Zebra Technologies - Q4 2022
February 16, 2023
Transcript
Operator (participant)
Good day, welcome to the Q4 2022 Zebra Technologies Earnings Conference Call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. 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.
Mike Steele (VP of Finance and Investor Relations)
Good morning and welcome to Zebra's fourth quarter conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least 1 year. Our forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially due to factors discussed in our SEC filings. During this call, we will reference non-GAAP financial measures as we describe our business performance. You can find reconciliations at the end of this 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, Bill Burns, our Chief Product and Solutions Officer, and Nathan Winters, our Chief Financial Officer. Anders will begin with our fourth quarter highlights and an update on the previously announced CEO transition. Nathan will provide additional detail on the Q4 results and discuss our 2023 outlook. Bill will conclude with progress made on advancing our Enterprise Asset Intelligence vision. Following the prepared remarks, Joe Heel, our Chief Revenue Officer, will join us as we take your questions. Let's turn to slide four as I hand it over to Anders.
Anders Gustafsson (CEO)
Thank you, Mike. Good morning and thank you for joining us. It was a strong finish to a challenging year with sales and profitability near the high end of our outlook. For the quarter, we realized sales growth of approximately 4%, an adjusted EBITDA margin of 22.5%, an 80 basis point increase year-over-year. Non-GAAP diluted earnings per share of $4.75, a 5% increase from the prior year, and strong free cash flow. Our team recovered from distribution challenges in North America to drive record sales volumes, which more than offset softer sales in our EMEA region. From a solutions offering perspective, printing, data capture, tablets and RFID were bright spots, more than offsetting lower sales of mobile computers.
Although we continue to see cautious spending behavior with certain large customers, demand has generally remained solid with strength in small to mid-size orders. We secured a number of exciting wins, helping to drive a strong year-end and momentum into 2023. These wins included a large postal customer in Asia who expects to improve productivity and efficiency by equipping 70,000 mail carriers with our mobile computing solutions. A British grocer expects to improve their shopper experience and drive store efficiencies by deploying 80,000 personal shopper devices. The European-based auto manufacturer plans to enable process improvement and quality assurance along all stages of the production line with 30,000 Zebra mobile computers. From a profitability perspective, we expanded EBITDA margin and increased EPS by scaling operating expenses and drove our strongest cash flow quarter of the year.
As you are aware, in December we announced that Bill Burns will succeed me as CEO effective March first. Bill is the ideal leader to continue to advance our strategy and has the full support of our board and executive team. Throughout his career, Bill has maintained a strong focus on culture, talent, and innovation. He has been a key member of Zebra's executive leadership team since joining us more than seven years ago to lead and integrate the enterprise business, which we had just acquired at the time. Since the announcement, Bill and I have been busy meeting with stakeholders discussing the transition and Zebra's bright future. I've also been taking this opportunity to thank our employees, suppliers and partners for their support and collaboration through the years as we transformed our business.
I look forward to continuing to ensure a smooth transition as I assume the role of executive chair. I will now turn the call over to Nathan to review our Q4 financial results in more detail and discuss our 2023 outlook.
Nathan Winters (CFO)
Thank you, Anders. Let's start with the P&L on slide 7. In Q4, net sales increased 2.5%, including the impact of currency and acquisitions, and 3.9% on an organic basis. Our Asset Intelligence & Tracking segment increased 13.5%, driven by double-digit growth in printing. Enterprise Visibility & Mobility segment sales were approximately flat, with mixed performance among our offerings. We realized particularly strong growth in data capture solutions, including RFID as well as rugged tablets. Mobile computing sales declined, primarily due to challenging prior year compares, particularly in EMEA. We also drove growth across services and software with strong service attach rates.
Performance was mixed across our regions. North America sales increased 11%, helped by the cut recovery from supply chain challenges and strength in data capture and printing. EMEIA sales declined 7%, primarily due to the 5-point impact of our suspension of sales into Russia in March, as well as lower sales to large customers in Northern Europe. Asia Pacific sales grew 3%, with strength in Japan and growth in China, despite COVID challenges late in the quarter. Latin America sales increased 7%, with strong growth in Brazil and Mexico. Adjusted gross margin decreased 10 basis points to 45.6% due to FX, offset by lower premium supply chain costs. Adjusted operating expenses were lower, improving by 100 basis points as a percent of sales, primarily due to lower incentive compensation and effective cost management.
Fourth quarter adjusted EBITDA margin was 22.5%, an 80 basis point increase driven by operating expense scaling. Non-GAAP earnings per diluted share was $4.75, a 4.6% year-over-year increase. Turning now to the balance sheet and cash flow highlights on slide 8. In 2022, we generated $413 million of free cash flow. Although Q4 was strong, the full year was significantly lower than last year, primarily due to a higher use of working capital due to elevated inventory, higher incentive compensation payments given our exceptional 2021 performance, and $135 million of previously announced settlement payments, which are scheduled to conclude in Q1 of 2024. In 2022, we invested approximately $880 million in the Matrox Imaging acquisition to expand our machine vision solutions offering.
We made $751 million of share repurchases and invested $12 million in venture investments. We ended the year at a comfortable 1.6 times net debt to adjusted EBITDA leverage ratio, and with more than $1.4 billion of capacity on our revolving credit facility. On slide 9, we highlight premium supply chain costs, which have continued to improve from peak levels. The actions we have taken to redesign products, targeted price increases, as well as improving freight rates and capacity, have enabled us to reduce component purchases on the spot market and reduce the freight cost impact. Additionally, we've increased the volume of printer shipments on ocean from air, which will contribute to reduced freight costs through 2023.
In Q4, we incurred premium supply chain costs of $25 million as compared to the pre-pandemic baseline, which was favorable to what we had anticipated in our prior outlook, and $38 million lower than the prior year. We are expecting these premium supply chain costs to steadily decline in 2023. Let's now turn to our outlook. Customer demand and our order pipeline remain healthy. We continue to see some softening of demand and elongated sales cycles that we referenced last quarter due to the uncertain macro environment. We are taking a cautious approach to our sales outlook and expense management while working to rightsize our inventory levels. For the first quarter, our sales are expected to decline between 4% and 1% compared to the prior year.
Our outlook assumes a 3-point negative impact from foreign currency changes and 150 basis point additive impact from recent acquisitions. This translates to expectations of negative 1% organic growth, which includes a 1-point headwind from sales into Russia last year. We anticipate Q1 adjusted EBITDA margin to be approximately 21%, driven by higher gross margin from improving supply chain costs despite significant FX headwinds. We expect premium supply chain costs to be approximately $20 million in Q1, a nearly $50 million year-over-year reduction. Non-GAAP diluted EPS is expected to be in the range of $3.70-$4.00. For the full year 2023, we anticipate net sales to be in the range of a 3% decline and 1% growth.
This outlook assumes a 50 basis point net negative impact from foreign currency changes and acquisitions as FX headwinds moderate throughout the year. We anticipate full year adjusted EBITDA margin between 22% and 23%. We expect premium supply chain costs of approximately $50 million for the year, with continued improvement in product availability. We have also proactively managed operating expenses as evidenced by OpEx scaling in Q4 and recent targeted restructuring actions as we enter 2023, which enables us to preserve strategic investments in the business. We expect our free cash flow to be at least $650 million for the year, which reflects the benefit of working down elevated inventory levels through the year, higher cash taxes, and $180 million of previously announced settlement payments. Please reference additional modeling assumptions shown on slide 10.
Note that the cost of borrowing is expected to be approximately 5%-6% this year, and our non-GAAP tax rate is expected to be approximately 19% due to the United Kingdom corporate tax rate increase. With that, I will turn the call to Bill to discuss how we are advancing our Enterprise Asset Intelligence vision.
Bill Burns (Chief Product and Solutions Officer)
Thank you, Nathan. Before I talk about the progress we are making on our vision, I'd like to take a moment to thank Anders for his exceptional leadership at Zebra over the last 15 years. Through disciplined organic investment and strategic acquisitions, he's led the transformation of Zebra. He's fostered an innovative and authentic culture that has received many awards recognizing Zebra as a great place to work. Also, under his leadership, shareholder value creation has significantly exceeded broader market benchmarks. I'm excited to build upon Anders' legacy by continuing to advance our Enterprise Asset Intelligence vision. Slide 12 illustrates how we digitize and automate the front line of business by leveraging our industry-leading portfolio of products, software, and services. By transforming workflows with our proven solutions that generate an attractive return on investment, Zebra's customers can effectively address their increasingly complex operational challenges.
Our innovative solutions empower the workforce to do their jobs more effectively by navigating constant change in a near real time, utilizing insights driven by our advanced software capabilities such as prescriptive analytics and intelligent automation. As I focus on moving Zebra forward, we will collaborate closely with customers and partners to continue to elevate Zebra as a premier solutions provider and work to attract, develop, and retain top global talent to drive innovation. Slide 13 summarizes our served market opportunities and long-term growth profile. The fundamental drivers of our business remain intact. Megatrends, including the on-demand economy, asset visibility, mobility and cloud computing, and intelligent automation, provide secular tailwinds for our business. I am proud of the progress we're making in elevating our strategic relationship with our customers.
We continue to extend our leadership position in our core business and are gaining traction in adjacent and expansion markets which have higher growth profiles. Anders and Nathan highlighted RFID as a bright spot where we have a comprehensive solutions offering for a wide range of use cases. Our momentum continues as we were just awarded a record RFID win last week. Another highlight is our market share gains in rugged tablets as a result of our focused investment. Overall, I believe we are well-positioned to deliver 5%-7% organic growth over a cycle with an increasing attractive margin profile as we drive continued traction across our core, adjacent, and expansion markets. Now we turn to slide 14. Businesses partner with Zebra to optimize their end-to-end workflows as they strive to meet an increasing demands of consumers across a variety of vertical end markets.
As you can see on the slide, we address a wide range of workflows and use cases across retail and e-commerce, transportation logistics, manufacturing, healthcare, and other markets. Anders highlighted a few recent wins across these markets. The breadth of business challenges we are addressing has been expanding through our investment in new offerings and markets, enabling us to further penetrate customer accounts. For example, leveraging our existing relationships enabled us to secure autonomous mobile robot and machine vision wins with our customers in manufacturing and warehouse use cases. We see a tremendous opportunity to continue to elevate and grow our customer relationships through our expanded solutions offerings. On slide 15, we highlight how Zebra was able to showcase how our solutions positively impact retail store operations to more than 1,300 customers at the National Retail Federation's trade show last month.
At the event, we brought the modern store concept to life by demonstrating how our portfolio of solutions empower retailers to better engage associates, optimize inventory, and elevate the customer experience. Our booth featured representatives from two prominent retailers who share how our solutions have improved their operational challenges. Lowe's Home Improvement has realized the synergies of combining Zebra's mobile printers, mobile computers, and our workflow optimization software solutions that improve the customer experience, increase efficiency, and reduce friction in their workflows. Zebra solutions have resulted in increased customer satisfaction by improving inventory accuracy and streamlining the buy online pickup in store experience, as well as over 1 million hours of annualized labor savings and reduced labor waste. Vera Bradley has improved associate engagement and retention by prioritizing workloads through our task and workforce management software solutions.
By leveraging Zebra's mobile devices and software solutions, they can now align the right task to the right associate in real time and increase employee satisfaction by reducing friction in scheduling. Additionally, insights in our software solutions elevate the customer's experience for Vera Bradley by empowering frontline associates with better information, including visibility of product inventory and pricing. In closing, I look forward to working with our team to advance our Enterprise Asset Intelligence vision by fostering an innovative culture, collaborating with our customers and partners, and delivering profitable growth across our core, adjacent, and expansion markets. I will hand it back to Mike.
Mike Steele (VP of Finance and Investor Relations)
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 as many of you as possible.
Operator (participant)
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from Damian Karas with UBS. Please go ahead.
Damian Karas (Senior Equity Research Analyst of Industrial Technology)
Hey, good morning, everyone, and congrats on the quarter.
Bill Burns (Chief Product and Solutions Officer)
Thank you.
Anders Gustafsson (CEO)
Thank you.
Damian Karas (Senior Equity Research Analyst of Industrial Technology)
My first question is related to your sales outlook. You know, in particular, we've heard some of your competitors and even one of your major distribution partners recently talking about inventory channel destocking taking place. I'm just curious, you know, if you guys are seeing the negative impact from that at all, and to what extent that's, you know, factored into your guidance for the year?
Anders Gustafsson (CEO)
Yeah. Starting on the channel inventory side, you know, our the global channel inventory levels are healthy for us, and we see solid sell-through signals, and, you know, particularly that's true for our run rate business. You know, inventory levels have rebounded in 2022 for our channel. You gotta remember that at the end of 2021, the industry was going through some very substantial supply chain constraints, and the channel was nearly stocked out. In 2022, that rebounded to some degree, but more back to normal levels. You know, inventory levels in absolute dollar terms in our channel compared to, say, pre-pandemic is up.
If you normalize that around days on hand inventory, which is how we really measure the health of the inventory in the channel, that is actually about only up by a couple of days compared to pre-pandemic.
Damian Karas (Senior Equity Research Analyst of Industrial Technology)
Got it. That makes sense. Then switching gears to the margin trajectory here. You know, if we kinda look at the low end of that adjusted EBITDA guidance, you know, it doesn't suggest much improvement, especially when you kind of look at the notable step down you guys are expecting in the premium supply chain costs. I was wondering if you could maybe just give a sense on how you're thinking about that, you know, margin guidance range and, you know, as it relates to the $50 million premium cost. Are you basically assuming that that's more or less eliminated by the third quarter?
Nathan Winters (CFO)
David, this is Nathan. If you look at our guides for the year of an EBITDA of 22-23, it's a, you know, 1 point higher than we were in 2022. As you mentioned, the primary driver is the supply chain improvements, which is about 2 points of improvement. That's being offset by 1 point of FX for the year, particularly here in the first half on the comps from where the rate was 1 year ago in the EUR. We also have pricing actions we've taken throughout the year that are flowing through, and that's largely offsetting material and labor costs predicted for the year. That's how to frame up.
We're definitely seeing the flow-through from the improvement in premium supply chain costs and lower freight rates, but FX is the real headwind that's offsetting it.
Operator (participant)
Thank you. Our next question today comes from Jim Ricchiuti at Needham & Company. Please go ahead.
Jim Ricchiuti (Senior Analyst of Advanced Industrial and Environmental Technologies)
Hi. Thank you. I wonder if you could provide us with your general outlook for the projects business in 2023? Are you seeing any changes? You've expressed some caution that you're seeing from some customers, but what's your outlook for that part of the business?
Bill Burns (Chief Product and Solutions Officer)
Yeah, Joe, I'd say. This is Bill. I'd say overall that, you know, from a macro environment, we're seeing really mixed signals. As you said, we're seeing on one hand really elongated sales cycles and some softening of demand, especially from, you know, some select large customers. That's resulting in some delays and push-outs. We saw that in fourth quarter. It's reflected in our first quarter in 2023, you know, outlook. On the other hand, we're really seeing that, you know, we've got strong backlog and a pipeline is healthy for projects for 2023. Our run rate sales in fourth quarter were strong, and we're continuing to see that in Q1. As we just talked about, our global, you know, just the inventory levels are healthy.
It's really mixed signals out there that's, you know, keeping us cautious, you know, overall. I think that, you know, our view of that is that we're gonna continue to monitor the environment in 2023. We're gonna take an agile approach to really managing expenses and focus on, you know, profit margin expansion but at the same time, really preserving the, you know, strategic investments we're making, you know, throughout the year. I think overall we're, you know, highly confident our solutions offering and our ability to continue to take share in 2023, but it just makes sense for us to be cautious given the macro uncertainty that's out there today.
Joe Heel (CRO)
Jim, this is Joe Heel. Maybe 1 or 2 additional data points on this. As we entered the year, our pipeline of large projects was about the same as it was the year before, so quite strong, and we're quite satisfied with how solid that pipeline of large deals was. When we are talking about caution and softness, I would say it's sort of the best possible thing you can hope for if you're in sales, which is customers are keeping the projects. In some cases, they are delaying the start time of them. In some cases, they are rolling them out over a longer period of time. But I would say those are few and far between at this point, and that's really the nature of what's driving some caution on our part.
Jim Ricchiuti (Senior Analyst of Advanced Industrial and Environmental Technologies)
It's helpful color. The follow-up question I have is just as you went through Q4 and thus far this year, have you seen any?
Changes in demand, meaningful changes, either in some of your major geographic regions or major market verticals. Thank you.
Joe Heel (CRO)
Yeah. I can also speak to that. I think we have a few anomalies that you're aware of, right? You know about our exit from Russia prior year, that revenue is obviously not there. You probably expected that in the Chinese market, we would have less revenue this quarter than we had in the quarter, same quarter prior year because of the COVID situation. By the way, that is very quickly recovering. We're seeing quick recovery of that. Those are, you know, perhaps some of the changes. Other than that, I couldn't say that there's a major shift in region or vertical makeup of our revenue structure.
Operator (participant)
Thank you. Our next question today comes from Paul Chung at JPMorgan. Please go ahead.
Paul Chung (Executive Director)
Hi. Thanks for taking my question. Just on the EBITDA margin guide of this year, can you expand on, you know, kind of the gross margin versus OpEx dynamic, driving that outlook? You know, freight's coming down materially. I just wanna get a sense for, you know, gross margin expansion expected throughout the year with, you know, oneQ most likely being in the trough. I have a follow-up.
Nathan Winters (CFO)
Yeah. Paul, if you look at the full-year guide on EBITDA, I mean, you know, both the supply chain improvements and FX both will flow through and from a margin perspective. I think we expect gross margin to increase throughout the year because of those two dynamics. I think from an OpEx scaling, we'd say roughly, you know, flat to in line with prior year, just as we work through some of the increase in compensation and incentive compensation year-on-year. Again, I think largely the benefit in the EBITDA would flow through mostly in gross margin.
Paul Chung (Executive Director)
Gotcha. Thanks for that. Just on the RFID opportunity, you know, how large is the contribution to the business today? I mean, you guys have been in the market for a long time, where are you seeing accelerating growth and some use cases across retail and other verticals? Thank you.
Bill Burns (Chief Product and Solutions Officer)
I would say that, this is Bill, Paul. The, you know, low single digits is the, you know, size we think about. We're excited about the Op-RFID opportunity. As we mentioned in the remarks that we've just, you know, won our largest RFID opportunity, ever really in the TNL space. We've seen, you know, RFID move from just really, retail into retail supply chain now into the broader supply chain and opportunities within transportation logistics, which is, you know, really, around, you know, parcel and others that create really an opportunity of a wider, serve use cases. In retail, we're seeing, you know, large retailers mandate the tagging of items within retail. We're seeing new opportunities there around loss prevention.
As I mentioned, you know, TNL opportunities, we're seeing quick-serve restaurants deploy RFID. In the NFL, you know, we're doing both active and passive RFID, so we just renewed the contract there in our relationship within the NFL. You know, we're excited about the RFID market. We've got, you know, the broadest and deepest set of RFID solutions today in the market, you know, ranging and covering all those use cases I talked about. The expansion of use cases beyond retail is what's exciting to us, and we've got the portfolio really to go address it, and we're excited about it.
Anders Gustafsson (CEO)
Let me add one other thing, Paul, to that, which is I think tipping points in the RFID market have been, you know, claimed several times in history, and I don't think we wanna say that today, but there are some very exciting developments in this market, that, you know, we're certainly bullish on. One of them is last year, one of our largest retailers announced that they were converting significant portions of their operation to RFID. The win that Bill mentioned earlier in his remarks, which was a record RFID deal, the largest, in certainly our business, and we believe in the industry, is in TNL.
With two large, a retailer and a large TNL company adopting RFID, what this will do, we think, is that it will drive economies of scale in the market and also be a lighthouse for other competitors in these segments to adopt this technology, which provides significant improvements in throughput time and productivity, in addition to the economies of scale it delivers for the broader market. We're pretty excited about this and foresee some strong growth for it.
Operator (participant)
Thank you. Our next question today comes from Keith Housum with Northcoast Research. Please go on.
Keith Housum (Managing Director and Research Analyst)
Good morning. Joe, just unpacking some of the guidance a little bit. When you're seeing deals that are being delayed or kind of spread out, perhaps can you give us a little bit of color about the momentum or the motivation that the companies have in doing so? Is it business specific issues? Are they worried about the economy? Perhaps a little bit of guidance there.
Joe Heel (CRO)
Keith, this is Joe Heel again. What we're hearing from those customers is mostly that, they are looking to adapt their spending to their budgets. You know, if we think about retailers, which probably make up a meaningful portion of some of those situations where we're seeing that, they are adapting their budgets to what they see as demand in for their business. As they're doing that, they're asking to spread... They still need our technology. I think that's the important piece that we see and why we're seeing a push-out or maybe a delay in the deployment schedule.
They're trying to fit it in because they know they need this technology, but they're trying to adapt when they're spending the money to when they think it will be available in their business. I think that's the best description.
Keith Housum (Managing Director and Research Analyst)
Great. I appreciate it. Bill, just trying to unpack a little bit more about the supply chain issues as my follow-up here, do you guys see still the mid-middle of the year when supply chain issues really become alleviated, and you're back to pre-pandemic levels?
Bill Burns (Chief Product and Solutions Officer)
Yeah, I think that, you know, I mean, from an availability perspective, I think we're pretty much there. I mean, we're seeing, you know, components move, you know, into much more reasonable lead times, not all, but many. The majority of our items have come back to normal delivery timeframes, you know, overall. I think that we feel good about our supply chain and the recovery of that really almost the majority of almost everything really in first quarter, is what I'd say from our supply chain perspective.
Nathan Winters (CFO)
Yeah. Keith, the only thing Just Nathan, I'd add is, it's obviously a dynamic environment, we're monitoring it in terms of, you know, events and shutdowns and things like that that could disrupt that. I'd also say it's also relative. If you look at our freight rates as a great example, it's meaningfully better than where they were 1 year ago or even 6 months ago. Still, you know, we're still paying 2x-3x what we paid pre-pandemic. I think it's also relative, in terms of where we have, you know, maybe where we were historically to where we've been 1 year ago in terms of, you know, how we feel about the overall supply chain.
Operator (participant)
Thank you. Our next question today comes from Meta Marshall with Morgan Stanley. Please go ahead.
Meta Marshall (VP and Equity Research Analyst of Technology)
Great, thanks. Just a couple questions for me. One, you know, you mentioned longer deal cycles, but I guess I was just wondering, is there any change to kind of the deal sizing that they're putting together of maybe looking at some lower cost SKUs or outfitting kind of fewer reps, just any change to kind of the overall deal size that's worth noting? Then maybe second, you know, now that you've had Matrox just a couple of quarters, you know, you did mention some kind of machine vision type wins. Just wondering kind of where you're seeing, you know, where you are on that integration, where you see kind of the best opportunities going forward there? Thanks.
Joe Heel (CRO)
Meta, Joe Heel here. In terms of the longer, in terms of the nature of these longer deal cycles, generally, we have not seen downsizing of deals or down-tiering of devices. I could think of maybe 1 or 2 instances. It's more what I was describing earlier to Keith, where the deal is being elongated in terms of either the deployment schedule, over instead of taking it all in Q1, they're gonna take it over 3 quarters for the rest of the year. Or they might say, "I don't wanna take it in Q1. I wanna take it in Q2." That's the most common 1. Downsizing, I would say not so much. Right? Is we're not seeing that as much.
Bill Burns (Chief Product and Solutions Officer)
Yeah. From a Matrox perspective, I can take that, Joe. You know, I think overall we're encouraged certainly by the progress of Matrox. It performed well in 2022 with a actually a record year. You know, the integration is moving as planned. As a, you know, kind of a quick reminder, the, you know, Matrox is really complementary to our organic investment that we made in the fixed industrial scanning and smart camera market. It really brought to us the breadth and depth of the portfolio that our partners were encouraging us to have in that marketplace. It brought Vision Controllers and frame grabbers and 3D sensors along with a portfolio of, you know, software solutions and a software library to meet, you know, many use cases in that marketplace overall.
You know, I'd say we're happy with the progress so far. It's, you know, there's lots of opportunities for us out there in machine vision across manufacturing and transportation logistics is the primary markets that we're focused on, and things are going well so far.
Meta Marshall (VP and Equity Research Analyst of Technology)
Great. Thanks, guys.
Operator (participant)
Our next question today comes from Guy Hardwick at Credit Suisse. Please go ahead.
Guy Hardwick (VP and Equity Research Analyst)
Hi. Good morning.
Anders Gustafsson (CEO)
Good morning.
Bill Burns (Chief Product and Solutions Officer)
Morning.
Guy Hardwick (VP and Equity Research Analyst)
Particularly as it pertains to your Q1 guidance, can you give me some sort of trends as to the difference between Zebra sales into the channel and then the distributor sales out of the channel, and maybe also how that differs from direct business?
Nathan Winters (CFO)
Yeah. Maybe just to frame the Q1 guide of -4% to -1%. Again, as we mentioned before, we have, you know, again, backlog and pipeline to support the outlook. We've actually had a solid start to the quarter, both in shipments into the channel, as well as we're seeing nice momentum from a sales out, particularly around the run rate business. We're also realizing some nice price realization, which is about a point of benefit in the quarter. I'd say early on, again, seeing nice momentum both from a sales in and sales out. I'd say the...
You know, the guide also reflects, as we've talked about before, more, you know, the uncertainty in the environment and that cautious behavior, particularly as a lot of our customers are finalizing their capital budgets for the year. The other thing important to note is that Q1 takes the full effect of the Russia headwind for the year, which is about a point for the first quarter. I'd say, I'd say no meaningful difference between, you know, what we're seeing within our own activity with the channel as well as from a sales out perspective that's noteworthy.
Guy Hardwick (VP and Equity Research Analyst)
Just a follow-up. Is it correct that the gross margin benefit from supply chain, declining supply chain headwinds should be most significant in Q1?
Nathan Winters (CFO)
True. From a year on, from a year-on-year perspective, if you look at the EBITDA guide of approximately 21%, the supply chain benefit or the premium supply chain benefit is about 3 points, that's offset by 2 points of FX. Those are the, you know, main drivers from a year-on-year. Yes, you're right. From a year-on-year perspective, Q1 last year was about the peak in terms of premium supply chain costs.
Operator (participant)
Thank you. Our next question today comes from Rob Mason at Baird. Please go ahead.
Rob Mason (Senior Research Analyst of Industrial Equipment)
Yes, good morning. I just wanted to circle back again to your commentary around the run rate business. Several times you've commented on healthy sales there sell out. I'm just curious, how much visibility do you have into the bookings trends in that part of the business? Is it seeing any of the elongated deal cycles or any sense of that?
Joe Heel (CRO)
Joe Heel here. On the run rate has been very strong, I would say, for Q4 in particular, and we're seeing that continue into Q1. In terms of visibility, this is the type of business where, you know, people obviously don't, you know, book big deals with us. They go to distributors and buy what they have on their shelves. The visibility is typically based on our conversations with distributors and what they're telling us they're seeing as their order intake. It's much less of a visibility. What we have so far, even in the first weeks of this quarter, has been very strong.
We've been pleasantly surprised, in particular for printing and scanning, which were areas of our business that we didn't have as much stock over the course of the last year. As a result, we're very pleased to see that that run rate in printing and scanning in particular is so resilient, right? That customers are staying loyal to us and continuing to buy again from the distributors.
Anders Gustafsson (CEO)
Yeah, maybe there's 2 further points on that. 1 will be that, you know, that we don't necessarily have the same visibility into each and in every deal, but this is 1 where you have a large number of orders. You get kind of a more statistical confidence from that. If you look at historically, our run rate business tends to be more of a longer cycle business for us. That if you have a strong quarter, it tends not to be kind of 1 strong quarter, then it drops down. It tends to be that we have 4-6 quarters of strength if, in that cycle, followed by maybe 1 or 2 quarters of a little softer demand. We would expect this to continue for a few more quarters.
Rob Mason (Senior Research Analyst of Industrial Equipment)
Understood. Understood. I wanted to go back to your geographic commentary. I think when you mentioned Asia, you called out Japan was strong. You know, I think historically, Japan has not necessarily been a large market for you. Could you just outline maybe what you're seeing in Japan, what your expectations might be there, if anything is changing on that front?
Anders Gustafsson (CEO)
First, let's say we're very pleased with the performance of the quarter. We had record sales. We came in above the high end of our outlook. We executed very well, I think, and recovered from the distribution network challenges that we had in Q3, and we drove double-digit sales in North America. We talked earlier about the strength we're seeing in kind of run rate business, and we see that certainly in small and mid-sized customers. And we had particularly strong growth from a solutions perspective from with print, data capture, RFID, tablets, partially offset by lower mobile computing sales in Europe, due in part to the exit from Russia in Q1 of last year. Asia Pac was had a good performance, particularly when you consider COVID in China.
We, you know, we have very broad-based growth. We saw nice growth in China, Australia, New Zealand. Japan, as you mentioned, is kind of the standout here. We had exceptional growth in Japan. We have invested in driving penetration in Japanese market over the last several years, both from a go-to-market perspective, but also from a product perspective. This large postal carrier win that we mentioned is kind of, you know, the latest evidence of that. We now have a very strong position in Japan in mobile computing, which is, you know, one of the largest markets in the world where we really didn't have much of a presence before.
Joe Heel (CRO)
I'll add one thing to that. Japan is the third largest market that we operate in, and it's one, as you say correctly, where our share in the past had been relatively low. Two important things have changed that I think have given us some really good momentum here. Anders mentioned it. The first thing that's changed is that the market has begun to embrace Android. This may seem like it's out of pace, and it is much later than many other markets in the world that that market has made the mobile computing shift from Windows to Android. That has given us a big opportunity, right? Because many of the local Japanese competitors who have dominated that market have not been as quick with Android as we have.
That has given us an opportunity, and that's a great example is this postal carrier deal that Anders mentioned. That's what we did. The second thing that we've done is,
Shifted our go-to-market strategy to focus more heavily on partners. We're working with some of the largest systems integrators now in the Japanese market. That's how we won this this postal carrier deal. That's how we've won several other large deals, in particular in retail around mobile computing. The combination of those two are really giving us some momentum we hadn't seen in any of the years before.
Operator (participant)
Thank you. Our next question today comes from Brian Drab at William Blair. Please go ahead.
Brian Drab (Partner and Co-group Head of Industrials)
Good morning. I was just wondering if you could talk a little bit more about what you're seeing in the different verticals? I'm not sure you've really spelled that out this morning in terms of manufacturing, retail, transportation, logistics, healthcare. I assume you won't want to give expected growth rates for those verticals in 2023, but if you could even, you know, give ranges or rank order where you're expecting the most strength or the weakest performance.
Anders Gustafsson (CEO)
Yeah, that can be a long answer. I'll give you a start a little bit high, and then we can pick up a couple of the verticals maybe here. Across all our verticals, as I said, we are seeing very strong secular trends to digitize and automate workflows and empower frontline workers in a now much more labor-constrained environment. These trends continue to drive an increased need for our type of solutions across a wide range of vertical end markets. You specifically mentioned manufacturing. You know, we had a very strong performance in Q4 around in manufacturing. We had a number of very significant wins that we were very proud of. You know, we are mentioned one in the automotive side in my prepared remarks.
There are some attractive trends in manufacturing that are helping to drive our business here. You know, one is around the business must invest in traceability tools to create more sustainable supply chains. Another one is around intelligent automation investment trends in productivity and visibility. Those present opportunities for our solutions, including machine vision and our autonomous mobile robots and or Fetch solutions. We've certainly seen very strong traction with machine vision in manufacturing and have some attractive early wins here. We're very excited about what Matrox and our Adaptive Vision acquisitions can bring to our customers and partners here. I can dig into other verticals also, but see if you have any other questions here.
Brian Drab (Partner and Co-group Head of Industrials)
Oh, well, thanks, Anders. I mean, I was just wondering if you could comment if even just briefly or just a bullet point on each one, you know, transportation, logistics, up or down in 2023, healthcare up or down, retail up or down, you know, just directionally even. Anything on all the four major verticals you play?
Anders Gustafsson (CEO)
I think that we probably will leave the kind of the outlook around the overall corporate level. Maybe on just say that for, you know, in retail in 2022, you know, we had approximately flat sales in retail vertical with some very broad-based growth that offset the pullback of one very large customers. You can see the strong momentum we have across the industry where we could offset a very large customer pulling back in a pretty big way. The diversification we have across all of these verticals is definitely helping us to mitigate kind of volatility and drive more consistent results.
Operator (participant)
Thank you. Our next question today comes from Tommy Moll at Stephens. Please go ahead.
Tommy Moll (Managing Director and Equity Research Analyst of Industrials)
Good morning. Thanks for taking my questions.
Anders Gustafsson (CEO)
Tommy.
Tommy Moll (Managing Director and Equity Research Analyst of Industrials)
I wanted to start on the revenue outlook you've provided for 2023, which you've described as embedding a cautious approach. When you use that word cautious, are you primarily referring to some of the spending patterns among the large customers that you referenced? Or is this more a philosophical adjustment you've made where you look at your opportunities and maybe you discount the probability of conversion on some of these deals higher than you typically would, just given the macro uncertainty?
Nathan Winters (CFO)
Yeah, Tommy, this is Nathan. I think, you know, as you look at the full year guide, which is about from an organic perspective, slightly down at the midpoint. As you mentioned before, I think it's a combination of the two, right? Both, you know, kind of cautious in the overall assumptions, due to the macro environment and how that's going to play out through the rest of the year. As well as to your other point of, you know, how we kind of look at each, you know, look at some of those large opportunities and probability weight those for the year. We think, you know, we believe the range we provided is appropriate given that overall uncertainty.
Anders Gustafsson (CEO)
Can I just add that I think we feel good about our business. I think this is really all about macro uncertainty. I mean, I think we think that, you know, we're going to continue to take share in 2023. That's how we see it. We're the leader across the core markets we serve. We've got attractive opportunities across the adjacencies and the expansion business we've invested in. I think we feel good about our business. I think the uncertainty really is around, you know, what's happening around macro, we're clearly seeing some of that come through in, you know, our results in Q4 and in our guide for Q1 in 2023.
Tommy Moll (Managing Director and Equity Research Analyst of Industrials)
If the macro were to deteriorate, could you rank order or maybe just identify one or two of the key verticals where you would expect to see that pressure first versus maybe some of the verticals You would expect more a secular growth trend through the year. Is that possible?
Bill Burns (Chief Product and Solutions Officer)
I'm not sure. I'm not sure we'd see it as, you know, separate verticals. What I'd say is that, you know, across the diversification of our solutions and our verticals actually give us kind of resiliency in a downturn, you know, which would dampen some of the cyclicality. I think this diverse solutions base that we have and product portfolio and the new investments we're making is dampened cyclicality across that customer base. I'm not sure we'd see it as one worse than the other. I mean, Joe may want to add to it, but I think that, you know, we think overall that we're gonna take a disciplined approach to, you know, OpEx during the year and focus our investments.
You know, you know, I think that, you know, from that perspective, I don't think we see one vertical over another.
Anders Gustafsson (CEO)
You could think of maybe as healthcare as one that will be more resilient. I think that, you know, economic cycles would probably not impact healthcare as much. It's been our fastest-growing vertical over quite a while, and we would expect that to continue to do well, more irrespective of the economic outlook.
Operator (participant)
Thank you. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Gustafsson for any closing remarks.
Anders Gustafsson (CEO)
As I wrap up my 60-second earnings call, I would like to again thank our partners, customers and employees for their contributions in transforming Zebra. I am proud of the progress we have made together and believe we will continue to prosper with Bill as our next CEO. I also want to thank our analysts and investors for your continued support of Zebra. Although this will be my last earnings call, I look forward to ensuring a smooth leadership transition and starting my new role as executive chair while continuing to support Bill and Zebra's ongoing success. Have a great day, everyone.
Operator (participant)
Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you all-
Speaker 15
Goodbye
Operator (participant)
For attending today's presentation. You may now disconnect your lines and have a wonderful day.