Motorola Solutions Q2 2024 Earnings Call Transcript

Yes. I think, look, we're really pleased with the device refresh and the newer portfolio that we continue to release globally. I think when I think of the APX NEXT family of devices, it accounts -- we think it will account for less than a quarter of the public safety device shipments this year. So that dimensionalizes kind of the opportunity for that and by the way, we also as I mentioned in the remarks also just announced its equivalent the MXP660 for TETRA, which opens up Europe and the international market, and that's a brand new product, which takes the combination of LMR and LTE capabilities to one device. So I think that is a contributing factor, but the demand for LMR both product, services, devices and writ large the whole technology portfolio remains quite strong.

And Alyssa, we mentioned during the call that our outlook for LMR as a whole as a technology this year has gone from mid to mid to high. That will include growth in both products for the year as well as software and services, ex-home Office. So strong growth drivers across and within the quarter and within the first half, with the supply chain improvements that we saw, and LMR products specifically, we were able to attain more supply and lead times improved, which in part drove the performance for the first half in LMR Products.

So we talked about a $40 million headwind, Alyssa, this year kind of incorporating the prem to cloud momentum that you just referenced. In Q2, our video software business grew 24%. Cloud and cloud adoption was exponentially higher than that. So quite frankly, it's performing as expected and cloud adoption remains very strong.

Well, just on the second one. First, we increased our operating cash flow expectations from $2.2 billion to $2.25 billion, I think that's a reflection of the confidence you're asking about in our ability to generate cash flow. Remember also the linearity of the way cash flow is generated by this business overwhelmingly, it's typically back half actually even more heavily weighted in Q4, and we expect the linearity of the cash flow generated and the yield associated to be reflective of that as well.

Actually Greg, it's even better linearity this year with our first half. We are strongly ahead of where we were last year as inventory working capital have come down, but you're right, the back half is usually significant cash flow contributors, and we're well on path to the $2.25 billion.

On the M&A front, Matt, we like the two acquisitions we made. We like the fact and you know I think we're pretty good stewards of capital and we always think about the deployment of capital along a framework of 55%, 25%, 15%, 55% fungible between share repo and opportunistic M&A, 25% dividend, 15% capex. That's kind of a reference framework. I do think the M&A funnel even at this point for us is quite active, and there's some interesting opportunities. Like anything, we'll see if they materialize, but I like the way the business is performing and the underlying demand drivers organically reflective of the portfolio we have. Equally, I am energized by the opportunity as it presents itself from an M&A funnel standpoint, but we'll see. We certainly have the balance sheet capacity with net-debt to net EBDITA of one and half and recent upgrade to BBB a quarter ago, so I like the firepower we have, but we'll remain very disciplined and focused on how and where we deploy it.

So first of all, it's a good question George. Total backlog is up as Jason referenced year-over-year when you exclude the home office. That's kind of one reference point. Product backlog, while it deteriorated in Q2, it deteriorated because supply lead times improved really a lot faster than we thought, which informed the 19% print on LMR product growth in Q2. Having said that, product backlog remains pretty healthy at like $4 billion -- actually $4.3 billion off of a record comp the previous year and as I referenced pipeline, the orders pipeline at this point is about $1 billion higher than a year ago, which I think is quite informative as well.

Having said all that, you put ingredients all into the blender. We expect total backlog comparable to slightly up off of a record last year. So all in all, I feel pretty good about it. The linearity is a little lumpy and bumpy given the accelerated supply lead times that improved dramatically in Q2, but overall, I feel pretty good.

And George, you're right. Last Q2, we did have two significant product related orders. The combination of Kern County, California as well as Ukraine order were almost $200 million in that quarter to a sizable significant deals in last year's comp.

Good point.

FX was fairly de minimis.

Yes, exactly.

Sure. So within the first half at operating margin, I'll start there. We're pleased with our margin performance. We saw good growth on supplier lead times improving pretty significantly during the quarter and really in the first half as well and we talked about on the call that at operating margin, we'll see 100 bps of expansion on the year, that's up from 75 bps. Within the mix, gross margins will remain comparable and we'll continue to invest in opex, whereby now for the year with the acquisitions that we've announced, our opex envelope is expected to be about $130 million more than last year. So good progress on operating margin expansion and healthy gross margins to help drive that.

So a big picture from a services standpoint, I think we've got growth opportunities in a number of different facets. Number 1, cyber. Our networks, particularly the public safety P25 networks in the United States, Canada and certain countries abroad, we've got opportunities and our customers have asked us to step up in that capacity. The second piece of it is just a scope, just general scope increases across the board globally. The third piece of it is that we manage various networks. We're in discussions right now with two different European countries and a network in South America that we manage for extensions and to every one of those, it's not apples for apples, it's usually apples plus something. So we're encouraged by the opportunities in front of us from a services standpoint.

I think it's relatively rare. The last one we did on the services side was TETRA Ireland. We always look for opportunities there. Obviously, that's of interest. That's our power alley and what we do well in provisioning and delivering and own and operating LMR networks. There could be an opportunity or two, but we'll see, but I they're more they're not typically run rate or every year, they're every few years in opportunity. The only other thing I'd add is just on these managed service networks, we don't typically just look at those through the lens of LMR. Those actually provide us a platform to go and do things like body worn as a service with the national police agencies as well. Sticks video contracts that we're looking to start to provide as a service as well. So there's a little bit of a flywheel effect when we get those service opportunities.

Yes. Look, I would say this kind of stepping back. The demand, the orders pipeline, the backlog, state and local funding, which is good and looks to be good again in 2025. The continued funding environment at the federal level, I mean, Adam, there's a lot of variables here, device refresh, systems and services scope, love the growth. As Jason referenced, we raised it for LMR from mid to mid to high. That's informing the full year raise to approximately 8% and I see continued runway here.

Now you're right, we're obviously not going to talk about 2025. Q2 was particularly strong again because component supply drove improved lead times faster than we thought. We still, Adam, expect continued products growth in the second half of the year. So look, I like the way the business is running, but not just for the quarter, I like the momentum we have for the balance of this year and we'll see what happens next year, but I really like the position we're in and we'll probably give you some color high level on the next quarter as you referenced to inform 2025.

Thanks. Sure, Adam. To begin with, I think one of the reasons why Avigilon has historically been strong is because of we offer an end-to-end solution, which is video plus access control tightly integrated and that end to end solution in many ways gets amplified with a cloud story. It's one where the installation, the configuration and the ability to deploy with the least amount of hardware bits on-site become that much more attractive. So, we see that as one of the reasons why starting with our smaller customers, but now very quickly going into much larger installations as well, we see a preference and a drift towards the cloud and then on top of that, there are also capabilities, AI services and additional capabilities that we're able to deliver via the cloud to augment what we already do at the edge, and that's also a motivator here as well.

So that's I'd say that's in many ways one of the things that's driving that the cloud growth, which as Greg already said, while software -- video software itself is growing at 24%, cloud software, very specifically, actually would be impacted.

Yes, and I think that the growth rate, the strong cloud adoption of what we call Avigilon Alta, which is the cloud version of Avigilon Unity being prem, is a reflection of the success of the Openpath acquisition and AVEVA and the successful integration for combined video and access control under the cloud with Mahesh's leadership and Alex Kazerani. So part of the other to quote you inflection point of our continued growth is the successful not only acquisitions, but the integration and the yield and the benefits associated with our cloud platform. I think the team is doing quite well.

The only other thing I'd add, Adam, is our cloud connector is a differentiator with our customers. It enables our customers to keep their cameras and move to cloud VMS. It's a great point. It's not a closed system, and I think that's a big value proposition differentiator between us and our cloud competition.

You're right, Jack.

Yes, that's exactly right. It's even like many of our competitors in this space, our direct to cloud cameras are actually standards compliant and they don't get locked out if that access is not present.

Adam, the second part of your question had to go with the financial model. Both on-prem and cloud for us are solid business models. They're value propositions to customers. Of course, we've planned for the $40 million impact of the cloud acceleration that's on track, and both have a good margin structure and as you know, cloud comes with a stickiness with the term license that upon renewal leads to even greater renewal. So we're pleased with both models.

Absolutely, Adam. Fire away. No problem.

Yes. So we mentioned that supply continues to improve and did so in Q2. If I think about the financial benefits that we are planning for and are showing up. We talked about the year's guide included when we opened in February about having about a $60 million improvement in costs relative to semiconductors and PPV. We're actually, on the year basis, probably trending closer to $70 million, and by the way that benefit is in both first half and second half. So we're seeing the benefit of prices as well as premiums coming down. In terms of product or mix, we continue to see favorable mix. We see volume growth complemented by mix. Both are helpful in terms of the growth drivers you've seen.

Yes. The backlog composition is almost 95% government direct. Why that's important is our direct sales force, it's clean line of sight to that backlog and it's not in the channel.

And given the funding of vehicles and procurements within government, governments order according to their prioritization and they issue a PO to a company like us directly, they don't subsequently order from someone else. So and we are fulfilling that backlog and our backlog, as Jack mentioned, 95% plus comes from our public safety direct customers.

I think we think international is a great opportunity. I mean, if you think about it, it's up single digits in Q2 outside of the home office. There's really three things. We've got, within Europe, very large managed and support service business there. We've just announced a new device, as Greg alluded to early, being the MXP660, which not only elongates our customers' investment in that managed support service but brings another opportunity from a device standpoint.

Australia continues to be a market that we perform quite well, but the other piece there's two other elements. Within our video business, we've talked about it before, but mobile video, we compete exceedingly well. Mahesh's team has recently brought out a new device to market, another VP device. We talked about Scotland. We've got great opportunities both within the government space, but also in the enterprise space outside of the United States.

So international continues to be a great market. We've got great leadership there, and I think we all collectively feel really good about opportunities for growth.

And I know Amit and you and team know this, but to remind everybody, our international revenues over almost 75% of them come from EMEA, Australia and New Zealand. That's our strength. That's where we build networks. That's where we have flywheels of growth and that those are great markets for us for Jack and his team.

There's actually one new point from a quarter ago and that is just a it's a good question to level set. You know the dispute. It's been ongoing. It's been several years. We believe the CMA ruling was unfounded. We think it's disproportionate. We think it's unprecedented. You've heard us talk about that. We appealed that. We lost. So we appealed to the Competition Appeals Tribunal and we lost. So the only last option as it relates to this dispute on the imposition of the charge control, was the U.K. Court of Appeal, which is their highest court in the U.K. and the noteworthy item is they decided to hear the case. So that's a new development. That hearing is November 11th and 12th. Impossible to predict what that is, but that is something that's new from when we talked about this a quarter ago. I just want to remind you that as it relates for Q2, the rest of this year, the full year of this year, we are operating under kind of the draconian disproportionately excessive discount.

So we're raising the full year inclusive of kind of that worst case charge control for this year. What happens in the future? Don't know. I am, pleased that the U.K. Court of Appeal will give this the appropriate audience and review and we'll see where it goes from there.

I guess from an experience standpoint, we've gotten very positive reviews. We've had multiple large scale police departments that have made the transition to APX Next and the APX Next family. The first thing is we contemplate one of the things we always think about when we develop product is ease of use. I think we nailed that. The LTE capabilities enable them to get radios programmed and re fleeted, I don't want to say instantaneously, but it was something that took them weeks months, can now be done in a day, which is a positive thing. It also gives them the capability extend the network coverage and what we've seen as a phenomenon is we've got a lot of customers that have mixed fleets, and it enables those transitions to happen as well.

Last but not least, we talk about our Command Center business, but the APX Next and its ability to put through higher bandwidth workflows is also very complementary to our Command Central Suite our Command Center Suite, rather. So we've heard really positive things. As Greg and Jason articulated, about 25% of those devices that will ship this year are APX Next. So we are in a multiyear phenomenon as it relates to the upgrade.

So a couple of things. Just, Louis, to ground you. The 15% kind of pop the clutch LMR product growth in Q2 was a reflection of lead times, component supply lead times that improved quicker than we thought. So that's why the exceptionally strong 15% print in Q2. Secondly, for the annual year-over-year growth rate, we're saying it's mid to high single digits for LMR, up from mid. I think that, that improvement is in part because of continued strong traction with devices. I do think -- you're right I think on average, it's about an eight year plus or minus device renewal or refresh. I think that's still in the zip code as it relates to a North America refresh, but, I'll give you an anecdote.

I was at a large city last week, with a senior commander and spent some time with him and he had his APX Next. I had no idea we'd have that. He had his APX Next device on his desk when we were talking. I said what do you think of that? And I know this sounds anecdotal and a self-promotion. It's just it's really not. He talked about what Jack referenced, the over the air reprogramming, having a control channel that you can hear everything about it, the video display capability, the LTE along with LMR, the adoption rate and the acceptance and the feature functionality that that device brings, which allows us to price for value has been really, really good and we're just getting started in the European and international market with the brand new MXP660, which think of that as the APX Next equivalent for Europe and beyond.

So I think look I love the position we're in. We have thousands of installed networks. We're monetizing the services. As Jack talked about with expanding scope. We're upselling things like CyberSecurity and it's a really good situation and I think that I like the hand we have.

Talking about orders, we used to reference cumulative orders. I think the more important metric that we've shared is that this year, our APX Devices total revenues, less than a quarter of those will come from the APX Next family. So Jack and team are still selling a very good APX radio. Our customers expect it. They don't like forced migrations. They want graceful migrations and Jack's point about mixed fleets evidences that. So we have a long way ahead of us and in the almost $2 billion of devices that we'll do for public safety, less than 25% of them are going to come this year from APX Next.

Yes. I'll let Mahesh, since the acquisitions are primarily in video and command center, maybe you could speak to the integration progress.

Sure. And maybe just to start out where, Greg, you left off with Ulta.

So Alta was our brand for Openpath and Ava, which is effectively our cloud based access control solution and our cloud based video management solution both being critical to our portfolio. Both under Alex Kazerani were brought together as Alta and now we are able to integrate the capabilities of both access control and video in I think in fairly unique and powerful ways, ones that our customers are really appreciating and evidenced by the uptake in the market.

Beyond that, Rave would be the other big piece here and Rave is one of those critical elements that's a glue between public safety and enterprise security and Rave integrated not just with 911 and CAD solutions, but also integrated with our enterprise security solutions effectively video both Alta and Unity. I think that plays a fairly significant role and we're seeing that impact of that ecosystem going forward as well.

Pelco, we rationalized our video management platforms into one with the on-prem solution being the Unity Video Management solution and our camera platforms across all our brands really operate on basically a shared infrastructure with the best of many things that each brand brought into the table integrated and offered across the board.

So I think that speaks to some of the key integration examples. Silent Sentinel is well on its way right now and as Noggin comes into play here, which has incident management, which is a key piece of the puzzle for us, Noggin will complement both our fixed video portfolio, but it will also complement Rave quite nicely as well.

I think just the only thing I'd add to that, Meta, the only thing I'd add is when I think about this company and look back over the last several years, I do think that M&A and successful acquisition financially from an accretion standpoint and a strategic impact standpoint and our ability to integrate and retain talent. Mahesh is Exhibit A, Alex Kazerani, the CEO of Openpath, Todd Pyatt, the CEO of Rave, not just retaining them, but having them in contributory senior executive roles that can facilitate and drive integration in addition to the competencies within core Motorola, I'm really pleased. I think it's going quite well.

Well, we got off to a fast start in the first half of this year with effectively a little over $700 million in share repurchase and the convert on the Silver Lake settlement, which is great. Nick, the Silver Lake settlement, memory tells me, was like $3.18 -- $3.14 a share. We did 71 million of share repurchases in Q2 at $3.48 and change. So I always like the way we deploy capital, I think pretty thoughtfully and opportunistically against the discounted share, the discounted cash flow and the value of the company going forward and we've now done 40 acquisitions plus or minus over the last 9 or 10 years. We just completed two that we referenced in Q2 and to your point, Meta, the M&A funnel is attractive. So we will be opportunistic along deploying that $2.25 billion of operating cash flow, 55% share repo or acquisitions fungible between the two with 25% dividend, 15% capex.

So we're well on our way and I like and by the way, I like deploying the capital internally on R&D too. So $850 million of R&D is giving us the widest and broadest product portfolio through three technologies with land mobile radio, video and command center, which is in turn powering a unique competitive differentiating safety and security ecosystem. So when I think about the deployment of capital organically, I like the returns. When I think about returning it to the shareholder and the value we've created and the float that we've contracted, I like that and when I look at the opportunities ahead potentially for acquisition, I'm optimistic about some opportunities that may present themselves.

Well, when I look back at the to your point, the previous few quarters, we're in the zip code of product video performance. So I like that consistency. The most important is really talking about market share and we gained market share last year in video security and access control as a category. We expect to gain market share again this year. The fact that the growth rate is much higher in cloud as we signaled earlier, I think is great. And the product video performance quarter-to-quarter, I think is fine in the zip code and against the backdrop of the overall market growth. So I like where we are and I like the continued execution.

Also keep in mind, this is an end to end systems or solutions business, and customers buy the entirety of the portfolio from us products, software, services and some of the areas we've made investments are in software. So whether it's cloud, whether it's analytics, services and or mobile video, those are some of the investments we've made and so to see software growing faster than products is commensurate with that.

Yes. So with the raise on the year and the higher volumes offset by a few dilutive sense from the acquisitions we've made, the raise is the performance of Q2 as well as the acquisitions reflecting the 8% total growth.

Yes. I mean, we passed through the beat in Q2 and obviously that informs the full year raise pretty nicely, but also there's M and A is slightly dilutive of a couple of cents as well, but we like the position we're in.

Yes. I just want to say thank you for everybody listening on the call. Obviously, thank you for everybody joining the call, but also thanks for all the Motorola Solutions people and our channel partners and our distributors worldwide, appreciate everything you've done for an exceptional quarter and probably more important than the quarter is the momentum that quarter -- this quarter informs for the back half of the year and how we'd like to finish the year strong.

I think our Solving for Safer narrative continues to resonate and gain traction. I think that's representative in the results. The customer prioritization for putting an emphasis and a priority on safety and security, I think, is self-evident and as I mentioned, the orders pipeline is up pretty significantly from a period ago. At this point last year reference about $1 billion. So finally, I think, as I have been asked about capital allocation, I like the strength of our balance sheet. I like the fact that our operating cash flow is expected to grow double digits again for the second year in a row and look, I think the performance of the business, the organic investment, the acquisitions and the firepower of the balance sheet, look, I think it provides us good flexibility to continue to execute and drive shareholder value going forward and I appreciate everybody on what you're doing and how you're helping onward and upward, and appreciate everything you've done.