Good day, and welcome to the Zebra Technologies Fourth Quarter and Full Year 2020 Earnings Results Conference Call. [Operator Instructions] Please note, this event is being recorded. .

I would now like to turn the conference over to Mike Steele, Vice President, Investor Relations. Please go ahead. .

Good morning, and welcome to Zebra's fourth quarter conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least 1 year. .

Slide 2 conveys that the forward-looking statements we make today 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 results. Then Nathan will provide additional detail on the financials and discuss our 2021 outlook.

Anders will conclude with progress made on advancing our Enterprise Asset Intelligence vision. Following the prepared remarks, Joe Heel, our Senior Vice President of Global Sales, will join us as we take your questions. .

Now let's flip to Slide 4 as I turn the call over to Anders. .

Thank you, Mike. Good morning, everyone, and thank you for joining us. I am proud of our employees' resiliency and focus on serving our customers critical needs during the pandemic. Through their efforts, we were able to deliver exceptional results to close out a challenging 2020. .

For the quarter, we realized adjusted net sales growth of more than 10% or more than 8% on an organic basis; an adjusted EBITDA margin of 23.5%, a 210 basis point year-over-year improvement; non-GAAP diluted earnings per share of $4.46, a 25% increase from the prior year; and strong free cash flow.

Each of these measures significantly exceeded our outlook. .

We generated more business in Q4 than any other quarter in our history. Our teams executed well to satisfy a faster-than-expected recovery in demand from smaller customers through our distribution channel, particularly for our printing solutions.

Demand from our large customers also continued to be strong due to their need to digitize and automate workflows in an increasingly on-demand economy. .

We also drove improved profitability and cash flow, while investing in research and development projects to drive sustainable, profitable growth. Our record Q4 results capped a challenging full year 2020, in which we realized slight declines in sales and earnings per share. However, we did achieve record free cash flow of $895 million for the year. .

With that, I will now turn the call over to Nathan to review our Q4 financial results in more detail and discuss our 2021 outlook. .

Thank you, Anders. Let's start with the P&L on Slide 6. In Q4, we returned to profitable growth after a particularly challenging first 9 months of the year. Net sales increased 8.3% before the impact of currency and acquisitions.

Our sales mix of large and small orders normalized to pre-pandemic levels, driven by a recovery of our run-rate business, which was driven in part by pent-up demand. .

Our Asset Intelligence & Tracking segment, including printing and supplies, significantly benefited from the recovery in smaller business demand, with segment sales increasing 14% from the prior year. Our Enterprise Visibility & Mobility segment sales increased 5.6%, driven by solid growth in enterprise mobile computing solutions.

We also realized strong growth in services and software, driven by our managed and support services and Zebra retail solutions. .

From a regional perspective, we realized solid year-over-year growth in North America and significant growth in EMEA, while Asia Pac and Latin America were slower to recover. In North America, sales increased 6%. Printing, supplies, data capture and services were bright spots. In EMEA, sales increased 20%.

Printing, supplies, mobile computing and services grew double-digits as we saw strong demand through our partner distribution channel. .

APAC sales were down 4% year-over-year, yet increased sequentially. Printing and mobile computing were bright spots, and we saw modest growth in China. Latin America sales declined 15%, with all major product and service categories declining in a challenging macro environment. .

Adjusted gross margin expanded 200 basis points to 47.8%, driven primarily by a $12 million recovery of China import tariffs paid in prior periods and improved services and software margin. Business mix had a negligible impact on year-on-year margin comparisons.

Additionally, this quarter's results were impacted by $10 million of premium freight costs. .

Adjusted operating expenses increased $28 million from the prior year period and improved 20 basis points as a percentage of sales. We continue to diligently manage costs, while accelerating high-return investments in the business.

Fourth quarter adjusted EBITDA margin was 23.5%, a 210 basis point increase from the prior year period, primarily driven by higher gross margin. We drove non-GAAP earnings per diluted share of $4.46, a $0.90 or 25.3% year-over-year increase. .

Turning now to the balance sheet and cash flow highlights on Slide 7. We generated $895 million of free cash flow in full year 2020. This was $271 million higher than the prior year. Free cash flow conversion of 130% was significantly higher than our target of 100%, primarily due to timing of customer collections and vendor payments. .

Lower 2020 payments of incentive compensation, taxes and interest also contributed to the improvement. Our balance sheet remains strong. From a debt leverage perspective, we ended 2020 at 1.2x net debt-to-adjusted EBITDA leverage ratio, which is comfortably below our target maximum of 2.5x. .

Let's now turn to our outlook. We entered the new year with a strong order backlog and healthy channel inventory levels. We are encouraged by the pickup in demand, primarily from our smaller customers, which includes pent-up demand from those who had paused spending during the peak of the pandemic.

This momentum, along with our sales pipeline, positions us well for double-digit sales growth for the first quarter and full year 2021. .

In Q1, we expect adjusted net sales to increase between 25% and 29%. This outlook assumes a 300 to 350 basis point additive impact from the acquisition of Reflexis and foreign currency changes. We anticipate Q1 adjusted EBITDA margin of slightly higher than 23%, which assumes gross margin expansion and operating expense leverage.

Non-GAAP diluted EPS is expected to be in the range of $4.30 to $4.50. .

For the full year 2021, we anticipate adjusted net sales growth between 10% and 14%, with growth moderating through the year as we cycle more challenging comparisons and navigate a continued uncertain global economic recovery.

This outlook assumes approximately 3 percentage points additive impact from the acquisition of Reflexis and foreign currency changes. We anticipate full year 2021 adjusted EBITDA margin between 21% and 22%, which assumes gross margin expansion from the prior year. .

We expect free cash flow to be at least $700 million for the year. We do not expect to repeat the exceptionally high level of free cash flow conversion that we achieved in 2020. Please reference additional modeling assumptions shown on Slide 8. .

With that, I will turn the call back to Anders to discuss how we're advancing our Enterprise Asset Intelligence vision in our end markets. .

Thank you, Nathan. Our team has done a fantastic job executing in a challenging environment. We have strong momentum entering 2021, supported by our order backlog and pipeline of business. We continue to build on our industry-leading offerings by investing in our people, operations and innovation to drive sustainable growth.

In 2020, we acquired Reflexis and launched a record number of new products and solutions to ensure that we continue to advance our industry leadership position. .

Slide 10 highlights how we are building on our foundational capabilities to elevate our value proposition. We are uniquely positioned to solve our customers' complex operational challenges. Our unmatched access to frontline operational data from our vast installed base of products and solutions can be harnessed to gain real-time actionable insights.

The result is a more intelligent enterprise, with optimized workflows. .

Through the pandemic, there has been a dramatic increase in the adoption of omnichannel and online shopping. Retailers need proven solutions to overcome the significant fulfillment challenges posed by this profound behavioral shift.

If goods are not delivered or made available for pickup, as promised, the retailer risks losing its shopper to a competitor. To address this issue, retailers have been prioritizing their capital spend in our broad portfolio of solutions with a sense of urgency. .

better operational visibility and insights; increased employee collaboration and labor productivity, improved inventory accuracy, well-equipped associates with real-time actionable information, and more satisfied customers. .

Last month, we participated in the National Retail Federation's virtual sessions, where we showcased how Zebra's solutions help retailers deliver a superior omnichannel shopping experience.

At one of the sessions, AutoZone explained how our Reflexis workforce and task management solution equipped their associates with highly flexible mobile technology that enables enhanced customer responsiveness and provides insightful data for analytics and reporting. We are proud to enable AutoZone to go the extra mile to delight its shoppers. .

Now turning to Slide 12. We continue to be excited about our opportunity to help our customers meet their mission-critical needs in an increasingly on-demand economy. As a trusted strategic partner, we orchestrate end-to-end workflows for customers in a variety of end markets.

As I mentioned, retailers continue to prioritize investment in our products and solutions to address their omnichannel fulfillment strategies and related warehouse automation needs. .

In Q4, we secured multi-million dollar orders from a range of e-tailers, mass merchants, grocers, department stores and auto parts retailers. In transportation and logistics, strong e-commerce growth continues to drive parcel volumes, while last-mile on-demand fulfillment has become increasingly important. .

The Italian Post recently selected our printing and scanning solutions for their 13,000 post offices. Separately, the deployment of our TC7 Series mobile computers to United States Postal Service carriers is on track to resume as expected in late Q1, with a goal of completion in Q3.

In health care, the need for increased real-time visibility into the entire patient journey as well as the demand for innovative solutions to provide safe and efficient care continue to make health care, our highest-growth end market opportunity. .

In Q4, we grew our relationship with one of America's leading health care providers. New acute care applications have made it increasingly important for this customer to equip more of their clinicians with mobile computers.

The most recent use case we addressed was COVID drive-through testing with our health care-purposed TC5 Series mobile computers, which seamlessly interfaces with their electronic medical record system. .

Although the manufacturing sector has been hardest hit in 2020, we are optimistic regarding our prospects of returning to growth soon. We see vibrant opportunity to increase automation in workflows, and we are viewed as a visionary in this market. .

In Q4, we also secured notable wins beyond our traditional end markets. This included a competitive takeaway win with a leading waste hauler in North America.

This customer initiated a multiyear rollout of our ET5 Series tablets, accessories and related services for its dispatch application, which is improving training and productivity among its drivers, dispatchers and supervisors. .

Another important win was with one of the largest metropolitan police departments in the United States. Using our TC7 Series mobile computers, along with ZQ5 Series mobile printers, they implemented an automated parking citation application that generated enough revenue to cover their technology investment in a matter of months. .

In closing, we continue to find substantial opportunities in our primary end markets, and we are excited about the emerging prospects we see in newer markets. We are well-positioned for ongoing success as the need to digitize and automate workflows continues to accelerate. .

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

Thanks, Anders. We'll now open the call to Q&A. [Operator Instructions].

[Operator Instructions] The first question comes from Andrew Buscaglia from Berenberg. .

So your guidance -- such a strong Q1 guidance, yet for the full year, it seems conservative. And can you talk about what you're expecting towards -- more towards the back half of the year? Because your guidance implies, maybe for EVM, more low single-digit growth, AIT probably going negative in Q4.

What's built into that back half? Any color would be great. .

First, our industry leadership and our steadfast investments in the -- in our broad solutions is what's enabling us to rebound stronger and, I think, faster than our competitors. So we do expect double-digit growth for Q1, but also for the full year 2021. And obviously, this is a strong rebound from a more challenging 2020.

We do feel as confident as ever about our business. .

We do expect growth across all our regions, verticals and business lines as we look at 2021. But we are a bit more cautious about our -- the assumptions we put into our second half forecast, given the global macro uncertainty that we're facing. And we're also starting to cycle so much tougher comps in Q4.

We should also mention that we're not assuming any growth in large deals or large accounts in the second half of 2021. .

Okay. And how much of USPS is in the Q1 guide? Because that's such a big guide.

And then maybe any other color you can give us on USPS into Q2 and Q3, maybe the percentage that's accounted for per quarter or something?.

Yes. So on USPS, the rollout is progressing as we expected. The teams are continuing to be highly engaged. As we noted, the current rollouts around our EMC, the 300,000 TC77s. .

And the 300,000 rollout, we've paused that since October going into the election and holiday season, and we do expect that to resume in late Q1. And really, a modest impact in our Q1 guide.

And then for the full year, we expect USPS about 1 point of our sales growth -- or the USPS growth to account for about 1 point of our full year growth, primarily in the first half of the year. .

Okay. So not much -- so that Q1 guide, not much -- that's all pure organic. Very little related to USPS. That's just pure like end market demand.

Is it primarily in EVM? Or is it -- or is there sort of a bulky order in AIT, or one or the other?.

Yes. So that's correct on USPS, and I'd say broad-based across both segments in Q1. .

Both? Okay. All right. .

Yes, it's been nice to see the business have performed very nicely in Q4 and the outlook for Q1 across all our products and verticals. .

The next question is from Tommy Moll of Stephens. .

Anders, I wanted to start with a follow-up on your retail and e-commerce end markets. And in the second half of last year, maybe most of last year, once the pandemic took hold, it sounded like within those end markets, it was larger customers who were leaning in quicker into some of the omnichannel capabilities that you offer. .

Then in today's commentary, you indicated that some small customer activity has resumed and looking positive. Maybe some of that's on the printer side, but I'm curious what you could give us on the mid- or smaller-sized customers within those retail and e-comms end markets? Anything changing for the better there? Or any context would be helpful. .

Yes. First, I'd say that across all the verticals that we play in, we are uniquely positioned to empower front-line workers to perform their duties better and more effectively and with higher customer service, particularly where COVID-19 has helped accelerate some of those secular trends around digitization and automation.

So each of our 4 primary verticals had a positive growth trajectory as we entered into 2021, and we're making good progress also in some newer expansion verticals that we talked about in our prepared remarks. .

Now specifically for retail and e-commerce, I said we saw a step change in consumer adoptions of omnichannel and e-commerce as part of the early phase of COVID. If you look at in-the-store, buy-online, pick-up-at-store and other delivery use-cases, we're growing very rapidly.

And in the warehouse, a lot of investments in technology to help automate them are also necessary for retailers to transform their business models. .

And we're starting to see pilots for our Enterprise Asset Intelligence solutions starting to resume. Another trend that we see in retail is around equipping all associates with a device. That's also very synergistic with our Reflexis workforce and task management solutions, where they work very much hand-in-hand. .

And the strength we saw around more small and medium-sized businesses was broad-based. It includes retail. Also, e-commerce is probably a little less of smaller companies, there's more large businesses. But the small and medium-sized business strength that we saw especially expand across the 4 verticals that we work in. .

Perhaps in addition from my side, Joe Heel speaking, the -- in the depth of the pandemic, in the Q2, Q3 time frame, we saw that the large retail and e-commerce customers have the wherewithal to continue investing and, in fact, charged headlong, if you will, into transforming their businesses.

Whereas small and medium-sized customers paused their spending and were a bit cautious. In particular, outside of the U.S., we saw this phenomenon. .

But we also learned that the solutions that we have, in particular on the printing and scanning side, are essential to these customers. And they ultimately need to come back and refresh those. And that is driving a lot of the pent-up demand that we were seeing in Q4 as they returned to make those essential purchases. .

That's very helpful. And Anders, you referenced something I wanted to ask as a follow-up, relating to the proof-of-concept-type pilots that you have with some retailers, where, potentially, all associates in the store have some kind of device.

What additional color could you give us there just in terms of what inning we're in, in terms of those pilots, when there might be an opportunity for some larger scale commercialization of that concept?.

And then I noted, let's see, last month, end of January, you introduced a new mobile computer series at EC5x and the description there sounded like it might be tied to this pilot concept. So I wonder if you could comment on that product innovation as well to the extent it's related. .

Yes. For our customers to introduce a device for every worker, that's a great opportunity for Zebra, great expansion for us. Our estimate is, today, that in retail, about 1/3 of all store associates are equipped with a device.

And I'd say, today, the -- it varies greatly between retailers, how deeply they are penetrated into their associate base with devices. Some are much further along than others. .

We are -- we have worked to basically expand our portfolio of mobile computing devices to ensure that we have kind of appropriate form factors and price points to enable our customers to take this more deeper into their associate base, and we expect that this will be a continued trend.

I'm not sure I expect it to be kind of big step-function changes in behaviors, but more looking to continually add to -- add devices to the store associate base to be able to ensure that they are all connected and able to take advantage of all the other digital tools and solutions that the retailers offer. .

I don't know, Joe, if you have any?.

Yes, I wanted to just point out 2 other things that I think address this question. One, you're right about the release of the EC5, it's EC50 and EC55, which are devices that combine a consumer-like form factor with all of the advantages that we bring to the enterprise Android ecosystem.

And so we expect that, that device, in particular, will play a role in this trend of a device [ for all ]. .

But I also wanted to point out another synergistic part of our strategy, which is the acquisition of Reflexis. Well, Reflexis, as you know, does task and workforce management and, therefore, needs to reach every worker within the enterprise, in particular, of course, retail, which is their dominant vertical.

And so, therefore, having a device in the hand of every worker now all of a sudden becomes essential again, and now we're in a great position to meet that demand. .

The next question is from Jim Ricchiuti of Needham & Company. .

Anders, I wanted to just follow-up on the comment about the second half and the assumptions around large deals. How does that -- you say you're not assuming large deals.

How does that compare with prior years because, typically, some of that large deal activity does materialize, I would assume, as you're going through the year?.

That's correct. We -- I'd say this is more a matter of limited visibility into the second half than it is, that there's a certainty that there won't be growth in larger deals. I think this is similar to how we generally, I think, forecast our years. So yes. .

Okay. And I wonder if you could -- my follow-up question is just regarding component constraints. We're hearing throughout the supply chain tightness in semiconductor components.

And I'm wondering to what extent that's impacting you guys as you think about your supply chain?.

Yes. We've definitely seen the lead times extending. And -- but our team is working diligently, and I think we are on top of it. We have incorporated whatever visibility we have to extended lead times for our semiconductors and other components into our outlook also, particularly for the second half. .

The next question is from Meta Marshall with Morgan Stanley. .

Great. I guess I just wanted to dig into how you guys are thinking about gross margins into Q1 and into 2021. Clearly, you guys saw a pickup in kind of your smaller customers, which would have helped gross margins in Q4. You clearly have some large deals and still some kind of overhang from freight as you head through 2021. .

So just how we should be thinking of the progression of gross margins through 2021? And then maybe just as a second question, just given the kind of very healthy cash flow that you guys saw in 2020 and kind of the continuation of that into 2021, how do you guys kind of think about balance sheet prioritization currently?.

Yes. So if you look at our full year guide, EBITDA of 21% to 22%. We expect gross margin to improve year-on-year, primarily due to the order size mix normalizing, which we saw in Q4 and implied in our Q1 guide. We do expect premium freight costs to persist around $30 million to $40 million, yet declining in the second half as air travel returns. .

And within the full year guide, we do expect OpEx to increase as a percent of sales once you include a full year of Reflexis as well as the majority of our spend returning post-COVID, including incentive compensation and travel, particularly in the second half.

I also think it's worth noting when you look at the full year EBITDA guide, Reflexis, as we stated, is going to be a dollar-neutral year, yet slightly dilutive given the investments in go-to-market and the platform. Then we do expect that to scale over time. .

On your second question, if you look at free cash flow, $895 million, a strong finish to the year, really around improved core working capital performance, particularly in AR. We saw very strong collection activity and some early timing at the end of the year as well as our Q4 sales were front-loaded, driving some of the benefit.

As well as small incremental AR factoring, lower taxes, interest expense and incentive comp kind of driving the year-on-year beat. So when we look at -- for 2021, we do expect it to decline, but primarily due to just the exceptional 2020 performance and really more normalizing the free cash flow conversion rate over the 2-year period. .

The next question is from Paul Coster of JPMorgan. .

I'm just wondering if we are at the sort of inflection point for the company in terms of the sort of mix shift and margin outlook. As the AIT business sort of comes back a bit, will be a bit driven by the smaller accounts here, obviously, has higher margins. But you've also got the software and services business growing faster. .

As far as I can figure it out here, you're probably seeing in excess of 50% growth for the Reflexis business, which has, what, 20 percentage points higher gross margins than the rest of the business. So it sort of feels to me like we're heading towards a new margin structure over the next 3 or 4 years.

Can you comment on that?.

The margin structure or more on the business inflection, generally?.

Well, not -- yes, the margin, I guess it's related, obviously, Anders.

But are gross margins going to be expanding from here on out? And is the business mix, I suppose, going to be permanently changing here?.

Yes. Okay. I think Nate is best positioned to answer that. .

Yes, Paul. So if we look at margin and margin expansion over time, we do believe we can go higher, and we have many levers to achieve that. I think, as you mentioned, scaling some of the newer markets with richer gross margin, Reflexis being one of those proof points. .

We always continue to focus on driving higher gross margin and productivity through all of our operational efficiencies across the business. And we've had a track record of doing that and driving profitable growth.

And we do expect EBITDA margins to get back to the pre-pandemic levels in '21, and we really don't see any reason that, that should be constrained as we move forward in terms of continued expansion. .

I guess I'm not asking my question very well.

But with the -- is there going to be a mix shift towards AIT and service and software? And will that drive up the margins structurally over the long-term, not just to pre-pandemic levels, but to sort of almost pre-MSI acquisition levels?.

Yes. I'd say, first, maybe think about the business around our core near adjacencies and around the Enterprise Asset Intelligence or Intelligent Edge Solutions, so more the newer stuff.

I do believe that our core business, AIT printing and scanning side, including services, are very healthy, good shape, and I expect them to continue to grow at a nice rate over the longer term. .

I don't expect printing to kind of break out from the pack here. Printing has been a bit more up and down over the last year. So we have probably a little bit more of a pent-up demand in printing solutions than we had in some of the other solutions. .

But if you look into our -- the Enterprise Asset Intelligence vision that we have in the Intelligent Edge Solutions, I do expect our software assets and some of our more intelligent automation solutions to grow faster than the company average from a gross margin perspective and, obviously, scale will help us here.

But also as we invest in some of the newer solutions, we will -- there will be a kind of investment phase first, and then we will see margins expanding, we believe, quite nicely once revenue is starting to grow.

Does that answer your question?.

Yes. Yes, it does.

So just one in passing, on the -- with respect to Reflexis, am I right that it's posting more than 50% compound growth at the moment? And can you just comment on the growth rate for Temptime as well?.

So we aren't commenting on the specific growth rates that they have.

But Reflexis has been growing at a nice double-digit growth rates for the last several years, and we have high expectations that will continue to do that and that it will also help accelerate some of our other -- growth of some of our other software assets that will be benefiting from being associated with and incorporated into the Reflexis platform.

And Temptime has had a nice growth over the last few years. And we do see this year the opportunity to accelerate growth as we support COVID-19 vaccine rollouts, also distribution. So we do expect a double-digit growth for our Temptime business as well. .

The next question is from Joe Aiken of William Blair. .

This is Joe on for Brian today. I want to start -- you mentioned in the prepared remarks some wins beyond your traditional end markets. I think you mentioned a waste hauler in particular. I was wondering if you can maybe just provide a little more color.

Any context around what brought you into that win? And maybe what the opportunity is in some different nontraditional end markets that you're seeing and how meaningful that could be going forward?.

Yes. I can start with this, and then Joe can also provide some extra color here. But as we have made -- maybe -- so first of all, on the product side, we've invested in addressing some of the use cases that we see in some of these new emerging verticals, government, utilities and so forth. But also, we made meaningful go-to-market investments. .

And we can say they probably started with our acquisition of Xplore. But then we've tweaked our other products to also address these use cases more. So it's been a big focus of ours and investment of ours over the last several years to make sure we position ourselves for this.

And we now have a portfolio of solutions and partners that can help us get into these opportunities and win them.

Joe?.

Yes. I would only add that the end markets that have shown some particular promise are government, both federal and state and local as well as the broader -- so service industry, where the waste hauling example fits in.

The Xplore acquisition, where Xplore has a strong market, the rugged tablets are a strong product offering into those markets, has been instrumental in leading us there. .

But it also has been something we've been pursuing for some time, but it does take some time to build up the channel infrastructure as well as fine-tune the product offering and hire the appropriate type of dedicated and expert sales reps who can operate in those verticals. And we feel we now have that in place, and it's beginning to pay off. .

Great. That's really helpful. And I know, on some past calls, you've talked about the transition to Android on the mobile devices in the past and the benefit you're seeing from that.

Is that transition largely over at this point? And maybe just to put a finer point on that, what percentage of devices do you estimate that you're shipping today are running Microsoft operating system?.

Yes. First, around our mobile computing platform, overall, we saw solid growth in Q4. We did benefit from a recovery in the small and medium-sized business segment there also. There's 3 trends that I think are worth highlighting. The Android transition is one of those, but I'll start with new use cases. .

We talked earlier about the second trend, which was around -- worth putting a device in the hand of every worker. But the use cases that's probably been the biggest driver, think about the omnichannel and retail. Health care is a newer vertical, which largely is new use cases. And then the third trend around the Android transition.

We still have lots of momentum around the Android transition and a lot of opportunity left in that. .

We have -- our market share in Android is still around 60%, but Android now makes up about 80% of our mobile computing sales. We've often talked about the transition from -- transitioning older legacy Windows devices to Android. But today, I think the opportunity to refresh existing installed older Android devices is actually bigger. .

Our estimate is that they're now low double-digit millions of Android devices in the market with a somewhat shorter refresh cycle than the old Windows devices used to have, and which we expect that there's about a high single-digit million Windows devices out there. So it's more of a balanced perspective, and we certainly like to get both of those.

And -- but Android has been a great catalyst for growth for us. .

Next question is from Richard Eastman of Robert W. Baird. .

Just a quick question.

Could you tell us -- the China tariff rebate impacted gross profit margin, did that impact the EVM margin? Was that solely confined to EVM?.

It was -- thanks for the question. So out of the $12 million, $8 million was associated with EVM, and then $4 million was for AIT in the fourth quarter. .

Okay, okay. Yes, in Q4? Okay. And then just a question around maybe the balance that you saw in your go-to-market.

So for all of '20, can you just kind of tell us how the direct business did relative to the channel? I'm just thinking sales growth or decline?.

Yes. I can start, and then Joe can provide some additional color also. Our direct business obviously did very well because we had a strong large deal activity, but also a lot of the larger customers that we worked with, we have been supporting through channel partners. .

So our channel centricity, so that's how much of our revenues go through channel partners, was actually, I think, at an all-time high in Q3 or Q4. So we have maintained a high degree of channel centricity in the business.

Joe?.

Yes, exactly. I mean our strategy has been and will be to be a channel-first go-to-market approach. And I think that's paid off very well for us here in the pandemic because the strong relationships with our partners have been instrumental in helping us recover faster, and we're seeing that in particular in the run rate. .

But as Anders said, a large -- if you recall, the contribution of large deals made to our second half, in particular, it's remarkable that the channel centricity, percentage of business going through the channel, has expanded in light of that, right? And that is part of our strategy. .

When you speak to some of the smaller and medium customers, is that visibility coming through from the VARs? I mean, again, we speak about the channel, but we obviously put distribution in there versus the VARs. .

And I guess my question is, what's the visibility on the VARs in the smaller and medium-sized customers rebounding in '21? Do you have that visibility either in orders? Or is it kind of frontlog and conversation with VARs or... .

Well, so we rarely have visibility to the specific individualized orders on small and medium businesses, right? We have the distribution and channel in between. But what we know is that our distributors have a very strong outlook for the upcoming quarters, at least, and are ordering strongly with us. .

As we indicated, our order volumes have been strong. And that's, I think, a reflection of that optimism that our distributors are feeling, in particular, also from SMB customers. .

I see. So when you look into '21 -- I'm really, really trying to get at is, obviously, the gross profit margin assumption, as Nate pointed out, is higher in '21. And is the mix of end-customers there from small to medium? Obviously, you mentioned large orders in the back half of the year, you're a little cautious there.

But is that mix supporting that upward migration in the gross margin when you think about '21?.

Yes. We expect to have a more traditional mix of business in 2021 than we had in 2020, where, for Q2 and Q3, particularly, large deals were kind of overrepresented.

And we do -- as Joe said, we -- our visibility around individual smaller deals are not great, but we are -- our channel account managers do meet with our channel partners and work on forecasts and looking at specific deals and what support they need from us and so forth. So we do have some level of visibility.

But obviously, the further out in time you go, the less clear that visibility is. .

Yes, I understand. And just staying on this gross margin for 1 more second.

From a pricing perspective, what's the assumption going into '21? Do we -- are we able to capture enough price to recover some of the COGS inflation that we're seeing in the business? I mean it would appear so, but is there any price increase, a net price increase that you might expect? Or is it mainly kind of net pricing?.

So maybe, first, I think, when you talk about COGS increase, is that the freight charges you're referring to? Or... .

Yes, so there's freight charges and just any other cost inflation in the supply chain, in your supply chain. .

Yes. I think we -- we don't modify our pricing based on what we believe to be a temporary cost inflation for freight. But we do have a lot of analytics and thoughts around our overall price points and where the market is. And we do always strive to get a premium for our brand. .

So pricing and margin is obviously a very strong focus that we have across the company. But we haven't necessarily gone and changed our price list because of this.

Joe, if you want to add anything to that?.

Well, yes, maybe another way to think about this is, if you looked back at 2020, the mix of our business, in terms of small versus large, was skewed towards the large, right? Because as I said, the small -- yes, so there was a pause in purchasing from the small that resumed towards the end. .

But in the long-term analysis, small was down relative to the long-term average. In 2021, we expect that, that mix will return closer to normal and, therefore, simply because of the mix effects, we think that the average price points would normalize as well as a result of that, right? That is an effect. .

The next question is from Keith Housum of Northcoast Research. .

Congratulations on a good quarter and good guidance. Just trying to unpack the printer growth a little bit more.

Can you help me understand that, in terms of that growth, is a substantial part of that growth being driven by not only the SMBs, but also growth in the supplies business as well?.

Yes. We had, obviously, great growth in both printing and supplies. Both printing and supplies were up double-digits in the quarter. Our printing business is up across the portfolio. We did, I think, benefit from some pent-up demand, particularly in EMEA. Remember, EMEA also was hit harder early on in the pandemic.

So there was probably a little bit more of a rebound to be had there. .

I'd also say, though, that we have, early in 2020, we took a number of actions to strengthen our go-to-market and strengthen our channel ecosystem, particularly around printing. And I think that is now bearing fruit for us also. So we are more competitive, and that's helping to accelerate our share gains in printing, specifically. .

But we did see our business through -- or our smaller business -- small and mid-sized business recover quite nicely. We recovered faster than we had expected. I think it's fair to say, in Q4, manufacturing has been a relatively light vertical.

We have a much -- strong vertical for printing, generally, but lighter over the last year, but that was also coming back and strengthening. And RFID was actually a very strong quarter for printing. I think it was a record quarter for print RFID. .

And then on supplies, we did see a strong performance in supplies, particularly in North America. And Temptime also had a strong fourth quarter.

But overall, though, I'd say that we have a very strong portfolio of smart and connected printers that have an unrivaled manageability through our Link-OS operating system, and that is a true differentiator in the market. .

Okay, appreciate it. And then just a follow-up, I think a comment made earlier during the Q&A, and I think the commentary was that the U.S. Postal Service will contribute about 1% growth for the year, with most of that coming in the first half, but I also heard you guys say that it's going to be only very modest for the first quarter. .

So that could imply, if my -- if my math is right, that you guys could have a $400 million contribution in the second quarter from the U.S.

Postal Service? Is that right, and does that include, I guess, ancillary projects as well as the main 300,000 devices being fulfilled?.

Yes. So if you look at the USPS for the year, regarding the size of the rollout, I think if you look at the 300,000 printers and what we expect to deliver in the -- throughout 2021, I think you can -- you really do the implication of we're selling about 2 million mobile computers annually.

And that can help you infer in terms of an average price range. I think the number you have for Q2 is a little bit higher than what we'd anticipate in terms of the full year implied guide. .

Yes. Remember, we've talked about earlier, the total volume of mobile computers for USPS, this contract is about 300,000 over 2 years. .

Understood. Understood. Yes. Just doing the math there, I guess, that $400 million, roughly, I understand it might be a little bit high. It seems a little bit more than a lot of us were assuming for the entire value of the contract. And we realize you guys fulfilled some last year as well as what you'll fulfill this year.

So it seems, again, perhaps higher than what a lot of us were assuming. .

Yes. As I said, I think the best way for you to think about USPS this year is the 1% of our growth in 2021 is coming from growth of our USPS business. And I wouldn't say Q2 is the only quarter, but Q1 will start ramping up towards the end of Q1, but Q2, Q3 will certainly be part of it. .

Oh, it's 1% of your growth, not 1% of your business? Okay. Got it. .

Correct. Yes. .

Yes, yes. 1% of our growth, yes. .

The next question is from Blake Gendron of Wolfe Research. .

I want to follow-up there with some of the growth commentary. So.

[Audio Gap].

Dollar impact from what you would consider pent-up demand to be greater or less than 4Q? And do you expect some pent-up demand follow-through into the second quarter? And I guess, longer term, I mean, are we going to see this pent-up demand idiosyncrasy show up in subsequent years just based on the replacement cycle? Or is it going to normalize fairly quickly as we recover here on the pandemic?.

Well, yes, the pent-up demand concept is a little hard to get -- be overly specific about the impact of it. But I'd say that, starting with our products and solutions, are now mission-critical for our enterprise customers, and they need that to compete effectively in their on-demand economy.

The sales to our larger companies, larger customers that we talked about in an earlier question, remained strong. .

And they have prioritized spend with us to better position themselves to address the newer automation and digitization trends like omnichannel, as an example.

And I'd say our larger customers who are better positioned to pivot their businesses early in the pandemic, to align with how consumers wanted to behave how the economy was working at that point, while smaller customers had to kind of pause spending or certainly cut back on it. .

But I think, now, we see the smaller companies coming back and other customers are also realizing that they need to invest in order to compete. Competing in the same way they did prior to COVID is not necessarily going to be a successful formula.

And I think that part of this is also that we have been able to execute very well during the pandemic, and we've been able to gain share. Our supply chain has shown great agility to be able to respond to customers that quickly want to ramp up their order volumes, and I think we were able to do that well and seize some opportunities that way. .

So we have been realizing some good demand from this pent-up demand, you can say, which helped us in Q4, and I expect it to help us in Q1 here also.

But more broadly, though, as we look forward, we are very excited about the business overall and the growth prospects that we have not just in Q4, Q1, but the longer term, based on our ability to help our customers digitize and automate their businesses. .

Yes. And Blake, just to add, this is Nathan. It's obviously, as Anders mentioned, a tough one to quantify.

If you look at our Q1 guide, we kind of think of the pent-up demand is likely contributing low double-digit growth on top of mid-teen growth from what you can say is our normal growth rates the impact of acquisitions, FX, as well as cycling from a comp perspective versus last year, where we had -- we started to feel the impacts of COVID late in Q1 last year.

.

Yes, that's helpful. I understand it's tough to quantify and disaggregate everything. But the longer-term growth outlook is kind of what I was getting at, and that's constructive. .

My follow-up is on EVM.

I'm just wondering, over the last, call it, 12 months or through the pandemic, what the growth of existing customers is with EVM versus new customer wins? How you see that evolving, I guess, here over 2021 and beyond? And is there any major margin difference between one or the other? Or should we think about EVM kind of along the same lines and delineate large versus small customers in terms of margin difference?.

Yes. I'd start by saying, new customers -- if you're looking for kind of brand-new customers that haven't done any business with us, it's rare that we have those because most companies are doing some level of business with us. So it's probably more that we have new awards or new use cases with those customers.

Again, it's -- we can only -- we really only have visibility into that for our larger customers. And I think we've had a good healthy clip of new customers, and I expect that we will continue to add new use cases, new applications. .

If you look at our portfolio of solutions, we've invested meaningfully to ensure we can expand the number of use cases that help address our customers' most pressing problems. So we feel good about our competitive positioning and our ability to win some of these new use cases.

They may not necessarily be brand-new customers, but they're brand-new use-cases. .

Joe, I don't know if you have any comments?.

Yes. I mean I would add, I mean, to your point about is there a big margin difference between the 2, I would say, not noticeably.

The new customers that we are able to acquire, so ones that were previously competitor customers, there have been meaningful ones, of course, right?.

I mean, USPS is one example of those that was in the last 12 months. But they do range from the small to the large and, therefore, I would expect, without having done the analysis, that there isn't a meaningful margin difference between the 2. .

That's very helpful. One more, if I can sneak it in here. Your balance sheet is in great shape.

I wonder if you could just level set the capital allocation thoughts here, and maybe update us on the M&A pipeline?.

Yes. I'll start. We ended the year at 1.2x net debt-to-adjusted EBITDA, which is below our 2.5x target maximum. Our priority remains organic and inorganic investment in the business, and we're excited about the opportunities we see both of those -- in both of those areas.

We do have our share repurchase, and we believe that's a flexible way to return capital. And we'll remain opportunistic in that approach, which is evidenced by our $200 million repurchased in 2020, and we'll continue that into this year. .

You know, on M&A, we're certainly very excited about the outlook for our business. And M&A is a -- we think of it as a growth vector for the business. We think of M&A as a way for us to accelerate the execution on our Enterprise Asset Intelligence vision. So it's not a stand-alone growth driver.

It is something that we think about how -- and a way for us to accelerate the execution on our vision. .

We're targeting, I'd say, select bolt-on acquisitions as well as higher-growth acquisitions that can truly help move our Enterprise Asset Intelligence vision forward. We see good opportunities in digitizing and automating supply chains and different workflows. And we -- as Nate talked about, we have a strong balance sheet that can support that. .

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

Yes. To wrap up, I would like to thank our employees and partners for our exceptional Q4 results and a strong start to 2021. And as we continue to navigate the pandemic, our top priority continues to be protecting the health and well-being of our employees, partners and customers. So stay safe, everyone. .

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