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I attended David's event in March of thisyear,2024.
And justyesterday, I was looking at my phone considering this upcomingconference.
And I noticed there were four different people that I spoke to yesterday that I had met for the first time at David'sconference.
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When you gather these groups of people in the right type ofenvironment, that's where relationshipscome, and very interesting thingsarise.
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Welcome back to businessbreakdowns.
Today we have a fascinating story of brand versus business as we coverMotorola.
Motorola was a mainstay on Interbrand's top 100 brand list for most of the2000s.
I get nostalgia thinking about those old flip phones and the Razermodel, but Apple and Samsung took over thatmarket.
It was not the end for Motorola and they found their own way tothrive.
For thisepisode, I'm joined by portfolio manager Joseph Shepashnik and we get into how Motorola achieved this stealth success over the past 15years.
We get into how CEO Greg Brown worked with two and arguably three activist investors to focus on mission critical communications a very specific customer segment and a more blended hardware softwaremodel.
It's a truly great example of a business finding a niche and executing to aT.
Please enjoy this episode onMotorola.
Allright,Joseph, it is great to have you back on business breakdowns and excited to get into Motorola withyou.
I have nostalgia thinking about Motorola and the early2000s, flip phones and that era and I'll behonest, I haven't thought about Motorola too much sincethen.
Yet I look at this name as you talk to me aboutit, it's got a $60 billion marketcap, so clearly there's a very interesting story here and I just want to kick it offwith, can you give us a snapshot of what Motorola is doingtoday?
Well,man, I think to have a snapshot of what they're doingtoday, it's important to go back to the days that you remember sofondly, the days when they were producing therazor, flip phone and people were so excited aboutthat.
Those days came to an end2006,2007,2008.
The handset market began to rollover.
The iPhone began to take market share and at the time Motorola was really involved in threebusinesses, the cell phonebusiness, which was a big part of their overallbusiness, a network's business where they made cable set top boxes and a thirdbusiness, which is the business that they're intoday, the land mobile radiobusiness, all of which are about a third ofsales.
As the business began to deteriorate because the razor and their cell phone business was underpressure, Carl Icon came in in 2007 and pushed for a breakup of the company and was pushing for a split off of the cell phonebusiness.
Cell phonebusiness, he had a CEO in mind and he succeeded in accomplishingthat.
So in January of2011, MotorolaMobility, the cell phone business was separated and for all intensivepurposes, Motorola solutions was born and Greg Brown was made CEO and that's really the Motorola solutions oftoday.
Can we just zoom in on what Greg Brown does is he takes over this newly splitbusiness, what he lays out and basically paved the path over the next 10years, what happened in those early days to set the business up into what it istoday?
Greg has been at Motorola for 20 plus years and hadrun, I believe two out of the three major divisions the networks and the land mobile radio business hard becoming chief operating officer and CEO of this new Motorola or what they call now Motorolasolutions.
One of the keys to his success was focusing this business on this undiscovered crown jewel that most couldn't see because it was buried within a segment of thesegment.
Just as Carl Icon was ramping down his pressure on thecompany, interestingly a new activist emerged and Greg had a grapple with a secondactivist, the new activist which came into the story and I think 2011 or2012, they were focused on optimizing Motorola's cash rich balancesheet.
They had a ton of cash and very little debt at thetime, improving the company's coststructure.
So it was clear that they were probably a thousand bases points or so bloated relative to where they shouldbe.
And so what Greg did was sell off the second business which was the cable set top box networksbusiness, that took place early on in the 2012 timeframe or so and managed to get Motorola focused and on this singlebusiness, the land mobile radio business which is the most attractive of all of the assets that they had backthen.
And they were purchased about a third of the companies market cap over the first five year period at a multiple that was very low because after thesplit, the story was pretty misunderstood and I think the stock traded that kind of a low teens earningsmultiple, they were buying back stock atvery, very attractive valuations at thetime.
And they focused on optimizing the real estate footprint of the company and getting this business slimmeddown.
He was pretty successful in executing on either his ideas or the ideas that the investors brought tohim.
And I think that that really helped him gain a lot of confidence withinvestors.
And eventually the challenges from the investor base quieted down and the activists left the story in 2016 and sold their shares and he was left to continue to build thisbusiness.
And then the next leg of the story was the entrance of Silver Lake who came in in2016, 2017 and helped them grow into adjacentareas.
And those adjacent areas were video surveillance and command centersoftware.
I must say to have the back-to-back activists campaigns and just the amount of high profile investors that you are dealingwith, including SilverLake, as kind of the third leg in thatstool, is remarkable in manyways.
And I don't know how many management teams have survived that long to go through that many moments intime.
So it is quite interesting just to zero in a bit on that initial spin and the second activist comingin.
When you say the market maybe misunderstoodMotorola, I'm picturing something where it was expected to have low growth but maybe kind of asteady, stablebusiness.
And that's what they were going for with therecapitalization.
You can add some leverage tothis, but you're not expecting major growth in thefuture.
Was that the perception at the time or to the extent that you kind of pine on what was happening in themoment?
I think that's a good way to explain the way investors that understood thestory.
But I think that most investors couldn't find a comparable business to compare Motorolato, because you have this hardware networksbusiness, which is a one timesale.
And then you have this razor blade radiobusiness, which has got somesoftware, but a lot of hardware associated withit, but also tied to municipal markets which tend to be verypredictable.
Yet the margins on this hardware business were unusuallyhigh.
So investors were grapplingwith, what do we havehere?
Is this as high quality as itlooks?
Is this business bloated or is this the right kind of cost-based for thiscompany?
Isn't quite clear what we have here and what this managementteam, which wasn't really known what they could do withit.
You have icon making a lot of noise and then another activist coming and making a lot ofnoise, which kind of put a lot of dust in the air and create a lot of uncertainty as to what this business was allabout.
Can you just give us the sketch of the numbers of thisbusiness?
However you would lay itout,revenue, buysegment, whatever you think is the best way to connect numbers into what Motorola isdoing.
So Motorola generates about $10 billion of annual sales, $2 billion of free cashflow, and generates a30% return on capitalemployed.
So really a profitable business at scalehere.
About three quarters of total sales come from the land mobile radio business and the remainder come from their fast growing video surveillance and command center softwarebusinesses.
The radio business is prettysizable.
So about 13,000 Motorola networks have been deployed across theUS,Europe, andAustralia.
We think they have about80% market share of those deployments and perhaps even higher percentage of the radio sales that come afterthat.
So a huge market position that they've developed overmany, manydecades.
Just to give you a sense as to how the transaction works for a typicalcustomer, typically when a customer agrees to have a LMR networkinstalled, it agrees to a long-term supply agreement with Motorola to have Motorola supply at radios for its first responders or commercial customers for a number ofyears.
The business operates in that classicrazor, razor blade business model where they sell therazor, which is the network at thestart, and then they sell radios really perpetually for a long period of time to the customer and Motorola tends to come out with a new radio model every five or sixyears, typically at a higher price point with newfeatures.
Just to give you a sense on the customer base about three quarters of the business is tied to the governmentsector, typically tied to public safety with the remainder being commercial customers in heavyindustries,municipalities, and municipal budgets are really a key driver for the LMR business and to some extent the software business aswell.
Understood. So if I think about what they're working withtoday, is it those two businesses that they had that weren't part of the basically cellular business that remain or what did Greg do with the business sincethen, just a snapshot of what it looks like and what segments are included inMotorola?
So many things and I think that's one of the keys to thestory.
Greg, one of the keys to his success was focusing this business on this undiscovered crown jewel that most couldn't see because it was buried within a segment of asegment.
And so what Greg did was sell off the second business which was the cable set top box networksbusiness, that took place early on in I think 2012 timeframe or so and then he had the third business which is the land mobile radio business but with some other businesses associated with that aswell.
He proceeded to sell off the other businesses associated with scanning technology and managed to get Motorola focused in on this singlebusiness, the land mobile radio business which is the most attractive of all of the assets that they had backthen.
Can you explain some of that in terms of it being a crownjewel?
I can think of walkietalkies, land mobile radio but what is the business behind what's going onthere?
I know there's some security element but can you capture it a little bit more just in terms of what's actuallyhappening?
The land mobile radio business is about three quarters of the company's total sales today and the attractive part of this business is that you have 12,000 land mobile radio networks today that are predominantly used by municipalities for emergency serviceapplications.
The business model is essentially selling the networkimplementation, which is a profitablebusiness, managing that network for themunicipality, for the customer but then gaining this perpetual stream of radio sales that tend to upgrade every five or six years for your firstresponders, for your securityprofessionals, etcetera, etcetera.
And so Motorola's business is maintaining the existing networks for their customers and investing in the creation of moreinnovative, more reliable radios for their customers which tend to be sold every five or sixyears.
And on thatpoint, the radio sales make a lot of sense just in terms of being some type ofhardware.
When you talk about that network implementation and managing thenetwork, what's going onthere?
Is there a softwareelement?
Are there boots on the ground for Motorola setting thingsup?
If you could paint a picture just to bring that tolife.
It's a focus on maintaining the overall security and reliability of thenetwork.
So they provide cybersecurityservices, software services to maintain thenetwork, backup powerservices, emergency response for the customer in theevent, a natural disaster has occurred and they're having an issue maintaining the viability of thatnetwork.
And so that service element is a nice business but it's not really the growth part of their business and the margin there areokay, but not quite as attractive as selling radios which tend to be highermargin.
Makes a lot of sense and I can understand the overall offering is probably what makes it such a sticky business and anytime you're dealing with governments orhumidisipalities, anything in thatarea.
That relationship can be so valuable over the longterm.
Just to harp a little bit more on the idea of the land mobile radionetworks.
If I just use the comparison of a Verizon or anAT&T, I can think about the quality of my network and that's usually related to whether they have fiber optic cable in thearea, cell phonetowers.
Are there assets in the ground that Motorola owns or is this just happening through the hardware itself of theradios?
The Motorola network or the land mobile radio networks have several key advantages over the traditional cellularnetwork.
I think the first really important advantages overall reliability and control of the network by the networkowner.
So if you think about a policedepartment, their communications abilities arecritical.
In the event of anoutage, poweroutage, the LMR network typically has backup power that will last for a week versus a few hours for the commercial cellularnetwork.
The land mobile radio network has multiple levels of redundancy built intoit.
So as you think about the P25standard, which is the standard that is used in the UnitedStates, if the core or the equivalent of it were tofail, the network would continue to operate on a site-by-sitebasis.
If multiple sites fail for whateverreason, users could continue to communicate between each other on a device to devicebasis.
With a traditional carriernetwork, if the core part of the networkfails, the users on the network will lose connectivitycompletely.
The other key aspect to it is the land mobile radio network has dedicated spectrum and capacity that isn't shared with the traditional consumer cellularnetworks.
So during adisaster, you don't want to have an emergency worker having his communications throttle down because consumers are trying to make calls between eachother.
So you don't want event overload preventing your emergency responders from being able tocommunicate.
Andlastly, on the point of reliability andcontrol, you want to beable, particularly in anemergency, to prioritize the capacity of that network based on where the emergencyis.
So certain first responder communication can be prioritized over other communication that's taking place on that network during anemergency.
And that can bevery, very important and very useful to that policeforce.
I think the second key differentiator of the LMR network versus the traditional cellular network is just the reliability and the ruggedization of thehardware.
So if you think about a firefighter storming into a burningbuilding, the firefighter needs a communications device in hand that can withstand very hightemperatures, lots ofwater, dustyconditions, and be loud enough for him or her to hear the communication that is going back and forth and be rugged enough to withstand what can be avery, very difficultenvironment.
Typically, these devices require a lot more power than the traditional consumer devices because of the configuration of thenetwork.
And so these devices need to have 10 to 12 hours of continuous operatingcapabilities, which wouldn't be able to be supported by a consumerdevice.
So the device itself isvery, very different and its requirements arevery, verydifferent.
Ofcourse, customers are looking for continuous improvement across all of thesevectors.
Theacoustics, the batterylife, the ruggedness of the product and its ability to hold up across multiple types of difficult conditions isvery, very important and notsurprisingly, because of the complexity of thedevices, these devices are several thousand dollars as opposed to much less expensive devices that are sold toconsumers.
Sovery, verydifferent.
And could you get into a little bit more detail about videosecurity?
What that actually entails beyond some obviousthings?
Just detail a little bit more about what Motorola is offering those customers and how they use it in thefield.
Just for somecontext, Motorola entered the video market through its acquisition of a Vigilon and a Vigilon gave the company the product suite that it essentially operatestoday.
And that product suite is an end-to-end portfolio ofcameras,analytics, videomanagement, videostorage.
Everything you might need to be able to deliver a complete offering to thecustomer.
As you think aboutit, video surveillance has becomemuch, much more important to oursociety.
As anexample, surveillance today can identify an individual or a weapon as they're walking into a school or afacility, notifysecurity, notify the police and indicate where that threat is in realtime.
And that's become more sophisticated and certainly much moreimportant.
Video surveillanceis, Ithink, changing significantly and evolving withAI.
Recently, Motorola acquired a company whose sole purpose is to eliminate the need for organizations to have teams of people sitting around looking at video monitors to monitor afacility.
Today's software and AI is good enough to be able to identify most threats and relay that information to the authorities which has made it much more efficient than what we had in thepast.
And then for commandcenters, what does that looklike?
What does thatentail? Does that differ from the other segments besides the obvious of it's happening inside of commandcenter?
What is Motorola providingthere?
Command centers for the longest time were stitched together using multiple systems and pen andpaper.
Motorola has done a great job ofacquiring, developing and integrating a suite of solutions that allows for a much moreefficient, effective command centeroperation.
They break down the command center into three separatephases,detection,response, andresolution.
So they provide software that allows for the detection of harmful situations that allows for consumers to send or upload pictures orvideo, which appear to show some suspicious behavior to a commandcenter.
They provide response software that allows for a coordinated response from the command center into the field and resolutionsoftware, which allows for the categorization and centralization of records from the incident to be recorded and to bestored.
That's really what they'reproviding.
Interestingly, this is very close to LMR similar customers in some ways to providing some LMR technology into the commandcenter.
So very synergistic with the existingbusiness.
And if we just go up alevel, I think you gave some context for them in terms of the variousmarkets.
Sounds like they're very muchglobal.
But how big is thismarket?
Do you have any sense of what Motorola's market shareis?
How penetrated are they in this unique marketsegment?
Within the land mobile radiobusiness, we think they have about80% marketshare.
I would say one and a half real competitors thatremain, and that'sHarris, who's in thisbusiness, and Airbus is also in thisbusiness.
That's really the remainder of the competitivebase.
And they basically dominate the western part of thisbusiness.
In terms of the growth of thatmarket, if they have the80% marketshare, you are very much reliant on some type of marketexpansion.
Is thatoccurring? Are there drivers that would make this market expand more and more in thefuture?
To anextent. So the business has historically been driven or been related to the growth and municipal taxreceipts.
And so that's a GDP-like growthrate.
And so for them to grow more quickly thanthat, they have to see government safety budgets grow faster than municipalbudgets.
And that certainly hashappened.
They also have been able to take pricing power to at least keep up withinflation.
So the last couple ofyears, they've certainly benefited from the inflation that's occurred in theirmarkets.
And so it's a business thatgrows, Ithink, on a secular basis at a mid-single digitrate.
But probably not more quickly thanthat.
And we've talked a bit about the top line storyhere.
I want to get a bit more into what the financial model lookslike.
You mentioned the opportunity to expand margins 1,000 basispoints, which isjaw-dropping.
What did the margin profile looklike?
How does it looktoday? Is it a business with a ton of operatingleverage?
Is it something where you see that number staysteady?
Any framing you have for that isuseful.
Just to give you asense, when they came out of thesplit, you had a business that was operating at kind of a mid-teens EBITDA margin at thetime.
And through variousactivities, which included dramatically refashioning the real estatefootprint, reducing the number ofemployees, optimizing the cost structure of thebusiness, I can't help but remember Greg wentthrough, Ithink, three CFOs in thisprocess.
So I think it was not an easy process forthem.
Margents have improved from mid-teens to nowhigh-twenties.
So they've done an incredible job improving the profitability of thebusiness.
Through that period oftime, they repurchased about50% of the share's outstanding at an average price that's about a third relative to where the stock is tradingtoday.
So they had a keen eye on capitalallocation, whichis, I wouldargue, even more important for a business that is a relatively modest growthcompany.
And so they had to pull a lot of different levers at the right time to make this story workout.
But they've also enhanced the growth profile of the business dramatically over theyears.
As we've talkedabout, they entered the video surveillancebusiness, which turned out to be a master's stroke through an acquisition some yearsago.
And it's become increasingly important for video surveillance to be owned by an Americancompany.
Andthat, Ibelieve, has helped themsignificantly.
They've also added on to that videobusiness, and today that's about15% ofrevenue, but growing at a double-digitrate.
It's quiteprofitable, so they aren't sacrificing the margins of the company to enter a faster-growingspace.
And it's also so synergistic with the current customerbase, which I think is one of the other very intelligent decisions that the companymade.
They entered two newspaces, but they're very adjacent to the existingbusiness, which is obviously selling to first responders and security-relatedentities.
And so videosurveillance, the customerbases,very, verysimilar.
They've used very similar channels tosell, both indirect anddirect.
So they've really leveraged the relationships they've had to grow thatbusiness.
And I think that has helped to enhance the growth profile of thebusiness, and certainly entering the softwarespace, which they did aswell.
Software is about10% or so of the businesstoday, where they sellsoftware, controlsoftware, to command centers and 9-1-1facilities.
Again, leveraging the exact samechannel, high-marginbusiness, grows more quickly than the existing LMRbusiness.
And that combination ofassets, Ithink, along with very predictable growth andexecution, has been very enhancing to the multiple of thisbusiness.
So when I started following the business in2012, this was a8,9,10% free cashflow yieldingbusiness.
Today, the free cashflow yields at3.25%, and I think a lot of that has to do with the combination of all of thosefactors.
Yeah, that's pretty incredible in terms of how the perception has changed and what they've been able to executeon.
It sounds like the early days is very much costoptimization, and now you're likely getting some combination of whether it's operating leverage through having optimizedcosts, but also the pricing power that youmentioned.
And I want to get into that a little bitmore.
If they were to go to some of these municipalities and say we're going to pushprice,4%,5% on the next renewal rather than a2% or3%, is there a natural substitute that they could lose businessto?
It just seems like with80% marketshare, the pricing power would be pretty significanthere.
What is your sense ofthat?
I'll just step back for a second and just give you a little bit ofcontext.
When they sell a network to acustomer, the customer typically gets preferential pricing on radios for an extended period oftime.
Think about it as five to sixyears.
They get a discount off of the list price forMotorola.
So for the first five or sixyears, they are probably relatively happy because they're getting an attractiveprice.
Longerterm, I believe that Motorola hasvery, very strong pricingpower, because while it's true that radios need to be interoperable with thestandard, the customer is very reluctant based on our discussions with customers to mix and match different radios across theirnetwork.
I think they fearcomplexity, they fear interoperabilityissues.
I think they're also very keenly aware of the amount of investment that Motorola puts into generatingbetter, more reliable radios relative to thecompetitors.
I think Motorola's brand isvery, verypowerful.
So they certainly have pricingpower.
I think that has shown itself in the last couple of years where the businesses generated solid pricing at least at the rate ofinflation, if notbetter.
I think also Motorola is likely to be sensitive to the fact that they're very intent on growing in other areas with thosecustomers.
So they're very intent on growing their software business with the samecustomers.
They're very intent on growing their overall video surveillance business with thosecustomers.
So it's a balance between getting appropriate price on thebusiness, but also satisfying the customer needs and finding other ways of growing with thosecustomers.
So it is abalance, but I think unquestionably they have avery, very strong position and pricing could be used as a strongerlever, but it is not evident that that has been one of their growth strategies over the last severalyears.
You mentioned earlier in the conversation a bit about the breath power of that sales force that sits insideMotorola.
Can you share anything that's unique about go to market or what they're doing about that salesfunction?
I think the most unique aspect of the sales function is just the sheer size of their salesforce.
Today, about70% of sales take place on a directbasis.
Obviously, the remainder areindirect.
So by ourestimates, that's thousands and thousands of people focused on what's a relatively niche market from LMR to video to Command Centersoftware.
So pretty focusedmarkets.
Motorola is focused on just a couple of channels and from our vantage point dominates thenarrative, thecommunication, and the sales motion because of itssize, itsfocus, and itsbreath.
From a salesperspective, when you combine the internal sales force with the indirect salesforce, video today is the largest sales organization for thecompany.
So it goes to show you that Motorola is focused on growing where the growthis, which is in video and insoftware.
I think that the investment in the sales force is certainly payingdividends.
Absolutely.Yeah, a good indicator in terms of the team size and where that growth focus mightbe.
On the growthspectrum, you mentioned what they have been doing in house through a variety of differentways.
How much could acquisitions play into this when you talked about capital allocationframework?
It seems like a lot of the dollars are going back towardsbuybacks.
Our acquisitions are as M&A something that you could see happening more here as they think about saturating that customer more andmore.
Capital allocation has been a very powerful and interesting part of the Motorola solutionstory.
If we go back to the time of the split2011-2012, as we talkedabout, the stock cameout, trading at avery, very lowmultiple, very high for cash foryou.
They were generating a kind of cash backthen, and as we talkedabout, the business was notappreciated.
And management was sharp enough to begin aggressively repurchasingshares.
So from 2012 to2015, about 80 percent of cash flow was used towards the repurchase of shares in the openmarket, and as the share price rose and as they began to look atadjacencies, thatshifted.
So from 2016 totoday, about 50 percent of free cash flow was allocated towards M&A and away fromrepurchase.
And so share repurchase over the last several years has gone down from about 80 percent of cash flow allocation to about 40 percent of cash flowallocation.
So think that they saw the opportunity to enter these adjacencies video and command centersoftware.
They saw assets which traded at relatively attractivemultiples, and they entered that market usingM&A.
Yeah, the track record and what you laid out there certainly suggests they're very thoughtful and opportunistic with whatever they're doing with thecapital.
And using the share price or devaluation almost as a currency to pivot to moreM&A, is the core in all of this the customerbase?
I'm thinking about summarizing Motorola and what the strategyis.
And what I keep coming back to is the customer base seems to be what everything is builtaround.
So it's selling into that specificcustomer.
So any adjacencies or growth areas would really be taking the customer into consideration first before thinking about taking that product that they have existing and expanding to a new market with a totally different customerbase.
I think that'sright. I think it goes back to Motorola'smission, which is to support customers in criticalindustries, particularly in safety and securityindustries.
They have entered areas very much tied to that existing core mission with regard to video surveillance and 9-1-1 centersoftware.
And as youreferenced, it's a very strong channelstrategy.
They have decided to use their existing sales force to feed the existing customerbase, moreproducts, more reliable products from one of the most reliable providers of critical products in theindustry.
And that seems to haveworked.
On competition or the risk of substitute products coming into themarket, where does that stand and how do you think about that risk of some either new innovative product being released or some switch happening that would be a threat toMotorola?
I'll segment the business into the land mobile radio business and then we'll talk about software andvideo.
So we'll start with land mobileradio.
Some years ago there was a perception that the cellular networks would present a significant threat to the LMRbusiness.
The stock reacted tothat.
The company positions itself to try to be agnostic to thatoutcome.
And there was a lot ofconcern.
And that risk never really playedout.
Therisk, Ithink, to the LMRnetwork, at least for the intermediate term was tested and didn't really showitself.
If you think about other networks that could providesolutions, if you think of satellite or other types ofnetworks, I just don't see them presenting a meaningful challenge to the LMRnetwork.
So from that perspective on three quarters of thebusiness, I don't see a significant technologyrisk.
From a competitiveposition, there's no reason to believe that the competition is doubling down in thisarea.
And there's every reason to believe they're looking for ways of exiting their relatively small positions in thatbusiness.
So the LMR business doesn'thave, in mymind, very significant risks toit.
On the LMR point ontechnology, is your sense that this is just the quality of the technology related to what Motorola can offer using the lens of cellularnetworks?
Or is it that the cellular networks don't care as much about the opportunity and aren't making as much of apush?
Is there a way to differentiate those twodynamics?
Yeah, there definitelyis.
The differentiation is the Motorola customer really cares about having control over their communicationsnetwork.
They don't want to have to throttle communications to police officers because somebody else is on thenetwork.
They want to be able to have100% visibility into their network and tremendous reliability and redundancy in the network just to give yousense, by theway, in the event that the LMR network goesdown, this system is enabled in such a way to where the radios can communicate with other radios up to 15 milesaway.
So there's a lot of technology built into creating redundancy associated with the LMR network that just isn't there in the cellularnetwork.
I think from a cellularperspective, the number of users in an LMR network is just not significant enough to warrant the type of investment you might need to create a threat to thatmarket.
You also need to develop newhardware, new handsets to address thecustomer.
So it's just not a particularly attractive place to enter and it would beexpensive.
So I just don't particularly see that as being anissue.
On the other segments interrupted youthere, what does the competition or threat of competition looklike?
In the softwarebusiness, which is a small but growing part of theirbusiness, there's certainly thiscompetition.
I think that they've done a very good job of leveraging thechannel, leveraging the assets that they've acquired to enter and grow in thatmarket.
But just to give yousense, by theway, they'vepenetrated, Ibelieve, about50% of 9-1-1 command centerstoday.
So they've done a good job of entering and gainingtraction.
What they found is that the technology investment in these command centers is relatively low and the technology there is verydated.
So they believe there's a long-term opportunitythere.
But there are definitely others that are in thatspace.
So we had itout. It's a competitiveindustry.
I think that incumbents certainly have a defensibleposition.
It's an attractive market that attractsothers.
In the videobusiness, they are the leading provider in NorthAmerica.
And so they have a relatively strongposition.
There iscompetition. But I think that what gives them anadvantage, aside from thechannel, which we've talkedabout, is the fact that most of the competition has come from outside the United States for a number ofyears.
And government agencies today are low to continue to acquire their technology from outside the UnitedStates.
And I believe that trend will continue to be persistent and will be a great benefit toMotorola.
They're fortunate to make their acquisition believe in 2018 and2019.
Andthen, ofcourse, the world moved in their direction in 2020 with regardto, Iguess, the way people view acquiring technology from outside the UnitedStates.
And so I believe that trend will bepersistent.
And I think that their ability to innovate on the software side and develop new capabilities using AI to identify and innovate in the video side of their business gives them an advantage in terms ofcompetition.
And in the major bullcase, is this name where there is a growth inflection from something happening in one of those othersegments?
Or is the bull case that they continue to do what they've been doing well and compounding that growth slowly overtime?
Is there something that stands out when you think about people who are excited about this stock that you would buckit?
Yeah, I think that the bull case is number one remarkably strong execution that has been predictable andreally, reallystrong.
Eitherway, just to give you asense, despite the fact that they've done all of theseacquisitions, the return on capital employed for this business is nearly30%.
So they've spent a lot of money the last couple of years entering two businesses that you wouldn't think that video surveillance would be a particularly high return business and building a software business can require a significant upfrontinvestment.
Yet despitethat, the return on capital employed is close to30%.
So I think that speaks to the quality of the decision-making by the managementteam, they're ability to manage and to generate profits from the company and from theacquisitions.
So it's been a very well-managed business and capital allocationstrategy.
With regard to what people are thinkingabout, I think the bull case is focused on one continued execution predictability from thisbusiness.
And numbertwo, a continued mixing upward of the revenues toward faster growing businesses with regard to EMS software and videosurveillance, both on the hardware side and on the softwareside, where the growth remainsvery, very strong into the double digits and the businesses arevery, veryprofitable.
So Motorola has the opportunity to continue to enhance its overall growthrate, improve its profitability as it getsbigger.
And continue to generate a great deal of free cashflow.
So just to give you asense, they convert about20% of revenue into free cashflow.
And that's prettyattractive.
So they have a lot of free cash flow to continue toreinvest.
And part of the bull case is that the management team will find great new places to reinvest free cash flow and drive the continued compounding of this highly recurring large-mode business that they operatetoday.
In yourmind, would Motorola be an interesting target for anotherbusiness?
They'resizeable. They have this really interesting recurring revenuestream.
As youmentioned, cash flow dynamics areinteresting, putting the valuation aside for a moment because ultimately it would come down tocost.
But has it historically been looked at as a potential acquisition target for anybusinesses?
Interestingly, back in2015,2016, there were rumors that the company was being looked at by a handful ofacquires.
I think that the issue wasalways, what do we comp this businessto?
How do we determine what the future of LMR will look like over the longterm?
And so it was always kind of this difficult business for acquires to get comfortable with because they just naturally couldn't find another cop to give them comfortin.
So I think it always made sense for private equity toacquire, but for whatever reason theydidn't.
Today, certainly it's becoming more diversifiedbusiness, less focused on LMR and more focused on areas that the market finds more attractivetoday, certain video surveillance andsoftware.
But certainly it's a very attractivebusiness.
They're going to grow high-sendable digits mostlikely.
They're going to generate a lot of free cashflow.
The moat isvery, verystrong.
So certainly it's an attractive business foracquires.
But you go back to who is a natural acquire for an LMR video surveillance in softwarebusiness.
You don't think of somebody that would be a natural acquire outside of privateequity.
As youimplied, the multiple today makesit, Ithink, difficult tojustify, but notinstrumentable.
Yeah, certainlynot. It'sinteresting.
If I just go back in time and look at thesplit, therecapitalization, thegrowth, the costtakeout, Imean, this is what happens when the private equity company buys the business and then they bring it back to the publicmarket.
It would be very interesting to see you go through that period and see them goprivate.
Greatpoint. It's a fascinating one just in terms of how it's played out and how Greg Brown has been there throughout these various changes and the approach that they'vetaken.
We round out these conversations with thelessons.
Honestly, there's quite a few that you could take away fromMotorola.
But what stands out to you as lessons from this unique kind of esoteric investment that you mentioned several times does not have a naturalcomp?
What stands out toyou? As so manylessons, I think that the first one is when you see a great asset that has a huge moat with a lot of recurring revenue that trades at a lowmultiple, payattention.
Despite the noise and the uncertainty around what would happen toit, this was unquestionably a good asset when it wassplit.
It got better and better overtime, particularly given that it was an inexpensive business for a longtime.
I think that's the first keytakeaway, payattention.
This is a uniqueasset. There isn't another one outthere.
It always had scarcity value and so it was something to pay attentionto.
I think the second key learning lesson is you had a lot of time to buy thestock.
The stock from 2012 to2016, the activists came in in the 50s or the 60s and they sold in the 80s or the 90s or so and stocks at 370today.
This story played out over 12 years so Fistock has doubled or tripled and oftentimes you haven't missedit.
This story just got better and better over time and you had a lot of opportunity to buy the business inexpensively as they executed for years and years onend.
Jason to that is the power of long-termcompounding.
They managed to compound free cash flow per share consistently over a long period oftime, reduce shares by50% over the life of this version of Motorola which resulted in avery, very powerful compounding machine and clearly generated a lot of value aswell.
I think it also underscores the power of a great management team that was able to identify the levers that would make the business run more efficiently and allocate capital in a way to create more value for investors because if Motorola had been run the way it was runningpre-split, this story would have beenvery, verydifferent.
It goes back to the importance of having a great CEO in theseat.
He managed to defend the business when the investors were all overhim.
He managed to execute and take costout, allocate capital precisely at the right time to the rightareas, pivot when that became a less attractive approach with regard to capitalallocation, pivot again into adjacent areas that made a lot of sense and that were synergistic with hisbusiness.
Those decisions really made the Motorola story and withoutthem, Ithink, without GregBrown, this story would certainly not have been as successful as it hasbeen.
Yeah, I think you laid that out incrediblywell.
It feels like there's multiple case studies mixed into this one business and it's still very much evolvingnow.
They're not sitting on theirhands.
They're very much still active in terms of thinking about what'snext.
So this has been a lot offun.
Joseph, thank you for bringing this name that everybody has heardof, but I doubt many people know what's actually going on inside thebusiness.
It's been apleasure.Matt, so muchfun.
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