Motorola Solutions, Inc. (NYSE:MSI) Q2 2023 Earnings Call Transcript

Motorola Solutions, Inc. (NYSE:MSI) Q2 2023 Earnings Call Transcript August 3, 2023

Motorola Solutions, Inc. beats earnings expectations. Reported EPS is $2.65, expectations were $2.51.

Operator: Good afternoon and thank you for holding. Welcome to the Motorola Solutions Second 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 three 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. [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: Good afternoon. Welcome to our 2023 second quarter earnings call. With me today are Greg Brown, Chairman and CEO; Jason Winkler, Executive Vice President and CFO; and Jack Molloy, Executive Vice President and COO; and Mahesh Saptharishi, Executive Vice President and CTO. Greg and Jason will review our results along with commentary, and Jack and Mahesh will join for Q&A. We posted an earnings presentation and news release at motorolasolutions.com/investor. These materials include GAAP to non-GAAP reconciliations for your reference. 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 and 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: Thanks, Tim, and good afternoon, and thanks, everybody, for joining us today. First, Q2 was another outstanding quarter with revenue and earnings per share both exceeding our guidance. In Software and Services, revenue was up 13% and operating earnings were up 15%, driven by strong growth across all three technologies. And in Products and Systems Integration, continued robust demand and improved supply chain availability led to a 12% growth in revenue and a 52% growth in operating earnings in the segment. Additionally, we ended the quarter with record Q2 ending backlog of $14.3 billion, up approximately $850 million versus last year, and also up approximately $200 million sequentially. Second, our exceptional performance during the quarter was broad-based, with double-digit revenue growth in both segments both regions and in all three technologies, including 20% growth in Command Center and 17% growth in Video Security.

We also saw record Q2 orders in both segments during the quarter, driven by customers prioritizing technology investments to strengthen public safety and enterprise security. And finally, based on our Q2 results and the continued strong demand we’re seeing across the business, we’re again raising our full year guidance for both sales and earnings per share. I’ll now turn the call over to Jason.

Jason Winkler: Thank you, Greg. Revenue for the quarter grew 12% 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 $23 million, while acquisitions added $20 million. GAAP operating earnings were $518 million or 21.6% of sales, up from 16.7% in the year ago quarter. Non-GAAP operating earnings were $641 million, up 29% from the year ago quarter and non-GAAP operating margin was 26.7%, up 350 basis points. The strong year-over-year increase in both GAAP and non-GAAP operating earnings was driven by higher sales, inclusive of our higher prices, pricing, lower direct material costs and improved operating leverage. GAAP earnings per share was $2.15 compared to $1.33 in the year ago quarter.

Non-GAAP EPS was $2.65, up 28% from $2.07 last year. This strong growth in EPS was driven by higher sales and margins, partially offset by a higher effective tax rate in the current year. OpEx in Q2 was $555 million, up $53 million versus last year, primarily due to increased expenses from acquisitions, investments in video and higher employee-related incentives in the current year. Turning to cash flow. Q2 operating cash flow was $93 million, up $83 million versus last year, and free cash flow was $40 million, up $89 million. The increase in year-over-year cash flow was primarily driven by higher earnings and improved working capital, partially offset by higher cash taxes. For the full year, we continue to expect approximately $1.9 billion of operating cash flow.

The linearity of our cash flow is expected to be consistent with last year with higher earnings and improved working capital driving increased cash flow in the second half. Also, as we previously highlighted, this year’s cash flow includes approximately $300 million of additional cash taxes compared to last year, inclusive of a one-time $70 million tax payment that relates to an IP reorganization that we did in 2022. Capital allocation in Q2 included $224 million in share repurchases, $148 million in cash dividends and $53 million of CapEx. Moving to segment results. In the Products and SI segment, sales were up 12% versus last year, driven by improved supply availability in the current year and the benefit from pricing actions continuing to flow through.

Currency headwinds were $10 million and revenue from acquisitions in the quarter was $2 million. Operating earnings were $285 million or 19.8% of sales, up from 14.6% in the prior year, driven by higher sales, lower material costs, inclusive of lower broker spend for semiconductors and improved operating leverage. Some notable Q2 wins and achievements in this segment include $145 million P25 system upgrade for Kern County, California. A $41 million P25 system and device order for a U.S. federal customer, a $31 million P25 system expansion for Ventura County, California, a $19 million P25 device order for a U.S. federal customer and a $6 million fixed video order for a large U.S. healthcare customer. In Software and Services, revenue was up 13%, including 20% growth in Command Center and 19% growth in Video.

Revenue from acquisitions was $18 million in the quarter, and FX headwinds were $13 million. Operating earnings in the segment were $356 million, up 15% versus last year and operating margins were 36.9%, up from 36.1% last year. On higher sales and improved operating leverage, partially offset by higher costs from acquisitions. Some notable Q2 highlights in this segment include a $34 million video order for the Virginia State Police, which included our largest in-car video order ever, a $15 million LMR services agreement with City of Baltimore, Maryland, a $13 million managed services agreement for LMR and a renewal in Latin America; a $12 million Command Center order for a U.S. federal customer and an $8 million LMR service agreement with another U.S. federal customer.

Looking at regional results for the company, North America Q2 revenue was $1.6 billion, up 11% on strong growth in all three technologies. International Q2 revenue was $762 million, up 16% versus last year, driven by growth in LMR and Video, partially offset by unfavorable FX. Moving to our backlog. Ending backlog was a Q2 record of $14.3 billion, up 6% or $856 million versus last year, driven by strong demand in all three technologies. Sequentially, backlog was up $211 million, driven by record Q2 orders in both segments. In the Products and SI segment, ending backlog was up $496 million or 11% and year-over-year and up $100 million sequentially, driven primarily by strong LMR demand. In Software and Services, backlog was up $360 million compared to last year, driven by strong demand for multiyear software and services contracts in North America, partially offset by revenue recognition for Airwave and the adjustment related to the ESN contract exit.

Sequentially, backlog was up $111 million, driven by record Q2 orders in the segment. Turning next to our outlook. We expect Q3 sales to be up approximately 6% with non-GAAP earnings per share between $2.99 and $3.04 per share. This assumes a weighted average diluted share count of approximately 172 million shares and an effective tax rate between 23% and 24%. For the full year, we are again increasing both our revenue and EPS guidance. We now expect revenue in the range of $9.875 billion to $9.9 billion, up from our prior range of $9.725 billion to $9.775 billion, and we expect non-GAAP earnings per share between $11.40 and $11.48 per share up from our prior guidance of $11.21 to $11.29 per share. This full year outlook assumes $25 million of FX headwinds, a weighted average share count of approximately 172 million shares and an effective tax rate of 23% to 24%.

Before turning it back to Greg, I wanted to provide some color on a few financial topics. First, an update on the CMA and Airwave. As we’ve stated previously, we strongly disagree with the CMA’s final decision. Earlier this week, the CMA issued its remedies order regarding implementation of their final decision effective on August 1. This procedural next step does not change our position regarding the ongoing appeal process and our strong belief in our case. However, from an accounting perspective, beginning August 1, we will now defer revenue for the amount above the remedies order price control until the appeals process has been completed. This deferral and resulting lower revenue from Airwave for the remainder of the year is fully incorporated into our increased revenue and earnings guidance for the year.

Second, earlier this week, Moody’s upgraded our credit from two Baa2 from Baa3. This higher credit rating underscores the strength of our balance sheet, including the strong liquidity position, our balanced debt maturity profile, significantly improved pension status, along with a track record of consistently growing earnings and cash flow. And finally, our increased guidance for the year highlights the strength of our business as we enter the second half. Our backlog is exceptionally strong, driven by robust customer demand. And based on our current pipeline and supply chain environment, we expect backlog to remain strong going forward. Additionally, the expected lower semiconductors we articulated in February, the cost related to these semiconductors coupled with the pricing adjustments in our own portfolio that were implemented in the second half of last year are driving the significant full year margin expansion of approximately 175 basis points.

That is implied in our increased guidance. I’m now turning the call back to Greg.

Greg Brown: Jason, thank you very much. First, our exceptional Q2 results highlight the continued strong momentum we’re seeing across the business. We grew revenue double-digits in both segments, both regions, and in all three technologies. We expanded operating margins by 350 basis points, and we achieved record Q2 orders, which has led to our highest ending backlog ever for a second quarter, and is driving our increased guidance for the full year. Second, we continue to leverage our global installed base to sell more value-add Software and Services to our customers. During the quarter, Software and Services revenue was up 13% with strong growth in all three technologies. We also achieved record Q2 orders in this segment, highlighted by our largest in-car video order ever from the Virginia State Police that included automated license plate recognition and digital evidence management.

And with our recent Rave acquisition, we’ve made significant advances in integration across our ecosystem, which is driving strong pipeline demand for Rave together with our command center products. And finally, I just wanted to spend a little time and provide some color on artificial intelligence. We recognized AI and the potential impact it could have on our customers back a few years ago when we acquired Avigilon and its AI capabilities. And we’ve seen and continue to see this technology driving opportunity for both our business and our customers. AI along with generative AI plays an important role in our solutions to help keep communities safe from actively analyzing live video and alerting humans when something important happens to assisting a 911 call with our live translation solution to automatically redacting evidence, these advancements improve response times, which can help save lives while also enhancing privacy for those involved.

AI will continue to enhance how our solutions help protect people, property, and places. With our ongoing investments and deep expertise, we’re very well-positioned in this space, and we expect to see increased adoption of these technologies from public safety, enterprises, and private organizations alike for a more proactive approach to safety and security. I’ll now turn the call back to Tim and we’ll open it up for your questions.

Tim Yocum: Thanks, 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?

See also 20 Countries With Highest Cost Of Electricity and 20 Most Educated Cities in the US.

Q&A Session

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

Tim Long: Thank you. I’ll start with the clarification, Jason, one for you, Greg. Jason, yes, pretty impressive, you’re raising numbers despite the change in accounting for Airwave. Just wanted to clarify there we got the new revenue level that was mandated and that you guys are accounting to. Can you just talk a little bit about expenses? I think you guys have run that network pretty efficiently. So should we assume a comparable expense level to how things have been running? Or is does something change on that side on the EPS impact? And then for Greg, if you could just talk a little bit about macro, it sounds like everything’s going pretty well, but if you could just hit on kind of what you’re seeing from the government customers and to what extent you’re starting to see federal and ARPA type of dollars flowing into the business. That’d be great. Thank you.

Jason Winkler: Thanks, Tim. So our expectations for Airwave revenues this year with the now deferred revenue effective August 1 are for about $480 million of revenue from Airwave. That’ll be down from about $560 million last year. To answer your question on cost, we run that network and provide a service level. I wouldn’t anticipate significant cost changes. Our cost to run that network and deliver the services are what they are. So we are deferring about $80 million in revenue this year and still raising our guidance from the last time we were together by about $140 million.

Greg Brown: And to Jason’s point, the $80 million reduction due to accounting and the required treatment of that from $560 million to $480 million is obviously all in the back half of the year starting August 1, running through the remainder of the year. As in terms of expenses and investment, we continue to invest in Airwave by the way, Tim just a few months ago the end users gave us feedback and network performance and reliability, which was as high as we’ve ever achieved on Airwave. So we’re proud of that and we continue to maintain and invest on behalf of our end users. In terms of macro, high level the business is as good as I’ve ever seen it. The demand drivers are strong. Jack has talked about, and we’ll talk a little bit about today if you want about device refresh.

And interestingly, Tim, Molloy mentioned last year, we try to track demand against the orders achieved last year, and we believe as best we could tell less than 5% of our orders last year were tagged due to ARPA. Through the first half of this year, we also believe it’s less than 5% as well. So the nice thing about this is, we’re seeing demand drivers around public safety, video security, access control, command center, software and services that’s really underpinning environmental and overall demand sure ARPA helps, but as best we could tell, it’s fairly minimal.

Jack Molloy: I’d agree with that, Greg. The only thing I’d add to that, and I think you highlighted the benefits from a product standpoint, but from S&S standpoint, a year-over-year, we had a $360 million increase in backlog. In addition to that, we’re in receipt of a contract from the State of Illinois for a $300 million frame agreement for a 10-year period for services. That’s incremental and that’s not reflected in our backlog, Tim. So I think that’s just another proof point to the conversations we’re having with customers really resonate for their needs right now.

Tim Long: Okay. Thank you very much. Appreciate it.

Greg Brown: Thanks, Tim.

Operator: And our next question comes from George Notter from Jefferies. Your line is open.

George Notter: Hi guys, thanks very much. I guess I wanted to ask about margins and profitability. I think at one point you guys were looking for about a $50 million benefit this year on lower brokers fees and expedite fees. I guess I’m wondering if that’s still the expectation for this year. And then also I’m curious about what the overall level of broker fees and expedite fees you’re carrying for this year would look like. And when do those step back down? Would that be a 2024 event or when do you see relief there? Thanks.