Motorola in Slo-Mo?


By Olga Kharif June may be busting out all over, but for analysts who follow Motorola (MOT), the No. 2 cell-phone maker behind Nokia (NOK), it's the winter of their discontent. Rarely has this venerable electronics outfit come under such fire from the Street, even when it had to reinvent itself in the 1970s and then again in the 1990s.

Never mind that Motorola returned to profitability in the third quarter of 2002, thanks largely to an aggressive cost-cutting campaign by CEO Christopher Galvin. The company's "Hello Moto" advertising campaign and a slew of new phones also seemed to revitalize the brand.

Analysts think that's all water under the bridge. They're now lashing Galvin & Co. for failing to follow through in 2003 with more cost-cutting and new-product development. "We're not seeing the execution from management," says Ken Leon, an analyst with Standard & Poor's.

CHOPPING CHIPS? Tops on the issues list: Whether Galvin has the stomach to lop off Motorola's money-losing semiconductor business, which accounts for 19% of revenues. The chip business lost $284 million in 2002 and should rack up $400 million in operating losses this year, estimates Leon. Instead, on June 16, Galvin appointed Scott Anderson to head the unit, which caters to the automotive industry, among others. He'll replace Fred Shlapak, a 33-year Motorola veteran who will retire later this year.

Perhaps Galvin, who in 1997 took the reins of the business founded by his grandfather, should step down and let someone else get the job done, asserts Michael Mahoney, a senior portfolio manager with EGM Capital Funds in San Francisco. New blood might also jump-start innovation at Motorola, which is increasingly perceived as a laggard rather than a leader, Mahoney adds.

Strong words -- but they mirror some harsh realities for Motorola going forward. Its survival isn't in question: It has $6.3 billion in cash, and it's still profitable overall. But its global market share in cell phones has dropped from 17.6% in the first quarter of 2002 to 14.7% in the first quarter of 2003, according to market researcher Gartner. And some of its other businesses, contributing the remaining 60% of revenues, are bleeding money at an accelerating rate.

LOWER GUIDANCE. Until Motorola gets its act together, "the stock will be dead money near-term," predicts S&P's Leon. Trading at around $9.05 a share, 45 times Motorola's anticipated 2003 earnings of 20 cents, the stock is already expensive. The p-e of cell-phone industry leader Nokia is half that.

Without some dramatic action, the sad truth for Motorola is that things don't appear to be looking up anytime soon: In its mid-period update on June 9, Motorola cut its second-quarter sales outlook to a range of $6 billion to $6.2 billion, vs. prior guidance of $6.4 billion to $6.6 billion. It cited a pileup of cell-phone inventory in Asia, which accounts for 28% of its global sales. The reason: The SARS scare deflated overoptimistic demand expectations, says Rick Black, an analyst with Blaylock & Partners (see BW Online, 6/16/03, "Is Tech Really a Victim of SARS?").

Analysts generally agree about what Motorola must do: First, to keep its margins, it needs to cut capacity or write off inventory -- though that's something its executives have recently vowed they won't do. Next, it needs to introduce spiffy new cell-phone features and designs to compete with rivals. It must also strengthen its marketing and distribution globally to regain market share. Motorola declined to comment on its growth strategy for this article.

BATTLEGROUND CHINA. Long regarded as an innovator, Motorola is "quickly becoming a fast follower" in cell-phone design, taking its cues from Nokia and Samsung, says Michael Grossi, a principal at wireless consultancy Adventis. That's partly why Motorola has lost in just the past year 11% market share in China, where it now controls 19% of the market, according to Gartner. Motorola is counting on winning back Middle Kingdom customers with designs such as its new V290, with a color screen and a camera, in the third and fourth quarters. However, main rival Nokia has even more phones in the works and will offer tough competition, says Mahoney.

Worse, Schaumburg (Ill.)-based Motorola is now under assault on its home turf of North America, where Nokia is gaining ground. The industry is rife with rumors that the largest wireless service provider in the U.S., Verizon Wireless, which hasn't offered a Nokia phone since 2001, might introduce several Nokia models this year. Verizon Wireless declined to comment on future product introductions.

Some analysts fret that on the technology front, Motorola is zigging while the rest of the industry is zagging. For example, this year it should come out with a phone based on the Linux operating system -- and eventually switch all phones to Linux-based software. While that might be a good move in China, where the open-source platform is popular, it's a hard sell everywhere else, says Neil Strother, an analyst with market consultancy Cahners In-Stat. Another mobile operating system, Symbian, is becoming the de facto standard in Europe and the Americas. And by going a separate route, Motorola might end up offering fewer applications for its phones with higher costs, worries Gartner analyst Ken Dulaney.

SMART BUYS? Not to worry, Motorola contends. In the mid-quarter update, its execs said they believe that Motorola's upcoming phones will help it gain market share back. How? By extending its distribution chain to third- and fourth-tier retailers and service providers in Asia.

Motorola has already taken some other steps deemed constructive by some Moto-watchers. It has bought a half-dozen startups that should strengthen its equipment portfolio. And its acquisition of switching company Winphoria Networks in April might let Motorola develop gear for the popular push-to-talk service to be used by cellular carriers other than Nextel (NXTL), says Ren Zamora, a Loop Capital Markets analyst. Motorola already has an exclusive agreement with Nextel to provide equipment for the walkie-talkie-like service.

Still, the overall telecom-equipment market is expected to grow by only single digits this year. Cell-phone sales are also proving slower than expected. Motorola needs to slim down and dress up its phones to have a shot at double-digit growth, many analysts believe. "We have a tendency to think that Motorola is going to revive, and then you'll be glad you bought it," says EGM's Mahoney. Alas, that might not be the case anytime soon. Kharif covers technology for BusinessWeek Online from Portland, Ore.


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