Why was Software and Services revenue flat even though the segment is growing?

Reported Software and Services sales were flat at $970 million because of U.K. Home Office impacts. The CMA's Airwave Charge Control took effect August 1, 2023, and the company exited the ESN contract as of December 31, 2023. Excluding U.K. Home Office sales, the segment grew 11%, with growth across all three technologies.

What did management change in its full-year 2024 outlook?

Management raised full-year revenue growth expectations to approximately 8%, up from about 7%, and non-GAAP EPS guidance to $13.22–$13.30, up from $12.98–$13.08. The outlook assumes about 171 million fully diluted shares and a non-GAAP tax rate of about 23.5%.

What is the main legal and financial risk to the Airwave contract?

The Court of Appeal will hear the company's challenge to the CAT's dismissal of its appeal of the Airwave Charge Control on November 11–12, 2024. Separately, the company is challenging the U.K. Home Office's Deferred National Shutdown Notice, which extends service through December 31, 2029, in the U.K. High Court, with a hearing scheduled for April 22, 2025. The company added $748 million to backlog for the extension, and that amount could change depending on the outcome.

Why did GAAP net earnings look weak in the first half of 2024 compared with non-GAAP results?

The first half of 2024 included a $585 million loss from extinguishing Silver Lake convertible debt, recorded in Other (income) expense. This item is excluded from non-GAAP results and accounts for most of the gap between GAAP diluted EPS of $2.37 and non-GAAP diluted EPS of $6.05 for the six months.

How strong is the company's cash generation this year?

Operating cash flow for the second quarter was $180 million, compared with $93 million a year earlier. Free cash flow was $112 million, compared with $40 million. For the first half, free cash flow was $448 million, up from negative $22 million in 2023. Management attributed the improvement to higher earnings, partly offset by higher employee incentive costs and cash taxes.

MSI 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed August 1, 2024. Cited figures are marked; the original filing is the authoritative source.

Motorola Solutions (MSI) reported second-quarter 2024 results (quarter ended June 29, 2024) that beat the year-ago period on nearly every headline metric and led management to raise full-year guidance for the second time this year.

Sales rose 9% to $2.63 billion^a, with Products and Systems Integration up 15% and Software and Services flat as reported. Excluding U.K. Home Office sales, Software and Services grew 11%.

GAAP EPS was $2.60^b (up 21%) and non-GAAP EPS was $3.24 (up 22%). GAAP operating margin expanded to 24.5% from 21.6%, and non-GAAP operating margin to 28.8% from 26.7%, driven by higher sales, favorable mix and operating leverage, partly offset by the Airwave charge control. The quarter's main drag was the U.K.

Airwave business. The CMA's prospective price control (the Airwave Charge Control) and the exit from the ESN contract reduced U.K. revenue, which is why reported Software and Services sales were flat. Backlog ended at $14.0 billion^c, down 2% year over year, though the company says backlog excluding the U.K.

Home Office was up. Cash generation improved, with operating cash flow of $180 million^d (vs. $93 million) and free cash flow of $112 million (vs. $40 million). Management raised full-year 2024 revenue growth guidance to about 8% (from about 7%) and non-GAAP EPS guidance to $13.22–$13.30 (from $12.98–$13.08).

Investors should weigh several open items. The U.K. Court of Appeal hearing on the Airwave charge control is set for November 11–12, 2024, and the U.K.

High Court challenge to the Deferred National Shutdown Notice begins April 22, 2025. Both could change Airwave revenue and backlog.

The Hytera litigation also has hearings scheduled for August 2024. Separately, the company recorded a $585 million non-GAAP-adjusted loss from extinguishing Silver Lake convertible debt in the first half of 2024, which significantly affected GAAP net earnings for the period.

02—Key points

Key Highlights

Q2 2024 sales rose 9% to $2,628 million. Products and Systems Integration grew 15% to $1,658 million, while Software and Services was flat at $970 million, or up 11% excluding U.K. Home Office sales.
GAAP operating margin expanded to 24.5% from 21.6%, and non-GAAP operating margin rose 210 basis points to 28.8%, reflecting higher sales, favorable mix and operating leverage.
GAAP diluted EPS was $2.60 (up 21%) and non-GAAP diluted EPS was $3.24 (up 22%).
Full-year 2024 guidance was raised to about 8% revenue growth (from about 7%) and non-GAAP EPS of $13.22–$13.30 (from $12.98–$13.08). This is the company's second raise in the year.
Free cash flow was $112 million for the quarter, versus $40 million a year earlier. Year-to-date free cash flow reached $448 million, compared with negative $22 million in the first half of 2023.
Backlog ended at $14.0 billion, down 2% year over year, but up excluding the U.K. Home Office. Software and Services backlog rose 2%, while Products and Systems Integration backlog fell 10% on strong LMR shipments.
Airwave/U.K. risk remains significant: the Court of Appeal hearing is set for November 11–12, 2024, and the High Court challenge to the Deferred National Shutdown Notice is scheduled for April 22, 2025. Both could change Airwave revenue and backlog.

03—Questions

Frequently Asked Questions

Why was Software and Services revenue flat even though the segment is growing?
Reported Software and Services sales were flat at $970 million because of U.K. Home Office impacts. The CMA's Airwave Charge Control took effect August 1, 2023, and the company exited the ESN contract as of December 31, 2023. Excluding U.K. Home Office sales, the segment grew 11%, with growth across all three technologies.
What did management change in its full-year 2024 outlook?
Management raised full-year revenue growth expectations to approximately 8%, up from about 7%, and non-GAAP EPS guidance to $13.22–$13.30, up from $12.98–$13.08. The outlook assumes about 171 million fully diluted shares and a non-GAAP tax rate of about 23.5%.
What is the main legal and financial risk to the Airwave contract?
The Court of Appeal will hear the company's challenge to the CAT's dismissal of its appeal of the Airwave Charge Control on November 11–12, 2024. Separately, the company is challenging the U.K. Home Office's Deferred National Shutdown Notice, which extends service through December 31, 2029, in the U.K. High Court, with a hearing scheduled for April 22, 2025. The company added $748 million to backlog for the extension, and that amount could change depending on the outcome.
Why did GAAP net earnings look weak in the first half of 2024 compared with non-GAAP results?
The first half of 2024 included a $585 million loss from extinguishing Silver Lake convertible debt, recorded in Other (income) expense. This item is excluded from non-GAAP results and accounts for most of the gap between GAAP diluted EPS of $2.37 and non-GAAP diluted EPS of $6.05 for the six months.
How strong is the company's cash generation this year?
Operating cash flow for the second quarter was $180 million, compared with $93 million a year earlier. Free cash flow was $112 million, compared with $40 million. For the first half, free cash flow was $448 million, up from negative $22 million in 2023. Management attributed the improvement to higher earnings, partly offset by higher employee incentive costs and cash taxes.

04—Continue

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