Motorola to lay off 3,500 due to pricing

CHICAGO - Motorola Inc. said yesterday that it was cutting 3,500 jobs and taking other steps to reduce costs after misjudgments on pricing and sales forecasts for its high-end cellular phones contributed to its least profitable quarter since 2004.

The move came as the world's No. 2 cell-phone-maker reported a 48 percent drop in fourth-quarter earnings, to $624 million, on a steep drop in profitability in the handset business.

Chief executive Ed Zander announced the cuts at an analysts' meeting in New York, saying Motorola could save about $400 million over two years by eliminating these jobs, or 5 percent of its workforce.

Motorola has 1,100 employees in Horsham, where it engineers set-top TV boxes. But company officials in Horsham and at headquarters in Schaumburg, Ill., would not say yesterday where the cutbacks would be made.

Zander called the quarterly results disappointing, but dismissed any need for a change in overall corporate strategy, as some analysts urged when the shortfall in sales and profit was disclosed two weeks ago. He said continuing strong demand for the trend-setting Razr cell phone puts Motorola in position to return to double-digit operating margins late this year.

"There's no change in strategy," Zander told analysts at the meeting. "There may be some changes in tactics." He also dismissed suggestions that the Razr, which turned around the company's fortunes two years ago, is running out of momentum.

"It's funny, I keep reading about Razrs being tired," he said on an earlier conference call. "We sold more Razrs in quarter four than in any quarter we ever had. We now have sold over 75 million Razrs worldwide."

Facing stiffer competition from its rivals' new products, Motorola aggressively cut prices of its phones during the quarter, especially in emerging markets, to gain market share, but at the expense of profit margins.

Company executives also acknowledged misjudging some markets and, as Zander put it, making wrong assumptions about how many products would sell at what price.

The decision to shed jobs comes after Motorola's recent $3.9 billion acquisition of Symbol Technologies Inc., a maker of bar-code scanners and handheld computers, had increased the company's workforce to 70,000 from about 67,000. The cuts are to be spread across the company globally and completed in the first half of 2007.

Coupled with its prediction that it would post full-year sales of $46 billion to $49 billion, above analysts' consensus estimate of $45.9 billion, the news sent Motorola's stock higher despite the lackluster earnings numbers.

Shares gained 56 cents, or 3 percent, to close at $19.27 in heavy trading on the New York Stock Exchange. More than 70 million shares were bought and sold, or more than double the recent average volume.

Not everyone outside Wall Street was impressed. Lowell Peterson, a labor lawyer who has represented unions and laid-off employees in corporate bankruptcies, said the labor cuts were an example of "the Alice in Wonderland logic of today's corporate thinking."

"Everything that's been disclosed suggests it's not a question of overcapacity, it's not a question of high fixed labor costs, it's a question of pricing" that hurt Motorola's results, said Peterson, of the New York law firm Meyer, Suozzi, English & Klein. "If you have a pricing problem, you should fix the pricing problem. Otherwise, in the long run, you're not going to have as many people to make your product."

Motorola's net profit was its smallest in nine quarters, dating to the third quarter of 2004 before the Razr was introduced.

While results remained strong in its networks and enterprise and connected home segments, the operating margin in the dominant handset unit sank to 4.4 percent from 11.6 percent in the third quarter.

Morningstar analyst John Slack said efforts discussed by the company to get Razr costs down, such as new software initiatives and a single chip set, should bring improvement, but not immediately.

"It may take a couple quarters for them to get back to where they want to be," he said.

Earnings amounted to 25 cents per share and were down from $1.2 billion, or 46 cents per share, a year earlier when profit was boosted by a large gain from a legal settlement.

Excluding certain items, Motorola said earnings from continuing operations were 21 cents a share.

Analysts surveyed by Thomson Financial had lowered their consensus estimate to 25 cents per share following Motorola's warning this month.

Revenue was $11.8 billion, up 17 percent.