Question-And-Answer Session
Unidentified Analyst
Hi, couple of questions. First is, just a little bit more detail and the stock buyback. What do you currently have authorized right now?
Greg Brown
We’ve authorized coming out of Q2, $2.5 billion left. So we’ve purchased 4.5. The Board extended $2 billion repurchase authorization taking us from five to a total of seven since inception.
Unidentified Analyst
Okay, so $2.5 billion left and in terms of how that plan is being implemented, is it something where you guys can adjust in a material way or how you have adjusted in the past, I think that’s a significant way depending upon business fundamentals currently?
Greg Brown
We have adjusted and we continue to do it quarter-by-quarter. We purchased $550 million in Q1, $357 million in Q2. Actually, maybe that’s a inverted. It’s $357 million in Q1, $550 million in Q2. I’ve said that those are reasonable reference points in terms of how we’re thinking about it from a share repurchase standpoint, we do a, we update every quarter, our long range plan, which talks about the growth of the firm in 2014 and beyond, we do discounted cash flows back obviously assumes at certain cost of capital, but I think we’re pretty diligent about how we’ve done share repurchase to-date and it remains the high priority.
Unidentified Analyst
Okay. And then last question just concerning, correct me if this is wrong, I thought government business overall is roughly 70% of revenues is that about right?
Greg Brown
Government is what?
Unidentified Analyst
Government is roughly two-thirds of your business?
Greg Brown
Oh, I thought you said 7%. Yes, roughly yes.
Unidentified Analyst
Okay. How much of that is domestic roughly and how much of what’s domestic is focused on local and then I just have one quick follow-up on.
Greg Brown
So our government business is the majority of it state and local. Our federal business is about $600 million. So the government business domestically here is significantly driven by state and local.
Unidentified Analyst
And then how of you, have you guys been able to stabilize only revenues of that business this has been grown a little bit given in just budget constraints that we’ve had and are likely to be ongoing for a while and do you still want anticipate that that business can be relatively stable despite of budget constraints?
Greg Brown
I do think that the government business can be relatively stable, I actually think state and the disposition of state and local is stronger than it was two or three years ago, comparatively, our federal business as I mentioned is about $600 million, I think the federal budget is probably a little bit more challenged and I would call the state and local business obviously the federal level the sequestration and the debt ceiling and the whole host of other things that are going on at the federal level. I think the majority our federal business is split between civilian and defense and we’ll keep our eye on our federal order business but state and local business I think is pretty solid.
Jim Suva – Citigroup
And as the microphone makes its way to the next investor here I do have to say I live in California and the property tax collector is a lot happier today than they were two years ago and they are quickly spending the money.
Greg Brown
No I think tax receipts are better and the good position of the government and public safety business, as it remains a high priority within the allocation of available spend within a state and local jurisdiction, that’s a positive for us.
Unidentified Analyst
Greg would you talk little bit more about the Microsoft OS transition more details as to what exactly that is and the timing of it and what do you expect after that?
Greg Brown
So I think that the overwhelming majority installed base of our enterprise and the global computing business is Microsoft whether it’s Windows CE, Windows Embedded Handheld, Windows Mobile 6.5.3 and what Microsoft customers have wanted they want to stay with Microsoft is a roadmap of next generation of OS.
I think the announcement of Microsoft Nokia recommits clearly Microsoft to the consumer smartphone base of business and solidifies their interest in prioritizing Windows Mobile 8 where derivatives and enhancements there off I think that’s positive for us because typically what Microsoft does is they prioritize the Windows phone version for the consumer and then the enterprise derivative follows.
So but it’s been in that transition and the elongated transition of the next generation enterprise OS from the Microsoft that some customers, have hit the pause button waiting for the availability of that next OS, now having said that we’ve moved full steam ahead on the android. We’ve got products our MC40, our ET1 on android and 3.0 and soon android 4.0 or 4.1.
We’ve also invested in — organically in a small acquisition about 18 months ago or two years ago for an HTML five layer of application development that’s agnostic of the OS. So we can deliver Microsoft product, we can deliver android product and we can deliver HTML five product. But Microsoft centric customers interested in staying with Microsoft are awaiting more clarity on the future functionality of an X OS.
Unidentified Analyst
And the Microsoft centric customers installed based that you have is the vast majority on the installed base, is that correct?
Greg Brown
Without a doubt, yes. That doesn’t mean necessarily they have a preference to stay with Microsoft but yes the space of mobile computing for Honeywell or us or other are predominantly Microsoft.
Unidentified Analyst
So, I’m sorry just so that I better understand, it’s trying to take Windows Mobile 8 from that’s already out in the consumer side and implementing that in the enterprise?
Greg Brown
What Microsoft has typically done is they released the consumer OS first and then an enterprise grade version build off of that.
Unidentified Analyst
Okay, so what do you know about the timing of the enterprise grade version of that?
Greg Brown
At the moment I would characterize it as mid 2014.
Unidentified Analyst
And then just one other question, is there a risk that some of your enterprise customers are using consumer based hand held appliances with scanner features and software applications to kind of displace the core enterprise asset that you have?
Greg Brown
So, we’ve seen very little of that, if I think of our mobile computing business, I think of it in three large buckets primarily industrial computing then field mobility computing and then customer facing. We’ve seen some customer facing experimentation with smartphone deployment. It’s pretty small in nature and in fact in a couple of the cases where customers have rolled that up, it actually returned in the discussion to us and entertaining consideration to Motorola Solutions product.
So, I think it’s pretty small, I think we’ve articulated in the past that 10% or 10% or 15% as best we can estimate would be potentially vulnerable but the overwhelming hope would not be, thank you.
Jim Suva – Citigroup
Additional questions in the room, it’ s packed room there’s a question here towards the back and then we’ll get to, we’ll get to you next.
Unidentified Analyst
In terms of [wisdom] of that continued buyback strategy versus M&A there seem a lot of industrial companies do M&A, you have a great channel with the government, but you haven’t really done lot of M&A as part of the strategy. And why continue to buyback so much stock, but the return doesn’t seem to be that great?
Greg Brown
Because of what was the last part?
Unidentified Analyst
The return on the repurchase hasn’t been that great.
Greg Brown
What makes you say the return on the repurchase hasn’t been great? Just so you can help me?
Unidentified Analyst
Stock is $56 and the when you’ve been buying back at $49 over three years.
Greg Brown
Well, I mean I , I take the point, but it’s certainly better than having the inversion. I think that in terms of M&A, we’ve been pretty surgical about it. Psion was a good tuck-in. I liked it because it solidifies our number one in mobile computing. It’s a logical extension with our product duplication that gets us in to manufacturing, cold storage, other form factors we didn’t offer. The companies were culturally compatible. So the synergy cost targets that we expected to achieve were at or tracking above them and it’s right in the sweet spot in our core.
Because of the position that we have in a couple of markets as number one, acquiring or rolling up other assets are largely not available to us, given the strength of our market leading position and at the end of the day, I still think either investing in the business organically from an innovation and R&D standpoint, things like LTE where we’ve invested probably about $100 million over the last three years that results in a leading edge LTE position on the infrastructure as well as devices, is capital well deployed and I obviously think that the business will return to stronger growth in the future which then married up against the shareholder return against where we buyback the shares in aggregate, we’ll look even better than the way it looks today.
Unidentified Analyst
Just on the enterprise, I mean, just thinking a year or so out, two questions. One, would you ever consider selling that business and secondly, as some of your clients move to IOS and Android, would you consider, perhaps, shifting to a more managed services or a VAR type roll that you just help, lets the Home Depot or [low] sort of manage those devices.
Greg Brown
So on the second one first, we do entertain more managed services engagements or what we call MLM, Mobile Lifecycle Management. We’ve done it on the device side, we’ve also done it more intently on the wireless LAN side to change the value proposition and try to compete a little bit more effectively in the segment and business that’s challenged.
In terms of the focus on enterprise, our focus is on improving the business, and returning it to growth, and first of all retuning it from an improvement standpoint even if its negative, x the negative line, showing a trajectory where the nose of the plane is up, getting traction with new products, having the vertical orientation by which we go to market in North America to get traction and that’s our primary area focused.
Now having said that at the end of the day, I think that we as management, especially given our history at Motorola, we took the decision to spin-off mobile devices that was a huge decision, then made the subsequent decision to a cash Connected Home to it, which was not contemplated in the original configuration of spinning the business office. We monetized the networks business for 1.1 billion with Nokia and Siemens. We exited the Backhaul business, the unlicensed Backhaul business which is a good business but not for us.
So I think we’ve demonstrated kind of a dispassionate view of ways that are available to us to maximize shareholder value and I think we’ll continue to evaluate that in time.
Unidentified Analyst
And just a quick follow-up, I mean are you guys seeing ASP pressure on the [annum] price side as more people experiment with sort of white box android devices, or IOS devices?
Greg Brown
We don’t see ASP compression, but we see if you get some of more that substitution you will see a mix difference but not necessarily ASP contraction. By the way one other thing I should have mentioned when you asked me the levers on the expense side was pension and I meant to mention that. Pension has been a favorable benefit to us this year. From an expense standpoint we are likely to contribute at the moment our current thinking is approximately $200 million towards the pension. Given the move of interest rates the U.S. pension exiting 2012 had about a $2.8 billion liability and that’s improved with interest rates going up by a little bit more than 1 billion so that’s a favorable trend. So I just wanted to mention that one as well.
Jim Suva – Citigroup
I came ready to cash in on your pension are you?
Greg Brown
I don’t have a pension, I don’t have a pension, and no I am not.
Jim Suva – Citigroup
A question here in the middle of this room and then we are going to get to this half of the immediately following your questions.
Unidentified Analyst
Thank you. You mentioned the prior CFO at the time of the split was very strong on investment grade debt ratings and would that be a criteria for whoever you chose as a new CFO or would you be want to be more aggressive on your debt ratings?
Greg Brown
No I think the investment grade rating the focus was getting it and establishing at BBB. I think that our balance sheet and the inherent performance of the business gives us a lot of flexibility. I don’t have any intention or haven’t thought about lowering the investment grade, I think that’s important from a competition standpoint. It’s important to have that solid balance sheet and be able to complete all over the global but I would have no intention of changing that.
Unidentified Analyst
Thank you.
Jim Suva – Citigroup
And lets shift over now to this side of the room because we’ve focused over here, so let me come to a question right here in the front row.
Unidentified Analyst
So given the competition on enterprise sides from iPad etcetera, what part of innovation are you guys thinking about to rejuvenate that segment instead of just standing [through] rejuvenate and get it more (inaudible)?
Greg Brown
So we have the new product on the MC40 for the lack of a better term it looks more like a consumer [iTouch] if you will with the ruggidization, with industrial scanning, with optimize for WLAN connectivity. We are engaged with a number of customers on that product, its android based that’s one new product. We have a new Smart Badge, what we call the Smart Badge 1, which is in trail with handful of customers that is more or less a [lapel] mic if you will or badge that can do scanning, inventory lookup, push to talk.
We have the ET1 LAN and WAN tablet also android centric, that can be customized from a phone factor standpoint and branded with the individual enterprise plan, that’s more of a ruggedized nature of product. Those are a few of our new products. We are continually refreshing the MC series. We’ve had good attraction with the MC67, with a different distribution customers and postal.
So there is a number of things that [dealership] is doing on the product refresh side to make us more competitive and to get into some of the expansionary products that you are describing where maybe smartphone substitution would sort of for the fact we are asking to it, we can have a product to compete for that expansion grade that wont contaminate the industrial nature of the majority of the portfolio that we have.
Jim Suva – Citigroup
There is another question on this side of the room; I know I saw a hand go up.
Greg Brown
By the way the other thing I did want to mention and I know a lot of question on enterprise, as you know our iDEN segment is in the Enterprise. We have talked about it being approximately a 185 million of revenue in 2013. As we look forward in 2014, we think the iDEN business will be closer to approximately $75 million. So Sprint has obviously shutdown the iDEN network. We continue to serve NII and some other international clients in Latin America and in other theaters abroad. But that’s also some visibility we have that should be incorporated into the thinking for 2014.
Jim Suva – Citigroup
And we have a question over here
Unidentified Analyst
That Smart Badge product that you talked about, do you expect to take that into the healthcare hospital environment, there is a small company Vocera, would that be competitive with that product or
Greg Brown
So, I don’t know the exact product from Vocera, but yes I think it’s applicable as well in the healthcare. The early trials that I’m thinking about now are all retail. But I think it will have applicability in the healthcare as well.
Jim Suva – Citigroup
Additional investor question; there is a question here. The microphone will make it’s way to you in one quick second.
Unidentified Analyst
Hi, just one more question on the share buyback. So you guys are generating, I think it’s really help you amount of something like $800 million or $900 million a year free cash flow. But the buyback run rate is significantly above that. How are you guys thinking about things in terms of amount of share buyback relative to free cash flow or is that not a metric that you look at. And then in terms of shares outstanding, I imagine, it’s declining given the (inaudible) that gives but if you give little bit more detail on that so I can compare to share option grants?
Greg Brown
So, the share count has declined 23% since the inception of the share repurchase. I believe the shares outstanding coming out of Q2, guys $276 million to [$266 million]. I don’t know the amount issued from a share standpoint but I know that net, net we can continually contract a share base. What was the first part of your question?
Unidentified Analyst
Relative to cash flow.
Greg Brown
Right, so I think that obviously the share repurchase outstripping the cash generation is a reflection of the excess cash we have and the disposition in the U.S. and it’s paced to the amount we can repatriate without friction cost. Obviously, overtime, that level is out a bit. Yes, sir.
Unidentified Analyst
Greg, I wanted to ask about the operating margin target for the year. Are you guys on a calendar year?
Greg Brown
Yes.
Unidentified Analyst
So what has been the operating margin for the first six months of the year?
Greg Brown
So as 16.7% last year, full-year, and adjacent with the first half. Three years ago, 17.3% was last year. 16.7 was three years ago, 17.3% was last year, what’s it through the first half?
Unidentified Company Representative
(Inaudible)
Greg Brown
15%?
Unidentified Company Representative
Yes.
Greg Brown
Now we’re seasonally always heavy in the second half of the year.
Unidentified Analyst
Okay.
Greg Brown
Particularly in Q4. So I think you’ll see more operating leverage given the higher volume in the second half coupled with the expense controls, coupled with the variable incentives, which are leveraged to pull on sales in the bonus plan, question over here in the left.
Jim Suva – Citigroup
Can you wait for the microphone please? Thank you.
Unidentified Analyst
I just wonder if we could talk broadly about the, how you see the competitive dynamic in the government business, sort of what it’s been has been historically and may be how you see it unfolding over the next sort of year or two any update there will be great? Thanks.
Greg Brown
So I don’t think there’s any material change in the competitive landscape for the government business or primary competitor here in North America, is [Harris] in London or in the UK or internationally its more EADS, which was (inaudible) which I guess is going to rename themselves Airbus. We compete on the subscriber side on (Inaudible) subscriber with a smaller company name Sepura out of the UK.
The professional commercial radio business, the competitors remain the same in [iCom] and Kenwood and Hytera, so I don’t all in on the P25 business, the TETRA business and the PCR business, I don’t see any material change, as it relates to traditional LAN mobile radio business. Thank you.
Jim Suva – Citigroup
Additional questions.
Greg Brown
Over there on the end, first row.
Unidentified Analyst
Greg, this is Chris. About the enterprise business is something core what the company does, obviously two thirds of the company from the public safety side, the government side, so any long term thoughts on the enterprise business since it’s structurally so much different from the…
Greg Brown
Since it’s what?
Unidentified Analyst
Since it’s structurally little different from the government side.
Greg Brown
Yeah I think at the end of the day we have two core businesses; one great and one very good. It’s always tough to compare any other business with the dimensions of government and public safety, given the install base the margin profile the portfolio that we have the domain expertise, the distribution channels and with the breadth, having said that I still think the enterprise business is a very good business, our focus is on operationally and financially improving it.
I think the portfolio referenced the earlier question around new products is getting stronger. Having said that I think the synergies between the two businesses are relatively low, but we have every expectation that we could improve the trajectory of growth going forward on enterprise, by the way it’s not lost only that little bit it’s all proof is in the pudding and we can talk all we want, but from a credibility standpoint we have restore some management credibility vis-à-vis our performance and that’s not lost on us.
Jim Suva – Citigroup
We have time for two more questions one in the middle of the room and then the last question will be all the way here in the last.
Greg Brown
Maybe three quick ones.
Jim Suva – Citigroup
Okay.
Greg Brown
Yeah, three quick ones.
Unidentified Analyst
Can you answer from a margin perspective can you help us think through for the back half the implied ramp up is pretty significant. So if you can kind of help us think through from a government perspective how much margin increase we should be expecting and then similarly from an enterprise perspective and what the drivers outside of the headcount reduction would be?
Greg Brown
Well the only other thing I’d add beyond from an operating margin standpoint levers that I’ve described is backlog is healthy and particularly aged backlog when we came out of Q2, aged backlog is up $100 million in Q4 giving us greater visibility around some of the stronger performance that we’re expecting in the back half and particular Q4.
Unidentified Analyst
Into the back half that is primarily on the government side?
Greg Brown
Primarily government, yeah.
Unidentified Analyst
Okay, so should we be thinking the contribution grew to the increase in the back half predominantly from government?
Greg Brown
I think you should think about our business in the second half anchored in government yes, and the strength of that affords us largely anchored in government, there is one question end and one question there.
Unidentified Analyst
How long do your products typically last at a customer installation like a handset or something like that before another breaks or is replaced and how long do you have to keep the same product in production, so if the customer has a stream of replacement parts?
Greg Brown
So on the government and public safety side, some of our systems are 15 and 20 years old. And on the enterprise mobile computing side, I think Gino may correct me here but I think on average we’re seeing about four and five years life cycle of the mobile computer. It’s a little bit of mixed blessing, part of reason, I think customers [sweat] the assets is the longevity and durability of the products that we make and my comment is more grounded in the enterprise sides, that’s where I think that they’re sweating the assets longer.
I think that the state and local tax receipts improve and the disposition of state and local improve and mission critical voice and land mobile radio for interoperability remains a high priority, we’re seeing an healthy backlog and a good consistent drum beat of demand on the public safety side.
Jim Suva – Citigroup
There is a question (Inaudible).
Greg Brown
There’s one more.
Unidentified Analyst
So just thinking long term about the impact of LTE on government business and sort of specifically referring to the Queensland contact in the (Inaudible) contract and how do you see LTE impacting device sales into non mission critical voice?
Greg Brown
So, just since you mentioned Queensland, Queensland is not an LTE award, it’s an LAN mobile radio award, it’s roughly $400 million, we do not have the awards yet. But Queensland announced their intention, [Telstra] is the prime we’re the subcontract is it does all the LMR over 15 years, I think of our piece is the $400 million is roughly half.
I think that the LTE business as the biggest growth opportunity in our government public safety business outside the core. I think if it is incremental, I think if it is worldwide. Although I’ve said, that I still believe that the international opportunities will be greater in the short term over domestically here in the U.S as for some (Inaudible) sorts through both the spectrum license agreements and BTOP grants . By the way I think FirstNet is working very hard and has all the right intentions of moving forward on a nationwide broadband network. And I think that FirstNet will look to one or two early customers to be completed largely probably BTOP customers to see, if there is a way that the customer and FirstNet and others can come to agreement to get early implementations and a reference point for LTE.
I think to your point around devices, I think they will LTE will afford a second device to a LAN mobile radio or converged device that could be Band Class 14 for a carrier or Band Class 13 for private networks. But I think the overall opportunity is net positive both for an infrastructure and for devices and the domain of expertise and public safety and all the interesting and unique characteristics that first responders need play well to our hand to capitalize on that growth opportunity.
Jim Suva – Citigroup
Ladies and gentlemen, I want to thank you so much for your time here in joining us for Motorola Solutions as well as for having Greg join us. Thank you.
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