2nd UPDATE: Motorola Mobility Posts 4Q Profit,Braces For IPhone

Motorola Mobility Holdings Inc. (MMI) Wednesday said it posted a profit in the fourth quarter and continued to gain ground in the smartphone business, but warned of a weak start to the year for the newly independent company.

Motorola Mobility sold 4.9 million smartphones in the fourth quarter, helped by holiday promotions and a strong tie-in with Verizon Wireless's Droid franchise of high-end smartphones. But it will soon have to contend with the expanded competitive threat of the Apple Inc. (AAPL) iPhone, which Verizon Wireless plans to sell starting next month. Chief Executive Sanjay Jha said he is already seeing a slowdown with shipments at the carrier.

Motorola Mobility said it expects to post a first-quarter loss of between $26 million, or 9 cents a share, and $62 million, or 21 cents a share, and break even on an operating basis. Jha told Dow Jones Newswires he expects to still post an operating profit for the year.

Motorola shares fell over 7% to $32.35 in after-hours trading.

The results and forecast mark an early barometer of Motorola Mobility's ability to handle the pressures of the highly competitive smartphone business. Following its split with sister Motorola Solutions Inc. (MSI) at the beginning of the year, Motorola Mobility is smaller, nimbler and more focused on its core mobile devices business. But it also lacks the financial flexibility and breadth of some of its larger rivals, and could be more exposed to outside factors such as the iPhone.

Due to a quirk in the scheduling of its separation, Motorola Mobility is actually reporting results from the mobile devices and home set-top box part of the former Motorola Inc., which was still together at the end of last year. Motorola Solutions, which is responsible public radio systems for governments and mobile enterprise devices half, is set to report Thursday.

Motorola Mobility reported a profit of $80 million, or 27 cents a share, in the fourth quarter, largely due to the strength of its home segment. It posted a loss of $204 million, or 69 cents a share, in the year-earlier period. Excluding items, the company earned 37 cents a share, a penny ahead of Wall Street's forecast.

Revenue rose 21% to $3.43 billion.

"The quarter wasn't anything great relative to expectations," said Matthew Thornton, an analyst at Avian Securities.

The Motorola mobile business has largely been revived through its partnership with Verizon Wireless, which over the past year anointed several of its handsets with the Droid name, synonymous with the carrier's premium tier of smartphones. But because Motorola Mobility leans so heavily on Verizon Wireless for its sales, it will have to scramble extra hard to make up for the potential hit it will take once the Verizon iPhone begins eating into sales of other smartphones.

"It's difficult to tell," Jha said on the potential impact of the iPhone, and how long that impact could last.

Verizon Wireless, a joint venture of Verizon Communications Inc. (VZ) and Vodafone Group PLC (VOD, VOD.LN), has spent considerable resources promoting the Droid brand, and few expect it to go away with the iPhone cropping up.

"The Droid franchise continues to be strong for Verizon," Jha said. "There's no indication that they will not continue to view Droid favorably."

The mobile devices, which represent a majority of the business, generated revenue of $2.4 billion and a loss of $72 million in the fourth quarter. On an operating basis, it posted a profit of $56 million.

Thornton said that smartphone sales, while up dramatically from a year ago and the third quarter, disappointed most analysts.

Jha noted that the company had suffered some weakness with its more affordable mid-tier smartphones, as customers continued to gravitate towards premium devices.

Chief Financial Officer Marc Rothman said he expects the company to sell 20 million to 23 million smartphones and tablets this year.

Jha added he plans to introduce more tablets, including one with a seven-inch screen and other designs, in the second half and looks to the category as a catalyst for growth.

Motorola has a number of products to throw against the iPhone. In February, it will release the Xoom tablet, which is the first to use a version of Google Inc.'s (GOOG) Android software specifically designed for that category of device. In the second quarter, Motorola will release one of Verizon Wireless's first 4G phones in the Droid Bionic. AT&T Inc. (T) will sell its Atrix 4G, a powerful smartphone that can dock and act as the brains of a laptop, as part of the carrier's revamped "4G lineup" in the first quarter.

"Clearly, we've diversified ourselves," Jha said.

The home business reported revenue of $1 billion and a profit of $54 million.

Rothman said he expects revenue in the business to be flat with 2010.

-By Roger Cheng, Dow Jones Newswires; 212-416-2153; roger.cheng@dowjones.com

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