MSC-241 Free PDF - Design and Deploy for MOTOTRBO Solutions EMEA Updated: 2023

Investment Thesis

Motorola Solutions (NYSE:MSI) specializes in public safety and enterprise security solutions, with a large customer base and an integrated portfolio of software, services, and devices. The company has a strong track record of revenue growth, profitability, cash flow generation, and shareholder value creation. MSI also has a positive growth outlook, as it leverages its record backlog, robust pipeline, and strategic acquisitions to expand its offerings and grow its business.

However, we anticipate some challenges for MSI, such as geopolitical and competitive pressures on some of its products, which could limit its growth potential and profitability.

In this report, we evaluate the MSI product performances and the macro and competitive risks they face. We also project their future growth based on their strengths and weaknesses. Our analysis shows that MSI is close to its fair value, as its growth opportunities are offset by its competitive challenges. Therefore, we recommend a Hold rating for MSI.

Global Leader in Public Safety Solutions

Motorola Solutions calls itself a global leader in public safety and enterprise security, but we think its leadership is mainly in the public sector, from which it gets 75% of its revenue.

The company provides solutions in Land Mobile Radio Communications, Video Security and Access Control, Command Center Software, and Managed Services and also has a very strong track record of innovation, with over 6,500 patents. It has 20,000 employees and serves more than 100,000 customers in over 100 countries, including government agencies, law enforcement, fire and rescue, emergency medical services, utilities, transportation, education, hospitality, and manufacturing.

Motorola Solutions generated $9.1 billion in revenue in 2022, and expects to deliver nearly $10 billion in 2023.

$60B Addressable Market Opportunity

Motorola Solutions' products and services are in high demand, as the world becomes more complex and dynamic, and safety and security become more important. The company's customers face various challenges, such as natural disasters, pandemics, cyberattacks, terrorism, crime, and all kinds of social unrest.

Motorola Solutions addresses these challenges by providing mission-critical technologies that enable them to communicate, collaborate, and coordinate effectively. The company estimates that its total addressable market is over $60 billion, and that it has a leading position in most of its segments. Given the current macro environment, the company is well positioned for growth.

The company has a strong presence in the 3 segments, each with a large and growing target addressable markets;

• LMR Communications: The target market for this segment is $12 billion, and it is growing at a steady rate of 10% CAGR. This segment is the bread and butter of Motorola Solutions and drives majority of its revenue.
• Video Security and Access Control: The target market for this segment is $22 billion, and it is growing at a pace of 12% CAGR. This segment is very competitive and we will analyze it in detail.
• Command Center: This segment delivers command center software that integrates data, voice, video, and analytics to enable security operations. The target market is $13 billion, growing at a rate of 7% CAGR. This is a very profitable segment for MSI.

2023 Q3 Earnings and Product Performances

Motorola Solutions delivered strong performance in the third quarter of 2023, beating analysts' expectations and raising its full-year revenue guidance ($9,930M - $9,945M). The company reported revenue of $2.6 billion, up 8% year-over-year, driven by growth in both its segments: Products and Systems Integration, and Software and Services. The company also reported GAAP earnings per share ('EPS') of $2.70, up 66% year-over-year, reflecting its operational efficiency and profitability.

The company's three product segments also showed growth in the quarter, with LMR growing 6%, Video growing 8% and command center software growing 31%.

LMR, which accounted for 75% of the total revenue, was driven by growth in both LMR products and services. Video, which accounted for 18% of the total revenue, was driven mainly by growth in software and services. Command center software, which accounted for 7% of the total revenue, was driven by growth in software and services.

Deglobalization Impact on MSI Business

Deglobalization is a movement towards a less connected world, characterized by powerful nation states, local suppliers, and export controls rather than global institutions, treaties, and free movement. Deglobalization has significant impacts on public safety spending and supplier preferences, as well as on the prospects of global security companies like MSI.

One impact of deglobalization is that countries are increasing their security budgets, to cope with the risks of a more uncertain world. We see that countries are investing more in their defense capabilities, cybersecurity, border protection, and emergency response systems. For example, NATO has set a military spending target of 2% of national GDP as minimum requirement for its allies.

It seems logical that global security companies like MSI could benefit from the increased spending of countries, but deglobalization also affects their supplier preferences. Countries tend to favor domestic or regional suppliers over global suppliers for their security solutions. This means that global security companies like MSI, which operates in more than 100 countries, may face more challenges in key international markets. They may encounter more competition from regional or local defense contractors, such as Hytera (China), Thales (Europe), Airbus SE (Europe) and Leonardo SPA (Europe), that produce and sell competing safety products .

When we look at the geographic distribution of MSI's sales, we see that the international revenue mix is at 30%, and has not increased. This suggests that MSI is facing some difficulties in expanding its global presence, and this might be due to the effects of deglobalization. Also important to note that MSI has high public sector exposure (75%)

MSI's LMR Business: Strengths, Challenges, and Outlook

MSI has one of the largest shares in the LMR market, driven by strong demand from public safety customers. The company offers a wide range of LMR products and systems, from devices and networks to software and accessories, covering various standards such as P25, TETRA, DMR, and LTE. MSI also provides the LMR services, such as installation, maintenance, repair, and support.

LMR revenue grew by 6% in the latest quarter and accounted for 75% of MSI's total revenue as of September 30, 2023. MSI Management sees LMR as a mid-single-digit growing business (they stated in their Q3 earnings call) and expects to sustain its growth by investing in new products and solutions, such as broadband push-to-talk, cloud-based LMR, LMR-LTE interoperability, and LMR artificial intelligence and analytics.

However, we think that MSI is facing some competitive challenges in the LMR market, as its growth trajectory is slowing down. MSI's LMR revenue grew by only 6% year-over-year in the third quarter of 2023, compared to double digit growth in the previous 3 quarters (see below)

Internationally, MSI is facing the competition from regional and local defense contractors in the LMR market, as a result of deglobalization in which countries are preferring the local security suppliers, as a result of their national security policies. These are mostly state-owned or state-backed companies like Hytera (China), Thales (France), Airbus SE (Europe) and Leonardo SPA (Italy) and they have all the advantages of government support.

In North America, L3Harris (LHX) is the main rival of MSI in the LMR market, but has different strategies and strengths. LHX concentrates mainly on the digital LMR solutions, so it has a narrower product range and smaller market share than MSI. Also, LHX's LMR business is not connected to its other businesses, such as the space and airborne systems, integrated mission systems, and broadband communications. MSI has a clear advantage over LHX in the N. America LMR market, as it has more customers, more diverse products, and a stronger brand image. Also, MSI's LMR business supports its other businesses (Video and Command Center), creating a competitive edge for the company.

Overall, we believe that the LMR market is becoming more competitive, as many existing and new players are entering the field, such as large system integrators, local defense contractors, telco equipment providers, satellite operators, wireless equipment providers, and device manufacturers. Some of these players have the advantage of the government support and some of them have solutions that leverage the new technologies, such as 5G, IoT, or AI, to enhance the affordability, performance, and reliability of LMR systems.

In conclusion, MSI is a dominant player in the LMR market, but it is facing challenges because of changing market dynamics. We see that MSI is aware of these challenges and is taking steps to address them, such as investing in new products and solutions, doing acquisitions, and broadening its portfolio toward enterprise security markets. We think that MSI can sustain its target of mid-single digit growth in the LMR market, as it has a loyal and large customer base in the North America region. However, we do not expect any significant LMR growth or expansion internationally, as MSI faces more competition and barriers in these markets.

Video Security Business Facing High Competition

MSI has also a strong video security and access control business, accounting for about 18% of its total revenue as of September 2023. MSI offers a comprehensive portfolio of the products and systems, ranging from cameras, sensors, analytics, software and accessories, to integrated solutions, such as Avigilon, Pelco and WatchGuard. MSI has done many acquisitions in this area, such as the purchase of Openpath (mobile access control) and Ave Security (Video Analytics), to enhance its video security and access control portfolio with new capabilities and accelerate growth.

While MSI is broadening its video security and access control portfolio, we noticed that it is experiencing a growth deceleration. MSI's revenue grew by only 8% year-over-year in the third quarter of 2023, down from high double digits growth in the previous 8 quarters (see below).

However, MSI Management thinks that the video business is on track and attributes the Q3 slowdown to the last year's high comparable (33%). See below the Q&A from the Q3 earnings call:

Tomer Zilberman (BoFA Analyst):

So your revenue outperformance this quarter versus street expectations really shown through LMR and Command Center. But it looks like you fell a little bit short on a Video product and SI. Can you talk about the weakness there? What drove the 5% growth this quarter?

John Molloy ('COO'):

Sure. Thanks, Tomer. So first of all, I want to highlight the fact that we're actually really pleased with Q3 because the 8% is against the backdrop of a comp last Q3 of 33%. So our full year expectations remain unchanged. It's really a linearity story. And I think leaving that, I think we take a look at it and say, from an alignment standpoint from the portfolio investments, we just announced the H6A camera.

Our view is that MSI is facing competition on the video/camera front from companies like Axon Enterprise (AXON). Axon has been expanding its market share in this segment by offering products like body-worn cameras that have intelligent features such as live streaming, communication support, evidence upload and gunshot detection. These features deliver law enforcement agencies an advantage over those using MSI's cameras.

MSI's video/camera business is also facing pressure from Axon's cloud-based Digital Evidence Management system, Evidence.com, which allows users to manage, share, and analyze video data from Axon's cameras and other sources.

In conclusion, MSI is a strong player in the competitive video security and access control market, but it needs to keep up with the innovation of players like Axon and others.

MSI Command Center: Growing Trajectory

MSI Command Center is the fastest growing product of the MSI portfolio, growing 31% in Q3 2023. MSI Command Center revenue was $186 million in Q3, up 31% from the year-ago quarter. The product has an accelerated growth trajectory as it can be seen below:

There are several catalysts that we think are driving the growth of the MSI Command Center business. Some of these are:

• The Command Center solution can help MSI grow its business in the enterprise security segments, as it offers key capabilities for security operations.
• The integration of Rave Mobile Safety's platform, which enhances the communication and coordination of the emergency response, and expands MSI's customer base and addressable market.
• The launch of new Command Center products and features, such as CommandCentral Aware, a solution that provides a unified view of the operational environment.
• The adoption of Next Generation 9-1-1, which improves the efficiency and effectiveness of the emergency response.

We foresee that the MSI Command Center will continue its accelerated growth thanks to its advanced technologies, enterprise functionalities and integration with MSI's other solutions. The Command Center business will be a key driver of MSI's revenue and profitability going forward.

Valuation

For our DCF valuation model, we forecast the revenue of each of MSI's product segment for the next decade (see below table), considering their challenges and future growth potentials. We project the LMR segment to sustain a mid-single digit growth rate, owing to its established market leadership. We foresee the video business to face competitive pressures and decline gradually to a flat growth rate. And we envision the Command Center business to sustain the high growth rate for the next 10 years, starting from 25% in 2024 and gradually dropping to 18% in 2033.

All-up, we estimate the MSI business to grow at around 6%, as we assume that the high growth of the Command Center business will compensate for the weakness of the Video business.

We conduct a 10 year DCF analysis, using the revenue projections above and making the following assumptions:

• We apply the FY23E FCF margin of 17%, and then increase it by 2% every year, reflecting the operational efficiency of the business.
• For the terminal growth rate, we use 5%, which is slightly lower than MSI's projected growth rate of 6%.
• We assume a WACC rate of 9%.

Here is the result:

The equity value of MSI is $53,6 billion, and the intrinsic value per share of MSI is $321. As per the DCF Model, MSI is undervalued by 7%, and near its fair value.

Risks

Here is a summary of the risks that we think are relevant to MSI's valuation:

• High Competitive Markets: MSI operates in a highly competitive and rapidly changing industry, where it faces competition from existing and new entrants, such as Axon Enterprise, L3Harris, Tyler Technologies, Hytera, Airbus SE, Leonardo SPA, and JVC Kenwood Corporation.
• High reliance on Public Sector: MSI depends on the public sector for 75% of its revenue, which is subject to various risks, such as political developments, geopolitical tensions, regulatory changes etc. These factors might affect MSI's revenue and profitability.
• High debt situation could constrain MSI's acquisition strategy: As of September 2023, MSI had a net debt of US$5.1 billion. MSI depends on acquisitions to diversify its product portfolio and increase its competitiveness.

Conclusion

Motorola Solutions is a dominant player in public safety and enterprise security, with a loyal customer base and a comprehensive portfolio. However, MSI faces some challenges from competitors on some of its products, which may limit its growth potential and valuation.

We conducted a competitive assessment and a 10-year DCF analysis to estimate the intrinsic value of MSI share, and we found it to be $321, which is close to its current market price. Therefore, we recommend a Hold rating for MSI.

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By Denny Jacob

Motorola Solutions posted better-than-expected results in the latest quarter.

The communications company logged earnings of $464 million, or $2.70 a share, for the third quarter ended Sept. 30, up from $279 million, or $1.63 a share, a year earlier. Adjusted earnings were $3.19 a share, above analysts' estimates of $3.03 a share.