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Motorola, Inc. (MOT)

Q2 2006 Earnings Conference Call

July 19, 2006, 5:00 pm ET

Executives

Ed Zander - Chairman and Chief Executive Officer

Dave Devonshire - Chief Financial Officer

Ron Garriques - President of the Mobile Devices Business

Greg Brown - President of the Networks and Enterprise Business

Dan Moloney - President of the Connected Home Business

Ed Gams - Corporate Vice President and Director of Investor Relations

Analysts

Mark Sue - RBC Capital Markets

Edward Snyder - Charter Equity Research

Ittai Kidron - CIBC World Markets

Phil Cusick - Bear, Stearns

Tim Long - Banc of America

Octavium Hapas - Thomas Weisel Partners

Ehud Gelblum - JP Morgan

Michael Ounjian - Credit Suisse

Maynard Um - UBS

Mike Walkley - Piper Jaffray

Blaine Marder - Loeb Partners Corporation

Scott Coleman - Morgan Stanley

Brian Modoff - Deutsche Bank

Brantley Thompson - Goldman Sachs

John Bucher - BMO Capital Markets

Daryl Armstrong - Citigroup

Tal Liani - Merrill Lynch

Richard Kramer - Arete Research

Brad Borggard - A.G. Edwards

Richard Windsor - Nomura Securities International, Inc.

Bill Choi - Jefferies & Co.

Ben Bollin - Cleveland Research

Presentation

Operator

Good afternoon, and thank you for holding. Your lines have been placed on a listen-only mode until the question-and-answer segment. Today's call is being recorded. If you have any objections, please disconnect at this time.

I would now like to introduce Mr. Ed Gams, Corporate Vice President and Director of Investor Relations. Mr. Gams, you may begin.

Ed Gams

Good afternoon, everyone. With me on this conference call are Ed Zander, Chairman and CEO of Motorola; and Dave Devonshire, Chief Financial Officer. Joining us for the Q-and-A portion of this call are Ron Garriques, President of the Mobile Devices business; Greg Brown, President of the Networks and Enterprise business; and Dan Moloney, President of the Connected Home business.

An Internet slide presentation is accompanying this call and can be viewed by visiting www.motorola.com/investor. Slides will be advanced automatically as our presentation proceeds. We encourage you to view these slides while you listen.

A replay of this webcast, including questions and answers, will also be available on our website at approximately 8:00 P.M. Central time today.

Forward-looking statements will be made during this call. Forward-looking statements are any statements that are not historical facts. Such statements are based on the current expectations of Motorola and there can be no assurance that these 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 today's earnings press release, on pages 19 through 27 of Motorola's Form 10-K for the fiscal year ended December 31, 2005, and in Motorola's other SEC filings.

This conference call is occurring on July 19, 2006. The content of this call contains time-sensitive information that is current only as of the time of this live broadcast. If any portion of this call is retransmitted at a later date, Motorola will not be reviewing or updating the material that is contained herein.

This call is the exclusive property of Motorola Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Motorola Inc. is strictly prohibited.

Now, I would like to introduce Ed Zander.

Ed Zander

Thanks, Ed, and good afternoon, everyone. Once again, we are very pleased with our results this quarter.

As the quarter progressed, the strength in all of our businesses accelerated, leading us to substantially exceed our guidance.

Before I review our Q2 results, I would like to remind everyone that we will be hosting our annual financial analyst meeting next Monday and Tuesday. We will be unveiling several new exciting products and going into more detail about our strategy and priorities. Also please, if you can, get there for our Monday evening event. I think Ron has a few nice surprises.

First, let me once again acknowledge the continued hard work and dedication of our talented employees worldwide. It is their unrelenting focus that makes our continued success possible.

Our results clearly demonstrate the success of our ongoing efforts to profitably grow market share. Our vision of seamless mobility is a compelling value proposition to communication, consumer and content companies worldwide. We intend to be number one in making the mobile broadband Internet a reality.

Now let me turn to our Q2 highlights.

First, sales of $10.88 billion, up 29% from the second quarter 2005 -- a record second quarter for our company. Gross margin percent was up quarter over quarter. Our sales growth continues to be among the strongest of large-cap tech companies. We are, in fact, a growth company.

Our first half of 2006, we have grown 27% year over year. We delivered strong Q2 earnings per share of $0.34, excluding the significant items highlighted in our press release. For continuing operations, excluding automotive electronics, EPS was $0.33. That is 32% growth year over year. Our balance sheet remains very strong and we generated about $500 million in operating cash flow.

In Mobile Devices, more records and outstanding results. We shipped more than 51.9 million units in Q2, an increase of 53% over the second quarter last year, and up over 12% versus quarter one. Once again, none of our competitors are close to this kind of performance.

Market share is up now to 22% -- up almost 4.3 percentage points year over year and up 1.3 points quarter over quarter. We earned an 11.2% operating margin. We continue to achieve our goals of year-to-year operating margin improvement and quarter-over-quarter market share growth.

It wasn't only Mobile Devices -- in fact, it was all of our divisions. Connected Home had a great quarter 2. New record for set-top box unit shipments, 2.4 million, and operating earnings grew 70% year over year.

As you know, we formed a new segment called Networks and Enterprise, led by Greg Brown. This business showed strong quarter-over-quarter improvement in sales and operating earnings with a very good operating margin of 14.6%, excluding reorganization charges, and growth sequentially in all segments of this business. Revenue and OE -- I will have more to say about that later.

A few other important achievements:

  • We completed the sale of the automotive electronics business to Continental AG for approximately $1 billion;
  • We announced an investment in Clearwire Corporation and our intent to acquire NextNet as further steps in Motorola's focused strategy to continue to expand and profitably grow our wireless broadband business and advance our vision of seamless mobility; and
  • We also announced Motorola will acquire a world-class software platform, AJAR, for low and mid-tier mobile devices with the acquisition of TTP Communications. This acquisition will bring valuable silicon IP and phone stack businesses to Motorola. It also adds complementary product development capabilities and personnel.

In summary, we are growing revenue, profits and market share. We are focusing on our core competencies -- seamless mobility, products and services, and we are attacking cost structure with supply chain and organizational simplicity while we are innovating for the future.

With that, I would now like to turn the call over to our CFO, Dave Devonshire, who will provide some more details about our second-quarter results.

Dave Devonshire

Thank you very much, Ed, and good afternoon, folks.

We had another very strong quarter in sales, which were up 29% over prior year. Earnings per share were $0.55 versus $0.37 in the prior year.

Excluding the significant items discussed in our press release, operating earnings increased 25% and operating margin was 11.1%, up 80 basis points quarter over quarter.

Excluding these significant items, earnings per share would be $0.34, including the $0.01 from auto, up 36% versus last year's per share of $0.25, demonstrating earnings leverage on our sales growth of 29%.

As Ed reviews in great detail our segment results, keep in mind that our stock compensation expense is reflected on the other elimination line rather than in each individual business.

Moving on to the significant items in the quarter, and providing a reconciliation between non-GAAP and GAAP, our earnings per share includes several significant items, shown here and listed in our press release, which aggregate again to a combined $0.21 per share of income.

The reorganization charges are related to a workforce reduction being implemented in our Networks and Enterprise segment. The reorganization impacts approximately 700 employees and we anticipate annual savings of approximately $50 million, which we will fully realize in early 2007. Additionally, other reorganization actions are anticipated to be announced later in 2006 in our Networks Enterprise segment, as a result of synergies to be realized from the combination of the former Networks and Government and Enterprise Mobility Solutions segments.

In addition, we recorded, as a result of repatriating cash to the U.S., tax benefits and other foreign tax benefits of approximately $0.11 a share. Finally, the Telsim settlement -- bad debt recovery of $400 million was recorded in the quarter, or $0.10 a share. So they represent the major items.

Looking at cash flow and debt for the quarter, overall for the first half, I will get into the details in a second on the quarter, but we earned $1.2 billion of operating cash flow. For the second quarter, we earned $500 million in operating cash flow, our 22nd consecutive quarter of positive operating cash flow. Cap-ex for the first half was $220 million, which was just 1.1% of sales. For the first half, therefore, we generated free cash flow of $1 billion.

As you can see, we ended the quarter with net cash of $10.1 million, down $400 million from year end 2005.

When I look at the share repurchase update, most notably in the second quarter, we acquired 38.9 million shares at an average price of $21.49, spending a total of $838 million. From inception through the end of the second quarter, we have now acquired 118 million shares, for total cash of $2.5 billion.

To recall, we implemented this program back in May 19, 2005, so with the end of the second quarter, we have now spent roughly 63%, 64% of our total.

In terms of our third quarter outlook for 2006, we are looking for sales in the range of $10.9 billion to $11.1 billion, which is up 20% to 23% versus the third quarter of 2005, reflecting the continuum of momentum in our largest business, Mobile Devices.

Our stock compensation expense again is estimated at approximately $0.02 a share. We also will record in the third quarter the gain on the sale of the automotive business, which will be approximately $450 million.

Lastly, we expect to record additional reorganization expenses associated with the consolidation of the segments of Networks and our former GEMS business.

Thank you very much. Now I will turn the meeting back over to Ed who will provide a lot more color and detail on each of our businesses.

Ed Zander

Thanks, Dave. I will now take you through all the businesses and then we will get to your questions.

First, in Mobile Devices, again, another record-breaking quarter for Ron Garriques and his team. We are very, very pleased with the performance during the past quarter. All-time record for units, all-time record for sales, all-time record for mobile device operating earnings, the 10th consecutive quarter of year-to-year operating percentage improvement, and the 7th consecutive quarter of market share growth. Of course, as I said earlier, we increased our market share to 22% once again.

Highlights in terms of products and technologies, RAZR is stronger than ever. In fact, here in July, we just announced -- I think it was yesterday or the day before yesterday -- we shipped our 50-millionth RAZR.

As I keep saying over and over again, we have just begun with RAZR. It is still a must-have mobile device product throughout the world. We have a lot more coming and you will see some more next week.

SLVR, which is a candy bar form factor based on RAZR, is now shipping in volume in all three models; L7, L6 and L2.

During the quarter, we announced SLVR Red, an exciting and socially important partnership with Project Red and Bono in the fight to eliminate AIDS and disease in Africa. With every call on SLVR Red, consumers can contribute money to help end the suffering. This is now available in Europe.

We also launched Q, the year's most anticipated new device. It is selling extremely well. More in a few minutes.

In the world of mobile music, we are doing very, very well. Since Q3 2005, we have now shipped nearly 10 million music-enabled handsets, as many as any other competitor, including new additions during Q2, such as the RAZR V3i with iTunes, the RAZR V3m and ROKR E2.

In 3G, we continue to grow with units up 55% quarter over quarter.

Our iDEN business is as solid as ever. We had record for second quarter and grew the business sequentially. We continue to innovate across technologies and price tiers -- 11 new handsets, and you can see many up here in terms of GSM, CDMA and iDEN.

We have momentum throughout the world. We expand our position as the industry's clear number two. As I said earlier, we expanded the gap between the industry's two leading companies and the rest of the pack, 22%. Number three lost share, number four lost share. A little over 18 months ago, we had 13% market share and now we're up to 22%.

The numbers I touched on earlier, comparing Q2 '06 to Q2 '05, sales increased 46%. ASPs decreased very slightly, about 1% quarter on quarter. Gross margin improved for the second consecutive quarter and improved year over year.

Operating earnings were up 62%. Operating margin increased to 11.2%, which is more than a full point increase over last year and 30 basis points better than Q1 of '06.

Unit shipments up 53%. Once again, we outpaced all major competitors, shipping more units than the industry's number three and number four combined.

As I said earlier, market share improved 4.3 percentage points from last year, and over 1 percentage point from Q1 '06.

Let's look at the five regions. North America, number one, and we are number one at five of the top six wireless operators. We expanded our share in North America by 4 percentage points and the gap between Motorola and our largest competitor now stands at 20 percentage points. Unit shipments were up about 33% year over year and we see strong demand across the board. We launched several new products to keep the momentum going. New product launches in Q2 include the RAZR V3m, the music one, color fruity PEBLs, Pink style 7, and the Q.

Latin America, Motorola enjoys solid leads in strong markets such as Venezuela, Argentina and Brazil. We remain in a very close race for leadership in Mexico. Today, we are number one at the top three wireless operators and we are number one in sell-through to consumers. Unit shipments were up 17% year over year. Consumers continue to drive demand for the C11x line, the C139 at the entry level, the RAZR V3, and both GSM and CDMA are also very strong.

Europe, shipments were up 10% year over year. We continue to enjoy strength across Western Europe and we are working to enhance our position throughout the region by building our brand reputation amongst consumers across price tiers. The RAZR V3 continues to be Europe's most popular handset, and other strong performers for Motorola include the C11x line, SLVR L6, the V3x for UMTS. We remain number two in Europe. We have more work to do. UMTS we have to improve upon. I think you will see some very competitive second-half product launches that are on track.

Turning to North Asia, the story continues to get better. Unit shipments were up nearly 200% year over year. Market share is up 10% year over year. Our investments in distribution and our marketing strategy that we talked about over the past several quarters, on improving our retail presence, have enabled us to restore our share to more than 20% in China. Additionally, we continue to grow in South Korea, where we now hold 11% of the market.

While RAZR is the Motorola flagship, our Smartphones are strengthening our portfolio. In fact, our new A1200, or MING, which we launched in Q1, is the must-have handset in China. Hits such as RAZR and MING, in addition to our complete line-up across price tiers, including the C11x, C139 in China, MS500 RAZR and Z Slider in Korea are contributing to this growth.

In the high-growth markets, which include Africa, Middle East, India and all of South Asia, we continue to achieve profitable growth. Market share continues to improve in India and is up 8 points overall in the region. Units are up nearly 165% year over year and demand is strong for products across all price tiers, the low-end C1xx, the SLVR, the RAZRs. In India, momentum continues to build with products such as SLVR L6. During the quarter, we increased marketing in India to help fuel consumer awareness and the Motorola brand.

A little bit about products. Yesterday we announced a major milestone; the shipment of our 50-millionth RAZR handset. We could not be more proud, and 50 million is only the beginning.

Make no mistake about it, RAZR has established itself as a brand and rivals, I believe, things like iPod and Xbox as the top consumer electronics brand around the world. We intend to strengthen that brand in all geographies in the coming months and quarters and years ahead. It is the gold standard of what consumers expect in mobile handset design. It is the most imitated product. Imitate does not allow you to innovate and what we are doing is innovate. We think it is hotter than ever worldwide. Stay tuned for seeing some new exciting products in not only the weeks, but the months and quarters ahead.

For Q2, we added a satin gold model under the exclusive Dolce & Gabbana marketing partnership. We also launched the new RAZR V3m, bringing the customers rich multimedia features such as video, music and more. This handset helped Motorola secure the top position at Verizon. If you have not seen a V3m, check it out. The music and location-based services and GPS is just really, really neat.

Q is what many prosumers have been asking for, a real alternative to the laptop and quick and easy access to email and data but also music and entertainment and a lot more. With all of the that and unmatched quality performance, Q has transformed the expectations for the QWERTY marketplace.

We think we have yet another Motorola hit. We shipped more than 150,000 prosumer devices, or Q devices, during the quarter. I have been using it. I love it. Lots of Fortune 1000 test sites. More about that in just a few minutes.

MING -- and we don't get to see that here in the United States, you have to go to China -- this is our RAZR in China. It is the hit. It is the MOTO A1200. It is the device to be seen with in China, Hong Kong and Taiwan. Momentum is growing for this newest addition to our suite of Linux Java Smartphones. It is the number one Smartphone in China.

If you actually add together MING and Q as a Smartphone category, we now rival the number one competitor in the QWERTY market in only just several months of shipping product, and this is for competitors that have been in the market for five to six years.

SLVR, Motorola's reinvention of the candy bar form factor, continues to win customers worldwide. It is available now in over 90 countries. While our RAZR line is clearly a hit, SLVR is changing the game too. We continue to expand and extend the SLVR line with fashionable colors, experiences such as iMode, and exciting and important partnerships such as the MOTO SLVR Red I mentioned earlier.

Let me cover some of the other technologies and products.

CDMA and iDEN, two very important technologies for Motorola and our customers. As other competitors exit or fail in CDMA, Motorola is profitable and growing. Our CDMA unit shipments are up more than 100% compared to Q2 2005, and our improved position is due in part to our re-entry into Sprint's CDMA offering. We are thrilled to be back and we look forward to continued growth together.

Additionally, we are seeing no let-up in iDEN. We are rolling out new and innovative products, including our super-rugged i580. Demand for iDEN continues to expand worldwide. In fact, this was a record second quarter for iDEN shipments.

So I think you have see this slide before. Ron and his team and the company's commitment to Mobile Devices -- grow market share profitably, wickedly compelling products, rich experiences with quality and efficiency.

As far as our outlook goes, the second half of 2006 to have traditional seasonality when compared to the first half of 2006 for the industry. Mobile Devices to continue to keep delivering market share growth on a quarter-to-quarter basis, and expanding operating earnings percent on a year-to-year basis. We see good things ahead for the wireless segment. We expect the mobile device market to grow by more than 15% for the full year 2006.

Let me shift to another really good story, and I know it was one last quarter that had many questions, and that was the Networks and Enterprise segment. As you know, we have completed our own merger inside our company, put together two very large divisions in the last 120 days.

Greg and his team have done an excellent job. Business integration is going well. In fact, I would say we are tracking at or slightly better than our operational integration plan. I will have a lot more to say next week.

The bottom line, we now have an $11 billion plus business, with double-digit operating earnings that grew quarter over quarter -- which is not what you are seeing from a lot of our competitors -- and is focused on where the industry is going around next-generation 4G wireless broadband interoperability, enterprise mobility and services.

I think you are going to see some really good things that we will talk about next week. We are very excited about the business.

In terms of the numbers, on a combined basis, we saw substantial sequential growth in both sales and earnings from Q1. Additionally, we saw backlog increase for the second consecutive quarter.

To give you a little more color, sales up 15% quarter over quarter, OE up 29%, and operating margins, as you can see, excluding significant items, up 1.6% from the first quarter.

Let me give you a little more color though on each of the segments of the business.

Our former Government and Enterprise business had a 9% year-over-year growth, compared to 2% last quarter and 20% sequential revenue growth in Q2. Our federal business was stronger sequentially. International as well as state and local business was up sharply. In summary, Q2 performance in our traditional Government and Enterprise business was the best second quarter we have had in our history.

Regarding our former Networks business, sequential revenue grew 12% and we had sequential expansion of OE dollars as well. China recovered for us in Q2, growing 20% sequentially over Q1. CDMA, GSM, wireless broadband and services were also up on a sequential basis. iDEN continued to report another solid quarter. Lastly, we took further integration and cost reduction actions in Q2 beyond those mentioned last quarter. They are expected to achieve additional annualized savings of approximately $50 million, beginning early in 2007. This reflects headcount reductions by approximately 700 across the Networks and Enterprise business.

Let me give you a little more color on a couple of other areas. First of all, in the 4G wireless broadband, we think we are uniquely positioned to capture a large share of the wireless broadband market by leveraging our early leadership in WiMAX as global operators move to 4G.

During the quarter, we made significant announcements to strengthen our position. Our recently announced acquisition of NextNet and investment in Clearwire is a further step in Motorola's focused strategy to continue to expand and profitably grow our wireless broadband business and advance our ambition of seamless mobility.

Once closed, this gives us an excellent first-mover footprint where we will be the wireless broadband equipment provider to Clearwire both domestically and in certain international markets.

During the quarter, we also announced our first nationwide wireless broadband network deployment in conjunction with Wateen Telecom in Pakistan. The network is currently scheduled to be the largest 802.16e WiMAX network in the world, with more than 1 million subscribers.

Overall, we continue to invest and grow in this very exciting and strategic area. Stay tuned for more I think exciting news over the rest of this year and throughout 2007.

Government networks, number one provider of wireless public safety system in voice. Going forward, we will leverage and extend that leadership to be the high-growth area of public safety data.

Although we had solid performance in the quarter in the United States, I want to highlight our international leadership in public safety communications.

We now have more than 280 TETRA contracts in more than 64 countries and have won over half of all contracts awarded to date in the key public safety, transportation and industrial markets. We are supplying the infrastructure for nationwide public safety in UK, Netherlands, Austria, Serbia, Iceland and most recently, Portugal.

During the quarter, we were selected to deploy a nationwide TETRA system in Portugal that will provide voice and data to an estimated 53,000 users in public safety and civil protection agencies. We also announced a contract by Shanghai Telecom to write a TETRA-based government radio network to cover the city of Shanghai.

An area that we will be featuring a lot more over the next year is in our enterprise. Momentum continues. We are leveraging our global leadership position in government and public safety to solve enterprise-relevant problems. We saw strong momentum in core field network business, with double-digit year-to-date growth in enterprise systems orders, including a multimillion win with New York State Electric and Gas to support field operations across 18,000 square miles.

We are leveraging Q with our enterprise customers with several hundred enterprisers trialling or deploying the Q. We continue to work closely with Verizon, Microsoft and Good Technology and other partners on expanding the enterprise program for the Q. We began shipping the HC700G, our second off-the-shelf rugged mobile computing device, for enterprise customers such as DHL. The handheld computer operates on a Microsoft platform and enables fieldworkers to wirelessly access critical data to improve their productivity in the field.

We also introduced MOTOPRO Mobility Suite, an integrated software framework that allows consistent management and security across mobile devices and enables rapid deployment and deployment of enterprise-wide mobile applications, such as customer relationship management, sales force automation and executive information systems.

Additionally, we are building and leveraging a strong ecosystem of strategic partners, including a new multi-year alliance with Microsoft announced this quarter, in which we will jointly develop client and server software that integrates Motorola's mobile voice capabilities with Microsoft's desktop capabilities. I believe you will hear more about this next week and measure some of our progress.

In terms of the network and enterprise industry outlook, for the full year 2006, we have tried to give you an outlook in both areas. Wireless infrastructure, in terms of the industry, low- to mid-single-digit growth and we intend to maintain market share in that space. In the government and enterprise, mid- to high-single-digit growth, and we expect to maintain or grow market share in that space.

Finally, Dan also hit it out of the park. His team, with Connected Home, great quarter as he grew sales and increased operating earnings and operating margin year over year and quarter over quarter. Sales up 8%, OE up 70%, and operating margin 2.6%. Demand for the entire product portfolio, including HD DVRs, voice-enabled consumer devices and network infrastructure.

As I said, we showed strong operating earnings improvement, up 70% from a year ago, as we begin to fully realize supply chain synergies across the company. If you exclude the wireline business, which is currently at an investment area for us, operating margin would have been much higher.

The segment continues to drive its leadership in key voice, video and data categories in the home. In video, we continue to see strong demand for HD and DVR. We have now shipped over 4 million DVRs, 6 million HD devices and almost 47 million digital entertainment devices.

In voice and data, our VoIP business continues to grow. We have set a quarterly record for VoIP modem shipments for the third straight quarter. We have now shipped 38 million modems overall, including 3.7 million VoIP capable.

We are innovating past the stand-alone DVR. The introduction of Follow Me TV connects the set top with mobile device and puts the convenience of digital video recording on every screen in the home.

We introduced our first DSL modem product, an all-in-one device for voice, high-speed data and creating a wireless and wired home network.

We deployed the world's first cable network to support PacketCable MultiMedia with StarHub of Singapore. This network architecture enables quality of service for interactive applications such as multiplayer gaming or Voice over IP.

In terms of the industry outlook for Connected Home, for 2006 in the broadband connected home market, mid- to high-single-digit growth. Motorola Connected Home Solutions will maintain or grow share and improve operating margin.

For Q3 specifically, we believe service provider cap-ex will likely experience normal seasonal decline quarter over quarter. The Connected Home Solutions sales will be down slightly quarter over quarter, in line with market seasonality but sales and operating margin will be up year over year.

In summary, a great start to the first half of 2006. We have a lot more work to do. We realize in this management team that there is still lots to do, lots of market share to get, improving our operating earnings, improving a lot of the other things that we set out in our yearly targets. We are still hungry, still motivated and we hope to continue with the kind of success in the second half of this year. Thanks.

Ed Gams

Once again, please remember that Dan Moloney, Ron Garriques and Greg Brown are here with Dave and Ed to take your questions.

We would like to ask that each of you please limit yourself to one question and avoid multiple-part questions. We only do this to help ensure that in the limited time available, that as many of you as possible will have an opportunity to ask a question. Your cooperation is greatly appreciated.

Operator, please instruct our audiences on how to poll questions to us.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from Mark Sue at RBC Capital Markets.

Mark Sue - RBC Capital Markets

Thank you. Ed, do you think there are any temporary elements in your level of Mobile Devices unit growth this quarter? For example, competitors leaving the market, which in turn is making your results magnified? If not, do you think your visibility for end demand is better now than this time around last year?

Ed Zander

You know, for me -- I will let Ron comment in a second -- it is pretty interesting. We are closing in on a billion-unit market. I do not think there is anything like that. I think televisions are 750 million. This is pretty extraordinary to look at how many of these things are sold. I think if you have a strong product line, if you have the kind of brand, if you stay focused and execute well with the kind of supply chain we are getting, we can do some of the amazing things we are doing.

Certainly some of our competitors that announced in the last week had difficulties. We are certainly gaining market share there, but I also think the other category is also shrinking.

All in all, we have more to do here. When you look at the places, I was in Southeast Asia a couple of weeks ago in places like Malaysia and Thailand and Vietnam. We are just getting on the ground there, and there's big populations that are going to get connected. So we have a lot to do.

I don't know, Ron, what is your perspective on that?

Ron Garriques

I think this was a quarter of full participation from all of our competitors. I think, as you have seen some of our competitors' performance this quarter, clearly they gave it all they possibly could, and we still, with our broad portfolio of products, took share and gained in profitability.

Ed Gams

Could we have the next question, please?

Operator

Your next question comes from Edward Snyder from Charter Equity Research.

Edward Snyder - Charter Equity Research

Thank you. Given your strong unit performance in phones here, I was just wondering if you saw a mix shift more towards edge phones, especially given that China, and this is for Ron, this portion, China is obviously not deploying 3G anytime soon. Are you seeing an increased interest in edge deployments there? Do you expect demand for those types of phones to start picking up?

Ron Garriques

If I look across all of the technology that we support, the one technology that clearly is being driven harder than all other technologies -- more than CDMA, more than UMTS, more than HSDPA -- is edge technology.

Ed Gams

As a reminder to everyone on the call, please, if you are you using a speakerphone, pick up your handset. If you are using a wireless headset, please pick up a handset. It allows us to hear your questions more clearly.

Could we have the next question, please?

Operator

Your next question comes from Ittai Kidron from CIBC World Markets.

Ittai Kidron - CIBC World Markets

Ron, can you give us a little bit better framework to think about the second half of the year? Given this strong contribution of the RAZR in the overall mix, and the assumptions that ASPs on that product will continue to decline, what kind of magnitude of improvement should we expect on the operating margin line in your division?

Ron Garriques

The only guidance I have given -- and I will not give any additional guidance today -- is that year over year, our OE percent would expand. If you look at the second half of last year, I averaged over 11% in both quarters. I will beat that in Q3 and Q4 of this year, at the same time expanding market share in both of those quarters.

When you look at our product portfolio and you look at the number of units that we have shipped since the RAZR came out, we have shipped over 300 million units globally since the RAZR came out. Of that, only 50 million of those were RAZR. Our CMC level platform, our W, our MINGs, our Qs, our SLVRs, our PEBLs are all doing very well.

From a portfolio perspective, in the 10 years almost that I have been at Motorola, never have we had such a balanced portfolio of winners in the marketplace.

Ed Zander

Let me add just one common to that. When we ended the quarter, 90 days seems like a long time ago -- believe me, 52 million was not the number and we do a lot of analysis. Ron has a great team and we have these forecasts. We all hear about what you hear about. Other competitors have thin products, they have these kind of products. So you factor that all in and you get demand. The real test is what goes on in the stores and the carriers and the retail.

What we found that when, as Ron said earlier, when our competitors put those products in those stores, in those retail channels, our product line was just better and our volumes actually accelerated throughout the quarter.

We try to really give you really good, transparent guidance. We think we know where it is and we look at our competitive products. But as Ron said, we have some -- I know you write a lot about RAZR but again, if you were in China this last quarter, MING was the hot product. If you were in India and Southeast Asia, the Cxx series was.

In places in Europe where they love candy bars, it was SLVR. Believe it or not, the Fruity PEBLs and the colored products were great winners in other countries. ROKR E2, which is not even available here in the United States, is one of the hottest products in Asia right now for music download.

We have a lot of great products in a lot of areas, and a lot of great brand, a lot of great marketing, but we get to do it all over again this quarter. Our competition certainly is not sitting still.

We just stay motivated, stay focused, and hopefully at the analyst meeting, you will see some things that will continue to reinforce our leadership in iconic design and cool experiences.

Ed Gams

Could we have the next question, please?

Operator

Your next question comes from Phil Cusick from Bear Stearns.

Phil Cusick - Bear, Stearns

Thanks for taking my questions. Ron, I wonder if we can talk about the contributors to growth in operating margins this quarter, a little better on the revenue. We talked about a little less investment this quarter, maybe. What else should we be thinking about?

Ron Garriques

You know, during the analyst meeting next Tuesday, I have about an hour-and-a-half in that and I am going to spend a significant amount of time of the things that are necessary to take us from the 11% OE up until the mid-teens from an operating earnings perspective.

But clearly, the single biggest thing that Motorola must do is to continue to bring things out like MING, like Q, like RAZR, and like some of the stuff I expect to wow you with next Monday night.

Ed Gams

Next question, please.

Operator

Your next question comes from Tim Long from Banc of America.

Tim Long - Banc of America

Thank you. A question just for Ron on the emerging market side. I think last conference call, you talked about investing a full gross margin point in the emerging market. Just curious if you could give us an update on what that looked like in the quarter. Was there less investment there, helping the operating margin line?

Additionally, did that impact potential limiting upside somewhat of the unit? It seems you had a much better balance of ASP in units this quarter than you have had the last few quarters. If you could just address that, that would be great.

Ron Garriques

I think if you look, the two markets that were really invested the most heavily in was the China market. I think if you see, we have actually doubled our share position from 10 points a share to over 20 points a share in the China market here, quarter over quarter.

I believe we are significantly down the path and probably significantly complete in making those investments.

India is a market where we are going to continue to have to drive investment into the market. I think you are going to see that for all of this year, and probably right into the beginnings of early next year.

I think they are the two biggest markets that we are going to be focusing on. I feel pretty comfortable with our level of investment in Southeast Asia and Africa.

Ed Gams

Next question.

Operator

Your next question comes from Hasan Imam from Thomas Weisel Partners.

Octavium Hapas - Thomas Weisel Partners

This is Octavium [Hapas] for Hasan. My question has to do with the supply chain. Your results and comments, as well as the comments from your competitors, all indicates a very strong end demand and acceleration to the second half of the year.

However, we have been hearing several comments from the supply chain companies, who have spoken on order costs and somewhat of a slowdown in orders for them. Can you explain this dynamic? We are wondering if this is like an inventory build or the results of overbooking capacity in the prior quarters.

Ed Zander

One of the sources of irritation, I will be honest with you, with me personally, I have asked repeatedly, listening to a specific supply chain vendor or supplier in the Far East that may have lost a contract, produced lousy quality, did not win a design win, is not the answer.

Now, we are going to give you what we are doing. I do not know what our competitors are doing. I do not know who they are buying from. Ron gave you some outlook for Motorola in the second half of this year, as well as what we think the industry will do.

But we had some noise this quarter. We did not understand it. I just keep doing this every quarter. You can certainly listen to a potential company over there but I am not sure it does the right thing, but that's just me.

I don't know, Ron, do you want to answer to that?

Ron Garriques

It is hard to follow up that answer, Ed, but I guess what I would say is I have yet to see any one of those reports be even remotely right, so I think we ought to quit betting on them.

Ed Gams

Just for everyone's information, Stu Reed, who runs our global supply chain, will be giving a presentation at our analyst meeting next Tuesday. I think you will want to hear what Stu has to say. Could we have the next question, please?

Operator

Your next question comes from Ehud Gelblum from JP Morgan.

Ehud Gelblum - JP Morgan

Thank you. Ed, great plug for Stu. A clarification and a question, if I could. First of all, you said, Ed, that 3G units this quarter were up 55%. I just wanted to make sure I understand, 3G units or just the UMTS? Or is that including UMTS plus CDMA 2000, EV-DO? I just want to make sure I understand what is in that unit of 3G.

Ron Garriques

That is a combination of EV-DO and UMTS/HSDPA units.

Ehud Gelblum - JP Morgan

Great, Ron, that is actually very helpful. David and Ed, on the debt, you had originally said you would retire $1 billion of debt in the first half. In fact, it sounds like things have changed and you decided not to. Then when I looked at your buyback, your stock was lower this quarter than it was the quarter before. You bought back fewer shares and you still have over $1 billion left on your original buyback. Why weren't you more aggressive in the buyback? Why didn't you aggressively go after that $1 billion of debt that you said you originally would bring down?

What is going on with your cash balance? What are you expecting to do with it and why does it seem like you are holding on to it rather than buying back stock?

Dave Devonshire

Well, I think we were pretty aggressive in the quarter. We operate with what is known as a 10b-5, for purposes of buying shares in the open market. It is essentially a grid, so the lower the price, the more shares you buy back. That allows us to buy shares through what is known as the blackout period. So normally, during the blackout period, you cannot buy back shares or sell shares in the open market, after June 1st all the way through two days after you announce earnings.

If we just had an open market share buyback, it would take us out of the market for roughly 40-some days. We have elected to go with the 10b-5. So once you do that, it makes it extremely difficult to change directions when you are that far into the quarter. That is the reason why.

We have elected not to pay down the debt this year, but rather allow it to flow through as it naturally becomes due in 2007. It just made a more economical net present value decision. That is the reason for that.

In terms of what we intend to do with the cash, it still remains the same, and that is share repurchase, acquisitions that provide us with high returns and, as you know, we increased our dividend 25% this year as well.

Also, I will just mention during the quarter as well that we were upgraded by S&P, both on short-term to an A1, and also on the long-term debt, A1. We recently heard late this afternoon that we were upgraded as well by Fitch.

Ed Gams

Could we have the next question, please?

Operator

Your next question comes from Michael Ounjian from Credit Suisse.

Michael Ounjian - Credit Suisse

Thank you. Ron, just to get into a little more detail on your outlook for the overall handset market in the second half. Looking region by region, are there any regions where there's any kind of inventory problem you are seeing there? Are there any regions in particular that you think are stronger than typical seasonality? Any color you could give on a regional basis?

Ron Garriques

First, I will answer the inventory issue. It is hard for me obviously to feel out my competitors' inventory, but for Motorola itself, I do not see any kind of inventory level in any one of the five regions that is anything different than being consistent with our previous quarters. It feels pretty whole from an inventory perspective, with nothing kind of outstanding.

From a growth perspective, we have seen North America be very, very strong, and North Asia has been extremely strong. I would be surprised to not see both of those regions kind of [war] into the second half of this year.

I think the Latin America market and the European market were kind of in a more traditional kind of speed of growth.

I think the high-growth markets, all the way from Africa, India through Southeast Asia, will be between North Asia, North America and in Latin America and Europe, so kind of better than average, real solid performance.

Ed Gams

Next question, please.

Operator

Your next question comes from Maynard Um from UBS.

Maynard Um - UBS

Thank you. This question is for Dan. Can you just talk about how you feel in your position for the GPON relative to competition, and potentially when we should be looking in terms of profitability for that segment? Thank you.

Dan Moloney

I will say just in general, we feel very positive about our GPON portfolio. We invested a lot of dollars in development. We have a very solid GPON platform today. We are pursuing a number of GPON opportunities here in the U.S. as well as throughout the world.

Our position remains that we feel very good about what we have. We believe we will be very competitive and win more than our share of business on an ongoing basis.

Relative to questions of any specific customer and where they stand, I think you would have to talk directly to any of the customers about any announcements they may be making on GPON.

Ed Gams

Could we have the next question, please?

Operator

Your next question comes from Mike Walkley from Piper Jaffray.

Mike Walkley - Piper Jaffray

Thank you. Just wonder if I could dig a little bit more into your 3G outlook. Could you give us any color on maybe just WCDMA-only units, and outlook for that technology in the back half of the year for Motorola?

Ron Garriques

From an industry perspective, I think I have been pretty consistent on this. I am more bearish than others about the growth of wide-band CDMA in the second half of this year.

I still think as an industry, we are really at the beginning stages of getting the real consumer-end benefit to get people really, really excited about devices. I think in the second half of this year, especially in the European market, it will be a healthy mix of GSM, GPRS, Edge and wideband CDMA/HSDPA units.

I will take you through Motorola's UMTS and HSDPA roadmap for the second half of this year. It is quite on track. It is quite compelling. I think we will fare quite well in both UMTS and HSDPA devices in the second half of this year.

Ed Gams

Ron, you are going to take them through this on Tuesday? Is that what you meant to say?

Ron Garriques

That is correct.

Ed Gams

Okay. Next question, please.

Operator

Your next question comes from Blaine Marder from Loeb Partners Corporation.

Blaine Marder - Loeb Partners Corporation

Ed, following up on the acquisition question, can you dig in a little deeper and tell us the criteria you are looking for in an acquisition, thoughts on any potential dilution? How would you structure a deal, given the $14 billion of cash on the balance sheet?

There was some speculation among analysts that if you buy Tellabs, you might use stock and cash. That just does not seem to make sense to me. Could you comment on that? Thank you.

Ed Zander

I think our track record and what we have done -- we will talk about this next week. I will give you a little bit of it right now, but I am going to go into a little bit about what we had been doing here for three years, or two-and-a-half years in transforming Motorola.

We divested a lot of our businesses. The auto just more recently, and others. We have acquired a lot and I am going to talk about that.

I think our actions really dictate what we like. I think when you see collectively the intellectual property we have accumulated, the patents we have accumulated and the people we have accumulated in the core assets that we want to play in, around Dan's business, Greg's business and Ron's business, I think you will get the story.

This is personal. I just have a different philosophy on scale.

Ron was at 13% 18 months ago. We could have gone out and bought big, big handset companies. Instead, we put our nose to the grindstone and we developed amazing, iconic products internally.

We did do some small acquisitions of engineering teams and IPR in the TTPCom acquisition, and now we have 22% of the marketplace and we are the fastest-growing handset manufacturer on the planet.

I think what Greg has been able to do in his short time with the two businesses together and how we are sharing technology and growing is something we are going to talk about.

I think that is where we are aiming. I do not really want to comment on the future but I just want to give you what we have been doing so far in the past, and maybe we will share a little more next week.

Ed Gams

Next question, please.

Operator

Your next question comes from Scott Coleman from Morgan Stanley.

Scott Coleman - Morgan Stanley

Thank you. Ed and Ron, I am wondering if you can give us a little more detail on what you mean by normal seasonality for the handset market in the second half of the year? If you look at 2004, second half was up about 17% over first half -- '05, it was up about 23%. Are you thinking about it second half over first half, or are you thinking more on a sequential basis?

Ron Garriques

I am really thinking on a second half versus the first half. I actually do not have the numbers cut that way here in front of me. If I look at it traditionally, Q3 over Q2 and Q4 over Q3, I think we have a healthy business. It is definitely going to be kind of in that 15% to 20%, Q1-Q2 going to Q3-Q4.

Scott Coleman - Morgan Stanley

Just to clarify, within that, if you look at Motorola's business over the last couple of years, you have been up in the mid- to high-single-digits in the third quarter and in the low- to mid-double-digits in the second quarter. Without previewing your guidance, are you seeing anything that would keep you from what the typical pattern has been?

Ron Garriques

I have not really dug into the patterns over the last three or four years and what they are. What I do commit to is, independent of where the TAM is in Q3 and Q4, Motorola's going to gain a little bit of share and we are going to expand our OE percent year over year.

Ed Zander

I think, Scott, on the basis of information we have already disclosed, given the market share we had in Q1, that we see the Q1 TAM at about 220 million units, and the Q2, at a 22% share on 51.9 million units, the TAM is 235.

We have also told you we think the market is going to grow by more than 15% for the full year. That puts the annual unit market for the full year in the 950-ish rate. You can easily do the math to see what our expectations are for unit volume in the second half of the year versus the first half.

You have heard Ron's comments about continuing to gain share quarter over quarter. I hope that helps.

Ed Gams

Next question, please.

Operator

Your next question comes from Brian Modoff from Deutsche Bank.

Brian Modoff - Deutsche Bank

A couple of questions. You said 235 million units is what you thought Q2 was, Ed?

Ed Zander

Yes.

Brian Modoff - Deutsche Bank

That would imply actually something in the 975 range, if you see normal seasonality for the year. That is one question, what is your view on that?

Then two, can you kind of give us an idea of what you see on the segmentation of the business going forward, high-end to mid-range, low-end? With the Q out there now, do you see a shift in that? Do you see perhaps higher end becoming more significant as a percent of units shipped for the industry?

Ed Zander

I am going to say, this is Ed Zander, on the unit count, I happen to catch up reading on the weekends and I see numbers all over the place. Even last year, I am not even sure what the number was, because if I look at the Gardners and the IDCs plus many of you out there plus our competitors, I just get the numbers of where last year was.

We cannot call it like that. We saw a number like 235, and yesterday we saw one of our competitors went down and last week another competitor went down. Until all the numbers are in and we can rack and stack them, I don't know what, for example, tomorrow's announcement by the number one competitor is going to be, and I don't know what the other category is.

We have the feeling in that number, whether it is 230, 227, 237 -- I do not know. Then, to call it versus last year on that number, we do not even necessarily know the exact number for the industry last year.

I am going to let you do that work. We gave you, again, what we want to give you in the numbers.

As Ron said, our commitment, however fast the market grows, whatever that number is, we think we can grow faster and gain market share. We are committed to growing ROE. That is what we have said now for seven or eight or 10 quarters and that is what we are going to continue to go to.

Ed Gams

Ron, did you want to comment on Brian's question about changing segmentation in the market?

Ron Garriques

I think clearly Q is a great enterprise device for us and MING is a great multimedia device. I think both of those are ramping. I think it is a conversation that we can probably have about 2007. I do not think from a shift in a portfolio perspective you will see significant shifts for Motorola in the second half of this year.

Ed Gams

Could we have the next question, please?

Operator

Your next question comes from Brantley Thompson from Goldman Sachs.

Brantley Thompson - Goldman Sachs

Ron, I was wondering if you could just, I know you are going to spend some time on the operating margin leverage in the handset business, but could you just hit on some of the things this quarter that impacted where the margin came in, given the strong level of volumes that you guys had in the business, and kind of what some of the puts and takes were there?

Ron Garriques

If you think about year over year, Q2 of last year towards Q2 of this year, we picked up 1.1% OE.

In addition to that, last year we did have the royalty sharing from a partnership perspective on CDMA and UMTS, which no longer is inside of our numbers now, which we actually covered that, as well as expanding OE by 1.1%.

If you look at the profitability, Q1 of this year versus Q2 of this year, we expanded OE dollars by $100 million, which is a very, very significant increase. If you look at the first half of this year versus the first half of last year, we increased OE dollars by $0.5 billion. Those are the numbers that we are using.

At the exact same time, we are making very, very significant investments in software. Our Linux JAVA platform is rolling out across MING and ROKR and a whole bunch of other things that you are going to see.

We are investing in markets, in many places in a catch-up mode, where we were not able to invest in the early 2000s when our competitors were.

Every quarter, I take the C platform, the W platform, SLVRs, PEBLs, RAZRs, MINGs and Qs, and I adjust those dials so that we are expanding our market share while increasing OE percent.

You will see during next Tuesday's review how we expect to do that for the second half of this year, and how we expect to all of 2007 to keep on this same beat that we are on today.

Ed Gams

Next question, please.

Operator

Your next question comes from John Bucher at BMO Capital Markets.

John Bucher - BMO Capital Markets

A question on the R&D trends in the Networks and Enterprise segment. It appears that there has been a shift away from traditional legacy cellular technologies and more of a focus on WiMAX in your public safety, commercial industrial. Are you seeing better synergies with that apparent shifting? What are your expectations for R&D efficiency levels? Thank you.

Ron Garriques

Yes, we are seeing better efficiencies in the utilization of R&D between the combined business segments. I think it primarily is in what I would call the shared R&D centers of excellence, like network management or operational support systems, or base station development or common R&D business processes.

We are taking advantage of some of the synergies that are afforded to us by this combination, hence one of the reductions that we talked about, vis-à-vis the 700 employees and the $50 million of annualized savings.

The other thing is we clearly will continue to invest, having said that, John, in the 2G businesses to ensure that we stay very competitive in feature-rich, because we have a great installed base there and we want to maintain that position but we are also redeploying capital investment in wireless broadband. It is just an enormously exciting and potentially huge opportunity for this next-generation opportunity for Networks and Enterprise in things like wireless broadband access and wireless broadband backhaul. You have seen with the recent announcement of what we've done vis-à-vis the NextNet acquisition and the investment in Clearwire.

Yes, we are calibrating the R&D spend to maximize the yield and double down on the bets where we think there is significant growth.

Ed Gams

Next question, please.

Operator

Your next question comes from Daryl Armstrong from Citigroup.

Daryl Armstrong - Citigroup

Thank you very much. Ron, I wanted to ask you a question about China. Clearly, you guys have done a pretty good job in terms of taking market share there. Is it possible to talk at all about how much of the share gains that you saw this quarter came from your expanding footprint in terms of the distribution investment versus taking share in markets where you have already always participated, such as Beijing or a Shanghai? Just so that we could get a better qualification of the returns that you guys are getting on your emerging market investment.

Ron Garriques

Daryl, it was difficult to hear you, and if it was difficult for me, it was probably difficult for others. I think the data that would take that is not sitting here in front of me. However, clearly, as Ed went through the presentations, we picked up 4 points of market share in North America, which is very, very significant. Obviously a market that we have been in in the past. We picked up a couple of points of share in Latin America, a market that we have been in. Obviously China, we have been in -- before anybody else was in the wireless industry, we were selling phones in China.

I think from an investment perspective, the amount of investment that we are doing in China and the doubling of market share is clearly about as an efficient of a lever as you could possibly see in the marketplace.

In India, where we have not been there as long, I think you will see it takes longer for the efficiency of that investment to pay off. Maybe it takes a couple of more quarters, but where we have been, which is China, I think it is a pretty big lever.

Ed Gams

Having said that, our market share is growing sequentially in India, right?

Ron Garriques

Absolutely.

Ed Gams

Okay. Next question, please.

Operator

Your next question comes from Tal Liani from Merrill Lynch.

Tal Liani - Merrill Lynch

I have a clarification, actually, if you can hear me better now. My question is about the quarter results. You gave numbers that are GAAP numbers. I am trying to find the pro forma numbers. You only give it on EPS. Would you mind to take the EPS impact and give us the P&L numbers, pre-tax for all of these items that adjust between GAAP and pro forma?

Ed Gams

Tal, we have posted to our website our entire presentation for this conference call. It includes an appendix which provides all the information you are looking for.

So for you or anyone else who is seeking this information, just go to our website right now, and go to the appendix section after the presentation that Dave and Ed gave and you will see what you are looking for. If you still have any questions, please call either Mike Ferrara or me later this evening. We will be glad to help you.

Next question, please.

Operator

Your next question comes from Richard Kramer from Arete.

Richard Kramer - Arete Research

Thanks very much. In a quarter which has just seen some major consolidation on the part of the other leading infrastructure suppliers, perhaps Greg could comment a little bit about how the networks business within Networks and Enterprise will attain the sort of scale that some of your major competitors seem to be driving for.

Also, where you stand in terms of pursuing new UMTS contracts, because it does not seem that there has been any major announcements from Motorola, either in the quarter or, if I recall, in the first half of the year. Thanks very much.

Greg Brown

Yes, in terms of the synergies that we are achieving with the combination, as we have referenced, we announced 700 employees approximately in terms of planned headcount reductions across probably engineering and back office functions between the two businesses, which should yield about a $50 million annualized savings. Just to level-set, remember we also had restructuring in both businesses in Q1.

When you cumulatively take that, it is roughly about $90 to $100 million of annualized savings of actions that we have taken in Q1 and Q2 cumulatively.

Stay tuned for more things that we will evaluate in terms of Q3 and beyond but we are, as Ed mentioned, rapidly bringing these businesses together quite successfully from an integration and speed standpoint.

In terms of scale, I think the question around scale is what is the minimum scale required to compete and where do you need scale specifically to compete?

If you look at the portfolio of businesses and platforms that makes up Networks and Enterprise, between public safety and P25 and TETRA and iDEN and CDMA and GSM, I think we have very, very solid positions and very solid platforms, both financially and operationally, that we will continue to grow on. I think where we don't have scale, candidly, is UMTS, which is the last part of your question.

I think we have had a pretty nascent performance cumulatively. You are right. We have not announced any new UMTS contracts. I think that is an area clearly that we are looking to reconfigure perhaps, and change the game of how we can more effectively compete. We will see how we do going forward but stay tuned on that front.

Ed Gams

Next question, please.

Operator

Your next question comes from Brad Borggard from A.G. Edwards.

Brad Borggard - A.G. Edwards

Can you comment on the profitability of your low- versus your high-end handsets, and the effect outsourcing is having on your margin?

Ron Garriques

We do not traditionally bring out different gross margin percentages across the different handsets.

What we can tell you is getting into the low end in [inaudible6705] has been accretive to our overall business, and it also helps from the volume that we get to bring down the cost point of our mid- and our high-tier, which helps the overall profitability of what we do.

Ed Gams

Next question, please.

Operator

Your next question comes from Richard Windsor from Nomura.

Richard Windsor - Nomura Securities International, Inc.

Good evening. Just a quick one on your Q. I wonder if you could give us an idea of what percentage of the Q products you actually expect to attach to, or have a data attachment to them? Looking at the guidance you mentioned before, it would kind of imply, for example, if they are all attached to the BlackBerry BES by February next year, there would not be any Blackberry devices left, almost. I was wondering if you could clarify that for us? Thank you.

Ron Garriques

I do not actually believe that the Q's primary competitor is the BlackBerry device. Clearly we have a device which is a prosumer device, which has expandable memory, which has a camera, which you can watch video on, which you can browse the Internet on.

I look at where this product is targeted and it is against the PC market. I think there is plenty of room in the PC market for us and the PC manufacturers to coexist.

Clearly from a Q perspective, there are people that are using it as an enterprise device. Some people really, really love it as an enterprise device. I think it will compete very, very well with some of our competitors in that space.

Ed Zander

Just to add to that, just very early data because we have only shipped, but we have a Q kind of store down in Chicago where I live, and I was down there and people hooking up G-mail, Hotmail. They were looking at the video and multimedia capability.

As Ron said, I think to categorize these as Smartphones, as I said when we announced it, was sometimes troubling to me because I think there is just a new class of “I want to take my pictures with me, my videos with me, my music with me, and I want to have mail with me”, and there is a lot of people that do not work at enterprises.

Having said that, we are going to have upwards of, I think we will talk next week, 5,000 or 10,000 of our employees on Q by the end of the year, with -- and we will talk about the applications. We are putting a lot of our enterprise applications on Q.

We are a good test case. As Greg pointed out and I have pointed out and we will talk next week, we are in kind of trial tests with many Fortune 500 companies. So as Ron said, it goes a lot of places but what is intriguing to me is being able to take my Hotmail, my G-mail, my Yahoo! mail, my AOL mail with me and do all those incredible multimedia things we are going to show you next week.

This is truly a new class of device. To think of it as just a Smartphone, all I said was if you take MING, which is a Smartphone, and you take Q and put then together, if you want to call them a Smartphone, we are already rivalling some of the volumes at the Smartphone market. We are much bigger than that. We are not thinking of this as a Smartphone.

Ed Gams

Next question, please.

Operator

Your next question comes from Bill Choi from Jefferies & Co.

Bill Choi - Jefferies & Co.

Thank you. Firstly, I may have missed this, but did you guys give the number for total thin form factor phones?

Ed Gams

We did not earlier --

Ron Garriques

I do not have the number off the top of my head. I can scratch it out when we talk about it at the analyst meeting.

What I would say is that when we look at the portfolio and people ask, so how did you get to 52 million units? The way we got to 52 million units is we had broad success on every tier of products.

The Cs did really, really well. The step-up Ws did well. All of the RAZR platforms -- SLVR, RAZR, as well as PEBL did well. At the same time, we add MING and Q into the portfolio, which we did not have previously. So it was broad-based success.

Ed Gams

Next question, please.

Operator

Your next question comes from Ben Bollin at Cleveland Research.

Ben Bollin - Cleveland Research

Thank you. I was actually hoping to harp in on the thin form factor a little bit. Could you detail the handsets that you are including in that portfolio? You said the MING, Q, RAZR. What new products are in there?

Ron Garriques

From a thin perspective, it is the ones that you are familiar with. What you will see is, hopefully you will be with us Monday night and Tuesday, you will see the new addition to the thin line of products.

Ben Bollin - Cleveland Research

Just to clarify, would it be fair to say then that in 2Q, the thin form factor itself as a percentage, was the growth there more dramatic than what you saw across the entire portfolio? Would it have mirrored the entire portfolio?

Ron Garriques

Actually, in Q2, we did not have a Q in Q1, right? So that was nice. Clearly MING had additional volume. If you think about the step-up above what was traditionally our Cs, we did not really have new products there. They did well.

I think what you saw is continued strength in the thin platform of products and the new introduction of some additional form factors that had not been there in Q1.

Ed Gams

I think we have run out of time. We thank you all for participating.

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 sales for the third quarter of 2006;
  • Motorola's stock compensation expense for the third quarter of 2006;
  • expectations regarding the volume and the impact of our stock repurchase program;
  • the expected completion, proceeds and financial impact of pending acquisitions and divestitures;
  • expenses and financial impacts relating to the Company's ongoing reorganization activities;
  • futures sales, profitability, operating earnings, operating margin and market share for each of Motorola's segments;
  • expected timing for the announcement, launch and shipment of new products;
  • the sales impact and pricing of new products;
  • expectations for the size of the worldwide handset and infrastructure markets;
  • plans for future use of cash.

Because forward-looking statements involve risks and uncertainties, Motorola's actual results could differ materially from those stated in the forward-looking statements. Information about factors that could cause those differences can be found in this afternoon's press release, on pages 19 through 27 and Item 1A of Motorola's 2005 Annual Report on Form 10-K, and in Motorola's other SEC filings.

Thank you for participating in this call, and we hope you will be participating with us at our analyst meeting next week.

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Source: Motorola, Inc. Q2 2006 Earnings Conference Call Transcript (MOT)
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