Motorola's promising comeback

Olga Kharif, Roger O. Crockett
02 Nov 2009

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.

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