NEW YORK, Apr 19 (Reuters) Motorola Inc., the world's No. 2 cellphone maker, on Tuesday posted a 1 per cent drop in first-quarter profit as strength in its handset unit failed to offset weakness in its network equipment business in Asia, pushing its shares down 5 percent.
Mobile phone sales rose 61 percent from a year earlier to 46.1 million, and Motorola said it gained market share. But the company's network business was weak, particularly in China.
''The only nick on the quarter was in the network business in Asia,'' Chief Executive Ed Zander said in an interview.
Networks was the only one of Motorola's four business units to post declining sales and earnings for the quarter, and it pushed down the gross profit margin.
''We had an operational execution issue in Asia,'' in the network equipment business, Zander said, adding that ''purchase orders and demand'' for the unit did not meet the company's internal targets.
Wireless operators in China delayed spending on network equipment as they are waited for the government to issue licenses for building high-speed wireless networks, he said.
The networks business should improve in the second quarter and the second half of the year, he forecast, but said the company does not expect revenue in 2006 from the high-speed wireless networks expected to be built in China.
Motorola's profit fell almost 1 percent to $686 million, or 27 cents a share, including 2 cents a share of stock option expenses, in line with average analyst estimates, according to Reuters Estimates.
Revenue rose 23 percent to $10.01 billion from $8.16 billion, above analyst estimates for sales of $9.54 billion.
Its mobile handset revenue rose 45 percent to $6.4 billion.
Charter Equity Research analyst Ed Snyder said that while the handset business was strong, a decline in Motorola's gross profit margin to 30.2 percent from almost 33 percent a year ago was disappointing.
''That's where they're going to get spanked,'' he said, adding that the network segment, dragged profits down.
The unit, which sells wireless network gear to service providers, had a 14 percent decline in revenue to $1.43 billion, while its operating earnings fell almost 44 percent.
Excluding $21 million in restructuring charges, the division's earnings were down almost 35 percent.
Some analysts want Motorola to make a major move such as an acquisition or a sale of its networks business, which will be dwarfed by the new Alcatel after it completes its proposed acquisition of Lucent Technologies Inc..
But Zander suggested in a call with analysts that he would not rush increase the scale of Motorola's network business through a major acquisition.
''I think the idea of scale for scales's sake is not the right answer,'' said Zander. The network unit's first-quarter problems were only in Asia, he added. ''If it was more systemic I'd be coming in with a different story,'' he said.
Ron Garriques, head of the company's mobile business said Motorola sold 18 million handsets in its flagship Razr phone design range during the quarter and expects to ship its 50 millionth Razr phone in the second quarter.
The company forecast second-quarter earnings of 30 cents to 32 cents a share, excluding stock option expenses of 2 cents a share, on revenue between $10.3 billion and $10.5 billion.
Revenue for its connected home unit, which makes television set-top boxes, rose 7 percent to $710 million. Revenue rose 2 percent to $1.54 billion for its government and enterprise division, which Motorola plans to combine with the network equipment division.
Motorola said its share of the cellphone market rose to 21 percent from 19 percent in the fourth quarter.
Shares fell $1.28 to $22.80 in extended trade on Inet after the news, after closing up 50 cents at $24.08 on the New York Stock Exchange.
Motorola's stock has risen by about 60 percent in the last year, boosted by the popularity of devices such as its Razr phone. Bigger rival Nokia has seen its U.S. shares rise more than 40 percent in the same timeframe.
REUTERS CS HS0922