摩托羅拉 (MSI) 2016 Q4 法說會逐字稿

Good afternoon and thank you for holding.

Welcome to the Motorola Solutions fourth-quarter 2016 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.

At this time, all participants have been placed in a listen-only mode, and the line will be open for your questions following the presentation.

I would now like to introduce Mr. Chris Kutsor, Vice President of Investor relations.

Mr. Kutsor, you may begin your conference.

Thank you and good afternoon.

Welcome to our 2016 fourth-quarter and full-year earnings conference call.

With me today are Greg Brown, Chairman and CEO; Gino Bonanotte, Executive Vice President and CFO; Bruce Brda, Executive Vice President Products and Services; and Jack Molloy, Executive Vice President Worldwide Sales.

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

We have posted an earnings presentation and news release at www.motorolasolutions.com/investor.

These materials include GAAP to non-GAAP reconciliation for your reference.

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 factors section of our 2015 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 now turn it over to Greg.

Thanks Chris.

Good afternoon and thanks for joining us today.

I would like to share a few thoughts about the overall business before Gino takes us through the results and the outlook.

First, Q4 was an outstanding quarter capping a very solid year.

For the quarter, we grew revenue by 12% including 4% organically.

Additionally, we grew revenue in every region.

Our products segment revenue grew 9% led by continuing strength in North America and reflecting the durability of our core LMR business.

Second, 2016 was a pivotal year for us as we returned to growth.

We strengthened our competitive position and grew revenue 6% while ending the year with a record backlog position, and our services segment grew 18% to $2.4 billion with services comprising 40% of our business.

And, lastly, I am very confident in our position going forward.

Since the split six years ago, MSI's annual total shareholder return has averaged over 20% a year.

We have strengthened our product portfolio, dramatically reduced our cost profile, normalized the balance sheet, reduced our share count by 52%, refreshed our board and senior leadership team, and completed four key software and services-based acquisitions just this past year.

So, with that baseline, I believe we're set up well for success going forward.

As I think about 2017 and beyond, we remain fully committed to revenue growth, earnings growth, and continued cash flow improvement.

I'll now turn the call over to Gino to provide additional details on Q4 results and outlook before returning to provide some closing thoughts.

Thank you, Greg.

Q4 results include revenue of $1.9 billion, up 12% from last year, including Airwave revenue of $124 million.

The strong results were driven by growth in every region -- 9% growth in products and 18% growth in services.

GAAP operating earnings were $403 million.

Non-GAAP operating earnings were $541 million, or 29% of sales, representing an improvement of 150 basis points from the year-ago quarter.

GAAP earnings per share from continuing operations were $1.43 compared to $1.56 in the year-ago quarter.

Non-GAAP EPS was $2.03 a share, up $1.58 -- up from $1.58 in the year-ago quarter, a 28% year-over-year increase.

Ending backlog is up $1.9 billion from last year and $234 million sequentially.

The $1.9 billion increase versus last year was driven by $1.25 billion from Airwave, $300 million from organic managed and support services, and $300 million from products.

For the remainder of the call, we will reference non-GAAP financial results including those in our outlook unless otherwise noted.

For the full-year, revenue grew 6% including $462 million of Airwave revenue.

Revenue excluding Airwave declined 2% on weakness in Latin America and parts of Europe in the first half while both North America and Asia-PAC grew for the full year.

Managed and support services grew 49% in the full year and 5% excluding Airwave.

Operating earnings were $1.4 billion, up $261 million, or 22% compared to the previous year.

Earnings per share grew 48% to $4.92.

Free cash flow was $894 million, up $48 million.

Moving to the product segment, Q4 product sales were $1.23 billion, up 9% from the prior year driven by growth in every region.

Q4 products operating income was $407 million, or 33% of sales, up 300 basis points from last year driven by higher sales.

Products backlog ended the quarter at $1.5 billion, up approximately $300 million from last year primarily on continued strength in North America.

Sequentially, backlog was up $102 million also driven by strong order volume in North America.

Q4 services revenue was $657 million, up 18%, including $124 million of Airwave.

Excluding Airwave, managed and support services grew 5%.

Services operating income was $134 million, or 20% of revenue.

Operating margins were down year on year due to higher integration costs associated with the completion of the Norway implementation phase as well as higher incentive costs for the 2016 backlog performance.

Services backlog ended at $6.9 billion, up $1.6 billion from last year.

Of the $1.6 billion increase, Airwave was $1.25 billion, and organic managed and support services was up $300 million driven primarily by North America.

Sequentially, services backlog is up $133 million driven by North America and Latin America, and it includes a $250 million adjustment primarily due to the British pound.

Moving to operating expenses.

Total OpEx in Q4 was $408 million, up $22 million from the year-ago quarter driven primarily by M&A expenses and higher incentives associated with our 2016 record backlog performance.

It is important to note that from a run rate perspective, we achieved our 2016 targets and remain on track for structural reductions to OpEx.

For the year, we reduced operating expenses by approximately $80 million.

Other income and expense in Q4 was $41 million compared to $51 million in the year-ago quarter.

The Q4 effective tax rate was 31%, and for the full-year 2016, the effective tax rate was also 31%.

Moving to cash and capital allocation.

Q4 operating cash flow was $513 million, an increase of $98 million from last year driven by higher revenue and EBITDA.

Free cash flow was $453 million, up $82 million.

We ended Q4 in a net debt position of $3.4 billion.

During the quarter, we repurchased $114 million of stock, paid out $68 million in dividends, and repaid the term loan related to the Airwave acquisition.

We also invested $246 million in software solutions with the acquisitions of Spillman Technologies, Gridstone, and Cyfas.

Capital return for 2016 was to $2.4 billion, this is comprised of acquisitions of $1.3 billion, share buybacks of $842 million at an average price of $70.28, and dividends of $280 million.

Turning to our outlook, we expect Q1 sales growth of 3% to 5% and EPS between $0.52 and $0.57.

This outlook reflects approximately $50 million of incremental Airwave revenue versus the year-ago quarter and an average diluted share count of approximately 170 million shares, and, it is based on current FX rates.

For the full-year 2017, we expect revenue growth of 1% to 2% and EPS of $5.05 to $5.20.

We expect operating cash flow to grow by approximately $50 million to $1.225 billion, and free cash flow to be approximately $950 million.

This outlook is based on current foreign exchange rates and assumes Airwave revenue to be approximately flat from the prior year due entirely to currency.

Moving to regional results, North America grew 3% in Q4 and 2% for the full year with approximately equal growth in both products and services.

Backlog is up significantly in both products and services year-over-year and sequentially.

Latin America revenue grew 21% in Q4 driven by products.

For the year, Latin America declined 20% on macroeconomic headwinds in the first half as well as expected iDEN declines.

Ending backlog is up double digits both year-over-year and sequentially driven by large projects in Q4.

EMEA grew 45% in Q4, inclusive of Airwave, and was up 1% organically.

For the year, EMEA grew 33% including Airwave.

Excluding Airwave, EMEA declined 15% driven by primarily by approximately $100 million of lower Norway revenue associated with the completion of the implementation phase of the nationwide contract.

Asia-PAC revenue grew 15% for the quarter and 3% for the year driven by the products segment.

Finally, I'd like to end with some notable segment highlights.

The product segment's strong results reflect our continued focus on innovation, cost efficiency, and execution.

A few examples of this innovation and investment include targeted acquisitions, including Spillman Technologies and Gridstone which strengthened our software offerings for public safety; the release of new P25 and TETRA devices that provide advanced features and functionality including Bluetooth 4.0, Wi-Fi, and enhanced location services that enable future software and services opportunities.

Norway and Sweden conducted their first major cross-border emergency response exercise supported by our software that enables fully inter-operable, multi-vendor radio communications.

This land, mobile, radio cross-border collaboration is spurring additional interest from neighboring countries and illustrates the power of our LMR communications platform.

Also, I want to mention some notable wins.

A $140 million P25 system deployment for the Washington Metro area transit authority enabling seamless communication both above and below ground.

$60 million to upgrade and maintain the citywide P25 system for the Metro area of San Francisco and $40 million to upgrade a P25 system that expands coverage and enables inter-operable communications unifying eight cities in Argentina.

In the services segment, we continue to grow our managed and support services business around the world.

Q4 multi-year service awards include wins in Texas, South Carolina, California, the United Kingdom, Argentina, China, and Latvia.

Deals such as these help drive our services backlog growth of nearly $300 million, or 7% excluding Airwave.

We expect our momentum in the managed and support services business to continue as our customers choose Motorola expertise to help them navigate their fast-changing technology options at a predictable cost.

I'd now like to turn the call back over to Greg.

Thanks, Gino.

Let me just close with a few brief thoughts.

2016 was a strong year of execution and growth especially considering the macroeconomic headwinds in Latin America and parts of Europe earlier in the year.

For a little additional perspective, it is worth noting that North America grew each of the past two years and six of the last eight quarters.

Asia-PAC grew the past two years, and EMEA returned to growth this year as well.

All of which I think confirms the durability and longevity of our LMR platform.

So, while I'm pleased with our results, we'll continue to drive the business for improved operating leverage and revenue growth in 2017, and I expect our record backlog position entering this year to support our growth going forward.

I'll now turn it back over to Chris.

Thank you, Greg.

Before we begin taking questions, I'd like to remind callers to please limit themselves to one question and a follow-up to accommodate as many participants as possible.

Operator, would you please remind our callers how to ask a question?

(Operator Instructions)

Pierre Ferragu, Bernstein.

Thank you for taking my question.

I am looking at 2017.

I just want to make sure I have the right picture here.

Your guide offers 1% to 2% revenue growth.

If I adjust for iDEN and where currency is today, I get an adjustment of maybe $120 million to $130 million which means that your organic growth is somewhere between 3% and 4%.

I just wanted to make sure that I had the right picture.

And then, if you can give us a sense of what gives you confidence in this organic growth?

Is that mostly services?

Or, do you see growth in products as well and maybe in terms of geography?

And then, a quick follow up of course on Q1.

Your guide is below expectations, and it feels like the seasonality between Q4 and Q1 is below what we have seen in recent years.

So, if you could explain moving parts around that, that would be very helpful.

Pierre, make sure I capture everything and if I don't please follow up.

Let's talk about 2017.

You're right.

We're guiding 1% to 2% at the top line.

You correctly articulated that it incorporates a few things, right?

iDEN is a negative headwind of $50 million.

There is an order for about -- ESN for about $25 million that with the delay of ESN gets pushed out of 2017.

And the third dimension is Airwave.

Airwave is flat contemplated in this guidance at about $460 million in 2017.

As a footnote, Pierre, if we were operating with the pound, at the rate when we closed Airwave just under a year ago, that would yield $80 million -- would have yielded $80 million of additional top-line revenue this year in 2017.

So, that is the chalk the field on the puts and takes in 2017.

We do believe organic growth will continue in 2017, and we do believe we will grow in both products and the services segments which is assumed in the overall 1% to 2% envelope for 2017.

For Q1, two points to make.

We look at Q1 and we look at Q4 more or less together.

When we look -- when Gino and I and Jack and Bruce, we look at Q4 and Q1 and combine those two quarters.

From a revenue and actually an EPS perspective, it is at or above where we thought it would be coming into Q4.

So, we had an exceptionally strong Q4 both on top and bottom so I would not necessarily get concerned about the linearity or the dimensions between the flow between the quarters.

The other note, Pierre, is on Q1 EPS, we have a higher tax rate, and we have higher interest expense in Q1.

Those two items are worth about $0.08 so that should give you some other ingredients to help think about and dimensionalize the overall performance in Q4, Q1, in FY17.

Thanks, Greg.

I think you've addressed everything.

Matthew Cabral, Goldman Sachs.

Thank you.

So, you talked on this a little bit in the prepared remarks, but it looks like OpEx came in a little bit above where you were expecting for the full year.

It seems like the first time that OpEx actually grew on a year-over-year basis for a while so if you could just dig in a little bit more into what drove that?

I know in the slides you said you were expecting OpEx down year over year in 2017, but is there a specific number that you are willing to throw out at this point in terms of a target there you're looking to take out?

Matthew, first of all, I would say that OpEx did not come in higher than expected.

It came in exactly where we expected, and we are achieving the run rate that we articulated previously.

It's higher in Q4 primarily on M&A expenses and higher incentives accrued that are directly related to achieving a record backlog.

That's an expense I will take all day long.

If you look at Q1 OpEx, it's up a little bit modestly flat to slightly up, but for the full year, we expect OpEx to be down roughly $20 million to $25 million.

By the way, that is inclusive of about $40 million of acquisitions made.

Overall, I am very pleased with OpEx on our run rate performance.

The Management Team hit the targets they committed to me, and we will reduce OpEx in 2017 over 2016 again, and that's absorbing $40 million of acquisitions.

Got it.

And then, on services, it looks like there was a pretty big downtick in the operating margin just sequentially.

Can you expand a little bit more on what drove that?

And, how should we think about the right level of profitability for that business going forward?

I think, and Gino can chime in.

But, I think that the services segment margin, operating margin, was compressed primarily due to the completion of the Norway integration project and higher incentive accruals that were in Q4.

The only point I will make that in 2016, Matt, margins were up 470 basis points to 21.6%.

And, we talked for several quarters about the drag on services margin related to some large implementation projects, and once we completed those projects and returned to the services margin in the mid-30%, 35% approximately.

And, that's our continued expectation.

Margin overall for 2017, our expectation is comparable to 2016.

Thank you.

Tavis McCourt, Raymond James.

Thanks for taking my questions.

Gino, I wondered if you could talk a little bit about cash flow and CapEx expectations in 2017?

And then, Greg, the backlog growth, when you make all the adjustments in 2017 was actually quite substantial both in product and services.

I think you mentioned, it was predominantly North America or skewed towards North America.

Is this all LMR?

Or, is any of this LTE or other business lines?

Thanks.

We will start with cash flow, Tavis, so cash flow expectation for 2017 we said up approximately $50 million in operating cash flow to $1.225 billion.

I will point you to the difference in cash tax rate 2016 to 2017.

The 2016 cash rate was 8%, and right now our view of 2017 is 15%.

Free cash flow we expect to be comparable to 2016 perhaps slightly lower as we continue the buildout of ESN as well as the ERP system deployment.

CapEx?

Okay.

The other was backlog.

Aged backlog, Tavis, you are right.

It was up nicely both sequentially and year over year.

It is definitely overwhelmingly LMR and command center software.

It is not LTE.

Public safety LTE for 2016 was about $140 million.

By the way for 2017, we expect it to be comparable also around $140 million.

So, definitely the strength of our backlog is LMR-driven and associated software around LMR.

Great.

Thanks a lot.

Sure.

Tim Long, BMO Capital Markets.

Thank you.

Greg, following up on public safety LTE.

Obviously, we saw a push-out at FirstNet.

If you could just talk a little bit about planning assumptions around that?

And, whether or not you think there has been any impact on other public safety LTE business in the US as we wait for that decision?

And then, secondly, could you just talk a little bit -- give us some color on the two acquisitions.

I think you mentioned an OpEx impact of $40 million.

Could you talk little bit about what that could mean to the top line for 2017?

And, what you think that could possibly add to the growth rate if we look out a few years?

Thank you.

On FirstNet, Tim, nothing really new to report.

We still anticipate FirstNet to be awarded by the end of Q1.

We definitely view it -- we have and we continue to view it as an incremental opportunity.

There is no revenue at all in 2017, as you wouldn't expect, that is contemplated with FirstNet.

And, we are still actively in the game.

We'll see how it unfolds.

I think the opportunity there for us will be, or could be, around broadband-enabled devices, mobile apps, software services, and I think we are well positioned there especially given the coverage in the US and the domain expertise around public safety.

That's really the long and short of it.

We will see what happens over the next few months.

And, what was your second question?

It was OpEx related to the two acquisitions.

OpEx.

So, Spillman --

It was more the revenue -- what kind of revenue impact we could have and what it could do to growth rates?

The acquisitions obviously are contemplated in the guidance.

For full-year 2017, Spillman is about $50 million a year.

And, I think that the important part of that and those acquisitions is we have a services business now that is 40% of total revenue.

When we take software and services, I think it is about 43% or 44%.

You will see us continue to invest both organically and look opportunistically inorganically around software and services.

So, the larger the LMR platform, and you saw our product segment there, the broader the footprint.

That's a greater opportunity to monetize on services, managed services, support services.

We will always be on the lookout for acquisitions that would be Airwave-like in their attractive characteristics where we can operate and take ownership of those networks.

So, I am very pleased with the strategy and execution of it.

Also, we have talked about, right, going from critical communications to critical intelligence.

And, the critical intelligence is having a better footprint and incumbency in the command center, and Spillman hits the sweet spot among others with ECW in filling out that portfolio.

So, I think we are well positioned going forward.

Okay, thank you.

Sure.

Kulbinder Garcha, Credit Suisse.

Thanks.

I joined the call a little bit late, but maybe you answered this.

Can you say whether you've outlined what the impact of acquisitions is in this year's revenues for the various acquisitions that have closed and year on year?

That's one thing.

I'm trying to think about your organic growth rate.

The second thing is on the cost-cutting side.

I heard talk about further OpEx reductions.

Just over the long-term period of time, you have done really well in taking costs out.

Is there still this approach that you could grow the top line in low single digits and keep OpEx flat or even continue to bring it down?

Or, are we at the end of that process?

Thanks.

Yes, Kulbinder, so in the acquisitions just noteworthy to talk about the two most important.

Airwave is flat year on year at about $460 million that is contemplated in our guidance.

And, I just mentioned a few minutes earlier that Spillman, the most recent acquisition in Q4, is about $50 million of annualized revenues.

So, obviously, that is contemplated in our full-year guidance.

The only thing to add, Kulbinder, if you were late to the call as Greg articulated earlier, we expect iDEN to be a $50 million headwind in 2017.

If you are doing the math, the puts and takes.

Okay.

From an OpEx standpoint, I am really pleased with what we have done.

We achieved the organic reductions that we set out to do in the beginning of the year.

And, we will take OpEx down again, anticipated to do that in 2017.

Kulbinder, probably about $20 million or $25 million, but that includes absorbing $40 million of acquisitions.

So, we continue to ring further efficiencies and higher productivity out of the footprint of the business and leverage is positive because it flows through.

And, as we are growing again and at a very significant organic growth rate in Q4 of 4%, and we do contemplate continued organic growth in 2017.

I think we are set up well from a leverage and flow-through standpoint.

Thank you.

Sure.

Keith Housum, Northcoast Research.

Good afternoon.

First question for you, some more housekeeping.

In your FY17 guidance, what is your share of repurchase assumption for the year?

It is about 50% of operating cash flow if we look at the framework that we outlined.

When you run the numbers on that, it is about $600 million to be used for either share repurchase or acquisition depending upon how we want to take opportunities that present themselves in front of the business.

The other thing, Keith, I would say it is a framework not a prescription.

As we think about it, it's kind of the guidepost of the way we think about it from this point going forward, but we will look at opportunities as they come.

And, Gino and I will make the decisions accordingly.

We have a very flexible balance sheet.

And, remember this business, the cash flow is strong.

It is $1 billion-plus a year going forward so I think we have the flexibility to do what we need to do.

Okay.

And then, more of a theoretical question for you here.

I know it's kind of tough to answer, but I have got to ask it.

Obviously, we have got a change in administration here.

We have a new SEC Head, and there's some discussion of tax reform and border taxes and things of that nature.

In general, how are you thinking about the change in administration?

How it may impact the business.

Early days, obviously, two weeks into the President's presidency.

But, I am cautiously optimistic.

I think the favorable trends to us -- a few things.

Corporate tax reform reduction is obviously -- the prospects of that is a positive.

The notion of less red tape and less regulation also is positive.

But, those two things apply to all businesses.

I think what is unique to us with this administration is, it appears that they have a strong priority around law enforcement and security, and I think those themes and trends could prove to be favorable to us.

We'll see.

Supporting us going forward.

Obviously, it is very early.

There are other things around trade, immigration.

You know that two-thirds of our revenue is North America.

If we take examples of China which gets a lot of news and noise.

China is about 3% of our overall revenue now.

It was down over 20% last year.

This year, we're contemplating it to be flat to down, and the management of our business there, even though it is a significant opportunity.

We've thought about in the context of the guidance we've provided you.

So, I think we have it sized pretty well, and I am cautiously optimistic about some of the opportunities that we may be presented with.

Great.

Thank you.

George Notter, Jefferies.

Can you hear me?

We can hear you, George.

Great.

If I can ask about product growth.

You are talking about organic product growth this year, but I guess I am curious about where you see the biggest levers in driving that organic product growth?

Is that mainly in North America?

I know there were some changes being made in the sales organization in terms of analytics exercises to focus your selling effort.

I know you are focused more on verticals.

I think there may have even been some pricing changes.

Can you talk about the big levers on product growth?

Maybe Jack and I will tag team this, but I am very pleased with where we are on it.

Q4 was strong.

It was led by North America.

By the way, we had a very good Q4 in PCR.

We call it professional and commercial radio.

That quarter for that line of business was better than several of the last quarters.

So, I was very pleased with the performance of Jack Molloy's Team.

I think that we had growth in North America for product sales.

We also had growth in Asia-PAC.

I think that was commensurately offset by, obviously, the dramatic weakness macro economically in Latin America and the first half weakness of EMEA.

But, overall, I like the position that we are in, and I think that we will have product segment sales growth for 2017, and there's opportunities that are in front of us in each region.

Rod Hall, JPMorgan.

Hi.

Thanks for taking my question.

This is [Ashroon] on behalf of Rod.

Can you comment on your visibility probably beyond Q1?

Do you feel more comfortable now than you were at the same point last year?

We do.

I think we have continually done a better job of managing the funnel and sizing up demand and risk-adjusting.

Backlog, as we talked about, both year over year and sequentially is up.

Aged backlog is up pretty handsomely so I think we have as good a view as we have ever had quite frankly from a visibility standpoint into the business as we sit here today.

And, just more specifically on the US, [if you exclude from another acquisitions], do still expect to grow revenue here in the US?

Yes, we do.

Great.

Thank you.

Thank you.

Stanley Kovler, Citigroup Research.

Thank you.

I wanted to just follow up a little bit more on the product segment.

And, I have a follow-up.

So, with respect to product.

I just wanted to get a better sense of where we are within the backlog as far as the aging of the backlog and some of the deals that have been there for some time?

And, what impact that is having on the current revenue trends in product?

And, within that, if you can also help us understand in your installed base, is it a matter of the fleet of products that your customers have that's getting old that is driving some of the end device product revenue?

And then, the final piece of that product question would be, I just want to better understand the software elements of product.

It sounded like when you add software to services, it would increase to 43% or 44% of revenue.

Maybe you could just reiterate what the product versus software mix in that overall product pie is?

Okay.

Let me make sure I can try to capture everything, and if I don't, Stanley, follow up.

But, we talked about the services which includes installation services is 40% of our business for 2016.

So, when you add software in of a few hundred million dollars, it takes it to about 43%.

That is the 2016 view.

I think there is a number of things that are driving demand for our business.

Some of it is age of the technology and we [refresh] it, but a lot of it is upgrading it in current releases.

It's the need for newer, digitally, more spectrally efficient radios with more feature functionality.

Public safety has always remained high in the value chain of mission-critical communications, particularly in developed countries, certainly in North America.

I think that continues to be a strong component of overall demand.

Things around border security, immigration, lone-wolf terrorism in other parts of the country all lend itself to the need for mission-critical, encrypted, secure, end-to-end reliable, redundant, always-on communications.

Very different than a smart phone.

Very different than a cellular network.

And, in these times, I think there are a variety of things that remind people and reinforce the need to invest in land mobile radio.

I think each time we put in a system, we see, Stanley, many customers still buying 10- and 15-year maintenance contracts on these systems and platforms that are going in.

So, in addition to that, the more systems that are in, people think about monetizing and upgrading from a services contract and adding other software to it.

So, there is a lot of different factors.

It depends by region, but there is a number of drivers from a demand standpoint that I think reflected very favorably in Q4 and reflect the fact that we continue organically that this business will grow in 2017.

By the way, in bulk segments of product and software.

I wasn't sure I totally understood the backlog question you asked.

But, I would simply say, that it's up -- first of all, it was up in three of four regions.

And, it was up in product and services, and it was up year over year and sequentially.

And, aged backlog was up very nicely, and the aged backlog increase in combination with improved process that I talked about earlier gives us higher confidence in the visibility in hitting the growth targets that we outlined for top- and bottom-line guidance.

Thanks.

I appreciate that.

The aged backlog question was the key there so I appreciate the detail.

I also just wanted to follow up on some of the more commercial trends.

If you can just walk us through globally what you have done in PCR both in Q4, and what the outlook is in that segment of the business for 2017?

We don't guide by that PCR segment, specifically.

We haven't, and we don't expect to.

What I would say, Stanley, though is Jack Molloy's Team is executing very well.

Thematically, we grew in all -- not thematically, we did grow in all four regions in Q4.

It is the best quarter I've seen in the PCR, the professional and commercial radio business, in several quarters.

It is a combination of improving the product portfolio, better execution, new management, particularly in EMEA, Viv Francis has done a fantastic job there.

And, I just think that the team is executing well.

The portfolio is stronger than it was a year ago.

I think it is a good opportunity for us.

It was a little spotty historically on execution, and historically, we had a product gap or two on the very low end.

I think Bruce Brda's Team on portfolio and Molloy's Team on sales coverage and execution have done some significant things to solidify that business since its history in the last year or so.

Thank you.

Paul Silverstein, Cowen and Company.

Thanks.

I will try to ask one question, but it is a broad one.

I did hear the responses to the previous question.

That said, where is the biggest delta?

Greg, I heard you say that visibility is the best it's ever been, and you articulated the reasons.

But, when you think about where things could go differently from your current expectations for better or worse, what is the one or two things that could drive greater -- have the most impact in terms of greater growth or coming up short?

Paul, good question.

I should just say that I think that we've done a much better job in the rhythm of meeting or beating expectations.

And, that's for a whole host of reasons.

But, I think it's important just to mention at the top that that remains front and center on us taking forecasting very seriously, and all of us individually and collectively having every expectation to deliver on the commitments that we have outlined.

That said as context, things on the unknown in 2017, you can never predict FX.

We certainly have seen that in 2016.

We had Brexit that I don't think a lot of people predicted in June, July, but we were still able to hit guidance both right exactly in the midpoint of revenue for 2016 and over achieved at the high end of EPS.

And, I think that is a credit to Gino and the Finance Team as the way they baked in the volatility or potential variability of Airwave in FY16.

But, Paul, for sure one of the unknowns is FX.

I think that that is really the one that comes to mind -- top of mind.

I think you get into -- could there be an economic downturn?

Or, a trade war?

Maybe.

But, again, 65% of our revenue is North America, and when I look at -- let's take Mexico and China since they are the most talked about.

China is 3% of our business, and we are forecasting it to be flat to slightly down.

Mexico is less than 1% of our business.

So, despite all of the chatter politically between the US and Mexico, the fact of the matter is our business is very small there.

If anything, I think there is opportunity there for us.

But, I think the answer to your question -- the best thing is FX is the biggest wildcard and economic volatility associated with a trade war would be the other one.

Greg, if I may, just a clarification of the previous question.

In terms of the plethora of drivers that you have, can you remind us what is the average age -- if there is an average on the product side?

And, what percentage -- I recognize it is only one of the drivers, but what percentage is at or near that end of life?

Paul, I don't know the answer to that.

I can tell you that there are just so many different systems.

There are literally thousands of systems installed around the world.

I think the last count I remember, there is about 11,000 or 12,000 systems globally, and they vary so wildly, I would not be able to estimate an average.

So, I don't know the answer to that.

Got it.

I appreciate it.

Thank you.

Sure.

Vijay Bhagavath, Deutsche Bank.

Hi, Greg and Gino.

Hi Vijay.

A question and a sub-question, if I may.

Software and recurring revenues is an important part of your fundamental story.

I would like to get a state of the state.

How do you view software and recurring revenues both product-wise and also impact the model as we head into the year?

And, the sub-question would be on the product mix and seasonality now with the new administration; new heads of federal agencies, et cetera.

Do you anticipate any changes in mix?

Any seasonal variations this year in your fed business?

Thank you.

In terms of annuity revenue or recurring revenue, about 25% of our 2016 revenue is recurring revenue or has the profile of recurring revenue.

We love that, obviously, from a managed services and software standpoint.

We're going to be very flexible on business model going forward, and we'd like to accommodate customers in different ways to sell them solutions flexibly.

Could be selling it as a product, could be selling it as a service.

But, we will price flexibly to accommodate the demand requirements of our customer set.

From a seasonality standpoint specifically with the US federal business, I have to give a shout out to specifically Mark McNulty here at the US federal business that runs it.

He has done a great job.

He and his team.

We had a very good year in 2016.

Double-digit growth, above $500 million.

As we think about it this year, we are thinking about it being comparable to that number figure; probably flat to low single-digit growth coming off such a very good year in 2016.

Thank you.

Sure.

Andrew Degasperi, Macquarie.

Greg, first maybe can you give us like a situation maybe in the UK where ESN let's say gets delayed in a meaningful way.

Should we consider that as a positive for your LMR business there?

And then, secondly, Gino, can you explain the unfavorable currency adjustment in your backlog?

It included $215 million on a sequential basis in Q4 versus $50 million in Q3.

I know the pound, obviously, is a part of that, but is there any other currency that you would highlight?

In terms of ESN, it has been delayed to mid-2018.

But, in terms of our responsibility for ESN, we are on track.

Our deliverables are progressing well against the lot 2 requirements which is software for apps in the data center.

We remain very closely aligned with the UK home office so I think it is good.

Now, I did mention earlier that with the delay, there is probably about $25 million of revenue that we had hoped for in 2017 that looks like it has gotten deferred outside of that.

But, nonetheless, we continue to work well with the UK home office.

I think it is too early to speculate on impact on Airwave.

So, we'll just continue to work closely with the customer, making sure, obviously, that Airwave performs the way it needs to, and it has.

And, I think it will continue to and from our expectation from a contract standpoint, we are very pleased with the Airwave acquisition.

But, we are equally cognizant of doing everything we can for the UK home office on ESN and will manage those interdependencies.

And, with respect to the $215 million adjustment at the end of Q4, that was primarily related to the pound.

Great.

Thank you.

Thanks, Andrew.

It appears we have no for the questions at this time.

I'll turn the call back over to Chris Kutsor, Vice President of Investor Relations.

Thank you for joining us today.

We will talk soon.

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