Zebra Technologies Corporation (ZBRA) Earnings Call Transcript & Summary

Okay. Good afternoon. I'm Brian Drab, the William Blair analyst covering Zebra. And today, we are very happy to have with us Anders Gustafsson, the Chief Executive Officer; and Bill Burns, Zebra's Chief Products and Solutions Officer. I do have to make the disclosure that you can find a full list of research disclosures and conflicts of interest on our website, williamblair.com. Today, we will be proceeding with an entirely fireside chat format. You can also submit questions. I see some questions actually already coming in on the chat. I'll try to get to all of those. And at this point, I will turn it over to Anders. Maybe Anders, you'd like to make just some opening comments around the recent strength in the business. Obviously, things are -- you guys are all very busy. Demand is very strong. The pandemic has changed things for Zebra in a lot of different ways. So maybe if you could just start with talking about that a little.

Yes. The change from 12 months back to where we are now has been pretty significant. I'd say, though, we feel as good or better about our business today than we've probably ever done, competitive positioning, the secular trends that we participate in, that we support and support our business. If you look at over the past year, the trends around digitization, automation, the on-demand economy have -- they've all strengthened. They were -- they certainly existed before. They were part of what we talked about prior to COVID, but COVID has accelerated those trends. And I think now coming out of COVID, we feel our customers are feeling a greater degree of urgency of investing in digitizing and automating their businesses. And we have good trends -- or secular trend lines across all our vertical markets in this space. But as an example, I'd say, the buy online, pick up at store will be a capability, most of our large retailers had prior to COVID. But when COVID happened, that became kind of the preferred mode of buying, of shopping. So the largest, most sophisticated customers, grocery, general merchandise, e-tailers, they were best placed to kind of pivot their operating model and adapt to this. And we've since then seen other customers kind of come -- as they come back, they want to build the same capabilities as the bigger presence they had. And so the trend lines around digitization, automation continues and it ripples kind of through the businesses. So starting with kind of the front -- the very front consumer-facing applications like buy online, pick up at store, but then you have driving other needs like greater inventory visibility, having a more dynamic ability to assign tasks during the day rather than having it more batch oriented and then go back to warehouse distribution centers, manufacturing, all having to kind of respond to the buy online, pick up at store use case and being more dynamic, more real-time in how they operate. So those are all been great supporting secular trend lines for us.

How would you rank the different end markets in terms of the impact the pandemic's had? Retail is, number one -- retail, manufacturing, government, other, which was most affected?

When COVID hit, there was a real bifurcation of our business. We had the must-have essential -- kind of the essential businesses, and then we have the nonessential. The essential businesses tended to be in great demand, had to invest a lot. And then we have business that shut down, that did nothing. So if you look at grocery, general merchandise, retail, e-commerce, logistics associated with e-commerce, they all did really well. They all invested heavily to be able to kind of pivot their operating models to this. If you're a retailer in more of a department store or nonessential retail, there was much more difficult environment. Manufacturing, if you're kind of process manufacturing, they tend to be better because food, drinks, those types of things. But if you were more discrete manufacturing, often shut down and did very little. Health care was an interesting one in that the -- what has driven our health care business over the last many years have been more elective care and acute care. That was largely shut down during -- in the trough of COVID, where either if you had some procedure planned, you weren't necessarily super eager to go to hospital to get exposure to a lot of COVID patients. Or if you had a hospital, you're generally overwhelmed with COVID demand. So we had a kind of -- our engagement with health care then became very much focused on pop-up hospitals, drive-through test facilities. But now that has largely kind of played itself out and elective carries back. The one remaining great driver for us from COVID has been more on Temptime, where we have our temperature sensitive vaccine vials and other data loggers that can help quality control, the cold chain, particularly in emerging markets.

And continuing the conversation that we were having just before we went live here, I know, Bill, you were talking to the team in New Zealand recently. Have you seen the pandemic impact different geographies in certain ways or create some opportunities in some geographies that weren't there? Or does it improve because of the pandemic?

I think we've had a -- just around the world, I mean, I think that our global sales team have done an incredible job continuing to stay connected with our channel partners and end customers through a very difficult time. So I think that when we're seeing -- even today, the challenges we're seeing in India, as an example, Australia, which was mainly opened, I was in a partner conference last evening and they're shut down again in Melbourne for a couple of days based on trying to eradicate just small numbers of COVID cases within the country. So I think we're seeing that changing dynamic around the world, but our teams have done just a great job of staying connected. I think our customers have engaged with us in a virtual way. I think that while it's been challenging for all of us to be on virtual calls all day, I think our customers still want to interact in executive levels. We've done a lot of executive briefings with our customers across each of the key verticals. And maybe at times, you get a bit more engagement, quite honestly, because people don't have to travel. So you get a couple of hours, even though it may be challenging that you invite somebody to another Zoom or Teams meeting, but they've been engaged with us throughout, especially as they've tried to continue to plan their business moving forward. I think now they're seeing that the news around the supply chain challenges, and we've done a good job overall of meeting the demand of our customers through this. So I think that we're seeing a bit more visibility from our customers because of it. They're seeing the headlines around what's happening in supply chain that are giving us more visibility than we've had in the past.

Great. You're guiding for revenue to be up about 20% this year. And I'm wondering, can you talk a little bit about the large -- some of the large orders that are in the pipeline or that are fueling that expectation? And if they're ended up being upside to the 20%, where could that come from?

Yes. Large orders is nothing new for us. We -- every year, we have large orders that we have to figure out how to replenish the following year. Last year, we had some very large orders from the customers I talked to before in grocery, e-commerce, as examples. We have to replenish or continue this year. In 2021, USPS is a large customer for us. That's been larger than last year. But we see -- we have broad-based demand around our larger orders. And in Q1 and as we look to Q2, we did see kind of our small- and medium-sized businesses, the run rate part of our business, return and grow faster than the larger order side. So I think the mix we have today around large orders and more SMB or run rate type business is healthy. It's not over indexed, say, in large orders today.

So you mentioned the USPS, and I know there's no reason to focus too much on any one large order. I know there's a lot of large orders and that's business as usual. But the USPS order, I believe, accounted for about $75 million in revenue last year and maybe will account for around $125 million this year. You said it would be more this year than last year, I know. But that isn't the end of it for USPS, obviously. This isn't going to be an ongoing relationship. I know you've talked about that, but there's plenty more to come in 2022. Should investors be concerned that the one -- maybe it's $125 million or so this year that there's a drop-off next year because of that?

As I said, having large orders that we have to replenish is something we have to deal with every year. And USPS is a frame contract, which gives us -- it has one large core opportunity of providing mobile computer to every mailman or letterman in the U.S. basically. But we've already been able to identify and penetrate other opportunities with USPS since we got that contract. And next year, we will largely be done with the letter carrier part of it, but we still have continued maintenance, software revenues from that. But also now both the USPS and Zebra will have budget capacity and management bandwidth to start looking at other opportunities. So we think that, that will start opening up as part of that. So I think this is part of -- this is just the regular part of our business.

Great. So you've had your EVM side of the business, and for those who don't know all these abbreviations, Enterprise Visibility & Mobility business has outpaced the AIT side, the Asset Intelligence & Tracking lately, right? And basically to summarize what's in those categories, EVM is a lot of the mobile computing; AIT, barcode printers. How -- can you just -- I think I know the answers to this, but can you just talk about what has been driving the stronger growth on the EVM side? And where do you -- how would you characterize the growth prospects or maybe quantify what you think the growth is in those segments going forward?

I think that we're excited about both segments, both have delivered solid growth in the past. Both are -- include and participate in our Enterprise Asset Intelligence vision of sense, analyze, act. And we're seeing that the portfolio is highly synergistic across what we look at is scanning, mobile computing, printing and now our software assets that we've recently acquired or organically developed. And then some new areas that we're investing in, small office, home office, printing machine vision and others. So there's new use cases. Our mobile computers have really benefited from taking significant share as we've seen the transition from Windows to Android within the marketplace and the adoption of new use cases, putting more devices in the hands of more workers within our customer segments and verticals. So whether that's transportation logistics at peak time, whether that's within a retail store, within health care, the more adoption of track and trace and the leveraging of electronic medical records, we're just seeing more mobile devices being used with more applications on them today than ever before. And we've been able to, through our investments in Android, continue to refresh that portfolio across -- think of our portfolios across printing, scanning and mobile computing is all vertically focused and then tiered from a good, better, best scenario to, ultimately, meet the price points and the demands of each vertical market that we serve. So we're seeing that -- our software assets as well fall into our EVM portfolio. So our investments in Workforce Connect, our collaboration software or our acquisitions of Reflexis and CPA or Profitect also fit in that segment, which allow more applications, again, to be [ run on ] more mobile devices. So we're excited about both elements of the portfolio. Mobile computing has been growing faster. We've been taking more share in that market, and we've been putting devices in more hands of associates that are customers, whether that's retail or T&L or others. So it's been growing a bit faster than AIT, but we've got a tremendous opportunity that our customers really want to buy a portfolio of products from us. And both those participate really in the long-term vision of how do you digitize assets within the supply chain or within retail or within transportation and logistics, both play a significant role.

So -- thanks for that. And your guidance in the past has been for 4% to 5% total growth. I get the question a lot, like, especially lately, isn't that a little conservative? What is the -- are you sticking with the 4% to 5%? I think the answer to that is yes. But do you see potential for upside to that growth rate over the next few years for Zebra potentially? And what could drive that?

Well, first, as I said before, we feel as good about the business today as we've ever done before. Our competitive positioning, the strength of our portfolio, the secular trends that are supporting the business, we have made meaningful investments over the last few years to enter new markets where we see -- that offer meaningful market expansion, but also where those markets have a higher growth rate than our traditional core markets. So we're trying to make sure we align our investments and our portfolio with where we see the best opportunities for us to continue to drive growth. So we want to make sure we can drive growth for today, tomorrow and the day after. The -- so we certainly don't have an upper limit on the growth that we're trying to drive to. But I think, at this stage, we feel that we are kind of through the -- say, the negative impact of the pandemic. But before we kind of officially come back and revise our long-term growth targets, we probably want to see the market kind of settle down a bit after COVID to make sure we have good confidence in whatever -- if we were to revise the numbers that we have good confidence in what those numbers would be prior to doing it. And doing it kind of where we feel that we're still in the -- feeling the repercussions of COVID is probably not the right time.

Right. So shifting gears a little bit, I'm looking at one of the questions that came in on the chat, and then maybe we'll expand on this. But in the category for these questions would be kind of what is special about Zebra? What is the competitive advantage? How much does it cost to customer to switch away from Zebra? I get this question a lot. And it's not just -- because some people who are just taking a look at the business for the first time will say, well, it's just a scanner, right? It's a handheld -- well, it's much more than that. But -- and so I'd like to talk about that for a few minutes. But the question in the chat, just to make sure I address my client's question is, does Zebra's computer manufacturer, and I guess we're talking about the mobile computers, start from scratch in Zebra's manufacturing environment? Or does it come from outside, and then you put it in the housing protective, make it ruggedized, et cetera, I think, is the idea?

So starting maybe one step before. We design our mobile computers. We design all our products in-house, but we do leverage some expertise from our joint development manufacturing partners, particularly for mobile computing. From a design perspective, they have certain building blocks that they can incorporate very well. From a pure manufacturing and assembly perspective, they start from scratch, but we do source -- we source, they source components from a variety of different sub-suppliers. So they are more doing assembly than manufacturing in that perspective. And -- yes, I think that answers, right?

Yes. But the designs originate at Zebra.

Designs -- Zebra designs. So we are -- part of the value that we bring from a design perspective is that we -- one, we do understand our customers' workflows really well. So we -- from a human factors' perspective, from an ergonomics use case perspective, we know -- we understand how our products are being used, and we can then design them to be as efficient and effective for those use cases. But also having the in-house design here enables us to platform much better. So if you look at some of the leverage we've had around Android platform, our printing platforms, as examples, where we have the same -- and scanning, too, electronic -- the operating system and electronic platform, that means that we can develop software once with very little modification between models versus having to start from scratch. And from a sourcing of components, we can get much better leverage. So the platforming that our in-house capability provides us is also a great advantage for us.

Great. So -- and then broadening the question, what are the competitive advantages? What's special about Zebra? The way that I begin to answer that question usually involves listing things like you've got 20,000-plus VARs that have decades-long relationships with Zebra, that know your product, help you sell the product, just the very custom -- like customer focus specific design or the products, the scanners, the ergonomics of it, it's just refined so much over time and the dependability of the products. And then the whole ecosystem that you can create for the customers, right? With the scanners, the mobile computers, the barcode printers, I mean, can you kind of -- can I hand that over to you? And is that -- am I on the right track? And how do you explain that?

Yes. First, I'd say -- so that's absolutely correct. You can start earlier and say, first, I think we are a unique company. I think we are very special. But part of that starts with the people we have. Every company has access to the same PCs, the same office furniture, whatever. The people we have, the culture we have, I think, is the foundation of what makes us special and unique. We -- then I'll go to say -- our Enterprise Asset Intelligence vision and the sense, analyze, act framework also helps us in that. Our customers say, while they want to buy the best device for today -- for what they need today, they also want to partner with a company they feel has a vision for the future that they can work with to solve other operating problems where they can apply technology. So we become -- by having our Enterprise Asset Intelligence vision, we actually sell a lot of our devices because that -- because our customers feel that we will be a good long-term partner, and they want to make sure they work with us for that. But also, in the meantime, they will buy our current solutions. But also, that gives us a chance to develop more strategic relationship or be more of a trusted partner, have better insight to their future requirements. So that positions us well for the future. And then maybe the last point will be the things that you talked about, which are, I think, creates a moat around the business also. We have -- trying to create a self-reinforcing circle where, by having the broadest portfolio of products in the industry, we can solve more of our customers' problems so they can -- and for our partners, our partners can rely more on us to solve their end-user customers' problems. That enables us to win more customers, which drives more revenue and profit that we can reinvest to expand our portfolio, which enables us to solve more customer problems and recruit more partners. So this becomes kind of a self-reinforcing circle. And if you try to compete with us and you have -- say, you have a better -- one device competing -- goes up head-to-head with one of our devices and they [ put room ], assume for a second it's better. You still have to compete against our portfolio. And if you're a reseller, you have to invest in having a ratio with this other vendor. And we provide value to them across what they do, across the entire portfolio, not just by product by product.