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Motorola's Q2: It'll Be Rough

CEO Ed Zander survived Carl Icahn's proxy fight, but he's back on the ropes after the handset maker warned of worse-than-expected results

Now there's even more pressure on Motorola (MOT) Chief Executive Officer Ed Zander. The struggling mobile-phone maker warned July 11 that its second-quarter results will be worse than expected and that it won't make money this year from mobile devices—its largest business.

Weak results had been expected for the quarter, continuing a tailspin that began last fall when aggressive attempts to increase market share by lowering phone prices began to backfire and hurt profit margins. Motorola executives warned as far back as February that the first half of 2007 would be "rocky," and now the cell-phone unit won't be back in the black until next year at the earliest. Motorola blamed the loss in the current quarter on a poor showing in Asia and Europe for the mobile-device business.

Despite Zander's previous optimism, the latest news shows that Motorola's turnaround efforts haven't gained traction. Zander, who survived a proxy fight with activist shareholder Carl Icahn earlier this year over the company's strategy, faces the increasing likelihood that the board could replace him.

Another Shakeup

In the latest management change since the company's troubles surfaced six months ago, Motorola said it had named Stu Reed, executive vice-president of its integrated supply chain organization, as president of the mobile-devices division. Reed, who spent 20 years with IBM (IBM) before joining Motorola in 2005, will continue to report to Greg Brown, president and chief operating officer.

His predecessor, Ron Garriques, oversaw tremendous growth at the cell-phone unit thanks largely to the worldwide popularity of the ultra-thin Razr handset. But the Razr's run petered out last year and Garriques abruptly resigned in February to take a job at Dell (DELL), furthering Motorola's turmoil.

The company forecast a loss from continuing operations in the range of 2 cents to 4 cents per share for the second quarter, including charges of 3 cents to 4 cents per share from previously disclosed job cuts and other items.

Motorola also cut its forecast for quarterly sales to $8.6 billion to $8.7 billion from a prior target of about $9.4 billion. Analysts polled by Thomson Financial had predicted earnings of 2 cents per share on sales of $9.26 billion.

The company said it expects to ship about 35 million to 36 million handsets in the second quarter.

Nine-Figure Pretax Charge

Motorola, the No. 2 handset maker behind Nokia (NOK), said last week it will take a pretax charge of $101 million related to layoffs. It has announced two rounds of jobs cuts this year—3,500 by June 30 plus another 4,000.

Besides the reductions and a restructuring plan, it has pinned its hopes for a recovery on a new cell-phone lineup, anchored by the Razr 2. That phone was to be introduced in Asia this month and elsewhere later in the summer.

The company reports second-quarter earnings July 19.

Motorola shares slipped 25 cents, or 1.4 percent, in extended-hours trading after closing the regular session up 33 cents at $17.95. The stock is just above a two-year low of $17.32, reached in April.

By the Associated Press

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