Burned By Busy Signals

When is good news just too good? Ask Motorola Inc. In January, the company reported record fourth-quarter earnings of $515 million, up 51% from 1993, on sales of $6.45 billion, a 29% hike. But on Feb. 17, the wireless-communications giant admitted its profits--which were as much as 18% above Wall Street estimates--had been aided by overzealous ordering of cellular phones by retail distributors. Now, the company says, dealers are swamped, despite record Christmas sales, and that has hurt new orders for phones. The bad news sent Motorola's stock tumbling almost 10%, to 57 7/8.

How could Motorola get hit by such a blooper? Industry sources say several distributors, including AirTouch Communications and Baby Bells such as U S West and BellSouth, drastically overordered. They were acting defensively. During the 1992 and '93 Christmas shopping seasons, Motorola wasn't able to meet consumer demand for handsets, forcing the Bells to turn away business.

Not wanting to miss out in 1994--especially with some Bell cellular units posting growth rates of over 40%--the companies placed orders early and often. And they didn't warn Motorola to throttle back on production until it was too late. "The phone companies didn't pay attention to the situation," says Alan H. Goldfield, chief executive of Motorola distributor CellStar Corp. "They were shocked when the phones kept coming."

POOR POLICING. They shouldn't have been. Schaumburg (Ill.)-based Motorola worked furiously last year to boost cellular-phone output. It also expanded production of semiconductors, a key component. Unhampered by bottlenecks, the company had no problem meeting Christmas demand, real or imagined. But Motorola didn't properly police incoming orders. "Motorola should have known that orders were going beyond demand," says Hambrecht & Quist Inc. analyst Rakesh Sood.

Motorola refuses to pinpoint which distributors caused its heartache. BellSouth Corp. is mum, too. AirTouch admits it overordered but says special deals have helped push inventory out the door. U S West says it beefed up fourth-quarter orders to make sure it had stock on hand for promotions in early 1995. Distributor Goldfield, sitting pretty with below-normal inventories, says several Baby Bells have offered to sell him excess phones "at below cost."

Most observers think the overhang will disappear by early April. But Sood says the inventory problem could slice $39 million, or 9%, from Motorola's first-quarter profits, which he figures will now come in around $389 million on sales of $6.18 billion, 5% less than his previous estimate. Analysts don't expect any long-term fallout for Motorola. Except that Motorola may try to make next Christmas a bit less of a bell-ringer.

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