Editor's Note: Tero Kuittinen's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published Wednesday at 12:31 p.m. EDT on RealMoney.
Predictably enough, a warm, fuzzy glow is hovering over
, dovetailing neatly with the day's overall optimism in the mobile sector. This is indeed the point when Motorola's performance is at its best -- but it's most certainly not indicative of the second-half outlook.
Pretty much everything mobile is going up this week, boosted by the stunning series of earnings results that have met or beaten the consensus estimates. The range of solid numbers runs the whole gamut from
RF Micro Devices
It's party time. But let's take a moment to reflect on what's what and what's not.
Motorola's core business is its phone division. Its broadband and mobile network units are performing poorly, and the heart of the company is now the phone unit to a never-before-seen extent. This is a perfect fit for the market's new hope about improving phone sales this year, turning this week into Motorola's moment in the sun.
Where the Strength Is
There are basically two reasons for Motorola's solid performance in the first quarter. First, the quarterly phone-sales numbers in China were exceptionally strong, and this plays directly into Motorola's strongest market in the world. China was the last major country where Motorola still held onto a 30% market share as late as last autumn.
Second, Nextel hasn't started weakening. This U.S. operator gets all of its phones and network gear from Motorola, and it has turned into an integral part of Motorola's performance. Nextel's surprising strength is helping Motorola to offset its drastic weakness in the
Motorola's TDMA phone performance is tumbling, pushing it far below the market share it held among TDMA operators like
and the Latin American players. This is taking place just before these operators switch to GSM, leaving Motorola without the platform it needs in order to benefit from the transition.
Nextel sales are cold comfort because this operator is destined to also switch to either CDMA or GSM in the near future -- driving down Motorola's share of Nextel phone sales from 100% to maybe 30%.
Those two factors are important in understanding why Motorola's phone division did relatively well during the first quarter. They're even more important in understanding why Motorola's phone division performance is going to deteriorate sharply during the second half of 2002.
At some point, Nextel is going to be in trouble. This summer and fall, the U.S. mobile market will see a big influx of new generation of CDMA phones from Sprint and
and GSM phones from AT&T Wireless, Cingular and
. Nextel uses neither standard -- and when the technology leaps in a big way, the risks for Motorola's iDEN product development spikes sharply.
Nextel now uses the iDEN proprietary standard, but Motorola basically carries all of its associated network and phone research-and-development costs. This is no problem when phone technology isn't changing rapidly. But when there's a major technology shift, keeping iDEN product development up to speed with the massive R&D muscle of 10 to 20 industry rivals becomes a mission impossible.
At some point this year, China should also turn into a problem for Motorola. The first cracks are already showing: Motorola's market share in China has started declining ever so slightly. The overall sales growth of China during the first quarter was so strong that it masked this trend.
Motorola's phone revenue was only $200 million under consensus. The miss was so slight that it's easy to overlook during the current euphoria -- but Motorola's attempt to maintain the China market share via sharp price cuts was a likely contributor here. That 30% market-share peak in China is a market anomaly that probably won't withstand the new spring offensives from rival brands. As China inevitably cools down during the second half, some brands can try to offset that by boosting market share there. But the only way for Motorola is down -- and that would mean a double whammy of declining share in a slowing market.
As it relies more and more on the combination of Nextel and China, Motorola has lost its grip in Europe. And if there's any single biggest phone sales driver for the second half, it will be the pent-up upgrade demand in Europe. During the first quarter, Motorola's mix of Nextel/China was optimal. The European phone rebound started in March -- at the very edge of the quarter. But as the global volume sales momentum swings away from Motorola's core strengths, it moves directly into its biggest weakness: Europe.
There's every reason to enjoy Motorola's current share price spike, which no doubt will be fueled by upgrades this week. Because this is as good as it gets.
Tero Kuittinen wears several hats. He is vice president of wireless communications at investment firm Halsey Advisory & Management of New York; tech adviser to Opstock Investment Banking of Helsinki; and senior strategist to SpringToys of Helsinki. At time of publication, Halsey had no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kuittinen appreciates your feedback and invites you to send it to