It's once again time to check in on our favorite non-domesticated equine, folks. Specialty printer maker Zebra Technologies (Nasdaq: ZBRA) canters onto Wall Street bearing a packet of Q3 earnings news on Wednesday. What news will it tell?
What analysts say:
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Buy, sell, or waffle? Only six analysts track Zebra, splitting their votes down the middle: three buys and three holds.
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Revenues. On average, analysts expect Zebra to report 7% sales growth, to $187.7 million ...
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Earnings. ... but a 17% decline in profits per share to $0.34.
What management says:
Judging from what Zebra had to say in last quarter's earnings release, international business is the name of the game for this company. Despite sales growth that was underwhelming overall, CEO Edward Kaplan noted that international business was the firm's shining light -- if also a bit of a drag on margins. In Q2, Zebra's Europe, Middle East, and Africa region contributed 16.8% sales growth -- nearly three times as fast as firmwide growth. Unfortunately for Zebra, much of its sales were at lower price points, and international sales in particular were adversely affected by currency exchange rates.
On the plus side, the firm's operating costs declined slightly, perhaps as a consequence of its decision to settle certain patent disputes with rival Paxar (NYSE: PXR).
What management does:
Although the company's release seems to suggest that the contracting gross margin was a new development, the table below shows that Zebra's rolling gross margins have been contracting pretty steadily for well over a year now. The rolling operating and net margins, however, seem to have stabilized.
|
Margins %
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4/05
|
7/05
|
10/05
|
12/05
|
4/06
|
7/06
|
|
Gross
|
51.5
|
51.2
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50.9
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50.4
|
49.4
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48.7
|
|
Op.
|
26.1
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24.6
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23.7
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22.2
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21.2
|
21.2
|
|
Net
|
17.4
|
16.5
|
16.1
|
15.9
|
15.8
|
15.9
|
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.
One Fool says:
What's Zebra doing to hold its operating and net numbers steady even as the gross continues to deteriorate (a result of raw materials costs rising three times faster than sales)? Just as the company said, it's cutting operating costs -- and not just last quarter, either. In fact, despite sales that so far this year have been averaging 4% higher than in last year's first half, Zebra has cut its selling, general, and administrative costs in both already-reported quarters, bringing the average SG&A number in 3% below where it was in last year's first half.
Even more impressive, Zebra has held its operating margins steady and improved its bottom line profitability while growing its research and development spending four times as fast as sales. Year to date, those expenditures are up 16% vs. last year.
So all in all, despite the gross margin deterioration, I'm not unimpressed with what Zebra's been doing so far -- on its income statement. The balance sheet is a horse of a different color, and the place I think investors should most seek out improvement tomorrow. There, we've seen both accounts receivable and inventories, when averaged for the year, rise three times as fast as sales so far this year. Although that hasn't yet had an adverse effect on cash flow, in time it will, unless Zebra makes serious strides toward improving its management of working capital.
Competitors:
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Hewlett-Packard (NYSE: HPQ)
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Lexmark (NYSE: LXK)
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Printronix (Nasdaq: PTNX)
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Xerox (NYSE: XRX)
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Sony (NYSE: SNE)
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Fool contributor Rich Smith does not own shares of any company named above.
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