Motorola Cuts Guidance As Macro Concerns Persist

Apr.30.13 | About: Motorola Solutions, (MSI)

Motorola Solutions (NYSE:MSI) reported weak Q1 2013 results and cut its revenue forecast for the full year, as macroeconomic concerns delayed an expected recovery in enterprise spending. Revenues in the first quarter were up only 1% over the same period last year, as enterprise sales declined by 4% y-o-y offset to an extent by a 3% growth in government revenues. The weakness is likely to continue next quarter as well, with the company guiding for revenues to be flat to down 2% as compared to the second quarter of 2012. Lower sales volumes also compressed the overall operating margins to about 11% for the quarter, down by a full percentage point over the year-ago quarter primarily due to weak enterprise spending.

However, the communications vendor expects the enterprise sector to start recovering in the later half of the year, albeit slowly. The delay in enterprise recovery caused Motorola to slash its revenue guidance from 5-5.5% to 3-4% for the full year. The markets reacted negatively to the guidance cut, pushing Motorola's shares down by more than 8% since the earnings call. Fundamentally, however, 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. Our revised $58 price estimate for Motorola Solutions is in line with the current market price.

Narrowbanding cliff is seeing government growth slow…

Motorola's 2012 fiscal year was a solid one 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 the macroeconomic uncertainty surrounding the Euro debt crisis, government spending held up pretty well. However, a portion of the out-performance last year was due to the narrowbanding mandate issued by the Federal Communications Commission (FCC), which had necessitated a switch to a more efficient spectrum band for public safety operations. About 3% of the full year growth in government revenues was due to this increase in U.S. public safety spending. However, the deadline for this transition passed on January 1, 2013, and while the same has been waived for a few projects, it is unlikely that Motorola will be able to emulate the same kind of growth this year.

As a result, Motorola expects government revenues to grow in the low- to mid- single digits range, unlike the double digit growth rates posted last year. The downside in this case is also limited by the fact that public safety is usually down the priority list of areas that governments will look to cut their spending in. As a result, we see little impact to government revenues from sequestration, or the spending cuts that the federal government started implementing recently.

…Accentuating Enterprise's weak state

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. On the other hand, enterprises have proved to be more susceptible to spending cuts across their business verticals. However, the effect of the enterprise decline will be felt more acutely this year since government revenues are not improving by as much compared to an exceptionally good last year. This could change soon, though, as macroeconomic concerns subside and business spending on infrastructure returns. Motorola expects recovery in the enterprise division to return in the second half, as new products are launched and customers finally decide on which OS (Android or Windows) to transition their next-generation systems to.

Despite the tough environment, 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. We expect Motorola 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)

Disclosure: No positions