1/24/2008 3:54:00 PM
Motorola a dead cat bouncing
As Ovum said after Motorola's Q3 results, if there is no significant movement on the handset portfolio, the improvement we saw in Q3 would be a dead-cat bounce.
(For those unfamiliar with the term, it is used by traders to describe a pattern where a moderate rise in the price of a stock is followed by a spectacular fall, the idea being the small rise is no cause for optimism - 'even a dead cat will bounce if it falls from a great height'.)
A dead cat bounce is what we have in these latest results and what is horrifying is Motorola's lack of optimism. This suggests that there was not enough useful new products 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. However, Motorola is caught in a balancing act between investing properly in the new handset portfolio and hoping for enough success with this year's phones in H1 to avoid more redundancies.
Given the length and depth of the handset problems, it's increasingly difficult to see why shareholders should see logic in keeping the divisions together. Are there really valuable synergies between the other divisions and a handset business that is in such difficulty? Or would it be better to break the company up?
There has been speculation about who might buy the handset division. We think that a sale is unlikely. But there might be interest in a Sony Ericsson style joint venture.
Martin Garner, Mobile Director at Ovum