Zebra Technologies Faces Declining Demand and Challenges in EMEA and China
2023-08-04
Zebra Technologies recently held a call meeting to discuss their second-quarter results and address challenges caused by weakening demand and cautious customer spending. The meeting also covered the company's revised outlook for 2023.
During the meeting, the decline in demand for Zebra Technologies' products and solutions was a significant topic of discussion. This decline was attributed to various factors, including sales pressures, budgetary constraints faced by customers, and increased customer confidence in their productivity as global supply chains have eased. The company's Vice President of Investor Relations acknowledged a broader softening of industry demand, which accelerated in the second quarter. This softening was driven by more cautious spending by customers following two years of strong demand and global macro weakness. Notably, the company experienced slower economic factors in EMEA and China, where they had expected more recovery from the COVID-19 pandemic. The decline in demand was observed across multiple industries, with the retail and e-commerce sectors absorbing capacity. Larger customers were particularly impacted, experiencing greater declines in purchasing compared to mid-tier and small businesses. This decline raises concerns about the company's future revenue and profitability, necessitating a deep-dive analysis to identify strategies for mitigating the effects and driving future growth.
The market outlook for Zebra Technologies is challenging due to the decline in sales and weak industry indicators. Distributors have been reducing inventory levels, leading to lower sales. The goods economy has underperformed the services economy, and key indicators like IT device spending have weakened. However, there are areas of growth, such as RFID, data capture, supplies, services, and software. To address these challenges, the company is reducing spending and focusing on underpenetrated markets. The revised full-year outlook considers the slowdown in demand and destocking by distributors. While the company expects a recovery in sales and profitability as end markets recover, they are cautious and not anticipating a recovery in 2023. Overall, Zebra Technologies is adopting an agile approach to navigate the uncertain near-term environment.
During the meeting, the key drivers of the business were discussed, including the broader softening of industry demand, global macro weakness, retail and e-commerce trends, and pushouts and project reductions.
In terms of product and service plans, Zebra Technologies aims to offer workflow optimization software solutions such as workforce and task management, communication and collaboration tools, inventory visibility, and demand planning. They are focused on improving the profitability of their software offerings by migrating to a cloud-based platform, with expectations of it becoming EBITDA margin accretive by 2024. The company believes they are well-positioned to benefit from the digitization and automation of workflows in the long term, aiming to continue elevating their position with customers through a comprehensive portfolio of solutions.
Looking at the company's outlook for the quarter and year, it appears to be challenging. The company mentioned that their customers' budgets are under pressure, leading to delays in purchasing and diminished revenue. However, no firm orders have been canceled. On a positive note, Zebra Technologies experienced a gross margin recovery in the second quarter, reaching 48%, which they consider a new baseline. They expect fluctuations in gross margin due to deal size and other business dynamics. Additionally, they anticipate worsening conditions in North America for the upcoming quarter, based on the organic decline in Q2 and the lack of recovery assumptions. The guidance for the quarter is supported by recent sales and bookings velocity, and the company does not expect any significant improvements in the near term.
The company has made progress on its strategic initiatives by focusing on improving profitability through a migration to a cloud-based platform. They expect this move to make their software EBITDA margin accretive by 2024. Additionally, the company believes they are well-positioned to benefit from the digitization and automation of workflows and aim to elevate their position with customers through their comprehensive portfolio of solutions.
The participants of the call included analysts from TD Cowen, Wolfe Research, Robert W. Baird and Company, and Credit Suisse. This diverse group of analysts likely joined the call to gain valuable information and insights about Zebra Technologies.
In conclusion, Zebra Technologies' call meeting highlighted the challenges posed by weakening demand and cautious customer spending. The decline in demand for their products and solutions across various industries, particularly in EMEA and China, raises concerns about future revenue and profitability. However, the company is taking steps to address these challenges and remains focused on underpenetrated markets and improving profitability through a migration to a cloud-based platform. While the market outlook is challenging, Zebra Technologies aims to navigate the uncertain near-term environment with an agile approach.