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July 21, 2005
Another Strong Quarter For Motorola
As you know, I am a daily contributor to StreetInsight.com, one of the sites operated by the Street.com. Among other things I do for them, I provide live commentary on conference calls. In the extended comments section available to subscribers is my commentary on MOT's latest quarter including pre call thoughts and the live comments I posted. Overall, it was a good quarter for MOT and supports a continued bullish view of the shares.
Post Earnings, Pre Call Comments
Motorola looks like it had another strong quarter and guidance for 3Q is nicely above consensus and equals the high end of current estimates. You never know, but even with the high bar set by the recent estimate increases and stock price performance, this seems good enough to allow the shares to move higher.
EPS came in at 26 cents after backing out 12 cents in one-time items. Consensus was 25 cents having moved up steadily over the past month. Revenues were $8.83 billion against consensus of $8.55 billion. Handset shipments were 33.9 million which easily beat estimates and whisper numbers of 32-33 million. ASPs declined about 6% sequentially but some decline was expected due to initial shipments of a $40 handsets to emerging markets. Networks looks like it could be a little light as some had expected with revenues growing only 5.5%. Government and Enterprises also had a second consecutive sub par growth quarter with a revenue gain of just 4.7%. Handset margins look fine to me, especially with ASPs down a bit and the huge volume shipped. Margins are 10.2%, up 20 basis points sequentially. Total company margins are up 50 basis points sequentially to 11.1%. Leverage on the SG&A against the big top line gains is helping offset a drop in gross margins as mix shifts toward handsets.
The balance sheet is in great shape. Cash is $12.8 billion against debt of $5.3 billion, netting out to $3 per share.
3Q05 guidance looks good to me at 27-29 cents against a consensus estimate of 25 cents. A quick review of the estimates showed only a handful out of more than 20 that were at 27 or 28 cents. Revenue guidance of $8.9-9.1 billion is above consensus of $8.58 billion.
So the press release and financial tables read well ahead of the conference call if I am not making any mistakes. I have been fearful the bar was set too high for this report but so far so good.
Conference Call Notes
MOT is trading down 80 cents from the close despite a strong report and good guidance. It seems like a knee-jerk, sell the news move being caused by YHOO and INTC. 2006 estimates likely headed to $1.20 or higher which leaves the stock reasonably valued, especially after backing out $3 per share in cash. Now let's see what we hear and whether it changes my mind.
Zander is "very excited" about a great quarter for "every segment of the company." Key takeaways are 17% y-o-y and 8% q-o-q revenue growth, 170 basis point market share gain in handsets sequentially, return to profits in automotive unit, and another billion dollar operating cash flow quarter and $900 million in free cash flow.
Guidance is above this morning's First Call consensus and we expect expanding margins in 3Q. As Zander wraps up, shares are lifting a bit to $19.20, up 15 cents from the start of the call.
CFO is now reviewing the press release and accompanying financial tables. The pre call comments I posted contain most of the information. Q3 sales guidance is for growth of 19-21%, better than 17% in 2Q. Pleased with gross margin given big sales of low priced handsets. Shares are now back to $19.36, up 30 cents since the call started but down 50 cents from the close.
Stock repurchase update announced on 5/19 for $4 billion. Bought 9.2 million in 2Q at average of $17.86. Expect pace to go up in 3Q.
Back to Zander now for some segment analysis starting with handsets. Margins would have been 10 basis points higher in handsets without a one-time charge. "See more opportunities for profitable growth in a healthy handset market." Market strategies targeted at NOK and want to be even stronger #2 globally. Very strong GSM position and still focusing on CDMA. iDEN demand "continued to expand." #1 in Latin America, units up 50%. #2 in Europe with 14% share in best ever 2Q in Europe. Units up 43% y-o-y. First time #2 in Europe. North Asia market share flat. Holding own in China. "Stay tuned" for improvement. Emerging markets up 74% y-o-y. Market share up 250 bps sequentially on 57% unit gain. Entry level and RAZR selling well. Will continue to gain share vs. 9% this quarter.
CDMA units were down in the quarter. ASPs down 4-5% y-o-y due to low end units. More of the same in Q3 but ASPs should be more stable.
Channel inventories below industry averages on a global basis.
RAZR units doubled in Q2 vs. Q1. Zander is reviewing current hot new products and talking of more to come. Goal is "wickedly compelling" products. Who would of thought that MOT would ever be cool again?
Networks: still want higher margins. Renewed focus and want to get better. Won 3G in Taiwan. Testing WiMax with Sprint. Guidance for Q3 is for sales and operating earnings to be up y-o-y.
Government and Enterprise: government was up double digits but automotive flat held back segment. Charge in auto business hurt margins for segment. I missed the auto weakness in the pre call comments, so government remains a key growth driver and a unique business for MOT. Guidance for Q3 is for sales and operating earnings to be up.
Connected Home: margins starting to expand on economies of scale and improved supply chain. Shipping Ojo, a product that once was highly touted a personal video phone.
Zanders personal scorecard is very good especially in terms of renewal of relationships with customers. Talking strategy now not operating issues.
Still have a road map to 13-15% operating margins 2-3 5 form supply chain, 50 basis points each form customer delight and G&A, an 50-100 bps form R&D. This is very positive for the long-term story.
As Q&A starts, stock is at $19.40, cutting initial after hours losses in half.
Q&A:
Any mix shift in handsets in 2H05? A: 3G a little slower to take off. GSM, UMTS, and iDEN will grow but CDMA will pick up and show significant growth.
How did low end phones impact margins? Is supply change improvement helping profits on low end phones yet? A: yes, low end margins are similar to segment average. iDEN ASPs were significantly down but will improve when new products shit later this year.
Will margins hold when RAZR pricing falters as all phones do? Or why arent margins even higher given huge shipments? A: we have are developing a broad line and we are not worried that margins will stall if RAZR pricing follows normal path. There is a sense of confidence from management that is bullish in response to this question. RAZR only 10%of 2Q sales and many new products already announced and still to come will helps on high end.
Any supply constraints on RAZR as it goes to 3G and CDMA? A: No. We hope to have a problem of not being able to meet demand. The new MOT can handle it is what Zander is answering. The analyst question shows the lingering concern of prior shipping problems. They seem to be saying they can sell as many RAZRs as they can produce.
MOT shares continuing to strengthen as Q&A goes on. Now trading at $19.60, highest in after hours session and down just 25 cents from close after going as low as $19.05 initially. Whoever sold at $19.05 and $19.10 has be kicking themselves. This is a very bullish call and management team is confident that there is more to come.
Govt and Enterprise guidance is vague. Can you be more specific? A: not providing specifics but Government part of business looks healthy.
Can you provide details on supply chain improvements? A: More on this at next week's analyst day. Trying to coordinate common platforms across company. Trying to gain scale with individual suppliers.
What will share count be going forward? A: we hope we can keep it flat.
How will mix of handsets impact Q3? A: Emerging market save lots of folks who buy higher end phones. These markets have not had a choice of vendors so we want to offer a mix of low and high end products. Most 2Q new products did not ship until late in the Q so that will help in 3Q.
Color on CDMA in U.S.? A: we are getting ready to improve share at CDMA vendors like Sprint and Verizon. The lineup will improve in CDMA as the company enters 2006. Management made comments here about 1Q06 that are positive and will be liked by the Street. EPS growth in 06 vs. 05 is key to expanding the multiple and getting the shares to the mid $20s.
Summary
Who would have thought that on a night when Intel, Yahoo, and Motorola reported that MOT would be the star performer. It really shows how big the turnaround at MOT has been. I think the fact that MOT's earnings and guidance were great while INTC and YHOO were nothing special is significant for MOT shares. MOT's turnaround only got acknowledged by the Street when 1Q05 was reported. However, the estimates have risen sharply so valuation hasnt expanded all that much. The call made clear that for at least the next three quarters, MOT will produce big numbers. Estimates will be going up and I think the stock will follow.
Management had a real sense of confidence on the call. They are focused on new product introductions and margin expansion at the same time. The evidence suggests they can pull it off. The company is hosting an analyst day next week and given repeated references to it on the call I think they will give the Street a better sense of the handset road map that includes more RAZR related phones, music phones, and a Blackberry type device. Further, MOT again talked today about long-term margin expansion of 300-500 basis points. MOT wants is margins where Nokia has been. The company has raised its internal bar and momentum currently in the business should last for awhile. I found it interesting that management mentioned handsets that would help in 1Q06. Clearly, this team is focused and thriving.
The shares are off a bit after hours thanks to the YHOO and INTC results. I'd be a buyer on weakness. Estimates are going up and multiple expansion lies ahead. If you are bullish on the market, you should be able to see MOT comfortably in the $20s this year. I do.
Posted by Steve Birenberg at July 21, 2005 11:57 AM in MOT