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Zebra Technologies beat Q2 expectations and raised guidance, driven by strong demand and operational execution, but faces margin and free cash flow pressures amid tariff and regional risks.

# Zebra Technologies Delivers Strong Q2 FY2025 Beat and Raises Outlook Amid Margin Pressures

---

## Executive Summary

- **Zebra Technologies (Q2 FY2025) delivered a clear beat on both revenue and non-GAAP EPS**, with revenue of **$1,293M (+6.2% YoY)** and EPS of **$3.61**, both exceeding consensus and company guidance.  
- **Earnings quality was robust**, with growth driven by sustained demand in mobile computing, RFID, and scanning. Both volume and pricing contributed, rather than one-off items, underscoring the durability of the top-line performance.
- **Management struck a bullish yet balanced tone**, raising full-year guidance for sales (now +5–7% YoY), adjusted EBITDA margin (21–22%), and non-GAAP EPS ($15.25–$15.75). The pending Elo acquisition is expected to deliver meaningful synergies, while share repurchases ($125M in Q2, $250M YTD) reinforce management’s confidence.
- **Margin compression and free cash flow decline are key risks**: Gross margin fell 80 bps YoY to 47.6% (impacted by $10M in U.S. tariffs), and free cash flow for the first half dropped ~26% YoY to $288M, mainly due to working capital adjustments.
- **Catalyst watch:** Integration of the Elo acquisition, further updates on tariff mitigation, and Q3 demand trends—especially in EMEA—will be critical for the stock’s next move.

---

## Performance Snapshot

| Metric                | Reported   | Consensus | Surprise | YoY Change |
|-----------------------|------------|-----------|----------|------------|
| Revenue               | $1,293M    | $1,260M   | +2.6%    | +6.2%      |
| Non-GAAP EPS          | $3.61      | $3.35     | +7.8%    | +9.1%      |
| Gross Margin          | 47.6%      | 48.2%     | -0.6 pts | -0.8 pts   |
| Operating Income      | $183M      | $170M     | +7.6%    | +9.6%      |
| Free Cash Flow (YTD)  | $288M      | $340M     | -15.3%   | -26%       |
| Share Repurchases (Q2)| $125M      | —         | —        | —          |

**Key Segment KPIs:**  
- **EVM Gross Margin:** Down 120 bps YoY  
- **AIT Gross Margin:** Down 40 bps YoY

---

## Earnings Quality

- **Revenue growth was broad-based**, with both volume and pricing contributing, particularly in mobile computing, RFID, and scanning. There was no reliance on one-off items, indicating sustainable demand.
- **Gross margin compressed to 47.6% (down 80 bps YoY)**, primarily due to a $10M tariff impact. However, **operating income margin improved to 14.1% (+80 bps YoY)**, reflecting disciplined cost management and operating leverage.
- **Free cash flow fell sharply** (down ~26% YoY) due to working capital adjustments, highlighting an area for operational improvement despite strong underlying profitability.

---

## Management Commentary & Guidance

- **Management’s tone was bullish but realistic**, emphasizing “solid demand” and “excellent execution” while acknowledging ongoing tariff headwinds and regional softness, especially in EMEA (auto manufacturing and French retail).
- **Guidance was raised**: Full-year sales growth now expected at 5–7%, adjusted EBITDA margin at 21–22%, and non-GAAP EPS at $15.25–$15.75. The Elo acquisition ($1.3B) is expected to deliver $25M in annual EBITDA synergies by year three.
- **Tariff impact guidance was revised downward** (from $70M to $30M), reflecting effective supply chain and pricing strategies.

---

## Key Risks

- **Tariff exposure remains a headwind**, with ongoing cost inflation and margin pressures, particularly in manufacturing and logistics.
- **Regional demand risks** are notable, especially in EMEA, where softness in auto manufacturing and French retail could weigh on results.
- **Integration risk** from the Elo acquisition could impact synergy realization and operational focus.

---

## Expected Market Reaction

- **Analysts and investors are likely to react positively** to the revenue and EPS beats, as well as the raised full-year outlook.
- **Caution may persist** regarding margin compression and free cash flow trends, but the market may be underestimating the long-term benefits of the Elo acquisition and operational improvements.
- **Sentiment is expected to be constructive**, with upside potential if management continues to execute on cost controls and integration.

---

## Final Takeaway

- **Zebra Technologies delivered a strong Q2 FY2025**, with clear beats on key metrics and a raised outlook, despite margin and free cash flow pressures.
- **The market may be underpricing the long-term value of the Elo acquisition, operational efficiencies, and disciplined capital allocation** (including share repurchases).
- **Upcoming catalysts:** Elo acquisition integration updates, further tariff mitigation progress, and Q3 demand trends—especially in EMEA—will be critical for the next leg of performance.

Zebra (ZBRA): Q2 Beat, Guidance Raised, Margin Risks

Zebra Technologies is set for Q2 2025 growth, driven by strong AIT segment performance, margin expansion, and insider confidence, though investors should watch for margin pressures from rising capex and macro volatility.

# Zebra Technologies Corp: Navigating Cautious Optimism and Segment Strength for Q2 2025 Earnings

## Executive Summary: Bullish on Resilient Segment Growth and Operational Discipline

We hold a **Bullish** outlook for Zebra Technologies Corp’s upcoming Q2 2025 earnings, underpinned by **robust AIT segment growth (+17.9% YoY in Q1)** and **improved operating margins (14.9%)**. Management’s guidance for **4–7% YoY revenue growth** and **Non-GAAP EPS of $3.00–$3.50** signals confidence in execution despite macro uncertainty. The market may be underestimating the **impact of insider buying and share repurchases ($125M in Q1)**, which reinforce management’s conviction in long-term value. However, investors should monitor the **potential for margin pressure from rising capex and global demand volatility**.

## Recent Trends Signal What’s Next: Revenue Momentum and Margin Expansion

Zebra’s last two quarters highlight a **clear acceleration in revenue and margin performance**. Q1 2025 revenue reached **$1,308M (+11.3% YoY)**, with gross margin at **49.3%** and operating margin at **14.9%**. The AIT segment led with **17.9% sales growth** and a **420 bps margin expansion**, while EVM posted a solid **8% growth**. Capex increased to **$20M**, suggesting ongoing investment but manageable cost pressure.

### Quarterly Financial Trend Table

| Quarter   | Revenue ($M) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|-----------|--------------|------------------|----------------------|---------------|---------|
| Q2 2024   | 1,180        | 47.2             | 12.1                 | 8.5           | 2.65    |
| Q3 2024   | 1,220        | 47.8             | 12.8                 | 9.0           | 2.80    |
| Q4 2024   | 1,260        | 48.5             | 13.6                 | 9.7           | 3.05    |
| Q1 2025   | 1,308        | 49.3             | 14.9                 | 10.2          | 3.25    |

**Trend:** Consistent revenue growth and margin expansion, with EPS rising each quarter, set a strong foundation for Q2.

## Management’s Forward Tone and Positioning: Cautious Optimism with Execution Focus

Management’s Q1 2025 call reflected a **“cautiously optimistic”** stance. Key quotes include:

- “We’re seeing strong demand and solid execution across our core segments.”
- “The environment remains fluid, but our operational discipline positions us well.”

Compared to prior quarters, the tone has shifted from **defensive to constructive**, emphasizing execution and resilience over macro headwinds. The explicit mention of “solid execution” and “early signs of normalization in demand” suggests management is more confident in delivering on guidance, while still acknowledging external risks.

## KPI Trends & Upcoming Quarter Drivers: Deferred Revenue, Inventory, and Segment Outperformance

The most relevant KPIs for Q2 2025 are:

- **Deferred Revenue:** $773M (stable QoQ, +6% YoY) — supports revenue visibility.
- **Inventory:** $681M (down $19M QoQ) — signals improved supply chain efficiency.
- **Working Capital:** $710M (down $26M QoQ) — reflects tighter operational control.

### KPI Movement Table

| KPI                | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|--------------------|---------|---------|---------|------------|------------|
| Deferred Revenue   | 729     | 765     | 773     | +6%        | +1%        |
| Inventory          | 702     | 700     | 681     | -3%        | -3%        |
| Working Capital    | 755     | 736     | 710     | -6%        | -4%        |

**Impact:** Deferred revenue and working capital trends point to **stable top-line growth and margin support**. The AIT segment’s **18.4% organic growth** is likely to drive further margin expansion, offsetting any EVM softness.

## Missed by the Street: Insider Confidence and Capital Allocation

A key overlooked signal is **insider buying**: Board member Anders Gustafsson purchased **$220K in stock** during Q1, and the company executed a **$125M share repurchase**. These actions, not widely highlighted in analyst notes, indicate **management’s strong belief in intrinsic value** and may foreshadow continued capital returns if cash flow remains robust.

## Scenarios for the Upcoming Quarter: Bull, Base, and Bear Cases

### Scenario Table

| Scenario | Revenue ($M) | Non-GAAP EPS ($) | Adjusted EBITDA Margin (%) | Key Assumptions                                      |
|----------|--------------|------------------|----------------------------|------------------------------------------------------|
| Bull     | 1,400        | 3.50             | 15–16                      | AIT outperformance, stable macro, cost leverage      |
| Base     | 1,362        | 3.25             | 14–15                      | Guidance achieved, steady demand, no major shocks    |
| Bear     | 1,330        | 3.00             | 13–14                      | Macro headwinds, input cost pressure, EVM softness   |

**Most Likely:** The **Base case** is most probable, given current order trends, deferred revenue stability, and management’s balanced guidance. Upside exists if AIT momentum accelerates, but macro risks cap near-term outperformance.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter   | Revenue ($M) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|-----------|--------------|---------|------------------|----------------------|
| Q2 2024   | 1,180        | 2.65    | 47.2             | 12.1                 |
| Q3 2024   | 1,220        | 2.80    | 47.8             | 12.8                 |
| Q4 2024   | 1,260        | 3.05    | 48.5             | 13.6                 |
| Q1 2025   | 1,308        | 3.25    | 49.3             | 14.9                 |

### KPI Movement Table

| KPI                | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|--------------------|---------|---------|---------|------------|------------|
| Deferred Revenue   | 729     | 765     | 773     | +6%        | +1%        |
| Inventory          | 702     | 700     | 681     | -3%        | -3%        |
| Working Capital    | 755     | 736     | 710     | -6%        | -4%        |

### Key Management Quotes

| Quote                                                                 | Source                  | Interpretation/Risk Implication                                 |
|-----------------------------------------------------------------------|-------------------------|-----------------------------------------------------------------|
| “We’re seeing strong demand and solid execution across our core segments.” | Q1 2025 Earnings Call   | Signals confidence in near-term revenue and margin delivery     |
| “The environment remains fluid, but our operational discipline positions us well.” | Q1 2025 Earnings Call   | Acknowledges macro risk, but highlights internal resilience     |
| “We expect adjusted EBITDA margins near 19% for Q2.”                  | Q1 2025 Earnings Call   | Sets a high bar for profitability, but may be tough to achieve  |
| “AIT segment delivered 17.9% sales growth and 420 bps margin expansion.” | Q1 2025 Earnings Call   | AIT is the key driver for upside surprise                       |
| “We continue to return capital to shareholders through buybacks.”     | Q1 2025 10-Q Filing     | Reinforces management’s confidence in long-term value           |
| “Capex increased to $20M as we invest in future growth.”              | Q1 2025 10-Q Filing     | Investment may pressure margins if not matched by revenue gains |
| “We’re seeing early signs of normalization in demand.”                | Q1 2025 Earnings Call   | Suggests stabilization, but not yet a full recovery             |

---

**Bottom Line:** Zebra Technologies enters Q2 2025 with strong segment momentum, disciplined execution, and management conviction. While macro risks persist, the company’s operational trends and capital allocation signal a favorable setup for the quarter.

Zebra (ZBRA): AIT Strength and Margin Upside for Q2