Zander's 'progress'

It took a year, but finally Motorola (MOT) Chief Executive Ed Zander addressed Wall Street on Oct. 25 with some positive news: Motorola netted $60 million in profit in the third quarter. While that's a far cry from last year's profit of $968 million, it's welcome news after two quarters of losses. Revenue of $8.8 billion was also below the prior year's $10.6 billion, but an improvement over last quarter's $8.7 billion. And best of all, the sputtering mobile-phone unit increased sales, units shipped, and gross margins while lowering operating expenses. In a word, Zander told the Street that Motorola is making 'progress.'

But progress doesn't yet mean turnaround. Motorola continues to lose market share to rivals Nokia (NOK) and Samsung (SSNKF). Its lineup of phones remains underwhelming, especially in the area of cutting-edge multimedia phones, and profitability, while better, is far from ideal.

In an interview with BusinessWeek, Zander spoke candidly about his company's struggles and what's needed to return Motorola to the sizzling growth pace of 2004 and 2005. 'In the first half of the year, we were sort of figuring out which end was up,' he says of the company's recent forecast reductions. 'Unfortunately, we had some pre-announcements and shareholder confidence certainly was shaken at the time.' Now, as in Zander's early days with Motorola, the emphasis is on execution. 'We wanted to get back to doing what we said we were going to do,' he says. 'We want to set goals"&brkbar;and meet them.'

Cutting costs

Motorola did that in the third quarter by taking an ax to costs. The company spent $1.1 billion on research and development, vs. $1.2 billion the previous quarter. Marketing expenses were $1.2 billion, down from $1.3 billion in the previous quarter. Plus, it finally released a successor to its popular Razr line of phones, helping boost profit margins. 'We're not trying to overhype anything,' Zander says. 'We want our numbers to do the talking. When we say we're introducing new products, we do it. That's what we did when I first got here in 2004.'

Investors liked what the third-quarter numbers had to say. Motorola shares jumped 4% after the results were released, closing at $19.30, and gained further in extended trading. 'It shows management has a handle on the business,' says Matthew Hoffman, an analyst with Cowen & Co.. 'They have it stabilized.' The next leg up for the stock may come when investors are persuaded there is a product-led rebound.

That's where Zander's biggest challenges lie. Motorola shipped 37.2 million handsets during the quarter giving it a 13% market share, trailing Samsung and No. 1 Nokia. In addition to the Razr 2, it unveiled seven new, lower-end handsets and a dual-mode walkie-talkie device. But analysts and consumers are looking for Motorola to step up its delivery of next-generation phones that pack a variety of multimedia features such as TV, gaming, music, and more.

Third-generation upgrade

It's not that Motorola doesn't have those phones, but simply that they still don't measure up to elite models on the market, analysts say. Zander, along with Chief Operating Officer Greg Brown and new Mobile Devices President Stu Reed, are racing to get multifunction operating systems such as Sun Microsystems' (JAVA) Java and the open-source Linux into high-end phones. Right now, when the consumer handles the most recent version of the Razr it looks and feels a lot like an earlier generation of handsets, Hoffman says.


Motorola needs to deliver a so-called third-generation, or 3G, phone that can hold its own against best sellers such as Apple's (AAPL) iPhone or Nokia's new N95.

Zander's task: getting his team to do a good job weaving the operating software with the hardware of Motorola's phones. The Linux operating platform, which adds features and makes the phone easier to use, is one way of doing this. 'Zander and Reed have settled on the right course,' Hoffman says. 'It's just going to take time to play out. They haven't closed the gap with the leaders in 3G yet.'

High-end 3G phones are crucial to Motorola because they can be more profitable. These phones, packed as they are with multimedia features, can be sold at higher prices. And assuming Motorola can build them affordably, which is what Zander is focusing on so intently, they offer higher margins. COO Brown talks of taking one step at a time: 'We are now shipping 3G phones,' he told BusinessWeek. 'If you think back six months ago, we had no 3G product. So that is a good start. Clearly the focus in 2008 will be to expand the portfolio.'

'Fiasco Land' management‾

Assuming the company delivers on that goal, the outlook for Zander's tenure will improve demonstrably from earlier this year, when investors were speculating a management change could be imminent (BusinessWeek, 7/12/07). 'If the new phones do fine, then I think Ed is safe,' says a recruiter who is close to at least one member of Motorola's board. 'The board is not going to let him go. They would have to show negative earnings.'

So does Motorola have the right team in place‾ Some investors aren't so sure. After three quarters of what he calls 'fiasco land,' Tom McIntyre, president of McIntyre, Freedman & Flynn Investment Advisers, said he lost patience and sold the firm's stake in Motorola. He considers the current performance 'an improvement, but off of several disastrous quarters.' McIntyre says he's 'waiting to see more.'

Zander is getting added help in making sure the improvement sticks. Brown, after being elevated to COO, was also appointed to the board a couple of months ago. Now, he and Chief Financial Officer Tom Meredith, who is also on the board, have joined Zander in making up a core management team that has its hands involved in every aspect of the business. 'The pressure the board is exerting makes Zander get involved more, Greg get more involved, and Tom Meredith get more involved,' says Ittai Kidron, an analyst with CIBC World Markets. 'At this point they have a collective decision-making process there. All of them have their hands on the wheel.'

Kidron and other analysts believe that despite the current progress it will be another year before Motorola is completely back on track. That means operating margins in the handset unit that are at least in the mid-single digits, up from 1.9% in the third quarter, and steady increases in market share, rather than losses. Zander, as sober as ever, doesn't argue: 'None of us is going to be satisfied until we get back to the financial profile we outlined [previously].'

Crockett is deputy manager of BusinessWeek's Chicago bureau.


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