A month has gone by since the last earnings report for Motorola (MSI). Shares have added about 6.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Motorola due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Motorola Beats on Q2 Earnings Despite Lower Revenues
Motorola reported relatively healthy second-quarter 2020 results, driven by diligent execution of operational plans. Despite surpassing the respective Zacks Consensus Estimate, revenues and adjusted earnings decreased year over year due to coronavirus-induced adversities. The company remains well poised to tide over the storm with a solid cash flow and balance sheet position.
On a GAAP basis, net earnings in the reported quarter were $135 million or 78 cents per share compared with $207 million or $1.18 in the year-earlier quarter. The decline was primarily attributable to top-line contraction due to demand-related challenges amid the virus outbreak.
Excluding non-recurring items, non-GAAP earnings in the quarter were $1.39 per share compared with $1.69 in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 19 cents.
Quarterly net sales fell 13% year over year to $1,618 million due to lower demand in the Americas and the International business, triggered by the coronavirus pandemonium. The top line, however, exceeded the Zacks Consensus Estimate of $1,574 million.
Organic revenues decreased 15% year over year to $1,578 million. Acquisitions contributed $40 million to incremental revenues, while currency headwinds aggregated $30 million in the quarter. Region-wise, revenues were down 13% in North America to $1,093 million, driven by lower sales of professional and commercial radio products, partially offset by growth in video security and services. International revenues were down 14% to $525 million due to a decline in professional and commercial radio products.
Net sales from Products and Systems Integration fell 22% year over year to $968 million, largely due to a significant decline in demand for professional and commercial radio products across all geographical regions. However, the segment witnessed solid demand for video security solutions from utility firms and government sectors. The segment’s backlog was down $228 million to $2.8 billion, primarily due to unfavorable foreign currency translation and a decline in the international backlog.
Net sales from Services and Software totaled $650 million compared with $622 million a year ago, with solid performance across Command Center Software and services. The segment’s backlog decreased $148 million to $7.7 billion, primarily due to adverse foreign exchange effects, partially offset by multi-year agreements in the Americas.
Other Quarterly Details
GAAP operating earnings decreased to $218 million from $349 million in the prior-year quarter, while non-GAAP operating earnings were down 19% to $359 million. The company ended the quarter with a total backlog of $10.5 billion, down from $10.9 billion a year ago. Overall GAAP operating margin was 13.5%, down 530 basis points due to lower revenues. Non-GAAP operating margin was 22.2% compared with 23.9% in the year-ago quarter.
Non-GAAP operating earnings for Products and Systems Integration were down 46% to $131 million for the corresponding margin of 13.5%. Non-GAAP operating earnings for Services and Software were $228 million, up 13% year over year, driven by gross margin expansion and higher sales led by strong demand for Command Center Software solutions and continued growth in the services business. This resulted in non-GAAP operating margin of 35.1% for the segment, up from 32.5%.
Cash Flow and Liquidity
Motorola generated $517 million of cash from operating activities during the first six months of 2020 compared with $502 million a year ago. Free cash flow in the first half of the year was $415 million. The company repurchased $83 million worth of stock during the quarter.
As of Jun 30, 2020, the company had $1,341 million of cash and cash equivalents with $5,111 million of long-term debt. Motorola repaid $300 million of its unsecured revolving credit facility during the quarter. Notably, the company has no near-term debt maturities in 2020 or 2021 and no pension debt obligations until 2023.
Despite the lack of clarity regarding the impact of the coronavirus pandemic on the business, the company offered guidance for the third quarter. Third-quarter 2020 non-GAAP earnings are expected in the $1.72-$1.78 per share range on a year-over-year revenue decline of 8-9%.
For 2020, non-GAAP earnings are expected in the $7.40-$7.52 per share range on a year-over-year revenue decline of 7% as the virus outbreak continues to impact its professional commercial radio business and delay engagement and deployments in certain cases, affecting the future revenue trend.
Nevertheless, Motorola is poised to gain from disciplined capital deployment and a solid cash flow position. The company expects to see strong demand across land mobile radio products, the video security portfolio, services and software while benefiting from a solid foundation.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 6.91% due to these changes.
Currently, Motorola has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Motorola has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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