Watch Government Spending Cuts In Motorola’s Earnings

by Trefis Team
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Motorola Solutions (NYSE:MSI) is set to announce its Q3 earnings on October 24. During the earnings call, we will look for any signs of a slowdown in infrastructure spending which might have had an impact on its top-line growth. We will also be closely following the management’s updates on the full year outlook for the company, which could be impacted by a stronger dollar and a difficult business environment globally. The macroeconomic concerns surrounding the European debt crisis and burgeoning debt levels of governments worldwide have increased the risks of a decline in government as well as enterprise infrastructure spending.

However, we believe the company’s fundamentals remain strong due to its recent acquisitions as well as the industry-wide shift to LTE, which we believe will help preserve its strong market position and bring in a steady stream of revenues going forward. We have a $51 price estimate for Motorola Solutions’ stock, in-line with the current market price.

See our complete analysis for Motorola Solutions stock here

Government business holding up

While Q1 and Q2 were very strong for Motorola’s government business this year with y-o-y growth rates in excess of 10% for both quarters, management has guided for the rest of the year to be somewhat subdued. During last quarter’s earnings call, Motorola said that it expects full year growth in upper single digit for government revenues, implying that the back half of the year might be unusually slow. The cautious guidance points to the highly uncertain macro environment with revenues under the constant threat of government budgetary cutbacks if the Euro crisis worsens.

Government spending cuts could have a big impact on Motorola, considering that these revenues account for about two-thirds of its overall sales. However, Motorola’s government customers buy equipment such as two-way radios and other devices that are used in mission-critical public safety situations. The critical nature of public safety causes it to figure high among government priorities; hence its revenues tied to public safety spending have seen little impact so far. In fact, 3% of the 14% growth in government revenues was due to an increase in public safety spending in the U.S. on infrastructure upgrades necessitated by a switch to a more efficient spectrum (narrow-banding) mandated by the FCC. Even in Europe, Motorola’s government business has held up pretty well.

On the other hand, enterprises have proved to be more susceptible to spending cuts across business verticals. Motorola said that revenues from the enterprise sector last quarter were impacted by tough macro-economic conditions in Europe. This is one of the primary reasons why Motorola expects enterprise revenues for the year to be relatively flat.

Key growth avenues in the future

Motorola has been focusing on increasing its market share within the enterprise segment through its acquisitions of Rhomobile last year and the more recently announced Psion. The company has already leveraged its Rhomobile acquisition to launch an application framework targeted at enterprise developers and to promote sales of its rugged handheld devices. The Psion purchase will help it expand globally and strengthen its mobile computing portfolio. We see Motorola’s enterprise focus helping it tide over near-term macroeconomic concerns while preparing itself for the high future demand for enterprise mobile computing devices. (see Motorola Closes Psion Acquisition And Bolsters Enterprise Prospects)

As for government revenues, we see the adoption of LTE for public safety along with the broader trend of analog-to-digital shift, not only in the U.S. but also internationally, as the key drivers for Motorola’s growth. U.S. public safety spending in the coming years will be bolstered by a job creation bill passed in February that reallocated the D Block spectrum for public safety use and provided a $7 billion funding to build a nationwide network over the next 8 years. Motorola is likely to benefit hugely from the higher stickiness of its government customers as well as its strong market position to grab a big chunk of that pie going forward. (see Motorola Solutions to Benefit from Public Safety Broadband Spending)

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