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July 20, 2006

Motorola Comes Through and the Stock Climbs

Beat and raise. That is what investors have demanded from MOT to reward the stock. Last night's earnings report did the trick. EPS of 34 cents were better than 31 cents expected. Revenues of $10.9 billion were $600 million ahead of estimates. Handset shipments of 51.9 million easily beat the 48 million target and the 50 million whisper. ASPs for phones held togther and just fell slightly, as expected. Maybe most importantly, 3Q revenue guidance, the only guidance figure MOT provides was $10.9 billion to $11.1 billion, the midpoint being $500 million ahead of consensus.

In terms of the impact on MOT shares, I could stop this summary right now. The quarter is a win. MOT can rally back to the mid $20s, adding a couple of dollars on to the after hours advance. Now, let's just hope that Nokia keeps the wind at MOT's back when they report tomorrow.

Here are some details from the conference call....

Management said that as the quarter progressed business accelerated across the entire company. Guidance commentary for revenues for each division reflected this statement.

Handset commentary was extremely confident. Management says the RAZR is as strong as ever but that the company is becoming much more balanced with SLVR selling well and the Ming in China and other products in emerging markets. Additionally, they have not seen a slowdown in iDen. In fact, iDen had a record quarter and was up sequentially. Share gains at Verizon and Sprint are helping in the US. Q is selling "very well" with lots of tests at Fortune 1000 sites. Management downplayed the competition between Q and Blackberry type devices. They view Q as more a PC substitute or mini-mobile PC. They don’t think of Q as a smartphone.

For the rest of the year, management expects to gain market share in both quarters and increase margins year over year in each quarter. Furthermore, management said that it will outline at next week's analyst meeting how it will get margin up the mid-teens.

There was an interesting exchange regarding the datapoints from the supply chain. Management completely dissed the analysis. They even said that "none of the reports we have seen are even remotely accurate." The question actually was driving at whether inventory was building across the industry. Management emphatically said it was not. Over on Real Money, Tero Kuittinen has discussed this risk so I'll be interested in his post call thoughts.

Commentary on the newly enlarged/combined Networks and Enterprise business was also constructive. The company expects mid-single digit year over year revenue growth the rest of the 2006. I would have liked to have heard more about margins in this business but there was a comment that the integration of the divisions was going at least as well as expected.

Connected Home continues to be very strong on the top line with margins restricted by investment spending for wireline products. This business is 1/10th the size of mobile devices so it doesn’t receive a lot of focus by analysts.

Several questions concerned the company's $10 billion net cash balance. The company says it no longer plans to retire early $1 billion in debt and will continue to buyback shares at a pace of 40 million or more a quarter. Debt maturities next year will be retired with cash.

Overall, the tone of the call was excellent. Management was confident and analysts were not nearly as tough on the company as usual. With the analyst meeting next week likely to continue the bullish tone, I think the shares can go higher even after the after hours pop.

Posted by Steve Birenberg at July 20, 2006 11:34 AM in MOT