Motorola has filed SEC documents which not only give more details of how it plans to split itself into two organizations, but which reveal a lot more detail of its past business shape ‘ for instance it reveals for the first time in two years how much (or rather how little) revenue its Home set top business does, an area we are extremely interested in at Faultline.
In particular it has broken out revenues of $838 million for its first quarter 2010 in the Home business, down 18% on its $1 billion figure a year earlier with the decrease due mostly to a 33% fall in revenues for set-top boxes. Shipments of set tops were off 29% partially offset by sales of network infrastructure gear. Home revenues fell in North America and Asia, but increased in Latin America and EMEA. While this hints that Motorola is still aggressively growing a European, mostly IPTV business, North America still accounted for 78% of Home sales.
Despite this fall away of revenues, the operation is closer to being profitable than it has been in recent quarters, with operating earnings of $20 million compared to $3 million in the first quarter of 2009. This was down to a more favorable HD oriented product mix, and a decrease in R&D expenditures.
For all of last year the Mobile device business had revenues of $7.1 billion, off 41% from the $12.2 billion in 2008 ‘ and that’s what all of the news has been about so far within Motorola and these numbers were previously broken out. This division lost $1.3 billion in 2009 but then again lost $2.4 billion a year earlier. By comparison the Home Business has 2009 revenues of $3.9 billion, 21% down on 2008 when it was a $4.9 billion business. So what most people have failed to realize is that the Motorola set top business has virtually halved during two years when most set top businesses, with the exception of the last two quarters of 2009, were growing.
Over the year Home had operating earnings of $11 million compared to operating earnings of $351 million in 2008 and the question here that must be asked, is just how it is going to return to its former glory, with a far lower R&D allowance and downward momentum. The answer appears to be by growing the business outside of the US. For us that route alone will be too slow and it needs more.
The company continues to expect demand for set-top boxes to contract in the US though it says that longer term, the growth drivers for the Home business are still there, in the form of HD, multi-room systems and 3D and advanced interactive services. Well that’s true and we can testify to that but it has to get more than its fair share of those technologies in the current round of procurements.
One of the reasons for set tops being so healthy in Europe for the next two years is because analog to digital transitions are scheduled to be complete there at the end of 2012, and many countries are right in the middle of set top ramp ups to get off analog TV. These are mostly in the low priced areas of DVB-T devices, but this has had an advantageous effect on the uptake of Pay TV as well, and that effect may well slow or subside completely during 2012 after cut off, as it did post June 2009, in the US.
The company will be split by creating a new subsidiary Motorola SpinCo Holdings which will become the Motorola Mobility holding company with Mobile Devices and Home businesses bundled in. Overall this company will have quarterly revenues of around $2.5 billion, shrinking or at best flat, over the next three quarters and while it was marginally cash generative in the last quarter, it remains loss making with a $212 million net loss for the first quarter and $1.3 billion for the year.
The Home segment says that its five largest customers, which include Verizon and Comcast, and we should think AT&T and probably Time Warner Cable, make up 54% of the segment’s revenues. In other words it cannot afford to have a single major reverse at one of these companies or it will remain in major free fall rather than flattening revenues out.
So far the Home business has amassed 1,900 granted patents and 1,300 pending patent applications worldwide, and the company has contributed to MPEG, ATSC and DOCSIS and will refocus what’s left of its R&D on this type of area, what it describes as its core enabling technologies, which it lists as digital compression, encryption and conditional access. That’s almost funny. It had to buy in encoder technology to stay in with AT&T’s U-Verse because it had no stand our products in that area. Like in so many other areas of its business, Motorola has engineers that understand a given technology but no products aimed at the right part of the market, giving the impression that the Home business is as badly run as the handset business was before Sanjay Jha took over.
The new company will have just 21,000 employees and be on track for annual revenues of $11.1 billion (but declining and it was once way over $20 billion). The Home segment had an order backlog of just $378 million at the end of 2009, down from the backlog of $431 million at December 31, 2008.
The handset business shipped 55 million handsets in 2009 down from the 100 million it shipped in 2008 and in handset terms is resting its entire future on Android devices. However in the first quarter Motorola Mobility shipped just 8.5 million, which is a rate which if continued for the year would mean more like 34 million devices shipped, another considerable drop. We understand that Motorola is clearly accelerating its new product lines just as its older lines fall apart, so at some stage this year the momentum will change direction. At least it has already experienced a 57% increase in handset average selling price, but that’s because its old strategy was low end cheap phones for the third world and its new strategy is top end smart phones.
It seems to us that apart from turning around its handset fortunes, which it may well be on the way to achieving, Motorola has to come up with a strategy which will either accelerate its set top growth internationally, or will put it back into the lead, feature for feature in US set top design. Over to you Sanjay.