The next couple of quarters will be rocky, Motorola Inc.’s CFO told investors and analysts at last week’s Bank of America’s 2007 Technology Conference in New York.
David Devonshire, Motorola’s CFO, used the term three times until an unidentified analyst asked him to clarify it.
Did “rocky” mean no margins or negative margins? the analyst asked.
“We’re not in the position of being a not-for-profit organization,” said Devonshire. “We’ve said that earnings, because of gross-margin compression in mobile devices in the fourth quarter, would not turn around in the first quarter. That’s why I refer to it as ‘rocky.’ ”
Devonshire’s cautionary and somewhat opaque remarks came in the course of what appeared to be an exercise in lowering expectations by the Schaumburg, Ill.-based handset vendor, which may be experiencing pressure to explain its direction to investors. Devonshire is scheduled to deliver the keynote address tomorrow at the Merrill Lynch Communications Forum in New York as well.
Mission: Profit
Devonshire’s dual appearances before influential audiences come on the heels of three events that have called into question Motorola’s business direction. First came the vendor’s fourth-quarter 2006 results, which featured solid results in every category except the one that mattered: profit. Then came Carl Icahn, the billionaire investor who shakes up or breaks up companies in the name of shareholder value, who announced his interest in gaining a seat on Motorola’s governing board. Then, on Feb. 16, came the resignation of Ron Garriques, who headed the company’s mobile devices business.
“Clearly we were pursuing market share, which is great as long as profitability follows,” Devonshire told his Bank of America audience. “We’re putting more focus on profit now, without giving up pursuit of market share.”
Devonshire said that Motorola expects to show improved results in the second half of the year with new handsets in high-tier price points with better margins, as well as by making cost reductions to lower-end phones for emerging markets, through improved marketing and by cutting 3,500 jobs.
The consensus among industry observers, however, is that sales of Motorola’s higher-tier handsets such as the Krzr-which offer the desired margins-have likely been eclipsed by massive sales of reduced-price Razrs, which may not contribute sufficient margins to the company’s bottom line.
Devonshire blamed his company’s lack of 3G products in the market last year-particularly in Europe, dominated in 3G sales by rival Nokia Corp.-to late chipset deliveries by Freescale Semiconductor, which has been a main component supplier since being spun off by Motorola in 2004. Motorola has since announced that it will also do 3G business with Qualcomm Inc. and Texas Instruments Inc., the two largest chipset suppliers in the business.
“So, we’re looking at a couple of rocky quarters,” Devonshire said. “This is not rocket science. We didn’t have a great fourth quarter. We admit it. We’re going to fix it.”
Emerging bets
The CFO said that Motorola would not “give up on our investments in emerging markets,” adding that Motorola has gone from zero to 20-percent market share in India, but without giving a timeframe. (Nokia has 60-percent market share in India.)
He said that in its first 90 days, the Motofone-a slim, low-cost handset designed for emerging markets-had sold well in India, Mexico, Colombia and other emerging markets.
At the other end of Motorola’s handset portfolio, Devonshire said that two GSM models of the Motorola Q were forthcoming, as well as an upscale handset based on the company’s so-called Scalpel platform. Devonshire also hinted at changes in its Asia strategy.
