Telecom & Wireless

MOT: Motorola Confirms Our Thesis - No Bottom in Sight for Mobile

By William Trent, CFA of Stock Market Beat

We have been saying for quite some time that the mobile phone market had peaked for the current cycle, and have been bearish on several of the associated stocks. For example, we recently said:

With potential buyers scheming months in advance on how to get hold of an iPhone, it’s a safe bet they won’t be buying a BlackBerry (RIMM), Treo (PALM), Nokia (NOK), Motorola (MOTAnnual Report), or whatever. And yes, we know there will be some people who prefer the traditional models and continue to buy them. But many of them will also wait to check out the iPhone, just in case.

We have also been surprised by the upbeat nature of some of the mobile phone suppliers such as Texas Instruments (TXNAnnual Report), who we believe are cruisin for further bruisin.

This is something of a confirmation of what we saw in the employment report last week. Things are slowing down, despite the arguments that the housing malaise wouldn’t spread. As we noted earlier today we were surprised Texas Instruments was able to tighten their guidance rather than lower it outright. A new cel phone probably isn’t a necessity for most consumers, and is an easy way to avoid some spending. What will the market reaction be if they do miss?

And, regarding optimism from National Semiconductor (NSM), we said:

So he has been fairly consistent in his categorization, which moved over time from “current” to “behind us.” But we’re still afraid that “everyone he talks to” is probably a narrow group of industry optimists. We see inventory continuing to be a problem, particularly given the slowing consumer’s likely impact on the mobile telephone market.

Judging from the revision to Motorola’s earnings forecast, it certainly doesn’t look as though the correction is “behind us.” In fact, for suppliers it seems likely to continue well into the future, given Motorola would seem likely to cut its orders back to a level more appropriate to meet end demand. Let’s take a look at some of the highlights from Motorola’s announcement:

The first quarter revision was prompted by lower than anticipated sales and operating earnings at the company’s Mobile Devices business….

“Performance in our Mobile Devices business continues to be unacceptable, and we are committed to restoring its profitability,” said Edward J. Zander, Chairman and Chief Executive Officer of Motorola. “After a further review following the leadership change in our Mobile Devices business, we now recognize that returning the business to acceptable performance will take more time and greater effort.”

Restoring its profitability? Last year the RAZR was the hottest thing since sliced bread. It’s not like they have been in need of a major turnaround. They just made too damn many phones.

Motorola now expects sales for the first quarter of 2007 to be in the range of $9.2 to $9.3 billion. First quarter GAAP results are expected to be a loss in the range of $0.07 to $0.09 per share, including charges of approximately $0.09 from the items highlighted below.

So even without restructuring charges, the company only expects to break even. Analysts were expecting $0.17 on $10.5 billion. They are falling short by more than a billion dollars on the top line and $0.17 on the bottom line. This isn’t an earnings miss, it is an unmitigated disaster brought on in part by their failure to recognize the oversupply issue earlier. How do we know?

In emerging markets, particularly India, Africa and South Asia, competitors lowered prices at a faster rate than anticipated.

Prices fall “faster than anticipated” when supply exceeds demand. It’s Economics 101. It gets even better:

For the full year 2007, Motorola currently expects overall sales, profitability and operating cash flow to be substantially below prior guidance. The company expects to be profitable for the full year and also to generate positive operating cash flow. The company expects the Mobile Devices business to incur an operating loss in the first quarter, and to experience a gradual recovery in the second half and be profitable for the full year.

Analysts were expecting $1.05 in EPS. So Motorola’s guidance for all of 2007 is that $1.05 > Earnings > Zero. Boy, that’s helpful. But don’t worry. Motorola has a plan:

Motorola is committed to improving the financial performance of the Mobile Devices business by pursuing market segments and product tiers that demonstrate the best opportunity for high gross margins and meaningful profitability. In this regard, the company is focused on steps to reduce cost and improve consumer experiences, including:

  • Deploying open standards Linux/Java™ software across mid- and high-tier devices to enhance the experiences available on handsets
  • Accelerating a more cost-competitive silicon strategy
  • Shifting the marketing approach to include experience as well as design as a product value proposition
  • Introducing new feature-rich products that deliver compelling mobile experiences
  • Simplifying platform and product portfolio while transitioning out of legacy platforms
  • Improving product design processes to achieve competitive price points

Unfortunately, “stop making so damn many phones” does not appear to be part of the plan. Until Motorola and its competitors adopt that last, crucial step this won’t be the last acerbic article we write on the issue.

Disclosure: Author owns put options on Research in Motion (RIMM).

Disclosure: Author holds put options on Research in Motion (RIMM) at time of publication.

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