Taking Stock: A Bleak Beginning To Third-Quarter Results

Despite Motorola's disappointing results, not all the news is bad.
Caffeine-enhanced days are now the norm again as I slog through the numerous quarterly earnings announcements that are pouring in. Motorola (MOT--NYSE) was one of the first companies to report, and, as always, its results provide insights into technology trends. This quarter, the outlook was grim, including a decrease in expectations for the rest of 2002 and 2003. However, there were some positives in Motorola's earnings release.

Motorola, one of the largest U.S. technology companies, is organized around five divisions: handsets (41.3% of third-quarter 2002 revenue); semiconductors (19.2%), telecom equipment and software (15.9%); government and industrial products (13.7%); cable set-top boxes, modems, and equipment (8.2%); and integrated electronic systems (8.5%). A sixth category includes assorted other products and intercompany sales (-6.8%). Revenue this quarter reached $6.4 billion, down 12% from last year and down 5.5% from the previous quarter. The sequential decline of only 5.5% masks weakness in the telecom-equipment and cable segments.

Revenue in the telecom-equipment segment slid 18% quarter over quarter and 42% year over year, which is pretty dismal. Motorola sees the division increasing sales slightly next quarter but posting a small loss, indicating that the overall telecom-equipment market continues to be on life support. The situation is similar in the cable division, with sales expected to decline further in the fourth quarter.

On the positive side, Motorola's handset division performed reasonably well, with sales flat quarter over quarter and expectations of increased revenue in the fourth quarter compared with the third. The division also accounted for most of Motorola's profits in the quarter. Operating margins improved to 4.7%. Not stellar but certainly better than the many losses Motorola has delivered in the recent past. The semiconductor division posted flat results, with expectations for the fourth quarter also flat to slightly up. Any recovery in the semiconductor sector remains weak at best. Specifically, sales of semiconductors for networking and computing were very weak, while chips for wireless applications held up.

The most disconcerting part of Motorola's news was the poor outlook for the fourth quarter of 2002 and next year, spurred by deteriorating business conditions last month. This year, the company expects that industrywide shipments of mobile handsets will reach only 390 million, 10 million less than it had previously expected. The most pronounced weakness comes from the divisions that also were weak in the quarter, including semiconductors. Revenue in the fourth quarter is expected to be $7.1 billion, or $400 million short of what was previously expected. Unlike many other companies, Motorola offered a guess as to what 2003 revenue and earnings per share would look like, and the numbers were down. The only good news is that Motorola, slowly but surely, appears to be turning itself around despite the serious downturn in the high-tech industry.

This was a rather bleak start to the third-quarter earnings season for technology companies, with both Intel and Motorola reporting lackluster results. I suspect we'll hear more cautious remarks from technology executives in the coming weeks.

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

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