Motorola Earnings Preview: Notable Bottom Line Improvement Expected

Motorola Solutions (NYSE:MSI) is scheduled to report its Q3 2015 earnings on Wednesday, November 4th, and we expect the company to continue to benefit from its high order backlog in North America. Following several quarters of lackluster growth, the company’s performance improved notably in the second quarter of 2015, as better operational efficiency and contract wins in North America helped it offset the impact of currency fluctuations and delay in the LA-RICS project. We expect these factors to continue to drive Motorola’s results in the third quarter as well. The company has guided flat to 2% growth in overall revenues for Q3 with EPS in the $0.68-$0.73 range, which reflects a year over year (y-o-y) improvement of 10%-18%.

With consistent product innovation, Motorola won several contracts during the second quarter of the year, which should help its revenues in the third quarter and beyond. The company is striving hard to bring down its expenses, by eliminating redundancies in its operational structure. At the start of the year, Motorola had planned to save $175 million in operating costs in 2015, and by the end of Q2 it had already saved $129 million. Some of the remainder of those savings were likely realized in the third quarter, thanks to the ongoing cost-cutting initiatives.

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

See our complete analysis for Motorola Solutions here

Order Backlog Increase Can Help Top Line

Following a period of mixed results, Motorola’s product business showed some signs of recovery in Q4 2014 and Q1 2015, as federal demand picked up and its order backlog rose. Its order backlog in Q1 2015 increased by a sizable $500 million, which is around 40% of Motorola’s quarterly sales. This increase continued sequentially into the second quarter of 2015, at which time the company’s total order backlog was at $6 billion. During the second quarter, Motorola won several contracts that included a $112 million P25 system upgrade deal for King County, Washington, a $153 million multi-year agreement for managed and lifecycle services with 10 customers across different markets, and four other contracts cumulatively worth over $150 million. With progress on these projects and others from its $6 billion backlog, Motorola should be able to realize higher sales y-o-y, in line with its top line forecast for the third quarter. ^[1]

Operational Efficiency Can Bolster Bottom Line

Motorola has lowered its operating expenses significantly over the last three years, with quarterly expenses declining 26% between Q2 2012 and Q2 2015. The company expects to save another $45 million by the end of the year, which seems achievable given the success of its cost-cutting initiatives during the first two quarters. 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. ^[2] Most recently, the company announced that it is cutting another 200 jobs at its Chicago and Schaumburg offices. ^[3] It is also 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. ^[4] These factors bode well for Motorola’s bottom line guidance for the third quarter.

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1. Motorola Solutions Reports Second-quarter 2015 Financial Results, Motorola, Aug 5 2015 [↩]
2. Despite profit, Motorola Solutions plans more layoffs, smaller campus, Daily Herald, Aug 5 2014 [↩]
3. Schaumburg-based Motorola Solutions to cut 200 jobs, Daily Herald, Oct 27 2015 [↩]
4. Motorola Solutions’ Q2 2015 earnings transcript, Aug 5 2015 [↩]