Motorola Solutions, Inc. (MSI) Earnings Call Transcript & Summary

Good afternoon, everyone. I am Paul Coster. I cover IT and hardware for JPMorgan. Joined by my teammates, Mark Strouse and Paul Chung, who co-cover with me. And it's the 45th JPMorgan TMC Conference, the second virtual conference. [Operator Instructions] And I'll weave them into the discussion. And the discussion today in this session is with Greg Brown, Chairman and CEO of Motorola Solutions. And good afternoon, Greg.

Good afternoon, Paul, thanks for having me.

You're welcome, and thanks for joining us from what seems to be Chicago, judging by the background.

Yes.

And we're very honored by your appearance. We appreciate you've raised the game for everyone, so thank you for that. And well, perhaps you can also raise the game for every other company out there by telling us what Motorola does.

Sure. So we are not quite 100 years old, but we do mission-critical communications and analytics. And we think of our business through the technology lens of 3 primary technology platforms: land mobile radio products and services, about 13,000 land mobile radio networks around the world. Think of command center software. It's more of a North American-centric strategy, Paul, but think about the 6,500 911 centers in America, where we do ingesting 911 calls as well as dispatch as well as records and evidence management. So we're an end-to-end provider in the command center software business. And the third technology is video security and analytics. We do fixed video. We do mobile video. We -- and mobile video is both in-car dash cam as well as body worn. And those are the 3 technologies that we provide that underpin basically the new Motorola Solutions from where we were several years ago. So we're -- it's a big difference, where historically, if you go back 6, 7, 8 years, we were traditionally, Paul, an LMR product hardware company. And now we do services, fixed and mobile video, analytics, command center software. And we've more than tripled the addressable market to -- in 2021, that addressable market is about $42 billion. That's, by the way, zeroing out China, putting zero on China for everything we do. So it's a very different company, an exciting company, and we're now deriving almost -- we expect to derive just under 50% of the revenues this year from video security, command center software and services. So a very different company than where we were years ago.

Duly noted. So I guess the theme that we're going to keep touching on through this discussion is that this is the inflection point that the company has been promising, that you would pivot from your legacy business to these growthy businesses. And we're at that point right now. So how did you get here? I mean it's been quite remarkable actually. It's not just through acquisitions. It's also been a lot of organic work on it.

Yes. So we -- it's been a great journey. We rightsize -- I mean, as you know, Paul, we exited the cell phone business and all things to do with cellular. We focused the purpose of the company around all things mission critical and workflow in emergency and critical infrastructure communications. We lowered the breakeven from a cost structure standpoint. We got out of the mobile computing business by selling that to Zebra. So we focused on what we want to be. We rightsized the expense structure. More recently with COVID, we made a declaration within ourselves as management and to the Board that we would come out of COVID stronger than we went in from a cash standpoint, from an investment standpoint. And we've, to your point, invested a lot organically, investing in product refresh on land mobile radio P25 technology, land mobile radio TETRA technology, refreshing the fixed video and mobile video product lines through the acquisitions that we made as well as did acquisitions along the way. The other way to think about this journey, Paul, I look at my tenure and I think of it in 3 chapters: stabilize, optimize and catalyze. So when I first got the baton as a battlefield promotion, Carl Icahn was in the stock, we were burning $300 million-plus a quarter. The cell phone business was very sick. This was cell phone, not smartphone. So we made the decision to exit the very business we invented, i.e., the cell phone. That was foundational, and it was fundamental, and it was also absolutely critical. And after that, we -- I worked with Carl Icahn. We worked with ValueAct through the stabilize and optimize phase. And then about 6 years ago, Silver Lake came in, both with a $1 billion pipe and on the Board. They monetized their first pipe. They re-upped, and they're in their second pipe. So stabilize, optimize and grow. And to your point on the inflection point, now it's about the growth. We've got the installed base. We have the brand. We have the balance sheet. We've got the product line. We have a significantly larger addressable market. And Paul, the other thing, quite frankly, that has worked in our favor is what I would characterize as the anti-Chinese sentiment in all things: public safety, national security and mission-critical communications. So in the States here, there is the National Defense Authorization Act, which names 5 Chinese companies by name: Hytera, Huawei, ZTE, Hikvision and Dahua. So in the U.S. government, they cannot procure product from those 5 companies nor can U.S. federal grant money be used for any product for those companies. We're seeing that sentiment in other certain Western democracies, so that clearly has also been a structural tailwind that I wish I could say I predicted. But I think that's been a circumstance which is beneficial to us here at the company.

Right. And you're pivoting -- and just because you're pivoting to video and services and the command center applications, doesn't mean that what you're pivoting away from is not something you dislike. That's actually still a pretty d*** good franchise, right, in LMR? So it's mature. Talk to us about it. Is it still -- does it still have growth potential? And in what context?

I absolutely think it does. And the land mobile radio networks for public safety as well as critical infrastructure, as you've heard me say, is a need-to-have, not a nice to have for secure, encrypted private communications. So back to the technology characterization, land mobile radio, command center software, video security and analytics with services as a wraparound, Paul, we see the LMR businesses all-in product and services as a solid mid-single-digit grower. But the important thing about land mobile radio, and you said it, Paul, we're not pivoting away from it. We're pivoting to utilize. We're pivoting to higher growth areas to utilize our incumbency, to utilize LMR as an anchor tenant. Because these networks are complex, customized around feature set and workflow. Many of them have maintenance contracts that are 7, 10, 12 and 15 years in duration. So these networks are here for a long, long time. We should also talk about LMR and LTE, FirstNet, Airwave, and we'll come back to that. But these networks are anchor tenants. And what we're doing with the other higher-growth areas is not only to provide a newer area to compete with faster growth with a larger addressable market. But we're doing the kinds of integration or orchestration, if you will, as an example, fixed video security, to have fixed video security and land mobile radio work in tandem through automation, through root cause analysis, through anomaly detection. So we're looking at critical infrastructure around airports, stadiums, hospitals, schools. And if you have a Motorola solution, a fixed video that's monitoring the perimeter, that's monitoring access control and egress, and it's integrated with land mobile radio that's feeding alarms and alerts into a 911 center, you can literally analyze and detect and communicate on breaches or potential crimes without any human intervention. So I'm quite bullish on LMR for predictable earnings and cash flow and the sticky durability of the installed base. And what we see here in the states with LMR and FirstNet, what we see in the U.K. with Airwave and ESN -- and more recently, we just won a large deal with German MOD, which is around LTE complementing LMR. In all 3 of these theaters, Paul, we see a recognition of the criticality and duration of LMR, but also wanting higher-speed LTE, 4G and eventually 5G for complementary video and data to complement and integrate with LMR, not necessarily as substitute, but as complement.

And of course, with the Kodiak platform, you're in a position to bridge those 2 demands, right, in technology?

Exactly. Making that acquisition and the part of push-to-talk integrated with cellular carriers, which is easier said than done, is it has the OSS/BSS integration as well as the leading-edge technology to provide that seamless integration for people that want a push-to-talk solution over a smartphone non...

So is it -- just trying to drill in a little bit further on LMR. It's got -- as you said, generally, the infrastructure sits there. It's robust and durable. It can last decades, I'm guessing. But the service contract's generally 7 to 10 years. What happens at the end of a service contract? What happens when the infrastructure itself gets to the end of life? What's the typical scenario?

So we're always on this "infrastructure." We're always refreshing and adding newer software releases and feature functionality. So whether it's over-the-air programming, spectral efficiency or other enriched features, yes, the infrastructure is there a long time, but the software releases are more current and fresh, which allows us to upsell and monetize and provide service user contracts to continue to expand the feature functionality. So the infrastructure is there, but the performance and feature set isn't necessarily static. And we continue to upsell those customers on the infrastructure side. On the device side, the average -- and again, this is an average, radio device is replaced approximately every 7 years. So more recently, we just came out with the APX NEXT. And back to capitalizing on the LMR installed base, but also taking advantage of LTE, this is a dual-mode radio. So a first responder, he or she is using, in the States P25, if they roam outside of a service coverage area, they immediately go over to LTE without a dropped connection. So we're providing the best of both worlds, and now we're just entering a new refresh cycle for radio subscribers on the P25 technology. And we're also introducing new radio devices on TETRA as well.

So it doesn't sound like you really enter into a dialogue with the customer, which goes along the lines of, we're thinking of getting rid of LMR and going to the cellular system here. It just doesn't happen.

That's not the conversations we're having. So there's, how do I get more out of it? What else can you do? And how can I integrate it potentially or coexist with LTE?

And as you layer in more capabilities and the systems become more digital, I assume it becomes more difficult for the customer to sort of self-support. So that's also driving them towards service contracts, and that's also helping you grow even in the 2 business, right?

Exactly. So think -- I talked about the addressable market, which we characterize at about $42 billion. Think of the -- in 2021, think of the LMR product addressable market as $10 billion. Think of the managed and support services that are LMR-centric, including some cyber, as $12 billion. Then we have the video security marketplace, again, with zero for China at $15 billion. These are 2021 numbers, and then command center software at $5 billion. So we've more than tripled the addressable market. We're growing faster. We're using the durability and the anchor tenant position of LMR, refreshing the radio devices, upgrading the infrastructure, cloud-enabling the portfolio, we haven't talked about that yet either, in a way that's allowing the firm to grow at a faster pace. And I will tell you that clearly, demand has been very strong for this year coming out of COVID, which is why we guided the full year up on top line and on earnings per share even on the first earnings call of the fiscal year.

Okay. So I mean it's causing someone like me to reassess because I was somewhat skeptical about the LMR situation. But I guess the implication is that it's a platform from which other things are now happening. It may not be growing in aggregate from an infrastructure perspective, though even that it's possible, I suppose. But it's really the fact that it gives you this on train to the adjacencies, the command center applications and into the video surveillance and all of the vertical solutions you're starting to build.

Exactly. And I look -- and Paul, I look at push-to-talk over cellular more as a complementary than a substitutionable solution. And when you get into mission critical, whether it's enterprise-critical infrastructure or public safety, NYPD, Chicago PD, they're not looking to replace LMR. In fact, they're investing in it. And they're refreshing radios, and they're looking for updated software to encrypt and they're modernizing the infrastructure. And by the way, the other, obviously, quite favorable circumstance is the recent Biden recovery plan, which makes available $350 billion for state and local governments, $170 billion for schools and $38 billion for airports and transit. That's over $0.5 trillion of stimulus that we could be eligible, our customers are eligible to use. And more importantly, Paul, than the amount is that goes through -- it's differing schedules, but most of it goes through the end of 2024. So as customers think about this critical technology, they think about the integration of it, they now have the available funds to tap. And they can do it over a multiyear period of time. And by the way, even this year, we're still using CARES Act money before you get to that recovery plan. And again, none of this contemplates any potential infrastructure plan if, in fact, they met -- that may get traction.

I know a couple of investors that have been focused on the U.K. Airwave contracts and ESN. And I took another look at it this morning, it's just -- it seems very complicated. But perhaps you can just talk to us about what's happening there? It seems like the new platform is not ready, and that there's every reason for Airwave to stick around for a lot longer yet. But even if it doesn't, you're still a participant in the next paradigm, right?

So I think right now, and I'm not going to speak for the customer, but they have said publicly they want to extend Airwave again. We've gone through one extension. When originally, when we bought it, which was a prepackaged bankruptcy with, I think, 17 creditors from Macquarie, we contemplated the terms and conditions of an extension and the construct around those conditions for those extensions. By contract, that has to be extended by the end of this calendar year, and the customer is already engaged in conversations, deciding how long ultimately they will do that. Again, Airwave has proven to be fantastic. It's -- Paul, it's about 350,000 subscribers -- users, police and fire. And again, this is a network that's been in place that's optimized. It has 99% coverage. So when you think about a network to contemplate replacing an LMR network, the requirements for performance are breathtakingly stringent. Now I know that the U.K. Home Office aspires ESN to do more and more. We support that. We will obviously fuel and work with them closely to enable ESN. But by the customer's own admission, I think Airwave and ESN, much like here in the states, LMR and LTE will coexist for a lot longer. So it would be my anticipation that Airwave gets extended contractually by the end of the year. How long, we'll see, but it is clearly proven to be absolutely mission critical. And when you talk to many of the users, they will tell you that as well.

Right. Got it. Let's move on to video, which I guess was catalyzed by the Avigilon acquisition, which was so was around about 2015, maybe 2016. That was a great success. You have now moved into mobile video as well, as you mentioned, sort of wearable included, police officers now wearing. Can you talk to us about the portfolio? And how you see that evolving? And where and what growth rates?

Sure. So our video business, which we just commented on at the last earnings call. Now if you take video security all-in: fixed video, mobile video, analytics, video software, we now expect it to grow 20% plus this year. We've made 3 different acquisitions in the fixed video market, Avigilon, IndigoVision and Pelco. We will rationalize those investments, but it's about reach, edge device camera refresh, providing a robust VMS, a VMS that's integrated with what we provide. Or we can also have a VMS solution that sells into competitive cameras as well. We acquired a mobile video solution in the form of WatchGuard is the brand here in the States, Edesix or Edasix is the brand in Europe. We just won the French MOI, which was $17 million or $18 million, 30,000-plus body-worn cameras in -- for MOI in France through Edesix. And I think of the mobile video business where the incumbent, the leader there, has traditionally not -- historically not been challenged. We now have a very viable alternative choice for police departments, both domestically here and internationally. We do it in a more affordable way, so lower cost, lower cost of storage, lower cost of ownership. And we will also look to now provide the integration that I talked about across our product portfolio. I think video security is growing by leaps and bounds. I also, as I mentioned earlier, Paul, I think it's further advantaged by many countries and customers concerned about how they want to use Chinese technology. And I think prior to Motorola getting into this business, Hikvision and Dahua, the 2 Chinese providers, #1 and #2, had the most market share of the fixed video market. I think given the concern around national security, our entrance, our organic investment, the more and more we're doing around analytics and integrating this technology back to our incumbent LMR solutions, I think we're in a great -- just a great position. The acquisitions we've made -- back to your inflection point, the pivot point of the -- has been around video security and analytics. I call it video security and access control as well as software. So if I think, Paul, about the acquisitions the company has made in the last 6 years, it's over $4 billion -- we've spent over $4 billion -- or it's $4 billion for a couple of billion in revenue with about 35% EBITDA margins growing at double digits. So quite pleased about those inorganic moves. And we'll always be on the lookout to see if there's other acquisitions that may make sense.

So a couple of questions came in from the audience during that discussion. Can you talk about the access control opportunity? How big is the TAM? I'm curious as well. What are the verticals there? I mean schools and airports and stadiums and -- have I got it right?

And it's also all enterprise corporations where you have a card reader. So when I talk about the video security business, TAM of $15 billion, it includes access control. I think the sub-TAM for access control in that is about $4 billion or $5 billion is the number I remember on that. We have an existing access control business today with Avigilon. But as you think about video security, you think about access control, here's another great example of the way to think about this, Paul. We made a ventures investment in a company called Evolve, a couple of different venture investments. We're now going to be putting a greater amount of money in a pipe to Evolve. And Evolve is all about frictionless access. So you talk about concerts, stadiums, where you have -- airports, large groups of people. Instead of going through a metal detector, emptying your pockets, walking through, collecting, we're working with Evolve to integrate access control and video security in a frictionless way. So you would -- think of these 2 8-foot posts, about 10 or 12 feet apart, and you just walk right through it. They know it's Paul Coster. They know you don't have a gun or a small knife. And the ability from a throughput standpoint to manage that kind of crowd access and entrance into large facilities in a frictionless way is of significant interest, interest by our customers. The other thing is more and more people from an access control standpoint, they don't want to use this. Why wouldn't they be able to use mobile credentials for a cloud-based solution with 2-factor authentication for video, i.e., Paul Coster walking in an office building from the bathroom back to your office, it says, "That's Paul Coster." How do I know? Because I know his phone. And then the video camera says, "Yes, that's Paul Coster," because they see the video facial verification. So when you think about video security and access control and the kind of things that we can do to upgrade and modernize the process for existing access control, I think that market is larger and will be larger over time and will offer itself well on the kind of solutions and product portfolio that we're looking to develop.

With respect to the contact center -- not contact center. The command center and the PSAP 911, so a single pane of glass solution, it seems to me like your -- the easy bit is what's -- the easy bit isn't easy, which is presenting it all in an integrated manner to the agent. But of course, behind the scenes, you're creating a completely -- almost like an ERP system for the emergency services, right?

Exactly.

Correct. Tell us the -- this was the scope, correct? But also, how is it going in terms of adoption around the 6,500 PSAPs that you're presumably going after in the U.S. alone?

So in 60% of the 6,000 or 6,500, whatever the accurate number is, in about 60% of those cases, Motorola Solutions has a product or a module that's installed. To your point, we're the only vendor that provides the ecosystem, you call it the ERP of the 911 command center, from an end-to-end standpoint. We offer on-prem solutions. We've also cloud-enabled the majority of the portfolio. The last part of the 911 call handling cloud enablement will be done probably mid to end summer. So customers can buy on-prem, they can buy cloud, they can buy a point product or they can buy multiple products as a part of the suite. So we have a foothold in more than half of these 911 centers, and we are seeing greater adoption of customers buying 2 or more modules together. Again, it is a North American-centric strategy. It's about a $5 billion addressable market. We think in 2021, it's going to grow approximately 20%. So another really nice -- and the other important part, Paul, about command center software is the integrated workflow that it provides us access to. So I like us to be -- the magic of Motorola is in our end-to-end systems orientation. Part of the reason we made the decision to get out of these phones and out of this business is it's a commodity. Now this was when we made the decision in '08. It's a commodity. We don't like the commodity business. We like the systems business. We like it being hard to disintermediate, and we like to have the ability to integrate, differentiate and customize feature sets and workflow to make that customer more dependable on the Motorola product, whether it's LMR or command center software that we're selling. So incumbency is our friend. Having a larger installed base of LMR is a favorable flywheel to growth for some of these other enhanced higher-growth areas that we're pursuing in addition to that.

I would say you're sort of getting close to $1 billion now in software and SaaS-related revenues. I may be off a bit there. You're welcome to correct me, but it's pretty sizable. It's growing pretty rapidly. How much of it is now SaaS and recurring rather than sort of perpetual license business?

Well, so it's still both. But the way -- we take a step back and we report the business in 2 segments: product and installation or product [ SI ]; and software and services. We look at software and services as more or less a proxy for recurring. And last year, I believe that was 37% or 38%. It's not all recurring. It's about a proxy for it, but it continues to grow. So high installed base, higher recurring revenues, sticky end-to-end solutions providing differentiating integration and incumbency, that's the strategy of the company.

A couple of questions here. Who's replacing Andrew Sinclair to lead the cloud and software business?

So Dr. Mahesh Saptharishi is running all -- he's the CTO, and he's running all of our software business now. He came through the acquisition of Avigilon. So he's doing all command center software, will pick up the organic investment on cloud enabling as well as doing all mobile video and the CTO of the company. He's taking on a more prominent role. We just had him present to the Board, and I couldn't be more happy with his impact.

We've another question here regarding the command center software. Can you give us some sense of customer retention rate and maybe some sense of the upsell each year? I don't know how you could quantify that. But how much are existing customers spending each year on -- or following on -- on follow-on modules?

I don't have that figure, but I would say that it is a longer sales cycle because you think about these 911 centers that are quite entrenched and rigid in terms of the way they dispatch, the way they do workflow. So I would say it has historically been, Paul, a very on-prem-oriented, longer sales cycle adoption. On the other hand, with COVID, I think, and people literally being forced to work from home, it's accelerated the interest in cloud enablement. And I think that more and more customers will move to cloud, but we'll also see a healthy number remain on-prem. I would characterize that as just more steady-state growth.

I think we've got a minute or so left for an important question, but you are -- as you said earlier on, you've turned this company around in terms of cash flow as well. And you've, therefore, been able to execute some interesting M&A. What's ahead in terms of capital allocation?

So we think of it in terms of 50-30-20: 50% of operating cash flow being fungible between acquisitions and share repurchase, 30% for dividend, 20% CapEx. That is a framework, that's not a prescription in a normalized balance sheet, which we believe we are. By the way, we just took on $500 million of more debt because we have the ability to do that. The debt-to-EBITDA ratios, we're generally comfortable with. We just refreshed and upscaled the revolver at very attractive rates. So our balance sheet is strong. We have the firepower to continue to invest internally, do share repurchase, but also look surgically for acquisitions. Jason and I, all the time, every month, look at the discounted cash flow of the firm against the terminal value and the backdrop of the LRP, so -- where were buyers of the stock and where it makes sense to deploy the capital. Paul, one of my favorite things is we have, since Motorola Solutions in a decade approximately, purchased about 12.5 billion to 13 billion of stock, buying back, reducing the float by over 50% at an average price of $61.98. So we're very serious stewards of capital. We have great opportunity in front of us organically to return to the shareholder and to contemplate inorganically. So stay tuned on -- as to how things develop.

Greg, we'll stay tuned. Thank you so much for participating in the JPMorgan TMC Conference today. We wish Motorola well. Right.

My pleasure, Paul. Thank you. Thanks for having me.

Thank you so much. You, too. You're welcome.