Zebra Technologies beats EPS expectations, refocuses on core solutions with sale of WLAN business
Zebra Technologies reported its Q3 2016 earnings on November 15th 2016 beating analysts’ EPS estimates by $0.12 at $1.42 while missing on revenue by $0.42 million. The company’s revenues declined 1.4% from Q3 2015. Revenues of $906 million for the quarter included $605 million from the Enterprise business unit, which was consistent with the revenue contribution in Q3 2015. Zebra’s legacy business (including barcode printers, card printers, consumables, location services) accounted for $301 million, down from $314 million in Q3 2015 (a decrease of 4.14%). The company’s gross margin now stands at 45.8% for the quarter, up from 45.1% in the third quarter of 2015; this is reflective of improved service margins, improved cost reduction initiatives and operating expense management.
The following are key insights from the company’s 2016 third quarter performance
- Enterprise segment grew 1% YoY driven by increased sales from data capture solutions and services, while mobile computing sales were flat and lower wireless LAN sales than last year. Zebra completed the sale of its wireless LAN business on October 28 2016 to Extreme Networks, with Zebra now focusing on its core business and offerings. VDC believes the divestiture was a positive step forward for the company and should have come much earlier. The wireless LAN business negatively impacted its enterprise segment for much of 2015 and 2016, having a 2% negative impact to overall YoY sales growth in 2015 and a 1% negative impact in 2016 sales growth through the past three quarters.
- Zebra’s legacy sales declined 4% YoY as a result of lower sales from its locations solutions business and a $7 million price concession to distribution partners in China to offset the impact of duties imposed this year on printers imported into the country. Globally, Zebra has seen strong traction with its integrated PartnerConnect channel program and has added more than 2000 partners since its launch.
- North America sales declined 3% YoY in Q3 2016 but saw strong sales in the retail and T&L segments driven by e-commerce growth. In manufacturing, Zebra experienced fairly flat sales and is planning to partner with Rockwell Automation to develop further solutions for the factory automation ecosystem. In addition to several large Android deals in the T/L and retail segments, the company is now also reporting traction for Android in its run-rate channel business which represents a positive development for this category. The company reported having a firm backlog for the upcoming quarter in the region.
- In Latin America, sales declined 3%, primarily contributed by sales declines in Brazil as a result of difficult macroeconomic challenges, while Mexico experienced double-digit growth. Zebra continues to see growth in its legacy printer business in the region driven by targeted programs implemented earlier in the year.
- In EMEA, sales grew 4% in Q3 2016 from a year ago, contributed by strong sales of its mobile computing solutions as well as from new solutions aimed at the retail and T&L segments. Slow sales in Southern Europe and the Middle East were offset by a strong quarter in Northern Europe.
- In Asia-Pacific third quarter 2016 sales declined 1%. The major reason for this decline was attributed to one-time concessions to accommodate distribution partners in China and offset the impact of new duties imposed on printers imported into China. Zebra has declared approximately $5 Million as a one-time concession for this quarter and is evaluating options to minimize the impact of these duties going forward. Zebra expects the region to present greater opportunities in Q4 and has continued seeing double-digit growth from Japan, a country market in which Zebra has historically not performed well.
- Acquisition and integration costs related to Zebra’s 2014 enterprise business acquisition have continued to decline with the company expensing $28 million in Q3. The company has also payed $90 million in Q3 2016 as a part of its 2016 debt paydown plan of $300 million with net proceeds from its wireless LAN business sale.
- Finally, Zebra announced the appointment of Olivier Leonetti as its new Chief Financial Officer replacing Michael Smiley who had held the position since joining the company back in May 2008. Leonetti served as Chief Financial Officer at Western Digital prior to his move to Zebra and is perceived as shareholder “friendly” in terms of driving shareholder returns.
Looking forward, Zebra Technologies is expecting adjusted net sales for Q4 2016 to decline approximately 1-4% YoY from $954 million in Q4 2015. This is reflective of an expected 3% decline as a result of its October 2016 divestiture of its wireless LAN business. While VDC is encouraged by Zebra’s strong Q3 performance in Europe but its North American sales decline is of potential concern. A slowdown in retail and T&L IT investments can greatly affect the vendor and hence should combat this by growing its position in high-growth verticals and markets. VDC believes that Zebra’s refocus onto its core businesses after divesting its wireless LAN business and its new partner program (PartnerConnect) should help improve organizational synergies and engage new opportunities in subsequent quarters.
(with David Krebs, EVP AutoID & Enterprise Mobility)