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Zebra Technologies announced its Q4 2014 earnings today for the first time since its acquisition of Motorola Solutions’ enterprise business officially closed. The results included two months of the enterprise business in addition to Zebra's existing operations. Zebra’s core printing and consumables business has been on a tear of late hitting record numbers on a consistent cadence. Q4 2014 was no different with the company reporting YoY sales growth of a strong 10.6%. The Enterprise business, conversely, was flat on a nominal currency basis (up a couple of percentage points on a constant currency basis). However, on a sequential comparison, the Enterprise business was up approximately 14%. While this is a positive number and may signal a strengthening of the core Enterprise business, it is somewhat misleading as the 4thquarter represents one of the strongest quarters in the year and the 3rd quarter one of the weakest. In addition, as Zebra absorbed the Enterprise business, gross margins predictably took a hit, declining by 700 basis points to 42.6% for the quarter.
So what is the new normal for Zebra? Clearly its core printer business cannot be expected to sustain its recent torrid run rate(VDC is projecting this market to grow by 5-7% annually). . However, the printer business does appear to be the early beneficiary from the sales synergies from this merger. The acquisition has provided a significant boost to Zebra’s cross-selling efforts, enabling it to proactively position its offerings as a complete data capture solution set as opposed to an ad-hoc aggregation of a broad range of devices. Moreover, from a market/competitive perspective we do not anticipate any major technology disruption or new vendors dethroning its leadership position. On the enterprise side the dynamics are vastly different with the disruptive impact of consumer (mobile) technologies, lower barriers to market entry and a much more fragmented competitive landscape. Pricing pressures have mounted leading to a lack of pricing discipline and opening the door to margin erosion. That said, we do see the market dynamics for ‘enterprise-focused’ mobile solutions improving in 2015 with Zebra well positioned to take advantage. So while the new normal for Zebra is certainly one of lower top line growth rates and margin compression, it is also operating at a significantly greater scale with a substantially higher upside.
Some of the comments made by Zebra’s leadership team during the earnings call that we found most compelling include:
Investors have not taken too kindly to Zebra’s earnings miss with the stock down by almost 4.5% since market opening. With much of Q1 2015 already behind us, Zebra’s guidance for the quarter was YoY growth of 6-8% on a constant currency basis (or 1-3% on a nominal basis), representing a strong start to the year. Ultimately this deal is about creating synergies throughout all aspects of the business and providing customers and partners with a stronger technology and solution value proposition.
View the 2017 Enterprise Mobility & Connected Devices Research Outline to learn more.