Good day, and welcome to the Second Quarter 2023 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, Investor Relations. Please go ahead.

Good morning, and welcome to Zebra's second 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 and we refer you to the factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of the slide presentation and 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. Additionally, note that our Asset Intelligence and Tracking segment now includes our RFID solutions and we have recast quarterly segment results since 2021 in a schedule included in the Appendix of our earnings press release. This presentation will include prepared remarks from Bill Burns, our Chief Executive Officer; and Nathan Winters, our Chief Financial Officer. Bill will begin with our second quarter results. Then Nathan will provide additional detail on the financials and discuss our revised 2023 outlook. Bill 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 Bill.

Thank you, Mike. Good morning and thank you for joining us. Our second quarter results were impacted by weakening demand and cautious customer spending behavior across our end markets. While these results are certainly disappointing to us, we'll spend some time today discussing the drivers that are having the greatest impact, as well as the actions we are taking to control what we can in a difficult demand environment, including our expanded cost reduction initiatives. For the quarter, we realized sales of $1.2 billion, a 16% decline from the prior year and an adjusted EBITDA margin of 21.2%, a 70 basis point decrease, and a non-GAAP diluted earnings per share of $3.29, a 29% decrease from the prior year. Let me now put these results in context. On our last quarter call, we discussed the broader softening of industry demand as customers tightened their CapEx budgets and IT device spending slowed. During the second quarter, those trends accelerated as we saw more cautious spending behavior by our customers of all sizes across our vertical end markets and regions. While all end markets declined, demand was weakest in retail, e-commerce, and transportation logistics, as many customers are absorbing capacity they built out during the pandemic. These dynamics have been exacerbated by our distributors' focus on reducing their inventory levels, which accounted for approximately 20% of our Q2 sales decline. Our distribution channel has been aggressively driving down inventory, as end-user demand has slowed, product lead times have recovered, and the cost of holding working capital has increased. Although global macro indicators have been resilient, the goods economy has underperformed the services economy, and certain key indicators most relevant to our industry have become significantly weaker, including IT device spending. This particular metric has been most correlated with mobile computing, where sales declines have accelerated year-to-date following more than two years of very strong demand. Growth across RFID, data capture, supplies, services, and software were bright spots in the quarter. From a profitability perspective, improved gross margin and cost controls enable us to achieve our EBITDA margin and EPS outlook for the second quarter. In our current market environment, swift action is needed and we are taking a number of steps to position us to deliver profitable growth and improve free cash flow. Slide 5 summarizes key industry challenges that have intensified since our prior update, and our actions to address and mitigate the impacts. These actions include reducing spending across the organization, including additional restructuring actions to drive an incremental $65 million of net annualized operating savings as we exit 2023, increasing our focus on accelerating growth in underpenetrated markets, and continuing to work closely with our customers as we continue to digitize and automate their environments. Our revised full-year outlook incorporates the slowdown and deceleration across our end markets, including a significant reduction in near-term demand in the mobile computing market, destocking by our distributors, as well as a partial year benefit of our expanded restructuring actions. Given our limited visibility in this environment, we are cautious in our assumptions and not expecting a recovery in 2023. We expect the reset of our cost structure and shift of our go-to-market resources to drive sales growth and improved profitability as our end markets recover. We'll continue to take an agile approach to managing through this uncertain near-term environment. I will now turn the call over to Nathan to review our Q2 financial results and provide additional details on our revised 2023 outlook.

Thank you, Bill. Let's start with the P&L on Slide 7. In Q2, net sales decreased 17.3%, including the impact of currency and acquisitions and were 16% lower on an organic basis. Our Asset Intelligence and Tracking segment was flat; strength in RFID and supplies was offset by a decline in printing as we lapped particularly strong prior year results. The Enterprise Visibility & Mobility segment sales declined 23.6%, driven by a sharp decline in mobile computing, partially offset by growth in data capture solutions. Additionally, we drove organic growth across service and software with strong service attach rates. Sales declined across our regions driven by broad-based double-digit declines in mobile computing. In North America, sales decreased 11%. EMEA sales declined 24% with pronounced weakness in Eastern Europe. Asia-Pacific sales decreased 17%, driven by China and India, with growth in Japan and Australia. And Latin America sales decreased 6%, partially offset by growth in Brazil and Mexico. Adjusted gross margin increased 200 basis points to 48%, primarily due to lower premium supply chain costs in favorable business mix and pricing, partially offset by expense de-leveraging and unfavorable FX. We are pleased to see gross margins recovering from the inflationary headwinds we experienced over the past couple of years. Adjusted operating expenses deleveraged 310 basis points as a percent of sales, partially offset by lower incentive compensation and cost controls. Note that as we began to see demand soften, we announced incremental restructuring plans that are expected to drive $65 million of net annualized operating expense savings as they're implemented. Including previous actions taken over the past year, our total net annual cost savings is $85 million. The second quarter adjusted EBITDA margin was 21.2%, a 70 basis point decrease driven by operating expense de-leveraging partially offset by improved gross margin. Non-GAAP diluted earnings per share was $3.29, a 29% year-over-year decrease. Increased interest expense contributed to the decline, partially offset by fewer shares outstanding. Turning now to the balance sheet and cash flow on Slide 8. For the first half of 2023, negative free cash flow of $144 million was unfavorable to the prior year period, primarily due to a greater use of working capital due to higher cash taxes and payments for inventory, and $45 million of previously announced quarterly settlement payments, which are scheduled to conclude in Q1 of 2024, partially offset by lower incentive compensation payments. In the first half of 2023, we also made $52 million of share repurchases and invested $1 million in our venture portfolio. We ended the quarter at a 1.8x net debt to adjusted EBITDA leverage ratio, which is below the top end of our target range of 2.5x, and had approximately $1.1 billion of capacity on our revolving credit facility. On Slide 9, we highlight the impact of premium supply chain costs on our gross margin over the past 2.5 years. The actions we have taken to redesign products and increase price, along with improving freight rates and capacity, have enabled us to avoid component purchases on the spot market and reduce the freight cost impact. In Q2, we incurred premium supply chain costs of an incremental $5 million compared to the pre-pandemic baseline and $51 million lower than the prior year quarter. As we enter the third quarter, we believe these costs will have been fully mitigated, which is the key lever to margin recovery. Let's now turn to our outlook. As we enter the third quarter, we are seeing sharp broad-based declines across most of our product offerings, which continues to be amplified by distributors recalibrating their inventory to lower demand trends. Our Q3 sales are expected to decline between 30% and 35% compared to the prior year. This outlook assumes double-digit declines across each of our core product categories, with distributor destocking accounting for approximately one-third of the decline. We anticipate Q3 adjusted EBITDA margin to be between 10% and 12%, driven by expense de-leveraging from lower sales volume, partially offset by higher gross margin from cycling $30 million of premium supply chain costs in the prior year period. Non-GAAP diluted EPS is expected to be in the range of $0.60 to $1. Given our Q2 results in the continued challenging demand environment, we are significantly reducing our full-year outlook, expecting a sales decline between 20% and 23%. This assumes the Q3 sales trajectory continues through the remainder of the year. We're seeing broad-based declines across our end markets as we enter the second half, with significant uncertainty in this environment. We expect full-year adjusted EBITDA margin of approximately 18%. We expect increased de-leveraging on significantly reduced sales volume expectations, partially offset by early benefits from cost reduction actions, as most of the actions will be implemented by early Q4. We plan to continue to align our cost structure with the long-term trajectory of our business. We now expect free cash flow to be positive in the second half, but negative for the year given lower sales and earnings expectations. Our cash flow will be impacted by new restructuring charges, increased cash taxes due to changes in R&D expected regulation, and $180 million of previously announced settlement payments. We continue to be focused on rightsizing inventory on our balance sheet, as component lead times have normalized. However, we now expect minimal inventory reduction in 2023 due to our lowered sales outlook. We are focused on achieving 100% cash conversion over a cycle, which is one of the metrics in our long-term incentive compensation plan. Please reference additional modeling assumptions shown on Slide 10. Note that we have improved our expected 2023 non-GAAP tax rate by one point due to favorable geographic mix. With that, I'll turn the call back to Bill to discuss how we're advancing our Enterprise Asset Intelligence vision.

Thank you, Nathan. While sales are pressured near-term, over the long-term, our solutions remain essential to our customers' operations, and we are well-positioned to benefit from the secular trends to digitize and automate workflows across our served markets. We are focused on advancing our Enterprise Asset Intelligence vision by elevating Zebra as a premier solutions provider through our compelling portfolio. By transforming workflows with our proven solutions, Zebra's customers can effectively address their complex operational challenges, including scarcity of labor and the need to improve productivity. We empower the workforce to execute tasks more effectively by navigating constant change in near real-time, utilizing insights driven by our advanced software capabilities such as machine learning and prescriptive analytics. Now turning to Slide 13, I would like to highlight several key mega trends, which support Zebra's growth and customer value propositions over the long term. These include automation, mobility and cloud computing, and artificial intelligence. Our customers rely on Zebra to help them take advantage of these key mega trends, which drive their growth strategies. As you can see on Slide 14, Zebra's enterprise mobile computers are critical to the front line of business. We are excited about our innovation roadmap and new solution launches that advance our value proposition. Labor is a scarce resource, and leveraging technology is a key way our customers can advance their operations. Our solutions empower enterprises to increase collaboration and productivity and better serve customers, shoppers, and patients by enabling and expanding the number of use cases across our end markets. Our enterprise mobile computing installed base has expanded significantly over the past several years due to the perforation of use cases, and the investment in Zebra solutions should rebound as technology refreshes or reprioritized. On Slide 15, we highlight a few areas that are advancing our capabilities to serve our customers' evolving needs and are expected to be profitable growth drivers for Zebra as we continue to scale them. Collectively, these offerings are approaching $0.5 billion of annualized sales and have a long runway for growth. First, we are a leader in advanced location solutions through RFID. We have been driving strong double-digit growth in recent years with the heightened importance of real-time inventory accuracy. We are now addressing an expanding set of use cases throughout the supply chain, including our previously announced large win with a global transportation logistics provider, which highlights the long-term growth opportunity for RFID solutions. Second, we believe investments in our machine vision business, which is accretive to our growth and EBITDA margins, position us well for long-term growth. We continue to invest in innovation and go-to-market efforts to further diversify and scale in attractive subcategories. Strong growth in certain end markets, including warehouse distribution and electric vehicle manufacturing, has partially offset weakness in the semiconductor industry. An example of our recent success is a win with the U.S.-based global auto manufacturer who has been transitioning to electric vehicle production. The ease of use of our solutions was a key differentiator as the manufacturer capitalized on the disruption in the auto market to modernize its processes with more flexible solutions. Lastly, our workflow optimization software offerings include workforce and task management, communication and collaboration tools, inventory visibility, and demand planning. Recent notable wins include our workforce management solution for location staffing at a large North America bank and our retail demand forecasting solution for a North America consumer packaged goods company. The actions we are taking to improve the profitability of our software offerings, including migration to a cloud-based platform, are expected to enable software to become EBITDA margin accretive in 2024. In closing, our long-term conviction in our business remains unchanged. While customer spending is pressured near-term, over the long-term, we believe we're well-positioned to benefit from secular trends to digitize and automate workflows. We'll work to continue to elevate our position with customers through our comprehensive portfolio of solutions while taking the actions needed to improve profitability and position us for success both in the current environment and in the future. I will now hand it 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, so that we can get to as many of you as possible.

Our first question comes from Tommy Moll with Stephens. Please go ahead.

Bill, you referenced the reset of the trajectory for e-commerce including parcel. I wanted to dig in on that a little bit. Do you have any sense of how long that reset appears to need going forward? And how widespread is this? And I ask that second part because there's certainly one fairly high profile, maybe the most high profile end user there where these trends I think are well known at this point. But anything you could do to highlight and maybe other examples would be helpful as well. Thank you.

Yes. I think overall that we've said that what we've seen in the market is that as the goods economy is clearly weaker than the service economy, which is resulting in we're seeing more of our customers really absorbing the capacity that they bought through the pandemic. That extends beyond just the largest e-commerce retailer we've talked about in the past, but to other e-commerce, even our retail customers and into transportation logistics customers as well. We've seen softness now spread into other markets. But specific to your question, I think that I guess maybe a good example of that is recently we've seen a large logistics company talk about really what's been detrimental to their volumes, right? I think it is this idea that the overall industrial economy is slowing, right? Clearly focused on goods and not services. They've said, look, that's slowing obviously because of all the macroeconomic indicators, right? Inflation, interest rates, slowdown in global trade. It's also being driven by consumers buying less, right? And then this reset of e-commerce coming out of the pandemic to the levels of purchases of goods slowing down transportation logistics package delivery as well, which has really been detrimental to the entire industry overall from a volume perspective. So we're seeing this additional capacity built out in e-commerce players. We're seeing it in retail, and I wouldn't say it as much as excess capacity is really they have what they need for now, and as the goods economy slows, they eventually will come back and buy more. But for today, they've got what they need. We're seeing it move into parcel delivery with transportation logistics, but also spread into other markets as well. As you know, in the first quarter, we talked about slowing down of large orders and large customers. We've seen that move into mid-tier and smaller customers as well. So it's more broad-based than we had seen in the past. We think it really is the two years of very strong demand we've seen, especially in mobile computing across our entire customer base is now being absorbed into the marketplace, and ultimately, that's why we're seeing the decline in the short-term. And that will come back as the macro indicators come back, as people buy more goods than services, and as you know they use this excess capacity within their environment. They will buy more from us. We will see that inflection point at some point, but right now we're not seeing it. We're clearly seeing our demand be pressured because of it.

Bill, you mentioned an inflection point, which is the theme for my second question here. I'm using the midpoints of your revenue guidance for the third quarter and the full year, and just looking at what's implied in the fourth quarter. At least on the midpoints, it looks like the implication is from third quarter to fourth quarter revenue steps up somewhere in the mid-single-digit range on a percentage basis. I just want to unpack that a little bit. Is that an inflection that you think you have visibility to? Is it just there's some ranges in here and it depends on what you want to assume within those ranges, or is there anything you can point to maybe that's impacting 3Q disproportionately, but not 4Q? Thank you.

Yes. Kind of a combination answers there probably is that overall, we would say that, why do we believe our guide, right? As we looked at Q3 and Q4, clearly in Q3, you're seeing more destocking from a distribution perspective than you are in Q4. But I think that we've taken an approach that basically for the guide for Q3 and full year, where we see the demand trends that will continue to begin to deteriorate really in Q1 and continue through Q2. We'll continue from a booking and sales velocity perspective, it'll remain about the same for the full year. We're assuming significantly lower conversion of opportunities within our pipeline than historical levels just because of these push-outs of large orders by our customers. We've removed expectations really for recovery at year-end in the fourth quarter. But the reason you see the uptick there is really because we're seeing an oversized effect of our distributors destocking inventory levels as their end demand continues to slow. So ultimately, our sales out of distribution, when that slows, they hold a specific days on hand inventory and they need to buy less from us because they're selling less out. They need less in inventory. I think that we see an oversize effect when end demand slows. In the fourth quarter, we're seeing less of the destocking than we were in Q3. Destocking is also driven by the fact that our delivery times have shortened and their cost of capital has gone up. So there's pressure on inventory and to lower those inventory levels really as their end demand has slowed, and we're seeing a bit less of that in the fourth quarter. So that's really the trajectory we're seeing around. We believe ultimately we're seeing the process of seeing really the bottom in Q3 and Q4 and do see an inflection point in 2024. But the difference between Q3 and Q4 is really predominantly based on inventory destocking levels. We expect to exit year-end with the right levels of inventory for what is the end demand that our distributors are seeing. So we see destocking taking place through the second half of the year, and then being really at the right levels for the demand that our distributors are seeing as we exit the year.

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

Bill, maybe you could just elaborate a little bit on the demand environment for your end customers kind of moving past the distribution destocking impacts, but you talked about declines across all end markets and all customers. I mean, what do you think are the biggest drivers of that change over the past few months here? Is it your end customers really are facing sales pressures and budgetary constraints, or do you think to some extent your customers are just feeling a lot better about their productivity, now that supply chains have almost kind of uniformly eased across the globe?

Yes. Maybe I'll start and then I'll add, Joe can jump in as well. Really, if we look back to our May call, we talked about broader softening of industry demands. Those trends really have accelerated in Q2 as we saw more cautious spending on the part of our customers, again, after two years of really strong demand for our products and solutions. We see this as really broader global macro weakness, but we've seen particular impact from that in EMEA and in China. In China, we expected more recovery out of COVID that we haven't seen due to slower economic factors within China. Retail and e-commerce, as we've talked about a little bit earlier on Tommy's question, really is driving that trend, as they're absorbing capacity coming out of the pandemic, but we've seen it more broadly across other industries as well as we worked our way through Q2. We're seeing an increased number of push-outs from a project perspective as well, or those projects being reduced in size. And Joe will talk a little bit more about that overall, but I would say that the dynamics we're seeing around distribution is one element of it, but the end demand clearly has slowed, and that's what's driving the distribution destocking of inventory is really about end demand. That's really, and after two years of really strong demand, we're now ultimately seeing that it really is in Zebra. We're seeing this across industry trends like IT device spending that ultimately we're seeing that same trend that that IT device spending is correlated to our mobile computing market, which we see as the biggest impact of this slowdown. But it's really broad-based across IT devices and through that we expect to continue to outperform our competition, but clearly disappointing demand levels from an end market, but maybe Joe wants to jump in.

Yes. Maybe if a little bit of additional color. So first, the declines in our larger customers were larger than the declines in our mid-tier and small run rate business, as we would call it. And that helps us understand this better because we track, of course, we have direct contact with our large customers and we see what's happening to individual deals there. Now what we've been seeing is that a lot of those deals, hundreds of millions of dollars, have pushed out of the first half into the future or in some cases have disappeared as deals altogether. I'll give you some examples of those, but before I do this, this behavior has accelerated in the second quarter. So, for example, in North America, the amount of push-outs that we've seen relative to the first quarter has tripled. Now let me give you just a few examples, right? So you can see what's driving this and what's happening, right? At the beginning of Q3, we had a grocer who came to us and said, 'I want to buy $4 million worth of your mobile computers.' And midway through the quarter they said, 'We're not going to do this deal in Q2; we're going to do it in Q3.' I'm sorry, I said Q3 at the beginning, my mistake. So they came at the beginning of Q2, said, 'We want to buy this.' And midway through the quarter they said we now want to do this deal in Q3 rather than in Q2. So a good example of what we would call a push-out. But we also had another grocer who at the beginning of the quarter was indicating that they were going to buy over $5 million worth of mobile computers. And they came and said, 'We now want to take these $5 million of mobile computers, but we want to buy them over the next five quarters equally distributed,' which of course delays our revenue trajectory. We also had a DIY retailer who wanted to buy $7 million at the beginning of Q2 and came to us during the quarter and said, 'My budgets have been cut. I can't do this project right now anymore. We'll do it sometime in the future, but I can't tell you when.' So these are three different examples that all impact our Q2 revenue and indicate that our customers' budgets are under pressure to the extent that they're trying to extend out when they buy from us, which diminishes our revenue. Hopefully that's helpful.

Yes. That's all very helpful. So could you maybe tell us what proportion of firm orders you've actually seen canceled?

I can answer that directly. We have had no or virtually no firm orders canceled. So all of what I was describing to you were movements in our pipelines. Generally, we have not seen orders that we've already taken or backlogged canceled.

Got it. Okay. I appreciate that. The gross margin recovery seems to be the bright spot in the quarter. Should we consider 48% as the appropriate run rate for gross margin, or given your portfolio of assets now with machine vision and Amer, is there potential for some upside to gross margin in the future?

This is Nathan. As you mentioned, I would say gross margin was a positive aspect in the second quarter, reaching 48%, which we haven't seen since the first half of 2021 when we had slightly higher revenue and the euro was at $1.20. The key highlight for the quarter includes the decrease in premium supply chain costs down to $5 million, and this is expected to be minimal as we enter the second half of the year due to the team's successful work in redesigning products and restoring our printer capacity. Overall, we feel optimistic about the gross margin, and we believe that 48% serves as a new baseline. There will be fluctuations as we move from quarter to quarter based on deal size; the absence of large deals is currently benefiting our gross margin. Additionally, we have other supportive factors for the remainder of the year, including foreign exchange assuming it stabilizes at its current level. Therefore, while 48% is a suitable benchmark, we anticipate some fluctuations influenced by the general mix and business dynamics.

Our next question comes from Jim Ricchiuti with Needham & Company. Please go ahead.

All right. Thank you. So as we think about the Q3 guidance and the implied outlook for Q4, it sounds like you're expecting at least geographically some worsening conditions in North America. Just if we look at what the organic decline was in Q2, is that the way to think about how the geographic distribution looks into the second half of the year?

Yes. Maybe I can give just a little bit more color on the guide and then to your point on some of the regional dynamics is just to re-emphasize what Bill mentioned earlier; the guide is supported by the most recent sales and bookings velocity, and we're not assuming any type of recovery as we enter the quarter or as we move through the quarter. So you really see that I'd say across all our geographies. So I think that if you look at the similarities across each region, they're very similar in terms of being impacted by mobile computing, tougher year-on-year comps for the business like print. So what we've effectively done is said, what is that velocity we're seeing in the end markets? How does that continue through the third quarter and into the fourth quarter? And again, removing some of the upside or opportunities to ensure that we have the right baseline to build from here, but I'd say the dynamics are very similar across each of the regions as we go through the second half.

And does your guidance assume slowing in the areas of the business that have been relative bright spots? You highlighted data capture, RFID, and the recurring business. Presumably, that holds up a little bit better. But what kind of assumptions are you making for these areas that have been more of a bright spot for you?

Yes, RFID continues to show strong performance, and we are observing growth in various applications beyond just retail. Our supplies business remains positive, benefiting not only from RFID but also from our broader supplies business stemming from the Temptime acquisition. We believe that services and software will also be significant contributors in the latter half of the year. However, data capture presents a challenging comparison for this period. Overall, the print and data capture solutions are experiencing variability due to supply chain issues from 2022 that we are comparing against in 2023. This has resulted in strong growth in the first half, but tougher comparisons in the second half, indicating ongoing challenges in those segments. Thus, data capture solutions will have a difficult performance comparison in the latter half of the year.

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

Great. Thanks. I guess just putting it into context, do you think you're seeing the greatest impact to the refresh business, which with just elongating hardware cycles, is this just a slowdown in new builds or a slowdown in new use cases? I guess I'm just trying to get a sense of you prepared yourself to the mobile IT market. We've seen some lengthening and refresh cycles in those markets over time as devices improve. And so is this just lengthening refresh cycles that may be more permanent or just kind of more macro impact to new builds or new use cases?

We are observing that refresh cycles are becoming longer as businesses make difficult decisions regarding their assets. They can only postpone technology refreshes for so long. The strong demand over the past two years has resulted in more devices being provided to frontline workers. When these workers refresh their devices, it will involve a larger number of devices being updated. In the short term, customers are utilizing the capacity they built in e-commerce, transportation logistics, and retail, where they purchased many devices during the pandemic and need to work through them; however, they will ultimately buy more. We still see significant opportunities to provide more devices to frontline workers across all our vertical markets. Additionally, there are many promising new applications for our devices, particularly in retail software and in areas like communication, collaboration, visibility, and AI, empowering workers with enhanced information via mobile devices. Despite the short-term demand challenges, long-term trends remain positive. Joe, would you like to elaborate on that?

Yes. I would underline that specifically that I think we're seeing is an extension of the sales cycles, not a diminishing set of use cases in any way. In fact, I think it's almost the opposite. So the examples I gave earlier were all examples of extending sales cycles. And what we're seeing with our customers is that in fact they're discovering during this period how they can use their devices and the Zebra solutions for more use cases. So we're seeing more use cases in the store like communication or flexible checkout advising customers on where to find goods and products in the store are being added to the devices that they have. And we're of course fueling that because we're releasing new use cases. For example, we just released the ability to take payment directly on our devices, right? So I would say very clearly it's an elongation of sales cycles; new use cases are alive and well.

Got it. Do you expect any cash charges related to the renegotiation of some supply agreements, or is there anything we should be aware of as part of the restructuring?

No, that is not part of the restructuring. The team is working on renegotiating supply agreements to optimize cash in response to demand changes. We will evaluate each agreement to ensure it makes economic sense for both the short and long term. However, none of this is classified as part of the restructuring charges.

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

Good morning. This is Tyler Hutin on for Brian. Thanks for taking my questions.

Hi, Tyler.

Hi, to begin with pricing, I believe you previously mentioned the full-year benefit, and I was curious if that has changed due to further softening in your expectations for volume growth. Can you provide an expectation for the full-year benefit from pricing?

We anticipate the full-year pricing benefit to be around 2 points, which is slightly higher than our previous guidance due to the recent price increases implemented late in the second quarter. We're seeing these actions remain effective in the market, so I would still estimate it to be about 2 points for the year. These were very specific, targeted actions rather than broad-based ones, and we continually monitor them to ensure competitiveness. I wouldn't attribute any part of the volume decline to the pricing actions, as these measures are widespread across the industry and focused on areas where we can maintain our market share in each market and product we operate in.

Okay. Thank you for that. And just following up, can you describe the opportunities that you're seeing with the government like what products, et cetera? And has this been an unexpected contribution in 2023? And will that be supplemental to your sales volume when other demand picks up? Thank you.

This is Joe Heel. Yes. So we've been working with governments around the world and have been seeing an increasing level of demand and opportunity there. And of course, we have commensurately increased the resources that we have put into this. Where we saw the North American government is the largest part of that. And of course, there are multiple different levels of that. State and local has been a growth area for us for some time. Specifically, for example, outfitting police forces with tablets in their cars or parking enforcement handheld devices with mobile printers have been the staple of our business there. But recently where we've been successful and have extended our engagement is with federal and state governments. And there are of course some very large contracts. You can see contracts with defense and in logistics areas that are increasingly important. And we've seen an increase in interest in those same levels in governments outside of the U.S. And of course, that has a little bit to do with some of the geopolitical situation that we find ourselves in and the governments needing in particular the types of solutions we provide to enhance the logistics behind some of those operations.

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

Good morning, guys. I was hoping you could unpack the commentary regarding the customers digesting what they previously bought. Certainly, we're aware of one or two e-commerce guys that probably overbought, but I guess people are digesting what they previously bought. Are they questioning the ROI that they previously experienced? I mean, perhaps just a little bit more color on the digestion commentary.

Yes, Keith. I mean, they're not questioning the ROI at all. They're clearly seeing the benefit of our devices that are mission critical in their environment. What they're really seeing is that, that extends beyond e-commerce to parcel delivery, for instance. So we're seeing that in our transportation and logistics customers that are saying if you look at what they've said around parcel delivery, the entire industry's down as the result of kind of e-commerce resetting to kind of pre-pandemic growth rates, and they build out capacity, assuming it was going to be much stronger than that. I would say in retail, they've bought the devices they have, so I wouldn't say it's absorbing beyond what they need in most cases. Now, some bought ahead because of supply chain challenges, right? They knew that they needed the devices they bought ahead for a project, but in most cases, they just have what they need. And they're I think to the earlier question continuing to use those devices in other applications or just making tough budget decisions that ultimately they'd like to buy more, but they're leveraging what they have today instead of purchasing new because there's pressure from either their CFOs and others on IT spending and CapEx within their environments and a certain macro environments. So I think it's in some cases using capacity. In other cases, it's just leveraging what they have today, and they don't need anymore. In some cases, they bought ahead because of supply chain challenges. But we saw a significant increase in demand over the last two years, and now we're seeing ultimately that demand slow, and then we'll see growth from here. Joe may want to add something.

Yes. If I could maybe to make it concrete, let me give again just a few examples, right? So, if you're in a retailer, you buy our devices typically with an expectation of a growth trajectory, which means how many associates you will have in your store, or how many new stores you will open. And so those retailers that some of the examples I gave earlier had planned for a certain growth trajectory, and then they've seen that growth trajectory change and lower. As a result, the ROI hasn't really changed for them, but they just see a lower demand trajectory, which then they're translating into lower purchases with us. I'm looking at I have four pages of individual deals that we look through and where customers have done exactly this. And here's an example of one where it says, customers working through gear they already have on hand, not ready for additional orders until Q3. That's literally the type of thing we're hearing. And I don't think it has anything to do with the ROI; it's simply about the expectation for demand.

No. We feel good about our machine vision business. When we acquired Matrox, at the same time we developed organically solutions in the low end of that range in fixed industrial scanning. We knew when we acquired Adaptive Vision that they had software capabilities around things like optical character recognition. We knew when we purchased that business that it was heavily weighted in their sales to the semiconductor industry. One of the objectives we have is for Joe and our marketing teams to focus on expanding markets beyond semiconductor into pharmaceuticals, electric vehicle manufacturing, transportation logistics, and e-commerce that are all big users of machine vision and fixed industrial scanning. We're seeing early progress and wins in that area. We're pretty happy with the progress overall. I think that we're excited about the machine vision business overall. It's closely adjacent to our scanning business, and we're seeing good results so far despite the headwinds associated with semiconductor.

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

I wanted to clarify the discussion about delays and changes from your customers. If we take a step back, looking at the broader picture, even though the industrial economy has shown poor data, the main point has been that consumers have remained quite resilient, and the expected consumer recession hasn't materialized. So how do you reconcile this with what you're hearing from your customers who are tied to those consumers, who seemingly aren't experiencing the difficulties that were anticipated?

I believe we are observing that the service economy is holding strong. Coming out of COVID, people are seeking more experiences and are traveling more this summer. They are willing to take trips despite the increased costs of flights and vacations. Every flight I board seems full. However, we are noticing a slowdown in the purchasing of goods. For instance, as interest rates rise and new housing sales decline, consumers are buying less from do-it-yourself retailers. During COVID, many invested in goods for their homes, but now they are directing their spending towards experiences instead. While the overall economy is stable, purchases of goods are decreasing, which is evident as e-commerce growth has returned to a more typical rate following the pandemic surge. This has impacted parcel deliveries from e-commerce. Expectations among our brick-and-mortar retail customers regarding sales have also slowed down, and these factors are significant. It appears that the macro environment is really distinguishing between goods and services.

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

Yes. While our spend is pressured certainly in the near term, over the long term, we believe that we are well-positioned to benefit from secular trends to digitize and automate workflows within our customers' environments. To wrap up, I'd like to just thank our customers, partners, and employees for their support and dedication over to our long-term success. Have a great day, everybody.

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