Motorola Solutions pruning costs to enhance profit

With gross margins decreasing, Motorola Solutions Inc, a US provider of data communications and telecommunications equipment, has taken up cost-cutting measures to boost its profit growth. The cost optimizing and restructuring exercise have been helping the company significantly in cost control. The sluggish sales, cut-throat market competition and adverse sales tax are putting more pressure on Motorola. The gross margins fell from 51 percent in 2012 to 48 percent in 2014. In a similar way, operating margins also down from 14.8 percent to 16.4 percent during the period.

Motorola Solutions is suffering from a continuous drop in gross margins. The ongoing uncertainty conditions in the macro-economy and rising competition are the main reasons for the pressure on the company.

The closing down of iDEN (integrated digital enhanced networks) is also another cause of concern. iDEN contributes significant revenues to Motorola, which is also facing pricing pressure. This will further bring down the gross margins for the company.

If the company manages to continue its cost cutting exercise supported by improvement in operational efficiency, then it'll result in five percent up in the company's value estimate. Analysts forecast price at $63, which is five percent below the market price. Motorola Solutions stock was trading at $67.

Selling, general & administrative (SG&A) and research and development (R&D) expenses were down when compared to revenues. Motorola's SG&A and R&D expenses are forecast to be further lowered when compared to a decline in gross margins.

The company's sales in North America grew five percent during the second quarter this year and non-GAAP EPS growth was 45 percent during the quarter. The revenues were down two percent to $1,368mn in second quarter 2015 from $1,393mn in the previous corresponding period.

Operating earnings improved 84 percent to $254mn from $138mn during the quarter. Earnings per share were up at $0.72 from $0.30. Motorola Solutions was able to improve operating margins from 9.9 percent to 18.6 percent.

Motorola is also expecting revenue loss from winding up of iDEN. Sprint has already stopped its iDEN network in the US. TELUS in Canada also stopped its iDEN services. The rest of the world is also expected to close down iDEN services.

Motorola's gross margins are expected to shrink further to 55 percent in next six years from 56 percent in 2014. If sales performance improves along with macroeconomic conditions, then the rate of decline in gross margins will be slower. But the drop in gross margins is inevitable.