Motorola Solutions (NYSE:MSI) announced its Q1 2012 results on April 25th. While overall revenues for the quarter grew by a strong 7%, it was masked by a huge income tax charge that saw net profits drop 68% over the same period last year. Revenues from the company’s government business grew a solid 11% year-over-year despite concerns of a slowdown in government spending across the world.
While the macroeconomic concerns have yet to take a toll on Motorola’s revenues due to the high priority that governments attach to public safety, we could see the signs of a slight slowdown in revenues coming from the EMEA region that grew only 1% compared to last year. If the macroeconomic conditions get worse, we would not only see an impact on revenues but also higher pricing competition from rivals Cisco (NASDAQ:CSCO), Honeywell International (NYSE:HON) and Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC).
Taking these risks into account, we have a $50 price estimate for Motorola Solutions’ stock, about 1% below the levels of the current market price.
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Government spending cuts remain a risk
Motorola Solutions derives most of its value from government customers, which contributed more than 66% of its total revenues this quarter. This puts a major part of its revenues at risk if the ongoing talks to reduce fiscal deficits across the world result in widespread government spending cuts.
Recently, the U.S. government announced a proposal for budget cuts to achieve $1.2 trillion in savings over a 10-year period.  While Congress hasn’t yet approved the spending cuts, rising debt levels and a worsening fiscal deficit outlook makes it increasingly likely that the two political parties will ultimately agree on budgetary cuts of some kind. Moreover, the global macroeconomic conditions suggest that government spending could take a hit in many other developed economies as well, as debt levels rise to precarious levels.
The company’s CEO, Greg Brown, acknowledged these risks during the earnings call saying that he was “mindful of the continued extenuating circumstances, particularly in Europe.” Sales in the EMEA region, which includes Europe, saw just 1% growth in sales as compared to the overall growth of 7% over the year-earlier quarter. Also, Motorola’s cautious guidance of 5% sales growth for the year compared to the 7% seen in Q1 implies that they expect the impact of a slowdown in government as well as corporate spending in the coming quarters.
That said, Motorola Solutions participates in the safer and more stable public safety market. While government spending may be cut due to the ongoing concerns, public safety will be among the less likely areas to take a hit as it figures very high on most governments’ priority lists. Therefore, the impact of the spending cuts on revenues may be limited, but the risk gets more pronounced if the macroeconomic conditions get worse.
Going forward, we expect Motorola Solutions to benefit hugely from the payroll tax bill that received Congress approval in February 2012. The bill has set aside a 10MHz block of spectrum – the so-called D block in the 700Mhz band – for public safety use. In addition, about $7 billion of funds will be granted for the deployment of a dedicated LTE network.
With the sanction for additional spending on public safety, Motorola Solutions is likely to benefit hugely from the higher stickiness of its government customers as well as its strong market position and a large installed base of security devices. (see Motorola Solutions to Benefit from Public Safety Broadband Spending) A big portion of the funding however rests on the ability of the FCC to conduct auctions for the allocated TV spectrum to wireless carriers in a fair manner and generate sufficient revenues for public safety allocation.
We are also likely to witness a more widespread shift from the older analog to newer digital networks as faster technologies such as LTE arrive in the marketplace and local governments overhaul their analog networks. In this regard, Motorola has been focusing on new devices that can tap the high-speed network. It launched the first Handheld Public Safety LTE Device, the Lex700 during the quarter. We expect Motorola Solutions’ industry leading position to help it benefit hugely from the industry-wide LTE switch in the coming years.Notes: