Motorola Inc. (MOT) is finally reaping the benefit of its decision that the company has taken regarding its fragile Mobile Devices once Dr. Sanjay Jha becomes the CEO of this division. Supported by increasing market traction of its 3G Android-based smartphones,Motorola today declared excellent results for the third quarter 2010.
On an adjusted basis, the struggling Mobile Devices division has become profitable in the third quarter much earlier than the company expected, which was fourth quarter of 2010. This segment has returned to profitability after over three years. Contrary to some analysts’ concerns, the flagship DROID smartphone portfolio performed beyond expectations. Dr. Jha has proved how a struggling business can be turned around if one has strong market sense and good foresight.
Third Quarter in Detail
Quarterly GAAP net income was $109 million or 5 cents per share compared to a net income of $12 million or 1 cent per share in the prior-year quarter. This includes the Network Infrastructure business of Motorola that will be acquired by Nokia Siemens Networks, a joint venture between Nokia Corp. (NOK) and Siemens AG (SI).
However, second quarter 2010 adjusted (excluding special items and amortization of intangible assets) EPS was 15 cents, miles ahead of the Zacks Consensus Estimate of 10 cents.
Quarterly total revenue including the Network Infrastructure business was $5,761 million, up 5.65% year-over-year and well above the Zacks Consensus Estimates of $5,575 million. For the first time since the fourth quarter of 2006, Motorola has achieved a quarterly year-over-year growth in revenue.
Gross margin, in the third quarter was 36.4% compared to 33.2% in the prior-year quarter. Quarterly operating income was $225 million compared to a loss of $11 million in the year-ago quarter. Quarterly operating margin was 4.6% compared to a negative (0.3%) in the year-ago quarter.
During the third quarter of 2010, Motorola generated $502 million of cash from operations compared to $616 million in the prior-year quarter. Free cash flow (cash flow from operations less capital expenditure), in the same quarter was $456 million, compared to $564 million in the year-ago quarter.
Cash, cash equivalents & marketable securities at the end of the third quarter 2010 were $8,999 million compared to $7,190 million at the prior-year quarter. Total debt, at the end of the reported quarter was $3,396 million compared to $3,925 million at the end of the prior-year quarter. At the end of the third quarter 2010, debt-to-capitalization ratio was 0.22 compared to 0.29 at the end of the year-ago quarter.
Mobile Devices Division
Quarterly revenue was $2,034 million, up by a whopping 20% year-over-year. GAAP operating loss was $43 million compared to an operating loss of $216 million. However, on an adjusted basis, this segment achieved operating profit of $3 million compared to an operating loss of $183 million in the year-ago quarter.
During the third quarter 2010, Motorola shipped 9.1 million mobile phones including 3.8 million of smartphones. This is a considerable improvement over the shipment of 2.7 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.
During the first nine months of 2010, the company launched 22 new 3G smartphones. These include the highly recognized DROID smartphone portfolio consisting of DROID, DROIDX, DROID 2, DROID PRO, and DROID R2-D2. All these phones are based on Google Inc’s (GOOG) Android operating system.
Home Division
Quarterly revenue was $912 million, up 6% year-over-year. GAAP operating income was $49 million compared to an operating income of $20 million in the year-ago quarter. Non-GAAP operating income was $77 million compared to $43 million in the prior-year quarter.
EnterpriseMobility Solutions Division
Quarterly revenue was $1,946 million, up 9% year-over-year. GAAP operating income was $253 million compared to an operating income of $223 million in the year-ago quarter. Non-GAAP operating income was $321 million compared to $303 million in the prior-year quarter.
Future Financial Outlook
Management has provided guidance that the company’s GAAP EPS from continuing operations is expected to be in the range of earnings of 14 cent – 16 cents in the third quarter 2010. This excludes stock-based compensation expense and intangible assets amortization expense of approximately 4 cents per share
Our Recommendation
We are highly optimistic about Motorola’s rejuvenated smartphone business betting on the Android software. We believe the proposed split-off of the company will also help to add more value to the mobile devices segment. However, it remains to be seen how Motorola faces the challenge from Apple Inc. (AAPL) once Verizon Wireless (VZ), which significantly promoted the DROID portfolio of Motorola starts selling the legendary iPhone 4.
We thus maintain our long-term Neutral recommendation for Motorola. Currently it is a short-term Zacks #3 Rank (Hold) stock.
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