Zebra Technologies (ZBRA) Q4 2024 Earnings Call Transcript

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Zebra Technologies (NASDAQ: ZBRA)
Q4 2024 Earnings Call
Feb 13, 2025, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the fourth quarter and full year 2024 Zebra Technologies earnings conference call. [Operator instructions] 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.

Michael Steele -- Vice President, Investor Relations

Good morning, and welcome to Zebra's fourth quarter earnings conference call. This presentation is being simulcast on our website at investors.zebra.com and will be archived there for at least one year. Our forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially, and we refer you to the 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 performance are year on year and on a constant currency basis. This presentation will include prepared remarks from Bill Burns, our chief executive officer; and Nathan Winters, our chief financial officer.

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Bill will begin with a discussion of our fourth quarter results. Nathan will then provide additional detail on the financials and discuss our 2025 outlook. Bill will conclude with progress on advancing our strategic priorities. Following the prepared remarks, Bill and Nathan will take your questions.

Now let's turn to Slide 4 as I hand it over to Bill.

Bill Burns -- Chief Executive Officer

Thank you, Mike. Good morning and thank you for joining us. Our teams executed well in the fourth quarter, delivering results above our outlook. For the fourth quarter, we realized sales greater than $1.3 billion, a 32% increase compared to the prior year, adjusted EBITDA margin of 22.1%, a nearly 7-point increase.

Non-GAAP diluted earnings per share of $4, which is more than double the prior year and strong free cash flow. As we discussed on our last earnings call, in the third quarter, we saw demand recovery broaden with data capture and printing returning to growth following mobile computing return to growth in Q2. Demand trends continue to improve in most end markets throughout the fourth quarter with the manufacturing sector lagging. North America retail was a bright spot with stronger customer year-end spending than we had anticipated.

These factors, along with a significant distributor destocking in the second half of last year resulted in strong double-digit sales growth in Q4. From a profitability perspective, the operating leverage from our strong sales growth drove significant margin expansion, supporting our earnings and cash flow. As we enter 2025, our order backlog supports a solid Q1, however, we remain cautious in our outlook as our customers navigate an uncertain environment, including a dynamic global trade, geopolitical, and macroeconomic backdrop. I will now turn the call over to Nathan to review actual results and discuss our 2025 outlook.

Nathan Andrew Winters -- Chief Financial Officer

Thank you, Bill. Let's start with the P&L on Slide 6. In Q4, total company sales were approximately 32%, reflecting continued recovery in demand across our major product categories. Mobile computing strength in retail drove growth above our outlook.

Our enterprise visibility and mobility segment sales increased 33% and asset intelligence and tracking segment grew 29%. Our services and software recurring revenue businesses had solid growth in the quarter. We realized double-digit sales growth across our regions. In North America, sales grew 36% with a significant improvement in large retail mobile computing works.

EMEA sales grew 24% with strength in Northern Europe. Asia Pacific sales increased 30%, led by Australia, New Zealand, and India, along with modest improvement in China and sales grew 40% in Latin America with particular strength in Brazil. Adjusted gross margin increased 410 basis points to 48.7% primarily due to volume leverage, and adjusted operating expenses as a percent of sales improved by 290 basis points. This resulted in fourth quarter adjusted EBITDA margin of 22.1% and, 670 basis point increase versus the prior year and a 70 basis point sequential improvement from Q3.

Non-GAAP diluted earnings per share was $4 to 134% year-over-year increase and at the high end of our outlook. Turning now to the balance sheet and cash flow on Slide 7. For the full year, we generated $954 million of free cash flow as EBITDA increased, and we drove significant improvements in working capital and inventory levels. We achieved 136% free cash flow conversion and ended the year at a 1.2 times net debt to adjusted EBITDA leverage ratio.

As our cash flows recovered and debt levels have moderated, we have increased flexibility to deploy capital consistent with our allocation priorities. We repurchased $47 million of shares for the full year, with most of the activity in Q4. As part of our continued efforts to scale our expansion in adjacent markets, we recently agreed to purchase Photoneo, a leading 3D machine vision company based in Eastern Europe for approximately 60 million euros, which is expected to close in the first quarter. Let's now turn to our outlook.

We entered 2025 with a solid backlog supported by strong retail year-end predict spending that carried into our first quarter. Our first quarter sales growth guidance range of 8% to 11% reflects favorable comparisons and assumes a 1-point unfavorable impact from FX due to a significantly stronger dollar over the past several months. Our first quarter adjusted EBITDA margin is expected to be approximately 21%, and non-GAAP diluted earnings per share are expected to be in the range of $3.50 to $3.70. This sales and profitability expectation is a sequential decline from Q4, reflective of normal seasonality.

For the year, we expect sales growth between 3% and 7% inclusive of 130-basis-point unfavorable impact from FX. Demand trends have been positive across most of our end markets with manufacturing lagging. That said, we remain cautious in our outlook as our customers navigate an uncertain environment. And as a result, our visibility to customer spending beyond Q1 is lower than usual.

Our full year adjusted EBITDA margin is expected to be between 21% and 22%. And non-GAAP diluted earnings per share are expected to be in a range $14.75 to $15.25. We will continue to remain agile to ensure we deliver solid profitable growth. Free cash flow for the year is expected to be at least $750 million, which reflects free cash flow conversion of greater than 90%.

We will continue to work on further optimizing our working capital levels, balanced with our supply chain resiliency initiatives. We made substantial progress diversifying our supply chain sourcing beyond China over the past several years. We continue to work closely with our manufacturing and trade partners to optimize our footprint which puts us in an improved position to navigate the impacts of recently announced import tariffs. Based on the incremental 10% China tariffs that became effective in early February and the 25% Mexico tariffs that become effective in early March.

We anticipate a net impact to gross profit of approximately $20 million in 2025 peaking in Q2. The impact is roughly split between China and Mexico. We expect to substantially mitigate these tariffs as we exit 2025 through supply chain initiatives and targeted price increases. Left on mitigated, the annualized impact would have been more than $60 million.

Please reference additional modeling assumptions shown on Slide 8. With that, I will turn the call back to Bill.

Bill Burns -- Chief Executive Officer

Thank you, Nathan. Turning to Slide 10. As we look at the long-term opportunities for our business, we remains well positioned to benefit from secular trends to digitize and automate workflows with our portfolio of innovative solutions, including purpose-built hardware, software, and services. We empower frontline workers to execute tasks more effectively by helping them navigate constant change in real time.

Innovation remains central to our industry leadership, and we have consistently reinvested approximately 10% of our sales into research and development to advance our portfolio of solutions. Recent progress includes AI-based machine vision offerings, expansion into self-service kiosks, embedded RFID capabilities within our mobile computing portfolio, and eco-friendly printing supply. We augment our organic efforts with strategic acquisitions that advance our vision. This includes our pending acquisition of Photoneo, which will expand our 3D machine vision solutions into automotive manufacturing, logistics, and other key markets.

We look forward to welcoming the team once the acquisition closes. As you will see on Slide 11, our customers leverage our solutions to optimize workflows across a broad bridge of end markets which drives productivity and better service to their customers, shoppers, and patients. The performance part continues to rise and increasingly on-demand account. Zebra works closely with our customer technology journey to address their biggest challenges.

I would like to highlight some of the wins to transform customer workflows. A large North American retailer is beginning to deploy Zebra RFID fixed readers to optimize shelf availability for fresh food and apparel. This initial investment lays the groundwork for expansion into additional RFID solutions such as loss prevention. A leading auto manufacturer recently launched a mobile computing refresh an expansion project spanning multiple U.S.

sites to provide real-time visibility and streamline final quality inspections. An online retailer in South America replaced the competitors' devices and expanded their relationship with us, selecting Zebra mobile computers, scanners, kiosk, printers, and RFID readers to optimize their inbound and outbound warehouse operations. Our reliable device performance and ability to improve operational efficiency are particularly important to this customer. Additionally, a leading retail pharmacy is deploying Zebra tablets, enabling their staff to provide improved patient care and scheduling, whether in-store or offsite.

This customer placed a competitor's solution with our tablets due to the breadth of Zebra's capabilities, along with our comprehensive support and maintenance services. These projects demonstrate how customers rely on us to navigate their technology journey through our workflow expertise, commitment to innovation, and product life cycle support. Slide 12 highlights Zebra value proposition that we showcased at the National Retail Federation trade show in January. We highlighted Zebra's AI power modern store, demonstrating how our innovative solutions help retailers drive improved performance through optimized inventory, engaged associates, and an elevated customer experience.

Zebra and our partners helped to deliver these outcomes through improved omnichannel execution, loss prevention, worker collaboration, and more. We have partnered with Qualcomm, Google, and strategic independent software vendors to help our retail customers begin to leverage the power of AI across their frontline operations. At the show, a prominent retail customer demonstrated our Zebra companion with AI agents that assist store associates with edge intelligence, such as operating procedures, sales product information, merchandising guidance, and device operations. These agents act as digital assistance tailored to our customers' unique operating environment, leveraging generative AI to respond to queries and perform tasks without the need for extensive training.

Additionally, as our customers and partners accelerate their use of AI within business-critical mobile applications, Zebra's AI suite enables quick and cost-effective development of new solutions that take advantage of the continued advancement of our mobile computing platform. While we don't expect our new AI solutions to have a material impact on near-term results, we believe they play an integral part of driving our connected frontline worker strategy. In closing, we'll be seeing strong conviction in the opportunities ahead as we address our customers' evolving needs with our innovative portfolio of solutions. Our confidence in sustainable long-term growth is underpinned by several themes reflected on Slide 13.

These include labor and resource constraints, track and trace mandates, increased consumer expectations, and the need for real-time supply chain visibility. I will now hand it back to Mike.

Michael Steele -- Vice President, 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 to give everyone the chance to participate.

Questions & Answers:

Operator

[Operator instructions] The first question comes from Damian Karas with UBS. Please go ahead.

Unknown speaker -- -- Analyst

Good morning. This is [Inaudible] on for Damian. So, I had a couple of quick questions on what you're seeing in terms of larger project activity in 4Q, if you saw any larger projects return and how that's factoring into the 1Q guidance?

Bill Burns -- Chief Executive Officer

Yes, I would say that in Q4, the team delivered well at the high end of our outlook. Really driven by stronger-than-expected year-end spending from our retail customers. So yes, we did see some larger projects take place in Q4. The broader backdrop, I would say, was a double-digit growth across really all major categories, kind of all regions, all end markets and order sizes of all types.

Run rate mid-tier and large deals in the quarter. And that was certainly helped by easier compares from last year, which included distributor destocking. We see that that flow-through of not just the retail activity, but a broader-based growth drove stronger sales growth in Q4. And then earnings above the high end of our outlook.

Unknown speaker -- -- Analyst

OK. Yes. That makes sense. And as a follow-up, I just want to quickly touch on tariffs and just get a sense for what you're planning there, if you've already executed some pricing actions, what the timing around those pricing actions would be? And more broadly, what would be a trigger decision to move manufacturing to other regions?

Nathan Andrew Winters -- Chief Financial Officer

Yes. So, I think the question is sort about just our broader tariff response. Obviously, it's a dynamic environment. We have a dedicated team to establish to monitor the changes, what are the potential impact design mitigation.

And if you look at our -- and obviously, now we just want to provide transparency around what has been announced to date. We do expect to announced price increases shortly to respond to the announced tariffs, which is part of the mitigation strategy that's embedded in the current guide.

Unknown speaker -- -- Analyst

Perfect. Thanks for taking the questions.

Operator

The next question comes from Tommy Moll with Stephens. Please go ahead.

Tommy Moll -- Analyst

Good morning and thank you for taking my questions.

Bill Burns -- Chief Executive Officer

Good morning, Tommy.

Tommy Moll -- Analyst

You mentioned that the visibility beyond the first quarter is lower than usual for this time of year. My question is, as you rolled up your full-year sales outlook, what kind of it are you making on large deals there? I know in the past, you look at the funnel and the pipeline and make some assumptions about conversion, what kind of assumptions are we making this year? Thank you.

Bill Burns -- Chief Executive Officer

Yes, I'd say, Tommy, maybe a broader view of that, and then I'll cover kind of large deals. I'd say that as we entered 2025, certainly with solid backlog driven by the stronger retail spending. So large orders, as you talked about, that carried into first quarter from fourth quarter. And we're expecting solid broad-based organic growth in 2025.

But while we haven't seen customers really pull back spending to date, we clearly are seeing some impacts from the market uncertainty playing out with our customers in a couple of examples. Budget still being finalized. And that impacts our visibility kind of tempers our expectations beyond Q1. We're seeing specific to large orders, some customers stage deployments over a longer period of time.

So that's something we are actually seeing some customers do. Clearly, we're seeing a strong U.S. dollar is a headwind to us, the FX impact. And that's causing a little bit of concern from some of our international customers and their plans with a strong U.S.

dollar, not as much large deal oriented, but still some impact. And I think that our customers are really focused on what's the potential impact on their business of the overall global trade policy and thinking about how do they mitigate it and it just adds to the uncertainty of their projects and visibility, small and large moving forward and our visibility around it. So, while we feel good about our business and that we're confident in our business, our guide really reflects solid organic growth despite all these uncertainties, but visibility is pretty tough, both especially on large orders and deployments.

Tommy Moll -- Analyst

Thank you, Bill. As you look at the inventory levels with some of your key channel partners, what context can you provide there? And if it feels like the bias is up or down or that you think the sell-through and the sell-in are roughly balanced at this point? Any insight would be helpful. Thank you.

Nathan Andrew Winters -- Chief Financial Officer

Tommy, this is Nathan. I'd say it's very balanced. It stayed fairly balanced throughout the year. So, we're you look at days on hand in the channel we're in a good place as we exited the year with our distribution partners around the globe.

And obviously, that's a daily activity with our teams, making sure they have the right inventory at the SKU level. But again, I think we feel good about the overall inventory position here at the beginning of the year. And again, it was pretty balanced throughout the year in terms of what we saw from a sales and sales out perspective, if you exclude the dynamics from 2023.

Tommy Moll -- Analyst

Thank you both. I'll turn it back.

Operator

The next question comes from Joe Giordano with TD Cowen. Please go ahead.

Joseph Giordano -- Analyst

Good morning, guys. So on the full year, like I guess we've touched on this a bit, but to me, given the 1Q, it feels a little conservative, but I understand why you're framing it the way you are, given the uncertainty. I'm just curious if you were to compare the full year framework and what you're taking in compared to where we were a year ago. How would you categorize that? It seemed like last year, you were only putting in what's like highly visible to you and if there was a project flows, it was all kind of upside.

Is it a similar idea right now?

Bill Burns -- Chief Executive Officer

I would say that the year is playing out a little bit like last year for very different reasons. I think last year, we came off a year that was much different in 2023 with really our customers absorbing the capacity that they built out in the pandemic. And then we saw broader-based recovery throughout 2024. I would say the lack of visibility today and the commitment to the budgets and projects are really driven by visibility.

It's the idea that they're still kind of absorbing what is the global trade policy and what's happened geopolitically going to impact their business and ultimately then it reflects back on our guide. So, while we clearly see solid organic growth in the year, and put it play out a bit differently where we see more confidence throughout the year. The visibility today is kind of where it's at, and that's reflected in our guide. So, I think that we feel like all the uncertainty out there at the moment is causing us ultimately to be conservative and impacts the guide we're providing today.

That's the visibility we have today.

Joseph Giordano -- Analyst

Yes. Fair enough. Just for a follow-up. The free cash flow in the quarter was excellent.

I see the guide is at least $750 million I mean, I guess there's infinite above that definitionally. How -- what are the puts and takes on '25 versus '24 that we should consider? And why wouldn't it kind of build from the strength that you had here?

Nathan Andrew Winters -- Chief Financial Officer

No, as you mentioned, great year last year from a free cash flow perspective coming off of '23 and 136% cash conversion, just repeating that, you're committing to repeat that on a on an annual basis is a challenge. So, if you look at the full year guide of $750 million, the real difference between the two is we do expect continued working capital improvements, but just not to the degree we saw in 2024. It also does imply that as we look at our inventory position, you saw a little bit of this in Q4 as inventory ticked up a bit to support January demand but also our teams are doing everything they can to pull volume in from a purchasing perspective and get that inventory into the U.S. as early as possible ahead of potential tariff impact.

So, I think giving us some flexibility to help manage that as we go through the year and try to mitigate tariffs, use our balance sheet as much as we can to help mitigate the short-term impact from tariffs. So, say, the big difference, again, working capital improvements, but this still implies over 90% free cash flow conversion for '25. And we think that's just a good baseline to work from.

Joseph Giordano -- Analyst

OK, good. Thanks, guys.

Operator

The next question comes from Andrew Buscaglia with BNP Paribas. Please go ahead.

Unknown speaker -- -- Analyst

Good morning. This is Ed on for Andrew. Thanks for taking my questions. Following the developments with DeepSeek few weeks ago, I wanted to ask about AI.

You guys have long discussed the power of AI in the platform. Following the recent events, do you find more fish in AI presents an opportunity from a product development standpoint or a net risk due to the probability or possibility of enhanced competition? Thanks.

Bill Burns -- Chief Executive Officer

Yes. We would see clearly, AI as an opportunity for Zebra really empowering the frontline workers. So I think if we look at what Zebra's role is today in AI. First and foremost, we collect data at the front line of business, which really gives assets and visibility in real time and gives assets and workers a digital voice that really feed AI models, first and foremost.

So, it's kind of the heart of what we do around data collection at the front line of business. The second opportunity for AI is that traditional AI is used today across many of our solutions across the portfolio. So, whether it's machine vision inspection or optical character recognition, product recognition, package dimensioning, we use traditional AI throughout the portfolio. And as a national retail show in January, what we demonstrated was really generative AI capabilities.

So, an AI suite of -- for our mobile community portfolio that really allows ourselves and other software developers, independent software developers to build AI applications on our devices. We've also launched Zebra companion. So, think of it as being a generative AI digital assistant that has multiple agents to it, one around knowledge within the specific customer base from their own standard operating procedures, let's say. Sales information and merchandising information, device management.

And there'll be multiple agents as we continue to develop these agents or our partners, software partners do. So, think of these agents as a way to the frontline worker to really be empowered with additional information and capabilities, leveraging Gen AI as the way to gather information from standard operating procedures from the way customers operate from making your newest employees as good as your best employee. And we see this as really an opportunity for us to drive premium hardware sales, gain market share because we see ourselves as the innovator in this area on enterprise mobile devices. Additional Software as a Service revenue and recurring revenues associated with AI capabilities from our work cloud software and our software offerings.

So, we see this as an opportunity for Zebra in leveraging AI in true real-world applications at the front line that help our customers improve their efficiency each and every day of their frontline workers.

Unknown speaker -- -- Analyst

Thanks for that. It was great to see that all in action. Over to M&A, you guys are entering 2025 with 1.2 times leverage, a fair amount of capacity to tap into. I guess, if you can expand on the recent acquisition, maybe offer any other plans into capital allocation, we could think about it in 2025, that would be helpful.

Thanks.

Bill Burns -- Chief Executive Officer

Yes, we're excited about the Photoneo acquisition and getting that closed ultimately, we feel good about that from a 3D vision perspective. So certainly, the 3D market is the fastest-growing segment within machine vision and we again leveraged M&A to really continue to enter adjacent or synergistic opportunities beyond our organic investments in the business. And this is just another example of that. We were partnered with Photoneo already with an OEM partnership.

So, we know the business well and the leadership team. So, we feel good about that. We've certainly, as you said, have a strong balance sheet and that enable us to have flexibility. I think we'll use M&A to advance our vision and strategy.

That's what we've done in closely adjacent markets. And I'd say today that in the near term, given the macro uncertainty and the visibility we're kind of experience in the market, there's a bit of a higher bar and certainly with higher interest rates, but we continue to be inquisitive about M&A and we continue to use it to be able to advance our vision.

Unknown speaker -- -- Analyst

Thanks for taking the questions.

Operator

Next question comes from Piyush Avasthy with Citi. Please go ahead.

Piyush Avasthy -- Analyst

Good morning, guys. Thanks for taking my questions. From a regional perspective, can you elaborate on the trends you are seeing in Europe and China based on your conversations with your customers? What's your outlook, overall outlook, for these regions as we think of your 1Q guidance in '25 in general, like we have heard some mixed signals from other companies, so I would appreciate what you're seeing at your end.

Bill Burns -- Chief Executive Officer

The two geographies, Europe and China, is that he said?

Piyush Avasthy -- Analyst

Yes.

Bill Burns -- Chief Executive Officer

Yes, I'd say that -- OK, great. I maybe start in North America, strong growth across all the product categories and end markets in North America, return to year-end spend within retail, strong growth in healthcare, manufacturing, lagging, I guess, in North America. EMEA, I'd say the highest growth rates really came from Northern Europe. Overall, we saw momentum in larger projects continue to build throughout 2024.

We're continuing to see competitive wins and strength in retail in our mobile computing business in Europe, and manufacturing still remains challenging, particularly in Germany and Europe. I'd say China represents about 3% of our business overall, and we've seen modest sales growth in China as the business has stabilized. But I think in Asia, the real strength has come from more like Australia, New Zealand, India, some markets outside of China. But clearly, the opportunity exists continue to see modest growth in China.

I think that's the story around manufacturing as well as China, right, we're seeing a clearly a move to outside of China from a manufacturing perspective and the opportunity for us is not just in China but also to capture the manufacturing opportunities outside of China as people move supply chains in other geographies.

Piyush Avasthy -- Analyst

Yes, helpful. Quickly following up on what you just said, like manufacturing lagging versus your other verticals, like the current U.S. administration appears to be more pro U.S. So, based on your conversations with your customers, I know it's still early, but have you at least begun to see a step up in conversations with our customers where your customers are talking about reshaping their supply chain and maybe adopting more automation, robotics, and machine vision?

Bill Burns -- Chief Executive Officer

Yes. I mean we're seeing clearly that around the world, manufacturing represents an opportunity for us. It's we see a short-term lagging the other markets. But we see longer term, it's an opportunity as we're less penetrated in manufacturing than our other vertical markets.

And we see investment in automation around machine vision, the move from fixed screens to tablets with production workers and monitoring production, RFID opportunities throughout the entire supply chain, all are opportunities for us.

Piyush Avasthy -- Analyst

Got it. I appreciate all the color. Good luck, guys.

Operator

The next question comes from Brian Drab with William Blair. Please go ahead.

Brian Drab -- Analyst

Good morning. Just a couple of quick questions. So, on the difference between AIT and EVM in the 2025 outlook in 2024, AIT was essentially -- I mean if I'm rounding a little bit, but flat first quarter, second quarter, third quarter kind of around $400 million and then the seasonal strength in the fourth quarter. EVM of course, kind of improving sequentially building.

Is that a similar dynamic to what you expect in 2025?

Nathan Andrew Winters -- Chief Financial Officer

Yes, I'd say similar growth rates, if we look out for the balance of the year. Obviously, there's timing wise in terms of growth rates could look a little distorted just based on obviously Q1 last year, we were down 16%. So, from an easier comp, obviously, that's playing into the higher growth rate in the first quarter across the portfolio. But I think on the balance of the year, again, as we talk about the visibility, we'd expect fairly consistent growth across the two segments.

And we see that really across -- even back to the previous question, I'm not seeing a huge bifurcation whether it's geography or vertical market or if you look at run rate large deals, we're seeing kind of, again, consistent growth across each one of those dimensions here as we enter the year. Now again, on a quarterly basis, you might see some variation just based on comps or timing of some deals. But I think on the year, you'll see fairly balanced growth.

Brian Drab -- Analyst

OK. Thanks, Bill. And then just one other question. Could you elaborate on how you're thinking about moving production potentially.

I think last time with the China tariffs and trade war, the playbook was a little bit more simple where you just move production out of China. But are you, at this point, considering even potentially moving some production back to the United States, I guess, which is one of the intentions of the administration.

Nathan Andrew Winters -- Chief Financial Officer

Look, we continuously assess the manufacturing footprint and taking multiple factors from geopolitical stability, capability within the regions, which I think is a really important dynamic as well as cost, overall cost, from a full production capability. We have made significant progress to diversify our supply base, which gives us a lot more flexibility today to respond than we did several years ago. I mean, if you look back historically, 85% of our imports into North America were from China. And with the actions we have in place right now and that are executing, we will end the year with about a third of our exposure from China.

So again, a lot of great work over the past several years to diversify. And then if you look today outside of China, it's primarily through Southeast Asia and kind of mid -- high single-digit exposure to Mexico. So, like I think we'll continue to evolve based on where things land from a trade perspective to have a diverse supply chain that gives us the most competitive position we can. So again, a lot of great activity, I think, to put us in a place, I think one advantage we have is our partnership with global manufacturing partners that have footprints around the world, really gives us that flexibility to leverage their footprint and where they're expanding as they react with their other customers gives us a lot of scale and capability that we wouldn't have on our own, and we're taking full advantage of that.

Brian Drab -- Analyst

OK. Thank you.

Operator

The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Meta Marshall -- Analyst

Great. Thanks. Just given that we're kind of hitting four or five years since COVID and some of the demand surges that you saw. I know in the past, you've talked about consider large deal activity more indicative of refresh activity.

But is that still the same way to think about it and what you're seeing on that refresh pipeline maybe build? And then I don't think that I caught anything in terms of RFID performance during the quarter and just where that was versus overall growth trends? Thanks.

Bill Burns -- Chief Executive Officer

Yes. Great. I'll take both of those. I would say that from a refresh perspective, we continually have refresh activity.

And I think that you look at, for instance, the fourth quarter retail spend was refresh plus additional opportunities in those retailers. Because remember, a refresh comes with multiple years of continuing to add additional devices, add applications. And then when a refresh time comes, they typically even more broad applications. I would say, given the installed base of mobile computers and the expansion of that since pre-COVID, they certainly believe that creates an opportunity for us.

We're not seeing any acceleration of refreshes like into 2025 or anything like that. But we think the time frame is, every customer is on a different time frame, meaning how long they use their devices, depending on how hard they are into the devices, how many applications they use, do they need more processing power? Or are they just damaging the devices because it's a hard environment. I'd say there's clearly an opportunity over the coming years here to refresh the devices we sold as you came out of COVID into '21 and '22, and that opportunity is still ahead of us and absolutely there. I'd say from an RFID perspective, we're pretty happy with RFID.

We had a strong Q4 sales growth in RFID. We've got a pipeline of opportunities across supply chain, not just in retail but P&L, manufacturing, even government. We've seen some opportunities most recently. Our adoptions beyond retail really have retail general merchandise, which has always been the primary use case into things like fresh food.

We saw the first North America grocer really move ahead with a rollout associated with bakery and fresh foods. We've seen another large retailer in North America, look at apparel as well as fresh foods. So, we've seen the U.S. military move ahead with one of their branches with visibility across the supply chain.

So, we're continuing to see broader adoption of RFID. We've got probably the broadest portfolio of RFID of anybody from fixed, to handle readers, to printers to services to specialty labels. So, I think we feel good about the opportunity and the broadening of that across supply chain, into grocery, into government applications, and we feel pretty good.

Meta Marshall -- Analyst

Great. Thanks.

Operator

Next question comes from Keith Housum with Northcoast Research. Please go ahead.

Keith Housum -- Analyst

Good morning, guys. Appreciate it. In terms of -- and I need to keep on being the drum here with the full year guy, but just trying to understand that a little bit better about perhaps how that changed just over the past several weeks in terms of has a lack of visibility increased because it seems like visibility was increasing over the past several quarters. And a second, can you perhaps touch about the visibility based on the end market here.

Just trying to understand the dynamics there.

Nathan Andrew Winters -- Chief Financial Officer

Keith, I think part of its visibility, but I think that is somewhat of an outcome of the uncertainty that we've -- I think everyone has experienced here over the last couple of months. So, if you look at our full year guide of 3% to 7% and over 6% on an organic basis. Obviously, that FX has become a significant headwind to sales growth since our last business update in terms of the strength of the U.S. dollar and it's been fairly volatile even over the last coming weeks.

So that FX headwind increases through the year as we roll over the hedges we've had in place, particularly in the first half of the year. And as Bill mentioned, while demand has stabilized, again, there's the -- we have the wider range reflects that higher uncertainty. So again, it's not -- we're not predicting a falloff from a trade war nor an acceleration, as Bill mentioned, from the refresh cycle. But we think outside of Q1, steady mid-single-digit organic growth for the balance of the year is appropriate, again, given the visibility and the uncertainty around the macro economy today.

Keith Housum -- Analyst

Got it. Appreciate it. And then just trying to understand the trends in the overall industry. And we're seeing more and more of your devices, I guess, we reach more toward the consumer end of the market.

Can you talk about how like your average sales price has evolved over the past several years? And where should we think about where it's going in the future?

Bill Burns -- Chief Executive Officer

Yes. I would say that, Keith, I'd say that there hasn't been a lot of change in ASP over the time frame. There's -- I would say that we've tiered the portfolio across mobile computing, scanning, printing to really protect the ASPs at the high end. So, if you want to buy a value to your device at the lower end of the market, I have that for you.

Because in the past, I would -- if I didn't have that device, I'd have to bring my mid-tier pricing to go compete at the low end of the market. So, gearing in the portfolio of kind of premium, mid-end value tier has really helped us kind of protect ASPs. I think that we continue to look at opportunities for mobile computing that drive the device in the hands of more associates. That clearly is a theme we've talked about for the last four years and but we are seeing it more.

We're seeing it in mobile computing and we're seeing it in tablet. I mentioned it kind of before, and let's use manufacturing example. The move from fixed screens to control production to tablets is a real opportunity. The idea that AI and ultimately, the idea of having an assistant, a digital assistant, the idea of communication and collaboration, the idea of task management.

More and more enterprises are realizing, but not having connectivity to the frontline worker, it's very difficult to communicate to them. Think of even a big box retailer. The only way for a manager to meet with everybody is to get them all in the break room and have a conversation. If you have no communication collaboration vehicle throughout the store.

So, I think that we'll see in mobile computing ASPs are what they are hearing the portfolio helps. But I think there's an opportunity here to put the device in the hands of more associates. We've got new devices out to go do that. So, some of our new devices are, instead of scan engine-based, they're camera based, but they have RFID technology on them.

That's another opportunity for us. So, I think we feel good about the price points we're selling mobile computing, but we're more excited about generating more demand with devices in the hands of more workers.

Keith Housum -- Analyst

Great. Thank you.

Operator

The next question, Guy Hardwick with Freedom Capital Markets. Please go ahead.

Guy Hardwick -- Analyst

Good morning. Bill, I just want to follow up on that last point. Those were throughout the NRF show in January, smoother companion demonstration I know you mentioned earlier that you saw the opportunity as premium hardware sales and SaaS revenues. But maybe could you talk maybe what you think the business model could look like for Zebra companion three to four years out? Mix you say, hardware sales versus what percentage of that could be in terms of recurring revenues in either the Zebra companion itself or, as you mentioned, some of the other software products.

Bill Burns -- Chief Executive Officer

Yes. I mean I think it's still early in the launch to kind of predict where all the revenues come from. We've got a lot about multiple areas to generate additional either volume of business or us to win more or others. So, I'll give you a couple of examples, maybe there and then we can go further.

But I think clearly, monetizing the premium device hardware working closely with Qualcomm and Google and to make sure that we've got devices that will support AI for our customers, not only in the cloud but on the device itself, which could drive ultimately premium hardware revenue and margin. Market share gains. We continue to lead in the innovation front, and we believe we'll do that here with AI as well with our AI suite as well as our own companions but also working with our partners. So anytime I can drive additional value to my end customer, either with our own software or third-party software and make it easy for our customers to either write the software or third-party vendors or Zebra that's an opportunity for me to gain share.

Higher recurring revenues come really from things like our agents. The idea that Zebra is going to create AI agents on top of this AI suite allows our customers to leverage our portfolio of software, including adding AI capabilities to our work cloud suite that we talked about at NRF around the modern store. So, there's opportunities for recurring revenue there as well. So, I think both in our software business as well as these agents.

So, I think overall, we're still working through what those projections look like. They're not near-term revenue, but they certainly are critical to our future, and we believe we're on the forefront of this. We feel really good about where we're at. And the business model represents lots of different opportunities to drive increased revenue and increased profit.

Guy Hardwick -- Analyst

Thanks. Just as a quick follow-up. I'm just wondering whether you saw any prebuy activity in Q4 or early Q1 and getting ahead of tariffs by customers?

Bill Burns -- Chief Executive Officer

No, not really. We've seen some customers -- we've seen larger retail orders with year-end spending, but not really driven by tariffs. So, I would say really no.

Guy Hardwick -- Analyst

Thank you.

Operator

The next question comes from Brad Hewitt with Wolfe Research. Please go ahead.

Brad Hewitt -- Wolfe Research -- Analyst

Good morning. Thanks for taking my question. So it appears that you're embedding about 30% organic incremental margins in 2025. I know the long-term framework is 30% incrementals or better.

But I would have thought the incrementals could have been a bit stronger in the early stages of volume recovery. So, can you just walk through the puts and takes for 2025 on the margin side of things?

Nathan Andrew Winters -- Chief Financial Officer

Yes, Brad, I think probably the first one I would point to is with the guide, including $20 million of profit headwind from the incremental tariffs. And again, that's predominantly in the first half of the year. So peaking in Q2, then we'd see a pretty substantial sequential improvement from Q2 to Q3 and then fully mitigated into Q4. So obviously, if you remove that, you'd have, I think, probably a different -- you come to a different conclusion around the sequential improvement.

So, I think that's one to consider. And again, where we've been focused, at least on what's been announced to date, ensuring we mitigate those as soon as possible so that we can again exit the year, end the year and exit the year fully recouped and get those back as we head into 2026. So, I think that's probably the first and most important dynamic from -- on the margin standpoint. And if you look from the full year EBITDA guide of 21 to 22 obviously, the higher end of the range would reflect removing those tariffs and get back to where we would expect full profitability to be on a stand-alone basis or a pre-tariff or at least pre incremental tariff basis.

And that's where you really see the volume leverage, along with about 0.5 point of FX headwind as we mentioned earlier. So, I think those are some of the puts and takes.

Brad Hewitt -- Wolfe Research -- Analyst

That's helpful. And then it looks like your gross margin on the services and software side of the business stepped down sequentially, and there's been a bit of a downtrend since the start of 2024. So, can you just talk about what's going on there and how you think about the services and software gross margin going into 2025?

Nathan Andrew Winters -- Chief Financial Officer

Yes. So Q4 was down a bit -- some of that was just timing. We had a pretty high demand from a repair volume. Part of that was internally driven just as we recoup some of the supply chain on some of those component parts and being able to get the repairs complete into Q4.

And I still expect both that service and software line to be accretive and drive margin expansion. And as we've said before, just not to the same degree we've seen over the last five years. I mean the team has done an incredible job on both of the portfolio service and software, expanding margins over the last three to four years to get us to where we are today. And I'd still expect margin expansion, but just not to the same degree we've seen over the last four years.

Brad Hewitt -- Wolfe Research -- Analyst

All right. Thanks, Nathan.

Operator

The next question comes from Alyssa Shreves with Barclays. Please go ahead.

Alyssa Shreves -- Barclays -- Analyst

Good morning. Just a quick question. On the -- you guys noticed that there was strength in healthcare in Q4. Just thinking about moving into 2025.

I know healthcare is the smallest vertical but it was pretty strong all last year. How should we kind of think about that moving into 2025? Is this a vertical where we should see continued kind of outsized strength? Thank you.

Bill Burns -- Chief Executive Officer

Yes. I would say that in Q4, we saw a broad-based demand across all the vertical markets. But as we commented, we feel good about where we're at in healthcare. We've got a portfolio of product specific to healthcare.

Prior to the pandemic, healthcare was our fastest-growing vertical for some time, and it's reemerged to that in Q2, Q3, and Q4 in 2024, and we would see that continuing into 2025. I would say the improved productivity that healthcare workers get and providers get from the use of devices. I would say the opportunities exist in clinical mobility, it's in home healthcare, patient engagement, virtual care. So, I think all of that bodes well for our portfolio of solutions.

We have the HIMSS show coming up, which is the largest trade show in healthcare that we're excited about. We talked about the retail show, but we're at that show in the next coming weeks, and we'll spend more time with our customers there. But I think the healthcare team, our sales team has done a great job, and I think that we've got a great portfolio of products and solutions in healthcare. So, I see continued strength there, yes.

Alyssa Shreves -- Barclays -- Analyst

Great. Thank you.

Operator

The next question comes from Jim Ricchiuti with Needham & Company. Please go ahead.

Chris Grenga -- Needham and Company -- Analyst

This is Chris Grenga on for Jim. Just a couple of quick ones. Do you anticipate the feature set for companion being exclusive to the customer that was showcased NRF for any period of time. And could you talk about potentially the opportunity for these types of features to be expanded beyond a retail setting into the manufacturing and perhaps transportation and logistics verticals.

Thank you.

Bill Burns -- Chief Executive Officer

Yes. So I think no, it's not exclusive to any one customer. It's a solution, and it's in two ways. One is that our AI suite for mobile computing allows our independent software vendors and our partners to be able to leverage AI on our devices for their own applications.

So that way they can broaden it, whether it's our customers specifically and in the case of the customer that presented with us at NRF or it's independent software vendors building on top of the devices, and then we're going to build agents on our own as well from that perspective. So, both, nothing there. What was the second part of the question?

Nathan Andrew Winters -- Chief Financial Officer

I can jump in on -- sorry. On the AI campaign being used in other verticals, one good example is we're using it within our own distribution center from a knowledge management, think of, again, language transfer being able to translate documents and standard operating procedures into different languages to support the workforce to, again, same thing that they're trying to do in retail, which is how do you quickly train new frontline workers to get up to speed as quickly as possible, and we're using that functionality in our own distribution center. So yes, I'd say different parts of the functionality are absolutely applicable to other vertical markets.

Bill Burns -- Chief Executive Officer

Yes, the idea is what you train the model on. So ultimately, it would be standard operating procedures within as Nate said, a warehouse or picking environment. It could be standard operating procedures inside manufacturing. So those are all opportunities to leverage the base software and it's all about training the model for your specific applications.

Chris Grenga -- Needham and Company -- Analyst

Thank you very much.

Operator

Our last question comes from Rob Jamieson with Cowen and Company. Please go ahead.

Rob Jamieson -- TD Cowen -- Analyst

Thanks for taking my questions. Just the first one, I know you've given a lot of color and appreciate it around the full year guidance. But I just want to make sure I have this right. So basically, have you seen really any indication delays or pushouts just more of a kind of hesitance from your customers? And maybe just taking it a little bit longer to understand the ramifications of the tariffs and everything.

I guess, in a normal year, when would you expect to get a bit more visibility then if some of this policy does come through and we get some clarity from the Trump administration, would you expect to see a little bit more of an understanding of how the rest of the year might play out? And when might that happen like would that be later this quarter and the second quarter?

Bill Burns -- Chief Executive Officer

Yes. I would say that there's always customers budgets and visibility. I would say typically, by this time, we'd have more conviction by our customers that are projects that are going to move ahead with. And I think it's just this visibility and uncertainty out there across the environment.

There's no specific date. Customers are all different. The retail customers now are still wrapping up their year, right, as we're continuing to ship in Q1 here to finalize last year's budgets from their perspective. Other T&L customers have budgets year-end.

So, it's -- or sorry, mid-year. So it differs by customer. I think that the lack of visibility is really driven by this uncertainty. And as you said, if there becomes more clarity, around trade and what's going to happen from a policy perspective.

But even yesterday and today, there were discussions of reciprocal tariffs in other countries. So, this uncertainty is not helping because our customers are focused as we are on things like, what happens if and how do I go mitigate tariffs and others as opposed to finalizing projects specifically with us. So, you're right. We haven't seen anything can be moved out or customers delaying things yet.

We just don't have the visibility we'd normally have at this point in time. FX certainly is a headwind on the growth that's real today. The China tariffs are real today. But for the Mexico tariffs go away, that's why we try to characterize it, about 50% of what Nate talked about is Mexico 50% China, if it does go away.

So, more clarity certainly would help and give our customers more confidence in their year and then give us more clarity. So, the problem is, even as of yesterday and today, there's less clarity than more on tariffs.

Rob Jamieson -- TD Cowen -- Analyst

Thank you for that. And then just one last one. Just on the Photoneo acquisition. I know you said it's not included in your full-year guidance.

Is there anything you can give us in the way of potential expectations from revenue profitability for full year as that acquisition gets completed?

Nathan Andrew Winters -- Chief Financial Officer

Yes. And obviously, based on the purchase price, it's relatively small relative to the total portfolio, but assuming closing later this quarter, it would be around 30 bps of incremental revenue for the year. So again, we include that in our guide as we move into second quarter once the deal is closed.

Rob Jamieson -- TD Cowen -- Analyst

All right. Thank you.

Operator

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

Bill Burns -- Chief Executive Officer

Yes, I'd like to thank our employees and partners for their support as we continue to work together to solve our customers' biggest challenges. Our relentless focus on innovation will continue to transform our customer workflows. We feel good about our business. Have a great day, everyone.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Michael Steele -- Vice President, Investor Relations

Bill Burns -- Chief Executive Officer

Nathan Andrew Winters -- Chief Financial Officer

Mike Steele -- Vice President, Investor Relations

Unknown speaker -- -- Analyst

Nathan Winters -- Chief Financial Officer

Tommy Moll -- Analyst

Joseph Giordano -- Analyst

Joe Giordano -- Analyst

Piyush Avasthy -- Analyst

Brian Drab -- Analyst

Meta Marshall -- Analyst

Keith Housum -- Analyst

Guy Hardwick -- Analyst

Brad Hewitt -- Wolfe Research -- Analyst

Alyssa Shreves -- Barclays -- Analyst

Chris Grenga -- Needham and Company -- Analyst

Rob Jamieson -- TD Cowen -- Analyst

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