Annus horribilis

The rise and fall of global telecom equipment manfacturer Motorola - what a difference a year makes.

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By  Ronan Shields Published  August 6, 2007

Motorola saw revenues from its mobile devices unit slump 40% year-on-year to US$4.3 billion in 2Q07, representing an operating loss of US$264 million during the period.

The results confirmed the US vendor had fallen behind South Korean rival Samsung, in terms of unit shipments, to become the world's third largest mobile device manufacturer in 2Q07, with Motorola's share of the global handset market for the quarter slipping to an estimated 13.5%.

Motorola shipped 35.5 million units in 2Q07, and the company's overall revenues from all its businesses amounted to US$8.7 billion for the quarter, resulting in an operating loss of US$158 million, down from an operating profit of US$1.5 billion for the year ago period.

Commenting on the quarter Ed Zander, chairman and chief executive officer of Motorola, said: "This was a challenging quarter for Motorola in which revenue fell short of our expectations due to a decline in mobile device unit shipments."

Industry commentators speculate that Motorola's poor performance was largely the result of price competition in the handset market as well as an unfavourable product mix.

Our efforts are focused on improving cash flow from operations and enhancing profitability.

"Our efforts are focused on improving cash flow from operations and enhancing profitability," said Tom Meredith, chief financial officer, during the results announcement. "In addition to cost controls and headcount reductions, which we expect will result in cost savings of US$1 billion in 2008, we intend to significantly improve our cash conversion cycle and our return on invested capital."

Although 2Q06 handset shipments for Motorola numbered 26 million devices, the corporation's overall net revenues for the period amounted to US$10.8 billion (compared to US$8.7 billion for 2Q07) based largely on the success of its flagship Razr handset series, according to Gavin Byrne, research analyst for handsets and devices at Informa Telecoms and Media in London.

"The fortunes of Motorola seemed to slip after it won the GSMA's emerging markets handset programme which led to a downturn in its average selling price (ASP)," Byrne says. "This move saw its ASP drop sequentially from US$138 in 2Q06 to US$131 (in 3Q06)."

Byrne also asserts that Motorola failed to ship sufficient volumes of its entry-level C-series to make the company's emerging market investments profitable at this time.

Motorola's inability to achieve adequate levels of cost control in this segment has been another contributing factor in the company's current difficulties, claims Byrne.

"This issue is an ongoing one that affects the entire handset industry and is particularly critical when operating in low margin markets," Byrne states.

Motorola's operating margin fluctuated between 9%-11% in mid-2006 before taking a significant downturn to 4.4% in the final quarter of the year based largely for the above reasons, says Byrne.

"It could be said that Motorola was looking to buy market share from 2Q06 in an attempt to take on Nokia by slashing the prices of its devices and shipping more volumes than the market needed," he maintains.

Byrne also suggests the legacy of this strategy has been a back-log of Motorola stocks across the distribution channel that has largely affected Motorola's performance in the first half of 2007.

Another problem Motorola has faced in its channel strategy is the lack of sale-through, which can lead channel partners to perceive a brand as undesirable to consumers.

"This has been reflected in Motorola's cash-conversion cycle in the last two-to-three quarters where it has risen to approximately 50 days from 35 days last year," says Byrne.

"A compound effect of this is that Motorola will have to offer distributors and retailers more favourable terms to encourage channel-uptake," he adds.

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