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The Daily Interview: When Motorola Talks...

The market will be watching intently after today's closing bell for the quarterly report from communications giant Motorola (MOT). The company has been losing market share recently in its handset business and has produced poor year-over-year earnings-per-share comparisons in the past two quarters.


Jeffrey Schlesinger
Managing Director
UBS Warburg
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What can we expect from the company, and what are the important aspects of its businesses to keep an eye on? Jeffrey Schlesinger, the managing director of the technology equity research department at UBS Warburg tackles these questions, and many more, while providing an overview of Motorola's problems and outlook.

TSC: The consensus estimate for Motorola is a loss of 12 cents a share. What do you expect the company to report in terms of earnings and revenue, and do you anticipate any major surprises?

Schlesinger: There's not going to be anything major because if there [were], it would have been preannounced. It could be something minor, like a loss of 13 cents or 14 cents, or maybe 11 cents. But I don't think that's the real issue. The real driver of the stock isn't going to be what it does in the quarter because we know that can't be too far off from where they guided. [The real driver is] going to be more in terms of what the data points suggest -- [whether there's] improvement in the handset and semi business going forward.

TSC: What do you think those data points will suggest?

Schlesinger: The semi business unfortunately is going to be worse sequentially than better. The semi business still has a negative trend -- down sequentially in terms of losses and down sequentially in revenue. And I can't imagine the orders are going to be great in semis, so I don't think there's going to be a whole lot to point to on the semi side that is going to be great.

So that really leaves you with the handset business. I think the Street has pretty much resigned itself that their semi business will turn when the industry turns, and either that's the end of this year or the beginning of next year. So, for the semis, it is what it is, and I think we all know it's not going to be pretty. Which takes you to the handset business because combined, semis and handsets are 45% of sales and both of them [are losing money today].

So the real story is taking 45% of the revenue base and going from losses to profit. Handsets, I expect, will be up sequentially in revenue, down sequentially in losses (i.e., less losses). And the real determinant there is going to be the order numbers. Those are really going to be a key tell-tale in the handset business because that's what's going to give investors either confidence or not in respect to what's the visibility to do product expansion.

Good orders would be a positive. If operators like what they see, they're ordering products. I would say if you get an up sequential order number from 2.8 billion in the first quarter -- a positive book-to-bill booktobillratio -- then that would be a positive. If orders are weak in the quarter because there is inventory out there, and they've been burning inventory, or operators haven't yet gotten to the point where they're ordering new products, investors will say "show me." I think those are the two key things that are going to move this stock over the next 12 months.

TSC: What do you expect the company to say in terms of an outlook for the remainder of the year? Do you expect a recovery, and would it depend on a recovery in the semiconductor sector?

Schlesinger: I don't cover semis, so it's tough for me say. I think the general consensus is for some improvement in the fourth quarter sequentially from the third, and continued improvement next year relative to this year. Their semi business should mirror that industry trend if, indeed, it does materialize.

The stock has traditionally moved with the semi stocks. If semi stocks start moving, then their stock will rally to some degree with them. I think as big a factor will be improvement in the handset business. There's not a great story for handsets this year. Their story is new products that can gain market share that can drive better growth. The key will be if their new products take hold, [then] I think the stock will perform quite well. If the new products fail to take hold, it's going to be tough for the stock to do much.

TSC: What are some of the major issues coming up for the company?

Schlesinger: Will the new products take hold in the European market? I'm convinced their new CDMA [code division multiple access] products will do quite well here in the Americas, but will their GSM [global system for mobile communications] phones do well in Europe? If they do, then that's going to fuel the recovery in the handset business, both revenue and margins. That's the thing to watch. New handset products driving market share, and a better cost-structure driving profitability.

TSC: When do you see an overall recovery for the company?

Schlesinger: You have different catalysts in different parts of their business -- the cable business is different from their semi business, which is different from cell phones. You have a lot of different answers to those questions. Semis -- everybody expects a recovery in the fourth quarter or early next year. Handsets -- I would hope that they could start to recover market share even in a very tough macro environment. Overall, I don't think the handset business is going to get materially better until some point in mid-next year to the back half. On the infrastructure business, I think the same thing -- that it's going to be a very tough macro environment for mobile infrastructure through next year. With the cable broadband business, I think they're looking to do quite a bit internationally to pick up some market share there to drive that business next year and the back part of this year.

TSC: What else should investors and market watchers keep an eye on in the coming month and quarters with Motorola?

Schlesinger: The balance sheet -- [they want] to get the debt back under control and constantly manage the liquidity of the company, not that [liquidity] is an issue; it's more of a flexibility issue as opposed to a liquidity issue. Just managing that balance sheet and showing improvement in that balance sheet and in cash flow.

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