Factors That Can Arrest The Decline In Motorola Solutions’ Product Revenues

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Motorola Solutions

Motorola Solutions (NYSE:MSI) has seen its product revenues falter over the past three years, due to weak performance in North America, a fall in overseas demand and the strengthening dollar. From $4.24 billion in 2012, product revenues have come down to $3.81 billion in 2014, driven by lower device sales in North America, lower system sales in Latin America and weaker device and system sales in Asia Pacific and the Middle East.

Going forward, however, we believe that Motorola can arrest the decline in its product revenues by leveraging the growth potential in the public safety wireless communication market. In addition, the widespread LTE shift for public safety systems, the corresponding shift from analog to digital technology and several long term contract wins are likely to offset the declining demand outside of  North America and FX headwinds caused by the strengthening dollar. Motorola reportedly holds more than half the share in the public safety market and earns over 60% of its revenues from North America. [1]

We currently estimate product revenues to decline slightly in the near term, as the dollar remains a major suppressing factor. Thereafter, we project revenues to remain stable at around $3.8 billion over the next three to four years. However, if they improve to $4 billion in the long run with higher sales in North America driven by the LTE shift, contract wins and a recovery in overseas demand, there is a potential for close to a 5% upside to the company’s price estimate.

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Our $65 price estimate for Motorola is slightly ahead of the current market price.

See our complete analysis for Motorola Solutions here

Growth In Public-Safety Wireless Communication Market

Motorola Solutions caters to the safer and more stable public safety market. While overall government spending may be cut due to the ongoing macroeconomic uncertainty, public safety is less likely to take a hit as it figures very high on most governments’ priority lists. In fact, several U.S. municipalities are upgrading their public safety networks, in line with the evolving technology, that can help Motorola earn higher revenues through sales of communications infrastructure, devices, accessories and software. [1]

The expected growth in the public-safety wireless communication market is indicative of the potential rise in government spending on public safety. According to a report by Transparency Market Research, the global public safety wireless communication & municipal wireless communication market is expected to grow at a CAGR of 7% (2012-2017) to reach $22 billion in 2017. Back in 2011, North America held a 50% share in spending on public safety wireless communication, which was likely at a similar level in 2014 as well. This figure may come down in the future, given that Asia Pacific is projected to be the fastest growing market in public-safety wireless communication. [2] However, spending on public-safety wireless communication in North America will continue to rise, but probably at a slower rate than 7%. Being the strongest player in the industry, Motorola solutions stands a chance to improve its wireless communication devices revenues in line with the industry growth.

Large-scale LTE & Analog To Digital Shift

In 2012, the U.S. government approved a payroll tax bill that set aside 10MHz block of spectrum – the so-called D block in the 700Mhz band – for public safety use. The government also conceived the First Responder Network Authority (FirstNet), imparting it with responsibilities for deploying and operating public safety broadband network nationwide. FirstNet was allocated a budget of $7 billion for the construction of the network. [3] With the sanction for additional spending on public safety, Motorola Solutions is likely to benefit hugely from the greater degree of stickiness of its government customers as well as its strong market position and a large installed base of security devices.

With the technology evolving, older and slower analog components of public safety systems are being upgraded to faster digital components. The arrival of faster technologies such as LTE and others demands Motorola’s clients to overhaul their systems accordingly. Their need to be up-to-date with technology is likely to keep the sales of Motorola’s devices running.

Long-Term Contracts

In 2012, Motorola finalized a contract with Nokia Siemens Networks to receive the responsibilities for Norwegian nationwide TETRA Nødnett project. The company will manage the network through to 2026, earning an estimated revenue of $750 million during the period. [4] In the subsequent year, Motorola signed a number of deals, including a multi-year contract to support one of the largest TETRA networks in the world, Airwave. [5] It also won a $187 million public-safety contract with Libya. [6]

Motorola signed seven large contracts in 2014 including (1) a $200 million contract with a country in the Middle-East (not disclosed) to deploy an LTE-based public safety communications network; (2) a $175 million contract with the Los Angeles Regional Interoperable Communication System Authority (LA-RICS) to develop a 4G LTE based Public Safety Broadband Network (PSBN) for public safety agencies in Los Angeles; (3) a $148 million contract with the state of Michigan to upgrade its ASTRO (two-way radio) network; and (4) a $100 million contract with another country in the Middle East (not disclosed) for providing integrated mobility management & cyber-security applications. [7]

Earlier this year, Motorola won a TETRA radio contract in Schleswig-Holstein, Germany, under which it will provide 25,000 TETRA radios to 1,500 non-police public safety organizations. [8] These wins will play a big part in boosting Motorola’s future revenues, as the long-term rollouts bring in steady revenues over multiple years.

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Notes:
  1. Motorola Solutions Could See Business Recover, Barrons, Jul 18 2015 [] []
  2. Public Safety Wireless Communication and Municipal Wireless Communication Market, Transparency Market Research, Apr 28 2015 []
  3. 700 MHz Public Safety Spectrum, Federal Communications Commission []
  4. Press release, Motorola Solutions, Feb 27 2012 []
  5. Motorola Awarded Seven Year Frame Contract to Support UK O2 Airwave Radio Network for Fire & Rescue Services, PR Newswire, Oct 10 2013 []
  6. Motorola Q4 2013 earnings transcript, Jan 22 2014 []
  7. Motorola’s Q4 2014 earnings transcript, Feb 4 2015 []
  8. Motorola Solutions wins TETRA radio tender in Schleswig-Holstein, Germany, Motorola Solutions, Apr 1 2015 []