Investors who choose to believe in the false statements from Motorola Solutions can be as blinded as those who choose to stare at a solar eclipse.
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$45 Target Reiterated
- Motorola Solutions (NYSE:MSI) is on the wrong side of a mega-trend (LMR to LTE)
- The effects of FirstNet will weaken Motorola pricing power
- 70%+ of the company’s EBITDA is monopoly priced handsets; increased discounting emerges
The verdict on FirstNet’s acceptance is being rendered daily. Not one state has opted out, and every day new ones are opting in (15 so far). The massive cost savings and disruptive technology advancements are no longer up for discussion. Furthermore, the $40 billion commitment from AT&T, funding the national buildout of mission-critical quality LTE infrastructure, is not open for debate.
In August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More
This past weekend Barron’s Magazine published a story titled “Static Ahead for Motorola Solutions“.
This story comes 6 months after Citron criticized Motorola Solutions for abusive selling practices to the US Government, and using their monopoly position in LMR Radio to stifle innovation. Citron’s main point was that Motorola’s companywide margins and EBITDA are all propped up by inflated US handset pricing (estimated to have 83% margins, and contribute over 70% of EBITDA). These radios run on their proprietary network for Push-to-Talk Land Mobile Radio (LMR), a legacy platform which benefits Motorola exclusively.
In our first report we suggested that the government might one day put an end to the price gouging. That is now irrelevant. Companies can fight off regulation, but it is impossible to fight off innovation – just ask the old Motorola.
While the writer at Barron’s followed up the story, they missed the pivotal issues that have emerged from the shadows, illuminating how the case against Motorola is gaining momentum on a daily basis. Citron explains why Motorola cannot avoid a margin compression collapse, on its way to $45 near term, and probably lower.
FirstNet is a Megatrend — the most significant change to first responder communication in over 50 years. It is not “competition”; it is the foundation of a new platform which will transform law enforcement and emergency response.
Investors have failed to take notice that Motorola is on the wrong side of a Megatrend, which seems to be a corporate tradition identified with the name Motorola. First the pager, then the flip phone, and now Land Mobile Radios. While the trend takes longer than a year to play out, we are already seeing the beginning of the end.
While Motorola has continued its campaign of misinformation to Wall Street and to the financial media, FirstNet has gained serious traction in the last six months. Citron presents proof that Motorola’s dominant position in LMR is fast waning, eclipsed by FirstNet’s bright and sunny future.
Claim: FirstNet is additive to Motorola’s market position; it frames income from FirstNet as “purely incremental”.
Sell-side and management claim FirstNet will be “additive” to Motorola Solutions communications business and that FirstNet will purely be “complementary” to its monopoly LMR voice network.
Truth: FirstNet is a looming disaster for Motorola Solutions.
To best illustrate the ongoing eclipse of the truth, it is easiest to look at the statements of Greg Brown on May 7th, just days before FirstNet and AT&T published their presentation. On the Q1 conference call, Brown’s spins that FirstNet is about “data and video”, posturing that First Responders will be carrying two devices — a Motorola radio for voice, and a smartphone for data. (Guess which one costs 10x to 20x to deploy….)
”I think I view FirstNet as additive, period, for quite a long time. Its data and video network for interoperable broadband that will interface with our narrowband mission-critical communications voice network.”
Yet clearly voice is a day-one feature of FirstNet. No, it is not Mission Critical Push-to-Talk needed by the highest level of emergency responders, but that is coming soon as well. Feel misled? Mr. Brown has a huge incentive to mislead. Read on.
Source: AT&T Public-Private Partnership Presentation on FirstNet [Page 27 of linked presentation]
The idea of FirstNet as complementary is as foolish as if 10 years ago Motorola stated, “We think the iPhone will be a great complementary product to our flip phones, as one is for voice and one is for data”.
First responder technology hasn’t been overhauled in 50 years. FirstNet is profoundly disruptive to Motorola’s monopoly position with first responders, and is going to end Motorola’s monopoly pricing stranglehold. Explicit in FirstNet’s mission statement, from its home page:
We will have the scale and leverage to drive development and procurement of devices at the best possible prices. Scale can also spur interest from a number of new vendors, which can enhance vendor/design diversity, increase competition and help lower prices for public safety devices.
This genie cannot be put back in the bottle. Motorola Solutions spent years and millions of dollars in lobbying (as disclosed in our first report) to attempt to minimize the effect of FirstNet. Their efforts became so counterproductive that it forced Senator John D. (Jay) Rockefeller to publicly rebuke them for undermining FirstNet (see source and source).
Motorola: Please do not insult or lie to Wall Street, pretending FirstNet is a positive to your business. Not after having spent millions in lobbying over a span of many years to stifle FirstNet.
In fact, you disclose as an explicit risk factor FirstNet’s intent to reduce handset prices. See MSI 10-K for 2015 (new language as of Feb 2016)
“Longer term, MSI’s opportunities to sell LTE equipment and related services in this space will be substantially impacted by: (1) the deployment model being developed by FirstNet, which has been heading in a direction more favorable to commercial carriers; (2) the type of procurement process established by FirstNet; (3) the timing and number of states (if any) that choose to opt out of FirstNet, and whether the FCC approves their request, as detailed in the Legislation; (4) FirstNet’s stated intent to reduce handset prices;…”
Claim: Motorola is a Strong Partner to FirstNet
Truth: No it is not. In its rollout presentation to states, one name is notably missing from the document: Motorola.
Worse, when they present to states literally dozens of candidate handsets, there is one company that is visibly absent: Motorola. We see Samsung, iPhone, Kyocera, LG and others…..but not Motorola.
While Motorola might be producing some software apps for FirstNet, its role is insignificant and is not expected to add materially to revenues.
Think about this — the most significant change to first responder communications in the past 50 years and the word “Motorola” is missing from the business plan!
Claim: Demand for LMR is as strong as ever.Motorola continues to win contracts. FirstNet and new technologies are not impacting LMR’s market dominance.
Truth: Unprecedented price discounting.While nothing happens overnight, we are seeing material trends in purchasing commitments that show the company is currently pricing for a dramatically different competitive landscape than it was just one year ago.
In its most recent quarter PR, Motorola highlighted 2 deals:
“Strategic wins and awards:
- $43 million award for P25 devices in a major U.S. city;
- $40 million P25 system in Broward County, Florida
Citron has obtained both contracts referenced above (yes, we were able to identify the $43 million customer) and we see a trend of black clouds looming in investors’ blue skies. Below are the pricing terms from Broward County. In both contracts, we note a 40% discount offered — which in our review of over 25 Motorola contracts spanning years, is unprecedented. When a monopoly lowers prices, it is the beginning of the end.
Also note that the big discount is pegged to time, rather than volume. The 40% discount applies if the equipment is bought within the next 2 years. This is the first we have seen a discount this large, and one that is time and not volume incented.
Broward County Purchase Terms
Citron was also able to identify the $43 million contact as the New York City Fire Department. Reviewing this contract also shows us a 40% discount, which is much greater than the standard 27% top discount we have observed historically.
New York City Fire Department Purchase Terms
This contract appears to have been transacted at a 40% discount because these units were bought in a block.
Of course Citron is not asserting that FirstNet is going to replace LMR immediately. Some municipalities will continue to order LMR products for years. The question is at what prices and for how many years. The overwhelming acceptance of FirstNet by all the states opting-in answers that question.
Claim: FirstNet will never be able to replace LMR for Mission Critical Push-To-Talk. This argument seems to be the cornerstone of the competitive moat claimed by Motorola Solutions regarding its handset business. This IS the entire bull case in one sentence, that Mission Critical Push-to-Talk (MCPTT) cannot be achieved on an LTE (FirstNet) network.
Truth: MCPTT on LTE is imminentLook right past this self-serving rhetoric, and go to the homepage of Kodiak, a company recently purchased by Motorola Solutions.
AT&T also makes it abundantly clear that it will offer voice push-to-talk functionality in its early-rollout of FirstNet. This punctures claims from Motorola’s CEO that FirstNet will not have mission critical voice capabilities for many years to come. Urgentcomm’s March 2019 availability roadmap of MCPTT is not good news for a company with a PE of over 23, that depends on a monopoly position in Mission-Critical-Push-to-Talk.
Claim: FirstNet is not ready for Prime Time.This was most recently expressed in the Barron’s article when the MSI spokesperson tells the writer:
“Because FirstNet is based on the broadband cellular technology in use today, she contends that it might become overloaded, compromised, or damaged during major emergencies. Motorola’s systems are highly resilient, she adds, and have features like instant “push to talk” and the ability to radio directly to other handsets when tower connections fail”
Truth: It was the utter interoperability failure of the Motorola “solution”, the tragic consequences of which conclusively demonstrated the need for FirstNet.Motorola’s claim is truly abhorrent, coming from a company that was the backbone of our nation’s most catastrophic communication breakdown in history, on the darkest day of the past 50 years, September 11, 2001.
That being said, this year FirstNet’s interoperability was tested, at of all places, The Super Bowl. And less publicized but no less remarkable than the comeback of the Patriots, was the breakthrough performance of FirstNet in the nation’s most secure and visible public gathering.
Here were some of the conclusions of Harris County and the City of Houston:
The deployment was incredibly successful. In addition to numerous success stories of arrests, re?unified children, medical responses and property seizures, the use of the HCLTE system and mobile apps provided a variety of operational benefits – some planned and others unanticipated:
- Significantly reduced radio traffic
- Reduced dispatch time through real?time location services
- Provided a secured mechanism for sharing sensitive information not broadcast on the radio
- Provided improved information sharing across agencies and different units within those agencies
- Group messaging allowed for the immediate redistribution of information
- Redistribution of original content and sharing of pictures and videos reduced the amount of ?misinformation that happens automatically as information is passed to numerous individuals
- Incident Commander (IC) could monitor events in real?time from any location
- Reduced the noise and chaos in the Forward Command Post
Mythbusting the Relentless Misinformation Campaign from Motorola
FirstNet is the most important advance in first responder communication over the past 50 years. Not only does Motorola lack a seat at the table, they do not seem to know where the table is. It is extraordinary that urgentcomm.com, the industry source for First Responders issues, feels the need to clear the air with a “Mythbusters”-themed piece to counter Motorola’s torrent of false objections to FirstNet.
This article is a great reference map to what MSI claims about FirstNet. It is a classic example of deliberate FUD and innuendo. They never really come out and say they hate FirstNet; they have recruited others to say it for them.
Claim: The initial Citron report stating that Motorola has enjoyed a world of sole source bids and egregious pricing is just plain wrong.This was the company’s response after the initial Citron report.
Truth: Instead of defending our own facts and conclusions, we defer to a recent article about Orange County:The Voice of Orange County
“Despite Spending $100 Million, County Hasn’t Audited Motorola Radio Costs in 15 Years”.“There has been a lot of frustration I think by this board, from time to time, about the exclusivity and the sole source with Motorola, and you’re [paying], you know, $5,000 for a [portable] radio,” Supervisor Todd Spitzer told a Sheriff’s Department official who oversees the system.
The price of each portable radio, Spitzer said, is “big. It’s dramatic…And you say, ‘wow, is that the market [price]? Or is that just something you have to do, because we’re sole-source and we’re completely all-in with Motorola.”
There are numerous examples of outrage expressed by officials in municipalities over the costs imposed by Motorola’s monopoly. This is just the most recent. So if your customers think you are raping them with costs, your communication problem goes way beyond Wall Street.
The numbers do not lie.
The reason for this is simple. Motorola has been selling radios to dog catchers, park rangers, utility workers, etc. for over 50 years. The smartphone has only been around for 10. The non-mission critical market is terminal as a business, just as when Motorola sold pagers to doctors and medical professionals. As we read in the article linked above:
“… there is a movement to cellular technologies and/or that entities are “just letting whatever they have now run, and they’re not doing anything to upgrade or install new systems.”
Truth: Don’t believe everything you read. Cost cutting is a notorious tool for simulating organic growth.While we are not suggesting that MSI is “cooking the books”, it must be noted that this skill set falls squarely within Greg Brown’s expertise. His approach to accounting is extremely aggressive, as he demonstrated at his previous company Micromuse.
Before his tenure at Motorola, Brown ran Micromuse, from 1999 to 2002. In 2003 Micromuse had to restate their earning for 2000, 2001 and 2002. As stated in the shareholder lawsuit, before each quarterly earnings call, and for each of the quarters that they were at the Company, Defendants Brown, Carney, Allott, Wise, Luetkemeyer and Kelly, as applicable, would direct Damstetter to look for ways to inflate or “plug,” Company expenses, to understate earnings and create a “rainy day fund” to dip into later.
Considering Brown’s compensation package is closely tethered to MSI’s stock price, we expect management to pull as many levers as possible to masquerade the deterioration of their LMR franchise.
Wall Street is starting to take notice. Citron readers know that we are always quick to criticize analysts who refuse to acknowledge the other side of the story. So we must commend those who do. Andrew Spinola of Wells Fargo, in his lengthy reports, states one line that eclipses all of the nonsense we read from others who cover the stock. He states:
“We continue to believe that LTE/FirstNet is likely to be a meaningful net negative for Motorola’s business as voice transitions to LTE over time, Networks & Services revenue moves to LTE equipment and carriers, new competition from the LTE ecosystem enters in Devices”
Wells Fargo has a $63 target on MSI.We continue to believe MSI will play a materially smaller role in the evolving public safety market in the medium-term versus its dominant position today as LTE replaces LMR. It also faces having to start funding pension plan costs after a pension-contribution afforded it a several year hiatus, and a huge contract with Great Britain for management of the TETRA network rolls off. Both of these events hit in 2019.
For all these reasons, it is only a matter of time before the market withdraws MSI’s high-growth tech stock multiple, and it is repriced for what is left of its business. Losing handset sales will be the initial blow to MSI and service revenue will soon follow.
For those who want to read more about FirstNet, sign up for their Twitter feed and watch how our first responder communications is about to enter the 21st century.
Cautious investing to all.
Article by Citron Research