Motorola: Android Help on the Way

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Worst Showing Among Handset Vendors

Many cell-phone vendors had a tough first quarter, but Motorola suffered more than most, partly as it dropped unprofitable product lines and exited unsuccessful markets. Across the industry, global mobile-phone shipments fell 13%, to 245 million units, the biggest decline ever, according to consultant Strategy Analytics. But Motorola's shipments plunged an astonishing 46%, the worst showing among the seven biggest handset vendors. By contrast, Samsung's shipments declined 1%, while Apple's (AAPL) more than doubled.

For Motorola's handset business, the bottom may still be one to two quarters away, says Neil Mawston, Strategy's director of wireless device strategies. Motorola is likely to continue underperforming the industry until the fourth quarter, he says. If all goes according to plan, Motorola could surpass industry growth rates in the first quarter of 2010, as the cell-phone market recovers, Mawston says.

Aggressive cost cuts helped Motorola eke out a smaller-than-expected net loss of $231 million, though it was still wider than the $194 million loss a year earlier. Motorola also said it expects to cut $200 million more in operating expenses by yearend than previously expected, bringing its total annual cost savings, largely the result of layoffs, to $1.7 billion. And while the company is still bleeding cash, it expects to start generating positive cash flow in the second half. Motorola shares fell 7.2%, to $5.5, on April 30 after the results were released.

Doubts About Co-CEO Structure

First-quarter results aside, Motorola's shares have gained 24% since the beginning of the year amid optimism the company will begin delivering successful devices. Still, some potential investors are concerned about distractions, including Motorola's unusual co-CEO structure, created at a time when the handset division was expected to be spun off. "In most organizations that I know, [the co-CEO structure] doesn't work," says Eric Jackson, founder of activist investor hedge fund Ironfire Capital who is considering investing into the stock. He also frets that management will be distracted by its acrimonious battle with former Chief Financial Officer Paul Liska, who alleges that Motorola misstated internal forecasts. "That whole situation just adds to my uneasiness," Jackson says.

But Motorola has overcome plenty of challenges before, creating industry-defining products along the way. In 1996, Motorola made a splash with its StarTAC, then the lightest cell phone on the market. In 2004, it kicked off the race to build the world's thinnest phone with its legendary Razr device. "It's very easy [for people] to write off Motorola," Llamas says. "I am not one of those people."

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.

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