Motorola Expects Uptick in Federal Video Sales in 2020, Downplays FirstNet Revenue
Friday, August 02, 2019 | Comments

Federal bans on Chinese company procurements in video surveillance will provide traction for Motorola Solutions, while the company has yet to see revenue from the First Responder Network Authority (FirstNet), said CEO and Chairman Greg Brown during an Aug. 1 earnings call for the second quarter.

Brown said the company’s Avigilon video business had double-digit growth in the second quarter, mostly from state and local government contracts. He expects more federal wins in 2020. “The federal sales cycle is longer,” he said. “In 13 days the prohibition of Chinese gear kicks in. We expect to get traction more in 2020 than this year [in the federal market].”

After Aug. 13, federal agencies are banned from buying new video security gear from Chinese companies. Under a second piece of the National Defense Authorization Act (NDAA), beginning in August 2020, no federal grant funds can be used to procure Chinese video equipment, although U.S. agencies don’t have to rip out or replace any current Chinese vendor equipment already installed.

Brown also said FirstNet subscribers are not transitioning to commercial push-to-talk (PTT) over cellular services. “We don’t see any benefit in terms of revenue for us,” he said.

Motorola Solutions didn’t have any revenue from FirstNet in the first two quarters of the year and is projecting only single-digit in FirstNet revenue for the year. “It’s a cellular data play …,” he said.

Brown said PTT services are separate from LMR and incremental to LMR. Motorola executives have first-hand knowledge of the PTT over cellular transition because Motorola owns Kodiak Networks, the PTT service used by FirstNet and several other commercial carriers.

“FirstNet, I think, is obviously working for AT&T, but for us it has no meaningful revenue contribution at all this year,” he said. It’s too early to project [FirstNet revenues] for next year but expectations are pretty muted.”

Motorola Solutions’ quarter two sales were $1.9 billion, up $100 million, or 6% from the year-ago quarter, driven by growth in the Americas. Revenue from acquisitions was $33 million, and currency headwinds were $37 million in the quarter.

The products and systems integration segment grew 4%, and the services and software segment grew 9%. Both segments were driven by growth in the Americas, partially offset by unfavorable currency rates.

GAAP operating margin was 18.8% of sales, up from 15.5% in the year-ago quarter. The improvement was primarily because of higher sales and gross margin, partially offset by higher operating expenses related to acquisitions. Non-GAAP operating margin was 23.9% of sales, up from 21.5% in the year-ago quarter due to higher sales and gross margin, partially offset by higher operating expenses related to acquisitions.

Operating cash flow was $251 million, compared with $425 million in the year-ago quarter. Free cash flow was $188 million, compared with $384 million in the year-ago quarter. Cash flow for the quarter decreased year over year primarily because of the timing of incentive payments made in 2019 versus 2018. For the first half of 2019, operating cash flow and free cash flow were higher versus the first half of 2018 primarily driven by a $500 million voluntary pension contribution in the prior year and higher earnings.

The company paid $94 million in cash dividends, incurred $63 million of capital expenditures and repurchased $25 million of common stock. From a debt perspective, the company issued $650 million of new 10-year senior unsecured notes and used the proceeds to repurchase existing notes, resulting in an extended weighted average debt maturity profile.

The company ended the quarter with backlog of $10.9 billion, up $1.5 billion from the year-ago quarter. Services and software backlog was up 24% or $1.5 billion due to growth in Europe, Middle East and Africa (EMEA) and the Americas, partially offset by unfavorable changes in currency rates. Products and systems integration segment backlog was down 2% or $48 million primarily because of two large system deployments in the Middle East and Africa in the prior year and unfavorable changes in currency rates, partially offset by growth in the Americas.

"Our outstanding Q2 results highlight the strength of our business and the value of our unique public safety ecosystem," said Brown. “Our strong revenue and earnings growth in the quarter, combined with our record ending backlog, position us well for continued growth in the second half of 2019 and beyond.”

The company highlighted several services and software contract wins, including the $200 million U.S. Emergency Services Network (ESN) service extension through the end of 2024 and a $60 million Project 25 (P25) multiyear service contract with the state of Tennessee, extending service through 2028.

Motorola also signed a $59 million five-year contract extension to provide license plate data and analytical software and a $5 million records management contract with Baltimore County.

Products and systems integration contract wins included a $60 million P25 additional orders for statewide system in North Dakota; a $46 million P25 order from Oakland County, Michigan; a $34 million P25 order from Washington Metropolitan Area Transit Authority; and $5 million of public-safety video security contracts in Broward County, Florida, and the Cleveland metro area.

In the third quarter, Motorola Solutions expects revenue growth of about 6.5% compared with the third quarter of 2018. For the full year, the company now expects revenue growth of 7% to 7.5%, up from the prior guidance of 6% to 7%.

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