Motorola under siege: Mobile business unravels

Motorola appears to be out of the Palm sweepstakes. Instead, Motorola will try to fix its rapidly deteriorating mobile business. 

When shares were halted after market close Thursday it appeared Motorola was poised to buy Palm. On Tuesday reports surfaced that Palm was looking to wrap up a deal before it reported earnings on Thursday. On Wednesday, word leaked to CNBC and others that Motorola was Palm's suitor.

However, Motorola had bad news to deliver.

The company said sales and earnings in the first quarter would be weaker than expected due to "lower than anticipated sales and operating earnings at the company's Mobile Devices business." Analysts were expecting bad news, but this warning may be a little worse than projected.

Specifically, Motorola said it would report a first quarter loss of 7 cents a share to 9 cents a share. Thomson Financial estimates called for earnings of 17 cents a share. Sales for the quarter are expected to be $9.2 billion to $9.3 billion. Wall Street estimate: $10.4 billion.

In a statement, Motorola said:

The revised guidance is attributable to lower than anticipated sales and operating earnings in the Mobile Devices business due to lower overall unit volumes, a difficult pricing environment, particularly for low-tier products and a limited 3G product portfolio. The Mobile Devices business expects to report an operating loss for the first quarter of 2007.

The Motorola warning would appear to take a Palm deal off the table. One struggling company usually doesn't acquire another one.

For the year, Motorola projected "overall sales, profitability and operating cash flow to be substantially below prior guidance." Motorola, however, says it will be profitable for the year. Wall Street estimates called for earnings of $1.05 a share on revenue of $46.1 billion.
With results like that you can expect the pressure on CEO Ed Zander to intensify dramatically. At least now we know why Zander bailed on its CTIA keynote.
So what's Motorola going to do to right the ship?
On the management front, Motorola named Greg Brown, president of Motorola's networks and enterprise business, president and chief operating officer. Thomas Meredith has been named acting CFO replacing David Devonshire, who is retiring as of April 1. Meredith is a general partner of Meritage Capital, L.P., an investment firm. He is also chief executive officer of MFI Capital. Previously, he was the managing director of Dell Ventures and CFO of Dell.
More interesting is what Motorola plans on the technology front. To boost the results of its mobile division Motorola said it will:

• Deploy open standard Linux/Java software across mid- and high-tier devices to enhance the experiences available on handsets. (I wonder if that's a knock against Windows Mobile.)
• Accelerate a more cost-competitive silicon strategy.
• Shift the marketing approach to include experience as well as design as a product value proposition. (Translation: Motorola can't compete on costs.)
• Introduce new feature-rich products that deliver compelling mobile experiences. (It remains to be seen how this goes with the Treo, Blackberry and iPhone out there.)
• Simplify platform and product portfolio while transitioning out of legacy platforms. (In other words, run screaming from the lower-margin phones).
• Improve product design processes to achieve competitive price points.
  

All of those aforementioned moves sound plausible. The big question: Will Zander be around long enough to see them through?

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