MSI Motorola Solutions Inc

Motorola Solutions Inc. (MSI) reported excellent financial results in the third quarter of 2011 with both the top line and bottom line exceeding the Zacks Consensus Estimates. The solid performance was mainly on the back of solid demand across both Government and Enterprise segments.

Third-Quarter Results in Details

Quarterly GAAP net income from continuing operation was $253 million or 45 cents per share compared with $211 million or a loss of 4 cents per share in the prior-year quarter. However, adjusted (excluding special items) EPS in the third quarter of 2011 was 65 cents, significantly above the Zacks Consensus Estimate of 54 cents. Quarterly total revenue was $2,105 million, up 10.3% year over year and exceeded the Zacks Consensus Estimate of $2,091 million.

Quarterly gross margin was 50.4% compared with 50.5% in the prior-year quarter. Operating income in the reported quarter was $253 million, up 19.9% year over year. Quarterly operating margin came in at 12% versus 11.1% in the prior-year quarter.  

During the third quarter of 2011, Motorola Solutions generated $477 million in cash from operations compared with $318 million in the year-ago quarter. Quarterly free cash flow was $434 million compared with $281 million in the prior-year quarter.

At the end of the third quarter of 2011, Motorola Solutions had $6,250 million in cash, cash equivalents and marketable securities compared with $8,863 million at the end of fiscal 2010. Total debt at the end of the reported quarter was $1,538 million compared with $2,098 million at the end of fiscal 2010. Debt-to-capitalization ratio at the end of the second quarter of 2011was 0.20 compared with 0.16 at the end of fiscal 2010.

Government Segment

Quarterly total revenue was $1,379 million, up 9% year over year. Operating income came in at $185 million, up 16% year over year.

EnterpriseSegment

Quarterly total revenue was $726 million, up 13% year over year. Operating income stood at $68 million, up 31% year over year.

Performance by Category

Quarterly Product revenue was $1,572 million, up 11.3% year over year. Services revenue was $533 million, up 7.7% year over year. Quarterly Product gross margin was 55.8% compared with 55.8% in the year-ago quarter. Services gross margin was 34.3% compared with 35.4% in the year-ago quarter.

Future Financial Outlook

Motorola Solutions expects fourth quarter 2011 revenue to grow in the range of 2% to 3% year over year and 7% sequentially. EPS from continuing operation is expected in the range of 78 cents to 83 cents. For fiscal 2011, revenue is expected to grow 7% year over year and operating income is estimated to be 16.5% of the total revenue.  

Recommendation

Motorola Solutions is the largest developer of the public safety products commanding nearly half of the total U.S market. The company recently entered into an agreement with Verizon Wireless (VZ) to install a standard-based public safety broadband network for mission-critical operations leveraging on the nationwide LTE network of Verizon.

We thus maintain our long-term Outperform recommendation on Motorola Solutions Inc. Currently,Motorola Solutions Inc. has a Zacks #1 Rank, implying a short-term Strong Buy rating on the stock.

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