Earnings Call Transcript - MSI Q2 2022

Operator, Operator

Good afternoon, and thank you for holding. Welcome to the Motorola Solutions Second Quarter 2022 Earnings Conference Call. Today's call is being recorded. The presentation material and additional financial tables are posted on the Motorola Solutions Investor Relations website. In addition, a webcast replay of this call will be available on our website within 2 hours after the conclusion of this call. The website address is www.motorolasolutions.com/investor. I would now like to introduce Mr. Tim Yocum, Vice President of Investor Relations. Mr. Yocum, you may begin your conference.

Tim Yocum, Vice President of Investor Relations

Good afternoon. Welcome to our 2022 second quarter earnings call. With me today are Greg Brown, Chairman and CEO; Jason Winkler, Executive Vice President and CFO; Jack Molloy, Executive Vice President and COO; and Mahesh Saptharishi, Executive Vice President and CTO. Greg and Jason will review our results along with commentary, and Jack and Mahesh will join for Q&A. We posted an earnings presentation and news release at motorolasolutions.com/investor. These materials include GAAP to non-GAAP reconciliations for your reference. And during the call, we reference non-GAAP financial results, including those in our outlook, unless otherwise noted. A number of forward-looking statements will be made during this presentation and during the Q&A portion of the call. These statements are based on current expectations and assumptions that are subject to a variety of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Information about factors that could cause such differences can be found in today's earnings news release and the comments made during this conference call in the Risk Factors section of our 2021 annual report on Form 10-K or any quarterly report on Form 10-Q and in our other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statements. I'll turn the call over to Greg.

Gregory Brown, Chairman and CEO

Thank you, Tim. Good afternoon, and thanks for joining us today. I'm going to start off by sharing a few thoughts about the overall business before Jason takes us through the results and our outlook. First, Q2 was exceptional across the board with revenue and earnings per share both coming in above our expectations. In Software and Services, revenue was up 11%, highlighted by strong software growth. And in Products and SI, continued record demand across both land mobile radio and video, led to 7% revenue growth and 17% orders growth, driving increased backlog. Additionally, we ended the quarter with a record Q2 backlog of $13.4 billion, up 19% versus last year, inclusive of approximately $500 million of unfavorable currency impact. Second, our portfolio and go-to-market investments are continuing to drive meaningful growth across all three technologies. During the quarter, revenue was up 21% in both video and Command Center Software, and we saw record Q2 orders in both of those technologies as well. And in LMR, demand is growing for our high-tier P25 APX NEXT device with customers embracing its unique ability to offer the must-have reliability of LMR while seamlessly leveraging broadband features such as remote programming, network extension, and location services. And finally, based on our Q2 record ending backlog and continued strong operational execution, we're raising our full-year guidance for both sales and earnings per share. At this point, I'll turn it over to Jason, who will take you through our results and outlook and then return for some final thoughts.

Jason Winkler, Executive Vice President and CFO

Thank you, Greg. Revenue for the quarter was up 9% and above our guidance with record second quarter revenue in both segments. We saw strong growth across all three technologies, led by over 20% growth in both Video and Command Center Software. In LMR, which grew 5%, we were able to secure more critical parts, particularly later in the quarter, which enabled us to ship more product. Acquisitions during the quarter added $34 million and FX headwinds were $44 million. GAAP operating earnings were $358 million, and operating margins were 16.7%. Non-GAAP operating earnings were $497 million, up $15 million or 3% from the year-ago quarter, and non-GAAP operating margins were 23.2%, down from 24.4%. The decline in operating margins was due to the higher semiconductor costs we outlined on our prior calls related to acquiring critical supply in the secondary market, together with higher freight costs and higher operating expenses related to acquisitions, partially offset by higher sales. GAAP earnings per share was $1.33 compared to $1.69 per share in the year-ago quarter. The decrease was primarily due to a discrete tax benefit recognized in the prior year and higher direct material costs in the current year. Non-GAAP EPS was $2.07, flat versus last year. The higher sales and operating earnings generated in the current quarter were offset by the higher direct material costs I mentioned previously, along with higher operating expenses related to acquisitions. OpEx in Q2 was $502 million, up $25 million, primarily due to acquisitions. Turning to cash flow. Q2 operating cash flow was $10 million compared with $388 million in the prior year, and free cash flow was a usage of $49 million compared to $326 million generated in the prior year. In Q2 and the first half of the year, our cash flow has been primarily impacted by two items: first, our planned investments in inventory to navigate the dynamic supply chain environment and position us to fulfill the record demand we're seeing in Video and LMR; second, higher employee incentive payments that were tied to 2021's performance and paid out this year. We expect our cash flow conversion to accelerate in the second half, driven by higher profitability and a reduction in our current inventory levels in addition to the normal seasonality of our cash conversion. Capital allocation for Q2 included $162 million in share repurchases, $132 million in cash dividends and $59 million of CapEx. Additionally, during the quarter, we closed the video acquisitions of Calipsa for $40 million and Videotec for $22 million. We also issued $600 million of long-term debt, used a portion of the proceeds to retire $275 million, resulting in approximately $320 million of incremental debt net of fees on our balance sheet. In the Products and SI segment, we continue to see strong demand across both LMR and video. Sales during the quarter were up 7% versus last year and orders were up 17%, including record Q2 orders for both LMR and video. Revenue from acquisitions for this segment in the quarter was $14 million and currency headwinds were $19 million. Operating earnings for Products and SI were $188 million or 14.6%, down from 16.2% of sales in the prior year, driven primarily by the higher material costs and higher freight costs previously mentioned, partially offset by higher sales. We continue to expect full-year operating margins for this segment to be slightly higher than 2021 as the impact from pricing actions accelerates in the second half. Some notable Q2 wins and achievements in the segment include several large P25 orders in the U.S., including $32 million for a state of California agency, $27 million for Dutchess County, New York and a $22 million order for the Georgia Department of Corrections. We also had a $26 million order for a P25 solution with LTE integration for an international customer, and a $15 million TETRA order for a customer in Argentina. Finally, we received two large fixed video orders, a $9 million order for a customer in the health care vertical and an $8 million order for a large retail customer.

Gregory Brown, Chairman and CEO

Jason, thanks. I'd like to end with a few thoughts as we conclude this call. First, I'm really pleased with what we accomplished during the quarter. We achieved Q2 record sales, including 21% growth in both video and Command Center Software. We strengthened our video portfolio with the acquisitions of Calipsa, which brings us advanced cloud-native video analytics, and Videotec, which broadens our ruggedized camera portfolio to serve the critical infrastructure market. We had record Q2 product orders at higher prices, including our single largest quarter ever for PCR orders, and we ended the quarter with record Q2 ending backlog. The pricing actions we've taken to offset higher input costs position us well for margin expansion for the back half of this year. Second, our investments in AI and cloud continue to drive robust software growth for the company. Customers like Greenville County Schools in South Carolina depend on our video security and access control solution to help keep students safe. And the city of Houston is deploying more than 3,000 body-worn cameras with cloud-based evidence management to help provide greater accountability and transparency. And with the acquisitions such as AVA Security and Calipsa, we're well-positioned to accelerate the deployment of cloud video software solutions with customers around the world. Finally, as we enter the second half of this year, I am very encouraged by our momentum. The multiyear funding environment for our customers continues to be as strong as it's ever been, our solutions for both public safety and enterprise security have never been more important. Our strong execution has allowed us to effectively navigate this dynamic environment. The resilience of our business, our durable cash flows and our strong balance sheet provide us with the flexibility to be opportunistic in our future deployment of capital. And now I'll turn the call back over to Tim and welcome your questions.

Tim Yocum, Vice President of Investor Relations

Thank you, Greg. Operator, would you please remind our callers on the line how to ask the question?

Operator, Operator

The first question comes from George Notter of Jefferies.

George Notter, Analyst

Congratulations on the strong results and backlog. I guess I wanted to ask about a comment you made about the funding environment. What's your perspective now on state and local government budgets? Obviously, many of those budgets began on July 1. Many of those budgets were reset looking forward. Just be curious on what your perspective is on the funding environment and how you're seeing those budgets? And then also related to that is a question of ARPA. I'm wondering if you're seeing ARPA money right now. I think last quarter, you told us you were seeing a 3x improvement in the sales funnel. What does that look like right now? Any more detail you can provide would be great?

John Molloy, Executive Vice President and COO

Sure, George. So when you think about state and local budgets, I mean, I think, first of all, we hear us say it time and time again, what we do, what we provide is a need to have, not a nice to have. But as it relates to the inflationary environment we're dealing in, self-funding alone for states, they're in a very beneficial period of time. Because if you look at it, they derive their budgets from personal income tax, from sales tax, and from corporate income tax, all of which stand to benefit to drive more money into their coffers and thereby, improve their general fund situation. So it's that piece of it. We also look at the second rail of this, and that's the monies that are being made available through ARPA. And I would just simply say that we've talked about it, it's generally beneficial, and we think it's a general tailwind. But the most important thing is it's not a 2022 phenomenon. It's one that's multiyear. And in fact, these won't expire until 2024, and all likelihood we know is those will likely be extended. So you've heard Greg said it. I think he said in the script, but we're in a really unique situation because we are in a good funding environment. But I think it also is timely because we're going through product refresh investments. We're seeing that here in the United States with the APX NEXT platform. And later this year, we're going to be announcing the mid-tier APX NEXT devices, which we're really excited about.

Operator, Operator

The next question comes from Erik Lapinski of Morgan Stanley.

Erik Lapinski, Analyst

Congrats on the quarter. Maybe just following up on the comment you just made on kind of LMR and the APX NEXT. Can you give us any update on just with some of the P25 deals you're seeing? What the uptake is of APX NEXT and some of those upgrades? Is it skewing towards being most? Or I guess, just legs on that cycle and how we should think about that?

John Molloy, Executive Vice President and COO

Yes, as I've mentioned before, we're still in the early stages of the P25 upgrade cycle. I used a baseball metaphor previously, and I believe we're still in the second inning. Just to provide some updates, we've received $190 million in orders. Interestingly, there's been notable interest from customers outside of Motorola. This interest isn't just about the improved basics, ergonomics, and audio quality of the APX NEXT, but also the Smart Connect feature. During COVID, customers like health departments recognized the ability to expand their coverage beyond the P25 networks. Features like smart mapping are becoming essential as we focus on accountability and the safety of officers and firefighters, where location is crucial. Additionally, we're addressing the need for messaging as more young officers come into the field. They require various ways to communicate, like text and video, and the ability to share data is being enhanced through the LTE collaboration aspect of the APX NEXT. I'm really excited about this progress. It's worth noting that the $190 million has been directed towards the highest tier, which is the original APX NEXT, with plans to release the mid-tier portfolio in the second half of this year, and we're beginning customer discussions regarding that.

Gregory Brown, Chairman and CEO

And Erik, the $190 million in orders has been since the introduction of the APX NEXT product. Additionally, Q2 was a record for P25 public safety devices, which encompasses more than just APX NEXT. The APX NEXT continues to perform well, and I believe the team executed an excellent product introduction. Molloy's team has effectively sold it, and beyond APX NEXT, Q2 set a record for 25 public safety orders, which I am quite pleased about as well.

Erik Lapinski, Analyst

Awesome. If I could sneak in another one just on Command Center Software. You had a few larger deals there to this quarter. Just in terms of progress and maybe uptake of some of the cloud-based offerings you have there, were any of those upgrades more on cloud-based? And then did any maybe expand beyond the PSAP presence you have into other capabilities?

Mahesh Saptharishi, Executive Vice President and CTO

Yes. So maybe just a quick overview. Jason mentioned two specific deals, LVMPD and Frederick County. If you look at both of those, LVMPD was on-premises records deal, but really a hybrid element to it, and that was the CommandCentral Responder piece, which is really driven by mobile access to records information. We're seeing more and more of that, and that hybrid element was key to that particular deal. With Frederick, we added CommandCentral Aware in addition to PremierOne CAD. Aware is a cloud-hosted SaaS solution for us. And Aware gives the county a single plane of glass to understand where unit locations are, both from radios and also from incident information. It is as Jack said previously, accurate location information being paramount in that case. We continue to invest in our hybrid strategy. We're executing on our hybrid strategy. And a key point there is that our SaaS growth rate is actually faster than the overall Command Center Software growth rate, which itself was quite strong in this quarter. And the last thing that I'll say is we're continuing to innovate and invest in innovations. And we had two significant firsts this quarter. One is, we introduced the world's first public safety Carplay application, one that we developed with Western Australia Police and with Apple. And the second is along with Prince Georges County in Maryland, we won the Thomas O'Reilly Innovation Award for being the first in the country to introduce NENA i3 compliant location-based routing. So together, I think we are executing well on our hybrid strategy.

Operator, Operator

The next question comes from Adam Tindle of Raymond James.

Adam Tindle, Analyst

I just wanted to ask about them between calls, so hopefully it hasn't been asked. But Greg, could you maybe give us any updates on ESN and Airwave? In particular, if you could review any financial implications? I think there's significant differences in the different outcomes and probabilities based on what happens and just that might make sense to level set with investors?

Gregory Brown, Chairman and CEO

Yes. I think things remain engaged and in progress, Adam, really. We are in close contact with the customer, in this case, the U.K. Home Office. We've maintained very close contact with the CMA and have regularly provided them with information over the last several weeks and months as we educate them on our role in both Airwave and ESN. As you've seen, the timeline has been updated by the CMA panel, and they now expect a provisional decision in September with a final decision in December. And there's really not much more I can add at this point because I just don't know. I think it will play out in the back half of the year, but I think the engagement has been quite strong. And in the meantime, we continue to invest both in Airwave actively and providing that mission-critical service as well as ESN.

Adam Tindle, Analyst

Got it. And maybe just as a follow-up. It looked like at a glance backlog trends remain very, very healthy. What does this say about elasticity in core products? I know you've been implementing some price increases understandably as your costs have increased. If you can maybe recap some of the price increases and talk about the elasticity that you're seeing given backlog trends, that would be helpful?

Jason Winkler, Executive Vice President and CFO

Sure. So when I think about the first half growth for the company, which is about 8%, the price contributions on the actions that Jack's sales team have implemented were less than half of the contributor to growth. And with the actions that Jack can describe, we think it will be even more of an opportunity in the second half as most of the orders that come to us in the second half were not from a more recent backlog as opposed to aged pricing.

John Molloy, Executive Vice President and COO

No, I think you're right. One aspect to consider is that while we have raised prices, our team has excelled in discount management. For example, we have increased prices across all three technology groups and in our services business as well. We are also seeing improvements in net retention in that area. We are really proud of our services team for their efforts.

Operator, Operator

The next question comes from Keith Housum of Northcoast Research.

Keith Housum, Analyst

Congratulations on a great quarter. I guess I just want to follow up on the supply chain. Much has been talked about the semiconductors and the $120 million will be spent through the end of the year. But can you talk about are there any other issues that have kind of popped up? Or are you guys looking to enter into 2023 is like a clean slate as you sit now?

Jason Winkler, Executive Vice President and CFO

We expect to see a $120 million increase year-over-year primarily due to our efforts in securing semiconductor supply. We remain on track with this plan, which has resulted in slightly more than $100 million spent in the first half of the year and potentially exceeding $20 million in the second half. With our revised guidance, we are supporting a higher volume, and we are satisfied with how we are allocating this budget to secure semiconductors, which can sometimes be costly. It's important to note that our main strategy involves rapid redesigns by our engineering teams, who are successfully identifying alternative components when certain parts are in limited supply. They are performing exceptionally well in this area. We will keep evaluating inventory investments and long-term supply agreements. Overall, semiconductors remain our biggest challenge, especially in LMR.

Keith Housum, Analyst

Great. Appreciate it. This is a follow-up. In terms of the backlog, backlog has been record numbers for a while now, and this is impressive growth. But are we looking at an apples-to-apples comparison? Or is the backlog getting older in terms of the contracts that you're entering into are getting longer? Is there an apple-to-apples comparison we need to go through?

Jason Winkler, Executive Vice President and CFO

The duration of the backlog is largely consistent with our historical performance. The products backlog, which has been growing sequentially, tends to turn over more quickly than our associated software and services. We are pleased with the backlog growth in both segments. Additionally, the product backlog continues to increase even as customers accept some price increases and recognize the value of our products.

Operator, Operator

Next question comes from Fahad Najam of Loop Capital.

Fahad Najam, Analyst

Greg, in the 8 years that I've been listening to you on the earnings call, I feel like you sounded the most confident and positive that I've ever heard us. So am I correct in my understanding? And if it is, can you just walk me through what is driving your confidence and your positive look in terms of your top drivers?

Gregory Brown, Chairman and CEO

Yes, Fahad, thanks for the question. I'm smiling because we've been discussing this, and the reality is this is one of the best environments I've experienced. This applies not just externally, as Jack and Jason have mentioned about multiyear funding in North America for state and local customers as well as at the federal level, but also to our company's overall position. Demand is incredibly high for public safety and enterprise security. Simultaneously, there are valid concerns regarding the use of Chinese equipment in critical infrastructure or secure areas. Our backlog is at record levels, with product backlog continuing as we noted in Q2. Orders increased by 17% compared to our revenue print of 7%. We are making progress. Jason just pointed out that the backlog comparison is largely consistent. We are enhancing our full-year projections from approximately 7% to 8%, despite ongoing foreign exchange challenges. We are navigating a challenging semiconductor supply chain situation. Although it's slightly improved, we credit our supply chain, financial, and operational teams at Motorola for their efforts in product redesign and inventory management, which have been effective in meeting demand. I appreciate the capital deployment we've undertaken. Organically, Jack and Mahesh are focused on innovation, transitioning to the cloud, and refreshing products. We've made strategic acquisitions that are important to our growth, and our addressable market continues to expand. So, when I consider our execution, demand, R&D, innovation, multiyear funding, and all the elements that support and drive demand for our products, the situation looks very promising. Additionally, our ability to implement multiple price increases while still growing our backlog and achieving strong revenue growth reflects the importance of what we do and our customers' capacity to accept these changes, as well as our ability to manage higher input costs. It truly is a favorable environment. This is why we exceeded expectations in Q2, why we're raising our full-year outlook, and why I feel optimistic about the momentum heading into the second half.

Fahad Najam, Analyst

That's really insightful. So how does that translate into your model? Because last time when you gave up your long-term model, it was 9%, 10%. Clearly, you're exceeding that now. So what are you thinking about your new model?

Gregory Brown, Chairman and CEO

No, we were discussing that. I provided a 9% and 10% forecast in 2021 because I was confident in it, but COVID delayed things for a year. Here we are now. At this moment, we won't be talking about any long-term projections, but we continue to believe that the product segment will grow in the mid-single digits. The increase we're seeing for the year from 7% to 8% largely comes from LMR and video. This uptick from a segment perspective primarily occurs in the product area, so it may be in the mid-single digits, slightly higher. We still anticipate that Software and Services will remain around 10%. We stand by our guidance for the three technologies: LMR at mid-single digits, video security around 20%, and Command Center Software in low double digits as we keep building our backlog. We are encouraged by the momentum in the latter half of the year, which positions us well for 2023. As we progress further into the year and enhance our execution, we'll provide updates on our future outlook for 2023 and beyond.

Operator, Operator

The next question comes from Sami Badri from Credit Suisse.

Sami Badri, Analyst

First, congrats on the quarter. I'm not sure many people are actually expecting an increase on the top line. But presenting the question that I had for you guys is, I wanted to know within products and systems integration. If we were just to look at radios and radio handsets, have you been prioritizing LMR public safety over PCR? Have you managed to ship and prioritize both essentially at the same level, right? Trying to get an idea on just mix. And then maybe just a clarification. Did you say that PCR is growing mid-single digits to slightly better in 2022? Or if you didn't actually clarify that, maybe you could just clarify it now?

Gregory Brown, Chairman and CEO

Yes, Sami, I'll take the second one first. The product segment color is to continue to grow Product and SI at mid-single-digit, maybe a little bit higher than that because the flow-through is in that segment. For PCR, last quarter, we said it would grow mid-single-digit. We now expect it to grow at 10% or even slightly higher for the full year, given the strong performance in Q2 that will flow through in the back half.

Jason Winkler, Executive Vice President and CFO

And Sami, to answer your question on prioritization and balance, we continue to be focused on public safety. Q1, we have prioritized public safety. In Q2, with some of the breakthroughs the team was able to make around supply, we were able to fulfill more demand for PCR in Q2 and grew at double digits. So in Q2, given the supply environment, we were able to fulfill both public safety and PCR.

Sami Badri, Analyst

Got it. And then I was hoping we could hear from Jack a little bit on body-worn camera and dash cam regarding license plate reading and some of the other kind of features that you guys have released. Can you give us an update on market share momentum? What's really going on from that side?

John Molloy, Executive Vice President and COO

Sure, Sami. So as it relates to Q2, our orders were up 13%. I think when you contextualize that over the fact that 13% over the previous quarter, that was up 80%, 8-0 percent, the previous year. We think we had a relatively strong order. You heard Jason reference the Detroit PD win. And I think that's a test point to what we've been saying is that the market wants an alternative. I think the other piece of it is we're starting to see, late last year, we came out with a service offer, and we're seeing an acceleration in our customers wanting to choose cloud. We've said before and I said at the end of 2021, we doubled our orders. We knew the market didn't grow that fast. We knew we took share in 2021. I'd simply say for the first half of this year, given our performance kind of in the mid-teens growth over 68% and 80% orders growth comps, we think we're performing relatively well. And as I said, we think we're a very viable alternative in the marketplace right now.

Sami Badri, Analyst

I have one quick one for Jason. Sorry, go ahead.

Mahesh Saptharishi, Executive Vice President and CTO

Just on the technology investments side that you also asked about, we continue to invest in a closer integration between our body-worn cameras and our radios as well, specifically with APX and APX NEXT devices. So for example, if you press the emergency button on an APX or an APX NEXT radio, it turns on recording as an option as well. And there are more features there to come as well. This quarter, we also released live streaming capability going from the V300s and our in-car video solution to Aware. Aware also integrates real-time location information from our APX and APX NEXT radios. So location information coming from both body-worn cameras and our radios together gives accurate information, again, location being a key necessity for our customers. And lastly, we also introduced new advanced AI-driven reduction capability to CommandCentral evidence, which is a key capability that our customers have been asking for. And I think we're very proud of what we were able to put in. Q2 also was our first shipping quarter for our M500 solution. The M500 started shipping in February of this year. We have seen great growth in the M500. And just as a reminder, we released the M500 with two key AI capabilities, ALPR being one of them, and backseat passenger analytics being the second. This is a true AI platform, the M500 is, and we're going to be introducing more capabilities we have firmware upgrade into that platform as well. We think there's great potential there.

Sami Badri, Analyst

Jason, could you clarify your guidance on foreign exchange headwinds for the year? Does it take into account any improvement in international currencies compared to the U.S. dollar, or is it based on the assumption that exchange rates will remain constant from this point onward?

Jason Winkler, Executive Vice President and CFO

Current spot rates going forward relative to last year. So the $170 million of headwinds on the year is about consistent with where it was the last quarter we were together. It's certainly been volatile. But today, it's at approximately $170 million of top line degradation related to FX this year.

Operator, Operator

Next question comes from Paul Silverstein of Cowen.

Paul Silverstein, Analyst

One clarification. What was the level of PCR in the quarter? Can you remind us what it peaked at before the pandemic hit? Also, where are you currently in the recovery of that business?

Jason Winkler, Executive Vice President and CFO

For Q2, Paul, PCR revenue growth was 15%.

Gregory Brown, Chairman and CEO

Last year, the base was around $800 million. As we mentioned earlier, it’s expected to grow by about 10%, maybe a little bit more this year, which will still leave it short of the 2019 level you referenced.

John Molloy, Executive Vice President and COO

Paul, I was just going to add one other point is that Q2 was a record orders quarter for PCR as well.

Gregory Brown, Chairman and CEO

Exactly.

Paul Silverstein, Analyst

Okay. Given the macro situation, it seems the business has various positive variables at play. Where do you see the greatest opportunity for improvement over the next 12 to 36 months? Additionally, I noticed there was an inability to pay cash regarding the litigation. Are they effectively being excluded from the market? What is the outlook on that? Lastly, how is video penetration progressing in the public sector?

Gregory Brown, Chairman and CEO

Let's begin with Hytera. I’m not particularly surprised that they missed the court order deadline to pay cash into escrow by July 31. They have a history of denial, deflection, distraction, and inaction. They owe us approximately $680 million in total. Just to clarify, our guidance for the full year of 2022 regarding cash and cash flow does not take anything from Hytera into account. We filed a motion this morning stating that they are in contempt of court. We will await the judge's ruling and any further remedies that may be applied, but I can’t say I’m particularly surprised.

John Molloy, Executive Vice President and COO

Paul, I think you had a question as well on video, and I would just simply say that our video and access control business is growing approximately 20% this year in 2022. We continue to invest in the portfolio extensively, both by way of our edge devices or cameras. But also in our software and analytics side of things, cloud and mobile become increasingly important when you think about our three big acquisitions: Openpath, who has fundamentally changed the game for us in the access control market; Ava and Calipsa as well. The AI that Calipsa brings and its ability to proliferate into our Pelco camera line is also a game-changer. And I think you asked a question about verticals. But when we think about our top verticals, it's really government, education, health care, and commercial. If you remember, when we acquired Avigilon in February of 2018, their government business was nascent. And now it's one of our top ones. We think that's the benefit of the scale and the revenue synergies that our sales force around the globe has been able to bring.

Paul Silverstein, Analyst

Okay. The real question was, I assume it's still preciously early in the government, public sector in terms of video penetration.

John Molloy, Executive Vice President and COO

Yes. So I think we talked about, first of all, just a baseline and government, it's early days. But to eventualize that business, it's approximately $430 million is our expectation this year. Think of that as two-thirds mobile video, one-third fixed video.

Operator, Operator

Next question comes from Louie DiPalma of William Blair.

Michael DiPalma, Analyst

Greg, on previous calls, you referenced how you are seeing robust demand from the education vertical. Is demand from education customers for your artificial intelligence solutions getting even stronger with this exceptionally strong guidance for this upcoming school year following several different security incidents nationwide?

Gregory Brown, Chairman and CEO

Yes, Louie. Education has been a very key vertical, along with government for fixed video and access control. It has been and continues to be because of what you referenced the need for video security, perimeter detection, anomaly detection, access control, automation alerts. And I think that the demand for that broad portfolio continues to be strong and maybe perhaps is even getting stronger. And I don't know if Jack or Mahesh want to complement on that as well.

John Molloy, Executive Vice President and COO

Greg, I think you hit it. The other one is we made a significant investment to evolve technologies. And I would say that stadiums and schools are the big driver for concealed weapons detection. We know the horrific things that happened at Uvalde just earlier in the summer. And I think that's driving a converged experience to make sure that they've got the video and access control, but they also have a way to temper and test for weapons as they approach campus as well.

Jason Winkler, Executive Vice President and CFO

The other point I'd make is that our Q2 results and our increased guide for the year were driven largely by our expectations for LMR, which is about two-thirds of the increase in video and then the other one-third, both of which are serving education and many other verticals.

Operator, Operator

The next question comes from Jim Suva of Citigroup.

James Suva, Analyst

Congratulations to you and your team. Greg, regarding strategy, you mentioned achieving your largest LMR contract ever, which is fantastic. Are you now at a stage where most of your new contracts include a range of cross-sold Motorola Solutions products, services, command centers, and similar offerings? Or are we still in the early stages with limited connectivity? That's my question related to strategy. Now, on the finance side, could you clarify the impact of gross margin decommits or entering the broker market on components? I assume that when you secure these large contracts, you're locking in the parts immediately to avoid future price increases, especially given the rising costs from chip manufacturers?

Gregory Brown, Chairman and CEO

Well, on the first part, Jim, I think we're in the early innings overall. I mean you take a step back and think about this firm and our addressable market now given the industries we play in and the acquisitions we've made, it's just under $50 billion. And the guidance this year for full year informs approximately 9%. So there's a lot of room to run here. While we are growing fixed video and access control at 20%, we are not the leader yet, either globally or in North America. I think there's every opportunity for us to continue to take share and make up ground given the width and breadth of the portfolio, which I believe from an industry standpoint is unmatched. Our ability to play in fixed video and mobile video, layer on analytics, license plate recognition and all the things that Mahesh and the technical team are doing in artificial intelligence. On LMR, the installed base gets larger. You think about roughly 13,000 different LMR networks, by which we fill the footprint of infrastructure, sell devices, monetize services, upsell, refresh the device portfolio, integrate LTE into LMR for network extension and software over-the-air reprogramming and location services. And then all the things Mahesh is doing in Command Center Software, which is premises-based, cloud-based, hybrid and the overall backdrop of more and more criticality around public safety, enterprise security and not having key China vendors in any of that critical infrastructure, I think there's a lot of opportunity in front of us.

John Molloy, Executive Vice President and COO

The only thing I would add is that I think I heard you ask about cross-selling, which is very important. We have approached this with specific sales incentives related to Command Center Software as well as fixed and mobile video. Our North America sales leader has developed a three-dimensional tool by account that provides an overview of our strong and weak areas, helping us identify where to concentrate our efforts. Additionally, we've implemented sales strategies focused on specific technology advancements. I believe this has been quite beneficial for us.

Jason Winkler, Executive Vice President and CFO

And Jim, to answer your question on securing semiconductor components, we're doing so in many different ways, directly from the manufacturer through us and purchase orders all the way through long-term supply agreements. And then finally, brokers when necessary, and therefore, have a constant flow of parts. I think it's important to note that Motorola and our engineering abilities, over 40% of our company are engineers. And we continually give them challenges, including if a part we know to be in constraint, they are helping find alternatives. And that alternative, then the supply chain organization can go out and procure. So it's a constant battle, and we're proud of the way the teams are collaborating and working through the environment.

Operator, Operator

This concludes our question-and-answer session. I will now turn the floor over to Mr. Greg Brown, Chairman and Chief Executive Officer, for any additional comments or closing remarks.

Gregory Brown, Chairman and CEO

Thank you, everyone. I especially want to express my gratitude to all the Motorolans on the call and listening in. Your performance has been exceptional, and I couldn't be prouder of you. I am proud of this company, proud of our team, and proud of the purpose we serve. These results highlight the importance of public safety and enterprise security, and in today's environment, this has never been more critical. I also want to acknowledge what Jason mentioned and commend everyone involved in supply chain execution for effectively navigating this dynamic landscape. The overperformance in Q2, and what we're projecting for the full year, is largely due to strong supply chain execution. This comes from the engineers Jason mentioned, as well as others involved in product redesign, strategic inventory acquisition, and prudent purchasing of brokered parts, along with a slightly improved environment in Q2. However, the supply chain, particularly the semiconductor sector, remains challenging. Despite this, there is still much work to be done, but I feel confident about our position and momentum for the second half. We must keep executing. Thank you for your attention, and I look forward to speaking with you again in a few months.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. A replay of this call will be available over the Internet within two hours. The website address is www.motorolasolutions.com/investor. We thank you for your participation and ask that you please disconnect your lines at this time.