摩托羅拉 (MSI) 2008 Q1 法說會逐字稿

Good morning and thank you for holding.

Welcome to Motorola's first quarter 2008 earnings conference call.

Today's call is being recorded.

If you have any objections, please disconnect at this time.

After this teleconference, the presentation material and additional financial tables will be posted on Motorola's Investor Relations website.

In addition, a replay of this call will be available approximately three hours after the conclusion of this call over the Internet through Motorola's Investor Relations website.

The website address is www.Motorola.com/investor.

(OPERATOR INSTRUCTIONS).

I would now like to introduce Mr.

Dean Lindroth, Corporate Vice President of Investor Relations.

Mr.

Lindroth, you may begin your conference.

Thank you and good morning.

Welcome to today's call.

With me this morning are Greg Brown, President and Chief Executive Officer, and Paul Liska, Chief Financial Officer.

A number of forward-looking statements will be made during this presentation.

Forward-looking statements are any statements that are not historical facts.

These forward-looking statements are based on the current expectations of Motorola, and there can be no assurance that such expectations will prove to be correct.

Because forward-looking statements involve risks and uncertainties, Motorola's actual results could differ materially from these statements.

Information about factors that could cause and in some cases have caused such differences can be found in this morning's press release on pages 18 through 27 in Item 1A of Motorola's 2007 annual report on Form 10-K and in Motorola's other SEC filings.

This presentation is being made on the 24th of April, 2008.

The content of this presentation contains time-sensitive information that is accurate only as of the time hereof.

If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, Motorola will not be reviewing or updating material that is contained herein.

Before we begin, I want to remind everyone these details outlining highlighted items, our GAAP to non-GAAP P&L reconciliations and other financial information can be found on our website, as well as today's slides and an audio replay.

I will now turn the call over to Greg.

Thanks, Dean.

Good morning and thank you for joining us.

I will begin today with a few opening comments about the quarter, after which Paul will take you through the consolidated financial results.

I will then come back to discuss the individual businesses and provide some perspective on the second quarter.

With respect to financials, we reported a first-quarter GAAP loss of $0.09 per share on sales of approximately $7.4 billion.

The loss excluding highlighted items was $0.05 per share and in line with the guidance we provided on our last earnings call.

During the quarter we announced our decision to pursue the creation of two independent publicly traded companies, and we have a leadership team and functional work groups addressing the requisite financial, tax, regulatory, legal planning and analysis.

We have taken further steps toward improving and enhancing the Mobile Devices portfolio and reducing costs, and our Board reached a settlement that avoided a costly and distracting proxy contest and just recently named Dave Dorman as our incoming non-Executive Chairman.

Now I will pass the call over to Paul to go through the financials.

Thanks, Greg.

In the quarter sales were approximately $7.4 billion, down 21% compared to the first quarter of last year.

The year-on-year sales decline is all attributable to lower sales in Mobile Devices.

On a GAAP basis, the Company had a loss from continuing operations of $0.09 per share, which is flat with the first quarter of last year.

The GAAP results include a net charge for highlighted items of $0.04 per share, primarily related to a change associated -- to a charge associated with workforce reduction.

More details on these items can be found on our website.

My remaining comments will all exclude highlighted items.

The loss per share was $0.05 compared to a profit of $0.02 per share in the first quarter of last year.

Gross margin percentage for the Company was essentially flat from the fourth quarter, but up from the first quarter of last year, primarily a function of our overall sales mix.

As you know, we have discussed our cost reduction objectives on earnings calls both last year and this past January.

Our actions were projected to result in $1 billion in net cost reductions.

Since we have substantially completed the planning and many of the associated actions, we want to level-set everyone.

As compared to our 2007 results, we currently expect net reductions in 2008 of approximately $540 million in selling, general and administrative expense and $240 million in research and development expense.

We also anticipate a reduction of approximately $220 million to impact our cost of goods sold.

That said, there will be puts and takes related to acquisitions and divestitures and the costs associated with the creation of two separate companies.

In the first quarter, we reduced operating expenses by $205 million compared to the first quarter of last year and $138 million sequentially.

The impact of lower sales in the quarter was partially offset by the reduction in operating expenses, resulting in an operating loss in the quarter of $140 million compared to operating earnings of $11 million in the first quarter of last year.

Total other income and expense was a net expense of $16 million.

This compares to net income of $52 million last quarter, which included a gain on the sale of embedded communications computing and net income of $39 million in the first quarter of last year due to higher levels of interest income.

Our ongoing income tax rate is 34%.

Operating cash outflow was $343 million, primarily resulting from the settlement payment to Freescale for which we took a charge in the fourth quarter of 2007.

In the quarter we repurchased 9 million shares of common stock at an aggregate cost of $138 million.

To date $7.9 billion of our total $11.5 billion in stock repurchase authorizations have been completed.

The operating cash outflow, along with share repurchases, debt retirement, acquisitions, dividends and capital expenditures, resulted in a net cash balance of $3.5 billion as compared to $4.3 billion at the end of the fourth quarter.

Cash conversion cycle at quarter-end was 46 days, 10 days lower compared to the first quarter of last year but up 13 days sequentially.

The sequential increase was mainly attributable to slightly higher inventory, higher receivable days due primarily to our mix of businesses and sales linearity, partially offset by approved accounts payable days.

That said, we expect sequential improvement in the second quarter.

Moving on to our outlook, for the second quarter, we expect a loss from continuing operations of $0.02 to $0.04 per share, excluding items of the variety highlighted in our quarterly earnings releases.

Now I will pass the call back to Greg who will discuss the business operations in more detail.

Thanks, Paul.

In Mobile Devices sales for the first quarter were $3.3 billion on volume of 27.4 million units.

Our estimated market share was 9.5% due primarily to a decline in North America.

As we previously discussed, we continue to be impacted by gaps in our product portfolio.

North America was still our largest region and accounted for 44% of total Mobile Devices sales.

Latin America accounted for 25% of sales, while Asia-Pac and the EMEA made up the remaining 17% and 14% respectively.

Our ASP was up slightly, reflecting a higher percentage of mid to high tier product compared to the fourth quarter.

Excluding highlighted items, the operating loss in the quarter was $347 million compared to a $204 million operating loss a year ago.

The operating loss increased as a result of lower sales, partially offset by lower operating expenses, resulting from our cost reduction actions.

With regard to the Mobile Devices portfolio, we began shipping six new products in the quarter, including the ROKR U9 multimedia device in Europe, Latin America and Asia, and the MOTO Z9 feature phone in the US.

We announced expansions to the MOTO Q smartphone product line, which will begin to ship through several carriers during the second quarter.

And recently we began shipping the ROKR E8 music device in Asia.

Later in the quarter we expect both the E8 and Z10 multimedia devices to ship in Europe.

As we move forward on our portfolio improvements, clarity around our silicon and software platforms is fundamental to successful execution.

In this regard I would like to share with you our direction in both of these important areas.

First, as you know, our multisource silicon strategy was broadened with the announcement of our QUALCOMM agreement in January.

Our design teams are currently planning and integrating TI and QUALCOMM chipsets into our 2009 UMTS product portfolio.

On software platforms the focus for our 3G UMTS devices in the mid to high tier will be centered around expanded use of our Symbian UIQ platform.

We will utilize Linux Java on certain devices to meet 2008 customer commitments and continue to support and invest in that platform for the longer-term.

In low to midtier devices, we will leverage P2K, a proven low-cost branded services-enabled platform.

This will allow us to discontinue investment in our other low-tier platform after completing some near-term customer commitments.

So, as I look at the Mobile Devices business overall and our priorities, we are focused on leveraging our talented employees, intellectual property and design leadership to enhance our product portfolio while managing our overall operating expenses.

In the second half, we expect more additions to the portfolio as compared to the first half as we improve our new product introduction effectiveness and deliver our 2008 product roadmap.

In 2009, as we transition more of our devices to our improved platforms, we will deliver a broader, more innovative and competitive customer-driven product portfolio in which we will have lower cost devices and improved feature sets reflecting trends in music, touch and messaging.

We will address a wider range of price points and key product segments.

We will better utilize partnering to develop ODM solutions to address a broader set of market opportunities.

With an improved product portfolio, we can leverage our strengths in distribution and brand across our key markets to reposition ourselves for success.

Coming back now to look at the second quarter in Mobile Devices, we anticipate sales to be flat to slightly up sequentially in an operating loss comparable to the first quarter.

Turning now to Home and Networks Mobility, sales were nearly $2.4 billion, up 2% compared to the first quarter of last year.

Excluding highlighted items, operating margin was 7.3% compared to 8.6% in the first quarter of last year.

Our Home portfolio delivers personalized media experiences to consumers at home and on the go.

Our solutions also enable service providers to operate their networks more efficiently and profitably by delivering new revenue-generating applications and services to their subscribers.

First-quarter Home sales were nearly $1.2 billion, up 12% year-over-year demonstrating continued strong demand particularly for our HD and DVR devices.

Operating margins in the quarter were lower compared to the first quarter of last year, attributable mainly to product mix and a high-level of transportation costs in the quarter.

R&D expenses were also higher as a result of recent acquisitions.

That said, we see near-term opportunities to increase the operating margin, to improve manufacturing costs and leverage on sales growth.

Looking regionally, compared to the first quarter of last year, sales in North America grew 10% and accounted for approximately 83% of total sales.

Sales outside North America also remain strong and were up 25% led by growth in Europe and Latin America.

In Digital Entertainment we maintained our market leadership position with overall unit volume of 4.1 million devices.

We have now shipped over 65 million devices to date, including over 3 million IP devices.

We are also a leader in end-to-end video, voice and data network solutions for operators.

Future demand will be driven by growth in services, including on demand and personalized video, interactive TV, targeted advertising and advanced IP applications.

Our recent DOCSIS 3.0 based CMTS award from J:COM, a major customer in Japan is just one example of our leadership in this area.

Over time we expect sales from this portion of our product portfolio to become a more significant contributor to overall results.

On the product front, this quarter we introduced several products that support our media mobility focus.

These include the DCX series of multimedia hubs capable of advanced video services and media storage and the DH series of personal mobile TV devices for on the go multimedia entertainment and navigation.

Finally, to support our international growth, we completed the acquisition of Dahua Digital.

This acquisition enhances our digital entertainment device portfolio for the rapidly growing cable market in China.

It also provides us with improved time to market and a low-cost solution suitable for other markets around the world.

Turning to wireless networks, sales in the quarter were over $1.2 billion.

Excluding embedded communications computing business we sold in December of last year, sales grew by approximately 2%.

This reflects higher GSM sales, partially offset by lower sales of CDMA and iDEN.

We were again profitable in each of these technologies, while we continue to invest in WiMAX and LTE.

Overall operating margin remained essentially flat with the impact of lower sales, offset by the reduction in the cost structure of this business.

In mobile broadband we made a number of enhancements to our WiMAX portfolio, including new AccessPoint and desktop CPE offerings.

We remain a leading supplier of having now delivered over 3600 access points and over 120,000 CPE devices to date around the world.

In the quarter we won a major contract in Saudi Arabia and registered our second win in Taiwan.

This brings us to 80 engagements, 19 of which are for commercial systems with customers in 43 countries.

We expect this to result in some initial WiMAX sales this year as the first networks are commercialized and more significant sales opportunities next year and beyond.

Looking to the second quarter for the Home and Networks Mobility segment year-on-year, we expect slightly higher sales and essentially flat operating margin.

This reflects continued solid growth for Home and lower wireless networks sales.

Now let's take a look at Enterprise Mobility Solutions.

Sales were $1.8 billion, up 5% as compared to the first quarter of last year.

Sales of mission-critical government and public safety equipment and services were nearly $1.3 billion for the quarter, up nearly 4% compared to the year ago quarter.

In the commercial enterprise verticals, sales of mobile computing, advanced data capture and wireless LAN were over $530 million, also up from the year ago quarter.

Excluding highlighted items, operating margin for the segment was 14.3% compared to 13.3% for the first quarter of last year.

The improvement was driven by higher margins in the commercial enterprise verticals.

Compared to the first quarter of last year, North America sales declined 6%.

The decline was due to a large initial system contract with the U.S.

Postal Service that we began implementing in the first quarter of 2007.

Excluding this sale from last year's results, North America sales were essentially flat.

Continued strong demand internationally is providing momentum for topline growth.

Outside of North America, sales grew in aggregate by over 23% compared to the first quarter of last year and accounted for 45% of total sales.

In EMEA sales grew by 25% compared to the first quarter of last year and accounted for 29% of sales.

We are beginning to see the impact of the nine countrywide digital radio system awards won last year and continued investment in Homeland Security.

In addition, we are experiencing strong demand for the MC70, and the new MC17 is gaining traction particularly in retail.

We also secured wins with several new customers in the transportation and logistics verticals.

In Asia-Pac sales grew by 33% compared to the year ago quarter and accounted for 10% of total sales.

Retail, manufacturing and transportation logistics verticals all performed well.

Results also include two months of operation from our joint venture with Vertex Standard.

The joint venture opens up new market opportunities and will enable us to develop and deliver a broader suite of solutions to customers worldwide.

As we focus on sustaining our growth in Asia, public safety and transportation and logistics markets provide us with significant opportunity.

We received our largest award ever in the region for a multiyear project valued at over $280 million for the Royal Malaysian Police for their digital migration.

We also secured several competitive TETRA system wins with major international airport customers in Europe and Asia.

On the product side, we launched the CA50, a new Voice over IP scanning device aimed at the retail and health care markets.

We also introduced a low-cost all wireless LAN solution for midsized enterprises.

Looking ahead to the second quarter for Enterprise Mobility Solutions, we expect a year-over-year increase in sales and continued double-digit operating margin.

So in summary, we're actively engaged in pursuing our plan to create two independent publicly traded companies.

In mobile devices we remain focused on our efforts to improve the product portfolio.

Our intellectual property and design, coupled with improved platforms and execution, will result in a broader-based and more innovative consumer-driven portfolio in 2009.

In Home and Networks Mobility and Enterprise Mobility Solutions, the teams were expanding their portfolio of solutions, executing well, growing internationally and delivering solid financial results.

And I will turn the call back over to Dean to start the Q&A.

Thanks, Greg.

Before we begin taking questions, we would like to remind callers to limit themselves to one question so that we can accommodate as many participants as possible.

Operator, you can now provide our callers with instructions on how to ask a question.

(OPERATOR INSTRUCTIONS).

Maynard Um, UBS.

I just wanted to touch on your guidance for flat revenues in handsets.

Assuming flat or up ASPs because of the new products in normal seasonal industry growth that implies further market share losses.

Can you just talk about your expectations?

Is it in industry you're expecting to be flat sequentially, or maybe talk about where in particular you're expecting to see further share pressure?

Yes, you are right we're expecting revenue to be flat to slightly up sequentially with a comparable operating loss for the quarter.

I think that from a TAM standpoint sequentially we're expecting a very slight increase.

So I think you could kind of calibrate accordingly and then overall between those reference points.

We will expect to see normal margin pressures on the existing portfolio, offset by operating expense improvements, as well as the introductions to newer products, which we will be shipping later in the quarter.

Phil Cusick, Bear Stearns.

Following up on Maynard's question on the handset side, can you talk about the product portfolio as you see it now?

Do you expect the new things that have been launched already that they are really starting to come through and shoring things up, or is it really just we have sort of normalized and stabilized the products that are out there on a quarter to quarter basis?

And then for Q2, have we sort of seen the lineup that is going to be out in Q2, and at what point do you expect that we're going to start seeing some more launches of a new lineup?

And then any update on the leadership enhancements would be great.

Thank you.

Yes, so we introduced six new products as you know in Q1 -- three W series, an iDEN device, a 3G UMTS device and a GSM device.

We expect more products in Q2 from a quantity standpoint, which is positive.

As we transition from where we are toward the end of the year and into 2009, the other thing I think you will see us do is pursue areas and gap where we are literally not effectively competing today.

So we have a very embryonic 3G product portfolio, but you will see us also expand the portfolio into some key areas around messaging and touch, some also lower-cost devices that I think will round out the portfolio and make us much more competitive between now and the end of the year to position us for a stronger 2009.

In terms of the leadership search for mobile devices, it is progressing well.

Obviously it is a top priority of mine, and I will update you when we have something specifically to announce, but I think it is progressing pretty well.

Mark Sue, RBC.

So the question is just units 27.4 million, is that the absolute bottom with all the new products that you have?

I think it is 50 to 70 new phones for the balance of the year.

And additionally should we model a sharp decline in ASPs because the current portfolio is aging a little bit, or are you still pretty disciplined in maintaining ASPs, that would be helpful?

Thank you.

Yes, I think our ASP in Q1 was basically a reflection of mix, more around mid to high tier.

I think we continue to exercise some good discipline around pricing and pricing consistency and rationalized channel management.

And again, I would expect in Q2 revenues to be flat to slightly up, and again, and maybe I did not mention this before, but the TAM will have a slight increase sequentially Q2 over Q1.

So that is kind of what we expect to see going forward.

And you can say with confidence that maybe 27.4 is probably the absolute bottom for Motorola?

Yes, obviously, as you know, we do not guide on the units, but I think you can get some overall context from the other guidance we are giving.

Our product portfolio is only going to get stronger, and we are going to compete in some key segment areas that we literally do not have products on the shelf for today.

So we absolutely understand what is required and look to grow over time.

Thank you and good luck, Greg.

Brian Modoff, Deutsche Bank.

A real quick clarification on the TAM.

You first said very slight decline, and then you said very slight increase.

So I just want to make sure you were saying a very slight increase in the number of units you ship in Q2 from Q1.

Just that clarification.

A question on UMTS productline, you have one product or had one product in Europe for 3G.

Can you kind of walk us through how many products you will have in each -- new products you will have in each of the quarters as we move through the year for UMTS in Europe.

Have you seen any impact from the macroenvironment on your PMR business?

Have you seen any US government order slowdowns due to perhaps lower tax receipts?

First, fact clarification, Brian, thanks for the question.

Sequential TAM is a slight increase sequentially Q2 over Q1.

Today we have about I think six UMTS products in the portfolio that are shipping today and active.

We will expect in Q2 to have three additional 3G products shipping in Q2 -- announced and shipping.

So that will enhance the portfolio.

From an overall macroeconomic standpoint, we continue to watch it pretty closely, both North America and EMEA.

I think EMEA in terms of government contracts, as you referenced on the public safety side, we have had tremendous momentum, winning a number of consecutive countrywide digital TETRA systems.

And the positive news around that is it provides a foundation by which we can then build out further footprint and then add subscribers over time for the balance of '08 and '09 into the framework of infrastructure that has been installed there.

For North America I think your question was on the government side.

We did have a decline in our government and public safety business.

I think when you normalize for some of the contracts, a period ago in Q1 it was generally flat.

But we're going to watch that closely because government spending on lower end public safety systems is something we're just going to have to keep our eye on moving forward.

Mike Walkley, Piper Jaffray.

I was wondering if you could just follow-up on the outlook for slight growth.

Are you seeing any pockets of inventory that affect that guidance on the handset side?

And then also on WiMAX, with momentum you are gathering, could you help us size the market, maybe how big you see the total addressable market maybe in '08 and '09?

In terms of inventory, I think it is generally comparable in mobile devices.

So from period to period, it is reasonably flat.

Stocking channel has further improved sequentially.

As well, in terms of WiMAX, our momentum is -- in 4G in general, our momentum is strong.

We have got as I referenced lots of WiMAX interest.

Clearly we continue to support Sprint and Clearwire here domestically.

Internationally we have got tremendous interest in WiMAX in a variety of international theaters and applications.

And the architecture that we're building with the investments we're making in 4G have a high-level of reusability between WiMAX and LTE, which I think will lend itself well to business case return in the future as well.

In terms of addressable markets, it is hard to say at this point.

It is still evolving.

We have said that we do not expect the materiality from a WiMAX financial contribution in 2008.

So I think we will give you updates in 2009 as it comes.

Ehud Gelblum, JPMorgan.

Greg, thanks for giving us a sense as to what you think the TAM is going to do next quarter.

If you can give us a sense as to what you think, first of all, the entire handset market is going to do for the year and what you are kind of basing that on.

And then foreign exchange, clearly the dollar has moved a lot in the negative direction over the last three months, and your ASP actually outperformed I think what most people were expecting.

Can you give us a sense as to how much -- I understand there is definitely a good mix shift going in your product portfolio -- but how much did the foreign currency possibly help your ASP, and how much can that kind of keep things maybe a little afloat as you go throughout the rest of the year?

And then if you could give us a sense as to what percent of your phones this quarter were 3G WCDMA.

I know that it was probably relatively small.

But what percent that was and where you expect it to go as you get your new product portfolio out by the end of the year?

In terms of the last question first, the contribution from WCDMA in Q1 was really small.

So that is first and foremost.

From an overall TAM perspective on an annualized basis, we're looking at double-digit, low double-digit range and planning that accordingly.

On foreign exchange, I will actually turn it over to Paul.

Yes, just to level set everybody, the sales mix at the Company level is about 50-50 US to non-US.

Importantly, though, outside the US, we still do a lot of our business in US dollars or in currencies that have not had much volatility to the dollar.

So actually the foreign exchange impact that we have is relatively insignificant.

Tim Long, Banc of America.

Back to the handset side, you talked about I think 17% of your units coming from the Asia-Pacific region.

That is obviously below the mix of the overall industry and a lot of the growth coming from there.

Could you talk a little bit about plans to recover the business in some of the key regions like China and India?

What is the go to market strategy?

Is it a distribution issue, is it a product issue, and what are kind of the focal points to improve in those really high-growth areas?

Thank you.

Yes, so Asia to your point represents a fantastic opportunity for us, specifically just looking at China first.

I think it is a combination of product refresh and localized customer requirements PIN-based product, touch product.

We had great success with the MING.

I think you will see us add on some nice product additions sooner rather than later that fill out the portfolio that hit us absolutely squarely on a very growing addressable market opportunity in China and capitalized on the go to market infrastructure that we have there, as well as our brand leverage.

India, the same thing, we have a number of product and retail distribution points, but that is more of about a product refresh and adding lower W series phones and increasing ODM partnerships to allow us to more effectively compete on lower price points.

And I think India is another opportunity that clearly from just a volume standpoint will allow us upside opportunity to compete with the existing infrastructure investments that we have made there, and you will see us look to do that.

Jeff Kvaal, Lehman Brothers.

My first question, Greg, could you give us a sense of how we should expect the timelines to develop for decisions about which -- how the split will unfold, i.e.

where the brand will go and how the capital structure will unfold?

And then secondly, the QUALCOMM and TI chipset phones, are they going to be out in 2008 and then impact in 2009, or were you saying they will be out in 2009?

Yes, so in terms of the separation of the two independent companies, work is well underway.

Teams launched a whole host of different cross-functional initiatives and outside advisors.

There are many issues to work through around intellectual property and brand and financial and tax and regulatory.

I think that will take several months for us to work through.

And, as we have talked about and referenced, we do not expect the separation to be until sometime in 2009.

Your second question was what again?

You had suggested that the QUALCOMM and TI chips --

Yes, right.

So just to kind of level set, obviously we use QUALCOMM throughout our CDMA portfolio.

TI does all of our ODM phones to date.

We're building QUALCOMM and TI into our UMTS portfolio product for 2009.

Just as a reference point as a footnote, we're shipping this quarter a QUALCOMM chipset on a UMTS phone in Korea which is positive.

And we will look to have those chipset designs in our portfolio as soon as we can.

I think the progress is progressing well, and the partnership between those two firms is going as expected.

Ittai Kidron, Oppenheimer.

A couple of questions from me.

First, on the gross margin, you actually did a decent job in keeping that flat, roughly flat for the last three quarters.

Can you give us a little bit more color to what extent that reflects just a pure cost-cutting, and given what you plan to introduce in your plans over the next couple of quarters, would that gross margin start moving up, or do you still expect it to remain roughly where it is?

And the second question, could you give us a little bit more color into the increase in inventory?

It is a little bit concerning from a seasonal standpoint.

I would have expected a stepdown.

So if you could give us more color, the breakdown of that between the different units and why it went up.

Thank you.

First, from a margin perspective, again incorporated into our Q2 guidance, we are having and will have some normal margin pressures on the existing portfolio, but that pressure is offset by the operating expense improvements we're making.

As we introduce some of the newer products both later in this quarter, as well as later in '08 and into 2009, we would expect them to have more positive financial contributions in the overall mix.

In terms of inventory --

Yes, regarding inventory, actually inventory was up in total about $100 million.

But importantly, primarily it was due to the acquisition of Vertex and field inventory related to GSM and WiMAX networks.

Mobile Devices was relatively flat.

I think importantly too with regard to your question, as far as any concern about our inventory and the level of inventory in Mobile Devices, our E&O reserve, basically the percentage as a percentage of inventory is comparable to what it has been the last six quarters.

So we do not see a concern there at this point.

Good luck.

Jim Suva, Citigroup.

Can you talk a little bit about your manufacturing and distribution scale issues?

I guess the concern is, why don't you use ODM a lot more to get products more timely out the door?

And are we in a little bit of a, pardon for being so blunt here, but a death spiral on the mobile side?

Meaning your cost manufacturing footprint does not equal your market share.

And because you don't have the volumes going through that to get the losses to decline, why are you not using ODM more, how should we think about your cost footprint versus your market share issue?

So, on supply chain as we have talked about just the overall absorption rate reflective of our current volumes, we are aggressively taking steps to optimize it.

As you saw, we announced just a few weeks ago a facility consolidation in Asia, specifically Singapore.

So we will consistently look to rationalize and optimize the overall manufacturing footprint to your point to be reflective of volumes.

I would absolutely agree that part of that also will be the increased utilization of ODMs, not just from a time to market standpoint, but from a financial contribution and the economic efficiencies that are extended to us in the mix of our ability to do that.

But I would also say that Rita and her team, as well as the Mobile Devices team, were being pretty thoughtful and pragmatic in the planning assumptions around supply chain, realistic around the absorption rates and what is reflected in Q2.

And as we model this business and manage it going forward and improve it financially, supply chain is obviously an opportunity in top of mind from where we are and where we need to go.

And do you think Q1 is really the worse for mobile right now as we sit here today, that this is kind of the worse for a year-over-year, quarter-over-quarter profitability?

That this is really the worst of it right here?

Well, I would point you to our Q2 guidance as kind of a reference point for that.

Obviously unlike last quarter, as we talked about what we expected in Q1 and guided accordingly and came in within the EPS range, we are now suggesting that revenues will be flat to slightly up, and we will have more new product introduced in Q2.

So it is all about building momentum.

Richard Kramer, Arete.

I would like to ask a couple of questions about the cash flow.

Maybe, Paul, could you walk us through what happened in the decline in Sigma funds, and whether the $631 million that we saw in the cash flow statement was it allocated to noncurrent assets?

And also, the $276 million payment to Freescale, was that made or cut up as sort of a new form of amended contract or deferred?

Can you walk us through where we might have seen that?

And Greg, can you give us any sense of what the total cost of the separation with all the legal and HR and accounting and what not is going to cost because it is obviously a very complex process, and maybe you have an idea of what the total end cost of that might be.

Okay.

Listen, first with regard to the Freescale settlement, yes, it is all -- that was the payment.

It was actually a cash payment to them.

Secondly, I think it is important and I'm glad you asked about what was going on with the Sigma fund.

I want to assure everybody that the asset class mix has not substantially changed versus year-end.

96% of the fund is currently rated single-A or better, and 99% of that fund is investment-grade.

What happened really is due to the credit market dislocations we're seeing, we classified $673 million to non-current as we do not expect to use the proceeds for operating purposes in the next 12 months.

So basically that explains why we shifted it like that.

Okay.

I'm sorry, Richard.

And do you have any sense of the total cost of separation?

It is obvious that it is going to be a massive exercise.

You have mentioned some stuff about the restructuring and separation payments.

But what will the total cost in your view of separation be for Motorola to undertake this whole effort?

You know, we do not really have -- you're right.

It will be a large number at the end of the day, but there is so much work to do with regards to citing on the brand, the intellectual property, the assets, etc., that at this point in time we just cannot tell you what that is going to be.

As we move further down the road and we start to affect this change or understand better what exactly it is going to mean for these two separate entities, we will update you with regard to what to expect cost-wise.

Scott Coleman, Morgan Stanley.

First, a question on the cost savings.

Paul, can you just confirm that we should be looking at about $9.1 billion exiting 2007 and a level of $1 billion below that for all of 2008 from a modeling perspective?

And could you help us understand the mix of cash versus non-cash expenses like D&A within that?

And then second for Greg, obviously walking down the path to structural separation, but are there any elements out there that would actually change your mind at this point, whether it was the cost or the difficulty or a view that these businesses actually could do well being under one roof?

What are the considerations that would alter this path at this point?

Well, I will just say take one first.

I mean we're absolutely on the path of creating two new businesses and continue to believe that that is absolutely the right thing to do for a whole host of reasons around focus and alignment and the structural efficiencies that will be afforded for those respective businesses, which were quite different, to increase their competitive effectiveness.

So we do not talk a lot about Broadband and Mobility Solutions to the other groups, but obviously I think they are doing a fantastic job and have category leadership across many dimensions of the areas that they compete.

And they are being managed well, as well as we are reinvesting in the portfolio to expand and grow their respective segments.

And on Mobile Devices, there is an acute level of focus and enhanced operational improvements that are being made.

We have talked about the silicon and platform decisions and actions that have been taken, and we are implementing.

And I am excited about the portfolio both in quantity, as well as category, as well as experiences of what that will grow to be over the next several quarters.

So I think that independent entity for Mobile Devices will be very competitive and effective in competing moving forward as an independent organization.

Thanks for asking about the cost reduction and the cash question.

I'm going to first handle the cost reductions.

What we wanted to do is because of different points in time, it was additive with regard to what we expected.

And so we wanted to take you through one last time where you should see these coming through.

So in 2008, as I said in the script that we had, SG&A you should see $540 million, R&D $240 million, and cost of goods sold $220 million.

I would like to a little bit redirect your question because I think anticipating that there might be some questions with regard to cash burn or whatever you want to call it, there was a reduction.

So I'm not going to get into specifically with regard to the cost reductions what part of it is cash, non-cash, etc.

What I would rather do is redirect the question toward the cash burn issue.

As you saw, there was actually an $844 million reduction in gross cash.

I took you through the major pieces of that.

I will repeat it.

Again, it was the Freescale settlement, acquisitions, share repurchase, dividends, debt repayments and CapEx.

Having said that, operating cash flow was a negative of $343 million, primarily due to the Freescale settlement.

Having said that, I think this is important.

Despite the difficulties we are currently experiencing in Mobile Devices, we generate a number, a significant amount of cash from those other businesses.

And I think it is important for you to note, and this gets again directly to this cash burn rate, we expect the net cash balance in 2008 to be comparable to the net cash balance in 2007.

David Wong, Wachovia.

Can you help us understand your cost-cutting efforts, do they help the operating margin of your Enterprise Mobility and Home and Networks divisions as well, or are essentially all of them in the Mobile Devices division?

And could you remind us if you have given any long-term operating margin targets for these other two divisions?

I think our cost reduction efforts on the operating margin or operating expense are broadly across overall Motorola in all of the segments, as well as the corporate organizations as we look for overall effectiveness and efficiency.

In terms of longer-term or the guidance that we talked about for Q2, we're expecting home to have solid year-on-year growth and networks to have effectively excluding embedded communications computing, flat sales.

Enterprise Mobility would have sales up year-over-year in Q2 with continued strong double-digit operating margin.

And Mobile Devices we talked about in terms of comparability from an OE loss standpoint with revenues flat to slightly up.

James Faucette, Pacific Crest.

Paul, you did anticipate part of my cash flow question.

I appreciate that color.

I guess one of the follow-ups to that is, in achieving the similar cash balance at the end of 2008 and 2007, do you expect that you'll have to slow considerably your share repurchases that you have been pretty aggressive in doing through the last year or so?

That is my first question.

And then the second question, just to look a little bit at some of the businesses that are generating cash.

Enterprise Mobility, it seems like that would be an area of potential concern in a slowing microeconomic environment.

Can you talk about what we have seen there in terms of impact from the economy, and what your outlook generally is for how that will be able to sustain itself during a slower period?

Thank you.

Okay.

I'm going to handle the buyback question, and then I will turn it back over to Greg for Enterprise Mobility.

But obviously we've never comment on the amount of timing of share repurchases.

As I said, we bought 9 million shares in the first quarter at an average price of $15.30.

The total cost of that was $138 million.

We currently have remaining $3.6 billion on our share repurchase program.

Having said all this, we're always looking to optimize our capital structure.

Yes, in terms of the economic environment for overall and your reference was Enterprise Mobility, we are pretty pleased with the performance of that segment, considering the environment we are in.

As we mentioned, we're watching North America very closely.

We will watch the public safety spending, particularly at the low-end in North America.

We have to keep our eye on that.

That said, in the Mobile Computing area, a lot of what we do, even though it is a reasonable density of retail, has pretty good, if not very good, lifecycle economic savings to our respective consumers.

So, as we sell wireless LAN infrastructure or Mobile Computing solutions, it is all about lifecycle economic savings to them in terms of better inventory utilization, real-time inventory shelf space, the connection of front office and backoffice.

So I think that it is a set of products and solutions within that Mobile Computing segment that continue to perform pretty well.

The other nice thing about Enterprise Mobility in that segment is they are getting strong growth internationally to balance overall from a diversification and a mix standpoint.

So we will watch it and continue to watch it for Q2, but it is a pretty solid segment that I think continues to do quite well overall.

Mark McKechnie, AmTec.

I appreciate your update on the leader search for handsets.

In the meantime, Greg, are you making any big strategic decisions?

You can help us how you are setting it up for a new leader, but I would like to get a sense for you are trying to focus on the low-end, the high-end, smartphones or geography, or anything you can say to help us out with how you're dealing with the transition.

Yes, I think we're making a number of decisions and actions.

We've talked about implementing QUALCOMM and TI to give us the silicon optionality.

We've referenced the fact that we are simplifying and taking specific decisions and actions on the software platforming.

We are building product, capitalizing on industrial design and form factor, but also pursuing categories, quite frankly, around messaging and touch and lower-cost devices that we have a very embryonic portfolio today on.

But I think, in addition to that, we're looking to leverage our global engineering that we have, our existing scale, our go to market distribution, our relationship with customers and carriers, as well as the investments we have made in retail.

So we are not looking to play small ball here.

We're looking to get operating leverage back and fill up that product portfolio that allows us to then get the operating leverage that I think everybody is looking for and get the growth trajectory back.

Leveraging our intellectual property and the brand and other existing investments that have been made, I think gives us tremendous opportunity to do that.

Tavis McCourt, Morgan Keegan.

Just a couple of clarifications.

On the $673 million reclass on the Sigma funds, can we assume those are auction rates or some kind of illiquid securities, and can you talk about have there been any write-downs in the Sigma funds either this quarter or the previous quarters?

Yes, first of all, there have not been any significant write-downs.

Secondly, it is not that they are not monetizable.

What it is is that we are scheduled -- we're going to hold these securities to their schedules at this point in time.

Unless the pricing changes, we're going to hold them to their scheduled redemption dates and fully recover the respective principal investments.

Got you.

And I wanted to follow-up on a question before.

In terms of the in-house manufacturing on the handsets, roughly what percentage of the handsets now are manufactured in-house versus ODM?

And can you talk about the capacity utilization at this point and where you would expect that to be maybe by year-end?

I think today roughly 40%, and we will verify, I think 40% of our handsets are manufactured outside Motorola.

And to the earlier point, we will always look to optimize and improve the overall economics of that mix in contribution.

As we get updates to that, we will keep you informed accordingly in terms of any decisions within that supply chain mix and balance.

And in terms of the capacity utilization of the in-house manufacturing?

I do not know the specific utilization.

Maybe Dean can follow up or give you some guidance off-line, but utilization for capacity is not our issue obviously.

It is getting the requisite fill.

And as we increase the number of products and load balance the footprint, I think that will improve clearly between now and over the next several quarters.

Great.

And then you mentioned before that you said channel inventories I think were similar exiting Q1 as they were in December.

I just want to confirm that.

You expect your sell-through you think was roughly about $27.4 million in the quarter as well?

Stocking channel actually improved sequentially overall quarter-over-quarter.

Bill Choi, Jefferies.

All of my questions have been asked.

Thanks.

Matthew Hoffman, Cowen.

Yes, a question on the QUALCOMM relationship, Greg.

You seem to be pointing to 2009 for its arrival and other technologies.

I was hoping for some color on the software side.

Specifically do you anticipate being able to use both the Symbian UIQ and the Linux Java OS's on the QUALCOMM chips, are do you anticipate that primarily being a Microsoft family of products?

And also, if you can give us any thoughts with regard to the split of the Motorola brand and IPR as the Company gets ready to separate, I would appreciate it.

Just on QUALCOMM again for clarification, we're shipping a QUALCOMM chipset on a UMTS device this quarter.

We're building QUALCOMM chipsets into the UMTS portfolio for 2009, but we're also going to look for QUALCOMM chipsets in an ODM environment.

And that may afford us some opportunity by the end of the year, if not early 2009.

In terms of Symbian UIQ and the mid to high tier devices that we're focused on around that, that is oriented around a Freescale chipset device now, and we will look to leverage that and transition consistent with our multisource silicon strategy moving forward.

I think that we will have TI and QUALCOMM for UMTS product portfolio optionality in 2009.

Operator, we will take our last question.

Samuel Wilson, JMP Securities.

Just given the cash burn and the buyback and the reclassification of some of the things, can you just talk about the safety of the dividend at this point?

Yes, we would not normally talk about what we plan on doing, but at this point in time, if you're asking about it in the context of do we have enough cash to pay it -- to continue paying dividends, the answer is yes.

Do you think that is a wise use of capital at this point given the restructuring and the costs associated with splitting the Company?

I think that we will not comment further on what we're going to do in the future with regard to the dividend.

Thank you.

There are no further questions.

I will turn the floor back over to Mr.

Dean Lindroth, Corporate Vice President of Investor Relations, for any additional or closing remarks.

During this call we have made a number of forward-looking statements.

Forward-looking statements are any statements that are not historical facts.

These forward-looking statements are based on the current expectations of Motorola, and there can be no assurance that such expectations will prove to be correct.

Such forward-looking statements include, but are not limited to, our comments and answers relating to the following topics.

Guidance for Motorola's earnings per share in the second quarter of 2008; expectations for cost savings from the Company's ongoing reorganization activities; guidance for future sales, operating margins, profitability, ASPs or market share for each of Motorola's segments; benefits to be realized from the Company's ongoing efforts to improve our cash conversion cycle; benefits to be realized for Motorola's Mobile Devices ongoing silicon and software initiatives, and expected additions to the Mobile Devices product portfolio; the impact on Motorola's performance and financial results from strategic acquisitions and divestitures, including those that are recently completed, those that are pending and those that made occur in the future; the expected timing for the announcement, launch and shipment of new product; ongoing effective income tax rates; the impact of the slowing economy on customer spending; the expected timeline for the separation of the Company into two independent publicly companies; cash generation and net cash balances and plans regarding our dividend.

Because forward-looking statements involve risks and uncertainties, Motorola's actual results could differ materially from those stated in the forward-looking statements.

Information about factors that could cause such differences can be found in this morning's press release on pages 18 through 27 in Item 1A of Motorola's 2007 annual report on Form 10-K and in Motorola's other SEC filings.

This now concludes our call.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

The presentation material and additional financial tables will soon be posted on Motorola's Investor Relations website.

In addition, a replay of this call will be available over the Internet in approximately three hours.

The website address is www.Motorola.com/investor.

We thank you for your participation and ask that you please disconnect your lines at this time.

Have a wonderful day.