Zebra Technologies Corporation

Good day and welcome to the fourth quarter 2022 Zebra Technologies earnings 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. 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 12 months following each acquisition. This presentation will include prepared remarks from Andrews Gustafson, our Chief Executive Officer, Bill Burns, our Chief Product and Solutions Officer, and Nathan Winters, our Chief Financial Officer. Anders will begin with our fourth quarter highlights and an update on the previously announced CEO transition. Then Nathan will provide additional detail on the Q4 results and discuss our 2023 outlook. Bill will conclude with progress made on advancing our enterprise asset intelligence vision. Following the prepared remarks, Joe 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 and thank you for joining us. It was a strong finish to a challenging year with sales and profitability near the high end of our outlook. For the quarter, we realized sales growth of approximately 4%, an adjusted EBITDA margin of 22.5%, an 80 basis point increase year over year. Non-GAAP diluted earnings per share of $4.75, a 5% increase from the prior year, and strong free cash flow. Our team recovered from distribution challenges in North America to drive record sales volumes, which more than offset softer sales in our EMEA region. From a solutions offering perspective, printing, data capture, tablets, and RFID were bright spots more than offsetting lower sales of mobile computers. Although we continue to see cautious spending behavior with certain large customers, demand has generally remained solid with strength in small to midsize orders. We secured a number of exciting wins helping to drive a strong year end and momentum into 2023. These wins included a large postal customer in Asia who expects to improve productivity and efficiency by equipping 70,000 mail carriers with our mobile computing solutions. A British grocer expects to improve their shopper experience and drive store efficiencies by deploying 80,000 personal shopper devices. And the European-based auto manufacturer plans to enable process improvement and quality assurance along all stages of the production line with 30,000 Zebra mobile computers. From a profitability perspective, we expanded EBITDA margin and increased EPS by scaling operating expenses and drove our strongest cash flow quarter of the year. As you are aware, in December we announced that Bill Burns will succeed me as CEO effective March 1st. Bill is the ideal leader to continue to advance our strategy and has the full support of our board and executive team. Throughout his career, Bill has maintained a strong focus on culture, talent, and innovation. He has been a key member of Zebra's executive leadership team since joining us more than seven years ago to lead and integrate the enterprise business, which we had just acquired at the time. Since the announcement, Bill and I have been Busy meeting with stakeholders discussing the transition and Cebra's bright future. I've also been taking this opportunity to thank our employees, suppliers, and partners for their support and collaboration through the years as we transformed our business. I look forward to continuing to ensure a smooth transition as I assume the role of executive chair. I will now turn the call over to Nathan to review our Q4 financial results in more detail and discuss our 2023 outlook.

Thank you, Anders. Let's start with the P&L on slide seven. In Q4, net sales increased 2.5%, including the impact of currency and acquisitions, and 3.9% on an organic basis. Our asset intelligence and tracking segment increased 13.5%, driven by double-digit growth in printing. Enterprise visibility and mobility segment sales were approximately flat, with mixed performance among our offerings. We realized particularly strong growth in data capture solutions, including RFID, as well as rugged tablets. Mobile computing sales declined, primarily due to challenging prior year compares, particularly in EMEA. We also drove growth across services and software with strong service attach rates. Performance was mixed across our regions. North America sales increased 11%, helped by the recovery from supply chain challenges and strength in data capture and printing. EMEA sales declined 7%, primarily due to the five-point impact of our suspension of sales into Russia in March, as well as lower sales to large customers in Northern Europe. Asia-Pacific sales grew 3%, with strength in Japan and growth in China, despite COVID challenges late in the quarter. And Latin America sales increased 7%, with strong growth in Brazil and Mexico. Adjusted gross margin decreased 10 basis points to 45.6% due to FX, offset by lower premium supply chain costs. Adjusted operating expenses were lower, improving by 100 basis points as a percent of sales, primarily due to lower incentive compensation and effective cost management. Fourth quarter adjusted EBITDA margin was 22.5%, an 80 basis point increase driven by operating expense scaling. Non-GAAP earnings per diluted share was $4.75, a 4.6% year-over-year increase. Turning now to the balance sheet and cash flow highlights on slide eight. In 2022, we generated $413 million of free cash flow. Although Q4 was strong, the full year was significantly lower than last year, primarily due to a higher use of working capital due to elevated inventory, higher incentive compensation payments given our exceptional 2021 performance, and $135 million of previously announced settlement payments, which are scheduled to conclude in Q1 of 2024. In 2022, we invested approximately $880 million in the Matrex imaging acquisition to expand our machine vision solutions offerings. we made $751 million of share repurchases and invested $12 million in venture investments. We ended the year at a comfortable 1.6 times net debt to adjusted EBITDA leverage ratio, and with more than $1.4 billion of capacity on our revolving credit facility. On slide nine, we highlight premium supply chain costs, which have continued to improve from peak levels. The actions we have taken to redesign products, targeted price increases, as well as improving freight rates and capacity have enabled us to reduce component purchases on the spot market and reduce the freight cost impact. Additionally, we've increased the volume of printer shipments on ocean from air, which will contribute to reduced freight costs through 2023. In Q4, we incurred premium supply chain costs of $25 million as compared to the pre-pandemic baseline, which was favorable to what we had anticipated in our prior outlook. and $38 million lower than the prior year. We are expecting these premium supply chain costs to steadily decline in 2023. Let's now turn to our outlook. Customer demand and our order pipeline remain healthy, yet we continue to see some softening of demand and elongated sales cycles that we referenced last quarter through the uncertain macro environment. we are taking a cautious approach to our sales outlook and expense management while working to right-size our inventory levels. For the first quarter, our sales are expected to decline between 4% and 1% compared to the prior year. Our outlook assumes a three-point negative impact from foreign currency changes and a 150 basis point additive impact from recent acquisitions. This translates to expectations of negative 1% organic growth which includes a one-point headwind from sales into Russia last year. We anticipate Q1 adjusted EBITDA margin to be approximately 21%, driven by higher gross margin from improving supply chain costs despite significant FX headwinds. We expect premium supply chain costs to be approximately $20 million in Q1, a nearly $50 million year-over-year reduction. Non-GAAP diluted EPS is expected to be in the range of $3.70 to $4. For the full year 2023, we anticipate net sales to be in the range of a 3% decline and 1% growth. This outlook assumes a 50 basis point net negative impact from foreign currency changes and acquisitions, as FX headwinds moderate throughout the year. We anticipate full year adjusted EBITDA margin between 22% and 23%. We expect premium supply chain costs of approximately $50 million for the year with continued improvement in product availability. We have also proactively managed operating expenses as evidenced by OpEx scaling in Q4 and recent targeted restructuring actions as we enter 2023, which enables us to preserve strategic investments in the business. We expect our free cash flow to be at least $650 million for the year. which reflects the benefit of working down elevated inventory levels through the year, higher cash taxes, and $180 million of previously announced settlement payments. Please reference additional modeling assumptions shown on slide 10. Note that the cost of borrowing is expected to be approximately 5 to 6% this year, and our non-GAAP tax rate is expected to be approximately 19% due to the United Kingdom corporate tax rate increase. With that, I will turn the call to Bill to discuss how we are advancing our enterprise asset intelligence vision.

Thank you, Nathan. Before I talk about the progress we are making on our vision, I'd like to take a moment to thank Anders for his exceptional leadership at Zebra over the last 15 years. Through disciplined organic investment and strategic acquisitions, he's led the transformation of Zebra. He's fostered an innovative and authentic culture that has received many awards recognizing Zebra as a great place to work. Also under his leadership, shareholder value creation has significantly exceeded broader market benchmarks. I'm excited to build upon Andrew's legacy by continuing to advance our enterprise asset intelligence vision. Slide 12 illustrates how we digitize and automate the 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, Zebra's customers can effectively address their increasingly complex operational challenges. Our innovative solutions empower the workforce to do their jobs more effectively by navigating constant change in a near real time, utilizing insights driven by our advanced software capabilities, such as prescriptive analytics and intelligent automation. As I focus on moving Zebra forward, we will collaborate closely with customers and partners to continue to elevate Zebra as a premier solutions provider and work to attract, develop, and retain top global talent to drive innovation. Slide 13 summarizes our served market opportunities and long-term growth profile. The fundamental drivers of our business remain intact. Megatrends, including the on-demand economy, asset visibility, mobility and cloud computing, and intelligent automation provide secular tailwinds for our business. I am proud of the progress we're making in elevating our strategic relationship with our customers. We continue to extend our leadership position in our core business and are gaining traction in adjacent and expansion markets, which have higher growth profiles. Anders and Nathan highlighted RFID as a bright spot where we have a comprehensive solutions offering for a wide range of use cases. Our momentum continues as we were just awarded a record RFID win last week. Another highlight is our market share gains in rugged tablets as a result of our focused investment. Overall, I believe we're well-positioned to deliver 5% to 7% organic growth over a cycle with an increasing attractive margin profile as we drive continued traction across our core, adjacent, and expansion markets. Now we turn to slide 14. Businesses partner with Zebra to optimize their end-to-end workflows as they strive to meet an increasing demands of consumers across a variety of vertical end markets. As you can see on the slide, we address a wide range of workflows and use cases across retail and e-commerce, transportation logistics, manufacturing, healthcare, and other markets. Anders highlighted a few recent wins across these markets. The breadth of business challenges we are addressing has been expanding through our investment in new offerings and markets, enabling us to further penetrate customer accounts. For example, leveraging our existing relationships enabled us to secure autonomous mobile robot and machine vision wins with our customers in manufacturing and warehouse use cases. We see a tremendous opportunity to continue to elevate and grow our customer relationships through our expanded solutions offerings. On slide 15, we highlight how Zebra was able to showcase how our solutions positively impact retail store operations to more than 1300 customers at the National Retail Federation's trade show last month. At the event, we brought the modern store concept to life by demonstrating how our portfolio of solutions empower retailers to better engage associates, optimize inventory, and elevate the customer experience. Our booth featured representatives from two prominent retailers, who share how our solutions have improved their operational challenges. Lowe's Home Improvement has realized the synergies of combining Zebra's mobile printers, mobile computers, and our workflow optimization software solutions that improve the customer experience, increase efficiency, and reduce friction in their workflows. Zebra's solutions have resulted in increased customer satisfaction by improving inventory accuracy and streamlining the buy online, pick up and store experience as well as over a million hours of annualized labor savings and reduced labor waste. Vera Bradley has improved associate engagement and retention by prioritizing workloads through our task and workforce management software solutions. By leveraging Zebra's mobile devices and software solutions, they can now align the right task to the right associate in real time and increase employee satisfaction by reducing friction in schedule. Insights in our software solutions elevate the customer's experience for Vera Bradley by empowering frontline associates with better information, including visibility of product inventory and pricing. In closing, I look forward to working with our team to advance our enterprise asset intelligence vision by fostering an innovative culture, collaborating with our customers and partners, and delivering profitable growth across our core adjacent expansion markets. Now I'll hand it back to Mike.

Thanks, Bill. We'll now open the call to Q&A. We ask that you limit yourself to one question and one follow-up so that we can get to as many of you as possible.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from Damian Karras with UBS. Please go ahead.

Hey, good morning, everyone, and congrats on the quarter. Thank you. Thank you. So my first question is related to your sales outlook. And in particular, we've heard some of your competitors and even one of your major distribution partners recently talking about inventory channel destocking taking place. I'm just curious if you guys are seeing the negative impact from that at all, and to what extent that's factored into your guidance for the year?

Starting on the channel inventory side, the global channel inventory levels are healthy for us, and we see solid sell-through signals, and particularly that's true for our run-rate business. Inventory levels have rebounded in 2022 in our channel. But you've got to remember that at the end of 2021, the industry was going through some very substantial supply chain constraints and the channel was nearly stocked out. So in 2022, that rebounded to some degree, but more back to normal levels. But Inventory levels in absolute dollar terms in our channel compared to say pre-pandemic is up. But if you normalize that around days on hand inventory, which is how we really measure the health of the inventory in the channel, that is actually only up by a couple of days compared to pre-pandemic.

Got it. That makes sense. Switching gears to the margin trajectory here, if we kind of look at the low end of that adjusted EBITDA guidance, it doesn't suggest much improvement, especially when you kind of look at the notable step down you guys are expecting in the premium supply chain costs. So I was wondering if you could maybe just give a sense on how you're thinking about that margin guidance range and You know, as it relates to the 50 million premium costs, are you basically assuming that that's more or less eliminated by the third quarter?

So, David, this is Nathan. If you look at our guide for the year of EBITDA of 22 to 23, it's a point higher than we were in 2022. And as you mentioned, the primary driver is the supply chain improvements, which is about two points of improvement. But that's being offset by a point of FX. for the year, particularly here in the first half on the comps from where the FX rate was a year ago in the Euro. We also have pricing actions we've taken throughout the year that are flowing through, and that's largely offsetting material labor costs predicted for the year. So that's how to frame up. We're definitely seeing the flow through from the improvement in premium supply chain costs and lower freight rates, but FX is the real headwind that's offsetting it.

Thank you. And our next question today comes from Jim Rashidi at Niedermann Company. Please go ahead.

Hi, thank you. I wonder if you could provide us with your general outlook for the projects business in 23. Are you seeing any changes? You've expressed some caution that you're seeing from some customers, but what's your outlook for that part of the business?

Yeah, Joe, I'd say this is Bill. I'd say overall that, you know, from a macro environment, we're seeing really mixed signals. As you said, we're seeing on one hand really elongated sales cycles and some softening of demand, especially from, you know, some select large customers. That's resulting in some delays and push outs. We saw that in first quarter or sorry, in fourth quarter. And it's reflected in our first quarter and 2023 outlook. On the other hand, we're really seeing that we've got strong backlog and a pipeline is healthy for projects for 2023. Our run rate sales in fourth quarter were strong and we're continuing to see that in Q1. And as we just talked about, our global disty inventory levels are healthy. So it's really mixed signals out there that's, you know, keeping us cautious, you know, overall. And I think that, you know, our view of that is that we're going to continue to monitor the environment in 2023. We're going to take an agile approach to really managing expenses and focus on, you know, profit margin expansion, but at the same time, really preserving the, you know, strategic investments we're making, you know, throughout the year. So I think overall, we're highly confident in our solutions offering and our ability to continue to take share in 2023, but it just makes sense for us to be cautious given the macro uncertainty that's out there today.

Jim, this is Joe Heal. Maybe one or two additional data points on this. As we entered the year, our pipeline of large projects was about the same as it was the year before, so quite strong, and we're quite satisfied with how solid that pipeline of large deals was. When we are talking about caution and softness, I would say it's sort of the best possible thing you can hope for if you're in sales, which is customers are keeping the projects. In some cases, they are delaying the start time of them. In some cases, they are rolling them out over a longer period of time. But I would say those are few and far between at this point. And that's really the nature of what's driving some caution on our part.

It's helpful, Keller. The follow-up question I have is just as you went through Q4 and thus far this year, have you seen any changes in demand, meaningful changes, either in some of your major geographic regions or major market verticals? Thank you.

Yeah, I can also speak to that. I think... We have a few anomalies that you're aware of, right? You know about our exit from Russia a prior year, so that revenue is obviously not there. You probably expected that in the Chinese market, we would have less revenue this quarter than we had in the same quarter prior year because of the COVID situation. By the way, that is very quickly recovering. We're seeing a quick recovery of that. So those are, you know, perhaps some of the changes. But other than that, I couldn't say that there's a major shift in region or vertical makeup of our revenue structure.

Thank you. And our next question today comes from Paul Chong. It's AP Morgan. Please go ahead.

Hi, thanks for taking my question. So just on the EBITDA margin guide of this year, can you expand on, you know, kind of the gross margin versus OpEx dynamic and driving the outlook, you know, freight's coming down materially, but just want to get a sense for, you know, gross margin expansion expected throughout the year with, you know, 1Q most likely being the trough and then I'll follow up.

Yeah, so Paul, if you look at the full year guide on EBITDA, I mean, you know, both the supply chain improvements and FX will flow through from a margin perspective. So we expect gross margin to increase throughout the year because of those two dynamics. I think from an OPEX scaling, we'd say roughly flat to in line with prior year, just as we work through some of the increase in compensation and incentive compensation year on year. But again, I think largely the benefit in EBITDA would flow through mostly in gross margins.

Gotcha. Thanks for that. And then just on the RFID opportunity, you know, how large is the contribution to the business today? I mean, you guys have been in the market for a long time. So where are you seeing accelerating growth and some use cases across retail and other verticals? Thank you.

Yeah, I would say that this is Bill. Paul, the, you know, low single digits is the, you know, the size we think about. We're excited about the RFID opportunity. you know, as we mentioned in the remarks that we've just, you know, won our largest RFID opportunity, you know, ever really in the T&L space. And we've seen, you know, RFID move from just really retail into retail supply chain, now into the broader supply chain and opportunities within transportation logistics, which is, you know, really around, you know, parcel and others that create really an opportunity of a wider serve use cases. And in retail, we're seeing, you know, large retailers mandate the tagging of items within retail. We're seeing new opportunities there around loss prevention. As I mentioned, you know, T&L opportunities, we're seeing quick serve restaurants deploy RFID. In the NFL, you know, we're doing both active and passive RFID. So we just renewed the contract there within in our relationship within the NFL. So We're excited about the RFID market. We've got the broadest and deepest set of RFID solutions today in the market, ranging and covering all those use cases I talked about. So the expansion of the use cases beyond retail is what's exciting to us. And we've got the portfolio really to go address it. And we're excited about it.

Let me add one other thing, Paul, to that, which is I think tipping points in the RFID market have been claimed several times in history. And I don't think we want to say that today, but there are some very exciting developments in this market that we're certainly bullish on. One of them is last year, one of our largest retailers announced that they were converting significant portions of their operation to RFID. And the win that Bill mentioned earlier in his remarks which was a record RFID deal, the largest in certainly our business, and we believe in the industry, is in T&L. And so with two large, a retailer and a large T&L company adopting RFID, what this will do, we think, is that it will drive economies of scale in the markets and also be a lighthouse for other competitors in these segments to adopt this technology, which provides significant improvements in throughput time and productivity, in addition to the economies of scale it delivers for the broader market. So we're pretty excited about this and foresee some strong growth for it.

Thank you. And our next question today comes from Keith Halson with North Coast Research. Please go ahead.

Good morning. Joe, just unpacking some of the guidance a little bit. When you're seeing deals that are being delayed or kind of spread out, perhaps can you give us a little bit of color about the momentum or the motivation that the companies have in doing so? Is it business-specific issues? Are they worried about the economy? Perhaps a little bit of guidance there.

Keith, this is Joe Hill again. What we're hearing from those customers is mostly that they are looking to adapt to their spending to their budgets. And if we think about retailers, which probably make up a meaningful portion of some of those situations where we're seeing that, they are adapting their budgets to what they see as demand for their business. And as they're doing that, they're asking to spread. They still need our technology. I think that's the important piece that we see and why we're seeing a push out or maybe a delay in in the deployment schedule. So they're trying to fit it in because they know they need this technology, but they're trying to adapt when they're spending the money to when they think it will be available in their business. I think that's the best description.

Great. I appreciate it. And Bill, just trying to unpack a little bit more about the supply chain issues as my follow-up here. Do you guys see still the middle of the year when supply chain issues really become alleviated and you're back to pre-pandemic levels?

Yeah, I think that, you know, I mean, from an availability perspective, I think we're pretty much there. I mean, we're seeing, you know, components move, you know, into reasonable, much more reasonable lead times, not all, but many. The majority of our items have come back to normal delivery timeframes, you know, overall. So I think that we feel good about our supply chain and, you the recovery of that really almost the majority of almost everything really in first quarter is what I'd say from our supply chain perspective.

Yeah, Keith, the only thing I'd, this is Nathan, I'd add is it's obviously a dynamic environment and we're monitoring it in terms of, you know, events and shutdowns and things like that that could disrupt that. And I'd also say it's also relative. If you look at our freight rates as a great example, it's meaningfully better than where they were a year ago or even six months ago, but still, you know, we're still paying two to three X what we paid pre-pandemic. So I think it's also relative in terms of where we, you know, maybe where we were historically to where we've been a year ago in terms of, you know, how we feel about the overall supply chain.

Thank you. And our next question today comes from Medha Marshall with Morgan Stanley. Please go ahead.

Great. Thanks. Just a couple of questions for me. One, you know, you mentioned longer deal cycles, but I guess I was just wondering, is there any change to kind of the deal sizing that they're putting together of maybe looking at some lower cost SKUs or outfitting kind of fewer reps? Just any change to kind of the overall deal size that's worth noting? And then maybe second, you know, now that you've had Matrox just a couple of quarters, you know, you did mention some kind of machine vision type wins, just wondering kind of where you're seeing, you know, where you are on that integration, where you see kind of the best opportunities going forward there. Thanks.

Meta Joe Hill here. In terms of the longer, in terms of the nature of these longer deal cycles, Generally, we have not seen downsizing of deals or down-tiering of devices. I could think of maybe one or two instances. It's more what I was describing earlier to Keith where the deal is being elongated in terms of either the deployment schedule over instead of taking it all in Q1, they're going to take it over three quarters for the rest of the year. or they might say, I don't want to take it in Q1, I want to take it in Q2. That's the most common one. Downsizing, I would say not so much, right?

We're not seeing that as much. Yeah, from a Matrox perspective, I can take that, Joe. You know, I think overall, we're encouraged certainly by the progress of Matrox. It performed well in 2022 with actually a record year. You know, the integration is moving as planned. As a, you know, kind of a quick reminder, the You know, Matrox is really complimentary to our organic investment that we made in the fixed industrial scanning and smart camera market. It really brought to us the breadth and depth of the portfolio that our partners were encouraging us to have in that marketplace. So it brought vision controllers and frame grabbers and 3D sensors, along with a portfolio of software solutions and a software library to meet many use cases in that marketplace overall. I'd say we're happy with the progress so far. There's lots of opportunities for us out there in machine vision across manufacturing and transportation logistics is the primary markets that we're focused on, and things are going well so far.

Great. Thanks, guys.

And our next question today comes from Guy Hardwick at Credit Suisse. Please go ahead. Hi.

Good morning. Good morning. Good morning. Um, um, because it pertains to your Q1 guidance, can you give us some sort of trends as to the difference between Zebra sales into the channel and then the distributor sales out of the channel and maybe how also how that differs from direct business?

So maybe just, just to frame the Q1 Q1 guide of minus 4%, uh, to minus 1%. Again, we, as we mentioned before, we have again, backlog and pipeline to support the outlook. We've actually had a solid start to the quarter, both in shipments into the channel, as well as we're seeing nice momentum from a sales out, particularly around the run rate business. We're also realizing some nice price realization, which is about a point of benefit in the quarter. So I'd say early on, again, seeing nice momentum, both from a sales in and sales out. I'd say that, you know, but the guide also reflects, as we've talked about before, more of the uncertainty in the environment and that cautious behavior particularly as a lot of our customers are finalizing their capital budgets for the year. And the other thing that's important to note is that Q1 takes the full effect of the Russia headwind for the year, which is about a point for the first quarter. So there's no meaningful difference between what we're seeing within our own activity with the channel as well as from a sales-out perspective. It's noteworthy.

And just to follow up, is it correct that the gross margin benefits from supply chain declining supply chain headwinds should be the most significant in Q1?

From a year-on-year perspective, if you look at the EBITDA guide of approximately 21%, the supply chain benefit or the premium supply chain benefit is about three points. But that's offset by two points of FX. So that's, those are the kind of main drivers from a year-on-year. But yes, you're right, from a year-on-year perspective, Q1 last year was about the peak in terms of premium supply chain costs.

Thank you. Our next question today comes from Rob Mason of Baird. Please go ahead.

Yes, good morning. I just wanted to circle back again to your commentary around the run rate business. Several times you've commented on healthy sales there, sell out. I'm just curious, how much visibility do you have into the bookings trends in that area? part of the business and is it seeing any of the elongated deal cycles or any sense of that?

Joe Hill here on the run rate has been very strong I would say for Q4 in particular and we're seeing that continue into Q1. In terms of visibility, this is the type of business where people obviously don't book big deals with us. They go to distributors and buy what they have on their shelf. So the visibility is typically based on our conversations with distributors and what they're telling us they're seeing as their order intake. And so it's much less of a visibility. But what we have so far, even in the first weeks of this quarter, has been very strong. So we've been pleasantly surprised, in particular for printing and scanning, which were areas of our business that we didn't have as much stock over the course of the last year. And as a result, we're very pleased to see that that run rate in printing and scanning in particular is so resilient, right, that customers are staying loyal to us and continuing to buy again from the distributors.

Maybe there's two further points on that. One will be that we don't necessarily have the same visibility into each and in every deal, but this is one where you have a large number of orders. You get kind of a more statistical perspective confidence from that. And if you look at historically, our run rate business tends to be more of a longer cycle business for us. If you have a strong quarter, it tends not to be one strong quarter, then it drops down. It tends to be that we have four to six quarters of strength in that cycle, followed by maybe one or two quarters of softer demand. So we would expect this to continue for a few more quarters.

Understood. Understood. Then I wanted to go back to your geographic commentary. I think when you mentioned Asia, you called out Japan was strong. I think historically Japan has not necessarily been a large market for you. Could you just outline maybe what you're seeing in Japan, what your expectations might be there if anything is changing on that front?

First, let's say we're very pleased with the performance of the quarters. We had record sales. We came in above the high end of our outlook. We executed very well, I think, and recovered from the distribution network challenges that we had in Q3, and we drove double digit sales in North America. We talked earlier about the strength they've seen in kind of run rate business, and we see that certainly in small and mid-sized customers. And we had particularly strong growth from a solutions perspective with print, data capture, RFID, tablets, but partially offset by lower mobile computing sales in Europe due in part to the exit from Russia in Q1 of last year. Now, Asia-Pac had a good performance, particularly when you consider COVID in China. We have very broad-based growth, and we saw nice growth in China, Australia, New Zealand, But Japan, as you mentioned, is kind of the standout here. We had exceptional growth in Japan. We have invested in driving penetration in the Japanese market over the last several years, both from a go-to-market perspective, but also from a product perspective. And this large postal carrier wind that we mentioned is kind of the latest evidence of that. So we now have a very strong position in Japan in mobile computing, which is one of the largest markets in the world that we really didn't have much of a presence before.

And I'll add one thing to that. So Japan is the third largest market that we operate in. And it's one, as you say correctly, where our share in the past had been relatively low. But two important things have changed that I think have... given us some really good momentum here. Anders mentioned it. The first thing that's changed is that the market has begun to embrace Android. And this may seem like it's out of pace, and it is much later than many other markets in the world, that that market has made the mobile computing shift from Windows to Android. And that has given us a big opportunity, right? Because many of the local Japanese competitors who have dominated that market have not been as quick with Android as we have. And that has given us an opportunity. And that's a great example is this postal carrier deal that Anders mentioned. That's what we did. The second thing that we've done is we have shifted our go to market strategy to focus more heavily on partners. And so we're working with some of the largest systems integrators now in the Japanese market. That's how we won this. The disposal carrier deal, that's how we've won several other large deals, in particular in retail around mobile computing. And the combination of those two are really giving us some momentum we hadn't seen in any of the years before.

Thank you. And our next question today comes from Brian Drab at William Blair. Please go ahead.

Good morning. I was just wondering if you could talk a little bit more about what you're seeing in the different verticals. I'm not sure you've really... spelled that out this morning in terms of manufacturing, retail, transportation, logistics, healthcare. I assume you want to give expected growth rates for those verticals in 2023, but if you could even give ranges or rank order where you're expecting the most strength or the weakest performance.

That can be long answers. I'll start a little bit high and then we can pick pick up a couple of the verticals maybe here, but across all our verticals, as I said, we are seeing very strong secular trends to digitize and automate workflows and empower frontline workers in a now much more labor-constrained environment. And these trends continue to drive an increased need for our type of solutions across a wide range of vertical end markets. You specifically mentioned manufacturing. We had a very strong performance in Q4 in manufacturing. We had a number of very significant wins that we were very proud of. I mentioned one in the automotive side in my prepared remarks. There are some attractive trends in manufacturing that are helping to drive our business here. One is around the business must invest in traceability tools to create more sustainable supply chains. Another one is around industrial automation investment trends in productivity and visibility. And those present opportunities for our solutions, including machine vision and our autonomous mobile robots or fetch solutions. We've certainly seen very strong traction with machine vision in manufacturing and have some attractive early wins here. We are very excited about what Matrox and our adaptive vision acquisitions can bring to our customers and partners here. I can dig into other verticals also, but see if you have any other questions here.

Oh, well, thanks, Anders. I mean, I was just wondering if you could comment even just briefly or just a bullet point on each one, transportation logistics up or down in 2023, healthcare up or down, retail up or down. just directionally even, and anything on all of the four major verticals you play?

I think that we probably will leave the outlook around the overall corporate level, but maybe on just say that for in retail in 2022, we had approximately flat sales in retail vertical with some very broad-based growth that offset the pullback of one very large customer. So you can see the strong momentum we have across the industry where we could offset a very large customer pulling back in a pretty big way. So the diversification we have across all of these verticals is definitely helping us to mitigate kind of volatility and drive more consistent results.

Thank you. And our next question today comes from Tommy Moll at Stevens. Please go ahead.

Good morning and thanks for taking my questions. I wanted to start on the revenue outlook you've provided for 2023, which you've described as embedding a cautious approach. When you use that word cautious, are you primarily referring to some of the spending patterns among the large customers that you referenced or is this more a philosophical adjustment you've made where you look at your opportunities and maybe you discount the probability of conversion on some of these deals higher than you typically would just given the macro uncertainty. This is Nathan.

I think as you look at the full year guide, which is about from an organic perspective, slightly down at the midpoint, as you mentioned before, I think it's a combination of the two, right? Both kind of cautious in the overall assumptions due to the macro environment and how that's going to play out through the rest of the year, as well as to your other point of, you know, how we can look at each, you know, look at some of those large opportunities and probability wait those for the year. And we think, you know, we believe the range we provided is appropriate given that overall uncertainty.

Yeah, I just add that I think we feel good about our business. I think this is really all about macro uncertainty. I mean, I think we think that we're going to continue to take share. And in 2023, that's how we see it. We're the leader across the core markets we serve. We've got attractive opportunities across the adjacencies and the expansion business we've invested in. So I think we feel good about our business. I think the uncertainty really is around what's happening around macro. And we're clearly seeing some of that come through in our results in Q4 and in our guide for Q1 and 23.

And if the macro were to deteriorate dramatically, Could you rank order or maybe just identify one or two of the key verticals where you would expect to see that pressure first versus maybe some of the verticals where you would expect more a secular growth trend through the year? Is that possible?

I'm not sure we'd see it as separate verticals. What I'd say is that the across the diversification of our solutions and our verticals actually give us kind of resiliency in a downturn, you know, which would dampen some of the cyclicality. So I think this diverse solutions base that we have in product portfolio and the new investments we're making is dampened cyclicality across that customer base. So I'm not sure we'd see it as one worse than the other. I mean, Joe may want to add to it, but I think that, you know, we think overall that We're going to take a disciplined approach to OpEx during the year and focus our investments. I think that from that perspective, I don't think we see one vertical over another.

You could think of maybe as healthcare as one that will be more resilient. I think that economic cycles would probably not impact healthcare as much. So it's been our fastest growing vertical over quite a while. And we would expect that to continue to do well, more irrespective of the economic outlook.

Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Gustafsson for any closing remarks.

As I wrap up my 62nd earnings call, I would like to again thank our partners, customers, and employees for their contributions in transforming Zebra. I am proud of the progress we have made together and believe we will continue to prosper with Bill as our next CEO. I also want to thank our analysts and investors for your continued support of Zebra. Although this will be my last earnings call, I look forward to ensuring a smooth leadership transition and starting my new role as executive chair while continuing to support BUILD and SEBRA's ongoing success. Have a great day, everyone.

Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.