Lenovo predicts Motorola turnaround, but cautions it will take time

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Lenovo, which is in the process of acquiring Google's (NASDAQ:GOOG) Motorola Mobile division for $2.91 billion, thinks it can turn around the Motorola unit, especially by reintroducing the Motorola brand in China. However, the company said it will take some time to do so.

"We have already identified areas where we can cut expenses. With the combined scale of Lenovo and Motorola after the acquisition, we can significantly reduce costs in terms of material procurement and supply chain," Lenovo CEO Yang Yuanqing told the Wall Street Journal after the company released its fourth-quarter earnings. "When we complete the acquisition, from day one, we can start working on those cost synergies."

Yang said it "most likely it will take a couple of quarters to turn around the Motorola business" but that he definitely believes "we can have a profitable business over time."

"We plan to launch more products under the Motorola brand to build a stronger portfolio," he said. "We will also re-introduce the Motorola brand in China by taking advantage of Lenovo's operational resources. Motorola is still a well-known, respected brand, so we believe we can improve our position not only in mature markets but also in China and other emerging markets."

Motorola, as a unit of Google in 2013, had a $1.24 billion operating loss, which some analysts see as a risk to Lenovo's balance sheet. "They basically are taking on a material headwind to profitability which will impact their results," Sanford C. Bernstein analyst Alberto Moel told Bloomberg. "For the next few quarters we will be seeing earnings coming down. The question is how bad those earnings will drop and how low they will go before they start rising again."

For now, Lenovo is doing just fine: Its quarterly revenue surpassed $10 billion for the first time. The company's net income too climbed to $265.3 million in the fourth quarter, up from $204.9 million a year earlier and beating an average analyst estimate of $243.7 million, according to Bloomberg. Lenovo's sales jumped 15 percent to $10.8 billion from $9.36 billion in the year-ago period, beating the $10.5 billion estimate of 19 analysts compiled by Bloomberg.

"For the short term, it could have a certain negative impact on our performance," Yang said of the Motorola deal. "But for the long term, I think this acquisition will be good for our shareholders and for the future of Lenovo."

Research firm Strategy Analytics estimates a Lenovo-Motorola merger would give the combined entity a 6 percent global smartphone share in full-year 2013, and would make it the world's third largest smartphone vendor by volume, behind Samsung (32 percent) and Apple (15 percent).

According to both IDC and Strategy Analytics, Lenovo was the No. 4 global smartphone maker in the fourth quarter of 2013 and the No. 5 smartphone player for all of 2013. Yang has said Lenovo hopes to sell more than 100 million smartphones in 2015.

Meanwhile, online storage firm Dropbox named Google executive Dennis Woodside, who had been Motorola's CEO, as its first CEO. Google confirmed the news on Wednesday. "Dennis and the team have reinvented Motorola, with wonderful products like Moto X and Moto G," said Google CEO Larry Page, according to the Journal. "I wish him all the best with his new big job at Dropbox."

"We've long admired Dennis's leadership at Google and Motorola where he ran multi-billion dollar businesses and built amazing organizations around the world," Dropbox CEO Drew Houston said in a statement. We're so happy to welcome Dennis to our team--I can't imagine a better person to help us bring Dropbox to global scale."

According to Re/code, which cited un unnamed source familiar with Google's plans, the transitional leadership at Motorola will be split between Google Chief Business Officer Nikesh Arora, who is executive chairman of Motorola's operating board overseeing strategy, and Jonathan Rosenberg, the former Google product management head who was helped with the original Motorola acquisition and is acting as COO.

For more:
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this separate WSJ article (sub. req.)
- see this Re/code article
- see this separate Re/code article

Related Articles:
Lenovo aims to pass Samsung, Apple with Motorola purchase
Google calls Motorola sale a 'win-win' for Android
Lenovo to become world's No. 3 smartphone vendor with Google's Motorola
Google to sell Motorola to Lenovo for $2.91B

Article updated Feb. 13 at 5 p.m. ET with a statement from Dropbox.