Google (NASDAQ: GOOG) recently announced that it will be laying off 4,000 Motorola Mobility workers in an effort to restructure the ailing mobile phone maker. The company is not focusing on a particular business segment with these cuts, but has announced that approximately two-thirds of the workforce reduction will occur outside of the United States. Google bought Motorola Mobility in 2011 to gain control of Motorola’s mobile patent portfolio and to position itself to better compete with smartphone platforms provided by Apple (NASDAQ: AAPL) and Research in Motion (NASDAQ: RIMM).
Cuts aimed at profitability
According to Google’s Q2 2o12 filings, Motorola posted GAAP operating loss of approximately $233 million. According to CFO Patrick Pichette, one of the primary reasons for the current round of layoffs is to bring Motorola’s mobile division back to profitability. However, there will be a cash drag over the short term as Google estimates a charge of approximately $275 million for severances booked during the third quarter.
If the company is successful in increasing its margins going forward, we could see an upside to the Trefis price estimate. We currently estimate that Motorola’s EBITDA margin will be approximately 7% by the end of our forecast period, but these layoffs are expected to increase the margin. You can assess the impact of a change in Motorola EBITDA margin on Google’s stock price by using the chart below.
Focus on smartphones
In its press release, Google also provided greater insights about its vision for Motorola products. The company stated that it will make changes to its mobile product portfolio, “shifting the emphasis from feature phones to more innovative and profitable devices.” Overall, we are encouraged by the company’s focus on smartphones as newer, faster hardware would allow more innovation on the Android platform.
A possible downside to Google’s focus on making new products is that it could result in higher R&D spending for the division. While the current layoffs will free up cash going forward, it could be reinvested to create new technologies. If the efforts to create innovative phones fail, or if the innovations are not welcomed by customers as expected, we would see the company burn cash without any returns.
We currently have $661 price estimate for Google, which is approximately the same as the current market price.