Zebra Technologies Corporation (ZBRA) Earnings Call Transcript & Summary

All right. Good morning, everybody. We are pleased here to have Zebra Technologies. I am Meta Marshall, head of the networking coverage here at Morgan Stanley. We're pleased here to have Anders Gustafsson, CEO; and Mike Steele, VP of IR.

And so Zebra has been a major beneficiary or maybe enabler of all of the additional services that we have kind of needed as a result of COVID, curbside pickup, grocery, e-grocery, a lot of the -- has had a lot of secular tailwinds for this year. And so maybe just to start, what do you think is the initial catalyst that drives customers choose Zebra in a normal environment? And what has kind of driven them in COVID? Is it just competing in a digital world? Just a little sense of how people first become familiar with Zebra or first turn to Zebra?

I think historically, we were -- if you go back 5-plus years or so, I think our customers thought of us more as a tactical productivity tool. As we have expanded our solutions and worked on our Enterprise Asset Intelligence vision, I think today, our customers tend to think of us as an enabler of their strategies. So anything that they're trying to do around digitizing their businesses, automating their businesses are things where we can help, particularly around our sense, analyze, act framework. So the -- you mentioned some of the retail trends we've seen. If you're a retailer and you're wanting to do buy online and pick up at store or have an omnichannel strategy, it's very hard to execute on that without our type of solutions.

And so you clearly benefited from the surge in e-commerce and kind of a need for curbside pickup and more stuff being sent and needing logistics there. So how do you think about how sustainable the growth is in those areas? And should there be kind of a natural slowdown as we anniversary some of those investments?

Yes. I think what we've seen this year is obviously an acceleration of adoption of a lot of these digital trends that we've talked about for a long time. So what we saw a lot of our customers do this year was that they had to scale up their capabilities. So standard buy online, pick up at store, so kind of a new application for this year, new use case for this year. It was kind of very, very niche at the beginning. But retailers felt that there was how their consumers or their customers wanted to engage with them. That's how they wanted to shop. So they rolled it out to more stores, and they had more capacity. But it's still, for most of them, something that is not yet to roll out the entire fleet of stores or where they have the capacity to do that for every consumer they have. So I still believe that there's plenty of room for us to continue to expand both kind of deeper into the use cases and expand them also. And if you think of the buy online, pick up at store also, that is the kind of customer-facing part of it. But if you're going to do that well, you need to make sure that you have really good control of your inventory. So you know what merchandise you have on the shelf. If you're going to tell somebody that I confirm your order, you can come back in 2 hours and pick it up, that you have those goods there. And retailers tend to be not -- historically not very good at having an accurate view of the inventory. So there's a lot of emphasis on also leveraging technology to gain a better insight to that to be able to give the consumers a high degree of confidence that stuff will be there.

Got it. So kind of taking in some of their spot investments and turning them into kind of greater platform investments. Okay. The flip side of the kind of rush of e-commerce and kind of logistics investment that you've seen, you do have some kind of traditional brick and mortar that's been, obviously, a little bit more impacted. But as those stores kind of gradually open up, are they looking to the same technology investments or kind of ways to evolve?

So the customers or the verticals that have not benefited so much from COVID, you mean?

Yes.

Yes. I think that generally, across -- well, first, we serve many different markets -- vertical markets: retail, health care, manufacturing, transportation logistics are the ones that we talk the most about. But I would say, across all of those, there are some common themes around having greater visibility into your supply chains, being able to deliver a high degree of customer service, being able to do somewhat efficiently and effectively. And digitizing those businesses automating different processes are all trends that kind of go across the verticals. So I think that there's a lot of commonality. It obviously varies by vertical, but it is something that I think is fairly common. And the customers that have been pausing some of their investment this year, it's been more based on -- they were not deemed to be essential businesses, as an example, they had to shut down. Many of our manufacturing customers who have been challenged and that they were not deemed to be essential, they shut down or they were smaller companies, they didn't have the resources to kind of deal with COVID as well. But I don't think that, that means that their need has disappeared. It's just that they have not -- they've had to prioritize other things.

Got it. And so maybe for retail specifically, what do you think are kind of those next generation of technology investments now that they're kind of better equipped? Is it RFID and machine vision for store management? Is it better analytics? Is it just like what ways can they get better control of their inventory things, things where you guys could be helpful?

Yes. A little bit what I talked earlier, I think scaling their solutions now, filling out coverage are definitely still the priorities for our customers. The -- this -- I would say, we've moved up the solution stack, and we see a lot of our customers focused, say, in retail focus on in-store execution. So they want to make sure they have better ability to, more in real time, react to what's happening. So if you take Reflexis as an example, our most recent software acquisition, and you combine that with Zebra Prescriptive Analytics, you get the ability to have a task engine that gets fed by lots of different things like Zebra Prescriptive Analytics with input, but enables basically a store or a retail chain to identify the highest ROI actions and activities, ensure that they get assigned to the best store associates, so not somebody who is in the wrong end of the store or who is already busy, but people who have capacity to do so. And we feed Reflexis with data from all sorts of things. But you mentioned RFID. RFID is definitely something we think will come back quite strong as it's a way for -- to help retailers, particularly here, with their inventory accuracy. There's an easy way to have more real-time and easier touch to understand exactly what's on the shelves.

Got it. That's helpful. A major question that we tend to get from investors is just how to think about kind of how much more technology dense kind of some of these e-commerce implementations are or a technology-rich story is then kind of a story would normally, I think, that maybe has a barcode scanner and a checkout stand. Just kind of relative context of like once you think that an organization has really embraced kind of an omnichannel approach, kind of how much more technology dense is that?

Yes. There's a few different ways to kind of look at how much denser technology is being used now, staying on the retail side and the omnichannel piece. If you take 6 day on the buy online, pick up at store type use case, historically, the consumer would come into the store pick up the basket, walk around the store and put whatever they want in the basket, they would do a self-checkout, say, a transaction at the end and put all their goods into their -- the bag to bring home. The only engagement they had with, say, technology was at the self-checkout station where they had a scale and the scanner and so forth. But otherwise, it was all done by the consumer. Today, if you do this as an omnichannel, you go online, you enter your order, the store has to be able to download the order. They have to then figure out how do I now fulfill this order. So they have to identify somebody in the store to pick the order. You can do this with paper and pen, but it's not very scalable, and the error rate will be high. So generally, they would have a mobile computer that they identify, say, the Reflexis system identifies that here's a store associate that is not busy at the moment, can basically download or -- the pick list from the customer there. They can use a Wayfinder type of app on their mobile computer to walk around the store and basically pick everything up and scan every item as they put them in the basket to make sure that they can check it off and they can have certainty that they picked everything that they're supposed to. At the end of that, they have to put it in a bag and they have to print the label to ensure that it's your bag. You get to pick this up, not somebody else, and then do a mobile point-of-sale type of checkout transaction also. So the entire process is enabled by technology. You say you can't theoretically do this without technology, but certainly not at scale.

Yes. And I can attest to the Brooklyn Whole Foods certainly having far more technology enablement than they used to.

Yes.

All right. So we've kind of spoken to this a little bit, but you've made investments in software over the past couple of years. SmartPack is an example, some of the Reflexis that you were mentioning. What are your goals with SmartPack and kind of other software products over the next couple of years? And just how does that fit into the portfolio?

Yes. So often, investors want to kind of pigeonhole the company as this is a hardware company or a software company. I said for Zebra, I think it's somewhat of a force distinction. We have -- we already have 70-plus percent of our engineers being software engineers. And the -- what enables our, say, our devices to really differentiate themselves and deliver value that why are we getting the gross margins we are getting, it's to a very large degree based on the software capabilities we have and the software solutions that we embed in those devices. But we also have developed new, more pure software applications. So we think of this as solutions. It's not -- we have purpose-built hardware. We have purpose-built software to solve unique customer problems. So we have kind of migrated from, to some degree, dumber devices to smarter devices to smart infrastructure with things like SmartPack, that you mentioned, to also now more smarter applications, so things like Reflexis. And we -- from a vision perspective, we're trying to stay close to our sense, analyze, act and make sure that we we've been building out over the last few years more the analyze and act side. Sense is more our historical strength that we've been able to read barcodes, RFID text. We've expanded that with the machine vision or computer vision. We -- I guess, it's a year ago now, we acquired -- or 2 years ago maybe, we acquired a computer vision company in London, Cortexica. That's been great to help build that capability. But we're also now working more on filling out the analyze and act side to enable our customers to leverage all the data they have in their facilities, and act on that in real-time or close to real time. We're focusing, and I expect we will continue to focus a bit more on broader workflows. So if we think of Reflexis, that is a broader workflow solution where we can leverage all our other type of solutions to feed the data or to receive instructions from the Reflexis system to enable people to act on that information in more close to real time.

Great. Maybe moving on to kind of the USPS win that you guys had last year, this can be upwards of $500 million opportunity. Just what were kind of the reasons for the win, a competitive displacement? And just how can that lead to other public service wins?

Yes. So first, we've had great success with postal services around the world. So USPS was a great win. It's the biggest one we've had, but we have a Royal Mail in the U.K. We work with a number of other customers across the world to do similar type of things. So we're certainly very pleased with the relationship we have with USPS and how the rollout has gone since we announced it for at least through the first year, and next year, we'll complete the rollout. But you asked about why did they select us. They had a rigorous process, took a long time. And what I can share, I think is obviously product was a big part of that, making sure we had the best product, and that included kind of the device but also all the software around it. I think they also liked our vision for where we were going as a company that felt that we would have opportunities to help the USPS with other problems, other challenges they may have across the network. And obviously, we had to deliver value. So there was a -- there was a price tag on this, and we were competitive. It doesn't mean lowest price necessarily, but the best value. And lastly, I think the relationship that we have and they felt that we will be a good partner for them to work with.

Got it. That's helpful. Health care has been another kind of vertical that you guys have looked to expand in over the past couple of years. It clearly has been one of your highest growth markets. Hospitals, kind of in general, health care in general, has been stressed by COVID. Your solutions offer potential efficiency gains. What are some of the ways in which you were seeing their need for technology and your need to assist them before? And maybe if that has changed in COVID and kind of their needs, any kind of update there?

Yes. I think that health care providers have been -- has recognized the need for technology or leveraging technology even more so now as part of COVID. So I think similar to what we talked about some of the other verticals we serve that COVID has accelerated some of these trends around digitization. And in health care, the health care providers are very much trying to digitize the entire patient journey. We have -- we've been active in health care from the very beginning, say, which was -- the catalyst for use of our type of technology in health care was the advent of electronic medical records, where you had an electronic record where you can append data or you can access data to read, not just having, let's say, paper Manila folder to store all your hand scribble notes as a doctor. And the value proposition we offer is very compelling. It's not just around providing just the care more efficiently, it is also about providing better quality of care. So that makes it quite compelling. We are engaged, basically, you can say, in the entire patient journey, all the way from admitting a patient in through -- we have risk band and that they can use to track that patient through -- all the way through discharge. And you look at something like just bedside care, a relatively straightforward part of health care, but you have a health care provider coming into a patient in the room, scan his or her wrist band to ensure that they're dealing with the right patient. They can scan his or her badge to ensure that's an authorized caregiver that's dealing with the patient and then scan the barcode on the medication to ensure that they give them the right medication at the right time and the right dose. So that minimizes the risk of maltreatment or making an error, which is fairly common in health care and makes -- also makes it much more efficient to administer that care. But we can also track and trace any -- a number of other things like blood banks -- blood bags, biopsies tested, other tests. And we also enable the caregivers to communicate much more efficiently between themselves with, say, Workforce Connect and other things, so they can spend time at the side of a patient giving care versus having to run back to PC to enter data or retrieve data.

Got it. And then maybe on manufacturing, this is probably an area where people think the technology and kind of digital automation has kind of been there for a while. So is that a misnomer and there's still a lot of manufacturing that has a great need for kind of digitization? Or where do you see as the areas where your manufacturing customers are looking for the greatest investment?

Manufacturing was under pressure, I'd say, even before COVID with a lot of the trade tensions and tariffs and so forth. But the need to drive greater visibility into supply chains to be able to track and trace all sorts of subassemblies to finished products and so forth, yes, I think it's definitely there. We've seen this year that some industries that were deemed more essential, so mostly, say, process industries around food and pharma, and they've done very well, while some more discrete manufacturing like aerospace, making airplanes have been more shut down. We do a number of things for our manufacturing customers all the way from an assembly line where if you take -- most of us, I guess, are sitting looking -- watching this on a PC. If you take your PC part, there's probably 5 or 6 or 7 labels printed by our -- hopefully, our printers in that machine to scanners on the line, but also in manufacturing, we include all the warehousing that goes on within manufacturing, which has lots of mobile computers, scanners and printers. We also include direct store delivery. So if you're a food company, say, and you've got to deliver your products to restaurants and to stores, all of that is something we do through -- mostly through mobile computers. So this -- the use cases are quite wide. And I think that they certainly are not going away, but have not been growing as fast over the last couple of years as health care or retail as examples.

Got it. I mean, maybe clearly, COVID is an event that has kind of transformed how a lot of organizations have thought. But you also alluded to kind of some of the trade dislocations over the past couple of years have made supply chains visibility or a supply chain mobility kind of much more important. So maybe on a -- where have you seen kind of your customers more focused over the changes over the past couple of years? And how does that inform what it is that you want to invest in?

Yes. First, we have a -- try to have certainly a robust process in how we engage with our customers to ensure that we are working on the right things. So we -- before COVID, we would have in-person, what we call, executive briefing sessions, maybe twice a year with our leading customers to talk about their biggest business challenges where technology could help. And we talked about more our long-term road map of capabilities and how we could come up with new solutions to help them address some of those challenges. So we tried to make sure we can align our investments very much with the needs of our customers, tell our customers that the last thing our engineers want to do is develop something that nobody wants to buy. They get excited, they get their satisfaction of doing stuff that are attractive in the market. From what -- after COVID I'd say also, we're still maintaining those briefing sessions, although we're doing it now virtually. Hopefully, we get a chance to start doing those things more face-to-face going forward also. But the -- I don't think the trends or what our customers are asking for are different. I think it's been more an acceleration. So the trends around digitization and automation are not new. They've just gotten to be more urgent. And I think also, some of them probably -- we may have been in areas that were not perceived maybe to be as tightly aligned with some of those as we are today. I think if you look at health care and retail as examples here, I think it's been much more clear to both our customers and to investors that our type of solutions are quite attractive in these markets.

And then maybe just a last couple of questions here. Over the last number of years, since the Motorola deal, you guys have clearly put the balance sheet in a much better position. It gives you far more flexibility from an M&A perspective. Just how do you think of M&A? And then conversely, you're still kind of in the midst of a CFO search. And so just kind of any update there?

Yes. So first, on the M&A side, we're excited and feel good about our -- the portfolio of solutions we have today. But we do think that M&A provides additional levers for strengthening our portfolio, particularly around some of our newer areas and actually helping to accelerate growth. So when you talk about our growth rates, we have not included M&A as part of our growth rate targets. So that will be over and above that, but we certainly feel that we have abilities to expand into new areas. We've talked about M&A kind of around 3 categories. First was around core. And here, I think that we haven't made any acquisition in our core products for the last 6 years since the Motorola acquisition, but we have made a couple of acquisitions in what we think of as adjacent -- near adjacent spaces. So Xplore, which is a tablet, a ruggedized tablet company, that was a good example of what we thought of as a mobile computer in a different form factor, a space that was growing faster than our mobile computing market overall, but where we had a strong right to play, but there's not as much market share. Another adjacent acquisition was Temptime, which is the -- making basically labels that changes color based on exposure to temperature. So they've been a great acquisition, and that helps to, you can say, EAI or digitize our supplies business. Very much something we're working hard on now with COVID and figuring out how can we participate and support quality control solutions for vaccines. But the 3 last acquisitions we made have been all pure software acquisitions to help accelerate our ability to execute on our Enterprise Asset Intelligence vision. So we have Cortexica, Profitect and Reflexis, which basically brought new capabilities around -- mostly around identifying in the analyze and act side of our sense, analyze and act framework. So I think we think that's a good framework for us to think about still, and we continue to look at inorganic acquisitions, but we also have a fairly tight framework for how we want to approve them. It has first has to have a strong strategic fit, but also deliver good ROI to our investors or for us.

Got it. Well, that has all been very insightful. With that, we're at time. So Anders, Mike, thanks so much for being with us here today. And any follow-up questions, you can follow-up with Mike or myself. Great. Thank you very much.

Thank you.

Thank you.