Zebra Technologies Corp Q3 FY2024 Earnings Call

Good day, and welcome to the Third Quarter 2024 Zebra Technologies Earnings Conference Call. All participants will be in listen-only mode. 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 third quarter earnings 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, and we refer you to the factors discussed on 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 the slide presentation and in today's earnings press release. Throughout this presentation, unless otherwise indicated, our references to sales performance are year-on-year and on a constant currency basis. This presentation will include prepared remarks from Bill Burns, our Chief Executive Officer; and Nathan Winters, our Chief Financial Officer. Bill will begin with a discussion of our third quarter results. Nathan will then provide additional detail on the financials and discuss our fourth quarter and revised full year outlook. Bill will conclude with progress on advancing our strategic priorities. Following the prepared remarks, Bill and Nathan will take your questions. Now, let's turn to Slide 4, as I hand it over to Bill.

Thank you, Mike. Good morning and thank you for joining us. Our teams executed well in the third quarter, delivering sales and earnings results above the high end of our outlook. For the quarter, we realized sales of almost $1.3 billion, a 31% increase compared to the prior year, and adjusted EBITDA margin of 21.4%, a 980 basis point increase. Non-GAAP diluted earnings per share of $3.49, which was four times the prior year, and delivered strong free cash flow. As we discussed on our last earnings call, during the second quarter, we began to see early signs of recovery across our end markets, with mobile computing returning to growth. In the third quarter, we were encouraged to see the recovery broaden with data capture and printing also returning to growth. We realized double-digit growth across all our primary end markets and broad-based growth to customers of all sizes as we began to cycle significant destocking activity in the second half of last year. We are seeing indications of customer spend generally improving in the second half, including expectations for higher year-end spending in North America and EMEA across most end markets. That said, the manufacturing sector is still lagging as the goods economy continues to recover. Additionally, as we look ahead to 2025, visibility remains limited regarding the timing of large deployments. Another highlight was our improved profitability, primarily due to improved gross margin driven by volume, leverage, and business mix. With the recent consolidation of our North American distribution centers into a single Chicago area facility, we have successfully completed our restructuring actions to deliver $120 million of net annualized operating savings. Given our third quarter performance, improved momentum in demand recovery, and our focus on profitable growth, we are raising our full-year outlook for sales, profitability, and free cash flow. I will now turn the call over to Nathan to review our Q3 financial results and discuss our revised 2024 outlook.

Thank you, Bill. Let's start with the P&L on Slide 6. In Q3, total company sales grew 30.6%, reflecting continued recovery in demand across our major product categories. Our Asset Intelligence & Tracking segment grew 25.8%, primarily driven by printing and RFID. Enterprise Visibility & Mobility segment sales increased 33% with strong growth in mobile computing and data capture solutions. Our services and software recurring revenue businesses grew 4% in the quarter. We realized double-digit sales growth across our regions. In North America, sales grew 22%, led by mobile computing and printing. EMEA sales grew 47% with strength in Northern Europe. Asia-Pacific sales grew 24%, led by momentum in Southeast Asia and India along with stabilization in China. And sales grew 42% in Latin America, with particular strength in Mexico and Brazil. Adjusted gross margin increased 430 basis points to 49.1% due to volume leverage and favorable business mix, and adjusted operating expenses as a percent of sales improved by 580 basis points. This resulted in third-quarter adjusted EBITDA margin of 21.4%, a 980 basis point increase versus the prior year and a 90 basis point sequential improvement from Q2. Non-GAAP diluted earnings per share was $3.49, a greater than 300% year-over-year increase. Turning now to the balance sheet and cash flow on Slide 7. In the first nine months of 2024, we generated more than $650 million of free cash flow as EBITDA improved, and we continue to drive significant improvements in working capital. We ended the quarter at a 1.6x net debt to adjusted EBITDA leverage ratio, which is within our target range. We resumed share repurchase activity in Q3 and now have increased flexibility given our improved cash flow, lower net debt, and $1.5 billion of capacity on our revolving credit facility. Let's now turn to our outlook. We entered the fourth quarter with a solid backlog and pipeline of opportunities and expect sales growth between 28% and 31%. This outlook assumes continued recovery across our major product categories with an improved level of year-end spending by our customers, including several large North American retail projects. We continue to cycle easier comparisons across the business due in part to significant destocking activity by our distributors during the second half of last year. Q4 adjusted EBITDA margin is expected to be approximately 22%, and non-GAAP diluted earnings per share are expected to be in the range of $3.80 to $4. Our fourth-quarter outlook translates to full-year sales growth of approximately 8%. Our full-year adjusted EBITDA margin is expected to be approximately 21% and non-GAAP diluted earnings per share is expected to be in the range of approximately $13.30 to $13.50 based on our Q4 guide. This represents stronger profitable growth than our prior outlook supported by increased momentum and demand recovery and continuing focus on our cost structure. Free cash flow for the year is now expected to be at least $850 million. We continue to drive profitable growth while improving our working capital levels, including rightsizing our inventory. Please reference additional modeling assumptions shown on Slide 8. With that, I will turn the call back to Bill.

Thank you, Nathan. Turning to Slide 10. We remain well-positioned to benefit from secular trends to digitize and automate workflows with our comprehensive portfolio of innovative solutions, including purpose-built hardware, software, and services. We empower frontline workers to execute tasks more effectively by navigating constant change in real-time to advance capabilities including automation, prescriptive analytics, machine learning, and artificial intelligence. Zebra continues to demonstrate market leadership through innovation. We have consistently reinvested approximately 10% of our revenues into research and development to advance our vibrant core and bring new innovative solutions to market. At recent customer events we hosted in North America and EMEA, we unveiled solutions that underscore our commitment to innovation. These include the latest version of our work cloud software utilizing advanced AI and machine learning and new rugged tablets for demanding environments. We also highlighted a Zebra kiosk solution offering self-checkout including tap-to-pay capabilities, which enhance the customer experience and enables frontline associates to focus on higher value tasks. This launch enables us to expand Zebra's addressable market with near-adjacent technology that leverages our core software platform. Additionally, we are developing a generative AI mobile computing solution designed to assist frontline workers with sales, merchandising, and operating procedures, which we will feature at the National Retail Federation Trade Show in January. As you see on Slide 11, our customers leverage our solutions to optimize workflows across a broad range of end markets. We empower enterprises to drive productivity and better serve their customers, shoppers, and patients. Our relentless focus on innovation continues to drive our competitive differentiation and secure wins. In the second half of this year, we're seeing momentum in large Zebra deployments in North America and EMEA across retail, e-commerce, and logistics. Our customers are beginning to increase investment in our solutions as they absorb the supply chain capacity built out during the pandemic and look to drive increased productivity. Recent key wins include a technology modernization project at a large e-commerce customer, a mobile computing upgrade at a large retailer to enable the latest software applications, a grocer's initiative to replace desktop computers with our mobile devices to drive several front-of-store use cases, and a luxury retailer will deploy work cloud software to optimize in-season pricing. Additionally, logistics customers in EMEA selected Zebra's new wearable mobile computers to replace a competitor's voice-picking solution. This customer expects to improve accuracy and increase employee and customer satisfaction with our solution. Last quarter, I highlighted our success and traction in selling the benefits of enterprise-grade devices in healthcare. Our ease of integration into electronic medical record systems has been a competitive differentiator, and we recently secured mobile computing and printing wins at large North American hospitals. Our solutions will improve workflows and enable enhanced visibility and tracking of assets, equipment, and specimens. Now turning to Slide 12. We realize double-digit sales growth across all vertical markets as demand recovers. Our confidence in sustainable long-term growth is underpinned by several themes that we expect to drive investment in our solutions including labor and resource constraints, track and trace mandates, increased consumer expectations, and the need for real-time supply chain visibility. In closing, we are seeing the broadening of demand recovery in the second half of this year with a more normalized seasonality in sales volumes as we enter the fourth quarter and into 2025. As we look longer-term, we maintain strong conviction in the opportunity for Zebra as we elevate our strategic role with our customers through our innovative portfolio of solutions. Our sales and cost initiatives have positioned us well for profitable growth as our end markets continue to recover. 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 to give everyone the chance to participate.

We will now begin the question-and-answer session. The first question comes from Andrew Buscaglia with BNP Paribas. Please go ahead.

So demand seems to be picking up quite a bit facing some easy comps. But also, you had some commentary around some larger North America retail project wins. Could you comment on that? What are you seeing in that market specifically and how do you see that playing out into next year?

Yes, Andrew. I would say that, certainly, we're seeing that the quarter ended where we were pretty happy with the results, and ultimately the teams executed well. I would say that we saw a broadening recovery across all vertical markets, not just retail, in Q3, which certainly was encouraging. From a retail perspective, I would say retail and e-commerce outperformed across all product categories in Q3, and we expect that to extend into Q4, as you mentioned easier comps from a year ago. But we've also been able to see some year-end spending, which injects some more normalized seasonality, which we have seen in past years, certainly year-end with larger orders from e-commerce, retail, and transportation logistics, specifically North America and EMEA. This is what we'd normally see at year-end. We hadn't seen that last year, of course, and now, we're seeing the return to more normalized levels. So we feel good about retail customers beginning to spend again. Their focus continues to be investments in e-commerce, and omni-channel continue to drive that market. We've got a solid pipeline of opportunities as we enter Q4 and we continue to win in that market against competition as we've got a differentiated portfolio of hardware and software serving the retail market. So we feel good about what we're seeing across retail in Q3 and Q4, and the seasonality coming back where we see some year-end spending across North America and EMEA. So we feel pretty good about retail at the moment. It was the first to recover. If you think back to the beginning of the year, retail was the first to decline and the first to recover. And we're seeing that continue across retail throughout the year.

Okay. And then can you just comment on what you're seeing with distributors and how they are going about their decision to start to restock and what kind of trends are you seeing with those customers?

Maybe I'll start and hand to Nathan. I would say overall that our distributors are seeing the uptick in business that we're seeing from our partner community. I think that we're working closely with them to make sure that they've got the right level of inventory to meet the increase in demand as we enter Q4. But that we continue to work closely with them to make sure that across all product categories, they have the right level of stocking across each of the regions around the globe.

Yes, I think that checks in, and again, when we look at it from an inventory perspective, they're at a good amount of days on hand in terms of where we'd like them to be entering the fourth quarter. So again, I think we feel good about the overall inventory position here as we enter the quarter with the expectation for the year-end spend to come through.

The next question comes from Jamie Cook with Truist. Please go ahead.

Hi, good morning. Congrats on a nice quarter. I guess, just back to the large orders, can you help us understand how much of the large orders did that help the third quarter and sort of what's implied in the fourth quarter and your confidence level that this continues into 2025? And then, I guess, my second question, the margins over the past two quarters, I mean the gross margins were 49% plus, that's implied 49% or so in the fourth quarter. I'm just wondering, based on the sales volume and benefits from some of their structuring, the expectation that margins can at least be at that level in 2025, given the exit rate for 2024. Thank you.

Yes. So Jamie, maybe I'll start and then hand over to Nate around margin. I'd say if we kind of look back to 2023 and recap where we're at, overall, I would say that customers in 2023 were absorbing capacity that they built out in the pandemic. They were scrutinizing budgets, sweating assets, and that drove significant distributor destocking in that timeframe. In the fourth quarter last year, we saw really no large deal activity at the end of fourth quarter of 2023. So I would say that that's what's different this year. Ultimately, as we entered 2024 in the first half, we saw early signs of recovery, particularly in mid-tier and run rate businesses we talked about in the first half, focused on mobile computing and retail. But larger orders remained below historic levels in the first half. As we got into the second half, what we're seeing is broader recovery across all regions. In most end markets, we're still seeing manufacturing lag, but we're seeing the return of year-end spending and larger orders by retail and logistics customers in North America and EMEA. We're also seeing some mid-tier orders from healthcare, which has also been a strength, allowing us to raise our guidance. I think we can expect a normalized seasonality to return in the fourth quarter, reflecting the typical uptick in customer spending as they plan for next year. I'd say from a 2025 perspective, while we're clearly not guiding to 2025, we're optimistic that the recovery continues into 2025 based on the strong second half. We'd expect again normalized seasonality to return in the fourth quarter and into 2025. One caution would be that we're seeing a little bit of uncertainty across the customer base, particularly in manufacturing lagging other segments. Each customer is in a different phase of whether it's refresh or new product investment, and there's a bit of visibility to large projects for when they'll happen in 2025. The recovery will likely continue, but could be uneven across some end markets.

Yes. So Jamie, if you look at our gross margin in the third quarter, just over 49%, that's the highest gross margin we've had in recent history. But really, it benefited from lower large deal volume. There has been a return, but it's still lower than as a percent than what we've seen historically. But we are experiencing good scaling on our fixed infrastructure. We completed the consolidation of our distribution centers in North America, which was the last piece of our restructuring actions midway through the quarter, so we're seeing that benefit flow through. The only thing I'd say is that you look at what's implied in the Q4 EBITDA guide. We do expect a sequential decline in gross margin, just based on the incremental large deal volumes coming through on the higher volume. That remains somewhat of a wild card as we enter 2025.

The next question comes from Damian Karas with UBS. Please go ahead.

Hey, good morning, everyone. Nice work in the quarter.

Thanks, Damian. Good morning.

You mentioned that you still have limited visibility around large deployments. Could you give us a sense of why that is and think about going into year-end and some of these late CapEx budget type decisions? What have you baked into your guidance? Are you only factoring in COGS from these larger deployments where you do have visibility? Is there potential that after we get through the election, there could still be some kind of later year spend?

Yes. I would say, Damian, we feel good about the fourth quarter guide with a solid pipeline and visibility in all size orders really to support the guide. Overall, from a limited visibility perspective, as we look into 2025, what we saw in 2024 was customers starting off with a conservative view on CapEx spending and ramping that spending through the year. We'd expect that same thing to likely happen in 2025. There is positive momentum from a macro environment, whether that's positive GDP, e-commerce growth, capital spending increases. However, the macro conditions include ongoing uncertainties such as U.S. elections, interest rates, and inflation impacting consumer spending, which creates a bit of caution for our customers leading to longer sales cycles and more approvals. So while we see projects for 2025, there's limited visibility to large deployments and when they'll happen throughout the year.

That makes sense. I was wondering if you could give an update on the machine vision business. Is that still a drag on your financials at this point, or are you starting to see some signs of improvement there?

I'd say that we still feel good about machine vision overall as being closely adjacent to our scanning portfolio overall. As our customers continue to look to automate supply chain and visibility across manufacturing from an inspection perspective and transportation logistics from a visibility perspective within their environment. Machine vision did decline in the quarter, with overall weakness in manufacturing affecting that market clearly. A good example of that would be electrical vehicle manufacturing, which has slowed. We saw our semiconductor, which we are heavily weighted to, and that's been one of our objectives all along is to diversify the business, particularly with the acquisition of Matrox beyond semiconductors. We saw stabilization in semiconductor in the quarter, which is a positive sign. We are pleased with the software growth of machine vision in the quarter. We feel good that the diversification efforts we're working on will benefit us as the market recovers. It’s a tough market at the moment, but we feel good about the long-term prospects.

The next question comes from Tommy Moll with Stephens. Please go ahead.

Good morning, and thank you for taking my questions.

Hey, Tommy.

Hi, Tommy.

I wanted to start on the large order topic. I hear you loud and clear that the visibility on next year remains limited at this point. What would a typical planning cycle look like? In a normal year, how much advance notice do you have, and when do the conversations really start to pick up for that visibility about what's coming?

Typically six months. We typically have six months of visibility to larger projects from our customers. That planning cycle typically begins six months in advance as they think about the next generation of device, the use cases they are using devices for. The upgrades in larger projects are always bigger than the last refresh, as they deploy more devices. They also look to add additional use cases along the way. All that gets discussed six months in advance, and then they go through their process of selecting what product, what solution, what vendor to move forward. Sometimes timing relies on other factors, like rolling out new software on their side or working with outside vendors to do that, or whether they've got internal developments happening or they have a rollout schedule they want to meet based on their business seasonality. So that all depends from a rollout perspective. Sometimes things get delayed or move faster, but typically six months of visibility.

The next question comes from Brad Hewitt with Wolfe Research. Please go ahead.

As we think about next year, aside from the year-end retail spending, are you seeing anything in the pipeline or the conversion rates that makes you more optimistic than you were last quarter about large orders returning in a more meaningful way in 2025? How much of a recovery in large order rates do you need to see for growth in 2025 to be in line with or better than your long-term growth framework?

We're optimistic that the recovery is expected to continue into 2025 based on the strong results we've seen in the second half of the year and the continued ramp of CapEx by our customers. However, we are seeing uneven results in the marketplace; while retail has recovered, transportation and logistics are developing but some customers are still using the capacity that they've built out during the pandemic. Manufacturing clearly is lagging other sectors. However, healthcare has had strong growth in the last two quarters, and while we expect recovery to continue in 2025, there are still macro headwinds, including manufacturing softness in China and limited budget visibility as we approach early 2025.

The next question comes from Keith Housum with Northcoast Research. Please go ahead.

Good morning, guys. Bill, perhaps you could provide a bit of color from a geographical perspective. EMEA and Latin America were the standouts this quarter. Was it easier compares for those geographies or is there something truly unique happening in those areas that we can think about as we go forward?

Yes, Keith. Double-digit growth across all major product categories, regions, and end markets was encouraging. However, as you know, EMEA had easier compares with a weak Q3 last year and aggressive distributor destocking during that time. Strength in Northern Europe was evident, particularly with larger projects in transportation and logistics moving forward and some wins in mobile computing. North America saw improvement across all product categories, especially in retail, healthcare, and transportation and logistics, but there's still some unevenness as customers utilize their existing capacity, although parcel volumes continue to recover. Manufacturing remains challenging overall, particularly in Germany. Southeast Asia was a highlight in Asia-Pacific, while we don't expect near-term recovery or growth driver from China. Latin America showed strength in Mexico and Brazil. Overall, we feel positive about recovery across all regions, but the vertical markets tell more of the story than the regions themselves.

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

I have a couple of questions. First, regarding the strength in healthcare that you're experiencing, can you clarify whether this is due to adding new accounts or just expanding your existing presence in the market? Additionally, is this growth a result of improved health and spending in the sector after the impacts of COVID? I would appreciate your insights on this. Secondly, there was a previous question about the initiatives you've implemented to enhance gross margins. As we consider operating expenses for 2025, can you tell us if all the initiatives from earlier this year have been fully executed? What should we anticipate for operating expenses going into 2025?

Yes, I'll start with healthcare and then hand over gross margin to Nate. From a healthcare perspective, we are seeing a combination of new customers and refreshes across the portfolio, with continued opportunities in healthcare. We saw growth across all product categories. We have specific lines for printing, scanning, and mobile computing focused on the healthcare market. Overall, we improve productivity for healthcare providers of all sizes, enabling enhanced safety and allowing information to be entered into electronic medical record systems, which is critical across healthcare. This opportunity exists not just in North America but globally. Healthcare is our smallest vertical market at the moment but is the fastest growing in opportunities for both new and existing clients. As for OpEx, Nathan can expand on that.

When you look at OpEx, the full benefit of the restructuring is embedded in the OpEx for the second half of the year. The incremental gross margin benefits are primarily related to the flow-through of the North America distribution center closure. The focus now is on how we scale and drive productivity across the existing OpEx infrastructure. There are exciting initiatives being worked on to leverage AI to drive productivity in areas like supply chain forecasting, order management, and technology support. This will allow us to scale efficiently with the tools and technology available today.

The next question comes from Brian Drab with William Blair. Please go ahead.

Good morning. Thanks for taking my questions. First one is just around the cadence of demand recovery and the timing that you saw in the third quarter. The tone is a lot different today compared to the second quarter, even from when we touched base during the third quarter. Did you see an incremental pickup in demand in some end markets even as recently as October?

Hey Brian, let me start. If you look back at our previous guidance, we assumed a similar level of demand from Q2 continuing into the second half with only modest increases for year-end spending. We wanted to see real commitments come through from our customers before embedding that into the guide. I think that's what we saw through the second half of Q3 and here at the early part of Q4 as the conversion of the pipeline really picked up towards the end of the third quarter.

Okay. That makes sense. And then second question, depending on the outcome of the election, there are concerns about significant tariffs that may start to go into place. I understand that during the previous Trump administration, you established a tariff task force. Could you describe the activities happening at Zebra right now to potentially position for that environment?

Well, it's too early to speculate on the impact of all the scenarios that could come out of next week's election. However, we have been focused on some of the planned tariffs set for 2026 and how we build alternatives to respond accordingly. The team is actively working on mitigation plans regarding some of these new tariffs. We've also been diversifying our supply base since 2019 to improve overall resiliency and prepare for future tariff changes. Our focus has been on varied scenario planning based on potential outcomes from the upcoming election.

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

Hi, good morning. The commentary around gross margin has already been touched on and is performing really well. I’m curious, given the early recovery, has there been any change in Zebra's promotional practices? Do you need to discount less from your leadership position, the way you've built out the portfolio, or anything that could structurally carry forward from a promotional aspect?

Overall, our strong customer relationships and deep vertical market expertise differentiates us in the marketplace. We are confident that we continue to win in the market with our investments in innovation. We haven't seen any meaningful changes in the competitive landscape. Currently, we believe in our ability to extend our industry leadership through our investments in innovation, and we haven't seen anything different from a competitive landscape perspective around the world.

As a quick follow-up, how are data capture and printing following mobile computing? Are you starting to see some accelerating momentum in those products as well?

Yes, Rob. Mobile computing was the first major category to recover in Q2, and we're continuing to see broad-based demand in Q3 and into Q4, particularly for larger deals driven by mobile computing. In Q3, there was broad-based growth across data capture solutions, including all product categories within that space. We expect that strength to continue into 2024. We are observing growth in data capture as well as printing. One of the strengths has specifically been in mobile printing, which ties back to mobile computing. There are also opportunities in eco-friendly linerless printing that reduces waste in print. Overall, we feel good about the broad-based growth across DCS, print, and RFID, which also saw strong growth in Q3.

The next question comes from Jim Ricchiuti with Needham. Please go ahead.

Hi, good morning. This is Chris Grenga on for Jim. Thank you very much for taking the questions. Just to follow up on the RFID point, there have been reports about new applications for RFID in grocery. First use case apparently being one involving bakery departments. Are you anticipating new opportunities for your RFID printing business as a result of these developments? And how do you view RFID growth opportunities over the next year, particularly in grocery alongside apparel, general merchandise, and logistics?

We experienced significant growth in Q3 for RFID and have a strong pipeline of opportunities in retail, transportation and logistics, and manufacturing. There is an expansion of retail applications that now includes general merchandise beyond just apparel. We also see potential in fresh goods within retail stores using RFID. This presents an opportunity to improve tracking and tracing throughout supply chains and parcels. We offer the widest range of RFID solutions, which includes fixed and handheld readers, industrial and mobile printing, software, and labels. We are optimistic about the RFID market and believe it will keep growing with new applications.

The next question comes from Joe Giordano with TD Cowen. Please go ahead.

You touched on tariffs and what you're doing. Can you remind us how much production is still in China? I know you moved a lot of production to your manufacturing partners during the last go-around. Can you provide an update on how much production remains, what can be moved, and how much needs to stay?

If you look at an aggregate in terms of dollars, it's almost close to 50% of finished goods production is outside of China, but a significant majority of our component supply chain remains within China. That's the trickier or more complicated part of the supply chain to move, given how embedded it is in that market. We moved a significant portion of manufacturing to support North America into places like Malaysia and Vietnam back in 2019, and that shift has ramped up over the last several years. However, we didn't move all North American volume out of China, as some products still make sense to produce there despite the higher tariffs. We balance that with the pricing actions taken in the past. The challenge now is figuring out what additional production needs to move if new tariffs are enacted while ensuring we’re not too far dislocated from where our source components are coming from.

The next question comes from Nathan Winters with Northcoast Research. Please go ahead.

Thanks for the questions. Let me conclude by discussing the potential for M&A. Our philosophy has remained unchanged; we are interested in leveraging our vision and strategy through disciplined acquisition targeting. We assess specific adjacent opportunities that synergistically complement what we do today. The strong balance sheet gives us choices for returning capital or looking at M&A when opportunities arise. However, with increasing interest rates and market uncertainty, we maintain a higher bar for acquisition assessments. While we're excited about the current state of our business, we're also inquisitive about market opportunities; acquisitions must align with our strategic goals.