Motorola Solutions - Earnings Call - Q1 2020

Transcript

Operator (participant)

Good afternoon, and welcome to the first quarter 2020 Motorola Solutions earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Tim Yocum, Vice President of Investor Relations. Please go ahead.

Tim Yocum (VP of Investor Relations)

Good afternoon. Welcome to our 2020 first quarter earnings call. With me today are Greg Brown, Chairman and CEO; Gino Bonanotte, Executive Vice President and CFO; Jack Molloy, Executive Vice President, Products and Sales; and Kelly Mark, Executive Vice President, Software and Services. Greg and Gino will review our results along with commentary, and Jack and Kelly will join for Q&A. We posted an earnings presentation and news release at motorolasolutions.com/investor. These materials include GAAP to non-GAAP reconciliations for your reference. During the call, we reference non-GAAP financial results, including those in our outlook, unless otherwise noted. A number of forward-looking statements will be made during this presentation and during the Q&A portion of the call. These statements are based on current expectations and assumptions that are subject to a variety of risks and uncertainties. Actual results could differ materially from these forward-looking statements.

Information about factors that could cause such differences can be found in today's earnings news release, in the comments made during this conference call, in the risk factor section of our 2019 annual report on Form 10-K, and in our other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statement. With that, I'll turn it over to Greg.

Greg Brown (Chairman and CEO)

Thanks, Tim. Good afternoon, and thanks for joining us today. I'll start off by sharing a few thoughts on the business before Gino takes us through our Q1 results and second quarter outlook. First, I'd like to start by thanking our more than 17,000 people around the world for their resilience, adaptability, and unwavering commitment to our customers. We made the decision in mid-March to have the vast majority of our workforce do their jobs remotely, and they've successfully and smoothly transitioned to their new environments. Those who needed to work on site have shown a fearless dedication to our customers, leaving the safety of their homes to ensure that our mission-critical operations centers and customer sites remain reliable and always on.

I'd also like to say that we're deeply thankful for the actions of the public safety and healthcare professionals that are keeping us and our communities safe, and we're acutely aware of our responsibility to them during these unprecedented times. Because of this, our employees have gone to great lengths to continue to support them, and I could not be more proud of their efforts. Second, despite the challenges brought on by COVID-19, we grew earnings per share by 16% during the quarter, expanded operating margins by 200 basis points, and generated $308 million of operating cash flow, an increase of 23% versus the prior year. Additionally, we continued to see strong demand for our video security solutions, highlighted by a $28 million order from a large utility in North America, the single largest order in the history of the Avigilon business.

Our software and services segment grew sales by 13% and expanded operating margins by 520 basis points. Finally, while the COVID-19 pandemic has confirmed the fundamental need for our mission-critical solutions, it has also brought uncertainties surrounding its severity, impact, and duration. As a result, we made the decision to withdraw our full-year guidance at this time. We will reassess this decision at the end of the second quarter based on the information and clarity we have at that time. With that, I will now turn the call over to Gino to provide additional details on Q1 and our second quarter outlook before returning for some closing thoughts.

Gino Bonanotte (EVP and CFO)

Thank you, Greg. Q1 includes revenue of $1.7 billion, flat versus a year ago, including $48 million of revenue from acquisitions and $7 million of currency headwinds. GAAP operating earnings of $259 million, up $30 million, and operating margins of 15.6% of sales compared to 13.8% in the year-ago quarter. Non-GAAP operating earnings of $347 million, up $32 million, or 10%, and non-GAAP operating margins of 21% of sales, up 200 basis points from 19%, driven by higher gross margins. GAAP earnings per share of $1.12 compared to $0.86 in the year-ago quarter. Non-GAAP EPS of $1.49, up 16% from $1.28 last year on higher operating earnings and a lower effective tax rate in the current quarter. OpEx in Q1 was $451 million, down $15 million versus last year, primarily due to lower incentives and lower legal expenses, partially offset by costs related to acquisitions.

The Q1 effective tax rate was 15% compared to 20% in the prior year. The year-over-year decrease was primarily due to higher excess tax benefits on share-based compensation. Turning to cash flow, Q1 operating cash flow was $308 million compared with $251 million in the prior year, and free cash flow was $260 million compared with $185 million in the prior year. The year-over-year increase in cash flow was primarily due to improved working capital. Capital allocation for the quarter included $253 million of share repurchases, $109 million in cash dividends, $48 million of CapEx, and $36 million for acquisitions. Additionally, out of an abundance of caution, we made the decision to draw down $800 million from our revolving credit facility. We ended the quarter with $1.7 billion in cash and have an additional $1.4 billion of committed undrawn capacity remaining on the revolver.

We've also taken numerous actions over the past several years to restructure our debt maturity profile and de-risk our pension liabilities. As a result, we have no debt maturities in 2020 or 2021 after the revolver and no expected pension contributions until 2023. The strong liquidity position and balance sheet provides us with the capital deployment flexibility for acquisition opportunities in the future. Moving to segment results, Q1 products and systems integration sales were $993 million, down $76 million, or 7%, driven by a decline in professional and commercial radio, partially offset by strong growth in video security. Revenue from acquisitions in the quarter was $24 million, and currency headwinds were $5 million. Operating earnings were $123 million, or 12.4% of sales, down 140 basis points f rom last year due to the lower revenue.

Notable Q1 wins in the segment include a $28 million video security award for a large utility customer in North America, of which $10 million was recognized as revenue in Q1. Over $50 million of sales into governments across the entire video security portfolio, a $13 million P25 order for Port of Los Angeles, California, a $12 million P25 order for Dinwiddie County, Virginia, and an $8 million TETRA order for Germany's Armed Forces. Moving to software and services, revenue was $662 million, up $74 million, or 13% from last year, driven by growth in command center software and services. Revenue from acquisitions in the quarter was $24 million, and currency headwinds were $2 million. Operating earnings were $224 million, or 33.8% of sales, up 520 basis points from last year, driven by higher gross margins and improved operating leverage.

Notable Q1s in the segment include an $8 million P25 multi-year service contract extension with Cleveland, Ohio, a $6 million P25 multi-year services contract in Latin America, a $4 million command center software suite contract with Brampton, Ontario, and a $3 million command center software suite contract with Fort Wayne, Indiana. Looking at regional results, during the quarter, we restructured our operations to realize more operational efficiencies, combining EMEA, Asia-Pac, and Latin America into one region, which is now reflected as international. Accordingly, we now report net sales in two regions, North America, which includes the United States and Canada, and international. North America Q1 revenue was $1.1 billion, up 4%, driven by growth in video security, command center software, and services, partially offset by a decline in professional and commercial radio.

International Q1 revenue was $539 million, down 7% due to a decline in professional and commercial radio, primarily in Asia-Pac. Moving to backlog, ending backlog was $10.4 billion, up $48 million compared to last year, inclusive of $462 million of unfavorable currency rates. Sequentially, backlog was down $821 million due to $407 million of unfavorable currency rate, revenue recognition of the Airwave and ESN contracts, and typical North America order seasonality. Software and services backlog was up $120 million, or 2% compared to last year, due to growth in North America multi-year agreements, partially offset by $423 million of unfavorable currency rates. Sequentially, backlog was down $604 million, primarily due to $368 million of unfavorable currency rates and revenue recognition for ESN and Airwave. Product and SI segment backlog was down $72 million, or 2% compared to last year, inclusive of $39 million of unfavorable currency rates.

A decline in international backlog was partially offset by growth in North America. Sequentially, backlog was down $217 million, driven primarily by typical North America order seasonality. Turning to our outlook, we expect Q2 sales to be down between 17% and 14%, with non-GAAP EPS between $1.18 and $1.27. This assumes approximately $30 million of OpEx headwinds at current rates, a weighted average diluted share count of approximately 175 million shares, and an effective tax rate of between 24% and 25%. I'd now like to turn the call back over to Greg.

Greg Brown (Chairman and CEO)

Thanks, Gino. I thought I would end with a few high-level comments regarding the full-year impact COVID-19 is having on our business and how we're responding. First, while this pandemic has disrupted and delayed our engagements with some customers and will have an impact on certain parts of our business, we remain fully committed to continue investing in our growth businesses. In command center software, we're accelerating our development to move to the cloud and recently launched our first cloud-enabled CAD customer. We also expect our records and CAD solutions to be fully cloud-enabled by the end of this year, with our 911 software to follow in 2021.

In the video security business, I'm very pleased with the continued traction with our enterprise and government customers, and we'll continue to invest in our H5 camera line, analytics, cloud-based VMS solutions, and features that integrate video and land mobile radio while also expanding our sales coverage. Additionally, our durable cash flow generation and strong balance sheet put us in a unique position to be opportunistic with respect to acquisitions going forward. Second, while this is a critical time to continue to invest, we're also taking actions in a number of other areas to reduce our operating expenses. We now expect operating expenses to be down approximately $210 million versus 2019, which is $150 million more than the annual decrease we discussed on our last earnings call.

This additional reduction, driven by lower variable compensation, lower discretionary spend in areas such as travel and contractors and third-party expenses, and a reduction in real estate, should allow us to slightly expand operating margins for this year. Motorola Solutions has been providing mission-critical solutions to customers on the front line for over 90 years and have managed to a number of crises. I couldn't be more proud of how our people have responded to this one. Whether it's our Airwave team enabling network coverage for temporary hospitals being built in the U.K., or our team helping a customer move their 911 command center operations to a backup location in days when their employees tested positive for COVID, our teams are going to great lengths to make sure our customers' mission-critical needs are met.

We entered this pandemic in a very secure position, and I absolutely believe that we'll emerge an even stronger company on the other side of it. Let me turn this call back over to Tim.

Tim Yocum (VP of Investor Relations)

Thank you, Greg. Before I begin taking questions, I'd like to remind callers to limit themselves to one question and one follow-up to accommodate as many participants as possible. Operator, would you please remind our callers on the line how to ask the question?

Operator (participant)

Yes, thank you. To ask a question, you may press star, then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. This time, we will pause momentarily to assemble our roster. Our first question comes from Tim Long with Barclays. Please go ahead.

Tim Long (Managing Director)

Thank you. Yeah, maybe just for the two of them. First, maybe the quick one first. When thinking about kind of the hole in revenues in Q2 versus kind of what was probably originally expected, Gino, can you help parse out how much of that is PCR-related and how much is public safety? Then, Greg, if you could just talk a little bit about the public safety market. It seems like overall the company is being impacted more than prior macro events in the world. Could you talk a little bit about what's different? What do you think is driving the change to the public safety market other than just logistics? Do you see any other fundamental changes here given the macro backdrop? Thank you.

Gino Bonanotte (EVP and CFO)

Hi, Tim. This is Gino. On the first part of the question, clearly we've seen pressure in professional and commercial radio. Certain verticals have been significantly impacted. You can think about hospitality, transportation, specifically airlines, oil and gas, manufacturing related to the pandemic and the shutdowns, the shelter-in-place orders. We have seen some impact of public safety as our engagements have been delayed, both in terms of site work, but also in terms of being able to talk to customers. Obviously, our customers are on the front lines of dealing with the pandemic, and there's certainly been a delay in that engagement and the ability to talk to our customers, really frankly, beginning in mid-March, lasting through April, and certainly in larger markets through May.

It is also important to note that embedded in that guidance, we continue to expect command center and video security, command center software and video security to grow in Q2. Dimensionally, PCR, certain verticals very much impacted. Public safety characterized as a move to the right based on, as you said, logistics and inability to get in front of people and get to sites.

Greg Brown (Chairman and CEO)

Yeah. Tim, I would add that even though things have been pushed to the right, we're a different company now than we were several years ago. The good news is we still expect software and services to grow this year. It could grow mid-single digits. We'll see. We still expect that to grow. We do expect video security to grow, command center software as part of software and services. I actually think, look, I think the severity of Q2 isn't so much as things have changed in public safety. I actually don't think they have. I think they've been pushed. Two or three weeks in March, we effectively became locked down in major locations domestically here in the United States. That lockdown has continued in May as well as April.

I think when you look at Q2 and see the sharpness of that decline, it's really things pushing to the right than any structural or behavioral patterns that are changing in public safety. What we do is still a need-to-do versus a nice-to-do. Obviously, this situation is pretty extensive given that it's a combination of a public health crisis as well as a dramatic economic decline in 180-plus countries all at once. Hence, I think our prudent approach at this point in time. I think the product segment for the full year will be down as things push to the right. It could be down low double digits. Again, we'll have to see. I think with resilient backlog and an overall strength of our position with about 75% of our business as public safety and government and 25% enterprise, I still think we're well positioned.

Tim Long (Managing Director)

Thank you, Greg.

Greg Brown (Chairman and CEO)

Yeah, sure, Tim.

Operator (participant)

Our next question comes from Adam Tindle with Raymond James. Please go ahead.

Adam Tindle (Managing Director)

Okay, thanks. Good afternoon. Greg, I just wanted to start kind of going back to the last financial crisis. I know that the business is different, but if we looked at a like-to-like basis during that time, revenue for the full year was down somewhere around the mid-single digit range. Do you remember what it was on kind of a max pain on a quarterly basis? Is there any similarities to sort of the mid-teen decline that you're seeing in Q2? Also maybe how quickly did it recover? What could be similar or different this time around versus that?

Greg Brown (Chairman and CEO)

Yeah, I think the difference is, again, unlike last time where we had the financial great recession and things recovered, what we've experienced here is a little bit like the market's seizing up, literally. We couldn't get in front of customers, many customers on the sales side from an engagement standpoint. Even on services and implementations, deployments were pushed out as well. I think we're much better positioned this time. Software and services is a little bit more than a third of our business, most of that largely recurring long-term contracts, mission-critical in nature. If I rewind the tape last time, that was 20% or sub-20% of our overall revenue. The other thing is, even though we're having a difficult Q2, and Jack could comment on this, we're seeing the funnel.

Even though projects get pushed to the right, we've actually, just over the last few weeks and months, seen a constant replenishment of projects coming in too. We just thought, given the fog and uncertainty and the uniqueness of this thing in a once in literally a century pandemic, it was kind of prudent for us to suspend full-year guidance at this time. I think we're much better positioned. I think we still expect growth in video. We still expect growth in command center software. The professional and commercial radio business, which is think of the radio business for commercial, has been hit hard, serving verticals like hospitality, transportation, airline, gaming, and some of the things that have been hit particularly hard. Jack, I don't know if you want to add anything.

Jack Molloy (EVP of Product and Sales)

Yeah, maybe just a couple of things. As we look around the globe, things are starting to open up in certain countries in Asia-Pac, who was frankly hit first. There are potentially some signs of encouragement there in terms of re-engaging with customers, customers' focus, moving back to technology projects. The second thing that I think that all of us feel pretty proud of is the team, their ability to continuously engage virtually with the customers by way of video conference mechanisms. Also, we held a video, a virtual trade show for our video security and analytics business because an industry event was canceled in March. We actually had over 30% more people that actually attended our virtual conference than would have attended the conference in person and literally had chat rooms, questions, and everything from access control, school safety.

We are encouraged by a lot of those things. We actually even see here into April, certain states' engagement starting to improve. It is just one of those things. Obviously, the pandemic has taken the focus of our customers, and we will continue to work with them in any way we can to support them.

Adam Tindle (Managing Director)

Okay, that's helpful. Maybe just as a follow-up, in the commentary on COVID-19 impact, you talked about delayed engagement and deployments with state and local customers near term, which may impact future revenue. Maybe Greg and Jack can provide some color on that statement more specifically. Are you finding that customers are now evaluating other options because there's a fear that, hey, we've long been worried about the potential cannibalization of LTE and broadband? Is that a way to save money? Are customers evaluating that in a bigger way? Is this kind of a catalyst to finally see that shift happen in a bigger way?

Greg Brown (Chairman and CEO)

No, I don't think. In fact, we see the opposite of that. During this time, we see the importance and criticality of land mobile radio versus any alleged migration or shift to LTE. I think LTE is complementary. It's a data broadband network that's an extension of LMR. Actually, our APX Next product that integrates broadband with land mobile radio is best positioned to take advantage of that. I know that there's been some speculation or commentary that suggests that LTE is starting to cannibalize. We see absolutely no indication of that. If anything, maybe the opposite.

Jack Molloy (EVP of Product and Sales)

Yeah. Just maybe one thing to add to that. Obviously, we'd see that. We have a public safety LTE device in the Lex 11. More importantly, as Greg said, we have a collaborative device in terms of APX Next. It does P25, obviously.

The focus here is, and what we've seen in the pandemic and the response with public safety is fundamentally, when someone calls 911, there's a multitude of things that happen. That puts our technology in place. There's been more strain on the networks, which really is evidence to the fact of why you need a purpose-built network. A really good example is a major, without getting into specifics, a major city health department procured APX Next devices because they needed to talk to the frontline fire and EMS people, but also wanted that backup capability when they left the city. It was a big health department that was really traditionally a secondary-type customer for Motorola that bought, obviously, high-tier equipment in terms of APX Next.

This thing has really been a lot of what we're seeing in Q2 has really been the ability to not get to physical sites, to not engage physically with customers. I think that's really the challenge. We view that as being kind of a short-term challenge.

Adam Tindle (Managing Director)

Understood. Thanks for the call. Stay safe.

Operator (participant)

Our next question comes from George Notter, with Jefferies. Please go ahead.

George Notter (Managing Director)

Hi, guys. Thanks very much. I guess just as a follow-on to that thought, you mentioned it's an issue around just customer engagement. What about budgets? Obviously, states are going through budgeting cycles at this point. I think certainly tax receipts are going to be down. Municipalities and counties, similar situation. Do you see sort of an economic kind of fallout of lower tax receipts, or do you think the LMR business is more immune to that?

Jack Molloy (EVP of Product and Sales)

Thanks, Ted. Hey, George, it's Jack. A couple of things. I think it's always important. We see there's been a lot written, a lot discussed around state and local budgets. I think it's very important to decompose what those budgets mean. The reality is state and local budgets, there's a confluence of probably five to six different funding streams: federal transfer dollars, federal grant dollars, property tax, income tax, sales tax in some states, but also 911 funding, which is one of the real reasons why we've made a lot of acquisitions in the command center space because part and parcel, that's a different funding stream that's essentially protected. It's a number of those things. I go back to one of the benefits we have of being a company that's close to 95 years old is we've gone through a number of these things after 9/11.

They're all a little different, the Great Recession. What we've seen and what we've gone back and looked at, the data suggests that public safety gets prioritized in these things. There are other things around the margins that may get delayed, may get deferred, all those kinds of things. At the end of the day, we've even seen it as evidenced in this response to the pandemic, you need to have the best technology in the hands of those first responders. We think that gets protected. By the way, the budget situations in state and local haven't been easy for the last number of years. I think that's lastly where our sales team, as much as they have relationships and everything, we've got a very veteran team out there that's very focused at working with our customers to navigate funding plans.

They are really holistic plans that they work with our customer base. I think we will come out of this with the same level of priority that public safety has always gotten, if not more, George. I think that answers your question.

George Notter (Managing Director)

Got it. Great. I'll just ask one more. The NG911 opportunity seems more interesting these days. I mean, there's obviously a stimulus package that's brewing here coming from Congress and the administration. I know in past drafts, there's been, I think, $12 billion-plus in funds that were earmarked for NG911 upgrades. I'm not sure what this current package is going to look like. Do you see that as an opportunity for Motorola Solutions? How much of those dollars do you think could trickle down to the stuff that you guys do?

Kelly Mark (EVP of Software and Services)

Hey, George, it's Kelly. Absolutely, we do see that as an opportunity for us, not just in the NG911, which is a refresh of the backbone associated with the 911 call center to help turn it into more of a broadband backbone. There has been a lot of interest related to cloud as a result of this pandemic, where a lot of our customers in the past have been operating with their equipment on an on-prem basis where they operate it there. The need to be able to operate it remotely is something that's definitely been introduced as part of this pandemic. The good news is we've already been investing in cloud, and a good portion of our software was already cloud-enabled. As you heard Greg mention in our remarks, we're accelerating our investments even more in cloud based on the demand we see now.

We just launched our first CAD customer in the cloud. By the end of this year, our CAD, our records portfolio will be completely cloud-enabled. In early next year, our 911 efforts will all be cloud-enabled as well. It does definitely drive that. Yes, we do see some of those dollars starting to flow through as folks prioritize not just NG911, but the rest of the command center software refresh.

George Notter (Managing Director)

Thanks.

Operator (participant)

Our next question comes from Keith Housum with Northcoast Research. Please go ahead.

Trevor Bowers (Analyst)

Hi, this is Trevor Bowers filling in for Keith. L3Harris, CEO, recently said that LMR sales could decline by 10% this year. Do you agree with that market assessment?

Greg Brown (Chairman and CEO)

I think our view is reflected in the commentary that we gave. They are a much smaller player in the business. I think we have much more extensive installed base and contacts and annuity revenues. As I mentioned, Q2 is very unique because, as Molloy pointed out, just the sheer logistical difficulty of customer engagement and deployment. Do I think product revenues are likely to decline? Yes. I think they will be on a decline that will be comparable to what we saw in the land mobile radio business actually in 2009. Again, that's more about delayed and deferred demand than any demand that's actually lost or goes away. I think it will recover. I think public safety has demonstrated over the last several years and longer, it remains at the top of the food chain.

I think they have a certain view of the market. That's their opinion. I would maintain that I think we have a very long-standing and more thorough and comprehensive perspective.

Trevor Bowers (Analyst)

Great. Thank you very much.

Jack Molloy (EVP of Product and Sales)

Just one additional item on that note. It's also important to note the composition of the business. As Greg mentioned earlier, the percentage of our business that's earmarked for commercial customers, the PCR business specifically, and that's where we're seeing the pressure more specifically is around PCR, not around necessarily the public safety to the degree that we're seeing in the PCR marketplace.

Trevor Bowers (Analyst)

Thanks.

Operator (participant)

Our next question comes from Paul Silverstein with Cowen. Please go ahead.

Paul Silverstein (Managing Director)

Thanks. I appreciate it. Can you all hear me okay?

Greg Brown (Chairman and CEO)

Yep. Yep.

Paul Silverstein (Managing Director)

Okay. If I can return to the PCR business, and I know you don't normally break it out, but given that you've got a business with particular exposure, I assume particularly heavy exposure to those sectors that have been absolutely devastated: hospitality, energy, etc., the ones you listed. Can you give us a sense for what % of revenue comes from those particular sectors?

Greg Brown (Chairman and CEO)

Yeah. Paul, the professional commercial radio last year, again, as Gino referenced, I think land mobile radio for commercial and enterprise, last year all in was about $1 billion. As we think about it this year, obviously, that's the area that's come under the most pressure. Two-thirds of that is vertical-served airlines, retail, hospitality, oil, and gas that had been the most significantly impacted. That's what's driving the more pronounced double-digit decline in that area.

Paul Silverstein (Managing Director)

Given the nature of LMR, that's exactly what I would have expected, somewhere well north of 50%. It's around two-thirds. Second question. With respect to your comments about Asia-Pac in particular, and I recognize it's not been uniform in Asia-Pac. At least I don't think it's been uniform in terms of the timing of the impact of COVID and the shutdowns. I think it hit China first, and now we're seeing Malaysia, Vietnam, Thailand, etc. My question is, is there any insight you can gain in terms of seeing the sequencing, in terms of things having gone cold turkey and coming back? I know it's very, very early. There's not a lot of visibility, I trust, anywhere. Is there anything you can take away from that timing sequencing of events as it relates to your North American business and your worldwide business?

Greg Brown (Chairman and CEO)

Yeah. Paul, I think when we look at Asia-Pac, to your point, it's essentially pretty sporadic. Things within country, you can't get in there from out. Our biggest country in Asia-Pac is Australia. I'd say they're slightly ahead of where certain states that have started to reopen are here, with a lot of the same precautions and measures that have been set up. It's just really early to kind of tell, to be honest with you. I will tell you, one of the things that we look at is our—we haven't really talked about it, but our video security analytics business in the states that have opened up, we've seen engagement even within North America improve there. There's not a whole lot we can glean. You look at parts of the Middle East, Dubai, those places are starting to open up a little bit as well.

It's what I would call very cautious opening up.

Paul Silverstein (Managing Director)

All right. I appreciate that. Thank you.

Operator (participant)

Our next question comes from Ben Bollin with Cleveland Research. Please go ahead.

Ben Bollin (Analyst)

Good evening, everyone. Thank you for taking the question. I wanted to begin, could you start by discussing a little bit about how you think of your sales cycle duration as you reengage customers? Do you think there's any change in kind of the traditional period of those awards? Just any high-level thoughts on where you think customers' heads are at as you're starting to have those discussions and your ability to close new business? I have a follow-up.

Jack Molloy (EVP of Product and Sales)

Okay, Ben. I dimensionalize our business. All things are not the same. There are big projects, and then there is an amount of what you call kind of term agreement and grassroots business that, by the way, has continued to an extent to continue to flow. Large projects typically go through—you get a request for proposal, that is a timeline. You have elements where they have to go through board approval, city council approvals, state procurement approvals, and the like, to use that example. Really what Gino and what Greg have referenced is a lot of those meetings have been delayed. There is not an issue that we have to go resell, re-canvas, if you will.

It's really just that procedural milestones have moved to the right, whereby we've had to kind of reshuffle the milestones of a project and just extend them out into the second half and those kinds of things. That's been the issue. The good news is with video technology and those kinds of things, we've been able to stay engaged with our customers, answer questions, and all those kinds of things. It's really just a milestone-type thing where we've seen the delays. As we talked about the physical access to get not only at sites but in the command center and those kinds of things as well, if we've got to go do work where there's people there, there's been some delays as it relates to those things as well.

Ben Bollin (Analyst)

Thanks for that. Jack, you also earlier commented on the diversity in the funding sources. Outside of the 911 funding, when you look at the federal transfer tax, federal grants, property, and income taxes, just stepping back, I mean, those four pieces do not seem to be in a very good position looking forward. I am not looking for guidance, but I am interested in how you are thinking about the absolute budget opportunity coming from the public sector customers into the future, just that aggregate bucket of opportunity, how you are thinking that develops over time, or any specific feedback you are getting from customers. Thank you.

Jack Molloy (EVP of Product and Sales)

Yeah. I'd start with—listen, if we were selling—and I don't want to—if we were selling something that they would deem is non-critical, non-essential to their workflow communications, I'd maybe be a little bit concerned. I think the fact that you're selling mission-critical communications, you're at the very top of the priority chain, that's a good thing. It's interesting. If you look at it, a lot of our customers feel like property taxes, a lot of these things, if there's a recovery that's a little bit sharper, they may not have the impact that we had. Obviously, there's been a pretty significant impact as it relates to sales tax. Remember, most of our things are things that they've been planned for multiple years, their technology upgrades, expansions, and those kinds of things related to mission-critical.

We have kind of went through this before, went through this a little bit after 9/11, certainly felt this. I was pretty close to the customer back in 2009, navigated a team in the central United States that was probably hit, frankly, from a budget perspective, harder than everybody. We saw some things delayed. We had some additional questions to answer. Every deal that we had at that point in time continued to move forward. I think I look at that as encouraging as we move through this pandemic.

Ben Bollin (Analyst)

Thanks, guys. Best of luck and good Q&R for the year.

Operator (participant)

Our next question comes from Paul O'Keefe with JPMorgan. Please go ahead.

Paul O'Keefe (Executive Director)

Yeah. Thanks for taking my question. The sequential decline that you're looking for from a geographic perspective, is it sort of uniform across geographies?

Jack Molloy (EVP of Product and Sales)

Yeah. Paul, I think it is. If you look at it, because of the broad spread nature and we do business, Greg had said it hit 180 countries. There are 120 of those that we do business. In general, if you look at it on the surface, it's essentially had an equal weighting. I think the reason for that is because it hasn't that the opportunities have just gone away. It's been that we've had some of the same limits: physically engaging with customers, going to sites, and physically deploying systems, and those kinds of things. There have been essentially equal opportunity delays as it's related to those things. I'd say, in general, it's been felt largely equally around the globe.

Paul O'Keefe (Executive Director)

I just want to go back to the sort of budget contention question for a moment. It seems to me, from a public safety perspective, things have shifted dramatically, and they're going to be around for a while now. The big shift, of course, is towards testing and then administration of public health systems. That is going to be data-intensive. It just seems like that's where the dollars are going to be going in the future. You feel like that doesn't contend with your budgets. If you can just comment upon that. In passing, also, does the opportunity present itself to Motorola as well? I mean, can you participate in what seems like a very big initiative over the next couple of years?

Jack Molloy (EVP of Product and Sales)

Paul, it's a great question and one that, frankly, has us—if there's a lot of things that we've—this has been certainly a struggle the last couple of months for most companies. It really delights us in the fact that we've added substantially in terms of the video security and analytics portfolio to the company. Right now, our teams are working on, and in May and June, we'll be continuing to market video analytics solutions around social distancing, around mask compliance and detection in campuses, in manufacturing facilities, in the public domain, fever scanning technology, as well as contact tracing.

Analytics that will essentially tell you if you think about a lot of the dialogue around getting returned to campuses, returned to schools, and the like, our access control solutions will be able to monitor and tell you if somebody was sick, who went through that door at that school, who might likely have come in contact with someone who's sick. As much as we'll see maybe a change or a moderation of different types of opportunities, our video security and analytics space put a spot on in that. I also think the moving—Kelly and his team have done a great job moving the command center to the cloud. If you look at our Vigilon Cloud Services business, this has been a thing. We've moved 35,000 cameras to the cloud so far this year.

I think with every challenge comes an opportunity, and the video security analytics business is one that I think has an opportunity to benefit from this.

Paul O'Keefe (Executive Director)

You don't see the contention that I talked about. I mean, I see the opportunity here, but you're not even seeing the contention for scarce resources there, the tension between public safety as expressed through healthcare versus public safety through LMR plus responder systems.

Jack Molloy (EVP of Product and Sales)

If you talk to a paramedic, a police officer, or a fireman, they tell you the most important piece of equipment that they have that they've always had—and this is a millennial fireman or it's a fireman who's been on the job for 30 years—the single most important communication in the lifeline that they have is their two-way radio. We don't see that changing. Our customers are telling us they don't see that changing.

Paul O'Keefe (Executive Director)

Got it. Thanks.

Operator (participant)

Our next question comes from Walt Piecyk with LightShed. Please go ahead.

Walt Piecyk (Analyst)

Thanks. Assuming that the next quarter's guidance basically just assumes that the current state of affairs extends until the end of June, you're not expecting any recovery. I'm just curious just kind of the thought process on that because obviously you've had some states opening up. You had some airlines talking about seeing increased bookings. You've had competitive companies talk about return to growth. Verizon talked about while consumer was down, some of their larger enterprise or public safety clients were stronger than ever. I'm just curious about kind of what the guidance for Q2 implies and how far to the right, I guess, you could realistically think it can be given some of these data points that already exist now in early May.

Greg Brown (Chairman and CEO)

Yeah. I think that, it largely reflects and is driven by, as Gino mentioned, the professional and commercial radio segment itself. So radio for corporate verticals. That's the most accentuated pressure point on Q2. The second is the engagement and deployment. It was the second half of March, April, and largely a lot of May as well. We just thought, if we're going to guide Q2, let's do it in a responsible, prudent way and move forward accordingly. It's really.

Walt Piecyk (Analyst)

Is it just the PCR that you're involved with? Because the PCR that other companies are involved with, I'm not sure has seen that type of dramatic move. Is it just that when you talk about airlines and things like that, that it's just these specific things because your products are addressing customers that are dealing with large crowds, that it's more specific to you guys as a result? I guess it's hard for any of us to figure out when those types of businesses are going to come back, if at all, right? I mean, some of these customers theoretically could just go away, right?

Jack Molloy (EVP of Product and Sales)

Yeah. Maybe if I could. PCR, if you think about it, I think you talked about Verizon, but the traditional PCR, if you think about it from a competitive set, it's companies like Kenwood, like Hytera.

Greg Brown (Chairman and CEO)

ICOM.

ICOM, a number of those types of people. I think, without a doubt, they felt the same thing. Those are private systems dedicated towards a refinery, an airline, a Marriott hotel, and those kinds of things. I think that industry has equally felt it because there is a physical element of design and deployment of a system as well. Verizon's a lot different. You could go and pick up at a kiosk. You could have a phone delivered, and you can pick it up. I would not see the same sort of physical delay, if you will, that we would see in our business. I think that's really what.

Walt Piecyk (Analyst)

Yeah. I wasn't referring only to Verizon. I mean, Ericsson, Axon, Ciena, CommScope, Adtran. I mean, obviously, there's more than just Verizon as a data point. It seems like some of these customers you just mentioned, like airlines and some of these, again, customers that rely on large crowds, it might be more specific, right? Again, are you worried that maybe those customers don't push to the right, but they just never kind of return at all because of the state of how people are going to return to a large crowd as opposed to not?

Jack Molloy (EVP of Product and Sales)

I think it'd be a small portion of it. I mean, the example is if an airline goes out of business, well, that's one airline that won't need a radio system. As we look at it, it's relatively—we view that to be a relatively small subset of the customers, frankly.

Walt Piecyk (Analyst)

Okay. It is enough that it is driving the revenue down that much in Q2 because I thought you said the public safety was doing well, and it was just that it was this segment that was doing poorly. That was enough to take guidance down by 15%, or, excuse me, your revenue growth down by 15%.

Greg Brown (Chairman and CEO)

Yeah. I think what we're trying to say is that Q2 is a timing issue, not an evaporation issue.

Walt Piecyk (Analyst)

Got it.

Greg Brown (Chairman and CEO)

It is acute, -14 to -17, but it is not evaporating. It is going to the right. There might be some that evaporates, but we think it is a pretty small percentage. It is really representative of things being pushed to the right in that professional commercial radio category.

Walt Piecyk (Analyst)

Awesome. If I see, for example, if JetBlue sees their numbers and we see those numbers go up and Marriott sees that we see their numbers go up, this should be indicative that that business could then come back next quarter. Not June quarter, but the September quarter. Is that fair?

Greg Brown (Chairman and CEO)

That is exactly right. Look, I cannot speak to the exact timing of quarterly alignment. I do not know if we are that precise. You are right that as airlines recover, people start to fly again, people go to Marriott, Hilton, Hyatt. The states and the economies and commerce reopen. Does that business and the acute pressure downward start to improve? Yes, it will improve.

Walt Piecyk (Analyst)

Got it. Thanks, Greg. That's helpful.

Greg Brown (Chairman and CEO)

Yeah. No problem, Walt. Thank you.

Operator (participant)

Our next question comes from Jim Suva with Citi. Please go ahead.

Jim Suva (Managing Director)

Thank you, Greg. I have known you for over a decade of time, and we have both been through a lot of cycles. You correctly talked about so much of the puts and takes. My question, since a lot of the questions already have been answered, is more on the top of the ladder, so to speak, or when you talked about Motorola Solutions will get its fair piece of the pie or even bigger than its fair piece of the pie. Is that pie or top of the ladder permanently structurally compressed or compressed for maybe six to 12 months just due to less inflows of, you mentioned, 5-6 inflows of state and local budgets? I am more focused on the state and local budgets balancing opportunities and what your experience has been in that. Thank you.

Greg Brown (Chairman and CEO)

I think what I would say is this. Obviously, this is a situation that I don't think any of us have seen before. We've had 9/11. We've had the dot-com collapse. We've had the Lehman Brothers great recession. This one's different in that it's 187 countries, and it's a combination of both a public health crisis and a severe economic downturn at once. They're intertwined. If I take a step back and think about, are we in the right businesses? Do we have brand equity? Do we have strength in incumbency? Do we have a greater percentage of recurring revenues in software and services? I look at command center software that will continue to grow. We believe it should grow this year even in the face of this. Video security and analytics, we expect to grow even in the face of this.

Software and services, we would expect and still could grow around mid-single digits even in the face of this. The incumbent footprint and strength that we have in our installed base of 13,000 land mobile radio networks worldwide, with probably our strongest anchor tenant position being North America, is that a good business to be in? We absolutely believe that. We'll monetize services. We'll move upstream. By the way, we'll integrate these as well. We'll integrate video security with integrated land mobile radio networks as an anchor tenant conveyor of communications and critical information. This addressable market, and we zero out China, forget China, is about a $40 billion addressable market. Is it temporarily dislocated? Obviously, the answer is yes. That is reflected in the Q2 guide. We always guide. I've never in my career not guided for a full year. This is a first.

We just think it was a prudent thing to do. There is a lot of variables and things that are moving around. It does not change the fundamental strength, attributes, longevity, and advantages that our brand and our market position and the technologies we play, we can capitalize on, which is also why we are going to continue to invest organically: sales coverage, video security, command center software to the cloud, tiering of different and newer radios that you will see later this year and next year. We are going to continue to invest inorganically. I think this is an opportunity to prioritize capital deployment around acquisitions of assets that are having temporary dislocation that may make sense for us creatively to fold into Motorola Solutions.

There is no doubt it's a tough environment, but I really believe, and I think our team does too, that this is an opportunity to invest and lean in responsibly, take down the breakeven, and take out $210 million of OpEx and position the firm even stronger to come out of the other end in 2021 and beyond. That's exactly what we're going to do.

Jim Suva (Managing Director)

Great. My quick follow-up is other companies have kind of called off M&A simply because you cannot meet in person, you cannot walk their floors in factories. It sounds like from your comment that you just gave me now that M&A is actually very, very interesting to you, and you are still going to go forward as planned. Is that correct? Maybe you go forward as planned and it just takes a little bit longer?

Greg Brown (Chairman and CEO)

I would say it's going forward. It may take a little bit longer, but there's a couple of opportunities that we're engaged with now, and that dialogue has begun. We'll see. Most of them don't pan out. I don't see, and right now, Jim, as we're in the middle of May, this is another area that I feel is kind of reopening, if you will. I don't see conversations in this regard being encumbered that will delay any plans or opportunities that come our way.

Jim Suva (Managing Director)

Thank you so much for the detail. That's greatly appreciated.

Greg Brown (Chairman and CEO)

Thank you.

Operator (participant)

Our next question comes from Sami Badri with Credit Suisse. Please go ahead.

Sami Badri (Managing Director and Senior Equity Analyst)

Hi. Thank you very much for the question. My question mainly has to do with Avigilon and the video surveillance business. You've guided to a slight growth or some growth in 2020 for video. I was hoping you could tell us what video and what Avigilon grew in Q1 of 2020 and where really we should be thinking about the growth rate just because the growth rate is coming from a mid-teens growth rate in 2019, and we just want to get a better sense on how to model that for 2020.

Jack Molloy (EVP of Product and Sales)

Yeah. Obviously, Q2, as Greg, Gino, as we've pointed out, there's been some limitations in terms of just ability to meet and some of those customer engagements. That's been the issue for Q2. I would tell you, Sami, looking at Q1, where we were coming out of the end of March in Q1, it was the best quarter we'd had with Avigilon. Frankly, we had talked about growing three times the market. We're taking more share, particularly in North America. The team has done an outstanding job. We've made significant investments in go-to-market, even greater investments in research and development. I spoke to some of the interesting things we're working on in pandemic response earlier. We've got a completely new line of H5 cameras, software analytic investments we've made.

That's not even to include what we've invested in public safety and WatchGuard, the acquisition of WatchGuard and VAS and what we're doing there. We expect the business, assuming a return to normal sometime in the third quarter, we expect to get back to those growth rate levels, if not greater.

Kelly Mark (EVP of Software and Services)

Got it. Got it. I just had a follow-up on command center. There was a big uptick that you guys have called out. You've addressed it. The big thing I really—and you are pointing to growth of the full year. The one thing I really wanted to know is, when it comes to the command center suite, do you have existing customers buying more modules within the command center? Is that what the big uptick was, or is it just these customers that needed the command center suite in the first place, and they just happened to execute that in Q1 2020? You are going to see more new customers come in for the rest of the year versus existing customers buying in more modules? Just want to understand kind of what the motion is within command center.

Hey, Sami, it's Kelly. It's a combination of both. Actually, in the first quarter, we actually picked up a number of new customers, frankly, more new customers than suite customers, which is great because that gives us the opportunity to land and expand those customers and grow the platform in the width and the depth of what we provide to them. We are still seeing also, though, many of our customers are still moving, and we are expanding and adding more modules of the command center suite. As you probably recall, as I've said in the past, folks don't walk in and buy typically all the components at one time simply because of the risk profile of a command center and a 911 center. They will schedule, and they will do 911 one year, CAD the next year, records the next year.

The thing that we watch is how we're doing in regards to penetrating across those positions, and we're still seeing good progress on that. I don't know if you have a follow-up on that, but that's pretty much how we look at the command center. That's the performance and why we saw the growth we did in Q1.

Sami Badri (Managing Director and Senior Equity Analyst)

Perfect. Thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Tim Yocum for any closing remarks.

Tim Yocum (VP of Investor Relations)

No additional comments. Thanks for joining today, and we'll talk to a lot of you soon.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.