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Zebra Technologies Corporation (NASDAQ:ZBRA)

Deutsche Bank Global Industrials and Basic Materials Conference

June 14, 2012, 11:00 a.m. ET

Executives

Mike Smiley - CFO

Doug Fox - VP, IR

Analyst

Eric Moskal - Deutsche Bank

Eric Moskal - Deutsche Bank

Good morning, I’m Eric Moskal with Deutsche Bank investment banking. We are very pleased today to be hosting Mike Smiley, the CFO of Zebra Technologies. For those of you not familiar with Zebra, the company is a world leading provider of barcode printer solutions as well as a range of other attendant technologies for supply-chain management and asset tracking across a variety of verticals. So without further ado, I'd like to hand it over to Mike for his presentation.

Mike Smiley

Thanks Eric. I appreciate having the opportunity to be here with you. Today talk to you little bit about Zebra Technologies, first of all business is tough, everybody has to read and memorize and we will give you quiz at the end. First of all, I think one of the things as Eric mentioned is that we view ourselves as helping our customers improve the performance of what they do to identify track ad manage assets, transactions and people. Ad we are seeing with the passage of time that there continues to be meaningful value in the market for helping our end customers track and identify manage their assets in better way. And that’s helped our business grow to what it is and is continuing to move it forward in a meaningful way. So gaining visibility is again a theme of, I think you hear lot of companies talk about.

What we do, as Eric said we are the global leader in design and sale of industrial printing, labels, receipts and tickets. We also have solutions that work with radio frequency identification, so for example the printers will do they call printing and encoding. So, if you have an RFID label with you will also will print on the outside and encode that RFID on the inside. So, we are in the radio frequency identification business. Location, solutions we have real-time locating solutions that help you know what’s in something but where something is and eventually hopefully how something is. And we also do supplies, accessories after-market parts and services. So, that’s mainly the business the products that we offer at this point.

We look at sort of what it is we provide; number one is, we do have a measurable and sustainable ROI. Think over the last couple of years, our business has benefited as companies have tried to invest in technologies and solutions versus headcount. And our solutions and things that we plan to are definitely optimization things that help companies manage the resources and limit the amount of headcount that they need. And so people are putting more money into technologies and in headcount.

With ROIs typically runs six months to a year, we tend to be involved in a lot of end products and solutions. So, when you look at what you are having as customers they are trying to increase the velocity of the throughput, how much stuff they can put through their system. Also trying to operate more efficiently, so they end up with less resources doing what they need to do also increasing safety, security and compliance. So, for example if you are trying to track something back, there has been some type of defect having those barcodes and identification things are very important.

So anyway, these things all help increase revenues, reduce operating expenses and avoid capital expenditures. So, typically we find that our solutions play in areas that our end customers find very attractive.

When you think about the trends that are driving our products and solutions, is first of all, supply chain is continuing to be very complex, is companies have to be very competitive offering cost competitive solutions. These supply chain extent further and further. So, having the ability to identify and track those assets is really important. There are also, everybody is looking to enhance the productivity and minimize our investment. And obviously industrialization of emerging markets continuous to be an important part of what we do.

So, for example, we will talk little bit more, we have been drawing internationally. One of the reasons that’s important is because the adoption of these technologies is not as great, and some of us say the BRIC countries and so that provides a great opportunity for us to expand our business in these emerging markets.

We also have the growth of complimentary markets. So, for example internet connectivity is important. We have wireless solutions and we also have solutions that can work through the cloud. And that continues to be an attractive business and solution for us. So, again along with connected devices, big data, cloud computing all of these things continue to drive the need for our products.

Foundational strength, we are the global brand leaders, so if you are in the industries that we are in, you will know about Zebra. I recall our TIO has worked for another company, he is walking through one of these plants, saw one of our printers fall over and they put it back up and it kept on running, and he goes, my goodness, we need these kind of printers. So, the awareness of our quality and our brand is well known. We also have the broadest product line. Now that’s important because typically when you go out and buy an HP printer and you pop it in your PC, right, it's plug and play, just works.

For this market which is non-demand printing market, each company often some kind have multiple printing languages. And as a result as a technician you need to know that could understand the implications of that printing language when you try to integrate on-demand printers. And so for us with a broadest product line your installers or technicians can know of how to install entire product line versus smaller more narrow product lines that our competitors may have.

We also have global reach, 60% of our revenue comes from outside North America, and that’s grown dramatically from what it was let’s say 5 or 10 years ago continuing to grow internationally. We also have a very large diversified customer base. We are probably about half of revenues, manufacturing, distribution maybe 20, 25% is retail, then it goes into transportation, logistics, healthcare, those types of verticals very diversified across the industries and within those industries we are very diversified set of customers. So, we don’t rely in any one customer, one industry for our success. And we have financial strength, we have very attractive margins that appears aspire to, we also have strong cash flows, and I think those things allow us to invest in our business and we continue to extend our leadership.

We think about global leadership, we’ve had high growth, our revenue grew about 21% in 2010, 10% in 2011. We have high profitability; our gross margins have been just short of 50%, on 49, 50%. Strong operating margins also on 20%. That’s one of the things when I came into Zebra about four years ago that really impressed me as to be in a company that makes computer hardware stuff to get those kinds of margins that we do. And we have been doing this year-after-year for decades. I think as testament to the strength of our business.

We have strong free cash flow. We don’t really require a great deal of investment, infrastructure and capital especially since we all starts to manufacturing about two, three ago. So, we generate tons of free cash flow. We have over $350 million of cash and investments at the first quarter of 2012 and we have untapped revolving credit facility. So, we have a lot of financial strength.

I think one thing for us is to really good is that we tend to do well in good markets relative to our competitors. I think we do even better in that markets compared to our competitors as far as the ability to build leadership, because we do have the capacity to make wise investments when other companies tend to have to cut back.

Out of a long run, our business cycle we see our revenue growing at high single-digits, market tends to grow around 6, 7%, and we think we can extend that as we focus on some geographies, it have higher growth opportunities and as we continue to take expand our leadership in the market.

Our gross margins in the high 40%, again recently we were close to more like 49%. And our operating expense we expect to build to grow to lower rate than our revenue. So, if our revenue were to grow 10%, we would expect our operating expense dollars to grow 9.5% or something like that. The reasons it's 95% not something less is because we still feel like there is some great investments we will be making our industry to grow that top line attractively.

So, when you look at it, again we have 8 to 10% organic sales growth. How we are going to do that, we are going to be for penetration, again in high growth markets and regions. Over the last two, three years we have been investing pretty dramatically in let’s say China, India, Brazil and the growth rates in those countries have been very good. One thing that’s nice is even in those countries we do have strong brand recognition and globally around we pretty much have the same pricing around the globe. So, for us our reputation drive attractive pricing that supports our business.

We have share strategies where we are trying to focus on our competitors and the opportunities that they create by virtue of our scale and their lack thereof. We continue to focus on taking share. Attractive industry fundamentals, so we talked about expanding this supply chain, those types of things. And then I mentioned the scale already.

Operating leverage, again the geographic expansion does not require a great deal of investment. SO, that investment provides a meaningful improvement to our bottom line. And the other thing most recently is we have improved the cadence of our development activities. In the past we might have developed maybe three or four new products in a year. Last year it was closer to 12 or 13, we expect to do same thing this year.

Part of that is in how we design using platform, we have a new R&D Director, Vice President that came in probably about two years ago and has done a fantastic job in helping us simplify our products and be able to put out more products that attractive to the market.

As far as capital deployment goes we continue to invest in the core, and I think I talked about that in regards to the level of OpEx growth relative to the revenue. But we have recently done a lot of over the last five years invest a lot of capital and buying back our stock. I think we bought back third of our capital in last five years or so.

We also see probably now versus maybe year and half, two years ago, we see more opportunities for acquisitions that would be closure to our business whether it's in supplies or printers. We might do some smaller technology tuck-ins but that again would be smaller. So, effectively that’s what we are deploying our capital.

As a company we have five strategic pillars for growth. We want to further penetrate our existing markets, expand in the new markets, obviously we inspire our people and culture, intensify our innovation making sure those R&D dollars are picking up greater and greater growth. And then maximize our operational effectiveness. So, as we grow our top line and make sure we bring more to the bottom line. So, I will talk about a couple of these things.

The first one is penetrating existing markets. We are by virtue of our innovation and capabilities from thermal printing to card printing to passive RFID solutions, active RFID solutions, real-time locating solutions. Over the last several years we had the ability to engage in a much more meaningful fashion with partners and systems integrators and stuff like that. We expect to continue to do that that helps us to sort of know what next is and make sure we invest in a wise way.

We also are focusing increasing our vertical markets and the application expansion. So, for example, healthcare has been attractive, we are continuing to invest in those areas. Those types of investments in those vertical markets as we understand those more we can help provide those solutions that are more attractive in those vertical markets.

Deeper more strategic customer relationships is important. One of the things that we are doing is we have been successful with certain customers, for example like Wal-Mart where we have them as a key customer. We have other key customer and by virtue of focusing on them directly versus not only through our distributors, we have been able to grow our revenue attractively, and we expect to expand that with more key customers that we will focus on.

This is an example of large key customer where a number of years ago in 2000 we might have had two applications working with this customer, now you have for example, 40. So, you go into the pharmacy and they will like four Zebra printers across the back, where they used to use laser and have a whole piece of paper come out to put on your pill bottle, now they will use a thermal printer which will be ours, with much more cost effective and reliable. And you so you see for shelf labeling for back room all sorts of things, they are using that putting new labels on items that are already on the floor that fall off, those types of things.

So, for us we have been able to, I think sometimes people say, my goodness thermal barcode printing, barcodes they are using it for all, they are going to use, but yet here is an example that we have and it continues to expand on where we have traditional U.S. customers expanding in nice ways.

As far as expanding in a new markets, I talked about our geographic growth; we have been in most of these markets in the past in very small ways. In 2009, we made some significant investments in understanding those market a little bit deeper, understanding who the partner, the end markets would be. What we need to be successful. And in 2009, 2010 we increased our market presence in primarily the BRIC countries and Eastern Europe and Middle East. It had phenomenal results in building up market share there. We also develop new products, focused on those markets to help us to be more successful. They had different demand; different value requirements then they have in the U.S. and Western Europe. So, that focus has been very positive for us.

As far as further penetrating existing markets, one example is in card printing, we came out not that long ago with what we call retransfer card printer, which basically is like a business card that prints very high quality color pictures on both side. You can also put smart chips and all sorts of things in there. So, for example if you are in Brazil, the Brazil financial institutions don’t like mailing peoples credit cards, because they just gets stolen. So what they want you to do is go to the local banks, so it need a very distributed way of creating credit cards and so they will use our credit cards in these local banks, so you don’t get them stolen. So, it's a very attractive scene. Also your driver’s license might be coming off of our printers. So, those are another example of high growth opportunities. You could gift cards; hospitality cards all sorts of things.

So, then the other thing is that intensify our innovation, because of our scale we probably invest four times more than our next in absolute dollars versus our next competitor that scale allows us to do that which helps us to keep in front of our customers and also helps drive our gross margins. We do spend a fair amount in R&D, but it comes back in terms of enhanced margin. I talked about the increased cadence of new product introductions, better ways to meet customer needs as we do that. And then the other thing is we are focusing on improving our customer experience. So, for example, (inaudible) we enhanced our internet capabilities for customers looking for technical solutions, because there are some customers that really don’t want to talk to people they would rather go to the internet. Those types of things we are trying to do to make sure our customers are satisfied with what we provide.

As an example for product innovation. We within the last couple of weeks we announced the introduction of ZT-200 series. It's the title ZT-200 doesn’t really just explain what it is. It's stands for Zebra table top, but it's basically a printer that sort of in a niche market we had some fantastic response from analyst. I think you can recent analyst did the market survey with end customers and this printer which is not being out very long is already receiving great reviews. But part of it is we did have some enhanced the economic design, maintenance of that printer a lot simpler, easier to do, space saving so the amount of space that you require for the printer is smaller than it used to be which is important actually.

We have also enhanced sort of the technology stuff. So, the wireless standards improved to [L-211]. An enhanced printer integration capabilities, device management are those things the customer interface is programmable. So, that’s important because typically you don’t have users and you could program it specifically for your need than you have to do less training. And typically the environments for this kind of product is there is a lot of employee turnover, so being able to program that user interface is important.

So, again an example of where our dollars are being spent helps that for our customer’s needs. Another example is I don’t know if you ever gone skiing in Vail, they have what they call EpicMix where, basically you printed off a card that has a RFID tag inside it. And so that will come off of our printer which it prints on the card and encodes on t. So when you go through, you just having to someone read a barcode, you have it in your pocket and you go through. And they keep track of where you have been, and so what happens is you have an iPad app that reads into where you have been, how many verticals feet you have gone up and how many black diamonds. And you get little awards when you do certain types of things, but the other unique thing that you can do is you can also quickly upload your accomplishments on Facebook. So, social media and Twitter.

That’s important because now all of the sudden these identification solutions aren’t just how do I identify a piece of an item going through my supply chain, it also now becomes almost like a marketing tool for this customer and helping increase brand awareness. So, here is another example, again we are managing and identifying something is adding value. I think one thing you will see is that recently they came out with the main items that are sort of driving IT and technology, media tablets and beyond, mobile centric applications, all of these things big data, cloud computing. The nice thing this is actually as we go through this [vesting] most of these things we play well into and we think we will continue to leverage.

When you look at our track record of success, the blue bars are sales, again we grew 21% in 2010, we have record sales in 2011. Again one thing we have to be careful when you pull numbers out of facts and stuff like that. We sold a business called Navis, for Vail that's in discontinued operations. They haven’t really gone back and change the revenue numbers, so it doesn’t look as impressive in fact so as actual is.

The other thing too you can see we had very attractive growth in our earnings per share again to record level could have driven that. Capital deployment, we used $160 million in 2011 to buy back 4.4 million shares, reduced the number of shares outstanding by 33% over five years and what we intend on doing is investing our capital in the highest risk adjusted returning alternative. The first place we tend to throw it is in our business, and that’s reflected in our R&D. And again we look at investments and acquisitions and stock buybacks trying to make sure we make the best most attractive investments there. So, I think that’s been positive results for us.

So, we think we are positioned for growth in higher returns, we see the ability to continue to increase our operating leverage as we grow our top line, and we see the debts, the investments we are making will continue to grow in a nice way providing high returns from geographic expansion, new products, channel expansion and as we use our capital wisely we continue to build our business.

So, with that I think I have gone through the presentation; I have few minutes for questions, if you have any questions.

Question-and-Answer Session

Eric Moskal - Deutsche Bank

One of the things that I know certain folks on the data capture side is really tried to tap their large install base with service applications, MRO, style, revenue streams. I know for Zebra given the footprint you have which is to distinguish service, support, MRO, still it's really small part of the pie. Is there a way to tap that market particularly given that you got a lot of data aggregation and new elements of the model coming in that maybe gives you a different trajectory of growth around that high margin service revenue?

Mike Smiley

Yes, couple of things first of all, number one is, we do have an attractive labels business. And most of that revenue is from Western Europe and North America. So, we still have opportunities to expand that around the globe and so when we say acquisitions, I wouldn’t be surprised if at some point we find some acquisitions on the labels and supply side to help us expand that.

Now I sort of view that as sort of that’s not terribly complex, but it is attractive. I also think that we have the other thing on the services side, I’d be honest with you I think we sell that, we sell services, we haven’t been aggressive in that and I think that’s an opportunity that we will see ourselves moving into more aggressively. I think, for example, on SMBs and SoHos, you end up with the smaller businesses, saying I want the printer but I don’t have the technical skills to keep up with that. So, they have the need for those kinds of skills and I think we have some technologies that we will be able to employ to expand on that. But we are still getting that going.

So, going back to your point Eric, I do think that we have the ability, people can look at the barcode, everybody do barcodes and a lot of barcodes is being done but we have the ability to expand the applications of barcodes and actually improve revenue from services and supplies. I think it's a nice opportunity for our business.

Eric Moskal - Deutsche Bank

You mentioned that you outsourced your manufacturing?

Mike Smiley

Yes.

Eric Moskal - Deutsche Bank

To whom, where an how so you then tool that to keep up with demand and new product development?

Mike Smiley

So, we in 2008, 2009 we moved our manufacturing, low cost manufacturing locations such as Chicago and Los Angeles, and we moved it to Guangzhou, China through Jabil. And I will say we did that, I have been in another companies where we have been through outsourcing projects and my goodness, they were hairy. This one went very smoothly. We actually have, I think better quality coming out of Jabil then we had at in our own shop. For us the big value proposition was not so much on the labor cause the labor cost of our product is not that high, but it really came to as one is the overhead infrastructure. We were small scale, so we couldn’t afford to make the investment in the infrastructure that our larger manufacturer could make. And then the other piece I will tell you is that we moved our components supply again from the low cost location of North America to Asia. And so those two things help drive about 300 to 350 basis point improvement in our gross margin.

And to your question about new product development, new products, what we have done is we have expanded our engineering resources next to Jabil. So, we are with them not only for quality standpoint, so we are keeping our nose and what they do to make sure you continue to have high quality products, but also to introduce new products to make sure we get those lines up and running as quickly as possible. And I will tell you we haven’t suffered that way. It has worked out very well for us.

Doug Fox

If I could adjust a little bit, I’m Doug Fox, I’m the IRO. With regard to global distribution along with outsourcing to Jabil, we also setup three Zebra owned regional distribution centers. SO, the product goes from Jabil to our three distribution and actually configuration centers and then go out to the customers. So, we are carrying pretty good inventories in all global regions in order to be able to supply to the customer. And the nice things about Zebra inventory is that, it's a very long lived, unlike a lot of technology products where today it's a products and tomorrow it's a antique. Our products tend to have very long commercial life. So, the risk of inventory obsolescence is actually very, very small in this company. Substantially all finished goods.

Mike Smiley

One other thing I’d tell you if you look at our tax rate overtime you will see that it has declined in a nice way and part of that’s because a meaningful part of that profit is now shifted overseas. So, it helps us to be more tax efficient.

Unidentified Analyst

I followed your company for a while and it seems like, I was always been surprised that the stock trades little bit more cyclically then I think it should. And you guys have strong margins, not a lot of capital intensity, generating more cash then you need. And you have done a great job buying back stock, but it seems like you can support a pretty meaningful dividend as well, which would probably provide a better base to the stock.

Mike Smiley

Good question. We think as last one-on-one somebody said, why you buying back stock? I will tell you I think what we try to do is, I think as management the most important job is we deploy our capital wisely. Do we have the capacity to pay dividend, absolutely. And I think within this room, one thing that concerns me is, we don’t have a lot of easy industry peers, and so to me paying a dividend might make, is one last thing to exclude this because we don’t pay a dividend and I realize that you are having a lot of baby boomers and stuff looking for income type investments and it could be attractive. What I’d tell you is could someday in the future we pay dividend, yes, as Board said to do that, yes, no. But I do think as far as returning capital back, we have done a lot of it in share buyback. So, I don’t think we haven’t been throwing our money away in an unattractive way. I think as we look back about how we bought stock back, what we have done is we have been fairly consistent in being in the market that we will be opportunistic in a sense that we are more aggressive. We think valuation is more attractive and I think if you look back at our buy backs overtime, you will see that actually our buy backs are more effective in that we just would have spend the same amount every year. So, I think we tried to be smart. But I hear your point and we talk a lot about it in the conversations not done.

Eric Moskal - Deutsche Bank

(Inaudible) great example of how the Zebra solution is helping, if you are at the edge of the enterprise at Vail. And I know edge of the enterprise, mobility, field force management, it become a big box terminal, a lot of logical environment. And you obviously see your products in the mobile side, and collocated with data capture settings and (inaudible). How is that changing the way you think about market opportunity, enterprise mobility and how does it view us tap into that market?

Mike Smiley

This is what I will talk about our staff in our laboratory, little science stuff. Where every company has got have a little bit of investment in sort of a next, and so for us for example, we just implemented our ERP system for ordered cash in North America. By the way if you look at our financial returns you will find out it didn’t hurt us, you obviously worry about implementing ERP system in your most and it went really well, but one other things we have is for example we have and by the way we are advanced in this. We have Oracle that’s we tightly referenced with and we walk them through. One of the things that we do is warehouse management systems is orders come up, there will be in orders, send Bob over here to take a piece for (inaudible) and send Joe over there to pick the other piece, come together and put those items together then these things are then ready to be shipped.

Well one of the challenges with that is the fact that Oracle doesn’t know how much space that it needs for those orders. So, there are two ways to solve that, one is it gives much space as you think in order could possible take and each space is that large. So, that cost is real estate, or you have some for sold piece of paper constantly doing like air traffic control, saying go over here, go over there, go over there, which again is not very effective. And so what we does we have actually used our real-time locating solution to put active RFIDs, so we have a little like almost like a little comb with an active RFID. When the order comes in some looks at doesn’t need much space when he puts it over there. And there is flat panel screens where warehouse workers go and say, it goes over there, and so he knows exactly where to go.

We are looking at the pay back on that, and it's basically six months as a result of that. So, now it's really neat now as we have customers, they want to see what the Oracle software looks like. So, they come to our Oracle pumping customers through our house, and they see our WMF, Oracle’s WMF and they also how we are doing this stuff with our solution. What’s also needed is we are also integrated from a printer standpoint. So, again as we become more sophisticated, we are able to touch more customers. I really did in the past in a much more of procurement sales, like the procurement guys say, go get 10 mobile printers. What we want to be is in the more higher order solutions and so by virtue of this technologies, we find ourselves contacting those that are making bigger decision.

So, for example if you are in Oracle 11i right now, you are going to be going up to Oracle 12, at least 12. That is a great opportunity for you to sit there and switch out your printers at that time. Now if our guys don’t know that from a sales standpoint, we might miss that opportunity, but because we have guys going through, and they are saying, show me Oracle 12, that gives us an opportunity to say, hey buddy, I just like your printers at the same time. So, to us a technology how we are engaging is really sort of changing how we are doing our business, I won’t tell you that right now our financial results are reflecting that, but that’s something I as a CFO, really excited about is our engagement in high order sales.

Eric Moskal - Deutsche Bank

We thank you very much for your attention and your interest in Zebra.

Mike Smiley

Thank you.

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