Motorola's Handset Headache

Motorola Inc. (NYSE: MOT) reported first-quarter results this morning largely as dour as it had warned of earlier, with no sign of brightness for the second quarter. (See Moto Revises Forecast and Motorola on Rocky Road.) In the first three months of 2007, the Schaumberg, Ill., networking firm reported a net loss of $181 million, or 8 cents a share. That compared with earnings of $686 million, or 27 cents a share, in the same quarter a year ago. Excluding certain items, EPS came in at two cents a share, which met analysts' average estimates.

Revenue for the quarter was down nearly 2 percent year-on-year at $9.43 billion. This is largely due to another weak quarter at the company's handset division as the company looks for another mega-hit phone like its RAZR. (See The Perils of Being Slim.)

Motorola's mobile devices division posted sales down 15 percent to $5.4 billion year-on-year. The number two handset vendor shipped 45.4 million handsets, a drop of 31 percent quarter-on-quarter. The handset division continues to cast a shadow on Motorola's Enterprise and Connected Home units.

"In the Mobile Devices business, we are very focused on improving operating cash flow and profitability," says Greg Brown, president and COO at Motorola. "Across the company, the previously announced cost reduction actions are on schedule." (See Motorola Profit Falls 48%.)

Analysts, however, are concerned with the firm's predictions for its second-quarter earnings. Motorola now is predicting flat revenues of $9.4 billion. Analysts had been predicting $10 billion revenues for the quarter.

"We believe that investors’ focus today will be on the 2Q07 outlook, which is worse than expected," notes Inder Singh at Prudential Securities. "Most likely, Street estimates for financial year will need to be reduced in light of the company’s own tempered expectations."

Motorola continues to say that it sees sales and operating margins gradually improving in the second half. Analysts are now less sure about this prediction.

"We believe that the company’s overall restructuring could take longer than expectations and could extend into 2008," says Singh.

— Dan Jones, Site Editor, Unstrung

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