Motorola's Uncertain Future
In the course of a dialogue with a boardmate in another forum I made the following statement ...
Don't count em out. If they dip another buck or two in coming months I'll be looking at them as a medium term recovery play again. They have a lot going for them. They have scale, a good manufacturing base, improved supply chain and logistics management, an improved brand image, and they've really improved distribution in recent years while reducing debt and building cash, and they are accelerating share buybacks with excess cash (of which they'll have less this year because of margins).
He responded:
<< Remember, Eric, MOT didn't really "reduce" debt. They stuck their spin-offs with it. ... I>.. [I have] no faith that MOT has made any fundamental changes to their management style or culture.
The text below was my unedited response back to him and some here may wish to add comments as we approach earnings, and feel free to tell me I'm all wet, if that is your conclusion about my remarks ...
>> I don't buy that because so far as I know that simply is not accurate.
While some debt may have traveled with the spin-offs, a focus of recently departed CFO David Devonshire (a 2002 Chris Galvin appointee from Ingersoll-Rand) who was probably somewhat of a scapegoat in the mess they now find themselves in, was to reduce debt, and he reduced it by using improved cash flow, even while they made several potentially significant acquisitions related to their core businesses, even while and after they were sensibly spinning off some units too tighten their focus.
Faith be darned, and whether or not a sustainable new Moto culture has taken root remains to be seen, but both the management style and the Moto culture have dramatically changed since Chris Galvin's departure and Ed Zander's arrival. Scores of "old Rotomolan" management dead wood are long departed and there is new accountability and new energy (along with new tension related to not meeting Zander set objectives), along with new young but experienced best of breed talent in key positions recruited from throughout the IT industry.
Truth be known, however, Zander walked into an exceptional situation from a timing perspective. Motorola was well on the way to recovery when he assumed responsibility due to the efforts of Chris Galvin and Mike Zafirovski who stayed on with Moto till January 31 2005, and the RAZR was already waiting in the wings for Ed.
Ed took over January 5, 2004 with MOT at ~$14.50 well above its $7.30 low of this decade set in 2002, and its $7.59 low of 2003. His 1st quarter on board was really a good Moto quarter, and he had little to do with it. It was onwards and upwards from there, however, all the way to a $26.30 high in 2006. Ed quickly became a Wall Street darling. He talked the talk and it looked like he was able to walk the walk. Moto margins in handsets had already recovered from the negative under Chris and Mike Z. to mid single digits, and under Ed and recently departed Ron Garriques (Motorola Mobile Devices President promoted internally to that slot by Ed) they climbed to low double digits and stayed there, at least until Q4 2006.
Moto drove for market share, and that's perfectly understandable. Market share drives economies of scale. Nokia knows that. The market knows that, which is why that metric (in conjunction with margin fluctuation) gets so much investor attention, and share price of handset OEMs fluctuate correspondingly with quarterly share upticks and downticks. Moto was really doing a number on Nokia in terms of closing the share gap that Nokia once closed on them before rocketing past them in 1999 ...
Nokia Unit Market Share v. Next Nearest Competitor (Sell Through)
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
==== ===== ==== ===== ===== ===== ===== ===== ===== =====
Nokia .7x 1.05x 1.6x 2.10x 2.40x 2.34x 2.40x 1.98x 1.79x 1.65x
Motorola 1.4x .95x .6x .48x .42x .43x .42x .51x .56x .61x
Nokia Unit Market Share v. Leading Asian Competitor
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
==== ===== ==== ===== ===== ===== ===== ===== ===== =====
Nokia 3.5x 3.00x 4.4x 5.90x 4.9x 3.60x 3.30x 2.43x 2.49x 2.95x
Samsung - - .3x - .2x .28x .30x .41x .40x .34x
Matsushita .3x .33x - .17x - - - - - -
Historical Handset Market Share 1997 to 2007 (Gartner)¹
Share 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Nokia 20.1% 24.3% 26.9% 30.6% 35.0% 35.1% 34.7% 30.7% 32.5% 34.8%
Motorola 28.8% 23.2% 16.9% 14.6% 14.8% 16.9% 14.5% 15.4% 17.7% 21.1%
Samsung 3.6% 4.2% 6.2% 5.0% 7.1% 9.7% 10.5% 12.6% 12.7% 11.8%
SEricsson² 16.2% 14.4% 10.5% 10.0% 6.7% 5.4% 5.1% 6.2% 6.7% 7.4%
LG -- -- -- -- -- 3.2% 5.0% 6.2% 6.6% 6.3%
BenQ Mobl² 2.5% 3.3% 4.6% 6.5% 7.4% 8.0% 8.4% 7.2% 4.9% 2.4%
Matsushita 5.7% 8.1% 5.5% 5.2% 4.1% 3.3% 2.9% ? ? ?
·
¹ Sources: Herschel Shosteck for 1997/1998 and Gartner for 1999 through 2006
² BenQ Mobile formerly Siemens; Sony Ericsson formerly Ericsson
Rather obviously, as we now realize, Moto did not have the cost structure to support that drive for share, despite improvements in supply chain and logistics management. They came too far too fast, cloned the RAZR too many times, never found a suitable replacement, never incorporated the proper degree of flexibility into their platform build, and neglected functionality as opposed to form to too great a degree. That neglect caught up with them as a tangible demand for wireless data started to emerge. Ron Garriques who drove the share drive and ran the Mobile Phones division got out while the getting was good and escaped to Dell before Ed could catch him and wring his pudgy neck. One step ahead of the jailer or the hangman's noose, so to speak.
As a consequence Moto's share gains of the last few years will likely evaporate this year to at least 2005 levels, and perhaps even below, as they fight to restore margins to a reasonable level. If Nokia takes advantage of this and executes well Nokia could get back closer to market share levels of 2x their next nearest competitor, Gorilla Game author Geoffrey Moore's qualification for Kingship in a given market sector ...
KING. The market leader, properly with a two-times lead or better over its next nearest competitor. The market will allow a little leeway here, but if the lead shrinks to far, the king becomes a prince -- examples are [or were back in 1998] Compaq in servers, Seagate in HD storage, 3COM in Ethernet cards, US Robotics in Modems, Motorola in Cell phones and pagers]. Kings enjoy a number of gorilla-like benefits, including economies of scale, favorable distribution terms, enhanced access to customers and partners, and favorable public relations."
[Note: In Moorespeak a King is the biological cousin of a Gorilla, but lacks proprietary control of an open technology architecture like Cisco still enjoys in routers and the Wintel duopoly still enjoys in controlling the desktop]
As I stated earlier ...
If they dip another buck or two in coming months I'll be looking at them as a medium term recovery play again. They have a lot going for them. They have scale, a good manufacturing base, improved supply chain and logistics management, an improved brand image, and they've really improved distribution in recent years while reducing debt and building cash and they are accelerating share buybacks with excess cash (of which they'll have less this year because of margins).
Whether I pull the investment trigger on them remains to be seen, but I'll be very attentive at their next 2 webcasted Earnings CC's and at their next Analysts Day and broker sponsored events they participate in, reviewing their financials, and observing the views of financial analysts that follow them.
One thing I'll be doing is trying to get a feel for the new management team which still has a few empty slots filled by "temps." With Devonshire and Garriques gone, there sure isn't a lot of Old Motorola senior management in place. Their CTO, Padmasree Warrior, who directly or indirectly manages some 25,000 engineers was hired by Moto in 1984 but she is one impressive and well respected woman. Greg Brown, 46, is president and the new COO and he came on board in 2003, hired from Micromuse Inc,, where he was Chairman and CEO. Tom Meredith, 56, is acting CFO hired by Moto from Meritage Capital, L.P., an investment management firm he co-founded after leaving Dell in 2001 (he was Dell's CFO from 1992 to 2000). "Casey" Keller is the new CMO and was hired in 2006 from Heinz Italy where he was chairman and CEO. Richard Nottenburg, Chief Strategy Officer joined Motorola in 2005 from Vitesse Semiconductor where he was VP and general manager. Stu Reed is EVP of Motorola's integrated supply chain organization and he spent 20 years with IBM before joining Moto in 2005.
This is a new Moto. It's a little early for an entirely new culture to gel but that is underway. Ed Zander, now has something to prove. He doesn't strike me as the type of individual who will be content to depart and fade off into the sunset until it does gel, and reflects in performance. ###
Best,
- Eric - |
