Zander's 'progress'

Roger O. Crockett
30 Oct 2007

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.

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