Zebra Technologies Corp

NASDAQ:ZBRA

Earnings Call Transcript 2021-Q4

[Operator]

Good day everyone and welcome to Zebra's Fourth Quarter and Full Year 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded.

At this time, I'd like to turn the floor over to Mike Steele, Vice President of Investor Relations. Sir, you may begin.

[Mike Steele, Vice President-Investor Relations]

Good morning and welcome to Zebra's fourth quarter conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year. Our forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially due to factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of the 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 Anders Gustafsson, our Chief Executive Officer; and Nathan Winters, our Chief Financial Officer. Anders will begin with our fourth quarter and full year 2021 results. Then Nathan will provide additional detail on financials and discuss our 2022 outlook. Anders will conclude with progress made on advancing our enterprise asset intelligence vision along with an updated view of our served market opportunity and revised long-term sales outlook. Following the prepared remarks, Joe Heel, our Chief Revenue Officer, will join us as we take your questions.

Now let's turn to Slide 4 as I hand it over to Anders.

[Anders Gustafsson, Chief Executive Officer]

Thank you, Mike. Good morning everyone and thank you for joining us. Our team delivered solid fourth quarter results in an exceptionally challenging supply chain environment. For the quarter, we realized adjusted net sales growth of 12% or 10% on an organic basis, adjusted EBITDA of $319 million, a 4% year-over-year increase and adjusted EBITDA margin of 21.7%, a 180 basis point decrease. Non-GAAP diluted earnings per share of $4.54, a 2% increase from the prior year and strong free cash flow.

Customer demand is stronger than ever for our solutions that digitize and automate workflows. We realized sales growth across all four regions, supported by exceptional strength in mobile computing, with particularly strong growth in Asia Pacific and Latin America. Supply chain constraints limited us from fully satisfying our customer demand, particularly for certain data capture and printing offerings. Our teams have been aggressively working to mitigate the impact of the unprecedented industry-wide supply chain challenges by securing new sources of supply, utilizing alternative modalities of transportation and expediting customer shipments.

Premium freight costs exceeded our expectations and significantly weighed on gross margin, which was partially offset by higher service and software margin. We also scaled operating expenses while continuing to invest in initiatives to drive sustainable, profitable growth. Our solid fourth quarter performance closed an outstanding full year 2021 in which we generated record sales, EBITDA margin, earnings per share and free cash flow.

With that, I will now turn the call over to Nathan to review our Q4 financial results in more detail and discuss our 2022 outlook.

[Nathan Winters, Chief Financial Officer]

Thank you, Anders. Let's start with the P&L on Slide 6. In Q4, adjusted net sales increased 11.7%, including the impact of currency and acquisitions and 10% on an organic basis reflecting broad-based demand for our solutions. Our Asset Intelligence and Tracking segment, including printing and supplies, grew 3.1% despite significant supply constraints on our printer products and cycling very strong prior year results.

Enterprise Visibility & Mobility segment sales increased 13.2%, driven by exceptional growth in mobile computing. We continue to drive solid growth across services and software with strong service attach rates and expansion of our software offerings. We recognized solid growth in all four regions. North America sales increased 4% with strength in mobile computing, supplies and services. EMEA sales increased 9%, driven by strong growth in mobile computing. Asia Pacific sales grew 29% with strength across all major geographies, including China. And in Latin America, sales increased 42%, continuing strong double-digit growth in all major offerings.

Adjusted gross margin declined 210 basis points to 45.7% due to unprecedented premium freight costs partially offset by higher service and software margins. We will discuss transitory costs, including premium freight further in a moment. Adjusted operating expenses as a percentage of sales improved 40 basis points as we scaled our cost structure while continuing to prioritize high-return investment opportunities in the business. Fourth quarter adjusted EBITDA margin was 21.7%, a 180 basis point decrease from the prior year period, entirely attributable to lower gross margin from transitory impacts, partially offset by operating expense leverage. We drove non-GAAP earnings per diluted share of $4.54 and $0.08 or 1.8% year-over-year increase, which also reflects lower interest expense and a slightly higher tax rate.

Turning now to the balance sheet and cash flow highlights on Slide 7. In 2021, we generated more than $1 billion of free cash flow for the first time in our history. This was $115 million higher than the prior year, primarily due to increased profitable growth. Our balance sheet remains strong. From a debt leverage perspective, we ended the year at a modest 0.5x net debt to adjusted EBITDA leverage ratio, which provides us ample flexibility. In 2021, we invested $452 million to acquire Antuit, Fetch Robotics and Adaptive Vision to advance our solutions offerings in retail, manufacturing and the warehouse. In addition, we made $34 million of venture investments in five portfolio companies, $59 million of capital expenditures, $257 million of net debt repayments and $57 million of share repurchases.

On Slide 8, we show the multi-year impact of transitory costs primarily related to expedited freight due to supply chain bottlenecks caused by the pandemic as well as tariffs on China imports. Our team is making heroic efforts to satisfy customer demand. This includes dedicating substantial engineering resources to product redesigns, negotiating long-term supply agreements with new and existing suppliers, shifting virtually all transport to air promotion and expediting component parts and finished goods to meet customer commitments.

Global freight rates have reached record high cost per kilo for all modalities of delivery across our supply chain. In Q4 compared to pre-pandemic rates, we incurred incremental premium freight costs of $67 million, which is higher than we had anticipated in our prior outlook, and $58 million higher than the prior year. Partially offsetting this impact were $4 million of refunds of China import tariffs, which was $8 million less than we received in the fourth quarter of 2020. In total, these transitory items had a combined unfavorable gross margin impact of $66 million year-over-year. I will discuss our assumptions regarding the 2022 impact of transitory costs in a moment.

Let's now turn to our outlook. We entered the year with a strong order backlog and healthy sales pipeline supported by broad-based demand for our solutions. Our expected sales growth of 1% to 3% for the first quarter has been capped by what we can deliver to our customers due to extended lead times and limited availability of component parts. Our outlook assumes an approximately 1 percentage point additive impact from acquisitions and foreign currency changes.

We anticipate Q1 adjusted EBITDA margin to be approximately 20%, which assumes gross margin contraction from the prior year due to unfavorable sales mix and expected premium freight costs of $60 million, which translates to 340 basis point unfavorable impact to the prior year period. We also expect increased operating expenses as a percent of sales primarily due to our entry into multiple expansion markets since last spring and resuming in-person events.

We believe total supply chain impacts, including transitory costs and product availability, are peaking in Q1 with recent improvements in freight capacity and better visibility and supplier commitments to component supply into the second quarter. Non-GAAP diluted EPS is expected to be in the range of $3.70 to $4. For the full year 2022, we expect adjusted net sales to grow between 3% and 7% with the assumption that supply chain constraints steadily abate throughout the year. This outlook assumes a net neutral impact from acquisitions and foreign currency changes.

We anticipate full year 2022 adjusted EBITDA margin between 23% and 24%, which assumes total transitory cost impacts, including premium freight expenses of approximately $140 million to $160 million. This is slightly higher than the impact we realized in 2021. We expect our free cash flow to be at least $900 million for the year. Please reference additional modeling assumptions shown on Slide 9.

With that, I will turn the call back to Anders to discuss how we are advancing our enterprise asset intelligence vision and to provide an update on our served market opportunity and long-term growth expectations.

[Anders Gustafsson, Chief Executive Officer]

Thank you, Nathan. I am encouraged by the strong demand across our business and the bold actions our teams are taking to navigate the supply chain challenges. Slide 11 illustrates how we digitize and automate the frontline of business by leveraging our industry-leading portfolio of products, software and services. By transforming workflows with our proven solutions that generate an attractive return on investment, Zebra's customers can effectively address their operational challenges, which have become increasingly complex through the pandemic.

Our innovative solutions empower the workforce to do their jobs more efficiently by navigating constant change in near real-time, utilizing insights driven by advanced software capabilities such as prescriptive analytics, intelligent automation and machine vision. We are raising our long-term organic sales growth expectations to 5% to 7% from our former expectation of 4% to 5%.

On Slide 12, we provide a refreshed view of our served markets totaling approximately $30 billion, which are supported by mega trends, including the on-demand economy, asset visibility, mobility and cloud computing and automation. These trends have become increasingly important to our enterprise customers and we remain well positioned to meet their needs with our comprehensive solutions. Today, the vast majority of Zebra sales are in our core, which remains vibrant and is now expected to grow 4% to 5%. We have the broadest and deepest offering among the competition and believe that our continued focus and investment will advance our leadership position. Our near adjacencies provide ample opportunity to expand and have a generally higher growth profile than our core.

The most promising categories include RFID solutions for use cases that demand the highest level of workforce productivity and inventory accuracy. Smart supplies, including dynamic temperature monitoring as well as the opportunity to equip a broader set of frontline workers with our expanded offering of mobile computers. Beyond our core and near adjacencies are rapid growth expansion opportunities that are transforming workflows across the supply chain. We have entered these areas through organic and inorganic investments over the past 18 months and they represent a low to mid-single-digit percentage of Zebra sales. In mid 2021, we launched several fixed industrial scanning and machine vision smart cameras.

We also acquired Fetch Robotics to give us the broadest portfolio of autonomous mobile robots in the industry. We have also been building a compelling software suite that optimizes retail execution and demand planning, which includes Reflexis workforce and task management, Zebra Prescriptive Analytics, Workforce Connect, SmartCount and antuit.ai powered demand forecasting. Collectively, we are serving an approximately $6 billion market in these exciting expansion areas. We are early on our journey and have the opportunity to extend our capabilities deeper into the areas of machine vision, warehouse automation and workflow optimization software over time.

Now turning to Slide 13. Businesses partner with Zebra to help optimize their end-to-end workflows as they strive to meet the increasing demands of consumers. I would like to highlight several recent key wins across our end markets. A global apparel retailer is deploying a Zebra solution of 32,000 TC52 mobile computers along with Workforce Connect voice collaboration software and our software solution that transforms mobile computers into workstations on demand.

We are enabling this retailer to improve associate productivity and communication in both front of store and distribution center applications, eliminating the need for walkie-talkies and full desktop computer workstations. Our mobile computers will also provide the benefit of stable network connectivity, improved security features and battery management tools.

This competitive takeaway win from a major consumer device provider demonstrates our superior value proposition versus the competition. In another recent win, Zebra's Reflexis workforce management solution has enabled a U.S.-based specialty retailer to optimize scheduling for more than 25,000 employees and provide enhanced self-service reporting and analytics to support accountability and performance.

We have expanded our relationship with a leading international energy company to empower thousands of convenience store associates in the United Kingdom with Workforce Connect and Reflexis workforce management applications on their Zebra mobile computers and tablets. Our solution enables the store associates to automate their daily responsibilities, maximizing productivity and streamlining task management and administration.

We have expanded our relationship with a European auto manufacturer, augmenting thousands of their Zebra mobile computers with RFID readers to enhance quality control in production lines and allow secure employee system access. We continue to collaborate with this customer to pilot promising new solutions to further optimize their operations. In health care, a large hospital system in the Southern United States purchased TC52 mobile computers and our Workforce Connect software application to enable mobile access to the medical record systems as well as facilitate instant communication between nurses and other clinicians.

Zebra has selected over competing consumer device providers because of our reputation for comprehensive enterprise solutions. In closing, we are working diligently to navigate through industry-wide supply chain challenges, which limit our ability to fully satisfy strong customer demand in the near-term. That said, the pandemic has accelerated trends that have been driving growth in Zebra's vibrant markets, including e-commerce adoption, the need for real-time track and trace across the supply chain and the shift to a more digital healthcare experience. We continue to be very excited about our growth prospects.

Now I'll hand the call back over to Mike.

[Mike Steele, Vice President-Investor Relations]

Thanks, Anders. 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.

[Operator]

Ladies and gentlemen, with that, we’ll begin today’s question-and-answer session. [Operator Instructions] And our first question this morning comes from Tommy Moll from Stephens. Please go ahead with your question.

[Tommy Moll, Stephens]

Good morning and thanks for taking my questions.

[Anders Gustafsson, Chief Executive Officer]

Good morning.

[Nathan Winters, Chief Financial Officer]

Good morning.

[Tommy Moll, Stephens]

I wanted to start with your revenue outlook. So looking at your first quarter guidance in the full year, it looks like you're expecting a step down sequentially in the first quarter and then revenue builds through the quarters for the rest of 2022. Can you walk us through the assumptions in that cadence across the quarters? And specifically, if you could provide detail on what assumptions you have for the deal business. That would be helpful. Thank you.

[Nathan Winters, Chief Financial Officer]

Thanks, Tommy. So if you look – we entered the quarter, as we said in our prepared remarks, with a very strong backlog, good bookings momentum here early in the quarter. The guide of 1% to 3% really reflects constrained supply, not demand, driven by very specific and certain component shortages within our Printing and DCS business. Without that, we would expect to be at least as high as our full year guide unconstrained. But with that said, we do see improved visibility into those components later in the quarter and into the early part of the second.

So we'd expect a solid rebound in Q2 and then gives us line of sight to our full year guide. And on the full year guide of 3% to 7%, and as we said in the prepared remarks that confident as ever about our business. We do anticipate improved supply chain constraints throughout the year. It's obviously a dynamic environment, but we've secured commitment and we do see improved visibility here over the next few months. And that would also assume increased growth in the last nine months of the year, again, due to the strong backlog demand, along with the recent targeted price increases that go into effect here at the end of the month. Let's say all that while being somewhat cautious in our overall growth assumptions given the supply chain challenges.

[Tommy Moll, Stephens]

And Nathan, would you be able to share any embedded assumptions on the deal business? I know sometimes you have more or less visibility there. So I'm just curious what you've embedded in the outlook today?

[Nathan Winters, Chief Financial Officer]

Overall, it does, particularly if you look from an EBITDA rate, we do assume a favorable deal mix. So a slightly higher percentage of run rate versus deal mix compared to 2021. But obviously, that becomes a little bit harder to predict as we get into the second half of the year.

[Joe Heel, Chief Revenue Officer]

I could add some color as well. This is Joe Heel speaking. As you saw in Q4, we had strong large deal flow. And if we look at our backlogs and pipelines, we also have continued strong large deal flow. We have no shortage of demand.

[Tommy Moll, Stephens]

Thank you, both. And if I could pivot to a higher level question here. Anders, I appreciate the update you provided on the long-term outlook around revenue. I'm curious for any additional context you could give us on the thought process there and what went into that revised outlook? And then specifically on the double-digit expansion opportunities that you provided, I noticed the ones on your slide are areas where you've already entered either organically or inorganically. Are there any other expansion opportunities that may not be on that slide where we could expect potential for continued M&A and/or organic investment? Thank you.

[Anders Gustafsson, Chief Executive Officer]

Yes. First, we've – so we raised our longer term growth outlook to 5% to 7% over cycle versus the historical number we had of 4% to 5% that we had in place since 2014 when we did the Enterprise acquisition. Over the last seven or eight years, we have overachieved that target and we've been more in line with 7%, and we see our overall markets being very strong. We served by some very strong secular trends that are helping to drive demand and as we help to digitize and automate our customers' operations and their workflows and our competitive position remains very, very strong.

And we think we have great opportunities in our core. The core continues to perform very well, but also in our adjacencies and in our expansion markets. So you asked specifically about the expansion markets, we include in there only things that we have identified so far where we have plans – or more than plans where we have solutions that are in the markets. So could it expand? Sure, absolutely. It can expand. But we looked at sizing the market to the solutions we have today and the type of applications that they address.

So we're not going after – we're not including, say, the entire markets for these funds, but only the markets that we can address today. So as we continue to add functionality that will possibly add to solutions, that total market, served market can expand. We certainly see those as very attractive markets. We have a strong right to play. And we have a differentiated value proposition like in fixed industrial scanning or in robotics. And those markets, we expect to have a materially higher strong double-digit growth rates versus our core, and they will then augment the overall growth rates we have for the company.

[Operator]

And our next question comes from Andrew Buscaglia from Berenberg. Please go ahead with your question.

[Andrew Buscaglia, Berenberg]

Good morning, guys. I wanted to ask a little bit more on the margin outlook near and long-term. So on the price side, you said you raised prices, do you have capacity to potentially raise again? And then on the cost side, are you – if need be, that is obviously. And then on the cost side, are you assuming everything is being shipped by freight again for the most part of the year – sorry, by air, excuse me. Are you assuming freight to ship by air, not land?

[Nathan Winters, Chief Financial Officer]

Yes. So a few – maybe I'll start with the last question there. If you look from our assumptions, particularly in Q1, we are still assuming that we're almost shipping, particularly in printing, exclusively via air versus ocean. Although, we do expect that to shift as we move throughout the year. So getting back to more normalized levels in the second half. So that's assumed in the full year guide from a margin rate perspective. Now when you look at the price increases, particularly the one we did here this month, that ranged from 0% to 8%.

Again, it was not a general increase similar to what we did in September. It was very specific to the product family region based on a competitive position as well as the cost increases we're seeing in those respective product families. And that represents a little less than point of sales growth contribution for the year. And it is something we'll always continue to assess and look at. And if we need to increase prices again based on the competitive positioning and/or the inflationary environment, we'll do so.

[Andrew Buscaglia, Berenberg]

Yes. Okay. And on that long-term guidance slide, I was surprised to see that core market, first off, can you update us on what do you think your market share is in that? I believe it's close to 50% last time you gave us that update. And then I'm surprised to see that, that's still 4% to 5% CAGR, just given the world sort of changed in the last couple of years. Yes, just wondering how you're thinking about that.

[Anders Gustafsson, Chief Executive Officer]

So our market share is very strong. We peg overall market share at about mid-40% for our core, where mobile computer would be a little bit higher. Printing is thereabout so maybe a little higher and a little lower for scanning. But the overall market share, we peg around mid-40%. And the growth rate is based on independent market research for those markets as well as an expectation that with the focus in investments we're doing, we will be able to continue to gain some share, although not quite at the same pace as we have for the last several years.

[Andrew Buscaglia, Berenberg]

Okay, all right. Thank you, guys.

[Operator]

And our next question comes from Jim Ricchiuti from Needham & Company. Please go ahead with your question.

[Jim Ricchiuti, Needham & Company]

Question about RFID. There's been quite a bit of activity in that market fairly high profile use cases that have been publicized recently. And I'm wondering, does this represent an incremental growth opportunity? Or does it perhaps shift some revenues from some of the conventional business, your core business. And I'm wondering if you could, number one, talk about the opportunity? And could you – and I'm not sure you've ever really sized that portion of the business. Can you elaborate on that perhaps? Thank you.

[Anders Gustafsson, Chief Executive Officer]

Yes. So we include RFID in the adjacent markets for us. It's – we've been in the RFID space for a long time. So it is very much a close adjacency to our core, where we have a strong right to play and our solutions are very much tied together. I would think of it as it's not either or type thing that customers either by RFID or the buyer regular solutions, our RFID solution go on top of our traditional products. So if you want to say, print and encode an RFID label, it is one of our traditional label printers with an RFID encoder attached to it.

And similar, if you want to read the labels that is an attachment to sled or something like that on our mobile computers. So it is an incremental part of our core business, but it's not the supplement. Or it's a supplement, but not a substitute for our core. And the market continues to grow very nicely. We've seen apparel retail, probably the main driver so far. We're looking at in-store inventory accuracy as one of the big drivers. But it's been spreading across more different categories within retail but also we see now moving into other industries, so manufacturing being able to track components or subassemblies through a supply chain or in health care to be able to do a number of attractive use cases there also.

[Joe Heel, Chief Revenue Officer]

Maybe I’ll add something, Jim. I would say that there’s definitely an incremental piece to it, but there’s also some substitution. I’ll give you two quick examples. In apparel retail, most of the supply chain has replaced barcoding with RFID now, at least in the more advanced retailers, and that’s probably a substitution. Because they’re using that now throughout their operations as they would have before barcodes.

On the other hand, we see a lot of applications, for example, pallets. Pallets have in the past, hardly ever been tracked. But with RFID, we can now track them. And so putting RFID labels on pallets is a great way to ensure much greater efficiency of pallet logistics, which is surprisingly a big problem. So that’s an indication of the incremental nature that we do see.

[Jim Ricchiuti, Needham & Company]

So if we take some comments recently from UPS, where they talk about working on some smart logistics centers where they’re replacing, I think they said something like 20 million potentially using RFID to replace 20 million manual scans simply with traditional barcode. It sounds like you still see a lot of opportunity even if there’s some impact on the core business?

[Anders Gustafsson, Chief Executive Officer]

Yes. We see that as a nice addition to the business because, one, they would have to augment, say, either printing or mobile computers with RFID capabilities or they could also, of course, use overhead RFID readers, which will be a new business for us with UPS. So we see that as a very attractive adjacent growth opportunity for Zebra.

[Jim Ricchiuti, Needham & Company]

Got it. Thank you.

[Operator]

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

[Unidentified Analyst]

Hi, team. This is Eric on for Meta. Thanks for taking our questions and congrats on navigating through another tough quarter and outperforming our expectations. I guess, just maybe to start off on the high-level growth target you put out, do you think every vertical has the potential to be a 5% to 7% growth vertical across your end markets? Or is that more skewed to certain customer bases?

[Anders Gustafsson, Chief Executive Officer]

We expect the broad-based growth across based on the entire business of verticals, geographies and product lines. Specific to verticals, I’d highlight health care and manufacturing as two high-growth opportunities for us. They have high need for – to digitize their operations and workflows, and say today, there’s an underpenetration – relative underpenetration of our type of technologies within those verticals.

[Unidentified Analyst]

Got it. That’s helpful. And then maybe if I could also ask on just some of the investments you’re making and from kind of an operating leverage perspective. You’ve been pretty consistent in delivering operating leverage. But if you were to more aggressively grow into some of your expansion areas that could there be a situation where your top line growth is higher, but earnings growth more mirrors top line growth? Or do you still think even through those investments, you would be able to kind of grow your profitability ahead of revenue?

[Nathan Winters, Chief Financial Officer]

Yes. So as you mentioned, we’ve had a long track record of driving profitable growth. And at a EBITDA level and EBITDA margin, we believe that can go higher, and we have many levers to do that. Maybe if you look at our full year guide here of 23% to 24% in the midpoint, that’s 2 points higher than we were in 2019, while expanding into these new expansion markets. And those expansion markets come with higher gross margin and the team has continued to focus on operational efficiency, by the way, growing at 2 points despite the transitory cost increases. So yes, it’s definitely still an objective for the company and something we can continue to do over the long-term.

[Unidentified Analyst]

Got it. Thank you.

[Operator]

And our next question comes from Keith Housum from Northcoast Research. Please go ahead with your question.

[Keith Housum, Northcoast Research]

Good morning, guys. Joe, I’m just trying to unpack the information on the price increases between what you guys in September here and in January and compare that to your annual growth rates. I mean, as you think about that 3% to 7% annual growth, how much of that is coming from, I guess, new unit growth versus just the pricing increase that you guys have been able to roll forward?

[Joe Heel, Chief Revenue Officer]

Yes, Nathan, I think you have a good summary of that. I can add some to it.

[Nathan Winters, Chief Financial Officer]

Yes. So Keith, so I said earlier, the price increases that went into effect here in the end of this quarter is a little less than 1 point of growth contribution for the year, and then the remainder of that would be driven by the strong backlog and the demand for the product. So it’s a relatively meaningful, but a relatively small part of the overall growth for the year. Joe, anything you want to add?

[Joe Heel, Chief Revenue Officer]

Did that answer the question, Keith? Or did I miss something?

[Keith Housum, Northcoast Research]

I’m trying to combine the February increase you guys come through at the end of the month with the one that you passed through in September. If you take both of those combined, what does it do to you with that?

[Nathan Winters, Chief Financial Officer]

Yes. Maybe Keith, it might be a little over a point. The 1 here in February is larger in size. And you just have – both of those slightly impacted by timing in terms of they went into effect in terms of our full year impact on 2022.

[Keith Housum, Northcoast Research]

Okay. And as a follow, a secondary question, in terms of like the supply chain, we’re hearing different comments in terms of the supply chain because you got the raw materials issue and then you have logistics. It sounds like from your guidance here, you expect both of those to improve quite a bit before the end of the year, if not totally abate. And I appreciate the efforts you’re doing in terms of the design and I guess, getting secondary sources. But is there one or two things you can point to that gives you the confidence that things will be improved before the end of the year for both these items?

[Anders Gustafsson, Chief Executive Officer]

Yes. First, as context, I’d say that we provided a record profitable results for the full year of 2021 and record Q4. And we were able to do that in a very challenging supply chain environment. The situation is clearly very volatile and Omicron as an example, has impacted the pace of recovery across all the verticals we serve and globally. But the demand environment is very strong and has ramped very fast over the past year or so. And we continue to put our customers first. So we prioritize making sure we can meet our customer delivery times and customer commitments to the extent we can.

Now there are times when we have not been able to meet the traditional lead times the way we would like, but that’s all been supply chain related. But we’re working very hard with our partners and our customers to minimize any impact on our customers’ business or our partners business in this area. And we do believe that the challenges are peaking, and we anticipate both freight and component availability to improve as we go through the year here.

Specifically on the component side, I’d say that the impacts on availability and pricing of components that we source there is. So it’s – some are much more impacted than others. So it’s certainly a very dynamic environment in that way. But we – as we said, we’ve been working very – all angles to make sure that we secure as much of supply as we can. We have worked on building more resiliency overall into our supply chain. We have been negotiating long-term supply agreements with both new and existing suppliers. We are working with our suppliers to ensure we get our fair share of allocations.

And we’ve dedicated a substantial part of our engineering organization to product redesign to basically design out long lead time parts. As we look into kind of Q2 and the rest of the year though, we do have better visibility and better supply commitments to some of these critical components as we enter Q2. So that’s part of what gives us the confidence for the full year. And so we do expect some gradual improvements as we go through the year.

[Nathan Winters, Chief Financial Officer]

Keith, I would say from a freight perspective, our air and ocean rates towards the end of the fourth quarter were 5x higher than what they were pre-pandemic. And as we’ve said, expediting both component parts, finished goods and shipping almost exclusively all of our printing air versus ocean. But rates are beginning to recover from the peak in December, still significantly higher than even the first half last year and definitely from the beginning of the pre-pandemic. And we’ll need some time to get print back on the ocean. And I think we still believe that these are largely transitory, but the world has changed, and we need to wait and see how the landscape settles to the extent that will go all the way back down to zero, that we’ll have to wait and see how that plays out.

[Anders Gustafsson, Chief Executive Officer]

And did you – Keith, did you ask about non-semiconductor shortages also?

[Keith Housum, Northcoast Research]

I didn’t, but you’re welcomed to answer that one as well.

[Anders Gustafsson, Chief Executive Officer]

Yes. So there’s some inflationary environment across all the commodities, but we would not have been – not to the extent that we will make that a talking point in our earnings calls, if it weren’t for the semiconductor side.

[Keith Housum, Northcoast Research]

Great. Thanks. Good luck, guys.

[Anders Gustafsson, Chief Executive Officer]

Thank you.

[Operator]

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

[Damian Karas, UBS]

Good morning, everyone.

[Anders Gustafsson, Chief Executive Officer]

Good morning.

[Damian Karas, UBS]

Good morning, Andres. I wanted to ask you guys, if you could maybe give us a sense on where you think you are for the core business in terms of the timing of the replacement cycle? I know that those devices are typically sort of recycled every five, six years or so. But just thinking about the really strong year you had last year, it looks like you’re expecting another positive year of growth in 2022, how should we think about the 5% to 7% growth rate kind of when we get past this year, thinking about the demand you’ve seen and whether you need to see a step down first or whether that 5% to 7% is kind of sustainable from here?

[Anders Gustafsson, Chief Executive Officer]

Yes. So first, the 5% to 7% growth rate is meant to be through a cycle. So there will be some – some years will be stronger, some will be maybe a little weaker. We certainly have been in that case if you look at the past seven years since we had the 4% to 5% rate. But I don’t see any reason why from a demand perspective, there will be any kind of step downs in the early part of the cycle here. We see a very strong demand environment and the refreshes of our product lines that we – that happens to mobile computing to scanning and printing all our products.

We talked mostly about it from a mobile computing perspective, where Android has – first, I said, driven an acceleration of refresh rates because there’s so much innovation going into the Android platform. So deployments or products that are deployed, say, five years back, have a hard time now to support the most recent Android versions or all the applications that our customers want to put on the devices. So we’ve seen a shorter refresh cycle for Android versus the traditional Microsoft devices that we had earlier. And that’s all baked into our assumptions for this year.

But it’s – we are certainly seeing many of our large deployments that happened in for 2015, 2016 or even 2017 that are now looking to refresh and/or have already refreshed in the process of refreshing. And I don’t know, Joe, if you had any further color for this?

[Joe Heel, Chief Revenue Officer]

Yes. I was going to give you one example, Damian. So in 2015, we closed the largest deal at that time in Zebra’s history in mobile computing, which was a postal service in Europe with the first purchase of TC70 at that time. And they have just refreshed their mobile computers last year. So it was about a six-year cycle for them. And you can see that others have followed suit. And as Andrew said, the replacement cycles have gotten shorter. So going from five to six years, closer to the three to four year period, in many cases.

[Damian Karas, UBS]

Okay. Great. That’s really helpful. And I appreciate all the detail around your addressable market and the long-term growth rates. I’m just curious on the margin front, what that means for your profile? I think the software side, obviously, higher gross margin relative to your business today. But thinking about those expansion areas, what does it mean for your guys’ margin kind of near-term as those businesses grow and longer-term as well? Thanks.

[Nathan Winters, Chief Financial Officer]

Yes, Damian, and I mentioned this a little bit earlier on the comments – the question from Eric, but we didn’t have an explicit target on EBITDA margin, although we do believe it can continue to scale and grow over the cycle. And as you pointed out, many levers to do that, including the – all these expansion markets typically come with higher gross margin and that will come through an EBITDA as we scale those respective businesses as well as churn through some of the transitory costs that are currently within the P&L. And I think ultimately, our goal is to continue to drive double-digit EPS growth through all the levers we have available to us.

[Operator]

And our next question comes from Brian Drab from William Blair. Please go ahead with your question.

[Brian Drab, William Blair]

Hey, thanks for taking my questions. I'm bouncing between two calls at the moment, and I missed a little bit of the Q&A. So sorry if I repeat something, but the post office project, the larger post – I know there's a lot of post office projects, with the large one that was, I guess, completed here at the end of 2021. What sort of headwind is that to your overall sales growth rate in 2022? And I know you're replacing that with a lot of business, but I mean, it would be great if you could make any comment on the large project.

[Nathan Winters, Chief Financial Officer]

Yes. So the initial deployment for USPS, we did complete in the – late in the third quarter, early fourth quarter, but our teams have continued to remain highly engaged with the post office. We have a healthy pipeline of opportunities here for 2022. And our current assumption within our 2022 guide is that we will sell less to USPS. So we are cycling through that. But again, have many other opportunities, as Joe mentioned earlier around other large deals in the pipeline, just like we do any other year to offset that and continue to grow.

[Brian Drab, William Blair]

Okay. So it's not material enough that you would tell me that like without this difficult comparison that you would have forecasted growth of a couple of points higher for 2022 barring this one big project?

[Nathan Winters, Chief Financial Officer]

That's right. Again, every year, we have a large deployments and rollouts. And again, we have new and other opportunities to offset that to reach the – our full year guide for 2022.

[Brian Drab, William Blair]

Okay. Okay. And then I'm just curious in the core part of your business that you're forecasting long-term growth of 4% to 5% for, how does that break down these days between AIT and EVM?

[Anders Gustafsson, Chief Executive Officer]

The growth between AIT and EVM is actually quite similar. It's not materially different. EVM would likely have a slightly higher growth rate, but not materially so.

[Operator]

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

[Rob Mason, Baird]

Yes, good morning. A lot of grounds have been covered already. But my question, Anders, just to go to some of these expanded areas in your introduction this year, the fixed industrial scanning and machine vision. I'm just curious if you could point to any kind of key progress points on those products? I know only in the marketplace maybe half the year. But key progress points around channel development, customer receptivity and what should be the expectations for that those areas and specifically fixed industrial scanning and also the Fetch business. How should we think about those in 2022?

[Anders Gustafsson, Chief Executive Officer]

Yes. No, happy to do that. And I'll ask Joe to also then provide some color after my comments here. But the expansion that we feel today that we can address about $6 billion of opportunity there. The fixed industrial scanning machine vision part is about $2 billion, warehouse autonomous mobile robots is approaching $1 billion and our software solutions are about $3 billion. So that gives you kind of the overall scope of that.

We are very excited about all three of these. We have good traction, good customer receptivity on the fixed industrial scanning machine vision side, we have some very attractive wins already, and we continue to add functionality, so we can address more and more of the market. But one particularly attractive win, I think, for us last year or in – I think it was Q4 was in automotive, where we could read – there was a bake-off and we showed very well on our ability to read some DPM type of markings, was better than for the competition, and we were selected based on that.

But I'd say here also the overall value proposition we have in fixed industrial scanning around the ease of use and the ease of upgrades using software to operate rather than having to change your cameras are very well received. And we are also working hard on – we have established a new fixed industrial scanning machine vision track in our PartnerConnect program. So we want to make sure we recruit partners to help us scale the business in a very cost-effective way and get better reach that we can do ourselves in that time frame. And we've always been very partner-centric. So we think this is a great way to both provide new opportunities for our existing partners as well as recruit new partners from that industry.

[Joe Heel, Chief Revenue Officer]

I can add a little bit. Maybe just to underline that PartnerConnect. We've made excellent progress in recruiting partners. We set ourselves a goal, both in the U.S. and Europe to recruit the premier partners that deploy these solutions. And that's very important because these are complex solutions set up in these manufacturing and warehouse environments. We've made excellent progress in doing that. And the reason that we've been able to do that is that Andres called ease of use. And that's particularly important for partners because they want to set up new solutions quickly and with few resources. And that's where our solutions are different from the rest of the market is that you can do that much faster with our solutions and that's what's attracting many partners. So we're very pleased with that.

On the Fetch business, I think we have the big milestone that I hope you've taken note of is that we've expanded from conveyance robots. So robots that move things from point A to point B in the warehouse to fulfillment robots, which are ones that are used to support pickers in e-commerce fulfillment activities. That's a large and very fast-growing part of the market, as you can easily imagine. And we've had an outstanding win here with one of the big e-commerce players here in the fourth quarter already, which, of course, is going to be a very important reference for us. So we're very pleased with the progress in both machine vision and the autonomous mobile robots.

[Rob Mason, Baird]

Excellent. Go ahead, Anders.

[Anders Gustafsson, Chief Executive Officer]

Joe, I just want to add on the AMR side. We have a very differentiated value proposition in the warehouse automation space, where our robot competitors, they work very hard on optimizing the movement and the use of the robot. And people who are more on the equipment side would try to optimize the movement of workers. Since we have both, we're trying to optimize the overall workflow and coordinate the movement of robots and frontline workers to drive the most productivity enhancements. And I think that value proposition resonates very well with customers.

[Rob Mason, Baird]

I see. I see. And just as a follow-up, Joe, to go back to the progress you've made recruiting partners, I'm just curious if you have a percentage that are existing Zebra partners that have added and expanded versus, I guess, entirely new partners?

[Joe Heel, Chief Revenue Officer]

We do. So we have a good number of our existing partners have already been active in the machine vision space. I would tell you though that the majority of partners that we expect to have will be new partners that are specialized and highly proficient in this area as their exclusive or dominant focus. But we do have a good number that we're starting with already.

[Operator]

Our next question comes from Paul Chung from JPMorgan. Please go ahead with your question.

[Paul Chung, JPMorgan]

Hi, thanks for taking my questions. So nice record free cash flow for the year. You have some nice flexibility to kind of continue M&A. You got some low net leverage levels. So should we expect kind of a similar pace of acquisitions, maybe more tilted towards on the software side? And then what kind of leverage levels are you comfortable with?

[Anders Gustafsson, Chief Executive Officer]

Yes. I'll start and then Nathan can talk about the leverage levels here. But first on M&A, we view M&A as a top priority for us, and we're very excited about the outlook for the business, and we see M&A as a vector for growth. We're not looking to do M&A for the sake of M&A, say, but this is to help accelerate our Enterprise Asset Intelligence vision. So think of Fetch was a great example of how we could accelerate our reach and expand our Enterprise Asset Intelligence vision here into the warehouse automation space. So you can expect that we can be looking at some targeted bolt-on acquisitions as well as high-growth acquisitions that truly advance our vision. And we do see opportunities in digitizing and automating workflows that is kind of the sweet sport for what we're looking for. And yes, as you noted, our balance sheet is strong, so we can support a certain number of acquisitions.

[Nathan Winters, Chief Financial Officer]

No, I think just add, we ended at 0.5x net debt-to-EBITDA ratio. And again, comfortable with the overall debt levels. And that gives a lot of opportunity and flexibility to address the M&A market, as Anders has mentioned.

[Paul Chung, JPMorgan]

And then your views on share buybacks. Is this more kind of offset some comp levels or what's your view there?

[Nathan Winters, Chief Financial Officer]

That's right. Obviously, the first priority is investment in the business, both organically and inorganically. But we still believe share repurchase is a good way to return capital to shareholders. We were active in the fourth quarter, and we've been active to date here in the first quarter with share repurchases.

[Operator]

And ladies and gentlemen, our final question this morning comes from Brian Lau from Wolfe Research. Please go ahead with your question.

[Brian Lau, Wolfe Research]

Hey, good morning, everybody and thanks for squeezing in here. Anders, you gave a lot of good examples of some wins this quarter on both the hardware side and then the software offerings for Reflexis and Workforce Management. Just curious about the go-to-market strategy there, how you're bundling those when you're approaching customers? Are there two or three sets of kind of sales teams? Or is it a more kind of holistic sales approach? Thanks.

[Anders Gustafsson, Chief Executive Officer]

Yes. I'll start and here since Joe – this is Joe's organizational, let Joe provide some color here also. But yes, we have – we put a lot of thought into how we go to market and how we ramp these new solutions because we have two objectives here. One, we want to leverage the broader relationships that we have with our existing customers, but we also need to have a real focus on these newer solutions. They are smaller today than our more established core solutions.

So we want the team that are very dedicated, very focused on them and understand those use cases and those technologies very well. So if you take our software solutions as an example, we have a dedicated software sales team that are kind of owning the software opportunities, but they work very much through our traditional account managers to get introduced to the accounts to get help in navigating those and understanding what the issues are and so forth. So it is a sales overlay strategy for most of these opportunities, but very much leveraging the – our traditional account managers. And Joe, do you want to add anything to that?

[Joe Heel, Chief Revenue Officer]

Yes. I would add. I mean, if you – Anders described the objective well, right? We have a very strong presence, right? If you think about the fact that 94 of the Fortune 100 in the U.S. are now Zebra customers. We have account managers on those, and we want to leverage those. And then on the other hand, we have specialists that need to bring specialized expertise, but also a special understanding of the specific personas that are making the purchases, which would be, for example, human resources purchasers or store operations purchasers.

These are – these overlay organizations Anders called them, we also refer to them as specialist sales organizations. These are meaningful organizations, which have both salespeople. They have application engineers or consultants. They have business development in them, and they have channel management in them. So these are becoming large organizations that are dedicated to driving that particular frame in concert with the account managers that are now maintaining the overall relationship for us across the multitude of offerings that we have.

[Operator]

And ladies and gentlemen, with that, we'll conclude today's question-and-answer session. I'd like to turn the floor back over to Mr. Gustafsson for any closing remarks.

[Anders Gustafsson, Chief Executive Officer]

Thank you. So just to wrap up, our primary focus continues to be the health and safety of those on the front line, and I would like to thank our employees and partners for their extraordinary efforts to serve customers and deliver record 2021 results in a challenging supply chain environment. We are optimistic that we are now seeing the peak of these challenges, and we are working hard to minimize these impacts. So thank you, and have a great day, everyone.

[Operator]

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.