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7/19/2002
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Taking Stock: Motorola Offers A Glimmer Of Hope For The Telecom Market

Vendor reports largest loss ever, but posts operating profit

Another earnings season, another two weeks of little sleep. Intel and Motorola led the parade of the big tech companies reporting last week. Intel reported earnings per share of 10 cents from continuing operations. Yes, I know we're all very suspicious of what is included in "continuing operations" and the level of write-offs. In this case, it was still below Wall Street analysts' consensus. But let's assume that companies are starting to get the point that their numbers better be realistic or else someone may actually go to jail in the near future.

The bigger surprise was Motorola's earnings. Though the company reported the largest loss in its history, the numbers actually provide a glimmer of hope for the telecom market, something we haven't seen in a while. Motorola reported revenue of $6.7 billion and continuing operating profits of 2 cents per share. That's right, Motorola finally reported an operating profit. Of course, it was subject to a lot of one-time write-offs, but what's a measly $3.36 billion of pre-tax charges among friends.

Let's look at some of the bigger one-time charges. There was $1.2 billion in fixed-asset impairment, which means these assets aren't worth as much anymore. There was an additional $960 million in investment impairment, which means the company made some bad investments. Severance charges totaled $220 million, and Motorola wrote off its Telsim (Turkish telecom company) receivables of $520 million. Also, its book-to-bill ratio remained weak at 0.95, giving poor revenue visibility going forward. A few tweaks where some charges in operating expenses could have been included and operating profit would have disappeared.

Motorola's semiconductor division had sales of $1.2 billion, up 11% quarter over quarter but with a pro-forma operating loss of $79 million. This excluded an additional $1.2 billion in one-time charges. The best part of this division was that book-to-bill exceeded 1.0, although it fell to 1.07 from 1.19 last quarter. Orders for wireless and broadband were up significantly. This will let the division operate at break-even at an annual revenue level of $4.9 billion, a big positive going forward.

The Global Telecom Solutions unit reported revenue of $1.2 billion, up 16% sequentially. Its reported pro-forma profit of $32 million excluded $560 million in one-time charges. Book-to-bill was 0.89, and the outlook remains very weak.

Broadband communications reported $554 million in revenue, up 5.5% from the previous quarter, and a pro-forma operating profit of $61 million, excluding $365 million in charges. This division remains slowed by the cable industry's capital spending slowdown. Book-to-bill was an anemic 0.76.

The good news is in handsets. The PCS division reported revenue of $2.6 billion, up 14% quarter over quarter with a pro-forma operating profit of $172 million, which excludes $169 million in one-time charges. The company estimates that it had about 18% market share during the quarter, up from 17% last quarter. Given handset sales of 16.7 million units, that would have put total handset sales for the quarter at about 93 million. It's unlikely the industry will achieve the annual total unit sales of 420 million that Motorola projected last quarter. The industry sales rate through the first half was about 180 million units.

Cash on the balance sheet rose to $6.49 billion from $6 billion last quarter, with cash flow from operations at $600 million. Overall debt stayed roughly the same. Cash and equivalents represent about $2.85 per share. Guidance for the third and fourth quarters is for increasing profitability, with full-year estimates of $27 billion in revenue and earnings per share of 14 cents. The company expects 2003 revenue of $29 billion, and it's comfortable with analysts' consensus earnings-per-share estimate of 45 cents.

Given the weakness in many of its markets, prospects for a quick recovery seem limited. Motorola's valuation, with today's uncertainties, is fair at $15. But given significant cost cuts, the company is well-positioned to leverage profitability if business starts improving.


William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. reach him at bschaff@bayisle.com.

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