Motorola’s Turnaround Prospects

On April 24, Motorola Inc. (NYSE: MOT) reported a weak first quarter that highlighted its pain. In March, Motorola confirmed that it will split its business in 2009 into two independently traded companies - Mobile Devices and Networks Mobility and Enterprise Mobility Solutions after Carl Icahn threatened to start a proxy fight. Earlier coverage is available here, here, and here.

Q1 revenue was $7.45 billion, down 23% q-o-q. Net loss was $194 million or $0.09 per share mainly due to plunging mobile device sales. It repurchased 9 million shares for $138 million and cash balance stands at $3.5 billion. Its cost cutting plan is in full force, and in the quarter it reduced operating expenses by $205 million compared to Q1 2007, and $138 million sequentially. It expects to save $1 billion in 2008 by cutting down R&D by $240 million and SG&A by $540 million.

Mobile Device sales were down 39% y-o-y and 31% q-o-q to $3.3 billion on shipment of 27.4 million handsets. Operating loss in the segment further plunged to $418 million, from last quarter’s $388 million. However, its ASP was up slightly compared to the Q4 reflecting a shift towards mid to higher-end products. During the quarter, it completed the acquisition of Soundbuzz, a leading pan-Asian music provider. It also introduced six new devices, including ROKR U9, MOTO Z9, and MOTO Q but none was innovative enough to help with its pain.

Motorola continues to be the No.1 in the U.S. market but its market share has declined to 27% from 35% in Q1 2007 and its worldwide share stands at just 9.5%. Shipments in the U.S. market have also declined 22% y-o-y in Q1 as per research from NPD group. With North America accounting for 44% of its Mobile Devices revenue, the weak economy and the tough competition are further increasing its pain. By the time Motorola recovers, Apple (AAPL), Research In Motion (RIMM), and Nokia (NOK) would have moved far ahead in the race.

Home and Networks Mobility segment sales were $2.4 billion, up 2% y-o-y led by strong demand for High Definition and DVR devices. North America sales grew 10% and accounted for 83% revenue and international sales were also strong with 25% growth led by Europe and Latin America. Operating earnings were $153 million. It acquired Dahua Digital, a leading Chinese digital cable company to diversify its digital device portfolio for the Chinese market.

Revenue from Enterprise Mobility Solutions segment sales also grew by about 5% to $1.8 billion driven by 23% increase in international sales. Operating earnings increased to $250 million.

For Q2, Motorola expects a loss of $0.02 to $0.04 per share. The way things look, a split might at least help its mobility business. Meanwhile, its strategy and technology chief, Rich Nottenburg resigned this week. CEO Greg Brown clearly has a tough time ahead to turn this company around.

The Convergence Device market, however, has enough discontinuity as well as momentum, that a strong convergence device strategy and execution can really make a difference. There is plenty of discontinuity also on the Home side, with a definitive movement towards Digital, High Def, and Video-on-Demand.

I happen to be of the opinion that discontinuities are great for turnaround situations, so it is now really up to Motorola’s CEO and the new management team that he will be recruiting to replace the many departures. Motorola’s assets are its brand, its channels, and its core business, none of which are to be written off.

Motorola is trading around $9 and its market cap is around $21 billion. It hit a 52-week low of $8.85 on April 15.

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Disclosure: None

Comments

[ringy]

Hmmm..... A list of facts. But no insight.

[terminator]

No insight...good probability then, that this was written by someone in MOTO's "top heavy" management stream, bean counter or marketeer?
Good stats info though!

[georgia boy]

the sooner Motorola gets on with splitting the company in to the various divisions based on a core technology that can be focused on. Then and only then can they attempt a strong turn around. One big issue is which division gets the brand that has become a household word worldwide?

[shhaz]

California's no hands phone law could be a stimulus for more sales given MOT's prominence in the area of bluetooth and head set car phones.

July, 2008 is the effective date.

[camel jockey]

statistics are not the entire answer. I understand why analysts use them and financial reporters use them, but in the real, intangible world, they are not necessarily all that matter. Motorola has had the Razr for several years and yet could not figure out anything to do with it. Apple sat down and completely reinvented the phone. And guess what? Everybody noticed! Gee, we can do lots more with this!
Motorola is frankly just empty suits sitting around a conference table.
They have no vision and probably have to subcontract it out. It's all about culture, I guess. Black, empty suits.