Motorola’s Q4 Results Beat Estimates On Improving North American Sales

Motorola Solutions (NYSE:MSI) announced better than expected fourth quarter results on sales growth in North America and a higher order backlog in both Products and Services. 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 low-single digits, overall revenues actually marginally improved year-over-year (y-o-y) to $1.82 billion on account of 3% growth in the Products segment, which offset the decline in Services (5%).

On the cost side, the company was able to reduce its operating costs by about $86 million in Q4 over the prior year quarter on account of its ongoing cost-cutting initiatives, staff reductions and lower incentive pay compensation expenses. The company cut about $200 million in costs in 2014 and expects to save another $150 million by the end of this year on the back of its cost optimization and cost structure simplification plans. This means that the company’s total operating expenses are likely to come down from about $1.86 billion in 2014 to about $1.7 billion by the end of 2015. ((Q4 Press Release, Motorola Solutions, Feb 4 2015)) ^[1]

Our $65 price estimate for Motorola is almost in line with the current market price.

See our complete analysis for Motorola Solutions here

Sales Growth In North America

One of the biggest reasons that Motorola mentioned for its top line under-performance in the last few quarters is lower product sales in North America. The company acknowledged that it underestimated the impact of narrowbanding in previous years, which had led to record performances in 2011 and 2012. 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 complete and government agencies going slow on their capital spending, Motorola’s North American products business faced headwinds in the first half last year.

However, Q4 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 $50 million and $586 million, respectively, offsetting declines in other regions and driving the company-wide Product and Services backlog up by $53 million and $268 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 Improve In 2014

The company has been successful in driving efficiency through its operations over the last few years, and expects to accelerate those efforts in the coming quarters. Despite top line concerns and significant operating leverage in the business, Motorola’s adjusted (non-GAAP) operating margins improved by almost a percentage point to 18.2% in 2014, benefiting mostly from its cost optimization plans. 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.

Company Guidance For 2015

The company expects sales growth to drop into negative territory again in the next quarter on seasonality factors as well as expected currency headwinds of about $40 million. In Q1 2015, Motorola expects North America to continue its growth momentum, while Latin America is likely to register top line declines due to unfavorable project timing and sluggish iDEN sales. For full year 2015, the company expects revenue to be flat to down 2% on account of currency headwinds which are likely to offset growth across North America, Latin America and the Middle East. Excluding the impact of currency headwinds, sales are expected to grow 1-3% during the year. The expected earnings per share (EPS) for full year 2015 is $3.15-$3.35, compared to Thomson Reuters-compiled analysts’ estimate of $3.35.

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1. Motorola Solutions’ (MSI) CEO Gregory Brown on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Feb 4 2015 [↩]
2. Presentation, Motorola Solutions, Nov 4 2014 [↩]