Motorola: It's Time For Change

The Motorola (MOT) Financial Analyst Meeting held last Friday in New York lasted 4.5 hours. Most of the comments from management offered few new details of what's to come in the months ahead. It was a lot of "we'll try harder" and "stay tuned." Most of the questions from analysts during the Q&A session afterwards were polite and very granular.

I thought the best question was the last one from Michael Regan, the analyst from Janus Capital:

What's changed now versus what you told us 2 years ago?

It really cut through all the painstaking (over-)explanations we heard. The Motorola Senior Leadership Team went to great lengths to say how things are really different now. More people within the company understand Days Sales Outstanding. Employees' attitudes are different. Therefore, results are going to be different. Greg Brown, the COO and new Director, also answered that Motorola's leadership had changed between now and two years ago. Well, in part it has, but Brown, CEO, Ed Zander, and CFO, Tom Meredith were all there before of course -- as was Stu Reed, the new head of Mobile Devices (in a different role).

Still, the big problem facing Motorola (and it was even more evident after the meeting on Friday) is what hasn't changed, rather than what has.

CEO Zander only spoke for a half hour on Friday -- less than half the time he allocated for his generals running the 3 company divisions. His introductory remarks and later answers in the Q&A tended to ramble and state the obvious (e.g., "We have to just have flawless execution"). They conveyed the troubling sense that the division heads had a better sense of the businesses than him.

Our "Plan B" Group for Motorola has criticized Zander previously for his over-simplifying or not articulating the company's strategy, as well as heavily using pet phrases like "Seamless Mobility" (he tried to clarify this phrase on Friday by saying "some of you might prefer to call it 'Broadband Internet'" - but that wasn't really that helpful). There was nothing in his Friday comments to dissaude us from the view that he is not comfortable sharing strategy. At one point, he stated that "profitable marketshare is our strategy."

This is a perfect illustration of Zander's biggest flaw as CEO -- and a key reason for why Motorola is undergoing its current pains. Zander is a short-term, tactical thinker. He responds instinctually, likes to joke (he introduced Reed to the analysts by imploring them to "take it easy on him") and schmooze. He appears to delegate the details of setting plans and executing them to his staff -- without necessarily a firm grasp on what is happening. When he arrived at Motorola and found a hot product with RAZR, he lurched to run with it. He trumpeted and supported growing market share. Now that the company has been humbled in the last year with low sales, he is promoting the pursuit of profits. Lurching is not leading.

As an investor, I was looking for a sense of vision and precisely how this company will win. Instead, we heard a lot of market segmentation and power of positive thinking.

Most focus during the morning meeting centered on new head of Mobile Devices, Stu Reed. It was an uneventful debut. After his hour-long careful discourse, investors were assaulted with "wave after wave" of repetitions of his theme that this was a company that had learned from its mistakes. It was a monotonous "drumbeat" of a speech, with an undeniable "cadence," describing how MDB would never again follow the siren song of a "one hit wonder."

Reed went out of his way to criticize the division's past leadership. Before Reed, according to him, Motorola's Mobile Business had the "audacity" to believe it knew what the customers wanted; now, it knows better to ask them. They are going to spend internally much better now ("We are done with the years of 'double spend,'" he said at one point -- referring to spending on the same features in different parts of the company.) They're also going to be more profitable by no longer "riding a hot horse for too long." Presumably, all these are shots at Ron Garriques - the former head of MDB. Yet, from February until his July appointment (according to the Q2 earnings call), MDB was co-headed by Zander, Brown, and Meredith (supported by Ray Roman and Terry Vega). By taking shots at Garriques, Reed was indirectly pointing the finger back at his CEO, COO, and CFO. "What's changed now versus what you told us 2 years ago?"

There were several positives from Friday's meeting. Multi-sourcing silicon, having a software strategy, and the draw downs of inventory are all positive for Mobile Devices. Tom Meredith does have a good grasp for this business and the focus he's brought to it with cash conversion is encouraging.

However, Friday's Analyst meeting was heavy on dissecting the "profit pools" (meaning the market segments) Motorola will compete in, commiting to assiduous R&D spending, and pledging to keep a clamp on costs. How will they raise revenues though and be successful in their markets? Wait and see.

In our opinion, changes at the top and at the board-level are still sorely needed for this company to more quickly move ahead. To really demonstrate to the Street and all investors that things have changed this time, Motorola needs to change its top leadership -- not in wholesale fashion, but certainly at the top. A new leader -- wisely chosen -- would truly bring new life and energy to this company to build on the early signs of progress.

HP didn't have to clean house when it shifted out Carly Fiorina and introduced Mark Hurd as CEO. I suspect the same thing would happen here. What Mark Hurd has clearly demonstrated is that a new CEO -- with the right focus, strategic vision, and operational discipline -- can take a company written off for dead and bring it back to the top of an industry. It can happen again here at Motorola, but not with Ed Zander. It's time for change.

Disclosure: Author has a long position in MOT

Comments

[Ruski:]

VAU !!
This was one of the best comments I have ever read on Seeking Alpha. Good work Eric!!

I have attended and listened in on most of Motorola's CMDs over the past 10+ years and I would totally agree with Eric that besides the normal "empty words of bs", this time they actually revealed (to people that understand the biz) that they are totally lost in what to do to get back to a position in handsets to actually challenge the Nr1 Nokia. It is not going to happen, at least not in the near future meaning 2-3 quarters. I am not sure if Motorola even will be able to defend their Nr2 position against Samsung, and even Sony Ericsson could become a tough name to stay ahead of.

Sure, it seems they talk about doing the right stuff now, but it also seems they are now doing some of the things Nokia has done for years already (like focus on working capital, turns, multiple sourcing, cash conversion, broad portfolio etc.) and copy-pasting that will simply not be enough.

Looks like Nokia has a lot of positive momentum ahead as Motorola is down on their knees. Even the likelihood of finally witnessing a turnaround for Nokia in the US market during 2008 seems much more likely now.

2007 Sep 12 08:08 AM