Note, Nokia lowered to "trading sell".
NEW YORK (MarketWatch) - Shares of Motorola Inc. were down as much as 10% in preopen trades Friday after the company lowered its sales and earnings forecast for the fourth quarter because of falling handset prices.
The world's No. 2 maker of mobile phones was forced to cut prices to entice customers and ward off rivals in the hotly competitive handset business. Motorola's new flagship KRZR phone is not selling as well as expected because of its high price, analysts say.
The company still sold 66 million phones during the quarter, but lower unit prices undercut profit margins. As a result, Motorola predicted late Thursday that earnings from operations in the fourth quarter would range from 13 cents to 16 cents a share, down from the 39 cents a share expected by analysts polled by Thomson First Call.
The new estimate includes costs totaling 10 cents a share related to investment-related losses, stock compensation expenses, business reorganization and unusual taxes.
The Schaumburg, Ill.-based technology giant also said fourth-quarter sales would range between $11.6 billion and $11.8 billion, lower than earlier guidance of $11.8 billion to $12.1 billion.
Analysts polled by First Call had forecast sales of $11.99 billion.
"We are very disappointed with our fourth-quarter financial performance," said Ed Zander, chief executive, in a statement. The company said it will discuss a plan to improve operating profitability in two weeks, when it announces full fourth-quarter results.
In preopen trades Friday, shares of Motorola fell as much as $2 from Thursday's closing price of $20.55.
Quality of mix, not volume to blame
Motorola said an "unfavorable geographical and product-tier mix" of sales of cell phones hurt the company. It sold 66 million units during the quarter, up 48% from last year and 23% from the third quarter.
UBS said in a note to clients that the language of the release made it difficult to understand the material margin shortfall and, more importantly, the length of the impact. It cautioned, however, that it appears pressure could continue beyond the fourth quarter.
Goldman Sachs told clients the profit warning supports its view that "the lack of upside in end-market demand will likely lead to increased price competition, further exacerbated by the mix shift in the industry towards emerging markets where people prefer cheaper phones.
"As a result we believe that Motorola will see several quarters of average-selling-price weakness, causing us to lower our handset segment operating margin estimate by 100 basis points-plus in fiscal 2007."
Goldman also warned that product differentiation, a key driver of Motorola's recent market-share gains, is likely to lessen as Nokia introduces some thin products in the first half of 2007. See archived story on Nokia's efforts to get skinnier
Motorola didn't disguise its disenchantment with the results.
Its networks and enterprise and connected-home divisions will meet or exceed Motorola's internal forecasts, the company added.
Shares of rival Nokia also dropped in preopen trades, with Credit Suisse moving the shares to a "trading sell." Credit Suisse said that the Motofone F3 from Motorola was introduced at a 15% discount to Nokia's low-end portfolio.
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