Zebra Technologies Corporation
Q4 2015 Earnings Call Transcript

Published: 25 Feb 2016

[Operator:]

Good morning, and welcome to the Zebra Technologies Fourth Quarter and Full Year 2015 Results Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Mike Steele, VP, Investor Relations. Please go ahead.

[Mike Steele:]

Good morning and thank you for joining us. Today's conference call and slide presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer; and Mike Smiley, our Chief Financial Officer. Anders will begin by discussing our 2015 accomplishments. Mike will then provide more detail on the financials and introduced our 2016 outlook. Anders will conclude with an overview of our strategic priorities in 2016 and elaborate on our outlook. Following the prepared remarks, Joe Heel, our Senior Vice President of Global Sales will join us as we take your questions. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year. Before we begin, I need to inform you that certain statements made on this call include forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect the company's current expectations concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the company's filings with the Securities and Exchange Commission. During this call, we will make reference to non-GAAP financial measures, as we describe business performance. You can find reconciliations of our GAAP to non-GAAP results in today's earnings press release. In addition, year-over-year sales growth references for Enterprise, which was acquired in October 2014 and for total Zebra, will be on an estimated historical basis. Now, I'll turn over the call to Anders.

[Anders Gustafsson:]

Thank you, Mike, and we're excited to have you on the team. Good morning, everyone, and thank you for joining us. I am pleased to report fourth quarter sales and non-GAAP EPS in line with our guidance. For the quarter, we reported sales of $956 million adjusted for purchase accounting, reflecting 4% year-over-year constant currency growth, and non-GAAP EPS of $1.51. After completing our first full year with the acquired Enterprise business, we delivered 2015 sales growth of 8% on a constant currency basis and adjusted EBITDA margin of 16.6%. This transformative combination has positioned Zebra as the global leader in Enterprise Asset Intelligence. This means delivering visibility solutions to help companies improve productivity and deliver better experiences for their customers. Our solutions enable our customers to sense, analyze and act. With sensing, we enable real-time operational visibility into people and things, such as

[Michael C. Smiley:]

Thanks, Anders. Before I discuss fourth quarter results shown on slide seven, I would like to remind you that we completed our acquisition of Motorola's Enterprise business on October 27, 2014. As a result with the exception of certain sales growth references, 2014 information reflects the financial results for the Enterprise business for the last two months of the year. Total GAAP sales for the fourth quarter were $953 million. Excluding the impact of purchase accounting, total sales for the fourth quarter were $956 million. Enterprise sales excluding purchase accounting adjustments were $636 million, up 2% year-over-year on a constant currency basis, inclusive of estimated 2014 Enterprise sales. Data capture and mobile computing sales grew and sales of wireless LAN and services declined. Pre-transaction Zebra sales were $321 million, up 7% in constant currency. Demand remains strongest in retail and transportation logistics verticals. Momentum in healthcare also continues to grow. Top growth drivers again include e-commerce, mobility, share gains associated with the OS migration in mobile computing, the transition from scanning to 2D imaging in data capture and the continuing refresh cycle in printing. From a regional perspective, on a comparable basis, sales in North America grew 7%. We experienced the strongest growth in the data capture business. Mobile computing continued to be driven by strong growth in our Android portfolio. Printing, tabletop and mobile computers were out performers. EMEA continued to experience softness and was up 1% from a year ago on a constant currency basis. Scanning and printing sales grew, offset by lower mobile computing sales. Sales in Asia-Pacific grew 9%. The region continued to be led by strong performance in China. Growth in mobile computers were driven by retail and transportation logistics both supported by trends in e-commerce. The printing business also performed well with mobile printers posting very strong growth. In Latin America, sales declined 12% as a result of a difficult macroeconomic environment. The region experienced growth in printing but currency devaluations continued to drive local currency prices higher, adversely impacting the overall demand environment. The region is stabilizing and we remain focused on pursuing selective opportunities and improving demand generation. GAAP gross margin for the quarter was 44.9%. Excluding the impact of purchase accounting, gross margin was 45.1%, consistent with our guidance. Normalized for currency, gross margin was comparable to third quarter 2015 gross margin of 45.5%. Enterprise gross margin of 42.3% was down slightly compared to the third quarter. Improved services margin resulting from operational efficiencies was offset by the impact of a large mobile computing deal and currency changes. Pre-transaction Zebra gross margin was 50.7% compared to 49.7% in the fourth quarter of 2014. The impact of currency has been offset by lower product sales in hardware and supplies, the price increase in Europe and the benefits of our hedging program. Operating expenses for sales and marketing, R&D and G&A, were $291 million, including $6 million of stock-based compensation expense. Operating expenses were favorable to our prior outlook, due to good expense control and lower stock-based compensation expense. Other operating expenses include acquisition and integration and exit and restructuring costs of $54 million and amortization of intangible assets of $61 million. In the quarter, the net loss per share on a GAAP basis was $0.13. Non-GAAP earnings per diluted share were $1.51 compared to $1.22 in the fourth quarter of 2014. Adjusted EBITDA increased 14% year-over-year to $165 million, or 17.3% of sales. Turning now to the balance sheet and cash flow highlights on slide eight. We ended the year with $192 million in cash, which includes $166 million held outside the United States. In the full year 2015, cash was negatively impacted by significant integration costs associated with the Enterprise acquisition. This includes $51 million of working capital settlement payments to Motorola Solutions associated with the acquisition and $34 million of real estate capital expenditures primarily related to the build out of a leased facility to accommodate our Illinois-based employees. As of year-end, we had $3 billion of long-term debt consisting of $1 billion of senior notes due in 2022 and a$2 billion term loan maturing in 2021. The debt was used to finance the October 2014 Enterprise acquisition and we've been paying it down aggressively. With $165 million in total principal payments in 2015, yearend net debt-to-adjusted EBITDA ratio was approximately 4.7 times. Subsequent to the end of the year, we made an additional $80 million in debt payments. For the full-year 2015, we generated $103 million of cash flow from operations and made capital expenditures of $114 million. In 2016, we expect a significant improvement in free cash flow primarily driven by sales growth and EBITDA expansion, approximately $90 million to $100 million less integration and restructuring costs, at least $75 million improvement in working capital as well as approximately $30 million lower non-integration-related capital expenditures. We also expect to reduce our minimum target operating cash level by approximately $50 million. As a result, we are confident in our ability to reduce debt by at least $300 million this year. Roughly one-quarter of our total company sales are denominated in euros. Given continuing elevated levels of currency fluctuations, we have been evaluating the options to cost effectively mitigate earnings and cash flow volatility associated with foreign exchange rates. As a result of that review in January, we implemented a hedge of approximately 80% of Zebra's net euro cash flow exposure for the entire year effectively locking in $1.09 euro rate. Finally, in light of the external focus over uncertainties on the macroeconomic environment, I'd like to point out that our liquidity levels are solid. We have no near-term debt maturities and an untapped $250 million revolving credit facility with no financial covenants triggered on our long-term debt unless we draw down more than $50 million. Before moving on to our guidance, I want to review our acquisition synergy program on slide nine. As we discussed last quarter, we have a stated goal to achieve $200 million of cost synergies on a run rate basis by the end of 2016. In 2015, we recognized significant synergy benefits and improved our operating leverage from a combination of organizational realignment, real estate consolidations, and other cost reductions. We realized approximately $130 million in cost synergies in 2015. We expect our P&L to benefit from realizing an incremental $50 million in cost synergies during 2016, $30 million of which will improve our gross margin and $20 million to reduce operating expenses. Finally, for 2017, we anticipate realizing an incremental $20 million of gross margin synergy benefits after reaching full run rate benefit as of the end of 2016. We are very pleased with the integration efforts thus far. As we said in the past, given the size and scope of the transaction, the integration of the IT systems is very complex. Modernizing, simplifying and integrating these systems into Zebra's IT network will increase efficiency and meet the demands of our growing business. It will also enable us to conclude our transition service agreements with Motorola Solutions. Consistent with our prior outlook, the rationalization and modernization of Zebra's IT platform and ecosystem will result in a remaining $130 million to $150 million of integration-related costs over the next two years, of which approximately 20% will be in the form of capital expenditures. We expect the vast majority, or roughly 80% of the remaining, total integration cost to be incurred this year. The expense portion of these costs are one-time in nature and will be excluded from our non-GAAP P&L results. These efforts are expected to drive additional operating expense efficiencies and reduce our ongoing capital expenditures once completed. I will now review our 2016 outlook, and in a few minutes, Anders will provide further perspective. Given the quarter to quarter volatility of our business, in addition to the quarterly outlook, we are providing an annual outlook to provide a longer-term view of our business. On slide 11, you will see that for the first quarter we expect net sales excluding purchase accounting adjustments to be flat to down 3% from the comparable net sales of $899 million in the first quarter of 2015. This expectation reflects a range of a negative 1% decline to positive 2% growth on a constant currency basis. First quarter 2016 adjusted EBITDA margin, expect to be in the range of 16% to 17%. Non-GAAP earnings are expected to be in the range of $1.19 to $1.34 per share. Compared to the first quarter 2015, this outlook reflects growth in Asia Pacific and EMEA, offset by a decline in North America. While North America remained strong in the fourth quarter, we did experience some softening in December, as a typical benefit we receive from the year-end budget flush was not as significant as in past years. This softening was driven by a cautious tone around capital spending, resulting in a lower backlog as we entered the first quarter. In addition, we had an exceptionally strong first quarter of last year with North America sales growth of 13% year-over-year, resulting in a challenging comparison for the first quarter of 2016. Our outlook also reflects a lower gross margin as compared to the first quarter of 2015 primarily due to a negative FX impact and changes in product mix. However, the gross margin should be higher than the fourth quarter. Operating expenses are expected to be flat to slightly lower than the prior year period. For the full-year, the company expects net sales excluding purchase accounting adjustments to grow 1% to 4% from the comparable net sales of $3.7 billion for the full-year 2015. This reflects an expectation of year-over-year growth of 2% to 5% on a constant currency basis. Adjusted EBITDA margin is expected to be in the range of 17% to 18% for the full-year 2016 driven primarily by a higher gross margin and improved operating expense leverage compared to 2015. For the full-year 2016, we have also assumed the following shown on slide 12 (sic) [slide 11]. We expect capital expenditures of $70 million to $75 million including $15 million to $20 million related to acquisition and integration; depreciation and amortization expense of $310 million to $315 million; interest expense of $195 million to $200 million including amortization of debt issuance cost of $18 million to $20 million; share-based compensation expense of $33 million to $35 million, and non-GAAP tax rate of approximately 22% to 24%, and cash taxes of approximately $50 million to $60 million. I'll now turn the call back to Anders.

[Anders Gustafsson:]

Thank you, Mike. As we kick off 2016, we remain focused on extending our leadership within Enterprise Asset Intelligence by executing on our four strategic priorities shown here on slide 12. I am confident that we can continue to deliver profitable growth for the full-year 2016, as we capitalize on secular growth trends and prudently manage our cost structure. This confidence is supported by customers in all verticals, recognizing the importance of technology in achieving their long-term strategic goals. We believe this focus will continue to be critical for customers, whether they are investing for growth or looking to streamline their operations and improve efficiencies. As we drive solutions-based selling, you can leverage our expertise and expand our share in key verticals such as healthcare as investments by customers within this vertical continue to accelerate. The dynamics of the retail industry, our largest vertical historically, are evolving as e-commerce and omni-channel are now top priorities. These initiatives require retailers to meet shoppers' growing expectations and provide product when, where, and how customers want it. This in turn requires further investments in technology to receive accurate and timely data on inventory availability. As e-commerce plays an increasingly more vital role in their businesses, Zebra is a trusted partner helping them with the tools to drive productivity and efficiencies. As a related benefit to the evolution of retail, we are in a position to benefit from the extension of this trend in T&L, as the increased number of packages from retailers to consumers drives the need for additional investments in technology by package delivery companies. We feel very optimistic about the opportunities today and in the future within retail and T&L. We are excited about our healthy pipeline of innovative products and solutions. For example, we launched our new mobile computer, the TC8000, which enables users to be 14% more productive through improved ergonomics and versatile capabilities. In addition, our new cartridge-based tabletop printer, the ZD420, has an ultra-compact design and provides Zebra an annuity revenue stream of aftermarket supplies. These high-margin high-volume products demonstrate our ability to build on well-established staples within our portfolio and reinvent them to meet the changing needs of our customers. Both products contributed to very strong customer engagement and heavy booth traffic at the National Retail Federation tradeshow last month. In 2016, we are also investing in Windows 10 solutions, as legacy Windows Mobile operating systems are expected to go end-of-life by 2020. In our services business, we strengthened the leadership team and made changes that will make us more competitive and support meaningful improvements in 2016. For example, we are starting to benefit from increased attached and renewal rates on our product support plans. As we move forward and maintain our focus on increasing efficiencies, cost reductions and pricing, we expect to drive margin expansion in services. While we continue to invest in R&D to further extend our leadership position, we will also maintain prudent management of our cost structure, as we further improve operating expense leverage. As Mike discussed in detail earlier, we expect to realize $50 million of incremental cost synergies in 2016, the majority of which will positively impact gross margin. Another top priority for us is to improve free cash flow in 2016 and 2017 and delever the balance sheet. Lastly, we will continue to make meaningful progress on our transition to One Zebra as we execute the remaining steps of our integration and leverage the Zebra brand. Our teams are performing extensive IT systems integration work including the start of our ERP system transition next quarter. We have the appropriate expertise and resources to execute well through the 2017 integration timeline. In addition, a key customer facing initiative is the implementation of our new channel partner program. This program is scheduled for a second quarter launch, which will simplify program administration for our partners, align our goals with theirs and ultimately enable growth for Zebra and our partners. And now, I would like to offer an additional perspective on our 2016 sales and EBITDA outlook. For the full year 2016, we are expecting sales growth of 2% to 5% on a constant currency basis. While our annual guidance does assume some continued headwinds from a macro perspective, we are not anticipating a meaningful change in the environment. As we have indicated for the first quarter, we are expecting approximately flat sales year-over-year on a constant currency basis due to lower sales in North America. However, we had a healthy global pipeline in our core markets and consistent expectation of growth from across our reseller network. In North America, we expect growth beginning in the second quarter and through the end of 2016. We expect the strongest growth this year in Asia-Pacific, driven by ongoing momentum in China and India, particularly in retail and T&L. In EMEA, we expect continued solid growth in Germany and the UK, while Russia, Turkey and the Middle East will likely remain soft. Latin America is stabilizing and we could see some modest growth in the region. As a result for the full year, we feel confident in our expectation to continue to grow the business. With expanding margins, managing our overall cost structure and increasing working capital efficiencies, we will generate increased free cash flow and reduce leverage. In conclusion, our business is performing well. We are positioned for long-term success and are reiterating our long-term financial goals as shown on slide 13. We continue to see sales growth of at least 4% to 5% over a cycle, which is faster than the market rate of growth. We also expect to achieve adjusted EBITDA margin of 18% to 20% by the end of 2017 driven by growth, gross margin expansion, and operating margin leverage. This also assumes no material change to this recent global currency exchange environment. Finally, we expect to achieve net debt to adjusted EBITDA of less than three times by the end of 2017. This will be driven by a total of at least $650 million of debt pay-down over 2016 and 2017. And with that, I'll hand the call back to Mike Steele.

[Mike Steele:]

Thanks, Anders. We've reserved the balance of the call for Q&A. We ask that you limit yourself to one question and one follow-up so that we can get to as many of you as possible. Operator, please let our callers know how to ask a question.

[Operator:]

We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. The first question comes from Richard Eastman of Robert W. Baird. Please go ahead.

[Richard Eastman:]

Anders, as we look out to 2016 against your constant currency growth forecast of, what, 2% to 5%. Could you just speak to the product lines and where you'd expect that continued growth to come from, from mobile computing, printer, just kind of line them up relative to that LC growth rate? And then I have one follow-up.

[Anders Gustafsson:]

Yes. First, we feel confident about the full year growth expectations that we have. We had a very strong 2015, and we built a lot of momentum across the business there. Our portfolio did very well in 2015. We gained share in most of our product lines globally. Three of our four regions had solid growth. We launched some new products in the beginning of 2016 that we are very excited about. The TC8000 is a great example of new – one of our highest running products that we reinvented in a new fashion. We got great feedback on that product at the NRF and since. We also launched a new tabletop printer. That's the highest volume of our printer portfolio, which has also a cartridge-based model, so you can make it very easy for customers to load ribbons and that drives an annuity-based revenue stream for us. And as the year goes on, we have a number of other attractive new product releases. But our pipeline is very healthy. We have a very detailed approach to build up the pipeline. It's both based on individual customer accounts but also looking at product and so far we feel that we have a very solid outlook for the year.

[Richard Eastman:]

Okay. And then just one last question as a follow-up. There has been a number of additions here to the marketing team, to the global marketing team. And all of which are right in front of the channel program adjustments that you are going to put in place in the second quarter. Could you just, kind of, walk through the structure there? And maybe what the additions are intended to accomplish?

[Anders Gustafsson:]

Yes. We announced, I think it was early this week, right, that Jeff Schmitz would become our new Senior Vice President and Chief Marketing Officer. So he will lead the overall marketing organization. So he joined us on Monday officially. He also visited with us at one of our sales kickoff meetings to get a good view of what the entire business looks like. We are very excited to have Jeff on board. We think he will be a great addition to our team. Under Jeff he has a number of different functions. One of those is a channel operations team. So that channel operations team is the one that really own, developing the channel program and make sure we work with the regions to launch it effectively into each of the regions. So Jeff has the team that owns the development and implementation of the new channel program, but clearly they also work very closely with the regional sales teams to make sure that the region is ready to engage with the partners and be off to a good start.

[Richard Eastman:]

Okay. Thank you very much.

[Anders Gustafsson:]

Yes.

[Operator:]

The next question comes from Saliq Khan of Imperial Capital. Please go ahead.

[Saliq Jamil Khan:]

Thank you, all. Hi, Anders. Hi, Mike.

[Anders Gustafsson:]

Hey.

[Michael C. Smiley:]

Hey.

[Saliq Jamil Khan:]

Hi, guys. As I take a look at the overall product portfolio and the changes that you've made to it, you certainly brought a lot of sleekness and changed the ergonomics to altogether bring about a lot more ease to the end customer. However, if I take a look at what your competitors are doing and I take a look at your product portfolio, are you merely trying to keep up with them or are you trying to find a way to go ahead and become a lot more competitive, take customers away from them and increase theoretically your market share?

[Anders Gustafsson:]

Well, so if you look at our performance in 2015, we gained market share in most of our large product lines. We believe that we have a more competitive product lineup. We take great pride of the strength of our products and the innovation of our products. As we look into 2016, there is a lot of new, very attractive, you can say, extensions of existing products, but also some new product concepts that we are very excited about. So we are very dependent on having a vibrant product portfolio in order to demonstrate value to our customers and we feel that the portfolio we have should enable us to continue to gain market share and extend our leadership position in the industry.

[Saliq Jamil Khan:]

As my follow-up, what you just noted is including with the fact that the business operations, the integration and the rebranding initiatives that you've been working on throughout 2015 and it was very evident at the NRF conference as well, how does this improve your overall sales cycle and how does it help you go ahead and have a more deeper and more of an integrated conversation with your end customer?

[Anders Gustafsson:]

Yes, I'll start and then I'll let Joe Heel also add to this. So I'd say when we talk to our customers, we hear two themes quite regularly

[Joachim Heel:]

Yes. From a sales perspective, we see the benefits in many areas, but three that I would perhaps call out

[Saliq Jamil Khan:]

Thank you, guys. I look forward to speaking with you later on.

[Anders Gustafsson:]

Thank you.

[Operator:]

The next question comes from Jason Rodgers of Great Lakes Review. Please go ahead.

[Jason A. Rodgers:]

Good morning.

[Anders Gustafsson:]

Good morning.

[Michael C. Smiley:]

Good morning.

[Jason A. Rodgers:]

Wondered if you could talk a little bit more about the ERP consolidation, if that's going as anticipated and if you expect to remain on track as far as ?

[Anders Gustafsson:]

Yes. The ERP integration is going as per plan. We feel it is going well. We have a strong team of people who've been working on this for quite some time now and we have a robust product plan or project plan with lots and lots of detail behind it. So we track it on kind of hourly basis or daily basis as far as what progress and what deliverables we have. We are looking to implement the first phase of the ERP conversion in Q2 in Asia and then go live with the full global entity middle of 2017, so we get a chance to road test it and then add some additional functionality for the full-year roll out. So we get great benefits from this. We get a much more rationalized modern IT platform. What we've had so far has been a lot of disparate IT systems, which drives a lot of inefficiencies. So if you have to enter data on two systems or sometimes three systems and they don't transfer data between them very well, so this provides a much more robust and streamlined IT platform for us and that will drive also great cost benefits as we go into the future.

[Jason A. Rodgers:]

And the follow-up, did any large mobile computing deals have an impact on the fourth quarter and what is the expectation for Q1?

[Anders Gustafsson:]

So every quarter we have large deals. It would be bad if we didn't have large deals every quarter. So we had large deals in fourth quarter. I wouldn't say that they were different from any other quarter particularly.

[Michael C. Smiley:]

Yes, this is Mike Smiley. I think one thing is actually our fourth quarter results are very comparable to the third quarter, excluding FX. So it was really in line with our guidance. The euro was basically Q3 about $1.11 versus $1.09 in the fourth quarter. Our service business had margin improvements offset by some of the large deals that Anders talked about and our legacy Zebra printing margins were flat sequentially. So, generally, the fourth quarter margins were really what we expected.

[Jason A. Rodgers:]

Okay.

[Operator:]

Mr. Rodgers, do you have anything else?

[Jason A. Rodgers:]

No. I'm just following up with that. So Q1 there is no major mobile deals out there that are larger than normal that might impact margins?

[Anders Gustafsson:]

No. I think the outlook for Q1 is also for normal rate or normal volume of larger projects. There is nothing that sticks out that's particularly bigger than normal. But we have a good pipeline for large deals for the full year.

[Jason A. Rodgers:]

Got it. Thank you.

[Operator:]

The next question comes from James Faucette of Morgan Stanley. Please go ahead.

[James E. Faucette:]

Thank you very much. Just a couple of questions for me. First, the strength in Motorola, I think, you've kind of mentioned this, but I wanted to make sure, is that from new products and are we expected to gain steam as we head into 2016? And then talking about specific geographies, obviously, we had a big pickup in results this quarter with a bit of a downtick in North America. And you kind of spoke to some of the dynamics there, but I'm wondering how much of that may be attributable to a couple of big customers or is there something I guess more broad-based and widespread? Thanks.

[Anders Gustafsson:]

So the first question was around the strength of the Enterprise business and the second about the softness at the end of Q4. Is that right?

[James E. Faucette:]

Yes. That's right. Yes.

[Anders Gustafsson:]

Yes. So the strength of the Enterprise business, I think, is it's multifaceted. We have worked hard on making sure we have a very competitive product lineup. Android has been a strong growth driver for us so far. We have by far the broadest portfolio of Android products of anybody in the industry and our win rate in Android is very high, higher than the overall win rate, say, it is for us across all operating systems. But I'd say it is more than product. I think the integration, the combination of our two companies have helped both sides. I think the Better Together story is very much resonating with customers. We have seen many examples where we mentioned one in the script here where printing led the way and got into new account first, but then we were able to pull in mobile computing afterwards. But we have many examples of where we've done the other way. So part of the growth is the Better Together and I'd say also we have executed well. We have improved on our services performance, which was a bit of a drag before and I would say the culture of the combined company is good. I don't hear much talk about say us versus them and things like that. It's very much we're all in this to try to make the company as successful as we can. I'll let Joe expand a little bit also.

[Joachim Heel:]

Well, I might support what Anders is saying in terms of the strength of the Enterprise business with two specific points

[Anders Gustafsson:]

Yes, maybe just to expand one more point on this. I think most of these comments were kind of North America centric, but if you look at the Enterprise business performance in 2015, the international markets were very strong. Asia was particularly strong and we had several large wins for mobile computing in Europe. So this is very much a diversified business like Zebra's legacy business where we have a broad portfolio of products, selling to a diversified set of vertical markets and geographically also very diversified.

[Joachim Heel:]

That scanning growth I was talking about.

[Anders Gustafsson:]

Yes.

[Joachim Heel:]

Our biggest contribution came from China, for example.

[Anders Gustafsson:]

Yes.

[Joachim Heel:]

So it is broad-based.

[Anders Gustafsson:]

Broad-based, yes.

[James E. Faucette:]

And then as far as looking at North America and any weakness there, was that related to specific customers or was that more broad-based?

[Anders Gustafsson:]

It was more broad-based. We talk about, say, budget flush that tends to be from many customers. Yes, there was more of, I think, a general cautiousness among our customers and they were I suspect looking at what was going on with their share prices and wondering what that was meaning for 2016 and being a little bit more cautious on capital spend. But it wasn't anything specific to any one customer or any large customer.

[James E. Faucette:]

And have you seen that persist early in the year?

[Anders Gustafsson:]

I think the start of January is always a bit weak, and I think it was commensurate with normal seasonality. As we look at the guidance we gave for the full year also, we expect basically normal seasonal increases quarter-over-quarter for the year. So we aren't assuming that there will be some form of heroic recovery. This is just based on looking at the last five to seven years of how much of our revenues come in Q1 versus Q2, Q3, Q4 and looking at how that should play out.

[James E. Faucette:]

Thanks.

[Operator:]

The next question comes from Keith Housum of Northcoast Research. Please go ahead.

[Keith Housum:]

Good morning, gentlemen. Guys, I was hoping to spend a little bit of time talking about the supplies and services. As I look at, perhaps, what we're expecting what you guys have done in quarters past, it looks like both of those have lagged a little bit here in the fourth quarter. What's your expectations for, I guess, your thoughts going into FY 2016?

[Anders Gustafsson:]

So services is an area that we have spent a lot of effort to strengthen. We believe services should be a good growth driver for the business. We brought in some extra leadership, some new leadership in the business to augment the team we had and so we could have more focus on both driving the sales side but also driving the operational side. We made I think great improvements in our execution. The customer-facing performance of break, fix, repair, return statistics are much better than they were when we first assumed the business. We've reduced the cost basis for most of these services and we've seen an increase in attach rates for new services. So we feel quite good about where we are and we feel confident that we should see good growth in 2016 from services. And I'd like Joe to add on that too.

[Joachim Heel:]

Yeah. From a sales perspective, of course you know that services is one of those that benefits from bookings that then deliver revenues over a longer period of time. And so what we've been very focused on and I think successful with in 2015 is on the support side increasing our attach and renewal rates, those will deliver increasing revenues this year. On the managed and professional services, increasing our bookings and we actually had an exceptional year in terms of increasing our bookings last year in managed and professional services, that continues here in Q1. And we've also been focused on migrating our managed and professional services to more higher value types of managed and professional services, ones where we have some unusual IP or unusual value added and that's been the focus of that, which will help us with the margins that we can deliver from those services in addition to the cost reductions that we're taking. I also wanted to make sure I heard you talk about services and supplies. Did I hear that correctly?

[Keith Housum:]

Yeah, absolutely. Supplies were down 8% in the quarter year-over-year?

[Anders Gustafsson:]

So I think supplies now, for the year supplies was up, I think it was 8% in constant currency. In Q4, I don't know, I don't have that data off the top of my head here, but constant currency was a lot better, so supplies is more – has a higher proportion of supplies in Europe than we have for our normal products. So Europe is a very large part of our overall supplies business. Let me see if I can find the number here.

[Keith Housum:]

I can follow-up that offline.

[Anders Gustafsson:]

Yes, we can follow-up offline.

[Joachim Heel:]

Yes, I didn't want to lump that in with services.

[Anders Gustafsson:]

Yes.

[Keith Housum:]

Yeah.

[Anders Gustafsson:]

Yeah, supplies....

[Keith Housum:]

Yeah, I'll follow-up offline, that's fine.

[Michael C. Smiley:]

Supplies for the full-year by the way was up 1.2%...

[Joachim Heel:]

In nominal.

[Michael C. Smiley:]

....nominal currency. Now by the way I would also argue that in – we have been seeing very strong growth in supplies. I think that in 2015 we recognize the benefit of wristband products that I think makes the 2015 to 2014 comp a little bit more difficult.

[Anders Gustafsson:]

And profitability of supplies has gone up because we have in-sourced some more of our wristband manufacturing, so that we have seen a great improvement in margins.

[Keith Housum:]

Thank you. If I can just follow-up, I guess, on the previous question regarding some of the cautious commentary as you exited fourth quarter. As you look at the demand going into FY 2016, your expectations, I guess, that you're hearing from the customers regarding your large project, is there a hesitancy of people moving forward, or are anybody talking about deferring projects out in response to the macro demand?

[Anders Gustafsson:]

So, at the high level, I'd say, we aren't expecting any material changes to the macro environment, to how our customers kind of behave. We get very good feedback, very encouraging feedback from our reseller communities. They certainly believe that 2016 should be a good year with good growth. I think the issues we saw in the end of Q4, beginning of Q1 were more isolated and we believe temporary in that it was more, I think, driven by people looking at the stock market and getting cautious about what that meant for the business and didn't want to lean in to the same extent, so budgets gets pushed out a bit. It takes a little longer for companies to hand out the operating budgets to – but once that happens, things go back to more normal we believe. And we have seen from end of last year some deals got pushed from Q4 into all of 2016. And some customers may have looked at some larger deals and instead of giving us one PO, they gave us one PO for P1 (sic) [Q1] and Q2 and so forth. But you should remember also that our value proposition is one that really works in good times and bad times. In good times, our customers are working with us to expand into new retail stores, new factories. In tougher times, they use our equipments to trade OpEx for CapEx. We have very short and well defined return on investment calculations. So, normally, our products are proven to have an ROI of less than, let's say, one year to upwards of maybe two years. And even in tougher times, companies tend to be comfortable with those types of paybacks.

[Joachim Heel:]

And one other thing that – or maybe two other things that give us a perspective on this cautiousness that we may have seen at the end of Q4 is number one, our pipelines for Q2 and the rest of the year are very strong. So that gives us a lot of good confidence. And also as we speak with our reseller partners, they reflect a lot of confidence to us in terms of the growth prospects that they see for the year. So that puts in perspective I think what we have seen.

[Keith Housum:]

Great. Thank you.

[Operator:]

The next question comes from Josh Berman of William Blair. Please go ahead.

[Josh Berman:]

Hi. Good morning.

[Joachim Heel:]

Good morning.

[Anders Gustafsson:]

Good morning.

[Josh Berman:]

Just two quick ones, one, I know you gave some of the components that go into free cash flow, but I was wondering if there's a certain dollar amount you're targeting for 2016?

[Michael C. Smiley:]

You know, I think what we – again our goal is to pay down $300 million of debt. We're confident in our ability to do that. Again, we expect some improvement from our EBITDA margin expansion and just regular business growth. We also know that we have improvements in our working capital, which should drive at least $75 million of additional cash flow from what we had last year. We will have $90 million to $100 million less integration spend from 2015. We also have our CapEx that's not related to integration down by about $30 million. I think Anders mentioned the fact that we had some Illinois – some spending in Illinois to bring the facilities together for the two companies. We also expect to reduce our cash levels by about $50 million. So when you put it all together, we're very confident in reducing our debt by $300 million in 2016 and $350 million in 2017, again, to get our leverage below 3 times debt-to-EBITDA.

[Josh Berman:]

All right. And then switching topics, I was wondering if you could dive a little bit more into the Windows 10 opportunity? Maybe how big is that, especially relative to the Android transition?

[Anders Gustafsson:]

So, first, there are no Windows 10 mobile products on the market at the moment. But I'll put it in context, maybe of what's more going on from an OS migration perspective. So, today, let's say, virtually all our customers, certainly most our customers are well aware of the need to migrate to newer, more modern operating systems. Android has been the primary beneficiary of this so far. And we were early investing in Android and so that is a great opportunity for us. Microsoft is planning on coming out with Windows 10 later on this year, and there will be some customers who believe – that are very loyal to Microsoft and would like us to have Microsoft 10. We have some Microsoft 8 products today, but which we will upgrade to 10 and then come up with some more products later on in the year, and we want to be basically operating system agnostic when we talk to our customers. We don't want them to feel that we are only supporting one operating system. We want to be able to go in and have a conversation with them about their unique situations and be able to offer the right type of solutions for them. Maybe, Joe, you have some?

[Joachim Heel:]

Well, what I would say is, first, we should recognize that still the majority of our revenues today come from Windows-based operating systems. And the transition to Android is happening very fast as Windows 10 Mobile, right, the mobile version of Windows 10 haven't been released for a very long time. With that now happening, we do see some customers, and it's very specific to the needs of individual customers. Logistics is a vertical where we see a bit more of it than others express the need and a desire in fact to be on a Windows 10 Mobile platform. And as such, we're developing those devices, and we'll see that they'll occupy a significant portion of the market.

[Josh Berman:]

Great. Thank you.

[Operator:]

The next question comes from Paul Coster of JPMorgan. Please go ahead.

[Anders Gustafsson:]

Hey, Paul.

[Paul J. Chung:]

Hi. This is Paul Chung on for Paul Coster. Thanks for taking my question. So a question on the core printing business. It's grown nicely really ever since 4Q 2013. You mentioned upgrade cycles have been a strong contributor. How much of that growth has been from existing customers, how much from market share gains from new business? And, finally, can you confirm how cross-selling initiatives with the Enterprise business have been going? Has it been a material contributor? Thanks.

[Anders Gustafsson:]

Yeah. I think the strength of the printing business is really driven, I think, by a number of different factors. Ultimately, I'd say, bring us back to – I think we've just executed well on our overall printing strategy over many years. So we've gained a lot of shares. So there's upgrades or refresh cycles, but we also gained a lot of share. I think according to VDC, we've gained about 1% of market share per year for the last several years. And I would attribute that to us having a very compelling and competitive product lineup. Some of the new things we talked about like Link-OS is one that unifies the look and feel and the user interfaces and how you interact with the printer across our entire portfolio. Something that's very difficult to replicate for smaller suppliers. I think the way we engage with the channel also gives us some benefits with the scale that we have there and how we can provide very compelling value propositions to our channels and our end users. So I'd say it's not really one thing that's driving the strength in the printing business. It's really a number of different things. Joe might have some more comments?

[Joachim Heel:]

Yeah. I'd say, we have seen a market share expansion in the printing business and I would attribute at least a part of that, a significant part of that to the Better Together, to the ability to operate and cross-sell between them. I'll give you a generic example of that. The strongest vertical for the Enterprise business was and is retail, right, in which we have mobile computers and scanners, which we deploy and there are applications such as when you change the pricing at the retail level where you would like to not only scan and understand the pricing on a item in the store as it is, but change the label immediately. This plays right into our technology of mobile printing which goes very well with that scanning capability that we already have on the retail floor. So we've seen an expansion of solutions like this where we're able to put the two technologies together to a solution to solve a problem like price markdowns and changes.

[Paul J. Chung:]

Great. Thanks.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mike Steele for closing remarks.

[Mike Steele:]

Thank you all for your questions. Have a great day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.