Motorola Solutions (NYSE:MSI) announced a mixed set of Q3 2012 results on October 24th. Overall revenues grew only 3% year-over-year despite a robust 12% growth in the government business as enterprise played the spoilsport with a big 13% decline. While a part of that decline was due to an anticipated drop in the iDEN business, macroeconomic concerns surrounding the European debt crisis as well as a stronger dollar also weighed on enterprise spending. Strong government revenues as well as the recent Psion acquisition however caused Motorola to revise its revenue outlook for the full year from approximately 5-6% to 6-6.5% y-o-y growth.
In line with the outlook revision, we have a revised $52.40 price estimate for Motorola’s stock, about in line with the current market price.
Government business holding up
The year has been good for Motorola’s government business so far with y-o-y growth rates in excess of 10% in each quarter. While the company had started 2012 with caution, setting a guidance of only 5% growth for the full year due to the macroeconomic uncertainty surrounding the Euro debt crisis, government spending has so far held up pretty well.
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 hardly seen any impact so far. In fact, 3% of the 12% 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.
Since government sales account for about two-thirds of its overall sales, Motorola has, to an extent, remained shielded from the effects of a tough macro-environment. On the other hand, enterprises have proved to be more susceptible to spending cuts across their business verticals. Management acknowledged that the enterprise revenues came in weaker than anticipated and they now expect the segment to see a mid-single digit decline for the full year.
Key growth avenues in the future
However, Motorola is focusing on maintaining market share within the enterprise segment during this difficult period through important acquisitions such as Rhomobile last year and the more recently completed Psion. The company has already leveraged its Rhomobile acquisition to launch an application framework targeted at enterprise developers and 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.
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 of Motorola’s value. 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 funding of $7 billion to build out 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 and large installed base of security devices to grab a big chunk of that pie going forward. (see Motorola Solutions to Benefit from Public Safety Broadband Spending)