Motorola Q2 Earnings Top Street Estimates, Phone Unit Disappoints

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By Surojit Chatterjee | July 30, 2010 10:25 AM EST

Motorola Inc., the second largest smartphone maker in the US, reported a higher-than-expected jump in its second quarter net profit, driven by strong performance of its enterprise mobility and telecommunications networks equipment units.

Motorola said second quarter net profit surged to $162 million or $0.07 per share in the second quarter from $26 million or $0.01 per share at the same time last year. The company's earnings stood at $0.09 per share, higher than $0.08 per share estimated by market analysts.

The good profit news was undercut by weaker net sales, which dipped to 1.5 percent to $5.4 billion, though still topping analysts' estimate of $5.19 billion.

Motorola said it shipped 8.3 million handsets in the June quarter, including 2.7 million smartphones, in line with analysts' estimates of 8.13 million handsets and 2.69 million smartphones. But the phone unit still reported an operating loss of $109 million once income from a legal settlement was excluded. That loss was still narrower than the $239 million reported the year before. Revenue from phone sales dropped 6 percent to $1.72 billion for he quarter.

Motorola's home unit, which makes set-top boxes for TVs and multimedia servers, also saw sales drop 13 percent to $886 million while earnings stood at $29 million.

It was the enterprise mobility unit, which makes communications gear such as police radios and wireless equipment for public safety agencies and bar-code scanners for industry, that drove up the company's earnings.

The unit  reported a revenue gain of 10 percent to $1.85 billion in the June quarter while operating income rose to $292 million from $225 million a year ago.

The company's telecommunications networks equipment unit also fared well, with adjusted operating income rising to $191 million from $147 million though sales slipped 2 percent to $967 million.

Motorola tried to dismiss concerns about its phone unit, saying Droid X sales was "off to a great start."

Sanjay Jha, co-CEO and head of Motorola's handset unit, said the company plans to launch more exciting handsets in the current year, including "meaningfully more" than 20 smartphones.

Jha also said sale of Droid X in July "exceeding our expectations" and the company expects strong demand for the smartphone in the coming months. The Droid X is currently one of the best smartphones available in the market, with beefy specs such as 4.3-inch high resolution multitouch display, Adobe flash and an 8-megapixel camera.

Overall, the company expects to sell 12-14 million smartphones in 2010.

However, a shortage in supply of mobile phone chips and intense competition from rivals could pose the biggest challenge for the company and could hit smartphone sales, Jha said.

Nonetheless, Jha said he expects the phone unit to return to sales growth in the third quarter for the first time in nearly four years and become profitable on an operating basis in the fourth quarter.

The company said it expected third quarter earnings per share of $0.10 to $0.12, excluding items.

Market analysts said the future looks good for Motorola, whose earnings will be driven by sales of Droid X and the upcoming Droid 2 smartphones.

"The Droid X is doing well and it looks like the Droid 2 launch is early," said MKM Partners analyst Tero Kuittinen. "This is kind of like Motorola's moment in the sun."

Analysts, however, said investors were not happy with Motorola's guidance on phone sales, especially as Droid X was doing well. Shares of the Schaumburg, Illinois-based company closed Thursday down 0.91 percent at $7.61.

According to RBC Capital analyst Mark Sue, investors were left "somewhat unimpressed by the smartphone unit outlook considering the current trajectory of Motorola's Android devices."

"The quarter was modestly better than people expected but guidance wasn't commensurately strong," said Charter Equity Research analyst Ed Snyder.

Gleacher & Co analyst Mark McKechnie said investors wanted Motorola to raise its smartphone outlook and push its phone unit profit target to the third quarter from the fourth.

Gartner said Motorola ranked sixth in the global smartphone market with a three percent share at the end of this year's first quarter, right behind Sony Ericsson at 3.1 percent.

Investors are pinning a lot of hope on Motorola's mobile business, especially after the company last month announced that it would restructure its business operations to concentrate on increasing its share of the mobile phone sector, particularly in the smartphone market.

Motorola, which lost ground in recent years in the smartphone market. BlackBerry maker Research In Motion and Apple Inc. have surged past it by offering devices that appeal to corporate customers as well as individuals.

Motorola plans to make its home and phone businesses into a single independent, publicly traded company called Motorola Mobility in early 2011. The new company will be led by Motorola co-CEO Sanjay Jha.

Motorola's remaining business - the enterprise mobility unit - will be called Motorola Solutions and will be led by co-CEO Greg Brown.

The company sold its telecommunications networks equipment business to Nokia Siemens Network for $1.2 billion earlier this month.

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