February 9, 2015 Motorola Solutions Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 12/02/2014 Current Price (02/06/15) $64.66 Target Price $68.00 52-Week High $67.87 52-Week Low $58.50 One-Year Return (%) 2.20 Beta 0.83 Average Daily Volume (sh) 1,887,659 Shares Outstanding (mil) 237 Market Capitalization ($mil) $15,324 Short Interest Ratio (days) 3.41 Institutional Ownership (%) 90 Insider Ownership (%) 2 Annual Cash Dividend $1.36 Dividend Yield (%) 2.10 5-Yr. Historical Growth Rates Sales (%) -13.7 Earnings Per Share (%) 23.6 Dividend (%) 16.5 using TTM EPS 27.3 using 2015 Estimate 24.6 using 2016 Estimate 20.1 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY Risk Level * (MSI-NYSE) Analyst Note Motorola Solutions reported mixed numbers in the fourth quarter of 2014, beating the Zacks Consensus Estimate on earnings but missing on revenues. The company expects revenues in first-quarter to drop 2% to 4% year over year. The company continues to face declining demand across different geographical regions. Moreover, phasing out of the iden network and reduced government expenditure will act as further headwinds for the company. Meanwhile, higher number of contract wins, divestiture of non-profitable segments, launch of new devices and a higher cost reduction target will boost margins and revenues going forward. Moreover, the authorization of a $5 billion share buyback plan will drive shareholders wealth. We believe that the stock is fairly valued at current levels and hence retain our Neutral recommendation on the company. Low Type of Stock Large-Growth Industry Wireless Equipm Zacks Industry Rank * 107 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 1,973 A 2,107 A 2,112 A 2,504 A 8,696 A 2014 1,801 A 1,393 A 1,436 A 1,823 A 5,881 A 2015 1,202 E 1,392 E 1,448 E 1,799 E 5,840 E 2016 5,954 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.55 A $1.03 A $1.23 A $1.57 A $4.34 A 2014 $0.40 A $0.40 A $0.35 A $1.22 A $2.41 A 2015 $0.36 E $0.56 E $0.63 E $1.12 E $2.63 E 2016 $3.22 E Projected EPS Growth - Next 5 Years % 2 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
RECENT NEWS Fourth Quarter Earnings Feb 4, 2015 Motorola Solutions reported mixed financial results in the fourth quarter of 2014, wherein the bottom line surpassed the Zacks Consensus Estimate while the top line missed the same. Quarterly GAAP net loss from continuing operations came in at $926 million or $4.02 per share as against a GAAP net income of $293 million or $1.12 per share in the prior-year quarter. Adjusted earnings per share of $1.22 outpaced the Zacks Consensus Estimate of $1.03. Quarterly total revenue stood at $1,823 million, flat year over year. The figure fell short of the Zacks Consensus Estimate of $1,930 million. Quarterly gross margin stood at 50% as against 49.6% in the prior-year quarter. Operating profit on a non-gaap basis, in the reported quarter, was $483 million compared with $396 million in the prior-year quarter. Likewise, operating margin in the same quarter was 26.5% compared with 21.8% in the year-ago quarter. Motorola Solutions generated a negative $700 million in cash from operations in fourth-quarter 2014 as against a positive $580 million in the year-ago quarter. Quarterly free cash flow was negative $751 million as against a positive $521 million in the year-ago quarter. At the end of the fourth quarter, Motorola Solutions had $3,954 million in cash and cash equivalents compared with $3,225 million at the end of 2013. Total debt, at the end of the quarter, stood at $3,396 million compared with $2,457 million at the end of 2013. Meanwhile, the debt-to-capitalization ratio was 0.55, up from 0.40 at the end of 2013. Segment Wise Results Quarterly Product revenues totaled $1,246 million, up 3% year over year. Services revenues were $577 million, down 5% year over year. Quarterly Product operating margin was 31.6% compared with 23.3% in the year-ago quarter. Services operating margin came in at 15.4%, down from 18.7% in the comparable year-ago quarter. Financial Outlook Motorola Solutions expects revenues in first-quarter 2015 to drop 2% to 4% year over year while non- GAAP earnings per share from continuing operations are likely to be in the range of 22--27 cents per share. For 2015, the company expects revenues to remain flat or decline by 2% as compared with 2014 while non-gaap earnings per share from continuing operations are likely to come in between $3.15 and $3.25. VALUATION Motorola Solutions delivered mixed numbers in the final quarter of 2014. The company reported betterthan-expected earnings but lower-than-expected revenues. Motorola Solutions is currently trading at Equity Research MSI Page 2
24.6x of our 2015 earnings estimate. This is at a premium to the S&P 500. With respect to our fiscal 2016 earnings estimate, the stock is trading at 20.1x, which is at a discount to the industry average but at a premium over the S&P 500. We believe that the stock is fairly valued at current levels and hence retain our Neutral recommendation on the company with a target price of $68, based on 25.9x our 2015 earnings estimate. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Motorola Solutions, Inc. (MSI) 24.6 20.1 2.0 19.8 27.3 N/A 14.6 Industry Average 36.6 24.0 15.0 26.6 58.5 299.9 25.6 S&P 500 16.4 15.4 10.7 15.0 18.9 19.4 12.0 ZTE Corp. (ZTCOY) 15.1 13.1 5.6 19.1 32.9 7.3 Nokia Corporation (NOK) 21.5 18.7 13.3 23.6 21.7 161.2 7.7 Harris Corporation (HRS) 14.3 14.0 9.9 13.9 15.1 7.4 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Motorola Solutions, Inc. (MSI) 4.8 6.5 1.2 19.0 1.2 2.2 10.6 Industry Average 2.8 2.8 2.8 2.7 0.3 0.7-4.9 S&P 500 5.3 9.8 3.2 25.5 2.1 Equity Research MSI Page 3
Earnings Surprise and Estimate Revision History Equity Research MSI Page 4
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of MSI. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will underperform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1136 companies covered: Outperform - 16.4%, Neutral - 76.8%, Underperform 6.5%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. NOTE: THIS IS A NEWS ONLY UPDATE. REST OF THE REPORT HAS NOT BEEN UPDATED YET. OVERVIEW Motorola Solutions Inc. (MSI), based in Schaumburg, IL, is a leading communications equipment manufacturer, and has strong market positions in bar code scanning, wireless infrastructure gear, and government communications. The company was formed following the split-off from its parent company Motorola Inc. on Jan 4, 2011. Motorola Solutions generally provides services and solutions to the government segments and public safety programs together with large enterprises and wireless infrastructure service providers. It develops and services both analog and digital two-way radio, voice & data communications products and systems for private networks, wireless broadband systems and endto-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. Motorola Solutions reports in two segments: Government Segment: This segment includes sales from two-way radios and public safety systems. Service revenues in the government segment are related to designing, installation, maintenance and optimization of equipment for public safety networks. The segment accounted for nearly 69.3% of the company s total revenue in fiscal 2013, primarily generated from the sale of public safety products to various state governments. Equity Research MSI Page 5
Enterprise Segment: This segment includes sales of enterprise mobile computing devices, scanning devices, wireless broadband system 1.4, RFID data capture solutions and iden infrastructure. Service revenues in the Enterprise segment are primarily derived from maintenance contracts associated with the above-mentioned products. The segment accounted for the remaining 30.7% of the company s total revenue in fiscal 2013, which came from the sale of products following the acquisition of Symbol Technologies. REASONS TO BUY Recently, Motorola Solutions completed sale of its enterprise business for $3.45 billion and the proceeds of which will be used to boost shareholders wealth by authorizing $5 billion share repurchase program. Divesting non-profitable segment will also drive margins for the company in the forthcoming quarters. Meanwhile, ongoing conversion of public safety radios to digital network technology from analog in the U.S. will act as a major product upgrade cycle for Motorola Solutions. The government s decision to install a nationwide wireless network for public safety may become a long-run revenue driver for the company. Management is looking for business prospects to the tune of over $1 billion in the next 3-4 years and another $3 $4 billion opportunity within the next 5 years. Motorola Solutions continues to win public safety contracts worth $57 million from the state of Maryland, Loudoun County and Spartanburg County. It also struck $21 million LTE deals with Los Angeles Regional Interoperable Communications System Authority. Previously, the company won a $175 million contract with the same department to deliver a public safety LTE network. In order to boost its public safety LTE portfolio, Motorola Solutions is spending heavily in Android and new devices like the TC55 and LEX 700. The company also unveiled the APX 7000L device which allows faster data speed through LTE on a land radio voice device. The company has also achieved a huge order of 4,000 TC55 units from a large U.S. retailer. Companies like Bed Bath & Beyond and Ceasars Entertainment will deploy several access points across its footprints. Recently, the company launched a new mission-critical handheld device called LEX L10, which is powered with push-to-talk (PTT) button and a 4.7-inch touch screen. The new device is operational in covert mode and can be securely connected with a Bluetooth to Motorola Solutions APX ASTRO 25 radios. Hence, allowing remotely accessing the Project 25 radio s contacts, channels and messages as well as providing a backup route for emergency signaling during critical missions. Earlier, Motorola Solutions teamed up with 3M Company to distribute headsets of the 3M Peltor Heavy-Duty Headset portfolio. The company also entered into an agreement with Verizon Wireless to install a standard-based public safety broadband network for mission-critical operations leveraging on the nationwide LTE network of the latter. This solution will offer public safety agencies real-time management and control, enhance nationwide roaming, while sharing existing mobile broadband sites. Further, the two companies also decided to collaborate to enhance machine-to-machine (M2M) connections, while delivering vertical enterprise solutions with wireless data and voice. The sale of its Enterprise Segment will not only boost the company s cash position but will also drive margins for Motorola Solutions. Motorola Solutions raised its previously set cost reduction target to $300 million from $200 million by the end of 2015. The company will likely achieve the target by means of streamlining its corporate structure thus, helping the company to improve its margins moving forward. Earlier, Motorola Solutions bought privately held Twisted Pair Solutions, a leading provider of push-to-talk technology over broadband applications. Twisted Pair Solutions offers a standard communications platform used in critical situations by military, government and private enterprises worldwide. The integration of Twisted Pair Solutions into Motorola Solution s Government Solutions segment will enhance Equity Research MSI Page 6
revenues significantly. Earlier in the year, Motorola Solutions launched its fifth generation shopping wireless device, MC18 that offers an advanced self-scanning facility to shoppers. The gadget is powered with the Bluetooth Low-Energy (BLE) technology which helps customers trace products and avail promotional offers with the help of indoor maps. It also recommends complementary goods available in the store. It has also developed an enterprise-class, dual radio 802.11ac access point (AP) for high quality internet speed. We believe that the launch of such value-added services will drive the company s top line. REASONS TO SELL In the third quarter of 2014, Motorola Solutions performed disappointingly reporting a decline in revenues across both its segments. However, Product revenues fell 31% sequentially. This drop in sales was primarily led by weaker ASTRO and professional commercial radio subscriber volume coupled with reduced iden deployment. Moreover, soft demand in North America, Asia Pacific and the Middle East has resulted in the deteriorating sales. Further, operating income and net earnings fell 16% and 75%, respectively, from the year-ago level. The U.S. Justice Department and the Securities and Exchange Commission are currently investigating whether Motorola Solutions bribed to win contracts in several European countries. The U.S. authorities have asked the company to provide information regarding transactions in seven European countries over the past two years. The U.S. Foreign Corrupt Practices Act prevents the American companies from bribing officials of other countries. The regulators are looking for evidences to validate whether Motorola Solutions violated the law. Motorola Solutions is heavily dependent on government expenditures for its revenues as 70% of its total sale comes from government agencies. We thus remain concerned that reduction in government expenditure and macroeconomic fluctuations may affect the company s top line. Moreover, management s expectation to generate $1 billion cash from operations per annum might prove a difficult task. The decision of Sprint Corp. to gradually phase out the iden network is a setback for Motorola Solutions. Sprint has already started with the elimination of the iden network in 2013. The total phase-out will take 3-4 years. As a result the company expects revenues in fourth-quarter 2014 to drop 1% to 3% year over year. Lower demand has forced the company to repeatedly slash its guidance over the last few quarters. Moreover, the company exited the reported quarter with nearly $3.4 billion debt against $2.5 billion in the prior-year quarter while debt-to-capitalization ratio for the same period stood at 0.51 compared with 0.40 at the end of 2013. Equity Research MSI Page 7