Google Inc will slash 20 percent of the workforce of Motorola Mobility in the Internet search giant's largest job cuts ever as it moves to make more smartphones and fewer simple mobiles.
The news sent Google's shares up nearly 3 percent but analysts said it was unclear if the cuts were enough to restore the fortunes of Motorola, whose last hit was the Razr flip-phone launched eight years ago.
"I think it's still going to be challenging to navigate the waters (of the handset business); how do you keep your partners happy and how you push your own smartphone devices at the same time," Morningstar Inc analyst Rick Summer said.
"This is the obvious step. The things that are harder are how do you drive profitability, how do you carve out a niche for Google devices, how to end up delivering solid returns on capital."
Google bought the money-losing cellphone maker for $12.5 billion last year - its largest acquisition ever - aiming to use Motorola Mobility's patents to fend off legal attacks on its Android mobile platform and expand beyond its software business.
By pairing Motorola's smartphone hardware business with its Android software, Google may have a better chance of mounting a direct challenge to Apple Inc's popular iPhone, technology market observers believe.
But the acquisition has also raised concerns on Wall Street as investors fret that Google, the world's No. 1 Web search engine, is entering a business with much lower profit margins and in which it has little experience.
Motorola's mobile devices unit has lost money in 14 of the last 16 quarters. In the second quarter, Motorola reported an operating loss of $233 million on revenue of $1.25 billion.
While many questions remain about Motorola's strategy, Morgan Stanley upgraded Google to "overweight" after the cuts.
"We believe that Google is planning to reduce Motorola Mobility's smartphone portfolio to a few reference Android devices, and perhaps a couple of tablet devices," analysts at the brokerage said.
Google had evaded questions about its plans for Motorola Mobility when it reported quarterly results last month, saying it had yet to complete its homework on the various businesses.
Recent media reports have suggested that Google is shopping Motorola Mobility's television set-top box business which is not the best fit with Google's high-profit-margin Internet business.
WHAT SIZE FITS?
In a regulatory filing announcing the job cuts on Monday, Google said it planned to simplify its line-up of mobile products, "shifting the emphasis from feature phones to more innovative and profitable devices."
The moves, Google said, are intended to return Motorola's mobile devices unit to profitability, but warned investors to expect "significant revenue variability for Motorola" for several quarters.
As Google restructures the Motorola business to fit Google's strategy, many of Motorola's legacy businesses will be "wound down," said BGC Partners analyst Colin Gillis. He cited low-end "feature phones," which lack the wide, color touchscreens and computing capabilities of smartphones, as the most obvious example.
"If it can't display a Google ad, then Motorola is probably not going to be making it for much longer," he said.
Google makes the majority of its revenue from online ads that appear on its search engine and other Web services. As consumers increasingly access the Web from mobile devices in addition to their PCs, Google is taking steps to ensure its money-making online services remain easily accessible.
Google's moves to cut 20 percent of Motorola's workforce is larger than the typical 10 percent layoffs that companies often make when restructuring a business, Gillis said, but he added that he expects Google to make further investments in Motorola's smartphone and tablet PC businesses.
Morningstar's Summer said he does not expect mass layoffs at Motorola, but said things might change as Google reviews all of the cellphone maker's units and tries to sell the TV unit.
Others were similarly unclear about the right size for Motorola, which will close nearly a third of its offices.
"They are still learning what makes it a leaner meaner machine. I think as we move into the new year, there maybe more right-sizing," said Susquehanna Financial Group analyst Herman Leung.
Google said in a regulatory filing it expects to take a severance-related charge of up to $275 million mostly in the third quarter, but with some possibly trailing through to the end of the year. It warned there could be some other significant charges yet to be calculated.
Google shares rose 2.8 percent to close at $660.01 on Nasdaq, after rising as high as $660.15 earlier.
One-third of the jobs lost will be in the United States, but the company has not specified where or what facilities would be affected.
Earlier, the New York Times reported Google's plan and said it was looking to shrink operations in Asia and India, by not just exiting unprofitable markets, but also stopping making low-end devices and focusing on a few cellphones instead of dozens.
Motorola Mobility, which has 94 offices throughout the world, will center research and development in Chicago, Sunnyvale, California and Beijing.
In addition to the planned cuts, Google has downsized Motorola Mobility's management, letting go 40 percent of its vice presidents, but has also hired new senior executives, the New York Times said.
(Additional reporting by Juhi Arora and Siddharth Cavale in Bangalore and Alexei Oreskovic in San Francisco; Editing by Rodney Joyce, Leslie Gevirtz and Richard Chang)