Zebra Technologies Corporation

Good day and welcome to the Zebra Technologies fourth quarter and full year 2020 earnings results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a 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 would now like to turn the conference over to Mike Steele, Vice President, Investor Relations. Please go ahead.

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. Slide two conveys that the forward-looking statements we make today are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially due to factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of this slide presentation and in today's earnings press release. Throughout this presentation, unless otherwise indicated, our references to sales growth are year-over-year on a constant currency basis and exclude results from recently acquired businesses for the 12 months following each acquisition. This presentation will include prepared remarks from Anders Gustafsson, our Chief Executive Officer, and Nathan Winters, our Chief Financial Officer. Anders will begin with our fourth quarter results. Then Nathan will provide additional detail on the financials and discuss our 2021 outlook. Anders will conclude with progress made on advancing our enterprise asset intelligence vision. Following the prepared remarks, Joe Heal, our Senior Vice President of Global Sales, will join us as we take your questions. Now let's flip to slide four as I turn the call over to Anders.

Thank you, Mike. Good morning, everyone, and thank you for joining us. I am proud of our employees' resiliency and focus on serving our customers' critical needs during the pandemic. Through their efforts, we were able to deliver exceptional results to close out a challenging 2020. For the quarter, we realized that adjusted net sales growth of more than 10% or more than 8% on an organic basis, an adjusted EBITDA margin of 23.5%, a 210 basis point year-over-year improvement, non-GAAP diluted earnings per share of $4.46, a 25% increase from the prior year, and strong free cash flow. Each of these measures significantly exceeded our outlook. We generated more business in Q4 than any other quarter in our history. Our teams executed well to satisfy a faster than expected recovery in demand from smaller customers through our distribution channel, particularly for our printing solutions. Demand from our large customers also continued to be strong due to their need to digitize and automate workflows in an increasingly on-demand economy. We also drove improved profitability and cash flow while investing in research and development projects to drive sustainable, profitable growth. Our record Q4 results capped a challenging full year 2020, in which we realized slight declines in sales and earnings per share. However, we did achieve record-free cash flow of $895 million for the year. With that, I will now turn the call over to Nathan to review our Q4 financial results in more detail and discuss our 2021 outlook.

Thank you, Anders. Let's start with the P&L on slide six. In Q4, we returned to profitable growth after a particularly challenging first nine months of the year. Net sales increased 8.3% before the impact of currency and acquisitions. Our sales mix of large and small orders normalized to pre-pandemic levels, driven by a recovery of our run rate business, which was driven in part by pent-up demand. Our asset intelligence and tracking segment, including printing and supplies, significantly benefited from the recovery in smaller business demand, with segment sales increasing 14% from the prior year. Our enterprise visibility and mobility segment sales increased 5.6%, driven by solid growth in enterprise mobile computing solutions. We also realized strong growth in services and software, driven by our managed and support services and Zebra retail solutions. From a regional perspective, we realized solid year-over-year growth in North America and significant growth in EMEA, while Asia-Pac and Latin America were slower to recover. In North America, sales increased 6%, printing, supplies, Data capture and services were bright spots. In EMEA, sales increased 20%. Printing, supplies, mobile computing, and services grew double digits as we saw strong demand through our partner distribution channel. APAC sales were down 4% year over year, yet increased sequentially. Printing and mobile computing were bright spots, and we saw modest growth in China. Latin America sales declined 15%. with all major product and service categories declining in a challenging macro environment. Adjusted gross margin expanded 200 basis points to 47.8%, driven primarily by a $12 million recovery of China import tariffs paid in prior periods and improved services and software margin. Business mix had a negligible impact on year-on-year margin comparisons. Additionally, this quarter's results were impacted by $10 million of premium freight costs. Adjusted operating expenses increased $28 million from the prior year period and improved 20 basis points as a percentage of sales. We continued to diligently manage costs while accelerating high return investments in the business. Fourth quarter adjusted EBITDA margin was 23.5%, a 210 basis point increase from the prior year period, primarily driven by higher gross margin. We drove non-GAAP earnings per diluted share of $4.46, a 90-cent or 25.3% year-over-year increase. Turning now to the balance sheet and cash flow highlights on slide seven. We generated $895 million of free cash flow in full year 2020. This was $271 million higher than the prior year. Free cash flow conversion of 130% was significantly higher than our target of 100%, primarily due to timing of customer collections and vendor payments. Lower 2020 payments of incentive compensation, taxes, and interest also contributed to the improvement. Our balance sheet remained strong. From a debt leverage perspective, we ended 2020 at 1.2 times net debt to adjusted EBITDA leverage ratio which is comfortably below our target maximum of two and a half times. Let's now turn to our outlook. We entered the new year with a strong order backlog and healthy channel inventory levels. We are encouraged by the pickup in demand primarily from our smaller customers, which includes pent-up demand from those who had paused spending during the peak of the pandemic. This momentum, along with our sales pipeline, positions us well for double-digit sales growth for the first quarter and full year 2021. In Q1, we expect adjusted net sales to increase between 25% and 29%. This outlook assumes a 300 to 350 basis point additive impact from the acquisition of Reflexus and foreign currency changes. We anticipate Q1 adjusted EBITDA margin of slightly higher than 23%, which assumes gross margin expansion and operating expense leverage. Non-GAAP diluted EPS is expected to be in the range of $4.30 to $4.50. For the full year 2021, we anticipate adjusted net sales growth between 10% and 14%, with growth moderating through the year as we cycle more challenging comparisons and navigate a continued uncertain global economic recovery. This outlook assumes approximately three percentage points additive impact from the acquisition of Reflexus and foreign currency changes. We anticipate full year 2021 adjusted EBITDA margin between 21% and 22%, which assumes gross margin expansion from the prior year. We expect free cash flow to be at least $700 million for the year. We do not expect to repeat the exceptionally high level of free cash flow conversion that we achieved in 2020. Please reference additional modeling assumptions shown on slide eight. With that, I will turn the call back to Anders to discuss how we're advancing our enterprise asset intelligence vision in our end markets.

Thank you, Nathan. Our team has done a fantastic job executing in a challenging environment. We have strong momentum entering 2021. supported by our order backlog and pipeline of business. We continue to build on our industry-leading offerings by investing in our people, operations, and innovation to drive sustainable growth. In 2020, we acquired Reflexis and launched a record number of new products and solutions to ensure that we continue to advance our industry leadership position. Slide 10 highlights how we are building on our foundational capabilities to elevate our value proposition. We are uniquely positioned to solve our customers' complex operational challenges. Our unmatched access to frontline operational data from our vast installed base of products and solutions can be harnessed to gain real-time actionable insights. The result is a more intelligent enterprise with optimized workflows. Through the pandemic, there has been a dramatic increase in the adoption of omnichannel and online shopping. Retailers need proven solutions to overcome the significant fulfillment challenges posed by this profound behavioral shift. If goods are not delivered or made available for pickup as promised, the retailer risks losing its shopper to a competitor. To address this issue, retailers have been prioritizing their capital spend in our broad portfolio of solutions with a sense of urgency. We are enabling retailers to generate an unprecedented amount of valuable data captured through mobile computers, point-of-sale systems, RFID, and other intelligent automation solutions, all of which are critical to digitizing their operations. Key benefits to the retailer include better operational visibility and insights, increased employee collaboration and labor productivity, improved inventory accuracy, well-equipped associates with real-time actionable information, and more satisfied customers. Last month, we participated in the National Retail Federation's virtual sessions, where we showcased how Sebra's solutions help retailers deliver a superior omnichannel shopping experience. At one of the sessions, AutoZone explained how our reflexes workforce and task management solution equipped their associates with highly flexible mobile technology that enables enhanced customer responsiveness and provides insightful data for analytics and reporting. We are proud to enable AutoZone to go the extra mile to delight its shoppers. Now turning to slide 12. We continue to be excited about our opportunity to help our customers meet their mission critical needs in an increasingly on-demand economy. As a trusted strategic partner, we orchestrate end-to-end workflows for customers in a variety of end markets. As I mentioned, retailers continue to prioritize investment in our products and solutions. to address their omnichannel fulfillment strategies and related warehouse automation needs. In Q4, we secured multimillion-dollar orders from a range of e-tailers, mass merchants, grocers, department stores, and auto parts retailers. In transportation and logistics, strong e-commerce growth continues to drive parcel volumes, while last-mile on-demand fulfillment has become increasingly important. The Italian Post recently selected our printing and scanning solutions for their 13,000 post offices. Separately, the deployment of our TC7 series mobile computers to United States postal service carriers is on track to resume, as expected, in late Q1 with a goal of completion in Q3. In healthcare, the need for increased real-time visibility into the entire patient journey as well as the demand for innovative solutions to provide safe and efficient care, continue to make healthcare our highest growth and market opportunity. In Q4, we grew our relationship with one of America's leading healthcare providers. New acute care applications have made it increasingly important for this customer to equip more of their clinicians with mobile computers. The most recent use case we addressed was COVID drive-through testing with our healthcare-purposed TC5 series mobile computers, which seamlessly interfaces with their electronic medical record system. Although the manufacturing sector has been hardest hit in 2020, we are optimistic regarding our prospects of returning to growth soon. We see vibrant opportunity to increase automation in workflows, and we are viewed as a visionary in this market. In Q4, we also secured notable wins beyond our traditional end markets. This included a competitive takeaway win with a leading waste hauler in North America. This customer initiated a multi-year rollout of our ET5 series tablets, accessories, and related services for its dispatch application, which is improving training and productivity among its drivers, dispatchers, and supervisors. Another important win was with one of the largest metropolitan police departments in the United States. Using RTC7 series mobile computers, along with ZQ5 series mobile printers, they implemented an automated parking citation application that generated enough revenue to cover their technology investment in a matter of months. In closing, we continue to find substantial opportunities in our primary end markets and we are excited about the emerging prospects we see in newer markets. We are well positioned for ongoing success as the need to digitize and automate workflows continues to accelerate. Now I'll hand the call back over to Mike.

Thanks, Anders. 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. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then 2. The first question comes from Andrew Biscaglia from Barenburg. Please go ahead.

Good morning, guys. Thanks for taking my question. Good morning. So your guidance, you know, such a strong Q1 guidance, yet, you know, for the full year, you know, it seems conservative. And, you know, can you talk about what you're expecting, you know, more towards the back half of the year? Because your guidance implies, you know, maybe for EVM, more low single-digit growth, AIT probably going negative in Q4. What's built into that back half? Any color would be great.

Well, as I said, First, our industry leadership and our steadfast investments in our broad solutions is what's enabling us to rebound stronger and I think faster than our competitors. So we do expect WG growth for Q1, but also for the full year 2021. And obviously this is a strong rebound from a more challenging 2020. We do feel as confident as ever about our business. We do expect growth across all our regions, verticals, and business lines as we look at 2021. But we are a bit more cautious about the assumptions we put into our second half forecast, given the global macro uncertainty that we're facing. And we're also starting to cycle so much tougher comps in Q4. We should also mention that we're not assuming any growth in large deals or large accounts in the second half of 2021.

Okay. And how much of USPS is in the Q1 guide? Because that's such a big guide. And then maybe any other color you can give us on USPS into Q2 and Q3? Maybe a percentage that's accounted for per quarter or something.

Yeah, so on USPS, the rollout's progressing as we expected. The teams are continuing to be highly engaged. As we noted, the current rollout's around our EMC, the 300,000 TT77s. And the 300,000 rollout, we paused that since October going into the election and holiday season, and we do expect that to resume in late Q1. and really a modest impact in our Q1 guide. And then for the full year, we expect USPS about a point of our sales growth or the USPS growth to account for about a point of our full year growth, primarily in the first half of the year. Okay.

So that Q1 guide, not much. That's all pure organic, very little related to USPS. That's just pure market demand. Is it primarily an EVM, or is there sort of a bulky order in AIT or one or the other?

Yes, that's correct on USPS, and I'd say broad-based across both segments in Q1. Okay. All right, thanks, guys.

Yeah, it's been nice to see the business have performed very nicely in Q4 and the outlook for Q1 across all our products and verticals. Okay.

Thanks, Anders. Thanks, Anders.

The next question is from Tommy Mall of Stevens. Please go ahead.

Good morning, and thanks for taking my questions.

Good morning.

Anders, I wanted to start with a follow-up on your retail and e-commerce and markets. In the second half of last year, maybe most of last year, once the pandemic took hold, It sounded like within those end markets, it was larger customers who were leaning in quicker into some of the omnichannel capabilities that you offer. Then in today's commentary, you indicated that some small customer activity has resumed and is looking positive. Maybe some of that's on the printer side, but I'm curious what you could give us on the mid or smaller sized customers within those markets. retail and e-coms and markets. Anything changing for the better there or any context would be helpful.

Yeah, first I'd say that, you know, across all the verticals that we play in, you know, we are uniquely positioned to empower frontline workers to perform their duties better and more effectively and with higher customer service, particularly where COVID-19 has helped accelerate some of those secular trends around digitization and automation. So each of our four primary verticals have had a positive growth trajectory as we entered into 2021, and we're making good progress also in some newer expansion verticals that we talked about in our prepared remarks. Now, specifically for retailing and e-commerce, I'd say we saw a step change in consumer adoptions of omnichannel e-commerce as part of the early phase of COVID. If you look at in the store, buy online, pick up at store, and other delivery use cases were growing very rapidly. And in the warehouse, a lot of investments in technology to help automate them are also necessary for retailers to transform their business models. And we're starting to see pilots for our enterprise asset intelligence solutions starting to resume. Another trend that we see in retail is around equipping all associates with a device. That's also very synergistic with our Reflexus workforce and task management solutions where they work very much hand-in-hand. The strength we saw around more small and medium-sized businesses was broad-based. It includes retail also. E-commerce is probably less of smaller companies. There's more large businesses. But the small and medium-sized business strength that we saw actually spanned across the four verticals that we work in.

Perhaps an addition from my side, Sophia speaking. In the depth of the pandemic, in the Q2-Q3 timeframe, we saw that the large retail and e-commerce customers had the wherewithal to continue investing and, in fact, charged headlong, if you will, into transforming their businesses, whereas small and medium-sized customers paused their spending and were a bit precautious. In particular, outside of the U.S., we saw this phenomenon. But we also learned that the solutions that we have, in particular on the printing and scanning side, are essential to these customers, and they ultimately – need to come back and refresh those. And that is driving a lot of the pent-up demand that we were seeing in Q4 as they returned to make those essential purchases.

That's very helpful. Thank you both. And Anders, you referenced something I wanted to ask as a follow-up relating to the proof-of-concept type pilots that you have with some retailers where potentially all associates in the store have some kind of device. What additional color could you give us there just in terms of what inning we're in, in terms of those pilots, when there might be an opportunity for some larger scale commercialization of that concept? And then I noted, let's see, last month, end of January, you introduced a new mobile computer series, the EC5X. And the description there sounded like it might be tied to these pilot concepts. So I wonder if you could comment on that product innovation as well to the extent it's related.

For our customers to introduce a device for every worker, that's a great opportunity for Zebra, a great expansion for us. Our estimate is today that in retail about a third of all store associates are equipped with the device. And I'd say today it varies greatly between retailers how, you know, how deeply they're penetrated into their associate base with devices. Some are much further along than others. We are, you know, we have worked to basically expand our portfolio of mobile computing devices to ensure that we have appropriate form factors and price points to enable our customers to take this more deeper into their associate base. And we expect that this will be a continued trend. I'm not sure I expect it to be kind of big step function changes in behaviors, but more looking to continually add devices to the store associate base to be able to ensure that they are all connected and able to take advantage of all the other digital tools and solutions that the retailers offer. Maybe.

I don't know, Joe, if you have any. Yeah, I wanted to just point out two other things that I think address this question. One, you're right about the release of the EC5. It's EC50 and EC55, which are devices that combine a consumer-like form factor with all of the advantages that we bring to the enterprise Android ecosystems. And so we expect that that device in particular will play a role in this trend of the device fall. But I also wanted to point out another synergistic part of our strategy, which is the acquisition of Reflexus. Reflexus, as you know, does task and workforce management and therefore needs to reach every worker within the enterprise, in particular, of course, retail, which is their dominant vertical. And so therefore having a device in the hand of every worker now all of a sudden becomes essential again, and now we're in a great position to meet that demand.

All very helpful. Thank you, and I will turn it back.

The next question is from Jim Mercuti of Needham & Company. Please go ahead.

Hi. Good morning. I wanted to just follow up on a comment about the second half and the assumptions around large deals, how does that, you say you're not assuming large deals, how does that compare with prior years? Because typically some of that large deal activity does materialize, I would assume, as you're going through the year?

That's correct. I'd say this is more a matter of limited visibility into the second half than it is that there's a certainty that there won't be growth in larger deals. I think this is similar to how we generally, I think, forecast our years. So, yeah.

Okay. And I wonder if you could, my follow-up question is just regarding component constraints. We're hearing throughout the supply chain tightness in semiconductor components, and I'm wondering to what extent that's impacting you guys, as you think about your supply chain?

Yeah, we've definitely seen the lead times extending, but our team is working diligently, and I think we're on top of it. We have incorporated whatever visibility we have to extended lead times for semiconductors and other components into our outlook also, particularly for the second half.

Thank you.

The next question is from Meta Marshall with Morgan Stanley. Please go ahead.

Great. Thanks. And congrats on the quarter. I guess I just wanted to dig into, you know, how you guys are thinking about gross margins into Q1 and into 2021. You know, clearly you guys saw a pickup in kind of your smaller customers, which would have helped gross margins in Q4. You clearly have some large deals and still some kind of overhang from freight as you head through 2021. So just how we should be thinking of the progression of gross margins through 2021. And then maybe just as a second question, just, you know, given the kind of very healthy cash flow that you guys saw in 2020 and kind of the continuation of that into 2021, how do you guys kind of think about balance sheet prioritization currently? Thanks.

Yeah, so if you look at our full year guide, EBITDA of 21 to 22%, We expect gross margin to improve year on year, primarily due to the order size mix normalizing, which we saw in Q4 and implied in our Q1 guide. We do expect premium freight costs to persist of around $30 to $40 million, yet declining in the second half as air travel returns. And within the full year guide, we do expect OPEX to increase as a percent of sales once you include a full year of reflexes, as well as the majority of our spend returning post-COVID, including incentive compensation and travel, particularly in the second half. I also think it's worth noting when you look at the full-year EBITDA guide, you know, reflexes, as we stated, is going to be dollar neutral here, yet slightly dilutive given the investments in go-to-market and the platform. And then we do expect that to scale over time. On your second question, if you look at free cash flow, $895 million, a strong finish to the year. really around improved core working capital performance, particularly in AR. We saw very strong collection activity and some early timing at the end of the year, as well as our Q4 sales were front-loaded, driving some of the benefit, as well as small incremental AR factoring, lower taxes, interest expense, and incentive comp kind of driving the year-on-year beat. So when we look at for 2021, we do expect it to decline. but primarily due to just the exceptional 2020 performance and really more normalizing the free cash flow conversion rate over the two-year period.

Got it. Thanks.

The next question is from Paul Koster of J.P. Morgan. Please go ahead.

Yeah, thanks for taking my question. I'm just wondering if we are at the sort of inflection point for the company in terms of the sort of mix shift and margin outlook. You know, as the AIT business sort of comes back a bit, we'll be driven by the smaller accounts here, it obviously has higher margins. But you've also got the software and services business growing faster. As far as I can figure it out here, you're probably seeing in excess of 50% growth for the Reflexus business, which has, what, 20 percentage points, higher gross margins than the rest of the business. So it sort of feels to me like we're heading towards a new margin structure over the next three or four years. Can you comment on that?

The margin structure or more of the business inflection generally?

Well, yeah, the margin, I guess it's related, obviously, Anders, but... Are gross margins going to be expanding from here on out, and is the business mix, I suppose, going to be permanently changing here?

I think Nate is best positioned to answer that.

If we look at margin and margin expansion over time, we do believe we can go higher. We have many levers to achieve that. I think, as you mentioned, scaling some of the newer markets with richer gross margin reflects us being one of those proof points. And we always continue to focus on driving higher gross margin and productivity through all of our operational efficiencies across the business. And we've had a track record of doing that and driving profitable growth. And we do expect EBITDA margins to get back to the pre-pandemic levels in 21. And we really don't see any reason that should be constrained as we move forward in terms of continued expansion.

I guess I'm not asking my question very well, but is there going to be a mixed shift towards AIT and service and software, and will that drive up the margins structurally over the long term, not just to pre-pandemic levels, but to sort of almost pre-MSI acquisition levels?

I'd say first, yes. Maybe think about the business around our core near adjacencies and around the enterprise asset intelligence or intelligent edge solutions, the more the newer stuff. I do believe that our core business, AIT printing and scanning site, including services, are very healthy, good shape, and I expect them to continue to grow at a nice rate over the longer term. I don't expect printing to kind of break out from the pack here. Printing has been a bit more up and down over the last year. So we had probably a little bit more pent-up demand in printing solutions than we had in some of the other solutions. But if you look into the enterprise asset intelligence vision that we have in the intelligent edge solutions, I do expect our software assets and some of our more intelligent automation solutions to grow faster than the company average from a gross margin perspective, and obviously scale will help us here, but also as we invest in some of the newer solutions, there will be an investment phase first, and then we will see margins expanding, we believe, quite nicely once revenue is starting to grow. Does that answer your question?

Yeah. Yeah, it does. Just in passing, with respect to Reflexis, am I right that it's posting more than 50% compound growth at the moment? And can you just comment on the growth rate for temp time as well?

We aren't commenting on the specific growth rates that they have, but Reflexus has been growing at nice double-digit growth rates for the last several years, and we have high expectation that we'll continue to do that, and that it will also help accelerate some of our other, growth of some of our other software assets that will be benefiting from being associated with and incorporated into the Reflexus platform. And TempTime has had nice growth over the last few years, and we do see this year the opportunity to accelerate growth as we support COVID-19 vaccine rollouts also or distribution. So we do expect the double-digit growth for our temp time business as well.

Okay, thank you.

The next question is from Joe Aiken of William Blair. Please go ahead.

Thanks. This is Joe on, uh, for Brian today. Um, I wanted to start, uh, you mentioned the prepared remarks, um, some, some wins beyond, uh, your traditional end market. Uh, I think you mentioned a waste hauler in particular. I was wondering if you maybe just provide a little more color, um, any, any context around, uh, what brought you into that win and maybe what the opportunity is in some different non-traditional end markets that you're seeing and how meaningful that could be going forward.

Yeah, I can start with this, and then Joe can also provide some extra color here. But as I said, we have made – first of all, on the product side, we've invested in addressing some of the use cases that we see in – in some of these new emerging verticals, you know, government, utilities, and so forth. But also we made meaningful go-to-market investments. And you could say they probably started with our acquisition of Explore, but then we've tweaked our other products to also address these use cases more. So it's been a big focus of ours and the investment of ours over the last several years to make sure we position ourselves for this. We now have a portfolio of solutions and partners that can help us get into these opportunities and win them. Joe?

Yeah, I would only add that the end markets that have shown some particular promise are government, both federal and state and local, as well as the broader service industry where the waste hauling example fits in. The Explore acquisition, where Explore has a strong market, the rugged tablets are a strong product offering into those markets, has been instrumental in leading us there. But it also has been something we've been pursuing for some time, but it does take some time to build up the channel infrastructure as well as fine-tune the product offering and hire the developers appropriate type of dedicated and expert sales reps who can operate in those verticals. And we feel we now have that in place and it's beginning to pay off.

Great. Thanks to both of you. That's really helpful. And, um, I know, uh, on some past calls, uh, you've talked about, uh, the transition to Android on the mobile devices, uh, in the past and the benefit you were seeing from that is that transition largely over at this point. Um, And maybe just to put a finer point on that, what percentage of devices do you estimate that you're shipping today are running Microsoft operating system?

First around our mobile computing platform overall, we saw solid growth in Q4. We did benefit from recovery in the small and medium-sized business segment there also. There's three trends that I think are worth highlighting. The Android transition is one of those, but I'll start with new use cases. We talked earlier about the second trend, which was around putting a device in the hand of every worker. But the use cases has probably been the biggest driver. Think about omni-channel retail. Healthcare is the newer vertical, which largely is new use cases. And then the third trend around the Android transition. we still have lots of momentum around the Android transition and a lot of opportunity left in that. Our market share in Android is still around 60%, but Android now makes up about 80% of our mobile computing sales. We've often talked about the transition from transitioning older legacy Windows devices to Android, but today I think the opportunity to refresh existing installed older Android devices is actually bigger. Our estimate is that there are now low double-digit millions of Android devices in the market with a somewhat shorter refresh cycle than the old Windows devices used to have. And we expect that there's about a high single-digit million Windows devices out there. So It's more of a balanced perspective, and we certainly like to get both of those. But Android has been a great catalyst for growth for us.

That's really helpful. Thanks for taking my questions.

The next question is from Richard Eastman of Robert W. Baird. Please go ahead.

Just a quick question. Could you tell us the China tariff rebate? impacted gross profit margin, did that impact the EVM margin? Was that solely confined to EVM?

It was, yeah, Greg, thanks for the question. So out of the $12 million, $8 million was associated with EVM and then $4 million was for AIT. Okay, okay. In the fourth quarter.

Yeah, in Q4, okay. And then just a question around maybe the balance that you saw in your go-to-market. So, you know, for all of 20, can you just kind of tell us how the direct business did relative to the channel? I'm just thinking, you know, sales growth or decline.

Yeah, I can start, and then Joe can provide some additional color also. Our direct business always did very well because we had a strong – strong large deal activity, but also a lot of the larger customers that we worked with we have been supporting through channel partners. So our channel centricity, so that's how much of our revenues go through channel partners, was actually I think an all-time high in Q3 or Q4. So we have maintained a high degree of channel centricity in the business.

Exactly. I mean, our strategy has been and will be to be a channel-first go-to-market approach. And I think that's paid off very well for us here in the pandemic because the strong relationships with our partners have been instrumental in helping us recover faster. And we're seeing that in particular in the run rate. But as Andrew said, a large part If you recall the contribution of large deals made to our second half in particular, it's remarkable that the channel centricity percentage of business going through the channel has expanded in light of that. And that's part of our strategy.

When you speak to some of the smaller and medium customers, is that visibility coming through from the VARs? I mean, you know, again, we speak about the channel, but we obviously put distribution in there versus the VARs. And I guess my question is, what's the visibility on, you know, the VARs and the smaller and medium-sized customers, you know, rebounding in 21? Do you have that visibility either in orders or is it kind of front log and, you know, conversation with VARs?

Well, so... We rarely have visibility to specific individualized orders from small and medium businesses, right? We do have the distribution and channel in between. But what we know is that our distributors have a very strong outlook for the upcoming quarters at least and are ordering strongly with us, as we indicated our our order volumes have been strong. And that's, I think, a reflection of that optimism that our distributors are feeling in particular also from SMB companies.

I see. So when you look into 21, I'm really, really trying to get at is obviously the gross profit margin assumption, as Nate pointed out, you know, is higher in 21 than And is the mix of end customers there from small to medium? Obviously, you mentioned large orders in the back half of the year. You're a little cautious there. But is that mix supporting that upward migration in the gross margin when you think about 21?

Yes. We expect to have a more traditional mix of business in 2021 than we had in 2020, where, you know, for Q2 and Q3 particularly, large deals were kind of overrepresented. As Joe said, our visibility around individual smaller deals are not great, but our channel account managers do meet with our channel partners and work on forecasts and looking at specific deals and what support they need from us and so forth. So we do have some level of visibility, but obviously the further out in time you go, the less

clear that visibility is yes i understand and just just staying on this gross margin for one more second um from a pricing perspective what what's the assumption going into 21 do we are we able to capture enough price you know to to recover some of the you know the cogs inflation that we're seeing in the business i mean it would appear so but is there any price increase and net price increase that you might expect or is it mainly you know kind of net pricing

So maybe first, when you talk about COGS increases, is that the freight charges you're referring to?

Yeah, so there's freight charges and just any other cost inflation in the supply chain, in your supply chain.

Yeah, I think we don't modify our pricing based on what we believe to be a temporary cost inflation for freight. But we do have a lot of analytics and thoughts around our overall price points and where the market is. And we do always strive to get a premium for our brand. So pricing and margins is obviously a very strong focus that we have across the company. but we haven't necessarily gone and changed our price list because of this. Do you want to add anything to that?

Well, yeah. Maybe another way to think about this is if you looked back at 2020, the mix of our business in terms of small versus large was skewed towards the large, right? Because as you said, the small, yeah. So there was a pause in purchasing from the small that resumed towards the end. But in the long-term analysis, small was down relative to the long-term average. In 2021, we expect that that mix will return closer to normal. And therefore, simply because of the mix effects, we think that the average price points would normalize as well as a result of that, right? That is an effect.

Okay. That's my answer. Okay. Excellent. Thank you.

The next question is from Keith Howsam of North Coast Research. Please go ahead.

Good morning, gentlemen, and congratulations on a good quarter and good guidance. Just trying to unpack the printer growth a little bit more. Can you help me understand it in terms of that growth? Is a substantial part of that growth being driven by not only the SMBs but also growth in the supplies business as well?

Yes. You know, we had obviously, you know, Great growth in both printing and supplies. Both printing and supplies were up double digits in the quarter. Printing businesses up across the portfolio. We did, I think, benefit from some pent-up demand, particularly in EMEA. Remember, EMEA also was hit harder early on in the pandemic, so there was probably a bit more of a rebound to be had there. I'd also say, though, that early in 2020, we took a number of actions to strengthen our go-to-market and strengthen our channel ecosystem, particularly around printing. And I think that is now bearing fruit for us also. So we are more competitive, and that's helping to accelerate our share gains in printing specifically. But we did see our business through our smaller business, small to mid-sized business, recover quite nicely. We recovered faster than we had expected, I think it's fair to say, in Q4. Manufacturing has been a relatively light vertical, a strong vertical for printing generally, but lighter over the last year. But that was also coming back and strengthening. And RFID was actually a very strong quarter for printing. I think it was a record quarter for print RFID. And then on supplies, we did see a strong performance in supplies, particularly in North America. And TempTime also had a strong fourth quarter, but, you know, Overall, though, I'd say that we have a very strong portfolio of smart and connected printers that have an unrivaled manageability through our LinkOS operating system, and that is a true differentiator in the market. Okay.

Appreciate it. And just to follow up, I think a comment made earlier during the Q&A, and I think the commentary was that the U.S. Postal Service will contribute about 1% growth for the year with most of that coming in the first half. But I also heard you guys say that it's going to be only very modest for the first quarter. So that could imply, if my math is right, that you guys could have a $400 million contribution in the second quarter from the U.S. Postal Service. Is that right? And does that include, I guess, ancillary projects as well as the main $300,000 devices being fulfilled?

Yeah, so if you look at the USPS for the year, regarding the size of the rollout, I think if you look at the 300,000 printers and what we expect to deliver throughout 2021, I think you really do the implication of we're selling about 2 million mobile computers annually. That can help you infer in terms of an average price range. I think the number you have for Q2 is a little bit higher than what we'd anticipate in terms of the full year implied guide.

All right. Thank you. Yes. Yeah, remember, we've talked about earlier the total volume of mobile computers for USPS this contract is about $300,000 over two years.

Understood. Yeah, just doing the math there, I guess that's $400 million roughly. I understand it might be a little bit high. It seems a little bit more than a lot of us were assuming for the entire value of the contract, and we realize you guys fulfilled some last year as well as is what you'll fulfill this year. So it seems, again, perhaps higher than what I was assuming.

Yeah, as I said, I think the best way for you to think about USPS this year is that 1% of our growth in 2021 is coming from growth of our USPS business. And I don't want to say Q2 is the only quarter, but Q1, we'll start ramping up towards the end of Q1, but Q2, Q3 will certainly be part of it.

Oh, it's 1% of your growth, not 1% of the business. Okay. Got it. Yeah, yeah. 1% of our growth, yeah. Okay. Thank you.

The next question is from Blake Gendron of Wolf Research. Please go ahead.

Yeah, thanks. Good morning. I wanted to follow up there with some of the growth commentary. So, dollar impact from what you would consider pent-up demand to be greater or less than 4Q? And do you expect some pent-up demand to follow through into the second quarter? And I guess longer term, I mean, are we going to see this pent-up demand idiosyncrasy show up in subsequent years just based on the replacement cycle? Or is it going to normalize fairly quickly as we recover here out of the pandemic?

Well, you know, the pent-up demand concept is a little hard to get, you know, be overly specific about the impact of it. But I'd say that You know, starting with our products and solutions are now mission critical for our enterprise customers, and they need that to compete effectively in an on-demand economy. The sales to our larger companies, larger customers, as we talked about in an earlier question, you know, remained strong. And they have prioritized spend with us to better position themselves to address the newer automation and digitization trends like Omnichannel as an example. And I'd say our larger customers were better positioned to pivot their businesses early in the pandemic to align with how consumers wanted to behave, how the economy was working at that point while smaller customers had to kind of pause spending or certainly cut back on it. But I think now we see, you know, the smaller companies coming back and, you know, other customers are also realizing that they need to invest in order to compete. You know, competing in the same way they did prior to COVID is not necessarily going to be a successful formula. And I think that Part of this is also that we have been able to execute very well during the pandemic and we've been able to gain share. Our supply chain has shown great agility to be able to respond to customers that quickly want to ramp up their order volumes. And I think we were able to do that well and see some opportunities that way. So we have been realizing some good opportunities demand from this pent-up demand, you can say, which helped us in Q4, and I expect it to help us in Q1 here also. But, you know, more broadly, though, as we look forward, we are very excited about the business overall and the growth prospects that we have, not just, you know, in Q4, Q1, but longer term based on our ability to help our customers digitize and automate their businesses.

Yeah, and Blake, just to add this, Nathan, you know, it's obviously, as Anders mentioned, a tough one to quantify. If you look at our Q1 guide, we kind of think of the pent-up demand as likely contributing low double-digit growth on top of mid-teen growth from what you could say is our normal growth rates, the impact of acquisitions, FX, as well as cycling from a comp perspective versus last year where we started to feel the impacts of COVID late in Q1 last year.

Yeah, that's helpful. I understand it's tough to quantify and disaggregate everything, but the longer-term growth outlook is kind of what I was getting at, and that's constructive. My follow-ups on EVM, I'm just wondering, you know, over the last, call it 12 months or through the pandemic, what the growth of existing customers is with EVM versus, you know, new customer wins, how you see that evolving, I guess, here over 2021 and beyond, and Is there any major margin difference between one or the other, or should we think about EVM kind of along the same lines and delineate large versus small customers in terms of margin difference?

I'll start by saying new customers, if you're looking for brand new customers that haven't done any business with us, it's rare that we have those because most companies are doing some level of business with us. So it's probably more that we have new awards or new use cases with those customers. Again, we really only have visibility into that for our larger customers. And I think we've had a good, healthy clip of new customers. And I expect that we will continue to add new use cases and new applications. If you look at our portfolio of solutions, invested meaningfully to ensure we can expand the number of use cases that help address our customers' most pressing problems. So we feel good about our competitive positioning and our ability to win some of these new use cases. They may not necessarily be brand new customers, but they're brand new use cases. Joe, I don't know if you have any comments.

I would add, I mean, to your point about is there a big margin difference between the two, I would say not noticeably. The new customers that we are able to acquire, so ones that were previously competitor customers, there have been meaningful ones, of course, right? I mean, USPS is one example of those that was in the last 12 months. But they do range from the small to the large, and therefore I would expect without having done the analysis that there isn't a meaningful margin difference between the two.

That's very helpful. One more if I can sneak it in here. Balance sheet's in great shape. I'm wondering if you could just level set the capital allocation thoughts here and maybe update us on the M&A pipeline.

Yeah, I'll start. We ended the year at 1.2 times net debt to adjusted EBITDA, which is below our 2.5 target maximum. Our priority remains organic and inorganic investment in the business, and we're excited about the opportunities we see in both of those areas. We do have our share repurchase, and we believe that's a flexible way to return capital, and we'll remain opportunistic in that approach, which is evidenced by our $200 million we purchased in 2020, and we'll continue that into this year.

On M&A, we're certainly very excited about the outlook for our business, and M&A is a We think of it as a growth vector for the business. We think of M&A as a way for us to accelerate the execution on our enterprise asset intelligence vision. So it's not a standalone growth driver. It is something that we think about in a way for us to accelerate the execution on our vision. We're targeting, I'd say, select bolt-on acquisitions as well as higher growth acquisitions that can truly help move our enterprise asset intelligence vision forward. We see good opportunities in digitizing and automating supply chains and different workflows. And as Nate talked about, we have a strong balance sheet that can support that.

Really appreciate the time. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Gustafson for closing remarks.

To wrap up, I would like to thank our employees and partners for our exceptional Q4 results and a strong start to 2021. As we continue to navigate the pandemic, our top priority continues to be protecting the health and well-being of our employees, partners, and customers. So stay safe, everyone.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.