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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) F1Q09 Earnings Call Transcript April 30, 2009 8:00 AM ET

Operator

Good morning and thank you for holding. Welcome to Motorola’s first quarter 2009 earnings conference call. Today’s call is being recorded. If you have any objections, please disconnect at this time.

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

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 first quarter results conference call. Today’s call will include prepared remarks by Greg Brown, Co-Chief Executive Officer of Motorola and CEO of Broadband Mobility Solutions; Sanjay Jan, Co-Chief Executive Officer of Motorola and CEO of Mobile Devices; and Ed Fitzpatrick, Motorola acting Chief Financial Officer

A number of forward-looking statements will be made during this presentation. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of Motorola and there can be no assurance that such expectations will prove to be correct. Because forward-looking statements involve risks and uncertainties, Motorola’s actual results could differ materially from these statements.

Information about factors that could cause and in some cases have caused such differences can be found in this morning’s press release on pages 18 through 30 in item 1A of Motorola’s 2008 Annual Report on Form 10-K and in Motorola’s other SEC filings. This presentation is being made on 30 April 2009. The 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. Good morning and thank you for joining us. This morning we reported Motorola first quarter sales of $5.4 billion. On a GAAP basis we had a net loss from continuing operations of $0.13 per share. Results from continuing operations included total net charge of $111 million or $0.05 per share per highlighted items. This net charge primarily relates to our cost reduction initiatives.

Excluding highlighted items, the first quarter net loss from continuing operations with $0.08 per share on this very difficult economic environment are results, reflect discipline execution and solid traction on our cost reduction efforts.

Operating expenses were over $500 million lower year on year, putting us on track to exceed our original annual cost reduction target by over $200 million. As a result we now expect a co-structure improvement of more than $1.7 billion compared to last year.

We ended the quarter with a total cash of $6.1 billion down from $7.4 billion at the end of 2008. The cash decline was primarily driven by reduction and accounts receivable sold and restructuring payments related to accelerated cost reduction actions. We expect improved the operating performance throughout the remainder of the year and expect to generate positive operating cash flow in the second half.

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 Broadband Mobility Solutions Businesses, and then Sanjay will review Mobile Devices. Ed.

Edward Fitzpatrick

Thanks, Greg. In the quarter, total sales are approximately $5.4 billion. Sales are lower year on year in Mobile Devices and the Broadband Mobility Businesses. The GAAP net loss from continued operations with $0.13 per share, this includes the net charge or $111 million or $0.05 per share for highlighted item. Highlighted items include a pretax charge $235 million associated with our restructuring actions partially upset by pretax income related to a $67 million gain on a repurchase of long-term debt.

These and all highlighted items can be found in our website and our remaining financial comments will exclude highlighted items.

The net loss per share in the first quarter was $0.08 compared to net loss per share of $0.05 in the first quarter of 2008. The higher net loss was the result of lower sales, largely offset by a significant reduction in operating expenses.

As you know we are implementing work force reduction across the Company. Since October we have taken charges related to the separation of approximately 7,500 employees which we expect to be substantially complete by the end of June. Lower headcount as well as action to cut discretionary spending is only an operating expense reduction of over $500 million compared to the first quarter of last year. For the full year, we now anticipate a total operating expense reduction of more than $1.7 billion, whatever $1.3 billion of these savings benefitting mobile devices.

Moving on to cash, we ended the quarter with total cash of $6.1 billion down from $7.4 billion at the end of 2008. The operating cash outflow of $1 billion which was driven primarily by a $700 million reduction in sold receivable in approximately $200million of payments related to our restructuring effort.

The reduced level of sold receivables was due to lower sales volumes and our planned reduction and factoring levels in an effort to reduce cost but also add that there is a lower level of bank factoring capacity due to the ongoing challenges in the financial market.

We will continue to value trade offs related to selling receivables but we are currently planning on a lower level of sold receivables in comparison to historical levels for the remainder of the year. We cannot anticipate any material impact on overall liquidity or financial flexibility as we employ this strategy.

As I mentioned in the call last quarter we are committed to driving working capital improvements. In the first quarter, these efforts are most clearly seen on inventory balance which declined over $500 million from the prior quarter reflecting reductions in all of our businesses. With that said there are still opportunities to further improve working capital particularly in inventory.

The total cash balance was also impacted by buying accumulated activities including approximately $130 million for your purchase of long-term debt, repurchases resulted the net gain of $57 million and the retirement of $200 million of debt at face value.

In addition, we gained a $140 million for the dividend declared prior to our recent decision to suspend cash dividends. Finally, the stronger dollar contributed to foreign currency translation losses of approximately $100 million.

During the quarter, we repatriated over $800 million with no cash tax cost and ended the quarter with US cash position of approximately $1.5 billion. We expect to continue to cause effectively repatriate funds throughout the year with little or no tax cash cost.

Moving out through our outlook, excluding items in a variety of highlighted in our quarterly earnings release, we expect the second quarter net loss in the range of $0.03 to $0.05 per share. From the cash perspective we are committed to driving sequential operating cash flow improvements in all of our businesses. With that said we anticipate total cash to be down slightly in the second quarter due in part to further restructuring related payments.

As Greg mentioned we expect to generate positive cash flows in the second half of the year driven by earnings expansion and continued improvement in working capital. These will enable us to improve our cash position from current levels by the end of the year and for the year we continue to expect or anticipate a significant reduction or overall cash consumption compared to 2008.

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

Greg Brown

Thanks, Ed. Broadband Mobility Solutions executed well and what continues to be a very challenging environment. We enhanced our portfolio products and solutions and maintained leadership positions in key markets.

Aggressive cost management and productivity improvement remained the high priority with the focus on sales efficiency, supply chain management and global operational support. We also continued to assess our investment and innovation priorities to ensure they remain tightly aligned with keys strategic objectives and critical customer needs.

In Home and Networks Mobility, first quarter sales were $2 billion, down approximately 16% compared to the first quarter of 2008, reflecting lower sales in both Home and Networks. Operating margin excluding highlighted items was 6.8% compared to 7.3% in the first quarter of 2008. The decline in margin reflects the impact of lower sales in the quarter partially offset by a more favorable product mix and lower operating expenses.

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

As a result home sales were slightly over $1 billion. The year on year decline of 12% in total sales reflects a single digit decline in sales for set-ups and a double digit declined in sales per head end and infrastructure equipment. This is consistent with the trend of operators placing a priority on revenue generating CPE equipment and deferring purchases of infrastructure.

On a unit basis, shipments of digital entertainment devices were 4.3 million units up 2% from the year ago quarter. The increase was mostly driven by higher demand for IPTV. Shipments and DDRs were lower as operators focused more heavily on HD only solutions. Originally sales in North America were down 19% and accounted for approximately 76% of sales. Sales outside of North America grew at 22% driven primarily by higher sales in Japan.

As we look ahead at the industry, we expect operators to remain cautious with CapEx spending plans until there is some level of economic stability or the minimum signs of improving market conditions. As a result we expect the addressable market for home to be down in 2009 compared to 2008.

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

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

In collaboration with Time Warner we announced the multi-room DVR solution using through two-way software that will allow consumers to access and share content throughout the home. We announced the industry’s first three-channel and peg 4 and peg 2 HD trans coding device enabling up to 50% higher through put for operators and more choices for consumers and we expanded our leading video server line up with a high performance scalable server which supports video on demand, add insertion and other advanced services for small to medium size streaming sites.

In Networks, as we anticipated market conditions remained challenging and competition intense. Sales in the first quarter were approximately $970 million, 21% lower than a year ago quarter. The decline was primarily due to lower GSM sales in the EMEA region.

Our WiMAX efforts continue across a global footprint of customers, many of them now in commercial operation, global economic challenges and tight credit markets however are resulting in slower subscriber loading and reduced operator financing. As a result we see delays in some network buildups. We now expect WiMAX sales in 2009 to be approximately $500 million to $600 million with investment levels commensurate with this revised outlook.

In LTE we continue to support our customer trials, at the mobile world congress and CTIA shows. We deployed a live demonstration network and introduced our newest base station capable of supporting both PDD and FTD modes.

Returning to our outlook for the second quarter for Home and Networks, we expect sales in both Home and Networks to be lower year on year but up slightly sequentially.

Operating margin for the segment is expected to be comparable to the first quarter. In enterprise mobility solutions, first quarter sales were $1.6 billion down approximately 11% compared to the first quarter of 2008. The lower sales were driven by a double digit declined across all enterprise markets partially offset by higher public safety sales. Excluding the highlighted items, operating margins for the segment was 11.6% compared to 14.3% in the first quarter of 2008. Operating margin was lower due to the decline in sales.

Segment sales in North American in the first quarter was 6% lower than a year ago and accounted for 58% of total sales, considering the market environment, sales of mission critical communication to federal, state and local public safety customers were higher year on year driven by demand for after 25 infrastructure and subscriber equipment. This was offset by lower sales to enterprise customers in retail, transportation, and logistics verticals and softness in the indirect sales channel per two way communications equipment to construction manufacturing and warehousing customers.

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

In EMEA, segment sales were lower year on year by nearly 21% and accounted for approximately 26% of sales. In Asia Pacific, segment sales decreased by 4% compared to the year ago quarter and accounted for 11% of sales. Enterprise sales were lower again offset partially by higher sales of two way communications to public safety and transportation verticals.

From a portfolio perspective two leadership milestones were reached in the quarter. We shipped our1 millionth [tester of] subscriber unit clearly setting us apart from our competition and we shipped our 200,000th [motoservo] device a level achieved just 2 years after introduction.

In addition we continue to innovate in focus on critical customer needs. We expanded our Astro25 solutions with a single site voice system. This expandable system provides a cost effective solution for many customers including universities, ports, and smaller public safety organizations. We also extended our mobile computing portfolio with the MC 55 a lightweight rugged device for mobile field operations and tuner devices aimed specifically at the AsiaPac market.

As we look ahead, back log for public safety remains solid and we expect to continue to see a higher priority placed on mission critical communications and national security. In the US we expect demand in the public safety market to continue to be resilient. Outside the US we see good opportunities in public safety across the Middle East, in Asia and in various parts of Latin America.

In the enterprise market we remain focused on our value proposition around mobility and productivity. However the ongoing challenges in the global economic environment will continue to put emphasis on customer cost control and capital conservation. To develop new sales opportunities and cost synergy we recently combined the enterprise and public safety teams. We believe this will lead the new sales opportunities for mobile computing and automated data capture products across an expanded customer base including federal, state and local public safety customers.

Starting specifically to the second quarter in the enterprise mobility solutions segment, we expect both sales and operating margins to be lower year on year but higher sequentially.

In closing, we are realistic about the market conditions in which we are operating, actions that we are taking across the broadband mobility businesses are aggressive, and will reduced cost, improved operating efficiencies and strengthen our future market position. Investments that we make will enable us to build upon our franchise leadership and position as for possible growth when the economic environment recovers.

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

Sanjay Jan

Thanks, Greg. In the quarter, the industry continued to be impacted by the macroeconomic environment and further reductions of inventory in the channel. We estimate that total industry unit shipments were down approximately 17% year on year. With that said, demand for smart phone and data enabled devices appear to be solid both near term and long-term.

In the North America market, prepaid demand continued to be strong, and China remains a very attractive market especially with renewed growth through CBMA and a new 3G UMTS network being ruled out this year by China [Unicorn].

In Mobile Devices, sales for the first quarter were approximately $1.8 billion down 45% compared to a year ago. Shipments were $14.7 million units and reflected a strong demand for more North American customers including certain prepaid markets.

For the quarter, we estimate our market share at 6% and overall ASP is flat compared to the fourth quarter. Regionally, our sales mix was similar to past quarters, with North America accounting for 57% of total sales and Latin America at 21% of sales. Asia-Pacific and EMEA made up 17% and 5% respectively

Excluding the impact of highlighted items, the operating loss in the quarter was $381 million, compared to a $471 million operating loss in the fourth quarter of last year. The improvement was due primarily to the reduction in operating expenses which were down over 40% year on year and over 25% sequentially.

We began shipping seven new devices during the quarter. These included the [Motosarp 830 100], a 3G touch tablet the [Evoke QA4] a full touch quality device with integrated widget, intuitive web browsing and IM style messaging and the renewed WT33 Green Phone made from recycled material.

Regarding our smart phone devices, we are executing well and have good traction with key customer. We remain on track to having [Inaudible] based smartphone devices in store for the fourth quarter holiday season. When we get closer to the first launch date I will share more details with you. As you know the [android] operating system is attracting significant developer interest. Today they are over 3,000 applications already available in the market. With the [android] we believe we can unable differentiated consumer experience and application that include enhanced integration of messaging and social networking application. We also intend to offer a range of devices by delivering these capabilities in both high year and midyear.

Regarding our efforts to resize mobile devices, we’re implementing an aggressive plan to reduce our overall cost structure. The actions we have taken resulted in the significant reduction in mobile devices operating expenses I noted earlier.

For the full year we now expect an OpEx reduction in excess of $1.3 billion compared to 2008. Even with this aggressive reduction we are making the appropriate investments to develop the services and applications that we require to differentiate our portfolio devices.

Moving now to outlook, given our portfolio decisions and geographic [paritization] we expect our second quarter sales and units to be comparable to slightly down on a sequential basis. However with further improvement in our cost structure we anticipate a meaningful sequential reduction in operating loss.

In closing I will share with you that we are making important strides in the operating as a more effective organization. Our development and supply team, chain teams are driving simplification and improving consistency in execution and product quality. Headcount and[cost structure reductions are ahead of target. Inventory both in house and in the channel are down significantly and we are reducing components and device skews. Product and portfolio management teams have developed a product road map that is gaining lot tractions in generating positive feedback from our customers.

These and other operational improvements are setting the stage for a higher level of predictability, lower fix in behavioral cost and better time to market. As a result we continue to believe that we will have significantly lower operating loss in 2009 compared to 2008.

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 would like to remind callers to limit themselves to one question so that we can accommodate as many participants as possible. Operator, you can now provide our callers with instructions on how to ask questions.

Question-and-Answer Session

Operator

The floor is now open for questions. (Operator Instructions) Our first question comes from Ittai Kidron, Oppenheimer & Co. Your line is now open.

Ittai Kidron - Oppenheimer & Co.

Thank you very much. A couple questions for Sanjay. First, on your comments on improvement, can you give us a little bit more color on the progress of your portfolio for the fourth quarter? You’ve mentioned you have clearly an [android] phones coming in that time frame but how has been the carrier discussion around that, what’s the level of confidence in adoption of that platform and also with regards to the separation plan, there has been two or three quarters since we’ve last heard about this now that you’re it seems like closer to getting to where you want to get and any chance that that gets revisited?

Sanjay Jan

Thank you, Ittai. This is Sanjay. We are in detailed discussions with the multiple carriers around the world but a few of our android smartphones that we intend to launch in fourth quarter and I’m very confident that we will make good progress and we’ll deliver meaningful products in fourth quarter. With respect to the separation when we last commented on this matter we said that there were 3 factors, the states of the telecom industry, the state of the handset market that is to say, our access to credit and the developmens in the mobile devices business which will govern the timing of our separation. As we have said all along we continue to be committed to the separation. Of the three factors, the one we control most closely is the development and the restructuring of our mobile devices business. We think we have made good progress and we will continue to make good progress through the year. I won’t guide you to the timing of this separation except to say that those are the three factors that we will be considering as we evaluate the timing of that separation.

Operator

Our next question comes from [Meynard Ong of UVS]. Your line is open.

[Meynard Ong – UVS]

All right. Thanks. We have question for Sanjay. Are you anticipating industry units to be flat slightly down sequentially or this your guidance for mobile devices anticipating market loss? And if so just wondering one in particular is changing given the prepaid strength presumably will continue and your [33.34] some new smartphones in the quarter? Thank you.

Sanjay Jan

So which regards to the industry, we see that the industry is probably flat to bend modestly up sequentially and we, as I say view ourselves doing either flat or comparable or just modestly down volume in second quarter relative to the first quarter. So I will just say that all of that is within range that it’s difficult for me to say what that means for a market share right now.

In terms of prepaid, I think we continue to see strength in prepaid as you know as I commented first quarter we saw particular strength and we see that strength continuing in the second quarter.

Dean Lindroth

Thanks. Next question please.

Operator

Our next question comes from Simona Jankowski, of Goldman Sachs. Your line is open.

Simona Jankowski – Goldman Sachs

Hi. Thank you. In terms of the incremental $200 million in cost savings for this year, is that roughly equally split between mobile devices and the rest of the business? Then also after the June quarter, do you expect to be on your new OpEx run rate or we should expect that to come down further?

Greg Brown

The $1.5 billion increased to $1.7 billion is split with $100 million with Sanjay and cross reduction efforts in Mobile Devices and the other $100 million with Broadband mobility and the corporate functions so which represents a $100 million increase for both Sanjay and myself and we are confident that we will achieve and exceed that $1.7 billion. And to add on the run rate we do expect the action to be announced previously to be executed and can see executed by the end of the second quarter, the incremental actions some of that will bleed into Q3 so we won’t get to the run rate until the end of Q3.

Dean Lindroth

Thank you. Next question please.

Operator

Our next question comes from Brian Modoff of Deutsche Bank. Your line is open.

Brian Modoff – Deutsche Bank

Hi, guys. Couple of things, Sanjay, can you guys talk about what you see your breakeven points being in units and the handsets just give us an idea? And then give us an idea also what you see in terms of the unit, number of different models that you’ll have in the market in the back half of this year versus the front half of this year? And then, Greg on the SMR business, with tax receipt likely getting increasingly challenged this year, do you see that business got continuing to have these kinds of results to the back half? Thanks.

Sanjay Jan.

Brian, I’ll take the first part of your question and that was what are the number of, when do we, what number of units do I see leading to a breakeven number. I don’t know that I have clear enough guidance or actually clear view, in a view of that myself, I think that obviously ASP and the arm, the strength of our portfolio in smartphone, gross margins, supply chain and cost reductions will have a major impact on when we do that. I would tell you that I think that in each of these regions in terms of focus of our smartphone and the parts that we deliver, in terms of a modest increase in our gross margin, in terms of the supply chain efficiency and obviously in terms of cost reduction where in each of these regions I think that we’re making good progress and I won’t, either in time or in unit set the breakeven point but I feel confident that we’re making good progress on those brand.

As it relates to public safety Brian, public safety in Q1 was higher year on year. It grew in the low single digits, now that does not mean government and public safety did but the public safety piece did and the enterprise business declined in double digits as I reference. I do believe that Q1 represents the low point for enterprise mobility solutions so I believe we’re on track to perform reasonably well for the balance of the year. There’s a possibility that the stimulus package and plans will begin to flow through in Q3 or Q4 but we’ll see. In the meanwhile we’re very aggressive on the cost side and managing the expense structure to be reflective of a difficult environment we’re in.

Brian, just come back to one part of your question, how many models do we see in first half of the year versus second half. They’re roughly comparable but obviously in second half we expect greatest strength in our portfolio in terms of data enabled devices, 3G devices, and smartphone devices. So we expect that to be a contributing factor towards restructuring.

Operator

Our next question comes from Ehud Gelblum from JP Morgan. Your line is open.

Ehud Gelblum - JP Morgan

Couple questions, first on the cash on the accounts receivable. How much cash burn you expect to continue to see in Q2 and then if you can give us a sense as what you think that happen in second half? And for the cash in flow as you are expecting what are the, what are your estimates in terms of what mobile devices do to get there? Also Ed, if you can walk us through a little bit how you get accounts receivable with up $200 million. I just want to make sure I’m understanding this correctly from the loss of the factoring of the accounts receivable, shouldn’t gone up $700 million and then it came back down again as the business contracted from normal within capital contraction. If there’s some sort of a waterfall chart you can help us to get from where it was last quarter to this quarter including that $700 million. That would be actually very helpful, I mean Sanjay, if you can elaborate a little more in China and the new models, and you said 17% of revenue in mobile devices was AsiaPac. How much of that was China and how is that [trended] and the new models are come out in Q4 or any of them slated for China or they are all for North America? Thanks.

Greg Brown

Okay. So there was a lot of stuff to digest there. Let me start with it on the cash and then I will let Sanjay answer the second or third part of that question.

For the cash decline in Q1 we mentioned was due in large part to the reduced level of sold receivables and EPS for waterfall, it is hard to do waterfall to the phone but simply we would’ve expect it with the decline in sales that took place from Q4 to Q1 to generate, significant cash flows from that reduced working capital requirement and receivables. As you mentioned not only do we not see an improvement or cash collection, we saw deterioration because of the increased level of receivables we did, sold receivables we did in Q4 versus Q1. So instead of $100 million declined in sold receivables really impacted that balance significantly, so and as we had mentioned our plan is not to increase the level of sold receivable significantly throughout 2009. We will keep it a lower level because it is costly the factor receivable, sold receivable and would just deliberately plan to do less. As far as the rest of the year cash flow, as we mentioned again, we do expect the improved earnings as we go throughout 2009 and our focus on improved working capital should generate significant cash flows in the second half of the year in for the full year. As we have said in Q1 we do expect the cash outflow to be significantly less in 2009 for the full year versus what we experienced in 2008.

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

Sanjay Jan

In terms of what portion of our Asia pack revenue was China, it’s about 60% in that ball park and in terms of our re-launching smartphones in China in the 4th quarter, my expectation is that it is either at the tail end of the 4th quarter, early the following quarter hopefully for the Chinese New Year.

In terms of your questions about mobile devices, we think that we will have lower operating losses through the year and of course improved the operating capital. Those are the 2 things that will contribute to better cash flow which Ed was referring to earlier.

Dean Lindroth

Thank you. Next question please.

Operator

Next, we have [Mark Stu] of Motorola. Your line is open.

[Mark Stu – Motorola]

Hi. It’s actually I am not employed by Motorola so RBC. Sanjay, maybe just, still trying to get a sense of how Motorola differentiates longer term if you are driving further towards Android base devices, I mean recognizing you don’t want to make just bright and shiny products. How those one differentiate if Android becomes a common element for a lot of the manufacturers?

Sanjay Jan

It’s a good question but it’s tough for me to answer without disclosing some competitive information. So if you don’t mind I’ll keep it at high level. Certainly I think the breadth of our portfolio, our ability to address both lower mid and high tier portfolios are differentiation from, we using application services, our brand, our distribution, our carrier relationships, our design. I think those are some of the places. We are probably investing as much as anybody on the Android platform and I think we certainly can differentiate in the market place. We think Android is a very good platform for us to leverage given the significant development, developer interest but there is and the availability of application.

[Mark Stu – Motorola]

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

Sanjay Jan

It is more of a global platform and the short term of course as you know we have prioritize some region so over others is so in the short-term we will focus on those regions disproportionately but there’s nothing about the platform that we see is globally limited.

[Mark Stu – Motorola]

Okay, and so far our feedback is pretty positive from what you can share with us?

Sanjay Jan

Very positive indeed.

Dean Lindroth

Thanks, Mark. Next question please.

Operator

Next we have Todd Koffman of Raymond James. Your line is open.

Todd Koffman – Raymond James

Thank you. This is a follow up to that, can you share with how broad based the 4Q Android refresh will be in terms of carriers or geography? Will it be somewhat narrow or will it be relatively broad based for that fourth quarter selling season?

Sanjay Jan

You know whenever you are launching new devices you have to prioritize a little bit but we will launch with multiple carriers and not just in North America and as we expand that portfolio to first half 2010 I expect much greater breadth in the beginning necessarily whenever you start something you narrow and make sure you succeed. But it won’t be one carrier, one region; it will be multiple carriers in multiple regions as I was saying earlier.

Operator

Next we have Samuel Wilson of JMP Securities.

Samuel Wilson – JMP Securities

Good morning. It’s a question for Sanjay. Just when you think about the smart phone in the fourth quarter launch of the Android based product, can you give us some sense on your perspective of the market of where you can gain real competitive advantage? RAM has their sort of e-mail bay systems, Apple is really good on web browsing. Where do you think there is wide space where you gain real advantage based on the android platform? Thank you

Sanjay Jan

It is tough thing to be able to answer without tipping my hand too much on these things. I would say that I certainly view messaging to being important like seeing web browsing as being very, very important. I think one of the things that I particularly like about the Android platform am the very good mobile internet experience and adjacent applications that the Android brings to the table. We also think multimedia is important, mobility is important, so I think we are focused on a number of different areas right now.

Operator

Next we have Jeffrey Kvaal of Barclays Capital. Your line is open.

Jefffrey Kvaal - Barclays Capital

Yes, thanks very much. Greg I got my question for you. How comfortable are you with where the cash balance is? Would you consider bolstering that opportunistically if the chance arose? And then Sanjay if you would not mind clarifying where you were on your entry level strategy, that would be helpful. Thank you.

Greg Brown

I think we are doing clearly cash and costs are a focus throughout the organization. Recognize also that within the results that we are reporting and forecasting, it already represents an investment organically in Sanjay’s business for next generation Android smart phones as well as the broadband mobility business on enhanced video applications and services improved and insertion infrastructure in home 4G investments in WiMAX and LTE next generation public safety. So I think we are doing a solid job of managing costs but also investing in a targeted way for the highest areas of return across Motorola.

From an acquisition standpoint, we do not comment specifically but we believe that our cash profile is limiting at this point in time. I do not think it is based on our plan of action and where we are.

Sanjay Jan

Jeff, to your entry level strategy question obviously entry level needs to be defined if we are talking about sub $50 devices for emerging marketplaces then as I have indicated, we will play in those devices opportunistically and work with some [48:08] partners to deliver products in those markets. But if we are talking about entry level data devices we are very keen on supporting that tier products with Android platform and we see that as one of the strengths that android brings to the table.

Operator

Next we have Mike Walkley of Piper Jaffray. Your line is open.

Mike Walkley- Piper Jaffray

Thanks. A question for Greg, it sounds like you are going back some investment in WiMAX given the tougher market environment, are you transitioning that into LTE and can you also just update us on how you are going to monitor the competitiveness of LTE and how you might invest longer term in that if you could use some contract wins for Motorola. And finally, what is your view of the overall wireless super structure market for 2009?

Greg Brown

As I mentioned, you are right. We are moderating our investment in WiMAX R&D to reflect current market conditions. We have had great success with over 2 dozen actual contracts. We are going to recognize as expected approximately $500 to $600 million of WiMAX revenue in fiscal ‘09 so I think we are well positioned. I actually do not think of WiMAX and LTE separately per se because the way we have invested our R & D and developed our architecture, there is a high level of reusability between the two investments with LTE as you know Verizon selected two other providers for their LTE plans. It is possible they will select a third. In 2010 we will see, but having said all that, investment levels we are making a pragmatic reflection of where we are. We still have a couple of customer opportunities. I think there will be another customer decision in Asia on LTE between now and the end of the year of which we are competing for that business. But we will always be diligent on the amount of spend and making sure that there is return on capital and we can make money for the longer term otherwise we are not just going to be in a segment to be in a segment.

On the legacy business, it continues to perform quite solidly. CDMA, GSM Iden for the last several years, we have been thoughtfully contracting our R&D spend to represent the contraction of the 2G legacy business. I think that will continue but I also expect we should be able to generate solid earnings and cash generation off of the legacy business.

Operator

Our next question comes from [Polly Yani] of Bank of America. Your line is open.

[Polly Yani] of Bank of America

Hi. I have 3 small questions. Sanjay you mentioned another decline in OPEX next quarter, could you elaborate more on the level of OPEX decline. Is it going to be higher or lower than the declined in operating expenses you have seen this past quarter? Can you also discuss when you launch the new handsets at the end of the year and early next year? Do you expect average selling prices of handsets to go up? Is your mix going to shift dramatically towards the low end or not to lift the entire ESP up? And then I have a third question not on handsets, this one sets of boxes, Comcast is scheduled to start shipping non-Motorola set of boxes and I know you still have very big part of Comcast regions. What could be the impact on your business there? Thank you.

Sanjay Jan

The first question was do I expect the second quarter OPEX improvement to be the same or lower or higher than the first quarter OPEX improvement? The answer to that is in second quarter, the OPEX improvement will be lower than the improvement we saw in first quarter. Though obviously, OPEX numbers therefore will continue to go down quarter over quarter.

The second part of your question I think was as we introduce smart phones in second half this year, do we see our ASP going up and do we see the mix getting richer. Clearly a function of how much volume we ship but yes, directionally, that is accurate.

On sets of boxes and connected home, a couple of thoughts. First of all, Q1 was a tougher quarter for our connected home segment as we talked about, I think it is a reflection of less CapEx being spent in the quarter, inventory levels in some of the cable MSOs, they are as low as we have seen in a long time. A mix shift as well as a deferral of video infrastructure purchases more specifically as it relates to setups in Comcast, again sensitive to speaking about any individual customer situation but there will be the introduction of an alternate low-end HT box supplier that is a fixed contract and we expect to compete for that business again in 2010 to attempt to regain that position. There is also in Comcast a significant amount of DTA, the digital terminal adaptor acquisitions that will be made between now and the DTB transition. We are a participant in that and expect, I think we have had about 1.4 million adaptors year to date. There are alternate suppliers of that as well. So that between the mix, the DTA adaptor introduction and consumption over the next several months and another provider in the low-end HT box that will put pressure on some revenues but we are managing our costs strongly and expect that also Q1 from an earning standpoint is the low point for connected home.

Operator

Next we have Mark Mckechnie of Broadpoint Amtech. Your line is open.

Mark Mckechnie - Broadpoint Amtech

Oh great. Thanks for taking the question. Sanjay just a couple more on android, are you planning one major platform with a bunch of different tiers on it? I know we talked what [banquet] they have in Barcelona and you were talking about [54.50] devices and tablets and what have you but I got the sense that that was all based on one platform. Is that the case?

Sanjay Jan

Mark, we will base it on one platform but we obviously will have time sequence releases of that platform with more on additional feature based particularly on the developments that are done at Google as well. We are looking to consolidate to one platform and leverage that platform for multiple devices as we go up and down the tiers I think that we have the ability to scale some of the features up and down starting from that single platform.

Mark Mckechnie - Broadpoint Amtech

Got you. And are you still working with Texas Instruments on them on the base band work or are you using a combination [55:46] and can you share anything with us on that?

Sanjay Jan

No change in the information that I have provided you prior on this matter. In the low end, we continue to use QUALCOMM base band and in the higher end, we continue to use the work that we have done with TI and based on their own map solutions.

Mark Mckechnie - Broadpoint Amtech

Got you. One last one, just kind of industry-wide android, probably better for you would you think if there were three or four other handset suppliers or are you seeing enough momentum developed amongst other players to build the begin of market for android or how do you look at that?

Sanjay Jan

It is always a balance between being commoditized and having large enough ecosystem that develop [56:35]. I think that I can see that there is enough interest in android that there will be large enough ecosystem and I think that we have enough of our own development and we have enough differentiated things like our brand, our distribution, our carrier relationship, our design, our own application services that we bring to the table that we can differentiate. So that there is clearly always in that question a balance between those two things and I think we have an opportunity to strike the right balance there Mark.

Operator

Next we have Edward Snyder of Charter Equity. Your line is open.

Edward Snyder - Charter Equity

Thanks a lot. A couple for Sanjay. You have kind of held the line on units here but the world is getting a bit more difficult both from a competitive point of view and from a total demand. I mean you have got the Palm III coming out; Apple is launching their new iPhone. The smart phone business is going to get tougher not weaker in the second half of the year as you introduce your android phones, the question is, are you going to get to a point here with unit volumes that I guess difficult to scale any launch on a large enough basis to make a competitive dent or do you see spending going up once you get a compelling product out there to try and get back some of the share that you have kind of given up. Especially regarding you lost back a couple of years, it took about 2 years to gain 600 basis points even with the raisers. So the scale of this business is always a difficult matter to deal with when you get to the levels that you are now.

And then for Ed, on the working capital, you talked about lowering it from where you are now. You have already kind of cut it significantly. What levelerage you going to point it to drop it even further to help your cash generation in the second half? You can identify maybe one or two areas, I would appreciate it. Thanks.

Sanjay Jan

Ed, I will take the first part of your question. This is Sanjay. We see smart phone market continue to grow and as you would know the definition of smart phone will evolve also. I would like to think of rich data enable devices, in other words devices which have capabilities more than SMS. And I see that if anything, there is probably an underestimate in the industry of what volume could be there. So I think that that market that we are going after, as you rightly say a lot of other people are also seeing as being very interesting market, is growing. So that gives me some comfort.

In terms of scale I am really not driving this business with market share in mind and we are organizing ourselves somewhat differently. I would give you just one piece of information even when we are shipping very large volume, the number of components that we use to address that volume was so large that I could argue that we did not have scale on a component basis. I think we have consolidated the platforms, we have consolidated the chips, we have consolidated the display, we have consolidated the batteries, the images and I think even with lower volume, I think it is possible for us to get scale in the components that we are using. I think that there are much more different ways of going after scale and scale is always I think as you imply a tough argument in itself to make in business. Scale alone does not get you a lot, though scale does become meaningful. I think that we are above the threshold where scale begins to be an issue for us. So I think that is a tough question to answer in short order but I feel comfortable we are making progress on those things.

Ed Fitzpatrick

Okay, on the working capital improvement as a highlight I think that the biggest opportunity there is in inventory. Its not one particular business you know, it is really across the board. Each of the businesses are driving for improved inventory turns and I think that the opportunity is there; I think we did pull up a bit more inventory by the end of the year. Each of the business recognized that and we are working that down. We are implementing improvements to our sales and operations planning process to improve the forecasting process at the front end and improve the coordination internally amongst our sales team and the factories to make sure that we are more fully aligned and the process is more automated. So I feel pretty good about that. Now on receivables front, it will be a little difficult to improve the year over year because as we mentioned we did factor resell if we can [get the] receivable at the end of Q4 relatively speaking and we do plan to factor or sell less by the end of next year. There were some opportunities there to improve, I would argue though on some past due accounts and will continue to get at that. So I think it is really a combination of DSO improvement and inventory turn improvement payable should be relatively consistent year over year.

Edward Schneider - Charter Equity

Sanjay, based on your comments it sounds to me like you are concentrating very heavily on the platform approach which actually was last time Motorola was hugely successful in moving the operating margins actually the first time that your phones broke to the 10% range, it was the tripped was I think 2003. So that was I guess the first time you tried to really do a serious platform that worked very well so are you basically saying that the phones that you are going to be releasing in the second half of the year from here on out will be very focused on achieving platform scales like you had done before let’s say the RAZR or are you looking at maybe selling a particular model that will it’s be fact that will make it become a platform?

Sanjay Jan

I think we will introduce multiple ideas and form factors but the plat forming underneath it is very deliberately talked through in fact I think that that is one of the four ways that were looking to simplify our business. If you look if you have to create UI for 18 to 20 different displays then each of the UI is less well done if you have to do that for a fewer displays especially in the touch screen environment where you have to be very careful about what your target, touch target is I think that we will do a much better job as we platform on display as we platform on cheap sets certainly with platform and android as we platform on a certain batteries and so and so forth so that’s the you are exactly right that’s the very core part of our strategy going forward here.

Operator

Our next question comes from Jim Suva of Citi. Your line is open.

Jim Suva – Citi

Thanks. Quick question on your original guidance for counter Q1 and then how this folds in the Q2, I noticed that you actually had a tax benefits that came in this quarter was that originally expected in the guidance and if so you know should we expect also a tax benefit in Q2 and well that’s kind of the housekeeping item after that when I get more detailed discussion for Greg.

Greg on the LTE there were some conversations earlier in the conference call about Verizon you know not selecting Motorola and then also I believe recently China Telecom, you also were not selected. Any thoughts around that it just seems like in the initial designs that Motorola is kinda being left out of the design when, what are you going to do to solve that problem and what is the cause and concern is to why Motorola is not in somebody’s major [winds]?

Greg Brown

Okay. Can I take the first part, on the tax benefit side really it just to pull through we had a loss for the period and it is because of the tax benefit associated with the loss at roughly 34% tax rate so that is just standard operating procedure.

I will turn over to Sanjay now.

Sanjay Jan

On LTE, Verizon, Jim, you know picked two competitive providers candidly I did not expect with the selection of two vendors from Motorola to be in the top two. I wont, talk to Verizon to explain their selection rational but recognize that we are basically in LTE,a ran provider only at this point in time. So our focus will be on providing an architecture that’s lower cost than often can compete in the Ran piece of LTE infrastructure build out. So which still be few to begin with and it says you know a few years out. So you are right we are not selected at Verizon.

At China Telecom they were expanding on CDMA 2000 not LTE. We were selected for phase one China Telecom in that infrastructure build out China mobile is the one that I think will consider LTE earlier than any other Chinese carrier although they have to go to the TDS CDMA first ,but China Telecom was the CDMA 2000 expansion. Now having said that in China in general, on the infrastructure side it is getting very, very competitive and margins are challenged in a significant way. We have decent footprint in China on CDMA as well as GSM will look to protect it but that said we are not going to do anything uneconomic in the [pursue] to share we are just not going to do that . So going forward on LTE we will look to compete with the carrier that I mentioned that I think will make a decision in the next quarter, couple of quarters in Asia, but also if it makes sense to have a broader partnership for more flexible business model and arrangement for us to enhance our competitive position we are going to do that. That’s where we are on LTE and 4G.

Jim Suva – Citi

And your comment about capital allocations for WiMAX being left so given the environment is that hold true for LTE or you know does it reallocate a little bit more to LT E or state is [call] for LTE?

Sanjay Jan

I think it is fair to say Jim we are adjusting LTE spend in 2009 reflective of the conditions for LTE as well.

Dean Lindroth

Thanks, Jim. I think, we’ll take our final question

Operator

Our final question comes from Matthew Hoffman of Cowen. Your line is open.

Matthew Hoffman – Cowen

Thank you. Greg does the proposed Tyco Inaudible] doing it was change the competitive environment in the government radio market other than putting a solid comp out there for the business and Sanjay, question on the market could you outline the condition of the handset market right now in terms of get inventory in the channel? I think you said it was very clean last time around and I didn’t hear you highlight Latin America. Could you comment on that geography? Thanks .

Greg Brown

I think on Harris Tyco there is a change the competitive dimension in the short term I think no I think they will be the fourth competitor that we have had in North America over the last 10 or 12 years. GE had these assets Ericsson [Tyco] may common. Now [Harris] we respect them, we respect all competitors and we look forward to seeing them in the market place. I think it is a very different profile. One of the big advantages Motorola has aside from technology encryption and the whole product and architecture is our goal to market distribution at the local level, at the state level within direct channels and so on that I think will be very difficult for anybody to replicate longer term we’ll see.

Sanjay Jan.

Matt, I’ll take the question around the inventory and stock in channel. We see for the industry starting channel is improving overall and particularly for us we saw stocking channel actually go down in weeks. With respect to LATAM, LATAM actually was one of the most challenged regions for us in first quarter and we say EMEA and LATAM as being two of the most challenged regions for us in the first quarter.

Dean Lindroth

Thanks, Matt. I want to remind everyone the details outlining 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 shortly after this call.

During this call we have made a number of forward-looking statements. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of Motorola and there can be no assurance that such expectations will prove to be correct.

Such forward-looking statements include but are not limited to our comments and answers relating to the following topics: guidance for Motorola’s earnings per share for the second quarter of 2009, expectations for the timing of workforce reductions and cost savings from the Company’s ongoing reorganization activities; expectation for cash flows and total cash during the remainder of 2009, and anticipated levels of receivables to be sold during the remainder of 2009, and expectations for the potential separation of Motorola’s businesses into two independent public reiterated companies, guidance for future sales, operating margins, profitability, ASPs or market share for each of Motorola’s businesses; plans for repatriation of funds from other jurisdictions; expected capital expenditures by network operators in the size of the total adjustable market in the Home business; and it is to be realized for mobile devices conference offer consolidation and issues, new product portfolio simplification, expected timing for the announcement, launch and shipment of new products.

Because forward-looking statements involve risks and uncertainties, Motorola’s actual results could differ materially from those stated in the forward-looking statements. Information about 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 2008 Annual Report on Form 10-K and in Motorola’s other SEC filings.

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

Operator

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

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Source: Motorola Inc. (MOT) Q1 2009 Earnings Call Transcript
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