摩托羅拉 (MSI) 2010 Q1 法說會逐字稿

Good morning and thank you for holding.

Welcome to Motorola's first-quarter 2010 earnings conference call.

Today's call is being recorded.

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

The presentation material and additional financial tables are currently 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 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 Enterprise Mobility Solutions and Networks; Sanjay Jha, co-Chief Executive Officer of Motorola and CEO of Mobile Devices and Home; and Ed Ftizpatrick, Motorola's 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 17 through 29 in Item 1A of Motorola's 2009 annual report on Form 10-K and in Motorola's other SEC filings.

This presentation is being made on the 29 April, 2010.

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

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

With that, I will now turn the call over to Greg.

Thanks, Dean, and good morning, and thank you all for joining us.

This morning Motorola reported sales in the first quarter of $5 billion.

On a GAAP basis, $0.03 per share from continuing operations compared to a loss in the first quarter a year ago.

Excluding highlighted items, earnings were $0.02 a share, exceeding the guidance of a loss of $0.01 to a loss of $0.03 per share that we provided on our last earnings call.

Operating earnings increased substantially reflecting year-on-year improvements in each of our businesses.

We increased total cash by over $450 million and ended the quarter with total cash of $8.5 billion.

In Mobile Devices smartphone units shipments increased sequentially to 2.3 million units.

Our portfolio of smartphones increased to eight, and we shipped the renounced devices with all four major carriers in North America and many others around the world.

In Home, while sales were lower year on year, operating earnings and operating margin were higher.

In Enterprise Mobility Solutions, sales grew 6% year on year, driven by recovery in the enterprise markets, and we've secured our largest ever TETRA subscriber contract in Europe.

In Networks operating margin was up substantially, and we were awarded a contract by Zain to deploy an LTE network in Saudi Arabia.

Regarding separation we continue to make significant progress on our plan to create two independent public companies, one comprised of Mobile Devices and Home and one comprised of Enterprise Mobility Solutions and Networks, and our target for the separation remains the first quarter of 2011.

Additionally we recently provided revised GAAP and non-GAAP financial results for each of our businesses to give further inside into our operating results ahead of our planned separation.

And beginning this quarter, Sanjay will review the operating results for Home in addition to Mobile Devices, and I will continue to review both Enterprise Mobility Solutions and Networks.

But now Ed will provide additional details on our reporting changes and Motorola's overall financial results for the quarter.

So I will now turn it over to Ed Ftizpatrick.

I will begin today by all out outlining three changes we have made to our financial reporting.

First, starting this quarter we are reporting the financial results of the Home business and our Networks businesses as separate segments.

In the past results of these businesses were reported as a single segment.

Second, stock-based compensation costs, amortization of intangibles, and corporate G&A costs that were previously included in the Other and Eliminations reporting segment are now included in the Business segment results.

This change impacted the GAAP results of each business segment, but has no impact on Motorola's consolidated GAAP financial results.

Going forward, the Other and Eliminations segment will only include eliminations of inter-segment sales, transactions, and a small amount of corporate operating expenses.

Third, to supplement our GAAP reported results, we will present operating earnings on a non-GAAP basis, excluding items we have historically highlighted, as well as stock-based compensation costs and intangible amortization expense.

Going forward our quarterly earnings guidance will also be provided in this manner.

We believe this presentation of non-GAAP earnings will provide further details and insight on our operating performance.

GAAP and non-GAAP results for 2007, 2008 and 2009 in this revised presentation format can be found on our website.

Shortly after we file our first-quarter 10-Q, we plan to file an 8-K, which will include revised 2009 10-K footnotes, which reflect the new segment presentation and the allocation of certain corporate costs to the segments.

Turning now to our financial results, Motorola's total sales were $5 billion in the first quarter.

On a GAAP basis, first-quarter burnings from continuing operations were $0.03 per share compared to a GAAP loss of $0.13 per share a year ago.

This includes net income of $0.01 per share for highlighted items.

Highlighted items include a tax-related gain and a legal recovery, offset partially by charges associated with preparing for separation, a change in healthcare tax regulation, and business reorganization.

Based on the way we have historically provided non-GAAP earnings-per-share and compared to our first-quarter guidance of minus $0.01 to minus $0.03 per share, first-quarter earnings were positive $0.02 per share.

As I mentioned earlier, beginning this quarter, we will present non-GAAP earnings, which will also exclude stock-based compensation expenses and amortization of intangibles.

In the first quarter, these expenses totaled $0.04 per share.

Our non-GAAP earnings for the first quarter in this new presentation format were $0.06 per share.

This compared to a loss of $0.04 per share in the first quarter of 2009.

Further details on our non-GAAP earnings can be found on our website, and our remaining financial references will exclude highlighted items, stock-based compensation costs, and intangible amortization expense.

Gross margin percentage in the quarter increased to 35.7% from 28.9% in the first quarter of 2009.

The increase was due to year-on-year improvements in all four businesses, particularly in mobile devices.

Operating expenses in the quarter were lower year on year and sequentially, reflecting our continued efforts to tightly manage spending and optimize our cost structure.

Total other income and expense was a net expense lower than anticipated and contributed favorably to our results.

This was due primarily to recovering the value of certain fixed income securities held in our Sigma Fund and interest income related to a tax settlement.

Our ongoing tax rate was 35% for the quarter.

Moving now to the balance sheet, in the quarter we generated operating cash flow of $485 million.

We ended the quarter with total cash of $8.5 billion compared to $8 billion at the end of 2009.

The increase in total cash of over $450 million is primarily attributable to both improved working capital and earnings.

Inventory declined by $57 million with inventory turns at 10.4 compared to 11.2 turns in the fourth quarter and 7 turns in the year ago quarter.

The cash receivables were lower sequentially and year over year.

DSO, days sales outstanding, was 57 days flat with the fourth quarter and lower than the 63 days in the year ago quarter.

Turning now to our outlook, we expect second-quarter earnings to be in a range of $0.07 to $0.09 per share.

As I mentioned earlier, this guidance excludes $0.04 per share related to stock-based compensation and intangible amortization expenses, as well as items historically highlighted in our quarterly earnings releases.

With that, I will pass the call to Sanjay to discuss Mobile Devices and Home.

Thanks, Ed, and good morning.

In the first quarter, we executed well on non-smartphone plans and continued to build momentum.

This market is expected to grow more than 40% this year, driven by continued growth in North America and Western Europe and increasing demand in China.

In smartphones we launched six new devices, bringing our portfolio to eight, shipped 2.3 million units, and now reach over 100 carriers, distributors and retailers globally.

Mobile Devices' overall sales were $1.6 billion on total shipment of 8.5 million units.

Our overall ASP increased to approximately $192 from $169 in fourth quarter due to a more favorable product mix.

The operating loss in the quarter was $148 million compared to a loss of $385 million in the year ago quarter.

On a sequential basis, the loss increased due to a lower unit volume and gross margin level in our feature phone portfolio, offset partially by growth in smartphones.

Operating expenses were lower driven by further reduction in headcount and tight control over G&A costs, offset partially by increased spending in support of the brand and new product launches.

Sales in North America accounted for 66% of our total sales and smartphones accounting for approximately half of the sales in the region.

Three of our new smartphones began shipping in Europe during the quarter.

BACKFLIP was introduced with AT&T and featured prominently in their NCAA tournament promotions slot.

CLIQ XT, a touchscreen with virtual QWERTY keyboard, was launched with T-Mobile and DEVOUR, our second smartphone with Verizon Wireless began selling in late March.

In China about two weeks ago, Frank Meng joined us as President of Mobile Devices and Home of Greater China.

Frank has over 25 years in telecom and will lead our business and sales operation in China, Hong Kong and Taiwan.

I have worked with Frank before, and I know he will be a great addition to our team.

From a product perspective, we are getting good traction in China.

During the quarter we began shipping smartphones for China Mobile, China Telecom, and China Unicom.

We also launched BACKFLIP, our second device in China with MOTOBLUR, into the retail channel and opened Shop4Apps, our applications and services store.

With our store consumers have the ability to customize their Motorola Android device with a wide choice of applications and services, including search, e-mail and maps.

In the first quarter, Motorola devices accounted for the largest share of Android-powered devices sold in China.

We expect this momentum to continue with China expected to be our second largest smartphone market this year after North America.

With regards to our portfolio, in smartphones we remain on track to launch at least 20 smartphones and expect to ship 12 million to 14 million smartphone units this year.

MOTOBLUR, our user interface and cloud-based services platform, will continue to be featured on a majority of our smartphones.

It provides consumers with push Internet content in aggregate and delivers messages and contacts from a variety of social networking sites.

Data traffic on BLUR-enabled devices continues to grow rapidly, driven largely by video.

Our next release of MOTOBLUR will enhance user experiences by providing new functionality in areas such as multimedia consumption and music.

In our mid to high-tier phone portfolio feature phone portfolio, which includes iDEN, ruggedized devices, and a modest number of other devices, we expect unit volume to decline in the second quarter and then remain fairly stable through the second half.

In voice-centric devices, we will utilize ODM partners and expect unit volume to begin to ramp in the second half of the year.

Our focus is to build brand awareness and meet customer requirements for a broad portfolio of products at multiple price points.

Across this portfolio we are targeting modest profitability and minimum working capital investments.

Looking ahead to the second quarter, smartphone shipments will be higher sequentially.

Overall unit volumes will be lower; however, due to a further decline in feature phones, we expect sales to be flat and operating loss to improve driven by an improved product mix.

We expect further reduction in the operating loss in the third quarter and expect to be profitable in the fourth quarter driven by higher smartphone sales.

Turning now to the Home business, in February we provided an update to our separation plan and indicated that we are combining the Mobile Devices and Home businesses.

This allows us to address the opportunity ahead of us, resulting from the convergence of mobility, media, computing and the Internet.

Since announcing our plans, I have had the opportunity to speak with a number of our largest customers, and the feedback has been very positive.

Turning to the results in the first quarter, Home sales were $838 million.

In digital entertainment devices, we shipped 3.1 million units and held share in the quarter.

Customer demand remains constrained, particularly in the US.

Sales of video and access infrastructure accounted for approximately 25% of overall Home sales and were up from a year ago.

This was driven by renewed network investments, following spending deferrals by operators last year.

Operating earnings were higher year on year, and operating margin increased to 5.6% from 3.4% in the first quarter of last year.

The improvement was driven by a favorable product mix and operating cost reductions.

In Home we expect longer-term demand recovery to be driven by a number of factors.

Analog to digital transitions are still under one, particularly outside the US.

Digital households are expected to grow in the double-digits over the next four to five years, driven by growth of high definition video and multi-room solutions.

DVR penetration will also continue to grow.

From an infrastructure perspective, consumer demand will continue to drive the need for more bandwidth, optimized network, and storage and services.

That said, R&D investments are focused on strengthening our core portfolio and on emerging growth areas, including content management and security solutions for IPTV, 3-D TV, and advanced interactive services.

We are also developing solutions which enable consumers to securely transfer content from their DVR for viewing on a mobile device.

In the first quarter, we introduced enhancements to our DCX line of set-top boxes that support viewing 3-D TV.

We also began trialing a new digital entertainment device for Verizon's FiOS service, which significantly reduces energy consumption.

Turning now to our outlook, in Home the industry has solid long-term fundamentals.

We are focused on managing our cost structure and prioritizing R&D on future growth opportunities.

In the second quarter, we expect Home sales and operating margin to be up from the first quarter.

For the full year, we now expect sales to decline by 5% to 7% compared to 2009.

This reflects lower demand for digital entertainment devices, offset partially by higher sales of video and access infrastructure.

That said, however, we are on track to increase operating earnings this year due to a more favorable product mix and improvement in our cost structure.

In closing, the increasing availability of broadband inside and outside the home is enabling consumers to watch more video content than ever before.

They are consuming it when they want it, where they want it, and on many different devices.

This is driving convergence in what consumers expect from mobile devices and home entertainment devices.

Demand is also increasing for interactive personalized user-driven services in home and on the go.

The Mobile Devices and Home businesses are uniquely positioned to address these opportunities.

Together we will have an industry-leading intellectual property position in wireless and video and in content delivery and rights management.

We have core strengths in end-to-end solutions, design, operator relationships, and a global brand.

By leveraging these assets and by driving our operating synergies, we will provide a broad range of converged devices and uniform multiscreen experiences, as well as mobile Internet content management and delivery services.

With that, I will pass the call back to Greg to discuss EMS and Networks.

Thanks, Sanjay.

Enterprise Mobility Solutions and Networks delivered an excellent quarter with solid topline results, improved year-on-year operating earnings, operating margin, and cash flow generation.

In EMS first-quarter sales were $1.7 billion, up 6% from the first quarter of last year.

Government market sales were up slightly.

In our enterprise markets, recovery is underway, evidenced by double-digit sales growth.

We performed very well in all of our key markets, driven by an industry-leading portfolio.

Operating margin increased to 12.8% from 10.8% in the year ago quarter.

The increase in operating margin was due primarily to higher sales and a more favorable product mix.

First-quarter sales in North America grew 5% compared to the first quarter a year ago.

Growth was largely driven by higher enterprise sales, including mobile computing, scanning and Wireless LAN.

Momentum continued in retail and in transportation and logistics, including a win with Conway, an industry leader in freight transportation and logistics, who selected our MC75 mobile computers to optimize their delivery processes.

In public safety RFP activity remained at a healthy pace.

Key awards in the quarter included three statewide expansion projects, including a P25 system upgrade with the state of Michigan, and several county and citywide projects across the US.

We also secured several wins in Canada, including one which displaced the incumbent radio supplier.

Outside North America, sales grew 7%, driven by higher public safety and enterprise sales in Asia and higher enterprise sales in EMEA.

Additionally during the quarter we secured several significant awards.

In Germany we received an award for over 50,000 radios from the German federal government, our largest ever TETRA terminal contract in Europe.

In China we were selected by the Shanghai Municipal Public Safety Bureau for the largest ever 350 MHz TETRA project in China.

This system includes integrated command and control and over 30,000 radios and strengthens our customers' capabilities in preparation for the Shanghai World Expo 2010.

Both of these awards further strengthened our position as the world's largest and leading TETRA supplier.

With respect to our go-to-market strategy, we recently announced PartnerEmpower, an industry-leading sales channel program.

Launched globally this quarter, this program brings together our government, public safety and enterprise sales channel activities under one unified framework, enabling a stronger and more distinctive global channel brand and acceleration of growth opportunities for EMS, and our highly valued network of 25,000 channel partners.

This program will enhance channel partner competency, simplify processes, strengthen relationships, and make it easier for customers to do business with us.

From a product perspective, we made a number of portfolio enhancements during the quarter.

We expanded our MOTOTRBO product line with the addition of 800 MHz and 900 MHz 4 portables and mobiles.

To simplify customer migration from analog to digital, we also introduced new portable and mobile radios with multimode functionality.

For the enterprise market, we recently announced a series of rugged digital bar-code scanners developed for harsh industrial environments.

We also announced a cordless digital imager, which can improve patient safety and caregiver productivity to take advantage of opportunities in healthcare.

In Wireless LAN we expanded our portfolio with a solution for centralized management of multi-vendor devices.

And finally, our recently introduced team portfolio of solutions continued to gain traction with a significant award from a major retailer in the US.

TEAM Solutions provide advanced communication functionality across an enterprise voice over land network, integrate mobile communications, including Push-to-Talk, enterprise voice-over-IP, and task-specific devices such as mobile computers and barcode scanners.

By enabling a wide array of devices, TEAM increases enterprise collaboration, mobility, and productivity, and enhances experiences for consumers.

Looking ahead EMS is positioned very well.

The year is off to an excellent start.

Recovery is taking hold, and enterprise customers are beginning to reinvest.

We are encouraged by the level of customer engagement across all of our verticals and by several key wins during the quarter.

That said, many of our government customers around the world continue to operate under tight budget constraints.

Regarding our outlook in the second quarter, we expect EMS sales and operating margin to be up sequentially.

We now expect full-year sales growth in the mid-single digits with slightly improved operating margin compared to 2009.

In Network sales in the first quarter were $896 million.

As we anticipated, sales declined year on year due to lower 2G and 3G sales, primarily in EMEA, offset partially by higher WiMAX sales.

That said, growth in smartphones and data traffic is driving continued demand for wireless network expansion and optimization.

We are profitable in each of the individual legacy technologies, and we will continue to focus on optimizing this business.

Operating margin improved to 14% from 9.2% in the year ago quarter.

The increase was driven by a favorable sales mix, including strong CDMA sales in both the US and Japan and lower operating expenses.

In LTE development of our RAN solutions and operator field trial activities continue.

We recently received an award from Zain for a network in Saudi Arabia, our second commercial LTE award.

In China our trial efforts with China Mobile have been very successful, and over the next six months, we will be working with them to provide indoor TD-LTE coverage at the World Expo 2010 in Shanghai.

Moving onto our outlook for networks, we expect second-quarter sales and operating margin to be up slightly on a sequential basis with continued strength in CDMA.

Following strong first-half results, we expect a more normalized sales mix and lower operating margin levels in the second half.

For the full year, we continue to expect sales to be down approximately 10% topline with operating margin now in the range of 10% to 11% for the full year.

In closing, Motorola performed well in the first quarter.

Earnings per share were up year on year, and total cash increased.

We are making excellent progress on the separation with work advancing in all areas.

We anticipate filing a Form 10 in the summer, which will provide you with additional details about the separation.

And, as we head into the second quarter, we have the momentum to deliver higher earnings, generate cash, introduce new products, and ultimately satisfy our customers.

And now 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 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).

Ittai Kidron, Oppenheimer & Co.

Congratulations on good numbers.

Sanjay, I wanted to focus on your guidance for the year and your perspective on your business for the next two quarters, specifically on the handset side.

You have not raised your 12 million to 14 million unit target for the year, yet you have already started the year on a stronger note than you previously guided for.

So how do I interpret that?

Does that mean that your expectation for the business for the rest of the year is lower than you've planned for?

And second, with regards to the competition, clearly the environment over the next couple of quarters seems to -- will likely get much, much tougher from a competitive standpoint than it has been in the last two quarters, especially on the Android side.

How do you view your position?

How do you expect to handle this over the next few quarters?

As you know, our guidance last quarter was 11 million to 14 million units of shipment of smartphones, and the guidance we provided today says that we expect to ship 12 million to 14 million.

So, at least on the low end, we have greater content now that we can ship more products, more smartphones, in this year.

So I guess we have materially changed our guidance from the last quarter.

To the broader point of not having raised the high end of the guidance, clearly I think we are comfortable with the range that we have provided to you on our guidance.

With respect to competition, you are absolutely right.

This is a very, very competitive marketplace, and particularly in the fourth quarter, I anticipate that there will be new devices from multiple people with probably three or four operating environments in the marketplace.

There will be obviously devices on Android in other operating environments.

We have taken the competition and the competitive environment into account when we provide you guidance obviously.

And I feel that we are well positioned to compete at each of our carriers in light of the competitive environment.

And I actually think that my comfort level if anything is slightly greater today than it would have been last quarter because we have greater visibility, and we have better understanding of our relationship, of the commitments that our carrier partners are making to us.

So I feel comfortable.

Good luck.

Brian Modoff, Deutsche Bank Securities.

A couple for Sanjay.

So in Q2 you have Verizon, you have got the incredible coming to Verizon, and that's obviously going to see some push by Verizon.

Can you talk about how you see Q2 relative to Q1?

Are you going to have a broader breadth of product across a broader category, specifically in China?

How do you expect to do sequentially in China in Q2 from Q1?

And can you talk about you said 20 phones?

You have announced eight so far, six in Q1.

How do you see the rest of the year?

And then, Greg, I think a lot of people struggle with how -- what is your position in the public radio market?

You have a dominant share, but what is that share globally?

Can you break it down between APCO 25 or APCO and and TETRA 25 standards?

Let me take the smartphone questions, and Greg will talk about the public safety part of it.

DROID sell-through in the first quarter was very strong, and I anticipate that we will continue to get traction with our DROID franchise in the marketplace.

I think with respect to your China question we launched three devices in China.

They were launched at various stages in the first quarter.

Clearly in second quarter, we will see a full quarter's worth of sales from these devices.

There are three devices we have launched with each of the carriers.

And really the XT800 in particular but all three of them are getting very good traction in the marketplace.

I feel comfortable and sequentially I expect our smartphone sales in China to be higher in second quarter than first quarter.

So we have a smartphone portfolio that has proven to be competitive globally and feel very good about the sell-through over the next few months.

So clearly there is competition at each of our carriers, not just Android, but all kinds of competition, but I feel very comfortable with where we are positioned.

In terms of public safety and P25 or ASTRO, we have a very strong marketshare position, primarily driven by North America.

We do not disclose the specific number, but obviously we lead worldwide.

In TETRA we also lead worldwide with a leading marketshare position, but less than our overall position in P25.

The only other thing I would say is in terms of public safety and overall demand for both, I think backlog is strong, and our composition either remains the same as it relates to both or actually is improving.

Clearly, with the big win in Germany, our TETRA market share will grow from the leading position we already have in 2010.

So, as we invest, we are investing more R&D, so we are getting the flow-through on the P&L with a 200 basis point expansion in operating margin year over year, 13.8 against 10.8.

But that is also while investing in next generation public safety and expanding and differentiating our already leading edge portfolio.

Tim Long, BMO Capital Markets.

If I could just, Sanjay, your iDEN comments here, I think you referred to units going down in Q2 and then stabilizing.

What makes you think that the units stabilize there and just don't further whittle array?

Some of the rhetoric from Sprint seems to be to continue to deemphasize it, maybe then change up from iDEN spectrum for CDMA.

And related to that, how important is that iDEN stabilization toward your goal of profitability for the Mobile Device businesses in the fourth quarter?

My comments related to feature phone as a category.

Feature phone includes iDEN, some ruggedized device, and a lengthy portfolio, and some very limited number of new products that we are introducing that were not just specific to iDEN, though clearly you're right.

iDEN plays a major role in that definition but let me maybe take iDEN.

I expect iDEN to be flat quarter on quarter.

Remember that iDEN is not just driven by Sprint.

It is driven by Sprint and NII and the rest of the world.

And while there has been talk about Sprint's future, we continue to see interest from Sprint in driving iDEN and the quarters of interest here.

So I feel that we are now comfortable saying we have guided to the iDEN volume and profitability being lower in this year than last year, and that is built into our plans.

In terms of how important it is to our fourth-quarter profitability, it plays a role.

But I just want to not leave any doubt that our success failure in fourth quarter would depend on our success and failure in smartphone.

And, as I say, with my guidance comments earlier, I feel comfortable where we are positioned with our carriers, and I feel comfortable with the guidance I have provided you.

Kulbinder Garcha, Credit Suisse.

My question is for Sanjay as well.

It is more about devices and how they evolve -- the device business and how it evolves over the year.

And, Sanjay, in this first quarter, of the 2.3 million, was a large part of the stocking just because of the number of new carriers that you were selling into?

And wouldn't that hurt your ability to grow sequentially?

So any kind of visibility there as to where you're on the channel would be helpful.

Then the other question is to get to the 14 million full-year number, the high end of your range, you would have to have quite a strong ramp in the second half.

And what is driving that in the second half of the year specifically?

Is that entering the European market?

Is it the commitment you have got in the US?

Could you give some visibility around that?

Thanks.

So the first question was really was -- if I can rephrase it -- it was what is our stocking channel, what is our sell-through?

I will tell you that I feel very comfortable with our sell-through.

I would say that our stocking channel is either at normal level or slightly below normal levels in some of the critical smartphones that are driving our business.

So I feel very comfortable that we are not building inventory in the channel, but the sell-through is commensurate with the shipment that we have made.

So that is the first part.

The second part of your question was, what is driving the ramp that we are growing in the US and China, or are we playing in elsewhere?

Well, the US will play as US is about 65% of our shipment in the smartphone market this quarter.

The US will continue to play a very important role in our shipments, but China and Europe will also play a role.

As you know, because of our global presence, we are able to launch in China, Europe and Latin America.

But a combination of these things will give us the ability to deliver on the profitability part of the promise that we have delivered to the street.

In terms of 14 million, clearly that is the high range of the target.

I will not comment on how we get to 14 million.

But certainly the range of 12 million to 14 million, I feel with the visibility that I have, with the tractions that we have with the customers, I feel comfortable that we have good ability to deliver on our promise.

And just to follow-up on that, do you have commitments basically for this full year now for the second half in terms of all the new products you are bringing out?

Is that is what giving that in terms of -- (multiple speakers) promotion?

What we know is that the carriers are interested in certain products, and we know what slots and what kind of promotion they are thinking about.

We don't have contracts all locked and signed and loaded, but we know where we are designing in and what our competitiveness and what our ASPs and so on and so forth are.

So a great deal of visibility, but it is not written in stone.

Edward Snyder, Charter Equity Research.

Sanjay, you had Google out there pushing HTC's new phone, which makes sense, and it is clear that Android is moving along nicely.

But innovation, I would not say, is moving as quickly as it was over the last year or so.

Is your plan for the smartphone business more reliant on hitting more carriers internationally as you just pointed out Europe and China?

Would it be fair to say that it is more of a distribution model than it is massive innovation.

You have already pointed to 20 phones.

I'm sure they have been in the works for the last year or so.

So should we be looking at it more of a channel expansion story than necessarily something bold and new in the feature set?

And then, Greg, it is clear that networks are struggling from Ericsson's report, and some of your competitors kind of mix here especially with regard to pricing and profitability.

Where do you see the WiMAX business currently?

Are we at a peak here?

Do you expect to see continued growth or investment going to wane in fear of more LTE?

So maybe I can take the first part of the question.

The short answer is both, both innovation as well as distribution.

I think that you would see that Google will continue to innovate.

And I would say right now the Google ecosystem and the Android ecosystem is the fastest innovating ecosystem in wireless.

But recall that we do a huge amount of work beside the work we inherit from Google.

And I fully expect that you would see devices from us, which are not a matter of capturing Google's delivery to us and integrating in the hardware and delivering to the marketplace that you would see meaningful differentiation in the marketplace from us as well.

And distribution is clearly important.

We have global distribution.

We have global brand, and we have global presence, and we have global carrier relationships and retail relationships.

I think that there is sometimes a view that this business is either about OS or about brand.

The reality is, to succeed in this business, you have to succeed in operating system, integration of hardware and software global distribution, brand, execution at the right time, IP position, user interface.

All of these things deliver with quality, do all the backend supply and demand planning, and delivering all of that, and do all of that efficiently.

And sometimes I think this business is just kind of made into a cardboard cutout of the business.

I really believe that as a machine over the last 20, 22 months, we have improved significantly in our operational efficiency.

And I think we are in a better position to take advantage of what opportunity is in front of us.

So I feel actually that you will see from us both innovation, as well as operational efficiencies, as well as distribution efficiencies that we talked about.

And in terms of networks, while the industry might be struggling, we are not.

Q1, as you can see, had 13.9% operating margin, which is as strong as it has been in a long time.

We also had significant gross margin expansion.

You are right the topline contracts, but that is as we expected.

And as I talked about in Q2, we are expecting the Motorola Networks Infrastructure business for sales to be up slightly and for operating margin to be up slightly.

Now that said, specifically as it relates to WiMAX, we believe that the next generation 4G market will clearly be dominated by LTE.

At WiMAX we had about $600 million of revenue last year.

We have guided to comparable revenue in 2010.

So $600 million as well.

And the opportunity for us is, I think we expect to see some WiMAX customers more and more migrate to TD-LTE.

The fact that Motorola got out to an early start several years ago on WiMAX and the fact that there is approximately 70% reusability in the R&D spend between WiMAX and LTE, we think gives us a lead at the moment in the RAN base station business.

So In revenue we expect comparable $600 million in 2010, $600 million last year, but we think our position on TD-LTE, FDD-LTE, and WiMAX remains pretty strong.

And, as I mentioned, we have strong earnings and cash generation, and we remain profitable in all of the legacy technologies.

Mark Sue, RBC Capital Markets.

Sanjay, if carrier partners have choice, does their focus on a particular Android vendor change quarter to quarter?

Is your increased comfort coming from a firm commitment on their part that they will be more with Motorola each and every quarter this year?

And then separately, will Motorola also sign a royalty agreement with Microsoft following the HTC agreement?

The first question was, how do carriers decide?

Do they change their preferences quarter to quarter?

I think some do, and some have longer-term relationships, and they have seen us execute for them.

For some it's been a very, very productive relationship, which has meaningfully changed both of our positions in the marketplace.

So I think that there is no doubt that people see the quality of execution from us and believe that given our brand name, given our execution, given our IP position, they would rather bet on us than a few others.

So at the moment there is going to be a huge number of people with credible choices in the marketplace.

So there will be turmoil, I guess, to a certain extent and change from OEM vendor from OEM vendor from quarter to quarter.

But I will tell you that carriers that we participate with recognize that they want longer-term relationships with partners.

I think we are well-positioned as that choice gets made at each of the carriers.

In terms of when we signed an agreement with Microsoft on HTC, we have no discussion ongoing, and I could not possibly comment on what we may do in the future in that regard.

Tal Liani, Bank of America/Merrill Lynch.

The question I have is on gross margin, maybe a question for Mark.

Operating margins declined from 6.5% to 9% this quarter on a sequential basis, but your shipments and ASPs went up.

So the question is, is it sourced at lower gross margins on the new products, or is the decline more related to seasonal items for higher operating expenses?

I assume your question was related to Mobile Devices' gross margin?

Yes.

Okay.

Maybe I can give you some color, and I missed some part of your question.

I apologize if I don't answer.

Please feel free to ask again.

So, first of all, let me just go to ASP.

ASP improved, as you noticed.

We went to $192 ASP from $169 ASP, really driven by mix shift, more towards smartphones and less toward feature phones.

Our smartphone gross margin is very much dependent on mix, as you probably recognized.

In the fourth quarter, we had a very limited number of smartphones.

In the first quarter, we have more smartphones.

And really it is a function of mix shift there.

Feature phone gross margins are definitely under pressure.

Particularly in first quarter, we saw gross margin for feature phones come down relative to the fourth quarter last year.

Feature phone gross margins as an industry is under pressure.

We are bringing down smartphones lower down this year.

That has an impact on the smartphone gross margin, but has a much greater impact on feature phone gross margins.

And I actually believe in the longer term our smartphone gross margin will be in the range of the industry average.

I think industry average is coming down, and our gross margin is actually going up.

I expect that there will be a meeting of the two, and we expect to operate at industry gross margin levels for smartphones.

I'm not sure if I got your question answered appropriately or not.

Yes, it had a second part, and the second part was, I understand that part of the sequential decline in operating margin is related to the gross margin.

The question is, what happened also to OpEx in the Mobile Devices division, the OpEx estimate?

I guided you last quarter to a flat OpEx, but, in fact, OpEx this quarter was down.

Every quarter we are very, very careful about managing our operating income.

My guidance to you is to look at our operating expense being somewhat flat.

That is not to say that we are not reducing headcount.

But offsetting that is very often an investment in our brand or in next generation technologies.

So if you are thinking about our operating expense, I think a flat modeling of it is the right way to look at it.

But this quarter on balance we reduced our operating expense.

But I would say probably the most significant feature on feature phone margins are under pressure.

And, as I say, we have guided you to a slightly lower volume in the second quarter on feature phones as well.

Feature phone volumes actually flatten out for second-half 2010 for us.

I don't know if that gives you all the color you needed.

Maynard Um, UBS.

Sanjay, a number of PT vendors are moving more aggressively into the smartphone market and also making a bigger push into the tablet-like devices, 5-inch screens or greater.

How important is this market, and is this a market you need to be in?

And if you can give us any update also on MOTOBLUR.

You've talked in the past on new apps on MOTOBLUR that will help your differentiation.

Any update there and what traction you are seeing?

Sure.

The first thing is I think you are seeing convergence with PC and mobility.

But also in Home, you are seeing a convergence of devices happening.

I actually anticipate that there will be a lot of media consumption devices, which are able to be used in Home and create a whole Home ecosystem.

I actually see this convergence as being very, very important.

Very, very important.

We are very engaged with this marketplace.

We think that tablet is one form factor, but there are number of other form factors and other solutions that people are engaged in.

We are engaged with this development very intimately, and we will announce whatever we need to announce at the appropriate time.

Let me go to MOTOBLUR.

We are very pleased with the traction, and I would say that we have seen hundreds of thousands users on our MOTOBLUR server.

And it enables us to get and understand our consumers better usage pattern and Internet usage patterns much more intimately, and allows us to think about what is the next service or what is the best way to serve our customers.

It is also actually meaningfully reduces their data consumption, which our carriers seem to like quite a bit.

So if you go to a Facebook website, the website is something like 300 kB.

Whereas if we are able to take the relevant updates and push it to your home screen and do it in an efficient way, that changes quite a bit of the data consumption traffic.

That is one thing.

Second thing going forward, you have seen us participate in social messaging.

I think social media becomes much more important, so location becomes much more important.

So you will see a continued focus on delivering what we call push Internet to consumers' home screens using our MOTOBLUR technology.

Ehud Geldblum, Morgan Stanley.

Sanjay, I thought you gave a pretty interesting fact that 50% -- let me know if I got that right -- 50% of your smartphone revenue -- I'm sorry 50% of your Mobile Devices revenue was smartphones.

So we can back into an ASP on that.

That was down from what I had as an estimate for ASP in the prior quarter.

So I'm wondering what the trend in the smartphone ASP was, and what that due to mix, fewer DROID milestones, and possibly more of other types of devices, and do you think you can give us a handle how ASPs did trend this quarter and how they trend going forward within the Android smartphone bucket?

And then when you gave guidance for second quarter of up, is there anyway you can give us a sense, is that seasonally up in what you consider seasonal, or should that be up more depending on because of new product launches that you anticipated this quarter or some of the ones you made at the end of last quarter that you expect to ramp?

So seasonal to me would be around 5%, 6% up into the second quarter.

Is that what you are thinking, or that it will be more significant due to the product launches?

And then, Greg, it sounds like things are going very strong, especially in Germany and other places.

But when we keep looking at the newspaper and hearing things about Europe and what is going on with the governments there and bonds and government debt being downgraded, does any of that impact you and impact some of the contracts that are in your pipeline that you are working on or that some of those countries may be looking project-wise to do going forward?

So I will take the first few of your questions.

The 50% comment was really related to the revenue in North America, not overall revenue.

And I actually anticipate that that portion will continue to increase as we go through the year.

So yes, I think if I could say this, the quality of our revenue I think as we go through the year -- and by that, I mean revenue with high gross margin or improving gross margin -- actually is getting better as we go through the year.

In terms of ASP for Android devices, I actually anticipate it will come down a little bit from where we are today, partially because we are going into a lower -- we are driving smartphones into feature phone territory.

So the ASP will come down a little bit.

But, at the same time, consistent with the question earlier, there is a scope for higher ASP devices as there is convergence with computing and mobility.

So I'm uncertain.

It will depend on product mix as I am certain exactly where the ASP ends up.

On balance I would say because there is greater volume in lower end rather than higher end, there is probably a slight declining trend in ASP.

And then your question around second-quarter seasonality, I guess the question I think if I can re-ask the question this way.

You are asking whether we will take market share or just stay current with the marketplace?

My anticipation is that we will gain some market share in the second quarter.

In terms of public safety, so while we grew 6% overall as a segment, remember I referenced the fact that enterprise or formerly Symbol was double-digit growth, and government and public safety, therefore, was more lower single-digit growth, which is reflective of the overall spend environment.

I do think the Americas and Asia will be stronger for the reasons you described structurally in terms of what is going on in Europe.

But we do not anticipate any incremental challenges beyond the guidance that we have provided for Q2, and I think we have incorporated that into our thinking.

No issues on the balance sheet there either from a European perspective, so our receivables are pretty clean there.

Jeff Kvaal, Barclays Capital.

My first question obviously HP has decided that they want to own an operating system.

They would really rather do that than embrace Android or Windows.

So the question for you, Sanjay, is how do you feel about that strategy?

You have talked in the past about being quite committed to Android but not necessarily 100% forever.

Any updates on that thinking would be helpful.

And then for clarification, if you could just help us understand what happened to that $200 million in deferred revenue from last quarter, that would be great.

Thank you.

Jeff, I have always felt that owning your own OS is important provided you have an ecosystem, you have all the services, and you have an ability and the scale to execute on keeping that OS at the leading edge.

And I continue to believe that at some point, if we have all of those attributes, that owning our own OS will be a very important thing.

But at this current point, I continue to feel that Google is the fastest innovating ecosystem.

We have a very good working partnership with Google, and together I think we will work well to help each other succeed in the marketplace.

So I continue to be committed to that particular way of working for us in the smartphone market.

To the second part of the question, we had about $200 million of deferred revenue in fourth-quarter 2009, and it will be recognized over the next eight quarters.

So the net impact of deferred revenue in first-quarter 2010 was not significant.

So I don't know if that covers your --

Yes, that is helpful.

Thank you, Sanjay.

Pierre Ferragu, Sanford Bernstein.

I would like to focus on the feature phone question.

Could you just explain to us what exactly is the driver of the decline in sales today?

What is going to stabilize shipments in feature phones going forward?

Beyond the comments you have made, Sanjay, what exactly is the point of keeping such a small business if you're going to be extremely subscale compared to competitors in this segment?

And what is your plan with it?

Do you want -- is your plan to grow it again going forward, or do you plan to exist a feature of the market?

Thank you.

Maybe I can comment a little more.

I see the feature phone market in the whole industry, leaving aside Motorola, compressing in terms of both revenue and profitability.

And, as I have commented in prior earnings calls, we have deemphasized our presence in that market, and we are not spending a lot of R&D in that market.

That market, that feature phone segment for us, consists of two segments really if I can break that up into two segments -- mid to high tier and then what we call voice-centric segment.

Maybe I can deal with them separately.

The mid to high tier has three kinds of devices for us -- iDEN, some ruggedized devices, BTT devices that we have a particular place in the marketplace for, and some legacy devices.

And we are introducing some other devices in this marketplace.

Those are the three things that form the mid to high tier.

I think consistent with the guidance that I provided earlier, I see iDEN being somewhat flat quarter on quarter.

Again, it is not just driven by Sprint.

Sprint, NII, and the rest of the world.

And I feel good.

Again, the ruggedized device, there is a distinct market for that, and we continue to play in that marketplace.

So I feel that in that segment, in the second half of this year, the volumes have come down to a level where I think they can remain somewhat stable to the second half.

As I look at voice-centric devices, these are the devices that I would say are below $100, meaningfully sometimes below $100.

We are utilizing ODM partners, and we are really not looking to take much working capital risk or inventory risk in this business.

But we play in this market because a number of emerging growth markets, our retail partners and our customers, want a broad range of offerings from us.

Our brand name extension is important.

Our expectation is from zero to modest operating profit in this area, but we do not want to run any inventory or operating working capital risk.

So that is kind of our strategy.

And to the last part of your question, as to why we do it, brand name extension and meeting our customer requirements.

Those are the reasons.

Simona Jankowski, Goldman Sachs.

Sanjay, I just wanted to get a little bit more color on China.

I think you said that North America was about 65% of your shipments in smartphones, if I heard that correctly.

Was China the majority of the remaining 35%?

And also, how meaningful do you think China will be as a proportion of your 12 million to 14 million guidance for the year?

And then lastly, how did the margin profile there compare to the rest of the smartphone expectations?

China was not the majority, but it was the biggest single element of the rest.

I actually, as you know, we hired Frank Meng as our lead, and I have worked with Frank, and I have done that because I see Frank and China being important for our future here as we go.

We see China as, at the current time, one of the fastest growing smartphone marketplaces.

You know that there has been broad 3G deployment.

The competitive dynamic there between carriers is actually getting much more interesting for us.

So I feel that China is going to be important for us going forward.

It is probably one of our highest single priorities outside of United States.

I have said just broadening my answer beyond actually the question that you asked.

Europe is going to become a little more important.

I think data networks are deployed there.

If you look at Latin America, we have a number of launches actually very well positioned there with our brand name and launches of product.

But data consumption there is nearly all prepaid, and smartphone market, as of right now, is somewhat limited.

But we are actually very hopeful that that market could be made to be activated with lower tier smartphones.

So our strategy in Latin America will be lower tier smartphone.

In Europe we will participate, but in 2010 I don't think -- I don't anticipate a big presence in Europe.

We will have carriers, we will have partners, and we will participate, but we are not anticipating spending a large amount of marketing dollars in Europe, and we will continue to move forward in each of these regions in that way.

And on the profitability of China versus North America?

I think North America has higher profitability as of right now than China.

But it is a matter of scale.

I anticipate over a period of time that we will improve our profitability in China.

Phil Cusick, Macquarie Research.

So two quickly if I can.

First for Greg on CDMA.

The strength of those networks sales, you said that's going to be a little bit lower in the second half.

Is that one carrier coming back really aggressively, is that existing carriers, and is that the US versus China ramping up?

And second of all for Sanjay, can you help us think about the Android relationship?

It seems like devices are taking a lot of time to upgrade to new versions.

Is this carrier reluctance to go back and disrupt those devices that are already out there?

Or is it really that BLUR is taking a little longer to update on the new OS versus just the operating system update?

So in terms of CDMA infrastructure sales, it was a key component in the strength of our performance in terms of cash generation and earnings for Q1.

And it is also very important as a component in the way we have guided you to Q2.

For us, as you know, CDMA is US-centric and really Japan with KDDI.

I think that one of the things that is happening is with the explosion of just the mobile Internet smartphones, it is putting more and more requirements for bandwidth on all networks in all geographies.

We are a subsequent beneficiary of that as it relates to CDMA in the form of Verizon and Sprint, more Verizon than Sprint, which is a bigger customer for ours on the infrastructure side proportionately, and KDDI.

And all we are saying in terms of the full year, while the strength is strong and carriers are upgrading their networks, EVDO, and ultimately positioning themselves for LTE downstream, that we have a more favorable product mix in the first half of the year than in the second half of the year.

But we still expect double-digit performance for networks as I guided in the full year in the 10% to 11% range.

And if I could just comment on your upgrade question.

First of all, as you know, we have upgraded DROID to 2.1, and it is progressing extremely well.

The DROID upgrade is largely complete, so most DROID devices -- I actually know the percentage -- but have been upgraded.

Obviously the users have to take a small action to participate in that upgrade.

Rolling out the upgrade on milestones in Europe and some other countries and other devices, CLIQ and others are slated for second-quarter upgrade, we actually rolled out our fourth software upgrade on CLIQ on T-Mobile's network just a week ago, and on CLIQ XT we will roll out our first upgrade.

In some ways I think this migration over the software upgrade is very new thing for a lot of us.

And I think I would say to you that Motorola, along with a handful of other people, has learned how to do that effectively.

And I think that that gives us a competitive position.

If you look at what are the factors in the timing of upgrades rolling out with access to software, software visions related to carrier services, so it's not just a matter of taking Android software.

A lot of phones that we deliver have to incorporate carrier branded services, and some of those services are migrating to new versions as well.

So when we do those software upgrades, we need to go to newer versions of carrier-branded services.

Clearly BLUR has to be upgraded.

There are some dependencies on hardware.

So 2.1, as you know, was released on one chipset.

Our DROID was another chipset.

There are some minor migrations that need to be done there.

There is the carrier backend testing and certification process.

There is the carrier push plan.

And, frankly, all parties learning as to how to do this well.

I think those are the things that are taking a little bit of time.

I expect -- I think we are at the leading edge of getting this done right, and I think we are learning and I'm hoping that this will become a competitive advantage for us.

It allows us to decouple hardware launches sometimes with software feature and upgrade the software feature, and that makes our development process more agile and flexible.

So we are here very focused on making sure we do this well.

I will now turn the floor back over to Mr.

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

I would like to remind everyone that details outlining our non-GAAP adjustments, GAAP to non-GAAP P&L reconciliations, and other financial information can be found on our Investor Relations website.

An audio replay, along with today's slides, will also be available 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.

Plans and progress relating to the potential separation of Motorola's businesses into two independent publicly traded companies, including the expected filing date of the Form 10; guidance for Motorola's earnings-per-share for the second quarter of 2010; future growth in digital households; expected timing for the announcement, launch and shipment of new products; expectations for the volume and financial impact of handset shipments, including smartphones in 2010; and guidance for future sales, operating expenses, margins, profitability, ASP, demand trends or market share for each of Motorola's businesses and their products.

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

Information about the factors that could cause such differences can be found in this morning's press release on pages 17 through 29 in Item 1A of Motorola's 2009 annual report on Form 10-K and in Motorola's other SEC filings.

Thank you for joining us this morning.

This now concludes our conference call.

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

A replay of this call will be available over the Internet in approximately three hours.

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Have a wonderful day.