Mixed Fortunes For Motorola Solutions Inc (MSI)
Many believed that ever since Motorola Solutions Inc (NYSE:MSI) sold off Motorola Mobility, the company may be sold out to a willing buyer when the opportunity presents itself. Whether management’s current strategy is trying to prepare the company for a takeover or not is a different story. What is clear, though, is that Motorola is trying to drive shareholder value. Once again, whether that shareholder value being sought will be achieved remains the question of the moment.
At the moment, Motorola has its eyes on many things, some intended to bolster earnings and other aimed at driving more revenue wins. The company is pursuing a turnaround that looks attainable but challenging at the same time.
Cost reduction is one area where the management of Motorola Solutions Inc (NYSE:MSI) is not leaving anything to chance. The company has been able to buyout some of its managers to lower operating expenses.
In the most recent quarter (1Q2015), the company posted 13% decline in operating expenses to $396 million. For the current full-year, the company is targeting cost-saving between $150 and $175 million on the operating expenses posted in 2014.
New business angle
Motorola Solutions Inc (NYSE:MSI) is rethinking its business strategy and data analytics and managed services are some of the new growth areas that the company is considering. Selling of communications hardware remains the core business of Motorola and that might not change soon. The company continues to build out its Services business so that it can deliver a full suite of managed services to these clients.
In Australia and New Zealand, the company’s smart safety solutions agenda is exciting. Motorola recently closed a AU$175 million deal with South Australian government whereby the company will run the state’s network for monitoring accidents for the next seven years.
Building a strong Service business by offering managed solutions allows Motorola to both tap new revenue and also diversify its revenue base.
As Motorola Solutions Inc (NYSE:MSI) pursues broader Services presence, the company continues to breathe new life into its Products business. The company has been able to launch new hardware like the APX8000 portable two-way radio, which is also Wi-Fi-enabled. Motorola has also been able to upgrade its portfolio of communications hardware. The new product launches and the upgrades should enable the company drive more Product sales.
LTE rollout for first responders
The public safety industry is transitioning to LTE. The opportunity there is that the Motorola’s reputation as a provider of mission-critical communications equipment gives it an edge when it comes to winning contracts from government agencies.
Risk areas for Motorola Solutions
LTE deployment for mission-critical: The shift to LTE for mission-critical is a double-edged sword. While Motorola can rely on its reputation in the industry to win more contracts, the rollout of LTE also opens the company to more competition. The rollout of LTE is attracting new players, which means pricing pressure can be expected, hurting both sales and profits in the business.
Historically, Motorola Solutions Inc (NYSE:MSI) has depended on government expenditures for most of its revenue. However, given the reduction in government spending on LTE upgrades, things don’t look great for Motorola in the network upgrade business.
The other cause for concern in the LTE narrative is that as enterprise customers evaluate their long-term roadmap of LTE deployment, they may settle for other providers, hurting the demand for Motorola’s legacy products in the process.
Debt burden: Motorola reported having long-term debt of $3.392 billion at the end of 1Q2015 with the debt-to-capitalization ratio being 0.62, having risen from 0.55 as of the end of 2014. What is clear here is that the company’s is sinking deeper into debts and that is unfavorable for its future growth.
The save the situation, the company should drive its cost restructuring further save money to prevent a plunge into more debt.
Shareholder returns: Motorola Solutions Inc (NYSE:MSI) has a culture of returning excess cash to shareholders, which is done through dividends and stock repurchase. Strong shareholder orientation in the company has double benefits – it keeps investors glued to the stock and also helps to bolster EPS.
The Board of Motorola recently approved a quarterly dividend of $0.34 per share, which is payable on July 15. The dividend will capture shareholders of record as of the close of business on June 15.
Motorola returned $2.9 billion to its shareholders in 2014 through a combination of dividends and buybacks. MSI’s share buyback is likely to remain at higher levels at least through 1Q2016, helping boost EPS.
Strong North America business: Motorola Solutions Inc (NYSE:MSI)’s North America business is improving, with revenue in the region increasing 6% YoY in 1Q2015. Strength in North America helped to offset weakness in the company services segment with the region contributing 62% of total revenue in 2014.
2Q and fiscal 2015 outlook
Motorola Solutions Inc (NYSE:MSI)’s weak revenue projection for 2Q2015 and full-year 2015 is a cause for concern. The company cited that weak European economy and unfavorable foreign exchange movements will impact is top-lines in the current quarter and year.
For the current quarter, Motorola expects EPS in the range of $0.51-$0.56. Revenue is expected to be about $1.34 billion, meaning a decline of 3% to 5%. Analysts expect EPS of $0.59 and revenue of $1.4 billion for the quarter.
Full-year revenue is expected in the band of $5.76 to $5.88 billion, meaning flat to a decline of 2%. EPS is expected to come in the range of $3.20-$3.40. The company had earlier guided EPS in the range of $3.15-$3.35. Better cost management has been cited for the improvement in EPS projection. Analysts on the average are looking for full-year EPS of $3.25 on revenue of $5.81 billion.
Currency translation is expected to hurt sales in 2Q and fiscal 2015.
In 1Q2015, Motorola posted EPS of $0.38 on revenue of $1.2 billion. Product sales in the quarter were up 1% to $758 million and Service revenue declined 2% to $465 million.
While North America revenue rose 6% in 1Q, Sales in Europe and Africa declined 11% on the back of unfavorable currency movements. Adjusting for the currency impact saw revenue in the region up 1%. Sales in Asia Pacific fell 5% but were flat after adjusting for currency translation impact.
The sale of Motorola
Motorola Solutions Inc (NYSE:MSI) is what remains of the former Motorola Inc. Google Inc (NASDAQ:GOOGL) acquired Motorola Mobility in 2012 for $12.5 billion and two years later it sold part of the business to Lenovo Group for $2.9 billion.
Motorola sold its canner business for $3.5 billion to Zebra Technologies, a step that was seen to be laying the ground for the eventual sale of the whole company. However, Motorola has been unsuccessful in attracting buyers, especially among large industrial companies and private-equity firms.
The possibility of selling Motorola Solutions Inc (NYSE:MSI) looks remote as the management seems to be more interested in building the business going forward. Reports about a key investor in the Motorola selling a third of its stake to the company also doesn’t seem to support thoughts of any buyout deal in the works.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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