Mike Steele - Vice President, Investor Relations Anders Gustafsson - Chief Executive Officer & Director Michael C. Smiley - Chief Financial Officer Joachim Heel - Senior Vice President-Global Sales

Paul Coster - JPMorgan Securities LLC Brian P. Drab - William Blair & Co.

LLC Keith Housum - Northcoast Research Partners LLC James E. Faucette - Morgan Stanley & Co.

LLC Richard Eastman - Robert W. Baird & Co., Inc.

(Broker) Jeffrey Ted Kessler - Imperial Capital LLC Andrew C. Spinola - Wells Fargo Securities LLC

Good morning and thank you for joining us. Today's conference call and slide presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer; and Mike Smiley, our Chief Financial Officer.

Anders will begin by discussing our first quarter highlights and key drivers of the results. Mike will then provide more detail on the financials and discuss our 2016 outlook.

Anders will conclude with an overview of our strategic priorities in 2016 and a brief update on our integration of the Enterprise business. Following the prepared remarks, Joe Heel, our Senior Vice President of Global Sales will join us as we take your questions.

This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year. Before we begin, I need to inform you that certain statements made on this call include forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements reflect the company's current expectations concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the company's filings with the Securities and Exchange Commission.

During this call, we will make reference to non-GAAP financial measures, as we describe business performance. You can find reconciliations of our GAAP to non-GAAP results in today's earnings press release.

Now, I'll turn the call over to Anders.

Thank you, Mike. Good morning, everyone, and thank you for joining us.

It was clearly a challenging quarter as the softening demand we began to see in late 2015, particularly in North America, unexpectedly persisted through the end of the first quarter. As a result, adjusted sales declined 3% year-on-year on a constant currency basis, short of our expectation for approximately flat sales.

In addition, given the flow-through impact of lower sales, non-GAAP earnings per share were $1.01 also below our expectations and lower than the prior year. Typically, our quarterly sales volume is backend loaded, particularly in the first quarter, through February we had been encouraged by a healthy pipeline of direct business, as well as the expectation for a pickup in growth across our reseller network.

However, as we progressed through March, continued economic uncertainty combined with the slow IT purchasing environment led customers to push out decisions and commitments. This impacted our late quarter close rates and resulted in lower than expected sales.

Also, our distribution partners reduced inventories as they navigated through softer than expected end-user demand. As a reminder, we faced a challenging comparison to exceptionally strong first quarter sales growth last year of 13% in North America, and 11% in constant currency for the total company.

Turning to our regions, while we anticipated a decline in North America. The decrease was more pronounced than expected, driven largely by the macroeconomic uncertainty I discussed earlier.

In EMEA, we saw a modest constant currency growth driven by strength in the UK, Germany and Eastern Europe. We saw some weakness in Southern Europe and the Middle East and the run-rate business was softer.

Our Latin America region continued to see sharp sales declines through the first quarter after a weak 2015. That said, we had limited growth in Mexico, our largest contributor to sales volume in the region.

This was overshadowed by ongoing weakness in Brazil where we have yet to see stabilization in the political and economic environment. There were some bright spots in the first quarter.

First mobile computing sales were up slightly on a constant currency basis, including solid growth in Android. Second, on a constant currency basis, we achieved double-digit growth in Asia-Pacific, led by strong performance in China, and our supplies business returned to growth after a brief pause in the fourth quarter.

In the U.S. and Europe, sales-out of our distribution partners outpaced sales-in, which indicates stronger end-user demand than our results indicate.

Looking at our verticals, we saw the strongest growth in transportation and logistics, which benefits from parcel delivery and e-commerce growth. Healthcare continued to gain momentum and remains a strong vertical for us.

However, retail, our largest vertical, declined due to slower purchasing decisions and fewer large transactions. While a number of environmental factors put pressure on our first quarter sales results, our team executed well within the areas of the business we were able to control.

For example, despite lower than expected sales, we delivered Q1 gross margin at the high end of our expectations, as the result of our efforts to capture synergies and execute on our improvement plan for services margins. Given the lower than expected first quarter results and the continued headwinds, we are introducing a tempered outlook for the second quarter and have lowered our full year sales forecast.

I'll now turn the call over to our CFO Mike Smiley, to review our financial results in greater detail and discuss our 2016 outlook. Afterwards, I will return to discuss our progress on strategic priorities, as well as key areas we are focused on to position the business for improved performance.

Thanks Anders. As you can see on slide five, adjusted net sales for the first quarter were $850 million, a 3% decline year-over-year on a constant currency basis.

Enterprise adjusted sales were $537 million, down 4% year-over-year on a constant currency basis. Data capture and services declined while mobile computing sales increased slightly.

We saw the steepest decline in data capture due to a difficult comparison, as we realized especially strong demand in Q1 2015. Wireless LAN sales, which represents approximately 3% of total Zebra, also were lower than last year.

Legacy Zebra sales were $313 million, down 3% on a constant currency basis, against 19% growth in Q1 2015. This is largely driven by a decline in location solution sales related to last year's NFL contract.

Our supplies business resumed growth in Q1 while printer sales declined slightly. As Anders mentioned, sales in North America declined 7%, with the sharpest decline in data capture offset by modest growth in mobile computing.

EMEA generated modest growth, up 1% from a year ago on a constant currency basis. Slight growth in mobile computing, data capture and supplies were partially offset by lower printer sales.

Sales in Asia-Pacific grew 10% in constant currency, led by strong performance in China. We saw growth in all major product categories.

The growing middle class is creating healthy momentum in e-commerce and healthcare and driving growth in China and India. In Latin America, sales declined 15% as the result of a continued difficult macroeconomic environment, particularly in Brazil.

Sales grew slightly in Mexico, where we are seeing signs of stabilization and have an improving pipeline of opportunities. Adjusted gross margin was 46.2%, at the high-end of our expectations and in line with the prior period.

The benefits from integration synergies, including lower service costs, were partially offset by the flow-through impact from lower sales volumes, as well as the impact from unfavorable foreign exchange movements of approximately 60 basis points. Operating expenses for sales and marketing, R&D and G&A were $288 million, including $9 million of stock-based compensation expense.

This reflects an increase of $4 million compared to the prior year, due to increased litigation expenses and the settlement of a legal matter. In the first quarter, we recorded expense associated with an under-accrual of 2015 commissions.

This is mostly offset by lower year-on-year expenses related to the company's short-term incentive compensation plan. Other operating expenses included acquisition and integration and exit and restructuring cost of $43 million, which was $6 million higher than the prior year, and amortization of intangible assets of $59 million, which declined by $9 million compared to the prior year.

In the quarter, non-GAAP EPS was $1.01, compared to $1.41 in the first quarter of last year. First quarter 2016 adjusted EBITDA margin was 15.5%, a decline of 140 basis points to the prior period, primarily due to the flow-through impact from lower sales, and an estimated 100 basis point unfavorable impact from foreign currency.

As a side note, Q1 EBITDA margins would have been approximately 400 basis points higher using the exchange rate as of the close of the acquisition in October 2014. Turning now to the balance sheet and cash flow highlights on slide six.

We ended the first quarter with $194 million in cash, which includes $143 million held outside the United States. We are at a seasonally high level of cash at the end of Q1 prior to a semi-annual interest payment on our senior notes in the second quarter.

At the end of Q1, we had approximately $2.9 billion of long term debt on the balance sheet, consisting of $1 billion of senior notes due in 2022 and a $1.9 billion term loan maturing in 2021. The debt was used to finance the October 2014 Enterprise acquisition and we've been paying it down aggressively.

With $80 million in total principal payments in the first quarter of 2016, net debt to adjusted EBITDA ratio is approximately 4.8 times. Our liquidity levels are solid.

We have no near term debt maturities and an untapped $250 million revolving credit facilities with no financial covenants unless we have more than $50 million drawn at the end of any quarter. In the first quarter of 2016, we generated $95 million of cash flow from operations, which compared to $36 million in the first quarter of 2015.

Capital expenditures were $19 million compared to $26 million in the first quarter of 2015. Our goal is to reduce debt by $300 million this year.

In 2016, we expect improvement in cash flow as compared to the prior year driven by EBITDA margin expansion, approximately $90 million to $100 million less integration restructuring costs, and approximately $30 million lower non-integration related capital expenditures. We're also targeting greater than $30 million (sic) [$100 million] from various working capital initiatives, which we have already seen good progress in accounts payable and receivables management through the first quarter.

Additionally, we also expect to reduce our minimum target operating cash level by approximately $50 million from the end of last year. Roughly one quarter of our total company sales are denominated in euros, and the vast majority of our cost in the eurozone are in U.S.

dollars. In order to minimize volatility in our financial results, earlier this year we hedged approximately 80% of Zebra's net euro cash flow exposure for the entire year, effectively locking in $1.09 euro rate.

This hedge rate is below current rates as the euro has recovered in recent months. Slide seven shows our path to financial deleveraging, our top priority for free cash flow over the next couple of years is to pay down the acquisition debt to achieve a more optimal capital structure.

We are still committed to achieving net leverage ratio of less than three times by the end of 2017. Given the current headwinds we are facing, the potential impact on conversion rates and timing within our sales pipeline, we've moderated our growth expectations for the second quarter and full year.

On slide eight, you'll see that for the second quarter, we expect adjusted net sales to be flat to down 3% from the comparable net sales of $894 million in the second quarter of 2015. This expectation reflects a range of a 2% decline to 1% growth on a constant currency basis.

Second quarter 2016 adjusted EBITDA margin is expected to be in the range of 15% to 16%. Non-GAAP EPS are expected to be in the range of the $1.0 to $1.20.

Our outlook also reflects a higher gross margin compared to the prior period, but lower than Q1 due to seasonal factors. Also in Q2 operating expenses are expected to be slightly lower than prior year period as we tightly control costs.

For the full year, adjusted net sales growth is expected to be in the range of a 3% decline to 1% growth from the comparable net sales of $3.7 billion for the full year 2015. This reflects an expected range of a 2% decline to a 2% growth on a constant currency basis.

We expect sequential growth in quarterly sales volumes throughout 2016 and also expect positive year-over-year sales growth by the fourth quarter. Due to the downward revision of our sales guidance, our adjusted EBITDA margin is now expected to be approximately 17% for the full year 2016, which is at the low-end of our previous expected range.

The improvement over the prior year is driven primarily by higher gross margin. We expect slightly lower operating expenses than the prior year.

Also note that we are assuming a 50 basis point drag to EBITDA margin year-on-year, based on foreign currency changes. For the full year, we have the following assumptions shown on slide eight.

We expect capital expenditures of $70 million to $75 million, including $15 million to $20 million related to acquisition integration. Depreciation and amortization expense of $310 million to $315 million.

Interest expense of $195 million to $200 million, including amortization of debt issuance costs of $18 million to $20 million. Share based compensation expense of $27 million to $29 million, a non-GAAP tax rate of approximately 22% to 24% and cash taxes of approximately $50 million to $60 million.

As previously stated, relative to 2015, we expect to realize an incremental $50 million in acquisition cost synergies, during the full year 2016, approximately $30 million of which will improve our gross profit and roughly $20 million to reduce operating expenses. Consistent with our prior outlook, the rationalization and modernization of Zebra's IT platform and ecosystem will result in $130 million to $150 million of integration related costs over 2016 and 2017, of which approximately 20% will be in the form of capital expenditures.

Also we expect the vast majority or roughly 80% of this cost to be incurred in 2016. The expense portion of these costs are one-time in nature and will be – and are excluded from our non-GAAP P&L results.

These efforts are expected to drive additional operating expense efficiencies and reduce our ongoing capital expenditures once completed. I will now turn the call back to Anders.

Thank you, Mike. As shown on slide nine, we are executing within the framework of our four strategic priorities to address our near-term challenges and to meet our financial objectives.

First, we are focused on delivering profitable growth as we capitalize on secular trends, prudently manage our cost structure and take immediate actions to improve sales. These include refining our go-to-market sales strategies, more frequent and intensive reviews of the opportunities in our sales pipeline, targeted programs to drive increased lead generation activity for our direct sales teams and distribution channel partners, and the rollout of new products and solutions.

Additionally, in early April, we launched our PartnerConnect program, which better aligns partners' incentive with our own to drive growth. We believe PartnerConnect will also help us recruit more partners to expand our global network.

Second, we continue to expect to realize $50 million of incremental cost synergies in 2016. In addition, we are tightly managing our overall cost structure, through investment prioritization and stringent controls on discretionary spending.

Third, a top priority for Zebra is to improve free cash flow and de-lever their balance sheet through margin improvement, declining integration costs, lower capital spending and working capital efficiencies. Lastly, we will continue to make meaningful progress on our transition to One Zebra as we execute the remaining steps of our integration and leverage the Zebra brand.

As I mentioned earlier, the recent key milestone in our transition to One Zebra was the launch of PartnerConnect, our new channel partner program. We've incorporated the strengths of the two prior programs and we have added a number of new design features.

The launch is the result of an intense year of planning and engaging with channel partners to develop a best-in-class program. As part of the rollout, we got off to a great start last month with four regional summits held around the globe.

We received very positive feedback on the new program and on our vision for Enterprise Asset Intelligence. Slide 10 provides some perspective on our progress in integrating the October 2014 enterprise acquisition.

From the beginning, we've had a very structured process to ensure a successful integration. We established an internal Business Transformation Office or BTO to oversee the execution of the integration.

The BTO has executive management and board oversight, as well as external resources to ensure that we implement best practices. The tremendous amount of advanced planning was done starting immediately after the transaction was announced.

This included laying the foundation for our global integrated ERP. The first phase of our ERP successfully went live this month in our Asia-Pacific region and the remainder of our global operations will be transitioned over the next year.

Other selected key initiatives shown on the slide have either been completed or are in advanced stages of completion. Despite near term challenges, I remain optimistic about the business, our value proposition to customers and our growth potential.

We have made tremendous progress with integration and we remain highly focused on extending our leadership position in Enterprise Asset Intelligence. Our robust solutions extend our relevance well beyond hardware products into services and software.

Later this month, we are launching our new brand campaign named Visibility That's Visionary, which highlights our smart innovative products, software and services, that help businesses gather insight into every aspect of their enterprise. Our Enterprise Asset Intelligence solutions enable our customers to sense, analyze, and act.

With sensing, we enable real-time operational visibility into people and things, such as packages moving through the supply chain, luggage on an airport tarmac, and work flows in a medical facility. We can provide instantaneous connectivity between our customers' physical and digital worlds.

We can then analyze this operational data, which can include status, condition, and location to provide actionable insights for our customers. Zebra's deep expertise has enabled us to be a strategic and trusted advisor to leading enterprise customers and partners throughout the world.

Through Enterprise Asset Intelligence, we help enterprises improve productivity and deliver better experiences for their customers. Let me provide a few examples of emerging areas, where we have developed Enterprise Asset Intelligence solutions for our customers.

First, we are working with a global transportation company on what we call Zebra Trailer Load Analytics, which collects real-time data on key load metrics, analysis the information and displays the results on a dashboard. The industry average load efficiency is about 70%, just 1% improvement in trailer space utilization, can represent millions of dollars in savings to transport carrier.

This patented solution provides the visibility to quickly survey the status of the loads and make real-time adjustments to optimize capacity utilization. The result is improved margins through productivity gains and a reduced carbon footprint.

Second, a solution piloted in Danish hospital allows staff to identify and track beds, wheelchairs, medical equipment and other assets on their mobile device. In general, more than one-third of nurses spend at least an hour locating equipment during an average hospital shift.

By leveraging this Zebra RFID technology, users are able to optimize workflows, increase accuracy and asset utilization and improve patient care. And third, we are currently working with Bosch to create visibility across the food supply chain.

The Food Safety Modernization Act requires greater transparency through the entire supply chain and requires electronic records of temperature to be kept from farm to fork. This regulation is driving increased interest in solutions that can sense and monitor temperature and other environmental conditions as goods are transported through the supply chain.

Using Zebra's easy to deploy cloud-based temperature monitoring solution that uses wireless sensors, mesh networking, mobile computers and our cloud service. Providers are able to meet increasingly stringent regulatory demands, while offering consumers enhanced protection.

All of these solutions demonstrate how our two legacy organizations are better together. We have a healthy pipeline of other innovative products and solutions to differentiate ourselves from our competition and drive leadership in Enterprise Asset Intelligence.

One example of a recently launched product line is our 3600 Series scanners, which are 23% more durable than any other scanner in its class. These scanners are ideal for use in demanding industrial environments, such as warehouses, distribution centers, manufacturing shop floors and do-it-yourself retail stores.

They also provide another proof point of Zebra's innovation in the core markets that we serve. We continue to be very well positioned.

Our enterprise customers value our innovative products and solutions more than ever to meet their demands to increase productivity and improve customer service. Zebra facilitates retail commerce through all its channels.

We benefit from the continued growth of e-commerce as those e-tailers expand their business. For traditional brick-and-mortar retailers, we are a key strategic partner as they work to improve their omni-channel capabilities and customer service levels, which require a more advanced level of inventory tracking technology than they have historically been able to deploy.

For these reasons, independent research forecasts that retail will be our fastest growing opportunity in mobile computing in coming years. In our other key verticals, particularly transportation and logistics, healthcare and manufacturing, customers turn to our technology to gain a competitive advantage, reduce costs and increase efficiency in a wide array of applications, including workforce mobility and workflow and patient safety.

Momentum behind secular trends including mobility, cloud computing and the Internet of Things continues to build with the proliferation of connected devices and mobile applications. Furthermore, the ongoing Windows operating system migration in mobile computing and the transition from 1D scanning to 2D imaging in data capture point to the depth and breadth of the growth opportunities ahead for Zebra.

For these reasons, we firmly believe in the outlook for the company and are reiterating our long term financial goals, as shown on slide 12. We plan to continue to balance investments for growth with prudent expense control while realizing acquisition cost synergies.

With this continued focus, we are confident in our ability to grow the business, further expand margins and reduce leverage. And with that, I'll hand the call back to Mike Steele.

Thanks, Anders. We've reserved the balance of the hour for Q&A.

We ask that you limit yourself to one question and one follow-up so that we can get to as many of you as possible. Jamie, please let our callers know how to ask a question.

Before we start, just real quick, I wanted to clarify something that I – in my prepared remarks, I mentioned that in our – achieving our goal of $300 million of debt repayment, I said that our working capital would provide $30 million of cash. Well, that number should be $100 million.

I just want to make sure that's correct for everyone. Thank you.

Yeah. Thanks.

Two questions. The first one really is to do with sales-out versus sales-in, in the United States.

Can you just sort of clarify which products we are talking about? And what is this telling us about the sort of confidence of the distributors versus the end customers?

And then I have a follow up.

Yeah. We saw the same trend in North America, Europe and Latin America, where the end markets were a little weaker than what the distribution partners had expected at the beginning of the period.

So, when their expectations are tempered a little bit, tempered down a bit, they tend to reduce their inventory positions, in order to maintain the same level of days on hand. But for us that means that basically sales-out continues at a reasonable clip, but they can then satisfy that with inventory in hand for some time.

So for us, our revenue recorded becomes less, while the sales-out, which is a better indication of the health of the end markets, continues at the better pace.

Okay. And then the follow-up question Anders is that, I think people will be forgiving if this is an air pocket that's cyclical in nature.

I think the concern is that there is competition, there's commoditization, substitution by smartphones of some of the MSI business, and that some of the secular growth isn't as strong as perhaps depicted. So, can you just sort of give us some sense of whether there's an – what your view of the competitive landscape and the commoditization risk currently is and whether that's also impacting you in addition to the cyclical slowdown here?

Yeah. Our industry is clearly competitive.

We always said it's a competitive industry, but it is also fairly fragmented. Zebra is the clear market leader, and if you go back to 2015, we gained share across all our main product lines globally, and early indications are that we held or gained share in the first quarter here also.

So, I think the cost for the difficulty we're seeing is much more macro in nature. I think we certainly feel that we are very well positioned to continue to expand our leadership position in the industry.

And our customers view us now much more as being strategic to them, our solutions are well respected and needed by our customers and I think we're very well aligned – our solution is very well aligned with our customers priorities.

Okay. Thank you.

Good morning. Thanks for taking my questions.

First one is just on OpEx is up slightly year-over-year and the expectation was for it to be flat to slightly down. Mike you mentioned the litigation expense, I guess that's related to the lawsuit around the NFL technology, I'm just wondering if you could comment further on why OpEx was up slightly year-over-year versus your expectation for flat to down?

And are those litigation costs something that – is that a headwind we should be expecting to be around through the balance of 2016, do you have any idea?

Yeah. The majority of that increase is related to a settlement, so fortunately settlements don't incur additional costs, so that shouldn't be ongoing.

It's related to an IP matter, and it's not the – it's not related to the NFL. I think that one thing we would want people to take away is that, we have been aggressively managing our cost.

And I think as we put out our forecast for Q2, we're seeing slightly lower year-over-year OpEx as we go into the second quarter, so OpEx is getting a lot of focus from management at this point.

Is that settlement – does that settlement account for the discrepancy between what you are expecting for OpEx versus the actual result?

Most of it. There's a little bit also of healthcare.

Healthcare is a difficult item to forecast. And so, depending upon the actual employee health issues it goes up and goes down.

So the biggest – the biggest one is the litigation related to the IP. I'd say the next one is healthcare.

Okay. Thanks.

And then can I just ask too, is there any way you could quantify what we were talking about in the last caller's question related to the sell-through for the channel. Anders you mentioned that the channel is seeing growth, what sort of growth are they seeing, how big is the discrepancy between your sales versus what the channel is seeing?

Yeah. I don't think we can quantify it in real dollar terms, but the channel sales were slightly negative for us in North America, but they were on the sales-in basis, but they are positive on the sales-out basis.

So there was a difference, but I wouldn't say that that would be – that's not the sole reason for why we missed our numbers.

Understood. Do you have any sense for the inventory level going into the second quarter in the channel?

Yeah. We believe that the inventory level going into the channel is appropriate.

And we are forecasting basically a neutral sales in and sales out for the second quarter.

Okay. Thanks very much.

Yeah.

Good morning, gentlemen.

Good morning.

Good morning, guys. If I could just follow-up on the performance of the legacy Zebra business during the quarter, I just want to clarify, how the business performed excluding the Location Solutions Group?

Effectively, it was fairly flat except for Location Solutions. Location Solutions was the major change from year-to-year.

Okay, great. And as we look at the first quarter guidance and the second quarter guidance, obviously, compared to full year, you guys are expecting significant growth, I think even in second half of the year, what gives you guys the confidence in that?

Is it the larger deals, is it your pipeline as you guys are exiting the quarter?

Yeah. So, we have confidence in our 2016 outlook as we've outlined here now.

We certainly had persistent macro headwinds in the first quarter. It's a big drive.

And when we look at the markets going forward, we don't believe that they are getting worse. If anything that feels like Q2 is getting a bit better, but we want to have a cautious tone I guess to this, and we've also taken a more cautious assessment of some of the assumptions that we used to build up our forecast.

So, I think on the last call, we talked about our close rates for the deals we have in the pipeline, they ended up being lower than what we had expected, lower than what we had seen in the last five years, based on both the budgets being pushed out, but also more C-level people changes where they kind of came in and put a freeze on some projects until they could figure out what the new IT strategy and IT projects priorities should be. And we're also assuming some longer sales cycle based on what we've seen here in the quarter.

But we do expect stabilization in the second quarter, and we would expect to have sequential growth, but we're forecasting basically sequential growth in line with historical trends when we look at what the business has done quarter-over-quarter over the last five years. It gives us a sense of what's normal, so we don't want to – we're not pushing beyond that particularly.

And as I said earlier, sales-out versus sales-in we're forecasting to be neutral. Our partner community they were very bullish beginning of the year at the end of last year, beginning of this year, and they continue to remain very optimistic.

So that gives us some confidence. We launched our new partner program, PartnerConnect in April, that we believe will help us drive some enthusiasm around our brand and recruit some more partners and win more business, and we have a good pipeline, we do have a very strong pipeline for the business.

Great. So you said that they are – they are just being pushed out and not being cancelled, but deals are in the pipeline?

Correct.

Yeah. The vast-vast majority of them are just being pushed out some to Q2, some further out.

We don't expect that trend will totally stop. I suspect that we will see some continued push out from Q2 to Q3, but it will diminish as the year goes by.

And our – we have not lost anymore deals than we would normally do, so this is not about we losing deals. This is deals getting pushed out.

Okay. Thank you.

Thanks very much. I guess I have two questions.

First, gross margins seems to have rebounded in the first quarter. And I'm wondering kind of, if you can give a little color what drove that, was that mix or were there build material changes, et cetera?

And then I have kind of a longer-term question or specifically related to 2017, is that if we look, you're continuing to talk about getting below three times debt-to-EBITDA type ratios, but – and it seems like they're indicating that part of that will come through the commitment to pay down the $350 million in debt, but at the same time I think at least what we're seeing today is that, the earnings outlook for 2017 probably looks a little dimmer today. And then also it seems like you're also reducing a little bit your synergies benefits expectations, so I'm just wondering if you can help us bridge a little more directly what you think you may have to do or how you can get those ratios?

?Thank you.

Yeah. This is Mike.

And so, there is a couple of questions in there and I'll start with the gross margin. I think, first of all, we were very pleased with the results in the first quarter from a gross margin standpoint.

One of the nice things that we saw there was our services margin improved meaningfully in the first quarter, which helped, obviously the synergy work we've been doing on the procurement side has helped us. We see as the year goes on that we'll continue to benefit from further work that's been done on the procurement side.

Volume will also improve. So, from what I think was a very solid first quarter, we see that continuing to improve through the end of the year.

So, when you look at the cash flow available for re-payment of our debt, part of it's going to come from the stronger margins to offset some of the top-line dampening that we've been sharing. As far as the ability to reach our three times net debt to EBITDA, there is a couple of things that I want to highlight is that when we set the $350 million for 2017, we weren't assuming that all of our cash for 2017 would be necessary to get down to that three times debt to EBITDA, so there is – so as a result, if we achieve what our expectations are in 2017 even with what we had prior to our current change, we could have done more than $350 million and we still see an easy path getting to the $350 million.

As far as the $300 million for this year, again just to reiterate, we said that we expect our EBITDA margin to improve from last year. And as I tried to clarify earlier, working capital improvements should be $100 million better than last year.

I think if you look at our cash flow, you can see we had $96 million of operating cash flow, a lot of that came from working capital. So, it was a huge improvement from the prior year.

We also have $90 million to $100 million lower integration spend year-over-year. CapEx will be lowered by $30 million, a big chunk that relates to the savings for the spending we had last year to get everybody in the same place.

And then, we also see the ability to – this doesn't necessarily go to three times as far as paying down our debt. We see the ability to repatriate $50 million in the year from foreign locations that will help us reduce our debt.

Maybe just to add a couple of things. You mentioned also, you thought our synergy target had gone down and it hasn't.

We have not changed our synergy target, that's the same as it was before. And in 2017, our integration cost will further come down and actually go away altogether, so it could generate a lot of additional free cash flow.

That's great. Thank you.

Yes. Thank you.

Anders, could you just speak a little bit. I just want to dig down into this dynamic around the push-out of the deals.

We continue to pick up, obviously the omni-channel spend is still pretty healthy. We do have this Android/Microsoft operating language conversion on the mobile computing side.

I'm just curious, what is the genesis of the push-outs? I mean, the spending in the omni-channel, and you commented earlier that your retail business was down.

But that spending in the omni-channel seems to be somewhat independent of the health of the retailers, given that they're supporting their online spending infrastructure, or their online shipment infrastructure. So maybe you could just help us understand the context of these push-outs and maybe the timing of that?

Yeah. I'll start a little broad, a little high, and then I'll kind of narrow myself down to more the omni-channel activities, but first I'd say the corrections we saw in the stock market in late 2015, early 2016, that happened as people were starting to put together their 2016 operating budgets.

So I think that caused people to wonder, should I lean into 2016 or should I lean out of it. So, I think people took a little longer to finalize their budgets, they took a little longer to hand down those budgets to their operating units.

So it took longer for basically the businesses to get back to business again. And also in retail specifically I think the Christmas season was kind of uneven between the different retailers.

And the omni-channel activities for retailers, it's a big strategic shift for retail generally. You have traditional brick and mortar retailers and then you've had more the pure play e-commerce guys fulfilling through a distribution center.

So, there has been more change I guess in the executive suite to be able to deal with this and when you have a new, say an IT team come in, they tend to want to pause a little bit of what they're doing, assess what they're doing, figure out what the new priorities, new strategies should be, but then, in order for them to execute on their omni-channel strategy. Now, we are very well positioned to help them with their omni-channel strategy.

We are an essential part of helping them drive greater visibility into all the merchandise they have in store, which is essential to having an effective omni-channel strategy. But I'd also like to, again, maybe point to, there are more new use cases that drives demand for our products in retail and in, say the online e-commerce piece.

So if you just go back and think about how historically a retailer would get a pallet of goods delivered at the back of the store, you would take the boxes out and scan them in, put them in the back of the store, then you would put them in the front of the store and the consumer will pick it up and take it to the point of sale, where they will be scanned. So the touch points for our products was there, but not as dense as it is today.

If you now look at, for a brick-and-mortar retailer, say, you have click-and-collect. So you order from home, you have somebody in the store pick up all the merchandise for you and check you out; that requires a lot more mobile computing, scanning, printing.

You have mobile point-of-sale as part of that. You have pick up at the curb.

You have to identify the consumer. We use lockers to do this.

And if you go into a fulfillment center, you see lots and lots of touch points where you have to scan every item in, it's not just pallets, you are scanning every item that comes, and equally you have to scan it out. And it drives lots of printing, lots of mobile computing, and eventually also you get the benefit of transportation logistics, that each package has to deliver to somebody's home.

So the backdrop for us in retail, we see as being very positive as these new modalities of how consumers want to interact with the retailers tends to be very favorable and require more of our product.

Let me just ask one follow-up question; in terms of rolling out the PartnerConnect program, do you feel that – I mean it's fairly well telegraphed. And I don't exactly know how commission structures have changed or any of that, but at the same time, was there any impact from the second quarter roll out of the PartnerConnect program on your sell-in to the distributors?

I think if there was, we believe it is very small. We don't believe that that had a big impact on the first quarter.

We purposefully were not sharing too much about the new program until we got into the first days of Q2 to specifically ensure that we didn't distort Q1 or Q2.

Okay. All right.

Thank you.

I'd like to drill down on the – sorry, on your pipeline a little bit. Could you describe the nature of what's in the pipeline from a – let's just say from a functional or perhaps from a vertical market point of view, and what gives you that confidence that that pipeline is going to have a good gross margin in it?

Yeah. So, I'll start and then I'll hand over to Joe Heel here also.

But we've driven a lot of discipline around how we manage our pipelines, making sure all the deals get put into the pipeline. So, we have as good a visibility into all the opportunities that we work on to make a quarter.

We categorize all the opportunities based on, if it's something that's high likelihood, medium likelihood or less likelihood and then we have our run rate business too in there. So, there's a number of different components that we look at historical, statistical conversation rates to add up to our forecast, and that's worked very well for us for many years.

The conversion rates were lower in Q1 than they've been before and that we had not anticipated that. We think that's because of the uncertainty in the economy and budgets getting pushed out later and so forth, not something that is systematic.

Thinking more episodic. I think Joe can probably give you a little bit more color around exactly how we use the pipelines?

Yeah. So, what we're seeing in the pipelines is very much a product of what Anders described happened in the first quarter in terms of some of the deals in particular in retail pushing out.

Those deals are in our pipeline going forward and the ones that we see there are the more significant investment decisions in particular things related to for example the operating system migrations. Those are big decisions that the retailers need to make and they were affected by this hesitation that they perhaps sensed in the first quarter.

But we see those in our pipeline where the customers are planning to do those operating system migrations. The other things that we see in the pipeline are the new products.

We've released a significant number of new products as you've seen over the last one to two quarters and those are beginning to take hold in our pipeline as are some of the new technologies that we have developed in some cases with customers. So that's a good summary of what we're seeing.

Okay. Also, on the incremental $30 million that you have – or $50 million, assuming that you expect to save in synergies this year.

You mentioned that a portion of that is going to go to, I believe, $30 million or $20 million will go to gross margin and the rest is going to go into operating expense. Is this a – is this in effect an incremental improvement over improving the margin than you saw in the first round of expense – of synergies?

Yeah, this is Mike. So yes it's $50 million, $30 million of it is cost to goods sold, $20 million is OpEx.

Again this is improvements from 2015 and for the OpEx, a portion of it is just actions that happened in last year will have a full year effect in 2016. The cost of goods sold is primarily procurement related items where you have to sort of burn through old inventory at higher prices before you can process through your P&L, the lower cost items that you negotiated previously.

Okay. So interpreting that last sense, you are saying that essentially by doing that.

The margin on cost of goods should continue to be helped by what you're doing right there on that $30 million?

Yeah, so we talked about the gross margin. As we go through the year, we see – obviously we're affected year-over-year by FX headwinds, right.

So that is a negative impact for us on our gross margins. We saw actually in the first quarter of 60 basis points.

That's offset by the synergy benefits that we saw, services improvements in margins that we talked about in the first quarter, we expect it continues through the full year. And then as we forecast it, our revenue is going to increase, our volume is going to increase as the year progresses, and that will also help us.

So as we've talked about gross margins, though we've done – considering the headwinds of FX, we had very strong Q1 and we expect that to continue through the end of the year.

Okay, great. Thank you very much.

Yes.

Anders, I wanted to ask you about the long-term EBITDA guidance of 18% to 20%. When you've talked about that in the past, you've sort of referred to it as not just a range that you hope to be in just for a moment and then back below it, but a range you hope to operate in on a consistent basis.

As you can imagine after this quarter and the lower guidance, it's starting to look fairly far out into the future, and even the low end of that range is looking more difficult to achieve. So it would seem to me there's going to need to be an inflection here in the expenses or the gross margin to reach that range by the end of 2017.

So I'm wondering two things. One, do you still feel like that range is the range you will be in as opposed to just a peak range?

And at what point in 2016 and 2017 will we start to see this inflection that you can get to that?

So, first, we are confident that that's still a very appropriate range for us and we expect to be within that range more consistently. I think the original target was for that to happen as a run rate as we exit 2017.

So, I think that what we saw here in the first quarter is much more driven by short-term economic issues that seems like many other companies have been hit by too, not a structural issue to us or our industry. We feel we have good growth opportunities.

We have good opportunity to expand our gross margin, expand our EBITDA margin as well. So, I feel that's a very appropriate and doable target for us.

Yeah. Just to follow-on Andrew, just not to belabor the point, but if we had – the exchange rate – the goals that you talked about were set and we did the acquisition.

And at that point, the exchange rate for the euro was a about a $1.33. So, if we were still in that environment today, our EBITDA margin would be 19.8% for the first quarter.

So, I think from a management standpoint, as Anders is saying for us to still hold onto this 18% to 20% EBITDA margin. I'm hoping people will realize that we are managing in a very, very challenging environment.

That said, as I mentioned on the previous question, we still see in the year, we had very strong Q1 gross margin. We see that improving through the year.

We have – we're managing our OpEx carefully and I would say that within our current OpEx, there are certain integration, or two-system dis-synergies, which is in the middle of 2017 should reduce pretty dramatically – meaningfully I don't want to say all of a sudden OpEx falls off the table, but that will help us further drive towards the EBITDA margin that we're still holding on to and are confident we'll achieve.

It's a very important goal for us. We have set a lot of internal targets around that also to align the entire organization towards these things.

So, we clearly see this as one of our absolute top priorities, and one that we feel very good about our ability to meet.

Thanks. And I also wanted to ask you about this recent sort of interesting product introduction by Cognex.

Just wondering if you have any thoughts on that product instruction in terms of sort of philosophically does it change your view at all on the effectiveness of smartphone products for some in this space, or make you think anything differently about how to approach the market for some of these products?

No. As I said earlier, we have a competitive market.

It's a very fragmented market. There's lots of competitors coming in and out of our market.

We are the clear market leader and we gain share in 2015, we certainly expect to continue to gain share in 2016. So, we're not focused on anyone particular competitor.

We're looking at how do we make sure that we can execute our plans. There're obviously a number of players with different sleds out there.

So it's not something radically new for the industry, so I feel comfortable with our competitive position and our ability to continue to grow and expand our market share.

Thanks, Anders.

We appreciate all your questions today and have a great rest of your day.