Zebra Technologies Corporation (ZBRA) Earnings Call Transcript & Summary

Okay. Okay. Well, retail and e-commerce, we haven't spent too much time on yet, but it is your largest end market at, I think, more than 1/3 of total revenues. So I want to break this conversation up into 3 pieces. First, if you could lay out for us, what did the legacy business look like there? So focusing more on the pure brick-and-mortar play. Then how in the era of e-commerce you were able to augment those capabilities you were providing? And then third, specific to 2020 with the global pandemic where e-commerce has really accelerated at a lot of your key customers and a lot of other retail platforms, what, if anything, has changed? Or how can you -- how could you frame up the acceleration of their adoption of what you have to offer?

Yes. So starting -- historically, I'd say our customers probably thought of us more as a tactical productivity tool. So we were an important part of their -- the tool sets or infrastructure they needed to run their business. But we were not quite, I would say, as a -- viewed as a strategic adviser. Two things kind of changed that made our retail business much more strategic to our customers: one was the advent of e-commerce and omnichannel, particularly; the other one was the Android all-touch computers. So historically, our use cases were more kind of back-office, back-of-store, inventory-related. But with the introduction of -- and those devices, those basically are old Motorola powered -- sorry, Microsoft-powered operating system devices that were very industrial. They could run a couple of applications maybe or something like that. But when we introduced Android all-touch devices, they started to get a lot of play in the front of store. So it opened up a host of new applications. And customers, they've gone from running 2, 3 applications on a device to now routinely having 50-plus applications on a device. So the use cases have expanded very dramatically. And many of them in the front of store to enable sales associates to serve their customers better and drive both productivity and a higher level of service. The omnichannel buy online, pick up at store have been drivers for that business for some time. Walmart and Target were probably the 2 first large retailers to publicly talk about how they intend to invest meaningful amounts of money over a multiyear period to build omnichannel capabilities, e-commerce capabilities. And that's certainly been very helpful to us as we partner with many of the large retailers to do kind of that. But it started with the more advanced financially-sound companies that could do that. But today, I would say every retailer has a vision of how they need to leverage omnichannel and e-commerce to compete with particularly e-commerce players, but just to how to grow their businesses. And in the last 8, 9 months now of COVID, we've seen a real explosion of e-commerce and omnichannel-type applications. Many of our customers have seen that their, particularly, say, buy online, pick up in store revenues grow by orders of magnitude. I'd say, beginning of this year, that was a capability that some of our customers had, but it was a niche application. And today, that is a -- one of their core applications on how their customers really want to engage with them. And our devices are an essential component of how a retailer can deliver an omnichannel or buy online, pick up in store type use case. You're going to have, first, leverage Reflexis to be able to do the scheduling of when an order comes in, when it's -- who should be the person or the sales associate in a store that picks that order, schedule the customer to come pick it up and so forth. So it's start with Reflexis. But then when Reflexis then picks a person to pick it, they have to have -- communicate with that person through a mobile computer. They download a shopping list to that mobile computer. They have an app, too, that kind of leads them through the store. When they check off everything they picked and put in the basket, then they have to do a mobile point-of-sale-type transaction to close it out and then use one of our mobile computers to put a label on the bag to make sure that the right customer picks up the bag. Theoretically, you can do that with paper and pen, but it's not going to be very accurate and it's not going to be very cost-effective. So you can see how our type of solutions are essential in this area. And similarly, e-commerce is a big market for us. And if you think of a fulfillment center, the -- with everything goes on there, but the most foundational part there is that every box that goes out needs to have a barcode label on it with your address and other things on it, too. And those are all big markets for us.

I want to talk at length about software in just a minute. But before we leave the brick-and-mortar example, if you think about a representative retail location before there's an omnichannel capability and after, Anders, you've touched on this, but I wonder if you could give more specifics. In the before case, where physically would you see your devices being used in the store? Is it primarily just in -- as the trucks are unloaded in the back of the store and in inventory versus today -- again, if you're just thinking about that store footprint or even in the parking lot, what are the new locations where you might see one of your devices? And is there any even rough math where you think about in the average retail store, we've doubled the number of our devices that are needed or they're increased by 50% or just some rough framing of what the impact is when one of these locations decides to spend money and become omnichannel capable.

Yes. So if you go back to -- I talked about kind of the older Microsoft-powered mobile computers. At that point, we would -- you -- there will be maybe high single digits, 7 or 8 devices in a large supercenter-type store primarily used in kind of inventory, back-of-store-type application, but it could be in front of store but still doing more inventory-type application. The device was shared. So whoever were performing those tasks would pick up the device to perform the task. And today, you can -- you would routinely see maybe 80 devices in a similar type of store. So you say, a factor of 10 improvement in -- or increase in the number of devices. And that the use cases are -- have proliferated. So many of the things we -- I talked about just previously around buy online, pick up at store and how you execute on an order like this, but it can be anything from inventory activities, return of a product to fulfilling an order, helping a customer look up if something is in inventory and being able to help them check out -- do a checkout there or take the order. If they don't have it in inventory in the store, take the order, but have it delivered from another store to the house to make sure they don't lose that sale. So it is a pervasive part of how retailers are kind of executing on their omnichannel strategies and improving customer satisfaction rates. We do have customers now that -- I've said, customers now tend to think about how can they deploy a device further into or deeper into the organization. Ideally, they would like to have every worker have a device, be able to be connected to their systems, be able to get the real-time actions more dynamically, schedule their days and what they should do. So we have proof of concepts or pilots, you can say, with some retailers where we have deployed it to basically every associate in the stores, so there can be several hundred. Today, we estimate that the -- of large retailers, maybe upwards of 1/3, 1/4 to 1/3 of their store associates have access to a device, but certainly not 100%, but we think that is the objective.

Yes. Well, now let's hit on software, Anders. You mentioned Reflexis a couple of times already, but I want to make sure folks get a full picture of the strategy there. So this was an acquisition recently announced for, I believe, $575 million. So a sizable deal. I believe the most common end-to-market application would be in retail and e-commerce. But just give us the quick summary there on what the full suite of capabilities is for Reflexis and how you plan to integrate that into your existing portfolio.

Yes. So we're very excited to have Reflexis be part of Zebra. We closed the acquisition at the end of August of this year, and it truly helps bring our Enterprise Asset Intelligence vision to life for retailers and others in that we -- it will truly strengthen the analyze and the act layer of our sense, analyze, act framework. So it's a very, very important component for us and something we can leverage in a number of different areas. Reflexis, before we acquired them, they -- the reason we acquired them was that they are the leader in intelligent workforce management and task execution. So this is new categories. I talked about our addressable market, how that increases. So these are new categories that are in the high hundreds of millions of dollars opportunity markets. So it creates big opportunities for Zebra also. And the focus has historically been on retail. But they have won a number of new customers in health care, in quick-serve restaurants, in banking. So it's a way for us to expand or help expand the solution to other verticals also. We have very much the same customers, but our footprint at Zebra is much larger. So we believe that we have a great opportunity to accelerate growth for Reflexis by bringing Reflexis into many of the customers that -- where we are already well established but Reflexis was not present. So it's very synergistic with our overall portfolio, particularly, say, with some of our software assets like SmartCount, Smart Workforce Connect and Zebra Prescriptive Analytics where they can all talk together as well as with our mobile computers where you see somebody can either add data -- if they go walk around in the store, they scan a barcode on a price label for something that's been stocked out. They can then quickly extend and inform the system about this and Reflexis can help provide an action to somebody in the back of store to go and replenish that or send an action to somebody to pick an order for somebody in the buy online, pick up at store-type application. So we're looking to, as first step now, integrate a lot of our software solutions more tightly to make it a nice seamless kind of experience for our customers to deploy all of these ones and create a much higher ROI for them. Reflexis had about $66 million of revenues in 2019, and we are seeing low double-digit growth in 2020, and we expect that we will be able to accelerate that in 2021 and scale the business.

Now let's talk about your software strategy more broadly. Reflexis is perhaps the most recent example of a bet you've made there, but it's certainly not the first. So it's a theme that comes up a lot in conversations with investors. So if you could just start at the highest level, what is the software strategy for Zebra in terms of the potential to smooth your revenue and ultimately earnings over time, the potential to create stickier relationships with customers, what's the big-picture strategy there?

Yes. I think this is kind of how software -- the role software plays for us in our strategy is maybe a bit misunderstood or underappreciated. It is very pervasive across our entire portfolio, and the investors tend to want to categorized companies into it. It's a hardware or software. I said it's a little bit of a false distinction when it comes to Zebra because we think of ourselves as a solutions company. We provide purpose-built hardware with purpose-built software to solve unique customer problems. So we are very much leveraging our software capabilities to solve unique customer problems. And the combination is what creates the margins that we have. So people often wonder why a device company can be -- have the margins we do. And it is because we have purpose-built hardware, but also we have a lot of software capabilities. And I think as I mentioned, on your first question, we've kind of migrated from kind of dumber devices to smarter devices to smart infrastructure and pure software applications, but that migration is enabled by software. It is an integral part of our capabilities, and it is something that's differentiating us in everything we do. The -- we have about, say, 70% of our engineers are software engineers. So most of the value add, most of the engineering content comes into software. So if you look at our mobile computers, they have Mobility DNA as a software layer on top of Android. First, we've written well over 1,000 enhancements to Android that we've shared with Google, too, many of those have been -- become standard parts of the Android portfolio today, but many of them are unique capabilities that we've -- that we developed for ourselves. But we have this Mobility DNA layer which enables our customers to more easily, efficiently, effectively deploy, manage, utilize their devices in our kind of particular use cases. That is something we've worked on for 6 years or so now. So it's something we have a big investment in it, and it is something that is truly what, I would say, differentiates us in the market and very hard for our competitors to be able to copy. But then we have the same Print DNA in printing and scan DNA for our scanning portfolio. But then we've also taken it up in software -- leverage software into brand-new type of solutions. If you look at our SmartSight solution, which is the -- our robot that can go up and down aisles in retail stores and take pictures of shelves in retail sources and see if there is any stock-outs or if there is a Pepsi in the Coke section and/or some things like that, that automatically detect that through computer vision and also automatically translate that data into information and send an action to Reflexis, say, software package to go and have somebody address it. So not just provide the data, but actually translate that into information and actions all the way up to, say, Reflexis or Zebra Prescriptive Analytics, which are more workflow-oriented software applications that can work with or without our other devices. But they work better with our devices and our devices help deliver a higher ROI for those customers there.

So if you think about a single customer example, one of the things investors try to understand are what are the points in time where you have a refresh cycle potentially on the hardware side? Is there a more ongoing or recurring nature to some of the revenue? But again, just focusing on a single customer, help us understand, once they've bought in and leaned into your portfolio, hardware will break, wear out, need refreshing. So there's that aspect of your relationship with the customer. But between those events, what is the ongoing relationship look like? And do you think about it as, just conceptually, there's an aspect of our relationship that's hardware, it breaks, we sell more hardware, there's a separate aspect of essentially stand-alone workflow software business that we do with them? Or do you view it more as one and the same and it's kind of hard to tease those apart?

Well, it's a big question. And yes, we can spend time on this one. But I'd say, first from a relationship perspective on how we want to engage, go back to the -- we have these executive briefings, where we kind of talk about the future. So our largest customers, we -- they buy many of our different products. They don't just buy one, they tend to buy many and many different use cases. And we work with them to help them solve more problems and get more of our solutions deployed into more areas. So obviously, we try to go deeper and wider into our accounts. So that's from the -- more from, say, from a relationship perspective. We -- as we expand our solutions, we get a broader footprint, but we also have a recurring -- more recurring-like relationship. And it comes from being, say, more recurring to being pure Software as a Service prescription businesses. So we say about 25% of our revenues are recurring like in nature. So that goes to -- take our repair business will be an example. If you have 100 devices, people often sign a repair contract with us, which is not similar to a Software as a Service-type contract, but it's a multiyear contract where there's fixed cost of different points of how that works. We have printer customers. If they're heavy users, they go through many, many print heads per year. And that's an aftermarket product that becomes more of a as-a-service-type or recurring-like revenue stream. But then we have both organically and inorganic-developed software packages. You can think of our VisibilityIQ that we developed ourselves, that is a software for our -- all our products, but particularly for mobile computing and printing to help give greater insights into how they're being used and the health of those devices for our customers. And that's a monthly-subscription-type business. We have our Zebra SmartCount solutions, which -- where we basically send out devices and software to -- or use Software as a Service platform to do cycle count and other things for our customers, all the way to Reflexis and Prescriptive Analytics Solutions that we have acquired over the last couple of years.

Anders, we just have a couple of minutes left. So last question from me, and then I'll turn it to you for any concluding remarks. And this one is really more focused on the here and now for folks who have followed your story closely. There have been some dynamics with the COVID pandemic where certain types of customers maybe pulled back more aggressively their spend with you than others. And if you look at your, I guess, last quarter or 2, you've offered some commentary around the larger customers in retail and e-commerce have been some of the outperformers among your customer base. Then as you look into the fourth quarter outlook you provided around earnings, you offered some commentary around some small and midsized customers that have come back. So what can you do to just help folks understand the dynamic of how different customers have engaged or not engaged throughout different points of this year?

Yes. This year certainly played out very differently than we expected when we set our budgets beginning of this year. We were very pleased at the earnings call a couple of weeks back when we were able to say that we expect to return to both top and bottom line growth in Q4. So the year has -- I think that the business has rebounded very, very strongly in Q2, at the -- say, when at the peak of the pandemic, we did see a lot of our largest customers, the most advanced customers who were able -- particularly, say, in retail around general merchandise, grocery, be able to -- they were deemed to be essential businesses and -- but their customers wanted to engage very differently. They didn't kind of go into the stores. They had to do buy online, pick up at store. So we saw a lot of very strong growth around that. Similarly around e-commerce, we saw phenomenal growth around e-commerce. But other retailers who are more focused on apparel or department stores, they were not deemed essential and had to shut down. Similarly, we saw terrific growth around transportation logistics for companies that were focused on the last mile delivery of particularly e-commerce-type merchandise, a little less for kind of B2B type of transportation logistic companies. Health care, obviously, a very -- we have big, but challenging market for us in Q2 would -- as all the pop-up hospitals, drive-through test facilities had to be equipped with devices while the traditional business around elective care, kind of all this were shut down. And manufacturing was quite hard hit as most of the manufacturing was not deemed essential except kind of food, pharmaceutical and things like that. But we've seen a strong rebound across the board. Smaller customers were harder hit early on. They didn't have the scale or sophistication necessarily to respond as quickly to the changes in how they had to operate with COVID. But we've seen our, what we call run rate, improved very nicely sequentially into Q3. And we're expecting it to continue to improve nicely into Q4 and into 2021. And we've said we expect to return to growth for the full year 2021.

Well, Anders, thank you for your time today. I have plenty more questions prepared, but the shot clock is about to buzz. So I'll turn it to you for any concluding remarks that you may have.

Well, thank you. That was great. I enjoyed our little chat this morning. And obviously, if any of the people listening in have follow-on questions, they know where to find Mike Steele and myself afterwards.

Great. Well, thank you very much. We'll talk soon.

Thank you.

Thanks, everybody.