Motorola Mobility, the smartphone maker being acquired by Google, reported its third quarter results yesterday and there were a couple of red flags, or at least areas for Google to focus on fixing.
The company essentially has two lines of business: the growing phone unit and the shrinking set-top box unit. Or, you could call them the unprofitable phone unit and the cash cow set-top box unit. For the first nine months of the year, phone revenues were up 30% to $7 billion and set-top revenues were unchanged at almost $3 billion. But set-top boxes generated a $54 million operating profit and phones showed a $41 million loss.
In theory, the set-top box unit is supposed to generate enough profits to tide Motorola over until its phone unit gets on its feet. And there's no rush since Moto has over $3 billion of cash in the bank. The problem is that despite a big increase in revenue at phones -- and despite selling a greater share of supposedly more profitable smartphones and relatively fewer dumb phones -- Motorola's profitability picture did not improve.
Motorola's gross profit margin in the third quarter was 25.9% -- less than its 26.8% margin in the same quarter last year. And if you look lower down the results, you see that operating profit of $6 million a year ago turned into an operating loss of $5 million this year. That's profit or loss before somewhat irrelevant stuff to assessing future business prospects like interest expense, taxes and so on. So even though Motorola is executing on its business plan and selling a lot more high-end phones, it's actually getting less profitable.
One area that might draw Google's attention is research and development. Moto spent 12% of its revenue on R&D, a high figure compared to, say, Apple, which typically spends about 3% of revenue on R&D.