Motorola Solutions' CEO Discusses Q1 2012 Results

Shep Dunlap

Thank you, and good morning. Welcome to our conference call to present Motorola Solutions' first quarter results. With me this morning are Greg Brown, Chairman and CEO; Ed Fitzpatrick, Executive Vice President and CFO; and Mark Moon, Executive Vice President, Sales and Field Operations. Greg and Ed will review our first quarter results, along with commentary, and Mark will join us for Q&A.

We have posted our earnings presentation and press release at motorolasolutions.com/investor. These materials also include GAAP to non-GAAP reconciliations for your reference. As always, I encourage you to review these materials.

A number of forward-looking statements will be made during this presentation. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of Motorola Solutions, and we can give no assurance that any future results or events discussed in these statements will be achieved.

Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Forward-looking statements are subject to a variety of risks and uncertainties that could cause our actual results to differ materially from the statements contained in this presentation.

And with that, I'd like to turn it over to Greg.

Gregory Q. Brown

Thanks, Shep. Good morning, and thank you for joining us today. Q1 highlighted another record quarter for Motorola Solutions as we achieved strong sales growth, improved operating leverage and returned significant capital to shareholders through our share repurchase program and quarterly dividend.

The most recent quarter included a number of significant product and solution launches that continue to demonstrate our unwavering commitment to deliver the best mission-critical solutions to our public safety and enterprise customers.

This morning, we reported record first quarter sales of $2 billion, an increase of 7% from Q1 of last year. On a GAAP basis, net earnings were $0.50 per share from continuing operations compared to $1.07 in the year-ago quarter. Non-GAAP net earnings from continuing operations were $0.59 per share compared to $0.54 per share in Q1 of last year, a 9% increase. And for the remainder of the call, we'll reference non-GAAP financial results unless otherwise noted.

Our Government business revenues increased 11%. North America, Asian and Latin America all experienced double-digit growth, but we were also pleased to see growth in the EMEA. Operating margins in the Government business improved 260 basis points year-over-year, due to strong sales growth across our portfolio and another quarter of disciplined cost management.

In our Enterprise business, sales declined 2% from the year-ago quarter, including an anticipated iDEN decline of $31 million. Growth in this business excluding iDEN was 3%. This increase was a result of growth across our portfolio as customers continued to select our solutions.

Regionally, both North America and Asia had strong results, while EMEA was down slightly, as we expected, in comparison to an extraordinarily strong Q1 of 2011.

On the capital allocation front, we continue to make significant progress in our initiatives and path to net debt that we spoke about at our financial Analyst Meeting last month. During Q1, we paid $70 million in dividends and repurchased $1.4 billion in MSI stock, bringing the total repurchase amount to approximately $2.5 billion since the program was announced in July of last year.

I'll now turn it over to Ed Fitzpatrick to discuss our financial results in more detail. I'll then return to discuss operational highlights and provide additional commentary and perspective on our overall business performance.

Edward J. Fitzpatrick

Thanks, Greg. Q1 was another quarter of strong growth in operating leverage. Along with revenue growth of 7%, our disciplined expense management yielded an increase of operating earnings of 9% despite a $13 million increase in U.S. pension expense.

We saw broad-based revenue growth in our Government business, with record first quarter sales of $1.3 billion, an increase of 11% in the prior year. Operating margin in the Government business improved 260 basis points, driven mainly by sales growth and continued leverage.

The Enterprise business declined 2% to $655 million, driven by an anticipated iDEN decline of approximately $31 million. Excluding iDEN, Enterprise posted growth of 3% as a result of growth across the broader portfolio. Operating margin in the Enterprise business declined 360 basis points. The decline was primarily attributable to iDEN. Increased pension and foreign currency expenses also impacted operating margins.

While on the topic of sales, I wanted to make a brief mention of our backlog. In order to provide a more comprehensive view of backlog and to provide a metric that is more consistent with industry standards, we've changed our reporting methodology. Previously, our backlog calculation excluded certain services-related contracts and backlog expected to shift beyond 18 months. We're now adding these items to our backlog figure as it is more reflective of our visibility.

Under this new methodology, our quarter-ending backlog was $6 billion, which compares to $5.3 billion in Q4 of 2011. The sequential increase in backlog is due to the previously announced award of the public safety network in Norway.

Turning to earnings. Earnings from continued operations were $0.59 per share compared to $0.54 per share a year ago, a 9% increase. Operating expenses were $689 million or 35.2% of revenue, which represents a 100-basis-point improvement from the year-ago quarter. Our operating earnings for the first quarter were $290 million or 14.8% of sales compared to $266 million or 14.5% in Q1 2011. This increase was a result of our continued work to balance critical investments in the business with the content focus on operating leverage. And as I mentioned previously, our first quarter results include a $30 million increase in U.S. pension expense from Q1 of the prior year.

Total other income and expense was a net expense of $4 million in the quarter compared to net income of $3 million in Q1 2011. The prior-year quarter benefited from investment gains in excess of interest expense. In future quarters, we expect this item to be a net expense of approximately $15 million to $20 million.

Our effective tax rate was 34% for the quarter. For the remainder of 2012, we expect our effective tax rate to be in the range of 34% to 35%. Cash flow from operations was $69 million during the quarter, which was in line with our expectations. Q1 2012 includes approximately $150 million in certain annual incentive payouts. In the prior year, all incentive payouts occurred in the second quarter. In addition, we paid $50 million related to our previously announced legal settlement.

With respect to working capital, I am pleased with our results in inventory management as our turns were 8.3 compared to 7 in the year-ago quarter. Our receivable balance declined, as expected, from Q4. In the second quarter, we anticipate liquidating certain notes receivable related to the Networks business we sold last year. These receivables were reclassified to short-term accounts receivable from long-term other assets last quarter.

We ended the quarter with $3.8 billion in cash and investments and $1.5 billion in debt. As Greg mentioned earlier, and as we addressed at our Financial Analyst Meeting last month, we purchased $1.4 billion in stock during the quarter, which brings us to approximately $2.5 billion in share repurchases since the inception of our plan.

We've reduced our share count by approximately 16% since the start of the program with a purchase of 54.6 million shares at an average price of $45.38. In addition, we paid $70 million in dividends during the quarter.

Now turning to our Q2 and full year outlook. For Q2, we expect sales growth of approximately 6% over the second quarter of 2011. Our outlook is for non-GAAP earnings per share of $0.65 to $0.70 from continuing operations. This compares to non-GAAP EPS in Q2 2011 of approximately $0.54 per share. Consistent with prior quarters, this outlook excludes stock-based compensation and intangible amortization expenses of approximately $0.10 per share and items historically highlighted in our quarterly earnings releases.

Moving to full year 2012, we are reiterating our sales outlook of approximately 5% growth and operating margins of approximately 17% of revenue. I'll now turn it over to Greg for business highlights from the quarter.

Gregory Q. Brown

Ed, thanks. In our Government business, sales for the quarter were $1.3 billion, which is up 11% over Q1 of last year. We saw solid growth in all regions, including significant growth in North America. Our profitability also improved, with operating earnings growing to 14.1% of sales this quarter compared to 11.5% in Q1 last year as the business continues to scale.

Some notable wins among our ASTRO P25 radio platform included projects in Pierce County, Washington and Adams County, Pennsylvania valued at $18 million and $19 million, respectively. We also announced a $12 million county-wide system to support all Sumter County, Florida public safety and public service agencies. We announced a $7 million system in Colombia County, Georgia that includes our latest ASTRO P25 Base 2 system yet maintains backward compatibility to the legacy networks. And in Warren County, Ohio, we replaced their 22-year-old system with a new $9 million ASTRO 25 emergency communications network for public safety and public service users across the county.

Internationally, the Ecuador police will deploy $10 million of additional ASTRO radios to increase the current installed base with our APEX series.

In TETRA, the International TETRA Awards recognized one of our ultra-rugged radios for its design and use in hazardous environments. In addition, our customers were recognized for their adoption of TETRA technology, including Best Use of TETRA in Public Safety for Airwave in the U.K. and Best TETRA Innovation for the Hong Kong Police.

During the quarter, we also won additional TETRA awards with Hong Kong Mass Transit and the Mumbai, India Airport. Growth also continued in our professional and commercial radio portfolio with solid double-digit growth on top of an excellent first quarter last year as customers continue to choose our digital solutions like MOTOTRBO.

This year's International Wireless Communications Expo in Las Vegas provided an opportunity for us to share our latest government solutions and innovation. We announced the MOTOTRBO SL Series, two-way radio, an industry-leading, incredibly thin and light digital radio with its slim form factor, designed to meet user requirements and solutions for hospitality, services, security and airports.

With innovative features such as integrated intelligent audio and intuitive work order ticket management, this device enhances professionalism and discretion while enabling improved customer service and faster response times.

We also introduced the LEX 700, the first handheld Public Safety LTE device, which delivers street-ready data over Public Safety LTE. This mission-critical handheld delivers a compact, rugged form factor with intuitive user interface in unprecedented access to multimedia applications over multiple networks, including Public Safety LTE. We've talked about how important this technology is for public safety and first responders in the U.S.

We recently were awarded a $4 million contract from Harris County, Texas to expand their Public Safety LTE network with additional sites, to deliver enhanced video and data capabilities along with expanded interoperability with their existing ASTRO 25 radio system.

And in February, President Obama signed the Middle Class Tax Relief and Job Creation Act, which reallocated the D Block for public safety use. In addition, the law provides a funding stream over the next 8 to 10 years at $7 billion for a nationwide network buildout. We believe we're well positioned to compete for this business in Public Safety LTE.

The products and solutions developed in our Enterprise segment often appeal to our Government customers as well. For example, the Colombia National Police purchased over 2,000 ES400s for their police force as a supplemental device to connect with local citizens.

Moving on to the Enterprise business, sales in the Enterprise segment were $655 million, a 2% decrease from Q1 of last year. Excluding the expected iDEN decline of $31 million, actually Enterprise grew 3%. Remember also, this comes off of an 18% growth rate in the year-ago quarter. Operating earnings were 16.2% of sales compared to 19.8% last year, with the difference in decline primarily driven by iDEN, pension expense and foreign exchange.

At the National Retail Federation Convention in January, we showcased a number of examples of our leadership and innovation. Together with our partners, we demonstrated how technology continues to change the retail landscape from the warehouse to the store floor.

Our Retail customers continue to invest in solutions to improve their customers shopping experience. Demand for this technology comes from all segments of the retail value chain, including designers, distributors and retail points of presence with online or traditional stores.

For example, Macy's recently chose our MC3190 and our wireless LAN infrastructure with air defense to drive real-time inventory accuracy within their operations. In another example of our purpose-built enterprise mobile computing portfolio, United Airlines has initially deployed over 3,000 MC95s for baggage handling, accurately tracking bags as they move throughout their North American network, providing greater visibility and improved customer service.

And TNT Express in Germany is deploying new proof-of-delivery applications at our MC95 enterprise mobile computing devices as well. In our advanced data capture business, we unveiled the rugged DS3500 extended range scanners with the flexibility to capture bar code information from extended distances for warehouse management and other harsh industrial environments. Goya Foods recently chose these extended-range scanners because of their ability to scan both 1D and 2D bar codes. And furthermore, Goya expects to improve efficiency with the flexibility of a single device that meets all of their scanning requirements.

Our go-to-market remains focused on a combination of our 1,700 direct sales professionals and our 20,000-plus channel partners, who help us meet customer needs and extend our reach. Our PartnerEmpower channel program was recently awarded with a top rating from CRN magazine, again recognizing the support and investment we provide to distributors, resellers and applications developers.

Our global services team continues to respond to customer demand for more managed services. This quarter, we finalized the transaction to assume responsibility for Norway's nationwide TETRA public safety system, representing a $750 million contract through 2026, one of our largest public safety agreements. Our services team continues to help public safety and public service agencies adopt innovative technologies like video surveillance as well. For example, the city of Chicago video surveillance program continues to expand in Chicago and with additional agencies, such as Chicago public schools, where the program includes -- now includes 14 high schools to keep students safe. In addition, we recently partnered with the city of Cleveland to integrate their Cleveland shared security surveillance network for public safety.

Now turning to a regional view for the total company. For the quarter, North America sales grew 9%, driven by solid growth in both Government and Enterprise. EMEA grew 1% with growth in Government. Asia posted 14% growth, while Latin America decreased 5% as a result of the planned decline in iDEN, which disproportionately affected the region.

Source: seekingalpha.com