The operator welcomes participants to the Fourth Quarter and Full Year 2023 Zebra Technologies' Earnings Conference Call. The call is being recorded and will be available on the company's website. The presentation will include non-GAAP financial measures and references to sales performance. The CEO and CFO will provide prepared remarks on the fourth quarter results, financials, and the company's outlook for 2024. They will also discuss progress on the company's Enterprise Asset Intelligence vision.

In the fourth quarter, the company's sales and profitability were significantly impacted by overall softness in end markets and regions. Despite declines in all product categories, services and software showed growth. The company has taken actions to optimize their cost structure and improve sales as demand recovers. They have expanded their cost reduction plan and expect to save $120 million annually by mid-2024. They have also worked with contract manufacturers to draw down component inventories and renegotiate long-term supply commitments.

In the fourth quarter, the company renegotiated an agreement with a key supplier, incurring a $10 million expense. This will improve profitability and drive sales growth as the company reallocated resources to focus on underpenetrated markets and new automation use cases. The company saw double-digit declines in all end markets due to the challenging environment and distributor destocking. However, the company remains cautious and agile in navigating the uncertain environment and remains disciplined in cost structure and capital allocation. In the fourth quarter, sales decreased by 33%, with distributor destocking accounting for a significant portion of the decline. The Asset Intelligence and Tracking segment also declined by 33.6% primarily due to printing.

In the Enterprise Visibility & Mobility segment, sales declined due to data capture and mobile computing, but there was growth in services. Despite a decrease in adjusted gross margin and operating expenses, the company was able to generate $102 million in free cash flow in Q4 and has ample flexibility with $1.1 billion in available credit. However, for the full year 2023, there was negative free cash flow of $91 million due to various factors. The company will now discuss their outlook.

In 2024, distributor inventory levels and backlog have improved, but Q1 sales are expected to decrease. The company anticipates a 18% adjusted EBITDA margin and non-GAAP diluted earnings per share of $2.30 to $2.60. For the full year, sales are expected to decline between 1% and grow by 3%, with a cautious approach due to uncertain market recovery. Adjusted EBITDA for the full year is expected to be 19%, with improvement in the second half. The company remains cautious with spending and expects free cash flow of at least $550 million. They are focused on managing inventory, achieving 100% cash conversion, and paying down debt. Additional modeling assumptions can be found on Slide 10.

Zebra's Enterprise Asset Intelligence vision is focused on providing innovative solutions that empower workers and improve the overall experience for customers. Recent wins, such as a major retailer selecting Zebra's mobile computers and device tracker solution, demonstrate the value and trust that customers have in Zebra's products and services. Zebra's comprehensive portfolio and exceptional post-sale support make them a premier solutions provider for enterprises looking to optimize workflows and adapt to the on-demand economy.

A European postal service, a field service organization, and a large retailer in Asia Pacific have all chosen to use Zebra mobile computers and software due to their superior performance and cybersecurity features. Zebra's value proposition for retailers was showcased at a trade show, where their innovative solutions were highlighted as a way to optimize inventory, engage associates, and improve the customer experience. Office Depot also shared how Zebra's workforce optimization software has helped them with their workflow challenges, including faster order fulfillment.

Bill Burns, in the eighth paragraph of the article, discusses how the combination of Zebra software and mobile computers has increased associate productivity and engagement, leading to improved customer satisfaction. He also mentions the company's strong business fundamentals and their ability to benefit from the digitization and automation of workflows. Mike Steele then opens the call to Q&A. The first question is about the excess capacity in the e-commerce landscape and when it is expected to be absorbed. Burns notes that retail IT budgets have been under pressure and retailers are sweating assets, but there is hope for a return to more normal levels of spending in the future.

The company has seen positive signs in the e-commerce sector, with increased demand from providers and a decrease in backlogs. However, there are still challenges in parcel delivery and the T&L providers are using this as an opportunity to restructure. Retail-related orders drove an improvement in backlog levels in January, but they are still not at pre-pandemic levels.

The company is confident about its backlog entering the first quarter and expects a slight uptick in revenue, excluding the Q4 destock headwind. However, the full year guidance suggests relatively flat revenue as the company is cautious about the lack of visibility and commitment to the pipeline in the second half. The growth is mainly driven by the 2023 destocking, with the market expected to be flat or slightly down in Q2 and up in the second half. The company has historically gained share coming out of downturns.

Nathan Winters, a representative from a company, discusses the potential for share gains in the future. He mentions that their customers see the value in their services and they have opportunities in retail, transportation logistics, and manufacturing. They have seen optimism from retail customers and are excited about showcasing their solutions at upcoming trade shows. They also see potential in technologies like RFID and have new solutions for manufacturing.

The speaker discusses the potential for automation and digital connectivity in the healthcare industry, as well as opportunities in other vertical markets such as retail. They also mention that the headwind from destocking was about the same in Q4 as in Q3, and that they have looked at opportunities to refinance at more attractive rates. Overall, they feel good about their position and the cost of borrowing.

The speaker discusses the company's current position in terms of borrowing and mentions that they are always looking for opportunities to refinance. They also mention that they have met with many customers and partners who are optimistic about the future, but the company remains cautious due to the uncertainty of a broader economic recovery.

The company has seen some growth in year-end spending in retail, particularly in North America. They are cautiously optimistic about the full year and are waiting for more orders and deployments before making any bold predictions. They have been conservative in their guidance due to lack of firm commitments from customers. The EBITDA margin for the year is expected to be 19%, with 20% in the second half. The company is also expecting a normalized free cash flow as they head into 2025.

The company has experienced a one point increase in gross margin due to favorable pricing, lower supply chain costs, and volume leverage. However, the benefits from restructuring are offset by incentive compensation. The company expects to have positive free cash flow and modest decreases in inventory and working capital throughout the year. They have renegotiated long-term supply commitments, with one contract resulting in a $10 million expense impacting gross margin. It is unclear if this will be a one-time hit or a structural change in the cost structure.

The company has resolved a one-time charge in the fourth quarter and there will be no changes to their structural costs moving forward. They have made progress in working with suppliers to renegotiate long-term supply agreements and have seen a 75% decrease in long-term purchase commitments. The focus for this year is on managing demand timing and working with manufacturing partners to reduce safety stock. The charge in the fourth quarter was related to one supplier and contract signed in 2021. The company is taking steps to mitigate working capital pressure and increase flexibility in component mix and timing. The company does not anticipate significant impacts from overseas shipping issues in their guidance.

Nathan Winters and Bill Burns discuss the potential impact of escalating tensions in the Red Sea on their printing business in EMEA, but state that the majority of their products are shipped via air or ocean from Asia to the US. They do not expect this to have a significant impact on their margins in the first quarter. When asked about their long-term guidance, they state that they do not anticipate any changes and remain confident in their strong business fundamentals and market position. They believe that the secular trends towards digitization and automation in customer operations will continue, and they are excited about future opportunities. Despite current challenges, they are confident in their ability to continue as market leaders and take advantage of expansion opportunities.

The company is committed to maintaining a 5-7% growth rate through the cycle. The software and services segment has been resilient and outperformed the rest of the hardware business. Customers are attaching higher rates to mobile devices and extending service contracts, but the company plans to encourage them to upgrade to new technology in the future. The company's work cloud software is providing a compelling value to retail associates through its modern store framework.

The company is focused on integrating various aspects of their software to improve productivity for retail workers. They have received positive feedback from customers and are also focused on improving profitability. The cost reduction plan is expected to result in $60 million of incremental savings in 2024, with the remaining balance in 2025.

During a recent earnings call, Brian Drab asked about the company's recent declines and how they may affect gross margin. Nathan Winters responded by saying that the declines were broad-based and similar to previous ones, with a majority of the impact being on operating expenses rather than gross margin. He also mentioned that the company expects modest increases in gross margin as the year progresses due to leverage and cost-saving measures. Rob Mason then asked about customers potentially "sweating their assets" during the current downturn, which Bill confirmed was a trend they had seen in the past.

The speaker is discussing strategies for stimulating new product demand, including service or subscription options and technology transitions. They are also working with customers who have older devices to convince them to upgrade by highlighting the benefits of new features and functionality.

The company is exploring opportunities to combine their software with hardware in the leasing sector, particularly in the retail industry. They are also focused on expanding their market share in underpenetrated markets such as Japan and government sectors. They have recently made changes to their channel strategy and hired a new sales leader to drive growth in these areas.

The speaker discusses the growth of the government and public safety market in the U.S. and the potential for their portfolio in underserved markets. They also mention the increasing interest in RFID and machine vision technologies, with strong growth expected in these areas in the coming years. The company has a strong presence in RFID and sees opportunities in various industries such as retail, supply chain, and healthcare. In machine vision, they are focused on manufacturing and transportation logistics, specifically in the automotive and food and beverage industries.

Zebra has had a successful year, with organic investments and acquisitions contributing to their broad offering in the multibillion-dollar market. Their focus is on combining software and hardware to provide a unified platform for their customers, making automation easier and more efficient. They are leaders in RFID reading and a challenger in the machine vision market, and see both as great opportunities. When asked about R&D expenses, they explained that the sequential decline in Q3 to Q4 was expected due to cost actions, but there will be an increase in the first half of 2024 due to timing and incentive compensation. Q4 is typically lighter due to holidays and project execution.

The speaker discusses the company's trajectory for the year and expects an uptick in performance after resetting their compensation plans. They plan to prioritize debt pay down and reassess other opportunities for capital deployment. The speaker thanks customers, partners, and employees for their support and looks forward to returning to growth in 2024.

The speaker is giving permission for the listener to disconnect their phone lines and wishes them a great day.

This summary was generated with AI and may contain some inaccuracies.