January 23, 2008 10:49 AM PST

Motorola's stock plummets on bad news

Posted by Marguerite Reardon

Once the second-largest handset maker in the world, Motorola has fallen from grace in what is looking more and more like a death spiral.

On Wednesday, the company's stock dropped more than 22 percent, to $9.55, in midday trading, after the company reported an 84 percent decline in fourth-quarter profit, due mostly to sharp declines in its handset business. The company's newly appointed CEO, Greg Brown, further spooked investors by saying during the conference call with analysts and investors that a turnaround of the handset division "will take longer than expected." Motorola had been counting on reviving its handset business in 2008.

Motorola's stock hasn't traded below $10 a share since August of 2003.

Motorola has been struggling for several quarters, as its market share has rapidly declined. It now is in third place, in terms of handset shipments, behind market leaders Nokia and Samsung Electronics, respectively.

Motorola's disappointing performance over the past several quarters prompted the ouster of its CEO, Ed Zander, in November. Brown, who had been Motorola's chief operating officer, took over as CEO on January 1.

The biggest problem Motorola has been facing is a lack of compelling and popular handsets, especially in Europe. The company hasn't had a hit phone since the Razr.

Motorola is also suffering from a change in strategy. Instead of chasing after market share at whatever cost and selling phones for little profit, the company has changed course in an attempt to sell more expensive phones for more profit. In the fourth quarter, Motorola shipped 40.9 million handsets, compared a record 65.7 million handsets shipped just a year ago. Of course, many of last year's handsets didn't generate much profit.

But now, without hit phones to drive sales, Motorola is facing a crisis in which it's losing market share amid sinking profits. The company reported that in the fourth quarter, sales of handsets fell 38 percent to $4.8 billion. The division posted an operating loss of $1.2 billion in the fourth quarter, compared with an operating profit of $2.7 billion a year ago.

Meanwhile, Motorola's competitors, particularly Nokia and Samsung, are marching forward with new and compelling handsets. And even though Motorola has said it is kick-starting development on new handsets, it can take at least 18 months for new designs to hit the market. Some analysts believe that it will take most of 2008 for the company to see any recovery in its handset division, which ultimately spells trouble for the company.

"The longer it takes, the harder it will get for Motorola, as the company improves its product portfolio, fends of competitors, while it simultaneously strives to right-size the business," Mark Sue, an analyst at RBC Capital Markets, said in a research note.