Participants

Michael Steele; VP of Investor Relations; Zebra Technologies Corp

William Burns; CEO & Director; Zebra Technologies Corp

Nathan Winters; Chief Financial Officer; Zebra Technologies Corp

Jamie Cook; Analyst; Truist Securities, Inc.

Piyush Avasthy; Analyst; Citigroup Inc.

Bradley Hewitt; Analyst; Wolfe Research

Andrew Buscaglia; Analyst; BNP Paribas Exane

Damian Karas; Analyst; UBS Investment Bank

Thomas Moll; Analyst; Stephens Inc.

Unidentified Participant

Keith Housum; Analyst; Northcoast Research Partners

Kenneth Newman; Analyst; KeyBanc Capital Markets Inc.

Joseph Giordano; Analyst; TD Cowen

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

Chris Grenga; Analyst; Needham & Company

Presentation

Operator

Good day, and welcome to the First Quarter 2025 Zebra Technologies Earnings 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

Good morning, and welcome to Zebra's first quarter earnings conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least 1 year.
Our forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially, and we refer you to the factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of this slide presentation and in today's earnings press release. Throughout this presentation, unless otherwise indicated, our references to sales performance are year-on-year, on a constant currency basis and exclude results from recently acquired businesses for 12 months.
This presentation will include prepared remarks from Bill Burns, our Chief Executive Officer; and Nathan Winters, our Chief Financial Officer. Bill will begin with a discussion of our first quarter results. Nathan will then provide additional detail and discuss our 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.

William Burns

Thank you, Mike. Good morning, and thank you for joining us. Our teams executed well in the first quarter delivering results above our outlook. As we enter customers navigate through an unpredictable environment, I want to begin by highlighting a few points before we cover our results in greater detail.
We have made significant progress over the past 18 months in returning to profitable growth, extending our market leadership and advancing our portfolio of solution. While there is macroeconomic uncertainty, our first quarter results were strong and the demand environment has remained positive into the second quarter. We are well equipped to navigate the current landscape. Our solutions are critical in any economic environment, and we continue to expand our market reach and opportunity.
We have made substantial progress diversifying our supply chain beyond China over the past several years, and we have a capital-light business model, which enables us to remain agile. We have a track record of preserving key investments in our business to accelerate long-term growth, in challenging times while protecting profitability, and we remain well positioned to benefit from secular trends to digitize and automate workflows with our portfolio of innovative solutions.
Now turning to Q1 results. As we discussed in our last earnings call, strong retail year-end project spending carried over into January. Demand in the quarter remained strong, driving sales growth above our guidance range. For the quarter, we realized sales exceeding $1.3 billion, a 12% increase compared to the prior year, and adjusted EBITDA margin of 22.3%, a 240 basis point increase, and non-GAAP diluted earnings per share of $4.02, which was 42% higher than the prior year.
We realized strong broad-based growth across all major product categories and regions. We also saw double-digit growth across most of our vertical end markets with high single-digit growth in manufacturing. From a profitability perspective, we achieved the highest quarterly gross margin in more than a decade and significant operating leverage, resulting in strong improvement in profitability.
As we enter the second quarter, we continue to see solid demand and the business has continued to perform well. However, we remain agile to changes in this dynamic environment and continue to take actions to mitigate tariffs. I will now turn the call over to Nathan to review our Q1 financial results, tariff considerations and outlook.

Nathan Winters

Thank you, Bill. Let's start with the P&L on slide 6. In Q1, total company sales were approximately 12%, reflecting continued recovery in demand across our major product categories, unfavorable prior year comparisons, particularly for Printing. And our Services and Software recurring revenue business grew slightly in the quarter. Our Asset Intelligence and Tracking segment sales increased 18% and Enterprise Visibility and Mobility segment sales grew 9%. We realized strong sales growth across our regions.
In North America, sales grew 7% with growth in all product categories, in particular, strength in data capture, print and RFID. EMEA sales grew 18%, with strength in Northern Europe. Asia Pacific sales increased 13%, led by Australia and New Zealand and sales grew 18% in Latin America with particular strength in Mexico. Adjusted gross margin increased 150 basis points to 49.6% primarily due to favorable business mix and volume leverage.
Adjusted operating expenses as a percent of sales improved by 100 basis points. This resulted in first quarter adjusted EBITDA margin of 22.3%, a 240 basis point increase versus the prior year. Non-GAAP diluted earnings per share were $4.02, a 42% year-over-year increase and above the high end of our outlook.
Turning now to the balance sheet and cash flow on slide 7. For the first quarter, we generated $158 million of free cash flow as we drove improvements in EBITDA, working capital and inventory levels. We ended Q1 at a 1.2x net debt to adjusted EBITDA leverage ratio.
As our cash flow has recovered and net debt levels have moderated, we have increased flexibility to deploy capital consistent with our allocation priorities. We repurchased $125 million of stock in Q1 and another $75 million in April. And as a part of our continued efforts to scale our expansion in adjacent markets, on February 28, we acquired Photoneo, a leading 3D machine vision company based in Eastern Europe for $62 million. This profitable business will contribute approximately 30 basis points to Zebra's overall sales growth in 2025.
Now turning to slide 8. As Bill outlined, we are well equipped to navigate the global environment. We deliver solutions that are critical to our customers in diverse end markets. Our capital-light business model has a flexible cost structure given that we outsource most manufacturing and the vast majority of our products are fulfilled through third-party distribution. We have a strong free cash flow profile with more than $1 billion generated over the trailing four quarters.
And as I just mentioned, our balance sheet is in excellent shape with nearly $900 million of cash, modest debt levels and $1.5 billion of credit capacity. We will continue to take appropriate actions to preserve profitability and prioritize business investments that improve our competitive position and create long-term value for shareholders.
Due to the global nature of our supply chain, like many other electronic manufacturing companies, we are subject to recently enacted US import tariffs. On slide 9, we provide an update on the anticipated impacts from tariffs on our products imported to the United States and our efforts to mitigate them. We are now assuming an $80 million to $90 million annualized gross profit impact after mitigating actions.
This assumes the current effective rates including the electronics and USMCA exemptions. Our mitigating actions have included shifting additional North American production out of China and approximately $80 million of recently announced annualized pricing adjustments.
For the full year 2025, we are now assuming approximately $70 million gross profit impact after mitigation. With a $25 million to $30 million impact in the second quarter, following a $3 million impact in Q1. We will continue to evaluate additional opportunities to mitigate US import tariffs as we monitor global trade policy developments. These potential actions will include additional shifting of global production, product portfolio optimization and additional price adjustments.
Let's now turn to our outlook. We entered the second quarter with a solid backlog and pipeline to support our sales guide and expect Q2 growth between 4% and 7%, with a net neutral impact from our most recent acquisition and FX. The weaker US dollar since our last earnings call has resulted in FX being less of a headwind than previously anticipated.
Our second quarter adjusted EBITDA margin is expected to be approximately 19%. We which assumes impacts from US import tariffs exceeding 200 basis points, and non-GAAP diluted earnings per share is expected to be in the range of $3 to $3.50. For the full year, we are leaving our guidance unchanged.
With the exception of the direct cost of tariffs, full year sales guidance remains between 3% and 7%, and assumes a net neutral impact from FX and recent acquisitions. Given our solid Q1 results and Q2 guidance, we would typically raise the outlook. That said, while we have not seen any meaningful shift in customers' purchasing behavior to date, the fluid global trade policies and related impacts on our customers remains uncertain.
We are now modeling a $70 million gross profit impact from tariffs for the full year, which is $50 million higher than our prior guidance. Consequently, we are reducing our full year adjusted EBITDA margin outlook by 100 basis points to between 20% and 21% to reflect the increased direct cost of tariffs, and non-GAAP diluted earnings per share to the range of $13.75 to $14.75.
Free cash flow for the year is expected to be at least $700 million which reflects the impact of tariffs and implies free cash flow conversion in excess of 90%. As we continue to monitor and navigate the evolving environment, we will remain agile and continue to work on further optimizing our working capital levels, balance with our supply chain resiliency initiatives. Please reference additional modeling assumptions shown on slide 10. With that, I will turn the call back to Bill.

William Burns

Thank you, Nathan. Turning to slide 12. As we navigate the near-term uncertainty, Zebra remains well positioned to benefit from secular trends to digitize and automate workflows with our portfolio of innovative solutions, including purpose-built hardware, software and services. We optimized the front line with solutions that intelligently connect people, assets and data to help our customers make business-critical decisions.
Innovation remains central to our industry leadership and we have consistently reinvested approximately 10% of our sales in the research and development to advance our portfolio of solutions. We augment our organic efforts with strategic acquisitions that advance our vision as evidenced by our recent closing of Photoneo, which will expand our 3D machine vision solution into manufacturing, logistics and other key markets.
As you will see on slide 13, Zebra Solutions enable our customers across a broad range of end markets to drive revenue, boost productivity and efficiency and to optimize the front line delivering improved service to their customers, shoppers and patients. The challenges of an on-demand economy, e-commerce growth, evolving regulations and labor constraints require increased adoption of automation. Here are some recent examples of customers transforming their workflows.
A large transportation logistics provider increased throughput and real-time asset visibility for hands-free package handling by upgrading to our new compact all-in-one Wearable Mobile Computing Solution.
A North American auto parts retailer is improving inventory accuracy through real-time cycle counts and increasing operational productivity as they deploy our new Mobile Computers to their store associates and drivers.
A large government agency is improving their supply chain efficiency by modernizing their warehouse and tracking of high-value cargo with Zebra's Fixed and Mobile RFID Solution.
These projects demonstrate how customers rely on us to navigate their technology journey through our workflow expertise and a commitment to innovation. At the ProMat Manufacturing and Supply Chain stage show on March, Zebra, along with our partners, showcased our expanding portfolio of solutions, that enable customers to accelerate warehouse modernization with faster cycle times, improved quality and increased visibility. We also launched the Aurora Velocity Scan Tunnel, which integrates our machine vision smart cameras, RFID readers and our Aurora Software for vertical-specific use cases and workflows.
slide 14 highlights how Zebra addresses manufacturers biggest challenges. Operators are faced with increased demand for speed and accuracy while ensuring product quality. To address these challenges, decision makers are investing in Zebra Solutions to provide actionable visibility, optimize quality and a technology augmented workforce.
Zebra is helping customers like Curtiss-Wright, Kine Robotics, Bimbo Bakeries, deploy and integrate our technology into their manufacturing environments, enabling work in progress tracking, communication and collaboration, quality control, and improved forecasting. Additionally, as manufacturing customers look to diversify their supply chains and make global production moves, Zebra can partner with them to equip their operations.
In closing, as we navigate through the near-term environment, our confidence in sustainable long-term growth is underpinned by several key themes, including labor and resource constraints, track and trace mandates, increased consumer expectations, advancements in artificial intelligence and the need for real-time supply chain visibility. As we move forward, we remain focused on advancing our industry leadership with our innovative solutions that digitize and automate our customers' workflows, serving our customers well and driving profitable growth. I will now hand it back to Mike.

Michael 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

(Operator Instructions)
Jamie Cook with Truist.

Jamie Cook

I guess my first question just is on the demand picture. It doesn't sound like it, but did you see a change in demand throughout the quarter or going into April? And what your clients are sort of saying -- customers are saying about demand trends?
And then, I guess, my second question, just around tariffs. It does sound like you're contemplating making changes to your manufacturing footprint and how to mitigate the risk of tariffs. Can you just go into a little more detail about what actions you're planning on taking?

William Burns

Sure, Jamie. This is Bill. We entered 2025 supported really by strong retail year-end spending in fourth quarter that really carried into first quarter. And that demand has remained strong through April. So we've seen, despite the global trade uncertainty overall, customers have remained positive. Capital budgets remained intact, projects continue to move forward.
And -- but at the same time, our customers are navigating what the global trade environment really means to their businesses. But so far to date, we haven't seen any real change in behavior by our customers. Overall, the they -- many of our customers, I would say, overall, are still digesting what this really means. And I think for us, that's the reason why we decided that holding our sales outlook for the full year was the best decision for us.
I'd say from a tariff perspective and global supply chain moves. Certainly, it's a dynamic environment. We've engaged certainly our network of resources, industry experts, what's happening across government affairs and to really understand a trade policy and all the uncertainty around that. We've got a dedicated team established that monitors these changes and assesses the potential impact and then ultimately designs mitigation strategies.
I'd say we continually assess our manufacturing footprint and have done that over the last several years to consider factors such as geopolitical stability, operational capabilities, cost overall. And we've made significant changes to diversify our supply chain over the last several years to make sure that ultimately we can serve our customers with the highest quality and lowest cost we can. So we continue to monitor the situation and make changes as necessary.

Operator

Piyush Avasthy with Citi.

Piyush Avasthy

I think you guys highlighted strong broad-based growth across your verticals. Can you elaborate on your manufacturing end markets? That vertical has lagged versus other verticals. So as we think of '25 guidance based on your conversations with your customers, do you have good visibility to signal a more sustained improvement in the underlying demand across this vertical?

William Burns

Yes. I'd say that if we look at first quarter overall and year-to-date through April, we saw a broad base recovery continue across most of our vertical markets were up double digits. Manufacturing is still somewhat lagging but still up high single digits. And I would say continued improving sales trends. But of course, the global trade environment is weighing on manufacturing. But we continue to see year-on-year growth. As I said, up high single digits in first quarter, but overall, adding the other sectors from a manufacturing perspective.
I'd say if you look at the other verticals, retail and e-commerce were up double digits. Transportation, logistics saw strong growth, health care continues to be a strength for us. But manufacturing grew just not as fast as the other verticals.

Piyush Avasthy

Got it. And I think following up on Jamie's question, like on your mitigation actions related to tariffs, like you talked about shifting production from China to other global locations. Can you comment on the typical time line and the cost that it would take to implement this? You modestly raised your CapEx expectation for this year. So maybe that explains some of it, but any additional color would be helpful.

William Burns

Yes. So if you look historically, just again, depending on the location, it could take 12 to 18 months depending on what location is there an existing location? Or is it greenfield in terms of opportunities. So it depends on where the move is happening. We actually bear a little of the capital expenditures. So typically, it's in some of the tooling costs, the large portion of that is with our manufacturing partners that we pay for over time in the bill of material. So it's not relatively high in terms of CapEx.
I think right now, the weighing factor is, we've had a series of actions ongoing as we entered the year. Those are all going to be complete here within this quarter. So those production moves are done and incorporated in the overall guide.
I think what we're waiting for next is certainly around the overall policy so that we can make the best decision for the business in terms of where is the right place to move production for the long term. But we do need some clarity around where the policies land in terms of tariff impact, so we can make the best decision.

Operator

Brad Hewitt with Wolfe Research.

Bradley Hewitt

It sounds like you guys are embedding a gross tariff headwind of about $150 million for the year before any mitigation actions. Is that correct? And then can you clarify the tariff rates you're assuming for the various countries as well as the impact and duration of exemptions on the mobile computers and scanners? And then also curious what you're assuming in terms of potential sectorial tariffs on electronics?

Nathan Winters

Yes. So if you look at our guide, it includes -- I'd say probably most simple way to say, what is effective as of today. It doesn't assume any changes in the rates or exclusions through the balance of the year. So what that includes is the incremental 145% tariff on US imports from China, 10% from other Asian countries, but I think it's important to note that most of our mobile computing portfolio, which includes about two-third of our China source imports are currently exempt with the electronic exemption from the reciprocal tariffs but not the original 20% increase in China.
And we also continue to receive USMCA retreat exemption out of our Mexico production. So it's kind of depends on which of the portfolios in terms of where it's produced, but that's what's incorporated into the guide.
So the incremental $70 million, [again], net of all the ongoing actions that we expect to be complete by the middle of the year as well as the increased pricing, which is about $50 million -- and overall that $70 million is a $50 million increase from our prior guide. So again, I think we're -- that's the best estimate we have up today, and we'll adjust accordingly as the rates are finalized here, over the coming months. But again, it seems what's affected today with no changes to the balance of the year.

Operator

Andrew Buscaglia with BNP Paribas.

Andrew Buscaglia

So for the guidance on the top line, you held that at up 3% to 7%, but you now have changing presumably pricing. Can you elaborate on the magnitude of the price increases you expect to implement? And then any impact of volume you're assuming for the year?

Nathan Winters

So as you said, we're leaving our full year outlook unchanged with the exception of the direct cost of tariff. And as Bill mentioned, the demand trends continue to be positive here into the second quarter. We haven't seen a pullback on projects to date, despite the tariff uncertainty. I think it's also important to note we're not assuming a material step down in demand due to the -- any economic downturn here over the coming months.
But let's say, overall, taking a cautious view of second half sales growth given the environment, and maybe the other thing is the year is playing out to date as expected. We've had several new tailwinds, but again, we overall didn't think it was appropriate to raise the full year sales guide given the uncertainty. So if you look at some of those tailwinds, I mean, obviously, the Q1 beat is a bit favorable. FX is about 100 basis points favorable from the prior guide, pricing would have been of incremental 70 bps. So they all stack up in terms of what would have been, I'd say, upside to our original guidance.
And effectively, we've taken those to the bank and offset demand pressure or potential demand pressure in the second half. So where our previous guide for the second half assumes mid-single-digit growth, that's now down to low single-digit growth in the second half. And again, we just think that's overall appropriate given the overall uncertainty in the environment.

Andrew Buscaglia

Okay. And then I know you commented on manufacturing. Can you comment on transportation and logistics. You're saying you see strong growth there, although some of the headlines from the bigger transport names are pretty negative, even UPS this morning, pulling their guidance. So can you talk a little bit more on seeing and why you're not seeing what those headlines are implying?

William Burns

Yes. I'd say that we saw double-digit growth in transportation and logistics really in first quarter. I think some of it is explained by being a truly global business, right, inside transportation, logistics. We also have postal and other carriers in there beyond just parcel delivery. I would say globally, e-commerce demand continues to be positive and grow.
I think there's certain aspects of different business where there's a shift of demand across different carriers and others. And I think in your example, there was clearly some business that they decided not to move forward with, which is impacting their demand for parcel delivery, but then that shifts to other carriers or to e-commerce providers themselves. So then we benefit somewhere else.
So I'd say we're seeing up double digits, certainly, depending on what happens with the broader trade environment could impact transportation, logistics moving forward. But to date, we haven't seen any change. There's an opportunity there as well with RFID.
So beyond our core products. RFID deployments continue to grow within Transportation Logistics to create more efficiencies within their business and across the supply chain. So that remains another opportunity for us. So I'd say overall, globally, we've seen Transportation Logistics grow at double digits in the first quarter and continue to be strong as we enter the second quarter.

Operator

Damian Karas with UBS.

Damian Karas

Just a follow-up question on the demand strength that you're seeing. Just curious if you think that any of that might be related to some pull forward of demand, maybe customers trying to tie up some loose ends and just get some work done before cost inflation starts ramping or your distributor partners stocking up on inventory? Maybe you can just kind of talk to that and give us a sense for where you think channel inventories are at the moment.

William Burns

Maybe I'll start and then Nate can jump in. I would say that we have not seen pull-forward behavior by our customers. Our price increases going to effect at the end of April here. overall. And we haven't seen any change in behavior of end customer or our partners or distributors due to tariffs. I think ultimately it is certainly weighing on sentiment and is in a lot of conversations we're having with them or all conversations, but they really haven't changed their behavior. And I would say inventory levels around the world that we've been working closely with our distributors to make sure they've got the right level of inventory overall, as we've seen market recovery, and we feel good about inventory levels to date.

Nathan Winters

I think, Damian, the other thing that's important to note with our distributors, when the price effect goes into place, we also adjust anything they're holding in inventory. So there's no advantage to a distributor stocking ahead of the price increase. It's really the market price to the end users. So again, there's no risk of distributors stocking up ahead of the price increase. And again, as Bill mentioned, I think the as well as Q2 is playing out as, can be expected since the beginning of the year, which, again, just doesn't lead us to see any material movements in pull-ins trying to get ahead of the price increase today.

Operator

Tommy Moll with Stephens.

Thomas Moll

Follow-up question on the price increases. Bill, I think I just heard you say they're effective end of April. Can you quantify or give us any detail in any other detail on conviction level and being able to stick the full amount of the increase. Does it feel like as a market leader in many cases, you're on the more aggressive side and pushing price here? Or do you feel like what you've outlined is pretty consistent with others?

William Burns

Yes, I think that we feel good about the price increases and the analytics we do around our pricing in the market. It's important that we have competitive pricing in the US market specifically, and we've done a lot of work and a lot of thought around price increases and we obviously prefer not to increase price. But in this case, we have no choice. I believe it's consistent with what our competitors are doing and what we're seeing from them in the marketplace overall. And I think we continue to monitor and will continue to monitor where we stand from a competitive pricing perspective moving forward.
They have no reason to believe they won't stick. Certainly, our largest customers get the best pricing, right, in the highest volume than others, and I think that we'll continue to work with them and be agile when it comes to pricing as we need to continue to sell value and make sure that we're winning the opportunities out there. But I think we feel okay about the price increases. We'd rather not have increased price. We just don't have a choice in this case to offset the tariffs, but we've been very thoughtful about it. And we feel good about where we're at.
We've -- the reason we picked the end of April was to give this some time to play out, and there's been significant changes along the way is the unpredictable nature of this. So we think we've made the right decision. And we'll see, hopefully, things quantity get better. And in that case, we'd pull back some of the price increases if we can. Ultimately, from an end market perspective, that would be the right thing to go do.

Thomas Moll

And as a follow-up, I wanted to talk about your visibility in terms of demand. Going back to last quarter, if I recall correctly, the visibility into this year was less than typical, and there were some commentary you offer just around customers delaying finalized budget decisions, et cetera. Today, has that visibility improved at all? Or would you characterize it in a similar fashion?

William Burns

Yes. I would say it's not as much about visibility. That visibility actually has gotten better. It's really about uncertainty at this point. So I would say that when I'm having conversations with our executives, our customers, CIOs and others. It's the beginning of the conversation is really around 15 minutes or so on just tariffs impacts on their business, our business, the impacts on the global economy generically. And then ultimately, it moves on to the projects that we're working together on.
But no mention of past cuts or pulling back. It's really about, hey, we've got these projects going, how are they progressing and the appreciation of them as a customer and us as a partner delivering for them. And then ultimately, the conversation switches to the future. How do we continue to talk about future technology deployments and move ahead with them.
So i'd say visibility actually had gotten better and what's ramped up is really uncertainty from a global perspective around tariffs more than anything else. And the conversations are clearly dominated by tariff, but really, it's not about pulling back or changing behavior. It's more about just the concern and the uncertainty that's out there today and it's weighing on certainly their sentiment.

Operator

Guy Hardwick with Freedom Capital Markets.

Unidentified Participant

I appreciate that Zebra delivered double-digit organic growth, but it looks like seasonality of Q1 was better than normal seasonality on a sequential basis. Perhaps you could maybe expand a little bit on which end markets or businesses did better than perhaps you would have expected given seasonality?

Nathan Winters

Yes, I'd say that we saw broad based recovery really in Q1 overall, and we delivered certainly, as you said, high end of our outlook. And I think we saw -- when I say broad-base growth, it really was across all product categories across all of our regions and across all of our verticals. I would say that retail and e-commerce continued to outperform in the quarter and continues to do that through April as we continue to see strong demand.
E-commerce and omnichannel continue to drive need for inventory visibility enhanced productivity within retail stores and things like communication, collaboration, driving our mobile computing and then ultimately, us continue to win in that environment with the breadth and depth of our portfolio and our expertise and customer relationships.
I'd say Transportation Logistics, we talked a little bit about. We saw growth year-on-year. Manufacturing, we've talked a bit about already, creates an opportunity for Zebra. So we had high single digits in manufacturing, some challenging areas still within manufacturing, but represents a longer term certainly opportunity for Zebra as we're less penetrated inside core manufacturing and areas like machine vision and other create an opportunity for us. And then, let's say, health care, up double digit continues to be strength vertical market for us.
Clinical mobility really driving that market improved patient safety, staff communication, collaboration, efficiency across healthcare creates an opportunity for us. So I would say all the verticals strong double-digit growth across each high single digits in manufacturing.
The growth was pretty broad-based so far this year, and again, I think is what is weighing on our customers today is all around really tariffs. I think that otherwise, the business is going really, really well. But we know that ultimately, as this plays out and the unpredictability we'll see what happens, but it is certainly weighing on our customer sentiment.

Operator

Meta Marshall with Morgan Stanley.

Unidentified Participant

This is [Karjakaran] on for Meta. Just a quick question. I know there's a lot of uncertainties and a lot of changing scenarios in terms of tariffs and macro. So just wondering how you guys are thinking about being maybe a little bit more opportunistic around gaining share? How are you thinking about potential share gains given the uncertainties?

William Burns

I think we continue to work closely with our customers across each of our vertical markets. As I said, we saw broad-based growth across all regions, across all products. And across all vertical markets in Q1 and through April, which we feel good about.
I'd say the competitive landscape hasn't really changed and that our strength of ultimately, our customer relationships, the deep vertical market expertise we have across the verticals we serve, the breadth and depth of our portfolio overall differentiates us from the competition. And gives us a competitive advantage. So we believe that ultimately, we're taking share in the marketplace.
Technologies such as AI creates a longer-term opportunity for us competitively. So at NRS in first quarter, National Retail Show we launched our AI suite for mobile computing, allowing our partners and development partners to Zebra itself to build AI solutions on top of our mobile computing platforms. We announced the Zebra Companion the Gen AI assistant for our mobile devices.
So we're excited about the near term where we're winning and our competitive advantage we have there, but also in the longer term, the idea of embracing as the market leader new technologies such as AI and leveraging those on our devices gives us a competitive differentiation in the market and allows us to continue to take share as we've been doing. So we feel good about the breadth and depth of the portfolio and current state as well as future investments we're making in areas like AI.

Unidentified Participant

Appreciate that. And then just a quick follow-up. I know you've mentioned seeing some manufacturing recovery. Just more specifically on the machine vision business. Generally, how has that tracked? How are the diversification efforts tracking? And is that being benefited at all by the manufacturing recovery that you're seeing?

William Burns

Yes. So we say we're excited about the Photoneo acquisition, which is focused on 3D vision capabilities that we closed in first quarter. They're really a leading developer and manufacturer in 3D vision systems. They were an OEM partner of ours prior, and we're excited about that acquisition and entering that space. I'd say machine vision declined in the quarter.
That's the one area of weakness, I would say we saw driven by manufacturing, again, manufacturing up high single digits versus double digits across the other areas. I would say that our diversification efforts continue to progress. We've seen better traction within North America. We've seen growth in our pipeline in active proof of concepts across multiple verticals, so manufacturing, retail, transportation, logistics. So some of the other vertical markets in areas like Scan Tunnel, which we released a new version of it at ProMat trade show just over the last month or so, it creates an opportunity for us beyond manufacturing as manufacturing has been lagging a bit.
But I think we're remaining excited about the long-term opportunities. I think it's a challenging market at the moment. So you marry less strength in manufacturing, but also just the machine vision market overall. But I think as the end market recovers and we expand our market presence and our focus, as you said, on diversification of it. We feel good about this market, medium and long term for us.

Operator

Keith Housum with Northcoast Research.

Keith Housum

Two questions for you. I guess, Nathan, first off, with the price increases, obviously, what you're passing through here, effective April 28, is pretty significant, especially in the mobile computing space. Compared to historical times, do you expect your ability to realize those price increases is better than it has been in the past? And then your potential, I guess, tailwind for you here next year in 2026, assuming the price changes are staying in effect and know some of the changes need to happen to that.
And then second, from a geographical basis, it surprises me, North America was actually your worst performer at 7% growth. Perhaps you can talk a little bit about your strength, especially in EMEA, I mean, 18% growth is pretty impressive in the current environment?

Nathan Winters

Keith, on the first one from price realization, as Bill mentioned earlier, there's a lot of factors that go into play, including the competitive considerations, the cost, tariffs, et cetera. I think -- we never assume 100% realization due to existing contracts, projects or just competitive positioning. So I think we've seen historically, whether that goes back to the price increasing we did in '19 with the original tariffs or what we did during the supply chain.
I think we've been pretty consistent in terms of being able to get good realization across our run rate business, and then selectively positioning it with some of our larger customers. So I think we've taken that all into account in the assumption. And if we can do better and get a little bit better realization, that's i guess an upside to what we embedded in the guidance and then the full year annualized impact.
I think the tailwind for next year, quite frankly, will play out, as Bill mentioned, depending on what changes or where the tariff landscape finally lands, we'll adjust the pricing accordingly. So I'd say, if we may roll some of that back or we may have to increase just depending on where it goes. So I think it's tough to say it would be a tailwind as much as we'll continue to do what we need to offset as much of the mitigate, tariff impact as possible whether that's through pricing or some of the other operational actions.

William Burns

Maybe I'll jump in on the markets. I would say EMEA still have to be a little careful as the percentage is favorable prior year compare, certainly in EMEA drove some of that growth. So I think that while all vertical -- all regions had strong growth in the quarter, it was oversized in EMEA really because of prior year compare, I would say, growth there.
The highest growth in EMEA was really Northern Europe, but large projects continue, especially in retail there. And we saw double-digit growth across most of the end markets, again, manufacturing, high single digits, same theme we saw globally.
North America, I think we felt good about North America. Strong retail, deal activity strength 1 year ago. So I think that year-on-year compare not as easy there. Double-digit growth across all end markets, again, except for manufacturing. I think we feel good about scanning and printing and RFID had a strong quarter in North America. So I think we feel good about the growth across all regions and the percentage difference in EMEA being strong really was about prior year compare.

Operator

Ken Newman with KeyBanc Capital Markets.

Kenneth Newman

So I did want to ask about the net impact on tariffs this quarter. It looks like it did come in a little bit lower than you were expecting. If I remember correctly, I think you were looking for a $7 million headwind and it came in around $3 million. Can you just talk a little bit about the moving pieces of what drove that better performance? Was that just better price realization in the quarter? Was it some timing of action? And then just how to think about the conservatism may be baked into the guide relative to that $25 million, $30 million you expect in 2Q?

Nathan Winters

Ken, I think it's a couple of things in play. One, was the team did a phenomenal job of buying as much product as possible before the effective date so really trying to front-end load our demand to get product in. So that definitely played a part in terms of the actions the team has taken to front-load purchasing ahead of the increase. I think that played a portion of it, as well as just what we ultimately capitalize a bit of that on our balance sheet just from a timing and inventory valuation perspective.
So like I say, I wouldn't call it any conservatism or potential conservatism built into what we've had for Q2 or the full year. They're just -- it's pretty complex in terms of if you look at timing of shipments, the timing of the effective dates and winning land on port that creates the variability. So I think it's our best estimate based on all those factors.
Obviously, what the team is trying to do every day is mitigate as much as possible with the operational actions we had at our disposal, very little price impact in Q1. I mean, negligible in Q1, and have a little bit in Q2, but really ramp up into Q3. So really the variability in Q2 is again, just what can we realize with pulling in inventory early adjusting some of those shipment schedules to mitigate as much as possible here in the short term.

Kenneth Newman

That's helpful, Nathan. And then just for my follow-up, maybe just a quick modeling question. Is there a way to think about how to quantify that $70 million full year impact between the 2 segments? I'm guessing one segment might be a little bit heavier than the others in terms of the margin impact?

Nathan Winters

Yes, it's -- I think from a not only assumption here out of the gate, it's pretty balanced, maybe a little bit heavier weighted towards AIT just given the tariff rates are fully in effect for print where mobile computing has some of the exemptions. So a little bit more weighted towards AIT here for the year.

Operator

Joe Giordano with TD Cowen.

Joseph Giordano

So first question, just on the semiconductor and electronics exclusions. I mean I guess it's all fluid for sure. But at least the administration frame this as a temporary exclusion as they figure out like specific tariffs on that. So I guess it seems like that's a number that at least given current commentary goes up at some point in the future. So like what are you kind of teeing up to offset that? If that's the outcome.

Nathan Winters

Yes, you're absolutely right. So we -- the scope of the semiconductor tariff, and I would say that first, it's pretty unclear of how that will be administered. How that will play out from the administration. So it's really tough to model what the potential impact would be. But no different from all the other electronic companies, we do have semiconductor content.
So there is a potential exposure. But we work with the largest semiconductor companies in the world and continue to assess their country of origin options, across their supply chain to see where we have options to mitigate how we quantify and make sure we can quantify the content within our products, semiconductor content.
So that whenever ruling is applied, we can react as quickly as possible, not only on mitigating the impact out of the gate, but also then what options do we have to mitigate over time. based on those rulings. So again, yes, it's absolutely one that's out there, but the team is all over it in terms of planning as best we can and executing whatever we can ahead of any final decision.

Joseph Giordano

And then just a follow-up on the kind of like the pre-buy stuff. And we're getting this commentary from a lot of companies, and I'm not sure how to think about it. Because a lot of the companies we go in the earnings calls they say that they're buying inventory of their own stuff ahead of tariffs, but that none of their customers are doing that.
Now like -- and the behavior hasn't changed. So it just doesn't make a ton of sense to me that all the companies are buying their own stuff to have an inventory, but none of the customers are doing the same behavior. Is there a risk that just what we think is the lack of a behavior change, just like weaker-than-expected demand is being like we're planning to buy some prebuy, but it doesn't really look like prebuy. I'm struggling with this dynamic across multiple companies right now.

Nathan Winters

Yes, Joe, I would say that you're talking about very short amounts of time, right? In the past, when tariffs implemented at 90 or 120 days to change inventory in the places that if you took actions, you had to get stuff on ocean very quickly. So the tariffs have been impulated very quickly. So despite us doing that, it's minimal in the scheme of things.
So I think you're reading more into it just because the timing has been such that ultimately, there hasn't been time to really react. Things that were on the ocean already ultimately are being exempt, but that's very a little bit. You heard other companies fly jets in and there's from -- into the country with shipments of devices and others. But it's ultimately minimal.

William Burns

I think the other one we look at is the underlying demand we've seen is pretty much in line, obviously, with what we expected. We knew our Q1 guide was a bit cautious given the uncertainty. But the quarter kind of played out where we didn't see the surge of demand that was unexpected or out of the blue or orders -- large orders coming in. So could there be some of that in the run rate. But again, the year is playing out year-to-date kind of as we had planned which, again, just supports that we're not seeing some volatile shift in demand here just to get ahead of the tariff rates.

Operator

Rob Mason with Baird.

Robert Mason

Yes, good morning. Jack on several calls. So I may have missed you addressing this, but when you quantified the $80 million to $90 million kind of residual impact after your pricing actions. Just assuming final decision around tariffs is the current status quo, what levers do you have to pull? Would you plan to pull to address that? Does that -- would you take incremental pricing or just speak to that residual amount if that's maybe what the go-forward looks like?

Nathan Winters

Yes. I think, Rob, I think that -- we put that number out just so we can have a baseline of what the -- I guess, the run rate would be under the current tariff scenario. But ultimately, our objective is to mitigate, right? So I wouldn't say that's the perpetual number or the -- we don't have other options to mitigate. It's really waiting for policy certainty, so we know which actions are the best actions to execute. So that's again, we have a plethora of options with our manufacturing partners around where they have capabilities around the world to shift production and the teams are working those.
We'll obviously look at additional pricing actions as well as the other cost levers we have across the portfolio to fully mitigate. So I think, again, once we have that certainty around where the rates shake out, then we can start to execute those plans and see what the timing is in terms of fully mitigating the exposure.
So think that timing of when and how it plays out is the uncertainty, that annualized number we provide was, I think, just to give context for what a kind of run rate would be, but knowing that the ultimate goal is to fully mitigate. But we just want to make sure we make the right decisions and have clarity around that before pulling the trigger.

Robert Mason

Makes sense. Just as a quick follow-up. You talked about good demand in the quarter, but your service and software revenue was kind of flattish. It was that -- anything going on there? Whether that's a comp issue how that compared versus your product tangible products?

Nathan Winters

Yes. So our service and software just had slight organic growth, really some part impacted by the lower mobile computing volume in '23. So we're starting to see that play out in our service business, as you would expect. But the other thing in the quarter, there was just a lower number of days versus prior year. So it's more of a quarter year-on-year dynamic.
So we'd expect the growth rate to improve as we get into Q2 and the balance of the year. So some of it is just, I think, timing and the nuance of the quarter, but I think a bit lower than what we've seen in the last couple of years is just you've seen now the overall installed base, the impact on the installed base from the sales decline back in '23 in mobile.

Operator

Jim Ricchiuti with Needham.

Chris Grenga

This is Chris Grenga on for Jim. Is the deployment of Zebra Companion with AI features at the anchor customers that showcased at NRF progressing in line with your expectations? And are you seeing traction with additional retailers for this offering?

William Burns

Yes. I mean I would say that we announcement in NRS and showed demos of it. We're continuing to work closely with our lighthouse customers to deploy along with them in early proof of concepts. And the development continues to be on track. What we have released is our Gen AI digital assistant from the -- from that perspective was more a launch and then our proof of concepts the AI suite for mobile computing, we did launch and is available to our own software developers and that of our partners. So that allows AI applications to be built on top of the device. And on the device software to be able to manage on the device. So that is released. And then again, the Companion with the assistant is in proof of concepts now working with customers to get to full deployment. So on track.

Chris Grenga

Great. And in your view, are the shifts that are impacting your customers' global production footprint and the disruption that's being caused by the near-term uncertainty could those translate into tailwinds for Zebra as customers adopt more of Zebra's technologies to enhance their tariff compliance, reduce friction, certified country of origin and things of that nature?

William Burns

Yes. So the production moves by our customers create, so it's certainly an opportunity for us. We've seen this in Southeast Asia through the China tariffs were first implemented a number of years ago and the benefits to Zebra associated with that. I do see that, again, this idea of visibility throughout the supply chain and digitizing and automating the supply chain overall creates an opportunity for us. And as you said, track and trace and other mandates around that.
So yes, it's an opportunity when production moves take place no matter where they are in the world, we benefit and then ultimately, the long-term trend of digitizing and automating environment, supply chain visibility across those environments.
And that also plays into to AI, the idea that, ultimately, what we fundamentally do is give assets and inventory at digital voice. And circling back to your first question, collecting ultimately real-time data that feeds AI models and that ultimately allows you to kind of sense, analyze and then take action within your environment. So collecting data that feeds AI models that ultimately drives action, which then would take place with things like mobile devices, driving task management with employees and frontline workers creates an opportunity for us.

Operator

Brad Hewitt with Wolfe Research.

Bradley Hewitt

Just in terms of capital allocation. So you stepped up the buyback in Q1 to $125 million. You mentioned another $75 million in April. Should we expect that you may look to maintain or maybe even accelerate the pace of buybacks throughout the rest of the year if the valuation remains where it is today?

Nathan Winters

As you know, we've been tracking higher than normal year-to-date at the $200 million to take advantage of the volatility. I'd say right now, we expect -- we definitely expect to remain active with some level of activity for the remainder of the year, and we'll see how to your point, the market plays out over the next couple of months to say whether we adjust the rate of return, but we wanted to, again, take advantage of the volatility here early in the year. And as we said, we wanted to commit to some level of buyback this year. And so we're on pace to that. But I think a little bit higher than we would expect out of the gate with the volatility, but we would expect, again, some -- to continue to remain active in the market for the balance of the year.

Operator

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

William Burns

I'd like to thank our employees and partners as they work to solve our customers' biggest challenges. We have strong conviction in the opportunities ahead for our business.
Thank you, and have a great day everyone.

Operator

The conference has not concluded. Thank you for attending today's presentation. You may now disconnect.