Motorola Solutions Earnings Preview: North American Sales To Drive Results

Motorola Solutions (NYSE:MSI) is scheduled to announce its Q1 2015 results on Wednesday, May 6. 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”.

Last quarter, the company announced better than expected 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 increased marginally to $1.82 billion on account of 3% growth in the Products segment, which offset the decline in Services (5%).

When the company comes out with its Q1 earnings, we expect overall sales to decline in the low-single digits y-o-y driven by better order conversion in the previous quarter and currency headwinds. In terms of costs, margins are likely to remain under pressure owing to deployment challenges in some ongoing projects. 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.

However, Q4 2014 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. We expect sales in North America to drive results in the upcoming earnings as well.

Key Growth Drivers

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 (see Motorola Solutions: A Look At Top Line Growth Drivers For 2015).

There is also a visible shift in the company’s focus towards Services as a line of business. Services currently contribute about 35% of the company’s top line, and we expect this to increase gradually. The company’s Product and Services backlog at the end of 2014 was about $1.2 billion and 4.6 billion, respectively. Motorola expects to recognize 58% of its Products backlog (~$700 million) and 26% of its Services backlog ($1.2 billion) as revenues this year. ^[1]

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1. Motorola Solutions 2014 10-K [↩]