and that has the visibility we've gotten into those transitions has given us both very good results in Q2 and the confidence for some of our outlook that we've shared.
Great. I appreciate the color. Just a brief follow-up again. R and D went up by about $10,000,000 this quarter. Olivier or Anders, can you just talk about the strategy for R and D going forward?
And what does the growth that you're having now, what does that give you the ability to invest in that perhaps you weren't able to invest in before?
So let me answer to the OpEx trend in general rather than only R and D, Keith. So first of all, you're right. We have increased the OpEx year on year by about €20,000,000 We're investing in organic investments and also in high incentive compensation based upon the performance of the business. And we when we deploy capital and OpEx specifically, we have 3 key principles in mind. 1st, we want to scale OpEx as a proportion of revenue.
And as you saw in Q2, we have increased OpEx as a proportion of revenue by 140 basis points year on year. We had the same kind of scaling last year. So principle number 1. Principle number 2, we want to be prudent in the way we invest and we want to generate obviously profitable growth and we have been able to do that nicely over the last 2 years, Q2 being not an exception. And we also invest in viable cost.
We want to be able to nimble. And maybe Anders, you have other points to add?
Yes. Just briefly, I'd say, we have lots of very attractive investment opportunities across all our product portfolios. And we have a productivity program going on to help make sure that we free up as much investment capacity as we can to put that money to use in a most productive way. So product development and sales and marketing are the 3 areas that tend to get the most of that, but also some of that we let flow through to shareholders to make sure we have a good balance. But we have lots of good opportunities for investment that will drive growth for 2019 beyond.
Great. Thank you very much.
Our next question comes from Jason Rodgers of Great Lakes Review. Please go ahead.
Yes. Just wanted to talk a little bit about the AIT segment. You had very strong organic growth there versus what you've done in previous quarters. You mentioned the benefits from new products, but I was wondering if there are any especially large deals that contributed to that growth and how sustainable that growth may be in the second half?
Yes. First, we're driving growth across all our business segments now or product segments now. And I'd say our innovative and broad portfolio of product solutions is a major differentiator and strong driver for us. Also our deep understanding of the vertical workflows within our customers' operations is helping us be much more of a partner to our customers. And we're excited about all our products here this quarter.
We had strong performance across all major product categories. On the printing side, we saw AIT had particularly strong performance in North America and in Europe. The new portfolio, the new products we have come out with have performed very well, and we have a very strong and fresh and differentiated portfolio of solutions today. Things like Link OS provides an unrivaled manageability of our printers that is very difficult for others to emulate. You can now scrape off data from labels and use that as intelligence to drive intelligence, you can say.
Our desktop and mobile printers did very well in Q2. We also launched a new card printer in the second quarter, one of our entry level models, which was performing very well and got very good feedback from customers. Supplies, we think of as a very attractive business, but it is an underpenetrated market from Zebra's perspective and we believe we have good opportunities to continue to grow there also. And overall, I'd say our printing and supplies business were the biggest beneficiaries of 1 Zebra, of the combination of the traditional printing business with the enterprise business. And I'll see if Joe has anything to add.
Well, perhaps only on your specific question around large deals, I would say there isn't a single large deal or a grouping of large deals that has influenced our results in Q2 that we shared disproportionately. We did have a number of areas that had very nice growth. For example, the manufacturing in Asia, which is one of our big customers, as Andres mentioned, healthcare, where we do have a strong presence with printers and supplies, all have contributed very nicely with growth, but not in any one concentrated deal or group of deals.
And then as a follow-up, with debt no longer the priority for cash flow, just looking specifically at share repurchase. Should we expect that to at least offset future dilution? And also, I wanted to get your thoughts on initiating a dividend.
So as Anders indicated, we are very excited by the end markets we are serving and by the competitive position of the company. And our first order of priority is going to be to invest in our business organically or inorganically. And we think that this is the best way today to deliver good return for our shareholders. Now buyback and dividends are not off the table. We will evaluate all our options.
The first order priority is going to be organic and inorganic investment opportunities.
Thank you.
Our next question comes from Brian Drab of William Blair. Please go ahead.
Thanks. This is actually Joe Aitken on for Brian this morning. I was wondering if you could talk a little bit about the winding down of 3 gs and how large an impact that could have on the business looking ahead to 2020 or 2021 and beyond. And more specifically, with the transition away from Windows taking place, won't most devices already be compatible with 4 gs or LTE by that time?
Yes. So first, the transition from Windows to Android, that continues to be a key driver of growth for us. We are approaching 50% market share overall for our mobile computing platform or portfolio and our market share for Android is substantially higher than that. So that's a driver for our market share increases. We see continued good potential for continued growth in Android.
There's still we estimate at least 10,000,000 legacy Windows devices out there that remains to be updated or refreshed to Android. And we now see continued expansion of the vertical market to the use cases where Android is being used. So we started off in retail, transportation logistics is clearly happening now, healthcare is doing well. And we see Android having a somewhat shorter life cycle than Microsoft devices. So that will also be help, specifically for 3 gs.
So for those who aren't as familiar maybe with 3 gs that as the service providers in North America will start rolling out 5 gs, They will have to do some frequency reharvesting and 3 gs service will be turned down over the next I can't remember, I think it's 2021 is the end date for when 3 gs service will be will disappear. And we have and the industry has a number of 3 gs only devices, wide area devices in service today. And those obviously will not work on a 4 gs network. So we think there's probably about maybe 3,000,000 devices or so in the market from us and others that would need to be refreshed as part of that upgrade also.
Great. Thank you. And then just a follow-up. Can you give any more granularity around the software and service segment? Specifically, what percent of sales the software account for in that?
And what was the growth of each during the quarter, if you can?
Of course. So services and software represent about 10% a bit more of the company revenue and the growth has been in the mid single digits. We are pleased with the performance of this particular segment. It has been an area of focus for us. The first order of priority was over the last few quarters to raise customer satisfaction.
And as a result, we in sourced North America repair operations. We in sourced that into in the U. S. And we have seen as a result, as I indicated, sales benefiting from that transition. So we are pleased with the result, and we think that this is actually the start of a new trend for us.
Maybe two things I would add is, the segment that you referred to also includes professional services and software. And we see those as critical to the EAI solutions that we're bringing to market and they are enabling those very nicely.
Great. Thanks for the color there. Appreciate you taking my questions.
Our next question comes from Richard Eastman of Baird. Please go ahead.
Yes, good morning. Perhaps Anders, could you just kind of speak to the second half sales outlook, whether it be the Q3 and certainly the implied Q4 and full year? I'm curious, we're now talking about full year core growth of 8% to 10%, I think is how the math works out. Could you just 0 us in a little bit on where that increased confidence is driven either by end market? Is there again, we talked a little bit about large deals in the retail segment.
But I'm curious, is there any cyclical uptick? You mentioned manufacturing, but maybe just 0 us in a little bit on where the increased confidence is over the second half, either by end market or perhaps by geography?
Yes, I think firstly, we are forecasting now some 8% to 10% organic growth. We think that's a prudent forecast based on the visibility we have today. And I'd say the growth we are seeing now is very broad based, right. You see in Q2, 3 out of 4 regions had solid growth. All our product categories had good growth.
So, we expect to see continued growth from our channel and we have good visibility now also into a large deal pipeline that will convert, we believe, in the second half of twenty eighteen. I'd say the drivers for this are similar to what we talked about before on the vertical side within each vertical market. So in retail, you have the shift to e commerce and omnichannel. That's a big investment that I would say pretty much every brick and mortar retailer and e commerce provider is embracing and they are adopting our type of technology to be able to execute on those strategies. We also are seeing some of the newer technologies around RFID or smart infrastructures like smart lens helped drive growth there.
And similarly, in healthcare, the continued efforts to digitize healthcare. So going from having a Manila folder with hand scribbled notes to electronic medical records where you can now tie patient data directly in real time, say, to from reading something with the client or that into those records. And the value proposition in healthcare is very compelling for us around stronger care, better care, but also more better efficiencies, which is our normal value proposition. We talked earlier about transportation and logistics with some strong secular trends supporting growth around e commerce and the on demand economy. And manufacturing similarly is a big opportunity for us as they've been the slowest so far to convert into Android.
So we see growth across all the verticals, all the products and geographically we continue to see all regions expecting to grow in the second half. Asia Pac, we talked quite a bit about in the prior year. We put a lot of emphasis on Asia Pac and Asia Pac is now delivering very strong growth and I would expect Asia to be the fastest growing market for us for the foreseeable future.
Okay. And
let me give you 2 other data points underpinning our confidence for the second half. One is we look very carefully at, business that we transact in small, sizes, what we call run rate business. And we have seen a good and steady growth of that run rate business in Q2 and we see that continuing that's quite predictable into the second half. So that underpins our confidence. And the second is we've talked about visibility to large deals.
And we were of course particularly prudent about our second half because as you remember last year in the second half, we did have a good number of such large deals and we wanted to make sure that we can repeat that and we do have good visibility to large deals in the second half. So those two data points in particular, would underpin our confidence.
Great. And then just as a follow-up question, Inder, should we be concerned or thinking about any tariff related issues on Zebra, whether it be on the cost side or just on the demand side? Anything to think about there?
I'll let Olivier start.
Yes. So this is a dynamic environment, and we don't know what would be ultimately enacted, and it would be premature to speculate on the call. The tariffs which have been enacted to date have a minimal impact on the company, they included in our guide. And going forward, we are looking at all options today. And our objective will be to minimize the impact of those tariffs on the P and L of the company.
And we have a flexible supply chain which will allow us to achieve that over time. Maybe Anders you have additional comments?
Yes, maybe a couple of comments on the demand side there. So we certainly haven't seen or heard it from customers today that they are concerned about tariff from a demand side. The one mitigating factor for us would be also that we tend to be a smaller part of a large network or a large rollout. So even if there were to be some impact, some modest impact on our solutions, it would not necessarily put the ROI at risk for our customers in a bigger rollout.
Okay. Okay, very good. Well, thank you. Thank you for your time.
Thank you.
Our next question comes from James Faucette of Morgan Stanley. Please go ahead.
Thank you very much. I wanted to ask just in terms of your investment, etcetera, should we expect that the impact will be entirely to OpEx as you continue to invest in the business? Or should we expect that there may be some gross margin impact either as you secure footprint with new big customers or as you introduce new products? Do you want to?
Yes. We have outsourced our supply chain. So most of the investments we made would be in the OpEx category. But again, we expect, as we have demonstrated to be able to scale OpEx as a proportion of revenue, James, and the
investments certainly show up in OpEx, but we are investing in building capabilities and other ways of reducing the cost of goods sold in our products to make sure that our gross margin can hold up or increase over time.
Got it. And then my other question just related was related to debt. Obviously, you've done a lot of refinancing there. But given the changing interest rate environment and just what your debt levels are coming down to, is there any incremental that can be done on debt refinancing to further bring down interest rate expense?
We are looking at all opportunities, and we are surprised ourselves to keep finding opportunities. We believe we have some additional levers indeed to reduce the debt, And we'll probably deploy those initial ideas in the coming 2 to 3 quarters. But we think we still have opportunities, James.
Thanks very much.
Thank you.
And our next question comes from Paul Coster of JPMorgan. Please go ahead.
Yes, thanks for taking my questions. First up, Anders, I'm wondering if you can hazard a guess at what you think the long term growth rate is through the cycle now. I mean, what if this is cyclical versus secular?
Yes. We're always challenging ourselves to think about how can we maximize profitable growth. And the 4% to 5% growth target that we've talked about historically, we think is still is not aspirational and that does not include any acquisitions. So that will be only on organic growth. And hopefully by now we've proven to everyone that we can execute and that we have overachieved this target since we concluded the acquisition of the enterprise business back in 2014.
And at this stage, I think we have a very strong competitive position. It's a very diversified business and we have many levers that we can pull to achieve sustainable growth, both in top line and bottom line. We see our core as still having great growth opportunities, near adjacencies, and also some of the newer solutions that we have around our enterprise asset intelligence vision. And we are making solid organic investments in to drive profitable growth for the business, both for 2019 and beyond. So we feel good about where we are.
So Anders, the other thing I'd like to ask about is, if you look at Slide 13 of your presentation, enabling enterprise visibility and the strategic objectives here in the 4 verticals. In every picture, there's a human being or a human hand. But as you know, some of the fastest growth we're seeing and where the highest multiples being awarded are in machine vision, robotics, where there's no human being involved necessarily. Can you talk to us about those adjacencies? Is that something that you may pursue?
Or whether you are ultimately tied to the human hand essentially here as part of your strategy?
Yes. I'll start giving you a little bit of a sense of our EAI strategy and then how that plays into automation. But first, we continue to be very excited about our EAI vision and where we think that can take us and the growth opportunities we can see there. It resonates very well today with our customers and our employees and it's very much integral to everything we do in the company. Our sense, analyze and act framework is a great way for us to think about this that helps drive real time guidance at the edge of the enterprise for our customers.
We help our customers digitize their businesses through a variety of way, such Link OS on the printing side, location solutions, our various SmartX type of solutions. And it also helps us helps position Zebra as a thought leader. We had a great win last week actually with an important customer competitive takeaway where I think the thought leader status that we had was a big part of why we won that business. They thought of us as somebody who could help them beyond just the RFQ that was out, but more deliver innovative solutions to them over the next several years. So overall, with EI, we're very pleased with progress and the drive gives us a number of attractive horizons for growth.
If you then move into more the automation or intelligent automation as we call it, we think of that as a big net opportunity for Zebra. It's kind of a natural extension to our EAI strategy. We leverage the same kind of critical capabilities for automation as we do for EAI. And when we look at we see opportunities to help automate basically each of the steps, the SENSE, Analyze and ACT steps that we have, right? And when people hear automation first, I think many people's minds go to robotics.
I think that's one way of delivering that automation. But a lot of it is around how to automate, the data capture, the analytics and how to dispatch that action to the right person. And that might be a person or a robot of some sort, right? So what we do is really we help solve our customers' problems. And we do that by leveraging how to make humans more efficient and effective.
We leverage robots where appropriately and we have smart infrastructures that provide even higher level of, say, automation. So I think of automation again as a continuum. You can think of a specific use case like inventory or replenishment in a retail store. Historically, it started with a human going out and counting whatever was on the shelves and having a clipboard to write down what was there. Then with barcodes, you could start automating and making those humans more productive by scaling that barcode.
Then you can see with introducing robotics that you can have a robot that can go up and down an aisle and be able to read the labels on the shelf and see also how much how many units of something is on the shelf. They can see if there's any gaps and they can take action on those things. We have drones as another kind of robotic activity where we've seen system integrators take our 4 of our long range scanners to put it on and put on a location solution tag to enable to guide and control the drone and basically control it from 1 of our tablets. So we're very much involved also on the robotic automation side. But we think maybe that the smart infrastructure is the more enabling the bigger opportunity for automation.
If you look at smart lens, smart pack, smart freight, all of these things where you have a system that is situationally aware, can know in real time exactly what's on the shelves. It can automate that data capture. It can automate the analytics of being able to determine that you're running low on a certain piece of merchandise and you can then automatically send an action to a person or to a, say, robot to replenish that good. So for us, I see it as a big net opportunity and we are looking to see how we can kind of participate across that continuum of both augmenting humans to be more productive, but also taking advantage of smart infrastructures and other tools that can deliver those improvements. Does that answer your question?
Yes, it does. So I mean in the future, it need not have a human being in the picture is the way I inferred that. And so there's nothing out of scope, right? Got it. Thank you.
Yes.
This concludes our question and answer session. I'd now like to turn the conference back over to Mr. Gustafsson for any closing remarks.
Thank you. As we wrap up, I want to thank the Zebra team and our partners for another quarter of strong growth and strong results, and we look forward to welcoming the Xplore team once we close the transaction. So have a great day, everyone.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.