Q3 2024 Zebra Technologies Corp Earnings Call
[inaudible]
Speaker Change: Good day and welcome to the third quarter 2024 Zebra Technologies.
Speaker Change: Ourtings Conference Call.
Speaker Change: Art Participants will be in Listen Only Mode.
Speaker Change: Should you need assistance? Please signally conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions.
Speaker Change: Please note the event is being recorded. I would now like to turn the conference over to Mike Steele, Vice President and Vester Relations. Please go ahead.
Mike Steele: Good morning and welcome to Zebra's third quarter earnings conference call. This presentation is being simultaneously cast on our website and investors. Zebra.com and we'll be archived there for at least one year.
Mike Steele: Our forward-looking statements are based on current expectations and assumptions and our subject to risks and uncertainties. Actual results could differ materially, and we refer you to the factors discussed in our SEC filing.
Mike Steele: During this call we will reference non-gap finance or measures that we describe our business performance. You can find reconciliation at the end of this slide presentation and in today's earnings press release.
Mike Steele: throughout this presentation, unless otherwise indicated, our references to sales performance are URIM year and on a constant currency basis.
Mike Steele: This presentation will be prepared remarks from Bill Burns, our Chief Executive Officer, and Nathan Winters, our Chief Financial Officer.
Speaker Change: Bill will begin with the discussion of our third quarter results.
Nathan Winters: will then provide additional detail on the financials and discuss our fourth quarter and revised full year outlook.
Nathan Winters: Bill will conclude with progress on advancing our strategic priorities.
Nathan Winters: Following the prepared remarks, Bill and Nathan will take your questions.
Speaker Change: Now let's turn to slide boards, I handed over the bill.
Bill Burns: Thank you, Mike. Good morning. Thank you for joining us. Our team's executed at well on the third four delivering sales and earnings result above the high end of our outlook.
Bill Burns: For the quarter, we realize sales of almost $1.3 billion, a 31% increase compared to the prior year. In a just an even margin of 21.4% and 9 or 80 basis point increase.
Bill Burns: and on Gap the Luted Earnings for Sheriff $3.49 which was four times the prior year and delivered strong precast law.
Bill Burns: As we discussed in our last earnings call, during the second quarter we began to see early signs of recovery across our end markets with mobile computing return to grow.
Bill Burns: In the third quarter, we were encouraged to see the recovery broad and with data capture and printing also returning to growth.
Bill Burns: We realized double-digit growth across all our primary and markets and broad-based growth to customers of all sizes, as we began to cycle significant destocking activity in the second half of last year.
Bill Burns: We are seeing indications of customer spend generally improving in the second half, including expectations for higher year and spending in North America and EMEA across most end markets.
Bill Burns: That said, the manufacturing sector is still lagging as the good economy continues to recover.
Bill Burns: Additionally, as we look ahead to 2025, visibility remains limited regarding the timing of large deployments.
Bill Burns: Another highlight was our improved profitability, primarily due to improved gross margin, driven by volume, leverage and business mix.
Bill Burns: with the recent consolidation of our North American distribution centers into a single Chicago area facility. We have successfully completed our restructuring actions through deliver $120 million of net annualized operating savings.
Bill Burns: Givin our third quarter performance, improvement in demand recovery, and our focus on profitable growth. We are raising our full year outlook for sales, profitability and free cash flow.
Speaker Change: and we'll now turn the call over at Nathan, to review our Q3 Finance Results and discuss our revised 2020 for Outlook.
Nathan Winters: Thank you Bill. Let's start with the PNL in 5-6.
Nathan Winters: and Keith III, total company sales through 30.6% reflecting continued recovery and demand across our major product categories.
Nathan Winters: Our asset intelligence and tracking segment can 25.8% primarily driven by printing and RFID.
Nathan Winters: Enterprise visibility and mobility segment sales increase 33%.
Nathan Winters: with Strong Growth in the Wolf and Eating and Data Capture Solutions.
Nathan Winters: Our services in software recurring revenue businesses are 4% in the quarter.
Nathan Winters: We realized double-digit sales growth across our regions.
Nathan Winters: in North America, sales grew 22% led by mobile computing and printing.
Nathan Winters: and Mia Sal's group 47% with strength in Northern Europe.
Nathan Winters: is a specific sales to 24%.
Nathan Winters: Led by momentum in Southeast Asia and India, along with stabilization in China.
Nathan Winters: and sales grew 42% in Latin America with particular strength in Mexico and Brazil.
Nathan Winters: Jesse Grossmargin, increased sport in 30 basis points.
Nathan Winters: to 49.1% through the volume leverage in favorable business next.
Nathan Winters: and adjusted operating expenses as a percent of sales improved by 580 basis points.
Nathan Winters: This resulted in third quarter, adjusted EBITDA margin of 21.4% in a 980 basis point increase versus the prior year, and a 90 basis point sequential improvement from Q2.
Nathan Winters: Non-Gap, diluted earnings per share with 3,049 cents.
Nathan Winters: A greater than 300% year over your efforts.
Nathan Winters: for any now to the balance sheet in cast flow on Flight 7.
Nathan Winters: In the first nine months of 2024, we generated more than $615 million of free cash flow. As Eva Dawn proved, we continued to drive significant improvements in working capital.
Nathan Winters: We ended the quarter at a 1.6-time net debt to adjusted EBITDA leverage ratio, which is within our target range.
Nathan Winters: We resume Sherry, Projectivity and Q3. And now I've increased flexibility given our improved cash flow, lower net debt, and $1.5 billion of capacity on a revolving credit facility.
Nathan Winters: The Fountain Turntaurale.
Nathan Winters: We are the fourth quarter of the solid backlog in pipeline of opportunities and execs sales growth between 28% and 31%.
Nathan Winters: The Falacos seems continued recovery across our major product categories with an improved level of year-end spending by our customers.
Nathan Winters: including several large North American retail projects.
Nathan Winters: The continued cycle, easier comparison to process business, due in part to significant destocking activity by our distributors during the second half of last year.
Nathan Winters: 24, adjusted EVID.margin is expected to be approximately 22%.
Nathan Winters: and non-gap diluted earnings per share are expected to be in the range of $3.80 to $4.
Nathan Winters: Our fourth quarter outlook translates to full-year sales growth of approximately 8%.
Nathan Winters: Our full-year adjusted Eva Dammargen is expecting to be approximately 21%.
Nathan Winters: and nine-gap, diluted earnings per share is expected to be in the range of approximately $13.30 to $13.50 based on our Q4 guide.
Nathan Winters: This represents stronger, profitable growth in our prior outlook, supported by increased momentum and demand recovery and continues focus on our cost structure.
Nathan Winters: Free cash flow for the year is now expected to be at least $815 million.
Nathan Winters: We continue to drive profitable growth while improving our working capital levels, including right-sizing our inventory.
Nathan Winters: Please reference additional modeling assumptions shown on flight A.
Speaker Change: with that. I'll turn the call back to Bill.
Bill Burns: Thank you, Nathan, turning this slide 10.
Bill Burns: Zero remains well positioned to benefit from secular trends to digitize and automate workflows with their comprehensive portfolio of innovative solutions, including purpose-built hardware, software and services.
Bill Burns: We empower frontline workers to execute tasks more effectively by navigating constant change in real time to advance capabilities including automation, prescriptive analytics, machine learning and artificial intelligence.
Bill Burns: We're going to continue to demonstrate market leadership through innovation.
Bill Burns: We have consistently reinvested approximately 10% of our revenues in the research and development to advance our vibrant core and bring new innovative solutions to market.
Bill Burns: At recent customer events we hosted a North Americanemia, beyond failed solutions that underscore our commitment to innovation.
Bill Burns: He's include the latest version of our Workbout software utilizing Advanced AI and Machine Learning and new rugged tablets for demanding environments.
Bill Burns: We also highlighted a zebra teosolution offering self-checkout, including tap-to-pay capabilities, which enhance the customer experience and enables front line associate to focus on higher value tax.
Bill Burns: This launch enables us to expand the UBRS addressable market with near adjacent technology that leverages our core software platform.
Bill Burns: Additionally, we are developing a genitive AI mobile computing solution designed to assist frontline workers with sales, merchandising and operating procedures, which we will feature at the National Retail Federation Trade Show in January.
Bill Burns: As you see on slide 11, our customers leverage our solutions to optimize workflows across a broad range of end markets.
Bill Burns: We empower enterprises to drive productivity and better serve their customers, shoppers, and patients.
Bill Burns: are relentless focus and innovation, continue to drive our competitive differentiation and secure wins.
Bill Burns: In the second half of the year, we're seeing momentum in large, eager deployments in North American in India across retail, e-commerce and logistics.
Bill Burns: Our customers are beginning to increase investment in our solutions as the absorbed supply chain capacity they've built out during the pandemic and looked to drive increased productivity.
Bill Burns: Recing team wins include a technology modernization project that a large e-commerce customer, the mobile computing upgrade at a large retailer to enable the latest software applications.
Bill Burns: The Grocer's Initiative to a place desktop computers with our mobile devices that drive several front-of-store use cases.
Bill Burns: and a luxury retailer will deploy War Cloud software to optimize in-season pricing.
Bill Burns: Additionally, logistics chastomanemia selects ebers new wearable mobile computers to replace the competitors' voice picking solution.
Bill Burns: This customer expects to improve accuracy and increase employee and customer satisfaction with our solution.
Bill Burns: Last quarter, I highlight our success interaction and selling the benefits of enterprise-grade devices in healthcare.
Bill Burns: Our ease of integration into electronic medical record systems has been a competitive differentiator and we recently secured mobile computing and printing wins at large North America hospitals.
Bill Burns: Our solutions will improve workflows, enable enhanced visibility and tracking of assets, equipment and specimen.
Bill Burns: Now turning the slides well.
Bill Burns: We realize WDJ sales growth across all vertical markets as demand recovers.
Bill Burns: Our confidence in sustainable long-term growth is underpinned by several themes that we expect to drive investment in our solutions, including labor and resource constraints, track and trace mandates.
Bill Burns: Increased consumer expectations and the need for real time supply chain to the building.
Bill Burns: In closing, we are seeing the broadening of demand recovery in the second half of this year with the more normalized usability in sales volumes as we enter the fourth quarter and into 2025.
Bill Burns: As we look longer term, we maintain strong conviction in the opportunity for zebra, as we elevate our strategic role with our customers through our innovative portfolio solution.
Bill Burns: Our sales and cost initiatives have positioned us well for profitable growth as our end-market continue to recover.
Speaker Change: but we'll now hand it back to Mike.
Mike Steele: Thanks Bill. We'll now open the call to Q&A. We ask that you limit yourself to one question and one follow-up to give everyone the chance to participate.
Mike Steele: [inaudible]
Speaker Change: We will now begin the question and answer your session. To ask a question you may press star than one on your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star than two. At this time we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Andrew Biscaleo with B&P Paribas. Please go ahead.
Speaker Change: Good morning, God.
Lawrence Edder: Lawrence Edder.
Lawrence Edder: Atoe
Andrew Biscaleo: You know, so obviously the man seems to be picking up quite a bit, you know, facing some easy cops, but also you had some comments around some larger North America retail project mens I believe. You could comment on that, what are you seeing in that market specifically and how do you see that playing out into next year?
Andrew Biscaleo: and Joe would say that, you know, certainly we're seeing that the quarter, you know.
Andrew Biscaleo: and did where we were pretty happy with the results and ultimately the team's executed well.
Speaker Change: I would say that, you know, we saw broadening recovery across all vertical markets, not just retail and in Q3 which certainly was encouraging.
Speaker Change: from a retail perspective I would say retail and...
Speaker Change: E-commerce, you know, outperformed across all product categories, really in two, three. And we expect that to kind of extend into Q4. As you mentioned, easier compares from a year ago, but...
Speaker Change: We've also been able to see some year-end spending, which injects some normalized seasonality, which we've seen in past year, certainly year-end with larger orders from...
Speaker Change: E-commerce, retail and transportation logistics specifically North American E-Mia. So this is what we'd normally see at your end. We hadn't seen that last year of course.
Speaker Change: and now we're seeing that return to more normalized levels.
Speaker Change: We feel good about your retail customers beginning to spend again.
Speaker Change: Good, they're focused, continues to be investments in e-commerce, you know, Omni-Channel, continue to drive.
Speaker Change: That market.
Speaker Change: We've got a solid pipeline of opportunities with Reenter, you know, Q4 and we continue to...
Speaker Change: To win in that market against competition is we've got a differentiated portfolio.
Speaker Change: and the hardware and software serving the retail market.
Speaker Change: We feel good about what we're seeing across retail in Q3 and Q4 and...
Speaker Change: and the seasonality coming back where we see some of your unspending across North American Emeas so we feel pretty good about retail at the moment.
Speaker Change: It was the first to recover, right? If you think back to the beginning of the year, retail was the first to decline in the first to recover and we're seeing that continue across retail throughout the year.
Speaker Change: Okay, and then, um, did you comment on what you're seeing with the distributors and how are they, how are they going about their decisions to start to restock and what kind of trends are you seeing and what you'll with those, those customers?
Speaker Change: I would say overall that
Speaker Change: You know, our distributors are seeing the uptick in business that we're seeing from our partner community.
Speaker Change: I think that we're working closely with them to make sure that they've got the right level of inventory to meet the increase in demand as we enter.
Speaker Change: Q4, but we continue to work closely with them.
Speaker Change: to make sure that across all product categories that we make sure that they've got.
Speaker Change: and the right level of stocking across you to the regions around the globe.
Speaker Change: Yeah, I think that checks and again when we look at it from an inventory perspective, there are a good amount of days on hand in terms of where we'd like them to be entering the fourth quarter.
Speaker Change: and I think we feel as Bill said, good about the overall inventory position. Here's we into the quarter with the expectations for the year and spend to come through.
Speaker Change: The next question comes from Jamie Cook with tourists. Please go ahead.
Jamie Cook: Hi, good morning, congrats on a nice quarter. I guess just back to the large orders, can you help us understand how much of the large orders did that help to third quarter and sort of what's implied in the fourth quarter?
Jamie Cook: and your confidence level that this continues into 2025. And then I guess my second question, you know, the margins over the past two quarters, I mean, gross margins.
Jamie Cook: We're 49% plus that's implied 49% or so in the fourth quarter, I'm just wondering based on the sales volume and benefits from some of their structuring the expectation that margin can at least be at that level in 2025, given the exit rate for 2024. Thank you.
Speaker Change: and maybe I'll start in the end over the mid-around margin. I'd say if we kind of looked back right at the 23 and kind of recap where we're at, but I would say overall that you know...
Speaker Change: Customers in 23 were absorbing capacity and that they build down the pandemic. We clearly were scrutinizing budgets, sweating assets, and that drove significant distributor destocking in that timeframe.
Speaker Change: and in 4th quarter last year we saw it.
Speaker Change: You know, really no large deal, you know, no larger water activity in the end of what's what are 23.
Speaker Change: You know, so I would say that that's what's really different this year. As we entered 24 and the first half we saw early signs of recovery.
Speaker Change: Reelian mid-tier and run-rate businesses we talked about in the first half and really focused on mobile computing and retail. But, you know, larger orders really remain below historical levels in the first half.
Speaker Change: As we got in the second half, what we're seeing is, you know, broader recovery across all regions.
Speaker Change: in most end markets, we're still seeing manufacturing for instance lag.
Speaker Change: But we're seeing the return of your end spending and larger orders by...
Speaker Change: You know, retail and logistics customers in North American, EMEA, we're also seeing some probably.
Speaker Change: Mid-Tier orders I would call it from healthcare so healthcare's also been a strength which has allowed us to raise our guide. So I think more normalized seasonality that we're seeing where typically fourth-quarter is an uptick in demand.
Speaker Change: As our customers spend more in the fourth quarter as they move in the next year. I would say the other thing we saw was that
Speaker Change: You know, a common, I'm kind of larger orders, is probably the fact that we saw capex.
Speaker Change: Increased throughout the year so I think his customers got more confidence.
Speaker Change: in the macro environment around them and what we're seeing across their business, they increased capital spending, especially in retail throughout the year, you know, and injecting again more seasonality that we expect to happen in fourth quarter, and then continue injecting seasonality back in our business in 2025.
Speaker Change: I'd say from a 25 perspective while we're clearly not guiding to 25, we're optimistic that the recovery continues into 25, certainly based on the strong second half.
Speaker Change: We'd expect, again, normalize these analyses to really be injected back into the business in fourth quarter just like we'd expect in 25.
Speaker Change: I'd say the one caution would be...
Speaker Change: We're seeing a little bit of uncertainty across the customer base.
Speaker Change: and I would say that what that means is really manufacturing, lagging, the other segments I would say.
Speaker Change: Each customer is in a different phase of whether it's refresh or new product investment or new investment across their business and new applications.
Speaker Change: We're seeing some Tino customer still absorbing capacity. So we've got a bit of limited visibility to large projects on when they're going to happen in 25.
Speaker Change: So, you know, again, we'd expect to retubber you to continue, but a bit uneven across some of the end markets is the only guy to say, from a caution perspective, maybe Nathan coming on margins.
Jamie Cook: is a Jamie here at our Pearls margin in the third quarter to so over 49 percent that's the highest gross margin we've had in recent history.
Jamie Cook: But really benefited from lower-largest deal volume. Obviously there was a bit of a return, but still lower than...
Jamie Cook: As a percent then what we see has historically.
Jamie Cook: of a good scaling on our fixed infrastructure. We completed the consolidation of our...
Jamie Cook: Distribution Centers in North America. That was in the last piece of our restructuring actions. Midway through the quarter, so seeing that benefit flow through.
Jamie Cook: is looking at what's implied in the Q4EBA.guide as we do expect a sequential decline in gross margin just as, again, based on the incremental large deal volumes coming through on the higher volume.
Jamie Cook: and I said it's still kind of the wildcard you look into 2025 is what that large deal mix look like as we enter the year and as we go throughout the year as we think about the growth margin dynamics.
Speaker Change: Thank you.
Speaker Change: The next question comes from Damian Carrus with UBS. Please go ahead.
Damian Carrus: Hey, good morning everyone. Nice work in the quarter.
Damian Carrus: Thanks, Daniel. Morning.
Damian Carrus: Yeah, so you guys...
Damian Carrus: mentioned that you still have limited visibility around large deployments.
Damian Carrus: Could you maybe just give us a sense for, you know, like...
Damian Carrus: Why that is? And when you think about going into year end, and some of these kind of late effects budget type decisions.
Speaker Change: Thanks for watching!
Speaker Change: You know, what have you baked into your guidance? Are you only kind of factoring in, cause the larger deployments where you do have visibility? And if they're potential that after we get through the election, there could still sweet some kind of later year spend.
Speaker Change: We feel good about the fourth quarter guide with a pipeline and visibility in all size orders really to support the guide. So I think we feel good about the guide for fourth quarter.
Speaker Change: I would say, you know, overall from a limited visibility perspective I think as we look into, you know, 25, what we saw in 2024 was
Speaker Change: You'll customer start off with kind of a conservative U1, PappEx spending and kind of ramp that spending through the year. We'd expect that same thing to likely happen in 25 is...
Speaker Change: Look, I think overall there's lots of positive momentum from a macro environment, whether that's positive GDP, whether that's...
Speaker Change: Ecommerce growth, you know, the capital spending increases, I said throughout 24, you know, IT device spending is projected to be up in 25. So that's all good news for 25, but I think.
Speaker Change: You mentioned it, right? All the other things that are kind of weighing on the macro around the globe, including US elections, right? Interest rates are still high.
Speaker Change: and inflation impacting consumers and their spending overall. Which then creates a bit of caution on a part of our customers, longer sales cycles, more approval, those kind of things. As they kind of second-guess their tap-back. So I'd say overall just...
Speaker Change: While we see projects for 25 at the moment, it's just a bit early to have the visibility.
Speaker Change: especially into large deployments and when they'll actually happen throughout 25 given that we've seen kind of this slow capex release in 24.
Speaker Change: So I think we feel good about 25. We feel really good about our guys for 4-4. But there is still uncertainty out there. What a lot of things happening from macro environment.
Speaker Change: That makes sense.
Speaker Change: and then I was wondering if you could maybe just give us enough data on the machine vision business. Is that still a drag on your financials at this point, or maybe starting to see some times of improvement there?
Speaker Change: We still feel good about machine vision overall as being closely adjacent to our scanning portfolio overall and creating an opportunity for us as our customers continue to look to automate supply chain and visibility across.
Speaker Change: Manufacturing from an inspection perspective and transportation logistics from.
Speaker Change: You know, a visibility perspective within their environment. And I think that...
Speaker Change: You know, looking machine vision, you know, declined in the quarter. I think overall weakness in manufacturing is affected that market clearly. A good example of that would be electrical vehicle manufacturing, you know, kind of slowed.
Speaker Change: We saw our semi-conductor, which we're kind of heavily weighted to and that's been one of our objectives all long as to diversify.
Speaker Change: The business, the acquisition of Maytrox beyond semiconductor. We've seen stabilization in semiconductor in the quarter, so that's a positive sign. We are pleased with the software growth, the machine vision, you know in the quarter and. [inaudible]
Speaker Change: We feel good that the diversification efforts were working on to diversify outside of some of the conductor into broader manufacturing, into TNL, will benefit us as the markets recover.
Speaker Change: and I think that ultimately we feel good about the opportunity for not just software but our continued investment across, go to market and some new investments around AI and deep learning that will benefit us as that market returns. So you know, how market at the moment but we feel good about the long term prospects in the shing vision.
Speaker Change: The next question comes from Tommy Moore with Steven.
Speaker Change: please go ahead.
Speaker Change: Good morning and thank you for taking my questions.
Speaker Change: Hey, Tommy, Tommy.
Tommy Moore: I wanted to start on the large order topic. Here you'll out and clear that the visibility on next year remained limited at this point. And my question is, what would a typical planning cycle look like? And in a...
Tommy Moore: Normal year however you want to define that for large orders.
Tommy Moore: How much advance notice do you have and when do the conversations really start to pick up? Where you get that kind of visibility about what's coming. Thanks.
Speaker Change: Can't tell me I'd say typically six months, you know, we typically have six months of visibility too.
Speaker Change: The larger projects from our customers and I would say that
Speaker Change: Then that planning cycle ultimately begins, you know, six months in advance as they think about, you know, what's the next generation of device? What are the use cases they're using devices for?
Speaker Change: The upgrades are always, you know, in a larger project are always bigger than the last reef fresh, right? Is they deployed more devices, they've used more use cases, and typically when our customers reef fresh, they also look to add additional use cases along the way.
Speaker Change: All that gets discussed six months plus an advance and then they go through their process of selecting.
Speaker Change: You know what product, what solution, what vendor and then move forward and then...
Speaker Change: The ultimate timing of the project and when it gets ordered and deployed, sometimes relies on other factors. They're rolling out new software on their side, for instance, and working with outside vendors to do that, or they've got internal developments happening, or they've got a real-out schedule. They want to go meet based on their seasonality of their business.
Speaker Change: That all depends from a rollout perspective. Sometimes they get delayed sometimes they move faster. But typically six months of the visibility and I think I would say...
Speaker Change: At the moment we saw CapEx ramp through 24. We kind of expect that in 25. You know, in first quarter we typically get more visibility to the first half projects in 25. And then, you know, they typically move along through their process.
Speaker Change: The next question comes from Brad Hewitt with Wolf Research. Please go ahead.
Brad Hewitt: Hey, good morning guys.
Speaker Change: Norman Bref.
Brad Hewitt: As we think about next year, aside from the year and retail spending.
Brad Hewitt: Are you seeing anything in the pipeline or the conversion rates to make you...
Brad Hewitt: Moore Optimus, picked in you wearing last quarter about large orders returning.
Brad Hewitt: and a more meaningful way in 2025 and then how much of our recovery and large order rates do you think we need to see for growth in 2025 to be in the line with or better than your long-term growth framework?
Speaker Change: I probably say that again we're trying not to guide for 25, I give you a little bit of a taller race certainly.
Speaker Change: where optimistic is the recovery we expect to continue into 25 based on the strong results we've seen in the second half year and continued.
Speaker Change: Ramph of CapEx By Our Customers. We've seen a bit of uneven results into the marketplace, right? Retail, first, re-cover, continue that recovery. Teno Green Shoots and second Porter now, broader Teno recovery, but a bit uneven, meaning some customers are still.
Speaker Change: using the capacity that they've built out during the pandemic and still working through that but we're seeing parcel volumes increase manufacturing clearly lagging the other sectors and then health care has been a positive over the last two quarters.
Speaker Change: But I'd say that, you know
Speaker Change: While we've seen that we also see some you know macro headwinds overall which
Speaker Change: you know, include all the challenges we've talked about already, you know, manufacturing.
Speaker Change: softness in China.
Speaker Change: you know, limited budget visibility as we kind of get into 25 as to when.
Speaker Change: projects will happen, you know, across the business. So we'd see continued recovery into 25 on the strength of second half. And right now it's just too early to have a lot of visibility into 25 overall. We do believe that seasonality does come back into the business in 2025 though. So as we're seeing
Speaker Change: seasonal effects of large orders at fourth quarter, we would expect that seasonality to really be injected back into the business in 2025.
Speaker Change: The next question comes from Keith Howsam with North Coast Research. Please go ahead.
Keith Howsam: Good morning, guys. You know, Bill, perhaps you can provide a little bit of color from a geographical perspective. You know, EMEA and Latin America were the standouts, obviously, this quarter. Was it a matter of easier compares for those geographies, or was there something truly unique happening in those areas that perhaps we can think about as we go forward?
Bill Burns: Yeah, Keith, I'd say, you know, certainly double-digit growth across all major product categories, regions, and...
Bill Burns: and markets, right, was encouraging. But again, as you know, easier compares, you know, with a week two, three last year. So, and aggressive distributor destocking at that, you know, point in time. I'd say EMEA, you know, clearly,
Bill Burns: easier compares than the other regions. So I would say we feel good about all regions, you know, overall. EMEA had an even easier compare than the other regions, but that said, I would say, you know, strength in northern Europe, clearly within EMEA.
Bill Burns: some larger projects in T&L moving forward and some wins in mobile computing. I would say across EMEA, manufacturing remains challenging, particularly Germany is an example, but I think that, you know, the story of EMEA is really easier to compare than the other regions.
Bill Burns: You know, North America, I would say, improvement across all product categories.
Bill Burns: strength in retail, health care, TNL, you know, coming back but a bit uneven as people are using the capacity, but the good news is we're seeing parcel volumes.
Bill Burns: continue to recover. Manufacturing still, you know, a bit challenging overall and kind of lacking the other areas. Healthcare, you know, two quarters in a row is our fastest growing market, so that's returned to what we've seen in the past around healthcare, especially in North America.
Bill Burns: I'd say Asia, you know, momentum is Southeast Asia. So Southeast Asia and India were kind of bright spots in the quarter
Bill Burns: stabilization in China, I'd probably say, you know, and we're not expecting a near-term kind of recovery or growth driver from China, you know, overall at the moment. And I'd say Latin America's strength and Mexico and Brazil, as you've kind of heard from us before. So I think we feel pretty good about recovery across all the regions. And I think
Bill Burns: The difference is more around vertical markets than it is the actual regions themselves.
Speaker Change: The next question comes from Mehtab Marshall with Morgan Stanley. Please go ahead.
Mehtab Marshall: Great. A couple questions. Just on the health care strength that you guys are seeing, you know, is this new accounts that you guys are adding or just expansion of penetration or just kind of overall health and spend in that market after kind of some
Mehtab Marshall: post-COVID hangover within healthcare. So just more in depth on healthcare. And then second, you know, I know a question was asked earlier just about some of the initiatives that you guys had enacted that had improved gross margins. But just as we think about OPEX and the 2025, you know,
Speaker Change: Are there initiatives that are, you know, are all of the initiatives around some of the moves made earlier this year fully carried out or just how should we think about kind of OPEX into 2025? Thanks.
Speaker Change: Yeah, I'll start with health care and then hand over gross margin to Nate. I would say that, you know, from a health care perspective, a combination of new customers and, you know, refreshes across the portfolio, but
Speaker Change: continued opportunities across health care. I would say we saw growth across all product categories. We have specific lines for printing, scanning, mobile computing, specifically towards and focused on the health care market.
Speaker Change: I'd say overall we improve productivity and, you know, help healthcare providers of all sizes really enhance safety and be able to, you know, take information and put it into electronical medical records systems, which is important across.
Speaker Change: healthcare, not just in North America, but around the world.
Speaker Change: I'd say, you know, overall, this idea of
Speaker Change: automating workflows, you know, collecting digital information on, you know, patients, assets, what's happening within the medical environment creates an opportunity for us in across all segments of health care. So whether it's...
Speaker Change: clinical mobility or home health care, you know, virtual care, all those have been opportunities for us. So I would say health care is our smallest vertical market at the moment, but it's the fastest growing in opportunities both.
Speaker Change: new and expansion across healthcare and not just North America, but global opportunities as well.
Speaker Change: Yeah, Meta, just when you look at it from an OPEX perspective, I'd say a couple of things. One,
Speaker Change: The full benefit of the restructuring is really embedded in the OPEX for the second half in the P&L.
Speaker Change: Really, the incremental restructuring benefits to go are primarily in gross margin and really related to the flow-through of the closure of the D.C. and North America.
Speaker Change: So, you know, the team is really now focused on
Speaker Change: How do we scale and drive productivity across the OPEX infrastructure that we have? And there's some really exciting things that teams are working around the use of AI to drive productivity.
Speaker Change: in terms of supply chain forecasting, order management, or how we leverage generative AI for technology support, software code generation, again, all allowing us to scale and drive efficiency of what we have today. So I think that's really the focus.
Speaker Change: is scaling on the structure that we have today with the tools and technology that are available.
Speaker Change: The next question comes from Brian Drob with William Blair. Please go ahead.
Brian Drob: Morning, thanks for taking my questions. First one is just around the cadence of demand recovery that you saw, the timing of demand recovery that you saw in the third quarter, because the tone is a lot different today.
Speaker Change: I think in the second quarter, it's a lot different even from touching base with you during the third quarter. So I'm just wondering, did you see an incremental pickup in demand in some of the end markets even as recently as October?
Speaker Change: Hey, Brian. Let me start. Thank you. One, if you look back at our prior guide, we really assumed a similar level of demand from Q2 continuing into the second half, with only really a modest increase per year in spending. And what we wanted to see was, you know,
Speaker Change: the real commitments the PO is starting to come through from our customers before
Speaker Change: embedding that in the guide, and I think that's what we saw through the second half of the third quarter and here in the early part of the fourth quarter.
Speaker Change: you know really the conversion of that pipeline coming through which is what we wanted to see to have the confidence to
Speaker Change: to raise the guide as we are today.
Speaker Change: That's really the difference. It's just that, you know, conversion of the pipeline really picked up in the later part of the third quarter and here in the early part of the fourth quarter where we had the confidence based on those commitments from our customers to you know, raise the guide for the full year and see that year-end spend start to really come through here in the fourth quarter.
Speaker Change: Okay, yeah, that certainly makes sense. And then second question.
Speaker Change: Depending on the outcome of the election here, there's concern that there could be significant tariffs that start to go into place.
Speaker Change: I know that, you know, in the past Trump administration, you established a tariff task force, and I'm just wondering if you could describe what, you know, the activity that's happening at Zebra right now to, you know, potentially, you know, position for that environment.
Speaker Change: Yes, it's a little too early to speculate on the impact and all the various scenarios that could come out of next week's election, but we have been focused on some of the new tariffs that have been planned for 2026.
Speaker Change: and how we build alternatives so we can respond accordingly so that the teams you know actively working on mitigation plans for some of the new tariffs that are coming into place and we're continuing to work actively work with our supply chain partners you know we've been doing this since 2019 to diversify the supply base
Speaker Change: to improve resiliency overall, as well as prepare for any future tariff changes.
Speaker Change: I'd say right now it's, you know, various scenario planning of what the different options could be, but, you know, our primary focus has been improve overall resiliency of our supply chain so that we can respond, whether it's tariffs, geopolitical.
Speaker Change: or natural disasters, you know, how we make sure we have that structure in place to respond accordingly. And that's really been the focus of the teams.
Speaker Change: and then obviously depending on the outcome of the election and policies coming from that, we'll respond and pivot accordingly.
Speaker Change: The next question comes from Rob Mason with Baird. Please go ahead.
Rob Mason: Hi, good morning. You know, the commentary around the gross margin has already been touched on and you're performing really well. I'm just curious...
Rob Mason: Again, we're still somewhat early in the recovery. I'm sure business is competitive, but has there been any change in Zebra's promotional practices as we've gone about the recovery?
Rob Mason: Do you need to discount less, either just from your leadership position, the way you've built out the portfolio, or anything that maybe structurally could carry forward from a
Rob Mason: a promotional aspect.
Speaker Change: Yeah, Rob, I'll take that. I would say that, you know, overall, look, our strong customer relationships, the
Speaker Change: The deep vertical market expertise we have across each of the vertical markets we serve, the breadth and depth of the
Speaker Change: solutions portfolio that's tailored to each market. I gave the example before around health care.
Speaker Change: truly differentiates us from, you know, our competitors.
Speaker Change: and clearly that, you know, our competitive advantage is being the market leader around.
Speaker Change: scale and investment in technology.
Speaker Change: Our partner community around the world all gives us strength and I would say that
Speaker Change: We really haven't seen...
Speaker Change: really any meaningful change across
Speaker Change: the competitive landscape. I would say we're, you know, confident that we continue to win in the market and that we'll continue to extend our, you know, industry leadership through.
Speaker Change: You know, our investments in innovation we talked about, you know, early on in the call and
Speaker Change: and continue to strengthen our strategic relationship with customers. So we really haven't seen much different from a competitive landscape perspective, you know, around the world at the moment. Pretty much, much of the same.
Speaker Change: I see good. It just is a quick follow-up. We've talked about mobile computing leading this recovery. Can you give any perspective just on how, you know, data capture and printing may follow that? Whether you're starting to see that, and then, no, we had good year-over-year growth against easier comps, but are you starting to see
Speaker Change: accelerating momentum in those products as well.
Speaker Change: Yeah, Rob, I think that again, as you said, mobile computing was kind of the first
Speaker Change: you know, major category to recover in Q2 and, you know, we're continuing to see broad-based, you know, demand for mobile computing and
Speaker Change: in Q3 and into Q4, and then some of these larger deal activity really driven by mobile computing. But I'd say, you know, what we saw in Q3 was really...
Speaker Change: broad-based growth across DCS, including all product categories, you know, within DCS and then, you know, across all regions. So I think that's a good sign and we'd expect that strength to continue into 2024. Again, there's been more variation in the first half year in print in DCS around
Speaker Change: supply chain, you know, not being available in 23 and then recovery in 24 and all the variations around it. But I think we're seeing growth in DCS. Same in print. So, you know, growth across most print categories.
Speaker Change: You know, one of the strengths has been particularly mobile print, so again, ties back to mobile computing, right? Strength across that.
Speaker Change: There's new opportunities in print. I would say things like eco-friendly, linerless printing, so the idea that, you know, less waste is creating new opportunities within print, so we feel, you know, good about the broad-based growth across DCS and print, I would say.
Speaker Change: Now maybe the last area worth mentioning because it hasn't come up yet is RFID. So strong growth in Q3 across RFID as we continue to see broad-based adoption of RFID in the quarter.
Speaker Change: The next question comes from Jim Ricciuti with Needham. Please go ahead.
Speaker Change: Hi, good morning. This is Chris Grangon for Jim. Thank you very much for taking the questions.
Speaker Change: Just to follow up on that RFID point, you know, there have been reports about new applications for RFID in grocery.
Speaker Change: The first use case apparently being one involving bakery departments.
Speaker Change: First question is whether you might anticipate new opportunities for your RFID printing business as a result of these developments.
Speaker Change: And second, more broadly, how do you view the RFID growth opportunities over the next year and whether grocery could be a meaningful use case to go along with what we're seeing in apparel, general merchandise, and logistics.
Speaker Change: Yeah, I would say that, you know, strong growth in Q3 for an RFID perspective and...
Speaker Change: strong pipeline of opportunities across retail, T&L, manufacturing, you know, as you said, Chris, you know, broadening in retail beyond, you know, what was originally apparel into general merchandise.
Speaker Change: And now, you know, an opportunity that we've seen for some time and it's been worked on across the industry is things like fresh right within, you know, the retail store and around the outside perimeter of the store where you see fresh goods and leveraging RFID there so I think that clearly represents an opportunity, you know, for us.
Speaker Change: track and trace across supply chains, parcels, tracking, healthcare, all those also create an opportunity.
Speaker Change: You know, from Zebra's perspective, we've got the broadest set of RFID solutions, including
Speaker Change: you know, fixed and handheld readers, industrial and mobile printing, our software and labels to go along with that. So we feel good about the opportunity and the broadening of the opportunities out.
Speaker Change: of RFID beyond, as you said, apparel and retail.
Speaker Change: I would say that...
Speaker Change: you know exciting piece that everybody's looking at in in RFID is the you know tag adoption right in the
Speaker Change: The growth of tags and those items that are source tagged or, you know, tagged within a retail store, for instance, or a parcel inside T&L, the more items are tagged, the more, you know, readers there are, the more applications there are.
Speaker Change: and that allows, you know, more automated collection of information. So I think ultimately, we're excited about the RFID market and it continues to grow and the pipeline of opportunities and applications continues to grow as well.
Speaker Change: The next question comes from Joe Giordano with TD Cowen. Please go ahead.
Joe Giordano: Hey guys, good morning. You touched on tariffs and what you're doing. Can you just remind us like how much, I know you guys moved with your manufacturing partners, moved a lot of stuff out of China last go-around. Can you update us on like where we are and how much production is still there or how much?
Joe Giordano: How much can be moved if necessary and how much is like structurally has to be there?
Speaker Change: If you look at an aggregate, in terms of dollars, close to 50% of finished goods production is outside of China. Still a vast majority of the component supply chain remains within China, and that's really the trickier or more stickier part of the supply chain to move.
Speaker Change: just given how embedded it is within that market. So again, we've moved a significant portion of the manufacturing out really to support North America into places like Malaysia, Vietnam back in 2019. And that's continued to ramp over the last several years.
Speaker Change: But I think it's important to note that we didn't move all North American volume out of China. Some products, just given the relative volume or the return on investment, still made sense to produce in China for the North American market, even with...
Speaker Change: the higher tariffs. So that's again the equation and we offset that with higher pricing, the pricing actions we took back then.
Speaker Change: That's the equation we're working through now, which is what more can be moved, should be moved.
Speaker Change: if and when any additional tariffs were enacted. So.
Speaker Change: That's what the team is scenario planning out, but also want to make sure we make the right business decision.
Speaker Change: that gives us long-term resiliency as well as follows where the supply chain is going, because we do rely on, again, components and sub-assemblies and making sure that we're not too far dislocated from where those source components are coming from. So it's a pretty complex equation that the team's working through, but.
Speaker Change: We're lucky that we have, you know, supply chain partners that in and around the region that we work with to work and solve that challenge.
Speaker Change: That's helpful, thank you. And then just I want to make sure I understand the seasonality discussion around next year and I know you mentioned you don't want to give 2025 guidance. I appreciate that. Normally your first quarter is a step down.
Speaker Change: quarter, but now we're in a situation where the big orders aren't hitting in the fourth
Speaker Change: Is it unreasonable to think that you just have kind of a continued moderate increase quarterly as you go through next year, or do you still get like a step down even without kind of the project activity in the end of this year?
Speaker Change: I think, you know, based on what we said earlier, I think the expectation is, you know, Q4 is maybe not back to full recovery, but it's still, you know, there's been a pretty big step up in what we saw from Q2 to Q3 and Q3 to Q4.
Speaker Change: with year-end spend, there is, you know, several, you know, large deployments within the fourth quarter. So I would, I would, you know, that's why we said we'd expect it to be more maybe like a, you know, historical seasonality as you go into next year because of the year-end demand we're seeing and some of the large deployments here in the fourth quarter.
Speaker Change: The next question comes from Guy Hardwick with Freedom Capital Markets. Please go ahead.
Guy Hardwick: Hi, good morning.
Speaker Change: Morning, Guy.
Guy Hardwick: Congrats on the results, excellent performance. Obviously Zebra has made great progress year-to-date in deleveraging and I noticed that trade working capital has fallen materially as a percentage of sales but now with the leverage ratio down at 1.6 times, at what point do you return to making acquisitions?
Guy Hardwick: How would you balance those up against shareware purchases? I believe you returned to shareware purchases for the first time in more than a year in Q3.
Speaker Change: Thank you for watching!
Speaker Change: Yeah, Guy, I think maybe just to start because we haven't touched on it, so obviously the free cash flow for the year to date, over $650 million, almost $850 million higher than from last year. So just really tremendous work by the team on working capital improvements.
Speaker Change: We've reduced inventory year-to-date by over $160 million, so it's great to see the actions that we put in place starting to flow through.
Speaker Change: in the reduction in working capitals and seeing that come through free cash flow. So it really puts us in a great position exiting the year and going into next year. And as you mentioned, we returned to share purchases slightly here in the third quarter, back in the third quarter.
Speaker Change: And we're continuing to take a systemic approach to sharing purchases here in the quarter and as we go into next year. But with the debt leverage ratio at 1.6 times, which is on the low end of the target range.
Speaker Change: overall comfortable with the net debt cash position, but puts us in a nice position to really return to either returning capital to shareholders, or as you mentioned, giving us capacity for M&A opportunities as they arise.
Speaker Change: Maybe just, you know, some comments on M&A. Overall, I would say that, you know, as Nate said, returning capital investors through, you know, share buybacks or M&A is
Speaker Change: you know, two really good uses of capital for us. I would say that our M&A philosophy hasn't changed. It really, overall, it's the leverage.
Speaker Change: You know, in advance our vision and our strategy moving forward is how we think about it.
Speaker Change: You know, we target, you know, a specific, um...
Speaker Change: opportunities that are really closely adjacent and synergistic to what we we do today.
Speaker Change: Clearly, as you pointed out, the strong balance sheet gives us optionality to return capital or look at opportunities within M&A. I would say that the bar is a bit higher today, even with the increasing free cash flow from the idea of...
Speaker Change: you know, doing something larger certainly would entail, you know, higher interest rates and...
Speaker Change: You know, there's still a bit of uncertainty out there from a market perspective.
Speaker Change: If we were going to acquire something, we'd want to be assured of the revenue stream coming in.
Speaker Change: We're excited about our business as it exists today, and I think that discipline to M&A is how we think about it as a vector for long-term growth that we can use in addition to returning capital to shareholders through share buyback. So both are an option.
Speaker Change: And I think we continue to look and be inquisitive in the marketplace from an M&A perspective, but it's got to meet our strategic vision
Speaker Change: And Bill, just as a quick follow-up, I think in your prepared remarks you referenced that the
Speaker Change: the AI-enabled enterprise mobile computers will be showing, you'll be showing those at the NRF show early next year. Does that mean that you are closer to commercialization than perhaps you would have thought just a few months ago when you discussed this on the Q2 call?
Bill Burns: Yeah, we, um, I would say yes. So, uh, we
Bill Burns: demonstrated an early version of AI companion really on mobile devices at NREF last year. This will be a continued advancement along those lines at NREF this year, working closely with you know our partners of Qualcomm, Google, and some of our customers to continue to advance that opportunity. I think that this idea of a digital assistant on a mobile device assisting the frontline worker
Bill Burns: that'll drive productivity and really elevate the customer experiences.
Bill Burns: and we see this as being running a large language model on the device without requiring connectivity to the cloud. You can have connectivity to the cloud if you want or not. And a lot of our customers don't have a lot of connectivity out of their environments. Think of retail stores, think of warehouses and others.
Bill Burns: That's an advantage, and I think it's something that we're focused on, and likely in 2025 what we'll see is some type of commercial offering from Zebra. We're working through what that really means from us, but I think it bodes well for us moving forward from
Bill Burns: working closely with our customers, making sure we're understanding how they're using and building large language models and their data. How do they protect that? How do they upgrade that? How do they keep it current within the mobile devices? And we're working closely with them to make that happen. So I think, yes, we're getting closer, continue our investment there, and continue to move ahead with the development cycle in that area. And we're gonna show a refresh demo at NRF that takes it kind of the next level this year.
Speaker Change: Our last question comes from Brad Hewitt with Wolf Research. Please go ahead.
Brad Hewitt: Thanks guys for sending me back in. It looks like you bumped up the Q4 implied sequential revenue growth by about 200 basis points.
Brad Hewitt: but you took down the implied sequential incremental EBITDA margins a little bit. So, curious if there were any mixed benefits in Q3 that you did not expect to occur in Q4 and how should we think about the puts and takes the Q4 EBITDA margin line on a sequential basis.
Speaker Change: Yeah, Brad, as you mentioned, so look at our EBITDA guide of 22%.
Speaker Change: It's up, you know, just over a half a point from sequentially from from Q3 and again primarily driven by the volume leverage and I think the the real change is
Speaker Change: Just the deal mix overall, with the higher mix of large deals and some of the large deployments in North America that somewhat of a drag sequentially on gross margin, driving that down a bit.
Speaker Change: and OPEX relatively flat, just based on some of the project timing. So, and the majority of any incremental gross margin on a sequential basis is embedded within gross margin. So I think that's...
Speaker Change: That's really the no other, you know, kind of I think Q3 obviously came through stronger I'm just seeing all the different actions flow through on the higher volume and then The real change from Q3 to Q4 is just the mix within the portfolio
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Mr. Burns for any closing remarks.
Bill Burns: In closing, I'd just like to say thank you to our employees and partners for their continued support in delivering strong Q3 financial results.
Bill Burns: It was about 10 years ago, actually 10 years ago this week, we closed the Enterprise Acquisition and I would say that our relentless focus on innovation and our continued commitment to our customers continues to drive differentiation for us in the marketplace and secure competitive wins.
Bill Burns: and I would say we're well positioned to advance our industry leadership as our end markets recover. So thank you. Have a great day, everyone.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation. Goodbye. You may now disconnect.
Speaker Change: In One Minute Thanks for watching!