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

Good morning. Thanks for being here. So my name is Paul Chung. I'm the applied emerging tech analyst here at JPMorgan. I'm pleased to have with me Motorola Solutions' Chairman and CEO, Greg Brown, welcome.

Thank you, Paul. Thank you, Paul. Good to be here.

Yes. So just to get us started, can you give us like a brief overview of the firm? How it's evolved over time?

Sure. So this is -- I'm in my 16th year running the firm, we've kind of transformed from a legacy conglomerate into what I would characterize or might be characterized more of a pure-play safety and security firm. We went through kind of 3 phases survival of the company vis-a-vis breaking it up, exiting the cell phone business, navigating -- Carl Icahn, as an activist shareholder, who came into the firm with my predecessor, and then we optimized the firm in terms of assets and rationalization. And now we're growing the firm. We've done 30 acquisitions or so over the last 7 or 8 years. We are all things around public safety and think about enterprise security, and by enterprise security, I mean doing things and deploying technologies and a safety and security ecosystem that protects people, property and places and connects automatically and virtually those people, property and places -- automatically with emergency networks of public safety. We -- Paul, think of our firm as 3 major technologies. There's land mobile radio, where we sell those private networks, the emergency networks for police, fire, ambulance as well as those same private networks and 2-way radio and critical infrastructure to oil, gas, utilities, education. We have about -- there's 13,000 LMR networks around the world. We then sell devices into those networks. We refresh those devices much like you would refresh a smartphone on whoever your carrier is. We monetize those networks with managed services and service user agreements. And it's a durable relatively predictable, solid business. And if anything, we know that land mobile radio is as critical now as it's ever been. We also play in 911 command centers, primarily North America-centric. There's 6,000 of those in the country. In over half the cases, about 60% of those 6,000, we have a critical piece of software installed from an incumbency standpoint. And then lastly, we're all things video security and access control. We play in fixed video, cloud and prem body-worn camera video, in-car dash cam video, license plate recognition and the analytics that goes with that. The total addressable market for our company now is $60 billion-plus, which is triple or quadruple what it was several years ago. The trends are strong. The firm is performing well, and I like where we sit.

Those are great. So let's just level set kind of quick update on state of supply chain, component costs and kind of expectations for the year.

Supply chain is still constrained. It's a little bit better, but we go and forecast and guide based on lead times and many of the lead times from critical supply chain, particularly semiconductor providers remains elevated. We have been successful in navigating supply chain quarter-by-quarter. We do it by prioritizing mix. We do it by working very closely with key semi providers. We do it through product redesign. Our engineering folks have been great substituting and redesigning Part B and C to substitute for Part A, and we have been in the market to meet our record demand buying broker parts, paying elevated premiums, these PPV premiums. Jason and I have said, as we came into the year, that we think we will be able to lower what we pay for PPV premium for the fiscal year this year by about $50 million. So in other words, $50 million of savings that will accrue to gross margin. We're on track to do that. But lead times are still, Paul, elevated. So that kind of informs our guidance through the remainder of the year. But we're hoping that maybe by the end of the year or early next year, it's more normalized. On the margins, it's better, but there's a lot more work to do.

Got you. So let's jump right into LMR. So just give us a recap on 2022 and some of the drivers of strength throughout the year. It's a great year.

It's a great year, and we're off to a great year this year because even though we had the print in Q1, which was pretty much of a monster Q1 and we increased Q2 over consensus, and we increased the full year. We did that by still achieving record Q1 orders and record Q1 backlog. So we didn't -- revenue growth was not at the expense of burning backlog, which was really, really important. As I mentioned, these networks are durable, they're critical. And what drives them is we are in the early stages of a product refresh or device refresh. Jack and Jason and I have all talked about the "early innings". So think of a public safety radio, a 2-way radio being replaced every 7 or 8 years. We have come out with APX NEXT, which is a best-in-class, high-tier superior product quality radio that provides over-the-air programming, more precise and enhanced GPS. It's a dual-band radio so it's LMR with LTE. The benefit to that is a first responder can get situational awareness to his or her device with an LTE video stream that it wouldn't be able to do in the past. It's more efficient doing software reprogramming. In the past, you'd bring radios into a site and reprogramming. Now you do an over-the-air push. So -- and you get the benefit of an LTE network in the event that a first responder roams outside the coverage area. He or she can still maintain constant connection and seamlessly traverse over to LTE. So if you look at what we're doing in North America, we have ASTRO or P25. Internationally, we have TETRA, and then the nonpublic safety think enterprise radio, we call that professional and commercial radio. In all 3 of those categories, we are at early stages of device refresh, which is a friendly fact towards sustainable growth for us going forward. So good spot.

That's great. Yes. We'll get more into APX NEXT, but I guess, over the past year and into this year, can you talk about kind of the price versus volume dynamic and the price increases benefit kind of you've seen over the course of the year?

So we've taken surgical pricing actions, a number of them in '22. We view those pricing actions as sticky. If I look at the growth, both in Q1 and our expected growth that informs the guidance for the full year, it is important to note that, that growth, we believe, will be derived more from volume than pricing. We are seeing in certain products, ASP lift. So we have volume driving growth, some price increases driving growth, but also we're seeing a little bit of a movement toward customers moving towards the higher tier and a more fully functional, feature-rich radio, which obviously is driving growth as well.

Great. Let's talk about the record backlog, which is a nice thing to have. So you have a very nice visibility -- can you expand on kind of makeup of the backlog? Help us kind of quantify, would have been even better if not for some of the FX and component inflation.

So backlog is $14 billion-plus. It's 2/3 software services, 1/3 product. It increased 5% year-over-year in the face of, to your point, I think it was $370 million or $372 million of an FX headwind, but very, very pleased with the backlog performance. And obviously, that's providing some foundational lift that gives us optimism for the guide we've done in Q2 and the full year.

So speaking of your guidance, revenue guidance for the second half implies the more kind of normalized growth than what you're expecting in the first half. What's -- is there something driving that?

Yes. I got a lot of questions on this, too. And I think for those of you that know us well, look, last thing we want to do is get over our skis. All the indications of the business are strong, as strong as I've seen them quite frankly. But the guide is informed by, number one, as I mentioned, supply chain lead times, particularly around semiconductors remain largely unchanged. So we're not going to guide hoping. We're going to guide reflecting the lead times that we see. Now what we see sometimes is we're able to achieve supply better than the lead times. But until that becomes the norm rather than the exception, we're going to provide deference to lead times. Second is, it's prudent to do that. I just think in the environment we're in -- by the way, the second half of last year grew at 15% and -- so it's a higher comp, but I don't want to make that "a dog ate my homework" excuse. I think the business is strong. I think we're -- our full year guide and second half guide being a little bit more conservative as a reflection of elevated supply chain lead times and just being prudent at this point in time.

Great. So APX NEXT will get more deep into that. So what are the kind of key features around capabilities, why people would not upgrade at this point? And where do we sit in the upgrade cycle? And how many years can this last?

I think, think about the average life cycle of a device being 7 or 8 years. We are metaphorically in the early innings, if you had me pick an inning, I'd pick maybe the second inning. So there's a long way to run here on this upgrade cycle. We have thousands and thousands of contracts and customers at varying stages of device refresh. As I mentioned, the over-the-air programming, so the labor savings to an end user is real. The LTE dual band and the ability to take advantage of that other network combined with LMR for situational awareness is real. It's just a superior product that we believe is unmatched in the market, and we have consistently high demand and customers that will take time to gradually refresh their whole base at the high end. It's a high-end radio to APX NEXT. Our goal is to drive APX NEXT down to the mid-tier and then have similar functioning product around TETRA as well. So it's a meaningful refresh for us.

Great. So lots of news on the CMA. Can you give an update in the process and then kind of commitment to that market as well?

Yes. So CMA, the market investigation, we believe is it's -- you've heard me use these words, unprecedented, overreaching, wildly disproportional. I'm very selective in those words because it's exactly how I and we feel about it. We will fight it as long and hard as we need to fight it. There is 2 things going on in parallel since the CMA reached a final decision. There's something called a "remedies" implementation order, which is to say they, the CMA, say we've made this final decision, how do we implement it on this pricing charge control. We believe that process takes to the end of the year, more like about Q4 is our guess. In the meantime, we're appealing the decision. The deadline for the appeal for the CAT, the Competition Appeals Tribunal, is June 5. We will file an appeal before that deadline with a strong set of arguments that have been out in the public domain, but I think further substantiate it, and we'll see where it goes. I -- after the CAT, there's a Court of Appeals escalation process. After the Court of Appeals, you could potentially take it to the Supreme Court of the U.K. I think we're seeing the CMA do some very interesting things writ large more broadly, but I'm focused on Motorola Solutions. And Paul, we're going to fight it as long and hard as we have to, but we expect both the remedies implementation and the Competition Appeals Tribunal to be several more months in duration.

Okay. Thanks for that update.

Sure.

Let's jump into video analytics, very strong demand. It's growing at 20%. Expand on kind of the key verticals and which features are driving demand?

Yes. We have now -- so I talked about our addressable market being $60 billion. The largest piece of that is $22 billion for video security and access control. What I like is, first of all, it's still a very fragmented market, both video and access control. So we have done a roll-up of a number of acquisitions to make sure we have a fulsome camera portfolio, to make sure we play in a muscular way in North America and internationally, primarily EMEA. We have a very broad portfolio, fixed video, both cloud and prem; mobile video, both body worn and dash cam; license plate recognition; and then building analytics across the portfolio to capitalize on all of that. By the way, we also have a bit of a tailwind because with the National Defense Authorization Act, the NDAA, in the U.S., they have banned Hikvision and Dahua to be used for federal use. They've also banned federal grant money to be used for Hikvision and Dahua. By the way, they've also mentioned Huawei, ZTE and Hytera, an LMR competitor of ours in North America. And then the FCC has also promulgated rules around the Secure Equipment Act, which, in essence, and that is still in progress, looks to potentially restrict Hikvision and Dahua with a broadband connection for video to be deployed in enterprise use. So to your point, number one, there is more of a need for video security than ever before from what we have seen. We have a uniquely wide portfolio. We have convenient tailwinds around a high level of concern around Chinese content and critical infrastructure or emergency networks or video surveillance. And we've guided that category of video security and access control to grow 15% for us. We believe the market is growing at high single digits, mid to high. We'll get the report in August that looks back. So the important thing, Paul, is we're taking share in that category. I think it's really important. And what I like is -- if you think about it, we really have a unique public safety and security ecosystem. Now I know everybody uses these words, right, CEO speak. But what I'm saying is we are solving for safer. We're solving for safer schools. We're solving for safer stadiums. We're solving for safer hospitals. We're solving for safer critical infrastructure. If you take -- and you asked about the verticals, education, health care, critical infrastructure. You take an active shooter -- by the way, the majority of active shooters have been a long weapon or a rifle. So why wouldn't or why couldn't you have a solution for Motorola deployed? First of all, it sees any unauthorized vehicle vis-a-vis license plate recognition. You've got perimeter detection, you've got anomaly detection. You've got brandish weapons detection, so you could see a perpetrator with a long rifle. It can take immediate action, trigger access control, do an automatic lockdown, trigger a communications with Rave Mobile for mass notification, let security operations people know in the school and call 911. You could potentially do that all without human intervention. So it's real, it's significant. And unfortunately, it's a big need in schools, but we're seeing, again, back to protecting people, property and places, we're focused on not just having a significant portfolio but best-of-breed product that then you can integrate and orchestrate and work together to protect and connect public safety with private institutions. And that's the path we're on.