Motorola Cutting Expenses To Grow Profits Amid Shrinking Gross Margins

-4.11%
Downside
355
Market
340
Trefis
MSI: Motorola Solutions logo
MSI
Motorola Solutions

Motorola Solutions‘ (NYSE:MSI) gross margins have declined slowly over the last three years due to weak sales, an adverse sales mix and growing competitive pressures. From 51% in 2012, the company’s overall gross margins dropped to 48% in 2014. However, the company’s operating margins have expanded from 14.8% to 16.4% (excluding other charges), as selling, general & administrative (SG&A) and research & developed (R&D) expenses have declined relative to revenues. Motorola Solutions’ cost optimizing and restructuring efforts have enabled it to cut expenses significantly. It expects to maintain control over these expenses going forward, while product gross margins are likely to shrink further.

With prevailing macroeconomic uncertainty and rising competition, Motorola is likely to face pricing pressure going forward, which could suppress its gross margins. Also, carriers worldwide are winding down their iDEN (integrated digital enhanced networks) operations, which will eliminate a lucrative revenue stream for Motorola, negatively impacting its top and bottom line. However, with robust cost-cutting efforts, the company can offset the impact of weaker product gross margins to an extent. We currently estimate Motorola’s SG&A and R&D expenses to continue to decline relative to gross profits.

Our $63 price estimate for Motorola is slightly below the current market price.

Relevant Articles
  1. Up 30% In The Last 12 Months, Will Motorola Solutions Stock Rally Further Following Q4 Results?
  2. What’s Happening With Motorola Solutions Stock?
  3. What’s Happening With Motorola Solutions Stock?
  4. Motorola Solutions Stock Has More Than Doubled Market Returns Since 2018- Here’s Why
  5. Motorola Solutions Stock Has Almost Doubled The S&P’s Returns Since 2018- Here’s Why
  6. Motorola Solutions Inc. Stock Looks Set To Continue Its Rally

See our complete analysis for Motorola Solutions here

Pressure On Product Gross Margins

Macroeconomic uncertainty has led some government agencies to defer spending, which has led to stiffer pricing competition between Motorola and its rivals. Furthermore, with carriers winding down their iDEN operations, Motorola anticipates sustained iDEN revenue losses in the coming years. Sprint has already decommissioned its iDEN network in the U.S., and the rest of the world is expected to follow suit. TELUS in Canada has also stopped marketing its iDEN services, and is likely to shut down its network by the end of 2015. Since Motorola’s iDEN sales have higher gross margins than the company average, the mix shift could impact its margins.

Overall, we expect Motorola’s gross profit margins to shrink from 56% in 2014 to 55% over the next five to six years. As sales improve and macroeconomic concerns ease, the rate of decline in gross margins is likely to slow down, but they will shrink nonetheless.

Cutting SG&A And R&D Expenses

Motorola has succeeded in bringing down its operating expenses significantly by leveraging cost-cutting initiatives and the strengthening dollar. Between 2012 and 2014, the company’s SG&A expenses have come down from $1.47 billion to $1.18 billion. During the same period, its R&D expenses have fallen from $790 million to $681 million. Both metrics have also declined relative to revenues.

msi

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. [1] Recently the company shifted resources to lower-cost locations and proactively streamlined 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. [2]

In Q2 this year, the company’s net operating expenses declined 15% year over year and they have come down 26% since Q2 2012. [3] Having cut close to $200 million in expenses last year, Motorola plans to save another $175 million in 2015. The target should not be too difficult to achieve given that the company has already cut $129 million in costs in the first two quarters. In fact, it would not be surprising if Motorola manages to surpass its annual target.

Potential For Upside

We currently project Motorola’s SG&A expenses as a percentage of gross profits to decline from 30.4% in 2014 to 29.8% over the next six-seven years. Meanwhile, we project the company’s R&D expenses to fall from 22.0% of gross profits in 2014 to 20.4% during the course of the coming six-seven years. However, if the long term figures for both drivers decline at a faster than expected pace driven by rigorous cost-cutting efforts, reaching 28.2% and 19.7%, respectively, in the long term, there can be more than a 5% upside to our price estimate for Motorola.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

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