Motorola's nightmare quarter

Martin Garner
28 Apr 2008
00:00

Motorola's first quarter results make grim reading for the handset division. The other divisions performed much better.

For the whole, business revenue was $7.45bn (€4.77bn), a drop of 27% from $9.43bn a year ago. Gross margin for the group improved from 26% to 29% and the operating loss improved from $366m to $269m.

However, this masks the deterioration in the handset business where Motorola shipped 27.4m phones in the quarter, down 33% from 45.4m in Q1 07. This brought revenues of $3.3bn, which is a fall of 39% over the year, and a widening operating loss of $418m, compared to $233m a year ago.

CEO Greg Brown said that Motorola would be progressively expanding its handset portfolio during the coming quarters and hinted that he believes the bottom has been reached.

In giving an outlook Brown said that the handset market would grow slightly in Q2 from Q1 and that - with a slightly stronger portfolio, the company's fortunes should begin to improve.

This quarter has been a nightmare for Motorola combining weak handset sales, with a large number of executive changes/departures, predatory moves at board level from Carl Icahn and - finally - the decision to break the company into two. This would be a lot to deal with in a year, never mind a single quarter, and it's tempting to say things can only get better.

As it has been for the last four years, the handset division is the big story. Shipments have crashed through the floor from the quarterly high of 65m in Q4 2006 and are now around the level they were in Q3 2004.

Although six products were launched in the quarter, our understanding is that they have not been particularly well-received. And this leaves Motorola still weak in most segments, and especially weak in the high-growth segments of W-CDMA, smartphones and low-end phones. Also its volumes are in decline in its home territory, North America, which accounts for 44% of its shipments.

This means that Motorola is now only just ahead of the #4 player in unit shipments, LG, and has actually slipped just behind LG on euro revenues into 5th place.

Having said that, though, Motorola's average sale price rose slightly in the quarter from $118 to $122 because of a shift towards higher end phones in its product mix (it did not have a currency boost, since most of its sales are in countries with dollar-related currencies).

The drop in volumes meant that profitability suffered and its average operating loss per phone nearly tripled from -$5.73 in Q1 07 to -$15.26 this quarter. This compares with Nokia's figure of +$24.4 (€16.3) profit per phone.

One equity analyst on the earnings call asked if the division is 'in a death spiral'. Greg Brown's response was that it has changed its chipset suppliers (to include Qualcomm and TI), the portfolio will improve, the company is being very disciplined on distribution and pricing, and the search for a new Head of the Division is going well.

Unfortunately he said nothing about the fact that three of the four major competitors have declared strategies of improving their market share in North America this year and are investing a lot in achieving this.

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