Motorola Solutions (MSI, Financial) revenue grew over +20% as pent-up project spending returned at its public safety and corporate customers. Many of these state and local government customers will likely receive relief funding thanks to the federal American Rescue Plan Act of 2021. The public safety and communication budgets of the Company’s customers has proven to be very resilient in past economic downturns as emergency responders need Motorola’s mission critical networks to operate regardless of GDP growth. However, added state and local funding from the federal government should enable more budget flexibility which could accelerate network upgrade plans that utilize more high-margin software and services offered by Motorola. (See more on Motorola below.)
Motorola Solutions
We have owned Motorola Solutions for more than two years and have been happy to see the Company continuing to execute on the strategy that attracted us to the stock. As a reminder, Motorola is the dominant market leader in its core Land Mobile Radio (LMR) business: providing infrastructure, handsets, and related software and services for customized, highly resilient, secure networks for global police and emergency services, a variety of government and military applications, and other commercial and public safety applications where security and reliability are of the utmost importance. The Company has continued to find success in using its entrenched position in these mission-critical networks to layer in faster-growing and higher-margin software, service, and video products. Although Motorola has some credible competition in these ancillary products, in contrast to its dominance in the LMR business, it is the only player capable of fully integrating the entire service offering with its core LMR network backbone.
Motorola has assembled this stable of complementary products and services largely through acquisition, using the steady, recurring cash flows the LMR business has provided. These purchases not only have been attractive strategically; they have been extremely attractive financially, as well. The Company recently pointed out it had made $4.5 billion of acquisitions since 2015; those businesses currently, in 2021, generate roughly $800 million in EBITDA, with margins and organic growth both running well ahead of the corporate average. This works out to a notional total purchase price of just over 5.5X the EBITDA these businesses are now generating, whereas Motorola’s stock currently trades over 20X this year’s anticipated EBITDA. While this is only one way to evaluate the Company’s acquisition strategy, we believe this data illustrates how well the Company has used its strong competitive and financial position in LMR to evolve into an even more attractive business.
While the first part of our ownership went according to our expectations, we did not, of course, anticipate a pandemic. Despite the fundamentals of the Company holding up quite well relative to the broad market during the massive economic downturn that ensued, the stock underperformed for much of 2020. We believe some of this was due to the market’s general lack of familiarity with the Company. We also believe some highly politicized police funding debates led to irrational pressure on the stock, as did misplaced worries about public safety customers’ budgets in the middle of the severe recession that temporarily accompanied the pandemic. We, on the other hand, know the company provides an absolutely critical service to its public safety customers, and it cannot be turned off if, for example, police funding is diverted elsewhere, or if sales tax receipts fall off for some period of time. Furthermore, it was very clear to us that the pandemic had created additional long-term opportunities for the Company.
While some investors were worrying about customers’ lower sales tax receipts, the U.S. federal government has been creating (and continues to create) massive stimulus funding for state and local governments, as well as other Motorola customers such as FEMA, school districts, and airport and transit operators. Although this funding typically does not appear immediately and may take some time to find its way from a news headline to an actual customer’s budget, the Company has highlighted funding already available to customers in the region of $350 billion for state and local governments, $170 billion for education, and $38 billion for airport and transit. The Company has begun to see significant interest from these customers in deploying some of these funds in much needed upgrades to its emergency call centers (known as Next-Gen 911 or NG911), school security, and airport security, among other areas. Motorola has said only a minimal amount of this government funding has actually appeared in its results as of yet – these funds are just starting to reach Motorola’s customers. Those customers are only now deciding how they wish to allocate the funds. The Company expects to see the benefit of this funding through 2024, when the current rounds of stimulus expire. As we are sure you have noticed, however, political debate continues about staggering potential sums of additional government funding, much of which eventually will find its way to Motorola’s customers’ budgets.
Looking at the opportunity in NG911 alone, Motorola has pointed out many times that approximately 80% of 911 call centers still are only capable of receiving phone calls – in 2021, the vast majority of 911 centers still can’t even receive a text message. This means, of course, that they also cannot receive pictures or videos; therefore, they are unable to pass any of this potentially useful data on to responding officers in the field.
This highlights an additional problem with these outdated call centers, which unfortunately was brought into sharp focus by the pandemic: with their lack of capabilities in mobile data or video, and a lack of software or cloud connectivity built into the call centers, public safety customers realized their shortcomings in being able to coordinate their responses among the call center, police officers, emergency medical personnel, schools, or hospitals. Imagine, for example, trying to coordinate a dinner reservation for six people without your mobile phone, without the ability to send group texts, without access to Google, and without the ability to make a reservation online. Now consider that 80% of America’s emergency response call centers were trying to handle something as critical and complex as a response to a pandemic without the most basic of modern technology resources.
We note that not only in these NG911 upgrade initiatives, but also in use cases beyond the traditional call center business, including areas such as school or airport security, Motorola’s newer capabilities in areas such as video and software have worked hand-in-hand with integration into its highly reliant, highly secure LMR networks to create opportunities for the Company, allowing Motorola to present a full solution to a customer looking to solve many of these issues that were highlighted by COVID.
So while the stock lagged the market for much of last year, we saw clear longer-term catalysts emerging as a result of the pandemic, leading us to take a few opportunities to increase our position size significantly last summer, after the stock retreated roughly to our original purchase price.
Finally, a core component of our original thesis was that the broad market was not familiar with this Company – in fact, even in financial news services, many of the news stories we see tagged with “MSI” still have nothing to do with MSI and instead are about the long-divested mobile phone business. We continue to expect Motorola Solutions’ fundamental performance to attract more investor attention and to lead to expansion of the Company’s valuation. We would note that the stock has in fact seen some multiple expansion during our holding period, but this has mostly mirrored the seemingly eternal multiple expansion in the market as a whole. Since the Company’s growth and financial return profile remains superior to the broad market, we still see plenty of opportunity for the stock’s valuation to move favorably relative to market multiples.
From David Rolfe (Trades, Portfolio)'s Wedgewood Partners third-quarter 2021 shareholder letter.
