Q2 2022 Motorola Solutions Inc Earnings 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 two hours. After the conclusion of this call the.
The website address is www dot Motorola solutions dotcom forward slash investor.
All participants have been placed in listening only mode.
You will have an opportunity to ask questions. After today's presentation.
We'd like to ask a question. Please press star one on your telephone keypad.
I'd now like to introduce Mr. Tim Yocum, Vice President of Investor Relations. Mr. Yocum, you may begin your conference.
Good afternoon, welcome to our 2022 second 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 <unk> Executive Vice President and CTO, Greg and Jason will review our results.
Along with commentary and Jack and Mahesh will join for Q&A.
Posted an earnings presentation and news release at Motorola solutions Dot Com Slash 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 in the comments made during this conference call in the risk factors section of our 2021 annual report on Form 10-K, or any quarterly report on Form 10-K, and in our other reports and filings with the SEC, we do not undertake any.
Duty to update any forward looking statements.
Turn the call over to Greg.
Thank you Tim good afternoon, and thanks for joining us today I'm going to start off by sharing a few thoughts about the overall business before Jason takes us through the results.
Our outlook.
First Q2 was exceptional across the board with revenue and earnings per share both coming in above our expectations in software and services revenue was up 11% highlighted by strong software growth and in products and Si continued record demand across both.
Land mobile radio and video led to 7% revenue growth and 17% orders growth driving increased backlog.
Additionally, we ended the quarter with record Q2 backlog of $13 4 billion up 19% versus last year inclusive.
Approximately $500 million of unfavorable currency impact.
Second our portfolio and go to market investments are continuing to drive meaningful growth across all three technologies during the quarter revenue was up 21% in both video and command Center software and we saw record Q2 orders in both of those technologies as well and <unk>.
LMR demand is growing for our high tier P 25, apex next device with customers embracing its unique ability to offer the must have reliability of LMR, while seamlessly leveraging broadband features such as remote programming network extension and location services.
And finally based on our Q2 record ending backlog and continued strong operational execution, we are raising our full year guidance for both sales and earnings per share.
At this point I'll turn it over to Jason who will take you through our results and outlook and then return for some final thoughts.
Thank you Greg revenue for the quarter was up 9% and above our guidance with record second quarter revenue in both segments. We saw strong growth across all three technologies led by over 20% growth in both video and command Center software and LMR, which grew 5% we were able to secure more critical parts, particularly.
Italy later in the quarter, which enabled us to ship more product acquisitions.
<unk> during the quarter added $34 million and FX headwinds were $44 million.
GAAP operating earnings were $358 million and operating margins were 16, 7% non-GAAP operating earnings were $497 million up $15 million or 3% from the year ago quarter and non-GAAP operating margins were 23, 2% down from 24, 4%.
The decline in operating margins was due to the higher semiconductor costs, we outlined on our prior calls related to acquiring critical supply in the secondary market together with higher freight costs and higher operating expenses related to acquisitions, partially offset by higher sales.
GAAP earnings per share was $1 33, compared to $1 69 per share in the year ago quarter. The decrease was primarily due to a discrete tax benefit recognized in the prior year and higher direct material costs in the current year.
non-GAAP EPS was $2 seven flat.
Flat versus last year, the higher sales and operating earnings generated in the current quarter were offset by the higher direct material cost I mentioned previously along with higher operating expenses related to acquisitions.
Opex in Q2 was $502 million up $25 million, primarily due to acquisitions.
Turning to cash flow Q2, operating cash flow was $10 million compared with $388 million in the prior year and free cash flow was a usage of $49 million compared to $326 million generated in the prior year.
In Q2, and the first half of the year, our cash flow has been primarily impacted by two items first our planned investments in inventory to navigate the dynamic supply chain environment and position us to fulfill the record demand, we're seeing in video and LMR second higher employee incentive payment.
That were tied to 2020 one's performance and paid out this year.
We expect our cash flow conversion to accelerate in the second half driven by higher profitability and a reduction in our current inventory levels. In addition to the normal seasonality of our cash conversion.
Capital allocation for Q2 included $162 million and share repurchases $132 million in cash dividends and $59 million of Capex.
Additionally, during the quarter, we closed the video acquisitions of Calypso for $40 million and video Tech for $22 million. We also issued $600 million of long term debt used a portion of the proceeds to retire $275 million, resulting in approximately $320 million of incremental debt net of fees.
Fees on our balance sheet.
In the products and Si segment, we continued to see strong demand across both LMR and video sales during the quarter were up 7% versus last year and orders were up 17%, including record Q2 orders for both LMR and video.
Revenue from acquisitions for this segment in the quarter was $14 million and currency headwinds were $19 million operating earnings for products and Si were $188 million or 14, 6% down from 16, 2% of sales in the prior year, driven primarily by the higher material costs and higher freight cost.
Previously mentioned, partially offset by higher sales.
We continue to expect full year operating margins for this segment to be slightly higher than 2021 as the impact from pricing actions accelerates in the second half.
Some notable Q2 wins and achievements.
In this segment include several large P 25 orders in the U S, including 32 million for a state of California Agency $27 million for Dutchess County, New York and $22 million order for the Georgia Department of Corrections. We also had a $26 million order for a P 25 solution with LTE integration.
For an international customer a $15 million Tetra order for a customer in Argentina.
And finally, we received two large fixed video orders a $9 million order for a customer in the health care vertical and an $8 million order for a large retail customer.
In the software and services segment revenue was up 11% with revenue from acquisitions of $20 million in currency headwinds of $25 million during the quarter.
Total software revenue was up 25% driven by strong demand in video and a large deployment in command center software while in LMR services revenue was up 5%.
Operating earnings in the segment were $309 million or 36, 1% of sales down 110 basis points from last year.
Driven by a change in year over year mix and higher M&A expenses, partially offset by higher sales.
We continue to expect segment operating margins for software and services for the full year to be comparable to last year inclusive of the additional opex spend from our recent acquisitions.
Some notable Q2 highlights in this segment include two large multi year LMR service renewals $43 million with the state with a state of with the state of South Australia, and $35 million with the state of Mississippi.
We also had three large command center software is in the U S orders in the U S $35 million from our large metropolitan city $14 million from the Los Angeles Police Department and $11 million from Frederick County, Maryland.
We were also awarded an $8 million body worn camera order from the Detroit Police Department.
Moving next to our regional results North America Q2 revenue was $1 5 billion up 13% on growth in all three technologies International.
International Q2 revenue was $656 million flat versus last year with growth in all three technologies offset by unfavorable FX.
Moving to our backlog.
Ending backlog was a record Q2 record of $13 4 billion up 19% or $2 2 billion compared to last year inclusive of approximately $500 million of unfavorable FX.
The growth was driven by the Airwave extension recorded in the fourth quarter of 'twenty, one and increased demand across all three technologies.
Sequentially backlog was down $21 million, driven primarily by a $397 million movement and unfavorable FX and the quarterly revenue burn related to the Airwave and ESN contracts, partially offset by record Q2 orders in LMR products video and command Center software.
And the products and Si segment continued robust order demand in both LMR and video is driving record backlog, which was up $986 million or 30% compared to last year sequentially.
Sequentially backlog was up $206 million, which was our eighth consecutive quarter of sequential backlog growth in the product segment.
Additionally, our product backlog increasingly reflects new pricing, which we expect to contribute to the profitability ramp for the second half.
In software and services backlog was $1 2 billion compared to last year, driven also by the Airwave extension and a $380 million increase in multi year services and software backlog in North America.
Sequentially backlog was down $227 million or 2% driven primarily by unfavorable FX and revenue recognition for the airwave and ESN contracts, partially offset by record second quarter orders in command Center software.
Turning next to our outlook, we expect Q3 sales to be up approximately 10% with non-GAAP earnings per share between $2 85.
And $2 90 per share this assumes approximately $60 million of FX headwinds, our weighted average share count of approximately 172 million shares and an effective tax rate of approximately 20%.
And for the full year, we are increasing both our revenue and EPS guidance.
We now expect revenue growth of approximately 8% up from our prior guidance of 7% and we expect non-GAAP earnings per share to be between $10 <unk> and $10 13 per share up from our prior guide of $9 80 to $9 95 per share.
This updated guidance includes FX headwinds of approximately $170 million.
Diluted share count of approximately 172 million shares and an effective tax rate of approximately 21% to 21, 5%.
Before I turn the call back to Greg I would like to highlight some of the priorities we are driving for the remainder of the year.
First we remain focused on supply chain execution, both tactically and strategically including rapid redesigns by our engineering teams to substitute to available semiconductors alternatives.
Strategic inventory investments that we're making securing high demand discrete semiconductors from brokers when necessary and entering into long term supply agreements where possible.
Second our pricing actions across the portfolio have been effective to date.
We will continue to look at pricing opportunities and maintain cost discipline as we manage through a higher cost environment.
And finally, we are balancing the benefits of higher inventory with cash conversion and we will continue to optimize our working capital and balance sheet to drive increased cash flow in the second half.
I'll now turn the call back over to Greg Jason.
Jason Thanks, So I'd like to end with a few thoughts.
We conclude this call first I'm really pleased with what we accomplished during the quarter.
We achieved Q2 record sales, including 21% growth in both video and command Center software, we strengthened our video portfolio with the acquisitions of Calypso, which brings us advanced cloud native video analytics and video Tech, which broadens our ruggedized camera portfolio to serve the critical infrastructure Mark.
Right.
We had record Q2 product orders at higher prices, including our single largest quarter ever for PCR orders and we ended the quarter with record Q2 ending backlog.
The pricing actions, we've taken to offset higher input costs position us well for margin expansion in the back half of this year.
Second our investments in AI and cloud continue to drive robust software growth for the company customers like Greenville County schools in South Carolina depend on our video security and access control solution to help keep students safe and the city of Houston is deploying more than 3000 body worn cameras.
With cloud based evidence evidence management to help provide greater accountability and transparency and with the acquisitions, such as Eva security and Calypso, we're well positioned to accelerate the deployment of cloud video software solutions.
With customers around the world.
And finally as we enter the second half of this year I am very encouraged by our momentum.
The multi year funding environment for our customers continues to be as strong as it's ever been our solutions for both public safety and enterprise security have never been more important our strong execution has allowed us to effectively navigate this dynamic environment and finally, the resilience of our business.
Our durable cash flows and a strong balance sheet provide us with the flexibility to be opportunistic.
And our future deployment of capital and now I will turn the call back over to Tim and welcome your questions. Thank.
Thank you Greg before we begin taking questions I would like to remind callers to limit themselves to one question and one follow up to accommodate as many participants as possible.
Later would you please remind our callers on the line how to ask a question.
Certainly.
The floor is now opened for questions. If you have a question or comment. Please press star one on your telephone keypad.
Any reason you would like to remove yourself from the queue. Please press star two.
We do ask that.
You possess your question. Please pickup your handset to provide optimal sound quality. Thank you.
First question comes from George <unk>.
Of Jefferies.
Please proceed.
Hi, guys, thanks very much.
Congratulations on the strong results and backlog I guess I wanted to ask about.
A comment you made about the funding environment.
What's your perspective now on state and local government budgets. Obviously many of those budgets began on July 1st many of those budgets were reset looking forward I'd just be curious on what your perspective is on on the funding environment and how youre seeing those budgets and then and then also.
Related to that is the question of ARPA.
I am wondering if youre seeing ARPA money right now I think last quarter, you told US you were seeing <unk> improvement in the sales funnel.
What does that look like right now any more detail you can provide would be great. Thanks a lot.
Sure George so.
When you think about state and local budgets I mean, I think first of all we hear us say it time and time again.
What we do what we provide is a need to have not a nice to have but as it relates to the inflationary environment we're dealing in.
Self funding alone for states.
We're in a very beneficial period of time, because if you look at it.
Derived or their budgets from personal income tax from sales tax and from corporate income tax.
All of which stand the benefit to drive more money into their coffers and thereby improve their general fund situations. So it's that piece of it.
Also look at the second rail this and Thats. The monies that are being made available through ARPA and I would just simply say that we've talked about it it's generally beneficial and we think it's a general tailwind, but the most important thing is it's not a 2022 phenomenon and it's one that's multi year and in fact, these won't expire until 2024 and in all likelihood we know as those will likely be.
Extended so you've heard Greg cited I think you said in the script, but.
Sure George. So we think about state, local budget. I mean, I think, first of all, we hear a say of, time and time again, what we do will provide is a need to have, not a nice to have is a related inflationary environment. We're dealing in self funding alone for States re in a very beficial period of time because, look at it, they derrived bus from personal income tax, from sales tax and from corporate income tax, all of which stand the benefit to drive more money into their cars and there by improve their general fund situation. So it's that piece of that. We also look at the second of this and that's the moneyies be in a made available through our, and I would just simply say that we talked about it. It's generally beneficial and we think it's a general tailwind. But the most important thing is it's not at 22 phenomenon is that's multiyear. In fact these won't expire 2024 and I likehood we know is those will likely be extended. So've heard Greg, that I think you said in the criptit we're a really unique situation because we are in a goodfunding environment. But I think it also is is is certainly because we're going to product defresh investments. We're seeing that here in United States with a tax tax platform and later this year we're going to be announcingthemidtiyear a tax next devices, which we really excited upgreat, Thank you. Thank you. Question comes from the pin Y Morgan Stanley . Please proceedi. Thank my question, the corarter, maybe just following up a just made. I'm kind of L MAR in the X. can you give us any update on?
We're in a really unique situation because we are in a good funding environment, but I think it also is.
As timely because we're going through a product refresh investments, we're seeing that here in United States with the apex next platform and then later this year, we're going to be announcing the mid tier apex next devices, which we're really excited about.
Okay.
Great. Thank you.
Thank you.
Next question comes from Eric Lapinski of Morgan Stanley .
Please proceed.
Hi team Thanks for taking my questions and congrats on the quarter, maybe just following up on the comment you just made on kind of El Morro.
Opex next can you give us any update on just with some of the <unk>.
25 deals you're seeing what the uptake is there.
Apex next and some of those upgrades is it skewing towards being most ore.
I guess just legs on that cycle and how we should think about that.
Yeah, So as I've said before we're in the early innings of the $2 25 upgrade cycle I use the baseball metaphor and are I believe it was our February call into the second inning I think we're largely still in that period of time, but just a couple of updates of $190 million of orders.
Interestingly, we're seeing a lot of interest from non Motorola customers and it's not only the better basics the ergonomics and the audio performance of the apex next but it's really the smart connect and so what our customer saw during COVID-19, particularly people like health departments was the capability to expand their coverage outside of the P 25 networks.
It's also things like smart mapping, we think about accountability, we think about officer firefighter safety location is paramount to that and then we're also looking at messaging as we have more and more young officers in the field they need wage different modalities like text and video and the capability to share those.
With some of the P, the P 25 deals, you're seeing what the uptake is. Apex next in some of those upgrades is skewing towards being most or, I guess, just legs on that cycle and we should think about that. Yes So, as I've said before, we're in the early advanced cloud native video analytics and video tech which broadens our ruggedized camera portfolio to serve the critical infrastructure market. We had record Q2 product orders at higher prices, including our single largest quarter for P C R orders, and we ended the quarter with record Q2 backlog pricing actions weakened to offset but cost.
That type of data and they are using the LTE collaborative aspect of the apex next so again really excited but I would note that the $190 million has all been targeted at the highest tier which is the original apex next with subsequent releases in the second half of this year with the mid tier portfolio, which we're starting to engage in customer discussions yet.
And Eric the $190 million of orders is since the apex next product was introduced but I'd also add.
But just in general.
Q2 was a record for P 25, public safety devices, which is more broad than apex next as well. So apex next continues to fire away.
And just do.
I think the team did a superb job in product product introduction will always team has sold it but also more broadly beyond apex. Next Q2 was a record for P 25, public safety orders, which I'm quite happy about as well.
Awesome. Thank you if I could sneak in another one just on the command Center software you had a few larger deals there too this quarter.
Just in terms of progress on maybe uptake of some of the cloud based offerings. You have there were any of those upgrades more on cloud based and then did any maybe expand beyond the piece that presence you have into into other capabilities.
Yes, so maybe just a quick overview.
Jason mentioned two specific deals.
Elliot.
Frederick County, if you look at both of those LAPD versa.
Gregory.
Hybrid element to it and that was the command central responder piece, which is really driven by mobile access to.
Two records information, we're seeing more and more of that and that hybrid element was key to that particular deal with Frederic We added command Central aware in addition to Premier one CAD.
Nowhere is a cloud hosted SaaS solution for us and aware gifts.
The county of single pane of glass to understand where unit locations are both from <unk>.
Radios and also from incident information.
It is.
<unk> previously location information being Paramount accurate location information being Paramount in that case, we continue to invest in our hybrid strategy. We're executing on our hybrid strategy and key point there is that our SaaS growth rate is actually faster than the overall command center software growth rate, which it is.
Self was quite strong in this quarter and the last thing that I'll say is we're continuing to innovate and invest in innovation and we had two significant first.
This quarter one is we introduced the.
Worlds first public safety car play application, one that we developed with Western Australia police and with Apple and the second is we along with Prince George's County in Maryland.
We won the Thomas O'reilly Innovation award for being the first in the country to introduce location based routing Nina <unk> III combined location based routing. So together I think we are executing well on our hybrid strategy.
Awesome. Thank you.
Thanks, Eric.
Thank you.
The next question comes from Adam Tindle Raymond James.
Please proceed.
Thanks, Good afternoon, I just wanted to ask him about some between calls so hopefully it hasnt been asked but Greg could you maybe give us any updates on ESN and Airwave and in particular, if you could review any financial implications I think there is.
Significant differences in the different outcomes and probabilities based on what happens in just might make sense to level set with investors. Thanks.
Yes, I think things remain engaged and in progress at them really we are in close contact with the customer in this case, the UK home office.
We've maintained very close contact with the CMA and have regularly provide them with information over the last several weeks and months.
As we educate them on our role in both Airwave and ESN.
As you've seen the timeline has been updated by the CMA panel and now expect a provisional decision in.
September with a final decision in December .
And theres really not much more I can add at this point because I just don't know I think it will play out in the back half of the year, but I think the engagement has been quite strong.
And in the meantime, we continue to invest.
Both in Airwave actively in providing that mission critical service as well as <unk>.
As well as the ESN.
Got it and maybe just as a follow up it looked like at a glance backlog trends remained very very healthy what does this say about elasticity in core products I know you've been implementing some price increases understandably as your costs have increased if you can maybe recap some of the price increases and talk about the elasticity that youre seeing.
Backlog trends that would be helpful. Thank you.
Sure. So when I think about the first half growth for the company, which is about 8%.
The price contributions on the actions that Jack's.
Sales team have implemented.
Was less than half of the contributor to growth and with the actions that Jack described we continue to do we think it will be even more of an opportunity in the second half as most of the orders that come to us in the second half.
Our from our more recent backlog as opposed to <unk> pricing.
No I think youre right and the other piece of that is just it's one thing to raise the price and I think one of the things that our team has done a really nice job at is actually discount management.
And so an example, we've raised prices in all three sleeves, all three technology groups, but also we've ushered in.
Price increases in our services business as well and we're seeing that retention.
Increases there as well so we're really proud and pleased with the services team on that aspect as well.
Yeah.
Okay.
Yeah.
Okay.
Daniel you go to the next question please.
The next question comes from Keith Hausman of Northcoast research.
Please proceed good morning, guys and congratulations on a great quarter guys.
I guess just wanted to follow up on the supply chain much has been talked about the semiconductors and the $100 million gets spent.
Through the end of the year, but can you talk about are there any other issues that kind of popped up or are you guys looking to enter in to 2023 of their clean slate as you sit now.
The 120 year mentioned, which was our year over year expected increase largely for finding the semiconductor supply we remain on target for that it was a little higher than $100 million in the first half.
And might be a little higher than 120 are then $20 million in the second half, but as you know with our increased guide that supporting our higher volume. So we're pleased with the allocation of that budget. If you will to find <unk>.
Semi conductors, which sometimes come into premium I should note that that's not our primary method. Our primary method is the rapid redesigns that our engineering teams are doing.
They are finding available alternatives.
If a part is constrained and they're doing an amazing job. There will continue to look at that inventory investments and and long term supply agreements. So generally remained semiconductors, our largest gating item in it.
Particularly in LMR.
Great I appreciate it and just as a follow up in terms of the backlog backlog spin record numbers for a while now and this is impressive growth, but are we looking at an apples to apples comparison or is the backlog getting older in terms of the contracts that you are entering into are getting longer is there a apples to apples comparison, we need to go through.
The duration of the backlog.
Thats, what youre getting at Keith is largely consistent with where we've been over time that if anything the products backlog, which we continue to print sequential increases in tends to be as you know a more quick quicker. Turning then the associated software and services. So we're pleased with the backlog growth in both segments.
And it continues in products backlog increases continues even with some price increases that customers are accepting and.
And value of our products.
Great I appreciate it thank you.
Thanks Keith.
Thank you. The next question comes from Mohan Fahad.
<unk> of loop capital.
Please proceed.
Okay.
Thank you for taking my question Greg.
Eight years that I've been listening to you on an earnings call I think I would I.
I feel like you've sounded the most confident and positive.
In.
Yes.
Yes.
So am I correct in my understanding and if it is can you just walk me through what is driving your confidence and your positive outlook.
One of the.
Pop.
Drivers.
Yes, hi, thanks for the question I'm smiling because and.
And we were talking about it we have been talking about it.
The fact of the matter is this is as good in an environment as I've seen and I don't mean that just externally as Jack and Jason talked about multiyear funding here, particularly in North America for state and local customers and at the federal level, but it's the position of the firm overall.
<unk>.
Demand is extremely high for public safety.
And enterprise security. We also see at the same time concerns, which I think are legitimate around deploying Chinese equipment, and critical infrastructure or highly confidential or secure areas backlog.
Is at record levels product backlog as we talked about in Q2.
Orders were 17% against the revenue print of 7%. So we're building it Jason just mentioned that the backlog comparison is largely apples to apples, we're performing in raising the full year from approximately 7% to 8% against continued FX headwinds.
We're managing our AR.
Difficult semiconductor supply chain environment, and while it's very modestly better.
I think the tip of the hat goes to the supply chain financial and operational teams here at Motorola that are learning to do product redesign and manage inventory in a way that is constructive and productive to meet demand I loved the deployment of capital that we've done organically, where JAK and <unk>.
Continue to emphasize innovation and move things to the cloud and do product refresh on devices.
We've made I think pretty thoughtful and accretive and strategically important acquisitions.
And our addressable market continues to grow as well so when I look at execution, what I look at demand what I look at R&D when I look at innovation, what I look at multiyear funding.
When I look at the overall factors that I think contribute enable.
And facilitate demand for our product is quite strong and as a final note.
The ability for us to demonstrate multiple price increases.
And still grow backlog and still drive robust revenue growth.
<unk> to the criticality of what we do and the ability for our customers to absorb that and our ability to pass on higher input costs. So it is a very good environment. It's why we.
Both top and bottom in Q2.
While we are raising the full year and why I feel very good about the momentum in the back half.
Okay.
Thanks, that's really insightful.
How does that translate into your your model because last time.
When you gave your long term model it with 910, clearly you're exceeding that now so.
What are you thinking a bunch of new models.
No.
We were talking about that I gave nine and 10 in 2021.
Obviously, because I believed in it we had COVID-19 COVID-19 delay things for a year, but but here we are.
We're not going to talk about any long term model for hot at this point, but we still believe that.
The product segment will grow mid single digits.
Although our increase.
For the year from 7% to 8% is largely LMR and video.
So actually that increase from a segment standpoint is primarily in the product. So it's maybe mid single digits nudging slightly higher we still believe Saul.
Software and services will be approximately 10% we agree with the we still are maintaining the guidance on the three technologies.
<unk> mid single digits video security approximately 20% Command center software low double digits as.
As we continue to contribute to backlog and we like the momentum in the back half I think.
I think it positions us well as we head into 2023.
As we print more of the year and get more execution behind US we will update you accordingly.
On the.
Future thoughts for 2023 and beyond.
Thanks, Craig I'll pass it on.
Thank you Bob.
Thank you. The next question comes from <unk>.
Amy Badri from credit Suisse. Please.
Please proceed.
Thank you.
First congrats on the quarter.
Not sure many people are actually expecting an increase on the top line.
For some of the questions that I had for you guys is I wanted to know with some products and systems integration. If we were just to look at radios and radio handsets have you been prioritizing LMR public safety over PCR have you managed to ship and prioritize both essentially at the same level.
I'm trying to get an idea on just mix and then.
Maybe just.
Just a clarification did you say that PCR is growing mid single digits slightly better in 2022, or if you didnt actually clarify that maybe you could just.
Bye now.
Yes, Sami I'll take the second one first the product segment.
Color is to continue to grow product and ESI at mid single digit maybe a little bit higher than that because the flow through is in that segment for PCR last quarter, We said it would grow.
Mid single digit we now expect it to grow at 10% or even slightly higher for the full year given the strong performance in Q2 that will flow through in the back half.
And Sami to answer your question on prioritization and balance we continue to be focused on public safety Q1, we'd prioritize public safety and.
In Q2 with some of the breakthrough as the team was able to make around supply we were able to fulfill more demand for PCR in Q2.
And grew at double digits.
So in Q2, given the supply environment, we were able to fulfill both public safety and PCR.
Got it. Thank you for that and then I was hoping we could hear from Jack a little bit on body worn camera and dash Cam regarding license plate reading and some of the other kind of features that you guys released can you give us an update on market share momentum, what's really going on from from that side.
Sure Sami so as it relates to Q2, our orders were up 13% I think when you contextualize that over the fact that 13% over the previous quarter that was up 88 zero percent.
The previous year, we think we had a relatively strong order you heard Jason referenced Detroit PD win and I think that's a test point to what we've been saying is that the market wants an alternative I think the other piece of it is we're starting to see.
Late last year, we came out with an as a service offer and we're seeing an acceleration in our customers wanted to choose cloud.
We've said before and I said at the end of 2021, and we doubled our orders we knew the market didn't grow that fast we knew we took share in 2021 I'd simply say for the first half of this year, given our performance kind of in the mid teens growth over 68% to 80%.
Orders growth comps, we think we're performing relatively well and as I said, we think we are a very viable alternative in the marketplace right now.
Got it.
One quick one for Jason.
Sorry go ahead.
That's just going to add something to add on.
On the technology investment.
You also asked about.
We continue to invest in a closer integration between our body worn cameras and our radios as well specifically with apex and apex next devices. So for example, if you press the emergency button on an apex are an epic sonesta radio turns on recording as an option as well and there are more features that to come as well this quarter. We also released.
Life streaming capability going from the <unk> 300.
And our in car video solution to aware.
And aware also integrates real time location information from our apex and apex ex radios, so location information coming from both body worn cameras and our radios together gift accurate information again location being a key.
The necessity for our customers and lastly, we also introduced.
Our new advanced AI, driven reduction capability to command central evidence, which is a key.
<unk> capability that our customers have been asking for and I think we're very proud of what we were able to put it Q2 also was our first shipping order for our <unk> hundred solution. The <unk> started shipping in February of this year, we've seen great growth in the <unk> hundred and just as a reminder, we released <unk> five <unk>.
With two key AI capabilities, LPR being one of them and backseat passenger analytics being the second this is a true AI platform. The <unk> hundred is and we're going to be introducing more capabilities. We affirmed our upgrade to that platform as well, we think there's great potential there.
Got it thank you.
Jason One quick one on your FX guidance FX headwind guidance for the year is that including international currencies.
Relative to the U S dollar or does that assume.
Everything equal at this point forward on FX rates.
Current spot rates going forward relative to last year, so the $170 million of headwinds on the year is about consistent with where it was.
Last quarter, we were together, it's certainly been volatile, but today, it's at approximately a $170 million of.
Topline degradation related to FX this year.
Perfect. Thank you.
Sami.
Thank you next question comes from Paul Silverstein of Cowen. Please proceed.
Thanks, one clarification, what was the level of PCR in the quarter and can you remind us I think.
Before.
The pandemic can you remind us of where you are adding for relocations.
For Q2, Paul PCR revenue growth was 15.
15%.
And its base last year, Paul was 800 and something million dollars and so it's an as we told you earlier, a 10% maybe slightly higher this year, which will put it still short of the 2019.
Reference point you just made.
Alright.
No.
Yeah.
I'm sorry.
Hello, Paul and I was just going to add one other point as of Q2 was a record orders quarter for PCR as well exactly.
Okay.
Notwithstanding the macro August it sounds like the business.
Given all the different variables that seem to be so positive.
Where's the greatest opportunities through greatest improvement from here going forward over the next 12 to 36 months.
With that I saw <unk> was not able to pay cash in respect to the <unk>.
Litigation, where does that are there.
<unk> start to really stood out in the market.
That go from here.
Finally.
Video penetration that in public sector.
But let's start with <unk>.
I am not surprised that they missed the deadline the court order deadline to pay cash into escrow.
By July 31, <unk> had a pattern of denied deflect distract.
And no action they owe us.
About $680 million all in.
By the way the guidance and color, we give you on the full year of 2022.
And cash and cash flow assume nothing from hi, Tera.
We filed a motion this morning.
That they are in contempt of court.
And.
We will see what what the judge rules and remedies further remedies that they apply but I can't say I can't say I'm, particularly surprised.
Well I think you had a question as well on video and I would just simply say that.
Our video and access control business is growing.
Approximately 20% this year in 2022, we continue to invest in the portfolio extensively both by way of our edge devices our camera.
But also in the on our software and analytics side of the things.
Cloud and mobile become increasingly important when you think about our three big acquisitions open path, who has fundamentally changed the game for us in the access control market.
Eva and Calypso as well.
The AI that calypso break and its ability to proliferate into our palco camera line is also a game changer and I think he asked a question about verticals, but when we think about our top verticals, it's really government education health care and commercial if you remember when we acquired a vigilant in February of 2018.
The government business was nascent and now it is one of our top ones and we think thats the benefit of the scale and the revenue synergies that are that are.
Our sales force around the globe has been over the break.
Okay. The real question was I assume is still cautiously early and the government public sector insurance video penetration.
Yes, So I think we've talked about before first of all just a baseline and government. It's early days, but debenture lies that business. It's approximately $430 million is our expectation this year.
Think of that as two thirds mobile video a third fixed video.
I appreciate that.
Thanks, Paul.
Thank you next question comes from Louie Dipalma of William Blair. Please proceed.
Greg Jack Jason Mahesh and Tim Good afternoon.
Hey, Louie how are you doing.
Yeah.
Great.
Greg on previous call you referenced.
You are seeing robust demand from the education, Paul is demand from education customers.
Artificial intelligence solutions getting even stronger.
With this exceptionally strong guidance.
For the upcoming school year following several different security.
Incidents nationwide.
Yes, Louie education has been.
Very key vertical.
Along with government for fixed video and access control.
It has been and continues to be because of what you referenced the need for video security perimeter detection.
Anomaly detection access control automation alerts.
And I think that the demand for that broad portfolio continues to be strong and maybe perhaps is even getting stronger and I don't know if Jack <unk> to complement on that as well Greg I think you hit it. The other one is we made a significant investment in new evolve technologies and I would say.
Stadiums and schools are the big driver for concealed weapons detection, we know the horrific things that happened at <unk> just earlier in the summer and I think that's driving a converged experience to make sure that they've got the video and access control, but they also have a way.
To temper and test for weapons as they approach campus as well.
The other point I'd make is that our Q2 results and our increased guide for the year were driven largely by our expectations for LMR, which is about two thirds of the increase in video and then the other third both of which are serving education and many other verticals.
Okay.
Thanks.
And.
For Jack these past two quarters. It appears that you want in your two largest command center software orders in company history, and I think you mentioned in a prior answer that you are seeing traction with <unk>.
Hi, Brent deployments on premise in the cloud where any of your recent orders for your next Gen 911 solution and your 911 call taking CAD solution in the cloud or are these more for your traditional module that youre seeing.
This is Tom.
Hello.
Sure.
I would say that there is still a stronger demand for the on premises solution for 911, and CAD availability and reliability being some factors that are involved there that said.
Our call handling solutions combined with our heavy investment in smart transcription, which is a cloud hosted AI solution citizen input, which is also a cloud hosted way of allowing citizens to have over the top video input and text input into <unk>.
<unk> is well for call handling we're seeing.
A significant traction in that space on CAD hybrid capabilities.
Become very important we're seeing aware command central aware frequently attached with our CAD sales and the other thing is.
Emphasis on mobile.
PDI mentioned command central responder.
The need for smartphone access to information.
In the field is becoming more and more important and command central responder, along with its many capabilities really complements both our on premises CAD and.
Record solutions as well.
See that hybrid really driving adoption for the key features that are best delivered in the cloud along with the high available solutions that our 901 on cat customers want.
Great. Thanks, Thanks, everyone.
Thanks Louie.
Okay.
Thank you. The next question comes from Paul Chung of Jpmorgan.
Please proceed.
Hi, Thanks for taking my questions. So just on on the guide how do we think about kind of the gross margin.
Ramp in the second half do you still expect to be kind of flat for the year.
Then the same kind of question on Opex I may have missed it but still kind.
Kind of a $100 million for the year and then as we think about 'twenty three how much is kind of the gross margin pressure. This year do you see as somewhat temporary and your expectations of how those margins rebound in particular in the first half.
You also have some benefits from price increases.
As well and how that kind of factors in just your early thoughts on on 23.
I'll start with the biggest driver of our gross margin trend. This year is the higher semiconductor costs year over year, we have planned for about $100 million of year over year increase which youre seeing in the P&L through the first half it was actually a little higher than that.
And we had planned for $20 million of incremental year over year.
Cost for semiconductors in the second half it'll probably be slightly higher than that.
Given the higher volumes that we just guided to so those items again are related to us its paying a premium for semiconductors that arent available from primary sources, so as the semiconductor market.
Stabilizers normalizes, there's opportunity on that as we continue to get more and more supply.
Into the future directly from the manufacturers, which is something we're working on.
In terms of gross margin trend for.
For the year, yes, the second half.
We'll be certainly better than we will get to approximately similar in the OE slightly up for the year.
Which will.
Ill cover the $100 million of Opex Youre right of increase that we're expecting for the year over year, <unk> 75 of which from the Opex side is related to M&A.
So that's how to think about it from a P&L perspective.
Okay.
Okay, Great and then just a follow up on video you are seeing some relative strength in the software and services for quite some time to talk about the demand trends and specific solutions youre kind of most excited about.
How do we think about that relative pace. So as we look further out thank you.
Yeah, Hey, Paul I think so we've talked about we expect 20% for.
For fixed video and really for the for the video segment as well approximately 20% for the full year.
Dimensionalize some of the verticals, we're having some success.
I think it's a story about cloud mobile and analytics.
The other piece of it that we probably didn't talk or some of the vertical specific things that we're doing we acquired a company called envision.
And that gives us space in the quick service retail.
In investments like that as well as cloud put us on a path, where we're starting to build.
<unk> revenue.
Within our video security segment, as well, which is which is exciting.
Great. Thank you so much.
Thanks, Paul.
Thank you. The next question comes from Jim Suva of Citigroup you.
You May proceed.
Thank you and congratulations to you and your team.
Greg when we think about strategy and you had mentioned you had your biggest LMR contract ever which is great.
Are you now at a point, where the majority of your new wins are including multiple cross sell.
Motorola solutions products solutions and services.
Demand center and things like that are we still at the very early part or not as much as the connected that was kind of my strategy question then for.
Finance Chief Financial Officer, a question.
Did you say, how much impacted gross margins be commence or go in depth local market was for components and I assume when you get these big contracts you are securing the parts you're right away. So you don't have future price escalation as chip companies and increased pricing. Thank you.
Well on the first part.
Jim I think.
We're in the early innings overall, I mean, you take a step back and think about this firm at our addressable market now.
Even the the industries, we play in and the acquisitions. We've made it's just under $50 billion.
And the guidance this year for full year and forums approximately nine.
So theres a lot of there's a lot of room to run here.
While we are growing fixed video and access control at 20%.
We are not the leader yet either globally or in North America, and I think there's every opportunity for us to continue to take share and make up ground given the width and breadth of the portfolio, which I believe from an industry standpoint is unmatched.
Our ability to play in fixed video and mobile video layer on analytics license plate recognition.
And all of the things that Mahesh.
The technical team are doing an artificial intelligence an LMR.
The installed base gets larger.
Think about roughly 13000 different LMR networks by which we <unk>.
Filled the footprint of infrastructure sell devices monetize services upsell refresh the device portfolio integrate LTE into LMR for network extension in software over the air Reprogramming and location services and then all of the things <unk> is doing in command Center software.
Which is premises based cloud based hybrid.
And the overall backdrop of more and more criticality around public safety enterprise security and not having a key China vendors in any of that critical infrastructure.
I think there is a lot of opportunity in front of us.
The only thing I'd add Greg as I think Jim I think I heard you ask a question around cross sell it as a very important we've attacked that by way of sales sales specific incentives around command center software.
Fixed and mobile video as well our North America sales later, Jim mirrors has come up with a first of all we have a tool a three dimensional tool by account that gives us kind of the lay of the land, where we're doing well where were not and where we should focus our time and we've instilled.
<unk> sales.
<unk>.
Around specific technology escalators.
That's I think served us fairly well.
And Jim to answer your question on securing semiconductor components, we're doing so in many different ways directly from the manufacturer.
Through us and purchase orders all the way through long term supply agreements.
And then finally brokers.
And necessary and therefore have a constant flow of parts I think it is important to note that Motorola and our engineering abilities over 40% of our company our engineers.
We continually give them challenges, including if a part we know to be in constraint.
<unk> are helping find alternatives and that alternative than the supply chain organization can go out and procure so it's a constant battle and we're proud of the way the teams are collaborating and working through the environment.
Great. Thank you so much for the details.
Thank you Jim.
Thank you. 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 everybody most especially.
Thank you for all the Motorola <unk> on the call and listening.
Exceptional performance Couldnt be more proud of you.
I'm proud of this company proud of view and proud of the purpose that we serve.
I think look I think these results amplify and reinforces the criticality of public safety and enterprise security and the fact that.
In this environment.
Quite frankly, it's never been more important I want to add to something Jason just said and tip my hat to everybody involved on supply chain execution and navigating this very dynamic environment I do think.
Part of the over performance in Q2, and what we're passing on through for the full year.
Is strong execution and supply chain I think it's largely done by the engineers that Jason referenced and others on product redesign surgical acquisition of inventory.
Appropriate purchases in the open market through.
For broker parts.
And a modestly slightly better environment.
The environment in Q2, but the supply chain, specifically semiconductor environment.
Remains challenging having said all that.
There is more work to be done.
But I do like our position and I like our momentum for the second half we have to continue to execute I. Appreciate you listening and I look forward to talking to you in joining you in a few months thanks everybody.
Yes.
Ladies and gentlemen, this does conclude today's teleconference. A replay of this call will be available over the internet within two hours.
The website address is www dot Motorola solutions Dot com forward Slash investor we thank you for your participation and ask that you. Please disconnect. Your line at this time.