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Executives

Sanjay Jha – Co-Chief Executive Officer of Motorola Inc. & CEO of Mobile Devices

Gregory Brown – Co-Chief Executive Officer Motorola Inc. & CEO of Broadband Mobility Solutions

Ed Fitzpatrick – Chief Financial Officer

Dean Lindroth – Corporate Vice President of Investor Relations

Analysts

Ittai Kidron – Oppenheimer & Co.

Mark Sue – RBC Capital Markets

Maynard Um – UBS

Samuel Wilson – JMP Securities

Mark McKechnie – Broadpoint.AmTech Equity Capital Markets

Edward Snyder – Charter Equity Research

Tal Liani – BofA Merrill Lynch

Kulbinder Garcha – Credit Suisse

Matthew Hoffman – Cowen & Co

Richard Kramer – Arete Research Services

Simona Jankowski – Goldman Sachs

Peter Misek – Canaccord Adams

Tavis McCourt – Morgan, Keegan & Company

Jeff Kvaal – Barclays Capital

Brian Modoff – Deutsche Bank Securities

Thomas Walkley – Piper Jaffray

Motorola Inc. (MOT) Q3 2009 Earnings Call October 29, 2009 8:00 AM ET

Operator

Welcome to Motorola's third quarter 2009 earnings conference call. (Operator Instructions). The presentation material and additional financial tables are currently posted on Motorola's investor relations Web site. In addition, a replay of this conference will be available approximately three hours after the conclusion of this call over the Internet through Motorola's investor relations website. The website address is www.motorola.com/investor. (Operator Instructions) I would now like to introduce Mr. Dean Lindroth, Corporate Vice President of Investor Relations.

Dean Lindroth

Good morning to Motorola's third quarter results conference call. Today's call will include prepared remarks by Greg Brown, Co-Chief Executive Officer Motorola and CEO of Broadband Mobility Solutions Sanjay Jha, Co-Chief Executive Officer of Motorola and CEO of Mobile Devices and Ed Fitzpatrick, Motorola's Chief Financial Officer.

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

Because forward-looking statements involve risks and uncertainties, Motorola's actual results could differ materially from these statements. Information about factors that could cause, and in some cases have caused such differences can be found in this morning's press release on pages 18 through 30 and item 1A of Motorola's 2008 annual report on Form 10-K and in Motorola's other SEC filings.

This presentation is being made on the 29th of October 2009. The content of this presentation contains time-sensitive information and is accurate only as of the time hereof. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, Motorola will not be reviewing or updating material that is contained herein.

I will now turn the call over to Greg.

Gregory Brown

Sanjay, Ed, Dean and I are originating our call this morning from New York City following a very exciting day yesterday with Mobile Device's second smartphone product launch. As most of you probably know, Sanjay was here in New York to launch our DROID smartphone with Verizon Wireless. The device has received a terrific reception, and later in this call, Sanjay will have a lot more to say about both of our new smartphones as well as provide an update on mobile devices.

This morning, we announced that we've appointed Ed Fitzpatrick as Chief Financial Officer for Motorola effective immediately. Ed's been with the company for nine years and has served as the company's acting CFO since February. Previously, he served as Corporate Controller, and was CFO for the Home and Networks Mobility business. Sanjay and I are thrilled to have someone of Ed's caliber take on this role, and we look forward to his continuing contributions to the company.

Turning to the third quarter results this morning, Motorola reported sales of $5.5 billion. Net earnings, excluding highlighted items of $0.02 per share exceeded the top end of our guidance. Across the company, we continue to execute well and improve our operating and financial performance.

On a sequential basis in Broadband Mobility Solutions, we improved operating margin on slightly higher sales. Mobile Devices significantly reduced its operating loss, and as I just mentioned, has announced new smartphone devices for the fourth quarter holiday season.

In all of our businesses, we continue to place significant focus on cost management, working capital, cash flow and the introduction of innovative new products. We now expect to achieve $1.9 billion in operating expense reductions compared to 2008, up $100 million from what we indicated on our last earnings call.

Sequentially, we further reduced inventory by over $130 million and improved our cash position by $700 million, ending the quarter with total cash of $7.2 billion. Continuation of these efforts will drive further earnings improvement and positive operating cash flow in the fourth quarter.

I now want to turn the call over to Ed to cover the financial results in more detail. Following that, I'll be back to discuss Broadband Mobility Solutions and then Sanjay will review Mobile Devices.

Ed Fitzpatrick

In the quarter, total sales were $5.5 billion, and on a GAAP basis, we reported net earnings of $0.01 per share. This includes net charges of $0.01 per share for highlighted items. Highlighted items related to environmental reserve and costs associated with our ongoing efforts to prepare for separation into two independent public companies. Details on these items can be found on our website. Our remaining financial comments will exclude highlighted items.

Third quarter earnings of $0.02 per share compared to a loss of $0.01 per share in second quarter. The increase in earnings was driven by an improvement in the gross margin percentage and a reduction in operating expenses.

Gross margin percentage was sequentially higher in Mobile Devices largely due to product mix and further supply chain efficiencies. The Enterprise Mobility Solutions segment gross margin percentage was also up sequentially due to a favorable product mix, and gross margin percentage in Home and Networks Mobility business was essentially flat.

With respect to operating expenses, we continue to maintain tight control on costs. Compared to the end of 2008, we have reduced our headcount by approximately 9,700 and also significantly reduced contract and temporary staffing levels. In the quarter, operating expenses declined by $486 million, a 23% reduction compared to the third quarter of last year. And as Greg noted, for the full year, we now anticipate an overall operating expense reduction of $1.9 billion with Mobile Devices realizing reduction in excess of $1.4 billion. Finally, our ongoing tax rate in the quarter was approximately 33% and we expect a full-year ongoing tax rate of between 34% and 35%

Moving now to the balance sheet, in the quarter, we reduced inventory by $137 million driven by a reduction in each of the business segments. On a turns basis, we sequentially improved overall turns of 9.1 to 9.6 with Mobile Devices now achieving over 10 turns. Total accounts receivable were also lower by over $280 million with DSOs declining sequentially from 61 to 57 days.

As a result of improved working capital efficiency and overall higher earnings, we generated operating cash flow of over $600 million and ended the quarter with total cash of $7.2 billion compared to $6.5 billion at the end of the second quarter. During the quarter, we repatriated over $300 million and increased our U.S. cash position to $2.4 billion.

Turning then to our outlook, excluding items of the variety typically highlighted in our quarterly earnings releases, we expect fourth quarter earnings to be in the range of $0.07 to $0.9 per share. From a cash perspective, we anticipate our year-end balance cash position to be above current levels.

With that I'll pass the call back to Greg to discuss Broadband Mobility Solutions.

Gregory Brown

Broadband Mobility Solutions performed well in the third quarter and delivered sequentially higher sales, solid operating margins and reduced inventory. We continue to focus on engaging with and satisfying our customer's evolving needs across all of our markets amidst economic conditions that are slowly improving.

As always, we remain vigilant on cost management and continue to direct our R&D efforts toward innovations to secure new opportunities and strengthen our market position.

Turning first to Home and Networks Mobility, third quarter sales were $2 billion, comparable to the second quarter. Operating margin, excluding highlighted items, was 9.9% compared to 10.2% in the second quarter. As we communicated on our last call, the anticipated decline in operating margin was due to product and region mix in networks.

Home sales were approximately $900 million including shipments of 3.3 million digital entertainment devices. The addressable market continues to be adversely impacted by the macroeconomic environment primarily related to the conditions in the U.S. housing market. So demand was below our expectations and operators continue to manage their inventory levels very tightly. We also continue to see some operators postpone video infrastructure purchases that carry longer return on investment time horizons.

Near term, we anticipate continued pressure on the addressable market for Home. That said, we'll continue to keep a tight rein on costs while not compromising the competiveness of our portfolio or support to our customers.

As economic conditions improve, particularly in housing, we expect recovery in demand for HD, DVR and in-home network solutions. This, in turn, will further drive demand for more personalized consumer viewing experiences and advanced services that will require operators to reinvest in their networks.

Furthermore, competition in the industry will drive the need for higher broadband speeds leading to network upgrades and increased demand for deep fiber architectures and DOCSIS 3.0 solutions. We're well positioned to address these opportunities, and we'll continue to target our R&D efforts on innovative end-to-end solutions and video and network infrastructure as well as in consumer premise equipment.

During the quarter, for example, we launched our next generation video platform for dynamically managing bandwidth, format and resolution to enable higher quality consumer viewing experiences and emerging services such as 3D television and multi-format output. We also announced our IPTV open applications software platform that enables operators to bring Web applications and user-generated content to the TV.

As one of our green initiatives, we announced a series of innovative IP set-tops that surpass new U.S. and E.U. initiatives for low power consumption devices in the home and finally yesterday we announced our plans to broaden our portfolio with a new low end HD digital entertainment device.

In Networks, sales in the third quarter were approximately $1.1 billion. The sequential sales increase was primarily in WiMax and GSM. In WiMax we secured additional wins, launched two new devices, shipped our one millionth CBE device and are incorporating emerging 802.16m standards into our product road map, establishing us and reinforcing us as a clear leader in this market.

For the full year we now expect to achieve approximately $600 million in total WiMax sales. While sales in 2G and 3G technologies are declining on a year-over-year basis we continue to drive very strong operating margins.

That said, voice demand continues to be resilient and some of our customers have seen strong demand for data-enabled devices. This trend is lengthening the tail on our 2G and 3G businesses, businesses which will continue to generate solid operating margin and cash returns.

In LTE we continue to pursue a very targeted strategy, one that's centered around our radio access network solution and existing wireless network customers. As you know KDBI has selected us for development and implementation of their LTE mobile broadband network.

We also continue to work closely with other operators on their LTE trials. Recently we successfully deployed the first live mobile demonstration of a TD-LTE network for China Mobile. Our OFDM-based solution leverages our WiMax R&D investment and expertise in the provisioning of commercial high speed broadband networks. This allows us to efficiently deploy capital and deliver innovative broadband solutions to our customers.

Turning now to the outlook for fourth quarter for our Home and Networks Mobility business, on a sequential basis we expect sales to be flat to slightly down compared to the third quarter. This reflects higher sales in home offset by a decline in networks due to the impact of WiMax revenue recognition in the third quarter. Operating margin for the segment is expected to be comparable sequentially.

In the Enterprise Mobility Solutions business third quarter sales were approximately $1.8 billion up 5% compared to the second quarter. This was primarily due to an increase in government and public safety markets. Sequentially Enterprise markets were up slightly as we saw a modest increase in demand from our channel partners, an indication that conditions are beginning to improve.

Excluding highlighted items operating margin for the segment was 17.3% compared to 13.9% in the second quarter. The increase in operating margin was due primarily to the higher sales level and product mix.

Sales in North America in the third quarter accounted for 59% of total sales. Sales were higher sequentially driven by government and public safety markets including improved traction in our indirect channel business.

During the quarter which was marked by the 20th anniversary of the P25 Standard we secured significant awards from Pima County, Arizona and the cities of Philadelphia and Virginia Beach. In EMEA and Asia-Pac segment sales were essentially flat sequentially and accounted for approximately 23% and 13% of sales respectively.

In the quarter we saw good momentum in [text] solutions with key orders in the Middle East, China, India and Germany. In terms of innovation in the product portfolio our new multi band APX 7000 portable radio platform provides system operability and eliminates the need to carry multiple devices.

We began shipping APX in the third quarter and customer reception has been strong with Nebraska becoming the first state in the U.S. to deploy APX in a state wide VHF P25 trunk network. To complement the APX portable we'll begin shipping the APX mobile radio later this quarter.

We've also announced a line of APX control heads which reduces the amount of equipment required in first responder vehicles, and provides simplified one touch operational control. Leveraging our industry leading MC9000 with over 1.5 million units deployed we also announced the new MC9500.

This is Motorola's' most rugged mobile computer and is the first to provide 3.5G WAN with support for GSM HSDPA and EVDO Rev A wireless broadband connectivity. It delivers business critical applications and data to mobile workers in the transportation and logistics, field service and public safety markets.

We also introduced the MT2000 series of rugged handheld barcode scanners that incorporates the benefits of a mobile computer. A first in the industry, these devices are quickly and easily deployed and are intended for small and medium-sized enterprise customers.

We also expanded our portfolio in areas such as MOTOTRBO two-way radios, air defense wireless vulnerability solutions and mesh networks. As we look ahead at our markets in government and public safety we expect demand to be up sequentially including continued gradual recovery it the indirect channel. Outside the U.S. we continue to see solid near term opportunities, particularly in the Middle East, parts of Asia and Latin America.

Regarding stimulus programs that have been implemented in the U.S. and other countries our go to market teams continue to work with customers who may be eligible for funding.

In the U.S. while we are beginning to see stimulus money flow through to recipients we expect that these funds will largely offset other sources of revenue that have eroded in the current economic climate. In the Enterprise market we believe the overall environment has stabilized and demand trends from some of our largest channel partners are encouraging.

We anticipate that opportunities in these markets will continue to improve as economic conditions especially in retail start to recover. Turning to our outlook for the Enterprise Mobility Solution segment in the fourth quarter, on a sequential basis we expect sales and operating margins to be higher with operating margin approaching the level of fourth quarter of last year.

In closing, broadband mobility solutions will remain focused on strengthening our market positions, prioritizing our R&D investments on customer-driven solutions and innovations. We'll also continue to proactively manage our cost structure for competitive advantage and improve financial performance.

When market growth returns we will be well positioned to take advantage of our investments and a more streamlined cost structure and with that I'll now pass the call over to Sanjay to discuss mobile devices.

Sanjay Jha

It's great to be here in New York today for our earnings call following yesterday's launch of our second smartphone in U.S. Back in April I said we would have Android-based smartphones in stores in time for fourth quarter holiday season.

We have delivered on that commitment. In September we announced CLIQ with our multiplier software solution. Offered in the U.S. through T-Mobile this device was launched at DEXT with several carriers in New York and Latin America.

And just yesterday we announced our DROID device with Verizon Wireless. But before I get into product details I want to first discuss our third quarter financial performance. In the third quarter mobile devices sales were approximately $1.7 billion on shipments of 13.6 million units.

From a regional perspective our sales mix was similar to recent quarters. Overall ASP was $124 comparable with the second quarter. Other units declined, we reduced our operating loss to $183 million excluding highlighted items comparable as compared to $238 million in the second quarter.

This improvement reflected the second consecutive quarter in which we sequentially increased gross margin percentage due to a more favorable product mix and further supply change efficiency. In addition the sequential reduction in both operating loss and inventory drove further meaningful improvement in our overall operating cash flow results.

Turning back now to our product portfolio, with the launch of our new smartphones we have taken the first steps toward positioning ourselves to address the mobilization of the Internet and the growing demand for modern smartphones.

Our CLIQ device features MOTOBLUR, a Motorola developed proprietary software solution that syncs contacts, post messages, photos, emails and delivers it to the home screen. It comes with built-in light widgets and allows users to prioritize their content and customize their user experience.

From the home screen MOTOBLUR provides one tap access to a variety of destinations including social networking sites and messaging accounts. The remote [light] feature provides security and peace of mind and is a major consumer satisfier. The real power of this experience is evident when it's in the consumer's hands and the user feedback that we have received thus far has been excellent.

CLIQ also features a full HTML browser, 5 megapixel camera, capacity of touch and a slide out QWERTY keyboard. Outside the U.S., CLIQ is known as DEXT and is shipping to Orange in U.K. and France, Telefonica in Spain and American Movil in Latin America.

Our DROID device is the first smartphone in the market to feature Android 2.0. It delivers an ultra fast connection, unmatched browsing experience, voice search, multitasking functionality and access to thousands of apps all packaged in the thinnest QWERTY slider available today.

It features a 3.7 inch widescreen high resolution display, full HTML browser, video at 24 frames per second, 16 gigabytes of included memory and 5 megapixel camera. These devices incorporate what is required in today's modern smartphone, including a large high resolution display, over the air software update and upgrade capability and a multi-threaded, multi-tasking graphical operating system.

The Android operating system is now the fastest growing platform in smartphones. Our new devices reflect our close working relationship with Google, and I wanted to thank the Android team for their support.

We look forward to continuing that collaboration as we deliver more devices to the marketplace. In the fourth quarter, we will begin to expand our smartphone portfolio as we ship new devices to additional carriers and markets. Our portfolio will be targeted at consumers, prosumers and other active social messaging concerned users.

These market segments, as you probably know, are growing at a high double-digit rate and faster than the enterprise market. With our devices, we'll continue to deliver differentiated functionalities, especially in the area of integrated contact and message management, multi-media and social collaboration.

The majority of our devices next year will feature our MOTOBLUR solution. MOTOBLUR's robust functionality will be updated periodically and over time will be enhanced to solve other consumer problems.

Other devices, such as DROID, will deliver deeply integrated experience and will appeal to users seeking fast PC-like mobile Internet browsing and a vast array of apps and services.

The ecosystem around our smartphone devices is the second largest and fastest growing in the industry. Today, there are over 12,000 apps at a very early point in the Android platform life cycle. The ecosystem is supported by one of the largest development communities through MOTODEV, our global program for developers and independent software vendors. Just a few weeks ago, we hosted a MOTODEV summit that drew over 800 participants, all working on innovative applications to deliver signature experiences to mobile consumers.

From an operational perspective we continue to make progress. We now expect operating expenses to be at least $1.4 billion lower than 2008 levels. In supply chain, we continue to drive simplicity, platforming and operational process improvement that will result in lower component pricing, improved inventory turnover and higher gross margin.

Moving now to our outlook, we expect fourth quarter sales to be sequentially higher. Overall, units be lower due to lower levels of feature phone shipment. This will be partially offset by the ramp of our new smartphone devices.

With continuing improvements in mix and further supply chain efficiencies, we expect a sequential improvement in gross margin percentage and further reduction in the operating loss. In 2010, we will launch a variety of new devices as we expand our smartphone portfolio across additional price tiers and carriers.

In iDEN, we will continue to refresh the portfolio as we have this year. In feature phones, we anticipate a declining profit pool due to some cannibalization by smartphones. That said, our strategy in feature phone will center in reducing the number of devices supporting the Motorola brand, utilizing ODM partners and minimizing supply chain risks.

In closing, I'm very satisfied with the reception to our first smartphone devices and our differentiated MOTOBLUR experience. I want to thank all of the mobile devices employees for their focused execution in meeting our commitment to launch these devices in time for holiday season.

I'm also pleased with where we are with respect to implementing our strategy. Throughout next year, we will continue to shift our product mix as we focus on addressing the smartphone opportunity and reduce our reliance on feature phones.

As a result, with increasing ASP and gross margin levels, together with a competitive cost structure, we expect to deliver significantly better financial results in 2010.

Now, I'll turn the call back over to Dean to start the question and answer.

Dean Lindroth

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ittai Kidron – Oppenheimer & Co.

Ittai Kidron – Oppenheimer & Co.

I guess this is a question for everyone. I was trying to dig a little bit deeper into the gross margin performance. Great progress on that front, but Ed and Sanjay, could you be a little bit more specific on the progress you've made in the third quarter with handsets, just from a back of an envelope of getting to around three to four points of sequential improvement in gross margin in that unit? Can you comment if that's about right, and if so, what are the key drivers there?

And Sanjay, going forward into the next quarter, is it, at this point, less so about cost efficiencies and now it's more about the product mix and your smartphones that's going to drive that going forward?

Ed Fitzpatrick

A couple things, on the margin improvement, you're in the right ballpark there. The favorability in the margins were given by a few different things, mix driving a piece of it as well as supply chain efficiencies that Sanjay had mentioned. So improvements in the sales and operations planning process leading to less excess and obsolete inventory and other savings driving those results.

Sanjay Jha

Ittai, I think those comments apply to mobile devices also. I think mix as we go from feature phones to smartphones makes a big difference. We have really focused on supply chain efficiency in mobile devices in our cash turn and managing our cash flow.

With respect to going forward, I think you're right that while we will definitely focus on further cost reductions, most likely we will look to reassign those savings in such a way that we drive our product portfolio in high – our smartphone revenue. So from here on, I think you're right in saying that our smartphone traction is the quickest driver of our financial performance.

Operator

Your next question comes from Mark Sue – RBC Capital Markets.

Mark Sue – RBC Capital Markets

Sanjay, can we get a sense of when we might celebrate mobile devices turning breakeven? Will it be mid next year or will it be later? And if for some unseeable reason we don't get the reception of the subsequent units for the DROID phones next year, will you consider further right sizing the business?

Sanjay Jha

Mark, let me maybe lay out a framework for thinking about this business in 2010. I think about our portfolio in three segments. There's the smartphone segment, then what I call the feature phone segment in mature marketplaces, and then I would call feature phone or phone devices in emerging marketplaces.

Smartphone success for us in 2010 will drive, almost singularly, our financial performance in 2010. The feature phone segment in mature markets, United States being a large part of it for us, but in mature markets in general, we see the volume as well as the profit pool declining and our strategy there would be to bring down our smartphone portfolio to address larger segment of that marketplace.

And as you look at both that feature phone segment in mature as well as in emerging marketplaces, our strategy is to address that with the ODM collaboration, and our objective there is to keep ourselves relevant with our carrier partners as well as and extend our brand. We will make modest profit there but our expectation there and the strategy is to keep ourselves relevant and keep a full portfolio.

So as you think about this, what I have said earlier is that I'd be surprised if I don't breakeven in at least one quarter in 2010 and I think that we continue to be committed to that objective.

For the last part of your question, if we don't get the reception will we further right size, look, I think we have a very good portfolio. We have already locked in our [forecast] 2010 portfolio with a large number of carriers and I'm very much making progress in the second half 2020 portfolio.

You guys know that this will be a very competitive marketplace and the technology in this smartphone segment is evolving faster today than ever before and actually I think that Android and Google is playing a very meaningful role in that.

It will a competitive marketplace but we are getting very good traction, but to your point I think we have shown in 2009 that we will address the financial circumstances that face us aggressively and we are committed to the objective of delivering at least one breakeven quarter in 2010.

Operator

The next question comes from Maynard Um – UBS

Maynard Um – UBS

Sanjay, sorry if I missed this, can you just talk about op margins for mobile device next quarter. I understand revenue is going to be higher on lower unit and higher ASP but it looks like there is a big push here by Verizon Wireless for the Droid from advertising. Can you just talk about the sales and marketing and the op margin impact and then any color on corresponding demand, whether you can fulfill the component shortages and things like that. And if you could just clarify what that 19 million separation-related costs were?

Sanjay Jha

I will take the first part of the question and Ed will take the separation cost part. In terms of op margin what I said in my prepared remarks that we will sequentially improve op margin from third quarter to fourth quarter for mobile devices.

The second part of your question about any component shortages, I feel extremely good that we have done very, very good planning in working with Verizon Wireless. Unless there is a rip-roaring success up at quality that we have not planned for, we have good access to components and supply and planning to take care of good upside from our base case so I think I feel pretty good that we will be able to meet our demand.

Ed Fitzpatrick

Okay, on the separation costs, this cost relates to longer lead time items to effectuate the separation transaction, so we've incurred those in the third quarter.

Operator

Your next question comes from Samuel Wilson – JMP Securities.

Samuel Wilson – JMP Securities

I have a question for Sanjay. As you look just simply at the smartphone segment that you highlighted, in 2010 would you expect every new device to be launched on the Android platform or would you expect any diversity in your operating systems?

Sanjay Jha

Sam, at the moment the vast majority of our devices will be launched on Android platform but we are very open to other options here and we are engaged in exploring other options but vast majority will be Android.

Operator

Our next question comes from Mark McKechnie – Broadpoint.AmTech

Mark McKechnie – Broadpoint.AmTech Equity Capital Markets

Sanjay, I know this is an optimistic type question for your Android platform but can you give me a sense for your planning assumptions and do you feel like you can scale if you get some unexpected high level of demand? And are there any type components that you need to be concerned about?

And then also I wanted to ask you about your opportunities in China.

Sanjay Jha

Mark, I feel very good about our ability to meet demand. We have spent a lot of time studying what has happened in the market when brand new products, very successful new products have been introduced and what has been the range. We have worked with Verizon. We have worked with their channels and we feel very comfortable that we can meet the upside hat may come along.

Now there are always circumstances when the upside is too large. I look forward to facing those challenges if they do arise. But I want to give you comfort that we have done very, very good planning around this.

On China, China is a very, very important market for us. We continue to be very engaged and we are working with all three operators. We see China as a growth opportunity for us and we have very strong brand position in China and we will make announcements regarding China as we get ready to deliver products there.

Operator

Our next question comes from Edward Snyder – Charter Equity.

Edward Snyder – Charter Equity Research

Sanjay, MOTOBLUR does not appear to be showing up on Verizon. Is that just a launch issue, meaning are you pacing yourself to get it all straightened out with T-Mo first and should we expect to see it at Verizon later? And how far down in the portfolio do you expect Android to go in terms of your market? I know you talked about future phones going off to ODMs to improve your profitability but would they – well would we expect to see Android in any of those phones? Just trying to get an idea of how far down you are propagating it.

Sanjay Jha

Ed, MOTOBLUR will not be on Droid. Droid is what we call a Google experience device and that won't have MOTOBLUR. As you know, Droid does have very good integration of social networking anyway. But we will have MOTOBLUR capable devices on Verizon's network in 2010.

And MOTOBLUR will be in vast majority of our devices and as I mentioned earlier we are working to evolve MOTOBLUR to address other experiences which will deliver similar aggregation, similar solving of the problem, similar push to the home screen. And our testing so far has indicated there has been a very good consumer response to our new experiences also.

I think that that was all the questions that I had. Oh, how far down in the portfolio to go with Android? With the feature phones, I think I almost define as the tier that doesn't have Android but I would say that we will drive Android in the price point. We are very aggressively working to drive Android down to lower price points but I would then say that those were low end smartphones as opposed to feature phones.

Operator

Your next question comes from Tal Liani – Bank of America Merrill Lynch.

Tal Liani – BofA Merrill Lynch

A clarification and a question – on the clarification, your OpEx reduction goes to just over $100 million sequential group in the fourth quarter OpEx. Is that reasonable or do you think you are being a little conservative there?

And second on the question, Sanjay, perhaps you give us a rough ballpark of what level of smartphone shipment, 5 million, 10 million, 15 million, whatever that you need next year to get to operating breakeven in the handset segment and also how you plan to stay ahead of the other Android players, HDC, LG, Samsung, etc.?

Ed Fitzpatrick

I'll take the operating expense question that was asked sequentially. I think the expenses we do expect to see related to the cost reductions but we will see some small reduction to OpEx expenses on that part of it. However, we do plan to ramp up the selling and marketing expenses, as Sanjay had mentioned as well, at the head of and in line with the rollout of the DROID and other smartphone products in Q4. So that part of it will offset the reduced level of expenses from the cost reduction action that we take.

Sanjay Jha

Back on the Android competition I think the number one thing that I would tell you is that I think that we will dramatically improve our execution. We will de-lever products. We have leverage. We have platform. We leverage the work that we are doing.

On one platform it could deliver a number of SKUs and address a broader segment of the marketplace. We'll, as I say, I think we will deliver different segments and more geographies in 2010. I think our brand name is going to be an important place that we make investments and make sure that we make that matter in the marketplace.

I think our brand recognition in China, in U.S., in Latin America is still one of the best of any brands. I think we are more focused on Android and I believe that we're putting more resources in Android than anybody than anybody else.

We have shown to you that we can differentiate by our own end-to-end solution MOTOBLUR and we'll continue to invest evolve MOTOBLUR. I think our design and I.D. has always been a differentiator and I believe that we have very good distribution relationships.

If you package all of that up I think that we will become much more efficient execution engine. I think, our supply chain we have spent in a lot of time in 2009 making that more efficient. I think a combination of these things really is what will make us more competitive.

In terms of the exact number of units that we need to break even, I have not guided you to that and I won't today. But all I would say is that we are not expecting dramatic increase in our market share to be able to get to a rational breakeven point.

Operator

Our next question comes from Kulbinder Garcha – Credit Suisse.

Kulbinder Garcha – Credit Suisse

Thanks. I just have a clarification first and then a question. A clarification is Sanjay, you mentioned that – is it going to be new devices as opposed to the on top of the Android and CLIQ that you launch this year or is it variants of these devices are going to be launched with other carriers? That's my clarification.

And secondly, just going forward, on the OpEx side and going forward, as you try to expand into new markets and new geographies, are you still kind of comfortable going into 2010 if you see OpEx in this business relatively flat or do you see that you have to start increasing it as you address new territories?

Sanjay Jha

Okay. The first part I just want to make sure that in my prepared remarks I didn't misspeak. When I said that we will expand our smartphone portfolio this shipment new devices to additional carriers and market, I meant for that to defer to first quarter 2010 as opposed to fourth quarter '09. For fourth quarter '09 I've guided to two devices and we have launched both the devices.

So I just wanted to clarify that, Kulbinder, if that makes sense. In terms of OpEx, Ed?

Ed Fitzpatrick

On the OpEx, I'm not sure if you – if that was mobile devices-specific. We can talk to that –

Kulbinder Garcha – Credit Suisse

Yes. That was mobile device specific growth.

Ed Fitzpatrick

I think there is going to be case-by-case basis, right? As we see demand picking up, we'll obviously adjust our cost structure as appropriate. Right now we're going to take it –

Sanjay Jha

I mean I think the commitment that I would make to you is that we will manage our OpEx extremely aggressively and we will invest in our brand and our distribution only if we see near term returns from so doing.

Operator

Will go next to Matthew Hoffman – Cowen & Co.

Matthew Hoffman – Cowen & Co

Thanks. Sanjay, it seems as though you're signaling with your lower sequential units commentary that despite all the Android smartphone launches, mobile devices may be leaving or substantially de-emphasizing some segments of the handset market. I was hoping you could supply some details there. For example will you still be in low end GSM or are you going to leave that market to Nokia and the Asian OEMs as you push Motorola's ASPs higher?

Sanjay Jha

Matt, I think you're right. I'm signaling that I'm not leaving that market. Some of the products that we have today, the listing products, clearly the volume from those are tailing off and we have introduced our ODM strategy to address this marketplace and there is clearly a transition there that will happen while the existing products stay up in volume and the new ones ramp up.

But our strategy there is to have a full portfolio. We don't see a large amount of profit pool in that tier, but it is important for us to play in that tier so that we can be relevant so we fulfill the needs of the carriers for the retail channels. That's really the core part of our strategy. The way to think about the financial performance of this division is to understand our smartphone success.

Operator

Our next question is from Richard Kramer – Arete Research Services

Richard Kramer – Arete Research Services

Thanks. Since most the questions have been Sanjay, I'll ask one for Greg and also a brief clarification one for Ed. For Greg, when on balance when we look across broadband mobility for 2010, it seems you've outlined a bunch sort of puts and takes about potential growth opportunities. Can we expect broadband mobility broadly to be gross business in 2010? And if so, can you just highlight the couple of areas where you think there might be substantial uptick in sales volume?

And just for Ed, it seem that a lot of the cash flow this quarter came from a very sharp working capital squeeze, and you suggested that you'd have flat sales, or sorry, flat net growth cash in fourth quarter. Can you please lay out for whether that means you think working capital is going to inflate again as sales come back and also whether you have any plans for changing around the financing structure?

Gregory Brown

So Richard, on broadband mobility I think we are in a very good position across a number of segments. I look at the P&L and obviously we're not going to guide for 2010, but I look at the P&L and the individual P&Ls as highly leveraged. So we've right-sized the cost structure. And we'll continually evaluate that. But we're in a good position. We're – I think as the economy returns so returns or improves EMS.

Now there's some individual instances, I think, home is more structural around housing. I think Enterprise Mobility Solutions, both government and public safety and the traditional enterprise mobility business or formally [SMBL] are very well positioned and have a great operating leverage P&L. We talked about the operating margins in Q4 for this year approaching or comparability to Q4 of last year, which was quite healthy.

The other nice thing is in EMB, the Enterprise Mobility Business non-public safety, it had a double digit operating margin contribution in Q3. So that team has done a really nice job and then continually refreshing product portfolio, etc.

Overall, when I think going forward, we're well positioned in video. We lead in IPTV I think video infrastructure spending should increase. I think fiber architectures and passive optical networking will push further into the network. Obviously WiMax represents a steady contributor for us in the networks business while 2G will continue to decline, but networks is all about earnings and operating cash yield out of that asset. And the EMS, I think, is well positioned for growth.

Ed Fitzpatrick

On the cash flow question, I think I mentioned that cash would be above where we are at the end of the third quarter. So it will be up. Your comment on working capital was appropriate, though. I think we – the team has done nice job of really accelerating the working capital improvements. And I talked about the inventory turns improving in each of the businesses and mobile devices going over 10 in the third quarter, which is terrific.

So I think that piece of it kind of accelerated where we actually thought we'd be by the end of the third quarter and we were very pleased with the results for the quarter. I do expect the fourth quarter working capital to be relatively flat to where we are as we continue to improve the metrics on turns and days sales outstanding, but with the uptick in the business, as you know, working capital typically does follow. But I think we're pretty efficient in the cash conversion cycle metrics there.

On the financing structure no plans at the current time. Now that of course, we'll continue to monitor it and be opportunistic as appropriate.

Operator

Your next question comes from Simona Jankowski – Goldman Sachs.

Simona Jankowski – Goldman Sachs

Hi. Thank you very much. Another question for Sanjay, you have mentioned before that you're planning on launching about 20 smartphones next year. Can you give us rough sense of how many non-smartphones you think might launch with your ODM strategy? And I heard you saying that it is going to be a diminishing profit pool, but nonetheless you think it'll still be profitable even at a low level.

Can you just outline how you think you can achieve that given that, as you mentioned, it's a shrinking market, you'll have lower volumes, and clearly even this year after all the cost cuts in that segment it's still tough to achieve profitability?

Sanjay Jha

Simona, in the ODM pool, I would say, that we expect similar scale of additional product portfolio to the smartphone product portfolio. That's the first thing. Second thing, to get to your point of how we would achieve profitability, I think that the way to think about it is that our gross margins will increase. Our ASPs will increase in smartphone segment.

And the feature phone segment in U.S., I think some people would say that today, over the fourth quarter this year, over 50% of the shipments in the United States will be smartphone. And that represents potentially as large as 70% of the profit pool in the United States.

So I think that you would see that the profit pool – and particular actually, Simona, as we bring the tier down to 2010 and 2011, I really think that the growth in smartphone segment is faster than people, I think, maybe recognize. My sense is that there's not a huge amount of profit pool in feature phones, especially in emerging marketplaces.

Certainly in China, that's different and we will participate in China differently. Latin America that's different. We'll participate in Latin America with feature phones differently and of course use our ODM strategy. But I feel comfortable with the strategy that we are on for the financial objectives that we've set for ourselves.

Simona Jankowski – Goldman Sachs

Sanjay, just to clarify actually, the question wasn't on how you will reach overall profitability in mobile devices because I think I understand that strategy pretty well. It was just specific to your comment that you think you can be profitable even just within the feature phone segment, that's what I was wondering how you think you can achieve on a lower scale.

Sanjay Jha

Well yes, on that one, it's somewhat – look. The first thing – today we're not. I can tell you that in feature phone scale today, we're not profitable obviously. The reason is that the supply chain has been very difficult to manage there and the demand and supply variation is what really causes us not to have profitability in that segment.

We will structure our deals in such a way to manage that risk extremely aggressively. I think that's probably the best way to say it. The scale there will not obviously be as large as some of the other players but I think that if we choose our partners carefully and choose one or two partners, we believe that we can have very modest amount of profitability there.

Operator

The next question is from Peter Misek – Canaccord Adams.

Peter Misek – Canaccord Adams

Just a question on carriers in Europe and how they sort of look at their portfolios. Sanjay, when you think about market share positions at some of these larger carriers, can you help us understand your strategy for gaining Hero status at some of these European ones. We've seen you do that here with Verizon. What's sort of the strategy to entice these carriers to give you Hero status in Europe?

Sanjay Jha

Peter, as I've probably said before my focus for at least first half 2010 is very much U.S., China, Latin America. And depending on how we perform there, we will go to Europe for Hero status. But your point is very well taken, those Hero status decisions are kind of sort of getting made right now.

For those decisions, for us to get Hero status, in some ways we have to participate in a different way with them. I think in Europe there are three to five large carriers. We have very good relationship with some of them.

We have to deliver products, which are very compelling but some of them have their own services and own operating systems and we have to very carefully evaluate if we want to participate. And if we do, I think there is a possibility of getting that Hero status.

Also I think that there is additional brand investment that we would have to make in Europe and we would have to make that judgment depending on whether we get Hero status and commitment from our carriers or not. So there are two or three things, which are somewhat intertwined together where we have to do new services and new operating systems.

And will that get us Hero status and then will that allow us the revenue that then we'd reinvest to build our brand name in Europe? I think those are the kind of things to work through for us.

Operator

The next question is from Tavis McCourt – Morgan, Keegan & Company

Tavis McCourt – Morgan, Keegan & Company

Just one for Sanjay on the iDEN business, looking at Sprint's results this morning, it looks like the post-paid iDEN business is pretty weak there but the prepaid continues to grow. From a handset perspective for you guys, how are you viewing that business? Is that still stable or is that a declining business for you?

And then for Greg, I was wondering if you could just comment on why WiMax specifically, obviously a good quarter in recognizing revenue this quarter and about $600 million this year I think you said. How should we view that next year?

Obviously I know you don't want to give guidance but in terms of should it be somewhere around flattish with that or should we expect it to be down a bit or up a bit just in terms of the rollouts that you see right now.

Sanjay Jha

On iDEN, Tavis, we see stable to modest decline in iDEN business next year. Remember that our iDEN business involves Sprint. It involves [NII] and some other business in the rest of the world. And when we aggregate all three of them, we see a relative amount of stability although probably slight decline.

Gregory Brown

On the WiMax side, we recognized $314 million of infrastructure, WiMax infrastructure revenue in Q3, that's part of the reason why we are guiding revenues down slightly in networks because it was up as a result of previous periods, revenue recognition from a longer sales cycle.

It's a little too early, Tavis, for 2010 but for now I would say perhaps roughly comparable but recognize the timing of WiMax revenues in 2010 and for that matter '09, aren't necessarily linear. They're a bit lumpy. So we have to actually get a little bit more detail on the timing of the implementations, the acceptances and so on. But broadly speaking, I think you should target it in the comparable range and I'll update it on the next earning call.

Operator

The next question is from Jeff Kvaal – Barclays Capital

Jeff Kvaal – Barclays Capital

One question for Greg and a quick one for Sanjay as well. Greg, could talk a little about the 4G IP embedded in the Networks business and to what extent the bidding for the Nortel unit has changed any of your through process there.

And then for Sanjay you talked about the importance of smartphones for financial performance. Will you give us the metrics about what kinds of unit volumes, et cetera the smartphone portfolio independently is generating? Thank you.

Gregory Brown

Yes, on 4G IP, we feel pretty good about – overall, about our competitive position in Motorola specifically. We started investing in WiMax several years ago. You know on the infrastructure side, Motorola wasn't competitive on 3G UMTS.

So we made a conscious decision to partner with Huawei and we redeploy and redirect R&D spending to 4G, specifically at the time several years ago WiMax. In the meantime, WiMax has grown as a business for us.

The addressable market will grow next year but won't be of the size probably that we thought it was a few years ago. But the portability or fungibility of the R&D spend on WiMax to OFD and LTE we're taking advantage of.

So we won KDDI. We feel good about being one of two [brand] vendors selected for trial with China Mobile, so overall we feel pretty solid about our 4G IPR. And Sanjay and I work very closely because the IPR is not just – on 4G is not restricted to infrastructure or handsets. It's both. So we do things very collaboratively. While we're focusing on our areas we're very inclusive as a team, focused on maximizing the value of the IPR around 4G.

Dean Lindroth

Jeff, could you just repeat the second part of the question for Sanjay if you would?

Jeff Kvaal – Barclays Capital

Yes, sure Dean. Given the importance of the Android performance, I was wondering if you would be providing metrics separately for that number of units or ASPs or what have you?

Sanjay Jha

As you know, Jeff we've not provided that to you so far. It's a thought that we will certainly consider.

Jeff Kvaal – Barclays Capital

Well, we've got you penciled in for 1 million units for the fourth quarter, Sanjay. So we'll have to figure out if you hit that or not.

Sanjay Jha

Well I've read your report.

Operator

Your next question comes is from Brian Modoff – Deutsche Bank Securities.

Brian Modoff – Deutsche Bank Securities

Sanjay, a question around – you keep talking about taking Android into the future phone kind of category. Are we talking having Android smartphones below $200 in 2010 as a wholesale ASP? And then a question for Greg around the SMR business, how do you see that business shaking out in 2010? Do you think you can start to see a recovery in growth in that business next year? Thanks.

Sanjay Jha

On the ASP, to the question of whether Android can be taken below $200 for wholesale without being specific about the negotiation and pricing and so on and so forth but it's that kind of a range of pricing that will enable us to go address the feature phone marketplace with Android.

And we have various different strategies for doing that but without saying whether it is 2010, 2011, whether it's $200 or $150 or $250, but it's that kind of a range that we need to deliver to really expand the scope of where Android can play and that's part of our strategy.

Gregory Brown

And Brian, around SMR, if you're referring to basically our broadly government and public safety –

Brian Modoff – Deutsche Bank Securities

Yes I am.

Gregory Brown

Yes, we think we should be able to grow that business in 2010. So I think that with a product portfolio refresh specifically around the APX portable that I referenced, we're starting to sell into some customers that will get more traction in 2010. That's a positive.

I think that there'll still the opportunities around the stimulus money, although we're not counting or banking on that as any kind of hockey stick reward to drive the financials but we think it will be reasonably steady and balanced in 2010.

And that will be a positive contributor and quite frankly on the lower end, professional and commercial radio business, kind of the low end walkie-talkie non-trunk business, which has been hit hard with the economy, there's no reason to think that can't stabilize and begin to grow in 2010 as well.

Operator

The final question is from Mike Walkley – Piper Jaffray.

Mike Walkley – Piper Jaffray

Greg, just another question for you, one, can you share maybe some market share trends in the cable business for you. And then two, just wanted to flesh out a little clarity as you talked about a longer tail for your GSM and CDMA businesses. With the macro getting better, maybe some projects coming back, should we think of the rate of growth slowing in 2010 of your GSM and CDMA businesses?

Gregory Brown

So on the cable side broadly, Mike, I think we held share. As I've said before though, the exception to that is Comcast where we did not have a low end HD set-top box. We just announced that yesterday out in Denver. So we're going to get back in the game there and that's a positive trend.

We also lost some share at Comcast all-in when you count the DTAs, the digital terminal adaptors in the very, very low end. There were our three different sources that supply that, we're one of the three, so when you calculate the overall share mix, it declines for both.

That said, overall domestically as well as internationally, I think we held share very well. We've investing in the long term and there's no question that longer term the trends still are there solidly for that business to recover.

On the 2G side, I think that what's happening, it's really positive actually but first of all, you should expect the 2G business to continue to decline all in. I think the rate of decline perhaps will be a little less than what we thought maybe a year ago.

But with all the sophisticated mobile Internet devices and smartphone devices coming on to these respected networks, they're taking more and more bandwidth. So people that have 2G are spending more on 2G and expansion; 3G the same.

And obviously on LTE with carriers like Verizon and KDDI leading, those are positive trends for our infrastructure business. So I think 2G does have a longer tail but I still expect it overall to decline next year. But again, we're going to be very conscious of it. I think we've been pretty well versed in predicting the rates of decline and managing the P&L accordingly for earnings and cash maximization.

Dean Lindroth

Thank you. I'd like to remind everyone that details outlining highlighted items, our GAAP to non-GAAP P&L reconciliations and other financial information can be found on Investor Relations website. An audio replay along with today slides will also 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 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, expected timing for the announcement and launch and shipment of new products, expected operating expense reductions from a company's ongoing reorganization activities, expectations for cash flow and total cash levels and working capital in the fourth quarter of 2009, our expected ongoing tax rate for the full year of 2009, guidance from Motorola's earnings per share in the fourth quarter of 2009, expected capital expenditures by network operators on the size of the total addressable market in our home business, guidance for future sales, operating expenses, margins, profitability, ASPs or market share for each of Motorola's businesses.

Expected WiMax sales in 2010 as well as 2009, plans for repatriation of funds from other jurisdictions, potential separation of Motorola' businesses into two publicly traded companies, strategy for mobile devices in 2010 around smartphones, including operating systems, availability of components for new products, plans for MOTOBLUR, strategy for Android-based phones in multiple tiers, feature phone and ODM strategies, smartphone segment growth, European strategy, iDEN business in 2010 and 4G strategy.

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 and item 1A of Motorola's 2008 Annual Report on Form 10-K and on Motorola's other SEC filings.

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

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. 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. Q3 2009 Earnings Call Transcript
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