No easy remedy for Motorola

Olga Kharif and Roger O. Crockett
25 Apr 2007

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, 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, 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.

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