Anders Gustafsson, Zebra Technologies CEO: A Fortt Knox Conversation

Well, first, thanks for having me. Exciting to be here with you today. The toughest challenges, I'd say, I answer in two ways. First, obviously in the last two and a half years, we and many other companies have fought COVID and supply chain issues and so forth. Those have been highly unusual and difficult things to manage. But I'd say the biggest challenge is more secular: how do we deliver attractive long-term growth rates? Consistently delivering attractive long-term growth rates is the biggest challenge, always having to innovate and come up with new solutions, new ways of delivering value.

If I go back seven years or so, to the end of 2014, we acquired the Enterprise business from Motorola Solutions. That was a big event for us. We went from having a one billion dollar business focused on specialty printing, basically the asset tag that could communicate something about its location through supply chains, but we combined that with the mobile computing and scanning business. That provided us with a more complete solution for our customers. We had the same end customer, same partners, and provided two halves of a complete solution. That also enabled us to expand our vision to what we call Enterprise Asset Intelligence, which is really how every asset and worker on the front line of business is visible, connected, and optimally utilized. It's a way of transforming how frontline businesses operate through digitizing and automating workflows. Over the last several years, our ability to help solve our customers' workflow issues has gone up by moving from a device-centric to a workflow solution-centric company. We've seen great changes with COVID in how our customers need to digitize and automate. Look at something like buy online, pickup at store in retail and grocery. That was a very niche application prior to COVID, but when COVID happened, that was how we all had to shop for groceries. They had to scale overnight, and it's very hard to scale that type of solution without our type of solutions. Similarly, in healthcare, we enable caregivers to engage in different ways with patients and free up time to actually provide care versus entering or receiving data from different systems.

It does vary by industry. Retail had historically been a bit of a laggard, but in the last five or six years, as brick-and-mortar retail has really had to figure out how to fight against e-commerce and deliver their own omnichannel or e-commerce capabilities, retailers as a segment have moved a long way. The largest and most sophisticated retailers tend to be the ones best positioned to implement some of the newer technologies; they have the scale to do so. But today, it's not really optional for retailers to do this. If you're a smaller retailer but your larger retail competitors are offering attractive omnichannel or e-commerce capabilities, you have to be able to offer that as well. So it's something that started at the top of the pyramid but is working its way down. Healthcare is a very attractive vertical market for different types of solutions like this, driven by electronic medical health records, so you have a cloud-based offering where you can append or add data. From a value proposition perspective, this is about how to provide better, safer care but also reduce cost for healthcare providers. The consolidation of healthcare systems is clearly driving a lot of this, where you can get the scale to drive those operational efficiencies. Transportation and logistics is another main market. Last-mile delivery is much more important, and how to automate and digitize a lot of those workflows to provide better services for end users as well as more efficient use of resources has been a big driver. Lastly, in manufacturing, it's becoming much more important for manufacturers to have a digital voice to their assets and be able to track and trace all sorts of sub-assemblies through the manufacturing process, from assembly through warehousing to the end users.

It's clearly a complex challenge for many retailers. Consumer sentiment and what people want to buy has changed quite a bit. I do think, though, that retailers broadly are fairly well positioned to address these issues. They're certainly better today than they were a year ago in that supply is more readily available and shipping routes have more capacity. So to the extent people need to make corrections on what they are buying or they see sell-outs, they can quicker pivot and replenish those areas. Also, the retailer's ability to have visibility into their supply chain and their inventory position is much better. That partially comes from doing buy online, pickup at store. If you were a consumer and you order something and they tell you to come pick it up in two hours, but when you show up, 20% of the items are missing, that's a bad experience. So retailers have invested meaningfully in being able to have better visibility into their in-store inventory and the inventory in warehouses to be able to have a higher service level for their consumers.

I was born and raised in Sweden, in Gothenburg, on the west coast. My mom and dad, my dad had grocery stores and my mother was a nurse. I have two younger sisters. I went through and got my engineering degree in Sweden, but then I moved to the US as part of that. I had a scholarship to study in the US, and then I spent most of my life after that in the US, although we moved around to England and Asia and other countries too.

I think I was always good in math and sciences, so that made it easy to think about that. I honed in on an engineering degree fairly early on. There was also a good engineering school in my hometown that I thought would be fun to go to, which I ended up going to. It was probably less of a struggle figuring out what to do than many others had, but I did think about other things. My first career aspiration was to be a miner because you got to wear a hard hat with a lamp, and I thought that was about as cool as it gets.

Yes, I got to work in the grocery store on weekends and things. I jokingly say my dad had an omnichannel shopping experience long before it was famous, but it was my dad answering the phone and taking the order, and I was bicycling out the order to our customers.

This is more tongue-in-cheek. The town is the second largest city in Sweden, but it was about half a million people. It was a neighborhood store, so I wasn't traveling too far.

My dad grew up on a farm, so there was some small family business. He moved from there into the city of Gothenburg and started working in a store. At that point, it was a butcher shop, and then he acquired that and the neighboring grocery store to become a more traditional grocery store. So there was some level of entrepreneurship or family business as part of his upbringing.

Very much so. We were the first to grow up in the city or the suburbs. My sisters and I were the first to go to college from our family.

It probably came more from us kids directly than from our parents. My dad worked quite a bit; my mother was probably more involved in our education and helping us with homework. She always stressed the importance of applying yourself in school, but there was never any pressure that we had to go to college. That was something we figured out for ourselves.

I jokingly say when I graduated as an engineer, I had no idea what an engineer actually did. It took a little time to sort that out. I worked as an engineer for about three years, then I went back to business school. At that point, I thought I wanted to continue to work in technology companies and leverage my engineering background, but also engage more in sales activities and international business.

I enjoyed the more social aspects of it, engaging with people and traveling. My first engineering job was to move abroad from Sweden, and then I moved around to a couple of different places. I liked that part of it, and I thought I could apply my skills in more international settings. It was fun.

I grew up in Gothenburg, which is the hometown of Volvo, but I went into telecommunications. I worked at Ericsson, which is a large telecommunications provider, and most of my career was with telecom or datacom companies. Zebra is actually the first company outside of that space.

When I graduated, it was right when there were a lot of changes to telecommunication networks. Telecom networks became digitized to a large degree, and Ericsson was one of the world leaders in that space. As a recent graduate, I thought Ericsson would be a great platform to start my career.

Datacom became much more real. The last story of telecom was really voice communications, very much around making a phone call. With the internet, it changed to datacom being the primary communications platform, and then over time you could overlay voice on the data platform. Today, telecom networks are really datacom networks that also transport voice as a different application for data.

I was about four years old when I decided to immigrate to the US. My aunt was a flight attendant for TWA and lived in New York City. When she came home to visit, there was a flair from the big world, and I found that intriguing. I probably didn't make the decision at that point, but I always had an interest. Then, as part of my undergraduate education, I got a full scholarship to come to the US and study. At that point, I thought I wanted to come back and get an MBA. I got accepted into HBS and studied there for two years. It was a great experience with lots of great friends from there that I still see. It also enabled me to stay in the US. I met my wife shortly thereafter, we got married, and this has become our home.

I was in Silicon Valley in the early 90s for a company called Network Equipment Technology, which did early datacom networks for banks and other large data-centric organizations. Then I left and moved to Asia and Europe for a few years and came back in the early 2000s after the dot-com boom. I was there as CEO of a datacom test and measurement company called ConSpriant, and that was just before I moved to Chicago.

It certainly became much larger. In the early 90s, it was a much smaller community. A lot of the innovations were around more hardware-centric datacom and telecommunications networks, people making some form of device. By the mid-2000s, the focus had squarely shifted to much more software-oriented innovations. The skill sets required and the type of businesses started were quite different, but the vibe was still very much the same: lots of focus on innovation, starting companies, and trying to figure out how to get them to scale and grow. The tenants were very much the same, but the type of areas that got the most focus and funding were different.

I had the distinct pleasure of joining Zebra one month before the 2009 recession started, at the end of 2007. Most of my jobs I have gotten through former colleagues. I joined Motorola after I lived in Silicon Valley in the early 90s through a former colleague from Ericsson. Then I joined a company called Telops through a former Motorola colleague who recommended me. And then to Zebra through a former Telops colleague who recommended me. I thought it was a great opportunity because telecom and datacom had become quite challenging industries, and this was something new and different where some of my background could be helpful in growing internationally, making it a bit more sales and marketing focused, and helping to drive a different degree of innovation and pace.

The first part of the plan was to figure out what the business was like and where we could take it. I didn't come in with a clear blueprint, but I clearly felt we had an opportunity to grow much more internationally. We were very much a North America-centric organization; today, half of our business is outside the US. Also, making sure we could be a bit more focused on what we do for our customers rather than on specific technology. We reframed how we think about what we do from more technology to how we help our customers connect the physical world to the digital world. You read the barcode, and that asset has now communicated something of itself to an application, which led to the Enterprise Asset Intelligence vision. It was very much about expanding internationally, more sales and marketing focused, and expanding into new, more technology-centric areas where we had a right to play and could bring our skill set to bear on problems that would be helpful to our customers.

It was a game-changing acquisition for us. We were a billion-dollar company and acquired a business that was two and a half times the size of our business. It was clearly a bet-the-farm type of deal. People told me afterwards, when we couldn't talk about it during the process, that it was very bold. If I had realized how bold people thought it was, I probably wouldn't have done it. But it fit very well with what we do. There were two value proposition theses we had. One was the more traditional industrial logic: we had very complementary product portfolios with no overlap, the same customer, same go-to-market channels. We would become much larger and more strategic to our customers. I have yet to meet a CIO who doesn't have fewer but more relevant suppliers. The other thesis was around what we could do in the future. By combining our capabilities, we could better execute on the Enterprise Asset Intelligence vision. From a Zebra perspective, we had to jump over the Enterprise business at times to get to those new use cases. By coming together, we were able to put much more resources and know-how into new innovation areas that have resonated very well with our customers. Part of the reason for our success was that we had a very similar vision of where we wanted to go as both companies, and it resonated very well with our customers. We could very quickly unify around who we are and what we're about. We spent a lot of time working on the culture. We didn't have the hubris to think that at Zebra we had the right culture to drive a much larger business. We felt we needed to take a step back and redefine our values and how we work together. We put 7,000 people through two days of culture training, which I think ended up being one of the most important decisions we made as part of that integration effort.

We had talked about this for some time before. It wasn't a new thought. We pursued this for a year or so before we actually started a process, and almost two years before we announced it. We set up a comprehensive due diligence project and involved the board intimately in this process. I certainly didn't feel this was too big a decision to push through without strong conviction from the board and the management team that this was the right thing to do. We had board meetings at least monthly, and we had a board member on Christmas Eve 2013 to review a bunch of stuff before we needed to make a submission at the end of the year. The board was intimately involved, and we identified what we thought were the biggest risk factors and particularly dug into those to understand what those risks were and how we could mitigate them. It turned out that we had a thesis around Android mobile computing being a very different type of business than the traditional mobile computing business. Having all-touch Android devices would allow us to compete effectively against consumer devices and offer a differentiated value proposition for enterprise customers. That had been the biggest concern for both the board and investors, but our thesis proved true, and we've been able to make that a great business.

At that time, you would have seen consumer devices, iPhones particularly, being adopted by quite a few retailers for frontline workflows. CIOs had a view that leveraging the scale and cost curves of consumer devices would be good. The devices we offered at the time were very different: heavy industrial, very ruggedized, and they ran one or two applications. When we could come out with all-touch devices designed specifically to solve unique customer problems that our enterprise customers had, we felt we had a way of offering a differentiated value proposition that served our type of customers better. Since then, the vast majority of our customers have switched back to enterprise-grade devices. We've been able to go from having five or six mobile computers in many environments to over 100 devices, enabling every frontline worker to be connected. We've gone from a few applications to over 100 applications at times. The mobile computers have become an essential way for our customers to operate their businesses.

Two things where we have unique skill sets: one, we have access to more data in our customers' operations than most through all our devices as sensors; and two, we understand our customers' workflows very well. By leveraging access to all that data with the knowledge of workflows, we can help them sense what's happening in the physical world, analyze that data, and act on it in real time. That was our vision. We migrated from being device-centric to much more vertical workflow-centric. Well over half our engineers are working on software. A lot of the value add and differentiation comes from having unique software to enable our customers to easily integrate our type of solution into their broader workflows and enterprise systems and continue to innovate. The purpose-built device with purpose-built software to solve unique customer problems is how we frame this. It's very much a systems approach.

Investors particularly tend to pigeonhole companies into being a software company or a hardware company. I think it's a false distinction; we're a systems or solutions company. We certainly felt, and our customers more importantly felt, that there was great value in being able to deliver value through software but also unique hardware solutions. To sense what's happening in the physical world, you have to have some form of sensors: cameras, RFID, barcodes, all sorts of things. A lot of Internet of Things companies need somebody to provide data to them to provide information. We have that unique ability to capture data and then analyze it ourselves to provide unique insights to our customers. We felt the combination of having devices and hardware together with software would enable us to offer much more value to our end customers than if we were only a software company.

Our business has become much more dependent on recurring revenue streams. Roughly 25% of our revenues today are more recurring in nature, ranging from repair contracts to proper software-as-a-service agreements. We also see that the level of innovation on our technology platforms drives a lot of upgrades or refreshes of the hardware. Each new version of Android requires more processing power and more memory. Our customers are putting more and more applications on the devices, which again drives more processing power. Security is another area that is top of mind for customers, making sure they can run the latest and greatest security. There are a number of catalysts for faster upgrade or refresh cycles. We've seen our mobile computing devices go from a refresh cycle of four to five years to more like three to four years. It's a meaningful acceleration.

I don't think there's been a Death Valley moment. We put a lot of effort into thinking about how we could redefine the business before we did the Enterprise acquisition. The printing business, the legacy of the company, was not an obvious candidate for transformation. How we could reframe it and think about adjacent markets to go after took a lot of effort to work through and come up with compelling answers, rather than branching out into distractions. When it comes to M&A, we always start by looking at whether an acquisition target will help us accelerate the execution on our vision. We're not just looking to buy a company for the sake of a good financial return; it has to fit the vision of the company and fit into our overall portfolio of solutions we can offer our customers.

Around 2000 and the collapse of the dot-com boom was probably the hardest period. We went from thinking that datacom and telecom were in a perpetual growth cycle to seeing it come down so hard. How difficult it was to rejuvenate a lot of companies and applications in that space was a lot of work and was mentally hard. It was emotionally challenging and impacted a lot of employees because many companies had to right-size.

That was very helpful. Having gone through that is helpful in a few ways. I use an analogy internally: a race car driver wants to brake ahead of the curve and accelerate through the curves to match the curve at maximum velocity. Part of it is that you want to take your medicine early, be honest about what's going on, how long the downturn will last, and take whatever actions you need to do quickly. But never lose sight of the longer-term vision for the company so you can protect the investments that will make you successful afterwards. At Zebra, in the 2009 and 2020 recessions, we were able to gain meaningful market share in both downturns by focusing on protecting the investments we needed to make. We have a very variable cost structure, so we were able to scale back opex in line with revenues, and we outsource manufacturing. But we also were able to protect and even step up investments in areas we thought would be particularly important afterwards. In 2020, omnichannel was an area we felt would be a winner as part of COVID. We moved a lot of resources to develop broader omnichannel capabilities and stopped other investments that we felt did not have the same future or would not get traction in a new COVID world. We mothballed those and doubled down on the areas we thought would be most important.

We spend a lot of time talking about how we prioritize our investments. We have more opportunities than we have resources to pursue. But we don't have a perspective on any given day about what necessarily will be the right solutions to double down on if there were to be a downturn or a change in the environment. When COVID happened, omnichannel wasn't driven by the recession; it was a pandemic that drove the need for that. So we also have to make sure we stay flexible and open-minded to explore how this environment is different from others and take the most appropriate decisions. We do that quite well. We spend probably more time than most management teams debating the business, but once we come to an alignment, we can be quite quick and decisive. We don't second-guess ourselves, so at that point, we can step on the accelerator and move from being defensive to more offensive.

We certainly believe that machine vision and AI and machine learning are key solution areas for us to engage in and invest in. We just concluded the second largest acquisition in the company's history earlier this summer, a company called Matrox, which is one of the leaders in machine vision. Being able to extract useful information from digital images and videos is a key part of how industry broadly will evolve. We can certainly see it in manufacturing, in quality control processes, being able to look at a brake assembly and see that all the rivets are in the right place. My favorite application for Matrox is that we have cameras at the fishing dock in Tokyo. When the tuna comes off the boat, we can take pictures of the tuna and help inform the buyers how much they should pay because we can help assess the fattiness of the tuna using machine vision, and that informs the price. There are a lot of different use cases, and we want to make sure we have a strong technology base to apply it to manufacturing, retail, healthcare, or looking at wounds and making assessments. You also talked about what this means in a warehouse. We have worked long on optimizing the warehouse worker through mobile devices, but with the advent of autonomous mobile robots, you have a different way of solving those problems. You can send out the robot to do some of that work. But we would work on automating the worker, and the mobile robot companies would automate the robot, which was sub-optimizing the overall workflow. So we acquired an autonomous mobile robot company, and now we can step back and orchestrate the entire workflow. When you dispatch a robot, you can also communicate with and identify the best worker through the mobile device, where they are, and make sure they're not actively doing some other task to go and intercept that robot to put something on it or take something off it. This minimizes the dwell time of the robot and maximizes the picks per hour, which is the key performance metric that most warehouse operators use. We try to make sure we have a breadth of solutions that are both part of the core today and things we see having a good growth trajectory for the future that we can augment with what we do today.

Clearly, our customers don't buy our products because they're cool; they buy them because they generate a return. We have a number of ways we can demonstrate that. Specifically, in new areas like autonomous mobile robots, we tend to do proof of concepts and pilots where we can demonstrate the before and after impact and how we can offer a very attractive return. Today, there are at least two drivers for that in the warehouse space. One is that it's been hard to find workers, and salaries have gone up meaningfully, so that certainly made automation more important. Also, with COVID, as a resiliency strategy, being able to operate with fewer people and have more social distancing was another value our customers saw in having more autonomous mobile robots to augment the overall workflows.

Today's environment feels more like a normal year. Last year, we grew 27%, which was not normal. We had 6% growth in the first half of this year, which we think is respectable coming off such a strong year. But we can certainly see that a lot of our customers are paying close attention to economic indicators and want to make sure they are prudent in their investments and don't get ahead of themselves, as do we. So, making sure that in a fairly turbulent environment, we can be very agile in realizing where to step on the accelerator and where to step on the brake, and ensuring we still have a very clear focus on the biggest long-term opportunities and how to position ourselves as well as we can to navigate a choppy environment and come out strong on the other side.

Thank you. We jokingly say we've been hiding in plain sight for 20 years, so most people don't know so much about us. I certainly appreciate the opportunity to share a bit more about Zebra with you.