VALUATION HIGHLIGHTS

1. Products constitute 63% of the Trefis price estimate for Motorola Solutions's stock.
2. Services constitute 37% of the Trefis price estimate for Motorola Solutions's stock.

WHAT HAS CHANGED?

1. Latest Earnings

Motorola Solutions delivered a stronger-than-expected performance for Q2 2024. While revenue rose about 9% year-over-year to $2.6 billion, adjusted earnings came in at $3.24 per share, up 22% year-over-year. While Products and Systems Integration sales expanded by 15% year-over-year in Q2, Software and Services sales remained roughly flat.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Motorola Solutions' value that present opportunities for upside or downside to the current Trefis price estimate for the company:

• Motorola Solutions Products' Gross Profit Margins: Motorola Solutions Products' gross margins stood at 54% in 2020 and rose to about 55% in 2023. We expect this metric to increase over the long term to about 58%. However, if Motorola Solutions' margins increase further to reach historical levels of around 65% by the end of our forecast period, there could be an upside of about 8% to our Trefis price estimate for Motorola Solutions's stock.


• Services Revenue as % of Product Revenue: Motorola Solutions Services Revenue as % of Product Revenue stood at 72% in 2023. This was primarily on account of higher software sales and the addition of VaaS International Holdings' revenues to the services division. Going forward, we expect this percentage to increase to over 76% as the company focuses more on software and services. If Motorola Solutions' Services Revenue as % of Product Revenue increases more than our expectations to reach levels of around 85% by the end of our forecast period, there could be an upside of about 10% to our Trefis price estimate for Motorola Solutions's stock.

BUSINESS SUMMARY

Motorola Solutions is a mission-critical telecommunications equipment provider and sells radios, accessories, base stations, and other equipment to government agencies, including law enforcement, emergency services agencies, and commercial clients. It also provides comprehensive services for government, public safety, and commercial communication networks.

Government Security devices are the devices used for:

1. Aiding police departments to communicate with their patrol cars and help respond to crime incidents efficiently.
2. Tools for electric power distribution, fire station alerting, irrigation control, and video instruments for traffic control purposes.

Commercial Security devices are the devices used for:

1. Baggage tracking at airports and transit authorities.
2. Retailers to drive workforce productivity with wireless WLAN.
3. Wireless connectivity at universities.

SOURCES OF VALUE

We believe the Products segment is the most valuable segment for the following reasons:

Higher revenues from Products

Motorola's Products division, which primarily sells Land Mobile Radio products and security cameras, is the biggest source of Motorola's valuation, as it accounts for roughly 60% of total revenues.

Higher margins

Margins from the Products division are also higher, standing at over 54% compared to 42% levels for the services division.

KEY TRENDS

1. Widespread LTE shift
   • The adoption of LTE for public safety use and the broader trend of an analog-to-digital shift in the U.S. and internationally are likely to be the key drivers of Motorola's value.
   • Motorola is also likely to benefit from the stickiness of its government customers as well as its strong market position. The large installed base of security devices is also expected to grab a big chunk of that market going forward.

2. Continued government spending on critical security systems
   • The Government is increasingly migrating to more technologically advanced systems with real-time data storage while replacing manual activities. This will require similar upgrades to its systems. In such a scenario, Motorola's services department is going to be a major beneficiary.
   • Due to increased security deployed by the government at the airport to deter illegal immigration, the government will need technical support. Motorola's Biometrics service meets that need.

3. Acquisitions will help to achieve continuous growth
   • In 2019, the company acquired VaaS International Holdings, a global provider of data and image analytics for vehicle location, and WatchGuard, a provider of in-car and body-worn video solutions. In addition to this, Motorola also made a couple of other acquisitions. Motorola is leveraging its strong product innovation to remain a step ahead of its competitors, helping it win critical contracts. This should help the company to achieve steady growth over the coming years.