'Stabilization' at Motorola: 3rd-Quarter Profit Shows Signs of Progress

Oct 26, 07:59 AM

Current Headlines: By Mike Hughlett, Chicago Tribune

Oct. 26--After wallowing in red ink for six months and enduring a barrage of criticism, Motorola Inc. finally served up some good news Thursday: a quarterly profit, albeit a tiny one, but one that topped Wall Street estimates.

It's not clear whether the good tidings mark the start of a turnaround, but Schaumburg-based Motorola has at least stabilized itself, analysts say. Plus, the company offered a fourth-quarter earnings forecast that was a bit rosier than expected.

Investors certainly liked what they saw Thursday: Motorola's stock closed at $19.30, up 75 cents, or 4 percent.

"Our third quarter can be characterized by one word: progress," Motorola Chief Executive Edward Zander said during a conference call with stock analysts. "We also realize there is a lot more work to do."

Indeed, Motorola's mobile phone unit, darling of the wireless industry a year ago, continued losing money in the third quarter, but it lost about 50 percent less than during the previous quarter.

The company, which also makes myriad communications equipment, reported a net profit of $60 million, or 3 cents per share -- around 90 percent less than during last year's third quarter.

Here's the good news, though: That profit, when adjusted for one-time charges and discontinued operations, was 6 cents per share, topping by 2 cents the estimate of stock analysts polled by Thomson Financial.

Plus, Motorola said it expects earnings of 12 to 14 cents a share in the fourth quarter, again besting forecasts by a couple of pennies.

"I'll give them credit," said Mark McKechnie, an analyst with American Technology Research. "I think this was a good progress report."

The improvement was partly driven by Motorola's efforts to reduce costs and improve efficiency, analysts said. Some of those cost cuts came from the company's decision this year to slash about 7,500 jobs, nearly 11 percent of its global workforce.

Motorola also got a boost from an increase in sales of phones with higher profit margins, analysts said.

For instance, Razr 2, a high-end phone that costs at least $250 at retail, has done well since it was launched in late August, say company executives and analysts. That's a particularly welcome development, since part of Motorola's recent downfall stems from a weakness in higher-end markets.

Still, Motorola's mobile phone unit lost $138 million during the quarter, and its sales were down 36 percent compared with the same time in 2006. Its global cell phone market share dropped to 13 percent from 13.5 percent in the second quarter. A year ago, its share was around 21 percent.

Also, the cell phone division's weakness caused Motorola's overall sales to drop 17 percent over 2006's third quarter, though at $8.81 billion they were still in line with expectations.

So has Motorola turned the corner?

"I think this is the beginning of a recovery, the initial stage where you get a handle on your cost situation and manage your cash flow," said Larry Harris, an analyst at Oppenheimer & Co.

Others, while acknowledging Motorola has stopped the bleeding, are less sure a recovery is under way. "Stabilization is definitely the word," said Brian Modoff, an analyst at Deutsche Bank Securities. "I think [any recovery] will be next year when we see innovative new designs."

While the company has some "decent" phones in the market now, Modoff said, he and other analysts are waiting for new models with a truly different look and feel than what Motorola has offered over the past year.

Motorola's progress should take some heat off Zander, whose job security has diminished in recent quarters, analysts say. Carl Icahn, a controversial financier and maverick Motorola shareholder, has openly called for Zander's exit if he can't mend the company.

"This certainly helps, but he'll be measured quarter by quarter," Modoff said. "If they slip back, the question will come up again."

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mhughlett@tribune.com

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