Zebra Technologies Corporation (ZBRA) Earnings Call Transcript & Summary

Okay. Great. Thank you, everyone, coming to Arizona and coming to our Annual UBS Global Technology and AI Conference. My name is Zach Walljasper. I'm a part of the U.S. multi-industrial team here at UBS. I'm joined on the stage by Nathan Winters, CFO of Zebra Technologies. Only housekeeping item is I have the iPad up here, so people are allowed to put questions to the app. And then I'll try and incorporate them best I can throughout the Q&A.

So without further ado, Nathan, let's maybe get rolling. So on the last earnings call, the team talked about how demand in the second half of the year is kind of playing out as expected. Can you maybe just talk to us a little bit about what you're seeing across the end markets? And then as we like look closer to 2026, what kind of end markets could have relative strength versus relative weakness?

So as we mentioned, the second half is playing out as we expected going all the way back to what we saw in the pipeline and the opportunities in July -- the July-August time frame, modest shift somewhat between the quarters. But really, what we see is our customers who had projects in the pipeline are moving forward with those projects and executing towards that. I think what we were obviously anticipating and what we haven't seen come through fruition is an acceleration of projects. I think some of that goes back to the uncertainty in the market, what they were kind of waiting to see kind of where their customers are going to behave here for their holiday season. But outside of that, it's largely playing out. And the strengths of the business have really been consistent for the last couple of quarters. I mean North America has had a really great year with retail and e-commerce leading the charge, but we've seen good stability in growth out of T&L and manufactured has grown slightly, but lagging a little bit from a growth perspective. But North America has had a strong year. Asia Pacific has had a really great year. And a lot of that is based on the investments we made over the last several years to expand our presence in markets like Japan, Southeast Asia and India. Australia has had a really strong year. And then Latin America, Q3 was the largest quarter, Latin America's had and any quarterly revenue in the company's history. So Latin America, again, had a nice recovery throughout the year. I think the pockets of weakness have really been focused in from a regional perspective around Europe. And markets like Germany, which have been impacted from a manufacturing perspective, the retail market in France, again, which is a large market for us, has been down this year. So Europe has really been kind of from a market, the big headwind. But look, as we go into '26, we're excited about the growth profile of the company. I think there's still -- if you look at the secular trends to digitize and automate workflows and drive productivity, that's remained unchanged. I think, which is pretty consistent regardless of the market, companies need to drive productivity. And we're the solutions provider who can help them do that across different verticals and applications. So we think about areas like RFID, where we've seen double-digit growth, that continuing into next year. A lot of the aspects of our machine vision business have stabilized here in the back half, and we expect growth as we go into '26. And then the large opportunity we have around our mobile computing installed base and seeing those refresh opportunities in the pipeline are starting to become real, particularly as we look out to next year. And then what we've had on the portfolio on RFID and AI, which we can talk about later. I think just again, adds new capabilities around the portfolio that our customers are really excited about.

All right. Sounds good. So it's a good recap in terms of like end markets where we're this year, where we're going next year. But obviously, you guys aren't the only company in your industry. So maybe you can just talk about any notable elements in terms of the competitive environment, anything including your larger competitors?

There's been, I'd say, no real meaningful change in the competitive landscape over the last several years. Obviously, it varies depending on the market. which we play in. But I think our core business remains largely unchanged. And we feel really good about the competitive positioning of the portfolio. We continue to win new opportunities and take share, particularly in our core markets. And I think our vision around intelligent operations and making every workflow digitized, automated, really resonates with our customers. And if you look at the portfolio today from mobile computing to machine vision, RFID and now you embed AI, we can have a pretty broad conversation with our customers around how do we help meet their biggest challenges. The Elo acquisition adds new capabilities around that frontline consumer-facing experience, which we didn't have before. So again, no one else really has that portfolio breadth that they can drive with our largest customers.

Got it. Got it. Okay. Next question. I'll be remiss to not talk about AI, hence it being AI conference. So how is AI playing a part in the evolution of your solutions? And what is the status currently of Companion and kind of the AI suite offering?

AI is, we think about it as a real positive catalyst for growth for the business. I mean if you start with what do we do every day, it's give assets and people a digital voice. So whether that's an asset through any stage of the supply chain, a worker in terms of the task they're working on and how they're operating, collecting all that data at the edge. Feeding AI models that allow our customers to make better informed decisions around their supply chain or their workforce that's at the heart of what we do. And so we see that as a real catalyst for growth across the breadth of the portfolio. And then if you look at the companions or agents we built, these are -- again, where we have a unique position to really drive applications for frontline workers that's, quite frankly, not a focus for a lot of the other AI applications. So how do you, again, an agent that can allow a brand-new store associate to become just as well trained as a store associate with 5 years of experience. How do you quickly get the -- how do I process a return for something that was purchased online without a receipt? Without asking your supervisor or looking at a manual. A large language model can give that information back real time based on customers' SOPs or how do you provide a better consumer experience. So if you're looking for something -- and I don't know what the right answer is. I can not only ask the large -- ask the generative AI model, which you'd say anyone can do that. But mirroring that -- partnering that with the customers' information around what products do you have in stock? What's the picture of that product, so you know what you're looking for? What's the price point and where is it exactly located and it's in stock. That's kind of combining the power of generative AI with unique proprietary information for those customers and building those applications is something we're excited about. And so as we look into next year, we're doing a bunch of proof of concepts with customers around different use cases throughout the course of '25. It's commercializing those next year, and that could be in the form of a subscription model where we build, maintain the model. It could just be helping design and build and they maintain it or it could be simply those are something they want to do on their own, and we have the API back into the mobile computer. But ultimately, not only that enhancing the value of the portfolio, but they may ultimately need a new mobile computer with the latest chipset and operating system to manage those applications, which will drive a refresh or a new purchase in the future. So again, we're pretty excited about what that can mean for the company and how it can help position us with our customers.

So that's something that's a good transition. If we take a step back, the company went through a big growth phase in 2021, 2022 and now we're 3, 4 years away from that period. How should we think about the installed base and the refresh cycles that go into -- obviously, we just talked about AI as part of it. But kind of what are the product drivers, I guess, going forward?

Yes. So if you look -- going back, say, the last 5 years since 2020 has been anything but unusual usual cycle. And obviously, the -- this condensed acceleration not only refreshes but -- of technology adoption in '21 and 2022. To meet the needs of e-commerce, buy online, pickup store, which obviously benefited our business tremendously. And then like many others, a few years of absorbing that capacity that was built out and then getting back to growth over the last 12 to 18 months that we've experienced. So if you look at today, our mobile computing installed base from that point in time to today has grown 35%, which is in line with the long-term CAGR. It just all happened to happen in a 2-year time frame, but that really opens up that opportunity for a refresh. And again, every refresh for every customer is a little bit different. And even within a customer environment, they could have what's front of store, back of store, a warehouse, last mile delivery could have its own unique refresh cycle. So not every customer has this unique kind of ubiquitous refresh. And so we have that mapped out with every one of our large customers. Some of the drivers of when those refreshes are going to occur are outside of our control. Meaning, they're going through their own business challenges. They're going through their own restructuring. They have ERP upgrades that aren't going to -- you're not going to do an upgrade, why you're doing something like that? And then it's really around the value we bring to the portfolio that that's ultimately what they're looking for. So we think of things like RFID embedded on a device or as we talked about, the new AI applications and the chipsets required. Again, these are all things that, again, open up new opportunities and kind of incite the refresh and give them a reason to refresh beyond, hey, it's been a long time. So again, we think of -- we don't see it as another concentration happening where you're going to have 1 or 2 years and wait another 5, but more of a driving long-term sustained growth over the next several years, and we're excited about that opportunity.

That's great. I think you guys are doing a good job in terms of not relying on the installed base to drive growth. You guys look into RFID and machine vision as other vectors of growth. Can you tell us a little more about what you're seeing there and the ultimate journey you guys have like in those areas?

Both RFID and machine vision are incredibly important pieces of the portfolio. Starting with RFID, we have the broadest set of RFID solutions in the market. I mean we're the market leader in RFID readers. So think fixed infrastructure and mobile readers. Our printing portfolio that will print tags for our customers in multiple different environments as well as the actual tag itself. Now we don't produce the chip, we don't produce the inlay, but you're printing those and bringing them together and obviously reading them throughout the journey of the product. And it's grown double digits. That business has grown double digits for the last couple of years, and we expect that growth to continue. So it now represents mid-single digit percentage of the company. And something we're, again, excited about because it just opens up new use cases in ways companies can automate different workflows that just weren't possible previously. Whether that's trying to detect theft as items are leaving. So that you can update your perpetual inventory system real time or tracking fresh food and understanding what's fresh to limit spoilage. I mean those are just, again, new use cases that continue to emerge around the technology. And then on machine vision, we spent a lot of time building out the portfolio we have today from organic investments, acquisitions over the last several years, including the Photoneo acquisition earlier this year that brought us 3D vision capabilities. So one of the leaders around vision systems for guided robotic arms. So think of the eyes for a robot in different picking applications. So we feel really good about the portfolio we have today. Obviously, it's been challenged, like many others in the industry, Matrox had a substantial part of their business around the semiconductor industry. And we knew that it was going to go through a cyclical downturn. I'd say this one has just been a little longer and deeper than we had anticipated. As well as some of the challenges the automotive industry has gone through have been a little bit painful. But both of those, we see bottoming out and starting to see a little bit of uptick, particularly around the semiconductor space. And then the work we've done around investments in diversifying that portfolio and adding new logos into different use cases, dock door capabilities, scan tunnels and things like T&L, have been smaller and have been able to offset those headwinds. But I think we see that now as a growth vector and you get some tailwinds on kind of the core part of that business. We're pretty excited about what that can do as we go into '26 and beyond.

Nice. Maybe just stay on RFID machine vision for a second. You guys are obviously a little newer to the industry. How are you guys looking to differentiate yourselves and kind of compete and where do you kind of see yourselves adding value in the industry?

Yes. So we've really spent a lot of time on 2 areas. One, I think ease of use -- and one of the challenges with -- I think in the machine vision world is, it's one thing to have the camera and build it, but how do you -- an easily configurable back end. So that you don't need a fully trained design engineer to set it up. So how do you make it easy to set up at the front line. So a lot of work around the ease of use being able to upgrade from a fixed industrial camera to a fully functioning machine vision camera with just software. And then our software portfolio, I think, is really the crown jewel in terms of we bought a company called Adaptive Vision. Matrox brought a library to us and consolidating that library has been pretty powerful, and we've seen a lot of growth there from a software. So we feel like we have a portfolio that can compete. Photoneo gets us into 3D, which is an emerging space. And I think what the great thing about the industry is it's a big market. There's plenty of white space, meaning you don't need to win head-to-head and displace competition if they're the kind of incumbent. You can go win a new application, a new workflow in an incumbent account, and that's where the team has been focused, and there's plenty of those opportunities to go out and win. So again, we feel like we have a portfolio that can compete and win in the market. And again, there's -- it's a pretty fractured market out as well around the world that gives us opportunities to compete, not just with those market leaders.

Got it. Next, we shift gears a little bit to Elo. So Elo obviously recently closed. I think, maybe first, could you just give a quick background what Elo is? And then what's kind of the strategic rationale for the acquisition? And how -- again, how does that kind of fit into your kind of differentiation, moving closer to the frontline worker.

Yes. So maybe take a step back, we've been in discussions and talking with Elo for several years now. So this has been a company that on again, off again. So we know them quite well and have a pretty long history in terms of trying to find an opportune time to bring the companies together. And at its core, they are very similar to what we are in terms of our core business. And I think we see a lot of opportunities from a synergy perspective. They sell to the same not only end users, but the same personas or departments within our accounts. They have the same distribution model. Their top distributor is our top distributor, similar manufacturing and operations as we have. So again, it just felt like a natural fit into the portfolio and really builds out our connected frontline experience. So now you have -- you take the expertise around Zebra's enterprise mobility and automation, partner that with Elo's touchscreen and self-service capabilities. And now you can offer kind of one pane of glass, one experience for our customers front of store retail and then take that into the same thing from a quick-serve restaurant, even the new health care environment where self-serve is becoming a more important aspect. Again, it was just a natural fit into the portfolio. And then we look at the synergy we can drive not only just from a cost perspective because of those operating models as we integrate the businesses, but also geographic expansion is a huge opportunity. Elo was really focused around North America and rightfully so around the opportunity they had. But we think of markets like India, Australia, where we have infrastructure, relationships. We can quickly take Elo to market in those places or where they have the infrastructure, but just haven't had the kind of focus we have on markets like Germany or the U.K. So again, we think there's -- we committed to $25 million of synergies over the first 3 years, and the team has already got some nice wins in the books even 1 or 2 months in now around the cost synergies. And then it's really around how do you bring the singular operating platform to our customers. So that they do things like digital media, new applications, even AI for the front line. You can have that seamless experience, whether you're working -- either you're looking at a self-serve kiosk doing point-of-sale or talking to a store associate, you can have that seamless experience across all those, and we think that's a really powerful advantage we'll have in the market.

It may be helpful just like really quick, is there a good example you could talk about. Like I imagine like I walk in front of store, touch touchscreen like, hey, maybe I want this sandwich. And then it connects to the back of the store, like, hey, we know how much inventory we have. Is that kind of like the view? Like any kind of examples you can maybe help illustrate for us?

Yes. I think the value Elo has seen as they deployed some of the self-serve kiosks in some of the quick-serve restaurants is not only you get the -- I think what we all see is now they don't need someone at the register taking orders, which is a labor productivity. But the real value they've seen is the actual ticket price or the dollar price per ticket has increased. We're much more apt to supersize the meal or add a milkshake when we're pushing buttons, and we see it on the picture, then we are asking for it with someone at the cash register. So the ticket unit, the unit price per ticket has actually increased in a lot of those instances. So again, that's value to our customers as they deploy those self-service capabilities. So I think that's kind of -- that's part of value creation. It's more than just saving on the labor and trying to do line blocking and those types of things. There's some real added economic value you get and what the -- with those experiences that have implemented it.

That's great. Super clear. We're going to switch gears again back to tariffs. So I think about earlier in the year, that was shaping to kind of be a big headwind. And I wouldn't say like we are -- moved past all yet, but we're definitely in a better environment than maybe 8, 9 months ago. So can you just talk about the progress that you guys made as a company? And then as we go into 2026, kind of where are we and the status of it and the progress that the company has made?

I'm super proud of what the team has been able to execute on this year. I mean we went back -- I mean, we've been working on tariff mitigations going back to 2018. So from the original tariffs to today, we do start with -- at that point, 80%, 85% of our North America volume was produced in China. That will be less than 20% in 2026. So that's obviously been a long road of diversifying our supply chain, which quite frankly was necessary for beyond just tariff mitigation, but also just a resilient, sustainable supply chain. And I think the other thing the team did is going back to November of last year, what do we need to do to prepare for whatever kind of came out of Liberation Day. And so thinking about where we're going to raise prices across product families, what additional portfolios needed to move. And if you -- now the net of it, this year, we'll have about $25 million of net costs because of tariffs, and that will be fully mitigated as we go into Q1. So now it turns into a $25 million tailwind as we go into 2026. And I think the -- what we've been able to prove whether it was back in '18, '19 or today is mitigating whatever might happen in the future is putting a plan in place to mitigate that P&L impact on I think in a reasonable time frame is obviously the goal, and I think the team has done a great job executing that.

Got you. I think -- if I think back through the meetings today, and I think a lot of discussions we've had in the last couple of months, I think a lot of the focus has been on organic growth, but not as much focus on driving profitability. So going from here and going forward, how do you think about kind of gross margin and EBITDA margin expansion opportunities from here? If I think about gross margin, EBITDA margins, probably closer to the higher end of maybe historical range. So like where can we go from here?

Yes. We have a track record of driving profitable growth. That's obviously something the team is absolutely focused on. We expect to deliver 50 basis points of EBITDA rate expansion annually with 5% to 7% revenue growth. And we have multiple levers to do that. I mean, first and foremost, every day, driving incremental productivity. AI as a tool that can help us do that. And we're doing that, as you would expect, in terms of where AI can drive efficiency within our operation. But also we just get a ton of value from scaling on our fixed cost structure, whether that's our distribution capabilities, our finance ERP. I mean that gives us a ton of leverage and you just naturally get that margin expansion as revenues grow. And then as we've entered new markets, whether it's machine vision or software with inherently higher gross margins, that helps. And then you go into 2026, it's -- hopefully, for now, and it stays this way, tariffs may become a tailwind on margin expansion as we go into '26. And then adding Elo, which has a very similar margin profile and driving $25 million of synergies now over the next couple of years will be an additional tailwind. So again, we don't see the business as having a cap in terms of what we can do from an EBITDA rate percentage, but it's something we just got to keep at and we believe we have a lot of runway here as we move forward.

Great. I'll just take a quick pause. If there are any more questions on the app, I'm happy to ask on your behalf. I mean maybe just on gross margin. The last couple of weeks, there's been a lot of questions about this memory costs that are coming up. What can that mean for Zebra? Is it like a nonfactor? Or is this something we keep an eye out as we go forward?

The memory pricing is definitely a factor. We're not immune to the inflationary pressure. Obviously, memory is a component of our mobile computing business. But I'd say at this point, it's manageable. With the type of memory we use and the inflation we're seeing. It's -- I'd say it's -- if any given year, there's always multiple factors that -- inflationary, deflationary -- and memory to go in every 2 years, you get one or the other. So I think it's nothing within today that we're seeing that we can't manage within the bounds of the portfolio, and the team is actively working with our supply base and getting ahead of it as much as they possibly can. And so we'll have to manage that as we go into next year, but it's -- I think it's manageable at this point in time.

Got you. Great. Before I kind of hit the last few questions, one thing I want to circle back to is our first question about kind of end markets. And I know a lot of customers have seen some maybe uncertainty in terms of putting the bigger orders in. If we could just zero in on what uncertainty is. Like what would you need to see change for you to go from uncertainty to more certainty?

Yes. Obviously, uncertainty can mean a lot to where you're at and what your business is. I think what we've seen though from our customers is, it's not as if they pulled back on what they were expecting to spend. I mean again, the year has played out largely as we've expected from the projects that were in the pipeline have largely moved forward. If anything, you may have seen projects be spread out over a longer period of time, but that's kind of been the same case all year. So it hasn't been a change here in the back half. What we haven't experienced is accelerating projects that may be out there in the next year or the next 12 months and saying, hey, I have extra cap -- I have extra budget availability or, hey, my year is going great. I feel better about the business. Let me accelerate projects in the pipeline. That's what we haven't seen. I think a lot of that does have to do with uncertainty. And I think for -- again, it's all in the eyes of the beholder. And I gave the example of getting a tweet of the tariff rate changing 2 weeks before you do an earnings call is never a good feeling in terms of where that is. But I think whether it's certainty around tariffs, inflation, interest rates, whatever it might be, they don't all have to be perfect. They don't have to be tailwinds. So I think some of that just is certainly abating, will help clear the air as we go into next year. But I think the team is now focused on what can we control around driving growth across the portfolio irregardless of the economic condition, how do we drive that value to our customers. So they see the need to move forward that refresh as we go into next year, and that's where the team is focused on. On driving that growth here regardless of the economic condition next year.

Okay. Great. And then next question is capital allocation. Apparently, the stock has obviously been in pressure this year, given the large acquisition and stock pressure, what is kind of the current outlook in terms of capital allocation?

Our capital allocation priorities remain unchanged. One, it's continuing to invest organically in the business. We invest around 10% of revenue in R&D. So it's obviously making sure we maintain our competitive position, our leading market share across our core business and continuing to invest in new technologies like we've done recently in AI. Obviously, M&A is a vector for growth. And we -- look, we're excited about what Elo brings. We're equally excited about on a smaller scale what Photoneo brings in terms of new technologies around machine vision, and we're going to continue to look for opportunities to expand the portfolio and leverage M&A. And as you mentioned, we felt it was important given where the stock price was, given the acquisition to make a forward commitment around share repurchases over the next 12 months. So that's something we've not historically done in terms of committing the $500 million over the next 12 months. And we've been as active as possible here in the short term given the price dislocation. So yes, look, I think the good news is between our free cash flow, the balance sheet is in great shape. The capacity we have to invest more, doesn't prevent us from either taking advantage of opportunities from an M&A or continue to return capital as we move throughout next year.

Got you. As we kind of -- a few minutes on the hour here. When we -- for 2026 there's a combination of factors that are both in the company's control and sort of outside the company's control. But from your seat as CFO, like what are you kind of most excited about in terms of that can transpire kind of in the next 12 months from an end market perspective, is something in the company's control, or probably realistically the combination thereof. But what are you kind of most looking forward to and from your seat?

I think first and foremost, it's the evolution of our AI offerings. Again, we think we have a unique position to really be the AI leader for the front line, right? I mean we're not building large language models. This is building unique applications that drive value for frontline workers for frontline applications that we can uniquely provide because of our position with mobile -- our mobile computing position. So that's something I think we're really excited about. We're going to continue to invest in. RFID is another one, again, just with the new use cases that are out there and the momentum in the market around RFID is, I think, the second. And I think the third is driving a successful integration with Elo. I mean it's the largest acquisition we've had in a bit. It drives a meaningful amount of new revenue for the company. We think there's some really exciting opportunities as we get particularly in the later part of next year once we get the commercial engine ramping up to get some incremental growth as we go into the back half and into 2027 on that acquisition. So I think those -- all 3 of those are things that we can control, exciting opportunities both for the near term as well as setting ourselves up for long-term growth.

Got you. One of the questions that came in. Incremental investment into machine vision. How do you guys like think about like whether that would be needed or not? Or how do you feel, I guess, about the level of investment currently in the business? And then how do you think about where maybe you need to make incremental?

We think we have the appropriate amount of investment in the business today. We've invested a lot around go-to-market capabilities. So again, think about how do you diversify out of some of those end markets that we talked about earlier, requires incremental go-to-market investments. Obviously, we do a lot of that with our channel partners, but it still requires us to have the specialist in the field driving that demand, working with our channel partners. So -- but look, as we see new opportunities, whether that's a geographic market, a use case technology, we're going to continue to invest because we -- again, we're big believers in that long-term opportunity that it has. So -- but for right now, I think we feel it's now about how do we generate a return on the investment made up to this point. And then I think there'll be more opportunities to go from there. But I think that's -- we feel good about the balance of the portfolio and where we've had investments to date. But it's something we're always constantly looking for where can we add incrementally as those opportunities present themselves.

Great. With that, time is now closed. So I appreciate you coming on the stage and answering for everyone in the audience here. Appreciate it so much.

Thanks, Zach.