5/2/2023
Good day, and welcome to the Zebra Technologies first quarter 2023 earnings conference call. Today, all participants will be in a listen-only mode. Should you need assistance during today's call, please signal for 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 that today's event is being recorded. And at this time, I would now like to turn the conference over to Mike Steele, Vice President of Investor Relations. Please go ahead.
Good morning and welcome to Zebra's first 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 Bill Burns, our Chief Executive Officer, and Nathan Winters, our Chief Financial Officer. Bill will begin with our first quarter highlights. Then Nathan will provide additional detail on the Q1 results and discuss our revised 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 Bill.
Thank you, Mike. Good morning and thank you for joining us. Our team executed well in a challenging macroeconomic environment, delivering first quarter sales and earnings results above the midpoint of our outlook. For the quarter, we realized sales of $1.4 billion, approximately in line with the prior year. An adjusted EBITDA margin of 21.4%, 150 basis point increase, and non-GAAP diluted earnings per share of $3.94, a 2% decrease from the prior year. Regional sales performance was mixed, with growth in Asia-Pac and North America mostly offsetting declines in EMEA and Latin America. From a solutions perspective, printing, data capture, and RFID were bright spots, while sales of mobile computers declined. we continue to see cautious spending behavior by enterprise customers with a decline in large orders and growth in small to mid-size orders. From a profitability perspective, improved gross margin drove our EBITDA margin increase. Higher interest and tax expense resulted in a slight earnings decline. I would now like to spend a moment on our sales outlook. As the risk of broader softening of industry demand has materialized, we have reduced our full-year outlook. Late in Q1 and into Q2, demand trends softened across our end markets, particularly for mobile computers in EMEA and North America, as customers' CapEx budgets tightened and IT device spending contracts. We are mitigating the impact of softer sales with targeted go-to-market actions to drive additional demand and incremental cost actions. We will continue to take an agile approach to managing throughout this uncertain near-term environment. I will now turn the call over to Nathan to review our Q1 financial results and provide additional details on a revised 2023 outlook.
Thank you, Bill. Let's start with the P&L on slide six. In Q1, net sales decreased 1.9%, including the impact of currency and acquisitions, and were 0.3% lower on an organic basis. Our asset intelligence and tracking segment increased 28.4%. led by strengthened printing as we lapped significant supply constraints in the prior year period. Enterprise visibility and mobility segment sales declined 11.2 percent, with mixed performance among our offerings. We realized strong growth in data capture solutions and RFID. Mobile computing sales declined, primarily due to large customer order deferrals, slowing demand through distribution, and the impact of ceasing sales to Russia in March of 2022. Additionally, we also drove growth across service and software with strong service attach rates. Performance was mixed across our regions. North America sales increased 1% due to strength in printing and data capture, helped by the recovery from supply chain challenges. EMEA sales declined 4%, primarily due to a 350 basis point impact of our suspension of sales into Russia. Asia Pacific sales grew 6%. driven by strong mobile computing growth in Japan. In Latin America, sales decreased 1%, with relative outperformance in Brazil and Mexico. Adjusted gross margin increased 290 basis points to 47.5%, primarily due to lower premium supply chain costs, partially offset by FX, and lower service margins. Adjusted operating expenses increased 130 basis points as a percent of sales, primarily due to a return to normalize sales and marketing activity and strategic investments in the business, partially offset by a reduction in G&A expense. First quarter adjusted EBITDA margin was 21.4%, a 150 basis point increase driven by gross margin expansion. Non-GAAP diluted earnings per share was $3.94, a 1.7% year-over-year decrease due to increased interest expense and a higher tax rate. partially offset by fewer shares outstanding. Turning now to the balance sheet and cash flow on slide seven. In Q1, we had negative free cash flow of $92 million, which was unfavorable to the prior year period, primarily due to the timing of inventory payments, higher interest costs and cash taxes, and $45 million of previously announced quarterly settlement payments, which are scheduled to conclude in Q1 of 2024. all of which was partially offset by favorability in the timing of customer collections and lower incentive compensation payments. In Q1, we also made $15 million of share repurchases and invested $1 million in our venture portfolio. We ended the quarter at a comfortable 1.6 times net debt to adjusted EBITDA leverage ratio, which is well below the top of our target range of 2.5 times. and had approximately $1.3 billion of capacity on our revolving credit facility. On slide eight, we highlight premium supply chain costs, which have continued to improve from peak levels. The actions we have taken to redesign products, along with the improving freight rates and capacity, have enabled us to reduce component purchases on the spot market and reduce freight cost impact. In Q1, we incurred premium supply chain costs of $15 million as compared to the pre-pandemic baseline and $53 million lower than the prior year. We are expecting these premium supply chain costs to continue to decline. Let's now turn to our outlook. We continue to see enterprise customers defer large orders and are also realizing lower sales into the channel as distributors adjust to softer demand trends as well as our improved product lead times and their higher cost of capital. For the second quarter, our sales are expected to decline between 9% and 11% compared to the prior year. Our outlook assumes a two-point negative impact from foreign currency changes and a one-point additive impact from recent acquisitions. We anticipate Q2 adjusted EBITDA margin to be approximately 20%, driven by expense deleveraging from lower sales volume partially offset by higher expected gross margin from improved supply chain costs. We expect premium supply chain costs to be approximately $15 million in Q2, a more than $40 million year-on-year reduction. Non-GAAP diluted EPS is expected to be in the range of $3.20 to $3.40. We are reducing our full-year 2023 sales outlook by three points. We now anticipate net sales to decline between 2% and 6%. This outlook assumes an approximately 50 basis point net negative impact from foreign currency changes and acquisitions. Second half sales are expected to benefit from easier year-on-year comparisons or recently announced price increase in evading FX headwinds. We have a solid pipeline of opportunities that gets us to the high end of the sales range. but are embedding caution in our outlook given recent demand trends and the uncertain macro environment. We expect full-year adjusted EBITDA margin of approximately 22%, which is the low end of our previous outlook. We now expect premium supply chain costs of approximately $40 million for the year, as we are seeing faster-than-expected supply chain recovery. We have been proactively managing operating expenses through targeted restructuring actions and discretionary cost controls, and we expect sequentially lower operating expenses in the second half of the year. We now expect our free cash flow to be between $450 and $550 million for the year, which reflects increased caution in our revised full-year outlook. As a reminder, cash flow is impacted by increased cash taxes and $180 million of previously announced settlement payments. We continue to be focused on right-sizing elevated inventory on our balance sheet as component lead times have normalized. Working capital variability over the past year has been significantly impacted by global supply chain dynamics. Our fundamental business model is unchanged, and we believe the actions we are taking will enable us to deliver greater than 100% free cash flow conversion as we normalize inventory levels. We are focused on achieving 100% conversion over a cycle, which is now included in our long-term executive incentive compensation plan. Please reference additional modeling assumptions shown on slide nine. With that, I will turn the call to Bill to discuss how we are advancing our enterprise asset intelligence vision. Thank you, Nathan.
While customer spend is pressured near-term, our solutions are essential to our customers' operations, and we are well-positioned to benefit from secular trends to digitize and automate workflows across our served markets. Slide 11 illustrates how we digitize the front line of business by leveraging our industry-leading portfolio of products, software, and services. By transforming workflows with our proven solutions, Zebra's customers can effectively address their complex operational challenges, including scarcity of labor and improving productivity in challenging times. We empower the workforce to execute tasks more efficiently by navigating constant change in near real time. utilizing insights driven by advanced software capabilities such as artificial intelligence, machine learning, and prescriptive analytics. Now turning to slide 12. We are focused on advancing our enterprise asset intelligence vision by continuing to elevate Zebra as a premier solutions provider through our compelling portfolio. In March, at the Promat Manufacturing and Supply Chain Trade Show, Zebra, along with our partners, showcased the depth and breadth of our innovative solutions for manufacturing, logistics, and the broader supply chain. Our industrial automation solutions, including autonomous mobile robots, machine vision, and fixed industrial scanning, are synergistic with technology-equipped frontline workers. At the show, we featured Zebra solutions at each stage of warehouse operations, including receiving, storage, and fulfillment. It demonstrated how we improved key outcomes for our customers such as enhancing supply chain agility, improving production quality, and maximizing utilization and productivity. As you can see on slide 13, Zebra empowers the frontline of business across retail and e-commerce, transportation logistics, manufacturing, healthcare, and other markets. Businesses partner with Zebra to optimize their end-to-end workflows as they strive to meet the increasing demands of customers across a variety of vertical end markets. The business challenges we are solving have expanded through our investment in complimentary offerings, enable us to further penetrate customer accounts. I would like to highlight several wins across our end markets. We are beginning to deploy the record RFID win we mentioned on our last call. This global transportation logistics provider plans to tag every package that enters their facilities with RFID encoded labels to enhance tracking visibility. Zebra solutions improve productivity, enable faster error detection, drive in cost savings, and increase customer satisfaction. In addition to our RFID offerings, this customer is also deploying our mobile computers as an integral part of the overall solution. A major e-commerce provider in Europe recently expanded their use case of Zebra's fixed industrial scanners at several thousand packing stations. This enables the customer to continue to significantly reduce scan time and increase throughput, particularly for their more complex packing needs. The support and collaboration with Zebra and our partner was a key differentiator among our competition. A large Australian supermarket chain has replaced consumer-grade devices with our Zebra rubbing tablets and scanners to enable faster and more accurate buy online, pick up in store, and home delivery fulfillment. Zebra's enterprise-grade solution, along with our commitment to sustainability, including our recycling program and eco-friendly packaging, were competitive differentiators in securing this win. The Latin American manufacturing company recently selected Zebra mobile computers and mobile printers to help streamline delivery and warehouse operations. Delivery personnel will benefit from synergies between these products, while warehouse employees realize similar efficiencies with Zebra scanners and desktop printers. This manufacturer shows our products for reliability and durability and considers us a strategic partner in their technology journey. The regional bank recently selected our workforce management software for all branch locations, displacing a competitor. Our solution is expected to drive cost savings through more efficient scheduling and allocation of people resources. We are pleased about the benefits our solutions are delivering in our customers' mission-critical operations. Slide 14 reiterates challenges that have materialized since our last guide. We believe the actions we are taking, which include working closely with our customers as they look to deploy solutions to drive efficiency within their businesses, increasing our focus on accelerating growth in under-penetrated markets, and driving incremental cost actions within our business will allow us to exit 2023 stronger, positioning us to deliver profitable growth, increased market share, and improve free cash flow. In closing, we are facing near-term headwinds and have taken actions to drive a stronger second half. Our long-term conviction in our business is unchanged. Moving forward, we are focused on driving profitable growth in our core and expansion markets, collaborating closely with our customers and partners to continue to elevate Zebra as a premier solutions provider in attracting, developing, and retaining top global talent to drive innovation.
I will now 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.
We will now begin the question and answer session. As a reminder, to ask a question, you may press star then one on your touchtone phone. If you're using your speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Tommy Mull with Stephens. Please proceed.
Thanks for taking my questions. Morning. Morning. Morning, Tommy. Bill, I wanted to start on the topic of run rate versus large customer demand. It sounds like the run rate business might have been a little bit stronger in Q1, but maybe also got a little weaker toward the end. So any commentary you could give us on one versus the other would be appreciated, and specifically when you're talking about the potential for channel destocking. Is that more a run rate-driven phenomenon, or is that not the right way to think about it? Thank you.
Yeah, Tommy, I would say that, you know, in the first quarter, our sales growth and, you know, we saw sales growth in run rate or non-large deals, which moderated towards the end of the quarter. And I would say that, you know, if we kind of characterized, you know, where we're at today, that through the majority of Q1, we saw that our sales opportunities were developing as we had, you know, expected, and it allowed us to deliver on our first quarter guide. And I think that as we got later into the quarter, towards the end of Q1 and into April, while our run rate continued to be strong in first quarter, we saw that begin to moderate. But the real challenge has been around large customers and really tightening their CapEx budgets further You know, as we got to the second, you know, the end of Q1 and into Q2, and we saw, you know, new projects not receiving, you know, the funding that our sales teams had expected in the near term. So we saw a number of projects really, you know, in our sales funnel that were planned for Q2 and early Q3. really become, you know, deferred. And we especially saw this in retail and, again, specifically in North America anemia. So that ultimately, you know, that slowing demand of larger deals and overall a bit of moderating of our run rate has really impacted our distributors that are looking to adjust their working capital levels that you know, to really these, you know, the slowing demand of large deals and some of the moderating of run rate. We've also seen, you know, our lead times improve. So our distributors are having to hold less inventory as our lead times improve. And, of course, you know, they've got an increase in cost of capital and holding costs as they, you know, adjust their, you know, days on hand to the right level. So, you know, overall, these pressures really led us to say, hey, You know, our Q2, you know, guiding that, you know, down further and then ultimately looking at the full year is, you know, despite run rate being strong in first quarter, we saw it moderate and large deals are really in large customers specifically around retail in EMEA and North America are really driving, you know, our guide for the full year.
Just to continue with that theme, Bill, as you mentioned earlier, some of the incremental weakness that drove your revision to the full-year outlook really didn't manifest until late first quarter into the second quarter, it sounds like. Nonetheless, the outlook does imply a fairly healthy improvement in terms of revenue in the second half versus the first half. At this point, though, how much visibility do you have there? It feels like some of these conversations, particularly on the large customer side, may still be early with a lot of question marks. But if I'm wrong in that characterization, please let me know. Thank you.
Hey, Tommy, this is Nathan. And then just a little color on the full year guide. So if you look for the full year down 3.5% on organic sales in the midpoint, as we said in prepared remarks, we do have the pipeline of opportunities and actions to get to the high end of the range. However, being cautious in the assumptions and what we expect out of the pipeline due to the uncertain macro environment and the cautious behavior we're seeing. I think the other thing that's important to note is, as we go into the second half, we have easier year-on-year comps, particularly in Q3, as well as we have the recently announced price increases that will benefit in the second half, as well as the favorable FX from our last guide helping offset some of the macro headwinds. So all those factors, you know, the latter factors play into some of the first half or second half dynamic, as well as what we believe we've taken a, you know, a conservative view at the pipeline and actions we have as we looked at the second half guide. Thank you both. I'll turn it back.
The next question comes from Damian Karras with UBS. Please proceed.
Hey, good morning, everyone. I have a follow-up. Good morning. Just a follow-up question on your comment, Phil, about some of these project deferrals. Just for clarification, right, are we talking about the same kind of select handful of large customers, you know, North America retail and EMEA retail, or are there additional large customers that are mimicking these behaviors or just kind of a combination of both of those factors? And I'm curious if, you know, thinking about, you know, kind of future execution and delivery. Do you have any kind of sense on timeline on that, or are they just kind of on pause for the moment?
Yeah, I think maybe it's worth, you know, covering the vertical markets in what we saw in Q1. So, you know, predominantly retail. I would say that, you know, from a T&L perspective, we continue to see customers, you know, invest in visibility and productivity solutions. And, you know, transportation logistics was up in Q1. In Q1, we also saw strong growth, you know, across manufacturing as well. they continued to invest in, you know, industrial automation and productivity within manufacturing. And healthcare also, you know, continued to be strong. So, it really was, you know, around on retail and those, you know, customers ultimately, you know, not all retail customers, but, you know, significant number of those across EMEA and North America. had pushed out projects that, you know, were in our sales funnel for Q2 and Q3, you know, out. And I think that ultimately, as Nathan said, allowed us to take or, you know, drove us to take a more conservative view of the funnel and pipeline for second half year. And, you know, maybe Joe wants to comment more on that. Sure.
So, Damian, I want to underline one thing first, and then maybe I'll give you some examples, because I thought someone might ask these questions. I put together a few examples to illustrate what we're seeing. I want to underscore that, by and large, we're not seeing cancellations from these large customers. We're seeing deferrals of the decision, and in some cases, deferrals of the deployment. And the majority of those deferrals are to the second half of this year, to Q3 and Q4, which goes in part also to Tommy's earlier question about what confidence do we have, right? That's where we're seeing most of those push. I'll give you two examples. One of our large U.S. customers in the retail space, by the time we last spoke here in the first quarter, had ordered about $3 million from us. And they had told us that they were going to be ordering, by the end of Q2, an additional $20 million. Since then, in the last three months, they've taken $6 million and said, we're still going to order that in Q2, but we still don't have the purchase order yet. They're still trying to secure the budget for it. They have $10 million that they moved to Q3, and another $4 million that they moved to Q4. At least that's what they've told us so far. Of course, to your point about the visibility, will they actually order it then? we will see, but that's the current state of what we know and what's changed since we last spoke. Another even larger customer in the U.S., also a retailer, had ordered $5 million by the time we were speaking last year in February and had indicated that they were planning to buy $35 million by the end of Q2. Since then, they've said $11 million of that we're going to order in Q3, and $24 million, we will not have budget for this year, but we plan to order it in 2024. That gives you an idea of how things are moving and how these deferrals are happening, hopefully.
I think just one thing to add, those two good examples of the decline for the overall year and the full year guide, but at the same token, while we have a pipeline and actions that are above you know, towards the high end of the range, but, you know, being conservative on assuming all those deals won't get pushed further. So I think that's the trying to find the balance there around, you know, what we're hearing from our customers and the visibility with also understanding it's not certain until we get to PO.
Understood. Appreciate that, caller. I also wanted to ask you about your margin guidance. It seems you're actually expecting higher gross margins than previously. So is that – the case? And could you maybe walk through the changes underlying your margin guidance for the year? Thank you.
Yes, we've looked at our full year EBITDA guide of 22%. That was the low end of our prior range. We are seeing favorable gross margin trends, but that's being offset by the lower volume. So, again, if you look at an aggregate, nearly a point higher than last year, primarily due to the supply chain improvements. And you can see that from our versus our prior guide of reducing those transitory or premium supply chain costs for the year from 50 to 40, as both the freight rates improved and we're having to buy less components on the spot market. And that's still being offset. Those two points of improvement are being offset by about a point of FX. Despite the improvement in FX with our hedging program, there's still a headwind for the year on FX. Again, I think a couple of things. The pricing actions we've taken over the past year and a half are offsetting the material and labor cost inflation or recouping some of that degradation over the past year. And we have actions identified to adjust our cost structure with the lower volume.
The next question comes from Jim Ricciuti with Needham & Company. Please proceed. Thank you.
Hi, thank you. I just wanted to fill down a little bit more, if I can, on the deferrals. And you may have mentioned this, and I apologize if you did. But are the deferrals that you're seeing, are they skewed more in North America, or are you seeing that same kind of level of deferrals in EMEA?
Yeah, I would say, Jim, it's really both. And again, it's, you know, centered predominantly around, you know, retail. We believe ultimately have seen some moderation of demand in the other vertical markets, T&L and manufacturing, but it's predominantly retail and it's predominantly, you know, North America and EMEA. And I think it's important, as Joe said, to say that, you know, These projects haven't been canceled, and our customers still have conviction about the value we ultimately deliver to them around, you know, improved productivity, increased visibility across supply chains, more effective and efficient operations within, you know, retail. All those are important because these projects, while they're moving out, are still, you know, have strong return on investments for our customers. They're making tough decisions around efficiency. CAPEX in the short term to adjust in a macroeconomic environment. But what they're telling us is that, you know, as their CAPEX, you know, loosens up inside their organizations, they expect to move ahead, you know, with these projects. And the challenge in retail is because we've seen them continue to move out, we've had to take a conservative, you know, view of the outlook. And as Joe said, some of those projects have moved into 2024, but our customers are still committed to do those. So, I think that we're seeing that ultimately, you know, our customers can only hold off from buying for so long that we have mission critical solutions and they truly deliver, you know, value to our customers that make them more effective and more efficient in their business each and every day. And I think we feel that ultimately they are going to buy these projects and they're going to move forward. It's really an issue around timing and it's really, you know, North America and EMEA in retail is the primary challenge at the moment.
And I wanted to just follow up with a question, only because you mentioned it several times, the strength in RFID. Is that mainly from this large North American logistics customer, or are you seeing the strength in other areas of logistics, or is it also a function of what we're seeing and hearing in retail? And is that sustainable as you go through the year?
Yeah, I would say that, you know, we're seeing, you know, broad-based demand for RFID, you know, across, you know, supply chains in general. So, all the way from retail through transportation logistics, all the way back into manufacturing. So, you know, it is broad-based. We have the broadest and deepest RFID portfolio of solutions of, you know, fixed readers, handheld readers, mobile printers, you know, software and solutions as well as, you know, our labels. So, you know, we expect that, you know, we'll continue to benefit from the strength in RFID. I know, Joe, you want to add anything to that, but I think that we feel good about the RFID portfolio beyond this large win in T&L.
We do, and I would underline, Jim, the broad-based nature of this demand. We're seeing it in healthcare, for example. We're seeing it in T&L, where entire package operations that were previously barcode-based are being driven online. by RFID now for greater efficiency and fewer errors, and we're seeing it in multiple regions of the world. We're seeing it strong in Asia Pacific, but also strong in Europe where labor costs are high, and RFID can have an outsized impact. This is a broad-based movement. Thank you.
Our next question comes from Keith Howsam with North Coast Research. Please go ahead.
Good morning, guys. In terms of looking at the guidance for the full year, can you kind of help me with some context in terms of how you're thinking about the overall macro economy and how changes in the macro economy may affect your guidance to the good and the bad?
Yeah, I'd say, Keith, that, you know, I'll start and then I'll let, you know, Nate or Joe want to jump in. But, you know, we're clearly seeing a softer macroeconomic environment that, you know, is, you know, having our customers take a more, you know, conservative view of their CapEx budgets and, you know, in first half year. And we're seeing less certainty in those budgets for second half year. So a bit of the unknown, mostly in retail, and again, mostly in North America and EMEA is where We're seeing this. It's most pronounced there. What it results to for us is directly elongated sales cycles and, you know, opportunities that we thought were going to close in Q2 and be deployed in early Q3 as moving out. And Joe gave the examples of all the businesses that are moving out. Some portion of it is doing that, and some is moving into Q3 and Q4 from Q2, and others is moving into 2024. You know, we think that ultimately, you know, we've taken a more conservative view of our pipeline and the opportunities we expect to close in second half year. There's lots of reasons why we believe that guide is the right one, as Nathan covered. But we also believe that our T&L manufacturing customers, where we saw, you know, strong growth in first quarter, Even at the end of Q1, we're seeing them moderate a bit due to the macro environment. And we're taking a, you know, cautious view overall of what our pipeline and the projects within it because of it. But I think ultimately we feel good about our business. We feel good about, you know, the value we bring to our customers. And this is really all about the macro environment and specifically in, you know, more pronounced in retail in North America and EMEA.
Maybe if I can tweak that question just a little bit. I guess, does your guidance include, I guess, a soft or a hard landing in the U.S. and Europe? Or do you look at that context?
Well, I'd say that, you know, we've had, you know, a tough Q1 from a mobile computing perspective. You know, with double-digit declines in Q1, we see, you know, Q2, to continue to be challenged from a mobile computing perspective. But, you know, we saw strong growth in other parts of the portfolio, like, you know, data capture and print. So I think overall, you know, what we're seeing is, you know, mobile computing remaining challenged in first half. And then, you know, in second half, we see some of these projects, you know, moving forward and then continuing into 2024. So we don't see the environment being, you know, a hard landing or much different than what we're guiding to at the moment, which is, you know, we were delivered on our first quarter guide, you know, which, you know, ultimately was, you know, down. But we see Q2, obviously, we knew was going to be our toughest quarter. And we see, you know, recovery in the second half, but, you know, modest. And we believe we can deliver on our guide.
Great. Thank you.
The next question comes from Joe Giordano with TD Cowan. You may proceed.
Hey, good morning, guys. So I'm just curious on, you know, coming out of COVID, you put in a ton of assets, and I'm just curious on thoughts on the replacement cycle of that. So as we go into a, you know, a soft patch here, what's the ability of customers to, like, extend, you know, when they need to refresh this stuff? And just curious, the deferrals that Joe mentioned, Are these like new expansions, or is this like refresh of old product that is getting pushed out? Just curious there. Thank you.