Good day, and welcome to the Q1 2019 Zebra Technologies earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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, sir.
Good morning. Thank you for joining us today. Before we begin, I need to inform you that certain statements made on this call are forward-looking and subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially due to factors discussed in our filings with the Securities and Exchange Commission. During this call, we will make reference to non-GAAP financial measures as we describe our business performance. You can find reconciliations of our GAAP to non-GAAP results in today's earnings press release and at the end of 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 start with our first quarter highlights.
Olivier will then provide more detail on the financials and discuss our second quarter and full-year 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 on a constant currency basis and exclude results from the recently acquired Xplore Technologies and Temptime businesses. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year. I'll turn the call over to Anders.
Thank you, Mike. Good morning, everyone, and thank you for joining us. Our team executed well and drove solid, profitable growth in the first quarter. As you can see on slide four, we reported net sales growth of 9% or 8% on an organic basis, an adjusted EBITDA margin of 21.1%, a 20-basis point year-over-year improvement, non-GAAP diluted EPS of $2.92, a 14% increase from the prior year, and free cash flow of $27 million. We achieved strong performance across Asia Pacific, EMEA, and North America. Our team drove growth across the vertical markets we serve, and demand remained strong through the channel. Our data capture and mobile computing product categories performed especially well. We also scaled operating expenses, while at the same time investing in our employees and initiatives to drive sustainable growth.
Additionally, in the first quarter, we closed on the acquisition of Temptime Corporation, a leader in time temperature monitoring, which is an attractive growth opportunity for us. Our solid start to the year and leading portfolio of solutions provides us confidence in our outlook for 2019. With that, I will now turn the call over to Olivier to review our financial results and to discuss our outlook.
Thank you, Anders. Let us start with the P&L. As you can see on slide six, net sales grew 9.1% in the first quarter, which translated to 7.9% on an organic basis before the impacts of currencies and acquisitions. We saw growth in each of our reporting segments and across most geographies. Enterprise Visibility & Mobility segment sales increased 11.6%, led by especially strong demand in data capture and mobile computing products. Asset Intelligence & Tracking segment sales increased 1.2%. We realized strong run rate business, which was partially offset by fewer large printer orders in North America than the prior year. Turning to our regions. In North America, sales grew 7%, driven by double-digit growth in our mobile computing and data capture categories. We saw particular strength in healthcare and retail. Sales to small and mid-size accounts remained strong.
EMEA sales increased 9% with relative strength across data capture, printing, and mobile computing. We saw broad-based growth across the continent. Retail was particularly strong with continued traction in RFID. Sales in our Asia Pacific region were up 12%, with strength across all major product and service categories. Most countries grew double digits, including China. Latin America sales decreased 3%, primarily due to lower sales in Mexico due to geopolitical weakness. Adjusted gross profit increased $37 million or 8%. As expected, adjusted gross margin decreased 50 basis points from a strong margin rate in the prior year period. Primarily driven by less favorable business mix in both operating segments. We expect favorable year-over-year margins in Q2 and the full year, as I will cover in my outlook commentary. Consistent with one of our principles, adjusted operating expenses as a percentage of net sales decreased 100 basis points from the prior period.
We achieved this operating leverage while continuing to make meaningful investments to drive organic growth. First quarter 2019 adjusted EBITDA margin was 21.1%, a 20 basis points increase from the prior year period. We drove non-GAAP earnings per diluted share of $2.92, a 14% year-over-year increase. Turning now to the balance sheet and cash flow highlights on slide seven. In the first quarter of 2019, we generated $27 million of free cash flow. This was $71 million lower than the prior year, reflecting increased working capital usage, including higher incentive compensation payouts tied to exceptional 2018 performance. Additionally, as expected, the timing of certain working capital items that benefited the fourth quarter of 2018 had an unfavorable impact on Q1 2019 cash flow.
Keep in mind that we are committed to a target of 100% free cash flow conversion, which fluctuates by period due to various short-term factors such as those I just covered. We had net borrowings of $146 million in the first quarter, which were primarily used to fund the acquisition of Temptime. We ended the first quarter with $1.7 billion of debt on the balance sheet. As of the first quarter, we had a 1.9 times net debt to adjusted EBITDA ratio, which is within our targeted range of 1.5 to 2.5 times. Let us turn to our outlook on slide eight. We expect Q2 2019 net sales growth to be between 7% and 9%, which assumes an approximately 2.5-3 percentage point positive impact from recent acquisitions, and an approximately 50 basis point negative impact from foreign currency changes.
We believe Q2 2019 adjusted EBITDA margin will be in a range of 20%-21%, which assumes higher gross margin both sequentially and from the prior year. Non-GAAP diluted EPS is expected to be in the range of $2.80-$2.95. We're raising full year 2019 net sales growth to be between 5% and 8%, which assumes an approximately 2 percentage point positive impact from recent acquisitions, and approximately 50 basis point negative impact from foreign currency changes. Full year 2019 adjusted EBITDA margin is now expected to be between 21% and 22%, an improvement from 2018 and our prior guide. We continue to drive operating leverage and gross margin improvement in the business. We expect that full year 2019 free cash flow will exceed $625 million.
We continue to expect to drive higher EBITDA, and unlike 2018, we are assuming that working capital will be a use of cash in 2019. You can see other full year 2019 modeling assumptions on slide eight. With that, I will turn the call back to Anders to discuss progress on our strategic priorities.
Thank you, Olivier. We are very pleased with the progress we made in Q1 and the momentum in our business. Slide 10 shows our key strategic areas of focus which support our industry leadership and drive value for all stakeholders. First, we continue to outpace the competition through our innovation, unmatched scale, and strong relationships with customers and partners. Our mobile computer, data capture, and printing portfolios have never been stronger. This has been accomplished through focused R&D investment to build upon our best-in-class offerings. We continue to see meaningful opportunities to address targeted, under-penetrated geographies and market segments in our core business. We are capitalizing on key technology trends, including cloud-based printing, RFID, and the transition in data capture to 2D imaging. Another trend has been the migration to the Android operating system, which now represents more than half of enterprise mobile computing sales in the industry.
Many large retailers have made the transition. We are early in the adoption curve in the warehouse environment. Second, we are focused on driving growth in attractive markets where we can leverage our competitive advantages. We plan to scale existing categories where we are under-penetrated and enter new markets outside the core that advance us as a solutions provider. We expect to gain traction in these markets through both organic and inorganic investments. We target high growth near adjacencies where we have a right to play, seeking businesses that can transform flows with their solutions. An organic example is in RFID, where we have been launching new fixed and mobile products and solutions that provide our customers significantly higher tracking accuracy for various use cases. From an inorganic growth perspective, we gained traction in smart supplies with the acquisition of Temptime Corporation.
Temptime is the leader in designing and manufacturing a time temperature monitoring portfolio that meets the strict specifications of the largest global health organization's vaccination programs. Our vision is to scale this technology deeper into the healthcare industry, as well as drive it into other use cases that can benefit from increased asset visibility. Third, we are advancing our Enterprise Asset Intelligence vision to enable every frontline asset and worker to be visible, connected, and optimally utilized. We are doing this by leveraging our deep knowledge of workflows and capitalizing on key mega trends. I will discuss this more in a minute. Lastly, maintaining our financial flexibility remains a key priority as we invest in the business to accelerate our traction in attractive markets. Now turning to slide 11. Zebra enables our Enterprise Asset Intelligence vision by providing a digital view of the entire enterprise.
Our products and solutions sense data from assets, products, and processes. This information, including status and location, is analyzed in real time to determine the best possible operational action to improve productivity and give greater insight into business operations. Our purpose-built products include a software layer, which makes them easy to integrate and intuitive to manage. Additionally, our new software applications and tools improve automated data collection and analysis, maximize device security, and enhance ease of use. Another integral part of our solutions ecosystem is Savanna, our cloud-based platform that powers our intelligent edge solutions with real-time data. Savanna is a key enabler of a wide range of our data-rich offerings. A newer example is our Workforce Connect software application, which enables our customers to marry all of their communications onto a single mobile computer.
Our team is encouraged by the additional opportunities we see to leverage the valuable data that is accessed through Savanna. We have been collaborating with an increasing number of our independent software partners to utilize this platform to deploy new solutions that address our customers' challenges. The rise of machine vision analytics and artificial intelligence is driving a new wave of intelligent automation, which is complementary to our core business and a natural extension of our vision. Unlike repetitive automation, intelligent automation leverages our sense, analyze, and act framework to improve workflow efficiency with or without a human operator. A key example is our recent venture investment in a company that specializes in the collaboration of humans and robots to fulfill orders on the warehouse floor.
We have made strong progress on our Enterprise Asset Intelligence vision as we help businesses across many industries digitize their operations and gain a performance edge. Zebra is benefiting from key technology mega trends, including mobility, automation, cloud computing, and the proliferation of smart devices and sensors, each of which are critical components to this transformation. Slide 12 highlights our primary vertical markets: healthcare, retail and e-commerce, transportation and logistics, and manufacturing. In healthcare, our fastest growing vertical. We are tracking clinical equipment and enabling caregivers to monitor patients while being mobile. These solutions translate into increased patient safety and reduced costs. We recently signed a new record healthcare deal for Zebra with one of the largest health systems in Canada. This customer is initially deploying premium handheld imagers and a range of desktop and mobile printers to manage specimen handling, wristband identification, and other use cases.
This Zebra solution increases productivity and improves the overall level of patient care for this customer. In retail and e-commerce, we are a trusted strategic partner for many of the largest companies in the world. We support their goals to drive their productivity metrics and improve customer satisfaction. An increasing number of our customers are equipping their associates and shoppers with our mobile computers that empower them with the real-time information they need to successfully execute omnichannel fulfillment and elevate the overall in-store experience. Additionally, it is common for our customers to deploy a wide range of our solutions for their various use cases. Examples include our mobile computers and printers, flatbed and handheld 2D scanners, as well as RFID solutions. At the ProMat trade show earlier this month, we showcased innovative solutions that help our manufacturing and transportation and logistics customers digitize their supply chain and modernize their warehouses.
These include the next generation of Android mobile computers, RFID products, and solutions to provide a digital view of their trailer loading process and work site activities. According to our research, our customers are faced with daunting scale challenges driven by the on-demand economy. Due to this increased volume, more than half of warehouse leaders plan to either add warehouses to their operations or enlarge current facilities over the next five years. By helping to drive increased productivity and efficiencies, we can help limit the scope of these costly expansions. At the ProMat showcase, Purolator, a leading Canadian freight, package, and logistics solutions company, demonstrated how they are using software on Zebra's mobile computers for track and trace, dispatch, and hub management operations. Together with a trusted partner, we have implemented a five-year as a service deployment model for Purolator.
This solution will improve delivery time, increase worker productivity, and enhance customer service. In manufacturing, our customers are looking for trusted partners who can increase their operational visibility while reducing cost and complexity. A notable example can be found with a major Latin American food manufacturer. The project includes plant floor solutions using our ET50 tablets and ZT400 series industrial printers across all their facilities in the region. It was a consultative engagement, which was initiated by our experts assessing this customer's operations and prioritizing optimal solutions. We were recently awarded a sizable data capture deployment with a customer outside of our traditional verticals. A large Italian gaming company recently rolled out our products to comply with the European Union Anti-Money Laundering Directive. They need to efficiently capture certified identification data from their customers for lottery ticket purchases. Our solution best met their unique needs.
We are pursuing additional opportunities with other prospective customers who need to comply with this regulation and similar directives. In summary, we are excited about the innovative solutions we are implementing with a diverse set of enterprise customers worldwide. Secular trends, including the on-demand economy and increased regulation, are driving increasingly complex business priorities that Zebra is uniquely positioned to address. Now I'll hand the call back over to Mike.
Thanks, Anders. We'll now open the call to Q&A. We ask that you limit yourself to one question and one follow-up so that we can get to as many of you as possible.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from James Ricchiuti of Needham & Company. Please go ahead.
Hi, good morning. Two questions. First, I wanted to focus more near term on the environment for mobile computing. You're continuing to see good strength in that market, and we've talked about the upgrade opportunity, but it appears that it's much more than that this is not just an upgrade opportunity, but it's also a market expansion story tied to associates using more of these. Is there any help you can give us in terms of how we might think about the growth rate for this portion of the business over the next year or so?
Yeah, thank you. First, all our product lines grew this past quarter. They're very fueled by the innovative and broad portfolio of products and solutions that we have. I think also our deep understanding of our customers' vertical workflows and how we can leverage data at the edge is great enablers of new use cases and for ways for our customers to derive data or derive value out of our solutions. We're very excited about the opportunities we have across all our product lines, and we're enabling several mega trends, such as the on-demand economy with these. Specifically to our mobile computing portfolio, we had broad-based growth in Q2, and we've had great momentum in the business for several quarters now. I'd highlight two key drivers that we see. One is new use cases, and the other one is the Android conversion across the industry.
On the new use cases, I see that as a good long-term driver for the business. Three specific sub-points, I guess, here. First, we are seeing a lot of our customers consolidate multiple devices or applications onto a mobile computer. If you think of historically, they would have a printer, a scanner, or not a printer, but scanners and walkie-talkies, DECT phones or PBX extensions. All of those things can now be consolidated onto our mobile computers, and Workforce Connect will be a great example of a software application that we developed that helps do this. And that makes the ROI very strong for purchases of mobile computers. Second trend will be around, our customers are looking to put a device in the hand of every worker, so that they're reaching much further into their operations to deploy technology. Obviously, that's a great driver for us.
Third, talk about screen size. Our tablet business, the biggest screen sizes are growing as a market faster than the traditional mobile computers. We're seeing more, say, managers getting tablets to digest the data that's being ingested by our mobile computers. Those are our three kind of new use cases that we see driving growth. Then on the Android transition, that continues to be a good catalyst for us. Now more than 50% of the market is Android, and so less than 50% of new devices sold are Microsoft. There's still a substantial amount of Microsoft devices going into the market. We have approximately 60% market share of the Android space and approaching 50% overall. It's still a huge potential here with approximately 10 million legacy Windows devices in the market, that over time will need to be converted.
Maybe Joe Heel, you want to add a little bit to this?
Yeah. The Android transition has been a terrific opportunity for us, we do see that continuing, in the space that Anders described, with about 10 million devices left. Where are those devices? Well, you see that the core retailers have adopted our solution quite broadly, now we're seeing the expansion in P&L in manufacturing. The warehouse is really the frontier that we're working on right now, as well as mid-tier accounts. With the larger accounts have adopted, now the mid-tier is adopting. One of the things we're seeing that you can also see in the market is that before a customer can adopt, their software application has to be available on Android. We've been working hard with ISVs, who have come to our program in very significant numbers, to help them move their applications to Android.
That's, I think, the indication that the expansion into the warehouse and the manufacturing space is where the Android migration will go next, the rest of those 10 million computers will be what we will pursue.
Yeah. You can see there's many reasons for us to be excited about the mobile computing portfolio.
That's helpful, Anders. I have one other question, if I may. As you look at the business and look back over the last one to two years, are you surprised at all by the increased pace of change with respect to how retailers and some of the logistics operators are moving to adopt automation technology? Are we seeing something that appears to be more of an acceleration versus where you might have thought the market was going to be a year ago?
Yeah. I'd say we're not particularly surprised. I think we've expected this and worked for this for a long time. I often kind of joke and tell people that overnight successes took years to happen. We've been working on a number of these initiatives and new solutions to enable these changes and this higher pace of change. We've been at this for a long time, but it may not necessarily become apparent to outsiders how long we've been working at it. It comes across as being maybe more an overnight success.
As one point of evidence, almost five years ago, we put forward the vision of Enterprise Asset Intelligence. Which is sense, analyze, and act. The automation is a natural part of that, and we're just seeing increasing opportunities to bring together all these technologies that we've had in the past and the innovations that we're bringing to market in the future to capitalize on that automation trend.
Thanks a lot.
Our next question today comes from Jason Rogers with Great Lakes Review. Please go ahead.
Yes. I wonder if you could talk a little bit more about the unfavorable business mix that you saw in both segments in the quarter and perhaps mention some of the factors that give you confidence that that mix will improve in the second quarter.
Good morning, Jason. I believe you're referring to the margin trend. Is that correct, Jason?
Correct.
Yes. In the quarter, and that was part of our Q1 guide, we had the gross margin rate being lower than Q1 last year. If you remember, Q1 last year was a strong, margin rate. What happened in Q1 as expected was two things. One, the Zebra retail solution, which is a high margin business, was very focused in Q1 last year. This year, this revenue will be spread. The impact on the quarter is about 20 basis points. You add some business mix impacting also the margin. Now, implied in our guide is that we expect Q2 margin to be higher than Q1 of 2019, and we expect the rest of the year margin to be higher than last year. If you look at our P&L over the last two years, you have seen that we have been able to scale margin up
We believe that this year will be no exception, and we feel comfortable about the levers we have to achieve that goal.
As far as the leverage that you have, I believe perhaps last quarter you talked about the net debt to EBITDA approaching the bottom of your range around 1.5 times by mid-year. Do you have an update on that target?
Absolutely. At the end of Q1, our leverage ratio was 1.9 times. We have a target. We have said that during our last call, target leverage of 1.5 to 2.5. We believe, and you can sense that from the remark from Anders and Joe, we are very excited by our end markets and by our ability to compete. As a result, in term of capital allocation, the priority will be to invest in our business, either organically or through M&A. We believe that would provide us with the best adjusted return. Share repurchase will become a consideration if we stay below our targeted leverage on a sustainable basis.
Okay, thank you.
Our next question today comes from James Faucette of Morgan Stanley. Please go ahead.
Hi, team. This is Eric on for James. Thanks for taking our question today. I just wanted to ask quick, as you're thinking through the current demand environment, have you seen any softening of RFP or cancellations or pushouts?
We have not seen any pushouts or any particular softening. The year has progressed very much the way we had expected. If you go back to 2018, we had very strong growth rates, and the annual guidance we've given here is for that to moderate. I think that has been entirely expected by us and projected. So far, I would say the year is progressing pretty much the way we expected it to.
Thank you. That's helpful. Just thinking through that, are there any areas where maybe your models have ticked down or may have ticked up or still pretty much what you were expecting?
Pretty much as expected at this stage, in term of top line and profitability. When you look at the quarter also, and that has been a theme, you see that we have a very diversified business, either by region, by products, by vertical. We're feeling good about where we are as a company, and we're serving important secular trends. We are feeling good about where we are as a business.
Thank you. That's it for me.
Our next question today comes from Richard Eastman of Robert W. Baird. Please go ahead.
Yes, good morning. Just a question around the AIT, the printing business. Could you just speak maybe a little bit to the core growth in the quarter? You still have some tough comps in Q2, Q3. Just curious how you expect that business to play out through the balance of the year. Also it's interesting, I presume you've got some price there, but the gross margin was quite good, relative to what we were thinking. Maybe just address the pricing and the growth rate in printing, if you would.
First, AIT had a good performance in the quarter. We grew particularly on the back of strong supplies performance. Within supplies, we had relative strength within wristband and RFID. The overall printer market had fewer large deals or large orders in Q1, which also we saw less large deals than we did a year ago. That was offset by a particularly strong run rate business for us. Looking a bit more longer term, we have a very strong and fresh portfolio of smart connected printers with a really unrivaled manageability through our Link-OS operating system. That's a great differentiator for us. We've launched a number of new printer products over the last 12 to 18 months, which are being very well accepted by the market and helping to ramp. We're quite excited about our printing portfolio and the growth prospect we see in the market.
Specific to pricing, I'll see if Joe Heel had any comments on that.
Well, I'll give you two pointers that are perhaps more a mix point, which is, on the one hand, the higher end of our product range, the tabletop printing range, had a strong quarter. If you look carefully in the regional piece, you'll see that Asia Pacific did well, where a lot of the regional printing business in the high end is concentrated. Another area where mix improvement has helped us is in the supplies business. We've always said that supplies is a growth opportunity, and we've focused recently on making the mix move towards the more profitable parts of that portfolio.
Just as a thought there, was there anything in the channel, was there any inventory adjustments in the channel, moving from the fourth quarter into the first quarter? Any pull into the fourth quarter based on pricing or programs or anything like that?
No, we didn't see any pull-ins into Q4 particularly. There was nothing out of the norm that was going on with our channel. Our channel inventory is within the normal range of days on hand inventory as we set out with them. The PartnerConnect channel performed very well though for us, the strong run rate. It was all good.
Okay. Just as a follow-up, Anders, could you maybe talk just generally about Xplore now that you have that acquisition integrated? What does the product roadmap look like there? Is there an OS upgrade opportunity there? You mentioned larger screens maybe being a factor in mobile computing, but just any thoughts you can have around Xplore and maybe what their product roadmap looks like as you move forward to stimulate growth there.
Yeah. I'll start, I'll ask Joe to provide some extra color also. Overall, our big screen or tablet portfolio is performing very well, and that includes the Xplore portfolio, but also our ET50 tablets that we had before. With the Xplore acquisition, we've become the clear number two in the tablet space. We're quite excited about the opportunities we see there. We have already launched a number of new products for Xplore, which have been well-received, we are looking to here to soon launch our Android products for Xplore. We're looking to basically extend the traditionally Android portfolio of mobile computers into the tablet portfolio also. We've had already the ET50 on Android for sometime. We've also now fully integrated organizationally Xplore into Zebra, and all the IT stuff will be done here this quarter.
Xplore is now part of our PartnerConnect partner program. Every reseller around the world has the ability to sell our full tablet portfolio, and all our sellers are incorporating that also. Overall, I think we feel very good about what's going on with our tablet portfolio and the growth prospects we have. Joe, any further thoughts?
I'll add one other thing that we're particularly excited about, which is, as Anders mentioned, the flagship product of the Xplore line that we just launched is the L10. We launched it on Windows, coming up towards the middle of the year is the Android launch of that same product line. That's significant because one of the big drivers, as we talked about earlier, of our growth in Android, has been our ability to bring our platform, our Android platform, and Mobility DNA and all that differentiating capability we have into the market. Now we're bringing that to the market in ultra-rugged tablets. There's nothing like that in the market today. What it provides customers is now a complete portfolio from the refreshed, so this is the other big change that's coming, the refreshed ET50.
That'll be the ET51 and 56 as a semi-rugged Android tablet, complemented with now the Xplore rugged tablets also on our Android platform. There's nothing like that in the industry, so we're very excited about that as being a major expansion for the Xplore portfolio.
Awesome. Thank you.
Our next question today comes from Brian Drab of William Blair. Please go ahead.
Hey, good morning. Thanks for taking my question. The first question is just on the guidance and what it implies for the second half of the year. I just want to make sure that I'm understanding this correctly. The guidance for 5%-8% revenue growth for the year, if you hit the midpoint in the second quarter, the growth in the first half will be about 8.5%, and the guidance implies then about 4.5% in the second half, including a net tailwind from FX and acquisitions. Can you just talk about how, number one, the outlook for larger orders appears to be developing for the second half of the year? Number two, what you're expecting for relative growth between EVM and AIT for the second half of the year.
Good morning, Brian. Your calculation is correct. We feel confident about the numbers you have mentioned based upon the visibility we have, and that despite strong comps. The reasons for this confidence, I'm not going to spend too much time on this, is based upon the strong secular trends we are today serving. In term of large orders, we are not planning for large orders at this stage to be a significant part of our business. In term of growth profile between the various businesses, we see mobile computing still being strong. We believe that data capture will be as well a stronger performance. As we indicated before, printing, supplies, and also services and software are going to contribute to the growth and offer us various avenues to keep growing the company and post a good profitability profile.
Thanks, Olivier. Can I just clarify, do you think in the second half of the year that EVM continues to grow at a faster rate than AIT as we saw in this first quarter?
That's the planning assumption today, indeed. And we covered the drivers behind that earlier, Android and new use cases.
Perfect. Thanks. It's been a couple quarters since you've commented on the potential positive impact of a more extensive rollout of 5G capability across the infrastructure. Can you talk about what impact 5G could have on your business, and the timing of that impact, potentially? Thanks.
Yeah. First, 3G services are expected to be turned down by 2021. That will be one driver towards upgrading towards either 4G or 5G devices. 5G rollout, we haven't announced when we will launch our first 5G device. I would say, we're not highlighting it as much because we don't see it as a real near term or certainly not a 2019 opportunity. Longer term, 5G can have a great impact on our business. It can really drive further connectivity at the edge of the network. You can have a lot of different types of devices connected and leverage data, including mobile computers or printers and even scanners. If you think of small warehouses or retail stores, they might decide to not implement Wi-Fi going forward.
They might just go for 5G as the connectivity for the store and have all the applications in the cloud instead. There's many drivers that can be very helpful to our business based on 5G.
Okay. Thanks, Anders.
Our next question today comes from Keith Housum of Northcoast Research. Please go ahead.
Good morning, guys. For a little bit more color on the Xplore acquisition. I understand the commentary that you guys provided here, but as I look at the numbers that it's provided here, both in the fourth quarter and this quarter, it appears that Xplore has actually been slowing down from when you guys bought it. Were the challenges that were existing in the business or some of the business moved over to the Zebra tablets to suggest that it's underperforming now and you guys will expect it to accelerate from here on in, hopefully some color for that?
Yeah. I'll start and Joe will provide some extra color. First I'd say, Xplore is performing in line with our expectations from when we made the acquisition. We are quite pleased with the performance overall. It's meeting our expectations. One thing to remember was beginning of 2018, Xplore had some very large refreshes that made those quarters look stronger than, say, an average trend line would be. We hadn't expected some of those large refreshes to repeat this year. Those are still customers, and we're still supporting them, but not with the same volumes. Joe?
Yeah. Keith, perhaps the way to look at it is if you take those large refreshes from the prior year in our plan, we had not expected that those would repeat this year. Our target, and that's why Anders said it's performing according to our plan, is to grow quarter-on-quarter, without those large refreshes. If you look at that's exactly what you see. We're quite pleased with how that is developing.
Got it. I appreciate it. Anders, a little more color on, I guess, one of the earlier questions where we were talking about EBITDA margin guidance growing throughout the year as well as gross margins. I believe you referenced that you had some levers to pull to expand gross margins as the year progresses. Can you provide a few examples of what some of those gross margin opportunities would be?
let me cover that, Keith.
Sure.
We believe that we have the ability to improve margin and scale OpEx. Actually, this is an operating principle for the company. We have demonstrated that over the last two years, and we are demonstrating that in our guide also this year. To answer to your question specifically on margin, we are using a series of levers. First of all, COGS levers, how do we optimize our supply chain? Design for value, adding more and more combined parts between the various devices. Also, we're optimizing the way we price and the way we price to value. Adding software, hardware packaged together allows us to sell on ROI basis rather than just not only on price. On OpEx, just to finish my discussion here, we believe that as we are growing the business, we are able to add dollars in OpEx, but nevertheless scale.
You saw in the quarter, Keith, we scaled OpEx as a proportion of revenue by about 100 basis points, and we do the same this year as we did over the last two years.
Great. Thank you.
Our next question today comes from Andrew Buscaglia of Berenberg. Please go ahead.
Hey, guys. Just a question on, one of your larger competitors saw some de-stocking with their distributors in the quarter. Sounds like you guys didn't really see that. Can you talk a little bit about that? If you looked into that, where you saw any impacts related to that?
Yeah. We can't comment really on what our competitors have said or what's been going on with their business. From a Zebra perspective, we did not see any de-stocking in the channel in Q1. We manage our base on hand inventory ratios with our distribution partners, which is the ones who hold inventory. The resellers don't hold inventory regularly.
Yeah. We manage the days on hand ratios very carefully. We want them to have adequate stock to be able to support the market, but we don't want them to have more and be heavy, as that impacts their profitability targets and how much they can invest in other programs to help us drive demand. Our sales team is incented on sales out, so there's no particular incentive for them to drive sales in if it doesn't have a clear path to get sold out. For us, the channel performed very well. We had strong sales out data, and we saw no signs of destocking.
Okay. Your cash flow in the quarter, was that in line with your expectations? It was a little lower than I was expecting. You're going to have a little bit of a ramp to catch up to your guidance, looks like.
You're right. As again, another principle, we are managing cash to ensure that we have a free cash flow conversion of about 100%. We might not meet that ratio in every single period. In Q1, that was one of those. That was expected. Two reasons for this. We had a strong cash conversion cycle at the end of Q4, if you remember, Andrew Buscaglia, and that had an impact in Q1, and also, we had higher incentive compensation payments in Q1 as we paid our bonuses due to the exceptional performance in 2018. We're driving this business to drive about 100% free cash flow conversion. We have, to your point, some catch up to do, but we believe we have the plan to do this. We are confident about the cash flow numbers we communicated to you, Andrew Buscaglia.
Okay. Maybe one last one, if I may. This Temptime acquisition I think is pretty interesting. You guys going a little bit deeper in healthcare, medical. Is this sort of a tip to where you want to continue to invest? Is this more so, we just think of this as a one-off, that it came up at the right price and you took it?
Well, Temptime, we felt was a great acquisition for us. It really helps us in two areas. One, we've talked about supplies as a near adjacency, where we are not as penetrated. We don't have the market share that we think we should have. The other one was around the connecting the physical with the digital. The kind of more the EI aspect of the supplies here. Temptime could address both of those. We thought that was very attractive and exciting for us. I'm not sure how many specific opportunities we'll have to do that again. I'm not sure I will say this is a trend, that we'll see more of those. We like the supplies business, and we clearly like the EI aspect of this, of how to digitize our supplies business.
Okay. Thank you.
Our next question today comes from Jeffrey Kessler of Imperial Capital. Please go ahead.
Thank you. Thank you for taking my question. I was interested in your comment about the Latin American food manufacturer, that the way you want it was on a consultative engagement. Are you seeing a better mix of, if you want to call it gaining a contract at the C-level, relative to going in and just dealing with the facilities people or the security people, et cetera? Are there going to be more of these types of, if you want to call it longer term, trust-oriented value proposition negotiations that you can identify for specific vertical markets?
Yeah. Some of the areas where we can provide particular insight is that we have very deep knowledge of our customers' vertical workflows. We have a team of people who regularly go out and live a day in the life of our customers. They can be working alongside a nurse in a hospital or doing ride-alongs with a delivery truck driver or something like that, to see how they are performing their duties and how we can apply technology to better help them and make their operations more productive, but also improve the customer experience or the patient experience.
When you start leveraging the access to data that we have today, that we didn't necessarily have the same, say, five years back, we can do more things around how we can offer greater insights into the business and enable our customers to be even more productive around those areas. I think we now have better access, and we've invested in the capabilities to help assess our customers' operations and for how they can apply technology to achieve their business goals. This is very much part of how we want to engage with our customers, and some are more receptive than others, but it's been a great example of how we try to leverage the skill sets we have. Joe, any further thoughts?
Yeah. Geoff, I'm so pleased that you noticed this. This has been a centerpiece of the transformation we've been driving in our go-to market. We've talked a lot about how we want to bring solutions to market, but not often how we do that. How we do that is exactly as you've mentioned, and as this example in Latin America highlights, when we take a solution like location solutions to market, we spend a lot of time with the auto manufacturer understanding their workflow and advising them how they can optimize that workflow by knowing where all the parts are. Or when we're implementing a SmartPack solution, we run a pilot, and then some intensive consultative work with a customer to help them understand how that will help them increase their trailer load efficiency, for example. This is a centerpiece of what we're doing.
We're dedicating close to 10% of our sales force already to this type of consultative selling, and we expect that only to expand.
Great. Thank you. Can I have a follow-up on any tweaks or any new trends that you are seeing in your Partners Program? Obviously, it got off to a somewhat rough start years ago, and then it kind of blossomed. What is going on right now in the Partners Program that has you believing that it will be added into your value proposition beyond what it's already done?
The partner program has been in place now for three, four years, and it's been well accepted, I think, by our partner community. They believe it is adding value and helping to structure how we work together. We're not envisioning any, say, large changes to it. It is working well, and we are helping drive more cross-sell, as an example, out of this. We've seen partners that sell more than one product. They have overall higher growth rates than the average growth rate of a partner. We continue to add new partners to the program as we expand. The one thing that we have put increasingly more emphasis on is our Independent Software Vendors. We commented a little bit on that earlier, but we see ISVs as an integral part of our overall partner program and our go-to-market capabilities.
These software vendors are a big enabler of the Android transition also, as they now have, across more and more verticals, started to port their software from traditional legacy Windows environments to Android. That's one of the prerequisites for us being able to provide the Android devices on the back end of that. Any further comments, Joe?
Well, I think the main part that I would highlight is Zebra has been, and has increasingly been since the enterprise acquisition, a channel centric company. Our channel centricity, the percentage of revenue we do through the channel, is well over 80%. Every year since the acquisition, that has gone up further. Our partners have noticed this. They have grown faster than the rest of the Zebra business. Not only that, but the registered partners and our largest partners have concentrated a larger portion of business with them. This has been an attractive value proposition and journey for them. The changes that we have made recently were intended to make this even more attractive, I would say, in two ways. One is we've introduced some specializations.
For example, in healthcare and in RFID, we've introduced specializations that allow partners who may not be among the largest partners, but have a specialty capability to be successful and flourish economically. That's attracted new partners to the program. The second one is there's a great deal of interest among the partners in the solutions that we have been talking about recently. This has been, on the one hand, a blessing for us, we've had to manage it carefully because onboarding partners into these complex consultative solutions conversations is more demanding, and we can't do that in as broad based a way as we can with products. For those partners that we've onboarded, this bit has been an attractive additional value proposition they can take to market and differentiate their business. Those have been some trends in the partner program.
Thank you very much.
Ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to Mr. Gustafsson for any closing remarks.
Thank you. I want to thank the Zebra team and our partners for a strong first quarter and solid momentum into Q2. We're looking forward to ringing the closing bell at the Nasdaq market site in Times Square tomorrow to celebrate Zebra's 50th anniversary, and honoring all who have contributed to our company's growth and success over the past five decades. Have a great day, everyone.
Thank you. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.