Motorola's Mobile Device Predicament
>> Analyst: Motorola Only Stalling Downward Spiral
Sarah Reedy
Telephony Online
Jul 31, 2008
telephonyonline.com
Motorola prepares for mobile device spin off with positive earnings, but struggles may still ensue
Surprise was the general sentiment amongst the investor community today after Motorola’s second quarter earnings. The handset manufacturer reported a small profit and sales of $8.1 billion in Q2. Although even the struggling handset division held on to its third place standing amongst handset vendors, not all are convinced that this is the start of turnaround for the handset manufacturer. The investor’s optimism centered on the numbers, but Daniel Longfield, industry analyst for Frost and Sullivan’s mobile and wireless group, was focused on the long-term outlook.
“Their revenue and the progress for the quarter were better than what most of the financial analysts had expected, but I’m more of a market and industry analyst and the thing I noticed was that they sold 160 million phones in 2007 and they’re on pace to sell about a hundred million phones in 2008,” Longfield said. “They are going to see a 40% decline in the units they ship. This is all happening while the market itself is probably going to increase by 10%. They are by far the worst performing of the larger handset companies right now.”
While mobile devices posted an operating loss of $346 million this quarter, that’s less than the $418 million lost in Q1. The company shipped 28.1 million cell phones, up from 27 million in the first quarter. As a result, despite expectations of a matrix switch up, Motorola held on to its number three ranking amongst handset vendors, narrowly squeezing out both LG and Samsung. Moto expects approximately 10% unit growth in 2008, according to CEO Greg Brown, on today’s second-quarter earnings call. The company was profitable in CDMA, iDEN, GSM and its 4G investments, he added, and he expects GSM to continue its strength in Q3.
Despite this, Longfield likens Motorola’s situation to that of Siemens, one of the top six vendors four years ago. The handset maker started to struggle against competition from Nokia and soon couldn’t stay profitable as price points of its devices declined. It finally spun off their handset division to BenQ in Taiwan. “Now BenQ isn’t even the top 10 of mobile devices,” he said. “So Siemens went from top five out of the top 10 in two years, and I really see the same thing happening for Motorola. By this time next year, they will be the fifth largest handset vendor.”
For now the company is still clinging to spot three. While other phones including the Apple iPhone and Samsung Instinct stole the media spotlight, Motorola quietly maintained its market share thanks to a low-range 3G handset, according to Brown. The manufacturer only introduced 16 new products in the first half of this year, but, Brown said 34 more will follow before the year’s end. This should help the company’s bottom line going forward, he said, adding that the 34 upcoming products will be a spread across tiers, experiences and technology – including not just new colors, but new form factors.
This means more Smartphone and QWERTY devices, touch screens, messaging, music and navigation “to strengthen the overall portfolio in different geographies and tiers to make the overall spectrum of products more robust,” Brown said. Moto is also continuing to focus on Symbian’s OS-based middleware and open interface platform, UIQ, which it took a 50% stake last year.
“I think that from a guidance standpoint in Q3 for mobile devices, we are expecting sales to be slightly down sequentially but also expecting improvement in the operating loss versus last quarter,” Brown said. “I do think that we expect newer products later in the quarter in Q3 and would anticipate a higher margin and better mix over all.”
Longfield attributed Moto’s struggles in part to its lack of Smartphone offerings to date, an area its competitors are successful in. He said Moto would have to have a revolutionary device come out and take the market by storm for anything to change its fate. Essentially, the next Moto RAZR – the company’s one-time cash cow – would be its only hope of changing things, he said.
Outside of handsets, Motorola’s gains came largely from cutting costs and increasing revenue in its home and networks mobility and enterprise mobility divisions. Earlier this week, Motorola also announced that rather than spin off more units of its business as some analysts predicted, it would create three businesses within its home and networks mobility business to focus on achieving the sector’s growth potential. These businesses include broadband home solutions, broadband access solutions and cellular networks.
This division comes just three months after Moto announced its split off of its mobile phone unit from its set-top box and network equipment business. Today, the company confirmed that the spinoff is expected to be complete in the third quarter of 2009. Without mentioning specifics, Brown said that the search for the new mobile division CEO is “making good progress.”
When questioned on the benefits behind the mobile device split from an IP, shared resources and money lost perspective, Brown responded that the industry has changed, and mobile devices as a segment has evolved to faster, more software-oriented, full and rich-experience driven devices. He thinks the split will help attract a world-class CEO who is keen on running their own public independent company with an investment base reflective of the market they serve.
“I also believe that separation – lots of people focusing on mobile devices – is very positive for the other businesses as well,” Brown said. “They have in many cases, leading positions, very strong intellectual property, strong distribution channels and, of course, the Motorola brand. I think the bifurcation will do a good job of unlocking value and providing them a requisite focus of the markets they serve with a management team and product portfolio.”
Longfield concluded that it’s a mixed bag for the handset vendor. Financial numbers were undeniably good, but the outlook of a 60% decline in units shipped in 2008 doesn’t bode well for the company. The positive financial report was essentially an indication of the company’s impending split off of its mobile division.
“That is what they have been saying for awhile about spinning off the handset business – they want to get it profitable before they spin it off into another company, and it seems like they may strive towards that kind of profitability by performing better than what the financial analysts had expected from a financial perspective,” Longfield said. “My concern from a market perspective is how many handsets will they actually be shipping by the time they spin off this division in Q3 of next year? Their market share may be cut in half again from what it is now.” ###
- Eric - |
