Earnings Call Transcript
Motorola Solutions, Inc. (MSI)
Earnings Call Transcript - MSI Q3 2023
Operator, Operator
Good afternoon and thank you for holding. Welcome to the Motorola Solutions' Third Quarter 2023 Earnings Conference Call. Today's call is being recorded. The presentation materials and additional financial tables are posted on the Motorola Solutions' Investor Relations website. In addition, a webcast replay of the call will be available on our website within three hours after the conclusion of this call. The website address is www.motorolasolutions.com/investor. All participants have been placed in a listen-only mode. You'll have an opportunity to ask questions after today's presentation. I 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 2023 third quarter earnings call. With me today are Greg Brown, Chairman and CEO; Jason Winkler, Executive Vice President and CFO; Jack Malloy, 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 a 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. During the call, we referenced 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 the factors that can cause such differences can be found in today's earnings news release, in the comments made during this conference call in the risk factor section of our 2022 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. And with that, I'll turn it over to Greg.
Greg Brown, Chairman and CEO
Thanks, Tim. Good afternoon, and thanks everybody for joining us today. First, Q3 was another strong quarter with revenue and earnings per share exceeding our guidance, driven by continued strong demand and an improving supply chain environment. Revenue was up 8% in the quarter, highlighted by 12% growth in software and services, and 5% growth in products and systems integration. We also expanded operating margins for the fifth consecutive quarter, which resulted in record Q3 operating earnings in both segments and over $700 million of operating cash flow. Second, investments in safety and security continue to be a priority for our customers. And we had another record orders quarter in Q3. Year-to-date orders are up 11% driven by strong software and services, record U.S. Federal demand, and continued adoption of our APX NEXT device by U.S. state and local customers. Additionally, we ended Q3 with a record backlog of $14.3 billion, up 6% versus the prior year. And finally, based on our Q3 results and continued momentum in the business, we are again raising our full-year guidance for both sales and EPS for the third time this year.
Jason Winkler, Executive Vice President and CFO
Thank you, Greg. Revenue for the quarter grew 8% and was above our guidance with growth in both segments, both regions, and all three technologies. FX tailwinds during the quarter were $13 million while acquisitions added $19 million. GAAP operating earnings were $639 million or 25% of sales, up from 15.7% in the year-ago quarter, which had the impact of the $147 million fixed asset impairment charge related to our exit from the ESN contract in the UK. Non-GAAP operating earnings were $741 million, up 10% from the year-ago quarter, and non-GAAP operating margin was 29%, up 50 basis points, driven by higher sales, lower material costs, and improved operating leverage partially offset by a higher mix of international product shipments and the revenue deferral related to Airwave. GAAP earnings per share were $2.70, up from $1.63 in the year-ago quarter, which had the impact of the ESN asset impairment. Non-GAAP EPS was $3.19, up 6% from $3 per share last year. The growth in EPS was driven by higher sales and margins, partially offset by the Airwave deferral and a higher effective tax rate in the current year. OpEx in Q3 was $551 million, up $29 million versus last year primarily due to acquisitions and higher employee incentives in the current year. Turning to cash flow, Q3 operating cash flow was $714 million, up $326 million versus last year, and free cash flow was $649 million, up $331 million. The increase in year-over-year cash flow was primarily driven by higher earnings and improved working capital. With our Q3 year-to-date operating cash flow of $799 million, up significantly from last year, we are solidly on track to deliver on our $1.9 billion of operating cash flow outlook for this year. Capital allocation for Q3 included $147 million in cash dividends, $322 million in share repurchases, and $65 million of CapEx. Moving to segments. In the Products and SI segment, sales were up 5% versus last year driven by growth in both LMR and video. Currency tailwinds were $4 million, and revenue from acquisitions in the quarter was $1 million. Operating earnings for the segment were $420 million or 26.1% of sales, up from 24.5% in the prior year, driven by higher sales, lower direct material costs, and improved operating leverage, partially offset by mix. Some notable Q3 wins and achievements in the Product segment include a $75 million P25 device order for a U.S. federal customer, a $55 million P25 System order for a Southeast Asia customer, a $42 million P25 device order for the Texas Department of Public Safety, a $30 million P25 device order for a U.S. federal customer, a $20 million P25 device order for Indiana State Police, and a $3 million fixed video expansion order for a U.S. federal customer. In software and services, revenue was up 12% inclusive of the Airwave deferral, with 31% growth in Command Center and 15% growth in Video. Revenue from acquisitions was $18 million in the quarter, and FX tailwinds were $9 million. Operating earnings in the segment were $321 million, up 7% versus last year, and operating margins were 34%, down from 35.7% last year. Excluding the Airwave deferral, operating margins for the segment were up, driven by higher sales and improved operating leverage. Some notable Q3 highlights in this segment include a $23 million LMR service agreement for a large European customer, a $23 million service agreement for East Bay regional communication systems in California, a $20 million LMR service agreement for the Los Angeles Police Department, a $12 million command center order for Tarrant County 911 District in Texas, and an $8 million body-worn camera order for the Metro Nashville Police. Looking at our regional results, North America Q3 revenue was $1.8 billion, up 6% on growth in all three technologies. International Q3 revenue was $773 million, up 13% versus last year driven by growth in LMR and Video. Moving to backlog. Ending backlog was a Q3 record of $14.3 billion, up 6% or $764 million versus last year, inclusive of $321 million of favorable currency rates driven by strong demand in North America. Sequentially, backlog was down $4 million, inclusive of $125 million of unfavorable FX, driven by the revenue recognition of Airwave, partially offset by strong demand in North America. In Products and SI, ending backlog was up $62 million or 1% versus last year, driven primarily by strong demand in North America. And sequentially, backlog was up $80 million, also driven by strong demand in North America. In Software and Services, backlog increased $702 million compared to last year, inclusive of $294 million of favorable FX driven by strong demand for multiyear software and services contracts in North America, partially offset by the revenue recognition for Airwave. Sequentially, backlog was down $84 million, driven by unfavorable FX of $96 million, partially offset by growth in multiyear Software and Services contracts in North America. Turning next to our outlook. We expect Q4 sales growth of approximately 4%, with non-GAAP EPS between $3.60 and $3.65 per share. This assumes a weighted average share count of approximately 171 million shares and an effective tax rate of approximately 24%. For the full year, we are again increasing both our revenue and earnings guidance. We now expect revenue in the range of $9.93 billion to $9.945 billion, up from our prior range of $9.875 billion to $9.9 billion, and we expect non-GAAP earnings per share between $11.65 and $11.70, up from our prior guide of $11.40 to $11.48 per share. The full-year outlook assumes $40 million of FX headwinds, up $25 million from our prior guidance. A weighted average diluted share count of approximately 172 million shares and an effective tax rate of approximately 23%. Before I turn the call back to Greg, I'd like to highlight two points. In addition to the strength of our LMR and Video business, our Command Center portfolio performed well during the quarter. In Q3, we achieved strong growth, complemented by a robust contribution from Rave, an acquisition, which continues to exceed our expectations. Secondly, our supply chain execution navigating extended lead times for some semiconductors and reducing broker purchases continues to drive year-over-year cost savings. We now expect the impact of lower broker purchases to be a $70 million tailwind for this year, up from our prior estimate of $60 million. As a result, we now expect full-year operating margin expansion of approximately 200 basis points, up from our prior guidance of 175 basis points.
Greg Brown, Chairman and CEO
Thanks, Jason. First, I'm really pleased with our Q3 results, which highlight the durability and criticality of our business and the strength of our portfolio. Revenue was up 8%, and that includes the revenue deferral related to Airwave that we've discussed already. We also achieved record operating earnings in both segments, record Q3 operating cash flow of over $700 million, and a Q3 record backlog that is 6% higher than last year, positioning us well as we head into next year. Second, the resilient nature of our business and strong cash flow allows us to continue to be flexible as we deploy capital to drive shareholder value. The strength of our cash flow comes from strong demand from product refresh, consistent margin expansion, and improving cash conversion. Through October, we've repurchased just under $800 million of stock, highlighting our conviction in the long-term value of Motorola Solutions. We also ended the quarter with a net debt-to-EBITDA ratio of 1.7, which provides us with a healthy balance sheet and additional firepower to continue to invest both organically and consider inorganic investments as well. And finally, as we look to close out another record year, I think we're exceptionally well positioned for continued growth. Demand for our solutions remains robust, we're continuing to add value to our customers, our end markets remain resilient, and our teams continue to execute at a high level.
Tim Yocum, Vice President of Investor Relations
Thank you, Greg. Before we begin taking questions, I'd like to remind callers to limit themselves to 1 question and 1 follow-up to accommodate as many participants as possible. Operator, would you please remind our callers on the line how to ask a question?
Operator, Operator
The floor is now open for questions. Our first question comes from Tim Long from Barclays. Your line is now open.
Tim Long, Analyst
First, regarding the Command Center and Software side, it's performing well, notably with Rave being a part of that. Greg, could you elaborate on what's driving the addition of Rave? It appears positive. Is it enhancing your ability to cross-sell various platforms? Additionally, the backlog remains at a record level, which is impressive given that many companies are seeing their backlogs decrease. Can you provide some insight into that and how it impacts your outlook for next year in terms of growth? Do you believe you can maintain the growth rates you've experienced this year? Thank you.
Greg Brown, Chairman and CEO
Just on Rave, and then maybe Mahesh can jump in. I would tell you, Tim, I love the acquisition. I think it was well done by the internal team here that founded it, did the diligence both technical strategic as well as financial. I love Todd Pyott and his entire team that's come over to the organization. And the performance of Rave since joining Motorola has exceeded the business case and exceeded our expectations.
Mahesh Saptharishi, Executive Vice President and CTO
Full year, I would say that we still expect our growth to be 20%. Look, our core platforms, that's NG-911, CAD, Records Aware, are all doing well as well. As Jason read out in the script, St. Charles, Missouri, just refreshed their call handling solution and adopted our new routing. And you see solution, Western Australia Police refreshed their CAD. There's also an ecosystem story here. Rave is certainly performing well above our expectations. Arizona is now the 15th state to sign on to Rave Alert. It's a statewide mass notification system. And as we're doing that, we're also refreshing all the call handling instances across the PSAPs in Arizona. Our call handling system integrates with Rave as appropriate here as well. When you think about a city like Glendale, Glendale now brings in radio, CAD 911, Rave, etc., now into a state-of-the-art real-time crime center, all integrated with Aware. Now you can think about orchestration when major incidents happen on the heels of things like active shooter incidents that benefit from the fact that the ecosystem allows you to now respond much faster.
Jason Winkler, Executive Vice President and CFO
Tim noted that we are in a strong position with our backlog, reflecting an 8% revenue increase in Q3 and a backlog exceeding $14 billion, which has risen by 6%. Our backlog is robust and is primarily composed of over 95% government customers, who rely on us to deliver what they need when they need it. Additionally, Q3 saw strong incoming orders, reinforcing our solid backlog position. Greg, I’ll hand it over to you for more insights.
Greg Brown, Chairman and CEO
Yeah. And Tim, as it relates to 2024, obviously, we'll wait until February to give specifics on any kind of detailed guidance. I would tell you, as we sit here today from a high level, we would estimate revenue, again, kind of back of the cocktail napkin to be about $10.5 billion at this point as we sit here today. By the way, that's inclusive of $250 million of incremental revenue headwinds, about $200 million of that out of the UK home office. We've talked to you about that before. The deferral of Airwave representing a little bit over $100 million, the balance of that being the formal exit of ESN for a total of $200 million related to the UK Home Office and anticipated FX headwinds of about $50 million.
Tim Long, Analyst
Okay. Thanks very much. I appreciate it.
Greg Brown, Chairman and CEO
Thank you, Tim.
Operator, Operator
The next question comes from the line of George Notter with Jefferies. Your line is now open.
George Notter, Analyst
Hi, guys. Thanks very much. Greg, you mentioned the UK I guess I was wondering what the latest and greatest is out of the UK. I know you guys were going through the CAD tribunal process. I think the release today references that you still haven't heard back. I think you had expected to hear back after a number of weeks. So wondering what's going on there. I'm wondering if the delay in being back with you is potentially good news. What do you think is going to happen there? And what does it look like in terms of the appeal processes if that CAD tribunal process did not work out?
Greg Brown, Chairman and CEO
Yeah. On the UK, there's really no news to report, George. We had the hearing on August 2 and 3. I think we reiterated the strong case that we feel with a high level of conviction. You've heard me use adjectives before. I'm very specific about how I would describe the situation. I think it's unprecedented. I think it's overreaching. It's entirely disproportionate, but we made the case. As a result, we're waiting on that CAD, that competition appeals tribunal ruling. It's a fairly opaque regulatory process, so I couldn't speculate one way or the other on how to interpret that. We'll wait to get it. I would anticipate getting it certainly between now and the end of the year. As I've said, if it does not go our way, we will continue to exhaust all legal options to defend our position of provisioning and delivering outstanding and very reliable emergency communication services throughout the UK.
George Notter, Analyst
Got it. And then just as a quick follow-up. I assume that you guys have made the adjustment in terms of your financials and expectations. But I assume that contract is still going as is while we wait for the CAD tribunal to make a decision and then potentially other appeals processes. Is that correct? Are you taking the price it now?
Greg Brown, Chairman and CEO
That's right. We're still delivering the services. We're still investing in the network. We're still doing all the things that are expected of us to deliver superior reliable emergency communication services. We've referenced this to your point. We did start the deferral of revenue on Airwave on August 1. So we're deferring that revenue through the balance of this year. That informs about $200 million of incremental revenue headwinds for next year. Airwave all-in is about $110 million or $115 million of that with a balance of $85 million or so being ESN. We are obligated to recognize that accounting consistent with the price control of final remedies order, and we're doing that. If there's a different outcome, then we would change that accordingly.
George Notter, Analyst
Thank you.
Greg Brown, Chairman and CEO
Thanks, George.
Operator, Operator
The next question is from the line of Keith Housum with Northcoast Research. Your line is now open.
Keith Housum, Analyst
Good morning, guys, and great question. In terms of the supply chain issues that you guys have had in terms of the semiconductor chips, where do we stand with that? I mean, do we still have a significant backlog of chips that might carry over into next year? Or is that largely caught up?
Jason Winkler, Executive Vice President and CFO
Keith, thanks for the question. The supply chain environment for our needs for chips, which I'll remind everyone is for generally 40 nanometers and above, is improving, although it's not to levels of normality. For example, lead times for certain chips are now approaching 25-26 weeks where they had been double that, but in a normal environment, they should be 15 or 16. Improvements? Yes, and that's what's helping us drive the favorability of now $70 million in the P&L, but still some opportunity to improve further, and that's what's incorporated into our expectations for Q4 that we'll continue to use the tools that we've been using for a number of quarters now, looking for substitutes, working with our supplier partners, and using the available supply that we can find at lower prices.
Greg Brown, Chairman and CEO
We would, Jason, continue to see PPV benefit in '24 as well.
Jason Winkler, Executive Vice President and CFO
Next year, as we told you on the last call, we're planning for about $60 million of '24 incremental PPP relief over '23. So we still have the opportunity to capture there and expect that in the P&L. That aligns with our expectations that things will continue to improve into '24.
Keith Housum, Analyst
Great. Thanks. Appreciate it. If I can just follow up, M&A has been a key part of Motorola's strategy over the years. As you're looking forward, I mean, is there anticipation that you're going to keep with some of these small tuck-in acquisitions? Or is there an appetite for perhaps a larger more transformational acquisition as well?
Greg Brown, Chairman and CEO
Yeah. Well, we certainly are in great shape from a balance sheet standpoint and the firepower to do some things inorganically. It's ironic, Keith, because here we are sitting in November, and we have not done an acquisition yet to date. That is certainly not for a lack of an active and a full funnel, but we've been pretty diligent, and quite frankly, some sellers have been reluctant at prices that we thought would be more reasonably valued. That's okay. Having said that, do I anticipate some continued M&A tuck-in activity? I do, and the team, Raj, Mahesh, Jack, Jason, Michael, Anas are actively working that funnel. I think we still probably emphasize, in general, services and video security and access control as areas of higher priority than others that we would look to do inorganically. If there's something larger for us to consider, we would evaluate that as well, clear-eyed, but balance both financially and strategically, and we'll see what comes.
Keith Housum, Analyst
Great. Thank you.
Greg Brown, Chairman and CEO
Thanks, Keith.
Operator, Operator
The next question comes from the line of Adam Tindle with Raymond James. Your line is now open.
Adam Tindle, Analyst
Okay, thanks. Good afternoon. Congrats on the results. Greg, I wanted to start with backlog again, record levels. Just I guess the heart of the question would be how long do you think this can continue? Do you think we're going to exit this year with record backlog again? Or when do you expect to see maybe some level of attenuation or normalization slowing in backlog based on what your business looks like right now?
Greg Brown, Chairman and CEO
Yeah, I certainly wouldn't speculate on backlog because I don't have a crystal ball. Having said that, Q3, we ended with record backlog. Q3 was also a record quarter. So I love the funnel. I love our conversion. I love the record orders, and I think we're well positioned. When I look at the quality of the backlog in terms of aged or duration, that remains strong as well. As Jason said, we still have to navigate supply chain on the semiconductor front. It's not normalized; lead times remain elevated. But at the end of the day, I like our end markets. I think they're pretty resilient. I like the demand and criticality for what we do, i.e., public safety and enterprise security informed by video security and access control as well as all the great work Mahesh is doing on the product side in Command Center.
Adam Tindle, Analyst
Got it. Okay. And then as we think about that backlog converting to revenue, obviously, supply chain is still challenged but starting to get better, and I'm wondering what that could ultimately mean for 2024 growth in various scenarios. Obviously, I'm not guiding to that. I hear you on the 10/5, but if supply were to free up in a blue-sky scenario, are you looking at high single-digit growth or better? What are the different scenarios based on potential backlog converting to revenue?
Greg Brown, Chairman and CEO
Yes. I think I would just stick to the 10/5 as a general high-level anticipated marker and reserve any additional color on either technologies or segments for the February conversation. But again, Adam, and I appreciate the question. All I would tell you is I feel very good about going into 2024, and we'll update you in about 90 days.
Adam Tindle, Analyst
Okay. Yeah. Understood. I know you like to stay conservative, which I think we all appreciate. Maybe just one final point on this for Jason. As this backlog comes through, can you maybe speak to the margin profile of that? I can't remember if you're FIFO or LIFO, but there may be some benefit from higher-priced backlog coming through and would think that would potentially help margins moving forward. But any finer point you can put on the mechanics of that would be helpful. Thanks.
Jason Winkler, Executive Vice President and CFO
Sure. Since the third quarter of last year, we have started to see the positive impact of the strategic pricing efforts led by Jack and his team. This trend has continued throughout the latter half of last year and into this year. We remain focused on pricing and optimization, and some of our new products, which our customers appreciate, also involve a price increase for us. With regards to our backlog, we prioritize customers, especially those in public safety. The backlog of products reflects the pricing changes implemented since July of last year. These changes have been evident in our financial performance, and we anticipate that our growth will continue to be fueled by both volume and price.
Greg Brown, Chairman and CEO
And I think we do expect operating margin next year.
Jason Winkler, Executive Vice President and CFO
Absolutely. Yes, exactly.
Adam Tindle, Analyst
Okay. Appreciate the clarification. Thanks, guys.
Jason Winkler, Executive Vice President and CFO
Thanks.
Operator, Operator
The next question comes from the line of Tomer Zilberman with Bank of America. Your line is now open.
Tomer Zilberman, Analyst
Hey, guys. Thank you for the question. Just the first one for me. So your revenue outperformance this quarter versus street expectations really shone through LMR and Command Center. But it looks like you fell a little bit short on a Video product and SI. Can you talk about the weakness there? What drove the 5% growth this quarter?
Jack Malloy, Executive Vice President and COO
Sure. Thanks, Tomer. So first of all, I want to highlight the fact that we're actually really pleased with Q3 because the 8% is against the backdrop of a comp last Q3 of 33%. So our full-year expectations remain unchanged. It's really a linearity story. We're looking at alignment around portfolio investments. We just announced the H6A camera, we're now shipping the ACC8, which is a unified video management solution. More importantly, if you think about the verticals that we serve, it's government, which has shown resilience in funding, education, healthcare, and industrial, which actually grew 17% for us this quarter. We're really pleased, and we think there's good synergies on the investments we're making in the markets that we serve.
Greg Brown, Chairman and CEO
And Tom, I think you said 5% for video, as Jack said.
Jack Malloy, Executive Vice President and COO
Actually 8%, over 33%.
Greg Brown, Chairman and CEO
33% comp. In terms of the segment, Software and Services of 5%, I remind you that includes the decrement and deferral of Airwave revenue, which is important and compresses that. But at the same time, we continue to have great performance in command center software with the strong print for Q3. We have strong managed services performance, and something that's not even reflected in Q3 is Denmark. Molloy's team did a fabulous job on a multiyear project and multiyear managed services contract to close on Denmark. That should also inform how you interpret the Software and Services performance.
Tomer Zilberman, Analyst
If I may follow up regarding your fourth quarter and fiscal guidance, it seems this may be more about language than actual figures. Your guidance for the fourth quarter at 4% suggests the upper end of your revised fiscal guidance, whereas the lower end indicates around 3.5% growth for the fourth quarter. Could you explain what factors might lead to that additional 0.5 point decline?
Greg Brown, Chairman and CEO
Yeah. I think what I would say, Tomer, is I kind of focus on the approximate 4%. I understand the math differences of how you disaggregated it. We're looking for and anticipate 4% revenue growth for Q4, which is in the face of $105 million of headwind for Q4. $50 million is the Airwave deferral that's in that growth, $40 million which is the business light change that we informed you on a couple of months ago, and $15 million of additional FX headwinds. So the 4% is actually a pretty healthy quarter that we're proud of, and that's why we're raising the full year accordingly as well.
Tomer Zilberman, Analyst
Great. Thank you.
Greg Brown, Chairman and CEO
Thanks, Tomer.
Operator, Operator
The next question comes from the line of Meta Marshall with Morgan Stanley. Your line is now open.
Meta Marshall, Analyst
Great, thanks. I just wanted to dive into a couple of your comments on the call. You guys noted that Rave was doing very well. Is that more customers coming on? Are you able to kind of cross-sell it, upsizing other products along with it? Just kind of where some of that Rave strength coming from? And then maybe on the federal side as well, I noted you talked about the $75 million P25 deal, but just is that a broadening of agencies, just faster refreshes, just kind of commentary on the two sources of upside this quarter would be helpful. Thanks.
Mahesh Saptharishi, Executive Vice President and CTO
Just to start out with on the integration piece, we announced a quarter ago, I believe, at this point, where we are bundling Rave with all our new Vesta offers going forward. There's an integration between our call handling solution and Rave as well. We have deeper penetration into the education market with our integration with Orchestrate and with our Video solutions, panic button being a big part of it. We integrated the Panic Button Rave elements with Aware, the command center Aware, for real-time crime center. All of that acts as a very positive synergy that I think helps with the accelerated rate of adoption across the board.
John Molloy, Executive Vice President
As it relates to federal, we're having a record year. As you know, the federal government closed just occurred September 30. We're seeing it's broad-based. It's Department of Defense, civil, law enforcement, multiyear. We are really pleased with what happened in federal. When you start to think about some of the federal supplemental requests, one of the items in there is $106 billion for critical national security, which is going to fund Ukraine and Israel. What I would highlight is that during the course of this year, we've actually shipped a little greater than $100 million into Ukraine at this point in time. So, as you think about it, everything related to federal, Joe Balchen, John Zidar and their team have really done a job we are really pleased with.
Jason Winkler, Executive Vice President and CFO
And just to remind everybody, the size and scale of our federal business last year was 7% of our total revenues. This year, it's trending slightly higher than that. It's an important market for us. It remains an area of focus, but it's smaller than state and local.
John Molloy, Executive Vice President
One final thing that we've talked about is around the NDA and Secure Communications Act that has essentially been an unfunded mandate. Now there's $450 million for the cybersecurity state and local grant, it's going to fund rip and replace, which should be beneficial from a camera business standpoint.
Meta Marshall, Analyst
Great. Thank you.
Operator, Operator
The next question comes from the line of Ben Bollin with Cleveland Research. Your line is now open.
Unidentified Analyst, Analyst
Good afternoon. Thanks for taking the question. This is Brian on for Ben. I was wondering if you could update us on the APX NEXT refresh cycle, kind of where we are in that and how you see that playing out into '24 and '25?
John Molloy, Executive Vice President
Sure. In two words, I'd say momentum acceleration. We've now received $600 million of orders since our introduction in late 2020. We actually did $100 million of orders in Q3 '23. I think the thing we're most pleased with is we're having good success within major cities, but we're now starting to see smaller state and local customers place orders against us. I would attribute a few things. It's a lot of the basics, I would call world-class ergonomics, audio quality. But the game changer for us has really been the application adoption customers, the demand to have location that works hand in glove with our command center software and Rave solution, the ease of use by way of smart programming, and then the ability to extend the network through SmartConnect have really been a game changer. I think we look at it and say there's nothing like the APX NEXT family and radios in the public safety domain. I think you asked a follow-on question around 2024. We've typically said our LMR business and the device plays into that as it's a mid-single-digit kind of business.
Unidentified Analyst, Analyst
Okay. And one follow-up, if I could, on the Surveillance business. I think you called out incremental verticals getting involved there, but I would love to hear your perspective on the mix between commercial and public sector and surveillance and kind of how that's shifted and where it's going?
John Molloy, Executive Vice President
Sure. Public safety is now one of our two largest vertical markets in terms of video security. And I'd remind everybody that when we acquired Avigilon, that was essentially a nascent business. So that's been the function of our sales team's ability to take a new portfolio in the government. That's the first thing. In the enterprise, our business in enterprise, particularly in video security and access control is a little different than most. It's really centered around safety and security. The primary verticals that we touch there, as we've said, are education, health care, and then business around energy production and utilities and transportation, which have all grown as well. Those are really the core verticals for that business in the enterprise space.
Unidentified Analyst, Analyst
Thank you.
Operator, Operator
The next question comes from the line of Joe Cardoso with JPMorgan. Your line is now open.
Joe Cardoso, Analyst
Good afternoon, and thank you for the questions. I would like to follow up on the comment regarding APX NEXT and the momentum you're observing there, alongside the mid-single-digit growth in LMR. We are approaching some quarters with challenging comparisons. I was wondering if you believe that the mid-single-digit growth can be sustained despite these difficult comparisons in the upcoming quarters. I also have a follow-up question. Thank you.
Jason Winkler, Executive Vice President and CFO
So our portfolio is refreshing itself around APX NEXT, as Jack mentioned, $600 million of orders since introduction in 2020. We have continued to invest in other parts of the portfolio too, like Tetra and others. So we're still early stages of device refresh. And while having had a number of good quarters and continued demand, we would expect to be able to grow that business as well as, as I mentioned earlier, the pricing strategy that supports the investments we make. We spend a sizable amount of R&D to innovate and advance the portfolio should lead to continued growth in the next year.
Joe Cardoso, Analyst
Got it. That's great. And then my follow-up actually on free cash flow. You had another solid quarter here. It appears that tailwinds are materializing, for example, being the elevated levels of inventories that we've seen over the past couple of quarters, that's coming down a bit. I guess if we take a step back and we are starting to cycle past some of the choppy free cash flow generation we've seen over the past couple of quarters, just given kind of that dynamic macro environment and returning to a consistent level we've seen in the past relative to conversions. Any thoughts on whether the level of shareholder return can be maintained or accelerated going forward, just given working capital, improving the momentum behind the business, etc.? Thanks, guys.
Jason Winkler, Executive Vice President and CFO
Sure. I'll start with this year. I mentioned that we're solidly on track to deliver on the $1.9 billion in cash flow. That was an aggressive plan that we set at the beginning of the year. We mentioned in February that included $300 million of higher cash taxes over 2022. With cash flow at this point through three quarters being up, we are well positioned to deliver on that $1.9 billion. You're also right in that our inventory levels continue to come down. They're down $200 million from this point last year. They're down $85 million sequentially, and they're still at $950 million. As we look into next year and the opportunities, we envision continued opportunity to balance investments in inventory with record backlog and working capital optimization into the future.
Joe Cardoso, Analyst
Got it. Thanks for all the color.
Greg Brown, Chairman and CEO
Thanks, Joe.
Operator, Operator
This concludes our question-and-answer session. I will now hand it over to Mr. Greg Brown, Chairman and Chief Executive Officer, for any additional comments or closing remarks.
Greg Brown, Chairman and CEO
Thank you all for joining us today. I also want to express my gratitude to everyone at Motorola Solutions for an exceptional quarter and outstanding execution. Despite the many moving parts, I am really proud of the team we have built and the strong collaboration and focus we maintain on balancing our results while investing for the long term. In closing, I want to emphasize that in a time of growing threats, our investments in safety and security are crucial. Essentially, our mission is to create safer environments, whether that’s in communities, schools, hospitals, or stadiums. We achieve this by integrating public safety with private entities to provide effective solutions that protect people, property, and places. I am proud of our team, and I believe the outlook for our business is promising with record orders and backlog and a strong pipeline ahead of us. There’s a lot to accomplish, but there are also many opportunities. I look forward to our next discussion in February. Thank you.
Operator, Operator
Ladies and gentlemen, this does conclude today's teleconference. A replay of the call will be available over the Internet within three 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.