January 19, 2007 / 11:42 AM / 13 years ago

Motorola quarterly profit falls, margins disappoint

NEW YORK (Reuters) - Motorola Inc. MOT.N, the world’s second-biggest cell phone maker, said on Friday fourth- quarter profit halved, hurt by a sharp fall in phone prices as it tried to hold on to market share amid stiff competition.

A V3xx Motorola phone is shown the 2007 International Consumer Electronics Show in Las Vegas, January 9, 2007. Motorola Inc., the world's second biggest mobile phone maker, on Friday posted a lower fourth quarter profit due to weakness in its handset business. REUTERS/Steve Marcus

The poor performance was anticipated by the market after Motorola issued a profit warning earlier this month, though results came in slightly better than it had forecast. Shares rose 2 percent to $19.11 on the New York Stock Exchange.

Despite the stock rise, analysts focused on Motorola’s steep fall in profit margin, saying its phone prices had dropped more than they had expected in the December quarter.

“Operating margin fell from 12 percent in the last quarter to under 5 percent this quarter, and that’s a very steep decline. It’s stunning they can drop so much in one quarter,” said Edward Snyder, an analyst at Charter Equity Research.

Motorola said profit from continuing operations fell to $528 million, or 21 cents a share, from $1.177 billion, or 46 cents a share, in the year-ago quarter, when Motorola reported a large gain from the collection of debt from Turkish phone company Telsim.

That was higher than its January 4 estimate of 13 cents to 16 cents a share because of items such a tax gain, Motorola said.

Revenue rose 17 percent to $11.8 billion, in line with its lowered forecast of $11.6 billion to $11.8 billion. The average forecast from Wall Street analysts was for revenue of $11.7 billion, according to Reuters Estimates.

Motorola executives said on a conference call with analysts that the earnings shortfall was due to discounts on the Razr, and price declines on the most expensive phones with high-speed wireless connections, and on cheaper phones sold in emerging markets, where competition was brutal.

Chief Executive Ed Zander also cited weakness in the U.S. market for phones based on iDen, a technology developed by Motorola that includes walkie-talkie style capabilities. Sprint Nextel Corp. (S.N), the No. 3 U.S. operator, is Motorola’s biggest iDen customer.

LOW PHONE PRICES

Motorola said it shipped 65.7 million handsets in the quarter, up 47 percent from a year earlier, and its share of the global market rose to 23.3 percent, up almost one percentage point from the third quarter.

But analysts said Motorola’s handset prices seemed to be even lower than they had expected after the warning.

“It shows they have a deeper hole to climb out of going forward,” said RBC Capital analyst Mark Sue, who estimated that Motorola’s average handset price was $119 for the quarter compared with his latest estimate of $123.

Including discontinued operations, the company’s net profit fell to $624 million, or 25 cents a share, from $1.2 billion, or 47 cents a share, a year earlier.

It forecast first quarter sales to fall to between $10.4 billion and $10.6 billion. Analysts, on average, were expecting $10.5 billion, according to Reuters Estimates.

Motorola said it hopes new products in the first and second quarter would improve results, and Zander said the goal was to return operating margins to the double-digit percentage range in the second half of 2007.

But analysts were concerned whether the products would be enough. Sue said, “We are unconvinced regarding what their next new high-end products will be, whether they’ll resonate with consumers and help the company start climbing out of the hole of depressed earnings.”

Another analyst, Inder Singh of Prudential, said Motorola’s price discounts could indicate pressure across the industry.

“If Motorola was aggressive with pricing, its major competitors would have had to make price cuts of their own,” he said. “It’s like the cockroach theory. If you see one, there’s more than one.”

Schaumburg, Illinois-based Motorola trails only Finland’s Nokia NOK1V.HE in the global handset market.

Motorola said its handset unit’s operating profit fell to $341 million in the fourth quarter from $663 million a year ago, even as sales rose 19 percent to $7.8 billion.

Its network equipment operating profit fell to $428 million from $542 million, while sales rose 6 percent to $3 billion.

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