Zebra Technologies Corporation (NASDAQ:ZBRA) Q3 2023 Earnings Call Transcript

Zebra Technologies Corporation (NASDAQ:ZBRA) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Good day, and welcome to the Third Quarter 2023 Zebra Technologies Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. And I would now like to turn the conference over to Mike Steele, Vice President, Investor Relations. Please go ahead.

Michael Steele: Good morning, and welcome to Zebra’s third quarter conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year. Our forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially, and we refer you to the factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of the slide presentation and in today’s earnings press release. Throughout this presentation, unless otherwise indicated, our references to sales performance are year-over-year on a constant currency basis and exclude results from recently acquired businesses for the 12 months following each acquisition.

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This presentation will include prepared remarks from Bill Burns, our Chief Executive Officer; and Nathan Winters, our Chief Financial Officer. Bill will begin with our third quarter results and actions we are taking. Nathan will then provide additional detail on the financials and discuss our Q4 outlook. Bill will conclude with progress we are making on advancing our Enterprise Asset Intelligence vision. Following the prepared remarks, Joe Heel, our Chief Revenue Officer will join us as we take your questions. Now let’s turn to Slide 4 as I hand it over to Bill.

Bill Burns: Thank you, Mike. Good morning and thank you for joining us. As expected, our third quarter performance was impacted by broad-based softness across our end markets and elongated sales cycles. This resulted in a significant decline in sales with expense deleveraging impacting profitability. We will spend time today discussing our results, and the demand environment as well as the progress we have made to rationalize our cost structure and shift our go-to-market resources to drive sales growth and improve profitability as our end markets recover. For the quarter, we realized sales of $956 million, a 30% decline from the prior year and adjusted EBITDA margin of 11.6% and a 950 basis point decrease and non-GAAP diluted earnings per share of $0.87, a 79% decrease from the prior year.

We saw broad-based softening of demand in late Q2, which continued throughout Q3 as customers demonstrated more cautious spending behavior across all our end markets and regions. These dynamics have been exacerbated by our distributors reducing their inventory levels, which accounted for about one-third of our Q3 sales decline. As a reminder, our distribution channel has been aggressively driving down inventory as end-user demand has slowed, product lead times have recovered and cost of holding working capital has increased. We believe this reset will largely complete by year-end. Although we experienced declines across all product categories, services and software were bright spots in the quarter. As we enter Q4, potentially all the cost restructuring actions now implemented, we expect to see a significant sequential improvement in profitability.

These actions are now expected to yield net annualized cost savings of $100 million, which is an increase from our previous expectation of $85 million. On Slide 5, we summarize drivers of demand trends across our end markets. Our three largest end markets, representing more than three-quarters of our sales volume are indexed to the goods economy, which has been significantly underperforming the services economy. While each of our primary end markets declined, demand was weakest in retail and e-commerce and transportation logistics as many customers are navigating a challenging environment and absorbing capacity built out during the pandemic. As you see on the slide, despite current demand softness, there are several themes that we expect to drive investment in our solutions over the long-term, including labor and resource constraints, real-time supply chain visibility, track and trace mandates and increased expectations from shoppers and patients.

Turning to Slide 6. I’d like to review the actions we are taking to address and mitigate the impacts of the soft demand environment and position ourselves for long-term success. In late Q3 and early Q4, we implemented most of the cost restructuring actions that are driving $100 million of net annualized operating savings. We are reallocating resources to accelerate growth in underpenetrated markets, including Japan, along with government and manufacturing sectors, and to capture the potential of new use cases that leverage our solutions to digitize and automate environments, including RFID and machine vision. We are also renegotiating long-term supply agreements and working with our contract manufacturers to drive down component inventories.

And as part of our long-term incentive plan, we added a free cash flow conversion [Technical Difficulty] to improve profitability and drive sales growth as our end markets recover. While we believe we are seeing a leveling of demand trends and the peak of distributor destocking activity, we are not seeing signs of a market recovery based on customer behavior. Therefore, we remain cautious in our planning through the remainder of this year and the first half of 2024. We’ll continue to take an agile approach to managing through this uncertain environment, and we remain disciplined with respect to our cost structure and cash flow. I will now turn the call over to Nathan to review our Q3 financial results and discuss our fourth quarter outlook.

Nathan Winters: Thank you, Bill. Let’s start with the P&L on Slide 8. In Q3, net sales decreased 30.6% and 29.6%, excluding the impact of FX. Our Asset Intelligence & Tracking segment declined 25.8% primarily driven by printing. Enterprise Visibility and Mobility segment sales declined 31.4% with pronounced weakness in mobile computing. On a positive note, we drove growth across service and software with strong attach and renewal rates. We saw double-digit sales declines across our regions. In North America, sales decreased 25%. EMEA sales declined 39% with broad-based declines across the region. Asia-Pacific sales decreased 32% driven by China and Southeast Asia, and Latin America sales decreased 15%, driven by Mexico. Adjusted gross margins decreased 100 basis points to 44.8%, primarily due to expense deleveraging from lower sales volumes, partially offset by favorable premium supply chain costs.

As these supply chain costs have been fully mitigated, we are no longer including a slide as part of our earnings presentation. Adjusted operating expenses delevered 910 basis points as a percent of sales. Note that the bulk of the previously announced restructuring plans to drive operating expense savings were implemented in late Q3 and early Q4. Third quarter adjusted EBITDA margin was 11.6%, a 950 basis point decrease driven by expense deleveraging. Non-GAAP diluted earnings per share was $0.87, a 79% year-over-year decrease. Increased interest expense contributed to the decline, offset by a lower tax rate. Turning now to the balance sheet and cash flow on Slide 9. For the first nine months of 2023, negative free cash flow of $193 million was unfavorable to the prior year period, primarily due to lower earnings, including the impact of restructuring actions and higher interest costs.

Greater use of net working capital due to higher cash taxes and payments for inventory and $45 million more of previously announced quarterly settlement payments, all of which was partially offset by lower incentive compensation payments. We ended the quarter at 2.2x net debt to adjusted EBITDA leverage ratio, which is below the top end of our target range of 2.5x and had approximately $1 billion of capacity on a revolving credit facility providing ample flexibility as we navigate a challenging environment. Let’s now turn to our outlook. As we enter the fourth quarter, we are seeing sales velocity out of the channel stabilize on a sequential basis and destocking activity moderate as expected. Our Q4 sales are expected to decline between 32% and 36% compared to the prior year.

This outlook assumes double-digit declines across our major product categories, with distributor destocking accounting for approximately one-fifth of the sales decline. We are in Q4 with the necessary backlog and pipeline to support our guide. That said, we are not seeing compelling signs of a market recovery as we look to the first half of 2024. We anticipate Q4 adjusted EBITDA margin to be approximately 16%, driven by expense deleveraging from lower sales volumes, partially mitigated by the benefits of our cost restructuring actions. Despite anticipated expense deleveraging, we expect year-on-year gross margin improvement as we cycle $25 million of premium supply chain costs in the prior year period. Non-GAAP diluted EPS is expected to be in the range of $1.40 to $1.80.

Our Q4 outlook translates to an expected full-year sales decline of approximately 21% at the midpoint, which is 50 basis points favorable to our prior guide and an EBITDA margin of approximately 18%. We expect our free cash flow to be positive for the second half of 2023 and negative for the full-year. We continue to be focused on rightsizing inventory on our balance sheet and in driving 100% cash conversion over a cycle. Please reference additional modeling assumptions shown on Slide 10. With that, I will turn the call to Bill to discuss how we are advancing our Enterprise Asset Intelligence vision.

Bill Burns: Thank you, Nathan. While sales are pressured near-term, our solutions remain essential to our customers’ operations, and we are well positioned to benefit from the secular trends that digitize and automate workflows. We are focused on advancing our Enterprise Asset Intelligence vision by elevating Zebra as a premier solutions provider through our compelling portfolio. By transforming workflows with our proven solutions, Zebra’s customers can effectively address their complex operational challenges, including scarcity of labor and the need to improve productivity. We empower the workforce to execute tasks more effectively by navigating constant change in near real time, utilizing insights driven by advanced software capabilities such as artificial intelligence, machine learning and prescriptive analytics.

We continue to advance and innovate our offerings. This includes several product and solution launches across our portfolio, including our Zebra Pay solution, which equips retail associates, hospitality workers and logistics employees with the mobile point-of-sale device that accepts a variety of payment options almost anywhere. At our Annual Software Customer User Conference, we unveiled our Zebra Work Cloud suite of software solutions, which address four critical enterprise functions, workforce optimization, enterprise collaboration, inventory optimization, and demand intelligence. The user experience is tailored to customer-specific business priorities and integrate it into a single application. This unique software suite, coupled with our mobile computing platform, differentiates us and expands our market penetration opportunity.

In collaboration with Qualcomm, we demonstrated a generative AI large language model for handheld mobile computers and tablets without requiring connectivity to the cloud. Is the competitive differentiator, which will enable Zebra partners and customers to create new ways of working by further empowering the frontline worker and driving additional productivity gains. We are confident that the innovation roadmap across our business will continue to elevate our customer value proposition. As you can see on Slide 13, customers leverage our technology to optimize workflows for the on-demand economy. Our solutions empower enterprises to increase collaboration and productivity and better serve customers, shoppers and patients. I would like to highlight some recent wins by our team.

A global technology provider recently selected Zebra’s machine vision solution to automate a previously manual inspection process for the manufacturing of engraved component parts. Our solution ensures high quality and traceability, reducing expensive material waste and false errors. We look forward to exploring opportunities to expand our relationship with this customer. A large health care system in Europe is using our mobile computers, printers and RFID solutions to enable real-time tracking of medical equipment, significantly reducing the time caregivers spend searching for critical assets throughout the hospital. A large retail pharmacy chain, selected Zebra’s work Cloud task management software to improve store productivity and effectiveness by streamlining communication and accelerating on-site inspections and marketing promotion updates.

Optimizing task assignments and store walks drives accountability and frees up staff to focus on customer-facing activities. A large North American retailer refreshed our mobile computers across their stores and added RFID technology to improve inventory accuracy, supply chain efficiency and customer satisfaction, the more frequent cycle counts. During the competitive review, Zebra demonstrated the most cost-effective solution for their needs. Lastly, a large Asian retailer decided to add Zebra’s communication and collaboration software to their Zebra mobile computers. This subscription-based solution drives store associated connectivity benefits while displacing the legacy phone system. In closing, our long-term conviction in our business remains unchanged.

While customer spend is pressured near-term, over the long-term, we believe we are well positioned to benefit from secular trends to digitize and automate workflows. We will continue to elevate our position with customers through our innovative portfolio of solutions, while executing on actions to position us well for profitable growth as our end markets recover. I will now hand it back to Mike.

Michael Steele: Thanks, Bill. We’ll now open the call to Q&A. We ask that you limit yourself to one question and one follow-up so that we can get to as many of you as possible.

Operator: And we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Brad Hewitt from Wolfe Research. Brad, please go ahead.

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Q&A Session

Brad Hewitt: Hi, thanks. Good morning everyone.

Bill Burns: Good morning, Brad.

Nathan Winters: Good morning, Brad.

Brad Hewitt: So I was wondering if you guys would be able to provide some preliminary thoughts on the overall growth setup for 2024, and how we should think about that relative to the 5% to 7% long-term growth algorithm. You talked about the first half kind of being a little bit more challenging. And then of course, comps is in the second half, but any thoughts on the growth outlook for 2024 preliminarily would be helpful.

Nathan Winters: Thanks, Brad. I guess I’d start with what we’re seeing today. And from a Q3 perspective, we finished at the high end of our outlook in a challenging demand environment. And as we said, we’re seeing leveling of demand trends overall and really in Q3, the peak of distributor destocking, but we’re not yet seeing signs of market recovery based on our customers’ behavior. So we saw really all region verticals declined in Q3 and along with customers of all sizes, but it was most pronounced in large enterprises. There were some bright spots in the quarter. Services and software are examples of that. I’d say is we’re certainly not guiding to ’24 at this time. But we’re not seeing really compelling recovery yet and the idea that we’re going to remain cautious for the remainder of the year.

And really, as we look into the first half of ’24, we’re seeing very — we have very challenging compares ahead of us. So I’d say that for the moment, still challenging demand environment that we would see that in ’24 and the remainder of the year, we’re going to remain cautious.

Brad Hewitt: Okay. That’s helpful. And then maybe if you could talk about what you saw in Q3 from a bookings perspective and how bookings looked sequentially as well as what you expect bookings to look like in Q4?

Nathan Winters: I would say that, again, with demand challenging from that perspective, bookings were as we expected going into — during Q3 and then as we enter Q4, we’ve got the bookings trajectory to feel good about our guide for Q4 overall. But again, not seeing quite signs of recovery yet, but feel that we’ve got the order velocity to be able to deliver on our guide for Q4.

Operator: And our next question comes from Tommy Moll from Stephens. Tommy, please go ahead.

Tommy Moll: Good morning and thank you for taking my questions.

Bill Burns: Good morning, Tommy.

Tommy Moll: I think I heard in your prepared comments, you described the velocity on the sell-through as having stabilized. And I wanted to circle back to that topic. One, just to make sure that, that’s correct. And two, if you think about that sell-through velocity at some point, and maybe you could tell us when that is when would you expect an acceleration there, just given that you’ll have some product refresh cycles where a lot of your installed base is approaching end of useful life, and it’s less of a discretionary spend on the part of the customer.

Nathan Winters: Yes, I think, Tom, we view the word leveling is we’ve seen those demand trends level out in Q3, and we’re seeing that kind of into Q4. And we’re seeing that from a destocking perspective, the biggest impact has been Q3 and again, less so in Q4, and we believe that will be behind us by year-end. And again, while we’re not guiding to ’24, maybe a little more color to add to what I said on the first question, we don’t see compelling signs of recovery yet, right? And therefore, our guide for fourth quarter. And then as we look into first half of ’24, we see very challenging compares. But that said, we’re not seeing customers cancel projects. They continue to push them out. And they can’t do that forever. We’re seeing use cases across our products and solutions continue to grow within our customer environment.

They will resume deployments as they use the excess capacity across retail and e-commerce across transportation logistics and as our customers around the world see the macro uncertainty abate. So we’ve seen this in similar downturns where typically, they last for Zebra quarters, not years. So as we go through the year, we do see some progression. And while our visibility for the second half would remain very challenging at the moment, we would be clearly cycling through easier compares at that time and really due to the restocking — that the destocking, sorry, that we were seeing in the second half of this year. So I think that’s how we’d see it at the moment.

Tommy Moll: And to follow-up on the destocking theme, it sounds like you expect most of that to be behind you by the end of the year. And my question is just relating to the visibility there. If 60 days on hand is typical or something in that ZIP code for your channel, broadly speaking, do you have any idea where you sit today? And is there a view that, that will remain the “normal level,” or could there be some period of time where we end up below that, just given conservatism among your channel partners at this point? Thanks.

Nathan Winters: Hey Tommy, this is Nathan. As we said, from a global channel inventory, which again, we measure on days on hand, and as you said, the average is around 60 days, two months, but that varies — you can see quite a bit of variation based on the product type and by region. So again, it’s not consistent globally. And as we said, we — in the end of Q3, better than we did in Q2, so the days on hand and the relative inventory balances decreased throughout the quarter. I’d say still slightly higher than the normal range despite those decreases. And that’s why we expect distributors will continue to lower their inventory here throughout the fourth quarter, but we do expect to exit the fourth quarter within our normal operating levels.

And that’s something we work with very closely with our distributors on in terms of where they try to get to what products do they need to support the markets. And so again, as we enter next year, we expect kind of the destocking to be and where it needs to be as we move forward into the year.

Operator: And we move to a question from Damian Karas from UBS. Damian, please go ahead.

Damian Karas: Hi, good morning everyone.

Bill Burns: Good morning, Damian.

Damian Karas: Good morning. So not to beat a dead horse here on the demand environment and recovery. But Bill mentioned not seeing signs of that as you think about early 2024, I get that you’re seeing that based on your order patterns, but based on your customer conversations, I mean, what do you think it’s going to take to see that inflection of demand to drive that? And where would you see it first? Thinking about the various markets you play in and your diverse set of customers?

Bill Burns: Yes. What I’d say is that overall, we’d have to see strengthening certainly of a goods based economy. And our customers overall will resume deployments as they — some of the macroeconomic uncertainty around the good based economy abates. And in T&L and e-commerce, we’ve seen significant capacity built out during the pandemic and that excess capacity has to be used within their environment. And that’s across their entire environment where we’ve built that capacity that now is more being used and demand is more normalized levels than the accelerated levels through the pandemic. I would say overall, when we see the broader demand across the industry, we’re seeing that where first, likely large customers first is what we’d expect that large customers, the first area where we saw it challenging from a demand environment, so we’d expect that to return first. And then from their midsize and run rate would follow. I don’t know, Joe, if you want to add anything.

Joachim Heel: Yes. Maybe just a little bit on that point. During the supply-constrained phase, we had given some priority to some of our larger customers. So that’s where a large amount of the volume and the capacity that went into the market went. And that’s where we’re seeing the steepest declines at this point. So I would expect that, that’s also where we would see the first signs of recovery where those customers would begin purchasing again. And we are staying very close to those large customers as we’re seeing them sweat their assets longer, we know exactly when they are reaching those points in the product life cycle where they will need to refresh. And we’re working with them on plans that will fit their budgets. And you can imagine, as we’re going into 2024, they’re coming up with new budgets and we’re working with them on doing that. So that’s perhaps where I would look first.

Damian Karas: Got it. That’s really helpful. And then maybe if we could switch gears and talk about gross margins. Curious how you are thinking about what those look like from here, is there a further downside from the third quarter just based on the volume levels you’re seeing? And how should we think about the kind of the new baseline or normalized gross margin?

Nathan Winters: Yes, Damian. So if you look just maybe for context on Q3 gross margin, obviously, down year-on-year by about one point to 44.8%, volume deleveraging was a major driver of the decline as we did see favorability in premium supply chain costs. Now that those are entirely mitigated. So that was a two-point favorable impact as well as we’re seeing nice traction from the pricing actions we’ve taken over the last several years and continued to strengthen our service and software margins. So if we look at our underlying gross margins with the pricing actions we’ve taken to offset component cost increases, inflation with the freight cost declining. Really now the focus is on rebalancing our manufacturing and distribution capacity to the lower volumes so that we can again, start to see those margins recover as we go into next year.

So I think the — as we look here at the second half is the low watermark just given the sharp volume declines and making sure we reset capacity to that while giving us flexibility to grow as the market recovers.

Operator: We now have a question from Keith Housum from Northcoast Research. Keith, please go ahead.

Keith Housum: Thank you. Good morning guys. If you perhaps focus a little bit on Zebra’s own inventory levels, which obviously are still high compared to historical levels. Is this more component cost product parts, or is it more finished goods? And then second to that is, do you guys have minimum purchase agreements with your OEMs where if you’re not making the minimum purchases, you’re going to have penalties you’ll incur?

Nathan Winters: Keith, so just on our own inventory, as expected, our inventory balances stayed relatively flat to where we were at the end of the second quarter. We don’t expect to see a material change as we exit the year. And as we said before and as you stated, the primary increase from where we’d expect to be is all around component — consigned components that are at our Tier 1 manufacturers. So these are inventory that we made purchase commitments on going back to a year, 1.5 year ago at really the peak demand as well as the peak supply chain challenges and issues where the lead times were out greater than a year. So really absorbing those inbound components as our demand decrease. I think the team has done a phenomenal job working with all of our partners to reduce those purchase commitments.

If you look at our outstanding purchase commitments, we’ve cut those in half since the beginning of the year. We’ve driven down finished good balance since the beginning of the year. So we’re making traction, although you don’t see it in the headline numbers. So really now, it’s around getting stability in the demand signal to our suppliers so that we can in right size those inbound components. If you — to your last question, we don’t have a minimum purchase agreement that it has penalties. Obviously, we work with our Tier 1 manufacturers to have different tiering in terms of volume on our purchase price to cover their overhead. But there’s not a, I’d say, a penalty per se at certain volumes, it’s just making sure that they have the right capacity within their cost structure.

Keith Housum: Okay. If I could follow-up on that. And as we look forward to like 2024, is there a rule of thumb or where do you think your inventory level should be under optimal level? Because, of course, we’d assume that you’ll have some positive free cash flow next year as that gets worked down?

Nathan Winters: Yes. So I would say, if you look at base, if you go back to our historical turns and you account for some of the M&A over the past couple of years, we said about a $200 million reduction would get us back to say, normalized levels. When and how quickly we can achieve that is the question. And some of that depends on, again, some of the demand stability as we go into next year. But that $200 million reduction would be entirely in consigned inventory components at our manufacturers.

Operator: We’ll take a question now from Joe Giordano from TD Cowen. Joe, please go ahead.

Joseph Giordano: Hey, good morning guys.

Bill Burns: Good morning, Joe.

Joseph Giordano: So I’ll ask a couple of higher, bigger picture kind of questions. We’ve dug into the near term dynamics quite a bit here. I’ve had a lot of questions about like longer term, what is a shift from potentially into kind of fixed automation mean for you guys? So you have huge share in mobile computers. And then what happens as you get more and more of these kind of big RFID-type fixed mounted scanners instead of having a person make scans. Like what does that mean for you over time if the percentage of scans being done by humans goes down?

Bill Burns: Yes, I would say that the investments we’re making across the portfolio, including new areas such as RFID and machine vision both play to exactly that. We see a need for both handheld devices, handled scanning, mobile printing just as we do fixed table operating and fixed industrial scanning/machine vision as well as RFID readers. So that’s why we’ve got a broad base across the portfolio as our customers continue to digitize and automate their environments. Ultimately, there are places where a fixed industrial scanning machine vision imager makes more sense than someone holding hands — something in their hand or a hand scanner. RFID does very similar type things, but you marry RFID technology along with barcode scanning.

So we think of machine vision and fixed industrial scanning is closely addition to our scanning business, really fixed versus handheld, and we see RFID portfolio the same way where we’ve got handheld RFID readers and fixed RFID readers across the portfolio just as we have tabletop RFID printers in mobile. So we think that mobility is going to continue to be an important aspect of our business, but fixed is as well as we’re seeing more fixed infrastructure, more automation in our environments. And that’s why we’re invested in both. And I think that machine vision and RFID both represent attractive markets for us for that very reason.

Joachim Heel: And Joe — this is Joe Heel, I’ll add. I think this is also an opportunity for us to add additional value to our customers, specifically because in both areas, the customers will need more than just the hardware solutions that they might buy from us today as a handheld reader, for example, they will need, in particular, software and other accessories. And so if you think about our machine vision business, a very important part of that is the software component, which, by and large, we don’t provide today when it comes to a handheld scanner. But in the machine vision, environment, we do provide that. So it’s a great opportunity for us to create additional value for customers, but also for us at Zebra.

Joseph Giordano: That was a very good answer. I just want one more on — we talked about the trends are not yet improving, but some of the true weakness in the destock is getting away. So as we come out of that, which I assume we do at some point, when I think back to your 2021, 2022, you’re doing $17.5, $18.5 of earnings, how do you categorize those years? So revenue was obviously very strong, but margins were maybe somewhat pressured from some of the supply chain, and what you guys had to do to deliver. So like what would it — what kind of market — end market dynamics do you think would need to be in place to get earnings back to levels like that? Because my guess is that you don’t need revenues to be nearly that high.

Bill Burns: I think that overall, we would expect to see continued progression in margin as our markets recover overall. So I would say that we would expect to get back to the levels that we’ve had in the past, and there’s no reason why we wouldn’t. There’s been a lot of challenges in moving pieces over the last several years, including tariffs, supply chain challenges that the significant increase demand we saw over the last two years driven by the pandemic and building out of capacity. But I think that returning to the profitability levels that we’ve had prior, we see that continuing to progress throughout in 2024 as we get back to more normal levels of demand and our customers begin to buy again. And as we continue to be very thoughtful around our costs, right?

So I think we’re going to continue to be cautious in spending as we have been. We are taking $100 million of annual cost out of the business in 2024 and that will also add to profitability along with demand returns. So we see profitability to continue to progress, and there’s no reason why we can’t get back to past levels. That’s how we see it.

Operator: And we will take a question now from Meta Marshall from Morgan Stanley. Meta, please go ahead.

Meta Marshall: Great. Thanks. Maybe a couple of questions for me. The health care market has been kind of a source of strength over the past couple of years. Just wondering if there’s kind of any commentary about that market maybe being less consumer goods related than the others? And then maybe the second question, you noted kind of a step-up in investments in the manufacturing market. That’s already kind of a pretty strong market for you. So I guess, is that kind of a combination of bringing robotics machine vision into that market, or just kind of what are kind of some of the areas that you think are unexploited there? Thanks.

Bill Burns: I would say that health care and manufacturing less declines than the other markets, so less impacted overall, but they are still seeing the same trends at a broader market. I would say, overall, in health care, our — has been in the past, our fastest growing vertical market, but our smallest. As health care continues to look to improve productivity, enhance patient safety, clearly automating workflows and digitizing assets within that environment creates an opportunity for the full breadth of our solutions portfolio across scanning, printing, mobile computing, RFID all play a role within health care. We’re also announcing new opportunities across health care in things like tablets for home health care or telehealth all remain opportunities for us.

So we’re — we like the health care market, and we continue to develop very specific products for the health care their market overall. I’d say in manufacturing, while we’ve got a strong base within our manufacturing customers, a lot of that is really tied to more of their logistics and distribution network more so than kind of assembly and on the line. And I think you said it best already machine vision, robotic automation for — in the manufacturing environment with good transport demand planning for our CPG customers with Antuit, all leverage or give us more strength to meet the demands of that marketplace overall. So we’ve shifted sales resources to focus on manufacturing and continue to look to recruit more partners in that area. We see that as an area for Zebra where we’re less penetrated than others, primarily because we are in certain product areas, print and for instance, on the manufacturing floor, but we could do more there in our new solutions.

So we clearly see manufacturing and health care is both opportunities for us to grow moving forward.

Operator: Thank you. We will take a question from Andrew Buscaglia from PNB Paribas. Andrew, please go ahead.

Andrew Buscaglia: Good morning, guys.

Bill Burns: Good morning, Andrew.

Andrew Buscaglia: Yes. So just — I know you don’t give guidance for ’24, but you are talking to kind of how you think the things trending into the New Year. And I’m wondering if you could talk about maybe a range of scenarios with distributors starting to restock potentially. I guess what drives the slope of that restocking? Like in terms of like is there the psychology of the distributor more aligned with what their end customer is providing them with the confidence to restock those shelves, I guess what I’m trying to ask is like, how do you view the cadence of that restocking event if it were to occur next year?

Joachim Heel: Yes. So I can address some of that, Andrew. Over the course of the last few quarters, we’ve gotten a lot tighter with our distributors in both understanding and agreeing on the objectives that they have in their business, which have changed. And in particular, the increasing cost of capital has led them to set very aggressive inventory targets for their business. And then using those targets, to ensure that we stay in sync as demand has been relatively volatile, right? So demand has come down, they have adjusted their inventory to match that, and that’s what we’re calling destocking. So if you now think about that in reverse, what has to occur is that they have to start seeing improvements in sales out, which we, of course, are working very heavily.

We generate the majority of our demand with our sales force working together with our partners. So we’re working with them to generate that sales out demand. As soon as they see that tick up again, we’re pretty confident that they will follow with stocking in lockstep to achieve those DIO or days of inventory outstanding targets that we have now really good visibility to and a clear understanding with them as well as incentives in place for them to reach those. So it’s really generating that demand and seeing it. We think the inventory will just follow.

Andrew Buscaglia: Okay. Very clear. And your two biggest markets, e-commerce and retail versus transportation and logistics, are you seeing any difference in the demand trends and dynamics driving those two areas. I guess, what is the key difference for you? Is one starter than the other, is one more likely to come back faster than the other. Yes, I guess could you parse that out?

Nathan Winters: Yes, Andrew, I would say they’re tied a couple pretty tightly together, especially when you consider e-commerce versus buy online and pick up in store or brick-and-mortar retail. So I’d say e-commerce and trans logistics tied together because of really parcel delivery. And I think in that case, both had built out e-commerce providers and transportation logistics built out significant network capacity across everything they did, their networks, their capacity around logistics and others to be able to meet the demands during COVID, which now kind of reset to pre-COVID levels and are going to grow from there. And I think you’ve seen moderating demand across e-commerce overall. So I think those two are tied together.

I think brick-and-mortar retail, think of in-store, I think that’s really more tied to the goods economy. So goods versus service-based economy, which is still relatively challenged. So I’d say e-commerce and translation districts tied hand-in-hand, brick-and-mortar retail, a little bit more goods economy focused. I wouldn’t see much difference in those two. The recovery really is going to be driven by using up this excess capacity we talked about or and a recovery from more positive signs in from an economic perspective overall for those markets to come back.

Joachim Heel: Maybe there’s one area that you could see a slight additional opportunity on the retail front. And that is, of course, the one area where they don’t overlap, which is the store. Retailers have been itching for some time, and we have had this vision that you can significantly improve the productivity of a retail store by having all of the workers in the store connected and collaborating. And they haven’t yet realized that vision. That’s been part of what’s been deferred as they’re going through the current phase of pausing and spending and scrutinizing their budgets. But they really do want to do that. I hear that from retailers all the time that they believe that there’s a big productivity improvement to be had there, in particular, because some of their peers have done it, and they have seen those improvements.

So that part of spending is still out there and it I’m convinced it will come our way, and that will create an additional demand on the part of retailers with stores that transportation companies don’t have.

Operator: And our next question comes from Rob Mason from Baird. Rob, please go ahead.

Robert Mason: Yes, good morning all. I wanted to maybe just probe again, your thoughts as we get into ’24 and not the put a stake into the ground at midyear ’24. But I’m just curious, as you think about normal replacement cycles, how would your average age of your installed base look midyear next year? Would it be at an average level or below average, above average?

Bill Burns: Yes, I’d say that, Rob, what we said is we’re not guiding to 24% as we’ve talked about before. I would say, again, from a color perspective, that on average, I guess, it would be the same. What we’re seeing today is our customers sweating some of their assets longer than they normally would. They can only do that so long. Devices get older, they want to use more applications requiring faster processor speeds, more memory, you see OSs moving forward, so security and others. So there’s reasons for them to upgrade those devices over time. Could they sweat them for a certain amount of time, yes. But then eventually, that kind of comes our way, and they go ahead and upgrade. So I would say average life cycle of demand in second half, nothing changing there.

We’re working closely with our customers to make sure we understand their refresh cycles. And I think that while there’s very little visibility in the second half of the year, I think the biggest thing to remember is we’re going to cycle compares that are easier and this destocking moves away. So I think that’s positive. But I would say average number of refreshes out their average length of the devices in service and today, customer sweating assets.

Joachim Heel: Maybe I’ll give you a two data points to support that. One is in Q2, the pushouts that we had in Q1 tripled. And in Q3, the pushouts were about the same as they were in Q2 which was almost the same as what we had in the entire year of 2020. So you can see that there’s a lot of demand being pushed out, and those are all refreshes that should be happening now to maintain the average life of our estate out there. And so the average life of our estate is likely going up. And at some point, and that’s what we said a couple of times already, sorry to repeat it, is that at some point, they will have to buy and refresh those devices.

Robert Mason: Understood. That’s good color. Bill, I wanted to go back to one of your earlier comments in the opening remarks. I thought I heard you mentioned a shift in go-to-market resources. And I was hoping you could put a little more color around that. And maybe just jointly, you talked about also accelerating growth in some of these underpenetrated markets, and I’m just curious if there’s a connection there. And how are those underpenetrated markets performing right now relative to some of your more traditional markets?

Bill Burns: Yes, I would say that manufacturing is a good example of that. It’s has been less impacted, still down significantly year-on-year, but less than other markets. That is an opportunity we’ve talked about earlier in the call. I think there’s other markets. Japan is an area that we’re investing additional resources as well. And we’ve won a large postal opportunity there and the largest retailer in Japan most recently, and we’re leveraging those wins and larger partners within Japan to do more business within Japan. Government is another area that we haven’t had a lot of focus on in the past, but there remains opportunities for us to grow our business within government. I think from a product perspective, we talked a bit about RFID and machine vision as fixed industrial scanning and machine vision around inspection, but also RFID around automation and digitizing and automating customers’ environments.

Tablet is another good example of an area in which is closely adjacent to mobile computing and people want larger screen formats at times, and that creates an opportunity for us. So it’s both a market perspective as well as a technology perspective. And tactically, we’re reallocating resources across regions and areas to address these. We’ve started that already in Q3, and we’ll continue to do that as we enter 2004. Some are short-term opportunities and others are longer-term opportunities. But we think it’s important that we continue to be agile, not only in the cost side of things, but also on where we’re deploying our resources to see and address the most attractive growth markets for us and stay close to our current customers, but really shift resources are the places that we see recovering the faster or that we’re underpenetrated today, that’s how we see it.

Operator: We will now take a question from Brian Drab from William Blair. Brian, please go ahead.

Brian Drab: Okay. Thanks. Most of my questions have been answered, obviously, at this point. Can you just talk about Fetch and some of the other acquisitions that you made in 2021. You spent quite a bit of money in 2021 and the assets kind of averaged like 9x to 10x sales in terms of purchase price. Is there — can you just give an update on how Fetch and Matrox and the other business that you’ve acquired recently is doing? And is there any risk of impairment as you’re looking at that going into year-end here potentially?

Bill Burns: I think we can — starting maybe with software is the largest segment and some of the acquisitions we did around Reflexis and Antuit prescriptive analytics in that area. We continue to focus on the retail associates and really enabling the retail associate through a suite of products and solutions portfolio around work cloud as we’ve announced at our recent customer user event around software, and that seems to be resonating well with our customers. This idea that taking task management, workforce management, communication, collaboration, demand planning combining that into a single application, leveraging our mobile devices in the hands of the associates in retail, and it plays into what Joe talked about earlier, this idea for a device for everyone within retail.

So we see our software assets being important part of marrying with our mobile devices within retail and the idea of putting devices in the hands of more retail associates. I would say machine vision, $100-plus million market to us attractive, fragmented market overall. The focus there is manufacturing. We’ve talked about that earlier in the call, but also logistics and the idea of fixed industrial scanning, they continue to both look to ways to automate, to drive productivity, to improve quality across their organizations. I think the challenge to machine vision in the short term is the same as others are seeing, certainly, cyclical weakness in semiconductors where when we acquired the asset in machine vision, we knew Matrox was heavily weighted towards semiconductor and our objective there is to not only scale that business, but to diversify the offerings outside of semiconductor into new attractive markets.

They could include automotive, food and beverage, inside fixed industrial scanning warehouse and distribution. So all those are represent opportunities for us, and we’re excited about that market and our focus there is really diversification scale in driving share gains across machine vision. I would say Fetch and robotics automation or warehouse automation perspective, it’s the smallest, still nascent in that area. I would say we’re focused in two areas predominantly. First is Goods Transport. And again, we talked about that playing in line side replenishment, for instance, inside manufacturing, but also just good transport in general, of moving goods from A to B of varying sizes, that’s an attractive market for us. The other market is e-commerce.

So think of e-commerce picking, cobots and humans working together within that environment, where our devices today are being used by those workers to pick orders and adding additional productivity using automation and robotics is an interesting opportunity for us longer term. So it’s the smallest of the segment. We don’t see any impairment opportunities there or issues or concerns. We really find these three as attractive long-term growth opportunities for Zebra overall. And some are challenged in the short-term. As I said, machine vision is a good example of that with semiconductors, but we have the long-term prospects of the machine vision and fixed industrial scanning market remain very attractive to us.

Operator: Ken Newman from KeyBanc Capital Markets has a question. Ken, please go ahead. I’m sorry. Let’s go to Jim Ricchiuti from Needham & Company. Jim, go ahead.

Unidentified Analyst: [Indiscernible] on for Jim. Most of the questions that I had have been addressed, but maybe just one for me. for the incremental $15 million of savings, is that in any one particular area or just a broad deepening across the existing targeted areas? Thank you.

Nathan Winters: Not in one particular area, just broad-based, as we’ve worked through the plans throughout the third quarter and the fourth and scrutinized where we had to backfill certain roles with the retirement plans as well as just any open roles that have come along, just again scrutinizing that spend is really what drove it. So again, I would say fairly broad based and in line with the actions that we’re driving for the company.

Operator: And this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Burns for any closing remarks. Please go ahead.

Bill Burns: Thank you. I’d like to thank our customers, partners, and employees for their support and dedication to our long-term success. Have a good day, everybody. Thank you.

Operator: Goodbye.