Motorola’s research and development (R&D) expense to gross profit ratio is now coming down quickly thanks to aggressive cost cutting measures and improving sales. Motorola primarily competes with Research in Motion, Apple, Nokia and Google in the mobile phone market which have all taken market share from Motorola in recent years.
Motorola’s R&D expenses increased from around 30% of gross profits in 2006 to around 45% by end 2009, [] as its margins shrank faster than the actual R&D spending. For 2010, this figure could actually come down to around 35% by our estimates.
If the R&D expense ratio drops in coming years as sales pick up, we could see an increase in our price estimate. We currently have a Trefis price estimate of $8.30 for Motorola’s stock, which is close to the current market price.
Aggressive Cost Cutting
Motorola revenues and market share declined in recent years forcing the company to undertake several cost cutting measures. In addition to laying off around 8,000 employees in 2008-09, Motorola cut salaries of top management and froze pension plans. [][] While this helped bring expenses under control, the company likely missed out on revenues as new products, like smartphones, reinvigorated growth.
Improving Sales Reduce Cost Burden
In Q3 2010, Motorola recorded its first quarter of growth in almost four years led by the success of its Android based smartphones, Droid and Cliq. Motorola stated that its total cash increased to $9 billion. The revenues from its mobile phone division grew 20% compared to same period last year. [] This is good news for Motorola’s whose margins have been dormant from quite some time.
If Motorola is able to continue its success with Droid, its leading smartphone product, and margins inch up, the company could well keep its costs in check.
The average forecast of Trefis members for R&D as % of gross profit indicate a decrease from 35% in 2010 to 26% by the end of the Trefis forecast period, which is similar to the baseline Trefis estimates.
Our complete analysis for Motorola’s stock is here.
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