Zebra Technologies Corporation (ZBRA) Earnings Call Transcript & Summary

Good day, and welcome to the Third Quarter 2025 Zebra Technologies' Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Steele, Vice President, Investor Relations. Please go ahead.

Good morning, and welcome to Zebra's third quarter earnings conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least 1 year. Our forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially, and we refer you to the factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of the slide presentation and in today's earnings press release. Throughout this presentation, unless otherwise indicated, our references to sales performance are year-on-year on a constant currency basis and exclude results from recently acquired businesses for 12 months. This presentation will include prepared remarks from Bill Burns, our Chief Executive Officer; and Nathan Winters, our Chief Financial Officer. Bill will begin with a discussion of our third quarter results. Nathan will then provide additional detail and discuss our outlook. Bill will conclude with progress on advancing our strategic priorities. Following the prepared remarks, Bill and Nathan will take your questions. Now let's turn to Slide 4 as I hand it over to Bill.

Thank you, Mike. Good morning and thank you for joining us. Our team executed well in the third quarter, delivering results above our outlook driven by solid demand, lower-than-expected tariffs and strong operating expense leverage. For the quarter, we realized sales of $1.3 billion, a 5% increase from the prior year, and adjusted EBITDA margin of 21.6%, a 20 basis point improvement, and non-GAAP diluted earnings per share of $3.88 which was 11% higher than the prior year. We realized solid growth in our Asia Pacific, Latin America and North America regions and had relative outperformance in printing, mobile computing and RFID. Our retail and e-commerce end market was a bright spot. Health care cycled a strong compare and manufacturing remained relatively soft. We achieved double-digit earnings growth by driving operational efficiencies as we continue to invest in our leading portfolio of solutions. While we see growth across most of our business, our customers continue to navigate in uncertain macro environment resulting in uneven demand across some geographies and vertical markets. As we look at our broader business prospects, we're excited about our profitable growth opportunities, including our recent acquisition of Elo Touch Solutions, which enables us to accelerate our vision for the Connected Frontline. Our strong balance sheet and free cash flow profile also enables us to commit $500 million to share repurchases over the next 12 months as we drive long-term value for our shareholders. I will now turn the call over to Nathan to review our Q3 financial results and Q4 outlook.

Thank you, Bill. Let's start with the P&L on Slide 6. In Q3, total company sales increased approximately 5% with growth across most product categories and services and software recurring revenue business grew modestly in the quarter. Our Enterprise Visibility & Mobility segment grew 2% led by mobile computing, and our Asset Intelligence & Tracking segment grew 11% led by RFID and printing. As we disclosed in our earnings press release this morning, please note that effective in the fourth quarter we will be reporting under 2 new segments, Connected Frontline and Asset Visibility & Automation. Bill will cover how this view aligns to our strategy and how we manage the business. Historical results have been recast in the appendix. We realized strong sales growth across most our regions. In North America, sales grew 6% with double-digit growth in mobile computing and RFID offsetting weakness in Canada. Asia Pacific sales increased 23% led by Australia, New Zealand and India. Sales increased 8% in Latin America with broad-based growth across the region. In EMEA, sales declined 3%. Regional performance was mixed with softness in Germany balanced with relative strength in Northern Europe. Adjusted gross margin declined 90 basis points to 48.2% primarily due to higher U.S. import tariffs. Adjusted operating expenses as a percent of sales improved by 110 basis points. This resulted in second quarter adjusted EBITDA margin of 21.6%, a 20 basis point year-on-year improvement. Non-GAAP diluted earnings per share were $3.88, an 11% year-over-year increase and above the high end of our outlook. Turning now to the balance sheet and cash flow on Slide 7. Year-to-date, we generated $504 million of free cash flow. As of the end of Q3, we held more than $1 billion of cash with a modest debt leverage ratio of 1 and $1.5 billion credit capacity. We have been deploying capital consistent with our allocation priorities. Through October year-to-date, we have repurchased more than $300 million of stock and acquired 3D machine vision company, Photoneo and Elo Touch Solutions, with cash on hand and our existing credit facility. We continue to maintain excellent financial flexibility for investment in the business and return of capital to shareholders. And as Bill highlighted, we are planning $500 million of share repurchases through the third quarter of 2026. On Slide 8, we provide an update on the anticipated impact from tariffs on our products imported to the United States and our progress on mitigation. For the full year 2025, we're now assuming approximately $24 million gross profit impact after mitigation, with a $6 million net impact expected in Q4, which is an improvement from our prior guide. Our forecast assumes the current effective rates and exemptions remain in place. We have a track record of successfully navigating supply chain challenges including tariffs, and expect to substantially mitigate the current U.S. import tariffs entering 2026 as a result of actions taken by our team, including previously announced pricing adjustments yielding about 1 point of sales growth, reducing U.S. imports from China to less than 20%, rationalizing our product portfolio and strong progress on driving overall supply chain efficiency and resilience. Let's now turn to our outlook. We anticipate between 8% and 11% sales growth in the fourth quarter, including approximately 850 basis points of contribution from our Elo and Photoneo acquisitions and favorable FX. Our second half demand assumptions have not changed from our prior business update. Our fourth quarter adjusted EBITDA margin is expected to be approximately 22% which assumes a $6 million net impact from U.S. import tariffs and non-GAAP diluted earnings per share is expected to be in the range of $4.20 to $4.40. Our fourth quarter outlook translates to full year sales growth of approximately 8%. Our full year adjusted EBITDA margin is expected to be approximately 21.5% and non-GAAP diluted earnings per share is expected to be approximately $15.80 based on our Q4 guide, a 17% year-on-year increase. Please reference additional modeling assumptions shown on Slide 9. With that, I will turn the call back to Bill.

Thank you, Nathan. As we turn to Slide 11, Zebra remains well positioned to benefit from secular trends to digitize and automate workflows with our portfolio of innovative solutions including purpose-built hardware, software and services. Our solutions intelligently connect people, assets and data to assist our customers with business-critical decisions. I would like to spend a minute on our new reporting segments. Zebra operates in a greater than $35 billion served addressable market, encompassing the Connected Frontline and Asset Visibility & Automation. Each segment has a 5% to 7% organic growth profile over a cycle supported by megatrends including artificial intelligence, mobile and cloud computing and the on-demand economy. The Connected Frontline is about equipping the frontline of business with tools and digital touchpoints necessary to drive efficiency, optimize collaboration and improve the consumer experience. Our solutions portfolio includes enterprise mobile computing, rugged tablets, frontline software and AI agents. Our acquisition of Elo adds key capabilities in self-service and point of sale, increasing our addressable market in this segment to greater than $20 billion. Asset Visibility & Automation is primarily focused on digitizing environments and automating operations across the supply chain through advanced data capture, printing, machine vision, RFID and other solutions. These are complementary and synergistic segments that digitize and automate operations and solve our customers' biggest challenge. Turning to Slide 12. Zebra solutions enable our customers across a broad range of end markets to drive productivity and efficiency and improve service to their customers, shoppers and patients. I would like to highlight RFID, which has been a consistent bright spot in our portfolio, growing double digits over the past several years. As a market leader, we are encouraged by the continued momentum we are realizing. Our largest customers in retail and e-commerce as well as transportation, logistics and manufacturing have been expanding their adoption of Zebra's RFID solutions to additional workflows and categories due to the improved business outcomes they are achieving. Supply chain visibility, inventory accuracy, increased productivity, improved profitability and reduced waste are key outcomes that are driving increased adoption of the technology deeper into all end markets. RFID continues to be an important area of growth for us, enhancing our broader set of solutions offerings and demonstrating how our evolving portfolio enables us to solve increasingly complex challenges. Turning to Slide 13. Our industry leadership puts us in a unique position to be the supplier of choice of AI solutions for the frontline. We can deliver an entirely new experience for frontline workers through mobile computing coupled with wearable solutions and the cognitive capabilities of AI. Imagine handheld and wearable solutions that can see, hear and understand the environment while interacting with the frontline worker in a conversational way. This is the direction AI for the frontline is headed and we are starting this journey with our Zebra companion offerings. We're excited by the opportunity to transform the way work gets done as we collaborate with our strategic partners across the AI ecosystem. Last month, more than 100 senior leaders of companies representing a variety of industries attended our inaugural Frontline AI Summit. During the event, we presented our AI vision, and the benefits Zebra can bring to our customers to accelerate AI adoption and impact across their frontline operations. We have active pilots with our customers validating the benefits of our new AI solution. A specialty retailer is actively utilizing an advanced pilot of our AI companion agents to provide assistance with product recommendations resulting in better sales conversions and upsells, faster employee onboarding and an elevated shopping experience. We believe that our AI agents will be attractive to any customer who strives to improve the productivity and effectiveness of their frontline associates. A large transportation logistics company is digitizing and accelerating proof of delivery with immediate feedback and enhanced compliance powered by our on-device AI suite, a digitized environment leveraging AI is fundamental to transforming workflows across a multitude of industries. These are early examples of the significant benefits our AI solutions can deliver to our customers and elevate Zebra as a leading AI solutions provider for the frontline of business. We are looking forward to demonstrating our solutions at the National Retail Federation trade show in January. Turning to Slide 14. We are excited about the opportunity to enhance the Connected Frontline experience with our recent acquisition of Elo Touch Solutions. Our combined capabilities enable us to offer more ways to digitize operations across more touchpoints and drive increased business with our enterprise customers. Elo is a pioneer in touchscreen technology and a leading provider of point-of-sale solutions, self-serve kiosks, interactive displays and industry tailored offerings. Elo's modular solutions deliver cross-generational compatibility, and their enterprise-ready platform and software tools seamlessly integrate into customers' existing ecosystem. Together, we can deliver better customer experiences through the intersection of frontline mobility and self-serve technology. This acquisition further elevates our strategic positioning across retail, hospitality, quick-serve restaurants, health care and manufacturing through the breadth and depth of our complementary portfolio of solution. Over time, Zebra will offer a common platform across mobile and fixed digital touchpoints that improve frontline efficiency. Together with Elo, we are better positioned to deliver complete solution and leverage AI to empower associates and elevate consumer experience. In closing, our confidence in sustainable long-term growth is underpinned by several themes that drive demand for our solutions including labor and resource constraints, track and trace requirements, increased consumer expectations, advancements in artificial intelligence and the need for intelligent operations. We are well positioned to address these critical requirements in our customers' operations with our leading portfolio of solutions. As we move forward, we remain focused on advancing our industry leadership with our innovative solutions that digitize and automate our customers' workflows and driving profitable growth. I will now hand it back to Mike.

Thanks, Bill. We'll now open the call to Q&A. We'll have to 1 question and 1 follow-up to give everyone the chance to participate.

[Operator Instructions] The first question comes from Andrew Buscaglia with BNP Paribas.

Demand trend seems strong and or relatively strong in Q3 and I noticed your Q4 guidance implies organic growth, they're somewhat decelerating. I know you're facing a tough comp, but I'm wondering if you can kind of walk through what you see demand-wise and just additional commentary by end market would be helpful.

Yes. I would say that if we look at Q3, the team executed well, driving sales near the high end of our outlook and that was backed up by kind of solid demand across the business. I would say the second half is really playing out as we expected with some customers that bought products early to deliver their peak season, a bit earlier than we had originally expected. I would say that if you look across the regions, we saw solid growth across North America, Asia Pac and Latin America. If we think of the vertical markets really the quarter was led by retail and e-commerce from an end market perspective. And as we called out in Q2, weakness in EMEA continued through Q3. I would say from a product perspective, relative strength in mobile computing and printing and RFID a bright spot. But I would say overall, second half is playing out as we expected, just the timing of those orders coming a little early into Q3.

I see, helpful. And can you comment on EVM? The growth was rather modest in the quarter. What are you seeing specifically in that segment? And do we still expect that to grow exiting the year?

I would say EVM from a mobile computing perspective, we saw strong growth in Q3 with large deals in North America, Asia Pacific and Latin America continue to be positioned for long-term growth and opportunities across mobile computing including device in the hands of more associates overall, next-generation product deliverables around wearables and RFID technology. We continue as we talked about in the prepared remarks, an opportunity mid- to longer term inside AI as we see opportunities there to leverage AI in the frontline. I would say that from a data capture perspective which is also the other element of EVM, the largest -- the second largest element to that is we saw decline based on a difficult compare, I would say, across the scanning portfolio. So I think that really was the story of EVM, a combination of strong mobile computing but difficult compare from a scanning perspective, which then impacted overall EVM in Q3.

The next question comes from Piyush Avasthy with Citi.

With the understanding that you're not providing 2026 guidance, but it would be helpful if you could provide some puts and takes on the construct itself, like how different or similar can 2026 be from your long-term financial targets? I know that visibility is somewhat limited and there is still some macro uncertainty, but based on your conversation with your clients, how would you characterize the demand outlook heading into '26 across your different verticals?

I'd say today, while our customers remain cautious in the near term, and we're experiencing some uneven demand across different environments, think EMEA and then overall places like Canada. So we're seeing uneven demand manufacturing from a vertical market perspective across our different vertical markets. Our solutions basically remain fundamental to our customers, and they remain essential for digitizing and automating environments. So longer term, AI represents an opportunity to continue to advance our solutions and we're well positioned to drive sustainable, profitable growth into next year is what I'd say.

Got it. And you guys mentioned digital AI features. Again, like I understand it's like very early, but how soon can these features become a catalyst for growth for the company? I think you have talked about a refresh cycle at some point. Do you think -- do you get the sense that there is demand and appetite from your customers to invest in software, which means when the next refresh cycle comes, it translates to not only hardware upgrade but also like strong software. Any comments there?

Yes. I would say from an AI perspective, we see 2 opportunities, as you've called out. One is certainly the hardware environment with next-generation handheld devices coupled with -- we're the leader today in wearable technology inside the enterprise. So we see that playing out as the way AI is delivered to the frontline. It starts with mobile devices, and it's likely coupled with wearable technology from a hardware perspective. We're in pilot now as we talked about in our prepared remarks with our Zebra companion and our AI suite overall in different applications with customers in retail and T&L as we talked about. So that creates a software opportunity for us across our AI agents and early customer pilots or they're seeing significant value to those. I would say first revenues likely in '26 and then ramping in '27 and beyond is where we'd see is where -- want to get through the pilots, demonstrate the value to our customers ultimately and then begin to drive revenue and scale those into our customers. But the opportunity, as you said, is in 2 areas. Hardware, upgrade of those hardware, new hardware in the idea of wearable, and then ultimately in software as well.

The next question comes from Damian Karas with UBS.

I was wondering if you could maybe speak a little bit to the large project funnel, what you're seeing out there, what conversations you're having? Has there been any -- obviously, the fourth quarter, it doesn't appear you're expecting much large project activity. But just in terms of the funnel, is there any increase in customer conversations and any hope that maybe you could see some of that stuff get awarded in the fourth quarter? Or are we likely going to be waiting sometime longer?

Yes, I'd say as we've talked about, I would say the demand trajectory has remained pretty consistent with our outlook from the prior quarter. And I would say customers have generally maintained their capital spending for the most part and projects continue to move forward. I would say some have -- and I think we talked about this last quarter as well, some have spread projects and purchases over multiple quarters, again, driven by caution that still remains out there is our customers are navigating the global macro uncertainty and specifically some of the ultimate ramifications to the uncertain trade policy that's in place today. I would say this has driven, this uneven demand across some verticals and geographies, but we feel good about the business overall and continuing to extend our lead. But the demand environment hasn't changed much. I think we saw some orders earlier in the year than we anticipated. We continue to monitor our customers and, not only opportunities for year-end, but what's happening across EMEA, the tariff situation, government shutdown. So there's a lot of things happening in Q4 that we feel good about our guide being balanced for the quarter and overall.

That makes sense. And Bill, on your point about some of this pull-forward demand, in the third quarter, any particular reason why you think some orders might have come in earlier in the second half? Anything to do with tariffs or sort of price optimization on the part of your customers? Just curious why that might be.

Yes. No, I would say, again, the timing is always -- isn't always exact, right? And we anticipated Q3 we call the guide for that. We overachieved that guide really is some customers just need a product earlier to meet their peak demand. I think that's a good thing, right? We're seeing e-commerce demand, retail continue to be strong in Q3 and I think that drove some earlier orders. I wouldn't call it pull in as much as just timing of the need for the product when they would have normally ordered a bit later. They said, hey, I'd like to have this product earlier to meet the Q3 demand for peak. And I think that's the balance between Q3 and Q4 it's just played out in a timing perspective. I think the demand is as we expected. I mean I think we feel good about the year overall, we're going to deliver almost 6% organic revenue growth, 17% EPS growth. So the year is kind of playing out as we expected as well. So I think we feel good. It's just timing not really pulling as much.

The next question comes from Tommy Moll with Stephens.

For the fourth quarter, I want to unpack the assumption around budget flush. So maybe we could take it in 2 parts. Can you quantify what you're assuming for Elo from a top line perspective in Q4? And then if we back that out, what does the sequential quarter-over-quarter look like there? I think typically you see some year-end flush, but I just want to hear you talk about what you're assuming for this year.

Yes, Tommy, I'll take that. I think as Bill mentioned, we're -- I would say the first thing is holding the full year organic growth rate consistent to what we had guided back in August and we believe that provides a balanced view of the current environment that Bill had talked about relative -- and with some of the -- some of those orders being realized a bit earlier ahead of the quarter. So if you look at our Q4 guide, 9.5% growth, as we said in the prepared remarks, about 8.5 points of that is just due to the Elo as well as Photoneo and FX. Elo, we have in the guide of $100 million so in line with what we had talked about last quarter in terms of their overall revenue profile and we're getting about 1 point of price which really leaves that organic demand flat if you look at it from a year-on-year perspective. And I'd say the way to think about it is we see year-end spend just similar levels as we saw last year. If you recall, we had a nice year-end as we exited 2024 and we're seeing similar levels of spend and pipeline here as we go in towards the year-end. So that's obviously one we're playing close attention to as well as, as Bill mentioned, monitoring what's going on within Europe, the government shutdown and everything else that's going around the world. But I think that's the way to think about the Q4, which is excluding FX pricing and M&A, you really have kind of a flat demand really driven by that year-end project spend being at similar levels to last year.

I wanted to ask about RFID. You framed some of the recent success there. There's been a pretty high-profile announcement recently in the fresh category from one of the omnichannel leaders. I'm curious, are you able to comment if your business should benefit from that recent update? Or maybe if you're not, anything you can do to comment on forward visibility on RFID? Are there things in your pipeline that are continuing to suggest some of those elevated growth rates?

Yes. I'd say, Tommy, we clearly have seen strong double-digit growth rates on RFID over the past several years and we continue to see a pipeline of opportunity across the entire supply chain, whether it's across retail or now T&L continues to deploy projects across RFID, manufacturing, government. I would say in retail, we're seeing grocery, as you said, fresh opportunities. So in retail beyond general merchandise, opportunities into quick-serve restaurants, into health care. So I would say the broader track and trace across supply chains, across multiple verticals, all creates growth opportunities for us. As you know, we're the -- we have the broadest set of RFID solutions in the market today across fixed and handheld readers, across new releases, our mobile computing devices that have RFID integrated within them, our printing portfolio, the labels associated with that. So all of that allows us to continue to be excited about RFID and moving forward. And yes, I think things like fresh and grocery and others just create more and more demand for our solutions. I think the customers that have deployed solutions to date continue to see value and continue to expand the use cases that they've deployed already inside their environment. So RFID, I think, continues to be a growth driver for us moving forward.

The next question comes from Keith Housum with Northcoast Research.

Bill, just want to unpack a little bit more of your commentary regarding AI and the opportunity there, understanding that it's the long game here. It sounds like the opportunity from a hardware perspective is adding more wearable devices, but also perhaps an acceleration of the refresh cycle. I guess, one, is that true? And then second, will these devices on the AI world, will they need a more higher-end device compared to what perhaps they're using today?

Yes. So I think you hit it spot on. I think the opportunity is certainly with higher or premium devices, higher-end devices, which we'd look to drive higher ASPs and over time we would see that being a driver for the refresh cycle as new technology would be that. So think faster processor, more memory on mobile devices. We see that we're the global leader today in wearable technology for enterprise and we see there's an opportunity there as well to pair, think body cam type devices, with a mobile device, things that can sense the environment or see the environment. So be leveraging the mobile device in certain applications, but also wearable technology could be almost watch-like technology that we've released recently as well. So different form factors and wearables as we're seeing across the customer base today. So hardware clearly mobile computing and wearable and then software offerings. So I think if we kind of wind all the way back, Zebra solutions of digitizing and automate the environment become kind of fundamental for AI collecting data on the frontline that allows this sense, analyze, act, right? Sense what's happening at the point of productivity so you can analyze it with AI and take the next best action within your business. So our solutions fundamentally drive models in AI. That's what we do, provide data to get a start there, AI use throughout multiple solutions today across different applications of software, robotics, 3D quality inspection today. So traditional AI used across our portfolio, the revenue you talked about from mobile devices and wearables and then software on top of that. So think of our Zebra companions and what we're doing in our AI suite that layers on top of software offerings on the mobile device to either manage those models for our customers. So think models on the device need to be managed or think of it actually applications that Zebra provides in the idea of AI agent all create opportunities for us. And as I said, likely first revenues in '26 and scaling from there.

Great. I appreciate that detail. And just as a follow-up, retail and e-commerce probably we're on a fifth or sixth quarter at least of contributing to the growth of the company. Is there visibility to how long that's sustainable? You're looking at historical information, is it usually over the 2-year period that these things go through a refresh cycle then kind of another vertical is going to be expected to kind of take over and drive growth from there?

Yes, not necessarily. I would say that we've seen strength in retail and e-commerce, but we got to remember that e-commerce continues to grow, right? So that -- we talked about some of this product being used for peak, it really driven some of that by the e-commerce players as they continue to deploy devices to meet peak demand. I would say this whole idea of refresh cycle, everyone's on a different time frame and cycle, whether that's retail or T&L or postal or others and they're all on their own cycle. Meaning that every retailer is on a different cycle and every e-commerce -- e-commerce is more. They don't do that same type of refresh. They buy over time. But I would say T&L the same way. So I don't think it switches from one vertical to the other. I think, look, we'd like all geographies and all vertical markets to be up all at the same time. It just doesn't quite work that way. Today, we're seeing strength in retail and e-commerce. Transportation and logistics has gone to more normalized levels and we're seeing growth there. Manufacturing pretty flat, tough compare in health care. So I think that while we'd like to see everything up in the right all the time, I don't think there's a transition away from retail and e-commerce to something else. I think we'd like to see growth across all of them and there's no reason why not. But I think things like manufacturing remains pretty challenging in the short term.

The next question comes from Jamie Cook with Truist Securities.

I guess my first question, just the margin divergence between the 2 segments, Asset Intelligence & Tracking, the margins seem to be doing better this year whereas last year the 2 segments were flat. So just if you could sort of unpack that, is tariffs hitting one of those segments more than the other? And then I know you talked about being able to cover tariffs for the most part in 2026. Any nuances on how would it impact the segments? And I guess we can talk about it within the new segmentation, but any color on that for '26 as well?

Yes, Jamie, I wouldn't say there's anything specific driving the gross margin difference between the 2 verticals in terms of unique, I think just some of that is a bit of the mix within the portfolio. You see the strong growth in AIT, so you're getting nice volume leverage there across our printing portfolio. That's also where you have the RFID growth kind of coming through in terms of the higher margin profile. So I think some of it's just timing of mix between the portfolios. As Bill mentioned, data capture was down in Q3 in the EVM segment which has, again, nice operating or nice gross margin profile. So again, I think that more just mix within the portfolio quarter-to-quarter versus, let's say, a fundamental shift between the 2. Yes. And I think as we mentioned, we expect to fully mitigate tariffs as we go into next year. So you'd expect maybe a modest amount in Q1 but fully mitigated as we go into the second quarter with some additional actions the team has been working. Again, I think primarily that will be benefiting within the AIT segment. So that's, again, where we have -- across EVM, that's where we have the mobile computing exemption today. So most of that benefit you'll see in AIT as we cycle into next year with some of the additional actions, we have planned later this year and early part of next.

Okay. I guess and then just my second question just on Elo. So I think you said for the fourth quarter that contributes $100 million in revenues, which is in line with the $400 million of annual sales that you talked about when you announced the acquisition last quarter. Any thoughts? I mean, I think that's a business that you've said has grown 5% to 7% through the cycle, similar to you guys. Any thoughts on Elo as you're thinking about 2026?