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Zebra Technologies reported its Q1 2016 earnings on May 10th, and saw its stock price drop by more than 17% when the markets closed as its revenues and EPS both missed analysts’ estimates – by $31 million and $0.21 respectively on net sales of $847 million. Enterprise segment sales accounted for $537 million, a 5.3% drop as compared to Q1 2015, and legacy business sales – including barcode printers, card printers, consumables, and location solutions – were $313 million, down 5.7% from last year. The company’s gross margin now stands at 46.2%, which is at the high end of expectations, helped by improved services margin and greater synergies on the procurement front. However, Zebra’s tempered outlook for Q2 and lower guidance for the rest of 2016 have been cause for investor concern, leading to the steep decline in share price.
Here are some interesting highlights from the company’s Q1 2016 earnings call:
Zebra expects marginal sales declines to continue into the second quarter with anticipated net sales to be flat to down 3% as compared to Q2 2015. The company also aims to cut down on its operating expenses than the prior year period as it works to tightly control costs. For the full year, the guidance is for 3% decline to a 1% growth compared to $3.652 billion for FY2015.
Zebra is the leading global vendor in several, if not all, of the product segments that it competes in; its performance more-or-less reflects the overall state of the market. However, many of these markets are mature or maturing and face disruption as barriers to entry lower for alternative solutions. Moreover, intensifying hardware commoditization in core product segments and the challenges to realize sustainable returns from its IoT and EAI initiatives continue to be cause for concern for investors and is now being increasingly reflected in their confidence in the Zebra Technologies stock. The company’s executive leadership team has a cautious outlook for the near term; however, they are consistently working towards expanding on the “Enterprise Asset Intelligence” theme and seeking out newer markets in which to position their solutions for enhancing productivity and delivering higher levels of customer service. Fundamentally the appeal of these solutions has a much broader audience. However, many of these opportunities remain highly nascent and the competitive dynamic is vastly different to Zebra’s more traditional markets.
While VDC is encouraged by Zebra’s strong Q1 performance in Asia, its North American sales decline is a cause for potential concern. A slowdown in retail IT investments will negatively affect the company’s performance even as consumer retail spending increases by high double digits. Zebra needs to consolidate and grow its position in high-growth verticals including health care and transportation & logistics to bridge the gap, especially as newer IT teams in the retail vertical take their time to assess their position as it relates to IT investments. Further diversification from its hardware-centric business model offer alternative avenues for growth, albeit at a potentially different scale and with solutions that could introduce conflict with many partners. It will be interesting to see how Zebra’s outlook aligns with its performance in subsequent quarters.
(With David Krebs, Executive Vice President)