摩托羅拉 (MSI) 2014 Q1 法說會逐字稿

Good morning, and thank you for holding, welcome to the Motorola Solutions first-quarter 2014 earnings conference call.

Today's call is being recorded.

If you have any objections, please disconnect at this time.

The presentation material and additional financial tables are currently posted on the Motorola Solutions Investor Relations website.

In addition, a replay of this call will be available approximately three hours after the conclusion of this call over the internet.

The website address is www.MotorolaSolutions.com/investor.

(Operator Instructions)

I would now like to introduce Mr. Shep Dunlap, Vice President of Investor Relations.

Mr. Dunlap, you may begin your conference.

Thanks, Aaron and good morning.

Welcome to our call to discuss first-quarter results.

With me this morning are Greg Brown, Chairman and CEO; Gino Bonanotte, Executive Vice President and CFO, and Mark Moon, Executive Vice President and President Sales and Product Operations.

Greg and Gino will review our results along with commentary and Mark will join for the Q&A portion of the call.

We have posted an earnings presentation and press release at www.MotorolaSolutions.com.

These materials include a GAAP to non-GAAP reconciliation for your reference which we encourage you to review.

In addition, we will post an historical view of the combined government and iDEN business for the past eight quarters on our site later today.

A number of forward-looking statements will be made during this presentation.

Forward-looking statements are any statements that are not historical facts.

These forward-looking statements are based on the current expectations of Motorola Solutions and we can give no assurance that any future results or events discussed in these statements will be achieved.

Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date.

Forward-looking statements are subject to a variety of risks and uncertainties that could cause our actual results to differ materially from the statements contained in this presentation.

With that I'd like to now turn it over to Greg.

Thanks, Shep, and good morning and thanks for joining us today.

I'd like to share a few thoughts with you relative to our overall business and specifically to the quarter.

First, following the sale of our enterprise business, our remaining business will be positioned as a singularly focused leader in mission critical communications to public safety and commercial customers.

I believe our government business is truly differentiated with an outstanding product portfolio, a vast and global install base, R&D leadership, a great sales and partner network and people that wake up every day thinking about mission critical communications.

And I'm excited about the opportunities that lie ahead of us and believe this business is positioned for solid profitable growth over the long term.

I wanted to highlight some key points relative to the enterprise transaction itself.

First, we expect the deal to close by the end of the year or sooner, generating cash proceeds of $3.45 billion which we intend to return to shareholders in a timely manner.

This transaction is effectively tax free to us and preserves our deferred tax assets.

The deal will include our reported enterprise segment with the exception of iDEN which will remain with Motorola Solutions.

Approximately 4500 people will transition to Zebra along with other enterprise assets and liabilities.

Approximately $100 million of stranded costs allocated to our enterprise segment will remain with MSI following the sale.

We are moving swiftly to eliminate or offset these stranded costs and Gino will cover that in more detail in a few minutes.

Now, moving on to the quarter there are three key points I'd like to emphasize.

First, sales were lower than we expected during the quarter.

Approximately $20 million of the difference is attributable to the government business while enterprise made up the balance as we originally anticipated growth in enterprise for the quarter.

As we previously indicated, aged backlog in Q1 was the primary driver for the year-on-year decline.

We also saw additional weakness in overall North America market demand.

Second, we plan to reduce our cost structure to reflect both the enterprise sale impact as well as the current business environment.

While we made solid progress on taking cost and inefficiencies out of our business since we launched MSI at the beginning of 2011, we will accelerate our cost reduction actions in 2014.

We have a number of opportunities that we'll look at including reducing our real estate footprint, reducing IT complexity, reducing manufacturing costs, and improving overall supply chain efficiency.

And third and finally the fundamentals of our government business remain strong.

Our pipeline remains robust and we continue to grow multi-year services backlog in core business, in our core business year on year while posting another quarter of services growth.

These factors coupled with investments in growth such as areas as public safety LTE, geographic and vertical market expansion and smart public safety have us positioned well for long term growth.

I'll now turn the call over to Gino to provide additional details on our Q1 results and then I'll return to provide additional thoughts and color on the quarter.

Thank you, Greg.

Today we reported first-quarter GAAP sales of $1.8 billion, a decrease of 9% from last year.

Sales in government declined 11% while enterprise sales were down 4% and less than 1% when excluding the iDEN business.

Non-GAAP operating earnings were $212 million or 12% of sales and operating cash flow improved by $77 million over the prior year quarter.

On a GAAP basis net earnings were $0.49 per share compared to $0.68 in the year ago quarter.

Non-GAAP net earnings were $0.50 per share compared to $0.66 per share in Q1 of last year.

For the remainder of this call we will reference non-GAAP financial results unless otherwise noted.

Turning to our government reporting segment.

Government sales in Q1 were $1.2 billion, a decrease of 11% from the prior year.

The biggest driver of Q1 revenue decline was our North America business.

Primarily due to lower age backlog, a challenging federal business comparison and lower than expected subscriber orders during the quarter.

And while we planned for North America government to be down in Q1 and for the year, overall market demand fell below those expectations.

Our Europe and Africa region grew due to strong TETRA product and services performance driven by a number of large contracts.

Asia Pacific and the Middle East declined low single digits, approximately $4 million.

And our professional and commercial radio business grew high-single digits in all regions with the exception of North America which declined by $39 million reflecting overall market demand weakness.

Operating income in the government segment was $140 million, down $77 million to 11.7% of revenue driven by the impact of lower sales.

Enterprise revenue excluding iDEN were down $4 million or less than 1% to $573 million as certain deals moved out of Q1.

We remain encouraged by the continued customer engagement and momentum in our new products.

Operating income in the enterprise business was $72 million or 12% up from the year ago quarter, improved gross margins and lower OpEx drove the improved earnings.

For total MSI, operating expenses were $639 million which is down $45 million from the year ago quarter driven by actions taken in 2013 as well as additional actions taken in Q1.

These actions include a reduction of our real estate footprint by almost one million square feet since the beginning of 2013.

This comprises nearly 25 sites including the sale of a portion of our headquarters in Schaumburg during Q1 which generated $25 million in cash and also the sale of our Reynosa, Mexico manufacturing facility which closed just a few days ago.

The enterprise sale will provide additional opportunities for optimizing our footprint and fixed cost to align with our more focused business needs.

Giving the enterprise sale, the pending enterprise sale and current market environment we are moving swiftly to simplify our corporate structure and reduce additional cost.

As such we plan to reduce approximately $200 million of cost.

$100 million which offsets the stranded costs Greg talked of will be reduced in 2014 an incremental $100 million will be removed over the next 18 to 24 months.

These savings will come from G&A as well as select areas within R&D and sales and marketing.

Shifting to other income and expense.

This line item was a net expense of $19 million in the quarter compared to a net expense of $11 million in the year ago quarter.

Our interest expense of $25 million was partially offset by $7 million of gains on the sale of several investments within our ventures portfolio during the quarter.

We expect this line item to be an expense of approximately $45 million in Q2.

For the remainder of the year we continued to expect this line item to be an expense of approximately $40 million per quarter which is primarily driven by $35 million of quarterly interest expense.

We expect the Q2 tax rate to be 33% to 34%.

Upon the close of the enterprise sale we expect our ongoing effective tax rate to be 32% to 33%.

Based on our current outlook we expect our cash tax rate to be in the range of 10% to 15% for the full year 2014.

As a result of the enterprise sale we now expect a cash tax rate of approximately 15% through 2019, an additional two years.

Moving on to cash flow.

Cash generated by operating activities in the first quarter was $46 million, a $77 million improvement from the prior year, primarily from the timing of our long term contract milestone billings and the return of cash that was seized by the government of India related to a tax dispute in the first quarter of 2013.

Partially offsetting these items we saw an uptick in inventory at quarter end due to lower than expected sales in both segments.

We ended Q1 with $3.1 billion in total cash and $2.5 billion in debt.

With respect to capital return, we repurchased $57 million or approximately one million shares at an average price of $66.32 per share.

This lower repurchase activity was result of trading restrictions due to the ongoing discussions leading to the enterprise sale announcement.

In addition to repurchase activity we paid $79 million in dividends during the quarter.

As a reminder we have approximately $1.7 billion remaining under our current share repurchase authorization.

We have repurchased 26% of the net share count outstanding since Q3 of 2011 at an average price of $50.13 per share.

Now turning to our outlook.

We expect total Company sales for Q2 to decline 5% to 8% with non-GAAP earnings per share between $0.58 and $0.64.

For total MSI, we expect 2014 sales to be down low single digits with operating margins of approximately 18.5% consistent with our prior outlook.

We expect government revenues to be down 8% to 11% for the Second Quarter.

For the full year we expect government sales to decline low-to mid-single digits.

iDEN sales are expected to decline by $20 million in Q2 compared to Q2 2013 and approximately $100 million for the full year.

I'll now turn it back to Greg.

Thanks, Gino.

Now I'd like to spend some time on the Q1 results and business units.

Our Q1 ASTRO contract wins continued.

Some of the large notable contracts included a $113 million system refresh in services contract with the State of Indiana, multiple Latin America military customers worth nearly $60 million, several Canadian first responder and city contracts and Asia police and Middle East defense departments The wins also spanned our portfolio with wins in Phase II TDMA systems, APX radios, services, software upgrades and consoles.

In Q1 we added three new models to our industry leading APX 25 portfolio and now have a number of product families with targeted derivatives of each product to meet customer needs.

The additional radio models include new small value based ruggedized form factors as well as our dual band P25 LTE radio that enables LMR voice and faster over-the-air data transfer.

On the system side we added key software and solutions enablement that includes automatic vehicle tracking, a command center application for geographic talk group management and software enablement for migrating customer transitions from analog to digital.

Our TETRA business grew double digits driven by strong subscriber shipments and services.

Our portfolio position and customer focus continued to drive current success and positive momentum for the future.

In Q1 we successfully demonstrated live video streaming over Norway's nodnett TETRA network using TETRA enhanced data service.

We also earned awards at the 2014 TETRA International for best TETRA innovation and best use of TETRA utilities.

Our global momentum in TETRA wins continued in multiple verticals such as government, corrections, and railroad.

Our professional and commercial radio business declined single digits compared to the year ago quarter driven by lower sales in North America and reflecting lower overall market demand.

We had solid single digit growth in all other regions.

Additionally we're continuing to demonstrate our leadership in this market with our best-in-class digital portfolio and we continue to invest for growth.

For example, we acquired Twisted Pair Solutions, a recognized leader in push-to-talk over broadband applications for secure realtime communication anywhere and on any device.

Finally we see encouraging engagement in both the government and commercial PCR businesses winning major deals with the railroad, major automotive manufacturer, and a multi-million dollar deal in retail.

In addition we continue to invest for the long term in our growth areas including public safety LTE, services, and smart public safety.

In Q1 we expanded our public safety LTE portfolio with the refresh of our LEX 700 to utilize the Android operating system.

Additionally we launched the APX 7000L, a converge device that utilizes LTE for fast data transfer on a land mobile radio voice device.

And we're seeing marketplace validation of this focus with recent wins such as the $175 million LA-RICS contract as well as the previously announced international public safety LTE contract for $100 million.

Additionally we continue to grow our services business that includes traditional network management as well as expanded offerings to include managed service offerings and smart public safety solutions.

In Q1 alone we closed eight large service deals with durations as long as 20 years.

Additional significant support agreements were also signed with the public building commission of Chicago and the Minnesota department of transportation.

Lastly, three European police departments selected us for multi-year life cycle services as well.

These service contracts demonstrate our ability to secure various recurring revenue streams built on our mission critical platforms and services.

Turning to the enterprise business, which will be reported in discontinued operations beginning in Q2.

The enterprise business excluding iDEN declined $4 million or approximately 1% versus Q1 of 2013.

Globally mobile computing declined single digits offset by single digit improvements in advanced data capture and double digit growth in WLAN.

In North America mobile computing was down double digits due to fewer large orders in channel softness while advanced data capture was up double digits.

Europe and Africa was up single digits on strong mobile computing demand and growth across the portfolio.

Asia-Pac Middle East was down low double digits primarily in enterprise mobile computing against strong comps in Q1 of 2013 and several deals being pushed out of the quarter.

The enterprise product portfolio continues to evolve its industry leading position with the growth of the Android portfolio.

We continue to see strong demand for the Android-based TC55 and we recently won a significant multi-million dollar order with a large US retailer for nearly 4000 units.

Additionally the adoption of Android has been robust with the strengthening partner ecosystems supported by a significant uptick in partners going from Gingerbread to Jelly Bean and 135 Android applications now certified on our devices.

The traction on other new product wins was also notable with a major contract win for 10,000 units of our SmartBadge1 to CVS.

Likewise we expanded our MP6000 rollout with a major global retailer.

And finally our focus on transitioning our WLAN solution to a more services based model has helped drive a significant double digit jump in WLAN revenue.

Lastly, our product innovation received numerous industry awards as well, including the HC1.

As an Edison Award finalist and the VC70 which was chosen for the 2013 good design award, and a TC55 Red Dot Award.

Now having said all that let me close with four points on our government business.

First, even though we plan for North America to be down, for the quarter and for the year, the overall market demand is lower than we expected.

So as a result I'm obviously disappointed in the recent challenges we've had in calling the business.

But second, despite this environment we gained worldwide market share in each of our major products in 2013.

Third, we still believe in the long term growth and fundamentals of this business given our pipeline and strong backlog.

Our backlog is growing year on year, driven largely by multi-year services contracts and we're very well positioned with recent wins in public safety LTE.

And fourth and finally, our singularly focused Company will enable greater operational efficiency and improved agility.

We intend to streamline our corporate structure that improves our operating leverage as we return to growth and given our excess capital, the pending enterprise transaction and operating cash flow potential, the opportunity still remains for a healthy return of capital.

I'll now turn it back over to Shep before we open it up for questions.

Thanks.

Before we begin taking questions, I would like to remind callers to limit themselves to one question and one follow-up so we can accommodate as many participants as possible.

Operator, could you please remind our callers on the line how to ask a question?

(Operator Instructions) Our first question is coming from Tavis McCourt with Raymond James.

Hi guys.

I guess my two questions are you expected North America government business to be down this year.

What was the rationale for the expectation, it looks like your biggest competitor in North America is also seeing double digit declines.

Is there something inherent in the market right now that's causing this weakness whether it's a pause in front of LTE or are we still coming off narrowband or just trying to understand why it doesn't seem to be an MSI issue, it seems to be an industry issue and then secondly just a clarification.

On the full year guidance, is the full year guidance including enterprise or is that with enterprise as a disco op, thanks.

Tavis, thanks.

On the first question, I think it's primarily a North America government issue and I think we underestimated the overhang and impact from narrowbanding.

I think that we're still very well positioned for the long term fundamentals but to your point I think it's more of an industry issue.

I don't think it's a structural issue.

I think it's a temporary issue given the narrowbanding and quite frankly perhaps even iDEN Sprint network shutdown because we had record years in 2011 and 2012 in state and local and ASTRO subscriber in PCR, and that's really what I think it is.

We still plan for North America to be down for both the quarter and the year in 2014 but knowing what we know now, I think narrowbanding had a greater impact than we originally thought.

In terms of full year guidance I'll turn it to Gino.

Tavis, in terms of full year guidance the low- to mid-single digit for government that we stated is not inclusive of iDEN.

We mentioned iDEN, the before mentioned $100 million reduction in iDEN revenue.

Was that the question, Tavis?

Let me clarify.

So that low- to mid-single digit that doesn't include the iDEN decline, is that correct?

It does not.

And then the 18.5% operating margin, is that inclusive of enterprise or is that government and iDEN combined or just government?

It's government and iDEN combined.

But not enterprise?

Well it's actually the same number.

Okay either way?

Right.

Got you, cool thanks.

Our next question comes from Pierre Ferragu with Bernstein.

Good morning.

Thank you for taking my question.

So first of all, Greg could you give us a bit more color on what happened, how things played out between late January when you guided for the first quarter and a couple months later when you realized you would not -- you would have to announce numbers below your guidance.

On my rough mark you had a shortfall in revenue like in the 3%, 4% region and if you think about 80% of your business as being something in which you have a bit of clarity with your backlog, as a percentage of 20% of revenue you had to go after in this quarter it's quite a big number, and so any color you could give us on like where the disappointment came from and why you have that much visibility on that?

And then from there, if you could tell us how you've been building out your guidance for Q2 in terms of this 20% you have to go after, how do you feel about that, how much risk do you see on that number?

And then your full year guidance for government implies quite a second half after all if I'm not wrong in my early calculations and so I'm just curious as to where you get this confidence from in terms of the second half where do you think you'll have better visibility and if that's the case, why?

So Pierre I'll do my best to recount, you asked a few questions.

First of all on the 80% visibility coming into a quarter, approximately 80% that remains unchanged.

You described it well that in any one quarter we have about 20% to go get coming into a quarter.

Given the size of the business of MSI, that's still about $400 million roughly per quarter.

What's different than January is we underestimated the overhang impact of narrowbanding and as a result, we have the $20 million government shortfall, I'm speaking to government now, in Q1 and then we had movement in orders in Q1 and Q2 that I'll turn it over to Mark Moon for additional commentary.

I think as it relates to our Q2 guidance, it's our best estimate that we've incorporated into some of the things that we're seeing now, hence the negative 8% to negative 11% for the government segment itself and then on the full year I'll ask Mark to provide some color.

Good, thanks Greg and I think when we talk about Q1 as we said, obviously we knew that we had the GAAP, we had to convert some orders in Q1 to be able to make the revenue guidance that we had provided.

The piece that we had also called out was the impact of narrowbanding which we underestimated and Greg also briefly mentioned the Nextel shutdown which actually lead to strong growth in our PCR business the last couple of years and even in the first quarter of last year that spilled over.

Gino called out that was $39 million as well of a miss that we had underestimated, so as a result of those things and orders not only converting in the quarter, we were expecting to convert orders that would provide revenue in Q2 and for the rest of the year.

Now on relook we see many of those orders approximately 300 million in the first half that have been pushed to the second half.

Now, with that said, the pipeline in our visibility to those orders and orders in the second half is very good.

In fact we continue to have very good engagements and our second half pipeline is over $1 billion stronger than the first half pipeline so when you talked at the end about what would give us confidence or risk in the comments that you made around the second half, it is really that pipeline, the fact that we've got a number of contracts that we've received in hand, a couple in particular like LA-RICS and the State of Maryland that we know have $75 million that is not currently aged in our backlog and as we move for the full year, remember the second half of last year had a huge decline in Federal Government.

We talked about $150 million decline in the second half.

It was the worst second half and the worst full year we had ever had in Federal Government.

Now we have budget certainty which was approved in January which we didn't have last year.

The pipeline is reflecting a ramp up from the government shutdown and some pent-up demand, so at the end of the day, we really have good visibility to what we're calling throughout the rest of the year and from a federal perspective, we're really only assuming modest growth for the full year, even though it will be a $70 million increase in the second half, only very modest, less than 20% growth for the full year, again coming off the worst year we've had.

We will next go to Simona Jankowski with Goldman Sachs.

Hi, thanks very much.

Just a couple of questions.

The first one is as I recall for most of last year, you were seeing a higher mix shift just of infrastructure sales.

I think you might have said it was a double digit increase and historically we see a follow on effective higher device sales which were in fact weak in the quarter you just reported.

Can you just walk us through that dynamic a little bit?

Would you still expect those follow on device sales and there might have been some reason for why they didn't come through but they should still come through in the rest of the year or there's something different about those infrastructure sales last year.

So Simona, this is Mark.

We don't really see anything different about infrastructure sales and as you talked about and the comments that we made early was that subscribers were less than we had anticipated in the quarter.

In fact we continue to have stronger infrastructure sales which we are positive about.

We also continue to have stronger multi-year services sales which are building very strong backlog but not necessarily feeding revenue in the very short-term.

When we talk about the Nextel shutdown and when we also talk about narrowbanding which pulled a lot of new infrastructure or accelerated infrastructure into the year, that also lead to some subscriber acceleration which lead to the piece that we talked about here in Q1 and Q2.

As an overall result we still expect, we believe our portfolio is in wonderful shape.

We mentioned a couple new models of our industry leading APX portfolio.

We still expect subscriber growth to return as we move forward.

Okay, and then my second question was on the new APX 7000L, which I think is your first converged device that handles both LTE data and LMR Voice so that seems to be a change relative to how you initially were approaching this market with separate LMR and LTE devices and so I was hoping you can talk about the strategy there a little bit and also if we think about this device relative to an equivalent LMR only device what would be the like-for-like ASP lift?

So it's really no change in strategy.

In fact we've always talked about we'll continue to lead in our mission critical voice portfolio and as we've talked about we believe we will also lead in public safety LTE portfolio both in infrastructure and devices.

We've often talked about the NDN portfolio and services component that we believe we'll offer that none of our other competitors will.

This first converged device we think is what the industry will ultimately want to go to.

We know that customers as Greg mentioned LA-RICS earlier will look to have devices like that that are able to both handle LMR and LTE.

They'll also be the need for collaborative devices and most customers will like that, dual devices, a LMR device and a LTE only device which will also feed that portfolio both with devices and with modems as we go forward, so all-in all it's strictly on our strategy of record.

We actually again believe we're leading.

We're excited about this new product and the ASPs will be slightly, again as you would think, this is complimentary to having more features, more capabilities in the ASPs will be slightly higher than what you would see in a traditional LMR or P25 device.

So just to clarify I think in the past you had talked about LTE as kind of an incremental multi-billion opportunity which if it was an incremental device I can sort of see how that could happen.

If this is really still the same device but with more features and a slightly higher ASP, will that still support that large incremental opportunity or should we just think of it as more of a slight ASP mix shift effect over time but not really a multi-billion increment?

I'll let Mark answer that but Simona, I think we still see it as an incremental multi-billion dollar opportunity over the long term both infrastructure and subscriber devices.

There were some that will keep different devices, video or data only, and voice LMR, there's some that will go with converged devices, and for some with converged devices it's not just necessarily an ASP potential lift but it could also be an event over time to upgrade subscriber radios so it really doesn't change the way we have looked at it and we still see LTE and public safety LTE as being incremental to the land mobile radio business.

Just complementing, this new announcement is another device in our overall portfolio.

As you're aware we had announced last year a LEX 700 device that was actually Microsoft based we've now come back with a Google upgrade of that as well, or Android upgrade.

We will also announce this device and there'll be a series of devices just like we do on the LMR portfolio we'll continue to build out that subscriber and device portfolio for public safety LTE.

Great, thank you very much.

And our next question comes from Ehud Gelblum with Citigroup.

Hi guys can you hear me?

Yes.

Awesome thanks, so first thing on narrowbanding I'm glad that you're starting to see that that probably had a little bit more of an impact.

It did kind of end a year and a half ago mostly in 2012 as there's a little bit of an impact probably in 2013.

When you're looking at your long term growth rate and you're basing it on historical numbers, narrowbanding obviously didn't just happen in 2012.

It was something that was out there for a number of years, five, six, seven years and kept getting pushed out so there a chance that narrowbanding may have had an impact to your growth rate numbers for five, six years even before you split off from Motorola Mobility.

How do you get a handle on what the true underlying growth rate is to give you confidence on your long term growth rate of 2% to 3% versus thinking that maybe all the historical numbers that you've looked at may actually not be necessarily indicative of what's going forward putting aside LTE and then I've got a follow-up on operating margins, thanks.

Maybe we'll tag team it but I think if you normalize the way we think about it is normalize for the record years of 2011 and 2012 and maybe even to your point maybe it's a little bit longer than that in anticipation.

It's still from a last 7 years or last 10 years the average historical compounded annual growth rate is about 4%, 4.5% but forgetting the rear view mirror looking forward we still believe the long term fundamentals remain sound, we still believe that mission critical communications remains an utmost priority, we still look at the multi-billion dollar install base internationally as an addressable market opportunity to upgrade.

We've talked about the fact that there's about 10,000 plus systems, 16% more than 10 years old.

When you look at the PCR radio business and that base, 35 million or 40 million PCR radios worldwide, 90% analog, 10% digital there's the opportunities for growth that are geographical and vertical market expansion in our core mission critical business.

As we provide more long term services contract, and lock a customer up for the long term it protects the customer base, it allows for technology refresh, it allows for more long term annuity revenue streams and then lastly is public safety LTE, which we believe as earlier stated is incremental.

The US and other countries are taking a business model that dedicates or allocates the spectrum which is the model we believe is appropriate that will allow for public safety LTE infrastructure and incremental subscriber demand on top of that, so that's what we believe.

Not just historically but we believe in the longer term growth drivers to get this to a low- to mid-single digit business.

You think it's about two or three?

I don't want to be that precise given some of the recent challenges we've had.

I'd just say low to mid.

On operating margin if you just look historically at the pattern enterprise in 2010 and 2011 had a higher operating margin than government did.

Primarily because iDEN was in that mix.

2012 government took over and was higher in terms of margin and more profitability and same with 2013.

It looks like from Gino your comments that both enterprise and government will have the same 18.5% operating margin this year.

When you say that I'm not 100% sure from the prior question whether where you're putting that corporate overhead the $100 million, is that in the government when you said they both have 18.5% is that--?

Yes, so Ehud, just so I'm clear when we talked about 18.5% we talked about approximately 18.5% for total MSI, and approximately 18.5% for Remainco.

In Remainco in government the stranded costs are in government.

The $100 million of actions to offset those stranded costs that we'll execute on in 2014 are predominantly government segment actions.

So then the $100 million additional in the next 12 to18 months on roughly a $6 billion Remainco total gives you another 150 basis points with no, assuming no revenue growth of operating margin expansion.

Are we to assume that going forward that as revenue grows therefore, so is that $100 million taking your OpEx from now and taking $100 million out and that's your OpEx number or is OpEx going to grow from revenue growth and then $100 million off of what it would have been otherwise because if you grow 3% you'll grow the topline about a $100 million and you'll expand operating margin that way in which case we could go 200 to 300 basis points of operating margin expansion.

If you could just help us understand what happens to OpEx as revenue grows vis-a-vis $100 million of OpEx.

Clearly as revenue grows there's opportunity for operating leverage.

The commentary around cost reduction was the $200 million, if you think about it in terms of Remainco, $200 million is approximately a 10% BGN reduction on Remainco.

Obviously with revenue growth we have the opportunity for operating margin expansion.

On the current OpEx level though can you handle 3% revenue growth or will operating margin or operating expenses have to grow with a 3% top line let's say.

Without getting into modeling 2015 and 2016, there may be slight OpEx increases but we believe that we will be able to expand operating margin and we'll have operating leverage when we return to growth.

Yes, Ehud, as Gino said $100 million is to be taken out, the target is to take it out this year, there's another $100 million beyond that, we're targeting about $200 million and by the way there could be more than that, if there is we'll pursue that accordingly but it's a below gross margin target and Gino's right.

There could be some uptick as the business returns to growth but our goal is to size the business to a lower fixed cost model and a cost basis that's a reflection of more of a pure play simplified corporate structure so as since we are the Remainco business that spun off mobility which is mobile devices and set top boxes we monetize the network business and sold it to Nokia Siemens, we are doing what we think we're very excited about the enterprise transaction to Zebra.

We've had good customer feedback on putting those assets together for a pretty compelling end-to-end enterprise mobility play.

We're simply saying that while we've taken action there's room for more, in the areas that we talked about, real estate, IT, supply chain, G&A, and we're going to size the business as a reflection of our more simplified structure and this is the time to do that.

Great, appreciate it.

Thanks.

Our next question comes from Keith Housum with Northcoast Research.

Thanks guys I appreciate the opportunity to ask a question.

First question on gross margins.

Gross margins were down for the quarter, hoping you can give me a little bit of color on that, I'm assuming a little bit's probably due to just the lower volume but yet I see services are down significantly I guess quarter over quarter.

If it's a government related enterprise related, any color you can offer there.

Sure, with respect to gross margin, it's really a function of -- we're not seeing ASP erosion in the government segment within any specific product so it's a function of higher infrastructure and deployment and services versus subscribers as well as higher TETRA volumes versus ASTRO and services growing faster than the overall business which has an impact on gross margin but with similar, with a similar OE profile.

As well the impact of a lower iDEN number impact to gross margin percentage as well.

Got you, so in general is TETRA have a lower gross margin than ASTRO?

Yes.

Okay, and then next question is more on competitive threats going forward.

Perhaps I don't understand the acquisition of Twisted Pair Solutions and what they do so much but can you speak to I guess a competitive threat or is there a competitive threat with public safety forces, who perhaps don't need the mission critical device but have used one historically say a police chief or fire chief is there a threat of those guys using a consumer device where previously perhaps they did not is that a concern going forward?

I think if you look at those type of executives in policing as you just kind of describe most of them are carrying dual devices today.

They carry a radio and they also carry a cell phone so primarily when you think about the Twisted Pair acquisition it really wasn't targeted at that executive level of public safety even though it could be but take a similar example in commercial space where you have a plant manager that may not want to carry a radio that carries a cell phone but may want to make from that cell phone a push-to-talk call back to folks within the plant or within the manufacturing facility.

That Twisted Pair combined with our MOTOTRBO Anywhere gives that capability so that could also be applied to an executive within public safety and as we look at the Twisted Pair technology we certainly are also leveraging that capability and technology as we move in our public safety LTE direction but all-in all, mission critical voice is still a constant, it's still a priority and throughout the world public safety still is moving and continuing to see the importance of mission critical voice.

Just one additional item, Keith, is probably the closest substitute to mission critical voice that was available, has been available historically was really the Nextel the iDEN technology in terms of set up time, in terms of one to many groups and through the Nextel period we saw growth in mission critical voice so we believe that mission critical voice continues to be very important and there is really from a substitution perspective there's nothing available that really shares the attributes in term of a hardened network, call set up time, one to many that we offer in our voice.

So if I understand it correctly from what you're saying there's not a threat of those I guess unique individuals who perhaps have previously had a radio they can now use a consumer device like a phone with a software solution.

Are you saying that's not necessarily a threat to the overall sale of devices?

As a matter of fact I think it's an opportunity to combine as Mark said someone who traditionally perhaps would not interact with a LMR fleet to have the ability on their device to talk to a plant manager that leaves the plant or anyone who leaves the coverage area, would have the ability to interface on an LMR network.

So there's a lot of conversations Keith about over the top push-to-talk exactly what you're just describing and where we're seeing that application if it's getting any traction is in the commercial space, we're seeing almost zero traction in mission critical voice because of the attributes that Gino described.

Got it.

Appreciate guys, thank you.

Our next question comes from Tim Long with BMO Capital Markets.

Thank you.

One for Gino, one for Greg.

Gino, you talked a little bit about the gross margin in the quarter and understanding mix going forward that'll change around but it sounds like some of Greg's initial comments talked about supply chain manufacturing cost and some efficiencies to be gained more on the gross margin line so just talk to us a little bit about mix aside, what type of benefits we could see from some of the more gross margin focused actions.

And then Greg, this is certainly at least a second year in a row where we're seeing pretty back end loading of the year so do you think that's the trend or that's the norm from now on and maybe have to plan the business accordingly or do you think it's just a coincidence that its been two in a row where we've gotten off to pretty weak starts in the year, thank you.

Let me do the second one and Gino will talk gross margin.

I think they're different.

I think if we look at last year the challenge we had was the unprecedented second half drop of our federal business.

We've never seen it decline to levels in 10 years plus on the second half of last year.

This is a government business comment and that being of course the no budget and the government shutdown which hasn't happened in about 20 years.

That was a unique pressure point on the government business in the second half and then last year of course we had the enterprise business and the cyclicality of that and trying to call its recovery.

I think this is different.

I think about this government business and this is more of a narrowbanding we believe overhang, so I think the causes are necessarily different last year and this year and I wouldn't necessarily conclude, Tim that it's a trend longer term.

We're just trying to comment on what we see this year and I think that the factors are a little bit different this year than last.

Tim on gross margin we talked about Q1 and we talked about some of the differences between products and products versus services and the impact in Q1.

Going back to Greg's comments on additional opportunities.

We're around this idea of becoming singularly focused on one segment and reducing our structure and reducing fixed costs.

An example of that would be I mentioned the Raynosa, Mexico manufacturing facility that we had that we sold just announced a few days ago so we believe there are opportunities within IT to reduce complexity and simplify within our real estate footprint, manufacturing footprint to reduce complexity and simplify that will lead to a lower breakeven and a better cost profile.

Now I mentioned the million square foot reduction since the beginning of 2013.

I think it's constructive to note that since spin we've had a 5 million square foot reduction, about 40% of our total square footage from spin to now has been reduced as well as 40 sites that have been closed since that time frame.

So that work will continue and it will continue at an accelerated pace given the new MSI profile.

Thank you.

Our next question comes from Peter Misek with Jefferies.

Good morning.

Maybe go back to the long term growth rate and trying to tackle it a different way.

Maybe you can give us a sense for the install base of physical equipment and infrastructure and domestically, any kind of rough age you can give us on that and maybe how that relates to LTE and FirstNet and then I had a question on cash return.

So when you think about the age of the infrastructure, I think Greg may have mentioned it but about 60% of the infrastructure that's deployed is over 10 years old, so relatively aging.

90% of the devices that are out there today are still analog, have not moved to digital as you know, the new technology is moving all to digital, so the install base that is there is certainly in a position to be churned and given our portfolio we think there are capabilities that will also, besides just aging, push for some of that churn because of new features, new functionality, new capabilities that are now available in our portfolio and through digital technology.

As far as the LTE piece of that, what we're seeing today is no impact on the traditional mission critical technologies from LTE.

In fact LA-RICS is a wonderful example where they just procured at a similar time the LTE network and a mission critical P25 network.

The customer in Europe that we described a quarter ago for $100 million also is deploying a mission critical P25 technology.

So the capabilities of each are different.

One is about big data and being able to have video and situational awareness.

The other is primarily about mission critical voice and the other features and capabilities that we've talked about for many years.

Any way you could give us a size of that install base that is you said over 60% of the install base is 10 plus years old.

Any way that we could sort of size that install base?

Pete, it's several billion.

I would leave it at several billion and we'll try to give some more color I think as we go forward.

Because I think if you step back and you try and get a sense for that size how much longer they could extend that life, what the savings are by moving to some of the newer mission critical voice and then by layering in the advantages of LTE maybe that can help us get a sense for whether that long term growth rate you've put out there is really easily achievable or a stretch goal.

Just in terms of cash return, obviously, you're hoping the enterprise deal is going to close here sooner rather than later.

Maybe you can articulate how you're thinking of splitting up that cash return, is it a bulk in terms of share repurchase and should we think of a tender offer for your shares as a way of using that cash up appropriately or are you going to hold it on your balance sheet and divide it up over time in dividends and share repurchases and small acquisitions?

Thank you.

So Peter I think as we stated in the call a couple weeks ago, the intent is to return the proceeds of the transaction in a timely manner.

We haven't articulated and we'll continue to work through exactly what form that takes and we'll update you on that soon but it is not our intent to hold that cash on the balance sheet.

So you'd anticipate that shortly after the close of the enterprise transaction there would be a capital return event?

Yes, we'll return it in a timely manner and we'll update you when the time is appropriate.

Perfect, thank you guys.

Our next question comes from Rod Hall with JPMorgan.

And we will now move to Brian Modoff with Deutsche Bank.

Good morning guys.

Just one question really.

Can you give us an update on FirstNet where you see it at, are we still looking at early next year for an impact on that, just any color you could provide we appreciate, thank you.

I think we continue to work pretty closely with FirstNet and we're successful in working with them and the customer for LA-RICS.

We continue to stay closely engaged with them.

Mark Hacker is our lead General Counsel and one of the key operating executive interface points into the FirstNet group and I'll have Mark maybe make a little additional commentary on where we are as well.

So as Greg indicated I think they continued to move down a path from their original plans to deploy this nationwide network.

Their current announced intent is to release additional RFPs towards the end of the year which would say the response would move into next year so it would probably be late next year, later in the next year for real activities to take place.

I'll let FirstNet speak of the timing but that's just extrapolating from their announced RFPs and response and evaluation from those RFPs and then the direction they would move from that point.

So we're looking at more of a 2016 time frame for when we really start to see the ramp in that business?

Again, I think when we think of LTE, we've talked about both FirstNet but also internationally so we've talked about the real ramp being in the latter part of next year and into 2016.

I think FirstNet will fall into that same equation.

Okay, thank you.

And this does conclude the question and answer session.

I'd now like to turn the floor back over to Mr. Shep Dunlap, Vice President of Investor Relations for any additional or closing remarks.

Thanks.

I just want to remind everyone the details outlined in highlighted items, GAAP to non-GAAP P&L reconciliations and other financial information can be found on our website.

An audio replay together with a copy of today's slides will also be available on the site shortly after the conclusion of this call.

As mentioned at the outset during this call we made a number of forward-looking statements within the meaning of applicable Federal Securities laws, such forward-looking statements include but are not limited to comments and answers related to the following topics, long term growth and profitability of government, sale of our enterprise business including timing and return of proceeds, cost reductions and their impact, outlook relating to sales, EPS, operating margin, OpEx and gross margin, amount of other income and expense, amount of quarterly interest expense, future tax rates, share repurchase and dividends, time and impact of new product solutions, services, introductions, including public safety LTE, timings of orders and contracts and impact on future revenue.

Because forward-looking statements involve risk and uncertainties, MSI actual results could differ materially from those stated in these forward-looking statements.

Information about the factors that could cause and in some cases have caused such differences can be found in the morning's press release on pages 10-21 on item 1-a of our 2013 Annual Report, form 10k, and in our other SEC filings.

Thanks and we'll be looking forward to speaking with you soon.

Ladies and gentlemen this does conclude today's teleconference.

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