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Motorola's $1B Miss Leads to CFO's Ouster

Motorola's $1B Miss Leads to CFO's Ouster

Motorola on Thursday announced it has lowered its sales outlook by more than $1 billion for the first quarter and has restructured part of its management team. CEO Edward Zander said performance in the company's core handset business division "continues to be unacceptable, and we are committed to restoring its profitability."

By Keith Regan
03/22/07 7:29 AM PT

No. 2 cell phone maker Motorola on Thursday said it would miss its current quarterly sales growth targets by US$1 billion or more and replaced its chief financial officer as part of a restructuring aimed at righting what appears to be a badly listing corporate ship.

Schaumburg, Ill.-based Motorola, the largest U.S.-based mobile handset maker and second worldwide only to Nokia, lowered its sales outlook for the quarter that ends later this month to the range of $9.2 billion to $9.3 billion. That's more than $1 billion below the $10.4 billion to $10.6 billion Motorola had forecast when it reported earnings in February.

CEO Edward Zander said performance in the company's core handset business division "continues to be unacceptable, and we are committed to restoring its profitability."

New Execs, Stock Buyback

In response, Motorola also announced some executive changes, saying CFO David Devonshire would retire at the beginning of April and be replaced by an acting CFO, Thomas Meredith, a former CFO at PC maker Dell. The company also named a president and chief operating officer, elevating Greg Brown -- who had previously overseen the company's network and enterprise division -- to that new position.

In addition, in a nod to shareholders and possibly as a result of pressure from billionaire investor Carl Icahn, Motorola said it would accelerate plans to buy back billions of dollars of its own stock.

Motorola has been struggling to revive sales growth and profitability in its handset unit since its Razr phone line took the market by storm in 2005. While searching for a follow-up, it has seen many rivals score with higher-end handset devices.

'Back to Basics'

"We need to get back to basics," Zander said in a conference call after the announcement. Some of the quarterly woes were the result of an internal decision "not to chase market share at any cost. We want profitable market share," he added.

Motorola made a decision not to match competitors' steep price cuts on lower-end phones in some emerging markets, where profit margins are typically smaller, Zander stated. Even without matching those cuts, Motorola still expects its handset unit to lose money in the quarter on an operating basis.

Motorola also suffered in Europe, Zander reported, where its relatively slim lineup of 3G phones apparently cost it market share to rivals.

Executives suggested there is light at the end of the tunnel, but that the company must still go through some darkness first to get there. The second quarter, which starts in April, is also likely to be "disappointing," but results should perk up by the end of the year, in time to return the company to profitability for the full year, Zander noted.

Shares of Motorola, already beaten up by the company's slacking performance in recent months, dropped another 5 percent in morning trading Thursday to $17.84. That price would represent a new 52-week low for the stock.

Icahn Impact?

Some observers saw the executive shake-up and the other measures put in place as a reaction to the sudden shareholder activism of Icahn, who has announced his intentions to seek election to the company's board of directors at its shareholder meeting next month.

Icahn, who has in recent months prompted significant corporate governance changes -- such as stock buyback programs and executive pay changes -- at Time Warner and Blockbuster, is also accumulating Motorola shares. Whether he can claim a seat or not, Icahn was widely expected to agitate for more of Motorola's $11 billion in cash to be returned to shareholders.

Motorola said Wednesday it is stepping up and expanding plans to do just that. The company said it would accelerate the planned buyback of $2 billion worth of its common stock and boost the overall share-buyback program to $7.5 billion, up from the original $4.5 billion.

Competitive Markets

Meanwhile, Motorola's search for a successor to the Razr continues, the latest effort coming in the form of the Rizr line of phones. Last week, Motorola debuted the MotoRizr Z3, a sleek slider phone with a built-in still and video camera and digital music player.

While Motorola has held the line on discounting in some markets, it has been forced to aggressively work to reduce mounting inventories of its phones in the U.S. and elsewhere, Bear Stearns analyst Philip Cusick told the E-Commerce Times. Razr and Krzr phones, in particular, have begun to be offered at steep discounts from mobile carriers, he noted.

The news has not been all bad for Motorola. Its other two units, which make wireless networking equipment, continue to perform well and, according to Gartner research, Motorola actually gained market share during the last part of 2006, boosting its take of the overall handset market by nearly 4 percent.

Motorola remains competitive in the middle market, Zander said, but is wary of competing on price in the lower market segment and has not yet found the right model to make significant headway in the high-end smartphone sector.

Enter the iPhone

The upper echelon of the market is set to become much more competitive soon with the pending release of the Apple iPhone, set to hit stores as soon as June. While that device has already enjoyed great hype and is being greatly anticipated, its arrival may create opportunities for other handset makers, Strategy Analytics analyst David Kerr told the E-Commerce Times.

In fact, Motorola knows firsthand how the Razr phone invited copycats and innovations that helped other vendors leapfrog it in the marketplace, he commented.

"Handset makers are already paying more attention to usability as well as form and function," Kerr said. "Those that respond well may find new opportunities opened up by the iPhone."

There has been widespread speculation that Motorola may attempt to gain greater high-end market exposure through the acquisition of handheld device maker Palm. Rumors accelerated this week that Motorola was making an aggressive play for the handheld device maker and was close to outbidding other suitors to land the company.

During the conference call, Zander declined to answer questions about the possible acquisition.


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