Motorola on a Losing Streak

Jul 11 2001

Motorola, the world's second-largest maker of cell phone handsets, posted a loss of 11 cents a share for the second quarter Wednesday, beating consensus estimates by a penny.

Revenues for the quarter totaled $7.5 billion, down 19 percent from the $9.3 billion recorded in the same quarter a year earlier.

"Despite the difficulties the telecom and semiconductor industries continue to experience and our operational loss for the second quarter, we continue to strengthen our balance sheet," President and COO Robert Growney said in a statement accompanying the release. "Cash flow from operations was strongly positive at approximately $1 billion. The actions we have taken to improve the performance of the wireless telephone segment of our business are beginning to show positive results with new products and orders."

The earnings mark the second consecutive quarterly loss for Motorola, which until April had not reported a quarterly loss in 15 years. And while the company did not revise its earnings projections during the current quarter – as rival Nokia did – Motorola has had its share of bad news throughout the quarter. During the past few months, Moody's Investors Service downgraded Motorola's credit rating, it was forced to issue a statement refuting rumors that it was facing severe liquidity problems and it revealed that Turkish wireless carrier Telsim had defaulted on a $728 million payment. It also has trimmed 15 percent of its staff to cut costs.

While the results beat the First Call consensus estimate of 12 cents a share, many analysts had been expecting higher revenues.

"The revenues were significantly short of where we were expecting," said First Union analyst Marc Roberts. "We were looking for $8.4 million. It appears to be offset by better-than-expected cost control."

Shares of Motorola were up 6.19 percent, or 97 cents, to $16.64 in after-hours trading.

With the initial numbers out of the way, the focus now shifts to Thursday's conference call with investors, who want to know whether the company will revise its outlook for the balance of the year. The company has stated that it expects to return to profitability by the end of this year. Among the things First Union's Roberts will be looking for in the call is whether Motorola is gaining handset market share in Europe.

"Most industry participants and experts have acknowledged the reality of the sharpest downturns in high-tech in decades," Chairman and CEO Chris Galvin said in a statement. "The industry's fundamentals are weak, and the imbalance between inventories and demand has spilled over into Europe."

Wednesday's quarterly earnings show Motorola taking a hit in all six of its major divisions. The Personal Communications Segment, which makes handsets and accounts for one third of Motorola's business, saw a 25 percent decline in sales from the year-ago period. And the company's semiconductor division reported a 51 percent drop in orders.

"Not surprisingly, semiconductors and broadband, which had been good until this time, took it on the chin," said BT Alex. Brown analyst Brian Modoff. "Orders were hit pretty hard."

The handset market has been especially ravaged of late. Earlier forecasts of 650 million units being sold worldwide in 2001, have been drastically pared. According to Modoff, BT Alex. Brown projects 420 million handset sales for the year.

The reason for this slowdown has been a glut of cell phones on the market combined with the worldwide economic downturn. "Because of the weakening economy, consumers aren't going out and buying replacement handsets as fast as expected," Roberts said.

But there are signs that things might be looking up on the wireless infrastructure side of things. In the past few days, several equipment vendors have announced big-ticket orders for equipment to build next-generation, or 3G, networks. On Wednesday, Nokia won a $1.1 billion deal with German carrier Viag Interkom to provide 3G equipment. Motorola signed a pair of smaller 3G infrastructure deals with Brazilian wireless operators recently, while Lucent and Nortel each signed $1 billion contracts with Sprint PCS.