Telecom Issues

Motorola, Inc. announced that its cell phone business issues are causing it to rethink the business. A spin off or divestiture of the business is a definite possibility. Elsewhere, Lenovo Group, Ltd. announced a strong quarter and the sale of its cell phone operations. Lastly, Sprint Nextel Corp. announced a significant write-down of its 2005 Nextel purchase.

Focal Points

• Motorola has been having serious difficulties with its cell phone business over the last several years, with sales plummeting 33 percent to $19 billion in 2007. The company expects the drop to continue, with sales potentially falling another 16 percent to $16 billion this year. The company has had pressure from minority shareholder Carl Icahn, a five percent owner, to sell the business. Handheld device sales account for 50 percent of the company's total revenues, and Chief Executive Officer Greg Brown recently assumed direct oversight over the division to help correct further slippage.
• Revenues for Lenovo in its third quarter posted at $4.6 billion, a more than 15 percent rise over its performance in the prior year. Net income almost tripled from $58 million to $172 million. The company's PC shipments rose 22 percent period-over-period, and it has grown its global market share to almost 7.5 percent. Lenovo numbers have been helped by the U.S. dollar's weak performance. The company also announced that it plans to sell its mobile phone business to a private-equity group in a deal valued around $100 million. That business – which is heavily centered around sales in China – fell about 31 percent during the last quarter, according to reports.
• Sprint's 2005 acquisition of Nextel cost the company about $35 billion, and now the company will potentially write down almost $31 billion of that amount. The company was quick to remind its shareholders that this will not affect Sprint's cash balance or future cash flows, though the third-largest U.S. wireless phone company has experienced significant subscriber drop off and a change of strategy lately. Sprint had previously broken its agreement with Clearwire Corp. to build out a WiMax network called XOHM, but reports are now surfacing that the company is reevaluating that decision. Sprint may work with Clearwire and other industry heavyweights to get its WiMax strategy reinvigorated.

Experton Group believes the cellular phone space is extremely heated. Cell phone manufacturers must redesign new products on a 12- to 18-month schedule, margins continue to dwindle, and there are an increasing number of competitive upstarts. Experton Group can understand Motorola's and Lenovo's desires to exit this highly contested market due to the significant barriers to profitability, though Motorola will have a great deal of difficulty regaining its former glory without some industry-leading technologies. As more than 50 percent of its business was in cell phones, Motorola has become best known for its cellular phones over the last 10 years, and has allowed enterprise networking vendor and semiconductor competitors to erode the presence in other spaces. Experton Group is not sure what Motorola will become without its cell phone space, though it is clear that it certainly needs to regain its earning power. Sprint has had a great deal of challenges attaining the desired and needed synergies from its Nextel acquisition, and the write-down is certainly understandable given the company's lackluster performance as of late. Sprint will need to get its WiMax strategy up, running, and pervasive at competitive rates if it hopes to become a more powerful and profitable industry force.