Motorola Solutions Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 10 speakers on the call.

Operator

Welcome to the Motorola Solutions First Quarter 2023 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 2 hours after the conclusion of this call.

Operator

The website address is www.motorolasolution.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. Tim Yoakam, Vice President of Investor Relations.

Operator

Mr. Yoakam, you may begin your conference.

Speaker 1

Good afternoon. Welcome to our 2023 First Quarter 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 Dappdarishi, 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've posted an earnings presentation and news release at motorolasolutions.com/ These materials include GAAP to non GAAP reconciliations for your reference.

Speaker 1

And 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 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 statements. Information about factors that could cause such differences can be found in today's earnings news release, And 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.

Speaker 1

We do not undertake any duty to update any forward looking statements. And with that, I'll turn it over to Greg.

Speaker 2

Thanks, Tim. Good afternoon and thank you everybody for joining us today. First, let me start by just saying that Q1 was an exceptional start to the year. We achieved revenue and earnings per share above our guidance With revenue up 15% and earnings per share up 31% versus the prior year, we expanded operating margins by 4.70 basis points And we had record Q1 orders, which led to record Q1 ending backlog of $14,100,000,000 up 5% versus last year, inclusive of $372,000,000 of unfavorable FX. 2nd, our outstanding Q1 performance was broad based With strong double digit revenue growth in both segments, all three technologies and in both regions, North America and International.

Speaker 2

Additionally, public safety and enterprise security remains more important than ever, which is driving demand for both Our public safety and enterprise customers. And finally, based on our strong start to the year and continued robust demand, We're raising both our revenue and earnings guidance for the full year. I'll turn the call over to Jason to take you through results and outlook and then be back And return for some final thoughts.

Speaker 3

Thank you, Greg. Revenue for the quarter grew 15% and was above our guidance with double digit growth in both segments, Both regions and in all three technologies. FX headwinds during the quarter were $45,000,000 while acquisitions added 42,000,000 GAAP operating earnings were $399,000,000 or 18.4 percent of sales, up from 12.6% in the year ago quarter. Non GAAP operating earnings were $532,000,000 up 42% from the year ago quarter and non GAAP operating margin Earnings was driven by higher sales, lower direct material costs, inclusive of lower broker spend in attaining semiconductors and Improved operating leverage. GAAP earnings per share was $1.61 compared to $1.54 in the year ago quarter.

Speaker 3

Non GAAP earnings per share was $2.22 up 31% from $1.70 last year. The strong growth in earnings per share was driven by higher sales and margins, partially offset by a higher effective tax rate in the current year. OpEx in Q1 was $530,000,000 up $38,000,000 versus last year, primarily due to acquisitions and higher incentives in the current year. Turning to cash flow. Q1 operating cash flow was a usage of $8,000,000 and free cash flow was a usage of 62,000,000 The cash flow in Q1 was in line with our expectations and included a one time cash tax payment of $70,000,000 For the full year, we continue to expect operating cash flow to be approximately $1,900,000,000 with greater contributions in the second half, Consistent with the shape of last year's cash flow, capital allocation for Q1 included $148,000,000 in cash dividends, $140,000,000 in share repurchases $54,000,000 of CapEx.

Speaker 3

Moving to our segment results. In the Products and SI segment, sales were up 18% versus last year, driven by improved supply availability in the current year and the benefit from pricing actions flowing through. Currency headwinds were $19,000,000 and revenue from acquisitions in the quarter added 12,000,000 Operating earnings were $246,000,000 or 18.9 percent of sales, up from 8.7% in the prior year, driven by higher sales, Lower material costs, inclusive of lower broker spend and improved operating leverage. Some notable Q1s and achievements in This segment includes a $27,000,000 countywide P25 system for Johnson County, Missouri, a $20,000,000 P25 device order For U. S.

Speaker 3

State and local customer, a $17,000,000 P25 system for Wakulla County, Florida, A $16,000,000 fixed video contract for a large healthcare system and a $15,000,000 Apex and Apex Next devices order for the Kansas Highway Patrol. In software and services, revenue was up 10%, including 19% growth in Command Center and twenty Revenue from acquisitions was $30,000,000 in the quarter and FX headwinds were 26,000,000 Operating earnings in the segment were $286,000,000 up 3% versus last year and operating margins were 32.9%, down from 35.2% last year on mix, higher costs from acquisitions and FX. For the full year, we expect operating margins in this segment to be comparable to last year to slightly down, Driven by higher costs from acquisitions, primarily Rave. Some notable Q1 highlights in the segment include a $340,000,000 Federal IDIQ award to combine existing services and provide new LMR services to the U. S.

Speaker 3

Air Force, which has long been an important customer of ours. Given the nature of this 10 year agreement, we recorded only $11,000,000 of backlog in the Q1 and expect Backlog to be recorded ratably over time for the remainder of the contract. Additionally, we expect new services included To contribute an incremental $60,000,000 of revenue over the 10 year period when compared to the previous service agreements. We also received a $20,000,000 $1,000,000 multi year support services extension for Portugal's nationwide TETRA system, A $10,000,000 LMR services agreement with a federal agency and a $9,000,000 fixed video services contract renewal with the City of Chicago. Looking at regional results, North America Q1 revenue was $1,500,000,000 up 14% on strong growth in all three technologies.

Speaker 3

International Q1 revenue was $679,000,000 up 16% versus last year with growth in all three technologies, partially offset by unfavorable FX. Moving to backlog. Ending backlog was a Q1 record of $14,100,000,000 up 5% Or $623,000,000 versus last year, inclusive of $372,000,000 of unfavorable FX. These results were driven by strong demand across all three technologies. Sequentially, backlog was down 280,000,000 driven primarily by typical order seasonality in North America.

Speaker 3

In the Products and SI segment, ending backlog was up 601,000,000 or 15 percent, driven primarily by strong LMR demand. Sequentially, backlog was Down $186,000,000 due to North America orders seasonality following a record backlog in Q4. In software and services, backlog was up $22,000,000 compared to last year, driven by strong demand for multi year software and services contracts in North America, Partially offset by the revenue recognition for Airwave, along with $329,000,000 of unfavorable FX and the adjustment related to the exit of ESN contract that we announced last year. Sequentially, backlog was down $94,000,000 driven primarily by revenue recognition for Airwave. Turning now to our outlook.

Speaker 3

We expect Q2 sales to be up 10% to 11% with non GAAP earnings per share between $2.49 $2.54 per share. This assumes weighted average share count of We now expect revenue in the range of $9,725,000,000 to $9,775,000,000 up from our prior range of $9,650,000,000 to $9,700,000,000 and we expect non GAAP earnings per share between $11.21 and $11.29 up from our prior guidance of $11.10 And $11.22 per share. This full year outlook assumes $25,000,000 of FX headwinds, A weighted average share count of approximately 172,000,000 shares and an effective tax rate of 23% to 24%. As I mentioned on the last call, the increase from our 20.1% tax rate last year is due to lower tax benefits on share comp And a higher UK tax rate in the current year, both of which combined represent an approximately $0.50 Headwind in our full year earnings per share guide. The increased outlook for the full year is a reflection of the continued strength Our business and demand for our solutions.

Speaker 3

The revenue guidance reflects expectations for strong double digit growth in the first half, As well as continued growth in the second half of the year, which comes on top of the 15% growth we saw in the second half of last year. I'll now turn the call back

Speaker 1

to Greg.

Speaker 2

Thanks, Jason. Let me just end with a few thoughts. 1st and foremost, our business remains very strong. We had record Q1 orders and achieved revenue above our expectations. We expanded operating margins by 4 70 basis points.

Speaker 2

We ended the quarter with our highest Q1 ending backlog ever and our public safety and enterprise customers are continuing to prioritize Our solutions that help keep communities safe, which is driving our increased top and bottom line guidance for the full year. 2nd, I want to highlight 2 recent announcements in our video security business. First, we've made the decision to integrate our end to end Fixed Video Portfolio, consolidating the majority of our fixed video solutions under 2 platforms, Avigilon Alta And Avigilon, Unity. Alta is our cloud native security suite consolidating OpenPath And Avis Security, while Unity is our on prem security suite, consolidating Avigilon and IndigoVision. This helps streamline our grow to market channels and further reinforces our vertical focus, particularly in government, but also education and healthcare, which combined those 3 now represent half of our video security revenues.

Speaker 2

Additionally, in our mobile video business, we launched our new integration with our market leading in car video solution, our Apex radios and our command center software, including live video streaming And location tracking through our Aware product. And finally, our strong start to the year Underlines the strength and resiliency of our business. The demand for our products and solutions that keep communities safe remains exceptionally strong. Our continued focus on cost management and inventory optimization, coupled with our previous modest pricing actions We took earlier continues to drive margin expansion and our strong balance sheet and durable cash flows allow us to be opportunistic with the deployment of capital Going forward to create long term shareholder value. And with that, I'll now turn it over to Tim and open it up for your questions.

Speaker 1

Thank you, Greg. Before we begin taking questions, I'd like to remind callers to limit themselves to one question and one follow-up to the community 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. Thank you. The first question is from Tim Long with Barclays. Your line is open.

Speaker 4

Thank you.

Speaker 5

Yes, 2 if I could here. First,

Speaker 4

Just looking at the second half, I know Jason you mentioned tough comps, but hoping you can just give a little commentary around moving parts given There's pricing benefits and pretty healthy backlog still. So what are the moving parts in that second half? And then second, more specifically on video, Greg or Jack, if you could talk a little bit about, it's good to see above the full year growth rate in Q1. Could you talk a little bit about where we are with cross sell opportunities and also Opportunities in video from NDAA and ARPA Safe Schools and things like that? Thank you.

Speaker 3

Sure, Tim. So on the second half, so you'll recall that last year in the second half is when the pricing actions that we implemented really began to show up in the And those really helped last year's growth and profitability expansion in the second half. So our position today As we look at those 15% comps is that we're still in a supply constrained environment. We have lead times from our suppliers. We have expectations to grow and with opportunities ahead of us for the second half with the continued demand That we have.

Speaker 3

Where the pricing actions benefited us, particularly in Q1 and expect similar for Q2 is last year's comps In the first half did not include those same pricing actions. So as we start to enter July, we're anniversarying those pricing actions and still expect growth on top of those. Okay.

Speaker 6

And specific to cross sell, what I would do is highlight 4 specific verticals starting with government. As we have attested to before, Government was a nascent business when we acquired Avigilon, and we made subsequent acquisitions. But just to put it in context, we've kind of put the marker out there this year for our video business that we would grow approximately 15%. We expect government to grow in the high teens. And we think we've got opportunities To move that specifically, I'd also call it healthcare.

Speaker 6

We're really, really pleased. We secured a $16,000,000 deal With a large scale hospital system, this was an add on and the beauty of that is they're not only A video user, but they're also a radio user. Education has been we've attested to the fact that numerous school systems are upgrading. Some are going with Avigilon Unity on prem systems, large scale urban schools, What we're really seeing is acceleration in growth in the cloud there. And the ability to do radio alert and integrate access control, LMR, Our command center software product called Compass into school systems is a game changer.

Speaker 6

And then lastly is the industrial space, namely utilities. We've talked about the fact that we've secured a large scale utility in the past. We've done in the area of $50,000,000 with the utility. And I think as utilities start to fortify their power grids and their substations, we'll have incremental cross sell opportunities there, Tim. I think the highlight is we tie it all into making sure that we incent our sales force to go and cross sell and that's just part of the DNA now.

Speaker 4

Okay. Thank you very much.

Operator

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

Speaker 7

Hi, guys. Thanks very much. I guess, I think you guys mentioned ARPA in the last question or maybe Tim did. But What are your expectations for the ARPA benefit this year? I know that you've got about $400,000,000 in orders from ARPA related projects last year.

Speaker 7

I would imagine some of that converted to revenue last year, but what do you think that might look like for 2023? Any sense? Thanks.

Speaker 6

Yes. So George, I would say ARPA, anytime there's federal stimulus dollars are conducive and I would say beneficial to the business. But to kind of put it in context, it's approximately 5% of our orders in North America last year. And that's not to diminish it, but I would take it to a higher level. I've actually gone and looked at Salesforce.

Speaker 6

They've contributed to deals that were secured, but they weren't the sole purpose I think at the end of the day, when you think about mission critical communications or even a school, We think we're in an area of prioritization and areas we've said before, it's a need to have and not a nice to have. So I think it's generally conducive, but it's I wouldn't necessarily Say it's the largest attributed to our success.

Speaker 7

Got it. Great. And then just as a quick follow on, I think The question everyone has been asking is, on supply chain, many companies, I think, are going through inventory Now, I mean, any sense that your customers have been inventorying products or is there any risk of

Speaker 3

The demand from our customers remains Very strong. Our backlog position is at a record level and that includes backlog that customers Are having to wait a bit longer than they'd like and we're working through those delays in getting them products. With the results in Q1, we were able to attain a little bit better supply. We had a good quarter across LMR, public safety, Had a good quarter with PCR. So we're getting after this backlog position and fulfilling the customers' demands, both So demand they placed on us in backlog is also the demand they placed on us within the quarter.

Speaker 3

So and our inventory position, If I shift to our balance sheet, has helped us mitigate a choppy supply environment and we continue to be mindful Of inventory and its utility in serving what remains a challenging supply environment, It's been a helpful tool and we do have expectations for inventory to reduce in the second half. That's in our cash flow expectations, But it remains an important tool to navigate this environment.

Speaker 8

Great. Thank you.

Operator

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

Speaker 8

Great. Thanks. And maybe just a question on the APX Next. You had mentioned that being targeted toward The high end and then introducing kind of the mid tier product, I just wanted to get a sense of adoption trends of the Various pieces of the portfolio and were they kind of following the customer adoption types that you expected? And then just maybe an Update on Rave integration would be helpful.

Speaker 8

Thanks.

Speaker 6

Sure, Meta. Maybe I'll start with the Apex next and Mahesh will speak to Rave. First of all, we're in the early innings, as we've said before. And I think it's most important to point out that it's a Multi year introduction for the Apex Next. What typically happens is we have We run the Apex original, the Apex Next line in tandem for the foreseeable future.

Speaker 6

In fact, to point that out, 80% In Q1 of our device revenue was actually Apex Original. So we've got a coexistent strong pipeline for both of them. We've got 410,000,000 orders since we introduced the Apex Next. But we've just recently last fall Introduce the N Series radio, which starts to fill in the portfolio and now we're bringing out international P25 units to bear that will be targeted in New Zealand and Israel, all in with the new product what we're seeing is kind of high single digit ASP increases as well.

Speaker 3

And I'd also mention other parts of the portfolio, TETRA, PCR are areas where we focused And have exciting products coming to market and receptive customers to those as well. So we're at an important point And the targeted investments we made in and through COVID that are now producing those exciting products are also an important part of our growth drivers.

Speaker 9

And on RAVE, RAVE has exceeded our initial expectations for performance. We see strong traction in education, especially higher ed, but also K-twelve. And as we Previously talked about RAVE Bridges Enterprise Security with public safety and with some of the initiatives that we have undertaken recently, we're making that The bridge wider, effectively allowing for more data and at a faster rate to go from enterprise security to Public Safety. So two specific examples worth mentioning there. First, with every one of Our new Vesta 911 orders, we're actually bundling Rave 911 Suite.

Speaker 9

And what that includes is two way texting, Caller profiles, this is information about individuals who perhaps need special assistance facility info, which is blueprints of facilities so that responders can with greater information as to what they will see when they get to the facility and very importantly, call our location. And that is going to be part of our Vesta 9 11 offer going forward. The second is, we're integrating more closely with our enterprise security solution. So Orchestrate is a key enabler for that. And as part of our full 8 year reimagine program, we're bringing RAVE much closer in terms of The ability to detect and the ability to alert using Graveler Alert and the ability to bridge into 911 as appropriate.

Speaker 9

So those two Together, it's really augmenting our path forward in terms of taking advantage of our strength in education along with our presence with PSAPs.

Speaker 8

Great. Thanks.

Operator

The next question comes from the line of Sami Badri with Credit Suisse. Your line is now open.

Speaker 5

All right. Thank you. I had a couple of questions, some of them modeling, some of them business dynamics. I'll start with business dynamics first. So one on the backlog, So there obviously are a lot of big deals.

Speaker 5

And maybe you could give us characterization of how many of these bigger deals are expected? And then maybe taking that question a step further is if we excluded FX impact and excluded big episodic activity, are you still seeing the backlog Step up, right, with more of these, your standard business motion?

Speaker 2

And then I have a follow-up.

Speaker 3

Sami, I think I'd address your inquiry. We've seen strong demand and not only big deals, but also the usual Type in profile of our business and I point to duration. While our backlog is up At record levels, the duration of our backlog is similar to slightly better than it was last year and than it was last quarter. So not only are we growing backlog, The opportunities we have to convert that backlog within the year are slightly better. So that's one of the reasons that again With our expectations going up for the year, it's driven by that backlog position.

Speaker 2

And backlog is up in the face of unfavorable effects to your other point of $370,000,000 By the way, the other thing, Sami, is Even when we have a large project, much like the Air Force we talked about earlier on the call, it's a $340,000,000 10 year order, Only $11,000,000 of that is logged in backlog. So I like the composition And the duration of the backlog in addition to it being absolute and at record levels as we exit Q1.

Speaker 5

Got it. Thank you for that. Also, Greg, Jason, if you guys could give us any kind of idea on All video revenue growth targets for 2023 and also we appreciate the new breakout of the Avigilon segment.

Speaker 3

So our expectations for total video remain approximately 15%. That's consistent with our last call. And as Jack mentioned, that growth will be even better in some of our power verticals, which represent over half of the composition of the revenue. So, Video is performing to our expectations. And then Sami, to your observation of Greg's comments around Our portfolio around Ulta and Unity, that's a market facing change that we will represent the brands And Jack's sales team is positioned to sell video.

Speaker 3

We are in a great position to sell it either in an on prem version, which is the way Most customers buy today, but also in a cloud version. And as markets move, we're positioned extremely well.

Speaker 6

I think a great example, I got a phone call yesterday, Sami, on that specific to a large scale Metropolitan School District. They had 3 finalists. 2 of the finalists were Avigilon Alta and Avigilon Unity. And I think that's the power that we can meet a customer for their specific needs That no one else in the marketplace has today.

Speaker 5

Great. Thank you very much.

Speaker 2

Thank you.

Operator

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

Speaker 2

Sure. Thank you. Look, I would just say in closing, It was a great Q1 and I think it highlights the fact that what we do has never been more important. Both the demand environment and execution is I'm really proud of the people. I'm really proud of our channel partners that achieved record Q1 orders, Record Q1 backlog.

Speaker 2

Look at the end of the day as we exit Q1, I like our position. More importantly, I like our momentum. And then again, this is despite the ongoing supply chain challenges that still have to sort itself through For the next several quarters, the fact is the intersection as Mahesh talked about of public safety and enterprise security, it's critical. And we're building a safety and security technology ecosystem that connects public safety with private institutions, as you heard Jack reference in those key verticals. I couldn't be more proud of this team and I'm optimistic and enthusiastic about the opportunity in front of us.

Speaker 2

I appreciate you joining

Operator

Ladies and gentlemen, this does conclude today's teleconference. A replay of this call will be available over the Internet within 2 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.

Powered by Quartr
Earnings Conference Call
Motorola Solutions Q1 2023
00:00 / 00:00