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

All right. In this last minute before we get started, I will read the disclosures, the super boring part. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. For those who don't know me, I'm Meta Marshall, I cover networking and cybersecurity here at Morgan Stanley. We're delighted to have Motorola Solutions, have Jason Winkler, CFO, with us here today.

Thanks, Meta, and it's a pleasure to be here. Looks like it's a well-attended conference. So congrats on that.

Yes. Even the 450 slot.

Yes. No, I'm right in front of drinks.

Yes. Exactly. So over the last year, there have been a lot of consternation just around backlog and tough comps that had weighed on the stock. As we emerge from that period and the stock has rebounded as well, what do you think that, that discussion missed about the underlying fundamentals of the Motorola story?

I think -- well, as you said, we completed a strong Q4 wrapped up a very good year achieved record operating margins of 30% despite some tariff headwinds. So what people missed, and not everybody missed it, by the way. I think you upgraded us mid-quarter. But I think there was some -- there's a lot of focus on backlog. We're in a record backlog position of $15.7 billion. And even products backlog is very strong at $3.8 billion. And what we focus on in terms of demand and how the business comes together is about orders. What do orders look like? And beginning in Q2, we saw an acceleration in orders growth to be double digits. Same in Q3, same Q4, not only for the company but for products. And with that strong growth in orders and now that we're in a supply chain environment, where we're far beyond not having the available supply, we're able to turn and get things out the door in revenue. So the pipeline that informs the orders that Molloy and team yet, our supply chain is then able to deliver. So maybe people missed that, but we didn't. We were, I think, pretty clear that the year when we put out a year ago was going to be accelerating growth in orders and more revenue growth in the second half, and that expectation continues. When we guided this year, and we guided it to another $1 billion of growth with 100 bps in operating margin expansion again for '26. That too will be informed by strong orders. And orders -- when we're able to receive an order and get it out the door timely, that's revenue growth. And that's how the company worked for years, Meta, you followed us for a while. But for the supply chain crisis when, frankly, backlog was stuck, we've always been a quick-turn focused business, and it's supported by a pipeline that our sales team knows when deals are going to close, when they can be delivered -- and that informs our forecasting, and that's where we ended up on -- for the year and for the year we're now in.

Yes. Perfect. As we look at the LMR business, still kind of the majority of the revenue, where are we in terms of kind of APX NEXT upgrades? And overall, just how do you look at that growth profile? Or what kind of drives the growth of the LMR business going forward?

Yes. So it's we think of it as a mid-single-digit growing business, inclusive of both product software and services. And that's before Silvus, we'll probably talk about that. But the fundamentals of how that business grows are consistent, right? It's -- you said APX NEXT, which is a device that customers really like that is increasingly selected by customers. It has more features. It has applications that are differentiating it. And that's a better sale for us and a better solution for customers. In LMR, the infrastructure, these are mission-critical networks. There's nearly a couple thousand of them in the U.S. and North in Canada. They need upgrades in time. So we're now launching our D-Series infrastructure the prior infrastructure for these LMR networks, which we designed and implemented is over a decade old. So we're seeing customers like State of Tennessee, Colorado, a region in the Midwest, starting to refresh the infrastructure or hardware that goes with the networks. And together with that, they're signing up for more software content, more services content. And long-duration services agreements because they believe in the future of LMR. We -- LMR is as living and breathing and innovative as it's ever been. We continue to differentiate around it. So for example, the D-Series, not only is it consume less power, more channels and coverage out of it. It also has yet another form of backhaul redundancy. It incorporates LEO. So instead of using microwave or whatever else a customer may use for backhaul. Now you have one more opportunity to connect these sites and resiliency is really important. So having the right product at the right time when it's a refresh cycle ahead of us for infrastructure, it's about a $2 billion a year business for us. We see that as an opportunity for sustaining the LMR growth that we expect.

Yes. an area that you guys have been talking more about, I think you focused on it at IACP this year is kind of noting that you have this kind of $300 per year subscription tied to the radio. What do these most often include? And just what are some of the newest areas you're introducing here?

So the APX NEXT Radio is not just an LMR mission-critical radio. It also has an LTE network embedded in it, chipset. You can -- the customers choose whichever carrier they want to use. But what that allows -- remember, mission-critical voice is a narrowband application. It does voice exceptionally well. It doesn't do data. So we put those 2 together in a device that's mission-critical voice first and has an additional network in it. You can then through that pipeline, deliver over-the-air programming, the kinds of things we're used to like getting an iOS update. We don't even think of it. Before this technology that we innovated around on this platform, you have to bring an LMR radio back into the shop when you want to reprogram it or are you going to add a user, it's really laborious. So that's a pretty big app. LMR networks are defined by coverage areas. So for example, the city of Chicago has a defined coverage area and the network covers exceptionally well. But if an officer leaves and goes to a lake in the Minneapolis, this is an extension of that range where they could go to an LTE and still communicate back with the home LMR range. It does better other improvements like better location. And of course, it can ingest video. It's got a screen. So that applications platform, which we've offered first a few years ago has grown to 200,000 subscribers, a little over that are now on the platform. It's very sticky, and we see that platform count of users going to 300,000 by year's end. So APX NEXT is a better device, solving a customer pain points that we benefit from both a better sale as well as an application stream that comes along with it. So -- and just to size it, dimensionally, there's -- we think about 2 million users in public safety, and we're at 300,000. So a long opportunity ahead of us to continue to have apps in that base.

Okay. That's 2 vectors kind of pretty interesting there. All right. Silvus, which I think we'll talk about more just given kind of the news over the weekend. But the Silvus acquisition has certainly outperformed expectations, at least that you gave to the Street in the first few quarters, allowing you to raise expectations for 2026 to $675 million from $600 million previously. Can you just give a little bit of background about Silvus and just where you're seeing some of that upside?

Yes. So Silvus is a leader in mobile ad hoc networks that are very strong use cases in empowering drones. So if you want to have a technology that empowers drones and allows them to communicate that the enemy cannot intercept, destroy, redirect, take down an impenetrable network, which is what these use cases require, that's what Silvus does. And so the expanding use cases and demand for drones, unmanned systems is part of the growth drivers for why we think that the business will grow to this year, we said $675 million over last year's annual calendar basis of $570 million. And the position that Silvus has both in a technology leadership, augmented by the things that we can help them with going deeper into some federal or international accounts where we serve them today with voice and we can now serve them with data is an area of opportunity. They have a great portfolio, and we think that together, we can continue to grow and perform. And they have a very strong EBITDA margin to start. So it's been a very good acquisition and one that we're excited about. And I think people are starting to understand it better. And it's not LMR substitute. It does something totally different than LMR. LMR does narrowband voice and it uses a different form of spectrum. [ ManA ] uses infrastructure list, high-band networking to do data and video, very different use cases. Now the commonality is they use RF. And they have very good RF engineers that are patented around [ ManA. ] We have exceptional R&D engineers that are patented around TETRA, P25 and DMR. So -- they're happy with their founder and their team likes being a part of Motor and we like them part of Motorola too.

Yes. I mean just -- you mentioned kind of there's these opportunities for cross-sell. Just where do you think you are in terms of MSI either being able to sell to existing Silvus customers or Silvus being able to sell to kind of existing MSI customers.

Yes. So Silvus for us is deeper into defense. So the demand that's in front of them, we think it's a $3 billion TAM and growing nicely, maybe doubling in the next 4 or 5 years. And that's really focused around areas where they're strong in defense. So we have a defense business. We sell to the German military. We sell to the U.S. military. We sell them voice communications. Now we can sell them data. So extending them and going deeper into certain accounts is part of the acquisition thesis. And we also think they had a very good sales team was 50 people. And with the right investments that we can make and adding to that sales coverage, we can help with their growth, help diversify their growth and go deeper into federal defense accounts. There are some use cases in public safety for a [ ManA ] network. It's not an area of focus for us.

Yes. Okay. Maybe just in terms of -- I know maybe to stop on Silvus for 1 more second. Just Ukraine had maybe -- you had been expecting when you initially made that acquisition that you were kind of winding down that revenue or at least taking it out of the expectations. That obviously seems not to be the case now. Just what -- can you give us a sense for kind of Ukraine as a piece of the opportunity -- or just expectations, not financial, but just how you see the Ukraine piece of the business.

Ukraine was a reason why they outperformed our expectations last year and continues to be an area where there's a lot of innovation development and demand. But at the same time, we're going into a broader base of accounts, including the U.S. Federal, including other international. So we see the growth opportunity for them being broader. But make no doubt about it, the innovation that's happening in Ukraine and how Silvus is getting better because of the adaptability and the features that are being developed for that. They're making the product better, and they're coming with demand, of course. But -- and the NATO ally and the support that's been given to them is only making the Allied countries more interested in their own drone and communications needs. So I think a proving ground/ area of opportunity for everybody else to learn from is how we see that theater.

Another area that you guys have talked about with Silvus is just kind of the border defense area. And this kind of being one of those areas where we might see those OBBBA funds. Just where are we in terms of kind of how that opportunity could develop?

So OBBBA funds, new and incremental, Meta, the DHS and DoD are both getting roughly $150 billion, which is to be spent over 4 years. There are 2 areas where we are, I think, maybe 3 where we're really well aligned with that new and incremental funding for our customers. One you mentioned is the border. And it's not just that Silvus networking could be an interesting use case for the border, but also we have a long-range thermal camera platform on silent Sentinel in fixed video. That's also a very important solution there. In terms of other areas of increased resources around the border, mission-critical voice communications is an area that they continue to look for more. And we just recently got our entire platform of APX and the related video and audio accompaniment, FedRAMP high certified. What that means is we can now sell the full portfolio into the federal government and serve their needs. And yes, the funding is -- we're seeing some activity start with those ones.

Okay. turning to the video business. This largely kind of started with the Avigilon acquisition has expanded from there. It's continuing to grow double digits. Just where are you seeing kind of the biggest incremental opportunities on the video side?

It did start in 2018 with Avigilon. They were $450 million in revenue about that. And at that point, it was probably the -- that was the beginning of the third leg of our technologies, right? Before that, it was LMR and Command Center and 911. We've grown it. We've grown it organically. We've added a dozen or more acquisitions to where last year was over $2 billion in revenue. And it's really -- we decipher the business in 2 ways. One, fixed video. That's Avigilon. It's cameras domed and long-range cameras, it's the software and AI that powers them and it's some storage. That's about 70% of that $2.1 billion. The other 30% is body-worn cameras, the cameras in cars and license plate recognition and information around those. Those tend to be -- that 30% tends to be more public safety derived. But to have guided another year of 10% to 11% for the overall video technology, and there are parts that are growing faster. Cloud is growing faster. Body warn is growing faster. So there are a number of significant improvements happening in the overall portfolio. But together, when we step back, it's a 10% to 11% grower effort over double digits last year. And the total TAM to dimensionalize it, $2.1 billion in revenue for us last year, $37 billion TAM. So a lot of opportunity. It's pretty fragmented. We like our portfolio. We like being in a fixed video, cloud as well as on-prem. Customers want a choice. Some customers want the on-prem and some want cloud. We offer an indifference to either model. In fact, we offer a path where if you want to do prem today and you want to migrate to cloud tomorrow, the SurePath. So we like the overall market dynamics. We've been taking share for a number of years.

Yes. Okay. You mentioned kind of the body cameras. Just what has been the response to the SVX and kind of the coupling of the radio and the body camera?

The response has been very good. In terms of the unit count last year, we deployed 15,000 units of the SVX, which just to remind everybody is not only a voice and body-worn assistant, but it's also fully featured video capabilities, along with the digital evidence back end that we have as well. So when fully enabled. It can do everything a body-worn camera can do along with mission-critical voice. So happy with the deployments thus far. Day 1, most have come out of the box in an audio capability. And by the way, it can do translation, which is a pretty important feature for law enforcement and media translation in the field at the edge. And then every one of them represents an opportunity to not have to need another body-worn camera. That's an additional sales opportunity for us and one that we're actively working on.

Got it. You mentioned kind of being agnostic to whether a customer wants subscription or premise, but you've noted kind of this headwind, at least from kind of the subscription transition on the video piece. But maybe showing up kind of in a higher software backlog number. And so just how should investors think about this kind of subscription impact on the video side?

Yes. So we report the business in 2 financial segments, Products and SI and software and services. And software and services has been growing generally over a multiyear view faster than that of products. That's where the more and more of the value and the innovation is. So to the point where last year, 38% of revenues are from software and services. Within there, that's a proxy for our recurring revenue is cloud. Is cloud applications for video, fixed, mobile, the apps that we talked about around APX NEXT. The future of SVX monetization is all there. And so as that business continues to grow, and by the way, the backlog shapes around that same dimension, too. The $15.7 billion of backlog, almost $12 billion of it is in software and services. That's a multiyear strength indicator complemented by the strong product orders growth that I mentioned earlier. That's how we put together our year's outlook. So continued business model transformation towards more and more software and services, but it really does start with a differentiated device portfolio, too.

Yes. Okay. Perfect. Maybe moving on to the Command Center business. This is an area where we're starting to see a little bit more AI come into. You recently introduced some product extensions here. Just how does that change kind of the TAM of the market that you see? Or just how does it change how you see the market opportunity?

So Command Center for us is about a -- had been a $20 billion TAM. And with the introduction of these role-based suites that we've introduced for the first responder to help them write a report and as well as for the dispatcher to do their job faster and better. That's added about another $2 billion of TAM. So TAM got better. The opportunity increased. And Command Center for us is a full -- we're deeply embedded in the command center. It's call taking and call routing. There's six thousand 911 centers in the U.S. We're in over 60% of them with one or more parts of our portfolio, increasingly more. There's applications that I mentioned earlier. And then there's also computer-aided dispatch or dispatch getting the right resources there quickly and the records of what happened during a given call that goes and flows through to judicial system. Being in all 3 of those is really a differentiator. And in the nervous system of the 911 center, it's CAD and to be there and to have these platforms and trusted customers trusting us and doing more puts us in a position where this year, we think we'll grow another 15%, which is the growth that we printed last year. So in a market that isn't growing 15%, it's more like mid-single. So good customer engagement, strong integrated portfolio, and I like where we're at with the addition of now SVX, Increasingly, the edge devices, the body-worn cameras, the audio device -- mission-critical audio devices. All that is being is converging towards the central nervous system of CAD records in the 911 software center, which is really integral to 911.

Got it. More on that AI discussion, you've noted kind of a version of your report writing software, where it edits an already drafted report versus kind of some alternatives, which take a first draft of the report. Just why do you feel like this is the direction to go in?

Well, for us, we think human in the loop is the way to go around enabling this technology. It's been that way since we started with AI differentiation in video. And -- so having AI assist or add perspective, we think, is the right way to go. And keep in mind, the report writing assist for us isn't just helping decipher what happened in the video clip. That's 1 mode. What happened in the audio channel? What happened -- what did the dispatcher here, say? What happened in the video that was being streamed from the command center to the device? We view those multiple modes, which this device and our solution ingests and helps write a report. We think that's a better way of approaching and making the officer more efficient, and that's our differentiator on how we're enabling ultimately, what officers want, which is a little bit of help in automating the mundane and doing it accurately.

Got it. Okay. Memory pricing, obviously, has been a topic of discussion here today. A big concern with any hardware company. I think one of the biggest pushbacks that I got when we upgraded you guys was, well, what about memory. I think what do investors need to understand just kind of about what your guys' memory exposure is?

Well, first of all, I think we dimensionalized last year's direct material input. We use -- I mean most of our printed circuit boards have DRAM and flash, right? And then that enables mission-critical audio video cameras and the like. So last year, we spent about $50 million of DRAM enabling our portfolio last year. We are planning for an increase, just like last year when we set together set our financial plan we knew there would be tariff impacts. So there are certain things you can control and there's things you can't. And so we're planning for in-year cost reductions elsewhere in our $6 billion of COGS to mitigate the risk around paying more for memory, to mitigate the risk that we still have around tariffs in the first half of this year. But there's opportunity elsewhere. And together, with the envelope we put together in our guide, we expect to grow operating margins this year 100 basis points. We'll face headwinds from tariffs. We know that. We'll face headwinds from memory. But there are a number of areas in the portfolio that with engineering's help and vendor consolidation and doing designs differently that we can create cost offsets to mitigate the impact of those things. And we also too, with the growth profile we mentioned. Software and service is growing faster than products in SI has a margin accretiveness to it. That's been with us, and we expect that to continue. Devices. Customers trending towards a more feature-rich device gives a little bit of an ASP tailwind as well. And we'll continue to mitigate memory like we did semiconductor crisis, right? It's how much are we using? Are we using it in the right way. There may even be some opportunities in certain parts of the portfolio to pass it on through price, which we've done before, too.

Yes. Okay. Public safety and defense is maybe seeing this whole host of kind of new companies come to market. How do you view the competitive landscape and just the opportunities to kind of leverage your balance sheet or be more active kind of within the market?

We like our position. We like the competitive differentiation. It's a tough market to enter and sustain the leadership position in. Part of that's enabled through our over $900 million of R&D per year. Part of it is us continuing to be M&A mindful of things that can make us better and companies that strengthen our portfolio. So having the balance sheet to do the M&A part, having the discipline to do the R&D part, and do R&D with the highest yield, for example, half of our R&D now goes to our fastest-growing businesses, which is -- we talked about video, and we talked about 911 center. Those are areas where we're making more R&D investments. LMR, we still invest sizable amount in LMR and with our leadership position, when we bring to market a D-Series, that can lead to growth. When we bring to market an APX NEXT and customers like it. that can help with growth. So I think it's about the staying power of the R&D, the balance sheet and having discipline around staying in areas where we can differentiate ourselves and be strong. If you think about our Chairman and CEO. He's built a great company with a lot of our being on the team of getting out of some really bad businesses, differentiating around where we could win public safety later acquiring around video and now Silvus, sustainable competitive advantage and good margins, cash and growth are how we try and make decisions.

And then just maybe a question on kind of capital structure and just kind of optimizing capital structure and how you're thinking around that, just given that you're continuing to kind of crank out more margin out of the business?

Yes. So our -- the model that's been with us for how we use our cash flow, our growing cash flow is for about 60% of it to be available for either M&A and buyback -- M&A or buyback, we've done both. 30% goes to support the dividend, and the remaining 10-ish percent is for capital, which is -- and even within that, we can step up from there. For example, last year, with Silvus, it went bigger in one direction. The balance sheet can sustain it. We're still at a net debt to EBITDA of just over [ 2. ] Again, the strong cash flow of the company gives us a great position to be in with our credit rating and the ability to flex up when we find something like Silvus. But the opportunities where we are now have in front of us for M&A are in areas like video and software. And we'll continue to look for things that make the overall portfolio rounded out better and also integrated better. The convergence that I mentioned earlier is one where we want to lead. You want a video solution that's well integrated with all the other things that we do, we want to lead in that.

Got it. Maybe just a last question for me. Just given news over the weekend, just any -- like should we think of kind of opportunities for Silvus nearer term in some of these kind of new markets in which we're seeing kind of activity?

Yes. So I think we're all seeing the footage on CNN and the likes around just how important drones can be the whatever is happening. And I think the demand for drones, some of our strongest largest customers for Silvus include the largest drone manufacturers as demand is very strong. I think those are just reminders and the geopolitical environment is one that it's challenging and safety, security, border, defense, these are areas where our portfolio helps.

Okay. Perfect. Any last questions from the audience? In between now and the end of the day. So Jason, thanks so much for being here today.

Thanks, Meta, for having us. It's a good conference. Thank you.