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Motorola Solutions Inc. |(MSI-NYSE) |$56.78 | |

Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.

Reason for Report: 1Q13 Earnings Update

Prev. Ed.: Mar 20, 2013; 4Q12 Earnings Update

Brokers’ Recommendations: Neutral: 46.7% (7 analysts); Positive: 46.7% (7 analysts); Negative: 6.6% (1analyst) Prev. Ed.: 6, 7, 1

Brokers’ Target Price: $61.00 (↑ $5.33 from the last edition; 8 analysts) Brokers’ Avg. Expected Return: 7.43%

Note: A Flash Update was done on Apr 24, 2013 (4Q12 Earnings Update; Misses Expectations)

Portfolio Manager Executive Summary

Motorola Solutions Inc. (MSI), based in Schaumburg, Ill., is a leading communications equipment manufacturer, and is well positioned in the bar code scanning, wireless infrastructure gear, and government communications markets. The company came into existence after the spin off from its parent company Motorola Inc. on Jan 4, 2011. Motorola Solutions Inc. generally offers solutions and services for the government segment and public safety programs together with large enterprises and wireless infrastructure service providers. It develops and provides both analog and digital two-way radio, voice & data communications products and systems for private networks, wireless broadband systems and end-to-end enterprise mobility solutions to a wide range of enterprise markets. It also provides customized, fully-integrated communication and information systems for mission-critical customers, including government and public safety agencies.

Key factors for evaluating an investment in MSI shares are as follows:

• Motorola Solutions is the largest developer of public safety products in the U.S. commanding nearly 50% market share.

• The company is a leading provider of two-way radios and WLAN products for both government and private enterprises.

• The U.S. government’s approval to prioritize the 700 MHz D-Block spectrum for public safety purposes is expected to enhance Motorola Solutions’ top line in the near future.

• Slowdown in the government expenditures due to budgetary pressures, particularly at the state and local levels, may significantly jeopardize the company’s overall financials.

Analysts’ Opinions: Of the 15 analysts in the Digest Group covering the stock, 46.7% adopted a positive stance, 46.7% provided a neutral rating, while the remaining 6.6% were negative on the stock. Target prices provided by the analysts range from a low of $50.00 to a high of $75.00, with the average at $61.00. The average expected return from the current share price is 7.43%.

Positive (Buy or equivalent ratings) – 7/15 analysts or 46.7%: These analysts hold a bullish stance based on the strong outlook for its Government business segment, offsetting the weaker Enterprise segment. They expect substantial revenues and double-digit EPS growth going forward from the public safety LTE network build out, which is expected to ramp up in 2014. Though MSI is facing cyclical headwinds, these analysts believe that MSI is well positioned over the long term. Furthermore, dividend hike, share buyback and restructuring the company’s capital structure to a net debt position will lead to EPS growth, enhancing shareholders’ value.

Neutral (Hold or equivalent ratings) – 7/15 analysts or 46.7%: These analysts believe that the company’s Government business segment will do well based on public safety LTE network rollout. However, they remain concerned about the growing competitive pressure in the enterprise sector. Moreover, they believe, based on the macroeconomic concern, weak enterprise IT spending and potential budget cuts among local governments could affect its Enterprise segment. These analysts expect declining iDEN business, slowing demand of ruggedized mobile devices and sliding market share in some of the growth markets, to create certain headwinds for the company and thus preferred to remain neutral.

Negative (Sell or equivalent ratings) – 1/15 analysts or 6.6%: The analyst remains bearish on the stock as it believes that MSI’s Enterprise segment will remain a major concern. According to the analyst, increased competition, declining iDEN business and unfavorable foreign exchange rate, remain the near-term headwinds for the company.

Jun 19, 2013

Overview

Key investment considerations as identified by the analysts are as follows:

|Key Positive Arguments |Key Negative Arguments |

|Motorola Solutions is the largest manufacturer of public safety |Motorola Solutions is heavily dependent on government expenditures for its |

|products, barcode readers and small rugged mobile computers in the U.S. |revenues. Approximately 65% of the total sales of Motorola Solutions come from |

|With manufacturing facilities located at various strategic locations, |government agencies. Macroeconomic fluctuations could adversely impact the |

|the company enjoys the benefits of scale and economy of operation. |company’s top line. |

|Motorola Solutions has always been known for its ability to innovate and|Decision of Sprint Nextel (S) to gradually phase-out iDEN network is a setback |

|timely introduction of quality products, which is driving revenue growth|for Motorola Solutions. Sprint Nextel will start eliminating iDEN networks from |

|in the public safety market. |2013. Total phase-out will take 3–4 years. |

|Motorola Solutions primarily caters to the stable government |Deteriorating retail same-store-sales could dampen the demand for enterprise |

|enterprises, and thus maintains a healthy top line. |products of Motorola Solutions. |

|While the federal budgetary pressure may continue, state and local level|A reduction in federal rainy day funds coupled with a lack of state tax receipt |

|agencies have become major growth drivers for the company. |may significantly impact the company’s near-term business prospects. |

|Europe, the Middle East and Africa are expected to contribute more in |Adverse economic condition and competitive pressure can impact the company’s |

|the near future. |Enterprise segment as it contributes almost 35% of the total revenue. |

|Motorola Solutions boasts a healthy cash flow and valuation also remains| |

|attractive. | |

Motorola Solutions Inc. (MSI), based in Schaumburg, Ill., is the largest public safety solutions provider in the U.S. The company develops a range of mobile devices and systems that enable safe and effective communication. Motorola Solutions is a leading vendor of bar code scanners, rugged mobile computers, and RFID solutions for government and several private enterprises.

Motorola Solutions reports its financial results in two segments:

Government Segment: This segment includes sales from two-way radios, public safety systems and emergency response systems. Service revenues in the government segment are related to designing, installation, maintenance and optimization of equipment for public safety networks. This segment accounted for nearly 2/3 of the company’s total revenue, which was primarily derived from the sale of public safety related products to various state governments.

Enterprise Segment: This segment includes sales of enterprise mobile computing devices, scanning devices, wireless broadband systems; RFID data capture solutions and iDEN infrastructure. Service revenues in the Enterprise segment are primarily derived from the maintenance contracts associated with the above-mentioned products. This segment accounted for the remaining 1/3 of the company’s total revenue, arising from the sale of products following the acquisition of Symbol Technologies.

Motorola Solutions provides business-and-mission-critical communication products and services for enterprise and government customers worldwide. The company caters to a wide array of industries including Logistics & Transportation, Hospitality, Public Safety, Retail, Wholesale Distribution, Oil & Natural Gas and Utilities where retail is its biggest enterprise customer. The company also provides design, implementation, management, security, and support services for the government and public safety agencies.

Motorola Solutions faces stiff competition from Cisco Systems Inc., Honeywell International Inc., Harris Corp. and European Aeronautic Defense and Space company, EADS N.V. The company’s website is .

Note: MSI’s fiscal references coincide with the calendar year.

Jun 19, 2013

Long-Term Growth

Motorola Solutions commands nearly half of the total public safety market in the U.S. and is also expected to do well in the data networking sector. The company is the largest manufacturer of barcode readers and small rugged mobile computers and primarily caters to a wide variety of industries including education, government, healthcare, hospitality, human services, manufacturing, mobile operators, petrochemical, retail, transportation and logistics, utility and wholesale distribution industries. Motorola Solutions’ business is primarily focused on providing mission critical communications to the public safety market backed by the government. Though the analysts are wary about the current macroeconomic concerns, they are optimistic that public safety will be the less affected segment as the government has prioritized it. However, the company derives a major chunk of its revenues from government projects, which puts them at risk if the governments across the world go for spending cuts in order to reduce the fiscal deficit.

Motorola Solution Inc. is going to benefit from the U.S. government’s decision to auction the airwaves currently used by the TV stations. The D-block legislation has set aside 10 MHz block of spectrum for deployment of public safety network and has earmarked around $7 billion of the auction funds for the dedicated LTE network build out. The analysts remain optimistic that the company’s top line would improve due to its large base of government customers along with an impressive product portfolio of handsets and other infrastructure equipment. However, the ability to spend money on public safety depends on the ability of the Federal Communication Commission (FCC) to generate sufficient revenues from the auction of allocated TV spectrum to wireless carriers. They believe that the arrival of faster technology like LTE will be a growth driver for the company as governments and enterprises shift from analog to digital technologies. The total size of the wireless broadband network including network deployment, devices installations, applications and services will be more than $10 billion. The company is looking for a business prospect of around $3–$5 billion within the next 5 years.

In Jun 2012, MSI declared that it will acquire Psion – an established player in the rugged mobile computing industry – for a cash consideration of about $200 million. Psion develops mobile computing hardware, software and services that meet the different needs of its customers. According to MSI, the acquisition will strengthen the company’s position in the ruggedized handheld products and vehicle-mount terminals, thus expanding its presence in the global market. The company further believes that the acquisition will support its inorganic-growth strategy and will enhance its global customer base.

MSI believes that LTE build out provides a global opportunity and it has witnessed continued interest from several countries. Apart from the LTE contracts, the company has a number of long-term contracts in its pipeline, particularly for its mission critical Voice and Data network solution. Motorola Solutions has recently formed a partnership with Ericsson to provide safety applications and services to state and local governments. This will further boost revenues going forward. Moreover, MSI believes that WLAN will play an important part in its managed service business based on customer’s dependence on MSI for mobile computing devices.

MSI’s ability to modify product in a cost effective manner will allow it to win customers in the emerging markets. A broader part of the company’s emerging market strategy is Asia and Africa, where it focuses on capturing the market by offering low-end products. However, the declining iDEN business could impact the company’s revenues over the long term. The analysts with negative opinion believe that the company could face stiff competition from Alcatel Lucent (ALU), Cisco Systems Inc (CSCO) and others.

Jun 19, 2013

Target Price/Valuation

Provided below is a summary of target price and rating as compiled by Zacks Research Digest:

|Rating Distribution |

|Positive |46.7%↓ |

|Neutral |46.7 %↑ |

|Negative |6.6%↓ |

|Avg. Target Price |$61.00↑ |

|Digest High |$75.00↑ |

|Digest Low |$50.00 |

|Analysts with Target Price/Total |8/15 |

According to the analysts, risks to the achievement of price targets include macroeconomic conditions, enterprise IT spending patterns, emergence of new competitors and probable reduction in budget among local government entities. Moreover, replacement of MSI instruments by new smartphones may put additional pressure on price targets.

Recent Events

On May 7, 2013, MSI’s board of directors has approved a regular quarterly dividend of $0.26 per share on the company’s common stock. The dividend is payable on Jul 15, 2012 to the stockholders of record at the close of business on Jun 14, 2013.

On Apr 24, 2013, MSI announced its 1Q13 earnings results. Highlights for the quarter are as follows:

▪ Total revenue in 1Q13 was $1,973 million versus $1,956 million in 1Q12. This was below the Zacks Consensus Estimate of $2,055 million.

▪ Quarterly gross margin in 1Q13 was 48.4% compared with 49.7% in 1Q12.

▪ Operating income in 1Q13 was $216 million, down by a massive 6.9% year over year (y/y).

▪ Pro forma EPS in 1Q13 was $0.55 compared with $0.59 in 1Q12 and was just below the Zacks Consensus Estimate of $0.56.

Revenue

As per the company press release, total revenue in 1Q13 was $1,973 million, up 1.00% y/y.

Revenue Breakdown by Product Segment

1) Government Segment (68.2% of 1Q13 revenue): Revenues in 1Q13 were $1,346 million, up 3.0% y/y.

2) Enterprise Segment (31.8% of 1Q13 revenue): Revenues in 1Q13 were $627 million, down 4.0% y/y.

Outlook

For 2Q13, the company expects revenues to remain same or fall by 2% y/y. For fiscal 2013, revenues are expected to grow 3% to 4% y/y.

Motorola Solution expects to tread the growth path by providing end-to-end solutions to government and enterprise customers. The company’s ability to understand client-specific needs, domain knowledge and the long standing relationship with the customers will be a positive, going forward. Most analysts believe that the Enterprise segment remains the concern for MSI, particularly in the WLAN and Advanced Devices product category, based on increased competition. New entrants in these categories are putting pressure on the company by offering cheaper products, particularly to the medium and smaller mobile device customers. WLAN continues to struggle as MSI is shifting sales resource from it to make WLAN part of the managed service platform. Additionally, management believes that the transition to the next version of Windows 8 Embedded operating system (OS) is also causing customers to delay their purchasing decision or shift to Android-based front office applications. The delay is slowing demand of MSI’s ruggedized mobile devices. Most analysts are not certain about the launch of the new Windows OS release and believe that weakness in the enterprise mobile segment is cyclical in nature. They expect acceleration in Enterprise sales from the 2H13.

The company’s Government segment is expected to perform well, bolstered by new product innovations, growth in the core markets and narrow banding mandate in the United States. Narrow banding mandate (Migration to 12.5 kHz efficiency technology), which will take effect during 2013, allows the creation of additional capacity within the same radio spectrum and support more users. The company will benefit as it holds the widest choice of two-way radio equipment operating in 12.5 kHz efficiency. MSI continues to win large contracts from North America and around the world primarily driven by the ongoing transition from analog to digital technology as government and local municipalities demand the most efficient products for their first responders. Currently, 45% of the company’s customers use systems, which are more than 10 years old. MSI believes that its P25 phase II systems will inspire more customers to upgrade their systems, thus, creating stable demand for its broadband products.

However, according to management, weakness in the Asia-Pacific region remains a major challenge for MSI following the completion of major projects in Australia, India and Malaysia. The company has addressed the weakness by changing the management in that region. MSI expects LTE deployment delay in the U.S. and has halved the prospect of the LTE projects in 2013. Reiterating management’s view, most of the analysts expect LTE expansion of public safety networks in the U.S. to remain subdued in 2013 but will pick up pace in 2014.

The company’s ASTRO solution continues to win contracts from North and South American customers. MSI already has more than 30 customers for its phase 2 TDMA systems, which is twice as efficient as required by the current narrow band mandate. MSI recently won its largest ASTRO order from Africa and has added a multi-million expansion to its existing contracts in Brazil. MSI’s portable radio product, TETRA has performed incredibly in the last three years and with the recent launch of two new products, the company has strengthened its radio products’ base.

MSI’s mission-critical solutions remain a preferred choice for public safety departments at both state and local government, hence aiding revenue growth for the company. Management expects Psion to generate $250 million of revenues in 2013. Most of the retail companies are upgrading their store operations to enhance customer service and improve efficiency of the workers. The company has won several contracts for its mobile computing solutions from various retail and transportation companies. These companies are increasingly deploying MSI’s MC17 to serve their customers more effectively. However, continuous reduction in iDEN clients is a cause of concern for MSI in 2013.

Margins

Gross profit in 1Q13 was $1,018 million up 3.6% y/y. Gross margin was 48.4% versus 49.7% y/y.

Operating Expenses in 1Q13 was $739 million, down 0.3% y/y. SG&A was $460 million down 2.5% y/y. R&D was $262 million up 3.1% y/y.

Operating income in 1Q13 was $216 million, down 6.9% y/y, while Operating margin was 10.9% versus 11.9% y/y.

Net income in 1Q13 was $192 million, up 20.8% y/y while net margin was 9.7% versus 8.1% y/y.

Outlook

Management expects margins within the Government business segment to remain stable on the back of continuous investments and increased focus on cost management. They also expect margin expansion within the Enterprise segment based on revenue growth. The company’s plan to move to a net debt position by 2014 can lead to deteriorating margins in the future. Most analysts believe that reduction in the high-margin iDEN business and lower profitability of the Psion business can exert additional pressure on MSI’s margins.

Earnings per Share

As per the company press release, EPS for 1Q13 was $0.66 as compared to $0.59 in 1Q12.

Outlook

Management provided EPS guidance in the range of $0.66 – $0.71 for 2Q13.

The analysts believe that management’s investor friendly capital deployment strategy will lead to EPS growth, going forward. They expect the share repurchase activity to remain strong in the forthcoming quarters, thus paving the way for double-digit EPS growth.

– The Online Stock Research Community

Discover what other investors are saying about Motorola Solutions Inc. (MSI) at:

MSI profile on

Jun 19, 2013

|Research Analyst |Kaustav Sarkar |

|Copy Editor |Parijat Sen |

|Content Ed. |Nalak Das |

|Reason for Report |Earnings |

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