Motorola Inc. stunned investors and analysts last week, lowering its fourth-quarter and 2001 earnings estimates despite reporting third-quarter earnings that mostly fell in line with expectations. Upon release of the poor financial outlook on Wednesday, the company’s stock tumbled nearly 18 percent to $21.75 in early trading, forcing analysts to grossly adjust their forecasts and take a second look at Motorola’s competition.
Motorola shares were trading at $22 at RCR Wireless News press time, up $1.81 from the previous day’s close.
The following day, Motorola said Merle L. Gilmore, executive vice president of the Communications Enterprise unit, resigned from the company, effective immediately. Robert L. Growney, president and chief operating officer, will act as president of the sector until a replacement is named.
The Communications Enterprise unit-one of three main units in the company-comprises 70 percent of Motorola’s business, and includes the Personal Communications sector, which manufactures mobile phones.
Motorola declined to provide insight into Gilmore’s departure except to say the move “wasn’t planned.” Gilmore told The Wall Street Journal, “The circumstances around my resignation are complicated and difficult to pin on one reason.” He added that he accepted the responsibility for the company’s questionable earnings, but he also thought Motorola made a lot of progress toward improving profitability.
For the third quarter ended Oct. 2, Motorola reported revenues of $9.5 billion, about $1.3 billion more than the $8.2 billion in revenues reported for third-quarter 1999. The company recorded net earnings of $531 million, or 23 cents per share, compared with earnings of $114 million, or 5 cents per share, for the same period last year.
Despite the positive third-quarter results, Motorola also announced it only expects to earn 27 cents per share on $10.5 billion in revenues during the fourth quarter-well below the 36 cents per share on $11.1 billion in revenues forecasted by UBS Warburg L.L.C. and other analyst firms.
Motorola said its 2001 earnings should be around $1.21 per share on sales of $44 billion, prompting UBS Warburg to reduce its earnings estimates from $1.43 per share on sales of $45.6 billion to $1.18 per share on sales of $43 billion.
Nokia, Ericsson affected
The firm cited overall lagging sales of handsets and the woes of Motorola’s Personal Communications sector as the main culprits. A weak euro also impacted the operating results of the PCS segment, possibly tweaking its performance by as much as $20-$30 million.
“Relative of expectations, the performance of the Personal Communications sector in the third quarter and the outlook going forward is not pretty,” UBS Warburg said. The troubles are far-reaching however.
“We believe Ericsson will post results in its handset business that will make Motorola’s results look good,” the firm said. L.M. Ericsson and Nokia Corp. announce their third-quarter results Oct. 20 and Oct. 26, respectively.
Marc Cabi, managing director of equity research for Credit Suisse First Boston, said Motorola most notably is losing its share in European handset sales and the trend is not likely to improve in the fourth quarter when Nokia’s new products hit the market. That impact should carry over into the semiconductor segment, as 24 percent of its production is consumed internally, Cabi said.
On the positive side, the Broadband Communications business finished strong, with sales increasing 47 percent to $917 million, and operating profits growing from $77 million in third-quarter 1999, to $154 million for the same period this year. The Commercial Government and Industrial Systems sector also performed well.
Wall Street panic aside, Motorola is expected to weather this financial storm. UBS Warburg said there is only one way “out” for the company-continuous and timely development of new products with added features and lower cost structures. Data products and services are expected to ramp up in mid-2001, giving the entire market a much-needed boost.
