MSI
#Good evening.
It's <UNK>.
I guess a couple of comments.
When you think about Q1, we had both product and services growth in North America.
I think that's an important point.
We also grew the managed and support services 9%.
As you alluded to, our backlog was up $575 million, again primarily driven by managed and support services, but we grew both segments.
If you think about 2016 in total as we said, we'll grow the North American business.
It continues to be a good environment for both the state ---+ both state and local and the federal business for us.
Couple of things to think about is we've improved sales coverage so we're starting to see some return on that.
And then, we're also ---+ we've gone into better data analytics in terms of our ability to target and capture additional software features on the equipment that we sell, the products that we sell.
Again, as we said, we expect to grow in North American 2016.
So, <UNK>, our backlog as we see it today has trended more towards devices.
We've certainly seen, particularly in Q1 and the back half of 2015, our mix has really gone to devices over infrastructure.
But, I will add that we've obviously seen with the backlog growth we've seen, the return of some large scale projects.
State of Iowa and those kind of deals.
It's a pretty good mix.
As we said, big growth in services.
Some growth in devices as well.
<UNK>, do you have anything to add.
The only thing I'll add, <UNK>, is from a duration perspective, clearly the managed and support services is a longer duration, multi-year contracts.
Product is typically a shorter duration, although in products we could have system deployments that would extend several quarters.
Next question, please.
Okay.
<UNK>, it's <UNK>.
So, I guess in regards to EMEA first, obviously Q1 was up 4% ex-currency.
But, when you look at the business organically, obviously we were down 26% in EMEA.
And, a large part of that is due to the fact of our Norway, the integration runoff and the comps there.
We also saw a decline in devices.
The other piece of it is if you think about EMEA, we've had some pockets of weakness in the channel at the low end, particularly in Europe.
But, again, we continue to see ---+ when you start to think about the region in 2016, we'll see continued pressure in the first half with the runoff of Norway, as well as FX.
<UNK>, I don't know if you have anything you want to add as it relates to the second part of the question.
Well, the second part of the question being confidence in the full year.
So, if we look at our backlog aged into the second half, it's comparable to what it was last year, <UNK>.
And, clearly in the first half, the first half Latin America, specifically, Q1 and Q2 have been hit hard from a year-over-year perspective.
If we look at what happened last year in Latin America, Q1 and Q2 were reasonable quarters and really the fall-off happened in Q3 and Q4.
So, combination of order activity, increasing backlog, and visibility that we have into the second half give us confidence for ---+ the expectation isn't for significant growth rates in the second half, but certainly better than performance in the first half.
Yes, a couple things to think about, <UNK>.
Q1 2015 was abnormally high.
As you know, Q1 is typically our smallest quarter due to timing of some of the receivables.
If you look at our trailing 12-month, we're ahead of where we were the prior year.
So really, we were expecting cash flow to be lower in Q1.
It was driven by higher incentive payments for 2015 performance versus 2014, variable pay payments, the majority of which are paid out in Q1, and higher tax payments.
And, working capital, working capital was a source of cash in Q1 2016, just not as large of a source as it was in Q1 of 2015.
As a matter of fact, from a cash conversion cycle, we improved four days in the quarter.
So, we still expect operating cash flow of approximately $1.1 billion to $1.2 billion for the full year and free cash flow per share at $4.75 to $5.
So, if we look at services, as you mentioned, the services gross margin were up year-over-year based on the Norway roll-off.
We talked about services gross margin getting back to that mid-30% as our run rate, and that did happen.
What happened in Q1 were really three things.
There was an FX impact, a volume impact on the product side, and a mix shift from product to services.
As services grew 6%, products contracted 7%.
Those are really the three items that impacted Q1 margin.
For the full year, we continue to expect full-year gross margin to be comparable to last year.
You mentioned Airwave.
Airwave does have a little bit lower gross margin than our base business.
But, again, our expectation for the full year are gross margins comparable to what they were in 2015.
We remain committed to return of capital.
There is no change to the model.
There is no change to the assumption of how much cash we need on the balance sheet to run the business.
So, for planning purposes, the expectation of $750 million to $1 billion of share buyback is still a valid ---+ valid for planning purposes.
Thanks, <UNK>.
This is <UNK> <UNK>.
We've seen an increase in the managed services business, primarily driven by a couple of things.
Number one, the smoothing of cash flows ---+ spend from our customers' perspective.
Second, and maybe more importantly, is the complexity of the networks are increasing on an ongoing basis.
Our customers don't have the resources or the capabilities to manage a lot of those.
So, we've seen both an increase in what we would consider support and managed, so long software upgrade agreements and multi-year support plans.
And, that's driven largely by North America, but also seen around the entire globe.
Yes, on the first one, you're right.
I think that we overperformed in Q1 against our original expectations.
That was largely driven by North America.
So, in Q2, our guidance, we think is prudent.
Obviously, we're holding the full year.
In Q2, specifically, we have pressure from Latin America, up probably about another $40 million.
The roll-off of Norway of about $30 million.
And, to your point, probably some revenue that we would have originally thought would have appeared in Q2 slid to Q1.
When you net all of those ingredients, it's entirely first half and full-year as we expected.
Backlog.
Yes, with respect to the backlog question, as I mentioned earlier, we're approximately at the same position we were comparable to last year, aged in the year from a backlog perspective.
And, with respect to Airwave, the incremental $1.8 billion, we've talked about a $450 million Airwave number.
So, clearly, that $450 million would come out of the $1.8 billion of Airwave backlog.
No.
I'll let <UNK> <UNK> expand.
But, we haven't.
As we've mentioned with LTE in the four largest engagements that have been awarded in the world so far, we've won all four.
Los Angeles, two countries in the Middle East, and the UK.
But, simultaneously, we see continued investment in LMR, even with those LTE awards.
We think that LTE is additive to LMR.
We're seeing increased interest between the interoperability between LMR and LTE, hence the award I mentioned from the UK home office in Q1.
So, no, we don't see any chilling effect on TETRA infrastructure in international markets as a result of LTE consideration.
The one thing that I would add to that is the situation in the UK was unique in that they did not own either their spectrum or their network.
So, they have a different decision than really every other customer we have or we serve around the globe.
To the best of my knowledge, they are the only customer in the world that didn't own spectrum or network and, again, had a different set of options presented to them than any other customer we have with the TETRA network.
Specifically to Airwave, <UNK>.
Minimal CapEx in that business, <UNK>.
Next question.
In terms of China, first of all, we had one of our strongest years ever that I can remember in China last year.
But, China was down about 25% in Q1, off of a high compare and some lumpiness in strong order activity.
I think it will be down probably 20% or 25% for the full year, so we are not expecting any growth in China.
Instead, we are expecting contraction of about 25% this year for the remainder.
<UNK>, I guess maybe a couple comments on LatAm.
I think the first point that I think is important, if you think about LatAm as a region, it's 5% of MSI's total revenues.
The second thing I would say is to your point, when we think about the first half of the year, we were down 42% in Q1.
Most of the pressure from a comparables perspective does reside and is the challenge for us in the first half of 2016, but I would really say, having obviously spent a good portion of time in the region that the situation remains fluid.
Both from, I think, a natural commodities perspective and a macroeconomic perspective.
Some countries are faring better than others, but it remains a challenge.
I will say the one bright spot is we remained, and we will sustain our investment in the region, both from a go-to-market and from a technical resource because we do believe the market will rebound again.
It's just tough to really put your finger on exactly when that will happen right now.
So, <UNK>, I guess a comment.
No, we don't necessarily see anything with the federal elections that will impact our business in the federal market.
<UNK>mand really post-2013 has been pretty stable, pretty solid in our business, and really that's across the continuum for both product and services.
So, no, we don't anticipate any impact or any slowdown as it relates to the upcoming election in our business in the federal market.
<UNK>, we said $120 million total reduction year-over-year, and we did $43 million in Q1.
So, the modeling for the back half of the year, the first half will be a little bit more from a reduction perspective than the second half.
And, remember, the $120 million is a $120 million reduction year-over-year after the addition of approximately $30 million of Airwave OpEx.
Really the reduction in the base business is approximately $150 million year-over-year.
Just for second half.
So, it really depends on the awards.
They are different.
Certainly, the services award would be aged over several years.
They are multi-year awards.
System deployments would likely be aged over several quarters.
And then, there was some APX subscriber backlog that would be realized as revenue in 2016.
Sure.
Thanks.
We appreciate everybody joining us today, and we look forward to speaking with all of you soon.
