Motorola Inc reported a surprising quarterly profit on better-than-expected demand for its higher-margin smartphones, vindicating its strategy of relying on Google Inc's Android software system.

The results were also helped by a decline in sales of Motorola's unprofitable, cheaper cellphones, and the company forecast current-quarter earnings per share in a range that could beat average analysts' estimates.

Motorola's shares rose nearly 5 percent in Thursday morning trading and have gained 18 percent since late January as investors were more willing to bet on its turnaround prospects despite stiff competition from rivals like Apple Inc's iPhone.

The smartphone market is set to become even more crowded with the entrance of Hewlett-Packard Co, which on Wednesday announced a deal to buy Palm Inc [ID:nN28209016].

I think they're doing the best they can in a very competitive market, RBC Capital Markets analyst Mark Sue said, adding that investors were encouraged that Motorola was accelerating its exit from less advanced phones.

Motorola said on a conference call that its mobile devices business would be able to report a profit in the fourth quarter of 2010, its first in years as the unit phases out cheaper phones in favor of more profitable smartphones.

The mobile devices division still posted an operating loss of $192 million in the first quarter, but this was much narrower than its loss of $545 million a year earlier.

Motorola Co-Chief Executive Sanjay Jha, who heads mobile devices, said total phone volumes would decline this quarter even as smartphones sales increase sequentially, resulting in an improvement in operating losses.

NORTH AMERICA AND CHINA

Motorola said sales of smartphones, such as the Droid, rose to 2.3 million from 2 million in the fourth quarter, driven by demand in North America and China, where it said it sold the most Android phones of any vendor. Motorola has reorganized its entire mobile devices business around the Google software.

It posted a first-quarter profit of $69 million, or 3 cents per share, compared with a loss of $231 million, or 10 cents a share, in the same quarter the year before.

Excluding items, profit per share was 2 cents compared with average analyst expectations for a loss of 1 cent per share, according to Thomson Reuters I/B/E/S.

The results were also helped by a better-than-expected profit in Motorola's network equipment business, which saw an increase in operating earnings to $112 million from $62 million in the same quarter the year before.

Avian Securities analyst Matthew Thornton said Motorola's first-quarter profit was especially good news after a weak report from handset market leader Nokia last week.

It was a good quarter in the face of cautious expectations, he said, adding that Motorola's cash generation of $455 million was a good sign ahead of its plan to separate into two companies early next year.

The smartphone numbers look good and the profitability looks good and they generated nice cash, he said.

Overall revenue fell 6 percent from a year earlier to $5.04 billion, and compared with the average forecast of $5.098 billion.

Motorola sold 8.5 million phones, short of the average forecast of 10.2 million from nine analysts contacted by Reuters, and 14.7 million phone sales in the same quarter a year earlier.

Motorola forecast current-quarter earnings per share of 3 cents to 5 cents, including expenses for stock-based compensation and amortization of intangibles. That compares with the average Street forecast of 3 cents per share according to Thomson Reuters I/B/E/S.

The company changed its estimate for 2010 smartphone sales to a range of 12 million to 14 million from its previous guidance for 11 million to 14 million.

Motorola shares rose about 30 cents, or 4.2 percent, to $7.25 on New York Stock Exchange

(Reporting by Sinead Carew; Editing by Derek Caney and Maureen Bavdek)

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