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Motorola: Still Bleeding, but New Strategies in Works

Could the next iPhone copycat come from Motorola Inc.?

Greg Brown, president and CEO of the struggling equipment manufacturer, said on Thursday Motorola will “pursue areas where we’re not competing.” Those areas, he said, include mobile messaging and touch – à la Apple Inc.’s iPhone – and developing lower-cost devices. However, he said, those initiatives remain “embryonic.”

If indeed Motorola wants to compete for iPhone-like market share, it might want to hurry. Samsung Inc., now the second-largest handset maker, earlier this month unveiled its iPhone knockoff, the Instinct. Sprint Nextel Corp. will sell the Instinct starting in June for an unannounced price, but says it will be cheaper than Apple’s $399 iPhone.

Brown didn’t say when Motorola might release an iPhone competitor and by all indications, it could take a while. Motorola is working to split itself into two publicly traded companies to eliminate the embattled mobile devices division’s drag on the rest of the company. Brown said Thursday during Motorola’s first quarter 2008 earnings call the separation won’t be finished until some time in 2009.

Motorola is trying to halt its fall from grace as a leading handset maker. Unable to follow up the wildly popular RAZR of several years ago, the company has sunk to third place behind Nokia and Samsung. Motorola released six new handsets in the first quarter of 2008, but sales still dropped – the company only sold $3.3 billion worth of mobile devices, compared to $4.8 billion in the fourth quarter and $5.4 billion in the first quarter of 2007. The mobile division posted an operating loss of $418 million.

Motorola’s two other branches fared somewhat better in the first quarter. The home and networks mobility unit, which makes HD, DVR and 4G equipment, added $2.83 billion to Motorola’s total sales of $7.45 billion. The division recorded $2.34 billion in revenue in the year-ago quarter. Similarly, the enterprise mobility solutions arm contributed $1.81 billion. That was an improvement over first-quarter 2007 numbers of $1.72 billion, but a drop from the fourth quarter’s $2.14 billion.

All told, Motorola lost $194 million, or 9 cents a share, compared to $181 million, or 8 cents a share, during the first quarter of 2007. Guidance for the second quarter of 2008 was just as discouraging. Motorola predicted it will lose 2 cents to 4 cents per share from operations. Motorola’s stocks fell on the news, down 45 cents in mid-morning trading to $9.09.

Motorola now is intent on the separation, as well as product development, international sales and, not surprisingly, more cost cuts.

“Work is well underway,” Brown said of splitting Motorola in two. The Schaumberg, Ill.-based company has hired outside advisers to help sift through intellectual property, brand, regulatory and other matters. The costs will be large, executives told analysts, but they couldn’t provide an estimate.

Even as Motorola focuses on the split, it still will create new products. The company’s portfolio “is only going to get stronger,” Brown said. That’s not just in the mobile devices division – Motorola also is cultivating its international prospects; half of its sales are coming from global customers.

“Asia represents a fantastic opportunity for us,” said Brown.

That’s because developing countries are constructing communications networks using next-generation technologies rather than copper. Remember, regardless of poor performance in the mobile devices division, Motorola is a key 4G competitor, through the home and networks mobility unit. This seems to be where much of the company’s innovation is brewing. For example, Motorola has built a new 4G platform that supports both the WiMAX and Long-Term Evolution (LTE) protocols. That would position the equipment maker to sell to different carriers – Sprint Nextel Corp. is building a WiMAX network with Clearwire Corp., for example, while AT&T Inc. will use LTE.

Motorola also secured “significant” 4G wins in Saudi Arabia and Taiwan in the first quarter, executives noted.

“Our momentum, in 4G in general, is strong,” Brown said.

Momentum in the public safety markets, on the other hand, lost steam. Motorola received fewer orders from first responders and government agencies in the United States; those organizations are turning to lower-end systems, Brown said. Internationally, however, sales grew 23 percent as Motorola won bids from entities including the Royal Malaysian Police. But the domestic segment is one “we’ll have to keep an eye on,” Brown said.

Overall, continued loss of market share means Motorola expects to clamp down on selling, general and administrative (SG&A) expenses. The company is forecasting net reductions of $540 million, said CFO Paul Liska. SG&A refers to salaries, commissions, and travel and advertising costs.

Executives didn’t say they will sever more jobs, but such a move looks likely. Motorola has slashed about 7,100 positions since last year.

Motorola further plans to reduce research and development by net $240 million. How that might affect new product rollouts was not immediately clear.

Whether such cuts will appease shareholders is hard to say. Motorola earlier this month settled a proxy battle with activist investor Carl Icahn, agreeing to seat two of his allies on the board. The company’s annual election meeting is scheduled for May 5 and Icahn, in part, wants a say in who will lead the separated mobile devices company.


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