Motorola issues profit warning, shares sink

Motorola Inc. (NYSE: MOT) became the latest company to announce that it can't meet its already lowered guidance. The company said Thursday it won't meet sales and earnings targets for the fourth quarter or fiscal 2001.

Shares fell 7 percent to 16.43 in early trading.

The company had already lowered guidance for 2000 and 2001 on its third quarter conference call in October.

Sales for the fourth quarter are now expected to be $10 billion with earnings of 15 cents a share, the company said. In October, Motorola predicted sales of $10.5 billion and earnings of 27 cents a share, a dime lower than the original consensus of 37 cent per share.

Motorola said it also sees fourth quarter charges to cover third quarter cost cuts. More restructuring moves are expected in the first quarter.

The company said its "personal communications" unit, which makes wireless phones, hasn't been as profitable as expected. The company said it also hasn't achieved cost reductions in wireless phone production due to bad timing and a backlog of inventory.

Motorola added that a slowdown in the semiconductor industry is denting the sales and operating profits for its chip unit. Chip makers have recently issued profit warnings, citing inventory corrections. Motorola said inventory adjustments by semiconductor customers should be completed by mid-year 2001.

On conference call Thursday morning, analysts asked whether the $500 million sales shortfall was attributable to Motorola's handset or semiconductor business. "We do not see a demand issue in our handset business for the fourth quarter," said Edward Breen, Executive VP & President, Broadband Communications Sector.

Motorola reassured investors that it expects robust growth in the global wireless telephone market, with unit sales in the range of 525 million to 575 million in 2001, up from an estimated 420 million units this year. The company also said positive impact of cost reductions in its wireless telephone business will be felt by mid-year 2001.

Motorola also lowered projections for the first quarter of 2001. Sales in the first quarter of 2001 are currently expected to be $8.8 billion and earnings per share to be 12 cents, excluding special items.

For fiscal 2001, Motorola didn't rule out cutting targets again when it announces final results for the current year. In October, the company said it expected 2001 sales of $44 billion and earnings per share of $1.20.

Gerard Klauer Mattison analyst Charles DiSanza cut Motorola to a "neutral" from a "buy."

"We believe that communications investors may be less willing (than semiconductor savvy investors) to accept the effect that looming macroeconomic issues may have on the intermediate-term semiconductor cycle outlook," he said.

DiSanza, however, noted that despite Motorola's lack of earnings visibility, long-term investors should hold the shares.