Motorola Steadily Building On Its Software Focus To Propel Service Revenues

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MSI: Motorola Solutions logo
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Motorola Solutions

Motorola Solutions‘ (NYSE:MSI) service revenues have increased steadily relative to its product revenues over the past few years, mainly due to its enhanced focus on software and services, and weak product sales. From 48% in 2012, the company’s service revenues as a percentage of product revenues increased to 54% in 2014, and we expect the figure to cross 60% over the next five or six years, with the company inking new contracts in the services domain. In fact, most of Motorola’s recent deals have been in this space, including PublicEngines, Wynyard and Airwave (not confirmed). And the company most recently introduced its advanced Cybersecurity Professional Service to help law enforcement and government agencies fight against cyber breaches. [1] We believe that with more such service contracts and software launches in the future, there exists a notable upside potential for Motorola.

Earlier this year, Motorola acquired PublicEngines for its Intelligence-Led Public Safety and citizen engagement softwares. Soon after, the company landed a partnership deal with New Zealand based crime-fighting software firm Wynyard to improve its overall crime fighting solutions. A couple of months back, reports surfaced that Motorola was in advanced talks to buy U.K. based Airwave solutions for its TETRA communication systems. [2] Although the news has not been confirmed yet, we believe that Airwave would be a valuable add to Motorola’s services portfolio. And the company’s recently launched Cybersecurity Professional Service will help customers protect mission-critical information transfer between agencies.

Our $63 price estimate for Motorola is about 10% below the current market price.

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Services Segment Has Performed Better Than Products

While Motorola’s services revenues haven’t grown much over the past three years, the segment has performed much better than the product division. Services revenues have been up 2% since 2012, but product revenues have declined 10% during the same period due to lower device sales. Since product sales are highly dependent on the company’s ability to bring in new customers, Motorola is laying a greater emphasis on its services business. Unless Motorola expands in new jurisdiction, where there’s virtually no competition, getting new consequential customers will be an arduous task. However, on the services front, the company can provide new features as add-ons to its existing customers. This explains why Motorola is looking for more deals and innovation in the services segment.

MSI

How Will Airwave Solutions Help Motorola

Motorola is reportedly in talks to buy U.K. based Airwave Solutions, which provides TETRA (Terrestrial Trunked Radio) communication systems for the U.K. fire, police and ambulance emergency services. Its acquisition can not only help Motorola strengthen its presence in the U.K., but can also help in technological advancements in the U.S. By leveraging Airwave’s technological expertise, Motorola can create a more reliable communication network for its TETRA radio devices being used by law enforcement and other government agencies in the U.S. With public safety broadly shifting to LTE, both Motorola and Airwave are working on moving their respective services to the faster LTE network. Since both Airwave and Motorola work on TETRA, the acquisition would likely have some synergies, and Motorola would have the best features of both the companies. For instance, by combining the recently launched intrinsically safe TETRA radios that retain their efficiency amid a high degree of exposure to oil, gas and fire with a more reliable communication network, Motorola can present a better case for relevant contracts than its competitors such as Harris, Kenwood and Hytera.

What Cybersecurity Professional Service Has To Offer

The number of cyber breaches have increased rapidly in the recent past, public safety and government agencies are among the prime targets for cyber criminals. According to a recent survey by PWC, total reported incidents related to cyber security increased 48% in 2014 to 42.8 million, and they have been increasing at a compound annual growth rate (CAGR) of 66% since 2009. [3] With multi-direction technological advancement and interconnnected networks shifting to open-source and cloud-based platforms, instances of cyber attacks will continue to increase in the future. Accordingly, cybersecurity needs to evolve at a similar pace.

Motorola’s new Cybersecurity Professional Service helps customers identify cyber risks in their operations through careful evaluation of technology and processes by physical observation, in-person interviews, manual, computerized, commercially available and custom tools. [4] It then creates potential risk scenarios and providers relevant solutions to fend them off. Public safety and law enforcement bodies transfer a lot of mission-critical classified information between various agencies, and thus security is their utmost priority. This is why services such as Cybersecurity Professional hold a lot of revenue generating potential for Motorola.

Upside Potential?

We currently project Motorola’s service revenues as a percentage of product revenues to increase from 54.5% in 2014 to 63.5% over the next six seven years. However, with persistent focus on software, consistent improvement in features and more contract wins on the services front, the segment’s revenue growth can be better than expected. If the figure increases to 70% over the forecast period instead of 63.5%, there can be about a 5% upside to our price estimate for Motorola Solutions. Increase in the aforementioned figure to 70% would mean a CAGR of 3.2% in services revenues, which seems achievable.

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Notes:
  1. Cyber Criminals Beware: Motorola Solutions Expands Security Services to Fight Attacks, Motorola Solutions, Oct 15 2015 []
  2. Motorola Said in Advanced Talks to Buy U.K.’s Airwave Solutions, Bloomberg, Aug 18 2015 []
  3. The Global State of Information Security Survey 2015-Managing cyber risks in an interconnected world, PWC, 2015 []
  4. Cybersecurity Professional Services, Motorola Solutions []