Motorola's Mixed Results Show Recovery Is Still A Work In Progress

Any recovery in technology spending is tenuous at best.
Though I fundamentally believe in the long-term value of technology, I was looking forward to Motorola's quarterly report to give me some glimmer of a near-term business rebound in at least one of its market segments. After all, Motorola (MOT-NYSE) is one of the largest diversified technology companies.

Motorola consists of five major divisions: personal communications (cell phones, 33.2% of revenue); global telecom solutions (wireless and wire-line telecom equipment, 22.3% of revenue); commercial, government, and industrial systems (two-way radios, etc., 13.8% of revenue); broadband communications (cable modems and digital set-top boxes, among other products, 10.9% of revenue); and semiconductors (digital signal processors and microprocessors, 16.6% of revenue).

The company can count the cell phone as perhaps its biggest innovation. But during the '90s, Motorola lost its edge and succumbed to infighting among the fiefdoms. As the decade ended, Motorola had lost its undisputed lead in cell phones to overseas rivals such as Nokia. The company invested billions of dollars in Iridium, the ill-fated satellite phone venture--remember the sleek phones that had a baguette for an antenna? The previously innovative cell-phone division went into a tailspin, suffering from outdated models and continued cost overruns. The telecommunications equipment and semiconductor divisions got caught in the post-bubble blues.

The just-reported quarter that ended June 30 was indeed bad. Overall, revenue declined 19% from the same quarter last year and 3% from the first quarter this year. Profitability evaporated, with a pro forma operating margin of-4.7%. The personal communications segment suffered a 25% decline in revenue from the same quarter last year but saw an increase of 9.3% from this year's first quarter.

Management expects revenue to increase next quarter from this one. Two factors are behind these expectations. One, the rollout of next-generation wireless networks in South Korea should increase demand for Code Division Multiple Access (CDMA) phones; and, two, Motorola is finally introducing new handsets. I suspect the revenue increase is specific to Motorola and might not indicate a broad turnaround for the cell-phone sector.

The global telecom solutions segment experienced a 14% revenue decline from last year and a 2.5% decline from last quarter. Again, management projects revenue will be up quarter over quarter. The strength stems from Motorola's entrenched position in Asia, especially in China, where business is still relatively strong. In general, the company's portfolio of CDMA infrastructure equipment is doing better than most competitors', although any deterioration in the emerging markets could hurt Motorola's top and bottom lines. Spending in Europe and North America is still dormant because of the lack of available funding, something that doesn't bode well for Ericsson, Lucent, Nokia, and Nortel.

The results for the semiconductor division were a bloodbath. Revenue tumbled 38% year over year and 16% from the previous quarter. Last year's profits turned to losses. Management forecasts that revenue will be down again next quarter.

Management decided to attempt to call the bottom of the semiconductor cycle despite this downbeat guidance. That stirs the skeptic in me. The guidance should be a clear indication of the state of affairs not only at Motorola, but also for wide swaths of the semiconductor industry. Motorola's portfolio of semiconductors spans a number of markets, from cell phones and various electronics to broadband applications such as digital set-top boxes. The data tells me that demand simply hasn't recovered yet.

Judging from Motorola's results, any recovery in spending on technology is tenuous at best. Yes, it's benefiting from upcoming wireless network product launches. But a broader return to healthier growth rates in most of its other technologies isn't likely to come until next year. I'm beginning to see a glimmer of hope--but I wouldn't be quick to open my wallet.

William Schaff is chief investment officer at Bay Isle Financial Corp., which manages the InformationWeek 100 Stock Index. Reach him at [email protected].

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