ZBRA - NASDAQ

Good day, and welcome to the Fourth Quarter and Full Year 2023

Good morning, and welcome to

Thank you, Mike. Good morning, and thank you for joining us. Today, we will discuss our results, the demand environment and progress and actions we are taking to optimize our cost structure and drive sales as demand recovers. As expected, our fourth quarter performance was impacted by continued broad-based softness across our end markets and regions, which resulted in a significant decline in sales and profitability. For the quarter, we realized sales of $1 billion, a 33% decline from the prior year, and adjusted EBITDA margin of 15.4%, a seven-point decrease and non-GAAP diluted earnings per share of $1.71 a 64% decrease from the prior year. Although we experienced declines across all product categories, services and software were a bright spot in the quarter. From a sequential perspective, we realized Q4 sales growth from Q3 as demand trends stabilize. Overall profitability was primarily impacted by expense deleveraging on lower sales volumes, in a charge to renegotiate a supplier contract. However, as a result of our cost restructuring actions and inventory management initiatives, we realized a significant sequential improvement in profitability and free cash flow. Turning to Slide 5. I'd like to update you on our actions to address and mitigate the impacts of the current demand environment and position ourselves for long-term growth. As referenced in our earnings release, we have expanded the scope of our previously announced cost reduction plan and now expect $120 million of net annualized operating savings, an increase of $20 million from our last update which we expect to implement by mid-2024. Our previously announced actions were substantially completed in the fourth quarter enabled us to realize approximately $50 million of savings in 2023. On the supply front, we continue to work with our contract manufacturers to draw down component inventories, and we are substantially complete with renegotiations of long-term supply commitments. In Q4, we renegotiated 2021 agreement with a key electronic component supplier, incurring a $10 million expense. The revised agreement cancels a portion of the multiyear volume commitment and increases purchasing flexibility. We have also reallocated resources to accelerate growth in underpenetrated markets, including Japan, along with government and manufacturing sectors and to address new automation use cases with RFID and machine vision. We expect our actions to improve profitability and drive sales growth as our end markets recover. We saw double-digit declines across each of our end markets for both Q4 and full year as many customers navigate a challenging environment and absorb capacity they built out during the pandemic to address the spike in e-commerce activity. On Slide 6, we highlight secular trends that we expect to drive long-term growth including labor and resource constraints, real-time supply chain visibility, track and trace mandates and increased consumer expectations. These are all focused areas in my conversations with our customers. Entering 2024, distributor inventories are aligned with current demand. Although we are seeing some improvement in order activity, we are not yet seeing any signs of a broad market recovery and remain cautious in our planning. Consequently, we continue to take an agile approach to navigating this uncertain environment and remain disciplined with respect to our cost structure and capital allocation. I will now turn the call over to Nathan to review our Q4 financial results and discuss our 2024 outlook.

Thank you, Bill. Let's start with the P&L on Slide 8. In Q4, sales decreased 33% with distributor destocking accounting for more than one-quarter of the decline. We saw double-digit sales declines across our regions, major product categories and customers of all sizes. Our Asset Intelligence and Tracking segment declined 33.6%, primarily driven by printing. Enterprise Visibility & Mobility segment sales declined 32.7% led by data capture and mobile computing. On a positive note, we drove services growth with strong attach and renewal rates. From a sequential perspective, total Q4 sales were $53 million higher than Q3 despite a similar magnitude of distributor inventory destocking due to modest improvement in demand. Adjusted gross margin decreased 100 basis points to 44.6% and primarily due to expense deleveraging from lower sales volumes and the $10 million charge mentioned earlier associated with the renegotiation of a supplier agreement, all of which were partially offset by higher services and software margin and cycling premium supply chain costs in the prior year. Adjusted operating expenses delevered 670 basis points as a percent of sales. The impact was mitigated by more than $20 million of net savings in the quarter from our restructuring actions. This resulted in fourth quarter adjusted EBITDA margin of 15.4%, a 710 basis point decrease. Non-GAAP diluted earnings per share was $1.71, a 64% year-over-year decrease. Increased interest expense contributed to the decline offset by a lower tax rate from executing on a global tax strategy. Turning now to the balance sheet and cash flow on Slide 9. We ended the quarter at a 2.5x net debt to adjusted EBITDA leverage ratio which is at the top end of our target range. We generated $102 million of free cash flow in Q4 and had approximately $1.1 billion of capacity on our revolving credit facility as of year-end, providing ample flexibility. For the full year 2023, negative free cash flow of $91 million was unfavorable to the prior year, primarily due to lower operating profit, higher interest and tax payments restructuring actions and previously announced settlement payments, all of which were partially offset by lower incentive compensation payments. Let's now turn to our outlook. We entered 2024 with distributor inventory levels aligned with recent demand trends and improved backlog driven by modest year-end budget spending into January from certain retailers. For Q1, we expect a sales decrease between 17% and 20% compared to the prior year. This outlook assumes continued declines across our major product categories, particularly printing and a 50 basis point favorable impact from FX. We anticipate Q1 adjusted EBITDA margin to be approximately 18%, driven by expense deleveraging from lower sales volume, partially offset by lower premium supply chain costs. Non-GAAP diluted earnings per share are expected to be in the range of $2.30 to $2.60. Q1 sales and profitability are expected to sequentially increase from Q4 as distributor inventories and end market demand has stabilized, and we have realized incremental benefits from cost actions. For the full year 2024, we expect sales to be in the range of a 1% decline and 3% growth. Although we are beginning to see signs of improvement in order activity, we are not yet seeing signs of a broad market recovery. Consequently, we are taking a cautious approach to our guide until we have increased visibility to a sustained recovery in demand. Adjusted EBITDA for the full year 2024 is expected to be approximately 19%. We expect our restructuring actions and other profitability initiatives to drive improvement through the year delivering EBITDA margin of 20% in the second half. We remain cautious in our spending and continue to take an agile approach to navigating the environment. We expect our free cash flow in 2024 and to be at least $550 million, including the impact of our final $45 million settlement payment in Q1. We remain focused on rightsizing inventory on our balance sheet, driving 100% cash conversion over a cycle and prioritizing debt pay-down in the near term. Please reference additional modeling assumptions shown on Slide 10. With that, I will turn the call to Bill to discuss how we are advancing our Enterprise Asset Intelligence vision.

Thank you, Nathan. As you look towards the long-term opportunity for

Thanks, Bill. We'll now open the call to Q&A. We ask that you limit yourself to one question and one follow-up so that we can get to you as many as possible.

[Operator Instructions] And today's first question comes from Tommy Moll with Stephens. Please go ahead.

I believe it was Bill who made the comment about the need to absorb some excess capacity in the e-commerce landscape and I'm curious, based on your discussions with end users in that ecosystem. Do you have any visibility into when most of that capacity will be absorbed? Is there any assumption in your 2024 outlook about a return to more normal levels of spending there?

Yes, Tommy, I think that we've clearly seen that retail IT budgets have been under pressure and the retailers overall certainly sweating assets, but also this idea of customers absorbing capacity, not just in e-commerce but also in transportation logistics as well. And they built out significant capacity during the pandemic, believing that ultimately the growth trajectory would continue off those rates. And now, we've seen kind of a reset in both e-commerce continuing to grow, obviously, but -- and parcel delivery both kind of resetting to pre-pandemic levels and growing from there. So we've seen some positive signs in the e-commerce side where some of that capacity has been used off and that we're beginning to see orders for from those e-commerce providers that need and have continued demand now. So we're seeing that coming to an end on some of the e-commerce providers. We're seeing across transportation logistics, still challenge in volumes of parcel delivery. And we're seeing the T&L providers really taking this as an opportunity to kind of restructure their businesses and think about how to be more effective and more efficient in their delivery mechanisms. We saw the same in e-commerce over the last year plus, but I think we're coming through it in e-commerce. Still P&L challenge there is we're continuing to see is the results in the -- around parcels being still remain challenged. So I would say, coming to an e-commerce but still challenging in the build-out across e-commerce -- around, sorry, trends.

Yes. And one point I wanted to clarify, Nathan, I think in your comments, you talked to an improving backlog in January and that there were certain retail-related orders that drove that. But could you correct the record there, if I got it wrong and just give us any more detail there?

Yes. No, Tommy, I think if you look, we did in the quarter, I'd say, back at pre-pandemic levels entering the quarter from a backlog perspective, where it was a little bit more depressed as we went into Q3 and Q4. And that was primarily driven by some of the uptick we saw in year-end spend that we were able to ship here in the early part of Q1, driving some of the sequential improvement from Q4 to Q1. So, I think again, not to the backlog levels we were at a few years ago, during maybe peak of the supply chain challenges, but definitely a sequential improvement with some of the incremental volume as well as getting our inventory in the channel right-sized. So again, we feel good about the backlog we have entering the first quarter relative to the guide.

Thank you. And our next question comes from Brad Hewitt with Wolfe Research. Please go ahead.

So, the Q1 guidance midpoint looks to imply a slight uptick sequentially on the top line, excluding the Q4 destock headwind. But then your full year guide seems to imply revenue remains relatively flat sequentially as we progress throughout the year. So just curious, if you could talk about how you see underlying demand progressing through the year? And do you see the potential for orders in the pipeline conversion rate to improve as we exit '24 and into 2025.

Yes. Maybe I'll start with just kind of the framework for the guidance. So yes, you're right. If you look at our Q1 guide, down 17% to 20% sequentially, that does improve from Q4 as we are not assuming any additional distributor destocking. So that drives the vast majority of the sequential improvement, again, along with the some uptick in demand that we saw particularly around year-end spend. And then if you look at the full year guide of 1% at the midpoint as you noted, if you look we expect Q2 to look similar to Q1 with the modest sequential improvement as we move through the second half. And as we talked about in the prepared remarks, I think we're cautious given the lack of visibility and the commitment to the pipeline in the second half. So if you look kind of again at the balance of the year, as you noted, really the growth is entirely driven by the 2023 destocking with the market flat, maybe down a little bit in Q2, up a little bit in the second half. And we think that's appropriate given the visibility we have around the demand environment.

Okay. That's helpful. And then you've talked in the past about how you typically tend to gain share coming out of downturns. Could you talk about how you see the opportunity for share gains as we turn the page to and kind of where you see the lowest hanging fruit in terms of potential share gains going forward?

I would say that overall, talking to our customers and spending a lot of time with our customers and partners through NRF that clearly, our customers see that there's tremendous value in what we do for them each and every day to make their businesses more effective and more efficient and to literally run their businesses. So, we see the opportunities across each one of our vertical markets as we see really retail likely returning first is where continuing to work with them as they've been holding off and sweating assets within their environments and our engagements with NRF, certainly, we've seen optimism by our retail customers in the second half of the year. We marry our mobile devices there with our software solutions. And what we talk about is really resonating with them around our modern store initiative. We see that in transportation logistics, our value proposition remains really to help our customers with things like labor constraints and additional supply chain visibility across their businesses and we're excited about opportunities there within opportunities in technologies such as RFID as they look to get more to productivity across their businesses. We've got the MODEX trade show coming up in transportation logistics, Expo coming up next month here. And will showcase our solutions to across transportation logistics. We've talked about manufacturing has really been an opportunity for us is that we're less penetrated in that market, and we've got new solutions around machine vision and robotic automation and our demand planning software offering inside manufacturing. So we see that as an opportunity for us. And then lastly, health care, as we continue to see ways to automate workflows and digitally connect assets and patients and staff within the health care environment. We see home health care and telehealth being an opportunity. So, there's lots of opportunities across each one of the vertical markets. We'd probably say that retail is a place that we've seen some of the positive year-end spending first. And then I think the other vertical markets will follow.

Thank you. And our next question today comes from Meta Marshall with Morgan Stanley. Please go ahead.

Great. Maybe first question. Just -- you noted that the headwind from destocking was about the same in Q4 as in Q3. I think we had expected it to be slightly smaller understanding that's largely behind us. But just was that amount of destocking kind of greater than expected in Q4? And then maybe as a second question, obviously, the interest rate environment is maybe a little bit friendlier now your balance sheet, your interest rate is relatively heavy on your interest expense. Just wondering, if you've looked at any opportunities to refinance that at more attractive rates?

Yes, Meta. So on the first question, you're right. So it was about $20 million, $25 million more of incremental destocking versus the original guide and the balance of that was offset by higher demand to come in above our guidance midpoint for Q4. So, I think we thought that is a -- I'll get a positive trend that again, we would take a little bit more out of the channel to set us up here as we moved into 2024. Now as it relates to interest rates, I think we feel good about actually our position. What you'll see in the cost of borrowing that includes all of our crediting and banking fees. But if you look at the overall cost of borrowing and where we trade at I think we feel good about the position, but we're always looking at opportunities given the environment to whether it makes sense to refinance and take advantage of the market. So that's something we're actively looking at. But today, we don't feel like we're at a disadvantage relative to the debt cost position.

Thank you. And our next question today comes from Joe Giordano with TD Cowen. Please go ahead.

I just wanted to -- last year, when we initially started to see the real weakness and you guys had to adjust your guide, there was clearly like a change in methodology, and it was very stripped down. It was kind of discounting things that weren't burden hand kind of orders and a change in how you were building up from the sales force commentary. So I'm just curious now as you look into '24 and you give that kind of qualitative guide. How would you compare your buildup methodology to how you were a full year ago versus how you were like six months ago when it got much more conservative.

Yes, Joe, I'd say that probably if you look back to January, we literally have met with thousands of our customers and partners across our channel partner summit in Asia Pacific and than in Europe and then North America, Latin America and then with the National Retail Federation show. And it's clear that our solutions are essential to what our customers are doing in their business every day and they're grateful to have gone honestly,

Yes, and I think if you look back historically at this point in the year, we would have always assumed we'd have several of those large mega deployments in the second half, even though we may not have identified exactly which customer, but we would -- that was something we always had. And I think that's where we've pulled back on that assumption, given the experience we've had over the last several quarters. And the fact, as Bill said, there's not a firm commitment. So until we start to see some of those firm commitments, we didn't think it was appropriate to lean in and just assume that some of those will start to come back in the second half.

Okay. That's fair. And then if I look at the margin guidance for the year, the EBITDA at 19%, maybe I thought maybe a little higher at that level of revenue, particularly given an extra $20 million in costs. So can you just maybe talk through the gross margin if you're seeing any pressures anywhere? And then, if you could just touch on the working capital this year, just the free cash flow. How normalize is that going to look exiting the year?

Yes. So again, if you look at our full year guide of 19% that does have us at 20% in the second half and as we head into 2025. We thought that was important for us to work through as we went through the cost actions and if you look sequentially, it's about year-on-year, I should say, about one point higher than '23 really around gross margin due to favorable pricing, some lower premium supply chain costs and a bit of volume leverage. If you think about the restructuring benefits, it's about $60 million of benefit improvement from 2024, but that's offset by incentive compensation. So getting back to fully loaded on our our incentive compensation plans for the year. So, those two negate each other for the full year. Again, if you look at our full year guide for free cash flow, one important milestone was getting back to positive free cash flow, which we did in the fourth quarter. Our guidance of at least $550 million has us above 100% free cash flow conversion, excluding our final Honeywell payment here in the first quarter, and our expectation is for modest decreases in inventory and working capital throughout the year. And there could be some opportunity to exceed, if we get back to our optimized inventory levels, but we did not include that in our guidance, just given some of the uncertainty around demand and the mix of that demand.

Thank you. And our next question today comes from Damian Karas with UBS. Please go ahead.

Thanks for all the color on kind of the demand and what you guys are seeing on the project front. Maybe just a question on these long-term supply commitments that you've been renegotiating. Could you just maybe talk a little bit more about what's happening there? You highlighted one particular contract, a $10 million expense impacting gross margin. Is that -- could you just clarify, is that a onetime hit? Or is that going to kind of be a headwind for the next three quarters, a little bit of a structural change in your cost structure?

Yes. So just as it relates to the one that was a onetime charge that's behind us in the fourth quarter, no change in our structural costs or that we did anticipate having moving forward. And we feel like we're, at this point, substantially complete, working with our suppliers around a lot of those longer-term supply agreements, and particularly the ones that we had to entered into in 2021 when we had kind of both a combination of peak demand as well as some of the extended lead times across the supply chain. And you'll actually see that if you look at we have also a 75% decrease in some of our long-term purchase commitments that we have in our 10-K. So, again, a lot of great progress by the team working through that throughout the year, and our focus really here this year is around components that we still have at our Tier 1 manufacturers. So that's a lot around just demand timing, working through that as well as a lot of the great work by the team to redesign those components into existing or new products as well as working with our manufacturing partners just around the safety stock that they hold. So I think we see a lot of progress there. And again, the charge we had in the fourth quarter was really associated with one supplier and one contract we signed back in 2021. And that was a combination of canceling as well as deferring some of the purchase commitments we had here in 2024 to mitigate some of the working capital pressure as well as it gives us a lot more flexibility around the mix of the components and again, the timing of when we expect to receive those or take -- or accept those components on our balance sheet. So again, we thought it was the right thing to do to kind of get that past us and move forward here as we move into.

Got it. And could you just comment on any impacts you're seeing owing to some of the overseas shipping issues like what's happening in the Red Sea and to what extent that might be factored into your guidance?

Yes, obviously, there's new concerns that we're monitoring with the risk of the escalating tensions in the Red Sea. So, we're monitoring the situation, working with our partners Today, we have mitigation plans, again, pending any further escalation of the situation. I think what's important for context is this really primarily impacts our printing business into EMEA. That's where we ship via ocean through the Red Sea and the Suez Canal. So again, the vast majority of our products are still air shipped or ocean shipped from the Asia into the West Coast of the U.S. So, we think it's -- as of today, it's a modest impact on extended lead times, which we've communicated to our partners, particularly in the EMEA region and a negligible impact expected on margin here in the first quarter.

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

Bill and Nathan, is there any reason to believe there's a change to your long-term guidance or an annual growth rate of 5% to 7% over cycle?

No, Keith, I think that we would see that the current sales declines are due to a cyclical bottom, really accentuated by the pandemic overall and that our long-term conviction and the strong business fundamentals really remain unchanged. And we think we're well positioned to be -- continue to be the market leader and continue to take share as our markets recover overall. The secular trends really to digitize and automate environments within our customer operations really remain unchanged. They were intact before the pandemic, and they remain intact today. And I think that our strong competitive position we have in the marketplace, especially in our core, the exciting opportunities we have in our adjacent and expansion areas. And quite honestly, we're excited about the future. So despite the near-term headwinds, we don't see a -- see that changing. We see the 5% to 7% through cycle what we're committed to and -- remains intact.

Okay. I appreciate that. Just as a quick follow-up. In terms of the software and services, obviously, it's been really resilient for you guys. As you think about that growth or what it does for 2024, can you unpack, I guess, your expectations there as we separate that from the rest of the hardware business?

Yes. I think that we'd say software and service is clearly recurring revenue, right? Similar -- you saw a similar comment we had on supplies, right, which we've talked about as being semi-recurring, right? It's like a recurring business. So clearly, services and software outperformed our broader product portfolio overall. But I say that customers today continuing to strong attach rates on our mobile devices. Also, we're seeing -- this is the negative side of some of the services growth is really people extending service contracts at higher prices, right, that ultimately, we're working closely with them to get their refreshes done within their environment. So that's a target for us starting in kind of second half of '23 and into '24 is really working closely with those customers that are looking to extend service agreements and sweat assets is to get them to move ahead with new technologies and new advantages of our hardware, but that's helping software a bit -- I'm sorry, services a bit in the short term. From a software perspective, we're seeing really a compelling value proposition to our customers around what we really brought together is our work cloud software, which is bringing the multiple organic and acquisition assets together to really address the needs that a retail associate. And we talk about that of this modern store framework as an engaged associate. So think of it as communication collaboration, think of it as task management workforce management, demand planning, so marrying that all together into a single application or instance for our customers and be able to really enhance the productivity of the retail worker and that's resonating well with our customers. We had our trade show on our internal event with our user group of our software customers in the second half of the year and rolled out really what we're doing around work cloud and the future of that and they're pretty excited about it. I know, Nate, do you want to add -- I mean the other thing we're focused on is really profitability around those areas and not growing top line, but also profitability in our software business as we bring those together.

That's right. I think the other -- yes, the bright spot on the service and software is the improved margins. So a lot of great work by the team focus on the cost structure for both of those pieces of the business. So that was a nice improvement as we move to the second half, and it will be a tailwind as we move here into 2024, along with the expectation that those businesses will continue to grow.

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

I just wanted to clarify first on the cost savings. Exactly what is the incremental benefit that we'll see in terms of cost savings, OpEx savings in '24 versus '23 now that we've got these incremental savings coming on in the year, I guess?

Yes. So, if you look at our the expanded cost reduction plan at $120 million of net annualized savings, $20 million higher than our prior guide with the additional actions expected to be completed here middle part -- by the middle part of the year, so we realized $50 million of savings in the second half of '23. So, we're expecting $60 million of incremental benefit into '24 and then the balance as we head into 2025.

Yes. Perfect, okay.

And what we had in the past, they're pretty broad-based across functions. So I'd say a similar with the declines, the incremental amount was similar structure as we had with the first pass in terms of fairly broad-based.

Okay. Got it. And that's all in OpEx and won't affect gross margin, I guess. And my next question was just going to be on gross margin. I guess the best assumption here for gross margin as we track through the year would be modest increases in sequential increases in gross margin as we move through the quarters on leverage and anything that you would correct me on there or add to that?

Yes. So, I think one thing I'd say on the $120 million. There's a small piece of that that is in gross margin. So I'd say the vast majority is OpEx. So there's a piece in gross margin just based on some of the actions the supply chain team is taking within our cost structure. So a bit of that is in the $120 million in gross margin. But I'd say for modeling purposes, I'd assume the vast majority is in OpEx. But you're absolutely right. In terms of the sequential improvement in gross margin, our EBITDA rate throughout the year is primarily going to be driven by gross margin, both as some of the actions we've taken around pricing the lower prime supply chain cost, which is, I guess, really here in the first quarter, but also a little bit of volume leverage, project timing as we move through the year. So yes, there's a that's what we'd expect through the year as a kind of modest improvement as we go through the year to get us to where we have as an exit point in the fourth quarter.

Thank you. And our next question comes from Rob Mason with Baird. Please go ahead.

I wanted to circle back, Bill. You mentioned several times customers willing to sweat their assets more right now, which, again, we've seen that in the past during these downturn periods. It sounds like you're trying to address that some with service strategies. I'm curious if you're testing any other strategies around trying to stimulate new product demand, whether customers might be more amenable to as service or subscription or, say, leasing type arrangements in this period of time? And then maybe relatedly, is there anything as you look into, say, the 2018-2019 devices that were put into the installed base -- anything on the horizon that would more catalyze their replacement, just where they can't be upgraded any further anything of that nature?

Rob. So a couple of things kind of weaved into that. I would say, first, that our sales teams are working and our partners closely with those customers that we have identified that are -- have the devices in there in use longer than normal and working closely with them to understand how we can convince them to move forward with upgrades and lots of different ways to go do that. And -- but the driver really would be a couple of areas. One would be technology transitions. So I think 4G to 5G and wireless think of faster WiFi speeds like WiFi 6, OS upgrade. So as the devices become older, then there's Android releases aren't available. And then along with that, we extend the security with that OS so long, but eventually, the security patches aren't available. So from a security perspective, that's a driver as well. The other place is really around use case expansion, right? So that adding more functionality of the devices, things like authentication of facial recognition, think of

That's helpful. Just as a follow-up, could you just comment on what you're seeing in some of these underpenetrated markets where perhaps you do have more runway, and I'm thinking Japan and government specifically just what the current tone of business is there.

Yes, Rob, I'd say that there are opportunities for us as we look around the globe, and we have different market shares those are two good examples of really significantly lower share than we have in other places. But as we look at each vertical market as we look at each geography, we see places where we can continue to take share as a business. Japan is a great opportunity for us, as we've talked about for a while, second largest market in Asia, we won the largest postal carrier there. We've won the largest retailer we now have the attention of some of the largest integrators -- system integrators and cellular carriers in Japan to work in some new opportunities there beyond retail and postal. So those have gotten some more attention and we've changed our channel strategy there a bit to large work with larger SIs. We've just hired a new sales leader. If we look at government in the U.S., a new sales leader there is the refocus on government and building our partner community and expanding our reach inside government opportunities that includes public safety. So, we're excited about these markets because we have low share, and we know there's opportunities for our portfolio within those underserved markets.

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

This is Chris Grenga on for Jim. Maybe just one for me. You had mentioned the trend of new automation use cases in RFID and machine vision could you talk about what you expect from these technologies in 2024? And what use cases are you having the most productive conversations with customers currently?

Chris, maybe start with RFID. We're continuing to see strong interest across many customers and verticals. We've seen the opportunity to expand beyond retail apparel really into track and trace, supply chains, parcel tracking, baggage tracking tools, work in progress in manufacturing, health care opportunities, all with RFID. Certainly, Walmart and what UPS is doing inside smart package into their environment has caused others to continue to look at of interest in RFID. The cost of the tags coming down in the has created opportunity because today, we have the broadest and deepest set of RFID solutions in the market. And that includes fixed readers, handheld readers, industrial and mobile printers, software and the label to go along with that. So we've seen strong double-digit growth over the past few years in RFID, including in 2023. And we are excited about the opportunity across everything we do in RFID. I would say in machine vision really focused in two areas: manufacturing and transportation logistics from a manufacturing perspective, automotive, food and beverage, inside logistics, it's really about warehouse and distribution. We combined our organic investment really with a few acquisitions of Matrox and Adaptive Vision. That's really given us a broad differentiated offering across those markets and creates opportunities for us to win and what we see as a fragmented multibillion-dollar market opportunity for us. Our value proposition really is around marrying software and hardware together and giving a unified software platform to our customers and easy to set up, easy to upgrade really to drive simplicity, speed, efficiency within our customers' organizations that allow them to automate in an easier way and upgrade that automation from things like fixed industrial scanning to machine vision. So, we're excited about both these opportunities. We are the leaders in RFID reading today. We're a challenger in the machine vision market, and we see both being a tremendous opportunity for

Thank you. And our next question today comes from Ken Newman at KeyBanc Capital Markets. Please go ahead.

First question here. Just looking at R&D expense, I know it saw that it took a sequential step down this quarter for 3Q. Just as I think about this first quarter guide in the full year, how should we think about the cadence of R&D dollars as we move through the year? And is there may be more room to take out there as we progress after the first quarter?

Yes. So I think a couple of things. Just some of the sequential decline from Q3 to Q4 was related to the cost actions that we took and just the timing of those rolling into the P&L, which is, again, what we had expected coming into the quarter. You'll see it increase a bit here as we go through '24 just as we reset comp plans and things like that around incentive compensation. And typically, the first half is a little more front-end loaded just with the timing of projects and deployments. And then Q4 is always a little light just with holidays and whatnot from a project execution. So, I think I would think of similar trajectory from a sequential perspective as we move through the year, but maybe a bit of an uptick just as we kind of again reset all of our comp plans and whatnot for the year.

Got it. That's helpful. And then for my follow-up, with free cash flow improving this year and you being at the top and a leverage target range, what is the midpoint of guidance like here for where you think net leverage ends up relative to debt pay down? And am I right in assuming that the priority for capital deployment will be towards the debt side? Or is there other portions or avenues that you see a better return for that capital?

Yes. So as you mentioned, we ended the quarter at 2.5x debt leverage, which is at the high end of our target range. We are prioritizing debt pay down of our variable rate debt here in the short term. And we would expect the debt leverage to increase a bit here through the first and second quarter really just as we lap on the profitability side, not so much debt will come down, but the ratio will increase, but then will decline through the second half as we kind of lap Q3 and Q4's lower profitability. And so that is really the priority here starting out the year as debt pay down but as always, we're going to reassess overall capital deployment and opportunities we have, whether that's share buyback or M&A as the year progresses.

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Burns for any closing remarks.

Thank you. As we look towards the long term, the opportunity for