Motorola Solutions (NYSE:MSI) is scheduled to announce its Q3 2013 earnings on October 23rd. The company has cut its 2013 revenue guidance twice already this year, with macroeconomic concerns taking a toll on corporate budgets and leading to a weaker-than-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% and government revenues remained flat y-o-y. The weakness is likely to continue into Q3 as well with the company guiding for revenues to be flat to down 3% as compared to the third quarter of 2012.
The communications vendor, however, expects the enterprise sector to see a near-term recovery, when some of the deals that were deferred in light of the macroeconomic uncertainties start to materialize. Part of the enterprise weakness could 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.  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. However, given the near-term enterprise uncertainty, we maintain a $55 price estimate for Motorola, about 8% behind the current market price.
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Narrowbanding cliff is seeing government growth slow
Motorola had a solid last year as the government business posted y-o-y revenue growth rates in excess of 10% each quarter. Despite macroeconomic concerns surrounding the Euro debt crisis which led the company to start the year cautiously, government spending held up pretty well to help it exceed its revenue guidance by almost 200 basis points. 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 the increase in U.S. public safety spending. However, the deadline for the transition passed on January 1, 2013, and while the same has been waived for a few projects, Motorola hasn’t been able to emulate the same kind of growth 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. However, the downside here is limited by the fact that public safety is usually at the bottom of the priority list of areas that governments usually look to reign their spending in. As a result, we see little impact to Motorola’s government revenues from sequestration, or the spending cuts that the federal government started implementing recently.
Enterprise segment having difficulty
On the other hand, enterprises have proved to be more susceptible to spending cuts across business verticals. 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. The effect is 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 coming months, 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 its enterprise market share through important acquisitions such as Rhomobile in 2011, and Psion in 2012. Motorola 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 the job creation bill passed in February last year 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 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).Notes:
- Motorola Solutions cuts sales forecast second time in 3 months, Reuters, July 24th, 2013 [↩]