Motorola: Android Help on the Way

Motorola's first-quarter results gave investors scant cause for glee. In the period that ended in March, Motorola smarted from a lack of customer-pleasing handsets and a loss of market share to rivals.

But Motorola (MOT) executives tried to reassure analysts and shareholders that hope is on the way—in the form of handsets sporting software created by a Google-led consortium. Before yearend, Motorola plans to introduce several mid- to high-end smartphones based on the Android operating system developed by the Google (GOOG)-backed Open Handset Alliance. "We remain on track to having Android devices in the fourth quarter, for the holiday season," Motorola co-CEO Sanjay Jha said during a conference call with investors.

The right handsets could be a salve for a company that for several years has failed to follow its best-selling Razr with equally enticing devices. Specs and photos of several handsets believed to be Motorola's Android prototypes have recently surfaced on the Web. One, reportedly code-named Calgary, features a slide-out Qwerty keyboard and a touchscreen. Another, called Ironman, is a BlackBerry-like messaging device. "Some of the devices that have leaked to the Net are pretty compelling," says Ramon Llamas, a senior research analyst at consultant IDC. "To borrow a quote from the auto industry, 'This is not your father's Oldsmobile.' [These phones aren't] Razrs anymore."

No Confirmation on Calgary

They better not be. Motorola declined to confirm that the Calgary and the Ironman are its new Android-based phones. "It is Motorola's policy not to comment on rumor or speculation," says spokeswoman Danielle McNally. However, Jha said during the call that Motorola's Android prototypes are getting a warm reception. "We are in detailed discussions with multiple carriers around the world about a few of our Android cell phones," Jha said. He added that the carriers that have seen the devices have provided "very positive" feedback.

Whether Motorola's bet on Android pays off should become clear in late 2009 or early 2010, says Mark McKechnie, an analyst at American Technology Research. "If they miss on Android, then the [money-losing] handset division is done," McKechnie says.

Motorola had to put on hold its plans to spin off the handset unit. The company is losing share to iPhone maker Apple (AAPL) and Research In Motion (RIMM), manufacturer of the BlackBerry. Competition will only stiffen in June, after the introduction of the widely anticipated Pre, by Treo maker Palm (PALM). Evidence of the share losses was widespread during the first quarter, when sales fell 28%, to $5.4 billion, missing analyst forecasts. Motorola's handset market share plummeted to 6%, based on figures released by the company. Two years ago, Motorola's global market share was about 18%.

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 more than doubled.

For Motorola's handset business, the bottom may still be one to two quarters away, says Neil Mawston, Strategy Analytics' 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 that by yearend it expects to cut $200 million more in operating expenses 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 5.53, on Apr. 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 in 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."

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