The RFID revolution is off to a slow start. In reviewing the list of players involved in this new, futuristic tracking technology, fellow Fool Rick Munarriz termed Zebra Technologies
The company, which specializes in manufacturing equipment for printing cards and labels, and which seems admirably suited for printing the gazillions of RFID inventory tracking tags that will soon be populating the warehouses of stores like Wal-Mart
Actually, Zebra didn't do half bad in the first quarter of fiscal 2005. Not if you're concerned only with sales growth, and pay little attention to profits. Revenues in Q1 grew 11% over Q1 2005. Profits, in contrast, headed the other way -- down 3% year-over-year.
Worse for investors who take the time to read what their companies write: Zebra's explanation for the divergence between sales and profits didn't make a whole lot of sense. Said CEO Edward Kaplan: "Results were affected by an order slowdown, including some order deferrals, and distribution capacity constraints.."
That would have been a fine explanation for a drop-off in sales. If orders don't get placed or get placed late, sales fall. Logical. But if sales grew 11%, then the problem with orders becomes less clear. Neither does this explain why profits headed downward, despite the sales climb. The answer to that conundrum lies in increasing costs:
- Marketing expenses: up 22%
- R&D costs: up 20%
- Administrative expenses: up 16%
You'll notice that each of those costs increased faster than sales did. So perhaps what Zebra really meant to say was: "Orders didn't come in fast enough to keep pace with mounting costs. If they had, then they would have offset those mounting costs and yielded better profits."
In any case, the problem -- whether it was primarily the result of delayed and lost sales or excessively high operating costs -- does appear to be temporary. Zebra projects continued double-digit, year-on-year sales growth next quarter, and a return to profits growth as well. If it hits its targeted profits range of $0.43 to $0.48 per diluted share, that will translate into 5% to 17% profits growth over Q2 2004.
Read up on the RFID players in:
Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.