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

All right. Why don't we go ahead and get started. Thanks, everybody, for joining early on Wednesday morning. We're on our last day of the conference. It's been a great event so far. So really appreciate you and all your participation. Very happy to have the team from Motorola Solutions here this morning. CFO, Jason Winkler is going to do a fireside chat with me. Many of you know this. It's been a great story, a great stock, continues to be a great stock and a near-term opportunity, in my opinion. Obviously, the stock has kind of pulled back here with the rest of the market. We're going to touch on some of those dynamics, a lot of the transformation that has happened at the company for the better. If you do have questions, we'd love to keep it interactive. Just raise your hand during the course of the presentation, and we'll certainly field your questions. But I'll start at a high level and get into some more specific topics here in a bit. So with that, Jason, thanks again for joining today.

Great. It's great to be here. Felt strange last night, but now normal. So it's good to be back in person.

Yes, I couldn't agree more. Well, investors that are looking for more detail, just as a heads up, they do have a really great slide deck. We've got Tim here this morning from Investor Relations, a very detailed slide deck on the Investor Relations website. But maybe you could start with a few minutes summarizing the business for investors that are newer to the story, core markets, customer base and the strategic focus of the company.

Sure. So we are a leader in public safety and government communication systems. About 75% of our revenues comes from government and public safety. Additionally, we're a leader in enterprise and fixed video security and about 25% of our revenues come from the enterprise market. We have 3 technologies within the company. The first, our land mobile radio and 2-way communications, devices, systems, networks, services that serve both public safety and enterprise. And secondly, video, which is now over $1 billion business for us. And that's largely an enterprise play, although we're building a large go-to-market presence for government sales to video as well and now have over $350 million of government sales into video as well. And the final one is command center software. And for that, you would find our solutions in a 911 center. And we'd be on the other end of a 911 phone call and helping people get the help that they need quickly.

One would certainly appreciate that. Topic du jour, maybe we'll just kind of start and get it out of the way, just a quick clarification. Could you talk about your exposure to Russia, Ukraine?

Very limited in terms of sales and extremely limited in terms of operations or any presence. So not a big market for us at all.

Okay. Great. And then so we kind of summarize some of the key characteristics. Obviously, video command center software increasing part of the business and then, of course, a very core -- strong core business. Can you tie that into the high-level financial profile and key metrics that you focus on?

Sure. So last year, $8.2 billion in sales, grew 10%; OE profile of 26%; EBITDA closer to 30%; and just looking at that OE profile just 5 years ago, it was closer to 20%. So we've grown substantially and growing profitably, while transforming the company. A lot of the growth has come from services, software. And today, in fact, half of our revenues come from services, software and video which is quite different than 5 years ago where only 20% came from those categories.

Right. Yes. And then in terms of growth, your CEO, Greg Brown outlined an expectation for, I think it was 7% total company growth for 2022. And you've been providing some helpful granular detail on actual results by segment. And Tim has done a great job of helping with those disclosures. Maybe you could speak to the forward expectation of that 7% by segment that builds up to the total company guidance.

Sure, Adam. So we have 2 segments that we report our results under products and integration of those products and then software and services. But additionally, and what you're referencing is over a year ago, we introduced an aggregation of revenue clarity around the technologies that are really behind those 2 segments. First, would be LMR. And that's mission-critical systems, devices and services. That LMR entirety of the business is expected to grow mid-single digits this year. The second technology, video, is expected to grow approximately 20% this year. It grew 21% organically last year, and the market is growing at about 1/3 of that rate. So we're capturing market share. I should note that the market opportunity for us in total as a company, it's $47 billion TAM. $18 billion of that TAM is within video. So it's our largest TAM. It's our highest growth profile. And we have -- I'm very proud of the team and the portfolio that we have. And the final one is Command Center software, and on that part of the business, we expect approximately low double-digit growth this year in 2022.

Okay. I wasn't expecting that number. So --.

Double digit. Yes, yes. It's -- the portfolio is terrific and is being cloud ready. Customers also are on different parts of their journey. Command Centers are very complex operations. And we're finding that customers want an upgrade and they want their operations to become more current. But they may choose that next upgrade is actually an on-premises one, which is how they do their operations today. But in doing that, we're taking them and giving them a path to the cloud on the plus one upgrade. So we call that a hybrid strategy, meeting customers where they're at. Mahesh, who leads that business is continuing to invest in cloud and also meeting customers with their next on-premise upgrade which is leading to the growth that I mentioned and the software and subscription nature of that business is actually growing at 2x, the low double digits that we have expectations for the entirety of the business.

Okay. That's helpful. And I'm going to double-click on that segment here in a second. But you're coming off your annual partner Expo here in Orlando. Maybe you could talk about the state of the core PCR market and the demand that you're seeing here in 2022?

Sure. I was here maybe 2 weeks ago in Orlando. Our professional and commercial radio business, which is 2-way communications, they use them at the hotel here, I saw our brand on the hotel, which is great. They serve markets like this hotel, retail, transportation, logistics, events, stadiums and the like. The business prior to 2019 in the pandemic was about $1 billion of radio sales into those markets. The pandemic with the economic activity suppressed [indiscernible] , it fell almost 30%. Last year, it grew back to about $800 million. So down to $700-and-some million, back up to $800 million, but we're not at 2019 levels yet in terms of revenue. The good news is that the order profile for that part of the business is extremely robust. The supply chain challenges, which I'm sure we'll talk about with respect to semiconductors, are squarely in that part of the portfolio. Professional commercial radios, use a bit more common semiconductor parts, and that's where some of our constraints on semiconductors that we're navigating are impacting that business. So demand is very strong. We'll navigate through the supply lines and get that business growing. It will grow this year, and it will eventually become, again, a business just like 2019.

And I think I talked to a lot of investors that are excited about that opportunity to kind of rebound in that segment. Maybe you can talk about the margin profile of the PCR segment?

It's a good margin profile. It's commensurate with the company type gross margins. And it's not quite the margin profile of our highest tier radios, it's more of a mid-tier price point. But the costs are commensurate with that. It's a good margin profile business.

Great. You alluded to it and I think in the last answer, but I wanted to double click on Command Center software. Really important piece of the business for investors, obviously, for valuation as this piece of the business grows. You can imagine the software multiples of those types of stocks are very different than hardware. Total reported revenue growth was a little bit more modest in this past Q4 and we've been fielding some investor questions on that. That's why I said I was surprised by the low double digit that you just mentioned in the buildup to 2022. But I think that reported revenue doesn't necessarily reflect the true health of the business because of some accounting nuances around cloud. Maybe you can talk about the transition from subscription to SaaS in that business and how it impacts financial metrics?

Sure. So last year, the entirety of this Command Center software business, which was $537 million was the print last year, grew 10% on the year. It was slower than that in Q4. But for those of you who've been in a Command Center, it's a pretty protected and core environment. And frankly, the Omicron variant really took things backwards in terms of access to sites, protecting the employees and the dispatchers, so we had some delays in terms of implementations there. Secondly, as I mentioned, the transition to a cloud journey but one that is first a non-premises upgrade with the promise and rights to the cloud thereafter, does change the revenue profile from a onetime revenue event to one over time. Of course, that's stickier. We like that, and it puts us in a good position with customers. We have 6,000 -- they are in North America 6,000 PSAPs or 911 centers, and we are present in 3,500 of those. So we have a strong starting point to take customers on their journey to the cloud.

And maybe we can double-click on the competitive environment for Command Center software. Like I said, investors are really excited about that opportunity within the total company profile. Could you talk about the competitive landscape and how Motorola's end-to-end workflow strategy is a little bit different than others?

Sure. So as I mentioned, it's a complex operation from the moment the call comes in to the dispatch and it is integrated with a radio system because ultimately, your phone call is a citizen gets routed to the nearest officer responder. And gets -- ultimately, if there's an incident -- a case, right, the crime happened. That case goes into records management, goes into -- someone might go to jail, ultimately the case is closed. And that kind of beginning-to-end workflow, if you look at our portfolio, we have the most comprehensive one, and we're tying it even more centrally together, including the ingestion of video, which is an important integration point is because more and more of these events are being captured in video, you want to record that, you want to analyze that and you want to make that part of your case file. So we're well positioned in what is a fragmented market and continuing to integrate our offers and doing well in terms of journey for customers.

And maybe you could talk about -- I've attended some of the industry conferences. And oftentimes, it's incredible to me to see these individual silos and these kind of regional software vendors that might just do dispatch for this particular area or records for this particular geography. How customers are responding and the desire to have maybe one single vendor across those different workflows? You've talked about adoption within the customer base as well in command center software, maybe you could tie in to some.

Yes. So I think the starting point of being in a these 3,500 customers with one or more solutions, gives us a strong point to add a second, a third, a fourth and to bring them on that journey of a more integrated platform. And today, the buying decisions tend to be pretty fragmented. You buy a CAD or a record system, you buy a 911 call dispatching system, you buy a video evidence management system. We think as customers integrate their platform, and we have the best integrated platform that it positions us well. And again, what is, as you described, a very siloed competitive environment. And we've invested both organically and inorganically and putting together our portfolio, having bought call taking operation. And also most recently, 911 data master, which helps with our portfolio with location, better location services among finding, again, that officer, that responder who is nearest to the incident and getting them there as fast as possible.

I'm going to talk about video here in a second, but -- anybody has any questions so far for Jason?

[indiscernible].

Sure. So within the core Command Center software environment, we have a much more comprehensive portfolio of not only products but also customers. So Axon has aspirations to enter the business through a video route. We have Command Center, call records, jail, evidence, 911, call taking, call dispatching, all of those are things we have today with customers. And we're taking all of those things, integrating them and the platform development and offering them to customers in a more seamless way. So our starting point in the 3,500 customers that we have is much more rich and robust than theirs.

Good question. Tavis? Yes, please.

[indiscernible]

In terms of buying patterns today?

Yes.

So buying patterns today, as I mentioned, are very siloed in RFPs that are even last year hitting the street are for a specific part of the portfolio. We believe with the investments that we're making and the dialogues we're having with customers, we will continue to meet that RFP and respond to it in a say, an on-premises way if that's their choice. And then, again, given the rights and entitlement to the cloud so that the next occurrence of their needs is right there and embedded, and we have an opportunity to serve them without an RFP. So we're in the early innings of an integrated purchasing decision, although the dialogues with customers indicate that that's where things will go.

[indiscernible].

Sure. So last year's operating cash flow was $1,837 million. This year, we are expecting approximately $1.9 billion in operating cash flow, that includes the 19 -- despite 2 discrete items, one being the $75 million impact of having to capitalize R&D, which many companies are facing under the U.S. tax legislation. And secondly, our budgeted employee incentive pool this past year played closer to 100% of plan where last year, it was 50%. That's an additional $75 million. So the $1.9 billion is inclusive of those 2 items. Our capital requirements are less than $300 million a year, Tavis, and that will continue. So it's a pretty -- and of that capital -- CapEx, almost half of that is for what we describe as customer success. So it's investing in networks, customer networks like Airwave, like -- other operations that we operate on behalf of customers. And in terms of capital allocation, we've -- since Tavis, you covered us back in 2011, we've had the same capital allocation framework, which has served us well. About half of our operating cash flow, we allocate to either M&A or share buybacks; 30% to support the dividend, which in every year since 2011 has increased double digits is 30% of OCF; and the final 20% or less is for the capital requirements that I mentioned. So that's our capital strategy we've taken out in the 11 years that Motorola started from Motorola Solutions. In 2011, we've taken out nearly half the float of the shares.

Still my later question -- yes, please?

[indiscernible].

So at a total company level, North America is around 65% of revenues, the rest internationally. And with respect to your question around video. Video is probably a little -- that was total revenues for the company. Video revenues are probably tilted a little bit more than the third internationally. And Europe is a strong market for us. We are navigating the EU compliance requirements around video storage, responsible use, GDPR, our products, which are implemented -- customers implement policies. We sell them robust solutions along with options for them to implement. And they, in turn, are responsible for configuring them in a way -- that is compliant with EU or any required mandate.

Questions, any others?

[indiscernible] .

With respect to Command Center software, the pricing on the products -- on the suite of products is dependent around the number of positions, so the number of, say, dispatchers that a complex operation has. That's one of the pricing drivers as well as the number of ingestion points of Safe Go, the number of officers that are integrated with it or are dispatch too. So it's -- there's a variety of inputs around the pricing of the suite. But again, given that the market is currently RFPing in a very siloed approach, we are pricing according to what the RFPs mandate and then we'll go forward from there. Did I miss anything on capital allocation from Tim -- .

We'll get there. I'm not going to let you escape.

[indiscernible] .

Let's double-click on video. Maybe you can, I mean this is an area that really for all intents and purposes, didn't exist within Motorola just 5 years ago or so. Maybe take us through the core thesis that got you into the video market, particularly around the Avigilon acquisition. And how this has evolved as you've broadened from more of that fixed camera to a more holistic ecosystem, and not to throw a 2-parter, but you also did a recent acquisition, if you wanted to tie that into answer that will be great.

Sure, no pressure. So in 2018, we acquired Avigilon. What we liked about Avigilon is that it was an integrated platform, much like our radio systems. Our radio systems work best together. So our infrastructure on our devices, on our services is generally how customers buy, similar for Avigilon. A camera, storage platform and the analytics or video management system at the time, 80%, 85% of when a customer bought Avigilon, they were buying all 3 of those things together. So that's a solution sale. We like that. We like their agile nature. They're Vancouver based. They were a market entrant and winning rapidly against Pelco and others at the time. And so it's been a great acquisition, frankly. It brought us $400 million plus in revenue in the full year of '18. And since then, it's continued to grow at a terrific rate, we -- by the way, we've invested as well in increasing R&D and increasing the go-to-market presence, particularly in North America around Avigilon. We since bought Pelco, which was a legacy -- great platform, but one that wasn't as advanced, and we're investing in Pelco to bring that platform into the ecosystem. And then also IndigoVision, which is a bit more of a niche European player. So those 3 fixed video operations are all integrated and led by the same team, same engineering group, same go-to-market group. And so we have a -- one of the most robust platforms of offering of camera storage and the analytics that go with it. And then as you mentioned, Adam, we recently bought AVA, which is a cloud-based technology and for those customers who don't want to have on-premises operations or storage and prefer a cloud route, we are planning to integrate that into our total offer as well. So in the entirety of the fixed video, video last year was a $1.2 billion revenue for us, about 70% of that is fixed video, and the other 30% is mobile video. So includes body-worn cameras, license plate recognition, the analytics that go with it. And we have a great offer there grounded in North America with a platform called WatchGuard based in Texas; and an international platform called Edesix based in Edinburgh, Scotland. So strong momentum as well in body-worn camera and the analytics that go with it.

Let's double-click on that because when the investor concerns was one of your major competitors kind of specialized in that body-worn piece. That's kind of how they grew up, Axon, right? And they had been kind of leading with that offering, landing big deals and running away with that market and doing really well. But here over the last few quarters, you've talked about some major body-worn camera deals, right, particularly internationally. What's changed in that perception? What's -- what have you done to start taking share and winning large deals, particularly in that body-worn market?

Sure. So I'll start internationally. You're, I think, referencing our French MOI deal, which was the best we know at one of the largest total deployments of body worn cameras. That was based on the Edesix VB400 camera, which, again, we acquired maybe 2.5 years ago, and we've been investing in, in that platform. So that's helping us win internationally. It's resonating quite well. We're also taking that camera platform, which in North America would be more of a value-based platform and bringing it into North America as well. In North America, with our WatchGuard camera offers both on a officer and also in a car, where we are a leader in the car cameras. That market, as you said, has been led by Axon. They have an incumbent advantage, although we're finding customers are looking for an alternative. And we're doing well in that market as well and continuing to invest, again -- in that market, it's -- our cameras are fully featured. Our battery life is better than the competition. And it's about the back-end video storage evidence management, analytics, and that's where we're continuing to make our investments.

Right. So the ecosystem is likely to be a flywheel that helps with market share?

Absolutely. The data, and I mentioned earlier that data is making its way into integrated workflows around Command Center and evidence management, so that's where the intersection of mobile video and what's ingested in the field. And Command Center software, which is the ERP of the workloads is coming together.

And it's not a zero-sum game at this point. There's a lot of greenfield opportunity. Axon is a great company. So I just want to make sure everybody understands -- we do have a question over here.

[indiscernible].

Good question. So a couple of years ago, that was an inbound narrative. We never saw the actuality of budget shifting. So while it was in the press and perhaps a possibility in terms of public safety budgets and how police are allocating funds, they've remained robust. And in fact, the body-worn camera in many cases, mandates that are coming from local governments that officers need to have cameras has actually helped the overall environment of demand for body-worn cameras. And today, even in the state of the union president Biden talked about the solution being funding the police. So the environment around prioritization and public safety and police helping people stay safe, remains healthy.

[indiscernible]

I don't have that estimate. I know it's increasing. And in many cases, the mandates which some of which are funded, some of which are unfunded in Illinois, for example, there's local communities that are adding body-worn cameras. And it's generally a positive momentum in terms of how many people -- offices have -- I should also mentioned I worked with the Chicago Police quite a bit. I'm the Treasurer of Foundation that benefits fallen officers. And really the psyche around wearing these devices has really changed, right? So at some point in time, maybe officers didn't like the idea, they've embraced it by far now because you want to capture both sides. Transparency leads to better outcomes on both sides for police as well as potential activity -- criminal activity. So the sentiment has changed dramatically in terms of -- these are a part of just like a gun, just like a vest and a body-worn camera.

Questions?

[indiscernible] .

So in LMR, our #1 challenge within supply chain is around access to the semiconductors that are within our products. It's a constraint that we navigated through last year. The delivery commitments from many of our supply chain partners or semiconductor partners were extended in Q4. And that, in turn, led to our requirements this year. We talked about it in the Q1 call or the Q4 call, that about $120 million of incremental costs this year, $100 million of which will be in the first half of this year, we are allocating to the pursuit of the parts that we need to fulfill the demand. So there's 3 principal strategies we're using to navigate a complex supply chain semiconductor environment: Number one, over 40% of our company's engineers, and we're asking those engineers in addition to working on new products to help if Part A, semiconductor A is unavailable, find Part B, which is a substitute which may be available. We're doing that. Number two, Greg, I, Jack and Mahesh are actively engaged with a handful of semiconductor suppliers for allocation. And given our [indiscernible] public safety, we do get prioritized. We're not creating printers, we're enabling public safety. And then thirdly, where necessary and it has been necessary from time to time, we are paying a premium for those who do have these commonly available parts semiconductors. And those premiums are pretty high in the broker market right now, which is a temporary demand and supply phenomenon, and we'll continue to navigate around those. But all 3 of those are going to help us -- those strategies are going to help us continue to get the supply on the semiconductors. We need and enable the growth that we've forecast for this year of 7%.

And that probably plays into your EPS guidance for the year. That's been another topic for investors. It's more back half weighted in terms of the inflection in margins and profitability. Maybe you could just clear the air on the expectations for the full year, and what went into this back half way?

Sure. So our expectations on earnings per share between $9.80 and $9.95 for the year, that's our guide. And the shape is -- the first half will be, as I mentioned, largely impacted by about $100 million of those increased year-over-year incremental costs related to the pursuit of getting the supply chain higher costs. Secondly, as we saw these pricing and these broker requirements emerge, we did take action in pricing of our own products. We have a record backlog, I should mention that $13.6 billion. And in a very good demand backdrop, we've taken a comprehensive review of pricing and implemented pricing actions that will largely benefit us in the second half as we churn through backlog. So backlog and the $13.6 billion is largely captured at prior pricing, that gets delivered, new orders get captured at a higher price, that benefits the second half as well. So that's a little bit about why the shape of the year is a bit different.

Perfect. Well, time plows when you're having fun. We're out of time, unfortunately, but we'll continue the discussion downstairs. Go ahead.

Sure, I had one other thing on capital allocation because we didn't get to it. But given the current market environment, and as you mentioned, disruptive, we are actively repurchasing shares. In fact, we acquired almost 400 million already quarter-to-date, which is a pace that's higher than the past.

I'm glad that you clarified that. It is a good place to end the discussion and we'll continue it down scares. But thank you so much, Jason.

Thanks.