RealMoney Silver - Motorola: A Bet for the Third Quarter, Not Fourth

Motorola: A Bet for the Third Quarter, Not Fourth
By Tero Kuittinen
RealMoney.com Contributor
8/31/2007 11:36 AM EDT

The unusually wide and deep geographic launch pattern of the Razr2 gives Motorola (MOT) a shot at a strong third quarter.

This week, Verizon (VZ) launched the Razr2 -- about two weeks after the model's Sprint (S) debut. AT&T (T) and T-Mobile launches are expected within two weeks. A couple of days ago, the Middle East markets started rolling out the Razr2, following Asian markets ranging from Korea to Vietnam.

Over the past 10 days, Motorola has been able to stick to the highly ambitious third-quarter timetable of its global Razr2 launch plan. The global width and depth of this rollout is close to unprecedented. The model is being shipped in CDMA markets from Korea to North America; across the major GSM markets like Italy and China; and in second-tier countries in Asia and Eastern Europe.

As we've discussed before, the Razr2 is anything but perfect. It lacks the 5-megapixel camera that defines many of the most promising models slated for the fourth quarter of this year, and it hews too close to the dated Razr design template. But it is the first model to offer two QVGA-quality displays in one clamshell, and it features a nifty twist on touch-screen technology by offering tactile feedback.

Motorola's European market share has sunk to a rock-bottom 6%, and its U.S. market share has tumbled 10 points in one year. If ever there was a moment when a moderately interesting phone could have a major impact on one quarter, this is it.

The impact of the Razr2 is amplified by the fact that Motorola managed to get a big cluster of launch orders packed into one quarter: North American pickup orders from four or five of the biggest operators, plus launch deals for much of Western Europe, the Middle East and Asia outside of Korea (where the model launched in June).

Another boost comes from expected October launches of major high-end models from Sony Ericsson (the W960) and LG (the KU990). They aren't around in September to hog consumer attention.

Other high-profile rival models have narrower geographic presence this September. The N-95 and other N and E series hits of Nokia (NOK) still are not distributed by major U.S. operators. Samsung's hotly anticipated G600 just kicked off its launch in Europe, but has a relatively narrow early footprint and is not expected in the U.S. anytime soon.

Motorola is currently widely despised on Wall Street. Expectations for both phone volumes and margins for the third quarter are low; perhaps 36 million units at negative operating margins in low single digits. All Motorola needs to do to deliver a positive surprise is to jack up its European market share from 6% to 7% sequentially, add 2 points of U.S. market share and stabilize in Asia.

The normal sequential volume growth of phone business from the second to the third quarter helps, as does the fact that the autumn is an important sales quarter for expensive models, whereas the fourth quarter is a key low-end sales quarter due to holiday present-buying. The Razr2 has an unsubsidized price more than three times Motorola's mobile device average sales price.

In the fourth quarter of 2007, the new 5-megapixel wonders from Sony Ericsson, Samsung, LG and Nokia will flood the European and Asian markets. Much of consumer interest also tends to shift during the quarter to cheaper models -- never Motorola's forte. The time to bet on Motorola definitely isn't the fourth quarter; it's now, while the competition still is relatively soft.