Amid increasing competition in a fickle cell phone market, Motorola expects to report a loss for its mobile devices business in 2007 and now estimates that second quarter sales will be lower than expected.
The number two handset maker said on Wednesday that second quarter sales for the company would be $8.6 billion to $8.7 billion, instead of $9.4 billion as previously expected.
That drop in expected sales is the result of lower handset sales, particularly in Asia and Europe, Motorola said. In the second quarter, Motorola expects to report sales of 35 million to 36 million handsets. That will lead to a larger operating loss for the mobile device business in the second quarter compared to the first quarter, it said.
During the first quarter, Motorola sold 45.5 million phones. At the time, the company said it foresaw a gradual recovery of its mobile phone business throughout the rest of the year with expectations of a profitable year.
Motorola now expects a second quarter generally accepted accounting principles (GAAP) loss per share in the range of $0.02 to $0.04.
The company will announce its earnings for the second quarter 2007 on July 19 and will offer further details then, it said.
Motorola also announced that it named a new president for the mobile division: Stu Reed, formerly executive vice president of integrated supply chain for Motorola. Reed’s predecessor, Ron Garriques, left the company in February to head up Dell’s global consumer division.
Prior to its first quarter earnings report, Motorola also had to warn that sales would be lower than expected. It made some executive changes then, including the appointment of a new president. Earlier in the year, Motorola had implemented a new plan to help it improve profitability but that plan wasn’t working out, the company said during the first quarter earnings warning.
Most of the large handset makers are struggling to keep profits up as sales in established markets such as Europe stagnate since most people there already have phones. The companies are increasingly branching out into emerging markets such as India and China, but they must sell their phones at lower prices to win customers there. That’s squeezing profit margins. “The only real growth is at the low end which means there’s nice unit growth but the dollar growth is not there,” said Will Strauss, an analyst with Forward Concepts.
“This year is a soft year for the cell phone market, in spite of Apple,” he said. Apple’s hugely hyped iPhone is expected to sell around 10 million units through next year, which may sound like a lot. But this number is dwarfed by the approximately 150 million units that companies like Nokia sell in a year, Strauss said.
The iPhone isn’t affecting the sales of the biggest cell phone companies, but it may help companies like Motorola realize what they need to do to improve their prospects, he said. The only way that the mobile phone companies can grow profits in saturated markets is to “convince everybody that they need a new cell phone with new bells and whistles,” Strauss said. “The iPhone is raising awareness of what the future cell phones are going to look like.”
In addition, Motorola is notorious for producing hit phones, like the Razr, that sell well but then failing to follow up with additional models that continue the momentum. “They rode too long on the Razr,” Strauss said.
But the handset maker could get a boost later in the year when it starts selling the Razr 2, which Avi Greengart, an analyst at Current Analysis, said is a big improvement on the first version. Motorola is likely to learn from its mistakes the first time around too. “In the past, they really let the original Razr run away with volume as opposed to maintaining it as a premium fashion phone,” he said. “I think this time they’re going to resist the rapid price drop.”