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Executives

Gregory Brown - Co-Chief Executive Officer, President, Executive Director, Co-Chairman of Executive Committee and Chief Executive Officer of Enterprise Mobility Solutions & Networks Businesses

Sanjay Jha - Co-Chief Executive Officer, Director, Co-Chairman of Executive Committee and Chief Executive Officer of Mobile Devices & Home Businesses

Edward Fitzpatrick - Chief Financial Officer and Senior Vice President

Dean Lindroth - Corporate VP of IR

Analysts

Brian Modoff - Deutsche Bank AG

Tim Long - BMO Capital Markets U.S.

Mark Sue - RBC Capital Markets Corporation

Edward Snyder - Charter Equity Research

Kulbinder Garcha - Crédit Suisse First Boston, Inc.

Phil Cusick - Macquarie Research

Jeffrey Kvaal - Barclays Capital

Ehud Gelblum - Morgan Stanley

Pierre Ferragu - Sanford C. Bernstein & Co., Inc.

Tal Liani - BofA Merrill Lynch

Ittai Kidron - Oppenheimer & Co. Inc.

Simona Jankowski - Goldman Sachs Group Inc.

Maynard Um - UBS Investment Bank

Motorola (MOT) Q1 2010 Earnings Call April 29, 2010 8:00 AM ET

Operator

Good morning, and thank you for holding. Welcome to Motorola's First Quarter 2010 Earnings Conference Call. [Operator Instructions] 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 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. Mr. Lindroth, you may begin your conference.

Dean Lindroth

Thank you, and good morning. Welcome to Motorola's First Quarter Results Conference Call. Today's call will include prepared remarks by Greg Brown, Co-Chief Executive Officer of Motorola and CEO of Enterprise Mobility Solutions and Networks; Sanjay Jha, Co-Chief Executive Officer of Motorola and CEO of Mobile Devices and Home; 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 on some cases have caused such differences, can be found in this morning's press release on Pages 17 through 29 and item 1A of Motorola's 2009 annual report on Form 10-K and on Motorola's other SEC filings. This presentation is being made on the 29th of April, 2010. The contents 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.

With that, I'll now turn the call over to Greg.

Gregory Brown

Thanks, Dean, and good morning, and thank you all for joining us. This morning, Motorola reported sales in the first quarter $5 billion. On a GAAP basis, we earned $0.03 per share from continuing operations, compared to a loss in the first quarter a year ago. Excluding highlighted items, earnings were $0.02 a share, exceeding the guidance of a loss of $0.01 to loss of $0.03 per share that we provided on our last earnings call.

Operating earnings increased substantially, reflecting year-on-year improvements in each of our businesses. We increased total cash by over $450 million and ended the quarter with total cash of $8.5 billion.

In Mobile Devices, Smartphone unit shipments increased sequentially to 2.3 million units. Our portfolio of Smartphones increased to eight, and we ship to renounce devices with all four major carriers in North America and many others around the world. In Home, while sales were lower year-on-year, operating earnings and operating margin were higher. In Enterprise Mobility Solutions, sales grew 6% year-on-year driven by a recovery in the enterprise markets, and we secured our largest ever TETRA subscriber contract in Europe. In Networks, operating margin was up substantially, and we were awarded a contract by Zain to deploy an LTE network in Saudi Arabia.

Regarding separation, we continue to make significant progress on our plan to create two independent public companies; one comprised of Mobile Devices and Home, and one comprised of Enterprise Mobility Solutions and Networks. And our target for the separation remains the first quarter of 2011.

Additionally, we recently provided revised GAAP and non-GAAP financial results for each of our businesses to give further insight into our operating results ahead of our planned separation. And beginning this quarter, Sanjay will review the operating results for Home in addition to Mobile Devices, and I’ll continue to review both Enterprise Mobility Solutions and Networks.

But now, Ed will provide additional details on our reporting changes in Motorola’s overall financial results for the quarter. So I'll now turn it over to Ed Fitzpatrick.

Edward Fitzpatrick

Thanks, Greg. I'll begin today by outlining the three changes we had made to our financial reporting. First, starting this quarter, we are reporting the financial results of our Home business and our Networks business at separate segments. In the past, results of these businesses were reported as a single segment. Second, stock-based compensation costs, amortization of intangibles and corporate G&A costs that were previously included in the Other and Eliminations reporting segment, are now included in the business segment results. This change impacts the GAAP results of each business segment but has no impact on Motorola's consolidated GAAP financial results. Going forward, the Other and Eliminations segment will only include eliminations of inter-segment sales, transactions and a small amount of corporate operating expenses. Third, to supplement our GAAP reported results, we’ll present operating earnings on a non-GAAP basis, excluding items we have historically highlighted, as well as stock-based compensation costs and intangible amortization expense. Going forward, our quarterly earnings guidance will also be provided in this manner.

We believe this presentation of non-GAAP earnings will provide further details and insight on our operating performance. GAAP and non-GAAP results for 2007, ‘08 and ‘09 and this revised presentation format can be found on our website. Shortly after we file our first quarter 10-Q, we plan to file an 8-K, which will include revised 2009 10-K footnotes, which reflect the new segment presentation and the allocation of certain corporate costs to the segments.

Turning now to our financial results. Motorola's total sales were $5 billion in the first quarter. On a GAAP basis, first quarter earnings from continuing operations were $0.03 per share compared to a GAAP loss of $0.13 per share a year ago. This includes net income of $0.01 per share for highlighted items, highlighted items include a tax related gain and a legal recovery, offset partially by charges associated with preparing for separation, a change in healthcare tax regulation and business reorganization.

Based on the way we've historically provided non-GAAP earnings per share and compared to our first quarter guidance of minus $0.01 to minus $0.03 per share, first quarter earnings were positive $0.02 per share. As I mentioned earlier, beginning this quarter, we will present non-GAAP earnings which will also exclude stock-based compensation expenses and amortization of intangibles. In the first quarter, these expenses totaled $0.04 per share. Our non-GAAP earnings for the first quarter in this new presentation format were $0.06 per share. This compares to a loss of $0.04 per share in the first quarter of 2009. Further details in our non-GAAP earnings can be found on our website and our remaining financial references will exclude highlighted items, stock-based compensation costs and intangible amortization expense.

Gross margin percentage in the quarter increased to 35.7% from 28.9% in the first quarter of 2009. The increase was due to year-on-year improvements in all four businesses, particularly in Mobile Devices. Operating expenses in the quarter were lower year-on-year and sequentially, reflecting our continued efforts to tightly manage spending and optimize our cost structure. Total other income and expense was a net expense but lower than anticipated and contributed favorably to our results. This was due primarily to recovery in the value of certain fixed income securities held in our Sigma Fund and interest income related to a tax settlement. Our ongoing tax rate was 35% for the quarter.

Moving now to the balance sheet. In the quarter, we generated operating cash flow of $485 million. We ended the quarter with total cash of $8.5 billion compared to $8 billion at the end of 2009. The increase in total cash of over $450 million is primarily attributable to both improved working capital and earnings. Inventory declined by $57 million with inventory turns at 10.4 compared to 11.2 turns in the fourth quarter and seven turns in the year ago quarter. The cash receivable were lower sequentially and year-over-year. DSO, day sales outstanding, was 57 days, flat with the fourth quarter and lower than the 63 days in the year ago quarter.

Turning now to our outlook. We expect second quarter earnings to be in the range of $0.07 to $0.09 per share. As I mentioned earlier, this guidance excludes $0.04 per share related to stock base compensation and intangible amortization expenses, as well as I have historically highlighted in our quarterly earnings release.

With that, I'll pass the call to Sanjay to discuss Mobile Devices and Home.

Sanjay Jha

Thanks, Ed, and good morning. In the first quarter, we executed well on our Smartphone plans and continued to build momentum. This market is expected to grow more than 40% this year, driven by continued growth in North America and Western Europe and increasing demand in China. In Smartphones, we launched six new devices, bringing our portfolio to eight, shipped 2.3 million units and now reach over 100 carriers, distributors and retailers globally.

Mobile Devices overall sales were $1.6 billion and total shipment of 8.5 million units. Our overall ASP increased to approximately $192.00 from $169.00 in fourth quarter due to a more favorable product mix. The operating loss in the quarter was $148 million compared to a loss of $385 million in the year ago quarter. On a sequential basis, the loss increased due to a lower unit volume and gross margin level in our feature phone portfolio, offset primarily by growth in Smartphones. Operating expenses were lower driven by further reduction in headcount and tight control over G&A costs, offset partially by increased spending in support of the brand and new product launches.

Sales in North America accounted for 66% of our total sales, and Smartphones accounting for approximately half of the sales in the region. Three of our new Smartphones began shipping in U.S. during the quarter. BACKFLIP was introduced with AT&T and featured prominently in their NCAA tournament promotion slot. CLIQ XT, a touch screen with virtual quality keyboard was launched with T-Mobile and DEVOUR, our second Smartphone with Verizon Wireless, began selling in late March.

In China, about two weeks ago, Frank Meng joined us as President of Mobile Devices in home of Greater China. Frank has over 25 years in telecom and will lead our business and sales operation in China, Hong Kong and Taiwan. I have worked with Frank before. I know he will do -- he'll be a great addition to our team.

From a product perspective, we're getting good traction in China. During the quarter, we began shipping Smartphones for China Mobile, China Telecom and China Unicom. We also launched BACKFLIP, our second device in China with MOTOBLUR, into the retail channel and opened SHOP4APPS, our applications and services store. With our store consumers have the ability to customize their Motorola Android device with a wide choice of applications and services, including search, e-mail and map. In the first quarter, Motorola devices accounted for the largest share of Android-powered devices sold in China. We expect this momentum to continue, with China expected to be our second-largest Smartphone market this year after North America.

With regards to our portfolio, in Smartphones, we remain on track to launch at least 20 Smartphones and expect to ship 12 million to 14 million Smartphone units this year. MOTOBLUR, our user interface and cloud-based services platform, will continue to be featured on a majority of our Smartphones. It provides consumers with push Internet content and aggregates and delivers messages and contacts from a variety of social networking sites. Data traffic on BLUR-enabled devices continues to grow rapidly, driven largely by video. Our next release of MOTOBLUR will enhance user experiences by providing new functionality in areas such as multimedia consumption and music. In our mid- to high-tier phone portfolio, feature phone portfolio, which includes iDEN, ruggedized devices and a modest number of other devices, we expect unit volume to decline in the second quarter and then remain fairly stable through the second half. In voice-centric devices, we will utilize ODM partners and expect unit volume to begin to ramp in the second half of the year. Our focus is to build brand awareness and meet customer requirements for a broad portfolio of products at multiple price points. Across this portfolio, we're targeting modest profitability and minimum working capital investment.

Looking ahead to the second quarter, Smartphone shipments will be higher sequentially. Overall, unit volumes will be lower. However, due to a further decline in feature phones, we expect sales to be flat and operating loss to improve driven by an improved product mix. We expect further reduction in operating loss in third quarter and expect to be profitable in fourth quarter, driven by higher Smartphone sales.

Turning now to the Home business. In February, we provided an update to our separation plan and indicated that we are combining the Mobile Devices and Home businesses. This allows us to address the opportunity ahead of us, resulting from the convergence of mobility, media computing and the Internet. Since announcing our plans, I've had the opportunity to speak with a number of our largest customers and the feedback has been very positive.

Turning to the results in the first quarter. Home sales were $838 million. In digital entertainment devices, we shipped 3.1 million units and held share in the quarter. Customer demand remains constrained, particularly in the U.S. Sales of video and access infrastructure accounted for approximately 25% of overall Home sales and were up from a year ago. This was driven by renewed network investments1 following spending deferrals by operators last year. Operating earnings were higher year-on-year and operating margin increased to 5.6% from 3.4% in the first quarter of last year. The improvement was driven by a favorable product mix and operating cost reductions.

In Home, we expect longer-term demand recovery to be driven by a number of factors. Analog to digital transitions are still underway, particularly outside the U.S. Digital households are expected to grow in the double digits over the next four to five years, driven by growth of high-definition video and multi-room solutions. DVR penetration will also continue to grow.

From an infrastructure perspective, consumer demand will continue to drive the need for more bandwidth-optimized network in storage and services. That said, R&D investments are focused on strengthening our core portfolio and on emerging growth areas, including content management and security solutions for IPTV, 3D TV and advanced interactive services. We are also developing solutions which enable consumers to securely transfer content from their DVR for viewing on a mobile device. In the first quarter, we introduced enhancements to our DCX line of set-top boxes that support viewing 3D TV. We also began trialing a new digital entertainment device for Verizon's FiOS service, which significantly reduces energy consumption.

Turning now to our outlook. In Home, the industry has solid long-term fundamentals. We are focused on managing our cost structure and prioritizing R&D on future growth opportunities. In the second quarter, we expect Home sales and operating margin to be up from the first quarter. For the full year, we now expect sales to decline by 5% to 7% compared to 2009. This reflects lower demand for digital entertainment devices, offset partially by higher sales of video and access infrastructure. That said, however, we're on-track to increase operating earning this year due to a more favorable product mix and improvement in our cost structure.

In closing, the increasing availability of broadband inside and outside the home is enabling consumers to watch more video content than ever before. They're consuming it when they want it, where they want it and on many different devices. This is driving convergence in what consumers expect from mobile devices and home entertainment devices. Demand is also increasing for interactive personalized user-driven services in home and on the go. The Mobile Devices and Home businesses are uniquely positioned to address these opportunities. Together, we will have an industry-leading intellectual property position in wireless, in video and in content delivery and rights management. We have core strengths in end-to-end solutions, design-operator relationship and a global brand. By leveraging these assets and by driving our operating synergies, we'll provide a broad range of converged devices and uniform multiscreen experiences, as well as mobile Internet content management and delivery services.

With that, I'll pass the call back to Greg to discuss EMS and networks.

Gregory Brown

Thanks, Sanjay. Enterprise Mobility Solutions and Networks delivered an excellent quarter with solid top line results, improved year-on-year operating earnings, operating margin and cash flow generation.

In EMS, first quarter sales were $1.7 billion, up 6% from the first quarter of last year. Government market sales were up slightly and our enterprise markets recovery is underway, evidenced by double-digit sales growth. We performed very well in all of our key markets, driven by an industry-leading portfolio. Operating margin increased to 12.8% from 10.8% in the year-ago quarter. The increase in operating margin was due primarily to higher sales and a more favorable product mix. First quarter sales in North America grew 5% compared to the first quarter a year ago. Growth was largely driven by higher Enterprise sales, including mobile computing, scanning and wireless LAN.

Momentum continued in retail and in transportation and logistics, including a win with Con-Way, an industry leader in freight transportation and logistics, who selected our MC75 mobile computers to optimize their delivery processes.

In public safety, RFP activity remained at a healthy pace. Key awards in the quarter included three statewide expansion projects, including a P25 system upgrade with the State of Michigan and several quiet country and city-wide projects across the U.S. We also secured several wins in Canada, including one which displaced the incumbent radio supplier.

Outside North America, sales grew 7%, driven by higher safety and Enterprise sales in Asia and higher Enterprise sales in EMEA. Additionally, during the quarter, we secured several significant awards. In Germany, we received an award for over 50,000 radios from the German federal government, our largest ever TETRA terminal contract in Europe. In China, we were selected by the Shanghai Municipal Public Safety Bureau (sic) [Shanghai Municipal Public Security Bureau], for the largest ever 350-megahertz TETRA project in China. This system includes integrated command and control and over 30,000 radios and strengthens our customers' capabilities in preparation for the Shanghai World Expo 2010. Both of these awards further strengthen our position as the world's largest and leading TETRA supplier.

With respect to our go-to-market strategy, we recently announced PartnerEmpower, an industry-leading sales channel program. Launched globally this quarter, this program brings together our government, public safety and enterprise sales channel activities under one unified framework, enabling a stronger and more distinctive global channel brand and acceleration of growth opportunities for EMS and our highly valued network of 25,000 channel partners. This program will enhance channel partner competency, simplify processes, strengthen relationships and make it easier for customers to do business with us.

From a product perspective, we made a number of portfolio enhancements during the quarter. We expanded our MOTOTRBO product line with the addition of 800- and 900-megahertz portables and mobiles. To simplify customer migration from analog to digital, we also introduced new portable and mobile radios with multimode functionality. For the enterprise market, we recently announced a series of rugged digital barcode scanners developed for harsh industrial environments. We also announced the cordless digital imager, which can improve patient safety and caregiver productivity to take advantage of opportunities in healthcare. In wireless LAN, we expanded our portfolio with a solution for centralized management of multi-vendor devices. And finally, our recently introduced TEAM portfolio of solutions continued to gain traction with a significant award from a major retailer in the U.S. TEAM solutions provide advanced communication functionality across an enterprise Voice Over LAN network. They integrate mobile communications, including push-to-talk, enterprise Voice Over IP and task-specific devices such as mobile commuters and barcode scanners. By enabling a wide array of devices, TEAM increases enterprise collaboration, mobility and productivity and enhances experiences for consumers.

Looking ahead, EMS is positioned very well. The year is off to an excellent start. Recovery's taking hold and Enterprise customers are beginning to reinvest. We are encouraged by the level of customer engagement across all of our verticals and by several key wins during the quarter. That said, many of our government customers around the world continue to operate under tight budget constraints.

Regarding our outlook in the second quarter, we expect EMS sales and operating margin to be up sequentially. We now expect full year sales growth in the mid-single digits, with slightly improved operating margin compared to 2009. In Networks, sales in the first quarter were $896 million as we anticipated sales decline year-on-year due to lower 2G and 3G sales, primarily in EMEA, offset partially by higher WiMAX sales. That said, growth in Smartphones and data traffic is driving continued demand for wireless network expansion and optimization. We are profitable in each of the individual legacy technologies, and we will continue to focus on optimizing this business.

Operating margin improved to 14% from 9.2% in the year-ago quarter. The increase was driven by a favorable sales mix, including strong CDMA sales in both the U.S. and Japan and lower operating expenses. In LTE, development of our RAM solutions and operator field trial activities continued. We recently received an award from Zain for a network in Saudi Arabia, our second commercial LTE award. In China, our trial efforts with China Mobile have been very successful and over the next six months, we'll be working with them working with them to provide indoor TD-LTE coverage at the World Expo 2010 in Shanghai.

Moving on to our outlook for Networks, we expect second quarter sales and operating margin to be up slightly on a sequential basis with continued strength in CDMA. Following strong first half results, we expect a more normalized sales mix and lower operating margin levels in the second half. For the full year, we continue to expect sales to be down approximately 10% top line with operating margin now in the range of 10% to 11% for the full year.

In closing, Motorola performed well in the first quarter. Earnings per share were up year-on-year and total cash increased. We're making excellent progress on the separation with work advancing in all areas. We anticipate filing of Form 10 in the summer, which will provide you with additional details about the separation. And as we head into the second quarter, we have the momentum to deliver higher earnings, generate cash, introduce new products and ultimately satisfy our customers.

And now I'll turn the call back over to Dean to start the Q&A.

Dean Lindroth

Thanks, Greg. But 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] And it's like our first question is coming from Ittai Kidron from Oppenheimer and Company.

Ittai Kidron - Oppenheimer & Co. Inc.

Sanjay, I wanted to focus on your guidance for the year and your perspective on your business for the next two quarters, specifically on the handset side. You haven't raised your 12 to 14 million unit target for the year, yet you've already started the year on a stronger note than you've previously guided for. So how do I interpret that? Should that mean that your expectation for the business for the rest of the year is lower than you've planned for? And second, with regards to the competition, clearly the environment over the next couple quarters will likely get much, much tougher from a competitive standpoint than it has been in the last two quarters, especially on the Android side. How do you view your position? How do you expect to handle this over the next few quarters?

Sanjay Jha

As you know, our guidance last quarter was 11 million to 14 million units of shipment of Smartphones. And the guidance we provided today says that we expect to ship 12 to 14 million. So at least on the low end, we have greater confidence now that we could ship more products, more Smartphones in this year. So I guess we have materially changed our guidance from the last quarter. To the broader point of not having raised the high end of the guidance, clearly, I think we are comfortable with the range that we have provided to you on our guidance. With respect to competition, you're absolutely right. This is a very, very competitive marketplace. And particularly in fourth quarter, I anticipate that there will be new devices from multiple people with probably three or four operating environments in the marketplace. There will be, obviously, devices in Android and other operating environments. We have taken the competition and the competitive environment into account when we provide you guidance, obviously. And I feel that we are well-positioned to compete at each of our carriers in light of the competitive environment. And I actually think -- I think that my comfort level, if anything, is slightly greater today than it would have been last quarter because we have greater visibility. And we have better understanding of our relationship of the commitments that our carrier partners are making to us. So I feel comfortable.

Operator

We'll take our next question from the line of Brian Modoff from Deutsche Bank Securities.

Brian Modoff - Deutsche Bank AG

Sanjay, so in Q2, you have Verizon. You've got the Incredible coming to Verizon and that's obviously going to see some push by Verizon. Can you talk about how you see Q2 relative to Q1? You're going to have a broader breadth of products across a broader category, specifically in China. How do you expect to do sequentially in China in Q2 from Q1? And can you talk about, you said 20 phones; you've announced eight so far, six in Q1. How do you see Q2? And how do you see the rest of the year? And then Greg, I think a lot of people struggle with how -- what is your position in the public radio market? You have a dominant share. But what is that share globally? Can you break it down between APCO and TETRA 25 standards?

Sanjay Jha

Brian, let me take the Smartphone questions and Greg will talk about the public safety part of it. DROID sell-through in first quarter was very strong. And I anticipate that we will continue to get traction with our DROID franchise in the marketplace. I think with respect to your China question, we launched three devices in China. They were launched at various stages in the first quarter. Clearly, in second quarter, we will see full quarter worth of sales from these devices. There are three devices we've launched with each of the carriers. And really the XT800 in particular, but all three of them are getting very good traction in the marketplace. I feel comfortable and sequentially, I expect our Smartphone sales in China to be higher in second quarter than first quarter. So we have a Smartphone portfolio that has proven to be competitive globally, and feel very good about the sell-through over the next few months. So clearly, there's competition at each of our carriers, not just Android but all kinds of competition. But, Brian, I feel very comfortable with where we're positioned.

Gregory Brown

Brian, in terms of public safety and P25 or ASTRO, we have a very strong market share position primarily driven by North America. We don't disclose the specific number. But obviously, we lead worldwide. In TETRA, we also lead worldwide with a leading market share position, but less than our overall position in P25. The only other thing I'd say is in terms of public safety and overall demand for both, I think backlog is strong. And our competitive position either remains the same as it relates to both, or actually is improving. Clearly, with the big win in Germany, our TETRA market share will grow from the leading position we already have in 2010. So as we invest -- we're investing more R&D, so we're getting the flow-through on the P&L with a 200 basis point expansion in operating margin year-over-year, 13.8% against 10.8%. But that's also while investing in next-generation public safety and expanding and differentiating our already leading-edge portfolio.

Operator

And we'll take our next question from the line of Tim Long from BMO Capital Markets.

Tim Long - BMO Capital Markets U.S.

If I could just, Sanjay, your iDEN comments there. I think you referred to units going down in Q2 and then stabilizing. What makes you think that the units stabilized there? And just going further whittle away some of the rhetoric from Sprint seems to be that -- continue to de-emphasize it, maybe even change out some iDEN spectrum for CDMA. And related to that, how important is that iDEN stabilization towards your goal of profitability for the Mobile Device businesses in the fourth quarter?

Sanjay Jha

Tim, my comments related to feature phone as a category. Feature phone includes iDEN, some ruggedized device and some legacy portfolio and some -- a very limited number of new products that we're introducing. They weren't just specific to iDEN, though, clearly, you're right, iDEN plays a major role in the definition. So let me maybe take iDEN. I expect iDEN to be flat quarter-on-quarter. And remember that iDEN is not just driven by Sprint. It's driven by Sprint and ii [ph] and rest of the world. And while there has been talk about Sprint's future, we continue to see interest from Sprint in driving iDEN in the quarters of interest here. So I feel that we're in a comfortable state. We have guided to the iDEN volume and profitability being lower in this year than last year, and that is built into our plans. In terms of how important it is to our fourth quarter profitability, it plays a role. But I just want to not leave any doubt that our success and failure in fourth quarter would depend on our success and failure in Smartphone. And as I say with my guidance comments earlier, I feel comfortable where we're positioned with our carriers, and I feel comfortable with the guidance I have provided you.

Operator

We'll take our next question from the line of Kulbinder Garcha from Credit Suisse.

Kulbinder Garcha - Crédit Suisse First Boston, Inc.

My question's for Sanjay as well. It's more about devices and how they evolved -- the Device business and how it evolves over the year. And, Sanjay, in the first quarter of the 2.3 million, was a large part of it stocking, just because of the number of new carriers that you were selling into? And wouldn't that hurt your ability to grow sequentially? So any kind of visibility there as to where you are in the channel would be helpful. And the other question is, to get to the 14 million full-year number, the high end of your range, you'd have to have quite a strong ramp in the second half. And what's driving that in the second half of the year specifically? Is that entering the European market? Is it the commitments you've got in the U.S.? Could you give some visibility around that?

Sanjay Jha

So the first question really was, if I can rephrase it, Kulbinder, it was, what is our stock in-channel, what's our sell-through? I'll tell you that I feel very comfortable with our sell-through. And I would say that our stock in-channel is either at normal level or slightly below normal levels in some of the critical Smartphones that are driving our business. So I feel very comfortable that we're not building inventory in the channel. But the sell-through is very commensurate with the shipment that we've made. So that's first part. Second part of your question was, what is the driving the ramp? Is it that we're growing in U.S. and China or are we playing in elsewhere? Well, U.S. will play -- U.S. is about 65% of our shipment in Smartphone market here this quarter. U.S. will continue to play a very important role in our shipments. But China and Europe will also play a role. As you know, because of our global presence, we're able to launch in China, Europe and in Latin America. But a combination of these things will give us the ability to deliver on the profitability part of the promise that we have delivered to the Street. In terms of 14 million, clearly, that's the high range of the target. I won't comment on how we get to 14 million. But certainly, the range of 12 million to 14 million, I feel with the visibility that I have, with the tractions that we have with customers, I feel comfortable that we have good ability to deliver on our promise.

Kulbinder Garcha - Crédit Suisse First Boston, Inc.

And, Sanjay, just to follow up on that, do you have commitments basically for this full year now, for the second half in terms of all the new products you're bringing out? Is that what this giving's at [ph]? In terms the fact [ph] that these are promotion?

Sanjay Jha

Kulbinder, what we know is the carriers are interested in certain products. And we know what slots and what kind of promotion they are thinking about. We don't have contracts all locked and signed and loaded. But we know where we're designing in and what our competitiveness and what our ASPs and so on and so forth are. So great deal of visibility but it's not written in stone.

Operator

We'll take our next question from the line of Edward Snyder from Charter Equity Research

Edward Snyder - Charter Equity Research

Sanjay, I mean, we got Google out there pushing HTC's new phone, which makes sense, and it's clear that Android's moving along nicely. But innovation I wouldn't say is moving as quickly as it was over the last year or so. Is your plans for the Smartphone business more reliant on getting more carriers internationally, as you just pointed out Europe and China? Would it be fair to say that, that's more of a distribution model than it is massive innovation? You already pointed to 20 phones; I'm sure they've been in works for the last year or so. So should we be looking as more of a channel expansion story than necessarily something bold and new in the feature set? And then, Greg, it's clear that networks are struggling from Ericsson's report on some of your competitors. I mean, it's kind of a mix here, especially with regard to the pricing and profitability. Where do you see the WiMAX business currently? Are we at a peak here? Do you expect to see continued growth? Or is investment going to wane in favor of more LTE?

Sanjay Jha

Ed, maybe I can take the first part of the question. The short answer is both. Both innovation as well as distribution. I think that you would see that Google will continue to innovate. And I would say, Ed, right now, the Google ecosystem and Android ecosystem is the fastest innovating ecosystem in wireless. But recall that we do a huge amount of work beside the work

[Audio Gap]

You would see meaningful differentiation in the marketplace from us as well. And distribution is clearly important. We have global distribution. We have global brand and we have global presence we have global carrier relationship and retail relationship. I think that there is sometimes a view that this business is either about OS or about brand. The reality is that to succeed in this business, you have to succeed in operating system, integration of hardware and software, global distribution, brand, execution at the right time, IP position, user interface. All of these things would deliver with quality, do all the back-end supply and demand planning and delivering all of that and do all of that efficiently. And sometimes, I think that as this business has just kind of made it into a cardboard cutout of the business. I really believe that as a machine over the last 20, 22 months, we have improved significantly in our operational efficiency. And I think we're in a better position to take advantage of what opportunity's in front of us. So I feel actually that both the -- you would see from us both innovation as well as operational efficiencies as well as distribution efficiencies that we talked about.

Gregory Brown

And in terms of networks, while the industry might be struggling, we're not. Q1, as you could see, had 13.9% operating margin, which is as strong as it's been in a long time. We also had significant gross margin expansion. You're right; the top line contracts, but that's as we expected. And as I talked about

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$100 [ph] million of revenue last year, we have guided to comparable revenue in 2010, so $600 million as well. And the opportunity for us is, I think that we expect to see some WiMAX customers. More and more migrate to TD-LTE. The fact that Motorola got out to an early start several years ago on WiMAX, and the fact that there's approximately 70% re-usability in the R&D spend between WiMAX and LTE, we think gives us a lead at the moment in the RAN base station business. So in revenue, we expect comparable, $600 million in 2010, $600 million last year. But we think our position on TD-LTE, FDD LTE and WiMAX remains pretty strong. And as I mentioned, we had strong earnings and cash generation, and we remain profitable in all of the legacy technologies.

Operator

And we'll take our next question from the line of Mark Sue from RBC Capital Markets.

Mark Sue - RBC Capital Markets Corporation

Sanjay, if carriers partners have choice, is there focus on a particular Android vendor change quarter-to-quarter? Is your increase confer [ph] coming from a firm commitment on their part that there will be more with Motorola each and every quarter this year? And then separately, will Motorola also sign a loyalty agreement with Microsoft following the HTC agreement?

Sanjay Jha

Mark, the first question was how do carriers decide, do they change their preferences quarter-to-quarter? I think some do, and some have longer-term relationships and they have seen us execute for them. For some, it's been a very, very productive relationship, which has meaningfully changed both of our positions in the marketplace. So I think that there's no doubt that people see the quality of execution from us and believe that given our brand name, given our execution, given our IP position, they'd rather bet on us than few others. So at the moment, there is going to be a huge number of people with credible choices in the marketplace. So there will be turmoil, I guess, to a certain extent and change from carrier -- from a OEM vendor to OEM vendor from quarter-to-quarter. But I'll tell you, Mark, that carriers that we participate with recognize that they want longer-term relationship with partners. And I think we're well-positioned as that choice gets made at each of the carriers. In terms of will we sign an agreement with Microsoft on HTC, we have no discussion ongoing, and I couldn't possibly comment on what we may do in the future in that regard.

Operator

We'll take our next question from the line of Tal Liani from Bank of America Merrill Lynch.

Tal Liani - BofA Merrill Lynch

The question I have is on gross margin, maybe a question for Mark. Operating margins declined from 6½% to minus 9% this quarter on a sequential basis, but your shipment delays [ph] went up. So the question is, is it sourced at lower gross margins on the new product or is the decline more related to seasonal items or higher operating expenses?

Sanjay Jha

Tal, I assume your question was related to Mobile Devices gross margin? Maybe I can give you some color and I missed some part of your question. I apologize if I don't answer; please feel free to ask again. So first of all, let me just go to ASP. Our ASP improved, as you noticed. We went to $192 million ASP from $169 million ASP, really driven by mix shift, more towards Smartphone and less towards feature phone. Our Smartphone gross margin is very much dependent on mix. As you probably recognized, in fourth quarter, we had very limited number of Smartphones. In first quarter, we have more Smartphones. And then really, it's a function of mix shift there. Feature phone gross margins are definitely under pressure, particularly in first quarter, we saw gross margin for feature phones come down relative to fourth quarter last year. Feature phone gross margins as an industry is under pressure. We are bringing down Smartphones lower down the tier. That has an impact on the Smartphone gross margin, but it has a much greater impact on feature phone gross margin. And I actually believe in the longer term, our Smartphone gross margin will be in the range of industry average. I think industry average is coming down, and our gross margin is actually going up. I expect that there will be a meeting of the two, and we expect to operate at industry gross margin levels for Smartphone. I'm not sure if I got your question and answered it appropriately or not, Tal.

Tal Liani - BofA Merrill Lynch

Yes. It had a second part, and the second part was, so I understand that part of the sequential decline in operating margin is related to the gross margin. The question is, what happened also to OpEx in the Mobile Devices division? The OpEx...

Sanjay Jha

Tal, I'd guided you last quarter to a flat OpEx. But in fact, OpEx this quarter was down. Every quarter, we are very, very careful about managing our operating income. My guidance to you is to look at our operating expense being somewhat flat. That's not to say that we're not reducing headcount. But offsetting that very often and investments in our brand or in next-generation technologies. So if you look -- if you're thinking about our operating expense, I think a flat modeling of it is the right way to look at it. But this quarter, on balance, we reduced our operating expense. But I would say that probably the most significant feature on -- feature phone margins are under pressure. And as I say, we've guided you to a slightly lower volume in second quarter on feature phones as well. And feature phones volumes actually flatten out for second half 2010 for us. I don't know if that gives you all the color you needed.

Operator

We'll take our next question from the line of Maynard Um from UBS.

Maynard Um - UBS Investment Bank

Sanjay, a number of PC vendors are moving more aggressively into the Smartphone market, and also making a bigger push into the tablet-like devices, five-inch screens or greater. How important in this market? And is this a market you need to be in? And if you can give us any update also on MOTOBLUR? You've talked in the past about new apps on MOTOBLUR that'll help your differentiation? Any update there and what traction you're seeing?

Sanjay Jha

I think you're seeing convergence with PC mobility. But also, in Home, you're seeing a convergence of devices happening. I actually anticipate that there'll be a lot of media consumption devices, which are able to be used in home and create a whole home ecosystem, and I actually see this convergence as being very, very important. Very, very important. We are very engaged with this marketplace. We think that tablet is one form factor. But there are a number of other form factors that other solutions that people are engaged in. We are engaged with this development very intimately. And we will announce whatever we need to announce at the appropriate time. Let me go to MOTOBLUR. We are very pleased with the traction, and I would say that we've seen hundreds of thousands of users on our MOTOBLUR server. And it enables us to get and understand our consumers' data usage pattern and Internet usage pattern much more intimately. And it allows us to think about what is the next service or what is the best way to serve our customers. It also, actually, meaningfully reduces their data consumption, which our carriers seem to like quite a bit. Because if you go to a Facebook website, the website is something like 300 kilobytes, whereas if we are able to take the relevant updates and push it to your home screen and do it in an efficient way, that, that changes quite a bit of the data consumption traffic. That's one thing. Second thing going forward, you've seen us participate in social messaging. I think social media becomes much more important. Social location becomes much more important. So you would see continued focus in delivering what we call Push Internet to consumers' home screen using our MOTOBLUR technology.

Operator

Next question from the line of Ehud Gelblum from Morgan Stanley.

Ehud Gelblum - Morgan Stanley

Sanjay, I thought you gave a pretty interesting stat that 50% of your Mobile Devices revenue was Smartphones, so we can back into an ASP on that. That was down from what I had as an estimate for ASP in the prior quarter. So wondering what the trend in the Smartphone ASP was? And was that due to mix, fewer DROIDs and milestones and possibly more of other types of devices? And if you can give us a handle as to how ASPs did trend this quarter and how they trend going forward within the Android smartphone bucket? And then when you gave guidance for the second quarter of up, is there any way you can give us a sense, is that seasonally up and what you consider seasonal? Or should that be up more depending on, because of new product launches that you anticipate either this quarter or some of the ones you made at the end of last quarter that you expect to ramp? So seasonally, looks to me, would be around 5%, 6% up into the second quarter? Is that what you're thinking? Or are you thinking that it'll be more significant due to the product launches? And then, Greg, it sounds like things are going very strong, especially in Germany and other places. But when we keep looking at the newspaper and hearing things about Europe and what's going on with governments there and bonds and government debt being downgraded, does any of that impact you? And impact some of the contracts that are in your pipeline that you're working on or that some of those countries may be looking project-wise to, going forward?

Sanjay Jha

And so, Ehud, I will take the first few of your questions. The 50% comment was really related to the revenue in North America, not overall revenue. And I actually anticipate that, that portion will continue to increase as we go through the year. So yes, I think that -- if I could say this, the quality of our revenue, I think, as we go through the year -- and by that I mean revenue with high gross margin or improving gross margin actually is getting better as we go through the year. In terms of ASP for Android devices, I actually anticipate that it'll come down a little bit from where we are today, partially because we are going into a lower -- we are driving Smartphones into feature phone territory. So the ASP will come down a little bit. But at the same time, consistent with the question earlier, there is a scope for higher ASP devices and there is convergence with computing and mobility. So I'm uncertain. It will depend on product mix. It's uncertain exactly where the ASP ends up. On balance, I would say because there's greater volume in lower end rather than higher end, there's probably a slight declining trend in ASP. And then your question around second quarter seasonality, I guess the question, I think, if I can re-ask the question this way, you're asking whether we'll take market share or just stay current with the marketplace. My anticipation is that we will gain some market share in second quarter.

Gregory Brown

Ehud, in terms of public safety, so while we grew 6% overall as a segment, remember I referenced the fact that Enterprise, or formally Symbol, was double-digit growth and government and public safety, therefore, was more lower single-digit growth, which is reflective of the overall spend environment. I do think the Americas and Asia will be stronger for the reasons you described, structurally, in terms of what's going on in Europe. But we don't anticipate any incremental challenges beyond the guidance that we've provided for Q2. And I think we've incorporated that into our thinking.

Edward Fitzpatrick

No issues on the balance sheet there, either, from a European perspective, so our receivables are pretty clean there.

Operator

We'll take our next question from the line of Jeff Kvaal from Barclays Capital.

Jeffrey Kvaal - Barclays Capital

Obviously, HP has decided that they want to own an operating system. They'd really rather do that than embrace Android or Windows. So the question then for you, Sanjay, is how do you feel about that strategy? And you've talked in the past about being quite committed to Android, but not necessarily 100% forever. Any updates on that thinking would be helpful. And then, for a clarification, if you could just help us understand what happens to that $200 million in deferred revenue from last quarter, that would be great.

Sanjay Jha

Jeff, I've always felt that owning your OS is important, provided you have an ecosystem, you have all the services and you have an ability and the scale to execute on keeping that OS at the leading edge. And I continue to believe that at some point, if we have all of those attributes, that owning our own OS will be a very important thing. But at this current point, I continue to feel that Google is the fastest innovating ecosystem. We have a very good working partnership with Google. And together, I think we work well to help each other succeed in the marketplace. So I continue to be committed to that particular way of working for us in the Smartphone market. To the second part of the question, we had about $200 million of deferred of revenue in fourth quarter 2009. And it'll be recognized over the next eight quarters. And the net impact of deferred revenue in first quarter 2010 was not significant. So I don't know if that covers your...

Operator

We'll take our next question from the line of Pierre Ferragu from Bernstein.

Pierre Ferragu - Sanford C. Bernstein & Co., Inc.

I'd like to focus on the feature phone question; could you please explain as what's exactly the driver of the decline in sales today? What are you going to stabilize shipments in feature phones going forward? And beyond the comments you've made, Sanjay, what's exactly the point of keeping such a small business that is following to be extremely sub-scale compare to competitors in the segment? And what is your plan? Do you plan to grow it again going forward? Or do you plan to exit the feature phone market?

Sanjay Jha

Maybe I can comment a little more. I see the feature phone market in the whole industry, leaving aside Motorola, compressing in terms of both revenue and profitability. And as I've commented in prior earnings call, we have de-emphasized our presence in that market, and we're not spending a lot of R&D in that market. That market, that feature phone segment for us consists of two segments really. If I can break that up into two segments, mid- to high-tier and what we call voice centric segment. And maybe I can deal with them separately. The mid- to high tier has three kinds of devices for us; iDEN; some ruggedized devices; HP devices, that we have particular place in the marketplace for; and some legacy devices, and we're introducing some other devices in this marketplace. Those are the three things that form the mid to high tier. I think it's consistent with the guidance that I provided earlier, I see iDEN as being somewhat flat quarter on quarter. Again, it’s not just driven by Sprint and ii [ph] and the rest of the world. I feel good. Again, the ruggedized device, that is a distinct market for that and we continue to play in that marketplace. So I feel that in that segment, in second half of this year, the volumes have come down to a level where I think they can remain somewhat stable through second half. As I look at voice-centric devices, these are the devices that I would say are below $100, meaningfully sometimes below $100. We are utilizing ODM partners, and we’re really not looking to take much working capital risk or inventory risk in this business. But we claim this market because a number of emerging and growth markets, our retail partners and our customers, want a broad range of offering from us. Our brand name extension is important. Our expectation is from zero to modest operating profit in this area. But we do not want to run any inventory or working capital risk, so that's kind of our strategy. And to the last part of your question, as to why we do it. Brand name extension and meeting our customer requirements, those are the reasons.

Operator

Our next question is from the line of Simona Jankowski from Goldman Sachs.

Simona Jankowski - Goldman Sachs Group Inc.

I just wanted to get a little bit more color in China. I think you said that North America was about 65% of your shipments in Smartphones, if I heard that correctly. Was China the majority of the remaining 35%? And also, how meaningful do you think China will be as a proportion of your 12 to 14 million guide and for the year? And lastly, how much does the margin profile compared to the rest of the Smartphone expectations?

Sanjay Jha

Simone, China was not the majority but it was the biggest single element of the rest. As you know, we hired Frank Meng as our lead. And I have worked with Frank, and I've done that because I see Frank and China being important for our future here as we go. We see China as, at the current time, one of the fastest-growing Smartphone market place. You know that there's been broad 3G deployment. The competitive dynamic there between carriers is actually getting much more interesting for us. So I feel that China is going to be important for us going forward. It's probably one of our highest single priority outside of United States. I've said just broadening my answer beyond actually the question that you asked. Europe is going to become a little more important. I think data networks best deployed there. If you look at Latin America, we have a number of launches and actually very well positioned there with our brand name and launches of product. But data consumption there is nearly all prepaid. And Smartphone market, as of right now, is somewhat limited. But we’re actually very hopeful that, that market could be made, could be activated with lower tier Smartphone. So our strategy in Latin America is lower-tier Smartphone. In Europe, we will participate, but in 2010, I don't anticipate a big presence in Europe. We will have carriers. We will have partners, and we'll participate. But we're not anticipating spending a large amount of marketing dollars in Europe. And we'll continue to move forward in each of these regions in that way.

Simona Jankowski - Goldman Sachs Group Inc.

And on the profitability of China versus the North America?

Sanjay Jha

Simone, I think North America has the higher profitability as of right now then China. But it's a matter of scale. I anticipate over a period of time that we'll improve our profitability in China.

Operator

We'll take our last question from the line of Phil Cusick from Macquarie Research.

Phil Cusick - Macquarie Research

First for Greg on CDMA, the strength in those network sales, you said that that's going to be a little bit lower in the second half. Is that one carrier coming back really aggressively? Is that sort of existing carriers? And is that the U.S. Versus China ramping up? And second of all, for Sanjay, can you -- help us think about the Android relationship. It seems like devices are taking a lot of time to upgrade to new versions. Is this sort of carrier reluctance to go back and disrupt those devices that are already out there? Or is it really that BLUR is taking a little longer to update on the new OSs versus just the operating system upfit?

Gregory Brown

So, Phil, in terms of CDMA infrastructure sales, it was a key component in the strength of our performance in terms of cash generation and earnings for Q1. And it's also very important as a component in the way we've guided you to Q2. For us, as you know, CDMA is U.S.-centric, and really Japan with KDDI. I think that one of the things that's happening is, with the explosion of just the mobile Internet Smartphones, it's putting more and more requirements for bandwidth on all networks in all geographies. We are a subsequent beneficiary of that as it relates to CDMA in the form of Verizon and Sprint; more Verizon than Sprint, which was a bigger customer for ours on the infrastructure side, proportionately, and KDDI. And all we're saying in terms of the full year, while the strength is strong and carriers are upgrading their network's EVDO and ultimately positioning themselves for LTE downstream, that we have a more favorable product mix in the first half of the year than in the second half of the year. But we still expect double-digit performance for networks, as I guided in the full year, in the 10% to 11% range.

Sanjay Jha

Phil, if I could just comment on your upgrade question. So first of all, as you know, we have upgraded DROID to 2.1, and it's progressing extremely well. The DROID upgrade is largely complete. So most DROID devices, I actually know the percentage, have been upgraded. Obviously, the users have to take a small action to participate in that upgrade. We are rolling out upgrade on milestones in Europe and some other countries and other devices, CLIQ and others are slated for second quarter upgrade, we actually rolled out our fourth software upgrade on CLIQ, on T-Mobile's network, just a week ago. And on CLIQ XT, we will roll out our first upgrade. In some ways, I think this migration to offer the software upgrade is very new thing for a lot of us. And I think I would say to you that Motorola, along with a handful of other people, has learned how to do that effectively. And I think that, that gives us a competitive position. If you look at what are the factors in the timing of upgrades rolling out, sort of access to [ph] software -- software versions related to carrier services. So it's not just a matter of taking Android software. A lot of phones that we deliver have to incorporate carrier-branded services, and some of those services are migrating to new versions as well. So when we do the software upgrades, we need to go to newer versions of carrier-branded services. Clearly, BLUR has to be upgraded. There are some dependencies on hardware. So 2.1, as you know, was released on one chipset. Our DROID was another chipset. There are some minor migrations that need to be done there. There is a carrier back-end testing and certification process. There's a carrier push plan. And frankly, all parties are learning as to how to do this well. I think those are the things that are taking a little bit of time. I expect -- I think we are at the leading edge of getting this done right, and I think we're learning. And I'm hoping that this will become a competitive advantage for us. It allows us to decouple hardware launches sometimes with software feature and upgrade the software feature, and that makes our development process more agile and flexible. We are here, very focused on making sure we do this well.

Operator

I will now turn the floor back over to Mr. Dean Lindroth, Corporate Vice President of Investor Relations, for any additional or closing remarks.

Dean Lindroth

I'd like to remind everyone that details outlining our non-GAAP adjustments, GAAP to non-GAAP P&L reconciliations and other financial information can be found on our Investor Relations website. An audio replay along with today's slides will also be available shortly after this call. During this call, we've made a number of forward-looking statements. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of Motorola and there can be no assurance that such expectations will prove to be correct. Such forward-looking statements include, but are not limited to, our comments and answers relating to the following topics: Plans and progress relating to the potential separation of Motorola's businesses into two independent publicly traded companies, including the expected filing date of the Form 10; guidance from Motorola's earnings per share for the second quarter 2010; future growth in digital households; expected timing for the announcement, launch and shipment of new products; expectations for the volume and financial impact of handset shipments, including Smartphones in 2010; and guidance for future sales, operating expenses, margins, profitability, ASP, demand trends or market share for each of Motorola's businesses and their products. Because forward-looking statements involve risks and uncertainties, Motorola's actual results could differ materially from those stated in these forward-looking statements. Information about the factors that could cause such differences can be found in this morning's press release on pages 17 through 29 and item 1A of Motorola's 2009 Annual Report on Form 10-K and on Motorola's other SEC filings. Thank you for joining us this morning. 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 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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