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Executives

Sanjay Jha - Co-CEO of Motorola Inc. & CEO of Mobile Devices

Gregory Brown - Co-CEO Motorola Inc. & CEO of Broadband Mobility Solutions

Dean Lindroth - Corporate Vice President of Investor Relations

Analysts

Tim Long - BMO Capital Markets

Phil Cusick - Macquarie Research

James Faucette - Pacific Crest Securities

Richard Kramer - Arete Research Services

Kulbinder Garcha - Credit Suisse

Maynard Um - UBS

Jeff Kvaal - Barclays Capital

Tavis McCourt - Morgan Keegan

Jim Suva - Citi Investment Research

Mark McKechnie - Broadpoint.AmTech Equity Capital Markets

Simona Jankowski - Goldman Sachs

Ittai Kidron - Oppenheimer

Vivek Arya - Bank America Securities/Merrill Lynch

Matthew Hoffman - Cowen & Co

Brian Modoff - Deutsche Bank

Motorola Inc. (MOT) Q2 2009 Earnings Call July 30, 2009 8:30 AM ET

Operator

Good morning and thank everyone for holding today. Welcome to Motorola’s second quarter 2009 earnings conference call. Today’s call is being recorded. Should you have any objections, please disconnect at this time. The presentation material and additional financial tables are currently posted on Motorola’s Investor Relations website.

In addition, a replay of this call will be available approximately three hours after the conclusion of this call over the Internet through the Motorola’s Investor Relation’s website. The website address is www.motorola.com/investor. At this time, all participants have been placed into a listen-only mode and the floor will be open for your questions following our presentation today.

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 second quarter results conference call. Today’s call will include prepared remarks by Sanjay Jha, co-chief Executive Officer of Motorola and CEO of Mobile Devices, Greg Brown, co-chief Executive Officer of Motorola and CEO of Broadband Mobility Solutions and Ed Fitzpatrick, Motorola’s 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 on 18 through 30 in item IA of Motorola’s 2008 annual report on Form 10-K, and in Motorola’s other SEC filings. This presentation is being made on the 30th of July, 2009. The content of this presentation contains time sensitive information that 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 Sanjay.

Sanjay Jha

Thanks Dean. Good morning and thank you all for joining us today. As you saw in this morning’s press release, Motorola reported a net loss, excluding highlighted items of $0.01 per share, exceeding our guidance. We executed well across the company amidst challenging yet stabilizing global economic conditions.

On a sequential basis, we reduced the operating loss in Mobile Devices and improved operating margins in broadband mobility solutions. Across the company, we reduced inventory by over $400 million, compared to the first quarter. We implemented further sustainable reductions in our cost structure and now expect an overall cost reduction of $1.8 billion for 2009, up from our previous plan of $1.7 billion.

In the quarter, we improved our cash flow by $360 million, and increased total cash from $6.1 billion to $6.5 billion. With the appropriate focus on cost management and the introduction of new products in all of our businesses, we will further improve earnings in the second half of the year.

This will drive positive operating cash flow and results in a higher total cash position at the end of the year compared to the current levels. I want to now turn the call over to Ed to cover the financial results in more detail. Following that, I’ll come back to discuss the Mobile Devices business and Greg will review the broadband mobility solutions. Ed?

Edward Fitzpatrick

Thanks, Sanjay. In the quarter, total sales were $5.5 billion, GAAP net earnings were $0.01 per share, including net income of $0.02 per share for highlighted items. Highlighted items primarily related to a favorable mark-to-market adjustment on certain Sigma fund investments and a further recovery related to telecom matter.

These items were partially offset by reorganization of business charges and facility impairment. Details on all of our highlighted items can be found on our website and our remaining financial comments will exclude highlighted items. The net loss in the second quarter was $0.01 per share compared to net earnings of $0.02 per share in the second quarter of 2008.

The decline in earnings was driven by lower sales, partially offset by improvement in gross margin percentage and a significant reduction in operating expenses. Our gross margin percentage was higher both year-on-year and sequentially. Compared to the first quarter, Mobile Devices improved largely due to product mix and improved supply chain efficiencies. The home and network segment also improved, primarily as a result of favorable product and regional mix in the networks business.

The Enterprise Mobility Solution segment gross margin percentage was essentially flat sequentially. With respect to operating expenses, we continue to implement actions across the company to make our cost structure leaner and to increase efficiency and speed. As of the end of June, we have reduced our headcount by approximately 8,000 compared to the end of last year.

In addition, we have significantly reduced contract and temporary staffing levels. In real estate, our rationalization efforts continue, as we shrink our footprint to reduce cost and improve operating efficiencies. In the quarter, operating expenses declined by $577 million, a 26% reduction compared to the second quarter of last year.

In the first half, we reduced OpEx by over $1 billion year-on-year. For the full year, as Sanjay mentioned, we now anticipate an annual operating expense reduction of $1.8 billion with Mobile Devices realizing a reduction of $1.4 billion. Finally, while our ongoing tax rate in the quarter was 44%, we continue to expect the full year ongoing tax rate of 34%.

Moving now to cash; we generated positive operating cash flow of $150 million and ended the quarter with total cash of $6.5 billion compared to $6.1 billion at the end of the first quarter. In the quarter, we improved working capital driven primarily by an inventory reduction of $411 million. Inventory levels were lower in each of the business segments with Mobile Devices driving the largest reduction.

Opportunities do still remain to further improve working capital metrics in the second half, particularly in inventory turns. During the quarter we sold approximately $370 million of receivables. We expect that sales receivables will continue this range throughout the remainder of the year.

Finally, total cash was favorably impacted by $138 million due to exchange rate changes and a $68 million mark-to-market adjustment related to the recovery in value of certain Sigma fund investments. During the quarter, we repatriated over $800 million with minimal cash tax cost and ended the quarter with a US cash position of approximately $2 billion. We have repatriated a total of $1.6 billion in the first half and we expect to continue to repatriate funds in the second half with minimal cash tax cost.

Moving now to our outlook; excluding items that I have already highlighted in our quarterly earnings releases, we expect third quarter results to be in the range of negative $0.01 to positive $0.01 per share. From a cash perspective, we anticipate our year end total cash position to be higher than the current $6.5 billion level driven by earnings improvement and further working capital efficiencies.

With that, I’ll pass the call back to Sanjay to discuss Mobile Devices.

Sanjay Jha

Thanks, Ed. What I would like to do today is review our second quarter financial results. I’ll also provide an update on the progress we’re making to deliver a differentiated Smartphone portfolio beginning in the fourth quarter, and position ourselves for continued financial improvement next year.

During the quarter, the overall handset market stabilized, and we estimate that total industry unit shipment were up sequentially. In Mobile Devices, second quarter results were comparable to the first quarter with sales of $1.8 billion and shipment of 14.8 million units. This reflects solid demand from our North American customers including certain prepaid markets.

For the quarter, we estimate our market share at 5.5%. Overall, ASP was $124, essentially unchanged from the first quarter. Regionally, our sales mix was similar to past quarters with North America accounting for 59% of total sales, and Latin America at 22% of sales. Asia-Pacific and EMEA made up 16% and 3% respectively.

Excluding the impact of highlighted items, the operating loss the quarter was $238 million, compared to $381 million operating loss the first quarter. Gross margin was higher largely due to a more favorable product mix and improved supply chain efficiencies. In addition, we reduced operating expenses by over 45% year-on-year and over 10% sequentially.

Finally, from a cash perspective, the sequential reduction in operating loss and reduced inventory levels resulted in a substantial reduction in Mobile Device’s cash consumption compared to the first quarter. We began shipping seven additional new devices during the quarter; these include the CDMA rival, a side-slider with one touch messaging access and QWERTY keyboard, the 3G karma, a messaging and social networking device with slide-out QWERTY keyboard and one click social networking access and item Clutch, a push-to-talk device designed for messaging and QWERTY keyboard and IM-style texting.

These devices are addressing consumer needs in their respective market segment and have gotten off to a good start. Regarding Smartphones, we will have two Android devices in stores for the holiday season. We have deals that are signed and we will launch with two major carriers in North America and multiple carriers outside the US. In addition, we have plans for several additional Android-based devices in the first quarter of 2010. I’m also very happy to report that Bill Ogle is joining Mobile Devices from Samsung.

Bill brings a wealth of experience to his role as Chief Marketing Officer and will lead the global marketing effort to launch our Smartphone portfolio. We are excited about these devices and those that will follow in 2010. Our device road map is well-defined and is receiving very good customer feedback.

Our Android devices will feature more intuitive user interface and will enable a combination of the best of Internet, messaging, multi-media and growing Android ecosystem. We will also be rolling out a service that provides personalized, shareable, end-to-end experience. This will simplify mobile communications especially in the area of integrated contact and message management, multi-media and social collaboration.

Regarding the ecosystem, investments from Mobile Devices over the past several years have resulted in one of the largest developer communities in the industry. We are working proactively through our MOTODEV program to bring that community to Android. We’ll offer developers early access to tools and Motorola devices, as well as engineering support to create, deploy and market their applications.

We have also established a very solid working relationship directly with Google on the Android platform and ecosystem. Through our close collaboration, we are coordinating our development effort. This includes fostering developer investment and making contributions to the open handset alliance, which enabled rich experiences in a number of key areas.

With these and other efforts, we will help sustain the rapid growth of new Android applications, adding to more than 6,000 applications that are available today. As a result, we expect the ecosystem to continue to gain consumer traction by providing a differentiated and optimized set of applications and experiences. In doing so, we will create user stickiness and a more lasting relationship with the consumers.

Looking ahead to the next year, the majority of our new devices will be Smartphones as we expand Android across a broader set of price points and address a wider set of customers. In mid to high tier feature phones, we anticipate an increasing number of consumers will migrate to Smartphones, resulting in a decline in our unit volume in this segment.

In, iDEN we will continue to refresh the portfolio, which will also include Android-based devices. And this shift in our portfolio mix, we expect our overall ASP and gross margin percentage to increase from where it is today. From an operational perspective, we continue to make significant progress. We have implemented staff reductions, resulting in a total workforce that’s over 30% smaller than when I arrived.

We have also put in place a more disciplined approach to product and portfolio management and R&D prioritization, which is driving more efficiency in our cost structure. As a result, for the full year we now expect to reduce OpEx by $1.4 billion, compared to 2008. In supply chain, with improved processes and a simplified portfolio, we have reduced inventory by over 50% compared to the end of 2008, and increased turns from mid single digits to approximately 10 turns.

We also continue to drive cost reduction in our supply chain. Our fixed cost per unit is now comparable to what it was with double the unit volume. In addition, we’re making substantial improvements in our hardware performing across our software portfolio. We are targeting 80% commonality for key modules in our Android family of devices. This will allow us to reduce for example our display, image, or battery and chip SKUs by more than 50%. The benefits we realize are better component pricing and improved inventory management.

Moving now to outlook, we expect third quarter sales to be comparable to the second quarter. Overall unit shipments will be lower, primary in low tier feature phones. However, with further improvement in the mix and further supply chain efficiencies, we expect a further reduction in operating loss.

In closing, I’m pleased with where we are with respect to implementing our strategy. The devices we are launching for the holiday season will get us back in the game in Smartphones. Throughout next year, we’ll continue to transition our product portfolio as we reduce our reliance on feature phones. Increasing ASP and gross margin trends, together with competitive cost structure, will keep us on the path of continued financial improvements over the remainder of 2009 and through 2010.

With that, I’ll pass the call over to Greg to discuss broadband mobility solutions.

Greg Brown

Thanks Sanjay, and good morning. In the second quarter, macro conditions remained challenging, but did show continued signs of stabilization. In Broadband Mobility Solutions, the teams executed well. We focused on our customers and held our leadership positions in key markets. We also further reduced our cost structure and increased our operating efficiencies.

As a result, we improved operating margin by nearly 300 basis points and reduced inventory by nearly 15% sequentially. Turning first to Home & Networks Mobility, second quarter sales were $2 billion, down from last year, but comparable to the first quarter.

Sales continue to be impacted by the economic headwinds facing home and declining industry spending in networks. The year-over-year comparable is tough, given that the second quarter of 2008 was arguably the best ever in home, primarily due to strong DVR demand, and as you may recall the drive for separable security.

In networks, last year’s results included a one time UMTS sale of $130 million. Operating margin excluding highlighted items was 10.2% compared to 6.8% in the first quarter. The increase was primarily due to a higher operating margin in networks, resulting from a favorable product and regional mix, as well as lower operating expenses.

In the Home business, operator spending contraction driven by the current macro-economic environment continues to impact demand. As a result, home sales were $1 billion flat with the first quarter. Digital entertainment device shipments were 3.7 million units and reflected an uptick in demand for HD-DVR devices compared to the first quarter. Despite the economic challenges, we’re maintaining our market leadership position.

As we look ahead, and in the near term, we expect operators to remain cautious with CapEx spending until there are indications of substantially improving market conditions. As a result, we continue to expect the addressable market for home to be down at least 10% in 2009, compared to 2008.

Longer term industry fundamentals remain solid. In the US, there are approximately 80 million homes subscribing to digital video services. HD and DVR penetration rates are approximately 43% and 47% respectively. As the economy recovers, the total number of homes with digital service and the penetration of HD and DVR will continue to grow.

In addition to that, we do expect that consumers will increasingly seek solutions that enable them to share their DVR content throughout the home and on Mobile Devices. The addition of network storage will further expand the opportunity for consumers to customize their viewing experience.

Our video solutions portfolio including video servers and other head-end equipment provides operators with the solutions they need to deliver these more advanced and personalized services.

Finally, competition in the marketplace continues to foster the need for higher broadband speeds. This will continue to drive operators to upgrade their networks resulting in increasing demand for our fiber rich architectures such as passive optical networks and bandwidth enhancing DOCSIS 3.0 solutions. To position ourselves to address these opportunities, we will continue to focus our R&D efforts on innovative solutions in both video and network infrastructure, as well as in digital entertainment devices.

In networks, sales in the second quarter were approximately $1 billion, flat with first quarter. Compared to a year ago, sales were lower primarily in GSM and UMTS. In addition, as I anticipated, iDEN sales were lower and accounted for approximately 10% of network sales. In WiMAX, we remain a market leader and sales were higher sequentially and compared to the year-ago quarter. We continue to track WiMAX sales of $500 to $600 million for the full year.

In LTE, we are very pleased that KDDI, our long-term customer in Japan is continuing its relationship with Motorola by selecting us for the development and implementation of their LET Mobile Broadband Network. We also continue to work closely with other operators including China Mobile with their ongoing LTE trial activities.

Turning now to our outlook for the third quarter for Home & Networks Mobility; on a sequential basis we expect sales in home & in networks to be comparable for the second quarter. Operating margin for the segment is expected to be lower with the decline attributable to product and region mix in networks. In the Enterprise Mobility Solutions business, second quarter sales were approximately $1.7 billion, up 5% compared to the first quarter.

Public safety sales were up sequentially and in enterprise with sales essentially flat on a sequential basis, we believe the spending environment has stabilized. Excluding highlighted items, operating margin for the segment was 13.9%, compared to 11.6% in the first quarter. The increase in operating margin was due primarily to the higher sales level.

Sales in North America in the second quarter accounted for 58% of total sales. On a sequential basis, sales were higher in public safety and backlog improved. In the quarter, we secured a state-wide system contract with a multi-year award from the State of Missouri. In Enterprise markets, sales increased slightly sequentially, and for the first time in several quarters and the order pipeline improved in mobile computing and scanning.

In the EMEA region with the European economy lagging the US, segment sales were flat sequentially and accounted for approximately 25% of sales. In Asia Pac, segment sales increased 28% compared to the first quarter, and accounted for 13% of sales, the increase was largely due to the implementation of a major piece contract in Malaysia.

Turning now to the portfolio, we continue to solve critical customer needs with innovative products. In the quarter, we achieved a major milestone as we began to ship the APX 7000. It’s our new P25 two-way portable radio.

APX is one of the most important product introductions we have ever made in public safety. It’s a break through that will service our flagship radio platform for a long time to come. Its multi-band functionality provides system interoperability, improves communications efficiency and speed and eliminates the need to carry multiple devices.

It provides first responders with unmatched volume and audio clarity for extreme environments where the ability to hear and be heard is critical for success. It also features an intuitive user interface and is 40% smaller in size than its nearest competitor. The APX portable is available throughout the North American market and we will be introducing the APX Mobile by the end of the year.

As we look ahead, with continuing public safety customer engagement and solid backlog, we expect demand to remain resilient. Regarding the US stimulus, we continue to monitor developments and work with customers who may be eligible for funding. We are just beginning to see the stimulus funds flow through to the intended recipients.

That said, we expect these funds will largely fill in budget gaps and support the continuation of existing projects and procurement plans. Outside the US, we see opportunities in a number of markets, particularly in the Middle East, parts of Asia, and Latin America. These will keep us on a path to further increase our international footprint.

For the global enterprise market, we believe the overall environment has stabilized. We’re encouraged by the level of customer engagement, particularly in North America and Asia Pac. Over the previous nine months, conversations with customers were focused on their need to curtail spending. More recently, the dialogue has shifted back to solutions to help them compete more effectively, improve processes and productivity and enhance their customer experiences.

Turning to the third quarter, for the Enterprise Mobility Solutions segment, on a sequential basis, we expect sales to be up slightly and operating margin to be higher. In closing, I believe that Broadband Mobility Solutions will emerge from the current market environment as a stronger, more competitive industry leader.

We will continue to invest for the long term by focusing our R&D investments on new opportunities and innovation that will further enhance our portfolio of solutions. This includes next generation public safety, Enterprise Mobile Computing, Enhanced Broadband Video, and 4G Wireless.

We will continue to maintain tight control over costs and further improve working capital management, resulting in a leaner and more efficient organization. Through these actions and with management teams that have a track record of execution and addressing client needs, we will sustain our market leadership position and position ourselves for profitable growth.

Now I’ll turn the call back over to Dean and we’ll start the Q&A.

Dean Lindroth

Thanks Greg. 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 a question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tim Long - BMO Capital Markets.

Tim Long - BMO Capital Markets

Thank you very much. Just a question on the Android devices that are coming, first Sanjay, you talked about two in the US. If you could just give us a sense as to what kind of technologies we should focus on and which would be first?

Then more importantly, on the European market you talked about a lot of international activity, obviously, Europe a big Smartphone market, but only about 3% of revenues in the division now. So, could you talk to us a little bit about how difficult it’s going to be to regain traction and how much of that international activity should we expect in Europe? Thank you.

Sanjay Jha

Thank you, Tim. First of all, with respect to Android devices in US, we expect to launch two of them with two major carriers in the United States for the holiday season, as I mentioned in my prepared remarks.

In terms of technology, I think it’s fair to say that we will launch with multiple technologies in US. With regards to your question about Europe, we have good close working relationship with multiple operators in Europe, and we will launch both devices that we will launch in US, in obviously UMTS of some of those devices in Europe. And I expect that we will begin to get back in Europe with these devices in the Smartphone marketplace.

It will take much further investment in 2010 for us to gain market share. You rightly pointed out, our market share in Europe is low right now because of our focus right now in US and China and Latin America. By the way, we will launch devices in those regions also. So I think we are focused on making sure that we address the Smartphone market. We see Europe as second largest Smartphone market and that in 2010 it will become a priority for us.

Operator

Your next question comes from Phil Cusick - Macquarie.

Phil Cusick - Macquarie Research

Switching gears a little bit to the networks business, I assume you took a good look at the Nortel assets that were for sale, and I wonder if you can help us comp those LTE, IPR and things like that to your business. And then on the WiMAX side, can you give us an update as to how that’s going, and would you consider doing a vendor financing deal in that space? Thanks.

Greg Brown

So on the Ericsson Nortel planned transaction, it’s not unexpected. Obviously, with Nortel announcing their intention to break up and sell assets, I think it was completely expected on our part that that would move forward. We are very pleased with the position that we have in the networks business, but we also recognize where we’re strong and where we’re not.

The business continues to perform very well, 2G in particular through the management team there has done a great job focusing on incumbent customers and optimizing it for profitability and cash, but also increasing customer quality and client satisfaction with the architecture hardware that we play in.

In terms of WiMAX, we recognized WiMAX revenues in a material way in Q2, and we talked about $500 to $600 million guidance annually for 2009, which we are still comfortable with. We have not seen a whole lot of customer requests for customer financing in WiMAX and generally speaking that’s not our primary business model.

Operator

Your next question comes from James Faucette - Pacific Crest.

James Faucette - Pacific Crest

Thanks very much. I wanted to return back to Sanjay and the strategy that is being pursued of moving more into the Smartphones, I think that’s one is understandable to us all. What I’m wondering is as you do that and as you’ve talked about a little bit de-emphasizing more the low end, how should we thing think about the impact on volumes?

Dean Lindroth

James, you’re fading in and out a bit. I’m going to need to ask you if you could sort of rephrase the question. We’re having a hard time hearing you.

James Faucette - Pacific Crest

Sure. Absolutely I apologize for that. My question was just as you work to move more into the Smartphone segment and de-emphasize some of the low end, obviously the ASP will go up, but I’m wondering what our expectations should be as to what the implications are for handset volumes and going forward, firstly?

Secondly, if you can comment on any type of or what the feedback has been so far on pricing of new particularly Android phones, as more competitors with Android-based products are also expecting to come to market in the same time frame. Thanks. Hopefully you could hear that.

Sanjay Jha

Thanks, James. Our core strategy really is to take Android and take Android to as low down the feature phone tier, as we possibly can, by bringing in Smartphone features, best of Internet, best of messaging, best of multi-media, best of location services. That’s our core strategy.

Now as you know, Smartphone market is a small percentage of the overall handset market, but carries the largest profit pool in the handset market. So we think with our current strategy we will be able to address that extremely well. So there is clearly a volume impact by just addressing the Smartphone marketplace. We will augment our Smartphone strategy by our ODM strategy.

Below a certain price point, we will work directly and very closely with our ODM partners and deliver a product road map, because some of our customers want to see a full portfolio of product from us and we will go address that marketplace with the help of our ODM partners.

We won’t invest a large amount of internal resources, but we’ll partner very closely with our ODM partners. That’s kind of the core strategy. In terms of volume, I think we are not focused on market share and volume. We’re focused on making sure that we are relevant and we have good operating profit, gross margin and higher ASP. Those are really our focus here, James.

Operator

Your next question comes from Richard Kramer - Arete.

Richard Kramer - Arete Research Services

Thanks very much. We haven’t heard you mention at all anything about a separation. Do you currently have a separate balance sheet and cash flow for the two halves of Motorola and what sort of gating factors could we look for in terms of profitability or scale or what have you, such that we might locate a separation of Mobile Device business in 2010, if that’s still your goal.

Maybe one other question, are you intending to appoint a permanent CFO at some point and give Tom the job or is that something that remains waiting for the separation or some further event?

Sanjay Jha

Thank you, Richard. We have not changed our strategy with respect to separation. We continue on the path to separation, gated by three factors, as we have talked about in previous times. One is the performance of Mobile Devices.

Second is the macro-economic environment. And third is the stability in the mobile handset marketplace. And I think those three things will ultimately govern our decision as to when we separate the business. But, that is the core plan of record for us. Greg, do you want to take the…

Greg Brown

just to add to Sanjay’s point, I think that the preparation that we have made and progress for separation and running the organization with co-CEOs and basically bifurcated operational scrutiny has really helped us get after cost structure, drive efficiencies and get to self contained entities.

We’ve integrated corporate staffs into the respective businesses. We’ve collapsed centralized supply chain into Sanjay’s business and mine, and we’ve obviously gotten after costs, which now we’re targeting approximately a 1.8 billion. So the preparation has been great. On CFO, we continue to evaluate candidates. I think solid progress is being made and Ed remains obviously in the active capacity. He has been in that job for six months and we’ll update you when we have something more.

Operator

Your next question comes from Kulbinder Garcha - Credit Suisse.

Kulbinder Garcha - Credit Suisse

Thanks. A question for Sanjay, and it’s really about carrier channel support. It seems that for the Smartphones that really are successful at the moment, they tend to have a kind of hero status where they attract a lot of carrier subsides for the channel.

I’m wondering as we exit 2009 to 2010 to materially turn around the fortunes for the Mobile Device business, do you think you need something like that, like a hero status that was in the carriers or can these other channels outside of the carriers, in other regions, especially outside of North America, make up any of the slack. That’s what I’m really interested in terms of how these devices maybe supported going forward.

Sanjay Jha

Kulbinder, we have for both devices relationships with major carriers. I would really let the carriers announce as to what status they want to accord these devices, but we’re working extremely closely with our two partners here to make sure that we make this device successful.

As I think Kulbinder, this fourth quarter is going to be quite a battle in the Smartphone marketplace, and I think our carriers are aware that you can’t just throw out the devices in the marketplace and that will sink or swim, that you have to support it with substantial marketing help, and I’m hoping that we will be able to receive some of that.

Kulbinder Garcha - Credit Suisse

Okay. Sanjay, just a follow-up if I may on that point. One of your competitors has kind of complained about their ability to price new Smartphones into the market versus the past, versus what you were expecting maybe six or nine months ago. Are you finding these discussions equally difficult or how is the kind of agreements you’re find, are they basically what you’ve expected maybe when you took the job.

Sanjay Jha

Thank you for bringing that up. I think James also had that question and I overlooked to answer that. There is no doubt that there has been ASP decline in the Smartphone marketplace, but I equally feel pretty confident with the supply chain initiatives that we have taken, with the platforming we are doing, with the family approach to developing Smart that we have here, and with the rationalization of our R&D and platform, that we can deliver cost competitive devices in the marketplace. And frankly, I think we are getting very good traction for our 2010 portfolio.

So there is no doubt that the ASPs and Smartphone marketplace will reflect the competitive pressures that are out there, but we feel relatively well positioned to be able to play and succeed in that marketplace.

Operator

Your next question comes from Maynard Um - UBS.

Maynard Um - UBS

Sanjay, can you just talk about your expectations for the handset industry, the growth into the next quarter and it sounds like you’re expecting the mix of lower end to decrease based on your guidance of lower units but flat revenues. Can you just talk about the factors there? And then maybe if I could, just curious what the differences will be between your lower priced and higher priced Android. Thanks.

Sanjay Jha

I didn’t catch the last part of your question, Maynard. Maybe you can just ask that part again, the lower and high end part.

Maynard Um - UBS

Just the differences between what the Android phones that will be ODM and the one that’s you’ll be internally developing, what the differences between those Smartphones will be, if it’s design or applications or the differentiators aside from price.

Sanjay Jha

The low end Smartphones that we are doing based on Android, all of those developments will be done internally. The ODM effort that I talked about are largely not third party OS efforts, they are voice centric or low end or mid-end feature phone devices that will be ODM. So just to be clear, high tier, mid tier and low tier Android devices we’ll develop ourselves, may partner with some ODM but primarily develop ourselves.

The ODM partnership is really for feature phones and voice centric phones. So the difference, therefore, would be quite dramatic. In terms of just extending your question, the difference between low end and high end Smartphones, I suspect that in both of them you need to provide sufficient capabilities that there is a probability, a high probability of attach rate of data plan. I expect that you would see some tiering of data plans and data plan for low end and high end will be different.

We’re actually quite focused on working with carriers to make sure that we could enable for that to occur, so that even in the low end Android Smartphones carriers can get data plan and have an ability to subsidize those devices a little more aggressively. So I think that that’s the difference we see between Android low end and Android high end.

Going back to the question of how I see or we see, I would say we see it flat to up sequentially. Somewhere between 270, 280 million units in third quarter, though I think there are a number of factors which will impact that as well. Our focus really is on Smartphones as I’ve said and I expect that that will lead to ASP and gross margin over a period of time for us.

Operator

Your next question comes from Jeff Kvaal - Barclays Capital.

Jeff Kvaal - Barclays Capital

I was wondering if you could update us a little bit on the market share trends on the cable side. We talked a little bit about pace last quarter. Then, Sanjay, for you, your commentary about the competitive environment in Smartphones, which you offset with your platform approach, should we take that to mean that the margins on your initial Android phone launches won’t be where you would ultimately like them to be, it will require you to get to scale volume? Thanks you.

Greg Brown

So in the home, clearly the first half of the year has been tough. From an industries perspective, and that’s obviously flowed through to our results. I think it’s primarily demand-driven and also deferring in terms of the cable MSO’s perspective, video infrastructure investments.

We do expect the second half of home to be better than the first half, and I think we have clearer visibility than we did a few months ago in that regard. But there’s no question, this has been a tough year. Having said that, as I mentioned, I think the long-term fundamental that’s will drive sustainable growth, whether it’s high end DVR penetration, international sales growth, multi-room DVR, IPTV and video infrastructure remains solid. I just think cyclically it’s been a tough period.

Jeff Kvaal - Barclays Capital

Okay. So the share loss is behind you at the moment.

Greg Brown

I think in digital entertainment devices we have held share for the first half of the year. The only difference I would say is at the very, very low end, Jeff, on the VTAs, the commodity-like digital terminal adapters on the very, very low end, where it has been multi-sourced, but if you extract that out and look at mid-to-high end, I think we’ve generally held share.

Sanjay Jha

Jeff, to your question on our expectation for gross margins and for the initial launches of Smartphones, I would just say that our expectation is that we would get industry comparable margins. There are players who have 60% gross margin in the marketplace. We are not aspiring with our launches to those margins. Industry comparable margin is what I would say we would get to with our launches.

As I mentioned in earlier response, as we get traction with our Smartphones in additional geographies, Europe in particular, I think we will make some investment in those areas to expand our presence. We will put some marketing dollars behind it. But we will only do that once we get traction in those marketplaces. As I say, I think the initial feedback from those markets is very, very positive and we’re pretty excited about it.

Operator

Your next question comes from Tavis McCourt - Morgan Keegan.

Tavis McCourt - Morgan Keegan

Thanks for taking my questions. First one is for you Sanjay. In terms of total number of SKUs you expect to launch next year, should we thing about that as being similar to this year, but just more skewed toward higher end Android or will you actually make a push for actually more handsets and more shelf space in the market?

Then Greg, I was wondering if you can comment on iDEN infrastructure. Sprint made some comments yesterday about maybe needing to reinvest in this, given the success of Boost Mobile and how do you think about that part of infrastructure business at this point?

Sanjay Jha

Okay, Tavis. First of all, I think it’s difficult to be precise just yet, because our ODM portfolio is still kind of getting formed, but I would say as way of initial guidance, I would say comparable number of devices to 2009 for 2010, it will be comparable to 2009. But, obviously the mix in terms of ASP and gross margin would be meaningfully better.

Greg Brown

On iDEN infrastructure, we have multi-year contracts for software and services for Sprint and II, and obviously the customers that drive and support and procure iDEN. So we have a level of predictability in those multi-year contracts.

We are not planning on any second half uptick in iDEN infrastructure at the moment. Obviously, with Sprint pushing forward and emphasizing prepaid boost, it’s had a positive impact on Sanjay’s business and commensurately increasing the utilization of iDEN infrastructure which is good but we’re not planning on any second half uptick beyond what’s in our plan.

Tavis McCourt - Morgan Keegan

A quick follow-up, Greg. Your guidance on Enterprise Mobility was up sequentially. I was wondering if you thought it would be up in both segments, both public safety and enterprise or it would be more weighted towards public safety.

Greg Brown

I think it’s more weighted towards public safety and in the Enterprise segment you can think of it more along the lines loosely flat to maybe very slightly up.

Operator

Your next question comes from Jim Suva - Citibank.

Jim Suva - Citi Investment Research

I think it’s fair to say it’s a little bit notable that Sanjay is leading the conference call today, and I just wanted to ask if there’s something behind that or previously, Sanjay you’ve been a lot more quiet relative to leading it today?

Then the follow-up question is Sanjay, with the cost cutting you’ve done in mobile and a terrific job of reducing the costs, what are you kind of right-sizing that business to? You know, you’ve got Apple and RIM who are very small parts of the market focused on the Smartphone market, who represent a very profitable and then you’ve also got Nokia on the other side who is a much bigger. What are you right-sizing your business for.

Sanjay Jha

Let me take the first part of your question. You should attach no significance at all to the fact that I’m leading the conference today. Greg and I will alternate from here on in and that ought to be the plan of record from here.

Secondly, to the substantial question of what we’re right-sizing this business to. I think, look, the number one thing is for us to get to break even profitability and what we’re trying to do is make sure that we deliver a portfolio, which gets us to there and then once we have that we can expand from there.

I’m not holding any of the names that you mentioned as a model for us to follow. What we need to do is bring down the cost structure to a place where we can in a rapid-fire fashion deliver good financial results and then we will invest as our performance dictates we should.

So we are not interested in just being a one region and a high tier only product company, but we will do in the short term what’s necessary to deliver the financial performance, which our shareholders expect.

Jim Suva - Citi Investment Research

A quick follow-up would be for that break even, and is it more on launching these new phones or is there still more cost cutting to go, because you’ve made significant progress, which has been very impressive. We’re just trying to see some milestones of what you’re targeting.

Sanjay Jha

I would say, as we talked about in the call, we have plans to take out $1.4 billion, which is up from our earlier projection of $1.3 billion. We have made substantial improvements in the fixed cost of our supply chain. We have reduced our inventory and increased our inventory turns. We have much better demand planning. We have much better visibility. I guess in terms of managing our relationship with our customers and supply and demand.

We are constantly looking for operational improvements, Jim. But, I would say that we’re getting close to a cost structure, which I feel comfortable. I think there’s probably still a modest opportunity going forward, but we will balance those cost structure reductions with any investment opportunities which we may have to increase our gross margin and volume.

So I would say that we are getting close to where I feel comfortable with the cost structure. We clearly analyze the cost structure of all of our competitors and I think that we are getting close to a competitive cost structure. There may still be modest amount of reduction that may come beyond this.

Operator

Your next question comes from Mark McKechnie - Broadpoint.AmTech.

Mark McKechnie - Broadpoint.AmTech Equity Capital Markets

You did mention handset gross margins improved sequentially. Do you share that number with us or can you give us an exact number or ballpark of what the gross margins were and maybe give us a sense of where and when you think that handset business can break even. Thanks.

Sanjay Jha

Mark, the handset gross March improvement in this quarter was reasonably modest. I think as we launch our Smartphone portfolio, that’s where we would begin to see through 2010 improvement in our gross margin.

Really I think it’s fair to say that our gross margins today are below industry levels and our aspiration here is to get to be comparable with industry levels over a period of next X number of quarters. I think that’s probably the best way to guide you on gross margin. As you know, we’ve not in previous times broken out gross margin to you. I probably won’t start that today, but I do want to give you some color on it.

Mark McKechnie - Broadpoint.AmTech Equity Capital Markets

Thanks Sanjay. And then the other thing is on your handset portfolio for next year, it sounds like you announced a lot of non-Android products that started shipping here this quarter. For 2010, it sounds like you expect the low end to fall off, but do you expect to continue at a pretty decent run rate of your old, I guess I’m calling them legacy or non-Android platforms. So, how should we look at your plan there?

Sanjay Jha

I think in this business legacy business doesn’t stay in circulation for very long. So we do expect the legacy business to begin to taper off in 2010. Except I think we continue to have pretty good traction with iDEN and with the recent renewed focus from Sprint on prepaid, we have a pretty good market share with Sprint in prepaid and we’re improving our relationships with not just Sprint, but every single North American carrier across the portfolio.

So with our ODM effort, we would hope to address some of the lower tier handsets as well. But, just to reemphasize, I think our primary focus in 2010 is going to be on Android devices, on Smartphones and making sure that we can bring the price points of those devices as low as possible in a profitable way. That’s really the primary focus.

ODM stuff is there to help us keep relevance in a segment, which will become important for us later on if we’re successful but Smartphones are really where the future of this division will lay, at least in 2010.

Operator

Your next question comes from Simona Jankowski - Goldman Sachs.

Simona Jankowski - Goldman Sachs

Just a couple of questions. Sanjay, number one, so let me kind of put it all together in terms of your Smartphone and feature phone and ODM strategy into next year, it seems pretty clear your ASPs will be up on a blended basis. But, should we think of that as being a meaningful increase such as double digits percent increase or do you think that because Smartphones are going to reaching to look today served by the feature phone segment that’s still going to be more of a single digit increase?

Sanjay Jha

Simona, I think you’re asking for precision on guidance that we are probably not ready to provide today. I would say that the most of our R&D is going to be focused on the Smartphone portfolio and if you look at the profit pool available in the Smartphone -- by the way, in my opinion, I think there is an underestimate of what the Smartphone volume is going to be in 2010, because of these effects.

It’s not just us, but a number of handset manufacturers are very focused in driving Smartphone-like feature sets into the what used be called feature phone tiers. So, I think that our ability and our success in being able to do that will determine our volume as well as the gross margin mix for the year. I won’t guide you more precisely than that.

Simona Jankowski - Goldman Sachs

The second question is you talked about offering a service for end-to-end mobile experience. Can you just talk a little bit more about how that would interact with things like the Android marketplace or the Verizon app store?

Sanjay Jha

We will support Android marketplace completely and fully, and as Verizon develops their app store, we are absolutely open to supporting their own app store as well.

The service is actually not an app store service. It’s an end-to-end user experience delivery and something like, say social messaging, social media, making the experiences that we deliver better by aggregating and delivering all of that in a much more user consumable way. The services we’re going to deliver, we’re working very hard for it not to conflict with any service plan that our carrier partners have, but what we’re looking to do is deliver much better experience.

We’re not particularly looking to monetize the service. We’re looking to make sure that experience that we deliver is sufficiently good that our consumers are more able to do what they want to do with the phone better.

Operator

Your next question comes from Ittai Kidron - Oppenheimer.

Ittai Kidron - Oppenheimer

Thank you very much. Congratulations also on a good quarter. Sanjay, going back to the comments in your press release that you have agreements in place of carriers, can you elaborate a little bit more on, I know you can’t tell us the terms, but can you tell us at least generally, are there volume commitments attached of to those contracts of they just set pricing terms based on certain volume achievements. Also, when will we finally see some Motorola commercials on TV again?

Sanjay Jha

We do have some minimal volume commitments, which is to say the minimal guaranteed volume commitments. Clearly, both the carriers and ourselves will be working closely to exceed those commitments.

In terms of when you will see ads, well, let me tell you, around mid September timeframe we hope to be able to let you play with these devices more and get your feedback as to where you think it fits into the marketplace. So, around mid September we’ll let you have a look and feel of these devices. As we begin to launch our devices, probably in third, fourth quarter, you will begin to see us having presence with more media advertising.

Operator

Your next question comes from Tal Liani - Bank of America Securities/Merrill Lynch.

Vivek Arya - Bank America Securities/Merrill Lynch

Thanks its Vivek Arya on Tal’s behalf. Sanjay, two questions for you. First is you how sustainable are the differentiators you’re building in Android? What prevents, say, HTC and Samsung from replicating those improvements? And secondly, without giving guidance, is it conceptually feasible to see operating break even in Mobile Devices in 2010? Is it in within your line of sight? Thank you.

Sanjay Jha

The question of differentiation is a very good one Tal, because my view is that we work to get differentiation and we need to continue to work. It’s not the case that we get one differentiation. We don’t, for instance, have the RIM-like differentiation in the sense that they have a messaging suite and they have a large number of BES and BIS servers behind fire walls, which gives them some differentiation in a more structured way.

What we have to do really is to get differentiation by the services we provide, by the ecosystem we deliver, by the form factors, by the brand, by our presence in China, Latin America, United States, by focus on certain features, by delivering them better than anybody else. And for us, it’s a matter of running harder than anybody else, and I think that my view is that we have demonstrated over the last year or we will demonstrate when we launch the devices that we have come along way in one year. And I think if we keep running at that pace, we have a chance of keeping differentiation.

I think Internet is going to be a very, very important feature and a very tight integration of a lot of the Internet services into the device as well as the home screen, I think is going to become very important. We are focused on all of those things, and I really think that we have to keep running to keep that differentiation. I don’t think that we have a built-in advantage, which gives us a structured advantage here.

Vivek Arya - Bank America Securities/Merrill Lynch

Okay. And on perhaps breaking even in Mobile Devices in 2010, is that conceptually possible? Is that within your line of sight or is that still a stretch goes?

Sanjay Jha

I think on a quarterly basis, if we don’t break even in 2010 I’d be disappointed, but certainly for a year I won’t guide you just yet.

Operator

Your next question comes from Matthew Hoffman - Cowen & Co.

Matthew Hoffman - Cowen & Co

Thanks. Greg, in the first quarter you made a point of indicating the government side of GMPS was stronger than the enterprise side, and it sounds like government again was the stronger contributor in 2Q. Two questions here as you look forward. First, how fast will the APX line begin to contribute meaningfully to a product upgrade cycle in public safety?

Second, with sales and margins getting better in 3Q without enterprise contributing much to growth, I was hoping you could outline the conditions that need to appear before enterprises do begin to initiate new product spending. Is it simply macro confidence? Are they looking for credit or something to support that spending? Thanks.

Greg Brown

We’re shipping the APX on your first question. We’ve begun shipments in the APX portable in Q2. And we have orders for it. We’ll get more between now and the end of the year. Probably realistically from a planning perspective, materiality of APX is probably more 2010 skewed, but we expect it to continue to ramp. It’s been really, really, really well received by the first responder community.

Again, as I mentioned sequentially, both the sector of Enterprise Mobility group, public safety grew more strongly, but for the first time in several quarters, enterprise grew small, but at least it was progress on low single digit sequential growth. I think that we’re seeing signs of stability now, and I think it’s more macro-economic driven than anything else, to your point.

Matthew Hoffman - Cowen & Co

Okay. And on APX, is that a premium? Is that priced at a premium to the current offerings with better margins or should we think of it as a more of a replacement sale that keep your leads in that space going?

Greg Brown

I think it extends our lead in the space and we have worked hard on the supply chain side, so the gross margins are robust but they’re consistent with what we would sell portables at the very high end today.

Operator

And for our last question today we’re going to go to the line of Brian Modoff from Deutsche Bank. Please go ahead.

Brian Modoff - Deutsche Bank

Those of us that have been around Motorola for some time remember the promises of phones to be launched in Q4 only to see them launched very late in Q4.

With regard on these two Smartphones, one, were they’re supposed to be three originally, but are we going to see these well in front of the Christmas season, so we’re not trying to rush sales in the last two or three weeks of the quarter? Are they going to be in there in plenty of time so the operators has chance to promote them, give also chance to see them, and you have a good chance of selling some.

Then second question, fragmentation of the Android OS, that we probably will see some of that. How do you control and influence the Android OS, so it’s minimized and or perhaps even how do you do it so that Motorola becomes a strong supplier of that operating system devices?

Sanjay Jha

I’ll take your last question first, Brian. We are completely committed to not fragmenting the Android ecosystem. I think the Android ecosystem, we bet on Android ecosystem and I think it’s a very important factor for us. And as you could see from my commentary, and my prepared remarks, that we are very focused in making sure that there’s a large development community supporting that.

We are 100% tied with Google in making sure that Android does not fragment. There are others who may go that way. I think that’s their preference. But, one of the ways to not fragment is that few of us to commit to not fragmenting it and driving volume on the main line, and I am certainly committed to doing that.

With respect to launching devices in fourth quarter, Brian, we understand what it takes to launch devices in fourth quarter and when it needs to be launched. And I feel pretty comfortable that we’ll launch devices, so that we will see meaningful volume in fourth quarter. I understand of course that there is a track record that you allude to. We’re very, very focused on making sure that we deliver it in such a way that allows operators the opportunity to get behind the devices again, in a meaningful way.

And your question about three versus two phones, really, from my perspective there were only two phones. There are phones that we will launch at the tail end of the quarter, but they were never in our plans for the fourth quarter.

Dean Lindroth

I want to remind everyone that details outlining highlighted items in our GAAP to non-GAAP reconciliation’s and other financial information can be found on our website. An audio replay along with today’s slides will be available shortly after this call.

During this call we have made a number of forward-looking statements. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of Motorola and there could 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: Expected cost savings from the company’s ongoing reorganization activities, expectations for cash flows and total cash levels during the remainder of 2009, anticipated levels of receivables to be sold during the remainder of 2009, plans for repatriation of funds from other jurisdictions, guidance for Motorola’s earnings per share for the third quarter on 2009, expected timing for the announcement, launch and shipment of new products, expectations for the potential separation of Motorola’s businesses into two independent publically traded company’s, guidance for future sales, operating expenses, margins, profitability, ASPs or market share for each of Motorola’s businesses, expected capital expenditures by network operators and the size of the total addressable market in our home business, expected tax rate, size of the global handset market and future product features.

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 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-10K and in Motorola’s other SEC filings. This now concludes our call. Thank you for joining us today.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. A replay of this call will be available over the Internet in approximately three hours. The website address is www.motorola.com/investor. Once again that 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. Q2 2009 Earnings Call Transcript
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