Zebra Technologies - Earnings Call - Q1 2025

Transcript

Operator (participant)

Good day and welcome to the first quarter 2025 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, Investor Relations. Please go ahead.

Mike Steele (VP of Investor Relations)

Good morning and welcome to Zebra's first quarter earnings conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year. Our forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially, and we refer you to the factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of this slide presentation and in today's earnings press release.

Throughout this presentation, unless otherwise indicated, our references to sales performance are year-on-year, on a constant currency basis, and exclude results from recently acquired businesses for 12 months. This presentation will include prepared remarks from Bill Burns, our Chief Executive Officer, and Nathan Winters, our Chief Financial Officer.

Bill will begin with a discussion of our first quarter results. Nathan will then provide additional detail and discuss our outlook. Bill will conclude with progress on advancing our strategic priorities. Following the prepared remarks, Bill and Nathan will take your questions. Now let's turn to slide four as I hand it over to Bill.

Bill Burns (CEO)

Thank you, Mike. Good morning and thank you for joining us. Our teams executed well in the first quarter, delivering results above our outlook. As we and our customers navigate through an unpredictable environment, I want to begin by highlighting a few points before we cover our results in greater detail. We have made significant progress over the past 18 months in returning to profitable growth, extending our market leadership, and advancing our portfolio of solutions. While there is macroeconomic uncertainty, our first quarter results were strong, and the demand environment has remained positive into the second quarter.

We are well equipped to navigate the current landscape. Our solutions are critical in any economic environment, and we continue to expand our market reach and opportunity. We have made substantial progress diversifying our supply chain beyond China over the past several years, and we have a capital-light business model which enables us to remain agile. We have a track record of preserving key investments in our business to accelerate long-term growth in challenging times while protecting profitability, and we remain well positioned to benefit from secular trends to digitize and automate workflows with our portfolio of innovative solutions.

Now turning to Q1 results. As we discussed in our last earnings call, strong retail year-end project spending carried over into January. Demand in the quarter remained strong, driving sales growth above our guidance range. For the quarter, we realized sales exceeding $1.3 billion, a 12% increase compared to the prior year, and adjusted EBITDA margin of 22.3%, a 240 basis point increase, and non-GAAP diluted earnings per share of $4.02, which was 42% higher than the prior year. We realized strong broad-based growth across all major product categories and regions.

We also saw double-digit growth across most of our vertical and markets, with high single-digit growth in manufacturing. From a profitability perspective, we achieved the highest quarterly gross margin in more than a decade and significant operating leverage, resulting in strong improvement in profitability. As we enter the second quarter, we continue to see solid demand, and the business has continued to perform well. However, we remain agile to changes in this dynamic environment and continue to take actions to mitigate tariffs. I will now turn the call over to Nathan to review our Q1 financial results, tariff considerations, and outlook.

Nathan Winters (CFO)

Thank you, Bill. Let's start with the P&L on slide six. In Q1, total company sales grew approximately 12%, reflecting continued recovery in demand across our major product categories on favorable prior-year comparisons, particularly for printing. Our services and software recurring revenue businesses grew slightly in the quarter. Our asset intelligence and tracking segment sales increased 18%, and enterprise visibility and mobility segment sales grew 9%. We realized strong sales growth across our regions. In North America, sales grew 7% with growth in all product categories, in particular strength in data capture, print, and RFID.

EMEA sales grew 18% with strength in Northern Europe. Asia-Pacific sales increased 13%, led by Australia and New Zealand, and sales grew 18% in Latin America, with particular strength in Mexico. Adjusted gross margin increased 150 basis points to 49.6%, primarily due to favorable business mix and volume leverage. Adjusted operating expenses as a percent of sales improved by 100 basis points. This resulted in first quarter adjusted EBITDA margin of 22.3%, a 240 basis point increase versus the prior year. Non-GAAP diluted earnings per share were $4.02, a 42% year-over-year increase, and above the high end of our outlook.

Turning now to the balance sheet and cash flow on slide seven. For the first quarter, we generated $158 million of free cash flow as we drove improvements in EBITDA, working capital, and inventory levels. We ended Q1 at a 1.2 net debt to adjusted EBITDA leverage ratio. As our cash flow has recovered and net debt levels have moderated, we have increased flexibility to deploy capital consistent with our allocation priorities. We repurchased $125 million of stock in Q1 and another $75 million in April.

As a part of our continued efforts to scale our expansion in adjacent markets, on February 28th, we acquired Photoneo, a leading 3D machine vision company based in Eastern Europe, for $62 million. This profitable business will contribute approximately 30 basis points to Zebra's overall sales growth in 2025. Now turning to slide eight. As Bill outlined, we are well equipped to navigate the global environment. We deliver solutions that are critical to our customers in diverse end markets.

Our capital-light business model has a flexible cost structure, given that we outsource most manufacturing and the vast majority of our products are fulfilled through third-party distribution. We have a strong free cash flow profile with more than $1 billion generated over the trailing four quarters. As I just mentioned, our balance sheet is in excellent shape with nearly $900 million of cash, modest debt levels, and $1.5 billion of credit capacity. We will continue to take appropriate actions to preserve profitability and prioritize business investments, then improve our competitive position and create long-term value for shareholders.

Due to the global nature of our supply chain, like many other electronic manufacturing companies, we are subject to recently enacted U.S. import tariffs. On slide nine, we provide an update on the anticipated impacts from tariffs on our products imported to the United States and our efforts to mitigate them. We are now assuming an $80-$90 million annualized gross profit impact after mitigating actions. This assumes the current effective rates, including the electronics and USMCA exemptions.

Our mitigating actions have included shifting additional North America production out of China and approximately $80 million of recently announced annualized pricing adjustments. For the full year 2025, we are now assuming approximately $70 million gross profit impact after mitigation, with a $25-$30 million impact in the second quarter following a $3 million impact in Q1. We will continue to evaluate additional opportunities to mitigate U.S. import tariffs as we monitor global trade policy developments. These potential actions will include additional shifting of global production, product portfolio optimization, and additional price adjustments.

Let's now turn to our outlook. We entered the second quarter with a solid backlog and pipeline to support our sales guide and expect Q2 growth between 4-7%, with a net neutral impact from our most recent acquisition in FX. The weaker U.S. Dollar since our last earnings call has resulted in FX being less of a headwind than previously anticipated. Our second quarter adjusted EBITDA margin is expected to be approximately 19%, which assumes impacts from U.S. import tariffs exceeding 200 basis points. Non-GAAP diluted earnings per share is expected to be in the range of $3-$3.50.

For the full year, we are leaving our guidance unchanged, with the exception of the direct cost of tariffs. Full year sales guidance remains between 3% and 7% and assumes a net neutral impact from FX and recent acquisitions. Given our solid Q1 results and Q2 guidance, we would typically raise the outlook. That said, while we have not seen any meaningful shift in customers' purchasing behavior to date, the fluid global trade policies and related impacts on our customers remain uncertain. We are now modeling a $70 million gross profit impact from tariffs for the full year, which is $50 million higher than our prior guidance.

Consequently, we are reducing our full year adjusted EBITDA margin outlook by 100 basis points to between 20-21% to reflect the increased direct cost of tariffs. Non-GAAP diluted earnings per share is to the range of $13.75-$14.75. Free cash flow for the year is expected to be at least $700 million, which reflects the impact of tariffs and implies free cash flow conversion in excess of 90%.

As we continue to monitor and navigate the evolving environment, we will remain agile and continue to work on further optimizing our working capital levels balanced with our supply chain resiliency initiatives. Please reference additional modeling assumptions shown on slide 10. With that, I will turn the call back to Bill.

Bill Burns (CEO)

Thank you, Nathan. Turning to slide 12. As we navigate the near-term uncertainty, Zebra remains well positioned to benefit from secular trends to digitize and automate workflows with our portfolio of innovative solutions, including purpose-built hardware, software, and services. We optimize the front line with solutions that intelligently connect people, assets, and data to help our customers make business-critical decisions. Innovation remains central to our industry leadership, and we have consistently reinvested approximately 10% of our sales in research and development to advance our portfolio of solutions.

We augment our organic efforts with strategic acquisitions that advance our vision, as evidenced by our recent closing of Photoneo, which will expand our 3D machine vision solutions into manufacturing, logistics, and other key markets. As you will see on slide 13, Zebra's solutions enable our customers across a broad range of end markets to drive revenue, boost productivity and efficiency, and to optimize the front line, delivering improved service to their customers, shoppers, and patients. The challenges of an on-demand economy, e-commerce growth, evolving regulations, and labor constraints require increased adoption of automation.

Here are some recent examples of customers transforming their workflows. A large transportation logistics provider increased throughput and real-time asset visibility for hands-free package handling by upgrading to our new compact all-in-one wearable mobile computing solution. A North American auto parts retailer is improving inventory accuracy through real-time cycle counts and increasing operational productivity as they deploy our new mobile computers to their store associates and drivers.

A large government agency is improving their supply chain efficiency by modernizing their warehouse and tracking of high-value cargo with Zebra's fixed and mobile RFID solution. These projects demonstrate how customers rely on us to navigate their technology journey through our workflow expertise and commitment to innovation. At the ProMat Manufacturing and Supply Chain Shades Show in March, Zebra, along with our partners, showcased our expanding portfolio of solutions that enable customers to accelerate warehouse modernization with faster cycle times, improved quality, and increased visibility.

We also launched the Aurora Velocity Scan Tunnel, which integrates our machine vision smart cameras, RFID readers, and our Aurora Software for vertical-specific use cases and workflows. Slide 14 highlights how Zebra addresses manufacturers' biggest challenges. Operators are faced with increased demand for speed and accuracy while ensuring product quality. To address these challenges, decision-makers are investing in Zebra solutions to provide actionable visibility, optimized quality, and a technology-augmented workforce.

Zebra is helping customers like Curtiss-Wright Corporation, Kine Robotics, and Bimbo Bakeries deploy and integrate our technology into their manufacturing environments, enabling work-in-progress tracking, communication and collaboration, quality control, and improved forecasting. Additionally, as manufacturing customers look to diversify their supply chains and make global production moves, Zebra can partner with them to equip their operations.

In closing, as we navigate through the near-term environment, our confidence in sustainable long-term growth is underpinned by several key themes, including labor and resource constraints, track and trace mandates, increased consumer expectations, advancements in artificial intelligence, and the need for real-time supply chain visibility. As we move forward, we remain focused on advancing our industry leadership with our innovative solutions that digitize and automate our customers' workflows, serving our customers well, and driving profitable growth. I will now hand it back to Mike.

Mike Steele (VP of Investor Relations)

Thanks, Bill. We'll now open the call to Q&A. We ask that you limit yourself to one question and one follow-up to give everyone a chance to participate.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, 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. Our first question comes from Jamie Cook with Truist. Please go ahead.

Jamie Cook (Managing Director of Equity Research)

Hi, good morning. I guess my first question just is on the demand picture. It doesn't sound like it, but did you see a change in demand throughout the quarter or going into April and what your clients are sort of saying, customers are saying about demand trends? I guess my second question just around tariffs. It does sound like you're contemplating making changes to your manufacturing footprint and how to mitigate the risk of tariffs. Can you just go into a little more detail about what actions you're planning on taking? Thank you.

Bill Burns (CEO)

Sure, Jamie. This is Bill. We entered 2025 supported really by strong retail year-end spending in fourth quarter that really carried into first quarter. That demand has remained strong through April. We have seen, despite the global trade uncertainty overall, customers have remained positive, capital budgets remained intact, projects continue to move forward. At the same time, our customers are navigating what the global trade environment really means to their businesses. So far to date, we have not seen any real change in behavior by our customers. Overall, many of our customers, I would say overall, are still digesting what this really means.

I think for us, that is the reason why we decided that holding our sales outlook for the full year was the best decision for us. I would say from a tariff perspective and global supply chains move, certainly it is a dynamic environment. We've engaged certainly our network of resources, industry experts, what's happening across government affairs, and to really understand trade policy and all the uncertainty around that. We've got a dedicated team established that monitors these changes and assesses the potential impact and then ultimately designs mitigation strategies.

I'd say we continually assess our manufacturing footprint and have done that over the last several years to consider factors such as geopolitical stability, operational capabilities, cost overall. We've made significant changes to diversify our supply chain over the last several years to make sure that ultimately we can serve our customers with the highest quality and lowest cost we can. We continue to monitor the situation and make changes as necessary.

Jamie Cook (Managing Director of Equity Research)

Just one follow-up.

Operator (participant)

Our next question comes from Piyush Avasthy with Citi. Please go ahead.

Piyush Avasthy (Equity Research Senior Associate)

Good morning, guys. Thanks for taking my questions.

Nathan Winters (CFO)

Good morning.

Piyush Avasthy (Equity Research Senior Associate)

I think you guys highlighted strong broad-based growth across your verticals. Can you elaborate on your manufacturing end market? That vertical has lagged versus other verticals. As we think of 2025 guidance based on your conversations with your customers, do you have good visibility to signal a more sustained improvement in the underlying demand across this vertical?

Bill Burns (CEO)

Yeah, I'd say that if we look at first quarter overall and year-to-date through April, we saw broad-based recovery continue across most of our vertical markets were up double digits. Manufacturing is still somewhat lagging, but still up high single digits. I would say continued improving sales trends, of course, the global trade environment is weighing on manufacturing, but we continue to see year-on-year growth, as I said, up high single digits in first quarter, overall lagging the other sectors from a manufacturing perspective.

I'd say if we look at the other verticals, retail and e-commerce were up double digits. Transportation logistics saw strong growth. Healthcare continues to be a strength for us, but manufacturing grew just not as fast as the other verticals.

Piyush Avasthy (Equity Research Senior Associate)

Got it. I think following up on Jamie's question, on your mitigation actions related to tariffs, you talked about shifting production from China to other global locations. Can you comment on the typical timeline and the cost that it would take to implement this? You modestly raised your CapEx expectation for this year, so maybe that explains some of it, but any additional color would be helpful.

Bill Burns (CEO)

Yeah. If you look historically, just again, depending on the location, it could take 12-18 months depending on what location. Is there an existing location, or is it a greenfield in terms of opportunity? It depends on where the move is happening. We actually bear little of the capital expenditures. Typically, it's in some of the tooling costs. The large portion of that is with our manufacturing partners that we pay for over time in the bill of material. It's not relatively high in terms of CapEx. I think right now, the weighing factor is we've had a series of actions ongoing as we entered the year. Those are all going to be complete here within this quarter.

Those production moves are done and incorporated in the overall guide. I think what we're waiting for next is certainty around the overall policy so that we can make the best decision for the business in terms of where is the right place to move production for the long term. We do need some clarity around where the policies land in terms of tariff impact so we can make the best decision.

Operator (participant)

Our next question comes from Brad Hewitt with Wolfe Research. Please go ahead.

Brad Hewitt (VP of Equity Research)

Hi, good morning, guys. Thanks for getting my questions.

Nathan Winters (CFO)

Morning. Good morning, Brad.

Brad Hewitt (VP of Equity Research)

It sounds like you guys are embedding a gross tariff headwind of about $150 million for the year before any mitigation actions. Is that correct? Can you clarify the tariff rates you're assuming for the various countries as well as the impact and duration of the exemptions on the mobile computers and scanners? I am also curious what you're assuming in terms of potential sectoral tariffs on electronics. Thank you.

Bill Burns (CEO)

Yeah. If you look at our guide, it includes, I'd say probably the most simple way to say it is what is effective as of today. It doesn't assume any changes in the rates or exclusions through the balance of the year. What that includes is the incremental 145% tariff on U.S. imports from China, 10% from other Asian countries. I think it's important to note that most of our mobile computing portfolio, which includes about two-thirds of our China-sourced imports, are currently exempt with the electronics exemption from the reciprocal tariffs, but not the original 20% increase in China.

We also continue to receive USMCA free trade exemption out of our Mexico production. It kind of depends on which of the portfolios in terms of where it's produced, but that's what's incorporated into the guide. The incremental $70 million is, again, net of all the ongoing actions that we expect to be complete by the middle of the year, as well as the increased pricing, which is about $50 million.

Overall, that $70 million to $50 million increase is from our prior guide. I think that's the best estimate we have up today, and we'll adjust accordingly as the rates are finalized here over the coming months. Again, it assumes what's effective today with no changes to the balance of the year.

Operator (participant)

Our next question comes from Andrew Buscaglia with BNP Paribas. Please go ahead.

Andrew Buscaglia (Senior Analyst for Industrial Technology)

Hey, good morning, everyone.

Nathan Winters (CFO)

Morning.

Bill Burns (CEO)

Good morning.

Andrew Buscaglia (Senior Analyst for Industrial Technology)

For the guidance, for the top line, you held that at up 3-7%, but you now have changing, presumably, pricing. Can you elaborate on the magnitude of the price increases you expect to implement, and then any impact of volume you're assuming for the year?

Bill Burns (CEO)

As you said, we're leaving our full-year outlook unchanged with the exception of the direct cost of tariff. As Bill mentioned, the demand trends continue to be positive here into the second quarter. We haven't seen a pullback on projects to date despite the tariff uncertainty. I think it's also important to note we're not assuming a material step down in demand due to any economic downturn here over the coming months. I'd say overall, taking a cautious view of second-half sales growth given the environment. I think the other thing is the year's playing out to date as expected. We've had several new tailwinds.

Again, we just overall didn't think it was appropriate to raise the full-year sales guide given the uncertainty. If you look at some of those tailwinds, I mean, obviously, the Q1 beat is a bit favorable. FX is about 100 basis points favorable from the prior guide. Pricing would have been an incremental 70 basis points. They all stack up in terms of what would have been, I'd say, upside to our original guidance and effectively taken those to the bank and offset demand pressure or potential demand pressure in the second half.

Where our previous guide for the second half assumed mid-single-digit growth, that is now down to low single-digit growth in the second half. Again, we just think that is overall appropriate given the overall uncertainty in the environment.

Andrew Buscaglia (Senior Analyst for Industrial Technology)

Okay. Okay. I know you commented on manufacturing. Can you comment on transportation and logistics? You're saying you see strong growth there, although some of the headlines from the bigger transport names are pretty negative, even UPS this morning pulling their guidance. Can you talk a little bit more on seeing and why you're not seeing what those headlines are implying?

Bill Burns (CEO)

Yeah. I would say that we saw double-digit growth in transportation logistics really in first quarter. I think some of it's explained by being a truly global business, right? Inside transportation logistics, we also have postal and other carriers in there beyond just parcel delivery. I would say globally, e-commerce demand continues to be positive and grow. I think there's certain aspects of different business where there's shift of demand across different carriers and others. I think in your example, there was clearly some business that they decided not to move forward with, which is impacting their demand for parcel delivery.

That shifts to other carriers or to e-commerce providers themselves. We benefit somewhere else. I'd say we're seeing up double digits. Certainly, depending on what happens with the broader trade environment, could impact transportation logistics moving forward. To date, we haven't seen any change. There's an opportunity there as well with RFID.

Beyond our core products, RFID deployments continue to grow within transportation logistics to create more efficiencies within their business and across the supply chain. That remains another opportunity for us. I'd say overall, globally, we've seen transportation logistics grow at double digits in first quarter and continue to be strong as we enter the second quarter.

Operator (participant)

Our next question comes from Damien Carras with UBS. Please go ahead.

Damian Karas (Senior Equity Research Analyst)

Hey, good morning, everyone.

Nathan Winters (CFO)

Morning, Damien.

Damian Karas (Senior Equity Research Analyst)

Just a follow-up question on the demand strength that you're seeing. Just curious if you think that any of that might be related to some pull forward of demand, maybe customers trying to tie up some loose ends and just get some work done before cost inflation starts ramping or your distributor partners stocking up on inventory. Maybe you can just kind of talk to that and give us a sense for where you think channel inventories are at the moment.

Bill Burns (CEO)

Yeah. Maybe I'll start, and then Nate can jump in. I would say that we have not seen pull forward behavior by our customers. Our price increases go into effect at the end of April here overall. We haven't seen any change in behavior of end customer or our partners or distributors due to tariffs. I think ultimately it is certainly weighing on sentiment and is in a lot of conversations we're having with them or all conversations, but they really haven't changed their behavior.

I would say inventory levels around the world that we've been working closely with our distributors to make sure they've got the right level of inventory overall as we've seen market recovery, and we feel good about inventory levels to date. Yeah.

Nathan Winters (CFO)

I think, Damien, the other thing that's important to note with our distributors, when the price effect goes into place, we also adjust anything they're holding in inventory. There is no advantage to a distributor stocking ahead of the price increase. It is really the market price to the end user. There is no risk of distributors stocking up ahead of the price increase. As Bill mentioned, I think the Q1 as well as Q2 is playing out as can be expected since the beginning of the year, which just does not lead us to see any material movements in full-ends trying to get ahead of the price increase today.

Operator (participant)

Our next question comes from Tommy Moll at Stephens. Please go ahead.

Tommy Moll (Equity Research Analyst)

Good morning, and thanks for taking my questions.

Nathan Winters (CFO)

Morning, Tommy.

Tommy Moll (Equity Research Analyst)

Follow-up question on the price increases. Bill, I think I just heard you say they're effective end of April. Can you quantify or give us any detail, any other detail on conviction level and being able to stick the full amount of the increase? Does it feel like, as a market leader in many cases, you're on the more aggressive side in pushing price here, or do you feel like what you've outlined is pretty consistent with others? Thanks.

Bill Burns (CEO)

Yeah. I think that we feel good about the price increases and the analytics we do around our pricing in the U.S. market specifically. It's important that we have competitive pricing in the U.S. market specifically. We have done a lot of work and a lot of thought around price increases and obviously prefer not to increase price, but in this case, we have no choice. I believe it's consistent with what our competitors are doing and what we're seeing from them in the marketplace overall. I think we continue to monitor, and we'll continue to monitor where we stand from a competitive pricing perspective moving forward. I have no reason to believe they won't stick.

Certainly, our largest customers get the best pricing, right, and the highest volumes than others. I think that we'll continue to work with them and be agile when it comes to pricing as we need to continue to sell value and make sure that we're winning the opportunities out there. I think we feel okay about the price increases. We'd rather not have increased price. We just don't have a choice in this case to offset the tariffs. We've been very thoughtful about it, and we feel good about where we're at. The reason we picked the end of April was to give this some time to play out.

There's been significant changes along the way as the unpredictable nature of this. We think we've made the right decision. We'll see, hopefully, things quantitatively get better, and in that case, we'd pull back some of the price increases if we can. Ultimately, from an end market perspective, that would be the right thing to go do.

Tommy Moll (Equity Research Analyst)

Thanks, Bill. As a follow-up, I wanted to talk about your visibility in terms of demand. Going back to last quarter, if I recall correctly, the visibility into this year was less than typical, and there were some commentary you offered just around customers delaying finalized budget decisions, etc. Today, has that visibility improved at all, or would you characterize it in a similar fashion? Thanks.

Bill Burns (CEO)

Yeah. I would say it's not as much about visibility that visibility actually has gotten better. It's really about uncertainty at this point. I would say that when I'm having conversations with our executives, our customers, CIOs, and others, the beginning of the conversation is really around 15 minutes or so on just tariffs, impacts on their business, our business, the impacts on the global economy generically. Ultimately, it moves on to the projects that we're working together on, but no mention of cost cuts or pulling back. It's really about, "Hey, we've got these projects going.

How are they progressing?" and the appreciation of them as a customer and us as a partner delivering for them. Ultimately, the conversation switches to the future. How do we continue to talk about future technology deployments and move ahead with them?

I would say visibility actually had gotten better, and what has ramped up is really uncertainty from a global perspective around tariffs more than anything else. The conversations are clearly dominated by tariff, but really, it is not about pulling back or changing behavior. It is more about just the concern and the uncertainty that is out there today, and it is weighing on certainly their sentiment.

Operator (participant)

Our next question comes from Guy Hartwick with Freedom Capital Markets. Please go ahead.

Guy Hardwick (Managing Director of Equity Research)

Hi, good morning. Congratulations on excellent results.

Bill Burns (CEO)

Thanks, Guy.

Guy Hardwick (Managing Director of Equity Research)

I appreciate that Zebra delivered double-digit organic growth, but it looks like seasonality Q1 was better than normal seasonality on a sequential basis. Perhaps you could maybe expand a little bit on which end markets or businesses did better than perhaps you would expect it given seasonality.

Bill Burns (CEO)

Yeah. I'd say that we saw broad-based recovery really in Q1 overall, and we delivered certainly, as you said, high-end of our outlook. I think we saw, when I say broad-based growth, it really was across all product categories, across all of our regions, and across all of our verticals. I would say that retail and e-commerce continued to outperform in the quarter and continues to do that through April as we continue to see strong demand. E-commerce and omnichannel continued to drive need for inventory visibility, enhanced productivity within retail stores and things like communication collaboration, driving our mobile computing.

Ultimately, us continued to win in that environment with the breadth and depth of our portfolio and our expertise in customer relationships. I'd say transportation logistics, we talked a little bit about we saw growth year on year. Manufacturing, we've talked a bit about already, creates an opportunity for Zebra. We had high single digits in manufacturing. Some challenging areas still within manufacturing, but represents a longer-term certainly opportunity for Zebra as we're less penetrated inside core manufacturing in areas like machine vision and others create an opportunity for us.

I would say healthcare, up double digit, continues to be a strength vertical market for us. Clinical mobility really driving that market, improved patient safety, staff communication collaboration efficiency across healthcare creates an opportunity for us. I would say all the vertical strong double-digit growth across each, high single digits in manufacturing, the growth was pretty broad-based so far this year.

I think what is weighing on our customers today is all around really tariffs. I think that otherwise the business is going really, really well. We know that ultimately, as this plays out and the unpredictability, we'll see what happens, but it is certainly weighing on our customer sentiment.

Guy Hardwick (Managing Director of Equity Research)

Thank you.

Operator (participant)

Our next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Karan Juvekar (Equity Research Associate)

Thanks for the question. This is Karan Jivani on for Meta. Congrats on the quarter. Just a quick question. I know there's a lot of uncertainties and a lot of changing scenarios in terms of tariffs and macro. Just wondering how you guys are thinking about being maybe a little bit more opportunistic around gaining share. How are you thinking about potential share gains given the uncertainties?

Bill Burns (CEO)

I think we continue to work closely with our customers across each of our vertical markets. As I said, we saw broad-based growth across all regions, across all products, and across all vertical markets in Q1 and through April, which we feel good about. I'd say the competitive landscape hasn't really changed in that our strength of ultimately our customer relationships, the deep vertical market expertise we have across the verticals we serve, the breadth and depth of our portfolio overall differentiates us from the competition and gives us a competitive advantage. We believe that ultimately we're taking share in the marketplace.

Technology such as AI creates a longer-term opportunity for us competitively. At NRF and First Quarter National Retail Show, we launched our AI suite for mobile computing, allowing our partners and development partners and Zebra itself to build AI solutions on top of our mobile computing platforms. We announced the Zebra Companion, the GenAI assistant for our mobile devices.

We're excited about the near term where we're winning and our competitive advantage we have there, but also in the longer term, the idea of embracing as the market leader new technologies such as AI and leveraging those on our devices gives us a competitive differentiation in the market and allows us to continue to take share as we've been doing. We feel good about the breadth and depth of the portfolio and current state as well as future investments we're making in areas like AI.

Karan Juvekar (Equity Research Associate)

Appreciate that. Just quick follow-up. I know you've mentioned seeing some manufacturing recovery. Just more specifically on the machine business, generally, how is that tracked? How are the diversification efforts tracking? Is that being benefited at all by the manufacturing recovery that you're seeing?

Bill Burns (CEO)

Yeah. I would say we're excited about the Photoneo acquisition, which is focused on 3D vision capabilities that we closed in first quarter. They're really a leading developer and manufacturer in 3D vision systems. They were an OEM partner of ours prior, and we're excited about that acquisition and entering that space. I'd say machine vision declined in the quarter. That's the one area of weakness I would say we saw driven by manufacturing. Again, manufacturing up high single digits versus double digits across the other areas. I would say that our diversification efforts continue to progress. We've seen better traction within North America.

We've seen growth in our pipeline and active proof of concepts across multiple verticals, so manufacturing, retail, transportation, logistics. Some of the other vertical markets in areas like Scan Tunnel, which we released a new version of at ProMat Trade Show just over the last month or so, creates an opportunity for us beyond manufacturing as manufacturing has been lagging a bit.

I think we're remaining excited about the long-term opportunities. I think it's a challenging market at the moment. You marry less strength in manufacturing, but also just the machine vision market overall. I think as the end market recovers and we expand our market presence and our focus, as you said, on diversification of it, we feel good about this market medium and long-term for us.

Operator (participant)

Our next question comes from Keith Housum with Northcoast Research. Please go ahead.

Keith Housum (Managing Director and Senior Equity Research Analyst)

Good morning, guys. There's two questions for you. I guess, Nathan, first off, with the price increases, obviously what you're passing through here, effective April 28, is pretty significant, especially in the mobile computing space. Compared to historical times, do you expect your ability to realize those price increases is better than it has been in the past?

Is there a potential, I guess, tailwind for you here and next year in 2026, assuming the price changes are staying in effect and no significant changes need to happen to that? Second, from a geographical basis, surprisingly, North America was actually your worst performer at 7% growth. Perhaps can you talk a little bit about some of your strengths, especially in EMEA? I mean, 18% growth is pretty impressive in the current environment. Thanks.

Nathan Winters (CFO)

Yeah, Keith, on the first one, from price realization, as Bill mentioned earlier, there's a lot of factors that go into play, including the competitive considerations, costs, tariffs, etc. I think we never assume 100% realization due to existing contracts, projects, or just competitive positioning. I think we've seen historically, whether that goes back to the price increasing we did in 2019 with the original tariffs or what we did during the supply chain, I think we've been pretty consistent in terms of being able to get good realization across our run rate business and then selectively positioning it with some of our larger customers.

I think we've taken that all into account in the assumption. If we can do better and get a little bit better realization, that's like an upside to what we've embedded in the guidance and in the full-year annualized impact. I think the tailwind for next year, quite frankly, will play out, as Bill mentioned, depending on what changes or where the tariff landscape finally lands, we'll adjust the price accordingly. I'd say if we may roll some of that back or we may have to increase just depending on where it goes.

I think it's tough to say it'd be a tailwind as much as we'll continue to do what we need to to offset as much of the mitigate tariff impact as possible, whether that's through pricing or some of the other operational actions. Maybe I'll jump in on the markets. I would say EMEA still have to be a little careful of the percentages favorable prior year compare. Certainly, in EMEA, drove some of that growth. I think that while all regions had strong growth in the quarter, it was oversized in EMEA really because of prior year compare. I would say growth there, the highest growth in EMEA was really in Northern Europe, but large projects continue, especially in retail there.

We saw double-digit growth across most of the end markets. Again, manufacturing, high single digits, same theme we saw globally. North America, I think we felt good about North America.Strong retail deal activity, strength a year ago. I think that year-on-year compare not as easy there. Double-digit growth across all end markets, again, except for manufacturing. I think we feel good about scanning and printing and RFID had a strong quarter in North America. I think we feel good about the growth across all regions and the percentage difference in EMEA being strong really was about prior year compare.

Operator (participant)

Our next question comes from Ken Newman with KeyBanc Capital Markets. Please go ahead.

Ken Newman (VP and Equity Research Analyst)

Hey, good morning, guys. Thanks for squeezing me in.

Nathan Winters (CFO)

No problem. Morning, Ken.

Ken Newman (VP and Equity Research Analyst)

Morning. I did want to ask about the net impacts on tariffs this quarter. It looks like it did come in a little bit lower than you were expecting, if I remember correctly. I think you were looking for a $7 million headwind, and it came in around $3 million. Can you just talk a little bit about the moving pieces of what drove that better performance? Was that just better price realization in the quarter? Was it some timing of action? How should we think about the conservatism maybe baked into the guide relative to that $25-$30 million you expect in Q2?

Nathan Winters (CFO)

Yeah, again, I think it's a couple of things at play. One was the team did a phenomenal job of buying as much product as possible before the effective dates. Really trying to front-end load our demands to get product in. That definitely played a part in terms of the actions the team has taken to front-load purchasing ahead of the increase. I think that played a portion of it, as well as just what we ultimately capitalized a bit of that on our balance sheet just from a timing and inventory evaluation perspective. I'd say I wouldn't call it any conservatism or intentional conservatism built into what we've had for Q2 or the full year.

It's pretty complex in terms of you look at timing of shipments, the timing of the effective dates, and when things land on port that creates the variability. I think it's our best estimate based on all those factors. Obviously, what the team's trying to do every day is mitigate as much as possible with the operational actions we have at our disposal. Very little price impact in Q1. I mean, negligible in Q1, and we'll have a little bit in Q2, but really ramp up into Q3. Really the variability in Q2 is, again, just what can we realize with pulling in inventory early, adjusting some of those shipment schedules to mitigate as much as possible here in the short term.

Ken Newman (VP and Equity Research Analyst)

That's helpful, Nathan. For my follow-up, maybe just a quick modeling question. Is there a way to think about how to quantify that $70 million full-year impact between the two segments? I'm guessing one segment might be a little bit heavier than the others in terms of the margin impact.

Nathan Winters (CFO)

Yeah. I think from a modeling assumption here out of the gate, it's pretty balanced, maybe a little bit heavier weighted towards AIT, just given the tariff rates are fully in effect for print, where mobile computing has some of the exemptions. So a little bit more weighted towards AIT here for the year.

Operator (participant)

Our next question comes from Joe Giordano with TD Cowen. Please go ahead.

Joseph Giordano (Managing Director)

Hey, guys. Good morning.

Nathan Winters (CFO)

Morning, Joe.

Joseph Giordano (Managing Director)

Hey. First question, just on the semiconductor and electronics exclusions. I mean, I guess it's all fluid for sure, but at least the administration framed this as a temporary exclusion as they figure out specific tariffs on that. It seems like that's a number that, at least given current commentary, goes up at some point in the future. What are you kind of teeing up to offset that if that's the outcome?

Bill Burns (CEO)

Yeah, you're absolutely right. The scope of the semiconductor tariff, I would say that first it's pretty unclear how that will be administered, how that will play out from the administration. It's really tough to model what the potential impact would be. No different from all the other electronic companies, we do have semiconductor content. There is a potential exposure.

We work with the largest semiconductor companies in the world and continue to assess their country of origin options across their supply chain to see where we have options to mitigate, how we quantify, and make sure we can quantify the content within our products, semiconductor content, so that whenever ruling is applied, we can react as quickly as possible, not only on mitigating the impact out of the gate, but also then what options do we have to mitigate over time based on those rulings. Again, yeah, it's absolutely one that's out there, but the team's all over it in terms of planning as best we can and executing whatever we can ahead of any final decision.

Joseph Giordano (Managing Director)

Just a follow-up on the kind of like the pre-buy stuff. We're getting this commentary from a lot of companies, and I'm not sure how to think about it because a lot of companies we go on their earnings calls, they say that they're buying inventory of their own stuff ahead of tariffs, but that none of their customers are doing that. The behavior hasn't changed.

It just doesn't make a ton of sense to me that all the companies are buying their own stuff to have in inventory, but none of the customers are doing the same behavior. Is there a risk that just what we think is a lack of a behavior change is just weaker than expected demand is being replenished by some pre-buy, but it doesn't really look like pre-buy? I'm struggling with this dynamic across multiple companies right now.

Bill Burns (CEO)

Yeah, Joe, I would say that you're talking about very short amounts of time, right? In the past, when tariffs are implemented, it's 90 or 120 days to change inventory. The places that if you took actions, you had to get stuff on ocean very quickly. The tariffs have been implemented very quickly. Despite us doing that, it's minimal overall in the scheme of things. I think you're reading more into it just because the timing has been such that ultimately there hasn't been time to truly react. Things that were on the ocean already ultimately are being exempt, but that's very little bit.

You heard other companies fly jets in and others from into the country with shipments of devices and others, but it's ultimately minimal. I think the other one we look at is the underlying demand we've seen is pretty much in line, obviously, with what we expected.

We knew our Q1 guide was a bit cautious given the uncertainty, but the quarter kind of played out where we didn't see the surge of demand that was unexpected or out of the blue or large orders coming in. Could there be some of that in the run rate? Again, the year's playing out year to date, kind of as we had planned, which again, just supports that we're not seeing some volatile shift in demand here just to get ahead of the tariff rates.

Operator (participant)

Our next question comes from Rob Mason with Baird. Please go ahead.

Rob Mason (Senior Research Analyst)

Yes, good morning. Juggling several calls, so I may have missed you addressing this, but when you quantify the $80 million-$90 million kind of residual impact after your pricing actions, just assuming final decision around tariffs is the current status quo, what levers do you have to pull? Would you plan to pull to address that? Would you take incremental pricing or just speak to that residual amount if that's maybe what the go-forward looks like?

Bill Burns (CEO)

Yeah. I think, Rob, I think that's kind of we put that number out just so everyone can have a baseline of what the, I guess, the run rate would be, again, under the current tariffs scenario. Ultimately, our objective is to mitigate, right? I wouldn't say that's the perpetual number or that we don't have other options to mitigate. It's really waiting for policy certainty so we know which actions are the best actions to execute. We have a plethora of options with our manufacturing partners around where they have capabilities around the world to shift production, and the teams are working those.

We'll obviously look at additional pricing actions as well as the other cost levers we have across the portfolio to fully mitigate. I think, again, once we have that certainty around where the rates shake out, then we can start to execute those plans and see what the timing is in terms of fully mitigating the exposure. I think that timing of when and how it plays out is the uncertainty. That annualized number we provide, which I think just to give context for what a kind of run rate would be, but knowing that the ultimate goal is to fully mitigate. We just want to make sure we make the right decisions and have clarity around that before pulling the trigger.

Rob Mason (Senior Research Analyst)

Makes sense. Just as a quick follow-up, you talked about good demand in the quarter, but your service and software revenue was kind of flattish. Was that anything going on there, whether that's a comp issue or how that compared versus your tangible products?

Bill Burns (CEO)

Yeah. Our service and software just had slight organic growth, really some part impacted by the lower mobile computing volume in 2023. We're starting to see that play out in our service business, as you would expect. The other thing in the quarter, there was just a lower number of days versus prior year. It's more of a quarter-year-on-year dynamic.

We'd expect that the growth rate to improve as we get into Q2 and the balance of the year. Some of it's just, I think, timing and the nuance of the quarter. I think a bit lower than what we've seen the last couple of years is just you see now the overall install base, the impact on the install base from the sales decline back in 2023 in mobile computers.

Operator (participant)

Our next question comes from Chris Graffeo with Needham & Co. Please go ahead.

Chris Grenga (Equity Research Associate)

Hi, good morning. This is Chris Grenga for Jim. Is the deployment of Zebra Companion with AI features at the anchor customer that showcased at NRF progressing in line with your expectations? Are you seeing traction with additional retailers for this offering?

Bill Burns (CEO)

Yeah. I mean, I would say that we announced at NRF and showed demos of it. We're continuing to work closely with our Lighthouse customers to deploy along with them in early proof of concepts. The development continues to be on track. What we have released is our GenAI digital assistant from that perspective, which was more a launch and then our proof of concepts.

The AI suite for mobile computing, we did launch and is available to our own software developers and that of our partners. That allows AI applications to be built on top of the device and in the device software to be able to manage on the device. That is released. The companion with the assistant is in proof of concepts now, working with customers to get to full deployment. On track.

Chris Grenga (Equity Research Associate)

Great. In your view, are the shifts that are impacting your customers' global production footprint and the disruption that is being caused by the near-term uncertainty, could those translate into tailwinds for Zebra as customers adopt more of Zebra's technologies to enhance their tariff compliance, reduce friction, certify country of origin, things of that nature?

Bill Burns (CEO)

Yeah. The production moves by our customers create certainly an opportunity for us. We've seen this in Southeast Asia through the China tariffs were first implemented a number of years ago and the benefits to Zebra associated with that. I do see that, again, this idea of visibility throughout the supply chain and digitizing and automating the supply chain overall creates an opportunity for us. As you said, track and trace and other mandates around that. Yes, it's an opportunity when production moves take place, no matter where they are in the world, we benefit.

Ultimately, the long-term trend of digitizing and automating environments, supply chain visibility across those environments. That also plays into AI, the idea that ultimately what we fundamentally do is give assets and inventory a digital voice. Circling back to your first question, collecting ultimately real-time data that feeds AI models and that ultimately allows you to kind of sense, analyze, and then take action within your environment. Collecting data that feeds AI models that ultimately drives action, which then would take place with things like mobile devices, driving task management with employees and frontline workers creates an opportunity for us.

Operator (participant)

The last question comes from Brad Hewitt with Wolfe Research. Please go ahead.

Brad Hewitt (VP of Equity Research)

Hey, thanks for fitting me back in.

Bill Burns (CEO)

No problem.

Brad Hewitt (VP of Equity Research)

Just in terms of capital allocation, you stepped up the buyback in Q1 to $125 million. You mentioned another $75 million in April. Should we expect that you may look to maintain or maybe even accelerate the pace of buybacks throughout the rest of the year if the valuation remains where it is today?

Bill Burns (CEO)

As you know, we've been tracking higher than normal year to date at the $200 million to take advantage of the volatility. I'd say right now we definitely expect to remain active with some level of activity for the remainder of the year. We'll see how, to your point, the market plays out here over the next couple of months to say whether we adjust the rate of return.

We wanted to, again, take advantage of the volatility here early in the year. As we said, wanted to commit to some level of buyback this year. We're on pace to that, but I think a little bit higher than we would expect out of the gate with the volatility. We would expect, again, to continue to remain active in the market for the balance of the year.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Mr. Burns for any closing remarks.

Nathan Winters (CFO)

I'd like to thank our employees and partners as they work to solve our customers' biggest challenges. We have strong conviction in the opportunities ahead for our business. Thank you and have a great day, everyone.

Operator (participant)

Goodbye. This call has now concluded. Thank you for attending today's presentation. You may now disconnect.