Motorola Has Strong 1Q

Electronic News, April 17, 2000 by Carol Haber

With Motorola's stock price up from the $50-plus level a year ago to $180 at one point in recent months, investors expected a lot. "You need perfection to justify those valuations," noted one financial analyst. A stellar first quarter 2000 wasn't enough, especially vs. "easy comparisons" with the downturn a year ago.

Motorola's signature wireless handset business didn't perform up to speed, Wall Street said, although the company beat estimates on overall first-quarter earnings and revenues after falling slightly short of ambitious "whisper numbers." Motorola's guidance for the second quarter and full year also fell short.

A combination of component shortages that constrained high-end handset sales and a preponderance of low-end handset sales in Europe shaved margins for the product, which accounts for 35 percent of sales. Robert L. Growney, chief operating officer, said the company was experiencing "an unexpected mix-shift" toward low-tier products in the wireless phone business, driven primarily by prepaid programs from cell service providers in the Europe, Mid-East, and Africa Region. The phenomenon is expected to continue into the second quarter and "possibly beyond."

Motorola executives were adamant: Handset margins would rise in the second and following quarters, they told financial analysts at a conference call, after being hammered on the issue. Component shortages had been handled with the culmination of year-long initiatives to strengthen and expand supplier relationships. New products and new product platforms were in the pipeline.

But it wasn't enough to calm technology investors who don't take the words "low-end" lightly and were spooked anyway by long-standing concerns of stock overvaluation, reduced tech exposure by major tech maven Abby Joseph Cohen of Goldman Sachs, Microsoft's woes, and general interest rate fears. Motorola's shares plummeted in New York Stock Exchange trading to $116 by midday Wednesday, along with the overall tech slaughter on Nasdaq and elsewhere.

On the face of it, you wouldn't know why.

Motorola reported sales of $8.8 billion in its first quarter of 2000. For ongoing operations, this was a gain of 19 percent from $7.3 billion a year earlier. Including sales from businesses sold later in 1999, sales rose 13 percent from $7.7 billion a year ago.

Excluding special items, earnings from ongoing operations were $449 million, or 59 cents per share, up 144 percent from $184 million, or 26 cents per share, a year ago. Including earnings from businesses sold later in 1999, first-quarter earnings were up 111 percent from the year-ago figure of $213 million, or 30 cents per share.

Wall Street had been expecting earnings of 58 cents per share and revenues of $8.3 billion. The so-called "whisper numbers" had projected Motorola earnings per share in the low $60s.

Handset unit growth and revenues were strong in the first quarter vs. the same quarter a year ago, said Merle L. Gilmore, president, Communications Enterprise, to analysts. This, "as we almost doubled our digital unit shipments versus a year ago." Still, average selling prices (ASPs) of digital phones were off 15 to 20 percent in some cases year-over-year and declined "faster than expected" sequentially. From the fourth quarter of 1999, unit growth was up "modestly" but revenues declined "slightly."

An analyst with Bear Stearns, Wojtek Uzdelewicz, said the Motorola report was "certainly a disappointment, as this business provides the biggest leverage to Motorola's numbers." In addition, "Margin weakness in handsets, when you have such a strong demand environment, makes people a little nervous."

Motorola executives told analysts that there was no market share lost during the period of high-end sales constraints. Uzdelewicz wasn't so sure. "Probably there could be a little market share loss on the high end. Nokia introduced a number of midrange and high-end phones. They may have put Motorola a little on the defensive."

Motorola has been promising better handset results for a couple of quarters now. "Investors would like to see a more dramatic turnaround in the business," Uzdelewicz said. "It's just taking a little longer than hoped for, given the big runup in the stock."

In terms of overall corporate results, the Street was looking for stronger guidance numbers, said Uzdelewicz. "Until now, it has been easy sailing because comparisons were easy. There's some nervousness in terms of the next few quarters. Street expectations are going up significantly as we go into the second half. Can Motorola deliver? Next quarter the consensus numbers were 70 cents and Motorola is guiding to 67 cents. For the fourth quarter, the Street is looking for $1.10. Will they come in under that?"

The company predicted full year 2000 sales of about $39.8 billion, which would represent an increase of about 24 percent based on ongoing operations. "We are slightly raising our prior guidance on EPS for 2000 to $3.14, which would represent a 67 percent increase vs. 1999's EPS on ongoing operations of $1.88," said Growney. The Street had been expecting about $3.18. Growney said his guidance took into account the low-end mix-shift and large outlays for research and development.