Motorola cuts 3500 jobs

Motorola said it would cut 3500 jobs, or 5% of its workforce, casting a further pall over disappointing fourth-quarter results. Motorola had enjoyed a long period of growth over the last two years driven by new phone designs like the RAZR, but missed forecasts and lackluster performance of its post-RAZR line forced the company to issue a profit warning earlier this month and begin looking for cost-cutting measures.

Motorola’s Q4 profits fell 48%, from $1.2 billion to $624 million, while its year over year earnings declined from $4.58 billion to $3.67 billion. Despite the drop in earnings, Motorola still reported growing revenues. Its Q4 sales grew 17% to $11.8 billion year-over-year and its 2006 sales topped out at $42 billion. Motorola also said it would beat Wall Street’s estimates in 2007, projecting between $46 billion and $49 billion in revenues, beating out analysts predictions of just under $46 billion. The news helped send Motorola’s stock on a rally after plummeting from its earnings warning on Jan. 5.

Motorola said the job cuts would come from across its businesses, and would be completed in the first half of this year. CEO Ed Zander said the move would save the company $400 million over two years.

The vendor’s cost pressure appears to be coming from its handset division where the company continues to sell more units and gain market share, but is finding the average cost of its handsets falling sharply. At the company’s earnings call, Zander refuted any claims that Motorola’s lead handset, the RAZR, was suffering from slackened sales, saying 75 million of the devices have already shipped. In fact, Motorola again set another record for handset shipments with 65.7 million units and claimed a global market share of 23.3% for the quarter and 22.2% for the year, both up more than four percentage points over last year’s numbers.

Motorola is still shipping a lot of RAZRs, but at a lot lower cost per unit than in the glory days when they retailed for $300. The RAZR’s high-end replacement, the KRZR has performed more poorly, and once core sales like that of iDEN phones are trailing off.

“Mix and pricing are the main issues with handsets,” said Christin Armacost, telecommunications analyst at Lazard Capital Markets, in a research note. “Although RAZR continues to hit record shipments, it can no longer maintain premium pricing in the market. Furthermore, Motorola's limited position in 3G has hurt its ability to maintain 2.5G pricing, as more established 3G vendors are putting downward pressure on that market.”

Armacost added further that much of Motorola’s growth is coming in developing markets where it is targeting its Motofone. While the phone line is grabbing market share, it has much lower margins than its other lines, he said.

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