Motorola battles 5% semi order dip

Electronic News, April 15, 1996 by Carol Haber

Schaumburg, Ill.--Battling declining semiconductor orders and gross margins--but aided by cost-cutting, a better tax rate and a land gain--Motorola managed to eke out 1Q96 earnings of $384 million, or 63 cents per fully diluted share, from $372 million, or 61 cents per share, in 1Q95. Net would have been flat, however, without the benefit of the lower 35 percent tax rate versus 37 percent a year ago.

Without the land sale, there would have been "a slight decline," it was said.

The company also warned of the possibility of "difficult earnings comparisons in the quarters ahead" due to weakening demand in semiconductor markets, pricing pressures in the cellular telephone industry and "a continuing mixed global economic environment."

Revenues for the quarter ended March 30 rose 16 percent to $7 billion from $6 billion.

Net margin on 1Q96sales tallied 5.5 percent versus 6.2 percent a year ago. Gross margin declines in all major businesses were largely offset by the advantage gained from lower selling, general and administrative costs (SG&A), the company noted. SG&A expenses fell to 15.4 percent of sales from 18.1 percent a year ago, as management, expecting continuing gross margin pressure, focused on curbing costs.

Pointing to "the continuing mixed global economic environment, pricing pressures in the cellular telephone industry, and weakening demand in semiconductor markets," CEO Gary Tooker warned, "We expect these factors to continue to put pressure on financial performance, and they could cause difficult earnings comparisons with the prior year in the quarters ahead. Robust economic growth continues in Asia, especially in China. Weakness in Europe is continuing, while the U.S. is growing modestly. Latin America continues to experience near-term volatility, but the long-term trend is favorable."

Motorola reported semiconductor sales for the quarter rose 14 percent to $2.1 billion, but orders declined 5 percent. Operating profits were higher but would have been flat except for the net gain from a real estate transaction. Orders were higher in the Americas, but declined in Asia/Pacific, Europe and Japan. Orders increased in the computer (mainframe and mid-range) and communications segments, Motorola noted.

"The PC/workstation segment was down significantly and other key segments were also lower," the company reported.

Distributor orders rose.

Order growth was said to be highest for fast SRAMs, customer-specified microcontrollers, high-performance embedded processors, sensors, digital signal processors, digital-analog circuits and power transistors. Logic/analog and discrete product orders were lower.

In the General Systems Sector, home of cellular, sales rose 16 percent to $2.7 billion. Orders grew 23 percent and operating profits were lower. Cellular Subscriber Group sales were flat but orders were higher, led by the Pan America and Greater China regions. Cellular Infrastructure orders were "up significantly" over the year-earlier period; growth was highest in Japan, China and Europe. Motorola Computer Group orders were also said to be higher.

In the Messaging, Information and Media Sector, sales rose 26 percent to $990 million, orders climbed 15 percent and operating profits were higher.

Paging orders "increased significantly" in the U.S., the company said. Orders also grew in China, while orders in other international markets were said to be lower. Orders in the Wireless Data Group were lower, while orders in the Information Systems Group were "up significantly" and were "especially strong" in China.

Land Mobile Products Sector sales rose 4 percent to $821 million, and orders were flat. Operating profits were lower due to increases in manufacturing and engineering costs.

Automotive, Energy and Controls Group sales declined 9 percent, orders were 7 percent lower and operating profits were lower, "due to pricing pressures and reduced demand for components and energy products serving the cellular communications business." In the Government and Space Technology Group (GSTG), including the Iridium project, sales increased 47 percent and orders were 41 percent higher. GSTG posted an operating profit, compared with a loss a year ago.

Corporate manufacturing and other costs of sales increased to 67.8 percent in 1Q96 from 64.5 percent in 1Q95. The company cited three factors: "Start-up costs and inefficiencies associated with the process of adding major elements of new semiconductor manufacturing capacity; more competitive pricing for semiconductors, especially memory products as industry growth has slowed; and the continuation of a strategy to remain a price leader in the cellular telephone and paging industries in order to influence continuing growth in those markets."

Speaking with analysts at the phone conference, Ed Gams, director/VP, investor relations, noted that semiconductor industry growth had slowed "more rapidly than expected," causing pricing pressure on "a wide range" of products.

The company is scaling back investment in semiconductor manufacturing capacity "to match industry conditions." Mr. Gams told analysts: "While manufacturing capacity expansion plans are continuing, the rate of investment is being adjusted to take into account the recent slowdown in rate of market growth. Worldwide semiconductor industry growth is expected to continue at the same rate in 2Q96 as 1Q96, followed by stronger growth in the second half." Reduction in spending will largely affect some of the longer-term projects, which will be delayed, and not canceled.