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Motorola, Inc. (MOT)

Q4 2006 Earnings Call

January 19, 2007 5:00 pm ET

Executives

Ed Zander - Chairman, CEO

Dave Devonshire - EVP, CFO

Ron Garriques - EVP, President-Mobile Devices

Greg Brown - EVP, President-Networks & Enterprises

Dan Moloney - EVP, President-Connected Home Solutions

Ed Gams - IR

Analysts

Edward Snyder - Charter Equity Research

Ittai Kidron - CIBC World Markets

Mike Ounjian - Credit Suisse

Maynard Um - UBS

Ehud Geldblum – JP Morgan

Phil Cusick - Bear Stearns

John Bucher - BMO Capital Markets

Tal Liani - Merrill Lynch

Daryl Armstrong - Citigroup

Brant Thompson - Goldman Sachs

Tim Long - Banc of America

Presentation

Operator

Good morning and thank you for holding. (Operator Instructions). I would now like to introduce Mr. Ed Gams, Corporate Vice President and Director of Investor Relations. Mr. Gams, you may begin.

Ed Gams

Good morning, everyone. With me on this conference call are Ed Zander, Chairman and CEO of Motorola Inc.; Dave Devonshire, Chief Financial Officer; Ron Garriques, President of the Mobile Devices Business; Greg Brown, President of the Networks and Enterprise Business; Dan Moloney, President of the Connected Home Business.

An Internet slide presentation is accompanying this call and can be viewed by visiting www.Motorola.com/investor. Slides will be advanced automatically as our presentation proceeds. We encourage you to view these slides while you listen. A replay of this webcast, including questions and answers, will also be available on our website at approximately 4:00 pm Eastern Time today.

Forward-looking statements will be made during this conference call. Forward-looking statements are any statements that are not historical facts. Such statements are based on the current expectations of Motorola and there can be no assurance that these expectations will prove to be correct. Because forward-looking statements involve risks and uncertainties, Motorola's actual results could differ materially from these statements. Information about factors that could cause -- and in some cases, have caused such differences -- can be found in today's earnings press release on pages 19 through 27 of Motorola's Form 10-K for the fiscal year ended December 31, 2005 and in Motorola's other SEC filings.

This conference call is occurring on January 19, 2007. The contents of this call contain time-sensitive information that is current only as of the time of this live broadcast. If any portion of this call is retransmitted at a later date, Motorola will not be reviewing or updating the material that is contained herein. This call is the exclusive property of Motorola Inc. Any redistribution, retransmission, or rebroadcast of this call in any form without the expressed written consent of Motorola is strictly prohibited.

Now I'd like to introduce Ed Zander.

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Ed Zander

Thanks, Ed and good morning, everyone. It's good to be back here in New York City, my staff and I are here today. Let me just tell you a little bit about this morning. We'll cover Q4 during this call and answer as many questions as we can. As you know, later on this morning, at 10:00, we have an analyst event here in New York City which will cover the 2007 outlook, plan and some of the strategic things we're doing. So we'll focus mostly here today on Q4 and then shift to 2007 later this morning.

By now you're all aware that the fourth quarter was a challenging one for us in delivering our operating earnings target. While we achieved our financial goals in our Network and Enterprise and Connected Home segments, and I have many positive things to say about the quarter, we did have challenges in our Mobile Devices business. More about that shortly.

But first, I would like to thank all of our employees around the world for their continued hard work and dedication. Our vision of seamless mobility is an ever-increasing value proposition to communication, consumer and content companies worldwide. We are delivering on our goal and making the mobile Internet a reality.

As we said in our January 4th earnings preannouncement, our mobile device segment was challenged by a geographical and product tier mix. Simply put, we made pricing moves on some of our popular products, including the RAZR line in late Q3, bringing this much sought-after product to a much broader range of users. It worked, if you look at the market share gain.

However, the forecast of geography and mix of the new product shipped during Q4 didn't meet the gross margin dollar targets, plain and simple. Add to this some difficulties in capitalizing on the growth of the UMTS market and softness in the U.S. iDEN market and you have the earnings shortfall in this division.

Having said that, I would like to add that the overall demand for our mobile device product remains strong and our market share continues to grow. Again, during our 10:00 analyst update meeting we will share our plans to get the mobile devices earnings back on track.

Now let me shift to some of the Q4 highlights for the corporation. Sales were up 17%, we had a record $11.8 billion compared to Q4 2005 of $10 billion. Q4 earnings were $0.26 a share from continuing operations, excluding $0.05 highlighted items noted in our press release. Both these numbers were at the high end of our January 4th guidance. Our balance sheet remains strong and we generated around $700 million in operating cash flow.

We shipped a record number of handsets of almost 66 million, up 47% from a year ago and 22% versus the prior quarter. Our global mobile device market share is now estimated at 23.3%, up 4.6 points versus last year, an almost 1% increase versus last quarter. Almost one out of every four people in the world that bought a mobile phone bought Motorola during Q4.

Network and Enterprise had its best quarter ever in the government and public safety market. WiMAX and Wi4 momentum continues and with our acquisition of Symbol, we are poised to strengthen our position. Network and Enterprise increased once again its operating margin on a sequential basis.

Our Connected Home business knocked the cover off the ball with another strong quarter. Sales up 39% year-over-year, a new record for digital entertainment devices and modem shipments; operating earnings were $117 million compared with $52 million a year ago, and sales increased 16% and operating earnings increased 46%.

For the year 2006 I'm generally pleased also with the progress we made. Sales up 22% for the corporation, a record $42.9 billion compared to 2005 sales of $35.3 billion. This is the third year in a row of double-digit sales growth.

GAAP earnings of $1.46 per share including income of $0.16 per share from discontinued operations; record handset shipments of 217 million, up 49% versus 2005; the global handset market share for 2006 is now estimated at 22.2%, up 4.3 percentage points versus 2005 and over 7 percentage points versus 2004. We had record shipments for the year in digital entertainment devices and modems; a record for the year in sales to public safety customers; excellent progress on the strategic realignment of our business portfolio including the divestiture of the automotive business and several important acquisitions; positive operating cash flow of $3.5 billion; significant progress in our share repurchase program.

Our business remains solid and we'll continue to execute on the strategic plan to create value to our shareholders. We look forward to continued success in the months of years ahead. As I said on the January 4th announcement, we are also committed to our long-term financial goal of double-digit operating margins as outlined last year at our analyst meeting. We are doing the right things for the long-term growth.

We have the right strategy, seamless mobility and the mobile Internet. Our mobile device line-up looks exciting in the year ahead, both cool devices and cool experiences. Our leadership in WiMAX and Wi4 will produce new sources of revenue and profits in the years ahead. We have strong leadership positions in video, IP set-tops and fixed mobile convergence; and with the recently completed acquisition of Symbol and Good, our opportunities in the emerging enterprise mobility space have increased significantly.

Again, we'll have more to say about 2007 and beyond at our analyst update at 10:00 today. With that, I'd now like to turn it over to our CFO, Dave Devonshire, who will provide some more details about our fourth quarter results.

Dave Devonshire

Thanks a lot, Ed. Sales for the quarter, as Ed indicated, $11.8 billion, which were up 17% versus the prior year at the high end of the guidance provided on January 4th. Earnings per share from continuing operations were $0.21, including charges of $0.05 per share of highlighted items.

Excluding the highlighted items discussed in our press release, Q4 operating earnings decreased 30% year over year. Operating margin was 7.5% and earnings per share would have been 26%. For the full year, sales were up approximately 21%.

Now I'd like to just note one change in terms of how we are reporting results this quarter and going forward. Amortization of intangibles and IP and R&D will now be shown at the corporate level only -- or in other words, for total Motorola -- and pulled out of each of the individual business operating segments.

The reason for this is simply that many of the acquisitions on a going forward basis, for example Symbol, cut across more than one operating segment. Therefore, it's much easier if you see this number in one place in terms of clarity. As you all know, going forward this is pretty much a non-cash type item. So that's what you can expect going forward and that was restated in our press release.

Now moving on to the items highlighted in our earnings press release for the fourth quarter, as I mentioned, they totaled $0.05 per share. The first one on the list that I'll spend just a few moments talking about is investment-related losses, $0.04, which is really a non-cash charge. We laid on some of our marketable securities, a hedge to protect the full value of the marketable securities. We were very successful in that regard.

We recorded some gains in prior quarters. We unwound the hedge in this quarter. So we protected the full value of our marketable securities, which was approximately $860 million, which now sits in our cash account.

In addition, as you know, this is the first year of stock compensation expense being recorded on the P&L of the company and that has been traditionally, for 2006, been a callout item. In 2007, it will no longer be a callout item because it will be consistent in both 2007 and 2006.

So moving on then and talking about cash flow and debt, for the fourth quarter we generated $700 million in operating cash flow, our 24th consecutive quarter of positive operating cash flow. During 2006, as Ed indicated, we generated approximately $3.5 billion of operating cash flow. Cash flow for the year was $668 million. For the year we generated a free cash flow of $2.8 billion. Our balance sheet remains very strong, with net cash of $11.2 billion and a debt to capital ratio of 20.4% at the end of the quarter compared to 20.3% at the end of 12/31/05.

In terms of an update on our share repurchase program, in the fourth quarter we acquired 32 million shares at an average price of $21.83. From the inception, our repurchase program in May of 2005 through the end of the fourth quarter of 2006, we purchased approximately 213 million shares for $4.7 billion. Approximately $3 billion remains authorized for repurchase of shares through June of 2009 under the program and approved by the board back in July of 2006.

Now moving on to guidance, our guidance for the first quarter, consistent with the way we've provided guidance in the past, we've talked about the sales for the next quarter. As you can see, we're looking at sales of $10.4 billion to $10.6 billion. In our analyst call update at 10:00 am Eastern Time, we will provide additional guidance related to our expected financial performance for the full year of 2007 and additional color on the first quarter.

Thank you, Ed.

Ed Zander

Thanks, Dave. Let me now give you some color on each of the businesses and some of their results. First of all let's begin with mobile devices in Q4 2006. As I said earlier, it's probably best described as a mixed bag. Just a tremendous quarter in terms of volume and market share, an all-time record, as I said earlier, in units and sales. This is the ninth consecutive quarter of quarter-over-quarter market share growth, over 23%.

We believe now market share increased, our market share, with growth in North America, Asia, and Europe. A significant milestone for us is that we've now exceeded 20% global share on an annualized basis for the first time since 1997. So without a doubt, people bought our products and with 66 million units, it exceeded by quite a bit our internal forecast.

However, we did miss our Q4 profit target. As I said earlier, on this slide it's pretty straightforward. We had some forecasts, some pricing assumptions in our GSM and EDGE business. We moved RAZR into a much more powerful position in terms of taking advantage of market share around the world and some of the newer products just didn't deliver in the mix and forecasted geographies that we thought. We'll share more of that, as I said, later.

In addition, our 3G products began to ship actually in the December timeframe, so we did not get the benefit of some of the increases in 3G markets especially here in the U.S. and in Europe. The iDEN business continues to remain challenged in the United States. If you add all three of those up, with a number like $66 million, you get some of these wrong and you do get some of the impacts we had.

In terms of the financials, another strong revenue up 20%, $7.8 billion; on an annualized basis it's $28 billion. This business has actually almost doubled now from 2004 to 2006. The margins, definitely not what we expect and not we plan in this business. Unit count 66 million, as I said, and market share over 23%.

In terms of the demand, we sold more RAZRs -- it's funny, because I keep reading about RAZRs being tired -- we sold more RAZRs in quarter 4 of this past year than in any quarter we ever had. We now have shipped over 75 million RAZRs worldwide, the RAZR family. We keep adding functionality to the RAZRs, music capability, more performance capability, better camera capability, colors. Again, as we move this into the price points in other geographies, and even here in the United States the sell-through was pretty amazing.

We also launched two significant products, the MOTO RAZR xx, which is our 3G product, in Japan. It was the hottest product for Christmas. That is now starting to roll out in other parts of the world. We introduced the MOTO KRZR in Korea, which was also a hit with consumers.

We also did a lot of work -- mostly outside the United States -- in music. I was in China recently, last month, and we introduced the ROKR E6 which is with our own MOTOMUSIC website. That is taking off in terms of music capability. MOTOMING, which was a big hit and has been a big hit in China, is now entering new markets, Latin America and other areas of Asia. I'd like to point out that if you haven't seen MING it's a touchscreen, it's been in the market all year. It's a touchscreen technology that we've heard a lot about recently, has been available not only from us but some of our competitors, and you ought to take a look at it.

MOTO Q continues to do well. We've now launched it at Sprint here in the United States and as we'll talk later this morning, we're about to launch this in other technologies around the world in the next quarter or so.

Bluetooth accessories, and the most important thing, all the products that we talked about in July launching for the holiday season did launch. In fact, on the next slide you can see MOTOFONE shipped, a great response in the emerging markets with that product.

The KRZR products that I talked about both launched. We shipped over 2 million KRZRs in the quarter. In its first 90 days it sold more than three times the units that RAZR sold in its first 90 days a couple of years ago. So we had a pretty good success with that product. Certainly we probably forecasted more of those, but we had a mix between the RAZR and the KRZR that perhaps wasn't forecasted the way we wanted to, but KRZR still did very, very well.

In addition the RIZR, which is our first slider product, shipped during the quarter. The two middle products here are very important because they are 3G products and they started ramping up in December. The xx is the 3G product and the MAX is 3G with multimedia capability, music, big camera, lots of memory, music buttons on the front. That's also beginning to ship.

We invested in new innovations for iDEN at the launch of the world's first dual mode CDMA iDEN handset, the 502 which was launched in October. So all of these products, and especially the ones with 3G capability, hopefully should help our operating earnings in the quarters ahead.

Again, we continue to do well in the innovation and design area. I just came back from Consumer Electronics a couple of weeks ago. All of these products you see here won awards. The one on the right, which is the RIZR Z6 which is our new music product, is the first one we have. It's a full Linux Java product and that also won some awards and demonstrated some really neat music capability.

In summary, our strategy is the same: grow profitably -- I underlined that one -- with wickedly compelling products. I've got a great roadmap this year. We do have to get the next line right, which is rich experiences, and we need to move up the food chain and take advantage of the emerging markets for video and music and photo and some of the other rich experiences around 3G; and of course, with the normal quality and efficiency.

So a good quarter on unit volume, good quarter on revenue, good quarter on market share, good quarter on getting out some cool products. Not a good quarter on our operating earnings and profitability, which Ron and his team will talk about later this morning.

Let me shift to Networks and Enterprise. Lots of good things happened here. We successfully completed our biggest acquisition since the GI acquisition about five, six, seven years ago, and we're quite excited about the kind of synergies and the kind of team that we have now part of Motorola. We continue with our public safety leadership with new wins globally. The next gen WiMAX momentum just continues. A year ago it was slides. This year it's lots of trials and lots of initial deployments. I think next year and the year after that it's going to be lots of revenue and lots of profits.

We continue to win contracts, especially a big one with Vodafone and an eight-year GSM contract which I'll talk about shortly. Solid financials, over $3 billion in revenue. Operating earnings, excluding highlighted items, was over 16%. Greg and his team did a bang-up job, great OE performance, considering also the pressures we've had for the last year on the iDEN business and infrastructure and some of the GSM issues that we've talked about during the course of 2006. So a solid quarter in operating earnings and revenue.

In enterprise mobility, which you're going to see a lot more in 2006, we closed the Symbol acquisition. We're delighted to welcome the 5,200 Symbol employees and 10,000 plus channel partners and many customers to Motorola. In conversations that have taken place since the deal closed we have received very positive feedback from the customers and channel partners. I believe this new business is uniquely positioned to change how enterprises view mobility by putting forward innovative new solutions.

Symbol's unparalleled strength in delivering enterprise mobility inside the building directly complements the depth and breadth of Motorola's network capabilities outside the building. The powerful combination was on display earlier this week in New York at the National Retail Federation's annual show.

As I mentioned, lots happening in this area. There's a significant potential in WiMAX through Motorola's Wi4 capabilities. WiMAX is a key to the portfolio and we continue to build momentum in the fourth quarter. Sprint Nextel has awarded us the contract to build out it's WiMAX wireless broadband service for the Chicago market. We are really proud to bring this advanced technology to our hometown. We are working with Clearwire on a WiMAX trial taking place in Portland, Oregon. In fact, we are now participating in 22 trials globally.

Following up on a contract we announced previously, we are progressing nicely on the first phase of infrastructure installation for Wateen Telecom in Pakistan and we've recently completed successful tests of the system's end-to-end voice and data services. In addition, during the quarter we announced the new WiMAX contract with an ISP in Bangladesh and since the quarter ended we have added an agreement to provide WiMAX infrastructure for customers in France.

These operators recognize what we have been saying for some time: WiMAX is leading the way to the next generation networks. Stay tuned in this space, I think it's just going to get better over the next year.

Lots of good work in the carrier area. During the quarter we announced six new contracts, more than we announced during each of the two previous quarters. This included network contracts for providers in Lebanon, Nigeria, Pakistan, Russia and Yemen. The deal that you probably have read the most about is the announcement last month that Vodafone Turkey awarded us an eight-year GSM contract. Motorola will modernize and upgrade Vodafone's radio access network to increase coverage and capacity. In addition, we will provide managed services for operational management of the network.

Additionally, we continue to see progress with our Huawei collaboration. We just announced two UMTS contracts with MTC and MTNL and we also have a new UMTS contract with VIBO Telecom in Taiwan.

Homeland Security continues to be front and center. During the fourth quarter we announced contracts to deploy public safety communication networks for the countries of Iceland and Norway. Since the quarter ended, we announced that we also will build a TETRA system for Lithuania.

Our government business in the United States remains very strong. Motorola recently received a notification of award from the state of Mississippi for a turnkey, statewide wireless voice and data capable infrastructure system. This interoperable next generation APCO 25 system will be used for statewide, mission-critical communications for public safety.

So in summary, you've seen that our networks and enterprise business is delivering solid results. We will look to continue building that momentum by investing to grow wireless broadband and WiMAX leading the way. At the same time, we will manage our 2G and 3G investments appropriately.

Secondly, we will seize the growth opportunities for our enterprise mobility business by strengthening our category leadership and we will expand our public safety business led by our next generation IP-based solutions.

Finally, and certainly not least, is our Connected Home Solutions. They had a terrific quarter: all-time record in digital video entertainment device total shipments, also a record for the year, shipping more than 10 million devices. We reached an industry milestone, our 50 millionth digital device shipped, and maintained our number one leadership in this space. Also a quarterly record in modem shipments, as well as a record year shipping more than 10 million units in 2006.

We maintain our number 1 market leadership in cable modems and a strong number 2 in voice. Cable infrastructure includes IP and broadband access network solutions, continues to be strong. Our cable modem infrastructure reached an all-time high in sales and our broadband network infrastructure achieved the highest sales quarter for 2006.

We expanded previously announced multi-year agreements with Comcast for the deployment of next generation set-tops. New models will be compliant with government mandated separable security and will support Motorola's Follow Me TV solution. Time Warner is deploying Motorola's On Demand Solutions next generation video and software platform which allows consumers to pause and rewind live TV. Cablevision Mexico continues to drive digital deeper throughout Latin America. Starhub's need for speed is up and running after successfully launching Motorola's Channel Bonding Solutions, enabling 100 Mbps plus service in Singapore.

Verizon is now shipping Motorola advanced digital set-tops and has reached penetration of approximately 200,000 subs at the end of 2006. AT&T selected Motorola's advanced digital video solutions for the deployment of their U-verse video services and began deploying our set-tops during the quarter. Embratel in Latin America launched VoIP in the second half of 2006 and reached 200,000 lines by the end of year 2006 with 70% Motorola market share. Sentivision has selected the Motorola VIP series IPTV set-top platform for providing video service to Japanese subscribers. Lots of really, really good things happening in Dan's area.

Our product line, our goals are to deliver a complete end-to-end broadband system that delivers the most advanced video, voice, data and wireless experiences. We're making the investments to enhance and expand our capabilities in this space with some of the acquisitions and some of the technology leadership that you see here.

Again, the financials were just a great, great quarter. They were driven by shipment volumes of digital entertainment devices, modems and infrastructure. A 20% improvement in sequential revenue growth 4Q06 versus 3Q06; year-to-year a better than 39% improvement in revenue growth; and, for the full year, a 15% improvement in annual revenue growth and greater than 1.7 points improvement in gross margin performance. As you can see here, our operating margin over 10%, which is quite significant for this business if you consider where it was three years ago.

The summary of our focus for 2007 in Connected Home: maintain our market leadership in key categories and drive market leadership in new, experience-based categories. Deliver and execute the triple play, advanced video, voice, and data in Latin America, in Europe, Middle East and Africa and Asia-Pacific with the existing and expanding customer base. Deliver the next play solutions beyond the quad play, enabling home to go experiences; and operational performance to double-digit margins, supply chain leverage, platform, and organizational performance.

With that, now I'd like to turn it back to Ed for questions.

Ed Gams

Now before we take your questions, we’d like to ask that each of you please limit yourselves to one question and to avoid multiple part questions. We only do this to help ensure that in the limited time available, as many of you as possible will have an opportunity to ask your questions. Your cooperation is appreciated. Operator, please inform our audience on how to pose questions to us.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Edward Snyder - Charter Equity Research.

Edward Snyder - Charter Equity Research

Thank you. Ed, last quarter you basically talked about almost the exact same trend, the product mix away from high ASP phones like iDEN and a high share growth from some low-cost markets like India as the primary factors for your shortfall last quarter. That's supposed to be more than offset by higher-priced new products in Q4 like the KRZR. The market share gains didn't seem to happen, and apparently KRZR didn't sell as well as possible. A lot of this looks like it's going to require lower costs in new phones, given your cost of goods sold was much higher than expected.

How confident are you that you could turn this around in the next couple of quarters? New phone designs usually take 12 to 18 months. Are these low margins going to be a longer-term problem for Motorola in '07?

Ed Zander

I think, Ed, you've got it right. In Q3 we were short a little on revenue, but we hit our profit targets and we struggled with ASP. We did not have the products, frankly, in Q4. I think Q4 was a little more, perhaps internally, some of the things we did as opposed to the market.

We moved, as I said earlier, some of our bread and butter products into a new price point and it worked. And even in the United States, if you were sitting around for Christmas, the ads that were playing on TV were about RAZRs and it seems like every young person and people that couldn't afford RAZRs wanted one and we sold a bucket of them and we're making money on them, butut some of the newer products that came in started ramping in the quarter and we had some mix issues with that.

We also saw some of the emerging market geographies take off and we did not forecast properly what happened. You get off a little bit on this thing and it can multiply very quickly. We are now starting to ship 3G products. We did announce music products, as I said earlier, late in the quarter and right here in January in some of the marketplaces that really want music over the air such as Japan, Korea, and some of the other places around the world and we expect this to start rectifying itself in the next couple of quarters as we introduce some rich experience products.

There is, as you can see even from some of our competitors that announced this week, an opportunity for margin, an opportunity for profit, especially with 3G and rich experiences. We just need to get our product line better in this area. Without preannouncing anything, I think we have some products in this space.

Maybe I'll let Ron maybe also add to it while Ron is here.

Ron Garriques

Sure. We're going to spend a little bit of time at 10:00 on this, but both the rich experiences and the UMTS devices, I think from an xx and a MAX experience, we began to ramp those up. The place where we got a full ramp was the Japanese market where the RAZR xx is flying off the shelves. As you will see at the 10:00 presentation today, we will bring the UMTS portfolio all the way for enterprise through rich experiences, through feature phones and you'll see us bring out some, what I believe to be, very compelling camera products and music products as well.

Now as we go do that, it's a very, very big market. We do have to ramp these products up; at the exact same time we have to ramp some of the legacy products down. That transition doesn't happen in just one quarter and we'll be doing that through Q1 and through Q2.

Ed Gams

Next question, please.

Operator

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

Ittai Kidron - CIBC World Markets

Hi guys. Ron, can you give us a little bit more color on the geographic standpoint? Clearly you've had a very strong quarter in units, but if you can break it down a little bit more by region, where do you think you did very well in share gains and where do you think you might have lost a little bit?

Ron Garriques

Sure. I think Ed stated in the geographic mobile devices that Europe was a very strong market for us, picking up several points of market share. That was really a conscious decision for us. We had been stagnant for almost a year from a market share perspective in the European market. With the UMTS portfolio coming in, it was time to really double down on our footprint there.

North Asia was extremely strong for us, both from a rich experience as well as high-end devices and share; back in the Korea market with KRZR, back in the Japanese market with the RAZR and just continued strength in the China market.

North America was a very strong market from a share perspective and unfortunately for us, we were not able to participate in the UMTS rollout of one of our largest operators here in the U.S. We look to rectify that here in the first quarter of this year. From a high-growth market, a brutal market from a pricing perspective. I think we were able to hold our own inside of that market, but it was quite price challenged.

Latin America, again, a place where we held our own from a share perspective, but also very challenged from a pricing perspective.

Ed Gams

Next question.

Operator

Your next question comes from Mike Ounjian – Credit Suisse.

Mike Ounjian - Credit Suisse

Great, thank you. Ron, could you talk a little bit about kind of what the state of channel inventories were coming out of Q4 in the different regions where you saw strength? Clearly pricing wasn't what you wanted in some areas in Q4. What are some of the opportunities in the near term to drive some improvements on the bill of materials on existing products or on the cost side of existing products?

Ron Garriques

Sure. For the first question, around the world from an inventories perspective, I don't really see anything different than the typical seasonal inventory around the world; no real cold spots, no real hot spots.

From a build of material and pricing perspective, I think MOTOFONE coming out into the market with good margins hit the entry levels here, a tier that nobody has really participated in the way that we're going after it.

In the mass-market product line we're bringing out the W serious both in the candy bars and the clamshells to replace the C series. The W series uses the one-chip solution, the same thing that MOTOFONE uses, which is the industry-leading cost structure. That, coupled with the fact that we're using the AJAR operating system, allows us to bring very rich features down into the mass market space.

We had always planned to take the RAZR line of devices and do the cost reduction on it as well with the one-chip solution. We had to make movements in the marketplace to be able to get the sweet spot of the market with the RAZR family before several quarters, before some of those cost actions hit. Clearly Stu and I will work closely to try to get that lower-cost platform inside of the RAZR family as soon in 2007 as we possibly can.

Above that, it's really not about the cost structure. It's about having the “wow” and the “whoa” and the really rich experiences. When I see you at 10:00 here today, I think some of the things that we're doing in the Slider family, the Candy Bar family, the QWERTY family, the PDA family, as well as what we're doing from a clamshell perspective will give us some balance in the higher end devices both from a UMTS and a rich experience perspective.

Ed Zander

I just want to add to that . I think Ron said it well. We're going to do everything we can, of course. We had a great demand, as I said earlier. Our demand in Q4 exceeded anything we thought with 66 million units. Good news: people like our products, they like our brand. The challenge was, of course, profitability. We are going to do everything we can to make all of those products in the low-end and mass market more profitable with cost reductions, materials and some of the other things we're doing.

Having said that, the key to profitability in this business -- and you can just see it by just looking at even some of our competitors -- is what Ron talked about. We've got to get our world-class 3G product line and we have to get some these rich experiences in our product line. That will happen this year. It will happening in various parts of the year starting hopefully in Q1 with some of the 3G products.

But that's where the profit pools are and you use a lot of those profit pools to fund. We've done it very well for the last two years, and the success in China right now is because of the investments two years ago. I believe if you'd don't invest in India right now two years from now you're going to regret that in terms of where the profit pools are going in India.

The same thing in other emerging markets around the world. So I mean, the strategy has worked, but you have to have experiences and the high-end products to do these fundings. That's where the profit is going to come from and hopefully at 10:00 Ron will talk a little bit more about that.

Ron Garriques

One just last follow-up on this. I have been reading some of the reports out there about product cycles inside of this industry, whether they be 12 months, 18 months, or 24 months. I alluded to all of you when we were at the financial analyst meeting about that Scalpel broadband platform. The Scalpel broadband platform is something that Motorola in the labs has been working on for well over a year when we were at the financial analyst meeting.

Those products are going into customer tests here in Q1 to be launching in the middle of 2007. These are the rich experiences, the UMTS, the HSDPA, the broad set of devices that we believe are the things that really help us be able to bounce gross margins up.

Ed Gams

Thank you. Next question, please.

Operator

Your next question comes from Maynard Um - UBS.

Maynard Um - UBS

Just a point of clarification and then a question if I could. In terms of the guidance, does that include any Symbol revenue?

Then on the reclassification of the costs and amortization in R&D, what was the impact -- or was there any -- in terms of the different divisions in Mobile Devices, Networks, and Connected Homes? Thank you.

Dave Devonshire

It does include the Symbol revenue. Hopefully at 10:00 we're going to give you a complete analysis for this year, not only on the Symbol revenue, but things like tax rates and cash and other things. So we're going to try to get you up to speed on all the ins and outs we've done over the past six months. We've had a lot of acquisitions. We had some divestitures earlier in the year. We're going to try to give you all the planning elements so that you can hopefully plan with your models a lot easier with all the things we've done. That includes the amortization.

Ed Zander

We will be providing restatements by quarter for 2005 and 2006 on our website, which you should be able to access, probably on Monday, so that you can update your historical models for the changes that we've made to segments and the changes that we've made to our income statement structure.

Ed Gams

Next question, please.

Operator

Your next question comes from Ehud Geldblum – JP Morgan.

Ehud Geldblum - JP Morgan

Good morning, thank you. If I go revisit some of the things that you've been saying, it sounds like the solution to the margin and profitability problem is more to come out with better handsets, bring the gross margin up through better value in the handsets and better cost structures.

Is it therefore accurate to assume that there's no intent to cut back on the OpEx side of things to get the profitability back up again? I didn't hear any comments on the previous targets of 33% market share. Is that still a target, or is part of bringing the profitability back up working a little bit on the OpEx and maybe adjusting where the goals are in the market share? Or is it all, like I said, in gross margin?

Ed Zander

A couple of things. We'll talk about that at 10, some of the OpEx for the company. We've had a lot of acquisitions, a lot of internal reorganizations, especially Network and Enterprise, and some synergies that happened actually in the past few quarters, but we're going to do some more in the coming year. In Ron's area too, with all the growth and all the expense structure, there are efficiency opportunities there and we'll share that with you in a couple of hours.

Maybe I'm mincing words here -- I think the product line, we sold 66 million units, that is just awesome. Again, just coming back from Asia myself and seeing KRZR, the new RIZR product, the new slider, the new music products, and if you line them up, the GSM EDGE space and some of the CDAM opportunities here and go to a Verizon store, we're just doing very well.

The area we are missing, and up until just December, is a very strong 3G lineup, especially here in the United States with one carrier that's moved there and in Europe. I do believe also in the higher end multimedia rich experiences, people that want the multi-mega pixel cameras and the music experiences which are selling outside the United States. Those two areas I'd have to say we have to do a better job on. But we are going to attack expense structure and we are going to attack new products in those two areas.

Ron Garriques

I think even what I would add to it is in Q4, we're shipping almost one out of every four handsets that was shipped in the world versus just two years ago where we were only one in eight handsets being sold around the world. We clearly have the tonnage out there in the marketplace and this is an industry about scale. Now it's our ability to take that scale and leverage it.

I think there are some good examples of where we're leveraging scale to go grow our business. Getting into Japan with the success of the RAZR and participating in the 700 series product is an example of that leverage. You'll continue to see us during 2007 and 2008 leverage the scale position that we have out in the market for additional profitability gains and additional market share gains.

When I think about returning to profitability in this business, the bulk of it is getting gross margin up higher as we do UMTS and rich experience devices. Having said that, I also believe that we can do it more efficiently inside of the mobile devices business, but when you look for a bounceback in operating earnings, you need to put a very strong eye to gross margin percent as we also continue to bring our OpEx down, but the bulk of it will be gross margin.

Ed Gams

Next question.

Operator

Your next question comes from Phil Cusick – Bear Stearns.

Phil Cusick - Bear Stearns

Hi guys, thanks for taking my question. Just to clarify first on the previous question, it sounds like you really believe you need to continue to reinvest or to continue to invest in emerging markets, distribution marketing, things like to build the brand, if you could just confirm that.

Second, if we could talk a little bit about iDEN, the trends there really seem to be falling off, in the U.S. anyway. Can you give us some idea on how much that's falling off? Do you expect a rebound? Are there drivers around the world that could offset that?

What about this new hybrid phone? What's the margin profile of that versus the phones you've been selling into those carriers?

Ed Zander

I think the first question is for all the organizations -- and again, we're kind of doing what we're going to talk about at 10. I believe in the Company's strategy. I believe we're doing the right thing. It's so compelling, this whole seamless mobility, mobile Internet, what Dan's doing in his space. Two years ago we just uttered the words IPTV and everybody looked at Verizon and AT&T and some of the people around the world and were doubting about what they were going to go do. I'm so thankful that Dan made the investments in that space, working with the cable industry and you can see the results there.

Three years ago we had nobody working on WiMAX. We made a bet in that area and the investments are just going to pay off, I think, huge. Enterprise mobility, understanding that opportunity and going after it, not only internally but acquiring someone like Symbol; doing the next gen public safety around IP and video are the things we're doing there. And then Ron's business with fixed mobile convergence and looking at rich experiences and getting to the next 5 billion is really important. So we have to keep investing around the company in our R&D portfolios and our advanced technology and in market expansion.

Having said all of that, as I said right at the top of this hour, it's about profitability and we have to get our operating earnings up. Two of our divisions actually knocked the cover off the ball. Ron has been the bulk of the profitability for the last three years. He and his team and myself and the rest of my team are committed to doing it and we'll do it by expense structure, we'll do it by gross margin and making some trade-offs. But we've got to be really careful not to sacrifice the long term for short term.

So we have a plan. We're going to get there, but I kind of like the strategy of the company. It's just a matter of the execution that we've got to improve upon.

I think the other question was on iDEN.

Ron Garriques

So from a growth perspective in the mobile devices business, the growth in the mobile devices business is generally outside of North America and Western Europe. And therefore we have to continue to invest in the way that we are in leveraging our brand into those markets and we will continue to do so. Internationally, the iDEN business continues to be strong and I think there are opportunities for us to put yet new greenfield iDEN networks in and therefore we have the ability over the long term to continue to grow the international iDEN handset business.

In the United States, the number of iDEN handsets that we shipped that were purely iDEN handsets were below our forecast here and that number continues to come down. The positive is as we continue the hold our share position, both by selling CDMA handsets and selling multi mode handsets into the U.S. business

Having said that -- and I've said this for a couple of years -- the general gross margin on spread spectrum products versus time division multiple access products for us is lower, so therefore we're taking and trading off generally higher gross margin products for lower gross margin products in the U.S. when it comes to iDEN, while maintaining or share position. However, it is putting pressure on gross margins.

Greg Brown

Just to quickly add to Ron's comments on iDEN from an infrastructure standpoint. IDEN infrastructure was down in 2006 over 2005. We expected it to go down again in 2007. As Ron mentioned, however, iDEN I think is roughly 27 million subscribers in 26 countries -- either in or planned -- but when you blend the international growth against the trends here in the U.S., the overall trend for single mode iDEN from an infrastructure standpoint will be a continued decline. Now having said that, we're managing the costs associated with it and that is assumed in our '07 plan.

Ed Zander

But again, the good news here is if we can get through this transition is as iDEN ramps down, WiMAX with Sprint ramps up. Again, we just got the Chicago contract, so yes, it is a year of transition. Greg and his team have done a remarkable job in 2006 of managing that and 2007 will be another year of transformation or transition here.

The customer we're dealing with in the United States, which is Sprint Nextel with iDEN, is ramping up on the other side with a company like ourselves on WiMAX handsets, WiMAX infrastructure, and dual mode products that we talked about. So we have another year or so or two of getting through this transition, but that is the current plan.

Ed Gams

Next question.

Operator

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

John Bucher - BMO Capital Markets

Thank you. Another question for you on mobile devices profitability. I thought that from the middle of the year to date that Motorola had sort of tempered investors’ expectations with respect to UMTS in the second half. Yet today, you're repeatedly sort of shining a spotlight on that and referring to RAZR having perhaps ramped only in a couple of markets. If you had to say in terms of contribution to the shortfall and originally forecasted profitability, was the iDEN device impact more or less than the UMTS device impact? Thank you.

Ed Zander

I think when you look at it from a source of the miss, the biggest part of the miss that we have out there is a missed forecast of the ability on the high end of 2.5G-type devices. We really looked at repositioning the RAZR family from a 2G perspective and bringing in the EDGE type products. I think around the world what we've seen is the UMTS pricing from some of our competitors came down pretty significantly, and actually came down on top of some of the 2.5G stuff that we had planned on bringing to the market. That was the bulk of what was amiss from our expectations internally for the quarter.

Second to that is the miss from a pricing pressure in the emerging markets on what we call the mass market line.

From a third bullet perspective is the ramp down faster than expected from an iDEN handset perspective. From a UMTS perspective, we were not that bullish on the size of the UMTS market. The number of UMTS phones that we shipped into the market was pretty consistent with what we had planned on going to do. I think from an overall market, the relative size of the UMTS market not being as what anybody thought it was, actually was a single reason why some of our competitors took their UMTS portfolio and repriced them right on top of some of our EDGE plans.

Ed Gams

Next question.

Operator

Your next question comes from Tal Liani – Merrill Lynch.

Tal Liani - Merrill Lynch

Hi guys. First just a clarification. Maybe I got it wrong, but the re-specification only applies to the amortization or also R&D and other expenses? If you don't mind to clarify this.

The question I have is on the broadband division. What happens in 2007, in your view, in this division given that Comcast starts to deploy other types of set-top boxes, but also you have other customers that are coming in? What in your view should happen to the margin there?

Dave Devonshire

I'll take the first part of the question. Thanks for the question, first of all. As it relates to amortization of intangibles, that is the part that's being held at corporate in total Motorola and will come out of each of the business segments.

Also on that line we'll have the sort of one-time non-recurring write-off of IP R&D associated with any single acquisition also go in that line. Again for clarity purposes, for comparative purposes, I think it will help clarify where the businesses are, where they're going, and how they can compare to other companies in those segments and compete from a competitive landscape standpoint.

Dan Moloney

Tal, to the second part of your question, I think as Ed indicated, and we had a very strong Q4, continuing strong business with our traditional customers like Comcast as well as the new entrants. We did announce the extension of an agreement with Comcast and we'll be providing them with a host of next generation devices, OCAP-based as well as those that deploy the Follow Me TV technology. So we see the opportunity in this segment for continued growth in the business. We'll talk a little bit more at 10:00. As I've talked for the last couple of years, the opportunity to grow this business into the double-digit operating margin basis, as we indicated and did in the fourth quarter of 2006.

Ed Gams

Next question.

Operator

Your next question comes from Daryl Armstrong - Citigroup.

Daryl Armstrong - Citigroup

Thank you very much. First a clarification. Ron, when you were talking about the pricing pressure in the emerging markets and your own pricing actions there, were they more offensive or defensive in nature? Meaning was it in response to a competitor's pricing action or did you initiate the action?

In terms of my full question, in terms of the KRZR unit shipments, you said that they were below your expectations. In terms of the KRZRs that you didn't ship, are they in your inventory right now? How does that impact your manufacturing utilization going forward in the short term?

Ron Garriques

The first question is from an emerging markets perspective around the world we generally share and didn't grow significantly, as I had said earlier, in what we call the high-growth markets. So I think that the pricing that we did in those markets was to maintain our share position.

From a KRZR perspective, we shipped a little over 2 million units. The rest of the units that we have in the market, some of them assembled and some of them still, from a parts perspective, and believe that the rest of those will obviously be metered out through Q1 of this year and will continue to have a good sell through on the product line. Both the GSM and the DO version of the device are doing quite well. In addition to that, we're bringing out the UMTS version here of the device inside of Q1.

One of the things, Daryl and you and I get an opportunity to talk almost every first quarter for the last several years and many times the conversation is about Motorola's failing to execute from a product launch perspective. One of the things I'd like to say today, and to all of the employees in Mobile Devices from an engineering and product management perspective, when the stood in front of the financial analyst meeting in July, we talked about 12 new launches and that team brought out 12 new launches to the marketplace with quality, some pretty exciting stuff. It's now our job from a management perspective to take those great products that came out on time and to leverage them into operating earnings increases both during Q1 and Q2.

Operator

Your next question comes from Brant Thompson – Goldman Sachs

Brant Thompson - Goldman Sachs

Ron, I was wondering if you could talk a little bit about how, when you look at the gross margin improvement and the bulk of that and you've talked a lot about expanding your 3G product line to go after that, how should we be really thinking about that? Because part of what you're citing is that pricing in the 3G market has been dropped relatively aggressively. Often a lot of 3G phones have a higher component count in them in terms of what they're trying to achieve with the devices. Can you talk a little bit about how broadening that will improve the margins overall? Would you expect to be shipping a lot of 3G phones actually into non-3G markets just to get scale across the product line? Thanks.

Ron Garriques

A lot of different questions inside of the same question. I think a good example of us having scale and then leveraging into the market is what we did in the Japan market. We now have shipped over 75 million RAZRs. We've taken that platform, which has a very, very nice cost structure to it, put UMTS in it, put the software that the customer very much values and now brings it into that market at the north of $300 price point.

I think we have the ability to do that across the globe in the different markets that we have, and I think we have the ability to take everything that we learned and roll it into the Scalpel platform and bring that out in the end of the second quarter of the year to the markets around the world.

Make no mistake about it, the competition in this market is quite fierce and we have very large competitors out there in the marketplace. But I think a good sign to all of the market, quite honestly, is what some of our competitors have been announcing here just in the last couple of days. Sony Ericsson went out, talked about their UMTS portfolio and their rich experiences and brought really nice operating earnings to the business. I suspect some of our other competitors will come out and announce similar things.

This is not a market issue, all right? This is our ability to bring out really, really rich experiences with a great cost structure inside of UMTS. I believe the team has been working on that platform for well over a year now and you'll see that not only at the end of Q4 through Q1, getting better into Q2 and solid performance in the second half of '07.

Ed Gams

We have time for one more question, please.

Operator

Your last question comes from Tim Long – Banc of America.

Tim Long - Banc of America

Thanks for getting me in. Just one more question on the handset operating margin. From my point of view, some of these issues of 3G and iDEN and emerging markets have been around, and maybe in the past quarters the RAZR profitability has been able to subsidize some of those issues. Ed, you mentioned that the RAZR is still a profitable phone. Could you just talk about maybe what's happened with RAZR profitability over the last few quarters, the thin product line? Related to that, if the demand is so strong, why cut pricing on them?

Ed Zander

Those are always the tough ones. You play back a quarter and you play back your decisions and you play back your assumptions and you say, boy, if I had to do it all over again… but I never live like that. You make your decisions. We've got a great management team here. Ron's been doing this for a long time, and his team.

Actually if you take a look back at the three years plus that I've been here, every quarter you make assumptions on pricing on all your products and this is a fast-moving market, nine-month product lifecycles or less. You roll products into different areas as you move through the year.

You know, the answer to your question is RAZR makes money. We have ways to even reduce costs further. I said it, as a matter of fact, a year ago I just still believe, as I travel around the world, people want their hands on a RAZR. Now we've enhanced RAZRs. We put more functionality into it. We have ways to cost reduce it and move it towards broader appeal.

I don't want to complicate this quarter. It's simple what happened. We made some pricing assumptions on KRZRs and RIZRs and some of the EDGE products that didn't materialize, the spread between some of these products and the RAZR product. And then on the other side, where the 3G products were, our forecast just wasn't correct in assuming some of these things. It's not rocket science to see on our forecast what happened.

This year we have been getting through this year without a strong 3G portfolio in Q4. Not only 3G, but I think 3G gives you the ability to build rich experiences. Remember, if you're going to do music and video and TV and photos over the air --and again, you can't live in the United States to see this -- a lot of it is in Europe, Japan, Korea, and other places. You need a faster network and a faster product to do some of these things.

We haven't been there with some of these products. We have music, but some of the other rich experiences we didn't. I think what Ron's saying is with some of the 3G products we've launched, some of the newer products in the first and second quarter, plus some of these cool experiences, I think we can get back into where I think a large portion of the profit pool is.

Having said that, Stu in supply chain and Ron are driving down costs and making some of the current products even more attractive from a cost perspective.

So we've just got to balance our portfolio and we've got to understand not better, but we've got to get these forecasts right on our mixes. We're in large numbers now. When you do over 65 million units a quarter you've got to get it right. That's what we've got to focus on right now, understanding these volumes, understanding where our profits are going to come from.

So we've done a really good job. Ron committed three years ago to year-over-year, quarter-over-quarter profit improvements, market share improvements. He knocked the cover off the ball. We just didn't get it right this quarter, no excuse. We've got to get it right and we're out there getting things right this year.

So we'll share more at 10:00 with what some of the plans are this year, what we're going to do about some of our costs and some of the strategies in the other divisions, too. So hopefully most of you will be here at 10:00 am this morning and we can answer more of your questions. Thanks a lot.

Ed Gams

You can participate on our 10:00 update using the same conference call number or the same web address that you used to participate in 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 related the following topics: guidance for Motorola's sales for the first quarter of 2007; Motorola's stock compensation expense for the first quarter of 2007; expectations regarding the volume and impact of our stock repurchase program; the impact on Motorola's performance and financial results from strategic acquisitions and divestitures, including those that are recently completed, those that are pending, and those that may occur in the future; expectations for expenses; workforce reductions and financial impact relating to the company's ongoing reorganization activities; future sales profitability, operating earnings, operating margin and market share for each of Motorola's segments; expected timing for the announcement, launch and shipment of new products; the sales impact and pricing of new products; plans in emerging markets; and future strategic plans.

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 19 through 27 in item 1(a) of Motorola's 2005 annual report on Form 10-K and in Motorola's other SEC filings. Thank you and we look forward to talking to you again at 10:00 am Eastern Time this morning.

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