Motorola Solutions, Inc. (MSI)

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Motorola Solutions, Inc. (MSI)

March 09, 2012 8:00 am ET


Unknown Executive -

Shep Dunlap - Vice President of Investor Relations

Gregory Q. Brown - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Mark F. Moon - Executive Vice President of Sales and Field Operations

Eugene A. Delaney - Executive Vice President of Product and Business Operations

Bob Schassler -

Bob Sanders -

Girish Rishi -

Bruce Brda - Senior Vice President and General Manager of Networks

Edward J. Fitzpatrick - Chief Financial Officer and Executive Vice President


Tavis C. McCourt - Morgan Keegan & Company, Inc., Research Division

Ehud Gelblum - Morgan Stanley, Research Division

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Lawrence M. Harris - CL King & Associates, Inc.

Jeffrey T. Kvaal - Barclays Capital, Research Division

Matthew B. Jones - Moody's Corporation, Research Division

Gregory Paul Spivy - ValueAct Capital, LLC

Matthew Thornton - Avian Securities, LLC, Research Division

Unknown Analyst


Unknown Executive

Ladies and gentlemen, please welcome to the stage Vice President, Investor Relations, Shep Dunlap.

Shep Dunlap

All right, good morning. Good to see everybody here. Just going to start with a little bit of housekeeping and then we can get started. So a number of forward-looking statements will be made during today's 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 these expectations will be achieved. Any forward-looking statements present 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, and in some cases, have caused our results to differ materially. You can consult our SEC filings for a description of these risks. As well, we're going to remind you that we'll make a number of references to non-GAAP measures today.

So with that, we've got a very full agenda today. The goal is to educate people further, double-click on businesses, show you more of the manager -- management team and senior leadership here, and hopefully, you'll come away feeling more educated about the business and some of the financial drivers. So with that, let's get started.

Unknown Executive

Ladies and gentlemen, please welcome to the stage, Chairman and Chief Executive Officer, Greg Brown.

Gregory Q. Brown

Good morning. Is this on? It's on. So thanks for coming. It's funny I think about the last time we were together, which I think was November of 2010 here in the city with our financial analyst meeting and what a difference 15 months makes. At that time, it was before separation. I think the biggest, probably, concern at the time aside from all the mechanical segregation of the actual enterprise was government spending. I remember that being asked about 11 or 12 different times, can you continue to grow in the face of headwinds of government spending? And then what also became clear was there was this whole thing about capital allocation and capital return. And as Ed and I talked that day and then subsequently meeting with you in the months thereafter, I think it was -- we hear you about separation and we hear you about what you're trying to do operationally, we hear you about what you're trying to do financially. But I hope you're paying attention to this. I hope you have a plan. I hope you kind of get it. And we feel pretty good 15 months later given where we are in the position of the firm.

Some of you may have heard me say this, but at the end of the day, as CEO, I have 2 roles: To effectively deploy capital and develop talent. And there's a whole host of different goals and targets and go-to-market product, R&D, new product investment, acquisition, all that supports deploying capital effectively and developing talent.

Now what you'll see this morning first is Moon, Mark Moon, and he will talk about, among other things, why we feel we can continue to grow at the rates that we're growing. He'll provide some regional color, go through some of the demand drivers, which are important that underpin demand, which is why we think we can continue to do what we're doing; provide an update on some customers and give a little bit more context and color around Public Safety, LTE and the D Block.

Gene Delaney will do product and business operations, and in addition to Gene, we have Bob Schassler, Bob Sanders and Girish Rishi. And I -- we did that obviously very purposely to double-click on the product portfolio, to highlight what we believe are the areas of differentiation, investment, distinction and why we're doing the kinds of things we're doing in R&D. We'll talk about -- he too and his team will talk about demand drivers, technology, migration, the size of the addressable market. And embedded in between both our Government business and Enterprise business, one of the things, among others, that makes us distinct is that the portfolio product and solutions that we sell have very high ROI. They have high return on investment characteristics. So even in the face of economic headwinds and austerity in Europe and government budgets, we've said that the Public Safety business is resilient and the industrial Enterprise Mobile Computing business is also different because retailers, transportation, logistics, warehouse, they deploy often times for increased productivity, OpEx savings and improve front-line customer service. So even though they're under pressure from budgets, we're kind of in the sweet spot of intersection of value, which is why I think we can continue to grow.

Fitzpatrick, I guess batting cleanup, will give you an update on repatriation, share repurchase, remind you of capital allocation, but also provide specificity on capital structure. Net debt, give you a little bit more of a current view around operating margin and operating leverage and update what we call kind of the 3-year financial envelope of the way we think about the firm. I think that at the end of the day, there's kind of 2 themes that underpin this morning in our business: Stability and sustainability. Stability and sustainability. So we will do our best with the team not to do a commercial or a marketing show, but instead give you some granular detail around region, product, return, thinking, capital structure, capital allocation, and give you some new information this morning that we haven't updated as of yet.

So by the way, we also have 2 different spots for Q&A. We'll have Moon and Delaney and the team to do the go-to-market and the product Q&A. And then at the end, it will be Gene and Mark and Ed and myself to do a closing Q&A. We'll try to move it along pretty crisply, not a lot of blah, blah, blah.

And with that warm introduction, I'll introduce Mark Moon. So thanks for coming.

Mark F. Moon

Thanks, Greg, and good morning. I'm excited to be back on this stage, as Greg just said, 15 months later. And when I was here before, the last slide I used was this slide. And what I talked about -- when we talked about our market position and where we're at and where we're going, I said at the end of the day, I believe we have a sustainable position because we have the right customers, we're in the right markets, we have the right solutions and most importantly, it's at the right time.

The good thing about being back up here today is I feel exactly the same way. I think all these things are more true today than they even were 15 months ago. In fact, if you look at a test case of last year, we certainly are excited about our performance. We had talked about our long-term growth rate of being 5% to 8%, and last year, $8.2 billion, 8% growth certainly outperformed our expectations both in Government and in Enterprise. We grew the Government business 6%, as you see. And that 6%, was still in the headwinds that we read about in North America, but in particular, against relatively flat growth in Government in EMEA, but we still grew 6%. Enterprise grew 11%, and by the way, that's 15% if you took away the item decline. So across the board, we had a wonderful performance. And if you look, we're still roughly 2/3 Government, 1/3 Enterprise. So we had good growth in both particular segments. But at the end of the day, we got to continue to grow, and we're going to come back to that.

If you look at the regions, basically the same footprint when you look at the mix of regions. There was a little bit of shift from North America, which dropped from 58% in 2010 to 2011 to 57%. And that was picked up by Asia Pacific. But I think a surprise here, probably for a lot of folks because we talked about it on several earnings calls, was that EMEA still held their own as we went across the mix of business.

In fact, if you look at the growth rates last year across each region, 5% in North America, and by the way, that would be 7% without the item decline; 10% in Latin America, which was 16% in our Traditional business less the Nextel International decline. Probably the surprise statistic is 9% growth in EMEA, again, very, very strong performance. And I'm going to come back when I give you a little bit more regional color around why I think we did that, but most importantly, why I think we can continue to do those kinds of growth rates. And then finally, 14% in Asia Pacific.

The other thing I wanted to say is this is not just a 1-year wonder. We went back and reviewed the last 3 years and the numbers are very consistent. So again, we are clearly winning today. But as I often times say to my team, with success comes expectations. And I recognize that. That's what you expect of me. Not just the fact that we've had a great year, but what's very, very important and make no mistake, I understand it, is that we got to continue to win. And when we think about how we're going to continue to win, I think it's important and Greg talked about that I would highlight some industry drivers. And you'll see this theme come through out because ultimately, what's most important whether it's me talking, Gene talking, Bob or Bob or Girish, it's all about customers. Everything we do starts with the customer. And it's important not just that we know what we're doing, but it's important we know what the industry is doing. And if you think about it, there's some common themes that run across both Enterprise and Government. Both have a rising mobile workforce, whether it's just in numbers, sometimes we say does government really have a rising number of workforce because we see that we're holding or declining in policemen and firefighters. But recognize it's not just policemen and firefighters, government in general, is clearly a rising mobile workforce and most importantly, the essence of that is they've got to get more information out to the edge. More information needs be moved to the situation that's out in the field.

And in Enterprise, clearly the case, we've been talking about for couple of years, the fast growth. There's also, in both cases, a need to get more efficient and effective. You've got to continue to do more with less. In both sides, we talked about the police folks last year that said, it's not just about more over the less, it's about being better with less. And the only way you can do that is by leveraging technology as a force multiplier.

It's also on both sides a pursuit of situational awareness, and what again, it comes back to the first point of getting information in the hands of people that can use it, whether it's an incident scene in public safety, or whether it's a store associate trying to help a customer, so they've got realtime information so they improved that customers' experience, it's critically important.

And ultimately, in both verticals, you see a technology migration that's really taking place very, very quickly: Analog to digital, voice to video, all the things that we're thinking about whether it just be older or antiquated equipment that needs to be upgraded or a move to newer, higher technology, that migration is taking place very rapidly.

And then if you look at each of the other verticals, the things that are really happening today and the drivers that are going on, no doubt, in Government and in Public Safety, safety and security continues to remain a high priority. We hear about at all the time, and an example I just quoted whether you have less budget or not, the citizens are not expecting to be less safe or less secure. So again, technology and what we do plays into that.

Federal regulations and funding, critical and in fact, if you're going to mention it, and we'll mention it several times, and I know you expect us to mention it, but the recent D Block legislation, and I think in general, not just in North America, we continue to see federal funding flowing throughout the world. And that's a big, big driver for what's going on. And then as I just mentioned around D Block, Public Safety broadband clearly a driver, clearly something that everyone's talking about throughout the world.

And if you go back one second, when we think about Enterprise, the connected consumer -- if you just go back one slide, please? The connected consumer is clearly a driver. You think about and you see today someone in a store with a smartphone, scanning a coupon or looking at what's going, it's clearly a push to get technology again to the edge, the omni-channel retail driving mobility. If you think about in retail, there's probably not a CIO, CMO or CEO that's not thinking about 3 things and how to deal with it. Number one, how do I deal with online? Number two, how to do I deal with brick-and-mortar, we'll have too much or too little and what does that mean; and then finally, mobile payment. And that challenge is clearly driving mobility investments.

And then finally, all of this rising mobility is clearly pushing strong growth throughout our Wireless Networking business to provide wireless access, so demand is higher than ever. You hear it from smartphones, you see it in our industry. So clearly, these things are going on and driving behaviors and business.

So how does Motorola Solutions continue to win? What is it? And in essence of it and is sounds very, very simple, but it's the comment I said earlier, everything starts with the customer. Our customer relationships, our domain expertise, the fact that we continue to invest in vertical market knowledge and the fact that it isn't just the sales organization that talks about customers, it's the entire organization. Everyone in Motorola Solutions believes that it starts with the customer and then we go develop products and solutions to meet that customer's need.

It's also about the fact that we focus on mobility solutions. In fact, we said before mobility solutions is really our DNA. It's what we've been all about. And it's what over the last 15 months has been a joy to talk about this business and what we do to make this dream a reality, if you will. It's; also and you'll hear a lot about from Gene, Bob, Bob and Girish, it's almost like an unfair advantage for a sales guy because we have an unmatched portfolio. Clearly, unparalleled from an end-to-end solution basis and you will hear about that. And then finally, I'm very proud of our reach of our sales and our service teams. We have over 1,700 direct sales people, have over 20,000 partners, have over 6,000 service people. It's a footprint that no one in the industry can match, and we're proud of that.

So it is wining today, but what it's really about is how winning today leads to growth tomorrow. And when you think about growth tomorrow, this again, is a slide we talked about last year. It's about leveraging and growing our embedded customer base -- excuse me, I try not to use any of these products here, it's about leveraging and growing our embedded customer base, which we call our core business. And we talked about sometimes you would say with our market position and a strong presence, is that a positive or a negative? And I think we talked a lot last year, it's a huge positive. The footprint we have and the ability to continue to migrate customers to the next generation solution is a big, big piece of our business. So we got to continue to hold that and to grow it as we go forward.

But then finally, the next piece is how do we expand solutions with next generation technologies? We're going to talk about the expansion category. And when we showed that CAGRs and we talked last time, we talked about the core business and where it is and what we've got to do to maintain it. But ultimately, what we talked about, the expansion portfolio gives us a chance to move to the top end of that 5% to 8%, which is exactly what we want to do.

So when we talk about it, just for quick refresher, I won't spent a lot time on this chart because it will be the essence of what Gene and his team talk about. But the core business is our radio systems, our radio products, the systems integration, implementation services that go with that, it's mobile computing, advanced data capture and again, the services that are associated, a wonderful business and by the way, when we show the CAGRs that we did last year, we outperformed the CAGRs in that market. So we continue to hold our core and leverage that core to grow.

But the piece that we'll talk more about today is really the expansion portfolio. Public safety broadband, integrated command and control, services. We've made a big push, and we made a formal announcement to create a global services team because we recognize if you're going to be in solutions, you got to have services to be the glue.

And when we think on the other side, advanced devices both around Government and in Enterprise, our Networking Converge business, our WLAN and all the things that happen. But make no mistake, there's a lot of excitement about that entire portfolio, but there's truly a lot of excitement around Public Safety broadband. And when we think about Public Safety broadband, we think about the impact of the D Block.

In this business, I've sensed particularly in the Government business, if you don't have spectrum and you don't not funding, it's tough to do business. The fact is this legislation gave both, spectrum and funding. It allocated an additional 10 megahertz of spectrum that was adjacent to the already existing 10 megahertz. It actually provided $7 billion of funding over the next 8 to 10 years, and quite honestly, it fulfilled a dream that we've been talking about since 9/11 of saying, we truly can enable public safety to have situational awareness, realtime video, interoperability and future technologies to allow them to be better and more efficient and effective.

We obviously worked very tirelessly on this legislation in support of our customers. And we're very pleased that it further demonstrates strength in the story that we told. In fact, if you remember when I was here last time, I talked about while we were excited about it and while when I talked about regions, I wanted North America to continue to be solid, but I needed Asia and Latin America, in particular, to grow double digits. And I needed Europe to hold on in the light of Western Europe. But what I said was when you think about Public Safety broadband, the exciting thing is it makes the biggest piece of our business, North America, a growth business. And quite honestly, we had planned for that when we talked about how we thought we could ease up towards the top of this 5% to 8%. So this actually solidifies exactly what we said in that particular arena.

The other thing is it's easy to talk about it, but sometimes it's also nice to just see some real-life examples. And we've got some big customers that really have spoken, and we've delivered the promise to them when we think about these new expansion areas.

In the State of Mississippi, we were fortunate again coming back to why the embedded customer base is a positive. We were fortunate to have won a statewide communications network for them with our traditional, if you will, core business of ASTRO 25. What they said was they wanted to move and be one of the first states to move forward with LTE. And the fact that we had that footprint, the fact that we were able to leverage a lot of the things that we already have there, enabled them to save money and more effectively deploy an LTE network. And we actually got that order from them and have been moving forward with that particular piece.

In Norway, just recently announced within the last month or so, a big win for us, in fact, a change of position for us. We were an equipment provider already, but they came back, and I think this speaks to our trusted customer relationship, number one; but number two, our new and expanded service capabilities and the fact that we had demonstrated in a number of countries in Europe, that we can manage countrywide networks. So they came back and we actually took on a prime role now. A 15-year agreement to manage, operate and build out a network and a communication center, if you will, for Norway. Big opportunity and a big expanded opportunity highlighting our services capability.

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