Motorola Is a Public Safety Technology Titan With a Moat, Spanning Radio, Video, and Software

Analyst

William Kerwin

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We think Motorola Solutions offers one of the most comprehensive solution sets for public safety, complementing its mature but sticky land mobile radio business with video products and software that we expect to boost growth and margins over the short and long term. 

Motorola is a leading provider of devices and infrastructure for land mobile radio, or LMR, which is a long-range communications technology primarily used by first responders but also by schools, hospitals, and businesses. We expect LMR to remain the tool of choice for public and private safety, even as dedicated long-term evolution, or LTE, networks are increasingly used as a complement. While we expect slow growth for Motorola’s LMR sales, we think its technology benefits from customer switching costs arising from its sales of mission-critical technology attached to long-term contracts, which we believe leads to a narrow economic moat. 

LMR devices and infrastructure remain the majority of Motorola’s revenue, but we expect more rapid growth from its software and services sales to increase the firm’s base of recurring revenue and expand margins. Network services, video analytics, and command center software all hold margin profiles well above the corporate average. We expect this high-growth recurring revenue to account for an increasing proportion of Motorola’s sales and be the primary driver of operating margin expansion. We also think that Motorola is in the early stages of a land-and-expand strategy for its computer-aided dispatch suite and that customers will become entrenched in the Motorola ecosystem as they adopt additional applications, boosting its software switching costs. 

Finally, we expect Motorola to continue being a strong and efficient generator of cash, splitting it between shareholder distributions and continuous bolt-on mergers and acquisitions. The firm consistently generates strong free cash flow, more than half of which typically goes toward maintaining its dividend and repurchasing shares. We expect this to continue and think management will use the balance for opportunistic mergers and acquisitions to bolster its video and software capabilities.

Business Strategy & Outlook

We believe Motorola Solutions warrants a narrow economic moat rating, due to switching costs prevalent across its business. We think its land mobile radios and networks become embedded in customers’ mission-critical workflows and that the firm has developed a sticky software ecosystem by integrating its video and command center software together. As a result, we think Motorola will more likely than not earn economic profits over the next 10 years. 

Motorola’s business is divided into three technologies: land mobile radio, video security and analytics, and command center software. Revenues from these three are disaggregated into two segments: the products and systems integration segment and the software and services segment. Products and systems integration comprises all physical LMR devices and infrastructure, video hardware, and integration labor. Software and services comprises LMR network services, video analytics, and command center software. 

Motorola’s land mobile radio business sells handheld radio devices and equipment, builds customer networks—including towers, base stations, and backhaul equipment—from scratch, and offers network support services. We think Motorola’s LMR business exhibits strong customer switching costs resulting from the time and cost to implement and integrate a new system, and from serving mission-critical communications with a high cost of failure that makes customers risk-averse. 

We think customers would be unwilling to switch from Motorola for a few reasons. First, when customers adopt a Motorola radio network, they own the entire network. They work directly with Motorola engineers to design a network customized to their coverage and capacity requirements, paying a capital investment up front to build it out with no subscriptions or fees thereafter. We think customers would be loath to pay millions of redundant dollars to build out a replacement network with another vendor. Even if a customer’s coverage requirements changed, we think it would prefer to pay incrementally for Motorola to add to the existing network rather than pay a new vendor to build out an entirely new one. While the networks are a fixed investment, Motorola can monetize established networks by providing around-the-clock support. Motorola provides remote network monitoring, regular software updates, and cybersecurity to ensure networks are fully operational at all times. As LMR networks have become increasingly digitized, it can be very difficult for a customer to self-support its own network, which we think creates an extremely sticky revenue stream for Motorola’s services contracts. We think it would be unwise and unlikely for a customer to cancel or fail to renew a services contract while still using a Motorola-built network, given the risks of unknown outages or cyberattacks without sufficient monitoring. 

We also think customers would be unlikely to switch away from Motorola devices. While all LMR networks have to be built to an interoperable common standard—meaning any brand’s devices can be set up to use the network—we think the costs of switching devices are material. If a customer wanted to switch away from a Motorola hand radio, it would incur the monetary cost of new devices and integration of those devices and new software into the existing network, along with the time spent retraining personnel on a new device. Finally, the customer would lose some capabilities attained by using Motorola devices on a Motorola-built network, like a central network portal with analytics. 

In our view, tangible switching costs like these are exacerbated in the mission-critical applications for which LMR is designed. LMR is a communications technology used primarily by first responders, schools, hospitals, and businesses that has been relied on for decades because of its coverage, reliability, and specialization to voice and GPS signals. Compared with cellular networks, LMR relies on relatively few, more powerful towers to create a much larger coverage network. According to Televate, an LMR broadcasting site has more than 2 times the coverage footprint of a comparable LTE site for voice communications. Today, there are LMR networks that span state lines and international borders. Each customer has its own network, specialized to its own frequency, meaning its users don’t have to worry about signal interference or capacity constraints, making it optimal for mission-critical communications. LMR networks are also specifically designed for push-to-talk communication, or PTT, where any participant on the network can initiate an instant group call to the rest of the network. PTT is critical for relaying information to all relevant parties, whether for firefighters on a mission or teachers during a school evacuation. 

For its coverage and PTT abilities, land mobile radio is one of the most essential tools for first responders or employees in an emergency response situation. Entire workflows, whether how to coordinate a tactical police response or maintain contact with teachers or hospital staff during an emergency, are designed using a specific device. Once incorporated, first responders and emergency dispatchers rely on Motorola’s radios and networks to work flawlessly every time, as even seconds lost in an emergency can be a matter of life or death. With such a high cost of failure, we think LMR customers like public safety departments are risk-averse and have a high bar for switching once a solution is ingrained in their workflows. A police department cannot afford to lose network monitoring and not know when part of a network has an outage or make its network vulnerable to cyber threats. A police officer, firefighter, or paramedic can’t risk fiddling with a radio that is unfamiliar or isn’t working while in the line of duty after insufficient training. These types of customers need confidence in their equipment, and once that confidence is built, we think they become extremely slow to change. 

Finally, we think that long LMR contracts and a mostly governmental customer base strengthen Motorola’s LMR switching costs. Governments at the federal, state, and local level combined make up roughly 75% of Motorola’s customers, and we think these customers are especially averse to switching. Public safety radio networks are a nondiscretionary budget expense, meaning there is a stable annual budget for investment. Furthermore, we think governments are slower to change than their commercial counterparts, due to a mix of gridlock and other priorities. Each time a government agency wishes to renew or change an LMR contract, it has to be presented to a city council or proposed in a state or national legislature and voted on. We think this inclines government customers to maintain vendors and opt for longer contracts, to streamline and reduce the frequency of what can be an arduous selection process. Consequently, a typical LMR service contract ranges between seven and 10 years, including network services like cybersecurity as well as break/fix services for handsets. The average lifecycle for a radio handset is also seven years. We think customers are unlikely to cancel a Motorola contract prematurely, giving the firm sticky revenue for the duration of the contract. A single radio can cost up to $6,000, which we think makes customers eager to make their investments (usually voted on and funded with taxpayer dollars) in LMR endure for as long as is feasible. Canceling a contract prematurely would require seeking funding to engage in a contract with a new vendor earlier than expected or budgeted for, in addition to the time and money spent retraining personnel and redesigning workflows. 

In Motorola’s video business, the firm sells fixed surveillance cameras, car-mounted cameras, body-worn cameras, and analytical software. In command center, Motorola offers a cloud-hosted software suite that covers incident response “from 911 to case closure.” This features computer-aided dispatch software, routing, transcription, embedded video feeds, records, and evidence management. We think Motorola’s video and software businesses benefit from switching costs arising from the firm’s development of a common platform and ecosystem of products that integrate seamlessly. 

It is our view that software platforms that embed themselves across multiple mission-critical touchpoints at a customer incur significant switching costs. The firm’s CommandCentral suite offers a solution for every stage of a public safety incident. Motorola offers call routing, voice and computer-aided dispatch, real-time integration of radio and video feeds from first responders, transcription services, video analytics, encrypted recordkeeping, and evidence management. Motorola is one of few competitors offering a comprehensive solution set, with most dispatch centers currently using point solutions for call routing, dispatch, recordkeeping, and other functions. We think the CommandCentral suite offers a compelling value proposition by keeping all of a dispatcher’s tools on a common platform. By using multiple components of the suite, dispatchers can reduce or fully eliminate time spent transferring files, transcribing calls, and organizing evidence. We think the time and manual labor that Motorola’s software saves customers makes them unlikely to switch back to a point solution, especially once they adopt multiple applications within the suite. We also think that once workflows are designed around a Motorola solution, customers would be averse to switching to even another comprehensive software suite, due to the time and money required to adapt workflows and transfer data to a new system. 

We also think that layering software on top of Motorola’s video hardware solutions creates an overall stickier combined solution. Customers of both Motorola’s video and command center businesses can integrate live video feeds and collected video evidence into the software suite, and apply analytics to video within the suite. We think this increases the utility of each of these technologies by reducing manual data transfer and file sharing, while also heightening switching costs at customers by further embedding them into the Motorola ecosystem. We think customers of both Motorola’s video cameras and command center software would be unlikely to switch away from either solution and forgo the deep integration to which they have become accustomed. 

In sum, we think Motorola’s business comprises three solution sets that become embedded in mission-critical workflows and would be costly to rip out. We think sticky revenue streams across Motorola’s business will generate returns on invested capital in excess of the firm’s weighted cost of capital for the better part of the next decade and that the firm possesses a narrow economic moat.

Narrow

Economic Moat

Motorola Solutions

Motorola Solutions, Inc. is engaged in the provision of communication infrastructure, devices, accessories, software, and services. It operates through the following segments: Products & Systems Integration and Software & Services. The Products & Systems Integration segment offers an extensive portfolio of infrastructure, devices, accessories, video security devices and infrastructure, and the implementation and integration of such systems, devices, and applications. The Software & Services segment is involved in providing a range of solution offerings for government, public safety and commercial customers, which includes public safety and enterprise Command Center Software, unified communications applications, and video software solutions, delivered both on-premises and as a service. The company was founded on September 25, 1928, and is headquartered in Chicago, IL.

Earnings data Q2 2023

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Motorola Solutions, Inc. engages in the provision of communication infrastructure, devices, accessories, software, and services. It operates through the following segments: Products and Systems Integration, and Software and Services. The Products and Systems Integration segment offers a portfolio of infrastructure, devices, accessories, and video security devices, and the implementation and integration of such systems, devices, and applications. The Software and Services segment provides a range of solution offerings which includes public safety and enterprise Command Center Software, unified communications applications, and video software solutions. The company was founded on September 25, 1928 and is headquartered in Chicago, IL.

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