Motorola Mobility Underperforms - Analyst Blog

Yesterday after the closing bell, Motorola Mobility Holdings Inc. (MMI) reported its fourth quarter 2010 financial results. It was the company's first earnings report after it separated from former Motorola Inc.

Nevertheless, the fourth quarter earnings fell below the Zacks Consensus Estimates. We are concerned about the surprisingly weak financial guidance for the ensuing first quarter of 2011 provided by management. Therefore, in the after market trade in NYSE, stock price of Motorola Mobility was down by $2.38 (6.83%) to $32.45.

Quarterly GAAP net income was $80 million or 27 cents per share compared with a net loss of $34 million or a loss of 12 cents per share in the prior-year quarter. However, the fourth quarter 2010 adjusted (excluding special items and amortization of intangible assets) EPS was 22 cents, well below of the Zacks Consensus Estimate of 26 cents.

Quarterly total revenue was $3,425 million, up 21.3% year over year.

Gross margin, in the fourth quarter, was 26.7% compared with 25% in the prior-year quarter. Quarterly operating income was $126 million compared with an operating loss of $196 million in the year-ago quarter. Quarterly operating margin was 3.7% compared with a negative 7% in the year-ago quarter.

During the fourth quarter of 2010, Motorola Mobility generated $225 million of cash from operations compared with $232 million in the prior-year quarter. Free cash flow (cash flow from operations less capital expenditure) in the quarter was $150 million compared with $210 million in the year-ago quarter.

Marketable securities at the end of fiscal 2010 were $161 million compared with $57 million at the end of fiscal 2009. The balance sheet of Motorola Mobility remains debt free.

Mobile Devices Segment

Quarterly revenue was $2,420 million, up by 33% year over year. Operating income, on a GAAP basis, was $72 million compared with an operating loss of $166 million in the year-ago quarter.

During the fourth quarter of 2010, Motorola Mobility shipped 11.3 million mobile phones including 4.9 million of smartphones. This is a considerable improvement over the shipment of 3.1 million of smartphones in the previous quarter.

We believe this encouraging performance was mainly due to solid growth of the company's flagship DROID product. For full-year 2010, Motorola Mobility shipped 37.3 million mobile phones including 13.7 million of smartphones. During fiscal 2010, the company launched 23 varieties of smartphones.

However, management's near-term outlook for this segment is extremely weak. Although Motorola Mobility did not specifically provide any figure for its ensuing first quarter 2011 smartphone shipment, it did announce that the company has already started facing intense competition of Apple Inc's (AAPL) iconic iPhone from Verizon Wireless (VZ). From mid-February 2011, iPhone 4 will be available with Verizon. So far, Verizon was the major carrier partner for Motorola Mobility and its massive marketing boost was the primary reason for the initial success of Motorola Mobility DROID series smartphones.

Home Segment

Quarterly revenue was $1,005 million, up 1% year over year. GAAP operating income was $54 million compared with an operating loss of $30 million in the year-ago quarter. Significant improvement in operating income was mainly attributable to increased shipment of DVR set-top boxes.

Future Financial Outlook

Motorola Mobility is expecting a net loss of $26 million - $62 million in the first quarter of 2011. EPS will be a loss of 9 cents – 21 cents. Its mid-point of 15 cents is significantly higher than the current Zacks Consensus Estimate of a loss of 7 cents.

 
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