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Motorola Handset Division Trims Losses

7/30/2009 12:28:32 PM Eastern

Schaumburg, Ill. - Motorola's cellular handset division trimmed its operating losses in the second quarter on a sequential and year-over-year basis while boosting revenues 1.6 percent on a sequential basis to $1.83 billion.

Quarterly operating losses shrank for the third consecutive quarter, and Motorola co-CEO Sanjay Jha forecast a "further reduction in operating losses" in the current quarter. He said he would "be disappointed" if the division did not break even on a quarterly basis sometime next year.

Division operating losses fell to $253 million in the second quarter from the first quarter's $381 million loss and a year-ago loss of $346 million. Losses peaked in 2008's third quarter at $840 million. Operating losses fell largely because of major cost-cutting initiatives, including a 30 percent workforce reduction and better demand planning with carriers. Jha described the cuts so far as "getting us close to a competitive cost structure." Modest cuts might still be in the offing, he said.

On the revenue side of the company's financial report, Motorola said second-quarter revenues, though up sequentially, were off 45 percent from the year-ago quarter. Likewise, first-half revenues were off 45 percent to $3.63 billion.

Third-quarter revenues will be "comparable" to the second quarter's, Jha said, contending that the division is not focused on market share and volume but on operating profit, gross margins and high average selling prices. Those three metrics will rise with the fourth-quarter launch of Motorola's first two Android-based smartphones through two unnamed major North American carriers, he said. The launches will "get us back in the game" in smartphones, he promised. The division signed contracts with the two carriers and will ship "in meaningful volumes" in the fourth quarter so carriers can "get behind the devices in a meaningful way," Jha said.

In the first quarter of 2010, several additional Android models will ship as the division ratchets up its presence in the higher margin, lower volume smartphone market and reduces its reliance on lower-price feature phones and voice-centric phones in 2010, he continued.

Next year, "the majority of new devices will be smartphones," Jha said. The division, however, will continue to offer feature and voice-centric phones because "some customers want a full portfolio of products from us," he emphasized. Those products, however, will be developed through original design manufacturer partners. Smartphones will continue to be developed in-house, including Android models that the company wants to drive to feature-phone price points in a "profitable way," Jha said.

In 2010, Motorola expects to offer a "comparable" number of SKUs compared to 2009, but the gross margins on the devices "will be meaningfully better" because of the company's smartphone focus, he said. Right now, he said, Motorola's handset gross margins "are below industry levels, and we want to be comparable." For the Motorola's Androids launched in the fourth quarter, he said he "expects industry-comparable margins."

Jha predicted "quite a battle in the smartphone marketplace" in the fourth quarter. Carriers know they will have to support their smartphone sales "with substantial marketing help," and "we hope to get some of that." Likewise, Jha called it probable that the industry "will see us have a presence with more media advertising" in the fourth quarter.

As for Motorola's iDEN-network portfolio, Jha said the company is still getting "pretty good traction with iDEN," in part because of Sprint's more aggressive prepaid focus and improved relationships with other iDEN-network carriers. In 2010, Jha said, Motorola will refresh its iDEN portfolio and offer Android-based iDEN phone.

Longer term, Motorola still plans to sell off its handset division, but it still hasn't set a timetable. The timing of the separation will depend on the economy, the division's performance and stability in the handset market, he said.

At Motorola's other two divisions, revenues were down for the quarter and half but not nearly as much as they were in the handset division. The divisions' earnings were also down, but both continued to post operating profits. Handset accounted for 33.3 percent of Motorola's second-quarter revenues.

All told, the company's consolidated revenues were off 32 percent for the quarter to $5.5 billion and off 30 percent for the half to $10.9 billion. Second-quarter consolidated operating profits grew to $10 million from the year-ago $5 million, but the first half posted a $439 million operating loss, up from the year-ago $264 million loss.

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