The operator introduces the Second Quarter 2024 Zebra Technologies Earnings Conference Call, and participants will be in listen-only mode. Mike Steele, Vice President of Investor Relations, welcomes everyone and provides information about the call. He mentions that the presentation will be archived on the company's website and that forward-looking statements are subject to risks and uncertainties. The call will include prepared remarks from the CEO and CFO, followed by a Q&A session. The CEO discusses the second quarter results, and the CFO provides further details and discusses the outlook for the third quarter and full year. The CEO concludes with updates on the company's strategic priorities.

In the second quarter, the company saw modest recovery in retail and e-commerce, as well as signs of momentum in other end markets such as healthcare. Mobile computing and services and software also saw growth, but other product categories declined. The company's restructuring actions led to improved profitability and they are raising their full year outlook. In the second quarter, total company sales were flat, with a decline in the Asset Intelligence & Tracking segment due to challenging prior year comparisons.

In the third quarter, Enterprise Visibility & Mobility segment sales increased by 8.2%, driven by growth in mobile computing but offset by a decline in data capture solutions. Sales were mixed across regions, with a decrease in North America and growth in EMEA, Asia-Pacific, and Latin America. Sequentially, Q2 sales were slightly higher than Q1, with growth in most product categories. Adjusted gross margin increased by 60 basis points, and adjusted operating expenses increased by 110 basis points due to normalized incentive compensation and restructuring savings. This resulted in a 70 basis point decrease in adjusted EBITDA margin, but a 60 basis point improvement from Q1. Non-GAAP diluted earnings per share decreased by 3.3% year-over-year. In terms of the balance sheet and cash flow, the company generated $389 million of free cash flow in the first half of 2024 and ended the quarter with a 2.4x net debt to adjusted EBITDA leverage ratio and $1.5 billion of available capacity on a revolving credit facility.

During the second quarter, we diversified our capital structure by issuing $500 million of senior unsecured notes and retiring a receivable financing facility. We also terminated interest rate swap agreements for $77 million in cash. Our priority has been debt pay down, resulting in lower debt and improved cash flow. Our outlook for Q3 includes sales growth of 25-28%, assuming stable demand and easier comparisons from last year. We have a solid backlog and pipeline, but are not expecting an increase in large orders. Adjusted EBITDA margin is expected to be 20-21%, with non-GAAP diluted earnings per share in the range of $3-$3.30. For the full year, we have raised our guidance for sales growth to 4-7% and expect adjusted EBITDA margin to be 20-21%. Non-GAAP diluted earnings per share are now expected to be $12.30-$12.90. Free cash flow for the year is expected to be at least $700 million.

Zebra is focused on improving its balance sheet and cash conversion, and is well-positioned for long-term growth due to trends such as labor constraints and the need for real-time supply chain visibility. Their solutions, including hardware, software, and services, help digitize and automate workflows for frontline workers. At their recent Innovation Day event, they showcased how their products and solutions can touch a product 30 times throughout its journey in the supply chain. Examples include using machine vision in manufacturing, wearable mobile computers and autonomous robots in warehouses, and software and mobile computers for store associates to assist with inventory management and online orders.

Zebra's mobile computing solutions are driving growth across various industries, with customers leveraging their software capabilities to improve workflows and outcomes. This includes wins with a commercial airline and a North American retailer, as well as displacement of consumer cell phones with Zebra's devices in a European retailer. In healthcare, Zebra's solutions are empowering caregivers and contributing to double-digit sales growth. The company expects to see continued growth in the second half of the year.

The speaker, Bill Burns, discusses the company's strong conviction in their long-term opportunities and their innovative solutions. They have positioned themselves well for profitable growth as their end markets recover. The call is then opened for Q&A, with the first question asking about the return of larger project activity and potential upside to guidance. Burns responds by mentioning early signs of recovery in Q1 and better-than-expected sales results in Q2, driven by mid-tier and run rate business. However, large deal activity remains below historic levels due to customer uncertainty in the market.

The speaker discusses how large deployments are being spread out over a longer period of time, with small orders being placed to add to existing installations or for new applications. They mention that there is optimism among partners and customers, but they would like to see more momentum in large orders. They also mention that there has been an increase in shipping rates, but it is only having a modest impact on costs and is included in their full year guidance.

The team is taking several actions to improve transit time and mitigate the impact of increased demand in the second half of the year. Despite a modest increase, the second half guidance remains on track. During the earnings call, it was noted that the EVM margins were better than expected, with gross margins at their highest in three years. This was driven by strength in large deals, run rate, and mid-tier, as well as continued strength in service and software margins. As a result, the EBITDA margin guidance has been raised to 20-21%.

The speaker is discussing the company's expected pull-through in the second half of the year and how it relates to their EBITDA guide. They expect similar margins in the third quarter compared to the second quarter, but do not anticipate as much incremental benefits as in the second quarter due to restructuring actions. The speaker also mentions that customer budgets are still being scrutinized due to economic uncertainty, and large deal conversations may focus more on 2025 when budgets are refreshed.

The speaker discusses the uncertainty surrounding year-end spending by customers and the factors that may be influencing their decisions. They mention that there has been an increase in shipping and parcel volumes and a return to growth in certain segments. However, there is still hesitation among customers to move forward with projects due to macro factors. The speaker remains optimistic about the direction of the business, but notes that the competitive environment has not changed significantly.

The company is maintaining its position in the marketplace and is confident in its differentiation, partnerships, and relationships with customers. The decrease in large deals is not due to competition, but rather reflects the overall market. The company is still working with distributors to ensure appropriate levels of inventory.

The company is in a similar position as they were in Q1, with some wanting more products in the channel. They are being cautious due to uncertainty. The RFID business had a challenging second quarter but is expected to return to growth in the second half of the year. The machine vision business has declined but the company is diversifying into new areas.

The company's organic investment in machine vision for the logistics area is going well, with more opportunities and global investments. The combination of mobile devices and software assets is also showing promise, particularly in the retail sector with the use of wearable mobile computing. These areas are expected to drive future growth for the company, although they currently make up a smaller portion of their overall business. As for potential upgrades of devices, the company's customers have been utilizing their capacity during the pandemic, so there may not be a significant need for upgrades in the near future.

The company is seeing continued upgrade cycles among its customers and a solid pipeline of opportunities for mobile computing. They are confident that as the macro environment improves, customers will continue to upgrade devices. They have raised their free cash flow expectations and are considering M&A and share repurchases for capital allocation before year-end.

The company's priorities for the first half of the year have been focused on paying down debt and improving their capital structure. They have successfully lowered their debt leverage and are now prioritizing organic growth, M&A, and share repurchases. The company's M&A philosophy remains unchanged, but they are being more selective due to macro uncertainty and higher interest rates. The healthcare sector has shown strength, which may be due to new projects. The EMEA region has also been a source of strength, possibly due to recovering from a previously depressed environment.

In the healthcare sector, Zebra's focus on clinical mobility and total cost of ownership has driven growth in EMEA. The company is also seeing opportunities in home healthcare. In terms of EMEA, there was overall strength in Q2 due to easy comparisons, larger projects outside of retail, and competitive wins. However, manufacturing remains challenging in the region.

The company expects North America and EMEA to recover first, with some strength also seen in Latin America. The results across the region are mixed. The second half of the year is expected to show double-digit growth, driven by underlying strength in the business and modest demand increases across all vertical markets. The company anticipates continued strength in the third quarter, but does not expect sequential improvement.

The company expects stability in business in July with a slight increase in the fourth quarter. They are being cautious about including large orders in their full-year guide until they have more certainty and commitments from customers. The second half of the year is expected to have lower OpEx spend and higher EBITDA margins due to timing of trade shows, sales, and benefits. The sequential improvement in profitability from Q3 to Q4 is attributed to a slight improvement in OpEx and higher volume leverage.

During a conference call, Keith Housum from Northcoast Research asked a question about the modest growth in the software and services line item for the company. Bill Burns, speaking on behalf of the company, explained that they have been seeing consistent growth in software and services over the past few quarters. He mentioned that strong attach rates with mobile devices, such as upgrades and security patches, contribute to this growth. He also noted that they have seen a decrease in customers extending their support agreements, which could signal a future upgrade in mobile devices. Overall, the company sees software and services as an important aspect of their business and a source of recurring revenue. As customers start to refresh their devices from four to five years ago, the company expects to see continued growth in this area.

The speaker, Bill Burns, discusses how pricing for mobile computers has changed over the past four years. He notes that customers are making choices based on their needs and experiences, and the company focuses on providing value to keep prices and margins high. He also mentions that they have a tiered portfolio to offer different levels of devices to meet customer needs. Additionally, he mentions that all end markets, including transportation and logistics and manufacturing, have shown sequential improvement.

The speaker, Bill Burns, discusses the current state of the manufacturing industry and how it has been impacted by recent events. He mentions that there have been signs of softness in the industry, but there has been sequential improvement in certain areas. However, overall demand is still not back to historical levels and there are challenges in the short-term. Burns also mentions that the company sees manufacturing as a segment for growth and they have a strong portfolio for this industry. He also notes that they have a strong balance sheet and continue to invest in technology and customer service.

The company is in a good position with its customer relationships and expects to see increased demand and larger orders in the future. They have seen growth in their installed base and are seeing increased use cases across their customer environment. The strength in gross margin has been commented on, but there have been no structural changes that would suggest a different margin when large orders return.

The speaker discusses the challenges faced by the company in 2019, such as tariffs and supply chain issues, and how they impact the baseline for measuring growth. They also mention the strength of the company's portfolio and the potential for incremental margin in the bottom line. They then address the decline in North America, attributing it to the return of growth in mobile computing but a decrease in other product categories due to challenging comparisons from the previous year.

The speaker discusses the growth of large deals in North America and hopes to see more in the second half of the year and into 2025. They also mention that large deals can occur across all nodes of the portfolio, such as retail, transportation logistics, and manufacturing, and give examples of where they have seen them in these areas.

Zebra is incorporating AI into their portfolio in various ways, such as collecting real-time data and using it to feed AI models. This includes reading barcodes and RFID tags, digitizing customer environments, and generating insights. They also have traditional AI solutions in about 50 different areas, including optical character recognition and navigation for autonomous mobile robots.

The third piece of AI in the company's portfolio is the AI assistant that empowers frontline workers with information without the need for cloud connectivity. The company is working with Qualcomm and Google to develop this technology and has demonstrated it at various trade shows. It is not yet commercialized and the company is still working with customers to understand use cases and determine the best approach. The company believes this technology will be a long-term driver for their mobile devices and is a differentiator, but it is still in the early stages and more focused on pilots and demonstrations than commercialization. The interviewer asks for a potential timeline for commercialization, but the company does not provide a specific date, only stating that it is still in the early stages and may take some time.

Bill Burns, CEO of Cognex, discusses the company's plans for future demonstrations and commercialization of their products at the National Retail show in 2025. He also mentions the potential for leveraging their existing customer relationships to expand into new markets and add adjacencies, such as machine vision, retail software, and robotics. The company's strong partnerships with customers allow for the opportunity to sell solutions in these areas.

The company has a strong relationship with their current clients and is considered a trusted partner. However, expanding into new markets or targeting different buyers within existing clients can be challenging. The company is actively looking at adjacent assets that are synergistic with their current portfolio, but are being cautious due to macro uncertainty and higher risk interest rates.

The operator concludes the question-and-answer session and hands the conference back to Mr. Burns for closing remarks. Mr. Burns thanks employees and partners for their support and announces that Zebra is now positioned for growth in the second half of the year. The operator then ends the conference.

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