Nathan Winters: 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.
Joe Giordano: 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?
Nathan Winters: 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.
Operator: Thank you. And our next question today comes from Damian Karas with UBS. Please go ahead.
Damian Karas: 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?
Nathan Winters: 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.
Damian Karas: 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?
Nathan Winters: 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.
Operator: Thank you. And our next question comes from Keith Housum with Northcoast Research. Please go ahead.
Keith Housum: 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?
Bill Burns: 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.
Keith Housum: 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?
Bill Burns: 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.
Nathan Winters: 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.
Operator: Thank you. And our next question comes from Brian Drab with William Blair. Please go ahead.
Brian Drab: 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?
Nathan Winters: 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.
