Motorola’s Q1 Results Beat Estimates On Solid North American Sales

Motorola Solutions (NYSE:MSI) announced better than expected first 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. In line with the company’s guidance, overall revenues marginally declined year-over-year (y-o-y) to $1.22 billion on account of 1% growth in the Products segment, offset by a decline in Services (2%). Excluding the unfavorable impact of foreign exchange ($40 million), overall sales grew by 3% y-o-y.

On the cost side, the company was able to reduce its operating costs from continuing operations by about $60 million or 13% in Q1 over the prior year quarter on account of its ongoing cost-cutting initiatives, staff reductions and the strong dollar. The company cut about $200 million in costs in 2014 and expects to save another $150-175 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, May 6 2015)) ^[1]

Our $65 price estimate for Motorola is about 10% ahead of the current market price.

See our complete analysis for Motorola Solutions here

Solid 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 2014 earnings showed signs of improvement in this business, with federal demand picking up and its order backlog improving over the prior quarter.

Motorola continued this improvement in the first quarter as well, with sales rising 6% y-o-y and its order backlog growing 8% over the prior year quarter. In fact, the Products and Services backlogs in North America grew by a combined $500 million in the quarter. Driven by the strong growth in order backlogs in North America and the Middle East, the company-wide Product and Services backlog grew by $132 million and $310 million in Q1 2015 to $1.2 billion and $4.6 billion, respectively. 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 16% of sales. ^[2]

Gross Margins Improve

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 2.5 percentage points to 12.8% in Q1 2015, benefiting mostly from its cost optimization plans and the strong dollar. 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.

Revised Earnings Guidance For 2015

The company expects sales growth to drop into negative territory again in the next quarter on seasonal factors as well as expected currency headwinds of about $45 million. However, the company expects its first half 2015 results to be in line with expectations owing to the better than anticipated first quarter results. For full year 2015, the company reiterated its earlier guidance and said that overall revenue is likely 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.

Owing to the better than expected savings in operating expenses, the company slightly increased its earnings expectations for full year 2015 from $3.15-$3.35 to $3.20-$3.40 per share, compared to Thomson Reuters-compiled analysts’ estimate of $3.35.

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1. Motorola Solutions’ (MSI) CEO Gregory Brown on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, May 6 2015 [↩]
2. Presentation, Motorola Solutions, May 6 2015 [↩]