Updated from July 20

Motorola ( MOT) swung to a loss in its latest quarter after a charge related to its chip-business spinoff.

But the company's shares rose 3% early Wednesday as investors were reassured by a strong revenue gain and a rise in top-line guidance. Motorola also said it would change leadership in its key wireless phone unit, after the unit posted a solid rise in handset sales.

For its second quarter ended June 30, the Schaumburg, Ill., tech shop posted a loss of $203 million, or 9 cents a share, on revenue of $8.7 billion. That reverses the year-ago gain-aided profit of $119 million, or a nickel a share. Year-ago sales were $6.16 billion.

Analysts surveyed by Thomson First Call had forecast an 18-cent-a-share operating profit on sales of $8.49 billion. The latest quarter, however, included a charge of $898 million, or 38 cents a share, related to establishing a deferred tax asset valuation reserve stemming from the initial public offering of the company's Freescale Semiconductor ( FSL) unit. The latest period also included various other charges and gains that appear to roughly offset one another.

"I think this was better than the Street had feared," said a hedge fund manager who has no position in the stock and asked not to be named.

Motorola boosted its third-quarter revenue guidance to around $8.6 billion from the previous $8.4 billion. The company said earnings would be 15 to 19 cents a share, which is toward the low end of Wall Street's estimate range.

Motorola rose 58 cents early Wednesday to $16.67.

Making Changes

The company said it generated $994 million of free cash flow in the latest period, putting its period-end cash position at $1.8 billion.

Motorola also said the head of its handset unit, Tom Lynch, would leave for personal reasons at the end of the summer. Lynch's departure comes as Motorola reported that it shipped 24.1 million handsets in the latest quarter. That's up 52% from a year ago but won't quiet speculation on Wall Street that the company risks losing ground to competitors.

Like big handset rival Nokia ( NOK), Motorola has been surprised in recent months by an onslaught of competition from South Korean electronics rivals Samsung and LG. The companies have been gaining market share at the expense of Nokia, and some on Wall Street fear Motorola may soon be victimized by their fashionable phones as well.

Not everyone is terrified at the thought of the wireless business' Asian invasion. "They did slightly better than expected," says Charter Equity Research analyst Ed Snyder. "It looks like they are benefiting from Nokia's problems and a good product line."

The news comes amid growing anxiety on Wall Street about Motorola's turnaround efforts. The company has spent the last year shrugging off the mantle of serial bumbler that it earned under the leadership of former chief Chris Galvin. Motorola's performance has improved greatly this year under new CEO Ed Zander, who has been amply compensated for his troubles .

Charter Equity's Snyder saw Zander's hand behind the Lynch change. "Zander is looking at bringing his own team in, it seems, and replacing folks one at a time," says Snyder, who rates Motorola a buy. His firm does no underwriting.

In the first quarter, the first full period under Zander's leadership, Motorola started a furious rally after posting much stronger-than-expected numbers.

Strong Outlook

On a conference call, Motorola executives said cell-phone sales should grow at a 30% to 40% pace this quarter, which ends in September.

CEO Zander emphasized that despite all the tough talk about pricing from a big competitor, referring to Nokia, Motorola was able to increase margins and hold average selling prices at the previous quarter's level.

But industry watchers say the next two quarters will be tougher as Nokia and Samsung cut prices and introduce new phones.

"The company is challenged from above by Nokia's economies of scale," writes Technology Business Research analyst Bill Lesieur. Motorola is also challenged from below by Samsung, which "has lower volumes than Motorola, but higher revenue, ASPs and profitability based on its focus on mid- to high-end devices."

A big surprise in the numbers came from Motorola's wireless infrastructure business. The networking unit posted $208 million in operating earnings, compared with $19 million in the year-ago quarter.

Executives explained that it was a function of share gains and stronger-than-expected spending by phone companies, but added that the growth was not likely to be sustained.

Some analysts attributed the big upside in networking to Motorola's push-to-talk efforts, as more telcos sought to add walkie-talkie features to their networks.

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