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Surprise! Motorola Turnaround Yields Small Profit

Motorola's much-touted turnaround may finally be showing some signs of progress, posting a surprise profit -- albeit a tiny one.

For its second quarter, the 80-year-old handset maker reported earnings of $4 million, breakeven on a per-share basis, citing strong demand for home and business networking devices. It also credited success on plans to cut operating costs by $1 billion this year.

Wall Street had expected a loss of 3 cents per share, according to Thomson Financial.

While the business isn't out of the woods yet -- revenue beat estimates of $7.69 billion but fell 7 percent to $8.1 billion from a year ago -- Motorola (NYSE: MOT) CEO Greg Brown said the numbers point to success in the massive turnaround effort he's driven since taking over the top spot early this year.

"We've pushed out enhanced products and put new leaders in key roles this quarter," Brown said during a conference call with analysts. "I'm confident that we are in a better position with mobile devices to compete and succeed."

The results are especially dramatic given Motorola's first-quarter results. The company reported missed estimates with a $194 million loss, or 9 cents per share, on revenue of $7.45 billion.

Brown now said the company expects third-quarter earnings to be breakeven to 2 cents per share, and that a spin-off of its mobile device division by the third quarter of 2009 remains on track.

The news also comes in stark contrast to Motorola's picture last year. Mobile device shipments dropped substantially in the second quarter of 2007 -- almost 10 million fewer units than in first quarter of that year. The company's poor showing eventually led to the ouster of Ed Zander in November 2007.

Since coming aboard in January of this year, Brown has made a slew of executive changes, from the financial offices to the business unit divisions. During the earnings call he said improving the mobile division is key to finding a world-class leader for the spin-off scenario.

In the most recent quarter, the company's Home and Networks Mobility division, which just underwent an organizational revamp last week, showed sales growth of 7 percent and operating earnings growth of 28 percent, compared to the second quarter of last year. Motorola attributed the growth to demand for digital entertainment devices.

The Enterprise Mobility Solutions division experienced growth of 6 percent for the quarter and operating earnings growth of 24 percent as compared to the same period last year. The increase was due to growing international demand and the launch of a new, ruggedized enterprise digital assistant device featuring 3G WAN and GPS navigational features.

Hard work ahead on handsets

Motorola sold about 28 million mobile devices during the quarter -- topping Wall Street estimates of 26.6 million, according to Reuters Estimates. However, revenue at the unit remained sluggish at $3.3 billion, down 22 percent compared to the year-ago quarter.

The company introduced 16 new handsets in the first half of the year, with 10 launched in the second quarter. It plans to launch 34 more by year's end, it said.

Upcoming products will include smartphones and handsets featuring touchpad functionality, increased messaging applications and greater music capabilities -- all designed to better appeal to customers eager for these kinds of advanced functionality.

"This is the product-led recovery we mentioned earlier this year," said Brown, adding that future devices will allow Motorola to "to play in the market."

But regaining strength in the competitive handset space remains a huge challenge, given strides by both the market's leaders and its new entrants. Nokia sold 122 million cell phones during the second quarter, while Apple sold 1 million 3G iPhones in the first weekend following its June debut.

According to a recent IDC report, Motorola held just 4.19 percent of the smart phone market in the first quarter of 2008, well behind market leader Research in Motion, as well as Apple, Palm and Samsung.

The mobile device market, overall, however will prove challenging going forward for all players. A Gartner report states annual growth in sales will hover about 10 percent this year -- a drop from an estimated 15 percent earlier in the year. Gartner attributes the reduced sales growth to a global economic slowdown that is limiting demand for cell phones and smartphones.

In terms of Motorola's 4G Long Term Evolution (LTE) initiatives, Brown said current trials with Verizon Wireless are going well.

LTE, which is viewed as the natural progression of Global System for Mobile communications (GSM) and Universal Mobile Telecommunications System (UMTS) standards, promises greater network speed. Currently 15 percent of Motorola's devices are UMTS, with that number expected to grow to 50 percent by 2009, said Brown.

Brown did not provide any updates related to its ongoing WiMAX efforts, though the handset maker has spent about half a billion dollars on WiMAX chips and devices, it has said.