Zebra Technologies Corporation (ZBRA) Earnings Call Transcript & Summary

Good morning. My name is Paul Chung, and thank you for joining this morning session. I'm pleased to have with me Bill Burns and Nathan Winters, CEO and CFO of Zebra. Welcome.

Thank you. .

Thank you.

So just to get us started, can you, Bill, maybe provide a kind of brief overview of the business?

Yes, sure. Zebra empowers organizations through our vision of Enterprise Asset Intelligence, which really means giving a digital voice to assets and frontline workers ultimately to provide ability connectivity and then ultimately take the next best action within our customers' businesses. So in that case, it's really about -- you see us in everyday life, you see us in front-of-store checkout with scanning, you see us with package delivery, mobile devices in the hands of packages that get delivered to your home, e-commerce picking, hospital wrist bands or scanning or labels inside hospitals. So in everyday life, you see Zebra is mission-critical to our customers. We've entered some new areas most recently around robotics and e-commerce picking along with mobile devices and robots working together. Machine vision and fixed industrial scanning is a new market that we entered. And then retail software leveraging those mobile devices I mentioned before inside retail environments to engage associates around things like task management, workforce management, collaboration and others. So today, our primary businesses are mobile devices, mobile computers as we call them, scanners, printers, and then these 3 new areas, adjacencies such as tablet, RFID, new areas we're invested in. So ultimately make supply chain smarter and give visibility to them. We make retail associates more engaged and we allow for ease of picking and warehouse and automation in manufacturing antenna.

Great. Thanks for that. So let's talk about what has happened in the past couple of years, so expand on the business and the step-up of revenues during the pandemic. What kind of drove demand then? And maybe talk about the USPS contract and some of those larger deals that came about?

Yes, I'd say that during the pandemic, the trends that we've seen prior to the pandemic to digitize and automate customers' environment. So ultimately, some customers accelerated their investments. So they were well on that journey of e-commerce or buy online, pick up in store, omnichannel as we call it within retail. And those that were head on that journey continued to invest during the pandemic. The customers that were further behind invested significantly during that time frame. Those secular trends continue. I would say, the challenge today is really around visibility and retail overall has been pulling back on spending, especially CapEx on large orders has been the challenge that we've seen most recently. In first quarter or other vertical markets, transportation, logistics, manufacturing, health care, all grew in first quarter. But clearly, retail has been challenging. Our large orders have been the biggest challenge most recently. So I think while customers absolutely believe they need to continue to address the labor challenges through technology, they need to continue to invest in technology in their business, they need to serve their customers better through technology. They're making tough decisions in the short term about their business, which is creating challenges around visibility for us, and we guided that in second quarter and full year because of that lack of visibility. I think it's really around large orders. Our smaller orders were continuing to grow in the first quarter. We saw towards the end of Q1, those begin to moderate as well. So it's all really about the macro environment. The trends that we saw through the pandemic continue, people spend more money during that to invest in technology. And now they're holding back based on concerns around macro. And we feel strong about our business. So ultimately, we've been able to continue to maintain or take share across each one of our market segments. We believe we're making the right investments in the right technology areas. We saw places where we were challenged around supply chain, customer loyalty and those customers come back and buy from Zebra. So we feel good about the business overall. But in the short term, we're clearly feeling the challenges around visibility within the macro environment.

Got it. And then as we look beyond kind of '23, you did kind of step up your top line guidance to that 5 to 7-point mark. Is this going to be mostly organic beyond '23? And can we get back into those ridges pretty quickly?

Yes. We updated our long-term guidance to 5% to 7% over a cycle. And we still believe in that range once we get out of the current economic cycle. And as Bill mentioned, if you look at the markets we serve, whether that's the regions, the verticals, it's a $30 billion market for us across -- whether it's our core businesses, adjacent and expansion. And as Bill mentioned, we're excited about the long-term prospects of each of those. And even in some of the markets where we have a higher market share, we still believe there's segments within the market where we're underpenetrated and have an opportunity to grow our market share even as those -- each of those markets continue to expand within themselves. So again, we're still billing out long-term guide, and we'll get back there once we get through the current economic state.

Got it. And then let's jump right into AIT. So it's performed very well in the past 2 years and even into 1Q. So can you talk about the trends you're seeing in that business?

Yes. I mean, AIT includes our printing portfolio, our supplies portfolio and then some of our services portfolio tied to that. From a print perspective, we think of printing is really the first place where you give something a digital voice, right? You print a barcode, you print a label that ultimately has an RFID tag embedded in it. That really is the start of a digital journey for an asset within retail or transportation, logistics, manufacturing is we see. So we continue to see growth across our printing portfolio. We see that growing 4% to 5% in the -- once we're through the macroeconomic cycle we're in today, as Nate talked about, the 5% to 7% overall. I think that our printing business has benefited from the acquisition, the Enterprise acquisition. So marrying or scanning and mobile computing portfolio, the print has allowed us to take about 10 points of share over the time frame. In printing, we continue to see loyalty, as I said before, from our customers. So we saw a strong Q1 on the backs of a year ago challenging environment around parts and being able to supply printers, but we've seen our customers come back and just continue to maintain or grow share within that market. Whole range of printing portfolio all the way from tabletop to desktop, to mobile, to RFID printers and we continue to be the leader in that space, and we feel good about that business longer term.

And then talk about the relative strength across some of your verticals like retail, logistics and then maybe across regions as well in AIT?

Yes. I would say that from an AIT perspective, North America and EMEA remains strong, but I think across the portfolio, as I said, we had an easier compare in the first quarter which challenges the supply chain last year. I would say that mobile computing is probably the most impacted by vertical in retail overall, I would say, compared to print or scanning. But again, print and scan had some other supply chain challenges in the first half of last year. So I think that overall from a vertical segment generically, not just AIT, as I said earlier, retail down in first quarter, but the other vertical segments, T&L manufacturing, healthcare were all up across the portfolio. So we feel good about that. I think that ultimately, we're still seeing the weighing of large deals across the portfolio, which really tied more to mobile computing than AIT. The run rate business has continued to be strong in the first quarter, it started to moderate towards the end of first quarter. We're seeing that moderation continue, which put some challenges on our distribution right from a -- we sell through teacher distribution. In that case, when the end markets slow, our distributors pull back a little bit or to pull back on inventory from their side. So we typically see kind of oversized pullback and then they begin to buy again as they get their inventory kind of rightsized for the demand they're seeing.

Right. So you talked about the run rate for AIT has stepped up to that $1.4 billion to $1.7 billion today. As we move through this year, how do we think about that pace for that business? And any kind of key indicators you look for?

Yes. I mean I think we look at a lot of different macro indicators across the business. IT device spending. We look at spending across CapEx, across our customer base. We look at new technology inflections like RFID that's driving our operating printer business. So there's several areas we look for. And there's no reason for us to believe that we don't continue to maintain or grow share within our printing portfolio. Our supplies are a great recurring revenue stream and attached to our printing business. So we feel good about that. And the 4% to 5% growth rate and an opportunity to continue to take share or to enter underserved markets, as Nate said, there's still opportunities for us. We're not -- we're #1 in the marketplace, but we're not #1 everywhere, and we don't have the same exact share across all the geographies or across all the vertical markets. So that creates an opportunity for the entire portfolio.

If you look within the portfolio, there's the Temptime business, which we acquired in 2019 that does time temperature monitoring. So they can monitor has a drug been outside of its stated range of temperature for a period of time and now looking to embed that technology within our core supplies, whether that's RFID. And we're also seeing a ton of operational synergies. It's now the headquarters are COE for our North America supplies business. So both from an R&D perspective, we're still excited about the future as well as we've been able to generate synergies with that acquisition a few years ago. .

Cool. So let's jump in to EVM. So '21 was a very, very strong year. You're seeing some retracement back here and run rate in '23. So what's going on in this business?

Yes, I'd say that the EVM portfolio includes our scanning and mobile computing portfolio and then the services associated with it, includes our tablet though in the new areas we're investing in. I think we're seeing overall is the biggest challenge is clearly retail, as I mentioned before. And it's really around larger orders or customers. They're still continuing to buy new product. But the large projects we're seeing in new customer environment. And I think the sales teams have had challenges around really visibility of those projects with our customers. So those projects continue to move out in time is the real challenge. We haven't seen customers cancel orders, and they continue to move ahead and complete those orders. You saw Lowe's, despite their challenging environment, they had a rollout plan and they completed that rollout in first quarter. Right now, they're seeing challenging top line, which means they'll likely pull back on CapEx, but they moved ahead and finished that project as they took their earnings yesterday. So once somebody starts a project, they continue that rollout and then they continue to buy after that. But what we've seen is projects being really moved out in time. And then the visibility of when that happens really comes down to our customers making tough economic decisions around their business and saying, "Hey, I've just got to pull back in CapEx. My top line is what I think it's going to be, I'm concerned about the macroeconomic environment weight on that project." That project will come back, and the timing of that is the challenge that we've seen. So I'd say retail is the biggest challenge in our mobile device portfolio today. Our scanning run rate business continues to be strong. As I said, through Q1, we saw -- at the end of Q1, just like our printing portfolio, that moderation continues in Q2. But again, the strength of the core portfolio overall grows to 4% to 5% moving forward. And we feel good about the portfolio we have. We feel good about the share we have. We see it in our competitors' results, ultimately, we're doing better to them. And we see it in the share opportunities, share distributor wallet. So we feel good about our competitive position. It's all about macro.

Okay. Great. So RFID, you called out for relative strength. How large is that contribution today, kind of the margin profile and expectations for that business?

I would say RFID today is low single digits revenue for us, but an exciting market. We're seeing RFID move from retail into the entire supply chain and backing up into all the way to manufacturing. So the idea of having more visibility across supply chains is driving RFID opportunity. We've recently had our largest win ever in RFID really a transportation logistics provider that's going to track every package with an RFID label through their system to get the right package on the right truck for delivery to their end customers. So we're seeing it move -- RFID move retail into supply chain, into specific areas of transportation logistics. We're seeing it in things like quick-serve restaurants that. It's all about labor savings. It's all about automatic reads. There's a place for both barcode reading and RFID tagging go together. You still can't eliminate the barcode. You still need the barcode reading on eaches, so you still need it because of the RFID tag, there's not enough RFID readers everywhere, so we get that question a lot. But the idea of RFID, we're the leader in RFID readers today, readers and printers across the portfolio. And we feel good about the growth of that segment. It grows faster than our core markets. That's one of the reasons why you hear us talk about our core markets of 4% to 5%. But then overall, the growth rate of 5% to 7% is areas like tablets and RFID by optic scanning grow faster than our core.

Right. So you mentioned some key partners you're leveraging, but why hasn't RFID kind of taken off more so in your mind, I mean, tags have gotten so economical now?

I think that's one of the reasons why you're seeing that RFID continues to be more use cases. Tags have not only come down in price, but also have become more sophisticated, where you can use tags on more items than you could in the past. The reads are better, so more accuracy when reading those. I think that you're also seeing -- we partner -- we have a lot of partners in RFID space across the different vertical markets we serve. And we have a lot of independent software vendors that we work with as well to develop software applications for those. So the inside of quick-serve restaurants, for instance, someone may develop the software to go along with that counting when items come into the back of a quick-serve restaurant. Without that software to enable it, it's an interesting idea, but you really need to be able to track and ultimately have software to support the application of RFID. So I think that we're seeing the use of tags not only in price but also in the idea of how you can use tags today and read rates become more accurate. I think you're seeing more of a need for visibility across the supply chain. And I think you're seeing the adoption of more software vendors writing more code to have applications around it, which is enabling the use cases within our customer environments.

Got it. So how do we think about kind of some of the recurring aspects of your business? You mentioned software. You have supplies and the hardware piece as well. But how do we think about some of the recurring types?

Yes. If you look at the makeup of the portfolio, service and software represents mid-teens percent of the business, about 15% of the company. Within that, software is low to mid-single-digit percent of the portfolio, which has a recurring nature both in our software contract -- or service contracts as well as the -- or a as-a-service offerings. Supplies, which is, again, recurring like. So once you're designed in, once you win that business, it's a recurring revenue stream. It's about 10% of the portfolio. And then our hardware side, we have a few instances where we have a recurring billing model, but that's a more of a one-off. But again, it has a similar sense of -- there's a replacement cycle for each one of our products that varies based on the product type and use case from several years to a printer in the right environment can last 10 years plus. So it quite depends on the use case and environment where the product set in the portfolio.

Got it. Let's jump to Matrox Imaging. So how is that business now grown? Now that you guys have acquired that business, how successful are some of the cross-selling opportunities have been for that business? And how are you kind of leveraging your distribution channel for that part of the business?

Yes, I'd say beyond our mobile computing, scanning and print portfolios and RFID where we're the leaders, tablets, where we leave in the portfolio. There's 3 new investment areas that I talked about earlier, some machine vision, fixed industrial scanning, retail software, leveraging those mobile devices in hands of retailers and then ultimately, and then robotics, cobots working with humans in applications like good transport or material movement. So in machine vision and fixed industrial scanning, we did 2 acquisitions in this space as well as in organic investment. So adapt the vision and then in our Matrox acquisitions married on top of our organic investment in fixed industrial scanning. So think of -- fixed industrial scanning market really more focused on T&L. So think of conveyance of fast barcode reading inside transportation logistics and then think of machine vision more focused on the manufacturing area. We feel good about both those acquisitions, Adaptive Vision being a smaller acquisition in the software space. And then Matrox being at the very high end of the market to marry with our portfolio of fixed industrial scanning that we developed out of our scanning team at the lower end of the market, so they kind of converge together. So that acquisition gave us a full portfolio of products across fixed industrial scanning, smart cameras all the way to the very high end of vision systems. It's gone well so far. We're happy with the results we're seeing. We're diversifying that business in some areas. So being a private business, they only made so much investment in go-to-market. So we are leveraging our go-to-market teams around the world and the relationships we have within transportation, logistics and manufacturing. It may not be the exact same persona or the exact same buyer, but we have relationships with those customers today. So we're leveraging that across the portfolio. We're building more channel partners. So we're using a channel partner strategy where we go to, just like we do in our core business, some customers we sell to direct, many we sell through channel partners, and we've got a channel partner program associated with machine vision and fixed industrial scanning as well. So we've been able to sign up a lot of partners today. The feedback early on was, okay, Zebra, your organic investment doesn't quite give me everything I need. It's more in the low end of the portfolio of fixed industrial scanning and smart cameras. I really like to see and partner with somebody with a wider portfolio. That's why those acquisitions made sense. So we're excited about 1 of these -- this is 1 of the 3 expansion areas, robotics, this and retail software that -- we're excited about that marries closely to the -- our core portfolio closely adjacent in those areas, and we can leverage those channel partners and customers that we have today.

Yes. If you could just expand on the robotics of Fetch which is also a big acquisition. And then talk about your philosophy of kind of being the one-stop shop for all your needs for automation?

Yes. I mean I think the Fetch acquisition. What we liked about Fetch was the idea that they've got Fetch core software and think of it as software that controls a series of different robots and different applications. So think of material movement on line sight replenishment inside manufacturing or moving pallets from one location to another or e-commerce picking or fulfillment where you're picking to robots each items within an environment. And we believe, ultimately, customers want a single robotic control system to control multiple different types of robots within their environment as opposed to a point solution. So goods transport was the main focus area for both pallet and smaller goods within Fetch's primary focus area. Fulfillment was an application they're building out, and we're still building that out fulfillment application out. And we're seeing early traction in that. It's a small business today. It's a fast-growing market. We can leverage the mobile devices that are used inside the picking environment today or manufacturing environment today in wearables and others to work robots and humans work together. So that's why we're excited about that. We're leveraging our entire portfolio, as you saw in some of the latest trade shows around ProMat and others, where we're leveraging the fixed industrial scanning and machine vision portfolio, along with robotics together to create solutions for our customers or provide those solutions to our partners that are creating those end-to-end solutions like conveyance and others. So we think that, again, the relationships that we have across T&O, manufacturing, e-commerce today, we can leverage those with both robotics as well as machine vision and fixed industrial scanning. Same goes inside retail. Those relationships we have with retailers that are using our mobile devices, we can leverage those relationships to sell more retail software.