February 7, 2017

Citron Exposes the Vulnerability of

Motorola Solutions…Price Target - $45
What would President Trump think about U.S. Law
Enforcement Agencies Paying 5 TIMES the Prices
Motorola Charges EU Countries?

Background
Motorola Solutions (NYSE:MSI) was created when Motorola spun off their
telecommunications division in 2011. With an 85% market share of radio
communications for law enforcement and other first responders (FR),
Motorola has used its dominant position in a fragmented customer base to
control the market for first responder communications in North America.
Motorola also has a worldwide presence selling broadband networks and
equipment though numerous partnerships.
But it's time investors start to realize …

How Motorola Really Makes Its Money!

While Motorola’s has many operating divisions, the bulk of its profits
come from selling overpriced handsets into its single source contracts in
the United States….taking advantage of both tax payers and the first
responder community. In fact, handset sales in the U.S. carry an
83.6% gross margin (see below), while device sales in Europe are at 9%.

Citron’s analysis shows that U.S. device

(handset) sales are contributing a whopping 76.7%
of Motorola’s bottom line!
Citron Reports on Motorola Solutions February 7, 2017 Page 1 of 13
 Read on to be appalled!!
From a series of articles reported by McClatchy last year:
“The industry giant has landed scores of sole-source radio
contracts and wielded enough pricing power to sell its glitzy
handsets for as much as $7,000 apiece, at a taxpayer cost of
hundreds of millions, if not billions, of dollars that could have
been saved in a more competitive market."
http://www.mcclatchydc.com/news/nation-world/national/economy/article24779224.html#storylink=cpy

Motorola Solutions has been coasting on a simple formula: Dote on police,

fire and sheriff’s departments; woo contracting officials; pursue every angle
to gain a sole-source deal or an inside track, and where possible, embed
equipment with proprietary features so it can’t interact with competitors’
products.
These tactics are borderline anti-competitive and definitely stand out in
stark contrast to the new age of government approach to spending:
https://www.ems1.com/ems-products/communications/articles/2098335-Motorola-
fights-to-keep-spot-in-EMS-police-and-fire-communication-market/

This is exactly what MSI does when supplying U.S. first responders with
critical communications equipment.

What would President Trump say if Lockheed was

charging the US Air Force 5 Times what it Charged
the United Kingdom for an F-35 ??

Citron Reports on Motorola Solutions February 7, 2017 Page 2 of 13

 “We’re going out to bid in virtually
every facet of our government.
We are going to save a fortune.”
http://fortune.com/2016/03/15/trump-lowest-bidder-contracts/

Citron can publish pages upon pages of documentation, but to make things
easy and understandable we present one clear example.

In 2016, the city of Chandler, Arizona bought 30 APX 6000 Police Radios
from Motorola … here is the contract:
http://www.chandleraz.gov/content/20160512_34.PDF

After a “discount” Chandler paid $5,200 apiece for this radio:

https://www.motorolasolutions.com/en_us/products/two-way-radios/project-25-radios/portable-radios/apx6000series/apx-
6000.html#tabproductinfo

Citron Reports on Motorola Solutions February 7, 2017 Page 3 of 13

Compare this to the MTP-6550 radio sold to first responders in the U.K.

About
$975 apiece!
http://www.tetrahandsetsandaccessories.co.uk/images/handsets/200/mtp6550.jpg

Note the 6550 is their high-end product with a color screen, etc. Most
police jurisdictions in the UK pay far less for their Motorola phones, for
lower-end B/W screens. The highest-end phone that Motorola sells to the
UK government is significantly cheaper than the lowest end phone it sells
to U.S. Law Enforcement agencies.
https://www.police.uk/procurement/airwave-radio-hand-held/

One former senior Motorola executive, who declined to be

identified to avoid harming relationships, said that everybody
knows that a cell phone costing a few hundred dollars is far
more powerful than today’s two-way emergency radios. He
said that public safety agencies shouldn’t be paying more
than $800 for a “ruggedized cell phone.”
http://www.govtech.com/products/With-Friends-in-Government-Motorola-Beats-a-
Path-to-Telecom-Supremacy.html

The reason why the UK and the rest of the world is less expensive is simple:
Their LMR network (TETRA) is an open platform; Motorola faces
competition to sell in these markets.

Citron Reports on Motorola Solutions February 7, 2017 Page 4 of 13

Competition on an Open Platform is
Motorola’s Kryptonite

Motorola’s overseas units, operating in TETRA markets, generate gross

profit margins LESS THAN HALF of it U.S. corporate average. The reason is
that Motorola doesn’t have monopoly control on the TETRA platform.

 Note: Motorola has been able to exploit the system because the vast
majority of U.S. contracts are awarded on a local level. Yet, most are
funded by government grants through DHS and/or the U.S.
Department of Commerce, right from the US Taxpayer.
In fact, Motorola has developed its own “in-house system” of procuring
federal funding for these non-competitive, outdated, and overpriced
projects.

Your Tax Dollars at Work

https://www.motorolasolutions.com/en_us/solutions/government-grants.html

Citron Reports on Motorola Solutions February 7, 2017 Page 5 of 13

 FirstNet: The Bomb for Motorola
FirstNet is a communications system for first responders proposed after the
9-11 disaster. That dark day stressed our first responder system on a
national level like no other, exposing major vulnerabilities in our disaster
infrastructure. Specifically, our first responders were grievously impacted
by their inability to respond to the disaster across multiple jurisdictions.
The U.S. has moved (albeit slowly) to develop an independent,
interoperable communication system for first responders. Finally, AT&T
will likely begin the build out in 2017.
As the Federal government has a strong interest in stimulating competition
and innovation in first responder communications, they are doing it
through the support of FirstNet. Wilbur Ross, President Trump’s appointed
Secretary of Commerce who will oversee the major source of funding for
local first responder communication systems, has already expressed his
support for the project.

Citron Reports on Motorola Solutions February 7, 2017 Page 6 of 13

 FirstNet represents the two words Motorola hates to hear:
Competition and Innovation.
Despite the obvious bullshit kicked by MSI management, it is no secret that
they have lobbied long and hard to put the kibosh on FirstNet.
An especially lucid statement about FirstNet was just published in Police
Chief Magazine, January 2017 edition:

" Just as smart phones have created a new era of real-time

information and connectivity for individuals, the FirstNet
network will enable services, devices, and applications that
provide the public safety community with the tools they need
to save lives.”
http://www.firstnet.gov/newsroom/blog/technology-talk-firstnet-delivering-21st-century-tools-law-enforcement

Motorola’s lobbying campaign got so bad that it prompted a scathing letter

from Senator Jay Rockefeller (West Virginia) :
"I will not stand by while your company continues to defend
a business plan solely because you are unwilling to make the
investments and commitments necessary to be a true
competitor on the new level playing field for public-safety
communications equipment …"
http://www.theatlantic.com/politics/archive/2015/09/why-police-and-firefighters-struggle-to-communicate-in-crises/457443/

As stated clearly in Motorola’s risk factors, in their 10-K:

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 …

(4) FirstNet’s stated intent to reduce handset

prices;
https://www.sec.gov/Archives/edgar/data/68505/000006850516000017/msi201510-k.htm

Citron Reports on Motorola Solutions February 7, 2017 Page 7 of 13

For more reading on FirstNet, Citron recommends you subscribe to their
excellent Twitter feed, or read the comprehensive website at
www.FirstNet.gov

How the U.S. Government Can Regulate the

“Motorola Monopoly

Just like the pharmaceutical industry was a problem already known by

Congress, so is the “Motorola Monopoly”.

Congresswoman Anna Eshoo, who serves on the United States House

Energy Subcommittee on Communications and Technology stated in a
report to Congress:

“$5,000 public safety radios are out, o-u-t, so there Is -- I

don't even -- I don't want to hear about them anymore. As far
as I am concerned, they don't exist, and I don't think any of
the dollars that are being provided should go to anything …
like that. That is yesterday.”
https://www.gpo.gov/fdsys/pkg/CHRG-114hhrg97652/html/CHRG-114hhrg97652.htm

As suggested by knowledgeable stakeholders in the space, the U.S.

Department of Commerce can easily access a list of all the DHS grants to
state and local agencies that have selected Motorola as their vendor for
public safety equipment and devices, and assure these bids were
competitive.
The Department of Commerce has already explored this issue in the past
and it will be on no secret to them that taxpayers are being exploited.

Citron Reports on Motorola Solutions February 7, 2017 Page 8 of 13

 “Any appearance that there would be a fair, competitive
bidding process ’was a ruse’ ”
-- Steve Overacker, Contra Costa County’s then telecommunications manager

The Future

With or without government regulation or even FirstNet, the days of

Motorola’s closed end business are numbered.

“The change that Motorola is getting hit with is no less

substantial than what hit IBM or Kodak. It’s a technology wave.”
-- Steve Koman, a former Motorola employee, consultant to the city of Charlotte, N.C

http://www.miamiherald.com/news/nation-world/national/article8258028.html#storylink=cpy

“Push-to-Talk” is Motorola’s Rapidly Obsolescing Secret Sauce

Motorola has maintained its near-monopoly on the U.S.’s first responder
market with its proprietary LMR channel for “push-to-talk” (e.g. “walkie-
talkie”) functionality, which first responders have long relied upon. But
technology advances are rapidly enabling cell phones to transmit voice
communications as fast and reliably as two-way radios, a development that
eventually will crumble the company’s radio franchise.
Just last week South Korea, which has completely updated its police
communications in anticipation of the 2018 Olympics, launched an
advanced push to talk solution over an LTE Network.
http://www.businesskorea.co.kr/english/news/ict/17111-‘mission-critical-
push-talk-solution’-sk-telecom-nokia-develop-lte-wireless

Citron Reports on Motorola Solutions February 7, 2017 Page 9 of 13

Later this month in Barcelona Wireless World, many vendors, including
Nokia, will be showcasing their Mission Critical Push-to-Talk Technology,
which will make Motorola’s $5K handsets stand out in stark contrast as a
thing of the past.
The chart below was prepared for Fairfax County, Virginia to assess the cost
of Motorola’s LMR vs. an advanced LTE system: This shows you exactly
where the industry is moving:

The Dirty Verdict

What are the actual financial impacts for investors as Motorola loses its
monopoly pricing power on U.S. handsets? What happens to its valuation?
Let’s start here. In European markets, Motorola competes with Nokia’s and
Ericson’s equipment. How does it compare with those companies on an
EBITDA basis?
Multiple on
2018E EBITDA
Ericsson 5.4x
Nokia 6.5x
Average 6.0x

Motorola Solutions 9.7x

Citron Reports on Motorola Solutions February 7, 2017 Page 10 of 13

Here’s our analysis of the massive gross margin discrepancy when
comparing Motorola’s business in Germany and the U.S.
United
Europe States
Estimated Gross Margin 24.6% 56.9%

Revenue Mix by Segment

% of Product Sales 60.4% 60.4%
% of Sales Service 39.6% 39.6%

Product Sales Mix

% of Product Sales in Systems 28.0% 28.0%
% of Product Sales in Devices 72.0% 72.0%

Estimated Services Margin 36.4% 36.4%

Assumed Systems Margin 36.4% 36.4%
Implied Margin on Device Sales 9.2% 83.6%

Through either government scrutiny or just evolution of technology, MSI

gross margins on its US handset business WILL be cut in half or more in the
coming years.

Citron thinks that MSI’s gross margins on handsets are likely to re-base to
the mid-30s, and head toward single digits, in line with its own European
margins for handset makers that face greater competition. Using this
“normalized” earnings level, we see MSI generating around $3.50 of
normalized earnings. As the market recognizes the secular pressures on
MSI, we see the multiple re-rating to 12x to reflect a more commoditized
handset maker. This places MSI shares 50% lower than its current trading
value.
Or you can look at it this way. Just by losing half the gross margin in its
monopoly-priced U.S. proprietary handset business, MSI's gross profit
companywide falls nearly 40%. (We’re still valuing its services and
competitive products business generously).

Citron Reports on Motorola Solutions February 7, 2017 Page 11 of 13

This is our homework that extrapolates the gross margin impact on EBITDA.

Motorola US Device Margin Analysis $MM

Total Sales 6,038
US Sales (~60% of Total) 3,623
US Product Sales (~60% of Total US) 2,189
US Device Sales (~72% of Product) 1,576
Est. Gross Margin on US Device Sales 83.6%
Est. Gross Profit $ on US Devices 1,318

Total MSI EBITDA 2016 1,718

US Device Sales Gross Profit as % of Total EBITDA 76.7%

Assumed Reduction in US Device Gross Profit $ 50.0%

Lost EBITDA $ 659
Lost EBITDA % 38.4%

Once a lower multiple more comparable to Nokia and Ericcson is considered, this
stock faces a 78% downside risk.

Target Price Calculation Support

MSI Current EBITDA 1,718
Less: Impact 50% Cut to Gross Profit (659)
Pro Forma MSI EBITDA 1,059
Average of ERIC/NOKIA Multiple 6.0x
Pro Forma Enterprise Value 6,302
Less: Current Net Debt (3,366)
New Equity Value 2,936
Target Price ($/sh) 17.70
% Downside Risk (78.4%)

NOTE: There is no way that MSI should ever deserve a multiple higher
than NOKIA who was identified as No.1 vendor of 4G public safety
technology by Current Analysis in global study of 100 operators:
http://www.nokia.com/en_int/news/releases/2016/03/21/nokia-identified-as-no1-vendor-of-4g-public-safety-technology-by-
current-analysis-in-global-study-of-100-operators

Citron Reports on Motorola Solutions February 7, 2017 Page 12 of 13

Conclusion
With the arrival of the Trump Administration, and its management style of
introducing business-style negotiations into the Government’s contracting
for goods and services, plus the maturing and emergence of open-platform
FirstNet, it appears the no lobbying, high paid consultants, football tickets,
golf outings, or Las Vegas conferences can overcome the forces driving
competition and innovation.
Reflecting on our “F-35” comparison from early in this piece, at least the F-
35 represents a state-of-the-art technology product of U.S. industry.
Ironically, Motorola’s LMR-P25 platform deployed in the U.S. is older than
either the LMR-Tetra deployed in the U.K. or the LTE technology employed
in Europe. Just like drugs, we pay more in the U.S. But unlike drugs, we get
less.

When Motorola transforms itself into a services company,

shareholders will not be happy with contracting gross margins
and multiples.
Cautious Investing to All

Citron Reports on Motorola Solutions February 7, 2017 Page 13 of 13