Zebra Technologies (ZBRA) Q3'23 Earnings Update
Soft market continues for Zebra, no signs of recovery in sight
Zebra Technologies ZBRA -0.14%↓ manufactures automatic identification and data capture technology for enterprises. The products feature mobile and tablet computers, barcode and RFID printers and scanners, in addition to software for connectivity and optimization. I published a deep dive on Zebra on June 28 (link here).
Zebra reported earnings before the bell on October 31 and reported better-than-expected revenue and earnings, with guidance that was in-line with expectations However, it wasn’t enough to spur a recovery in shares largely because management didn’t instill any confidence that a turnaround was imminent. I’ll dig into earnings and highlight conference call statements starting with the high-level financial information. Revenue of $956M was down -30.6% YoY, which compares to management’s guidance given in August of $930M (midpoint) and the consensus estimate of $927M. Non-GAAP EPS, which removed several non-recurring expenses, was 87 cents per share. The guidance was for 80 cents and the consensus estimate was for 81 cents.
Here’s a look at revenue growth and EBITDA margins since 2018. EBITDA of $31M in Q3’23 translated into a margin of 3.2%. That compares to 20.9% in Q2’23 and 18.9% in Q3’22 (same quarter a year earlier). Adjusted EBITDA was $111M (11.6% margin). The $80M difference largely came from $19M in stock-based compensation and $58M in exit and restructuring costs. The latter is a true non-recurring expense so unadjusted EBITDA margins could’ve been 9.3%. Zebra is currently taking on cost cutting initiatives to align its operating costs with its new revenue base. Silver lining for investors - management had planned on shedding $85M in expenses but are now planning for $100M. Zebra is rightsizing its cost by executing a voluntary retirement plan with one-time costs expected to be $105M and settled by Q1’24.
If you’re unfamiliar with the drop in sales that began in Q2’23 it can be pinned down to the slowdown in the goods economy. 75% of Zebra sales are indexed to the goods economy and it’s an area that’s been underperforming the services economy which has been hot. This shift has hit Zebra broadly. Initially in Q2’23 it appeared drop in sales was stemming for customers unwillingness to buy new mobile products. However, the latest 10-Q made it more clear that the soft market has core products broadly and that also including printing. To that end, management said earnings call and had to reiterate six times that they’re not seeing signs of a recovery yet. More specifically, here’s a quote by CEO Williams Burns:
While we believe we are seeing a leveling of demand trends and the peak of distributor destocking activity, we are not seeing signs of a market recovery based on customer behavior. Therefore, we remain cautious in our planning through the remainder of this year and the first half of 2024. We'll continue to take an agile approach to managing through uncertain environment, and we remain disciplined with respect to our cost structure and cash flow.
After beating a dead horse on the topic of a recovery in sales, what’s it going to take to see an inflection in sales. Burns gave some good context there.
Overall, we'd have to see strengthening certainly of a goods-based economy. And our customers overall will resume deployments as they -- some of the macroeconomic uncertainty around the good base economy abates. And in T&L and e-commerce, we've seen significant capacity built out during the pandemic and that excess capacity has to be used within their environment. And that's across their entire environment where we've built that capacity that now is more being used and demand is more normalized levels than the accelerated levels through the pandemic.
Zebra has a good history of innovation and growth. At some point growth will return, though it may not be until deep into 2024. This is a technology company that produces hardware that eventually gets stale. Existing customers have apparently continued to push out existing orders and they can’t do that forever. One more quote by Burns.
What we're seeing today is our customers sweating some of their assets longer than they normally would. They can only do that so long. Devices get older, they want to use more applications requiring faster processor speeds, more memory, you see OSes moving forward, so security and others. So there's reasons for them to upgrade those devices over time. Could they sweat them for a certain amount of time, yes. But then eventually, that kind of comes our way, and they go ahead and upgrade.
Zebra shares have generally been a poor performer over the past two months by trading down to ~$210 after the post Q2’23 earnings drop that initially brought ZBRA down ~$250. Despite trading at its worst level since April 2020, the forward EV/EBITDA multiple of 16.5X doesn’t look cheap, especially since the current consensus EBITDA target isn’t an easy achievement. If these estimates come down further so will the stock price. Longer-term Zebra continues to have notable secular tailwinds with customers having labor and resource constraints and needs for real-time supply chain visibility. Therefore, fixed RFID scanning and machine vision technology products represent markets that are worth tracking in the coming years. Investors need to get past 2024 first.
Disclaimer: This is not advice to buy, sell or hold any stock referenced. Do your own due diligence. I have no position in any stock mentioned in this report. Like any financial analyst, doesn’t mean I’m not biased.