Motorola sees Q1 shortfall, perhaps loss

Ben Klayman

CHICAGO: Wireless communications giant Motorola Inc. warned on Friday that a

dramatic sales slowdown could lead to its first quarterly operating loss in 15

years, as its president became the latest top executive in the slumping

technology sector to use the dreaded "R" word.

"As far as we are concerned, we are in a recession at this point, and

it's a recession of confidence," president and chief operating officer

Robert Growney told analysts less than a week after networking giant Cisco

Systems Inc. warned of a US recession.

"We need some confidence measures to bring this market back," he

added on a conference call, "but the recessive part of everyone's thinking

right now is bleeding over very, very quickly into Europe and also into Asia

Pacific."

Motorola, the world's No. 2 wireless handset maker behind Finland's Nokia

Corp., will soon announce the sale or closure of four of its 55 plants and is

weighing doing the same with three others, Growney said. He did not identify the

plants or when the decisions would be made.

The company's shares were down $1.00 or 5.8 per cent, at $16.29 in New York

Stock Exchange trade on Friday afternoon. In pre-market trading, however, the

stock had slid as low as $15.75 - its lowest price since October 1998.

Motorola's news also hit rivals Nokia and Sweden's Ericsson, the No. 3 player

in the wireless handset business. Their shares fell to new year lows.

Following on the heels of slowdown warnings on Thursday from network computer

maker Sun Microsystems Inc. and data storage powerhouse EMC Corp., Motorola's

news drove US stock markets lower.

Analysts and portfolio managers said Motorola's news was not surprising in

light of the recent warnings by other telecom companies.

"Motorola is starting down the road that a lot of these companies are

going to end up going down in the next couple quarters," Jerome Castellini,

president of Chicago fund company CastleArk Management said. "They built

cost structures for growing revenues and unfortunately the revenues aren't going

to be there."

Outlook tied to economy



Motorola, which employed 147,000 at the end of 2000, had already warned last
month that its first-quarter results would suffer from a slowdown in its

personal communications, or handset, and semiconductor businesses. Since the

beginning of the year, the Schaumburg, Ill., company has cut almost 7,000 jobs

in various units.

In last month's warning, the company projected first-quarter sales of $8.8

billion would be flat with a year earlier, while profits would drop to 12 cents

per share from 20 cents.

Now, however, it said it won't meet that lowered guidance, and if the

slowdown persists, it expects to report an operating loss for the quarter.

The last time Motorola posted an operating loss was the third quarter of

1985, a spokesman said. It posted a net loss in second quarter 1998, but that

included a $2 billion charge.

Tim Ghriskey, a portfolio manager with Dreyfus Fund, which has reduced its

Motorola holdings, said investors will have to wait for a recovery in Motorola

stock.

"It's hard to see the stock outperforming in the near term until we see

some economic recovery."

Down more than 73 per cent from its all-time high of $61.54 last March,

Motorola stock has underperformed the Standard & Poor's 500 index .SPX) by

about 65 per cent in the past year.

Credit rating agency Standard & Poor's responded by putting its

"single-A" senior long-term and "A-1" short-term ratings for

Motorola on review for a possible downgrade.

Continued...

Competition from Nokia and Ericsson



Motorola has been facing intensifying competition in its handset business
from Nokia and Ericsson.

But Motorola executives insisted on the conference call following its profit

warning that the shortfall resulted from the sharp economic slowdown in the

United States and inventory corrections taking place broadly in technology

markets worldwide - not lost market share.

"We believe that this weakness is the result of current industry-wide

conditions and not a loss in market share," Growney said in discussing the

company's handset business.

Many European carriers, he added, are cutting spending to strengthen their

balance sheets, including scaling back cell-phone subsidies that result in

higher retail prices and lower consumer demand. He said Motorola sees global

cell-phone sales possibly falling below 500 million this year, off from previous

estimates of 525 million to 575 million.

In the semiconductor segment, Growney said, Motorola expects industry global

business to be flat or down from last year, and the company's unit won't be

profitable in the first quarter and possibly not for the year.

Even in businesses where Motorola sees growth for the year, Growney warned of

softening demand in pockets or regions in reaction to fears of a US economic

slowdown.

Motorola said it would take additional cost reduction steps in the future.

Growney said Motorola will hold capital spending this year to significantly

less than the $2.5 billion it had previously projected. Last year, its capital

outlays totaled $4 billion.

"We have fairly extreme volatility right now," Growney said.

"When you look at the charts, some of the businesses are kind of in

free-fall, when you look at rates of change."

Motorola not alone



Motorola's warning follows a spate of profit and sales warnings from major
technology companies in recent days.

Cisco chief executive John Chambers told a Swedish business newspaper on

Saturday that the United States is suffering a recession and said the Federal

Reserve should have cut interest rates last November instead of waiting until

January.

On Thursday, Sun Microsystems and EMC cut sales and profit targets, citing

the slowdown in capital spending by large corporations.

And last week, telecommunications equipment maker Nortel Networks Corp., the

world's biggest supplier of fiber-optic telecom gear, said it will post a

first-quarter loss and lowered its revenue growth expectations for the year.

Other high-tech powerhouses like Cisco, JDS Uniphase Corp. and Corning Inc.

have recently ratcheted down expectations with slowdown warnings. And they won't

be the last, said Walter Casey, co-manager of Bank One Investment Advisors'

technology fund.

"The entire (telecom) area for awhile may be under a cloud," he

said. "There are serious finance issues, serious issues of profitability in

customer base and in the supplier base and I don't think that's a short term

issue."

(C) Reuters Limited 2001.