Q1 2023 Motorola Solutions Inc Earnings Call
<unk> executive Vice President and CTO.
Greg and Jason will review our results along with commentary and Jack in the house will join for Q&A.
We've 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 and the comments made during this conference call in the risk.
Factors section of our 2022 annual report on Form 10-K, or any quarterly report on Form 10-Q, and in our other reports and filings with the SEC we.
We do not undertake any duty to update any forward looking statements and with that I'll turn it over to Greg.
Thanks, Tim Good afternoon, and thank you everybody for joining us today.
First let me start by just saying that Q1 was an exceptional start to the year.
We achieved revenue and earnings per share above our guidance with revenue up 15% and earnings per share up 31% versus the prior year, we expanded.
Operating margins by 470 basis points.
And we had record Q1 orders, which led to record Q1, ending backlog of $14 1 billion up 5% versus last year inclusive of $372 million of unfavorable FX.
Second our outstanding Q1 performance was broad based with strong double digit revenue growth in both segments, all three technologies and in both regions North America and international additions.
Additionally, public safety and enterprise security remains more important than ever which is driving demand for both.
Our public safety and enterprise customers and finally based on our strong start to the year and continued robust demand, we're raising both our revenue and earnings guidance for the full year I will turn the call over to Jason to take you through results and outlook and then be back in return for some final thoughts.
Thank you Greg revenue for the quarter grew 15% and was above our guidance with double digit growth in both segments, both regions and in all three technologies.
FX headwinds during the quarter were $45 million, while acquisitions added $42 million.
GAAP operating earnings were $399 million or 18, 4% of sales up from 12, 6% in the year ago quarter.
non-GAAP operating earnings were $532 million up 42% from the year ago quarter, and non-GAAP operating margin was 24, 5% up 470 basis points.
This strong year over year increase in both GAAP and non-GAAP operating earnings was driven by higher sales.
Lower direct material costs inclusive of lower broker spend in attaining semiconductors and improved operating leverage.
GAAP earnings per share was $1 61, compared to $1 54 in the year ago quarter non-GAAP earnings per share was $2 22 up 31% from $1 70 last year. This strong growth in earnings per share was driven by higher sales and margins, partially offset by a higher effective tax a tax rate in the current year.
<unk>.
Opex in Q1 was $530 million up $38 million versus last year, primarily due to acquisitions and higher incentives in the current year.
Turning to cash flow Q1, operating cash flow was a usage of $8 million in free cash flow was a usage of $62 million.
The cash flow in Q1 was in line with our expectations and included a onetime cash tax payment of $70 million related to an IP reorganization, we completed last year.
It also reflects our strategic decision to carry higher inventories.
For the full year, we continue to expect operating cash flow to be approximately $1 9 billion with greater contributions in the second half consistent with the shape of last year's cash flow.
The capital allocation for Q1 included $148 million in cash dividends $140 million in share repurchases and $54 million of Capex.
Moving to our segment results in the products and Si segment sales were up 18% versus last year, driven by improved supply availability in the current year and the benefit from pricing actions flowing through.
Currency headwinds were $19 million in revenue from acquisitions in the quarter added $12 million operating earnings were $246 million or 18, 9% of sales up from eight 7% in the prior year driven by higher sales lower material cost and closer to the lower broker spend and improved operating leverage.
Some notable Q1s and achievements in this segment include a $27 million Countywide key 25 system for Johnson County, Missouri, a $20 million P 25 device order for a U S state and local customer.
$17 million P 25 system for Wakulla County, Florida.
A $16 million fixed video contract for a large health care system.
And a $15 million apex and apex next devices order for the Kansas' Highway patrol.
In software and services revenue was up 10%, including 19% growth in command center and 20% growth in video.
Revenue from acquisitions was $30 million in the quarter and FX headwinds were $26 million.
Operating earnings in the segment were $286 million up 3% versus last year and operating margins were 32, 9% down from 35, 2% last year on mix higher costs from acquisitions and FX.
For the full year, we expect operating margins in this segment to be comparable to last year to slightly down.
Driven by higher costs from acquisitions, primarily rain.
Some notable Q1 highlights in this segment include a $340 million Federal IDI Q award to combine existing services and provide new LMR services to the U S Air Force, which has long been an important customer of ours.
Given the nature of this 10 year agreement, we recorded only $11 million of backlog in the first quarter and expect backlog to be recorded ratably over time for the remainder of the contract.
Additionally, we expect new services included it to contribute an incremental $60 million of revenue over the 10 year period, when compared to the previous service agreements.
We also received a $20 million $1 million multiyear support services extension for Portugal's nationwide Tetra system.
$10 million LMR services agreement with a federal agency and a $9 million fixed video services contract renewal with the city of Chicago.
Looking at regional results North America, Q1 revenue was $1 5 billion up 14% on strong growth in all three technologies.
International Q1 revenue was $679 million up 16% versus last year with growth in all three technologies, partially offset by unfavorable FX.
Moving to backlog ending backlog was a Q1 record of $14 1 billion up 5% or $623 million versus last year inclusive of $372 million of unfavorable FX.
These results were driven by strong demand across all three technologies.
Sequentially backlog was down $280 million, driven primarily by typical order seasonality in North America.
And the products and Si segment, ending backlog was up $601 million or 15% driven primarily by strong LMR demand sequentially backlog was down $186 million due to North America orders seasonality.
Knowing our record backlog in Q4.
In software and services backlog was up $22 million compared to last year, driven by strong demand for multi year software and services contracts in North America, partially offset by the revenue recognition for Airwave.
Along with $329 million of unfavorable FX and the adjustment related to the exit of ESN contract that we announced last year.
Sequentially backlog was down $94 million, driven primarily by revenue recognition for airwave.
Turning now to our outlook, we expect Q2 sales to be up 10% to 11% with non-GAAP earnings per share between $2 49, and $2 54 per share.
This assumes.
Weighted average share count of approximately 173 million shares and an effective tax rate of approximately 24% for.
For the full year, we are increasing both our revenue and EPS guidance. We now expect revenue in the range of $9 75 to 977 5 billion up from our prior range of $9 65 to $9 7 billion and we expect non-GAAP earnings per share between $1 $11 21.
And $11 29.
Up from our prior guidance of $11 10.
And $11 22 per share.
This full year outlook assumes $25 million of FX headwinds.
Weighted average share count of approximately 172 million shares and an effective tax rate of 23% to 24%.
As I mentioned on the last call the increase from our 21% tax rate last year is due to lower tax benefits on share comp and a higher U K tax rate in the current year, both of which combined represent an approximately 50 cent headwind.
In our full year earnings per share guidance.
The increased outlook for the full year is a reflection of the continued strength of our business and demand for our solutions. The revenue guidance reflects expectations for strong double digit growth in the first half as well as continued growth in the second half of the year, which comes on top of the 15% growth. We saw in the second half of last year.
I'll now turn the call back to Greg.
Thanks, Jason Let me just end with a few thoughts.
First and foremost our business remains very strong we had record Q1 orders and achieved revenue above our expectations, we expanded operating margins by.
470 basis points, we ended the quarter with our highest Q1 ending backlog ever and our public safety and enterprise customers are continuing to prioritize our solutions.
It helped.
Immunity safe, which is driving our increased top and bottom line guidance for the full year.
Second I want to highlight two recent announcements and our video security business.
First we made the decision to integrate our end to end fixed video portfolio consolidating the majority of our fixed video solutions under two platforms are vigilant Alta.
Individually <unk> unity Alta is our cloud native security suite consolidating open path and Avis security, while unity is our on Prem security suite, consolidating a vigilant and indigo vision.
This helped streamline our go to market channels and further reinforces our vertical focus, particularly in government, but also education and healthcare, which combine those three now represent half.
Of our video security revenues. Additionally, in our mobile video business, we launched our new <unk> 700 body worn camera. The B 700 is our first body worn camera to provide broadband connectivity that facilitates integration with our market leading in car video solution, our apex radios and our command center software.
Including live video streaming and location tracking through our aware product.
And finally, our strong start to the year underlines the strength and resiliency of our business the demand for our products and solutions that keep communities safe remains exceptionally strong our continued focus on cost management and inventory optimization, coupled with our previous modest pricing actions.
We've took earlier continues to drive margin expansion and our strong balance sheet and durable cash flows allow us to be opportunistic with the deployment of capital going forward to create long term shareholder value and with that I'll now turn it over to Tim and open it up for your questions.
Thank you Greg before we begin taking questions I'd like to remind callers to limit themselves to one question and one follow up.
Many participants as possible.
Operator would you remind our callers on the line how to ask a question.
Yeah.
Floor is now open 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 while you pose your question. Please pickup your handset to provide optimal sound quality.
Thank you.
First question is from Tim long with Barclays. Your line is open.
Okay.
Thank you.
Yes, so two if I could.
And here first.
Just looking at the second half.
I know, Jason you mentioned tough comps, but hoping you can just give a little commentary around you know moving parts, given those pricing benefits and pretty healthy backlogs still so whats what are the moving parts in that second half.
And then second more specifically on video Gregory Jack If you could talk a little bit about <unk>.
Good to see above the full year growth rate in Q1.
Could you talk a little bit about where we are with cross sell opportunities.
And also.
Opportunities in video from NDA, and ARPA state schools and things like that thank you.
Sure Tim So on the second half so youll recall that last year in the second half is when the pricing actions that we implemented really began to show up in the P&L.
And those really helped last year's growth and profitability, especially in the second half so our position today as we look at those 15% comps is that we're still in a supply constrained environment, we have lead times from our suppliers.
Have expectations to grow and.
With the opportunities ahead of us for the second half with the continued demand that we have where the pricing actions benefited us, particularly in Q1 and expect similar for Q2 is last year's comps in the first half did not include those same pricing action. So as we start to enter July we're anniversarying those.
Those pricing actions and still expect growth on top of those.
And Tim specific to cross sell what I would do is highlight.
For specific verticals starting with government.
As we have attested to before government was a nascent business when we acquired a vigilant we've made subsequent acquisitions, but just to put it in context, we've kind of put the marker out there this year for our video security business that we would grow.
By 15%, we expect government to grow in the high teens, and we think we've got opportunities to move that specifically I'd also call. It health care, we're really really pleased.
We won that we secured a $16 million deal with a large scale.
Large scale hospital system.
This was an add on and the beauty of that is there not only.
Video user, but they're also a radio user education has been we've attested to the fact that numerous school systems are upgrading.
Some are going with.
Vigil on unity <unk> systems large scale urban schools, but what we're really seeing is acceleration in growth in the cloud there.
And the ability to do radio alert and integrate access control LMR.
Our command Center software Port product called Compass in the school systems as a game changer and then lastly is the industrial space, namely utilities, we've talked about the fact that we've secured a large scale utility in the past.
We have done in the area of $50 million of the utility and I think as utilities start to fortify their.
Power grids and their Substations will have incremental cross sell opportunities there, Tim but I think the highlight as we tie it all into making sure that we are.
We incent and we Incent, our sales force to go and cross sell and Thats just part of the DNA now.
Okay. Thank you very much.
The next question is from the line of George Notter with Jefferies. Your line is now open.
Yeah.
Hi, guys. Thanks, very much I guess.
I think you guys mentioned ARPA and the last question or maybe Tim did but.
What are your expectations for the ARPA benefit this year I know that you've got about $400 million in orders from.
ARPA related projects last year.
I imagine some of that converted to revenue last year, but what do you think that might look like for 2023 any sense. Thanks.
Yeah, So George.
I would say ARPA anytime there's federal stimulus dollars are are conducive and I would say beneficial to the business.
Put it in context.
It's approximately 5% of our orders in North America last year, and that's not to diminish it but I would take it to a higher level I've actually gone and looked at Salesforce.
They've contributed.
Two deals that were secured.
They weren't the sole purpose of deals that were secured I think at the end of the day. When you think about mission critical communications are you going to school. We think we're in an area of prioritization in areas. We've said before it's that need it and not a nice to have so I think it's generally conducive, but its I wouldnt necessarily give.
Say, it's the largest.
Attributed to our success.
Got it great and then just as a quick follow on.
I think.
The question everyone has been asking is on.
On supply chain.
Many companies I think are going through inventory correction now I mean, any sense that your customers have an inventory products or.
Is there any risk of supply chain corrections or inventory corrections for you guys. As you look forward. Thanks.
The demand from our customers remains very strong.
Our backlog position is at a record level and.
That includes backlog that.
Customers are having to wait a bit longer than they'd like and we're working through those delays in getting them products.
With the results in Q1, we were able to obtain a little bit better supply we had a good quarter across LMR public safety had a good quarter with PCR. So we're getting after this backlog position and fulfilling with customers.
Demands both both demand they placed on us in backlog is also the demand may place on us within the quarter, So and our inventory position if I shift to our balance sheet has helped us mitigate a choppy supply environment and we continue to be mindful of inventory.
And its utility in serving what remains a challenging supply environment.
<unk> been a helpful tool and we do have expectations for inventory.
<unk> reduced in the second half that's in our cash flow expectations, but it remains an important tool to navigate.
This environment.
Great. Thank you.
Once again, if you have a question you May press star one on your telephone keypad.
Our next question comes from the line of meta Marshall.
Stanley Your line is now open.
Great. Thanks.
And maybe just a question on the apex snacks.
You had mentioned that being targeted towards the high end and then introducing kind of the mid tier.
Thanks, I just wanted to get a sense of.
Adoption trends of the various pieces of the portfolio and where they kind of following the call.
Customer adoption types that you expected and then just maybe an update on rave integration would be helpful. Thanks.
Sure maybe I'll start with the apex <unk> will speak to rave.
First of all we're in the early innings as we've said before and I think it's most important to point out that it's a multi year.
Multi year introduction for the apex next what typically happens is we have we run the apex. Originally apex next line in tandem for for the foreseeable future in fact, the point that out 80% in.
In Q1 of our device revenue was actually apex original so.
So we've got a coexist and strong pipeline for both of them and we've got $410 million order of orders since we introduced the apex next.
But we've just recently last fall.
Introduced the N series, a radio which starts to fill in the portfolio and now we're bringing out international P 25 units to bear that it'll be targeted in Australia New Zealand.
In Israel.
All in with the new product what were seeing is kind.
Kind of high single digit ASP increases as well.
I'd also mentioned the other parts of the portfolio Tetra TCR.
Our areas, where we focused and have exciting products coming to market.
And receptive customers to those as well so we're at an important point and the targeted investments we made in and through Covid that are now producing those exciting products are also an important part of our growth drivers.
Our non rave.
Ralph has.
Exceeded our initial expectations for performance.
We see strong traction in education, especially higher Ed, but also K through 12.
And as we previously talked about rail bridges enterprise security with public safety and with some of the initiatives that we have undertaken recently, we're making the bridge wider effectively allowing for more data and at a faster rate to go from enterprise security too.
Public safety. So two specific examples worth mentioning there first.
With every one of our new Vesta 911 orders, we're actually bundling rate of 901 suite.
And what that includes is two way texting caller profile. This is information about individuals who perhaps need special assistance facility info, which is blueprints of facilities <unk> responders can respond with greater information as to what.
See what they will see when they get to the facility and very importantly, caller location and that is going to be part of a rate.
And I know you don't offer going forward. The second is we're integrating more closely with our enterprise security solution. So orchestrate. This is a key enabler for that and as part of our re imagine program.
We're bringing ray much closer in terms of.
The ability to detect and the ability to alert using rave alert and the ability to bridge into 901 as appropriate. So those two together is really augmenting our path forward in terms of.
Taking advantage of our strength in education, along with our presence with pizza.
Great. Thanks.
The next question comes from the line of Sami Badri with Credit Suisse. Your line is now open.
Yeah.
Alright, thank you.
I had a couple of questions some of the modeling some of them business dynamics I'll start with business dynamics first.
So one on the backlog. So there obviously has a lot of big deals and maybe.
Maybe you could give us a characterization of how many of these bigger deals are expected and then maybe taking that question. A step further is if we excluded FX impact and excluded big episodic activity are you still seeing the backlog step up right with more of these.
Your standard business motion and then I have a follow up.
I think I'll address your inquiry, we've seen strong demand not only big deals, but also the usual.
Type and profile of our business and I point to duration.
While our backlog is up and at record levels. The duration of our backlog is similar to slightly better than it was last year and then it was last quarter. So not only are we growing backlog of opportunities we have to convert that backlog within the year are slightly better.
So that's one of the reasons that again with our expectations going up for the year, it's driven by that that backlog position.
And backlog is up in the favorable unfavorable effects on your other point of $370 million.
By the way the other thing Sami is even when we have a large process much like the air Force.
Talked about earlier on the call to $340 million 10 year order only $11 million of that is logged in backlog.
So.
I like the composition and the duration of the backlog in addition to it being absolute and at record levels as we exit Q1.
Got it thank you for that.
Also Greg Jason if you guys could give us any kind of idea on all video revenue growth targets for 2023 and also we appreciate the new breakout of eventual on segment.
So our expectations for total video remain approximately 15% that's consistent with our last call and as Jack mentioned that growth will be even better in some of our power verticals, which represent over half of the composition of the revenue so.
Video is performing to our expectations and then Sami to your observation of Greg's comments around.
Our portfolio around Alta and unity, that's a market facing change that we will represent the brands and Jack sales team is positioned to sell video we're in a great position to sell it either in an on Prem version, which is the way most customers buy today, but also in a car.
Cloud version and as markets move we're positioned extremely well.
I think a great example, I got a phone call yesterday xiaomi on that specific to a large scale Metropolitan School district. They had three finalists two of the finalists were vigilant Alta individually on unity and I think that's the power that we can meet a customer for their specific needs that no one else in the marketplace has today.
Great. Thank you very much.
Thank you.
This concludes our question and answer session I will now turn the floor over to Mr. Craig Brown, Chairman and Chief Executive Officer for any additional comments or closing remarks.
Sure. Thank you look I would just say in closing.
It was a great Q1, and I think it highlights the fact that what we do has never been more important.
The demand environment and execution is strong I'm really proud of the people I'm really proud of our channel partners.
Achieved record Q1 orders.
Record Q1 backlog look at the end of the day as we exit Q1, I like our position more importantly, I like our momentum and then again this is despite.
The ongoing supply chain challenges that still have to sort itself through.
For the next several quarters. The fact is the intersection.
As <unk> talked about public safety and enterprise security, it's critical and we're building a safety and security technology ecosystem that connects public safety with private institutions as you heard Jack referenced in those key verticals I couldnt be more proud of this team and I'm optimistic and enthusiastic about the opportunity and.
In front of US I appreciate you joining and I look forward to connecting up with you in a quarter from now.
Ladies and gentlemen, this does conclude today's teleconference.
<unk> of this call will be available over the internet than two hours.
Website address is www dot Motorola solutions dotcom slashing that's true.
We thank you for your participation and ask that you. Please disconnect your lines at this time.
Hum.
Oh Oh.
[music].
Hum.
[noise] [noise].