Bloomberg News

Motorola Mobility Drops as Profit Forecast Trails Estimates

July 29, 2011

(Updates share price in fifth paragraph.)

July 29 (Bloomberg) -- Motorola Mobility Holdings Inc., spun off in January from Motorola Inc., declined in New York trading after the Droid smartphone maker forecast profit for this quarter and full year that trailed analysts’ estimates.

Profit excluding some charges will be 48 cents to 60 cents a share this year, the Libertyville, Illinois-based company said yesterday in a statement, below the average estimate of 66 cents in a Bloomberg survey of analysts. The company said it will break even this quarter or report a profit of as much as 10 cents a share, compared with an average estimate of 24 cents.

Chief Executive Officer Sanjay Jha is trying to restore long-term profitability as the company competes against Apple Inc. and larger rivals such as Samsung Electronics Co. that also use Google Inc.’s Android platform. Motorola Mobility delayed the release of its Bionic phone to September and cut the price of its Xoom tablet to entice customers, steps that will reduce earnings this quarter, Jha said yesterday in an interview.

The “longer-term concern remains increasing smartphone competition from larger Android manufacturers,” said Michael Walkley, an analyst at Canaccord Genuity Ltd. Walkley, who has a “hold” rating on the stock, cut his price target to $22.

Motorola Mobility fell 53 cents, or 2.3 percent, to $22.38 at 4 p.m. in New York Stock Exchange composite trading. The stock has declined 23 percent this year.

‘Risky Bet’

While a steady stream of new devices has helped Motorola Mobility to revive handset sales growth after Jha reorganized the business, they are still less than a third of the company’s phone sales in 2007.

Motorola Mobility said it sold 4.4 million smartphones among 11 million devices total last quarter. Pierre Ferragu, an analyst at Sanford C. Bernstein in London who rates the stock “market perform,” estimated 4.6 million smartphone shipments and 9.2 million handsets.

The company said it expects to ship more smartphones this quarter than last, and ship between 21 million and 23 million smartphones and tablets this year.

That projection “is optimistic and relies on a strong last quarter,” said Ferragu. Given signs of market share losses in North America and smartphone growth that lags Samsung, it’s “a risky bet based on the success of coming high-end models.”

Tablet Sales

The Bionic, which will run on faster 4G, or fourth- generation, wireless networks, will debut in September, a delay after being retooled to add features, he said. Another 4G model, the Photon, will be released through Sprint Nextel Corp. on July 31. The company expects tablet sales to be lower in this quarter than the 440,000 sold in the previous three months as it gears up to release two new models in the fourth quarter, he said.

Cutting the price of the Xoom tablet to $499 from $599 “had a very healthy impact” on sales, he said. “But gross margins have been hurt.” Jha said he expects the handset business to be profitable in the fourth quarter and for the year.

Motorola Mobility beat analysts’ estimates for the second quarter. Profit excluding some charges was 9 cents a share, compared with an average estimate of 5 cents in a Bloomberg survey of analysts. Sales climbed 28 percent to $3.34 billion. Analysts estimated an average of $3.11 billion.

Android’s Share

“This is the second quarter in mobile devices that we’ve had sales exceed expectations, but the company isn’t seeing any operating leverage from that,” said Stephen Patel, an analyst at Gleacher & Co. Securities in San Francisco, who rates the stock “neutral.” “It’s very concerning.”

Jha aims to harness the surging popularity of Android to achieve that scale even as Samsung and HTC grow larger still. Android’s share of U.S. smartphone subscribers jumped 5.1 percentage points to 38.1 percent in the three months through May, according to ComScore Inc. Android will claim half of the total market in 2012, Gartner Inc. said this year.

Motorola Mobility’s net loss was $56 million, or 19 cents a share, compared with net income of $80 million a year earlier.

Second-quarter sales at the mobile devices business jumped 41 percent to $2.4 billion. Revenue at the home business, which sells TV set-top boxes, rose 2 percent to $907 million.

Sales in that business in the third quarter, which straddles the North American summer, are “typically” down, contributing to the lower forecast for the period, Jha said. That shouldn’t be interpreted as a sign of a broader slowdown in household spending on entertainment, he said.

--With assistance from Devin Banerjee in New York. Editors: Peter Elstrom, James Callan, John Lear

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net


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