Zebra Chicago Office

Zebra expects stronger performance in 2017

By Yingcong (June) Fu

Zebra Technology Corp. is seen as having returned to profitability in the 2016 fourth quarter after four consecutive quarterly losses, and further increasing income in 2017.

The provider of printers and barcode scanners is estimated by analysts to make annual revenue of $3.58 billion in 2017, slightly higher than the estimate in 2016. Adjusted annual income is estimated to be $333.7 million, or $6.34 per diluted share, compared with the estimated $284.3 million, or $5.45 per diluted share in 2016.

Shares are targeted at $93.25, 8.7 percent higher than the closing price of $85.81 on Wednesday. Eight out of 12 analysts polled by Bloomberg rate the stock a buy while the other four say hold.

Zebra is estimated to swing to net income of 27.5 cents per diluted share in the fourth quarter ended on Dec. 31, from net loss of 7 cents per diluted share in the year-ago period. Revenue is projected to be $931 million, the highest in 2016, but 2.3 percent lower than a year earlier.

Shares surged 11.1 percent from $66.81 to $75.46 on Nov. 15, the day Zebra reported its third-quarter earnings.

Adjusted net income excluding certain items of $75 million, or $1.43 per diluted share, in the third quarter beat the consensus estimate of $73.62 million, or $1.41 per diluted, although the GAAP net loss of $1.61 missed the estimate.

Zebra revenue
Zebra’s revenue in 2016 (Yingcong (June) Fu/MEDILL)
Zebra EPS
Zebra’s operating results in 2016 (Yingcong (June) Fu/MEDILL)

Michael Morosi, an analyst at Avondale Partners in Nashville, Tenn., upgraded the stock to market outperform on that day, with a target price of $84. On Dec. 21 he increased his target to $107.

Morosi expects $1.62 adjusted earnings per share for the fourth quarter and $1.45 in the first quarter of 2017.

The adjusted net income excluding $158 million operation expenses implies the company is profitable, Morosi said in an interview. Substantial 2016 costs related to the 2014 acquisition of Motorola Solutions’ Enterprise are a one-time charge, and expenses of amortization of intangibles are a non-cash expense, he said, so these two items are excluded in computing adjusted earnings.

Zebra acquired Motorola’s Enterprise, the mobile computing and communications technology services of Motorola Solutions Inc., for $3.45 billion in an all-cash transaction in October 2014. The acquisition was funded by $200 million of cash on hand and $3.25 billion of debt.

“The company took on a lot of debt to complete an acquisition of a subsidiary of Motorola. The investors were concerned about the risk of having more debt on the balance sheet,” Morosi said. “However, they began to pay back the debt with debt metric per earnings to more normal levels,” he added.

Long-term debt declined to $2.79 billion in the third quarter, 8 percent lower than a year earlier.

Zebra still has a “highly leveraged balance sheet,” Brian Drab, an analyst at William Blair in Chicago, wrote in a report.

Motorola’s Enterprise’s annual revenue, including sales of a wireless network and a mobile application development platform, was $2.5 billion in 2013, more than twice that of Zebra in the same year.

Full integration of the acquisition is expected to be completed in the middle of 2017, said Mike Steele, Zebra vice president, in the third-quarter earnings conference call with analysts. “We’re making meaningful progress on our transition to one Zebra as we complete the remaining steps of our integration plan–-leverage the Zebra brand and establish the culture of the new Zebra,” he said.

However, according to Morosi, such an acquisition can be risky. “Entering a new line of business which Zebra is unfamiliar with, or acquiring a business that would have difficulties integrating with the company are all risks related with the success of future acquisitions,” Morosi wrote.

Other risks include fluctuations in currency and rapid technological change.

With more than half of its revenue coming from overseas, Zebra’s business is significantly impacted by currency exchange. “Approximately one quarter of our total company sales are denominated in euros and the vast majority of our costs are in U.S. dollars, which exposes us to currency transaction risk from both a sales and earnings perspective,” said Michael Smiley, Zebra’s chief financial officer, in the conference call.

To pursue technological innovation, Zebra spent $96 million in research and development in the latest quarter, 21.9 percent of total operating expenses, slightly lower than the $100 million in a year-earlier period.

The Lincolnshire, Ill.-based company opened a Chicago office in 2013 for software development. Located downtown and close to the University of Illinois at Chicago, the office has approximately 20 people working on innovation and data analysis.

Zebra office 1
A whimsical display in Zebra’s office in downtown Chicago. (Yingcong (June) Fu/MEDILL)
Zebra office 2
A lounge in Zebra’s Chicago office (Yingcong (June) Fu/MEDILL)

It is an “extension of the Lincolnshire office” and “will be competitive and attractive to employers and employees,” said Adebayo Onigbanjo, director of marketing chief technology office at Zebra, noting that McDonald’s Inc. is moving its entire headquarters from the suburbs to downtown Chicago.

Zebra unveiled an innovation called “SmartSense” at the National Retail Federation show in New York in January. The product is intended to help retailers improve their store operations by providing videos of shoppers and employees and tracking inventory.

The new product will not significantly increase revenue immediately, Morosi said. “They have a very large product portfolio in a number of markets. Any one product announcement shouldn’t materially drive the earnings in the short term,” he said. But developing new products will certainly benefit the company’s growth in the long term, he added.

Zebra has said it expects a revenue decline of 1 to 4 percent in the fourth quarter, due to currency exchange and the divestiture of its wireless LAN business last October.

Zebra sold the business for $55 million to Extreme Networks, a San Jose, Calif.-based information technology service company.

Wireless LAN contributed about $30 million to $35 million to Zebra’s quarterly revenue and the divestiture will negatively impact its revenue, Drab wrote.

Zebra’s annual revenue for 2016, which will be included in the quarterly earnings report on Feb. 23, is estimated to be $3.57 billion, 8 percent lower than $3.65 billion in 2015, with an estimated net loss of $2.48 per diluted share.

Photo at top: Zebra opened its Chicago office in 2013 for software development. (Yingcong (June) Fu/MEDILL)