Zebra Technologies Corporation (NASDAQ:ZBRA) Q2 2024 Earnings Conference Call July 30, 2024 8:30 AM ET
Company Participants
Mike Steele – VP, IR
Bill Burns – CEO
Nathan Winters – CFO
Conference Call Participants
Damian Karas – UBS
Jamie Cook – Truist Securities
Tommy Moll – Stephens
Joe Giordano – TD Cowen
Andrew Buscaglia – BNP
Meta Marshall – Morgan Stanley
Brad Hewitt – Wolfe Research
Keith Housum – Northcoast Research
Brian Drab – William Blair
Rob Mason – Baird
Chris Grenga – Needham
Guy Hardwick – Freedom Capital Markets
Rob Jamieson – Vertical Research
Operator
Good day, and welcome to the Second Quarter 2024 Zebra Technologies Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.
I would now like to turn the conference over to Mike Steele, Vice President, Investor Relations. Please go ahead.
Mike Steele
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 one year.
Our forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially and we refer you to the factors discussed in our SEC filings.
During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of 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 and on a constant currency basis.
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 on the financials and discuss our third quarter and revised full year outlook. Bill will conclude with progress on advancing our strategic priorities. 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.
Bill Burns
Thank you, Mike. Good morning and thank you for joining us.
Our teams executed well in the second quarter delivering sales and earnings results above the high end of our outlook. For the quarter, we realized sales of $1.2 billion approximately flat to the prior year. An adjusted EBITDA margin of 20.5%, a 70 basis point decrease, and non-GAAP diluted earnings per share of $3.18, a 3% decrease from the prior year.
As we discussed in our last earnings call, during the first quarter, we began to see modest recovery in retail and e-commerce. In the second quarter, we saw signs of momentum across other end markets, including healthcare, where we realized double-digit growth.
Mobile computing returned to growth across each of our vertical end markets led by healthcare and retail. The growth in mobile computing was offset by declines across our other major product categories where year-on-year comparisons are more challenging and we were in earlier stages of recovery. Services and software saw modest growth in the quarter.
While we are encouraged by early momentum and demand, we continue to see cautious spending behavior from our customers on large deployments which have not yet returned to historical levels.
Another highlight was our sequential improvement in profitability due to improved gross margin and the benefits of our restructuring actions. Our plan to deliver $120 million of net annualized operating savings is on track and substantially complete.
Given our second quarter performance, progress in our cost actions, and early signs of momentum and demand, we are raising our full year outlook for sales and profitability.
I will now turn the call over to Nathan to review our Q2 financial results and discuss our revised 2024 outlook.
Nathan Winters
Thank you, Bill.
Let’s start with the P&L on Slide 6. In Q2, total company sales were approximately flat, reflecting early signs of momentum demand beyond retail and e-commerce. Our Asset Intelligence & Tracking segment declined 14.4%, primarily driven by printing and RFID on challenging prior year comparisons.
Enterprise Visibility & Mobility segment sales increased 8.2% with double-digit growth in mobile computing partially offset by a decline in data capture solutions. We saw modest growth in services and software.
Performance was mixed across our regions. In North America, sales decreased 7% with fewer large orders in retail and transportation and logistics, partially offset by strong growth in healthcare. In EMEA, sales increased 10%, driven by mobile computing. In Asia-Pacific, sales declined 3% with continued weakness in China and challenging compares in Australia and Japan, partially offset by growth in Southeast Asia. And sales increased 7% in Latin America led by Brazil.
From a sequential perspective, total Q2 sales were slightly higher than Q1, with growth in nearly all product categories as we realized modest improvement in demand throughout the quarter in manufacturing, healthcare, and transportation and logistics.
Adjusted gross margin increased 60 basis points to 48.6% as we benefited from cycling premium supply chain costs in the prior year in favorable effects.
Adjusted operating expenses as a percent of sales increased 110 basis points. This was driven by normalized incentive compensation expense partially offset by approximately $25 million of incremental net savings from our restructuring actions. This resulted in second quarter adjusted EBITDA margin of 20.5%, a 70 basis point decrease versus the prior year, and a 60 basis point sequential improvement from Q1.
Non-GAAP diluted earnings per share was $3.18, a 3.3% year-over-year decrease.
Turning now to the balance sheet and cash flow on Slide 7. In the first half of 2024, we generated $389 million of free cash flow as we drove improvements in working capital. We ended the quarter at a 2.4x net debt to adjusted EBITDA leverage ratio, which is within our target range and we had approximately $1.5 billion of capacity on a revolving credit facility as of quarter end.
We diversified our capital structure during the second quarter by issuing $500 million of senior unsecured notes, while retiring a receivable financing facility that matured in May. We also terminated our remaining interest rate swap agreements for $77 million of cash proceeds. We have been prioritizing debt pay down and now have increased flexibility given our lower debt balance and improved cash flow.
Let’s now turn to our outlook. For Q3, we expect sales growth between 25% and 28% compared to the prior year. This outlook assumes continued stability of demand trends across our major product categories with broad-based growth as we cycle easier compares across the business, including significant destocking activity by our distributors during the second half of last year.
We entered the third quarter with a solid backlog and pipeline of opportunities. That said, we are not anticipating an increase in large order activity considering the conversion rates on our pipeline remain lower than historical levels as customers continue to be cautious in what remains an uncertain environment. We would like to see additional momentum in large orders before factoring in a stronger recovery.
Q3 adjusted EBITDA margin is now expected to be between 20% and 21%, driven by expense leveraging from higher sales volume with benefits from restructuring actions partially offset by normalized incentive compensation expense.
Non-GAAP diluted earnings per share are expected to be in the range of $3 to $3.30.
We have raised our guide for the full year, reflecting our second quarter performance and early signs of momentum and demand. We now expect sales growth between 4% and 7% for the year and adjusted EBITDA margin to be in the range of 20% to 21%.
Non-GAAP diluted earnings per share are now expected to be in the range of $12.30 to $12.90. Free cash flow for the year is now expected to be at least $700 million. We have been making progress rightsizing inventory in our balance sheet and improving cash conversion. Please reference additional modeling assumptions shown on Slide 8.
With that, I will turn the call back to Bill.
Bill Burns
Thank you, Nathan.
Zebra is well-positioned to benefit from secular trends that support our long-term growth. These include labor and resource constraints, track and trace mandates, increased consumer expectations, and the need for real time supply chain visibility.
We help our customers digitize their environments and automate their workflows through our comprehensive portfolio of innovative solutions, including purpose-built hardware, software, and services.
We empower frontline workers to execute tasks more effectively by navigating constant change in real-time through advanced capabilities including automation, prescriptive analytics, machine learning, and artificial intelligence.
At our Innovation Day event in May, we demonstrated how we transform workflows across the supply chain to drive positive outcomes for enterprises across our end market. Our products and solutions are mission critical to enable visibility that consumers and enterprises now expect throughout the entire supply chain.
On Slide 11, you will see Zebra solutions can touch a product 30x from its origination to the point of last mile delivery. Let’s briefly walk through the journey with a few high level exams. In manufacturing, our machine vision solutions provide quality inspection and track and trace visibility throughout the process.
In a warehouse, our wearable mobile computers, autonomous mobile robots and comprehensive RFID portfolio transform receiving, picking and shipping. As the product arrives at a store, associates are equipped with Zebra software running on our mobile computers to assist customers’ stock inventory and fulfill online orders. And when an item is delivered to your home, you receive a notification and picture from Zebra’s handheld device verifying on time quality delivery.
As you’ll see on Slide 12, our customers leverage our solutions to optimize workflows across a broad range of end markets. We empower enterprises to drive productivity and better serve their customers, shoppers, and patients. We are seeing Zebra’s competitive differentiation in mobile computing solutions drive wins across our vertical end markets.
Customers value the capabilities we embed in the software layer of our devices that they leverage to transform workflows and improve outcome. For example, we secured a mobile computing win with the commercial airline utilizing our mobile package dimensioning solution enabled through AI.
Also, a North American retailer will leverage Zebra’s work cloud collaboration software on their new wearable mobile computers, connecting their associates to drive better outcomes in their stores.
Additionally, we are able to displace consumer cell phones at a European retailer with our mobile computers and Zebra’s Identity Guardian solution. It provides multifactor authentication for a shared device environment that brings security, productivity, and convenience to the front line.
It is also notable that mobile computing contributed to double-digit sales growth in healthcare. Over the past year, our teams have been successfully selling the benefits of our solutions and clinical mobility that empower caregivers while delivering lower total cost of ownership for hospital systems. We have been displacing consumer cell phones with our devices and there continues to be a long runway of opportunity for equipping more clinicians with mobile computers.
In closing, we expect to see broad-based growth in the second half as we cycle much easier comparisons and benefit from momentum beyond retail. We maintain strong conviction in our long-term opportunity for Zebra as we elevate our strategic role with our customers through our innovative portfolio of solutions. Our sales and cost initiatives have positioned us well for profitable growth as our end markets continue to recover.
I will now hand it back to Mike.
Mike Steele
Thanks, Bill.
We’ll now open the call to Q&A. We ask that you limit yourself to one question and one follow-up to give everyone a chance to participate.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions].
Our first question comes from Damian Karas with UBS. Please go ahead.
Damian Karas
Hey, good morning, everyone. Congrats on the quarter.
Bill Burns
Good morning, Damian.
Damian Karas
Bill, I wanted to get your thoughts on what you suspect it’s going to take to bring some of the larger project activity back into the fold, and maybe you could just give us a sense on, it sounds like you’re not expecting much this year. How much upside to your guidance do you think there would be if you do in fact start to see a return sooner rather than later?
Bill Burns
Yes, Damian, I think that if we look back to Q1, we saw early signs of recovery, as we talked about last quarter in retail and e-commerce. We’re certainly encouraged by the better than expected sales results in Q2, which really, we saw momentum, as we said around beyond retail really. And really, it was driven by mid-tier and run rate business. So large deal activity was pretty consistent in Q2 coming off of Q1, but still well below historic levels.
So I think that we see customers overall continue to cite uncertainty to us in the market, their markets, their end markets, which really is reflecting in their purchasing behavior. I’d say that large deployments overall are being spread more to these mid-size deals or smaller deals, and being spread out over a longer period of time because of this, and I think ultimately, when they’re placing small orders, they’re placing those to add to their installed base or for new applications or expansion opportunities to-date.
So I think that the pipeline of opportunities remains strong. I think there’s optimism on the part of our partners and customers. I think we’d like to see more momentum in large orders. So we saw the first uptick in large orders in the first quarter kind of flat the second quarter. So we feel okay about that. We saw growth in mid-tier and run rate.
I just think we’d like to see more large order activity to call a broader base recovery. So I think now we’re seeing strength in mobile computing, strength across kind of large orders, medium and small. But we just want to see more large orders really from our customers. And I think it’s just driven by their caution of what’s happening in macro today.
Damian Karas
Great. That makes sense. And I just want to ask you on the cost front, it seems like there’s been a pick back up in shipping rates, and I know that was a little bit of a headwind for you guys in past years. To what extent have you been maybe experiencing some of that cost inflation and maybe just talk through what’s kind of in your guidance for the rest of the year? Thanks.
Nathan Winters
Yes. Damian, so we have seen a modest increase in rates due to whether that’s some of the Red Sea issues or now with the stronger demand, particularly on the ocean rates. I’d say it’s a modest impact in terms of incremental costs that we’ve included in our full year guide. But the team’s again working several actions in terms of the different air modes, how we leverage cost off to improve transit time, as well as again working with our partners around the forecast for the remainder of year to get ahead of that, the second half demand and mitigate as much of that as possible. So there is absolutely seeing some increase, but I’d say it’s pretty modest at this point and within our second half guide.
Operator
The next question comes from Jamie Cook with Truist Securities. Please go ahead.
Jamie Cook
Hi, good morning, and congratulations on a nice quarter. I guess, just my first question, I guess, what struck me in the quarter, your EVM margins were much better than I thought, and I think even better than your expectations. I think you were guiding to down margin sequentially. So can you just speak to the drivers behind that? I guess, that’s my first question. And then I’ll stop there and then I’ll give you my second question after, I guess.
Nathan Winters
Good morning, Jamie. So, yes, if you look at overall gross margins at 48.6%, this is our highest gross margin quarter in three years, benefiting from the level of large deals. So the strength in run rate and mid-tier is a positive for gross margin in particular within the EVM segment. We’re also seeing continued strength in our service and software margins again, which is heavily less more weighted towards EVM, as well as now fully rolling over all the premium supply chain costs.
So again, I think it was part of that was just the strength in the quarter and really seeing the incremental volume fall through to the bottom line, driving the sequential improvement in gross margin both within EVM particularly.
Jamie Cook
Okay. And then I guess, just given the strength in the margin this quarter, and I mean, I don’t think your EBITDA margin guide is now, what 20% to 21%, I think before it was about 20%. I’m just wondering why we wouldn’t see better pull-through in the back half of the year, in particular with the top-line growth that you would see relative to declines or flat revenues in the second quarter.
Nathan Winters
Yes. If you look at our EBITDA guide for the third quarter of 20% to 21% again year-on-year, that’s up primarily due to volume leverage, nearly 9 points. And I think we expect similar deal as well as business mix Q2 to Q3 such that you get a similar margin profile from Q2 to Q3. So if you look at the Q3 guide, effectively flat to Q2 based on that assumption of kind of the underlying mix of deals as well as the business unit mix gives us that similar profile.
And I’d say the other really don’t expect the same level of incremental benefits sequentially as we were able to realize some of the incremental benefits in Q2 from the restructuring actions. And then you do see that modest uptick implied in the guide for the fourth quarter on the incremental volume.
Operator
The next question comes from Tommy Moll with Stephens. Please go ahead.
Tommy Moll
Good morning and thank you for taking my questions.
Bill Burns
Good morning.
Nathan Winters
Good morning, Tommy.
Tommy Moll
First question on the large order activity. At this point where we’re nearly through July, how fully baked are your customer budgets for this year? And at what point does the large deal conversation really start to become one centered around 2025, when a lot of the customer budgets are refreshed?
Bill Burns
I think that, Tommy, I’d say that customers continue to scrutinize their budgets even as we’re well into the year, right? And I think that some of those have to do with, in the past, we’ve seen kind of year-end spending from our customers, but I think that the uncertainty around the economy is still kind of weighing on them in large deployments and what will happen in kind of second half of year here.
So I think that we typically not have visibility quite yet into whether there’ll be year-end spending by our customers. We’re talking about certainly a pipeline of opportunities that they see.
And then the question is, do they move ahead with those in late 2024 or into 2025. I think that from a macro perspective, whether it’s interest rates or presidential election or manufacturing production, all those shipping parcel, parcels, shipments have just started to inch up and turn to more positive volumes or growth in volume.
So I think all those kind of weighing on their business, and I think there’s even though they’ve got budgets, it’s kind of the reluctance to move ahead with those, really because of the macro factors overall. And I think that we’d expect those to continue to kind of stabilize. They can get more confidence in their business and then abate as we get into kind of second half year and into 2025.
But I’d say, overall, many discussions with our customers regarding projects; it’s really about just taking longer to kind of move those forward still. Now, again, we saw a large order activity about flat Q1 to Q2 overall, and we saw this pickup in mid-tier run rates. So these are all positive signs.
Growth outside of retail, which we really saw in first quarter into a broader segment. Mobile computing was the first to decline and the first to return to growth we expected that. So I think everything’s moving in the right direction. So I think that — I think our customers just don’t know for kind of year-end 2024 and into 2025, but we’re optimistic, I would say, that everything’s moving in the right direction.
Tommy Moll
And Bill, just from a competitive standpoint, is there anything that you’ve sensed having changed particularly in a large deal context where you’ve seen other market participants perhaps become more aggressive on price or whatever other factor?
Bill Burns
Yes. No, I would say that really the competitive environment hasn’t changed a lot. Overall, we’re certainly continuing to maintain share in the marketplace. We feel good about our differentiation that we bring to the marketplace with the depth and breadth of our solutions, our competitive advantages, scale, technology, leadership, our partner community, our go-to-market, our relationships with our customers. So the large deal, phenomenon not coming, not returned to historic levels is not really about Zebra. It’s truly about the market.
And we don’t really see any mark change from a competitive perspective. We’re always going to have competitors out there, large and small, and then that continues to be the case. So nothing there. And we feel good about our market position and continue to win in the market.
Operator
And the next question comes from Joe Giordano with TD Cowen. Please go ahead.
Joe Giordano
Hey guys, good morning.
Bill Burns
Good morning.
Nathan Winters
Good morning, Joe.
Joe Giordano
Bill, you had mentioned, I guess, it was last quarter that distributors were asking for more product than you were willing to sell because, but you were hesitant because you wanted to make sure you understood where it was going and try to prevent a future buildup of inventory that then needs to get liquidated again. Like, what’s the update on that? Have you kind of started to give them what they’re requesting?
Nathan Winters
Yes, Joe. This is Nathan. I can take that. I’d say overall, the global channel inventory as we look at it from days on hand is still at a normalized level. I think you have pockets around the world, where there’s still a little bit of rebalancing both driving down inventory in the channel as well as where there’s incremental needs.
And I think similar to where we were last quarter, it’s working with each one of those partners across the region to ensure that they have the appropriate level of inventory for the demand they’re expecting and that we see in the pipeline. So again, it remains very collaborative. I’d say similar position where we were in Q1, where there’s always some that want a little bit more. And again, just trying to make sure we have the right amount in the channel to support our end users, but not getting ahead of ourselves, given some of the uncertainty that we’ve talked about.
Joe Giordano
Fair enough. And then just if I could ask on some of your smaller businesses, can you give us an update on trends within like RFID and with Matrox and Fetch and maybe how you see those businesses in terms of like growth in size exiting this year?
Bill Burns
Yes. I can take that, Joe. I’d say, RFID challenging kind of second quarter on compares from cycling large opportunities a year ago. I would say that overall would expect return to growth in second half year. We’re continue to — we move into the second half really with strong backlog and pipeline of opportunities across not just retail but transportation, logistics, manufacturing. So we’re seeing continued use cases across RFID, including moving beyond apparel to general merchandise inside retail. Clearly track and trace across the supply chain, parcel tracking within T&L, baggage tracking within airlines, so lots of opportunities across RFID.
I would say machine vision. We continue to be excited about the opportunity within machine vision, challenging market at the moment.
And our Matrox acquisition, when we acquired that asset, we knew was heavily weighted towards semiconductor equipment manufacturing, which is still a challenge segment as well. So decline in the quarter in machine vision, but we feel good about it overall.
We saw strength in our Adaptive Vision acquisition. So software — machine vision software in the quarter that was a bright spot. I’d say that the diversification of that business, which was our focus all along with the Matrox business diversify into areas like automotive and logistics into new areas. We also had our organic investment in machine vision, which really applies more to logistics area. That diversification is going well.
Ultimately, we’re calling on more customers. We’re seeing more opportunities. We’re continuing to invest in go-to-market across the globe in just seeing more opportunities is across machine vision. So we feel good about that in a great opportunity for Zebra overall.
I’d say software — our software assets, we’re seeing the combination of our mobile devices, especially in the wearable space now with some of our assets in software that we’re pretty excited about. So the word cloud solutions really focus on retail and then leveraging our mobile device in the hands of retail associates. And we continue to advance and bring those solutions together and combine that with things like wearable mobile computing. We’ve seen some early wins there. So we feel good about the portfolio. They’re a smaller segment of the market, right, or, sorry, our not market, meaning smaller segment of our business overall or piece of our business. So really mobile computing returning to growth, other segments being more challenged. These are areas that we see as driving the future growth of Zebra.
Operator
The next question comes from Andrew Buscaglia with BNP. Please go ahead.
Andrew Buscaglia
Hey, good morning, guys.
Bill Burns
Good morning.
Nathan Winters
Good morning.
Andrew Buscaglia
Yes. So I want to get your thoughts on potential upgrades of devices, especially in 2025. Do you have any data you can share around the age of your installed base? Because presumably a lot of these devices were sold during COVID and we should start to see a natural need to upgrade these in the next year, I would think.
Bill Burns
I’d say overall we’re, from a mobile computing perspective, I’d say that our customers have really been absorbing the capacity that they’ve built out during the pandemic more than anything else. So I think there’s clearly continued upgrade cycles across all of our customers. But from the idea that they built out so much capacity during the pandemic that they’re using that capacity today, and then as the economy slowed, that created even more capacity, so they’re ever using that capacity off, I think we’re seeing customers move into the idea that they’ve absorbed some of the capacity and are beginning to buy again. But that’s kind of early signs of what we’re seeing.
I’d say that there’s a solid pipeline of opportunities for mobile computing overall, both in kind of refresh new use cases continue to add to the number of devices inside our customer base. And we continue to see competitive wins across the portfolio. So I think the upgrades are out there, the refreshers are out there, and ultimately some customers are sweating assets a bit more, others are leveraging what they have today.
And I think that we’re confident that as the macro environment gets better, our customers will continue to upgrade our devices and we’ll see an uptick in large orders within our business, which will marry with what we’re seeing as kind of medium in run rate business growing in second quarter.
Andrew Buscaglia
Yes. Okay. Okay. And then you’re raising your free cash flow expectations again and just kind of given where we are things looking to start to improve, and you probably have some confidence here. Where do you see capital allocation going into the year-end? Is M&A — will see some M&A come to fruition before year-end? Or is there a focus more on share repurchase? Or how are you thinking about things?
Nathan Winters
Yes. So I think on the first part, again, please raise the guide for free cash flow to over $700 million, including the final settlement, as well as the swap sale in the second quarter. So — and the improvement overall in working capital to get us above the 100% free cash flow conversion. And as you say, the — really the prior — we’ve prioritized debt paydown as well working on our capital structure in the first half of the year. So ending the second quarter just under our below the target range of 2.5x debt leverage, and that will sequentially improve as we move through the year.
I think in terms of overall priority, they remain unchanged. The first is organic growth getting the business back to the growth trajectory we need it to be and want it to be along with the right profitability levels.
M&A continues to be a lever. And I think now with the improved cash flow as well as our overall capital structure, we have additional flexibility for share repurchases as we move through the year. So Bill, you want to touch on the M&A brochure?
Bill Burns
Yes. I guess, I’d say that our M&A philosophy really remains unchanged. I think we continue to leverage M&A where it makes sense to advance our vision and our overall strategy. I’d say in the short-term, the bar is probably higher based on kind of macro uncertainty and then higher interest rates. But I would say that we continue to target select assets that ultimately are closely adjacent and synergistic to our business today. As Nate said, we’ve got a strong balance sheet and flexibility to continue to look at companies and we continue to be inquisitive. But the bar is higher at the moment.
Operator
And the next question comes from Meta Marshall with Morgan Stanley. Please go ahead.
Meta Marshall
Great. Thanks. Maybe a couple of questions, just on the healthcare strength that you saw. I know that that had been a relatively they had been in a more challenged spend environment. So just wondering, how broad-based that is. Is that kind of new project based or just any detail there? And then second question, EMEA looked like a source of strength for you guys. I think we’ve seen that across some other companies. And so is that a matter of, they’re just coming from a very depressed environment. And so we’re coming off of a lower base and that’s where some of the EMEA strength is. Are you — are there any trends in EMEA that you think are worth calling out? Thanks.
Bill Burns
Yes. So I’ll start with healthcare and then jump to EMEA.
Healthcare, I’d say overall, mobile computing drove the growth in healthcare. It really is our team’s focus on clinical mobility and really total cost of ownership. We’ve seen in the past a significant number of consumer devices used in that space. And I think that we’re seeing healthcare systems realize that the total cost of ownership of Zebra devices is well-positioned for them in an environment of tighter budgets and thinner margins overall within healthcare. And we add a lot of value, ultimately by improving productivity of healthcare workers, getting data into electronic medical record systems, and then ultimately enhancing patient safety overall.
So I think the automating of workflows, the digitizing the information around assets and patients and staff is of value that our healthcare customers are seeing. I think a medium to longer-term opportunity we’re now seeing is things like home healthcare that remains an opportunity for us. So things like tablets in that area, in home healthcare. So we’re excited about that. Healthcare has always been a smaller piece of our business, but in one of the faster growing areas, and certainly that happened in Q2.
I would say, if we move to EMEA, say overall strength in EMEA was relatively easy compare in Q2 compared to the other regions. Overall, the positive, I’d say in EMEA is that we saw some larger projects move ahead outside of retail. So this is one of the places where we’ve seen some growth in P&L outside of retail, and some competitive wins in EMEA. So we feel good about that.
Manufacturing remains challenging in EMEA today. So I think that kind of mixed overall feel good about some P&L orders, large P&L orders, easier to compare where manufacturing makes challenging. So I think overall, I think we want to see North American EMEA, we’d expect to come out of this first, but we saw some strength in Latin America too. So I think mixed results across the region.
Operator
And the next question comes from Brad Hewitt with Wells Fargo. Please go ahead.
Brad Hewitt
Hey, good morning, guys. Wolfe Research, not sure what happened there.
Bill Burns
Sorry, Brad. We missed the question. You broke up there during the question.
Brad Hewitt
Yes, sorry. So, just curious if you could elaborate a little more on what you’re assuming in the second half from the top-line perspective. So at the mid-point of your full year guidance, it implies revenue in the second half, essentially flat with the Q2 run rate. So can you help me reconcile that versus kind of the early signs of momentum in mobile computing and also given the typical positive seasonality in Q4?
Nathan Winters
Yes. So if you look at our full year guide of 4 to 7 with a mid-point of 5.5, I think from a year-on-year perspective, really driven by what we see is double-digit growth in the second half demand, it’s about 5 points for the year where again, if you look at the full year, a lot of moving parts where the destocking from last year accounts for about 7 points of growth. But then we had the challenging comps in the first half that offset that.
So again, really the full year growth is driven by underlying strength in the business in the second half. As we said, we see modest demand increases across each of our vertical markets. That’s inclusive of the Q2 beat. So I think we look at it as really the strength we saw in Q2 continuing into the third quarter. I think similar to how we structured the guide over the last several quarters of not anticipating or expecting sequential improvement.
But what have we seen here in the most recent weeks and months? We see that continuing here in July in terms of that stability in the business, albeit at a bit higher level than we saw as we entered the second quarter with modest increase as we go into the fourth quarter. So as Bill highlighted before, typically a lot of the year-end spend that we see from our customers has leaned towards large orders in the past, and again, being thoughtful about how we embed those in the guide until we have more certainty and commitments from our customers on moving forward with those projects before including it for our full year guide. So I think, we think it’s grounded in what we see today, given that visibility into the large deployments and appropriate.
Brad Hewitt
Okay. That’s helpful. And then you guys have talked in recent quarters about your expectation for seasonally lower OpEx spend in the second half of the year. Just curious if you could kind of shine some more light on that. And then if we look at the implied Q4 EBITDA margins about 21%, can you talk about some of the puts and takes there on a sequential basis?
Nathan Winters
Yes. So if you look just historically, sometimes it is hard to see. But typically, as we go throughout the year, just based on when a lot of our trade shows, sales, kickoff meetings, timing of benefits, et cetera, tend to be more weighted towards the first half of the year. Then as you get into the back half of the year, you get into holiday seasons around the world, as well as some of the lower benefit costs as you go sequentially through the year.
So I’d say a lot of the sequential improvement is timing-related now that we’ve kind of flushed through all of the restructuring benefits, or the vast majority of restructuring benefits through the P&L.
And then look at the sequential improvement in profitability from Q3 to Q4 is really based on that slight improvement in OpEx, as well as the higher volume leverage flowing to the bottom line.
Operator
And the next question comes from Keith Housum with Northcoast Research. Please go ahead.
Keith Housum
Good morning, guys. Question for you on the software and services. With mobile computing being up double-digits, I guess, I would have expected a little bit of that flowing through more in software and services design as people sign up for their warranty contracts and things of that nature. Can you pass a little bit of light on the connection between the two and the modest growth that you had and that’s in that line item this quarter?
Bill Burns
Yes. Keith, this is Bill. I would say that overall, we’ve seen consistent growth in software and services over the last several quarters. So we feel good about that. I’d say we continue to see strong attach rates with mobile devices. So the revenue lags that, of course, right? So ultimately, the strong attach rates continue with uptick in mobile computers. So no real change there. It’s just not tied directly to revenue in the exact quarter depending on when the mobile devices are sold. So I wouldn’t take anything away from that. We’re continuing to see strong attach rates, really driven by things like upgrades around OS and security patches and so forth continue to be an important aspect of our customers buying service from us.
I can say that we’ve seen in the past some customers extend their support agreements, and I think we’re seeing a little bit less of that now, which is again a good sign for ultimately our customers looking to upgrade the mobile devices in the future. So maybe a little bit of less of that, if anything else. Overall, I’d say software and services, an important piece of our business, recurring revenue that we and others like. So I think all good there, nothing really to read into it, Keith.
Keith Housum
Okay. I appreciate that. And then just a follow-up, in terms of like, as most people are starting with here toward the refresh cycle of all the devices bought four or five years ago. How should we think about pricing today versus where it was, say, four years ago? Are people trading down to a lower mobile computer? Or as you think about most customers, is it relatively similar? But how do you think about pricing, what people are buying today versus four years ago?
Bill Burns
Yes. I think we’re — obviously, there’s customers are making choices on the type of device they need in their environment. So I think that we continue to see that. So if somebody needs a more rugged device, and their experience was they had a lower tier device and they beat those devices up, they’ll move to a higher tier device and you’ll see the reverse. If they had a good experience with a more rugged device, could they go to a more mid-tier type device? I think that happens all the time.
I think we continue to focus on value that the devices bring to our customers to keep ASPs as high as we can, and then if we can’t, to make sure that we’re getting the same gross margin out of each tier of the portfolio. In the past, we’ve tiered the portfolio kind of good, better, best, or all the way down to kind of value tier. And I think that’s allowed us to keep our pricing and margins higher. So if you want a higher spec device, you pay us a higher price for it.
In the early days, call it, eight, nine years ago of — eight years ago, nine years ago on Android, we didn’t have as many flavors of devices. So you’re discounting higher end devices to meet value to your players. We don’t do that today. We’re really tearing the portfolio has allowed us to kind of have conviction around our prices at the higher end, and we feel good about our customers and working closely with them to select the right device for the right use case.
Operator
And the next question comes from Brian Drab with William Blair. Please go ahead.
Brian Drab
Hi, thanks. You mentioned that you’re seeing sequential improvement in all the end markets, including T&L and manufacturing. There have been some signs of further softness across the manufacturing industry in recent weeks, and I’m just wondering if you are seeing any of that show up in your customers buying patterns or if it really does feel like a pretty stable sequential improvement environment now.
Bill Burns
Yes. I’d say that, as we talked about before, I think in Q1 we saw kind of retail and e-commerce first, and now we’ve seen mobile computer — mobile computing kind of grow across each of the vertical end markets. So retail, manufacturing, healthcare, I’d say that, we’re still seeing challenges in manufacturing and overall, demand, especially in a large deal isn’t back to the historical levels that it’s been in the past.
But in manufacturing specifically, we saw sequential improvement from Q1 and Q2. But I still think EMEA, for instance, we’re clearly seeing a challenge in manufacturing where I would say overall, I wouldn’t call manufacturing back to normalized levels in any way. But I think we just saw some sequential improvement, which I think was good.
Manufacturing is an important segment for us. We see we’ve got lesser — we’re lesser penetrated in through manufacturing. Our relationship with manufacturing, many times are more in the warehouse or the finished production and moving that through the supply chain and some of our new solutions around machine vision, rugged tablets, our demand planning solutions for CPG manufacturers, all play into having a broader portfolio for manufacturing. So we ultimately see that a segment for growth for us, but I think still challenging the short-term. We would say, we’re seeing probably about the same as you’re seeing.
Brian Drab
Okay. Thank you. And then for follow-up, are you seeing opportunities potentially to gain share when we come out of this tougher environment? I mean, you obviously have a great balance sheet. You’re not letting up in terms of investment in technology and customer service. Can you comment on how you might be potentially better positioned in both AIT and EVM ultimately?
Bill Burns
I’d say that overall, we feel good about where we’re at in our customer relationships. We continue to stay very close to our customers as we’re a trusted partner to them. And I think that as the macro environment gets better, I think we would say that they will begin to buy again, especially, and we’ll see large orders improve as we continue to solve growth in medium and run rate in second quarter.
The installed base continues to grow. And I think that from that perspective, I think that we’re seeing increased use cases across our customer environment. So some are still sweating their assets that will shift. They can’t do that forever. So I think overall, we see the momentum in demand continuing and then continue to broaden both by vertical market to your first question, and then by size of order and order activity across small, medium and large type orders.
Operator
And the next question comes from Rob Mason with Baird. Please go ahead.
Rob Mason
Yes. Good morning, Bill and Nathan. The strength in the gross margin, I think has already been commented on. But as you think about when large orders do come back, how should we be thinking or how are you thinking about sensitivity in the gross margin profile today versus, say, maybe 2018, 2019? Have you done anything different structurally around either your supply agreements or just as you mentioned, Bill, tiering the portfolio that would suggest the gross margin holds up better? Or does it have that kind of return to maybe 2018, 2019 levels when large orders come back?
Nathan Winters
Yes. Rob, I’d say just if you look, I would say, no structural difference in terms of maybe the differential between the margin we’d expect on a large yield versus kind of the run rate business. So that hasn’t structurally changed.
The one thing, if you go back, I think the one aspect, particularly if you go from 2019 — since 2019, whether that’s tariffs, the supply chain, challenges the rapid growth. So it’s pretty challenging to find what’s the right baseline.
And if you go back to 2018, right, so I’m just the lower rev — lower base. So I think, if you look at the business today, I think the strength across the portfolio is — we have strength across the portfolio in terms of the underlying gross margin and being able to leverage the scale and leverage our distribution network as we’ve grown to inherently build a higher gross margin profile company.
But again, I think it will be somewhat decremental as we in gross margin once large deals recover, but still incremental, as you think about it from a EBITDA rates. So I think there’s the balance of — there’s still incremental margin to the total — to the bottom line, but slightly dilutive in gross margin.
Rob Mason
I see. And just to go back on the regional discussions, my math, and maybe this is not totally right, but it did look like North America stepped down a little bit sequentially. If that is the case, just any color that you could provide on what you saw there.
Bill Burns
Yes, Rob, North America was down year-on-year. I’m not sure it’s sequentially — down sequentially as well. Nate’s warning to me, I would say, overall mobile computing return to growth in North America, again, just like we saw across the other regions. So that clearly was positive. The other product categories were down, as a year ago, in first and second quarter, we saw supply chain challenges abate from a print and a scanning perspective.
So the compares were pretty challenging for both those businesses. They had really good Q1 and Q2s of last year. So I think that impacted North America. In North America typically has an overweight on large deals as well. So growth in North America, we really like to see kind of run rate, mid-tier and large deals because the large deals are overweight typically in North America.
So we saw kind of flat sequentially, as we said before, large deal activity, Q1 to Q2. And really, North America would like to see more large deal activity come back here in kind of second half, and then hopefully some year-end spend and then growth into 2025. So that’s really the story of North America.
Operator
And the next question comes from Jim Ricchiuti with Needham. Please go ahead.
Chris Grenga
Hi, good morning. This is Chris Grenga on for Jim. Most of my questions have been addressed, but maybe just one for me. The chart with the touchpoints is very helpful. Just wondering, as you look ahead to seeing larger projects return, are you preparing for large project activity to be in any one of these particular nodes, whether it’s factory, warehouse store, or last mile, et cetera, or do large projects generally entail a broad coverage of one or many of those nodes, or just how you’re thinking about that? Thank you.
Bill Burns
Yes. I think we see large deals typically across the portfolio, so that it’s all about kind of size and scale of customers. So in retail, it’d be larger — the larger retailers that would refresh and have refresh cycles or upgrades or larger orders across the portfolio that we do a multiple store upgrade, refreshing to a new device for instance.
In transportation logistics, you’d see things like the fleet of last mile delivery drivers as an example. Upgrade across transportation logistics, or postal workers around the globe would be examples of large opportunities. So I think we see them across each one, they’re a bit different. In manufacturing, it’s more location by location or plant by plant, as opposed to large deal activities, would see in retail where they do multiple stores at once, or T&L, where they do an entire fleet of drivers or postal.
So it’s a bit different by nodes. So manufacturing more broken down by site, retail more, multiple stores at once, T&L more larger deployments, I would say, healthcare more, more like manufacturing, not as large a hospital systems more kind of hospital at a time or multiple hospitals at a time, but not those large refreshes. So I’d say large refreshes and upgrades more tied to retail and T&L.
Operator
And the next question comes from Guy Hardwick with Freedom Capital Markets. Please go ahead.
Guy Hardwick
Hi, good morning. Zebra issued some —
Bill Burns
Good morning.
Guy Hardwick
Good morning. Good morning, all. Zebra issued some very interesting press releases regarding working with Qualcomm to run LLMs on Zebra mobile computers, but without the requirements to kind of regular uploads to the cloud. So I was just wondering, Bill, just how close is Zebra to kind of a broad-based introduction of these kind of AI digital system products in mobile computing?
Bill Burns
Yes. So we think of AI across the portfolio in several different ways. First is that just our core business really is about collecting real-time data, and that’s used as kind of intelligence to feed AI models overall. So whether that’s a barcode reading a printed label with the information on it back into the cloud, whether that’s an RFID tag being read. So the idea of digitizing a customers’ environment, getting real time data to AI models, and ultimately to generate insights in AI is a fundamental thing we do in our — the value of our data that we collect feeds these models. So I think that’s kind of the baseline of when we think about AI.
Second is traditional, more traditional AI is used about probably in 50 different solutions across the portfolio today, whether that’s optical character recognition or product recognition, navigation for autonomous mobile robots, package dimensioning inside our software around workforce planning and demand forecasting. So traditional AI is kind of the second piece that we think of across the portfolio.
The third is what you’re kind of referring to is the idea that it’s AI assistant, right? Is that empowering the frontline worker through more information, leveraging a large language model on the device without connectivity to the cloud? Working closely with Qualcomm and Google, as you mentioned, to go do that. We’ve demonstrated that it — at our National Retail Federation Trade Show in January. We demonstrated again at our Innovation Day. We also demonstrated at Google’s Trade Show earlier this year as well.
So I think we’re excited about that opportunity. Today, it’s not commercialized yet. We’re continuing to work closely with our customers to really understand all the use cases, what’s required around that. How do we best leverage which model in that case, how do we keep the model up to date? So a lot of different discussions with our customers about what that offering will look like.
But we’re excited to work with Google and Qualcomm on it. Our customers excited about having a digital assistant within retail or manufacturing. You think of all the use cases of making your newest worker as good as your most experienced worker, having all of your standard operating procedures at the hands of the associate or the frontline worker, being able to tie that back to what’s the source of the data being restricted to the individual customer.
So we think it’s a driver long-term for our mobile devices and a differentiator for us. But today, still early days, more pilots and demonstrating and working with customers than commercialization.
Guy Hardwick
If you don’t mind just me pushing a little bit on that. I mean, in terms of commercialization, is it a 2025 timeframe or beyond that?
Bill Burns
Yes, no, likely — like we’re going to have more demonstrations around it that we’re planning today with some of our customers at the National Retail show as we go the next step along with it next year in 2025, and then probably commercialization in likely in 2025 as I would see it today.
Guy Hardwick
Okay. Thank you.
Operator
And the final question comes from Rob Jamieson with Vertical Research. Please go ahead.
Rob Jamieson
Hey good morning, Bill and Nathan. Congrats on the quarter.
Bill Burns
Thanks, Rob.
Rob Jamieson
Just wanted to kind of ask more of a high level question around and go back and revisit M&A and add an adjacencies. I mean, you all have a great installed base and a lot of market share across your various verticals. As we think about you adding adjacencies and what you’ve done recently, adding things like Fetch and Matrox and other markets, given the comfort that your customers have with you, do you think that as we return to like a more normal environment that will kind of, you can leverage that and your customers be more comfortable maybe deploying a new solution, something more kind of like advanced like Fetch or Matrox in their operations.
Bill Burns
I think that clearly are strategic relationships with our customer creates an opportunity for us to deploy a broader set of solutions within those customers. That, that trusted partnership allows us to go do that. I think the backdrop of the environment hasn’t been all that great. So machine vision is a good example of that.
It’s been kind of a challenging market and then our diversification just takes time where we were centered really around more semiconductor manufacturing and moving outside of that. So — but that is — our customers are giving us an opportunity to sell solutions in that space because we have a relationship with them already. I think we’re seeing the same thing across retail software and robotics, as you mentioned.
So clearly it matters. Our breadth and depth of our current portfolio, the relationship we have with them, the fact that we’re a trusted partner to them; it’s not always the same persona. So it’s not — I wouldn’t say it’s easy. Meaning we’ve got to get from our current buyer of our solutions and the person who deploys our solutions today to someone else within the organization.
So if we’re working with somebody inside a manufacturer more on the distribution of products at the end of the manufacturing line, we now need to form a relationship with somebody on the manufacturing line for things like machine vision solutions to stick with that example. So it’s not easy, but it’s certainly doable. And our — because of our trusted relationship, they’re willing to make that introduction. And then we’ve got to earn our way in and prove our solutions into that manufacturing space. But we’re given that opportunity because of those relationships.
Rob Jamieson
That’s helpful. And I appreciate it. And then to the extent that you’re willing to share, just as you talked about adjacencies and things you’re looking at in the portfolio, is there anything either high level or specific that you’re looking at the moment, just especially as your leverage is getting to an attractive point here. Thank you.
Bill Burns
No, I think that again, it’s — we think of assets that are closely adjacent to the portfolio overall, and really synergistic to what we do today. We’d like to do things in the similar vertical markets for the reasons we just talked about. So all that comes into play. And then ultimately, as I said before, a little bit higher hurdles at the moment, given the macro uncertainty to make sure that if we were going to acquire something, or the certainty of revenue, and then ultimately higher risk interest rates weigh down on that a little bit. So I think overall, we continue to be inquisitive. It’s got to be the right asset and the right fit for Zebra.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Burns for any closing remarks.
Bill Burns
Yes. I’d like just to wrap up by saying thank you to our employees and partners for continued support of Zebra and execution in the second quarter. We’re now positioned for growth in the second half year. So have a great day everyone. Thank you.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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