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MOTOROLA

SOLUTIONS

INC

DATE: Dec. 31, 2021

TICKER: MSI

EXCHANGE: NYSE

GICS SECTOR: Information Technology

INDUSTRY: Communications Equipment

CURRENT PRICE: $272

TARGET PRICE: $287

UPSIDE: 6.5%

RECOMMENDATION: BUY

BRIEF Motorola Solutions is the industry giant in public safety communications equipment, specializing in

Land Mobile Radio (LMR), Video Security & Analytics, and Command Center Software. MSI’s

dominance in the sticky LMR market provides a financial anchor supporting the company’s expansion

into faster-growing, more profitable public safety technologies.

INVESTMENT SUMMARY We issue a BUY recommendation for MSI with a one-year target price of $287, offering a 6.5% upside

to its December 31, 2021 $272 closing price. Our analysis utilizes a Discounted Cash Flow model (and is

confirmed by Monte Carlo, Dividend Discount, and Relative Valuation models) and is based upon MSI’s

economic moat, adjacency acquisitions, and favorable margins (Figure 1).

Economic Moat

MSI’s LMR market dominance and entrenched customer relationships establish a protective economic

moat that enables upselling and cross-selling, boosts topline performance, and diversifies revenue

streams (Figure 2). MSI effectively controls the LMR market (i.e., 84% Illinois first responder market

share, 70% domestic market share, and 54% global market share, Figure 3, Appendix 11) and captures

LMR customers via sunk infrastructure costs and high switching costs. Most LMR contracts are multi-

year — 5 year average — and involve both network installation and ensuing service support, which

can only be provided by MSI as each LMR network is custom built to meet customer requirements. MSI

leverages entrenched customers to upsell newer, higher-priced LMR devices (e.g., APX NEXT radio) and

cross sell more profitable Video Security & Analytics (25% forecasted market CAGR through 2026) and

Command Center Software (11% forecasted market CAGR through 2025) products and services,

boosting both revenue growth and margin expansion. Its ability to upsell and cross-sell is additionally

strengthened by a favorable funding environment (American Rescue Plan Act, ARPA, provides $0.5

trillion in funding for target customers through 2024).

Adjacency Acquisitions Funded by cash flows generated by its LMR market dominance (which still offers growth opportunities

with a 9% forecasted market CAGR through 2027), MSI utilizes strategic public safety adjacency

acquisitions to penetrate less protected technologies, doubling its total addressable market (TAM)

between 2015 and 2021. In Video Security & Analytics ($12 billion TAM with an expected 25% market

CAGR through 2026), MSI has acquired Avigilon, VaaS, and IndigoVision, with the former’s fixed and Source: William Blair

Figure 3: Domestic LMR Market

Figure 2: Investment Thesis

Source: Team Consensus

Figure 1: Valuation Summary

Source: Team Consensus

2

mobile video solutions providing real-time surveillance and analytics for governmental and commercial

customers (Figure 4). In Command Center Software ($6 billion TAM with an expected 11% market CAGR

through 2025), MSI has created its CommandCentral Suite (Figure 27) — the market’s most

comprehensive 911 call center software — via acquisitions of Callyo, Spillman Technologies, and Airbus

DS Communications. We expect MSI to spend 37.5% of operating cash flow on acquisitions of Video

Security & Analytics and Command Center targets, supporting a 6.3% revenue CAGR through 2030

(compared to a 2.1% eight-year historic CAGR).

Favorable Margins

MSI’s service-heavy adjacency acquisitions (e.g., Avigilon, VaaS, and Callyo) have not only increased its

Software & Services proportional revenue from 29.3% (2017) to 37.5% (2020), the healthier margins of its

Video Security & Analytics and Command Center Software acquisitions (Figure 5) have simultaneously

improved its operating margins by 350 bps between 2014 and 2020. Comparing MSI’s revenue segments,

its Software & Services segment provides an operating margin of 26.2% compared to the 14.2% operating

margin offered by its Products & Systems Integration segment. We expect MSI to continue its cutting-edge

public safety service solutions focus, and by 2030 Software & Services (due to a 9.24% projected revenue

CAGR through 2030 compared to Products & Systems Integration’s 2.8% projected revenue CAGR,

Appendix 8) will comprise 50% of total revenue and support a 58% overall gross margin (compared to

Appendix 15’s 50% in FY 2020 and Axon Enterprise’s 61.1% gross margin).

BUSINESS DESCRIPTION Headquartered in Chicago, MSI provides LMR radio networks and devices, Video Security & Analytics

solutions (fixed and mobile), and Command Center Software (custom built for 911 call centers). MSI has

18,000 employees (6,000 specializing in R&D) spread across key manufacturing facilities in Illinois, Texas,

and Canada as well as R&D centers in Illinois, Poland, and Israel. Though MSI utilizes in-house

manufacturing facilities, it also outsources manufacturing of key components to Sanmina Corporation

(12.5% of COGS), Hon Hai Precision Industry (8.6% of COGS), and other contract manufacturers.

History and Management Team Founded in Chicago in 1928 (Appendix 28), MSI has been a perennial leader in communications equipment

with its introduction of car radios in the 1930s and cellular phones in the 1980s. In 2011, Motorola split

into Motorola Mobility (cellphone segment, later sold to Google then Lenovo) and Motorola Solutions

(public safety segment). Following declining revenues, Chairman and CEO Greg Brown led an acquisition-

driven company turnaround resulting in 197% EPS growth (Figure 31) between 2015 and 2020 and 131%

market capitalization growth between 2018 and 2021 (Figure 6). Other key members of MSI’s management

team (Appendix 7) include Jason Winkler (CFO) who handles financial strategy and supply chain, Jack

Malloy (COO) who oversees the company’s sales and systems integration teams, and Mahesh Saptharishi

(CTO) who heads Video Security & Analytics, Command Center Software, and cybersecurity solutions.

Business Segments and Technologies MSI is divided into two segments—Products & Systems Integration (non-recurring revenue associated

with LMR network and video security camera installation; 62.5% of 2020 revenue) and Software &

Services (recurring revenue associated with LMR network maintenance and services, video security and

analytics services, and 911 call center software; 37.5% of 2020 revenue). MSI offers three technologies

across its segments (Figure 7). LMR Mission Critical Communications networks (82% of 2020 revenue)

enable two-way communication between radio transceivers and are favored by public safety customers

over long-term evolution (LTE) because customers directly own and operate these stronger, more resilient

LMR networks that remain operational during natural disasters and emergencies. Video Security &

Analytics (15% of 2020 revenue) includes AI-enabled fixed video surveillance systems and access control

solutions, the M500 Police In-Car Video System, police body cameras, and license plate recognition

software. Command Center Software (3% of 2020 revenue) provides cloud-based applications allowing

public safety personnel to collect and access pertinent information from an initial 911 call to case closure.

Customer Base With sticky, high-margin government contracts accounting for 75% of 2020 revenue, MSI’s largest

customers (i.e., the US and UK governments with 9% and 8% of revenue, respectively) primarily purchase

LMR network installation and ensuing services. Commercial customers (25% of 2020 revenue) primarily

purchase Video Security & Analytics solutions. Its target Command Center Software market encompasses

domestic 911 call centers, and management estimates that 60% of US 911 call centers use at least one

Figure 6: MSI Market

Capitalization (m USD)

Source: Bloomberg

Figure 7: Revenue Segments

Source: MSI 2020 10-K

Figure 5: Ten-Year Average Net

Profit Margin Comparison

Source: Bloomberg

Source: Bloomberg

Figure 4: Disclosed Acquisitions

Target Price (m) EV/

EBITDA

$1,041 14.96

$445 15.32

$36 12.47

3

MSI software module. Its largest geographic markets (Figure 28) are the United States (64% of revenue),

the United Kingdom (10% of revenue), Canada (3% of revenue), and other developed nations (23% of

revenue).

ENVIRONMENTAL, SOCIAL, GOVERNANCE Figure 11 summarizes MSI’s Environmental,

Social, and Governance (ESG) performance

and rankings while Figure 8 outlines its

internal areas of focus.

Environmental Factors positively impacting MSI’s

environmental ratings include waste

reduction, climate impact, mineral

sourcing, and supplier standards. Its total

waste (1,113 tons) fell 34.4% in 2020

(Figure 9) and its take-back option for used

products covered more than 80% of

product sales. For 2021, MSI aims at a

recycling rate of at least 50%. It lowered

greenhouse gas (GHG) emissions by 166% over the past 10 years and in 2020 beat its 2027 38% reduction

target by lowering Scope 1 & 2 GHG emissions by 39.7%. To mitigate mineral mining impacts (i.e., its

products contain tantalum, tin, tungsten, and gold originating largely from the Democratic Republic of the

Congo), MSI is a member of the Responsible Minerals Initiative (RMI) and supports US and EU policies

such as “Solutions for Hope” aimed at creating a closed-pipe system of mining conflict-free tantalum from

the DRC (Figure 10). In accordance with EU RoHS legislation, MSI has banned 82 substances from its

products. It also demands compliance with its environmental supplier standards and code of conduct

based on guidance from the 2020 Responsible Business Alliance (RBA), United Nations Guiding Principles

on Business and Human Rights, and International Labor Organization.

Factors negatively impacting its environmental rating include limited information regarding whether

employees are certified in ISO energy management, the degree to which sustainable energy sources are

utilized, unclear goals regarding freshwater and total waste reduction and product energy efficiency, and

environmental management at its outsourced production sites.

Social Factors positively impacting MSI’s social ratings

include its commitment to diversity, equity and

inclusion (DEI), a healthy and safe workforce, and

information security. MSI was recognized in Forbes’

2020 and 2021 “Best Employers for Diversity” (Figure

12) due to its 2020 Chief Diversity Officer hire, its

2021 DEI strategic framework launch incorporating

global DEI training, its six DEI business councils, and

STEM gender diversity support via the Society of

Women Engineers. To support its employees’ health

and safety during the Covid-19 pandemic, MSI rolled

out a “work from home if you can” approach to 80%

of its 18,000 employees (vs. L3Harris Technologies, LHX, only offered remote options to 50% of its

employees) and provided paid time off, virtual hangout spots, and wellness workshops. To promote

cybersecurity, data privacy, and responsible technology (Appendix 4), MSI appointed a Data Protection

Officer in 2018 (in compliance with Europe’s General Data Protection Regulation, GDPR) and founded the

Motorola Solutions Technology Advisory Board in 2020. Its information security systems conform to ISO

27001 certification standards, with hard– and software-based security considerations integrated into

100% of its products and regularly tested by ethical hackers. Over the past ten years, its nonprofit

Foundation donated over $100 million (including 200 grants in over 24 countries in 2020 to provide over $2

million to worldwide Covid-19 relief efforts) and served 14,000 volunteer hours during the 2020 Global

Month of Service.

Factors negatively impacting MSI’s social ratings include undefined bargaining rights, lack of clarity as to

Figure 12: Company Awards & Recognitions

Source: MSI CR Report 2020

Source: Bloomberg

Figure 11: ESG Ratings

Source: 2020 MSI CR Report

Figure 8: ESG Focus Topics

Source: ISS ESG Report

Figure 10: Relative ESG

Source: Bloomberg

Figure 9: ESG Performance

4

whether leave requirements exceed legal minimums, no information regarding on-site childcare access or

direct financial support, failure to disclose governmental financial assistance, and failure to respect

territorial self-determination rights. Specifically, MSI was identified by the UN in 2020 for providing

ground surveillance (e.g., its MotoEagle Wide Area Surveillance System) to Israeli police, military, and

prison service in West Bank settlements considered illegal by international law.

Governance MSI’s B+ ISS ESG corporate governance and business ethics score is positively driven by shareholder

democracy, CEO and executive management team compensation scheme disclosure, and its code of

business ethics and compliance procedures. Areas for improvement are highlighted in MSI’s 2020 ISS

QualityScore of 8/10 signaling key risks in the board structure assessment (Figure 10).

Executive Compensation. Positive factors affecting MSI’s 6/10 ISS Compensation Risk QualityScore

include its cash exchange for underwater options restriction, shareholder approval requirement for option

compensation repricing, prohibition of share recycling for options/SARs, and award clawback. However,

the most negative factor is excessive CEO compensation. CEO Greg Brown’s salary is 416x the next-

highest-paid MSI officer, 1.3x the peer group median, exceeds its peers in terms of the ratio of CEO-to-

typical-worker compensation (Figure 14), and received less than 90% support in the most recent Say for

Pay proposal (despite containing the second largest performance-based compensation weight in its peer

group, Figures 13 and 14).

Board of Directors. Its 10/10 ISS Board Structure QualityScore indicates severe governance risks

associated with MSI’s 7 directors (Appendix 8). Primary areas of concern are the lack of separation

between Board Chair and CEO (i.e., Greg Brown occupies both positions, introducing agency problems), a

busy board member, low director support ratings (28.57% received less than 80%), and a lack of diversity

(e.g., only 14.29% of board members are women with 0% named as executives, Appendix 9). Mitigating

factors include 86% independent directors (equal to its peer average) that also serve on subcommittees

(Appendix 10), unentrenched directors, disclosed board policies and succession plan, and director

compensation less than its peers’ median (0.94).

Shareholder Structure. Its 2/10 ISS Shareholder Rights QualityScore

suggests low shareholder risk, mainly attributed to its 1-share-1-vote,

annual director election, charter and bylaws amendments by simple

majority vote, and proxy access rights. This low risk determination is

further supported by the relatively high oversight suggested by its

93.0% institutional ownership (Figure 18) (compared to LHX’s 89.7%

and Axon Enterprise’s 89.8%), the largest owners being Vanguard

Group Inc and BlackRock Inc (Figure 16). No individual or asset

management firm has filed a 13-F with the SEC since 2020,

suggesting limited potential hostile takeover. MSI’s CEO is the top

insider with 0.27% (Figure 17), trailing the stakes of AXON’s founder/

CEO (3.23%) but exceeding those of LHX (0.04%) and Tyler

Technologies (TYL, 0.18%), indicating better shareholder interest

alignment. However, existing risks include blank check preferred stock

issuance, an exclusive litigation venue, and a 20% share capital

minimum to convene a special meeting.

INDUSTRY OVERVIEW The safety communications industry is comprised of companies that specialize in the production,

distribution, and post sales services of safety and communications networks. Technologies from this

industry are used in telephone, broadband coverage, TV broadcast, cloud computing, land mobile radio,

and cable networks. Main players include Motorola Solutions, Ericsson, Huawei, Hikvision, L3 Harris,

Boeing, and Tyler Technologies. Revenue—expected to rise 6.7% in 2021—is largely garnered from local,

state, and federal government agencies. The remaining portion of sales is generated from safety contracts

with private entities for services such as data tracing and analytics as well as safety software.

Key Drivers & Success Factors Main industry drivers include technological innovation aimed at creating a more secure, reliable, and

integrated public order and security infrastructure (Figure 20 and Appendix 1). Global IT spending reached

$4 trillion in 2021 and is expected to grow at 5.5% in 2022 after posting a 3.1% CAGR between 2005 and

2021. US annual government expenditures on public order and safety have grown at a 4.36% CAGR from

Figure 18: Shareholder Ownership

Source: Bloomberg

Source: Bloomberg

Figure 16: Top Institutional

Owners

Figure 15: CEO Pay Ratio

Source: Proxy Statements

Source: Bloomberg

Figure 14: CEO Compensation

Figure 13: Exec. Compensation

Source: Bloomberg

Figure 17: Top Insider Owners

Source: Bloomberg

5

1997 to 2020. Though the industry’s highest growth rate is in Asia-Pacific (Figure 19), domestic industry

growth will hasten in the near future due to the approval of ARPA with $0.5 trillion being earmarked for

public safety. This portion of ARPA focuses on funding safety and order services for communities, in

addition to rescue and vaccine distribution services. We believe local public safety agencies will increase

communications equipment spending in response to this favorable funding environment, complementing

the revenue growth assumptions factored into our DCF model (Appendix 13).

Headwinds and Tailwinds In addition to the items below, factors impacting the industry include customer concentration, limited

talent availability, and manufacturing economies of scale.

Innovative Technology. Market share critically depends upon product and service technology (e.g., a one-

minute increase in first responder speed can save 10,000 lives annually). Consequently, players routinely

spend 10-20% of revenue on R&D, safeguard intellectual property via patents, and generate income via

licensing patents. The speed at which technology evolves creates both struggles and opportunities such as

the Internet of Things (IoT), cloud computing, enterprise digitization, and the integration of LTE networks.

MSI’s investment in R&D (e.g., 6,000 fully-dedicated R&D employees and 9.3% of 2020 revenue spent on

R&D) has led to major technological innovations such as their new Mobile LXN 6000 LTE hardware. MSI’s

consistent technological advancement shows its superior ability to properly allocate swaths of resources

towards R&D.

LMR radio systems, dating back to the 1930s and featuring push-to-talk (PTT) two-way radio

communication that works both on and off networks, are increasingly integrating with cellular-based LTE

networks, which support increased broadband applications, mobile device updates, and video streaming

but fail to operate in “dead zones.” Technical infrastructures are also vulnerable to production design

failures (generating unnecessary service costs and lost customer loyalty), natural disasters, software

malfunctions, and cybersecurity attacks (which have increased 600% during the pandemic and cost

organizations on average $8.64 million in 2020). In response to heightened threats, MSI provides

comprehensive cybersecurity services for its LMR, Video Security & Analytics, and Command Center

Software customers (Appendix 4).

Regulatory Environment. The domestic industry is highly regulated by state public utility commissions, the

Federal Communications Commission (FCC), and environmental protection agencies (due to the equipment

and materials used for production). Companies operating in Europe must also comply with the EU’s

General Data Protection Regulation (GDPR), which requires enhanced data protection measures and

expanded personal information use disclosures. Regulatory constraints increase compliance costs;

noncomplying firms run the risk of penalties (e.g., MSI incurred a $57 million charge under the

Comprehensive Environmental Response, Compensation, and Liability Act in 2018), restricted access to

spectrum auctions, or suspension / cessation of contracts with the US government.

COMPETITIVE POSITIONING Comparables Selection To capture customer and revenue stream variation, we construct distinct peer groups for MSI’s three

technologies using management and analyst-selected peers as well as overlapping operating sub-

industries, target markets, and parallel product portfolios. The closest LMR, Video Security & Analytics,

and Command Center Software competitors are L3Harris Technologies (LHX, primarily an aerospace and

defense contractor, the only major domestic LMR competitor), Axon Enterprise (AXON, state and local

police body camera and taser provider), and Tyler Technologies (TYL, state and local government software

and services provider specializing in public safety solutions and financial management), respectively

(Appendix 6).

Market Dynamics

MSI entered the $11 billion TAM LMR market (excluding China) in 1930, and the market grew at a 7%

CAGR between 2018 and 2020 primarily due to international expansion. With MSI’s 70% domestic (54%

global) market share and LHX’s 30% domestic (23% global) stake, the two firms have achieved effective

domestic market saturation (Figure 21). Coupled with multi-year service contracts and significant sunk

costs (Appendix 3), the resulting captured customer base means that growth occurs via upselling higher-

priced radios and cross-selling network services (e.g., cybersecurity) rather than through new customer

acquisition.

The larger Video Security & Analytics market is growing more quickly (i.e., 15% historic CAGR 2018-2020

Figure 21: LMR Market Comparison

MSI, 54%

LHX, 23%

Others, 23%

$11b TAM

Source: William Blair

Figure 22: Video Security &

Analytics Market Comparison

Source: William Blair

$12b TAM MSI,

8%

AXON, 7%

Others, 85%

Source: William Blair

Figure 23: Command Center

Software Market Comparison

MSI, 9%

TYL, 16%

Others, 75% $6b

TAM

Global US

Figure 20: Public Safety &

Security Market Share, 2020

Source: Fortune Business Insights

Figure 19: Public Safety Market

Growth Rate by Region

Source: Mordor Intelligence High Mid Low

6

and 25% forecasted CAGR through 2026) but is more fragmented (i.e., six major competitors, none with

stakes larger than 15%). MSI entered the technology in 2018 via its Avigilon acquisition and holds an 8%

global market share (Figure 22). Although its closest competitor (AXON) is slightl