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Motorola split Jan. 4 into a consumer goods and a business solutions company. The two companies reported their first quarterly earnings on Jan. 26.
Motorola's quixotic mobile business outshines its sturdy twin
by Megan Jonas
Feb 17, 2011
Motorola's Legacy
When the company split, stockholders of Motorola Inc. were given one share of Motorola Mobility for each eight shares of Motorola they held, and one share of Motorola Solutions for each seven shares of Motorola they held.Motorola Solutions Inc. retains the history and liabilities of the original Motorola Inc., including pension and healthcare for retirees and long term assets like the company’s headquarters in Schaumburg. Motorola Mobility Holdings Inc. is now located in Libertyville.
In fact, neither company performed as expected in their first separate quarterly reports, which covered their final months together in Motorola Inc. But the horde of analysts covering the companies is far more optimistic and enthusiastic about Mobility.
Only three of 21 analysts recommend buying Solutions stock, while well over half the 32 covering Mobility call it a buy.
After struggling for years, Motorola's mobile-device business is now seen as more innovative and more competitive than ever, particularly in high-end smart phones.
In the first quarter alone, Motorola Mobility plans to release three new smart phones and a tablet PC. The tablet, called the Xoom, won best in show at the 2011 Consumer Electronics Show in January. It will be the first tablet to run Google Inc.’s Android 3.0 system.
Analysts polled by Bloomberg LP expect the company, which posted losses in 2009 and 2010, to return to profitability in 2011 with a net income around $168.2 million, or 96 cents per share.
“The number one positive is CEO Sanjay Jha: in general because of his can-do spirit, leadership and smarts; and in particular because he led Motorola Mobility to the promised land (the Android OS) before other companies, thus providing a competitive and marketing advantage,” wrote Jim Kelleher, director of research at Argus Research Corp. and author of “Equity Valuation for Analysts and Investors,” in a research note.
Executives at Motorola Mobility are projecting revenue growth in their mobile devices division, but flat revenue in home products. The company expects to ship between 20 million and 23 million smart phones and tablets in the coming year. Strong foreign markets are driving growth. In 2010, 53 percent of revenue came from North America, compared with 69 percent a year earlier.
However, Kelleher cautioned, “the mobile devices business faces a huge list of deep-pocketed competitors." He cited the release of Apple Inc.'s iPhone by Verizon Wireless, “by far the largest customer for Motorola Mobility’s smartphones,” as creating uncertainty in his forecast.
Analyst Douglas Reid, of Stifel, Nicolaus and Co. Inc., said the iPhone release is already figured into his earnings estimate for Mobility. He thinks that growth in other markets will more than make up for any losses due to iPhone sales and is maintaining a buy rating for the company.
Furthermore, Mobility is already in an acquisition mode. In January it acquired Zecter Inc., a startup whose technology enables users to access on their mobile device content from their home computer. On Monday Motorola Mobility announced the acquisition of another technology company, Three Laws Mobility Inc., which develops security software for mobile devices.
In addition to mobile devices, Motorola Mobility sells set-top boxes and cable modems. Kelleher noted that, originally, Mobility was envisioned as a stand-alone mobile phone business. “By adding the connected home business, Motorola Mobility adds a second wheel to the bike: not as stable as a three-legged stool, but more balanced than the unicycle model,” he said.
Paradoxically, in contrast to Motorola Mobility's recent losses, Motorola Solutions reported for 2010 a pro forma net income of $254 million, or 75 cents per diluted share, rebounding from a 2009 loss of $367 million, or $1.12 per share. But fourth-quarter results came in below Wall Street's expectations, and company officials are expecting a comparatively modest 4 percent growth in revenue for this year. Still, a poll of analysts by Bloomberg LP projects robust 2011 earnings of $2.46 per diluted share on a net income of $507.4 million.
In a conference call with analysts, Motorola Solutions executives cited a prospective public safety spectrum reallocation as key to their growth projections for the year. All public safety organizations in the United States are required by the Federal Communications Commission to shift their radio transmissions into the 700 MHz spectrum in order to allow interoperability of systems. This shift makes old equipment obsolete and has already begun to spur equipment orders.
But analysts aren’t convinced that states will keep spending in an era of shrinking tax receipts. “Risks for Motorola Solutions include a potential decline in spending by state and local authorities on first-responder solutions,” wrote Kelleher of Argus Research. “Given the fact that the company is much less diverse, it is highly dependent on its first responder business for profits.”
Analysts predict that both Motorolas will have relatively high price-to-earnings ratios in the coming year as they restructure and commit money to research and development. Reflecting greater analyst enthusiasm, Motorola Mobility is estimated to have a 12-month ratio of 30.6, while Motorola Solutions is estimated at only 16.3; the S&P 500 Index is expected to be 13.6.
“Both companies have separate drivers, so it makes sense that they are separate companies,” said Alkesh Shah, an analyst with Evercore Partners Inc. With the companies split apart, investors who want to invest in the volatile smartphone market have one company, while investors that are looking for the more consistent growth of government and corporate contracting can invest in the other.
At the moment, Motorola Solutions still owns its Networks business, despite an agreement to sell it to Nokia Siemens Networks, a joint venture. Huawei Technologies Co., a Chinese company that sold technology to Motorola, sued to prevent the sale. Huawei Technologies was one of the companies that sought the networks business, but lost out to Nokia Siemens’ $1.2 billion bid. In their quarterly conference call with analysts, Motorola Solutions executives vowed to fight the suit. In any event, they said, the sale is expected to be completed in the first quarter.
