How The Services Segment Can Drive Value For Motorola Solutions

Motorola Solutions’ (NYSE:MSI) bread-and-butter land-mobile radio sales to U.S. government agencies could come under pressure over the long run, with the U.S. government looking to create an alternative, interconnected communications platform for first responders called FirstNet. However, Motorola is looking to counter this by improving sales of its services operations, which provide end-to-end solutions ranging from implementation and optimization to repairs, support, and hardware maintenance. Over the first nine months of 2017, Motorola Solutions’ services revenues rose by about 9% year-over-year to $1.88 billion, while its product sales grew by less than 5%. Although services revenues are tied to hardware sales, we believe that Motorola should be able to grow services revenues as a percentage of hardware sales in the long run, driven by acquisitions in the managed and support services space and growth in software sales. Software sales in particular could add value for Motorola, given their higher margins and ability to drive customer loyalty via platform lock-ins. For example, Motorola is looking to double down on command center software, which is used for emergency call handling.

We have created an interactive analysis that determines how stronger services and particularly software sales could impact Motorola’s valuation. If we assume that service revenues as a percentage of product sales rise to about 85% by 2024, up from our base case of 70% of product revenues, with services gross margins rising to about 40%, up from our base case of under 35%, there could be an upside of close to 20% to our price estimate.

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