Zebra Technologies Corporation

Good day and welcome to the second quarter 2023 Zebra Technologies earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mike Steele, Vice President, Investor Relations. Please go ahead.

Good morning and welcome to Zebra's second quarter 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 and we refer you to the factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of this slide presentation and in today's earnings press release. Throughout this presentation, unless otherwise indicated, our references to sales growth are year over year on a constant currency basis and exclude results from recently acquired businesses for the 12 months following each acquisition. Additionally, Note that our asset intelligence and tracking segment now includes our RFID solutions, and we have recast quarterly segment results since 2021 in a schedule included in the appendix of our earnings press release. This presentation will include prepared remarks from Bill Burns, our chief executive officer, and Nathan Winters, our chief financial officer. Bill will begin with our second quarter results. Then Nathan will provide additional detail on the financials. and discuss our revised 2023 outlook. Bill will conclude with progress made on advancing our enterprise asset intelligence vision. Following the prepared remarks, Joe Heal, our Chief Revenue Officer, will join us as we take your questions. Now let's turn to slide four as I hand it over to Bill.

Thank you, Mike. Good morning and thank you for joining us. Our second quarter results were impacted by weakening demand and cautious customer spending behavior across our end markets. While these results are certainly disappointing to us, we'll spend some time today discussing the drivers that are having the greatest impact, as well as the actions we are taking to control what we can in a difficult demand environment, including our expanded cost reduction initiatives. For the quarter, we realized sales of $1.2 billion, a 16% decline from the prior year, an adjusted EBITDA margin of 21.2%, a 70 basis point decrease, and a non-GAAP diluted earnings per share of $3.29, a 29% decrease from the prior year. Let me now put these results in context. On our last quarter call, we discussed a broader softening of industry demand as customers tightened their CapEx budgets and IT device spending slows. During the second quarter, those trends accelerated as we saw more cautious spending behavior by our customers of all sizes across our vertical end markets and regions. While all end markets declined, demand was weakest in retail and e-commerce and transportation and logistics, as many customers are absorbing capacity they build out during the pandemic. These dynamics have been exacerbated by our distributors' focus on reducing their inventory levels, which accounted for approximately 20% of our Q2 sales decline. Our distribution channel has been aggressively driving down inventory as end-user demand has slowed, product lead times have recovered, and the cost of holding working capital has increased. Although global macro indicators have been resilient, the goods economy has underperformed the services economy, and certain key indicators most relevant to our industry have become significantly weaker, including IT device spending. This particular metric has been most correlated with mobile computing, where sales declines have accelerated year to date, following more than two years of very strong demand. Growth across RFID, data capture, supplies, services, and software were bright spots in the quarter. From a profitability perspective, improved gross margin and cost controls enable us to achieve our EBITDA margin and EPS outlook for the second quarter. In our current market environment, swift action is needed and we are taking a number of steps to position us to deliver profitable growth and improve free cash flow. Slide five summarizes key industry challenges that have intensified since our prior update and our actions to address and mitigate the impacts. These actions include reducing spending across the organization, including additional restructuring actions to drive an incremental $65 million of net annualized operating savings as we exit 2023, increasing our focus on accelerating growth in under-penetrated markets, and continue to work closely with our customers as they continue to digitize and automate their environments. A revised full-year outlook incorporates the slowdown and deceleration across our end markets, including a significant reduction in near-term demand in the mobile computing market, destocking buyer distributors, as well as a partial year benefit of our expanded restructuring actions. Given our limited visibility in this environment, we are cautious in our assumptions and not expecting a recovery in 2023. We expect the reset of our cost structure and shift of our go-to-market resources to drive sales growth and improve profitability as our end markets recover. We will continue to take an agile approach to managing through this uncertain near-term environment. I will now turn the call over to Nathan to review our Q2 financial results and provide additional details on a revised 2023 outlook.