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Zebra Technologies Corp. (NASDAQ:ZBRA)

NASDAQ OMX 29th Investor Program Conference Transcript

December 5, 2012 5:45 AM ET

Executives

Doug Fox - Vice President, Investor Relations and Treasurer

Analysts

Unidentified Analyst

So next we have the pleasure of hearing from Zebra Technology Corporation. Doug Fox is the Vice President, Investor Relations and the current Treasurer. Let's welcome, Doug.

Doug Fox

Yeah. John couldn’t make it. I’m for this presentation here. Thank you, [Autumn], and thank you, everybody. It’s a real pleasure being here today. It's a real exciting time for Zebra. I think we are poised for a lot of continued growth in the company and we have a lot of ground to cover this morning. So let's get started.

Okay. The forward-looking statement as we are all use to. And for those of you who are unfamiliar with Zebra. We have been in business now for little more than 40 years. With throughout our history, a company with great amount of technological expertise and we are by far the market leader in our business. We are going to be close to a $1 billion and hopefully with a little bit of luck, bit over a $1 billion in sales this year.

And I think particularly in this environment where we have some challenging issues, business issues in Europe which are well known. We have a great diversity in our business across multiple dimensions, across products, across geographies, across channels, across a number, across industries.

And this has really enabled us to continue to gain share and to continue to extend our leadership in this relatively difficult time and to post relative to our competitors in particular some very -- some pretty strong numbers for the company.

Okay, getting to the meat of what we do, Zebra really helps improve our customer's business performance through solutions that really give a digital voice. The real value add to what we do to for our customers is to provide or enable them to gain greater visibility into their assets and what they can see, they can manage better and they can improve their overall performance.

So what we do is we help them identify, track and manage their valued assets, whether that’s people, whether its transactions, whether it's cars and a lot, whether it's inventory, what have you. And by far Zebra is the preeminent company in the industry that helps our customers do that.

We do this with a very broad portfolio of products. For those of you who know Zebra, you probably maybe thinking about us as a barcode label printer company and clearly, thermal printing is a very strong part of our heritage.

We do have a very robust line of printers. In addition to that overtime we’ve developed a very strong line of printer management and connectivity tools, printer consumables and services, primarily labels and ribbons that go through our printers.

In addition, we have a very strong position in the upcoming technology, emerging technology of radio frequency identification, which is starting to be rolled out by retailers in particular around the world, as well as real-time locating systems, which is essentially RFID with a battery that provides very close and accurate real-time location on over a wide area, such as a campus or a factory, or what have you.

And the real value, again, value to the customer is really at a very relatively low cost and high return. So the products in which, the solutions in which Zebra products are embedded might costs, maybe, at the most make perhaps a couple million dollars. The products, you might buy Zebra products that maybe a couple hundred thousand dollars and the pay back on these solutions might be six months to 18 months.

So unlike perhaps putting in an ERP system and wishing you knew what your return was on that investment. There is a very demonstrable return on the investment for Zebra either through operating more efficiently, improving customer service or even increasing safety and security. So there is, again a very measurable ROI on the products in which, on the solutions in which Zebra is embedded.

There some very strong powerful trends that are driving the growth for Zebra over a long period. First, you have the industrialization of emerging markets such as China, Brazil, India, places like that.

And as these emerging markets continue to develop, they are going to need great -- they are going to demand greater use of automatic identification solutions to that drive -- to drive the continued growth.

Increasing global competition as well, so which is driving productivity and one that is perhaps not as obvious but growing middle class take China for example, where historically that has been a very industrial or manufacturing-based economy, whereas today with a growing middle class, they're demanding more cars, more washing machines, more healthcare, more government services, which is driving the demand for more barcoding, more identification technology and again, driving demand for more Zebra solutions.

Also focus on granting -- gaining efficiencies and cost reductions in complex supply chains, example for Zebra, three or four years ago we were actually manufacturing our own products in our own factories, in the low cost areas of Chicago, Illinois and Los Angeles, California.

Today, it's 8000 miles away in Guangzhou, China and there is, that increasing complexity really demands greater understanding of where your assets are, more in real time and so therefore greater demand for the solutions.

In addition to that, there are some interesting key technologies that are -- we believe are continuing to offer greater growth for the company. And Gartner in 2012 published a list of 10 emerging technologies that and Zebra we believe plays into 10 of -- eight of these, excuse me.

For example, media tablets and other things like that if you walk into a Macy’s or if you walk into some stores today, media tablets are the range in Zebra printers often hang off of these tablets and we’ll continue to hang off of those tablets or mobile centric solutions, where you have more people on the road and the need for printing devices for offering receipts and things like that.

So in the Internet of things as well which is offering greater use of the technology as people want to know in real time, not just what things are, but also where they are and increasingly how they are. If you take for example a shipment of fresh produce from Argentina that might be coming to the United States and the demand -- and the requirement is that that product be under refrigeration for the entire time that it's being transported.

And perhaps there is a spike, perhaps the refrigeration unit went out and the raspberries have been sitting in 90° heat for a week. Well, the customer can see that and he could say, well, we want, we don’t want that shipment. We see -- we have the evidence that it's no longer a product that, it hasn't met -- it hasn’t been under refrigeration for the whole time. So, again, these are things that we believe will continue to offer further growth for the company.

Let me offer some insight into Zebra. Zebra as you know has some awfully good margins and we have a number of sustainable competitive advantages in the marketplace. And the first is the leading global brand. Wherever you go, even in China and places like that, Zebra has the preeminent name in automatic identification.

We have by far the broadest product line of any company in our industry. As you could see here, we have high-end printers, midrange printers, some of the higher growth areas lately have been in mobility, so the mobile printers, desktop printers as well. And for those of you who aren’t familiar with the company, increasingly software and then consumables that go through our printers.

We also have a growing line of card printers. And all of these items really are designed for use at the point of issuance, compared with products that might be use in the central location. These products are used for offering, let say credit cards, in banks in, for right there, for the customer rather then having somebody waiting a mail to get it.

One area which is very exciting for us, you could see down on the lower right-hand corner is wristbands. We have a growing business. We recently made an acquisition in the area of wristbands for healthcare. So identifying patients is a really new and exciting area for us for growth.

As you could see here, there is a great amount of diversity in our business. About 75% of our product is in hardware. And even among the hardware, it’s pretty well diversified across a number of lines.

And unlike a lot of companies, we have a pretty healthy revenue stream from all of our products. We are not really dependent on one or two of the product lines within our portfolio to really generate sales, it really comes from the broad portfolio, and clearly in some cases, in some periods, it might be stronger by region or by particular time and economic cycle but generally speaking, it’s very broad. About 75% of our product is in hardware, which is primarily printers and RFID devices and about 20% or 19% in the supplies area.

Interestingly, you might -- we make our money primarily on the hardware. Okay. This is not the HP model per se, where you make really nice gross margins on the hardware. We make acceptable margins on the supplies but really what drives the business from a P&L perspective today tends to be hardware.

Overtime, you will see continued growth in supplies. That’s an area where we do believe that we do have opportunities for growth, it tends to be. The supplies do tend to be more European and North American centric. And I think you are also going to see some further growth in the services in software area which right now only represents about 5% of our business.

From a geographic perspective, we sell into about 100 countries around the world and right now we have about 40%, 43% of our business in North America, which has been very strong for us. It was up about 10% for us in the second quarter, up about 5% in the third quarter and that has really helped a lot to offset the relative weakness that we have seen lately in the EMEA region. That’s been down about 11% and on a constant currency basis down around 5% versus a year ago.

Some a little bit of softness in Asia Pacific as well as you’re probably aware the weakness in Europe is really creating little bit of a backup into Asia Pacific as well. Still, we have a great amount of, I think, operating leverage in the business at this point because we've invested fairly heavily in expanding our global presence in the emerging markets which have paid off for us very well to-date, kind of, a little bit of a pause right now but we are well positioned that when growth resumes in this area, we don't have to really invest a whole lot in the sales and marketing in these regions to affect further growth.

Worldwide presence, we’re in about 100 countries around the world with our headquarters in the Chicago area. And this is really -- our channels are really considered one of our strongest assets. We have global channels. We are primarily an indirect model where about 80% of our product is sold through distribution.

We are a company that -- we are able to sell anywhere -- really anywhere in the world in for multinational companies. This is a very strong selling point where, for example, Global Retailers, we could sell in Chicago and we could sell to them in Brazil or in Europe and we have that capability of doing that where number of our competitors -- in fact, I don’t think any of our competitors have that capability.

This by the way is a very difficult aspect of our business to replicate. We have traditionally been a very strong channel-centric company. And a number of our competitors have kind of wavered back and forth in their love. They fall in love and then out of love with the channel, we've always been very straightforward with the channel. And there is a great amount of loyalty in the channel for Zebra.

In many, many cases, our channel partners lead with the Zebra. Okay. They are only going to perhaps sell a competing brand if the customer requires it. Perhaps there is an installation of a competitive product that they have to fulfill. But in most cases, our channel partners which are not necessarily exclusive to us, they do lead with Zebra.

So all of these competitive advantages really deliver strong financial benefits, first, high growth. In 2010, we grew about 21%, last year about 10%. This year is going to be obviously a little bit tougher because of the weakness that many of us, at least Zebra is seeing in the region -- in the European region.

We have high profitability even with the relative growth that we’re seeing today. We operate on gross margins of roughly 50%, operating margins of roughly 20% and we're a very strong cash flow generator. So far this year, we’ve generated $145 million in free cash and that's only for the first nine months. We have one quarter to go and we have approximately $369 million of cash and investments on our balance sheet.

And we've been very active in cash deployment, I think in a very responsible way. First, obviously we invest -- continuing to invest in our business but in addition to that we've been buying back stock at a fairly good clip. Over the past five years, we’ve actually shrunk our share base by about a third and by deploying about three quarters of $1 billion in stock repurchases.

So we’ve gone from 72 million, down to about 51 million shares of stock outstanding today. And in addition to that, we’ve made some acquisitions along the way as well. And lot of people ask whether we feel that we could put some debt on the balance sheet as well. I don't think that there's any philosophical reason why we don't. We just happen to have a very high-class problem in that. We just generate an awful lot of cash.

And the success has translated into some very nice sales growth for the company. You could see the dip in 2009, which is really only the second time in the company's history that we actually had a sales decline. And then -- since then, actually some very nice growth as you could see. 2012 again, we’re going to be touching close to that $1 billion mark. The number we have up there actually is for illustrative purposes and by no means are we confirming guidance at this point or anything like that. But you could see the trend continues to be up.

Very quickly now running through the areas that we’re investing for growth and profitability. Overall, we believe that we can grow at about 8% to 10% clip over the course of the business cycle through deeper penetration of high-growth markets and regions. These are largely things that we've been doing for a long time and we will continue to do.

We've been very successful in taking share over time -- over our competitors and we expect to do that as well. And we have very, as I pointed out earlier, we have some very attractive industry fundamentals and we are improving the cadence of our product introductions.

We’ve got some operating leverage in the business as well. We’ve got high return on investments in of our geographic expansion. Again a lot of those people are still in place that we put in place over the last couple of years. And as business conditions improve hopefully here in Europe as well as in Asia Pacific, again we don't have to really invest a whole lot to gain some operating leverage there.

And then also the benefits of scale, we are by far the largest company in our industry. And for example, we probably spent four times as much as any other company on R&D. And we believe we can get some real good continued benefits from scale and then continued capital deployment in internal investment, stock buybacks and acquisitions.

Very briefly, we have a five-point strategy here in terms of growth for the penetration of existing markets expanding into new markets, inspiring our people and culture, intensifying innovation and maximizing operational effectiveness. Let me go through these very quickly for you.

First, success -- further penetration of existing markets. As I mentioned, we have been very successful in gaining share over our competitors just in the third quarter here. Zebra posted essentially flat sales for the third quarter. That compares with about down 10% to 15% for our competitors and for other companies in our industry.

And in addition to that by penetrating markets, we can do that through further recruitment of expansion of our channel, both through systems integrators, as well as independent software vendors. And we’re really getting some very nice benefits from that as well as stronger ties with our strategic accounts. This is a fairly important change for the company actually. And really, we continue to fulfill through the channel, but we’re starting to develop stronger ties with the corporate entity itself.

For example, if you take a company like Ford where we previously were selling to the factories like General Motors, we might be selling to the Lordstown plant with really no tie at all to the corporation. And today we are working much harder at developing these ties with the CIOs of General Motors, of Ford, of other about 30 or 40 larger companies that will enable more of a global strategic approach to the deployment of Zebra Solutions rather than a spot approach for, let say, inventory management and things like that.

In addition to that, we have been very successful at expanding our share within particular accounts. Here is a typical retailer where about 10 years ago when we started working with this retailer that company might have been using Zebra products into three solutions in generating whatever amount in revenue. Today, that same retailer is using Zebra products in 40 different solutions.

Okay. The most recent ones would be radio frequency -- RFID, radio frequency identification for the tracking of apparel and other complex SKUs and this has been a very good model for us that we do expect to continue to pursue in the future.

We are also expanding into new markets. The impact of more sales resources in emerging markets is really -- again really built out for further benefit, some innovative new products as well as continue to expand into new markets.

As an example, we’ve developed new printer products, card printer products for penetration of financial -- the financial services industry, which we were not in perhaps five years ago, where companies particularly in South America are offering their customers cards, their credit cards on site rather than sending them through the mail, because the mail there is very unreliable, customers can actually come and pick their cards up right there in the bank in the local branch and that’s being done on a Zebra printer.

Growth in healthcare is another exciting area for us. So, we made an acquisition in July of a company called LaserBand, which gives us some really nice benefits with some proprietary products. Healthcare represents today just about under 10% of our total sales manufacturing, in fact, is about 50% of our sales, retail about 20% to 25% of our sales. And this offers us a really nice opportunity for growth in a very traditional way where LaserBand has some excellent ties with the general purchasing organizations of hospitals and healthcare institutions.

So, we're able to leverage those sorts of relationships for the sale of more Zebra products and at the same time with Zebra's global distribution we're able to take largely a North American product and start to sell it overseas. We're also intensifying innovation in a very good way. This year, we expect to introduce about 13 new products for the company that's up from 12 last year. And it's -- about five or six years ago, we were probably at a pace of about four, five products in a given year.

And we've also done a lot to standardize the process, the product innovation and the product development process, where today we’re using a lot more commonality of parts. We do some -- with now being able to reduce costs compared with a five or even longer ago where essentially, we developed a product from a blank piece of paper and where even the screws were different on our printers.

So, we've been doing a really good job I think and I’m really proud of what we've been doing in this area. And another interesting area is that, you think of us primarily as a hardware company. Today half of our engineers are actually software engineers. So, we're seeing a lot more opportunity in that area through the development of cloud computing and things along those lines that really were not available a number of years ago.

Driving some operational excellent, this is a little more history that we completed our outsourcing to reduce our costs back in 2009, end of 2009 that actually benefited us by about 300 basis points over the last few years. So, we've been very successful in lowering our cost and actually improving our responsiveness to our customers as well, particularly, in the Asia Pacific region. We made a couple of divestitures in 2011, which helped us to focus the company a bit more.

And we're actually nearing the completion of our Oracle ERP system that has been ongoing for number of years. It's actually been quite as successful sort of implementation you hear about this horror stories about our companies actually at Zebra. We've been doing it internally and really pretty much without a hitch. We're doing it over time in stages and it's actually been -- actually a very nice thing for us and helping us to actually improve the outsourcing model as well.

We were not able to really take advantage of -- the true advantage of the outsourcing model without moving to the new system. And we're -- I think, by about the middle of next year, we should be pretty much completed with the ERP system.

And just to wrap up here, Zebra is following a proven winning strategy. We're everyday extending our leadership in our industry. We have opportunities for further operating leverage in the business and the growing impact of our investments both internal investments as well as the recent acquisition we made.

And we will continue to invest in geographic expansion, new and innovative products and in our all important channels. And then finally, I think you will continue to see very responsible capital allocation as well. We are -- every quarter we’re in the market buying back stock. We are as well, as you know, not a very capital intensive business. So certainly the rest of the cash is either focused on investing in the business or we do have a fairly active M&A program that we do expect and hope we'll add to the growth and value of the company as well.

And that's it. And we have about five minutes for questions for anybody who has any?

Question-and-Answer Session

Unidentified Analyst

What is the average life of your printers. So essentially for your most selling products what is the replacement cycle?

Doug Fox

So that's a great question. We have a broad range of products, some of which might have an average life of about seven years. Our faster -- the faster turnover products tend to be our mobile printers and our desktop printers, they tend to be lighter duty. You tend to replace them versus repair them.

And in addition to the mobile -- in addition to that, the mobile printers, a lot of times companies would replace them, because of changing wireless standards. Particularly retails are -- retailers are very sensitive to encryption technology and to get to that next level of encryption technology with Zebra printers. They do tend to buy new ones.

It's interesting that just to expand upon that a little bit Zebra's products today are largely essential to the operations of these companies. So, when a retailer opens, a typical retailer opens a new store, they have to put in the types of products that Zebra provides. Because they are very focused on the technology that really helps to improve the productivity and enhance the customer experience.

Particularly the bricks and mortar stores, they are scared to death of the internet, of e-tailing and anything that they can do to improve that customer experience ether from faster checkout or an improvement in some sort of customer experience. They are going to do it and the Zebra products in particular are very good at enhancing that experience. Any other questions? Yeah.

Unidentified Analyst

You mentioned SAP implementation is underway?

Doug Fox

Oracle actually…

Unidentified Analyst

Oracle…

Doug Fox

… but that’s the same thing. Yeah.

Unidentified Analyst

Yeah.

Doug Fox

Not to them.

Unidentified Analyst

As long as Oracle wanted to be.

Doug Fox

Yeah.

Unidentified Analyst

So, inventory management, I guess, what I’m getting to, I guess, any other pieces and people in place, inventory -- finish good inventory management, what -- that is a -- this is a basically the finish inventory management, finish inventory is basically increasing last year, four, five years, and just wondering what’s steps are being made to improve, I guess the efficiency of that finish good inventory number on that same direct model, so you don’t necessarily what’s get some full visibility through the channel…

Doug Fox

Sure.

Unidentified Analyst

… and how is that getting managed and how can we expect?

Doug Fox

Sure. Actually there are couple of points in that, first, when you go back to 2008 and 2009, we’re actually -- we were actually weight under inventory. As we move to the outsourcing model back in the later part of 2009 as the supply chain really started shutting down because of the worldwide recession.

We actually had inventories that we very, very low. And it seems like at the later part of 2009 somebody flip the switch and we have this much of orders coming in. And we did everything we could to actually improve -- to get product to the customer. And that included bringing in a lot of inventory just from China over to Zebra.

Couple of things there, first, our inventory would naturally increased, because we have more product on the boat so to speak, because we take possession, our contract manufacturer is Jabil. We take possession when it leaves Jabil. So there's a lot of product at any given time on the boat and we have product within our distribution center.

So I would say that, that ramp up was very important to us, because we want to make sure that we have product that is available for our customers and it give -- at current interest rates it's not a big deal to carry it and our products have very long commercial life, so there's a very low risk of product obsolescence.

That said, we are probably a bit over inventory right now and we are -- we do have steps in place to bring that inventory down overtime and I think that's part of the learning curve when you go to an outsourcing model, where we kind of went over there, we did it, but now we are perfecting it and part of that inventory reduction is part of that learning -- of that learning process.

As far as channel -- as far as inventories in the channel, we actually have a very good visibility into that. And I could tell you categorically that there's really no bubble or anything like that in the channel. The industry itself has moved largely to what’s call the two tier model, where you have Zebra then the distributor, then the value-added resellers, then the customer.

The value-added reseller today does really -- doesn't really had carry inventory and at the distribution level, we compensate our distributors on their seals out, not on sales in, because you really doesn't do any good for them to carry a bunch of inventory that's not being moved. So, we’re pretty comfortable that at that level in particular there we are comfortable with the inventory levels.

I think we have to move on from here. So thank you very much for your attention. And we will always available for if you have any further questions.

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