updated 4/18/2006 8:03:38 PM ET 2006-04-19T00:03:38

Motorola Inc., the world’s No. 2 cell phone manufacturer, reported a slight drop in first-quarter income Tuesday despite a 23 percent jump in sales that helped it gain market share and close the gap on rival Nokia Corp.

Motorola shares tumbled 5 percent in after-hours trading as investors showed their disappointment that record first-quarter sales failed to translate into higher profits.

The company also disclosed 2,500 new job cuts, mostly abroad, that had not been formally announced — most of them related to the closure of two manufacturing plants in Nogales, Mexico, and Taiwan. Schaumburg-based Motorola had 69,000 employees at the start of 2006.

Motorola said its market share was higher than it had been since 1999 as it rode the continued momentum of its trendy Razr line of phones and makes inroads in the fast-growing markets of Brazil, Russia, India and China.

But Wall Street punished the stock because the gains came on lower average selling prices for its phones in those countries, as reflected in a 1 percent decline in operating margin in Motorola’s handset business.

“The company is facing a delicate balance between capturing the revenue growth in these emerging markets and keeping it up on the bottom line,” said Morningstar analyst John Slack. “The market share gains were significant in the growth areas, but that’s less profitable growth.”

Net income fell to $686 million, or 27 cents per share, from $692 million, or 28 cents per share, in the same period a year earlier when results were boosted by a substantial gain on investments.

That matched the estimate of analysts surveyed by Thomson Financial, who had pegged earnings at 29 cents per share without counting stock option costs, which Motorola said amounted to 2 cents per share.

Revenue jumped to a record $10 billion from $8.2 billion a year earlier, exceeding analysts’ estimates by almost $500 million.

Motorola said handset shipments rose 61 percent in the quarter to 46.1 million units. The company estimated its global handset market share at about 21 percent, up 4.8 percent from the first quarter of 2005.

CEO Ed Zander said on a conference call that it was the first time Motorola had topped 20 percent in market share in seven years, thanks in no small part to the Razr’s ongoing success.

“Razr was the story again,” he told analysts. “If we keep going at this rate, and we think we will, 2006 may well be the Year of the Razr, Part 2. All of you are asking ’What’s after Razr?’ and I say ’More Razrs.”’

The company said the cell-phone unit, its biggest business, saw operating earnings rise 60 percent to $702 million on $6.4 billion in sales, up 45 percent from a year ago.

Responding to questions about the slightly slower margin growth, Ron Garriques, president of the division, said the company invested some of its earnings in distribution channels in Russia, China and India, and “we think that is going to pay off for us long term.”

The government and enterprise unit posted modestly positive results with operating earnings of $171 million on sales of $1.54 billion, both up 2 percent. The connected home division, whose products include digital set-tops and cable modems, saw operating income dip to $15 million from $19 million as a result of $43 million in restructuring charges; sales were up 7 percent to $710 million.

Motorola said the charges resulted from the closing of the two manufacturing facilities and the layoffs of 2,500 in the networks and government and enterprise divisions. Spokeswoman Jennifer Weyrauch said the moves were made at the end of March and disclosed only internally. She said the company also has been adding employees elsewhere and is not significantly reducing its work force.

Motorola’s network business, focusing on equipment for cellular carriers, had a down quarter with sales falling 14 percent to $1.43 billion and operating earnings down 44 percent to $132 million. Motorola cited the impact of both $21 million in restructuring charges and the lower sales as it tries to keep pace with the next-generation wireless standard in China.

The company said it expects sales of $10.3 billion to $10.5 billion in the second quarter and earnings of 30 cents to 32 cents per share, excluding stock compensation expense of 2 cents per share. Analysts had estimated 31 cents per share.

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