管理層發言
Good day, and welcome to the Zebra Technologies First Quarter Earnings Conference Call. Please note, this event is being recorded. I would now like to hand the call over to Michael Steele, Vice President of Investor Relations. Please go ahead.
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 1 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 risk factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe business performance with reconciliations shown at the end of the slide presentation and in our 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 both business acquisitions and dispositions 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 his perspective on our first quarter results, our value proposition and strategic priorities. Nathan will then provide additional detail on our financial results and discuss our outlook. Followed by Bill's closing remarks. Then Bill and Nathan will take your questions. Now let's turn to Slide 3 as I hand it over to Bill.
Thank you, Mike. Good morning, everyone, and thank you for joining us. The year is off to a great start. Today, I want to take a step back to put our results into a broader context to what our performance says about Zebra's position in the market, the momentum in our business and the opportunity ahead. There are 3 takeaways I want to leave you with this morning. First, we achieved strong Q1 results, and we are seeing continued momentum that supports our increased outlook for the full year. Second, our performance reflects Zebra's industry leadership and our unique value proposition backed by our integrated portfolio of solutions that combines hardware, software and services to solve our customers' complex challenges. We are deeply embedded in our customers' operations and increasingly central to their efforts to drive productivity through automating workflows and proving how work gets done across the front line of business and beginning to integrate AI into their operations.
Third, we are executing a clear strategy to create long-term shareholder value by driving profitable growth, building on our leadership and track record of innovation and enhancing our financial strength and flexibility. With that, let's start with our first quarter results. Turning to Slide 4. We delivered results near the high end of our outlook, driven by our team's strong execution and positive demand trends across our portfolio. For the quarter, we generated sales of nearly $1.5 billion, a 14% increase or 4% on an organic basis from the prior year, and adjusted EBITDA margin of 23.2% and non-GAAP diluted earnings per share of $4.75, an 18% increase over the prior year. We achieved growth across both our segments and all regions with outperformance in our manufacturing end market. Elo Touch also contributed solid profitable growth, and we are encouraged by our customers' interest in our combined portfolio of solutions and our progress in driving synergies.
We expanded adjusted EBITDA margin by 90 basis points, driven by a multiyear high gross margin and operating expense leverage, reflecting the benefits of our productivity initiative. These results demonstrated the durability of demand for our solutions and our ability to convert that demand into profitable growth. Supported by our strong financial position, we have executed $500 million of share repurchases year-to-date through early May, following more than $300 million in the fourth quarter. Our business momentum and progress in navigating the current memory supply environment gives us confidence in raising our outlook for the full year with our recently elevated stock repurchase activity, underscoring our conviction. In a few minutes, Nathan will discuss our outlook and our progress in managing memory supply. Turning to Slide 5. We have significant runway for growth with our clear and differentiated value proposition, supported by trends in automation, digitization and AI across a $35 billion served market.
Our broad portfolio of integrated hardware and software solutions enables us to deliver value across the entire workflow, not just a single use case, creating a meaningful competitive advantage. And our industry leadership puts us in a unique position to be the supplier of choice of AI for the frontline. We have a resilient financial model with strong margins and cash generation, supported by disciplined capital allocation that drives long-term shareholder value. Moving to Slide 6. Zebra provides the foundation for intelligent operations. We help our customers understand what's happening across their operations in real time and then act on that information to drive better outcomes. We operate across 2 segments: the connected frontline, providing the digital touch points necessary to improve productivity, collaboration and the customer experience. Our solutions include enterprise mobile computing, interactive displays, frontline software and AI agents.
Asset visibility and automation enables real-time insights from assets, inventory and operations to automate environments through our portfolio of solutions, including advanced data capture, printing and supplies, RFID and machine vision. Together, these segments give us a broad and complementary portfolio that allows us to meet customers where they are in their automation journey and advance their capabilities. Zebra is well positioned to benefit from the megatrend shown on Slide 7. Across industries, our customers are operating in increasingly complex environments, shaped by labor constraints, cost pressures, higher consumer expectations and the growing need for real-time visibility and execution. As a result, priorities like mobility, intelligent automation, asset visibility, cloud connectivity and physical AI are becoming increasingly central to how enterprises run their operations. We see these as durable long-term demand drivers that support Zebra's growth opportunity.
Slide 8 illustrates how Zebra's end-to-end presence across the supply chain is a key differentiator. Our embedded role in daily operations generates the insights that power smarter solutions and AI at scale. Our broad portfolio enables us to address mission-critical workflows that span from factory floor to the warehouse to the end customer and all touch points along the way. Zebra's products and solutions can be utilized more than 30x as an item travels through the supply chain and this number continues to increase with the need for real-time visibility. Slide 9 highlights the breadth of our customer base and the significant opportunities in front of us. Zebra supports more than 80% of the Fortune 500 across large and growing end markets, each with distinct needs shaped by the unique business models. That said, there's a common need across all of them: greater operational visibility and productivity.
We play a critical role in helping our customers better understand what's happening across their operations, allowing them to take action in real time. We are deeply embedded in their workflows as a trusted partner, enabling us to co-innovate as they adopt new technologies to digitize their operations and look to leverage AI. On Slide 10, we highlight the 3 strategic priorities guiding our business. Our first priority is driving profitable growth. We see meaningful room to grow across both of our segments, supported by a large and diverse market and a long runway of adoption in many of the environments we serve. We believe both connected frontline and asset visibility and automation have a 5% to 7% organic sales growth profile over a cycle and are confident in our ability to deliver. Penetration is still relatively low across the markets we serve highlighting the opportunity in front of us.
For example, based on third-party research, three quarters of warehouses globally are in the early stages of their automation journey. Our growth prospects are supported by investments in RFID, machine vision and AI that enhance our differentiation and expand our relevance with customers. We are also driving efficiency initiatives in our business to enhance profitability, which include operating margin leverage through cost discipline, including our previously announced restructuring actions, accelerating software development velocity by deploying new AI tools and enhancing our go-to-market model to improve market coverage and efficiency. Our second strategic priority is to continue building on our market-leading position by advancing innovation. Recent progress includes launching an entirely new line of enterprise mobile computers and wearables with embedded RFID and optimized AI processing capabilities and a global logistics customer has selected our new frontline AI picture proof of delivery capability.
This on-device AI solution is driving faster delivery times while improving the consumer experience. These are just a couple of examples of innovation that are tightly aligned with customer needs and designed to drive both growth and differentiation. Our third strategic priority is enhancing our financial strength and flexibility by driving consistency of earnings and cash flow generation through our capital-light business model. We will also continue to execute on our balanced capital allocation strategy, prioritizing investments in our business that elevate our portfolio of solutions, while consistently returning capital to shareholders. I will now turn the call over to Nathan to review our Q1 financial results and improved 2026 outlook.
Thank you, Bill. Let's start with the P&L on Slide 12. In Q1, total company sales increased 14.3% or 4.3% on an organic basis with momentum across our business. Our Connected Frontline segment grew 20.6%, including the recent Elo Touch acquisition, or 3.8% on an organic basis led by mobile computing. Our Asset Visibility and Automation segment grew 4.8%, led by printing and machine vision. We realized solid performance across all our regions. North America sales increased 4%, led by strength in manufacturing. EMEA sales grew 2%, with broad-based growth across Europe, partially offset by softness in the Middle East. Asia Pacific sales increased 11%, led by India and Southeast Asia and Latin America sales grew 10%. Adjusted gross margin improved 80 basis points to 50.4% primarily due to productivity initiatives, favorable FX and business mix with a modest impact from memory inflation in the quarter.
Adjusted operating expense leverage improved by 20 basis points. This resulted in first quarter adjusted EBITDA margin of 23.2%. Non-GAAP diluted earnings per share were $4.75, an 18% year-over-year increase, exceeding the high end of our outlook. Turning now to the balance sheet and cash flow on Slide 13. In the quarter, we generated free cash flow of $163 million. As of Q1, we had a modest debt leverage ratio of 2.1 and $1.1 billion of credit capacity. We have been deploying capital consistent with our allocation priorities. For the quarter, we repurchased $300 million of stock and have repurchased an additional $200 million in the second quarter to date. Turning to Slide 14. We have a proven track record of navigating dynamic environments, and we are applying that same disciplined playbook as we manage the current memory cost and supply landscape. While this remains an area we are monitoring closely, we are increasingly confident in our ability to successfully mitigate impacts based on the actions already underway and the visibility we have today.
We are working proactively across multiple fronts, including direct supplier co-planning, alternative sourcing options and transitions to higher density memory components, where capacity is expected to increase into 2027. Based on the progress we have made, we currently have line of sight to the supply we need to support our outlook. In addition, the component pricing trajectory for the year is tracking in line with our prior guidance. Our cost position remains favorable relative to spot market rates, given our direct supplier relationships, and we have line of sight to fully mitigate the margin impact for the year. This is not a new muscle for Zebra. Our teams have managed through prior component disruptions by acting early, maintaining close supplier partnerships and using our scale to create flexibility in the supply chain. We are taking that same approach here. Let's now turn to our outlook.
We've entered the quarter with a strong backlog and pipeline that supports our sales growth guidance range of 14% to 17%, including approximately 10.5 points of contribution from business acquisitions and favorable FX. Our second quarter adjusted EBITDA margin is expected to be slightly higher than 21%, and non-GAAP diluted earnings per share are expected to be in the range of $4.20 and $4.50. For the full year, we expect sales growth between 10% and 14%, reflecting a 1 point increase at the midpoint from our prior outlook. Our guide factors in year-to-date performance, a strong pipeline of opportunities, momentum in manufacturing and machine vision, the previously announced price increases, constrained memory availability and a 7-point favorable impact from acquisitions and FX. Our full year adjusted EBITDA margin is expected to be approximately 22% and non-GAAP diluted earnings per share is now expected to be between $18.30 and $18.70.
Our full year guide continues to reflect full mitigation of the memory 2-point headwind, which we are increasingly confident in achieving. We are driving this through targeted price increases and other direct memory initiatives, net of savings from our restructuring actions, volume leverage and FX favorability. Free cash flow for the year is expected to be at least $900 million, which reflects a conversion rate of approximately 100%. We are continuing to optimize our working capital levels, balanced with our supply chain resilience objectives. Please reference additional modeling assumptions on Slide 15. With that, I will turn the call back to Bill.
Thank you, Nathan. Before we turn to your questions, let me conclude with the points I highlighted at the start of the call. We delivered a strong quarter and are moving forward with confidence in our increased outlook for the full year. Our integrated portfolio of solutions continues to differentiate Zebra, enabling customers to automate workflows and improve their operations. We remain focused on executing our strategy to drive profitable growth and deliver long-term value for our shareholders. I will now turn the call back to Mike.
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.
分析師問答
Our first question will come from Andrew Buscaglia of BNP Paribas.
Yes, I wanted to check on some of the comments you made on memory, clearly a concern amongst investors. You say you have a line of sight to mitigate these costs through the end of the year. Are you implying—have you secured capacity at this point because shortages are a concern? And what are your memory price assumptions baked into the rest of the year in terms of memory price movements?
Andrew, maybe I'll start and then hand to Nate for specifics. I'd say that memory continues to be a dynamic environment overall. Our teams have done a great job, quite honestly, working closely with our suppliers and leveraging the long-term relationships we have with them, and also working with our customers and partners to make sure that we get early visibility into their needs on the demand side. We're confident in our ability to mitigate the memory challenges and to achieve both our second quarter and full year guide. A lot goes into that: a lot of thinking and planning, and the teams have been working this memory issue since the second half of 2025. We feel we're in a good position to enter Q2 and where we are for the full year, but I'll let Nate add some more color.
Yes. So two pieces. One, from a supply perspective, as we mentioned, we're pursuing numerous mitigation strategies, we have great relationships with our direct suppliers, we are looking at new alternatives and doing a lot of work in terms of transitioning to different memory types where we expect capacity to increase as we get into 2027. We feel really confident in what we had for the first half. In Q1, we got the supply we needed to deliver on the outlook and have great visibility to what we need in Q2. Our second half guide assumes a similar memory supplies received in the first half. We've received no indication that our second half allocation would be any less than the first half. If anything, the teams are working options for increased supply to meet the unconstrained demand we have, which is near the high end of our guidance range. So again, a lot of actions right now in terms of how we increase the supply to give some upside to the guide that we provided this morning.
On costing, as we mentioned, the market pricing trajectory is in line with our prior guidance. There's variability across different memory types. But as a reminder, we purchased the vast majority of our memory direct, which has been favorable to the spot market rates that many people reference. We have built-in escalations through the balance of the year, and so far those are playing out, which has enabled us to maintain our margin guidance for the year relative to memory.
The next question comes from Tommy Moll of Stephens.
I wanted to start on margins. You were well ahead of your guidance for the first quarter on an EBITDA margin percentage basis. Then if we look at the second quarter that percentage steps down sequentially. So it's a two-part question. What were some of the favorable items you would call out that drove that outperformance in Q1 that may fall away into Q2? And then are there any headwinds sequentially as we move from Q1 to Q2?
Tommy, if you look at Q1, it starts with operational gross margin, which was at record levels at 50.4%, an increase of 80 basis points, driven by a combination of factors. One, the productivity initiatives the teams have been actively working on. We had favorable deal mix. We had real strength across our manufacturing vertical, which is favorable from a run-rate perspective, and strength in our print, scanning and machine vision portfolio. So the deal mix was a benefit in the quarter and drove a portion of the upside to our guide, and FX was a tailwind as we entered the quarter. Memory was, I'd say, a modest headwind in the quarter. From Q1 to Q2, the decline in EBITDA margin guidance is really driven by the step-up in memory costs in the second quarter. About 1.5 points of the roughly 2-point sequential decline is higher memory costs in the quarter, as well as normalized deal mix as we go into Q2. Q1 reflects part of our mitigation strategy on memory: half was the price increase we announced and the other half was underlying operational benefits from restructuring actions as well as other actions the team has taken. That bore out in Q1, and now it's being utilized to offset some of the headwind as we go into Q2 and the back half of the year.
The next question comes from Amit Malhotra of UBS.
This is Paratabh on for Amit Malhotra. I just wanted to catch up on the Elo acquisition. It has been a couple of quarters now. Can you provide any early feedback on your progress with the business? What is the growth rate and what kind of revenue or margin synergies are you seeing there?
Yes, we continue to be excited about the Elo acquisition as it really elevates our strategic position across our Connected Frontline segment and the breadth and depth of our portfolio. It delivers a set of complementary solutions to what we've got across mobile computing and our software assets inside the Connected Frontline pillar. Elo in the quarter grew in line with our expectations. We have a solid pipeline of opportunities. We'd expect 2026 growth to be in the mid-single digits, and that's playing out as expected. We're seeing progress in the synergies, both revenue and cost. There's a lot of work on the integration taking place today. There's a lot of focus across the teams globally on building a commercial pipeline of opportunities, working together as one team and positioning with our customers. We've entered some new geographies with the Elo portfolio where they didn't have a presence before, and we've had our first wins in India, which was one of those new geographies.
So we feel good about what's happening so far across the portfolio. We're still very excited about it. It gives us another opportunity to have a digital touch point, modernize point of sale within our retail customers, streamline self-service payment, touchscreen displays across areas like manufacturing and health care. Overall, it expands the breadth and depth of our portfolio, and so far, things are going well.
The next question comes from Ken Newman of KeyBanc Capital Markets.
Maybe if you could give us a little bit of color on how sales trended through the quarter, Bill. And help us quantify if you saw any indications of a pull forward. I think you mentioned that the price actions for memory costs took place in late March. Maybe help us quantify what that added to the full year sales growth and whether you saw customers trying to get ahead of that price action?
I'd say that Q1 overall was excellent execution by the teams and a really strong start to the year; we're pretty happy about double-digit sales growth and EPS growth in the quarter. The results demonstrate the durability of demand for our solutions across all the verticals we serve. So broad-based growth across both vertical markets, regions and products, and our ability to convert that demand into profitable growth for Zebra. Momentum has continued into Q2 across the business. We're progressing in navigating the memory challenges and have made a lot of progress, giving us more confidence in the full year guide based on what we've seen in Q1 and our visibility throughout the year, both on demand and constraints to that demand. The unconstrained demand pushes us to the higher end of our outlook range, and I think we're seeing that. We feel good about the momentum across the business. We saw no real pull forward of demand across our customers related to memory or price increases overall.
Our customers continue to execute on their plans to deploy technology across their environments to make their businesses more effective and efficient. The only thing we've really seen is close collaboration with suppliers and customers on the demand side to make sure we have early visibility to what they need so we can procure memory and build the right products for them. So we've been working closely with our customers to understand needs, but we have not seen any pull forward across the business.
The only thing I'd add is that the upside to our guidance to the high end in Q1 was driven by Asset Visibility and the strength in manufacturing, which did not have the price increase. So the real strength in the quarter that drove some gross margin favorability was around Asset Visibility, where we didn't have the price increase. We did incorporate the full year pricing benefit of one point into our guide, but we offset that by lower volume assumptions in the back half due to memory constraints. So net neutral from pricing benefit, but lower volume given constraints — that balances out for the second half of the year.
The next question comes from Brad Hewitt of Wolfe Research.
You raised the full year organic growth guidance by about one point to 5%. You mentioned the Q1 outperformance in manufacturing, Latin America and Asia. Could you elaborate on what drove the implicit organic growth guidance range for the rest of the year, whether that's by vertical or geography?
Demand trends overall remain strong. Customers continue to invest across each of the vertical markets. Growth was really broad-based across regions, vertical markets and both segments. Manufacturing has helped — it has been a lower growth profile historically, but we've seen strength including in print, scanning and double-digit growth in machine vision in the quarter. We feel good about machine vision. Demand for Elo continues to be strong. Our three largest trade shows of the year early in the year — retail, logistics and warehousing, and health care — were positive venues to demonstrate our innovation and depth across mobile computing, machine vision, RFID and our AI solutions. So broad-based demand across regions, segments and verticals gives us confidence in the full year outlook and being at the top end of our range, with memory constraints factored in.
The next question comes from Meta Marshall of Morgan Stanley.
First, in terms of the demand you're seeing within manufacturing, are there any subsectors within manufacturing where you're seeing particular strength? Or do you think some of this is a refresh of devices bought during COVID? Second, any commentary around increased freight and whether that impacts your assumptions for the rest of the year?
From a manufacturing perspective, we saw strength across subverticals including semiconductor and auto, and additional strength across our machine vision portfolio. Investments are focused on visibility across the supply chain, not just warehousing. There's increased drive to automate quality control, which is driving machine vision inside manufacturing. Outside manufacturing, retail e-commerce was strong in the quarter and continues to be a long-term growth driver. Health care also had solid growth. Regarding refresh cycles, retail customers continue to refresh and each customer has a different refresh cycle. Transportation and logistics involve larger refreshes we are working with customers on, with some of that opportunity beginning in 2027. We expect similar refresh activity in 2026 compared with 2025 in our guide, with larger transportation and logistics refreshes coming into play more prominently in 2027.
On freight rates and logistics, we've experienced 20% to 30% price increases across various lanes we use for our products. That has stabilized recently and we've incorporated those increases into our guidance. Transportation and freight costs are less than 2% of revenue, so the current level is manageable and we can use other levers to offset. The teams are actively working on different lanes and options given the environment.
Next question comes from Keith Housum of Northcoast Research.
Congratulations on the gross margin improvement. Regarding machine vision, you mentioned it was up double digits. Do we see an inflection point here? Where is the improvement coming from and what are expectations for the rest of the year?
Machine vision is integral to the future of our Asset Visibility and Automation segment, supporting logistics, transportation and manufacturing. We saw strong double-digit year-over-year growth in Q1 and believe this is an inflection point in the market. Recent logistics wins across the U.S. and Europe are encouraging, and we're delivering new solutions. We're seeing growing opportunities in manufacturing and e-commerce, and we expect double-digit growth for the full year. Our value proposition — ease of use, a single unified software platform across the portfolio — is resonating. We've expanded the portfolio with the Photoneo acquisition and continue to invest in software assets around AI and deep learning to simplify deployment. We're seeing momentum in both transportation & logistics and manufacturing and feel good about continued growth through 2026.
The next question comes from Jim Ricchiuti of Needham & Company.
Thanks for the color on machine vision. Can you discuss growth across the RFID portfolio in the same light?
RFID continues to build a strong pipeline across the supply chain — retail, transportation & logistics, manufacturing and government. We saw strong compares from a year ago in RFID, so we would expect a decline in Q1 on a compare basis but are not concerned. We expect growth in Q2 and for the full year. Momentum continues as RFID moves beyond apparel into fresh foods and broader merchandising in grocery. Transportation and parcel tracking are creating new markets for RFID, and there are opportunities in quick-serve restaurants and health care where tracking and tracing are important. Zebra has the broadest set of solutions: market-leading fixed and handheld RFID readers, printing, labels and newly released mobile computers with embedded RFID and wearables. We continue to expand RFID functionality across the portfolio and see this as a long-term growth opportunity.
A question about the large project business: any change in outlook for the second half due to macro factors or the competitive landscape related to the pending transaction with Brady and Aiva?
Jim, we haven't seen any changes related to the second half. The project funnel remains strong with a great pipeline of opportunities through the balance of the year and into 2027 as some large T&L refreshes start to come online. No change in the overall pipeline relative to the recent transaction announcement. Large deals are in line with total growth as we expected. Our focus is on expanding our lead in the marketplace with deeply embedded relationships with enterprise customers. We are focused on continuing to innovate and drive our solutions portfolio to take share.
The next question comes from Rob Mason of Baird.
Any change in the thought process around capital allocation for 2026? Originally you earmarked about half of free cash flow for share repurchase. Year-to-date you're already at that point. Any change to that thought process?
Rob, we've repurchased $500 million through April, already above the 50% outlook provided in the last update, taking advantage of what we believe is an attractive stock valuation. We'll continue to be active in the market. Our full year EPS guide assumes an additional $100 million of share repurchases; however, we have the flexibility to allocate all of our free cash flow for the year if we see attractive opportunities to repurchase at favorable prices.
Next question comes from Joe Giordano of TD Cowen.
One structural pushback on the Zebra story is the terminal value question: as automation and robotics increase and there are fewer people in buildings you serve, is there a structural smaller need for your products and services? How do you address that in a much longer-term view?
Joe, automation trends are a net positive for Zebra. Our business is about driving automation and productivity within customers' environments. We have a long runway of growth and deep relationships with large customers; even the most advanced customers continue to grow their installed base of Zebra solutions, including mobile computers that drive labor productivity. In many settings, automation augments workers rather than replaces them. Today, roughly 75% of warehouses around the world are in the early stages of an automation journey. Warehouse footprint and the number of frontline workers continue to grow, driven by e-commerce and manufacturing. Customers want flexible solutions for automating, which is our focus. Zebra collects data—reading barcodes, printing labels—that feeds automation and physical AI for analytics. Workers use mobile devices and software to execute, and those workers are augmented by technology and automation to make their jobs easier. We believe automation and physical AI are net positives for Zebra and support continued demand for our solutions and terminal value.
When you think about AI deployment, where do you see the sweet spot for Zebra: developing your own AI tools, partnering with software vendors to deploy on Zebra devices, or getting device sales only? How do you think about monetization and the right balance?
It's all of the above. AI adoption is a tailwind for us and automation. We uniquely understand frontline workflows and have a large installed base fundamental to driving AI for the front line because AI needs data from the physical world. Our Asset Visibility and Connected Frontline portfolios capture that data — printing, scanning, machine vision, OCR, parcel dimensioning — feeding AI models that tell customers how to be more effective. Work is executed by people using mobile devices and software such as task management, collaboration and our frontline AI agents. The entire portfolio benefits from AI. Our frontline AI suite includes enablers, blueprints and companions to meet customers wherever they are in the journey. Enablers allow customers to use our next-gen mobile devices with AI processing; Blueprints package enablers into specific use cases like parcel proof of delivery; Companions are where we build full applications for customers. We meet customers whether they want to build their own agents, use our packaged blueprints, or have us deliver the full solution. We partner with ISVs and large platform vendors to deliver the complete suite. Different customers want different levels of involvement — we accommodate all of them and monetize across enablers, software and services.
The next question comes from Guy Hardwick of Barclays.
Nathan, you expect to fully offset the 200 basis points memory impact. Do you expect any impact from a lag of recovery in any one quarter? One competitor called out memory as a gross margin headwind for Q3, and a major mobile device manufacturer mentioned a headwind in the June quarter. Can you comment?
There's a step-up in the cost profile from Q1 to Q2 as we work through inventory positioning and price escalations that have occurred. You see a step-up from Q1 to Q2 and a modest further increase into Q3 and Q4, but that is mitigated by higher price realization on our products, which helps offset the inflow. So Q2 is the inflection point in terms of sequential step change, and then a modest increase in Q3 and Q4, but overall mitigated as pricing flows through.
Quick follow-up: could changes in the tariff regime have had any impact on the business in Q1 and how might it impact your Q2 guidance?
With the elimination of certain IEEPA rates and the offset by Section 122 tariffs, we didn't have a meaningful impact on the P&L in Q1 given timing and inventory carryover. There will be a small benefit in Q2, but we don't expect material impact to our full year guidance. We expect any replacement rates in the second half, whether Section 301 or others, to replace the effect of the earlier rates. If things change materially, we will update.
The next question comes from Brian Drab of William Blair.
How might Section 232 impact you given you moved manufacturing to Mexico? Does that have any impact on bringing devices into the country from Mexico or elsewhere?
It depends on the final scope. We're monitoring and tracking with our trade compliance team and leveraging the largest semiconductor companies and our supply base. We continue to assess country of origin across our products. There's nothing specific to report relative to 232 at this time. As tariff measures evolve, we'll take necessary actions to mitigate P&L impact and communicate implications to customers.
Specifically, the dynamic of products being taxed on metal content at 50% versus being taxed on full value at 25% — is that impactful for barcode printers or other devices brought from Mexico?
Again, it depends on what's ultimately written regarding country of origin, scope, content and rate. There's not enough detail today to speculate on impact until we get further clarity.
The next question comes from Rob Jamieson of Vertical Research.
You've been active on the ecosystem side, including strategic investments like Apera AI or CoreVision for factory automation, and building an ISV network for AI and mobile compute. How central are these partnerships and investments to your AI strategy? Near-term, where are you seeing the most tangible benefits from AI-enhanced solutions and which verticals will see the most incremental AI revenue contribution?
Our venture investments are another lever to stay close to new innovation. These are relatively small investments that allow us to invest across technologies we see as interesting long term, particularly around machine vision and physical AI. Independent software vendor relationships are important; whether it's Qualcomm, Google, memory suppliers or software vendors large and small, everyone is part of our ecosystem. Channel partners serve many customers globally. Across AI we meet customers wherever they are in the journey. Our frontline AI suite has enablers, blueprints and companions. Enablers support next-generation devices with AI processing. Blueprints package those enablers into specific use cases like parcel proof of delivery — combining enablers and agents underneath customer applications. Companions are full applications we build. We meet customers who want to build their own AI, those who want packaged solutions, and those who want us to deliver full applications. The portfolio benefits across verticals; some large customers will develop more themselves but the majority want help. Our ecosystem and partners help deliver complete solutions.
Our last question comes from Piyush Avasthy of Citi.
Bill, you mentioned AI helping customers improve efficiency. Are you deploying AI internally as well? You mentioned productivity initiatives helped this quarter. Could you elaborate on what you're doing internally and how to think about margins longer term — does AI improve the 50 basis points of year-on-year margin expansion baked into the long-term outlook?
Yes, we are deploying AI internally. Areas include software development, with many teams using AI tools across development and research; sales and marketing leveraging AI globally; supply chain forecasting; customer service teams; and Marketing Cloud. We've encouraged employees to leverage AI tools and are seeing broad-based adoption. We believe AI drives efficiency and allows us to continue increasing margins over time. The biggest opportunity is what we provide customers, but AI also improves our internal productivity and profitability. So absolutely, AI is a productivity tool inside Zebra, and we expect it to contribute to margin expansion over time.
This concludes our question-and-answer session. I would like to turn the call back over to Bill Burns for any closing remarks.
I'd just like to wrap up by thanking our employees and partners for delivering solid Q1 results and the excellent progress we've seen so far on our 2026 priorities, and we're excited about the opportunities ahead. Thank you, everyone, for joining.
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.