Okay, great. Thank you, everyone, for coming to Arizona and coming to our annual UBS Global Technology and AI Conference. My name is Zach Wall Jasper. I'm a part of the US Multi-Industrial Team here at UBS, and I'm joined on stage by Nathan Winters, CFO of Zebra Technologies. Only housekeeping item is I have the iPad up here, so people are allowed to put questions through the app, and then I'll try and incorporate them best I can throughout the Q&A. Without further ado, Nathan, let's maybe get rolling. On the last earnings call, the team talked about how demand in the second half of the year is kind of playing out as expected. Can you maybe just talk to us a little bit about what you're seeing across the end markets?
As we look closer to 2026, what kind of end markets could have relative strength versus relative weakness?
Yeah, as we mentioned, the second half is playing out as we expected, going all the way back to what we saw in the pipeline and the opportunities in the July-August timeframe. It might have shifted somewhat between the quarters, but really what we see is our customers who had projects in the pipeline are moving forward with those projects and executing towards that. I think what we were obviously anticipating and what we have not seen come to fruition is an acceleration of projects. I think some of that goes back to the uncertainty in the market, what they were kind of wanting to see, kind of where their customers were going to behave here for their holiday season. Again, outside of that, it is largely playing out, and the strengths of the business have really been consistent for the last couple of quarters.
I mean, North America has had a really great year with retail and e-commerce leading the charge, but we've seen good stability and growth out of T&L. Manufactured has grown slightly, but lagging a little bit from a growth perspective. North America has had a strong year. Asia-Pacific has had a really great year, and a lot of that's based on the investments we made over the last several years to expand our presence in markets like Japan, Southeast Asia, and India. Australia has had a really strong year. Latin America, Q3 was the largest quarter Latin America has had in any quarterly revenue in the company's history. Latin America again had a nice recovery throughout the year. I think the pockets of weakness have really been focused in from a regional perspective around Europe.
Markets like Germany, which have been impacted from a manufacturing perspective, the retail market in France, again, which is a large market for us, has been down this year. Europe's really been kind of from a market, the big headwind. Look, as we go out into 2026, we're excited about the growth profile of the company. I think there's still, if you look at the secular trends, to digitize and automate workflows and drive productivity, that's remained unchanged, I think, which is pretty consistent irregardless of the market. Companies need to drive productivity, and we're the solutions provider who can help them do that across different verticals and applications. We think about areas like RFID, where we've seen double-digit growth, that continuing into next year.
A lot of the aspects of our machine vision business have stabilized here in the back half, and we expect growth as we go into 2026. The large opportunity we have around our mobile computing install base and seeing those refresh opportunities in the pipeline are starting to come real, particularly as we look out to next year. What we have added around the portfolio around RFID and AI, which we can talk about later, I think just again adds new capabilities around the portfolio that our customers are really excited about.
All right, sounds good. That is a good recap in terms of end markets, where we were this year, where we are going next year. Obviously, you guys are not the only company in your industry. Maybe you could just talk about any notable developments in terms of the competitive environment, anything including your larger competitors.
There's been, I'd say, no real meaningful change in the competitive landscape over the last several years. Obviously, it varies depending on the market in which we play in, but I think on our core business, it remains largely unchanged. We feel really good about the competitive positioning of the portfolio. We continue to win new opportunities and take share, particularly in our core markets. I think our vision around intelligent operations and making every workflow digitized, automated really resonates with our customers. If you look at the portfolio today from mobile computing to machine vision, RFID, and now you embed AI, we can have a pretty broad conversation with our customers around how do we help meet their biggest challenges. The Elo acquisition adds new capabilities around that frontline consumer-facing experience, which we did not have before.
Again, no one else really has that portfolio breadth that they can drive with our largest customers.
Got it. Got it. Okay, next question. I'd be remiss to not talk about AI, hence it being an AI conference. How is AI playing a part in the evolution of your solutions, and what is the status currently of Companion and the kind of AI suite offering?
AI is, we think about it as a real positive catalyst for growth for the business. I mean, if you start with what do we do every day, it's give assets and people a digital voice. Whether that's an asset through any stage of the supply chain, a worker in terms of the tasks they're working on and how they're operating, collecting all that data at the edge, feeding AI models that allow our customers to make better-informed decisions around their supply chain or their workforce, that's the heart of what we do. We see that as a real catalyst for growth across the breadth of the portfolio. If you look at the companions or agents we've built, these are, again, where we have a unique position to really drive applications for frontline workers.
That's, quite frankly, not a focus for a lot of the other AI applications. How do you, again, an agent that can allow a brand new store associate to become just as well-trained as a store associate with five years of experience? How can you quickly get the, how do I process a return for something that was purchased online without a receipt, without asking your supervisor or looking at a manual? Large language model can give that information back real-time based on customers' SOPs. How do you provide a better consumer experience?
If you're looking for something and I don't know what the right answer is, I can not only ask the generative AI model, which you'd say anyone can do that, but mirroring that, partnering that with the customer's information around what products do you have in stock, what's the picture of that product so you know what you're looking for, what's the price point and where is it exactly located and it's in stock? That's kind of combining the power of generative AI with unique proprietary information for those customers and building those applications is something we're excited about. As we look into next year, we're doing a bunch of proof of concepts with customers around different use cases throughout the course of 2025. It's commercializing those next year. That could be in the form of a subscription model where we build, maintain the model.
It could just be helping design and build and they maintain it. Or it could be simply those are something they want to do on their own and we have the API back into the mobile computer. Ultimately, not only is that enhancing the value of the portfolio, but they may ultimately need a new mobile computer with the latest chipset and operating system to manage those applications, which will drive a refresh or a new purchase in the future. Again, we're pretty excited about what that can mean for the company and how it can help position us with our customers.
That is something that is a good transition. If we take a step back, the company went through a big growth phase in 2021, 2022, and now we are three, four years away from that period. How should we think about the install base and the refresh cycles that go into it? Obviously, we just talked about AI as part of it, but kind of what are the product drivers, I guess, going forward?
Yeah, if you look, going back, I'd say the last five years since 2020 has been anything but an unusual cycle. Obviously, this condensed acceleration, not only of refreshes, but of technology adoption in 2021 and 2022 to meet the needs of e-commerce, buy online, pick up store, which obviously benefited our business tremendously. Like many others, a few years of absorbing that capacity that was built out and then getting back to growth over the last 12 months to 18 months that we've experienced. If you look at today, our mobile computing install base from that point in time to today has grown 35%, which is in line with the long-term CAGR. It just all happened to happen in a two-year time frame. That really opens up that opportunity for refresh. Again, every refresh for every customer is a little bit different.
Even within a customer environment, they could have what's front of store, back of store, a warehouse, last mile delivery could have its own unique refresh cycle. Not every customer has this unique or kind of ubiquitous refresh. We have that mapped out with every one of our large customers. Some of the drivers of when those refreshes are going to occur are outside of our control, meaning they're going through their own business challenges. They're going through their own restructuring. They have ERP upgrades that aren't going to, you're not going to do an upgrade while you're doing something like that. It is really around the value we bring to the portfolio that that's ultimately what they're looking for. We think of things like RFID embedded on a device or, as we talked about, the new AI applications and the chipsets required.
Again, these are all things that, again, open up new opportunities and kind of incite the refresh and give them a reason to refresh beyond, hey, it's been a long time. We think of, we don't see it as another concentration happening where you're going to have one or two years and wait another five, but more of a driving long-term sustained growth over the next several years. And we're excited about that opportunity.
That's great. I think you guys are doing a good job in terms of not relying on the install base to drive growth. You guys are looking to RFID and machine vision as other vectors of growth. Can you tell us a little more about what you're seeing there and the ultimate journey you guys have in those areas?
Both RFID and machine vision are incredibly important pieces of the portfolio. Starting with RFID, we have the broadest set of RFID solutions in the market, meaning we're the market leader in RFID readers. I think fixed infrastructure and mobile readers, our printing portfolio that will print tags for our customers in multiple different environments, as well as the actual tag itself. Now, we don't produce the chip, we don't produce the inlay, but you're printing those and bringing them together and obviously reading them throughout the journey of the product. It's grown double digits. That business has grown double digits for the last couple of years, and we expect that growth to continue.
It now represents mid-single digit % of the company and something we're, again, excited about because it just opens up new use cases and ways companies can automate different workflows that just weren't possible previously, whether that's trying to detect theft as items are leaving so that you can update your perpetual inventory system real-time or tracking fresh food and understanding what's fresh to limit spoilage. I mean, those are just, again, new use cases that continue to emerge around the technology. On machine vision, we spend a lot of time building out the portfolio we have today from organic investments, acquisitions over the last several years, including the Photoneo acquisition earlier this year that brought us 3D vision capabilities. One of the leaders around vision systems for guided robotic arms. Think of the eyes for a robot in different picking applications.
We feel really good about the portfolio we have today. Obviously, it's been challenged, like many others in the industry. Matrox had a substantial part of their business around the semiconductor industry, and we knew that it was going to go through a cyclical downturn. I'd say this one has just been a little longer and deeper than we had anticipated, as well as some of the challenges the automotive industry has gone through have been a little bit painful. Both of those we see bottoming out and starting to see a little bit of uptake, particularly around the semiconductor space. The work we've done around investments in diversifying that portfolio and adding new logos into different use cases, dock door capabilities, scan tunnels, and things like TNL have been smaller and have been able to offset those headwinds.
I think we see that now as a growth factor, and you get some tailwinds on kind of the core part of that business. We're pretty excited about what that can do as we go into 2026 and beyond.
Nice. Maybe just stay on RFID machine vision for a second. You guys are obviously a little newer to the industry. How are you guys looking to differentiate yourselves and kind of compete? Where do you kind of see yourselves adding value in the industry?
Yeah, so we've really spent a lot of time on two areas. One, think of ease of use. One of the challenges with, I think, in the machine vision world is it's one thing to have the camera and build it, but how do you get an easily configurable backend so that you don't need a fully trained design engineer to set it up? How do you make it easy to set up at the front line? A lot of work around the ease of use, being able to upgrade from a fixed industrial camera to a fully functioning machine vision camera with just software. Our software portfolio, I think, is really the crown jewel in terms of we bought a company called Adaptive Vision.
Matrox brought a library to us, and consolidating that library has been pretty powerful, and we've seen a lot of growth there from a software. We feel like we have a portfolio that can compete. Photoneo gets us into 3D, which is an emerging space. I think the great thing about the industry is it's a big market. There's plenty of white space, meaning you don't need to win head-to-head and displace competition if they're the kind of incumbent. You can go win a new application, a new workflow in an incumbent account, and that's where the team's been focused. There's plenty of those opportunities to go out and win. We feel like we have a portfolio that can compete and win in the market.
It is a pretty fractured market as well around the world that gives us opportunities to compete, not just with those market leaders.
Got it. Next, we're going to shift gears a little bit to Elo. So Elo obviously recently closed. Maybe first, can we just give a quick background on what Elo is and then what's kind of the strategic rationale for the acquisition? Again, how does that kind of fit into your kind of differentiation moving closer to the frontline worker?
Yeah, maybe take a step back. We've been in discussions and talking with Elo for several years now. This has been a company that, on again, off again. We know them quite well and have a pretty long history in terms of trying to find an opportune time to bring the companies together. At its core, they are very similar to what we are in terms of our core business. I think we see a lot of opportunities from a synergy perspective. They sell to the same not only end users, but the same personas or departments within our accounts. They have the same distribution model. Their top distributors, our top distributor, similar manufacturing and operation as we have. It just felt like a natural fit into the portfolio and really builds out our connected frontline experience.
You take the expertise around Zebra's enterprise mobility and automation, partner that with Elo's touchscreen and self-service capabilities. Now you can offer kind of one pane of glass, one experience for a customer's front of store retail, and then take that into the same thing from a quick-serve restaurant, even in new healthcare environments where self-service is becoming a more important aspect. Again, it was just a natural fit into the portfolio. We look at the synergy we can drive not only just from a cost perspective because of those operating models as we integrate the businesses, but also geographic expansion is a huge opportunity. Elo was really focused around North America and rightfully so around the opportunities they had. We think of markets like India, Australia, where we have infrastructure relationships.
We can quickly take Elo to market in those places or where they have the infrastructure but just haven't had the kind of focus we have on markets like Germany or the U.K. We think there's, we committed to $25 million in synergies over the first three years, and the team's already got some nice wins in the books, even one or two months in now around the cost synergies. It is really around how do you bring the singular operating platform to our customers so that they do things like digital media, new applications, even AI for the front line. You can have that seamless experience whether you're looking at a self-serve kiosk doing point of sale or talking to a store associate.
You can have that seamless experience across all those, and we think that's a really powerful advantage we'll have in the market.
It may be helpful just like really quick, is there a good example you could talk about? I imagine I walk into front of store, touch the touchscreen, like, "hey, maybe I want this sandwich," and then it connects to the back of the store, like, "hey, we know how much inventory we have." Is that kind of like the view? Any kind of examples you can maybe help illustrate for us?
Yeah, I think the value Elo has seen as they deployed some of the self-serve kiosks and some of the quick-serve restaurants is not only you get the, I think what we all see is now they do not need someone at the register taking orders, which is a labor of productivity. The real value they have seen is the actual ticket price or the dollar price per ticket has increased. We are much more apt to supersize a meal or add a milkshake when we are pushing buttons and we see it on the picture than we are asking for it with someone at a cash register. The ticket unit, the unit price per ticket has actually increased in a lot of those instances. That is value to our customers as they deploy those self-service capabilities. I think that is kind of value creation.
It's more than just saving on the labor and trying to do line blocking and those types of things. There's some real added economic value you get in what those experiences have implemented.
Oh, that's great. Super clear. We're going to switch gears again back to tariffs. If we think about earlier in the year, that was shaping to kind of be a big headwind. I wouldn't say we are in the we've passed it all yet, but we're definitely in a better environment than maybe eight, nine months ago. Can you just talk about the progress that you guys made as a company? As we go into 2026, kind of where are we, the status of it, and the progress the company's made?
I'm super proud of what the team's been able to execute on this year. I mean, we went back, we've been working on tariff mitigations going back to 2018. From the original tariffs to today, you start with at that point, 80-85% of our North America volume was produced in China. That'll be less than 20% in 2026. That's obviously been a long road of diversifying our supply chain, which quite frankly was necessary for beyond just tariff mitigation, but also just a resilient, sustainable supply chain. I think the other thing the team did is going back to November of last year, what do we need to do to prepare for whatever kind of came out of Liberation Day? Thinking about where we're going to raise prices across product families, what additional portfolios needed to move.
If you now look at the net of it, this year we'll have about $25 million of net costs because of tariffs, and that'll be fully mitigated as we go into Q1. It turns into a $25 million tailwind as we go into 2026. I think what we've been able to prove, whether it was back in 2018, 2019 or today, is mitigating whatever might happen in the future is putting a plan in place to mitigate that P&L impact in a, I think, in a reasonable timeframe is obviously the goal. I think the team's done a great job executing that.
Gotcha. I think if I think back through the meetings today and I think a lot of discussions we've had over the last couple of months, I think a lot of the focus has been on organic growth, but not as much focus on driving profitability. Going from here and going forward, how do you think about kind of the gross margin, EBITDA margin expansion opportunities from here? If I think about gross margin, EBITDA margin, they're probably closer to the higher end of maybe historical range. Where can we go from here?
Yeah. We have a track record of driving profitable growth. That's obviously something the team is absolutely focused on. We expect to deliver 50 basis points of EBITDA rate expansion annually with 5% to 7% revenue growth. We have multiple levers to do that. I mean, first and foremost, every day driving incremental productivity. AI is a tool that can help us do that. We're doing that, as you would expect, in terms of where AI can drive efficiency within our operation. We just get a ton of value from scaling on our fixed cost structure, whether that's our distribution capabilities, our finance ERP. I mean, that gives us a ton of leverage, and you just naturally get that margin expansion as revenues grow. As we've entered new markets, whether it's machine vision or software with inherently higher gross margins, that helps.
Going to 2026, it's hopefully for now, and it stays this way. Tariffs may become a tailwind on margin expansion as we go into 2026. Adding Elo, which has a very similar margin profile and driving $25 million of synergies now over the next couple of years, will be an additional tailwind. We do not see the business as having a cap in terms of what we can do from an EBITDA rate percentage, but it's something we just got to keep at. We believe we have a lot of runway here as we move forward.
Great. I'll just take a quick pause. If there are any more questions on the app, I'm happy to ask on your behalf. I mean, maybe just a longer on gross margin. The last couple of weeks, there's been a lot of questions about this memory costs that are coming up. What can that mean for Zebra? Is it like a non-factor, or is it something we keep an eye on as we go forward?
The memory pricing is definitely a factor. We're not immune to the inflationary pressure. Obviously, memory is a component of our mobile computing business, but I'd say at this point, it's manageable. With the type of memory we use and the inflation we're seeing, I'd say if any given year, there's always multiple factors that are inflationary, deflationary, and memory tends to go, and every two years, you get one or the other. I think it's nothing within today that we're seeing that we can't manage within the bounds of the portfolio. The team's actively working with our supply base and getting ahead of it as much as they possibly can. We'll have to manage through that as we go into next year, but I think it's manageable at this point in time.
Gotcha. Great. Before I kind of hit the last few questions, one thing I want to circle back to is our first question about kind of end markets. I know customers are seeing some uncertainty in terms of putting the bigger orders in. If we can just zero in on what uncertainty is, what would you need to see change for it to go from uncertainty to more certainty?
Yeah. Obviously, uncertainty can mean a lot to where you're at and what your business is. I think what we've seen, though, from our customers is it's not as if they pulled back on what they were expecting to spend. I mean, again, the year has played out largely as we've expected from the projects that were in the pipeline have largely moved forward. If anything, you may have seen projects be spread out over longer periods of time, but that's kind of been the same case all year. It hasn't been a change here in the back half. What we haven't experienced is accelerating projects that may be out there in the next year or the next 12 months and saying, "hey, I have extra budget availability," or, "hey, my year is going great. I feel better about the business.
Let me accelerate projects in the pipeline. That's what we haven't seen. I think a lot of that does have to do with uncertainty. I think for, again, it's all in the eyes of the beholder. I gave the example of getting a Tweet of the tariff rate changing two weeks before you do an earnings call is never a good feeling in terms of where that is. I think whether it's certainty around tariffs, inflation, interest rates, whatever it might be, they don't all have to be perfect. They don't have to be tailwinds. I think some of that just certainty abating will help clear the air as we go into next year. I think the team's now focused on what can we control around driving growth across the portfolio irregardless of the economic condition.
How do we drive that value to our customers so they see the need to move forward that refresh as we go into next year? That is where the team's focused on, on driving that growth regardless of the economic condition next year.
Okay. Great. Next question is capital allocation here from here. The stock's obviously been in pressure this year. Given the large acquisition and stock pressure, what is kind of the current outlook in terms of capital allocation?
Our capital allocation priorities remain unchanged. One, it's continuing to invest organically in the business. We invest around 10% of revenue in R&D. That's obviously making sure we maintain our competitive position, our leading market share across our core business, and continuing to invest in new technologies like we've done recently in AI. M&A is a vector for growth. We're excited about what Elo brings. We're equally excited about on a smaller scale what Photoneo brings in terms of new technologies around machine vision. We're going to continue to look for opportunities to expand the portfolio and leverage M&A. As you mentioned, we felt it was important, given where the stock price was, given the acquisition, to make a forward commitment around share repurchases over the next 12 months.
That's something we've not historically done in terms of committing the $500 million over the next 12 months. We've been as active as possible here in the short term given the price dislocation. Yeah, look, I think the good news is between our free cash flow, the balance sheet's in great shape, the capacity we have to invest more doesn't prevent us from either taking advantage of opportunities from an M&A or continuing to return capital as we move throughout next year.
Gotcha. As we kind of a few minutes on the hour here, when we for 2026, there's a combination of factors that are both in the company's control and sort of outside the company's control. From your seat as a CFO, what are you kind of most excited about in terms of that can transpire kind of the next 12 months? Is it from an end market perspective? Is it something that's in the company's control? Probably realistically, it's a combination thereof. What are you kind of most looking forward to from your seat?
I think first and foremost, it's the evolution of our AI offerings. Again, we think we have a unique position to really be the AI leader for the front line, right? I mean, we're not building large language models. This is building unique applications that drive value for frontline workers, for frontline applications that we can uniquely provide because of our position with our mobile computing position. So that's something that I think we're really excited about. We're going to continue to invest in RFID is another one. Again, just with the new use cases that are out there and the momentum in the market around RFID is, I think, the second. I think the third is driving a successful integration with Elo. I mean, it's the largest acquisition we've had in a bit. It drives a meaningful amount of new revenue for the company.
We think there's some real exciting opportunities as we get, particularly in the later part of next year, once we get the commercial engine ramping up to get some incremental growth as we go into the back half and into 2027 on that acquisition. I think all three of those are things that we can control, exciting opportunities both for the near term as well as setting ourselves up for long-term growth.
Gotcha. One of the questions that came in, incremental investment into machine vision. How do you guys think about whether that would be needed or not? Or how do you feel, I guess, about the level of investment currently in the business? How do you think about we maybe need to make incremental?
We think we have the appropriate amount of investment in the business today. We've invested a lot around go-to-market capabilities. Again, think about how do you diversify out of some of those end markets that we talked about earlier. It requires incremental go-to-market investments. Obviously, we do a lot of that with our channel partners, but it still requires us to have the specialists in the field driving that demand, working with our channel partners. Look, as we see new opportunities, whether that's a geographic market, a use case, a technology, we're going to continue to invest because, again, we are big believers in that long-term opportunity that it has. For right now, I think we feel it's now about how do we generate a return on the investment we made up to this point. I think there'll be more opportunities to go from there.
I think we feel good about the balance of the portfolio and where we've had investments to date. It's something we're always constantly looking for, where can we add incrementally as those opportunities present themselves?
Great. With that, time is now closed. Appreciate you coming on stage and answering questions for everyone in the audience.