Motorola Solutions Q1 2023 Earnings Call Transcript

Participants

Corporate Executives

• Tim Yocum, Vice President of Investor Relations
• Greg Brown, Chairman & Chief Executive Officer
• Jason Winkler, Executive Vice President & Chief Financial Officer
• Mahesh Saptharishi, Executive Vice President & Chief Technology Officer

Analysts

• Tim Long, Barclays PLC
• George Notter, Jefferies Financial Group Inc.
• Meta Marshall, Morgan Stanley
• Sami Badri, Credit Suisse Group AG

Presentation

[Operator]

Welcome to the Motorola Solutions First Quarter 2023 Earnings Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. The presentation material and additional financial tables are posted on the Motorola Solutions' Investor Relations website. In addition, a webcast replay of this call will be available on our website within 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.

[Operator Instructions] I would now like to introduce Mr. Tim Yocum, Vice President of Investor Relations. Mr. Yocum, you may begin your conference.

[Tim Yocum, Vice President of Investor Relations at Motorola Solutions]

Good afternoon. Welcome to our 2023 first quarter earnings call. With me today are Greg Brown, Chairman and CEO; Jason Winkler, Executive Vice President and CFO; Jack 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've posted an earnings presentation and news release at motorolasolutions.com/investor. These materials include GAAP to non-GAAP reconciliations for your reference. And during the call we reference non-GAAP financial results, including those in our outlook, unless otherwise noted. A number of forward-looking statements will be made during this presentation and during the Q&A portion of the call. These statements are based on current expectations and assumptions that are subject to a variety of risks and uncertainties. Actual results could differ materially from these forward-looking statements.

Information about factors that could cause such differences can be found in today's earnings news release, in the comments made during this conference call, in the Risk Factors section of our 2022 Annual Report on Form 10-K or any quarterly report on Form 10-Q and in our other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statements.

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

[Greg Brown, Chairman & Chief Executive Officer at Motorola Solutions]

Thanks, Tim. Good afternoon and thank you everybody for joining us today. First, let me start by just saying that Q1 was an exceptional start to the year. We achieved revenue and earnings per share, above our guidance, with revenue up 15% and earnings per share up 31% versus the prior year. We expanded operating margins by 470 basis points. And we had record Q1 orders, which led to record Q1 ending backlog of $14.1 billion, up 5% versus last year, inclusive of $372 million of unfavorable FX.

Second, our outstanding Q1 performance was broad-based with strong double-digit revenue growth in both segments, all three technologies and in both regions, North America and international. Additionally, public safety and enterprise security remains more important than ever, which is driving demand for both our public safety and enterprise customers. And finally, based on our strong start to the year and continued robust demand, we're raising both our revenue and earnings guidance for the full year.

I'll turn the call over to Jason to take you through results and outlook and then be back and return for some final thoughts.

[Jason Winkler, Executive Vice President & Chief Financial Officer at Motorola Solutions]

Thank you, Greg. Revenue for the quarter grew 15% and was above our guidance with double-digit growth in both segments, both regions and in all three technologies. FX headwinds during the quarter were $45 million, while acquisitions added $42 million. GAAP operating earnings were $399 million or 18.4% of sales, up from 12.6% in the year-ago quarter. Non-GAAP operating earnings was $532 million, up 42% from the year-ago quarter and non-GAAP operating margin was 24.5%, up 470 basis points. This strong year-over-year increase in both GAAP and non-GAAP operating earnings was driven by higher sales, lower direct material costs, inclusive of lower broker spend in attaining semiconductors and improved operating leverage.

GAAP earnings per share was $1.61 compared to $1.54 in the year-ago quarter. Non-GAAP earnings per share was $2.22, up 31% from a $1.70 last year. This strong growth in earnings per share was driven by higher sales and margins, partially offset by a higher effective tax rate in the current year. Opex in Q1 was $530 million, up $38 million versus last year, primarily due to acquisitions and higher incentives in the current year.

Turning to cash flow, Q1 operating cash flow was a usage of $8 million and free cash flow was usage of $62 million. The cash flow in Q1 was in line with our expectations and included a onetime cash tax payment of $70 million related to an IP reorganization we completed last year. It also reflects our strategic decision to carry higher inventories. For the full year, we continue to expect operating cash flow to be approximately $1.9 billion with greater contributions in the second half, consistent with the shape of last year's cash flow. The capital allocation for Q1 included $148 million in cash dividends, $140 million in share repurchases and $54 million of capex.

Moving to our segment results, in the Products and SI segment, sales were up 18% versus last year, driven by improved supply availability in the current year and the benefit from pricing actions flowing through. Currency headwinds were $19 million and revenue from acquisitions in the quarter added $12 million. Operating earnings were $246 million or 18.9% of sales, up from 8.7% in the prior year, driven by higher sales, lower material costs, inclusive of lower broker spend and improved operating leverage.

Some notable Q1's and achievements in this segment include a $27 million county wide P25 system for Johnson County, Missouri; a $20 million P25 device order for a US state and local customer; a $17 million P25 system for Wakulla County, Florida; a $16 million fixed video contract for a large healthcare system; and a $15 million APX and APX NEXT devices order for the Kansas Highway Patrol.

In Software and Services, revenue was up 10%, including 19% growth in command center and 20% growth in video. Revenue from acquisitions was $30 million in the quarter and FX headwinds were $26 million. Operating earnings in the segment were $286 million, up 3% versus last year and operating margins were 32.9%, down from 35.2% last year on mix, higher costs from acquisitions and FX. For the full year, we expect operating margins in this segment to be comparable to last year to slightly down, driven by higher costs from acquisitions primarily Rave.

Some notable Q1 highlights in this segment include a $340 million federal IDIQ Award to combine existing services and provide new LMR services to the US Air Force, which has long been an important customer of ours. Given the nature of this 10-year agreement, we recorded only $11 million of backlog in the first quarter and expect backlog to be recorded ratably over time for the remainder of the contract. Additionally, we expect new services included it -- to contribute an incremental $60 million of revenue over the 10-year period when compared to the previous service agreements.

We also received a $21 million multiyear support services extension for Portugal's nationwide TETRA system, a $10 million LMR services agreement with a federal agency and a $9 million fixed video services contract renewal with the City of Chicago.

Looking at regional results, North America Q1 revenue was $1.5 billion, up 14% on strong growth in all three technologies. International Q1 revenue was $679 million, up 16% versus last year with growth in all three technologies, partially offset by unfavorable FX.

Moving to backlog; ending backlog was a Q1 record of $14.1 billion, up 5% or $623 million versus last year, inclusive of $372 million of unfavorable FX. These results were driven by strong demand across all three technologies. Sequentially, backlog was down $280 million driven primarily by typical order seasonality in North America. In the Products and SI segment, ending backlog was up $601 million or 15%, driven primarily by strong LMR demand. Sequentially, backlog was down $186 million due to North America orders seasonality, following a record backlog in Q4.

In Software and Services, backlog was up $22 million compared to last year, driven by strong demand for multi-year software and services contracts in North America, partially offset by the revenue recognition for Airwave, along with $329 million of unfavorable FX and the adjustment related to the exit of ESN contract that we announced last year. Sequentially, backlog was down $94 million driven primarily by revenue recognition for Airwave.

Turning now to our outlook, we expect Q2 sales to be up 10% to 11%, with non-GAAP earnings per share between $2.49 and $2.54 per share. This assumes weighted average share count of approximately 173 million shares and an effective tax rate of approximately 24%. For the full year, we are increasing both our revenue and EPS guidance. We now expect revenue in the range of $9.725 billion to $9.775 billion, up from our prior range of $9.65 billion to $9.7 billion, and we expect non-GAAP earnings per share between $11.21 and $11.29, up from our prior guidance of $11.10 and $11.22 per share. This full year outlook assumes $25 million of FX headwind, a weighted average share count of approximately 172 million shares and an effective tax rate of 23% to 24%.

As I mentioned on the last call, the increase from our 20.1% tax rate last year is due to lower tax benefits on share comp and a higher UK tax rate in the current year, both of which combined represented approximately $0.50 headwind in our full year earnings per share guide. The increased outlook for the full year is a reflection of the continued strength of our business and demand for our solutions. The revenue guidance reflects expectations for strong double-digit growth in the first half as well as continued growth in the second half of the year, which comes on top of the 15% growth we saw in the second half of last year.

I'll now turn the call back to Greg.

[Greg Brown, Chairman & Chief Executive Officer at Motorola Solutions]

Thanks, Jason. Let me just end with a few thoughts. First and foremost, our business remains very strong. We had record Q1 orders and achieved revenue above our expectations, we expanded operating margins by 470 basis points, we ended the quarter with our highest Q1 ending backlog ever and our public safety and enterprise customers are continuing to prioritize our solutions that help keep communities safe, which is driving our increased top and bottom-line guidance for the full year.

Second, I want to highlight two recent announcements in our video security business. First, we made the decision to integrate our end-to-end fixed video portfolio, consolidating the majority of our fixed video solutions under two platforms, Avigilon Alta and Avigilon Unity. Alta is our cloud-native security suite consolidating Openpath and Ava Security while Unity is our on-prem security suite consolidating Avigilon and IndigoVision. This help streamline our go-to-market channels and further reinforces our vertical focus, particularly in government, but also education and healthcare, which combine those three now represent half of our video security revenues.

Additionally, in our mobile video business, we launched our new V700 body-worn camera. The V700 is our first body-worn camera to provide broadband connectivity that facilitates integration with our market-leading in-car video solution, our APX radios and our command center software, including live video streaming and location tracking through our Aware product.

And finally, our strong start to the year underlines the strength and resiliency of our business. The demand for our products and solutions that keep communities safe remains exceptionally strong. Our continued focus on cost management and inventory optimization coupled with our previous modest pricing actions that we took earlier continues to drive margin expansion and our strong balance sheet and durable cash flows allow us to be opportunistic with the deployment of capital going forward to create long-term shareholder value.

And with that, I'll now turn it over to Tim and open it up for your questions.

[Tim Yocum, Vice President 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?

Questions and Answers

[Operator]

The floor is now open for questions. [Operator Instructions] The first question is from Tim Long with Barclays. Your line is open.

[Tim Long, Analyst at Barclays]

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

[Jason Winkler, Executive Vice President & Chief Financial Officer at Motorola Solutions]

Tim, so on second half, so you'll recall that last year in the second half is when the pricing actions that we implemented really began to show up in the P&L and those really helped last year's growth and profitability expansion in the second half. So our position today, as we look at those 15% comps is that we're still in a supply-constrained environment. We have lead times from our suppliers. We have expectations to grow and with opportunities ahead of us for the second half, with the continued demand that we have. Where the pricing actions benefited us particularly in Q1 and expect similar for Q2 is last year's comps, in the first half did not include those same pricing actions. So as we start to enter July, we're anniversarying those pricing actions and still expect growth on top of those.

[Greg Brown, Chairman & Chief Executive Officer at Motorola Solutions]

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

Specifically, I'd also call healthcare, we're really-really pleased. We won -- we secured a $16 million deal with a large-scale hospital system. This was an add-on and the beauty of that is they're not only a video user, but they're also a radio user. Education has been, we've attested to the fact that numerous school systems are upgrading. Some are going with Avigilon Unity on-prem systems, large-scale urban schools. But what we're really seeing is acceleration in growth in the cloud there and the ability to do radio alert and integrate access control LMR, our command center software portfolio -- product called Compass into school systems is a game-changer.

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

[Tim Long, Analyst at Barclays]

Okay, thank you very much.

[Operator]

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

[George Notter, Analyst at Jefferies Financial Group]

Hi guys, thanks very much. I guess, I think you guys mentioned ARPA in the last question or maybe Tim did, but what are your expectations for the ARPA benefit this year. I know that you've got about $400 million in orders from ARPA-related projects last year. I would imagine some of that converted to revenue last year, but what do you think that might look like for 2023, any sense? Thanks.

[Jason Winkler, Executive Vice President & Chief Financial Officer at Motorola Solutions]

Yeah, so, George, I'll -- I would say ARPA, anytime there's federal stimulus dollars are conducive and I would say beneficial to the business. But to kind of put it in context, it's approximately 5% of our orders in North America last year and that's not to diminish it, but I would take it to a higher level. I've actually gone and looked at in Salesforce. It contributed to deals that were secured but they want the sole purpose of deals that were secured. I think at the end of the day, when you think about mission-critical communications or even a school, we think we're in an area of prioritization in areas we've said before, it's a need-to have, not a nice-to-have. So I think it's generally conducive, but I wouldn't necessarily say it's the largest attributor to our success.

[George Notter, Analyst at Jefferies Financial Group]

Got it, great. And then just as a quick follow-on, I think the question everyone has been asking is, you know, on supply-chain, many companies I think are going through inventory corrections now. I mean, any sense that your customers have been inventorying products or is there any risk of supply-chain corrections or inventory corrections for you guys as you look forward? Thanks.

[Greg Brown, Chairman & Chief Executive Officer at Motorola Solutions]

The demand from our customers remains very strong. Our backlog position is at a record level and that includes backlog that customers are having to wait a bit longer than they'd like and we're working through those delays in getting them products. With the results in Q1, we were able to obtain a little bit better supply. We had a good quarter across LMR, public safety, had a good quarter with PCR.

So we're getting after this backlog position and fulfilling the customers demands, both demand they placed on us in backlog, it is also the demand they placed on us within the quarter. So -- and our inventory position, if I shift to our balance sheet, it has helped us mitigate a choppy supply environment and we continue to be mindful of inventory and its utility in serving what remains a challenging supply environment. It's been a helpful tool and we do have expectations for inventory to reduce in the second half, that's in our cash flow expectations. But it remains an important tool to navigate this environment.

[George Notter, Analyst at Jefferies Financial Group]

Great, thank you.

[Operator]

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

[Meta Marshall, Analyst at Morgan Stanley]

Great, thanks. Maybe just a question on APX NEXT. You had mentioned that being targeted towards the high-end and then introducing kind of the mid-tier product. I just wanted to get a sense of adoption trends of the various pieces of the portfolio and where they kind of following the customer, adoption types that you expected. And then just maybe an update on Rave integration would be helpful. Thanks.

[Greg Brown, Chairman & Chief Executive Officer at Motorola Solutions]

Sure, Meta. Maybe I'll start with the APX NEXT and Mahesh will speak to Rave. First of all, we're in the early innings as we've said before and I think it's most important to point out that it's a multi-year introduction for the APX NEXT. What typically happens is we have -- we run the APX originally, APX NEXT line in tandem for the foreseeable future. In fact to point that out, 80% in Q1 of our device revenue was actually APX original. So we've got a coexistence strong pipeline for both of them. We've got $410 million of orders since we introduced the APX NEXT.

But we've just recently, last fall, introduced the N-Series radio, which starts to fill in the portfolio and now we're bringing out international P25 units to bear, that will be targeted in Australia, New Zealand and Israel. All-in, with the new product what we're seeing is kind of high single-digit ASP increases as well.

[Jason Winkler, Executive Vice President & Chief Financial Officer at Motorola Solutions]

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

[Mahesh Saptharishi, Executive Vice President & Chief Technology Officer at Motorola Solutions]

And on Rave, Rave has exceeded our initial expectations for performance. We see strong traction in education, especially higher ed, but also K through 12. And as we previously talked about Rave bridges enterprise security with public safety and with some of the initiatives that we've undertaken recently, we're making that -- the bridge wider, effectively allowing for more data and at a faster rate to go from enterprise security to public safety.

So, two specific examples worth mentioning there. First, with every one of our new VESTA 9-1-1 orders, we're actually bundling Rave 9-1-1 suite. And what does include is two-way texting, caller profiles, this is information about individuals who perhaps need special assistance, facility info which is blueprint of facilities so that responders can respond with greater information as to what they will see when they get to the facility. And very importantly caller location, and that is going to be part of our Rave VESTA 9-1-1 offer going forward.

The second is, we're integrating more closely with our enterprise security solutions. So, Orchestrate is a key enabler for that. And as part of our global safety reimagined program we're bringing Rave much closer in terms of the ability to detect and the ability to alert using Rave Alert and the ability to bridge into 9-1-1 as appropriate. So those two together is really augmenting our path forward in terms of taking advantage of our strength in education, along with our presence with [Indecipherable].

[Meta Marshall, Analyst at Morgan Stanley]

Great, thanks.

[Operator]

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

[Sami Badri, Analyst at Credit Suisse Group]

All right. Thank you. I had a couple of questions. Some of them modeling, some of them business dynamics. I'll start with business dynamics first. So, one on the backlog. So there, obviously are a lot of big deals and maybe you could give us a characterization of how many of these bigger deals are expected. And then maybe taking that question a step further, if we excluded FX impact and excluded big episodic activity, are you still seeing the backlog step up with more of these your standard business motion? And then I have a follow-up.

[Greg Brown, Chairman & Chief Executive Officer at Motorola Solutions]

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

[Jason Winkler, Executive Vice President & Chief Financial Officer at Motorola Solutions]

And backlog is up in the -- unfavorable effect, to your other point of $370 million. By the way the other thing, Sami, is even when we have a large prospect, much like the year four -- [Indecipherable] earlier on the call, so $340 million 10-year order, only $11 million of that is logged in backlog. So, I like the composition and the duration of the backlog in addition to it being absolute and at record levels as we exit Q1.

[Sami Badri, Analyst at Credit Suisse Group]

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

[Jason Winkler, Executive Vice President & Chief Financial Officer at Motorola Solutions]

So our expectations for total video remain approximately 15%, that's consistent with our last cll. And as Jack mentioned, that growth will be even better in some of our power verticals which represent over half of the composition of the revenue. So, video is performing to our expectations. And then, Sami, to your observation of Greg's comments around our portfolio around Alta and Unity, that's a market-facing change that we will represent the brands and Jack's sales team is positioned to sell video. We're in a great position to sell it either in an on-prem version, which is the way most customers buy today, but also in a cloud version. And as markets move, we're positioned extremely well.

[Greg Brown, Chairman & Chief Executive Officer at Motorola Solutions]

I think a great example, I got a phone call yesterday Sami on that, specific to a large-scale metropolitan school district, they had three finalists, two of the finalists were Avigilon Alta and Avigilon Unity. And I think that's the power that we can meet a customer for their specific needs that no one else in the marketplace has today.

[Sami Badri, Analyst at Credit Suisse Group]

Great, thank you very much.

[Greg Brown, Chairman & Chief Executive Officer at Motorola Solutions]

Thank you.

[Operator]

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

[Greg Brown, Chairman & Chief Executive Officer at Motorola Solutions]

Sure, thank you. I would just say in closing, it was a great Q1 and I think it highlights the fact that what we do has never been more important. Both the demand environment and execution is strong. I'm really proud of the people, I'm really proud of our channel partners that achieved record Q1 orders, record Q1 backlog. At the end of the day, as we exit Q1, I like our position.

More importantly, I like our momentum. And then this is despite the ongoing supply-chain challenges that still have to sort itself through for the next several quarters. The fact is the intersection as Mahesh talked about of public safety and enterprise security, it's critical and we're building a safety and security technology ecosystem that connects public safety with private institutions, as you heard Jack reference in those key verticals. I couldn't be more proud of this team and I'm optimistic and enthusiastic about the opportunity in front of us. I appreciate you joining and I look forward to connecting up with you in a quarter from now.

[Operator]

[Operator Closing Remarks]