NEW YORK (CNN/Money) -
Motorola, the world's second-largest maker of cell phones, posted sharp increases in first-quarter earnings and sales that were well ahead of Wall Street's expectations, causing the stock to skyrocket more than 20 percent Wednesday morning.
The Schaumburg, Ill.-based company said Tuesday that it expects to report strong profit and revenue gains in the second quarter as well, a sign that it may be taking advantage of cell phone market leader Nokia's woes. Nokia (NOK: Research, Estimates) warned last week that second-quarter sales would be lower than expected and indicated that it was losing market share to rivals.
Motorola reported net income of $609 million, or 25 cents a share, a 260 percent increase from earnings of $167 million, or 7 cents, a year ago. Excluding one-time various gains, Motorola earned 19 cents a share, much higher than the 7 cents that Wall Street analysts were expecting, according to First Call.
Shares of Motorola (MOT: Research, Estimates) hit a new 52-week high of $19.45 on the New York Stock Exchange on Wednesday, a gain of 20 percent from Tuesday's close.
Sales soared 42 percent from a year ago, to $8.6 billion. The consensus forecast was for revenue of $6.8 billion. Motorola's cell phone division, which accounted for nearly half of the company's total revenues, had a particularly strong quarter, with sales surging 67 percent.
Operating margins in this division improved dramatically as well, to nearly 10 percent. Profit margins in the unit were just 4.7 percent a year ago and 5.4 percent in the fourth quarter.
In a research note, Marquis Investment Research analyst Greg Gorbatenko said it looks like Motorola made the decision to focus on higher-priced cell phones as opposed to lower-end and less profitable models. "Motorola doesn't blindly go after unit volume market share like Nokia, rather they focus on revenue market share, which we believe is more important," Gorbatenko wrote.
Motorola had struggled last year due to poor product execution. The company was unable to ship some of its camera phones to U.S. wireless carriers in time for the holiday shopping season. But under new CEO and Chairman Ed Zander, Motorola has pledged to do a better job of getting key phones on the market sooner.
To that end, Motorola said that second-quarter sales should be in a range of $8.2 billion to $8.6 billion. Analysts had been expecting revenues of $6.9 billion. Motorola reported sales of $6.2 billion in the second quarter of 2003.
The company also said it expects earnings, excluding charges, to come in between 14 and 18 cents a share. The First Call consensus estimate was 9 cents.
There had been a growing sense on Wall Street that Motorola would benefit from Nokia's stumbles, but based on the magnitude of Motorola's stock move Wednesday, it looks like nobody was expecting Motorola to report numbers this strong.
"Motorola's results did not just surpass our estimates, consensus, and management guidance, these 1Q 04 numbers were downright huge. Honestly, we are scratching our heads about such a big beat," said Loop Capital Markets analyst Ren Zamora in a research note that was put out shortly after Motorola's numbers were released.
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Still, some expressed concerns about whether Motorola's momentum was sustainable. In a report, analysts from fixed income research firm CreditSights wrote that a potential cell phone price war in the second quarter could hurt Motorola.
In addition, the CreditSights analysts said investors need to take the strong first-quarter results with a grain of salt, namely that numbers probably wouldn't have been so strong if the company had actually released many of its delayed products in the fourth quarter as originally planned.
Nonetheless, it was a good overall quarter for Motorola as the company reported healthy sales and operating profit increases in its other major divisions as well, including its semiconductor business, which reversed a year-ago loss. Motorola is planning to spin off its chip division later this year.
Analysts quoted in this piece do not own shares of Motorola and their firms have no investment banking ties to the company.
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