Motorola shares tumble after it cuts estimates for 4th quarter

The trendsetting Razr phone has lost much of its buzz. So, for now, has Motorola Inc.

Ultra-slim and different from any cellphone before it, the Razr turned Motorola's image from stodgy to cool and enabled it to rack up huge profits and increased market share following its introduction in 2004.

But there were increasing signs Friday that the Razr's run of dominance may be coming to an end as its spinoff phones fail to make the same connection with the public.

A day after the company warned of disappointing sales and earnings from the key holiday selling season, investors dumped their Motorola stock and industry experts used phrases like "tired product" to describe the industry-changing phone.

Motorola's announcement Thursday night of worse-than-anticipated fourth-quarter results made it two straight quarters that the company has fallen short of Wall Street expectations.

It also threatens to end eight consecutive quarters of market-share gains for a company that, despite improving to a 22 per cent share from 16 per cent in 2004, remains far short of its goal of recapturing the lead it held in the 1990s from Finland's
Nokia.

Shares fell $1.61, or 7.8 per cent, to close at US$18.94 on the
New York Stock Exchange after sinking as low as $18, matching their lowest price since July 2004.

Analysts said the news raised questions about Motorola's strategy, underscoring that recent market-share gains came largely by selling less profitable phones in emerging markets as the Razr's appeal faded.

"We believe that the issues are not a one-time hiccup but rather a reflection of a weak portfolio that struggles to replace a successful Razr model," Merrill Lynch analyst Tal Liani wrote in a note to investors.

Motorola's reliance on the ultra-slim Razr and its variations to carry it through another holiday season clearly backfired, some said.

"It's becoming a tired product that's heavily discounted, especially in the U.S. market," said Kenneth Leon, an analyst for Standard & Poor's Equity Services, in an interview. He said other recently introduced products such as the Krzr and Slvr "don't appear to have the buzz or the sales traction that we expected" and sales of the Motorola Q smartphone, its challenger to the Blackberry, may be slowing.

Motorola isn't expected to give full details of its problems until it reports quarterly results on Jan. 19. In its announcement, it blamed only an "unfavourable geographical and product-tier mix of sales" for causing it to fall short of estimates despite a solid 66 million units in mobile device sales, up 48 per cent from a year earlier.

The Schaumburg, Ill.-based company said it now expects to earn 13 to 16 cents per share, including about 10 cents per share in charges, on sales of $11.6 billion to $11.8 billion. Those numbers are well off the consensus estimates of analysts surveyed by Thomson Financial for a profit of 39 cents per share on sales of $12 billion.

"We are very disappointed with our fourth-quarter financial performance," said Ed Zander, chairman and CEO, "but we remain committed to the strategic direction and long-term financial targets we discussed at our annual analysts meeting in July 2006."

The news prompted a raft of downgrades on Wall Street.

Phil Cusick of Bear Stearns said Motorola's increased focus on selling inexpensive phones in emerging markets has come at a significant cost to profit margins at a time when the recently released Krzr, the Razr update which features a music player and a camera, is not performing up to some expectations.

"Updated Razr models and the Krzr have not been able to offset Razr discounting and increased low-end contribution," he said in a research note.

Confirmation that Motorola has hit a slump comes just before a series of industry events for new product launches, starting with the International Consumer Electronics Show in Las Vegas next week. Motorola isn't expected to introduce any mega-products at CES, although it is expected to launch several new mid-to high-end phones through the second quarter.

But so are its rivals. Motorola is considered by many industry observers to still have a strong handset lineup, but others are closing the gap on what had been the industry's top-selling portfolio, including Nokia with new thin phones. Sony Ericsson, Samsung and LG already have added competitive phones.

T. Michael Walkley of Piper Jaffray said it could take Motorola's handset business several quarters to recover from the challenge posed by lower average phone prices and tougher competition.

"We believe the dominance of the Razr is vulnerable to aggressive pricing," he wrote.