斑馬技術公司 (ZBRA) 2013 Q4 法說會逐字稿

Good morning and welcome to the Zebra Technologies 2013 fourth-quarter earnings release conference call. Joining us from Zebra Technologies are Anders Gustafsson, CEO; Mike Smiley, CFO; Mike Terzich, SVP Global Sales and Marketing; and Doug Fox, Vice President of 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.

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

Good morning. 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 latest 10-K 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.

Zebra achieved record financial results for the fourth quarter of 2013 on strong sales and earnings growth. For the quarter, earnings increased 20% to a record $0.82 per share, including acquisition, exit and restructuring costs that reduced earnings by $0.09 per share.

Quarterly sales increased 12% over the fourth quarter of 2012 to a record $284 million. Growth was broad-based across virtually all dimensions of our core business.

Supported by this performance, I am proud to report that Zebra surpassed $1 billion in annual sales for the first time in the Company's history. For the quarter, sales increased in three out of our four geographic regions, with North America and Europe setting new records. Run rate activity through distribution partners across all regions remained firm. And large deal business improved.

Sales in all product categories -- hardware, supplies, service and software -- grew more than 10% year over year. With sales of all printer lines increasing, as well. Fourth-quarter growth was virtually all organic, with the Hart Systems acquisition in mid December contributing less than $400,000 to sales.

Even though some areas of weakness remain, most notably in parts of southern Europe and Latin America, Zebra's broad success reflects continued improvement in business conditions in many of our verticals and geographies. The record volume supported solid gross margins, operating income growth and free cash flow.

Our results demonstrate the effective execution of our proven strategies that have enabled us to, first, penetrate targeted industries such as retail and healthcare more deeply with solutions that offer a compelling value proposition. Second, expand into new markets. Third, intensify innovation around products and processes. Fourth, maximize operational effectiveness. And, lastly, inspire our people and culture.

Investments and a steadfast focus on execution on these strategies have further enhanced the diversity of our business across geographies, solutions and customers. They will continue to strengthen our core business, while positioning us with initiatives that align Zebra with prevailing technology trends such as the Internet of Things, big data and cloud computing.

In North America, sales increased 16%, fueled by a strong run rate business and an improvement in large enterprise deals, in part from refresh cycles. In addition to retail and transportation and logistics, healthcare remained a solid contributor to growth, with momentum continuing within our wristband product lines. Our patient identification solutions improve hospital efficiency, patient safety and enable electronic health record systems.

Supplies had an excellent quarter in the region with sales increasing more than 15%. Thus far in 2014, Zebra's strong core value proposition has led to further opportunities in North America. In addition, the acquisition of Hart Systems, and the formation of our Retail Solutions Group to deliver a broader range of solutions to our retail customers, add to our optimism for continued growth in the region.

In EMEA, positive trends continued during the quarter with growth in 9 out of 13 subregions. An ongoing challenge to business environment in part of southern Europe partially offset solid growth in the UK, Benelux and Spain. Large deal activity improved, along with a strengthening run rate business.

During the quarter we shipped mobile and RFID printers to retail customers, card printers for a variety of personal ID applications, and a broad range of supplies. For the first quarter of 2014 we have a firm pipeline of business, including orders that will be fulfilled for postal applications in Italy and rail applications in Hungary, among other deals.

In Latin America, economic and political challenges, and the shipment of a large deal last year, restricted growth in the region. Card printer shipments remain strong, as our refreshed product line continues to gain popularity for use in applications such as drivers licenses, student IDs, and bank credit cards. Strength in Mexico from a rebounding manufacturing sector partially offset sales declines in Brazil and other South American countries.

In Asia Pacific, sales increased 29% and exceeded $40 million for the second consecutive quarter. The return of manufacturing in the region led to higher shipments to customers in China, India and South Korea. Broad improvement across Asia-Pacific also included sales to customers in retail and healthcare. Shipments of card products continued to gain momentum, as well.

Also in Asia-Pacific the power of Zebra's brand helped to drive strong growth in supplies. The growth is a direct result of our investments in regional supplies product managers, and highlight how our customers value the quality and consistency of our supplies for their mission-critical labeling applications.

Overall, Zebra's record fourth-quarter results demonstrate the strong global demand for our products and solutions. Companies worldwide rely on Zebra printers, supplies and other products to identify, track and manage their assets better across their supply chains. Ongoing competitive forces continue to drive our customers to invest in core barcoding solutions, in addition to emerging technologies such as passive and active RFID to improve business execution and deliver better customer service.

Zebra is leveraging its competitive advantages, including scale, install base, and global go-to-market channels to help more customers achieve their goals. Our success is extending our leadership in a fundamentally attractive industry. We are confident in our ability to continue to diversify our business across multiple dimensions to drive further growth and enhance shareholder value.

Now our CFO Mike Smiley will provide a detailed review of fourth-quarter results and guidance for the first quarter of 2014. 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 fourth-quarter results.

First, sales increased broadly across all dimensions of Zebra's core business. Hart Systems was not a material contributor to performance in the quarter. Second, gross margin improved primarily from the increase in volume. And, third, operating expenses included higher marketing, professional services and employee compensation costs.

Now let's take a look at sales. For the quarter, sales increased 12.4% from $253 million last year to a record 284.5 million. The high pace of business was sustained through the entire quarter. Foreign exchange had a positive impact on sales of $2 million net of hedges.

Sales for North America increased 16% from a year ago, with strong growth in hardware, supply, service and software. Within North America, desktop, mobile and kiosk printers were top performers.

In EMEA sales increased 6.4%, also to a new record. 9 out of 13 subregions had year over year growth. The region had strong growth in RFID, mobile, kiosk and card printers, as well as supplies.

Latin America sales declined 3.5% against record sales a year ago. Higher shipments to customers in Mexico, Argentina and Colombia partially offset declines in Brazil, Chile and Peru.

In Asia-Pacific, sales increased 29%, with growth in nearly every subregion. Tabletop printers supported customer expansions in manufacturing. In addition, we had strong shipments of desktop, mobile and card printers to customers in retail, healthcare and government, as our marketing activities further diversify our business in the region. We're very pleased with the success of our desktop printers that are designed to meet the needs of customers in developing regions.

Underscoring the diversity is Zebra's business by product category. Sales of hardware increased 12% and supplies advanced 13%. Services revenue grew 19% primarily from investments to be made to expand the number of repair facilities around the world and a greater emphasis on sales and marketing. Software revenue was up 72% on a small base.

For the fourth quarter gross margin was 49.6%, up from 49.2% a year ago. As I mentioned, higher volume was the primary reason for the improvement. Net of hedges, favorable currency movements increased fourth-quarter gross profit by $1.7 million.

Sales and marketing, engineering and administrative expenses increased 9.4% from one year ago. The growth is primarily related to higher marketing, professional services and employee compensation costs.

Total operating expenses, which were up 14% over a year ago, included $3.3 million in acquisition costs as we picked up the pace of M&A activity. Part of the quarter's expenses related to the completed Hart acquisition.

Exit restructuring costs totaled $2.4 million for the quarter. The expense primarily relates to actions we are taking to redirect more location solutions resources to supports and other motion management opportunities.

Quarterly operating income of $49.1 million, plus depreciation and amortization of $8.8 million, totaled $57.9 million of cash earnings, or $1.14 of cash EPS on a pre-tax basis. The effective income tax rate for the third quarter was 17.3%. The rate reflects the impact of a greater portion of our income that is generated in regions with lower tax rates, plus some one-time benefits from certain tax filings.

Earnings totaled $0.82 per share, including a reduction of $0.09 per share for acquisition expenses, and exit and restructuring costs, on 50.7 million average shares outstanding. At the end of the fourth quarter we had 50.3 million shares outstanding.

For the fourth quarter, inventories increased $14.4 million from the third quarter to further improve customer service levels and reduce freight costs. Net receivables are up $1.3 million from the third quarter. Quarterly inventory turns held steady from the third quarter at 5 times. Day sales outstanding declined from 61 days to 56 days.

During the quarter we generated $51 million in free cash flow. This amount brought full-year free cash flow to $175 million. We deployed approximately $100 million for the quarter, with $95 million for the Hart acquisition and $5 million for the buyback of 88,100 shares of Zebra stock at a weighted average price of $52.70 per share.

For the full year we returned $63 million to Zebra's shareholder in the form of stock buybacks. We ended the period with $416 million of cash investments, with approximately 60% held in foreign accounts, all of which are invested in US dollar-denominated securities.

Now let's look at our 2014 first-quarter forecast. We're forecasting first-quarter sales in the range of $276 million to $286 million. The forecast contemplates continued organic growth plus the revenue contribution from Hart Systems.

In 2013 Hart had annual revenues of approximately $21 million. About half of its revenues occurred in the first quarter, with the other half spread somewhat evenly across the subsequent period. Because of the large effect Hart has on the first-quarter revenues, we expect the typical sequential increase in Zebra's consolidated second-quarter sales be more muted on a go-forward basis.

The expected sequential growth in core printer and supply sales will be offset by seasonal reduction in Hart's revenues. Hart will be immediately accretive to Zebra's earnings.

First-quarter earnings are expected in the range of $0.77 to $0.87 per share. Our forecast assumes a consolidated gross margin in the range of 49.5% to 50.5%, which, in part, is benefited by higher gross margins associated with Hart.

Operating expenses for the first quarter are forecast between $88 million and $90 million, in part due to the usual increase in first-quarter benefit costs and Hart operating expenses. The forecast also assumes an effective income tax rate of 19.5%.

That concludes my formal remarks. Thank you for your attention. Now here is Anders for some concluding comments.

Thank you, Mike. Zebra's record fourth-quarter results underscore the global strength of the Zebra brand and the value of the diversity of our business. The underlying drive of companies to gain greater visibility into their extended value chains continues to create abundant opportunities for us.

Looking ahead, Zebra is well-positioned for further success by leveraging our considerable competitive advantages and focusing on those activities that extend our leadership over the long term. Our core business continues to hold multiple avenues for growth and higher returns from further vertical and geographic expansion.

Greater business diversification offers considerable opportunities, particularly with customers in retail, healthcare and government. To achieve this goal we are building on our industry-leading channel partner network by adding new partners to reach customers in more geographic regions and emerging technology areas. We are also optimistic about further growth by increasing our annuity attach rate in services, software and supplies, to complement our leading industry position in thermal printers.

In retail, Hart has given us greater critical mass for delivering a broader suite of solutions that address vital customer needs in a rapidly changing business environment. Our high-value portfolio now includes software and hardware solutions for inventory management and pricing, mobile point-of-sale, and a broad set of applications for personalized customer engagement to deliver unique customer insights and efficient retail operations. It enables us to sell more deeply across a wider range of customers.

Product innovation continues at a brisk pace at Zebra. In 2013 we introduced 17 printer-related products.

In the fourth quarter we introduced the ZD500R RFID desktop printer. Its high performance and cloud connectivity in a compact package are attracting attention from new customers in retail and healthcare. For 2014 we are scheduled to release other RFID printers in addition to exciting new products in other categories.

In the fourth quarter we launched Zatar, an open cloud-based service platform to connect and control devices, including zebra printers. Since its launch in October, we announced a partnership with an RFID middleware provider. We also demonstrated Zatar at the NRF show in how it enables retailers to build iBeacon applications to identify customers and deliver customized in-store marketing programs.

Finally, we are optimistic about the growing opportunities for our location solutions business. Active RFID is capturing greater attention as customers see the benefits of managing things in motion.

During the fourth quarter the pipeline of orders grew for yard management and other industrial solutions. We also entered into a pilot with a large airplane manufacturer to improve worker health and safety. As well as engaged with a regional hospital for improving care in cardiac centers.

We are optimistic about the future for our Zebra MotionWorks and other LS solutions. All of these initiatives are helping to build an even stronger Zebra that is well-positioned to take advantage of the Internet of Things, big data and other important technology trends. They differentiate us further from our competition and will generate greater software and service content to our offerings over time.

As we pursue our growth goals, we will continue to strive for greater operational excellence, to improve efficiency, optimize costs, and deliver better customer service. At the same time, we will invest our resources in those activities that will deliver the highest returns for the long-term benefit of our shareholders.

Thank you for your attention today. I would now like to turn the call back 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.

(Operator instructions)

Brian Drab, William Blair.

Good morning and congratulations on a great quarter.

So, one question and one follow-up, and I will stick to that. You mentioned in North America the refresh cycle. Could you talk a little bit more about that? And is that going to be primarily a fourth-quarter phenomenon? And how will that impact 2014?

I will start and then I will ask Mike Terzich to also give some color on that.

In North America, in the fourth quarter, it was really a very broad-based surge in the business. And that gives us a lot of confidence for how we enter 2014. We feel that our strategies are working. And we do expect a strong continuation of the run rate business. There was really a run rate business quarter in Q4.

But we did see a return of large deals in retail, T&L, and healthcare to more natural levels, more normal levels. But we are also seeing a higher level of refresh. We expect that to continue for some time, but it is a more definitive period for that.

Normally we say we have good visibility for one or maybe two quarters. We feel good about certainly the first quarter, as you see it here. And we expect that we will have a good year. The comps in the first half are much easier, certainly, than the comps we would have in the second half. Mike?

Brian, just a couple of added points here.

I do think that in North America, particularly, on previous calls we have talked about some of the challenges with some of the retail, the broader retail market sweating the assets, and holding onto more aged equipment, if you will. So, we started to see some relief from that in the context of the fourth quarter. A lot of that business was actually at the tier 2 and tier 3 retail account base, so it is reflected in the strong run rate business that we saw through the distribution channel, as Anders noted.

Yes, historically, it is hard to predict where it all lands. But our visibility is always a quarter, two max, out. And as things look today, we are seeing that surge continue into the first quarter.

Okay, thanks, Anders. Thanks, Mike.

And maybe one quick question, probably for Mike Smiley, on Hart. Can you talk a little bit about the gross margins, operating margins at Hart, if you are able to? And would I be very far off the mark if I guessed that maybe Hart could be $0.04 to $0.05 accretive in the first quarter of 2014?

I think the way we will describe it is the gross margin are higher in that business, as you would expect, being be more of a software-as-a-service portion of that business. We would also say the margins on that total business are a little bit higher than the corporate average.

And, so, I think you can triangulate, knowing that roughly half of that revenue that we will get in the year will come in the first quarter. Historically that business has had a mid-teens growth rate. So, if you triangulate I think you can come up with the answer you are looking for.

Okay, thank you.

Keith Housum from Northcoast Research

Good morning. Again, a great quarter. Good to see it.

If I look at the supply and the software and services segments, obviously those have been some great drivers of growth for you here. Is there a level of recurrence that you see on a regular basis from this? Or every quarter do you have to really eat what you kill here?

It is a little bit of both, I guess. Supplies tend to be more of an ongoing attach. We try to pursue customers that have more of an ongoing need versus individual project-based business. There is a high level of stability to our supplies business.

I think our supply strategies have worked really well over the last couple of years. We have increased our supplies revenues very consistently for two, three years now. And I think with our channel partners, our end-user customers, they know we want their supplies business also, that we are not just looking for the printers, but we really want their supplies business. And we've stepped up our game when it comes to providing good quality products and short lead time for deliveries, and be competitive in how we quote.

Keith, this is Mike Terzich. Let me just add a point or two to Anders' comments.

We have talked previously on the call about where we tend to focus our supplies business, which is in the higher-value specialty solution space. We tend to stay away from the commodity paper business. The commodity paper business is -- more in line to your comment -- which is, it is a fly-by-night business. It is a hit-or-miss business. We tend to be stickier, no pun intended, in the space we play because we are more engineered into the longer-term solutions that our customers are looking for.

Okay. So if I think about this a little bit further, we should expect to see a dip, necessarily, because this business is, as you said, a higher attach rate.

It is. And I think for us, it's certainly, we look at it like an annuity business. We're certainly very interested in expanding that business. And we have international opportunities to get closer to that customer base. But generally we hold onto the business for longer periods of time. We get into less pricing events, off-cycle events. We like where we are positioned today.

Okay. Can you elaborate?

I think I heard your comments saying that you have an Asian supplies manager. I previously thought you guys didn't do much supplies business in Asia.

It's been a very interesting story. I think Anders' comments earlier about the power of the Zebra brand on supplies is a very relevant one.

In Asia, because of the heavier manufacturing base that we have, that is, again, a profile of a higher-quality supply play for us. And what we have been doing is we have added some people to carve out some strategies there. And we have been effective at actually producing supplies in bulk, believe it or not, from the United States, moving them in container load, and selling them effectively to end-users in Asia.

Okay. Appreciate the color, thanks.

Michael Kim, Imperial Capital

Good afternoon, guys. Just turning to gross margins, and you talked a little about the increase in scale, but are you also seeing a shift in the mix, especially towards the higher performance products, with maybe a pick-up in manufacturing?

Good question. When you look at this year over year, mix has not been a big player year over year. It was really driven by volume and I would say management of our cost structure in that area. So, I think year over year it's not really so much of a mix issue benefiting our gross margins.

We had more in the middle of 2013, a period where we had weaker mix. But we considered Q4 to be more of a normal mix for us.

Got it. And then just as a follow-up on a higher level question, with it looks like to be an expansion and potential sales opportunities. How are you guys thinking about balancing near-term growth versus perhaps a ramp in investments in sales and marketing, and really expanding your ability to capture more deals?

We balance that very carefully. We spend a lot of time trying to figure out what are the top priorities for us, and how do we make sure we resource those priorities appropriately.

But we also spend a lot of time figuring out how do we now drive efficiencies, or stop doing other things to free up investment capacity to make the necessary investments in the biggest growth areas. So, we are trying to make sure we can really get the most impact for our investment dollar as possible.

Great, thank you very much.

(Operator instructions)

Jason Rogers, Great Lakes Review.

What is the estimate for CapEx for 2014?

We don't give that out. But I would say if you look at our K we historically have been around $20 million-ish or so. And I think that is consistent going forward. We really don't -- our business doesn't drive a lot of need for CapEx. It's primarily driven out of IT and some of our manufacturing. But it is pretty low.

Okay. And then looking at the RFID business, is that still less than 5% of the corporate total? And what areas in that whole area do you think hold the greatest potential for 2014?

Yes, RFID is still a small part of our business. It is less than 5%. But we have seen -- I think 2013 was a good year for RFID overall. Passive RFID on the printing side saw a lot of interest, from retailers primarily, in both America and in Europe, as well as in the extended retail supply chain. So, all the way back to garment manufacturers in Asia.

We participated nicely in many of the larger deals in 2013. And we expect that passive RFID will continue to be a nice growth area for us, although from a smaller base.

Then on the active RFID side, we have had a strong position in industrial manufacturing applications for some time. We are shifting a little bit of our focus to, instead of tracking just location, we are now tracking motion. So, we can actually keep track of things that are moving in a different way. That expands our opportunity into more sports verticals. But also we have seen great wins from this with, as we talked about in the script, a large airplane manufacture for a health and safety application, and also in healthcare to track people who are moving in hospitals.

Thank you.

Michael Kim, Imperial Capital

Just a quick follow-up question on channel inventory levels and if your sense is, relative to what we saw maybe a year or two ago, if that's at normalized levels. Or with the extension in sales that maybe it's thinned out a little bit relative to historical norms.

A good question.

I think when you look year over year, we look at our channel inventory, it is actually down about 5% from the beginning of the year. If you recall in the first quarter, we mentioned that some of our sales decline was because of sales out needed to add larger levels of inventory at the beginning of the year.

And we see them at, I would say, what are good levels. As I think we talked about before, we have done a lot of work with the distributors and such to make sure that those inventory levels are really appropriate for the level of business that they're seeing today.

Okay, great. And then just one other follow-up was Latin America, a little bit of an outlier geographically. Is it your sense that that area should stabilize? Or is Brazil maybe one of your larger country markets? Any color you can provide on regional changes in that business.

Yes, we expect Latin America to improve in 2014. For us Mexico is the largest country and there has been a beacon of steadiness for us. Brazil has been a bit more choppy. We had some great quarters and some not so great quarters with Brazil.

And then other countries like Venezuela and Argentina have historically been good countries for Zebra. There is more variability, I think, to the outlook and the results for Latin America based on political and macroeconomic situations.

But our position competitively in Latin America I think is very strong. And we have a very good team. We don't believe we lost share in any way. On the contrary, we believe we actually gained share, even though the market, or our revenues were down some

Okay, great. Thank you very much

Keith Housum from Northcoast Research.

Thank you for the follow-up questions here. Earlier in the year you guys announced the structuring -- you still have a supply chain over in China. Has all those benefits come through in the gross margins already? Or should we expect anymore benefit in FY14?

We are scratching our heads here a little bit,. I don't recall that we announced a large restructuring. Did we? We did for the overhead.

We did, but effectively the value of that restructuring is pretty much our margins right now. So I wouldn't -- going forward, we are not really projecting any big change year over year because of the restructuring in our margins. In other words, we have already realized the benefit of that.

Okay, fair enough. That's what I was looking for. And then you guys had mentioned in your press release this morning the expansion into new geographical markets. Perhaps if you could expand a little bit there? What markets you're looking at there and how much of your sales (inaudible) in the fourth quarter came from any of those efforts.

The expansion we're thinking about now for entering new geographic areas is much more modest, say, than the programs we had in 2010 when we put real effort and real investments into some of the larger markets. So now it is more infills in other markets.

Southeast Asian would be one of those markets we believe sill has lots of opportunities for us. Africa is turning out to be a stronger one. But that is small investments to help drive that.

We still continue to grow in China. That is a big market for us. And we see India coming back in a pretty good way. But overall, though, I would say the investments are much more modest than what we did a couple of years back.

Okay, thank you.

We have no further questions. I will now turn the call back over to Doug Fox for closing comments.

Once again, everybody, thank you for joining us today. I just want to let you know that our next regularly scheduled conference call for our first-quarter earnings will take place on May 6. Until then have a very good day. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.