New Smartphones, Higher Mobile Gross Margins Important for Motorola

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by: Trefis

Motorola (NYSE:MOT), which competes with RIM’s (NASDAQ:RIMM) BlackBerry, Apple’s (NASDAQ:AAPL) iPhone and Nokia’s (NYSE:NOK) N-Series of smartphones, is improving its mobile phone gross margins due in part to smartphones like the Droid and Cliq.

Motorola’s smartphones have higher margins than most of the company’s phones and we believe that the introduction of more Motorola smartphones in 2010 will help the company to improve margins temporarily. We estimate that Motorola’s mobile phone business constitutes 27% of the $7 Trefis price estimate for Motorola’s stock, meaning that company’s smartphone gross margins are an important factor in the stock’s value.

Over the long run, we expect Motorola’s mobile phone margins to trend down in line with the margin declines of its competitors.

Motorola’s Droid Smartphone Improving Margins

Motorola’s Droid and Cliq smartphones have higher prices and margins compared to the rest of Motorola’s mobile phones. The success of the Droid smartphone, in particular, will be an important part of Motorola’s margin increase.

Motorola launched the Droid in early November 2009 and sold 1.05 million phones in the first 74 days of its launch in the US, according to a report from Flurry. In comparison, Apple’s popular iPhone sold 1 million phones during the first 74 days of sale.

More Motorola Smartphones Can Help Grow Margins

Motorola is planning to launch 20 new smartphones in 2010 with expected sales of around 11-14 million. We expect Motorola to sell a total of around 54 million mobile phones in 2010, which translates to 4.2% market share within the global mobile phone market in 2010.

Motorola’s smartphone sales will constitute around 25% of the total mobile phones that we expect Motorola to sell in 2010. We believe this ratio will reach 50% by 2011 and that Motorola will sell a total of 53 million mobile phones in 2011. The growing ratio of higher priced and higher margin smartphones will help to increase Motorola’s overall mobile phone gross margins.

Margins Likely to Decline Over the Long Run

However, as Motorola increases its smartphone ratio past 50% in the years beyond 2011, it could see a decline in the average pricing and margins due to increasing commoditization of smartphones. We expect Motorola’s margins to reach around 34% by the end of Trefis' forecast period.

Our expectations for Motorola’s long-term mobile phone margins are in line with how we expect margins to trend for the company’s competitors. For example, we expect Apple’s iPhone margins to decline from 52% in 2009 to 34% by the end of Trefis' forecast period. Similarly, we expect RIM’s BlackBerry margins to decline from 36% in 2009 to 28% by the end of Trefis forecast period.

You can modify our forecast for Motorola Mobile Phone Gross Margins above to see how Motorola’s stock could be impacted if an increase in Motorola’s smartphone mix were to improve margins even more than we forecast.

Disclosure: No positions.