updated 3/22/2007 7:36:24 AM ET 2007-03-22T11:36:24

Hold the phone on that Motorola comeback story.

The cell-phone maker’s attempted recovery from a late 2006 setback was dealt a severe blow Wednesday when the company warned that sales and profits have weakened further and it will post a first-quarter loss.

Acknowledging deeper problems than it had just a month ago when its cell-phone chief left under pressure, Motorola Inc. replaced its chief financial officer and named a new president and chief operating officer.

Its stock, already down 29 percent from last October’s six-year high, tumbled nearly 5 percent in after-hours trading to $17.83 after closing the New York Stock Exchange session down 8 cents at $18.74.

Chief Executive Ed Zander, who earlier this year pledged the cell-phone unit would return to double-digit operating profitability in the second half of 2007, said it became clear following Ron Garriques’ departure as that unit’s leader last month that it would take longer to turn around its “unacceptable” performance.

He said the company, no longer willing to boost market share at the expense of profit margin, decided not to match competitors’ price cuts on some inexpensive models last month, and that hurt sales significantly.

“We decided in mid-February that we’re not going to go chase that stuff (price cuts),” he said in an interview with The Associated Press. “We did take down our revenue because of that and our volume numbers because of that, but it’s the right answer long-term.”

Besides reshuffling top management, Motorola said it will buy back more of its lagging stock, accelerating $2 billion of share repurchases and increasing the size of its current share repurchase program to $7.5 billion.

That appeared designed to placate demands by activist shareholder Carl Icahn, who recently increased his stake in the company and is seeking a board seat in hopes of forcing actions to raise the company’s stock price.

Analysts said the company’s struggles remain linked to price cuts it made to its popular Razr phone when competitors came out with their own impressive new handsets.

“It’s nice to see them emphasizing profit over market share,” said Morningstar analyst John Slack. “But when their sales drop as rapidly as they did this quarter ... it looks like the first quarter is a mess.”

Targeting the market-share lead it lost to Nokia Corp. in the late 1990s, Motorola raised its global share to about 22 percent in 2006, up from 14 percent in 2003. But much of the gains came at the expense of profit margins as it cut prices of the Razr and other high-end phones sharply, especially in emerging markets.

Neil Strother, a wireless analyst in Seattle for Jupiter Research, blamed Motorola’s downfall on the new vulnerability at the top of its product lineup.

“They’ve been searching around for another hit product to follow the Razr and so far haven’t come up with that,” he said. “Pebl, Rizr, Krazr have been innovative but nothing that’s set the market on fire.”

With other competitors besides Nokia on the rise, Strother said, “If you make a mistake, you pay a price.”

Thomas Meredith, 56, was named acting chief financial officer, effective April 1. He replaces David Devonshire, 61, who will retire from the position. Zander also named Greg Brown, president of the company’s networks and enterprise business, to the vacant posts of president and chief operating officer.

The world’s No. 2 cell-phone maker said it now expects sales for the January-March quarter of $9.2 billion to $9.3 billion, down more than $1 billion from its January forecast, and a net loss of 7 cents to 9 cents per share.

It also expects sales, profitability and operating cash flow for the full year to be “substantially” below its prior guidance.

Motorola said the cell-phone unit, its largest, likely will report an operating loss in the first quarter due to slower unit volumes, a difficult pricing environment and a limited 3G product portfolio that is keeping its results in Europe below expectations.

The company, which had been coming off a nearly two-year period of nearly unprecedented gains because of the popularity of the Razr phone, stunned Wall Street in January by disclosing a steep drop in profitability in the handset division that led to its least profitable quarter since 2004.

It said it was cutting 3,500 jobs and taking other steps to reduce costs following misjudgments on pricing and sales forecasts for its high-end phones.

Zander said on a conference call that he was dissatisfied with the pace of restructuring steps taken since Garriques’ departure, citing delays and other problems.

He maintained that the business should experience a gradual recovery in the second half and be profitable for the full year.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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