Zebra Technologies Corporation (NASDAQ:ZBRA) Q4 2023 Results Conference Call February 15, 2024 8:30 AM ET Company Participants Mike Steele - Vice President of Investor Relations Bill Burns - Chief Executive Officer Nathan Winters - Chief Financial Officer Conference Call Participants Tommy Moll - Stephens Brad Hewitt - Wolfe Research Meta Marshall - Morgan Stanley Joe Giordano - TD Cowen Damian Karas - UBS Keith Housum - Northcoast Research Brian Drab - William Blair Rob Mason - Baird Chris Grenga - Needham ...

Business Operations and Growth - The company has expanded operations and customer offerings both organically and through acquisitions, leading to increased complexities in the business[83]. - Future growth depends on the ability to identify and successfully acquire businesses at appropriate prices, with macroeconomic factors potentially influencing acquisition opportunities[84]. - The company expects non-U.S. customers to continue accounting for a material portion of net sales, relying on third-party contract manufacturing services[94]. - The company faces risks related to geopolitical instability, including the war between Russia and Ukraine, which could impact sales and increase costs[96]. - The company must adapt to rapidly changing technological needs and customer demands to remain competitive in a highly competitive industry[89]. - The company may face challenges in retaining customers and managing relationships from acquired entities, which could affect operating results[87]. - The ability to innovate and develop new technologies is crucial for the company's success in addressing user needs and market demands[89]. Risks and Compliance - The company is dependent on third-party operating systems and software, and any disruption in their development could adversely affect business operations[99]. - Emerging issues related to artificial intelligence (AI) could lead to legal or regulatory actions, impacting the company's reputation and business[100]. - Cybersecurity incidents pose a risk to business operations, with potential disruptions and loss of sensitive information[101]. - There is a risk of product liability claims due to design or manufacturing defects, which could lead to recalls and significant costs[106]. - The company has not suffered significant harm from software errors, but future undetected issues could impair market acceptance and financial results[107]. - Global health crises, such as the COVID-19 pandemic, have impacted supply chains and could adversely affect operations and financial conditions[110]. - The company enters into large, multi-year contracts that expose it to technological, financial, and cybersecurity risks[111]. - Fixed-price contracts may lead to losses if cost estimates are inaccurate, especially with new technologies[112]. - The reliance on subcontractors for contract performance could negatively impact the company's obligations and financial results[113]. - Outsourcing certain operations limits control and exposes the company to risks from partners' actions[114]. - Third-party dealers and distributors' effectiveness in promoting products is crucial, as their failure could negatively impact sales and financial results[117]. - The company faces risks from changes in accounting standards and subjective management estimates, which could affect reported financial performance[133]. - Compliance with evolving data protection laws may result in increased costs and legal claims against the company[135]. - The company is subject to various product regulatory and safety laws, which could impact production capabilities and financial performance[137]. - Increased public awareness of environmental issues may lead to additional costs and changes in manufacturing practices due to new regulations[140]. Financial Performance - Total net sales for 2023 were $4.584 billion, a decrease of 20.7% compared to $5.781 billion in 2022[240]. - Gross profit for 2023 was $2.123 billion, down from $2.624 billion in 2022, reflecting a gross margin of 46.3%[240]. - Net income for 2023 was $296 million, a decline of 36.1% from $463 million in 2022, resulting in diluted earnings per share of $5.72[240]. - As of December 31, 2023, total debt outstanding was approximately $2.2 billion, with a one percentage point change in interest rates impacting annual interest expense by about $14 million[222]. - The company reported a foreign exchange loss of $2 million in 2023, compared to a loss of $3 million in 2022[240]. - Current assets decreased to $1.672 billion in 2023 from $1.883 billion in 2022, primarily due to a reduction in accounts receivable and inventories[238]. - Total liabilities decreased to $4.270 billion in 2023 from $4.796 billion in 2022, with a significant reduction in current liabilities[238]. - Research and development expenses for 2023 were $519 million, a decrease of 8.9% from $570 million in 2022[240]. - The company has exposure to foreign exchange risk, with a one percentage point change in exchange rates potentially impacting pre-tax income by approximately $1 million[224]. - The company’s goodwill as of December 31, 2023, was $3.895 billion, slightly down from $3.899 billion in 2022[238]. - Comprehensive income for 2023 was $308 million, down from $426 million in 2022, reflecting a decline of 28%[243]. - Cash flows from operating activities resulted in a net cash used of $4 million in 2023, compared to a net cash provided of $488 million in 2022[249]. - The company reported a cash and cash equivalents balance of $138 million at the end of 2023, up from $117 million at the end of 2022[249]. - The company incurred $52 million in payments for repurchases of common stock in 2023, significantly lower than $751 million in 2022[249]. - The company’s total assets at the end of 2023 were $4,332 million, reflecting an increase from $4,036 million at the end of 2022[246]. - The company’s share-based compensation expense was $55 million in 2023, down from $88 million in 2022[249]. - The company reported an unrealized gain on forward interest rate swaps of $17 million in 2023, compared to an unrealized loss of $89 million in 2022[249]. Acquisitions and Goodwill - The company accounts for acquired businesses using the acquisition method, with excess purchase price recorded as goodwill[280]. - The acquisition of Matrox for $881 million significantly expanded the company's machine vision product offerings, with $639 million of goodwill allocated to the EVM segment[300][301]. - The acquisition of Fetch Robotics for $301 million aimed to enhance automation solutions, with $176 million of goodwill allocated to the EVM segment[311]. - Goodwill as of December 31, 2023, totaled $3,895 million, with the EVM segment holding $3,666 million and the AIT segment holding $229 million[316]. - The company completed its annual goodwill impairment testing in Q4 2023, with estimated fair values exceeding carrying values by at least 40%[317]. Operational Challenges - The company has experienced past shortages that negatively impacted operations and may face similar challenges in the future[120]. - Indebtedness could adversely affect the company's ability to meet financial obligations and may require refinancing under potentially unfavorable terms[130]. - The Company incurred exit and restructuring costs of $110 million to date, with $98 million attributed to the year ended December 31, 2023[324]. - The balance of the Company's liability associated with exit and restructuring was $22 million as of December 31, 2023[325]. - The Company has entered into multi-year purchase commitments totaling $124 million, primarily related to semiconductors and cloud services[358].

Zebra Technologies Corporation (ZBRA) is slated to release fourth-quarter 2023 results on Feb 15, before market open.The Zacks Consensus Estimate for the company’s fourth-quarter earnings has remained steady in the past 60 days. The company has an impressive earnings surprise history, having outperformed the consensus estimate in three of the preceding four quarters while missing in one.Let’s see how things have shaped up for Zebra Technologies this earnings season.Factors to NoteSignificant weakness in the ...

LAS VEGAS--(BUSINESS WIRE)--The NFL, AWS and Zebra Technologies announced today they will host a Super Bowl press conference on Wednesday, Feb. 7 from 3:30-4:15pm pacific. Los Angeles Rams’ wide receiver and finalist for the Offensive Rookie of the Year, Makea “Puka” Nacua will join the discussion to give his perspective on the match ups for the Super Bowl. Experts from the NFL, AWS and Zebra will also share data and insights for a Super Bowl preview powered by Next Gen Stats to help the media and fans know ...

LINCOLNSHIRE, Ill.--(BUSINESS WIRE)--Zebra Technologies Corporation (NASDAQ: ZBRA), a leading digital solution provider enabling businesses to intelligently connect data, assets, and people, will report its fourth quarter and full year 2023 financial results on Thurs. morning, Feb. 15, 2024. The company will also host a conference call to discuss these results on the same day at 7:30 a.m. CT (8:30 a.m. ET). To access the live webcast of the presentation, visit the events section of the company’s website at ...

LINCOLNSHIRE, Ill.--(BUSINESS WIRE)--Zebra Technologies Corporation (NASDAQ: ZBRA), a leading digital solution provider enabling businesses to intelligently connect data, assets, and people, today announced the United States Postal Service (USPS) awarded the company a Change of Address Reporting System and Remote Forwarding System (COARS-RFS) printer technology refresh contract through 2028 for the purchase of ZD411 printers. Zebra’s ZD411 printers and related services will provide label printing for the ...

Zebra Technologies Corporation (ZBRA) has been benefiting from improving supply chains and reduced product lead times of late. Targeted list price increases and higher sales of radio frequency identification devices (“RFID”) products are aiding the company’s Asset Intelligence and Tracking segment. Higher sales of services and software and contributions from recent acquisitions bode well for the Enterprise Visibility & Mobility segment.The firm remains focused on acquiring businesses to gain new customers a ...

Zebra Technologies announces the new evolution of its ultra-rugged mobile computers with the MC9400 Series, enhanced with 5G (data only) and Wi-Fi 6E connectivity for use inside and outdoors, even in cold storage. The MC9400 Series meets the connectivity, scanning and device security needs for retail, manufacturing, warehousing, transportation and logistics, including yards, ports and other tough workflows on the edge. (Photo: Business Wire)Zebra Technologies announces the new evolution of its ultra-rugged ...

Financial Data and Key Metrics Changes - In Q3, net sales decreased by 30.6%, and 29.6% excluding the impact of foreign exchange [1] - Adjusted gross margins decreased by 100 basis points to 44.8%, primarily due to expense deleveraging from lower sales volumes [24][76] - Non-GAAP diluted EPS was $0.87, a 79% year-over-year decrease [76] Business Line Data and Key Metrics Changes - The Asset Intelligence & Tracking segment declined by 25.8%, primarily driven by printing [1] - The Enterprise Visibility and Mobility segment sales declined by 31.4%, with pronounced weakness in mobile computing [1] - Services and software showed growth with strong attach and renewal rates despite overall declines [9] Market Data and Key Metrics Changes - North America sales decreased by 25%, EMEA sales declined by 39%, Asia-Pacific sales decreased by 32%, and Latin America sales decreased by 15% [1] - Demand was weakest in retail and e-commerce, and transportation logistics [22] Company Strategy and Development Direction - The company is focused on advancing its Enterprise Asset Intelligence vision and enhancing its portfolio to address complex operational challenges [49] - There is an emphasis on innovation, including the launch of the Zebra Pay solution and the Zebra Work Cloud suite of software solutions [50] - The company is also exploring opportunities in underpenetrated markets such as government and healthcare [99] Management's Comments on Operating Environment and Future Outlook - Management noted broad-based softening of demand and cautious spending behavior from customers [9] - There are expectations for a significant sequential improvement in profitability due to cost restructuring actions yielding net annualized cost savings of $100 million [22] - The company remains cautious in its planning through the remainder of the year and the first half of 2024, not seeing compelling signs of market recovery yet [23][36] Other Important Information - The company ended the quarter with a net debt to adjusted EBITDA leverage ratio of 2.2x, below the target range of 2.5x [45] - Free cash flow for the first nine months of 2023 was negative $193 million, primarily due to lower earnings and higher interest costs [44] Q&A Session Summary Question: What is the visibility on inventory levels and destocking? - Management indicated that global channel inventory is slightly higher than normal but is expected to return to normal operating levels by year-end [12] Question: What is needed for demand recovery? - Management stated that a strengthening goods-based economy is necessary for customers to resume deployments, with large customers expected to recover first [14][15] Question: How do you view gross margins moving forward? - Management expects gross margins to improve as they cycle through premium supply chain costs from the prior year [46] Question: What are the dynamics between e-commerce and retail? - Management noted that e-commerce and transportation logistics are tied together, while brick-and-mortar retail is more focused on the goods economy [110] Question: What is the outlook for 2024? - Management is not providing guidance for 2024 but expects to see easier comparisons as destocking activity subsides [36][72]

PART I - FINANCIAL INFORMATION [Consolidated Financial Statements](index=3&type=section&id=Item%201.%20Consolidated%20Financial%20Statements) The consolidated financial statements reflect a **$7.33 billion** asset base, a **$15 million** Q3 net loss, and **$(145) million** negative operating cash flow year-to-date Consolidated Balance Sheet Highlights (in millions) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | **Total Current Assets** | $1,652 | $1,883 | | **Total Assets** | $7,331 | $7,529 | | **Total Current Liabilities** | $1,562 | $2,332 | | **Total Liabilities** | $4,318 | $4,796 | | **Total Stockholders' Equity** | $3,013 | $2,733 | Consolidated Statement of Operations Highlights (in millions, except EPS) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | **Total Net Sales** | $956 | $1,378 | $3,575 | $4,278 | | **Gross Profit** | $427 | $628 | $1,675 | $1,939 | | **Operating (Loss) Income** | $(12) | $202 | $407 | $269 | | **Net (Loss) Income** | $(15) | $170 | $279 | $277 | | **Diluted (Loss) EPS** | $(0.28) | $3.26 | $5.40 | $5.25 | Consolidated Statement of Cash Flows Highlights (in millions) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Oct 1, 2022 | | :--- | :--- | :--- | | **Net cash (used in) provided by operating activities** | $(145) | $221 | | **Net cash used in investing activities** | $(49) | $(941) | | **Net cash provided by financing activities** | $140 | $470 | | **Net decrease in cash and cash equivalents** | $(56) | $(252) | [Note 3: Revenues](index=10&type=section&id=Note%203%3A%20Revenues) Revenue disaggregation shows Q3 2023 net sales at **$956 million**, a decline from **$1,378 million** in Q3 2022, with **$1,094 million** in remaining performance obligations Disaggregation of Revenue by Segment (Q3 2023 vs Q3 2022, in millions) | Segment | Product Category | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | :--- | | **AIT** | Tangible Products | $295 | $414 | | | Services and Software | $29 | $28 | | | **Total AIT** | **$324** | **$442** | | **EVM** | Tangible Products | $434 | $750 | | | Services and Software | $198 | $186 | | | **Total EVM** | **$632** | **$936** | | **Total** | | **$956** | **$1,378** | - Remaining performance obligations for contracts with an original term exceeding one year stood at **$1,094 million** as of September 30, 2023, expected to be recognized over approximately two years[29](index=29&type=chunk) [Note 6: Exit and Restructuring Costs](index=11&type=section&id=Note%206%3A%20Exit%20and%20Restructuring%20Costs) The company expanded its productivity plan and initiated a voluntary retirement plan, incurring **$82 million** in YTD restructuring charges with **$54 million** remaining liability - The company expanded its 2022 Productivity Plan and initiated a voluntary retirement plan (VRP) with an expected total cost of at least **$105 million**[37](index=37&type=chunk) Restructuring Charges (in millions) | Period | Charge | | :--- | :--- | | **Q3 2023** | $58 | | **YTD 2023** | $82 | | **Total to Date** | $94 | - As of September 30, 2023, the remaining payment obligation for restructuring was **$54 million**, expected to be settled by Q1 2024[38](index=38&type=chunk)[39](index=39&type=chunk) [Note 9: Long-Term Debt](index=15&type=section&id=Note%209%3A%20Long-Term%20Debt) Total debt increased to **$2.28 billion** as of September 30, 2023, primarily due to higher Revolving Credit Facility borrowings, with the company remaining in compliance with all covenants Debt Composition (in millions) | Debt Instrument | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Term Loan A | $1,684 | $1,728 | | Revolving Credit Facility | $477 | $50 | | Receivables Financing Facilities | $119 | $254 | | **Total debt** | **$2,280** | **$2,032** | - As of September 30, 2023, the company had **$1,489 million** available for borrowing under its **$1,500 million** Revolving Credit Facility[59](index=59&type=chunk) - The company was in compliance with all debt covenants as of September 30, 2023[63](index=63&type=chunk) [Note 16: Segment Information & Geographic Data](index=21&type=section&id=Note%2016%3A%20Segment%20Information%20%26%20Geographic%20Data) Both AIT and EVM segments experienced significant Q3 2023 sales declines, with total net sales falling to **$956 million** and EMEA showing the largest regional percentage drop Net Sales by Segment (Q3 2023 vs Q3 2022, in millions) | Segment | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | AIT | $324 | $442 | | EVM | $632 | $936 | | **Total** | **$956** | **$1,378** | Net Sales by Region (Q3 2023 vs Q3 2022, in millions) | Region | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | North America | $517 | $690 | (25.1)% | | EMEA | $269 | $456 | (41.0)% | | Asia-Pacific | $106 | $158 | (32.9)% | | Latin America | $64 | $74 | (13.5)% | | **Total** | **$956** | **$1,378** | **(30.6)%** | - In Q2 2023, the advanced location technology solutions business (RFID and RTLS) was moved from the EVM segment to the AIT segment, with historical data restated for comparability[83](index=83&type=chunk)[90](index=90&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the **30.6%** Q3 2023 net sales decline to demand moderation and inventory reduction, leading to a **$12 million** operating loss, while implementing cost-saving measures for **$100 million** annualized savings [Overview](index=23&type=section&id=Overview) Q3 2023 net sales dropped to **$956 million**, resulting in a **$15 million** net loss due to demand decline and inventory reduction, prompting expanded restructuring plans for **$100 million** annualized savings Q3 2023 Financial Summary (in millions, except EPS) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Net sales | $956 | $1,378 | | Operating loss | $(12) | $202 (income) | | Net loss | $(15) | $170 (income) | | Diluted EPS | $(0.28) | $3.26 | - The company attributes the decline in demand to customers absorbing significant capacity built out in recent years and tighter capital spending budgets, as well as distributors reducing inventory levels[95](index=95&type=chunk) - Restructuring programs are expected to cost at least **$105 million**, impact over **7%** of the global employee base, and result in approximately **$100 million** of annualized net cost savings[96](index=96&type=chunk) [Results of Operations](index=24&type=section&id=Results%20of%20Operations) Consolidated net sales for Q3 2023 fell **30.6%** to **$956 million**, with gross margin slightly decreasing to **44.7%** and an operating loss of **$12 million** due to restructuring costs Consolidated Organic Net Sales Decline | Period | Reported GAAP Decline | Impact of Forex | Impact of Acquisitions | Organic Decline | | :--- | :--- | :--- | :--- | :--- | | **Q3 2023** | (30.6)% | 1.0% | 0.0% | (29.6)% | | **YTD 2023** | (16.4)% | 2.0% | (0.7)% | (15.1)% | - Q3 2023 gross margin decreased by **90 bps** to **44.7%**, as benefits from lower freight and component costs were more than offset by volume deleveraging[101](index=101&type=chunk)[102](index=102&type=chunk) - Q3 2023 operating expenses were higher than the prior year primarily due to **$58 million** in exit and restructuring costs[103](index=103&type=chunk) [Results of Operations by Segment](index=26&type=section&id=Results%20of%20Operations%20by%20Segment) Both AIT and EVM segments saw significant Q3 2023 sales declines, with AIT net sales falling **26.7%** and EVM net sales dropping **32.5%**, impacted by lower product sales and volume deleveraging AIT Segment Performance (Q3 2023 vs Q3 2022, in millions) | Metric | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $324 | $442 | (26.7)% | | Gross Profit | $145 | $193 | (24.9)% | | Operating Income | $44 | $85 | (48.2)% | EVM Segment Performance (Q3 2023 vs Q3 2022, in millions) | Metric | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $632 | $936 | (32.5)% | | Gross Profit | $282 | $435 | (35.2)% | | Operating Income | $30 | $159 | (81.1)% | [Liquidity and Capital Resources](index=29&type=section&id=Liquidity%20and%20Capital%20Resources) Cash used in operating activities was **$145 million** for the first nine months of 2023, a **$366 million** decrease, with total debt increasing to **$2.28 billion** and **$893 million** remaining for share repurchases - Net cash used in operating activities was **$145 million** for the nine months ended Sep 30, 2023, a decrease of **$366 million** from the same period in 2022, primarily due to higher cash payments for inventory, taxes, interest, the Settlement, and restructuring actions[127](index=127&type=chunk)[128](index=128&type=chunk) - During the first nine months of 2023, the Company repurchased **194,319 shares** of common stock for approximately **$52 million**[140](index=140&type=chunk) - As of September 30, 2023, **$893 million** remained available for share repurchases under the authorized plans[140](index=140&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=32&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company reported no material changes in its market risk, including foreign currency exchange rates and interest rates, during the quarter ended September 30, 2023 - There were no material changes in the Company's market risk during the quarter ended September 30, 2023[147](index=147&type=chunk) [Controls and Procedures](index=32&type=section&id=Item%204.%20Controls%20and%20Procedures) Management assessed the company's disclosure controls and procedures as effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - Management believes that, as of September 30, 2023, the company's disclosure controls were effective[148](index=148&type=chunk) - During the quarter ended September 30, 2023, there have been no changes in internal controls that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[149](index=149&type=chunk) PART II - OTHER INFORMATION [Legal Proceedings](index=34&type=section&id=Item%201.%20Legal%20Proceedings) The company is subject to various legal proceedings, with management not expecting a material adverse impact, and the final **$90 million** patent litigation settlement payments due by Q1 2024 - The company is subject to various legal proceedings but does not expect them to have a material adverse impact on its business, financial position, or results of operations[69](index=69&type=chunk)[151](index=151&type=chunk) - The remaining two quarterly payments of **$45 million** each for the 2022 patent litigation settlement will be paid by the first quarter of 2024[70](index=70&type=chunk) [Risk Factors](index=34&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors were reported, but expanded descriptions highlight cybersecurity, reliance on third-party distributors, dependence on suppliers, and economic condition impacts - The company highlights the risk of cybersecurity incidents, noting that while no material incidents have occurred to-date, a breach could disrupt business, damage reputation, and lead to financial obligations[152](index=152&type=chunk)[153](index=153&type=chunk)[154](index=154&type=chunk) - The company relies on third-party dealers, distributors, and resellers, and their failure to effectively market products or their own financial instability could negatively impact results[155](index=155&type=chunk)[156](index=156&type=chunk)[157](index=157&type=chunk) - The ability to source sufficient materials, parts, and components, some from sole suppliers, is a key risk, as shortages, price increases, or supplier disruptions could negatively impact operations and financial results[158](index=158&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=35&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company did not repurchase any common stock during Q3 2023, with **$893 million** remaining authorized for future share repurchases Share Repurchases (Q3 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2, 2023 - Sep 30, 2023 | 0 | $0.00 | - As of September 30, 2023, the remaining amount of share repurchases authorized under the plans was **$893 million**[161](index=161&type=chunk) [Other Information](index=36&type=section&id=Item%205.%20Other%20Information) No director or executive officer adopted or terminated a Rule 10b5-1 trading arrangement during the third quarter of 2023 - No director or executive officer adopted or terminated a Rule 10b5-1 trading arrangement during the third quarter of 2023[162](index=162&type=chunk) [Exhibits](index=37&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including officer certifications and financial data in Inline XBRL format