Zebra Technologies Corporation ($ZBRA)

Okay. We can go ahead and get started. Welcome to the Zebra Technologies presentation. I'm Brian Drab, the industrial technology analyst at William Blair. And of course, I first have to tell you that you can find a full list of research disclosures on our website, williamblair.com. So today, we're happy to have with us CFO, Nathan Winters, and also Vice President of Investor Relations, Mike Steele. Thank you both for being with us today. I'm sure most of you are familiar with Zebra, I'll just say a couple of words, but this company for a long time has been the leader in bar code manufacturing -- bar code printer manufacturing RFID components and that whole range of supplies for that industry, mobile computers, the company enables frontline workers and the mobile workforce across, I think about 80% of the S&P 500 is and has a leading global market share and has in most of these areas or all of these areas for a long time. But I will get out of the way and turn it over to Nate. We do have a breakout session as well. I think it's in the Adler room upstairs. So we'll continue the discussion there after we finish here. So Nate, over to you.

Thank you, Brian. It's a pleasure to be here today. I hope the slide presentation will be helpful for everyone learning about the company who -- or give an update on where we're at today. Just as we get started, just a moment to absorb the safe harbor statement regarding the forward-looking statements. Any non-GAAP financial measures in the presentation. We'll have reconciliations available on our website. I'd like to begin just by laying out the compelling investment thesis around Zebra today. First, we're a clear market leader in mission-critical workflows across a wide industry. And as Brian mentioned, we support of the Fortune 500 companies around the world in various end markets. Second, we're positioned at the center of durable long-term growth trends. As companies continue to accelerate the need for digitization automation across their environments. Now how they leverage AI. Our portfolio allows us to really help our customers enable this at the front line across many different settings in their company. Third, we're uniquely positioned to be the AI leader for the frontline. And what I mean by that is our products really give assets a digital voice, give real-time visibility across their operations that can feed data models and then provide that output back to the frontline associates so they can be more effective and drive a better experience for their customers. We have a strong and resilient financial model. Our capital-light business allows us to flex across various economic cycles, generate strong margins and free cash flow and then disciplined allocation strategy. And if you look at the company today, we like the debt structure we have, the capital, which allows us to continue to invest in the company for long-term growth while returning capital to shareholders. So if you look at the company, we think about really the foundational layer of intelligent operations for the front line by again, providing that real-time visibility and better outcomes for our company -- for our customers. We operate in 2 segments, the first being our connected frontline solutions, which includes mobile computing, the most recent Elo Touch acquisition, along with the associated services and software and really think about empowering frontline workers with information and technology so they could be more effective in their jobs and provide that better experience for their customers. Our asset visibility and automation segment includes printing, supplies, data capture, along with RFID and machine vision, again, giving that real-time visibility to assets across the supply chain, along with the tools so they can automate those workflows with RFID and machine vision. Together with a look at this, what we do is we can give our customers the ability to the sense was going across their environment. And I want to it, which is even more and more helpful under with the acceleration of AI and then act on that in real time by giving that information back to their associates and workflows. We're the industry leader across a diverse set of end markets. Again, if you look at connected front line, about $3 billion in revenue in 2025, our Asset Visibility and Automation segment around $2.5 billion last year. We operate in 180 countries around the world with about half of our revenue coming from North America and significant opportunities, we believe, in regions like Asia Pacific and Latin America that have had really strong growth here over the last 12 months. And then we offer work across a diverse set of end markets. From retail and e-commerce, which accounts for about 40% of the company, manufacturing in our T&L verticals, which each around 20%, 25% and then health care which has historically been one of our higher growth vertical markets around high single digits of the company. And again, supporting a wide range of customers who each have unique needs for our solutions, but leverages the same underlying technologies to help solve those issues, and we'll talk more about that here in a few pages. Just want to take a minute to highlight the key strategic priorities for the company today. First, we're focused on driving profitable growth again, really capitalizing on those durable growth trends of automation, digitization and AI across a $35 billion served market. We believe ample room to continue to grow 5% to 7% organically here over the cycle, while continuing to expand our margin rate and generating attractive free cash flow that we can continue to accelerate growth in the company. Continue to build on our industry leadership through innovation, both investing in new areas of growth like machine vision and along with our core portfolio and continue to maintain that market leadership, maintain our premium in the market, and our new mobile computing platform we've loaded out over the last year is a great example of this. Our new mobile computing platform has embedded RFID readers on the device, which really allow our customers to take advantage of those assets being tagged with an RFID tag to open up new use cases and new form factors to be able to leverage that technology. And also the computing power to not only run AI models through but on the device. So again, opening up new use cases, better sales experience, a better way to upsell if you're from a front of store perspective, or new applications like picture proof of delivery for last mile delivery drivers. Again, new different ways that they can leverage AI for the front ride, to drive meaningful productivity that these new devices now enable our customers to execute on. And then finally committed to enhancing our financial strength and flexibility. And I'd say the last year, I think, is a great example of how we execute on that. investing 9% to 10% of sales in R&D to continue to grow organically and feel that growth engine, allocating capital within that with some actions we've taken over this last year to focus that investment around RFID and machine vision. We've added 2 assets to the portfolio over the last year. Photo Neo, we acquired in the first quarter of '25, giving us 3D machine vision capability is a bolt-on to our existing machine vision business. And then the -- then the Elo acquisition at the end of last year, which gives us capabilities in touchscreen technology, self-service kiosks, self-checkout, complementary to our mobile computing platform what really allows us to differentiate and provide a whole suite of solutions for our front store retail customers, health care, quick-serve restaurant and industrial settings. And we're really excited about the progress of that acquisition and believe there's still meaningful synergies here as we move forward. As I mentioned earlier, we're really at the center of several global mega trends that's powering the underlying growth of the company. Starting with the growth of e-commerce and the expected growth of e-commerce, not only the expected growth of it, but the expectation, particularly as all of us as consumers around those experiences from an e-commerce, visibility to where that package is at on its way to your doorstep, knowing that the inventory is there when you request it, all those are absolutely critical, and our products and solutions help our customers enable this. The continuing need for automation even as the number of warehouses is expected to grow over the next 5 to 10 years and the continuous automation in those environments, we play a critical part in that and then obviously, the explosive growth around IoT and AI, again, both tailwinds for how our products can be used to help our customers deliver on that. But ultimately, what all this result to be doing is creating a more complex operating environment for our customers. And how do we leverage each one of these technologies to provide that better experience and drive productivity. And again, the breadth of our portfolio and being able to not only provide point solutions for every 1 of those, but give a balanced approach from whether it's barcode scanning, RFID, machine vision, leveraging our 10,000 partners around the globe to help with end point solutions or the global reach that's necessary is a real differentiator for us versus the competition. And as I mentioned, we work across a diverse set of end markets. If you look at retail and e-commerce, again, always have different expectations and outcomes are ultimately wanting to drive. From retail and e-commerce, it's how do they respond to that demand for shorter delivery times that all of us are expecting as well as reimagining that in-store experience and providing the better touch and customer service with the technology that's available. And transportation and logistics is going to need for real-time visibility and driving real productivity for that last mile delivery driver with all the packages that are being delivered, it's a huge cost, and it's a lot of time allocated to delivering packages. And again, our products help deliver that productivity that's necessary for that last mile. In manufacturing, is what you would expect. How do you provide more resiliency across the supply chain, which I think is ever more important, what's happened over the last 5 years, increasing production quality and output leveraging our technology. And then in health care, it's how do you connect assets, patients with the care providers to the overall patient experience. And that's exactly what our technology helps enable for our customers. And if you just look at the picture, again, at each step of the supply chain and the each step of the process, our products are there, enabling the benefit for our customers. And if you look at -- we call it the life of a product, our products could touch it over 30 times from the label that's being generated in the manufacturer to the machine vision, inspection and doing the quality inspection down the production line, to the warehouse, whether it's a ring scanner, RFID or machine vision utilized within the warehouse, that in-store experience with our mobile computer are now with Elo from a digital touchscreen and service capability to that last mile delivery on the productivity can drive. Again, embedded within each one of these operations and ability to go and talk to our customers about how they can link these all together to provide that overall better experience and then drive the efficiency they need for their business. And just pivoting here. If you look at our financial strategy, as you would expect, highly correlated and aligned with the overall strategy for the company. But first, driving profitable growth, ensuring we're allocating our precious resources to the highest ROI projects and initiatives within the company. Disciplined capital management, ensuring we have the right capital structure to not only protect the company, but the ability to continue to invest organically, inorganically and return capital to shareholders continuously driving efficiency across our operation. Again, I think, a legacy of the company that as we grow in scale, we can also accretively grow margins and ultimately advancing our vision and strategy with both inorganic and organic investments. Now if you look back over the last 5 years, I'd say, from a P&L perspective, it's been anything, but a normal cycle for the business. So coming out of COVID obviously, incredible growth in '21 that's sustained into 2022. And I think what ultimately that proved was the value of our products and solutions for our customers. As everyone had to not only expand their capabilities, expand their network, put the latest generation of technologies in their hands of their workers to meet the needs of the on-demand economy, I think just overall showed the resilience and the need for our products across those environments. But like many in '23 and '24, there was a need for our customers to absorb that capacity they have built out over that time frame across their network, and we weren't immune to that. But coming out of '23 and '24, you see sustained growth in '24, again last year and now 5% organic as our current guidance for the full year with incremental margin along the way while delivering solid free cash flow that we can continue to reinvest in the business. And I think just -- it's obviously worth pointing out as a topic for many investors is what we're seeing from an overall memory perspective. I want to start by saying we have a track record of taking on these global supply chain challenges, whether it's been the various rounds of tariffs to semiconductor shortages back a few years ago and now memory, and the team has a playbook that they've executed with a commitment on delivering for our customers for the long term while protecting the overall profitability for the company and the sort of time frame as possible. And the team has been actively working with our suppliers here to ensure we have the supply we need, obviously, to meet the guidance we've given for the year, but incremental volume to get to the higher end of our guidance range. which we feel very comfortable with the guidance we have there and the supply visibility we need to achieve that, along with working the actions to offset the cost increase, which we've done with a series of price increases in our mobile computing business, along with many other restructuring actions and productivity initiatives to help offset that cost within the P&L. And again, the team is actively working with our suppliers on qualifying second, third sources of memory as well as ensuring that our portfolio is designed into the latest generation of memory chips. So that as that capacity comes online later this year and has shifted to that memory type, our products are designed in there so we can take advantage of that capacity and continue to grow the business as expected. So let me just wrap with where we started around the compelling investment thesis, which we believe in, which is why we have repurchased over $800 million of shares over the past 3 quarters. which is we're the market leader in these complex enterprise-wide workflows. We have a real opportunity ahead of us to take advantage of being the AI leader for the frontline and helping our customers utilize that technology in the hands of those frontline workers in real use cases and continuing to have a balanced capital allocation approach, investing for the long term, while returning capital to shareholders. So with that, I have plenty of time for Q&A.

Yes, we do have plenty of time. We've got 14 minutes in this room for Q&A, and then we'll continue the discussion in the breakout room, Adler upstairs. So Nathan, maybe you could talk a little bit more about the memory issue. This is obviously one of the main sources of concern or questions around a lot of companies, including Zebra. . Can you talk in maybe just a little bit more on specifics around the margin pressure that you're seeing near term from that maybe give everyone a frame of reference for where memory sits within your cost of goods and how that's changed and the timing with which we'll be able to pass through all that increase?

Yes. So you look from a cost perspective, memory is predominantly used in our mobile computing platform. So within our connected frontline segment and our ELO portfolio as well. And we've quantified the impact from the cost increase for the year is 2 points around $120 million headwind for the year. And we've offset that within the year with a couple of things. One, the price increase we announced earlier this year offsets around half of that exposure, particularly as you ramp through the back half of the year and that pricing starts to flow through the P&L. And then the other half was offset with various other actions, which somewhat unrelated and actions we had taken just kind of set up as a tailwind for the year, but that was exiting our robotics business. which was $20 million, $25 million of annual benefit just from the costs associated with that portfolio. FX was a tailwind for the year. Tariffs was a net tailwind for the year as we had fully mitigated that exposure coming into the 2026. And then the volume leverage we have on the growth. So I think you had this and about half offset with unrelated operational actions. We feel very good about that. You see the benefit of that really flowing through our Q1 results. So our Q1 results were a 23% EBITDA rate. We guided 22% for the full year. So A lot of those we've already seen in the P&L are now being utilized to offset the memory headwind. And so far, the pricing actions, we haven't seen any detriment in demand or projects being delayed or pushed out because of the incremental price. We're seeing it across our competitors also raising. So we're not alone in that. And obviously, our customers see it from a wide variety of their products. So again, so far, so good on the expectations around that. It's obviously a dynamic environment. But I think the guidance we laid out for the year at the beginning of the year has played out up to this point, which still embeds price increases in the back half of the year. But so far, those are all playing out kind of as we had modeled and expected, and that's not -- we just made that up. That's a lot of work with our suppliers around where they see prices going, and they've been very transparent around those expectations that we've modeled in for the year.

Great. And then maybe sticking in the category of annoying external factors or things that are somewhat out of your control tariffs. What is the impact this year? And how is that affecting margin this year? And then also, can you kind of weave in the dynamic with Mexico. You've been moving a lot of manufacturing out of places like China over the last year or two, and a lot of it has gone to Mexico and these dynamics are obviously changing. It seems every day.

So just on the first -- last year, we had about $20 million -- a little less than $20 million net cost from tariffs. That was -- again, we fully mitigated the P&L as we exited the year. So from a year-on-year perspective, think of a $20 million benefit just as we offset those costs either through production moves or the price increase we announced last year. And then back on -- if you look at the portfolio or the footprint today, historically, 80% of our North America inbound was from China back in pre-2019. Today, that number is less than 20%. And again, the vast majority of that move to other parts of Southeast Asia, along with Mexico. And I'd say today, the rates vary from each one of those regions. In the short term, the IEEPA moving to 122 is a small benefit -- just from a lower net rate. The announcement made yesterday by the administration is kind of in line with where the 122 rates are at. So not a lot of change coming there. And it's something we're monitoring. I go back to what I said at the point on memory, which is that's not new. I think it's just part of our normal operating environment of adjusting to where the rates are and we'll take the necessary actions, both from pricing with our own portfolio or production capacity with our partners to have a resilient and cost-effective supply chain. And I think we're set up now with the diverse supplier base and locations to adjust as necessary. Again, to protect demand for our customers and the profitability of the company.

Great. We can take questions from the audience as well. But I'll ask one other one that's on my mind is just on the long-term growth rate for the company. How are you thinking about the 5% to 7% growth longer term driven by -- in part by these bolt-on acquisitions, getting into these adjacencies, the higher-growth adjacencies like robotics and the RFID, which you have a strong presence in is growing well, machine vision, the Elo acquisition. Can you just talk about that strategy and how it's evolving and whether that still feels like it's fully within reach for the next 3, 5 years?

Yes. No, look, we feel very confident in that organic growth profile. I think if you go back to the page we had in the presentation around just some of these mega trends that do support kind of the breadth of the portfolio, right? Whether that's the need to drive increased productivity, meet the demands of e-commerce, increase in warehouse capacity, all those -- every one of those actions as we need more printer scanners, mobile computers to support the growth across those different work streams. . And then there's plenty of opportunities we have, even as the market leader to continue to grow share in our traditional portfolio. So constantly looking at sub vertical markets within manufacturing, regional markets like Japan, Southeast Asia of how we can continue to take more than our fair share of market -- of that market. So I think those are all actions the teams are actively working on. And then as you mentioned, RFID has grown double digits now for the past several years. I think the -- it's pretty exciting in terms of the new use cases that it's opening up. So we don't see it as displacing anything as much as opening up new opportunities. So the -- you see real we're putting an RFID tag on fresh food out of a bakery have been talked about, but is actually real and is happening. And the great thing about that is you need more readers and our printers are the one printing the label in the back. So again, the just new use cases that are opening up again to enhance efficiency for our customers. And then machine vision is one that, obviously, we've been in for several years, but now had double-digit growth in the quarter. We see double-digit growth for that business here through the year. And I think the work we've done over the prior years of integrating the business, building beachheads and footprints in large customers so that as you start to see the market turn and they start to invest, we can take our fair share of that. And then some of the markets where we've had a historically strong presence with Metro like semiconductor that's been in a cyclical downturn are now starting to turn the other way. So I guess if there was any benefit of memories, we're getting some benefit with -- from our machine vision business on the other side. So again, I think, again, if you look at the combination of that, along with the opportunity we have, the one area that's kind of missing has been in that last mile delivery refresh opportunity going back to the post-pandemic area. And that's a huge opportunity we have here over the next 2 to 3 years as those mobile computers all need to be refreshed. We are the market leader, have the installed base for that entire fleet, and now with our new mobile computer and the ability to use RFID and AI for that last mile delivery is there's meaningful productivity that our customers can drive with the new mobile computers and they're all really excited about it, and that's a big opportunity layer all those in is what gives us that confidence here over the next several years to deliver on that growth.

You mentioned the ELO acquisition a couple of times. Can we dive into the details of that a little bit more and just remind people of the size of that acquisition, the thinking behind it, the growth that you've seen since acquiring it and the growth expected. .

Yes. So Elo Touch we acquired at the beginning of the fourth quarter last year, was about $400 million of annual revenue. The market growth rate, the historical growth rate was in line with our growth kind of mid-single digits, and that's what they've performed both in Q4 and Q1, and I think many of us see it, right, which is touchscreen, quick service, self-service and multiple different applications. That's the core of what they do. . So they have a strong presence in quick-serve restaurant, which we think is a nice opportunity of how we leverage that presence with our portfolio. As more quick-serve restaurants are using things like RID, right, to blend those together. But ultimately, if you look at, I think, front of store retail, many of our customers would have Zebra mobile technology and Elo for fixed. And now we have the ability to integrate the back end of that from a software perspective so they have a unified software stack to support both their fixed and mobile screens, if you will. So I think of being able to update those from a security protocol applications across and provide that seamless experience for their consumer, whether they're looking at -- talking to a store associate and getting that service or maybe a screen, we think that's a real differentiator in the market and one that our customers have asked for going back several years. So that thesis we're really excited about over time. as we integrate that back in. And we've committed to $25 million of synergies by year 3. I think we're well on track for that. We have $10 million of committed cost synergies already identified, and now kind of from an annual run rate, the pipeline of opportunities is continuing to grow from cross-sell across our relationships. So we'll start to see that play out maybe a little bit later this year into next year just because of the lead time and the cycle time of that product. But I think it's been a great add to the company. And as we're going through diligence and some of the pre-meetings, you just look at it and said, they look and act just like us, right? So from manufacturing footprint to Tier 2 distribution model, the customer, the buyer in the customer environment were all similar to us. So we just looked at that and said it was such a natural fit as part of the portfolio, which is why we feel so confident about the synergies and the long-term positioning that company within the portfolio.

You mentioned the 2-tier distribution model for them as well. Can you talk about the overlap between your distribution channel, you've got 20,000 resellers ultimately that are within your core business and what does their distribution look like? And how are you leveraging each other's? .

Yes. So I think Tier 2 means we sell through distributors around the world. Their primary distributors is 1 of our top 3 distributors. So that's been easy from a -- and then think of the vast majority of those resellers are resellers, ISVs who have a local expertise in the market, they may be doing the final configuration, the rollout, the deployment. They may have certain software applications that they're adding to the device as a value-add. And they're a great partner network because, again, these are sometimes bespoke applications that are, I say, great businesses for that local company, maybe not a great business to be part of a public company like us from a size and scale that you'd want but it's absolutely value-add. And our customers, what they appreciate is we say, look, if we can't do it, here's the partners that can add that application or do that integration, whatever that might be, that again, it gives us the ability to reach the breadth we have at a cost structure that makes sense, right? That's also -- we think about capital-light business model, that's the very definition is I don't need to add more sellers right, to hit a certain market. That's where a reseller can do it or add more engineers just to design bespoke applications because an ISV can do that. And that's great because it adds an overall ecosystem and value.

That reseller network is something that really struck me when I first started covering Zebra. I went to, I think, like Orlando or something for some event, and it was a reseller convention kind of like a kickoff event, but there over 1,000 people there who are not Zebra employees who really felt like Zebra in place, we're all in on the product. .

As you look back in their LinkedIn, you'd see most of them probably were at some point. So it's a tight community, whether you go to the NRF, National Retail Federation or as we said, we do a lot of our sales kickoffs are combined with our sellers and resellers because we want them to feel like they're part of it, but obviously, they're running their own business, and it's up to us to make sure that we're there supplier of choice and who they recommend when they have those relationships at a local level. .

Is there anything that you want to close with because then we can ramp up here and move to the breakout session. .

Yes. Look, I think we're excited about the business. Again, we see a lot of underlying demand. Again, I think we feel confident with where we're at from having supply we need from a memory perspective to achieve our guidance and working every day, as I mentioned, to secure more supply that hopefully gets us to the higher end of our guidance range. And again, this is all about continuing no matter what the environment is, executing for our customers that I think the history of the company that's allowed us to sustain these different economic cycles, and maintain our market leadership and grow as they do over time. So I really appreciate all the time today.

Yes. Thanks a lot, Nathan. Thanks, Mike, for being here. Thank you. .