NEW YORK-Motorola Inc.’s unusual advance warning last week of poor third-quarter expectations raised eyebrows and at least two questions.
Is Motorola still the bellwether company, giving early notice of stormy weather ahead for the entire industry? Or are its problems largely attributed to external factors unique to Motorola? The answer is yes to both questions-depending on who answers.
Motorola, headquartered in Schaumburg, Ill., announced early Sept. 11 that it expects profits for the third quarter, which ends Sept. 28, to be significantly lower than the expectations of Wall Street analysts. The company will make its quarterly report on Oct. 7, said Ed Gams, director of investor relations for Motorola.
The manufacturer earned 54 cents per share during the second quarter. Analysts have been expecting Motorola to report a profit of 50 cents per share this quarter, according to a survey by First Call Inc. Shortly after the start of trading on the New York Stock Exchange Sept. 11, Motorola dropped as much as $3.88 to a share price of $46.75, then rebounded somewhat to $49.25 at the close of the day. In contrast, most technology stocks on NYSE closed up slightly the same day.
“Motorola is seeing the shakeout coming long before anyone else,” said Tim Archdeacon, president of Allied Business Intelligence, an Oyster Bay, N.Y., research company that follows the wireless communications industry. “There is a serious restructuring going on in the RF (radio frequency) semiconductor industry, and it is strictly related to price.”
Motorola placed primary blame for lowered earnings expectations on weak prices and demand for semiconductors, including those used in its own cellular and paging equipment. Until the Oct. 7 earnings report conference, Gams said Motorola would not break out numbers for chips used in wireless communications devices and those used in computers.
However, company officials also attributed the poor earnings outlook to continuing price wars in Motorola’s cellular phone, paging product and modem business lines-partly due to new entrants into these businesses. They also said international sales of telecommunications products have been declining.
In Archdeacon’s view, the U.S. market is at the crest of a wave, which will break worldwide during the next few years. The commoditization of wireless end-user products will put downward pressure on unit prices and therefore profit margins, despite the overall industry success indicated by the increasing number of wireless customers.
There also is another way in which the wireless industry could become a victim of its own success, Archdeacon said. Investors are quite impressed by 20 percent annual sales growth in most other industries, but they have become used to phenomenal growth rates of as much as 60 percent in the wireless sector. Unrealized expectations, even if they are not realistic, are rarely rewarded by the investment community.
For a counter viewpoint, “What Motorola announced today is Motorola’s problem,” said Luke T. Szymczak, telecommunications equipment and systems analyst for Prudential Securities Inc., New York, in an interview Sept 11. “Whether these issues will affect Nokia (Corp.) and (L.M.) Ericsson, for that matter, I don’t think so. In terms of product offerings, there’s not a big overlap between Motorola and the other vendors, except Ericsson and Nokia.”
Evidence supporting Szymczak’s perspective includes a Sept. 10 release by the Semiconductor Industry Association, Palo Alto, Calif., of chip industry sales in August. “The chip industry’s book-to-bill ratio in the North and South American market scored a modest gain in August on the strength of $2.84 billion in new orders, a 0.9 percent increase from the $2.82 billion figure recorded in July,” the association reported. “The book-to-bill ratio compares new chip orders to prior sales. In August, chip companies received $90 in new orders for every $100 in shipments.”
The trade group said that book-to-bill ratios for semiconductors in Japan, the rest of Asia and Europe are significantly higher overall than in the Americas. It also noted, however, that 1995 was a record-setting year not likely to be matched in 1996.
In Europe, where Nokia and Ericsson are strong players, Motorola may be at somewhat of a disadvantage because of the Global System for Mobile communications standards in those countries.
Additionally, the company, which has trimmed work schedules and production, has experienced delays in getting new generations of InFLEXion and ReFLEX paging systems equipment to customers in the United States. The company also has spent the last 18 months trying to resolve voice quality problems with its iDEN technology.
However, Gams said the infrastructure side of Motorola’s business has not suffered in this last quarter so far.
“We remain confident that the global opportunities for our communications and semiconductor products remain as exciting as ever,” said Gary Tooker, vice chairman and chief executive officer of Motorola.
