Zebra Technologies Corp Q2 FY2025 Earnings Call

Good morning, and welcome to Zebra's Second 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 factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of this slide presentation and in today's earnings press release. Throughout this presentation, unless otherwise indicated, our references to sales performance are year-on-year on a constant currency basis and exclude results from recently acquired businesses for 12 months. This presentation will include prepared remarks from Bill Burns, our Chief Executive Officer; and Nathan Winters, our Chief Financial Officer. Bill will begin with a discussion of our second quarter results. Nathan will then provide additional detail and discuss our revised outlook. Bill will continue with progress on advancing our strategic priorities, including the pending acquisition of Elo Touch Solution we announced this morning. Following the prepared remarks, Bill and Nathan will 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. In addition to our second quarter highlights and financial results, we will discuss this morning's announcement of the exciting milestone in our journey to enhance the connected frontline experience to our acquisition of Elo. We will also review our increased full year outlook. Before we get into the details of the quarter, let me spend a moment on the acquisition that drives profitable growth and elevates our market leadership. Elo Solutions engage consumers, enhance self-service and deliver automation across a wide range of end markets. This combination strengthens Zebra's portfolio of solutions, enabling us to advance our strategic priorities. Now turning to our Q2 results. Our team executed well in the second quarter, delivering results exceeding our outlook, with solid demand across the business and lower-than-expected U.S. import tariffs. For the quarter, we realized sales of $1.3 billion, a greater than 6% increase compared to the prior year, an adjusted EBITDA margin of 20.6%, a 10 basis point improvement, and non-GAAP diluted earnings per share of $3.61, which was 14% higher than the prior year. We realized strong growth in our North America, Latin America and Asia Pacific regions and had relative outperformance in mobile computing, scanning, and RFID. Transportation & Logistics, along with Retail & E-commerce, were our highest growth vertical end markets, with healthcare cycling a strong comparison and manufacturing continuing to lag. As we enter the third quarter, demand has been resilient. However, we remain cautious as our customers navigate through uncertain trade policies. Additionally, we expect the recently passed tax legislation to be constructive for some of our U.S. customers, although it is too early to assess the impact on demand. I will now turn the call over to Nathan to review our Q2 financial results, tariff considerations, and outlook.

Thank you, Bill. Let's start with the P&L on Slide 6. In Q2, total company sales grew by more than 6%, reflecting recovery in demand across our major product categories. Our services and software recurring revenue business grew slightly in the quarter. We had similar growth rates in both of our financial segments. We realized strong sales growth across most of our regions. In North America, sales grew 8% with double-digit growth in mobile computing and RFID. Asia Pacific sales increased 20%, led by Australia, New Zealand, and India. Sales grew 11% in Latin America, with growth across the region. In EMEA, we cycled strong comparisons, particularly in mobile computing with a sales decline of 1%. Adjusted gross margin declined 70 basis points to 47.9%, primarily due to higher U.S. import tariffs than last year. Adjusted operating expenses as a percent of sales improved by 80 basis points. This resulted in second quarter adjusted EBITDA margin of 20.6%, a 10 basis point increase versus the prior year. Non-GAAP diluted earnings per share were $3.61, a 14% year-over-year increase and above the high end of our outlook. Turning now to the balance sheet and cash flow on Slide 7. Year-to-date, we generated $288 million of free cash flow. We have been deploying capital consistent with our allocation priorities. We repurchased $250 million of stock year-to-date, and our recent $62 million acquisition of Photoneo as well as this morning's acquisition announcement support our continued efforts to scale in adjacent markets. Our balance sheet is in excellent shape, with $872 million of cash at the end of Q2, a modest 1.2x net debt to adjusted EBITDA leverage ratio and $1.5 billion of credit capacity, providing ample flexibility to fund the $1.3 billion pending acquisition of Elo later this year. Due to the global nature of our supply chain, like many other electronic manufacturing companies, we are subject to U.S. import tariffs. On Slide 8, we provide an update on the anticipated impact from tariffs on our products imported to the United States and our efforts to mitigate them. For the full year 2025, we are now assuming approximately $30 million of gross profit impact after mitigation, with a $10 million net impact in the third quarter, following a $12 million impact in the first half of the year. Our forecast assumes the current effective rates remain in place, including the electronics and USMCA exemptions. This implies a $40 million annualized gross profit impact which is less than half of our previous expectation, primarily due to a lower rate on China imports. Our mitigating actions to date have included shifting additional production out of China and approximately $40 million of annualized pricing adjustments. North America imports from China are now expected to represent 20% of the mix by year-end. We will continue to evaluate additional opportunities to mitigate U.S. import tariffs as we monitor global trade policy development. These potential actions include additional shifting of global production, product portfolio optimization, and price adjustments. Let's now turn to our outlook. We entered the third quarter with a backlog and pipeline to support our sales guide of between 2% and 6% growth, with a 30 basis point favorable impact from the acquisition of Photoneo and a neutral impact from FX. Our third quarter adjusted EBITDA margin is expected to be approximately 21%, which assumes a $10 million net impact from U.S. import tariffs, and non-GAAP diluted earnings per share is expected to be in the range of $3.60 to $3.80. We are raising our full year sales growth guidance range by a full point which is now expected to be between 5% and 7%, including approximately 50 basis points of combined favorability from FX and the Photoneo acquisition. We are now expecting a $30 million gross profit impact from tariffs, net of mitigations for the full year, which is $40 million favorable to our prior guidance. We are also raising our full year adjusted EBITDA margin by a full point to between 21% and 22% and increasing our non-GAAP diluted earnings per share to a range of $15.25 to $15.75. Additionally, we are raising our free cash flow guide for the year to at least $800 million, which reflects the anticipated benefit of recently enacted U.S. tax legislation and implies free cash flow conversion of approximately 100%. We continue to work on further optimizing our working capital levels, balanced with our supply chain resiliency initiatives. Please reference additional modeling assumptions shown on Slide 9. With that, I will turn the call back to Bill.

Thank you, Nathan. Zebra remains well positioned to benefit from secular trends to digitize and automate workflows with our portfolio of innovative solutions, including purpose-built hardware, software, and services. Our solutions intelligently connect people, assets, and data to help our customers make business critical decisions. As you will see on Slide 11, Zebra Solutions enable our customers across the broad range of end markets to drive revenue, boost productivity and efficiency, and optimize the front line, delivering improved service to their customers, shoppers, and patients. The challenges of an on-demand economy, e-commerce growth, evolving regulations, and labor constraints require increased adoption of automation. Here are some of the recent examples of customers transforming their workflows at various stages of their automation journey. An athletic retailer in the United Kingdom recently launched the initial phase of their RFID journey to improve inventory accuracy by equipping their store associates with Zebra mobile RFID solutions. This strategic investment enables better supply chain visibility given that the majority of their vendors now RFID tag at the point of manufacture. We continue to see strong interest from customers in leveraging RFID across the supply chain. A North American logistics company is focused on moving freight more effectively by equipping their drivers and cross-dock workers with Zebra mobile computing solutions to collaborate seamlessly across their operations. Additionally, a large North American food distributor recently began a technology upgrade of their Zebra mobile computers, tablets, and mobile printers to improve the efficiency and productivity of their distribution centers. Our market-leading portfolio solution enhances their receiving, restocking, and cold chain operations. These are a few of the many examples that demonstrate how customers rely on us to navigate their technology journey leveraging our commitment to innovation and workflow expertise. Innovation remains central to our industry leadership, and we have consistently reinvested approximately 10% of our sales in research and development to advance our portfolio of solutions. We augment our organic efforts with strategic acquisitions that advance our vision, as evidenced by the recent acquisition of Photoneo, which expanded our 3D machine vision solution as well as the pending acquisition of Elo. Turning to Slide 12, the acquisition of Elo will enable us to expand our portfolio of solutions to help customers transform their frontline operations by digitizing and automating workflows. Elo is a leading provider of point-of-sale solutions, kiosks, interactive displays, and touchscreen solutions with a 50-year track record of innovation in more than 400 patents operating in an $8 billion market. The company generates approximately $400 million of annual revenues with a similar sales growth and EBITDA margin profile to Zebra. Elo also has a similar go-to-market approach to Zebra, offering a wide range of industry tailored solutions that modernize point of sale, streamline self-service and payment experiences, automate kitchen industrial workflows, and optimize production and process management. Our leadership in hardware, software, and services for the frontline worker will be augmented by Elo's consumer-facing offerings to deliver a unified connected frontline experience. Together, we will pursue attractive market and geographic expansion opportunities while delivering a comprehensive software-differentiated portfolio that enables customers to better address emerging use cases. The continued growth of retail media networks and the deployment of AI-based agents on the front line are examples of new opportunities that Zebra and Elo can pursue together. The Elo acquisition is expected to be immediately accretive to earnings once the transaction closes and we expect to generate an incremental $25 million of annual EBITDA synergies by year three. In closing, our confidence in sustainable long-term growth is underpinned by several key themes that drive demand for our solutions, including labor and resource constraints, track and trace requirements, increased consumer expectations, advancements in artificial intelligence, and the need for real-time supply chain visibility. As we move forward, we remain focused on advancing our industry leadership with innovative solutions that digitize and automate our customers' workflows, serving our customers well, and driving profitable growth. We are well positioned to expand our addressable market as we add complementary solutions to our portfolio that elevate our capabilities to serve our customers. I will now hand the call back to Mike.

Thanks, Bill. We'll now open the call to questions and answers.

Our first question comes from Joe Giordano with TD Cowen.

Maybe I'll start on the acquisition. Can you tell me how does that technology tie in with yours? Where are they doing things that you couldn't do on your own? What's the customer overlap look like in terms of leveraging that?

Yes, sure, Joe. I would say, overall, first of all, we're really excited about the acquisition. It really represents the next step in what we see as our journey to have a leading portfolio of solutions that digitize and automate the front line of business, where we've been focused for certainly some time. And I think that what Elo brings us is a market-leading portfolio of self-service and customer-facing solutions that really expands our addressable market by about $8 billion. So think of more customer-facing use cases. Overall, their focus is on areas like point-of-sale, self-serve kiosks, interactive touchscreen displays, and automation in the industrial space. I think overall, what we bring them is complementary solutions to what they do in things like point-of-sale and others. Our global reach allows us to expand their offerings beyond their strength in North America and what they have in EMEA today, and smaller in Asia Pacific, but really take them to a global scale and reach across our go-to-market. Overall, our extensive service capabilities and deep customer relationships have numerous customer overlaps, especially in places like retail, but there are strengths that they have in things like quick-serve restaurants that we're not as strong in, but are putting in emerging solutions like RFID into quick-serve today, which gives us additional offerings there. So quick-serve restaurants is an example. We believe our strength in healthcare would help them. So there are vertical markets and geographical expansion that we can bring to their portfolio overall, which would allow them to expand. So think of it as more customer-facing, more self-service, more automation, and more fixed than mobile, which significantly adds to our broad-based portfolio today.

That's great. You guys have done a nice job of withholding judgment on the second half in terms of volumes until you see what's going on with your typical seasonal flows. You don't want to commit to them until you have them in firm backlog. Now as we sit here in August, we see the guide, but how are you feeling about the ability of your customers to release budgets and move forward with things? What do you think is inherent in your guide now for the second half?

Yes. Joe, I'd say demand has remained resilient through the first half despite the uncertainty around global trade policy. Customers have generally maintained their capital spending levels and moved ahead with the projects that they had planned for the year. We're seeing that, and we're happy with where things are from a customer perspective. Some have spread some of the spending out over multiple quarters, really a combination of managing their CapEx, but probably a bit of uncertainty as well. We've seen that from our increased outlook for the full year, which is based on strong second quarter results and the backlog and pipeline that we see going into the second half that supports second half growth overall. All that said, our customers still remain a bit cautious. While there's been more clarity, they're still navigating the uncertain trade policies, but clarity has certainly been helping. Also, there's some uncertainty around macro and geopolitical factors. So I would say overall, while we're increasing our outlook for the full year, we think it makes a lot of sense, and it's pretty balanced to what we're seeing from a positive customer perspective, but also a bit of uncertainty still out there overall. So we believe our guide is balanced for the second half.

Our next question comes from Damian Karas with UBS.

Congrats on the deal.

Thanks, Damian, appreciate it.

Just a follow-up question on Elo. Could you talk about how their business cyclicality has compared with Zebra historically? And I think you're moving into a little bit more of a competitive space compared to your core mobility solutions, so could you just talk a little bit about Elo's market share and how that has progressed over time?

Yes. I'd say overall that the Elo portfolio has a bit different demand cycle than us, where we typically see a fair amount of year-end spending by our customers. They don't see quite that much; it's more balanced throughout the year. I think that you'll see us spread some of our year out ultimately and not put as much in the fourth quarter from a cyclicality perspective, and I think that's positive. I would say, yes, there are different competitors in the space as they have a broad portfolio of solutions across point-of-sale and kiosks, interactive displays; there are different competitors than we face today in the market. It's a fairly fragmented market and their strength is really strong in North America overall, as I would say, as one of the market leaders, both in North America and EMEA, with additional opportunities where they've got good share. We think there's an opportunity to gain more share by leveraging Zebra's relationships and global reach. As the size company they are, you ultimately make decisions on where you're going to go next geographically, and us having a presence around the world will help expand their product lines across the globe. So different competitors, yes, but some of the same channel partners. Some of the same distributors and value-added resellers that we leverage around the globe are the same. Some of the customers are the same, but many are different as well, and we're excited to enter markets they have strength in that we don't today. So we see revenue synergies as well as cost synergies as we talked about in the release, and we're excited about working together as they give us more of a consumer-facing offering to add to our portfolio.

That's helpful. And Bill, I think you mentioned the one big beautiful bill legislation, and that should have a positive impact on North America. Just curious, is that kind of Zebra's internal assessment? Or are you maybe hearing that in your dialogue with customers, and they're becoming increasingly positive, and maybe even you're seeing that reflected in your funnel activity in North America?

Damian, I can jump in and address that. I think we're not hearing it directly from our customers. I think like many, including ourselves, are digesting and understanding what is the impact from a cash perspective, particularly around the R&D deductibility in year 1, as well as the ability to deduct 100% of capital expenditures in year 1. So my guess is, like us, they are assessing what that means for their business, which will ultimately turn into how they want to allocate that capital that could lead to more capital purchases in the back half of the year. But we're not hearing it directly from customers, just more noting that it is an opportunity as we go through the back half, but it's going to take some time for folks to understand it and make sure they allocate where they want to put the capital and understand when they receive the cash back in terms of less future payments here in the back half of the year or what it might mean even as you go into 2026.

Our next question comes from Tommy Moll with Stephens.

Bill, I think I heard you use the term balanced for the approach to your second half outlook. I wanted to follow up on that and ask what you're assuming on large deal conversion. Maybe just related to what you saw in the second quarter as well would be helpful.

Yes. I'd say that from a second half year kind of fourth quarter perspective, as it relates to kind of year-end spending, I would say that the year overall is playing out better than we expected, and we saw strong growth in the first half and strong results, as you saw in second quarter, which allows us to increase our outlook. We had easier comparisons in the first half and a bit tougher comparisons in the second half, so you're seeing it play out as we expected. I would say that as we look to the fourth quarter overall, we've factored in some year-end spending at about the same levels as we had last year, because while we don't have visibility yet to it, it's too early for that. We know there will be some. As we just talked about, things like the U.S. legislation around the big beautiful bill could help with CapEx spending year-end. And certainly, as customers have remained cautious throughout the year, we could see additional year-end spending, but we factor that in, which we think is prudent, even though we don't have quite the visibility today. That's why we're saying it's our outlook; I would use the word balanced as you said, with the opportunities we see, a bit of uncertainty out there, but clarity coming through on tariffs. We haven't talked about it yet, but we're seeing some softness in Europe, certainly mixed results across Europe. That’s weighing in as well. So we're trying to find the right balance for the second half, and the guide for Q3 we feel good about, with less certainty around Q4. But we feel good that customers will spend some year-end money. If they're being conservative, maybe there's some upside to that. There are some positive signs, like the U.S. legislation. We'd like to see Europe be a bit stronger as we're seeing softness there, but it's been mixed across the region, and that's why I used the word balance.

You've mentioned that there's a significant market opportunity for Elo that is more consumer-facing. I'm curious to learn more about your strategy in this area. It seems like a slightly different focus for Zebra compared to what you've discussed in the past. Are there changes in that market that are attracting you to it? What is the thought process behind this approach?

Yes. So maybe the easiest example is when we've talked about kind of the modern store from a Zebra perspective, really powered by AI. The idea is that we think of engaged associates in a retail store, and then we think of inventory accuracy. The last is kind of customer consumer-facing for the retailer. This adds to that element of solutions. Today, our mobile devices, for instance, are used for payment. Our mobile devices are used in Europe extensively. We're the market leader in self-scan. Ultimately, the buying experience also includes self-serve checkout, kiosks, and quick-serve restaurants. There is a move to serve customers not just through mobility, tablets, and mobile devices with payment on them, but also in fixed touchscreens and in payment and point of sale that includes, in the Elo case, things like compute and touchscreen displays and payment, which is all driven by or focused on customer and self-service. There's also an element within retail, and I'll stick with retail for a minute, but it applies to multiple other verticals that involve media networks within the store. So screens and touchscreens and displays ultimately that are driven by Android today as well. Both a combination of Windows and Android, but Android is becoming more prevalent to drive those technologies. Customers have said to us that they'd like to see that same Android platform used across our fixed screen technology and touchscreens in the store. And they have actually represented some of this to us, saying it would be interesting if you could pull those two together. Think of places where we work together, such as point of sale. Their offerings would include self-service kiosks, which would marry with things like mobile device checkout or self-scanning. We think of new areas, as we go to the HIMSS show for health care. While we're talking about mobility and healthcare, there is clearly an element around kiosks and self-serve within healthcare. When discussing quick-serve restaurants, our relationships most recently have been advanced technologies around RFID and tracking food into quick-serve restaurants. The restaurants are controlling both the customer interface and the production of food inside the kitchen. So think of process management inside quick-serve restaurants. It’s closely adjacent to what we do in manufacturing. We talk about tablets on the production floor, but there are also fixed screen elements and touch screens associated with the manufacturing process and process management, so automation. We see this as another step to not only address the consumer but also address automation in a different way beyond mobility. The two are coming together with operating systems such as Android. That's why we see overlapping customers, overlapping markets, and places where we can take their solutions globally.

Our next question comes from Andrew Buscaglia with BNP Paribas.

I wanted to ask on just to gauge how you're viewing tariffs from here. Obviously, we saw some de-escalation intra-quarter in China. There is still uncertainty with how this plays out. I'm wondering, maybe number one, are you concerned or have you contemplated or what are you seeing in terms of the potential exemptions picking and/or going away? Any other further tariff escalations you're aware of that you're monitoring? And what can you do to offset those?

Yes, Andrew, I’d say progress has been made since our last update, but it remains a dynamic environment. We anticipate it will continue to be dynamic for some time. We are continually collaborating with our trade and industry partners to gather insights on their perspectives and reactions. We have a dedicated team that keeps track of developments to ensure we can respond effectively. Our aim is to maintain a diversified supply base that can adapt to tariffs while also ensuring a sustainable supply chain. We are executing a playbook with various options we can implement as we gain more clarity throughout the year. Regarding exemptions or changes in rates, we don’t have any information beyond what’s already reported in the news. We will keep focusing on the options available to us, including pricing strategies and geographical shifts, while ensuring we maintain a resilient and sustainable supply chain for the future.

Fair enough. I want to get your take on competition and your potential for market share gains. You're seeing one of your biggest competitors across many different business lines somewhat get deemphasized by their parent company. Do you see a pathway for more share gains going forward? What's your take on the competitive landscape?

Yes. I would say overall, not much has changed except for the announcement you mentioned with our competitor. I think that our strong customer relationships, the vertical market expertise we have, the breadth and depth of our portfolio, our commitment to our customers, and our continual investment in innovation along with them, expanding our portfolio, I think from the acquisition perspective, clearly elevates our strategic position with our customers to do more business with them in areas they are focused on, like self-serve and others. This was reminiscent of the Enterprise acquisition. The more business we do together and the more vision we paint with our customers about the future of retail, the future of P&L, and the future of manufacturing looks, and having a breadth and depth of the portfolio that expands our relationships is vital. That's one of the reasons we like this acquisition; it allows us to remain relevant and trusted. We feel good about where we stand competitively. The portfolio is as strong as it’s ever been. We continue adding to the portfolio, adding new areas such as wearables, which will play a role not only today but in AI in the future. If you look at what is being set out there regarding the future AI device, it likely combines a mobile device augmented with something wearable. We continue to expand the portfolio with next-generation devices across T&L as we see refreshes coming up over the next couple of years. We're quite focused on that. We recently won a large postal opportunity in Australia which again speaks to our strength in postal and having the right device in T&L as these refreshes arise. We feel good competitively, and what happens with our competitor is to be seen. We'll continue to play our game, and we feel good about our position.

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

You noted some softness in Europe. I'm wondering what changes have you seen in the various subsectors of the market more broadly, whether any changes in retail, retail automation, e-commerce, logistics areas versus 3 months ago?

Yes. I would say that when we look at Q2, certainly strong growth across North America, Asia Pac, and Latin America. So geography-wise, strong growth with EMEA certainly being more challenged or soft. Globally, T&L, retail, and e-commerce continue to be strengths for us. Healthcare in North America is cycling some strong comparisons in mobile computing. While growing mid-single digits, manufacturing continues to be slower than the other areas, especially transportation, logistics, and retail. When I look at the regions specifically for EMEA, I see the comparison cycles of strong prior year comparisons in mobile computing, which is a factor. I think overall, we’re seeing mixed performance across EMEA. There’s strength in places like Northern Europe, particularly in T&L, but we're seeing softness in auto manufacturing. Some of the retail sectors in France present a good example where we’re facing some challenging conditions. Some of the run rate we believe is driven by concerns around geopolitical issues and tariffs. So overall, we’d like to see the softness in EMEA kind of abate and improve. That has happened throughout the year, starting okay, but we saw more EMEA degradation through the second quarter. North America is seeing strong growth, especially in mobile computing, data capture, RFID—so a broad portfolio set. Asia Pacific has strengthened. We talked about Australia, New Zealand, India, with some new applications around RFID, especially in transportation, like rail. We're excited about that as RFID continues to play an important role.

Got it. Just congratulations, by the way, on the Elo announcement. I'm curious, are they working with channel partners that you work with? Or is this a different channel than some of your products?

Yes, very similar from a channel perspective and go-to-market, in which case they work closely with the end customer as we do and then fulfill through value-added distributors and distribution, two-tier distribution in the marketplace that ultimately serves both of us. Their largest distributor in North America is also our largest distributor in North America. In that case, we're essentially on top of each other. I think that their go-to-market approaches are very similar to ours. In places, they may have different relationships, meaning they may be stronger in quick-serve restaurants or different places with the fragmentation of healthcare, they may have different customers than we do and have strong relationships in those areas. But we’re looking forward to leveraging the customer base on both sides.

Our next question comes from Brad Hewitt with Wolfe Research.

It looks like your net leverage will be around 2 turns pro forma for the Elo deal. As we think about capital allocation going forward, should we assume the focus is more on bolt-on deals and perhaps modest buybacks in the near term until pro forma leverage comes down a little bit?

I'd say that, overall, our capital allocation hasn't changed; we focus first on organic growth in the areas where we invest in our portfolio, and we believe there are continued opportunities across it. We view M&A as strategic adjacencies to what we do, and we continue to be selective. Something smaller like Photoneo, which we closed, and something larger like Elo, both in areas that we see as strategic and closely adjacent to our focus. We'll continue to be inquisitive out there and look for strategic M&A. However, we want to get through this one first, integrate it, and bring it into Zebra—that's our near-term focus. As you've seen, we've returned $250 million in capital to shareholders as well. We're trying to find the right balance between M&A, the strategic things that are available in the market, and how we can elevate our capabilities, especially in machine vision with Elo.

That's helpful. You mentioned in the release the 5% to 7% revenue growth algorithm going forward for Elo. I'm curious about the historical organic growth profile of the business, particularly from 2019 through 2024, and how you would describe the potential scope of revenue synergies, and if that is incremental to the 5% to 7%.

Brad, I think very similar. If you look back over the last several years, you'll see that their performance overlaps nicely with ours in terms of revenue growth. There were ups and downs due to COVID and the supply chain challenges that affected many industries coming out of that. If you look at the long-term growth profile, it aligns closely with ours. Regarding the revenue synergies, I would say just take a step back on the total $25 million; we're highly confident in achieving those. There are multiple levers, and we expect a steady ramp of those over the next few years. On the cost side, we expect areas like real estate portfolios where we have overlapping sites, consulting services, and leveraging our supply base to drive efficiencies will be areas of focus. On the go-to-market side, it's primarily around international developed markets where we have a strong presence. Elo has a limited presence in those markets, but we think there's a great opportunity to leverage our presence for growth. Cross-selling opportunities are significant for both sides. So yes, I think the $25 million, while we have a holistic view on the cost side, we do believe there are synergies that could get us to, your point, on that top end of the 5% to 7% as we move forward.

Our next question comes from Piyush Avasthy with Citi.

Just thinking from the perspective of your raised sales growth guidance of 5% to 7% for '25, is there any incremental color you can provide on trends across the expansionary and adjacency verticals? Could you break out how machine vision, mobile robots, and RFID are performing?

Overall, I would say that from a vertical perspective, retail and e-commerce continue to be our strongest areas of growth. T&L recovery is also showing normalization across the board. I mentioned a large postal win earlier that fits into transportation and logistics. In manufacturing, we're seeing challenges, even with machine vision. We're seeing growth in T&L and retail; healthcare is seeing strong opportunities as well. RFID and machine vision are continuing to show strong potential in various vertical markets. We're seeing strength across the core portfolio in the areas in which we do business today, with RFIDs, machine vision, and additional opportunities across the varied vertical markets.

Helpful. And I think you touched on the replacement cycle. Have you started discussions with customers regarding their refresh plans? If you have that visibility in 2026, help us understand what that could mean for your 5% to 7% organic sales growth framework?

Yes. I think every customer is on a different journey of refresh. We've seen the postal win is an example of a refresh with that postal carrier in Australia. Over time, there will be additional refreshes. Everybody is on a different schedule, including retail and T&L. While we clearly have seen, through COVID and today, the number of mobile devices in the marketplace has increased, that will continue with upgrades, with more devices in the hands of frontline workers. We're not guiding to 2026 at the moment, but we see that there could be an accelerated refresh cycle, whether it begins in '26 or moves into '27 and '28., We just don’t know yet. We’re tracking our customers closely to be prepared when they are ready.

Our next question comes from Keith Housum with Northcoast Research.

Congratulations on the quarter and the acquisition. Bill, thinking about the Elo acquisition, what is the makeup of their revenue? Is it primarily hardware? Are there other sources of revenue that you are acquiring?

Yes. I would say that their strength in software is around the OS and what they're doing in two areas. One is the move to Android that ties into touchscreens and displays and others for control, and the other is their point-of-sale terminals, which also combine hardware and OS, software. Like Zebra, the predominant sales mechanism is through hardware, but there is tremendous value in the software side of what they do today within their environment.

Great. Is there a particular competitive mode that Elo has versus other competitors in the space you may have looked at?

Yes. I would say the breadth and depth of the portfolio, like us, the relationships they have with their customers, and really understanding where they serve their customers today. That is probably one of the biggest strengths they have, along with technology. They are the leader in touchscreen displays and have been doing this for 50 years, with significant patent protection. Customers recognize them as leaders in this market, and they remain focused on their sector. While others are moving away from this market, they continue to remain focused on it, which matters. We saw this with our competitor on mobile devices. Others have exited this market, creating opportunities for both them and us.

Our last question comes from Rob Mason with Baird.

Maybe just one more question on Elo. As you think about some of these products, is the strategy to keep the Elo brand? Does this give you an ability to tier any of your products?

Yes, I would say that the overlap is relatively small. Our recent kiosk announcement has been successful in the market, but it's quite different to have a single kiosk offering and a complete portfolio. It’s the same on their side, as their mobile device has focused more on payment; again, it represents small revenue compared to the overall portfolio. The product overlap is very minimal, and we see that as a strength in the acquisition. The fact that there is little overlap allows us to focus without debates about which product or area to focus on, avoiding product line confusion that helps you succeed from an acquisition perspective. We have also worked with Elo for some time, having had a relationship with them as an OEM customer. We know the team well, and there is a cultural fit and alignment on product portfolios, which are both high-quality and respected in the market. That is definite evidence and conviction for us and when customers say it would be great if we could come together.

Just a quick note, your third quarter EBITDA margin guidance is a little down year-over-year. But if I adjust for the tariff impact you outlined, it equates to about a 30% incremental margin year-over-year. As you think about tariffs, hopefully, we get to a normalized place with pricing and mitigation. Are there any major puts and takes on the margins right now, FX or anything else you would call out? No. As you said, the 30% incrementals, excluding tariffs is about what you'd expect and we've historically delivered. We've largely worked through the last year's supply chain challenges, and we're seeing great leverage on our supply base and fixed infrastructure with growth. So those are the key dynamics. For us, it's how do you drive the incremental volume and leverage our scale to expand margins.

Our next question comes from Meta Marshall with Morgan Stanley.

A couple of questions for me. One, in the past couple of quarters, you've mentioned that you didn't expect customers to necessarily absorb the price, but instead, adjust the volumes. I wanted to see, as you've been putting in price increases for tariffs or contemplating them, does that expectatiOn still stand where you would expect kind of volume to offset price increases? And the second question, just on Elo, any 10% customers or kind of customer concentration on their part to be mindful of?

On the price increase, I’d say we’re seeing two dynamics. Where we’ve raised it on some of the transactional business, we’ve seen good flow-through, maybe a little bit of impact on volume, but overall, volumes have held up well on the run rate business where we increased prices. Notice that we reduced the amount of price we expected from the raise in April between our last guide and today, primarily in mobile computing, realizing a bit less due to the electronics exemption. For us and our competitors, you’re not paying the higher tariff; our customers know we're not paying the higher tariffs, so you’re not seeing market price increases. It’s a competitive market. We're managing that through concessions. The teams are still driving it, because obviously, we still have more to go to fully mitigate the impact of tariffs. Overall, outside of mobile computing, we’re seeing how we expected: a bit of volume trade-off, but prices are coming through in large part.

From an Elo perspective, they have a diverse customer base. Their largest customer would be distribution, as you see with us. For end customers, certainly larger customers you’d expect in retail, quick serve, and others, are larger clients for them, but no 10% concentration and overall, their customer mix is pretty diverse across retail, quick-serve restaurants, hospitality, healthcare, and industrial applications in the markets they serve overall. There are certainly larger concentrated customers, just as with Zebra, where those larger customers buy more from us.

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

I'd like to thank our employees and partners for their support as we delivered strong Q2 results. We look forward to welcoming the Elo team as the acquisition closes. Have a great day, everyone.

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