Motorola warns of more dismal results - Estimates show phone woes deepening; pressure on Zander mounts

Motorola warns of more dismal results - Estimates show phone woes deepening; pressure on Zander mounts
By Mike Hughlett
Copyright © 2007, Chicago Tribune
Published July 12, 2007

Motorola Inc.'s string of grim quarters has reached three, and the one disclosed Wednesday is the ugliest yet, with the company warning that its hobbled cell phone operation will post worse-than-expected sales -- and even bigger losses.

In fact, phone sales were so weak that Samsung may displace Motorola as the world's second-largest cell phone-maker, analysts said. Plus, the poor showing is likely to put even more pressure on Motorola's embattled chief executive, Edward Zander, who just a year ago was still the toast of the cell phone world.

"I think clearly the catcalls for Zander's head are heating up again," said John Slack, a stock analyst at Morningstar Inc. "If we don't see any improvements in the next quarter, it will be interesting to see if he is here by the end of the year."

Zander has been under fire since this winter, particularly from Carl Icahn, the controversial billionaire financier who unsuccessfully ran for a Motorola board seat this spring after snapping up a chunk of Motorola stock.

To right the listing phone division, Zander has chosen its new leader: Stu Reed, head of Motorola's supply-chain operation, Motorola said Wednesday. The cell-phone operation has had two interim co-leaders since Ron Garriques, its previous chief, abruptly exited in February for a high-ranking job at computer-maker Dell Inc.

Motorola, in releasing preliminary financial estimates, said it expects second-quarter sales to range from $8.6 billion to $8.7 billion, well below the $9.4 billion it had originally expected. And Motorola said it anticipates a loss of 2 cents to 4 cents per share, including non-recurring charges of 3 to 4 cents for job cuts and other matters.

Without those charges, Motorola will lose 1 penny per share in the worst-case scenario, and make 2 cents a share in the best case. Analysts polled by Thomson Financial were expecting profits of 2 cents per share, not including one-time charges.

The upshot: Motorola's profit shortfall isn't as bad as its sales shortfall, said Mark McKechnie, a stock analyst at American Technology Research. And that development is in line with Zander's new focus on steering clear of sales that build market share but not profit, he said.

But that would appear to be the only bit of good news -- tepid as it is -- in Motorola's disclosures Wednesday.

The company said it now expects the mobile-phone division to post an even larger operating loss during the second quarter than in the first. Red ink in the cell-phone division from January through March caused Motorola to post its first overall quarterly loss in 2 1/2 years.

And there's no quick cure, either. Motorola said Wednesday it no longer expects its cell- phone division to be profitable for the entire year, confirming what many analysts have long believed would be the case.

The company said it would further flesh out its phone woes July 19 when it releases its full second-quarter financial results. For now, Motorola primarily blamed weaker-than-expected sales in Asia and Europe.

Analysts said the company's problems are the same ones that have bedeviled it since the 2006 fourth quarter, including its lack of a successful follow-up to the smash hit Razr phone.

"Their competitors caught up," said Ed Snyder, a stock analyst at Charter Equity Research. "They took their eye off the ball."

In fact, Motorola has lost so much ground that its global market share -- as high as 22 percent just a year ago -- may slip from about 17 percent during the first quarter to around 15 percent in the second quarter, analysts say.

Snyder said he expects Samsung to surpass Motorola as the world's second-biggest phonemaker in the second quarter. Other analysts are more circumspect, but the race will be close. Motorola is "dangerously close to being No. 3," McKechnie said.

Reed will have a huge job ahead of him as the new mobile phone chief, but he's a good choice for the post, McKechnie said.

As head of Motorola's supply chain operation, Reed's primary mission has been to take out costs throughout the company, from consolidating suppliers to jettisoning redundant plants.

However, while he may be good for the short term, the long term is another question, Snyder said: "He's not a phone guy." Reed has little experience in phone design, engineering and marketing, Snyder said.

Reed came to Motorola in 2005 from IBM, where he had worked for more than 20 years. He will be replaced as Motorola's head of supply chain by Rita Lane, who is currently Motorola's chief procurement officer.

Ray Roman, who co-led the phone division on an interim basis, will remain with the division as senior vice president of global sales. Terry Vega, the division's other co-leader, will leave the company for "personal reasons," said Motorola spokeswoman Jennifer Weyrauch.

Motorola's stock closed Wednesday at $17.95, up 33 cents, or 1.87 percent. The earnings announcement was made after the market closed. In after-hours trading, Motorola shares were down nearly 30 cents.

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mhughlett@tribune.com