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

Hello, everyone. It's so great to see you virtually. I'm Jim Suva, the IT hardware and tech supply chain analyst here at Citigroup. We're very pleased to host this fireside chat with Motorola Solutions, stock ticker MSI and the Chief Financial Officer, Jason Winkler. Jason and I are going to go through some interactive discussions, but there -- if you do have any questions, you can press the Ask a Question on your screen. I will try to accumulate all those questions and ask them in 1 or 2 questions because a lot of times the questions are similar across the audience, and we're going to keep your lines muted. That way you have optimal audio and video feeds on this fireside presentation. I do want to note a couple of housekeeping items. No media and no press are allowed. If you are media or press, please disconnect immediately. If you're an investor subject to MiFID II, please ensure you have the applicable research agreements in place. For disclosures, there are several places for disclosures to be mindful of, first, on the Citigroup Investment website known as Velocity as well as the conference registration and log-in as well as the information we've sent out. And I would encourage you to take a look at Motorola Solutions' investor website. On the website at -- in their Investor Relations sections, they do have safe harbor, risks and forward-looking statements, which you should be mindful of that are relevant. I want to introduce again Jason Winkler. He's the EVP and also Chief Financial Officer of Motorola Solutions. So thanks for joining us today. But maybe if you can start off by talking big picture. I've given the audience a brief overview of each of your businesses within, say, LMR, Video Security and Command Center, just so people are kind of up to speed who may be joining us for the first time.

Sure. Thanks, Jim, and it's a pleasure to be here with you and your clients. So first, we have 3 technologies that we sell products and services around. Our first is land mobile radio. This is a business long associated with Motorola. We have a market leader presence. We continue to innovate. It's a strong cash flow business. This year, we expect it to grow mid-single digits. And really, what we do here is we custom design networks, make robust devices and then provide services support and operations for public safety response. It's a large installed base of customers, over 13,000 major networks and that, of course, provides a strong foundation for services that our customers count on us for. Second is our Video Security & Access Control technology. This is a business or technology that we've developed inorganically, largely beginning in 2018 with the addition of Avigilon, which was a global leader in fixed video cameras and access control. We've continued acquisitions to build on it. Now that it's -- last year $922 million business. And this year, we expect the business to grow at 30%. 70% of our video business is fixed video, Avigilon and some of the other brands like Pelco and IndigoVision. We also have an access control portfolio. So think of managing doors and access points, where we recently invested in an additional part of the portfolio with Openpath, which does some pretty exciting things around the convergence of video and mobile access sort of eliminating the key cards that we often have to wear, which is pretty exciting. And then the other 30% of video is mobile. Think in-car cameras for police cars, body-worn cameras, license plate recognition and the data and information that goes with it. Here again, an important part of our business and the entirety of the business, as I mentioned, is expected to grow 30% this year. And the final technology is around Command Center. And I tend to think about this businesses like the ERP behind the 911 call from the moment that someone calls 911 to the response, to the record keeping, to the jail evidence, probation, all those types of workflows are enabled through our technologies. We are in 3,500 of the public safety answering points. These are the nervous centers of 911 across the country. There are 6,000 of them, so we have a strong base, 3,500 of 6,000. And our portfolio is not only growing with cloud readiness, but also additional modules that's helping grow the business. On this business, Command Center Software, we expect approximately 20% growth this year.

I can tell you the company and I followed Motorola even before the separation of mobility. That's been gone through a lot of significant portfolio transformation over the past 5 years. If my memory is right now, about half of your company is coming from software services and video like pretty significant. Can you -- let me know, is my memory correct on that, that it's such a big percent now? And have you been able to transform such a long-time company, 70, 80, 90 years from a hardware-centric company to such a -- more of a software services video company over such a short period of time?

Well, Jim, your numbers and your memory are correct. Almost 50% of our revenue does, in fact, come from services, software and the video business I mentioned. And this is up from 20% came from services and software in 2015. So it's a pretty big change. As you know, you've been following us for a long time and followed the journey that Greg's led around Motorola not only focusing on where we're strong, but also exiting businesses where we're not. And we've since complemented that with the addition of the video businesses. Along the way, we've also added some pretty important parts to the business like the acquisition of the Airwave network, which helped increase our recurring revenues and serving that critical customer. We've increased our services around LMR, LMR networks, our complicated networks. And with that comes an opportunity to serve our customers, areas like cybersecurity, upgrade agreements. And in some cases, we fully managed the entirety of the customer's network. So to put a finer point on it, since 2015 through video, Airwave and others, we've acquired companies that have added this year approximately $2.3 billion of revenue. Over 6 years, we've spent $4.5 billion on those acquisitions. And those acquisitions bringing $2.3 billion of revenue are dropping 35% EBITDA. So the transformation has been significant. Lastly, I'd add that the employee base. We have 18,000 employees today. 40% of them have been at Motorola only 3 years. And our total available market has grown by 3x from it was what it was in 2015 to what it is now of over $40 billion in '21.

Jason, can you talk a little bit more about the video and security business and maybe help investors understand exactly what it is? Are these like on top of police cars? Are these on the corner of Lake Shore Drive there in Michigan or in San Francisco? Or are they on the police men? Are they on a tow truck? Can you maybe give us some examples in growth and talk about that because it seems like it's been a very positive growth for your company?

Yes. So when I think about the video business that I described earlier, it is enabling enterprise security. So think schools, think airports, think buildings, businesses, you look up and you see that dome. It likely has a Motorola or an Avigilon label on it or Pelco or some of our other brands. And then it's also public safety. So if it's cameras on street poles in the city of Chicago with the blue light monitoring high crime areas, that's also an area where our cameras and security operations are. And then finally, that mobile category on police officers, on responders and in vehicles. So really, the video is pervasive everywhere and helps public safety, do their job well. It also helps lead to greater transparency and it keeps businesses safe. All in, the business video this year, as I mentioned, is expected to grow 30% with 20% of that being organic growth. And really, the need for video is growing pretty much everywhere. It helps keep schools safe. It helps monitor incidents. It helps prevent crime, and we continue to take share, by the way. We have strong product offerings. And another point that's important for our government customers and approximately $300 million of our video business serves government customers is that our federal customers about 2 years ago were precluded from buying new cameras that were of Chinese origin by what was called the NDAA or the John McCain Defense Act. So that's given us an opportunity along with some of our other non-Chinese competitors to win business and accelerate our growth within the government vertical. Our enterprise vertical and enterprise security remains strong as well. And we've seen some rollover of demand from 2020 from COVID, that's helping, of course, this year. And we've seen some new features that we've enabled on our cameras as well, like detecting masks, detecting crowds and monetize the opportunity that way as well.

You mentioned governments. I think it's fair to actually ask you the question about government funding and stimulus. Has that already rolled out to help you guys? Or is that still yet to come? And if so, when? Because I think on your recent earnings calls, your -- Greg Brown, CEO, has mentioned unprecedented funding in the environment. So any thoughts about that?

Yes. So the funding environment is solid and the backdrop of CARES Act, which benefited us last year and is still available to our customers this year. And of course, ARPA, there's $350 billion allocated to state and local through 2024, $170 billion for schools through '23 and $38 billion for airports and other transit operations also through '24. Altogether, that's $0.5 trillion. That funding will help customers continue to prioritize the needs that they have around public safety, which could be LMR, could be Command Center Software and could be cameras as well. So our customers are sorting through the government funding processes. Our sales team is right there with them, eager to help them identify and categorize funding to develop deals. Deal flow in large deals in state and local government does take time, and we have a sales team that matches that RFP life cycle and they're actively engaged pursuing these new opportunities of funding.

You mentioned LMR. So why don't we transition over to that, Jason, about LMR. There are some people who think that LTE and 5G is really going to be a headwind and simply replace LMR, but you've been consistent in your belief that LTE will actually be complementary with LMR and the networks. Can you kind of talk about your thoughts regarding LMR and LTE and help investors understand it's not kind of one or the other?

Sure. So first of all, we've seen even with LTE and technologies advancing, customers continuing to deploy new LMR networks, upgrade their existing LMR networks and sign on to a multi 5-, 10-year arrangements for us to support and serve those LMR networks. Those are testaments to the technology is not going away. That said, an LTE network can help an LMR network in some ways. Number one, it can help enable the devices to receive code upgrades like you would get an Android or an Apple update to your phone, that's now possible as our devices have an LTE ability for them to get code updates as opposed to bringing them in the shop, which is a pretty significant value driver for customers. Secondly, there's GPS positioning opportunities that the technology enables. And thirdly, there is a voice component, a supplementary one, on these devices using LTE. But no doubt, they're LMR or radios first and that's the design that the customers want. So we continue to invest in LMR infrastructure, support and devices and believe that LTE will coexist for a long time. And we've seen customers also like German MOD, a few in the Middle East and even with what's going on in the U.K., exploring these opportunities to have LTE and LMR work together and investing in new LMR networks.

Jason, can you talk a little bit about the puts and takes around your professional and commercial radio or PCR sales and the demand rebounding? And I think you'd actually mentioned faster and exceeding expectations. Can you help us understand that a little bit better?

Sure. So our radios, while they serve largely public safety, also have use cases in enterprise. So think the building that you likely walk into, think about construction sites, think about security operations, they too use a form of Motorola LMR radios largely called professional and commercial. We're a leader in this area. The business had been in 2019 about $1 billion. It was significantly impacted due to COVID and the economic activity that was suppressed among those verticals. So we saw almost a 30% decline in that $1 billion in 2020. So what we've seen subsequently is a rebound off that lower base. We saw good growth in the first half, better than we anticipated and planned for. And we anticipate having a good year in PCR, and we see opportunity to grow that business and return it to prior levels and beyond with the innovation and continued investment that we're making in that market. So it's typically a GDP grower, but that's changed with like a lot of things, the COVID and what that did to the business. So we'll look to that business to continue to grow.

Jason, can you spend a little bit of time talking about the Command Center Software? And literally a couple of days ago, I called the police when I was driving down the street in California when it was about 100 degrees out. And I saw an elderly lady leaning against a poll and slide down and I got on my car and helped her with some water and called the police and they were talking to me on the phone, and I could hear the dispatcher kind of talking on a different device. And I'm in Silicon Valley and it just seemed like the Command Center Software wasn't cohesive. Can you talk to us about your Command Center Software packages you have? Do people buy at all? Is there à la carte? And a lot of it seems like it's -- there's a lot of legacy Command Center Software. How should we help people understand Command Center a lot better?

Well, first of all, Jim, I commend you for being the good samaritan in that scenario. I hope she's okay. With respect to the responses that you were hearing from the dispatcher, which is a pretty challenging job, they were likely talking into a dispatch council and communicating through that dispatch council with the nearest first responder who hopefully got there within a matter of minutes. And that's the metric that first responders and emergency operations hold themselves to. The market itself and the technology that customers use in these operation centers that dispatchers use is generally fragmented. That's the state of the market. However, when I think about our portfolio, we have one of the most comprehensive and end-to-end workflows as we like to call it, from the call that you made to the closure of hopefully her making it to a safe place. That's everything that our technology does. It's available on-prem today and in the cloud as well, and we're working to help solve customers' problems around what a complex operation looks like when you're using multiple software modules and our integrated solution helps solve that. So we have modules that can be bought individually like call routing, call taking and -- as well as computer-aided dispatch and records. And you can buy the entirety of the suite. As I mentioned earlier, we have significant share. Nearly 60% of public safety answering points have at least some part of our solution. And we'll continue to grow what we have in those 3,500 and win new opportunities.

Jason, and by the way, she had heat stroke. And so she was okay, but they did take her in the ambulance. But with that being said, you'd mentioned you're in about 60%. But I assume those 60% of people, and again, I'm in Silicon Valley, which should be adhering or embracing this a little faster than, say, other parts of the world. Is it fair to say that even though you're in 60%, that those command centers haven't subscribed to all the digital innovation menu items that you have?

That's absolutely true. It's shocking, but many 911 centers, the current technology that they use, they can't ingest a text message, let alone a picture. It's primarily a voice operation. So these are switched very antiquated backbones that need to be upgraded so they can receive the technology that you and I use every day to communicate into an emergency situation. And that's a significant opportunity across most PSAPs.

Yes. And they wouldn't take any pictures or anything. She just said, we can't do that. I have to walk her through what the woman looks like and what her symptoms are. So can we now switch over, say, about 12 months ago, there was a concern about state and local municipalities actually having budget challenges. I wasn't traveling to Chicago where I went to MBA school to see you, I wasn't paying hotel taxes and all that. And so the government funding seemed to be a narrative, of big concern, but your results of the past 12 months show quite the opposite. Can you help us understand that the funding environment about your customers relative to the concern that people think that first responder spending is really going to be pressured?

Sure. You're right, Jim. The narrative 12 months ago was significantly different. A lot of things were different 12 months ago as we've all continued to navigate the post-COVID world or emerging COVID world. One thing is clear that many state and local entities navigated their budget scenarios better than the dramatic forecast of decline that were out there. So they were able to continue to operate tax receipts, property values and the likes were not impaired as many had thought. Cities in the hotel taxes that you mentioned, they were -- cities were in a tougher spot. They've since, of course, gotten funding flow down from the states who've gotten funding flow down from the federal government. So in general, monies in government and funding is pretty fungible. And so we've seen a better backdrop for funding through those things, including the ARPA, $0.5 trillion that's now starting to make its way through the system. So the backdrop for our customers is very good. They'll continue to prioritize the needs that they have for public safety and now have opportunity to do incremental things as well as continue to fund their priorities around public safety.

Well, so far, Jason, we've had a great dialogue about kind of bigger picture and revenue drivers. Maybe we take it a step below and start talking about margins a little bit. How should investors be thinking about margins for your company? Because if I hear everything you talk about so far, it seems like software and security and video is going to be a bigger part, and I tend to think of those as margin accretive or higher margins than hardware business?

Yes, Jim. So I think to answer that question, I'd take you to our 2 business segments where we report the business financially through a P&L. One is Products and the Integration and deployment of those. That's about 63% of revenues. The other is Software and Services, which we describe as a proxy for recurring revenue. Highly sticky, either ARRA or pretty significant renewal rates that drive the other 37% of the business. And in S&S, as we call it, or Software and Services, margins have expanded significantly. This past year in 2020, they were over 34% OE. And we've guided at the last update in August that they will be close to 36% this year. So continued good growth and expansion with 170 bps in '21. So yes, our transition to services, software and the monetization around that installed base that I mentioned earlier continues.

Your company has made quite a few acquisitions recently. And if I think about them, it seems like they've been a little bit more centered on video and software, if my memory is right. Can you correct me if I'm right on that? And is that a trend that we should expect to continue at Motorola Solutions?

We've definitely been focused on video and software over the last 18 months. The Openpath acquisition, which does the access control technology that I mentioned is an example of that. We just closed that a few months ago. We'll continue to look at opportunities that strengthen our value proposition in video and help us serve our customers with a deeper set of offerings. Last year, at the beginning of the year, we made a couple of investments in cybersecurity, which are helping us -- help customers secure these very critical networks. These are areas and examples of where we continue to look for opportunities that fit our portfolio and can make us stronger and help us deliver more to our customers.

Can you talk a little bit about being Chief Financial Officer, you're also in charge of capital allocation, M&A, stock buyback, you pay a dividend, funding the organic business, CapEx, build-outs? We're in a COVID world where it looks like you're working from home, and I'm in a hotel room. How should we think about your capital allocation and priority uses for cash and cash flow?

Sure. So Greg and the management team have been operating under a framework that we developed back in 2013, which guides our uses of operating cash flow to be in 3 areas: 50% of OCF to be allocated for the opportunities that present themselves around mergers and acquisitions or alternatively buying back our own shares; 30% to support the dividend, which has been growing since 2011 every year at double digits, that's a function of our cash flow as well growing. I should mention that this year, we expect $1.8 billion in OCF. And then the final bucket is for CapEx, which has been 20%. It's largely been less than that. We are a CapEx-light type business. In fact, half of the capital that we do deploy is used for customer success, that includes investing in networks such as Airwave and other customer-centered operations that help us serve our customers. So that's the model 50-30-20, and continues to guide our deployment of capital and as well continue to drive increasing operating cash flows.

Jason, you have a great audience here. Is there a couple of items before I ask you about why you're so excited and people should own MSI stock? But a couple of items that maybe you can clarify that you get asked a lot about for CFO that people can better be educated from this venue?

I think one is the customer intimacy that we have in LMR and how that -- those relationships. We have hundreds of salespeople in communities that are part of the community that those relationships help them sell our products and keep those communities safe. And the opportunity that we've had in having those relationships expanded to be now selling video, selling video cameras, selling body-worn cameras, selling cameras to keep schools safe. That's one of our significant strengths is in our go-to-market reach for these technologies, includes Command Center Software. So we're right at the point of influencing customers where they're at in a direct sales model. That's an important part of our advantage.

Jason, can you kind of wrap it up here with helping people understand the 2 or 3 reasons about why you're so excited to be Chief Financial Officer of Motorola Solutions? And importantly, why should they own MSI stock?

I wake up every day passionate about working for this company because of what we do. And enabling public safety is critically important, enterprise security is too. And the fact that we're serving customers, growing our revenues and at the same time increasing our profitability while doing all those things is something that I'm passionate about. And we have a great team from engineers all the way through finance, supply chain and the likes, who wake up every day and are passionate about delivering on those goals. And with our leadership position and with the investments we make, we can continue to grow our earnings, grow our cash and while executing to this very important public good or public safety.

Well, I want to thank Jason for his time as Chief Financial Officer of Motorola Solutions. And I apologize we couldn't do this in person. And I hope next time, it's you and Greg Brown and I are live on stage in front of the big audience because I know you typically pack the house, and we view it as a stock ownership that sometimes falls between the crack of technology investors and industrial investors. And your education and insights to this was greatly appreciated. So thank you so much, Jason.

It was my pleasure to be here and for those who may be new to the story, I encourage you to look at our website where we have a very good investor overview that dives in more detail about the uniqueness of our business and where we're positioned. So thank you, Jim, for the time today.

Thank you, everybody.