(GOOG) Motorola Mobility’s Woes Continue

Motorola Mobility (MMI) reported somber financial results for the third quarter of 2011. Following the earnings release, stock price of Motorola Mobility went down by 7 cents (0.18%) to $38.95.

Quarterly GAAP net loss was $32 million or 11 cents per share compared with $34 million or 12 cents per share in the prior-year quarter. Adjusted (excluding special items) EPS in the reported quarter was a loss of 12 cents, wider  than the Zacks Consensus Estimate of a loss of 10 cents. Quarterly total revenue was $3,259 million, up 10.6% year over year but below the Zacks Consensus Estimate of $3,376 million.

Gross margin in the reported quarter was 25.9% compared with 26.8% in the prior-year quarter. Quarterly operating loss was $5 million compared with an operating income of $6 million in the year-ago quarter.

During the third quarter of 2011, Motorola Mobility’s cash flow from operations was $25 million compared with the cash generation of $324 million in the prior-year quarter. Free cash flow (cash flow from operations less capital expenditure) in the reported quarter was negative $15 million compared with $298 million in the year-ago quarter. Cash and cash equivalents at the end of the third quarter of 2011 was $3,078 million. The company had no debt on its balance sheet in the quarter.

Mobile Devices Segment

Quarterly revenue was $2,434 million, up by 19.7% year over year. Operating loss, on a GAAP basis, was $41 million compared with $43 million in the year-ago quarter.

During the third quarter of 2011, Motorola Mobility shipped 11.6 million mobile handsets including 4.8 million smartphones. This is a considerable improvement from 3.8 million smartphones shipped in the prior-year quarter. The company also shipped approximately 5.3 million feature phones in the year-ago quarter. Furthermore, Motorola Mobility shipped 100,000 XOOM tablets in the reported quarter.

Home Segment

Quarterly revenue was $825 million, down 9.5% year over year. GAAP operating income was $54 million versus $49 million in the year-ago quarter. Significant improvement in operating income was mainly attributable to higher demand of DVR set-top boxes.

Motorola Mobility and Google Agreement

On August 15, 2011, Motorola Mobility Holdings Inc. announced that it has entered into a definitive agreement with Google Inc. (GOOG), under which the latter will acquire 100% stake of Motorola Mobility for $40 per share in cash or a total consideration of approximately $12.5 billion.

Presently, Motorola Mobility holds rights for approximately 17,000 patents and another 7,500 patent applications are in process, which Google is mainly eyeing. Moreover, the company is one of the leaders in the set-top box category, which makes it another lucrative opportunity for Google as the latter is aggressively rolling out the next generation smart TV option called GoogleTV.

Our Take

Currently, Motorola Mobility boasts a huge 4G product line up, which we believe will act as a growth catalyst going forward. However, lack of product differentiations and stiff competition from other cheap smartphone makers will act as headwinds for the stock going forward.

We, thus, maintain our long-term Neutral recommendation for Motorola Mobility Holdings Inc. Currently, Motorola Mobility Holdings Inc. has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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