Motorola Solutions, Inc. (NYSE:MSI) Q3 2023 Earnings Call Transcript

Motorola Solutions, Inc. (NYSE:MSI) Q3 2023 Earnings Call Transcript November 2, 2023

Motorola Solutions, Inc. beats earnings expectations. Reported EPS is $3.19, expectations were $3.02.

Operator: Good afternoon and thank you for holding. Welcome to the Motorola Solutions’ Third Quarter 2023 Earnings Conference Call. Today’s call is being recorded. [Operator Instructions] The presentation materials and additional financial tables are posted on the Motorola Solutions’ Investor Relations website. In addition, a webcast replay of the 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’ll have an opportunity to ask questions after today’s presentation. [Operator Instructions] I 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 third quarter earnings call. With me today are Greg Brown, Chairman and CEO; Jason Winkler, Executive Vice President and CFO; Jack Malloy, 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 a 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 referenced non-GAAP financial results including those in our outlook unless otherwise noted. A number of forward-looking statement 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 the factors that can cause such differences can be found in today’s earnings news release, in the comments made during this conference call in the risk factor section of our 2022 Annual Report on Form 10-K or any quarter The 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. Good afternoon, and thanks everybody for joining us today. First, Q3 was another strong quarter with revenue and earnings per share exceeding our guidance driven by continued strong demand, and an improving supply chain environment. Revenue was up 8% in the quarter highlighted by 12% growth in software and services, and 5% growth in products and systems integration. We also expanded operating margins for the fifth consecutive quarter, which resulted in record Q3 operating earnings in both segments and over $700 million of operating cash flow. Second, investments in safety and security continue to be a priority for our customers. And we had another record orders quarter in Q3. Year-to-date orders are up 11% driven by strong software and services, record U.S. Federal demand and continued adoption of our APX NEXT device by U.S. state and local customers.

Additionally, we ended Q3 with record backlog of $14.3 billion, up 6% versus the prior year. And finally, based on our Q3 results and continued momentum in the business, we are again raising our full year guidance for both sales and EPS for the third time this year. I’ll now turn the call over to Jason.

Jason Winkler : Thank you, Greg. Revenue for the quarter grew 8% and was above our guidance with growth in both segments both regions and all three technologies. FX tailwinds during the quarter were $13 million while acquisitions added $19 million. GAAP operating earnings were $639 million or 25% of sales up from 15.7% in the year ago quarter, which had the impact of the $147 million fixed asset impairment charge related to our exit from the ESN contract in the UK. Non-GAAP operating earnings were $741 million, up 10% From the year ago quarter and non-GAAP operating margin was 29%, up 50 basis points driven by higher sales, lower material costs and improved operating leverage partially offset by a higher mix of international product shipments and the revenue deferral related to Airwave.

GAAP earnings per share was $2.70, up from $1.63 in the year ago quarter, which has the impact of the ESN asset impairment. Non-GAAP EPS was $3.19 up 6% from $3 per share last year. The growth in EPS was driven by higher sales and margins, partially offset by the Airwave deferral and a higher effective tax rate in the current year. OpEx in Q3 was $551 million, up $29 million versus last year primarily due to acquisitions and higher employee incentives in the current year. Turning to cash flow, Q3 operating cash flow was $714 million up $326 million versus last year and free cash flow was $649 million of $331 million. The increase in year-over-year cash flow was primarily driven by higher earnings and improved working capital. And with our Q3 year-to-date operating cash flow of $799 million, up significantly from last year, we are solidly on track to deliver on our $1.9 billion of operating cash flow outlook for this year.

Capital allocation for Q3 included $147 million in cash dividends $322 million in share repurchases and $65 million of CapEx. Moving to segments. In the Products and SI segment, sales were up 5% versus last year driven by growth in both LMR and video. Currency tailwinds were $4 million, and revenue from acquisitions in the quarter was $1 million. Operating earnings for the segment were $420 million or 26.1% of sales, up from 24.5% in the prior year driven by higher sales, lower direct material costs and improved operating leverage, partially offset by mix. Some notable Q3 wins and achievements in the Product segment include a $75 million P25 device order for a U.S. federal customer, a $55 million P25 System order for a Southeast Asia customer, a $42 million P25 device order for the Texas Department of Public Safety, a $30 million P25 device order for a U.S. federal customer, a $20 million P25 device order for Indiana State Police and a $3 million fixed video expansion order for a U.S. federal customer.

In software and services, revenue was up 12% inclusive of the Airwave deferral with 31% growth in Command Center and 15% growth in Video. Revenue from acquisitions was $18 million in the quarter, and FX tailwinds were $9 million. Operating earnings in the segment were $321 million, up 7% versus last year and operating margins were 34%, down from 35.7% last year. Excluding the Airwave deferral, operating margins for the segment were up, driven by higher sales and improved operating leverage. Some notable Q3 highlights in this segment include a $23 million LMR service agreement for a large European customer, a $23 million service agreement for East Bay regional communication systems in California, a $20 million LMR service agreement for the Los Angeles Police Department, a $12 million command center order for Tarrant County 911 District in Texas and an $8 million body-worn camera order for the Metro Nashville Police.

Looking at our regional results. North America Q3 revenue was $1.8 billion, up 6% on growth in all three technologies. International Q3 revenue was $773 million, up 13% versus last year driven by growth in LMR and Video. Moving to backlog. Ending backlog was a Q3 record of $14.3 billion, up 6% or $764 million versus last year, inclusive of $321 million of favorable currency rates driven by strong demand in North America. Sequentially, backlog was down $4 million, inclusive of $125 million of unfavorable FX, driven by the revenue recognition of Airwave, partially offset by strong demand in North America. In Products and SI, ending backlog was up $62 million or 1% versus last year, driven primarily by strong demand in North America. And sequentially, backlog was up $80 million, also driven by strong demand in North America.

In Software and Services, backlog increased $702 million compared to last year, inclusive of $294 million of favorable FX driven by strong demand for multiyear software and services contracts in North America, partially offset by the revenue recognition for Airwave. Sequentially, backlog was down $84 million, driven by unfavorable FX of $96 million, partially offset by growth in multiyear Software and Services contracts in North America. Turning next to our outlook. We expect Q4 sales growth of approximately 4%, with non-GAAP EPS between $3.60 and $3.65 per share. This assumes a weighted average share count of approximately 171 million shares and an effective tax rate of approximately 24%. For the full year, we are again increasing both our revenue and earnings guidance.

We now expect revenue in the range of $9.93 billion to $9.945 billion, up from our prior range of $9.875 billion to $9.9 billion, and we expect non-GAAP earnings per share between $11.65 and $11.70, up from our prior guide of $11.40 to $11.48 per share. The full year outlook assumes $40 million of FX headwinds, up $25 million from our prior guidance. A weighted average diluted share count of approximately 172 million shares and an effective tax rate of approximately 23%. Before I turn the call back to Greg, I’d like to highlight two points. In addition to the strength of our LMR and Video business, our Command Center portfolio performed well during the quarter. In Q3, we achieved strong growth, complemented by a robust contribution from Rave, an acquisition, which continues to exceed our expectations.

Secondly, our supply chain execution navigating extended lead times for some semiconductors and reducing broker purchases continues to drive year-over-year cost savings. We now expect the impact of lower broker purchases to be a $70 million tailwind for this year, up from our prior estimate of $60 million. As a result, we now expect full year operating margin expansion of approximately 200 basis points, up from our prior guidance of 175 basis points. I’ll now turn the call back to Greg.

Greg Brown : Thanks, Jason. First, I’m really pleased with our Q3 results, which highlight the durability and criticality of our business and the strength of our portfolio. Revenue was up 8%, and that’s inclusive of the revenue deferral related to Airwave that we’ve talked to you about already. We also achieved record operating earnings in both segments, record Q3 operating cash flow of over $700 million and a Q3 record backlog that is 6% higher than last year, which positions us well as we head into next year. Second, the resilient nature of our business and strong cash flow allows us to continue to be flexible as we deploy capital to drive shareholder value. The strength of our cash flow comes from strong demand from product refresh, consistent margin expansion and improving cash conversion.

Through October, we’ve repurchased just under $800 million of stock, highlighting our conviction in the long-term value of MSI. We also ended the quarter with net debt-to-EBITDA ratio of 1.7, which provides us with a healthy balance sheet and additional firepower to continue to invest both organically and consider inorganic investments as well. And finally, as we look to close out another record year, I think we’re exceptionally well positioned for continued growth. Demand for our solutions remains robust. We’re continuing to add value to our customers. Our end markets remain resilient, and our teams continue to execute at a high level. I’ll now turn the call over to Tim and welcome your questions accordingly.

Tim Yocum : Thank you, Greg. Before we begin taking questions, I’d like to remind callers to limit themselves to 1 question and 1 follow-up to accommodate as many participants as possible. Operator, would you please remind our callers on the line how to ask a question?

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Q&A Session

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

Tim Long : Yeah, the two, if I could. First, maybe on the Command Center and Software side, pretty strong, obviously, with Rave, a part of that. Could you maybe Greg talk a little bit about what’s driving that addition of Rave seems to be positive. Is it adding to ability to cross-sell some of the different platforms or — just a little bit more color on what’s driving that and how Rave ties into that? And then the second one, on the backlog still being record, it’s pretty impressive. Most companies are seeing backlog coming down. So a little color there and maybe how that makes you feel about next year as far as growth? Do you think you can kind of sustain the type of growth rates you’re seeing this year? Thank you.

Greg Brown : Just on Rave and then maybe Mahesh can jump in. I would tell you, Tim, I love the acquisition. I think it was well done by the internal team here that founded, did the diligence both technical strategic as well as financial. I love Todd Pyott and his entire team that’s come over to the organization. And the performance of Rave since joining Motorola has exceeded the business case and exceeded our expectations.

Mahesh Saptharishi : Full year, I would say that we still expect our growth to be 20%. Look, our core platforms, that’s NG-911, CAD, Records Aware, are all doing well as well. As Jason read out in the script, St. Charles, Missouri, just refreshed their call handling solution and adopted our [indiscernible] routing. And you see us solution, Western Australia Police refreshed their CAD. There’s also an ecosystem story here. Rave is certainly performing well above our expectations. Arizona is now the 15th state to sign on to Rave Alert. It’s a statewide mass notification system. And as we’re doing that, we’re also refreshing all the call handling instances across the PSAPs in Arizona. And our call handling system integrated with Rave as appropriate here as well.

When you think about a city like Glendale, Glendale now brings in radio, brings in CAD 911, Rave, et cetera, now into a state-of-the-art real-time crime center, all integrated with Aware. And now you can think about orchestration when major incidents happened on the heels of things like active shooter incidents, et cetera, that benefit from the fact that the ecosystem allows you to now respond much faster.

Jason Winkler : Tim, on backlog, we remain in a strong backlog position with an 8% revenue print in Q3 and backlog of $14 billion or more being up 6%. Our backlog is very strong. And I’d also point out that our backlog comes over 95% of it from government customers, who buy what they need, when they need it and count on us to deliver it. So we remain — and Q3 orders inbound in Q3, inbound orders were also strong. So our backlog position is one of strength and Greg, I’ll turn it to you for further comments.

Greg Brown : Yeah. And Tim, as it relates to 2024, obviously, we’ll wait until February to give specifics on any kind of detailed guidance. I would tell you, as we sit here today from a high level, we would estimate revenue, again, kind of back of the cocktail napkin to be about $10.5 billion at this point as we sit here today. By the way, that’s inclusive of $250 million of incremental revenue headwinds, about $200 million of that out of the UK home office. We’ve talked to you about that before. The deferral of Airwave representing a little bit over $100 million, the balance of that being the formal exit of ESN for a total of $200 million related to the UK Home Office and anticipated FX headwinds of about $50 million. So high level, as I sit here today and take a look — that’s kind of how I would dimensionalize next year and filling in more detail when we get together in February.