Skip to main content

Shares of



remained lower early Wednesday as wireless fans grew anxious about industry pricing pressures.

Late Tuesday, Motorola blew the doors off first-quarter sales and handset-shipment targets. But in a

replay of last quarter the stock slipped as investors worried about shrinking margins on the company's phones, particularly the once-sizzling Razr.

In recent Instinet trading, the stock was down $1.28, or 5.3%, to $22.80.

The Schaumburg, Ill., wireless giant made $686 million, or 27 cents a share, for the quarter ended April 1, down from $692 million, or 28 cents a share, a year earlier. Latest-quarter numbers include a penny-a-share net charge for stock-based compensation, business reorganization and investment gains. Excluding that cost, the earnings fell a penny shy of the 29-cent Thomson Financial estimate.

Sales jumped 23% from a year ago to $10.1 billion, breezing past the $9.5 billion Thomson estimate. The company said it shipped 46.1 million handsets in the quarter, well over the Street view.

Wall Street had been looking for blowout sales numbers, thanks in part to the

early success of the ultra-thin Slvr phone. Handset sales volume for Motorola in the first quarter was expected to be close to 40 million units, but estimates had been climbing lately.

"The company continues to profitably grow revenue and market share," said CEO Ed Zander. "With a sharpened strategic focus, Motorola is well-positioned for growth and success."

The company posted $700 million in operating cash flow in the latest quarter and bought back $815 million worth of stock.

But with rivals such as


(NOK) - Get Nokia Corporation Sponsored American Depositary Shares Report

Scroll to Continue

TheStreet Recommends


Sony Ericsson

rolling out new phones, the rest of the year promises to be a bigger challenge. And there, the news was definitely mixed. Gross margin fell to 30% in the latest quarter from 32% a year ago, as Motorola cut prices on the Razr to keep sales flowing.

For the second quarter, Motorola said it expects to make 31 cents a share, excluding 2 cents a share in stock-based pay costs, on sales of $10.4 billion or so. While that matches up favorably with the Thomson forecast of 31 cents a share on revenue of $10 billion, the revenue forecast points to sequential growth of just 2% where Wall Street was looking for 5%.

"The thing is they are guiding up revenue, but their bottom line is coming down. This is a margin issue," says one hedge fund manager who is short the stock. Handset pricing "is getting worse. They are having a profitless prosperity, you could say."

Handset operating margins were 11%, flat with the prior quarter and within the 10% and 11% range the profits margin Motorola watchers have become familiar with.

"Bullish investors are plugging in 12% to 13% handset margins for 2006 and higher for 2007 -- not a lot of nourishment for these expectations in these numbers," says Sanford Bernstein analyst Paul Sagawa.

"That said, the unit volumes were awesome," says Sagawa.

The popularity of Motorola's ultrathin Razr continued to drive the big sales numbers. The company expects to sell its 50 millionth Razr this quarter.

"This could be the year of the Razr part two," CEO Ed Zander on a conference call with analysts Tuesday.

Motorola claims 21% worldwide cell phone market share, which if true, is a 2 percentage point sequential increase from the fourth quarter. The business gains came at the expense of No. 3 and No. 4 players




, and possibly from No. 1 handset maker Nokia.

Zander vowed to take Motorola to the No. 1 position when he took over the company two years ago. The concern is whether Motorola can gain market share without sacrificing profits in a price war.

But some observers say product cycles more than prices are playing a role in the marketshare shift.

"It's not really a price war -- just some natural product leapfrogging and repositioning," says Bernstein's Sagawa.

The networking business was the weakest unit ,due to sluggish sales in Asia, where 3G wireless plans are in flux. Network gear sales fell 14% from a year ago to $1.4 billion. The company says it expects no sales growth from its networking unit this year, guiding for flat year-over-year results.