Zebra Technologies Corporation 2026 Q2 Earnings Call

Please go ahead. Good morning, welcome to Zebra second quarter earnings conference call.

This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year. Our forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially. We refer you to the risk factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe business performance, with reconciliation shown at the end of this slide presentation and in our earnings press release. Throughout this presentation, unless otherwise indicated, our references to sales performance are year-on-year on a constant currency basis and exclude results from business acquisitions and dispositions for 12 months. This presentation will include prepared remarks from Bill Burns, our Chief Executive Officer, and Nathan Winters, our Chief Financial Officer.

Bill will begin with perspectives on our second quarter results, our value proposition, and strategic priorities. Nathan will then provide additional detail on our financial results and discuss our outlook, followed by Bill's closing remarks. Bill and Nathan will take your questions. Now let's turn to slide three as I hand it over to Bill.

Thank you, Mike. Good morning, everyone, thank you for joining us. There are three key points I'd like to focus on today. First, our team executed well, driving record results with broad-based growth and significantly increased profitability. This strong performance, together with the continued momentum we are seeing across our business, supports our meaningful raise to the full-year outlook. Second, our results reflect Zebra's unique value proposition. Customers are investing to digitize and automate frontline operations. Our integrated portfolio is central to their progress. Zebra's AI-powered solutions are helping customers globally to improve outcomes, to enhance productivity, visibility, and real-time decision making. Third, we are executing on our clear strategy to create long-term shareholder value by driving sustainable growth, building on our industry leadership and track record of innovation in enhancing our financial strength and flexibility. With that, let's turn to our second quarter results.

Turning to slide four, we delivered results exceeding our outlook, driven by our team's execution and positive demand trends across our portfolio. We had strong performance across all segments and regions, with double-digit growth in our retail, manufacturing, and healthcare end markets. Elo Touch contributed strong, profitable growth with robust customer interest in our combined portfolio of solutions as we drive synergies with the acquisition. For the quarter, we generated sales of more than $1.5 billion, growing more than 20% or 9% on an organic basis from the prior year. An adjusted EBITDA margin of 27.7%, including the benefit of $73 million of tariff recovery and non-GAAP diluted earnings per share of $6.35, a 76% increase over the prior year.

Excluding the benefits of tariff recovery, we expanded adjusted EBITDA margin by two points, driven by better than expected gross margins as well as operating expense leverage benefiting from our productivity initiatives. These results demonstrate both the durability of demand for our solutions and our ability to convert this demand into profitable growth. Our strong performance and financial position also supports our disciplined approach to capital allocation. We repurchased more than $560 million of shares in the first half of the year, following more than $300 million in the fourth quarter. This elevated level of capital return reflects our conviction in Zebra and our long-term value creation opportunity. Our business momentum and progress navigating the memory supply environment gives us confidence in raising our outlook for the full year. Moving to slide five, I want to share some additional details on our key end markets.

In retail, e-commerce and convenience stores were bright spots, driven by consumers' elevated expectations for faster delivery and expanded fulfillment options. Our recently acquired Elo Touch business delivered strong growth benefiting from self-service trends. We are also encouraged by customer interest in our Zebra Frontline AI Suite and new devices that can best deliver these solutions. In transportation logistics, sales were flat on a strong prior year compare with relative outperformance in third-party logistics and warehousing. Our AI software solutions and recently launched portfolio of AI-optimized mobile computers has positioned us well with industry-leading companies who recognize Zebra's ability to bring increased productivity and service levels to their operations. As we look ahead to 2027, we have a robust multi-year pipeline of large deployments. In manufacturing, our strong double-digit growth was driven by continued macro improvement and our customers' need for increased visibility across their operations.

Electronics and pharmaceuticals were particularly strong in the quarter. Machine vision has also outperformed as our team has been executing well on growth initiatives as we invest in the business. Healthcare was our highest growth end market in Q2. We realized particularly strong performance in mobile computing as customers equip more caregivers with enterprise-grade solutions. We're excited about our opportunity to improve the patient care journey. Now turning to slide six, we continue to build on Zebra's unique competitive positioning as the foundation for intelligent operation. Our solutions capture data at the frontline, turn that data into insights, and enable customers to take action in real time. AI strengthened its ongoing process by enabling faster decision-making, greater automation, and continuous workflow improvement. Benefits include increased productivity and better experiences for frontline workers as well as consumers.

We are deeply embedded in our customers' workflows and understand how work gets done on the frontline. This allows us to serve as trusted partners to our customers and to co-innovate with them to digitize, automate, and deploy AI. With our integrated portfolio, we meet customers where they are today in their automation journey. We'll also continue to expand our value as their operations evolve. Turning to slide seven. Our results reflect the progress we are making in executing on our three strategic priorities. On our first priority, long-term profitable growth, we continue to see meaningful opportunity across both our segments, supported by a large and diverse market and a long runway for adoption in many of the environments we serve.

We believe both Connected Frontline and Asset Visibility & Automation have a 5%-7% organic sales growth profile over a cycle and are confident in our ability to deliver. Penetration remains low across the markets we serve, highlighting the opportunity in front of us. For example, based on third-party research, nearly three-quarters of warehouses globally are in the early stages of their automation journey. Our growth prospects are augmented by investments in RFID, machine vision, and AI that enhance our differentiation and expand our relevance with customers. We're also driving efficiency initiatives in our business to enhance profitability, which include operating expense leverage through cost discipline, including our previously announced restructuring actions that were substantially completed in the second quarter. Accelerating software development by deploying new AI tools and enhancing our go-to-market model to improve market coverage and efficiency.

We also continue to make progress on our second priority, building on our market leadership by advancing innovation. We're seeing early traction in our new line of enterprise mobile computers and wearables that embed RFID and optimized AI processing capabilities, as well as new RFID and 3D machine vision solutions. Finally, our strong earnings and cash flow generation continue to enhance our financial strength and flexibility. We are executing on a balanced capital allocation strategy, prioritizing investments in our business that elevate our portfolio solutions while consistently returning capital to shareholders. Let me wrap up before I hand over to Nathan. We have significant runway for growth with our clear and differentiated value proposition, supported by trends in automation, digitization, and AI across a $35 billion served market.

Our broad portfolio of integrated hardware and software solutions enables us to deliver value across the entire workflow, not just a single use case, creating a meaningful competitive advantage. Our industry leadership puts us in a unique position to be the supplier of choice of AI for the frontline. We have a resilient financial model with strong margins and cash generation, supported by disciplined capital allocation that drives long-term shareholder value. I will now turn the call over to Nathan to review our Q2 financial results, progress in navigating memory supply, and our improved 2026 outlook.

Thank you, Bill. Let's start with the P&L on slide 10. In Q2, total company sales increased 20.4%, or 9.2% on an organic basis. We exceeded the high end of our guidance range, primarily due to our ability to secure increased memory supply, as well as continued momentum across the business and favorable pricing. Our Connected Frontline segment grew nearly 26%, including the recent Elo acquisition, or 7.5% on an organic basis, led by mobile computing. Our Asset Visibility & Automation segment grew 11.4%, led by printing and machine vision. We realized solid performance across all our regions. North America sales increased 9%, led by our retail, manufacturing, and healthcare end markets. EMEA sales grew 7%, with broad-based growth across Europe, partially offset by continued softness in the Middle East. Asia-Pacific sales increased 13%, led by China, Korea, and Southeast Asia.