Motorola Solutions Earnings Preview: North American Sales, Margins In Focus

Motorola Solutions (NYSE:MSI) is scheduled to announce its Q4 2014 results on Wednesday, February 4. The company’s last few quarters have been challenging, as both its government and enterprise businesses have suffered due to macroeconomic uncertainties. Following the sale of a major part of its enterprise business to Zebra Technologies, Motorola reported its enterprise revenues, other than iDEN, under discontinued operations in its Q2 2014 earnings report and changed its reporting segments to “Products” and “Services” from the earlier segments of “Government” and “Enterprise”.

In the third quarter, the company announced better than expected 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 had 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.

When the company comes out with its Q4 earnings, we expect overall sales to decline in low-single digits y-o-y, in line with the company’s guidance. In an earnings call last year, Motorola had stated that its order pipeline growth in Q3 2014 was likely to reflect in its fourth quarter results. Therefore, sales are likely to improve sequentially in the fourth quarter on order backlog improvement in Q3. Our $65 price estimate for Motorola is in line with the current market price.

See our complete analysis for Motorola Solutions here

North America Likely To Continue Growth Momentum

One of the biggest reasons that Motorola mentioned for its top line under-performance last year was lower product sales in North America. The company acknowledged in the first quarter last 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, in line with third quarter results which showed signs of improvement in this business, we expect product sales to sustain this growth in North America in the fourth quarter as well.

Public Safety LTE To Drive Sales

Going forward, we see the adoption of LTE for public safety use, along with the broader trend of the analog-to-digital shift in the U.S. and 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 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 to 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 the Los Angeles region in March last year. The company is progressing well with this $175 million project, which is estimated to have generated about $50 million in revenue in the latter half of 2014. 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. ((LEX L10 Press Release, Motorola Solutions, Oct 23 2014))

Expansion In Gross Margins Expected

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 over the next two years. 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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