Motorola Gains as Forecast Signals Demand Picking Up

Motorola Inc.'s new Droid phone
Motorola Inc.'s new Droid phone is displayed at a news conference in New York. Photographer: Jeremy Bales/Bloomberg

April 29 (Bloomberg) -- Motorola Inc., the largest U.S. mobile-phone maker, climbed 3.5 percent in New York trading after its earnings forecast signaled demand for models like the Droid is helping to reverse a three-year sales slump.

The company predicted second-quarter earnings, excluding some costs, of as much as 9 cents a share, exceeding analysts’ projections. Motorola also posted its smallest revenue decline in three years.

Sales of the touch-screen Droid, a smartphone running Google Inc.’s Android software, were “very strong” last quarter, co-Chief Executive Officer Sanjay Jha said. The challenge for Motorola is to follow up with other attractive handsets to win users from Apple Inc.’s iPhone and Research In Motion Ltd.’s BlackBerry, said Tavis McCourt, an analyst at Morgan Keegan & Co. in Nashville, Tennessee.

“The success of the Droid has got them back in the game and given them great marketing support from Verizon,” said McCourt, referring to Verizon Wireless, the largest U.S. wireless carrier. McCourt has an “outperform” rating on the stock. “They need more than one hit to get the scale to be profitable.”

Motorola, based in Schaumburg, Illinois, rose 24 cents to $7.16 at 4 p.m. in New York Stock Exchange composite trading. The stock has dropped 7.7 percent this year.

‘Dramatic’ Change

Motorola said it shipped 2.3 million smartphones, up from 2 million in the previous three months. Total handset shipments were 8.5 million. McCourt estimated 1.7 million smartphones and 10.3 million devices in total.

“Smartphone shipments were better than expected and that’s a positive,” said Matt Thornton, an analyst at Avian Securities LLC in Boston with an “outperform” rating on the stock. Motorola has succeeded in winding down sales of basic phones and ramping up smartphone shipments, he said. “It’s happened in a dramatic fashion.”

Motorola is focusing on phones that can surf the Web and play video, a segment that’s outpacing the rest of the handset market. Sales of smartphones may climb 46 percent this year worldwide, more than triple the pace of the overall market, according to researcher Gartner Inc.

Full-Year Target

“People like what they see,” Jha said of Motorola’s phone lineup in an interview today. He said he expects Motorola to gain market share this quarter.

Jha said he’s “comfortable” Motorola can reach a sales goal of 12 million to 14 million smartphones this year. Last quarter, the company’s target for this year was 11 million to 14 million.

Still, Jha’s also facing intensifying rivalry. Yesterday, Hewlett-Packard Co. said it would buy Palm Inc., maker of the Pre and Pixi smartphones, in a $1.2 billion deal.

Jha declined to say whether Motorola had bid or plans to counterbid for Palm.

“What we do is always look at all options available to us and that’s all I can say,” he said.

Motorola is counting on a sales recovery as it prepares to split off its handset business. The company said in February the wireless unit will be merged with its unit that makes cable TV set-top boxes and be headed by co-Chief Executive Officer Sanjay Jha. Co-CEO Greg Brown will oversee the remaining units that make two-way radios, bar-code scanners and wireless networks.

Motorola is making “excellent progress” toward the split, which is on track for the first quarter of next year, Brown said on the call. Motorola will file a report this summer with more details, he said, declining to be more specific.

Division Sales

Second-quarter earnings will be 7 cents to 9 cents a share, Motorola said. Analysts projected 4 cents, according to the average of estimates compiled by Bloomberg.

Motorola said its forecast excludes expenses of 4 cents a share for stock compensation and amortization. Including those costs, the forecast was in line with estimates, Thornton said.

First-quarter net income was $69 million, or 3 cents a share, compared with a loss of $231 million, or 10 cents, a year earlier. Profit, excluding some items, was 2 cents a share. Analysts had predicted a loss of 1 cent on average.

Sales fell 6.1 percent to $5.04 billion. Analysts projected sales of $5.12 billion.

The loss at the mobile-phone unit narrowed to $192 million from $545 million a year earlier, while revenue dropped 8.9 percent to $1.64 billion. The division’s loss should narrow in the third quarter and the unit should be profitable in the fourth, Jha said.

Motorola is open to developing its own operating system provided it made strategic sense, Jha said.

“Owning your OS is important, but it’s not just the OS -- you have to have the ecosystem, the apps, a huge range of services,” he said. Right now, Android is “delivering very good results for us,” he said.

Sales at the set-top-box unit fell 18 percent to $838 million. The division making scanners and two-way radios boosted revenue 5.9 percent to $1.69 billion, and sales at the network unit fell 7.2 percent to $896 million.

(Motorola held a conference call today to discuss results. To listen to a replay, go to {LIVE <GO>}.)

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