Motorola profit drops 48% as margins collapse
Handset margins take a beating as Motorola slashes prices
WASHINGTON (MarketWatch) -- Motorola Inc., the world's No. 2 mobile-phone maker, on Friday posted a 48% drop in quarterly profit as margins in its handset business collapsed.
Although Motorola shipped 66 million wireless devices, the company slashed prices to ward off competitors and relied more heavily on sales of cheaper phones, especially in developing markets.
In the final three months of 2006, the Schaumburg, Ill.-based company earned $624 million, or 25 cents a share, compared to $1.2 billion, or 47 cents a share, a year earlier. Excluding one-time items, Motorola would have earned 21 cents a share.
Fourth-quarter revenue rose 17% to $11.8 billion.
Motorola said it sees first-quarter sales in the range of $10.4 billion to $10.6 billion.
Before Motorola cut its forecast on Jan. 4, the vendor was expected to earn 39 cents a share on revenue of $12 billion, based on the consensus of analysts surveyed by Thomson First Call.
The outcome: the first truly disappointing results under the stewardship of Chief Executive Ed Zander since he was hired three years ago.
Although Motorola gained 4.6 percentage points of market share compared to the year-ago quarter, the profit margin in its handset business collapsed to 4.4% from 11.9% in the third quarter.
At the time, Zander also expressed disappointment and said the company would announce new steps to improve profit once it released its full quarterly results.
While Motorola has experienced great success in the past few years, many investors fret about the slowing momentum in the mobile-handset business. That unit generates more than 60% of Motorola's revenue.
The vendor continues to sell millions of Razr phones -- the hugely popular thin handsets that Motorola introduced two years ago -- but prices for the device have fallen from a peak of $500 to under $50 in the latest quarter. Some carriers were even giving the phone away for "free" if customers agreed to long-term contracts.
The price cuts stem from stiffer competition from Motorola's rivals, which have introduced a bevy of their own thin-styled phones, some even thinner than Motorola's.
Motorola has offered a successor to the Razr, the so-called Krzr, but that phone did not sell especially well in the fourth quarter because of its much higher price, analysts say. Customers bought the Razr instead.
The company made up for lower prices of its premium phones by selling more handsets to developing countries such as India and China, but those devices sell at a much lower prices and deliver smaller margins.
Analysts believe the severe pressure on handset prices could last at least several quarters, but investors want Motorola to take immediate steps to reverse the decline in margins. Yet while some want the company to raise handset prices at the cost of market share, others say it's imperative for the company to maintain its current position.
Lower handset prices and profit margins, however, could be hard to reverse. Consumers have grown accustomed to cheaper handset prices and most are unwilling to shell out big bucks for the very latest design. And competition in the industry, already intense, might only get worse with Apple wading into the market with its snazzy-looking iPhone.
Motorola has stepped up efforts to develop new wireless-networking technologies and devices for home entertainment, but those initiatives aren't expected to pay off in a big way anytime soon.
Jeffry Bartash is a reporter for MarketWatch in Washington.
Aude Lagorce is a reporter for MarketWatch in London. |
