Zebra Technologies beats EPS but integration to come at a higher cost

by Shahroze Husain | 11/13/2015

Zebra Technologies reported its Q3 2015 earnings on November 10th beating analysts’ EPS estimates by $0.16 while missing on revenue by $2.22 million. The company’s revenues grew 3% from Q2 2015. Net sales of $916.27 million for the quarter included $605.1 million contributed by the Enterprise business unit acquired from Motorola Solutions, a 5.6% increase from Q3 2014. Zebra’s legacy business (including barcode printers, card printers, consumables, location services) accounted for $314 million, up from $303.3 million in Q3 2014. The company’s gross margin now stands at 45.2% for the first 3 quarters in 2015, down from 50% for 2014; this is reflective of rebranding of legacy Motorola product, the change in product mix and the contribution of Enterprise solutions to the overall revenues, which tend to have a lower margin than legacy Zebra products. Although Zebra managed to exceed analyst expectations in EPS estimates, company shares have fallen almost 12% since the Q3 earnings release.

Here are some key insights from the company’s 2015 third quarter performance. 

  • Zebra experienced a strong quarter for its data capture business unit driven by the increasing migration from 1D to 2D imagers and it plans to build on this momentum by actively engaging its installed client base. In addition, Zebra’s printing business experienced continued growth which was driven by the increased sales of table top and desktop printers.
  • OS migration continues to play a major role in driving sales growth this year as Android-based mobile computer sales have increased by 170% through September this year in comparison to the same time period last year.
  • North American sales were flat quarter on quarter with 3% growth. The company accomplished a number of new wins for mobile computers in retail and manufacturing engaging the Tier 2 & 3 markets. Growth for data capture came from Zebra’s scan engine business as more organizations transition and upgrade their scanning solutions to 2D imagers and the printing business continues to generate growth with the increased sales of tabletop and desktop printers. Zebra’s Latin America business was the only region to experience a decline this quarter with a 16% decline as a result of difficult currency and microeconomics challenges. The company plans to reengage the market once the regional economy improves. 
  • EMEA sales were stable at 3% this quarter as anticipated with typical European slowdown during summers, in contrast to the unusually strong Q3 in 2014. Zebra’s price increase back in April 2015 appears to have had limited impact on European demand as the company achieved new wins across retail, manufacturing and government sectors.  Sales remained strong for mobile computers in Europe with Germany and UK leading the way while the company saw a slowdown (even decline) in parts of the Middle East and Eastern Europe due to geopolitical reasons.
  • Asia Pacific led the way for most year-over-year growth with 23% in the quarter. In Asia, Zebra’s Enterprise division experienced strong sales in China, India, and Southeast Asia. The company saw success in the retail space for its mobile computing and data capture solutions driven by e-commerce adoption and upgrades. Increased sales of desktop printers to the healthcare and T&L verticals contributed to the positive growth for the printer business in Asia.
  • The company continues to gain traction with e-commerce, mobility and OS transition leading the way for growth. Hardware upgrades and e-commerce have driven retail sales growth for both mobile computers and scanners. Printer sales were also strong as desktop printers saw increased deployment across health care and T&L verticals. Ongoing printer hardware refresh at some of Zebra’s largest clients is also a key growth driver.
  • Zebra will continue to spend a substantial amount on integration and synergy operations. The company has expects synergy related expenses to increase to $180 million - $200 million which would see the company through to 2017 in its efforts to reduce costs and perform as one complete unit. Acquisition and integration related costs were $42.7 million this quarter, an increase from $35.2 million in 2014. As a part of its ongoing integration efforts, Zebra has carried out the removal of hundreds of Enterprise IT applications and Motorola service agreement items and is now focusing on the implementation of a companywide IT infrastructure and transitioning the Enterprise business onto Zebra Systems.  

With additional cost savings and cost controls being implemented, Zebra expects its positive growth to continue and plan to end on a high note in the fourth quarter. The company expects total revenues in the range of $945 million to $975 million. Zebra Technologies’ executive leadership is confident in its market standing and optimistic about market opportunities for the remainder of 2015.

Like we’ve mentioned in our previous posts, Zebra has its work cut out for it from a distribution and execution standpoint and needs to manage expectations via well-crafted messaging to both partners and customers. We will continue to follow the company’s progress and keep our readers updated.

(with Richa Gupta, Senior Analyst)

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