Good day, and welcome to the 4th Quarter 2016 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. Today's conference call and slide 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 Q4 highlights and key drivers of the results and progress made in 2016. Olivier will then provide more detail on the financials and discuss our outlook for 2017. Anders will conclude with discussion of 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. This presentation is being simulcast on our website at investors. Zebra.com and will be archived there for at least 1 year. 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. Also, our financial results include the divested wireless LAN business through October 2016. In this presentation, our references to organic sales growth for the consolidated company, the Enterprise segment, our Services business and all regions are on a constant currency basis and exclude the sales results from the wireless LAN business in both 2016 and the prior year.
Now, I'll turn the call over to Anders.
Thank you, Mike. Good morning, everyone, and thank you for joining us. As you see on Slide 4, we delivered solid results in the 4th quarter, thanks to strong execution by our team and disciplined cost management. For the quarter, we reported net sales of $944,000,000 at the high end of our guidance range, with organic growth of 3.5%. We drove gross margin expansion and reduced operating expenses, and we achieved a 19% adjusted EBITDA margin, reflecting a 310 basis point improvement over the prior year, resulting in non GAAP EPS of $1.93 a 48% increase from the prior year period.
A few additional highlights during the quarter include solid growth in our largest region, North America, led by strength in retail a record quarter in our mobile computing, led by the strongest product launch in our history with our new TC51 mobile computer a return to growth in our printing business, and sales growth in our Latin America region in a very challenging macroeconomic environment. For the full year, we paid down $382,000,000 in debt, significantly exceeding our goal of $300,000,000 This was driven by increased earnings, excellent working capital management, and proceeds from the sale of our non core wireless LAN business. As a result, we are well on our way to exceeding our 2 year goal of $650,000,000 in debt pay down. We have seen steady improvement over the past year. We returned to organic sales growth in the Q4 after a challenging start to 2016, while also driving improved profitability and cash flow.
At the same time, we have been extending our leadership position by continuing to deliver innovative solutions that create value for our customers. As shown on slide 5, our improved performance was a direct result of the successful execution of our strategic priorities in 2016. 1st, we gained market share and grew margin and profits in an improving global environment, while also prudently managing our cost structure. While we have seen pockets of elevated promotional activity, we have remained disciplined yet flexible in our approach. In our services business, we delivered solid gross margin expansion and low single digit organic sales growth by successfully executing on our operational plan.
Zebra's positioning with customers and partners remains unmatched. We announced a number of new offerings that further differentiated us as the leader in Enterprise Asset Intelligence or EAI. Key introductions throughout the year include refreshed and strengthened mobile computing and data capture devices for warehouse, storefront and field mobility use cases. These devices have enhanced capabilities and applications that enterprises require to optimally run their operations. Our mobile devices are supported by Zebra's Mobility DNA suite, which layers enterprise switch features on top of the standard Android platform.
As a result of our early strategic investments in Android, we are ahead of the competition and have the broadest portfolio in the industry. Today, nearly half of our mobile computing shipments are Android based devices. With more than 14,000,000 legacy Windows enabled mobile computers in the market today, Zebra has a significant opportunity to gain additional share over the next several years as Microsoft phases out support of its legacy mobile operating system. In 2016, we launched Asset Visibility Services, or AVS, as an extension to our OneCare managed service portfolio. Designed to increase mobile computer and printer performance, AVS offers insight into device help utilization and availability, resulting in increased productivity and operational efficiency.
We also introduced trailer load analytics, which enables our customers in the transportation and logistics space to monitor and optimize load efficiency. 2nd, we continue to successfully manage our overall cost structure through tight controls on spending. With regard to our investment in the business to drive growth, we have employed a disciplined R and D process focused on identifying opportunities with the highest potential to strengthen our core portfolio and EAI solutions. 3rd, we made excellent progress on improving free cash flow, lowering operating cash levels and retiring debt balances. Finally, we are harnessing the strength of the Zebra brand to further extend our leadership position in EAI, and we are delivering on our financial objectives.
Upon execution of our global ERP implementation, which is scheduled for mid year, our transition to 1 Zebra will be complete. With that, let me now turn the call over to Olivier to review our financial results in greater detail and provide our 2017 outlook. Thank you, Anders. It is a privilege to be part of the Zebra team and its long successful history. I am excited about the opportunities in front of us.
As a reminder, all references to organic sales growth for the consolidated company, the enterprise segment and all regions are on a constant currency basis and exclude the sales results from the wireless LAN business in both 2016 and the prior year. Let us begin with a walk through the P and L. As you can see on Slide 6, adjusted net sales in the 4th quarter were $944,000,000 up 3.5% on an organic basis. Solid 4th quarter sales performance was driven by our innovative portfolio, resulting in strength across most regions. Enterprise segment sales of $617,000,000 increased approximately 4% on an organic basis.
Sales on mobile computers increased due to strength in retail and demand for our new devices. Pre transaction Zebra sales were $327,000,000 up approximately 3% on a constant currency basis. As Hamdars highlighted, we returned to growth in printing in Q4, led by solid growth in mobile printing. Sales of supplies were higher, while sales in our location solutions business were lower. Turning to our regions.
Organic sales growth in North America was 6%, driven by strength in mobile computing, mobile printing and services. We saw particular strength in retail. EMEA sales decreased 2% from a year ago on an organic basis. While underlying trends were solid, we cycled a significant sell in the prior year period to a large customer in the U. K.
Sales in Asia Pacific were up 5% on an organic basis, including the adverse impact of the previously communicated printer price concessions of nearly $2,000,000 We also continued to see strong growth trends in China. As Anders highlighted, Latin America sales increased 12% on an organic basis, which was a sharp reversal from the steep year on year decline during the 1st 3 quarters of the year. This was driven by strong growth in Mexico, resulting from our team's efforts to stimulate growth in a very challenging environment. Adjusted gross margin of 46.1% was 90 basis points higher than the prior year period. We benefited from our continued focus on cost reduction and additional improvement in services margin.
Adjusted operating expenses declined by $24,000,000 primarily due to the benefit of our productivity initiatives and expense controls as well as the sale of our non core wireless LAN business. 4th quarter 2016 adjusted EBITDA margin was 19%, a 3 10 basis point increase from 15.9% in the prior year period. This was driven by higher gross margins and disciplined operating expense management, partially offset by approximately 10 basis points due to foreign currency impacts. Finally, it is worth highlighting that our full year 2016 EBITDA margins would have been approximately 3 percentage points higher using currency rates as of the Enterprise acquisition in 2014. Non GAAP earnings per diluted share increased to $1.93 in the 4th quarter compared to $1.30 in the prior year period.
A lower tax rate impacted by tax adjustments and changes in profitability mix by jurisdictions positively impacted 4th quarter 2016 non GAAP EPS by approximately $0.16 Acquisition and integration costs related to the Enterprise acquisition declined throughout 2016. We expensed $27,000,000 in Q4 and expect continued sequential declines in spending through the first half of twenty seventeen as we complete the integration. For the second half of twenty seventeen, we expect integration expenses to be minimal. Turning now to the balance sheet and cash flow highlights on Slide 7. We ended the 4th quarter with 100 and $56,000,000 in cash, which includes $98,000,000 held outside the U.
S. Zebra has strong liquidity and no borrowings on our $250,000,000 revolving credit facility. At year end, we add $2,600,000,000 of long term debt on the balance sheet, which is 65 percent fixed rate, including nearly $700,000,000 of floating to fix LIBOR swaps against our term loan. In December, we successfully completed our 2nd repricing of the year on our $1,700,000,000 term loan, reducing the spread by an additional 75 basis point and saving approximately $13,000,000 of annualized interest expense. Strong cash flow, repatriation of international cash and net cash proceeds from the sale of the wireless LAN business enabled $382,000,000 in principal payments on our term loan during 2016.
Our net debt to adjusted EBITDA ratio decreased to 4 times as of year end, down from 5.1 times as of the close of the Enterprise acquisition. Capital expenditures were $77,000,000 for the full year 2016, down from $122,000,000 in 2015, primarily due to lower spending on integration and real estate. We generated $295,000,000 of free cash flow in 2016, which was a significant improvement from the prior year. The key drivers of this improvement were working capital optimization, reduced integration and restructuring costs, improved margins, and lower capital spending. With respect to the wireless LAN transaction, we netted $29,000,000 of cash proceeds in the 4th quarter after transaction fees, escrow, taxes and other adjustments.
With respect to foreign exchange, for 2017, we implemented a rolling 4 quarter program to edge the euro in order to mitigate the impact of exchange rate volatility. As a reminder, approximately 1 quarter of our total company sales are denominated in euros, and it is the only currency where we have material exposure to sales, profitability and cash flow. Slide 8 shows our path to financial deleveraging. We expect to exceed our original goal of $650,000,000 of debt paid down for the 2016 2017 2 year period. Our top priority for cash flow and excess cash balances is to aggressively pay down the acquisition debt to achieve an investment grade credit rating.
We entered the Q1 of 2017 with a solid sales backlog and healthy pipeline of opportunities. These facts along with the assumption of the continuation of a gradually improving macro environment give us cautious optimism for our outlook. On Slide 9, you will see that for the first quarter of 2017, we expect the change in adjusted net sales to be between negative 2% and positive 1% on a nominal basis. Organic sales growth is expected to be between 3% and 6%, which excludes the adverse impact of 4 percentage points from wireless LAN as well as the adverse impact of 1 percentage point from changes in foreign currency rates. We expect organic sales growth to moderate through the balance of 2017, considering the year over year comparisons to our improving results through 2016.
Q1 2017 adjusted EBITDA margin is expected to be approximately 17%, which assumes flat to higher gross margin and lower operating expenses relative to the Q4 of 2016. Non GAAP diluted EPS is expected to be in the range of $1.20 to $1.40 For the full year 2017, we expect low single digit organic sales growth. This outlook excludes the adverse impact of 3 percentage points from wireless LAN as well as the adverse impact of 1 percentage point from changes in foreign currency rates. Full year 2017 adjusted EBITDA margins are expected to be in the range of 18% to 19%, including an 80 basis point adverse impact from year on year foreign currency changes. Our full year outlook assumes slightly higher gross margin rates compared to the prior year period due to continued productivity improvements offset by impacts of foreign currency changes.
We also expect lower operating expenses due to cost efficiencies as we complete the integration of the company as well as from the sale of the wireless LAN business. For 2017, we expect debt pay down to exceed free cash flow and to be back end loaded in the year. Our goal is to pay down at least $300,000,000 of debt, which is supported by higher EBITDA, lower integration expenses, lower interest cost and reduced cash balances required to operate the business. Our teams made great progress in 2016 to optimize cash conversion metrics. However, we do not expect working capital to be a source of cash this year.
Please reference additional full year 2017 modeling assumptions on Slide 9. With that, I will turn the call back to Anders. Thank you, Olivier. In 2016, we successfully completed our planned integration milestones, executed in a challenging global environment, extended our market leadership, and ended the year in a position of strength. We are staying ahead of an evolving technology landscape through focused investment and close collaboration with our customers and partners.
Building on this strong foundation, we are focused on several areas to further solidify our leading positions globally and to drive growth. First, we are leveraging our scale, innovation and relationships with customers and partners to extend our leadership with the most innovative portfolio of enterprise solutions and sensing technologies in the market. 2nd, we are advancing our enterprise asset intelligence vision by capitalizing on key technology trends and leveraging Zebra's deep knowledge of the markets we serve. 3rd, we are executing on the final phase of the enterprise integration, which includes harmonizing and streamlining back office systems and processes. And 4th, we are enhancing Zebra's financial strength by increasing profitability, improving cash flow and optimizing our capital structure.
Now turning to Slide 11. Connecting the physical and digital worlds to increase visibility into business operations and work flows is the essence of the intelligent enterprise. We are uniquely positioned to capitalize on this opportunity by leveraging our deep market expertise and key megatrends, such as mobility, cloud computing, and the proliferation of smart devices. According to industry experts, within 3 years, 30% of hospitals will be running on real time healthcare systems that will leverage location, identification and mobility for clinicians, patients and assets. 15% of global retail sales will occur online requiring new fulfillment solutions, such as our industry leading wearable computing and picking solutions.
More than 40% of the global manufacturing workforce will be comprised of mobile workers that need actual time data to run their operations. And 15% of shipments within T and L will be instant delivery, requiring new levels of visibility throughout their transportation networks. Our solutions directly address these trends and will provide a significant source of growth for us. Slide 12 highlights the key industries we serve. In 2016, we launched a number of solutions that transformed the way our customers do business to enable a more intelligent enterprise.
Our software, services, analytics and hardware are used to connect customers, assets, systems and people, giving their entire operation a digital voice. As a result, we have increased strategic engagement with customers, which is translating into new growth opportunities for Zebra. For example, in retail and e commerce, we are seeing transformation driven by several trends including mobility, inventory visibility, and multi channel fulfillment. These trends have the common thread of delivering on increased customer expectations. Both online and brick and mortar retailers realize the vital need to invest in technology that provides the improved levels of visibility and functionality necessary to thrive in an evolving environment.
A recent Zebra survey highlighted the increasing demands of the retail shopper. We found that nearly 2 thirds of shoppers are willing to make purchases from stores that provide better customer services, And more than 40% of shoppers agree that they have a better experience in stores where sales associates use the latest technology to assist customers. This means retailers need to delight their customers and equip their associates with the tools necessary to provide better in store experiences, including real time inventory visibility. Our solutions are doing just that. At the National Retail Federation Trade Show in January, we launched a revolutionary new EAI solution for the retail sector called SmartSense.
This solution leverages multi technology sensors, a data analytics engine and applications to identify and track the journey and location of merchandise, as well as associates and shoppers. SmartSense enables our retail customers to increase sales, deliver a superior omnichannel experience, and reduce shrink, theft, and operational costs. Outside of retail, Zebra's recent warehouse vision study found that more than 40% of respondents cited the need to reduce delivery times as a top driver of investment in their supply chain. This could include a wide variety of Zebra solutions. In healthcare, patient identification and timely treatment are critical success factors.
Smart, non invasive technology that provides hospitals real time tracking, evaluation and feedback is crucial to enable better patient outcomes. In closing,
our ability
to extend our leadership in the market in any macroeconomic environment. The real time visibility that Zebra solutions provide a key competitive differentiator for us. They enable our customers to improve their operating efficiency, comply with regulations, and deliver a superior level of customer service. We are well positioned to meet our objectives in 2017 beyond. We are excited by the opportunities ahead to drive value to our customers and for our shareholders.
Finally, I would like to conclude by thanking our employees for their strong commitment and many contributions to help us realize our 1 Zebra vision. And with that, I'll hand the call back to Mike Steele. 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 that we can get to as many of you as possible. Operator, please instruct our callers on how to ask a question.
Thank you. We will now begin the question and answer session. Our first question comes from Jeremy Capron of CLSA. Please go ahead. Jeremy, your line is now open.
Our next question comes from James Faucette of Morgan Stanley. Please go ahead.
Thank you very much. I just had a couple of questions. First, it seems like the business is accelerating pretty nicely or at least showing good December quarter and initial outlook for both the hardware and printing businesses on the back of new products and initiatives. Can you talk about how you're thinking about the evolution of that growth and prospects as we go through 2017? I'm just trying to understand what's built into your guidance and formulation of it.
And then, second question is, longer term, how are you thinking about the need or if there is a need for you to increase your investment in software and services to better deliver more complete solutions to your customers? Thanks.
Sure. I'll start here. So, first on the outlook, we ended the 2016 on a position of strength. We saw great momentum build throughout 2016. We obviously had a tough start, but momentum continued to grow and 2016 ended strongly, right?
And that momentum, I think, has been continuing into the first part of 2017. All four regions did perform very well in Q4 and our products also all our product families performed well. And I think we are well positioned to continue to drive growth here. So, I think we entered 2017 with the strongest product portfolio we've had in a very long time. And I feel very good about the competitiveness of our solutions.
And we're getting very good feedback from our customers and partners on both the lineup of solutions that we have as well as the progress on the integration as we're working our way through that. As we entered 2017, we also had a higher backlog than we had last year. So, that gives us an extra confidence and a robust pipeline of new opportunities. So based on all that, I feel that our 2017 outlook is prudent as we see things today. And as you look through the year, maybe comps get a little tougher, but we feel that this is a prudent and good outlook.
But we also see that we have a very strong foundation from which we can grow and continue to extend our leadership.
Well, this is Joe Hill speaking. Your second question was around the software and services.
Yes. I was going to say on that one was we certainly recognize that software will become a more prominent part of our portfolio. So far, we have created a software organization, a software BU within the company. It's a smaller organization today, but we're looking to make some smart investments to both gain some greater knowledge and put some investments behind some very compelling opportunities. We are certainly looking if you think of our mobile computing platform around Mobility DNA as an example, also we have we are doing a lot of things around software to make sure that our devices are as smart and connected as they can be.
So, we can use them to both generate data to fuel other type of applications and use cases. And on the printing side, I'd say one of our biggest differentiator is Link OS, which is our real time operating system, which makes the printer a smart and intelligent network device or network citizen. So, we are working on developing more use cases and more applications that we can satisfy by that are closely related to our devices.
And perhaps to add and point out some of the things that were mentioned earlier that are proof points of the importance of software and services as we evolve towards solutions around enterprise asset intelligence. We mentioned the launch of OVS and AVS, which are services that we are now providing to give visibility to the status of our devices, which enables our customers to manage them in a much more effective way. We also mentioned the smart sensing solution, which was launched at NRF, which is a combination of hardware, software and services needed in order to provide retailers with visibility. And another example was the TLA solution that we're providing to logistics customers. Again, one that includes hardware, software and services needed to optimize doctor operations.
So those are some examples of how we think that software and services are central to our long term targets for growth.
Great. Thanks.
Our next question comes from Richard Eastman of Robert W. Baird. Please go ahead.
Hi. Just first question just is around EMEA. Could you just kind of speak to maybe where we ended up in local currency or constant currency for the full year in EMEA? And then just kind of maybe speak to the tone of business, tone of demand there. The macro picture seems to be continuing to improve.
And I'm just curious as you move into 2017, what your expectations might be for that region?
So, I'll start first with the maybe more of the setting the context around EMEA and then Olivier will follow-up with the specific numbers for you. But the underlying trends in EMEA has been very positive. We had a rich mix of wins with existing and new customers in Q4. Retail was strong. T and L was also strong.
The TC51 mobile computer launch went very well in Europe and we had some big wins with important customers there. So, as we look at 2017, we do expect to continue to see positive trends as we go out the year and continue to drive growth from Europe. And in terms of performance for EMEA in local currency, it would have been a slight decline maybe in the range of 0% to 1%.
Okay. And then, is it when we look into 'seventeen, and I'm curious, the local currency with all adjustments for the wireless LAN business, the thought is low single digit revenue growth for 'seventeen is maybe what the thought process is now. If you were Anders, if you were to maybe identify 2 upsides to that, what might those be? For instance, would that be U. S.
Retail spending or how could we see some upside to that low single digit kind of adjusted outlook, revenue outlook?
Let me start by giving you a sense of a little bit more broadly maybe on the outlook here. So, we ended 2016 strong and we see that momentum coming in well. We are well positioned for growth across our regions and with our products. The business is quite diversified and we have a number of different avenues or levers to pull to achieve growth. There are areas of the business that I consider to be somewhat underpenetrated, I would call supplies, services and healthcare to be some of those.
And I would say also our enterprise asset intelligence vision, that's something that is compelling to customers and generates a lot of interest and we have a number of new attractive offerings in that area. Now, so when we go back and look at our 2017 outlook, I think it is prudent based on everything we know today. There's obviously some level of upside or downside, we want to look at it, which can happen. But as we see things today, we think that this is a prudent outlook.
Okay. All right. Thank you.
Our next question comes from Jason Rodgers of Great Lakes Review. Please go ahead.
Yes. A question on the organic growth forecast for the Q1. It seems like you're looking for a little bit of acceleration from the Q4. And I wonder if you could talk about where you're seeing that. Is it anywhere in particular or just across the board?
Our Q1 outlook is strong for all regions and I'd say all product families. So I think the strong momentum we had in Q4 is carrying into the Q1 here also. And the strengthening on a, say, percentage year over year growth also has to do a little bit where we had a weaker compare in Q1 of last year.
And I wonder if you could comment on your distributor inventory levels and the progress you're making with the new channel program.
Yes. So, first, Partner Connect, we launched Partner Connect, a new channel program in Q2 of last year. It's now been basically working for 9 months or so. We're very pleased with how it's gone. I think it's been well received as a good structure, good program.
We were able to gain share of wallet with our channel partners through 2016. And I guess I'm quite pleased with that going through all the complexities of our integration and be able to gain share at the same time, I think is quite an achievement. And so, yes, so the channel program I think is working very well. The second part I forgot the second part of the question.
The inventory levels.
Inventory levels, yes. So, we target about fifty-fifty 5 days of inventory with our channel partners and we've stayed close to those targets for the year and we entered 2017 with an appropriate inventory position with our distribution partners across the world. So, we feel that's healthy. It's good.
And then, just looking at the synergies, realized $50,000,000 in 2016 from ES, is $20,000,000 still the target for 2017? And is there anything additional that you can realize in 2018?
So that's correct. Dollars 20,000,000 mainly in COGS is what we believe we will realize. We have a fair amount of line of sight of that number. And in addition, as we implement our new ERP system, and we do that in the middle of this year, we believe we will have further opportunities to increase operational leverage in the company.
And if I could just squeeze one more in. You mentioned during the prepared remarks about pockets of elevated promotional activity. Is that something new that you've seen from past quarters? And maybe if you could say where you're seeing that and what you're doing to it? Thank you very much.
So, our markets have always been competitive. So, that's not new. And I think we've mentioned we've had the same concept of some pockets of elevated promotional activities in earlier calls also. And our approach continues to be one where we're trying to respond in a very disciplined way. We want to have flexibility to go after deals that we think are worth winning and that we need to win, but we do it with a very strong focus on driving profitable share gains.
You know, that's our we gained share in the past year, but the one metric, say, that we're trying to really maximize is to drive profitable growth and maximize the value of the enterprise over the long term. So, we want to make sure that we are prudent in how we pursue those things and disciplined in our approach.
Thanks very much.
Our next question comes from Saliq Khan of Imperial Capital. Please go ahead.
Hi, good morning, Anders.
Good morning.
Anders, when you were at NRF, what gave you confidence that that the retailers are willing to open up the wallets and invest in these new retail technologies over the next 12 to 18 months?
Retail has always been a strong vertical for Zebra. And I think we're very well positioned to capitalize on the transformation that's currently going on driven by e commerce and omni channel. Our traditional, say, brick and mortar customers are recognizing the need for them to invest more in our type of technologies to drive improvements and enable them to compete against e commerce. So, investments to drive greater customer experiences, enable different delivery modalities such as buy online and pick up in store, but also to drive just greater efficiencies to enable them to compete on price with others. And we also see and we have had several, I think, large retailers in the US publicly talk about their strategy of stepping up investments in technology to do just that.
We've also seen traditional e commerce players investing meaningfully in our type of solutions to enable them to scale efficiently and also to be able to offer new customer offerings. So, I think that bodes well for us. And our portfolio to address retail, both brick and mortar and e commerce is very strong. The TC 50 Fund mobile computer that we launched in Q4, that was the fastest ramping product in the history of the company. It really was a great success for us.
And at NRF, we also showed a couple of other products that you might have seen, so like MP7000. It's a flatbed scanner that's very competitive that's coming out this year, and the SmartSense solution that Joe also referred to here. And also, I'd say we feel good about being able to add additional customers through the year. So, in 2016, we added a lot of new customer names, both traditional brick and mortar customers as well as e commerce customers. And I guess this all gives us confidence that momentum will continue into 2017.
And then, Anders, as you kind of walk around the booth at NRF, one of the things that you saw over the last couple of years was their payment solution providers, asset tracking solution providers or scanners and printer solution providers that were out there. So where do you believe the Zebra technology ranks in the purchasing priority for the retailers? And wherever you believe it ranks, how do you actually improve that ranking as well? So they are more likely, the retailers are more likely to go ahead and adapt Zebra technology as opposed to the payment solution technology that's out there?
Yes. I think I will say that we are essential for retailers. If retailers want to implement an omnichannel type of strategy, I think that getting that increased visibility into what the in store visibility, being able to effectively guide people to do the pickup and self checkout and so forth in the store are capabilities that are essential for them to have. And we do offer that. Now, many things that retailers do are broader projects and we are not the only thing that's in it.
So, there's certainly other solutions that goes into that too. But I do believe that we are considered to be a strategic partner to many of our largest retail customers because they see the value and the essence of what we do. Maybe Joe, you can add something. Yes.
Also bear in mind that our go to market strategy inherently is one of partnering. So you will find us in many cases partnering with many of those solution providers that either provide checkout solutions or payment solutions. And indeed, if you look at many of the most prominent solutions that were showcased at NRF, you'll see that there's either a Zebra inside or there's a Zebra partnership involved there. So that's deliberately part of our strategy.
And just one last question on my end. To get to the organic growth outlook of 3% to 6%, could you kind of break down what the outlook looks like for the different geographies?
No. For Q1, I think we tend to give you an outlook for the company and we give you some color for each of the regions. I think we've gone through some of the regions here already this morning and for the products, but we don't really break it down by all its components.
Great. Thank you.
Thank you.
Our next question comes from Brian Drab of William Blair. Please go ahead.
Hi, good morning and thanks for taking my questions. Good morning. Good morning. Just wanted to start with just a quick question on OpEx for 'seventeen. I guess we should be modeling OpEx in terms of dollars to be down in 'seventeen.
Just wondering if you could give us a better sense for how much those dollars should be down and how it breaks down in terms of benefits from restructuring and productivity versus how much OpEx was associated with the wireless LAN business?
Good morning, Brian. We gave you two numbers on purpose. One, which is a gross margin number, we believe that this gross margin number will slightly increase in 'seventeen. And we also gave you an EBITDA number of 2018 to 2019. So you can deduct what the OpEx is.
And we did it this way for a reason. We want to adjust the OpEx of the enterprise based upon the trajectory of the business. That's why we moderate this way. However, the integration effort is actually well on its way. We believe that we're going to hit our various commitments.
And in addition, the implementation of our new ERP system midyear will give us the opportunity to deliver additional operational leverage.
Okay, great. Okay, that's helpful. Thanks. And then, I guess, this is just sort of theoretical, I guess, at this point, but there's a lot of discussion around tax policy changes, of course. And I was wondering if you could just give us an update in terms of how much of your manufacturing is done overseas?
I know the legacy Zebra business manufacturing went to Jabil and how much of the Motorola Enterprise business is done overseas and just the total if you look at your total manufacturing footprint and what Let
Let me answer indirectly to your question, Brian. So we don't know for sure what a new tax reform will include. So we have spent actually a fair amount of time with our teams internally, with our business partners, with our various advisers. And we believe that we have the ability to mitigate the impact of a new tax reform. Looking at the way the supply chain is structured is one lever.
That's not the only lever.
Yes. So I understand it's not the only lever. I'm just wondering, could you help us at all if we did focus on this one lever for a second? How much of the manufacturing is done overseas? I guess I understand that the legacy Zebra, most of it is done at Jabil.
But do you reveal how much of the Motorola business? I'm just not as familiar with that side of the business in terms of the manufacturing footprint.
So we haven't disclosed how exactly on purpose. It's obviously a competitive information. And we could restructure the supply chain in order to achieve our goals, which is to make a tax reform neutral. So there are few things we can do. We don't want to be definitive for obvious reasons.
We don't know really what the tax law is going to be. But we have various scenarios and all of them we believe would be will lead to a neutral impact for the new tax reform.
But I'll give you a
little bit more color maybe just our supply chain is probably very similar, I suspect, to most electronics supply chains. So, we have a significant footprint of manufacturing or assembly in Asia, but we also have it in Mexico and we have all our converting and a lot of our services activities in the US. But that gives you kind of the current footprint. There are certainly things that we can do to mitigate any impacts of any border adjustment taxes, but we still don't know what they look like or anything. But we are working on what how would we respond to various scenarios.
Okay.
Thanks very much and congrats on the solid quarter.
Thank you.
Our next question comes from Matt Cabral of Goldman Sachs.
So it sounds like the TC51 is off to
a pretty good start. Can you
just talk a little bit about where you've seen the biggest traction so far? And if you think there was any
meaningful amount of pent up demand that you
had heading into the launch of that product? Amount of pent up demand that you had heading into the launch of that product?
Yes. So, the TC51 is we think of it as a midrange Android all touch device. It certainly met an unmet or satisfied an unmet need in the market because otherwise we wouldn't have had that kind of launch or that kind of ramp, right? So, I think we got it right from a form factor, from a functionality perspective. We got kind of the latest and greatest operating system drop, chipsets and so forth in there.
So, it was a very compelling product when it came out and we're still seeing very good feedback from customers about it. We were down at HIMSS this past week also, which is the healthcare show and had great interest from healthcare providers in that product and we're coming out with a special healthcare version of the TC51. But the Q4 launch was primarily aimed at retailers, so mostly say brick and mortar retailers who are working on omni channel type of solutions and also to help them have a more compelling customer experience by arming their sales associates with better tools to engage with their customers.
I would add 2 things in terms of the pent up demand opportunity that I think TC51 squarely hit. On the one hand, retail and the need to compete with e commerce that this device enables in a number of different directions. On the other hand, bear in mind this transition of operating systems, which is still ongoing. And many of our customers, whether they're in retail, healthcare or other verticals, are looking to make that transition and are waiting for or have been waiting for the compelling opportunity to do that. And TC51 I think struck that nerve and hit that opportunity squarely, which is why it's been such a successful launch.
And maybe one more point to say also, there's been a lot of conversations or concern over the years around consumer encroachment.
And
the TC51, certainly, I think the first customer we had was a very large consumer device user where we were able to basically win them to switch over to our devices. So, I think this is a great way for us to compete against the consumer devices also. Great. And then, as given
the magnitude given the magnitude of the difference, can you give us a little bit more detail on what drove the benefit in the Q4 and just the right level that we should be thinking about just on an ongoing basis as we go throughout 2017?
Absolutely. So at the end of Q3, we were planning tax rate for the year at 26%. So that was an estimate that was based upon the forecast, assuming a mix of profit by legal entities or tax jurisdictions. So when we closed the year based upon the mix of the profit, based upon additional work we did as part of the year end process, the tax rate for the year moved from 26 to 23. And we had to book the full impact in the Q4 quarter, which was about $0.16 Now to answer to your second question, in term of tax rate for 2017, we believe that low to mid-20s will be a good planning assumption.
Thank you.
Our next question comes from Keith Housum of Northcoast Research. Please go ahead.
Good morning, gentlemen. Thanks for taking my question and congratulations on the execution during the year. Anders, can you revisit your long term growth rate of 4% to 5 percent? Obviously, printers came off with an incredible stretch here in 2015, with a double digit growth for several years. But since then, it looks like the growth rate has been much lower.
Do you still think the 4% to 5% long term growth rate over the cycle is the right way to think about
it? Yes. We still think 4% to 5% growth rate or the target is an appropriate target for us over a cycle. If you look at our performance over the last 2 years, we have actually hit that level. It didn't kind of come exactly the way we had expected.
So, we had almost 10% in constant currency growth in 2015 and we were just a tad of growth in 2016. So, our business is a bit more cyclical than we might enjoy, but it tends to drive it towards a good number over time. But again, we feel we have a good diversified business with many avenues and levers to pull in order to achieve our growth. And generating the kind of growth we did in the last 2 years while we were going through a very complex integration, I think it's a testament to our execution. And I feel we still feel that that's an appropriate target for us and that's what we're going for.
Great. Thanks. And then second follow-up.
I think you guys addressed us a little bit in the previous question regarding the TC51. But the mobile the Microsoft operating systems now, the Internet of Things operating systems out there, you still have a legacy system, which is going to be end of life in 2020. But obviously, you guys have a huge advantage of the Android portfolio. Are you seeing a shift now where the retailers and the other companies that will hesitant to move toward Android? Are they now making the evaluation and starting to make the move?
Can you speak to the operating system environment for mobile computers?
Yes, I'll start and then Joe can help out here also who talks to customers even more frequently. I'd say that the momentum around the Android migration is continuing strongly or strengthening. If you remember 2 years back when we first merged our businesses, at that point, there was the largest, most advanced customers that were doing it. I think now we see depending on the vertical, but retail, I'd say all large deals in retail tend to be Android today. Healthcare is very much moving in that direction.
So, we're seeing greater traction in our channel with Android. But we always talked about how the largest, most advanced customers will be leading the charge and that smaller customers won't have necessarily the resources or the know how to switch as quickly. And that's still the case. If you go down into smaller companies, they're probably more likely to continue to buy what they already have, but we are putting together different type of both educational material and other offers to make it as easy as possible for customers to switch. If you go back to the TC8000 device that we launched for kind of warehouse applications at the beginning of 2016, That was the 1st generation of Android device in that environment.
That means that our customers have to rewrite and port some of their applications to run on that device. So it's a little bit the barrier to early adoption is a bit higher. But once you start having moved your applications over, now it's much, much easier to just continue to expand and have a greater portfolio or use a broader part of our portfolio in those areas.
So, another viewpoint on the opportunity is if you go back 2 years ago, we said there's about 15,000,000 mobile computers out there that need to make the transition from legacy operating systems to either Android or an alternative. And you can do the math of what's been sold in the meantime, but our synthesis would be that the majority of that opportunity is still out there. And we think that there are at least 2, but probably 2 critical things needed to unlock that opportunity. 1 of which we think we have hit with products like the TC51. You need a compelling offering and value proposition, right, that gets customers over that hurdle.
And things like TC51, which is surrounded with the types of software and services that people expected from those legacy operating systems, those are now in the market and present and giving customers the confidence to move that way. The other one though that's important and that is the focus of I think our growth opportunity this year is that channel partners which are the majority of the way that we sell, they need to embrace this solution as well and they need to either take their customers along and in some cases take their applications. Many of the applications that customers run come from those channel partners and they need to move those over to Android. That is a focus for us this year and we see a lot of growth opportunity ahead of us from that.
Great. Thank you.
Our next question comes from Paul Coster of JPMorgan. Please go ahead.
Yes. Just one question, Olivia. When you're 1 Zebra and what will actually happen in terms of the TSAs? And should there be a kind of step function reduction in OpEx in the second half once you cross that threshold?
I'm not too sure we will speak about step function, but clearly the implementation of 1 ERP will allow us now to be really focused on optimizing the P and L further. If you look at the kind of synergies we have generated to date, they were the obvious one duplication in product roadmap, supply chains. But we believe as a management team that we could go to another level in the second half of the year gradually and then forward.
Okay. And will all of the TSAs be eliminated by the second half of the year?
The vast majority will be correct, yes.
Okay. Thank you.
Our final question comes from Michael Morosi of Avondale Partners. Please go ahead.
Hi, guys. Thanks for taking the questions. First, with respect to deleverage, it looks like this year you're targeting maybe another half turn or so in terms of net debt to EBITDA. Longer term, you've talked about being investment grade, but I wondered if you could just give a little bit more color on in terms of those leverage targets. And once you're there, how does that change your cash allocation thought process?
So you're right. We believe we should be going down by half a turn between the end of 2016 and the end of 2017. Our target is to reach investment grade rating as soon as possible. We believe that we will achieve that rating once we have a ratio of debt to EBITDA ratio of about 3. Once we achieve that level, we want to look at the best options to maximize return for our shareholders.
And that can take various forms, repaying more debt or allocating excess cash to shareholders in other ways. So we want to keep options open based upon what would be best for our shareholders.
Very good. And then a little bit longer term, we're looking at the automation of supply chains and distribution centers and having an impact on headcounts longer term. How do you view that as both a challenge and an opportunity? And how does Zebra's EAI fit into that broader automation trend? And longer term, how would that impact your mix of hardware and software analytics sales?
Yes. So, we see that as an opportunity for Zebra. Today, in some conversations around retail where they've been trying to do certain things and automate certain things. And when that has happened, it's invariably led to more use of our type of technology in order to enable that kind of automation. So, we see that we are an essential part of enabling a warehouse or a factory, whatever that is, to be much more automated.
Some of the things that we're working on for release later this year or in 2018 are specifically aimed at making people much more effective and efficient in how they do their jobs in those types of environments.
That's very good. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Mr. Steele for any closing remarks.
Thank you all for participating on our call today. We look forward to speaking with you again soon.