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Sunday, January 28, 2007

Moto, Eat Nokia's Dust

Ever since Motorola reported its shockingly horrible results for the fourth quarter about two weeks ago, my editors have been asking for a prognosis.

I kept telling them that we needed to wait until Nokia reported its numbers in order to assess the true magnitude of the damage in Schaumburg, Ill. Is the entire industry under siege, or did Motorola trip up?
The verdict is in: The industry is under pressure, but Motorola (ticker: MOT) is in a deep hole.

Last week, rival Nokia (NOK) surprised most everyone by reporting better-then-expected revenue and earnings, especially in the wake of Motorola's financial implosion. But the biggest takeaway from Nokia's call was that its cellphone margins actually rose, despite the lower asking prices for phones that were introduced because of intense competitive pressure. Nokia's handset operating margins were 17.8%, up more than two percentage points from the previous quarter's level, while gross margins in all segments were up. In comparison, Motorola's margins came in at 4.4%, about half as high as expected.

To be fair, other handset makers, such as LG and Samsung, have suffered from shrinking margins, while Sony-Ericsson is the only other major handset maker, with Nokia, to buck the trend. Sony-Ericsson can thank its concentration on high-end, music-enabled phones for that. Meanwhile, Motorola is racking up market-share gains and high-volume growth in emerging markets, at the expense of margins and profitability. That isn't a winning combination.

Don't look for Nokia to give Motorola a break soon. The operating gap between Nokia and Motorola could widen during this year's first half, as Nokia unleashes new handsets. Prices will likely come down, but margins could continue to expand as production costs slip faster than prices, predicts Charter Equity Research analyst Ed Snyder.

Motorola has been riding the super-successful RAZR for three years, while Nokia consolidated its model templates and developed new, lower-cost handsets that are rich in features and fashion. Motorola handsets such as the multimedia KRZR and the BlackBerry-like Q have failed to capture momentum, in part because Motorola slashed RAZR prices to irresistible levels in order to grab share.

"We see this as the end of Motorola's latest run in handsets," Snyder posits.

Nokia's scale and cost advantages, owing to decisions made at the height of RAZR-mania, could allow the Finnish company to thrive in a year when most everyone else, except Sony-Ericsson, struggles.

At the recent Consumer Electronics Show in Las Vegas, where Motorola CEO Ed Zander was a keynote speaker, the company had so few new products to unveil that seemingly a third of his speech was filled by a Yahoo! executive, who was touting that company's new mobile-search service. That wasn't one of Zander's better moments. Worse, the keynote speech came a day before Apple threw its hat in the ring as the latest entrant to an already cut-throat arena.

After two quarterly-earnings misses in a row and with no hot successor to the RAZR in sight, the prognosis for Motorola isn't healthy.

While enticing at 18-plus a share -- its price Friday afternoon -- and trading at only 15.2 times trailing earnings (versus Nokia's 17.2 times), Motorola stock appears to be no better than dead money for at least the first half of 2007.

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