Now that Christmas is out of the way, it's time for that other "most wonderful time of the year" -- year-end earnings season, when those companies whose fiscal years align sensibly with the calendar report their Q4 and full-year results. Motorola (NYSE:MOT) will be one of the first to do so, reporting bright and early Friday morning.

What analysts say:

  • Buy, sell, or waffle? Thirty-five analysts follow Motorola, which garners 14 buy ratings, 19 holds, and a pair of sells.
  • Revenues. On average, the analysts expect to see 12% sales growth, to $11.72 billion.
  • Earnings. Profits, however, are predicted to plunge 25.5% to $0.25 per share.

What management says:
Starting at the top, the big news this quarter was the finalization of Motorola's acquisition of Symbol Technologies. As of Jan. 9, the latter's operations are now wholly incorporated into Motorola.

The next biggest news item probably interests you more, though: the earnings warning Motorola issued earlier this month. Management predicted revenues that -- surprise! -- squarely bracket what analysts are now expecting to see. As for the profits on those revenues, Motorola told us to expect $0.13 to $0.16 in profits per share.

Quite a bit lower than the analyst estimates you see above, right? Well, I warned you: "Detracting from those earnings, and most likely ignored by most analysts, will be the usual slew of non-cash 'one-time items' such as stock-option expensing, charges for reorganizations and 'investment-related losses,' and 'unusual' taxes." (Emphasis added.)

What management does:
As Motorola's cell-phone market share has leapt forward, its margins have fallen behind. The problem: Most of the volume growth remaining in this marketplace lies in the cash-poor developing world. As the company has learned, you can still sell cell phones over there, but most of your sales will be low-price, low-margin phones. Unsurprisingly, as sales have soared, gross, operating, and net margins have contracted.

Margins %

7/05

10/05

12/05

4/06

7/06

9/06

Gross

33.0

32.6

32.1

31.6

31.1

31.0

Op.

11.1

11.8

11.6

11.4

11.3

10.9

Net

8.5

11.8

12.4

11.8

12.2

9.9
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
As much as I like Motorola and love its free cash flow, and think the stock is significantly undervalued, I have to admit that I don't like these margin trends one bit. Over the last six months, it has produced tremendous sales growth -- 23% year over year, in a company already selling nearly $43 billion worth of goods per year, is amazing. But its cost of goods sold is rising at a 26% annual clip, and selling, general, and administrative expenses are following suit.

In fact, the only operating costs I see rising less quickly than sales at Motorola are in research and development -- the lifeblood of a tech firm. In Friday's report, I'd like to see some indication that the firm recognizes the need to keep investing in its scientists and engineers, in order to keep the growth coming.

If there's a second, then obviously, I'd like to see those margins start moving in the right direction: Up.

Related competitors:

  • Alcatel (NYSE:ALA)
  • Apple (NASDAQ:AAPL)
  • Cisco (NASDAQ:CSCO)
  • Hewlett-Packard (NYSE:HPQ)
  • Nokia (NYSE:NOK)
  • Qualcomm (NASDAQ:QCOM)

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Fool contributor Rich Smith does not own shares of any company named above.