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

Good afternoon, and thank you for holding. Welcome to the Motorola Solutions Third Quarter 2026 Earnings Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. The presentation material and additional financial tables are posted on the Motorola Solutions Investor Relations website. In addition, a webcast replay of this call will be available on our website within 3 hours after the conclusion of this call. The website address is www.motorolasolutions.com/investor. [Operator Instructions] I would now like to introduce Mr. Brian Piotrowski, Vice President of Investor Relations. Mr. Piotrowski, you may begin your conference.

Good afternoon. Welcome to our 2026 third quarter earnings call. With me today are Greg Brown, Chairman and CEO; Jason Winkler, Executive Vice President and CFO; Jack Molloy, Executive Vice President and COO; and Mahesh Saptharishi, Executive Vice President and CTO. Greg and Jason will review our results along with commentary, and Jack and Mahesh will join for Q&A. We have posted an earnings presentation and news release at motorolasolutions.com/investor. These materials include GAAP to non-GAAP reconciliations for your reference. During the call, we reference non-GAAP financial results, including those in our outlook, unless otherwise noted. A number of forward-looking statements will be made during this presentation and during the Q&A portion of the call. These statements are based on current expectations and assumptions that are subject to a variety of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Information about factors that could cause such differences can be found in today's earnings news release, in the comments made during this conference call in the Risk Factors section of our 2025 annual report on Form 10-K or any quarterly report on Form 10-Q and in other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statements. I'll now turn the call over to Greg.

Thanks, Brian, and good afternoon, and thanks for joining us today. I'm going to start off by sharing a few thoughts about the business before Jason takes us through our results and our outlook. First, Q3 was another outstanding quarter, highlighted by record revenue in both segments, across all 3 technologies. Revenue and earnings per share exceeded our guidance as we continue to see strong menu across our entire safety and security ecosystem, both segments grew double digits with products in SI growing 12%, driven by growth in public safety LMR and continued robust demand for Silvus, while software and services grew 13%. Additionally, we expanded operating margins 200 basis points, with strong contributions from both segments, and that's inclusive of higher supply chain costs. Second, demand remains exceptionally strong with our record Q3 orders and our highest ever ending backlog of $16.6 billion, up approximately $1 billion from last quarter. Orders grew over 20% versus last year with broad-based growth in both segments, demonstrating the critical need and continued trust customers put in our solutions. And finally, following our strong Q3 performance, we are again raising full year guidance for both revenue and EPS as well as now increasing our full year cash flow expectations. And with that, I'll turn the call over to Jason.

Thank you, Greg. Revenue for the quarter grew 12% and was above our guidance with double-digit growth in both segments and in all 3 technologies. Revenue growth from acquisitions was $211 million, during the quarter, while FX tailwinds were $11 million. GAAP operating earnings were $777 million or 23% of sales, down from 25.6% in the year ago quarter, which included an $87 million noncash charge for the increase in the Silvus earn-out provision driven by the continued strong performance of the business. Non-GAAP operating earnings were almost $1.1 billion, up 19% from the year ago quarter and non-GAAP operating margin was 32.5%, up 200 basis points, driven by higher sales and improved operating leverage partially offset by higher supply chain costs. GAAP earnings per share was $3.06, down from $3.33 in the year ago quarter, primarily driven by the $0.52 noncash charge for the Silvus earnout that I mentioned earlier. Non-GAAP EPS was $4.69, up 16% from $4.06 last year. The growth in EPS was driven by higher operating margins, partially offset by higher interest and taxes in the current quarter. OpEx in Q3 was $696 million, up $44 million versus last year due to acquisitions. Turning to cash flow. Q3 operating cash flow was $662 million, and free cash flow was $589 million. Our year-to-date operating cash flow was almost $1.6 billion, up versus last year, inclusive of investments that we've made in inventory. And we're now raising our operating cash flow expectations $50 million from $3 billion to $3.05 billion for the year. Capital allocation for Q3 included $200 million of cash dividends, $94 million in share repurchases and $73 million of CapEx. Additionally, during the quarter, our Board of Directors approved a $2 billion increase to the share repurchase program. Moving to segment results. In Products and SI, sales were up 12% versus last year, driven by double-digit growth in both MCN and video. Revenue growth from acquisitions was $169 million and FX tailwinds were $7 million during the quarter. Operating earnings were $671 million or 31.7% of sales up from 29.3% in the prior year, primarily driven by higher sales and improved operating leverage, partially offset by higher supply chain costs. Some notable Q3 wins and achievements in this segment include $140 million P25 systems and device order with the Federal Bureau of Prisons, a $98 million P25 device, an SVX order for a U.S. Federal customer, a $63 million P25 systems and device order for the Metro government of Nashville and Davidson County, a $56 million fixed video order for a large convenience store chain and a $39 million service order for a German unmanned systems provider. In Software and Services, revenue was up 13% compared to last year, driven by double-digit growth in all 3 technologies. Revenue growth from acquisitions was $42 million and foreign currency tailwinds were $4 million in the quarter. Operating earnings in the segment were $425 million or 33.8% of sales, up from 32.6% of sales last year, driven by higher sales and improved operating leverage. Some notable Q3 highlights from this segment include a $139 million order that included P25 services, mobile video and command center solutions for the state of Louisiana over a 10-year period, a $78 million 8-year mobile video award with a U.S. federal customer, a $59 million 6-year LMR P25 services order for a state and local customer, a $51 million command center CAD and records management order for the Los Angeles Police Department and a $27 million LMR P25 services renewal with the North Carolina State and Highway Patrol. Looking next at our regional results. North America Q3 revenue was $2.3 billion, up 10%, with growth driven by all 3 technologies. International Q3 revenue was $1 billion, up 18% versus last year driven by double-digit growth in all 3 technologies. Moving next to our backlog. Q3 ending backlog was an all-time record of $16.6 billion, up $2.1 billion or 14% versus last year and up $1 billion sequentially driven by record Q3 orders in all 3 technologies. In the Products and SI segment ending backlog increased $635 million versus last year, and $454 million sequentially due to strong demand in MCN and video. In Software and Services backlog increased $1.4 billion compared to last year and $575 million sequentially, driven by strong demand in all 3 technologies. Turning to our outlook. We expect Q4 sales growth of approximately 13%, with non-GAAP EPS between $5.47 and $5.52 per share. This assumes a diluted share count of approximately 168 million shares and an effective tax rate of approximately 22.5%. For the full year, we now expect revenue of approximately $13.050 billion, up from our prior guidance of $12.975 billion and non-GAAP EPS between $17.94 and $17.99 per share, up from our prior guide of between $17.62 and $17.72 per share. This full year outlook assumes a diluted share count of approximately 168 million shares, and an effective tax rate between 21.5% and 22%. With our increased guidance for the year, Products and SI is now expected to grow 12%, up from our prior guidance of 11% and MCN is now expected to grow 11%, up from 10% to 11% previously. And we now expect operating margin expansion of 190 bps, up from our prior expectations of 170 bps, which also includes expectations for gross margins now being up. Before I turn the call over to Greg, I wanted to touch on a couple of key topics. First, on the M&A front, we are excited about the acquisition of Defend, which we closed for $1.3 billion net of cash acquired. Defend expands our radio frequency capabilities into drone detection and cyber takeover based mitigation and will be included in our mission-critical networks technology, along with LMR and Silvus. Our full year outlook contemplates approximately $45 million of revenue contribution from Defend this year during the stub period. Bell Canada's LMR network services business, an acquisition we previously expected to close in Q4 is now expected to close in Q1 or Q2 as we continue to work through customer and regulatory approvals. Finally, regarding our balance sheet. In August, we raised $950 million of new long-term senior debt at attractive rates to fund the Defend acquisition and refinanced $300 million of Silvus term loans that matured during the quarter. With continued strong cash generation expected in Q4, we remain well on track to end the year at around 2x of net debt to EBITDA leverage in line with the expectations that we have shared with you previously. I would now like to turn the call back to Greg.

Thanks, Jason. I'd like to conclude with a few final thoughts before we open it up. First, I'm extremely pleased with our execution in the quarter. We achieved double-digit revenue growth in both segments while also driving significant operating margin expansion. Additionally, we saw record Q3 orders ended the quarter with an all-time record backlog of $16.6 billion and continued to generate strong operating cash flow. Second, over the last month, our teams met with hundreds of customers at the Army's AUSA Conference in D.C. and the International Association of [indiscernible] in Orlando. The energy, customer engagement and momentum coming out of both events was outstanding. At AUSA, Silvus was front and center underscoring the critical need for high throughput, jam-resistant tactical communications, powering unmanned systems in contested environments. And at IACP, it was abundantly clear that our safety and security ecosystem is resonating as public safety and defense leaders increasingly look to us to help simplify their mission-critical emergency workloads. Our multiyear award for the State of Louisiana this quarter was yet another example of the momentum we're seeing and continued competitive wins like this one, demonstrate how customers are recognizing the compelling value of complementing our next-generation LMR devices and infrastructure with our mobile video and command center solutions. In those ecosystem wins, our purpose-built Assist AI amplifies the integration across these technologies, streamlining the end-to-end emergency workflow from incoming 911 calls all the way through case closure. And third, we closed on the acquisition of Defend, which brings industry-leading counter-UAS technology into our portfolio, specializing in drone mitigation via cyber takeover capabilities. As drone detection and mitigation becomes an urgent priority for public safety and critical infrastructure, integrating this differentiated cyber takeover counter UAS technology into our mission-critical networks and command center platforms provides a critical highly differentiated tool for our federal, state and local public safety customers globally. And finally, as we look to close out another record year and head into 2027, I feel very good about our position. The overall demand profile for safety and security remains robust. Our record backlog provides us with strong multiyear visibility and our core foundation of innovative and impactful solutions position us exceptionally well to serve an addressable market that is now approaching $100 billion. I'll now turn the call over to Brian, and we'll open it up for your questions.

Thank you, Greg. Before we begin taking questions, I would like to remind callers to limit themselves to 1 question and 1 follow-up to accommodate as many participants as possible. Operator, would you please remind our callers on the line how to ask a question?

[Operator Instructions] Our first question will come from Tim Long with Barclays.

Two for me, if I could. First, on Silvus. Maybe if you could just touch on kind of the near-term strength here, where you're seeing the most activity and related to that, if you could just update us on the capacity -- the new plant and the capacity increases and what that would mean as we head into 2027? And the second, maybe for Greg, talking about 2027. Q4 is a solid year-over-year growth number. Obviously, a lot of visibility, a lot of good orders here, a lot of momentum in the business. So just give us a sense on how you're thinking about kind of growth into next year to the extent that you can at this point?

Yes. Tim, I'll start. So first of all, with Silvus, I think you asked what the strengths we're seeing. I mean, unmanned systems has clearly been a strength, not only internationally, but here in the States. And I think, as Greg just mentioned, it's high bandwidth. It's been tested, the Ukraine's litmus test, and I think in the most contested congested environments, it's the market leader. And I think that's the first thing. The second thing is we've doubled the sales force. So we had a presence -- a heavy presence in the U.S. within the DoD. We've expanded internationally, and we're starting to get some significant traction in NATO given what's happening in the Ukraine. And we've also seen -- we're seeing an uptick in activity in Indo Pacific as well. So I think -- and the last thing I would say is a spectrum dominant software. I think continues to be a difference maker there. We continue to feed that invest from an R&D standpoint. So we brought scale, we brought coverage and from a supply constraint, we've actually doubled our Los Angeles capacity, so just to meet and bring down lead times in the second half of the year. We've added an LC line, which puts us front and center in programs like drone dominance. And then Salt Lake City, which we announced, I think, 60 days ago, will start to come online and get some benefits of that as we roll into 2027.

In terms of its expectations for the year, Tim, with all the performance that we've had and what Jack just mentioned, it's on pace to do probably a little more than $900 million this year.

$900 million, yes. And by the way, in terms of 2027, obviously, you know we're not going to guide specifics for next year. We'll update you in February. But kind of taking a step back, I think at this point, we're expecting, again, high level, Tim, revenue approximately in the ZIP Code of [ $14.25 billion ]. I would also say it's worth mentioning that, with that expectation, we believe organic growth will be stronger in '27 over 2026, and we also would expect, again, to expand operating margins. And that's in the face of increasing memory costs and supply chain headwinds. I mean, it wouldn't surprise us if memory costs that could very well double, 2027 over 2026. But even with that, we would expect to provide operating leverage and grow operating margins in 2027 over 2026. That's my view at this point in time.

Your next question will come from Keith Housum with Northcoast Research.

Just, Greg, if we can just unpack that memory cost that just kind of threw in there. What was the impact of that for the third quarter and the expiration for fourth quarter? You say doubling in '27 versus '26? Maybe give us some baseline for what the 2026 number is?

Yes. High level, we did about $50 million in 2025 of direct memory components. Last quarter, we talked about it being about $150 million -- $150 million, $160 million, I think we said $150 million. My commentary is related to that base number. So as we go into 2027, that could effectively double. And obviously, we will continue to do the things we do around that, whether it's accelerating inventory, working with suppliers to secure continuity of supply, maybe there's some surgical price increases, although we're very mindful to remain quite competitive on that front. But I think overall, the supply chain team and Jack's sales and operations team have done a very good job. But even in the face of those headwinds, we still expect to grow operating margins in 2027.

And to dimensionalize how that $100 million of increase this year over last year in memory is presenting itself in the P&L. More of it is in the second half as we went through inventory and the price, as you know, Keith has gone up. So we're having more of it impact Q3 and Q4 than was there in the first half.

By the way, one other thing, Keith, I'd add, as I think back to Tim's question on 2027, again, high level, probably expect revenue linearity as we look out at this point in time in November 2027 to be very similar to linearity in 2026, just high level.

One other point, Keith, the IEEPA tariff, which we booked in Q2, which we were very clear on -- in Q2, also helped Q2's margin offset from memory. So as we think about next year, of course, that's about a $75 million good guide this year. That, of course, doesn't present itself next year.

Appreciate a reminder there. And then if we just go back to Silvus and the expansion of the manufacturing capacity, I think you guys referenced lead times coming down in the capacity expansion in Salt Lake City. Perhaps maybe just color on how that's coming down. Any concerns about being able to meet demand for next year?

Yes. So number one, we are -- we have no concerns. We have not had any loss of business, which I think is really important with -- in the face of increased demand. We've been able to remediate from what was at 1 point in time around 20, 21, 22 weeks were down around 12 weeks right now, 12 to 14 weeks, depending on the line. And obviously, as I alluded to earlier, Salt Lake City puts us in a better position as we roll into '27. So I'd tell you what, between the Motorola supply chain team and the public supply chain team at Silvus, we have had escalation in demand and we've been able to meet the need of the OEM, the unmanned OEMs as well as the end user environment that we've been invested in as well. So I'm really pleased with the work we've done.

Your next question will come from Joseph Cardoso with JPMorgan.

This is Mark [indiscernible] on for Joseph Cardoso. Thanks for the 2027 commentary. I guess with regards to 1Q, there's typically a pretty steep step down from 4Q to 1Q, and 4Q happens to be pretty strong as guided this year. So how should we think about the magnitude of that step down and some of the kind of puts and takes that take us into the linearity that was described. And then I have a follow-up.

Well, as Greg mentioned, the linearity that we see at this point for next year reflects the linearity that's playing out this year. So as you pointed out, Q1 is typically our smallest quarter of the year, and reflects the seasonal patterns in our business. We expect that next year will look a lot like this year in terms of how growth represents itself. We have strong demand, strong backlog and the continued ability to convert that is included in the color that we gave in November.

Got it. And then a follow-up. Going into the drone space now that you have Defend, are there any other parts of the market that you're interested in going into organically that might look attractive to you? Or is it now an opportunity to invest organically and grow from within?

Yes. We're pleased with where we are and people call the category "drone". But just to clarify, Silvus is Mana drone infrastructure, mobile ad hoc networking infrastructure. And it's agnostic and it powers a lot of primes and a lot of other integrators and it's a preferred technology, proven technology and the tip of the spear often used in conflict. And on Defend, it's counter-drone public safety and critical infrastructure driven. Our focus right now, Mark, is on integrating those. Jack and the team have done a phenomenal job growing Silvus. As Jason mentioned, we now expect Silvus to be a little over $900 million for the year. We're investing in the sales force. We're investing in R&D. We're investing in capacity, lead times are coming down and demand remains very strong. And on Defend, they're obviously a relatively newer acquisition. We're focused on integrating them. And we love the fact that they have leading-edge mitigation cyber takeover technology, which is much more than just jamming mitigation, which I think is differentiated. Now having said that, we'll always look at the funnel of inorganic opportunities, but our focus around kind of things in unmanned, I would continue to characterize as defense and public safety centric, and we'll see how things unfold.

Your next question will come from Meta Marshall with Morgan Stanley.

It's Antonio on for Meta. I wanted to go back to the backlog here. Nice to see that accelerate on the quarter. I was wondering if you could unpack some of the key drivers behind that? And if you saw any type of impact leading up to the midterm.

Sure. So we're definitely very pleased with the 16.6%, which we mentioned is its highest ever. We -- that was driven sequentially by record orders in all 3 technologies, the biggest of which was MCN, which includes not only Silvus, but also our LMR public safety business and the strength of those orders continuing. And our backlog position now as well as where we anticipate it to be at the end of this year informs the revenue color that we gave entering for next year as well.

That's helpful. And then as a follow-up, thanks for those growth comes into 2027. Could you maybe double-click into some of like the key drivers that you see for growth next year just across all parts of your business?

P At this point, I think it's pretty broad-based. I mean we obviously have LMR that continues to grow robustly LMR. We expect to grow strong double digits in Q4. Backlog is driven handsomely, as Jason referenced, driven by mission critical. Again, a lot of which is land mobile radio as well. We talked about Silvus. I think Defend is relatively nascent and early on. I would expect that we -- Defend is still expected to be about $185 million of revenue for fiscal full year 2026. And as we look into 2027, we would expect that to grow 40% to 50% given the wide aperture of opportunity that sits in front of that. Obviously, we're doing D-Series infrastructure refresh. We're doing device refresh, services, multiyear services continues to be in high demand, and Mahesh has done a great job embedding and integrating AI throughout the portfolio with a focus around kind of an emergency workflow. So MCN is growing nice. LMR is growing nice. Silvus is growing nice. Defend, as I mentioned, 40% to 50%. Video is growing double digits again this year. Command Center is going to grow 15% this year, and the backlog growth is broad-based. And by the way, orders -- overall orders are up 25%. So it's been a really good, I think, performance to date. I like the position we're in, the visibility we have and the momentum. And also, I think that we're a bit indifferent to the political ebb and flow. Obviously, there was a "blue wave or blue tsunami" yesterday. But often, and Jack could probably comment on this, he's got more data than I do. Like public safety bubbles to the top consistently. In blue administrations, in red administrations, funding remains really strong at state and local. I think DHS is funded through 2029. So demand is strong. Funding is strong. I think that there's a lot of wins at our back. Now having said all that, we got to execute. We got to run through the tape on Q4. Don't take anything for granted. We talked about memory things we'll manage through and continue to manage through, but you've got more data on midterm than I do.

Yes. I think, Greg, you kind of hit some really good points. I think the one thing I'd always stress is that when you think about our government business, the state and local business is the majority of that business. And what gives us great balance there as we've got like think about P25 kind of our anchor tenant from an LMR standpoint, we got 1,300 networks. So the balance -- there's a lot of balance in funding, meaning local funding, sales income, real estate taxes and then there's 911 fees. So we have that. The other piece of it is we look back -- we went back and did an analysis over 20 years. And in the years where you've seen a midterm flip we've still had better-than-expected growth rates. And by the way, some of those years, we weren't in a funding environment conducive as we are right now with the portfolio as good as we have right now. So I think all things being equal, we feel pretty good as we enter '27.

Your next question will come from Ben Bollin with Cleveland Research Company.

Greg, I wanted to hit on a couple of items you just mentioned. When we look at the LMR refresh cycle, P25 B Series and the subscriber trends, interested in your thoughts like where are we? How much we got left? Just any high-level thoughts on that? And then I have a follow-up.

Well, I think I'll start with -- we'll start with the network piece of it. D-Series, as I mentioned, we've got over 1,300 P25 networks. We are very much in the early stages of a multiyear refresh. I'd remind you there that a lot of this is vintage driven, meaning it's a longer refresh cycle depending on the age of the system that was actually fielded. When I think about -- I would dimensionalize a couple of things. Interest is high, engagement is robust, and I think I look at our pipeline and it's healthy. If you just look over the last 4 quarters, we've had 3 of our biggest statewide networks, Tennessee, Michigan and Colorado that have signed new agreements. Good things there. Yes, they've signed new infrastructure. But with those refresh cycles, they come long-term support and service contracts that typically add they're accretive because they're adding new things like cyber services, software agreement plan. So that's that. As it relates to the Apex -- the Apex next journey. We've talked -- there's roughly 2 million first responders in the United States. We still got great opportunities ahead of us. I think the highlight there that we probably don't talk about enough, we did probably earlier this year, what's the recurring revenue that, by the way, gets reported in command center software. We've talked about the fact that we will now have 300,000 users that are consuming those applications by the end of 2026. And again, Apex Next, early days, we had good traction with state and local. We've now seen good traction this year as we've highlighted with some of the wins within DHS. We had a $96 million deal Apex with SPX in Q3. So like I said, I think I'll reiterate my point, as we said and we look at our mission-critical networks business and the foundation, which is LMR devices, we've got new -- we continue to see great competitive wins. We think we're in a good position there. And in infrastructure, we've got a lot of room to run.

That's great. Last one for me. When we look at Silvus, could you talk about what does that mix look like today, international versus domestic? And how do you feel about your actual execution thus far in the domestic defense complex. When does that really start to scale and ramp in a bigger way from the U.S. customers?

It has. So as we've talked about, largely -- so since we've acquired last August 4, early days, it was more international. And even early -- late last year in the third quarter, a lot of that was Ukraine. We have seen significant expansion into NATO into the Indo-Pacific internationally. So good momentum there. But I think one of the things I'm most proud of is the growth we're getting in the U.S. They were doing business within the Army. We've made pretty significant investments not at the executive levels, but also at the business development levels. We're now doing work. We're in test at the Marine Corps within the Air Force, and I mentioned the RV, but also at the Navy as well. So we're doing business in more broad efforts. As you know, if you follow the defense sector right now, I would categorize a lot of what's happening within the U.S. is there's a lot of testing. We've converted very well in those testing because they're doing a lot of testing -- the testing in highly contested environments. And a lot of what succeeded for us when we talk about the litmus test of Ukraine and things like radio roundup and some of the other tests that have happened, we performed exceptionally well, I think it relates to some within our peer group. So -- by the way, there's a lot of work to do there, but we're really pleased not only what's happening internationally, but what's happened in the U.S. as well.

Your next question will come from Matt Niknam from Truist.