Motorola Solutions Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 12, 2022

There are 14 speakers on the call.

Operator

Good afternoon, and thank you for holding. Welcome to the Motorola Solutions First Quarter 2022 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 Sterilations' website.

Operator

In addition, a webcast replay of this call will be available on our website approximately 2 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 pass the conference over to Mr.

Operator

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

Speaker 1

Good afternoon. Welcome to our 2022 Q1 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 Satharishi, 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 motorolasolutions .com/investor.

Speaker 1

These materials include GAAP to non GAAP reconciliations for your reference. And during the call, we reference non GAAP 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 release.

Speaker 1

Comments made during the conference call In the Risk Factors section of our 2021 Annual Report on Form 10 ks and in our other reports and filings with the SEC, We do not undertake any duty to update any forward looking statements. And with

Speaker 2

that, I'll turn it

Speaker 3

over to Greg.

Speaker 4

Thanks, Tim. Good afternoon and thanks for joining us today. I'm going to start off by sharing a few thoughts about the overall business before Jason takes us through our results and our outlook. First, I'm really pleased with our strong start to the year as we achieved sales and earnings per share above our guidance in spite of the challenging macroeconomic and supply chain environments that we continue to navigate. During the quarter, we saw record Q1 orders and Record Q1 sales highlighted by our video security and access control business, which grew 21% in revenue with even higher growth in orders.

Speaker 4

We also finished the quarter with a record Q1 ending backlog of $13,400,000,000 up 19% versus last year. 2nd, we continue to see strong demand across all three technologies, driven in part By a robust funding environment for our customers. In land mobile radio, we're seeing continued investment in regional, statewide and even countrywide networks It further reinforces the longevity and criticality of this technology. And in our higher growth areas of video and command center software, Our investments in cloud and artificial intelligence are differentiating us from our competitors. Total software revenue was up 17% during the quarter, including 28% growth in software for our video security and access control business and 9% growth in Command Center Software.

Speaker 4

And finally, our expectation for full year guidance remains unchanged. As the year has progressed as this year has progressed, we've seen incremental headwinds related to higher freight costs, a stronger dollar and the dilutive impact of the AIVUS Security acquisition. However, these headwinds are being offset by further pricing actions, stronger demand, favorable mix and targeted cost reductions. I'll now turn the call over to Jason to take you through our results and outlook before returning for some final thoughts.

Speaker 5

Thanks, Greg. Our Q1 results included revenue of $1,900,000,000 up 7% and above our guidance, driven primarily by better than anticipated supply for LMR. Revenue from acquisitions was $17,000,000 and currency headwinds were $18,000,000 GAAP operating earnings of $239,000,000 And operating margins of 12.6 percent compared to 16.8 percent of sales in the year ago quarter. Non GAAP operating earnings of $374,000,000 down $37,000,000 or 9% from the year ago quarter and non GAAP operating margins of 19.8 percent of sales, down from 23.2%. This decline in operating earnings was primarily due to the $50,000,000 of higher semiconductor costs that we outlined on our last call related to the acquiring critical supply in the secondary market for semiconductors.

Speaker 5

Additionally, we saw higher freight costs driven by elevated airfreight rates and higher operating expenses related to acquisitions, partially offset by higher sales. GAAP earnings per share of $1.54 compared to $1.41 in the year ago quarter. The increase was primarily due to a deferred tax benefit in the current quarter related to the reorganization of intellectual property. Non GAAP EPS of 1 point and $0.70 per share compared to $1.87 last year, a decrease primarily due to the operating earnings impact I described related to higher semiconductor and freight costs and increased operating expenses from acquisitions, partially offset by higher sales and a lower tax rate. OpEx in Q1 was $492,000,000 up $37,000,000 versus last year primarily due to higher expenses related to M and A, Investments in video and higher selling costs commensurate with our higher sales.

Speaker 5

Turning next to cash flow. Q1 operating cash flow was $152,000,000 compared with $370,000,000 in the prior year and free cash flow was $98,000,000 compared to $318,000,000 in the prior year. The decrease in cash flow was primarily due to our planned increase in inventory as we invest to meet the strong products demand we're seeing from our customers in video and LMR. Capital allocation for Q1 included $493,000,000 in share repurchases, dollars 134,000,000 paid in cash dividends And $54,000,000 of CapEx. Additionally, during the quarter, we closed the acquisitions of AIVA Security for 387,000,000 And TETRA Ireland for $120,000,000 And subsequent to quarter end, we acquired Calypsa, a leader in cloud based Advanced Video Analytics for $40,000,000 And just earlier today, we announced the acquisition of VideoTek, a global supplier of pan tilt zoom And explosion proof cameras for $22,000,000 VideoTech enhances our portfolio of NDAA compliant Fixed Video Cameras.

Speaker 5

Moving next to our segment results. Q1 Products and System Integration sales were $1,100,000,000 up 9% driven by anticipated strong growth in video and better supply availability in LMR. Revenue from acquisitions in the quarter was $7,000,000 and currency headwinds were $8,000,000 Operating earnings were $96,000,000 or 8.7 percent of sales, down from 12.9% in the prior year, driven by the $50,000,000 of higher semiconductor costs and higher freight Costs previously mentioned partially offset by higher sales. Some notable Q1 wins and achievements in this segment include An over $60,000,000 nationwide P25 order for Taiwan National Police, dollars 20,000,000 of P25 upgrade orders for Los Angeles Unified School District, a $14,000,000 TETRA upgrade for the Israeli Railways, dollars 11,000,000 P25 expansion for a large U. S.

Speaker 5

Customer And a $5,000,000 video order for a large U. S. Public school system. Moving next to our Software and Services segment, Q1 revenue was $789,000,000 up 4% from last year. Revenue from acquisitions was $10,000,000 and currency headwinds were also 10,000,000 Growth in this segment was driven by Video Security and Command Center Software, while LMR Services was approximately flat As expected, due to the impact of a tough comp related to customers' P25 system upgrades that were concentrated in the Q1 of 2021 due to the COVID delays throughout 2020 and the impact of unfavorable FX.

Speaker 5

Operating earnings were $278,000,000 or 35 percent of sales, down 170 basis points from last year, driven by a change in year over year mix and higher M and A operating expenses, partially offset by higher sales. For the full year, we still expect Software and services revenue growth of 10%, and we expect operating margins that are comparable to last year with the dilutive impact of recent M and A offset by pricing and improved operating leverage. Some notable Q1 highlights in the segment include $27,000,000 command center software order for a customer in Latin America, a $20,000,000 U. S. Federal multi year service Contract orders $8,000,000 command center software record management order for the City of Phoenix And an $8,000,000 services agreement with the City of Chicago.

Speaker 5

During the quarter, we grew our video security and access control software revenue by 28%. And subsequent to the quarter end, we launched the Public Safety Threat Alliance, a cybersecurity information sharing and intelligence hub for the public safety community. Looking next at our regional results. North America Q1 revenue was $1,300,000,000 up 10% on growth across all three technologies. International Q1 revenue was We saw growth in Latin America and Asia Pac, while Europe was slightly down, primarily due to FX.

Speaker 5

Moving to backlog. Ending backlog was a Q1 record of $13,400,000,000 up 19% or $2,100,000,000 compared to last year, driven by the Airwave extension recorded in the Q4 of 2021 and increased demand across all three technologies. Sequentially, backlog was down $115,000,000 driven primarily by the Airwave and ESN revenue burn during the quarter, partially offset by growth in LMR and Video Products. Software and Services backlog was up $1,300,000,000 compared to last year, driven by the Airwave extension and a $320,000,000 increase Multi year services and software backlog in North America. Sequentially, backlog was down $221,000,000 or 2%, driven primarily by revenue recognition for Airwave and ESN during the quarter and typical order seasonality in North America.

Speaker 5

Products and SI backlog was $852,000,000 compared to last year and up $106,000,000 sequentially, driven primarily by strong LMR and video demand in both regions. We entered the year with a record backlog position And approximately $2,200,000,000 of our beginning backlog in the product segment was scheduled to be delivered in 2022, With over 2 thirds of this amount expected to be delivered in the first half, we saw continued strong demand for new orders during the quarter With a record Q1 orders total that included comprehensive pricing actions we implemented across our portfolio in January. We expect these new orders at higher prices together with higher volumes in the second half to lead to a significant profitability ramp throughout the year. Turning to our outlook. We expect Q2 sales to be up between 4% 5% with non GAAP EPS between $1.83 $1.88 per share.

Speaker 5

This assumes approximately $50,000,000 of FX headwinds, a diluted share count of approximately 173,000,000 shares and an effective tax rate of 22% to 23%. It also includes $50,000,000 of year over year increased costs that we described on our Last earnings call related to elevated material costs for semiconductor supply from secondary markets. For the full year, we are maintaining our prior revenue guidance of 7% growth and non GAAP EPS Guidance between $9.80 $9.95 per share despite the significant strengthening of the U. S. Dollar since our last call.

Speaker 5

We now expect FX to be a headwind of $170,000,000 for the year, up $110,000,000 from our prior guidance. This outlook now assumes a diluted share count of approximately 173,000,000 shares based on the timing of our share repurchases in the year and an effective tax rate of 21% to 21.5%. Additionally, our full year operating cash flow guidance For approximately $1,900,000,000 and full year OpEx expectations of approximately a $100,000,000 increase over last year are also unchanged, inclusive of the new acquisitions we announced offset by targeted reductions we're making. Before I turn the call back to Greg, I wanted to reiterate some of the proactive measures we've been taking to navigate this dynamic environment. 1st, Amid strong demand, we've taken further pricing actions across various parts of our portfolio, which we expect to benefit our second half of the year.

Speaker 5

We remain cost disciplined with targeted OpEx costs planned while funding our recent acquisitions. We are strategically investing in inventory to maximize the parts availability to fulfill the strong demand that we're seeing. And finally, we continue to be good stewards of capital, maintaining a strong balance sheet to be opportunistic and deploying capital on acquisitions and shareholder returns. I would now like to turn the call back to Greg.

Speaker 4

Thanks, Jason. I thought I would end with a few thoughts on the business. First, business remains really strong. Despite the ongoing macroeconomic and semiconductor challenges, We had record Q1 orders and sales that drove results above our expectations. We ended the quarter with our highest Q1 ending backlog ever.

Speaker 4

And our higher growth businesses in video security and command center software continue to grow at a multiple of their overall markets. 2nd, our healthy balance sheet and durable cash flow provides us with the flexibility to be opportunistic in our deployment of capital. During the quarter, we closed 2 additional acquisitions I'm excited about. TETRA Ireland, the provider of Ireland's nationwide digital radio service First Responders is a business we've had our eye on for a while actually and it adds to our strong LMR Managed Services Business. Mavis Security, a scalable, secure and flexible cloud solution provides customers with the benefits of an enterprise grade video security solution while minimizing the physical footprint of their security infrastructure.

Speaker 4

AIVA complements our on prem offerings in fixed video security and provides us with the flexibility to meet our customers where they are with options for both cloud or on prem solutions. And finally, while the macroeconomic environment remains turbulent, I like our position. We're a leader in the markets we serve. We provide need to have solutions that are critical for customers. We continue to invest heavily in R and D and all of this provides us with the ability to take continued pricing actions to manage higher cost pressures.

Speaker 4

Additionally, we have strong predictable cash flows that allows us to continue to invest in our growth businesses, while simultaneously returning capital to shareholders in the form of share repurchases and dividends. I'll now turn the call back over to Tim.

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 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. Thank you. The first question is from Keith Hulsome with Northcoast Research. Your line is now open.

Speaker 5

Good afternoon, guys. I appreciate

Speaker 6

the opportunity. It sounds like you guys have been able to navigate the supply chain challenges fairly well. I noticed you guys have said the $50,000,000 in extra costs for the Q1. But can you guys talk about the supply visibility into supply for the rest of the year? Obviously, there have been a lot of upheaval with things going on in Shanghai recently, But any updated thoughts on where supply chain stands today?

Speaker 4

Hey, Keith. I think Our view of supply chain is it's pretty much unchanged from where it was a quarter ago. It's still very challenging. We go through week by week negotiations and discussions with critical suppliers on allocations. On the good news side, I think we were more successful in Q1, getting some critical parts sooner than expected, and I think that drove and informed our over performance in Q1.

Speaker 4

The overall environment around semiconductor constraints remains challenging. I think, Keith, realistically, we expect Those challenges to exist throughout the rest of 2022.

Speaker 5

And Keith, you mentioned the 50,000,000 In Q1, it's another $50,000,000 in Q2. So as we set out the year and described in the last call, dollars 100,000,000 Is elevated costs that we're incurring to buy these parts at a premium in the first half, but the second half is only $20,000,000 That's in part driven by The elevated cost that we faced last year, so the comp. But secondly, in terms of our supply and what our teams are doing to increase The number of substitutable parts, the engineering and quality teams are doing a good job in finding alternative parts and doing well in that. And we've also shifted to air as our primary means of freight. That's what's elevating our freight costs a little bit to get the parts in a timely fashion.

Speaker 5

So,

Speaker 4

Keith, semiconductor constraints largely unchanged, as Jason dimensionalized, although freight It has incrementally gotten worse as we shift more ocean to air, and the overall cost is higher than was anticipated on our last call, but anticipated and included in our full year guidance.

Speaker 3

Got you. Just as a follow-up, You guys had a

Speaker 5

really strong Q1 for bookings. Is there a capability despite the challenges, are you

Speaker 6

able to get enough supply to get Over and above your guidance if the demand was there?

Speaker 5

Yes. Our guidance for the quarter the year is a compilation of the demand and then match to the supply that we Have and foresee in terms of delivery. So nothing's changed there. We over performed in Q1 largely because we were able to Get the supply and allocate it purposefully to parts of the portfolio like public safety that are important to customers. They also happen to have Slightly higher ASPs.

Speaker 3

Got you. Thanks guys. Good luck. Thanks Keith.

Operator

Thank you, Keith. The next question is from the line of George Notter with Jefferies. You may proceed.

Speaker 7

Hi, guys. Thanks very much. I guess I wanted to just quiz you on the full year guidance. You're keeping the 7%, but it seems like there's a lot of moving Parts in there and I'm just wondering how it all kind of nets out. So you have $110,000,000 of additional FX headwinds.

Speaker 7

You've got a bunch of new M and A deals in here. Pricing has gone up. I guess I'm Wondering what it looks like when you kind of peel all that back, is your guidance better or worse than Maybe you thought it was 3 months ago.

Speaker 5

You mentioned 110 in FX. That's absolutely correct. The incremental M and A that's That we've acquired since we last talked is $60,000,000 Additionally

Speaker 4

Of net new revenue. Of net

Speaker 5

new revenue. In Additionally, in terms of you mentioned price, we're absolutely looking at that and have made some changes across the portfolio. And the 3rd item is favorable mix. So what we where we prioritize and allocate our supply to.

Speaker 4

Yes. And we acquired AIVA, and AIVA is about $0.10 dilutive To EPS for the full year, so net net, we've got incremental headwinds as you talked about George of FX, incremental headwinds with freight, some M and A, higher costs than our last call, But that's balanced out by favorable mix, particularly as we index toward higher tier shipments. We continue to take pricing actions. I think tax rate will be a little bit better and share count will be lower. So all in all And by the way, at the end of the day, I think demand is as strong or maybe even stronger today than it was back in February.

Speaker 7

Got it. And then just continuing on that, could you give us a sense for the magnitude of the pricing And I think you said January was the time you instituted those. Is that correct? And then when do you think those will be fully in the model?

Speaker 5

So we've been looking at price for a number of quarters. The most recent ones were January. I mentioned on the call that The backlog that we began the year with was $2,200,000,000 That's largely going to fuel the first half. So the orders January Onward are going to fuel the second half and that's where we our most recent pricing actions are. When I think about products, the segment, In terms of what's driving the growth we expect this year for our product segment of mid single digit growth.

Speaker 5

Within LMR, the driver is largely price and mix favorability. And then within video, which is the higher growth part, It's price and volume that are driving the growth we expect there.

Speaker 7

Got it. All right. Super. Thank you very much.

Speaker 8

Thanks, George.

Operator

Thank you, George. The next question is from the line of Paul Silverstein with Cowen. Your line is now open.

Speaker 9

My apologies. Guys, I apologize if you answered this in your prepared remarks, but with the improvement in some of your Key sectors in your professional in your PCR business, are you seeing that translates to an improved outlook? Hospitality has obviously improved significantly. Oil and gas prices are up, albeit I'm not sure how much that's improved that industry. But are you seeing any improvement there?

Speaker 5

So with PCR, we expect it to grow this year mid single digits. It was flat in Q1. The demand for PCR is very robust. The limiting or gating item is supply around PCR. So Jack, if you want to talk about markets.

Speaker 10

Paul, I think that the 2 markets that we've seen the most profound rebound kind of post COVID have been air, transportation and hospitalities. I think the next to follow will be commercial real estate as we get people back to work in major cities. We're starting to see upgrades even in our building. We'll see upgrades on the communications front there, but we've really been air and hospitality this year.

Speaker 9

Yes. For my follow-up, I Appreciate you just increased prices, but everybody is citing stepped up component costs. Any thoughts you can share on longer term margins where they got In what time frame? On the gross line.

Speaker 5

Sure. So headline inflation, we're navigating it like all companies and have And planning for a significant inflation number that we've been seeing. We have 2 unique cost Inflation items that we believe are temporal. 1, we're paying a premium for semiconductors that aren't available directly from the manufacturer and getting them through Alternative secondary markets, that's $120,000,000 that is in the P and L this year as we get after that critical supply. Secondly, the freight levels that were incurring this year are also, air rates are frankly high.

Speaker 5

They got higher after the Ukraine Invasion and they remain high. So those are 2 temporary items that are we're navigating around As well as general inflation.

Speaker 4

Yes. And Paul, I would also say that taking all those things into account, We still expect full year gross margins to be comparable for MSI and operating margins to be slightly up for full year 2022.

Speaker 9

Great. I appreciate it. Thank you.

Operator

Thank you, Paul. The next question is from the line of Meta Marshall with Morgan Stanley. Your line is now open.

Speaker 2

Great. Thanks. Maybe starting I noticed you guys Talked about strong order activity kind of across the board, but just wanted to get a sense of was there any changes by region? So anything Notable in the Europe region, maybe more specifically. Maybe start with that and then I have a follow-up question.

Speaker 10

Sure, Meta. I think so as it applies to Europe, first of all, I just want to remind you, half of our revenue in Europe is actually recurring revenue. So think large Scale Managed Service Businesses. In Q1, internationally, we'd have been up 3% we're up 3% in And currency, so really the FX headwind that Jason alluded to, really impacted Europe, to the greatest extent. But I would say this, Our challenges in Europe and really quite frankly in international are not demand related.

Speaker 10

Demand remains very robust. It remains very robust in Europe, not only in video security and access control, but our command center software as well as our land mobile business. So I think the biggest challenge I would say is really currency right now.

Speaker 4

And Meta, just as a footnote, as it relates to Russia, Contextually, we've exited that market. It was pretty de minimis for us to begin with. Full year revenue on Russia Last year was $25,000,000 So we've exited that market. We don't have Corolla Solutions employees In that theater any longer. So just as a footnote, I thought that could be helpful as well.

Speaker 2

Perfect. Very helpful. And then maybe just on the I just want to get a sense of you guys obviously spoke to growing backlog. Just how much of the Growing backlog is a result of supply chain challenges and inability to ship versus just some longer term contracts coming in. Thanks.

Speaker 2

And that's it for me.

Speaker 5

Majority of our backlog is from direct customers, governments, agencies, thousands of who order as their procurement cycles permit them. And so we believe that and to be a very strong signal for their demand. We also have a channels business, where channel inventories are very low And our channel partners are placing orders on us to replenish that inventory. So our demand signal from both our direct customers and our indirect Customers is pretty clean and as Jack mentioned is growing in both sides of the business.

Speaker 2

Perfect. Thanks. Congrats, guys.

Operator

Thanks, Meta. Thank you, Meta. The next question is from the line of Sam Badri with Credit Suisse. Your line is now open.

Speaker 11

Great. Thank you. I was hoping you could elaborate on ARPA contribution. I know you guys put a couple of sentences or a sense In your press release, could you just walk us through contribution from explicitly ARPA that you guys are estimating? Hey,

Speaker 10

Sam, it's Jack. First of all, I want to we said it before, but it's important to first of all point out that ARPA will be a multiyear phenomenon. So our team is actually when we look at our pipeline, which is our sales funnel, we've actually seen a 3x increase over this period last year. So that's great. And a lot of that is really directed at the $350,000,000,000 in state and local, which really We've never had a problem as it relates to we're a need to have business.

Speaker 10

But what it really does is it draws clarity to how those deals get funded. And so we'll be in that for the next 2.5, 3 years. The second area where it's been very helpful is with our fixed video security and access control business, particularly around the education vertical where people are really trying to say bring kids back to school, trying to make sure those places are safe, actually investing in things like concealed weapons technology with our evolved partnership as well. Yes, as well. So we think the money that's appointed, which is $170,000,000,000 there will also be will benefit us over the course of the next 3 years as well.

Speaker 11

Got it. And then just as a follow-up, maybe for you, Jack, again. Any update on body worn camera For fixed cameras that go on to the vehicles like first responder vehicles, could you give us an update on that and growth rates or any kind of comments on market share?

Speaker 10

Absolutely. So, first of all, as it relates to BodyWearn, I talked about last year from a market share context, last year we doubled our orders. In 2021 doubled our orders in a market Certainly didn't double. So we felt like we took share. As it relates to Q1 2022, our orders were up double digit.

Speaker 10

I think most importantly, they were up double digit against a comp whereby last year we grew 65% in orders in Q2. I think the only thing I'd add is we announced our as a service offer last year and we've actually seen acceleration in customers' willingness to choose the cloud there. So We've said before, we think that the market wants an alternative. We've got good relationships internationally in North America. Our team continues to fight for their fair share and then some.

Speaker 12

Just to add to that,

Speaker 11

we launched the

Speaker 13

M500 It started shipping a few months ago, a little bit earlier this year. The M500, we consider to be Significant leap up from our prior generation, the 4RE. And it builds upon a lot of the goodness that the 4RE had. And For RE, from the WatchGuard legacy really has evolved with a lot of customer feedback. Critically for the M500, we have added some significant new AI capabilities.

Speaker 13

This is a platform that's really meant to deliver AI capabilities. At launch, we launched it with 2 capabilities effectively, officer and passenger safety, but in addition, ALPR as well. And the ALPR stream actually contributes to the other sets of ALPR cameras we have in our portfolio. These Speed into one of the largest the industry's largest license plate databases that we have. Right now, we're exceeding 50,000,000,000 plate reads.

Speaker 13

And to give you an idea of like the rate at which it gets refreshed, in Q1 of this year, we accounted for about 2,400,000,000 plate reads. And to give you an understanding of the frequency at which we're growing here compared to the previous year, we doubled the plate rate. So overall,

Operator

Thank you, Sam. The next question is from the line of Ben Bollin with Cleveland Research, your line is now open.

Speaker 12

Thanks for taking the question. Good afternoon, everyone. First question, I was hoping you could share any thoughts around customer priorities with respect to command center software And refresh and just talk to any execution you're seeing how you think you're doing, how it's developing and kind of where it's going? And then I had a follow-up for Greg.

Speaker 13

Sure. So the first point is that We're growing faster in the market. We're taking market share. Over half of our orders last quarter in Q1 We're suite orders. Effectively, we either added on to existing bundles or we customers bought more than 1.

Speaker 13

And Jason mentioned 2 of our large opportunities in his bit. The L. A. Unified School District, they bought our CAT and record solution. But not only are we seeing synergies now with Our software suite, but one of the key reasons to buy there was location data integration from our LMR side as well.

Speaker 13

And that had a profound impact in that opportunity. The City of Phoenix opportunity that Jason mentioned was driven by the national incident based reporting Criteria that the city needed to comply with and that along with the fact that we are now integrating with the Aware solution for real time situational awareness that added a lot of synergy to that opportunity as well. We had our summit In April, the summit was the largest software summit we have ever had in Motorola history, 1600 attendees, Over 300 classes and user group sessions, we had representation across all user types going from call to case closure. There are some important themes that we hit there. The first was the fortification theme and really what resonated there was cyber security.

Speaker 13

We talked about the Public Safety Threat Alliance that we launched quite recently. And as a consequence of us talking about the Public Safety Threat Alliance, Within the 1st 2 weeks of the creation of it, we've had over 50 members sign up to be part of that and we expect that to rapidly increase. We also talked extensively about our innovations in user experience given the pieces given the users That were represented there. And some of the as an example, some of the AI capabilities that we talked about there really resonated with our customers. Smart transcription is something that we have talked about previously, but smart transcription has become more than just a transcription, a Speech to text transcription, but it really has become an application platform for us that we have built alongside our customers.

Speaker 13

So not only is transcription a second pair of years that make sure that the call taker doesn't miss anything, we have now been able to add capabilities where smart transcription allows the call taker to benefit from the experience of other callers who have responded to similar sorts of events. So to be able to search for similar calls that others have responded to and for them to be better informed in responding to new types of events. So Smart transcription has actually become an experience base for existing customers. On top of that, based upon customer feedback, we've added capabilities for supervisors to know when to support a call taker during a call as well. And lastly, we're also extending this to now recognizing when call takers are under stress.

Speaker 13

So these Smart transcription as a capability has really expanded our capacity to add applications for our CommandCentral Software Suite. And the last Part that I'll mention here is that mobile has become a significant part of what we have talked about as well. We've invested heavily in mobile cc responder command center responder Has now both an iOS and an Android instance supporting our on prem and our cloud installs, hybrid being a key priority there. And with our customer in Western Australia, we recently launched a CarPlay application that was done in collaboration with Apple And the Western Australia Police, and this is the very first public safety application to be launched for CarPlay. All of this, by the way, Very much consistent with our hybrid strategy and we're seeing a

Speaker 5

fair amount of traction there.

Speaker 12

That's great. Thanks for all that color. The follow-up for you, Greg, when you step back and kind of look at The world and clearly we're in a surplus demand environment and at some point supply starts to catch up. But I'm interested in how you think about monitoring the inbound orders and ensuring that customers aren't running out there and placing a lot of orders, maybe with multiple tenders, Perhaps ordering more than they need and just kind of taking what comes first. How do you think about that?

Speaker 12

Obviously, I think it's more PCR related, but just curious any thoughts you have there? That's it for me. Thank you.

Speaker 4

Ben, I was just going to say the last part that you said. I think it is more PCR related. I think the way we do that is I think Malloy and Jon Zadar during this time work really closely with the channel partners, particularly in North America on prioritization, on active conversations, On transparency, on what they really need versus what they may think they want, to try to eliminate any kind of artificial forecasting. So I think it's a reflection of the relationships we have with the channel partners, and I have to tip my hat to John Zadar, who runs that organization under Molloy. I think the way you sort through that is the efficacy and the authenticity of the conversations with the partners during these tough times.

Speaker 4

And I think Molloy and his team are doing that.

Speaker 10

Greg, the only thing I'd add to that is, and you're right, the PCR channel, by the way, it's also important to note that a lot of our partners are CarryOne brand, so they're not putting orders in against the second one. The second thing, is government customers don't have the wherewithal, meaning they have a limited budget. They're not able Cut multiple purchase orders against the same budget line item. So we wouldn't have any inflation in orders on there. There's an end Customer within, for instance, Cook County, if it's the highway department or the sheriff's department, they've got line item 32 is $1,000,000 They can't spend that twice.

Speaker 10

So we know that there's clarity of funding there.

Speaker 12

Thanks.

Speaker 4

Thanks, Ben.

Operator

Thank you, Ben. The next question is from Bahad Najam with Loop Capital, your line is now open.

Speaker 3

Thank you for taking my question. I had 2 clarifications first before I can get to my question. What was the FX headwind in the quarter? And also you highlighted about $170,000,000 in FX headwinds to the revenue, but what's the I'm assuming there is a benefit of the OpEx line. So can you maybe Tell us what benefit you're seeing on the OpEx from the FX?

Speaker 5

So the answer to the first question is within the quarter it was $15,000,000 of FX. And on FX in general, we have some offsets Within OpEx, to mitigate the effects of the gross margin dollars lost. So there is some relief, if you will, on OpEx. But in total, the $110,000,000 Degradation in from last call to this call comes with an OE impact that we are mitigating through price, through cost targets and through allocation to higher mix.

Speaker 3

Got it. I wanted to ask you on the component shortages, maybe if you can double click on that and maybe provide us a color what It has improved, what has not improved, what has gotten worse. Maybe you can give us a bit of clarity on What your line of sight is? You're clearly thinking that things will improve, but can you just give us a color on what portfolio is getting most impacted by component shortages?

Speaker 4

Yes. Fahad, I would say as it relates to semiconductor constraints because that's really what we're referring to, I don't think we see it improving. I think we see it as a constant challenge throughout the remainder of 2022. What improved in Q1 was successfully navigating and negotiating and getting some increased allocation on some key parts with some key suppliers that moved it from Q2 into Q1 that allowed us to Overperformed the way we did top and bottom in Q1. I would say the semiconductor constraint environment remains unchanged, I.

Speaker 4

E. Still challenging. We think it will be through the remainder of the year. It is primarily around land mobile radio, but Quite frankly, video security is not immune completely either, but we are managing those accordingly.

Speaker 3

Within the LMR portfolio, are you seeing a more adverse impact on your higher margin PCR and LMR sorry, Apex Next portfolio, just kind of color what within your LMR

Speaker 4

I think the part of LMR that's the most challenged is PCR because we have a lot of common semiconductor parts that go into all types of radios. So we are working closely with customers around favorable mix, in particular, North America and oftentimes higher tier devices that allow us to ship those and fulfill those orders quicker than others. So the main part of the LMR portfolio, I think that feels it the most acutely is probably PCR.

Speaker 5

The only thing I'd add on the high tier in Apex, Apex Next is, the complexity of those products and the joint engineering we do and the supply lines we have For semiconductors, our unique to those products and we're doing a good job in getting the So there are some commonalities, but also some uniqueness and our key suppliers in public safety LMR Are doing a good job of getting us what we need.

Speaker 12

Agree.

Speaker 3

Appreciate the answers. Thank you. Thank you, Fahad.

Operator

Thank you, Fahad. The next question is from the line of Louie DiPalma with William Blair. Your line is now open.

Speaker 8

Greg, Jason, Jack and Mahesh, Good afternoon from sunny Chicago.

Speaker 4

Louie, how are you doing?

Speaker 8

Doing great. Thank you for taking my question. The William Blair team heard very positive Commentary about OpenPath Solutions at the Commercial Real Estate Tech Conference in San Diego. So I was wondering, can you discuss your growth strategy for Access Control in general? And Also, I wanted to note that during the quarter, it seemed that STANLEY sold its Access Technologies division for $900,000,000 And related to your strategy, do you expect to be as active with Access Control acquisitions as you have been with video acquisitions.

Speaker 8

Thanks.

Speaker 10

Okay, Louis, I'll start and Mahesh may want to color in some lines. I think first of all, as it relates to fixed video security and access We've taken a premise and a look at the market to say we want to make sure we meet our customers for where they are. So it started with Avigilon which is an on Prem end to end solution, we've invested in Avigilon Cloud Services, but they had a legacy access control business as well. Actually, that business was actually the highest Growth within the Avigilon portfolio at 1 point in time. But we really saw a move to cloud and mobility, particularly as people want They want smartphones capability to access a building, it's having old key card.

Speaker 10

And I would also tell you that OpenPath has seen It's been it's outkicked its business case due to the fact that, there's a shortage on card readers right now, like a lot of things in the heart. So that's really accelerated the growth into the cloud for OpenPath. So I think you will hear a lot of good things. The other piece with OpenPath as I said is it's cloud native, Which is different than the most. So we think we've got a pretty good strategy as it relates to both in terms of a buyer wants a cloud solution or OpenPath.

Speaker 10

I mean, not a cloud solution or an on prem solution. Mahesh, anything you want to add to that?

Speaker 13

Yes. I think the OpenPath team launched the Video intercom reader in Q1 as well. And that sort of is a signal in terms of the convergence between video and Access Control more broadly. If you look at the architecture of OpenPaths cloud native with endpoints on prem like readers, But also the ability to tackle existing leaders, support a migration from on prem to cloud. AVA is a very similar model as well, where it can be either entirely cloud native or support Mix in between as well.

Speaker 13

The combination of Ava and OpenPAT gives us the opportunity to converge many of the So we see a strong solution there that's end to end for security needs.

Speaker 8

Great. That's perfect. That's it for me. Thanks, everyone.

Speaker 4

Thanks, Louie.

Operator

Thank you, Louie. The next question is from the line of Jim Suva with Citigroup. Your line is now open.

Speaker 6

Thank you. A question for Greg. Greg, on your prepared comments, you mentioned improved funding. Is that coming from the stimulus plans Or from property taxes. And the reason why I ask is a lot of property taxes or at least where I am here in Silicon Valley, California Get reassessed each year, so people are kind of bracing for a big property tax inflow maybe in 6 or 9 months from our big property tax hit in 6 or 12 months from now.

Speaker 6

So I would assume that a lot of your budgets are more to stimulus, but or maybe travel and tourism improving As opposed to real estate property taxes? And if so, does that mean that there's still kind of a second round of improved funding that's coming in?

Speaker 10

Hey, Jim, it's Jack. Maybe I'll take that one. So there's we look at if you remember, there's really 3 primary budgets Excluding federal stimulus and those are operating expense budgets that are annualized. So those things pay for things like maintenance replacement of radios, Those kind of things, that's the first piece of it. The second of which is actually 911 funding.

Speaker 10

So a lot of what a lot of the portfolio are command center software Budgets, those get set, and those monies are allocated in a different way. So it's a different funding stream. The third, as you said, are real estate and property taxes. There's more of an ebb and flow to those things. And quite frankly, historically, we don't see a big uptick in those things because public safety Need to have not and nice to have.

Speaker 10

Those are prioritized on an annual basis. And it's really capital or operating expense and it's 911. Now what's really benefited us, as I pointed out earlier and you heard Greg in his prepared remarks, is the $350,000,000,000 for state and local and the 170,000,000,000 directed at schools. Those are new funding that's created new opportunities in all aspects of our portfolio.

Speaker 5

In terms of state and local Budget cycles and I'll remind everyone we have thousands of customers in North America. A common changeover in year is around July 1. So They will look at available funds as well as stimulus and set their priorities. So we'll see what those budgets look like, but all indications are with The backstop of funding that will continue.

Speaker 10

To get real technical, there's also something there's also spot taxes, which are specialized purchase things, And they do special taxes to raise money for countywide systems as well. That's the only kind of one off.

Speaker 6

Great. Thank you so much for the details and clarifications. Congratulations.

Speaker 3

Jim.

Operator

Thank you, Jim. 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 4

Yes. I just want Close, thank you for that opportunity. I want to close by thanking all of the Motorola Solutions people around the world for their commitment, resolve, perseverance in what was a strong Q1. Despite the fluid and dynamic environment, demand, it just remains exceptionally strong. The customer funding environment remains robust.

Speaker 4

We continue to make investments in software and video. And as Jason and others outlined this call, we continue to take action to offset higher costs. I would just say this, macroeconomic turbulence and uncertainty presents opportunity, and we will continue to deploy capital against the backdrop of those opportunities that present themselves. Thank you for joining us. We look forward to talking to you again in a few months.

Speaker 4

And again, to all the Motorola people, thank you, thank you, thank you. Much appreciated.

Operator

Ladies and gentlemen, this does conclude today's teleconference. A replay of this call will be available over the Internet in approximately 2 hours. The website address is www.motorolasolutions.com/investor. We thank you for your participation and ask you please disconnect your lines at this time.

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Earnings Conference Call
Motorola Solutions Q1 2022
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