Motorola Solutions Gaining Steam With Product Innovation, Contract Wins & Operating Efficiency

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Motorola Solutions

Motorola Solutions (NYSE:MSI) was able to beat market expectations with its recently announced Q2 revenues and earnings on the back of an increase in backlog and its ongoing cost-cutting initiatives. The company struggled up to the fourth quarter of 2014 with weak product sales in North America, but innovations in its product portfolio, several contract wins and better operating efficiencies helped it turnaround the performance. Motorola is aggressively investing in Smart Public Safety Solutions to present a strong case for government and enterprise contracts. In fact, it recently announced that Silver Lake is planning to invest $1 billion in the company, which it plans to re-invest in the aforementioned area. With Silver Lake’s investments, the company will have enough cash reserves to continue is strong share buyback program (recently announced a $2 billion tender) and keep investing in innovations. Motorola is leveraging its strong product innovation to remain a step ahead of its competitors, which is helping it win critical contracts. In its recent earnings call, the company mentioned that it was able to secure an additional $90 million+ worth of contracts, which will contribute to its growth going forward. [1]

On the bottom line front, Motorola is consistently improving its operating efficiency, streamlining its R&D and reducing SKUs to lower the overall operating costs. It saved a total on $129 million dollars in the first two quarters of 2015, and is on track to meet its annual target of $175 million. [2] Overall, the recent quarterly results indicate that Motorola is beginning to gain some growth momentum following a lackluster 2014.

In Q2 2015, Motorola reported a 2% year-over-year growth in revenues (constant currency) to $1.4 billion, which surpassed its own expectations of flat to a 2% decline. Its operating margins expanded 460 basis points year over year, thanks to cost-optimization efforts, which pushed its non-GAAP EPS up 45% year over year. Interestingly, the company’s non-GAAP EPS of $0.68 was 20% ahead of the high end of its initial guidance. [2] Following the earnings release, Motorola’s stock price increased about 5%.

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Our $61 price estimate for Motorola is less than 5% below the current market price.

See our complete analysis for Motorola Solutions here

Product Innovation Enabling Contract Wins

Crucial for Motorola’s growth is product innovation in-line with the changing customer needs and the shift towards software enablement . The company has inked some valuable deals, including notable wins with PublicEngines and Wynyard, that have bolstered its Smart Public Safety Solutions portfolio. During the quarter, Motorola witnessed strong demand for its radio platform (APX8000, released earlier this year), which allows customers to introduce new features and functionality using over-the-air software loads. The APX8000 integrates four different radio bands to provide high voice quality and combines Wi-Fi broadband and LMR (land mobile radio) into a single device. The company’s newly introduced line of intrinsically safe TETRA radios allows customers to use the devices in hazardous conditions with a high degree of exposure to oil, gas, fire etc., while sustaining their effectiveness. [1]

Such product innovations help Motorola curb competition from smaller players who can offer similar products and services at a relatively cheaper price. This ultimately increases the company’s chances of securing contracts in new and existing jurisdictions. However, product innovation requires significant investment in research and product development. Motorola’s recently announced $1 billion partnership with the private equity firm Silver Lake should provide it with the desired capital to keep innovations running.

Contract Wins Building Backlog And Pipeline

Motorola won a number of contracts during the second quarter of 2015, which include a $ 12.5 million WAVE software purchase by the U.S. Army. WAVE software converts radio signals into voice-over-IP packets, allowing authorized users with voice-enabled IP devices to participate in voice communications irrespective of the device or network being used. U.S. Army plans to use WAVE in the Army Program Executive C3T programs. Other wins include four deals with oil & gas and utility industries worth close to $66 million for the P25 and TETRA technologies. On the services front, Motorola said that it continues to see a strong growth in maintenance agreements. Some of the recent ones include a $19 million multi-year contract in Hong Kong, a $13 million agreement in Quebec and an $8 million contract in Pennsylvania. [1]

With several contract wins, Motorola’s backlog is growing and the company is building up a strong order pipeline as well. In the second quarter, the order backlog increased 11% year over year (or $624 million), bringing the total order backlog to $6 billion. Of the total order backlog, 22% is in products and the remaining is in services. Interestingly, the sequential increase in order backlog for the second quarter was a sizable $173 million, indicating that Motorola is gaining significant momentum in the terms of contract wins and renewals. [1]

$2 billion tender offer Implies A Strong Balance Sheet

In its earnings call, Motorola announced a tender offer to buyback common shares worth up to $2 billion. The company has been very generous in giving returns to its shareholders, repurchasing $8.7 billion worth of shares and issuing $1.1 billion in dividends over the last four years. Motorola’s strong balance sheet has allowed it to spend a significant amount on buybacks, while maintaining its investment-grade rating, and setting aside a sizable capital for acquisitions and technological investments. At the end of Q2, the company had $3.1 billion in cash and cash equivalents, and Silver Lake’s $1 billion strategic investment, in the form of convertible debt,  is likely to bolster is cash pool. This implies that Motorola has enough cash to go through with its buyback program seamlessly, with investments in business growth, technology and innovation being unaffected.

In fact, Motorola’s CEO Greg Brown said that even with the commencement of the share repurchase program, the company is expected to have $3.5 billion in cash and cash equivalents at the end of the year. However, with significant buyback programs in the past, the company has now entered a net debt position, with its total debt at $3.4 billion. Nevertheless, Motorola’s capital capacity and credit rating remain strong, which is evident from its tender offer and Silver Lake’s $1 billion investment.

In addition to capital investments, Silver Lake’s managing partners – Egon Durban and Greg Mondre are joining the board of directors. Motorola said that partnership with Silver Lake will play a crucial role in extending and accelerating its existing growth strategies. In fact, the company is planning to leverage Silver Lake’s expertise in technology products and information solutions to improve its public safety offerings. [1]

Operating Efficiency Boosting Profits

Motorola has succeeded in bringing down its operating expenses significantly by leveraging cost-cutting initiatives and the strengthening dollar. In Q2 this year, the company’s net operating expenses declined 15% year over year and they have come down 26% since Q2 2012. [2] For the purpose of cutting costs, Motorola laid off a number of employees last year and also sold its extra land at its Schaumburg campus. [3] In the more recent efforts, the company is shifting resources to lower-cost locations and proactively streamlining its R&D division. Motorola said that it has reduced the number of testing labs from 19 to 5, which is likely to have a marginal positive impact on its operating efficiency. Furthermore, the company is aggressively reducing its SKUs, which should be down 40% by the year end. [1]

Motorola plans to save a total of $175 million in 2015 and it has already cut $129 million in costs in the first two quarters. It appears to be progressing very well on the aforementioned strategies and it would not be surprising if the company manages to surpass its annual target. And incremental savings will be accretive to Motorola’s earnings per share.

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Notes:
  1. Motorola Solutions’ Q2 2015 earnings transcript, Aug 5 2015 [] [] [] [] [] []
  2. Motorola Q2 earnings presentation, Aug 5 2015 [] [] []
  3. Despite profit, Motorola Solutions plans more layoffs, smaller campus, Daily Herald, Aug 5 2014 []