斑馬技術公司 (ZBRA) 2012 Q1 法說會逐字稿

Good morning, and welcome to the Zebra Technologies 2012 first quarter earnings release conference call. Joining us from Zebra Technologies are Anders Gustafsson, CEO; Mike Smiley, CFO; Mike Terzich, Senior Vice President Global Sales and Marketing; and Doug Fox, Vice President Investor Relations.

All lines will be in a listen-only mode until after today's presentation. Instructions will be given at that time in order to ask a question. At the request of Zebra Technologies, this conference call is being recorded. Should anyone have any objections, please disconnect at this time.

At this time, I would like to introduce Mr. Doug Fox of Zebra Technologies. Sir, you may begin.

Thank you. Good morning, and thank you for joining us today.

Certain statements made on this call will relate to future events or circumstances, and therefore, will be forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Words such as expect, believe and anticipate are a few examples of words identifying a forward-looking statement. Forward-looking information is subject to various risks and uncertainties, which could significantly affect expected results. Risk factors were noted in the news release we issued this morning, and are also described in Zebra's 10-K for the year ended December 31, 2011, which is on file with the SEC.

Now, let me turn the call over to Anders Gustafsson for some brief opening remarks.

Thank you, Doug, and good morning, everyone. Today, Zebra reported sales of $244 million, and earnings per share of $0.58, both within our guidance range. Strong execution across our business drove year-over-year sales growth in all geographic regions. We further extended our industry leadership with our scale, diversity, and targeted business strategies. At the same time, our operational discipline helped deliver continued strong profitability, with gross margin exceeding 49%, and a sequential increase in operating margin to 17.2%.

We also successfully launched the latest and most complex module in our new company-wide ERP system, which will generate greater operational efficiency well into the future. While maintaining investments in activities that will drive further growth and higher returns, we generated $42.7 million in free cash flow. For the quarter, we repurchased 265,000 shares.

Within the constraints of a more challenging business environment in Asia-Pacific and EMEA, and a seasonally slower period, our strong performance underscores the continued effectiveness of our strategic focus. Zebra continues to out-grow and out-execute its competitors. Companies around the world want to see more and do more with their valued assets across their supply chains, and Zebra is well-positioned to deliver more high-value products and solutions to meet our customers' growing asset visibility needs.

As we outlined at our Investor Day in February, Zebra, together with our partners, is working to create a smarter, more connected business community. We are pursuing this vision through five strategic pillars. First, penetrate existing markets further. Second, expand into new markets. Third, intensify innovation. Fourth, maximize operational effectiveness. And lastly, inspire our people and culture.

Now, let me highlight a few of our successes from the quarter. To further penetrate existing markets, our work is ongoing to develop deeper, more strategic customer relationships. We are executing on these opportunities by investing in relationships with key influencers such as system integrators and independent software vendors. With our expanding set of channel partners, coupled with the development of our own high-touch sales capability, we are developing meaningfully tighter engagements with strategic customers in important sectors, including small package delivery, retail, and aviation and aerospace. Take-share strategies with key customers are also resulting in solid wins, including growing success in displacing installed competitor products, as well as an increase in pipeline of opportunities.

Our expansion into new markets is paying off as well. Our focus on building a greater presence in the BRIC countries -- Brazil, Russia, India and China -- has helped us grow in the past, and will contribute to our success in the future. The growing middle-class and increasing adoption of AIDC technologies will continue to drive growth in these regions. In addition to supporting established manufacturing customers, we are increasingly engaging with customers in government, healthcare, retail, and financial services. The region-specific products we introduced last year, together with our growing in-country service capabilities, demonstrates our commitment to supporting our customers and channel partners, and further strengthens Zebra's competitive position.

Finally, innovation has been and continues to be core to Zebra's long-term success. Today, Zebra out-invest its competitors more than 4 to 1 in product development. More importantly, our focus is driving innovation throughout the product line. The strong growth of our card printers, which underwent a significant transformation over the past two years, demonstrates the success of these efforts. We increased the cadence on new product introductions, as well as enhanced the efficiency of our product development activities.

Separately, we also made progress in location solutions. Most recently, we upgraded our WhereNet family of products to the new IPv6 standard, ahead of schedule. This ability to stay current on evolving standards has already resulted in new bookings. In this case, for a Department of Defense application, a targeted growth area for Zebra.

In addition, we delivered vehicle tracking solutions to a broader range of automotive customers. These deployments include the real-time tracking solutions for Audi, in conjunction with system integrator IBM. We also closed multiple outdoor wide-band system deals for a variety of high precision tracking applications with our Dart product family, such as tool and [part] tracking in aerospace, an emerging industry for these solutions.

In the first quarter, Zebra also became a location solutions customer. With the implementation of our own ERP system, we installed a dynamic staging solution that we developed internally. This system is meaningfully improving the efficiency of our Vernon Hills warehouse and configuration center, with an integrated messaging and high-precision real-time location system utilizing WhereNet and Dart products.

From a regional perspective, we continue to see more examples of the successful execution of our strategies. In North America, business activity exhibited increasing strength for a third consecutive quarter. We further saw the rising return of domestic manufacturing, including customers in the automotive supply chain. Shipments to retail accounts remained strong as well, with the ongoing push to put more technology in stores to enhance the customer experience. As an example, we worked with a major department store retailer on several inventory visibility projects employing multiple of our products, including Zebra RFID printer encoders.

We are also pleased with the progress of our strategic account focus. This initiative is generating greater customer diversification, while lessening the volatility we have with a few large retail accounts. Sales growth to this group, excluding our primary discount retail customer, increased 30% year-over-year. Solid business trends are in place in North America, and we are confident of further growth in the region as the year progresses.

In EMEA, the diversity of our business, brand strength, and ongoing investments in channels, products, and people, drove share gains and growth. During the quarter, we shipped card [prop] printers to Angola for its national ID card program, desktop printers to Turkey for a retail application, and ruggedized mobile printers to enhance service productivity for a large national automobile glass replacement company in the UK. The pipeline for additional large deals is developing nicely in EMEA, but we are taking a more cautious stance on the outlook, given the current economic climate in Europe.

In Asia-Pacific, we expanded the distribution of the Zebra printer products that we introduced last year for emerging markets. Our larger, more robust sales organization also enabled us to penetrate targeted verticals more deeply by engaging with more customers in retail, healthcare and government. These activities led to a record opportunity pipeline at the end of the quarter, and an improving outlook for the region.

In Latin America, greater business opportunities have developed in government and retail from new channel partners and distributors as a result of our expanded sales team. During the second quarter, we will be supporting our customers, and providing better coverage with the opening of a new spare parts and repair depot in Brazil, a country with continued significant business opportunities in multiple industries.

Zebra's first quarter results benefited from investments to extend leadership, improve growth, and enhance capital returns. By investing ahead of our competitors, we have consistently taken share and expanded the range of business opportunities by penetrating existing markets more deeply, expanding into new markets, and working to maximize operational effectiveness. The broad range of innovative products and solutions enables Zebra to serve more customer needs to improve their visibility, and therefore, enhance business performance.

I would now like to turn the call over to our CFO, Mike Smiley, to provide a detailed review of first quarter results, and guidance for the second quarter of 2012. After Mike's remarks, I will return for some brief closing comments.

Thank you, Anders. Let me highlight some of the key components of Zebra's results for the first quarter. My comments will principally focus on year-over-year changes in the performance of Zebra's operations. First, sales came in within our guidance range on year-over-year growth in all geographic regions. Second, gross margin at the top end of the guidance range declined from the very high level a year ago, principally because of mix. And third, operating expenses increased 5.6%.

Let's review sales. For the quarter, sales increased 2.8%, from $233 million last year to $244 million this year. The impact of foreign exchange, net of hedges, was not material to our sales growth. Sales growth for North America, EMEA and Latin America each ranged between 1% and 2%, with some variations in product mix. At a high level, shipments of card printers were particularly robust, demonstrating the successful outcome of product development to strengthen this product line, as previously mentioned by Anders. Supply sales also stood out as a significant area of growth, up 12% to a record $50 million. Shipments of specialty printer labels and ribbons were notably strong to established and new customers in North America and EMEA. We also had a surge in ribbons for card printers, demonstrating the pull through of consumables for this product line.

More specifically, in North America, printer sales benefited from strong and steady shipments through distribution, an excellent indicator of the region's health and vitality. In EMEA, ongoing strength in Germany, France, Spain, and the Middle East and Africa, offset some weakness in Italy. Asia-Pacific had pockets of strength, including China and India, where investments in greater sales representation continue to generate growth. This activity offset softness in Australia, where we shipped a large deal a year ago, and softness in Korea, where the export-oriented manufacturing sector is down. In addition to year-over-year sales growth, Asia Pacific sales increased 2% on a sequential basis.

And finally, our investments in sales resources in Latin America drove strong growth. We had a strong broad-based quarter in the region, except for some softening in Brazil. Sales for the region increased 11% year-over-year, and 3% from the fourth quarter of last year.

Looking at profitability, we maintained a high gross margin of 49.1%, down from a year ago, but unchanged from the fourth quarter of 2011. Operating expenses increased 5.6% from a year ago, and was down 2% sequentially. Compared with last year, higher wages and salaries, largely from personnel additions over the past year supporting our growth initiatives, were the primary reasons for the increase. Product development expenses declined from a year ago, due to the timing of expenses related to various projects.

Quarterly operating income of $42 million delivered a 17.2% margin, down from 18.7% a year ago, and down from 17% for the fourth quarter of 2011. Adding $6 million in depreciation and amortization to the operating income totaled $48 million of cash earnings, or 19.7% of sales. The income tax rate for the first quarter was 28%.

GAAP earnings per share was $0.58 per share on 52.3 million average shares outstanding. At the end of the quarter, we had 51.9 million shares outstanding. In the first quarter, we repurchased 265,000 shares of Zebra stock. The weighted average price of the purchases was $36.95 per share. We have noted in the past that Zebra would be sensitive to the price of the stock, and become less aggressive in our buybacks at higher prices.

The days sales outstanding declined from 49 days for the fourth quarter of 2011, to 48 days. Inventories declined $7 million from the fourth quarter of last year.

Quarterly free cash flow totaled $42.7 million, including $14 million we received from the Navis divestiture escrow. At the end of the quarter, we had $362 million of cash investments on hand. With low capital expenditures and high profitability, Zebra has been a consistent generator of high levels of free cash throughout its history as a public company.

Now, let's look at the second quarter forecast. We are forecasting 2012 second quarter sales of $250 million to $260 million, for a $6 million to $16 million sequential increase over first quarter sales. Earnings are expected at $0.58 to $0.63 per share. Our guidance reflects continued concern over economic headwinds, particularly in Europe. Our forecast assumes consolidated gross margin in the range of 48.5% to 49%, due to an expected slightly less favorable product mix.

GAAP operating expenses are forecast between $79 million and $82 million. The expected increase in the first quarter includes some planned higher spending on research and development, and miscellaneous project expenditures, which should moderate in the second half of the year. The tax rate is estimated to be 27.5%. That concludes my formal remarks. Thank you for your attention.

Now, here's Anders for some concluding comments.

Thank you, Mike. First quarter results demonstrate the value of excellent execution and in innovation. During the quarter, Zebra's market leadership increased. The investments made to fortify our business have resulted in deeper engagements with strategic accounts in attractive industries, a larger global footprint to serve customers in high-growth markets, and a demonstrably more competitive and innovative product line. All of these make Zebra an even greater force in the industry, and give the Company additional leverage with the capacity for higher growth and greater shareholder returns.

As we look to the remainder of 2012, our focus remains on driving performance through the successful execution of our five strategic pillars. We are well-positioned to outperform our competition, irrespective of business conditions. We have proven our ability to operate and manage the business effectively through changing business conditions. We will remain agile and responsive in the current business climate, as we continue to invest prudently to successfully extend leadership, increase profitability, and grow capital returns.

Our focus on creating valued solutions for our customers remains a priority. Advanced technologies is driving greater demand for information and knowledge about our customers' assets within the enterprise, and along the supply chain. Zebra is well-positioned to benefit from these trends as a leader providing a vital link between the physical and digital worlds, with bar codes, passive RFID, and active RFID. Our technology collaboration agreement with OATSystems, announced early in the first quarter, is already bearing fruit with an enhanced platform for integrating multiple AIDC technologies. The visibility platform makes it easier for Zebra customers to use active RFID, passive RFID, and bar coding across the enterprise for greater visibility into a wide range of assets. We have received much positive feedback on this innovation, and we are already deploying it in a pilot for an MRO tracking system with a large transportation company.

Finally, maintaining our discipline on driving innovation through our product design process is a key component to our success. More standardized design in 2011 led to the introduction of 13 new printer products and 10 software and hardware updates for location solutions. These trends are continuing in 2012. Within the next month, we will be introducing an exciting new table-top printer family. This series of mid-range printers features superior ergonomic design, optimum print quality, and elegant space-saving design. All features that make our printers easy to integrate, easy to use, and easy to maintain. These printers will set a new standard of performance and value in this category.

The outlook for our Company is bright, and we remain confident about Zebra's future. The great diversity of our business, our financial strength, and our continued industry leadership provide us the resiliency to pursue multiple growth opportunities. Investing in the highest risk-adjusted returns continues to be a priority. In addition to internal growth, we will support our strategic vision by carefully considering potential acquisitions. Share buybacks will remain another important alternative in our capital deployment decisions.

This concludes our prepared remarks. And I thank you for your attention this morning. I would now like to turn the call over to Doug for Q&A.

Thank you, Anders. Before we open the call to your questions, let me ask that you limit yourself to one question and one follow-up. In addition, Mike and I will be available after the call for any further discussions. Also, our next regularly scheduled conference call is currently scheduled for July 31.

Let's begin the Q&A.

(Operator Instructions)

Brian Drab, William Blair.

Good morning.

Good morning, Brian.

Sorry if I missed -- I missed the first few minutes of the call, so sorry if I missed some information that I'm going to ask. But, I know the FX was negligible in the quarter, but including any divested businesses, Navis, what was organic growth revenue growth in the first quarter?

Well, basically, it's -- the entire growth was -- it is organic, in the sense that we didn't have Navis in the year-ago numbers because it's in discontinued operations. So basically, the growth was 2.8% for the year. ( Inaudible) year-over-year. And on a constant currency basis, it's 3.5%.

Okay. Thanks. And then, R&D expense was a little bit below our estimate. What direction should we expect it to go from here, and why? What are the main drivers?

The R&D has a fair amount of, I'd say project expense, when projects come to an end, and so it's a matter of timing. And so the first quarter was a little bit low. Because of, again, timing we expect the third quarter -- or second quarter to be up. And that speaks to a big piece of our operating expense increase from Q1 to Q2.

Okay. I'll get back in line. Thanks.

Michael Holt, Morningstar.

Good morning. Thanks for taking my question. I just want to follow up on gross margin and the product mix you referred to. Should we be thinking about this as reflecting slowdown in manufacturing versus some of the other higher growth areas? Or more in terms of how your geographic mix is trending? Or how should we think about this product mix going forward? Is this a permanent structural change? Or more of a temporary cyclical feature?

Well, Mike, I don't think that there's a cyclical change to the structure of our business or the performance of our business. Manufacturing was a good -- performed well for us across the globe. It wasn't as high-growth as it was maybe a year or two ago, but it was still a nice growth business. And particularly, I would say manufacturing did very well for us in North America. But there is a mix shift between -- within product families and between families, which is basically costing the AUP decline that you saw. But there's no real price pressure on individual product.

And I would add, at 49.2% gross margin, that's sort of very consistent with the long-term guidance we've been providing everyone, which is where we think that the long-term rate is at -- 50.6% a year ago was fairly high.

Okay. That makes sense.

And just a quick follow-up, still on gross margin. You mentioned how a lot of the supplies businesses, the cards, the wrist bands, the custom labels, those are growing quite nicely. Should we think about those as neutral to that gross margin? Or -- in other printing businesses, sometimes the supplies are quite high in margin.

Yes. Our card printing business has done very well for us over the last year. We spent a lot of effort and invested quite a lot in rejuvenating and coming up with new innovative products in that category for the last two years. And that's been helpful to both the top line and to the margin for the card business. Our supplies business tends to be slightly lower, but we also there would like to -- like for you to think about it in two categories, really. We have our labels and the labels that we actually print on. That tends to be a little lower, but then we have a lot of supplies. So the ribbons that go through us. And particularly in the card business, a lot of dedicated supplies that only -- that are required to use our printers. Those have much higher margins and are very much comparable to our margin profile that we have on our overall business.

And the other thing I would say, Mike, is that although the gross margin in some areas is a little bit lower, there's no R&D associated with that activity. So it's operating income standpoint, still very attractive.

Great. Thanks.

Anthony Kure, KeyBanc.

Good morning, guys. Thanks for taking my question.

Good morning.

Just, I didn't -- maybe I didn't quite catch it, and I apologize to go back to this question on the mix for the gross margins. Could you maybe specify one more time what is causing the mix headwind here going forward?

Anthony, this is Mike Terzich. I'll take that.

When you look at Q1across the broad product platform, we had a very strong quarter, as we noted in the prepared remarks, in the area of supplies. Also a very strong quarter in the area of card printers. All other product lines we saw more moderate growth across each of those lines. And they effectively all grew in each of the geographies. So it was principally driven by mix.

So while we were a little bit more moderate in some of the high end products, it was offset by growth in the card business. We were a little bit more moderate in the desktop and the mobile, which are also very much tied to large deal opportunity; and in any given quarter, that deal opportunity tends to be a little bit more volatile. So it was principally a mix issue. And as Anders noted, it's not cyclical. It's just a matter of timing.

Okay. And actually, that leads into my next question about large deal opportunity. Could you talk about the mix of large versus small deals in the quarter? Was it anything out of the ordinary, or is it pretty much as, pretty normal?

I think that we would characterize Q1 as a solid run rate business. We had very good run rate deals going through. The larger deals were -- the volume of large deal was not as high as it would normally be. We saw larger deals get subdivided into a few smaller pieces. So they'd get broken into smaller projects. But there are still deals there. And that was really on a global basis and across all industries. So that was in the US and that was in Asia. But we still feel that we are very well-positioned to continue to win large deals and win-- break into new customers as we go forward.

And just sneak one more in on Europe. You're up year-over-year. Given what's going on over there, it's pretty impressive. If you could just comment if you think that's mostly comprised of gaining share, or is the market actually holding up and actually still growing a little bit in Europe?

Well, we've been really careful to say exactly what we think the market is doing before we see independent analyst research. But I think we feel we have a very strong position in Europe, and we have gained share, so we certainly are growing faster than the market in Europe. We saw great strength in Germany, France, Eastern European countries, even Middle East. But we did see weakness, in particularly Italy. No surprise. But overall, we feel that we have a very strong position in Europe, and that's helped us perform quite well in Europe, given the economic situation we have there.

Chris Quilty, Raymond James.

Good morning, gentlemen. Wanted to follow-up on the supplies business, which has in the past been a bit of a leading indicator. First of all, just want to confirm with Mike that you view that as a leading indicator. And second, is that primarily just reflect the North American market, because as I -- if I remember, you don't have a huge consumables business located outside the US.

Okay, Chris, it's Mike Terzich.

As a business, it was strong. And essentially, it's actually strong in three regions. It was strong in North America,. Asia-Pacific was the region where we don't have effectively on the ground converting capability. EMEA was very strong. And Latin America -- we actually service Latin America, most of it, from Mexico through two our facilities in North America. So we were very strong in three regions. And obviously, not much of a contribution out of Asia.

But peeling back the layer on the business, going back to a little bit of what Anders said, the business is really made up of three components. It's made up of bar code, label, and ribbon, which was very healthy in all geographies, which is a leading indicator for us. So labeling and demand for labeling continues. We had a very strong quarter in card printer sales, hardware sales. And usually what happens is we get the 100% annuity attached to the ribbon that goes with that product. So we saw an increase in demand in the ribbon for card. Ribbon on the card business is very good margin for us. And then the third piece of it for us is in the area of wrist bands and the cartridges that those wrist bands are produced through. And that is also very high margin business for us. And the healthcare side of our business continues to expand in all four geographies. And that's, the sum of that is what's driving a pretty healthy, robust supplies business in total.

Great. Good color. Thank you very much.

Okay.

Keith Housum, Northcoast Research.

Thanks, gentlemen. I appreciate you taking the call. Could you guys provide a little bit of color on the location services group? It's probably been a few quarters since I've looked at that hard, and I think a lot of us have. And has it reached profitability? And in terms of the growth rate, what are you guys expecting there, and what are you seeing?

So we've now had location solutions has been part of our global P&L for about a year. The business has been doing well for us. We've continued to come out with new innovative products that has enabled us to win nice, new contracts, expanding the number of partners we work with.

I mentioned in my script that we've won a nice contract with Audi, by working with IBM as a system integrator. IBM has also won some other nice deals for us in mining. We've signed a nice licensing agreement with Oat Systems at the beginning of the year, which really gives us a unique capability of providing visibility into a common system for bar codes, for passive RFID and active RFID, so we do well, are doing well with coming up with new, innovative solutions for this. And I think that we feel we are well-positioned, and that business should have good growth opportunities over the coming years. But it is still a small part of our overall business. It's only a few percent of our overall revenues.

Got it. Okay. Thank you.

And a follow-up question, back to the supplies business, obviously it's the common theme today, based on its good results in the quarter. Is the growth that we saw this quarter, is that indicative of what we may see in future quarters? You think with the card printers gaining the traction they have, that they're going to be a contributing factor to seeing some good supplies growth?

Yes, Keith, it's Mike Terzich.

I think, the indicators are good. We've got a healthy hardware business on the card side. And as I mentioned, we get the annuity attached to the ribbon. Healthcare, as this rising middle class expands globally, people are having higher demand for improved healthcare services, and that is feeding that healthcare business. And obviously, we have strategic plans to continue to expand in the bar code, the core bar code labeling and ribbon business. And that is really driven by the diversification of our solutions across both labeling and receipt printing in all of our geographies. And we don't see that slowing down. As a matter of fact, if you look at our performance overall, we are gaining share in the supplies business. And if you look at the converting industry as a whole, our growth, I would say, is a significant outlier to what you would see traditionally in that space.

Great. Appreciate the color. Thank you.

Jason Rodgers, Great Lakes Review.

Looking at the general and administrative expense for the quarter, up 8% year-over-year, is that due to the new personnel?

A good chunk of that is. It's also a function of the fact that we have -- as we implement our new ERP system, we had some greater levels of support for that implementation. And we have -- when you look at the second quarter, we are expecting that there's a little bit of a burden there as we continue to, what we call stabilize the ERP. So it's primarily people-related. And it's depreciation-related with the ERP system is in there, too.

So is that a good number to use for the remaining quarters of 2012, or do you expect that to come down a little in the second half?

We expect it to moderate, come down a tad.

Okay. Thank you.

Mark Heuer, Spector Advisory.

Hello. I realize this is a sensitive question, but can you give us any feedback on how the outsourcing to [Jabel] has worked out for you, considering the changes in China taking place since you reached that agreement? That's the first question.

Yes. I don't think that's a particularly sensitive question for us. We started outsourcing the project, we started the outsourcing project in beginning of 2008. And I think we were basically done by end of 2009. So it took us 18 months to two years and we got benefits through that process. But we set out to get about 3.5 percentage points of gross margin improvement. We've communicated we have gotten more than that, as we've gone through this process. We've gotten, I think, good support from [Jabel]. We've built up new competencies for how to source and manage a number of vendors in China. I think we've been able to build a more responsive global logistics network because of this. So from our perspective, it's been a very good success.

That's good to hear. My other question, I know Avery Dennison is using their inlays in connection with a smart pill for communicating. information about the condition of a patient. Are you aware of that? And are there any opportunities for Zebra in that part of the healthcare business?

I'm not sure if I fully understood the question.

Well, you may not be familiar. It's a small project. Avery Dennison has an agreement in which their inlays are being used to -- in conjunction with a smart pill to communicate information to a cell phone.

I can't comment on the specific project. But we do encode RFID labels, so the application is definitely something we could do. I'm not familiar if we are involved with that particular customer.

Okay. All right. Thanks, guys. Good-bye.

(Operator Instructions) And at this time, we have no further questions.

With that, thank you very much for joining us today. Just as a reminder again, our next regularly scheduled conference call will be on July 31. Thank you again for participating.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.