Motorola Solutions, Inc. (MSI) Q4 2011 Earnings Report, Transcript and Summary

Good morning, and thank you for holding. Welcome to the Motorola Solutions Fourth Quarter 2011 Earnings Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. The presentation material and additional financial tables are currently posted on the Motorola Solutions Investor Relations website. In addition, a replay of this call will be available approximately 3 hours after the conclusion of this call over the Internet. The website address is www.motorolasolutions.com/investor. [Operator Instructions] I would now like to introduce Mr. Shep Dunlap, Vice President of Investor Relations. Mr. Dunlap, you may begin your conference.

Thanks, and good morning. Welcome to our conference call to present Motorola Solutions' fourth quarter results. With me this morning are Greg Brown, Chairman and Chief Executive Officer; Ed Fitzpatrick, Executive Vice President and CFO; and Mark Moon, Executive Vice President, Sales and Field Operations. Greg and Ed will review our fourth quarter results along with commentary, and Mark will join us for Q&A. I would like to point out that the results Greg and Ed will highlight in their prepared remarks refer to continued operations and exclude the Amateur, Marine and Airband radio businesses we recently exited. Updated financials reflecting this transaction can be found on our Investor website. We have posted an accompanying earnings presentation and press release at motorolasolutions.com/investor. In addition, we have posted updated pro forma non-GAAP financials that reflect the recent move of the Amateur, Marine and Airband radio businesses to discontinued operations. 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. With that, I will now turn the call over to Greg.

Thanks, Shep, and good morning, and thank you for joining us today. Q4 marked another great quarter for Motorola Solutions as we achieved a record performance for sales, operating earnings and operating margin. These quarterly results helped cap a very strong and exciting year for our company. 2011 was a year in which we streamlined and strengthened our portfolio, generated excellent cash flow, delivered substantial operating earnings expansion and returned significant capital to our shareholders. Highlights for the quarter included growth in all regions. Strong Government growth, improved operating leverage and the continuation of a meaningful capital distribution program for our shareholders. This morning, we reported sales in the fourth quarter of $2.3 billion, an increase of 5% from Q4 of last year. On a GAAP basis, net earnings were $0.54 per share from continuing operations compared to $0.49 in the year-ago quarter. Non-GAAP net earnings from continuing operations were $0.87 per share compared to $0.64 per share in Q4 of last year, a 36% increase. For the full year, we posted revenue growth of approximately 8% while increasing non-GAAP operating earnings by 29%. For the remainder of this call, we'll reference non-GAAP financial results unless otherwise noted. So overall, our Government business revenues increased 6%. North America, Asia and Latin America all saw steady growth, while EMEA was down slightly due to continued challenges in Western Europe, but also the modules business divestiture we had earlier. Operating earnings in the Government business grew 39% due to the strength in sales, a stronger product portfolio and continued expense management. Government sales increased 6% for the full year exceeding our outlook of low single digits. In our Enterprise business, sales increased 3% from the year-ago quarter, including an anticipated decline in iDEN. Growth in Enterprise, excluding iDEN, was 9% for the quarter. Growth was driven by enterprise mobile computing and wireless LAN, including managed services as customers continue to view us as a strategic partner, enabling them to increase efficiencies, revenues and customer satisfaction. Operating earnings in the Enterprise business grew 10%. On a full year basis, the Enterprise business delivered revenue growth of 11%. The sales growth this past year in both businesses is a result of our continued focus on new product innovation and delivering solutions recognized by Enterprise and Government customers as an investment with high returns. We continue to enhance the features available on our products, and we've expanded or tiered many of our product portfolios including mission critical voice and enterprise mobile computing. With respect to capital allocation, I'm pleased with our continued progress. During the quarter, we paid $72 million in dividends and repurchased $366 million in MSI stock, bringing the total repurchase amount to over $1.1 billion during the first 2 quarters of the program that we announced last July. I'll now turn the call over to Ed to discuss our financial results in more detail, then I'll return to discuss some operational highlights and provide additional thoughts on our business performance.

Thanks, Greg, and good morning. As Greg mentioned, our Q4 sales included growth across all our regions and much of our product portfolio. Along with solid revenues, our disciplined expense management yielded another excellent quarter of operating leverage. On a full year basis, revenue grew 8% to $8.2 billion while operating earnings as a percent of revenue was 16.7%. This represents a 29% increase in operating earnings from 2010. In our Government business, we saw continued growth in the fourth quarter with sales of $1.5 billion, an increase of 6% from the prior year. 2011 full year Government revenues were $5.4 billion, growing 6% over 2010. The Enterprise business grew 3% to $753 million in Q4 driven by enterprise mobile computing, wireless LAN and related managed services. These Enterprise results included a $37 million decline in iDEN revenues. For 2011, the Enterprise business posted revenues of $2.8 billion, growing 11% year-over-year. Earnings from continuing operations were $0.87 per share compared to $0.64 per share a year ago, a 36% increase. Operating expenses were $725 million or 31.5% of revenue, which represents a 300-basis-point improvement from the year-ago quarter. Operating expense dollars were up slightly on a sequential basis and generally in line with our expectations, which we shared with you on the Q3 call. Our operating earnings for the fourth quarter were $444 million or 19.3% of sales compared to $346 million or 15.8% in Q4 2010. Operating earnings growth was over 5x the top line growth in the quarter. Similar to Q3, this accelerated increase in earnings growth was driven by continued expense management focus, as we lowered both R&D and SG&A as a percentage of revenue. Total other income and expense was a net expense of $9 million in the quarter compared to a net expense of $24…

Thanks, Ed. In Government, our sales for the quarter were $1.5 billion, up 6% over Q4 2010. Profitability for the business also improved with operating earnings of 19.8% of sales this quarter compared to 15.2% in Q4 of last year. Our growth in the Government business of 6% for the quarter and 6% for the full year demonstrates that mission critical communications remain a priority for our public safety customers and the communities they serve. We had a strong finish to a very good year in North America Government with full year sales growth of almost 6% in the region. Consistent with historical trends, growth in Asia and Latin America was also very good. EMEA saw a modest decline for the quarter and the year driven primarily by the divestiture of the Modules business. There are many common demand drivers across all geographies as public safety users seek improved capability and coverage enhanced features from digital and interoperability. In ASTRO, our market-leading P25 compliant radio system, we won several new large awards including St. Louis County for $65 million to design and build one of the largest local radio systems in the Midwest; and Washington State Patrol for $25 million, which will integrate with the existing Department of Justice P25 trunked system in the state. The state of Tennessee chose us to implement Phase 1 of a statewide radio system to replace a decades-old system. The $29 million upgrade will improve communications across public safety agencies and includes new safety enhancements such as emergency man-down notification and GPS capabilities along with improved coverage and multi-agency interoperability. We also won ASTRO awards with several counties in Florida, including St. Johns for $26 million, Seminole for $15 million, Osceola for $11 million. In Latin America, we won a $20 million contract with…

Thanks, Greg. Before we begin taking questions, we want to remind callers to limit themselves to one question and one follow-up so we can accommodate as many people as possible. Operator, please instruct our callers on how to ask a question.

[Operator Instructions] Our first question comes from Peter Misek with Jefferies & Company. Peter Misek - Jefferies & Company, Inc., Research Division: I guess, if we look at 2 key factors, if we look at 2013, I know it's next year and we look at public safety legislation, if it were to pass this year given Congressional support, never mind the bickering they have, how many quarters do you think it'll be before we would see a ramp in revenue for that if we make assumption that it passes this year?

Peter, if you're referring to kind of D Block, it's a close call. It's tough to say whether it will go this year or not. But what I would say is that we are -- we remain pretty confident that eventually additional spectrum will be made to public safety. To remind you, and I think you referenced it, we're not anticipating any material revenue contribution in '12 from LTE. But I think eventually they'll get there and they'll coalesce around a plan to give public safety more spectrum. That as we've referred to, LTE is incremental to the plan and included and incorporated in the guidance we've given for this year. Peter Misek - Jefferies & Company, Inc., Research Division: And just to sneak one in on the guidance for next quarter, if we look at historical patterns and what seems to be like your backlog going into the quarter, it looks like the growth that you're forecasting seems very conservative. Can you give us a little bit more detail there in terms of puts and takes, seasonality on how we should be thinking about Q1?

Well, and I'm glad you mentioned that, Peter, because to remind everybody, from a linearity standpoint, Q1 is typically our lowest quarter. So our guidance incorporates looking at historical trends for revenue contribution. So it's 4% including the decline of iDEN in Q1, which I think is $37 million in Q1. So if you normalize for that, we would anticipate on a normalized basis, it being higher. But you're right, Q1 is technically the lowest revenue growth quarter and then we ramp over time. For the full year, we're expecting 5% all-in even with a $70 million decline in iDEN. And we're forecasting and anticipating operating margins of about approximately 17%.

We'll take our next question from Jim Suva with Citigroup.

When we think about your outlook for 2012, I want to make a couple of clarification questions, then I have a follow-up. I assume that 5% outlook in sales is excluding the exiting of businesses, is that correct?

That's correct. The results that have been included in discontinued operations will be taken out and that guidance is provided with that in context.

Okay, great. And then my question is when we think about, your company has a lot of attractive cash flow and this year you paid down debt, you started issuing stock buybacks and dividends and such. When we think about your cash flow, which, if I heard correctly, you think should basically mirror your sales growth of 5%, maybe I'm off on that. But let's say your cash flow does grow by 5% next year, how should we think about the cash deployment there? Are you looking at a continual reducing of your share base? Does acquisition start to be a little bit more interesting here? How should we think about that use of cash, which is a good issue to have?

Okay, thanks, Jim. I think a couple of things. First, we have the $2 billion share repurchase program as we talked about, $1.1 billion through that program through the end of the year. Another $900 million left to go through the end of 2012. I think on the -- when you look at the cash flow generation, the operating cash flow, I think we're still sticking to the guidelines that we gave at the end of the second quarter. That framework of the allocation of cash that is generated, 25% CapEx, approximately 30% to dividends and then that 45% remainder to a flexible combination of acquisitions and/or incremental share repurchases. So I think we're sticking with that, and I think that framework will work for us going forward.

We'll take our next question from Ehud Gelblum with Morgan Stanley.

This is actually Stan Kovler for Ehud. I was wondering if you can update us on the $1.5 billion LTE funnel that you used to talk about before. Where does that still stand, if you can give us some information there?

So Ehud, if you think about -- I'm sorry, Stan, if you think about what we've talked about in the past, we still remain very confident about the LTE funnel. And we talked about in the past that it was not only a North American funnel, it's been driven somewhat by the BTOP grant and the D Block that Greg mentioned earlier. But there's also strong demand in the Middle East and in parts of Asia, as well as Latin America where we're doing a trial in Brazil and are talking to Colombia as well. So that funnel is still very healthy. As we've talked about earlier, no meaningful revenue in 2012, but we do expect the ramp to start in '13 and continue forward in the out years beyond that. So we're still very excited about the LTE business as we go forward.

So next, the side of Craig Hettenbach with Goldman Sachs.

Greg, can you touch on the backlog in the public safety business and also visibility in that business today versus recent quarters?

So Craig, I would say our visibility is pretty consistent with previous quarters. So we've talked about having a reasonable view, 3 to 6 months out. I think that's the same as we -- as it has been historically. Backlog was down slightly exiting the year as we finished 2011, but we feel good about our position and it's been incorporated in the guidance we've given.

Got it. And then, Ed, on the 17% operating margin target, you talked about some of the pension expense. Any other puts and takes as you think about margins as you trend through the year in terms of SG&A and gross margin?

I think the big one we talked about is the pension expense of $60 million, but we also did talk about the iDEN decline to a certain extent, right? So the $70 million decline in iDEN, which we have talked a bit more profitable given the stage of that business and the position that we are there in that business. So I think, those are that 2 big factors. We'll get that leverage at the top line by managing expenses, but growing the operating earnings from 16.7% to approximately 17% as a result.

We'll go next to Tavis McCourt with Morgan Keegan. Tavis C. McCourt - Morgan Keegan & Company, Inc., Research Division: The question is really on 2012 guidance, although Enterprise, ex-iDEN, is still growing, it clearly decelerated throughout this year. And I was wondering as we look at the 5% guidance for the full year, how should we be thinking about that split between Government and Enterprise and even if you can just talk qualitatively about that. And then a follow-up on the pension, Ed. The cash contributions you're putting into the pension both last year and this year, are those minimum requirements? And if not, what are the costs and benefits you're weighing to decide on that cash number?

So Tavis, as you think about it, we've had really good Enterprise performance for the last several quarters and very pleased with it. Going into 2012, as we look at our individual businesses and segments with Government and Enterprise, we think about Government growing low to mid-single digits for 2012 and Enterprise growing for high single digits, and that's the mix that we're anticipating that gets incorporated for the full year annualized at 5%. I think that this push for mobility in the Enterprise, specifically in retail and the press for having store operations is informed as smart consumers when they come in. Because more and more shoppers are smarter, is pushing retailers and other enterprise verticals to equip and modernize from a mobility technology standpoint, and those trends serve us well.

So on the pension front, as you mentioned, the $230 million was more in line with what we had planned at the beginning of the year and in line with what would be required. The $250 million was the incremental amount that was contributed this year, the voluntary amount if you will, bringing the total contributions for the U.S. plan to $480 million. The $340 million next year, I would view more in line with the required amounts as we look at the pension contributions for the full year 2012.

Our next question from Jeff Kvaal with Barclays Capital.

I wanted to get into the Enterprise segment a little bit because actually I'm not sure that it was as strong as you would have hoped it would be. A little bit below seasonality in the fourth quarter, and it seems a little bit light in the first. Now it sounds as though that iDEN is a big part of that. And if that's the case, would you mind giving us a little bit more detail on how big iDEN is as a percentage of the mix? And if there's more to it rather than iDEN, we'd -- I'd obviously love to hear that.

Yes, Jeff. So iDEN was -- declined $37 million in Q4. And as you -- which is obviously included in our Enterprise results and compressed the revenue growth to all-in of 3% for Q4. If you think of 2012, iDEN is going down approximately $70 million, of which half of that decline is hitting us -- anticipated to hit us in Q1. So that's the math that's working its way through the Enterprise P&L. But normalized for that, we continue to see some positive demand both in transportation and logistics. And obviously, for Q4, we grew 9% and for the full year, 11%. So -- and it's coming off a pretty high base year of comps, too. So that's the composition of the segment.

Could you tell us what the total iDEN revenues were for 2011?

So in '11, they were $365 million I believe. And I think they're going to be -- we're planning on approximately $300 million for 2012.

Okay. And would it be fair to say that they are above the corporate -- above the segment average operating margin?

That's correct.

We'll go next to the side of Larry Harris with CL King. Lawrence M. Harris - CL King & Associates, Inc.: Was wondering if you could perhaps discuss, and I know it's a relatively small business, but the Amateur, marine, Air/land radio business, was that contributing about $22 million in revenues per quarter? And was this in the Enterprise or Government segment? And why is it being discontinued? It didn't look like it had a major impact one way or another on earnings.

Yes, Larry. I think your comment is exactly right across both fronts, it was roughly $90 million for the full year. We had picked up those businesses when we made the acquisition of Vertex Standard. It was really noncore to our business as you mentioned. Wasn't really substantial, so we've decided to exit that Marine, Airband and the Amateur business and stick back to our core business. It was reported in the Government segment. So we're going back to our core Government business. Those brands will continue on under a new brand of Yaesu as it goes forward. So we won't be in those lines of business. Lawrence M. Harris - CL King & Associates, Inc.: And do you expect much in the way of proceeds from this or what will happen?

No, it was...

I would just say it was just a part of an agreement that we made with the former owner, and there was a division of assets, if you will, so not a lot of net proceeds as a result.

We'll take our next question from Deepak Sitaraman with Crédit Suisse. Deepak Sitaraman - Crédit Suisse AG, Research Division: Greg, just a question for you. In the core Enterprise business ex-iDEN, your guidance for the full year seems to suggest a meaningful deceleration. Is that more reflective of just the cyclical nature of that business or are there certain geographies or verticals that are driving that view?

I think, Deepak, it's more or less coming off of previous periods, strong growth in terms of year-on-year comp candidly. We expect -- we had record years in our advanced data capture business, in our WLAN business, enterprise mobile computing was really robust. We expect a continuity in extension of strong performance in those product areas. And so I think it's more or less that. Now obviously, as I mentioned, we still are all-in planning on high single digits for the Enterprise for revenue and low to mid on the Government segment. Deepak Sitaraman - Crédit Suisse AG, Research Division: Excluding the iDEN decline, right? So that's...

The other comment around the regional clarity, we spoke in the last couple of calls about the strength of Enterprise in Europe and particularly Western Europe, which again as we plan for this year, we've been a little more conservative given everything that's going on in that region.

We'll take our next question from Steve Tusa with JPMorgan. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Just a question on the short-cycle Enterprise business. Are you seeing any kind of destocking or any kind of major movement in those businesses?

I think as we look at that business, we see the trends continuing the same. In fact, as we work through all of the supply chain issues that arose last year due to the incidents in Japan and in Thailand, our distributors have continued to show strength. In fact, they continue to stock at pretty good levels. So interestingly enough, across the board, the demand, the buying patterns, as well as the trends seem to remain consistent to what we've been seeing in the past.

We'll go next to Brian Modoff with Deutsche Bank.

RFID, you've talked about that a few times, Greg. Can you kind of give us an idea of the size of that market as you see it now? And with the standards getting a bit more kind of settled out, where do you see that as a growth opportunity for your business and how do you see yourself positioned? Are you primarily a reader's player? Have you done anything -- you used to have a packaging capability, do you still have that? Can you give us a little bit of a more run down on that part of your business?

So Brian, we're -- I'm still very excited about the opportunity but candidly, it's pretty small. And I think it will remain small. Now we've had some great client references. I mentioned Lord & Taylor is the most recent. And yes, we're active, and I think lead in the mobile reader space. I think more and more retailers and other enterprise clients will also look to incorporate fixed. I think there's opportunities for RFID, both mobile and fixed, and perhaps optimize with some things in our WLAN portfolio that could be unique. So I consider us very strong in RFID. I like our patent portfolio. I like our product portfolio, but it is small. And while it remains an interest of high appeal for many customers, it's not -- by no means material, and I wouldn't see it as such for the foreseeable future.

So it's below 5% of revenues?

Absolutely, yes, for sure.

We'll go next to Matt Thorton with Avian Securities.

Ed, a quick question. Can you remind us, I know you guys have a debt payment coming up this year, I think it's like $400 million. What quarter does that hit? And then secondly on the payment to Motorola Mobility, how much is left and kind of how will that play out?

So on a debt piece, it's the fourth quarter and it's a $400 million amount that comes due. We remain flexible on what we plan to do with that. And we'll give you more updates on that as we move forward on the quarters. On the Motorola Mobility, I believe the amount that's left to...

$75 million.

To go there is $75 million. That will depend upon as we disclosed repatriation of cash from certain foreign jurisdictions. So we'll update you on that as there's news to report.

Got you. And how much did you guys repatriate in the quarter?

We repatriated in excess of $400 million during the quarter.

Okay, terrific. And just one follow-up if I could, quickly. On the Wi-LAN business, I know it's a fairly small but a high-growth business for you guys. Can you kind of just talk about the demand you're seeing there quarter-to-quarter? And then perhaps just talk about how much of a priority you're putting on, pushing outside of retail and your core cement 4 verticals into other verticals in that market?

So the WLAN business and market overall is -- as you know, Matt, is really strong growth, and we were clearly a beneficiary of that, which was reflected by the fact that we've had our best year ever. Now we do focus and we have great success in the verticals where we're strong. So retail, transportation and logistics, energy, utilities and that remains the power alley of where we focus our WLAN portfolio. We're not nearly as successful in the verticals where we are not as strong from a distribution and sales coverage standpoint. But the other thing I'd mention, Matt, is it's becoming an interesting asset, more interesting asset as a component in our services strategy. So as enterprise customers want to manage mobility behind the firewall, and they're trying to do device management and security and manageability for a portfolio devices and optimize the performance of those devices with WiFi infrastructure, obviously we bring all 3 elements of that stool, the devices, the wireless LAN portfolio, as well as the manageability software. So it was -- it had a really good year, and I think we've got a great team leading it. And I expect it to grow pretty strongly again in 2012. And we will be targeted in our stronger verticals and using it as an anchor tenant in some of our managed services offerings.

I show we have no further questions at this time. I would like to turn the floor back over to Mr. Shep Dunlap, Vice President of Investor Relations, for any additional or closing remarks.

Okay. Thank you. I want to remind everyone the details outlining, highlighted items are GAAP to non-GAAP P&L reconciliations and other financial information can be found on our motorolasolutions.com, Investor Relations site. An audio replay together with a copy of today's slides will also be available on this site shortly after the conclusion of this call. During this call, we made a number of forward-looking statements within the meaning of applicable federal securities law. Forward-looking statements or 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 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. Such forward-looking statements include, but are not limited to, our comments and answers relating to the following topics: future sales growth including by segment, by region; earnings per share outlook; future tax rates and cash tax rates; operating cash flow; growth and uses of cash; expectations for operating earnings, operating expenses including those related to pension costs in contributions, the amount of other income expense, as well as operating margins and profitability; future declines and intangible amortization; demand trends for our businesses and products such as wireless LAN, LTE, RFID and conversion from analog to digital; the ability of our products to increase efficiencies and revenues for our customers; our expected decline in iDEN; the timing and ability to repurchase shares under the share repurchase program; our ability to pay future dividends as well. Because forward-looking statements involve risks and uncertainties, Motorola Solutions' actual results could differ materially from those stated in these forward-looking statements. Information about the factors that could cause and in some cases have caused such differences can be found in this morning's press release on Pages 12 through 25, and Item 1-A of our 2010 annual report on Form 10-K; on Page 46, Item 1A of our first quarter 2011 quarterly report on Form 10-Q; on Page 50 in Item 1A of our third quarter 2011 quarterly report on Form 10-Q; and in Motorola Solutions and other SEC filings. Thanks. We look forward to speaking with all of you again shortly.

Ladies and gentlemen, this does conclude today's teleconference. A replay of this call will be available over the Internet in approximately 3 hours. The website address is www.motorolasolutions.com/investor. We thank you for your participation and ask that you please disconnect your lines at this time. Have a wonderful day.