Friday, October 05, 2012

MOTOROLA: FUTURE QUESTIONED

The Erstwhile No.1 maker of Cellphones is Today, Only a Shadow of its past. And there is a Sense that something will not end well. But new CEO Sanjay Jha’s Android bet has pumped-in a Fresh Breath of Life into Motorola. The Issue is – it’s only One Breath. 

But the good tidings come with strings attached. Smartphones, despite being the latest claim to fame of Motorola, is a market where the Jha-led entity still only has a market share of 0.7% (source: Gartner). This is set to improve though, with 50% of the company’s sales expected to come from the smartphone category over the next two quarters. One aspect which Jha has to be careful about is an undue focus on gaining volumes by promoting lower-priced products, which could work to prevent its falling market share, as New York-based Thomas D. Lee, Analyst at Goldman Sachs & Co., shares with B&E, “The smartphones sold through AT&T and in China are mostly in the low-end to mid-line, as opposed to the high-end Droid smartphones sold at Verizon. Thus, we expect the negative Average Selling Price (ASP) and margin impact to be more significant than the positive unit impact. As a result, we are modelling the first sequential handset ASP decline (-8.0%) and gross margin decline (-2.2%) in Q1, 2011, after seven consecutive quarters of ASP and gross margin increases.” It is no hidden secret that 8 of the 22 smartphones launched this year are specifically made for China. Good idea. But Jha has to be careful that expectation of positive margins over the next few quarters is what is keeping the shareholders on their seat, the Motorola stock around the $10 margin, and him at Motorola.

On the flip side, Jha should also increasingly address the fact that today, only 20% of his sales come from emerging markets. And this is what separates Motorola from the pack of market leaders. At present, while Nokia sells 65.3% of its handsets in new growth markets, the figure for #2 Samsung stands at 58.8%, while that for #3 LG is 61%. Even Apple & Research-in-Motion are selling more handsets outside US (61% of the 14.1 million units of iPhones and 57.9% of BlackBerry smartphones were sold in non-US markets during Q3, 2010; source – Canalys estimates 2010). The man on top has to realise that for an innovation engine that has weakened, targeting emerging markets (where the technological churn rate is minimal), is the key to growing both top and bottomlines (with precautions to be taken as far as ASPs are concerned). “It will be critical for Motorola to further strengthen its position in key international markets, notably China and Latin America. Of late, the company has taken proper steps in addressing the near-term risks, with a number of smartphone devices expected to ship internationally, notably into China. Three of Motorola’s Q3 smartphone introductions are aimed at AT&T (the Bravo, Flipout and Flipside) and four are targeted at China,” says Lee of Goldman Sachs.

There is another steep turn at the corner, threatening to topple Jha’s rollercoaster. Despite the Android magic, the company continues to lose its hold over the global market. As per a report by Gartner, the Q2, 2010 market share of Motorola stands at a meagre 2.8%. Though this puts it at the 6th spot, Apple, a close follower with a market share of 2.7%, is set to displace it to the 7th spot. Having said that, Motorola’s and its Droid comeback story, has largely been due to an incredible growth over the past three quarters, in the US market, which currently accounts for 68% of the company’s handset revenues. It is also Apple’s playground. Motorola’s international handset sales grew a modest 11% q-o-q, slightly above the global market, which grew at 8%. On the other hand, the company’s US handset sales displayed a robust growth of 22%, largely driven by strong smartphone sales at Verizon, which drives around 20% of the company’s mobile devices revenues. Now the threat. When the iPhone, which is exclusively sold only by AT&T in US, becomes available to Verizon customers in 2011, there is a strong possibility that this will effect an exodus of Motorola smartphones’ existing and prospective customers (of handset models Droid X, Droid 2, Droid Pro, Droid R2, XTs, et al). Given that Jha has no new hit launch in sight for the near future, this could seriously ruin his run. San Francisco-based Simona Jankowski of Goldman Sachs tells B&E, “With sales in North America in particular expected to slow considerably in Q1, 2011, we see a key near term challenge to Motorola, due to Verizon’s launch of the iPhone. We are currently estimating that Motorola’s smartphone shipments will decline to 4.7 million in Q1, 2010, from 5.4 million in Q4, 2010, which assumes that its Verizon shipments will get cut in half (to 1 million). We are adjusting our FY10/FY11 EPS estimates to a lower $0.39/$0.57 from $0.42/$0.60.”


Source : IIPM Editorial, 2012.
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