Motorola Solutions Q1 2022 Earnings Call Transcript

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Provided by Quartr
May 12, 2022

Key Takeaways

  • We achieved record Q1 orders and an ending backlog of $13.4 B in Q1, up 19 % YoY, reflecting strong demand in our video security and LMR businesses.
  • First-quarter revenue was $1.9 B, up 7 % YoY, with non-GAAP EPS of $1.70; earnings were pressured by $50 M in elevated semiconductor costs and higher freight.
  • Software revenue grew 17 % in Q1, including 28 % in video security software and 9 % in Command Center Software, with full-year software growth on track at 10 %.
  • We’re maintaining full-year guidance of 7 % revenue growth and $9.80–$9.95 non-GAAP EPS despite ~$170 M in FX headwinds and inflationary cost pressures, supported by pricing actions, favorable mix and cost reductions.
  • During Q1 and subsequent weeks we closed acquisitions of AIVA Security, TETRA Ireland, Calypsa and VideoTek to expand our cloud, AI and NDAA-compliant video and critical communications portfolios.
AI Generated. May Contain Errors.
Earnings Conference Call
Motorola Solutions Q1 2022
00:00 / 00:00

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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 relations website. In addition, a webcast replay of this call will be available on our website approximately two 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. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to Mr. Tim Yocum, Vice President of Investor Relations. Mr. Yocum, you may begin your conference.

Tim Yocum
Tim Yocum
VP of Investor Relations at Motorola Solutions

Good afternoon. Welcome to our 2022 first quarter earnings call. With me today are Greg Brown, Chairman and CEO, Jason Winkler, Executive Vice President and CFO, Jack Molloy, Executive Vice President and COO, and Mahesh Saptharishi, Executive Vice President and CTO. Greg and Jason will review our results along with commentary, and Jack and Mahesh will join for Q&A. We posted an earnings presentation and news release at motorolasolutions.com/investor. These materials include GAAP to non-GAAP reconciliations for your reference. During the call, we reference non-GAAP financial results, including those in our outlook, unless otherwise noted. A number of forward-looking statements will be made during this presentation and during the Q&A portion of the call. These statements are based on current expectations and assumptions that are subject to a variety of risks and uncertainties. Actual results could differ materially from these forward-looking statements.

Tim Yocum
Tim Yocum
VP of Investor Relations at Motorola Solutions

Information about factors that could cause such differences can be found in today's news release, comments made during the conference call in the Risk Factors section of our 2021 annual report on Form 10-K, and in our other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statements. With that, I'll turn it over to Greg.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Thanks, Tim. Good afternoon, and thanks for joining us today. I'm gonna 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. We also finished the quarter with a record Q1 ending backlog of $13.4 billion, up 19% versus last year.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

The second, 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 country-wide networks that further reinforces the longevity and criticality of this technology. 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. Finally, our expectation for full year guidance remains unchanged. As this year has progressed, we've seen incremental headwinds related to higher freight costs, a stronger dollar, and the dilutive impact of the Ava Security acquisition.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

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.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

Thanks, Greg. Our Q1 results included revenue of $1.9 billion, up 7% and above our guidance, driven primarily by better than anticipated supply for LMR. Revenue from acquisitions was $17 million, and currency headwinds were $18 million. GAAP operating earnings of $239 million and operating margins of 12.6% compared to 16.8% of sales in the year ago quarter. Non-GAAP operating earnings of $374 million, down $37 million or 9% from the year ago quarter, and non-GAAP operating margins of 19.8% of sales, down from 23.2%. This decline in operating earnings was primarily due to the $50 million of higher semiconductor costs that we outlined on our last call, related to the acquiring critical supply in the secondary market for semiconductors.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

Additionally, we saw higher freight costs driven by elevated air freight 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.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

Non-GAAP EPS of $1.70 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 million, up $37 million versus last year, primarily due to higher expenses related to M&A, investments in video, and higher selling costs commensurate with our higher sales. Turning next to cash flow. Q1 operating cash flow was $152 million, compared with $370 million in the prior year, and free cash flow was $98 million compared to $318 million in the prior year.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

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 million in share repurchases, $134 million paid in cash dividends, and $54 million of CapEx. Additionally, during the quarter, we closed the acquisitions of Ava Security for $387 million, and TETRA Ireland for $120 million. Subsequent to quarter end, we acquired Calipsa, a leader in cloud-based advanced video analytics for $40 million. Just earlier today, we announced the acquisition of Videotec, a global supplier of pan tilt zoom and explosion-proof cameras for $22 million. Videotec enhances our portfolio of NDAA-compliant fixed video cameras. Moving next to our segment results.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

Q1 products and system integration sales were $1.1 billion, up 9%, driven by anticipated strong growth in video and better supply availability in LMR. Revenue accretion from acquisitions in the quarter was $7 million, and currency headwinds were $8 million. Operating earnings were $96 million or 8.7% of sales, down from 12.9% in the prior year, driven by the $50 million of higher semiconductor costs and higher freight costs previously mentioned, partially offset by higher sales.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

Some notable Q1 wins and achievements in this segment include a nationwide $60 million P-25 order for Taiwan National Police Agency, $20 million of P-25 upgrade orders for Los Angeles Unified School District, a $14 million TETRA upgrade for Israel Railways, an $11 million P-25 expansion for a large US customer, and a $5 million video order for a large US public school system. Moving next to our software and services segment. Q1 revenue was $789 million, up 4% from last year. Revenue from acquisitions was $10 million, and currency headwinds were also $10 million.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

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' P-25 system upgrades that were concentrated in the first quarter of 2021 due to the COVID delays throughout 2020, and the impact of unfavorable FX. Operating earnings were $278 million or 35% of sales, down 170 basis points from last year, driven by a change in year-over-year mix and higher M&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&A offset by pricing and improved operating leverage.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

Some notable Q1 highlights in the segment include $27 million command center software order for a customer in Latin America, a $20 million U.S. federal multi-year service contract orders, $8 million command center software record management order for the city of Phoenix, and an $8 million services agreement with the city of Chicago. During the quarter, we grew our video security and access control software revenue by 28%. 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 $1.3 billion, up 10% on growth across all three technologies.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

International Q1 revenue was $587 million, flat versus last year, with growth in video security and command center software offset by a decline in LMR due to FX. We saw growth in Latin America and Asia Pac, while Europe was slightly down, primarily due to FX. Moving to backlog. Ending backlog was a Q1 record of $13.4 billion, up 19% or $2.1 billion compared to last year, driven by the Airwave extension recorded in the fourth quarter of 2021 and increased demand across all three technologies. Sequentially, backlog was down $115 million, driven primarily by the Airwave and ESN revenue burn during the quarter, partially offset by growth in LMR and video products.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

Software and services backlog was up $1.3 billion compared to last year, driven by the Airwave extension and a $320 million increase in multi-year services and software backlog in North America. Sequentially, backlog was down $221 million or 2%, driven primarily by revenue recognition for Airwave and ESN during the quarter and typical order seasonality in North America. Products in SI backlog was $852 million compared to last year and up $106 million sequentially, driven primarily by strong LMR and video demand in both regions. We entered the year with a record backlog position, and approximately $2.2 billion of our beginning backlog in the product segment was scheduled to be delivered in 2022, with over two-thirds of this amount expected to be delivered in the first half.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

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% and 5% with non-GAAP EPS between $1.83 and $1.88 per share. This assumes approximately $50 million of FX headwinds, a diluted share count of approximately 173 million shares, and an effective tax rate of 22%-23%. It also includes $50 million 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.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

For the full year, we are maintaining our prior revenue guidance of 7% growth and non-GAAP EPS guidance between $9.80 and $9.95 per share, despite the significant strengthening of the U.S. dollar since our last call. We now expect FX to be a headwind of $170 million for the year, up $110 million from our prior guidance. This outlook now assumes a diluted share count of approximately 173 million shares based on the timing of our share repurchases in the year and an effective tax rate of 21%-21.5%.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

Additionally, our full year operating cash flow guidance for approximately $1.9 billion and full year OpEx expectations of approximately a $100 million 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. First, 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. 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.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

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.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

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, and our higher growth businesses in video security and command center software continue to grow at a multiple of their overall markets. Second, 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 two additional acquisitions I'm excited about. TETRA Ireland, the provider of Ireland's nationwide digital radio service for 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.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Ava 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. Ava 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. 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&D, and all of this provides us with the ability to take continued pricing actions to manage higher cost pressures. 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.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

I'll now turn the call back over to Tim.

Tim Yocum
Tim Yocum
VP of Investor Relations at Motorola Solutions

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. If you have a question or comment, please press star one on your telephone key pad. If for any reason you would like to remove yourself from the queue, please press star two. We do ask that while you pose your question, please pick up your handset to provide optimal sound quality. Thank you. The first question is from Keith Housum with Northcoast Research. Your line is now open.

Keith Housum
Keith Housum
Managing Director and Senior Research Analyst at Northcoast Research

Good afternoon, guys. I appreciate the opportunity here. It sounds like you guys have been able to navigate the supply chain challenges fairly well. I notice you guys said the $50 million is an extra cost for the first quarter. Can you guys talk about the supply visibility into supply for the rest of the year? Obviously, there's been a lot of upheaval, things going on in Shanghai recently. Any updated thoughts on where supply chain stands today?

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

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

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

Keith, you mentioned the $50 million in Q1. It's another $50 million in Q2. As we set out the year and described in the last call, $100 million is elevated costs that we're incurring to buy these parts at a premium in the first half. The second half is only $20 million. That's in part driven by the elevated costs that we faced last year, the comp. 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. 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.

Keith Housum
Keith Housum
Managing Director and Senior Research Analyst at Northcoast Research

Great. Appreciate that.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

Semiconductor constraints.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Keith, semiconductor constraints largely unchanged, as Jason dimensionalized. Although freight 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.

Keith Housum
Keith Housum
Managing Director and Senior Research Analyst at Northcoast Research

Gotcha. Just as a follow-up, you guys had a really strong first quarter for bookings. Is there the capability, despite the challenges, are you able to get enough supply to get over and above your guidance if the demand was there?

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

I mean, yeah. I mean, our guidance for the quarter and the year is a compilation of the demand and then matched to the supply that we have and foresee in terms of delivery. Nothing's changed there. We overperformed in Q1 largely because we were able to get the supply and allocate it purposely to parts of the portfolio like public safety that are important to customers. They also happen to have slightly higher ASPs.

Keith Housum
Keith Housum
Managing Director and Senior Research Analyst at Northcoast Research

Gotcha. Thanks, guys. Good luck.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Thanks, Keith.

Operator

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

George Notter
George Notter
Managing Director and Equity Research Analyst at Jefferies

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 kinda nets out. So you have $110 million of additional FX headwinds. You've got a bunch of new M&A deals in here. Pricing has gone up. I guess I'm, you know, wondering, you know, what it looks like when you kind of peel all that back, you know, is your guidance, you know, better or worse than maybe you thought, you know, three months ago?

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

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

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Of net new revenue.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

of net new revenue.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Like, in the period, yeah.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

Additionally, in terms of you mentioned price, we're absolutely looking at that and have made some changes across the portfolio. The third item is favorable mix. Where we prioritize and allocate our supply to.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Yeah, you know, we acquired Ava, and Ava is about $0.10 dilutive to EPS for the full year. Net-net, we've got incremental headwinds, as you talked about, George, of FX, incremental headwinds with freight, some M&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. All in all, 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.

George Notter
George Notter
Managing Director and Equity Research Analyst at Jefferies

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

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

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 $2.2 billion. That's largely gonna fuel the first half. The orders January onward are going to fuel the second half, and that's where 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. Within LMR, the driver is largely price and mix favorability. Within video, which is the higher growth part, it's price and volume that are driving the growth we expect there.

George Notter
George Notter
Managing Director and Equity Research Analyst at Jefferies

Got it. All right, super. Thank you very much.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Thanks, George.

Operator

Thank you, George. The next question is from the line of Paul Silverstein with Cowen. Your line is now open. Paul, please check to ensure you are not muted.

Paul Silverstein
Paul Silverstein
Managing Director at Cowen

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 translate to an improved outlook? Hospitality's 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?

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

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

Jack Molloy
Jack Molloy
EVP and COO at Motorola Solutions

Paul, I think the two markets that we've seen the most profound rebound kind of post-COVID have been air transportation and hospitality. 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 it's really been air and hospitality this year.

Paul Silverstein
Paul Silverstein
Managing Director at Cowen

Yeah. For my follow-up, I appreciate you just increased prices, but everybody's citing stepped up component costs. Any thoughts you can share on longer term margins, where they gap, in what timeframe grow on the gross line?

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

Sure. You know, headline inflation, we're navigating it like all companies and have been planning for a significant inflation number that we've been seeing. We have two unique cost inflation items that we believe are temporary. One, 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 million that was in the P&L this year as we get after that critical supply. Secondly, the freight levels that we're incurring this year are also high. Air rates are frankly high. They got higher after the Ukraine invasion, and they remain high. Those are two temporary items that we're navigating around as well as general inflation.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Yeah. 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.

Paul Silverstein
Paul Silverstein
Managing Director at Cowen

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.

Meta Marshall
Meta Marshall
Managing Director at Morgan Stanley

Great. Thanks. Maybe starting, you know, 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.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Sure, Meta. I think so as it applies to Europe, first of all. I just wanna remind you, half of our revenue in Europe is actually recurring revenue, so think large scale managed service businesses. In Q1, internationally, we're up 3% in constant currency, so really the FX headwind that Jason alluded to really impacted Europe to the greatest extent. I would say this, our challenges in Europe and really quite frankly in international are not demand related. 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. I think the biggest challenge I would say is really currency right now.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

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 million. We've exited that market. We don't have Motorola Solutions employees in that theater any longer. Just as a footnote, I thought that could be helpful as well.

Meta Marshall
Meta Marshall
Managing Director at Morgan Stanley

Perfect. Very helpful. Maybe just on the I just wanna get a sense of, you know, 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. That's it for me.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

The majority of our backlog is from direct customers, governments, agencies, thousands of customers who order as their procurement cycles permit them. We believe that 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. Our demand signal is from both our direct customers and our indirect customers is pretty clean and, as Jack mentioned, is growing in both sides of the business.

Meta Marshall
Meta Marshall
Managing Director at Morgan Stanley

Perfect. Thanks. Congrats, guys.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Thanks, Meta.

Operator

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

Sami Badri
Sami Badri
Managing Director and Equity Research Analyst at Credit Suisse

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

Jack Molloy
Jack Molloy
EVP and COO at Motorola Solutions

Hey, Sam, it's Jack. First of all, we've said it before, but it's important to first of all point out that ARPA will be a multi-year phenomenon. 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. That's great. A lot of that is really directed at the $350 billion in state and local, which really we've never had a problem, as it relates to we're a need to have business, but what it really does is it draws clarity to how those deals get funded. We'll be in that for the next, you know, 2.5 to three years.

Jack Molloy
Jack Molloy
EVP and COO at Motorola Solutions

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, as they bring kids back to school, trying to make sure those places are safe, actually investing in things like concealed weapons technology with our Evolv partnership as well. We think the money that's pointed, which is $170 billion there, will benefit us over the course of the next three years as well.

Sami Badri
Sami Badri
Managing Director and Equity Research Analyst at Credit Suisse

Got it. Just as a follow-up, maybe for you, Jack, again, any update on body-worn camera or fixed cameras that go onto the vehicles, like first responder vehicles? Can you give us an update on that and growth rates or, any kinda comments on market share?

Jack Molloy
Jack Molloy
EVP and COO at Motorola Solutions

Absolutely. First of all, as it relates to body-worn, I talked about last year from a market share context, last year we doubled our orders. In 2021, you know, doubled our orders in a market that certainly didn't double. We felt like we took share. As it relates to Q1 2022, our orders were up double-digit, and 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. We've said before, we think that the market wants an alternative. We've got good relationships internationally.

Jack Molloy
Jack Molloy
EVP and COO at Motorola Solutions

In North America, our team continues to fight for their fair share and then some.

Sami Badri
Sami Badri
Managing Director and Equity Research Analyst at Credit Suisse

Thank you.

Jack Molloy
Jack Molloy
EVP and COO at Motorola Solutions

Just to add to that.

Mahesh Saptharishi
Mahesh Saptharishi
EVP and CTO at Motorola Solutions

I think Mahesh has. Yeah.

Jack Molloy
Jack Molloy
EVP and COO at Motorola Solutions

We launched the M500 last year. It started shipping a few months ago, a little bit earlier this year. The M500 we consider to be a significant leap up from our prior generation, the 4RE. It builds upon a lot of the goodness that the 4RE had. The 4RE 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. This is a platform that's really meant to deliver AI capabilities. At launch, we launched it with two capabilities, effectively, officer and passenger safety, but in addition, ALPR as well. The ALPR stream actually contributes to the other sets of ALPR cameras we have in our portfolio.

Jack Molloy
Jack Molloy
EVP and COO at Motorola Solutions

These feed into one of the largest, the industry's largest license plate databases that we have. Right now we're exceeding 50 billion plate reads. To give you an idea of like the rate at which it gets refreshed, in Q1 of this year, we accounted for about 2.4 billion plate reads. To give you an understanding of the frequency at which we're growing here, compared to the previous year, we doubled the plate reads. Overall, from a mobile video standpoint and an ALPR standpoint, we're doing fantastic.

Sami Badri
Sami Badri
Managing Director and Equity Research Analyst at Credit Suisse

All right. Thank you.

Operator

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

Ben Bollin
Analyst and Partner at Cleveland Research Company

Thanks for taking the question. Good afternoon, everyone.

Mahesh Saptharishi
Mahesh Saptharishi
EVP and CTO at Motorola Solutions

Ben.

Ben Bollin
Analyst and Partner at Cleveland Research Company

The 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, kind of where it's going. I had a follow-up for Greg.

Mahesh Saptharishi
Mahesh Saptharishi
EVP and CTO at Motorola Solutions

Sure. The first point is that we are growing faster than the market. We're taking market share. Over half of our orders last quarter in Q1 were suite orders. Effectively, we either added on to existing bundles or customers bought more than one. Jason mentioned two of our large opportunities in his bit. The Los Angeles Unified School District, they bought our CAD and record solution. 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, and that had a profound impact in that opportunity.

Mahesh Saptharishi
Mahesh Saptharishi
EVP and CTO at Motorola Solutions

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're 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, and the summit was the largest software summit we have ever had in Motorola history. 1,600 attendees, over 300 classes, and user group sessions. We had representation across all user types, going from call to case closure. There's some important themes that we hit there. The first was the fortification theme, and really what resonated there was cybersecurity.

Mahesh Saptharishi
Mahesh Saptharishi
EVP and CTO at Motorola Solutions

We talked about the Public Safety Threat Alliance that we launched quite recently. As a consequence of us talking about the Public Safety Threat Alliance, within the first two 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 user that were represented there. Some of the, as an example, some of the AI capabilities that we talked about there really resonated with our customers.

Mahesh Saptharishi
Mahesh Saptharishi
EVP and CTO at Motorola Solutions

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 engine, but it really has become an application platform for us that we have built alongside our customers. Not only is transcription a second pair of ears that makes 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. 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. Smart Transcription has actually become an experience base for existing customers.

Mahesh Saptharishi
Mahesh Saptharishi
EVP and CTO at Motorola Solutions

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. Lastly, we're also extending this to now recognizing when call takers are under stress. These Smart Transcription as a capability has really expanded our capacity to add applications for our CommandCentral software suite. 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 CommandCentral Responder. CommandCentral Responder has now both an iOS and an Android instance supporting our on-prem and our cloud installs, hybrid being a key priority there.

Mahesh Saptharishi
Mahesh Saptharishi
EVP and CTO at Motorola Solutions

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 fair amount of traction there.

Ben Bollin
Analyst and Partner at Cleveland Research Company

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 you know, clearly we're in a surplus demand environment, and at some point, you know, supply starts to catch up. But I'm interested in how you think about monitoring the inbound orders and ensuring that, you know, customers aren't running out there and placing a lot of orders, maybe with multiple vendors, perhaps ordering more than they need and just kind of taking what comes first. How do you think about that? Obviously, I think it's more PCR related, but just curious any thoughts you have there. That's it for me. Thank you.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Ben Bollin, I was just gonna 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 John Zidar 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. I think it's a reflection of the relationships we have with the channel partners, and I have to tip my hat to John Zidar, who runs that organization under Malloy. I think the way you sort through that is the efficacy and the authenticity of the conversations with the partners during these tough times, and I think Malloy and his team are doing that.

Jack Molloy
Jack Molloy
EVP and COO at Motorola Solutions

Greg, the only thing I'd add to that is you're right, the PCR channel. By the way, it's also important to note that a lot of our partners carry one brand, so they're not putting orders in against a second one. The second thing is government customers don't have the wherewithal, meaning they have a limited budget. They're not able to 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 million. They can't spend that twice. So we know that there's clarity of funding there.

Ben Bollin
Analyst and Partner at Cleveland Research Company

Thanks. Thanks, Ben.

Operator

Thank you, Ben. The next question is from Fahad Najam with MKM Partners. Your line is now open.

Fahad Najam
Fahad Najam
Managing Director and Senior Analyst at Loop Capital Markets

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

Jack Molloy
Jack Molloy
EVP and COO at Motorola Solutions

The answer to the first question is, within the quarter, it was $18 million of FX. On FX in general, we have some offsets within OpEx to mitigate the effects of the gross margin dollars lost. There's some relief, if you will, on OpEx. In total, the $110 million degradation 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.

Fahad Najam
Fahad Najam
Managing Director and Senior Analyst at Loop Capital Markets

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 has improved, what has not improved, what's gotten worse?

Mahesh Saptharishi
Mahesh Saptharishi
EVP and CTO at Motorola Solutions

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?

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Yeah. Fahad, I would say as it relates to semiconductor constraints, 'cause 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 overperform the way we did top and bottom in Q1. I would say the semiconductor constraint environment remains unchanged, i.e., still challenging. We think it'll be through the remainder of the year. It is primarily around land mobile radio, but, you know, quite frankly, video security is not immune completely either, but we are managing those accordingly.

Mahesh Saptharishi
Mahesh Saptharishi
EVP and CTO at Motorola Solutions

Within the LMR portfolio, are you seeing a more adverse impact on your higher margin PCR and APX NEXT portfolios? Is kind of color on what within your LMR portfolio is being more adversely impacted or is it all universal?

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Excuse me. 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. 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. The main part of the LMR portfolio, I think that feels it the most acutely is probably PCR.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

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

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Agree.

Fahad Najam
Fahad Najam
Managing Director and Senior Analyst at Loop Capital Markets

Appreciate the answer. Thank you.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

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.

Louie DiPalma
Louie DiPalma
Research Analyst at William Blair

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

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Louis, how you doing?

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

Finally sunny.

Louie DiPalma
Louie DiPalma
Research Analyst at William Blair

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. I was wondering, can you discuss your growth strategy for access control in general? Also I wanted to note that during the quarter it seemed that Stanley sold its access technologies division for $900 million. Related to your strategy, do you expect to be as active with access control acquisitions as you have been with video acquisitions? Thanks.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Okay, Louie. 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 control, we've taken a premise and a look at the market to say, we wanna make sure we meet our customers for where they are. It started with Avigilon, which is an on-prem end-to-end solution. We've invested in Avigilon Cloud Services. They had a legacy access control business as well. Actually, that group, that business was actually the highest growth within the Avigilon portfolio at one point in time. We really saw a move to cloud and mobility, particularly as people want what they want the smartphone's capability to access a building instead of an old key card. I would also tell you that Openpath has seen.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

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 with the hardware. That's really accelerated the growth into the cloud for Openpath. 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 most. 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. I mean, not the cloud solution or an on-prem solution. Mahesh, anything you want to add to that?

Mahesh Saptharishi
Mahesh Saptharishi
EVP and CTO at Motorola Solutions

Yeah. 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 Openpath's cloud native with endpoints on-prem, like readers, but also the ability to tackle existing readers, 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 a mix in between as well. The combination of Ava and Openpath gives us the opportunity to converge many of the security and access control use cases and expand that ecosystem. We see a strong solution there that's end-to-end for security needs.

Louie DiPalma
Louie DiPalma
Research Analyst at William Blair

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

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Thanks, Louie.

Operator

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

Jim Suva
Jim Suva
Managing Director at Citi

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? The reason why I ask is, you know, a lot of property taxes, or at least where I am here in Silicon Valley, California, get reassessed each year. People are kinda bracing for a big property tax inflow maybe in six or nine months. A big property tax hit in six or 12 months from now. 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. If so, does that mean that there's still kind of a second round of improved funding that's coming in?

Jack Molloy
Jack Molloy
EVP and COO at Motorola Solutions

Yeah. Hey, Jim, it's Jack. Maybe I'll take that one. If you remember, there's really three primary budgets excluding federal stimulus, and those are operating expense budgets that are annualized. 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 9-1-1 funding. A lot of the portfolio or 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.

Jack Molloy
Jack Molloy
EVP and COO at Motorola Solutions

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 a nice to have. 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 billion for state and local and the $170 billion directed at schools. Those are new funding that's created new opportunities in all aspects of our portfolio.

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

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 a year is around July 1. They will look at available funds as well as stimulus and set their priorities. We'll see what those budgets look like, but all indications are with the backstop of funding, that'll continue.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

To get real technical, there's also SPLOST 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.

Jim Suva
Jim Suva
Managing Director at Citi

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

Jason Winkler
Jason Winkler
EVP and CFO at Motorola Solutions

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.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

Yeah, I just wanna close. Thank you for that opportunity. I wanna 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, you know, demand, it just remains exceptionally strong. The customer funding environment remains robust. We continue to make investments in software and video. 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. Again, to all the Motorola people, thank you, thank you, thank you.

Greg Brown
Greg Brown
Chairman and CEO at Motorola Solutions

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 two 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.

Executives
    • Greg Brown
      Greg Brown
      Chairman and CEO
    • Jack Molloy
      Jack Molloy
      EVP and COO
    • Jason Winkler
      Jason Winkler
      EVP and CFO
    • Mahesh Saptharishi
      Mahesh Saptharishi
      EVP and CTO
    • Tim Yocum
      Tim Yocum
      VP of Investor Relations
Analysts
    • Ben Bollin
      Analyst and Partner at Cleveland Research Company
    • Fahad Najam
      Managing Director and Senior Analyst at Loop Capital Markets
    • George Notter
      Managing Director and Equity Research Analyst at Jefferies
    • Jim Suva
      Managing Director at Citi
    • Keith Housum
      Managing Director and Senior Research Analyst at Northcoast Research
    • Louie DiPalma
      Research Analyst at William Blair
    • Meta Marshall
      Managing Director at Morgan Stanley
    • Paul Silverstein
      Managing Director at Cowen
    • Sami Badri
      Managing Director and Equity Research Analyst at Credit Suisse
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