Q2 2024 Summary
Published Jan 6, 2025, 8:15 PM UTC- 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.
- 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.
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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.