Motorola Solutions Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 11 speakers on the call.

Operator

Good afternoon, and thank you for holding. Welcome to the Motorola Solutions Third Quarter 2023 Earnings Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. The presentation materials and additional financial tables are posted on the Motorola Solutions' Investor Relations website.

Operator

In addition, a webcast replay of the call will be available on our website within 3 hours after the conclusion of this call. The website address is www.motorolasolutions.com/investor. All participants have been placed in a listen only mode. You will have an opportunity to ask questions after today's presentation. I would now like to introduce Mr.

Operator

Tim Yoakum, Vice President of Investor Relations. Mr. Yoakum, you may begin your conference.

Speaker 1

Good afternoon. Welcome to our 2023 Q3 earnings call. With me today are Greg Brown, Chairman and CEO Jason Winkler, Executive Vice President and CFO Jack Malloy, Executive Vice President and COO and Mahesh Saptarishi, Executive Vice President and CTO. Greg and Jason will review our results along with commentary and Jack and Mahesh will join for Q and A. We posted an earnings presentation and news release at motorolasolutionsdot com/investor.

Speaker 1

These materials include GAAP to non GAAP reconciliations for your reference. And during the call, we reference non GAAP financial A number of forward looking statements will be made during this presentation and during the Q and 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 Information about the 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 2022 Annual Report on Form 10 ks or any quarterly report on Form 10 Q and in our other reports and filings with the SEC. We do not undertake any duty to update any forward looking statements.

Speaker 1

And with that, I'll turn it over to Greg.

Speaker 2

Thanks, Tim. Good afternoon, and thanks, everybody, for joining us today. First, Q3 was another strong quarter, With revenue and earnings per share exceeding our guidance driven by continued strong demand and an improving supply chain environment. Revenue was up 8% in the quarter, highlighted by 12% growth in software and services and 5% growth in products and Systems Integration. We also expanded operating margins for the 5th consecutive quarter, which resulted in record Q3 operating earnings in both segments And over $700,000,000 of operating cash flow.

Speaker 2

2nd, investments in safety and security Continue to be a priority for our customers and we had another record orders quarter in Q3. Year to date, orders were up 11%, driven by strong software and services, record U. S. Federal demand and continued adoption of our Apex Next device by U. S.

Speaker 2

State and local customers. Additionally, we ended Q3 with record backlog of $14,300,000,000 up 6% versus the prior year. And finally, based on our Q3 results and continued momentum in the business, We are again raising our full year guidance for both sales and EPS for the 3rd time this year. I'll now turn the call Over to Jason.

Speaker 3

Thank you, Greg. Revenue for the quarter grew 8% and was above our guidance with growth in both segments, Both regions and all three technologies. FX tailwinds during the quarter were $13,000,000 while acquisitions added $19,000,000 GAAP operating earnings were $639,000,000 or 25 percent of sales, up from 15.7% in the year ago quarter, which had the impact of the $147,000,000 fixed asset impairment charge related to our exit from the ESN contract in the UK. Non GAAP operating earnings were $741,000,000 up 10% from the year ago quarter, and non GAAP operating margin was 29%, up 50 basis points, driven by higher sales, lower material costs and improved operating leverage, partially offset by a higher mix of international product shipments and the revenue deferral related to Airwave. GAAP earnings per share was $2.70 up from $1.63 in the year ago quarter, which had the impact of the ESN asset impairment.

Speaker 3

Non GAAP EPS was $3.19 up 6% from $3 per share last year. The growth in EPS was driven by higher sales and margins, partially offset by the Airwave deferral and a higher effective tax rate in the current year. OpEx in Q3 was 551,000,000 up $29,000,000 versus last year, primarily due to acquisitions and higher employee incentives in the current year. Turning to cash flow. Q3 operating cash flow was $714,000,000 up $326,000,000 versus last year and free cash flow was 6 $49,000,000 up $331,000,000 The increase in year over year cash flow was primarily driven by higher earnings and improved working capital.

Speaker 3

And with our Q3 year to date operating cash flow of $799,000,000 up significantly from last year, we are solidly on track to deliver on our $1,900,000,000 of operating cash flow outlook for this year. Capital allocation for Q3 included 147,000,000 Dividends, dollars 322,000,000 in share repurchases and $65,000,000 of CapEx. Moving to segments. In the Products and SI segment, sales were up 5% versus last year, driven by growth in both LMR and video. Currency tailwinds were $4,000,000 and revenue from acquisitions in the quarter was $1,000,000 Operating earnings for the segment were 4 $20,000,000 or 26.1 percent of sales, up from 24.5% in the prior year, driven by higher sales, lower direct material costs And improved operating leverage, partially offset by mix.

Speaker 3

Some notable Q3 wins and achievements in the product segment include A $75,000,000 P25 device order for a U. S. Federal customer a $55,000,000 P25 system order For a Southeast Asia customer, a $42,000,000 P25 device order for the Texas Department of Public Safety, A $30,000,000 P25 device order for a U. S. Federal customer, a $20,000,000 P25 device order for Indiana State Police And a $3,000,000 fixed video expansion order for U.

Speaker 3

S. Federal customer. In software and services, Revenue was up 12%, inclusive of the Airwave deferral, with 31% growth in Command Center and 15% growth in Video. Revenue from acquisitions was $18,000,000 in the quarter and FX tailwinds were $9,000,000 Operating earnings in the segment were $321,000,000 up 7% versus last year and operating margins were 34%, down from 35.7% last year. Excluding the Airwave deferral, Operating margins for the segment were up, driven by higher sales and improved operating leverage.

Speaker 3

Some notable Q3 highlights In this segment include a $23,000,000 LMR service agreement for a large European customer, a $23,000,000 service agreement for East Bay Regional Communication Systems in California, a $20,000,000 LMR service agreement for the Los Angeles Police Department, A $12,000,000 command center order for Tarrant County 9 11 District in Texas and an $8,000,000 body worn camera order for the Metro Nashville Police. Looking at our regional results, North America Q3 revenue was $1,800,000,000 up 6% on growth in all three technologies. International Q3 revenue was $773,000,000 up 13% versus last year, driven by growth in LMR and Video. Moving to backlog. Ending backlog was a Q3 record of $14,300,000,000 up 6% or $764,000,000 versus last inclusive of $321,000,000 of favorable currency rates, driven by strong demand in North America.

Speaker 3

Sequentially, backlog was down $4,000,000 inclusive of $125,000,000 of unfavorable FX, driven by the revenue recognition of Airwave, partially offset by strong demand in North America. In Products and SI, ending backlog was up $62,000,000 or 1% versus last year, driven primarily by strong demand in North America. And sequentially, backlog was up $80,000,000 also driven by strong demand in North America. In Software and Services, backlog increased $702,000,000 compared to last inclusive of $294,000,000 of favorable FX, driven by strong demand for multi year software and services contracts in North America, partially offset by the revenue recognition for Airwave. Sequentially, backlog was down $84,000,000 driven by unfavorable FX of $96,000,000 partially offset by growth in multiyear software and services contracts in North America.

Speaker 3

Turning next to our outlook. We expect Q4 sales growth of approximately 4%, with non GAAP EPS between $3.60 $3.65 per share. This assumes a weighted average share count of approximately 171,000,000 shares and an effective tax rate of approximately 24%. For the full year, we are again increasing both our revenue and earnings guidance. We now expect Revenue in the range of $9,930,000,000 to $9,945,000,000 up from our prior range of $9,875,000,000 to 9,900,000,000 And we expect non GAAP earnings per share between $11.65 $11.70 up from our prior guide From our prior guidance, a weighted average diluted share count of approximately 172,000,000 shares and an effective tax rate of approximately 23%.

Speaker 3

Before I turn the call back to Greg, I'd like to highlight two points. In addition to the strength of our LMR and Video business, our Command Center portfolio performed well during the quarter. In Q3, we achieved strong growth complemented By a robust contribution from RAVE, an acquisition which continues to exceed our expectations. Secondly, our supply chain execution navigating extended lead times for some semiconductors and reducing broker purchases continues to drive Year over year cost savings. We now expect the impact of lower broker purchases to be a $70,000,000 tailwind for this year, up from our prior estimate of $60,000,000 As a result, we now expect full year operating margin expansion of approximately 200 basis points, up from our prior guidance of 175 basis points.

Speaker 3

I'll now turn the call back to Greg.

Speaker 2

Thanks, Jace. First, I'm really pleased with our Q3 results, which highlight the durability and criticality of our business and the strength of our portfolio. Revenue was up 8% and that's inclusive of the revenue deferral related to Airwave that we've talked to you about already. We also achieved record operating earnings in both segments, record Q3 operating cash flow of over $700,000,000 And a Q3 record backlog that is 6% higher than last year, which positions us well as we head into next year. 2nd, the resilient nature of our business and strong cash flow allows us to continue to be flexible as we deploy capital to drive shareholder value.

Speaker 2

The strength of our cash flow comes from strong demand from product refresh, consistent margin expansion And improving cash conversion. Through October, we've repurchased just under $800,000,000 of stock, highlighting our conviction in the long term value of MSI. We also ended the quarter with net debt to EBITDA ratio of 1.7, which provides us with a healthy balance sheet and additional firepower And finally, as we look to close out another record year, I think we're exceptionally well positioned for continued growth. Demand for our solutions remains robust. We are continuing to add value to our customers, our end markets remain resilient and our teams continue to execute at a high level.

Speaker 2

I'll now turn the call over to Tim and welcome your questions accordingly.

Speaker 1

Thank you, Graeme. Before we begin taking questions, I'd like to remind callers to limit themselves And one 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

The floor is now open for questions. Our first question comes from Tim Wong from Barclays. Your line is now open.

Speaker 4

Thank you. Yes, the 2, if I could. First, maybe on the command center software side, Sounded pretty strong, obviously, with Rave a part of that. Could you maybe, Greg, talk a little bit about What's driving that? The addition of Rave seems to be positive.

Speaker 4

Is it adding

Speaker 5

The ability to cross sell some of

Speaker 4

the different platforms or just a little bit more color on what's driving that and how Ray's ties into that. And then second one, on the backlog still being record, it's pretty impressive. Most companies are seeing backlog coming down. So A little color there and maybe how that makes you feel about next year as far as growth? Do you think you can kind of sustain the type of growth rates you're seeing this year?

Speaker 2

Thank you. Just on RAVE and then maybe Mahesh can jump in. I would tell you, Tim, I love the acquisition. I think it was well done by the internal team here that found it, did the diligence, both technical, strategic as well as financial. I love Todd Pyatt And his entire team that's come over to the organization and the performance of RAVE since joining Motorola has exceeded the business case And exceeded our expectations.

Speaker 6

Full year, I would say that we still expect our growth to be 20%. Look, our core platforms, that's NG911, CAD, Records, Aware are all doing well as well. As Jason read out in the script, St. Charles, Missouri just refreshed their call handling solution and adopted our geospatial routing NGCS Solution, Western Australia Police refresh their CAD. There's also an ecosystem story here.

Speaker 6

RAVE is certainly performing well above our expectations. Arizona is now the 15th state to sign on to RAVE Alert. It's a state at the statewide mass notification system. And as we're doing that, we're also refreshing All the call handling instances across the PSAPs in Arizona and our call handling system integrated with Rave, as appropriate here as well. When you think about a city like Glendale, Glendale now brings in radio, brings in CAD, 911, Rave, etcetera, now into a State of the art real time crime center, all integrated with Aware.

Speaker 6

And now you can think about orchestration when major incidents happen on the heels of things like active shooter incidents, etcetera, that benefit from the fact that the ecosystem allows you to now respond much faster.

Speaker 3

Tim, on backlog, we remain in a strong backlog position with an 8% revenue print in Q3 And backlog of $14,000,000,000 or more being up 6%. Our backlog is very strong, and I'd also point out that our backlog Comes over 95% of it from government customers who

Speaker 6

buy what they need, when they need

Speaker 3

it and count on us to deliver it. So we remain and Q3 orders inbound. In Q3, inbound orders were also strong. So our backlog position is one of strength. And Greg, I'll turn it to you for further comments.

Speaker 3

Yes. And Tim, as

Speaker 2

it relates to 2024, obviously, we'll wait till February to give Specifics on any kind of detailed guidance. I would tell you, as we sit here today from a high level, we would estimate revenue, Again, kind of back of the cocktail napkin to be about $10,500,000,000 at this point as we sit here today. By the way, that's inclusive of 2 $250,000,000 of incremental revenue headwinds, about $200,000,000 of that Out of the U. K. Home office, we've talked to you about that before, the deferral of Airwave representing a little bit over 100,000,000 The balance of that being the formal exit of ESN for a total of $200,000,000 related to the U.

Speaker 2

K. Home office And anticipated FX headwinds of about $50,000,000 So high level as I sit here today and take a look, That's kind of how I would dimensionalize next year and filling in more detail when we get together in February. Okay. Thanks very much guys. Appreciate it.

Speaker 2

Thank you, Tim.

Operator

The next question comes from the line of George Notter with Jefferies. Your line is now open.

Speaker 4

Hi, guys. Thanks very much. Greg, you mentioned the U. K. I guess I was wondering what the latest This is out of the U.

Speaker 4

K. I know you guys were going through the cat tribunal process. I think the release today references that you still haven't heard back. I think you would expect to hear back after a number of weeks. And so, wondering what's going on there, wondering if the delay in getting back with you is potentially good news.

Speaker 4

But What do you think is going to happen there? And then and what does it look like in terms of appeal processes if that cat tribunal process does not work out? Thanks. Yes. On the U.

Speaker 2

K, there's really no news to report, George. We had the hearing on August 2nd and third. I think we reiterated The strong case we feel with a high level of conviction and You've heard me use adjectives before. I'm very specific with how I would describe the situation. I think it's unprecedented.

Speaker 2

I think it's overreaching. It's entirely disproportionate, but we made the case. And as a result, we're waiting on that CAT, that Competition Appeals Tribunal you referenced that ruling. It's a fairly opaque Regulatory process, so I couldn't speculate one way or the other on how to interpret that. We'll wait to get it.

Speaker 2

I would anticipate getting it Certainly, between now and the end of the year. And as I've already said as well, if it in turn does not go our way, we will We continue to exhaust all legal options to defend the position we have, provisioning and delivering Outstanding and very reliable emergency communication services throughout the U. K.

Operator

Got it. And then just as

Speaker 4

a quick follow-up, I assume the I understand that you guys have made the adjustment in terms of your financials and expectations, but I assume that contract is Still going as is while we wait for the cash tribunal to make a decision and then potentially other appeal processes. Is that correct? You taking the price hit now?

Speaker 2

That's right. We're still delivering the services. We're still investing in the network. We're still doing all the things that are expected of us to deliver superior reliable emergency communication services. We referenced this to your point.

Speaker 2

We did start the deferral of revenue on Airwave on August 1. So we are deferring that revenue through the balance of this year, and That informs the about $200,000,000 of incremental revenue headwinds for next year. Airwave All in is about $110,000,000 or $115,000,000 of that with a balance of $85,000,000 or so being ESN. So we are obligated to recognize that accounting consistent with the price control final remedies order and we're doing that. If there is a different outcome, then we would change that accordingly.

Speaker 2

Thank you. Thanks, George.

Operator

The next question is from the line of Keith Housum with Northcoast Research. Your line is now open.

Speaker 3

Good morning, guys, and great quarter. In terms of the supply chain issues that you guys have had in terms of the semiconductor chips, Where do we stand with that? I mean, do we still have a significant backlog of chips that might carry over into next year? Or is that largely caught up? Keith, thanks for the question.

Speaker 3

The supply chain environment for our needs for chips, which I'll remind everyone is for Generally 40 nanometers and above is improving, although it's not to levels of normality. For example, lead times for Certain chips are now approaching 25, 26 weeks where they had been double that. But in a normal environment, they should be 15 or 16. So Improvements, yes, and that's what's helping us drive the favorability of now $70,000,000 in the P and L. But Still some opportunity to improve further, and that's what's incorporated into our expectations for Q4 that we'll continue To use the tools that we've been using for a number of quarters now, looking for substitutes, working with our supplier partners And using the available supply that we can find at lower prices.

Speaker 2

And we would expect, Jayce, continue EPB benefit In 2024 as well.

Speaker 3

Yes, next year, as we told you on the last call, we're planning for about $60,000,000 of $24,000,000 incremental PPV relief over $23,000,000 So we still have opportunity to capture there and expect that in the P and L. And again, that aligns to Our expectation is that things will continue to improve into 2024. Great. Thanks. Appreciate it.

Speaker 3

If I could just follow-up, M and A has been a key part of Motorola's strategy over the years. As you're looking forward, I mean, is there anticipation that you're going to keep with some of these Small tuck in acquisitions? Or is there an appetite for perhaps a larger, more transformational acquisition as well?

Speaker 2

Yes. Well, we certainly are in great shape from a balance sheet standpoint and the firepower to do some things inorganically. It's ironic, Keith, because here we're sitting in November and we have not done an acquisition yet to date. That is certainly not for a lack of an active and a fulsome funnel, but we've been pretty diligent and quite frankly some sellers have been reluctant At prices that we thought would be more reasonably valued, that's okay. Having said that, do I anticipate Some continued M and A tuck in activity?

Speaker 2

I do. And the team, Raj, Mahesh, Jack, Jason, Michael Anis are control has areas of probably higher priority than others that we would look to do inorganically. And if there's something larger for us to consider, We would evaluate that as well clear eyed, but balanced both financially and strategically, and we'll see what comes.

Speaker 3

Great. Thank you.

Operator

Thanks, Keith. The next question is from the line of Adam Tindle with Raymond James. Your line is now open.

Speaker 7

Okay, thanks. Good afternoon.

Speaker 5

Congrats on the results. Greg, I wanted to start with backlog, again record levels. Just I guess the heart of the question would be how long you think this Can you continue? Do you think we're going to exit this year with record backlog again? Or when do you expect to see maybe some level of attenuation or normalization slowing in backlog

Speaker 2

Yes. I certainly wouldn't speculate on backlog Because I don't have a crystal ball. Having said that, Q3, we ended record backlog. Q3 was also a record Orders quarter. So I love the funnel.

Speaker 2

I love our conversion. I love the record orders. And I think we're well positioned. By the way, when I look at the quality of the backlog in terms of age or duration, that remains strong as well. As Jason said, we still have to navigate supply chain on the semiconductor front.

Speaker 2

It's not normalized. Lead times remain elevated. But at the end of the day, I like our end markets. I think they're pretty resilient. I like the demand and criticality for what we do, I.

Speaker 2

E, public safety And Enterprise Security informed by Video Security and Access Control as well as all the great work Mahesh is doing on the product side in Command Center. So, we'll see where we're at. But as we sit here in November, do I like how we're entering into 2024? Absolutely. And if there is any changes to that, obviously, we'll update you in February.

Speaker 5

Got it. Okay. And then as we think about That backlog converting to revenue, obviously, supply chain is still challenged, but starting to get better. And I'm wondering what that could ultimately mean for 2024 Growth in various scenarios, obviously not guiding to that. I hear you on the 10.5.

Speaker 5

But if supply were to kind of free up in a blue sky scenario, are you looking High single digit growth or better, what are the kind of the different scenarios based on potential backlog converting to revenue?

Speaker 2

Yes. I think I would just stick to the 10.5 as a general high level anticipated marker and reserve any additional color on either technologies or segments for the February conversation. But again, Adam and I appreciate the question. But all I would tell you is I feel very good about going into 2024, and we'll update you in about 90 days.

Speaker 5

Okay. Yes, understood. I know you like to stay conservative, which I think we all appreciate. Maybe just one final point on this For Jason, as this backlog comes through, can you maybe speak to the margin profile of that? I can't remember if you're FIFO or LIFO, but There may be some benefit from higher priced backlog coming through and would think that would potentially help margins moving forward, but Any finer points you can put on the mechanics of that would be helpful.

Speaker 5

Thanks.

Speaker 3

So beginning in Q3 of last This year is when our P and L began to see the benefits of the work that Jack and his team did around strategic pricing. We've seen that continue in the back half of last year as well as the entirety of this year. So continue to focus on price and Optimization and some of our new products, which customers really like, also come at a price increase for us. So In terms of backlog, we're we prioritize around, 1st of all, customers. Priority goes to public safety.

Speaker 3

But for the most part, the backlog that we do have in products is representative of the prices that we've implemented circa July of last year. So you've seen it show up in the P and L, and we would expect that to continue with our growth being driven by both volume and price. And I think we do expect operating margin expansion next year. Absolutely.

Speaker 5

Yes, exactly. Okay. Appreciate that clarification. Thanks, Greg.

Speaker 2

Thanks, Adam.

Operator

The next question comes from the line of Tomer Zilverman with Bank of America. Your line is now open.

Speaker 8

Hey, guys. Thank you for the question. Just the first one for me. So your revenue outperformance this quarter versus you talk about the weakness there? What drove the 5% growth this quarter?

Speaker 2

Sure. Thanks, Tomer. So first of all, I want to highlight the fact that we're actually really pleased with Q3 because the 8% is against the backdrop of a comp Last Q3 of 33%. So our full year expectations remain unchanged. It's really a linearity story.

Speaker 2

And I think leaving that, I think we take a look at it and say from an alignment standpoint from the portfolio investments, we just announced the H6A camera. We're now shipping the ACC8, which is a unified video management solution. And then more importantly, if you think about the verticals that we serve, It's government, which has shown a resilience in funding. It's education. It's health care and industrial, which has actually grew 17% for us this quarter.

Speaker 2

We're really pleased, and we think there's good synergies on the investments we're making in the markets that we serve. And Tomer, I think you said 5% per video, as Jack said, video 8% over 33 percent comp. In terms of the segment S and S, 5, I remind you that includes the decrement and deferral of Airwave revenue, which is important and compresses that. But at the same time, we continue to have great performance in command center software with the strong print for Q3. We have strong managed services performance and something that's not even reflected in Q3 is Denmark and Molloy's team did a fabulous job on a multi year project and multi year managed services contract to close on Denmark.

Speaker 2

So I think that also should inform how you interpret the S and S performance.

Speaker 8

Got it. And if I can just follow-up. In terms of your 4Q and your fiscal guidance, I'm sure this Just something more with language than anything. But your 4Q guidance of 4% implies the higher end of your revamped fiscal guidance, While the low end of your fiscal guidance would imply around 3.5% growth for 4Q, so can you just talk about what would draw what could happen that would draw that Incremental 0.5 point weakness?

Speaker 2

Yes. I think what I would say, Tilmer, is I kind of focus on the approximately 4%, I understand the math differences of how you disaggregated it, but we're looking at and anticipate 4% revenue growth For Q4, by the way, that's in the face of $105,000,000 of headwind for Q4, $50,000,000 which is the Airwave deferral that's in that growth $40,000,000 which is the business light business model Change that we informed you on a couple of months ago, a couple of quarters ago, and there's $15,000,000 of additional FX headwinds. So, The 4% is actually pretty healthy quarter that we're pretty proud of and that's why we're raising the full year accordingly as well. Great. Thank you.

Speaker 2

Thanks, Tomer.

Operator

The next question comes from the line of Meta Marshall with Morgan Stanley. Your line is now open.

Speaker 9

Great. Thanks. I just wanted to dive into a couple of your comments on the call. You You guys noted that Rave was doing very well. Is that more customers coming on?

Speaker 9

Is that you're able to kind of cross sell it? You know, with that upsizing other products along with it, just kind of where are some of that rate strength coming from? And then maybe on the federal side as well, I noted you talked about the $75,000,000 P25 deal, but just is that a broadening of agencies, just faster refresh, Just kind of commentary on the 2 sources of upside this quarter would be helpful. Thanks.

Speaker 6

Just to start out with on the integrations piece. We announced a quarter ago, I believe, at this point, where we are bundling Rave with all our new Vesta Offers going forward, that's an integration between our call handling solution and Rave as well. We have deeper penetration into the Education market with our integration with Orchestrate and with our video solutions, Panic Button being a big part of it. We integrated the panic button rave elements with Aware, Command Center Aware for real time crime center. So all of that acts as a very positive synergy, and I think that helps with the really accelerating RAVE adoption across the board.

Speaker 2

As it relates to federal, we're having a record year. And as you know, the federal government close just occurred September 30. We're seeing it as broad based. It's Department of Defense. It's civil.

Speaker 2

It's law enforcement. It's multi year. So we're really pleased with what's happened in federal. And then when you start to think about some of the federal supplemental requests, One of the items in there is $106,000,000,000 for the critical national security, which is going to fund Ukraine and Israel. What I would highlight During the course of this year, we've actually shipped $100,000,000 into Ukraine, a little greater than $100,000,000 at this point in time.

Speaker 2

So as you think about it, everything related to federal, Joe Belschun, John Zidar and their team have really done a job we're really pleased with.

Speaker 3

And just to remind everybody, the size and Scale of our federal business last year was 7% of our total revenues. This year, it's trending slightly higher than that. It's an important market for us, and it remains an area of focus, but it's smaller than state and local.

Speaker 2

One final thing, Mehdi, We've talked about is around the NDA and Secure Communications Act, that has essentially been an unfunded mandate. And now there's $450,000,000 for the cybersecurity state and local grant that's going to fund rip and replace, which should be Beneficial from a camera business standpoint.

Speaker 9

Great. Thank you.

Operator

The next question comes from the line of Ben Bollin with Cleveland Research. Your line is now open.

Speaker 10

Good afternoon. Thanks for taking the question. This is Brian Wilcox on for Ben. I was wondering if you could update us on the Apex next refresh cycle and where we are in that and How you see that playing out into 2024 and 2025?

Speaker 2

Sure. So in two words, I'd say momentum acceleration. We've now received $600,000,000 of orders since our introduction in late 2020. We actually did $100,000,000 of orders In Q3 'twenty three, I think the thing we're most pleased with is we're having good success within major cities, but we're now starting to see smaller state and local customers Place orders against us. I would attribute a few things.

Speaker 2

It's a lot of the basics, I would call world class ergonomics, audio quality, But the game changer for us has really been the application adoption, customers, the demand to have location It works hand in glove with our command center software and Rave solution, the ease of use by way of smart programming And then the ability to extend the networks through SmartConnect have really been a game changer. And I think we look at it and say there When we look at our portfolio, Apex, Next Family of Radios, it's there's really nothing like it in the public safety domain.

Speaker 3

Okay. And as we've

Speaker 2

said, I think you asked a follow on question around 2020. We've typically said, our LMR business and the device plays into that as it's a mid single Digi kind of business.

Speaker 10

Okay. And one follow-up, if I could, on the surveillance business. I think you called out some incremental verticals getting involved there, but we'd love to hear your perspective on mix between commercial and public sector and surveillance and kind of how that shifted and where it's going?

Speaker 2

Sure. So public safety is now one of our 2 largest vertical markets in terms of video security. And so I remind everybody that we acquired Avigilon that was essentially a nascent business. So that's The function of our sales team's ability to take a new portfolio into government. So that's the first thing.

Speaker 2

In the enterprise, Our business in Enterprise, particularly in Video Security and Access Control, is a little different than most. It's really centered around safety and security. The primary verticals that we touch there, as we've said, is education, it's health care and then Business around energy production and utilities and transportation, which have all grown as well. Those are really the core verticals for that business in the enterprise space.

Speaker 3

Thank you.

Operator

The next question comes from the line of Joe Cardoso with JPMorgan. Your line is now open.

Speaker 7

Hey, good afternoon and thanks for the questions. I actually just want to follow-up on the Apex Next comments and the momentum you're seeing there in combo with the LMR growing mid single digits. We're just coming up against some quarters with tough compares. So just want to Just curious or maybe it's more of a clarification, if you think that mid single digit growth is sustainable even on

Speaker 3

So our portfolio is refreshing itself around Apex Next. As Jack mentioned, dollars 600,000,000 of orders since Introduction in 2020. And we have continued to invest in other parts of the portfolio too like TETRA and others. So We're at the still early stages of device refresh. And while having had a number of good quarters And continued demand, we would expect to continue to be able to grow that business, as well as, as I mentioned earlier, The pricing strategy that supports the investments that we make and we spend a sizable amount of R and D To innovate and advance the portfolio should lead to continued growth in the next year.

Speaker 7

Got it. That's great. And then my follow-up is actually on free cash flow. You had another solid quarter here. It appears that tailwinds Our materializing, example being the elevated levels of inventories that we've seen over the past couple of quarters, That's coming down a bit.

Speaker 7

I guess if we take a step back and we're starting to cycle past some of the choppy free cash flow generation we've seen over the past couple of quarters, Given kind of that dynamic macro environment and returning more to a consistency type of level we've seen in the past relative to conversions, Any thoughts on whether the level of shareholder return can be maintained or accelerated going forward, just given working capital improving the momentum behind the business,

Speaker 3

Sure. So I'll start with this year. I mentioned that we're solidly on track to deliver on the $1,900,000,000 in cash That was an aggressive plan that we set at the beginning of the year. We mentioned in February that, that included $300,000,000 of higher cash taxes over 2022. And with cash flow at this point through 3 quarters being up, we are well positioned to deliver on that 1.9.

Speaker 3

You're also right in that our inventory levels Continue to come down. They're down $200,000,000 from this point last year. They're down $85,000,000 sequentially. And they're still at $950,000,000 So as we look into next year and the opportunities, we envision continued opportunity to balance Investments in inventory with record backlog and working capital optimization into the future.

Speaker 7

Got it. Thanks for all the color.

Speaker 10

Thanks,

Operator

This concludes our question and answer session. I'll now turn the floor over to Mr. Greg Brown, Chairman and Chief Executive Officer for any additional comments or closing remarks.

Speaker 2

So first A great quarter, great execution, lot of moving parts, but I love the team we've assembled and I love the collaboration And pristine focus we have, both balancing results and investing for the long term. I also would say in closing that In a world of challenging and increasing threats, I think the investments we've made in safety and security Are as important as ever. We in effect, when you think about what we do, we are solving for safer. We're solving for safer communities, Safer Schools, Safer Hospitals, Safer Stadiums, and we do that by linking and integrating public safety with private organizations and private institutions to ensure that the solutions that we deliver and provision And the bidirectional customized workflow within them protect people, property and places. Again, I'm proud of everybody.

Speaker 2

I think the outlook for our business is strong, record orders, record backlog, a robust funnel, Lots to do, but also lots of opportunity as well. Look forward to talking to you in February. Thanks.

Operator

Ladies and gentlemen, this does conclude today's teleconference. A replay of the call will be available over the Internet within 3 hours. The website address is www.motorolasolutions.com/investor. We thank you for your participation and ask that you please disconnect your lines at this time.

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Earnings Conference Call
Motorola Solutions Q3 2023
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