Motorola posts unexpected 2Q profit

While sales continued to decline from last year, Motorola said the cost cuts, including 8,000 layoffs so far this year, set the stage for a comeback from its long-suffering cell phone unit. Its shares surged on news of the outlook.

Co-CEO Greg Brown said the "overwhelming majority" of the cost-cutting has now been completed.

The Schaumburg, Ill.-based electronics company earned $26 million, or 1 cent per share, in the three months ended July 4. That's up from $4 million, or break-even per share, a year ago.

The latest results were boosted 2 cents per share by various one-time effects, but even so, Motorola exceeded its own forecast, which called for a loss of 3 cents to 5 cents per share, excluding the cost of its restructuring initiatives.

Analysts polled by Thomson Reuters had on average been looking for a loss of 4 cents per share.

Motorola's sales fell 32 percent from a year ago to $5.5 billion from $8.1 billion a year ago. Analysts were looking for revenue of $5.6 billion for the latest quarter.

"We will further improve earnings in the second half of the year," co-CEO Sanjay Jha told analysts and investors on a conference call.

For the third quarter, the company now expects results in a range from a loss of 1 cent per share to a profit of 1 cent per share. Analysts had been expecting a 1-cent loss.

Motorola shares rose 46 cents, or 7.1 percent, to $7.03 in midday trading after rising as high as $7.68 earlier, the highest level since October. The shares had already risen 58 percent this year, as investors have overcome the worst of their pessimism and have started to look for signs of a turnaround.

Motorola's sales have been on a multiyear slide, as its cell phone division has failed to come up with a product that matches the popularity of the Razr, a stupendously popular phone in 2005.

In the second quarter, Motorola shipped 14.8 million handsets, up from 14.7 million in the first quarter, but just over half of what it sold a year ago. It is the world's fourth-largest maker of cell phones, with a 5.5 market share according to IDC Corp. That puts Motorola just ahead of Sony Ericsson but far behind Nokia Corp., Samsung Electronics Co. and LG Electronics Inc.

Motorola's turnaround strategy hinges on taking advantage of the current popularity of "smart" phones like iPhones and BlackBerrys. Though regular phones outsell them, smart phones carry high margins and sales are growing, unlike the overall market. Motorola introduced such phones, based on Microsoft Corp.'s Windows Mobile software, years ago to no great acclaim. Now it's trying again with Google Inc.'s Android software.

Jha said that by the holiday season, Motorola will have two Android phones on sale through two U.S. carriers and multiple carriers overseas. He didn't name the U.S. carriers, but Verizon Wireless has confirmed it will have one of them. Jha said the two phones will have different network technologies, which makes it likely that other carrier is AT&T Inc. or T-Mobile USA.

Jha said he expects the cell phone unit to break even in some quarter next year, but didn't want to promise such a result for the full year.

Part of the reason for the quarter's uptick in cell phone sales was the success of Sprint Nextel Corp.'s Boost prepaid service, for which Motorola is the sole phone supplier. Tavis McCourt, an analyst at Morgan Keegan, estimates that Motorola shipped 2 million phones to Boost in the second quarter.

Jha was brought on board as co-CEO last year as part of a plan to spin off the cell phone division, which he would lead as an independent company. The separation plan was put on hold a few months later, as the recession deepened and sales continued to deteriorate. Jha said the company is still working towards an eventual spinoff, but is waiting for business to improve.

It is not the first time Motorola has appeared to be on the cusp of a turnaround: in the second quarter last year, it also posted a small surprise profit and reported shipping more phones than the first quarter. Its shared soared, only to lose more than half their value before the end of the year.

Motorola's non-phone divisions, which make police radios, equipment for cable companies, and other electronic gear, continued to make up for losses in the cell phone division, though their sales have also been affected by the recession. They make up two-thirds of the company's sales.

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