Motorola Solutions Q3 2022 Earnings Results & Report

Motorola Solutions EPS Results

• Actual EPS: $2.79
• Consensus EPS: $2.64
• Beat/Miss: Beat by +$0.15
• One Year Ago EPS: $2.19
• EPS Beat Rate: 8 of last 8 quarters

Motorola Solutions Revenue Results

• Actual Revenue: $2.37 billion
• Expected Revenue: $2.32 billion
• Beat/Miss: Beat by +$54.57 million
• YoY Revenue Growth: +12.60%

Motorola Solutions (NYSE:MSI) provides communications, software, video security and related services for public safety agencies and commercial and industrial organizations. Its products include two-way radios and land mobile radio systems, dispatch consoles, command center software, video surveillance systems and access control technology.

The company’s offerings are designed to help customers coordinate communications, manage incidents and support security operations. Motorola Solutions also provides services such as system integration, maintenance and technical support.

Motorola Solutions serves customers around the world. It was formed in 2011 when Motorola, Inc. split into Motorola Solutions and Motorola Mobility. Greg Brown is the company’s chairman and chief executive officer.

Motorola Solutions Q3 2022 Earnings Call Transcript

Key Takeaways

• Record Q3 performance: revenue +13%, EPS +28%, operating margins expanded 220 bps, and record backlog of $13.5 billion, up 19% YoY.
• Raised full‐year guidance to 9.25–9.5% revenue growth and $10.17–$10.22 non‐GAAP EPS, reflecting strong demand despite $220 million FX headwinds.
• To manage persistent semiconductor constraints, Motorola is carrying elevated inventory and spending an incremental $150 million on premium parts, a strategy expected to continue into 2023.
• Announced an early exit from the UK ESN contract, recognizing a $147 million impairment and reducing backlog by $99 million, with revenues set to fall to zero post-2023 absent transition terms.
• Continued portfolio investments with new Apex Next radios, expanded video integrations in Command Central Aware, and the launch of the cloud-native AIVA Quad camera to fuel future growth.

Presentation

[Operator]

Good afternoon and thank you for holding. Welcome to the Motorola Solutions Third Quarter 2022 Earnings Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. Presentation material and additional financial tables are posted on the Motorola Solutions investor relations website. In addition, a webcast replay of this call will be available on our website within 2 hours after the conclusion of this call. 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 introduce Mr. Tim Yocum, Vice President of Investor Relations. Mr. Yocum, you may begin your conference.

[Tim Yocum, VP of Investor Relations at Motorola Solutions]

Good afternoon. Welcome to our 2022 Third Quarter Earnings Call. With me today are Greg Brown, Chairman and CEO, Jason Winkler, Executive Vice President and CFO, Jack Molloy, Executive Vice President and Chief Operating Officer, and Mahesh Saptharishi, Executive Vice President, 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. 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, VP of Investor Relations at Motorola Solutions]

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

[Greg Brown, Chairman and CEO at Motorola Solutions]

Thank you, Tim, and good afternoon, and thanks for joining us today. First, our Q3 results highlight the continued strong demand and robust funding environment that we're seeing across the business. We grew revenue 13%, EPS 28%, and expanded operating margins by 220 basis points. Additionally, we ended the quarter with record Q3 ending backlog of $13.5 billion, up 19% from last year, inclusive of over $800 million of unfavorable currency impact. Second, we achieved record Q3 revenue in both segments. In Products and Systems Integration, increased demand for video security and Land Mobile Radio technologies, and continued solid execution in our supply chain led to revenue growth of 15% during the quarter. In Software and Services, revenue was up 8% and 13% when normalized for FX.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Finally, based on our exceptionally strong Q3 results and our expectations for the remainder of the year, we're raising our full year guidance for both sales and EPS for the second consecutive time, despite full-year FX headwinds that now total about $220 million, up $50 million from our expectations last quarter. At this point, 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, EVP and CFO at Motorola Solutions]

Thank you, Greg. Revenue for the quarter grew 13% and was above our guidance with record third quarter revenue in both segments. We also saw growth across all three technologies, led by 33% growth in Video Security and Access Control. In LMR, which grew 9%, our supply chain execution during the quarter enabled us to ship additional product revenue. FX headwinds during the quarter were $66 million, while acquisitions added $32 million. GAAP operating earnings were $373 million, inclusive of a $147 million non-cash fixed asset impairment charge recognized during the quarter related to the now planned exit from the ESN contract. GAAP operating margins were 15.7%.

[Jason Winkler, EVP and CFO at Motorola Solutions]

Non-GAAP operating earnings were $676 million, up 22% from the year-ago quarter, and non-GAAP operating margin was 28.5%, up from 26.3%. This increase in operating margin was driven by higher sales, higher gross margins, and improved operating leverage, particularly in the Products and SI segment. GAAP earnings per share were $1.63 compared to $1.76 per share in the year-ago quarter, primarily due to the impairment charge related to the expected early exit of the ESN contract. Non-GAAP EPS was $3 per share, up 28% from $2.35 last year. This strong growth in EPS was driven by higher sales and margins, as well as a lower effective tax rate related to higher benefits from stock comp recognized in the current year.

[Jason Winkler, EVP and CFO at Motorola Solutions]

OpEx in Q3 was $521 million, up $25 million versus last year, primarily due to acquisitions. Turning to cash flow. Q3 operating cash flow was $388 million, up $12 million compared with the prior year, and free cash flow was $318 million, up $3 million. For the full year, we expect operating cash flow to be approximately $100 million lower than our prior guidance, primarily due to our continued investment in inventory, which is helping us execute in a dynamic supply chain environment and deliver against the continued record demand we're seeing in video security and LMR. Capital allocation for Q3 included $132 million in cash dividends, $94 million in share repurchases, and $70 million of CapEx.

[Jason Winkler, EVP and CFO at Motorola Solutions]

Additionally, during the quarter, we closed the acquisition of Barrett Communications, a specialty supplier of high frequency and tactical communications equipment for $18 million net of cash. Moving to segment results in the Products and SI segment, we continue to see strong demand across both LMR and video. Sales during the quarter were up 15% versus last year, and orders were up 29%, including record Q3 orders for both LMR and video. Currency headwinds were $28 million, and revenue from acquisitions in the quarter contributed $13 million. Operating earnings were $375 million or 24.5% of sales, up from 20.6% in the prior year, driven primarily by higher sales and operating leverage, partially offset by higher material costs.

[Jason Winkler, EVP and CFO at Motorola Solutions]

The impact from our pricing actions increased in Q3 as expected, and we continue to expect full year operating margins in this segment to be higher than last year. Some notable Q3 wins and achievements in the segment include an order in Israel valued at over $400 million for a duration of 25 years. This unique system integration project also includes over $30 million of fixed video equipment and software, and is our single largest order ever for Avigilon. A $165 million P25 system and APX NEXT Devices award received from Miami-Dade County that includes a new customer for us in the state of Florida. A $67 million P25 order from Southeastern Pennsylvania Transportation Authority. A $45 million P25 order from a customer in Africa. A $29 million P25 devices order from a U.S. federal customer.

[Jason Winkler, EVP and CFO at Motorola Solutions]

An $18 million TETRA order from a customer in Europe. A $5 million fixed video order from a major transportation company in North Africa. In Software and Services, revenue was up 8%, which includes $38 million of FX headwinds and $19 million of revenue from acquisitions. Total software revenue was up 17%, driven by strong demand in video, while in LMR services, revenue was up 4% after $33 million of FX headwinds. Operating earnings in the segment were $301 million or 35.7% of sales, down 30 basis points from last year, driven by higher acquisition expenses. Some notable Q3 highlights in the segment include two large multi-year LMR service renewals, a $43 million one with the State of Maryland and $15 million with the City of Phoenix.

[Jason Winkler, EVP and CFO at Motorola Solutions]

Also, a $17 million push to talk or over-broadband order from a customer in the Middle East. A $7 million command center software renewal with Will County, Illinois. A $4 million body-worn camera order for the Texas Department of Public Safety, and a $4 million command center software suite order from Ellis County, Texas. Looking at regional results, North America Q3 revenue was $1.7 billion, up 16% on growth in all three technologies. International Q3 revenue was $686 million, up 4% versus last year, with growth in all three technologies partially offset by unfavorable FX. Moving to our backlog.

[Jason Winkler, EVP and CFO at Motorola Solutions]

Ending backlog was a Q3 record of $13.5 billion, up 19% or $2.1 billion compared to last year, inclusive of approximately $826 million of unfavorable FX and a $99 million orders reduction related to the planned exit from the ESN contract. The growth was driven by the Airwave extension recorded in the fourth quarter of 2021 and increased demand across all three technologies. Sequentially, backlog was up $87 million, driven by several large orders received during the quarter, partially offset by $411 million of unfavorable FX and the $99 million adjustment for ESN. In the products and SI segment, robust order demand in both LMR and video continues to drive record backlog, which was up $1.2 billion or 35% compared to last year.

[Jason Winkler, EVP and CFO at Motorola Solutions]

Sequentially, backlog was up $513 million, which was our ninth consecutive quarter of sequential backlog growth in this segment. In software and services, backlog was up $876 million compared to last year, driven by the Airwave extension and a $288 million increase in multiyear services and software contracts in North America, partially offset by $722 million of unfavorable FX and the adjustment related to ESN. Sequentially, backlog was down $426 million or 5%, driven primarily by unfavorable FX, the ESN adjustment, and revenue recognition for Airwave and ESN during the quarter. Turning now to our outlook. We expect Q4 sales to be up approximately 9% with non-GAAP earnings per share between $3.40 and $3.45 per share.

[Jason Winkler, EVP and CFO at Motorola Solutions]

This assumes $90 million of FX headwinds, a weighted average share count of approximately 172 million shares, and an effective tax rate of approximately 23%. For the full year, we are increasing both our revenue and EPS guidance again. We now expect revenue growth between 9.25% and 9.5%, up from our prior guidance of 8%, and we expect non-GAAP earnings per share to be between $10.17 and $10.22 per share, up from our prior guidance of $10.03 to $10.13 per share.

[Jason Winkler, EVP and CFO at Motorola Solutions]

This updated guidance now includes full-year FX headwinds of $220 million, up $50 million from our prior guidance, a weighted average share count of approximately 172 million shares, and an effective tax rate of approximately 20.5%. This now also assumes $150 million of higher costs for the full year related to the procurement of semiconductors from secondary markets at a premium. This is a $30 million increase over what we indicated earlier in the year and supports the increased revenue included in our updated guidance today. Finally, as I reflect on where we stand today with just two months left in another dynamic year, I'm encouraged with how our teams have been navigating the supply chain environment and overcoming the impact of a historically strong U.S. dollar.

[Jason Winkler, EVP and CFO at Motorola Solutions]

At the beginning of the year, we expected currency headwinds to have a $60 million translation impact on our full-year revenues. The full-year FX headwind has increased by $160 million since then. The decisions we've made to carry higher inventory, pay premiums for semiconductors, and the pricing actions we implemented have enabled us to drive higher product revenues that not only offset these significant FX headwinds but have materially increased our revenue and EPS expectations during the year. I'll now turn the call back over to Greg.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Thanks, Jason. I'm really pleased with our Q3 results, and I'm extremely proud of the people here at Motorola and how our team continues to execute across all areas of the business. We achieved record Q3 sales in both segments. EPS is up by 28%. We expanded operating margins by 220 basis points, and we ended the quarter with a record-ending backlog of $13.5 billion, up 19%. Again, that's in the face of some significant FX headwinds. Second, we continue to deliver these strong results while also continuing to invest in both new products and strengthening our ecosystem. During the quarter, we extended our successful APX NEXT device portfolio with three additional radios that support agencies of all sizes, personnel needs, and budgets.

[Greg Brown, Chairman and CEO at Motorola Solutions]

We announced several new video integrations into CommandCentral Aware, bringing body-worn, in-car, and emergency drone video feeds into the command center. We expanded our suite of cloud-connected cameras with the Avigilon Alta Quad, a cloud-native four-head camera with built-in analytics. Finally, as I look ahead, the momentum of our business is strong. Our investments in the portfolio, combined with a robust funding environment, are driving increased demand for our solutions. Our supply chain execution and higher inventory is helping us navigate a continually challenging environment to meet this record demand, and our record Q3 backlog positions us well for another year of strong revenue earnings and earnings growth into 2023. I'll now turn the call back over to Tim, and we'll open it up for your questions.

[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 keypad. 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. Our first question today comes from Tim Long from Barclays. Your line is open.

[Alyssa Shreves, VP of Equity Research at Barclays]

Hi, this is Alyssa Shreves on for Tim Long. Two questions if I may. You guys had mentioned in your release and prepared remarks about exiting your ESN contract, and just kind of trying to get a little bit more color there, is that just managing the contract or would that also be inclusive of the Kodiak revenue? Is there anything more you think you'll need to kind of concede in negotiations with the Home Office? Just kind of given the raised guidance now, how should we kind of high-level think about, you know, 2023 expectations? Thank you.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Yeah. In terms of ESN, Alyssa, I think it's a result of ongoing conversations with the customer. I think more recently, they reached an advanced stage, kind of a late-stage negotiation, where at this point we think it's more likely than not that we will be exiting ESN earlier than the expiration of 2024. We don't have an agreement signed with them at this point, but I think there's mutual interest in reaching that conclusion, and we continue to work toward that end. I think we both think it's the right thing to do and a reasonable way forward.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Look, in terms of 2023, and I know we have a lot of good news, you know, for the Q3 print, it's a little bit, you know, a little bit early to think about. There's still a lot of moving parts. You know, I think at this point in time, we think about revenue of about $9.5 billion in 2023. We expect at that level we could grow within all three technologies. It's also worth noting, you know, that there's still some things that we'll be dealing with into 2023. I think that the supply chain constraints around semiconductors, which we're still experiencing, which is one example of why Jason referenced. We're carrying higher inventory purposely and paying higher PPV premiums.

[Greg Brown, Chairman and CEO at Motorola Solutions]

I think that those semiconductor supply chain challenges continue into next year, and therefore, I think our higher inventory levels will continue well into 2023. I also think, again, at the moment, we have FX headwinds that look about $150 million, of which by the way, more than half of that would be actually in Q1 alone. One other just thing to think about for all of us in terms of 2023 is we expect about 200-300 basis points of higher tax rate headwinds in 2023 that will inform our thinking. You know, those are high-level chalk to field thoughts at this moment. We'll obviously give you the specifics in February.

[Jason Winkler, EVP and CFO at Motorola Solutions]

Alyssa, if I could also add color to your question around ESN. The revenues this year for ESN are gonna be approximately $65 million. That includes some of the MCPTT as well as the integration and the project. As Greg mentioned with the exit of the contract, that'll go to zero in 2024. We're working through as part of the negotiation what transition services and what that looks like in terms of revenue for next year. We'll update you on that as it concludes, but $65 million in this year's top line results from ESN.

[Alyssa Shreves, VP of Equity Research at Barclays]

Thank you so much.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Thanks, Alyssa.

[Operator]

We now turn to George Notter from Jefferies. Your line is open.

[George Notter, Managing Director of Equity Research at Jefferies]

Hi, guys. Thanks very much, and congratulations on all the growth and the crisp execution here. I guess I wanted to just keep going on the same line of questioning. Does the exit of the ESN contract help you in the renegotiation with Airwave? Obviously you're negotiating with the Home Office and the CMA, I presume about a revised contract extension. Is this a negotiating point in that negotiation? How do you see it?

[Greg Brown, Chairman and CEO at Motorola Solutions]

Yeah. I think just to remind you, look, the CMA investigation was undertaken with two tenets. One is our returns on Airwave and the evaluation of that, and secondarily, the apparent potential structural dual role of us being both in Airwave and ESN. We talked about the decision working with the customer to exit ESN earlier than the expiration of 2024. I think the Airwave return issue obviously remains on the table, and while it's related to ESN, it's separate. Now, having said that around, you know, the provisional decision that came out more recently, we disagree with the CMA's provisional decision and their findings. We still are convicted in our position. I think we feel the CMA's provisional decision is legally and economically flawed. I think it's not proportional. It's unprecedented and overreaching.

[Greg Brown, Chairman and CEO at Motorola Solutions]

That said, we continue to stay in close conversation with the CMA and with the U.K. Home Office. It's kind of also ironic that as we are in the middle of this on Airwave, we coincidentally had the highest customer satisfaction score we've ever had for network performance of Airwave in the month of September, which included and incorporated all the planning around the Queen's funeral. Look, we'll continue to work it and we will defend our position and pursue all legal avenues that are available to us, including appeals, if we think that's the right thing to do.

[George Notter, Managing Director of Equity Research at Jefferies]

Got it. Okay. Thank you very much. I appreciate it.

[Greg Brown, Chairman and CEO at Motorola Solutions]

George.

[Operator]

Our next question comes from Erik Lapinski from Morgan Stanley. Your line is open.

[Erik Lapinski, VP and Equity Research Analyst at Morgan Stanley]

Hi, team. Thanks, and congrats on the quarter. I wanted to go back a little bit to the supply chain piece and just make sure I fully understand some of the dynamics. It sounds like maybe things haven't really improved, but you did see a pretty good ramp in hardware sales during the quarter, and maybe you're able to at least get supply, but at a higher price. Maybe if you could just give us a bit of an update on exactly kind of where you feel like we are in the supply environment. As we think about that in the context of backlog, just trying to understand a little bit better because hardware backlog ramped a lot. Was that due to supply constraints?

[Erik Lapinski, VP and Equity Research Analyst at Morgan Stanley]

Is that due to just a factor of kind of the growth you're seeing in shipping times and just maybe some more details there would be really helpful? Thank you.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Yeah, sure. I think we'll tag team this. As I mentioned, I think the semiconductor supply constraints remain. Now, there's a lot that's been said and written about softening demand, and we're heading toward a recession. Laptops, smartphones, and PCs, that doesn't apply to us. The more legacy silicon and semiconductor supply that we embed into our solutions is more analogous to the automotive industry. As you've seen there, the automotive industry continues to be supply constrained. We don't see a lot of relief. The progress we're making in satisfying this record demand is the decision to carry higher inventory to meet this record demand, pay more in PPV premiums. We had said we thought we'd spend $120 million for the full year. Jason just referenced we're gonna spend $150 million.

[Greg Brown, Chairman and CEO at Motorola Solutions]

That incremental $30 is paying PPV premiums to satisfy demand. The third leg of the stool is product redesign. I think the environment on supply is on the margins very slightly better, but still challenging and stiff for us. We're doing the inventory, higher inventory, increased PPV spend and continued product redesign I've referenced in earlier calls to satisfy this record demand.

[Jason Winkler, EVP and CFO at Motorola Solutions]

I would add, Greg, that on the automotive front, most of the LMR componentry that we are looking to get is in 40 nanometers and greater.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Got it.

[Jason Winkler, EVP and CFO at Motorola Solutions]

That supports what's going on in automotive and heavy industry. We're having success in getting what we need. The $30 million incremental is not only a good business decision, it also aligns to customer prioritization and us needing to fulfill backlog that customers have been waiting for. In particular, this quarter, in Q3 and again in Q4, we anticipate strong PCR shipments, where we're getting to parts of the portfolio that have been delayed in getting componentry for. PCR, for example, this year, while we thought it could grow or would grow with constraints at 15% last quarter for the year, we now anticipate it's gonna grow 20%.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Right.

[Jason Winkler, EVP and CFO at Motorola Solutions]

We're getting access to the components necessary to unlock some of that PCR backlog as an example.

[Greg Brown, Chairman and CEO at Motorola Solutions]

By the way, it also has helped the higher inventory decisions, has also helped in Video Security and Access Control as well. We now expect that growth annually to be 25% for this year, up from 20%, and the higher inventory has afforded us the position to take some incremental share both in video and PCR because of the available product.

[Jason Winkler, EVP and CFO at Motorola Solutions]

Lead times are a competitive advantage in this market for sure.

[Erik Lapinski, VP and Equity Research Analyst at Morgan Stanley]

Awesome. Thanks, guys. Well, congrats on the execution.

[Jason Winkler, EVP and CFO at Motorola Solutions]

Thank you.

[Operator]

Our next question comes from Sami Badri from Credit Suisse. Your line is open.

[Ryan Cui, Equity Research Associate at Credit Suisse]

Hi, this is Ryan Cui for Sami Badri. Thanks for taking my question. I have two questions. First is, can you remind us how many round of price increase have been done so far? Is there another round of price increase should we like expected considering the unlimited like inflation level trends?

[Jason Winkler, EVP and CFO at Motorola Solutions]

Our results for the year are going to be driven by both volume and price. The second half of this year will be even more supported by price because many of the actions we put into place earlier in the year have begun to impact the second half as we churn through prior backlog. We've done a variety of value-based pricing across the portfolio. They're helping enable, as we expected, our growth and our results in the second half. We'll continue to look at that, Jack and team, around the near $800 million of R&D that we spend per year. It does differentiate our solutions and the work the team's doing on pricing to price to value.

[Ryan Cui, Equity Research Associate at Credit Suisse]

Got you. Appreciate that. If I can squeeze in another one. Are you seeing any like signs of like potential slowdown, especially in the EU market considering the broad like concern for the macroeconomic risk?

[Greg Brown, Chairman and CEO at Motorola Solutions]

We're not seeing that. I think the Q3 print speaks for itself. Again, I can't thank the people across Motorola Solutions enough. I think the execution and focus is been superb. There's a lot of moving parts, right? The historical pressure on the dollar, continued supply challenges, a lot of moving parts, but we're not. Also further reinforced by ending the quarter with record Q3 backlog. I think demand remains strong.

[Jason Winkler, EVP and CFO at Motorola Solutions]

Greg, just to piggyback on that. When you think about our business outside of public safety, our next biggest vertical is education, which obviously given the initiatives around safe schools, around access control, analytics, that's been a hot market. There's not only funding through the American Rescue Plan, but there's also funding being pointed at that, through the Bipartisan Safer Communities Act, which directly addresses access, egress, ingress issues at schools.

[Ryan Cui, Equity Research Associate at Credit Suisse]

Got you. I appreciate the color. Thanks so much.

[Jason Winkler, EVP and CFO at Motorola Solutions]

Thank you.

[Operator]

We now turn to Adam Tindle from Raymond James. Your line is open.

[Adam Tindle, Managing Director of Software, Supply Chain & Connected Devices at Raymond James]

Okay. Thank you. I wanted to, Greg, return to the ESN conversation on the exit. I think a lot of investors viewed that as kind of the hedge to Airwave potentially going away at some point, kinda like having both LTE and LMR. I wanted to understand why the strategic business decision to exit, given it seemed like a hedge that you had. What does that mean for ESN? Does that network retired? Does it change hands? What becomes the Airwave alternative after this? Jason, if you could-

[Greg Brown, Chairman and CEO at Motorola Solutions]

Yeah, I know.

[Adam Tindle, Managing Director of Software, Supply Chain & Connected Devices at Raymond James]

Talk about $65 million. Go ahead, Greg. I don't mean to throw too much out there.

[Jason Winkler, EVP and CFO at Motorola Solutions]

No, I'm sorry. Keep going, Adam. We wanna get everything together. Go ahead. I'm sorry.

[Adam Tindle, Managing Director of Software, Supply Chain & Connected Devices at Raymond James]

I was just gonna sneak in for Jason. He said $65 million of revenue, but my understanding was this wasn't the highest profitability. You know, just wanted to understand the profitability impact of this.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Yeah. On the first question, I don't think we ever looked at ESN as a hedge. We were asked way back when to bid on it. We did. I think we've fulfilled our deliverables. We've been fully committed to this project, and we've worked closely with the customer. Again, what I said, they're obviously interrelated, Airwave and ESN. They're the same customer, and ESN has plans to be a certain network by the UK Home Office. I never viewed ESN as a hedge. I viewed it as building a lot to and from MSI and delivering on the expectations they had for us. As the discussions advanced this year and more recently in the past quarter, I think there's mutual agreement it's the right thing to do to exit.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Now, the original contract, it was expiring at the end of 2024 anyway, so I think we both felt it was the right thing to do. As Jason said, $65 million of revenue about this year, and goes to zero in 2024. For next year, it's obviously less than 65, but that has to be worked out in a final agreement with transition terms that predicate exactly what that looks like for next year.

[Jason Winkler, EVP and CFO at Motorola Solutions]

In terms of margin, you're right, it's lower than the rest of SNS. Think of it as a custom integration project in addition to us supplying them the MCPTT. It's an integration like margin profile on that $65 million.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Adam, you know, I point to you to the US where, you know, we are a subcontractor to AT&T for all things FirstNet which is a 4G, now 5G, evolving to 5G, high-speed LTE network, and we participate in that. At the same time, we continue to grow and build LMR here domestically in the States. In fact, we see record demand for LMR here in the US while simultaneously participating in FirstNet. I don't see it as a hedge, and I don't see it as a trade-off per se.

[Adam Tindle, Managing Director of Software, Supply Chain & Connected Devices at Raymond James]

Got it. Okay, and then on the other subject, wanted to talk about the price cost equation in your business model. I mean, we can debate when the $150 million of cost comes out of the model from a timing perspective, but I think we can all agree that that's probably not permanent. It's gonna come out at some point. I'm wondering when that happens, what's your intention with price at that point? You've implemented all these price increases. You know, it would there be a need to reduce price at that point, or do you think price sticks, $150 million comes out, and we might be looking at a structurally different level of margin in your business?

[Jason Winkler, EVP and CFO at Motorola Solutions]

We view the price increases on our products as stickier than the $150 million of temporary market conditions that really are driven by brokers and third parties extracting maximum value in a scarce commodity play right now. We've had good success in looking through the portfolio and engaging with our customers, and we'll continue to procure the parts that we need to at the prices that are market-driven right now. As we look forward, there's opportunity there.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Yeah. The other thing I would remind you when you think about 2023 is, as we said, we expect inventory to remain at elevated levels, you know, well into 2023. Second, we've prioritized public safety shipments this year, so we have some lower tier PCR sitting in backlog that we'll have to flush through in Q4 and also into next year, being a little bit of a counterweight to just the peel off of that $150.

[Adam Tindle, Managing Director of Software, Supply Chain & Connected Devices at Raymond James]

Is there a simple way to think about the price, Ben? I mean, the $150 is really easy for us to understand. Is there a way to think of, you know, price was $X in 2022 and an incremental $X in 2023, or is it just too complicated to do that?

[Greg Brown, Chairman and CEO at Motorola Solutions]

No, I would say this. For 2022, the growth we've had is both volume and price year to date. For the full year, Adam, we expect the growth to be volume and price increases, but with volume still being a little bit more than half. You know, it would be maybe appropriate to dimensionalize some further thoughts around pricing in February, but that's the best we could give you at this point in time.

[Adam Tindle, Managing Director of Software, Supply Chain & Connected Devices at Raymond James]

Understood. Thank you.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Thanks, Adam.

[Operator]

We now turn to Fahad Najam from Loop Capital. Your line is open.

[Fahad Najam, Managing Director at Loop Capital Markets]

Thanks for taking my question. I wanted to ask you, first of all, a clarification of your S&S backlog. How much of it is from ESN? Is that about $100 million?

[Jason Winkler, EVP and CFO at Motorola Solutions]

$99 million of a contract value was reduced, so that's a reduction in backlog, yes.

[Fahad Najam, Managing Director at Loop Capital Markets]

Okay. That's the entirety of the ESN backlog you are carrying in the S&S. There's no additional related projects from that, right, in that $99 million?

[Jason Winkler, EVP and CFO at Motorola Solutions]

That's right. The decision to exit the ESN contract as most probable reduced our backlog by $99 million for future contracts, as well as we had a non-cash charge of $147 million off the balance sheet corresponding to our project, and the delivery. Those are the two numbers that I think are most relevant to financially what we've decided is the most likely outcome.

[Fahad Najam, Managing Director at Loop Capital Markets]

Got it. Thank you. Now to my question. Greg, in terms of how much of your revenue you're benefiting from stimulus funds, are you still, you know, expecting the majority of funds to show up next year? Just kind of walk us through how you're thinking about calendar 2023. I appreciate the initial outlook you shared with us, but maybe if you could double-click your thoughts on what's driving that.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Sure. It's always important to probably take it back and point out that what we do, it's a need to have and not a nice to have. With that said, we've got $200 million year to date through Q3 in revenue that's tied in some way to the American Rescue Plan. The bigger thing to point to is this is a multi-year phenomenon. The ARP funds run through 2024. In all likelihood, some element of that will be extended as well. Yeah, I think it's actually $200 million a year to date orders.

[Fahad Najam, Managing Director at Loop Capital Markets]

Orders.

[Fahad Najam, Managing Director at Loop Capital Markets]

You're right, yes. Good clarification.

[Keith Housum, Managing Director at Northcoast Research]

All right. Appreciate the answers. Thank you.

[Jason Winkler, EVP and CFO at Motorola Solutions]

Thank you.

[Operator]

Once again, if you have a question, you may press star one on your telephone keypad. We now turn to Paul Chung from JP Morgan. Your line is open.

[Paul Chung, Credit Risk Middle Office Senior Associate at JPMorgan Chase & Co]

Hi, thanks for taking my question. You know, you mentioned you feel comfortable, you know, with that $9.5 billion in 2023 initially. Can you kind of expand on, you know, the pace of growth you expect between segments? Can we still see that 20% type growth in video? And, you know, as we start to think about gross margins for next year, you know, can you kind of quantify the uplift we should kind of, you know, expect as, hopefully you start to see some component pricing come down and supply chain costs also come down?

[Greg Brown, Chairman and CEO at Motorola Solutions]

Yeah, I think, Paul, the color I'm giving on the $9.5 billion is really that. It's meant to be more directional than specific. I think we'll reserve, you know, the individual specifics around segments and technologies when we have the next earnings call in February. I would say, though, you know, it has been our ongoing goal and history from a margin standpoint anyway, and I'd say operating margins that aspirationally, we would look to expand operating margins again in 2023. We wanna see the Q4 print, the disposition of the backlog that will inform us better on the specifics in February around more detail from a segment and technology view.

[Paul Chung, Credit Risk Middle Office Senior Associate at JPMorgan Chase & Co]

Gotcha. I appreciate that. Then just to follow up on free cash flow guide, it kind of implies, you know, a record ramp here in Q4. What are some risks here across, you know, working cap to hitting that guide and your visibility into cash flows? You know, are you starting to see some component pricing easing a bit, helping in 2023? Thank you.

[Jason Winkler, EVP and CFO at Motorola Solutions]

Our Q4 cash flow is supported by almost $900 million of higher sales in the second half. Tremendous AR opportunity. We've had better linearity than we did in Q3, and we'll have it again in Q4. We anticipate getting products out the door sooner in the quarter, such that they can turn to cash within the quarter. We call it quick turn. Of course, we are anticipating lower payments and slightly lower inventory to end the year off of our current elevated $1.157 billion inventory level. We had a good Q3 operating cash flow, and we anticipate having another very good Q4 getting to the $1,775 million that we talked about during my portion of the call.

[Paul Chung, Credit Risk Middle Office Senior Associate at JPMorgan Chase & Co]

Gotcha. Very helpful. Thank you.

[Jason Winkler, EVP and CFO at Motorola Solutions]

Thank you.

[Operator]

Our next question comes from Keith Housum from Northcoast Research. Your line is open.

[Keith Housum, Managing Director at Northcoast Research]

Good afternoon, guys. I appreciate it. I mean, Greg, you mentioned that the, you know, the Airwave, perhaps the appeals process. Can you provide a little bit of color about what options actually Motorola will have if the CMA is successful coming through with this proposal, you know, adjustments for the Airwave?

[Greg Brown, Chairman and CEO at Motorola Solutions]

Yeah. Thank you, Keith. Again, the decision that came out was provisional. We don't expect a final decision till early next year. To your question, it's worth mentioning that after a final decision, there is then a remedy implementation phase that actually takes a few more months to sort out what the final ruling is in terms of how to implement. I think statutorily, that has to be done no later than, I think it's nine or 10 months after the final decision. So, that takes time to do that. I told you that, you know, we are confident in our position, and while we are obviously gonna continue to work with the CMA and the customer, we think the findings in the provisional are unfounded and overreaching and unprecedented.

[Greg Brown, Chairman and CEO at Motorola Solutions]

By the way, it's worth also mentioning there is a notation in the actual provisional decision that includes a potential invitation for the Home Office and us to agree to a different arrangement than what the CMA has proposed. That's explicit and referenced embedded in the provisional. We would certainly be open to that conversation. We'll see how things develop, but there's several more months to go here.

[Keith Housum, Managing Director at Northcoast Research]

Appreciate it. I'm gonna ask you a different question for my follow-up, if I could. You know, video surveillance going from 20%-25% growth for the year. I guess, could you guys provide a bit of color about some of that strength there? You know, obviously, it's been notable that, you know, some of your Chinese competitors are getting some more challenges, I guess, for lack of a better word, around the country, around the world. Is that contributing to that growth?

[Greg Brown, Chairman and CEO at Motorola Solutions]

I think you were clipping in and out, but I think that the direction of your question is the kind of inertia against some Chinese suppliers adding to our growth this year. I think the answer is yes, but actually, it's kinda measured. 'Cause remember, under the NDAA, the National Defense Authorization Act, at the federal level, it prohibits future procurement from, you know, Huawei, Hytera, Hikvision, Dahua, ZTE. It is not a rip and replace. I don't think there's a pop the clutch moment of big growth there, which is the same thing in terms of the NDAA provision around grant money.

[Greg Brown, Chairman and CEO at Motorola Solutions]

The other positive move that could help as a potential tailwind, kinda circumstantially will be the Secure Equipment Act at the FCC level, which by the way could be as early as November, but it also could take more time. If the FCC follows along the lines or contours of the NDAA, that could potentially prohibit in the case of LMR, Hytera procurement, and in the case of video security, Hikvision and Dahua future procurement for the enterprise. That would be favorable. Clearly it's a favorable trend, but I think it's a contributor, but I don't think it's an overwhelming driver to the results we're printing to date.

[Keith Housum, Managing Director at Northcoast Research]

Great. Thank you.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Thanks, Keith.

[Operator]

Our final question comes from Jim Suva from Citigroup. Your line is open.

[Jim Suva, Managing Director at Citigroup]

Thank you very much. Education, you highlighted great on your comments, which is great to hear. Can you give us a little bit of insights about like percent of sales now versus importantly outlook? It seems like that's a growing area. I mean, just recently, our school PTA had a meeting talking about, you know, the situation of putting in technology, and I actually recommended, you know, your type of products and but, it's a long discussion. Can you talk about kinda the timeline there of what you're seeing? The profitability, I assume, continues to increase as certain other school districts start to seed solutions to other school districts, and it kinda starts to self-market itself at some point. The initial kickoff seems pretty hard. Thank you so much.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Jim, you nailed it. It is a game of inertia, but just to dimensionalize it, think of it as around 25% of our fixed video security and access control business. The one thing that we've been very thoughtful around the investments we've made, not only organically. It started with the Avigilon and the investments we've made organically there, but the acquisitions by way of Ava and Openpath. Because what we're seeing, and as you pointed out, larger school districts may want an on-prem solution, and a lot of the monies that are being directed now are actually at private and smaller schools, and they might want a cloud-based solution. We feel like we've got, you know, obviously we've got the ability to meet the customers depending on their needs for where they are.

[Greg Brown, Chairman and CEO at Motorola Solutions]

In terms of growth rate, you've seen the print. We had 33% growth. Education is growing in that category. It's you know, roughly a quarter of our fixed video security business, you know, growing approximately 30% this year.

[Jason Winkler, EVP and CFO at Motorola Solutions]

This is also an area of investment as we further integrate all of our portfolio in and around safer schools. Mahesh, maybe you could talk about some of the things we're doing to integrate the portfolio so to better position our portfolio to keep schools safe.

[Mahesh Saptharishi, EVP and CTO at Motorola Solutions]

Introduced this program called Safety Reimagined not too long ago. A key element, a technology element of Safety Reimagined was a solution called Orchestrate. One of the things that Orchestrate enables us to do is to really coordinate the detection capabilities of our AI-enabled fixed cameras to actions that are possible within the school, including notifications to radios as well. All of this, it enables effective public-private partnership even during a response timeframe. When you put it all together, it actually takes advantage of the entirety of the Motorola Solutions portfolio, and we are uniquely positioned to go in and solve the specific problems for schools.

[Jim Suva, Managing Director at Citigroup]

Thank you so much for the details, and congratulations.

[Greg Brown, Chairman and CEO at Motorola Solutions]

Thank you, Jim.

[Operator]

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

[Greg Brown, Chairman and CEO at Motorola Solutions]

Thank you very much. I appreciate everybody joining us Thursday afternoon. Look, I just want to summarize and just say thank you to everybody. Despite ongoing supply chain challenges, significant FX headwinds, increasing inflation, and the Fed raising interest rates, despite all of that, we continue to grow. We continue to grow based on volume and some pricing power. We're raising expectations on top and bottom for the full year. We've delivered on capital allocation strategy year to date, investing more than $1.003 billion. Most importantly, we continue to meet the needs of our customers. I mean, the environment's strong, exceptionally strong. Strong funding, record orders, record backlog.

[Greg Brown, Chairman and CEO at Motorola Solutions]

While we're really proud of the print, I'm also equally proud of that we're printing these results while still investing in the business and in the portfolio to differentiate ourselves accordingly. I like our position heading into 2023, and I am deeply grateful and thankful to everybody at Motorola Solutions. A hell of a quarter. By the way, particularly all of you in Florida, the systems integration team, the services team during Hurricane Ian, the strength of our LMR networks shone through, but even more importantly, the courage and the pride of our people showed through too, time and time again. I'm grateful, and I'm proud of you. Thanks for joining us, and we'll talk to you again in a few months.

[Operator]

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

Participants

Executives

• Greg Brown, Chairman and CEO
• Jason Winkler, EVP and CFO
• Mahesh Saptharishi, EVP and CTO
• Tim Yocum, VP of Investor Relations

Analysts

• Adam Tindle, Managing Director of Software, Supply Chain & Connected Devices at Raymond James
• Alyssa Shreves, VP of Equity Research at Barclays
• Erik Lapinski, VP and Equity Research Analyst at Morgan Stanley
• Fahad Najam, Managing Director at Loop Capital Markets
• George Notter, Managing Director of Equity Research at Jefferies
• Jim Suva, Managing Director at Citigroup
• Keith Housum, Managing Director at Northcoast Research
• Paul Chung, Credit Risk Middle Office Senior Associate at JPMorgan Chase & Co
• Ryan Cui, Equity Research Associate at Credit Suisse