Zebra Technologies Corporation (ZBRA) Earnings

Management highlights

- Overall Q2 Performance • Delivered record quarterly results that exceeded the high end of prior guidance, with total sales of over $1.5 billion, growing 20.4% year-over-year (9.2% organic), adjusted EBITDA margin of 27.7%, and non-GAAP diluted EPS of $6.35, a 76% year-over-year increase. • Excluding $73 million of IEPA tariff recovery, adjusted EBITDA margin expanded 200 basis points year-over-year, driven by operating expense leverage of 170 basis points. • Broad-based double-digit growth was achieved across retail, manufacturing, and healthcare end markets, with healthcare as the highest growth end market for the quarter. - Strategic Priorities • Long-term profitable growth: Management targets 5% to 7% organic sales growth over a full cycle, supported by low market penetration (three-quarters of global warehouses are in early automation stages) and ongoing investments in RFID, machine vision, and AI to expand differentiation. • Operational efficiency: Previously announced restructuring actions were substantially completed in Q2; other initiatives include cost discipline, accelerated software development via AI tools, and enhanced go-to-market efficiency. • Innovation and market leadership: Early commercial traction has been achieved for new AI-optimized mobile computers, wearables with integrated RFID, new RFID solutions, and 3D machine vision products. • Financial strength and capital allocation: The company ended Q2 with a 1.9x debt leverage ratio and $925 million of available credit capacity; $568 million of shares were repurchased in the first half of 2026, reflecting strong cash flow generation and confidence in long-term value creation. - End Market Highlights • Retail: E-commerce and convenience stores are bright spots driven by consumer demand for faster delivery and expanded fulfillment; the Elo Touch acquisition is benefiting from growing self-service adoption, and customer interest is strong for Zebra's Frontline AI Suite. • Transportation & Logistics (T&L): Sales were flat against a very strong prior year comparison, with outperformance in third-party logistics and warehousing; a robust multi-year pipeline of large deployments is expected to start ramping in 2027, focused on last mile delivery, parcel visibility, and worker productivity. • Manufacturing: Delivered strong double-digit growth driven by macro improvement and customer demand for operational visibility; electronics and pharmaceuticals were particularly strong, with machine vision outperforming on aligned go-to-market initiatives and inorganic growth from the FotoNation acquisition. • Healthcare: Q2's highest growth end market, driven by strong mobile computing demand as more caregivers are equipped with enterprise-grade solutions to improve patient care, staff communication, and operational efficiency; new self-service opportunities for Elo Touch in patient/visitor check-in are expanding the addressable market.

Guidance

- The company raised its full-year 2026 guidance, with the midpoint of sales guidance 3 percentage points higher than the prior outlook. • Full-year 2026 sales are expected to grow 14% to 16% year-over-year, with 8 percentage points of growth coming from acquisitions and favorable foreign exchange impacts. • Full-year adjusted EBITDA margin is expected to be between 23.5% and 24%, with non-GAAP diluted EPS expected between $20.75 and $21.25. • Full-year free cash flow is expected to be at least $1 billion, representing a conversion rate of approximately 100%. • The full-year guidance reflects full mitigation of the $120 million memory cost headwind via targeted price increases, restructuring savings, volume leverage, and favorable FX. - Q3 2026 Guidance • Total sales growth is expected between 17% and 20% year-over-year, with approximately 8% organic growth at the midpoint including 2 percentage points from price increases. • Adjusted EBITDA margin is expected to be approximately 22%, and non-GAAP diluted EPS is expected between $4.70 and $4.90. - Long-term expectations: Management reaffirmed a 5% to 7% long-term organic sales growth target for the full business over a cycle, driven by ongoing automation, digitization, and AI adoption trends across Zebra's $35 billion addressable market.

Segment performance

1. Connected Frontline Segment: Grew nearly 26% including the recent ELO acquisition, or 7.5% on an organic basis, with mobile computing leading growth. The recently acquired Elo Touch business delivered strong profitable growth, contributing to segment performance driven by self-service trends and cross-selling synergies. This segment contributes approximately 58% of total company organic growth for the quarter. 2. Asset Visibility and Automation (AVA) Segment: Grew 11.4% year-over-year, led by printing and machine vision. The segment saw strong performance across printing, data capture, and supplies, with particularly strong outperformance in machine vision driven by manufacturing demand. RFID deployments continued, with Q2 softness attributed solely to project timing rather than weak demand. This segment contributes approximately 42% of total company organic growth for the quarter. By region: North America sales grew 9% organically, EMEA grew 7% organically (offset by softness in the Middle East), Asia Pacific grew 13% organically, and Latin America grew 15% organically.

Risks & headwinds

- Ongoing memory supply constraints and memory cost inflation: The memory market remains dynamic and challenging, with supply levels continuing to constrain total achievable sales relative to unconstrained customer demand. - Geopolitical risk: Softness in the Middle East is negatively impacting EMEA region performance due to ongoing geopolitical challenges. - Price increase acceptance: While the company has successfully passed through targeted price increases to date to offset memory costs, further price increases may be required if memory costs continue to rise, which could impact customer demand.

Analyst Q&A

• Q: What is the outlook for large T&L deployments expected to ramp in 2027, and what is driving growth in machine vision? /

  A: Despite challenging year-over-year compares in Q2 2026, T&L saw solid performance with growth in 3PL and warehousing. Management notes a robust multi-year pipeline of large deployments starting in 2027, focused on last mile delivery, with new RFID and AI-enabled mobile devices giving Zebra a competitive advantage for upcoming hardware refreshes. For machine vision, aligned go-to-market teams focused on manufacturing verticals are driving strong results, with organic portfolio enhancements and the FotoNation acquisition expanding offerings across use cases from electronics/pharma manufacturing to logistics and food and beverage. (372 characters)

• Q: To what extent is Q3 and full year guidance still constrained by memory supply, and what are your share repurchase plans for the second half? /

  A: Customer demand is above the current guidance range, and memory constraints still persist, though the team has secured enough supply to hit the guided range. Management is working long-term with 10 new suppliers to qualify 5-7 qualified suppliers per primary memory type, supporting growing supply into 2027. For share repurchases, after $568 million in repurchases in H1, the full year plan assumes an additional $150 million in H1 for a total of ~$700 million, with flexibility to repurchase more if the stock remains attractively valued. The balance sheet is strong with a 1.9x leverage ratio. (398 characters)

• Q: Why does Q3 guidance imply a sequential deceleration in growth and margin step down from Q2, and would you be able to implement additional price increases if needed? /

  A: The Q3 growth and margin step down is primarily driven by the absence of the $73 million Q2 IEPA tariff recovery and a planned $20 million step up in memory costs from Q2 to Q3. Growth rates are also impacted by prior year compares and planned memory supply levels. While management prefers not to implement additional price increases, if memory costs rise further, Zebra has proven it can pass through pricing increases across both its legacy business and the acquired Elo business, similar to other industry players, and is confident it can implement further increases quickly if needed. (405 characters)

• Q: What is the update on synergies from the Elo Touch acquisition, and where is healthcare growth coming from? /

  A: The Elo integration is progressing ahead of expectations, with $10 million in synergies identified to date, and early commercial synergies from joint selling into Zebra's existing global named accounts and expanding Elo into new geographies where it previously lacked presence. For healthcare, Q2 growth is driven by equipping more caregivers with enterprise-grade mobile devices to improve staff communication, patient safety, and operational efficiency across clinical mobility and urgent care settings. Elo is also expanding into new healthcare use cases like patient and visitor self-service check-in that it did not previously target. (401 characters) Total: 1576 characters