Motorola Solutions: Solid Growth in Video and LMR (NYSE:MSI)

In my previous article published in March 2024, I discussed Motorola Solutions (NYSE:MSI) increase in the APX NEXT replacement cycle for FY24. Motorola released its Q2 result on August 1st^Streporting record sales and operating profits. I like the company’s leadership in both the video and mobile radio markets, and new product launches could drive the company’s future growth. I reiterate a “Buy” rating with a fair value of $460 per share.

Video growth and LMR

Motorola continues to deliver strong growth in both video security and access control (video) and mobile radio communications (LMR), with year-over-year growth of 10% and 9%, respectively. Driven by strong growth in video security and LMR, Motorola achieved a 9% increase in revenue and an 18.3% increase in adjusted operating profit, as shown below.

I anticipate strong growth in Video and LMR to be sustained for the foreseeable future. The key reasons are:

• As discussed in my previous coverage, the video business is a very important growth opportunity for Motorola, encompassing fixed and mobile video products and solutions. These video products can provide an end-to-end security ecosystem for the public sector, providing detection, analysis, communication and response capabilities. The driver of structural growth is the growing demand for public safety from government and public safety customers. Motorola has invested heavily in their Video business lines, launching several innovative products such as their video recorder offering, both on-premise and cloud-based platforms.
• Motorola has a huge install base for their LMR products, with customers increasingly relying on Motorola upgrades and services, as indicated on the earnings call. Motorola is a global leader in the two-way radio category among several solutions, including Project 25, etc. As I discussed in my previous article, Motorola benefits from the multi-year APX NEXT refresh cycle. Replacing outdated technology could help Motorola generate higher revenue in the near future.
• On June 27^th In 2024, Motorola announced the release of VESTA NXT, powerful 911 software designed to maximize call handling speed and efficiency. In addition, on May 20^ththe company launched the new TETRA MXP660 radio solution, which allows first responders to automatically switch between walkie-talkies and broadband networks. I agree with the company’s efforts to launch innovative products to further monetize its customer base and gain market share.

Outlook and assessment

Due to strong backlog and past performance, Motorola is raising its full-year revenue growth guidance to 8%, as detailed in the slide below.

I believe Motorola will deliver single-digit earnings growth in the near future for the following reasons:

• MRL: The future growth of MRL will be primarily driven by the refresh cycle as discussed in my previous article. Last year, Motorola faced challenges with their global supply chain, but they gradually resolved the problem, resulting in improved LMR supply in Q2. As a result, Motorola has been able to reduce lead times and deliveries. Given the strong performance in the first half, I estimate LMR to grow by 10% in FY24.
• Video: Motorola released its Avigilon Unity Video 8 software, formerly known as Avigilon Control Center, a leading solution for surveillance and security systems. The next generation ACC 8 video management system could strengthen Motorola’s market leadership position. In addition, Motorola is developing their cloud solutions for video management, which could make their business more recurring. We have estimated the business to grow by 12% in FY24.
• Command Center: I expect Motorola to maintain its growth momentum, delivering 8% year-over-year revenue growth.

Starting in FY25, I estimate that Motorola will grow its revenue by 9% assuming: 9% growth in LMR, 9% in Video and 8% in Command Center, all in line with the historical average.

My biggest takeaway from the quarter is robust margin expansion, delivering 210 bps margin expansion in Q2. Management guides 100bps margin expansion for FY24. I model normalized margin expansion of 40 bps assuming: 20 bps from gross profit due to new product launches and an increasing mix towards software/services, 10 bps from operating leverage in R&D and 10 bps from the effect of operating leverage in SG&A.

DCF can be summarized as follows:

The discount rate is calculated to be 9% assuming: risk-free rate 3.8%; beta 0.8; equity risk premium 7%; cost of debt 7%; equity capital USD 71 billion; debt $6 billion; tax rate 23.5%.

The fair value is calculated to be $460 per share after discounting all future FCF and adjusting the net cash balance.

Negative risks

In October 2021, the CMA opened a market investigation into Airwave, which was acquired by Motorola in 2016. Airwave provided voice and data communications to UK emergency services. Motorola’s backlog for Airwave services contracted with the UK Home Office until December 31, 2026 has been reduced by $777 million, the company disclosed. Motorola is currently taking further proceedings against the UK Home Office and the outcome of the proceedings remains uncertain. During the recent earnings call, most of the financial results were revealed, excluding the impact from the Home Office. However, headwinds against the Home Office could persist for years.

Closing thoughts

Public safety is a very attractive sector for investment, and Motorola’s global leadership position allows them to sustain single-digit revenue growth in my opinion. I reiterate a “Buy” rating with a fair value of $460 per share.