Motorola's promising comeback

Is Motorola back?

The mobile-phone giant has struggled for years as rivals from Nokia to Research In Motion to Apple have stolen away its customers. To get back on track and win over dispirited investors, Motorola has undergone a painful overhaul, chopping expenses and laying off employees, including 9,700 workers this year.

Now, finally, Motorola is showing real signs of progress. This month, the company debuted two impressive new smartphones, the Cliq and the Droid, which appear to be viable competitors for Apple's popular iPhone and RIM's BlackBerrry. And on Oct. 29, the company dazzled investors with quarterly financial results that were much stronger than expected. The company reported a surprising $12 million profit on $5.5 billion in sales, compared with a loss of $397 million on $7.5 billion in revenues in the year-earlier period. The company's shares rallied 9.8%, to 8.74, on the news.

Sanjay Jha, the Motorola co-chief executive who oversees the mobile-phone business, says the days of retrenchment are likely in the past and the company can now focus on one clear goal: revving up sales of mobile phones. "From here on, our smartphone traction is the critical driver of our financial performance," said Jha during Motorola's earnings call.

Some analysts on Wall Street believe Motorola is turning the corner. Impressed by the Droid handset announced Oct. 28, RBC Capital Markets upgraded the stock to outperform. Michael Mahoney, senior managing director at Falcon Point Capital, bought some Motorola shares earlier in October. He expects the stock to rise as high as 12 if Motorola manages to revive and stabilize its handset business and eventually split the company into two or more pieces, as it still plans to do. "I think they may have a real winner on their hands," he says.

Youth targeting

With Droid, the thinnest Qwerty keyboard slider smartphone around that can also run mobile apps like Facebook, Motorola might be able to build greater brand presence with a younger crowd. "If you energize the under-30-year-olds and bring them to Motorola's brand, that's huge," Mahoney says. During the earnings call, Jha said he is looking to invest in rebuilding the brand, which could mean a major marketing campaign. The Droid is already widely touted by Verizon Wireless, and Cliq by the likes of T-Mobile USA.

Of course, one or two phones won't be enough for a lasting turnaround, even if they are successful. Motorola scored a huge hit with its sleek Razr phone, introduced in 2004, but the company suffered as it failed to follow the success with additional strong phones. Motorola's financial recovery is just beginning, and it may not be an easy or fast one. If all goes according to plan, analysts say the business may stabilize in mid- to late 2010.

Broadpoint AmTech analyst Mark McKechnie expects Motorola to ship 700,000 new smartphones globally in the fourth quarter—which won't be enough to offset dropping shipments of much-cheaper feature phones. Those estimates assume respectable, but not breakout success for the Droid and Cliq. (For comparison, the iPhone sold 1.1 million units in its first quarter of availability in 2007.) While the Droid has received rave reviews, it won't go on sale until Nov. 6 and, as a result, is yet to be proven a hit with consumers.

Jha understands the challenge. "We are all anxiously waiting to see how consumers respond," the co-CEO told BusinessWeek in an interview. "We have to support them the right way—get the message out about what the devices can do and position them right, and make sure consumers leave the store with their accounts set up to deliver a really good out-of-box experience. So there is a ton of work left on these products. They are our first steps and we have to deliver on 2010."

Twenty more models

To pull its handset division out of operating losses—a $183 million operating loss on sales of $1.7 billion in the third quarter—Motorola will need to pump out a lot more well-designed products and sell 10 million smartphones a year, estimates Tavis McCourt, an analyst with Morgan Keegan & Co. While that may not seem like much, considering the business shipped 13.6 million phones in the third quarter, the vast majority of them are basic-feature phones. Motorola expects to unveil 20 more smartphone models in 2010, including with AT&T, Jha tells BusinessWeek. The company is also looking to expand its presence in Japan, Europe, and China.

Motorola also faces the risk of losing its economies of scale with component suppliers and carriers. The company may, sometime next year, wish to exit its unprofitable feature-phone business altogether, McCourt believes. If that happens, that would further reduce Motorola's production volumes and market share—and its ability to pressure its suppliers on prices. At the end of the third quarter, the company held 4.7% of the global market, down from 5.4% in the prior quarter and 8% share in the third quarter of 2008, estimates Neil Mawston, a director at consultant Strategy Analytics. "They are at a record low," he says. And its share could slip further in 2010, to as little as 4%, he estimates.

That drop doesn't worry most analysts, as Motorola may have to let go of unprofitable sales to return to making money. An average smartphone generates three to four times the revenue of a feature phone, and offers more than double the profits, with margins in the low 30% range, says McKechnie. So as Motorola's product mix becomes more heavily weighted toward smartphones, its financial performance should improve as well. Jha guided for at least one break-even quarter for the division next year. And many analysts believe that's conservative: "He is giving himself an easy hurdle to jump over," McCourt says.

Kharif is a senior writer for in Portland, Ore. Crockett is deputy manager of BusinessWeek's Chicago bureau.