Motorola Cuts Guidance Yet Again As Enterprise Recovery Falters

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MSI: Motorola Solutions logo
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Motorola Solutions

Motorola Solutions (NYSE:MSI) reported weak Q1 2013 results Wednesday, and cut its revenue forecast for the full year for the second time in three months as macroeconomic concerns delayed an expected recovery in enterprise spending. Revenues in the second quarter were down about 2% over the same period last year as enterprise sales declined by almost 5% offset to an extent by government revenues which remained flat y-o-y. Adjusted for the recently completed Psion purchase and the expected decline in iDEN revenues, enterprise revenues were down by as much as 9% y-o-y. The weakness is likely to continue for the rest of the year with the company reducing its revenue growth forecast for 2013 from an already reduced 3-4% to 0-1%. Lower sales volumes also compressed overall operating margins by about 40 basis points over the same period last year to less than 16% primarily due to weak enterprise spending.

The communications vendor however expects the enterprise sector to start recovering from Q4 when some of the deals that were deferred in light of macroeconomic uncertainty would materialize. Part of the enterprise weakness could also be due to the company’s delay in launching Windows 8-based enterprise handhelds, which has been pushed to 2014, according to a Reuters report. [1] As Motorola releases these new products, some of the deferred enterprise spending should return towards the end of the year and in 2014. Going forward, the company’s outlook looks 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.

Our revised $55 price estimate for Motorola Solutions is in line with the current market price.

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See our complete analysis for Motorola Solutions here

Narrowbanding cliff is seeing government growth slow…

Motorola’s 2012 fiscal year was a solid one as government business posted y-o-y revenue growth rates in excess of 10% each quarter. While the company started 2012 cautiously, setting guidance of only 5% growth for the full year due to macroeconomic uncertainty surrounding the Euro debt crisis, government spending held up pretty well. However, a portion of the outperformance last year was due to the narrowbanding mandate issued by the Federal Communications Commission (FCC), which had necessitated a switch to a more efficient spectrum band for public safety operations. About 3% of the full year growth in government revenues was due to this increase in U.S. public safety spending. However, with the deadline for this transition passing on January 1, 2013, Motorola has found it tough to emulate the same kind of growth in its government business this year.

As a result, Motorola expects government revenues to grow in the low- to mid- single digits range, unlike the double digit growth rates posted last year. The downside in this case is also limited by the fact that public safety is usually down the priority list of areas that governments will look to cut their spending in. As a result, we see little impact to government revenues from sequestration, or the spending cuts that the federal government started implementing recently.

…Accentuating Enterprise’s weak state

Since government sales account for about two-thirds of its overall revenues, Motorola was shielded from the effects of a tough macro-environment in 2012. On the other hand, enterprises have proved to be more susceptible to spending cuts across business verticals. The effect of the enterprise decline is only being felt more acutely this year since government revenues are not improving by as much compared to an exceptionally good last year. This could change soon, however, as macroeconomic concerns subside and business spending on infrastructure returns. Motorola expects recovery in the enterprise division to return in the second half, as new products are launched and customers finally decide on which OS (Android or Windows 8) to transition their next-generation systems to.

Despite the tough environment, the company is focusing on maintaining market share within the enterprise segment through important acquisitions such as Rhomobile in 2011, 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. The company would however have to better execute on its product plans to avoid delays such as the one being seen on the Windows 8 front.

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 the job creation bill passed in February last year that reallocated the D Block spectrum for public safety use and provided funding of $7 billion to build out a nationwide network over the next eight years. We expect Motorola to benefit 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 market going forward. (see Motorola Solutions to Benefit from Public Safety Broadband Spending)

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Notes:
  1. Motorola Solutions cuts sales forecast second time in 3 months, Reuters, July 24th, 2013 []