Motorola: Getting worse before it gets better

Martin Garner/Ovum
28 Jan 2008

Motorola's Q4 and full year 2007 results show continuing gloom in the handset division, more than offsetting improving performance in other parts of the company.

Company sales for the quarter were $9.65 bn (6.6 bn) for the quarter, up 9% sequentially but down 18% over the year. Gross margin was down 2 percentage points sequentially to 26%, but flat over the year. Operating loss widened to $-190k (130 k) from $-100k (70 k) in Q3 and a profit of $753m (515 m) a year earlier.

For the full year, sales were $36.6bn ($25bn) down from $42.8bn ($29.3bn) in 2006.  Gross margin fell by 3 percentage points to 27% and operating earnings were $-550 m ($-376 m) down from $4.09 bn (2.8 bn) in 2006.

Motorola shipped 40.9 m handsets in Q4.  Average sale price fell $3 (2) to $118 (81), bringing sales of $4.8 bn (3.28 bn), down 38% year on year. The division returned an operating loss of $-388 m (265 m)  compared with a profit of 341m (233 m) in Q4 06.

Incoming CEO Greg Brown said that he feels privileged to be CEO of Motorola. He thanked all the staff, suppliers and customers of Motorola and he re-iterated that they are absolutely not satisfied with the current position and are working as hard as possible to fix it. He also expects Motorola to lose further handset market share in Q1 2008 and said the portfolio will be more robust in 2009.

As we said after the Q3 results, if there is no significant movement on the handset portfolio, the improvement we saw in Q3 would be a dead-cat bounce. That's what we have in these results and what is horrifying is the lack of optimism.  This suggests that there was not enough useful new product in Motorola's cupboard (possibly some products in the pipeline have been cancelled) and Ed Zander's mid-2007 recovery bet has gone wrong.

The handset volumes are well below Motorola's normal seasonal pattern.  Greg Brown pointed to heavy competition, gaps in the portfolio (3G, China and other emerging markets), new product development being late and weakening demand for existing products (KRZR, RAZR2). On the latter, it's not clear if this was driven by US consumer conditions.

In Q3 07 Motorola launched a slew of new low-end models and these started shipping in Q4. Their volumes changed the mix and took the ASP down, but new products require a marketing push so costs rose and volume gains were not enough to lift profitability. Average operating loss per phone dropped from $-4.83 (-3.3) to $-6.55 (-4.48).

Motorola has quietly changed tack.  Rather than talking up refreshes of existing products, the company is now clear that it is working on new software and hardware platforms and that these will enable a whole new portfolio.  A key part of this is a new deal with Qualcomm for 3G chipsets, announced yesterday. The first products from this approach will ship in 2008, but the portfolio will only be robust in 2009. Given Motorola's heavy dependence on the US market and the likelihood of recession there, this leaves 2008 looking grim.

Meantime there is heavy focus on managing costs and - to its credit - many operating metrics are improving in all divisions.


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