Wireless

Motorola continued to lose money during the first quarter of 2009 as shipments for wireless handsets declined amid the ailing economy.

The company was already in pretty bad shape when the global economy started to tank last year. And since then, things have continued to get worse. Without any cool new handsets and with dropping demand from customers, Motorola's troubled handset business continues to drag the company down.

During the first quarter, which ended April 4, Motorola reported that shipments of cell phones fell about 46 percent to 14.7 million compared with the same quarter a year before. And shipments were down about 23 percent compared to the fourth quarter of 2008. The mobile-devices division's operating loss widened to $509 million as sales for the unit dropped about 45 percent to $1.8 billion. But the loss was an improvement over the $595 million the division lost in the fourth quarter of 2008.

Motorola's two other major divisions, home networking and emergency response communications, helped buoy the company's overall earnings. But even these divisions were hit by the dragging economy in the first quarter. As a result, Motorola reported a net loss of $231 million, or 10 cents a share. In the year-ago period, the company reported a loss of $194 million, or 9 cents a share. Revenue was down about 28 percent to $5.37 billion compared with $7.45 billion a year ago.

Motorola has been taking a series of steps to reduce costs. It has suspended its dividend, and it's cut about 6 percent of its workforce. The company also set aside plans to spin off the handset business because at this point it can't survive on its own.

The company's executives have said that the cost cuts are making a difference. And the company has predicted that it will lose only between 3 cents and 5 cents per share, adjusted for onetime items, in the second quarter of 2009. It expects to be generating cash in the second half of the year.

Currently, Motorola has about $6.1 billion in cash, down from $7.4 billion at the end of 2008.

Research In Motion, maker of the popular BlackBerry smartphone, warned investors Wednesday that it will likely hit the low end of its earnings forecast for the fourth quarter.

The news comes despite the fact that RIM also predicts strong subscriber growth for the quarter. RIM said Wednesday that it will add about 3.5 million new subscribers by the end of the quarter. This figure is about 20 percent higher than the 2.9 million new subscribers the company said it had expected on December 18.

So what does this mean? Analysts believe the fact that RIM is growing subscribers but slipping in terms of revenue means that the company is likely sacrificing profit margins to win new customers. RIM also said its gross margins will be at the low end of the range it gave previously. Gross margins are expected to be around 40 percent to 41 percent compared to about 45.6 percent in the third quarter.

RIM is facing stiff competition from other phone makers, especially Apple. The new iPhone 3G device went on sale last summer, and Apple sold about 6.9 million new iPhones worldwide during the third quarter. Shipments slowed a bit in the fourth quarter, but were still strong. The company sold 4.3 million new iPhones.

RIM launched its own touch-screen phone, the Storm, in November to compete head to head with the iPhone. The device is sold exclusively through Verizon Wireless. Feedback from consumers so far has been lackluster, as many have complained that the device's software and hardware perform sluggishly.

Maynard Um, an analyst with UBS, said in a research note that RIM's lowered earnings expectations might also suggest that consumers are returning the Storm for the older and less expensive Curve.

James Faucette, an analyst at Pacific Crest Securities, told Business Week that the margin pressure appears to be coming from hardware. The Storm and the BlackBerry, another phone launched this fall, are expensive for RIM to make. This means that RIM makes lower gross margins on these devices.

Market research firm iSuppli recently took apart the BlackBerry Storm and priced its components at about $203. Verizon sells the device for $199 with a two-year contract. Another iSuppli report says the Blackberry Bold's hardware cost is about $158. Meanwhile, the iPhone costs $174.

The news might also indicate that the smartphone market may not be as resilient to the recession as some experts had thought. Market research firm IDC said earlier this month that smartphones are likely to be the bright spot in an otherwise dismal cell phone market. But the high prices of these devices might make it a difficult sell to cash-strapped consumers.

RIM's fiscal fourth quarter ends February 28. And the company reports quarterly results April 2.

Nokia, the largest handset maker in the world, is cutting jobs at one plant and closing down at least one R&D site, as demand for cell phones plummets amid the worldwide recession.

The Finnish company said Wednesday that it will cut production at a key plant in Salo, Finland. It also plans to temporarily lay off about 20 percent to 30 percent of the plant's 2,500 employees on a rotational basis. All workers at the plant will be affected as groups rotate through the temporary layoffs.

Nokia also plans to shut down one R&D center in Jyvaskyla, Finland, where it currently employs 320 people. And it will cut another 90 jobs elsewhere, the company said.

The cuts come as Nokia is being hit by slowing demand in the cell phone market. In January, executives told investors that they expect the overall cell phone market to drop around 10 percent in 2009.

For the fourth quarter of 2008, Nokia's sales dropped 19 percent to $16.5 billion compared with the same period a year earlier. Its profit fell about 69 percent.

While the overall cell phone market has declined, smartphones sales have actually been growing. In the fourth quarter, smartphone sales were up about 22.5 percent year over year, buoyed by new products from Apple and Research In Motion. But Nokia has actually been losing share in this high-end niche to these competitors.

To cope with the deteriorating economic situation, Nokia CEO Olli-Pekka Kallasvuo told investors last month on its quarterly conference call that the company plans to slash annual costs by about $905 million by the end of 2010. Kallasvuo also acknowledged that the cost cutting would likely result in job cuts.

There's one obvious lesson learned from the earnings news of America's biggest wireless carriers: people can't do without their cell phones, even when times are bad.

This week AT&T and Verizon Communications each reported strong growth in their cell phone businesses. Verizon saw a profit gain of 15 percent, largely boosted by its growing wireless service. Despite a 26.3 percent drop in profits, which was mostly attributed to increased expenses, AT&T managed to grow revenue across the board with wireless providing the biggest benefit.

Executives running the two largest phone companies say they expect to see strong growth continue into 2009.

"We think we had a very solid quarter and an excellent year," Verizon's CEO Ivan Seidenberg said during a conference call on Tuesday. "And we see no reason why the momentum we have developed in 2008 should not continue in some way in 2009. We don't have perfect visibility in the economy, so the level of success could be tempered. But we think we will perform well absolutely and relatively."

But aren't we in a recession?

Indeed, the U.S. is sinking deeper into what looks like possibly the longest and roughest recession in a lifetime. Thousands of jobs have already been shed with the U.S. Labor Department reporting this week that unemployment rose in all 50 states for the first time since the bureau began keeping such records in 1976. And in some states, such as Michigan and Rhode Island, unemployment rates are above 10 percent.

Some of the latest layoffs are coming from the telecommunications industry. AT&T announced in December it would cut 4 percent of its workforce, or some 12,000 employees. And on Monday, Sprint Nextel, the third largest wireless operator in the U.S., said it would shed 8,000 workers, or 15 percent of its workforce.

These numbers all sound bleak, but the truth is that despite the troubled economy, Americans are still spending money on wireless and broadband services, which is helping to keep phone companies much healthier than other industries.

That said, the industry is feeling the pinch. Specifically, phone companies are seeing a more rapid decline in their traditional telephone businesses. And they're seeing a slowdown in providing corporate communications services.

In terms of the traditional phone business, AT&T and Verizon have been seeing this part of their businesses decline over the past few years as customers migrate to less expensive alternatives, such as voice over IP services or wireless. But over the past quarter, as the economy has worsened, AT&T and Verizon have each reported sharper declines in these businesses.

Instead, consumers are relying more on their cell phone service. And many are substituting new voice over IP services for their old phone service. But signing up for new VoIP services, requires a broadband connection, which are services that AT&T and Verizon also sell. Verizon has even just launched a new voice over IP product and service specifically designed to address this market.

"We are transitioning services right now," Rick Lindner, chief financial officer for AT&T, said on a conference call on Wednesday. "We are taking cost out of the legacy parts of our business, and at the same time gaining scale and working to improve margins on our growth products, (such as IP services)."

So even though the phone companies are losing more traditional "access lines," the companies are not necessarily losing customers, because some customers are substituting the older service with newer services provided by the phone company. But right now, it's costing the phone companies more money to offer new services than to offer the older services, which puts pressure on its profit margins.

Another area where AT&T and Verizon are seeing some weakness is in the business market. These carriers sell a whole slew of services to businesses around the world, including long distance telephony, wireless data services, and managed Internet services. As one might expect, as these corporate customers layoff employees and cut expenses, they are reducing the amount of money they spend on phone and data services, which ultimately hurts the phone companies' growth.

Spending more on wireless
Meanwhile, consumers are actually increasing how much they spend per month on their cell phone service. This increase in spending is not coming from voice services. Instead, it's coming from data. People are actually upgrading to more expensive smartphone devices that require data plans.

Denny Strigl, chief operating officer for Verizon, noted on the company's conference call Tuesday that 37 percent of new devices sold during the quarter were smartphones. As a result, Verizon Wireless also reported that it increased the average revenue per user, or ARPU, for data services to $13.99 in the fourth quarter of 2008.

AT&T also reported that its customers are spending more on data services. It increased data ARPU to $13.50 during the quarter. Apple's iPhone 3G, which is exclusively sold by AT&T, was likely the biggest contributor to AT&T's 35 percent year-over-year growth in data ARPU. AT&T announced that it added 1.9 million new iPhone subscribers during the quarter. The company has added a total of 4.3 million iPhone subscribers over the past two quarters.

Each of these iPhone subscribers has agreed to a two-year contract that locks them into a $30 per month all-you-can-eat data plan. Due to this extra data fee, most iPhone users are spending about $100 per month on their service, which is about 1.6 times more than the average AT&T cell phone subscriber.

"The iPhone along with integrated devices are proving to be fairly resilient in what is considered a tough time," Randall Stephenson, chief executive officer for AT&T during the conference call. "Right now, we feel pretty good about wireless."

The high-end smartphone appears to be serving as both a replacement for traditional phone services as well as a potential alternative to broadband service for some customers. This fall ComScore published a report that found households making between $25,000 and $49,999 a year were the fastest-growing segment of iPhone purchasers for the June through August time period.

"As an additional household budget item, a $200 device plus at least $70 per month for phone service seems a bit extravagant for those with lower disposable income," ComScore senior analyst Jen Wu said in a statement. "However, one actually realizes cost savings when the device is used in lieu of multiple digital devices and services, transforming the iPhone from a luxury item to a practical communication and entertainment tool."

If consumers opt to dump their broadband connections at home for the iPhone or some other smarthphone with Internet access, it could have a negative effect on overall wire-line growth for the phone companies. But so far, that hasn't been the case.

In fact, AT&T and Verizon reported for the fourth quarter stronger than ever sales of their new data and TV services that operate over their newly upgraded networks.

Verizon beat analyst expectations by adding 303,000 Fios TV customers and 282,000 Fios Internet customers. Analysts had expected the company to add 250,000 Fios TV customers and 250,000 Fios Internet subscribers. Verizon noted this marked the most new customers for these individual products in a single quarter.

AT&T added a total of 264,000 new TV subscribers in the fourth quarter, up from 232,000 added in the third quarter of 2008. The company now has more than 1 million subscribers for this service.

AT&T's U-Verse broadband service also helped push growth in the company's IP data services. In total, AT&T grew its consumer IP data revenue, which includes broadband and AT&T U-Verse services, by 21.4 percent.

"We understand we are operating in a difficult environment," said Stephenson. "But we have demonstrated that we have competence in managing through times like these. And we're committed to building a strong company."

Sprint and T-Mobile to benefit
So what does this good news mean for the other two major wireless phone companies, Sprint Nextel and T-Mobile USA?

These operators should also benefit from the fact that during the economic downturn, people are less likely to cancel or reduce service. And these companies will also likely benefit from the trend toward smartphones and more data usage.

T-Mobile, which is still rolling out its 3G wireless network, is selling Google's Android G1 and Sprint has just announced it will be the exclusive carrier for Palm's Pre, a phone that many believe could be a strong competitor to the iPhone.

But more than the economy, these companies will be battling stiff competition. AT&T added 2.1 million subscribers during the fourth quarter. Stephenson said during the conference call that he expects AT&T to have taken market share from its competitors, since it managed to port more numbers to its service from other carriers than it ported to competitors.

Sprint, in particular, has been struggling for several quarters before the economic crisis in the U.S. hit. And it has been trying to cut costs for more than a year. On Monday, the company announced it would lay off 8,000 workers, or 15 percent of its workforce. But the company had already shed 4,000 workers in 2008.

The deepening economic crisis might help Sprint and T-Mobile attract more value customers. Sprint offers a $99 all you-can-eat voice and data plan that might appeal to consumers. It also has a strong pre-paid brand, Boost.

T-Mobile has also been seen as a value provider and could attract customers with its @Home wireless services that allow mobile subscribers to switch to Wi-Fi when in a wireless hot spot. It also offers a home phone replacement service called Hotspot @Home Talk Forever that allows its wireless customers to add a voice over IP service for $9.99 a month on top of their cell phone service.

Sprint Nextel on Monday announced plans to cut approximately 8,000 jobs through the first quarter, as the economic meltdown cuts into the telecommunications carrier's business.

In addition, Sprint plans to suspend its 401k match in 2009, as well as continue with its salary freeze for a second year. The telecommunications carrier's tuition reimbursement program will also be suspended this year.

The workforce reduction is expected to result in a $300 million charge in the first quarter for severance payouts, but also is anticipated to save the company $1.2 billion in annualized labor costs.

Sprint said the job cuts will also include 850 positions lost through its voluntary buyout plan that began late last year.

While the layoffs are expected to affect employees companywide, the degree of the cuts will vary based on geographic location, with the impact expected to be less severe in areas that deal directly with customers, Sprint stated.

The telecommunications carrier is the latest in a growing list of companies to announce layoffs> That group most recently has included software giant Microsoft with 5,000 cuts, Internet search pioneer Yahoo with roughly 1,500 jobs and social media site Digg, which is cutting a small handful of workers, or 10 percent of its 75-person workforce.

In addition to the layoffs, Sprint also announced it will report its fourth-quarter earnings results on Feb. 19.

The global recession is hitting the handset market hard, as the biggest supplier in the market, Nokia, is seeing its sales plunge.

The Finnish handset maker said Thursday that fourth-quarter sales dropped 19 percent to $16.5 billion compared with the same period a year earlier. And its profit fell about 69 percent.

Nokia had warned investors in November and December that sales volumes were going to be lower than expected, but the magnitude of the decline still came as a big surprise to most investors.

Sales were hit not just at the high end, but also at the low end, where Nokia has driven much of its profits the last several quarters.

At the high end, the company lost market share to Apple with its iPhone and Research In Motion with its BlackBerry devices. But the company also felt the slowdown in developing markets, where it has provided low-cost phones. Even in China, Nokia's largest handset market, the company sold 36 percent fewer devices during the fourth quarter than the same period a year ago. And sales were down 23 percent in the Middle East and Africa.

CEO Olli-Pekka Kallasvuo explained that the weak economy forced many distributors and retail outlets to sell excess inventory instead of ordering new devices from the manufacturer. But he said as inventory is sold, he expects sales to pick up later in 2009.

Nokia's dismal earnings are likely a harbinger of problems that face handset markers in 2009. Nokia has for many quarters been the strongest cell phone maker in the market. It has dominated both at the high end and at the low end of the market. But Kallasvuo said the overall market is weak now because of the poor economic conditions around the world. And he expects the overall handset market to be down 10 percent in 2009.

The fact that Nokia is now struggling to get people to buy new phones, means it will likely be even harder for its weaker competitors, such as Motorola and Sony Ericsson. Last week, Sony Ericsson Mobile Communications, a joint venture formed between Sweden's Ericsson and Japan's Sony, reported a loss of $243 million for the fourth quarter. Motorola was already struggling before the economy took a sharp nosedive. And the overall outlook for the industry will certainly hurt it most severely as the company is not expected to come out with any exciting phones until 2010.

Nokia is in far better shape than these other companies. And it will surely weather the current economic storm. But the question is how badly will it get beaten up in the process? The smartphone category of handsets is where most of the growth will likely come from in the coming year. But it is precisely this market, where Nokia faces the stiffest competition from Apple and RIM.

Nokia says it has products in the pipeline that will compete in this category. It has the 5800 Xpress Music phone, which has a touch screen and offers multimedia functionality. It also plans to launch the N97, which will also have a touch screen and a slide-out keypad.

Even with new devices, Kallasvuo acknowledged the company will have to make significant cutbacks. Specifically, it plans to reduce annual costs in its devices and services operations by more than $900 million by the end of 2010. The cost cutting will no doubt result in job cuts, Kallasvuo said. But he didn't say how many jobs would be lost.

Wireless equipment maker Ericsson said Wednesday it will cut 5,000 jobs after witnessing a 31 percent drop in fourth-quarter net profit year over year.

The Swedish company said profit plummeted due to a dramatic drop in sales in its handset unit, Sony Ericsson, and restructuring charges. Overall, net profit fell to $465 million (3.9 billion kronor) from $672 million (5.6 billion kronor) in the same quarter a year ago. The job cuts represent about 6 percent of the company's 79,000 employees.

"It remains...difficult to more precisely predict to what extent consumer telecom spending will be affected and how operators will act," said Carl-Henric Svanberg, CEO of Ericsson. "To date, our infrastructure business is hardly impacted at all, but it would be unreasonable to think that this would be the case also throughout 2009."

Still, Ericsson's core equipment business, along with a weaker kronor, helped quarterly revenue increase 23 percent to $8 billion (67 billion kronor) from the same quarter a year ago. The revenue figures beat analyst expectations, sending shares of the equipment maker up more than 10 percent in early European trading.

For the year, profits fell 48 percent to $1.3 billion (11.3 billion kronor), while sales grew 11 percent to $25 billion (209 billion kronor).

Motorola announced Wednesday that it plans to cut another 4,000 jobs, or about 6 percent of its workforce, and warned that weaker-than-expected handset sales would lead to a fourth-quarter loss.

Motorola said 3,000 jobs would be eliminated from its handset unit, while another 1,000 jobs would be cut from the rest of the company. The cuts announced Wednesday are in addition to 3,000 job cuts Motorola announced in October as part of a broader restructuring that also halted the launch of many upcoming phones.

"The actions we are taking today in our Mobile Devices business will allow us to further reduce our cost structure and positions us for improved financial performance in 2009," Sanjay Jha, co-chief executive officer of Motorola, said in a statement. "Together with these actions and the announcements made in the fourth quarter, the Mobile Devices business expects to recognize annual cost savings of approximately $1.2 billion in 2009."

"Additionally, we are making good progress in developing important new smart phones for 2009 and are pleased with the positive response from our customers to these new devices," he said.

Motorola expects the latest cost-cutting to result in $700 million in new savings, which when combined with a previously announced plan for $800 million in cuts, brings the total projected savings to $1.5 billion for 2009. The company also warned that its fourth-quarter revenue would come in between $7 billion and $7.2 billion, short of the $7.5 billion analysts had been expecting.

Motorola, which has seen its global handset market share steadily decline, reported sales of 19 million phones, down from 25.4 million in the third quarter and 40.9 million in the fourth quarter of 2007.

Jha, who had been a top executive at Qualcomm, was hired last August to turn around the company's struggling handset business. But even with good leadership Motorola's battle for survival will likely be made more difficult by the current state of the world economy.

Motorola recently postponed the planned spin-off of the handset division into its own company.

As the recession takes its toll, Motorola announced Wednesday that it is cutting compensation and benefits packages for its employees, including top executives.

Co-CEO Greg Brown will forgo a 2008 cash bonus earned under his incentive plan, while co-CEO Sanjay Jha will forfeit his cash bonus at a similar level as Brown's and take the remainder of his cash bonus in restricted stock.

Beginning in the new year, Motorola plans to suspend its matching 401(k) contributions, leaving employees to be the sole contributors to their 401(k) plans.

And a number of Motorola employees will face a salary freeze in the new year, with co-CEOs Brown and Jha taking a 25 percent cut to their base salary.

Beginning March 1, Motorola will permanently freeze its U.S. pension plan, preserving the vested benefits accrued by employees and retirees, but canceling future benefit accruals. The company, however, will continue to fund its pension obligations to current and future retirees.

"The sustained downturn in the global economy requires that we take these difficult but necessary steps," Brown and Jha said in a statement. "While serving our customers remains a top priority, we are equally focused on our cost structure, and we will continue to implement appropriate measures to conserve cash and reduce expenses."

The compensation hit is just the latest blow to Motorola, whose troubles reach back before the onset of the current economic crisis. Earlier this month, for instance, Standard & Poor's dropped the phone maker's credit rating to junk status.

Motorola fell 4.31 percent to $4.22 a share in early morning trading Wednesday.