Motorola Solutions (NYSE:MSI) announced a an encouraging set of Q4 2012 results on January 23rd. While overall sales grew only 6% on account of strong government spending, operating income was up by a whopping 53% y-o-y. Sales to government customers continued their recent strong performance, growing by 10% y-o-y while the enterprise market languished under the macroeconomic overhang of the Euro debt crisis. Enterprise sales declined by 3% y-o-y despite the recent acquisition of Psion without which sales in this division would have declined by 12% y-o-y.
What was therefore the most important takeaway from the results declaration was that the company believes that the downturn in infrastructure spending is in its last legs and that ‘there’s a recovery underway’. As a result, Motorola now expects enterprise to be up mid- to high-single digits for the full year 2013 as compared to 2012 when it saw a decline of 5%.
Fundamentally, we think the company’s outlook is strong due to its recent acquisitions as well as the industry-wide shift to LTE, which we believe will help preserve its strong market position and bring in a steady stream of revenues going forward. We are in the process of updating our price estimate for Motorola Solutions.
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- Why We Have A Bearish Outlook On Motorola Solutions
Narrowbanding cliff will see government growth slow…
Motorola’s 2012 fiscal year was solid as government business posted y-o-y revenue growth rates in excess of 10% each quarter. While the company started 2012 cautiously, setting a guidance of only 5% growth for the full year due to macroeconomic uncertainty surrounding the Euro debt crisis, government spending held up pretty well. As a result, government revenues grew 6% for the full year, comfortably beating its initial guidance.
However, a portion of the out-performance has been on account of the narrowbanding mandate that the Federal Communications Commission (FCC) had issued, necessitating a switch to a more efficient spectrum band for most public safety operations. The company said that about 3% of the full year growth in government revenues was due to this increase in U.S. public safety spending on infrastructure upgrades required by this shift. However, the deadline for this transition passed on January 1, 2013, and while the same has been waived for a few projects, the company does not expect similar double-digit growth rates in 2013. Instead, it expects government revenues to grow in the low- to mid- single digits range.
…Compensated by Enterprise’s return to strength
Since government sales account for about two-thirds of its overall revenues, Motorola was shielded from the effects of a tough macro-environment in 2012 due to the high priority governments attach to public safety. On the other hand, enterprises have proved to be more susceptible to spending cuts across their business verticals in 2012. This could change soon, however, as macroeconomic concerns subside and business spending on infrastructure returns. Motorola expects enterprise revenues to grow in the mid- to high-single digits in 2013.
Additionally, the company is focusing on maintaining market share within the enterprise segment through important acquisitions such as Rhomobile in 2011, and the more recently completed Psion. The company has already leveraged its Rhomobile acquisition to launch an application framework targeted at enterprise developers and promote sales of its rugged handheld devices. The Psion purchase will help it expand globally and strengthen its mobile computing portfolio. We see Motorola’s enterprise focus helping it tide over near-term macroeconomic concerns while preparing itself for the high future demand for enterprise mobile computing devices.
As for government revenues, we see the adoption of LTE for public safety along with the broader trend of analog-to-digital shift not only in the U.S. but also internationally as the key drivers of Motorola’s value. U.S. public safety spending in the coming years will be bolstered by the job creation bill passed in February last year that reallocated the D Block spectrum for public safety use and provided a funding of $7 billion to build out a nationwide network over the next eight years.
Motorola is likely to benefit from the higher stickiness of its government customers as well as its strong market position and large installed base of security devices to grab a big chunk of that market going forward. (see Motorola Solutions to Benefit from Public Safety Broadband Spending)