Zebra Technologies Corporation (ZBRA)
NASDAQ OMX 27th Investor Program
December 7, 2011 08:45 AM ET
Michael Smiley - Chief Financial Officer
It is really grateful to be here. We are excited to be able to spread our message a little bit wider and share with you a little bit about Zebra Technologies. One of the things is that I think you will probably here a lot more talked about the value proposition of managing assets smarter and that's the business that we play in. We help identify track and manage assets, transactions, and people. It helps people gain visibility into what they have and how they use it and to use that smarter. We find that the theme for that kind of value proposition continues to grow in the industry and we are excited to participate in that.
The things that we do is we are known for being a global designer of industrial printing for labels, receipts, and tickets. We are the largest player in our market which is a discrete label printed from the thermal printer. We also sell supplies, accessories and aftermarket parts as part of that business. We are also in the radio identification (RFID) type business, not that we make the labels themselves but we are printing code in those and we will talk a little bit more about that. And then lastly, we're also working in what we call location solutions, so RFID will let you know what something is, the locations solutions will let you know where something is, and we also play in that area of the market.
The value proposition to the customer is a very strong return on invested capital. Our customers are able to see the benefits of the solutions that they invest in, usually very quickly around six months or so and it helps them again, increase the velocity of their throughput so the amount of working capital they have to have goes down and it also helps them to work more efficiently, so the amount of processes and people engaged in that can be managed more effectively and then it also helps us in safety and security and compliance. Actually you will hear a lot more about figuring out where the peanut butter came from and those types of things.
When you look at the trends that we play in one of the big things is obviously globalization, most businesses seem to be going anywhere in the world they can to find the best solution for their customers as those supply chains expand that benefits the solutions that we have because our solutions help manage those extended supply chains. Certainly, we also look for increased efficiencies, cost reductions in supply chains, which we play into, there is continued safety and security concerns, certainly as people go in and out they want to know who is there and who shouldn't be there, know where things came from, make sure the right thing is given to the right person. So the demand for asset information includes what is it, where is it, when is it going to arrive, and that action now moving into house, is it been too cold, is it been too hot, those types of things that are becoming more and more important. So basically what we are engaged in is helping give a voice to assets that gives data to people that allows them to manage those assets. So we sort of view this as a convergence of physical and digital and that's the role that we play.
When you look at our competitive advantages we are the industry leading player in our business. We are probably three times larger than our closest competitor in locating technologies. We have global reach, we will spend a little bit more time with that but we sell around the world, so our customers with a Fortune 500 can get support basically anywhere there are. We have a very strong channel program. What that means is we have a lot of partners who are installing solutions to a lot of end customers that use our printers and that's helpful because it gets us to more end solutions and makes our product more pervasive in the industry. That leads to a large installed base. And a large installed base is good because as those printers expire or come to the end of their life they tend to replace them with similar same brand printers. So what that gives us is almost like an annuity in the business as printers continue to come to the end of the life. We also have the broadest product line. One of the things with our product is you know, if you have a PC and you hook in a HP printer, the HP printer just as plug-and-play, whereas in our industry the operating language is proprietary. So ours is called Zebra Programming Language (ZPL) and so as a result our operating language is within our entire product offering. If you have an installer that knows how to install a tabletop printer, you can also install a desktop printer or a mobile printer. Installer is a value-added reseller having the ability to sort of use your technicians to install our printers really easily, helps a great deal. Again we have a very broad product line so as people get comfortable with one of our printers they gain confidence in investing in another one.
And then again we talk about the breath of channel. We have the largest channel offering, largest set of channel partners in the industry. Again we have broad product lines, 19% of what we sell is supplies, but we primarily sell -- we are a hardware-focused company that is primarily selling printers and other hardware type solutions.
We have high profitability. Our gross margins have been consistently close to 50%. Again for a printer-type business we are very proud of how we achieve that. We have operating margins approaching 20% to the bottom line. Strong free cash flow north of $100 million every year. Low capital investment required. We are not capital intensive in our business. Right now we have close to $300 million in cash and investments. We have an untapped line of credit and we also have no debts, so that gives us the flexibility continue to invest in our business. That's important because as the -- naturally the economies go up and go down, and when they go down we are able to continue to invest in our business and extend our leadership. So when the market turns around we are even further ahead of our competitors who don't have the same kind of financial metrics that we do.
So want to talk a little bit about how we are growing our business and there is sort of three areas that we are focused on, one is expanding our geographic growth in regions, growing in new verticals and applications in strategic accounts and lastly out innovating our competitors. So I'll spend a little bit of time in each one of those. For expanding our presence, we have been developing -- we are putting more resources in developing economies, so that would be like China, India, Brazil, Turkey, Middle East. In 2009 when the economy was going through its time we follow those good times to make investments to sort of see how robust those opportunities were. So we did a lot of marketing research, interviewed hundreds of end-users and channel partners to figure out where we think we could do best and how we would do well. It's one thing to say you can be successful in North America but these are different markets. And so from that we learnt that we still have some great opportunities so we have been investing and expanding our presence in China and those other countries and as a result our growth continues to go very well.
We also as a result of that came out with a better awareness with the value propositions for a printers that these customers require and from that we design products that are focused in these high-growth markets that we think will increase our competition. When you expand in this presence in these markets we have been in these markets we just haven't been there in the big way. So fortunately we knew a lot of the customs and things that were necessary to be successful in running a business there. So it wasn't like we were starting from square one. Again you can see the regions the markets that we expanded in and we also knew which verticals would be attractive for us. So for example, in China we have been very strong in manufacturing, we are adding retail and government, and healthcare is an area to focus in those different countries.
So you can see our global expansion. In 2000, we had 63% of our revenue was in the green North America and now it is 41%. And what that means is we had tremendous growth in both Europe, Asia and Latin America. So we can point to some great successes by virtue of that expansions story. I think the other thing is as you go into those emerging markets you have two other phenomena, one is the adoption of AIDC or identification technology is not as advanced as it is in developed countries. And so that ramp still has to go. The other thing it has is they have a growing middle-class which is increasing demand for products that would benefit from these barcodes. So those two phenomena are really benefiting us as we expand into these emerging markets.
Next area of growth is stronger channel relationships. We continue to expand our partners and focus on those that are strategic in the area. Again because of our brand and our reputation these partners are also looking to work with us and so we get excited about that. We also work with systems integrators and integrated software vendors. Now that’s important because usually these two groups of enterprises that are focused in developing new solutions that employ our technologies. And what we want to do is make it easy for them to use our solutions in their products, so that when they come up with a new attractive solution we are part of that. To be honestly, we haven't done a great deal of that over the last 10 years or so and this is something that's new for us, it's not something that all of a sudden turns on real quickly but it is something in the long run we think that’s going to continue to benefit our company to help us to be forefront of managing assets smarter.
The other thing is -- I think one of the things that I don't know that people appreciate is we do have -- we are increasing the level of innovation in our products. We hired a couple of years ago a new head of engineering out of HP, he has created a platforming approach to developments that helps us to come up with new products. A couple of years ago we would have come up with maybe three or four new products in a year, now we're coming up with about 12 and it is not because we are spending four times as much R&D. So as a result of that we are able to commit to our partners with like a good, better, best type approach for what they are looking for. There is some really neat things that we are doing, so for example on the left you see the QLn320 is sort of a product that the name just rolls off your lips. We can tell we are an engineering company, who else would name a product QLn320 but nevertheless what's neat about this product is it has the ability to adjust the user interface, you can program it so that if you're a retail customer and you have a high turnover of employees you want to minimize the amount of training you can do. So you can program it so it will do certain processes very easily just by hitting one button instead of hitting several. We find that to be -- we find our end customers are finding that to be attractive. We also have one of the only mobile RFID printer/encoders in the industry. Again because we have the scale we would probably spend three times more than our closest competitor in these printer technologies which allows us to continue to build our leadership.
The other thing is that we believe that the business of tracking assets continues to evolve as does the technologies. We have a unique place to be able to play in that. So Horizon 1 would be sort of the barcode printing that you know about and maybe the card printing on the plastic cards like employee cards or drivers license or health cards or credit cards, gift cards, we called that more Horizon 1. Horizon 2 investments are the things that we are doing. They would be more like passive RFID type investments where we are seeing – passive RFID is less than 5% of our business but we see that market taking off in a nice way. Our market share in passive RFID printing and coding is probably twice what it is in the other parts of our business because we are providing more value in that solution we also have a higher profitability in that business. So we sort of view Horizon 2 as more of a passive RFID whereas Horizon 3 might be more like adjacent which would be like active RFID which is a passive RFID with a battery that sends out information and can be triangulated to know where something is. So we have solutions that are continuing to evolve that will allow companies to better manage those assets and continue to attain value in what they do.
For financial highlights, we have had record sales, we have been feeling good about the way things are going. I think over the last couple of years we find companies that have been reluctant to add employees but are looking for technologies that can do the things that perhaps employees would have done before or look to increase efficiencies. So for us we have benefited that. Obviously you can see our sales last quarter was $253 million, it has grown nicely over the last 9 quarters. Our earnings-per-share from continuing operations continues to grow nicely. We think that in our business, our top line can grow into high-single low double-digits, we think our gross margins will sort of stay in the 49% to 50% range and we are able to grow our operating expenses at a rate that is slower than our top line growth. And then as we generate cash we will either be making investments or we will be buying back stocks. So when you put that all together it’s a very attractive equation for bottom-line growth.
Recent developments, we had about four years ago made investments in a company called Navis which was a location solution -- actually an ERP type solution for terminaling business where operators would know where different containers were and would know how to move those most effectively. We sold that $190 million. If you look at Zebra we tend to have solutions that are very horizontal. We were expecting to be able to take that business and take some of those solutions to other verticals and we found that there is more value actually just investing in that specific vertical. So we have realized that they would be more value for someone else to own that asset than for us. We also did the same thing with Proveo, which was airport solution company that helped manage the fleet that works around aircraft. We're also investing in ERP implementation. We went live in EMEA with order to cash January, we will be going live in the first half of next year for North America. We think this is one of the ways -- in the past we had a very patch work set of software running the company that was highly customized made it difficult to advance with the business. We think this is one of the ways to be able to grow our top line, our operating expense at lower rate than our top line.
Capital deployment year-to-date, we spent $146 million buying back stock. We have reduced the shares outstanding by 27% over the past five years. And keep in mind we still have $300 million of cash. The way we view things we want to invest in the highest risk adjusted returning investment that is available. I think you can see that we felt like our stock was an attractive place to make those investments.
We believe that we are well positioned for growth and higher returns for our shareholders. We do believe we have the opportunity to increase our operating leverage, maintain attractive gross margins. When you think about it we have been having attractive gross margins for decades. I think we have demonstrated the ability to do that and confidently we continue to do that. We think we can manage our operating expenses so more of the top line can flow down to bottom. And then we're also trying to leverage our location solutions, the other part of the business, and we think that that would help us grow long-term.
So these investments will continue to have growing impact in our business and we will continue to have high returns as we have geographic expansion, innovate with new products and work on channel expansion. And then again, lastly, as we use our capital wisely certainly to continue to buy shares back.
So with that that's the presentation I have and now I would turn the time over to you if you have any questions. Sort of went through that quickly. If not what I would suggest is Doug Fox over there and myself if you want to come and chat with us one off we are more than welcome to do that. Here is a question.
Just looking at the figure that you put up it rather looks like the American market is quite mature, the growth rates over the last 10 years have been quite low and have close are you to get into the state in the other markets and first of all would you agree with what you said?
Well I think we're doing a couple of things. We are aware of the growth rates in North America and again I think in North America the adoption of the IDC has had a number of years to play out. We do find that there's a lot new – there continues to be new processes that people are implementing whether it is in retail. So for example at Wal-Mart they use line item RFID tagging and stuff like that and so as a result they find it very valuable to know what's on the shelf and what's not because when you go and buy a pair of jeans from Wal-Mart if it is not on the shelf you go someplace else. And so in that piece they find it if they can just put RFID tags and they can just walk through if they want they can very quickly and rapidly and cost-effectively make sure these things are shelved. Then what happens is the manufacturer say, “Hey, this is something worthwhile for me to participate in because now I know that if I have an RFID tag there is more likely that my stuff will get on the shelf and will get sold.” That is just one example of where we think we have growth opportunities. The other thing we are focused on is working with system integrators and ISVs again with new solutions. And lastly is we are spending a little bit more effort going direct to enterprise. So we have been successful in working with customers again like Wal-Mart, UPS, FedEx directly and we want to expand on that. We think we have opportunities to continue to build on that. I would argue that we hope to increase the growth rate of North America, I don't expect it to ever be like China in the near term but we think that broadly we have great opportunities to continue to build the business in an attractive way.
Other questions? Well, if not then thank you very much, I appreciate your time.