Zebra Technologies Corporation (ZBRA) Earnings Call Transcript & Summary

Good afternoon, everyone. We're going to have Mike Steele from Zebra Technologies to give a presentation. Thank you, everyone.

Thanks, Jarrett. Happy to be back in London to visit our offices and [ Experience Center ] and to meet the many new and familiar faces at this very popular Nasdaq conference. I know a lot of you are new to the story, so I'm doing a full-overview slide presentation of Zebra. Nice to see all of you. So let's start it with the formalities before we get started, I'll give you a moment to look at our safe harbor statement regarding forward-looking statements. Also, the non-GAAP financial measures in this presentation, we'll have reconciliations available on our website. So getting into to the compelling investment opportunity. First, I'd like to start with framing that for Zebra. Zebra benefits from secular trends to digitize and automate operations across the supply chain to facilitate the increasingly on-demand economy. These trends have accelerated through the pandemic. We're the market leader in our automatic identification and data capture market, the AIDC market, which includes data capture, mobile computing, barcode printing, and we also have a strong track record of innovation throughout the years. We're enhancing our profitable growth profile through strategic investments and complementary expansion markets that elevate us as an end-to-end solutions provider. Our global partner ecosystem enables us to serve all pockets of the globe with our technology to our diversified customer base. We use contract manufacturers for our electronic products. And the vast majority of our business is transacted through distribution partners, which makes us a capital and carbon-light business model with a high return on capital. Our cash flow profile has been improving over the years, and we have a fortress balance sheet with significant credit capacity. A few weeks ago, we expanded our credit facility with favorable terms to meet the needs of our growing business. So Zebra has been in business for 53 years, 31 years as a public company, and we have a strong record of innovation through both organic and inorganic investments in the business. The 2014 acquisition of the Enterprise business was the most transformational event in our history, more than tripling the size of our company, enabling us to offer the entire core ecosystem which has significantly elevated us as a strategic supplier to our customers for end-to-end technology solutions at the edge of their operations. Following the integration of this highly successful acquisition, we have made 9 acquisitions in adjacent and expansion markets over the past 4 years. The strategic acquisition areas include machine vision, autonomous mobile robots, workflow optimization software, prescriptive analytics, time temperature monitoring and demand sensing through our artificial intelligence. Here's a brief profile of Zebra that we've recently updated. We are diversified from a customer base, region and industry perspective, with approximately half of our sales in North America. We're capitalizing on growth opportunities around the globe and across multiple industries, serving greater than 80% of the Fortune 500 in a number of vertical end markets, which I'll elaborate on in a moment. The Enterprise Visibility & Mobility, our EVM segment, was established when we acquired the Enterprise business from Motorola Solutions in 2014, which broadened our capabilities, drove go-to-market synergies and elevated our positioning with customers from a strategic perspective. As I mentioned, Zebra is the leader in our core market of enterprise mobile computing, data capture and thermal barcode printing. These categories currently account for the vast majority of our sales volume today. Over the past several years, we've entered new exciting markets that advance Zebra as a solutions provider, which I'll expand on in a minute. A network of more than 10,000 global channel partners help bring our solutions to thousands of customers of all sizes, expanding our global reach and scale. Our broad and innovative portfolio is supported by approximately 6,000 patents, and we've been reinvesting approximately 10% of sales back into research and development. Our nearly 10,000 employees are critical for our innovation and are our most important asset in driving innovation. A bit of a drill down on our financial segments shown here. Zebra has a 1 -- has top market share positions in our core categories that I just mentioned. These categories currently account for the majority of our sales. We also provide support services for all of our devices and supplies for our printers as well as temperature monitoring labels. We expect to continue to expand our market leadership through continued innovation and evolution of our core portfolio to meet the evolving customer demands. Software solutions, which are becoming a larger part of our offering, and I will elaborate more on this and entry into other markets in a moment. Overall, our offerings are synergistic in helping to address our customers' operational needs. Also, Zebra is proud to have achieved the visionary status from Gartner's Magic Quadrant, which recognizes our unique and differentiated approach to the market. Turning to our value proposition. We are capitalizing on key trends in mobility, cloud computing and the proliferation of smart tools. Our vision and aspiration is to enable every asset and frontline worker to be visible, connected and fully utilized. It's -- this vision provides a digital view of the entire enterprise, digitizing and automating operations, and is inherent in everything we do. Our devices and intelligent infrastructures sense information about the assets, products and processes. This information, including identity, status and location, is then analyzed to provide actionable insights to frontline employees in real time to reduce friction in workflows, improved productivity and enable greater insight into business operations. Our strategy focuses on actions and outcomes that can be optimized by knowing and analyzing what's happening on a real-time basis, adding a performance edge to frontline employees. Our purpose-built products include a software layer, which make them easy to integrate and intuitive to manage. Additionally, our new software applications and tools improve automated data collection and analysis, maximize device security and enhance ease of use. An integral part of our solutions ecosystem is Savanna, which we call our cloud data platform that powers our intelligent solutions with real-time data and is the enabler of a wide range of our data-rich offerings. Regarding the end markets we serve, we're a trusted strategic partner to industry leaders. In retail, the continued growth of omnichannel is straining retailers' resources, investment in technology and automation is necessary for transformation. In the store, expanding buy online, pick up in store or other iterations of omnichannel as well as delivery use cases require equipping more associates with enterprise mobile computers. Additionally, prescriptive analytics and task management solutions further optimize workflows. In transportation, logistics, solid growth is really the outcome of customers prioritizing their investment in our solutions. Increased e-commerce volumes has been a key driver of customer investment, we enable last-mile fulfillment, which is increasingly important as customers expect faster and faster deliveries. As for manufacturing, prospects for this end market are brighter than ever, opportunities to increase automation in workflows, including with wearable technology, including heads-up display, robotics, et cetera. Track and trace from production through the supply chain is increasingly important as well. We're excited about the opportunities as well for machine vision solutions through our new offerings, and -- which is helped by the recent Matrox acquisition. In healthcare, our purpose-built solutions are critical to improving the patient journey and productivity of healthcare providers. We enhance caregiving to better address patient demands and accomplish this by automating workflows. So we're connecting assets, patients and staff, is the key to accomplishing this. Opportunities include tablets for telehealth and locationing of equipment and supplies. We also have a significant presence in government, public safety and education and hospitality markets. Earlier this year, we raised our long-term organic sales growth expectations to 5% to 7%, up from 4% to 5% previously, and provided a refreshed view of our $30 billion served market, which you see on the screen. These expectations are supported by mega trends, including the on-demand economy, asset visibility and mobility, cloud computing and intelligent automation. These trends have become increasingly important to our Enterprise customers and are now a higher priority as labor shortages and cost inflation continue to bring more challenges for our customers. We expect broad-based growth across all solution offerings, regions and vertical end markets, given the need to digitize and automate operations. We have a vibrant core market, augmented with exciting, attractive synergistic solutions in our adjacencies and expansion markets. Our commitment to these expansion areas as evidenced by our recent acquisition of Fetch Robotics, Antuit, as well as Matrox Imaging, which we just closed last week. A bit of a drill down on that most recent acquisition in terms of machine vision, Matrox Imaging is a recognized leader in machine vision, significantly expanding our portfolio. The acquisition enables us to create a comprehensive portfolio of fixed industrial scanning and machine vision solutions, building on our smart camera product launch last year, and augmenting our growing expertise in software and deep learning. Matrox brings a complementary offering of products and solutions, including advanced smart cameras, vision controllers and 3D sensors as well as one of the most sophisticated software imaging libraries in the market. These solutions capture, inspect, assess and record data from industrial systems and factory automation, electronics, pharmaceuticals and semiconductor industries. Customers benefit from increased productivity and improved product quality. Zebra has become even better positioned to serve our customers' increasingly complex needs, regardless of where they are in their automation journey. In terms of our historical growth profitability over the last few years, we've realized solid growth, averaging approximately 9% [ organic ] sales growth over the past few years. Results have been a bit uneven over the past few years as we've worked through the pandemic. After a challenging 2020 as certain small customers pause spending, we rebounded nicely in 2021 through pent-up demand. This year, growth has been closer to our long-term organic sales growth target despite supply chain constraints that we've been navigating. We've been enhancing the profitability and cash flow profile of Zebra. However, recent progress has been masked by significant and largely transitory premium supply chain costs that were close to a 5 percentage point margin impact or headwind in Q1. Looking back to the peak of the pandemic in 2020, we drove strong free cash flow due to our flexible, capital-light cost structure and quick actions to cut discretionary expenses. Importantly, we did not cut any organic investment in innovation, and we are in excellent competitive position today because of it. As we look past supply chain challenges, we believe our business can drive sustainable profitable growth, including double-digit EPS growth through all of our levers. Now turning to ESG. It's foundational to Zebra's business model to ensure that it's sustainable. Regardless of how Zebra's areas of strategic focus may shift, we need to focus on our foundational priorities consistently of human capital management, resource conservation and climate, which I drill down a bit on the next slide regarding our priorities. As a responsible corporate citizen, Zebra is committed to sustainable business that will benefit all stakeholders. Our entire Board of Directors oversees our progress. We're focused on advancing our efforts across these 3 priorities of human capital management, climate, resource conservation, with objectives that align with our business model and strategy. We've been making a lot of progress recently, facilitated by our cross-functional Sustainability Council, which has top executive sponsorship. Regarding human capital management, it's Zebra's most important asset to drive innovation, as I mentioned. Employees are our #1 resource. That's why cultivating a high-performance culture that's inclusive and diverse to make Zebra an employer of choice in the battle for talent is critical. We've been recognized with some reputable awards from Newsweek, Forbes and others, as we show on the slide. We're fostering a culture of inclusion and diversity. We set goals to drive increased representation of women and ethnic racial minority groups at all levels through external partnership and internal development. We have employee-led inclusion networks and are expanding our allyship and inclusive behaviors, supporting our community through supplier diversity. And we're focused on philanthropy and volunteerism in a focused way. Climate initiatives include energy management reduction in partnership with the U.S. Department of Energy. We've submitted science-based targets for carbon reduction across our operations and the broader supply chain. We have significantly enhanced our reporting on Scope 1, 2 and 3 carbon emissions. And we have identified climate-related opportunities and risks, which we also highlight on our website. We have significantly enhanced our reporting and -- regarding resource conservation, the green product -- our Green Product Council internally, employee-led effort, drive sustainable products and packaging initiatives. One example, the output is, we launched an eco-friendly label printer for the small office, home office market last year. And we're focusing on reducing e-waste and packaging with the design for sustainability. Zebra's Circular Economy Program was named 2021 Sustainability Service of the Year Award winner by the Business Intelligence Group. And let's -- we're wrapping up on customer benefits of our solutions from an ESG perspective. We digitize and automate workflows, which has a variety of critical benefits supporting ESG and sustainability more broadly for our customers. Our solutions drive efficient operations and productivity gains with the added benefit of enabling carbon reduction. We also address labor shortages in operations. Our solutions improve quality and reduce waste. Examples are supply chain demand sensing through artificial intelligence, product inspection through machine vision for quality, our time temperature labels help ensure vaccine and medication efficacy. We encourage our teams to find new and innovative ways to help meet our customer needs by offering eco-friendly solutions where we can. These include circular economy, refurbished product sales and rentals to maximize product life cycle, recycled packaging and product inputs, compostable label printer cartridges that I mentioned and product power management, which can help minimize the carbon footprint of our products in our supply chain. Safety examples include supply chain integrity, quality medicine administration with accuracy, even NFL player safety. From a security perspective, we're -- we help ensure secure data transmission through smart software, and track and trace improves compliance. We're empowering workers with real-time analytics to serve customers and drive value. We also automate repetitive and unsafe task for workers, improving the experience. So this is not a comprehensive list, and we work closely with customers to meet their evolving needs. So for those of you I'm not meeting with today, I'd love to talk to you in more detail about Zebra. So have a great day.

Time for questions.

A couple of questions. Firstly, you mentioned about a significant impact to your margins from these unprecedented supply chain costs in Q1. Looking at the Q2, it appears that the margin hit in Q2 year-on-year should be quite a bit less, about 260 basis points, I think, you guided to. But given inflationary pressures have probably got worse, supply chain pressures have got worse, how do you balance the kind of short-term issues of that -- of those cost impacts? And how long do you think they're going to last for until we start to get some relief from that? And the second question I want to ask you is, obviously, we've had some -- your biggest vertical, I believe, is still to the retail chain. And we've had a few companies, rather large, won't name them, but company A, company W, company T have all kind of guided pretty poor Q2 and big impacts, based on things like demand, overcapacity of warehouses or the wrong kind of inventory of goods. So again, could you just help sort of [ mile ] up with the opportunities that presents you in terms of inventory management for those customers? Also, are you not already helping them with that management? Or has there been such a quick change in those demand dynamics that no software solution can help them overcome those issues?

Yes. So let me start with the last question first, regarding how we're addressing the needs of retailers and e-tailers, which is a primary vertical, as I highlighted. So they're generally -- we have a broad and deep portfolio, where we are able to provide tailored solutions to solve problems, solve the issues of our customers, including for retailers. So I'd say, three of the major issues that they're dealing with and confronting, that they're trying to solve are improving productivity. So enhancing productivity and efficiency in their operations. Also inventory accuracy and tracking is another key area. And then customer service, which kind of overlaps with the employee experience as well. So they're trying to address all those areas. We help to solve those challenges we have for a long time. And through our evolving portfolio, we're able to meet more and more of their needs. Now, if you think about challenge being labor constraints, as I referred to, there's a limited labor pool out there. So in order to meet the increasing demands that they have on them, right? Everything is faster -- increasing faster delivery times, increased needs for omnichannel, they're making promises to their customers that they haven't made before. And the only way to improve their operational effectiveness is to invest in solutions such as Zebra to help them get to that next level. And we basically were partnering with them, essentially, to advance their -- advance their broader strategies. So -- and I would say -- I don't want to talk about any one customer in particular, but I'd say there's just -- there's a broader theme where our customers are generally not satisfied with their levels on all the fronts that I mentioned, right? There's plenty of room for improvement to get better, and we want to help them get there, and it's a journey. So our solutions generally evolve over the years, a very sticky relationship, and that's because we're a strategic provider to them with top-to-top discussions on that front. So everybody is at a different point in their journey. But I'd say, the overall trends and theme is more technology in the operation. Some are -- some are leaders in the space, some are not. Some are catching up, and we're helping all of them. Maybe just briefly on -- so the supply chain challenge has kind of been well documented in terms of the discussions we've had. The challenges on that front, which are not unique to us, we've been discussing it at plenty of conferences and stuff. And what we are -- I guess, we're not able to satisfy all the demand we have today, unfortunately, with the product supply constraints we have. We're doing everything we can. We're pulling a number of levers to do that, through product redesigns, negotiating longer-term agreements with certain suppliers. But you mentioned kind of Q1 being particularly challenged, which we had signaled earlier this year, particularly in printing, where we had double-digit sales decline due to the supply chain constraints. Some of the actions that we've been taking throughout last year, in terms of what I mentioned, some of those solutions that I mentioned, are to try to address or mitigate the challenges, have started to take a hold earlier this year. As we've had higher demand than what we had anticipated through last year, that made it even more challenging for our supply chain and to meet the needs. So we're working closely with our customers to meet their most pressing needs and balancing that in the best way that we can. But again, this has -- this has taken some time, and we will continue to be navigating through it this year, assuming steady improvement. And we're working through it. The team is pulling all levers. Yes, sir.

So I just wanted to ask on your acquisition strategy. [indiscernible] AMR business, machine vision business. These are quite competitive areas, and lots of players are trying to attract the talent. What does those acquisitions -- those businesses being part of Zebra Technologies, what makes -- what is big part Zebra Technologies bring to those businesses to make them more competitive? What kind of business [ amount ] you get? And do you have ROI targets because you say AMR, machine vision, these are very [ different ] areas. So what [ if we put them ] together?

Yes. So those are two of the spaces that we identified in the slide I presented, regarding the expansion market categories, which are quite attractive. So we view these areas you had mentioned, AMRs, machine vision, as extension of our current operations, our offering, where we have a right to play, and that advance our Enterprise Asset Intelligence vision. So that's really the first gating factor or screen, is regarding where -- do we have a right to play there? And does it advance our vision? Do our customers view us as a good enabler of those solutions? And we've talked about -- for AMRs or maybe more broadly, intelligent automation, we see autonomous mobile robots in the warehouse playing a very key role there, where you have the robot that's doing flexible conveyance in the warehouse and interacting with the worker in the warehouse, who is typically doing the pick. So it's a technology-equipped worker with our technology. And then the AMRs are typically doing the conveyance or runs. And that's an optimal solution. We believe, that's most efficient. And we can implement that with fairly fast payback and higher return on investment for our customers, enabling them to increase their productivity and efficiency in their existing operations. So that's something we've been -- a space we've been doubling down on. We acquired Fetch after having a venture investment in them. And we really could not get full benefits or synergies with that solution without acquiring them and fully integrating that orchestrating of the technology-equipped worker and the robotic in the environment over the cloud. Machine vision. That's another one that's kind of evolved from fixed industrial scanning and then through the spectrum of machine vision, getting a lot more capabilities, gaining a lot more capabilities in advanced machine vision with the acquisition of Matrox. A perfectly complementary acquisition of -- or add to our organic efforts that we started last year, more so on smart cameras, with a fixed industrial scanning focus. So Matrox did not offer the fixed industrial scanning. We do that together. We have a comprehensive offering, very compelling. We've recruited over 100 channel partners over the past year or so to help to help drive and scale that offering for Zebra. We go direct as well. And we have a full comprehensive solution that we're very excited about. So we think the prospects are bright for these higher-growth, higher-margin opportunities that should elevate the profile of Zebra over time. Looks like we're at time. Thank you, everybody, for your interest.