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    Zebra Technologies Corp (ZBRA)

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    Business Description

    Zebra Technologies Corporation is a global leader in the Automatic Identification and Data Capture (AIDC) industry, providing Enterprise Asset Intelligence (EAI) solutions. The company offers a wide range of products, including mobile computing devices, barcode scanners and imagers, RFID readers, specialty printers for barcode labeling and personal identification, real-time location systems (RTLS), and related software applications . Additionally, Zebra Technologies provides machine vision and robotics automation solutions, along with comprehensive services such as maintenance, technical support, repair, managed and professional services, and cloud-based software subscriptions .

    1. Enterprise Visibility & Mobility (EVM) - Specializes in automatic information and data capture solutions, including mobile computing and data capture technologies.
    2. Asset Intelligence & Tracking (AIT) - Focuses on barcode printing and asset tracking technologies, including RFID and real-time location systems (RTLS) offerings.

    Q2 2024 Summary

    Initial Price$302.59April 1, 2024
    Final Price$306.21July 1, 2024
    Price Change$3.62
    % Change+1.20%

    What went well

    • Zebra Technologies achieved a gross margin of 48.6% in Q2 2024, the highest in three years, benefiting from strength in run rate and mid-tier activity, indicating strong profitability.
    • Mobile computing returned to double-digit growth, being the first segment to decline and the first to recover, showing early signs of demand recovery and potential for continued momentum.
    • The company maintains a strong competitive position, with no significant changes in the competitive environment, and is well-positioned to gain market share as customers refresh their devices, particularly with upgrades anticipated in 2025.

    What went wrong

    • Macroeconomic uncertainty and higher interest rates are causing Zebra to be cautious with acquisitions, leading to higher hurdles for potential investments, which may limit growth opportunities.
    • Customers are scrutinizing budgets and delaying large deployments due to economic uncertainty, potentially pushing significant projects into 2025 and impacting near-term revenue growth.
    • Zebra is carefully managing inventory levels amid concerns about demand, limiting the supply of products to distributors despite their requests for more, which could constrain sales growth.

    Q&A Summary

    1. Large Project Activity
      Q: What's needed to revive large projects? Guidance upside?
      A: Management observed early signs of recovery in Q1, especially in retail and e-commerce, with better-than-expected sales in Q2. However, large deal activity remains well below historic levels due to customer caution amid market uncertainty. Customers are spreading large deployments into midsized or smaller deals over longer periods. The pipeline remains strong, but more momentum in large orders is needed for a broader recovery.

    2. EVM Margin Improvement
      Q: Why were EVM margins better than expected?
      A: EVM gross margins reached 48.6%, the highest in three years. This improvement was driven by strength in run-rate and mid-tier business, positively impacting margins in the EVM segment. Continued strength in services and software margins, heavily weighted towards EVM, also contributed. Additionally, fully rolling over premium supply chain costs boosted margins.

    3. EBITDA Margin Outlook
      Q: Why not see better pull-through in H2 margins with top-line growth?
      A: The EBITDA margin guidance for Q3 is 20%-21%, up year-over-year due to volume leverage of nearly 9 points. However, a similar deal and business mix from Q2 to Q3 results in a similar margin profile. Incremental benefits from restructuring actions realized in Q2 are not expected to repeat. A modest uptick is implied in the Q4 guidance from incremental volume.

    4. Device Upgrade Cycle
      Q: Are device upgrades expected, given aging installed base from COVID sales?
      A: Customers have been utilizing capacity built during the pandemic, leading to excess capacity as the economy slowed. As this capacity is absorbed, early signs indicate customers are beginning to purchase again. There is a solid pipeline for mobile computing refreshes and new use cases. Management is confident that as the macro environment improves, customers will upgrade devices, resulting in an uptick in large orders.

    5. Emerging Businesses Outlook
      Q: Update on RFID, Matrox, Fetch trends and growth outlook?
      A: RFID faced challenges in Q2 due to tough comparisons from large opportunities a year ago but is expected to return to growth in H2 with a strong backlog and pipeline across retail, transportation, logistics, and manufacturing. Machine vision is currently challenged, with the Matrox acquisition affected by exposure to the struggling semiconductor equipment market. However, diversification into automotive and logistics is progressing well. Early wins in combining software assets with mobile devices, particularly in wearables, are promising.

    6. Channel Inventory Levels
      Q: Are you providing distributors more products as they request?
      A: Global channel inventory levels remain normalized in days on hand. While some partners request more inventory, the company collaborates closely to ensure appropriate levels that support end-users without getting ahead amid uncertainty. This approach balances inventory across regions.

    7. Large Deal Timing
      Q: Are customer budgets set for this year? When does focus shift to 2025?
      A: Customers continue to scrutinize budgets due to economic uncertainty, affecting large deployments in the second half. Visibility into year-end spending is limited, and there's reluctance to proceed with projects. Management expects stabilization and increased confidence as macro factors improve into 2025.

    8. Competitive Landscape
      Q: Any changes in competition for large deals?
      A: The competitive environment remains largely unchanged, with Zebra maintaining market share. The lack of large deals is attributed to market conditions, not increased competition. The company is confident in its market position and continues to win in the marketplace.

    9. Shipping Cost Inflation
      Q: Experiencing cost inflation from higher shipping rates? What's in guidance?
      A: There has been a modest increase in shipping rates due to issues like the Red Sea situation and stronger demand, particularly in ocean freight. The incremental costs are modest and included in the full-year guidance. The company is taking actions to mitigate impacts, such as leveraging different air modes and improving transit times.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    William J. BurnsChief Executive OfficerMarch 1, 2023William J. Burns was named CEO of Zebra Technologies effective March 1, 2023. He has over 30 years of experience in the technology sector and joined Zebra in 2015. Prior to becoming CEO, he served as Chief Product & Solutions Officer .
    Robert J. ArmstrongChief Marketing OfficerMarch 2023Robert J. Armstrong was appointed as CMO of Zebra Technologies in March 2023. He previously served as Senior Vice President of Integrated Marketing & Channels at Zebra .
    Michael ChoChief Strategy OfficerFebruary 2013Michael Cho joined Zebra Technologies in 2010 and has served as Chief Strategy Officer since February 2013. He previously held roles as Vice President of Strategy and Vice President of Corporate Development .
    Tamara D. FroeseChief Supply Chain OfficerNovember 2022Tamara D. Froese was appointed as Chief Supply Chain Officer at Zebra Technologies in November 2022. She joined Zebra in 2020 and has extensive experience in supply chain management .
    Richard E. HudsonChief Revenue OfficerNovember 2023Richard E. Hudson was named Chief Revenue Officer of Zebra Technologies in November 2023. He previously served as Senior Vice President and General Manager for EMEA starting in 2017 .
    Cristen L. KoglChief Legal Officer, General Counsel & Corporate SecretarySeptember 2018Cristen L. Kogl joined Zebra Technologies in 2015 and has served as Chief Legal Officer, General Counsel & Corporate Secretary since September 2018 .
    Colleen M. O’SullivanSenior Vice President, Chief Accounting Officer2016Colleen M. O’Sullivan joined Zebra Technologies in 2016 as Chief Accounting Officer. She previously held various positions, including Senior Vice President and CFO at Career Education Corporation .
    Jeffrey F. SchmitzChief People OfficerMarch 2023Jeffrey F. Schmitz is the Chief People Officer at Zebra Technologies. He joined Zebra in 2016 as Chief Marketing Officer and was named Chief People Officer in March 2023 .
    Joseph R. WhiteChief Product & Solutions OfficerMarch 2023Joseph R. White is the Chief Product & Solutions Officer at Zebra Technologies. He joined Zebra when Matrics Technologies was acquired by Zebra and became Chief Product & Solutions Officer in March 2023 .
    Nathan A. WintersChief Financial OfficerJanuary 2021Nathan A. Winters was appointed as CFO of Zebra Technologies in January 2021. He initially served as Acting CFO from August 2020 through January 2021 .
    Ken MillerBoard of Directors, Audit Committee (expected start date if elected)Future Date: 2024Kenneth B. Miller is a nominee for the Board of Directors at Zebra Technologies, specifically as a Class I director. He is currently the Executive Vice President and CFO of Juniper Networks. He was nominated to stand for election at Zebra's 2024 Annual Meeting .

    Questions to Ask Management

    1. Given the macroeconomic uncertainty and higher interest rates raising hurdles for M&A, how do you plan to achieve your growth targets if acquisition opportunities are limited, and are you concerned that delaying M&A could hinder your strategic objectives?
    2. With customers continuing to scrutinize their budgets and large deal activity not returning to historic levels, how confident are you in achieving your raised sales growth guidance, and what specific factors give you confidence in a second-half rebound?
    3. As some customers consider trading down to lower-tier devices affecting pricing and margins, are you experiencing any margin erosion in specific segments, and how are you mitigating these risks amid competitive pressures?
    4. Your cautious approach to inventory management has led you to supply distributors with less product than requested; could this risk missing potential sales if demand picks up faster than expected, and how are you balancing this with the need to prevent overstocking?
    5. Considering the modest increase in shipping rates and cost inflation, to what extent could rising logistics costs impact your margins in the second half, and what strategies do you have in place to offset these cost pressures?

    Share Repurchase Program

    Program DetailsProgram 1Program 2
    Approval DateJuly 30, 2019 May 17, 2022
    End Date/DurationCompleted in Q4 2022 No stated expiration date
    Total additional amount$1 billion $1 billion
    Remaining authorization$0 $877 million
    DetailsCompleted Active, subject to market conditions

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      • Q3 Sales Growth: Expected to be between 25% and 28% compared to the prior year .
      • Q3 Adjusted EBITDA Margin: Expected to be between 20% and 21% .
      • Q3 Non-GAAP Diluted Earnings Per Share: Expected to be in the range of $3 to $3.30 .
      • FY 2024 Sales Growth: Expected to be between 4% and 7% .
      • FY 2024 Adjusted EBITDA Margin: Expected to be in the range of 20% to 21% .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      • Q3 Sales Growth: Expected to be between 25% and 28% compared to the prior year .
      • Q3 Adjusted EBITDA Margin: Expected to be between 20% and 21% .
      • Q3 Non-GAAP Diluted Earnings Per Share: Expected to be in the range of $3 to $3.30 .
      • FY 2024 Sales Growth: Expected to be between 4% and 7% .
      • FY 2024 Adjusted EBITDA Margin: Expected to be in the range of 20% to 21% .
      • FY 2024 Non-GAAP Diluted Earnings Per Share: Expected to be in the range of $12.30 to $12.90 .
      • FY 2024 Free Cash Flow: Expected to be at least $700 million .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024
    • Guidance:
      • Q2 Sales: Expected to decrease between 1% and 5% compared to the prior year .
      • Q2 Adjusted EBITDA Margin: Expected to be slightly above 19% .
      • Q2 Non-GAAP Diluted Earnings Per Share: Expected to be in the range of $2.60 to $2.90 .
      • FY 2024 Sales Growth: Expected to be between 1% and 5% .
      • FY 2024 Adjusted EBITDA Margin: Expected to be approximately 20% .
      • FY 2024 Non-GAAP Diluted Earnings Per Share: Expected to be in the range of $11.25 to $12.25 .
      • FY 2024 Free Cash Flow: Expected to be at least $600 million, including a $45 million settlement payment .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024 and FY 2024
    • Guidance:
      • Q1 2024 Sales: Expected to decrease between 17% and 20% compared to the prior year .
      • Q1 2024 Adjusted EBITDA Margin: Expected to be approximately 18% .
      • Q1 2024 Non-GAAP Diluted Earnings Per Share: Expected to be in the range of $2.30 to $2.60 .
      • FY 2024 Sales: Expected to be in the range of a 1% decline to 3% growth .
      • FY 2024 Adjusted EBITDA Margin: Expected to be approximately 19%, with an improvement to 20% in the second half of the year .
      • FY 2024 Free Cash Flow: Expected to be at least $550 million, including a $45 million settlement payment .
      • Cost Savings: An expanded cost reduction plan expected to deliver $120 million of net annualized operating savings, with $60 million of incremental benefit expected in 2024 .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • Datalogic: Competitor in mobile computing and data capture.
    • Honeywell: Competitor in mobile computing, data capture, and barcode and card printing.
    • Panasonic: Competitor in mobile computing.
    • Newland: Competitor in data capture.
    • Impinj: Competitor in data capture and RFID and RTLS offerings.
    • Cognex: Competitor in fixed industrial scanning and machine vision.
    • SICK: Competitor in fixed industrial scanning and machine vision.
    • Keyence: Competitor in fixed industrial scanning and machine vision.
    • Fargo Electronics (a unit of HID Global): Competitor in barcode and card printing.
    • Sato: Competitor in barcode and card printing.
    • Toshiba TEC: Competitor in barcode and card printing.
    • TSC: Competitor in barcode and card printing.
    • Brother: Competitor in barcode and card printing.
    • Dymo: Competitor in barcode and card printing.
    • Chainway: Competitor in RFID and RTLS offerings.
    • Alien: Competitor in RFID and RTLS offerings.
    • Rodinbell: Competitor in RFID and RTLS offerings.
    • JADAK: Competitor in RFID and RTLS offerings.
    • Ubisense: Competitor in RFID and RTLS offerings.
    • Invengo: Competitor in RFID and RTLS offerings.