Motorola Comments on Sales Shortfall

Motorola (MOT) reported last night a 45% drop in Q3 profit y/y and that it is likely to miss its $12.1 billion sales forecast for the year. MOT shares fell $1.87, or 7.5%, to $22.98 in extended NYSE trading. On yesterday's Q3 conference call, Motorola senior management addressed several reasons for the sales shortfall:

Motorola CEO Ed Zander

About half of our shortfall is due to lower than expected GSM infrastructure sales in our EMEA -- Europe, Middle East and Africa -- region. Primarily, customers delayed capital spending, plain and simple. The other half was due to lower sales of iDEN handsets caused by customer inventory adjustments, in anticipation of our new dual-mode phones which will ship this quarter...

Q - Tal Liani - Merrill Lynch

...In your remarks, you said that part of the reason that you had some weakness this quarter is because Nextel was waiting for a dual-mode phone and it's now being shipped. So the question is, when I look at your guidance versus the consensus for the next quarter, the consensus is at the high end of your guidance, which means your midpoint is below consensus. So if we are going into a seasonally strong quarter, and if it was just because of Nextel waiting to get the new phones, why don't we see stronger guidance?

A - Ed Zander

Well, first of all, I'm not going to talk about specific customers. We talked about iDEN, and we did have as I said, the sales weakness was two things: GSM in Europe and also the iDEN inventory adjustments for anticipation of dual-mode.

As far as our forecast goes, we think it's a healthy...18% to 20% year-over-year forecast. It takes in a lot of businesses that we have here, including infrastructure and other things. But in Ron's business, I think, with our new products we did say we would grow earnings year over year and we would grow market share year over year.

So I just don't want to comment specifically on customers, other than to say we do think this quarter is going to be, with all our new products shipping, a good one for Mobile Devices.

A - Motorola head of Mobile Devices Ron Garriques

One of the things I would add to Ed's comment is when we look at our backlog, which is basically our orders for Q4, our orders for this coming quarter are at the highest level since Motorola has been in the Mobile Devices business.

...

Motorola head of Networks and Enterprise Greg Brown

On the infrastructure side...Q3 was a solid quarter on the iDEN infrastructure. We will probably have our second-best year on iDEN infrastructure out of the last four or five on an annualized basis. That's coming off of last year, which was a record high.

iDEN continually has a high level of interest and growth outside of the U.S., internationally. We referenced NII Holdings, but iDEN now worldwide is up to about 27 million subscribers in I think 26 different countries. So we see it has a very viable technology in a variety of different international theaters.

A - Ed Zander

The iDEN was a missed forecast, frankly, on our part and a shortfall. If we forecasted properly, we plan accordingly. So understand that. We think we have now forecasted for Q4 what we need to go do there, including the dual-modes, and hopefully throughout 2007.

...

Q - Larry Harris - Oppenheimer

Any additional information you can provide relative to the GSM infrastructure sales in the third quarter? Was that delayed to the fourth quarter or 2007? Any additional commentary would be helpful.

A - Greg Brown

Quite frankly, we were just disappointed. We expected GSM to be stronger in Q3. It was not. It was primarily, as we have talked about, delay and deferred decision-making out into future periods. We would expect GSM to be stronger in Q4 than Q3.

Historically, specifically when we looked at EMEA which was the biggest sore point, the last two years, Q2 to Q3, EMEA on the Networks side actually sequentially increased. This year, Q3 from Q2, we had a sequential decline. So, again, we are hopeful that we can close the majority of that business in future periods, and we are going to do that.

Q - James Faucette - Pacific Crest

Thank you. I just wanted to follow up on the infrastructure question, a bit of clarification. I understand that the EMEA region was a bit weaker than you had expected. But I'm wondering if you had anticipated that it would be up sequentially, as it has been the last couple of years, and this year was just down as normal seasonality would imply? Or is there something a bit broader going on there with the carriers readjusting their plans and reevaluating their priorities?

A - Greg Brown

No, I think you hit it right on. I think that we expected it to perform along more historical trends, either flat or slightly sequentially up in EMEA, and it just didn't materialize. So obviously, we had to readjust accordingly. But that's really the primary driver. Again, I think that was largely driven by the push-out of customer decisions, primarily to Q4 in 2007.

A - Ed Zander

There was consolidation going on across the world. It doesn't let us off the hook for not forecasting properly in that particular area. So we have to take that one plus the iDEN one, as in July when we gave you guidance, those two things had different forecast numbers on them. They didn't materialize. One for, we know now, with the dual-mode and the GSM, our checks in the last few weeks or months actually was mostly due to move outs, some of which you just said about, in terms of consolidation and people reassessing their capital budgets. But nothing in terms of competition in the accounts we went after and took a look at.

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