- Products constitute 60% of the Trefis price estimate for Motorola Solutions's stock.
- Services constitute 40% of the Trefis price estimate for Motorola Solutions's stock.
WHAT HAS CHANGED?
- Latest Earnings- Q1'22
Motorola delivered a mixed performance for Q1 2022. The company's net sales rose to $1.89 billion, driven primarily by growth from the products segment, while sales from the services segment came in roughly flat. However, operating income dropped to $239 million from $298 million over the same period. Additionally, a tax benefit of $49 million helped the company's net income, driving EPS up from $1.44 in Q1 '21 to $1.59 in Q1 '22.
- Recent acquisitions
In mid-2018, Motorola Solutions acquired Avigilon, a maker of security cameras and video analytics systems. The deal could allow the company to provide a broader portfolio of solutions for commercial and government customers while capitalizing on the current backlash against Chinese-made tech products such as surveillance cameras in Western markets. Separately, in July 2019, the company acquired WatchGuard, one of the largest providers of body-worn cameras, which are supplied to police departments.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Motorola Solutions' value that present opportunities for upside or downside to the current Trefis price estimate for the company:
Motorola Solutions Gross Profit Margins
- Motorola Solutions Products' Gross Profit Margins: Motorola Solutions Products' gross margins declined slightly from around 58% in 2012 to 54.3% in 2021. We expect this metric to decline over the long-term, as the company faces a threat from the new FirstNet first responder network in the U.S. and also due to a higher mix of non-LMR sales, which could have lower margins. However, if Motorola Solutions' margins increase to reach historical levels of around 60% by the end of our forecast period, there could be an upside of about 12% to our Trefis price estimate for Motorola Solutions's stock.
- Services Revenue as % of Product Revenue: Motorola Solutions Services Revenue as % of Product Revenue has increased from 48% in 2012 to over 77% in 2021. This was primarily on account of higher software sales and the addition of Vaas revenues to the services division. Going forward, we expect this percentage to increase as the company shifts its focus more towards software and services. If Motorola Solutions' Services Revenue as % of Product Revenue increases more than our expectations to reach levels of around 90% by the end of our forecast period, there could be an upside of about 8% to our Trefis price estimate for Motorola Solutions's stock.
Motorola Solutions is a mission-critical telecommunications equipment provider and sells radios, accessories, base stations, and other equipment to government agencies, including law enforcement and emergency services agencies, and commercial clients. It also provides comprehensive services for government, public safety, and commercial communication networks.
Government Security devices are the devices used for:
- Aiding police departments to communicate with its patrol cars and help respond to crime incidents efficiently.
- Tools for electric power distribution, fire station alerting, irrigation control, and video instruments for traffic control purposes.
Commercial Security devices are the devices used for:
- Baggage tracking at airports and transit authorities.
- Retailers to drive workforce productivity with wireless WLAN.
- Healthcare centers as technologies instruments.
- Wireless connectivity at universities.
SOURCES OF VALUE
We believe the Products segment is the most valuable segment for the following reason:
Higher revenues from Products
Motorola's Products division, which primarily sells Land Mobile Radio products and security cameras, is the biggest source of Motorola's valuation, as it accounts for roughly 60% of total revenues.
Margins from the Products division are also higher, standing at over 54% compared to 42% levels for the services division.
- Widespread LTE shift
- The adoption of LTE for public safety use and the broader trend of an analog-to-digital shift in the U.S. and internationally are likely to be the key drivers of Motorola’s value in the near future.
- U.S. public safety spending in the coming years will be bolstered by the job creation bill passed in 2012 that reallocated the D Block spectrum for public safety use and provided funding of $7 billion to build out a nationwide network over eight years.
- Motorola is also likely to benefit from the stickiness of its government customers as well as its strong market position. The large installed base of security devices is also expected to grab a big chunk of that market going forward.
- Continued government spending on critical security systems
- The Government is increasingly migrating to more technologically advanced systems with real-time data storage while replacing manual activities. This will require similar upgrades to its systems. In such a scenario, Motorola's services department is going to be a major beneficiary.
- Due to increased security deployed by the government at the airport to deter illegal immigration, the government will need technical support. Motorola's Biometrics service meets that need.
- Acquisitions will help to achieve continuous growth
- In 2019, the company acquired VaaS International Holdings, a company that is a global provider of data and image analytics for vehicle location and WatchGuard, a provider of in-car and body-worn video solutions. In addition to this, Motorola also made a couple of other acquisitions. Motorola is leveraging its strong product innovation to remain a step ahead of its competitors, which is helping it win critical contracts. This should help the company to achieve steady growth over the coming years.