摩托羅拉 (MSI) 2011 Q1 法說會逐字稿

Good morning and thank you for holding.

Welcome to the Motorola Solutions first-quarter 2011 earnings conference call.

Today's call is being recorded.

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

The presentation material and additional financial tables are currently posted on the Motorola Solutions 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.

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

(Operator Instructions).

I would now like to introduce Mr.

Shep Dunlap, Vice President of Investor Relations.

Mr.

Dunlap, you may begin your conference.

Thank you.

Good morning.

Welcome to our conference call to present Motorola Solutions first-quarter results.

With me this morning are Greg Brown, President and Chief Executive Officer of Motorola Solutions; Ed Fitzpatrick, Senior Vice President and Chief Financial Officer; and Mark Moon, Senior Vice President in Sales and Field Operations.

Greg and Ed will review our first-quarter results, along with commentary, and Mark will join us for Q&A.

We have posted an accompanying earnings presentation and press release at motorolasolutions.com/investor, and I encourage you to review these materials.

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 Solutions, and we can give no assurance that any future results or events discussed in these statements will be achieved.

Any forward-looking statements represent our views only as of today and should not be relied upon representing our views as of any subsequent date.

Forward-looking statements are subject to a variety of risks and uncertainties that could cause our actual results to differ materially from the statements contained in this presentation.

I will now turn the call over to Greg.

Thanks, Shep.

Good morning and thank you all for joining us today.

I would like to start by saying that I'm very pleased with our first-quarter results as we delivered excellent revenue growth with improved profitability and cash flow.

Highlights for the quarter included sustained global demand across all regions, improved operating earnings, disciplined expense management and important examples that demonstrate our purpose, which is to help customers be their best in the moments that matter.

This morning Motorola Solutions reported sales in the first quarter of $1.9 billion, an increase of 8% from Q1 of last year.

On a GAAP basis, net earnings were $1.06 per share from continued operations compared to $0.29 in the year ago quarter.

Non-GAAP earnings from continuing operations, which exclude intangible amortization, stock compensation and highlighted items were $0.54 per share, a 64% increase from $0.33 per share in Q1 of last year.

Our Government segment posted sales growth of 5% with improved operating margins, demonstrating continued resiliency and demand for our Public Safety solutions.

In the Enterprise segment, sales increased 14% from last year with higher operating margins as we saw robust demand for our solutions from customers across all the major geographies we serve.

I'm now going to turn the call over to Ed Fitzpatrick to discuss our financial results, as well as reporting changes.

I will then return to discuss operational highlights and provide a little additional color on the business.

Ed?

Thanks, Greg.

Before I review the financial performance, let me briefly highlight some changes we have made to our reporting.

On April 14, we filed an 8-K with updated financial information for Motorola Solutions' historical GAAP and non-GAAP financial results presented in two product segments, Government and Enterprise.

Our Government segment includes our two-way radio business and our Public Safety Systems business.

The Enterprise segment includes enterprise mobile computing, scanning devices, wireless broadband systems, RFID data capture solutions, and our iDEN infrastructure business.

This new segment format provides further details and insight into our sales and operating earnings performance.

In addition, the 8-K includes pro forma cash flow statements for 2008 through 2010.

Now onto our financial results for the quarter.

Sales for the quarter grew 8% year over year, driven by Enterprise business strength, continued resiliency in Government, and growth in all regions.

Sales growth continued in our Government business with first-quarter sales of $1.2 billion, an increase of 5% from the prior year.

Enterprise sales demonstrated sustained momentum as the segment grew 14% to $695 million driven by robust demand in EMEA and stronger than expected demand for iDEN.

Although iDEN sales increased in Q1 compared to last year, we still expect a full-year decline for this business.

On a GAAP basis, earnings from continuing operations net of taxes were $365 million, and EPS was $1.06 per share.

Non-GAAP earnings were $0.54 per share compared to $0.33 per share a year ago.

For the rest of this call, we will refer to non-GAAP financial measures.

Gross margin percentage in the quarter was 50.3%, up from 49.3% in the same quarter last year.

The increase in gross margin was due to favorable product mix in both segments.

Operating expenses of $681 million were roughly flat in absolute dollar terms compared to the year ago quarter.

We continue to focus on expense management and executing our previously disclosed plan to reduce G&A costs, while making the necessary investments in R&D and go-to-market capabilities.

We are on target for removing separation-related G&A overhang costs by the end of Q2.

Our operating earnings for the first quarter were $267 million or 14.2% of sales compared to $175 million or 10.1% in Q1 2010.

This 53% increase in operating earnings was driven by increased sales and gross margin, coupled with flat operating expenses, which demonstrates the operating leverage of our P&L.

Total other income and expense was a net income of $3 million in the quarter compared to a net expense of $11 million in Q1 2010.

The positive result in this line-item was driven by investment and foreign currency gains, as well as lower interest expense due to adjustments in tax-related and other interest accruals.

These net benefits favorably impacted Q1 by approximately $35 million or $0.11 per share relative to our outlook we shared with you last quarter.

We expect this line to return to a net expense of approximately $30 million to $40 million in future quarters.

Our effective tax rate was 33.7% for the quarter, and we still expect the tax rate for the year in the range of 35% to 37%.

However, as we have shared with you before, our cash tax rate is expected to be 20% for the next seven years as we utilize over $1 billion of available tax credits.

We generated $231 million in cash flow from operations and $204 million in free cash flow.

We also generated approximately $217 million in operating cash flow from discontinued operations related to the network's business in Q1.

From a working capital perspective, accounts receivable days were essentially flat at Q4.

Inventory turns decreased sequentially from 8.7 to 7.2 times, which is attributable in part to lower seasonal sales in Q1.

We are focused on managing and continuing to improve our working capital over time, particularly inventory turns.

We ended the quarter with $6.2 billion in cash and investments and $2.7 billion in debt.

Our cash balance is now 35% in the US compared to 31% after separation, an increase driven primarily by repatriation activities.

We will continue working towards our goal of greater than 40% US cash balance by year-end.

Turning now to our Q2 outlook, we expect sales growth of 4% to 5% over second-quarter 2010.

This factors in the impact of approximately $15 million in reduced sales from the modules business we divested this quarter, lower iDEN revenue, and potential supply chain disruptions in Japan.

Our outlook is for non-GAAP earnings of $0.46 to $0.51 per share from continuing operations.

This compares to non-GAAP EPS in Q2 2010 of $0.37 per share.

Consistent with prior quarters, this outlook excludes expenses for stock-based compensation and intangible amortization of approximately $0.18 per share and items historically highlighted in our quarterly earnings releases.

The Company now expects full-year revenue growth to track towards 4% to 4.5%.

This reflects growth of 5.5% to 6%, offset by a decline in our iDEN business and $45 million of reduced revenues from the modules business we divested this quarter.

With this growth, we now expect operating earnings in the range of 16% to 16.5% of sales.

I will now turn it over to Greg for segment highlights from the quarter.

Thanks, Ed.

In Government our sales for the quarter were $1.2 billion, up 5% over Q1 of 2010.

We saw healthy growth in all regions, except for EMEA, where continued challenges in Western Europe offset demand in other parts of the region.

Our profitability also improved with operating earnings representing 11.7% of sales this quarter compared to 8.7% in Q1 of last year.

This increase in operating earnings was driven by higher gross margins due to favorable product mix and a continued focus on operating expense management to drive further operating leverage.

Although the general funding environment remains challenging in the US, there are some signs of improvement as tax receipts continue to increase and approach 2008 levels.

In addition, our customers continue to prioritize their Public Safety communication needs, and we remain focused on helping them find ways to fund system upgrades, improve interoperability and meet spectrum, narrowbanding requirements.

Examples of key wins that demonstrate our solutions to meet these needs include a $14 million award in Cortland County New York to enable numerous public safety agencies to communicate and improve coverage; a $16 million regional system with East Bay Regional Communications to serve the San Francisco Bay area; a $10 million award in Brown County, Wisconsin to implement an ASTRO 25 system that will improve interoperability and enable more efficient use of spectrum; and finally, in Pennsylvania we won a $31 million award to upgrade Berks County from a conventional system through the benefits of ASTRO 25 trunking.

We announced plans to begin shipping our ASTRO 25 systems with P25 Phase 2 TDMA trunking later this year.

This is part of our standards compliant next generation Public Safety portfolio that is transforming Public Safety operations and strengthening the mission-critical communications core.

Nearly a dozen customers have already contacted with us to deliver P25 TDMA functionality.

In TETRA we secured multimillion-dollar projects with Airwave in the United Kingdom and with a Chevron affiliate in Kazakhstan to service one of the largest oilfields in the world.

In Latin America we won new multimillion dollar projects for ASTRO 25 radio systems with public safety agencies in Colombia and the civil police in Sao Paulo, Brazil.

Our innovation continues to earn recognition from our customers and industry as well.

This year we earned prestigious Red Dot Awards for the designs of our industry-leading APEX portable radios and our mission-critical wireless earpiece.

And American Cop Magazine recently featured our solutions for in car digital video, mobile workstations and the APEX Integrated Radio Control Head.

With respect to our next generation Public Safety initiatives, during the quarter we announced with Verizon Wireless a first-of-its-kind solution that combines a standards-based Public Safety broadband network tailored for mission-critical operations with the benefits of a leading public commercial broadband LTE network.

As a result of this alliance, Public Safety agencies will benefit from economies of scale, site sharing, optimized network design and an open standards-based approach.

The alliance allows agencies to supplement their mission-critical core platforms with the rich media services and the increased capacity and coverage of Verizon Wireless's public LTE network.

With bills now in the House and Senate in support of our first responder customer's position, there is optimism about prioritization of the 700 MHz D-Block to Public Safety, which would efficiently and effectively double the spectrum available for a Public Safety grade broadband data network.

We have been investing in R&D for next generation Public Safety for over two years, and our expertise in both public and private networks makes us uniquely qualified to deliver standards-based LTE solutions to our Public Safety customers.

Moving to the Enterprise business, sales in our Enterprise segment were $695 million, an increase of 14% from Q1 of 2010.

Operating earnings expanded to 18.4% of sales, up from 12.7% last year with robust EMEA demand and improved contribution from iDEN.

Excluding iDEN, Enterprise operating margins still increased and were consistent with our Government segment.

Retail, the largest vertical segment we serve in Enterprise, continues to invest in technology to empower workers and generate sales growth.

In January we released the latest results of our annual retail study, which indicated 55% of retailers cited shoppers as better connected to information than their own store associates.

When shoppers received guidance from a retail associate equipped with a handheld mobile computer, over 43% reported that the device improved the overall shopping experience.

The return on investment on our retail solutions is further supported by research that suggests nearly a third of retail store visits ended with an average of $132 unspent because of out of stock items, limited store associate assistance, and long checkout lines.

An example of how retailers are investing in technology to respond to these trends is a $24 million award that we recently received from a large US big-box retailer to deploy in-store wireless infrastructure, mobile applications and security.

Another area of growth in Enterprise is among our transportation and logistics customers.

We announced a $20 million mobile computing solution with General Logistics Systems in Germany and another award with Correos in Spain, both to further enable world-class logistics and package delivery.

Additionally we will continue to grow our Enterprise services portfolio with mobile security and network management solutions.

During the quarter we expanded our scale of these offerings with additional large retailers and financial institutions.

The RFID Journal recently recognized Motorola Solutions as the best-known brand in the RFID industry.

Our RFID solutions enabled businesses to advance to new levels of efficiency with real-time asset management and ensuring that the right product is on the shelf and available for the customer at the right time.

Furthering our leadership in RFID, we recently introduced a contactless mobile computer based on our premier MC75 Enterprise mobile computing platform, which now features high frequency RFID and near field communications.

Now turning to a total regional view for the Company, our sales grew in all four geographic regions over the same quarter a year ago.

North America grew in mid-single digits, while EMEA grew in high single digits fueled by continued strength in Enterprise mobile computing.

Asia continues to grow with favorable economic trends and expanding infrastructure for transportation, public safety, utilities and healthcare.

Latin America's performance is in part attributable to growth in iDEN, investments in infrastructure, adoption of enterprise mobile computing, and demand for radio communications systems.

From a go-to-market perspective, we hosted a channel partner kickoff events in every region with 5000 attendees representing our top worldwide partners for sales and product training.

Our Motorola Solutions partner and power channel, which spans both Government and Enterprise, was also awarded a five-star rating in CRN Magazine's 2011 Partner Program Guide which recognizes outstanding partnership opportunities and support.

We saw examples this past quarter where our equipment and employees delivered in moments that mattered.

Following a 6.3 magnitude earthquake in Christchurch, the second largest city in New Zealand, we contributed to rescue and recovery by sending wireless broadband gear, 250 TETRA mission-critical radios, and other types of support.

Our technicians on the scene worked with emergency services personnel to ensure systems were configured for full communications capability and integrated seamlessly with local emergency networks.

In response to the catastrophic earthquake and tsunami in Japan, we donated over 1300 radios and other equipment to assist with rescue and recovery.

Our employees in Japan are safe and have returned to work, and we will continue to support our partners in Japan during this rebuilding effort.

I am proud of the responses from our employees worldwide, including their personal donations and our Motorola Solutions Foundation contributions exceeding $0.5 million of disaster relief for both Japan and New Zealand.

We continued to refine our overall portfolio to strengthen our focus on mission-critical communications solutions for Public Safety and Enterprise.

With this focus in Q1, we divested of our modules business, and we also sold a production facility in Israel.

Several weeks ago we announced an amended agreement with Nokia Siemens for the sale of our Networks business for $975 million in cash, plus $150 million in retained accounts receivables.

We expect net cash proceeds of $1 billion after taxes, Accounts Receivable collections, assignment fees and other transaction fees and expenses.

A significant amount of the net proceeds will be received in the US.

In addition, our discontinued operations from the Networks business generated approximately $270 million in operating cash flow during Q1.

We received regulatory approval in China on April 20, and with all of the remaining closing conditions satisfied, we are scheduled to close this transaction with NSN tomorrow.

This will represent another significant accomplishment toward optimizing our capital structure, and we will provide greater clarity on our capital allocation decisions within the next 90 days.

Overall our Q1 results were an outstanding start to the year, and we are well positioned for continued success with a strong balance sheet, a commitment to innovation and exceptional customers and employees.

Thanks, Greg.

Before we begin taking questions, we want to remind callers to limit themselves to one question and one follow-up so that we can accommodate as many participants as possible.

Operator, please instruct our callers on how to ask a question.

(Operator Instructions).

Avi Silver, CLSA.

Congratulations.

Good numbers.

Just given the magnitude of the topline and the operating margin beat, can you walk us through what factors led you to exceed expectations in the quarter?

Were there any major mix benefits there?

And I guess in the context of your guidance, can you talk about why EPS should decline sequentially with revenue increasing 7% quarter over quarter?

I can't recall margins ever being down in Q2 for solutions or for the former EMS business.

So, first of all, thanks.

In Q1 the strong exceeding of the expectations over $0.32 a share to $0.54, $0.11 of that were from the operating dimensions of the business and $0.11 of that were below the line.

So when you look at it, quite frankly, we just had stronger volume and a favorable mix.

iDEN was up.

We did not expect it to be up in Q1 on the infrastructure side, and quite frankly, we were more aggressive in exceeding some of the expense reduction targets than we had originally forecasted.

So net/net overall demand was strong in all four regions.

Mix was favorable.

iDEN was a positive surprise driven by international expansion, and we were more successful reducing costs than we had originally thought as we committed to get these costs out of the business in the first half.

We also had some favorable foreign exchange.

So think of it as $0.11 from the business and $0.11 below the line.

And on the below the line items, we don't expect those items to recur, and that's why I said, hey, we expect that line to be expense going forward in the $30 million to $40 million range.

We did have some favorability on gains of investments in businesses.

As Greg mentioned, the Modules business, we sold that business.

We also had some other investment gains and some tax-related interest favorability on some favorable rulings in international locations on taxes.

So all those, that favorability, $0.11 per share will not recur, so that is why you see some of the anomaly Q1 to Q2.

If you take those unusual items out, you will see that we are growing, and we are improving the earnings-per-share from the operations of the business.

And just one other -- a couple of points on the Q2 guidance.

So we are guiding revenue growth of 4% to 5%.

When you normalize for the divestiture of the modules business and you incorporate the way we believe iDEN will perform vis-a-vis a decline, that 4% to 5% revenue growth looks closer to 6% from the core operating dimensions of the business.

We guided $0.46 to $0.51 earnings-per-share.

That is up nicely over Q2 of last year of $0.37 a share.

So we are still getting very strong EPS expansion, and we are growing the topline well.

Remember also, Q2 of last year was a 12% quarter in revenue growth.

It was actually, I think, the beginnings of the turnaround of the economic recovery, so it is off of a very high comp from the year-over-year quarter.

That should help you dimensionalize the thinking around how we are moving forward.

Jeff Fidacaro, Susquehanna.

I was wondering if you could address on the Government side the sales up 5%, a bit better than we thought.

Can you talk about the outlook for the rest of the year?

And then, if you could, even break it down between the North America and Europe.

I noticed North America you are saying was up mid-single in total, and Europe was up high single digits.

Can you talk about that as respect to the Government side?

So we were really pleased with the Q1 performance of 5% growth in Government.

We have continually mentioned the fact that not all Government spending is equal, and I think what the quarter demonstrates is the prioritization that agencies across the globe continue to put in terms of the privatization of mission-critical communications.

Maybe to talk a little bit about the growth in North America and other regions, I will let Mark Moon comment as well who obviously runs worldwide sales and field operations for the firm.

Thanks, Greg.

So, as Greg commented earlier, we did grow Government in every region with the exception of Western Europe, and in most of the other parts of Europe, Government grew as well.

So I think that was to be expected.

What was not expected necessarily, even though we constantly continued to be bullish on Government growth in North America, was that it would be as strong as it was.

North America grew 6% in the first quarter, and as we look out through the end of the year, which was your question, we believe that growth will continue to remain similar to what we guided early on in the 4% to 6% range.

So we see Government growth continuing to be strong.

Quite honestly, we think it is very strong in the Middle East and Africa with some big opportunities.

It is very strong in Asia, and we hope that Western Europe will also recover as we go through the year.

So we are expecting good growth and similar to the guidance we gave early in Government as we go forward, and we continue to see peaks in the Enterprise growth, which is complementing that.

And just a quick follow-up, so on that side, too, you do have long lead times in that visibility, correct, as far as contracts and bids?

We've got long -- a little bit of both when you think about them.

I mean we've got good visibility to the funnel and the contracts we are working.

We have got good backlog.

When you look at the makeup of our backlog, the majority of that backlog is in the Government space.

And once you have got these large contracts, then that again stems out not necessarily lumpy but over an extended period of time.

So because of our market position and because of where we are and what is going on, we feel really good about the comments that I'm making as far as projections for the rest of the year.

Matt Thornton, Avian Securities.

Congratulations on the results.

Greg, I don't know if you mentioned this, but what was backlog for the quarter?

Were we up sequentially year on year?

So backlog, I did not mention it in the prepared remarks, but it is flat to ever so slightly down, which we were actually pleased with in combination with pruning 8% revenue growth in Q1.

Got you.

And that is on a sequential basis or a year-on-year basis?

Both.

It is actually -- it is like 1%, 1.5% both sequentially and year over year.

Okay.

Perfect.

And then can you just quantify -- you guys talked about the modules business that you sold in the quarter.

Is that material?

Can you quantify what the revenue run-rate was there?

The revenue run rate was $60 million a year.

About $60 million a year.

Okay, perfect.

And then the cost reductions, it looks like you guys are a little bit ahead of plan of eliminating that $150 million.

Where are we on that?

Is that completely removed?

Are we halfway through that?

Any sense as to what is left there?

I think we have made really nice progress.

We also talked last quarter that we really started this in the fourth quarter, so I think we're right on track.

We had a little bit of favorability as Greg mentioned in the quarter.

We still expect the full year to be in and around taking out the $150 million that we had talked about.

Perfect.

And one last question, if I could, on the NSN transaction that is set to close tomorrow, the transaction price was renegotiated from $1.2 billion down to $975 million, but it looks like the structure on the assets are the same.

Can you walk us through what the change was and what the rationale for the price change was?

Yes, so, first of all, it gave us greater certainty around closing.

We also received concessions as part of that amended price.

And we have the benefit -- we have the benefits of the earnings and cash for the first four months of this year.

For the first quarter, it equates to additional cash flow of $217 million.

That was not originally contemplated when we struck the deal and assumed it would close by 12/31.

So we have always been assuming approximately $1 billion plus or minus net of tax, and that is what we will achieve tomorrow when we close the deal.

So we are thrilled with that transaction.

Okay.

That makes sense.

Perfect.

Thanks and congrats again, guys.

Pierre Ferragu, Sanford Bernstein.

One more question on your Government business.

I'm very impressed by the radiance of the business, and based on your comments, you have a reasonably good visibility on the radiance for the rest of the year.

My question would be, how would you assess any risk on that front of further Government spending cuts, further budget reviews that would put at risk this outlook, I don't know, on the [six to 18 months horizon]?

I would say this, as we mentioned, Government was good and pretty strong across all regions with the exception of Western Europe where we thought it would be down.

So we will continue, I think, to see a challenging Government environment in Western Europe.

But that said, with the backlog and the visibility, we feel reasonably comfortable that it can continue to grow in the other geographies.

In addition, the Obama administration, if we move toward the US, has solidified with Congress the 2011 budget.

At the end of the day, when we look at the 2011 budget on the margins, it does not look like it disrupts or materially contracts any available grant money here in the US.

So we look at the US grant and federal funding environment as generally constant in 2011, which is favorable.

And, of course, there are some other things that are driving continued Government spending.

There is a narrowband mandate here in the US where new radios sold after the end of 2012 have to have a certain technical requirement that that will allow for and continue to incent public safety agencies to refresh and upgrade radios to those new narrowbanding compliant subscriber devices over the next 18 months.

So generally speaking we are always looking at it closely.

And in the US, certainly it dominates the headlines around the deficits at the state level.

But our experience at least historically and again demonstrated in Q1 is that not all Government spending is equal, and public safety mission-critical communications, interoperability and adding technology like video surveillance or other types of solutions that will augment and help pressure on headcount in Public Safety continues to put us in a favorable position.

So we have incorporated all those thinking into the Q2 guidance and the full year, and we will continue to stay diligent and watch it closely.

And what about Europe?

Where do you see the situation stabilizing there or improving, or do you think there is a risk of further cuts in budgets and the situation deteriorating?

I think the situation in Europe is mixed.

When we describe what we call our European region because it is Europe, Middle East and Africa, obviously spending in the Middle East and Africa is pretty strong, and we are working on a number of very large opportunities there.

Western Europe is where we have been seeing constriction, but there are some catalysts for spending like preparing for the Olympics, other things that are coming, and we are seeing, as we mentioned, this contract with Airwave, which was directly related to those kinds of things.

We also had been declining in Western Europe for the past four quarters, which we predicted all along.

I think now we're getting to a point where we were also coming off some higher comparables which made the decline there.

As we go forward, I think it will stabilize in Western Europe.

I don't expect strong growth, but we will get our growth out of the other regions.

And then the other regions of the world I expect to continue to grow at the consistent pace that we have outlined previously.

So, again, kind of reiterating, we feel really good about the outlook that we provided.

Tavis McCourt, Morgan Keegan.

Great start to the year, Greg.

Kind of a big picture question.

We are hearing a lot of -- I should not say a lot -- but some activity of Android operating system handsets getting into applications like U.S.

Army and supply chain.

What I'm wondering is, in the breakup between your business and Sanjay's, is it a pretty clean split in terms of opportunities that you are able to go after that are clearly rugged, or is the split based on operating system?

And kind of talk about your ability to shift operating systems from Windows CE to Android if it comes to that?

And then add just a couple of financial details.

The DSOs you put up this quarter and the cash conversion cycle, how should we think about that longer-term?

Is this a good representative quarter, or does it get better from here or worse from here?

And then the final financial question is, on the balance sheet, there is about $2.8 billion of deferred tax assets.

Are there any allowances on that, or is that a clean number?

So, on the separation of MSI and MMI, yes, I think it is pretty clean.

The mobility group has responsibility for consumer devices, which, at this point to date on the smartphone side Sanjay has been Android-centric.

On the Enterprise side, which is our purview, we have been Windows-centric, Windows Mobile, now Windows Handheld.

We stay in close touch with Microsoft.

I had talked to Ballmer just a few weeks ago, and we are continuing to stay very closely aligned to ensure that we are working together and proactively on the Windows roadmap and how it involves whether it is Windows Phone 7 or Windows 8 and the implications to our Enterprise customers.

We have, as you know, exclusive use of the brand in the Enterprise and Government side or military side that you referenced.

But, at the end of the day, there is nothing that limits our ability to either adopt Android or another operating system.

And over time, over the next several years, I think that you see the development of what is called HTML 5, which will lessen the importance of EOS on the individual device and allow the manageability and apps ecosystem to be written agnostic of whatever, whether it is Microsoft for Android on the device.

The fact of the matter is we are Microsoft-centric today.

There is nothing that limits our ability to go Android.

We may choose to do that on certain specialty devices either for the Enterprise or perhaps in a battlefield or Public Safety application.

But we continue to work that, and that is being worked in Holtsville, New York with the Device group, with our Mobile Computing group led by [Gerish Richi].

But there is definitely opportunity there.

On the working capital front, yes, we do expect to improve as we go throughout the year.

The first quarter typically is our lowest quarter.

I would say just given the way the math works we will improve over time as we get more flow through on the cost of goods sold line on inventory.

But, on top of that, I think we still have some operating improvements to make, particularly in inventory, with our sales and operations planning process as we also implement an ERP, a single instance ERP over the next year or so.

We are in the process of doing that.

We will get better information from the start from the sales force all the way through operations to distribution.

So we will improve on the working capital throughout the year.

The second part of your question related to deferred tax assets and valuation allowances.

We do have about $250 million of valuation allowances remaining on the $2 billion plus of overall tax assets that we have, and that really relates to the foreign operations that we have on a global basis.

Peter Misek, Jefferies.

Just a question follow-up on the cash flow.

Your cash generation looked pretty solid even with some working capital puts and takes.

As you look out through the year, I think your cash generation should be pretty solid.

Can you walk us through what your plans are for returning cash or uses of cash for the rest of the year?

That would be really helpful.

Thanks.

Sure.

I think your question really alludes to the capital allocation question that we have got and that we have given you some feedback in the past.

So let me first outline for you what we have said in the past and where we're going to go from here.

We have talked about executing on four things.

One, completing a separation which we have now done.

The second item is attaining solid investment grade at all the rating agencies.

We have gotten that from two of the three rating agencies.

We do hopefully expect to get that near-term third agency pumping us up to solid investment grade.

The third thing is closing the networks transaction, which we now expect to be imminent.

Hopefully we will close tomorrow.

The fourth item was driving cash repatriation to the US, getting to that balance that I talked about earlier greater than 40% by the time we exit the year.

We have also talked about paying down -- we are committed to paying down the $600 million debt that comes due in November this year, so we will do that.

In the meantime, as we have been trying to execute all these things, we had gotten very close to completing the initial phase of our capital allocation framework, incorporating our forecasts, future forecasts, as you talked about cash flows, benchmark data that is out there, and investor feedback that we have heard over the past quarter or two.

With all that said, we will plan to come back to you in the next 90 days with our capital allocation decisions as Greg mentioned on the call earlier.

Perfect.

If I could ask a follow-up question, in your prepared remarks, you mentioned the federal LTE network.

Can you walk us through any thoughts you have as to timing of some of these large network bills and how you plan for that?

It looks like it would be a pretty serious network resource drag or a network resource issue to manage.

It may take up a lot of your capacity.

Can you just walk us through how you think about that and when the potential timing could be?

So we have been investing in the LTE Public Safety both infrastructure and device initiatives for over two years, and we have been doing that obviously with no financial return to date.

We don't expect LTE Public Safety to be a material contributor at all in 2011 either.

We have two awards, San Francisco BayRICS and Harris County, Texas.

We are working closely with both of those customers and would expect to start to deploy some of the resources and the systems associated with the implementation milestones in Q4.

I would not call it a drag on resources; I would call it a redeployment that we have anticipated and plan for both financially and operationally.

It is in the Product group under Bob Scheffler, and we have redeployed R&D resources within our cost structure, and we have put a high priority on it.

I think Public Safety LTE is the biggest opportunity we have in Motorola Solutions looking out for the next three or four years.

We have talked about that there is $1 billion plus in the funnel that we work.

We have to win it, but it is out there.

We have also sized this opportunity incrementally to the core business of about $3 billion to $5 billion over the next five years.

So Mark Moon is working on the go-to-market sales organization and necessary partnerships, which we reference with Verizon Wireless, and we're pretty excited about it.

And I want to emphasize that it kind of brings -- it capitalizes on our expertise in Public Safety, and it also will bring the benefits to the public safety agencies of an open standards approach.

So with that comes economies of scale.

With the agreement with Verizon Wireless comes a substantial amount of site sharing, which I know politically and regulatorily is targeted in Washington DC.

They want an open standards approach.

They want the benefits of public/private.

You want to capitalize on the existing infrastructure that has been spent on Public Safety, and we want improved interoperability.

This opportunity is incremental to our voice narrowband Public Safety business, and we feel pretty good about it.

The only clarification, I think you made a comment about the federal network buildout, and I think there is a lot of discussion around what happens.

Today the plan is to really let this be a buildup of a lot of local systems, if you will.

Greg described two that we are undertaking today.

So that the ultimate concept would be a network of networks.

Clearly focused exactly on what Greg highlighted and what Washington wants to ensure is that we make sure we keep interoperability and everything is standards-based to allow that to happen and to allow these network of networks to look like an overall nationwide network.

And we are committed to stand behind both of those things as we go forward and, as Greg said, excited about that opportunity as we move forward.

Ehud Gelblum, Morgan Stanley.

A couple of questions.

One was, how big was iDEN this quarter?

You said it was larger than you thought.

So we don't break out the individual quarter, but to reference you back to what we said in the financial analyst meeting, it was $400 million, approximately $400 million last year, and we thought it would be down to approximately $300 million in 2011.

It was stronger, it actually grew in Q1, but we still expect the decline structurally overall from the business.

It grew quarter over quarter and year over year?

Yes, I think that is right.

It is right.

It grew both sequentially and year over year, and it was driven internationally by Nextel International adding subscribers.

We actually expected it would be the first quarter to be roughly flat and then the decline to happen second quarter through fourth.

So just more color.

Now when you say you expected it to be $300 million this year, when you say now it is going to be down, it is going to be greater than $300 million?

Probably, yes.

If I normalize the operating margin of Enterprise to the 11.7% operating margin of Government, it looks like there was an additional $4 million to $6 million of operating income you got out of the extra iDEN or [inside] of iDEN, plus a base.

I can get somewhere in the 50s, $50 million to $55 million of operating income coming out of iDEN.

If you get $100 million, $120 million, $130 million in revenue, I mean that is like 50% margin.

Is that the right way to look at it?

We are not going to get to that level of detail in that business.

As we talked about, this is the business that will be declining over time and become less a piece of the portfolio.

We did have some favorable results of that business which helped the results.

But overall the growth in the business really is what drove the improved results.

iDEN did help a bit because it was actually up, and we planned it to be flat during the quarter.

But we are not going to get to that level of detail.

And let me make sure that I did not drive past your question.

When you said you expect it to be greater than $300 million, I answered yes.

We now -- we don't think the decline -- it will decline, but probably not as significantly as we talked about in Q4.

So it will be up a little higher than $300 million but still structurally declining.

I wanted to make sure we did not talk past each other.

I will just add one other thing.

As you look at our results and the results of the Enterprise business, we talked about that the iDEN business is a mature business.

The R&D investment in that is really more sustaining as opposed to a lot of new product introductions, if you will.

So that business is a bit more profitable than the other business.

Without the impact of iDEN, the Enterprise business and its profitability, when you look at it compared to Government, is roughly comparable for the quarter.

And I will tell you for the full year, as we said before in prior meetings, we expect it to be roughly comparable.

When you back out iDEN, the profitability of the Enterprise business should be roughly comparable to the Government business when you look at OE.

It may be different quarter to quarter, but overall you should think about it being comparable.

Okay.

That makes sense.

I just wanted to make sure I was right on that.

Western Europe, that seems to be a problem.

Two things, how large is Western Europe?

Can you help us quantify what that looks like on your Government side?

And two, is the problem essentially governments that clearly don't have enough money to spend and are grappling with their own budgets, or is there a competition issue there with TETRA?

So Western Europe Government is challenging.

Western Europe Enterprise is strong.

The challenges in Western Europe Government are structural austerity and funding, not competition.

So I think competition has been constant.

I don't think there has been a material change one way or another.

So it is more just the headwinds that they have and the challenges in many of the countries there economically and the deficits that they are battling back from.

Okay.

Can you help us quantify how large Western Europe is for you on the Government side?

Obviously we don't talk to that level of detail, but let me give you some color around what we have said in the past.

If you think about your overall EMEA being roughly 22% or so of our business, the business in EMEA different than in the other parts of the world is relatively similar.

Worldwide we have talked about being 65% Government, 35% Enterprise.

In Europe it is roughly 50-50.

Within that Europe, the business in Western Europe versus the rest of Europe is also roughly 50-50.

So all of a sudden as you break this down to about a quarter, the size of Western Europe is probably 6%, 7% of our overall business.

And, again, it is only flat to slightly down.

So we are talking about it, but in the scheme of things, not really a big impact that we cannot overcome.

Obviously I wish Western Europe Government was going as well as everywhere else, but I don't see this as a big impact, but as you narrow it down to just that Government.

And, as Greg pointed out, Western Europe Enterprise is growing and has been growing much faster than expected.

That makes a lot of sense, and that is very helpful to quantify it.

Last thing, you talked about a favorable product mix.

Ed, I think he mentioned that.

Was that on both sides, Enterprise and the Government, and can you tell us what products did better, which ones did not do better, and what impact that had on margins?

And if you can relate that to next quarter, do you expect those same pieces to do well next quarter, or do you think it is going to revert?

So I will give you a couple of points of detail.

They both did improve year over year.

I would say the government improved a bit more, and I would say the government probably a bit better on the mix than on the Enterprise side.

So a better improvement I think year over year in the Government.

I will not get into the color.

It can fluctuate as we have talked about before by as much as a percent quarter to quarter.

We think it stays relatively stable.

Year over year we did have a nice improvement given the volume uptick, some favorability for sure in the throughput at the factory, so some favorability there, but mix probably really drove more of that.

I expect it to be relatively stable in this range.

We talked about margins would be about 50%.

That is the way I would think about it going forward.

And what is that mix when you say it's favorable, what products did better and which ones did worse?

I don't think we need to go to that level of detail.

Because, as I said, it is not going to be something that you can trend going forward.

It will fluctuate quarter to quarter.

As you think about it, you should think about approximately 50% modeling as you go forward.

Brian Modoff, Deutsche Bank.

So guys we can expect some type of decision around dividends, your dividend policy in the next 90 days or so, I guess, is one of the things you are saying.

And then the second question is, what percent of your business can you remind us is book versus ship on a given quarter?

And then finally, in terms of North American Government, what percent of it is federal versus state and local?

So I will take the first one, and then I will kick it to Mark to talk about the federal and state and local mix.

But, as Ed appropriately walked through the framework for our thinking around capital allocation and as we have said before, we totally understand that there's opportunities with the balance sheet given our total cash and our net cash position.

We have pretty much satisfied the majority of the requirements that we were thinking about as we transition to the independent company.

We made progress on our percentage of US cash, up from 31% to now 35% of our total cash in the US.

So we will continue along the repatriation lines and look to increase that percentage.

And, as we have signaled before, we plan to pay down the $600 million debt note in November.

Having said all that, there will be opportunities.

We want to make sure that we continue to stay engaged with the rating agencies that we have talked to over the last 18 months, giving them the milestones and signposts along the way up to separation, and what we would do through separation, and then yes, within the next 90 days, we are going to give you some specificity around our thoughts and decisions around capital allocation.

So I think we are in a good position.

We acknowledge the opportunity is clearly there to return capital to the shareholders, and we have transitioned along the timeline we have outlined, and I think it is going pretty well.

So, as regards the Government business in North America, I think we have indicated in the past that it is about 58% of our total Government business, and of that, about 8% of that is federal.

The remaining would be state and local and some level of commercial sales of those government products.

So federal is a relatively smaller piece today of the overall North American Government market.

And then in terms of your turns versus booked business in the quarter, given quarter?

So I think we talked -- Greg actually in the last call talked a little bit through that.

When we go into a quarter, we go in with backlog visibility somewhere around 30% to 40%.

And then if you think about our businesses, things like service, things like our personal communication radios, those things are fairly -- and it is fairly run-rate that hits our government.

So very predictable.

Then we come down to the business that you're really trying to get to a quick turn kind of orders that we need to capture and ship in that same quarter.

What we have said in the past is that go gets usually about 20% of our number.

Jim Suva, Citi.

Congratulations to your team for a great result and a very strong outlook.

Can you help me and investors bridge the news of the government budget and hiring challenges, meaning budgets are under pressure, but politicians really don't want to cut Public Safety and have a big backlash on their hands from the community.

But yet we are seeing that the police and fire forces, instead of laying off employees, a lot of them are seeing lower enrollment in coming classes versus the retiring outgoing.

So net less individuals in the various public services for the fire, police and different forces.

Will there be a lagging headwind at some point in the future from headcount reductions, or does the systems implementation sizes trump this headwind, or how can we think about bridging what we are seeing and hearing in the news every day and your very strong results?

I think that is a very good question and one that we get asked often times by investors.

And the reality is we have been in a continuation over the last year to 18 months of reductions in headcount of Public Safety officers, policeman, firefighters.

At the same time, as we have continued to show you, we continue to grow our business in the government.

We have had lots of conversations about that.

In reality I think it is tied to a couple of pieces.

First, Public Safety, even though we may be reducing headcount, I use the comment that one of the largest major city chiefs said that said, even though we are being asked to do more with less, we have actually got to be better with less because there is no less expectation of the services we have to deliver to the citizens.

So we have got to go invest in technology, so we make the officers or firefighters that we have today more efficient and effective.

So back to ROI moving from the Enterprise space into government, that is really happening.

So we continue to sell more and more technology into this piece to kind of augment the questions that you ask around headcount reductions.

The other piece, which I think is easy to say, okay, there is a policeman or a firefighter, and for every one of those, there is one radio.

And fortunately for us in North America, that is true, and most of them are Motorola radios.

But that's not really just the essence of what we do.

When you think beyond today, we are really providing solutions.

So there is computer-aided dispatch and what we call our Integrated Command Center.

There's other systems to actually manage and articulate data so you improve situational awareness.

There's network components.

There's video components.

As we mentioned, broadband LTE.

So it's much more than just thinking about, do I equate the number of radios to the number of officers, and does that help me forecast this business?

So I think, again, it is a challenge.

I would certainly like to not see those numbers going down, but actually it plays to something that makes us be able to leverage how the tools that we have make them more effective in those situations.

Thank you.

And, as a follow-up to that and then I will be finished is, when we look at that shift, do you think that that shift is more budgetary of the reduced headcount, or is it just structurally because now in technology you have the ability to provide more services with less given technology?

What I'm wondering is, just structurally should we just build in at or we should anticipate employee numbers just gradually being under pressure and going down over time because the infrastructure and the ability to do more with less continues to rise?

I think it is strictly budgetary.

I mean all the police chiefs, the fire chiefs, the mayors, the governors that I have time to spend time with would prefer to, number one, increase productivity through technology, but also leverage more public service folks.

No one is taking these reductions as this is something we would like to do.

I think it is a necessity to do because of budgets.

Thank you and congratulations to you and your team on great results and a strong outlook.

All right.

We will take one last question.

Deepak Sitaraman, Credit Suisse.

Greg and Mark, first, just a clarification on the revised outlook.

It sounds like your new guidance for the full year is based on slightly better outlook for Enterprise and an unchanged outlook for Government.

Could you maybe give us a little bit of color on the product or service areas or geographies or even customer verticals within the core Enterprise business that are driving the slightly better outlook?

And then I have a quick follow-up for Ed as well.

So I think the improved outlook for the full year is because we are cautiously optimistic looking forward, and we had a very strong Q1.

We do think that the Enterprise -- the Enterprise business has been fantastic, and that is even against -- that is these growth numbers against pretty high comps of last year as well.

The retail vertical has been very strong.

It is a leading anchor tenant vertical for us to begin with that positioned us with the acquisition with Symbol, but Mark and I were just with customers earlier this week.

A number of big-box retailers, a number of home improvement customers -- there is a very favorable efficiency and return on investment characteristics of particularly enterprise mobile computing and the deployment of wireless infrastructure that is favorable to us.

The demand in Europe has been really strong and continues to be that.

We believe that between the backlog and the funnel of opportunities and the current customer engagement, that between that and the resiliency and consistency of government spending, allows us to be able to modestly increase the full year.

So -- and, by the way, I do want to say thanks too and I appreciate the kind words from many of you on the team.

But our 23,000 strong associates worldwide have done a phenomenal job.

The go-to-market team, the product folks, the supply chain organization could not be more proud.

We have launched this business independently.

We have been waiting for this a long time to come out of the gate strong and demonstrate the visibility and the uniqueness of what we believe to be Motorola Solutions characteristics, and it is a great start.

The only thing I would just add to that, as we talked about on the call as well, we did expect iDEN to be down, and we talked about it being down but not quite as much that.

That is also helping as well in the guidance that we have given you.

Good point.

Okay, that helps.

And Ed, if I could just a follow-up on margins.

Based on your and Greg's comments earlier about margins in the Government business being roughly -- I guess, Government and Enterprise ex-iDEN being roughly comparable, first of all, it appears that the margin profile for the government segment is lower than I think what we were previously thinking.

Is this a function of how you are classifying certain costs, or is this where it has always been?

And then secondly, besides revenue growth, how should we think about the levers for margin expansion in the Government business?

So, on the margins, let me clarify a couple of things.

We talked about the margins being comparable when you back out iDEN for Enterprise and Government.

Remember, we guided full-year operating earnings in the 16% to 16.5%.

So and we guided that for the full year, we expected both businesses to be roughly in that space when you back out iDEN.

So looking at, as you kind of look at our guidance for the full year, you could probably model it.

You start out at a lower point, and we will expect the businesses to ramp from Q1 as we get into Q4, which we expect to be our biggest business, and the margins will ramp really more based upon that as we expect gross margins to be roughly in the range that we talked about, in the 50% range.

As the sales grow, that will flow through to the bottom, and we will get the operating earnings to ramp up such that for the full year we will get in the 16% to 16.5% range.

Spending will be flat maybe to down slightly as we get throughout the year.

But you have merits that will offset that with the cost reductions that we had talked about with the overhang.

So maybe the numbers that you are seeing on Government are a bit lower then you have seen in the past because, remember, we had to reflect the impact of overhang in prior periods, and we are now getting those costs out of Q4 as I talked about last year, Q1 and Q2 of this year.

So part of that ramp will happen because of the cost being taken out; the other part will happen because of the topline growth.

I will let Mark or Greg talk about the second part of the other question on Government versus Enterprise growth and how that -- or maybe I answered it with my question.

Yes, and I just think that we have said that you could think of this as Government growing in composite kind of low to mid-single digits, and the Enterprise is very high single digits.

So you take those two, meld them together, to get the consolidated outlook.

And, as we continue to take costs out of the business, we are left with a pretty good operating leverage P&L.

So, as we can continue to get topline growth, there should be good flow through given the cost structure.

And, in short summary, you kind of answered it yourself.

I mean I think we feel even more confident -- I know I got a lot of questions when I said I was confident before about Government -- more confident than ever on what we said about Government early on.

And Enterprise in North America and Europe in particular has shown stronger growth.

So you're right.

We are just holding mostly Government where we have always said, but Enterprise looks to be even stronger.

At this time, I would like to turn the floor back over to Mr.

Shep Dunlap, Vice President of Investor Relations, for any additional or closing remarks.

Thanks.

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