Q2 2021 Motorola Solutions Inc Earnings Call
The effective tax rate of approximately 22%.
Now I'd like to turn the call back over to Greg.
Okay.
Thanks, Jason I thought I'd end with a few thoughts as we conclude the call first our results for the quarter were excellent. We achieved Q2 record sales operating earnings and EPS expanded operating margins grew our video security technologies by 66%.
And achieved strong growth in LMR and command center software technologies as well. Additionally, we finished the quarter with record Q2, ending backlog and a robust pipeline that we expect to drive growth for the remainder of the year inclusive of the continued supply chain challenges that we're navigating primarily in <unk>.
Sure.
In video security demand remains strong we've continued investing in this area even during the early days of the pandemic and these investments have positioned us well to capture the increased demand. We're now seeing from our customers. Additionally, we just announced our acquisition of open path a leader in cloud based access control.
Solutions open path is disrupting the access control industry and extends our value proposition in the $15 billion video security market.
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Our first question will come from Tim long from Barclays. Please go ahead.
Thank you maybe just the 2.2 if I could first could you touch a little bit on the the command center software side maybe.
Maybe just give us a little update on how you're penetrating.
The peace apps and how the kind of the sweet sales are going with more than more than 1 or 2 software modules.
To the customer base and.
And then the second on the video side, just looks like there's been a lot of traction wins internationally on the body worn side can you talk a little bit about the U S market where.
Over the next few years, maybe there'll be more more bids coming up. So can you just talk a little bit about how you could further penetrate the U S market there. Thank you.
[noise] Yeah on command center of software, we continue Tim to make good progress our growth rate in queue too.
Increasing over Q1 of the penetration of new customers also continues to expand.
From a sweet standpoint.
I think the number of customers in queue to ordering the sweet is comparable of too about the 25%.
We stated last time of quarter ago, but we continue to make solid progress mulch.
Multiple fronts on the command center software slide and overall I think I'm pretty pleased.
Tim Ed Jack Hello, just maybe just the follow on to that I think the other thing as it relates to command Center software just from from an environmental standpoint, I think there's some excitement both with our sales teams that our customer of engagement just in terms of our we have of non Prem solution that were actually have a path to the cloud for customers I think being able to meet them for where they want to be will be.
That stronger growth is driven primarily by video, but also by LMR in Q2 P. C. R had a great quarter strong double digit growth, but it's also the area is Jason reference that's probably the most supply constrained so if I think about.
Out Sam of your question about expectations for P. C. R growth over the full year I I'd like to think about it is mirroring the mid to high single digits for the product and S. I segment. Overall Q2 was much stronger than that but in the second half we have to continue to navigate.
Supply constraints, and that's informing our expectations and guidance for full year P. C. R.
An open path, it's not profitable for the remainder of the year of full year. The stub revenue period, it's probably about 5 million of incremental revenue in the second half of this year. The last 5 months and it's a nickel diluted but having said that I'm Super excited by this act.
Physician I think it's I think it's leading edge around cloud based multifactor authentication access control I love the products I Love the architecture I Love the management team and the leadership team and the Haitian was instrumental.
In guiding this along with Raj and John because they're of ski and couldn't be more pleased with it I don't know if you want to mention anything the hasty about it.
Within the of vigilant portfolio of we've always had access control access control. In fact has been 1 of the fastest growing product portfolios within of vigilant. It is an on premise solution. The on crammed solution connects to a third party readers controllers and panels is appropriate.
We are open path is going is really of mobile first approach and of cloud native approach the use of experienced that'd be see in the future for access control is 1 where authorized users never realized with the doors locked in the first place. It's frictionless. It is contact lists and from that standpoint.
Open path complements our of Vigilance X control Swedish unwell and together I think we have a good solution going forward.
And just last item on the revenue asked it's about 5 cents dilutive the EPS this year and 5 and $5 million in revenue in the second half.
Perfect. Thank you.
Our next question will come from met of martial with Morgan Stanley. Please go ahead.
Hi, Tim This is Eric I'm for me the thanks for taking a question and congrats on the other great corner, maybe sticking out of some of the video side. When we think about that large federal day, only 1 or the other federal deals in the pipeline you're looking at now is that an area, where you know demand is picking up with a lot of of the federal funding and.
Things, we talked about last quarter.
Just just wondering on that and then maybe if we could also talk about the enterprise side and and if open packed of you know open more opportunities in enterprise piece of it looked like their presence was probably stronger there some of anything on that thank you.
Sure hair. So I think the starting out is are there you ask the question are there more big opportunities of the federal government, Yes, I would tell you the federal government.
Is ripe with opportunities.
There's opportunities.
By way of the the N D. A there's opportunities that are go to market teams of created also the palco acquisition. If you recall from a year ago had federal contracts in place of theirs opportunities there so the.
The federal government is part of the overall government market is 1 of the 1 of the 3 largest growth vectors for us and fixed video.
The second part of your question I believe Eric could you just repeat it was the second part of that enterprise 600 price. Yeah. So just a reminder of our video of security and access control business is still really roughly.
70 to 70 per cent of 3 quarters of enterprise. So open path is mahesh very eloquently alluded to well I think we will accelerate converge opportunities between video security and access control of our customers more and more COVID-19 taught us that they want the ability to remote monitoring networks. They want frictionless access.
Roll I think the marriage of those 2 things together will only open up more and more doors in the enterprise force and Eric a quarter of go Jack talked about fixed video government revenues being about 300 million me, maybe a little bit more I think as we sit here today the government contribution for all and video revenue is key.
Closer now to $330 million to $340 million of revenue.
And again the demand we see is really strong we had 66 per cent growth in queue to about 40 per cent of that was organic.
And again informing our full year raise we now expect video security technology to be we said it was 20 per cent plus we now expect the approximately 30% with organic growth being a little bit more than 20 per cent of that so really good performance by the whole portfolio.
Awesome. Thank you.
Our next question will come from George <unk> with Jeffries. Please go ahead.
Hi, guys. Thanks, very much I guess I wanted to I wanted to ask about the supply chain constraints. It's obviously a recurring theme touring season here, but could you talk about what kind of revenue impact. It might've had this quarter and then also the margin impact and then how do you see that going forward. Thanks a lot.
Thanks for the question so uhm the supply environment that we've been navigating all year is primarily around LMR and as Greg mentioned, specifically most around P. C. R. R.
Our supply situation didn't improve incrementally in queue to and in our guidance for the second half we've contemplated Ah continuing to have to navigate supply chain related constraints. Those are factored into our our full of your guidance and our second half. So we expect to have to navigate through them were.
Working with key suppliers of handful of suppliers handful of critically important parts, we're making progress. The teams are doing well, we have executive relationships that are helping us prioritize and our suppliers recognize that our equipment is critically important the first responders. So we have good success.
And getting prioritization on the cost side.
Despite the challenging environment.
We have not seen material input costs rise significantly in the first half of course, we plan every year from material cost reductions those are becoming more challenging to achieve.
That said, we didn't see a big.
Material cost driver in the first half will navigate through some small increases in the second half 1 area and the piano that we are absorbing higher cost is Frank.
If you control for the volume and the growth that we've had we're seeing rate increases where by the first half absorbed $20 million more than would have been the expected higher growth, which is the reflection of higher air freight the shift to shorter supply chains elongated lead.
Times et cetera, which were navigating so that's where we've seen the 1 input costs rise as in Frank Yeah, and just to put a bow on it George I think the what's informing our full year raise for the year as demand not necessarily any improvement in supply chain, although as Jason just talked about.
I think he and his team did a very nice job in hand to hand combat.
Working through queue to but we have our work to do with key suppliers for the back half of the year again. This is primarily around P. C. R. But I think that view is contemplated into our our full year guidance.
Got it and then Greg real quickly you mentioned the raise on on expectations for the full year I think you're getting a tailwind from FX here certainly you had some in the queue to I'm not sure how much of that was already in the plan but.
Feels like you're gonna continuing to get some benefit is that part of the full year raise on guidance or or no.
Not much.
The FX benefit when you take a look at the full year was much more waited to the first half.
So that's not really driving it's of component, but it's not as much.
Pleased to now of approximately 30% for video security technology of which over 20 is organic is driven by new product investment. We'd also talked about new product apex next we're continuing new product on command center software, both premise and cloud.
New product investment Inorganically with cloud based access control so.
High level, Paul again, there's a lot of work to do and.
And we want to be easy in the saddle and the second half and navigate these supply chain challenges, but there's a lot of positive that I see Paul.
The parts of our business that are less backlog driven for example video.
It's about pipeline, it's about execution within the quarter and the 40% organic growth in Q2, and our outlook for now 30% growth for that business on the year is a function of higher pipeline as well.
Executing and delivering within the quarter on that part of the business.
All of the only thing that we've seen.
Alright.
The Paul the other thing we've seen is that we saw a lot of our competitors furlough selling resources. During COVID-19, we actually continue to put the pedal to the matter of hired more particularly in the video security space and as we look back in that 12.9 months. After the fact, we think without a doubt that's created a great opportunity and it has created our ability to take market share.
In that space.
Can I just follow the math.
The massive amount of federal or Jeff.
That's on the docket, albeit not yet perhaps may not pass.
Customers are first responder agencies already talking to you about allergan funds or the waiting for the absolute dollars of flow.
So Paul what I would say is so think of this think of government money in 2 buckets, there as well.
We don't even talk about the cares act money anymore, but by the way Cares Act money was available last year that we benefited from and it's available through the end of this year that we're benefiting from I would say that the results. We've printed so far largely don't even include the stimulus money that I just articulated.
Which is $350 billion of state and local 170 billion in education 38 billion of airport in transit et cetera, but those conversations to your question Paul are absolutely.
The beginning to take hold with our go to market.
Sales organization for both this year and multi year planning.
Got it alright I appreciate the responses. Thank you.
Thank you Paul.
Our next question will come from Louis Dipalma with William Blair. Please go ahead.
Greg Jason the Haitian Tim good afternoon.
Hey, Louie.
Okay.
Greg can you talk about the prevalence of the access control market for the education vertical specifically it seems that you've invested a lot of them for the education vertical with a vigilant and that security with access control has.
Increased in importance with.
The multitude of gun unrelated incidents is this a major opportunity for Motorola and do you <unk>.
<unk>.
Continue to be acquisitive in order to grow your share of the access control market.
The Louis it's Jack I'll start and I think the hassle of some things to add to my comments. So first of all Hi, Jeff Education.
How are Ya education is 1 of our top.
Our second largest vertical in terms of growth right now in video security and access control.
Front and center to what every school Superintendents School safety director is thinking about is safety of their kids.
We've talked about the convergence of video security and access control, but Theres also the ability of the converged 2 way radio through our safety re imagine platform that were selling the schools of Greg just talked about the federal monies that have been that have been pointed to schools.
It is historic in terms of schools 1 of the biggest problems. There always had there is interest, but there isn't funding and now we've got interest.
Married with funding. We also put together of specialized sales team that just talks to school superintendents every day and we think that overlay team has helped us kind of accelerate opportunities. The has from a technology standpoint is there anything you would add.
I think the only out.
There is.
We just launched our Motorola solutions concealed weapons detection solution, which is a key part of the story.
When you think about it in the context of access control. It's not just who are you are you authorized to be there, but also what risk you pose. So this complements our access control solution really well.
Great. Thanks, Thanks, everyone.
Thanks Louie.
Our next question will come from Trevor Bowers with Northcoast Research. Please go ahead.
Hi, guys congrats on the quarter and thanks for taking my question you mentioned on the last call and also earlier today that it looks like you're taking share in the body worn camera market. What would you say is driving the success in that space.
So I think first of all customers want an alternative.
It's been a market primarily led by by.
By 1 company they.
They want an alternative but I think in public safety trusted relationships matter, we've been in business for as you know over 90 years, we've got trusted relationships throughout the state and local market.
We also.
The bear the advantage of having a very large international footprint and we think that's obviously been beneficial to us as well.
We've got things, we're working on in terms of new products. Both in terms of body worn cameras in terms of income solutions, but again, we think it's a it's an area of around police transparency and accountability that will continue to get focus and funding and we think there's an opportunity for 2 players in the market and we're capitalizing accordingly.
Maybe the 1 other thing.
Sorry.
Maybe the 1 other thing that I would add as Jack mentioned this previously.
Meet our customer's needs, where they are and so having both an on premises solutions along with the cloud solution really matters here as well and that's the other reason we win.
Okay, Great and then what's the.
Sort of long term impact would you say of the pandemic has had on Motorola is go to market approach. For example, do you expect there to be less travel.
Entertainment spending in the future or maybe more efficiencies of the results of the new sales and delivery methods, how should we think about that going forward.
Yeah, Great question think pivot to digital I think digital marketing and our spend to try to get customers, particularly customers that of latent needs that we may be unaware of that's 1 we've pivoted to continue to grow our inside sales force not only in the U S. But abroad. We think that's critically important and we've also just become more efficient in terms of the.
Not only our frontline selling teams, but our all powerful sales engineers, how do we get more leverage and get more tactical acumen in the moments that matter with our customers and thats truly been something that we've pivoted too.
With all of that said.
What we do are fairly large scale enterprise or government sales and it's going to take some face to face engagement. So we're still going out and seeing customers, but we've just driven of even more efficient and we don't think of it as much about time traveling and selling time that was the legacy way to think about it we think about and I measure of our teams in terms of engagement time, now and so thats really what <unk>.
We've seen the pivot.
Yeah.
Okay, great. Thanks, a lot and congrats again.
Thank you.
Our next question will come from Ben Bollin with Cleveland Research. Please go ahead.
Good afternoon, guys. Thanks for taking the question.
Greg you've talked.
About the framing for demand for rescue plan enacted in the amount of money there.
What's your perspective on when you see the sweet spot of that spending if you think about your sales cycles and how it typically flows.
And do you have any thoughts on how it might be influencing customer behavior in the different segments Radio surveillance Command center.
So.
First of all thanks for the question I think the sweet spot.
Starts.
And I mean, just very early innings in the back half of this year and it's a multiyear run.
So state and local funding the $350 billion runs through <unk>.
December of 'twenty for the 38 or $40 billion per airports and transit run through 'twenty 4.
There are 7 billion plus for broadband connectivity.
That that runs through September of 30.
A long runway, so I don't necessarily think theres going to be of pop of the clutch quarter 4.
Multi month period, I think it's going to be strong and.
And reasonable reasonably consistent over the next few years I think it helps I actually think it helps across the suite of what we provide it helps LMR and public safety LMR, primarily of P 25, and the sustainability of multiyear service contracts.
Tracks that elongate these platforms that allow us to do subscriber and radio refresh like apex next over a multiyear period I think it clearly helps video whether it's fixed video ore body worn for state and local county municipalities, we talked about the benefits around.
<unk> and.
And quite frankly, I think money can flow around a 911 piece of <unk> Command Center software as well so I think it's Mike.
I think it's the lifts for all 3 hard to Dimensionalize, which 1 is more of a benefit but it's clearly favorably to the products and solutions.
That we have.
Ed.
I like the position.
And then a follow up Jason if I could.
You gave the disaggregation of the revenue on slide 13.
Could you talk a little bit about.
The way to think about how much of this is being recurring.
And also interested in if there is any variation in either average contract duration or how customers are invoicing the recurring business versus the traditional product type businesses.
Sure. Thanks, Ed So in terms of recurring or proxy for recurring is the segment that software and services, which I believe this quarter was 38% of total revenues.
That includes a lot of different varieties of recurring business, including service renewals.
Subscriptions et cetera, and.
That was up significantly in the has been growing as you know even during the pandemic.
And it's growing at a rate Thats fair.
The positive with earnings expansion at OE. This year, we believe now at 170 bps of OE expansion within the services software and services segment.
So not only growing but expanding profitability.
On the technology side from that same disaggregation, you can see that the.
Video is a strong driver.
As well as command center software and that LMR is performing well as well with up mid single digits.
Sure.
Thanks, everyone.
Yeah. Thank you Ben.
Our next question will come from from Fahad in the John with <unk> Partners. Please go ahead.
Thank you for taking my question.
So given the.
Favorable backdrop that you just highlighted.
Understood you correctly glad that the.
The most of the funding from 2020, the beginning to flow through right now, but Mike.
The programs like the <unk>.
The program of getting funding from.
That will pass of calendar 2020.
So yet to see.
The benefit of all of the E R and the.
The stimulus spending.
Why not take the opportunity to update us on the long term model. It clearly looks like your 910 model the.
The conservative you probably can make it 10 now given the expansion.
Operating margins from the favor.
Software.
Yes.
Fahad. Thank you so look.
This is the strong environment demand is strong and.
The environment is generally favorable but.
We are still in a pandemic.
And and we see that by the way popping up not just with the Delta variant and Ed.
And different policies within the U S, but we've seen it in supply chain, we've seen it in factories, we've seen it in other countries and we want to be prudent and mindful around the current environment that we're in.
And while demand is strong and funding is good.
And Theres a lot of reasons to be optimistic and encouraged we just want to be very mindful and aware of what we don't know and the uncertainty that I think is informing and incorporated.
Into the remainder of the full year I do think that there'll be time for hard over time to to update.
All of you in 2022 by the way I think that.
We're likely going to have an analyst day.
We're targeting doing that in Q1 of next year as we get through this fiscal year as we get through the.
The large implications of the pandemic as we get to a point, where hopefully the FDA gives general approval for the vaccine as we get to where many more populations and countries are vaccinated and heard the herd immunity is achieved and we just think that's a better environment to give an update at that point in time, so I'm not going to I appreciate your.
The interest and not going to.
Date, the model per se yet.
But I like we are positioned for the back half of the year and I think we've got some good momentum to build on.
Alright, I appreciate the answer I have.
Follow up question on 2 of our videos.
Thank you for disclosing the fixed government video was about 200 many of them.
Can you give us a sense on how big mobile is in.
And how you know how fast could that be growing.
In general it seems like it's growing even faster than your.
6 video access control business.
Yes, just 2 things video first of all the hot on the $300 million, we're now updating that today, where we expect the.
<unk>.
Video revenue to government customers now to be about $330 million to $340 million.
Talk about the addressable market of video security and access control of being about $15 billion by the way. That's the 2021 addressable market number that grows next year, that's inclusive of fixed video it's inclusive of body worn video it's inclusive of in car video.
And the commensurate Vms software and cloud based revenue. So it's an all in number remember with the acquisition of of Vigilance, which is fixed video the acquisition of telco fixed video the <unk>.
Acquisition of Indigo vision fixed video that fixed video is the predominant amount of revenue contribution within the technology disaggregation that we characterize just to give you. A reminder, at the total level of all video the rock split between what is fixed video and what is mobile video at the 1.
Plus the part of our business that this year is growing we believe at 30% this year and that's our.
The increased expectations of 70% fixed and 30% mobile.
Both are growing nicely.
Kidney care to share with us how fastest mobile doing as of late.
In the quarter, how fast 1 of it is it 515.
Yeah, I would just say this in terms of day.
Data points to remember Q2 was.
No its 66% of all in 40% of little bit more was organic.
And Jack talked about strong double digit.
60%, 65% orders growth for body worn so that's strong growth, which has driven us taking share in the first half.
Given that the market is looking for a viable alternative.
And our product performance continues to improve and when I look at the body worn video book of business and things like Malta or the UK or.
The French MRI.
It's pretty strong growth.
I appreciate the answer thank you.
Thank you Bob.
Our next question will come from Jim Suva with Citi. Please go ahead.
Thank you and great job executing through such of turmoil time of Covid supply chain issues and things like that looking ahead is it possible that as hopefully we get mass immunity and Covid, hopefully dies down and people return back to the office in meetings in person is it possible that you are.
Command Center business and installations could actually accelerate just because it's been so hard to meet with people and do testing and show all the bells and whistles of your solutions and also with the government stimulus is coming in or is that just not the way to think about how things could roll out from let's say the next year or 2.
Jim I would think about it.
That as we printed the first half of the year in Q2 and look at the second half and basically what you are describing as the trends I really see video security and access control of leading the way, which is why we are raising.
The technology view from what we thought would be of full year of 20% plus performance.
The 2 approximately 30%.
And Thats driving the segment guide products and Si from mid to mid to high. So I think if you're thinking about an anchor tenant.
Of incremental growth from current expectations of where we were I think it's led by video security and then the second area I'd actually say is LMR and those 2 areas are driving the increased momentum with command center software.
Paul It's our smallest component, we're still growing at greater than the industry rate. So I'm pleased about that but we also are offering both on prem and cloud.
And we've got organic worth to do on the internal development on cloud, but I think Jim looking forward. The I think the video security access control and LMR as being more of the incremental drivers from a trend standpoint.
Thank you so much and again congratulations to you and your full teams.
Thank you Jim.
This concludes our question and answer session I will turn the floor back over to Greg Brown, Chairman and CEO for any additional or closing remarks.
Thank you everybody listen.
I'm really pleased with Q2s results.
And the execution, we were able to achieve and I just wanted to take the opportunity.
To thank my team and to thank all of the people in the in Motorola solutions.
You delivered you produced you we're unflinching your resilient and I'm Super proud of you.
I think the other thing I'm proud of is we've continued to invest in this business we did it.
In the throes of Covid last year, Jack referenced it we continue to do that I think in part some of the benefits were able to demonstrate in the second raise of the year is driven by the ongoing investment decisions we've made.
The last 2 thoughts are I like our momentum.
I like the momentum as we enter the back half of the year, particularly pleased with the with the increased strength of video security, but I'm also proud of the fact that now approximately half of our revenue for the full year will be derived from video security and software and services.
And that's a much different composition and disposition than where we were several years ago. So I just want to thank everybody to my team I'm proud of you.
And we got a lot of work to do and we know what we need to do in the in the back half. So thank you.
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