Brian Drab: Yes. Perfect, okay.
Nathan Winters: 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.
Brian Drab: 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?
Nathan Winters: 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.
Operator: Thank you. And our next question comes from Rob Mason with Baird. Please go ahead.
Rob Mason: 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?
Bill Burns: 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 Zebra Pay integrated RFID on those devices we’re going to release here shortly. Over time, we’ll be releasing. We showed this at the National Retail Federation Show generative AI large language models on the actual devices and an assistant. So we want this to really be about productivity and wanting more features and functionality within their environment versus just around security, right? And we’re seeing that. I would say that in the area of leasing, what we’re looking at is opportunities to marry our software with hardware, and we demonstrated some of this at the National Retail show as well is that Think of a wearable device that has our task management software, communication collaboration on that wearable device in retail, which would be sold as a service kind of offering to our customers, so not quite a lease.
In most cases, our customers say, hey, I can — I’d rather spend the capital than lease. But in this case, it would be an OpEx recurring revenue stream around software and hardware combined together. So sales teams have a lot of different plays they’re running to try to move those customers forward with upgrades.
Rob Mason: 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.
Bill Burns: 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.
Operator: Thank you. And our next question today comes from Jim Ricchiuti with Needham & Company. Please go ahead.
Chris Grenga: 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?
Bill Burns: 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 Zebra.
Operator: Thank you. And our next question today comes from Ken Newman at KeyBanc Capital Markets. Please go ahead.
Ken Newman: 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?
Nathan Winters: 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.
Ken Newman: 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?
Nathan Winters: 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.
Operator: 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.
Bill Burns: Thank you. As we look towards the long term, the opportunity for Zebra is bright. I’d just like to thank our customers, our partners and employees for their support. We look forward to returning to growth in 2024. Have a good day, everyone.
Operator: Thank you, sir. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.
