The operator introduces the Third Quarter 2023 Zebra Technologies Earnings Conference Call and reminds participants that the call is being recorded. Michael Steele, Vice President of Investor Relations, welcomes everyone and mentions that the call can be accessed on the company's website. He also states that the company will be discussing non-GAAP financial measures and references to sales performance will be on a constant currency basis. Bill Burns, the CEO, will discuss the third quarter results and actions being taken, followed by Nathan Winters, the CFO, who will provide more financial details and the Q4 outlook. Bill will then talk about the company's progress on their Enterprise Asset Intelligence vision. Joe Heel, the Chief Revenue Officer, will join in for the Q&A session.

The company's third quarter performance was negatively affected by a decline in sales and profitability due to a slowdown in demand and longer sales cycles. The company has taken steps to reduce costs and shift resources to drive sales growth and improve profitability as the market recovers. Sales declined in all product categories, but services and software showed some growth. The company expects to see a significant improvement in profitability in the fourth quarter due to cost restructuring actions. The company also expects to see a net annualized cost savings of $100 million, an increase from their previous expectation of $85 million. A summary of the drivers of demand trends across the company's end markets is provided on Slide 5.

The company's largest end markets have been underperforming due to a weak goods economy, particularly in retail, e-commerce, and transportation logistics. However, the company expects long-term growth in areas such as labor and resource constraints, supply chain visibility, and increased expectations from consumers. To address the current soft demand, the company has implemented cost restructuring, reallocated resources, and renegotiated agreements. They are also focused on improving profitability and sales growth. Despite a leveling of demand trends, the company remains cautious in their planning for the remainder of the year and the first half of 2024.

In the fourth quarter, the company will continue to manage through the uncertain environment in an agile manner and remain disciplined in terms of cost structure and cash flow. Nathan Winters then discussed the third quarter financial results, with a 30.6% decrease in net sales. The decline was primarily driven by printing in the Asset Intelligence & Tracking segment and mobile computing in the Enterprise Visibility and Mobility segment. However, there was growth in service and software sales. Sales declined across all regions, with North America seeing a 25% decrease and EMEA seeing a 39% decrease. Adjusted gross margins decreased due to lower sales volumes, but this was partially offset by favorable supply chain costs. Operating expenses also decreased due to previously announced restructuring plans. Adjusted EBITDA margin decreased by 950 basis points, and non-GAAP diluted earnings per share also saw a significant decrease.

The company reported negative free cash flow for the first nine months of 2023 due to lower earnings, restructuring actions, and higher interest costs. However, they ended the quarter with a strong net debt to adjusted EBITDA leverage ratio and ample flexibility. In the fourth quarter, they expect sales to decline between 32% and 36%, with distributor destocking accounting for a portion of the decline. They anticipate a 16% adjusted EBITDA margin and non-GAAP diluted EPS in the range of $1.40 to $1.80. This would result in a full-year sales decline of approximately 21% and an EBITDA margin of 18%.

Zebra expects positive free cash flow in the second half of 2023 and is focused on improving inventory management and cash conversion. The company is also advancing its Enterprise Asset Intelligence vision by providing solutions that address operational challenges and empower the workforce through advanced software capabilities. Zebra has recently launched new products and solutions, such as Zebra Pay and Zebra Work Cloud, to improve workforce optimization, collaboration, inventory management, and demand intelligence for its customers.

Zebra's unique software suite, combined with their mobile computing platform, sets them apart from competitors and allows for expanded market penetration. Their collaboration with Qualcomm has resulted in a generative AI large language model that does not require cloud connectivity. This technology empowers frontline workers, increases productivity, and enhances customer service. Recent wins include a global technology provider using Zebra's machine vision solution, a healthcare system in Europe utilizing their mobile computers and RFID solutions, and a large retail pharmacy chain implementing Zebra's task management software to improve store productivity.

A large North American retailer implemented Zebra's mobile computers and RFID technology to improve inventory accuracy, supply chain efficiency, and customer satisfaction. Zebra's cost-effective solution was chosen over competitors. A large Asian retailer also added Zebra's communication and collaboration software to their mobile computers. Zebra remains confident in their business and expects long-term growth from the digitization and automation of workflows. The call was then opened to Q&A, with the first question asking for preliminary thoughts on the growth outlook for 2024 compared to the long-term growth algorithm of 5-7%. Zebra expects a challenging first half of the year but anticipates growth in the second half due to favorable comparisons.

In the paragraph, the speaker discusses the company's performance in Q3 and the current demand environment. They state that they finished at the high end of their outlook, but are not yet seeing signs of market recovery. All regions and customer sizes saw declines, with large enterprises being the most affected. However, there were some bright spots in services and software. The speaker also mentions that they are not guiding to '24 at this time and will remain cautious for the remainder of the year due to challenging compares ahead. They also mention that bookings were as expected in Q3 and they have a good bookings trajectory for Q4. The speaker concludes by stating that they have stabilized sell-through velocity.

The speaker is addressing the topic of demand trends and their impact on the company's sales. They believe that the leveling out of demand seen in Q3 will continue into Q4, with the biggest impact being in Q3. They do not see signs of recovery yet and are not providing guidance for 2024. However, they believe that customers will resume deployments as macro uncertainty abates and that the current downturn will not last for years. They expect easier compares in the second half of the year due to restocking.

Tommy Moll asks about the company's destocking plans and the visibility of inventory levels in their channels. Nathan Winters responds that they expect to finish destocking by the end of the year and that their global channel inventory is currently slightly higher than normal. They are working closely with distributors to reach normal levels by the end of the fourth quarter and expect to enter next year with the destocking completed. Damian Karas then asks a question about the demand environment and recovery.

Bill and Joe discuss the potential for an increase in demand in early 2024. Bill believes that a strengthening of the goods based economy will lead to increased deployments by customers. The excess capacity built during the pandemic will need to be utilized for demand to return to normal levels. They expect large customers to see the first signs of recovery, followed by midsize and run rate customers. Joachim adds that the steepest declines have been seen in the larger customers, so they would likely be the first to start purchasing again.

The company is closely monitoring their large customers and working with them to plan for product refreshes within their budgets. They expect to see new budgets in 2024. When discussing gross margins, they mention a decline in the third quarter due to volume levels, but note that pricing actions and cost mitigation have helped. They are now focused on rebalancing manufacturing and distribution to the lower volumes and expect the second half to be the low point, with potential for growth as the market recovers.

Keith Housum asks about Zebra's inventory levels, which are still high compared to historical levels. He wants to know if this is due to component costs or finished goods, and if Zebra has minimum purchase agreements with their OEMs. Nathan Winters responds that the inventory levels have stayed flat and are primarily due to consigned components from Tier 1 manufacturers. Zebra has been working to reduce purchase commitments and finished goods, but there is still work to be done. There are no minimum purchase agreements with penalties, but Zebra does have tiered volume-based pricing with their manufacturers.

The speaker discusses the potential impact of a shift towards fixed automation on their company, particularly in regards to their large share in mobile computers and the potential decrease in the need for human-operated scanners. They mention investments in new areas like RFID and machine vision to adapt to this shift.

Zebra sees a need for both handheld and fixed devices for scanning and printing, as well as RFID readers, in order to meet the demands of their customers who are digitizing and automating their environments. They believe that both machine vision and RFID represent attractive markets for them, and that their investment in both handheld and fixed devices will add value for their customers. Additionally, the software component of their machine vision business provides an opportunity for them to create more value for customers.

The speaker asks about the company's future earnings and how they will be affected by current market trends. The company's representative responds that they expect to see continued improvement in margins as the market recovers, and they anticipate returning to previous levels of profitability in the coming years. They also mention cost-cutting measures that will contribute to profitability. Another question is asked by a person from Morgan Stanley.

The health care market has been a strong sector for the company in recent years, with less impact from consumer goods trends compared to other markets. The company sees opportunities for growth in health care through automation and digitization of workflows and assets. In the manufacturing market, the company is looking to expand its presence through machine vision and robotic automation, as well as demand planning for consumer packaged goods customers.

The company has shifted its sales resources to focus on manufacturing and is looking to recruit more partners in that area. They see manufacturing and healthcare as opportunities for growth. The company does not give guidance for 2024, but they are seeing trends that could potentially lead to distributors restocking next year. The company has been working closely with distributors to understand their objectives and adjust inventory levels accordingly due to volatile demand. This process is referred to as "destocking."

The company is working with their partners to generate demand and improve sales out. They are confident that once demand picks up, their partners will follow and achieve their inventory targets. There is no significant difference in demand trends between e-commerce and transportation/logistics, as both had built out capacity to meet COVID demands and are now seeing moderating demand. Brick-and-mortar retail is more tied to the goods economy.

The speaker believes that the recovery will be driven by using up excess capacity and positive economic signs. There may be a slight opportunity for increased productivity in retail stores by connecting workers. The speaker is convinced that this will create additional demand for the company's services. The next question asks about the average age of the company's installed base in mid-2024, but the speaker declines to give a definite answer.

Bill Burns and Joachim Heel discuss the company's guidance for the second half of the year, stating that they are not guiding to 24% as previously discussed. They mention that customers are sweating their assets longer than usual, but eventually they will have to upgrade due to aging devices and the need for faster processors and more memory. They also mention that in Q2 and Q3, there were a high number of pushouts, indicating a potential increase in the average life of their devices. They believe that at some point, customers will have to refresh their devices, leading to potential positive results in the second half of the year.

Bill Burns discusses a shift in go-to-market resources and the acceleration of growth in underpenetrated markets. He mentions manufacturing, Japan, and government as areas where additional resources are being invested. He also highlights RFID, machine vision, and tablets as product opportunities. The company has already started reallocating resources and will continue to do so in the future.

The company is focused on being agile and deploying resources to target attractive growth markets. They have made several acquisitions in 2021, including Fetch and Matrox, which are performing well and helping to enable retail associates through a suite of software solutions. The company sees these assets as important in conjunction with their mobile devices for retail associates.

The machine vision market, worth over $100 million, is attractive to Zebra due to its potential for automation and improved productivity in manufacturing, logistics, and fixed industrial scanning. However, there may be some short-term challenges due to cyclical weakness in the semiconductor industry. Zebra's focus in this market is on diversification and scaling, with potential opportunities in automotive, food and beverage, and warehouse and distribution. The robotics automation market, specifically in goods transport and e-commerce, is smaller but still a promising opportunity for Zebra. There are no concerns or issues in this segment, and Zebra sees all three markets as attractive long-term growth opportunities.

The speaker discusses the challenges faced by the company in the short-term, such as in the machine vision market, but also highlights the attractive long-term prospects. A question is then asked about $15 million in savings, which the speaker explains is a result of broad-based cost-cutting measures. The speaker thanks stakeholders for their support and dedication.

This summary was generated with AI and may contain some inaccuracies.