Q4 2021 Zebra Technologies Corp Earnings Call
Good day, everyone and welcome to <unk> fourth quarter and full year 2021 earnings conference call.
All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded.
At this time I'd like to turn the floor over to Mike Steele, Vice President of Investor Relations. Sir you may begin.
Good morning, and welcome to Zebras fourth quarter Conference call. This presentation is being simulcast on our website at investors Zebra dot com and will be archived there for at least one year.
Our forward looking statements are based on current expectations and assumptions and are subject to risks and uncertainties.
Actual 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 and full year 2021 results then Nathan will provide additional detail on financials and discuss our 2022 outlook.
Anders will conclude with progress made on <unk>.
Advancing our enterprise asset intelligence vision, along with an updated view of our served market opportunity and revised long term sales outlook.
Knowing the prepared remarks, Joe heel, our chief revenue officer will join us as we take your questions.
Now, let's turn to slide four as I hand, it over to Anders.
Thank you Mike.
Good morning, everyone and thank you for joining us.
Our team delivered solid fourth quarter results in an exceptionally challenging supply chain environment.
For the quarter, we realized adjusted net sales growth of 12% or 10% on an organic basis.
Adjusted EBITDA of $319 million.
A 4% year over year increase in.
And adjusted EBITDA margin of 21, 7%, a 180 basis point decrease non.
non-GAAP diluted earnings per share of $4 54.
A 2% increase from the prior year.
And strong free cash flow.
Customer demand is stronger than ever for our solutions that digitize and automate workflows.
We realized sales growth across all four regions supported by exceptional strength in mobile computing with particularly strong growth in Asia Pacific and Latin America.
Supply chain constraints limited us from fully satisfying our customer demand, particularly for certain data capture and printing offerings.
Our teams have been aggressively working to mitigate the impact of the unprecedented industry wide supply chain challenges by securing new sources of supply.
Utilizing alternative modalities, so transportation and expediting customer shipments.
Premium freight costs exceeded our expectations and significantly weighed on gross margin, which was partially offset by higher service and software margin.
We also scaled operating expenses, while continuing to invest in initiatives to drive sustainable profitable growth.
Our solid fourth quarter performance close to an outstanding full year 2021 in which we generated record sales EBITDA margin earnings per share and free cash flow.
With that I will now turn the call over to Nathan to review, our Q4 financial results in more detail and discuss our 2022 outlook.
Thank you Anders let's start with the P&L on slide six.
Q4, adjusted net sales increased 11, 7%, including the impact of currency and acquisitions.
And 10% on an organic basis, reflecting broad based demand for our solutions.
Our asset intelligence and tracking segment, including printing and supplies grew three 1% despite significant supply constraints on our printer products and cycling very strong prior year results.
Enterprise visibility <unk> mobility segment sales increased 13, 2% driven by exceptional growth in mobile computing.
We continue to drive solid growth across services and software with strong service attach rates and expansion of our software offerings.
We recognized solid growth in all four regions North America sales increased 4% with strength in mobile computing supplies and services.
EMEA sales increased 9% driven by strong growth in mobile computing.
Asia Pacific sales grew 29% with strength across all major geographies, including China.
And in Latin America sales increased 42% continuing strong double digit growth in all major offerings.
Adjusted gross margin declined 210 basis points to 45, 7%.
Due to unprecedented premium freight costs, partially offset by higher service and software margins.
I'll discuss transitory costs, including premium freight further in a moment.
Adjusted operating expenses as a percentage of sales improved 40 basis points as we scaled our cost structure, while continuing to prioritize high return investment opportunities in the business.
Fourth quarter adjusted EBITDA margin was 21, 7%.
A 180 basis point decrease from the prior year period entirely attributable to lower gross margin from transitory impacts partially offset by operating expense leverage.
We drove non-GAAP earnings per diluted share of $4 54, and eight or one 8% year over year increase which also reflects lower interest expense and a slightly higher tax rate.
Turning now to the balance sheet and cash flow highlights on slide seven in.
In 2021, we generated more than $1 billion of free cash flow for the first time in our history.
This was $115 million higher than the prior year, primarily due to increased profitable growth.
Our balance sheet remains strong from a debt leverage perspective, we ended the year at a modest 0.5 times net debt to adjusted EBITDA leverage ratio, which provides us ample flexibility.
In 2021, we invested $452 million to acquire Intuit central Biotics and adaptive vision to advance our solutions offerings in retail manufacturing and the warehouse.
In addition, we made $34 million of venture investments in five portfolio companies 15th.
$59 million of capital expenditures.
$257 million of net debt repayments and $57 million of share repurchases.
On slide eight we show the multiyear impact of transitory costs, primarily related to expedited freight due to supply chain bottlenecks caused by the pandemic as well as tariffs on China imports.
Our team is making heroic efforts to satisfy customer demand.
This includes dedicating substantial engineering resources to product Redesigns negotiating long term supply agreements with new and existing suppliers shifting virtually all transport to air promotion and expediting component parts and finished goods to meet customer commitments.
Global freight rates have reached record high cost per kilo for all modalities of delivery across our supply chain.
In Q4 compared to pre pandemic rates, we incurred incremental premium freight costs of $67 million, which is higher than we had anticipated in our prior outlook.
And $58 million higher than the prior year.
Partially offsetting this impact were $4 million of refunds of China import tariffs, which was $8 million left we received in the fourth quarter of 2020.
In total these transitory items had a combined unfavorable gross margin impact of $66 million year over year.
I will discuss our assumptions regarding the 2022 impact of transitory costs in a moment.
Let's now turn to our outlook.
We entered the year with a strong order backlog and healthy sales pipeline supported by broad based demand for our solutions.
Our expected sales growth of 1% to 3% for the first quarter has been capped by what we can deliver to our customers due to extended lead times and limited availability of component parts.
Our outlook assumes an approximately one percentage point additive impact from acquisitions and foreign currency changes.
We anticipate Q1, adjusted EBITDA margin to be approximately 20%.
Which assumes gross margin contraction from the prior year due to unfavorable sales mix and expected premium freight costs of $60 million.
Which translates to a 340 basis point unfavorable impact to the prior year period.
We also expect increased operating expenses as a percent of sales primarily due to our entry into multiple expansion markets since last spring and resuming in person events.
We believe total supply chain impacts, including transitory costs and product availability are peaking in Q1 with recent improvements in freight capacity and better visibility and supplier commitments to component supply into the second quarter.
non-GAAP diluted EPS is expected to be in the range of $3 70 to $4.
For the full year 2022, we expect adjusted.
Adjusted net sales to grow between 3% and 7%.
With the assumption that supply chain constraints steadily abate throughout the year.
This outlook assumes a net neutral impact from acquisitions and foreign currency changes.
We anticipate full year 2022, adjusted EBITDA margin between 23 and 24%.
Which assumes total transitory cost impacts, including premium freight expenses of approximately $140 million to $160 million.
This is slightly higher than the impact we realized in 2021.
We expect our free cash flow to be at least $900 million for the year.
Please reference additional modeling assumptions shown on slide nine.
With that I will turn the call back to Anders to discuss how we are advancing our enterprise asset intelligence vision and to provide an update on our served market opportunity and long term growth expectations.
Thank you Nathan.
I am encouraged by the strong demand across our business and the bold actions. Our teams are taking to navigate the supply chain challenges.
Slide 11 illustrates how we digitize and automate the frontline business by leveraging our industry, leading portfolio of products software and services.
By transforming workflows with our proven solutions that generate an attractive return on investment.
<unk> customers can effectively address their operational challenges, which have become increasingly complex through the pandemic.
Our innovative solutions empower their workforce to do their jobs more efficiently by navigating constant change in near real time, utilizing insights driven by advanced software capabilities, such as prescriptive analytics.
Telegent automation and machine vision.
We are raising our long term organic sales growth expectations, two 5% to 7% from our former expectation of 4% to 5%.
On slide 12, we provide a refreshed view of our served markets totaling approximately $30 billion, which are supported by mega trends, including the on demand economy asset visibility.
Mobility, and cloud computing and automation.
These trends have become increasingly important to our enterprise customers and we remain well positioned to meet their needs with our comprehensive solutions.
Today, the vast majority of zebra sales are in our core which remains vibrant and is now expected to grow 4% to 5%.
We have the broadest and deepest offering among the competition and believe that our continued focus and investment will advance our leadership position.
Our near Adjacencies provide ample opportunity to expand and have a generally higher growth profile than our core.
The most promising categories include.
RFID solutions for use cases that demand the highest level of workforce productivity and inventory accuracy.
Smart supplies, including dynamic temperature monitoring as.
As well as the opportunity to equip a broader set of frontline workers with our expanded offering of mobile computers.
Beyond our core and near Adjacencies or rapid growth expansion opportunities that are transforming workflows across the supply chain.
We have entered these areas through organic and inorganic investments over the past 18 months.
And they represent a low to mid single digit percentage of zebra sales.
In mid 2021, we launched several fixed industrial scanning and machine vision smart cameras.
We also acquired fetched robotics to give us the broadest portfolio of autonomous mobile robots in the industry.
We have also been building a compelling software suite that optimizes retail execution and demand planning, which includes reflects this workforce and task management.
<unk> prescriptive analytics workforce connect.
<unk> count and Intuit AI powered demand forecasting.
Collectively we are serving an approximately $6 billion market in these exciting expansion areas.
We are early on our journey and have the opportunity to extend our capabilities deeper into the areas of machine vision warehouse automation and workflow optimization software overtime.
Now turning to slide 13.
Business. This partner, we'd see breadth to help optimize their end to end workflows as they strive to meet the increasing demands from consumers.
I would like to highlight several recent key wins across our end markets.
Our global apparel retailer is deploying a <unk> solution or <unk> 32015 to two mobile computers, along with workforce connect voice collaboration software and our software solution that transforms mobile computers into workstations on demand.
We are enabling this retailer to improve associate productivity and communication in both front of store and distribution center applications eliminating.
Eliminating the need for walkie talkies and full desktop computer workstations.
Our mobile computers will also provide the benefit of stable next network connectivity.
Improved security features and battery management tools.
This competitive takeaway win from a major consumer device provider demonstrates our superior value proposition versus the competition.
In another recent win <unk> reflects this workforce management solution.
Enabled a U S based specialty retailer to optimized.
Scheduling for more than 25000 employees and provide enhanced self service reporting and analytics to support accountability and performance.
We have expanded our relationship with a leading international energy company to empower thousands of convenience store associates in the United Kingdom.
Workforce connect and reflects this workforce management applications on their <unk> mobile computers and tablets.
Our solution enables the store associates to automate their daily responsibilities maximizing productivity and streamlining task management and administration.
We have expanded our relationship with a European auto manufacturer augmenting thousands of their <unk> mobile computers with RFID readers to enhance quality controlled and production lines and allow secure employee system axis.
We continue to collaborate with this customer to pilot promising new solutions to further optimize their operations.
In healthcare, a large hospital system in the southern United States purchased TC 52, mobile computers, and our workforce connect software application to enable mobile access to the medical record systems as well as facilitate instant communication between nurses and other clinicians.
<unk> was selected over competing consumer device providers because of our reputation for comprehensive enterprise solutions.
In closing, we are working diligently to navigate through industrywide supply chain challenges, which limits our ability to fully satisfy strong customer demand in the near term.
That said the <unk>.
Pandemic has accelerated trends that have been driving growth in <unk>, a vibrant markets, including e-commerce adoption the need for real time track and trace across the supply chain and the shift to a more digital healthcare experience.
We continue to be very excited about our growth prospects.
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.
Ladies and gentlemen, with that we'll begin today's question and answer session.
I ask a question you May press Star and then one on your Touchtone telephone.
If you are using a sneaker finally do ask you. Please pick up the handset before pressing the keys.
So it's all your questions you May press star two.
At this time, we will pause momentarily to assemble the roster.
And our first question. This morning comes from Tommy Moll from Stephens. Please go ahead with your question.
And thanks for taking my questions.
Good morning, good morning.
I wanted to start with your revenue outlook. So looking at your first quarter guidance and the full year it looks like Youre expecting.
Step down sequentially in the first quarter.
And then revenue builds through the quarters for the rest of 2022.
Can you walk us through the assumptions in that cadence across the quarters and specifically if you could provide detail on what assumptions you have for the deal business that'd be helpful. Thank you.
Thanks, Tommy So if you if we entered the quarter.
As we said in our prepared remarks with a very strong backlog.
Good bookings momentum here early in the quarter the guide of 1% to 3% really reflects constrained supply not demand driven.
Driven by very specific in certain component shortages within our printing and Dcs business.
Without that we would expect to be at least as high as our full year guide unconstrained.
That said, we do we do see improved visibility into those components later in the quarter and into the early part of the second.
So we would expect a solid rebound in Q2 and then it gives us line of sight to our full year guide.
And on the full year guide of 3% to seven.
As we said in the prepared remarks that youre confident as ever about our business, we do anticipate improved supply chain constraints throughout the year.
It's obviously, a dynamic environment, but and we've secured commitment and we do see improved visibility here over the next few months.
And that would also assume increased growth in the last nine months of the year again due to the strong backlog demand along with the recent targeted price increases go into effect here at the end of the month.
Let's say all of that well.
While being somewhat cautious in our overall growth assumptions given the supply chain challenges.
And Nathan would you be able to share any embedded assumptions on the deal business I know, sometimes you have more or less visibility there. So I'm just curious what you've embedded in the outlook today.
So overall it doesn't particularly when you look at it from a EBITDA rate, we do have some favorable deal mix. So.
So a slightly higher percentage of run rate versus deal mix compared to 2021, but obviously that becomes a little bit harder to predict as we get into the second half of the year.
I could add some color as well this is Joe heel speaking.
You saw in Q4, we had a strong large deal flow and if we look at our backlogs and pipelines.
Also have continued strong large deal flow, we have no shortage of demand.
Thank you both.
If I could pivot to a higher level question here.
Anders I appreciate the update you provided on the long term outlook around revenue I'm.
I am curious for any additional context, you could give us on the thought process there and what went in to that revised outlook and then specifically on the double digit.
Expansion opportunities that you provided I noticed the ones on your slide or areas, where you've already entered either organically or inorganically are there any other <unk>.
Expansion opportunities that may not be on that slide where we could expect potential for continued M&A <unk> organic investment. Thank you.
First <unk>.
We raised our longer term growth outlook to 5% to 7% over a cycle versus the historical.
Number we had a 4% to 5% that we had in place since 2014, when we did the enterprise acquisition.
Over the last seven or eight years, we have over achieved that target and we've been more in line with 7%.
And we see our overall market as being very strong which will be served by some very strong secular trends that are helping to drive demand and as we helped to digitize and automate our customers' operations in their workflows.
And our competitive position remains very very strong and.
We think we have great opportunities in our core the core continues to perform very well, but also in our adjacencies and in our expansion markets.
You asked specifically about the expansion markets.
We include in there.
The only things that we have identified so far we have plans to or more than plants, where we have solutions that are in the markets.
So could it expand sure absolutely can expand but.
We looked at sizing the market too.
The solutions, we have today.
Type of applications that they.
Address so we're not going we're not including say the entire markets for these funds, but only the markets that we can address today. So as we continue to add functionality.
Possibly add new solutions.
That's total market served market Ken can expand.
We certainly see those as very attractive markets, we have a strong right to play and we have a differentiated value proposition like in fixed industrial scanning going robotics.
And in those markets, we expect to have a materially higher strong double digit growth rates versus our core and they will then augment the overall.
Growth rates, we have for the company.
And our next question comes from Andrew Buscaglia from Marin Berg. Please go ahead with your question.
Good morning, guys I wanted to ask a little bit more on.
On the margin outlook.
Near and long term so.
On the price side that you said you raised prices.
Do you have capacity to essentially raised again and then on the cost side are you if need be that is all.
And then on the cost side are you.
Everything is being shipped by afraid again for the most part of the year.
Alright, Alright bye Eric.
Are you assuming <unk> ships.
By Air not land.
Yes.
I'll start with the last question there if you look at from our assumptions, particularly in Q1, we are still assuming that.
We're almost shipping, particularly in printing and exclusively via air versus Ocean. Although we do expect that too to shift as we move throughout the year, so getting back to more normalized levels in the second half.
So that's that's assumed in the full year guide from a margin rate perspective now.
And when you look at the the price increases, particularly the one we did here this month that ranged from zero to 8%.
Again, it was not a general increase similar to what we did in September I was very specific to the product family region based.
Based on our competitive position as well as the cost increases we're seeing in those respective product families and that represents a little less than a point of sales growth contribution for the year.
And it is something we'll always continue to assess.
No.
Look at it and if we need to increase prices again based on the competitive positioning <unk>.
Inflationary environment, we will do so.
Yes, okay.
Okay.
And then on the long term guidance slide.
C Corp that core market first off can you update us on what you think your market share is in that.
Believe it close to 50% last time, you gave us that update and then.
I'm surprised that that's still a 4% to 5% CAGR just given the world sort of changed.
And the last couple of years.
Yes, just wondering.
How youre thinking about that.
Our market share is very strong we peg our overall market share.
At the mid 40% for our core where mobile computer would be a little bit higher printing is thereabout, so maybe a little higher and lower for scanning.
But the overall market share we pegged around mid 40%.
And the growth rate is based on independent market research for those markets as well as.
And expectation that with the focus and investments we are doing we will be able to continue to gain some share although not quite at the same pace as we have for the last several years.
Okay.
Alright, Thank you guys.
And our next question comes from Jim Ricchiuti from Needham <unk> Company. Please go ahead with your question.
Good morning.
That RFID.
Yes, it's been quite a bit of activity in that market.
Early high profile use cases that had been publicized recently and I'm wondering does this represent an incremental growth opportunity or does it perhaps shift.
Some revenues from some of the conventional business your core business and I'm wondering if you could.
Number one we talk about the opportunity and if you can say.
I'm not sure you've ever really size that portion of the business.
Can you elaborate on that perhaps thank you.
Yes, we can.
RFID in the adjacent markets for us.
<unk> been in the <unk> space for a long time. So it is very much a.
Close adjacency to our core where we have strong right to play in.
Our solutions are very much tied together I would think of it as not a.
It's not a.
Or tape type thing that customers either by RFID order by our regular solutions.
Our RFID solution, both on top of our traditional products. So if you want to say Trenton in code and RFID label. It is one of our traditional labels printers within RFID encoder attached to it and similarly, if you want to.
Read it.
The label that as an attachment to sled or something like that on our mobile computers. So it is an incremental part of our core business, but it's not the supplement or it's a supplement but not a substitute for a quarter.
And the market continues to grow very nicely.
We've seen apparel retail probably be.
The main driver so far we're looking at.
In store inventory accuracy.
One of the big drivers.
It's been spreading across more different categories within retail, but also we see now moving into other industries manufacturing being able to attract.
Components of sub assemblies through our supply chain or in healthcare to be able to do a number of attractive use cases there also.
Yeah, maybe I'll add something.
I would say that there is definitely an incremental piece to it.
But theres also some substitution I'll give you two quick examples.
In apparel retail.
Most of the supply chain has replaced.
Barcoding with RFID now at least in the more advanced retailers and that's probably a substitution.
Sir.
They are using that now throughout their operations as they would have before bar codes on the other hand, we see a lot of applications for example, pallets.
Palettes have been the past hardly ever been tracked but with RFID, we can now track them.
And so putting RFID labels on pallets as a great way to.
And sure much greater efficiency logistics, which is surprisingly a big problem.
That's an indication that the incremental make sure that we do see.
So if we take some comments recently from UBS, where they talk about.
Some some smart logistics centers, where they are replacing I think they said something like $20 million potentially.
Using RFID to replace 20 million manual scan simply with traditional barcode. It sounds like you still see a lot of opportunity even if there is some impact on our core business.
Yes, we see that this asset.
A nice addition to the business because one.
They.
They would have to augment.
Either printing or mobile computers, with RFID capabilities or they could also of course use overhead RFID readers, which will be in new new business for us.
So we see that as a very attractive.
Adjacent growth opportunity for zebra.
Got it thank you.
Yes.
Our next question comes from meta Marshall from Morgan Stanley . Please go ahead with your question.
Hi team. This is Eric on for me to thanks for taking our questions and congrats on navigating through another tough quarter.
And outperforming our expectations I guess just.
Maybe to start off on the high level growth target you put out do you think every vertical has the potential to be a 5% to 7% growth.
Vertical across your end markets or is that more skewed to certain certain customer basis.
We expect broad based growth across basically all the entire business, so virtu verticals geographies and product lines specific to verticals that highlight healthcare and manufacturing.
Two high growth opportunities for us.
They have high need for to digitize their operations and workflows and say today there is a.
Under penetration relative under penetration of our type of technologies within those verticals.
Got it that's helpful. And then maybe if I could also ask on just some of the investments, we're making from kind of an operating leverage perspective.
You've been pretty consistent in delivering operating leverage, but if you were to more aggressively grow into some of your expansion areas could there be a situation where your top line growth is higher but earnings growth more mirrors topline growth or do you still think even through those investments you would be able to to kind of.
Joe.
Your your profitability ahead of revenue.
And so as you mentioned, we've had a long track record of driving profitable growth.
And I'd say.
EBITDA level EBITDA margin, we believe they can go higher.
We haven't any levers to do that if you look at our full year guide here of.
23% to 24% in the midpoint, that's two points higher than we were in 2019, while expanding into these new expansion markets.
And those expansion markets come with higher gross margin.
And the team is continuing to focus on operational efficiency and Oh by the way growing at two point, despite the transitory cost increases so.
Yes, it's definitely still an objective for the company and something we can continue to do.
Over the long term.
Got it thank you.
And our next question comes from key housing from Northcoast Research. Please go ahead with your question.
Hey, guys, Hey, Joe just kind of unpack.
Information on the price increases between September here and in January and compare that to your annual growth rates. I mean, as you think about that 3%, 3% to 7% annual growth how much of that is coming from I guess, new unit growth versus just the pricing increase that you guys been able to roll forward.
Yes Nathan.
Do you have that.
Many of that I can add something to it.
Yeah, So Keith so I said earlier.
Price increases went into effect here in at the end of this quarter is a little less than a point of growth contribution for the year.
And then the remainder of that would be driven by the strong backlog and the demand for the products. So.
Relatively meaningful but a relatively small part of the.
The overall growth for the year on John anything you want to add.
Did that answer the question Keith.
Yes.
I'm trying to combine the February increase you guys come through at the end of the month with the ones that you pass through September if you take both of those combined what does it do.
With that yeah, maybe Keith you might be a little over a point the one here in February is larger in size.
And you just have both both those slightly impacted by timing in terms of it went into effect in terms of their full year full year impact on 2022, okay.
Secondly, your question in terms of the supply chain, we're hearing different comments in terms of the supply chain because you've got the raw materials issue. Then you have logistics it sounds like from your guidance here you expect both of those to improve quite a bit before the end of the year if not totally abate.
And I can appreciate the efforts youre doing in terms of their design and.
It's getting secondary sources, but is there what do you think you can point to that gives you the confidence that things will be improve before the end of the year for both these items.
Yes, firstly as context, I'd say that we we provided a record profitable results for the full year of 2021 and record Q4.
And we were able to do that in a very challenging supply chain environment.
This situation is clearly very volatile and omicron as an example has impacted the pace of recovery across all the verticals, we served and globally.
But the demand environment.
It is very strong and has ramped very fast over the past year or so.
We continue to put our customers first so we prioritize making sure we can meet customer delivery times and customer commitments to the extent, we can now airtime somebody have not been able to meet that traditional lead times the way, we would like but.
That's all been supply chain related.
We're working very hard with our partners and our customers to minimize any impact on our customers' business or our partners business in this area and we do believe that the.
Challenges are peaking and we anticipate both freight and component availability to to improve as we go through the year here.
Specifically on the components side I would say that.
The.
The impact on availability and pricing of the <unk>.
<unk> W source Darius so it's.
Some are much more impacted than others. So it's certainly a very dynamic environment in that way.
As you said, we've been working very well.
All angles to make sure there'll be secure as much of.
<unk>.
Supply as it can.
Yes.
We have worked on building more resiliency overall into our supply chain, we have been negotiating long term supply agreements with both new and existing suppliers.
We are working with our suppliers to ensure we get the <unk>.
Their share of allocations and we've dedicated a substantial part of our engineering organization to two product redesign to basically design out long lead time parts.
As we look into Q2 and the rest of the year, though we do have better visibility and better supply commitments to some of these critical components as we enter Q2, so thats part of what gives us confidence for the full year and so we do expect some gradual improvements as we go through the year.
Thank you those head on.
Freight perspective.
Our air and ocean rates towards the end of the fourth quarter were five to X higher than what they were pre pandemic.
As we've said.
<unk> been adding both component parts finished goods and shipping almost exclusively all of our printing.
Air versus ocean, but rates are beginning to recover from the peak in December still significantly higher than even the first half last year.
Definitely from the beginning of the pre pandemic and will need some time to get print back on the ocean.
And I think we still believe that these are largely transitory.
But the world has changed and we need to wait and see how the landscape settles to the extent that it.
We will go all the way back down to zero.
So that will have to wait and see how that plays out and did you get that you asked about non semiconductor shortages also.
I didn't but youre welcome to answer that one as well.
Yeah.
Yes.
He has said there.
Yes.
Some inflationary environment across all the commodities, but we would not have been.
Now to the extent that we will make that a talking point in our earnings calls.
Werent for the semiconductor side.
Great. Thanks, Good luck guys.
Thank you.
Our next questioner comes for our question comes from Damian Karas from UBS. Please go ahead with your question.
Hey, good morning, everyone.
Good morning, good to ask you.
Good morning Andre.
I wanted to ask you guys.
If you could maybe give us a sense on where you think you are for the core business.
In terms of.
The timing of the replacement cycle I know that.
Those devices are typically.
We've recycled.
Five six years or so.
But just thinking about the.
The really strong year, you had last year.
Looks like you're expecting another positive year of growth.
In 'twenty two.
How should we think about the five 7% growth rate kind of when we get past this year thinking about.
The demand you've seen in weather.
You need to see a step down.
First or whether that 5% to 7% is kind of sustainable from here.
Yes, so first the.
5% to 7% growth rate is meant to be through a cycle. So it will be some.
Some years will be stronger some will be maybe a little weaker certainly been that case, if you look at.
The past seven years since we had the 4% to 5% rate, but I don't see any reason why from a demand perspective.
There will be any any kind of step downs in the early part of this.
The cycle here.
See very strong demand environment and.
The refresh of our product client summit that we that has so that happens to mobile computing to scanning and printing to all of our products.
Mostly about it from the from our mobile computing perspective, where Android.
Android has.
First just had driven a an acceleration of refresh rates because there's so much innovation going into the Android platform. So.
Deployments or products that are deployed say five years back has a hard time now to support the most recent Android versions or all the applications that our customers want to put on the devices. So we've seen a.
Shorter refresh cycle for Android versus the traditional Microsoft devices that we had earlier.
And thats all baked into our assumptions for this year.
But its we are certainly seeing many of our large deployments that happen.
15, 16, or even 2017 that are now looking to.
Refresh and or have already refreshed and are in the process of refreshing and I know Joe If you had any further color.
Okay.
Yeah, I was going to give you. An example, damian so in 2015, we closed the largest deal at that time and zebras history in mobile computing, which was a postal service in Europe .
With the first.
The purchase of TC 70 at that time.
And they have just refreshed their mobile computers last year. So it was about a six year cycle for them and you can see that.
Others have followed suit and as Andrew said the replacement cycles have gotten shorter so going from five to six years.
Closer to the three to four year period in many cases.
Okay.
Okay, Great that's really helpful.
I appreciate all the detail around here.
<unk> addressable market.
And the long term growth rates I'm, just curious on the margin front what.
That means for your for your profile.
Thank the software side, obviously, a higher gross margin relative to your business today, but.
Thinking about those expansion areas.
Yes.
What does it mean for you guys margin kind of near term as those businesses grow and longer term as well.
Hey, Damian.
I mentioned, a little bit earlier when it comes to the question from Eric, but we didn't service explicit target on EBITDA margin. Although we do believe it can continue to scale and grow.
Over the cycle and as you pointed out many many levers to do that including all these expansion markets typically come with higher higher gross margin and that will come through in EBITDA as we scale those those respective businesses.
As well as turn through.
Some of the transitory costs that are currently within the P&L.
I think ultimately our goal is to continue to drive double double digit EPS growth through all the levers we have available to us.
And our next question comes from Brian Drab from William Blair. Please go ahead with your question.
Hey, Thanks for taking my questions.
I'm bouncing between two calls at the moment.
Miss a little bit of a Q&A, so sorry, if I repeat something but the post office project.
The larger Postop I know Theres, a lot of post office projects with the large one that was.
<unk> completed here at the end of 'twenty one.
What sort of headwind is that.
Tier overall sales growth rate in 'twenty, two and I know, you're replacing that with a lot of business.
It would be great. If you could make any comment on the large project.
Yeah. So the initial deployment for USPS, we did complete.
And late in the third quarter early fourth quarter, but our teams have continued to remain highly engaged with with.
With the post office, we have a healthy pipeline of opportunities here for 2022, and our current assumption within our 2022 guidance.
You will sell less.
So we are cycling through that but.
But again have many other opportunities as Joe mentioned earlier around other large deals in the pipeline.
Just like we do any other year.
To offset that and continue to grow.
Okay. So it's not.
Not material enough that you would tell me that without without this difficult comparison that you would would've forecasted growth of a couple of points higher for 'twenty two.
This one big project.
That's right again every year, we have a large deployment and rollouts and again we have.
New and other opportunities to offset that to reach the full year guidance for 'twenty two.
Okay, Okay and then.
I'm just curious in the <unk>.
Core.
Part of your business that you are forecasting long term growth of 4% to 5% for.
How does that breakdown.
Days between AI and Evs.
Okay.
The growth between ASE and <unk> is actually quite similar.
It's materially different.
We'd like to have a slightly higher growth rate, but not.
Not materially so.
Our next question comes from Rob Mason from Baird. Please go ahead with your question.
Yes, good morning.
<unk> been covered already but.
My question Anders.
Just to go to some of these expanded areas in your introduction this year of fixed industrial.
Scanning and machine vision I'm, just curious if you could point to any.
Kind of key progress points on those products.
Only in the marketplace, maybe half of the year.
But key progress points around channel development.
Marissa receptivity and in what should be the expectations for that alright.
<unk>.
Those areas.
Specifically fixed industrial scanning and also the <unk> business.
How should we think about those in 'twenty two.
Yes, no happy to do that and I'll ask Joe to also then provide some color estimate my comments here.
The expansion of our cities that we feel today that we can address about $6 billion of opportunity there.
The fixed industrial scanning machine vision partners about $2 billion.
Warehouse.
Autonomous mobile robots is approaching a $1 billion in.
Our software solutions are about $3 billion. So that gives you kind of the overall scope of that.
We are very excited about all three of these we have good good traction good customer.
Receptivity.
On the fixed industrial scanning machine vision side, we have some very attractive wins already.
And we continue to add functionality. So we can address more and more of the market.
One, particularly attractive when I think from a for US last last year or in Q. I think it was Q4 was in automotive where we could read it was a bake off and we.
Showed very well and our ability to read.
Some some DPA DPM type of the.
Markings.
What was better than the competition and we were selected based on that.
But I'll say heroes at the overall value proposition, we have in fixed industrial scanning around the ease of use and the east.
Ease of upgrades using software to upgrade rather than having to change your cameras are very well received.
And we are also working hard on.
We have established a new.
Fixed industrial machine vision track in our partner connect program. So we want to make sure we recruit partners to help us scale the business in a very cost effective way and get better reached and we can do ourselves in that timeframe and we've always been very partner centric. So we think this is a great way to both provide new opportunities.
Our existing partners as well as to recruit.
New partners from from that industry.
Yes, I can add a little bit maybe just to underline that partner point, we've made excellent progress in recruiting partners. We set ourselves a goal both in the U S and Europe to recruit the Premier partners that deployed the solution and that's very important because these are complex solution set up in the manufacturing and warehouse <unk>.
We've made excellent progress in doing that and the reason that we've been able to do that is what Andrew is called ease of use and that's particularly important for partners because they want to set up new solutions quickly and with few resources and Thats, where our solutions are different from the rest of the market is that you can do that much faster with our solutions and thats.
Whats attracting many partners. So we are very pleased with that.
On the <unk> business I think.
We have the.
The big milestone that I hope you have taken note of is that we've expanded from conveyance robot. So robots it move things from point a to b in the warehouse.
<unk>.
Fulfillment.
Robots, which are ones that are used to support pickers.
E Commerce fulfillment activities that's.
A large and very fast growing part of the market as you can easily imagine and we've had a.
Outstanding win here with one of the Big E Commerce players.
Here in the fourth quarter already which of course is going to be a very important reference for us. So very pleased with the progress in both machine vision and the autonomous mobile robot.
Excellent and then Joe can add.
Go ahead, Andrew I, just wanted to add on there.
<unk> side.
We have a very differentiated value proposition.
The warehouse automation space, where.
A robot competitors they worked very hard on optimizing the movement in the use of the robot and.
People, who are more on the equipment side would try to optimize.
The movement of.
Of workers since we have both we are trying to optimize the overall workflow and coordinate the movement of robust and frontline workers to drive the most productivity enhancements and I think that that value proposition resonates very well with customers.
I see.
And just as a follow up Joe to go back to the <unk>.
Progress you've made recruiting partners.
I'm just curious if you.
Have a percentage that are existing.
Zebra partners that have added and expanded.
Versus I guess entirely new partners.
We do so we have a good number of our existing partners.
Our body.
As.
<unk> been active in the machine vision space.
I would tell you, though that the majority of partners that we expect will be new partners that are specialized and highly proficient in this area as their exclusive were dominant focus but we do have a good number that we're starting with our bank.
Yeah.
Our next question comes from Paul Chung from Jpmorgan. Please go ahead with your question.
Hi, Thanks for taking my question, so nice record free cash flow for the year you have some.
Nice flexibility to continue M&A.
You've got some low net leverage level. So should we expect kind of a similar pace of acquisitions, maybe more tilted towards.
On the software side, and then what kind of leverage levels are you comfortable with.
Yes, I'll start and then Dave can talk about the leverage levels here, but first one on M&A.
We view M&A as a top priority for us and we're very excited about the outlook for for the business and we see M&A as a vector for growth.
We're not looking to do M&A for the sake of M&A say, but this is to help accelerate our enterprise asset intelligence vision. So think of fish was a great example of how we could accelerate our outreach and expand our enterprise asset intelligence vision here into the warehouse automation space.
So you can expect that we can look we're looking at some targeted bolt on acquisitions as well as.
High growth acquisitions that truly advanced our vision.
And we do see opportunities in.
Digitizing and automating workflows that is kind of the sweet spot for what we're looking forward.
Yes.
We noted our balance sheet is strong so we can support a certain number of acquisitions.
I think just to add we ended that.
<unk> five times net debt to EBITDA ratio and get comfortable with the overall debt levels.
And that gives a lot of.
Opportunity and flexibility to address the M&A market as Anders mentioned.
And then your views on share buybacks is this more kind of offset some some comp levels or what's your view there.
That's right obviously, the first priority is investment in the business both.
Organically and Inorganically, but.
We still believe share repurchases as a good way to return capital to shareholders. We were active in the fourth quarter and we've been active to date here in the first quarter.
With share repurchases.
And ladies and gentlemen, our final question. This morning comes from Brian Lau from Wolfe Research. Please go ahead with your question.
Hey, good morning, everybody and thanks for squeezing me in here and you gave a lot of good examples of some wins this quarter on both the hardware side and then the software offerings that reflects this and workforce management just curious about the go to market strategy. There how you're bundling those when you are approaching customers are there two or three sets of kind of sales teams or is it more kind of holistic.
Sales approach thanks.
Yes.
And here since Joe as Joe's organizational that Joe will provide some color here also but yes, we have we put a lot of thought into how we go to market and how we ramp these new solutions.
We have two objectives here one we wanted to leverage the broader relationships that we have with our existing customers. While we also need to have real focus on these newer solutions.
Sorry.
Smaller today than our large deal.
More established core solution. So we want the team that are very dedicated very focused on them and understand those use cases and those technology is very well. So if you take out our.
Our software solutions as an example.
Have a dedicated software sales team.
That are kind of owning the software opportunities, but they work very much through our traditional.
Account managers to get introduced it accounts to get help in navigating those and understanding what the issues are and so forth. So it is a sales overlay strategy for most of these opportunities, but very much leveraging the.
Our traditional account managers and Joe do you want to add anything to that.
Yes.
I would add.
If you have Andrew.
Andrew has described the objective well right we have.
A very strong presence right. If you think about the fact that 94 of the fortune 100 in the U S are now.
Zebra customers.
<unk> account managers on those and we want to leverage those.
And then on the other hand, we have.
Specialist that need to bring specialized expertise, but also a special understanding of the specific personas that are making the purchases which would be for example, human resources purchasers of store operations purchasers. These are these overlay organization that Andrew called the Mic.
We also refer to them our specialist sales organization. These are meaningful organizations, which have both.
Sales people they have.
Application engineers are consultants.
They have business development in them and they have channel management inbound. So these are becoming larger organizations.
That are dedicated to driving that particular offering in concert with the account managers that are now maintaining the overall relationship for us across the multitude of offerings that we have.
And ladies and gentlemen, with that we'll conclude today's question and answer session I would like to turn the floor back over to Mr. Gustafsson for any closing remarks.
Thank you so just to wrap up.
Our primary focus continues to be the health and safety of those on the frontline and I would like to thank our employees and partners for their extraordinary efforts to serve customers and deliver record 2021 results.
Charlotte challenging supply chain environment.
We are optimistic that we are now seeing the peak of these challenges and we are working hard to minimize these impacts.
So thank you and have a great day everyone.
Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending you may now disconnect your lines.