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Updated from Jan. 21

Motorola

(MOT)

shares slipped Wednesday after the company released a cautious first-quarter forecast.

The stock ended down 22 cents, or 2.5%, at $8.53, though the company a day earlier kicked off the wireless earnings season on a positive note, reporting that it swung to a profit in the fourth quarter thanks to price cuts during the holidays.

The company set first-quarter earnings targets of break-even to 2 cents a share, on sales of $6 billion to $6.2 billion. It affirmed full-year 2003 guidance for earnings of 40 cents a share, on sales of $27.5 billion.

"We expect each of our major segments to have positive operating earnings in 2003 and to generate positive cash flow," said Chief Executive Christopher Galvin in a prepared statement. "Our objective is that 2003 will produce the next positive phase of our turnaround and Motorola's renewal."

With the bulk of a year-long restructuring behind it, the Schaumburg, Ill., handset maker on Tuesday posted net profit of $174 million, or 8 cents a share, on revenue of $7.5 billion, according to generally accepted accounting principles. In the same period last year, the company reported a net loss of $1.2 billion, or 55 cents a share, on revenue of $7.3 billion.

Excluding previously disclosed restructuring charges of about $200 million, the company reported earnings of $299 million, or 13 cents a share, compared with a loss of $90 million, or 4 cents a share, in the comparable quarter last year. In the same period last year, the company took special charges of about $1.7 billion pretax, or $1.1 billion after taxes.

Wall Street analysts expected Motorola to earn 10 cents a share on revenue of $7 billion.

For the full year 2002, the company reported a GAAP net loss of $2.05 billion, or $1.09 per share, compared with a net loss of $3.9 billion, or $1.78 a share. Excluding charges, full-year net earnings were $314 million, or 14 cents a share, compared with a net loss of $697 million, or 31 cents a share, in 2001.

Sales in 2002 fell to $26.7 billion from $29.9 billion in 2001. The company ended the year with $6.6 billion in cash and cash equivalents and investments.

Handset Sales Jump

Handset sales improved 11% to $3.3 billion, even as orders fell 3% to $2.1 billion. In a prepared statement, the company explained that order levels were lower as the company was "assisting customers in reducing backlog and handset inventories" through improved supply-chain management.

Operating earnings in the closely watched segment, which accounts for about 45% of the company's business, more than doubled to $294 million, compared with $121 million in the year-ago quarter. Excluding special items, the gains weren't as pronounced, however. Operating earnings before charges were $308 million, compared with $208 million last year.

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Motorola shipped 27% more handsets in the fourth quarter, or 22 million units, compared with the same period last year. The company said unit-shipment growth outpaced sales growth because the majority of handsets shipped were skewed toward the lower-end, lower-priced markets, reflecting a marketwide trend.

Nokia

(NOK) - Get Nokia Oyj Report

, likewise, warned in early December that it was likely to sell more lower-priced phones during the holiday season.

Analysts said sales were largely boosted by steep promotional price cuts to lure holiday shoppers, a move that forced the average selling prices of phones down.

Motorola said the entire handset industry shipped about 400 million handsets in 2002, slightly ahead of its prior expectations of 390 units. For 2003, the company expects 10% growth industry-wide, or about 440 million units.

The company is hoping to deliver more higher-end phones in the coming year. It unveiled a snazzy portfolio of new models at a Shanghai reception last week. The new models likely will have little to no impact over the next two quarters, however, as the bulk of the shipment won't begin until the latter half of the year.

Analysts warned that price cuts in the past few quarters may have a long-term negative impact on handset companies. "Rising

average selling prices are not happening," said Deutsche Bank's U.S. wireless equipment analyst Brian Modoff, pointing out that steep cuts on high-end new models could potentially hurt sales of traditionally higher priced items in the long run. "What

vendors perceive as a high end phone is harder for

consumers to determine."

Price cuts and the shift to the lower end of the cost spectrum helped Motorola gain market share, which now stands at 19%, with the bulk of gains in North America and Latin America.

Cost Cuts Boost Chip Sales

Motorola also managed to squeeze profits out of its chip division through stiff cost cutting and improved margins. Chip sales rose 15% to $1.3 billion. Operating earnings on a GAAP basis were $18 million, compared with a loss of $798 million last year. Excluding charges, operating earnings were $9 million, compared with an operating loss of $284 million in the same period last year.

Handset gains were partially offset by continued softness in the market for broadband equipment. Sales in the broadband division were down 16% to $489 million. Operating earnings on a GAAP basis in the sector improved to $33 million, compared with a $7 million loss in the year-ago period. Excluding charges, operating earnings tumbled to $65 million, from $78 million.