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Motorola’s (MOT) chief executive Ed Zander announced the results of a “challenging” fourth quarter Friday, as the company hinted on January 5th in its earnings pre-announcement, with a weak outlook for the first quarter. Zander said the company will reduce staff by 5%, or 3,500 people, however, which seemed to bright the stock Friday morning.

Sales at Motorola were $11.8 billion, at the high end of the revised forecast the company gave on Jan. 5th, because, as Zander characterized things, the company “made some pricing moves” with respect to cell phones. Translation: it cut prices, especially with the popular Razr phone, to gain market share, which Cowen & Co. analyst Matthew Hoffman estimates rose from 22.6% in the prior quarter to 23.3% in the fourth quarter.

The price cuts look as if they’ll haunt sales and profit for some time to come, according to early Street reaction. The company’s operating profit margin in the 4th quarter fell to 4.4% from the 10% to 12% range in recent quarters, as gross profit on mobile phones as a percentage of sales “collapsed,” in one analyst’s words, from 32% in the prior quarter to 26%.

Zander said Motorola, “are … committed to our long-term financial goal of double-digit operating margins as outlined last year at our analyst meeting.” And Zander said that with more features in the Razr and other slim phones this year — things such as fast data services, or “3G” — Motorola, “can get back into where I think a large portion of the profit pool is.”

But analysts see the company continuing to cut prices to maintain its second-place share of the global phone market ahead of Samsung and behind Nokia (NYSE:NOK):

  • Cowen & Co.’s Matthew Hoffman:> With guidance light on top-line, lower interest income likely (post Symbol Technologies (SBL) buy), and a renewal of the handset business unlikely to occur before 2H07, we maintain MOT caution and see estimates heading lower. Derivatively, it initially seems as though Motorola is going to continue to invest in marketing and share, keeping pricing pressure a key issue for the overall handset market.

    For 1Q, the company is guiding top line to $10.4B-$10.6B compared to existing consensus of $10.5B. However, we believe many in consensus had not yet included Symbol in numbers - we had not - and assuming Symbol’s quarterly run-rate of $400-500MM holds, our estimates and consensus go down. We expect our 1Q07 EPS estimates to fall (post analyst event) from current levels considering lighter top-line guidance and continued investments. We maintain Neutral on MOT.

  • American Technology Research’s Albert Lin: Mobile phone operating margins are 4.4%, on the very low side of revised expectations. Motorola has had steadily improving op margins for the last several years moving from 10% to almost 12% last quarter. This collapse in margins will be a big problem for investors as phones and related accessories are now 66% of all company sales. Mobile phone sales were $7.8BB (up 19% Y/Y). 65.7MM units were sold making 2006 a 217MM unit sales year for MOT (about 23% of global share). Total company operating margins in 4Q06 was 6.4% meaning non-phone sales operating margins were just over 10%. If 4.4% margins are a sustainable and regular margin, we see MOT shares fairly valued at $15-range. If they can improve and quickly get back to 10% range, then the shares are worth about $20 in our view.
  • Incidentally, results of the “connected-home business,” which makes things such as set-top boxes for cable service, did much better than expected, notes Prudential Equity Group analyst Inder Singh, bringing in $980 million versus analysts’ consensus expectation for $830 million, according to Singh, which may lend some support to theories that this company could be bought out, broken into separate parts, and trade more efficiently as separate companies, as Eric Savitz noted Friday.

    As of Friday, Motorola shares were actually up 1.59% at $19.01.

    MOT 1-yr chart

    Source: Motorola Makes "Pricing Moves" To Gain Market Share