Motorola Profits From Cutbacks

Motorola Inc. (NYSE: MOT) has reported a first-quarter net profit of $169 million on sales of $6.04 billion -- and its ninth consecutive quarter of positive operating cash flow.

This 2.4 percent operating profit margin is a marked improvement on its fourth-quarter 2002 margin of only 0.3 percent and is delivered against a 2 percent fall in sales (see Motorola Q1 Sales Slip 2%).

Today’s figures reflect the strides the U.S. vendor is making in its efforts to counteract the telecom downturn, following several rounds of financial cutbacks (see Motorola Cuts Debt by $900M) and unimpressive product launches (see Moto Fails to Inspire and Motorola Lags Rivals).

Motorola CEO Christopher B. Galvin today stated defiantly that he expects the infrastructure side of his business, along with all the company’s other segments, to have “positive operating earnings in 2003 and to generate positive operating cash flow.”

Unstrung Insider's April report -- "Financial Healthcheck: Top Ten Wireless Equipment Vendors" -- has Motorola listed as one of the market’s most improved infrastructure players over the past year. “The growth in net income is especially positive,” says Gabriel Brown, author of the report. “Motorola is the clear number two in the final rankings -- behind Nokia Corp. (NYSE: NOK). The company scored highly in many key areas, and is probably the most improved business overall.” The table below indicates the extent of Motorola’s improvements:

Table 1: Financial Performance of Motorola's Wireless Equipment Division
1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03
Revenue ($ millions) 1,669 1,649 1,759 1,376 1,069 1,239 1,014 1,220 952
Operating profit margin (%) 2.5 4.3 1.6 -8.7 -4.6 2.6 0.5 0.3 2.4
Source: Unstrung Insider

The report also shows that the company as a whole experienced nearly a 300 percent increase in net income during 2002, putting it streets ahead of its rivals in this field:

Source: Unstrung Insider Within its infrastructure business, operating earnings of $29 million were announced, compared to an operating loss of $52 million in the same quarter last year. This is despite a 12 percent fall in sales of its network infrastructure equipment.

According to Nomura Holdings Inc. analyst Richard Windsor, Motorola's delayed entry into W-CDMA (wideband code-division multiple access -- the radio interface mandated in the UMTS specification, which greatly increases the data transfer rates that can be offered on core networks) has actually helped its cause. While rivals struggle to roll out networks within tight regulatory deadlines, Motorola has the luxury of determining market interest in the new technology before entering the fray.

“W-CDMA appears to be deadly for margins,” writes Windsor. “Vendors not shipping W-CDMA seem to be weathering the downturn in mobile infrastructure. This is in stark contrast to Nokia and LM Ericsson (Nasdaq: ERICY), who are really struggling. W-CDMA is clearly not the place to be for 2003.”

However, it is expected that Motorola will have to stake a claim in this market at some point, as such a quest could be crucial to the vendor’s long-term success. “Yes, Ericsson and Nokia are struggling now, but they will benefit in years to come from their investment in W-CDMA,” says Brown. “The big question for Motorola is how well will they be positioned when 3G infrastructure does take off?”

— Justin Springham, Senior Editor, Europe, Unstrung

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