Following a few quarters of under-performance due to lower product sales in North America, Motorola Solutions has started to turn things around. For the second quarter of 2015, we expect the company to continue to benefit from its high order backlog in North America. However, the company has guided for a decline of 0-2% (constant currency) in overall revenues for the quarter, citing a $20 million headwind related to the delay in LA-RICS (Los Angeles Regional Interoperable Communications System) public safety LTE deployment as one of the reasons. The company reports its Q2 2015 results on Wednesday, August 5, and we will be particularly interested in the top line, excluding the LA-RICS delay, as well as the efficacy of the company’s cost-cutting initiatives.
Motorola expects to save a total of $150-175 million this year, largely through cost-cutting initiatives and staff reductions, as well as some FX impacts. The company has guided its Q2 2015 Non-GAAP EPS at $0.51-$0.56, which reflects a y-o-y improvement of close to 13%. We also expect the company to improve its operating margins, albeit at a slower pace than last quarter as deployment challenges in some ongoing projects may provide headwinds.
Our $62 price estimate for Motorola is slightly ahead of the current market price.
See our complete analysis for Motorola Solutions here
Rise In Order Backlog Can Help North America Sales
Following a period of mixed results, Motorola’s product business showed some signs of recovery in Q4 2014 and Q1 2015, as federal demand picked up and its order backlog rose. Its order backlog in Q1 2015 increased by a sizable $500 million, which is around 40% of Motorola’s quarterly sales. Effective conversion of its order backlog should help the company improve its product and services revenues in North America.
Expense Control Can Help Bottom line Growth
Motorola has lowered its operating expenses significantly over the last three years; the company’s quarterly expenses were $510 million in Q1 2012, and came down to just $396 million in Q1 2015. Motorola expects to save another $90 million – $115 million by the end of the year, and after its Q1 2015 results, the company raised its full year EPS guidance to $3.20-$3.40 from the previous range of $3.15-$3.35.
Motorola improved its operating margins significantly in Q1 2015 with effective execution of its cost optimization plans. If the company manages to repeat this performance in Q2, it can set the precedent for a relatively stable bottom line going forward. Motorola may face margin pressures in the future, however, due to an expected rise in competition, as rivals increasingly address the ongoing transition of public safety networks from analog to digital.
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