Motorola Solutions, Inc. ($MSI)

I guess, good early afternoon. My name is Tomer Zilberman. I cover 2 areas within the bank, software, networking and a little bit of public safety as well. Today, I'm joined by Jason Winkler, CFO of Motorola Solutions. Jason, thank you for being here with us today.

Pleasure Tomer. Thanks for having us.

Yes. Absolutely. Jason, maybe just a high-level question to kick off with here. Just for investors that are a little bit newer to the story. Can you give us a brief background of Motorola Solutions, right? You have several different product lines from LMR, which is land mobile radio, very simply walkie talkies for law enforcement agencies. Maybe it's a little too simple of a advanced

Very advanced

Very advanced wacky takes you have a video security portfolio for both fixed video and mobile video, which includes body Warn, which we will discuss about a little bit more in depth in the command center, which is a 911 call center software. -- right? And you also recently made an acquisition, recent as of the last couple of quarters of Silvis, which is drone network technology and most recently, an acquisition as over the last few days for counter-drone technology. So can you kind of just walk us through all the bits and pieces there

So I'll start with the technologies, which is really what we sell and what our customers count on us for. So mission-critical networks, which includes purpose-built public safety networks for communications, police fire first responders is a significant business for us, which we lead in. We added to it Corvus, which we'll talk about in a minute, which is mobile ad hoc infrastructure networking protocol that's commonly used in defense and in powering drones in a defense and warlike context. And then we have also video solutions, which came to us through the acquisition of Avigilon, 5 or 6 years ago, which is now over a $2 billion business for us. And then the last 1 that you mentioned is we are in the command center or 911 center empowering the software for the workflows of the call takers, the call routers and the dispatchers that really important epicenter of calling 911. The software there is is generally ours, and we have strong presence there. So in terms of growth algorithm for this year, the mobile communications network technology, 8% to 9% video, 10% to 11% and the command center of 15%. Additionally, we record and report the business on 2 financial segments, full line P&Ls, products and the onetime integration to make those products perfect. And then software and services, which is approaching 40% of the business, that's how we show profitability and the likes. But our customers count on us for an end-to-end video solution or an end-to-end networking solution for comms and end-to-end solution for 911.

Right. Let's talk about the biggest segment first, Mission Critical Networks. As you described, a combination of the land mobile radio and Silvus. If I take the growth outlook that you just gave the 8% to 9%, we're seeing different growth rates upon the 2 segments, right? If I look at the history of the growth of the LMR segment over the last few years, it's grown anywhere from 7% to 9% for you guys the last several years. It's now I think you're guiding to about 3-ish percent growth for the core LMR business. and that's supplemented by Silvus so you have guided to grow 30%. -- right? Can you just think about the trajectory of each growth segment? Why are we seeing the deceleration in the LMR? And -- maybe on the silver side, how sustainable is that 30% growth target?

Yes. So Silvus, in our recent earnings call, we increased our outlook expectations to be $750 million for the year. So that's an important sign for them, but also the core business of MCN, which would have been called LMR previously, we also expect to do $25 million better than we thought in February so. And the growth characteristics, Tomer, are that the second half acceleration is implied in our guide. It's expected -- we talked about that since February. And the makeup of this year is really informed by prior period comps. Q2 in MCN or LMR, specifically will be the last of some very elevated comps, which were a result of the backlog that we had that was frankly stuck because we couldn't get the requisite supply. Once we did, we got that through, customers were happy. It is presenting us with significant comps. But as we look at the second half, Several things inform why we think growth will accelerate. First of all, demand -- forward-looking demand orders in MCN and in LMR have been up double digits for quarters in a row orders. We expect that double digits to continue. And with the opportunities ahead of us to turn that revenue in the second half is why we expect the characteristic of this year to be better growth in the second half. By the way, that's not unusual. That's happened pre supply chain crisis where the attributes of growth are faster in the second half. We have -- the other thing about our business that I think sometimes isn't totally understood, it's in public safety. Our COO, Jack Molloy likes to frame it and runs a very disciplined ship around deals, dates and desks. We know through quotations, through customers, through engagement, who has to approve it, when it needs to be approved when the order is going to be received, when the supply is going to match it, all of that is a highly visible forecast through pipeline. That too is informing what we expect to happen in the second half. So MCN is in a very good spot. It's supplemented, as you mentioned, by Silvus, and both are strong and have good growth characteristics into the future.

Right. Maybe to continue the discussion on the core piece of the business first, I think you're right, there is mechanics of backlog and tough comps that are kind of distorting the growth levels, but -- if you actually remove that, there was maybe a little bit of a decline this quarter, but I think implicitly, the second half LMR is supposed to grow 6-ish percent, kind of upper or mid- to high single digits. Without giving specific guidance, right, the historical trajectory of the LMR market is about low-ish single-digit growth, maybe GDP type growth. As you think about the portfolio today and the customer demand today with things like Apex next, is there an opportunity to sustain growth above that historical market growth?

It's a great market, as you mentioned. Actually, in the second half, we expect products, the segment I mentioned, organically to grow almost 10% and even MCN or LMR, as we were describing the core organically to drive that 10% growth as well. So strong attributes actually even stronger than you mentioned expected in the second half. LMR is a market that we've led in. We lead in public safety for P25. We lead in TETRA, and we lead in PCR. Those are the 3 kind of standards globally that are deployed. And the opportunities for us to continue to grow through the incumbency that we have in serving our customers in deeper and richer ways is a growth driver. We have customers that are accounting us to do more and more to serve and maintain their networks, upgrading their networks, the devices that they're using on their networks are an opportunity for refresh, for example, -- we have, by year's end this year, we'll have 300,000 Apex next. That's our latest and greatest radio subscribed by year-end. That device is feature rich. It comes to us at a premium when we sell it. And it comes at a $300 per year application revenue stream. So entering in next year, we'll have about almost $100 million ARR business from the LMR incumbency that we have, which, by the way, we record in Command Center because it's apps. It's an extension into the command center of those applications. So we're creating growth, not even with -- not just within the LMR of the category or MCN, but it's helping fuel growth within the command center technologies. -- through the innovations and the applications that we're developing. So a great market, one we continue to lead. We spend almost $1 billion in R&D Half of that goes to LMR and continuing to advance the technology, which we think will be with -- and our customers have voted with their contracts years and years to come. The networks are only getting more complicated and better as we develop them.

Understood. Maybe moving on quickly to the silver side of the growth equation. You did talk about how you just raised the savings guidance for the year. Maybe a 2-part question. One, if we look at the Silvus business over the last few years, even prior to when you acquired it, there was a strong connection to the Ukraine Russia conflict. How tight are you still to that is the incremental growth opportunity coming from that? Or are you starting to finally realize more revenues from global contracts? And the second part is you also talked last quarter about increasing manufacturing capacity. And I was just kind of future-proofing the capacity, meaning you're trying to get supply ahead of demand? Or are you already seeing the demand here and you're trying to get the supply to catch up?

Sure. So the Silvus demand continues to be internationally led, not just Ukraine, but U.K., Germany and other NATO allies that are surely supporting Ukraine, but also preparing their own countries for the defense needed that Jones empowered by solves can provide. Additionally, we're seeing greater penetration in the U.S. armed services with that -- with the routes to market that we have there. So we're really pleased with Silvus, and I remind people, Silvus is really a defense technology empowering drones in a battlefield context. When you look at their press release when they introduce a new product, they talk about how that product benefits the modern war fighter. That's the use case for Silvus. It's defense and it's an increasingly important one. Silvus, as a platform is empowering over 100 different drone manufacturers in 150 different drone platforms. It's the choice when you want to deploy communications network that cannot be intercepted jam taken down, interfered with, it's resilient and it's the best. That's the Silvus technology. That's why we really like it. Of course, it's built around capabilities, which is also at our core. So the technologists in our companies are very excited about that opportunity. But the route to market is about defense. And the investments that are happening there, position it for growth. On your question on supply, not only is demand strong, we're increasing supply. So we've helped them increase their capacity in California where they had been. But we also added a facility in Salt Lake, which is absolutely a future-proof facility. It's a large modular facility that we will use to meet the demand and grow into for many years to come and it provides us with duality of sites, which is always important and provides us with more output to match what we see as increasing demand.

Got it. Maybe just 1 more point on the defense aspect, right? You have a close partnership with the U.S. Department of Advance. Where are you positioned with the UAS groups 1 through 5. First of all, I have a very limited understanding of UAS groups 1 through 5. So if you can help us walk through what that means and it was smaller.

I mean many of those categories are called attritable, meaning if it doesn't come back, that's acceptable. So a lower profile cost point of a drone. And of course, that end needs to be matched with a lower cost option for empowering it from a communications protocol. So Silvus, which is primarily at the higher tier, it's a very resilient, robust offer is also tiering into areas of smaller attritable drones with the Streamcaster of 5200. So they're doing both. They're empowering the top larger side, but also tiering the portfolio in a way that meets some of the demand that you're mentioning around the smaller size for a factor. So growth in both places and taking that portfolio and expanding it is part of the strategy that Bob Beck and the founder, who now works for us and Jack Ma have to expand that market in the DoD beyond Army into other parts internationally, and we're seeing good interest in that Solvus investment for sure.

Got it. Maybe segueing into another part of the drone area. I would be remiss not to ask about your recent acquisition of D-Fend. First of all, it's counter drone technology. So can you talk about specifically what it does and how does it fit into your overall done portfolio considering you have 1 part which is Silvus and another partnership with Brink drones?

Sure. So while Solvus is defense, we covered that, you mentioned Brink. We have a strategic partnership with them. and a route to market where together, we enable drones as a first responders. Customers there are not battlefield warfighters, they're public safety. And DFR and Brink and our solution is eyes in the skies to see what's happening in an incident fast and bringing back video to the command center. It can also bring a payload to help somebody need with maybe a medicine, et cetera. So it's an important tool for public safety, and we're well positioned with our DFR portfolio with Brink. The most recent acquisition is around counter drums, securing Sky, securing the city, securing the stadium, securing airports, keeping drones out of places, unauthorized drones and what we really like about D-Fend -- and by the way, we've been working and have deep relationship with Zohar and team for 4 years. We've admired the in-force air is their technology progression. They've had good success we've routed to market with them on some federal law enforcement opportunities. And together, we think we can really take this deeper into public safety because they're the ones that are being expected to secure the sky. So it's an important solution to a pain point that our law enforcement agencies, federally, domestically and internationally have. And what we like about their technology is it doesn't -- it does not just jamming airwaves and not just radar. But it does gracefully intercepts through cyber takeover a target, a drone, and gets it out of the air space lands it carefully. That's their differentiator, is that they can do not just jamming, not just radar, but INTERCEPT-rone or more in an area where other authorized drones might be desired to be. So it's that property and that cyber takeover solution that really differentiates what Zohar and team have done and the need for our customers. It's not only a technology extension because it again is the form of RF sensing. But also, it's a route to market. We have a sizable customer base who are eager to deploy these. Yes, there's some policy regulatory training certification to use these systems, and we're going to work with our customers to work through that as well. the revenue profile that they're driving to year's end this year, we think they're going to achieve $185 million in revenue for D-Fend. And the last 3 years, they've grown 50% or more per year. That's more than 50% CAGR. And so we're really excited about the work they're doing and what we can do together. Not only is it growing, it's profitable. So from a financing standpoint, we have the close of for defend as well as Bell Canada, an acquisition that we're excited about that announced a while ago, that's the managed services operation of many networks in Canada. So together, we're likely to introduce about $1 billion more of debt, which is well within our headroom of 2x EBITDA. EBITDA this year is going to grow over $400 million. So to add $1 billion of debt, we want to maintain the flexibility to do our strategy around deployment of capital, and we're really excited about being in this drone space purposefully, Sobic for Defense, DFR with Brink, as well as now counter drone technology with defend, all of them serving our customers with specific needs.

Yes. Maybe to ask you a follow-up on the competitive landscape. I want to go back maybe to the growth and profitability part. But -- when we think about the drone as a first responder market, you guys are the leaders there with Brink as well as some other leaders such as Axon and Fox safety that both have counter drone technology. So is the is the way to win this market more about the differentiation about talking about how you can jam certain drones and not others? Or is it more about kind of building a holistic drone platform where there is a differentiation in the full capacity of the suite.

I think it comes down to the technology but also how it's deployed. So if you think about the synergies we have within our LMR networks, our customers where we own and maintain and service LMR network towers. Those are prime candidates to launch DFR from. They're prime candidates, that installed base to launch or configure defend from. So there's a footprint opportunity as well as, of course, the consolidation of the technologies and all of them around RF sensing. So we like our position. We like the investments we've made, and we like that it ultimately is serving customers with pain points we know they have. We're engaging with them. And to have that discussion and now have the technology and the partnership and the route to market is a great place to be.

Got it. Now maybe on the growth piece of the equation, right? You had mentioned, I think, last 3 years, 50% CAGR. What's the sustainability of that growth and alongside the $1 billion in debt that you're raising for the acquisition, what else can you tell us about profitability metrics?

Sure. So $185 million, we expect them to achieve this calendar year. We'll add $1 billion of debt. We'll pay the financing associated with that, and yet still the opportunity, we believe, is that -- excuse me, Defend will be slightly accretive next year. So it has a good profitability base. It has a good growth outlook. If I think about growth opportunities, mitigation of drones, detection and mitigation of drones brings to us an additional $1 billion TAM. And we think that, that TAM is going to triple by 2030. That's where the market opportunity is, and that's where Defend positions us to go after that opportunity and with growth and profitability and some investments, we expect it to be slightly accretive next year.

Got it. Maybe last question on MCN, given we're starting to run a little bit long time, radio infrastructure, right? You guys have disclosed that, that accounts for about 1/4 of the total MCN business. What's the opportunity with Series?

So D Series is specifically around P25, which is the standard common here in the U.S., Australia and a few other markets. D Series is a new introduction of the infrastructure that powers these networks, these purpose-driven networks. It's a decade since its predecessor. It covers faster and better, consumes less power. It includes more network resiliencies with the addition of Elios for forms of backhaul connecting sites and providing yet another resiliency layer Customers are pretty excited about it. We've announced some pretty big deals. The infrastructure that's in the field is aged and customers are buying an upgrade. And with that, of course, comes more services, more software, likely an extension of their maintenance contracts. So it's not only going to help us grow in the next several years on the infrastructure or the products and SI side. It will also be a growth driver for services and software. So good receptivity from customers around the D-Series and it's just beginning.

Got it. Let's move on to video security, and I want to specifically ask you about body one within the market because you were announced, I believe it was last year, the SVX, which is an advanced body one camera, which you guys call a body worn assistant. Can you first maybe take us through the TCO advantage of the SVX given if you take a law enforcement officer who has a radio on their hip, the body-worn camera in the middle of the when you remove the RMS as part of the SPX equation, what kind of cost savings does an agency get from that?

Well, Tomer, we're thinking about the other way. removing the body one camera from someone else from the equation. You're still -- the RMS, which was formerly a speaker mic is now a body-worn assistant paired with Apex next, so our cost synergy to the customer, our value proposition of the customers, you have a body worn assistant. You have an industry-leading radio. Why do you need a third-party device to do exactly what's capable now on the SPX. It's not only a great audio assistant. It's a terrific video assistant along with the back end and digital evidence management and all the capabilities of redaction that aren't really critical for that market. So our cost advantage in our TCO is about anchoring around mission-critical voice, additional modalities with LTE included and the AI-assisted properties that are embedded in our device as well as the back end and the subscription that goes with it of $99 is priced at a discount to the incumbent. So we like our strategy here. It's a one that we think wins over time. We've deployed 100 customers have chosen the solution. 30% of them have activated the video capabilities. and we're selling more and more of them, the activity, the funnel is high. And by the way, it also helps customers really think through their next upgrade because in order to pair SVX and have that pipeline, you're going to choose Apex next yet 1 more reason where customers are going to choose our industry-leading latest radio because they want the benefits of the SPX and they're together. So our strategy is one of to continue to meet customers solve their pain points and offer them an alternative and one that's easy to contractually choose as well as physically. You've got the device on, you let's activate it, and let's add that feature capability. That's really our strategy.

Yes. I mean I think if we look at the competitive marketplace for the body Warren, I mean, the incumbent Axon had something like 80% market share, right? And I think what role did a good job prior to the SVX of being an alternative for maybe the Tier 2, Tier 3 agencies, but I think Exxon really had a strong foothold on the Tier 1 -- so when you think about everything you just discussed, does that finally put you in a conversation with the Tier 1s?

Well, I think we've done a pretty good job being in the market as an alternative. I mean we've had through acquisitions, been in the body worn and in-car video since 2018 or '19. Great portfolio internationally. We do quite well on greenfield. Most international customers are choosing their first ever body worn opportunity. And when we go head-to-head, we do pretty well. It's the incumbency in North America that we're working our way through. And yes, the SVX strategy, we think, is a game changer. -- for the opportunities in disrupting and winning flips into the future. In the meantime, we're going to continue to serve customers with their voice needs the voice-assisted properties and when they're ready to take on video at the next contract cycle, opportunity, frustration, et cetera, we're well positioned to do that.

Right. Maybe before we go back into the individual kind of segment line then. I want to ask you a more conceptual question, right? Because we spoke about some of the same competitors here who are also trying to grow into other areas of your market right now. I think Axon made 2 acquisitions for the 911, the command center, right? So you historically have touched more key parts of the public safety workflow, right, across LMR, video and command center and you've had it for longer. So you've had more market mind share awareness, whatnot and the resulting market share. How do you think that the competitive landscape evolves over the next few years, not just on the point products, but as the platform as a whole?

You're right. We've been in the market a long time. There are 6,911 centers in the U.S. We have 1 or more parts of our solution in 60% of them. And so there's -- whether it's call taking or what we call Vest and next, whether it's CAD or records, the recordization of what happens during these incidents or whether it's the dispatch, which ultimately makes its way into LMR communications and using voice to dispatch the nearest responder to help somebody. That entire workflow is integrated. It's not only integrated on-prem, it's integrated in the cloud. And traditionally, the barriers for 911 operators, which are critical operations have been -- upgrades are painful and disruptive. And with our integrated fabric, we're making upgrades less painful. And if you choose our solution, it's naturally integrated. If you don't have to do interfaces. So we really like where we're at. We're familiar with what those other possibilities were, looked at them. We like what we have, and we're differentiated, where we have core, not over-the-top solutions, but end-to-end workflows that are becoming more and more integrated, and that's what customers really want. They want -- in this critical solution, they want a vendor a provider, a partner to solve their problems and do it in a way that has accountability and to be in all of the parts of the command center, including CAT, which is tough, which we have a strong presence in, that's like the epicenter of a 911 center. To be in cat and records is really important. It demonstrates to our customers that we can solve their complicated solutions.

Right. We have a few minutes left here. So maybe I want to open up to the room if anyone has questions. No. I don't keep going then. Maybe in the last few minutes, we'll talk about margins. memory first. You called out last quarter that memory costs are doubling, right, from $50 million to $100 million.

A little more than double.

Yes. A little more than double, but it roughly equates to, I think, about 2% of your COGS. So not a huge impact, but I kind of want to back up and ask you what where are the memory impacts most prevalent? And what steps are you taking off.

Yes. I mean the categories are DRAM and flash in general. And it's a small portion of our bill of materials in total, as you mentioned, it's also small when it comes down to the amount of DRAM or flash and the camera relative to its overall bill materials the same for a device or a radio. Nonetheless, it's a headwind, right? So what are we doing about it? We're finding offsets elsewhere in our $6 billion COGS line, working with vendors as we did in prior scenarios like when semiconductor costs were inflating, we were still growing op margins because we were finding offsets. We've done a little bit of pricing around particularly high memory content solutions like video recorders. So we've adjusted price a little bit there. But it's really about finding alternatives. We are getting the memory that we need. We're paying more for the memory. That's the reality of the market. But to be able to grow op margins as we expect 100 bps this year, and grow it in both segments. Despite this headwind, that's sort of table stakes DNA, figure it out that we expect our supply chain and teams as well as a little bit of price opportunity to do. Gross margins for the company despite this headwind and even a little bit from tariffs, would still remain with us, different types of tariffs. We expect to remain comparable over last year. So the OE expansion and the opportunity that's there, in front of us is positive.

You beat me to the next question about operating margin. But maybe I'll ask one last question here is the funding environment, right? I think historically, you talked about the OBB kind of as a potential tailwind. I don't think we heard too much about it lately. Is there anything that you're seeing, finally, funds started flowing through the end of last year? Are you seeing any kind of...

The overall funding environment for our state and local business, which is the heart of our North America is good. It's relatively similar to last year. Customers figure out funding and prioritization for what we've been talking about, which is mission-critical. In the case of OBBB, some of our federal customers are seeing and using that opportunity, and we've seen a couple of federal opportunities come our way with those as funding sources. So just starting to flow. It's over $150 billion for both DoD and DHS. So again, one more opportunity for customers who need these solutions to find funding opportunities, which they generally do.

Got it. Okay, Jason, we are out of time. Thank you so much for being here.

Thanks, Tomer for the time.

Thank you. Thank you all.