Motorola Solutions Q1 2024 Earnings Call Transcript

Yes. Tim, on Video, pleased with the results in Q1. As you know, we remain convicted around the 10% for the full year. We did talk about last quarter that we are seeing an increased adoption to Avigilon Alta and cloud adoption. We talked last quarter and it remains unchanged. That's probably about -- probably a $40 million estimated headwind in terms of the top line growth number that informs the 10% but feel very good about [Technical Issues] orders for video were strong, both in fixed and mobile.

And Tim, on the second part of your question, you're right, software within video is growing faster than the product side. That's a trend we've been seeing. And keep in mind, it's not just Alta, it's all of the exciting developments that we have around analytics. Both of our VMSs, our software products are recorded there. Mobile video is also there, all complemented by cloud subscription. So that's a very important and fast-growing part of our business. Now the LMR piece.

Yes. I think -- look, I can't be more pleased with the performance of LMR products and services. And Jack talked about the continued strong demand last quarter, it's the same as this quarter. In terms of APX NEXT, as an example, a lot of customers are indexing and in Q1 indexed to more feature-rich devices which helped drive revenue and quite frankly, Tim, margin expansion. But I'd actually -- I think the way to think about LMR growth is APX writ large, the entire segment for APX Radio. They're newer.

They've been upgraded. We talk about APX NEXT, which is the very high end, but the whole portfolio which we also talk about APX Originals performing exceptionally well. And then when you go over to TETRA and PCR, where we've refreshed devices there as well, that's gone very well. In fact, PCR, we now expect to grow slightly up off of record levels last year. So I'd say we're still in the middle of the game on device refresh with a lot more to run. Really pleased on that front.

The only thing Tim I'd add on top of that is, as just Greg pointed out, it's the breadth of the portfolio is a strength. But what's particularly driving the APX NEXT adoption are the applications. So in the quarter, in Q1, we secured two large state patrols as well as on Department of Transportation, as you think about what drives those, it's location. It's the ability to extend the network vis-a-vis SmartConnect and Smart Programming with large fleets, their ability to reprogram and the like in a more expeditious fashion, so.

Jack, you've seen customers embrace a blended fleet too.

Exactly, right. In fact, all three of those customers have APX Original and like a third of those are APX NEXT.

Good point.

Yes.

Yes. Thanks, George. So we recorded the backlog of the extension of years 2027, 2028 and 2029, because in March, we received notice from the UK Home Office for the extension of Airwave. Aside from our disputes, let's put that off to the side for a minute. I think it confirms our belief all along in the durability, longevity and quite frankly, criticality of mission-critical LMR, particularly in this case, Airwave.

So it reaffirms the long-standing need of how critical that technology is, and that's one of the best performing from a network performance standpoint, emergency networks in the world. To your point, we took the backlog and recorded it at kind of worst-case scenario, i.e., it's logged -- the log backlog is at the charge control rates, which we are still contesting.

As it relates to the Court of Appeal, we -- the CMA issued their final decision. We appealed to the CAT, the Competition Appeals Tribunal. We lost that. And as a result, appealed to the Court of Appeal, the UK Court of Appeal to see if they'll hear that case. We would expect to get clarity on that either in May or June. But having said that, we will continue to defend our position on the circumstances and conditions that extended Airwave, and we will defend ourselves accordingly.

No. No. I think the UK is very, very unique in many ways, but the answer is no.

Thank you, George.

Our view on the full year and what's informing our raise does not change from what we updated you on the Ukraine situation last year. We did talk about $100 million, Jack referenced that about $100 million headwind. By the way, that headwind still exists. It's primarily in the second half of this year, which informs kind of the seasonality that's implied in both Q2 and our full year guide. By the way, we remain in game, I'm thrilled. We're thrilled that the Foreign Aid Bill got passed for $95 billion and Molloy's team remains actively engaged on multiple fronts. But our view in terms of the full year guide is unchanged from what we said last time.

Still very enthusiastic about Command Center overall as a category. We still expect 10% growth for the full year. By the way, I might add that remember, ESN in the way we record revenue was in the Command Center technology bucket. So Q1 would have grown handsome double digits normalized for UK Home Office. And quite frankly, when you look at the 10% guide implied for Command Center for the full year, it's a number higher than that when you normalize for ESN as well. And you may want to mention just some of the other things going on.

We just actually finished our summit. This has been our largest summit, I think, ever, over 1,300 customers attending. We launched our VESTA -- refreshed products, both for cloud and for on-prem, along with quite a few other new launches or responder, our mobile app. So it's been -- traction has been amazing, and we see greater than 60% of our Command Center customers now adopting a cloud connected product and Rave and our other Command Center cloud products are doing exceptionally well beyond expectations.

Thank you.

Sure. So I'll take the first one. We remain seeing the $60 million of lower broker costs, we call the PPV that we guided to 90 days ago. That's a full year number. Q1 included some of that benefit. There's more to go in getting to the total $60 million. We're on path for that. We are seeing certainly the need to use far less and the supply improvements from our direct vendors are helping us get the parts we need at the price we need.

That's in part what informed our Q1 as well as our expectations for the year, complemented by the continued strong demand. So on plan in terms of the margin improvements related to lower supply chain costs, I would also point to what we talked about on the call is the continued benefit of customers adopting more feature-rich parts of the portfolio. That comes with a margin improvement for us as well.

And in terms of margins, we -- by the way, this year, we do expect gross margins to be up slightly, and we also now expect operating margins to be up about 75 basis points. As we think about it holistically and kind of on a pro forma basis, we think the levers of volume mix, which we're enjoying now, some surgical price increases, primarily around services, where we have contracts that have appropriate cost of living mechanisms built into multiyear services contracts. And as they come due we will be disciplined in making sure we're recovering appropriate cost increases that come and hit the firm.

We look at the way we price new product as well and we continue to refresh the device portfolio and also fixed and mobile video. And then opex. By the way, opex probably will be up about $100 million this year, year-on-year. Last quarter, we told you it was about $80 million. That $20 million increase, actually, I think it's a good thing. We're investing more in the business, indexing particularly around video.

We're likely to have some higher incentives around sales commissions, reflective of the higher revenue guide we're giving you for the full year. And there's some ancillary legal costs, which I actually consider investments in the business as we defend our position, both with the UK Home Office and continue to fight the good fight on Hytera and we'll report hopefully more news between now and the end of the year on that front.

And the other thing I'd tell you on the opex side, as you know, we acquired Silent Sentinel. Given the balance sheet, the aperture is pretty wide but disciplined on acquisitions we may pursue and close. And if we do that, we do that because it's financially accretive, it's strategically important. It's culturally compatible, and we can operate it or operationalize it and integrate it operationally, but also because we expect synergies on that front, too.

We are built, I think, as a team, an executive team and as a company, that growing is not good enough. You've got to grow top line, you got to grow margins, you got to grow operating cash flow and you got to take share. That's when you know the firm is cooking on all cylinders. And we always look at operating margins. We're proud of them, but we know the there's more work to be done.

And by the way, I didn't even mention AI. I know a lot of companies tout it, but we'll be disciplined in our use of that internally, the Mahesh and Jack have built it into a lot of our products in the analytics that Jason mentioned. I love what we're doing, descriptive and Generative AI as it relates to the ecosystem, around public safety and physical security.

But obviously, we'll also use it in customer service internally in legal and contract management with copilot and engineering efficiencies. So that really isn't factored in at this point, and I'm not making any declaration of promises, but we'll always be able to, I think, aspirationally drive toward operating margin improvement. And I think we have the assets where we can continue to do that.

So Adam, I mentioned it earlier, if I -- if we exclude the Home Office impact on a multi-quarter basis, total backlog is up over $500 million and S&S backlog is up over $600 million. So while we recorded the $748 million in this Q1 related to the extension of years 2027, 2028, 2029. We also in the quarter before that, reduced the backlog related to the pricing control implemented for years, 2024, 2025 and 2026. So they're a bit of a cancellation, if you will, and then the core of the business at Home Office is absolutely growing.

I will pause for a few seconds to see if we have any additional questions. 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.

Yes. Thank you. First and foremost, I want to thank the Motorola Solutions employees around the world and our channel partners. It's a great team, very proud of the performance in the quarter and very proud of what I think we can do between now and the end of the year. I do want to highlight, we had some great significant events in Q1, Mahesh mentioned one of them, the Solutions Summit in Dallas. A week ago, we had 1,300 customers. It's the largest ever event we had on that front. We demonstrated operational working public safety an enterprise security ecosystem. It was significant, well attended and lots of good feedback.

We had our first-ever joint channel partner -- executive partner forum, in February, in Orlando. The significance of that is it brought together LMR, Land Mobile Radio channel partners and Video Security and Access Control under one roof with common vernacular, common language, relationships we're looking to develop. And Molloy's had this mantra cross-sell, upsell.

I thought that was an excellent event that was a catalyst to kind of culture and focus items we need around upselling the writ large broader portfolio between now and the end of the year. And we had a great presence at ISC West, which highlighted, of course, Video Security and Access Control, rolled out our enterprise body-worn camera, which we're getting great traction on body worn on the enterprise. So a lot of good stuff in Q1. Look, at the end of the day, the print is great in Q1, but I'm actually more excited about our momentum, raising the year, strong backlog, but also strong funnel of opportunity and a strong balance sheet couldn't be more proud. I want to thank everybody. Thanks for listening, and we'll talk to you in a quarter.