Good day. And welcome to the Fourth Quarter and Full Year 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 fourth 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 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 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 fourth quarter results. Nathan will then provide additional detail on the financials and discuss our 2025 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 team executed well in the fourth quarter, delivering results above our outlook. For the fourth quarter, we realized sales greater than $1.3 billion, a 32% increase compared to the prior year. Adjusted EBITDA margin of 22.1%, a nearly 7% increase. Non-GAAP diluted earnings per share of $4, which is more than double the prior year and strong free cash flow. As we discussed on our last earnings call, in the third quarter, we saw demand recovery broaden with data capture and print returning to growth, following mobile computing returning to growth in Q2. Demand trends continued to improve in most end markets throughout the fourth quarter, with the manufacturing sector lagging. North America retail was a bright spot with stronger customer year-end spending than we had anticipated. These factors, along with significant distributor destocking in the second half of last year, resulted in strong double-digit sales growth in Q4. From a profitability perspective, the operating leverage from our strong sales growth drove significant margin expansion supporting our earnings and cash flow. As we enter 2025, our order backlog supports a solid Q1. However, we remain cautious in our outlook as our customers navigate an uncertain environment, including a dynamic global trade, geopolitical, and macroeconomic backdrop. I will now turn the call over to Nathan to review our Q4 financial results and discuss our 2025 outlook.

Thank you, Bill. Let's start with the P&L on slide 6. In Q4, total company sales grew approximately 32%, reflecting continued recovery in demand across our major product categories. Mobile computing strength in retail drove growth above our outlook. Our Enterprise Visibility & Mobility segment sales increased 33%, and Asset Intelligence & Tracking segment grew 29%. Our services and software recurring revenue businesses had solid growth in the quarter. We realized double-digit sales growth across our regions. In North America, sales grew 36% with a significant improvement in large retail mobile computing works. EMEA sales grew 24% with strength in Northern Europe. Asia-Pacific sales increased 30%, led by Australia, New Zealand, and India, along with modest improvement in China. And sales grew 40% in Latin America, with particular strength in Brazil. Adjusted gross margin increased 410 basis points to 48.7%, primarily due to volume leverage. And adjusted operating expenses as a percent of sales improved by 290 basis points. This resulted in a fourth quarter adjusted EBITDA margin of 22.1%, a 670 basis point increase versus the prior year, and a 70 basis point sequential improvement from Q3. Non-GAAP diluted earnings per share was $4, a 134% year-over-year increase, and at the high end of our outlook. Turning now to the balance sheet and cash flow on slide 7. For the full year, we generated $954 million of free cash flow as EBITDA increased, and we drove significant improvements in working capital and inventory levels. We achieved a 136% free cash flow conversion and ended the year at a 1.2x net debt to adjusted EBITDA leverage ratio. As our cash flows recovered and debt levels have moderated, we have increased flexibility to deploy capital consistent with our allocation priorities. We repurchased $47 million of shares for the full year, with most of the activity in Q4. As part of our continued efforts to scale our expansion in adjacent markets, we recently agreed to purchase Photoneo, a leading 3D machine vision company based in Eastern Europe, for approximately EUR 60 million, which is expected to close in the first quarter. Let's now turn to our outlook. We entered 2025 with a solid backlog supported by strong retail year-end project spending that carried into our first quarter. Our first quarter sales growth guidance range of 8% to 11% reflects favorable comparisons and assumes a one-point unfavorable impact from FX due to a significantly stronger dollar over the past several months. Our first quarter adjusted EBITDA margin is expected to be approximately 21%, and non-GAAP diluted earnings per share are expected to be in the range of $3.50 to $3.70. This sales and profitability expectation is a sequential decline from Q4, reflective of normal seasonality. For the year, we expect sales growth between 3% and 7%, inclusive of a 130 basis points unfavorable impact from FX. Demand trends have been positive across most of our end markets, with manufacturing lagging. That said, we remain cautious in our outlook as our customers navigate an uncertain environment, and as a result, our visibility to customer spending beyond Q1 is lower than usual. Our full year adjusted EBITDA margin is expected to be between 21% and 22%, and non-GAAP diluted earnings per share are expected to be in the range of $14.75 to $15.25. We will continue to remain agile to ensure we deliver solid, profitable growth. Free cash flow for the year is expected to be at least $750 million, which reflects free cash flow conversion of greater than 90%. We will continue to work on further optimizing our working capital levels, balanced with our supply chain resiliency initiatives. We've made substantial progress diversifying our supply chain sourcing beyond China over the past several years. We continue to work closely with our manufacturing and trade partners to optimize our footprint, which puts us in an improved position to navigate the impacts of recently announced import tariffs. Based on the incremental 10% China tariffs that became effective in early February, and the 25% Mexico tariffs that became effective in early March, we anticipate a net impact to gross profit of approximately $20 million in 2025, peaking in Q2. The impact is roughly split between China and Mexico. We expect to substantially mitigate these tariffs as we exit 2025 through supply chain initiatives and targeted price increases. Left unmitigated, the annualized impact would have been more than $60 million. 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. As we look at the long-term opportunities for our business, Zebra remains well-positioned to benefit from secular trends to digitize and automate workflows with our portfolio of innovative solutions, including purpose-built hardware, software, and services. We empower frontline workers to execute tasks more effectively by helping them navigate constant change in real-time. Innovation remains central to our industry leadership, and we have consistently reinvested approximately 10% of our sales into research and development to advance our portfolio of solutions. Recent progress includes AI-based machine vision offerings, expansion into self-service kiosks, embedded RFID capabilities within our mobile computing portfolio, and eco-friendly printing supply. We augment our organic efforts with strategic acquisitions that advance our vision. This includes our pending acquisition of Photoneo, which will expand our 3D machine vision solutions into automotive manufacturing, logistics, and other key markets. We look forward to welcoming the team once the acquisition closes. As you will see on slide 11, our customers leverage our solutions to optimize workloads across a broad range of end markets, which drives productivity and better service to their customers, shoppers, and patients. The performance bar continues to rise in an increasingly on-demand economy. Zebra works closely with our customers on their technology journey to address their biggest challenges. I would like to highlight some of the wins that transform customer workloads. A large North American retailer is deploying Zebra RFID fixed readers to optimize shelf availability for fresh food and apparel. This initial investment lays the groundwork for expansion into additional RFID solutions such as loss prevention. A leading auto manufacturer recently launched a mobile computing refresh and expansion project spanning multiple U.S. sites to provide real-time visibility and streamline final quality inspections. An online retailer in South America replaced competitors' devices and expanded their relationship with us, selecting Zebra mobile computers, scanners, kiosks, printers, and RFID readers to optimize their inbound and outbound warehouse operations. Our reliable device performance and ability to improve operational efficiency are particularly important to this customer. Additionally, a leading retail pharmacy is deploying Zebra tablets, enabling their staff to provide improved patient care and scheduling, whether in-store or off-site. This customer replaced the competitor's solution with our Zebra tablets due to the breadth of Zebra's capabilities along with our comprehensive support and maintenance services. These projects demonstrate how customers rely on us to navigate their technology journey through our workflow expertise, commitment to innovation, and product lifecycle support. Slide 12 highlights Zebra's value proposition that we showcased at the National Retail Federation trade show in January. We highlighted Zebra's AI-powered modern store, demonstrating how our innovative solutions help retailers drive improved performance through optimized inventory, engaged associates, and an elevated customer experience. Zebra and our partners help to deliver these outcomes through improved omni-channel execution, loss prevention, worker collaboration, and more. We have partnered with Qualcomm, Google, and strategic independent software vendors to help our retail customers begin to leverage the power of AI across their frontline operations. At the show, a prominent retail customer demonstrated our Zebra companion with AI agents that assist store associates with edge intelligence such as operating procedures, sales product information, merchandising guidance, and device operation. These agents act as digital assistants tailored to our customers' unique operating environment while leveraging generative AI to respond to queries and perform tasks without the need for extensive training. Additionally, as our customers and partners accelerate their use of AI within business-critical mobile applications, Zebra's AI suite enables quick and cost-effective development of new solutions that take advantage of the continual advancement of our mobile computing platform. While we don't expect our new AI solutions to have a material impact on near-term results, we believe they play an integral part of driving our connected frontline worker strategy. In closing, we retain strong conviction in the opportunities ahead as we address our customers' evolving needs with our innovative portfolio of solutions. Our confidence in sustainable long-term growth is underpinned by several themes reflected on slide 13. These include labor and resource constraints, track and trace mandates, increased consumer expectations, and a need for real-time supply chain visibility. 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.

The first question comes from Damian Karas with UBS.

Hi, good morning. This is Srikar Venjamuri on for Damien. I had a couple of quick questions on what you're seeing in terms of larger project activity in Q4, if you saw any larger projects return and how that's factoring into the Q1 guidance.

Yes, I would say that in Q4, the team delivered well at the high end of our outlook, really driven by stronger-than-expected year-end spending from our retail customers. So, yes, we did see some larger projects take place in Q4. The broader backdrop was double-digit growth across all major categories, all regions, all end markets, and order sizes of all types, meaning run rate mid-tier and large deals in the quarter. That was certainly helped by easier comparisons from last year, which included distributor de-stocking. We see that flow-through of not just the retail activity, but broader-based growth drove stronger sales growth in Q4 and earnings above the high end of our outlook.

Yes, that makes sense. And as a follow-up, I just want to quickly touch on tariffs and just get a sense for what you're planning there, if you've already executed some pricing actions, what the timing around those pricing actions would be, and more broadly, what would be a trigger decision to move manufacturing to other regions?

Yes, so I think the question started about just our broader tariff response. Obviously, it's a dynamic environment. We have a dedicated team to establish and monitor the changes, what the potential impact is, and to design mitigation strategies. If you look at our current guidance, we expect to announce price increases shortly to respond to the announced tariffs, which is part of the mitigation strategy that's embedded in the current guide.

The next question comes from Tommy Moll with Stephens.

Good morning, and thank you for taking my questions. You mentioned that the visibility beyond the first quarter is lower than usual for this time of year. My question is, as you rolled up your full year sales outlook, what kinds of assumptions were you making on large deals there? I know in the past you look at the funnel and the pipeline and make some assumptions about conversion. What kind of assumptions are we making this year? Thank you.

Yes, I'd say, Tommy, maybe a broader view of that, and then I'll cover kind of large deals. As we entered 2025, we certainly had solid backlog, driven by the stronger retail spending, so larger orders, that carried into the first quarter from the fourth quarter. We're expecting solid broad-based organic growth in 2025. While we haven't seen customers really pull back spending to date, we clearly are seeing some impacts from the market uncertainty playing out with our customers. In a couple of examples, budgets are still being finalized, and that impacts our visibility and tempers our expectations beyond Q1. We're seeing specific to large orders, some customers staging deployments over longer periods of time. Clearly, we're seeing the strong U.S. dollar as a headwind to us. The FX impact is causing some concern from international customers and their plans. Our customers are focused on the potential impact of the overall global trade policy and thinking about how they mitigate it, which adds to the uncertainty of their projects and visibility, small and large, moving forward. Our guidance reflects solid organic growth in light of all these uncertainties, but visibility is tough, especially on large orders and deployments.

Thank you, Bill. So as you look at the inventory levels with some of your key channel partners, what context can you provide there? And if it feels like the bias is up or down or that you think the sell-through and the sell-in are roughly balanced at this point, any insight would be helpful. Thank you.

Yes, Tommy, this is Nathan. I'd say it's very balanced. It stayed fairly balanced throughout the year. We're looking at days on hand in the channel. We're in a good place as we exited the year with our distribution partners around the globe. And that is a daily activity with our teams, making sure they have the right inventory at the SKU level. We feel good about the overall inventory position here at the beginning of the year.

The next question comes from Joe Giordano with TD Cowen.

Hey, good morning, guys. So, on the full year, given the Q1, it feels a little conservative. But I understand why you're framing it the way you are given the uncertainty. I'm just curious if you were to compare the full year framework and where we were a year ago. How would you categorize that? It seemed like last year you were only putting in what was highly visible to you, and if there were project flows, it was all kind of upside. Is it a similar idea right now?

I would say that the year is playing out a little bit like last year for very different reasons. Last year we came off a year that was much different, with customers absorbing the capacity they built out during the pandemic. We saw broader-based recovery throughout 2024. I would say the lack of visibility today and the commitment to budgets and projects is driven by several uncertainties with global trade policy and geopolitical considerations impacting our customers' decision-making. Our guidance reflects solid organic growth, but we are taking a conservative approach as we navigate through the uncertainties.

Yes, fair enough. Just a follow-up. The free cash flow in the quarter was excellent. I see the guide is at least $750 million. Why wouldn’t it build from the strength that you had here?

Yes, as you mentioned we had a great year from a free cash flow perspective coming off of ‘23. Committing to that level of performance on a consistent basis is a challenge. If you look at the full year guide of $750 million, the real difference is we expect continued working capital improvements, but not to the degree we saw in 2024. It also implies that as we look at our inventory position, we saw inventory tick up a bit to support January demand, but our teams are doing everything to manage that inventory to mitigate any potential tariff impacts. So, in summary, we expect over 90% free cash flow conversion for 2025, which we believe is a solid baseline.

The next question comes from Andrew Buscaglia with BNP Paribas.

Hey, guys. Good morning. This is Ed on for Andrew. Following the developments with DeepSeek a few weeks ago, I wanted to ask about AI. You’ve long discussed the power of AI in the platform. Following the recent events, do you find that more efficient AI presents an opportunity from a product development standpoint or a net risk due to the probability or possibility of enhanced competition? Thanks.

Yes, we would see clearly AI as an opportunity for Zebra, really empowering the frontline workers. If we look at Zebra's role today in AI, first and foremost, we collect data at the frontline, which provides visibility in real-time and gives assets and workers a digital voice that feeds AI models. The second opportunity for AI is that traditional AI is used today across many of our solutions, whether it's machine vision inspection, optical character recognition, product recognition, or package dimensioning. We demonstrated our generative AI capabilities at the National Retail Show. We've also launched Zebra Companions, which are generative AI digital assistants tailored to our customers' unique operating environments. We see this as an opportunity to drive premium hardware sales, gain market share, and increase recurring revenue associated with the AI capabilities. We’re excited about the potential in this area to empower frontline workers and improve efficiency.

Thanks for that. It was great to see that all in action at NRF. Pivoting over to M&A, you guys are entering 2025 with 1.2x leverage, which gives a fair amount of capacity to tap into. Can you expand on the recent acquisition and any other plans into capital allocation that we should consider for 2025?

Yes, we're excited about the Photoneo acquisition and getting that closed. We feel good about that from a 3D vision perspective. The 3D market is the fastest growing segment within machine vision, and we've leveraged M&A to enter adjacent or synergistic opportunities. We're partnered with Photoneo already with an OEM partnership, so we know the business well. We have a strong balance sheet, allowing us to remain inquisitive about M&A while carefully considering the macro uncertainty.

The next question comes from Piyush Avasthy with Citi.

Hey, good morning, guys. Thanks for taking my questions. From a regional perspective, can you elaborate on the trends you are seeing in Europe and China based on your conversations with your customers? What's your outlook for these regions as we think of your Q1 guidance and 2025 in general? We've heard some mixed signals from other companies, so we'd appreciate your insights.

Yes, I'd say that North America has seen strong growth across all product categories and end markets, driven by retail year-end spending. In EMEA, the highest growth rates came from Northern Europe, and we've seen momentum in larger projects. Manufacturing in Europe, particularly in Germany, remains challenging. China represents about 3% of our business, and we've seen modest sales growth there, but real strength is coming from markets like Australia, New Zealand, and India. Overall, there are opportunities for us as supply chains continue to evolve.

Yes, helpful. Quickly following up on what you just said, are you beginning to see a step up in conversations about reshaping their supply chain and adopting more automation, robotics, and machine vision?

Yes, we see manufacturing as a short-term lagging opportunity for us. However, we are seeing potential investment in automation, robotics, and machine vision. While this market is not currently leading, we believe we are well-positioned to capture future opportunities.

The next question comes from Brian Drab with William Blair.

Good morning. Can you talk about the expected dynamics between AIT and EVM in the 2025 outlook? What should we expect in terms of growth rates across the two segments?

Yes, I'd expect similar growth rates as we progress through 2025. There may be quarterly variations due to the previous year's comparisons, but overall, we expect fairly consistent growth across both segments.

Okay, thanks, Bill. Just one other question, could you elaborate on your considerations for moving production? Are you considering moving production back to the United States?

Yes, we continuously assess our manufacturing footprint based on various factors including geopolitical stability. Significant progress has been made to diversify our supply base, reducing exposure to China from 85% historically to around a third now. We will continue to evolve our manufacturing strategy based on trade and cost factors, and partner with global manufacturers to leverage their capabilities.

The next question comes from Meta Marshall with Morgan Stanley.

Just given that we're hitting four or five years since COVID, can you talk about your thoughts on refresh activity and the RFID performance during the quarter?

We continuously see refresh activity across our customer base. The fourth quarter retail spend was driven by refresh opportunities. I see a strong future for refresh activities, as customers have different usage patterns. RFID performed well in Q4 with strong growth, and we're seeing a broader adoption of RFID solutions across various sectors beyond just retail.

The next question comes from Keith Housum with Northcoast Research.

Can you touch on how the visibility has changed over the past weeks? Also, how does it vary by end market?

I think the visibility has decreased due to the uncertainty everyone is experiencing. Our full year guide reflects a higher uncertainty and the headwinds from FX have increased. We expect steady mid-single digit growth for the year, but visibility remains a concern.

Understood. Can you discuss the trend in average sales price and how you see that evolving?

There hasn’t been a significant change in ASP. We’ve tiered our portfolio to protect ASPs at the high end, allowing us to compete without compromising premium pricing. We expect to continue generating demand and placing more devices in the hands of associates.

The next question comes from Guy Hardwick with Freedom Capital Markets.

Can you talk about the potential business model for Zebra Companion in three to four years?

It’s still early to predict revenue sources, but we see opportunities for premium hardware revenue and higher recurring revenue through AI capabilities. We believe our AI suite and agents will drive further market share and revenues.

Did you see any pre-buy activity in Q4 or early Q1 due to tariff concerns?

No, we saw larger retail orders, but it was not driven by tariff concerns.

The next question comes from Brad Hewitt with Wolf Research.

Can you discuss the organic incremental margins you are embedding in the guidance and the reasons for the margin expectations?

The guide includes profit headwinds from tariffs, which we expect to mitigate as we progress through the year. There's potential for margin improvements if we remove this headwind.

You’ve noted strength in healthcare in Q4. How should we think about that moving into 2025?

We feel strong in healthcare with continued demand across clinical mobility, in-home healthcare, patient engagement, and virtual care. We anticipate that strength will carry into 2025.

The next question comes from Jim Radushi with Needham & Company.

Do you anticipate the feature set for Companion being exclusive to the customer that was showcased? Can we expect the opportunity to expand beyond retail?

No, it’s not exclusive to any one customer. Our AI suite allows independent software vendors to leverage AI on our devices for various applications. We are using similar functionality in our own distribution center to support workforce efficiency.

Absolutely, functionality like knowledge management and language translation will be applicable across verticals, including manufacturing and logistics.

Our last question comes from Rob Jamieson with Cowen & Company.

I wanted to confirm observations about your guidance. Has the lack of visibility increased due to uncertainty in policies?

Yes, we're seeing that lack of visibility driven by uncertainties, especially around trade policies and the effects of tariffs. If we gain more clarity, it could improve our visibility and customers' confidence in their budgets and projects.

As for Photoneo, assuming closing later this quarter, we expect around 30 basis points of incremental revenue for the year.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Burns for any closing remarks.

I would like to thank our employees and partners for their support as we continue to work together to solve our customers' biggest challenges. Our relentless focus on innovation will continue to transform our customer workflows. We feel good about our business. Have a great day, everyone.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.