Motorola Posts Q3 Profit On Lower Handset Losses

By Joseph Palenchar -- TWICE, 10/29/2009

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Schaumburg, Ill. - Motorola posted its second consecutive quarterly net and operating profit in the third quarter on significantly lower losses by the company's wireless-handset division, which reduced its operating losses for the fourth consecutive quarter.

In the fourth quarter, co-CEO Sanjay Jha promised, the handset division would post its fifth consecutive quarter of lower operating losses, followed in 2010 by "significantly better financial results." He reiterated that the division will return to profitability sometime in fiscal 2010, when the division will post at least one quarter of operating earnings.

During an investors' conference call, Jha also pointed out that investors shouldn't expect "a dramatic increase" in the handset division's market share to return the division to a "rational break-even point." Motorola's worldwide market share runs in the mid single digits. With the bulk of cost cuts over with, he added, "from here on, smartphone traction is the critical driver of our financial performance."

The company launched its first two Android-based smartphones in the fourth quarter and will expand its Android portfolio to more carriers and more markets in the first quarter of 2010, Jha said. The "vast majority" of new smartphones planned in 2010 will use Android, he said.

In the third quarter, the handset division's operating losses fell to $183 million compared to a peak $840 million loss in the year-ago quarter. Sequentially, division losses fell from the second-quarter's $253 million and first quarter's $381 million, largely due to massive cost reductions that fell mostly on the handset division. For the nine-month period, handset division operating losses shrank 41 percent to $945 million compared to the year-ago period's $1.6 billion.

For its full fiscal year, Motorola projects it will have reduced companywide expenses by $1.9 billion compared to the end of 2008. Of that amount, the handset division will have reduced expenses by $1.4 billion, CFO Ed Fitzpatrick said. The companywide expense reduction will be $100 million more than previously forecast, he added. Since the end of 2008, Motorola has reduced its companywide workforce by 9,700 people, not including contract workers, he said.

Division expense reductions went hand-in-hand with revenue reductions. Handset revenues in the third quarter dropped 46 percent to $1.69 billion from the year-ago quarter and were also off sequentially from the second quarter's $1.83 billion. For the nine-month period, handset revenues fell 45 percent to $5.3 billion from the year-ago $9.45 billion.

For the fourth quarter, Jha forecast handset revenues to grow sequentially on lower unit sales as the division expands its smartphone selection. The division will also reduce its operating losses in the quarter and raise its margins, he said.

Companywide, third-quarter operating earnings grew to $128 million, up sequentially from the second quarter's $10 million, but net earnings slipped to $12 million from the second quarter's $26 million.

For the nine months ending Oct. 3, Motorola posted companywide operating and net losses because of large losses in the company's first quarter, but the third-quarter losses were significantly lower compared to the year-ago period. Nine-month operating losses fell 43 percent to $311 million from the year-ago nine-month period, and net losses fell by 33 percent to $193 million for the nine-month period.

Companywide third-quarter net sales were down 27.4 percent from the year-ago quarter to $5.45 billion, largely because of a steep drop in handset sales, but sequentially, companywide net sales were down only 1 percent to $5.45 billion.