Zebra Technologies Corporation

Good day, everyone, and welcome to Xero's fourth quarter and full year 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by Xero. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Mike Steele, Vice President of Investor Relations. Sir, you may begin.

Good morning and welcome to 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. 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 and full year 2021 results. Then Nathan will provide additional detail on financials and discuss our 2022 outlook. Anders will conclude with progress made on advancing our enterprise asset intelligence vision, along with an updated view of our served market opportunity and revised long-term sales outlook. Following the prepared remarks, Joe Heal, our Chief Revenue Officer, will join us as we take your questions. Now let's turn to slide four as I hand it over to Anders.

Thank you, Mike. Good morning, everyone, and thank you for joining us. Our team delivered solid fourth quarter results in an exceptionally challenging supply chain environment. For the quarter, we realized adjusted net sales growth of 12% or 10% on an organic basis. Adjusted EBITDA of $319 million, a 4% year-over-year increase. An adjusted EBITDA margin of 21.7%, a 180 basis point decrease. Non-GAAP diluted earnings per share of $4.54, a 2% increase from the prior year. And strong free cash flow. Customer demand is stronger than ever for our solutions that digitize and automate workflows. We realized sales growth across all four regions supported by exceptional strength in mobile computing, with particularly strong growth in Asia Pacific and Latin America. Supply chain constraints limited us from fully satisfying our customer demand, particularly for certain data capture and printing offerings. Our teams have been aggressively working to mitigate the impact of the unprecedented industry-wide supply chain challenges by securing new sources of supply, utilizing alternative modalities of transportation, and expediting customer shipments. Premium freight costs exceeded our expectations and significantly weighed on gross margin, which was partially offset by higher service and software margin. We also scaled operating expenses while continuing to invest in initiatives to drive sustainable, profitable growth. Our solid fourth quarter performance closed an outstanding full year 2021 in which we generated record sales, EBITDA margin, earnings per share, and free cash flow. With that, I will now turn the call over to Nathan to review our Q4 financial results in more detail and discuss our 2022 outlook.

Thank you, Anders. Let's start with the P&L on slide six. In Q4, adjusted net sales increased 11.7%, including the impact of currency and acquisitions, and 10% on an organic basis, reflecting broad-based demand for our solutions. Our asset intelligence and tracking segment, including printing and supplies, grew 3.1%, despite significant supply constraints on our printer products and cycling very strong prior year results. Enterprise visibility and mobility segment sales increased 13.2% driven by exceptional growth in mobile computing. We continue to drive solid growth across services and software with strong service attach rates and expansion of our software offerings. We recognize solid growth in all four regions. North America sales increased 4% with strength in mobile computing, supplies, and services. EMEA sales increased 9% driven by strong growth in mobile computing. Asia Pacific sales grew 29%, with strength across all major geographies, including China. And in Latin America, sales increased 42%, continuing strong double-digit growth in all major offerings. Adjusted gross margin declined 210 basis points to 45.7%, due to unprecedented premium freight costs, partially offset by higher service and software margins. We will discuss transitory costs, including premium freight, further in a moment. Adjusted operating expenses as a percentage of sales improved 40 basis points as we scaled our cost structure while continuing to prioritize high return investment opportunities in the business. Fourth quarter adjusted EBITDA margin was 21.7%. A 180 basis point decrease from the prior year period entirely attributable to lower gross margin from transitory impacts, partially offset by operating expense leverage. We drove non-GAAP Earnings per diluted share of $4.54, an 8 cent or 1.8% year-over-year increase, which also reflects lower interest expense and a slightly higher tax rate. Turning now to the balance sheet and cash flow highlights on slide seven. In 2021, we generated more than $1 billion of free cash flow for the first time in our history. This was $115 million higher than the prior year, primarily due to increased profitable growth. Our balance sheet remains strong. From a debt leverage perspective, we ended the year at a modest 0.5 times net debt to adjusted EBITDA leverage ratio, which provides us ample flexibility. In 2021, we invested $452 million to acquire Antuit, Fetch Robotics, and Adaptive Vision to advance our solutions offerings in retail, manufacturing, and the warehouse. In addition, we made $34 million of venture investments in five portfolio companies, $59 million of capital expenditures, $257 million of net debt repayments, and $57 million of share repurchases. On slide eight, we show the multi-year impact of transitory costs primarily related to expedited freight due to supply chain bottlenecks caused by the pandemic, as well as tariffs on China imports. Our team is making heroic efforts to satisfy customer demand. This includes dedicating substantial engineering resources to product redesigns, negotiating long-term supply agreements with new and existing suppliers, shifting virtually all transport to air from ocean, and expediting component parts and finished goods to meet customer commitments. Global freight rates have reached record high cost per kilo for all modalities of delivery across our supply chain. In Q4, compared to pre-pandemic rates, we incurred incremental premium freight costs of $67 million, which is higher than we had anticipated in our prior outlook, and $58 million higher than the prior year. Partially offsetting this impact were $4 million of refunds of China import tariffs, which was $8 million less than we received in the fourth quarter of 2020. In total, these transitory items had a combined unfavorable gross margin impact of $66 million year over year. I will discuss our assumptions regarding the 2022 impact of transitory costs in a moment. Let's now turn to our outlook. We entered the year with a strong water backlog and healthy sales pipeline supported by broad-based demand for our solutions. Our expected sales growth of 1% to 3% for the first quarter has been capped by what we can deliver to our customers due to extended lead times and limited availability of component parts. Our outlook assumes an approximately one percentage point additive impact from acquisitions and foreign currency changes. We anticipate Q1 adjusted EBITDA margin to be approximately 20%, which assumes gross margin contraction from the prior year due to unfavorable sales mix and expected premium freight costs of $60 million, which translates to a 340 basis point unfavorable impact to the prior year period. We also expect increased operating expenses as a percent of sales, primarily due to our entry into multiple expansion markets since last spring and resuming in-person events. We believe total supply chain impacts, including transitory costs and product availability, are peaking in Q1, with recent improvements in freight capacity and better visibility and supplier commitments to component supply into the second quarter. Non-GAAP diluted EPS is expected to be in the range of $3.70 to $4. For the full year 2022, we expect adjusted net sales to grow between 3 and 7%, with the assumption that supply chain constraints steadily abate throughout the year. This outlook assumes a net neutral impact from acquisitions and foreign currency changes. We anticipate full year 2022 adjusted EBITDA margin between 23 and 24%, which assumes total transitory cost impacts, including premium freight expenses of approximately $140 to $160 million. This is slightly higher than the impact we realized in 2021. We expect our free cash flow to be at least $900 million for the year. Please reference additional modeling assumptions shown on slide nine. With that, I will turn the call back to Anders to discuss how we are advancing our enterprise asset intelligence vision and to provide an update on our served market opportunity and long-term growth expectations.

Thank you, Nathan. I am encouraged by the strong demand across our business and the bold actions our teams are taking to navigate the supply chain challenges. Slide 11 illustrates how we digitize and automate the front line of business by leveraging our industry-leading portfolio of products, software, and services. By transforming workflows with our proven solutions that generate an attractive return on investment, Fibra's customers can effectively address their operational challenges, which have become increasingly complex through the pandemic. Our innovative solutions empower the workforce to do their jobs more efficiently by navigating constant change in near real-time utilizing insights driven by advanced software capabilities such as prescriptive analytics, intelligent automation, and machine vision. We are raising our long-term organic sales growth expectations to 5 to 7% from our former expectation of 4 to 5%. On slide 12, we provide a refreshed view of our served markets, totaling approximately $30 billion. which are supported by megatrends including the on-demand economy, asset visibility, mobility and cloud computing, and automation. These trends have become increasingly important to our enterprise customers, and we remain well-positioned to meet their needs with our comprehensive solutions. Today, the vast majority of Zebra sales are in our core, which remains vibrant and is now expected to grow 4% to 5%. We have the broadest and deepest offering among the competition and believe that our continued focus and investment will advance our leadership position. Our near adjacencies provide ample opportunity to expand and have a generally higher growth profile than our core. The most promising categories include RFID solutions for use cases that demand the highest level of workforce productivity and inventory accuracy, smart supplies including dynamic temperature monitoring, as well as the opportunity to equip a broader set of frontline workers with our expanded offering of mobile computers. Beyond our core and near adjacencies are rapid growth expansion opportunities that are transforming workflows across the supply chain. We have entered these areas through organic and inorganic investments over the past 18 months, and they represent a low to mid single digit percentage of Zebra sales. In mid 2021, we launched several fixed industrial scanning and machine vision smart cameras. We also acquired Fetch Robotics to give us the broadest portfolio of autonomous mobile robots in the industry. We have also been building a compelling software suite that optimizes retail execution and demand planning, which includes Reflexus Workforce and Task Management, Debra Prescriptive Analytics, Workforce Connect, SmartCount, and Antuit AI-powered demand forecasting. Collectively, we are serving an approximately $6 billion market in these exciting expansion areas. We are early on our journey and have the opportunity to extend our capabilities deeper into the areas of machine vision, warehouse automation, and workflow optimization software over time. Now turning to slide 13. Businesses partner with Zebra to help optimize their end-to-end workflows as they strive to meet the increasing demands of consumers. I would like to highlight several recent key wins across our end markets. A global apparel retailer is deploying a Zebra solution of 32,000 TC52 mobile computers, along with Workforce Connect voice collaboration software and our software solution that transforms mobile computers into workstations on demand. We are enabling this retailer to improve associate productivity and communication in both front of store and distribution center applications, eliminating the need for walkie talkies and full desktop computer workstations. Our mobile computers will also provide the benefit of stable network connectivity, improved security features, and battery management tools. This competitive takeaway win from a major consumer device provider demonstrates our superior value proposition versus the competition. In another recent win, Zebras reflexes workforce management solution has enabled a US-based specialty retailer to optimize scheduling for more than 25,000 employees and provide enhanced self-service reporting and analytics to support accountability and performance. We have expanded our relationship with a leading international energy company to empower thousands of convenience store associates in the United Kingdom with Workforce Connect and Reflexes workforce management applications on their Zebra mobile computers and tablets. Our solution enables the store associates to automate their daily responsibilities, maximizing productivity and streamlining task management and administration. We have expanded our relationship with a European auto manufacturer, augmenting thousands of their Zebra mobile computers with RFID readers to enhance quality control in production lines and allow secure employee system access. We continue to collaborate with this customer to pilot promising new solutions to further optimize their operations. In healthcare, a large hospital system in the southern United States purchased TC52 mobile computers and our Workforce Connect software application to enable mobile access the medical record systems, as well as facilitate instant communication between nurses and other clinicians. Zebra was selected over competing consumer device providers because of our reputation for comprehensive enterprise solutions. In closing, we are working diligently to navigate through industry-wide supply chain challenges, which limit our ability to fully satisfy strong customer demand in the near term. That said, the pandemic has accelerated trends that have been driving growth in Zebra's vibrant markets, including e-commerce adoption, the need for real-time track and trace across the supply chain, and the shift to a more digital healthcare experience. We continue to be very excited about our growth prospects.

Now, I'll hand the call back over to Mike. Thanks, Anders. 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.

Ladies and gentlemen, with that, we'll begin today's question and answer session. To ask a question, you may press star and then one on your touch-tone telephones. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the keys. To withdraw your questions, you may press star and two. At this time, we'll pause momentarily to assemble the roster. And our first question this morning comes from Tommy Mull from Stevens. Please go ahead with your question.

Good morning and thanks for taking my questions. Good morning. I wanted to start with your revenue outlook. So looking at your first quarter guidance in the full year, it looks like you're expecting a step down sequentially in the first quarter and then revenue builds through the quarters for the rest of 2022. Can you walk us through the assumptions in that cadence across the quarters? And specifically, if you could provide detail on what assumptions you have for the deal business, that'd be helpful. Thank you.

Thanks, Tommy. So if we enter the quarter, as we said in our prepared remarks, with a very strong backlog, good bulking momentum here early in the quarter, the guide of 1% to 3% really reflects constrained supply, not demand. driven by very specific and certain component shortages within our printing and DCS business. Without that, we would expect to be at least as high as our full year guide unconstrained. But with that said, we do see improved visibility into those components later in the quarter and into the early part of the second. So we'd expect a solid rebound in Q2 and then gives us line of sight to our full year guide. And on the full year guide of three to seven, As we said in the prepared remarks, confident as ever about our business. We do anticipate improved supply chain constraints throughout the year. It's obviously a dynamic environment, but we've secured commitment and we do see improved visibility here over the next few months. And that would also assume increased growth in the last nine months of the year. Again, due to the strong backlog, demand, along with the recent targeted price increases that go into effect here at the end of the month. I'd say all that, you know, while being somewhat cautious in our overall growth assumptions given the supply chain challenges.

And Nathan, would you be able to share any embedded assumptions on the deal business? I know sometimes you have more or less visibility there, so I'm just curious what you've embedded in the outlook today.

Overall, it does, particularly if you look at it from an EBITDA rate, we do assume a favorable deal mix, so a slightly higher percentage of run rate versus deal mix compared to 2021. Obviously, that becomes a little bit harder to predict as we get into the second half of the year.

I could add some color as well. This is Joe Hill speaking. As you saw in Q4, we had strong, large deal flow. And if we look at our backlogs and pipelines, we also have continued strong, large deal flow. We have no shortage of demand.

Thank you both. And if I could pivot to a higher level question here, Andrews, Appreciate the update you provided on the long-term outlook around revenue. I'm curious for any additional context you could give us on the thought process there and what went into that revised outlook, and then specifically on the double-digit expansion opportunities that you provided. I noticed the ones on your slide are areas where you've already entered either organically or inorganically. Are there any other that may not be on that slide where we could expect potential for continued M&A and or organic investment? Thank you.

Yeah, you know, first, you know, we've, we raised our longer-term growth outlook to 5 to 7% over cycle versus the historical number we had of 4 to 5% that we had in place since 2014 when we did the enterprise acquisition. Over the last seven or eight years, we have overachieved that target, and we've been more in line with 7%. And we see our overall markets being very strong. We serve by some very strong secular trends that are helping to drive demand, and as we help to digitize and automate our customers' operations and their workflows. And our competitive position remains very, very strong. And we think we have great opportunities in our core. The core continues to perform very well, but also in our adjacencies and in our expansion markets. So you asked specifically about the expansion markets. We include in there only things that we have identified so far where we have plans or more than plans, where we have solutions that are in the markets. So could it expand? Sure, absolutely, it can expand. But we looked at sizing the market to the solutions we have today and the type of applications that they address. So we're not including, say, the entire markets for these funds, but only the markets that we can address today. So as we continue to add functionality, we'll possibly add new solutions. That total market, served market, can expand. we certainly see those as very attractive markets. We have a strong right to play, and we have a differentiated value proposition, like in fixed industrial scanning or in robotics. And those markets we expect to have a materially higher, strong double-digit growth rates versus our core, and they will then augment the overall growth rates we have for the company.

And our next question comes from Andrew Biscaglia from Barenburg. Please go ahead with your question.

Good morning, guys. I wanted to ask a little bit more on the margin outlook, near and long term. So on the price side, you said you raised prices. Do you have capacity to potentially raise again? And then on the cost side, are you – if need be, that is, obviously. And then on the cost side, are you – assuming everything's being shipped by freight again, you know, for the most part of the year? Or sorry, by air. Excuse me. Are you assuming freight is shipped by air, not land?

Yeah, so if you, I'll start with the last question there. If you look from our assumptions, particularly in Q1, we are still assuming that we're almost shipping, particularly in printing, exclusively via air versus ocean. although we do expect that to shift as we move throughout the year. So getting back to more normalized levels in the second half. So that's assumed in the full year guide from a margin rate perspective. And then when you look at the price increases, particularly the one we did here this month, that ranged from zero to 8%. Again, it was not a general increase similar to what we did in September. It was very specific to the product family region. based on the competitive position, as well as the cost increases we're seeing in those respective product families. And that represents a little less than a point of sales growth contribution for the year. And it is something we'll always continue to assess, um, and, you know, uh, look at, and if we need to increase prices again, based on the competitive positioning and or, um, the inflationary environment, we'll do so.

Yeah. Okay. Okay. And, um, On that long-term guidance slide, I was surprised to see that core market. First off, can you update us on what you think your market share is in that? I believe it was close to 50% last time you gave us that update. And then I'm surprised to see that that's still 4% to 5% CAGR, just given the world's sort of changed in the last couple of years. Yeah, just wondering how you're thinking about that.

So our market share is very strong. We peg our overall market share at about mid-40% for our core, where mobile computer would be a little bit higher. Printing is thereabout, so maybe a little higher and a little lower for scanning. But the overall market share, we peg around mid-40%. And the growth rate is based on independent market research for those markets, as well as an expectation that with the focus in investments we're doing, we will be able to continue to gain some share, although not quite at the same pace as we have for the last several years.

Okay. All right. Thank you, guys.

And our next question comes from Jim Rashudi from Needham & Company. Please go ahead with your question.

One thing. A question about RFID. you know, there's been quite a bit of activity in that market, some fairly high profile use cases that have been publicized recently. And I'm wondering, you know, does this represent an incremental growth opportunity? Or does it perhaps shift some revenues from some of the conventional business, your core business? And I'm wondering if you could uh, you know, number one, talk about the opportunity and, and if, can you say, and I'm not sure you've ever really sized that portion of the business. Uh, can you elaborate on it perhaps? Thank you.

Yeah. So we include RFID in the adjacent markets for us. You know, it's, it's, uh, you know, we've been in the RFID space for a long time. So it is very much a, a close adjacency to our core where we have strong right to play and, and, uh, our solutions are very much tied together. I would think of it as not a, it's not a either or type thing that customers either buy RFID or they buy our regular solutions. Our RFID solution goes on top of our traditional products. So if you want to say print and encode an RFID label, it is one of our traditional label printers with an RFID encoder attached to it. And similarly, if you want to, read the labels, you know, that is an attachment, the sled or something like that on our mobile computers. So it is an incremental part of our core business, but it's not the supplement or it's a supplement, but not a substitute for our core. And the market continues to grow very nicely. We've seen apparel retail probably be the main driver so far. We're looking at the in-store inventory accuracy as one of big drivers, but it's been spreading across more different categories within retail, but also we see now moving into other industries. So manufacturing, being able to track components or sub-assemblies through a supply chain or in healthcare to be able to do a number of attractive use cases there also.

Maybe I'll add something, Jim, I would say that There's definitely an incremental piece to it, but there's also some substitution. I'll give you two quick examples. In apparel retail, most of the supply chain has replaced barcoding with RFID now, at least in the more advanced retailers, and that's probably a substitution because they're using that now throughout their operations as they would have before barcodes. On the other hand, we see a lot of applications, for example, pallets. Pallets have in the past hardly ever been tracked, but with RFID, we can now track them. And so putting RFID labels on pallets is a great way to ensure a much greater efficiency of pallet logistics, which is surprisingly a big problem. So that's an indication of the incremental nature that we do see.

So we take some comments recently from UPS where they talk about working some smart logistics centers where they're replacing, I think they said, something like 20 million, potentially using RFID to replace 20 million manual scans with traditional barcode. It sounds like you still see a lot of opportunity, even if there's some impact on the core businesses.

Yes, we see that as a nice addition to the business, because they would have to augment, say, either printing or mobile computers with RFID capabilities, or they could also, of course, use overhead RFID readers, which will be a new business for us with UPS. So we see that as a very attractive adjacent growth opportunity for Zebra.

Got it. Thank you. Yep.

Our next question comes from Meta Marshall from Morgan Stanley. Please go ahead with your question.

Hi, team. This is Eric on Formita. Thanks for taking our questions, and congrats on navigating through another tough quarter and outperforming our expectations. I guess just maybe to start off on the high-level growth target you put out, Do you think every vertical has the potential to be a 5% to 7% growth vertical across your end markets, or is that more skewed to certain customer bases?

We expect broad-based growth across basically the entire business. So, you know, verticals, geographies, and product lines. Specific to, you know, verticals that highlight healthcare and manufacturing as a too high growth opportunities for us. You know, they have high need for to digitize their operations and workflows and say today there's a, you know, an under penetration, relative under penetration of our type of technologies within those verticals.

Got it. That's helpful. And then maybe if I could also ask on just some of the investments you're making and from kind of an operating leverage perspective, You've been pretty consistent in delivering operating leverage, but if you were to more aggressively grow into some of your expansion areas, could there be a situation where your top-lying growth is higher, but earnings growth more mirrors top-lying growth, or do you still think even through those investments you would be able to kind of grow your profitability ahead of revenue? Yeah.

So as you mentioned, we've had a long track record of driving profitable growth. And I'd say at a EBITDA level and a DPDA margin, we believe that can go higher. And we have many levers to do that. If you look at our full year guide here of 23 to 24% in the midpoint, that's two points higher than we were in 2019 while expanding into these new expansion markets. And those expansion markets come with higher gross margin. And the team, you know, has continued to focus on operational efficiency. You know, by the way, growing that two points despite the transitory cost increases. So, yeah, it's definitely still an objective for the company and something we can continue to do over the long term. Got it. Thank you.

And our next question comes from Keith Halsem from North Coast Research. Please go ahead with your question.

Good morning, guys. Hey, Joe, I'm just trying to unpack the information on the price increases between what you guys did in September here and in January and compare that to your annual growth rates. I mean, as you think about that 3% to 7% annual growth, how much of that is coming from, I guess, new unit growth versus just the pricing increase that you guys have been able to roll forward?

Yeah, Nathan, I think you have a good summary of that. I can add some to it.

Yeah, so Keith, so I said earlier, the price increase that went into effect here in the end of this quarter is a little less than a point of growth contribution for the year. And then the remainder of that would be driven by the strong backlog and the demand for the product. So it's a relatively meaningful, but a relatively small part of the overall growth for the year. Joe, anything you want to add? Did that answer the question, Keith, or did I miss something?

I'm trying to combine the February increase you guys come through at the end of the month with the one that you passed through in September. If you take both of those combined, what does it do to you? What's that?

Yeah, maybe, Keith, it might be a little over a point. The one here in February is larger in size. And you just have both of those slightly impacted by timing in terms they went into effect in terms of their full year impact on 2022. Okay.

You know, as a secondary question, in terms of like the supply chain, you know, we're hearing, you know, different comments in terms of the supply chain because you've got the raw materials issue and then you have logistics. It sounds like from your guidance here, you expect both of those to improve quite a bit before the end of the year, if not totally abate. And I can appreciate the efforts you're doing in terms of the redesign and, I guess, getting secondary sources. But is there one or two things you can point to that gives you the confidence that things will be improved before the end of the year for both these items?

First, as context, I'd say that we provided record profitable results for the full year of 2021 and record Q4. So we were able to do that in a very challenging supply chain environment. The situation is clearly very volatile and Omicron is an example that has impacted the pace of recovery across all the verticals we served and globally. But the demand environment, is very strong and has ramped very fast over the past year or so. And we continue to put our customers first. So we prioritize making sure we can meet our customer delivery times and customer commitments to the extent we can. Now, there are times when we have not been able to meet the traditional lead times the way we would like, but that's all been supply chain related. But we're working very hard with our partners and our customers to minimize any impact on our customers' business or our partners' business in this area. And we do believe that the challenges are peaking, and we anticipate both freight and component availability to improve as we go through the year here. Specifically on the component side, I'd say that the – The impact on availability and pricing of components that we source varies. Some are much more impacted than others, so it's certainly a very dynamic environment in that way. But as you said, we've been working all angles to make sure that we secure as much of a supply as we can. We have worked on building more resiliency overall into our supply chain. We've been negotiating long-term supply agreements with both new and existing suppliers. We're working with our suppliers to ensure we get our fair share of allocations. And we've dedicated a substantial part of our engineering organization to product redesign, to basically design out long lead time parts. As we look into Q2 and the rest of the year though, we do have better visibility and better supply commitments to some of these critical components as we enter Q2. So that's part of what gives us the confidence for the full year. And so we do expect, you know, some gradual improvements as we go through the year.

And Keith, I'll just add on from a freight perspective. Our air and ocean rates towards the end of the fourth quarter were five to X higher than what they were pre-pandemic. And as we've said, we, you know, expediting both component parts, finished goods, and shipping almost exclusively of all of our printing air versus ocean. But rates are beginning to recover from the peak in December, still significantly higher than even the first half last year and definitely from the beginning of the pre-pandemic. And we'll need some time to get print back on the ocean. And I think, you know, we still believe that these are largely transitory, but the world has changed. We'll need to wait and see how the landscape settles to the extent that, you know, we'll go all the way back down to zero. We'll have to wait and see how that plays out.

And did you, Keith, did you ask about non-semiconductor shortages also?

I didn't, but you're welcome to answer that one as well. You do.

Yeah, so here I said, you know, there's some inflationary environment across all the commodities, but You know, we would not have been, you know, not to the extent that we would make that a talking point in our earnings calls if it weren't for the semiconductor side.

Great, thanks. Good luck, guys. Thank you.

Our next questioner comes from, a question comes from Damian Karras from UBS. Please go ahead with your question.

Hey, good morning, everyone. Good morning. I wanted to ask you, morning, Anders. I want to ask you guys if you could maybe give us a sense on where you think you are for the core business in terms of the timing of the replacement cycle. I know that those devices are typically sort of recycled every five, six years or so. But just thinking about the really strong year you had last year, looks like you're expecting another positive year of growth. in 22, you know, how should we think about the 5% to 7% growth rate kind of when we get past this year, thinking about, you know, the demand you've seen and whether, you know, you need to see a step down first or whether that 5% to 7% is kind of sustainable from here?

Yeah, so first, you know, the 5% to 7% growth rate is meant to be through a cycle. So there will be some Some years will be stronger, some will be maybe a little weaker. It's certainly been that case if you look at the past seven years since we had the 4% to 5% rate. But I don't see any reason why, from a demand perspective, there will be any kind of step downs in the early part of the cycle here. You know, we see a very strong demand environment and demand The refreshes of our product lines, that happens to mobile computing, to scanning and printing all our products. We talk mostly about it from a mobile computing perspective, where Android has first, as I said, driven an acceleration of refresh rates because there's so much innovation going into the Android platform. So deployments or products that were deployed, say, five years back, have a hard time now to support the most recent Android versions or all the applications that our customers want to put on the devices. So we've seen a shorter refresh cycle for Android versus the traditional Microsoft devices that we had earlier. And that's all baked into our assumptions for this year. But we are certainly seeing many of our large deployments that happen in, you know, 15, 16, or even 17 that are now looking to, you know, refresh and or have already refreshed and are in the process of refreshing. And I don't know, Joe, if you had any further.

Yeah, I was going to give you one example, Damien. So in 2015, we closed the largest deal at that time in Zebra's history in mobile computing, which was a postal service in Europe with the first purchase of TC70 at that time. And they have just refreshed their mobile computers last year. So it was about a six year cycle for them. And you can see that, you know, others have followed suit. And as Andrew said, the replacement cycles have gotten shorter. So going from, you know, five to six years, you know, closer to the three to four year period in many cases.

Okay, great. That's really helpful. And appreciate all the detail around your addressable market and the long-term growth rates. I'm just curious on the margin front what that means for your profile. I think the software side, obviously higher gross margin relative to your business today. But thinking about those expansion areas, you know, what does it mean for your guys' margin kind of near term as those businesses grow and longer term as well? Thanks.

Yeah, Damian, and I mentioned this a little bit earlier when the question from Eric, but we didn't set out an explicit target on EBITDA margin, although we do believe it can continue to scale and grow over the cycle. And as you pointed out, many levers to do that, including, you know, all these expansion markets typically come with higher gross margin, and that'll come through an EBITDA as we scale those respective businesses, as well as churn through some of the transitory costs that are currently within the P&L. And, you know, I think ultimately our goal is to continue to drive double-digit EPS growth through all the levers we have available to us.

And our next question comes from Brian Drab from William Blair. Please go ahead with your question.

Thanks for taking my questions. I'm bouncing between two calls at the moment, and I missed a little bit of the Q&A, so sorry if I repeat something. But the post office project, the larger post office, I know there's a lot of post office projects, but the large one that was, I guess, completed here at the end of 21, what sort of headwind is that to your overall sales growth rate? And I know you're replacing that with a lot of business, but I mean, it would be great if you could make any comment on the large project.

Yeah, so the initial deployment for USPS, we did complete in the late in the third quarter, early fourth quarter, but our teams have continued to remain highly engaged with the post office. We have a healthy pipeline of opportunities here for 2022. And our current assumption within our 2022 guide is that we will sell less to USPS, so we are cycling through that. But again, have many other opportunities, as Joe mentioned earlier, around other large deals in the pipeline, just like we do any other year, to offset that and continue to grow.

Okay, so it's not... It's not material enough that you would tell me that without this difficult comparison that you would have forecasted growth of a couple points higher for 22, barring this one big project.

That's right. Again, every year we have a large deployment and rollouts. And, you know, again, we have new and other opportunities to offset that to reach our full year guide for 22. Okay.

Okay. And then I'm just curious, in the core part of your business that you're forecasting long-term growth of 45% for, how does that break down these days between AIT and EVM?

The growth between AIT and EVM is actually quite similar. It's not materially different. EVM would likely have a slightly higher growth rate, but not materially so.

Our next question comes from Rob Mason from Baird. Please go ahead with your question.

Yes, good morning. A lot of grounds have been covered already, but my question, Anders, just to go to some of these expanded areas in your introduction this year of the fixed industrial scanning and machine vision, I'm just curious if you could point to any You know, kind of key progress points on those products. I know only in the marketplace, maybe half the year, but key progress points around channel development, customer receptivity, and what should be the expectations for that or, you know, those areas, and specifically fixed industrial scanning, and also the fetch business. You know, how should we think about those in 2022?

Yeah, no, happy to do that. And I'll ask Joe to also then provide some color after my comments here. But the expansion areas that we fill today that we can address about $6 billion of opportunity there. The fixed industrial scanning machine vision part is about $2 billion. Warehouse or autonomous mobile robots is approaching a billion. And our software solutions are about $3 billion. So that gives you kind of the overall scope of that. We are very excited about all three of these. We have good traction, good customer receptivity on the fixed industrial scanning machine vision side. We have some very attractive wins already, and we continue to add functionality so we can address more and more of the markets. But one particularly attractive win, I think, for us last year, or I think it was Q4, was in automotive, where we could read It was a bake-off, and we showed very well our ability to read some DPM type of markings was better than for the competition, and we were selected based on that. But I'd say here is the overall value proposition we have in fixed industrial scanning around the ease of use. The ease of upgrades, using software to upgrade rather than having to change your cameras are very well received. And we are also working hard on a, you know, we have established a new platform fixed industrial scanning machine vision track in our Partner Connect program. So we want to make sure we recruit partners to help us scale the business in a very cost-effective way and get better reach than we can do ourselves in that timeframe. And we've always been very partner-centric, so we think this is a great way to both provide new opportunities for our existing partners as well as recruit new partners from that industry.

Yes, Al? I can add a little bit, maybe just to underline that partner point. We've made excellent progress in recruiting partners. We set ourselves a goal, both in the U.S. and Europe, to recruit the premier partners that deploy these solutions, and that's very important because these are complex solutions set up in these manufacturing and warehouse environments. We've made excellent progress in doing that, and the reason that we've been able to do that is what Andrew's called ease of use. And that's particularly important for partners because they want to set up these solutions quickly and with few resources. And that's where our solutions are different from the rest of the market is that you can do that much faster with our solutions and that's what's attracting many partners. So we're very pleased with that. On the fetch business, I think, We have the big milestone that I hope you've taken note of is that we've expanded from conveyance robots, so robots that move things from point A to point B in the warehouse, to fulfillment robots, which are ones that are used to support pickers in e-commerce fulfillment activities. That's a large and very fast growing part of the market, as you can easily imagine. And we've had an outstanding win here with one of the big e-commerce players here in the fourth quarter already, which, of course, is going to be a very important reference for us. So we're very pleased with the progress in both machine vision and the autonomous mobile robots.

Excellent. And Joe, one add.

Go ahead, Anders.

Just one add on the AMR side. We have a very differentiated value proposition in the warehouse automation space where our robot competitors, they work very hard on optimizing the movement and the use of the robot. And people who are more on the equipment side would try to optimize the movement of workers. Since we have both, we're trying to optimize the overall workflow and coordinate the movement of robots and frontline workers to drive the most productivity enhancements. And I think that value proposition resonates very well with customers.

I see, I see. And just as a follow-up, Joe, to go back to the progress you've made recruiting partners, I'm just curious if you have a percentage that are existing Zebra partners that have added and expanded versus, I guess, entirely new partners?

We do. So we have a good number of our existing partners have already been active in the machine vision space. I would tell you, though, that the majority of partners that we expect to have will be new partners that are specialized and highly proficient in this area as they're exclusive or dominant focus. But we do have a good number that we're starting with already.

Our next question comes from Paul Chung from JP Morgan. Please go ahead with your question.

Hi, thanks for taking my question. So, you know, nice record free cash flow for the year. You know, you have some nice flexibility to kind of continue M&A. You got some low net leverage levels. So should we expect kind of a similar pace of acquisitions, maybe more tilted towards, you know, on the software side? And then what kind of leverage levels are you comfortable with?

Yep, I'll start and then Nate can talk about the leverage levels here. But first on M&A, We view M&A as a top priority for us, and we're very excited about the outlook for the business, and we see M&A as a vector for growth. We're not looking to do M&A for the sake of M&A, say, but this is to help accelerate our enterprise asset intelligence vision. So think of Fetch was a great example of how we could accelerate our reach and expand our enterprise asset intelligence vision here into the warehouse automation space. So you can expect that we can be looking at some targeted bolt-on acquisitions as well as high growth acquisitions that truly advance our vision. And we do see opportunities in digitizing and automating workflows that is kind of the sweet spot for what we're looking for. And as you noted, our balance sheet is strong, so we can support a certain number of acquisitions.

No, I think just that we ended it 0.5 times net debt to EBITDA ratio and comfortable with the overall debt levels. And that gives a lot of opportunity and flexibility to address the M&A market, as Anderson mentioned.

And then your views on share buybacks, is this more to kind of offset some comp levels or what's your view there?

That's right. Obviously, the first priority is investment in the business, both organically and inorganically, but we still believe share repurchase is a good way to return capital to shareholders. We were active in the fourth quarter, and we've been active to date here in the first quarter with share repurchases.

And ladies and gentlemen, our final question this morning comes from Brian Lau from Wolf Research. Please go ahead with your question.

Hey, good morning everybody, and thanks for squeezing me in here. Anders, you gave a lot of good examples of some wins this quarter on both the hardware side and then the software offerings for Reflexus and workforce management. Just curious about the go-to-market strategy there, how you're bundling those when you're approaching customers. Are there two or three sets of kind of sales teams, or is it a more kind of holistic sales approach? Thanks.

I'll start in here since this is Joe's organizational that Joe provided some color here also. But yeah, we put a lot of thought into how we go to market and how we ramp these new solutions. You can say that we have two objectives here. One, we want to leverage the broader relationships that we have with our existing customers, but we also need to have real focus on these newer solutions. They are smaller today than our more established core solutions. So we want the team that are very dedicated, very focused on them and understand those use cases and those technologies very well. So if you take our software solutions as an example, we have a dedicated software sales team that are kind of owning the software opportunities, but they work very much through our traditional uh account managers to get introduced to the accounts to get help in in navigating those and understanding what the issues are and so forth so it's it is a sales overlay strategy for most of these opportunities but very much leveraging the our traditional account managers and you know joe do you want to add anything to that yeah um i would add i mean if you um

Anders described the objective well. We have a very strong presence. If you think about the fact that 94 of the Fortune 100 in the U.S. are now Zebra customers, we have account managers on those, and we want to leverage those. And then on the other hand, we have specialists. that need to bring specialized expertise, but also special understanding of the specific personas that are making the purchases, which would be, for example, human resources purchasers or store operations purchasers. These overlay organizations, Andrew's called them, we also refer to them as specialist sales organizations. These are meaningful organizations which have both salespeople, they have application engineers or consultants, They have business development in them, and they have channel management in them. So these are becoming large organizations that are dedicated to driving that particular offering in concert with the account managers that are now maintaining the overall relationship for us across the multitude of offerings that we have.

And ladies and gentlemen, with that, we'll conclude today's question and answer session. I'd like to turn the floor back over to Mr. Gustafson for any closing remarks.

Thank you. So just to wrap up, our primary focus continues to be the health and safety of those on the frontline. And I would like to thank our employees and partners for their extraordinary efforts to serve customers and deliver record 2021 results in a challenging supply chain environment. We are optimistic that we are now seeing the peak of these challenges, and we are working hard to minimize these impacts. So thank you, and have a great day, everyone.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.