The departure of a key executive just a day after a downward revision for coming-year earnings and revenue expectations should send a cold chill down investors' spines. But analysts said the jury is still out on
announcement yesterday that executive vice president Merle Gilmore is leaving the company.
The reason they didn't hit the panic button? Analysts believe there are three up-and-coming executives who can fill Gilmore's shoes. If this bench proves deep enough, Gilmore's departure may even be a long-term positive, they say.
"The company's bringing in new blood, prepping for a new management team and laying down the foundation for the future," says
analyst Matt Hoffman. (Wit SoundView does not have an investment banking relationship with Motorola.)
Gilmore is a long-time company executive who headed up the key
division, which is responsible for 70% of Motorola's revenue. It is responsible for Motorola's broadband, mobile-phone manufacturing, global integration and two-way radio operations. Gilmore was seen as having initiated a turnaround in the division since taking the helm there in 1998, according to a research note from
His departure was announced yesterday, just a day after Motorola said it was cutting fourth-quarter and 2001 expectations. It said revenue and earnings per-share estimates for next year have been cut by $3 billion, or 6%, to $44 billion and $0.22, or 15%, to $1.20, respectively. The company also says it expects worldwide mobile-phone sales of between 410 million to 420 million in 2000, and between 525 million to 575 million in 2001. These numbers are down from estimates of 425 million to 450 million and 600 million, respectively. Motorola said the weak euro dragged down fourth-quarter operating margin estimates from 8%-8.5% to 6.5%.
The three executives analysts point to as possibly filling Gilmore's shoes are Edward Breen, Bo Hedfors and Mike Zafirovski. They currently oversee the company's broadband, global telecom solutions and two-way radio sectors, respectively. All three executives, who reported to Gilmore, joined Motorola within the last 18 months.
analyst Pete Peterson agrees that this could be a strong enough bench to make up for the loss of a 30-year industry veteran. He says Breen, Hedfors and Zafirovski are all outsiders with first-rate industry reputations. "They're all well thought of," he said. (Prudential does not have an investment banking relationship with the company.)
The fact that the three are relative newcomers to Motorola could also be a positive, Peterson says, because Motorola has suffered from management credibility issues in the past. New leaders could help build a new start. That's not to say everything is rosy at the company. Far from it. Peterson downgraded Motorola from a strong buy to accumulate and slashed his 12-month price target by 58% to $28 from $67 on news of its performance revisions. He didn't downgrade the company to a hold, he says, because he still believes Motorola is well positioned over the next two years to take advantage of industry changes, such as the growing importance and presence of code division multiple access (CDMA) technology.
And success is far from assured for the three execs or the division. In a note released after Gilmore's departure was announced,
said, "Following MOT's disappointing
third-quarter 2000 results and a resetting of investor expectations, we believe the somewhat sudden departure of Mr. Gilmore may add incremental uncertainty around the communications businesses and Motorola shares."
Motorola has kept mum about whether Gilmore's resignation is tied to the company's earnings-forecast revisions. The company said that Robert Growney, president and chief operating officer, will take over as acting president of Communications Enterprise. Gilmore has been in charge of the Communications Enterprise since July 1988 and has held executive positions with the company since 1994.
In its note, Lehman said Gilmore's departure "may have come as a surprise internally."