Challenges seen at Moto's handset spinoff

SAN JOSE, Calif. - As reported, Motorola Mobility Holdings Inc. has completed its previously-announced spinoff from Motorola Inc. So what do analysts think about the spinoff?
 
Motorola Mobility consists of the Mobile Devices and Home businesses. Mobile Devices is the provider of smartphones including the family of Droid devices. The Home business provides digital set-top boxes and end-to-end video solutions.

''We have initiated coverage of Motorola Mobility Holdings Inc. (MMI) with a 'Buy' rating and $36 target. We expect MMI to remain a top player in the growing Android community for smartphones and tablets,'' said Gleacher & Co. analyst Mark McKechnie, in a new report.

MMI could grab 8-10 percent of the overall handset market, he said. ''Our thesis assumes that MMI will retain 23-25 percent share of the growing Android market,'' he said.
 
''We view MMI as an attractive option and believe it will remain a dominant player in the rapidly growing Android ecosystem. Our CY11 forecast assumes 20.6 million Android units at a $294 ASP (down 16 percent year-over-year) and 1.8 percent operating margins for the division. Our CY12 forecast assumes 27 million Android units at a $257 ASP (down 13 percent year-over-year) and 2.9 percent operating margins for the division,'' he said. ''Our Home forecast assumes 3 percent and 5 percent growth for CY11 and CY12 and stable margins of 8.0 percent and 8.5 percent versus 7.6 percent in CY10.''

According to the analyst, here's what the ''Bulls'' will point to with MMI:

• ''The smartphone market is growing at 30 percent-plus and 25 percent-plus for CY11 and CY12 with the Android ecosystem growing at or above market rates.''

•'' MMI Android share has grown from 11 percent in CY09 to 25 percent in CY10 and will remain at or above 25 percent for the long-term for both smartphones and tablets.''

•'' MMI will be on the leading edge of the Android tablet ramp with early 'Honeycomb' demos based on MMI hardware, likely to be announced at CES.'' (Honeycomb is Google's next-generation Android operating system.)

• ''MMI can achieve 8-10 percent operating margins in the Mobile Devices group despite the competitive landscape fostered by the open Android ecosystem.''

• ''World class management team with CEO Sanjay Jha and President Dan Moloney from the Home group positions the company to manage through the competitive landscape and upcoming transitions.''

•'' MMI is heavily exposed to the U.S. with 67 percent total sales, offering geographic expansion opportunities.''

According to the analyst, here's what the ''Bears'' will point to:

• ''MMI’s legacy handset division will ultimately ramp down as feature phones are replaced by smartphones, thus causing a drag to revenue growth.''

• ''Smartphone ASPs are artificially inflated by component tightness and will fall dramatically as smartphones move to the mid-range and constraints ease.''

• ''Android hardware margins will ultimately shake out below 5 percent for the industry due to Android’s open system and a plethora of handset and PC vendor support.''

• ''Windows7 phone may displace Android growth and MMI is behind the curve relative to HTC, Samsung, SNE and others.''

•''iPhone launch at VeriZon in 1Q11 will result in a major dislocation at MMI’s top carrier customer.''

•'' Home division faces a challenging transition as set-top boxes will ultimately be replaced by streaming media devices.''