Motorola Solutions, Inc. (NYSE:MSI) Q4 2023 Earnings Call Transcript

Motorola Solutions, Inc. (NYSE:MSI) Q4 2023 Earnings Call Transcript February 8, 2024

Motorola Solutions, Inc. beats earnings expectations. Reported EPS is $3.9, expectations were $3.63. Motorola Solutions, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. And thank you for holding. Welcome to the Motorola Solutions’ Fourth 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 Relation 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 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 fourth 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. 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 will turn it over to Greg.

Greg Brown: Thanks, Tim. And good afternoon and thanks for joining us today. First, Q4 was exceptional quarter. We achieved record revenue in both segments in all three technologies, including double digit growth in Video Security and Command Center, highlighting the strength and robust demand for our safety and security solutions that help protect people, property and places. Additionally, we expanded operating margins for the sixth consecutive quarter, generated over $1.2 billion of operating cash and strengthened our video security portfolio with the recent acquisition of IPVideo, creator of the HALO Smart Sensor. Second, our full year results were outstanding. In our Products and SI segment, we grew revenue 9%, driven by strong growth in both LMR and Video Security and we ended the year with record product backlog.

We also expanded operating margins in this segment by 380 basis points, driven in part by higher ASPs and lower product costs. In Software and Services, revenue was up 10%, inclusive of the Airwave revenue reduction, highlighted by strong growth in Video Security, Command Center and our Services business outside of the UK. And we also generated record operating cash flow of $2 billion, up 12% versus the prior year. And finally, as we enter 2024, our robust backlog position coupled with the continued strong demand for our safety and security solutions positions us well for another year of strong revenue and earnings growth. And with that, I’m going to turn the call over to Jason.

Jason Winkler: Thank you, Greg. Revenue for the quarter grew 5% and was above our guidance with growth in both segments, both regions and all three technologies. FX tailwinds during the quarter were $16 million, while acquisitions added $17 million. GAAP operating earnings were $738 million or 25.9% of sales, up from 25.6% in the year-ago quarter. Non-GAAP operating earnings were $870 million, up 6% from the year-ago quarter. And non-GAAP operating margin was 30.5%, up 10 basis points. The increase in both GAAP and non-GAAP operating earnings was driven by higher sales and lower direct material costs. GAAP earnings per share was $3.47, up from $3.43 in the year-ago quarter. Non-GAAP EPS was $3.90, up 8% from $3.60 last year.

The growth in EPS was driven by higher sales and higher margins. OpEx in Q4 was $597 million, up $60 million versus last year, primarily due to higher incentives and acquisitions in the current quarter — current year. For the full year 2023, revenue was $10 billion, up 10% with strong growth in both segments and across all three technologies. Revenue from acquisitions was $98 million and the impact of unfavorable foreign currency rates was $38 million. GAAP operating earnings were $2.3 billion or 23% of sales versus 18.2% in the prior year. The increase was primarily driven by lower direct material costs, higher sales, the $147 million ESN fixed asset impairment charge in the prior year and lower intangible amortization expense in the current year.

Non-GAAP operating earnings were $2.8 billion, up $416 million and non-GAAP operating margins were 27.9% of sales, up from 26% of sales in the prior year, driven by lower direct material costs, higher sales, inclusive of higher ASPs and improved operating leverage. GAAP earnings per share was $9.93, up 25% compared to $7.93 in the prior year, primarily driven by higher earnings and the asset impairment charge related to the exit of ESN in the prior year, partially offset by a higher effective tax rate in the current year. Non-GAAP earnings per share was $11.95, up 15% from $10.36 in 2022. On higher earnings, partially offset by a higher effective tax rate. For the full year OpEx was $2.2 billion, up $178 million versus 2022, primarily driven by higher employee incentives and higher expenses associated with investments in Video and Rave.

And the effective tax rate for 2023 was 21.9% compared to 20.1% in the prior year due to lower benefits from employee stock-based compensation in the current year. Turning to our cash flow. Q4 operating cash flow was $1.2 billion, driven by higher earnings, partially offset by higher cash taxes. And for the full year, we generated record operating cash flow of $2 billion, and record free cash flow of $1.8 billion. The increase was driven by higher earnings, partially offset by higher cash taxes. Capital allocation for 2023 included $804 million in share repurchases, $589 million in cash dividends and $253 million of CapEx. Additionally, during the quarter, our Board of Directors approved a $2 billion increase to the share repurchase program and an 11% increase in our dividend, which is the 13th consecutive year of double digit increases.

Moving next to segment results. In the Products and SI segment, Q4 sales were up 4% versus last year, driven by growth in LMR and Video. Operating earnings were $567 million or 30.0% of sales, up from 28.4% in the prior year, driven by higher sales and lower direct material costs. Some notable Q4 wins and achievements in this segment include a $90 million P25 system and device order from a US customer. A $67 million P25 device order for emergency services telecommunications authority in Australia. A $57 million P25 APX NEXT devices order for a US customer. A $38 million P25 system order for the State of Arizona Department of Public Safety. A $31 million TETRA system order for a European customer. And a $13 million fixed video order for an international customer.

And for the full year, Products and SI revenue was $6.2 billion, up 9% from the prior year, driven by higher sales of LMR and Video. Revenue from acquisitions was $15 million and currency headwinds were $19 million. Full year operating earnings were $1.5 billion or 24.3% of sales, up from 20.5% in the prior year on higher sales, inclusive of higher ASPs and lower direct material costs. In Software and Services, Q4 revenue was up 7%, driven by growth in Video, Command Center and LMR. Revenue from acquisitions was $15 million in the quarter and FX tailwinds were $11 million. Q4 operating earnings in the segment were $303 million and operating margins were 31.6%, down from 34.4% last year, primarily driven by the Airwave revenue reduction related to the price control.

Some notable Q4 highlights in the segment include a $330 million LMR managed services renewal through 2034 for Denmark’s nationwide public safety communications network. A $48 million Command Center order for the city of Chicago’s Office of Public Safety Administration. A $20 million LMR service agreement for Spokane Washington Regional Emergency Communications and a $19 million mobile video order from a US customer. And finally, a $10 million command center order for the city and County of San Francisco. For the full year, revenue was $3.7 billion, up 10% on growth in LMR services, Command Center and Video. Revenue from acquisitions was $83 million and currency headwinds were $19 million. For the full year, operating earnings were $1.3 billion or 33.9% of sales, down 140 basis points versus the prior year, driven by the Airwave revenue reduction and higher acquisition related expenses.

Looking next at our regional results. North America revenue was $2 billion in Q4, up 6% and $6.9 billion for the full year, up 9%, driven by growth in both segments and across all three technologies. And in international, Q4 revenue was $832 million, up 3% versus last year, driven by growth in Video and LMR. And for the full year, international revenue was $3 billion, up 11% versus last year, driven by growth in LMR and Video. Moving to backlog. Ending backlog for Q4 was $14.3 billion, down $88 million versus last year, inclusive of approximately $1 billion of backlog reduction related to the Airwave price control and revenue recognition for Airwave and ESN. Sequentially, backlog was down $15 million, inclusive of the Airwave and ESN reduction and $160 million of favorable FX.

In the Products and SI segment, ending backlog was up $93 million or 2% driven primarily by strong demand in North America. Sequentially, backlog was up $99 million, also driven by demand in North America. In Software and Services, backlog decreased $181 million from last year and $114 million sequentially. Excluding Airwave and ESN, Software and Services backlog was up almost $800 million versus last year, driven by strong multi-year agreements in both regions. Turning now to our outlook. We expect Q1 sales to be up approximately 8%, with non-GAAP earnings per share between $2.50 and $2.55 per share. This assumes a weighted average diluted share count of approximately 172 million shares and an effective tax rate of approximately 23%. And for the full year, we expect revenue growth of approximately 6% and non-GAAP earnings per share between $12.62 and $12.72 per share.

This full year outlook assumes a weighted average diluted share count of approximately 171 million shares and an effective tax rate between 23% and 24%. Additionally, we expect another strong year of operating cash flow with 2024 expectations of $2.2 billion in operating cash flow. And before I turn it back to Greg, I wanted to share some additional highlights. First, I want to give you some color on the technology growth expectations that are included in the sales guidance for the year. In Video Security and Access Control, we’re planning for 10% growth, which is informed by the acceleration and strong adoption of our cloud offerings. For Command Center, we also expect 10% growth consistent with last year’s organic growth rate. And in LMR, we expect to grow mid-single digits or high single digits when normalized for the impact of the UK Home Office.

Second, I would like to share with you some exciting updates about our Video business, in light of two recent partnerships that support our growth expectations, one with Jabil and another with Google. With Jabil, we’ve entered into a strategic manufacturing agreement where Jabil will assume responsibility for our manufacturing operations at our sites in Canada and Texas. This agreement further optimizes our video supply chain, provides redundancy, future cost savings and scalability. Additionally, it allows us to focus on engineering, designing and bringing to market video solutions that serve our customers’ security needs, while continuing to enable regulatory compliance with NDAA rules for the procurement of secure equipment. And with Google, yesterday, we announced a new strategic agreement with Google Cloud that harnesses the power of their latest cloud advancements to enable assistive intelligence, such as accurate and reliable video content, mapping and other AI capabilities.

Google Cloud also enables Avigilon Alta, our fast growing cloud native fixed video and access control platform, which we introduced a little more than a year ago. Alta combines the power of our AI analytics with the ease and simplicity of a cloud delivered VMS that is increasingly preferred by some verticals like education. The rapid adoption in Alta contributed almost a quarter of our growth last year to total video and includes a higher subscription attachment compared to a traditional Avigilon Unity sale. And finally, we ended the year with a very strong balance sheet, including $1.7 billion in cash, a fixed rate balance debt maturity profile and our net debt to EBITDA ratio of 1.4 is our lowest since 2015, providing us with ample flexibility to continue to deploy capital and drive shareholder value.

I’ll now turn the call-back to Greg.

Greg Brown: Thanks, Jason. First, 2023 was a phenomenal year for the company. We achieved [Technical Difficulty] significantly expanded operating margins, grew earnings per share by 15% and generated record operating cash flow of $2 billion. We also returned $1.4 billion to our shareholders through dividends and share repurchases and we strengthened our Video Security portfolio with the recent acquisition of IPVideo. Second, this past November, we announced our new brand narrative, solving for safer. This reflects our purposeful transformation centered on public safety and enterprise security and our sharpened focus on solving for safer communities, safer schools and safer businesses. Our solutions across LMR, Video Security and Command Center that are powered by artificial intelligence enable collaboration between public safety agencies and enterprises, connecting those in need with those who can help.

And while we recognize technology is not the only way to a safer future, it does play a vital role. And finally, as we enter 2024, the momentum of our business remains strong. Funding for public safety continues to be a priority. Investments we’ve made in the portfolio, including our APX NEXT device. And by the way, the software applications that run on this device are driving higher ASPs for our products and strong growth in Software and Services. We’re also seeing a noticeable acceleration of cloud adoption in Video Security that is driving margin accretive revenues in Software and Services. And with our exceptionally strong balance sheet, we have the opportunity to continue to deploy capital to drive long-term shareholder value. I’m extremely pleased how we’re positioned and I expect 2024 to be another year of strong revenue and earnings growth for our company.

I’ll now turn the call back over to Tim.

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, please remind our callers on the line how to ask a question.

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Q&A Session

Operator: [Operator Instructions] The first question is from George Notter with Jefferies. Your line is now open.

George Notter: Hi, guys. Thanks a lot. I have a question on the margin expansion in the business. I guess I wanted to ask about what kind of headwind you guys still had running through the business in 2023, I’m thinking about things like expedite fees and even freight costs. I know that a lot of those fees didn’t come out of the model until you guys had burned down some backlog. So I guess I’m wondering how much of the headwind was in the 2023 numbers and then I assume that’ll be all out fully for the 2024 year. I’m just kind of wondering what kind of benefit you might get on margins there. And then just as a follow-up, second question was just on Silver Lake. I’m just curious about, is there any update there and what those guys might do? And how might you kind of fund the unwind of that position? Thanks a lot.

Greg Brown: Yeah, George. So just to reconfirm, we do expect operating margin expansion for 2024, that’s in part by informed continued improvement in PPV. And I have to complement Jason in the supply chain and Jack’s ops team did a great job exceeding what we set out as targets last year. And to remind you, we are expecting another $60 million of PPV improvement in this year in ’24. From a gross margin standpoint for the firm, we expect them to be comparable to slightly up. So I think we do a pretty good job on the operating leverage side of this business, both on gross margin and operating margin. By the way, the OpEx envelope year-over-year is probably going to be up about $80 million, ’24 over ’23, of which half is organic, $40 million, and $40 million is inorganic.

As it relates to Silver Lake, really no update. They are in the final year of the second five year pipe. It expires in September. The diluted share count is already calculated into our EPS expectations. So really nothing to report at this point. The partnership remains good and we’ll see how that plays forward for the balance of the year. By the way, we do expect — on the expiration of the pipe, we do expect higher interest expense this year to be about $40 million, which includes the assumption of $1.3 billion of refinancing, of which $1 billion is the Silver Lake notes and $300 million is debt that expires in September this year.

George Notter: Great. That’s helpful. Thanks very much.

Operator: The next question comes from the line of Tim Long with Barclays. Your line is now open.

Tim Long: Thank you. Just wanted to get little bit on the top line. Maybe, Greg, for you. The Q1 guide looks — it looks pretty strong. But the full year is a little bit lower on growth. So maybe can you talk about visibility or what you’re kind of expecting in the back half of the year? Is it just compares conservatism or anything else we need to be aware of that little discrepancy in growth rates? And then, I did want to secondly, follow-up on the video, 10% growth. I mean, obviously the numbers are getting bigger here, but can you kind of put that in context of where you are with share gains and getting into — deeper into the government verticals and getting some benefits this year from ARPA funding say on Safe Schools and other areas. If you can just put that into context with some of those drivers, that would be great. Thank you.

Greg Brown: So let’s take the full year first. I think it’s important to say that I’m super proud of last year. But to your point, as we’re sitting here in February, backlog is strong, but Tim, so is the pipeline. So we’re in a good aged backlog position but the pipeline remains strong as well, which makes me feel good about where we sit here for the balance of the year. I’d also tell you that when we think about the full year guide, it’s coming off of a Q4 that exceeded our guidance. It’s coming off of a full year that exceeded our guidance. And if you anchor it to the color I gave last time at about $10.5 billion, it’s about $75 million higher than that reference a quarter ago. Now having said all that, so we guide for full year 6%, I remind you that $200 million is a headwind related to the UK Home Office.

So year-over-year, we expect Airwave revenue to be about $375 million. But if you take year-over-year, you add in the $200 million full year UK Home Office headwind that can normalize the year-over-year comparison. Additionally, one other thing worth mentioning is and Jack talked about this a quarter ago, we had exceptionally strong revenue contribution from Ukraine of $150 million last year. And based on what’s expected to be shipped in backlog, we expect that to be $50 million. So you take the year-over-year 6%, you take $200 million detriment for UK Home Office headwind, you normalize for Ukraine and I think our growth is quite solid and a prudent guide at this point in time.

Jason Winkler: One other insight into the video growth of approximately 10% this year. Within that, we’re really pleased with the cloud growth that we’re seeing. Alta which we talked about on the call, the platform is, which is cloud native is growing exceptionally well. We’ve also made a decision to rationalize some of our on-prem VMS. And the combination of that growth rate in ’24 and rationalizing the VMS is about $40 million of impact in 2024. So we’re continuing to grow. And, Jack, do you want to talk about the market and how we’re doing in Video?

Jack Molloy: Yeah. Tim, I’d also dimensionalize both — Jason alluded to it, both in script and his comments, clouds growing, but we also — our expectations are also that are on-prem but business is very healthy, continues to grow. As it relates to share, we believe, we’re — continue to take market share. You also asked the question, Tim, in government. Total government video sales that encompasses both mobile and fixed video are now at $500 million in 2023. And I would highlight our government video growth, it’s growing faster than our overall total business. So I think — I don’t think it’s being driven at all by our — but I think it’s being driven by prioritization and really building more and more efficiency and mobility within police forces as they have to contend with more and more crime.

Greg Brown: Tim, one other thing, just because we’re still to George’s question weaning off PPV, and we’ll have some commensurate benefits this year. If you take last year and this year, as we’re working through the supply chain and elevated inventory and an improved freight in PPV, if you look at first half and second half, Tim, to your point about guide and linearity, it’s very similar to last year. So I’m not concerned about anything as we sit here with our expectation for the full year performance.

Tim Long: Okay. Thank you very much.

Greg Brown: Thanks, Tim.

Operator: The next question comes from the line of Matthew Niknam with Deutsche Bank. Your line is now open.

Matthew Niknam: Hey, guys. Thank you for taking the questions. One question, one follow-up. So just on the supply chain, I think this was alluded to a little bit, but just if you can give any more color on the latest you’re seeing there and any noticeable impact from some of the disruption we’ve seen on the Red Sea front, if that’s impacted you guys at all in terms of costs. And then secondarily, can you just talk a little bit more about the Jabil agreement, strategic rationale there and any cost implications we should keep in mind? Thank you.

Greg Brown: I’ll answer the second one first. The Jabil agreement is for them in 2024 to operate the two factories that will be transitioning to them. So not a significant change in cost profile in ’24, but as we look to ’25, with our growth expectations, there’ll be opportunities for cost as well as an efficient way to scale the growth that we’re expecting. So it was an agreement and us looking into the future and we’re very pleased with it and providing us additional redundancy as well. It will help us scale, grow and also manage our cost envelope as we grow.

Matthew Niknam: And the Red Sea?