Q4 2022 Zebra Technologies Corp Earnings Call
Good day and welcome to the fourth quarter of 2022.
All of these earnings conference call.
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I would now like to turn the conference over to Mike Steele, Vice President Investor Relations. Please go ahead, 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 that 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.
You can find reconciliations at the end of this 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, Bill Burns, our chief product and solutions Officer.
And Nathan Winters, our Chief Financial Officer.
Anders will begin with our fourth quarter highlights and an update on the previously announced CEO transition than.
Nathan will provide additional detail on the Q4 results and discuss our 2023 outlook.
Bill will conclude with progress made on advancing our enterprise asset intelligence vision.
Following the prepared remarks, Joe heel, our chief revenue officer will join US as we take your questions now.
Now, let's turn to slide four as I hand, it over to Anders.
Thank you Mike.
Good morning, and thank you for joining us.
It was a strong finish to a challenging year with sales and profitability near the high end of our outlook.
For the quarter, we realized sales growth of approximately 4%.
And adjusted EBITDA margin of 22, 5%, an 80 basis point increase year over year.
non-GAAP diluted earnings per share of $4 75.
A 5% increase from the prior year.
And strong free cash flow.
Our team recovered from distribution challenges in North America to drive record sales volumes, which more than offset softer sales in our EMEA region.
From a solutions offering perspective.
<unk> data capture tablets, and RFID were bright spots more than offsetting lower sales of mobile computers.
Although we continue to see cautious spending behavior with certain large customers.
Demand was generally has generally remained solid with strength in small to mid sized orders.
We secured a number of exciting wins, helping to drive a strong year end and momentum into 2023.
These wins included a large postal customer in Asia, we expect to improve productivity and efficiency by equipping 70000 mail carriers with our mobile computing solutions.
A British grocer expects to improve their shopper experience and drive store efficiencies by deploying 80000 personal shopper devices.
And the European based auto manufacturer plans to enable process improvement and quality assurance along all stages of the production line with 30000 <unk> mobile computers.
From a profitability perspective, we.
We expanded EBITDA margin and increased EPS by scaling operating expenses and drove our strongest cash flow quarter of the year.
As you are aware in December we announced that Bill Burns will succeed me as CEO effective March one.
Bill is the ideal leader to continue to advance our strategy and has the full support of our board and executive team.
Throughout his career Bill has maintained a strong focus on culture talent and innovation.
He has been a key member of <unk> executive leadership team since joining us more than seven years ago to lead and integrate the enterprise business, which we had just acquired at the time.
Since the announcement.
Bill and I have been busy meeting with stakeholders discussing the transition and <unk> bright future.
I've also been taking this opportunity to thank our employees suppliers and partners for their support and collaboration through the years as we transformed our business.
I look forward to continuing to ensure a smooth transition as I assumed the role of executive chair.
I will now turn the call over to Nathan to review, our Q4 financial results in more detail and discuss our 2023 outlook.
Thank you Anders let's start with the P&L on slide seven in.
In Q4, net sales increased two 5%, including the impact of currency and acquisitions and three 9% on an organic basis.
Our asset intelligence and tracking segment increased 13, 5% driven by double digit growth in printing.
Enterprise visibility <unk> mobility segment sales were approximately flat with mixed performance among our offerings.
We realized particularly strong growth in data capture solutions, including RFID as well as rugged tablets.
Mobile computing sales declined primarily due to challenging prior year compares particularly in EMEA.
We also drove growth across services and software with strong service attach rates.
Performance was mixed across our regions North America sales increased 11% helped by the recovery from supply chain challenges and strength in data capture and printing.
EMEA sales declined 7%, primarily due to the five point impact of our suspension of sales into Russia in March as well as lower sales to large customers in northern Europe .
Asia Pacific sales grew 3% with strength in Japan and growth in China. Despite COVID-19 challenges late in the quarter.
In Latin America sales increased 7% with strong growth in Brazil and Mexico.
Adjusted gross margin decreased 10 basis points to 45, 6% due to FX offset by lower premium supply chain costs adjusted.
Operating expenses were lower improving by 100 basis points as a percent of sales primarily due to lower incentive compensation and effective cost management.
Fourth quart fourth quarter adjusted EBITDA margin was 22, 5%.
An 80 basis point increase driven by operating expense scaling.
non-GAAP earnings per diluted share was $4 75.
A four 6% year over year increase.
Turning now to the balance sheet and cash flow highlights on slide eight.
In 2022, we generated $413 million of free cash flow.
Although Q4 was strong the full year was significantly lower than last year, primarily due to a higher use of working capital due to elevated inventory.
Higher incentive compensation payments, given our exceptional 2021 performance.
And $135 million of previously announced settlement payments, which are scheduled to conclude in Q1 of 2024.
In 2022, we invested approximately $880 million and the matrix imaging acquisition to expand our machine vision solutions offerings.
We made $751 million of share repurchases and invested $12 million in venture investments.
We ended the year at a comfortable one six times net debt to adjusted EBITDA leverage ratio and with more than $1 $4 billion of capacity on our revolving credit facility.
On slide nine we highlight premium supply chain costs, which have continued to improve from peak levels.
The actions, we have taken to redesign products targeted price increases as well as improving freight rates and capacity have enabled us to reduce component purchases on the spot market and reduce the freight cost impact.
Additionally, we have increased the volume of printer shipments on ocean from here, which will contribute to reduce freight costs through 2023.
In Q4, we incurred premium supply chain cost of $25 million as compared to the pre pandemic baseline.
Which was favorable to what we had anticipated in our prior outlook and.
And $38 million lower than the prior year.
We are expecting these premium supply chain costs to steadily decline in 2023.
Let's now turn to our outlook.
Customer demand and our order pipeline remains healthy yet we continue to see some softening of demand and elongated sales cycles that we referenced last quarter due to the uncertain macro environment.
We are taking a cautious approach to our sales outlook and expense management, while working to right size our inventory levels.
For the first quarter, our sales are expected to decline between four 1% compared to the prior year.
Our outlook assumes a three point negative impact from foreign currency changes.
And the 150 basis point additive impact from recent acquisitions.
This translates to expectations of negative 1% organic growth.
Which includes a one point headwind from sales into Russia last year.
We anticipate Q1, adjusted EBITDA margin to be approximately 21%.
Driven by higher gross margin from improving supply chain costs, despite significant FX headwinds.
We expect premium supply chain costs to be approximately $20 million in Q1, and nearly $50 million year over year reduction.
non-GAAP diluted EPS is expected to be in the range of $3 70 to $4.
For the full year 2023, we anticipate net sales to be in the range of a 3% decline and 1% growth.
This outlook assumes a 50 basis point negative impact from foreign currency changes and acquisitions as.
As FX headwinds moderate throughout the year.
We anticipate full year, adjusted EBITDA margin between 22% and 23%.
We expect premium supply chain costs of approximately $50 million for the year with continued improvement in product availability.
We are also proactively managed operating expenses as evidenced by Opex scaling in Q4 and recent targeted restructuring actions as we enter 2023, which enabled us to preserve strategic investments in the business.
We expect our free cash flow to be at least $650 million for the year, which reflects the benefit of working down elevated inventory levels through the year higher cash taxes.
And $180 million, a previously announced settlement payments.
Please reference additional modeling assumptions shown on slide 10.
Note that the cost of borrowing is expected to be approximately 5% to 6% this year and our non-GAAP tax rate is expected to be approximately 19% due to the United Kingdom corporate tax rate increase.
With that I will turn the call to bill to discuss how we are advancing our enterprise asset intelligence vision.
Thank you Nathan before I talk about the progress we are making on our vision I would like to take a moment to thank Anders for his exceptional leadership with zero over the last 15 years.
Through disciplined organic investment strategic acquisitions. He has led the transformation of zebra.
These sponsored an innovative and authentic culture.
Received many awards recognizing zebra as a great place to work.
Also under his leadership shareholder value creation has significantly exceeded broader market benchmarks.
I'm excited to build upon Andrew's legacy by continuing to advance our enterprise asset intelligence vision.
Slide 12 illustrates how we digitize and automate the frontline of 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 the linkage increasingly complex operational challenges.
Our innovative solutions and power of the workforce to do their jobs more effectively by navigating constant change in a near real time utilizing insights driven by our advanced software capabilities, such as prescriptive analytics and intelligent automation.
As I focus on moving Zebra forward, we will collaborate closely with customers and partners to continue to elevate zebra as a premier solutions provider and work to attract develop and retain top global talent to drive innovation.
Slide 13 summarizes our served market opportunities and long term growth profile.
The fundamental drivers of our business remain intact mega trends, including the on demand economy.
Asset visibility mobility, and cloud computing and intelligent automation provides secular tailwind for our business.
I am proud of the progress, we're making and elevating our strategic relationship with our customers. We continue to extend our leadership position in our core business and are gaining traction in adjacent and expansion markets, which have higher growth profiles.
Anderson Nathan highlighted RFID is a bright spot, where we have a comprehensive solutions offering for a wide range of use cases.
Our momentum continues as we were just awarded a record RFID win last week.
Another highlight is our market share gains in rugged tablets as a result of our focused investments.
Overall, I believe we are well positioned to deliver 5% to 7% organic growth over a cycle.
With an increasing attractive margin profile as we drive continued traction across our core adjacent and expansion markets.
Now, we turn to slide 14.
<unk> partner with zebra to optimize their end to end workflows as they strive to meet an increasing demands of consumers across a variety of vertical end markets.
As you can see on the slide we address a wide range of workflows and use cases across retail and E Commerce transportation logistics manufacturing health care and other markets.
Andrew has highlighted a few recent wins across these markets.
Our breadth of business challenges, we are addressing has been expanding through our investment in new offerings and markets, enabling us to further penetrate customer accounts.
For example, leveraging our existing relationships enabled us to secure autonomous mobile robot and machine vision wins, with our customers and manufacturing and warehouse use cases.
We see a tremendous opportunity to continue to elevate and grow our customer relationships through our expanded solutions offerings.
On slide 15, we highlight how zebra was able to showcase how our solutions positively impact retail store operations to more than 3300 customers at the National Retail Federation trade show last month at.
At the event, we brought the modern store concept to life by demonstrating how our portfolio of solutions empower retailers to better engage associates optimized inventory and elevate the customer experience.
Our booth featured representatives from two prominent retailers, who share how our solutions have improved their operational challenges.
Lowe's home improvement as realized the synergies of combining zebras mobile printers mobile computers, and our workflow optimization software solutions that improve the customer experience increase efficiency.
And reduce friction in their workflows.
Zebra solutions have resulted in increased customer satisfaction by improving inventory accuracy and streamlining the buy online pickup in store experience as well as over 1 million hours of annualized labor savings and reduce label ways.
Vera Bradley is improved associate engagement and retention by prioritizing workloads through our task and workforce management software solutions.
By leveraging zebras mobile devices and software solutions.
They can now aligned the right test to the right associate in real time, and increase employee satisfaction by reducing friction and schedule.
Additionally, insights in our software solutions elevate the customer experience for Vera Bradley by empowering frontline associates with better information, including visibility of product inventory and pricing and.
In closing I look forward to working with our team to advance our enterprise asset intelligence vision by fostering an innovation innovative culture, collaborating with our customers and partners and delivering profitable growth across our core adjacent expansion markets now I will hand, it back to Mike.
Thanks, Bill, we'll 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.
Thank you we will now begin the question and answer session.
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Today's first question comes from Damian Karas with UBS. Please go ahead.
Hey, good morning, everyone and congrats on the quarter.
Thank you. Thank you.
So my first question is related to your sales outlook and in particular, we've heard some of your competitors and even one of your major distribution partners recently talking about <unk>.
Inventory channel Destocking, taking place.
Just curious if you guys are seeing.
Seeing the negative impact from that at all and to what extent that factor.
<unk> factored into your guidance for the year.
Yes, starting on the on the channel inventory side.
Sure.
Global channel inventory levels are healthy for us and we see.
Solid sell through signals and.
Particularly that's true for our run rate business.
Inventory levels have rebounded in 2020 244 are in our channels, but you got to remember that at the end of 2021.
The industry was going through some very substantial.
<unk>.
Supply chain constraints and the channel is nearly stocked out so in 2022 that rebounded to some degree but more back to normal levels, but.
Inventory levels in absolute dollar terms in our channel compare to say pre pandemic is up but if you normalize that around based on hand inventory, which is how we really measure the health of the inventory in the channel that is actually but only up by a couple of days compared to three.
Pre pandemic.
Got it that makes sense.
And then switching gears to the.
Margin trajectory here.
If we kind of look at the low end of that adjusted EBITDA guidance.
Yes, it doesn't suggest much improvement.
Especially when you kind of look at the notable step down you guys are expecting in this premium supply chain costs.
I was wondering if you could maybe just give a sense on how youre thinking about that.
Margin guidance range.
And.
As it relates to that $50 million.
Premium costs are you basically assuming that that's more or less eliminated by the third quarter.
Yeah. So David this is Nathan if you look at our guide for the year and EBITDA of 22 to 'twenty three.
It's a point higher than we were in 2022 and as you mentioned the primary driver is the supply chain improvements, which is about two points of improvement, but that's being offset by a point of FX.
For the year, particularly here in the first half on the comps from a from where the FX what the rate was a year ago in the Euro and we also have pricing actions. We've taken throughout the year that are flowing through and that's largely offsetting material and labor costs predicted for the year. So that's that's how I'd frame up we're definitely seeing the flow through from the improvement in premium.
Supply chain costs and lower freight rates.
FX has the real headwind thats offsetting it.
Thank you and our next question today comes from Jim Ricchiuti of Needham and company. Please go ahead.
Alright, thank you.
I'm wondering if you could provide.
With your general outlook for the for the projects business in 'twenty three.
Seeing any changes you've expressed some.
Caution that youre seeing.
Some customers, but what's your outlook for that part of the business.
Yes, Joe I would say this is bill.
I'd say overall that from a macro environment, we're seeing.
Really mixed signals as you said, we are seeing on on one hand, really elongated sales cycles, and some softening of demand, especially from some select large customers.
That's resulting in some delays and push outs, we saw that in first quarter or sorry in the fourth quarter.
And it's reflected in our first quarter and 2023 outlook.
On the other hand, we're really seeing that.
We've got strong backlog and our pipeline is healthy for projects for 2023.
Our run rate sales in fourth quarter were strong and we're continuing to see that in Q1 and as we just talked about our global inventory levels are healthy. So it's really mixed signals out there thats keeping us cautious.
Overall, and I think that.
Our view of that is that we're going to continue to monitor the environment in 2023, we're going to take our agile approach to really managing expenses.
Focus on profit margin expansion, but at the same time really preserving the.
Strategic investments, we're making throughout the year. So I think overall, we're highly confident our solutions offering and our ability to continue to take share in 2023, but it just makes sense for us to be cautious given the macro uncertainty that's out there today.
Kevin This is Joe heel, maybe one or two additional data points on this as we entered the year our pipeline of large projects was about the same as it was the year before so quite strong and we're quite satisfied with.
How solid that pipeline of large deals was when we are <unk>.
Talking about caution and softness I would say, it's the best possible thing you can hope for if youre in sales, which is customers are keeping the project in.
In some cases they are delaying the start time at them in some cases, they are rolling them out over a longer period of time, but I would say those are few and far between at this point.
And that's really the nature of what what's driving some caution on that.
That's helpful color either as a follow up question I have is just as you went through Q4 and thus far this year have you seen any.
Changes in demand meaningful changes either in some of your major geographic regions or major market verticals. Thank you.
Yes, I can also speak to that.
I think.
We have.
A few anomalies that youre aware of right you know about our exit.
Exit from Russia prior year, so that revenues, obviously not there you probably.
Our expected debt.
The Chinese market, we would have a less revenue this quarter than we had in the <unk>.
<unk> same quarter prior year because of the Covid situation by the way that is very quickly recovering we are seeing a quick recovery of that.
So those are perhaps some of the changes, but other than that I couldnt say that theres, a major shift in region or vertical makeup of our of our revenue.
Structure.
Sure.
Thank you and our next question today comes from Paul Chung Jpmorgan. Please go ahead.
Hi, Thanks for taking my question. So just on the EBITDA margin guide up this year can you expand on.
Gross margin versus Opex dynamics driving the outlook.
Freights coming down materially, but just wanted to get a sense for.
Gross margin expansion expected throughout the year with one seamless likely being the trough and then I'll follow up.
So Paul if you look at the full year guide on EBITDA.
Both the supply chain improvements and FX, both will flow through and from a margin perspective, so that we expect margin to gross margin to increase.
Throughout the year because of those two dynamics I think you are from an opex scaling.
We would say roughly flat to in line with prior year, just as we as we work as we work through some of the.
Increase in compensation and incentive compensation year on year, but again I think largely the benefit in the EBITDA would flow through mostly in gross margin.
Got you. Thanks for that and then just on the RFID opportunity how large is the.
Contribution to the business today, I mean, you guys have been in the market for a long time so.
Where are you seeing accelerating growth in some use cases across retail and other vertical. Thank you.
Yes, I would say that this is bill Paul the.
Low single digits as the <unk>.
The size, we think about we're excited about the RFID opportunity.
As we mentioned in the.
Remarks that we have just.
One of our largest RFID opportunity.
However, really in the P&L space and we've seen you know.
RFID move from just really retail into retail supply chain now into the broader supply chain and opportunities within transportation logistics, which is really around parcel and others that create really an opportunity of a wider.
<unk> use cases and in retail we are seeing.
Large retailers mandate the tagging of items within retail, we're seeing new opportunities there around loss prevention.
As I mentioned Tino opportunities, we're seeing quick serve restaurants.
Deploy RFID.
In the NFL, we're doing both active and passive RFID. So we just renew the contract there within in our relationship with the NFL. So we're excited about the RFID market, we've got the broadest and deepest set of RFID solutions today in the market.
Ranging and covering all of those use cases I talked about so the expansion of the use cases beyond retailers, what's exciting to us and we've got the portfolio really to go address it in and we're excited about it.
Let me add one other thing above to that which is.
Think tipping points in the RFID market has been.
Claimed several times in history, and I don't think we want to say that today, but there are some very exciting developments in this market.
Sure.
We're certainly bullish on one of them is last year, one of our largest retailers announced that they were converting significant portions of their operation to RFID and the win that Bill mentioned earlier in his in his remarks.
That we just which was a record RFID deal the largest in.
Certainly our business and we believe in the industry is in P&L and so with two large retailer and a large P&L company adopting RFID with this we'll do we think is that it will drive economies of scale in the market.
And also be a lighthouse or other.
Competitors in the segment to adopt this technology, which provides significant improvements in throughput time and productivity.
In addition to the economies of scale to deliver for the broader market. So we're pretty excited about this and foresee some strong growth for it.
Thank you and our next question today comes from Keith <unk> with Northcoast Research. Please go ahead.
Good morning, Joe.
And even some of the guidance a little bit when youre seeing deals that are being delayed or kind of spread out.
Perhaps can you give us little bit color about the momentum or the motivation of the companies have in doing so has it been a specific issues are they worried about the economy, perhaps further guidance there.
Yes, Keith this is Joe heel again.
What we're hearing from those customers is mostly that theyre looking to adapt their spending it to their budgets and.
We think about retailers, which probably make up.
Meaningful portion of some of those situations, where we're seeing that.
They are adapting their budgets to what they see as demand and put their business and they're doing that they are asking to spread they still need our technology I think that's the important piece that we see and why we are seeing.
Out or maybe a delay in the deployment schedule.
They're trying to fit it in because they know they need this technology.
But they're trying to adapt when they are spending the money to when they think it will be available in their business I think that's the best description.
Great I appreciate it and then bill just trying to unpack a little bit more about the supply chain issues as my follow up here you guys see still the middle of the year when the supply chain issues really become alleviating a are back to pre pandemic levels.
Yes, I think that I mean from an availability perspective, I think we're pretty much there I mean, we're seeing.
<unk> components move.
Into reasonable much more reasonable lead times, not all but many.
The majority of our items have come back to normal delivery timeframes.
Overall, so I think that we feel good about our supply chain and the recovery of that really almost the majority of almost everything really in first quarter.
Is what I'd say from our supply chain perspective.
Keith.
This is Nathan I would add is it's obviously a dynamic environment and we're monitoring it in terms of <unk>.
Vince and shutdowns and things like that that could could disrupt to.
To disrupt that and I'd also say, it's also relative if you look at our freight rates is a great example that is meaningfully better than where they were a year ago or even six months ago, but still.
We're still paying two to three X what we paid pre pandemic. So I think it's also relative in terms of where we are maybe where we were historically to where we've been a year ago in terms of how we feel about the overall supply chain.
Thank you and our next question today comes from but our Marshall with Morgan Stanley . Please go ahead.
Great. Thanks.
A couple of questions for me one.
You mentioned longer deal cycles, but I guess I was just wondering is there any change to kind of the deal.
Sizing that theyre, putting together of maybe looking at some lower cost skus or outfitted fewer reps just any change to kind of.
The overall deal size that's worth noting.
And then maybe a second now that you've had <unk> just a couple of quarters you did mention some kind of.
Machine vision type wins, just wondering kind of where you are.
Where you are on that integration, where are you seeing kind of the best opportunity is going forward there.
Meta Joe heel here in terms of the longer.
Terms of the nature of these.
Longer deal cycles.
Generally we have not seen downsizing of deals or down tearing of devices I could think of maybe one or two instances.
It's more what I was describing.
Describing earlier to Keith where the deal is being elongated in terms of either.
The deployment schedule.
Over instead of taking it all in Q1, they're going to take it over three quarters for the rest of the year or they might say I don't want to take it in Q1 I want to take it in Q2, that's the most common one downsizing I would say not so much alright.
We're not seeing that as much.
From a matrix perspective, if I can take that Joe.
I think overall, we are encouraged certainly by the progress of matrix.
It performed well in 2022 at a actually a record year.
The integration is moving as planned.
As a kind of a quick reminder, the.
<unk> is really complementary to organic investment that we made in the fixed industrial scanning a smart camera market. It really brought to us the breadth and depth of the portfolio that our partners were encouraging us to to have in that marketplace to a broad vision controllers and frame grabbers and <unk> sensors along with.
Our portfolio of software solutions, and our software library to meet.
Many use cases in that marketplace overall so.
I'd say, we're happy with the progress so far.
There's lots of opportunities for us out there in machine vision across manufacturing and transportation logistics as the primary markets that we're focused on and things are going well so far.
Great. Thanks, guys.
And our next question today comes from Guy hard work at Credit Suisse. Please go ahead.
Hi, good morning.
Good morning.
Particularly as it pertains Youll Q1 guidance can you give miss some trends as to the difference between Super sales into the channel and then the distributor sales out of the channel and maybe how Elisa how that differs from direct business.
So maybe just to frame the Q1 Q1 guide of minus 4%.
To minus 1% again as we mentioned before we are again backlog and pipeline to support the outlook, we've actually had a solid start to the quarter both in shipments into the channel as well as we're seeing nice momentum from a sales out, particularly around the run rate business.
We're also realizing some nice price realization, which is about a point of benefit in the quarter, Let's say early on again seeing nice momentum both from a sales in and sales out I'd say, but the guide also reflects as we've talked about before.
Uncertainty in the environment and that cautious behavior, particularly as a lot of our customers are finalizing their capital budgets for the year.
The other thing is important to note is that Q1 takes the full effect of the Russia headwind for the year, which is about a point for the for the first quarter.
Yes.
But no meaningful difference between.
What we're seeing within our own activity with the channel as well as from a from a sales out perspective, that's noteworthy.
So I just think that's about.
Is it correct that the gross margin benefit from supply chain.
Declining supply chain headwinds shipping less significant in Q1.
From a year on from a year on year perspective, if you look at the EBITDA guide of approximately 21%.
The supply chain benefit of the premium supply chain and a bit about three points, but that's offset by two points of FX. So thats.
Those are the kind of main drivers from a year on year, but yes, you are right from a year on year perspective, Q1 last year was about the peak in terms of premium supply chain costs.
Thank you and our next question today comes from Rob Mason of Baird. Please go ahead.
Yes, good morning, I just wanted to.
To circle back again to the your commentary around the run rate business.
Several times you've commented on healthy sale sales there. So I'm just curious how much visibility do you have into the bookings trends.
In that part of the business and is it seeing any of the elongated deal cycles or any sense of that.
Joe heel here on the run rate has been.
Strong I would say four.
For Q4 in particular, and we're seeing that continue into Q1.
We in terms of visibility.
This is the type of business where.
People, obviously don't book Big deals with us they go to distributors and by what they have on their shelves. So the visibility is typically based on our conversations with distributors and what theyre, telling us they are seeing as their order intake.
<unk>.
And so it's much less of a visibility, but what we have so far even in the first weeks of this quarter has been very strong. So we've been pleasantly surprise surprise.
In particular for printing and scanning which were.
Areas of our business that we.
We didn't have as much stock over.
Over the course of the last year.
And as a result, we're very pleased to see that that run rate in printing and scanning in particular is so resilient right that customers are staying loyal to us and continuing to buy again from this from the distributors.
It may be just two two further points on that.
While it will be that we do.
Don't necessarily have the same visibility into each and every deal but this is one where you have.
A large number of orders so you get kind of a more of a statistical.
Confidence from that and if you look at historically.
Our.
Run rate business tends to be more of a longer cycle.
The business for Us if you have a strong quarter it tends not to be kind of one strong quarter, then it drops down it tends to be that we have.
Four to six quarters of strength.
In those in that cycle, followed by maybe one or two quarters. So we got a softer demand. So we would expect this to continue for a few more quarters.
Understood understood.
And then I wanted to go.
Go back to your geographic commentary I think when you mentioned as you called out Japan was strong.
I think historically, Japan has not necessarily been.
A large market for you could you just outline maybe what youre seeing in Japan, what your expectations might be there if anything is changing on that front.
But first I would say, we're very pleased with the performance of the quarters. We had record sales we came in above the high end of our outlook.
We executed very well I think and recovered from the distribution network challenges that we had in Q3 and we drove double digit sales in North America.
<unk> talked earlier about the strength <unk> seen in our run rate business and we see that certainly in small and mid sized customers.
And we had particularly strong growth.
Our solutions perspective.
Print data capture RFID tablets.
Partially offset by lower mobile computing sales in Europe due.
In part to the exit from Russia in Q1 of last year now Asia Pac was had a good performance, particularly when you consider.
Covid in China, we have very broad based growth and we saw a nice growth in China, Australia, and New Zealand, but Japan as we mentioned is kind of the standout here. They have we had exceptional growth in Japan.
We have invested in.
Driving penetration in Japanese market over the last several years both from a go to market perspective, but also from a product perspective, and this large postal carrier win that we mentioned is going to.
The latest evidence of that so we now have a very strong position in Japan in mobile computing, which is one of the largest markets in the world that we really didn't have much of a presence before.
I'll add.
One thing to that so Japan is the third largest market.
That we operate in and its one as you say correctly, where our share in the past had been relatively low but two important things have changed that I think have.
Given us some really good momentum here and as mentioned at the first thing that's changed is that.
The market has begun to embrace Android and.
This may seem like it's out of pace.
It is much later than many other markets in the world that that market has made the mobile computing shift from windows to Android and that has given us a big opportunity might because many of the local Japanese competitors, who have dominated that market have not been as quick with Android as we have and that has given.
As an opportunity and that's a great example is this postal carrier deal that Andrew mentioned, that's what we did the second thing that we've done is we have shifted our go to market strategy to focus more heavily on partners and so we're working with some of the largest systems integrators now in the Japanese market. That's how we won this.
This also carrier deal that's how we've won several other large deals in particular in retail around mobile computing and the combination of those two are really giving us some <unk>.
<unk>, we haven't seen in any of the years before.
Thank you and our next question today comes from Brian Drab William Blair. Please go ahead.
Good morning, I was just wondering if you could talk a little bit more about what youre seeing in the different verticals I'm not sure you've really.
Felt that out this morning in terms of manufacturing.
Retail transportation logistics health care.
Yes.
Assuming you will want to give the expected growth rates for those verticals in 2023, but if you could even.
Give ranges or rank order, where you're expecting the most strength.
The weakest performance.
Yes that can be a long long answer so I'll give you start a little bit high and then we can pick up a couple of other verticals may be here, but.
Across all our verticals as I said, we are seeing very strong secular trends to digitize and automate workflows and empower frontline workers.
How much more labor constrained environment and these trends continue to drive an increased need for our type of solutions across a wide range of vertical end markets.
You, specifically mentioned manufacturing, we had a very strong performance in Q4 or in manufacturing.
Ed.
We had a number of very significant wins that we were proud.
Paolo mentioned, one in the automotive side in my prepared remarks.
There are some some attractive trends in manufacturing that.
Helping to drive our business here, one is around the business and must invest in traceability tools to create more sustainable supply chains.
Another one is around industrial automation investment trends in productivity and visibility.
And those present opportunities for our solutions, including machine vision, and our autonomous mobile robots or fetch solutions.
Certainly seeing very strong traction with machine vision.
In manufacturing and have some attractive early wins here.
Excited about what we what may trucks in our adaptive vision acquisitions can bring to our customers and partners here.
I can dig into the other verticals also but.
See if you have another questions here.
Thanks Anders.
I was just wondering if you could comment even just briefly here just a bullet point on each one in transportation logistics up or down.
In 2023 health care up or down.
Retail up or down.
Directionally, even and anything on on all of the four major verticals you play.
I think that we probably will.
He leaves.
The outlook around the overall corporate level, but.
But maybe on on just say that the poor.
In retail in 2022, we had approximately flat sales in retail vertical with some very broad based growth.
Offsets the pullback of one very large customers customers. So you can see the strong momentum we have across the industry, where we could offset a very large customer pulling back in a pretty big way. So the diversification we have across all of these verticals is definitely helping us too to mitigate.
Kind of volatility and drive more consistent results.
Thank you and our next question today comes from currently more with Stephens. Please go ahead.
And thanks for taking my questions.
Okay.
I wanted to start on the revenue outlook you provided for 2023, which you've described as embedding a cautious approach.
Hum.
When you when you use that word cautious or are you primarily referring to some of the spending patterns. Among the large customers that you referenced or is this more a philosophical.
Adjustments, you've made where you look at your opportunities and maybe you.
You discount the probability of conversion on some of these deals are higher.
And then you typically would just given the macro uncertainty.
Yes.
Nathan I think as you look at the full year guide.
Which is about from an organic perspective slightly down at the midpoint.
As you mentioned before I think it's a combination of both.
Kind of cautious on the overall assumptions due to the macro environment and how that's going to play out through the rest of the year as well as to your other point of how we kind of look at each look at some of those large opportunities and probability weight those for the year and we think.
We believe the range, we provided is appropriate given the overall uncertainty.
Yes, I'd just add that I think we feel good about our business I think this is really all about macro uncertainty I mean, I think we think that.
We're going to continue to take share and in 2023, that's how we see it we're the leader across the core markets. We serve we've got attractive opportunities across the adjacencies and the expansion business. We've invested in so I think we feel good about our business I think the uncertainty really is around whats happening around macro and we're clearly seeing some of that come through in <unk>.
Our results in Q4, and our guide for Q1 and 23.
And if the macro were to deteriorate.
Would you rank order or maybe just identify one or two of the key verticals, where you would expect to see that pressure first versus maybe some of the verticals where.
You would expect more of a secular growth trend through the year is that possible.
Sure I'm not sure we see it as a separate verticals what I'd say is that.
You know the.
Across the diversification of our solutions and our our verticals actually give us kind of resiliency.
Downturn.
Which would dampen some of the cyclicality. So I think this diverse.
<unk> solutions base that we have in product portfolio and the new investments were making is is dampens cyclicality across that customer base. So I'm not sure we'd see it as one worse than the other I mean, Joe may want to add to it but I think that we think overall that we're going to take a disciplined approach to it.
Opex during the year and focus our investments.
I think that from that perspective.
I don't think we see one vertical over another.
You could think of maybe as health care is one that will be.
More resilient I think economic cycles will probably not impact healthcare as much. So it's been our fastest growing vertical over over quite a quite a while and we would expect that to continue to do well.
Irrespective of the economic outcome.
Thank you and ladies and gentlemen. This concludes our question and answer session I would like to turn the conference back over to Mr. Gustafsson for any closing remarks.
So as I wrap up my 62nd earnings call.
I'd like to again, thank our partners customers and employees for their contributions in transforming zebra.
I am proud of the progress we have made together and believe we will continue to prosper would be unless our next CEO .
I also want to thank our analysts and investors for your continued support of zebra.
This will be my last earnings call.
I look forward to ensuring a smooth leadership transition and starting my new role as executive chair, while continuing to support field and <unk> ongoing success.
Have a great day everyone.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you all for Brian because I guess presentation.
Now disconnect your lines will have a wonderful day.