Motorola (NYSE:MOT) turned in a quarter of strong sales but weak profits, as the company continues to chase after global market share at the expense of top-to-bottom margins. But is that the best strategy today?
Motorola is the worldwide No. 2 in cell phone sales after Nokia (NYSE:NOK), with a sizable cushion over the rest of the field. In the penultimate fiscal quarter of calendar year 2006, Nokia shipped 88.5 million handsets, Motorola sold 53.7 million, Samsung 30.7 million, and Sony Ericsson managed 19.8 million sales.
In terms of unit growth, Motorola is still in second place, but this time after the Sony (NYSE:SNE) and LM Ericsson (NASDAQ:ERIC) joint venture. The numbers reported above showed a 20% year-to-date boost for Motorola, 23% for Sony Ericsson, and 13% for Samsung. Nokia apparently focused on higher-margin and lower-volume growth, only increasing unit sales by 5.3%.
Motorola management seemed happy about an increased market share, but ultimately the bottom-line numbers just weren't there. So bring on the 5% job cuts. Some 3,500 Motorola employees worldwide will feel like square pegs in octagonal holes soon, as CEO Ed Zander cuts corners to improve his company's profitability. Two recent acquisitions in the enterprise communications arena also point to a new focus, bringing Motorola in more direct competition with Research In Motion (NASDAQ:RIMM) and its smash-hit BlackBerry handsets.
Motorola's top-of-the-line units like the RAZR, KRAZR, and SLVR have tended to be heavy on entertainment features and low on business appeal. The Motorola Q model is a step in the corporate direction, and management clearly hopes to fatten margins on the back of business-class purchasing budgets rather than penny-pinching end consumers.
The Connected Home Solutions division should become more of a focus this year, as digital entertainment and cable/telco service providers continue to improve their infrastractures. Motorola sells plenty of back-end equipment to cable companies, and new wrinkles like on-demand servers and switched digital video could raise the profile of this business unit a great deal. Motorola already announced a couple of large sales in this arena to cable leaders like Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWX). Connected Home provides just 8% of the company's revenues today, but 16% of its operational income, and it's by far the fastest-growing segment on both the top and bottom lines.
Motorola clearly has some challenges to overcome, but it remains solidly profitable and is defending a lot of turf already. I think management has seen the high cost of chasing unprofitable sales for the sake of market share, and might let up somewhat on that strategy. The newfound enterprise focus certainly hints as much. I'd be surprised if margins stayed flimsy for very long, though sales growth might slow down a bit. You can't win 'em all, guys.
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Fool contributor Anders Bylund holds no position in any of the companies discussed here, and he just canceled his cell phone plan. You can check out Anders' holdings if you like, and Foolish disclosure always gets you a strong signal.
