Data management expert Zebra Technologies (ZBRA 0.77%) reported first-quarter results on April 29. Revenues rose 11% year over year while earnings jumped 42% higher. The company beat Wall Street's consensus estimates across the board.
That's great news for Zebra's investors, customers, and other stakeholders. But that's not the end of the story. The most important part of this report was how the company will handle the incoming torrent of new tariff expenses. As it turns out, Zebra will benefit from lessons learned (and actions taken) in the coronavirus pandemic and the worldwide shipping shortages that followed.
Image source: Getty Images.
The tariff impact on Zebra's bottom line
Zebra's management expects some tariff expenses in 2025. The direct costs should add up to about $30 million in the second quarter and $70 million for the full fiscal year.
These costs will apply to Zebra's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). To put the tariff impact into perspective, Zebra's adjusted EBITDA was $292 million in Q2 and $1.05 billion in fiscal year 2024. Hence, the tariff-based damage should be roughly 10% of adjusted EBITDA profits in the next quarter, slowing down to less than 7% for the full year.
I realize that the first quarter played no part in the tariff drama, so it should be excluded from these calculations. The profit reduction still slows significantly in the second half, targeting a tariff cost of approximately 5% in that period. That's what I get after backing out the reported and estimated EBITDA numbers for the Q1 and Q2 periods.
Zebra's global manufacturing shuffle pays off
Zebra's tariff expenses should be pretty manageable even in the first stage, followed by even lighter impacts later on. I got Zebra CEO Bill Burns on the phone and asked how the company is dodging those potentially massive tariff bills. Will Zebra benefit from the supply chain tweaks it made in recent years?
Bill agreed with my thesis, highlighting Zebra's diversified supply chain with an increasingly global network of manufacturing services and components.
"In the past, we would have said we've had 85% of our shipments into the U.S., for example, from China," he said. "We expect by the end of Q2, that's at 30%. That's a good example of supply chain resiliency that we've worked on over the last several years."
Zebra's remaining tariff exposure
The tariff costs won't go away entirely. Most of the manufacturing work can be moved to different locations, but some key components can only be found in the Chinese market. The expenses aren't always direct, often passed down from Zebra's manufacturing partners. This is an issue for the entire sector of making electronic devices like Zebra's barcode scanners and data-tracking systems.
"I can manufacture the actual products in Vietnam, but the majority of their parts still come from China," he said. "That's true for anyone from an electronic manufacturing perspective."
Zebra trots onward
So Zebra can't exactly avoid the tariff drama, but it won't be a big thorn in this company's side.
As long as the business world keeps relying more heavily on data-tracking services and supply chain analytics, the revenue growth and margin expansion should continue. And better access to item-tracking data is a valuable idea right now, as the resulting data stream can be analyzed and managed by artificial intelligence (AI) tools.
At the same time, Zebra's stock price is down 34% over the last three months and shares are trading at just 13 times free cash flows. It looks like market makers applied a big discount to Zebra's stock in a broad panic over tariff costs and a shaky global economy. I think they painted those price cuts with a broader brush than necessary. Zebra expects robust sales growth and a manageable tariff impact.
So if you haven't looked into Zebra's stock yet, this could be a good time to get started. It's a smart investment in the long-term growth of global business activity, especially in data-driven sectors like shipping, manufacturing, and retail stores.
