NEW YORK-Motorola Inc. reported disappointing second-quarter earnings July 9. The industry giant cited competition’s effect on cellular handset and semiconductor prices, which offset increases in cellular infrastructure and paging revenues.
Second quarter sales totaled $6.83 billion, compared with $6.88 billion during the second quarter of 1995. Second quarter earnings were $326 million, compared with $481 million during the same period last year.
“Second quarter results reflect a continuation of the conditions we noted in the previous two quarters, (including) pricing pressures and weakening demand in semiconductors, coupled with the start-up costs and depreciation from adding new capacity,” said Christopher Galvin, president and chief operating officer. “Pricing also remains competitive in the paging and cellular telephone businesses, where we are committed to remain a price leader to enhance market growth. Costs associated with introducing a number of new technologies also have had a negative effect on earnings.”
Cellular handsets and semiconductors account for more than half of Motorola’s business. Motorola reported that semiconductor sales declined by 5 percent to $2 billion, and orders dropped by 34 percent, compared with the second quarter of 1995. Orders for cellular handsets and systems actually rose by 5 percent, although sales declined by 4 percent to $2.8 billion, primarily due to declines in selling prices for handsets.
Motorola’s Messaging, Information and Media Sector, which includes paging, experienced a 20 percent increase in sales, to $1.1 billion, while orders grew by 4 percent.
Although the cellular handset business was not broken out between analog and digital in the Motorola second quarter report, digital cellular is a key growth area for handset manufacturers. By some projections, analog shipments worldwide will just about double to approximately 81 million units by the end of 1999. The number of digital handsets shipped will nearly triple, to more than 55 million worldwide, by the end of 1999.
At the same time, “digital prices have dropped more rapidly, while analog prices have stabilized, that is, the rate of decline has dropped,” said Brian Modoff, telecommunications equipment analyst for Rauscher Pierce Refsnes Inc., Dallas. “That’s part of what clobbered Motorola.”
On the digital handset side, he said, Motorola’s stature as an innovator and an efficient manufacturer will afford it “a bit of breathing room” from a new group of foreign competitors, particularly large Japanese and South Korean consumer electronics manufacturers. Such companies, often with good consumer brand name recognition, are extremely good at high-volume production and low unit pricing. Harbingers on the horizon include the Sony Corp./Qualcomm Inc. alliance, which landed a large order from PrimeCo Personal Communications L.P. and Oki telecom, which has a contract to supply handsets to Sprint Corp. Panasonic Co., a division of Matsushita Electric Corporation of America, is another player to watch, Modoff said.
“It will be tough for the smaller guys. Not everyone is going to have the market share they say they will have because the total of (all their projections) is greater than 100 percent,” Modoff said. “Some players will decide it isn’t profitable enough to enter the business or will decide to get out of the business.”
While some handset manufacturers have hyped their forecasts, the same cannot be said of Motorola, which has been, “fairly up front recently,” Modoff said.
Gary Tooker, vice chairman and chief executive officer of Motorola, said current conditions in the semiconductor and cellular telephone business are likely to continue for the rest of 1996. “We have confidence in the longer-term outlook, as technologies such as CDMA cellular systems, iDEN (integrated dispatch enhanced network) radio systems, two-way and voice paging and CableComm telephony become commercially deployed and move into higher unit volume phases of their product life cycles,” Tooker said.
Motorola’s chief executivealso predicted that the competition in both developed and developing nations will increase global penetration rates for wireless communications, which “remain very low.”
