Good morning and welcome to the Zebra Technologies Conference Call. Joining us from Zebra Technologies are Anders Gustafsson, CEO, Mike Smiley, CFO, Mike Terzich, Senior Vice President of Global Sales and Marketing, and Doug Fox, Vice President of Investor Relations. All lines will be in a listen-only mode until after today's presentation. Instructions will be given at that time in order to ask a question. At the request of Zebra Technologies, this conference call is being recorded. Should anyone object to the recording, please disconnect at this time. Please note that the slides associated with this call will advance automatically throughout the presentation. At the bottom of your browser, you will find a help icon for technical assistance. If your screen freezes or the slides do not appear to be advancing as they should, please try exiting and restarting the session as it may be an issue with your connectivity.
The slides are also available in PDF form on Zebra's website. At this time, I would now like to introduce Doug Fox of Zebra Technologies. Sir, you may begin.
Good morning. Thank you for joining us today. Certain statements made on this call will relate to future events or circumstances and therefore will be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Words such as expect, believe, and anticipate are a few examples of words identifying a forward-looking statement. Forward-looking information is subject to various risks and uncertainties which could significantly affect expected results. Risk factors were noted in the news release we issued this morning and are also described in Zebra's 10-K for the year ended December 31st, 2013, which is on file with the SEC. Now, let me turn the call over to Anders Gustafsson and Mike Smiley for some comments on this morning's announcement.
Thank you, Doug. Good morning, everyone, and thank you for joining us on such short notice. This is a very exciting day. Today, we announced that Zebra will be acquiring the Enterprise business of Motorola Solutions, excluding iDEN, for $3.45 billion. This transaction is pivotal for Zebra. For those of you who are new to our story, let me briefly share a bit about the transformative journey we have been on. Zebra has been hiding in plain sight for more than 20 years in many aspects of your work and personal life. For example, the shipping label on your recent package from your favorite online retailer was likely printed by Zebra. There's also a good chance that Zebra helped your healthcare provider keep track of and ensure the safety and security of the flu vaccine you received this season.
If you enjoy this particularly good ski season and took a few runs down the slope, you may have noticed that your paper ticket was replaced by a card, which provided you with an unparalleled customer experience, made possible by Zebra's RFID technology. There are many more examples, but I hope these few paint the picture of who Zebra is today. Zebra gives physical assets a digital voice to drive business value. This is what we refer to as Enterprise Asset Intelligence. Think of it as the business-to-business version of the smart home, but in this case, we are building a smart enterprise. As the Internet of Things emerges, Zebra has the opportunity of being the first call a CIO makes to understand more about what's happening within an enterprise's workforce, assets, and workflows. Many enterprises simply haven't had a complete picture of what is happening in their business.
With the increasing number of sensors, processors, cloud-based mobile workforce applications, wireless networks, and now IoT application management platforms, there is an invaluable, always-on data stream that business leaders can mine to improve their operations and the experience of their customers. This grounding begins to paint the picture of why Zebra's acquisition of the Enterprise business of Motorola Solutions is so attractive. It will complement and accelerate Zebra's transformation into a technology company, providing the necessary building blocks for a truly smart Enterprise in this IoT world. As I hope you can tell, this is an exciting strategic opportunity for our company and shareholders. However, I know many of you are eager to understand the fundamentals of our transactions, so let me turn the call over to our CFO, Mike Smiley.
Thank you, Anders, and good morning. As Anders mentioned, we are acquiring Motorola Solutions' Enterprise business. The combination will create the largest and most profitable business in the Enterprise Asset Intelligence arena. The acquisition will include the rights to more than 3,700 patents issued and pending, and will include approximately 4,500 employees around the globe. Of note, we are not acquiring the iDEN or the professional commercial radio product lines of Motorola's Enterprise business. We believe this acquisition will create a highly appealing financial proposition for our shareholders. Benefits from the combination include increased sales, significant synergies, a strong return on capital, and greater participation in attractive secular trends.
The purchase price of the transaction is $3.45 billion in cash, which represents a multiple for the business we are buying of approximately 10.9x pro forma EBITDA for the last 12 months ended March 31st, 2014, or 8.3x EBITDA when you include run rate synergies estimated at $100 million. We intend to fund this transaction through a combination of $3.25 billion of new capital raised with debt and $200 million of cash on hand. As structured, the transaction will make efficient use of our offshore cash holdings. We expect the transaction to be materially accretive in the first full year on a cash EPS basis. As synergies are realized, we expect the acquisition ROIC to exceed our cost of capital within three years. Morgan Stanley is providing a fully underwritten financing commitment for the debt component of the transaction.
The commitment includes a $250 million revolver, which will ensure ample liquidity going forward. We expect to have a leverage ratio of around 5x debt to adjusted EBITDA closing. We plan to rapidly delever and are targeting leverage of less than 3x in about three years. The combined company will generate significant free cash flow to achieve this target. Given the strong free cash flow of the business and attractiveness of this opportunity, we believe shareholders will benefit from this capital structure. Over the long term, we expect the combined business to achieve 4%-5% sales growth. This outlook is before any upside from sales synergies. We expect to share with you more about our plans to drive revenue synergies as we approach the close of the deal. We're also targeting 18%-20% EBITDA margin, again, over the long term.
We expect to start realizing upside from the acquisition from day one post-closing. To hit this target, we have put in place an experienced integration team led by Mike Terzich, Zebra's current Senior Vice President of Global Sales and Marketing. Mike will work with other senior leaders at Zebra and within the Enterprise business to efficiently integrate the two organizations and ensure a smooth transition. We expect closing for the acquisition to occur by the end of 2014. Closing of the transaction will be subject to customary regulatory approvals. Finally, as you saw in our release issued this morning, for the first quarter of 2014, we expect to report sales in the range of $287 million-$289 million and an anticipated increase of 21% over the $236.9 million in sales reported in the first quarter of 2013.
For the first quarter of 2014, we expect earnings in the range of $0.79-$0.82 per share or $0.88-$0.91 per share, excluding $0.09 per share for approximately $5 million in acquisition expenses, which represents an increase of 80% over the first quarter on a pro forma earnings per share of $0.50 per share. We are excited about the opportunity this transaction has for our business, shareholders, and customers. With that, let me turn our discussion back to Anders to expand on the business opportunity we see.
Thanks, Mike. The Enterprise Internet of Things is upon us. And as a result, there's a race among technology companies to provide the necessary building blocks. The Enterprise IoT requires the combination of several things, including data sensing, tracking, and capturing devices across millions of physical business assets, digital transactions, and workforce professionals. The transmission of those resulting data streams via secure wireless and wireline networks, flexible cloud-based application platforms to manage assembling that data, and big data analytics to mine the data streams for actionable business insights. With today's acquisition, we will have the ability to offer smart Enterprise solutions with all of these foundational technologies in one company to enable Enterprises, large and small, to identify, track, and manage their assets, transactions, and people. We will go deeper with barcode and RFID sensing-enabled handheld and wearable devices for the mobile workforce.
From wireless LAN solutions to Zebra's Zatar IoT cloud platform, we hold a unique position in the building of IoT applications. Zebra will now be able to expand the critical data stream for actionable business analytics. We'll be dramatically expanding the services we offer that support planning, integration, and lifecycle management for our enterprise products. Zebra will have leading positions in six key technologies. First, mobile computing, as found in the wearables and ruggedized tablets and PDAs that are in the hands of personnel around the globe. Second, barcode and mobile printing solutions like those you see on the packages delivered to your home or the receipt you receive when you return a rental car. Third, data capture, including the scanners used by delivery personnel or in e-tailer high-volume logistics centers. Fourth, RFID tags and readers used in ski passes, entertainment venues, and retail stores.
Fifth, location and motion management solutions, such as those we are developing with professional sports teams, to better understand player performance. And lastly, cloud-based device management solutions with our Zatar platform that bring visibility to the data streams generated by all these technologies. No other competitor has a similar breadth of products, services, and technologies. No one else has as many devices installed in the field today. And no company will have the focus Zebra will have on driving innovation and delivering a comprehensive portfolio of high-value solutions to the Enterprise. The new Zebra will be at the forefront of innovation in Enterprise Asset Intelligence. As is the case at Zebra, innovation is a cornerstone of the culture within Motorola's Enterprise segment. With an extensive R&D platform and a significant patent portfolio, we will be positioned as the clear leader in Enterprise Asset Intelligence Solutions.
Together, we will have more than 1,700 product development engineers worldwide focused on strengthening and broadening our already extensive platform, more than 4,500 patents issued and pending, and a steady stream of new solutions, as evidenced by our combined 60 introductions in 2013. Helping companies become smart and connected enterprises requires a detailed understanding of the nuances of specific vertical industries. That is something Zebra and Motorola's Enterprise business know quite a bit about. Let me illustrate the value we bring customers and the expanded opportunity we see with today's news. First, our solutions enable the operations of over 70,000 retail stores in the U.S. alone, with many more internationally. Second, all 10 of the largest global manufacturers rely on Zebra in their supply chains and operations. Third, our product helped our transportation and logistics partners deliver over 9 billion packages in 2013.
Lastly, our solutions helped healthcare providers elevate the quality of care to over 300 million patients last year. These are huge numbers in aggregate, and in fact, approximately 95% of Fortune 500 companies chose Zebra and Enterprise solutions for their businesses. Our customers are global, and so are we. Our reach will span 81 countries with 122 facilities and approximately 7,100 employees worldwide. I believe the combination of these two great businesses creates an excellent opportunity for our customers, shareholders, and employees. Bringing together the established leaders in RFID, mobile Enterprise computing, scanning, specialty printing, and motion management will not only give us scale in procurement, manufacturing, and logistics. It will vastly expand our distribution reach and deepen our network of value-added channel partners.
All of this will come together within a global organization that has a deep history of innovation that is synonymous with our respective, well-established brands. In closing, this is a period of tremendous opportunity. Through our Enterprise Asset Intelligence solutions, we generate the critical data streams business need in order to have greater visibility inside their organizations and ecosystems. We intend to make the smart Enterprise a reality, and today's news is a transformative step to get us there. I hope I have conveyed how excited I truly am about the acquisition of Motorola's Enterprise business. The opportunities are great for all of our stakeholders: our shareholders, employees, partners, and customers. Thank you for calling in this morning. We would now be delighted to take questions. I would now like to turn the call back to Doug for Q&A.
Thank you, Anders. Before we open the call to your questions, let me ask that you limit yourself to one question and one follow-up. In addition, Mike and I will be available after the call for further discussions.
Thank you. Now begin the question and answer session. Simply hit star then one on your touch-tone phone to enter the queue for asking a question. Questions will be answered as time permits. Our first question is from Paul Coster from JP Morgan.
Well, congratulations to the Zebra team here. So my question is a quick one. Can we first perhaps compare and contrast this to the Zebra Solutions business of years ago? Why is it different now? I think circumstances have obviously changed a lot. So perhaps you can provide us a little bit of a historical perspective here.
I think this is very different from Zebra Enterprise Solutions in that first, we have worked side by side with the Motorola Enterprise business for 20 years. We are two ends of the same solution. By coming together now, we can offer basically a full end-to-end complete solution to help our customers increase visibility in their operations. We know their customers. We know their sales team. We've been partners for many years. We have the same global go-to-market channel partners. We have a very detailed understanding of their business and how we work together. This is something that is as close to our core as I think we can come.
Okay. In terms of meshing the two companies together, can you compare and contrast the seasonality, the cyclicality, and in passing, can you also talk a little bit about the focus of R&D of the two businesses and how hardware and software fit into that profile moving forward? Thank you.
Yeah. First, on the product side a little bit, I think this is always early days. I'm not going to talk too much about the focus areas, but we got very comfortable with the product roadmaps that the Enterprise business has. And particularly, I liked some of the things they've done recently to launch new semi-ruggedized devices that are Android-based. That really opens up a great new opportunity to compete in areas that otherwise weren't really well-suited for their core products. And also having more Android-based products, I think, opens up great opportunities to attract many, many more developers. The whole software community writing applications for Android-based products is much greater, and the access to lots of new applications too. And I'll ask Mike Terzich to maybe color a little bit on the seasonality of the businesses.
Thank you. Okay. Paul, from a seasonality perspective, somewhat similar in pattern to what we see within the traditional Zebra business. I would characterize their business as a little stronger in the second half of the year versus the first half of the year, predominantly driven by the fact that they have still a pretty high concentration of retail customer base, and retail deployments, technology deployments tend to be a little bit more active middle of the year. And we all know they kind of shut it down a little bit later in the third quarter, fourth quarter to prepare for the holiday season. But by and large, it's pretty similar and consistent to what we've seen in the Zebra pattern of business.
Thank you. Our next question is from Keith Housum from Northc oast Research.
Thanks for taking my call, guys, and congratulations on this transformational acquisition. I guess the first question, Anders, is, I guess, why now? Why have you done it earlier? And I guess, why do it now and perhaps wait a few months and see how things turn out with the Enterprise business, which is over the past two years at a challenging time for Motorola?
So first, I said we've had interest in this business for a long time. We've known each other for a very long time, and I've had an ongoing dialogue with Greg Brown for a long time about our interest in this. So it was just more a confluence of events that led to today being today and not two months ago or two months from now. One is obviously the availability of lower-cost financing, which enabled us to do something like this. But I also think that our ability to execute, as we think of ourselves now as proven operators, we come at this from a position of strength. And so when Motorola decided to engage in a competitive bidding process, we felt that we needed to participate here also.
Okay. I appreciate that. A follow-up question is, looking through the slides here, you guys have long-term growth rates of 4%-5%. I guess, what gives you that confidence, especially in light of the fact that the Enterprise segment for the past two years for those guys has been far from that growth rate?
So, in our due diligence, we did extensive research on market growth rates globally and within each segment and product vertical market and product segments. We retained McKinsey to help us with this, and we interviewed lots of end-user customers, channel partners, and others. We got comfortable that this should be a nicely growing business. I think the last couple of years have been somewhat, I think, cyclically more challenged for that space. I think other competitors are similarly positioned, I think. Our understanding is that Motorola's Enterprise business has held share. It hasn't lost share. We believe by putting these two companies together, it really takes our business to the next level. We can now position truly end-to-end solutions with our customers.
We see that we have a fair shot at being our customers' CIOs' first call when they need to understand more about what's going on in their business and understand more about the data streams and how to connect the physical world to the digital world.
Okay. I appreciate it. Thank you. Good luck.
Thanks.
Our next question is from Andrew Spinola from Wells Fargo.
Thanks. I'll just ask a follow-up on that. Motorola's retail-heavy Enterprise business seems to have been impacted by retailers sort of transitioning to smartphones and using that instead of the Motorola handheld. And so there's been this pressure, and the business has been down, looks like, about 5% each of the last two years when you back out the acquisitions. And I'm wondering what your expectations are for that business when you say that you expect it to be accretive on cash EPS this year. Thanks.
Yeah. So specific to retail and consumer devices, that was another key area of our due diligence effort where we did a lot of research. We interviewed, as I said, end users, channel partners, software developers to really get an understanding of how that plays. And while there is a small part of the portfolio that is exposed to some consumer encroachment, so there's some risk, but I think net-net the opportunities that are offered here are much, much greater. We see the original applications that came into retail as being staff in people who are really customer-facing, customer-consumer-facing. And Motorola's Enterprise business has primarily had more back-office type of applications. And then you had two different types of products, either a very ruggedized product or a consumer device, smartphone, with a sled of some sort to give it the battery and other things.
But there weren't really applications that were well-suited for Motorola's products at that point. So two points on that. First, those applications were incremental to the traditional ruggedized markets that Motorola served. And second, now with new semi-rugged devices like the TC55 that are Android-based, I think that we have a great opportunity to go aggressively after those markets and really make that a big part of our space, our business.
Makes sense. That's helpful. Just one other question. There's a different effective tax rate on the MSI business. Do you have any sense at this point whether we should expect that business to be paying the 33%-34% rate that Motorola shows, or would you be able to get the tax rate down to your rate?
Well, clearly, trying to minimize our taxes is one of our objectives. But at this point, I think what we'd like to do is give you a little bit more color as we approach close. It's a little bit early for us to give you a definitive tax rate at this point.
Fair enough. Thanks a lot.
Our next question is from Brian Drab from William Blair. Please go ahead.
Good morning. Congratulations.
Thank you.
Thank you.
So Gustafsson, I've just got one question and a follow-up. I wanted to get a better sense for the growth expectations relative to the recent performance in the Motorola segment as well. And I was wondering if you could shed any more clarity on how that business has been doing by giving us a sense for the performance of this iDEN segment, which looks like it was about a $200 million revenue business, so less than 10% of the Motorola segment overall. But has that business been operating at a loss? Can you comment on that? Has that business been down more than the overall Enterprise segment recently?
So I really can't comment much on iDEN. I mean, it's part of Motorola's ongoing portfolio. They'll have a call right after this. But I think they've been very clear that from a revenue perspective, iDEN has been declining much faster than other parts because it's an outgoing business. But if you look at what we tried to create with this combination, it's really to create a new industry leader in Enterprise Asset Intelligence, really helping our customers connect the physical world to the digital world and generate those data streams that will enable them to really analyze and get much more valuable insights into what's going on in the businesses. And we have very, very good complementary vertical skills and product offer skills. So we are Zebra. We have great strength in manufacturing and healthcare, more so than Motorola's Enterprise business.
Motorola is stronger than us in healthcare, sorry, retail and transportation logistics. So we see great opportunities for us to really create stronger vertical teams to capitalize on this. And I think also just being able to be more of an end-to-end solutions provider will give us opportunities to be more strategic with our customers.
Okay. Thanks. And then on the margins here, the long-term target here, 18%-20%, I'm assuming that's for the consolidated company after the acquisition. And we're at Zebra today. We're in the low 20s. The Enterprise segment appears to, well, it reported an operating margin of 8.9% in 2013. So I'm assuming low double-digit EBITDA margins. This business is going to account for 70% of revenue, roughly, after the acquisition. Can you talk a little bit more about how you get what will be a low double-digit margin, EBITDA margin business up to the high teens or 20% range?
Yeah. This is Mike. I think keep in mind when we, this probably doesn't answer your question, but one thing is when we talk about that 18%-20% EBITDA margin, we're not factoring in revenue synergies, which I think would further benefit us. But I think there's a couple of things that we see happening. First of all, certainly the $100 million of synergies we expect to realize over the first three years will get us very meaningfully in that direction. The other thing is as we scale the business, we expect to be able to grow our revenue at a faster rate than our operating expense. So when you put those factors together, I think we do the math. It pretty easily comes up to the 18%-20% growth EBITDA margin over the three-year time period.
Okay. Thank you.
Our next question is from Michael Kim from Imperial Capital.
Hey, good morning, guys. Just wanted to touch on what you think of potential for channel conflict with 20,000 channel partners. Can you go into any geographic synergies as well as where you might see more overlap?
This is also an area that we think we have a good handle on. We have been in the same channel for years. As Zebra, we've been having the same channel partners as Motorola's Enterprise business has had. By now combining these, we are going to just make it easier for our channel partners to really deal with us. We would have more opportunities to engage with them and help them drive growth. I don't see that this really introduces any more channel conflict because the channel partners have already had both of our product sets as part of their portfolios. Mike Terzich can help with it here also.
Okay. Michael, yes, indeed. I think when you look at how the respective businesses are positioned today, to Andrew's point, when you look at the geographic distribution of our business, they're very similar geographically in their segmentation of revenue. And then I think going back to Anders's earlier point, when you really assess the vertical prominence that each of the companies brings to the table, Zebra very strong in the manufacturing, warehousing, T&L a little less so in retail, and the Motorola business being strong in the retail and T&L side, we have a combination that is going to enable quite a bit of future opportunity. That being said, to Anders's point, we share many, many today common partners simply because both products are viewed as leading best-in-class solutions, and the channel has been selling them independent of our respective collaboration for years. And we don't envision that will change.
As a matter of fact, we think that there's the potential for us to attract some new partners, particularly in places where the combined solution really starts to enable a lot more of the asset intelligence solution set, i.e., the healthcare space, where both of us still have a very minority position.
Do they fill in any particular geographies where you're planning to expand and vice versa?
No, not necessarily. I think you'll be quite surprised when you look at the similarity in the geographic distribution. I think they may be slightly heavier weighted than we are in North America, and we're a little bit more weighted than they are in Asia-Pacific. Other than that, they're very similar. They almost mirror each other.
Great. Just separately, do you anticipate any regulatory impediments to the combination? Would there be a need to divest any specific businesses, or is it a fairly clean transaction?
Yeah. We will obviously have to follow the customer regulatory approval process, but we have no overlapping product lines. These are very, very complementary offerings. So we don't envision that to be a difficulty.
Okay. Great. Thank you very much.
Thank you. I'll turn it back to Doug Fox for closing remarks.
Thank you very much. On behalf of Zebra's management, thank you for joining us today. Again, Mike Smiley and I will be available after the call for some further discussions. Thank you and have a good day.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.