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Motorola Losses Mount; Handset Spinoff Delayed

10/30/2008 12:04:00 PM Eastern

Schaumburg, Ill. -- Motorola announced additional cutbacks in its cellular handset division and an indefinite postponement of plans to spin off the division, whose operating losses more than tripled in the third quarter to $840 million from the year-ago $248 million.

Company-wide operating losses in the quarter were kept to $452 million because of growing year-over-year earnings posted by the company two other main divisions, which include wireless infrastructure. The operating losses were way up, nonetheless, from a $10 million loss in the year-ago quarter.

Net sales during the quarter fell 15.1 percent on a company-wide basis to $7.48 billion, largely due to a 31 percent decline in mobile handset sales to $3.12 billion. For the nine months ending Sept. 27, company-wide net sales fell 15 percent to $23 billion, with handset sales declining 31 percent to $9.75 billion. Company-wide net losses hit $397 million for the quarter compared to year-ago net earnings of $60 million and second-quarter earnings of only $4 million.

Motorola co-CEO Sanjay Jha forecast reduced losses in the handset division for 2009 but declined to say when the division would break even. “There is no quick fix here,” he said of the restructuring, which includes a focusing of sales efforts on North America, Latin America and select Asian markets, including China.

The planned handset-division sale, originally targeted for the third quarter of 2009, will be postponed indefinitely because of the slowing global economy, financial-market instability, slower than expected handset-market growth and a desire to improve the division’s performance before selling the business off, executives said in a conference call. The company, however, remains committed to selling the division “when appropriate,” said Jha, who is also mobile devices division CEO.

The company’s priority right now, said Motorola co-CEO Greg Brown, is “cash and earnings.”

With earnings and cash in mind, management announced a new round of cuts that, combined with previously announced cuts, will reduce company-wide costs by $800 million in the next fiscal year compared with the current 2008 fiscal year, with $600 million of those savings coming from the handset division, said chief financial officer Paul Liska. The cuts will include a paring of handset operating systems from about a half dozen to three to accelerate product development time and reduce costs. The company will use the Google Android and Microsoft Windows Mobile operating systems for mid- to high-tier devices and a Motorola OS for low-tier devices. The company will drop its proprietary Linux/Java OS and the Symbian OS.

As a result, the number of models available in the first half of 2009 will be lower than previously planned, leading to a first-half sales reduction that Jha declined to quantify. The first-half sales decline will follow a projected decline in the fourth quarter of this year, based on a company forecast of slower than normal seasonal growth and on a small selection of Motorola handsets in the industry’s fastest growing segments: low-end phones, smartphones and 3G phones, Jha said. As a result, fourth-quarter sales will drop sequentially from the third quarter, and fourth-quarter operating losses will increase sequentially, he said.

The company expects to offer multiple new Windows Mobile handsets in the second half of next year and its first Android phone in time for the 2009 Christmas selling season, Jha said.

Although Apple and RIM have enjoyed major successes with their own proprietary mobile operating systems, Jha said Motorola will be able to boost its fortunes even if it depends on operating systems available to other handset makers. “It’s possible to deliver differentiated handsets without owning the platform,” he said. In addition, Windows Mobile in particular will enjoy “much larger market shares” than it has in the past, and both Windows Mobile and Android will enable Motorola to leverage larger ecosystems of third-party applications. Although Windows Mobile “has not delivered an Apple experience,” he said versions 6.5 and 7 will add “significant new features.”

In scaling back its worldwide presence, the handset division will focus its resources on parts of the world where the company offers “the best product portfolio” and enjoys the “best brand recognition,” Jha said. Those markets are North America, Latin America and certain Asian markets, primarily China. But, he added, “We’re not getting out of any region in particular.”

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