Ailing Motorola Phone Unit Shows Signs of Progress

Motorola's mobile-phone business recorded a $138 million loss in the third quarter, with handset revenues declining by 36 percent to $4.5 billion in comparison with the year-earlier period. Nevertheless, Motorola executives remain upbeat about the ailing unit's prospects for returning to profitability, noting that substantial progress has been made during the quarter.

"The third quarter was about execution, doing what we said we were going to do," said Motorola CEO Ed Zander. "In mobile devices we began to move in the right direction: We increased unit sales and gross market percentage while lowering operating expenses."

Zander also said he was pleased with sales of Motorola's new Razr2 handset right out of the gate. "We sold 900,000 units in about 80 days," he noted.

Chasing Profitability, Not Share

Motorola, which said it shipped 37.2 million handsets in the quarter, failed to live up to the channel sell-in expectations of Gartner research director Carolina Milanesi, who had been "expecting Motorola to come in at around 39 million." However, Motorola's estimated 13 percent share of the global handset market precisely matched Milanesi's forecast.

Motorola's global market share has slipped by 5.5 percent so far this year, according to Gartner's own research. With respect to sales into the channel, the U.S. handset-maker remains far behind Samsung, which maintained its No. 2 position globally by moving 42.6 million handsets in the third quarter.

Zander told analysts that Motorola has no interest in chasing market share at the expense of profits. "Our strategy is profitable growth and product portfolio enhancement in parallel," Zander said. "As we do that -- and get the flow-through and leverage of the model as well as continue to expand the product portfolio into segments in which traditionally we have been limited in playing -- those two things in combination should allow us to grow market share over time."

When it comes to channel sell-through to end-users, the chasm separating Samsung and Motorola might not be nearly as wide as the channel sell-in numbers suggest. "Samsung might have built up a bit more inventory this quarter," as was the case in the first two quarters of this year, Milanesi noted.

By contrast, Motorola's channel inventory levels continued to improve, essentially returning "to levels that we would consider normal," noted Greg Brown, Motorola's chief operating officer. "And if you went back to March, I would say they were down substantially -- both in weeks and actual amount of units -- which would mean that our sell-through picked up," Brown explained.

Targeting the High-End

Looking ahead to the fourth quarter, Motorola executives noted that the global handset market remains strong. "From a demand perspective, obviously we see the industry growing by double digits," Zander said. "For the fourth quarter, we expect to see sequential improvements in both the top and bottom line for mobile devices," Brown added.

In emerging markets, Motorola expects to continue to compete with its current product lineup and intends to become considerably more aggressive as the company introduces low-cost solutions down the line. Zander referred to Motorola's intent to introduce "a richer experience multimedia phone" to target a market in which Motorola hasn't played historically.

"In the next year we expect to bring in the rich multimedia products that we need at the high end," Zander said. Motorola's recent deal to obtain a 50 percent interest in UIQ Technology, which develops open user interfaces for mobile phones, is a step in this direction, he said.