After the Call: Motorola Still Looks Weak

Motorola (MOT Quote) needn't worry. Its spot in Wall Street's doghouse is safe.

The cell phone and semiconductor company Wednesday morning followed up its report of wider-than-expected first-quarter losses from Tuesday evening with a rather uninspired 2001 outlook. It expects that sales will come in "somewhat" lower for the year, producing "modest" earnings.

The company's cell phone business is hurting because of a weak market and strategic missteps that left it with a bunch of phones that nobody wanted. That's meant hefty inventories and declining market share. In addition, its semiconductor division -- which makes chips for cell phones, among other markets -- has been caught in one of the sharpest downturns ever for chips. Then there are the balance sheet issues that have dogged the company in recent weeks, and investors are wondering whether the company is facing a cash crunch. Motorola firmly denies this.

But Wednesday's conference call did little to allay concerns that these issues will continue to follow the company for the rest of 2001, though the stock was basically holding steady in recent trading, up 5 cents to $13.05.

Dirty Word

"At this point, Motorola is more like a dirty word on the Street, and management is not believed anymore," says Todd Bernier, a stocks analyst at Morningstar. On the call, the company skated around questions about its cash flow from operations and failed to come up with any sort of plan for returning to profitability in the second half, Bernier says. (Morningstar doesn't do underwriting and doesn't rate stocks.)

And what does "modest" mean anyway? "I looked up in Roget's Thesaurus what modest means and it means humble ... what it means is that it's going to be weak," Bernier says.

Of course Motorola isn't the only company facing the broad supply and demand problems that have been dogging cell phone makers, telcos and chipmakers alike for the past six months. Competitors from Nokia (NOK Quote) to Nortel (NT Quote) to Texas Instruments (TXN Quote) have had to lower earnings estimates as orders dried up. Those companies will report earnings over the next few weeks.

The difference between Motorola and those companies is that it's facing problems in more than one market or another, and it has some of its own internal issues. It can't reign in costs fast enough to keep its losses from growing. The company plans to cut 26,000 jobs this year and is reigning in capital spending to $1.4 billion from $4.1 billion last year, but those changes won't help right away. For the second quarter, for instance, the company says it expects a loss worse than the 9 cents a share it lost in the first quarter. Sales will increase "somewhat."

Falling Numbers

Meanwhile, the company lowered the outlook for worldwide cell phone sales to 425 million to 475 million units this year, flat to slightly higher than in 2000. That brings Motorola's worldwide market expectations more in line with its competitors, such as Nokia, which expects to move 450 million to 500 million units. Morningstar's Bernier says a shrinking market is more problematic for Motorola than for a competitor like Nokia because Motorola is ceding market share and will continue to do so.

Inventories of old cell phones and chips are already biting at the company's bottom line. Motorola said that it wrote down $500 million worth of inventory during the quarter, accounting for most of the decline in its total inventory position at March 31 to $4.5 billion from $5.2 billion at the end of December. That writedown was part of the company's net charge of $279 million, offset in part by certain investment gains. Motorola plans to continue selling investments in the second quarter to help raise cash. For instance, the company could book $1.8 billion from selling Mexican wireless interests.

Which points to another issue -- cash flow. The company raised about $1 billion in cash during the quarter from sales of investments. The company said that cash flow "from businesses" was positive during the first quarter as it defended its balance sheet. It didn't say what cash flow from businesses was exactly and declined to specifically provide cash flow from operations figures, denying any cash crunch.

"Great concern was raised in financial markets Friday by an irresponsible and erroneous article in the media," Robert Growney, president and chief operating officer, said during the call. (Growney popped off the call for a television commitment but made it back to give his spiel before the question and answer period). "Cash flow from businesses was positive and we anticipate it will be positive for the year."

But based on Motorola's penchant for downgrading expectations, witnessed in numerous earnings warnings, it's hard to be anything but negative.