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

Thank you, everybody, for joining. Tim Long here, IT hardware, comm equipment analyst at Barclays. Very happy to have Motorola Solutions with us today, Jason Winkler, CFO. Thanks for coming. Really appreciate it. I know it's a little bit of a crazy time.

So got a bunch of stuff to go through here. Maybe we'll just start with a few of the kind of hotter topics that we get from investors on the name. So let's start with LMR product. This is obviously was an area that had a few good years of growth, probably higher than trend rate and then pull back a little bit on a growth perspective. Walk us through how you're looking at that business, maybe we'll talk about Silvus separately, kind of the core LMR product business specifically over the next few years?

Sure. So LMR for us, before the addition of Silvus because now we call it mission-critical networks, which is whole new MANET technology to it. But as I think about the LMR business for us, where we're a leader in P25, which is largely North America. We're a leader in TETRA, which is a European standard, and then we're a leader in DMR, which is a commercial standard, mean the LMR business for us is a mid-single-digit growth business in totality. I know we're going to talk about products, but I think it's important to -- we think about the business on the whole because there's a lot of high-quality attributes around the product side, and it's supplemented by a very good transition that's taken place to a more services attached software type business. And then Silvus, of course, when we add that in, improves its growth profile over the long term as well. So in terms of products, there's a couple of things we're pretty excited about. One has been with us for a few years. One is just getting started and it's infrastructure, the one that's just getting started. Our P25 customers are mission-critical state, local county, city of X customers in North America are on their second -- our second generation of infrastructure, our base stations, our proprietary P25 standards compliant equipment that now we've introduced our third generation, which is the D-Series. And infrastructure for the company is a little less than $2 billion. And we think that the opportunities in the coming years for that infrastructure change out from our customers. We've talked about some big ones, by the way, on the last call, State of Colorado, State of Tennessee, St. Louis area. They're investing in upgrading their land mobile radio networks for both the infrastructure and the services and software that come with it. Those customers and most customers attach a software agreement or services agreement. And so that will benefit us as well. So D-Series, we're just seeing the beginnings of. We just released it, and we're seeing good uptake and traction and infrastructure takes some time to replace. You got to go touch sites, you've got to change things out. So that will be with us for a number of periods. And then on devices, which is another $2.5 billion of our total LMR business. So together, devices and infrastructure about half of LMR and we've talked about the devices uptake there, continuing towards APX NEXT, which is our most recent radio that is accompanied with an LTE pipe to deliver applications and value to customers. It's priced at a little bit of a premium upfront. And then, of course, it comes with the subscription or apps that accompany it. And our customers overwhelmingly adopt the app. So 200,000 subscribers on the Apps platform end of this year. We talked about next year, we see 300,000 units being subscribed to the platform. So continued driver as well around devices refresh, now with the beginnings of a D-series refresh and then all the services and applications that get attached to it. So LMR before we talk about Silvus continues to be in a strong place.

Okay. Great. Yes, that APX NEXT transition is good. And for those that don't know these are long cycles. These devices tend to last 8 years or whatever.

Right, in infrastructure, by the way, is usually about double that. So we'll see 2 cycles on devices for every 1 cycle on infrastructure. And by the way, also, we talk about cycles, our business, our customers, every customer is on a different journey, different dates of when they adopted it. So we don't see cyclicality in our total business because every customer is different. And the aggregate effect is that it leads to more of a steady state for us. But if you look at a customer and even our top customers in any given year, they're always different because everybody is on their different unique locally owned, locally controlled, locally funded type network and devices journey because they're maniacally focused around state and local governments want control of what's happening. Their citizens expect safety. They do expect interoperability as well. So that when something does happen in a city, in a state and the county and Feds and they all come together, they interoperate. And that's where our technology excels because we're selling to all of those customers. And when you know what hits the fan and they show up, those communication systems are well coordinated and responses are strong.

Right. Right. Okay. Great. Yes, we'll get a little more into APX NEXT and that part of the business. But just one other on the infrastructure. You mentioned the software and services. When we look at LMR services, it's a pretty good growth business for Motorola typically back out what happened with Airwave, but pretty consistent grower. Do you think those infrastructure upgrades on the hardware side allow that growth to continue or even accelerate at times because of you're touching it again and you have more ability...

The content and the hardware is more powerful. It's solving customer challenges like better redundancy, better cybersecurity, better backup and yes, with that comes an opportunity to attach more software content as well as services in what we do. You're right, Tim, if I zoom out and think about the long term of our business and what we've seen transpire and what we would expect, services and software around LMR generally grow faster than that of products. And so that's a content, that's a value, and that's our opportunity to serve our customers more and more. Some customers have turned to us to do things that they once did themselves, right, protecting a network, reading a network, cyber securing a network. We're monitoring a network. We have a NOC SOC in Illinois, we have another one in the U.K. We can scale those operations and do things for our customers that they either weren't doing or that they were doing themselves that we can offer them at a better value and better expertise.

Okay. Great. Second topic is the funding environment. I think there's been a lot of discussion around DOGE and shutdown and a lot of federal stuff and you guys are mostly state and local. So maybe if you could just talk a little bit high level about what Motorola sees in the current funding environment for the core parts of the business.

Yes. So state and local for us, in aggregate, is about a $5 billion business largely focused in -- it is in North America, U.S. plus Canada. And it's thousands of customers and to dimensionalize that, in every year, we see about 20,000 purchase orders, contracts, buying decisions from them. So it's a very diverse space. They all buy for their unique needs. They don't count on the federal government for their funding. They count on property tax, use tax, special tax, general funding sources. They figure out a funding plan to do something that's critical, which is public safety. And so they continue to do that. We look at the budgets. Many state and local budgets roll over in July, some in January. As we looked at the July rollover, the budget situation among our -- most of our customers was for yet another good year in terms of their own funding priorities within their budgets, which, by the way, state and local budgets have to be balanced. That's not the case from the federal government. So we entered and are entering and we're seeing it a period of another good year for funding backdrop. The things that we provide to our customers are generally top of the list. And we've seen orders growth within our portfolio, largely driven by LMR. In Q2, Q3 and expected in our Q4 guidance is for double-digit products growth complemented by double-digit services growth. So it's in both places.

Okay. And it seems the reliance on federal grants is probably a little overstated in the investment community. But maybe to some of the bigger programs like where are we with ARPA and OBBB as far as more impacting the next year or 2 in certain parts of the business?

ARPA is behind us, but for our customers, our state and local customers, we didn't see a significant. It was a super small contribution to what some customers used to buy, single digits, real small. It's behind us. And customers continue to find new and other ways to fund. So we never saw it as a significant tailwind. And so as we look forward, you mentioned OBBBA, different bucket of money that's targeted again towards our federal customers. And we do serve federal customers -- law enforcement continues with DHS as well as some DoD as well. The OBBBA funds that have been made available for both of those -- some of agencies, DoD, DHS, each one is getting over $150 billion of incremental and new funding that's yet to flow, but we see alignment between what are their priorities with that funding and what some of the things we do are communication systems, video security, national defense, Silvus, all of those types of things that we enable and they have prioritized in this new source of funds those represent opportunities for our federal business, which for us is about 9% of revenue.

Okay. Yes. I had a later follow-up on federal but let's hit it now. You talk obviously with the shutdown, not a big part of your business, but remind us how you're looking at that federal business in the near term into Q4, I think you couched it as this business might be subseasonal, but if things pull in, it's better. And then are we back to business as usual in 2026 in that business?

We framed it as we reaffirmed our guidance for Q4, which is for 11% growth, 7% to 8% of which will be organic and that we gave a marker. Greg generally gives a marker color around the following year of 12.6% which is 8% growth, a little north of 5% organic, which again is better than the year we're completing. So we feel good about next year. And that to the extent that when the government was closed, there was any timing issue with orders or engagement with customers. It would add to the 12.6% of next year. Now thankfully, the shutdown is behind us. So we're actively engaged with customers, again, prioritizing the types of things that we do tend to be top of the list. And we're back at it and engage with our customers.

Okay. Great. Maybe let's hit on Silvus. It's still from the investment community still learning this business. But -- you've only had a short amount of time, it already upside the first quarter that they reported and still seeing pretty healthy 20% growth for next year. So walk us through kind of how you view that business given that it's very good margin, very good growth right now, a lot of incremental TAM, really strong technology. So how important do you think this could be for Motorola?

Yes. I think you framed it well. And we've been working through diligence with them for about a year, right? And what do we like about them and now us together, they lead in a different form of RF, which is MANET, mobile ad-hoc networks that have use cases like in the battlefield, where you need a mission-critical data always on resilient, can't be blocked, can't be jammed kind of application, that's what they do. And we're excited about the business that they've built. We're excited about the opportunities that we have together. They've scaled this year on an annual basis to be $500 million. They have 45% EBITDA margins. And yet they have a pretty small sales team, right? It's 30-plus people. We're going to enhance their market coverage with the relationships that we do have. We do have a federal business, but not a defense-oriented business. So we think we can help them there. Their R&D, we spend $900 million a year in R&D, half of which goes to our LMR now MCN technology. They spend a fraction of that. We've already got our best teams working together with them around how to advance their software and solutions even further. And to date, they are generally a very good software-enabled product with little services or software attached around it. That's a lot like we were a decade ago. And you've seen us, Tim, you followed us, transition from where 80% of our business came from more hardware-centric things to we're now more like 60% trending to 40% software and services. So a lot of opportunities, good growth, good platform, good synergies, and it is taking us deeper in defense. And we like that. We like the demand backdrop for drones, unmanned systems. We like the customer base. We like the work that they've demonstrated as best-in-class in Ukraine. And together, I think we can continue to help them grow and diversify their account base.

I imagine Europe is another big opportunity given the focus on defense and there are probably limited exposure to that.

Yes. I just got back from an NDR in Europe and a lot of investors acknowledging that those area NATO countries are getting serious about increased defense spend in the environment we're in. And where is a lot of that going. It's going in new defense which includes things like unmanned systems. And also, another thing Silvus got counter drone, right. So they have a very powerful network to empower communication systems, which have a good use case in drones. But the inverse is true, too, where you don't want drones to be somewhere and you want to field a place or protect a place or monitor a place using similar technologies to keep drones out from somewhere. And we like that application, too.

Okay. Great. And there's been stories about the U.S. government with pretty ambitious drone plans over the next multiple years. I would assume this is a pretty good guide post an indicator for what some incremental Silvus opportunities would be?

Yes, absolutely. I mean you can't read a headline without the current readiness for the defense industrial base and what modern warfare and what drones or unmanned systems, what part they have in the future, and that's a great backdrop for us. In terms of TAM, we've sized it at roughly about $3 billion. It's going to, we expect, double in the next 4 to 5 years. And Silvus has a lead. There's 2 or 3 other competitors in there, but they have the most robust platform, scalable and can't be intercepted better than anybody else's. And we're going to continue to grow that technology lead, and we're going to grow it from an account coverage or a sales base lead as well. So we're excited about Silvus. At the same time, we're excited about the majority of everything else that we do, which is -- next year, $12 billion in everything else in our core, $600 million in Silvus, the relationship, we're very excited about it, but not to miss the fact that we have fundamental drivers in our business in LMR, in Command Center and in video that will continue to be strong for us.

Yes. Before we get into the video and command center, just to go back to APX NEXT, you mentioned the 200,000 going to 300,000. Where are we in what inning are we in the transition to APX NEXT? And then second, if you can talk about -- I think that $300 number encompasses like 6 or 7 applications mostly. Do you see growth in the ability to monetize the base on top of what's currently being monetized for the applications?

We do. So there's 4, 5, 6 core apps that have been delivering value for customers and driving the adoption curve, extending the network, programming the radios, better GPS and video ingestion are 4 that are top of the list. We're developing more. It's a platform to size it, again, next year's end-of-year view, 300,000 units, there's 2 million public safety users. Now we have significant share. We don't have all of them, but that gives you an opportunity for us to see how this thing plays out. We're a few years into it. And just this year, we've fully tiered the portfolio. I mean when we released the APX NEXT platform, which was industry-leading and remains so, it was targeted at the quad-band radio, four bands. Most complicated users with the most needs for interoperability. That's where we started. We fully tiered it out now where if you're a simpler user and you're on 1 band or RF and there's an APX NEXT for them, too, which comes with the applications platform. Now another thing that can help us bend the curve around adoption is the release of this SVX device, which starts first as a mission-critical audio device paired with only APX NEXT. So as that has gotten some very good customer reception, we're already in 70 accounts as an audio-first device. Many of them are trialing the video capabilities to examine what that could bring as well. But we think that, that strategy not only will help us sell value upfront, help customers with an AI assistant but position us as well for further video growth, including body-worn camera video, which the device does and, of course, all the value on the back end and storage redaction, evidence management and the platform that we have there as well.

Okay. Yes, it's a good segue to the video business. So maybe at a higher level, still guiding that business, I think, 10% to 12% annual growth. So I know there are some headwinds around the move to SaaS. So maybe talk -- and the software piece of that software analytics is obviously growing pretty rapidly. So maybe walk us through the calculus of how we can continue to see that business as double-digit growth.

Sure. So we guided this year, 10% to 12% in the total video business, which last year was 1.9. So plot that out, we're over $2 billion expected this year. If you then look at how the growth has shown up, it's stronger growth in software and services for a number of periods, a couple of years, where software content in that double digits is growing more than the related products in SI. And that's a favorable trend. That will -- we expect continue. And it's complemented by what you just mentioned, Tim, which is a transition to cloud. So think in fixed video, which is about 70% of that total video business. Most customers today are on-prem, but we're seeing an increase in the number of customers that are wanting to run the software, which is the very powerful ingestion of lots of cameras in the cloud. Still includes a camera, a very good camera, edge-enabled analytics. We lead in what's powered at the camera's edge, complemented by what happens on the software layer. So within that growth profile, and you'll see it in software and services in video is a transition to customers, more and more embracing wanting to run the software layer for them in the cloud. The market -- the most of the market remains on-prem today, and we have a portfolio in both places. We are a leader in the ability to serve a customer how they want to be served. If they were a big scaled operation and they want the control in the on-prem, we have a portfolio called Unity. And that's exceptional portfolio from -- started with Avigilon. If you want to explore moving to the cloud and running the very good cameras that we engineer in the cloud, you can do that, too. And to be positioned in both places, I think, is a really special opportunity for us, and we're going to continue to drive the growth while transitioning to that software stickier content.

Okay. Great. And on the SPX, you mentioned some good initial activity with some trials going on. When do you expect that to kind of more fully ramp as body camera and because you need APX NEXT with it, do you think it will drive increased upgrades to APX NEXT? Or how do you think that dynamic?

It will do all 3. So we're selling it today. it is already -- and it's more feature rich in terms of what it can do. It's not just a speaker microphone. It's an audio assistant. It can help through AI assist right reports, it can ingest data from the command center. Another important differentiator, audio logs. What -- if you're going to write a report and a police officer between what happens, it's multimodal, right? What happened between you and the assailant, what were you being told from the command center in your audio, were you being told to do something? Did you follow directions? Where you following policy? All those types of multimodal things come together in this device, whereas the first draft that's available in using that tool is high quality and of course, then subject to review and edits and the like. So we like the position of where it puts us around mission-critical audio. It will lead to a little bit more content upfront. And then over some time, it will, we believe, lead to higher video growth, including more customers in North America on our body-worn camera platform. We have a body-worn camera platform. We're in North America. We're doing more with SVX than we ever had. And then I think about the international portfolio, which is a little different device, but we're -- the strength of our body-worn camera portfolio there, we talked about in the earnings call, we're in 18 countries of countrywide deployments where they tend to prefer at the moment on-prem deployments, and we have that value proposition for them, too. So I like our long-term positioning and what SVX does for us in North America, extends what we can do for our customers and extends the possibilities for video into the future.

Okay. And I'm guessing in North America, one of the hurdles is maybe an agency is with a competitor that has some type of subscription. And I think this is something you've come across in your command center software business, which we talk as well, maybe win the 911, but they don't have CADs not up yet or something like that. So is that a little bit of an inhibitor in the near term on the body camera?

There is an incumbent in the market in North America who's been there a while and has contracts. But to be on the body or the person that we talk about of already having that device deployed and the opportunities that presents at every contract renewal for us to have a conversation about why do you need another device. It's already there. We have a great back end. It converges. It's taking information and it's delivering video from our camera platform. So I think it's a great position to be in. Stay tuned. I think we'll end up doing more on the platform, too. I think our opportunities around using voice, data, video and around an application stream and a value proposition to customers will be more put into a suite format where customers will be offered a more comprehensive enablement that doesn't matter whether it's writing on a camera or writing on an audio device or a converged device. It's just that -- it's important applications that can help them do their jobs and respond better.

Okay. Great. And I did want to touch on the command center software. You guys -- it's been a pretty good growth business and very fragmented. Your share looking at compared to the total TAM is not crazy big. So a little bit more of a land-and-expand model. So kind of walk us through where you are with the PSAP community and selling multiple modules into it.

There are 6,000 911 centers or PSAPs in the country. We're in over 60% of them with one or more products. An important one is VESTA NXT, and we're transitioning that call routing platform to be cloud. We've integrated it with our CAD and records. We've integrated with our call taking. We have a full integrated platform. And to be in those -- that many accounts and offer every customer additional content or additional migration paths is an excellent place to be for growth, and we're committed -- fully committed to being in CAD, which is the central nervous system of these 911 centers. It's the ERP of what they do. And it's challenging, and it's customized and it's integrated and it's -- but that's what we do. We help customers solve problems, Motorola solutions. And with that systems orientation and a platform that's fully integrated, we really like our position in the command center. It's growing at 12% this year. We talked about apps around the platform for LMR. Those apps are monetized in command centers, so that's a growth enabler, too. So like being in the command center and like the apps that opportunity that presents to us, and we also have incident response like a portfolio called Rave that we acquired about 1.5 years ago. So definitely continued growth opportunities for us, and we've been taking share in that market.

Great. I did want to touch on a financial question. So maybe talk to us a little bit about capital return. You guys very acquisitive over the years. That's always a part of it, buybacks, dividends, there's been some disruption in the stock this year. So how do those priorities shape up? And as you look out through this year and into next year?

We have a strong balance sheet that will enable us to continue to do both. M&A funnel remains active. It's pointed in video and software like solutions that you've seen us do. In video, we started with Avigilon. We found 11-plus companies that make us stronger in total video. And in terms of the opportunity that the current stock price presents us, I mentioned that we're on path to buy over $400 million already this quarter, and that will be over $1 billion for the year, which is more than the last year or the year before that. So we can be opportunistic. We have a strong balance sheet. Our backlog position as I communicated for as we expect to end this year. On path towards $15-plus billion of backlog in total with high 3s in the product segment, which has gotten a lot of attention. Those -- that's a very strong position to be in and to expect the growth that we do next year. And so the stock price at the moment represents an opportunity as well as the M&A funnel.

Okay. Great. Yes, I think we're basically out of time here. So Jason, really appreciate the time.

Thank you.

Thank you so much.

Thank you, everybody.