Motorola Meets Estimate, but Struggles Continue

Updated from 5:52 p.m. ET

Motorola (MOT), the world's second-largest cell-phone maker, said Wednesday that it met lowered fourth-quarter earnings expectations, though it reported a decline in profit.

Earnings excluding special items fell 41% to $335 million, or 15 cents a share, from $564 million, or 25 cents a share, a year earlier. The consensus estimate of analysts polled by First Call/Thomson Financial was 15 cents. Including special items, earnings were just $135 million, or 6 cents a share. The special items resulted in a net charge of $68 million on a pretax basis, or 9 cents a share after taxes.

Revenue rose 11% to $10.064 billion from $9.1 billion a year ago, but was slightly lower than the consensus estimate of $10.157 billion.

For the full year, earnings from ongoing operations, excluding special items, rose to $1.9 billion, or 84 cents a share, from $1.4 billion, or 63 cents a share, a year earlier.

Shares of the company finished regular trading down 50 cents, or 2%, to $21.19. In after-market trading, they were at $22, according to Island ECN.

Robert Growney, Motorola's president and chief operating officer, in a statement ascribed the profit decline to "increases in manufacturing costs and operating expenses," adding, "We have taken steps to reduce the cost structure in our manufacturing activities and to tightly control operating expenses."

An Easy Task

Motorola, based in Schaumburg, Ill., may have met expectations, but the bar was pretty low. Warnings just a few weeks apart in October and December effectively brought the company's estimate for fourth-quarter earnings per share down a staggering 59%, from 37 cents a share to 15 cents a share.

In its warning last month, the maker of electronic equipment and components also cautioned that fiscal 2001 would be shakier as well, but it released no details Wednesday. That information could come in the company's conference call Thursday morning.

Motorola has fared so badly of late -- diving 65% from its 52-week high set in March 2000 -- that investors had set themselves up for even more disappointment Wednesday. "We're not expecting anything wonderful and we'd be surprised if they met expectations," David Katz, chief investment officer of the Matrix Advisors Value Fund, said before the numbers were released. (His fund has a position in the company.)

Motorola blames the shortfalls on its handset and semiconductor businesses. In the fourth quarter, the personal communications segment, which includes handsets, recorded a 1% rise in sales to $3.5 billion. However, operating profits declined 69% to $76 million because of increased manufacturing costs, resulting in dismal operating profit margins of 2.2% in the quarter. Operating margins for the year were 3.3%, well below its stated goal of 10% at the beginning of 2000.

"That's what happens when you have to discount phones to move them out the door," says Todd Bernier, an analyst with Morningstar.com, which doesn't rate stocks or perform underwriting.

The Leader

Compare that with Finland's Nokia (NOK), the largest and by far most profitable of the cell phone manufacturers. In the third quarter, Nokia reported operating margins of 17.5% and projected that figure would be above 20% in the next quarter.

A reduction in worldwide estimates for cell phone demand in 2001 isn't helping matters. On Tuesday, Nokia announced figures for its cell phone sales in 2000 that were lower than some analysts expected and sent its shares down sharply.

Some observers read Nokia's news as confirmation of slowing demand, which will affect Motorola as well. "Handset sales growth is definitely tied to worldwide economic growth," explains Kevin Dennean, technology portfolio manager at Groupam Asset Management. "Motorola is fighting a headwind now and that's the economy." (Groupam has no position in Motorola.)

Others dismissed that viewpoint, with Katz pointing out that any perceived "slowdown" is relative to "expectations of hypergrowth. Our sense is that handsets will grow. The sizes are coming down. The bells and whistles they're putting on them are going up. Battery life is going up. They're dirt-cheap to use. We do think it is a good growth market."

Big Numbers

Indeed, in December, Motorola said it continues to expect overall mobile-phone sales of 525 million to 575 million worldwide in 2001, though those estimates are lower than an earlier figure of 600 million.

"Motorola is in the same boat as Ericsson (ERICY), as its handset business seems to be in a state of relative disrepair," says Bryan Prohm, a senior analyst with research firm Dataquest. (His firm doesn't rate stocks or participate in underwriting.) Sweden-based Ericsson is the third-largest handset manufacturer.

He adds, "Clearly, they've made a strategic decision to go after margin and leave market share at the rest stop and keep driving down the road."

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