Motorola Walking The Razr's Edge

By Hans Wagner | September 19, 2007 AAA

When you hear the word Motorola (NYSE:MOT) you probably think cell phones. The company has other products, but it became a household name with its slim, Razr cell phone.

The problem is the Razr is more than two years old now. Its sales are dropping off and Motorola has failed to find a replacement with the same sort of mass appeal. It seems that, as the Razr goes, so too, goes Motorola.

In the third quarter of 2006 Motorola's cell phone segment, Mobile Devices, comprised more than 66% of the company's revenue. In the second quarter of 2007, revenue from this segment was down to 49% of the company's total. Perhaps, it's no coincidence that the company's star performer, the Razr handset had also begun to fade at this time. The other high-end replacements Motorola has offered, the Krzr, Pebl and Slvr, have all failed to excite consumers.

So far, there is little for investors to count on from the company as it tries to turnaround its most important business.

New Phone Products Still Lacking
The company gained significant success with the very popular Razr phone a couple of years ago. Since then, it has rolled out a number of new products, but none have found the same success. Europe continues to be a challenge, as the company lacks sufficient 3G phones.

The Mobile Devices segment has a new leader in Stuart Reed. Reed was executive vice president of Motorola's Integrated Supply Chain organization and prior to joining Motorola in April 2005, he spent more than 20 years at IBM Corporation (NYSE:IBM), where he held executive roles over manufacturing; strategy, process and information technology; and systems and software products.

The mobile phone devices industry is experiencing a transition from feature phones to a multimedia rich set of capabilities. This requires a continuous set of new products to meet customer expectations. Mobile Devices is focusing on this as a key part of its strategy; however, success is not assured.

Motorola's silicon-and-software technology platform allows it to roll out new products with the right capabilities at the right price. This platform is designed to give the company the flexibility to leverage key components to deliver what the customer wants. It also is designed to lower costs.

Selection is not Motorola's problem. It has plenty of phones and plenty of them are not selling well. Motorola is encountering significant competition from Nokia (NYSE:NOK), Sony Erickson (NYSE:SNE, Nasdaq:ERIC), Samsung and Apple (NYSE:AAPL). As part of its strategy, Motorola expects to eliminate the existing legacy phones with new product sets. The plan is to produce wave after wave of new products that meet customer expectations. New products will replace existing precuts on a continuous basis. The idea is not to count on one or a couple of devices and then live on those phones. The strategy sounds fine, but we need to see its execution. (For related reading, check out Buying Into R&D.)

Recent new phone announcements include the Razr2, a Z8 movie phone, and a new version of the Q smart phone. There is also a new world class phone rumored for October.

Whether this works depends on Motorola's ability to execute and the acceptance of the phones by the market. A year ago Motorola announced a number of new products, many of which failed to gain any market traction. When this division looks like it is turning around it will be a good time to establish a position.

Management Expects 2007 Loss
Net revenues for the quarter ending June 30, 2007 were $8.73 billion, 19.3% lower than $10.82 billion in the comparative quarter in 2006. Operating income was $482 million, down 68.3% from $1.5 billion in the second quarter 2006. This resulted in a net loss of $28 million for the second quarter.

Motorola reported a loss of 2 cents per share versus 54 cents in the same quarter one year ago. Shrinking market share and lower selling prices in the mobile device market plagued the company. The primary problem is the lack of new and exciting products that stimulate the interest of customers.

Mobile Devices, Motorola's largest business unit, is also its largest problem. Mobile Devices, revenue fell 40.2% when compared to the same quarter a year ago, due to at 31.6% drop in units sold and a 14% lower Average Selling Price (ASP). Furthermore, Europe continues to be a challenge for Mobile Devices as Motorola lacks sufficient 3G phones for the European market. There are challenges at the low end of the price spectrum too, as Motorola doesn't have products that can be sold at competitive price points and still be profitable. Finally, the company has a limited portfolio of multimedia devices that are in demand.

Starting with the second half of 2007 the company is rolling out new products. The hope is that these products will solve some of the problems mentioned above. The company is also working with suppliers to reduce costs throughout the range of its products. However, Mobile Devices is still not expected to be profitable in 2007, incurring an operating loss for the year.

Other Segments Can't Carry the Load
The Home and Networks Mobility segment continues to grow revenues at high single digit rate, though its operating income declined for the quarter and six months. These results were driven by a 74% increase in shipments of digital entertainment devices, which reflects increased demand for digital set-tops, including high-definition digital video recorder set-tops and internet television devices. Unit shipments of digital entertainment devices increased 74% to 4.2 million units. It had a 7% decrease in net sales of wireless networks, primarily driven by lower demand for its iDEN infrastructure equipment in North America. After the end of the second quarter, Home and Networks acquired Leapstone Systems and Terayon Communication Systems.

Sales for its Enterprise Mobility Solutions segment increased 42% to $1.9 billion compared to the second quarter 2006. These results were primarily due to its acquisition of Symbol Technologies. Although, higher net sales in the government and public safety markets contributed as well. This segment is expected to continue to grow at double-digit rates over the foreseeable future.

The performance of these segments is important to the success of Motorola. However, due to the large size of Mobile Devices, they cannot make up for the performance problems of the cell phone business. They do help provide cash flow and profit for the company overall.

The Bottom Line
Motorola is facing significant challenges as it turns around its Mobile Devices segment. Developing one or two competitive products isn't going to be enough, it must also create a business culture that is able to continuously create new products that are able to beat the competition.

Motorola's focus on mobility across all three segments is an interesting strategy that may leverage its engineering talents and market position. However, it has yet to prove itself. Investors should monitor current activities and results in the next quarter before committing any capital to a position in Motorola. While the company represents a significant turnaround opportunity, it also may take awhile to take hold.

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