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Can an Android save Motorola? Print E-mail
Wednesday, 09 September 2009

By Ronald Fink

Motorola's second quarter filing for 2009 shows that the cell phone maker remains in precarious financial condition, according to a research note published on Tuesday. And the note, put out by bond research firm CreditSights, cast doubt on expectations that sales of the company's new Android-based line of cell phones would turn things around.

The company disclosed in its 10-Q that it has agreed to amend the terms of a $2 billion, five-year revolving credit facility, which CreditSights said was an indication that the company could be concerned with the availability of this facility if its business continues to deteriorate. That prospect, wrote analysts Zhiping Zhou and Scott Sable, "is a real possibility in our opinion."

The terms of Motorola's facility previously had a standard financial covenant that required the company to maintain a certain amount of EBITDA in proportion to its debt. But the new terms do away with that in exchange for what the CreditSights analysts described as "a number of concessions" to lenders, including at least a25 percent reduction in the amount of available credit.

Now Motorola has access to the lesser of either $1.5 billion or the book or market value of the domestic receivables and inventory that it can sell.

But the CreditSights note suggested that the interest of potential receivables buyers might be limited. While the company's receivables rose to $3.7 billion as of July 4, compared with $3.5 billion at the end of 2008, the increase was due entirely to lower sales of receivables for mobile devices. And the 10Q noted that the lower receivables sales reflected lower unit sales as well as a decision on the part of the company to sell fewer receivables. Motorola said it expected that receivable sales during the rest of 2009 would follow the slower pace seen in the second quarter.

Although the company said it had $6.4 billion in cash on its balance sheet, most of that is held in foreign countries, and CreditSights noted that much of the company's "cash burn" is occurring in the U.S. The company said it expects to be able to take advantage of tax-advantaged repatriation strategies for its foreign cash but conceded that at least some of it could be subject to tax.

Meanwhile, the analysts noted that the Motorola seemed to be backing away from previously announced plans to break itself into two companies, one based on mobile devices and the other based on the rest of its assets, including those related to home and business networking "solutions." That plan has been championed by Carl Icahn, one of the company's largest - and most vocal - shareholders.

While the second quarter 10-Q, indicated that plans for the break-up were proceeding and that management remained committed to the separation, Creditsights observed that the company gave no indication that it would proceed any time soon.

After offering an extensive description of the break-up in its 10K for last year, Motorola put the plan on hold earlier this year as rapid deterioration in the capital markets made investors unreceptive to the envisaged spin-off.

That means Motorola may need to hit a home run with its Android mobile phones, which use an open source operating system designed by Google. The company's first Android phone is scheduled to be released on Wednesday.

But CreditSights noted that the marketing expense for the Google OS phone could put significant pressure on Motorola's profit margins. The company's losses narrowed somewhat during the quarter, to negative operating cash flow of $253 million from a negative $346 million a year earlier, but that was due entirely to lower SG&A, which CreditSights said could be reversed by the marketing of the Android.

In a note on July 30 discussing Motorola's earnings results for the second quarter, which topped analyst expectations, Zhou and Sable observed that competition in cell phones was increasingly intense and that it was not clear whether Motorola "will gain any traction there."

In their latest note, the analysts observed that it also "remains to be seen" whether the improvement in Motorola's gross margins from Android sales would be enough to offset the increase they expect in SG&A.

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