Motorola Solutions: 2014 In Review

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MSI: Motorola Solutions logo
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Motorola Solutions

Motorola Solutions (NYSE:MSI) had a challenging year, with a sustained decline in the U.S. federal business impacting top-line growth. The company continued to struggle in the first half of the year due to the greater-than-expected overhanging impact of narrowbanding in North America as well as from the U.S. government shutdown-related lows of 2013. Towards the latter half of the year, federal demand improved and order pipeline strengthened, signaling that the impact of narrowbanding in North America from prior years had started to weaken. Additionally, Motorola sold off a major part of its Enterprise business to Zebra Technologies for $3.45 billion in cash, to focus singularly on its government business. Motorola utilized the opportunity from this sale to restructure and reduce costs in keeping with the difficult business environment. The company 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. It also expects to cut an additional $100 million in operating costs by the end of next year.

In accordance with the sale of the majority of its enterprise business to Zebra Technologies, Motorola changed its reporting segments to “Products” and “Services” from the earlier “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. On the other hand, the Services segment consists of integration services including iDEN services, lifecycle management services, managed services and solutions services for public safety as well as private communication networks.

We have a $64 price estimate for Motorola, which is about in line with the current market price.

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Narrowbanding Impact

One of the biggest reasons for Motorola’s sluggish top line underperformance in the last few quarters was lower product sales in North America. The company acknowledged in the first quarter of this year that it underestimated the impact of narrowbanding in 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. [1]

Public Safety LTE To Be Key In 2015

We see the adoption of LTE for public safety use, along with the broader analog-to-digital shift in the U.S. and internationally, as the key drivers of Motorola’s value going forward. U.S. public safety spending in the coming years will be bolstered by the job creation bill passed in 2012 that reallocated the D Block spectrum for public safety use and provided funding of $7 billion to build out a nationwide network over eight years. We expect Motorola to benefit from the stickiness of its government customers, as well as its strong market position and large installed base of security devices, and grab a big chunk of that market going forward.

The Los Angeles Regional Interoperable Communication System Authority (LA-RICS) selected Motorola to develop a 4G LTE based Public Safety Broadband Network (PSBN) for public safety agencies in Los Angeles in March. The company is progressing well with this $175 million project, which is expected to generate about $50 million in revenue in the latter half of this year. In addition, the company’s first quarter launch of APX 7000L – its first two-way portable radio that works on both legacy LMR (Land Mobile Radio) and next-generation 4G LTE networks – and its recent launch of the LEX L10 Mission Critical LTE Handheld – which works on Public Safety LTE as well as Verizon’s 3G/4G – bolsters our view that Motorola has positioned itself strongly to benefit from the LTE transition in the years to come.

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Notes:
  1. Presentation, Motorola Solutions, Nov 4 2014 []