Is Motorola Mobility Holdings Inc. (MMI) losing pace in its effort to regain its lost glory in the mobile handset market? We believe that the company can make a turnaround though it is facing tougher challenges at present. Motorola Mobility must deliver in the fourth quarter of 2011 since its ensuing third quarter 2011 outlook is disappointing. Failing to do that the company may face problem of existence like the one Nokia Corp. (NOK) is experiencing.
Yesterday, after the closing bell, Motorola Mobility reported mixed financial results for its second-quarter 2011. Moreover, management provided a weak financial guidance for the ensuing third quarter of 2011. As a result, in the after market trade in NYSE, stock price of Motorola Mobility went up by 80 cents (3.5%) to $22.11.
Quarterly GAAP net loss was $56 million or 19 cents per share compared with a net income of $80 million or 27 cents per share in the prior-year quarter. Second-quarter 2011 adjusted (excluding special items) EPS was a loss of 7 cents, significantly higher than the Zacks Consensus Estimate of a loss of 4 cents. Quarterly total revenue was $3,337 million, up 28% year over year, surpassing the Zacks Consensus Estimate of $3,117 million.
Gross margin, in the second-quarter 2011, was 25.9% compared with 25.5% in the prior-year quarter. Quarterly operating loss was $23 million compared with an operating income of $116 million in the year-ago quarter.
During the second quarter of 2011, Motorola Mobility’s cash flow from operations was nil compared with the cash generation of $31 million in the prior-year quarter. Free cash flow (cash flow from operations less capital expenditure) in the reported quarter was a negative $46 million compared with $8 million in the year-ago quarter. Cash and cash equivalents at the end of the second quarter of 2011 was $3,026 million. The balance sheet of Motorola Mobility remains debt free.
Mobile Devices Segment
Quarterly revenue was $2,430 million, up by 41% year over year. Operating loss, on a GAAP basis, was $85 million compared with an operating income of $87 million in the year-ago quarter.
During the second quarter of 2011, Motorola Mobility shipped 11 million mobile handsets including 4.4 million of smartphones. This is a considerable improvement over the shipment of 2.7 million smartphones in the prior-year quarter. Shipment of feature phone in the previous quarter was around 6.2 million. Furthermore, Motorola Mobility Shipped 440,000 XOOM tablets in the reported quarter.
Motorola Mobility delayed its much hyped 4G LTE- enabled DROID BIONIC smartphone, which will be available till late September 2011. This device, which will be launched for the LTE network of Verizon Wireless (VZ), was expected in the early second quarter of 2011. The company will also delay the launch of its upgrade 4G LTE XOOM tablets till September. However, management is hopeful that this division will achieve profitability in the fourth quarter of 2011.
Home Segment
Quarterly revenue was $907 million, up 2% year over year. GAAP operating income was $62 million compared with an operating income of $29 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 provided a disappointing financial outlook for the ensuing third quarter of 2011. We believeMotorolaMobility is facing the risk of commoditization of the Android software. Several low-cost Asian producers such as Samsung, LG, and HTC are developing a series of smartphones and tablets based-on Android.
At present, Apple Inc. (AAPL) developed iPhone (20.3 million sold in 2Q 2011) is miles ahead of Motorola Mobility developed smartphones (4.4 million sold in 2Q 2011). In addition, Motorola Mobility was forced to drastically reduce the price of its XOOM tablets (440,000 sold in 2Q2011) to compete with the Apple’s iPAD (9.25 million sold in 2Q2011).
Delay in new smartphone launch, margin pressure on tablets, and a seasonally weak set-top market were the main reasons for weak financial outlook. Motorola Mobility is expecting net earnings of breakeven to 10 cents per share in the third quarter of 2011. Its mid-point of 5 cents per share is significantly below the current Zacks Consensus Estimate of 10 cents per share. For fiscal 2011, Motorola Mobility is expecting its non-GAAP EPS to be within the range of 48 cents-60 cents.
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