All right, good afternoon, everyone. I'm Tommy Moll, analyst here at Stephens. We appreciate your interest in our conference, and specifically for the next 45 minutes, for your interest in Zebra Technologies. I'm delighted to be joined by Nathan Winters, the company's CFO, who's sitting to my right on stage today. Nathan, thank you for your time to travel here and meet with our investor clients. We all appreciate it.
Yeah, thanks. It's great to be here.
So I have a list of questions drawn up targeting both a generalist and a specialist investor audience. Nathan, as you remember, we often have both types of investors here. So I want to start with some of the higher-level questions for folks that may have seen your ticker, know a thing or two about the company, but need to just be level set at the outset on what you do. So first point I want to highlight is on the Enterprise Asset Intelligence strategy. What does this reference? What's the history here? And maybe just to give a couple tangible examples, pick one or two in retail or logistics, please.
Yeah, so if you look at our company, we really empower companies to thrive in an on-demand economy. And so our vision is having every asset or worker at the edge or at the front line connected, visible, and optimally utilized. And the other way to think about it is our solutions are really foundational to intelligent operations. So what does that mean? We empower enterprises to be able to collaborate, communicate across their frontline employees, have visibility to their inventory so they can optimize where and how they use their inventory, and really help them provide better outcomes to their patients, consumers, and customers. So that's really how we think about the vision, is automating workflows across our customers' environments. And we like to say our solutions are hidden in plain sight.
You'll see or use our products, whether you're using a scanner for checkout, a mobile computer, maybe when you're asking for support in a retail environment, or when a package is delivered to your front door and you get the notification that it's been arrived. That's driven through our products. Or if you check into a hospital and get a wristband printed so that they can provide that better patient experience through the journey. Again, all throughout various parts, you'll feel our products, even though you may not realize the impact.
And if you unpack some of the growth potential, Nathan, you've talked about a served market, CAGR, in the 5%-7% range long-term, but there's different buckets there with your core business. That's the slower-growing piece. And then some adjacent and expansion markets that grow faster, a lot of times with higher margins. So maybe just walk us through first, starting with core and then upward from there.
Yeah, so we serve a $30 billion market across those various aspects, which I'll talk to. And I think what underpins each one of those markets, which brings them together, is the growth in the on-demand economy, the need for increased visibility and mobility across the enterprise, cloud, mobile computing, automation, again, are all tailwinds, secular tailwinds across each one of the markets we serve. And as Tommy mentioned, you break the business up into three components. Our core business, so this is mobile computing, printing, scanning, kind of the legacy products in the portfolio, where we are the market leader in each one of those categories, but still makes up a little- less than 80% or a little- over 80% of the company today, but still significant opportunities to grow, even in the market share.
So, we look at regions like Japan, where we have lower than our fair share of market share, or areas like manufacturing. So again, both areas where we're continuing to invest to continue to penetrate the market. And then we talk about our adjacent markets. So, I think close to the core, ruggedized tablets is a great example of that, our supplies business, RFID, which I know we'll talk a little bit later. So again, markets that are very closely aligned to our core business, but a higher growth rate across those markets. Typically, we have a lower share position. So again, where we think we can have an outsized growth over the horizon. And then our emerging businesses, which today represents mid-single digits in terms of the overall, but this consists of areas where we've invested organically and inorganically over the last five years.
So I think machine vision, software, as well as robotic automation. So again, all areas of the portfolio that we've invested in over the last five years that we think we can continue to grow with those markets as they both have inherently higher growth rates, but also, I think, longer-term potential. And it's that mix across the portfolio that we bring to our customers that allows us to grow that 5%-7% over a cycle.
So if we look back over the past one to two years, Nathan, a lot of the themes that have come up regularly have really been driven by the industry conditions where you first had this big destocking headwind where your channel was reducing days on hand. Associated with that, you had your own internal cost-out program that you've largely executed by now. And all of this has been discussed many times, likely don't need to rehash here. So my question is really, behind some of those big initiatives visible to the public, what are some of the internal initiatives that have been going on, more aimed at positioning yourself for the next opportunity to really drive growth in the business?
Yeah, I think you throw on top of that, we also had our CEO transition just a couple of years ago. And I think one of the benefits of Bill being within the company and internal successor is really keeping the company focused on the strategy and the vision. And I think that's allowed us to stay focused as we worked through the market reset, that we didn't have too many balls in the air of resetting a strategy vision while resetting our cost structure and getting back to growth. And I think Bill's kept us focused on keeping the customer and our partners at the center of what we do, being really focused around, can we drive profitable growth? How do we drive profitable growth around each one of our product categories and continue to make sure we have the right talent in the organization for the long term?
So I think as you peel back and look at some of the cost actions we took, things like an early retirement plan, which we've really never done in the history of the company. Again, great opportunity to not only reset the cost structure, but allow new leaders to step up within the organization. We've had some changeover in the leadership team, which again, I think was great to see all from internal successors, both our Chief Product and Solutions Officer as well as our Chief Revenue Officer. I think that continuity has really helped us kind of weather the storm over the last year and a half and now come out of it, I believe, in a stronger position as the markets improve going into next year.
So that leads us to this year's Innovation Day, which was in May. Seems like an eternity ago, but really wasn't that long ago. One of the themes you emphasized there was your research and development budget, which is rather sizable. It's about 10% of revenue, which equates to more than $500 million of annual spend. So what are some of the hallmarks of your R&D strategy? And if you think about how you allocate those dollars versus, say, some of your competitors, what are some of the distinguishing characteristics at Zebra?
Yeah, I think it stayed around 10% of sales, but that's not something we target. It's not like if we go into a planning cycle and say, "Okay, here's revenues plan, R&D, your budget's X." I mean, it's really based on what's the priorities? Do we have a pipeline of opportunities? Does the money go into the right place that are there or go to market from an allocation? I think a couple of ways we think about it. One, if you look at the spend, about two-thirds of the R&D spend is around, call it near horizon. So how do you refresh the portfolio, upgrades to the portfolio? What's the next evolution of the current product set? The other third is on, you call it future horizon, things like this allowed us to enter into the machine vision space several years ago.
We just recently announced a new product introduction from a new kiosk application. This is where a lot of the dollars are being spent from a machine vision perspective, building out our software capabilities. So I think that mix in the portfolio allows us to, again, keep the portfolio fresh, allow us to maintain our market share and presence today, but also place those future bets for what's the next evolution. The other thing is 80% of the spend, or 80% of our engineers are software engineers. So I think a lot of people think of our products as hardware, the rugged nature of the product, but really the differentiator is in the software.
If you think our mobile computers, obviously they're built to last over time, but again, the differentiation is the underlying software, the security, the upgrades, the ability to interoperate with various operating platforms is really the differentiator in the product, and I think the other one, which has been a real asset, is our venture portfolio. Today we have 13 companies, about $100 million in book value, and we target, what I like to say to investors is we don't place any bet that hopefully anyone would really notice if it fails, as venture investments sometimes do, which also means on the flip side, if you hit a unicorn, we're not going to, it's not going to change the trajectory of the company in either direction.
But what it allows us to do is get early insights into new technologies, whether that's today robotic automation, vision technologies, and those types of things, is where we have those dollars placed. So it's small bets. We get advisory board seat. We tend to try to do something from a partnership with those venture companies. And I think it's that mix that allows us to kind of continue to focus on here in the short term, but also what's the future roadmap for the company.
So continuing to scroll forward here in the timeline, Nathan, let's go to last quarter and the update you gave us on demand. Some of the phrases from earnings include continued momentum, broadened recovery. At the same time, the discussion around what you call the larger deal or large deal business indicated that your visibility there is still rather limited. So I think it's safe to say you're partway through this recovery cycle, but give us a little more context on where we sit today.
Yeah, again, I think you see it through the kind of guidance we provided throughout the year, which is steady, consistent improvement. And we're seeing that across each one of the vertical markets, started with North America retail, momentum in healthcare through the middle part of the year. And now I'd see across each of our stability and sequential improvement, which has been great to see. And then the other thing we were really looking out for is, will our particularly retail customers in North America and Europe, what would they do with their year-end? Would they typically have budget to spend as they get visibility to the shopping season and how that's playing out? And I think back in July, that was tough to call.
But what we saw through September and October was customers moving forward with projects of various sizes that had been in the hopper, kind of been on the back burner, but now moving forward that they had more confidence in their business exiting the year and wanting to push those projects forward, so I think that was great to see kind of that normalized kind of sequential improvement that we typically get as we go into year-end. Now, what I would say when you look at visibility, and so the way I think about visibility, it's we have visibility to projects, meaning we have two, three-year timelines with our most strategic customers of their technology roadmap. How does that look with our roadmap and melding those two together? I'd say it's, but commitment to that is very different, right?
So it's, we can see some of the large deals that are coming through here in the fourth quarter. We're still up in the air as late as October, and it was kind of late September, early October. They said, "Hey, we have the budget. We want to move forward, but we need the product by December 15th," and you go, right? And so it's that commitment and laying out the timeline of when they want to do the rollout. So that's really what we're looking for in terms of that level of visibility around the budgets and the commitment to a project. It's not all of a sudden these things just come out of the air. So it's in the pipeline, but it's just having that confidence that they're going to move forward.
And fortunately, we've seen that continue to improve here through the end of the year. And look, I think we'll see maybe a similar trend as we go into next year, which is probably cautiousness out of the gate, seeing how the year plays out, and then hopefully as the year progresses, as they build confidence in their full year moving forward with some of those additional projects in the pipeline.
So now we'll scroll it forward into the future a bit here, Nathan, and I want to ask about what, if any, impact you see from the recent elections in the U.S. So it's really a two-part question. First, what do you see as the biggest potential impact on your business? And then second part, if you think about potential impacts on some of your customers' businesses, what comes to mind there?
Yeah, I guess it's easy to say that in the short term, just having the election complete with a winner was a net positive here in the short term, right? So that we can all just get on with business and execute what we need to through the end of the year. And I think it was more of a probably risk if it had dragged on and become a distraction. So I think that's the net positive is that we can move on and execute what we need to here to close out the year. And I think that speaks for us as well as our customers. And you're seeing that now with some of the more recent earnings announcements, even today, of holiday spend, looking positive.
So that, again, that's a net positive for us in terms of having dollars available in their budgets here as they exit the year. I think as you look forward into 2025, there's still just as many uncertainties in terms of what will any policy implications have on the business. Put on top of that, what's still lingering, whether that's inflation, interest rates, the geopolitical situation. So those haven't gone away, but at least one of those uncertainties that was there maybe a month ago has dissipated. And again, I think that allows us all here to focus on closing out the year strong.
You didn't mention tariffs, Nathan, which I want to make sure we cover today. Can you give us a rough fraction of your cost of goods that are tied to China? And then if a new tariff regime were imposed early next year, how quickly can you react in terms of finding alternative sources or potentially raising prices to pass through some of the increased cost?
Yeah, so if you look back in 2019, when the first tariff increases, we moved a significant portion of our North American volume out of China, but not all, for a variety of reasons. One, we really look at this on a product-by-product ROI. So is there an alternative manufacturing site? What's the volume? What's the cost to transfer? And then ultimately we raised prices where those were not alternatives for that. And then not all of our products were impacted back in 2019. So again, I think as we sit here today, most is not from China, but we still have some work to do if there is any new tariffs enacted here. And if you look back, it took us about 18 months from the time tariffs were announced to fully mitigating the P&L impact, 12 months from the time it was actually implemented.
We have a whole team working on scenarios, action plans. I think we're in a better position today from a global supply chain. Obviously, supply chains have been built out around Southeast Asia. There's more, I think, options in terms of where to go for certain product lines. Then we'll ultimately have to raise prices if it doesn't make economic sense, raise prices. Those take contractually 45 days to work through our distribution channel. Once we decide to raise prices, it's 45 days to contractually work through the channel. The only thing I would say is, we try to keep this in mind with the team, if I go back to 2019, what was originally proposed changed dramatically from what was finally implemented in terms of the specific products included, the rate, the timing.
And now if you look at are there other countries potentially involved, all those have to fall into the equation. So right now we're building it, but also don't want to jump ahead too far and get too far ahead of our skis until we know where the puck's going to land.
I have a couple of themes I want to unpack on retail and e-commerce. But before I launch into that discussion, just to flag for the audience, if you have a question you'd like to ask directly, once I get through these next couple of topics, we'll have plenty of time left. So please feel free to put up a hand and ask your question if you like. But Nathan, on omnichannel retail and e-commerce, the first theme I want to unpack is just what this industry recovery cycle looks like. If you go back to 2021, 2022, some of the big players here started slowing their spend pretty dramatically.
During the most recent earnings, so third quarter earnings from this year, your CEO, Bill Burns, indicated that there have been some signs of absorption by some of the key end users here of that excess capacity that was built years prior. So are there any anecdotes you can share to corroborate that comment he made on the absorption point just in terms of planning discussions, commitment levels, whatever else you're seeing to suggest that that's where we now sit in this recovery cycle?
Yeah, one thing we look at, if you think of, pick on mobile computing, for a large customer who has a significant installed base of our mobile computers, every quarter they're buying new incremental units, whether that's add-on, new use cases, new functionality, or just add-on and new people. And if you have such a large installed base, you're just going to have some churn of loss, damage beyond repair that you're kind of consistently refreshing. So when we talked about absorbing capacity, those customers stopped buying, many of them just stopped buying altogether through most of last year and the early part of this year. And so now you see those customers coming back buying a few thousand here and there, right? And so that says, hey, they've worked through whatever capacity they had.
Now they're back to maybe a little bit more of a normal maintenance cycle, if you will, within their installed base. But what you're not seeing is moving forward with a large refresh of whether it's a storefront, back of store. And then the other thing just to unpack is if we think about a retailer, it's not just kind of ubiquitous products across front of store is different than back of store, different than maybe what they have in a local regional warehouse, different than their national warehouse, then their logistics operations. So you could be refreshing different parts of that portfolio with different technologies at any given time. So those are some of the signs we're looking at from what we see coming through from a sales and revenue perspective. And then there's the conversations with the customers on, okay, where are we at?
If they move forward with the refresh, what's that product look like, and those conversations have been ongoing, even going back into last year, and again, I think it's now just trying to mirror up when are they ready to move forward, when do they have confidence in their budget with all the other things they're trying to prioritize to move forward with those projects, and again, the good news is we started to see a few here in the fourth quarter, and hopefully we see that continue as we go into 2025.
Second theme I want to unpack here, Nathan, is what I'll call the arms race, where if you look across this landscape of end users, all the major public players, communications center around continually improving customer experience. A lot of that basically means getting product delivered more quickly and efficiently to customers, which is nearly entirely underwritten by more technology investment. Now, that doesn't speak exclusively to your portfolio, obviously. However, you serve all the marquee players in these industries. So if you focus on some of the large, more high-profile examples here, where does it feel like we sit on the adoption curve in terms of automation technology?
Yeah, so maybe the first part of that, and I think, look, I think that's what's exciting. We talk about what's the underlying trends across our market, that as they need to automate, digitize, improve that experience, our technology helps across every one of those aspects. And I think the other aspect is we support the industry leaders across each one of those vertical markets. We're working side by side on solving those challenges that they have. We're essential to their operations. And again, I look at it more of a, it's a football, it's a moving goalpost, right?
And so I think, and we just want to make sure we're at the forefront of driving that innovation, whether that be how do you embed RFID across your operation today, how do you leverage machine vision in different workflows, how do you use generative AI as we move into the future, and each one of those technologies and others we're having with those kind of the thought leaders across each one of the industries. So I think that's what makes us excited about the long-term opportunity. And so, if you look, then every customer is at a different spectrum, right? So it's from, we were talking to one recently about a large warehouse operator that is barely trying to adopt barcode scanning, right?
And this is not a small operation of very basic to kind of the technology leaders in retail thinking about how they use Generative AI, right? So it's just such a large spectrum of where our customers are at. And again, I think what makes us unique is we can offer and talk about from the most basic automation to the most advanced automation, depending on where they're at in that journey.
So I'll pivot now to a discussion on expenses and margins. I want to start on gross margins. So in your EVM segment, year to date, you're in the high 40s, right around 49%, which is up on my math about 300 basis points year over year and sets a high watermark for the company. So specifically around that segment, what are some of the drivers that have enabled that gross margin expansion, and are they sustainable?
They are, so I think, look, I think one thing that's benefited us in the third quarter in particular is, now that we're complete with the restructuring actions, volume had returned to a reasonable level and really with the lack of large deals. So think about a large deal for us as a deal over $1 million. In general, they may be 10-15 points lower margin than kind of our run rate business. Still EBITDA accretive, so I think a headwind would be, as large deals recover, we would have some pressure in gross margins, particularly in EVM, but if you look back, if you look back to 2021 and 2022, we're in kind of peak volume. We also at that time had, and this is the reason we disclosed it, two-three points of gross margin pressure from premium supply chain costs.
So, freight. Higher freight. We were airshipping our printers, which is not economically not something you want to do long term. We were having to go on the spot market and pay extraordinary prices just to find components. And unfortunately, as those dissipated and we offset it, so did the volume decline. Now that I think what you're seeing now is as volume recover without the overhang of the premium supply chain costs, if I went back at an EBITDA rate, and we said this in 2021 and 2022 when we were in the 22%-23% EBITDA range, there was no reason we shouldn't have been at 24%-25% if you had removed those incremental freight costs. Look, I think as we go into next year and from a gross margin perspective, clearly we'll have a little bit of pressure from as large deals recover.
But I think one of the real value propositions for the company is our variable cost structure allows us only about 20% of our cost of goods is fixed. So think of our distribution center, our repair depots. And as we grow, that's 100% leverage on that fixed cost. And so I think as we grow, we think we have the right cost structure in place to continue to expand margins. And there'll be puts and takes as large deals come back into the fold. But I think net net, we think of it as incremental opportunities.
Maybe just to clarify for my benefit, if not anyone else, is just the comment you made there on the large deals, Nathan. So from a gross margin percentage standpoint, stands to reason that larger deals come in at a lower rate. You made a comment though from an EBITDA percentage standpoint, how do large deals compare versus the corporate average, say in that context?
I'd say it's if you think about on average, we think about incrementals in our business, and this goes back kind of the test of time that every incremental dollar of revenue comes at about 30% EBITDA rate. So I think that's kind of a fair way to not to say that's the large deal margin, but I think in aggregate, if you think about our total cost structure, when we get to normal growth, I mean, 30% growth kind of or decline creates craziness in that equation. But in a normal demand environment, 30% incrementals has kind of run the test, and there's no reason to think that's any different going forward.
Fair enough. Let's move on to the restructuring program. Mid-year, you completed this, if memory serves, and it was about a $120 million annualized expense that you reduced. Can you just run us through again some of the main elements here? And then if we think about the timing of when all of this was phased in, does incremental benefit show up next year in 2025 just because you get a full year's benefit at the new cost base?
Yeah, so out of the $120 million, we recognize about $50 million of that in 2023, an incremental $60 million here year to date or through the third quarter. So there's really about an incremental $10 million of benefit from kind of the current run rate that we'll get here in the fourth quarter and into next year, really in gross profit as we've consolidated two distribution centers in North America back to one. So really the incremental $10 million is predominantly in gross profit. And if you look at the program, I would say it was fairly broad-based. Given the decline was broad-based, I would say no function or group was immune to the decline to some restructuring. We also reduced our real estate footprint, targeted a few specific projects throughout the company just to make sure we right-size those investments.
But the other is that was a net saving. So embedded in that, we increased our investment in areas like Japan, machine vision, and manufacturing because we believed all those were areas that as the market recovers, as we go into next year, can drive outsized growth. So we wanted to ensure that we weren't just reducing, but also reallocating to areas that we thought had future potential for accelerated growth.
So that leads right to my next question, Nathan, which is focusing specifically on your operating expense, where there clearly have been some offsets to the costs that you've taken out. And bear with me here for some of these numbers, but on a year-to-date basis, if we just sum up your three biggest expense lines there, selling and marketing, research and development, G&A, it's somewhere in the range of 31%-32% of your revenue. By historic standards, that's fairly high, one of the highest marks since you integrated the Motorola acquisition a number of years back. So just help us reconcile this OpEx as a % of revenue, which looks fairly high by historic standards with some of the more recent messaging where, as we just unpacked, you have actually taken a significant number of dollars in cost out.
I think one of the things we really focused on when we did the restructuring actions is one of our kind of pillars is make sure there's no-regret decisions and that we protected investments in areas where we believe the company would continue to grow, and so what I mean by that, a simple example is, and we've had these dialogues where you have a seller whose accounts, let's say we're buying nothing, the handful of accounts they support had very limited sales in 2023, and you'd say, should we eliminate that role, well, if those are long-standing customers with an installed base that we knew would return, what we didn't want to do is let go of that seller just to turn right back around six months, one year later as they begin buying to rehire a role and possibly lose those relationships.
So I think we thought about not just cutting to whatever the base revenue was this year, but what's a sustainable cost structure so that as we grow, we have the cost structure to support it and that we're not just rehiring roles that we fired 12, 18 months ago. And if we are hiring, it's in targeted areas of investment. So I think of it as we've set the baseline for here as we grow into next year, the right cost structure that we can scale quickly. And again, where and how we add is more targeted versus just firing groups just to rehire a short time later because we believed at the time and it's played out that we would recover.
As that played out, I think we're thankful the decision we made not to cut too deep and put us in this position where we jeopardize our market share and leadership position.
So I want to pivot a little bit and talk about some of the end markets that we haven't discussed much today. Manufacturing is one you mentioned earlier, Nathan, where it's a situation where there is a market share opportunity for you there. So maybe just give us a little context on Zebra's history in that vertical. And then also if you just think about the end market itself, how good a predictor is PMI for your 6 to 12 months opportunities there?
Just on that last one, I think PMI we do look at as a how we think about maybe planning for next year as an indicator, but very limited kind of direct correlation of, oh, it was a good PMI report, we had a good quarter. So I'd say it's a, but we do look at it for sure as we think about planning and where to budget, but it's an interesting indicator, but not a direct correlation to how good a quarter or the next six months might play out. So look, manufacturing today, it's about 20% of the company. We've seen, I'd call it maybe sequential improvement as we move through the year, which was great to see. It's stabilized, but I'd say lacking if you look across our other verticals. So retail leading, healthcare has been strong, then I'd say T&L followed by manufacturing.
And I think it tracks with what you see in the news, and we see it in our business, Germany in terms of contraction around their manufacturing sector. The pullback in EVs was really an opportunity for us to penetrate around automotive and new production lines. As that's pulled back, we've seen that impact in our business. But if you look longer term, it is an area where we have lower market share than we do in retail or in general across the portfolio. But there's clear opportunities if you think about what they need to do, digitize, automate, track and trace through the supply chain. Those are all products that we excel in. I think the real challenge is decisions many times are made plant by plant, operator by operator. And I get it, I've been in big supply chain operations.
The last thing you do if you're running a plant is changing technology for technology's sake, is a lot of risk. And so if it works, there may be something a bit better or maybe a lot better, but there's still a risk anytime you're making those changes. So for us, it's making sure we have the coverage, the relationships at a corporate level with the COEs, the technology COEs across these large manufacturers so that when those opportunities come, whether it's a new production line, a shift in manufacturing, that's when we have a real opportunity to gain share. But it's a different battle than in retail where they typically go, "We want everything to look in the front of the store the same." And you're talking thousands of stores all over a relatively short window.
But the other advantage in manufacturing that's relatively new is now that we have a machine vision portfolio. It's a different way to have a conversation with those customers around how they embed, use machine vision in new use cases. And oh, by the way, while we're there, we can talk about how they can use ruggedized tablets for their production line managers to track production as it goes through. Or if they need to replace a scanner, printer, et cetera. Again, but I think it's elevating the conversation, and machine vision is a great example of opening those doors that we didn't have a couple of years ago.
Healthcare is another market that's been mentioned only briefly. This one I would characterize or really if we just look at your numbers historically, it's high growth rate, but small revenue contribution, relatively speaking. So just give us a sense of some of the factors that limit the adoption rate in that particular market.
Yeah, so healthcare is high single-digit % of the company, so less than 10%. It's the fastest growing vertical market the last two quarters. We do the same thing, automate workflows, digitally connect patients with staff with assets. I think the one, and spending a bit of my career there, the fragmentation of healthcare is somewhat of a barrier to our technology. And I think as the industry consolidates, but more importantly, the operations consolidate, so IT, purchasing, where we can talk things like enterprise device management, security, total cost of ownership versus the alternatives, that's really where I think our value proposition shines versus kind of what they have today. So as the healthcare market consolidates, decision-making comes together, it's just taking a very long time. But those, again, that's where we can really demonstrate our value proposition versus maybe some of the technology they use today.
So, RFID, we need to make sure to hit on before this session concludes here in just five minutes or so. There's not enough time to unpack the whole story here, but it's a question that investors often ask me about and I know they ask you about. So generally speaking, when the topic comes up, the question is something along the lines of, is this a threat to your business? In other words, is increasing adoption of RFID technology in the picking market a threat to Zebra's existing revenue base in that market. So let me just give you an opportunity to answer that question, maybe give some substance as to why.
Yeah. I'd start with what we've always said, which is we're excited about RFID just as much as some of the pure-play RFID players talk about it. And I think it's exciting to see move beyond apparel retail into general merchandising, into grocery, into areas of T&L. And we have a broad set of RFID solutions. So if there are more tags, that means we sell more fixed readers, more mobile readers. We sell the printers, whether that's industrial or mobile printers. Now, we don't produce the chip or the inlay, but we partner with them. If you look into a full RFID solution, you're going to see every probably logo in there in terms of all those kind of different play a different role in terms of the market expansion. So the other thing I'd say is there's nothing wrong with more assets being identified.
And if there's ways to track that asset at different points through the supply chain, that's a net positive for our business. And a lot of the use cases, particularly that you see now, are use cases that could not be done without RFID, meaning a traditional barcode scanner just in terms of being able to quickly see inventory in a given area, tracking that inventory real-time as it exits a store so they know immediately if something's been stolen. That's not a use case you can do with scanning because it was never scanned. So you think about that use case, that is a net new use case, which is a net new use case for more fixed readers around input and output from a storefront. So we think of it as complementary. And there's a place for all these different technologies.
I think the other thing we'd add is even in the worst-case scenario where you look at like a mobile computer. A mobile computer will soon be, and we're rolling these out embedded with RFID. So now if you're a store associate, you can do more close proximities where if you think a traditional application in retail apparel is you can wand and see, do I have all the jean sizes? Do I need to restock whatever extra large jeans? Now you can do that, but at a closer proximity if you were the consumer trying to find that pair. Think of it as literally the RFID reader where you can go and now find it in that stack quickly using RFID embedded on a mobile computer as a net new application that benefits us. The mobile computer does so much more from collaboration, communication, pricing.
I don't know about you all. Anytime I go into a hardware store, you say, "Where is this?" They can look at their mobile computer, tell you exactly where it's at. And oh, by the way, if they had RFID on it, they can tell you if it's definitely there or not. So again, I think it just opens up new use cases and new opportunities that's, again, exciting for the industry.
So, let's finish on M&A. And it's a two-part conversation here, Nathan. First part, just any kind of a quick update you can give us on some of the marquee deals from recent years here. I'm thinking about Fetch, Matrox, and Reflexis.
In five minutes.
Just one bullet each, just quick, and then we'll talk about the go forward.
Sorry, we mentioned machine vision. Again, this was an extension of our scanning business into fixed industrial scanning. The Matrox acquisition we did in June of 2022 really put us at the high end of the market, and look, we're very excited about the market opportunity long term. We knew we bought Matrox. They had a large exposure to semiconductor that we knew was going to go through a cycle, and we're seeing that. It's now stabilized, starting to recover. That's great, but the effort's been all around how do you diversify outside of semiconductor, so new use cases or new logos every quarter. We have 3X the number of proof of concepts in the market, and again, we're really excited and bullish on the machine vision portfolio in total. Software is one, again, combination of organic, inorganic investments.
And now we've relaunched our Workcloud suite of solutions, which really target four key areas: workforce optimization, so do you have the right people working at the right time, enterprise collaboration, so communication across the storefront, tasks at a storefront. Then you look at inventory optimization and demand intelligence. And all partnered, when you can bundle that with a mobile computer, really what it drives is adoption of, if you look, one of the largest opportunities we have, only about 30%-40% of frontline workers are not equipped with technology. Meaning if you go to a storefront, the greeter, they don't have a mobile computer, nor should they, right? It's too much for what they have.
Well, imagine putting a wristband kind of mobile computer where they can say, Lisa's walking in. "Hey, Lisa, what are you looking for?" "Oh, I'm trying to find this." "Oh, I can tell you exactly where it's at." By the way, I can also call up my associate, tell you that they're on the way. So someone's there to meet you. It really elevates that consumer experience. So mirroring the portfolio with the software is what we're really excited about. And then the last one, the smallest portion, the smallest of those emerging businesses is our automation, the robotics automation business. I'd say it's very early days from just how that technology is evolving. You're seeing a lot of, I think, interesting aspects in the broader automation space of those companies who have been kind of early to adopt automation and our solutions, let's say in picking.
You can do a great job automating picking, but then you just create a backlog on packing and shipping. So before you go deploy it at the next site, you got to figure out how that works with packing. And if you can pick, pack, and ship efficiently and automated, you better have the product inbound and on the shelf efficiently. So I think, again, all these technologies around automation are melding together. And again, I think it's an important part of the portfolio, but one that I think has got some years to play out. So that's the big rundown.
Sure. And just to round out the conversation here before we conclude on M&A priorities going forward, what is the level of priority now that the underlying business has started to recover a little bit, may open up the opportunity set?
Yeah, I think it's important to note that last year's priority was return the business to positive free cash flow, get our debt leverage ratios back in order, restructure the capital structure of the company, and we were able to do all those things and then really get our working capital balances in line as we're exiting the year, which puts us in a great position heading into next year to find opportunities, but still being, look, I think as all you would want, selective in an asset that fits the portfolio that makes sense to be part of Zebra that we're not overpaying for and finding the right valuation for the company, so we're being diligent in that, and that's okay. I think we've spent the time now.
There's a lot we can do within our core business with what we have today to drive organic growth, return capital to shareholders with buybacks, and then when an opportunity comes along that makes sense, we now have the capital structure to move forward.
We'll end it there. Nathan, thank you for your time, and thanks to all in the audience for your interest.
Thank you.