Q4 2020 Zebra Technologies Corp Earnings Call
[music].
Good day and welcome to the Zebra technologies fourth quarter and full year 2020 earnings results Conference call. All participants will be on listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays.
Presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Mike Steele, Vice President Investor Relations. Please go ahead.
Good morning, and welcome to Zebra fourth quarter Conference call. This presentation is being simulcast on our website at investors that cheaper dot com and will be archived there for at least one year.
Slide to convey is that the forward looking statements. We make today are based on current expectations and assumptions and are subject to risks and uncertainties.
Results could differ materially due to factors discussed in our SEC filings.
During this call we will reference non-GAAP financial measures as we describe our business performance you can find reconciliations at the end of the slide presentation and in today's earnings press release.
Throughout this presentation unless otherwise indicated our references to sales growth are year over year on a constant currency basis and exclude results from recently acquired businesses for the 12 months following each acquisition.
This presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer, and Nathan Winters, Our Chief Financial Officer.
Anders will begin with our fourth quarter results, then Nathan will provide additional detail on the financials and discuss our 2021 outlook.
Anders will conclude with progress made on advancing our enterprise asset intelligence vision.
Following the prepared remarks, Joe heel, our senior Vice President of global sales will join us as we take your questions.
Now, let's flip to slide four as I turn the call over to Anders.
Thank you Mike.
Good morning, everyone and thank you for joining us.
I am proud of our employees resiliency and focus on serving our customers critical needs during the pandemic.
Through their efforts, we were able to deliver exceptional results to close out a challenging 2020.
For the quarter, we realized adjust.
Adjusted net sales growth of more than 10% or more than 8% on an organic basis.
And adjusted EBITDA margin of 23, 5%, a 210 basis points year over year improvement.
Non-GAAP diluted earnings per share of $4 46, a.
A 25% increase from the prior year.
And strong free cash flow.
Each of these measures significantly exceeded our outlook.
We generated more business in Q4 than any other quarter in our history.
Our teams executed well to satisfy a faster than expected recovery in demand from smaller customers through our distribution channel.
Particularly for our printing solutions.
Demand from our large customers also continued to be strong due to their need to digitize and automate workflows in an increasingly on demand economy.
We also drove improved profitability and cash flow, while investing in research and development projects to drive sustainable profitable growth.
Yeah.
Our record Q4 results capped a challenging full year 2020 in which we realized slight declines in sales and earnings per share.
We did achieve record free cash flow of $895 million for the year.
Yeah.
With that I will now turn the call over to Nathan to review, our Q4 financial results in more detail and discuss our 2021 outlook.
Thank you Anders let's start with the P&L on slide six in.
In Q4, we returned to profitable growth after a particularly challenging first nine months of the year.
Net sales increased eight 3% before the impact of currency and acquisitions.
Our sales mix of large and small orders normalize to pre pandemic levels driven by a recovery of our run rate business, which was driven in part by pent up demand.
Yeah.
Our asset intelligence and tracking segment, including printing and supplies significantly benefited from the recovery in smaller business demand with segment sales increasing 14% from the prior year.
Our enterprise visibility <unk> mobility segment sales increased five 6% driven by solid growth in enterprise mobile computing solutions.
We also realized strong growth in services and software driven by our managed and support services and Zebra retail solutions.
From a regional perspective, we realized solid year over year growth in North America, and significant growth in EMEA, While Asia Pac and Latin America were slower to recover.
In North America sales increased 6% printing supplies data capture and services were bright spots.
In EMEA sales increased 20% printing supplies mobile computing and services grew double digits as we saw strong demand through our partner distribution channel.
APAC sales were down 4% year over year, you had increased sequentially printing and mobile computing were bright spots and we saw modest growth in China.
Latin America sales declined 15% with all major product and service categories declining in a challenging macro environment.
Adjusted gross margin expanded 200 basis points to 47, 8% driven primarily by a $12 million recovery of China import tariffs paid in prior periods and.
And improved services and software margin.
Business mix had a negligible impact on year on year margin comparisons. Additionally, this quarter's results were impacted by $10 million of premium freight costs.
Adjusted operating expenses increased $28 million from the prior year period, and improved 20 basis points as a percentage of sales.
We continue to diligently manage costs, while accelerating high return investments in the business.
Fourth quarter adjusted EBITDA margin was 23, 5%.
The 210 basis point increase from the prior year period, primarily driven by higher gross margin.
We drove non-GAAP earnings per diluted share of $4 46 a.
A 90 or 25, 3% year over year increase.
Turning now to the balance sheet and cash flow highlights on slide seven.
We generated $895 million of free cash flow and full year 2020.
This was $271 million higher than the prior year.
Free cash flow conversion of 130% with significantly higher than our target of 100%, primarily due to timing of customer collections and vendor payments.
Lower 2020 payments of incentive compensation and taxes and interest also contributed to the improvement.
Our balance sheet remains strong from a debt leverage perspective, we ended 2020 at one two times net debt to adjusted EBITDA leverage ratio, which is comfortably below our target maximum of two five times.
Let's now turn to our outlook.
We entered the new year with a strong order backlog and healthy channel inventory levels. We are encouraged by the pickup in demand primarily from our smaller customers, which includes pent up demand from those who had paused spending during the peak of the pandemic.
This momentum along with our sales pipeline positions us well for double digit sales growth for the first quarter and full year 2021.
In Q1, we expect adjusted net sales to increase between 25 and 29%.
This outlook assumes a 300 to 350 basis points additive impact from the acquisition of reflects us and foreign currency changes.
We anticipate Q1, adjusted EBITDA margin slightly higher than 23%.
Which assumes gross margin expansion and operating expense leverage non.
Non-GAAP diluted EPS is expected to be in the range of $4 30.
To $4 50.
For the full year 2021, we anticipate adjusted net sales growth between 10% and 14%.
With growth moderating through the year as we cycle more challenging comparisons and navigate a continued uncertain global economic recovery.
This outlook assumes approximately three percentage points additive impact from the acquisition of reflects us and foreign currency changes.
We anticipate full year 2021, adjusted EBITDA margin between 21% to 22%.
Which assumes gross margin expansion from the prior year.
We expect free cash flow to be at least $700 million per the year, we do not expect to repeat the exceptionally high level of free cash flow conversion that we achieved in 2020.
Please reference additional modeling assumptions shown on slide eight.
With that I will turn the call back to Anders to discuss how we are advancing our enterprise asset intelligence vision and our end markets.
Thank you Nathan.
Team has done a fantastic job executing in a challenging environment.
We have strong momentum entering 2021 supported by our order backlog and pipeline business.
We continue to build on our industry, leading offerings by investing in our people operations and innovation to drive sustainable growth.
In 2020, we acquired reflects this and launched a record number of new products and solutions to ensure that we continue to advance our industry leadership position.
Slide 10 highlights how we are building on a foundational capabilities to elevate our value proposition.
We are uniquely positioned to solve our customers' complex operational challenges.
Our unmatched access to frontline operational data from our vast installed base of products and solutions can be harnessed to gain real time actionable insights.
The result is a more intelligent enterprise with optimized workflows.
Through the pandemic day has been a dramatic increase in the adoption of omni channel and online shopping.
Retailers need proven solutions to overcome the significant fulfillment challenges posed by this profound behavioral shift.
If groups are not delivered or made available for pickup as promised.
The retailer risks, losing its trucker to a competitor.
To address this issue retailers have been prioritizing their capital spend in our broad portfolio of solutions with a sense of urgency.
We are enabling retailers to generate an unprecedented amount of valuable data captured through mobile computers point of sales systems, RFID and other intelligent automation solutions.
All of which are critical to digitizing their operations.
Key benefits to the retailer include <unk>.
Better operational visibility and insights.
Increased employee collaboration and labor productivity.
Improved inventory accuracy.
Well equipped associates with real time actionable information.
And more satisfied customers.
Last month, we participated in the National retail Federation virtual sessions, where we showcased how <unk> solutions help retailers deliver a superior omnichannel shopping experience.
At one of the sessions Autozone explained how our reflects this workforce and task management solution equipped their associates with highly flexible mobile technology that enables enhanced customer responsiveness and provides insightful data for analytics and reporting.
We are proud to enable autozone to go the extra mile to delight its shoppers.
Now turning to slide 12.
We continue to be excited about our opportunity to help our customers meet their mission critical needs in an increasingly on demand economy.
As a trusted strategic partner, we orchestrate end to end workflows for our customers in a variety of end markets.
As I mentioned retailers continue to prioritize investment in our products and solutions to address their omni channel fulfillment strategies and related warehouse automation needs.
In Q4, we secured a multimillion dollar orders from a range of E. Tailers mass merchants grocers department stores and auto parts retailers.
In transportation and logistics strong E commerce growth continues to drive parcel volumes.
Last mile on demand fulfillment has become increasingly important.
The Italian post recently selected our printing and scanning solutions for their 13000 post offices.
Separately the deployment of our TC seven series mobile computers to United States Postal service carriers is on track to resume as expected in late Q1 with a goal of completion in Q3.
In healthcare.
The need for increased real time visibility into the entire patient journey.
As well as the demand for innovative solutions to provide safe and efficient care.
Continue to make health care, our highest growth and market opportunity.
In Q4, we grew our relationship with one of America's leading health care providers.
New acute care applications have made it increasingly important for this customer to a quick more of their clinicians with mobile computers.
The most recent use case, we addressed to us Covid drive through testing without health care purpose Tc five serious mobile computers.
<unk> seamlessly interfaces with their electronic medical record system.
Okay.
Although the manufacturing sector has been hardest hit in 2020, we are optimistic regarding our prospects of returning to growth soon.
We see vibrant opportunity to increase automation and workflows.
And we are viewed as a visionary in this market.
In Q4, we also secured notable wins beyond our traditional end markets.
This included a competitive takeaway win with a leading waste hauler in North America.
This customer initiated a multiyear rollout of our <unk> five sears' tablets accessories and related services.
Its dispatch application, which is improving training and productivity among its drivers dispatchers and supervisors.
Another important win was with one of the largest metropolitan police departments in the United States.
Using <unk> mobile computers, Longwood <unk> five series mobile printers, they implemented an automated parking citation application that generated enough revenue to cover their technology investment in a matter of months.
In closing, we continue to find substantial opportunities in our primary end markets and we are excited about the emerging prospects, we see in newer markets.
We are well positioned for ongoing success as the need to digitize and automate workflows continues to accelerate.
Now I'll hand, the call back over to Mike. Thanks, Anders will now open the call to Q&A, we ask that you limit yourself to one question and one follow up so that we can get to as many of you as possible.
Yeah.
We will now begin the question and answer session to ask a question you May Press Star then one on your touched on from <unk>.
We are using a speakerphone please pick up your handset before pressing the key to withdraw from the question queue. Please press Star then two.
The first question comes from Andrew <unk>.
From Aaron Berg. Please go ahead.
Good morning, guys. Thanks for taking my question.
Good morning.
So your guidance.
Such a strong Q1 guidance.
Yet for the full year.
It seems conservative and.
Can you talk about what youre expecting towards more towards the back half of the year because your guidance implies.
Maybe for <unk>.
We're a low single digit growth.
It probably going negative in Q4.
What's built into that back half.
Any color would be great.
Uh huh.
Yeah.
First our industry leadership and steadfast investments in.
In our broad solutions as well.
Enabling us to rebound stronger and I think faster than our competitors.
So we do expect double digit growth for Q1, but also for the full year 2021.
And obviously this is a strong rebound from the more challenging 2020.
We do feel as confident as ever about our business, we do expect growth across all our.
Regions verticals and business lines as we look out to 2021.
But we are a bit more cautious about our.
The assumptions, we've put into our second half <unk>.
Cost given the.
The global macro uncertainty that we're facing.
And we're also starting to cycle so much tougher comps in Q4.
We also mentioned that we're not assuming any growth in large deals on large accounts in the second half of 2021.
Okay and.
And how much of <unk> is in the Q1 guide because that's such a big guide and then maybe.
Any other color you can give us on USPS into Q2 and Q3.
Hey, maybe percentage debt accounted for a per quarter or something.
Yes, so on USPS. The rollout is progressing as we expected the teams are continuing to be highly engaged.
As we noted the current rollouts around our E&C the 300000 <unk> 77.
And the 300000 rollout on pause that since October going into the election on holiday season, and we do expect that to resume in late Q1.
And really a modest impact on our Q1, our Q1 guide.
For the full year, we expect USPS, but on a point of.
Our sales growth on the USPS growth to account for about a point of our full year.
Total your growth primarily in the first half of the year.
Okay.
So not much though that Q1 guide not much that's.
That's all pure organic.
On.
On a very literally related use debt that's just pure like.
Market demand is it primarily in EDM or is that or is there sort of a bulky order in AIG or one or the other.
Yes, that's correct on USPS and I'd say broad based across both segments in Q1.
Okay.
Alright, thanks, guys.
It's been nice to see the business that performed very nicely in Q4 and day outflow from Q1 to across all of our products on verticals.
Okay.
Thanks Anders.
The next question is from Tommy Moll.
Please go ahead.
Good morning, and thanks for taking my questions.
Good morning.
And then I wanted to start with with a follow up on your retail on E Commerce and markets.
Indeed.
Second half of last year, maybe most of last year.
Once the pandemic took hold.
It sounded like within those end markets it with larger customers, who are leaning in quicker to some of the omni channel capabilities that you offer.
Then in todays commentary you indicated that some small customer activity.
Has resumed and is looking positive.
Maybe some of that is on the printer side, but I'm curious what you could give us on the mid or smaller sized customers within those <unk>.
Retail on E coms and markets anything changing for the better there or any context would be helpful.
Yes, first I'd say that across all the verticals that we play and we are uniquely positioned to empower frontline workers to two.
To perform their duties better and more effectively and with high customer service, particularly where COVID-19 has helped accelerate some of those secular trends so on digitization and automation.
So each of our four primary verticals have.
Had a positive growth trajectory as we entered into 2021.
We're making good progress also on some newer expansion verticals that we talked about on the in our prepared remarks now specifically for retail.
Commerce I'd say, we saw a step change in consumer adult consumer adoptions of the Omni channel E. Commerce is part of the early phase of Covid.
If you look at in the store buy online pickup at store and other the other day ever use cases.
We're growing very rapidly and in the warehouse a lot on investments in technology to help automate them are also necessary for retailers to transform their business models.
And we are starting to see pilots for our enterprise asset intelligence solutions starting to resume.
Another trend that we see in re tenants are on equipping all associates with a device.
<unk>.
Also very synergistic with our <unk> workforce and task management solutions, where they work very much hand in hand.
And the strength we saw.
Around more small and medium sized businesses.
It was broad based it includes retail.
Also on the E Commerce is probably less of the smaller companies theres more large businesses, but the small small small and medium sized business strength that we saw.
Especially spanned across the four verticals that we that we work in.
Perhaps.
In addition from my side sales speaking.
In the depths of the pandemic into Q2 Q3 timeframe, we saw that the large retail and E. Commerce customers have the wherewithal to continue investing in and in fact charged headlong, if you will into transforming their businesses, whereas small and medium sized customers paused their spending.
We're cautious in particular outside of the U S. We saw this phenomenon, but we also learned that the solutions that we have in particular on the printing and scanning side are essential to these customers and they ultimately.
Need to need to come back and refresh those and that is driving a lot of pent up demand that we were seeing in Q4 as they returned to make those essential purchases.
That's very helpful. Thank you both.
Anders you you referenced something I wanted to ask as a follow up.
<unk> to the proof of concept type pilots that you have with some retailers where potentially all associates in the store has some some kind of device.
What additional color could you give us there just in terms of what inning. We're in in terms of those pilots when when there might be an opportunity for some larger scale commercialization of that concept and then.
I noted, let's see last month's end of January you introduced a new mobile computer series that you see five X from the.
Description there sounded like it might be tied to these this pilot concepts. So I wonder if you could comment on that product innovation as well to the extent it's related.
Yes.
For our customers to introduce the device for every worker.
Great opportunity placebo, great expansion for us.
Our estimate is today that in retail about a third of all store associates on it.
<unk> with the device.
And I'd say today.
<unk>.
It varies greatly between retailers how.
How deeply penetrated into the associate base with devices. Some are are much further along than others.
We are.
We have worked to basically expand our portfolio of mobile computing devices to ensure that we have kind of appropriate form factors and price points to enable our customers to take this.
Deeper into their associate base, and we expect that this will be.
Continued a trend I am not sure I expect it to be kind of a big gap.
Yeah.
Step function changes in behaviors, but more looking to continually.
Add to add devices to the the store associate base to be able to ensure that they are all.
Connected and able to take advantage of all the other digital tools and solutions that the retailers offer.
Maybe John if you have any yes.
I wanted to just pointed out two other things that I think addressed. This question. One you are right about the release of the EC side.
<unk> 50 on EC 55, which are device combined.
<unk> like form factor with all of the advantages that we bring to the enterprise Android ecosystem and so we expect that that device in particular will play a role in.
And this trend of the device Paul but I also wanted to point out another synergistic.
Our strategy, which is the.
The acquisition of reflexive outdoor reflects this as you know debt tasks and workforce management and therefore needs to reach every worker within the enterprise in particular of course retail which is the dominant vertical and so therefore, having a device on the Hamburger every worker now all of a sudden becomes.
Essential again, and and now we're in great position to meet that demand.
All very helpful. Thank you and I will turn it back.
The next question is from Jim Ricchiuti of Needham <unk> Company. Please go ahead.
Hi, Good morning, I wanted to just follow up on the comment about.
The second half and the assumptions around large deals how does that.
Say youre not assuming large deals how does that compare with prior years, because typically some of that large deal activity does materialize I would assume as youre going through the year.
That's correct.
I'd say this is this is more on.
A matter of limited visibility into the second half than it is that there's a certainty that it won't be growth in larger deals.
I think this is.
Similar to how we.
Generally.
Think forecast or years so.
Yes.
Okay.
I Wonder if you guys. My follow up question is just regarding.
Component.
Constraints, we're hearing throughout.
The supply chain tightness and semiconductor components and I'm wondering to what extent that's impacting you.
You guys as you think about your supply chain.
Yes.
Definitely seen.
Ill.
Lead times, extending and but our team is working diligently and I think we are on top of it.
We have the <unk>.
Cooperated.
Whatever visibility we have to extended lead times for our power semiconductors and other components into our outlook also particularly.
Particularly for the second half.
Okay.
Thank you.
The next question is from meta Marshall with Morgan Stanley. Please go ahead.
Great. Thanks, and congrats on the quarter I guess I just wanted to dig into how you guys are thinking about gross margins into Q1 and into 2021, clearly you guys saw a pickup in and kind of your smaller customers, which would have helped gross margins in Q4, you clearly have some large.
<unk> deals and still some kind of overhang from freight.
Had through 2021, so just how we should be thinking of the progression of gross margins through 2021, and then maybe just as a second question just.
Given.
The kind of very healthy cash flow that you guys saw in 2020 and kind of a continuation of that into 2021, how do you guys kind of think about balance sheet prioritization currently thanks.
Yes. So if you look at our full year guidance EBITDA of 21% to 22%, we expect gross margin to improve year on year, primarily due to the order size mix normalizing, which we saw on Q4 and implied on our Q1 guide.
We do expect premium freight costs to persist around $30 million to $40 million.
You have declining in the second half as air travel returns.
And within the full year guide, we do expect Opex.
To increase as a percentage of sales. Once you include the full year reflects this as well as the majority of our spend returning post COVID-19, including incentive compensation and travel, particularly on the second half.
I think it's worth noting when you look at the full year EBITDA guide.
<unk> as we've stated is dollar neutral year, yet slightly dilutive given the investments in go to market in the platform.
We do expect that to scale over time.
On your second question, if you look at free cash flow $895 million on a strong finish to the year.
Really around improved core working capital performance, particularly on <unk>, we saw very strong collection activity and some early timing at the end of the year as well as our Q4 sales were frontloaded driving some of the benefit.
As well as small incremental are factoring lower taxes interest expense on incentive comp kind of driving the year on year beat.
So we look at for 2021, we do expect it to decline.
Primarily due to just the exceptional 2020 performance and really more normalizing the free cash flow conversion rate over the two year period.
Got it.
The next question is from Paul Coster of Jpmorgan. Please go ahead.
Yes. Thanks for taking my question I was just wondering if we are the sort of that's what I mean.
Flexion point for the company in terms of sort.
Or sort of mix shift.
On margin outlook.
I don't see business comes back.
But the smaller accounts, obviously has higher margins.
<unk>.
But you've also got the software and services business growing faster.
So I can figure it out you're probably seeing some 50% growth for the reflects this business.
On the percentage points.
On a gross margins from the rest of the business.
So it feels to me like we're heading towards a new margin structure over the next three or four years can you comment on that.
The margin structure or more on the business inflection generally.
Well, yes the margin.
This is related obviously on this book.
Gross margins guidance be expanding from here on out.
Business mix, so I suppose it's going to be permanently changing here.
Yes.
<unk> is best positioned to answer that so if we look at.
Margin and margin expansion over time, we do believe we can go higher and we have many levers to achieve that I think as you mentioned scaling some of the newer markets with Richard gross margin reflects us being one of those proof points.
We always continue to focus on driving higher gross margin and productivity through all of our operational efficiencies across the business.
On a track record of doing that and driving profitable growth.
And we do expect.
EBITDA margins to get back to the pre pandemic levels in 'twenty, one and we really don't see any reason to debt should be.
Constrained as we move forward in terms of continued expansion.
I guess I'm asking my question very well, but.
Is there going to be a mix shift towards C and servicing software and will that drive up the margins structurally over the loans just to pre pandemic levels, but some sort of almost pre.
MSR acquisition levels.
I'd say first.
Maybe thinking about the business around on our core near Adjacencies and around the enterprise asset intelligence or intelligent edge solutions to more than newer stuff I do believe that our core business.
Right.
Printing and scanning EQT services are.
Very healthy good shape and I expect them to continue to grow at a nice rate over over the longer term I don't expect printing to kind of breakout from from the pack here printing has been.
A bit more.
Up and down over the last year. So we had probably a little bit more of a pent up demand in printing solutions than we had in some of the other solutions.
But if you look into our <unk>.
Enterprise asset intelligence vision that we have in the intelligent edge solutions I do expect that.
Our software assets and some of our more intelligent automation solutions to grow faster than the company.
Average from a gross margin perspective, and all of this is scale will help us here, but also as we invest in some of the newer solutions. We will it will be up any kind of investment phase first and then we will see.
Margins expanding.
We believe quite nicely once revenue starting to grow.
Okay. So to answer your question.
Yes, it does.
So just in passing on the.
With respect to reflect system on my right.
<unk> posted more than 50% compound growth at the moment can you just comment on the growth rate for some time as well.
So.
We aren't commenting on specific growth rates that they have that.
Texas has been growing at a nice double digit growth rates for for the last several years and we.
<unk> high expectations that we'll continue to do that and that.
It will also help accelerate some of our others the growth of some of our other software assets that will be benefiting from being associated with and incorporated into the reflects this platform.
And <unk> has had.
Nice growth over the last few years and we do see this year the opportunity to accelerate growth as we support.
COVID-19 vaccine Rollouts also distribution. So we do expect the double digit growth for our <unk> business as well.
Okay. Thank you.
The next question is from Joe Aiken of William Blair. Please go ahead.
Thanks. This is Joe on for Brian today.
I wanted to start you mentioned in the prepared remarks.
Wins beyond your traditional end markets.
You mentioned <unk>.
Waste hauler in particular I was wondering if you could maybe just provide a little more color.
Any context around.
What brought you into that win and maybe.
What the opportunity is.
Different non traditional end markets that youre, seeing and how meaningful that could be going forward.
Yeah.
Yes, I can start with this and then Joe can also provide some extra color here, but that said we have made.
Maybe so first of all on the product side, we have invested in addressing some of the use cases that we see in them.
Some of these new emerging verticals government utilities and so forth.
But also we've made meaningful will go to market investments.
And you said it probably started with our acquisition of the explorer.
But then we've tweaked our other products to also address these use cases more so it's been a big focus of ours on the investment of ours over the last several years to make sure we position ourselves for this and we now have a portfolio of solutions and partners that can help us get into these opportunities and win them.
Joe.
Yes, I would only add debt.
The.
And markets that.
Have shown some particular promise our government and our role in state and local as well as the broader so service industry with at least holding example fits in the explore acquisition where explore has a strong market that rugged tablets are a strong.
Product offering into those markets has been instrumental in leading US there, but it also has been something we've been pursuing for some time, but it does it does take some time to build up the channel infrastructure as well.
Fine tune the product offering and higher the.
Appropriate type of dedicated an expert sales reps, who can operate in those verticals and we feel we now have that in place and it's beginning to pay off.
Okay.
Great. Thanks to both of you that's really helpful.
I know on from past calls.
You've talked about the tree.
In addition to Android on mobile devices in the past and the benefit Youre seeing from that is that transition largely over at this point.
And maybe just to put a finer point on that what percentage of devices. Do you estimate that you are shipping today are running on Microsoft operating system.
The first around our mobile computing platform overall, we saw solid growth in Q4.
We did benefit from from recovery into small and medium sized business segment. There also.
There are three trends that I think are worth highlighting the Android transition is one of those but I'll start with new use cases, we talked earlier about.
The second trend which was around.
Putting a device in the hand of every every worker.
But do you use cases has probably been the biggest driver.
Think about omni channel and retail.
Healthcare is the newer vertical which largely is new use cases.
And then the third trend around the Android transition.
We still have lots of momentum around the Android transition and a lot of opportunity left in that.
We have our market share on Android is still around 60%.
Android now makes up about 80% of our mobile computing sales.
We've often talked about.
The transition is from transitioning older legacy windows devices to Android, but today I think.
The opportunity to refresh.
<unk> installed older Android devices is actually bigger day.
Our.
Our estimate is that there is now low double digits.
On the Android devices in the market with a somewhat shorter refresh cycle than the old windows devices used to have.
We expect that Theres about a high single digit million million windows devices out there. So it's more of a balance perspective, and we certainly like to get both of those and but and Android has been a great catalyst for growth for us.
That's really helpful. Thanks for taking my questions.
The next question is from Richard Eastman of Robert W. Baird. Please go ahead.
Just a quick question could you.
Tell us the.
China tariff rebate.
Impacted gross profit margin does that impact the margin.
Was that solely confined to <unk> M.
It was great. Thanks for the question so out of the $12 million.
$8 million was associated with <unk>, and then $4 million for AIG.
Okay on the fourth quarter.
In Q4, Okay, and then just a question around.
Maybe the balance that you saw.
When you go to market so.
All of 'twenty.
Can you just kind of tell us how the direct business did relative to the channel and I'm just thinking.
Sales growth or decline.
Yes, I can start and then Joe can provide some additional color on so.
Sure.
Our direct business, obviously did very well because we had a strong.
Strong large deal activity, but also a lot of the larger customers that we worked with.
We have been supporting through channel partners. So our channel Centricity. So that's how how much of our revenue growth through channel partners was actually I think an all time high in Q Q3 on Q4, So we have we.
We have maintained a high degree of channel Centricity in the business.
Hello, guys.
Exactly I mean.
Our strategy has been and will be to be channel first.
Our go to market approach and I think thats paid off very well for us here on the pandemic because.
Our strong relationships with our partners have been instrumental in helping us recover faster and we're seeing debt in particular in the run rate, but as Anders said large.
Do you recall.
Contribution that large deals made to our second half in particular.
Remarkable debt.
Channel Centricity percentage of business going through the channel has expanded in light of that and that's part of our strategy.
Well when you when you speak to some of the smaller smaller and medium customers.
Is that visibility coming through from the Vars.
Again, we speak about the channel, but we obviously put distribution in there versus the bars.
I guess my question is what's the visibility on.
The vars and the smaller and medium sized customers rebounding.
Rebounding in 'twenty, one do you have that visibility either on orders or is it kind of front log and.
Conversation with Vars or.
Hmm.
Well so.
We rarely have visibility to specific individualized orders from small medium businesses right.
So you haven't seen the distribution and channel in between but what we know is debt or distributors.
A very strong outlook for <unk>.
For the upcoming quarters at Easton.
Our order being strongly with us as we indicated our our order volumes have been strong and that's I think a reflection of that.
Optimism that our distributors are feeling in particular also from SMB company.
I see so so when you when you look into 'twenty, one I'm really I'm really trying to get at is obviously the gross profit margin assumption.
<unk> pointed out is higher in 'twenty one.
And as the mix of end customers there from small to medium.
Obviously, you mentioned large orders in the back half of the year, you're a little cautious there, but as that mix supporting that debt upward migration in the gross margin when you think about 'twenty one.
Yes.
We expect to have a more traditional mix of business in 2021, and then we had in 2020, where.
For Q2, and Q3, particularly large deals were kind of overrepresented than we do.
As Joe said, we are visibility around individual smaller deals are are not great. But we are our channel account managers do meet with our channel partners and work on forecasts and looking at specific deals and what support they need from us and so forth. So we do have some level of visibility, but obviously.
The further out in time you go the less clear that visibility is so I understand and just just staying on this gross margin per one more second.
From a pricing perspective.
What's the assumption going into 'twenty, one do we are we able to capture enough price.
To recover some of the the.
Cogs inflation that we're seeing in the business I mean, it would appear so but is there any price increase on net price increase that you might expect or is it mainly kind of on net pricing.
So maybe first just you talked about Cogs increases that the freight charges, you're so far yes on this free charges and just any other cost inflation in the supply chain in your supply chain.
Yes, I think we.
Yeah.
Yeah.
We don't we don't modify our pricing based on what we believe to be a temporary.
Cost inflation.
Right.
But we do have a lot of analytics and thoughts around our overall price points and what where the market is and we do.
We always strive to get a premium per hour for our brand.
So.
Pricing and margins, obviously, a very strong focus that we have across across the company.
But we haven't necessarily gone unchanged on a price list because of this.
Well, yes, maybe another way to think about this is if you look back at 2020.
The mix of our business in terms of on a small versus large was skewed towards the large right because this.
So there was a pause in purchasing from the small debt we assumed towards the end.
In the long term analysis small was it was down relative to the long term average in 2021, we expect that day.
That mix will return closer to normal and therefore.
Because of the mix effects.
Think that the average price points would would normalize as well.
I'll get that right that that is an ex okay. That's my answer okay excellent. Thank you.
The next question is from Keith Hausman of Northcoast Research. Please go ahead.
Good morning, gentlemen, and congratulations on a good quarter and good guidance, just trying to unpack the printer growth a little bit more.
Help me understand in terms of that growth is a substantial part of that growth being driven by net.
Smbs, but also growth on the supply business as well.
Yes, yes, we had obviously great great growth.
Printing and supplies, both printing and supplies were up double digits in the in the quarter.
Printing business was up across the portfolio.
We did I think benefit from some pent up demand, particularly in EMEA.
You remember <unk> was hit harder early on in the pandemic. So there was probably a bit more of a rebound to be had there.
I would also say, though that we have early in 2020, we took a number of.
Actions to strengthen our go to market and strengthening our channel ecosystem.
Particularly around printing and I think that is now bearing fruit for US also so we are more competitive and thats, helping to accelerate our share gains in printing specifically.
But we did see.
Our business through.
Our smaller business small and midsized business.
Recover quite nicely recovered faster than we had expected I think it's fair to say in Q4.
Manufacturing has been up.
Relatively light vertical.
A strong vertical for printing generally, but later over the last year, but that was also coming back and strengthening.
And RFID was actually a very strong quarter for printing I think it was a record.
Port for print RFID.
And then on supplies, we did see a strong performance in supplies, particularly in North America and <unk> also had a strong fourth quarter.
Overall, though I would say that we have a very strong portfolio of smart connected printers that have an unrivaled manageability through our link with operating system and that is a true differentiator in the market.
Okay I appreciate it.
Follow up on I think a comment made earlier during our Q&A and I think the commentary was that the U S. Postal service will contribute about 1% growth for the year with most of that coming in the first half, but I've also heard you guys say that it's going to be only a very modest for the first quarter. So that could imply if my number if my math is right you guys could have 400.
Million dollar contribution in the second quarter from the U S. Postal service is that right and there's debt include I guess ancillary projects as well as the main $300000.
Devices being free.
Phil.
Okay.
Yeah. So if you if you look at the USPS.
For the year regarding the size of the rollout I think if you look at the 300000 printers and what we expect to deliver.
Throughout two.
2021, I think you can you really do the implication of we're selling about 2 million mobile computers annually.
That can help you infer in terms of an average price range I think the number you have from Q2 is a little bit higher than what we would anticipate in terms of the full year implied guide.
Alright, Thank you remember.
Remember we've talked about earlier.
<unk>.
Total volume on mobile computing Peters.
Sps this contract was about 300000 over two years.
Okay understood.
Understood.
Doing the math there.
$400 million roughly.
Standard might be a little bit high standard a little bit more than allow us we're assuming for the entire value of the contract. We realized you guys fulfill some last year as well.
As we go fulfill this year. So it seems again, perhaps higher than what I was really on that.
Yes.
As I said I think the best way for you to think about USPS. This year is to that 1% of our growth in two.
2021 is coming from growth of our USPS business.
I would say Q2 is the only quarter, but.
Q1 will start ramping up towards the end of Q1, but.
Q2, Q3 will certainly be part of it.
Alright, one per cent of your growth not one percentage of business. Okay got it yes, yes, yes.
One percentage of our growth.
Okay. Thank you.
Okay.
The next question is from Blake Gendron of Wolfe Research. Please go ahead.
Yes. Thanks, good morning, I wanted to follow up there with some of the growth commentary.
Sure.
Low dollar impact from what you would consider pent up demand to be greater or less than <unk> and do you expect some pent up demand follow through into the second quarter and I guess longer term I mean are we going to see this pent up demand idiosyncrasy show up in subsequent years, just based on the replacement <unk>.
Fecal or is it going on normalized fairly quickly as you know.
As we recover here on the pandemic.
Well.
Yes.
Pent up demand concept is a little hard to get overly.
Specific about about the impact of it but I would say that.
Starting with our products and solutions on our mission critical for our enterprise customers and they need that to compete effectively in the on demand economy.
Sales to our larger.
Companies larger customers. So if you talked about in earlier question remained strong.
And they have prioritized spend with us to better position themselves to.
The.
Address the newer automation and Digitization trends.
Like Omni channel as an example, and that's a larger.
Larger customers, who are better positioned to pivot their businesses early in the pandemic to aligned with how.
Consumer just wanted to behave how the economy was working at at that point, while smaller customers.
Had to kind of put.
Paul spending or certainly cut back on it.
But.
I think now we see this.
Lola.
Companies coming back and other customers are also realizing that they need to invest in order to compete.
Competing in the same way they did prior to Covid is not necessarily going to be a successful formula and I think that part of this is also that we have been able to execute very well during the pandemic and we've been able to.
Gained share we our supply chain has shown great agility to be able to to respond to customers that quickly want to ramp up.
Net order volumes and I think we were able to to do that well and see some opportunities that way.
So we.
You have been realizing some some good.
Demand from from from this from this pent up demand you can say, which helped us in Q4 and I expect it to help us in Q1 here also.
But more broadly, though as we look forward. We are very excited about the business overall and the growth prospects that we have not just <unk>.
In Q4, Q1, but longer term based on our ability to help our customers digitize and automate their businesses.
Yes, Blake just add the state then it's obviously as Anders mentioned a tough one to quantify if you look at our Q1 guide.
We kind of think of the pent up demand is likely contributing low double digit growth on top of mid teen growth from what you can say is our normal growth rates the impact of acquisitions FX as well as cycling.
So from a comp perspective versus last year, where we had we started to feel the impacts of Covid late in Q1 last year.
Yeah. That's helpful. I understand it's tough to tough to quantify and disaggregate everything but the longer term growth outlook is kind of what I was getting at and that's constructive.
My follow Up's on <unk> I'm just wondering.
Over the last call it 12 months or through the pandemic what.
What the growth of existing customers is with EDM versus.
New customer wins.
You see that evolving I guess year over 2021 and beyond and is there any major margin difference between one or the other or should we think about EDM kind of along the same lines and delineate large versus small customers in terms of margin difference.
Yeah.
Yes.
I'll start by saying on new customers. If you were looking for kind of brand new.
Customers that haven't done any business with us it's rare that we have those because most companies are doing some level of business with us. So it's probably more that we have new new new awards or new use cases with those customers.
Again as we.
We can only we really only have visibility into that from our larger customers.
I think we have.
We've had a good healthy.
Clip on.
On the new customers and I expect that we will.
To add new use cases, and new applications. If you look at that portfolio of solutions.
Invested meaningfully too.
Ensure we can expand the number of use cases that help address our customers' most pressing problems. So we feel good about our competitive.
Positioning and our ability to win.
Some of these new new use cases, so it may not necessarily be brand new customers, but theyre brand new use cases.
Joe do you have any comments.
I would add day, let me to your point about is there a big margin difference between the two I would say not noticeably on the new customers that we are able to acquire so ones that were previously.
Competitor customers they have been meaningful ones of course, right I mean, the USPS is one example of those that was in the last 12 months.
But they do range from small to large and therefore I would expect without having done the analysis that there isn't a meaningful margin difference between the two.
That's very helpful. On one more if I can sneak it in your balance sheet is in great shape I'm wondering if you could just level set the capital allocation thoughts here on maybe update us on the on the M&A pipeline.
I'll start we ended the year at one two times net debt to adjusted EBITDA, which is below our two five target maximum our priority remains organic and inorganic investment in the business and we're excited about the opportunities we see both of those and both of those areas.
We do have our share repurchase and believe that as a flexible way to return capital and we'll remain opportunistic on that approach, which is evidenced by our $200 million purchased in 2020, and we will continue that into this year.
And on M&A.
Very excited about the output from our business and M&A is a we think of it as a growth vector for the business.
We think of M&A as a way for us to accelerate the execution on our enterprise asset intelligence mission. So it's not a it's not a standalone growth driver is something that we would think about it in a way for us to accelerate the execution on our ambition.
On.
We are targeting let's say selective bolt on acquisitions as well as higher growth acquisitions that can truly helped move our enterprise asset intelligence vision forward.
We see good opportunities in digitizing and automating the supply chain and different workflows.
<unk>.
As <unk> talked about we have a strong balance sheet that can support that.
Really appreciate the time thank you.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Mr. Gustafsson for closing remarks.
Yeah to wrap up I would like to thank our employees and partners for our exceptional Q4 results on a strong start to 2021.
As we continue to navigate the pandemic our top priority continues to be protecting the health and wellbeing of our employees partners and customers.
So stay safe everyone.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.