Zebra Technologies Corporation (ZBRA) Earnings Call Transcript & Summary

Okay. Welcome, everyone. Good afternoon. My name is Brian Drab. I'm the William Blair industrial technology analyst and the analyst covering Zebra. Today, we're very happy to have with us Anders Gustafsson, CEO; and Head of Investor Relations, Mike Steele. I should be able to say your name better than that right now.

That's all right.

Anders Gustafsson or is it Gustafson?

Either one works.

Either one. I've been covering the company for long enough to be able to say his name more articulately than that since 2010, I believe. So I think everyone in the room is probably somewhat familiar with Zebra, leader in automated identification, data capture and mobile computing, barcode printers and so much more. The company has evolved so much since the acquisition and merger with Motorola business unit. And I know that you don't want to hear too much from me, so I'm going to get out of the way, let Anders present. He has some slides, and then we'll get into Q&A. The breakout session is in this room as well. So we'll have plenty of time for Q&A. And 2 quick logistics notes. One item is that I need to mention that you can find all the William Blair disclosures on our website, williamblair.com. And one last thing is that you might see me leave because my daughter is graduating from 8th grade, sorry about that. But at the end of the presentation, I'll get up, but we can stay in here and have some Q&A. So Andres, let me turn it over to you.

Thank you. So thank you, everybody, and welcome. I appreciate you taking the time to come and talk to us or listen to us. I think we have some people who know us quite well in the audience, and we have some who may not know us as well. So we prepared a few slides to go through with you. I'll start by letting you absorb our safe harbor statement here a little bit. And then we can go into some points around how we are framing the value -- the investment opportunity for Zebra. We are benefiting from a number of strong secular trends around digitization and automating of our customers workflows. You look at the on-demand economy is only one example that is a strong driver for why customers invest in our type of solutions. And I'd say those trends have generally accelerated through the pandemic. We are a market leader in all our core product categories. So we have a very strong market position with 50% market share in printing, 50% in mobile computing and about 30% in scanning. We are -- we've been enhancing our profitable growth profile through a number of strategic investments over the last several years and expanded into new adjacent and expansion markets that have generally higher growth profile and a higher margin profile, and we expect them to be more and more accretive as we scale those investments. We have a very strong partner ecosystem, both regular traditional resellers, but also software partners, strategic alliances and so forth, and that gives us great scale and very cost effectively reach the entire market, a very diversified customer base from a vertical geography and product perspective and very capital and carbon-light business, so very variable cost structure. And you will see if you look back at 2008, '09 and to 2020, when there were some stronger headwinds. You could see our OpEx coming down very fast and our cash flow being very strong. And with that, we can look at a little bit of a time line of our history. We are a little bit over 50 years old. We've been public for 31, and I've been the CEO since 2007, so coming up on 15 years. We have a strong track record, I'd say, of innovation, both organic and inorganic. We -- in 2014, we combined with Motorola's enterprise business and more than tripled our revenues overnight. There was a big transaction for us, but has worked out very well from a financial perspective and been very, very attractive and way of transforming the business really. And then we've more recently made a number of other recent acquisitions in machine vision. We just -- Matrox that we closed earlier this week, vertical software companies, software-as-a-service companies, AI-enabled and machine learning-enabled solutions. So quite a lot of new capabilities that we added to our portfolio. So as I said earlier, we're quite a diversified business. And you can see by -- about half of our business is in North America, third in Europe and the rest in Asia Pacific and Latin America. Also by verticals, we have 4 main verticals about retail, transportation logistics, manufacturing, health care, that make up the vast majority of our business. And from a segment perspective, AIT is the more focused on the traditional printing business, which is the heritage of the company and the enterprise visibility and mobility is more to do with the mobile computers and scanning and some of the newer software acquisitions we made. And you can see we had about $5.6 billion of revenue last year. Over 10,000 partners, a strong patent portfolio, and we continue to invest in R&D to make sure we have a strong portfolio of solutions that can drive our long-term growth. And I mentioned earlier also, we have strong market leadership on the printing side and around AIT, we have 50% market share. And apart from printing in that segment, we have a strong business in supplies, the basic stuff that goes through our printers, which is more of a recurring like revenue stream, it's kind of more on demand. And also on the enterprise visibility mobility side, we are the market leader in both mobile computers and scanners. And also we have most of our software businesses. And we have -- we're capitalizing on a number of strong secular trends, including mobility, cloud computing and the proliferation of smart devices and tools and kind of the IoT part of the world. Our vision is to enable every asset and worker to be visible and connected and optimally utilized. That's our vision we kind of branded it as Enterprise Asset Intelligence. And we have this framework around sense, analyze and act as to when we talk about what we do for our customers. We help them sense what's happening in the physical world that you can say is the more inherited to the company. And we then help them analyze that information and enable them to act on that in real time. So if you look at reading barcodes, RFID tags, object recognition through machine vision as part of the sensing side. But most of the investments we've made, particularly the inorganic investments we made over the last few years have been around have how to analyze and act on that information, which has positioned us to be much more of a vertical workflow solutions company. Since here, we talked about how big a vertical workflow solutions company. You see in a number of things we're doing in these different verticals where we are, you have omnichannel and e-commerce are strong drivers for our business. And you look at buy online, pick up at store, which was a kind of a niche application or use case prior to COVID that became the go-to way for consumers to buy. That is something that's basically -- we enable that. It's very hard to execute that without our type of solutions. And in transportation logistics, they are prioritizing invest in our type of solutions. And to no small part based on e-commerce growth. And we do a lot of things around helping the last-mile delivery, making that as efficient as possible by enabling the driver to be as connected as he can be. Manufacturing was held back in 2020 with COVID, but it came back. It was a fastest growing vertical for us last year, and we see great opportunities to expand our position here by introducing heads-up displays and other wearable technologies. But also our machine vision activities around Matrox, it plays right into manufacturing as well as our warehouse automation would Fetch the robotics activities we do. And lastly, we have the health care, which is a very, very attractive market for us. Our value proposition here is very strong and that we both help improve the quality of care as well as the cost of care, the efficiency of our customers. So earlier this year, we raised our long-term organic sales growth expectations to 5% to 7%. And provided a refreshed view of our addressable markets and so you see here basically a $30 billion market. These expectations are supported by these strong mega trends around the on-demand economy, asset visibility, cloud computing and automation more broadly. And they've become increasingly important trends as through the pandemic and as our customers are investing more and more to address labor shortages or inflation in salary and so forth. These expansion areas are also generally higher growth and have a higher margin profile. So as we scale those, we expect them to be quite attractive to us. So a few more words here on Matrox, which is the acquisition we announced earlier this week. Matrox, it's a Canadian company. They're a strong, recognized leader in machine vision, not the market leader, but one of them, it's a very fragmented market. Their solutions have -- are very well respected from a technical perspective. And they have -- we expect -- we see as the strongest software offering in their Matrox Imaging library portfolio. And we now have -- see, we now have a full portfolio of imaging solutions from being able to do barcode imaging to fixed industrial scanning, to machine vision. And together, also we have a much stronger go-to-market. I think Matrox has been more, say, engineering focused, developing very good solutions, but we have now recruited well over 100 new partners to help us in machine vision, fixed industrial scanning and building out a strong sales organization for this. So we're very excited about what we can do together with them here. If you look at our financial performance here, we have had strong growth over the last 3 years here, 9% over the last 3 years. We've had organic growth, always a little lumpy with COVID year. We were down 1% and up 23% last year. And then we had about -- growing a bit over 6% over the last 8 years organically, strong EBITDA margin performance. And for the outlook we gave for the full year this year will be higher than 2019 if you -- even if you -- even including the headwinds we see today from supply chain and very strong cash flow. You can see even particularly in 2020, where the market was harder and our revenues were down. We had a very strong cash flow conversion. And so looking at few -- a couple of comments on ESG. It's foundational to our business model, and it's -- we want to make sure we have a very sustainable business and can also help our customer drive sustainability. So regardless of our strategy and where we're going, we will have a strong focus on ESG and conservation more broadly. And as we are committed to sustainability and they will benefit all our stakeholders and certainly, our customers are asking us about this also. And our Board is directly involved in overseeing our activities here. We have a strong focus on human capital that it's essential part of our business and what we really need to do to thrive. So that's -- we have invested a lot in building a strong culture, a very positive culture, and we've gotten a number of recognitions from Newsweek, Forbes and other publications about our workplace and people enjoy it. And we are enjoying a lower turnover than most other companies from a benchmark perspective. Then from a climate perspective, we have a number of energy management solutions, partnerships that we're reducing energy consumption. We've been working with the U.S. Department of Energy and submitted a science-based target for carbon-based reductions and substantially improved our reporting around section Scope 1, 2 and 3 for carbon emissions. And lastly, we have a resource conservation. You can see this is where -- what our products will do for our customers. We drive a lot of productivity enhancements for our customers. It addresses more efficient operations, labor shortages and overall carbon reductions for our customers. We also have a number of solutions that help reduce -- improve quality and reduce waste. We use AI tools to drive better demand sensing to ensure our customers have the right inventory or if they start seeing changes in sales out that they can move them around to make sure they can sell them out without having to have more spoilage or so. We also track vaccines and drive vaccine efficacy. So we can make sure that the vaccine has been quality controlled throughout and not have to throw it away. We've included a number of things in our eco offerings also around circular economy. So we can -- take back and refurbish the product and resell them. We use potato starch to manufacture the cartridge that you see in this picture here, which is kind of cool. And you have safety and security. We do a lot of things throughout particularly in health care on this. We drive safety in all workplaces, including the NFL and empowering workers, this is where our software and devices together really provide much more real-time actionable insights and free up time for workers to spend the normal high-quality tasks. And our robotics solution, so it reduces the walking a warehouse worker does from maybe 8 miles per day to more like 2 miles per day. So a number of things we're doing around the ESG side also. And I think that kind of wraps up my presentation.

Thank you very much, Anders.