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Zebra announced its Q2 2015 results today. Although the top line results mostly were in line or slightly beat expectations, the same cannot be said of EPS which significantly missed expectations. The gross margin hit was explained by various non-recurring events such as the cost of re-branding. However, looking a little closer, the numbers are also suggestive of a change to business mix with a larger share of revenues being derived from Tier 1 deals which inherently carry lower margins when compared to the run-rate or channel business. Put another way, the run rate business is showing signs of weakness. A lot of time during the Q&A on the earnings call today was dedicated towards the state of Zebra’s mobility opportunity and their customer’s migration from legacy Windows platforms (Windows Mobile/Windows CE) to Android, iOS and potentially/eventually Windows 10. With an installed base of almost 15 million rugged mobile devices that will require upgrading prior to the 2020 support deadline, this represents both a massive challenge AND opportunity for vendors like Zebra and its peers moving forward. However, given these solutions are tied to work flows that are critical to an enterprise’s operations it is not a decision organizations are taking lightly (or in some cases are waiting to the absolute last possible moment to deal with it). Given that a large share of Zebra’s business is in essence “upgrade” or “brown-field” opportunities this makes it especially challenging and confounding from an operational perspective.
With a vested interest to accelerate the decision process, Zebra has been aggressively expanding its software portfolio to support its customers and partners with their migration efforts. Although Zebra remains OS agnostic, with no current viable Microsoft alternative this has meant focusing on Android. With the many challenges – real and perceived – facing enterprise decision makers about the stability of Android as a platform for its business critical applications this has been a tough sell. To its credit Zebra has recorded some significant recent momentum and major wins with Home Depot (2014) and Royal Mail (2015) delivering substantial legitimacy to its Android efforts. Moreover, among its direct peers, Zebra is the clear Android leader and increasingly embracing the more open approach to development that this platform promotes. However, Zebra’s early Android wins have been concentrated among large accounts with run rate traction of Android devices in the channel still limited (especially in North America and for warehouse applications). According to research VDC is currently fielding, approximately 22% of respondents with existing Windows Mobile/CE solutions are migrating to Android, another 20% plan to remain with Windows and leverage Windows 10, 10% indicate a transition to Apple/iOS devices and the balance (48%) undecided and taking a wait and see approach.
The key to Zebra’s success will invariably be tied to its ability to enable partners with the appropriate tools and services to support migration efforts. This clearly influenced their recent decision to acquire ITR Mobility and its iFactr platform. A challenge for them – and something they encountered with other SW investments – is encouraging partners to leverage these tools without them feeling forced to do so. Zebra also needs to mindful of striking a balance to maintain its ‘partner-first’ model without crossing the traditional ‘partner domain’ threshold. In addition, with much of the market still undecided on their OS direction, Zebra needs to be sensitive to and counter the perception among partners that their roadmap does not include a Microsoft option.
That does not take away from the growing reality that a significant number of legacy solutions will need to be modernized and applications recoded – irrespective of the final OS destination. The trick will be doing this without substantially disrupting current operations and in a manageable time-frame. In addition – and this is really the counter to postponing decisions – is that virtually all the enterprises going down this path that VDC has spoken with is taking this opportunity NOT ONLY to leverage the capabilities of modern mobile devices in their updated applications BUT ALSO to take the opportunity to refine and often revise their mobile workflows to drive even greater efficiency, enhance customer engagement and further transform their businesses.
However, hearing of mobile development budgets in the tens of millions of dollars and time-frames exceeding three years to update 20 existing apps (only to reach functional app performance parity) has decision makers understandably tentative. What the iFactr solution is designed to provide organizations with is a more manageable transition from legacy to updated applications. The iFactr app virtualization solution enables organizations to seamlessly achieve functional app parity of legacy apps on a modern platform relatively quickly with the opportunity to incrementally add new functionality while reusing upwards of 80% of existing code. Claims that the benefits of the iFactr solution can only be realized with well-coded applications were refuted by the iFactr team who acknowledged that while this may have previously been the case it has completed been addressed by their recently released virtualization solutions. While no silver bullet exists that addresses this very real issue – and enterprises and their partners will take various approaches to navigate this transition – capable and viable approaches exist today.
As mentioned by Zebra executives on their earnings call, this current OS migration represents a significant “jump ball” for the rugged mobile market. VDC will be dedicating significant research resources into legacy application migration and modernization best practices. Please reach out to us to share your opinions. Eric Klein, our Director of Mobile Software research will also be hosting a round-table discussion on this topic at the upcoming M│Enterprise event in Boston this fall. Please also reach out for more information about this exciting event.
View the 2017 Enterprise Mobility & Connected Devices Research Outline to learn more.