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Motorola to Cut Handset Staff?

Dan Jones
LR Mobile News Analysis
Dan Jones, Mobile Editor

Motorola Inc. (NYSE: MOT) could announce plans to cut staff at its handset division as it lays out disappointing fourth quarter results this Friday.

Motorola said earlier this month that its sales for the fourth quarter of 2006 will fall to between $11.6 billion and $11.8 billion, below the company's earlier predictions of as much as $11.8 to $12.1 billion and below consensus analyst estimates. The fall-off is being blamed on an increasingly tough handset market for the company, which had been buoyed by sales of its RAZR phone during most of 2006. (See Motorola Margins 'Collapse'.)

Citigroup analyst Daryl Armstrong is predicting that as part of a plan to improve the profitability of their handset business the firm could lay off up to 5 percent of the employees in that unit.

"We estimate that each 1 percent of the workforce in Mobile Devices that are terminated results in $45 million in cost reductions. Or roughly $0.01 EPS improvement," writes Armstrong in a research note. "Our current expectation is that the company reduces headcount by 3 percent to 5 percent."

Motorola has not yet returned calls for comment on the prediction.

"Scalpel" forthcoming Armstrong notes, however, that there is only so far the Schaumburg, Ill.-based company can go with restructuring in the highly competitive cellphone market. "Given the competitive landscape, where vendors like Nokia, Samsung, & LG are improving their product portfolios, we think that Motorola has little room to disrupt the operations in their handset division," Armstrong notes. "We think this limits the amount of restructuring that the company can execute without incurring meaningful operational risk."

This means the firm has to keep trying to replicate the success of the RAZR with new models. Armstrong expects to see new Linux-based SCPL -- or "Scalpel" models this year.

Motorola's reaction to the new iPhone from Apple Inc. (Nasdaq: AAPL), however, could be 12 to 15 months away. "We expect the company to respond with its own offering, although we expect them to attack the mid- to high-end of the market ($200 - $400) rather than replicate Apple’s offering at the ultra high-end of the market," Armstrong writes. "While we think they can replicate the hardware aesthetic design and much of the feature functionality of the iPhone, we think they probably have to radically overhaul their User Interface software for a product like this."

Motorola appears to be experiencing similar problems to those that its top-ranked handset rival Nokia Corp. (NYSE: NOK) underwent over the last year or two when some of its product line started to look rather outmoded thanks to the Motorola RAZR.

RAZR margins decline "Motorola is having a relatively tougher time than other major phone vendors," Gartner Inc. analyst Todd Kort tells Unstrung, "because they are facing difficult comparisons with their performance of the last two or three years, when they were able to achieve substantial market share gains and strong profit growth based on the huge success of their RAZR line.

"Interest in the RAZR remains good," Kort adds, "but profit margins on the RAZR line have substantially declined." Motorola is now charging "a small fraction" of the $500 original price for RAZRs at launch.

Indeed, Nokia has now revamped its offerings with new enterprise models and thin phones coming in 2007. Goldman Sachs & Co. recently upgraded the company's stock from a "hold" to a "buy" on the expectation of solid fourth-quarter results. Nokia is reporting on January 25.

Meanwhile, Sony Ericsson Mobile Communications is claiming to once again be the third-largest handset maker in the world over nearest rival Samsung Electronics Co. Ltd. (Korea: SEC) The firm this week reported fourth-quarter net profit up 144 percent to $578 million compared to the same quarter a year ago. Revenues were up 60 percent from $2.99 billion to $4.89 billion year-on-year.

The London, U.K.-based company shifted 26 million phones in the last quarter of 2006, compared to 16.1 million a year ago. The firm noted that many of these had been high-end models such as its "Walkman" MP3 phone and "Cybershot" camera phones.

"Sony Ericsson is the driver of Ericsson... Sony Ericsson’s Q4 results have improved EPS [Earnings Per Share] growth in 2007 from 2 percent to 14 percent," estimates Richard Windsor at Nomura Securities He still says that Ericsson is "slightly overvalued", however.

Ironically, Gartner's Kort says that Nokia and Sony Ericsson are looking sharper now because they don't have the burden of matching a RAZR-like success in their product lines, as does Motorola. "Nokia and Sony Ericsson have not had a huge success on the level of the RAZR and their new higher-end, higher margin lines have been growing relative to where they were a year or two ago, so they are looking better now."

— Dan Jones, Site Editor, Unstrung

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