Fortune..''Motorola reported Q2 profits of
44 cents a share vs. just a penny (I kid you not)
in the year-ago period. That's 3 cents above the
consensus,
Motorola to disappoint and Intel to beat. Not today.
After the close, Motorola reported Q2 profits of
44 cents a share vs. just a penny (I kid you not)
in the year-ago period. That's 3 cents above the
consensus, and I'm sure there's partying tonight in
Schaumburg, Ill., where MOT is headquartered.
Motorola shares, which had a very tough '97 and '98,
have risen from around $60 in January to $96 1/2 now
Intel predicted a strong secondhalf in 1999. (As we say in Yiddish: nisht aheyn,
nisht ahehr, or not here, not there.) Although
Intel could very well be weak on Wednesday, I think
the more important news is the company's prediction
of a robust Q3 and Q4. In other words, buy this
baby on weakness--if there is any.REVERSAL OF FORTUNE.... Normally, you'd expect''
MOTOROLA
CAN A COMPANY that once orchestrated the growth of the cellular-phone industry learn to play second fiddle?
Motorola (MOT) ruled cellular phones in the early 1990s the way Amazon.com (AMZN) rules online bookselling today. Then, it chose to use its own technology for digital phones and got eclipsed in market share by Nokia (NOK) when a different standard won out. In 1998, it staggered, dropping from $2.34 in annual earnings per share to a humble 58 cents.
Now, Motorola is getting ready for the wireless Internet era. But instead of dominating wireless phones -- or pagers, or cable modems, or chips or any of the other devices Motorola's far-flung engineers produce -- the company is trying for a much smaller share in a much bigger industry. By joining alliances with just about everybody in sight, the company hopes to grab a piece of the enormous gains that will come when real-time stock quotes and email become common on wireless devices. That strategy won't make Motorola the prohibitive market-share leader, but it could make investors plenty happy. A First Call consensus expects earnings per share to grow 244% this year and 44% next year. "If you hold onto 15% to 20% of the mobile phone market, with its astronomical growth rate, you've done a great thing," says Matt Hoffman, a wireless analyst for the market-research firm Dataquest.
Motorola certainly seems to have turned the corner. After Tuesday's bell, it announced second-quarter earnings before special charges of 44 cents per share, three cents above analysts' expectations, a result 44 times better than the one-cent earnings it showed a year ago. The company also said sales for the second quarter had improved 7%. But the real question is whether the sort of not-invented-here arrogance that got Motorola in trouble in cell phones is a thing of the past.
The alliances Motorola has formed suggest that it is. In a five-company venture called Symbian, it's helping to develop an operating system for simple Internet information; the Wireless Application Protocol Forum, of which it's a member, is setting standards for Web sites on the phones; another consortium, Bluetooth, is developing technology that lets wireless devices such as phones and pagers communicate with each other at short distances. Hoffman says Motorola's membership in these alliances shows that it has changed its tune. "If they were not part of it, they would be selling mobile phones that were behind the curve," says Hoffman, who projects Bluetooth will put programming into 60% of U.S. phones by 2002.
With more fanfare, Motorola has hooked up with networking leader Cisco Systems (CSCO) and programming powerhouse Sun Microsystems (SUNW) in the past year. The Cisco alliance covers a jointly owned company, purchased in June, which the two firms will use to build wireless Internet systems. The Sun alliance salts away $1 billion over 10 years to fund engineering designed to make wireless Internet connections as reliable as ordinary phone calls. Last week, Motorola reversed months of layoff announcements to issue word that it will hire 1,400 engineers to work on these and other systems. The details of these alliances are far down the road, but they give investors a clear signal. "They are saying 'We are going to be a leader in putting the Internet on the air,'" says industry consultant Craig Mathias of the Farpoint Group.
But success in all these products depends less on engineering smarts than marketing and product strength. And because this technology is so early, the odds heavily favor companies that open their programming standards and processes to whoever might have the sharpest idea. "Today it costs so much to [make this stuff] that it's kind of silly to keep a great idea and watch others innovate around it," Mathias says. "The name of the game is to merchandise what you've got."
Motorola trumpets in press releases that it's "committed to interoperability," but it's historically been known as contemptuous of it. In Motorola's engineering-driven culture, anything invented in-house was ferociously guarded -- even against other divisions; anything invented anywhere else was disparaged. Two former employees, who both asked for anonymity because they still have friends at the company, doubt CEO Chris Galvin -- whose grandfather founded the firm and whose father ran it -- can force a revolution. "It's very tough to change a culture when you're basically a product of it, no matter how good you are," said one. "Intellectual property is a profit center for them," said another.
If someone comes up with a more user-friendly wireless Internet connection than Cisco and Motorola, and Motorola fails to latch on to it, investors could feel the bottom drop out. And Motorola's size, efficiency and engineering prowess matter less than you might think. Mathias says that important technical advancements of wireless Internet access will probably involve cheaper materials and "very predictable" refinements in programming -- not techniques that are easy to keep secret.
Motorola's size and power do make it a good partner for these alliances. It can afford to devote the resources and time to develop widely accepted standards. It's the nation's largest maker of cable modems, and a pending $1.6 billion sale of its semiconductor components operation should further improve costs. Its debt and equity investment in Iridium (IRID), a satellite-phone venture that's tottering near bankruptcy, may also turn sunny -- but probably not before a storm breaks. Dataquest's Hoffman says Iridium's new focus on serving users throughout specific industries should serve it well, but Motorola will take a palpable hit to its income statement if the venture defaults on its debts.
Looming cash losses, unproven technologies and the legacy of an insular culture: Motorola isn't out of the woods yet. Investors will have to watch its sales growth -- and visibility in airports, lobbies and homes -- to see how gracefully this once-proud company can move with the herd. |
