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Motorola issues warning
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December 7, 2000: 2:25 p.m. ET
4Q earnings and sales to be below expectations; chip slowdown cited
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NEW YORK (CNNfn) - Motorola Inc., the world's No. 2 maker of mobile telephones and a leading chipmaker, warned Thursday of a sales and earnings shortfall for its fourth quarter, fueled by slowing conditions in the global semiconductor market.
 In afternoon trading Thursday, shares of Motorola (MOT: Research, Estimates) eased 50 cents, or 2.8 percent, to $17.31, below its previous 52-week low of $17.62 and far below its high of $61.54.
The Schaumburg, Ill.-based company said sales for the fourth quarter are expected to be $10 billion and earnings per share will be 15 cents, versus earlier guidance given in October of $10.5 billion in sales and EPS of 27 cents a share.
The consensus estimate of Wall Street analysts for the period is 27 cents per share.
Motorola also said sales for the first quarter of 2001 currently are expected to be $8.8 billion with EPS of 12 cents a share, versus the consensus estimate of 23 cents a share.
In a press conference Thursday, Motorola executives blamed delays in cost cutting measures, targeting timing issues in relation to inventory overhang in the semiconductor market and said the company's chip build-up is in a "burn-off period."
The company said it will give full-year 2001 guidance when it reports fourth- quarter results but expects it to be lower than earlier views of $44 billion in sales and EPS of $1.20 a share.
"Even though it is necessary to reduce our expectations for sales and earnings in the short term, we continue to believe that tremendous long-term opportunity exists at three levels of the value chain – embedded chips, embedded electronic systems, and end-to-end integrated communications solutions – for wireless, broadband and Internet markets," Robert Growney, president and chief operating officer, said.
In October, Motorola lowered its earnings outlook for the fourth quarter and full year, as well as for 2001, citing slower growth in mobile phone sales and weakness in the euro.
To remedy the shortfall, Motorola said it began cost-cutting measures in its third quarter that will continue into the first quarter of 2001. Actions include the consolidation of manufacturing operations and outsourcing manufacturing, which the company said will result in a charge against earnings that will be reported as a special item in its fourth quarter results.
"There are no issues on the demand side," Motorola's vice president of investor relations Ed Ganz said. "This is about cost reductions not happening as quickly as we thought."
Motorola also reportedly is cutting 2,870 jobs, or 2.2 percent of its workforce, and will outsource the manufacture of $1 billion of wireless communications equipment to Celestica under terms of a deal announced Wednesday, according to Thursday's edition of the Wall Street Journal.
Analysts downgrade stock
Analysts from Merrill Lynch and Deutsche Bank Alex Brown downgraded Motorola's stock rating following Thursday's announcement.
Merrill's Michael Ching cut Motorola to an intermediate term rating to "accumulate" from "buy," and said "We believe that a lower opinion than 'accumulate' is not warranted given its low valuation. The only bright spot is that at the current price, valuations are at the low-end of historical ranges."
Ching believes that Motorola's substantial downward earnings per share revision coupled with more modest revenue change "suggests that the main issue is in operating profitability, especially with respect to cellular phones and semiconductors."
"Specifically, the company suffers from a bloated inventory of older model phones, which is slowing the transition to newer, higher-margin products," Ching said.
Regarding Motorola's semiconductor pileup, Ching said he sees the slowdown in networking and computing as a reflection on buildup by some key customers due to double-ordering in a previously capacity-constrained environment.
Deutsche Bank Alex Brown's Brian Modoff also downgraded Motorola and rated its shares as "market perform," from "buy," and cut his forecasts.
"While an industry-wide slowdown in semiconductor demand is something management has little control over, of greater concern to us is management's continued difficulty in executing its handset product transitions and cost reductions in an increasingly competitive market. We do not see this improving anytime soon," Modoff said in a research note. 
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Motorola
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