Zebra Technologies - Q1 2014
May 6, 2014
Transcript
Operator (participant)
Good morning, and welcome to Zebra Technologies 2014 First Quarter Earnings Release Conference Call. Joining us from Zebra Technologies are Anders Gustafsson, CEO, Mike Smiley, CFO, Mike Terzich, Senior Vice President, Global Sales and Marketing, and Doug Fox, Vice President, Investor Relations.
All lines will be in 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 have any objections, please disconnect at this time. At this time, I'd like to introduce Mr. Doug Fox of Zebra Technologies. Sir, you may begin.
Doug Fox (VP of Investor Relations)
Thank you. 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 latest 10-K, which is on file with the SEC. Now, let me turn the call over to Anders Gustafsson for some brief opening remarks.
Anders Gustafsson (CEO)
Thank you, Doug, and good morning, everyone. I am pleased to report that Zebra achieved record first quarter sales of $284 million and earnings of $0.82 per share, including acquisition costs that reduced earnings by $0.09 per share. Earnings per share increased 78% year-over-year on sales growth of 22%. All geographic regions contributed to the sales growth.
Improvements in large enterprise deals and the incremental contribution from the Hart Systems acquisition drove record sales in North America. In Europe, more sustained economic growth in the U.K., Germany, and other large countries helped us achieve record sales in this region as well.
Overall, the record results also reflect sharp execution of an effective business strategy and broad-based strength across our diverse business. For the quarter, the improvement in large deal activity complemented an ongoing strong run rate business through distribution partners.
Sales were robust across all product lines. The notable increase in service and software revenue reflects the impact of our acquisition of Hart in December. We also saw improving profitability as our gross margin exceeded 51%. The growth in sales, improved gross margin, and leverage on operating expenses contributed to first quarter free cash flow of $47 million.
As most of you are aware, a few weeks ago, we announced our definitive agreement to acquire Motorola Solutions enterprise business, excluding iDEN. Zebra gives physical assets a digital voice to drive business value. This is what we refer to as Enterprise Asset Intelligence.
This transaction will create the largest player in Enterprise Asset Intelligence, while complementing and accelerating Zebra's transformation into a company that provides the necessary building blocks for a truly smart enterprise in this Internet of Things world.
The initial response to the announcement from customers, channel partners, and employees has been overwhelmingly positive. We further believe the combination of the two leading companies in our industry will create a highly appealing financial proposition for our shareholders from our increased scale, significant synergies, and greater participation in attractive secular trends.
Now, more than ever, we believe Zebra is well positioned to extend our industry leadership. Let me now highlight some areas of progress in the first quarter. Product innovation remains a cornerstone of Zebra's strategy. We continue to have a strong cadence of product introductions, enhancing our value proposition with customers in targeted industries. During the quarter, we expanded the capabilities of our Zatar platform with the ability to integrate iBeacon technology to customize in-store displays.
We also recently announced our first commercial agreement with an important reseller to take advantage of the platform to offer their customers a new range of services. We are now working with a strategic healthcare partner, which is using Zatar to remotely manage and support printers through cloud-based infrastructure, as well as to manage RFID tagged pharmacy trays within a hospital.
This week, we are excited to be announcing a great leap forward in innovation with our new ZT400 family of mid-range tabletop printers. Designed for maximum feature flexibility, the ZT400 is easier to integrate with best-in-class connectivity options.
It gives customers faster print speed and quality, and it is easily configurable for connectivity, communications, and media handling to address a broad range of applications, including RFID. With Link-OS and NFC communications, the ZT400 will be easier to manage over the cloud and obtain powerful web-based support.
From a vertical perspective, we will soon be introducing the QLn Healthcare Solutions series. These innovative mobile printers expand the capabilities of our popular QLn mobile printers to ensure patient safety and lower the risk of specimen mislabeling. The printers meet national specimen labeling standards. Among several innovative features, they are built with disinfectant-ready plastics that allow healthcare workers to safely and easily clean the printers to reduce contamination risk.
During the first quarter, we also advanced activities to further penetrate the existing markets we serve. In North America, we had record sales for the third consecutive quarter, with further improvements in large enterprise deals and a steady, high run rate business. Printer shipments to strategic accounts in retail and small package delivery were particularly strong as customers refreshed legacy products and implemented new applications.
The improved pace of large deal activity has continued, and the business pipeline is strong going into the second quarter. For the quarter, Hart Systems generated incremental revenue of $12 million, substantially all in North America. The acquisition of Hart bolsters our leadership within retail and serves to address vital customer needs in a rapidly changing retail business environment.
In EMEA, the continued improvement in the Eurozone economy contributed to our record sales performance in this region. Nearly all sub-regions experienced year-over-year growth, with particularly strong demand in the UK, Germany, the Nordics, and Spain. With a solid number of smaller deals, product shipments were notably strong to customers in retail, postal, and rail.
We also had robust growth in healthcare, with thermal wristbands helping to support strong growth in supplies. Looking ahead, we have improved confidence in our EMEA business based on a continued strong deal pipeline.
In Latin America, sales increased 11%, driven primarily by solid run rate activity. Continued challenges in Argentina and Venezuela were more than offset by strength in other parts of the region. In addition to the strong run rate business, we had continued success with the deployment of card printers. Our supplies business was also strong, supporting manufacturing customers in Mexico.
Finally, in Asia Pacific, sales were up a solid 15%, with broad strength in the region. We had robust shipments to retail customers in Australia. Further, manufacturing-heavy Korea contributed to growth in the region, as did growth in shipments to customers in China during a traditionally slower period because of the Chinese New Year.
We expect the positive business momentum to continue in the second quarter. Overall, Zebra's record first quarter results demonstrated continued improvement in business conditions and a strong global demand for our products and solutions.
Our commitment to innovation enables Zebra to help our customers gain greater visibility into their extended value chains to improve critical business processes. Our deeper engagements with customers across industries and geographies, coupled with our recently announced agreement to acquire the enterprise business of Motorola, will enable Zebra to play a greater role in the important trends of Enterprise Asset Intelligence and mobility.
Now, our CFO, Mike Smiley, will provide a detailed review of first quarter results and guidance for the second quarter of 2014. After Mike's remarks, I will return for some brief closing comments.
Mike Smiley (CFO)
Thank you, Anders. Let me highlight some of the key components of Zebra's first quarter results. First, we had record sales with increases in all four geographic regions. Second, operating leverage enabled EPS growth of 78%. Third, Hart performed strong in line with our expectations.
Before reviewing our financial performance for the first quarter, let me quickly review the details of our recent announcement to acquire the enterprise business from Motorola. As a reminder, we are not acquiring the iDEN business.
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 Adjusted EBITDA for the 12 months ended March 31, 2014, or 8.3x EBITDA when you include expected synergies estimated at $100 million.
We intend to fund this transaction through a combination of $3.25 billion of new debt and $200 million of cash on hand. As structured, the transaction will make efficient use of our offshore cash holdings. Now, let's take a look at sales performance for the first quarter. For the quarter, sales increased 22% from $237 million last year to a record $288 million. On an organic basis, sales increased 17%.
Foreign exchange had a positive impact on sales of approximately $3 million, net of hedges, year-over-year. Sales for North America increased to a record $133 million, up 29% a year ago. In addition to the impact from Hart Systems, the results reflect strong growth in hardware, with mobile printers performing best.
We also had growth in desktop and tabletop printers. Sales on an organic basis, exclusive of Hart, were up also 17%. In EMEA, sales increased 18%, also to a new record. Nearly all of our 13 sub-regions had year-over-year growth. The region had strong growth in retail, postal, and rail, in addition to healthcare, with strong growth in thermal wristbands. In Latin America, sales increased 11%.
Higher shipments to customers in Mexico and Brazil offset ongoing weakness in Argentina and Venezuela from the economic and political challenge in those countries. In Asia Pacific, sales increased 15%, with growth in nearly every sub-region, with notable shipments to customers in retail and manufacturing. Underscoring the diversity of Zebra's business by product category, sales of hardware increased 18% and supplies advanced 11%.
Services and software revenue grow, grew 123%, which reflects the impact of the revenues from the Hart Systems acquisition, resulting in organic growth of 22%. For the first quarter, gross margin was 51.3%, up from 47.7% a year ago. The higher gross margin reflects the impact of higher sales, a reduction in freight costs, and the positive contribution of the operations of Hart.
Net of hedges, favorable currency movements increased first quarter gross profit by roughly $2 million year-over-year. Sales and marketing, engineering, and administrative expenses increased 8% from a year ago. The growth is primarily related to higher employee-related expenses and increased expenditures for outside professional services. Hart accounted for approximately $1.9 million of the $6 million of year-over-year growth.
The operating expenses, which are up 11% over a year ago, included about $5 million in acquisition costs. The increase in acquisition costs was principally associated with the company's agreement to acquire the enterprise business of Motorola. Quarterly operating income of $53 million, plus depreciation and amortization of $9 million, and $5 million of acquisition, exit, and restructuring costs totaled $68 million of adjusted EBITDA.
This compares with $38 million in adjusted EBITDA for the prior, prior year quarter. As a result of the announced acquisition, we have started to present adjusted EBITDA in our press releases. We believe this measure will help investors better understand the fundamental performance of our business. The effective income tax rate for the first quarter was 22.3%.
The rate reflects the impact of approximately $4 million of acquisition costs that were not deductible for tax purposes. Earnings totaled $0.82 per share, including a reduction of $0.09 per share for acquisition expenses on 51 million average shares outstanding. At the end of the first quarter, we had 50.5 million shares outstanding.
Financial results for the first quarter of 2013 included exit, acquisition, and restructuring costs of $0.04 per share. For the first quarter, inventories decreased $1.7 million from the fourth quarter. Inventory turns increased from 4.1x for the fourth quarter to 4.7x. Net receivables were up $4.7 million from the fourth quarter. The day sales outstanding declined from 65 days to 56 days.
We ended the period with $468 million of cash and investments, with approximately 60% held in foreign accounts, all of which are invested in U.S. dollar-denominated securities. Now let's look at our 2014 second quarter forecast. We are forecasting second quarter sales in the range of $280 million-$290 million, which represents an increase of approximately 13% year-over-year.
The forecast reflects the company's historical seasonal increase in the printer and supplies business, offset by the typical sequential decline in revenue from Hart Systems. Second quarter earnings are expected in the range of $0.74-$0.84 per share, excluding acquisition costs, up 25% from last year's EPS of $0.60 per share, excluding $0.03 per share of exit and restructuring costs.
Our forecast assumes a consolidated gross margin in the range of 48.5%-49.5%, also reflecting the seasonal lower contribution from Hart Systems. Operating expenses for the second quarter are forecast between $88 million and $90 million, excluding acquisition expenses. The forecast also assumes an effective income tax rate of 20%. That concludes my formal remarks. Thank you for your attention. Now, here's Anders for some concluding comments.
Anders Gustafsson (CEO)
Thank you, Mike. Zebra's strong first quarter results demonstrate the success of our strategies to drive profitable growth. Our investments in product innovation, emerging technologies, channel development, and geographic expansion are making Zebra more strategic to more customers in new ways. Our business diversity, the global strength of the Zebra brand, and the sustainable competitive advantages we continue to possess, will enable us to extend our industry leadership.
We see multiple avenues for growth and high returns as we diversify and expand our business to leverage opportunities from emerging technology trends. Through the acquisition of Motorola's enterprise business, we will have the ability to offer smart solutions, enabling companies to identify, track, and manage their assets, transactions, and people.
These emerging technologies include data sensing, tracking, and capturing devices, the transmission of those resulting data streams via secure wireless and wireline networks, flexible cloud-based application platforms, and big data analytics to mine the data streams for actionable business insights. Looking ahead, the new Zebra will be a clear leader at the forefront of innovation in Enterprise Asset Intelligence solutions, with an extensive R&D platform and a significant patent portfolio.
Our expertise in RFID technologies, mobile enterprise computing, scanning, specialty printing, wireless LAN, and location solutions 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 well-established brands and innovation. Finally, the great diversity of our business, our financial strength, and continued industry leadership provide us the resiliency to pursue multiple growth opportunities.
And our recent investments are critical, high return activities that help Zebra penetrate existing markets more deeply, as well as expand our presence in new, exciting areas of growth. All of this gives us great confidence and optimism in Zebra's future. Thank you for your attention today. We look forward to providing you with regular updates on our progress through 2014. I would now like to turn the call back to Doug for Q&A.
Doug Fox (VP of Investor Relations)
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 any further discussions.
Operator (participant)
Thank you. We'll now begin the question and answer session. If you have a question, please press star, then one on your touchtone phone. If you're using speakerphone, you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question, please press star, then one on your touchtone phone, and please wait for the questions to register. And we have Brian Drab from William Blair online with a question. Please go ahead.
Brian Drab (Co-Group Head in Industrials)
Morning, it's Brian Drab. How are you?
Mike Smiley (CFO)
Hey, Brian.
Anders Gustafsson (CEO)
Good.
Brian Drab (Co-Group Head in Industrials)
Hey, good. Just, Mike, really quickly to clarify, you said 22% organic revenue growth, and I missed what that was for. Was that for the service and software segment?
Doug Fox (VP of Investor Relations)
That was for the difference would be for Hart. So we had about $12 million of revenue for Hart that we didn't have a year ago.
Brian Drab (Co-Group Head in Industrials)
Right. That was... Okay, so $12 million. And so the growth in North America of 29%, given Hart is, I guess it's about 90% in North America, maybe more that-
Doug Fox (VP of Investor Relations)
Yeah. Yeah, you got it.
Brian Drab (Co-Group Head in Industrials)
You had high teens, maybe 17%-18% organic revenue growth in North America.
Anders Gustafsson (CEO)
17%.
Mike Smiley (CFO)
17%.
Brian Drab (Co-Group Head in Industrials)
Okay. Sorry if I missed that. Okay, so 17%, and so very strong organic revenue growth rate. And I'm trying to just drill down into, you know, if you look at the first three quarters of last year with, you know, average of around 2% revenue growth in North America, you've talked about the step up in large deal activity, but also the step up in the run rate business.
You mentioned the small package industry as going through a refresh cycle. Can you just talk about, you know, what's driving that refresh cycle? Is it really just focused on one industry, or is it more broad? And are you seeing more, as a proportion of sales, are you seeing more large deal impact than you did last year?
Anders Gustafsson (CEO)
I'll take the first part of that, and then I'll hand over to Mike Terzich for the follow-up. So, yeah, you know, Q1 was a very good quarter for us overall in North America, with a strong run rate business, but it was very much complemented by, you know, large deal activity, which has really ramped up over the last three quarters for us.
You know, North America is the most diverse region we have from a vertical perspective, and we saw particular strength in retail, T&L and healthcare. And when we look forward, I guess we would say we see more of the same, you know. We have good momentum in the business today. The pipeline for large deals continues to look very healthy, and the run rate is performing very well also. So now, Mike Terzich.
Mike Terzich (SVP, Global Sales and Marketing)
Okay. Brian, just a couple added points to what Anders articulated here. In North America, yeah, we enjoyed a particularly strong quarter in retail. The large deal activity has come back. I think retail has been somewhat on the sidelines over the last couple of years.
There's been a lot of stuff going on in the retail dynamics from a project perspective, but there's quite a few projects that have been put back into play. Healthcare, as Anders noted, and I think the other piece to this is, you know, historically, we've been seeing some refresh rates in North America.
This has probably been the market where, when you go back to 2008, 2009, when things kind of reset after the economic challenges of that period, North America was still the one market that I think has been a little, a little absent of some of those refresh cycles.
We may have actually missed a refresh cycle at some point, and we're seeing a surge that's supporting that run rate business. So we've got the best of both worlds right now. We've got the return of large deal activity, principally centered in retail and some of the T&L space, combined with a strong refresh run rate through the traditional distribution channel.
Brian Drab (Co-Group Head in Industrials)
Okay, thanks very much.
Operator (participant)
We have Paul Coster with JPMorgan online with a question. Please go ahead.
Paul Coster (Senior Analyst)
Yes, thanks very much. I appreciate you taking my questions. I just want to sort of follow through on Brian's questions here. The visibility seems to be improving largely as a result of these bigger deals. So the bigger deal, are there more deals? Are they bigger? And are they also of a sort of more extended timeline? I'm wondering if you can just give us some sense of all three of those sort of metrics and how they're evolving.
Anders Gustafsson (CEO)
So specifically for North America, we have, you know, I guess it's all of those. We have more large deals. They have become somewhat larger. You know, they, you know, the average is probably similar to what it was before, but we probably have a few more larger deals, and some of those larger deals do span more than one quarter.
Paul Coster (Senior Analyst)
Now, are they generally sort of taking the products off the shelf, or is there any sort of project, sort of, non-recurring to revenue associated with these that, that helps you sort of, maybe there's some costs attached to it, but it gives you even more confidence around the timeline because you know, you know, what your project deliverables are?
Anders Gustafsson (CEO)
So, you know, most of our products in these larger deals use more standard products, but we do have, you know, more custom software applications that we put on them. So some specific things for communications or integrations or other things to make them, you know, more easily integrate into our customers' networks. So we do have some, you know, some of that, but though there's pretty light touch for the most part, as far as how much customization we do on our products.
Paul Coster (Senior Analyst)
Okay, last question on Hart. Can you talk to us a little bit about the growth opportunity there? Is it international, or is it sort of, you know, cross-selling into your existing US base, or is it both? And-
Mike Smiley (CFO)
Yeah, just as a-
Paul Coster (Senior Analyst)
Any color there would be helpful.
Mike Smiley (CFO)
Yeah, just a little bit of a refresher, and I'll turn it back to Anders to talk about. Just as a, you know, basically half of Hart's revenue comes in the first quarter of the year. So as we go forward, you know, Hart will become less, less significant in quarters two through four. But this being so significant, we called it out a little bit more in our call. I think Anders can talk a little bit about the growth opportunities.
Anders Gustafsson (CEO)
Yeah, I think that there's, you know, lots of growth opportunities in North America and in the international markets. You know, the market share of Hart's approach of more of a self-service inventory solution is still pretty low.
So there's lots of opportunities to go after the more traditional heavier workforce implementations that most retailers use. And there's been good progress on a couple of nice wins in the first quarter and some good pilots that they're doing. If you think just about, you know, the whole omni-channel activity, for instance, you know, that's a big driver for having greater inventory accuracy.
So more and more retailers are looking to be able to ship a customer's order or customer request from any store or from any warehouse. So having them, you know, when you take an order and do that, you've got to have more confidence that you have an accurate accurate view of your in-store inventory or warehouse inventory.
So that's something that's Hart very much helps retailers do. So I see it as, you know, a market which is still very low, you know, low penetration, and it plays to some strong secular trends in retail.
Paul Coster (Senior Analyst)
Thank you.
Operator (participant)
We have Keith Housum from Northcoast on the line with a question. Please go ahead.
Keith Housum (Managing Director and Research Analyst)
Thanks, gentlemen. I appreciate you taking the call, and great quarter this quarter. If we look at the growth, Hardware had a fantastic quarter, you know, year-over-year. Can you provide a little bit more color on, is that growth coming from the refresh cycle, or perhaps a bit color on new verticals that you guys are in, or expanded product entries that has gotten you business this cycle, or perhaps you didn't have last year or even, you know, last refresh cycle that we saw?
Anders Gustafsson (CEO)
Well, the strength in the hardware business... First, I'll say, I'll give the intro, and then, I'll hand over to Mike Terzich again. I would say the strength in the hardware business is, you know, broad-based. Clearly, the refresh cycle is giving an extra boost to it because the, you know, the refresh is printer-centric.
It is very hardware-centric. But it comes from, you know, refreshes. It comes from the work we've done to penetrate new vertical, like healthcare, you know, parcel deliveries in the Asia Pacific. You know, lots and lots of things that have contributed to it. But for the quarter, I would say large deal activity was maybe the largest single contributor to the increase. Mike, any further thoughts?
Mike Terzich (SVP, Global Sales and Marketing)
Okay, Keith, yes, I think, you know, I would say, you know, the characterization of the hardware performance kind of goes back to some of the prepared comments that Anders made earlier, which is we're really enjoying the diversity of our business. When you look at the geographic diversity, and you look at the vertical market diversity, it's really playing very favorably for us.
So we're enjoying the large deal activities that have been primarily associated with the retail and the T&L space. We're seeing refresh, which has been driven in multiple geographies. You know, Asia is a big manufacturing corridor for us now. So we're enjoying refresh in Europe and in Asia, and even in North America, some of the warehousing applications, we're seeing some refresh on some of the heavier sided side of our hardware business.
And then we're getting the emerging growth opportunities that are coming up from the spaces like healthcare. And we've obviously got some purposefully built design products that are going to be entering that space. We're starting to see some hardware demand, even in those emerging verticals. So it's diversity that's really working for us across the business right now.
Keith Housum (Managing Director and Research Analyst)
I appreciate that. And then if I could just drill down, and this is probably for Mike as well, just drill down on the gross margin improvement over the quarter. You know, obviously, Hart was contributor, and I heard the lower freight costs. If I try to understand a little more about the Hart business, would it be safe to assume that maybe the increase in the gross margin was 50% attributable to Hart, or is that perhaps a little too small?
Mike Smiley (CFO)
I'm sorry, are you saying 50% of the gross margin? Explain that again.
Keith Housum (Managing Director and Research Analyst)
Gross margin. Yeah, the gross margin improvement compared to last year, would that 50% improvement be because of the Hart?
Mike Smiley (CFO)
Well, I don't know that it'd be 50%, but I'm gonna tell you the gross margin, again, we had about roughly $12 million of revenue from Hart. The gross margin on Hart is meaningfully higher than the company average. So, on $12 million, it helps. It doesn't certainly explain everything. We also had the higher volumes, we're able to spread more of our overhead over a greater number of units.
So I would call it, you know, better absorption. I will also say our operations team basically hit on all cylinders this quarter, really performing extremely well. They've been investing a fair amount of time and energy in projects that help us to run that part of the business better.
We're not planning for exceptional performance every quarter, and I think our second quarter gross margin forecast sort of gives ourselves something a little bit closer to the average, but we certainly performed extremely well in the first quarter. And then the other piece is, obviously benefited a little bit from foreign exchange.
So those would be the, you know, Hart, better absorption, lower overhead, and then foreign exchange are sort of the four primary drivers that we point to. But, Hart will be a little less than... It would not be as much as 50% of the gross margin improvement.
Mike Terzich (SVP, Global Sales and Marketing)
Improvement, no.
Mike Smiley (CFO)
It's less than that.
Anders Gustafsson (CEO)
Yeah.
Keith Housum (Managing Director and Research Analyst)
Got it. All right, appreciate it. Thank you.
Operator (participant)
The next question comes from Michael Kim from Imperial Capital. Please go ahead.
Michael Kim (Senior Research Analyst and Vice President)
Hi, good morning, guys. You know-
Anders Gustafsson (CEO)
Morning.
Michael Kim (Senior Research Analyst and Vice President)
When you're looking at your sales pipeline, you know, how do you continue to see the hardware mix as broad-based, or do you see opportunities driven by either geographic or vertical opportunities? And how do you see ASPs and margins trending, given that pipeline?
Anders Gustafsson (CEO)
So I'll start again and then ask Mike to provide some more detailed color. But I think similar to how we answered the previous question, you know, the diversity of our business is really helping us. We've seen strong performance, a strong pipeline for, I would say, all regions and all verticals.
So this is not a one vertical, one region type of thing. This is very much, you know, demonstrating the strength, the broad strength of our business. You know, price points and margin outlook we have, I think, you know, our business tend to be quite steady. You know, we are very disciplined in our pricing approach, so, you know, we don't expect there to be any material difference in pricing or margins based on the larger deals.
Mike Terzich (SVP, Global Sales and Marketing)
Michael, just a couple other points on this. I would say that, you know, we have certainly, within the business, we have put a lot of focus emphasis on improving our large deal pipeline from a visibility and from a validity perspective.
And that has been an internal initiative that is really starting to pay more dividends in our confidence to look into the pending quarter and gain some confidence on what's transpiring. And I think, along the lines, you know, the larger deal opportunities for us tend to be oriented towards our mobile device, our mobile printer devices, and to a lesser extent, on some of our desktop product range and some of our card printing product ranges.
So to the degree that we see more activity in that space, they generally come from a mix of our product that is away from some of the traditional, big iron, higher margin product. But we've been able to offset that, to Mike's point, by all the good work we've been doing on the supply chain side and getting scale out of a lot of our electronic design architecture, so.
Michael Kim (Senior Research Analyst and Vice President)
Great. And then, you know, when you think about, you know, the refresh cycle and the new products and the, improvement in EMEA, you know, how are you guys thinking about balancing, you know, investments versus the operating leverage that you saw in the quarter, just given all the opportunities that you're seeing in the pipeline?
Anders Gustafsson (CEO)
Yeah. So, you know, we're obviously carefully assessing how we, you know, balance our investments versus, you know, in the business versus, kind of profitability. But first and foremost, I said, we wanna make sure we invest in our core business to make sure we can continue to extend our leadership position in the industry.
We think that generates lots of long-term benefits for the business as far as having product leadership, you know, getting the market share and the scale benefits. So that is very important to us. But, you know, we're obviously mindful that we also need to deliver healthy returns to our shareholders. So, you know, at the moment, I feel we have been able to strike a fairly good balance in that respect.
Michael Kim (Senior Research Analyst and Vice President)
You know, obviously, with the pending acquisition of Motorola Solutions' enterprise business, are you already in your planning process of integrating, you know, that organization with your investment spend on, you know, either R&D or your sales and marketing activities?
Anders Gustafsson (CEO)
Well, it's probably a little early to start talking about the specific, you know, investment profiles different parts of the organization will have. But, you know, from an integration perspective, I feel we are, you know, where we are, where we would expect to be, being three weeks into this transaction.
Actually, it's three weeks today since we announced it, right? You know, we've appointed Mike Terzich, who's on the phone, to be the lead integration officer. You know, he has, lot, you know, a very good experience, long experience with us, obviously, and, and but also been the champion for our relationship with, with Motorola for many years.
We've started to ramp all the activities around our integration management office, and we've had a number of meetings with our combined teams, so both the Zebra teams and the Motorola teams. We've identified the functional team leaders toward the different work streams that we have to perform.
We are largely done populating those teams with, you know, the individuals who will do the work. We're now, you know, in the process of scoping the actual work streams for, you know, all the things we have to do there. Early in the process, but I feel good about where we are. I think we're on target.
And I would say, also, since we have had such long history with Motorola, and it's a very complementary, solution set, the, you know, working teams are, you know, they know each other, each other well. There's, there's a lot of, comfort with, with getting along. So I would say it's, it's the, you know, all, all the working teams are getting along very well and working well together, based on, on having a good familiarity with, with each other. And Mike, maybe a few extra words from, from you?
Mike Terzich (SVP, Global Sales and Marketing)
You know, no, I think it's pretty much in line. I think we're where we need to be at this stage, and we've been very complementary, you know, selling at different ends of the solution spectrum. So it's a very friendly acquisition, so to speak. And so we've got a very high esprit de corps with the work teams, but the heavy lifting is really just beginning. But we feel we've put our best people in charge of some key work streams, and we're marching towards a flawless day one close.
Michael Kim (Senior Research Analyst and Vice President)
Terrific. Well, good luck with that, and, thank you very much.
Anders Gustafsson (CEO)
Thank you.
Operator (participant)
We have Greg Halter from Great Lakes Review online with a question. Please go ahead.
Greg Halter (Analyst)
Yes, thank you, and congrats on the excellent results.
Anders Gustafsson (CEO)
Thank you.
Mike Terzich (SVP, Global Sales and Marketing)
Thank you.
Greg Halter (Analyst)
I wondered if you could detail your large customers in the quarter. I think there has been three of them or have been three of them. And also how that dynamic may change once the acquisition is consummated.
Anders Gustafsson (CEO)
Mike, is this Smiley?
Mike Terzich (SVP, Global Sales and Marketing)
Why don't you talk about how things are cons-
Greg Halter (Analyst)
Well, by the way, so when you look at it, you know, again, the three large customers I think you're referring to are distributors. And when you sort of add the three up, they're about the same. The percentage sales for the top three are about the same as they were a year ago, although there's been some mix change between them. I don't know if you wanna give any more color going forward.
Anders Gustafsson (CEO)
Yeah, maybe Mike, Mike T, you want to-
Mike Terzich (SVP, Global Sales and Marketing)
Yeah.
Anders Gustafsson (CEO)
Add?
Mike Terzich (SVP, Global Sales and Marketing)
Well, I, you know, I think that's exactly right. I mean, the three largest are distributors, and we're pretty confident that when we, when we close on the transaction, the three largest will remain those distributors. I don't think it necessarily will change, you know, who is represented in that list.
We will clearly become a larger piece of business to those respective distributors, and, that's certainly worth noting. I think from our perspective, those are important relationships. They've been important relationships to both Motorola and to Zebra, and we don't envision that's going to change.
We're excited about the opportunity to leverage the combined businesses and put forth what we think will be ultimately a very exciting channel program and channel proposition that'll just further cement opportunities for us in the broader market, so.
Anders Gustafsson (CEO)
I would just add also that, you know, we've obviously spoken at length with our, you know, these three distributors, but also many other resellers. The feedback we've had is, you know, has been very, very positive. People see this as a great combination that will, you know, drive some more innovation in the industry, will reinvigorate the industry to some degree, and people have been very, very supportive of the transaction and not expressed any particular concerns.
Greg Halter (Analyst)
Okay. Sounds good. On the guidance, the EPS guidance, Mike, that you provided, the $0.74-$0.84, is that including or excluding costs?
Mike Smiley (CFO)
Well, it's excluded. It includes most costs, but it's excluding the acquisition, exit, and restructuring that we normally exclude when we quote our number.
Keith Housum (Managing Director and Research Analyst)
What do you envision that amount to be?
Mike Smiley (CFO)
Well, that's a number where, you know, we announced the transaction three weeks ago, and so we're putting that together right now. We really don't have as good a visibility into that as we need, as we're trying to put together the right teams and resources to make sure we're effective. So we're working through that right now. I don't have any better color to give you.
Anders Gustafsson (CEO)
We've been trying to make sure that we've, you know, really focused on getting the integration done right, and make sure the teams have feel that they can get the right type of resources and advisors to, you know, augment both competencies and just kind of discuss the strength of the teams. So we don't wanna be, you know, penny-wise and pound-foolish here. So we wanna make sure we do this right and get the right outcome and can get off to a very good start when we do close the transaction.
Greg Halter (Analyst)
Okay, but there's no other exit, acquisition, or restructuring costs from Hart or any other transactions in that-
Mike Terzich (SVP, Global Sales and Marketing)
Not of any consequence.
Greg Halter (Analyst)
Okay. Thank you.
Operator (participant)
Once again, if you have a question, please press star then one on your touchtone phone. We have Andrew Spinola from Wells Fargo online with a question. Please go ahead.
Andrew Spinola (Vice President and Associate Analyst)
Thank you. Mike T. made the comment before that Zebra and Motorola are sort of opposite ends of one solution to the enterprise market. You know, knowing that, it seems somewhat surprising that there's such a big gap between the growth rate in your hardware business, up 18% year-over-year, and Motorola down 1% ex-iDEN.
I'm just wondering how you reconcile those differences and how you think about how these two businesses are sort of executing, you know, market share gains and losses, and how that all plays into your guidance of 4%-5% going forward?
Anders Gustafsson (CEO)
So first, I think that we believe that there are significant opportunities for the combined business. You know, we've had great response from all stakeholders, I would say, you know, but certainly customers who ultimately will determine the success of the combination. We do have, I guess, early indications of our thesis that we will have more relevance with CIOs.
You know, we can now provide broader solutions. We will have a larger spend and be more strategic, more important to them. We see great opportunities for cross-selling our solutions, particularly saying the vertical market side, where we are very strong in healthcare and manufacturing.
We believe we can pull in some Motorola solutions there, and their Motorola is very strong in retail and T&L, and can help us in that area. I think there's a few things that I believe have held back growth on the enterprise side. You know, I think the Microsoft OS issues appear to be an irritant to customers, I guess.
The Microsoft have been somewhat vague in expressing the, you know, or specifying what the roadmap for their operating systems look like in the future. But Motorola has, you know, made a strong commitment to Android, which I think is playing out very well for them also and expands the market quite a bit.
The Motorola business has also been quite cyclical, like, like ours, but I think we got out of our cyclical downturn a little earlier, but I believe that they are coming out of their of their downturn also. I would say we concluded we should be able to achieve a growth rate, longer term growth rate of 4%-5%.
I think also when we look at the longer term, there are certainly a number of very attractive secular trends that I think will support the business. You know, mobility being probably the most prominent one. I mean, everything—we have a strong mobility play. Motorola is really all about mobility, and, you know, all companies are trying to make their employees and workers more mobile, less tethered.
But they also then need to have the right tools to drive the productivity in the field. So, you know, they're very, very much placed to what we do. Then you have the Internet of Things. You know, we are generating a lot of real-time data about what's actually happening in our customers' operations, be that a, you know, retail store or assembly line or a healthcare facility.
You know, enabling our customers to take advantage of that and drive that into, you know, also cloud computing. You know, if you move a worker from being an office employee to a field worker, you need to also then, as I said, drive the same level of tools and other things to enable them to be productive.
What happens then is you start migrating your desktop applications to the cloud and have the user interface on a mobile device. So we see, you know, a lot of opportunities for us to be able to drive growth and continue to make this a very creative business.
Andrew Spinola (Vice President and Associate Analyst)
Thanks. That's, that's very helpful. Just changing directions a little bit. On the supplies business, you know, I, I had thought that that business might slow down a little in Q4 after you annualize the LaserBand acquisition, but yet you've grown double digits in both Q4 and Q1.
And I'm wondering, do you think about that business as, as having that type of growth profile going forward? And is it all coming out of healthcare, or, or what kind of color can you give us on how to think about that business and what's driving growth?
Anders Gustafsson (CEO)
I'll start, and then I'll ask Mike T. to provide some further color here. But this is, you know, first, I guess, we have the supplies business or supplies marketplace is a huge marketplace, you know, much, much larger than the, you know, barcode printer market space, and we have a very low market share.
So for us, you know, we're still just scratching the surface as to, you know, what, where we are from a market share perspective. So we're one of the largest market share player, but it is a very, very fragmented industry. So, you know, what we have done internally, I would say, you know, or apart from the LaserBand acquisition, is really to put a lot more emphasis and focus on driving supplies revenues.
I think our sales teams today see that, you know, the only way for them to really make their numbers is to also sell supplies. They see that as being a, you know, very, additive part of our portfolio to their quotas. So we are managing it that, you know, more differently, I guess. We're putting much more focus and emphasis on it than we say we did some years back, probably. And maybe with that, Mike, you can-
Mike Terzich (SVP, Global Sales and Marketing)
Okay.
Anders Gustafsson (CEO)
Add a couple of comments.
Mike Terzich (SVP, Global Sales and Marketing)
Yeah, just a couple more, Andrew. It's, you know, it's really become a gem of a business for us. And to Anders' point, our focus has been in the specialty media spaces where the customers are marking, tagging a variety of critical assets.
Those could be as basic as patients in a hospital, but they could be very high-priced assets in a supply chain. And it really speaks to the growing opportunity in big data and some of that insight that we're helping customers drive through their value in their supply chain. So we tend to play in the higher margin specialty space. It's less competitive.
To Anders' point, it's a very large market, but there's a big cross-section of the market that is plain paper labels going on cardboard boxes, which is very commodity, and the label has to last the life of the parcel shipment. That's not where we wanna play. We wanna play on the high-end specialty, where the information and the ability to read that information multiple times and sometimes over multiple years becomes of high value.
And that has allowed us to kind of separate ourselves from a lot of the commodity players. We have the financial strength to carry a lot of this high-end raw material in inventory and convert that specifically to a customer. And then we've been able to do that by expanding our converting locations and getting closer to that customer base.
The Zebra brand is actually a very relevant piece to that equation. We've been clearly outperforming the broader supplies market. We've been taking share, and we really like the way we're positioned in that business.
Mike Smiley (CFO)
You know, this is Mike, Mike Smiley. One last comment. I think one reason I like this business is it is a fairly stable, almost like an annuity type business, which again supports, you know, the stability of our cash flows, that that does makes one of the reasons makes Zebra feel very attractive or be very attractive.
Andrew Spinola (Vice President and Associate Analyst)
That's great. Thanks very much.
Operator (participant)
We have no further questions at this time. I'll now turn the call back over to Doug Fox for closing remarks.
Doug Fox (VP of Investor Relations)
Thank you. And again, thank you for joining us today. I want to let you know that our next regularly scheduled quarterly call will be on August 6th. And with that, on behalf of the Zebra management team, thank you for joining us today.
Operator (participant)
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating.