Zebra Technologies Corporation (ZBRA) Q2 2021 Earnings Call Transcript

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Zebra Technologies Corporation (ZBRA -2.31%)
Q2 2021 Earnings Call
Aug 3, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Zebra Second Quarter 2021 Earnings Results Conference Call. [Operator Instructions] 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.

Michael Steele -- Vice President of Investor Relations

Good morning, and welcome to Zebra second quarter conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year. Slide two conveys that the forward-looking statements we make today are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially due to factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of the slide presentation and in today's earnings press release.

Throughout this presentation, unless otherwise indicated, our references to sales growth are year-over-year on a constant currency basis and exclude results from recently acquired businesses for the 12 months following each acquisition. This presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer; and Nathan Winters, our Chief Financial Officer. Anders will begin with our second quarter results. Then Nathan will provide additional detail on the financials and discuss our revised 2021 outlook. Anders will conclude with progress made on advancing our Enterprise Asset Intelligence vision. Following the prepared remarks, Joe Heel, our Chief Revenue Officer, will join us as we take your questions. Now let's turn to slide four as I hand it over to Anders.

Anders Gustafsson -- Chief Executive Officer and Director

Thank you, Mike. Good morning, everyone, and thank you for joining us. Our team delivered exceptional second quarter results with strong performance across the business, resulting in record sales and profits. For the quarter, we realized adjusted net sales growth of 44%, or 40% on an organic basis; an adjusted EBITDA margin of 23.6%, a 530 basis point year-over-year improvement. Non-GAAP diluted earnings per share of $4.57, a nearly 90% increase from the prior year and strong free cash flow. Despite ongoing industrywide supply chain challenges, our teams successfully satisfied stronger-than-expected demand from customers, both direct and through our distribution channel.

Similar to Q1, we realized robust broad-based demand with double-digit sales growth across all four regions, each major product and solutions category as well as in all of our vertical end markets. Our customers continue to digitize and automate their workflows with a sense of urgency in the increasingly on-demand global economy. We also significantly expanded profit margin across our business more than offsetting escalating global supply chain costs. We also continued our balanced approach to scaling operating expenses while investing in initiatives to drive sustainable profitable growth.

With that, I will now turn the call over to Nathan to review our Q2 financial results in more detail and discuss our improved 2021 outlook.

Nathan Andrew Winters -- Chief Financial Officer

Thank you, Anders. Let's start with the P&L on slide six. In Q2, adjusted net sales increased 44.4%, including the impact of currency and acquisitions and 39.8% on an organic basis, reflecting broad-based demand for our solutions from customers of all sizes. We realized particularly high growth from our run rate business through the channel, partially driven by pent-up demand, while continuing to see strong growth in direct sales to large customers. Our Asset Intelligence and tracking segment, including printing and supplies, grew 51.2%, while enterprise visibility and mobility segment sales increased 35.1%, driven by exceptional growth across all major categories, including enterprise mobile computing and data capture.

Note that we also realized double-digit growth in services and software, along with very strong growth in our RFID solutions, for which deployment activity has snapped back as customers recover from the pandemic. We recognized double-digit growth in all regions. In North America, sales increased 39% with all major categories growing double digits. In EMEA, sales increased 44% with solid growth across subregions and solutions offerings. APAC again realized strong growth with sales up 20%, led by strength in China, Australia, India and Japan. Latin America also continued its recovery with exceptionally strong growth in all subregions with sales increasing 79%. Adjusted gross margin expanded 390 basis points to 48%, primarily driven by favorable business mix, a $12 million recovery of Chinese import tariffs, higher support service margins and contribution from our recent high-margin acquisitions.

These benefits were partially offset by higher premium freight charges, which we'll discuss further in a moment. Adjusted operating expenses as a percentage of sales improved 180 basis points. We continue to scale opex while prioritizing high-return investments in the business. Second quarter adjusted EBITDA margin was 23.6%, a 530 basis point improvement from the prior year period, reflecting higher gross margin and operating expense leverage. We drove non-GAAP earnings per diluted share of $4.57, a $2.16 or 89.6% year-over-year increase. EPS growth also benefited from lower interest expense, partially offset by a slightly higher tax rate.

Turning now to the balance sheet and cash flow highlights on slide seven. We generated $514 million of free cash flow in the first half of 2021. This was $192 million higher than the prior year, primarily due to increased profitable growth. In Q2, we acquired Adaptive Vision for $18 million to advance our machine vision solutions and made $4 million of venture investments. In addition, we also repurchased $25 million of Zebra shares. Our balance sheet remains strong. From a debt leverage perspective, we ended Q2 at a modest 0.6 times net debt-to-adjusted EBITDA leverage ratio, which affords flexibility to invest in attractive business acquisitions.

On slide eight, we show the multiyear impact of transitory costs, primarily related to expedited freight due to supply chain bottlenecks caused by the global pandemic as well as tariffs on China imports. For the second half of the year, we now expect the year-on-year unfavorable impact from these items to be approximately $85 million, which translates to a three percentage point negative gross margin impact. Our supply chain team has been taking extraordinary actions to satisfy customer demand in an exceptionally challenging global environment. Global freight costs for virtually all modalities of delivery across our supply chain continue to escalate.

Impacts include higher global shipping cost per kilo, a shift in modality from ocean to airfreight as well as increased cost to expedite component parts to our Tier one manufacturers in order to meet customer commitments. We expect premium freight costs to abate once component supply and freight capacity improves. Let's now turn to our outlook. The pandemic has accelerated trends that have been driving our business, including omnichannel shopping adoption, the desire for track and trace across the supply chain and the need for more digital healthcare experience. We entered Q3 with a strong order backlog, and we continue to see broad-based robust demand across virtually every dimension of our business.

This momentum, along with our sales pipeline, gives us the confidence to provide a strong Q3 guide and substantially raise our full year outlook. In Q3, we expect adjusted net sales to increase between 21% and 25% year-over-year. This outlook assumes a three percentage point additive impact from the acquisitions and foreign currency changes. We anticipate Q3 adjusted EBITDA margin to be between 20% and 21%, which assumes gross margin expansion and operating expense leverage from the prior year. It also assumes approximately $45 million of premium freight expense, which is $37 million higher than last year. We are also experiencing higher product component costs, which we expect to largely offset with recently announced price increases. Non-GAAP diluted EPS is expected to be in the range of $3.90 to $4.10.

For the full year 2021, we are raising our guide for adjusted net sales growth to be between 23% and 25%, which reflects our increasing optimism for strong growth in the second half of the year despite significant industry supply chain constraints for certain product components as well as transportation bottlenecks. This outlook assumes an approximately three percentage point additive impact from acquisitions and foreign currency changes. Despite our significantly increased expectation for transitory premium freight charges that we just highlighted, we are maintaining our expectation of full year 2021 adjusted EBITDA margin to be between 22% and 23%, which assumes operating expense leverage and gross margin expansion from the prior year.

We now expect our free cash flow to be at least $900 million for the year due to increased profitability. Please reference additional modeling assumptions shown on slide nine. Note that our outlook does not include any projected results from the pending acquisition of Fetch Robotics. Anders will discuss the strategic acquisition in a few moments. With that, I'll turn the call back to Anders to discuss how we're advancing our Enterprise Asset Intelligence vision in new and existing markets.

Anders Gustafsson -- Chief Executive Officer and Director

Thank you, Nathan. I am encouraged by the strengthening demand across our business, which allows us to further increase our 2021 outlook. Slide 11 illustrates how we are working with our customers and partners to advance our Enterprise Asset Intelligence vision. By leveraging Zebra's industry-leading portfolio of products, solutions, software and services, our customers can overcome some of their most complex operational challenges and transform their frontline workflows to achieve higher levels of performance. We help businesses across industries implement tailored solutions that digitize and automate their operations, enabling them to compete more effectively.

With our innovative solutions, our customers' associates can now anticipate and react in near real time, utilizing insights driven by advanced software capabilities such as artificial intelligence, machine learning, prescriptive analytics and machine vision. Now turning to slide 12. As a trusted strategic partner, businesses in a variety of end markets turn to Zebra to help optimize end-to-end workflows. I would like to highlight several recent wins across our end markets, which demonstrate how Zebra solutions are improving productivity, customer service and patient care. A large European postal service will be deploying approximately 80,000 TC57s to their carriers.

Continuing a long-standing relationship, they are upgrading to the latest mobile computing solution, which will enable them to more effectively handle increased parcel volumes and a broad range of use cases. It's another proof point of successful collaboration with post and parcel services around the globe, including our current business with the United States Postal Service. We are also helping a large North American steel manufacturer to optimize and digitize its operations. This customer is adding more than 1,000 of our ET56 tablets to their operations, which will allow them to eliminate manual paper processes by implementing electronic proof of delivery to automate and expedite the invoicing process.

This solution will also improve the customer experience by providing advanced notification of delivery. Large public sector hospital system in the U.K. is utilizing our mobile computers, printers and wrist bands to enable real-time visibility into the entire patient journey and ensure safe and efficient care. This customer is using our solutions for specimen tracking, patient monitoring and blood transfusions in emergency and operating rooms. Their employees also use our mobile computers for physical security access. A regional U.S. supermarket operator recently decided to implement our Reflexis workforce management tool for labor scheduling and employee self-service to more efficiently manage their resources across more than 100 locations.

This solution also frees up their associates to focus more on customer service versus administrative tasks. More broadly in retail, the sharp increase in omnichannel and online shopping requires retailers to deliver goods in a timely manner and make them available for pickup when promised. To address this challenge, a wide range of retailers have been prioritizing investment in Zebra solutions that provide higher inventory accuracy and utilize their labor more effectively. Slide 13 highlights significant recent investments, we are making in advance -- to advance our Enterprise Asset Intelligence vision in the warehouse and in manufacturing.

In May, we announced the launch of our fixed industrial scanning and machine vision solutions to increase efficiency and quality inspection in our customer's operations. We complemented this product launch with the acquisition of Adaptive Vision, whose software enables customers to easily build machine vision and deep learning applications. We are excited about our opportunity to penetrate this high-growth, fragmented market, and we are actively recruiting channel partners to scale the business. In July, we announced our intent to acquire Fetch Robotics, which has the broadest portfolio of autonomous mobile robots in the industry, powered by a cloud software platform that can be deployed stand-alone or integrated with warehouse management systems.

Our vision is to orchestrate both robots and technology-equipped frontline workers through software in the cloud to optimize material transport and order fulfillment workflows. As a venture investment, Fetch has been a trusted partner to Zebra, and we are excited about the prospects for our combined businesses. In closing, we are confident in our growth prospects given the momentum we are experiencing in the business and our heightened pace of innovation. We are energized by our vibrant core markets as well as the emerging prospects, we see in newer markets to digitize and automate workflows. Now I'll hand the call back over to Mike.

Michael Steele -- Vice President of Investor Relations

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

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Damian Karas with UBS.

Damian Karas -- UBS Investment Bank -- Analyst

Hi, good morning everyone. So I just wanted to ask you a little bit about the component shortages. Obviously, still, we're able to drive some pretty strong growth in the second quarter and expecting to see that in the third quarter as well. But would you be able to quantify how much of a drag, if any, of the component shortages are on your sales this year?

Anders Gustafsson -- Chief Executive Officer and Director

Yes, I'll start, and then I'll have Nathan also help out here. So the first, I'll start on the kind of the industrywide semiconductor shortages. They've been very well documented by the press, obviously, over the last few months, and we are impacted. I said impact, though, is not uniform across all components. Some components are impacted much more than others, but it's a much larger number of components that we're kind of working than we would in a normal quarter.

But I'd say our team is doing a great job in working all angles to optimize our allocations and there's been great collaboration between our sustaining engineering groups to ensure we can qualify new alternative components that have less lead time to ensure we get this much available product to provide to our customers as we can. We did raise prices here recently to mitigate some of the impact of the increased component costs. And I said, despite these shortages and the price increases that we have increased, we're quite confident in the increased full year outlook that we announced today.

Nathan Andrew Winters -- Chief Financial Officer

And Damian, just to answer the question on the Q3 and full year guide, the risk associated with the shortage have been incorporated in our outlook. But it would be really tough to quantify, and I think really constructive to speculate on what that number could be unconstrained.

Damian Karas -- UBS Investment Bank -- Analyst

Okay. That's really helpful. And then I wanted to ask you a little bit about the freight headwind. I mean, second quarter, despite having those, I think you were able to outperform on the margin front. So just curious why we shouldn't -- but you're expecting a pretty abrupt drop here, 300 basis points in the second half. Shouldn't we expect you to kind of be able to manage those as you we're in the second quarter? And I guess, additionally, should we be thinking that next year, you will be able to kind of completely reverse these premium freight expenses?

Nathan Andrew Winters -- Chief Financial Officer

Yes. So maybe if you take us back on just where we're seeing the bottlenecks because there's really three different areas in terms in the incremental cost. One, which we've seen earlier in the year, and we've talked about in our previous calls around the lower international commercial air travel, container shortages, port congestion. So we're on the supply side of it. That's where we're seeing our air and ocean rates two to three times since the start of the pandemic. And those really have not come down over the last several months. If anything, oceans gone up, air rates have stabilized.

In addition, because of the global supply constraints, along with the increase to global demand, we're now expediting component parts from our Tier one and Tier two manufacturing partners, along with shipping a higher percentage of printing, in particular, via air versus ocean. And so those are also really driving the step change in terms of the transitory costs from Q2 into the second half. In addition, you have the manufacturing shutdowns in parts of Southeast Asia, in particular, for us, Vietnam and Malaysia due to COVID, there's further constrained supply.

So as we see today, you're expecting the impact to persist at least through the end of the year. It's hard to say when those will abate into next year. But again, the team is doing a great job of managing the impacts with our customers really through extraordinary actions and communicating the lead times. So as you look at our second half guide, I think there's two things to think of. One is the step change increase in terms of the incremental cost. And in Q2, we also had $12 million of China tariff recovery that we don't expect to repeat in the second half that was an offset in the second quarter.

Damian Karas -- UBS Investment Bank -- Analyst

Understood. Thank you very much for the insight. Good luck.

Nathan Andrew Winters -- Chief Financial Officer

Thank you.

Operator

Our next question comes from Tommy Moll with Stephens.

Thomas Allen Moll -- Stephens Inc. -- Analyst

Good morning, and thanks for taking my question. Anders, you've talked about a robust backlog and pipeline. Any comments you could give to augment there would be helpful. Do you have any sense of whether the momentum is sustainable through the year-end and even into next year? And any comments you could give us on channel inventory levels as best you understand them would be appreciated as well. Thanks.

Anders Gustafsson -- Chief Executive Officer and Director

Yes. I will start here, and then I'll ask Joe Heel to also provide some color. First, we're obviously very excited about and pleased with the performance we had in the second quarter. We exceeded the high end of the guidance range here. And to the previous question, we have extraordinary collaboration between our supply chain and sales teams to satisfy very strong demand in a supply constrained environment. The strong secular trends that have been supporting our business for a long time, they have accelerated through COVID, and we don't see any abatement in those trends. They're continuing to build. I'd say our customers across pretty much all our vertical markets are prioritizing, digitizing and automating their workflows.

I think omnichannel is probably the best example in retail of the retail vertical. Most retailers investing meaningfully in building out their omnichannel capabilities and digitizing their operations that way. We did see double-digit growth in all regions as well as across all our product and solutions categories as well as across our four main vertical markets. We did see our small and medium-sized customers do particularly well.

So the growth we saw here was definitely to a large degree, driven by our small, medium-sized customers. And that was partly, I think, a result of pent-up demand, but we see that largely being behind us at this stage. But even our large strategic accounts performed very well with strong growth. And based on this performance, I do expect that we will continue to take share in the market. Our inventories are healthy in the channel today, but it may be at the lower end of our expected ranges. Joe?

Joachim Heel -- Chief Revenue Officer

I think that's fair. I mean, on the inventory side, we're working hard with our distribution partners to keep our inventory at the levels that we need to sustain the demand, but at the same time, to serve every possible demand, which is at the moment, as you can tell, very, very strong. And we're trying to serve all of the demand we can and taking our inventory to the lower end of what we consider our healthy range. When it comes to the backlog and the pipeline, it is very strong as you're seeing.

And what I can underscore what Anders was saying, this pandemic has definitely triggered a wave of digitization and automation in our customers that is leading to projects and demand that we did not see before the pandemic. So that is a sustained driver of momentum that we see. And we also are enjoying because customers are aware of the supply shortages, we're enjoying good pipeline visibility. Our customers are working with us to give us that visibility for an advance, and that gives us confidence for continued growth into the next year.

Thomas Allen Moll -- Stephens Inc. -- Analyst

Thank you. Both those are helpful answers. Anders, I wanted to follow-up with a question on Adaptive Vision and your entry into the fixed industrial scanning and machine vision markets. A couple of part question here. Just any context you could give us around any prior relationship you had with Adaptive Vision or how you came to know the asset? Anything you can do to frame the size of the market opportunity where you think you've got a good shot at competing? And then what advantages you bring in those markets? They're adjacent to markets where you currently play and have substantial share, but what advantages do you bring in these new markets?

Anders Gustafsson -- Chief Executive Officer and Director

Yes, I'll try to summarize this here. But first, we're excited about our entry into the fixed industrial scanning and machine vision market. These are solutions that really accelerate our Enterprise Asset Intelligence vision. This is more on the Sense side of the Sense Analyze Act framework, but it helps us provide some new ways of capturing data that we can then analyze and enable our customers to act on. This is a very attractive market we see, but it's quite fragmented. It's a multibillion-dollar market that our new portfolio then can address, although we're not addressing the entire market on day one.

But we are continuing to invest in it to add functionality, to add capabilities that we can go after a bigger and bigger part of the market, but we really are focusing initially mostly on the fixed industrial scanning market. Our value proposition, we believe, is very strong, and the focus is on the ease of use of these types of solutions as well as the ability to upgrade cameras and devices in the field. So those are, we believe, two strong differentiators that we have. The Adaptive Vision is a great way for us to augment the, say, the cameras that and the software we had developed. It's a way for our customers to more easily be able to develop and build and implement applications for how to basically engage in machine vision, or fixed industrial scanning, or incorporate machine vision and fixed industrial scanning into their workflows.

And we've been familiar with Adaptive Vision for some time. And we've been looking at ways to augment our own internal software development in that area to make sure we can come up with a really strong offering. And we felt that Adaptive Vision had a very attractive solution, very strong solution, and there was nice fit with Zebra.

Thomas Allen Moll -- Stephens Inc. -- Analyst

Thanks, Anders. I'll turn it back.

Operator

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

James Andrew Ricchiuti -- Needham & Company, LLC -- Analyst

Hi, good morning. Thanks for the additional color on some of the cost issues that you're incurring in terms of freight and components. I wonder if you could spend a few moments talking about opex, both sales and marketing. G&A up by a healthy amount sequentially, admittedly with a significantly higher sales. So I'm just wondering how we might be thinking about opex in the second half of the year? And I have a follow-up, Andrew, for you on some of the acquisitions.

Nathan Andrew Winters -- Chief Financial Officer

Yes. So I think from an opex perspective, if you look year-on-year, there's a couple of major drivers in terms of the overall increase that really impact every quarter. Last year, we took some actions mid-year around, salary reductions in the peak of the pandemic to help offset the impact as well as a lower incentive comp as we're obviously below our planned targets for the year. So those two alone drive a significant increase year-on-year, along with the full year of Reflexis us in the P&L. And starting to, again, invest particularly in R&D and go-to-market with some of the discretionary cost increases.

So if you look for the second half of the year, I'd say the ramp in the first half will continue. But I wouldn't expect to see a real step change increase from where we saw spending in the second quarter. But again, the year-on-year increases are all pretty consistent for each quarter.

James Andrew Ricchiuti -- Needham & Company, LLC -- Analyst

Thanks, Nathan. Anders, you talked about the acquisitions, both Adaptive and Fetch. You talked about, I think, as being a fragmented market. And I'm wondering to what extent might we see you in addition to internal development of these technologies, look at potential additional M&A to expand your footprint?

Anders Gustafsson -- Chief Executive Officer and Director

Yes. Obviously hard for me to comment on specific opportunities here. But we are excited about both of these markets, the fixed industrial scanning and the autonomous mobile robot market. And we have had long-standing organic development activities that we now have augmented by the acquisitions of Fetch and Adaptive. But I'd say, first, more generally about M&A, first, we're very excited about our business and the outlook for our business. We do see M&A as a vector for growth.

I think the Adaptive Vision and the Fetch Robotics acquisitions are -- we're excited about them. We think that we can deliver good growth and good returns on those. We do look at all M&A opportunities as a way for us to accelerate and advance our EAI vision. We're targeting selective bolt-on acquisitions that also have high growth. And look at around the -- what I talked earlier about the customers' need and interest in digitizing and automating a number of workflows across all of their supply chains. That provides good opportunities for us to continue to add to our capabilities. And so we do look at M&A as a way for us to accelerate that growth. And we have a strong balance sheet that can support M&A activities also.

James Andrew Ricchiuti -- Needham & Company, LLC -- Analyst

And your pipeline for M&A?

Anders Gustafsson -- Chief Executive Officer and Director

Yes. We obviously have a team that scans the market broadly around our target areas where we have particular interest. We have a good healthy pipeline of opportunities. You never know what really work out, where we'll come to terms or not, but we do have a healthy pipeline of opportunities.

Operator

Our next question comes from Paul Chung with JPMorgan.

Paul Chung -- JPMorgan Chase & Co -- Analyst

Hi, thanks for taking my question. So just another follow-up on machine vision, fixed industrial scanner. So how large is this business today? And will the solution eventually kind of be led with software similar to your peers kind of resulting in very accretive margins? What is the strategy to kind of take share from larger players in the industry, maybe competitive pricing? And then another on M&A in general. Very strong free cash flow, high-quality earnings provides you kind of a nice cushion for broader opportunities. Should we expect continued preference for software solutions over time and resulting kind of higher margins longer term?

Anders Gustafsson -- Chief Executive Officer and Director

Yes. I will start, and I'll also ask Joe to comment on this here. But I think your first question was around the fixed industrial scanning machine vision market. So we believe it's a very attractive market. It's a near adjacency to what we do. And it's quite a fragmented market. If you look at the market share table there, there's one or two players that have reasonable share, but then it's a long tail of smaller players. We are entering the market, say, primarily through or initially with our fixed industrial scanning portfolio, which is distinctive process to our core competencies and use cases where we have a very strong right to play. But we are adding both, say, on the capabilities, both on the hardware side, on the camera side, but primarily here on the software side to be able to then address a larger part of that market.

Software is a big differentiator in all our devices, right? If you look at mobile computing, print and scan, the majority of our engineers, a huge part of the differentiation and the value add comes from the software. And we certainly expect that to be the case here also. So we are investing in building more of that software capability. That division was an inorganic way to accelerate some of that, but we also do that organically. We should also not underestimate or minimize the importance of the investments we're making in the go-to-market. I mentioned earlier, I think, that we are putting in a specialized track in our Partner Connect reseller program to specifically address recruiting fixed industrial scanning machine vision partners to help accelerate that growth. And maybe, Joe, you can expand on that a little bit?

Joachim Heel -- Chief Revenue Officer

Yes, exactly. I was going to comment specifically on your question around what's our strategy to take share. So you know that we have the fixed industrial scanning and the machine vision parts of this. The fixed industrial scanning is a natural extension of the leadership that we have in the scanning part of the market. And we're, of course, translating that technically to succeed in the machine vision part. That's where the software piece is essential. And the acquisition of Adaptive now gives us industry-leading software capability. So we fully expect to translate that into share gains. But there's more to it than that.

We specifically want to use the software to enhance that ease-of-use value proposition. That's critical to these customers. How easy is it to use and to deploy. And that's also important for the second part of the strategy to win, which is using partners as a way to compete in this market. All of these solutions are deployed through partners for us. We're a very partner-centric company, as you know. And that is also what we're going to use to compete and win in the machine vision space. And making our software easy to use is a value proposition, not just to the end users, but to the partner specifically. So hopefully, that's helpful.

Paul Chung -- JPMorgan Chase & Co -- Analyst

Yes, very much. And lastly, on Fetch Robotics. I know it's early days, but if you could talk about how you see this business ramping, how material revenues can be over time kind of from a small base, the margin outlook, competitive environment, all that good stuff, some key customers you hope to get some cross-selling opportunities? And if you could expand on kind of use cases beyond warehouses and fulfillment centers.

Anders Gustafsson -- Chief Executive Officer and Director

Yes, it's a broad question. It can take a while to answer all of it. So I'll try to give you a high-level response here. But first, we haven't closed on the acquisition yet, but we are certainly excited about it. We have worked with Fetch as a venture investment for quite some time. So we believe we understand the market, we understand the team, and we see great opportunities to leverage the Fetch's broad portfolio of AMRs. They have the broadest portfolio of autonomous mobile robots in the industry. And they have a very strong, very capable cloud-based software platform for how to deploy and manage these robots.

And then here at Zebra, we have been more focused on technology enabled, the workers in warehouses. And by combining those two to be able to control and optimize both the flow of robots and the workers, we think we can offer a superior ROI to customers in manufacturing, in warehouses and a number of these use cases. Fetch has say, initially been mostly focused on the kind of contains market. So more of movement of goods, but we see there's a number of other use cases that are also growing fast where they have solutions that are very well suited to pursue those also. And here is another area where I think our strength that we have in our go-to-market organization, I'll ask Joe to comment on this also, will augment as well.

We know virtually all of these large customers in transportation logistics, in manufacturing, retail, whatever industrial vertical we're going after, and we can help, I think, with providing those introductions and position to be our broader automation workflow solutions with those customers.

Joachim Heel -- Chief Revenue Officer

Yes, a particular attribute of the market that we're focusing on is that we're targeting those areas where humans and robots work together. And so the notion of a cobot, right, the collaboration between the two, is at the heart of the strategy. So that means we're targeting use cases like person to goods picking and conveyance. And those use cases allow us to take advantage of a broad installed base we already have, where workers in warehouses have mobile computers, and they're now being augmented by robots.

So this means that we can take advantage of the orchestration between the two, and there's really no one else in the market that can do that to the extent that we can. And as a result, we're taking this strong platform capability that Fetch has with robots that can go across a broader range of use cases than anyone else and can deliver products with safety and speed that no one else can and combining it with the orchestration of humans to achieve overall productivity improvements that are unequaled. And that's really the strategy.

Paul Chung -- JPMorgan Chase & Co -- Analyst

Thanks so much.

Operator

The next question comes from Meta Marshall with Morgan Stanley.

Meta A. Marshall -- Morgan Stanley -- Analyst

Great. Thanks. On the price increases that you guys noted, can you just give a sense of the degree or how broad they were? And like are you expecting those price increases to be transitory, so the channel may hold less inventory in the near term? Just how you see that interaction? And then just maybe a second question. Just getting a sense of the postal service concentration this year, or the USPS deal, still expected to be primarily Q2, Q3 this year?

Anders Gustafsson -- Chief Executive Officer and Director

Yes, I'll start, and then I'll ask Nathan to comment here also. But first on the price increases. Pricing is obviously something that is very important to us and something we continue to assess and address. We do regular checks to make sure that our solutions are priced competitively to the end users as well as that our partner community have the right profitability part of our overall go-to-market activities here. The competitive actions and competitive positioning is obviously a key part of how we assess pricing here. And we believe that the price increases that we have now announced are appropriate. They respond to some of the competitors who also announced price increases and everybody hasn't.

So we believe that we have kind of assessed this based on very granular based on products and geographies to make sure that we don't put ourselves at any competitive risk with these. We see the cost as being transitory, and we want to play the kind of a long-term game here, though, making sure we maximize the value of the corporation longer term, and we don't want to seed market share in the short term for that either.

Nathan Andrew Winters -- Chief Financial Officer

And then from USPS perspective, the rollout is progressing as expected and as we communicated earlier in the year. This is for the current rollout of the full EMC solution of 300,000 units to the carriers with the goal of largely completing here at the end of the third quarter.

Meta A. Marshall -- Morgan Stanley -- Analyst

Great. I mean, just coming back to the price increases, like is there just a range we should think of just on the top line of what that impact is across the portfolio? Or is that just too difficult to assess at this point?

Nathan Andrew Winters -- Chief Financial Officer

I'll take that. So we just rolled the price increases out last week. And I would say from a full year perspective, it's within the margins from the full year revenue.

Anders Gustafsson -- Chief Executive Officer and Director

With the rollout price increases there's a lag time between us announcing and being effective in the market. So you can see that this will be impacting our Q4 business rather than Q3.

Meta A. Marshall -- Morgan Stanley -- Analyst

Okay. Great. Thank you so much.

Operator

The next question comes from Keith Housum with Northcoast Research.

Keith Michael Housum -- Northcoast Research Partners, LLC -- Analyst

Good morning guys. Congratulations on a great quarter. Just looking at the, I guess, cost of goods sold here and the transitory costs, that being the premium freight costs. Is there anything in the adjusted EBITDA margin guidance and thought process that suggest that some of the impact will be perhaps longer term? For example, increased labor costs or anything else in there that again, will perhaps go on beyond the rest of this year.

Nathan Andrew Winters -- Chief Financial Officer

Yes, Keith, between the two buckets, if you look at the, say, labor costs or the raw material cost increases, that's what the price increases we've taken is meant to largely offset that. So if we think about from a mitigation of the inflationary prices, I think as we go into the fourth quarter and into next year, those will be largely mitigated with the price actions we've taken. The logistical bottlenecks are the one that -- from the timing, I think, is still to be played out. Again, I think we expect no changes between now and the end of the year. But really, we're taking kind of one quarter at a time and reacting accordingly to optimize and maximize profitability as best we can.

Keith Michael Housum -- Northcoast Research Partners, LLC -- Analyst

Okay. Fair enough.

Anders Gustafsson -- Chief Executive Officer and Director

Maybe just to build on that a little bit. So the logistics and the semiconductor component cost, we consider those to be transitory. On the labor side, there's always some upward movement in labor rates. But if you think of the amount of labor that goes into our cost of goods sold, it's very small. So it's a single digit, I think, high single-digits part of our value add is from labor. So it's not something that meaningfully changes the P&L.

Keith Michael Housum -- Northcoast Research Partners, LLC -- Analyst

Got it. Got it. And as I look at your full year guidance, Anders, historically, you guys have always had a very strong fourth quarter, sequentially a big uptick from the second and third quarter. The guidance you're providing here suggests perhaps you've been roughly a flat fourth quarter. So is there a thought process that businesses kind of pulled ahead during the year? Or how are you thinking about the fourth quarter? Any potential upside to that?

Anders Gustafsson -- Chief Executive Officer and Director

Well, I think the implied guide for the fourth quarter that we had in our full year number here certainly would indicate this growth, not as strong growth as we've had in the first half or in -- we guided for Q3. But Q4 was a very strong quarter last year. So we saw a great recovery in the fourth quarter. But we do see continued strong demand from our customers. The momentum is very strong. We don't see that abating. This is more of a tougher compare than anything. I don't know if, Nathan, you want to -- or Joe, want to add anything?

Nathan Andrew Winters -- Chief Financial Officer

Yes. I think from a sequential standpoint, Keith, in terms of the typical update from Q3 to Q4, I don't think it reflects anything from a weakness in the fourth quarter as much as just strength we're seeing here in the third quarter. And as we've noted earlier, when you look at our days on hand inventory and the strength, I wouldn't say sales pull-ins are not a major factor. It's really just that acceleration of investment from our customer base. And if anything, where we're getting the visibility is in the backlog and funnel, as Joe mentioned, in terms of giving us confidence in the full year, particularly the fourth quarter guidance.

Keith Michael Housum -- Northcoast Research Partners, LLC -- Analyst

Okay. Thanks. I appreciate it.

Operator

The next question is from Andrew Buscaglia with Berenberg.

Andrew Edouard Buscaglia -- Joh. Berenberg, Gossler & Co. KG -- Analyst

Good morning guys. So I wanted to ask on R&D. You're spending this you're on track to spend about $560 million or so. And I'm wondering how much of this over the last, call it, 12 months, is related to this vision and AMR kind of push? And then secondly, at what point can you start to really leverage that R&D line. Do you need to be spending cost $550 million a year going forward?

Anders Gustafsson -- Chief Executive Officer and Director

Well, first, I'd say R&D investments is a key activity for us. That is what really drives our longer-term growth. And I would say if you look back over the last several years, the investments we've made in product development and R&D has had a great return for us. So we want to make sure that we have a portfolio of fresh solutions that offer real value to our customers so we can compete and grow the business. We look at our R&D investments across a number of horizons, you can say, our investments in our core that would have a very short-term return kind of the near adjacencies, which would have a little bit longer return, say, a couple of years, two, three years, and then more innovative new solutions, more of the enterprise asset intelligence type of solutions here which will have a little longer-term payback as they're more ground-up innovations.

In many areas, let's say, you mentioned Fetch specifically, we developed our own robots with SmartSight before. So there's certainly been a way for us to both learn the industry, but there's also attractive ways for us to leverage those investments across. So when we do make acquisitions, we see that as a great way for us to augment our own internal programs and drive us into new high-growth adjacencies where we can make a difference. Did that answer to your question?

Andrew Edouard Buscaglia -- Joh. Berenberg, Gossler & Co. KG -- Analyst

Yes. No, that's helpful. And if I heard correctly, you got nice healthcare award this quarter. Like that area is taking kind of a back seat to all excitement going on in retail and e-commerce and logistics. Can you update us on healthcare in terms of -- you are still seeing that narrative play out post COVID, where people are accelerating investments in automation there?

Anders Gustafsson -- Chief Executive Officer and Director

Yes. I think across all our verticals first. I mean, COVID has accelerated the secular trends that we talked about all our end markets are driving solutions that help to digitize and automate their workflows and empower frontline workers to be connected and optimally kind of utilized. Each of our primary vertical markets grew double digits in the second quarter, and we continue to invest in expanding in each of these ones. Specifically for healthcare, I'd say we saw our healthcare markets, they started in more acute care, but it's been moving into other areas like outpatient, remote patient care, COVID testing, vaccine distribution.

So our efforts in healthcare continues to expand into new areas. It's also expanding geographically. So the win we talked about today was in Europe. And I think here also the healthcare patients are taking a book out of their e-commerce or kind of online shopping activities also. They are seeking a more digital experience, which is putting some extra pressure on healthcare providers to make sure they can offer similar type of experiences for the patients. And I'll say here, our purpose-built devices and solutions are critical for healthcare providers, not only to improve the patient journey but also to drive greater productivity for the healthcare providers.

Joachim Heel -- Chief Revenue Officer

I might add that in healthcare, there's two other phenomenon that will drive continued growth. One is that, we know that healthcare systems, depending on where in the world you are, this is in a different stage, have pulled back on some of their spending because they didn't have income from the elective procedures that they usually enjoyed. And as we come out of the pandemic, we see more of that income returning to for-profit hospitals and then their ability to spend on these solutions returns as well. And we've seen that. And the international growth is another big dimension. Anders mentioned the European piece, but we also see significant interest in different parts of Asia that we haven't seen to that extent before. So there are two more growth factors that we expect.

Anders Gustafsson -- Chief Executive Officer and Director

Just one more comment on this will be, I expect the healthcare to continue to be our fastest-growing vertical over the longer term. But it's great to see that we have this diversity in the business across our main four verticals and some other newer ones coming up. But in Q2 here, manufacturing, which was our fastest-growing vertical, manufacturing was the one that was the hardest hit by COVID-19 and the macro was a bit tougher going into that with tariffs and other things. But the opportunity to increase automation in workflows through wearables and heads-up displays and the need to track and trace sourcing components at sub-suppliers through assembly, all the way through distribution is providing great opportunities for us. So all our vertical markets performed very well, but manufacturing was actually the strongest one for us in Q2.

Andrew Edouard Buscaglia -- Joh. Berenberg, Gossler & Co. KG -- Analyst

Okay. Thanks Anders.

Operator

Our last question is from Rob Mason with Baird.

Robert W. Mason -- Robert W. Baird & Co. Incorporated -- Analyst

Yes. Good morning. Thanks for the question. Anders or Joe, wanted to get your thoughts on how quickly you thought you could pull together the channel, the partners, to be able to sell your fixed industrial scanning and machine vision products? And I'm curious also if you envision those being two separate channels, or both products will go through the same channel? And then also relatedly, I guess, maybe what percent of your existing channel is suitable to sell those products?

Anders Gustafsson -- Chief Executive Officer and Director

Yes. I'll start and Joe can provide some extra color here also. So we have worked on our go-to-market strategy and our channel engagements basically since we started working on the product and solutions. So this is not something we're kind of doing serially. This has been something we've done in parallel to a large degree. So you can say there's a Venn diagram of partners out there. There are partners who we currently have who are also in the fixed industrial scanning machine vision space that we are obviously having a great -- already have a relationship with and with easy expansion to add our fixed industrial scanning and machine vision capabilities to their portfolio, but also recruiting new partners that are not necessarily Zebra partners today, but are strong in that space.

And we've seen good interest and response rates from them. And I think they have been impressed with our solutions and they see how we can add value to them. So this is obviously a big part of what we need to do now and for the next year to ensure that we deliver the revenue growth that we are intending or planning for. But so far, I'd say that the response from the channel has been very positive.

Joachim Heel -- Chief Revenue Officer

Yes. I appreciate that you're asking this question because channel is central to our go-to-market strategy, right? We're a very channel-centric company. And as we were designing this go-to-market approach, we spent a lot of time on this. First, we created a dedicated track in our Partner Connect program, which is very important to serve the needs of these particular partners. A percentage of our current partners are also machine vision distributors and sellers. I would estimate that that's a small percentage. The majority of machine vision partners we need to recruit. And we have made great progress in recruiting these partners already.

We have a very strong group of partners that have already signed up to sell this force. And that's because of what we were talking about earlier that we've designed the product with a particular value proposition geared toward partners. We wanted it to make easy for those partners to deploy and sell these solutions. We think that's critical to success, and that's essential in how we've designed the product. So we're very pleased with both the number of partners we've already been able to recruit and the pipeline of additional partners that we have that is interested in selling our product.

Robert W. Mason -- Robert W. Baird & Co. Incorporated -- Analyst

Very good, very good. Just one follow-up. Nathan, the China tariff recovery, it was a nice contribution in the second quarter. What's assumed in the third quarter or second half for that or the potential for that to recur?

Nathan Andrew Winters -- Chief Financial Officer

Yes. So we have no incremental amount assumed in the second half guide. Our total claim was just over $30 million, and we've recovered $27 million to date. So I'd say the large majority that's left is in reconciliation. So I would expect the amount that's left to go is fairly small, and the timing of that is a little bit unknown just as we reconcile those last few batches of transactions.

Robert W. Mason -- Robert W. Baird & Co. Incorporated -- Analyst

I see, I see. And just to clarify as well in your guide. You've assumed nothing for Fetch because it hasn't closed, but just how should we think about the profit impact. Small business, I know, but I assume you're planning to invest fairly heavily or aggressively. And would that be material in the second half or fourth quarter?

Nathan Andrew Winters -- Chief Financial Officer

That's right. So it is not assumed in the guide since we haven't closed. And it's about a $10 million run rate revenue business and unprofitable at this time as it scales, but I'd say not material within the margins of our overall guide.

Robert W. Mason -- Robert W. Baird & Co. Incorporated -- Analyst

Okay. Very good. Thank you.

Operator

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

Anders Gustafsson -- Chief Executive Officer and Director

So just to wrap up, I would like to thank our employees and partners for going above and beyond to serve our customers as they stretch to meet heightened expectations in the increasingly on-demand economy. While we are focusing on maximizing profitable growth in the business, our top priority continues to be protecting the health and well-being of our employees, partners and customers as we recover from the pandemic. We're also looking forward to welcoming the Fetch robotics team once we close the transaction. Thank you, and have a great day, everyone.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Michael Steele -- Vice President of Investor Relations

Anders Gustafsson -- Chief Executive Officer and Director

Nathan Andrew Winters -- Chief Financial Officer

Joachim Heel -- Chief Revenue Officer

Damian Karas -- UBS Investment Bank -- Analyst

Thomas Allen Moll -- Stephens Inc. -- Analyst

James Andrew Ricchiuti -- Needham & Company, LLC -- Analyst

Paul Chung -- JPMorgan Chase & Co -- Analyst

Meta A. Marshall -- Morgan Stanley -- Analyst

Keith Michael Housum -- Northcoast Research Partners, LLC -- Analyst

Andrew Edouard Buscaglia -- Joh. Berenberg, Gossler & Co. KG -- Analyst

Robert W. Mason -- Robert W. Baird & Co. Incorporated -- Analyst

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