Q4 2023 Zebra Technologies Corp Earnings Call

Operator: Good day, and welcome to the fourth quarter and full year 2023 Zebra Technologies earnings conference call. All participants will be in listen-only mode.

Good day and welcome to the first quarter and full year 2023, Zebra technologies earnings Conference call.

Participants will be in listen only mode.

Operator: For questions or should you need assistance, please call the conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I'd now like to turn the conference over to Mike Steele, Vice President, Investor Relations. Please go ahead.

Should you need assistance. Please signal a conference specialist by pressing the star followed by zero.

After todays presentation, there will be an opportunity to ask questions. Please.

Please note this event is being recorded.

I'd 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 that zipper dot com and will be archived there for at least one year.

Michael A. Steele: Good morning, and welcome to Zebra's fourth-quarter conference call. This presentation is being simulcast on our website at investors.zebra.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. The actual results could differ materially, and we refer you to the factors discussed in our SEC filing. During this call, we will reference non-GAAP financial measures as we describe our business performance.

Michael A. Steele: Our forward looking statements are based on current expectations and assumptions and are subject to risks and uncertainties actual results could differ materially and we refer you to the factors discussed in our SEC filings.

Michael A. Steele: 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.

Michael A. Steele: 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 performance are year over year on a constant currency basis and exclude results from acquired businesses for the 12 months following the acquisition. This presentation will include prepared remarks from Bill Burns, our Chief Executive Officer, and Nathan Winters, our Chief Financial Officer. Bill will begin with our fourth-quarter results and actions we are taking. Nathan will then provide additional detail on the financials and discuss our 2024 outlook, and Bill will conclude with the progress we are making on advancing our enterprise asset intelligence vision. Following the prepared remarks, Bill and Nathan will take your questions. Now, let's turn to slide four as I hand it over to Bill. Thank you, Mike. Good morning, and thank you for joining us.

Michael A. Steele: Throughout this presentation, unless otherwise indicated our references to sales performance our year over year on a constant currency basis and exclude results from acquired businesses for the 12 months following the acquisition.

Michael A. Steele: Yeah.

Michael A. Steele: This presentation will include prepared remarks from Bill Burns, our Chief Executive Officer, and Nathan Winters, Our Chief Financial Officer.

William J. Burns: Bill will begin with our fourth quarter results and actions we are taking.

Nathan Winters: <unk> will then provide additional detail on the financials and discuss our 2024 outlook.

Nathan Winters: Bill will conclude with progress, we're making on advancing our enterprise asset intelligence vision.

Nathan Winters: Following the prepared remarks, Bill and Nathan will take your questions now, let's turn to slide four as I hand, it over to Bill.

William J. Burns: Thank you Mike Good morning, and thank you for joining us.

William J. Burns: Today we will discuss our results, the demand environment, and progress on actions we are taking to optimize our cost structure and drive sales as demand recovers. As expected, our fourth-quarter performance was impacted by continued broad-based softness across our end markets and regions, which resulted in a significant decline in sales and profitability. For the quarter, we realized sales of $1 billion, a 33% decline from the prior year, an adjusted EBITDA margin of 15.4%, and a 7-point decrease in non-GRAP diluted earnings per share of $1.71, a 64% decrease from the prior year.

William J. Burns: Today, we will discuss our results the demand environment and progress on actions, we were taking to optimize our cost structure and drive sales as demand recovers.

William J. Burns: As expected our fourth quarter performance was impacted by continued broad based softness across our end markets and regions, which resulted in a significant decline in sales and profitability.

William J. Burns: For the quarter, we realized sales of $1 billion, a 33% decline from the prior year.

And adjusted EBITDA margin of 15, 4%.

William J. Burns: Seven point decrease in non-GAAP diluted earnings per share of $1 71.

William J. Burns: Ah, 64% decrease from the prior year.

William J. Burns: Although we experienced declines across all product categories, services and software were a bright spot in the quarter. From a sequential perspective, we should see Q4 sales growth from Q3 as demand trends stabilize. Overall profitability was primarily impacted by expense deleveraging on lower sales volumes and a charge to renegotiate a supplier contract.

William J. Burns: Though we experienced declines across all product categories services and software were a bright spot in the quarter.

William J. Burns: From a sequential perspective, we realized Q4 sales growth from Q3 as demand trends stabilize.

William J. Burns: Overall profitability was primarily impacted by expense deleveraging on lower sales volumes.

William J. Burns: And are charged to renegotiate a supplier contract however.

William J. Burns: However, as a result of our cost restructuring actions and inventory management initiatives, we realize a significant sequential improvement in profitability and free cash flow. Turning to slide five, I'd like to update you on our actions to address and mitigate the impacts of the current demand environment and position ourselves for long-term growth. As referenced in our earnings release, we have expanded the scope of our previously announced cost reduction plan and now expect $120 million of net annualized operating savings, an increase of $20 million from our last update, which we expect to implement by mid-2024. Our previously announced actions were substantially completed in the fourth quarter and enabled us to realize approximately $50 million of savings in 2023. On the supply front, we continue to work with our contract manufacturers to draw down component inventories, and we are substantially complete with renegotiations of long-term supply commitments. In Q4, we renegotiated a 2021 agreement with a key electronic component supplier, incurring a $10 million expense. The revised agreement cancels a portion of the multi-year volume commitment and increases purchasing flexibility.

William J. Burns: However, as a result of our cost restructuring actions and inventory management initiatives, we realize a significant sequential improvement in profitability and free cash flow.

William J. Burns: Turning to slide five I'd like to update you on our actions to address and mitigate the impacts of the current demand environment and position ourselves for long term growth.

William J. Burns: As referenced in our earnings release, we have expanded the scope of our previously announced cost reduction plan and now expect $120 million of net annualized operating savings.

William J. Burns: An increase of $20 million from our last update which we expect to implement by mid 2024.

William J. Burns: Our previously announced actions were substantially completed in the fourth quarter enable us to realize approximately $50 million of savings in 2023.

William J. Burns: On the supply front, we continue to work with our contract manufacturers the drawdown component inventories and we are substantially complete with renegotiations of long term supply commitments.

William J. Burns: In Q4, we renegotiated 2021 agreement with a key electronic components supplier incurring a 10 million dollar expense.

William J. Burns: The revised agreement cancels a portion of the multiyear volume commitment and increases purchasing flexibility.

William J. Burns: We have also reallocated resources to accelerate growth in Underpenetrated markets, including Japan, along with government and manufacturing sectors and to address new automation use cases, with RFID and machine vision.

William J. Burns: We have also reallocated resources to accelerate growth in underpenetrated markets, including Japan, along with government and manufacturing sectors, and to address new automation use cases with RFID and machine vision. We expect our actions to improve profitability and drive sales growth as our end markets recover. We saw double-digit declines across each of our end markets for both Q4 and full year, as many customers navigate a challenging environment in the absorbed capacity they built out during the pandemic to address the spike in e-commerce activity.

William J. Burns: We expect our actions to improve profitability and drive sales growth as our end markets recover.

William J. Burns: We saw double digit declines across each of our end markets for both Q4 and full year as many customers navigate a challenging environment and absorb capacity. They built out during the pandemic to address the spike in e-commerce activity.

William J. Burns: On slide six, we highlight secular trends that we expect to drive long-term growth, including labor and resource constraints, real-time supply chain visibility, track and trace mandates, and increased consumer expectations. These are all areas that I focus on in my conversations with our customers. Entering 2024, distributor inventories are aligned with current demand. However, although we are seeing some improvement in order activity, we are not yet seeing signs of a broad market recovery. We should remain cautious in our planning.

William J. Burns: On slide six we highlight secular trends that we expect to drive long term growth, including labor and resource constraints real time supply chain visibility track and trace mandates and increased consumer expectations.

William J. Burns: These are all focused areas in my conversations with our customers.

William J. Burns: Entering 2024 distributor inventories are aligned with current demand.

William J. Burns: Although we are seeing some improvement in order activity, we're not yet seeing signs of a broad market recovery remain cautious in our planning.

William J. Burns: Consequently, we continue to take an agile approach to navigating this uncertain environment and remain disciplined with respect to our cost structure and capital allocation. I will now turn the call over to Nathan to review our Q4 financial results and discuss our 2024 outlook. Thank you, Bill. Let's start with the P&L on slide 8. In Q4, sales decreased 33%, with distributor destocking accounting for more than one quarter of the decline.

William J. Burns: Consequently, we continue to take an agile approach to navigating this uncertain environment, we remain disciplined with respect to our cost structure and capital allocation.

William J. Burns: I will now turn the call over to Nathan.

Nathan Winters: Review, our Q4 financial results and discuss our 2020 for outlook.

Nathan Winters: Thank you Bill, let's start with the P&L on slide eight.

Nathan Winters: In Q4 sales decreased 33% with distributor Destocking accounting for more than one quarter of the decline.

Nathan Winters: We saw double-digit sales declines across our regions, major product categories, and customers of all sizes. Our asset intelligence and tracking segment declined 33.6%, primarily driven by printing. Enterprise Visibility and Mobility Segment Sales declined 32.7%, led by data capture and mobile computing. On a positive note, we drove services growth with strong attached and renewal rates. From a sequential perspective, total Q4 sales were $53 million higher than Q3, despite a similar magnitude of distributor inventory destocking due to modest improvement in demand. Adjusted gross margin decreased 100 basis points to 44.6%, primarily due to expensive leveraging from lower sales volumes and the $10 million charge mentioned earlier associated with the renegotiation of a supplier agreement, all of which were partially offset by higher services and software margin and cycling premium supply Adjusted operating expenses delivered 670 basis points as a percent of sales. However, the impact was mitigated by more than $20 million of net savings in the quarter from our restructuring actions. This results in a fourth quarter adjusted EBITDA margin of 15.4%, a 710 basis point decrease. Non-GAAP diluted earnings per share were $1.71, a 64% year-over-year decrease.

Nathan Winters: We saw double digit sales declines across our regions major product categories and customers of all sizes.

Nathan Winters: Our asset intelligence and tracking segment declined 33, 6%, primarily driven by printing.

Nathan Winters: Price visibility and mobility segment sales declined 32, 7% led by data capture and mobile computing.

Nathan Winters: On a positive note we drove services growth was strong attach and renewal rates.

Nathan Winters: From a sequential perspective total Q4 sales were $53 million higher than Q3 <unk>.

Nathan Winters: Despite a similar magnitude of distributor inventory destocking due to modest improvement in demand.

Nathan Winters: Adjusted gross margin decreased 100 basis points to 44, 6%, primarily due to expense deleveraging from lower sales volumes and the $10 million charge mentioned earlier associated with the renegotiation of supplier agreements.

Nathan Winters: All of which were partially offset by higher services and software margin and cycling premium supply chain costs in the prior year.

Nathan Winters: Adjusted operating expenses, Deleveraged 670 basis points as a percent of sales the impact was.

Nathan Winters: Was mitigated by more than $20 million of net savings in the quarter from our restructuring actions.

Nathan Winters: This resulted in fourth quarter adjusted EBITDA margin of 15, 4%, a 710 basis point decrease.

Nathan Winters: non-GAAP diluted earnings per share was $1 71.

Nathan Winters: A 64% year over year decrease.

Nathan Winters: Increased interest expense contributed to the decline offset by a lower tax rate from executing on our global tax strategy.

Nathan Winters: Increased interest expense contributed to the decline, offset by a lower tax rate from executing on a global tax strategy. Turning now to the balance sheet and cash flow on slide 9. We ended the quarter at a 2.5x net debt to adjusted EBITDA leverage ratio, which is at the top end of our target range. We generated $102 million of free cash flow in Q4 and had approximately $1.1 billion of capacity on our evolving credit facility as of year end, providing ample flexibility. The full year 2023 negative free cash flow of $91 million was unfavorable to the prior year, primarily due to lower operating profit, higher interest in tax payments, restructuring actions, and previously announced settlement payments, all of which were partially offset by lower incentive compensation payments. Now, we turn to our albums.

Nathan Winters: Turning now to the balance sheet and cash flow on slide nine.

Nathan Winters: We ended the quarter at two five times net debt to adjusted EBITDA leverage ratio, which is at the top end of our target range.

Nathan Winters: We generated $102 million of free cash flow in Q4 and had approximately $1 $1 billion of capacity on our revolving credit facility as of year end, providing ample flexibility.

Nathan Winters: The full year 2023 negative free cash flow of $91 million was unfavorable to the prior year, primarily due to lower operating profit higher interest and tax payments restructuring actions and previously announced settlement payments.

Nathan Winters: All of which were partially offset by lower incentive compensation payments.

Speaker Change: Let's now turn to our route.

Speaker Change: We entered 2024 with distributor inventory levels aligned with recent demand trends and improved backlog driven by modest year end budget spending into January from certain retailers.

Nathan Winters: We entered 2024 with distributor inventory levels aligned with recent demand trends and improved backlog driven by modest year-end budget spending into January from certain retailers. For Q1, we expect a sales decrease between 17% and 20% compared to the prior year. This outlook assumes continued declines across our major product categories, particularly printing, and a 50 basis point favorable impact from FX. We anticipate Q1 adjusted EBITDA margin to be approximately 18% driven by expense deleveraging from lower sales volume, partially offset by lower premium supply chain costs. Non-GAAP diluted earnings per share are expected to be in the range of $2.30 to $2.60.

Speaker Change: For Q1, we expect a sales decrease between 17 and 20% compared to the prior year.

Speaker Change: This outlook assumes continued declines across our major product categories, particularly printing and a 50 basis point favorable impact from FX.

Speaker Change: We anticipate Q1, adjusted EBITDA margin to be approximately 18% driven by expense deleveraging from lower sales volume, partially offset by lower premium supply chain costs.

Speaker Change: non-GAAP diluted earnings per share are expected to be in the range of $2 30 to $2 60.

Nathan Winters: Q1 sales and profitability are expected to sequentially increase from Q4 as distributor inventories and in-market demand have stabilized, and we have realized incremental benefit from cost action. For the full year 2024, we expect sales to be in the range of a 1% decline and 3% growth. Although we are beginning to see signs of improvement in order activity, we are not yet seeing signs of a broad market recovery. Consequently, we are taking a cautious approach to our guidance until we have increased visibility to a sustained recovery in demand. Just as EBITDA for the full year 2024 is expected to be approximately 19%, we expect our restructuring actions and other profitability initiatives to drive improvement through the year, delivering an EBITDA margin of 20% in the second half. We remain cautious in our spending and continue to take an agile approach to navigating the environment.

Speaker Change: Q1 sales and profitability are expected to sequentially increase from Q4 as distributor inventories and end market demand has stabilized and we have realized incremental benefits from cost actions.

Speaker Change: For the full year 2024, we expect sales to be in the range of a 1% decline and 3% growth.

Speaker Change: Although we are beginning to see signs of improvement in order activity, we are not yet seeing signs of a broad market recovery.

Speaker Change: Consequently, we are taking a cautious approach to our guide until we have increased visibility to a sustained recovery in demand.

Speaker Change: Adjusted EBITDA for the full year 2024 is expected to be approximately 19%.

Speaker Change: We expect our restructuring actions and other profitability initiatives to drive improvement through the year delivering EBITDA margin of 20% in the second half.

We remain cautious in our spending and continue to take an agile approach to navigating the environment.

Speaker Change: We expect our free cash flow in 2024 to be at least $550 million, including the impact of our final $45 million settlement payment in Q1.

William J. Burns: We expect our free cash flow in 2024 to be at least $550 million, including the impact of our final $45 million settlement payment in Q1. We remain focused on right-sizing inventory on our balance sheet, driving 100% cash conversion over a cycle, and prioritizing debt paydown in the near term. Please refer to the additional modeling assumptions shown on slide 10. With that, I will turn the call over to Bill to discuss how we are advancing our enterprise asset intelligence vision. Thank you, Nathan.

Speaker Change: We remain focused on right sizing inventory on our balance sheet, driving 100% cash conversion over a cycle and prioritizing debt paydown in the near term.

Speaker Change: Please reference additional modeling assumptions shown on slide 10.

Speaker Change: With that I will turn the call to bill to discuss how we are advancing our enterprise asset intelligence vision.

William J. Burns: Thank you Nathan as you look towards the long term opportunity for zebra, our future is bright.

William J. Burns: As you look towards the long-term opportunity for Zebra, our future is bright. Our solutions remain essential to our customers' operations, and we are well positioned to benefit from secular trends to digitize and automate workflows. We are focused on advancing our enterprise asset intelligence vision by elevating Zebra as a premier solutions provider through a comprehensive portfolio of innovative solutions that demonstrate our industry leadership. We empower workers to execute tasks more effectively by navigating constant change in near real time, utilizing insights driven by advanced software capabilities such as intelligent automation, artificial intelligence, machine learning, and prescriptive analytics.

Our solutions remain essential to our customers' operations.

And we are well positioned to benefit from secular trends to digitize and automate workflows.

William J. Burns: We are focused on advancing our enterprise asset intelligence vision by elevating zebra as a premier solutions provider to a comprehensive portfolio of innovative solutions that demonstrate our industry leadership.

We empower workers to execute task more effectively by navigating constant change in near real time, utilizing insights driven by advanced software capabilities, such as intelligent automation artificial intelligence machine learning and prescriptive analytics.

William J. Burns: By transforming workflows with our proven solutions enterprises can improve the experience of frontline workers and customers.

William J. Burns: By transforming workflows with our proven solutions, enterprises can improve the experience of frontline workers and customers, as you can see on slide 13. Customers leverage our technology to optimize their workflows for the on-demand economy. Our solutions empower enterprises to increase collaboration and productivity and better serve their customers, shoppers, and patients. I would like to highlight some recent wins by our team. A leading North American retailer selected 30,000 Zebra mobile computers and our device tracker solution for customer order fulfillment and fresh food inventory tracking. This competitive win was secured by our ability to deliver higher productivity along with superior data capture performance and network connectivity. This retailer has a long history with Zebra across our broad portfolio, demonstrating the value they see in our hardware and software solutions coupled with our exceptional post-sales support. The European Postal Service purchased more than 10,000 Zebra mobile computers to facilitate proof of delivery and package tracking.

William J. Burns: As you can see on slide 13.

William J. Burns: Customers leverage our technology to optimize workflows for the on demand economy are.

William J. Burns: Our solutions empower enterprises to increase collaboration and productivity and better serve their customers shoppers and patients.

Speaker Change: I would like to highlight some recent wins by our team.

Speaker Change: A leading north American retailer selected 30000, zebra mobile computers, and her device tracker solution for customer order fulfillment and fresh food inventory tracking.

Speaker Change: This competitive win was secured by our ability to deliver higher productivity, along with superior data capture performance and network connectivity.

Speaker Change: Our north American retailer refresh 60000, mobile printers and related accessories to enable frequent product pricing updates across various locations.

Speaker Change: This retailer has a long history with zebra across our broad portfolio demonstrating the value they see in our hardware and software solutions, coupled with our exceptional post sales support.

Speaker Change: The European Postal service purchased more than 10000, zebra mobile computers to facilitate proof of delivery and package tracking.

William J. Burns: This organization's decision to replace a competitor was driven by superior product performance and enhanced cybersecurity features. A European field service organization providing public housing repairs selected Zebra for both mobile computers and tablets to replace consumer devices that had been in place for three product generations. Zebra secured the win by demonstrating a customer-first strategy by addressing their unique facial recognition and authentication challenges. And finally, a large retailer in our Asia-Pacific region selected Zebra scheduling software to be utilized on Zebra mobile computers. Zebra's solution was selected over our competitors based on the capabilities of our software and our trusted partnership. Slide 14 highlights Zebra's value proposition for retailers, which was showcased at the National Retail Federation Trade Show in January. Alongside our partners, we demonstrated how our innovative solutions help retailers solve their most pressing challenges and drive increased performance by optimizing inventory, engaging associates, and elevating the customer experience. As retailers address e-commerce growth, the expansion of anywhere fulfillment, and consumers' demand for hyper-convenience, Zebra's solutions provide a performance edge for retail associates. Our demonstrations included next-generation checkout solutions with machine vision, loss detection with RFID, a mobile computing AI assistant, along with other innovative solutions.

Speaker Change: This organization's decision to replace a competitor was.

Speaker Change: Driven by superior product performance and enhanced cyber security features.

Speaker Change: The European Field service organization, providing public housing repairs selected zebra for both mobile computers and tablets to replace consumer devices that had been in place for three product generations.

Speaker Change: Zebra secured the win by demonstrating our customer first strategy by addressing their unique facial recognition and authentication challenges.

Speaker Change: And finally, a large retailer in our Asia Pacific region selected zebra scheduling software to be utilized on zebra mobile computers.

Speaker Change: <unk> solution was selected over our competitors based on the capabilities of our software and our trusted partnerships.

Speaker Change: Slide 14 highlights zebras value proposition for retailers, which was showcased at the National retail Federation trade show in January.

Long side, our partners, we demonstrated how our innovative solutions help retailers solve their most pressing challenges and drive increased performance by optimizing inventory engaging associates and elevating the customer experience.

Speaker Change: As retailers address e-commerce growth the expansion of anywhere fulfillment.

Speaker Change: And consumers demand for hyper convenience zebra solutions provider performance edge for retail associates.

Our demonstrations included next generation checkout solutions with machine vision loss.

Speaker Change: Lost detection with RFID.

Speaker Change: Our mobile computing AI assistant along with other innovative solutions.

William J. Burns: In our booth, Office Depot shared how our solutions address their workflow challenges. This includes Zebra's workforce optimization software, boosting operational efficiency of associates and delivering faster buy online, pickup, and store order fulfillment. The combination of Zebra software and mobile computers is driving associate productivity and engagement, along with improved customer satisfaction. In closing, our long-term conviction in our strong business fundamentals remains unchanged, and we are well-positioned to benefit from trends to digitize and automate work. We are enhancing our position with customers through our innovative portfolio of solutions, while our cost and go-to-market actions are positioning us well for profitable growth as our end markets recover. I will now hand it back to Mike.

Speaker Change: And our Booth office depot shared how our solutions address their workflow challenges.

Speaker Change: This includes zebras workforce optimization software boosting operational efficiency of associates and delivering faster buy online pickup in store order fulfillment.

Speaker Change: The combination of Zebra software and mobile computers is driving associate productivity and engagement along with improved customer satisfaction.

Speaker Change: In closing our long term conviction and our strong business fundamentals remains unchanged and we are well positioned to benefit from trends to digitize and automate workflows.

Speaker Change: Elevating our position with customers through our innovative portfolio of solutions, while our costs and go to market actions are positioning us well for profitable growth as our end markets recover.

Speaker Change: I will now hand, it back to Mike.

Michael A. Steele: 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. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone.

Michael A. Steele: 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.

Michael A. Steele: Well now begin the question and answer session.

Michael A. Steele: To ask a question you May Press Star then one on your Touchtone phone.

Michael A. Steele: If you are using a speakerphone please pick up your handset before pressing the keys.

Operator: If you are using a speakerphone, please pick up your handset before pressing any buttons. To adjourn your questions, please press star... At this time, we will pause momentarily to assemble our roster. And today's first question comes from Tommy Morrow with Stevens. Please go ahead.

Michael A. Steele: Oh I'm sorry. Your question. Please press Star then two.

Michael A. Steele: At this time, we will pause momentarily to assemble our roster.

Michael A. Steele: And today's first question comes from Tommy Moll with Stephens. Please go ahead.

Tommy Moll: Good morning, and thank you for taking my questions.

Operator: Good morning, and thank you for taking my question. Good morning, Tony.

Tommy Moll: Good morning.

Tommy Moll: Good morning, Tommy.

Tommy Moll: I believe it was bill who made the comment about.

William J. Burns: I believe it was Bill who made the comment about the need to absorb some excess capacity in the e-commerce landscape, and I'm curious, based on your discussions with end users in that ecosystem. Do you have any visibility into when most of that capacity will be absorbed? Is there any assumption in your 2024 outlook about a return to more normal levels of spending there? Thank you.

Tommy Moll: The need to absorb some excess capacity in an e-commerce landscape and I'm curious based on your discussions with end users in that ecosystem do you have any visibility.

Tommy Moll: Visibility until when most of that capacity will be absorbed.

Tommy Moll: Is there any assumption in your 2024 outlook about a return to more normal levels of spending there. Thank you.

Speaker Change: Yes, I mean I think that.

William J. Burns: Yeah, Tommy, I think that, you know, retail IT budgets have been under pressure, and, you know, retailers are overall certainly sweating assets, but also this idea of customers absorbing capacity, not just in e-commerce but also in transportation logistics as well. And, you know, they built out significant capacity during the pandemic, believing that, ultimately, the growth trajectory would continue at those rates.

Speaker Change: We've clearly seen that our retail it budgets have been under pressure and you know the retailers overall, certainly sweating assets, but also this idea of.

Speaker Change: Customers absorbing capacity not just in e-commerce, but also in transportation logistics as well and you know they built out significant capacity during the pandemic, believing that ultimately the growth trajectory would continue off those rates and now we're seeing kind of a reset in both.

Nathan Winters: And now we've seen kind of a reset in both, you know, e-commerce continuing to grow, obviously, but off, you know, and parcel delivery, both kind of resetting to pre-pandemic levels and growing from there. So we've seen some positive signs on the e-commerce side, where some of that capacity has been used often and we're beginning to see orders for, you know, from those e-commerce providers that, you know, need and have continued demand now. So we're seeing that coming to an end on some of the e-commerce providers; we're seeing across transportation logistics, still a challenge in volumes of parcel delivery. And we're seeing the TNL providers really taking this as an opportunity to kind of restructure their businesses and think about, you know, how to be more effective and more efficient in their delivery mechanisms.

Speaker Change: E Commerce, continuing to grow obviously, but but off you know and and parcel delivery, both kind of resetting to pre pandemic levels and growing from there. So we've seen some positive signs in the e-commerce side, where some of that capacity has been been used often that we're beginning to see orders for.

Speaker Change: You know from those e-commerce providers that are need.

Speaker Change: We need to and have continued demand now so we're seeing that coming to an end on some of the E. Commerce providers, we're seeing across transportation logistics still a challenge in volumes of parcel delivery and we're seeing the.

Speaker Change: <unk> providers really taken this as an opportunity to kind of restructure their businesses and think about how to be more effective and more efficient in their delivery mechanisms. We saw the same any commerce over last year, plus but I think we're coming through it in e-commerce.

Nathan Winters: We saw the same in e commerce over the last year plus, but I think we're coming through in e commerce. Still, TNL, you know, the challenge there is we're continuing to see results in the, you know, around parcels being still challenged. So I would say it's coming to an end in e commerce, but still challenging in the build out across e commerce. Ron, sorry.

Speaker Change: GNL you know challenge there is we're continuing to see as the results in the you know around parcels being still remain challenged so I would say coming to an end in e-commerce, but still challenging and the build out across e-commerce.

Speaker Change: Iran, Sorry try thank you bill.

Nathan Winters: Thank you, Bill. Yep. Thank you. And one point I wanted to clarify, Nathan. I think in your comments, you talked about an improving backlog in January and that there were certain retail-related orders that drove that. But could you correct the record there if I got it wrong and just give us any more detail there?

Speaker Change: Yep.

Thank you and one point I wanted to clarify Nathan I think in your comments you talked to an improving backlog in January and that there were certain retail related orders that drove that but could you correct. The record there if I got it wrong and just give us any more detail there. Thank you.

William J. Burns: Yeah, no, Tommy, I think if you look, we did end the quarter, I'd say, back at pre-pandemic levels, entering the quarter from a backlog perspective, where it was a little bit more depressed as we went into Q3 and Q4. And that was primarily driven by, you know, some of the uptick we saw in year-end spend that we were able to ship here in the early part of Q1, driving some of the sequential improvement from Q4 to Q1. So I think, again, not to the backlog levels we were at a few years ago during maybe the peak of the supply chain challenges, but definitely sequential improvement with some of the incremental volume, as well as getting your inventory in the So, again, we feel good about the backlog we have entering the first quarter relative to the guide. Thank you both. I'll turn it back.

Nathan Winters: Yeah, No telling me I think if you look we did in the quarter I'd say back yet.

Nathan Winters: Pre pandemic levels entering the quarter from a backlog perspective, where it was maybe a little bit more depressed as we went into Q3 and Q4.

Speaker Change: And that was primarily driven by some of the uptick we saw on year end spend that we were able to ship here in the early part of Q1.

Speaker Change: Driving some of the sequential improvement from Q4 to Q1, so I think.

Speaker Change: Again not to the backlog levels, we were at a few years ago during maybe peak of the supply chain challenges.

Speaker Change: But definitely a sequential improvement.

Speaker Change: With some of the incremental volume as well as getting your inventory in the channel right sized.

Speaker Change: So again, we feel we feel good about the backlog we have entering the first quarter relative to the guide.

Speaker Change: Great. Thank you both I'll turn it back.

Speaker Change: Thank you and our next question comes from Brad <unk> with.

William J. Burns: Thank you. And our next question comes from Brad Hewitt with Wolf Research. Please go ahead.

Brad: Wolf Research. Please go ahead.

Operator: Hey, thanks. Good morning, everybody. Morning. So the Q1 guidance midpoint looks to imply a slight uptick sequentially on the top line, excluding the key forward B stock headwind. But then your full-year guide seems to imply revenue remains relatively flat sequentially as we progress throughout the year. So, just curious if you could talk about how you see underlying demand progressing through the year, and do you see the potential for orders in the pipeline conversion rate to improve as we exit 24 into 2025? Yeah, maybe I'll start with just the kind of framework for the guide.

Brad: Hey, Thanks, good morning, everybody.

Brad: Good morning.

Brad: So the Q1 guidance midpoint, it looks to imply a slight uptick sequentially on the top line, excluding the Q4 destock headwind.

Brad: But then your full year guide seems to imply revenue remains relatively flat sequentially as we progress throughout the year.

Speaker Change: So just curious if you could talk about how you see underlying demand progressing through the year and do you see the potential for orders in the pipeline conversion rate to improve as we exit 'twenty four 'twenty five.

Speaker Change: Yeah, maybe I'll start with just the kind of the framework for the for the guidance. So yeah, you're right. If you look at our Q1 guide down 17% to 20%.

Nathan Winters: And so, yeah, you're right. If you look at our Q1 guide down 17 to 20 percent sequentially, that does improve from Q4 as we are not assuming any additional distributor destocking. So that drives the vast majority of the sequential improvement. Again, along with the, you know, some uptick in demand where we saw particularly around year-end spend. And then if you look at the full year guide of 1% at the midpoint.

Speaker Change: Sequentially that does improve from Q4 as we are.

Speaker Change: Assuming any additional distributor destocking and so that drives the vast majority of the sequential improvement again along with the.

Speaker Change: Some uptick in in demand, we saw particularly around year end spend.

Speaker Change: And then if you look at the full year guide of 1% at the midpoint.

Speaker Change: As you noted if you if you look we expect Q2 to look similar to Q1 with the modest sequential improvement as we move through the second half.

Nathan Winters: As you noted, if you look at it this way, we expect Q2 to look similar to Q1 with modest sequential improvement as we move through the second half. And as we talked about in the prepared remarks, you know, I think we're cautious given the lack of visibility and the commitment to the pipeline in the second half. So, you know, if you look kind of, again, at the balance of the year, as you noted, really, the growth is entirely driven by the 2023 destocking, with the market flat, maybe down a little bit in Q2, up a little bit in the second half. And we think that's appropriate given the visibility we have around the demand environment. Okay, that's helpful.

Speaker Change: And as we've talked about in the prepared remarks, I think were cautious given the lack of visibility and the commitment.

Speaker Change: To the pipeline in the second half so.

Speaker Change: If you look kind of again at the balance of the year. As you noted really the growth is entirely driven by the 2023 destocking with the market flat, maybe down a little bit in Q2 up a little bit in the second half and we think thats the.

Speaker Change: The appropriate given the visibility we have around the demand environment.

Speaker Change: Okay. That's helpful. And then you've talked in the past about how you typically tend to gain share coming out of downturns.

William J. Burns: And then you've talked in the past about how you typically tend to gain share coming out of downturns. Could you talk about how you see the opportunity for share gains as we turn the page to 2024 and kind of where you see the lowest hanging fruit in terms of potential share gains going? I would say, overall, talking to your customers and spending a lot of time with our customers and partners through, you know, our app, that clearly, our customers see that, you know, there's tremendous value in what we do for them, you know, each and every day to make, you know, their businesses more effective and more efficient and to literally run their businesses. So, you know, we see the opportunities, you know, across each one of our vertical markets Certainly, we've seen optimism by our retail customers in the second half of the year. We marry our mobile devices there with our software solutions, and what we talk about, you know, is really responding with them around our modern store initiative.

Speaker Change: Could you talk about how you see the opportunity for share gains as we turn the page to 2024 and kind of where you see the lowest hanging fruit in terms of potential share gains going forward.

Speaker Change: I would say that you know overall talking to your customers and you are spending a lot of time of our customers or partners through an RF that clearly our customers see that.

Speaker Change:

Speaker Change: There is tremendous value in what we do for them each and every day to make their businesses more effective and more efficient and to literally run their businesses. So we see the opportunities across each one of our vertical markets. As we see really you know retail likely returning you know first is we're continuing to work with them.

Speaker Change: You know as they've been holding off and sweating assets within their environments and our engagements within RF certainly we've seen optimism by our retail customers and in the second half year, we marry our mobile devices, there with our software solutions and while we talk about it you know when it is really.

Speaker Change: Resonating with them around our modern store initiative we.

William J. Burns: We see that in transportation logistics, you know, our value proposition remains really to help our customers with things like label constraints and additional supply chain visibility across their businesses. And, you know, we're excited about opportunities there within opportunities in technology, such as RFID, as they look to increase productivity across their businesses. We've got the MODEX trade show coming up in the transportation logistics Expo next month here, and we'll showcase our solutions for cross-transportation logistics.

Speaker Change: We see that in transportation logistics that our value proposition remains really to.

Speaker Change: To help our customers with things like labor constraints and additional supply chain visibility across their businesses and we're excited about opportunities there we're seeing.

Speaker Change: Opportunities in technologies, such as RFID as they look to get more to productivity across their businesses. We've got the moat X trade show coming up and in transportation Logistics Expo coming up next month here and we will showcase our solutions to cross transportation logistics, we've talked about manufacturing has really been an opportunity for us as it were.

William J. Burns: We've talked about manufacturing as really being an opportunity for us because we're less penetrated in that market, and we've got new solutions around, you know, machine vision and robotic automation and our demand planning software offering inside manufacturing. So, we see that as an opportunity for us. And then, you know, lastly, healthcare, as we continue to see ways to automate workflows and digitally connect assets, patients, and staff within the healthcare environment. We see home healthcare and telehealth as an opportunity.

Speaker Change: Less penetrated in that market and we've got new solutions around machine vision and robotic automation in our demand planning software offering inside manufacturing so we see that.

Speaker Change: As an opportunity for US and then lastly health care as we continue to see ways to automate workflows and digitally connect assets in patients and.

Speaker Change: And staff within the health care environment, we see home health care and telehealth being an opportunity. So there's lots of opportunities across each one of the vertical markets. We would probably say that retail is a place that we've seen some of the positive year end spending.

William J. Burns: So, there are lots of opportunities across each one of the vertical markets. We'd probably say that, you know, retail is a place where we've seen some of the positive year-end spending first, and then I think the other vertical markets will follow. Thank you, and our next question today comes from Meta Marshall with Morgan Stanley. Go on.

Speaker Change: First and then I think the other.

Speaker Change: Vertical markets will follow.

Speaker Change: Thank you and our next question today comes from meta Marshall with Morgan Stanley. Please go ahead.

Meta A. Marshall: Great. Thanks.

Meta A. Marshall: Maybe first question just you know you noted that the headwind from Destocking was about the same in Q4, I think Q3, I think we had expected it to be slightly smaller understanding that's largely behind us, but just what is that amount of destocking kind of greater than expected in Q4, and then maybe as a second question.

Operator: Maybe my first question is, just, you know, you noted that the headwind from de-stocking was about the same in Q4 as in Q3. I think we had expected it to be slightly smaller, understanding that it's largely behind us, but just was that amount of de-stocking kind of greater than expected in Q4? And then maybe as a second question: obviously, the interest rate environment is maybe a little bit friendlier now. You know, your balance sheet, your interest rate is relatively heavy on your interest expense. Just wondering if you've looked at any opportunities to refinance that at a more attractive rate. Meta, so on the first question, you're right.

Meta A. Marshall: And.

Meta A. Marshall: Obviously, the interest rate environment is maybe a little bit friendlier now.

Meta A. Marshall: Your balance sheet or interest rate is relatively heavy.

Meta A. Marshall: Your interest expense just wondering if you've looked at any opportunities to refinance that at more attractive rates.

Meta A. Marshall: <unk>.

Speaker Change: Yeah. So on the on the first question.

Speaker Change: You are right. So it was about 2000 $25 million more of incremental destocking versus the original guide.

Nathan Winters: So it was about 2025 million dollars more of incremental destocking versus the original guide, and the balance of that was all set by higher demand coming in above our guidance midpoint for Q4. So I think that is again, a positive trend that we were to take a little bit more out of the channel to set us up here as we moved into 2024. As it relates to interest rates, I think we feel good about our position, what you'll see in the cost of borrowing, that includes all of our crediting and banking fees. But if you look at the overall cost of borrowing and where we trade at, I think we feel good about the position, but we're always looking at opportunities, given the environment, to whether it makes sense to refinance and take advantage of the market. So that's something we're actively looking at, but today we don't feel like we're at a disadvantage relative to the debt cost. Thank you. And our next question today comes from Joe Giordano with TD Cowen. Please go ahead.

Speaker Change: And then the balance of that was offset by higher demand to come in above our guidance midpoint for Q4. So I think we thought that is oh.

Speaker Change: I will get a positive trend that again, we would take a little bit more out of the channel to set us up here as we've moved into into 2024.

Speaker Change: So as it relates to interest rates I think the I think we feel good about actually are our position.

Speaker Change: What you'll see in the cost of borrowing that includes all of our crediting and banking fees.

Speaker Change: But if you look at the overall cost of borrowing and where we trade at.

Speaker Change: I think we feel good about the position, but we're always looking at opportunity opportunities given the environment to whether it makes sense to refinance.

Speaker Change: And take advantage of the market.

Speaker Change: That's something we're actively looking at but today.

We don't feel like we're at a disadvantage relative to the debt cost position.

Speaker Change: Thank you and our next question today comes from Joe Giordano with Cowen. Please go ahead.

Joe Giordano: Hey, guys good morning.

Operator: Hey, guys. Good morning. Morning, Joe. Hey, I just want to, you know, last year when we went, when we initially started to see the real weakness and you guys had to adjust your guide, there was clearly like a change in methodology, and it was very stripped down.

Joe Giordano: Morning, Jeff.

Joe Giordano: Hey, I just wanted to.

Joe Giordano: Last year, when we were when we initially started to see the real weakness and you guys had to adjust your guide there was clearly a change in methodology and it was very stripped down it was kind of discounting things that werent bird in hand kind of kind of orders and a.

William J. Burns: Discounting Things That Weren't Bird in Hand kind of orders and a change in how you were building up from the Salesforce commentary. So I'm just curious now, as you look into 24 and you give that kind of qualitative guidance, how would you compare? your buildup methodology to how you were a full year ago versus how you were like six months ago when it got. Yeah, Joe, I'd say that, you know, probably, if we look back to January, we literally met with thousands of our customers and partners across our channel partner summits in Asia Pacific, and then in Europe, and then North America, Latin America, and then with the National Retail Federation show. And it's clear that our solutions are essential to what our customers are doing in their business every day. And they're, you know, grateful to have, quite honestly, Zebra as a strong partner along with them.

Joe Giordano: A change in how you're building up from the sales force commentary. So I am just curious now as you look into 'twenty four and you gave that kind of qualitative guide.

Joe Giordano:

Joe Giordano: How how would you compare.

Joe Giordano: Your buildup methodology to how you are a full year ago versus how you were like six months ago. When you when it got much more conservative.

Speaker Change: Yeah, Joe I'd say that probably if you look back to January we literally have Matt with that one.

Speaker Change: <unk> of our customers and partners across our channel partner Summit in Asia Pacific and then in Europe, and then North America, Latin America, and then with the National Retail Federation show.

Speaker Change: And it's clear that our solutions are a central to what our customers are doing in their business every day and there you know.

Speaker Change:

Grateful to have quite honestly zebra has a strong partner along with them and they are excited about the innovation that we're bringing to market.

William J. Burns: And they're excited about the innovation that we're bringing to market, and they're optimistic. So our partners and our customers are optimistic. They're happy to put 2023 behind them, quite honestly.

Speaker Change: And they're optimistic so our partners and our customers are optimistic they're happy to put 2023 behind them quite honestly and there's optimism for 2024, especially in in second half year.

William J. Burns: And, and there's optimism for 2024, especially in the second half year. However, I would say that, from our perspective, it's prudent to remain cautious. And, you know, that we haven't seen a broader recovery; we've really seen some kind of green shoots here at the end of the year and spending across retail, mostly in North America. And you know, we'd rather we'd like to see first some, you know, orders, projects, deployments really move forward before we, you know, get ahead of ourselves kind of for the full year. So I think optimism, happy to put 23 behind us.

Speaker Change: However, I would say that from our perspective, and it's prudent to remain cautious.

Speaker Change: And that we haven't seen a broader recovery, we really seen.

Speaker Change: Some kind of green shoots here and in the year end of year end spending across retail mostly in North America.

Speaker Change: And we'd rather we'd like to see first some.

Speaker Change: <unk> projects deployments really you know move forward before we get ahead of ourselves kind of for the full year. So I think optimism happy to put twenty-three behind us I think we feel good about modest increases through.

William J. Burns: I think we feel good about modest increases through the year as demand progresses throughout the year, but we'd like to gain a little more confidence by having, you know, more orders, more projects, more deployments across our end customers move forward. And we think it's prudent and reflective of our guide to be a bit conservative at the moment. I think if you look back historically, at this point in the year, we would have always assumed we'd have several of those large mega deployments in the second half, even though we may not have identified exactly which customer, but we would, you know, that was something we always had. And I think that's where we've pulled back on that assumption, given the experience we've had over the last several quarters and the fact that the bill said there was So until we start to see some of those firm commitments, we didn't think it was appropriate to lean in and just assume that some of those will start to come back in the second half. Okay, that's fair.

Speaker Change: Through the year as demand progresses throughout the year, but we'd like to get a little more confidence by having more orders more projects more deployments across our end customers move forward and we think it's prudent and reflected in our guide to be a bit conservative at the moment I think if you look back historically at this point in the year, we would've always assumed.

Speaker Change: We would have.

Speaker Change: Several of those large mega deployment in the second half, even though we may not have identified exactly which customer, but we would you know that was something we always had and I think that's where we pulled back on that assumption given the experience we've had over the last.

Speaker Change: Several quarters and the fact that Bill said, there's not a firm commitment so until we start to see some of those firm commitments.

Speaker Change: We didn't think it was appropriate to lean in and just assume that some of those will start to come back in the second half.

Speaker Change: That's fair and then if I look at the margin guidance for the year.

Nathan Winters: And then if I look at the margin guidance for the year, the EBITDA at 19, maybe I saw it maybe a little higher at that level of revenue, particularly given an extra $20 million in costs, so can you just maybe talk through the gross margin, if you're seeing any pressures anywhere, and then if you could just touch on the working capital this year, just the free cash flow, how normal is that going to look? Yeah, so again, if you look at our full-year guide of 19%, that does have us at 20% in the second half and as we head into 2025. So we thought that it was important for us to work through as we went through the cost actions. And if you look sequentially, it's about a year on year, I should say, about a point higher than 23, really around gross margin due to favorable pricing, some lower premium supply chain costs, and a bit of volume leverage.

Speaker Change: Yes, the EBITDA 19, maybe I thought maybe a little higher at that level of revenue, particularly given an extra 20 million in cost. So can you just maybe talk through the gross margin if youre seeing any pressures anywhere and then if you could just touch on working capital. This year, just the free cash flow.

Speaker Change: Normalized I kind of look exiting the year.

Speaker Change: Yeah. So again, if you look at our full year guide of 19%.

Speaker Change: That does have us at 20% in the second half and as we head into 2025.

Speaker Change: We thought that was important for us to work through as we went through the cost actions and if you look sequentially. Its about a year on year I should say about a point higher than 20.

Speaker Change: 23, really around gross margin due to favorable pricing lower primates premium supply chain costs and a bit of volume leverage.

Nathan Winters: If you think about the restructuring benefits, it's about $60 million of benefits improvement from 2024, but that's offset by incentive compensation. So getting back to fully loaded on our... are incentive compensation plans for the year. So those two negate each other for the full year.

Speaker Change: Think about the restructuring benefits, it's about $60 million of a benefit improvement from 2024.

Speaker Change: But that's offset by incentive compensation, so you're getting back to fully loaded on our.

Speaker Change: Our incentive compensation plans for the year. So those two negate each other for the full year.

Nathan Winters: Again, if you look at our full-year guide for free cash flow, you know, one important milestone was getting back to positive free cash flow, which we did in the fourth quarter. Our guidance of at least $550 million has us above 100% free cash flow conversion. Our final Honeywell payment here in the first quarter, and our expectation is for modest decreases in inventory and working capital throughout the year. And there could be some opportunity to exceed if we get back to our optimized inventory levels, but we do not include that in our guidance, just given some of the uncertainty around demand in the mix of that. Thank you. And our next question today comes from Damian Karras with UBS. Hey, good morning, everyone.

Yeah, and if you look at our full year guide for free cash flow one important milestone was getting back to positive free cash flow, which we did in the fourth quarter.

Speaker Change: Our guidance of 500 at least $550 million has us above 100% free cash flow conversion.

Speaker Change: Excluding the adult our final Honeywell payment here in the first quarter and our expectation is for modest decreases in inventory and working capital throughout the year.

Speaker Change: And there could be some opportunity to exceed it if we get back to our optimized inventory levels, but we do not include that in our on our guidance just given some of the uncertainty around demand and the mix of that demand.

Speaker Change: Thank you and our next question today comes from Damian Karas with UBS. Please go ahead.

Damian Karas: Hey, good morning, everyone.

Damian Karas: Good morning.

Operator: Thanks for all the color on the demand and what you guys are saying on the project front. Maybe just a question on these long-term supply commitments that you've been renegotiating. Could you just maybe talk a little bit more about them? What's happening there?

Damian Karas: Morning, Thanks for all the color on kind.

Damian Karas: Kind of demand and what you guys are saying on the project side.

Damian Karas: Maybe just a question on.

Damian Karas: These long term supply commitments.

Damian Karas: Then you have been renegotiating a can you just maybe talk a little bit more about.

Damian Karas: What's happening there.

Nathan Winters: You highlighted one particular contract, a $10 million expense, impacting gross margin. Could you just clarify, is that a one-time hit, or is that gonna kind of be a headwind for the next three quarters, a little bit of a structural change in your cost structure? Yeah, so just as it relates to the one, that was a one-time charge that's behind us in the fourth quarter.

Damian Karas: You highlighted one particular contract that $10 million expense.

Damian Karas: Impacting gross margin is that could you just clarify is that a one time hit or is that going to kind of be a headwind for that.

Damian Karas: Three quarters, a little bit of a structural change in here.

And your cost structure.

Damian Karas: Yeah. So just.

Damian Karas: As it relates to the one that was a onetime charge.

Damian Karas: Behind us in the fourth quarter.

Nathan Winters: So we, so there was no change in our structural costs or that we'd anticipate having moving forward. And we feel like we're, you know, at this point, substantially complete working with our suppliers around a lot of those longer-term supply agreements, particularly the ones that we had to enter into in 2021, when we had kind of both a combination of peak demand, as well as some of the extended lead times across the supply chain. And you'll actually see that, if you look, we also have a 75% decrease in some of our long-term purchase commitments that we have in our 10K. So again, a lot of great progress by the team working through that throughout the year.

Damian Karas: No change in our structural costs.

Damian Karas: Or that we would anticipate having moving forward.

Damian Karas: We feel like we're at this point substantially complete working with our suppliers around a lot of those longer term supply agreements, particularly the ones that we had to enter into in 2021, when we had kind of both a combination of peak demand.

Damian Karas: As well as some of the extended lead times across the supply chain.

Damian Karas: And you'll actually see that if you look.

Damian Karas: We have also a <unk> 75 per cent decrease in some of our long term.

Damian Karas: Purchase commitments that we have in our 10-K, so again a lot of great progress by the team working through that throughout the year.

Nathan Winters: And our focus really here this year is around components that we still have at our Tier 1 manufacturers. So that's a lot around just demand timing, working through that, as well as a lot of the great work by the team to redesign those components into existing or new products, as well as working with our manufacturing partners just around the safety stock that they hold. So I think we see a lot of progress there. And again, the charge we had in the fourth quarter was really associated with one supplier and one contract we signed back in 2021.

Damian Karas: Our focus really here. This year is around components that we still have at our tier one manufacturers. So.

Damian Karas: That's a lot around just demand timing working through that.

As well as a lot of the great work by the team to redesign those components into existing or new products as well as working with our manufacturing partners just around the safety stock that they hold so I think we see a lot of progress there and again the charge we had in the fourth quarter was.

Damian Karas: Really associated with one supplier and one contract we signed back in 2021 and that was a combination of.

Nathan Winters: And that was a combination of canceling and deferring some of the purchase commitments we had here in 2024 to mitigate some of the working capital pressure, as well as give us a lot more flexibility around the mix of the components and again, the timing of when we expect to receive those or take, you know, accept those components on our balance sheet. So, again, we thought it was the right thing to do to kind of get that past us and move forward here as we move into 24.

Damian Karas: Canceling as well as deferring some of the purchase commitments, we had here in 'twenty 'twenty four to mitigate some of the working capital pressure as well as it gives us a lot more flexibility around the mix of the components.

Damian Karas: And again, the timing of when we expect to receive those or take except those components on our balance sheet. So.

Speaker Change: And we thought it was the right thing to do to kind of get that past us and move forward here as we as we move into 'twenty four.

Speaker Change: Got it thank you for clarifying and could you just comment on any impact you're seeing.

Nathan Winters: And could you just comment on any impacts you're seeing owing to some of the overseas shipping issues, like what's happening in the Red Sea, and to what extent that might be factored into your guidance? Yeah, obviously, there are new concerns that we're monitoring with the risk of the escalating tensions in the Red Sea. So we're monitoring the situation, working with our partners. Today, we have mitigation plans again, pending any further escalation of the situation. I think what's important for context is this really primarily impacts our printing business in EMEA. That's where we ship via ocean through the Red Sea and the Suez Canal.

Speaker Change: Owing to some of the overseas shipping issues like what's happening in the Red Sea.

Speaker Change: That might be factored into your guidance.

Speaker Change: Yes, obviously, there is new concerns that we're monitoring with the risk of the escalating tensions in the Red Sea. So we're monitoring the situation working with our partners.

Speaker Change: We have mitigation plans again pending any further escalation of the situation I think what's important for context is this really primarily impacts our printing business into EMEA.

Speaker Change: That's where we shipped via ocean through.

Speaker Change: The Red Sea in the Suez Canal. So it was again the vast majority of our products are still air ships or ocean shipped.

Nathan Winters: So, again, the vast majority of our products are still air shipped or ocean shipped from Asia to the west coast of the U.S. So we think, as of today, it's a modest impact on extended lead times, which we've communicated to our partners, particularly in the EMEA region, and a negligible impact expected on margin here in the first quarter. Thank you. And our next question comes from Keith Housum with North Coast Research. Please go ahead.

Speaker Change: From the Asia into the West coast of the U S.

Speaker Change: So we think it's you know as of today at the.

Speaker Change: Modest impact on extended lead times, which you've communicated to our partners, particularly in EMEA region.

Speaker Change: And a negligible impact expected on margin here in the first quarter.

Speaker Change: Thank you and our next question comes from cookies wholesome, whereas at Northcoast Research. Please go ahead.

Operator: Good morning, guys. Phil and Nathan, is there any reason to believe there's been a change to your long-term guidance of an annual growth rate of 5 to 7 percent over a cycle? No, Keith, I think that we would see that the current sales declines are due to a cyclical bottom really accentuated by the pandemic overall, and that our long-term conviction in the strong business fundamentals really remains unchanged. And we think we're well-positioned to continue to be the market leader and continue to take share as our markets recover overall. The secular trends to digitize and automate environments within our customer operations really remain unchanged. They were intact before the pandemic, and they remain intact today.

Cookies Wholesome: Good morning, guys.

Cookies Wholesome: Nathan is there any reason to believe there is a change to your long term guidance or a annual growth rate of 5% to 7% over a cycle.

Nathan Winters: No I think that we would see that you know the current sales declines or are due to a cyclical bottom really accentuated by the pandemic overall and that our long term conviction and the strong business fundamentals really remain unchanged and we think we're well positioned to to be continued to.

Nathan Winters: To be the market leader and continue to take share as our markets recover overall.

Nathan Winters: The secular trends relate to digitize and automate environments within our customer operations really remain unchanged. They were intact before the pandemic and they remain intact today and I think that our strong competitive position, we have in the marketplace, especially in our core.

William J. Burns: And I think that the strong competitive position we have in the marketplace, especially in our core business, the exciting opportunities we have in our adjacent and expansion areas. And quite honestly, we're excited about the future. So despite the near-term headwinds, we don't see that changing. We see the 5 to 7 percent through cycle, you know, what we're committed to and remains intact. OK, I appreciate that. This is a quick follow-up in terms of the software and services. Obviously, it's been really resilient for you guys.

Nathan Winters: And the exciting opportunities we have in our <unk>.

Nathan Winters: Jason and expansion areas in and quite honestly, we're excited about the future. So despite the near term headwinds.

Nathan Winters: We don't see that that changing we see the 5% to 7% through cycle.

Speaker Change: What we're committed to an end remains intact. Okay. I appreciate that as a quick follow up in terms of the software and services. Obviously, it's been really resilient for you guys. If you think about that growth or that way.

William J. Burns: If you think about that growth or what it does for 2024, can you unpack, I guess, your expectations there as we separate that from the rest of the hardware business? Yeah, I think that we'd say, you know, software and services, clearly recurring revenue, right? A similar, you saw a similar comment we had on supplies, right, which we've talked about as being, you know, semi-recurring, right? It's like a recurring business.

Speaker Change: Does for 2024 can you unpack I guess your expectations there.

Speaker Change: We separate that from the rest of the hardware business.

Speaker Change: Yes, I think that we'd say software and services clearly recurring revenue right. A similar you saw some more comment we had on supplies right, which we've talked about as being.

Speaker Change: Semi recurring right. It's it's like a recurring business. So you know clearly.

William J. Burns: So, you know, clearly, services and software outperformed our broader, you know, product portfolio overall. But I say that the, you know, customers today continue to have strong attach rates on our mobile devices. Also, we're seeing the negative side of some of the services, growth is really people extending service contracts at higher prices, right? And ultimately, we're working closely with them to get their refreshes, you know, done within their environment. So that's a target for us, you know, starting in kind of the second half of 23 and into 24, really working closely with those customers that are looking to extend service agreements and sweat assets to get them to move ahead with new technologies and new advantages of our hardware. But that's helping software a bit, I'm sorry, services a bit in the short term.

Speaker Change: Services, and and and software outperformed.

Speaker Change: Our broader <unk>.

Speaker Change: <unk> portfolio.

Speaker Change: Overall, but I would say that the customers.

Speaker Change: Today continue into two strong attach rates on our mobile devices.

Speaker Change: So we're seeing this as a negative side of some of the services.

Speaker Change: <unk> growth is really people extending service contracts at higher prices right that ultimately, we're working closely with them to get their refreshes done within their environment. So that's not a target for us starting in kind of second half of 'twenty 324 is really working closely with those customers that are looking to extend service agreements as well.

Speaker Change: That is to get them to move ahead with new technologies and new advantages of our our hardware, but that's that's helping software a bit I'm, sorry services a bit in the short term.

Speaker Change: From a software perspective, we're seeing really a compelling value proposition to our customers around.

William J. Burns: From a software, you know, perspective, we're seeing really a compelling value proposition for our customers around what we've really brought together is our work cloud software, which is bringing the multiple organic and acquisition assets together to really address the needs that are retail-related. And we talk about that in this modern store framework as an engaged associate. So think of it as communication collaboration; think of it as task management, workforce management, and demand planning.

Speaker Change: We're really brought together is our work cloud software, which is bringing the multiple organic and acquisition assets together to really address the needs that have retail associated and we talk about that at this modern store framework is an engaged associates. So think of it as communication collaboration and think of it as a task management workforce management.

Speaker Change: <unk> planning, so marrying that all together into a single.

William J. Burns: So marrying that all together into a single application or instance for our customers and being able to really enhance the productivity of the retail worker is really responding well with our customers. We had our trade show and internal event with our user group of our software customers in the second half year and rolled out, you know, really what we're doing around work cloud in the future of that, and they're pretty excited about it. I know Nate, do you want to add anything?

Application or instance for our customers and be able to really enhance the productivity of the retail worker and that's resonating well with our customers. We are our trade show on our our internal event with our user group of our software customers in the second half of year and rolled out really what we are.

Speaker Change: Doing around where cloud in the future of that and they're pretty excited about it.

Speaker Change: Do you want to add I mean, the only thing we're focused on is really profitability around those areas and not growing top line, but also profitability in our software business as we bring those together that's right I think the other bright spot on the service and software as the improved margins. So a lot of great work by the team.

Nathan Winters: I mean, the other thing we're focused on is really profitability in those areas and not just growing the top line, but also profitability in our software businesses. We bring those together. That's right.

Operator: I think the other bright spot on the service and software is the improved margin. So a lot of great work by the team focused on the cost structure for both of those pieces of the business. So that was a nice improvement as we move to the second half and will be a tailwind as we move here into 2024, along with the expectation that those businesses will continue to grow. Thank you, and our next question comes from Brian Drab with William Blair. Hi, good morning.

Speaker Change: Focus on the cost structure for both of those pieces of the business. So that was a nice improvement as we move to the second half there will be a tailwind.

Speaker Change: As we move here into 2024, along with <unk>.

Speaker Change: The expectation that those businesses will continue to grow.

Speaker Change: Thank you and our next question comes from Brian Drab with William Blair. Please go ahead.

Brian Drab: Hi, Good morning, I, just wanted to clarify first.

Nathan Winters: I just wanted to clarify first on the cost savings, exactly what is the incremental benefit that we'll see in terms of cost savings, OPEX savings in 2024 versus 2023 now that we've got these incremental savings coming on mid-year. Yeah, so if you look at the expanded cost reduction plan at $120 million of net annualized savings, $20 million higher than our prior guide, with the additional actions expected to be completed here by the middle part of the year. So we realized $50 million of savings in the second half of 2023. So we're expecting $60 million of incremental benefit into 2024 and then the balance as we head into 2025. Yeah, perfect.

Brian Drab: On the cost savings exactly what what is the.

Brian Drab: Incremental benefit that we'll see in terms of cost savings Opex savings from 24 versus 23 now that we've got some of these incremental savings coming on mid year I guess.

Speaker Change: Yeah. So if you look at our.

Speaker Change: The expanded cost reduction plan at $120 million of net annualized.

Speaker Change: <unk> savings 20 million higher than our prior guide.

Speaker Change: With the additional actions expected to be completed here middle part of you know by the middle part of the year. So we realized 50 million of savings in the second half of 'twenty. Three so we're expecting $60 million of incremental benefit into 'twenty four and then the balance as we head into 2025.

Speaker Change: Yes, perfect. Okay. Thank you.

Nathan Winters: Okay, thank you. And what we had in the past, they're pretty broad based across functions. So I'd say that, you know, as similar with the decline, the incremental amount was a similar structure as we had with the first pass in terms of fairly broad... Okay, got it.

Speaker Change: Similar to what we had in the past they are pretty broad based across functions.

Speaker Change: So I would say.

Speaker Change: Similar with the declines or the incremental amount was similar structure as we had with the.

Speaker Change: The first pass in terms of fairly broad based.

Speaker Change: Okay got it and that's all in Opex and won't affect gross margin I guess my next question was just going to be on gross margin.

Nathan Winters: And that's all in OPEX and won't affect gross margin, I guess. My next question is just going to be about gross margin. I guess the best assumption here for gross margin as we track through the year would be modest increases in sequential increases in gross margin as we move through the quarters on leverage. Anything that you would correct me on there or add? Yeah, so one thing I'd say on the 120, there's a small piece of that that is in gross margin. So I'd say the vast majority is OPEC.

Speaker Change: I guess.

Speaker Change: The best assumption here for gross margin as we track through the year would be.

Speaker Change: Modest increases in sequential increases in gross margin as we move through the quarters on leverage.

Speaker Change: And anything that you would correct me on there or add to that.

Speaker Change: Yes.

Speaker Change: One thing I'd say on the 100 point. There is there is a small piece of that that is in gross margin. So I'd say the vast majority of the opex. So there is there is a piece of it in gross margin just based on some of the actions of the supply chain team is taking within within our cost structure. So a bit of that is in.

Nathan Winters: So there's a piece in gross margin, just based on some of the actions that the supply chain team is taking within within our cost structure. So a bit of that is in the 120s in gross margin. But I'd say for modeling purposes, I'd assume the vast majority is in OPEC.

Speaker Change: The 100, Twenty's and gross margin, but I would say for modeling purposes, I would assume the vast majority is in opex.

Nathan Winters: But you're absolutely right in terms of the sequential improvement. And gross margin, our EBITDA rate throughout the year is primarily driven by gross margin, both as some of the actions we've taken around pricing, the lower premium supply chain costs, which are, I guess, really here in the first quarter, but also a little bit of volume leverage, project timing as we move through the year. So yeah, that's what we'd expect through the year, the kind of modest improvement as we go through the year to get us to where we have as an exit point in the fourth quarter. Thank you. And our next question comes from Rob Mason with Barry. Yes, thank you.

Speaker Change: But you are absolutely right in terms of the sequential improvement.

Speaker Change: <unk>.

Speaker Change: Gross margin in our EBITDA rate throughout the year is primarily driven by gross margin both as some of the actions we've taken around pricing.

Speaker Change: The lower premium supply chain costs, which as you know I guess really here in the first quarter, but also a little bit of volume leverage project timing as we move through the year. So yes, theres a that's what we'd expect through the year is that kind of modest improvement as we go through the year that get us to where we have as an exit point and in the fourth quarter.

Speaker Change: Thank you and our next question comes from Rob Mason with Baird. Please go ahead.

Yes. Thank you I wanted to circle back Bill you've mentioned several times customers willing to sweat their assets more right now, which again, we've seen that in the past during this downturn periods. It.

William J. Burns: I wanted to circle back, Bill. You mentioned several times customers willing to sweat their assets more right now, which, again, we've seen in the past during these downturn periods. Sounds like you're trying to address that some with service strategies. I'm curious if you're testing any other strategies around trying to stimulate new product demand, whether your customers might be more amenable to, you know, service or subscription or, you know, say, leasing type arrangements in this period of time. And then maybe relatedly, is there anything on the horizon that would more catalyze their replacement, just where, you know, they can't be upgraded any further or anything of that nature? Yeah, Rob, so a couple of things kind of woven into that.

Robert W. Mason: It sounds like you are trying to address that somewhat service strategy. So I'm curious if you're testing any.

Robert W. Mason: Any other strategies around trying to stimulate new product demand whether.

Robert W. Mason: Customers might be more amenable to as service or subscription or say leasing type arrangements. In this period of time and then maybe Relatedly is there anything as you look into say the 2018 2019 devices that were put into the installed base.

Robert W. Mason: Anything on the horizon that would more catalyzed their replacement.

Robert W. Mason: Just where they can't be upgraded any further anything of that nature.

Speaker Change: Yeah, Rob So a couple of things kind of weaved into that I would say first that our sales teams. Our sales teams are working and our partners closely with those customers that we have identified that are have the the devices in there.

William J. Burns: I would say first that our sales teams and our partners are working closely with those customers that we, you know, have identified that are, you know, have the devices in there, in use longer than normal and working closely with them to understand how we can, you know, convince them to move forward with upgrades and lots of different ways to do that. And, but the driver really would be in a couple of areas. One would be technology transitions. So think 4G to 5G and wireless; think of faster Wi-Fi speeds like Wi-Fi 6, and OS upgrades. So as, as they, you know, devices become older, then there's, there's Android releases aren't available. And then along with that, we extend the security, you know, with that OS for so long, but eventually, the security patches aren't available.

Speaker Change: Use longer than normal and working closely with them to understand how we can you know.

Speaker Change: Vince them to move forward with with upgrades in lots of different ways to go do that and but the driver really would be a couple of areas. One would be technology transitions. So I think <unk> and wireless think of faster Wifi speeds like Wi Fi six.

Speaker Change: OS upgrades, so as devices become older than theirs, there's Android releases aren't available and then along with that we extend the security with Nols, So long, but eventually the security patches aren't available so from from a security perspective, that's a driver as well.

William J. Burns: So from a security perspective, that's a driver as well. The other place is really around use case expansion, right? So, you know, adding more functionality to the devices, things like authentication and facial recognition, think of zebra pay, integrated RFID on, on those devices. Over time, we'll be releasing, we showed this at the National Retail Federation show, generative AI, you know, large language models on the actual devices and an assistant. So, you know, we want this to really be about, you know, productivity and wanting more features and functionality within their environment versus just around security, right? And we're seeing that.

Speaker Change: Other places really around use case expansion right so that.

Speaker Change: Adding more functionality of the devices things like.

Speaker Change: Authentication and facial recognition think of zebra pay.

Speaker Change: Integrated RFID on on those devices were going to release here shortly.

Speaker Change: Over time, we will be releasing we showed this at the National retail Federation show generative AI large language models on the actual devices.

Speaker Change: An assistant so we want this to really be about productivity and wanting more features and functionality within their environment versus just around security right.

Speaker Change: And we're seeing that I would say that in the area of leasing what we're looking at is opportunities to marry our software with hardware and we demonstrated some of this.

William J. Burns: I would say that in the area of leasing, what we're looking at is opportunities to marry our software with hardware. And we demonstrated some of this at the National Retail Show as well. Think of a wearable device that has our task management software, communication, and collaboration on that wearable device in retail, which would be sold as a service kind of offering to our customers. So not quite a lease.

Speaker Change: National retail show as well is that think of a wearable device that has our task management software communication collaboration on that wearable device in retail which will be sold as you know.

Speaker Change: As a service kind of offering to our customers so not quite a lease in most cases, our customers, saying, hey, I can I'd, rather spend the capital and lease but in this case it will be in Opex recurring revenue stream around software and hardware combined together so.

William J. Burns: In most cases, our customers say, hey, I'd rather spend the capital than lease. But in this case, it would be an OPEX recurring revenue stream around software and hardware combined together. So sales teams have a lot of different plays they're running to try to move those customers forward with upgrades. That's helpful.

Speaker Change: Those teams have a lot of different players they are running to try to move.

Speaker Change: Those customers forward with upgrades.

Speaker Change: Okay. That's helpful.

William J. Burns: Just as a follow-up, could you just comment on what you're seeing in some of these underpenetrated markets, where perhaps you do have more runway, and I'm thinking Japan and government specifically, just what the current tone of business is there? Yeah, Rob, I'd say that there are opportunities for us. As we look around the globe, and we have differing market shares, those are two good examples of really significantly lower market shares than we have in other places.

Speaker Change: Just as a follow up could you just comment on what Youre seeing in some of these underpenetrated markets.

Speaker Change: Perhaps you do have more runway and I'm thinking, Japan and government specifically.

Speaker Change: Just what the current tone of business is there.

Speaker Change: Yeah, Rob I would say that there are opportunities for us as we look around the globe and we have different market shares. Those are two good examples of really you know significantly lower share than we have.

William J. Burns: But as we look at each vertical market, as we look at each geography, we see places where we can continue to take share as a business. Japan is a great opportunity for us, as we've talked about for a while, the second largest market in Asia. We won the largest postal carrier there.

Speaker Change: In other places, but as we look at each vertical market as we look at each geography, we see places where we can continue to take share as a business Japan is a great opportunity for us as we've talked about for a while second largest market in Asia. We won the largest postal carrier. There. We won the largest retailer we now have the attention of some of the largest integrators.

William J. Burns: We won the largest retailer. We now have the attention of some of the largest integrators, system integrators, and cellular carriers in Japan to work on some new opportunities beyond retail and postal. So those have gotten us some more attention, and we've changed our channel strategy there a bit to work with larger SIs. And we've just hired a new sales leader. If we look at government in the US, a new sales leader there is to refocus on government, building our partner community, and expanding our reach inside government opportunities that include public safety.

Speaker Change: With system integrators, and cellular carriers in Japan to work in some new opportunities there beyond retail and postal so.

Those who have gotten some more attention and we've changed our channel strategy. There are bits of large with work with larger size.

Speaker Change: We've just hired a new sales leader, if we look at government and in the U S. A new sales leader there is the refocus on government and building our partner community and expanding our reach inside government opportunities that includes public safety. So we're excited about these markets because we have low share and we know there's opportunities for our portfolio.

William J. Burns: So we're excited about these markets because we have a low share and we know there's opportunities for our portfolio within those underserved markets. Thank you. And our next question today comes from Jim Ricchiuti with... Hi. Good morning. This is Chris Grengorn for Jim. Maybe just one question for me.

Speaker Change: Julio within those those underserved markets.

Speaker Change: Thank you and our next question today comes from Jim Ricchiuti with Needham <unk> Company. Please go ahead.

Speaker Change: Hi, Good morning. This is Chris <unk> on for Jim Maybe just one for me you had mentioned.

Operator: You mentioned the trend of new automation use cases in RFID and machine vision. Could you talk about what you expect from these technologies in 2024 and what use cases are you having the most productive conversations with customers currently? Yeah, Chris. Maybe start with RFID.

Chris: The trend of new automation use cases in RFID and machine vision.

Chris: Could you talk about what you expect from these technologies in 2024 and and what use cases are you having the most productive conversations with with customers currently.

Speaker Change: Yeah, Chris maybe we start with RFID, we're continue to see strong interest across.

William J. Burns: We're continuing to see strong interest, you know, across, you know, many customers and verticals. We've seen the opportunity expand beyond retail apparel really into track and trace and supply chains, parcel tracking, baggage tracking, tools, work in progress, and manufacturing, you know, healthcare opportunities, all with RFID. Certainly, Walmart and what UPS are doing inside the smart package into their environment is causing others to continue to look at the interest in RFID, the cost of the tags coming down, and the trade opportunity because, you know, today, we have the broadest and deep And that includes, you know, fixed readers, handheld readers, industrial and mobile printers, you know, software, and the labels to go along with that.

Chris: Many customers and verticals, we've seen the opportunity to expand beyond retail apparel really into track and trace and supply chains parcel tracking baggage tracking tool.

Chris: Tools work in progress in manufacturing health care opportunities all with RFID.

Chris: Certainly a walmart and <unk>.

Chris: And what <unk> is doing inside smart package into their environment has caused others to continue to look at the end of interest in RFID the cost of the tags coming down in the U S.

Chris: That has created opportunity because today, we have the broadest and deepest set.

Chris: RFID solutions in the market.

Chris: And that includes fixed readers handheld readers industrial and mobile printers software and the labels to go along with that so we've seen strong double digit growth.

William J. Burns: So we've seen strong double-digit growth, you know, over the past few years in RFID, including in 2023. And we, you know, are excited about the opportunity, you know, across everything we do in RFID. I would say machine vision is really focused on two areas, manufacturing and transportation logistics. From a manufacturing perspective, automotive, food, and beverage; inside logistics, it's really about warehouse and distribution.

Chris: Over the past few years and in RFID, including a 2023 and we are.

Chris: We're excited about the opportunity across everything we do in RFID I would say in machine vision really focused in two areas, our manufacturing and transportation logistics from manufacturing perspective, automotive food and beverage inside logistics, it's really about warehouse and distribution.

William J. Burns: We combined our organic investment really with a few acquisitions of Matrox and Adaptive Vision. You know, that's really given us a broad differentiated offering across those markets and created opportunities for us to win. And what we see is a fragmented, you know, multi-billion dollar market opportunity for us. Our value proposition really is around marrying software and hardware together and giving a unified software platform to our customers that is easy to set up, easy to upgrade, really to drive simplicity, speed, and efficiency within our customers' organizations and allow them to automate in an easier way and upgrade that automation from things like fixed industrial scanning to machine vision. So we're excited about both these opportunities. You know, we are the leaders in RFID reading today.

Chris: We combined our organic investment really with a few acquisitions of matrix and adaptive vision, that's really given us a broad differentiated offering across those markets and creates opportunities for us to win and what we see is.

A fragmented multibillion dollar market opportunity for us.

Chris: Our value proposition really is around.

Chris: Marrying software and hardware together and giving a unified software platform to our customers and easy to set up easy to upgrade.

Chris: Really to drive simplicity speed efficiency within our customers.

Chris: Organizations, and then allow them to automate in an easier way and upgrade that automation from things like fixed industrial scanning the machine vision. So we're excited about both these opportunities.

Chris: We are the leaders in RFID reading today, we're a challenger in the machine vision market and we see both being a tremendous opportunity for zebra.

William J. Burns: We're a challenger in the machine vision market, and we see both as a tremendous opportunity for Zebra. Thank you. And our next question today comes from Ken Newman at Key Bank Capital Markets. Please go ahead.

Chris: Thank you and our next question today comes from Ken Newman at Keybanc Capital markets. Please go ahead.

Ken Newman: Hey, good morning, guys. Thanks for squeezing me in good morning.

Operator: Hey, good morning, guys. Thanks for squeezing me in. Good morning. Good morning.

Ken Newman: Good morning.

Ken Newman: First question here, just looking at R&D expense I know it saw that it took a sequential step down this quarter from <unk>.

Nathan Winters: First question here, just looking at R&D expense, I know I saw that it took a sequential step down this quarter from 3Q. As I think about this first quarter guide and the full year, how should we think about the cadence of R&D dollars as we move through the year? And is there, you know, maybe more room to take out there as we progress after the first quarter?

Ken Newman: Just as I think about this first quarter guide and the full year, how should we think about the cadence of R&D dollars as we move through the year and is there maybe more room to take out there as we progress after the first quarter.

Nathan Winters: Yeah, so I think a couple of things. Some of the sequential decline from Q3 to Q4 was related to the cost actions that we took and just the timing of those rolling into the P&L, which is, again, what we had expected coming into the quarter. You'll see it increase a bit here as we go through 24, just as we reset comp plans and things like that around incentive compensation. And typically, the first half is a little more front-end loaded just with the timing of projects and deployments, and then you know Q4 is always a little light just with holidays and whatnot from project execution. So I think I would think of a similar trajectory from a sequential perspective as we move through the year, but maybe a bit of an uptick just as we can again reset all of our comp plans and whatnot for the year. Got it, that's helpful.

Speaker Change: Yes, so I think a couple of things just.

Speaker Change: Some of the sequential decline from Q3 to Q4 was related to the cost actions that we took.

Speaker Change: And just the timing of those rolling into the P&L, which is again, what we had expected coming into the quarter you'll.

Speaker Change: Youll see the increase a bit here as we go through 24, just as we reset comp plans and things like that around incentive compensation.

Speaker Change: And typically the first half is a little more.

Speaker Change: Front end loaded just with the timing of projects and deployments and then Q4 is always a little light just with holidays and whatnot from a project execution. So I think I would think of a similar trajectory.

Speaker Change: From a sequential perspective, as we move through the year.

Speaker Change: But maybe a bit of an uptick just as we kind of reset all of our comp plans and whatnot for for the year.

Speaker Change: Got it Thats helpful.

Speaker Change: And then for my follow up.

Nathan Winters: And then for my follow-up, you know, with free cash flow improving this year and you being at the top of a leveraged target range, what is the midpoint of guidance right here for where you think net leverage ends up relative to debt paydown? And, you know, am I right in assuming that the priority for capital deployment will be towards the debt side? Or are there other parts or avenues that you see as a better return for that capital?

Speaker Change: With free cash flow improving this year and you being at the top end of leverage target range. What is the midpoint of guide imply here for where you think net leverage and relative to debt Paydown and.

Speaker Change: Am I right in assuming that the priority for capital deployment will be towards the debt side or are there other portions or avenues that you see a better return for that capital.

Yeah. So as you mentioned we ended the quarter at two five times debt leverage which is at the high end of R. R.

Nathan Winters: Yeah, so as you mentioned, we ended the quarter at two and a half times debt leverage, which is at the high end of our, our target range. We are prioritizing debt paydown on our variable rate debt here in the short term. And we would expect the debt leverage to increase a bit here through the first and second quarters, really just as we lap on the profitability side. Not so much debt will come down, but the ratio will increase, but then it will decline through the second half as we kind of lap Q3 and Q4's lower profitability.

Speaker Change: Our target range.

Speaker Change: We are prioritizing debt paydown of our variable rate debt here in the short term.

Speaker Change: And we would expect the.

Speaker Change: The debt leverage to increase a bit here through the first and second quarter really just as we lap the on the profitability side not so much debt will come down but.

Speaker Change: The ratio will increase but then will decline through the second half as we kind of lap Q3, and Q4 is lower.

Profitability.

Nathan Winters: And so that is really the priority here starting out the year is debt paydown. But, as always, we're going to reassess overall capital deployment and opportunities we have, whether that's shared buyback or M&A as the year progresses. Thank you. And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Burns for any closing remarks. Thank you. As we look towards the long term, the opportunity for Zebra is bright. I'd just like to thank our customers, our partners, and employees for their support. We look forward to returning to growth in 2024.

Speaker Change: And so that is really the priority here.

Speaker Change: Starting out the year as debt paydown, but as always we're going to reassess overall capital deployment.

Speaker Change: The opportunities, we have whether that share buyback or M&A as the year progresses.

Speaker Change: Thank you ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Mr. Burns for any closing remarks.

Burns: Thank you as we look towards the long term the opportunity for zebra is bright.

William J. Burns: Like to thank our customers our partners and employees for their support we look forward to returning to growth in 2024 have a good day everyone.

William J. Burns: Have a good day, everyone. Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day. Goodbye. BF-WATCH TV 2021

William J. Burns: Thank you Sir This concludes today's conference call. Thank you all for attending today's presentation.

Speaker Change: That is correct your lines and have a wonderful day.

Speaker Change: Goodbye.

Speaker Change: [music].

Speaker Change: Yeah.