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conference date: January 19, 2007
for quarter ending: December 31, 2007 (4th quarter)
Overview: Earnings did not match revenue growth due to mobile device challenges.
Basic data:
$11.8 billion in sales, up 17% over Q4 2005.
Earning per share of $0.24, of which $0.21 were from continuing operations.
Operating earnings decreased 30% year over year when items are excluded. GAAP operating earnings were $753 million; non-GAAP $885 million.
GAAP Operating margin was 6.4%
Net cash ended at $11.2 billion.
Guidance:
First quarter 2007 sales expected between $10.4 and $10.6 billion.
Conference Highlights:
Some things went well during the quarter but mobile device segment "was challenged by a geographical and product tier mix." They lowered prices on certain lines to gain market share. There were also difficulties in capitalizing on the growth of the UMTS market and softness in the US iDEN market that accounted for the earnings shortfall in this division.
Earnings per share were impacted by: investment loses of $0.04; stock compensation expense of $0.02; legal reserve of $0.01; reorganization charges of $0.01; and a tax benefit of $0.03.
Operating cash flow was $700 million.
The company was disappointed with its operating earnings performance, which occured despite strong revenue growth.
In this and future reports amortization of intangibles and one-time write offs of IP will no longer be attributed to operating segments, just to the overall corporate numbers because acquisitions are cutting across more than one operating segment.
Mobile Devices sales were $7.8 billion, up 19% year-over-year. 65.7 million handsets were shipped, up 47%. Networks and Enterprise sales were $3.0 billion, up 6% and with an improved operating margin. Connected Home Solution sales were $0.98 billion, up 39%, with $118 million in operating earnings and a 12.0% operating margin.
Now has 23.3% of global mobile device market, up 4.6% in the year and up 1% sequentially. Problem was with profitability of mix. 3g products were just beginning to ship. RAZR family continues to sell well; units increasing as price points are reached. Mobile music with ROKR launch went well. KRZR did well but below forecasts.
Purchased 32 million shares averaging $21.83 consuming $700 million. $3.8 billion remains authorized for repurchases.
Won 8 year GSM contract with Vodaphone. WiMAX will lead future gains. 6 new contracts in carrier areas, largest is Vodafone Turkey.
Q&A:
Last quarter gave same reasons for shortfall. Confidence to turn around? Q3 was short on revenue. Q4 did not have the products. Mainly lower prices on RAZR. So we missed our forecast. We are now shipping 3g and music products in Japan and Korea, so next couple of quarters should see better margins with newer products and UMPS.
Geographic color? Europe was strong market share gain. North Asia extremely strong. North America was strong market share, but no UMTS rollout participation with one large operator. But it is a brutal market for pricing. Held own in South America, but pricing brutal there too.
Channel inventories? Inventories are typical for season. Bill of materials and pricing: w-series replacing c-series; has one chip solution like motophone, so has rich features at low cost. Needs to move those low costs to RAZR family. But key to profitability is in adding rich experiences. Expect new launches mid-2007.
Guidance includes Symbol revenues.
No intent to cut back op ex to regain profitability? Will do operating expense reductions and reorganization within company.
Went from 1 in 8 two years ago to selling 1 in 4 handsets sold in world. Now need to start taking advantage of scale that was obtained.
iDEN? Made bets on WiMAX and iptv when no one else believed in them, and they paid off. Need to keep investing. iDEN business continues to be strong internationally. In the US shipments were below forecast and are declining. Spread-spectrum has lower margins. iDEN infrastructure sales also down.
In past downplayed UMTS for second half. Specific source of miss? 2.5g devices. UMTS pricing from competitors came down significantly, down to 2.5g devices. Also mass markets in emerging markets. Also ramp down of iDEN.
Broadband in 2007? Had a strong Q4 with traditional customers, extended agreement with Comcast. Opportunity for continued growth in segment with goal of double digit operating margins.
Pricing actions in emerging markets offensive or defensive? Held market share. Pricing was to maintain share position.
KRZR shipments? Shipped over 2 million units, believes remainder will go out in Q1.
3G phones into non-3G markets? Japan is good example. Shipped over 75 million RAZRs there, now adding 3G. Scalpel platform will come out in second half. It is a very competitive UMPS market.
Still room for improving operating margins for RAZR. Real problem is lack of strong 3G in porfolio.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.
Copyright 2007 William P. Meyers
