No easy remedy for Motorola

Asked about turnaround prospects at his troubled company, Motorola Chief Executive Ed Zander resorts to an equine analogy: 'We've got to get back on the horse and start riding again,' he says. 'It will take us a little time.'

Judging from the performance of the company's shares on Apr. 18, investors are buying the part about getting back on the horse. Motorola (MOT) shares rose 2% after the company reported first-quarter results that met or exceeded its previously lowered forecasts. It's the timing part that's meeting with skepticism.

In the first three months of the year, Motorola reported a loss of $181 million on its first sales decline in almost four years. Among the woes: Motorola has cut prices, lost market share to rivals such as Nokia (NOK) and Samsung, and lacks a best-selling follow-up to its popular RAZR phone. It's also facing pressure from billionaire shareholder Carl Icahn, who's asking for a seat on the board (see BusinessWeek.com, 4/1/07, 'Motorola: Cut Icahn's Interference').

Vows to return to the black

Parts of the business"”namely, set-top boxes and networking equipment"”are doing well. But Zander has embarked on an ambitious turnaround effort to reinvigorate the ailing phone division. He revamped Motorola's executive team and introduced 18 new products in the first quarter, up from six in the same period of 2006. One is already drawing praise: The new Q 9h is more appealing to business users than its predecessor, the Q, says Strategy Analytics analyst Cliff Raskind.

Motorola also has unveiled updates to the MOTORIZR, a slider phone designed to offer MP3 music play. It's a device that 'can kick Sony Ericsson butt,' Zander says, referring to the maker of the competing Walkman. 'We have nice products and we have more coming.' Motorola vows to cut additional costs and return to profitability for the full year. 'It's all about sustained profitability,' Zander says.

Getting out of the red is one thing, but getting back to sustained growth may take much longer, some investors and analysts say. 'They are looking at the better part of two years to address their problems,' says Chris Ambrosio, an analyst with consultancy Strategy Analytics.

Competition coming from Apple

Motorola said second-quarter sales will be 'essentially flat' compared with the first quarter and it forecast per-share earnings of 2¢ to 3¢, before certain items. The company is likely to ratchet down expectations further, says Michael Mahoney, managing director at EGM Capital hedge funds in San Francisco. 'I disagree with the idea it's going to be an instant turnaround,' Mahoney says, adding that the shares may dip to as low as $15, down another 18%. Mark Sue, an analyst with RBC Capital Markets, predicts zero revenue growth for the full year.

Revamping the cell-phone lineup won't be easy either, especially come midyear, when Apple (AAPL) introduces its own music-playing mobile phone (see BusinessWeek.com, 3/26/07, 'North America's Cell-Phone Land Grab'). While higher-priced multimedia phones contribute 39% of Motorola's unit volume, much of that still comes from the RAZR, whose sales are declining, says Ambrosio.

Industry experts aren't holding their breath for another RAZR any time soon.

 

'I don't think anyone can predict a RAZR, a mega-hit,' says Avi Greengart, an analyst with consultancy Current Analysis. 'An iconic product like that comes once in a decade, if ever again.'

No market-share recovery seen

Meanwhile, the focus on profitability rather than market share could hurt the company in the long run. Zander said the handset division's average selling prices (ASPs) have stabilized.

That may sound good on the surface, but it could also mean the company simply can't cut prices on RAZR phones any further. 'Stable ASPs aren't always good,' Ambrosio says.

It could also mean that the cell-phone company is readying for deeper market-share losses. Motorola's share of the market fell to 19% in the first quarter, from 21.5% at the end of last year, according to Strategy Analytics. 'It's a very sharp decline,' Ambrosio says. 'Their market-share loss was more than we anticipated.' And Paul Sagawa, an analyst with Sanford C. Bernstein, expects another market-share drop in the second quarter.

Ambrosio predicts no market-share recovery for Motorola this year at all. And that means that Motorola will lose some of its bargaining power with component vendors and manufacturing partners. Its brand could lose luster as well, Ambrosio says. In effect, 'they are going to sacrifice gains they made against [cell-phone market leader] Nokia,' he says.

Losing its edge in emerging markets

In particular, Motorola may be forfeiting gains in some emerging, fast-growth markets: While the company introduced a slew of promising entry-level handsets and will accelerate the rollout of cheap, Linux-based phones, Zander said the company will be 'picking markets more carefully.'

Some analysts see danger in that. 'In saying good-bye to the low end, we believe that Motorola is sacrificing longer-term growth for a more rapid margin turnaround,' Richard Windsor, an analyst with Nomura, wrote in a research note. In fact, Windsor expects Motorola's share to fall to 16.5% in 2012 because the company will lose its edge in emerging markets. 'We believe that Motorola has chosen the wrong strategy for long-term growth and think growth will be very hard to find once the operations have recovered,' Windsor wrote.

Tom Meredith, Motorola's acting chief financial officer, remains confident that Motorola will eventually win back lost share. 'Recovering market share is not what it's all about now,' he tells BusinessWeek. 'It's about recovering profitability. We will ultimately regain the market share that we lost.' Ultimately, in this case, could be a very long time.

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

Copyright 2000-2007 by The McGraw-Hill Companies Inc. All rights reserved.

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