Zebra Technologies Corp Q3 FY2021 Earnings Call

Good day, and welcome to the Third Quarter 2021 Zebra Technologies Earnings Conference Call. All participants will be in listen-only mode. 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 of Investor Relations. Please go ahead.

Good morning, and welcome to Zebra's Third Quarter 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 due to factors discussed in our SEC filing. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of the slide presentation in today's earnings press release. Throughout this presentation, unless otherwise indicated, our references to sales growth are year-over-year on a constant currency basis and exclude results from recently acquired businesses for the 12 months following each acquisition. This presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer, and Nathan Winters, our Chief Financial Officer. Anders will begin with our third quarter results then Nathan will provide additional detail on the financials and discuss our fourth quarter outlook. Anders will conclude with progress made on advancing our Enterprise Asset Intelligence vision. Following the prepared remarks, Joe Heel, our Chief Revenue Officer, will join us as we take your questions. Now let's turn to Slide 4 as I hand it over to Anders.

Thank you, Mike. Good morning, everyone, and thank you for joining us. Our team delivered exceptional third quarter results that exceeded our outlook, supported by robust, broad-based demand for our solutions. For the quarter we realized adjusted net sales growth of 27% or 23% on an organic basis. An adjusted EBITDA margin of 21.7%, a 140 basis point year-over-year improvement. Non-GAAP diluted earnings per share of $4.55, a 39% increase from the prior year and strong free cash flow. Our customers are prioritizing investment in our solutions to digitize and automate their workflows in an increasingly on-demand global economy. We realized double-digit sales growth across all four regions with particularly strong growth in EMEA. Favorable business mix and higher service and software margins enabled us to expand our gross profit margin despite escalating freight costs. Our teams have been diligently leveraging alternative modalities of transport and expediting shipments to mitigate the impact of continued industry-wide supply chain challenges. We also scaled operating expenses while continuing to invest in initiatives to drive sustainable, profitable growth. For that, I will now turn the call over to Nathan to review our Q3 financial results in more detail and discuss our Q4 outlook.

Thank you, Anders. Let's start with the P&L on slide 6. In Q3, adjusted net sales increased 26.6%, including the impact of currency and acquisitions and 23.2% on an organic basis, reflecting broad-based demand for our solutions from customers of all sizes. Our asset intelligence and tracking segment, including printing and supplies, grew 12.1%, while enterprise visibility and mobility segment sales increased 27.9% driven by exceptional growth in mobile computing. Note that we also realized double-digit growth across services and software. All four regions grew double digits. North America sales increased 14% with particular strength in mobile computing, supplies, and services. EMEA sales increased 39% with strong growth across all major solutions offerings, particularly mobile computing. APAC sales grew 17% with strength across most geographies, including China. And in Latin America, sales increased 41%, continuing its strong recovery with double-digit growth in all major offerings. Adjusted gross margin expanded 130 basis points to 45.1%, primarily driven by favorable business mix and higher service and software margins. These benefits were partially offset by significant premium freight charges, which we will discuss further in a moment. Adjusted operating expenses as a percentage of sales improved 30 basis points as we continue to prioritize high return investments in the business. Third quarter adjusted EBITDA margin was 21.7%, a 140 basis point increase from the prior year period reflecting higher gross margin and operating expense leverage. We drove non-GAAP earnings per diluted share of $4.55, $1.28 or 39% year-over-year increase was benefited from lower interest expense and a favorable tax rate. Turning now to the balance sheet and cash flow highlights on slide 7. We generated $798 million of free cash flow through the first nine months of 2021. This was $316 million higher than the prior year, primarily due to increased profitable growth. Our balance sheet remains strong. From a debt leverage perspective, we ended Q3 at a modest 0.5 times net debt to adjusted EBITDA leverage ratio, which provides us ample flexibility. In the first nine months of 2021, we invested more than $300 million to acquire Fetch Robotics and Adaptive Vision to advance our intelligent automation solutions in manufacturing and the warehouse. We made $24 million of venture investments in four portfolio companies. In addition, we made $38 million of capital expenditures and $25 million of share repurchases. On slide 8, we show the multiyear impact of transitory costs primarily related to expedited freight due to supply chain bottlenecks caused by the pandemic, as well as tariffs on China imports. Our supply chain team continues to take extraordinary measures to satisfy customer demand in an exceptionally challenging environment. Global freight costs are elevated for all modalities of delivery across our supply chain. This includes higher shipping cost per kilo, a significant shift from ocean to air freight, as well as increased costs to expedite component parts to our Tier 1 manufacturers to meet customer commitments. In Q3, compared to pre-pandemic rates, we incurred incremental premium freight costs of $44 million, which were $36 million higher than the prior year. For Q4, we now expect approximately $55 million of premium freight costs based on the higher spot rates we are seeing in the market, which translates to a 4 percentage point negative gross margin impact. We expect premium freight costs to abate as component supply and freight capacity improves. Let's now turn to our outlook. Our robust sales pipeline and strong order backlog is supported by broad-based demand for our solutions as enterprises look to automate their operations to satisfy increasing consumer expectations. Despite extended lead times and uneven inventory availability, we expect fourth quarter adjusted net sales to increase between 8% and 12% year-over-year. This outlook assumes a 2 percentage point additive impact from acquisitions and foreign currency changes. We anticipate Q4 adjusted EBITDA margin to be slightly higher than 21%, which assumes gross margin contraction from the prior year due to significantly higher premium freight expenses, which I discussed earlier. We're also experiencing product component inflation, which we expect to largely offset with price increases that became effective in September. Non-GAAP diluted EPS is expected to be in the range of $4.20 to $4.50. We have increased our free cash flow outlook to be at least $950 million for the year due to higher-than-expected profitability. Please reference additional modeling assumptions shown on slide 9. With that, I will turn the call back to Anders to discuss how we are advancing our Enterprise Asset Intelligence Vision in new and existing markets, with spotlights on our acquisition of Antuit and our healthcare vertical.

Thank you, Nathan. I am encouraged by the strengthening demand across our business and the bold actions our teams are taking to navigate supply chain challenges. Slide 11 illustrates how we digitize and automate the front line of business by leveraging our industry-leading portfolio of products, solutions, software, and services. By transforming workflows, Zebra's customers can address complex operational challenges to achieve higher levels of performance. By closely collaborating with our partners and customers, we help businesses across a variety of end-markets to implement solutions that maximize their return on investment. Human labor is a scarce resource. Our innovative solutions empower their workforce to do their jobs more effectively by navigating constant change in near real-time, utilizing insights driven by advanced software capabilities, such as machine vision, prescriptive analytics, and artificial intelligence. In October, we acquired Antuit for approximately $145 million to further advance our Enterprise Asset Intelligence Vision. This high-margin software-as-a-service business generated sales of approximately $27 million in 2020, nearly doubling over a three year period. Slide 12 illustrates how the AI powered demand forecasting solution ensures that its retail and consumer product customers have the right inventory, at the right time, at the optimal price, whether it's fulfilled through online ordering, or in-store shopping. Antuit's cutting-edge offering complements our suite, the workflow software solutions, including Reflexis, Zebra prescriptive analytics, workforce connect, and smart count, which work together to increase the performance of labor and inventory across the integrated supply chain. Our growing software suite will help our customers break down silos between planning and execution, giving them a competitive advantage that can increase revenue and margins as they navigate the increased demands of omni-channel fulfillment. Now turning to slide 13. Businesses partner with Zebra to optimize their input and workflows. I would like to highlight a few recent key wins across our end markets that demonstrate how Zebra's solutions are improving productivity and service levels. In retail, Zebra is enabling improved execution of omni-channel fulfillment as more consumers shop online. We recently secured our largest win-to-date in India, providing TC21 mobile computers and printers to help a local retailer compete more effectively against its larger omni-channel and e-commerce global competitors. We're also enabling a Japanese supermarket chain to provide an improved customer experience with our EC55 personal shopping mobile computing solution. Over the next several quarters, a leading home improvement retailer will be deploying 90,000 TC52 mobile computers to a broader number of associates in their stores. Key use cases include item locating, best-in-class long-range imaging, mobile point of sale, and e-commerce functionality. Competitive differentiators for this win included our seamless network connectivity, best-in-class noise cancellation, and enterprise leading durability. Our mobile computers will also have full desktop functionality when inserted into workstation cradles. This retailer is also deploying our Workforce Connect software as a service solution, which enables associate-to-associate instant collaboration as well as associate-to-group and store-to-store communication. A leading North American transportation and logistics company is deploying 9,000 TC-77 mobile computers to their truck drivers for loading and delivery use cases. This solution will increase productivity, improve inventory accuracy, log driving times, and track regulatory compliance. Turning to Slide 14, we highlight how healthcare providers are using Zebra solutions to digitize and automate the patient journey and address labor challenges. Our recently published Vision Study highlights that 95% of decision-makers expect to increase spending in healthcare IT and clinical mobility in the next year. We have some exciting recent strategic wins that demonstrate our value proposition. We recently secured a take-away win of a leading U.S. healthcare provider with more than 150 hospitals and approximately 2,000 sites of care. This customer selected Zebra to provide a multi-year rollout of 85,000 scanners for a wide range of use cases, including bedside nursing, surgery, pharmacy, and inventory management. They also recognized our unique software tools that enable real-time event tracking to prioritize patient care. A large Eastern European public hospital system recently placed an order to provide 19,000 TC25 mobile computers to nurses across 100 hospitals. Hospitals are facing labor shortages made worse by the pandemic, which puts patient safety at risk. Zebra's solutions, including printers and wristbands, reduce the administrative burden on the nursing staff and allows for more efficient patient care. Our value proposition to this customer also includes real-time tracking of costs of supplies, equipment, and medicine. Additionally, Zebra is growing our long-standing relationship with GE Healthcare whose solution encompasses utilizing Zebra's Bluetooth beacon technology for medical equipment asset management. This solution improves asset utilization and prevents unnecessary equipment replacement purchases. Caregivers also benefit by reduced time searching for medical equipment, which can increase the time dedicated to patient care. In closing, the pandemic has accelerated trends that have been driving Zebra's business, including omni-channel shopping adoption, the desire for track and trace across the supply chain, and the need for a more digital healthcare experience. Our core markets are vibrant and our prospects to scale new expansion markets are bright. We are steadily navigating through significant transitory, industry-wide supply chain challenges. That said, we continue to be as excited as ever about our long-term profitable growth prospects. Now I'll hand the call back over to Mike.

Thanks, Anders. We'll now open the call to 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.

We will now begin the question and answer. At this time, we will pause momentarily to sample our roster. The first question today comes from Tommy Moll with Stephens, please go ahead.

Morning, and thanks for taking my questions.

Good morning.

Anders, I wanted to start on your Antuit acquisition, and wondered if you could highlight a couple of ways in which it might be synergistic with your portfolio. I really had two buckets in mind: first, just in terms of scale, you've got more robust go-to-market capabilities, more robust R&D dollars you can put against it. So what would you highlight for us there? But also just in terms of the portfolio and fit, so if I'm a customer, what augmented capabilities will you be able to deliver with the software platform given you've got other software adjacencies and hardware opportunities to deliver a solution versus what the portfolio or rather what Antuit would have done as a standalone business?

Yeah. I'll try to go through and give you some insights to each of those points. But first, this helps us to augment our solutions around improving retail store execution for our customers, as well as for consumer products companies. It is very synergistic with our Enterprise Asset Intelligence Vision. We talked about our Sense-Analyze-Act framework here. This is very much around the Analyze and Act part of this, enabling our customers to sense what's happening in the real world, analyze this information, and act on it in real-time. The solution that Antuit offers is a demand sensing solution, but they take in lots of different data feeds, anything from in-store sales to weather, social media. They use that to determine basically what demand trends will be. They can be very quick and do this much better than traditional models. For example, when COVID happened, Antuit's algorithms were able to better and quicker adjust to this new environment. This is very synergistic with our other offerings, particularly on the software side, where Antuit's insights will generate actions for our Reflexis task management solution. These actions can include replenishing something or moving inventory from the back of the store to the front or other parts of the supply chain. It works synergistically with our broader software solutions, as well as with our devices. Our mobile computers will generate insights that Antuit can analyze and put into its AI algorithms to derive better insights. With this broader set of solutions, we position Zebra to be more of a strategic solutions partner to our customers, and we have access to more executive-level people at our customers than Antuit would have individually. Therefore, we think that this fits very well with our broader strategy.

Thank you.

One other addition, this is Joe Heel. If you think about the customer set, you mentioned go-to-market that Antuit targets. They primarily focus on merchandising executives in retail and packaged goods. Of course, that retail is a very strong segment for us, so that should give us the ability to leverage our scale to the benefit of Antuit's offering. Conversely, we have a position in packaged goods, but the Antuit will give us a stronger offering to further expand our offerings in general, not just Antuit but in the way Anders described into packaged goods.

Thank you both. That's very helpful. I wanted to pivot for my follow-up to the margin. And again, we appreciate the transparency you've offered around the premium freight headwinds and the trajectory there. So we're looking at $55 million for Q4. My question really is the following: if you think about how the fourth quarter is progressing, both in terms of the realization of some of the pricing actions you've taken, and also you've got on the cost side, it's dynamic and presumably changing on a day-to-day or week-to-week basis. If you think about where you'll likely end the quarter once all that rolls through versus the full quarter outlook you gave, I think it was above 21%, does it feel like the exit rate is probably a little better than that average, or how do you see things shaping up here in real-time?

Hi, Tommy. To start with the fourth quarter, we'll be slightly above 21%. That represents a decline from last year of just over 2 points, with an additional 4 points attributed to premium freight, which is balanced out by a favorable business mix, improved service margin, and operating product margin. We've raised prices to counteract the component pricing, and we are continuing to monitor and assess this as the temporary impacts unfold. From a logistics and freight standpoint, we anticipate moderation through the first half of 2022. However, it's something we are managing on a daily and weekly basis. We'll see how the quarters unfold in terms of when we start to experience a significant benefit from our current position.

And Nathan, just to make sure I'm tracking you here. It sounds like the pricing actions are really more targeting the product aspect of input inflation rather than the freight. Am I hearing you correct?

That's correct. We have not raised prices to offset the transitory premium freight expenses, but that's something we'll continue to assess as this plays out.

Great. Appreciate the insight and I'll turn it back.

Our next question comes from Andrew Buscaglia with Berenberg, please go ahead.

Guys, just on that question around margins. How were you able to manage supply constraint issues in securing parts for your products? It seems broadly across most industrial customers and companies in general that the constraints will continue into next year. So I guess what are you doing on that side of things, as you talked about the freight cost, but just wondering in terms of securitization of parts.

Yeah. I'll start at a higher level here. If you look at the broader backdrop, demand has ramped very fast over the past year. We have now prioritized meeting our customer needs and commitments. While we are not always able to meet our traditional lead times due to these industry-wide supply chain challenges, we have been working with our partners and customers to ensure that we can deliver very strong double-digit year-over-year growth. Based on feedback from our customers and partners, we've been managing this better than our competition. Specifically, for how to secure parts, we're focusing on the semiconductor industry shortages that have impacted the availability and pricing of some parts more than others, or some of our devices more than others. This is a highly dynamic environment; if we sort out and get good news on some parts, the next day we could get some more challenging news on other parts. Our teams have done an exceptional job of working all angles to mitigate these issues. We've built more resiliency in our supply chain by putting in new assembly plants across Southeast Asia, so we're less dependent on any particular location. In Q3, for instance, we had to move volume between plants based on COVID outbreaks. We also worked hard to engage with our semiconductor suppliers to ensure that we get our fair share, securing appropriate allocations of parts. We have a large part of our engineering team working on redesigning our devices to qualify new alternative components that are not as exposed to or limited with supply. We're doing all of these things to ensure that we can meet our customer needs as well as possible, but as I said, it's a dynamic environment, making it difficult to predict exactly how this will play out. Based on our conversations with suppliers, we expect gradual improvement by mid-2022.

That's helpful. You clearly excel at managing these constraints, and you are directly facing that issue. It seems you have the right capabilities to continue this progress. Regarding demand, I expected your AIT sales to be slightly higher. To what extent is this related to the supply constraint issue, or are you noticing any changes in demand?

First, I'll say we continue to drive innovation across the entire portfolio of products and solutions, and we're helping our customers digitize and automate their operations. The core business is very vibrant, and we're very excited about the adjacent expansion opportunities that we have. Specifically for printing, we had very solid growth across the regions in printing. Printing was up across most of its portfolio. We had particular strength in manufacturing, which tends to deploy mostly tabletop printers. We also saw strong runs of smaller business through our channel. It's fair to say printing was disproportionately impacted by supply chain challenges, which included both component issues, but also our main assembly plant in Southeast Asia had to almost shutdown based on COVID, resulting in a need to shift a lot of the volume from Vietnam to China. So that took some capacity out of the quarter. Still, it was a very good quarter for printing. We could have done probably a little bit better, but we believe that we continue to gain market share. Year-to-date, we gained a lot of share in printing.

Thanks, Anders.

Our next question comes from Jim Ricchiuti with Needham and Co, please go ahead.

Good morning. I'm wondering if you could characterize your large projects business. Anders, you highlighted a few nice wins. I'm also wondering to what extent that business is being impacted by the component constraints, the logistics challenges, whether customers are themselves being impacted by bottlenecks elsewhere in their supply chain that are affecting the timelines for when these projects are going to go forward.

To start with, our large customers and larger projects are continuing to do well. We saw growth year-over-year. However, the mix between our run-rate business and large customers has moderated, reverting back to historical normal rates versus what we saw a year ago. I don't believe we can say we've seen any impact on our customers' rollout schedules based on supply chain issues. We have worked very hard with our large customers as well as our channel partners to understand what is true demand, what our customers truly need to run their business versus what they might want to have, or think of as risk buys, to satisfy all our customers but particularly our larger customers. The demand from them continues to be strong and in line with what we've seen previously. Joe, do you have any additional color here?

Yes, I would echo what you said. We have not seen any delay in large businesses due to bottlenecks on our customers' parts elsewhere. We have had some extraordinary wins even in this past quarter. As you know, the large projects can be somewhat lumpy, but we had double-digit growth nearly in the large projects business as well, including extremely nice wins in multiple geographies. We are very pleased with it.

Got it. A follow-up: I appreciate the color on your expectations, looking out to the first half of next year concerning components and some of the unusual freight costs you're incurring. I'm wondering how we should be thinking about your operating expense levels over the next several quarters. Only because things are beginning to normalize, presumably trade shows starting to occur again, and I'm just wondering if we need to be mindful of some temporary cost savings you might have benefited from this year being layered back in over the next several quarters.

Hi, Jim. It's fair to say that as we go into next year, we do expect some of the discretionary spend, particularly on travel and trade shows, to increase. But we will find offsets in efficiencies to mitigate that impact as we move through next year.

Got it. Thank you. I will jump back in the queue.

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

Great. Thanks. I wanted to maybe first ask a question just on seasonality. I know a lot of your retail customers still tend to be active in Q4, but we're also dealing with a labor shortage. So just any kind of perceptions of what you're seeing as far as seasonality in Q4? And then maybe a second question. Clearly, you're highlighting success within healthcare. This has been a continued area of success for you guys. Are you able to use your traditional go-to-market, or are there partnerships that you think you could explore that would further accelerate that opportunity?

Thank you. Meta, I'll start and then I'll ask Joe Heel to provide additional color here. First on seasonality, I think this year has been similar to what we would normally see, but there is a slight increase this quarter-over-quarter in Q3 and into Q4. So not a huge difference from that perspective. Obviously, demand has been strong and very broad-based, which helps on the overall demand profile, but I don't think the seasonality has meaningfully changed. Joe, can you comment on that?

Yes, I'll add something. One additional thing we've seen is that retailers have been ordering further in advance. They're seeing the shortages that exist in the supply chain, and are working with us to anticipate those, which allows us to plan better. So, our reflection of their seasonality is pulled forward in that regard. In terms of healthcare and the go-to-market aspects, we have a dedicated healthcare sales team within our sales organization, and we have largely dedicated healthcare partners. We have a large number of specialized resellers and system integrators interested in working with us to maximize our opportunity in this area.

In healthcare, we have built out a dedicated sales approach, meeting the specialized needs of healthcare customers. You mentioned our Vision Study, which highlights that 95% of decision-makers expect to increase spending in healthcare IT and clinical mobility next year. We're also forming partnerships with ISVs and OEMs, which have proven crucial in expanding our offerings in this sector. We aim for this segment to be our fastest-growing vertical over the longer term.

Great, thank you.

Our next question comes from Paul Chung with JPMorgan. Please go ahead.

Hi, thanks for taking my question. So just a follow-up on margins. If we think about EBITDA margins, excluding freight costs, maybe you're in that mid-20s percent range. You mentioned some temporary costs may come back, but is this the more normalized margin profile we should expect in the second half of '22 when some of these costs fade a bit? And as your software product mix continues to accelerate, can we see further expansion there? I have a follow-up.

Yeah, Paul. I think if you look back at our track record of driving growth, we will exit the year around 23%, and that's a 150 basis points improvement from where we exited 2019, despite the transitory cost increase. We do believe EBITDA margin can go higher. We have many levers to achieve that. As we scale into new markets that have traditionally richer gross margins, such as software and the fixed industrial machine vision markets, we expect margins to improve, especially as the transitory freight abates.

Thanks. Your free cash flow in the quarter essentially paid for Fetch, so your flexibility continues. Inorganic expansion is looking good. Debt level is in a good place. Where are you looking to expand the portfolio, and what leverage levels are you comfortable with? Reflexis, Antuit, those are driving higher-margin software mix. Do you continue to expect priority on software moving forward? And you mentioned Adaptive Vision as well. If you could provide an update on how that business is progressing.

I'll start on the M&A side. M&A continues to be a priority for us. We're excited about the outlook for the business and see M&A as a vector for growth. We're pleased with the recent acquisitions of Fetch, Antuit, and Adaptive Vision. We look at M&A as a way to accelerate our strategy and advance our Enterprise Asset Intelligence Vision by targeting bolt-on and high-growth acquisitions that align with this vision. We see opportunities in digitizing and automating supply chains and workflows more broadly. We have a strong balance sheet that can support our M&A opportunities. As for Adaptive Vision, we acquired them back in Q2, and they provide software solutions that assist in integrating machine vision or fixed industrial scanning solutions within workflows, thus making implementation easier compared to our competitors.

Thank you.

Our next question comes from Brian Drab with William Blair. Please go ahead.

Hey, good morning. With such great momentum in a number of end markets, I'm wondering, Anders, are there any end markets where the impact of COVID-related sales and sales stimulated by the pandemic has been delayed? Are there any end markets where it's not going to be a headwind for a tough comp in 2022, like the rental car market or healthcare market that took a while to get going? Do you see any end markets that have yet to drive growth as it relates to the pandemic? Where will we see incremental growth in '22?

The pandemic has accelerated a number of secular trends supporting our business and helping to drive enterprises to implement our type of solutions. How to digitize and automate our customers' businesses is a high priority across all markets and geographies. I can't think of any market that would be hampered by this environment or really lagging from this. It's a pretty broad-based picture. Early on during COVID, the healthcare sector was hit hard, with traditional acute care largely shut down. However, that has rebounded, and we're now surpassing 2019 levels.

I guess, Anders, can I interject and just say I don't think I asked the question as clearly as I wanted to. But do you see any end markets where you look at the opportunities and say, okay, that's starting to kick in, whereas it hasn't to-date where you're excited about incremental growth going forward?

There are areas where we expect to see more growth, for instance, hospitality, which was largely shut down during much of COVID, is coming back. We see a number of opportunities in hospitality, which is recovering nicely. Manufacturing is another area with a longer curve where we expect continued benefits. Additionally, Japan has been on the sidelines during the pandemic. However, many of our Japanese customers have not yet migrated to Android, and now they are seeing recovery, which is leading to opportunities for us there as well.

What percentage of revenue is in Japan roughly today?

It's a small part of our revenue stream today, but it's a nice upside opportunity for us.

And then just the last question on software. Are you able to give us an update since there have been so many acquisitions and growth in software? You're mentioning that the margins are being aided by the higher margins in software. Where are you in terms of the size of that software business? I know you don't shy away from saying the percentage of total revenue historically from software, but just curious if you could give any comment on that, or when do you envision software being 5% or 10% of sales down the road? Any quantification or clarity on that would be helpful.

If you look at our software, the SaaS portfolio is still in the mid-single digits as a percent of the company. We haven't set a target or aspiration in terms of what's the right mix. It's a priority from an M&A perspective, and we expect it to grow organically faster than the core business over time. However, we don't have a set date for when we aim to reach particular percentages of sales.

Thanks for taking my question.

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

Good morning, guys, and congratulations on a good quarter. I want to revisit the supply chain challenges once again. Is there a feeling that the supply chain challenges are peaking now, and perhaps you're on a slow way to recovery? Or are we not quite sure if it peaked yet and still need to work through it?

There are different parts to the supply chain challenges. As we discussed, we've touched on semiconductor issues and logistics challenges with ocean freight and airfreight. On the freight side, I would expect a quicker recovery leading to moderation as we enter the first half of 2022. We're probably at peak rates and capacity constraints. However, it will be a gradual improvement rather than a binary shift from current conditions back to pre-COVID levels. On the component side, we wouldn't expect it to worsen, and gradual improvements are expected by mid-2022.

Great. It does. And then on the component side, is it primarily with chips, or does it seem like the issues are popping up and playing like whack-a-mole, where you resolve one issue, but another one arises?

I think it's largely on the semiconductor side, but it does move around. We secure one part while the next day, another part could be impacted. The frequency of parts on allocation or experiencing longer lead times is considerably higher than in the past. We ensure to work very closely with our semiconductor suppliers to communicate our true requirements and have signed long-term supply agreements and price agreements to secure appropriate consideration during allocations.

Great. I appreciate it. Moving over to the software, you've got flexibility now for at least a part for over a year. In terms of your sales approach, is it still primarily direct as a primary sales force, or do you have a different software sales force? How does Antuit go-to-market, and how do you envision these things together going forward?

I'll start, and then Joe Heel can provide additional color. For Reflexis and our broader software portfolio, we have set up dedicated software sales teams within our broader go-to-market organization. Our traditional account management teams qualify accounts while bringing in our software experts to manage the technical aspects of the sales process. However, we do have a dedicated part of the organization focused on software. We're primarily selling directly today, but we’re also working on broadening our partner portfolio to include resellers and system integrators. Regarding Antuit, we are initially keeping their sales team separate to maintain focus on their business while leveraging the account teams for access to accounts and expertise. Joe?

I think you summarized that well. I have nothing to add.

It's good.

Great. Thanks, guys. Appreciate it.

Our next question comes from Damian Karas with UBS. Please go ahead.

Hey. Good morning, guys.

Morning.

Morning.

I think you've covered a lot of ground. You did highlight particular strength in mobile computing, I think most notably in Europe. Maybe you could just elaborate on what you're seeing that's driving that. To some extent, is this a matter of Europe just catching up, or are there any particular end markets, customers, or outside projects that are driving that mobile computing strength in Europe?

I'll start again, and then Joe can also add some extra colors on Europe. Overall, we're pleased with Q3 as we've seen great demand. We’ve been able to exceed the high end of our guidance range. Our customers are aggressively pursuing digital enterprise transformation strategies, which is driving our revenue growth this year. We talked about supply chain issues being a moderator on this, but we've still been able to deliver double-digit growth across all regions in each product segment. We continue to see strong growth from smaller customers as well as large strategic accounts. I clearly expect us to continue taking share in the industry and we entered Q4 with a strong backlog and healthy pipeline, providing good visibility into 2022. Specifically for Europe, we saw fantastic performance with growth across nearly all sub-regions of EMEA, and strength in nearly all verticals, particularly transportation logistics, driven by solid large postal service wins, and retail was also a strong vertical for us. Product-wise, mobile computing and services performed particularly well, while the printing business was more impacted by supply chains. Joe, any further comments?

Yes. I would say that the strength in Europe was perhaps a little bit of an artifact of us trying to get the optimal mix of supply that's available to the customers that we have. If you look over more than one quarter, you will see that the strength of North America and Europe is pretty much exactly on par. So we're seeing equal strength in both over two or three quarters here. This was more of a one-quarter artifact, I'd say.

Understood, that's really helpful. And I guess we've all seen the headlines since last quarter regarding Honeywell's actions against IBRA investors. I do have some questions on this. Maybe you could just give us an update on the ITC case and that pending litigation. How should we expect these matters to play out?

First, we have a policy of not commenting on ongoing litigation, so it's hard for me to provide as much color as I'd like. However, I can say that we plan to vigorously defend our positions here. We have the broadest and deepest intellectual property portfolio in our industry, and we will remain laser-focused on extending our lead and taking market share from our competition.

Okay, great. Appreciate it. Thanks a lot, guys.

And to wrap up, I would just like to thank our employees and partners for their extraordinary efforts to drive or to serve unprecedented customer demand in a supply-constrained environment. While we focus on maximizing profit growth in the business, our top priority continues to be the health and safety of our employees, partners, and customers as they recover from the pandemic. We would also like to wish a warm welcome to the Antuit team. Thank you and have a great day, everyone.

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