摩托羅拉 (MSI) 2009 Q1 法說會逐字稿

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  • Operator

  • Good morning and thank you for holding.

  • Welcome to Motorola's first-quarter 2009 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.

  • Dean Lindroth - Corporate VP, IR

  • Thank you and good morning.

  • Welcome to Motorola's first-quarter results conference call.

  • Today's call will include prepared remarks by Greg Brown, co-Chief Executive Officer of Motorola and CEO of Broadband Mobility Solutions; Sanjay Jha, co-Chief Executive Officer of Motorola and CEO of Mobile Devices, and Ed Fitzpatrick, Motorola's acting 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 30 in Item 1A of Motorola's 2008 annual report on Form 10-K and in Motorola's other SEC filings.

  • This presentation is being made on the 30th of April, 2009.

  • 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 revealing or updating material that is contained herein.

  • I will now turn the call over to Greg.

  • Greg Brown - Co-CEO & CEO, Broadband Mobility Solutions

  • Thanks, Dean.

  • Good morning and thank you for joining us.

  • This morning we reported Motorola first-quarter sales of $5.4 billion.

  • On a GAAP basis, we had a net loss from continuing operations of $0.13 per share.

  • Results from continuing operations included total net charge of $111 million or $0.05 per share for highlighted items.

  • This net charge primarily relates to our cost reduction initiatives.

  • Excluding highlighted items, the first-quarter net loss from continuing operations was $0.08 per share.

  • Amidst a very difficult economic environment, our results reflect disciplined execution and solid traction on our cost reduction efforts.

  • Operating expenses were over $500 million lower year on year, putting us on track to exceed our original annual cost reduction target by over $200 million.

  • As a result, we now expect a cost structure improvement of more than $1.7 billion compared to last year.

  • We ended the quarter with a total cash of $6.1 billion, down from $7.4 billion at the end of 2008.

  • The cash decline was primarily driven by a reduction in Accounts Receivable sold and restructuring payments related to accelerated cost reduction actions.

  • We expect improved operating performance throughout the remainder of the year and expect to generate positive operating cash flow in the second half.

  • I now want to turn the call over to Ed to cover the financial results in more detail.

  • I will then come back to discuss Broadband Mobility Solutions businesses, and then Sanjay will review Mobile Devices.

  • Ed?

  • Ed Fitzpatrick - Acting CFO

  • Thanks, Greg.

  • In the quarter total sales were approximately $5.4 billion.

  • Sales were lower year-on-year in Mobile Devices and in the Broadband Mobility businesses.

  • The GAAP net loss from continuing operations was $0.13 per share.

  • This includes a net charge of $111 million or $0.05 per share for highlighted items.

  • Highlighted items include a pretax charge of $235 million, associated with our restructuring actions, partially also by a pretax income related to a $67 million gain on the repurchase of long-term debt.

  • Detail on highlighted items can be found on our website, and our remaining financial comments will exclude highlighted items.

  • The net loss per share in the first quarter was $0.08 compared to a net loss per share of $0.05 in the first quarter of 2008.

  • The higher net loss was a result of lower sales, largely offset by a significant reduction in operating expenses.

  • As you know, we are implementing workforce reductions across the Company.

  • Since October we have taken charges related to the separation of approximately 7500 employees, which we expect to be substantially complete by the end of June.

  • Lower headcount, as well as actions to cut discretionary spending, resulted in an operating expense reduction of over $500 million compared to the first quarter of last year.

  • For the full year, we now anticipate a total operating expense reduction of more than $1.7 billion with over $1.3 billion of these savings benefiting Mobile Devices.

  • Moving now to cash, we ended the quarter with total cash of $6.1 billion, down from $7.4 billion at the end of 2008.

  • The operating cash outflow of $1 billion was driven primarily by a $700 million reduction in sold receivables and approximately $200 million in payments related to our restructuring efforts.

  • The reduced level of sold receivables was due to lower sales volumes and our planned reduction in factoring levels in an effort to reduce costs.

  • I would also add that there is a lower level of bank factoring capacity due to the ongoing challenges in the financial markets.

  • We will continue to evaluate the trade-offs related to selling receivables, but we are currently planning on a lower level of sold receivables in comparison to historical levels for the remainder of the year.

  • We do not anticipate any material impact on our overall liquidity or financial flexibility as we employ this strategy.

  • As I mentioned on the call last quarter, we are committed to driving working capital improvements.

  • In the first quarter, these efforts are most clearly seen in our inventory balance, which declined over $500 million from the prior quarter, reflecting reductions in all of our businesses.

  • With that said, there are still opportunities to further improve working capital, particularly in inventory.

  • The total cash balance was also impacted by financing-related activities, including approximately $130 million for the repurchase of long-term debt.

  • The repurchase resulted in a net gain of $67 million and a retirement of $200 million of debt at face value.

  • In addition, we paid $114 million for the dividend declared prior to our recent decision to suspend cash dividends.

  • Finally, a stronger dollar contributed to foreign currency translation losses of approximately $100 million.

  • During the quarter we repatriated over $800 million with no cash tax costs and ended the quarter with a US cash position of approximately $1.5 billion.

  • We expect to continue to cost-effectively repatriate funds throughout the year with little or no tax cash cost.

  • Moving now to our outlook, excluding items of the variety highlighted in our quarterly earnings release, we expect a second-quarter net loss in the range of $0.03 to $0.05 per share.

  • From a cash perspective, we are committed to driving sequential operating cash flow improvements in all of our businesses.

  • With that said, we anticipate total cash to be down slightly in the second quarter, due in part to further restructuring related payments.

  • As Greg mentioned, we expect to generate positive cash flows in the second half of the year, driven by earnings expansion and continued improvement in working capital.

  • This will enable us to improve our cash position from current levels by the end of the year, and for the year, we continue to expect or anticipate a significant reduction in overall cash consumption compared to 2008.

  • With that, I will pass the call back to Greg to discuss Broadband Mobility Solutions.

  • Greg Brown - Co-CEO & CEO, Broadband Mobility Solutions

  • Thanks, Ed.

  • Broadband Mobility Solutions executed well in what continues to be a very challenging environment.

  • We enhanced our portfolio of products and solutions and maintained leadership positions in key markets.

  • Aggressive cost management and productivity improvement remained a high priority with a focus on sales efficiency, supply chain management and global operational support.

  • We also continue to assess our investment and innovation priorities to ensure they remain tightly aligned with key strategic objectives and critical customer needs.

  • In Home and Networks Mobility, first-quarter sales were $2 billion, down approximately 16% compared to the first quarter of 2008, reflecting lower sales in both home and networks.

  • Operating margin, excluding highlighted items, was 6.8% compared to 7.3% in the first quarter of 2008.

  • The decline in margin reflects the impact of lower sales in the quarter, partially offset by a more favorable product mix and lower operating expenses.

  • While industry fundamentals for the home business remains strong, tough economic conditions continued to contribute to lower industry CapEx spending, including inventory contraction in the first quarter.

  • As a result, home sales were slightly over $1 billion.

  • The year-on-year decline of 12% in total sales reflects a single-digit decline in sales for settops and a double-digit decline in sales for head-end and infrastructure equipment.

  • This is consistent with the trend of operators placing a priority on revenue-generating CPE equipment and deferring purchases of infrastructure.

  • On a unit basis, shipments of digital entertainment devices were 4.3 million units, up 2% from the year ago quarter.

  • The increase was mostly driven by higher demand for IPTV.

  • Shipments of DVRs were lower as operators focused more heavily on HD-only solutions.

  • Regionally sales in North America were down 19% and accounted for approximately 76% of sales.

  • Sales outside of North America grew 22%, driven primarily by higher sales in Japan.

  • As we look ahead at the industry, we expect operators to remain cautious with CapEx spending plans until there is some level of economic stability or at a minimum signs of improving market conditions.

  • As a result, we expect the addressable market for home to be down in 2009 compared to 2008.

  • With that in mind, we continue to develop innovative products to address increasing consumer trends toward time and place, shifting of entertainment and other advanced services.

  • During the quarter we enhanced our video portfolio with solutions that address operator priorities, including reducing costs, maximizing bandwidth and improving consumer experiences.

  • In collaboration with Time Warner, we announced a multiroom DVR solution.

  • Using tru2way software, it will allow consumers to access and share content throughout the home.

  • We announced the industry's first three channel MPEG-4 to MPEG-2 HD transcoding device, enabling up to 50% higher throughput for operators and more choice for consumers, and we expanded our leading video server lineup with a high-performance scalable server which supports video-on-demand and insertion and other advanced services for small to medium-sized streaming sites.

  • In networks, as we anticipated, market conditions remained challenging and competition intense.

  • Sales in the first quarter were approximately $970 million, 21% lower than the year ago quarter.

  • The decline was primarily due to lower GSM sales in the EMEA region.

  • Our WiMAX efforts continue across a global footprint of customers, many of them now in commercial operation.

  • Global economic challenges in tight credit markets, however, are resulting in slower subscriber loading and reduced operator financing.

  • As a result, we see delays in some network buildouts.

  • We now expect WiMAX sales in 2009 to be approximately $500 million to $600 million with investment levels commensurate with this revised outlook.

  • In LTE we continue to support our customer trials.

  • At the Mobile World Congress and CTIA shows, we deployed a live demonstration network and introduced our newest base station capable of supporting both PDD and FTD modes.

  • Turning to our outlook for the second quarter for home and networks, we expect sales in both home and networks to be lower year on year but up slightly sequentially.

  • Operating margins for the segment is expected to be comparable for the first quarter.

  • In Enterprise Mobility Solutions first-quarter sales were $1.6 billion, down approximately 11% compared to the first quarter of 2008.

  • The lower sales were driven by a double-digit decline across all enterprise markets, partially offset by higher public safety sales.

  • Excluding highlighted items, operating margin for the segment was 11.6% compared to 14.3% in the first quarter of 2008.

  • Operating margin was lower due to the decline in sales.

  • Segment sales in North America in the first quarter were 6% lower than a year ago and accounted for 58% total sales.

  • Considering the market environment, sales of mission-critical communications to federal, state and local public safety customers were higher year on year, driven by demand for ASTRO 25 infrastructure and subscriber equipment.

  • This was offset by lower sales to enterprise customers in retail, transportation and logistics verticals and softness in the indirect sales channel for two-way communications equipment to construction, manufacturing and warehousing customers.

  • The lower demand is being driven by reduced capital spend and enterprise contraction, resulting in customers extending the life of existing equipment and deferring purchases of expansion equipment.

  • In EMEA segment sales were lower year on year by nearly 21% and accounted for approximately 26% of sales.

  • In Asia-Pacific segment sales decreased by 4% compared to the year ago quarter and accounted for 11% of sales.

  • Enterprise sales were lower, again offset partially by higher sales of two-way communications to public safety and transportation verticals.

  • From a portfolio perspective, two leadership milestones were reached in the quarter.

  • We shipped our 1 millionth TETRA subscriber unit, clearly setting us apart from our competition, and we shipped our 200,000th MOTOTRBO device, a level achieved just two years after introduction.

  • In addition, we continue to integrate and focus on critical customer needs.

  • We expanded our ASTRO 25 solutions with a single site voice system.

  • This expandable system provides a cost-effective solution for many customers, including universities, ports and smaller public safety organizations.

  • We also extended our mobile computing portfolio with the MC55, a lightweight rugged device for mobile field operations and two new devices aimed specifically at the Asia-Pac market.

  • As we look ahead, backlog for public safety remains solid, and we expect to continue to see high priority placed on mission-critical communications and national security.

  • In the US we expect demand in the public safety market to continue to be resilient.

  • Outside the US we see good opportunities in public safety across the Middle East, in Asia and in various parts of Latin America.

  • In the enterprise market, we remain focused on our value proposition around mobility and productivity.

  • However, the ongoing challenges in the global economic environment will continue to put emphasis on customer cost control and capital conservation.

  • To develop new sales opportunities and cost synergy, we recently combined the enterprise and public safety teams.

  • We believe this will lead the new sales opportunities for mobile computing and automated data capture products across an expanded customer base, including federal, state and local public safety customers.

  • Turning specifically to the second quarter, in the Enterprise Mobility Solutions segment, we expect both sales and operating margins to be lower year on year but higher sequentially.

  • In closing, we are realistic about the market conditions in which we are operating.

  • Actions that we are taking across the Broadband Mobility businesses are aggressive and will reduce costs, improve operating efficiencies and strengthen our future market position.

  • The investments that we will make will enable us to build upon our franchise leadership and position us for profitable growth when the economic environment recovers.

  • So now at this point, I will pass the call over to Sanjay to discuss Mobile Devices.

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • Thanks, Greg.

  • In the quarter the industry continued to be impacted by the macroeconomic environment and further reductions of inventory in the channel.

  • We estimate that total industry unit shipments were down approximately 17% year on year.

  • That said, demand for smartphone and data-enabled devices appear to be solid both near-term and long-term.

  • In the North American market, pre-paid demand continued to be strong, and China remains a very attractive market, especially with renewed growth in CDMA and a new 3G UMTS network being rolled out this year by China Unicom.

  • In Mobile Devices sales for the first quarter were approximately $1.8 billion, down 45% compared to a year ago.

  • Shipments were 14.7 million units and reflected strong demand from our North American customers, including certain prepaid markets.

  • For the quarter we estimate our market share at 6% and overall ASPs flat compared to the fourth quarter.

  • Regionally our sales mix was similar to past quarters with North America accounting for 57% of total sales and Latin America at 21% of sales.

  • Asia-Pacific and EMEA made up 17% and 5% respectively.

  • Excluding the impact of highlighted items, the operating loss in the quarter was $381 million compared to a $471 million operating loss in the fourth quarter of last year.

  • The improvement was due primarily to the reduction in operating expenses, which were down over 40% year on year and over 25% sequentially.

  • We began shipping seven new devices during the quarter.

  • These included the MOTOSURF A3100, a 3G Touch Tablet, the Evoke QA4, a full touch QWERTY device with integrated widget, intuitive web browsing and IM style messaging, and the Renew W233 Green Phone made from recycled materials.

  • Regarding our smartphone devices, we are executing well and have good traction with key customers.

  • We remain on track to having Android-based smartphone devices in store for the fourth-quarter holiday season.

  • When we get closer to the first launch date, I will share more details with you.

  • As you know, the Android operating system is attracting significant developer interests.

  • Today there are over 3000 applications already available in the market.

  • With Android we believe we can enable differentiated consumer experience in applications that include enhanced integration of messaging and social networking application.

  • We also intend to offer a range of devices by delivering these capabilities in both high tier and mid tier.

  • Regarding our efforts to resize Mobile Devices, we are implementing an aggressive plan to reduce our overall cost structure.

  • The actions we have taken resulted in the significant reduction in Mobile Devices' operating expenses I noted earlier.

  • For the full year, we now expect an OpEx reduction in excess of $1.3 billion compared to 2008.

  • Even with this aggressive reduction, we are making the appropriate investments to develop the services and applications that we require to differentiate our portfolio of devices.

  • Moving now to outlook, given our portfolio decisions and geographic prioritization, we expect our second-quarter sales and units to be comparable to slightly down on a sequential basis.

  • However, with further improvements in our cost structure, we anticipate a meaningful sequential reduction in operating loss.

  • In closing, I will share with you that we're making important strides in operating as a more effective organization.

  • Our developments and supply chain teams are driving simplification and improving consistency in execution and product quality.

  • Headcount and cost structure reductions are ahead of target.

  • Inventory, both in-house and in the channel, are down significantly, and we are reducing components and device SKUs.

  • Product and portfolio management teams have developed a product roadmap that is gaining a lot of traction and generating positive feedback from our customers.

  • These and other operational improvements are setting the stage for a higher-level of predictability, lower fixed and variable costs and better time to market.

  • As a result, we continue to believe that we will have a significantly lower operating loss in 2009 compared to 2008.

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

  • Dean Lindroth - Corporate VP, IR

  • Thanks, Sanjay.

  • 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 some instructions on how to ask a question.

  • Operator

  • (Operator Instructions).

  • Ittai Kidron.

  • Ittai Kidron - Analyst

  • A couple of questions for Sanjay.

  • First, on your comments on improvement, can you give us a little bit more color on the progress of your portfolio for the fourth quarter?

  • You mentioned you have clearly Android phones coming in that time frame.

  • But how has been the carrier discussion around that, and what is the level of confidence in adoption of that platform?

  • And also with regards to the separation plans, it has been two or three quarters since we have last heard about this.

  • Now that you are it seems like closer to getting to where you want to get, any chance that that gets revisited?

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • Thank you.

  • We are in detailed discussions with multiple carriers around the world about a few of our Android smartphones that we intend to launch in the fourth quarter, and I'm very confident that we will make good progress, and we will deliver meaningful products in fourth quarter.

  • With respect to separation, when we last commented on this matter, we said that there were three factors -- the state of the telecom industry, the state of the handset market that is to say, our access to credit, and the developments in the Mobile Devices business which will govern the timing of our separation.

  • As we have said all along, we continue to be committed to the separation.

  • Of the three factors, the one we control most closely is the development and the restructuring of our Mobile Devices business.

  • We think we have made good progress, and we will continue to make good progress through the year.

  • I will not guide you to the timing of the separation, except to say that those are the three factors that we will be considering as we evaluate the timing of that separation.

  • Operator

  • Maynard Um, UBS.

  • Maynard Um - Analyst

  • A question for Sanjay.

  • Are you anticipating industry units to be flat to slightly down sequentially, or is this your guidance for Mobile Devices anticipating market loss?

  • And if so, I am just wondering what in particular is changing given pre-paid strength presumably will continue and you've added some new smartphones in the quarter?

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • So with regards to the industry, we see that the industry is probably flat to thin, modestly up sequentially.

  • And we, as I say, view ourselves doing either flat, comparable, or just modestly down volume in the second quarter relative to the first quarter.

  • So I will just say that all of that is within range, but it is difficult for me to say what that means for a marketshare right now.

  • In terms of prepaid, I think we continue to see strength in prepaid.

  • As you know, as I commented first quarter, we saw particular strength, and we see that strength continuing in second quarter.

  • Operator

  • Simona Jankowski, Goldman Sachs.

  • Simona Jankowski - Analyst

  • In terms of the incremental $200 million in cost savings for this year, was that roughly equally split between Mobile Devices and the rest of the business?

  • And then also after the June quarter, do you expect to be on your new OpEx run-rate, or should we expect that to come down further?

  • Ed Fitzpatrick - Acting CFO

  • The $1.5 billion increase to $1.7 billion is split with $100 million with Sanjay and cost reduction efforts in Mobile Devices and the other $100 million with Broadband Mobility and the corporate functions.

  • So it represents a $100 million increase for both Sanjay and myself, and we are confident that we will achieve and exceed that $1.7 billion.

  • Ed Fitzpatrick - Acting CFO

  • And just to add on the run-rate, we do expect the actions that we announced previously to be executed, substantially executed by the end of the second quarter.

  • The incremental actions, some of that will bleed into Q3, so we won't get to the run-rate until the end of Q3.

  • Operator

  • Brian Modoff, Deutsche Bank.

  • Brian Modoff - Analyst

  • A couple of things.

  • Sanjay, can you kind of talk about what you see your breakeven point being in units and handsets, give us an idea?

  • And then kind of give us an idea also of what you see in terms of the unit -- number of different models that you will have in the market in the back half of this year versus the front half of this year?

  • And then Greg, real quick on the SMR business, with tax receipts likely getting increasingly challenged this year, do you see that business continuing to have this kind of -- these kinds of results through the back half?

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • I will take the first part of your question, and that was, what are the number -- what number of units do I see leading to a breakeven number?

  • I don't know that I have a clear enough guidance or actually clear view in a view of that myself.

  • I think that obviously ASP are the strength of our portfolio, and smartphone, gross margin, supply chain and cost reductions will have a major impact on when we do that.

  • I would tell you that I think in each of these regions in terms of focus of our smartphone and the parts that we deliver in terms of a modest increase in our gross margin, in terms of the supply chain efficiency, and obviously in terms of cost reduction, within each of these regions, I think that we are making good progress, and I won't either in time or in units set the breakeven point.

  • But I feel confident that we are making good progress on those.

  • Greg Brown - Co-CEO & CEO, Broadband Mobility Solutions

  • As it relates to public safety, Brian, public safety in Q1 was higher year on year.

  • It grew in the low single digits.

  • Now that is not to mean government and public safety did, but the public safety piece did, and the enterprise business declined in double digits as I referenced.

  • I do believe that Q1 represents the low point for Enterprise Mobility Solutions.

  • So I believe we are on track to perform reasonably well for the balance of the year.

  • There is a possibility that the stimulus package and plans will begin to flow through in Q3 or Q4, but we will see.

  • In the meanwhile we are very aggressive on the cost side and managing the expense structure to be reflective of the difficult environment we are in.

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • Brian, I will just come back to one part of your question -- how many models do we see in the first half of the year versus second half?

  • They are roughly comparable, but obviously in the second half, we expect greater strength in our portfolio in terms of data-enabled devices, 3G devices and smartphone devices.

  • So we expect that to be a contributing factor towards our restructuring.

  • Operator

  • Ehud Gelblum, JPMorgan.

  • Ehud Gelblum - Analyst

  • A couple of questions.

  • First, on the cash in the Accounts Receivable, how much cash burn are you expecting to continue to see in Q2 and then if you can give us a sense as to what you think happens in the second half?

  • And for the cash inflow in the second half you are expecting, what are the -- what are your estimates in terms of what Mobile Devices do to get there.

  • Also, if you can walk us through a little bit how you get -- Accounts Receivable was up $200 million.

  • I just want to make sure I'm understanding this correctly.

  • From the loss of the factoring of Accounts Receivable, should it have gone up $700 million, and then it came back down again as the business contracted from normal working capital contraction?

  • If there is some sort of waterfall chart you can help us to get from where it was last quarter to this quarter, including that $700 million, that would actually be very helpful.

  • And then Sanjay, if you can elaborate a little bit more on China and the new models.

  • You said 17% of revenue in Mobile Devices was Asia-Pac.

  • How much of that was China, and how has that trended?

  • And the new models that come out in Q4, are any of them slated for China, or are they all for North America?

  • Greg Brown - Co-CEO & CEO, Broadband Mobility Solutions

  • Okay.

  • So there was a lot of stuff to digest there.

  • Let me start with it on the cash, and then I will let Sanjay answer the second or third part of that question.

  • So the cash decline in Q1 we mentioned was due in large part to the reduced level of sold receivables.

  • You asked for a waterfall.

  • It is kind of hard to do a waterfall over the phone, but simply we would have expected with the decline in sales that took place from Q4 to Q1 to generate significant cash flows from that reduced working capital requirement in receivables.

  • As you mentioned, not only do we not see an improvement in our net cash collection, we saw a deterioration because of the increased level of receivables we did, sold receivables we did in Q4 versus Q1.

  • So the $700 million decline in sold receivables really impacted that balance significantly.

  • And, as we had mentioned, our plan is not to increase the level of sold receivables significantly throughout 2009.

  • We will keep it at a lower level because it is costly to factor receivables, sold receivables, and we will just deliberately plan to do less.

  • As far as the rest of the year cash flow, as we mentioned again, we do expect the improved earnings as we go throughout 2009, and our focus on improved working capital should generate significant cash flows in the second half of the year.

  • And for the full year, as we had said in Q1, we do expect the cash outflow to be significantly less in 2009 for the full year versus what we experienced in 2008.

  • So I will let Sanjay take the next part of the question.

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • In terms of what portion of our Asia-Pac revenue was China, it is about 60% in that ballpark.

  • And in terms of are we launching smartphones in China in fourth quarter, my expectation is that is either at the tail end of the fourth quarter or early in the following quarter, hopefully for the Chinese New Year.

  • In terms of your questions about Mobile Devices, we think that we will have lower operating losses for the year and, of course, improved operating capital.

  • Those are the two things that will contribute to better cash flow, which Ed was referring to earlier.

  • Operator

  • Mark Sue, RBC.

  • Mark Sue - Analyst

  • Sanjay, just I'm still trying to get a sense of how Motorola differentiates longer-term if you're driving further towards Android-based devices.

  • I mean recognizing you don't want to make just bright and shiny products, how does one differentiate if Android becomes a common element for a lot of the manufacturers?

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • It is a good question, a question that is tough for me to answer without disclosing some competitive information.

  • So if you don't mind, I will keep it at a high level.

  • Certainly I think the breadth of our portfolio, our ability to address both the lower mid and high tier portfolios, our differentiation from we're using applications and services, our brand, our distribution, our carrier relationships, our design -- I think those are some of the places.

  • We are probably investing as much as anybody on the Android platform, and I think that we certainly can differentiate in the marketplace.

  • We think Android is a very good platform for us to leverage, given the significant developer interest that there is and the availability of applications out there.

  • Mark Sue - Analyst

  • Just a follow-up, is there a particular end market or regional focus with your Android product portfolio, or do you think it's more of a global platform for you?

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • It is more of a global platform.

  • In the short term, of course, as you know, we have prioritized some regions over others.

  • So in the short term, we will focus on those regions disproportionately, but there's nothing about the platform that we see as globally limited.

  • Mark Sue - Analyst

  • Okay.

  • And so far feedback is pretty positive from what you can share with us?

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • Very positive, indeed.

  • Operator

  • Todd Koffman, Raymond James.

  • Todd Koffman - Analyst

  • Just as a follow-up to that, can you share with how broad-based the Q4 Android refresh will be in terms of carriers or geographies?

  • Will it be somewhat narrow, or will it be relatively broad-based for that fourth-quarter selling season?

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • You know whenever you're launching new devices, you have to prioritize a little bit.

  • But we will launch with multiple carriers and not just in North America.

  • And as we expand that portfolio through first-half 2010, I expect much greater breadth in the beginning necessarily.

  • Whenever you start something, you narrow and make sure you succeed.

  • But it won't be one carrier, one region; it will be multiple carriers and multiple regions as I was saying earlier.

  • Operator

  • Samuel Wilson, JMP Securities.

  • Samuel Wilson - Analyst

  • It is a question for Sanjay.

  • Just when you think about the smartphone and the fourth-quarter launch of the Android-based products, can you give us some sense on your perspective of the market of where you can gain real competitive advantage?

  • You know, RIM has they're sort of e-bate e-mail-based systems.

  • Apple is really good on Web browsing.

  • Where do you think there is whitespace where you gain real advantage based on the Android platform?

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • You know, it is a tough thing to be able to answer without tipping my hand too much on these things.

  • I would say that I certainly view messaging as being important.

  • I see Web browsing as being very, very important, and I think one of the things that I particularly like about the Android platform is very good mobile Internet experience and adjacent applications that Android brings to the table.

  • We also think multimedia is important.

  • Mobility is important.

  • So I think we are focused on a number of different areas right now.

  • Operator

  • Jeff Kvaal, Barclays Capital.

  • Jeff Kvaal - Analyst

  • Greg, my question for you is, how comfortable for you with where the cash balance is?

  • Would you consider bolstering that opportunistically if the chance arose?

  • And then Sanjay, if you would not mind clarifying where you were on your entry-level strategy, that would be helpful.

  • Greg Brown - Co-CEO & CEO, Broadband Mobility Solutions

  • I think we are doing it, clearly cash and costs are a focus throughout the organization.

  • Recognize also that within the results that we are reporting and forecasting, it already represents an investment organically in Sanjay's business for next-generation Android, smartphones, as well as the Broadband Mobility business, enhanced video applications and services, improved and insertion infrastructure in home, 4G investment in WiMAX and LTE, next-generation public safety.

  • So I think we are doing a solid job of managing costs, but also investing in a targeted way for the highest areas of return across Motorola.

  • From an acquisition standpoint, we don't comment specifically, but we believe that our cash profile is limiting at this point in time.

  • I don't think it is based on our plan of action and where we are.

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • Jeff, to your entry-level strategy question, obviously entry-level needs to be defined.

  • If we are talking about sub $50 devices for emerging marketplaces, then, as I have indicated, we will play in those devices opportunistically and work with some ODM partners to deliver products in those markets.

  • But if we are talking about entry-level data devices, we are very keen on supporting that tier of products with the Android platform, and we see that as one of the strengths that Android brings to the table.

  • Operator

  • Mike Walkley, Piper Jaffray.

  • Mike Walkley - Analyst

  • A question for Greg.

  • It sounds like you're getting back some investment in WiMAX given the tougher market environment.

  • Are you transitioning that into LTE, and can you also just update us on how you're going to monitor the competitiveness of LTE and how you might invest longer-term in that vis-a-vis some contract wins for Motorola?

  • And then finally, just what is your view of the overall wireless infrastructure market for 2009?

  • Greg Brown - Co-CEO & CEO, Broadband Mobility Solutions

  • So, as I mentioned, you are right.

  • We are moderating our investment in WiMAX R&D to reflect current market conditions.

  • That said, we have had great success with over two dozen actual contracts.

  • We are going to recognize as expected approximately $500 million to $600 million of WiMAX revenue in fiscal '09, so I think we are well-positioned.

  • I actually don't think of WiMAX and LTEs separately per se.

  • Because the way we have invested our R&D and developed our architecture, there is a high level of reusability between the two investments.

  • With LTE, as you know, Verizon selected two other providers for their LTE plans.

  • It is possible they will select a third in 2010.

  • We will see.

  • But having said all that, the investment levels we are making I think are a pragmatic reflection of where we are.

  • We still have a couple of customer opportunities that I think there will be another customer decision in Asia on LTE between now and the end of the year, of which we are competing for that business.

  • But we will always be diligent on the amount of spend and making sure that there is return on capital, and we can make money for the longer-term.

  • Otherwise, we are not just going to be in a segment to be in a segment.

  • On the legacy business, it continues to perform quite solidly.

  • CDMA, GSM, iDEN for the last year, for the last several years, we have been thoughtfully contracting our R&D spend to represent the contraction of the 2G legacy business.

  • I think that will continue, but I also expect we should be able to generate solid earnings and cash generation off of the legacy business.

  • Operator

  • Tal Liani, Bank of America.

  • Tal Liani - Analyst

  • I have three small questions.

  • You mentioned another decline in OpEx next quarter.

  • Could you elaborate more on the level of OpEx decline?

  • Is it going to be higher or lower than the decline in operating expenses you have seen this past quarter?

  • Can you also discuss when you launch the new handsets at the end of the year and early next year, do you expect average selling prices of handsets to go up?

  • Is your mix going to shift dramatically towards the low end or not to lift the entire ASP up?

  • And then I have a third question, not on handsets, that is on set-top boxes.

  • Comcast is scheduled to start shipping non-Motorola set-top boxes, and I know you still have very big part of Comcast regions.

  • What could be the impact on your business there?

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • The first question was, do I expect the second-quarter OpEx improvement to be the same or lower or higher than the first-quarter OpEx improvement?

  • And the answer to that is, that in the second quarter, the OpEx improvement will be lower than the improvement we saw in the first quarter, although obviously OpEx numbers, therefore, will continue to go down quarter over quarter.

  • Your second part of your question I think was, as we introduce smartphones in the second half of this year, do we see our ASP going up, and do we see the mix getting richer?

  • Clearly a function of how much volume we ship, but yes, directionally that is accurate.

  • Greg Brown - Co-CEO & CEO, Broadband Mobility Solutions

  • On set-top boxes and connected home, a couple of thoughts.

  • First of all, Q1 was a tougher quarter for our connected home segment as we talked about.

  • I think it is a reflection of less CapEx being spent in the quarter.

  • Inventory levels in some of the cable MSOs, they are as low as we have seen in a long time.

  • A mix shift, as well as a deferral of video infrastructure purchases.

  • More specifically, as it relates to settops in Comcast, again sensitive to speaking about any individual customer situation, but there will be the introduction of an alternate low-end HD box supplier.

  • That is a fixed contract, and we expect to compete for that business again in 2010 to attempt to regain that position.

  • There is also in Comcast a significant amount of DTA, the digital terminal adapter, acquisitions that will be made between now and the DTV transition.

  • We are a participant and expect -- I think we've had about 1.4 million adapters year to date.

  • There are alternate suppliers of that as well.

  • So between the mix, the DTA adapter introduction and consumption over the next several months, and another provider in the low-end HD box that will put pressure on some revenues but we are managing our costs strongly and expect that also Q1 from an earnings standpoint is the low point for connected home.

  • Operator

  • Mark McKechnie, Broadpoint AmTech.

  • Mark McKechnie - Analyst

  • So, Sanjay, just a couple more on Android.

  • Are you planning one major platform with a bunch of different tiers on it?

  • I know we talked what back in Barcelona, and you were talking about QWERTY devices and tablets and what have you, but I got the sense that was all based on one platform.

  • Is that the case?

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • We will base it on one platform, but we obviously will have time sequence releases of that platform with more additional features based particularly on the developments that are done at Google as well.

  • So we are looking to consolidate to one platform and leverage that platform for multiple devices.

  • As we go up and down the tiers, I think that we have the ability to scale some of the features up and down starting from that single platform.

  • Mark McKechnie - Analyst

  • Got you.

  • Are you still working with Texas Instruments on the baseband work, or are you using a combination of QUALCOMM or (inaudible), or can you share anything with us on that?

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • No change in the information that I have provided you prior on this matter.

  • In the low end, we continue to use QUALCOMM baseband, and in the higher end, we continue to use the work that we have done with TI and based on their own map solutions.

  • Mark McKechnie - Analyst

  • Got you.

  • One last one, just kind of industrywide -- Android probably better for you would you think if there's three or four other handset suppliers, and are you seeing enough momentum develop amongst other players to build a big enough market for Android, or how do you look at that?

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • It is always a balance between being commoditized and having large enough ecosystem that developers are interested.

  • I think I certainly see that there is enough interest in Android that there will be a large enough ecosystem, and I think that we have enough of our own development and we have enough differentiated things like our brand, our distribution, our carrier relationship and our design, our own applications services that we bring to the table that we can differentiate.

  • So there is clearly always in that question a balance between those two things, and I think that we have an opportunity to strike the right balance there.

  • Mark McKechnie - Analyst

  • Right.

  • Thanks much.

  • It makes sense.

  • I appreciate it.

  • Operator

  • Edward Snyder, Charter Equity.

  • Edward Snyder - Analyst

  • A couple.

  • First, Sanjay, you have kind of held the line on units here, but the world's getting a bit more difficult both from a competitive point of view and from a total demand.

  • I mean you have got the Palm Pre coming out.

  • Apple is launching their new iPhone.

  • The smartphone business is going to get tougher not weaker in the second half of the year as you introduce your Android phones.

  • The question is, are you going to get to a point here with unit volumes that it gets difficult to scale any launch on a large enough basis to make a competitive dent, or do you see spending going up once you get a compelling product out there to try and get back some of the share that you have kind of given up?

  • Especially with regards, if you look back a couple of years, it took about two years to gain 600 basis points even with the RAZR.

  • So the scale of this business is always a difficult matter to deal with when you get to the levels that you are now.

  • And then for Ed, on the working capital, you talked about lowering it from where you are now.

  • You have already kind of cut it significantly here.

  • What leverage are you going to drop it even further to help your cash generation in the second half?

  • If you can identify maybe one or two areas, I would appreciate it.

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • I will take the first part of your question.

  • This is Sanjay.

  • You know, we see smartphone market continuing to grow.

  • And, as you would know, the definition of smartphone will evolve also.

  • I like to think of rich data enabled devices, in other words devices which have capabilities more than SMS.

  • And I see that if anything, there is probably an underestimate in the industry of what volume can be there.

  • So I think that market that we are going after that, as you rightly say, a lot of other people are also seeing it as being a very interesting market is growing.

  • So that gives me some comfort.

  • In terms of scale, you know, I'm really not driving this business with marketshare in mind, and we are organizing ourselves somewhat differently.

  • I will give you just one piece of information.

  • Even when we're shipping very large volume, the number of components that we used to address that volume was so large that I could argue that we did not have scale on a component basis.

  • I think we have consolidated the platforms; we've consolidated chipset; we have consolidated the displays; we have consolidated the batteries, the imagers.

  • And I think even with lower volume, I think it is possible for us to get scale in the components that we are using.

  • I think that there are multiple different ways of going after scale, and scale is always, as I think you imply, a tough argument in itself to make in business.

  • Scale alone does not get you a lot, though scale does become meaningful.

  • I think that we are above a threshold where scale begins to be an issue for us.

  • So I think it is a tough question to answer in short order, but I feel comfortable we are making progress on those things.

  • Ed Fitzpatrick - Acting CFO

  • Okay.

  • So on the working capital improvements, as I highlighted, I think the biggest opportunity there is in inventory.

  • It is not one particular business unit.

  • It is really across the board.

  • Each of the businesses are driving for improved inventory turns, and I think the opportunity is there.

  • I think we did pull up a bit more inventory at the end of the year, and each of the businesses recognize that and we are working that down.

  • We are implementing improvements to our sales and operations planning process to improve the forecasting process at the front and to improve the co-ordination internally amongst our sales teams and the factories to make sure that we are more fully aligned and the process is more automated.

  • So I feel pretty good about that.

  • On the receivables front, it will be a little difficult to improve it year over year because as we mentioned we did factor (inaudible) going to be out of receivables at the end of Q4 relatively speaking, and we do plan to factor or sell less by the end of next year.

  • There are some opportunities there to improve I would argue, though, on some past due accounts, and we will continue to get at that.

  • So I think it is really a combination of DSO improvement and inventory turn improvement.

  • Payables should be relatively consistent year over year.

  • (multiple speakers)

  • Edward Snyder - Analyst

  • A quick follow-up.

  • Sanjay, based on your comments then, it sounds to me like you are concentrating very heavily on the platform approach.

  • It was actually the last time Motorola was hugely successful in moving up your operating margins.

  • Actually the first time that your phones broke through the 10% range was the [Triplis] and I think it was 2003.

  • So I guess the first time you tried to really do a serious platform, it worked very well.

  • So are you basically saying that the phones that you're going to be releasing in the second half of the year from here on out will be very focused on achieving platform scales like you had done before, let's say, the RAZR, or are you looking at maybe selling a particular model that de facto will make it become a platform?

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • No, it is the former.

  • I think we will introduce multiple IBs and form factors, but the platforming underneath it is very deliberately talked through.

  • In fact, I think that is one of the core ways that we are looking to simplify our business.

  • If you look, if you have to create UI for 18 to 20 different displays, then each of the UI is less well done.

  • If you have to do that for fewer displays, especially in a touchscreen environment where you have to be very careful about what your target, touch target is, I think we will do a much better job as we platform on displays, as we platform on chipsets, certainly we platform on Android, as we platform on certain batteries and so forth.

  • So you are exactly right.

  • That is a very core part of our strategy going forward here.

  • Operator

  • Jim Suva, Citi.

  • Jim Suva - Analyst

  • A quick question.

  • On your original guidance for calendar Q1 and then how this folds into Q2, I noticed that you actually had a tax benefit that came in this quarter.

  • Was that originally expected in the guidance, and if so, should we expect also a tax benefit in Q2?

  • And while that is kind of a housekeeping item, after that one I guess a more detailed discussion for Greg.

  • Greg, on the LTE there were some conversations earlier in the conference call about Verizon not selecting Motorola, and then also I believe recently China Telecom you also were not selected.

  • Any thoughts around that?

  • It just seems like in the initial designs that Motorola is kind of being left out of the design win.

  • What are you going to do to solve that problem, and really what is the cause or concern as to why Motorola is not in some of these major wins?

  • Ed Fitzpatrick - Acting CFO

  • Okay.

  • I will take the first part of that.

  • On the tax benefit side, really that's just a flow through.

  • We had a loss for the period, and it's just a tax benefit associated with a loss at roughly 34% tax rate.

  • So that's just standard operating procedure.

  • Greg Brown - Co-CEO & CEO, Broadband Mobility Solutions

  • On LTE Verizon picked two competitive providers.

  • Candidly I did not expect with the selection of two vendors for Motorola to be in the top two.

  • I will not -- it is up to Verizon to explain their selection rationale, but recognize that we are basically in LTE a RAN provider only at this point in time.

  • So our focus will be on providing an architecture that is lower-cost enough and can compete in the RAN piece of LTE infrastructure buildouts, of which there will be few to begin with and it is, as you know, a few years out.

  • So you are right.

  • We were not selected at Verizon.

  • At China Telecom they are expanding on CDMA2000, not LTE.

  • We were selected for Phase I China Telecom in that infrastructure buildout.

  • China Mobile is the one that I think will consider LTE earlier than any other Chinese carrier, although they have to go to TD-SCDMA first.

  • But China Telecom was a CDMA2000 expansion.

  • Now having said that, in China in general on the infrastructure side, it is getting very, very competitive, and margins are challenged in a significant way.

  • We had a decent footprint in China on CDMA as well as GSM.

  • We will look to protect it, but that said, we're not going to do anything uneconomic in the pursuit of share.

  • We are just not going to do that.

  • So going forward on LTE, we will look to compete with the carrier that I mentioned that I think will make a decision in the next quarter, a couple of quarters in Asia.

  • But also if it makes sense to have a broader partnership or a more flexible business model and arrangement for us to enhance our competitive position, we are going to do that.

  • That is where we are on LTE and 4G.

  • Jim Suva - Analyst

  • And your comment about capital allocation for WiMAX being less so given the environment, does that hold true for LTE, or does it reallocate a little bit more to LTE or status quo for LTE?

  • Ed Fitzpatrick - Acting CFO

  • I think it is fair to say we are adjusting LTE spend in '09 reflective of the conditions for LTE as well.

  • Jim Suva - Analyst

  • Great.

  • I understand very much.

  • Thank you very much.

  • Operator

  • Matthew Hoffman, Cowen & Co.

  • Matthew Hoffman - Analyst

  • Greg, does the proposed Tyco, M/A-COM, Harris deal do anything to change the competitive environment and the government radio market other than putting a pretty solid comp out there for the business?

  • And Sanjay, a question on the market.

  • Could you outline the conditions in the handset market right now in terms of getting inventory in the channel?

  • I think you said it was very clean last time around, and I did not hear you highlight Latin America.

  • Could you comment on that geography?

  • Greg Brown - Co-CEO & CEO, Broadband Mobility Solutions

  • I think on Harris, Tyco, does it change the competitive dimensions in the short term?

  • I think no.

  • I think they will be the fourth competitor that we have had in North America over the last 10 or 12 years.

  • GE had these assets.

  • Ericsson, Tyco, M/A-COM and now Harris.

  • We respect them.

  • We respect all competitors and look forward to seeing them in the marketplace.

  • I think it is a very different profile.

  • One of the big advantages Motorola has aside from technology encryption and the whole product in architecture is our go-to- market distribution at the local level, at the state level, within direct channels and so on that I think will be very difficult for anybody to replicate.

  • Longer-term we will see.

  • Sanjay Jha - co-CEO & CEO, Mobile Devices

  • I will take the question around inventory and stocking channel.

  • We see for the industry stocking channel is improving overall, and particularly for us we saw stocking channel actually go down in weeks.

  • With respect to Latin, Latin actually was one of the more challenged regions for us in the first quarter.

  • We saw EMEA in Latin as being two of the more challenged regions for us in the first quarter.

  • Dean Lindroth - Corporate VP, IR

  • I want to remind everyone that the details outlining highlighted items are GAAP to non-GAAP P&L reconciliations, and other financial information can be found on our website in today's slides.

  • An audio replay will be posted shortly after this call.

  • 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 for the second quarter of 2009; expectations for the timing of workforce reductions and cost savings from the Company's ongoing reorganization activities; expectations for cash flows and total cash during the remainder of 2009; anticipated levels of receivables to be sold during the remainder of 2009; the expectations for the potential separation of Motorola's businesses into two independent publicly traded companies; guidance for future sales, operating margins, profitability, ASPs or market share for each of Motorola's businesses; plans for the repatriation of funds from other jurisdictions; expected capital expenditures by network operators and the size of the total addressable market in the home business; benefits to be realized from Mobile Devices silicon and software consolidation initiatives and product portfolio simplification; expected timing for the announcement, launch and shipment of new products.

  • 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 2008 annual report on Form 10-K and Motorola's other SEC filings.

  • Thank you for joining us today, and this now concludes our conference call.

  • Operator

  • 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.