Motorola Says Yes, Things Can Get Worse - TheStreet

Communications-equipment maker

Motorola

(MOT)

delivered a fair amount of bad news before the market opened Wednesday when it presented its first-quarter 2002 outlook.

Investors may have been prepared for the seasonal weakness Motorola anticipates in the first quarter, but Motorola detailed several new difficulties in the mobile-phone and infrastructure markets that may be more punishing. However, it offered some hope in a higher-than-expected profit outlook for the full year 2002.

Motorola management had already braced the Street for a rough first quarter. On Dec. 18 the company said that judging by typical postholiday patterns, revenue in the first quarter could fall as much as 14%. On Wednesday morning Motorola worsened that opinion, forecasting a 16% to 18% slip in revenue to a range of $6 billion to $6.1 billion and a loss of 11 to 14 cents a share.

Going into the forecasting call, Wall Street was looking for a slightly lighter 16% sequential revenue decline from the fourth quarter of 2001 to the opening of 2002, or $6.29 billion in revenue. Consensus estimates had predicted a growing 12-cents-a-share loss. Motorola CEO Chris Galvin reiterated that the company would stack up continued losses in the first and second quarters of 2002.

As has been the case throughout 2001, the personal communications segment was the highlight of Motorola's quarter, with its revenues up 11% and its market share stable from third-quarter estimates of 17%. But several gloomy data points emerged from the call to test the enthusiasm of the Motorola mobile-phone-segment fan.

Investors have come to understand that the 2001 holiday season was weaker than expected in the U.S., but they will be further disheartened by Motorola's acknowledgment that it did not ship the 5 million GPRS handsets it had projected for 2001, but instead shipped only 4.1 million. Carriers have put in orders for 2.4 million more GPRS phones to date.

The company noted also that CDMA handset sales fell 2% sequentially; it attributed this to competition at the lower end. Motorola believes that in the slow December quarter, channel inventory in the industry increased one to two weeks above normal levels.

Additionally, mobile phone unit chief Mike Zafirovski added that the Chinese market is not living up to the hype of several quarters ago. Though China had something like 40% growth in 2001, he said, 2002 would see something more like 20%. Investors have been expecting China to become a major new consumer of mobile phones as North American subscriber began to slow, a development we saw in the December quarter.

Zafirovski predicted that the industry would ship 420 million mobile phones in 2002, and that Motorola would attempt to keep its average selling prices (ASPs) for phones "flat to slightly down" during that time. Motorola asserted that ASPs grew 2% sequentially in the fourth quarter of 2001.

As expected, Motorola sees little hope for improvement in its mobile infrastructure business. Revenues dropped from the third to fourth quarters, and management expects that trend to continue in a year in which Motorola and industry leader

Ericsson

(ERICY)

expect the sector's revenues to remain steady or contract 5% to 10%.

However, COO Ed Breen clarified Motorola's position in depressing detail, adding that while the industry might slip as much as 10% in 2002, Motorola's equipment group sales would slip 15%. He acknowledged that Motorola would have little presence in the first wave of third-generation wireless systems, but said that with new products out later in the year, Motorola would jump in later phases.

Motorola's overall guidance comes as a reminder that even troubled businesses can sink further. The company forecast sequential decreases in revenue for all segments, with only the mobile infrastructure and integrated electronics businesses expected to show operating margin improvement in the first quarter.

Motorola then pulled a surprise out of its sleeve, refuting Wall Street consensus estimates of 4 cents a share in profit for all of 2002. Breen boasted that Motorola could achieve a 15-cents-a-share profit, because of a reduced cost structure that came at the expense of 39,000 jobs so far, as well as gross margin improvement throughout the year. The company plans to eliminate another 9,300 positions.