Zebra Technologies Corporation

And welcome to the third 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. And 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 third 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 performance are year over year on a constant currency basis and exclude results from recently acquired businesses for the 12 months following each acquisition. 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 third quarter results and actions we are taking. Nathan will then provide additional detail on the financials and discuss our Q4 outlook. Bill will conclude with progress we are making 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. As expected, our third quarter performance was impacted by broad-based softness across our end markets and elongated sales cycles. This resulted in a significant decline in sales with expense deleveraging impacting profitability. We will spend time today discussing our results and the demand environment, as well as the progress we have made to rationalize our cost structure and shift our go-to-market resources to drive sales growth and improve profitability as our end markets recover. For the quarter, we realized sales of $956 million, a 30% decline from the prior year. An adjusted EBITDA margin of 11.6%, a 950 basis point decrease and non-GAAP diluted earnings per share of 87 cents, a 79% decrease from the prior year. We saw broad-based softening of demand in late Q2, which continued throughout Q3 as customers demonstrated more cautious spending behavior across all our end markets and regions. These dynamics have been exacerbated by our distributors reducing their inventory levels, which accounted for about one-third of our Q3 sales decline. As a reminder, our distribution channel has been aggressively driving down inventory as end user demand has slowed, product lead times have recovered, and cost of holding working capital has increased. We believe this reset will largely complete by year end. Although we experienced declines across all product categories, services and software were bright spots in the quarter. As we enter Q4, it was potentially all the cost restructuring actions now implemented we expect to see a significant sequential improvement in profitability. These actions are now expected to yield net annualized cost savings of $100 million, which is an increase from our previous expectation of $85 million. On slide five, we summarize drivers of demand trends across our end markets. Our three largest end markets representing more than three-quarters of our sales volume are indexed to the goods economy, which has been significantly underperforming the services economy. While each of our primary end markets declined, demand was weakest in retail and e-commerce and transportation logistics, as many customers are navigating a challenging environment and absorbing capacity they built out during the pandemic. As you see on the slide, despite current demand softness, there are several themes that we expect to drive investment in our solutions over the long term, including labor and resource constraints, real-time supply chain visibility, track and trace mandates, and increased expectations from shoppers and patients. Turning to slide six, I'd like to review the actions we are taking to address and mitigate the impacts of the soft demand environment and position ourselves for long-term success. In late Q3 and early Q4, we implemented most of the cost restructuring actions that are driving $100 million of net annualized operating savings. We are reallocating resources to accelerate growth in under-penetrated markets, including Japan, along with government and manufacturing sectors, and to capture the potential of new use cases that leverage our solutions to digitize and automate environments, including RFID and machine vision. We are also renegotiating long-term supply agreements and working with our contract manufacturers to draw down component inventories. And as part of our long-term incentive plan, we added a free cash flow conversion metric. We expect the cost actions we have implemented and the shift of our go-to-market resources to improve profitability and drive sales growth as our end markets recover. While we believe we are seeing a leveling of demand trends and the peak of distributor destocking activity, we are not seeing signs of a market recovery based on customer behavior. Therefore, we remain cautious in our planning the remainder of this year and the first half of 2024. We'll continue to take an agile approach to managing through this uncertain environment. We remain disciplined with respect to our cost structure and cash flow. I will now turn the call over to Nathan to review our Q3 financial results and discuss our fourth quarter outlook.