updated 1/19/2007 11:20:34 AM ET 2007-01-19T16:20:34

Motorola Inc. CEO Ed Zander said Friday the cell-phone maker will cut 3,500 jobs, or about 5 percent of its work force, as it moves to improve operating costs after a disappointing fourth quarter.

Zander, speaking to analysts at a meeting in New York, said the move will save the company about $400 million over two years. The job cuts are to be completed by mid-2007. Motorola has about 67,000 employees worldwide.

The announcement came after the world’s No. 2 handset manufacturer reported that fourth-quarter profits fell 48 percent despite record sales as operating results stumbled during the key holiday selling season.

The Schaumburg, Ill.-based company had warned two weeks ago that results would come in well below expectations after a decline in its operating profitability.

Zander said a variety of factors, including missed forecasts, had resulted in a worse-than-expected quarter despite strong sales. He said Motorola is sticking with its strategy, which many analysts had said was in need of overhaul following the company’s Jan. 5 profit warning.

“There’s no change in strategy,” he told analysts at the meeting, which was broadcast over the Internet. “There may be some changes in tactics.”

He also dismissed suggestions that the trend-setting Razr phone, which turned around the company’s fortunes two years ago, is running out of momentum.

“It’s funny, I keep reading about Razrs being tired,” he told analysts on an earlier conference call. “We sold more Razrs in quarter four than in any quarter we ever had. We now have sold over 75 million Razrs worldwide.”

Net profit for the last three months of 2006 was $624 million, or 25 cents per share, down from $1.2 billion, or 46 cents per share, a year earlier.

Results included a net gain of 5 cents per share for various charges. Excluding those items, Motorola said earnings from continuing operations were 21 cents a share, or better than the 13 cents to 16 cents it forecast two weeks ago.

Analysts surveyed by Thomson Financial had lowered their consensus estimate to 25 cents per share following Motorola’s Jan. 5 warning.

Revenue was $11.8 billion, up 17 percent from $10 billion a year ago and slightly above Wall Street’s $11.7 billion estimate.

The company said it expects sales between $10.4 billion and $10.6 billion in the first quarter, in line with analysts’ forecast of $10.5 billion.

Edward Jones analyst Rick Franklin said that while results remained strong in Motorola’s networks and enterprise and connected home segments, the company has to reduce costs in the handset business, where the operating margin sank to 4.4 percent from 11.6 percent in the third quarter.

“When you see this level of margins, there’s something that needs fixing and it’s not a three-month fix,” he said.

The company, which trails Finland’s Nokia Corp., said its world market share grew nearly 1 percent in the quarter to 23.3 percent.

Operating earnings from the mobile devices division, the company’s largest business, fell 49 percent to $341 million despite a 19 percent increase in sales to $7.8 billion. The company shipped a record 65.7 million handsets in the quarter, up 47 percent from a year earlier.

“It definitely was a pricing issue, being very aggressive on pricing — particularly in the emerging markets,” said Morningstar analyst John Slack. “It may take a couple quarters for them to get back to where they want to be.”

For the full year, net earnings were $3.67 billion, or $1.46 per share, down 20 percent from $4.58 billion, or $1.81 per share, in 2005. Sales rose 22 percent to $42.9 billion from $35.3 billion.

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