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Motorola Solutions Inc  (NYSE:MSI)
Q4 2018 Earnings Conference Call
Feb. 07, 2019, 5:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Motorola Solutions Q4 2018 Earnings Call. (Operator Instructions)

It is now my pleasure to turn today's program over to Mr. Chris Kutsor, Vice President of Investor Relations. Please go ahead, sir.

Chris Kutsor -- Vice President, Investor Relations

Thank you, operator, and good afternoon, everybody. Welcome to our 2018 fourth quarter earnings call. With me today are Greg Brown, Chairman and CEO; Gino Bonanotte, Executive Vice President and CFO; Jack Molloy, Executive Vice President, Products and Sales; and Kelly Mark, Executive Vice President, Services and Software. Greg and Gino will review our results along with commentary and Jack and Kelly will join for Q&A. We've posted an earnings presentation and news release at www.motorolasolutions.com/investor. These materials include GAAP and non-GAAP reconciliations for your reference. We reference non-GAAP financial results including those in 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, in the comments made during this conference call, in the Risk Factors section of our 2017 annual report on Form 10-K and in our other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statement.

With that, I'll it over to Greg.

Gregory Q. Brown -- Chairman and Chief Executive Officer

Thanks, Chris. Good afternoon, and thanks for joining us. I'll share a few thoughts about the overall business before Gino takes us through the results and the outlook. First, Q4 was another excellent quarter. We posted records for revenue, earnings per share, operating cash flow and backlog. Revenue grew 15%, earnings per share grew 25% and we generated operating cash flow of over $800 million. Second, our full-year results were outstanding as well and illustrate the earnings power of our business, driven by demand across our entire portfolio and continued strong execution.

For the full year, we grew revenue 15% earnings per share 31% and generated close to $1.6 billion of operating cash flow, excluding a voluntary pension contribution and grew our backlog by almost $1 billion. And finally, demand remained strong across our platforms and mission-critical communications, video, services and software, and we continue to invest for long-term growth. So, I'll now turn the call over to Gino to provide additional details on Q4 results and 2019 outlook before returning for some closing thoughts.

Gino A. Bonanotte -- Executive Vice President and Chief Financial Officer

Thank you, Greg. Q4 results include revenue of $2.3 billion up $297 million or 15% from the year-ago quarter, including $159 million of revenue from acquisitions and $25 million of revenue related to the adoption of accounting standard 606. Organic revenue, which excludes acquisitions and the accounting change, was up 6%. GAAP operating earnings were $516 million, up $13 million, and operating margins were 22.9% of sales compared to 25.7% in the year-ago quarter. The lower operating margin is primarily due to costs related to the closure of certain supply chain operations in Europe and higher OpEx related to acquisitions.

Non-GAAP operating earnings were $650 million, up 15% or $84 million and operating margins were 28.8% of sales compared to 28.9% of sales in the year-ago quarter. Higher sales and gross margin were offset by higher OpEx related to acquisitions. GAAP earnings per share was $2.44 compared to a loss of $3.56 in the year-ago quarter. The prior-year loss was driven by the effects of 2017 tax reform. Non-GAAP earnings per share was $2.63, up 25% from $2.10 in the year-ago quarter.

OpEx in Q4 was $484 million, up $77 million due to acquisitions and ASC 606. Other income and expense was $51 million compared to $36 million in the year-ago quarter, driven by an increase in net interest expense of $12 million. The Q4 effective tax rate was 23.5% compared to 32.8% last year, primarily due to 2017 tax reform. For the full year, revenue was $7.3 billion, up $963 million or 15% including $507 million of revenue from acquisitions and $83 million of revenue related to the adoption of ASC 606.

Organic revenue, which excludes acquisitions and the accounting change, was up 6%. 2018 GAAP operating earnings were $1.3 billion, down $29 million or 2%, primarily driven by a charge to an existing environmental reserve, the closure of certain supply chain operations in Europe and lease exit cost associated with acquisitions. Non-GAAP operating earnings were $1.7 billion, up 16%, driven by higher sales in gross margin, partially offset by higher OpEx related to acquisitions.

GAAP earnings per share was $5.62 compared to a loss of $0.95 in 2017, driven by the effects of 2017 tax reform. Non-GAAP EPS was $7.15 compared to $5.46 in 2017, an increase of 31%. For the full year, OpEx was $1.8 billion as expected including $258 million from acquisitions and ASC 606. Other income and expense was $165 million compared to $163 million in the prior year and the effective tax rate for 2018 was 21.7% compared to 31% last year, due primarily to tax reform and tax benefits related to share-based compensation.

Turning to cash flow. Q4 operating cash flow was $812 million compared to $761 million in the year-ago quarter. The increase was driven primarily by higher earnings. Free cash flow in Q4 was $743 million compared to $740 million last year. Capital expenditures were $69 million, up $48 million versus last year, primarily related to the Airwave extension. For the full year, operating cash flow was $1.1 billion including the $500 million voluntary debt-funded pension contribution in Q1 of 2018.

Free cash flow in 2018 was $878 million compared to $1.1 billion in the prior year. Excluding pension, operating cash flow was $1.575 billion and free cash flow was $1.4 billion. The higher cash flows in 2018 was driven primarily by higher earnings. Capital allocation for 2018 was $1.2 billion of acquisitions $337 million in cash dividends, $197 million of CapEx and $132 million of share repurchases at an average price of $112.42. Additionally, in Q4, we repaid the remaining $100 million of the revolving credit facility associated with the Avigilon acquisition. And we continue to expect -- to repay the $400 million term loan associated with the Avigilon acquisition in 2019.

Moving to the segment results. Q4 products and systems integration sales were $1.7 billion, up $233 million or 16%, driven by the Americas and EMEA. Revenue growth from acquisitions and ASC 606 in the quarter was $137 million. Q4 products and systems integration segment operating earnings were $483 million or 28.9% of sales, down 140 basis points from last year, driven by higher OpEx related to acquisitions. Some notable Q4 wins in the segment included a $47 million P25 order from Snohomish County, Washington; a $24 million P25 order from Ingham County, Michigan; and a $16 million P25 order from Riverside County, California.

Full year Products and Systems integration revenue was $5.1 billion, up $587 million or 13%, led by the Americas and EMEA. Revenue from acquisitions and ASC 606 was $396 million. Products and systems integration operating earnings were $1.1 billion or 21.7% of sales compared to 22.7% of sales in the prior year, driven by OpEx from acquisitions. For 2019, we expect operating margins to be up approximately 100 basis points and gross margins to be between 48% and 49% which is comparable of 2018.

Moving to the Services and Software segment. Q4 Services and Software revenue was $584 million, up $64 million or 12% from last year, driven by growth in every region and inclusive of $47 million of growth from acquisitions and ASC 606. Services and Software operating income in the quarter was $167 million or 28.6% of sales, up 340 basis points from last year, driven by organic gross margin expansion, partially offset by higher OpEx from acquisitions.

Some notable Q4 highlights in Services and Software include a $71 million services contract with Maricopa County, Arizona; a $29 million services contract from Cobb County, Georgia, a $26 million contract to provide Next-Gen 911 core services for a customer in North America, and a $16 million services contract in Australia. Additionally, we signed the Airwave network extension through the end of 2022 for $1.1 billion with additional services from local agencies to be added during 2019. And subsequent to quarter end, we acquired VaaS International Holdings, a leading global provider of data and image analytics for vehicle location.

The equity used in the acquisition has been offset with share repurchases of $65 million in Q4 and $125 million in January of 2019. For the full year, services and software revenue was $2.2 billion, up $376 million or 20% with growth in all regions. Revenue from acquisitions and ASC 606 was $194 million. Services and software operating earnings in 2018 were $631 million or 28.1% of sales compared to 25.7% in the prior year, driven by organic gross margin expansion and acquisitions.

Looking at 2019, we continue to expect full year operating margins to be approximately 30% with gross margins of approximately 50%. Looking at regional results. Americas Q4 revenue was $1.6 billion, up 16% and growth in both the segments. For the full year, the Americas revenue was $5.1 billion, up 17% with growth in both segments, driven by acquisitions and organic growth. EMEA Q4 revenue was $491 million, up 24% and was also driven by growth in both segments. For the full year, EMEA revenue was $1.6 billion, up 18% with growth in both segments, driven by acquisitions and organic growth.

In Asia Pac, Q4 revenue was $202 million down 5% and a decline in Products and Systems integration, partially offset by growth in Services and Software. For the full year, AP revenue was flat at $680 million with growth in Services and Software, offset by a decline in Products and Systems integration.

Moving to backlog. Ending backlog was $10.6 billion, up $988 million or 10% compared to last year inclusive of a $205 million of backlog revaluation due to unfavorable changes in currency rates. Services and Software backlog was up $1.1 billion or 18% compared to last year, driven by an increase of $613 million in the Americas and $537 million in the EMEA related to Airwave. Sequentially, Services and Software backlog was up $1.2 billion, also driven by growth in the Americas and the Airwave extension.

Products and Systems Integration backlog was down $116 million or 3% compared to last year, due primarily to two large system deployments in 2018 in the Middle East and Africa. The Americas backlog was up $14 million year-over-year. Sequentially, backlog was down $42 million, driven by the same Middle East and Africa deployment. Segment backlog in the Americas was up $104 million sequentially.

Turning to our Q1 outlook. We expect Q1 sales to be up approximately 11% with non-GAAP EPS between $1.11 and $1.16. This Q1 outlook assumes approximately $35 million of FX headwinds at current rates, approximately $140 million of revenue from acquisitions and effective tax rate of approximately 25% and approximately $174 million fully diluted shares.

For the full year 2019, we expect revenue growth of 6% to 7% with non-GAAP EPS between $7.55 and $7.70. And full year operating cash flow is expected to be approximately $1.7 billion. This full year outlook assumes approximately $65 million of FX headwinds at current rates, approximately $230 million of revenue from acquisitions and effective tax rate of approximately 25% and a weighted average diluted share count of approximately 175 million shares for the full year.

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

Gregory Q. Brown -- Chairman and Chief Executive Officer

Thanks, Gino. Let me close with a few thoughts. First, 2018 was a record year for the Company built on a strong foundation. We saw continued LMR growth, led by North America and EMEA, and Airwave has been extended through the end of 2022, and our Services and Software segment grew revenue and operating earnings double digits and we acquired key assets in video, software and analytics. Second, I think we are very well-positioned for another strong year in 2019 with our industry-leading portfolio of LMR Solutions, a comprehensive command center of software suite and new video and analytics capabilities, all of which are supported by a growing services business. We serve customers in growth segments of large addressable markets. We have a strong team focused on consistent execution, a healthy balance sheet and durable growing cash flows that will drive continued shareholder returns over the long term.

And finally, a year ago at our financial Analyst Meeting, I provided a view of driving the Company toward what I call 8 and 8 in 2020, meaning approximately $8 billion in revenue and $8 plus in EPS. Today, I'd like to update this and tell you we're now driving the Company toward 9 and 10 in 2021, approximately $9 billion in revenue and approximately $10 of earnings per share by the end of 2021. This current view (technical difficulty) allocation framework.

And with that, I'll turn the call over to Chris.

Chris Kutsor -- Vice President, Investor Relations

Thank you, Greg. Before we begin taking questions, I'd like to remind everybody to please limit themselves to one question and one follow-up, so we can accommodate the others. Operator, would you please remind everyone on the line how to ask a question.

Questions and Answers:

Operator

(Operator Instructions) And we will take our first question of the day from Mr. Tim Long with BMO Capital Markets. Please go ahead.

Timothy Long -- BMO Capital Markets -- Analyst

Thank you. Yeah. So just one question. I was hoping you could update obviously there's been a lot of movement and some acquisition in the command center in the software space and you had talked about $400 million run rate there. Could you just talk a little bit about kind of the trajectory particularly as you're adding more pieces on there? And then just on the follow-up, Greg, more specifically few of those more positive numbers for 2021. Could you just talk a little bit about obviously backlog's good all over the place. So maybe just give us some color on what's driving the much higher confidence? Which piece of the business you're seeing the most traction leading to that -- those increased revenues and EPS numbers? Thanks.

Gregory Q. Brown -- Chairman and Chief Executive Officer

Yeah, Tim. So, look, as I said, I think we're really pleased with 2018 pretty much across the board both in the products and SI segment as well as Services and Software. I think why we feel good about going into 2019 is a record backlog position, strong entering Q1. General comparability of backlog 2019 against 2018. But a lot of strong demand drivers. We still see continued consistent demand. We talked about organic constant currency growth. A quarter ago, we said we thought it would be 4% first half of 2018, 4% second half of 2018 and 4% for the full year. We actually came in a little bit higher than that on an organic growth constant currency growth rate for revenue and we expect comparable organic growth revenue of constant currency growth in 2019 as well. I think the regions that will lead that are the Americas and EMEA, as well as converting some of the backlog and of course the Avigilon asset continues to perform at or above our expectations, and as Jack mentioned last quarter, huge addressable market, about $12 billion without China. And we size that market growth growing at 5%. We're targeting growing the Avigilon asset 3x that. I think Jack has done a great job with his team of managing the asset, increasing sales coverage, investing in that business. So when I look at LMR, when I look at the command center software suite and the progress Andrew Sinclair and Kelly are making and then overall growth of Services and Software which we continue to believe is high single-digits, PS&I (ph) low single-digits. But in '19, we're going to grow revenue of the firm. We're going to expand gross margin of the firm. We're going to increase cash flow despite a higher effective cash tax rate. We're going to grow our earnings per share. We're going to grow operating margins. So, I think the team has done a really good job and I think we're well-positioned as we sit here in February '19.

Gino A. Bonanotte -- Executive Vice President and Chief Financial Officer

And Kim, this is Gino. The first part of the question was VaaS?

Timothy Long -- BMO Capital Markets -- Analyst

No, just kind of updating the overall software stand-alone or command center, however you want to look at it revenue rate comparable to the $400 million you were talking about?

Gino A. Bonanotte -- Executive Vice President and Chief Financial Officer

Yes, I think as you unpack this segment, we expect high single digits for the segment of Services and Software. That can port (ph) the double-digit growth of software and mid-Single-digit growth of managed and support. On an annualized basis, in '18, the business performed that way, actually I would say above expectations given acquisitions. But Tim as you can port (ph) that $400 million software and lay out the growth rate, I think double-digit growth rate on that piece which feeds a high single-digit combined for this segment.

Timothy Long -- BMO Capital Markets -- Analyst

Okay. Great. Thank you.

Gino A. Bonanotte -- Executive Vice President and Chief Financial Officer

Yup. Thank you.

Operator

And we'll go next to George Notter with Jefferies.

George C. Notter -- Jefferies LLC -- Analyst

Hi, gys. Thanks very much, and congratulations on the good result. I guess I wanted to start by asking about the government shutdown. Obviously, it's topical these days. I'm assuming you had a minimal impact in your December quarter and then maybe a little bit more impact you expect in Q1. But can you just talk about what mix of business comes from U.S. federal? And then what sort of impact are you seeing or do you expect to see in Q4 and then now going into Q1 and beyond?

Gregory Q. Brown -- Chairman and Chief Executive Officer

Hey, George. So, first of all, we have -- any impact in Q1 has been implied obviously in our guidance. And frankly, we expect minimal impact. The second thing -- I think the second part of the question was related to the size of the federal business. It's approximately $600 million. But it's important to note that it comes from multitude of different agencies. I think many companies in this space are defense and security. We do business with law enforcement administration, FBI, as well as providing data security as well. The last thing I would note is that of our manage and support business for the federal government, actually those contracts all come in largely in our fiscal Q3, which is aligned with the federal government's close. So those things are already logged on the books. So to tie it all together, nimble impact and we will have to see. No one can predict the future given the length. But we expect minimal to no impact to Q1 and we'll see how things play out in the rest of the year.

George C. Notter -- Jefferies LLC -- Analyst

Okay. And then just as a quick follow-up. I was just curious about Avigilon. So obviously you're investing for growth in that business. You can see it in the margin performance. But when do you expect to start to see, you know, the revenue ramp there associated with those investments? And maybe just give us an update on where you're investing and how that's going? Thanks.

John P. Molloy -- Executive Vice President

So, George, really our investment has been two-fold. First of all, we fortified and expanded our enterprise sales force. So, that's the first thing. The second thing we hired a team specifically to get after our revenue synergies in state and local and in federal government. Those teams were all hired by the end of the year. So, the net of it, I think as we think about it, the second half of the year is really when we think we'll start to see the impact of those things, because we have a lot of new hires in the enterprise space. And then as you've heard me relate and I think you've heard Greg and Gino discuss before the government sales cycle in and of itself typically takes 12 months. And so we started those things in the back half of last year and I think we'll start to see some positive impacts in the second half of '19.

Operator

(Operator Instructions) We'll go next to Vijay Bhagavath with Deutsche Bank.

Vijay Bhagavath -- Deutsche Bank Securities, Inc. -- Analyst

My question is, Gino, it's great to see your -- the confidence in the full year outlook, 6% to 7% versus expectations for around 5%. So help us understand, Greg, what are the drivers as detailed as you can be on what's driving that confidence in that 6% to 7% number? Thanks.

Gregory Q. Brown -- Chairman and Chief Executive Officer

Well, you're right. We expect 6% to 7% for the full year. I think in part some of that top line comes as I mentioned from the backlog position and the record-backlog position that we have exiting '18 coming into '19. Additionally, there is top-line revenues that are coming from acquisitions both Avigilon at least in Q1 in the subperiod, as well as PlantCML and VaaS. I think that -- I think there's a really good focus, Vijay, on both gross margin expansion to come with that top-line growth as well as continued operating expense management.

While OpEx is increasing for the firm, that's largely driven by -- not entirely driven by acquisitions. But on the base business, we continue to drive consistent efficiency. So as I mentioned, I think demand in the state and local business, regionally what's driving it, Vijay, is the Americas and EMEA. If I desegregated from a product view, land mobile radio demand remains pretty solid for North America both in public safety as well as commercial customers, and command center software continues to grow at double digits.

I think people -- we have low penetration, single-digit penetration against the $5 billion addressable market, more and more people want to buy the suite of product that we're developing. So, demand is solid there. And again Avigilon, as Jack mentioned and not only is it a good segment. Look, video is in high demand. Everybody knows that both from a city or public safety standpoint as well as commercial. But it's not just video. It's video with machine learning. The appropriate analytics. The intelligence in the edge device, integrating it back into VMS (ph) and integrating it to our portfolio and the command center in what we do. So the good news is, yes, we are in video. But I think of our solution is particularly strong around its design of AI at the edge device and the way that we're incorporating that back from an integration standpoint for our customers into the command center software. So, that's what I say.

Vijay Bhagavath -- Deutsche Bank Securities, Inc. -- Analyst

Thank you.

Gregory Q. Brown -- Chairman and Chief Executive Officer

Thanks, Vijay.

Operator

And we'll take our next question from Walter Piecyk with BTIG. Please go ahead.

Walter Piecyk -- BTIG -- Analyst

Thanks. Hey, Greg. There's been a ton of noise since the last call about Chinese manufacturer, I think, even today. There was another one ripped out of Nokia network. I'm just curious as you're kind of ramping the Avigilon business and talking to customers, is that something that's resonating with enterprise customers as well as public safety? And how do you think that plays out? Because I think there's been some press about not only the manufactures of some of these cameras being Chinese, but even the components of other cameras that you wouldn't necessarily think are Chinese maybe creating some concern for customers that could be an opportunity for you guys?

Gregory Q. Brown -- Chairman and Chief Executive Officer

Yeah. No, I think you're right, Walter. I think it's, as you know, right to backup. There's obviously a growing concern about, what I call, Chinese electronic content through the lens of cellular Huawei ZTE through the lens of land mobile radio, Hytera, and certainly in video, concerns around Hikvision and Dahua. And I mentioned them by name, because they're mentioned by name in the National Defense Authorization Act. They're mentioned by name, because our government has said that there is concerns around national security as it relates to those vendors. The government is saying that, we're not saying that. So, we're following it accordingly. Clearly, that's beneficial as Molloy and team going to the U.S. federal business. The NDA takes effect in August of this year, although since it's out there with long sales cycles, I think it is already been contaminated with purchases now, even though it hasn't gone into effect until August 13th.

Your other question is right. It's not just government agencies. It's critical infrastructure. So whether it's power of rail or airports or transit or oil and gas, I think there is an effect where some customers are contemplating, because critical infrastructure looks an awful lot like public safety and it gives some of our customers cause for pause. And your last point is also correct that it's not just Chinese vendors, but there are some critical Chinese components in other people's products that this ban applies to. So, all of that said, I think we continue to drive to be the prefer western alternative and the leader which we are in mission-critical communications command center software and video and all of the characteristics that you described both governmentally and in critical infrastructure, well, I think are favorable.

Walter Piecyk -- BTIG -- Analyst

And then just my follow-on question since (inaudible) do get to enterprise, again I think earlier you had mentioned that Avigilon strengthened your enterprise sales capabilities. Lot of the acquisitions you've done historically have been adding more things to sell into public safety and helping those good relationships with the customers. When we look at 2019 and 2020, is there going to be an opportunity to add things that also maybe the enterprise space would like. I'm thinking like industrial IoT-type applications or thinking that might not necessarily be the strong public safety, but appeal maybe to the enterprise base given you've got the sales force there now.

John P. Molloy -- Executive Vice President

Yeah, I think that's a possibility. Well, I mean if you take our VaaS acquisition and License Plate Recognition, there is a part of that solution that is public safety centric. But there's also a part of that solution that's deployed around commercial enterprise. So, yes, I think we will look at acquisitions. We're always evaluating acquisitions that makes sense strategically and financially, that would supplement the strength and clearly public safety. But it may make sense to your point in the enterprise as well, whether it be IoT or critical infrastructure, we'll always keep an eye on that for those assets.

Walter Piecyk -- BTIG -- Analyst

And in the interim, you're just going to buy a ton of stock back. I mean you just mentioned 125 million so far that obviously you already hit our Q1 run rate. So in the absence of acquisition, just a lot of share repurchase, right?

John P. Molloy -- Executive Vice President

Well, I think that again we've always talked about the capital allocation model which, on a normalized basis, we continue to follow. We used the majority of our capital last year to acquire companies. As we're into 2019, we will pay back the $400 million or we intend to pay back the $400 million of short-term debt associated with the Avigilon acquisition. When you do that and over the course of the year given more available capital, again today it contemplates buying maybe approximately 500 million of shares plus or minus which again is fungible between share repurchase and/ or acquisition, but you're right, we've gotten off to a solid start in Q1.

Walter Piecyk -- BTIG -- Analyst

Great. Thank you.

Operator

And we'll go next to Adam Tindle with Raymond James. Please go ahead.

Adam Tindle -- Raymond James & Associates -- Analyst

Okay. Thanks. Greg, I had a question before the call, prepared to ask you about catalyst beyond 8 and 8. But I guess you pre-empted me on that. So wanted to (multiple speakers).

Gregory Q. Brown -- Chairman and Chief Executive Officer

I anticipated your question.

Adam Tindle -- Raymond James & Associates -- Analyst

Yes, you did. So $9 billion and $10 billion, just wanted to kind of break it apart just starting with the $9 billion in revenue. You've seen nice revenue growth for a while. I think that applies like a high single-digit revenue growth CAGR to 2021. We're likely going to get questions on concerns that we've been enjoying an upgrade cycle, narrow banding, all that sort of stuff and lapping that. Understand the secular trends in Services and Software. But maybe just talk about what gives you confidence from the Products and SI side to enable the sort of growth CAGR that you're applying here?

Gregory Q. Brown -- Chairman and Chief Executive Officer

So, I think that I'd say three things about the $9 billion and $10 billion. Remember it's not prescriptive guidance, it's directional. It's a current view and its contemplated within the capital allocation framework. In other words, it could very well be a combination of organic growth and acquisitions. So, it's not meant to be necessarily unpacking some detailed three-year view. But as we've looked at it from a management team and incorporated both what's in backlog and the drivers of the business across the segments for Services and Software as well as Products and SI. Again, segment guidance thinking low single-digits P and SI, Software and Services high single-digits, we think those respective growths rates are generally sustainable which informs our view of that three-year target. So that's kind of the way to think about it and contextualize it.

Adam Tindle -- Raymond James & Associates -- Analyst

Okay. That's helpful. I think it also implies a strong double-digit profit dollar growth CAGR. Maybe just touch on as you thought about that plan, which segment do you see the most opportunity to expand margins to enable it?

Gregory Q. Brown -- Chairman and Chief Executive Officer

Well, I mean in '19, we're going to expand the operating margins for both segments. For Kelly Mark's group on Services and Software, we talked about it a year ago and here we are. And so we're guiding to it specifically, about gross margins of about 50% and operating margins of about 30%. On the PS&I segment, comparable gross margins of 48% to 49%, but operating margin growth of 100 basis points on the bottom line. Over time, I think that Services and Software given its profile and given its over time expansion in gross margins to be more software and multiyear services like, I think we have an opportunity to grow those margins over time which I think would clearly be beneficial to us.

Adam Tindle -- Raymond James & Associates -- Analyst

Thanks. And congrats on 2018.

Gregory Q. Brown -- Chairman and Chief Executive Officer

Yeah, thank you.

Operator

And we'll go next to Sami Badri with Credit Suisse. Please go ahead.

Sami Badri -- Credit Suisse -- Analyst

Hi. Thank you. My question only has to do with just contribution from VaaS and Avigilon. Did they contribute anything to your reported backlog in the quarter or very little for 2018?

Gino A. Bonanotte -- Executive Vice President and Chief Financial Officer

Well, Avigilon very little, nothing for VaaS. It was subsequent to quarter end.

Sami Badri -- Credit Suisse -- Analyst

Got it. And then for Avigilon and VaaS, as you think about these two businesses being attributed to business and then offered across I guess you'd say the rest of the channel and the sales force that you have currently. Would you describe the integration at least for Avigilon as somewhat completed or still in the cycle and then for VaaS, could you give us an idea on when that would be considered fully integrated across every single salesperson, every entity, et cetera?

Gregory Q. Brown -- Chairman and Chief Executive Officer

I would say Avigilon's integration is largely completed. And VaaS again dimensionalized of about $100 million of annual revenue, EPS neutral for '19. It's a fairly small tuck-ins, so I would expect us to have some run rate and rhythm of performance in a quarter or two.

Sami Badri -- Credit Suisse -- Analyst

Got it. Thank you.

Operator

And we'll go next to Jim Suva with Citi. Please go ahead.

Jim Suva -- Citi -- Analyst

Thank you very much. I know you earlier talked about the federal government closure. The question is, is there any ripple effect positive or negative to the state and local governments whether the election cycles or the federal government shutdowns and coming back? Or is the contract just so long-term nature, but not impacted?

John P. Molloy -- Executive Vice President

Yeah, so as it applies to state and local, around nine years ago, state and local government had really kind of moved away from federal grants. There's been kind of a suppressive effect on federal funding to the locals for public safety technology. So they stand alone. They budget their own dollars in a large part. And so the federal shutdown has no impact at all. State and local has fully operational RFP activity cutting the purchase orders, et cetera, is normal course of activity right now.

Jim Suva -- Citi -- Analyst

Again, my follow-up is any updates on the Airwave terms extensions? Is it reflected in your backlog? How should we think about that if any changes?

Gregory Q. Brown -- Chairman and Chief Executive Officer

Thrilled about the Airwave extension. I tip my hat to Kelly Mark and Vincent Kennedy and his team old team in securing that extension again through the end of 2022. It's about $1.1 billion that went into backlog and we expect another $300 million to $350 million of additional contracts, local entities that aggregate up, that will go into backlog that those contracts get signed between now and the end of the year. So that the $1.45 billion which was referenced by the customer is fully contracted for entering into the extension period. It is worth noting to your point that the terms and conditions are substantially similar to the original contract term for Airwave which I think is obviously good. And a lot of hard work by a lot of people. So it's good news.

Gino A. Bonanotte -- Executive Vice President and Chief Financial Officer

And Jim, just to be clear on the $1.1 billion into backlog. So as we think about year-over-year backlog increase in Services and Software. $1.1 billion was the extension of Airwave extension. But in the backlog -- the year-ending backlog you have to offset the revenue that we realized in 2018, as well as a portion of the FX that we noted in our earlier comments impact to backlog. So when you think about the Services and Software segment, the majority of the backlog increase was driven by the Americas -- by North America. It's about $550 million or so of backlog increase associated with the Airwave, just to be clear on that.

Gregory Q. Brown -- Chairman and Chief Executive Officer

It's a great point, you know.

Jim Suva -- Citi -- Analyst

Thank you so much for the details and clarification. Greg, I appreciate it.

Operator

(Operator Instructions) We'll take our next question from Paul Silverstein with Cowen. Please go ahead.

Paul Silverstein -- Cowen -- Analyst

Thanks, guys. First off, I was hoping, Greg and Gino, I think you all have referenced Avigilon the quarter before last as having accelerated from the 15% growth rate at the time of the acquisition over last year. I was hoping you can give us an update on where that growth rate is today? I heard you say that you're expecting 15% or triple the 5% market rate. But again if you could update that? The bigger-picture question is, relative to the guidance you gave for calendar '19, where are the greatest opportunities for upside? Where are the greatest risks for the guidance you provided? And one more if I may which is, I heard your response to the last question about state and local. My specific question would be in their budgeting process sort of in the year and I recognize that public safety is somewhat unique. But do you already have visibility in most cases into those budgets. I assumed a relatively healthy given the state of the economy, but that's the question, do you already have that visibility? Thanks, guys.

Gino A. Bonanotte -- Executive Vice President and Chief Financial Officer

No, I would say on Avigilon, again credit to Jack Molloy and his team performed at or ahead of expectations for the planned period last year in 2018, healthy double-digit growth. You're right, again, articulating for '19 looking to 3x the market given the performance of -- and actions that Jack and team have taken to prepare us to go, get and satisfy demand on the commercial as well as public safety side and U.S. federal side. Longer sales cycle. Jack mentioned he sees that getting more traction in second half. So, Avigilon tracking well. On risks and upside, I would just say I think all in, I think our view is balanced. It's probably worth noting that if I were to detail regional color, we see the growth being driven largely by North America or the Americas and the EMEA. But we have a muted expectation for Asia Pac or roughly flat. So I think that incorporates our realistic view are at this point of that region. But I'd say from a risk and opportunity standpoint, all in it's a balanced view at this point in time.

Gregory Q. Brown -- Chairman and Chief Executive Officer

Well, I think your last question was around state and local budgets. And to answer your question, our team works very closely on both fronts. There's operational budgets for state and local governments and that would really encumber maintenance and support of networks. The secondary thing that's also device refreshes and those kind of things. So, we have good visibility on a consistent basis to those budgets. The second thing is our team particularly here in North America, Jim Mears' team, works very closely with customers on large-scale projects in terms of capital allocation, request that we put through. So in terms of visibility, I think our team around the room here is generally pleased. We -- the six-quarter rolling that we take -- we obviously take a keen interest to not only what's happening this quarter, but on six quarters and visibility and pipeline for state and local government continues to look good.

Paul Silverstein -- Cowen -- Analyst

Appreciate it. Thank you.

Operator

And we'll go next to Keith Housum with Northcoast Research.

Keith Housum -- Northcoast Research Partners, LLC. -- Analyst

Good afternoon, gentlemen. Just Greg, if you can provide a little bit color on the VaaS acquisition, perhaps dimensionalized, the strategy behind the acquisition and perhaps the growth rate and where you expect synergies and the benefit going forward with that acquisition?

Gregory Q. Brown -- Chairman and Chief Executive Officer

Well, I think the VaaS acquisition is all about the importance of content. And it has the largest database of License Plates in North America. It's a critical need component for public safety and we have been talking to these folks for a number of months and feel it's a natural tuck-in that matches the demand requirements of our customers. It improves our analytics capability. I think it integrates and simplifies our customers' workflows. So I just think it makes a lot of sense. As we mentioned, it's probably an additional approximately $100 million in revenue in 2019, EPS neutral for the year. Probably $0.01 negative in Q1 if you really want to desegregate and get into the detail. But I like it, because data is getting more and more important and this specific data is directly a high need one for our public safety North American customers.

Keith Housum -- Northcoast Research Partners, LLC. -- Analyst

Got it. And then did they go to market the same way as Motorola does, there would be synergies in the sales force?

Kelly S. Mark -- Executive Vice President, Services & Software

We look to line up -- this is Kelly, Keith. We look to line up their sales team working with our team closely. They also use some partners. So, there are similarities to the way we go to market and in regards to selling their solution. It will fit right into our command center software selling motions that happen with Jack's team.

Keith Housum -- Northcoast Research Partners, LLC. -- Analyst

Great. And I'd say to a follow-up question here. You guys mentioned you already beat with your gross margins throughout the year. I guess if you can just (inaudible) little bit of strategy behind you go and do that, is there efficiency you can get in the manufacturing process or is it through pricing? How do you plan on raising gross margins?

Gino A. Bonanotte -- Executive Vice President and Chief Financial Officer

In both segments, either segment, Keith?

Keith Housum -- Northcoast Research Partners, LLC. -- Analyst

Both segments, please.

John P. Molloy -- Executive Vice President

So, let's take the Services and Software segment first. A large part of the margin expansion in 2018 and a significant portion moving forward into 2019 is related to our underlying software business and improvements we've made in delivering and closing out prior projects. In the government sector -- I'm sorry, in the Products and Systems Integration segment, gross margin improvements, there is several initiatives around gross margin from SKU reductions to rationalizations and the supply chain too, as well as some targeted price actions within that segment. And I think for both segments, Andrew Sinclair on the software side and Jack's team with Kedzierski and Scott Mottonen, I think that we continue to get efficiencies around platforming of these businesses, both platforming infrastructure, platforming LMR devices and platforming command center software. And those efficiencies are reflective in the gross margin expansion for Services and Software, and some of the operating margin expansion plan for PS&I.

Keith Housum -- Northcoast Research Partners, LLC. -- Analyst

Great. Thanks, guys. Appreciate it. Good luck.

John P. Molloy -- Executive Vice President

Yeah, thank you.

Operator

And we'll go next to Paul Coster with JPMorgan. Please go ahead.

Paul Coster -- JP Morgan Securities. LLC. -- Analyst

Thank you for taking my questions. Two quick ones. I wonder if you could give us a little bit help on projecting out the segment level revenue for 2019. I assume obviously the basket's loaded into the Software and Services business. Perhaps you can sort of elaborate a little bit for us?

Gino A. Bonanotte -- Executive Vice President and Chief Financial Officer

Sure. Paul, this is Gino. Really it's consistent with what we've said about the longer-term guidance. Products and Systems Integration at low single-digit growth and Services and Software at high single-digit growth. Now that's a longer-term view, but in general that's our view of the growth of both segments.

Paul Coster -- JP Morgan Securities. LLC. -- Analyst

Got it. Thank you. And then if I may ask the other way of question slightly different way. I think in the past we have thought of it as a $400 million to $500 million of revenue per annum contract. And I wasn't quite sure with the $1.1 billion whether we should kind of cut that back a little bit or was there some kind of adjustments that we had to make, but from what Greg was saying earlier on that gets us back into $400 million to $500 million zone or perhaps obviously simply gone?

Gregory Q. Brown -- Chairman and Chief Executive Officer

No, the total number associated with the Airwave extension is $1.45 billion. $1.1 billion is contracted for already and has fed into backlog. We expect the subsequent $300 million to $350 million in local contracts executed over the balance -- over the next several months. So, the Airwave extension three years through the end of 2022, Paul, is it's a very substantially similar terms on the original deal. So, that's a favorable outcome for us.

Paul Coster -- JP Morgan Securities. LLC. -- Analyst

Yup. Got it. Thank you.

Operator

And we'll take our next question from Ben Bollin with Cleveland Research. Please go ahead.

Ben Bollin -- Cleveland Research -- Analyst

Good evening, guys. Thanks for taking my question. I wanted to dive in a little bit on the command center. How would you say you're progressing on the creation of a broader product suite? And can you talk a little bit about the sales cycle of that notion in customers? What's the duration? How does it compare to what you've seen traditionally in LMR? How does it compare to Avigilon? Thanks.

Kelly S. Mark -- Executive Vice President, Services & Software

So on the command center, the progress -- we're very pleased with the progress we're making. The focus of the strategy in the command center has been around three things. First off, it's around consolidating the platforms across the various products suits that touch every component of the workflow. The second component is around integrating the suite, so there is a clear flow of information, a common user interface, pieces of records that come in from a 911 call taker will then automatically be handed to the CAD operator and then automatically handed to the the command center and subsequently into records. And the third thing is, moving the platform to be cloud ready on the Azure platform. So, it's prepared to be sold as a service.

So, we're very pleased to what we're seeing, as we sell the command center software, I'll let Jack talk a little bit about the sales cycle. But when we sell brand new software engagements right now, roughly you can think about 25% of those are suit sales. But that's not the thing that we are really looking at. When we engage our customers, most of our customers that we engage have a piece of software in the command center already. And the elegance of this suite is it makes the subsequent pieces of software that we sell in, they're all the more attractive based on the common user interface and the interface of data that helps make their workflow operate much, much smoother and help hence provides them to be able to provide better outcomes to their customers. So Jack, I don't know if you want to talk a little bit about the sales cycle that we see as we engage.

John P. Molloy -- Executive Vice President

Sure, Kelly. So I would just piggyback on that to say that the selling motion is typical of a government CapEx project typically 12 to 24 months. The difference with command center software and Kelly just noted it is there is a level of tangibility, because it's a constant, it's 24/7 environment. We're by there dealing with the technology. Why the suite approach makes sense from our customer's standpoint, this is big, Is because when you go in and do and upgrade these networks, it's pretty intensive in terms of the work that's done. It's disruptive in a 24/7 environment. So the more that you can get to a common user experience, which is exactly what Kelly and Andrew and team are doing, we think it will make the lives of frankly our dispatchers and 911 call takers much more simple. But again tying it back similar to a large scale radio network, 12 to 24 months is a sales cycle and we're engaging now on 2019, 2020 and beyond projects.

Operator

And there are no further questions at this time. So, I'd like to return the floor back to Mr. Chris Kutsor.

Chris Kutsor -- Vice President, Investor Relations

Thank you, operator. That will conclude it for today. Thanks, everybody.

Gregory Q. Brown -- Chairman and Chief Executive Officer

Thank you.

Operator

This will conclude today's program. Thank you for your participation. You may now disconnect and have a wonderful day.

Duration: 56 minutes

Call participants:

Chris Kutsor -- Vice President, Investor Relations

Gregory Q. Brown -- Chairman and Chief Executive Officer

Gino A. Bonanotte -- Executive Vice President and Chief Financial Officer

Timothy Long -- BMO Capital Markets -- Analyst

George C. Notter -- Jefferies LLC -- Analyst

John P. Molloy -- Executive Vice President

Vijay Bhagavath -- Deutsche Bank Securities, Inc. -- Analyst

Walter Piecyk -- BTIG -- Analyst

Adam Tindle -- Raymond James & Associates -- Analyst

Sami Badri -- Credit Suisse -- Analyst

Jim Suva -- Citi -- Analyst

Paul Silverstein -- Cowen -- Analyst

Keith Housum -- Northcoast Research Partners, LLC. -- Analyst

Kelly S. Mark -- Executive Vice President, Services & Software

Paul Coster -- JP Morgan Securities. LLC. -- Analyst

Ben Bollin -- Cleveland Research -- Analyst

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