Motorola Q3 Earnings: Sales Beat Expectations As North America Shows Signs Of Revival

Motorola Solutions (NYSE:MSI) announced better than expected third quarter results on robust sales in Europe and Africa and an improvement in system sales in North America. Federal demand improved and the order pipeline was healthy, signaling that the impact of narrowbanding in North America from prior years has started to weaken. Compared to the company’s own expectations of a decline in high-single digits, overall revenues fell by about 5% year-over-year (y-o-y) to $1.4 billion on account of an 8% decline in the Products segment and almost flat Services sales. For the fourth quarter, the company expects to report a modest low-single digit decline in sales.

On the cost side, the company was able to reduce its operating costs by about $43 million in Q3 over the prior year quarter on account of its ongoing cost-cutting initiatives, staff reductions and lower incentive pay compensation expenses. The company has cut about $120 million in costs in the first nine months this year and expects to save a little over $200 million by the end of 2014. In the earnings call, Motorola reiterated its goal to save about $300 million by the end of next year. This means that total operating expenses of the company are likely to come down from $2 billion in 2013 to about $1.7 billion by the end of 2015. ((Q2 10-Q, Motorola Solutions, Nov 4 2014)) ^[1]

Our $64 price estimate for Motorola is slightly below the current market price.

See our complete analysis for Motorola Solutions here

New Reporting Structure

In accordance with the sale of the majority of its enterprise business to Zebra Technologies, Motorola reported its enterprise revenues – other than iDEN – under discontinued operations in its recent earnings report and changed its reporting segments to “Products” and “Services” from the earlier segments of “Government” and “Enterprise”. The Products division, contributing about 64% of the company’s total sales, consists of an extensive portfolio of network infrastructure, devices and software products, including iDEN products, ASTRO, dimetra and broadband products such as LTE. In the third quarter, product sales declined by 8% y-o-y to $921 million owing to sluggish demand in North America, Latin America and the APME (Asia-Pacific and Middle-East) region.

On the other hand, Services segment sales – consisting of integration services including iDEN services, lifecycle management services, managed services and solutions services for public safety as well as private communication networks – marginally declined to $515 million in the quarter. Sales were impacted by a decline in integration service and iDEN sales in North America and an increase in integration service sales in Europe and Africa.

Signs Of Turnaround In North America

One of the biggest reasons that Motorola has mentioned for its top line under-performance in the last couple of quarters is lower product sales in North America. The company acknowledged in the first quarter of this year that it underestimated the impact of narrowbanding in the previous years, which had led to record performances in 2012 and 2011. Motorola’s product revenues in those years were boosted by the narrowbanding mandate issued by the Federal Communications Commission (FCC), which necessitated a switch to a more efficient spectrum band for public safety operations.

With most of the narrowbanding-related equipment upgrades now complete and government agencies going slow on their capital spending, Motorola’s North American products business faces near-term growth concerns. However, Q3 earnings showed signs of improvement in this business, with federal demand picking up and its order backlog improving over the prior quarter. In fact, the Products and Services backlogs in North America grew by $60 million each, offsetting declines in other regions and driving the company-wide Product backlog up by $32 million. Motorola’s performance in North America significantly impacts the overall business because the region accounts for over 60% of the company’s total sales. The other significant contributors are Europe and Africa, accounting for about 20% of sales. ^[2]

Gross Margins to Improve in 2014

The company has been successful in driving efficiency through its operations over the last couple of years, and expects to accelerate those efforts in the coming quarters. Despite the top line concerns and significant operating leverage in the business, Motorola expects operating margins to improve by almost a percentage point to 18.5% in 2014, benefiting mostly from the cost controls in place as well as the $300 million in cost cuts expected by the end of next year. Going forward, we expect improving operational efficiency to more than offset the margin decline that could result from rising competition in the coming years, as rivals increasingly address the ongoing transition of public safety networks from analog to digital.

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1. Motorola Solutions’ (MSI) CEO Gregory Brown on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Nov 3 2014 [↩]
2. Presentation, Motorola Solutions, Nov 4 2014 [↩]