Motorola Gears Up Its Product & Services Business Amid International Concerns

Despite beating expectations on revenues and profits (excluding certain items), Motorola Solutions‘ (NYSE:MSI) shares slid 9% as the company’s fourth quarter guidance was significantly below estimates. Weak demand in Latin America and Eastern Europe, on account of government agencies’ budget cuts, along with the strengthening dollar are responsible for Motorola’s lackluster outlook. Though the company’s growth in North America was strong for the quarter, it does not expect any revenue growth from the region in Q4, which again contributes towards a weak outlook. For the fourth quarter, Motorola has projected revenues to decline by 6%-8% with EPS at $1.45-$1.50, which was well below the analyst consensus of $1.57. ^[1]

As economic uncertainties in major markets trouble the company, it is looking to bolster its services segment by leveraging Silver Lake’s $1 billion investment for innovation, while contract wins on the product side continue. Also, Motorola’s domestic performance has been good so far this year, which it expects to sustain in the future, thanks to a healthy order pipeline and backlog. It is the international business, which accounts for about 35% of the revenues, that has been troubling the company. Weak economic conditions in some key markets, a strong dollar and iDEN declines are all causes for concern for Motorola in Latin America, Europe and Africa. However, there is a silver lining in the form of strong growth in the Middle East and Asia Pacific.

Our $63 price estimate for Motorola is slightly below the current market price. However, we are in the process of updating our model in light of the recent earnings release.

See our complete analysis for Motorola Solutions here

Q3 Earnings Highlights

Motorola’s overall revenues fell about 1% year over year (y-o-y) to $1.42 billion, but excluding the currency exchange impact, net revenues were up 3%. The company’s SG&A expenses were down 10% y-o-y and product development costs shrunk 8%, thanks to its proactive cost cutting and R&D streamlining measures. Net income totaled $115 million or $0.57 a share, two pennies down from the year ago period. However, excluding the impact of certain items, adjusted earnings per share from continuing operations rose to $0.82 from $0.62, and was well ahead of the consensus estimate of $0.73. ^[2]

Progress on The Services Front

Motorola earlier this year announced the $1 billion strategic investment by Silver Lake, which should provide sufficient capital to keep innovation strong. The company has mentioned that it could leverage this investment to bolster its services segment, which holds stronger growth potential as compared to the products segment. During the quarter, Motorola ran LTE public safety trials in collaboration with multiple international police forces, in order to provide secure and situation-aware content distribution system and high-speed broadband capabilities. The company intends to utilize the interoperability between Land Mobile Radio (LMR) and LTE networks to improve front-line officers’ communication with command centers. On the contracts side, Motorola won a $45 million extension contract to complete the statewide network upgrade in the eastern U.S., and several other contracts pertaining computed aided-dispatch, next-gen 911, and expansion of intelligence led public safety solutions. ^[2]

Products Show Some Promise Too

Even though Motorola sees a better growth potential for its services segment, it is the product division that has performed better this year. For the first nine months of 2015, the product segment reported flat growth, while services sales were down 3%. During the quarter, the company won a $50 million contract to deploy P25 digital Land Mobile Radio for a state police force in Northern Africa across 50 sites and more than 50,000 subscriber, and a $25 million contract for P25 systems in four Texas cities. In addition to these contract wins, Motorola launched a three-in-one body-worn device including video camera, radio speaker and microphone, and introduced a new cloud-based content management system. The company’s product revenues are being supported by the launch of the APX 8000 radio, which is a multiband device with WiFi and Bluetooth capabilities. The radio is an important launch for the company from an Internet of Things perspective.

Latin America And Europe Are A Concern

New product launches and consistent innovation across different verticals have been helping Motorola bag contracts amid sluggish government spending. However, in Latin America, the company’s revenues declined 22% on account of weak economic conditions, a decline in iDEN services and the strong dollar. In Europe and Africa, currency headwinds and Norway implementation wind-downs brought revenues down by 23%. These factors are likely to continue to impact the company’s growth in these markets in the near future. Also, economic uncertainty will continue to push regional governments to narrow their budgets for public safety solutions. Thus, Motorola will have to strive even harder to gain a sizable share of whatever the governments are spending, by leveraging its strong product portfolio. ^[3]

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1. Motorola Solutions’ profit forecast falls short, shares slide, Reuters, Nov 4 2015 [↩]
2. Motorola Solutions Reports Third Quarter 2015 Financial Results, Motorola Solutions, Nov 4 2015 [↩] [↩]
3. Motorola Solutions’ Q3 2015 Earnings Transcript, Nov 4 2015 [↩]