Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Greg Brown - Co-Chief Executive Officer & CEO of Broadband Mobility Solutions

Sanjay Jan - Co-Chief Executive Officer & CEO of Mobile Devices

Ed Fitzpatrick - Acting Chief Financial Officer

Larry Raymond - Treasurer

Marc Rothman - Chief Financial Officer of Mobile Devices

Dean Lindroth - Corporate Vice President of Investor Relations

Analysts

Vivek Arya - Merrill Lynch

Samuel Wilsom - JMP Securities

Simona Jankowski - Goldman Sachs

Brian Modoff - Deutsche Bank

Matt Hoffman - Cowen & Co.

Ehud Gelblum - JP Morgan

Tavis McCourt - Morgan Keegan

Kulbinder Garcha - Credit Suisse

Scott Coleman - Morgan Stanley

Mark McKechnie - Broadpoint

Jim Suva - Citi

Matt Thornton - Avian Securities

Richard Kramer - Arete Research

Motorola Inc. (MOT) Q4 2008 Earnings Call February 3, 2009 8:00 AM ET

Operator

Good morning and thank you for holding. Welcome to Motorola’s fourth quarter 2008 earnings conference call. Today’s call is being recorded. If you have any objections, please disconnect at this time.

After this teleconference, the presentation material and additional financial tables will be posted on Motorola’s Investor Relations website. In addition a replay of this call will be available approximately three hours after the conclusion of this call over the internet through Motorola’s Investor Relations website. The website address is www.motorola.com/investor.

At this time all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. I would now like to introduce Mr. Dean Lindroth, Corporate Vice President of Investor Relations. Mr. Lindroth, you may begin your conference.

Dean Lindroth

Thank you and good morning. Welcome to Motorola’s fourth quarter results conference call. Today’s call will include prepared remarks by Greg Brown, Co-Chief Executive Officer of Motorola and CEO of Broadband Mobility Solutions; Sanjay Jan, Co-Chief Executive Officer of Motorola and CEO of Mobile Devices; and Ed Fitzpatrick, Motorola acting Chief Financial Officer. Joining them for the Q-and-A portion of the call will be our Treasurer, Larry Raymond and Marc Rothman, CFO of Mobile Devices.

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 results.

Information about factors that could cause and in some cases have caused such differences can be found in this morning’s press release on pages 18 through 27 in item 1A of Motorola’s 2007 Annual Report on Form 10-K and in Motorola’s other SEC filings. This presentation is being made on 3 February 2009. Content of this presentation contains time sensitive information and is accurate only as of the time hereof. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, Motorola will not be reviewing or updating the material that is contained herein.

I will now turn the call over to Greg.

Greg Brown

Thanks, Dean and good morning and thank you for joining us. As you saw in this morning’s press release we’ve named Ed Fitzpatrick Senior Vice President and Corporate Controller to the additional role of acting CFO, replacing Paul Liska and we have also initiated a search to identify a replacement.

Ed’s been with Motorola for 11 years and has held a number of senior financial roles. Previously he was CFO for the Home and Networks Mobility segment. We appreciate the contributions Paul made to our planned separation and managing our cost reduction activities. We remain committed to the separation and we will continue to prepare for a separation at a time that is appropriate for the company and its stakeholders.

Turning to our financial results this morning; we reported Motorola fourth quarter sales of $7.1 billion. On a GAAP basis we had a net loss from continuing operations of $1.57 per share. This reflects a total net charge of $3.6 billion or $1.56 per share in highlighted items. Substantially all other charges for highlighted items are non-cash and relate to goodwill impairment and deferred tax asset valuation. Ed will provide more details on all of our highlighted items in a few moments.

Excluding highlighted items, the net loss in the quarter was $0.01 per share, consistent with the preliminary estimate that we provided on January 14. For the full year, sales were $30.1 billion. On a GAAP basis we had a net loss from continuing operations of $1.84 per share. The excluding highlighted items we had net income of $0.02 per share.

With respect to cash, we generated $201 million in operating cash flow in the fourth quarter and finished the year with total cash of over $7.4 billion. Our solid liquidity position gives us agility and flexibility in today’s challenging economic environment. To strengthen the balance sheet and further enhance flexibility, our Board has made the decision to suspend the quarterly cash dividend, effective immediately. This will result in a cash savings of approximately $350 million in 2009. We are also actively implementing cost reduction actions, which are expected to reduce our cost structure by approximately $1.5 billion this year as well.

I want to now turn the call over to Ed to cover the financial results in more detail. I’ll then come back to discuss Home and Networks Mobility and Enterprise Mobility Solutions; and then Sanjay will cover Mobile Devices. Ed.

Edward Fitzpatrick

Thanks, Greg. In the quarter, total sales were $7.1 billion. The decline in sales compared to the fourth quarter of 2007 is primarily attributable to lower sales in Mobile Devices. On a GAAP basis we reported net loss of $1.57 per share which includes a net charge of $3.6 billion or $1.56 per share for highlighted items. Substantially all of this charge is non-cash and primarily relates to the impairment of goodwill and an increase in our deferred tax asset valuation reserve.

The total charge includes pretax charges of $1.6 billion associated with our goodwill impairment analysis under FAS 142. This charge against goodwill was driven by the macroeconomic environment and the resulting depressed level of asset valuations in relation to book. It had no impact on our cash position.

In addition, we had charges of $206 million associated with impairments of our investment in Clearwire and investments in the Motorola ventures portfolio. $169 million associated with previously announced workforce reduction and $41 million on a previously disclosed impairment in the sigma funds related to a single issuer. These charges were partially offset by pretax income related to a $237 million gain from the decision to freeze the US pension plan and $99 million for income associated with the legal settlement in the extinguishment of a liability.

Finally, in accordance with FAS 109 we took a non-cash charge of $2.1 billion to record a partial valuation reserve against our deferred tax assets. This accounting standard required that historical results be weighed more heavily and future projections when determining the company’s ability to realize deferred tax benefits. Its subsequent analysis, the tax asset is deemed to be realizeable. We would make the appropriate adjustments to the reserve at that time.

Partially offsetting this charge was a $228 million tax benefit associated with the settlement of a tax audit. Detail on these highlighted items can be found on our website and our remaining financial comments will exclude highlighted items. Net loss per share in the fourth quarter was $0.01 compared to earnings per share of $0.14 in the fourth quarter of 2007. The reduction in net earnings was primarily attributable to the lower sales in mobile devices.

Overall gross margin in the quarter improved by 100 basis points compared to 2007 due primarily to a more favorable business mix. We expect overall gross margin to continue to expand as the broadband mobility businesses account for a larger percent of overall sales.

Also impacting the net earnings decline was a lower net interest income with lower net interest income and higher costs associated with foreign currency hedging that was implemented to minimize our exposure to foreign currency losses. The tax rate in the quarter was higher, primarily due to non deductible currency translation losses in foreign subsidiaries.

Regarding our cost reduction efforts, we’ve been very focused on reducing operating expenses. On a year-on-year basis, operating expenses declined for the quarter and full year, by $385 million and nearly $1.1 billion respectively. Including our cost reduction efforts in cost of goods sold, we exceeded the original $1 billion target for 2008 by over $300 million.

As you know, we recently announced workforce reductions totaling 7,000, of which 5,000 are associated with mobile devices. We’ve also implemented actions to freeze the US pension plan, suspend the US 401(k) match and eliminate salary increases in the United States and certain other markets for 2009. Including the impact of these actions and those previously implemented, we expect operating expense reduction in 2009 of approximately $1.5 billion compared to our 2008 cost structure.

More than $1.2 billion of these savings relate to mobile devices. The actions to achieve these savings are well underway and we will begin to see sequential savings in the first quarter with further improvement in the second and third quarter. In addition, we further aligned our manufacturing operations with each of our businesses which should increase operational efficiency and focus and improve line of sight. We also continue to optimize our manufacturing footprint having completed or announced the closure or down sizing of several facilities during 2008.

Moving now to liquidity; we had positive operating cash flow in the quarter of $201 million, compared to $180 million in the third quarter. For the full year we had positive operating cash flow of $242 million. Our cash and liquidity position remained solid. We ended the year with total cash of over $7.4 billion, compared to approximately $7.6 billion at the end of the third quarter.

During the quarter we increased our US cash position from approximately $675 million to over $2 billion, due in part to repatriation of over $1.3 billion, with no significant cash cost. Over the course of last year, I will add, we repatriated over $2.1 billion from various international jurisdictions, also with no significant cash costs. We continually review our geographic funding requirements and have a track record of timely and efficient repatriation of funds. In 2009 we expect this trend to continue.

As you know, we invest most of our US dollar denominated cash in the Sigma Fund. Proceeds from maturing securities, as well as new funds, are being directed exclusively into cash and treasuries and government backed agency securities with durations of 30 days or less. As a result, compared to the end of the third quarter, investments in cash and government agency securities have increased by $750 million to approximately $1.9 billion. These highly liquid amounts represent about 45% of the Sigma Fund assets at the end of the fourth quarter.

Regarding debt, we do not have any significant amounts of long term debt maturing in 2009. Beyond that, we have approximately $530 million due in November 2010.

Moving now to our outlook, excluding items of the variety highlighted in our quarterly earnings releases, we expect a first quarter net loss in the range of $0.10 to $0.12 per share. This is based on expected effective tax rate of 34%. Beyond the first quarter, we expect operating results to improve, as operating gross margin expands due to business mix and we realize the full benefit from the operating cost reduction actions.

From a cash perspective, we’ve taken a number of actions that we have previously discussed. These include suspending the dividend, suspending the 401(k) match, freezing the US pension plan, and implementing plans to reduce capital spending year on year. We are also committed to driving improved working capital efficiency in all our business to solidify our cash position.

With that, I’ll pass the call back to Greg to discuss Home and Networks Mobility and Enterprise Mobility Solutions.

Greg Brown

Ed thanks. Despite a very tough economic environment, the broadband mobility businesses performed very well in the fourth quarter and produced solid overall results for the full year. In 2008, we generated over $18 billion of sales and contributed $2.5 billion in operating earnings. While the global economic downturn has adversely impacted some of the industries and the customers that we serve, these businesses remain substantial franchises with leadership positions in their respective markets.

In Home and Networks Mobility, fourth quarter sales were $2.6 billion, down approximately 5% compared to the fourth quarter of ‘07, reflecting a decline in Networks, offset partially by growth in home. Excluding highlighted item, operating margin was 10.9%, up significantly from 7.6% in the fourth quarter of 2007, reflecting improvement in both Home and Networks.

For the full year segment sales were $10.1 billion, up 1% from 2007. Sales in Home were higher, but largely offset by lower network sales. Operating margin excluding highlighted items improved to 9.6% from 7.8% in 2007, again with the improvement in both Home and Networks.

In the fourth quarter sales in the Home business were approximately $1.2 billion, up 11% year-over-year. The increase in sales was driven by higher demand for digital video products, which included 4.7 million digital entertainment devices. For the full year we shipped 18 million devices compared to 15 million in 2007.

Despite a challenging North American marketplace, Home sales in the region grew 10% over the year ago quarter and accounted for approximately 80% of sales. Sales outside of North America were up 16%. Fourth quarter operating margin for Home improved sequentially and year-over-year, primarily as a result of leverage from higher sales.

Overall for the full year, Home had great results, delivering top line growth of 16%, gaining market share, integrating several acquisitions and improving operating margin on a year-over-year basis. As we look ahead for Home, the longer term fundamentals of the business are solid, including demand for high def TV, personalized video services, broadband connectivity and a higher speed.

For 2009, overall industry visibility remains limited, with uncertainty in the economy a major factor. While we’re anticipating some pull back in total industry CapEx, revenue generating CapEx is a critical element to operator growth strategies in a very competitive marketplace.

In Networks, sales in the fourth quarter were approximately $1.4 billion down from the fourth quarter of 2007, primarily due to the divestiture of Embedded Communications Computing or what we call ECC, as well as lower GSM and iDEN sales. This was offset partially by higher wireless broadband sales, including our initial WiMAX sales and higher CDMA sales.

Operating margin in Networks was higher compared to the year ago quarter, due primarily to lower operating costs as well as favorable mix. For the full year, excluding Embedded Communications Computing, Networks sales declined 3% compared to 2007. This reflected the anticipated decline in iDEN, offset by higher sales in UMTS and wireless broadband, primarily WiMAX related.

In GSM, CDMA and iDEN, we significantly reduced our cost structure and improved margins. We funded R&D investments and demonstrated leadership in both WiMAX and LTE. In summary, the Networks business performed very well, especially in delivering overall year-on-year operating margin improvement, despite a changing sales mix and investment in next generation technologies.

Looking at 2009, we anticipate a continued decline in the overall market for 2G Networks. In our Networks business we expect lower sales in GSM, particularly in EMEA given the decline in the number of large 2G deployments. CDMA sales will be lower due in part to the recent carrier consolidation in the US, offset partially by recent wins in China and as expected, iDEN sales will also continue to decline.

In wireless broadband we’re pleased with the traction we have made in WiMAX and the developing area of LTE and expect to generate significantly higher WiMAX sales this year. Looking at the first quarter for Home and Networks Mobility on a year-on-year basis, we expect lower sales in both Home and Networks with relatively flat overall operating margin.

Now, if you switch over to Enterprise Mobility Solutions, Gene Delaney is now leading both the government and public safety and enterprise mobility businesses. Gene will drive further synergies and expand our growth opportunities by leveraging these best-in-class organizations, across a broad spectrum of government and enterprise customers.

In the fourth quarter, segment sales were over $2.2 billion, up approximately 4%, compared to the fourth quarter of 2007. Sales in government and public safety markets were over $1.6 billion for the quarter, an increase of nearly 11% compared to the fourth quarter of 2007. In Enterprise, sales were $560 million, down approximately 13% from the year ago quarter.

Excluding highlighted items, operating margin for the segment was 21.4%, compared to 21.8% in the fourth quarter of 2007. For the full year, segment sales were $8.1 billion, up nearly 5% from 2007. This was driven by the acquisition of Vertex, as well as organic growth outside of North America, by government and public safety. Operating margin excluding highlighted items improved to 18.8%, from 17.2% in 2007, which reflected improvement in both government and public safety as well as in Enterprise.

Looking regionally, sales in North America in the fourth quarter were essentially flat compared to the fourth quarter of 2007. Government and public safety sales were higher, driven by steady demand in state and local and federal markets. This was partially offset by softness in the indirect channel, serving construction, manufacturing and warehousing customers. Enterprise Sales were lower as well, driven by weakness in the retail and transportation and logistics verticals.

Segment sales outside of North America which accounted for 41% of sales were up approximately 11% over the fourth quarter of 2007, driven by growth in government and public safety, partially offset by a decline in Enterprise. In EMEA, year-over-year sales grew by nearly 4% and accounted for approximately 26% of sales. In Asia-Pac, sales increased by 19%, compared to the year ago quarter and accounted for 9% of sales.

Looking now at 2009, we expect continued softness in our indirect channel. While a significant number of states and municipalities in the US are facing budget challenges, our backlog and long term contracts do give us some visibility, but less than what we have had in prior years. That said we expect mission critical communications and Homeland Security to remain high priorities.

One final note on government and public safety; for 2009 we transferred certain aftermarket products to the Mobile Devices business and we anticipate closing the sales of our Biometrics business by the end of the first quarter. On a combined basis in 2008, these two activities accounted for sales of approximately $160 million.

In Enterprise, our leadership position and the fundamental needs for converged enterprise communications and productivity enhancing enterprise solutions remained strong. However, as we look at this year, given the global economic stresses and customer CapEx constraints, we anticipate continued pressure across our key verticals. As we look at the first quarter in the enterprise mobility solutions segment, on a year-on-year basis we expect lower sales and a decline in operating margin.

In closing, broadband mobility delivered solid results in 2008. Our employees in these businesses had many accomplishments throughout the year and have a lot to be proud of and I want to thank all of them and all of our support teams and partners for their ongoing efforts and commitment to our customers.

That said, we’re heading into 2009 with an economic environment that’s expected to be difficult. We’ve taken a number of actions to ensure that we are aligned with market realities as well as our strategic priorities. Throughout 2009, we will aggressively manage our costs and prioritize investments in innovation and future growth opportunities. This will further position us for the next growth cycle and enable us to build upon our leadership positions in broadband, video, mission critical and enterprise mobility solutions.

Now, I’ll pass the call over to Sanjay to review and discuss Mobile Devices.

Sanjay Jha

Thanks, Greg. Today I will give you an update on our progress and 2009 priorities and expectations, but first, let me review our fourth quarter results. In Mobile Devices, sales for the fourth quarter were approximately $2.4 billion. Unit shipments were $19.2 million and our estimated market share was 6.5%. Sales were adversely impacted by gaps in our portfolio and a weakened global economy.

Overall ASP was $123, unchanged from the third quarter. Stock in channel at the end of the quarter was down sequentially, both in unit terms and in weeks. Regionally, our mix was similar to past quarters, with North America accounting for 51% of total sales and Latin America 26% of sales. Asia-Pacific and EMEA made up 16% and 7% respectively.

Excluding the impact of highlighted items, the operating loss in the quarter was $476 million, compared to a $295 million operating loss in the third quarter. This increase in loss reflects lower sales due to certain gaps in our portfolio, as well as volatility in foreign exchange rates in certain geographies.

With regards to new devices in the portfolio, we began shipping several new products, including the ZN4 Krave touch device, the Q830 Hint to messaging slider, the I9 iDEN stature for both prepaid and post paid customers, and our luxury AURA device. This brought our total number of new devices in 2008 to nearly 50. More recently, at the Consumer Electronics Show, we announced the WT33 Green Phone made from recycled material. The VA76R Tundra, a rugged 3G push-to-talk device and a A3100, a 3G touch tablet.

As we move forward in 2009, our platform decisions and market focus will result in fewer new product launches than in the past year. We will be much more focused on mid and high tiers. This allows us to narrow our portfolio and focus on delivering more devices with compelling user experiences.

Consumers are migrating towards devices that provide easy to use mobile experiences which increasingly involves data subscription. As a result, carrier growth today is being driven primarily by data revenue. For this reason our road map has a much greater focus on bringing Smartphone functionality into lower tiers, with touch enquiry and on experiences around messaging and mobile internet. This will allow us to address the largest and fastest growing gross margin pool in mobile handsets.

Our Smartphone road map includes a variety of devices, many based on the Android operating system. Android is a flexible operating environment and has attracted thousands of developers with it as we believe we can enable differentiated user experience.

To that end, we are working on applications with best-in-class web browsing and unique experiences related to enhanced integration of mobility and social networking. We have shown a number of our devices to several customers. The feedback we’re getting is that the portfolio will be very competitive. This puts us in a position for important product slots in the fourth quarter and first half of 2010.

Turning now to our efforts to lower cost structure in Mobile Devices. We have announced plans to reduce our global workforce by approximately 25%. As you know, there are regulatory requirements in our biggest geographies associated with an action of this size. Much of the reduction will be completed during the first quarter and the majority by the second quarter. These and other actions that we have implemented are expected to result in a cost reduction in excess of $1.2 billion in 2009 compared to 2008.

In addition, we expect to generate manufacturing cost improvements through design for cost, higher level of standardization and a greater focus on quality. We have also made progress in our efforts to optimize our manufacturing footprint, having completed or announced several actions last year.

Regarding our outlook, in the first quarter we anticipate a higher than normal sequential decline in overall handset industry. Given this industry slowdown, decisions we have made to reduce platforms and our geographic prioritization, we expect sales and units to be down more than overall market on a sequential basis. This mix will reflect less lower tier products than in prior quarters. Our cost reduction efforts are expected to more than offset the lower volume, resulting in a reduced operating loss compared to the fourth quarter.

In closing, our priorities as we head into 2009 are clear. Develop and deliver compelling Smartphone road map by bringing data enabled functionality to mid and high tier devices, execute on reducing our cost structure and continue to leverage our strength in CDMA and iDEN and companion products. By executing on these priorities, we expect a meaningful reduction in the operating loss in 2009 compared to 2008. We will exit 2009 with a much more competitive cost structure which will position us for further financial improvement in 2010.

Finally, let me say that we have made a significant number of changes in a short period of time. I have been impressed with the team’s sense of urgency and unyielding desire to win. We have our work cut out for us in 2009 as we focus on the future success of Mobile Devices. I want to thank all of the Mobile Devices employees and their supporting teams for their effort and I look forward to our progress in the quarters ahead.

Now, I will turn the call back over to Dean to start the Q-and-A.

Dean Lindroth

Thanks, Sanjay. Before we begin taking questions, we’d like to remind callers to limit themselves to one question so that we can accommodate as many participants as possible. Operator, you can now provide our callers with instructions on how to ask questions.

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. (Operator Instructions) Our first question is coming from Tal Liani of Merrill Lynch. Your line is now open.

Vivek Arya - Merrill Lynch

Thank you. Good morning. This is very Vivek Arya Tal’s behalf. A question for Sanjay. Sanjay, can you please discuss how your mobile device strategy will differentiate? Do you expect to be the lowest cost provider like a Nokia or to focus on handset designs like an apple iPhone or to be a services player like Research in Motion and also relatedly if you look at the Smartphones with the most buzz in the industry, they are from vendors like apple, RIM and Alpalm, who control their in-house operating system. So how do you plan to differentiate with Android if you are the 30th or 40th handset with that operating system by the time the products come out? Thanks.

Sanjay Jha

Android certainly has gotten a great deal of traction in the marketplace and that is one of the things that attracts us to Android. Already we see over 1,000 applications being available from third party developers in Android, so that is very attractive to us. The second thing that we like about it is that it’s written ground-up. Very much optimized for mobile internet with multi-threading operating environment, so those things we like.

The advantage that we bring to Android firstly is that we have worked in Linux, Java, which is the basis for Android for a number of years. We have a large team which is very familiar with Linux, Java and now Android. That gives us an advantage. Second thing is we bring a number of assets from our past work in Linux and Java in terms of modules which are today not part of the platform in Android, but allow us to differentiate using these modules in the marketplace.

Third thing that we would do is we will deliver some compelling applications and user experiences which are not core part of Android solutions. For instance, social networking is an important area that we have spent significant amount of resources in making sure that we can deliver a key differentiated and much more highly integrated social networking experience. There are a number of other areas that we are similarly working on to differentiate in this way.

You mentioned our design capabilities. I think this is a company that delivered RAZR and we have I think world class design capabilities and as we address, much broader geographic, as well as tiered handset product portfolio, we will be able to use Android and bring it lower down into tiers and differentiate versus our competitors. So I think those are some of the ways that we want to differentiate in Android in what will be a very competitive marketplace.

To go to your last part of the question about vertical integration of software platforms versus horizontal, we have spent a lot of time working very closely with Google. We have a large team located very close to them. In fact, some of them in Google offices and we have spent a lot of time in very tight hardware and software integration. I think that will become a key differentiator also.

Dean Lindroth

Great, thank you. Next question please.

Operator

Our next question comes from Samuel Wilson of JMP Securities. Please go ahead.

Samuel Wilsom - JMP Securities

Good afternoon or good morning. Just two quick questions; one is what is the current headcount at Motorola and what would you expect the headcount to be for breakeven? Thank you.

Sanjay Jha

I’m not sure that we have disclosed the Motorola headcount. As you have seen, we have driven dramatic cost reductions in the last nine months and we believe that the cost structure for both mobile devices, as well as Motorola by the time we exit 2009 would be extremely competitive and will allow us to deliver the kind of financial performance which will be commensurate with our product portfolio.

Ed Fitzpatrick

And just to add to that, as you’ll see, obviously the headcount report when we file the K which will detail through the end of ’08, but to remind you again, with the actions announced in Q3 and more recently, we’re looking to reduce 7,000 Motorola employees, as well as by the way a number, literally thousands more of contractors that aggregate into $1.5 billion of annualized savings ‘08 to ’09, we think that many of those separations will be done by the end of Q2 2009.

Greg Brown

About 1,000 of that 7,000 Greg mentioned have already left in 2008.

Dean Lindroth

Thank you. Next question, please.

Operator

Next we’ll go to Simona Jankowski from Goldman Sachs. Your line is opened.

Simona Jankowski - Goldman Sachs

Hi, thank you very much. In terms of your Q1 guidance, how much of the $1.5 billion in cost savings is already reflected in the March quarter guidance? It sounds like most of it is going beyond March; I was just wondering if you could quantify that. Related to that, what is your best estimate of the timing, so the handset business is getting to breakeven? Now, obviously there is a number of moving pieces, so you can also respond in terms of what market share do you think you would need to get to breakeven?

Sanjay Jha

I’ll take the last part of the question. This is Sanjay. In terms of breakeven, we’re very, very confident on the path that we are on right now. In fact, I would say that when I arrived here six months ago, I would have been pleased if I thought that I would be at a place that we are now. We’re ahead of schedule in making the kind of progress that we have made in developing our new product road map, as well as the kind of traction that we are getting with our customers.

Remember that they see all competitors’ road maps, so the fact that they continue to believe and choose our product, believe in us and choose our product is very important for us. So I think we’re making very good progress. I won’t guide you with precision on when we will break even, but our choices on platform and market focus will allow us to leverage our R&D very effectively and deliver a very good product road map in a very reasonable time frame.

Ed Fitzpatrick

In regards to the cost reductions, they’re in-process, the bulk of the work of the reductions is going to be taking place this quarter and in Q2, so that will then allow us coming out of Q2, mid ‘09, to be much more competitive from a below gross margin structure for the balance of the year, but we are going to continually watch the cost structure of all the businesses, the functions and the corporation and be as aggressive as we can be.

Dean Lindroth

We should be on the reduced run rate by the end of the second quarter.

Ed Fitzpatrick

Exactly.

Dean Lindroth

Next question, please.

Operator

Next we’ll go to Brian Modoff of Deutsche Bank. Your line is open.

Brian Modoff - Deutsche Bank

Hi, guys. A couple of questions; first Sanjay, you talk about Android. Previously you had talked about Windows Mobile operating system. Are you still planning products on that platform? Then second question, on the spinout, you guys are continuing to assert there will be a spinout. Is this still reasonable and is the delay in the timing, if at all of a spinout, the reason Paul Liska left the company? Thanks.

Greg Brown

You’re right, that our plan of record remains the separation. We, both Sanjay and I are committed that and believe it’s the right thing to do. Obviously Brian, in this environment it’s unrealistic, given both the external global economic environment, as well as the current financial position in mobile devices. Sanjay and I are unified in the end point of getting to that separation point. It’s going to take time.

So we both know what we need to do and we need to make sure that the broadband mobility group continues to provide strong operating earnings and cash generation, even though it’s going to be a difficult year, but we feel good about the leadership position we have in those franchises and obviously Sanjay is moving very promptly to turn around mobile devices.

Sanjay Jha

Brian, to address your Windows Mobile question, yes, we are still committed to Windows Mobile. As you know, Windows 6 series is available in 2009 and as compared to Android, we believe in 2009 Android is more competitive; more of our effort and focus in 2009 is going to Android, but in 2010 when Windows 7 will become available, we will then participate in a more focused way in Windows Mobile 7 in 2010.

Just going back to the spin question, when we deferred the spin we said that there were three reasons for deferring spin; one was market conditions, second was access to the marketplace for capital and third was the status of mobile devices and I think that as these things, all these factors improve, we will remain committed and we will go forward with our plan on separation.

Dean Lindroth

Next question, please.

Operator

Our next question comes from Matt Hoffman of Cowen. Your line is open.

Matt Hoffman - Cowen & Co.

Hi, Sanjay. There’s been some news of late that QUALCOMM has entered renegotiations with one of its licensees and there’s been speculation that Motorola is the OEM involved, whether or not that’s the case and I understand there might not be a whole lot you can say on this front, but I was hoping we could ask you to at least characterize the deal you have in place with QUALCOMM, how long it extends or whether more generically you’re satisfied with the competitiveness of the 3G agreements Motorola now has in place? Thanks.

Sanjay Jha

Matt, I’m sorry. I missed the first part of your question. Could you just repeat the first part of your question again?

Matt Hoffman - Cowen & Co.

Sure. There’s been news that QUALCOMM has reentered negotiations with one of its licensees and some have speculated that Motorola is the OEM involved. So, I know you can’t say a whole lot, but I was hoping you could characterize the deal you do have in place with QUALCOMM; how long it extends and whether you’re generally satisfied with the competitiveness of the 3G agreements you have in place.

Sanjay Jha

I’m sorry Matt, I don’t think I could add much to an NDA bound agreement that we have with various partners in the industry. We have a great working relationship with QUALCOMM and that’s all I think I could add to you.

Dean Lindroth

Next question, please.

Operator

Next we’ll go to Ehud Gelblum from JP Morgan. Your line is open.

Ehud Gelblum – JP Morgan

Hi, thank you. First, a couple of clarifications and then a question on the guidance; first of all on Paul Liska, can you give us a little bit more information surrounding the reason that he left. It seems that the Controller and now CFO have left within a couple of months of each other and just want to see under what conditions it happened and if there’s anything you could provide us on that.

Another thing on clarification, Greg you said that you saved $350 million from the dividend. I thought your dividend was $0.20 and that would come closer to that $450 million that was in savings. Just want to make sure I heard that right. Then the guidance of $0.10 to $0.12 loss for Q1 is it a dime lower than where we are right now, give or take.

With operating income coming out of mobile devices being actually up, according to what Sanjay was guiding to, we have to be losing, I calculate about $250 million or more in the other businesses. Is that the seasonality of the revenue or are we losing some of that 20%, 21% operating margin from the government business and kind of where should we look at the margins in those other businesses?

Greg Brown

So as it relates to the dividend, the $350 million represents Q2, Q3, Q4, because the Board has already committed to pay out Q1. So you’re right, on an annualized basis, it would be a larger number. The $350 million I referenced is the balance of ‘09 for Q2, Q3, and Q4.

As it relates to Paul, I do want to say, he did a lot of good work here and helped us get a lot of the heavy lifting done around this separation and preparation for separation which as we talked about remains the commitment to our strategy going forward and he was also very helpful in getting after along with the businesses and the other leaders in the organization, cost reduction initiatives. That said, I think the business environment’s changed and given the environmental changes, we thought the change was appropriate at this time as well in that position.

Relative to Q1 guidance, I’ll provide a little bit more color as it relates to what we’ve already talked about, Home and Networks Mobility; but as it relates to enterprise mobility solutions, you know Ehudie that Q1 is typically seasonally weaker to begin with. You take that and combine it with what we saw in terms of a double digit slowdown in the legacy symbol business or enterprise business and we’re mindful of the economic pressures overall, and it is putting Q1 pressure, particularly on the EMS segment.

Having said that and we’ll also see a little flow through compression in the operating margin segment as well, but we still expect for the overall EMS segment, mid to high teen operating margin contribution for the full year. So Q1 is under pressure, you’re right. We will manage through the remainder of the year to ensure that we have as much earnings and margin flow through and cash generation as possible.

Dean Lindroth

Next question please.

Operator

Next we’ll go to Tavis McCourt of Morgan Keegan. Your line is open.

Tavis McCourt - Morgan Keegan

Thanks for taking my question. First a clarification; you mentioned in Enterprise Mobility there will be $160 million impact I think related to some new product coming into that division. Can you just kind of repeat what you said there?

Then also, in terms of the backlog impact to the government business, obviously that’s a big backlog business. Can you give us some sense of in ’09, what percentage of revenues you expect to come out of backlog in that business?

Ed Fitzpatrick

Yes. So first on the $160 million, it’s actually $160 million outflow of enterprise mobility, of the EMS segment. So if you take the anticipated divestiture of Biometrics and the transfer of our parts and accessories business that comes out of EMS into MDB; what I was guiding you to was on a normalized basis, year-on-year, you would see $160 million revenue decline just from those two activities. As it relates to the government business and backlog, while we don’t give specific color, actually backlog is up year-on-year, that’s a positive.

Having said that, our indirect business in government and public safety; we call it indirect or PCR, Professional and Commercial Radio and that would be the low end walkie-talkie if you will or hand held radio business that’s in manufacturing, construction and actually the industrial verticals in public safety and they are under pressure and we see that business with double digit contraction very similar to the mobile computing business, that’s also experiencing double digit contraction. When you take that all in, that’s embedded in the guidance we’re giving you for Q1.

Dean Lindroth

Next question please.

Operator

And next we go to Kulbinder Garcha of Credit Suisse. Your line is open.

Kulbinder Garcha - Credit Suisse

Thanks; a question for Sanjay. Sanjay, I think last time you tried to make fairly clear that you thought mobile devices might continue to lose market share all the way through the first half of this year, just given the product gaps, etc. Is that something that you still believe in?

The second thing is specifically on Q1, if the handset industry is down more than 20 tons in volume terms, which it seems like it might be and you’re also going to also probably lose some share in Q1, which you’ve made clear on today’s call, to the 30/10 volume decline or even revenue decline. I’m struggling to see why your operating loss has actually narrowed; is that because of the cost savings you’ve already done on a run rate basis entering Q1 or is it just a very fast pace in the first quarter? We need some insight as to why the loss actually narrows? Thanks very much.

Sanjay Jha

Thanks Kulbinder. First, I think that our estimates of the market are not as dramatic a reduction as you’ve outlined in the first quarter. Secondly, I think that our reduction from market are not as dramatic I think as you have outlined in your estimates, but if you look at the reason for the reduced volume shipments in the first quarter, we made a decision last year to consolidate our portfolio, as a result of which we cancelled a number of products at that time mainly on Symbian platform and they were scheduled to launch in the first and second quarter. So, that has definitely made a difference.

Secondly, as I mentioned in the script, we’re moving a little more to middle and high tier products and our emphasis on low tier where you tend to get more volumes, though not as much profitability is lower. Thirdly, geographically our focus has shifted much more to North America, Latin America and China, rather than equal emphasis throughout the globe.

I think if you combine all these factors, that gets you to the slightly greater than market decline for our volume in the first quarter; but I would say that our cost reduction efforts here, which as we have said, are targeted to reduce costs in 2009 by over $1.2 billion over our OpEx in 2008. I think that our cost reduction efforts, we expect to show improvements and will lead to improvements in our operating loss in first quarter.

Kulbinder Garcha - Credit Suisse

Sorry Sanjay, was that a $1.2 billion reduction in OpEx year-over-year, not in total cost in the device business?

Sanjay Jha

That’s exactly right.

Kulbinder Garcha - Credit Suisse

Okay. All right. Thanks.

Dean Lindroth

Next question, please.

Operator

Next we’ll go to Scott Coleman of Morgan Stanley. Your line is open.

Scott Coleman - Morgan Stanley

Thanks. Two questions, both on the cost side if I could. First, given the strong cash position that you called out and the operating cash flow this quarter, the decision to cancel the dividend is a bit surprising to me. Do you expect cash flow to get significantly worse in 2009 and is that what in part is driving the decision here, Greg?

Greg Brown

I think it’s just being prudent and given the uncertainty that we have in the external environment, the preservation of cash is an absolute priority. So obviously we have a whole portfolio of businesses here and Home and Networks Mobility and Enterprise Mobility continue to generate cash; Mobile Devices continues to burn it. We’re doing our best to balance that. Sanjay is moving very fast to get the cost structure in line as quickly as possible. Having said all that, we don’t know what we don’t know and we thought it was a responsible thing to do, given the uncertainty overall.

Scott Coleman - Morgan Stanley

Fair enough. What about the cash cost for the 7,000 in headcount reduction?

Ed Fitzpatrick

We expect it to be somewhere in the $600 million range.

Scott Coleman - Morgan Stanley

And is that all coming out in the first and second quarter of 2009?

Ed Fitzpatrick

First and second quarter is where the majority of the hedge will come out. Let me correct that statement. The total cost is in the $300 million range, consistent with what we spent in 2008.

Greg Brown

And we’ll provide you with the restructuring charges on a quarter basis.

Scott Coleman - Morgan Stanley

Then one last one from me: where do you expect your cash levels to end up, whether it’s the end of Q1 or deeper into 2009, if you have any visibility into that?

Ed Fitzpatrick

Okay. So as we mentioned on the call and as Greg just mentioned, we are taking significant actions to reduce the cash outflow with the actions that we’ve taken. With that said, as you know, cash came down by about $1 billion in 2008 from where we were at the beginning of the year. We do expect to significantly improve the cash outflow during the year. That’s the color that we give and those are the reason why we’ve taken some of the actions on taking costs out in 2009.

Dean Lindroth

Next question, please.

Operator

Next we’ll go to Mark McKechnie of Broadpoint. Your line is open.

Mark McKechnie – Broadpoint

Great, thanks so much. Sanjay, you’ve been barraged with questions and I’ve got some more for you. I’m certainly encouraged by your focus strategy on handsets and Smartphones. It looks like the trick is probably going to be defunded. Three questions I’ve got are; one, how much of your team is going to be focused on just smart phones?

The second is on Android. I hear you on the developer support, but I would love to kind of get your thoughts on what the carriers are saying and if you’ve got some pretty big carriers lining up behind Android?

Then third, with QUALCOMM, I heard some questions there. I know they’ve done a lot of work with Android and so the chips are pretty well tuned and the software, it’s tuned for Android. I wanted to get a sense if you thought from a funding perspective you might back off on your work with Texas Instruments there? Thanks.

Sanjay Jha

Mark, first of all on Smartphone, about between 30% and 40% of our R&D investment is on Smartphone going forward. We think that one of the reasons that we’ve liked Android is that we could focus a lot of those dollars on differentiating, because we don’t have to develop the platform ground-up.

As you know, in previous years we made very large investments in R&D in developing the platform here. We get the platform and we can focus on differentiating, that we like a lot, both in user experience, in terms of delivering differentiated applications and services, as well as in differentiating UI and user experience. So I think that’s very important.

As you mentioned, Android, a large development community and the amount of traction that we’re seeing with carriers and really the focus on mobile internet derived services and applications, makes us much more likely to succeed here.

We have also made significant changes within the organization here in the last six months and changing the organization to be much more execution focused, far greater discipline in program management and far greater discipline in coordinating and correcting course if we believe that we’re not on the right course if things occur, which require changes, we make those changes much faster.

We also believe as we exit 2009, we will have a competitive cost structure with respect to our industry wide competitors and that allows us to deliver in 2010 a much improved financial performance with respect to 2009. If you look at this strategy that we’ve put in place, I think there’s a great deal of certainty and commitment from the whole organization to make this work.

Mark McKechnie - Broadpoint

Thanks Sanjay, and about Texas Instruments, is that going to be your lead horse or are you going to back off on that work and move more towards QUALCOMM, do you think?

Sanjay Jha

In the low end, we are committed to Qualcomm solutions. In the high end, we have committed to TI and we remain committed to that strategy.

Mark McKechnie - Broadpoint

Got you. Thanks so much. Good luck.

Dean Lindroth

Next question, please.

Operator

Next we have Jim Suva of Citi. Your line is open.

Jim Suva - Citi

Thanks very much. I think everybody on this call is aware that it appears that the market is implying that, to be blunt you can’t fix the handset business. Based upon what the market is and valuing up to some of the parts of Motorola. Can you comment on how much would it cost to exit the handset business? This is a topic that everyone kind of talks about and have you considered this option internally?

Sanjay Jha

Jim, we’re completely committed to making the handset business work. That commitment is shared throughout the organization including Greg and I and we think the path that we are on is the right path.

Jim Suva - Citi

Okay, great; and then earlier you mentioned that you’re not going to give any specifics as far as a breakeven quarter so to speak. Would we be looking at 2011 or 2009, more of a general sense?

Sanjay Jha

In 2009, as I’ve said, our loss will be meaningfully lower than 2008. So the breakeven year, not talking about quarter, is clearly outside of 2009. We exit 2009 with a very competitive cost structure. If we are able to execute and deliver on our Smartphone road map and bring Smartphone functionality to middle of this year, with efficiencies that we’ve derived with our platforming strategy, with a more modular development structure, I think that sometime after 2009, whether it’s 2010 or 2011, I’m not going to speculate today, but we are very confident on the path that we’re on.

Jim Suva - Citi

Thank you very much.

Dean Lindroth

Next question please.

Operator

Next we have Matt Thornton of Avian Securities.

Matt Thornton - Avian Securities

Thanks for taking my question. Two questions, one for Sanjay. Sanjay, how should we think about ASPs trending throughout the year with a mix shift towards more Smartphones, more mid to high end devices? Should we expect ASPs to exit 2009 higher than they entered the year?

Sanjay Jha

I think that we will have to see how that plays out Matt, but I think that that’s absolutely a possibility, because we are not spending as much time and effort on below $50 a tier. We still will have presence because a number of markets around the world to stay relevant you have to have presence, but as we focus more on data enabled devices, touch, QWERTY, Smartphones and bringing these functionalities to lower tier devices, I think that there’s a possibility our ASP shifts upwards.

Matt Thornton - Avian Securities

Terrific. Then the second question, just one for Greg. Greg, can you talk about the impact of inventory reductions in the set-top box market in the first half of the year and what kind of impact that has relative to overall end markets in the first half of the year.

Greg Brown

Yes, I think it has impacted our guidance for Q1 in Home. I think that when you look, a couple of things. When you look at Q1 a year ago in ‘08, it was a strong Q1 of ‘08. That’s because the holiday season that preceded it was strong and many of the carriers and MSOs replenished inventory, because the holiday season previously was so strong.

There’s a couple of things going on with Q1 in Home. One is, comparative to a year ago is a robust period for comparisons. Second, you’re right. I think that many of our customers, carriers and MSOs are being more aggressive in managing their respective inventory levels and of course all of them are being as diligent as possible to minimize CapEx. So those three ingredients, all go into the mix that are a reflection of our Q1 guidance.

Dean Lindroth

Thank you. Operator, we’ll take our last question.

Operator

And our final question comes from Richard Kramer of Arete Research. Your line is open.

Richard Kramer - Arete Research

Thanks very much. Just to clarify what you said about cash outflow in 2009, does that mean you’ll finish 2009 with a lower cash position than you have now? Given the plan of record is a separation as you mentioned before, can maybe the three financial guys on the call comment a little bit how you might finance a separation of mobile devices business and whether you’ve thought through that?

Maybe one other question for Greg; I’ve asked before about whether Motorola would consider consolidating part of the network infrastructure market. Given Nortel’s bankruptcy which happened in this previous quarter, have you thought differently about the outlook for the Networks business and whether you might consider adding scale in that business at some stage? Thanks.

Greg Brown

Just to take the last one first. I just have to say again, I’m really proud of the Networks organization within Motorola. We are profitable in GSM, we’re profitable in CDMA, we’re profitable in iDEN and all-in, the financial contribution of Networks is really, really good, on top of or in spite of significant 4G R&D spend, with minimal return at this point, as we fund both WiMAX and LTE.

So I feel that the management there in that organization is doing a great job and we will look to maintain a strong earnings and margin position, even in spite of a very rugged industry that you described. There are no current plans for us at this point to lead a consolidation move in that segment. That would be my view in regards to that.

In terms of cash, two clarifications, as Ed was describing. We finished ‘08 with $7.4 billion. The previous year in ‘07, ending cash was $8.6 billion. What he said was we will finish ‘09 with less cash than $7.4 billion, but a much improved rate as compared to the reduction year-over-year.

Lastly, in terms of financing a separation, at this point a little bit moot. As Sanjay and I both talked about, while it remains the plan of record, it is not a 2009 event. So any near term preparation or calculation in that regard would be premature. We have to get mobile devices back to a position to separate and then we’ll take that analysis up with more rigor.

Dean Lindroth

Thank you. I want to remind everyone the details outlining our highlighted items. Our GAAP to non-GAAP P&L reconciliations and other financial information can be found on our website and today’s slides and an audio replay will be posted later today.

During this call we’ve 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 related to the following topics: financial guidance for 2009, including guidance for Motorola’s earnings per share for the first quarter of 2009; expectations for the timing of workforce reductions and cost savings from the company’s ongoing reorganization activities; guidance for future sales, operating margins, profitability, ASPs or market share for each of Motorola’s segments; plans for repatriation of funds from other jurisdictions; expected 2009 capital expenditures by network operators in the Home business; expected timing for the announcement, launch and shipment of new products; timing of the Biometrics business sale; our R&D investment; and for 2009 handsets; cash flow and cash levels in 2009.

Because forward-looking statements involve risks and uncertainties, Motorola’s actual results could differ materially from those stated in the forward-looking statements. Information about our factors that could cause such differences can be found in this morning’s press release, on pages 18 through 27 in item 1A of Motorola’s 2007 Annual Report on Form 10-K and in Motorola’s other SEC filings. This now concludes our call. Thank you for joining us.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. The presentation material and additional financial tables will soon be posted on Motorola’s Investor Relations website. In addition, a replay of this call will be available over the internet in approximately three hours. The website address is www.motorola.com/investor. We thank you for your participation and ask that you please disconnect your lines at this time. Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Motorola Inc. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts