Zebra returns to profitability, stock jumps

By Yingcong (June) Fu

Shares of Zebra Technologies Corp. surged 4.8 percent on Thursday as the company reported a profit for the fourth quarter after four consecutive quarterly losses.

The Lincolnshire, Ill.-based printer and mobile computer provider swung to net income of $17 million, or 34 cents per diluted share, in the fourth quarter ended Dec. 31, compared with a net loss of $28 million, or 53 cents per diluted share, in the year-earlier period, beating the consensus estimate of 27.5 cents by eight analysts polled by Bloomberg.

Zebra's revenue and bottom line improved significantly in the fourth quarter. (Yingcong (June) Fu/MEDILL)
Zebra’s revenue and bottom line improved significantly in the fourth quarter. (Yingcong (June) Fu/MEDILL)

While quarterly revenue decreased slightly to $942 million from $952 million, Zebra’s strong performance was mainly due to a significant decline in operating expenses. Operating expenses dropped 14.3 percent to $361 million from $421 million, with a noticeable reduction in acquisition and integration costs.

The acquisition of Motorola’s Enterprise, the mobile computing and communications technology services of Motorola Solutions Inc., which cost $3.45 billion in October 2014, loaded $3.25 billion debt on Zebra and increased its operating costs. Zebra swung to a loss in the fourth quarter in 2014 and continued to lose money from the fourth quarter of 2015 to the third quarter of 2016.

Acquisition and integration costs decreased 47.1 percent to $27 million from $51 million in the fourth quarter. The expenses are estimated to continue declining in the first half of 2017, when the integration is supposed to be completed, and they will be minimal in the second half, according to Olivier Leonetti, Zebra’s chief financial officer, in a conference call with analysts.

“The quarterly performance reflects that they learned a lot since the integration began,” said Keith Housum, analyst at Northcoast Research Holdings LLC in Cleveland, Ohio, in an interview.

Enterprise became Zebra’s biggest source of revenue after the acquisition. It contributed $747 million, almost two-thirds, to Zebra’s total revenue in the fourth quarter. Revenue of Zebra’s legacy business was $327 million, 2.2 percent higher than in the year-ago period. The growth of the legacy business was relatively consistent with that of Enterprise, Housum said.

Within the total revenue, Hardware accounted for 79.3 percent of the total revenue, while service and software contributed 13.5 percent.

“Although Zebra spent approximately half of its research and development cost in software, it is still a hardware company,” Housum said. Software development is only a way to make the company more competitive as it doesn’t sell software separately from hardware, he added.

Organic net sales growth, excluding the negative impact of foreign currency and the business of wireless LAN, which Zebra sold out in October last year, was 3.5 percent. The company forecasted organic net sales growth to be 3 percent to 6 percent in the first quarter of 2017, and “low-single digit” organic revenue growth for the full year 2017.

Analysts expect earnings to increase to 70 cents in the first quarter in 2017, and to $1.78 for the full year, as shares are targeted at $99.11, 10.2 percent higher than the current price.

Zebra reported a 2016 annual loss of $127 million, or $2.65 per diluted share, narrowed 19.6 percent from a loss of $158 million, or $3.10 per diluted share in 2015. Annual sales decreased 2 percent to $3.57 billion in 2016.

Photo at top: Zebra’s office in downtown Chicago for software development, intended to make the hardware company competitive in the technology market. (Yingcong (June) Fu/MEDILL)