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Motorola Mobility Holdings Inc. (NYSE:MMI)

Q2 2011 Earnings Call

July 28, 2011 5:00 PM ET

Executives

Dean Lindroth – Corporate VP, IR

Sanjay Jha – Chairman and CEO; and CEO, Motorola Mobility, Inc.

Marc Rothman – SVP and CFO

Dan Moloney – President, Motorola Mobility

Analysts

Ittai Kidron – Oppenheimer & Co

Brian Modoff – Deutsche Bank

Kulbinder Garcha – Credit Suisse

Rod Hall – JP Morgan

Tim Long – BMO Capital Markets

Amitabh Passi – UBS

Jim Suva – Citi Investment Research

Mark Sue – RBC Capital Markets

Simona Jankowski – Goldman Sachs

Tal Liani – Bank of America – Merrill Lynch

Mike Walkley – Canaccord Genuity

Jeff Kvaal – Barclays Capital

Peter Misek – Jefferies

Ehud Gelblum – Morgan Stanley

Tavis McCourt – Morgan Keegan

Operator

Good afternoon, and thank you for holding. Today’s call is being recorded. If you have any objections please disconnect at this time. The presentation material and additional financial tables are currently posted on Motorola Mobility’s Investor Relations website. A replay of this call will be available approximately three hours after the conclusion of this call. Our Investor Relations website is at http://investors.motorola.com. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. I would now like to introduce Mr. Dean Lindroth, Corporate Vice President and Investor Relations Officer. Please go ahead sir.

Dean Lindroth

Thank you, and good afternoon. Welcome to Motorola Mobility’s Second Quarter Results Conference Call. Today’s call will include prepared remarks by Sanjay Jha, Chairman and Chief Executive Officer; Marc Rothman, Chief Financial Officer; Dan Moloney, President of Motorola Mobility will join for the Q&A portion of the call.

Today’s presentation includes a number of forward-looking statements. Forward-looking statements are any statements that are not historical facts. They are based on our current expectations and should not be relied upon as representing our views as of any subsequent date. We can give no assurance of any future results or events discussed will be achieved. Because forward-looking statements involve risks and uncertainties, 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 press release of 2010 10-K and our other SEC filings.

I’ll now turn the call over to Sanjay.

Sanjay Jha

Thanks Dean, good afternoon and thank you joining us today. I would begin today by updating you on each of our business. Marc will then discuss the detailed financial results for the quarter and our guidance. After that we’ll take your questions.

Just becoming an independent company in January, we have been focused on a number of key priorities. In Mobile Devices, these include growing the business, expanding customer and geographic diversity, delivering a compelling and differentiated product portfolio and improving the financial results. In Home our priorities include, maintaining leadership and improving profitability in our core business taking a lead in the transition underway to all IP solutions and developing solutions to address the multi-screen environment.

In each of these areas, we have made good progress. In Mobile Devices, we grew revenues by over 40% year-over-year. Our growth was driven by the shipments of 4.4 million smartphones, 440,000 tablets and 6.2 million feature phones. For the first six months of the year, we have announced 13 new smartphones and tablet devices growing revenues by 35%, increased smartphones shipment by 70% and cut the operating loss by 64%. We continued to diversify our geographic footprint by expanding our sales outside of the US.

In the quarter, revenues in China, Latin America and other international markets were up significantly compared to the second quarter a year ago, due primarily to smartphone unit shipments that more than tripled. Feature phone sales were also higher driven by a competitive portfolio of mass market devices developed for emerging markets. In China, we continued our growth momentum with additional smartphone launches and by focusing on expanding our retail presence.

New launches included ATRIX for China Unicom, the XT882 for China Telecom and our first value priced smartphone the XT316. We have now launched eight smartphones in China this year with several more devices planned for the second half of the year. Second quarter smartphone shipments were up sequentially led by DEFY in the mid-range and XT800 at the high-end. We remained one of the top Android smartphone providers in China. And in the first six months of the year, we have surpassed our total smartphone unit shipments for the all of last year.

In Latin America, handset demand continues to be very strong. We continued to grow our business by reentering Chile and Columbia and increasing share in Brazil and Mexico. During the quarter, we added ATRIX and XOOM to the product lineup and just recently launched the XT316 marketed as Motorola SPICE Key. Smartphone unit shipments were up significantly from a year-ago quarter, with our mid-tier SPICE and DEFY devices the top sellers. Sales of our mass market phones particularly MOTOKEY and Motorola SCREAM [ph] also increased substantially.

In Europe, we continued to focus on key carrier relationships and expanding our retail distribution in priority markets including the UK, France and Germany. Smartphone shipments were up significantly from a year-ago. ATRIX supported with few campaigns by Orange in France and the UK and DEFY our life proof device were the leading sellers. In North America second quarter total revenues and total smartphone shipments declined from a year-ago quarter. That said, ATRIX sent towards AT&T is up since moving to the $99 price point in June. In addition, we announced the plan to launch 10 new devices with Sprint in 2011, Android 3 has come out of the gates in July with strong sell through.

While the smartphone market continues to expand rapidly all around the world, particularly with the introduction of LTE, it is still in its early stages. To address the growth opportunity in the second half of the year, we have a strong product lineup. In North America, we will have several smartphones ready for back to school season including PHOTON 4G and TRIUMPH at Sprint, Android X2, Android 3 at Verizon. Regarding the DROID BIONIC, we want to ensure that we deliver an exceptional consumer experience. BIONIC will be the first device to deliver the combination of the power of LTE and a dual core gigahertz processor. And it will be in the stores in September.

We also plan to launch a number of new smartphones later in the year, including at least one additional LTE device, a re-brush up DEFY and several sub 200 smartphones for emerging markets. In tablets, the Android experience continues to improve. An increasing number of tablet applications that are available in the market and the Honeycomb upgrade underway enhances media and video experiences.

In the second quarter, we expanded XOOM distribution internationally, including launches in Latin America, Europe, China, Korea and Japan. Our upgrade to LTE for XOOM will be available in September followed by two additional LTE tablets introductions later this year. All-to-all we will have at least five LTE devices in the market by the end of the year. In addition to driving growth through new products and expanded distributions, differentiation is also a driver of growth. We are keenly focused on differentiating our product portfolios in the following areas.

In mobile computing, we will introduce enhancements to our webtop application which enables consumers to get more out of their Motorola smartphones. Later this year, our high performance smartphones and suite of smartphone accessories will feature improved capabilities in a number of areas including office productivity and multimedia. Accessory and device bundle price points will be more competitive and form factor will be expanded to address both the enterprise and consumer segments of the market.

In enterprise, Android is gaining momentum by offering consumers and CIOs more choices. We are supporting ongoing enterprise trails and expanding our ready for business portfolio of smartphones and webtop enabled accessories. Upcoming devices will include more comprehensive security features, device management and enterprise support capabilities. In cloud-based services, we continued to enhance our offering, for example vast majority of the consumer personal content using photos, music photos, videos and files is typically stored on a PC. We have developed a secure personal cloud by integrating our ZumoCast experience to enable consumer to access that content from a Motorola smartphone or tablet.

Users will also be able to stream content and sync content among multiple devices. Motorola smartphone users will also be able to access the leading on-demand music streaming service with the availability of Spotify for which we are the exclusive US mobile device launch and marketing partner.

Let me now turn to the Home business. The industry continues to face constraint but stable levels of demand. That said the transition to all-IP solutions is underway and competition and consumer are driving operators to provide more advanced and interactive services. In our core business, we are focused on expanding new customer relationships developing solutions to improve consumer experiences and network efficiencies and increasing profitability. We are also positioning ourselves to lead in the multiyear transition to all-IP network and delivery of more advanced services.

Solutions we are developing includes, streaming TV, home monitoring and control and advanced video gateways. From an infrastructure perspective, our focus includes solution for network based storage and delivery, enhanced network capacity and improving consumer service level. Some process point on these priorities include the following. We have significantly improved operating margin in the first half of the year compared to the same period a year ago. We announced Televation, a broadband video device that allows consumers to watch TV on any connected IP device in or around the home. We launched the Medios Xperience platform which enables service providers to merge video content with social network, games and other web based contents to deliver more personalized multi-screen TV viewing experience.

We’re collaborating with Time Warner to develop a video gateway platform that creates an IP home network capable of delivering premium in-home entertainment across multiple devices. And our full home solution with selective for the rollout of a home monitoring control and energy management service to be announced later this quarter. Across the company we have made good progress in our strategy and priority. For the second half, we have a strong lineup of new products and experiences and a high level of confidence in our ability to continue to grow the business and further improve our financial results.

But before passing the call to Marc to cover financials, I also want to comment briefly on the topic of intellectual property. As most of you know, we own one of the strongest and most respected patent portfolios in the industry. We have over 17,000 patents granted and over 7,000 patents pending with particular strength in 2G and 3G essential, non-essential patents important to the delivery of competitive products in the marketplace, video particularly compression, decompression and security technologies and finally, a leading position in 4G LTE essential.

With new entrants to the mobile space resulting from the convergence of mobility, media, computing and the internet, our patent portfolio is increasingly important. We regularly review the company’s strategies opportunities and assets including IP with the goal of creating and enhancing value.

With that I now turn the call over to Marc to provide additional details on the financial results for the quarter and our guidance. Marc?

Marc Rothman

Thanks Sanjay. In the second quarter, we continued to grow our business. Motorola Mobility revenues were $3.3 billion, up 28% from the second quarter of 2010. On a GAAP basis, we reported an operating loss of $23 million. Non-GAAP adjustments on a pre-tax basis totaled an expense of $82 million. This includes stock compensation expense and intangible asset amortization of $62 million and $20 million related to our reserve for a legal matter.

On a non-GAAP basis, operating earnings were $59 million, a significant improvement compared to the operating loss of $51 million in the year-ago quarter. On a per share basis, we reported a second quarter GAAP net loss of $0.19. On a non-GAAP basis, earnings were $0.09 per share compared to a loss of $0.30 per share in the second quarter of 2010. Further details on our non-GAAP results are included as part of today’s press release and available on our website. My remaining income statement references will be on a non-GAAP basis.

The second quarter gross margin percentage for Motorola Mobility was 26%, up from 25% in the first quarter and 25.7% in the second quarter of 2010. On a sequential basis, the improvement was driven by higher gross margin bubbles in both, Mobile Devices and Home associated with the favorable product mix. Total operating expenses in the quarter were $809 million, up 12% year-over-year. The increase was driven primarily by higher sales and marketing expense to support revenue growth in Mobile Devices.

Non-operating income was $6 million. This is favorable to our prior guidance, due to income from the sale of certain equity investments no longer considered strategic. The provision for income taxes was $39 million. This was at the high end of our guidance due primarily to the increased level of business in Brazil and China.

Turning now to our business segments. In Mobile Devices, second quarter revenues were $2.4 billion, up 41% year-over-year. Total mobile device shipments were 11 million units including 4.4 million smartphones and 440,000 XOOM tablets. Feature phone unit shipments were 6.2 million, up 1.3 million units sequentially due primarily to continued strong demand for our devices in Latin America. The strong feature phone demand resulted in overall ASP of $220 compared to $229 in the first quarter. Smartphone ASP was up sequentially driven by an increased mix of high performance devices while the overall tablet ASP was lower due to a larger mix of Wi-Fi only devices in our recent price reduction action.

The non-GAAP operating loss for mobile devices was $31 million compared to a loss of $109 million in the second quarter of 2010. The year-over-year improvement reflects higher sales volume, offset partially by increased sales and marketing expenses. In the Home business, second quarter revenues were $907 million, up 2% year-over-year. Higher set-top revenues were offset by slightly lower infrastructure sales. Non-GAAP operating margin was 9.9% compared to 6.5% in the second quarter of last year. The margin improvement is attributable primarily to an improved product and customer mix.

Moving now to cash flow and the balance sheet. In the quarter, operating cash flow was breakeven compared to a $107 million inflow in the first quarter. The decline was due primarily to growth in accounts receivable related to the higher level of sales. Total cash, cash equivalence and cash deposits at the end of the quarter were approximately $3.2 billion. Subsequent to the end of the quarter, we received $75 million of the $300 million of deferred cash contribution from Motorola Solutions. We expect to receive the balance of the deferred contribution from our former parent over time as they complete the associated capital repatriation activities.

Accounts receivables was $1.8 billion compared to $1.6 billion in the first quarter. Days sales outstanding increased sequentially from 50 days from 46 days due largely to changes in geographic and customer mix. Net inventory declined to $744 million, days sales in inventory were 27 days compared to 34 days for the March quarter. Accounts payable was $1.7 billion, an increase of $1.6 billion from the first quarter. Days payable outstanding increased slightly to 63 days.

Moving now to our outlook. In the third quarter in Mobile Devices, we expect sequential growth in total unit shipments including a higher smartphones and feature phone shipments. We expect XOOM shipments to be sequentially lower as we transition the portfolio. Sales in the third quarter are expected to be up slightly on a sequential basis compared to the second quarter.

We also expect further sequential improvement in the operating loss. In Home, as we have anticipated and reflected our previous outlooks we expect lower revenues and operating margin in the third quarter on both a sequential and year-over-year basis. For Motorola Mobility, we expect non-operating income and expense to be breakeven and make impact provision in the range of $40 million to $45 million. All in, we expect non-GAAP earnings per share of breakeven to $0.10. For the full-year, we expect shipments of smartphones and tablets to be between 21 million and 23 million units including 1.3 million to 1.5 million tablets.

In our Home business, we continue to expect 2011 revenues to be comparable from 2010. From an operating earnings perspective for the full-year, we expect Mobile Devices to be modestly profitable. In Home, we expect 2011 operating margins to improve by as much as 100 basis points compared to 2010. With respect to income taxes for the year, we anticipate a total tax provision of approximately $160 million to $170 million primarily related to taxes in foreign jurisdictions.

In addition for this call, we will also provide a full-year perspective on non-GAAP earnings per share of $0.48 to $0.60. And again that is for the full-year. Our common share assumptions for earnings per share include approximately 297 million basic shares and approximately 303 million shares on a fully diluted basis. For stock compensation expense and amortization of intangibles, we expect approximately $51 million and $220 million for the third quarter and full-year respectively.

Finally, the earnings per share guidance we have provided today is on a non-GAAP basis which excludes stock based compensation expense, intangible asset amortization and items similar to those historically highlighted in our quarterly earnings results.

With that, I will turn the call back over to Dean.

Dean Lindroth

Thanks Marc. We’d ask the participants to limit themselves to one question so that we accommodate as many callers as possible. Operator, would you please provide instructions on how to ask a question.

Question-and-Answer Session

Operator

Certainly, the floor is now open for questions. (Operator Instructions) And it looks like our first comes from the side of Ittai Kidron from Oppenheimer. Please go ahead.

Ittai Kidron – Oppenheimer & Co

Thank you very much, couple of things for me. Can you talk about your Home business, the exact sort of deterioration in margin there in the second half of the year? Can you remind us kind of what’s behind this and you’ve done an extremely good job in your first half of the year, what’s changing in the second half and Sanjay in to the fourth quarter, seems like looking into a very strong ramp on the sequential basis from September. Can you give us some color on the programs that you’ve already – how much of that is already kind of lined up through programs with carriers and how much of that is more international progress versus stability if not a bounce back here in the US?

Dan Moloney

Hi, this is Dan Moloney. Let me take the first part of that question. Relative to the Home business in the second half, as Marc indicated in the guidance, in Q3, we have a seasonality factor which in many of the past years has driven that quarter to be slightly lower on a revenue basis. As a result of that, there is a flow through effect relative to the operating margin performance in the quarter. That said, again if you look at the Home business on a full-year basis, we are guiding to relatively flat year-over-year revenue and an operating income performance increase of as large as 100 basis points.

So I think what you’re seeing here is a third quarter seasonality factor filtering into the performance in the Home business.

Sanjay Jha

Ittai, with just back to the fourth quarter for the Mobile Devices business, you’re right, we are anticipating as a strong quarter. The reason that we have confidence in the fourth quarter are the following, one, we have a strong part of the portfolio going into fourth quarter including at least one additional LTE smartphone and two additional LTE tablets. We have very good traction with carriers. We have a reasonable understanding of the competitive landscape that we will face in the fourth quarter. And we anticipate continued improvements in international sales. Those are the factors that aggregated together give us confidence that our fourth quarter would be good.

Ittai Kidron – Oppenheimer & Co

And how much of that is locked in already through carrier programs?

Sanjay Jha

Most of our guidance is based on vast majority of it being already designed in, the volumes obviously are a function of sell through and what happens in competitive dynamics in the markets and I’d like to say we have a reasonable understanding of it, but most of the devices that we’re guiding on the basis of is already designed it.

Dean Lindroth

Thanks Ittai. We’ll take our next question please.

Operator

Next we’ll go to side of Brian Modoff from Deutsche Bank. Please go ahead.

Brian Modoff – Deutsche Bank

Talking on Q3, North America was down in Q2…

Dean Lindroth

Hi, Brian the volume is little low, I am not sure if you’re on a headset, you can speak up a little bit, kind of hard to hear you?

Brian Modoff – Deutsche Bank

Is it better?

Dean Lindroth

Much better.

Brian Modoff – Deutsche Bank

Okay, I am sorry, so Sanjay with regard to Q3, it sounds like or Q2 North America was down in unit volumes. How do you see Q3 from that, and then you talked about LTE as an important item in Q4. Verizon sold about a 1.2 million units combined of everything in Q2. What kinds of volumes are you assuming in LTE in Q4 to kind of help you hit your targets?

Marc Rothman

Can we just take the first part of that question with respect to unit expectations for Q3? As we said we expect sales to be up slightly between Q2 and Q3. And within North America, smartphone volume is well will be modestly in ramps more significantly in the second half of the year.

Brian Modoff – Deutsche Bank

Okay. And then the LTE part?

Sanjay Jha

Brain, the LTE – altogether I anticipate that we will have at least five devices in the marketplace with LTE. And of those we anticipate other than BIONIC and XOOM LTE, we anticipate we’ll launch additional three devices in the fourth quarter. It’s my expectation that LTE will be a strong focus for carriers in fourth quarter. And I would say that we believe that we have a very good position with some of the devices that we are offering in the fourth quarter.

Brian Modoff – Deutsche Bank

And could you – would you eventually guess what you think the LTE will be as a percent of your smartphone volumes in 4Q?

Sanjay Jha

Let me hold on guiding you more precisely on that Brain.

Dean Lindroth

Thanks Brian. We’ll take our next question please.

Operator

Next we’ll go to Kulbinder Garcha from Credit Suisse. Please go ahead.

Kulbinder Garcha – Credit Suisse

Thanks I have a couple of questions, I guess for Sanjay, on just the full-year margin guidance it sounds that there is a slight reduction from the low single-digit that you spoke about before and your smartphones volumes have been in line but you’ve raised your smartphone volume for the year. I am just wondering what’s the issue with the incremental margin in your Mobile Devices business. You perhaps underestimated or overestimated profitability on the tablet side? Is it the pricing environment is may be slightly worse or you haven’t spent more. And the reason why I am asking is that my best guess is that your overall devices revenues might go up by more than $2 billion this year, but your profit increase had only be $200 million of sales. The incremental margin is 10% or slightly more not really that significant. So I am trying to figure out, if something has changed in the leverage that you potentially have in this business now and long-term?

Sanjay Jha

As a result of BIONIC being delayed, our mix is driven a little more by international in smartphone which obviously has lower growth margins. So there is mix factor. The second factor here is that the growth margins in tablets have come down more quickly than we had anticipated, and you have seen a move of $100 from $499 from rather $599 to $499 for our 32 gigabyte Wi-Fi tablet. I think those two factors have been key contributors in the net effect that you highlight in your question.

Kulbinder Garcha – Credit Suisse

And Sanjay is there any need that you think to may be look for the cost basis from a restructuring point of view?

Sanjay Jha

Can I tell you something, Kulbinder, I think we are very disciplined in terms of our cost structure. And I anticipate that we will keep that discipline as we go forward. And if there is a need for us to really look that cost structure, we will always do that. I think that the need to balance that cost structure versus our projected growth is the one that we keep in mind in thinking about this.

Kulbinder Garcha – Credit Suisse

Okay, thank you.

Dean Lindroth

Thank you. The next question please.

Operator

Next we’ll go to Rod Hall from JP Morgan. Please go ahead.

Rod Hall – JP Morgan

Yes, thanks for taking my question guys. I guess my first question Sanjay is talking about the margins, you were going to launch of new LTE tablets you’re saying at the end of year or towards the backend of the year. I am just wondering whether the cost situation there is looking better, so that you might be able to price more aggressively with those and still make a decent margin or are we going to be in the same situation we’ve been in up to this point with tablets that are roughly priced at the same level as the iPad? So just curious how you see the cost trajectory going there in the margins? And then secondly, I got a tough topic to talk about, on the intellectual property, I just wondered that my interpretation have you guys response to Carl Icahn’s 13D filing was that you see that patent portfolio as part of that reason you’ve been able to deliver the kind of growth you’ve delivered in the business. And so I just wondered if you could comment it all about how core you see that how important [ph] portfolio of your business, how important is it as an insurance policy against future technological developments and so on?

Sanjay Jha

Rod, let me address the tablet margin question first of all. First of all let me tell you that at $499 32-gigabyte device we are pricing our tablets more aggressively than iPad. That’s the first point. So we are not just placing iPad as a competitor there are other competitors in the Android ecosystem that we need to be competitive with. Second point going forward, remember one of the advantages of being first is that you get the halo effect of being first but also you have less time to cost optimize. As we look at our second generation of devices, we have really focused on cost optimizing those devices. And what I’ve guided you before is the profitability in tablet business will be somewhere between PC and smartphone growth margins. And I anticipate that we will get those gross margins with the new tablet that we’ve launched. And we have designed them with more aggressive cost points in mind already. So I feel pretty good that we will be able to get gross margins on the tablets.

With respect to your IP point Rod, I think when I first came here one of the reasons that I liked this opportunity was because I had to view that most brand and IP portfolio here was very strong. As I have arrived here and have had an opportunity to understand our IP portfolio, I actually think it’s stronger than I anticipated. And there are really a few areas where our patent portfolio is extremely strong. First I think 2G, 3G essentials I think that’s very well understood by the street and the industry and we’ve monetized that asset over the last few years very well.

Probably a little less well known of our terms and patent portfolio is in the non-essential patents which are capabilities which are important to have in delivering competitive products in the marketplace. Third, I think is in our video encoding, decoding and security. And fourth, and probably the least understood and most underestimated is the strength in our 4G LTE patent portfolio. As I look at these patent portfolios, I feel very good that we will be able to go forward and find ways to create and enhance shareholder value for all of our shareholders.

Rod Hall – JP Morgan

Okay, that’s great. Thank you, Sanjay.

Sanjay Jha

Thank you.

Dean Lindroth

Thanks Rod. Next question please.

Operator

Next we’ll go to the side of Tim Long from BMO Capital Markets. Please go ahead.

Tim Long – BMO Capital Markets

Thank you, Sanjay, if I could stay on that IPR topic, could you may be a little specific on what currently the Icahn portfolio does for the model in royalty revenues and/or saving gross margin? And related to that, just looking through the case in the annuals, it looks like the royalty revenue coming into Motorola both MMI and previously Motorola was called out as being reduced over the last several years and that was actually in the last four years. So could you just explain how that royalty revenue number has been going down over the last year? What has caused that?

Sanjay Jha

Let me just tell you that that number has come down over the years as a result of the licenses that have expired over a period of time. And they are largely related to our 2G and 3G patent portfolio. As we go forward, really I think the introduction of number of players with large revenues which have come, they’ve come into the marketplace as a result of the conversions with mobility, computing, internet and other various segments. I think that that creates an opportunity for us to monetize and maximize the shareholder value number of different ways and we evaluate all of them all the time.

Tim Long – BMO Capital Markets

Okay, so the implication is that number could start going back up with the new players as you had decided the patent portfolio?

Sanjay Jha

Let me now guide you with any greater precision than that we will do all that we can to create and enhance our shareholder value using all the assets that we have at our disposal.

Tim Long – BMO Capital Markets

Okay, thank you.

Dean Lindroth

Thank you. Next question please.

Operator

Next we’ll go to Amitabh Passi from UBS. Please go ahead.

Amitabh Passi – UBS

Thank you Sanjay, just a question for you. As we look at the fourth quarter of this year and you introduced few more tablet devices and a couple of more smartphone devices. What do you think fundamentally changes in your go-to-market strategies specifically with the respect to tablets such that we hopefully see a better success rate than what you saw with the original generation of the XOOM?

Sanjay Jha

I think those numbers that you quoted were related to LTE only tablets, right. I wanted to be cautious in not believing that those are the only devices we’ll introduce between here in end of the year. That’s the first thing. And the second thing, what gets us more optimism about the success per tablet are the following things, Amitabh. One is that we have much greater cognizance of where the price points are in the marketplace. Secondly, I think we will have differentiation in the marketplace with respect to – I think there are three things that tablets get used for primarily. One is web browsing, second content consumption, content consumption of all kind, not a video, graphics and digital content of all kind as well. And finally for enterprise purposes and I think we have focused in delivering differentiation in each of these areas.

And finally I would tell you that we have traction with carriers around the world and they have seen the products and they have given us feedback that they are interested in ranking these products and getting behind these products. Those are the things that give us confidence that fourth quarter our tablet performance would be better than perhaps we had in the beginning.

Amitabh Passi – UBS

Great, and if I could just ask a follow-up for Marc. Marc, any color just in terms of how we should think about OpEx in the back half of the year and receivable days?

Marc Rothman

With respect to the balance sheet, the receivable days that would suggest that they’d be relatively consistent with what we’ve been running, in both second quarter and first quarter you saw they were up slightly because the geographic mix but I think that’s is a reasonable assumption going into second half of the year. And with respect to the OpEx structure, what I said previously and stick with is that, when I look at research and development and I look at G&A collectively for the business, I’d expect them to be relatively comparable for the full-year relative to last year. And with respect to selling and marketing, I would expect to see us ramp selling and marketing consistent with the growth in the business towards the second half of the year.

Dean Lindroth

Thanks. We’ll take our next question please.

Operator

Next we’ll go to the side of Jim Suva from Citi Investment Research. Please go ahead.

Jim Suva – Citi Investment Research

Thank you. Congratulations. Sanjay, I was hoping we could talk a little bit about the topic of making money and not to be funny, but it’s a lit bit of a surprise to see that Q3 earnings per share were likely be lower than Q2 when you’ve got some new product launches, seasonality. Can you help us bridge that gap. Is that mostly to Home business softening or why would you make less money in Q3 versus Q2? Thank you.

Sanjay Jha

There are three reasons for that. One, BIONIC launch relative to where we anticipated it. It’s clearly late there, therefore there is less runway for shipments of BIONIC in third quarter, that’s one. Second and that actually goes for the XOOM LTE also. Second is tablet. There are two things that are going on in tablets. One, we anticipate our volumes sequentially in tablets to be lower and secondly, we believe our gross margin as a result of price movements that we’ve made are going to be lower. Its hard thing obviously that is seasonality Home business. So I would ask Dan to just comment on that. I don’t want you to believe that there is just great softness in Home business. There is seasonality and may be Dan, you could address that.

Dan Moloney

Yes, thanks Sanjay. I think as I mentioned earlier, if you look at the Home business on a full-year basis, its comparable to 2010 in the revenue and improvement on operating earnings quite much as 100 basis points. And if you look at Q1, Q2 what’s transpired to-date and then you map that against last year, look at the projections at the second half of the year, you’ll see that this is a third quarter seasonality phenomena. That’s the quarter when many people move. And so there is a lot of churn during that period of time. You also have the seasonality impact of college students who go back to home and disconnect during that period of time.

So it’s not at all common, you can see that and that’s not reflective if an overall patent in the Home business.

Marc Rothman

If Jim I may let’s just add something to Sanjay’s comments. DROID BIONIC is to launch in September that’s our expectation. So we have volume albeit modest volume in September but as I said earlier in my guidance between Q2 and Q3 for the company, there is sequential improvement in the operating results of Mobile Device.

Dean Lindroth

Thanks Jim. We’ll take our next question please.

Operator

Next we’ll go to Mark Sue from RBC Capital Markets. Please go ahead.

Mark Sue – RBC Capital Markets

Thank you. Now that the Android ecosystem is out, 400 devices from all over 35 manufacturers. Are there things in development to further differentiate your products similar to kind of what you did with MOTOBLUR that would may be more, and do you think that an increase in R&D per unit is likely considering that goes to distance yourself from others?

Sanjay Jha

Mark, let me just start by saying I do not believe per unit R&D increase is likely or necessary. Two reasons, one, I think we will manage our R&D very effectively at the levels that it is at and secondly because I anticipate we will have volume increase. Let me then address the substance of your question with regards to how will we differentiate our product? I think if you look we have always said that there are four elements to our differentiation. First is enterprise, second is this notion of personal cloud and I’ll spend a little bit of time on that, third is disability to differentiate in care as to how we provide care to our consumers and fourth is cloud-based services.

So let me take enterprise. I think today in Android ecosystem, I believe that we have and we get this feedback from our customers differentiated in terms of the capabilities that we have embedded in our devices to support enterprise class security, to support feature sets which are relevant to enterprises. And I think we’re beginning to see that traction in the marketplace. Second, we have talked about our cloud services. We have over 10 million subscribers now to our cloud services and we are increasingly able to provide them services like making them aware of what is happening on their phones like delivering them aggregated social networking, like delivering them rich social location services, like delivering them connected media and connected gallery features which I think our consumers more and more recognize as being differentiated.

Third thing is this notion of being able to access your content on your PC from anywhere. As much as we all believe that all of the consumers contents will eventually go to the cloud, today vast majority of that content actually exists on our PCs. And with the acquisition of the Zecter Company, they have a solution called ZumoCast which enables you to either download or sync or stream from your PC. And this resonated extremely well with our consumers. And I think that that is a very differentiated capability. So we are already focused on differentiating ourselves and we will certainly manage our R&D expense very carefully and with discipline.

Mark Sue – RBC Capital Markets

And Sanjay what about the notion of improving Motorola’s time to market of new products from unveiling to delivery, is nine months kind of the exception and there is some thought to kind of accelerate product delivery?

Sanjay Jha

I think you are referring to the BIONIC, I think you’ve probably seen that that’s an exception rather than the rule for us and I think we’ve been pretty explicit that we all view that as a disappointing event. And I certainly wouldn’t want you to draw the conclusion that that is the trend rather than an exception. I think that we have done a lot and have made dramatic improvements in our ability to deliver products faster and faster. And I am actually very, very pleased with what the team is doing in that front.

Dean Lindroth

Thanks Mark. We’ll take our next question please.

Operator

Next we’ll go to Simona Jankowski from Goldman Sachs. Please go ahead.

Simona Jankowski – Goldman Sachs

Hi, Sanjay just wanted to clarify first something you said and then a couple of questions. On the clarification I think you said smartphone ASPs were up sequentially which was somewhat surprising considering the North America business was down and the international business was up a lot. And typically I think the conventional wisdom is that international ASPs are lower, so if you can just expand on that a bit. And also I think you said that gross margins were lower in smartphones because of the international mix going higher, and I just wanted to understand that in the context of what it sounds like were better international ASPs and that was the clarification.

.

Sanjay Jha

Yes, that ASP actually reflects both smartphones and tablets Simona. And our ASP was driven primarily by tablets. The mix certainly for the mobile devices was geared a little more towards international. And certainly the gross margin there was down as a result of that mix. Does that clarify, Simona?

Simona Jankowski – Goldman Sachs

Sure, yes. So just to be sure, so smartphone ASPs were down sequentially?

Marc Rothman

Smartphone ASPs – what Sanjay is talking about smartphones and tablets being up together, correct. Smartphone Simona were also up slightly between Q1 and Q2. And it was driven by a higher amount of performance smartphones that we shipped in the marketplace including in the international markets. You may recall that we began to ship in more quantities the ATRIX device into parts of Asia.

Simona Jankowski – Goldman Sachs

Okay, that’s helpful. And then just a couple of very quick questions, one is for the upcoming three LTE devices you spoke about. Are they also based on your internal silicon or on third-party silicon, and then a quick update on the enterprise progress you have, you’ve talked in the past about potentially having multi thousand excuse me, multi thousand unit deployments at enterprises. Have any of those materialized at this point?

Sanjay Jha

First of all on the chip set, we will use both our internal and one other chip set and going forward on LTE modem front, we will continue to use two solutions Simona. So we will be more risk mitigated going forward. Secondly I think we are getting number of places where we are shipping enterprise wide devices on multi thousand basis. I will – I don’t think that we have permission to disclose the names but we’re making progress on that.

Dean Lindroth

So we’ll take our next question please.

Operator

Next we’ll go to Tal Liani from Bank of America. Please go ahead.

Tal Liani – Bank of America – Merrill Lynch

Hi guys, you spoke a lot about the differentiation in the US and my question is about China. The growth in China was very strong. And the second is how do you see the prospects in China or how do you view differentiation in China, given that we see a surge in Chinese ODMs in 3G when it comes to Android handsets? Thanks.

Sanjay Jha

I think the experience is that we talked about in US apply in China as well. I think that the markets in China is a little more middle tier centric than it is in US. It’s actually I think the way to think about the biggest markets is that Latin America market is the least – is most geared towards lower tier. The second market after that believe it or not, would be Europe, the third would be China and the highest tier market is US. China market has in the high tier at least the same considerations that we have seen in US. So I think the same experiences resonate there as well.

Tal Liani – Bank of America – Merrill Lynch

Sanjay, if I can just have a follow-up to one of the questions which was asked much early on into the discussion, there was a question about OpEx, but I want to just focus about the R&D expense not entire OpEx. And R&D expense was up sequentially this quarter. Can you discuss the reasons and the outlook for R&D expenses? Is it going to wind down given that you’re launching a lot of these products now?

Marc Rothman

Hi Tal, this is Marc. Let me take the R&D question. There was a sequential increase in R&D and it was across both the Home business and the Mobile Devices business. And there is a combination of cost that went into that increase. Some of it has to do with some of the smaller acquisitions that we did we closed Dreampark is one example most recently. The second as we ramp and grow the business in the second half of the year, there is a fair amount of test units that we produce to get us launch ready, and that has an impact.

But I see the rate in Q2 go in Q3, Q4, relatively constant but may be some modest variance. But I’ve been guiding to Tal collectively for the full-year looking at research and development and G&A in totality and comparing that for the cost structure, research and development and G&A last year. I see it relatively comparable with some modest variance.

Tal Liani – Bank of America – Merrill Lynch

Comfortable as a percentage of sales or comfortable in absolute dollars?

Marc Rothman

That would be in absolute dollars.

Tal Liani – Bank of America – Merrill Lynch

Absolute dollars, okay. Thank you.

Dean Lindroth

Thanks. We’ll take our next question please.

Operator

Next we’ll go to Mike Walkley from Canaccord Genuity. Please go ahead.

Mike Walkley – Canaccord Genuity

Great, thank you. Sanjay with your business trends for non-smartphones in your strong areas such as Latin America. Can you take advantage of us this to move them up into lower price smartphones over time such as your ODM products? And also given that your Latin American businesses, is it profitable at these levels or if there is mix of more low-end phones? Thank you.

Sanjay Jha

Mike, you know strategy, that’s exactly the strategy for us is to move our feature phones focus which we have as you rightly say, it’s done extremely well with, move them to low tier smartphones, that’s exactly our strategy. And in terms of Latin America we are profitable in Latin America.

Mike Walkley – Canaccord Genuity

Great, thank you.

Dean Lindroth

Thank you. Next question please.

Operator

Next we’ll go to Jeff Kvaal from Barclays Capital. Please go ahead.

Jeff Kvaal – Barclays Capital

Yes, thanks very much. I was wondering if we could revisit the European strategy a bit. Obviously we’ve talked a little bit about the dislocation and the competitive environment over there in the past at the moment. I am wondering what your plans are to take advantage of that if any or if you have challenges of getting through the year with the operating margins targets that push those plans back a little, any comments there would be super.

Sanjay Jha

Well I think this quarter is the first quarter and considerable period time that we were actually profitable in Europe. So we actually today have reasonably good momentum in Europe with DEFY, ATRIX and XOOM playing a role in getting our brand name more established in Europe. As I look forward to second half, we have better ranging of our products, both in the performance tier as well mid-tier smartphones and feature phones. Then we’ve had probably as long as I’ve been here Jeff, I would say that we will invest in marketing commensurate with attraction that we are seeing in these tiers. But I don’t think that we will get ahead of ourselves and invest disproportionately.

Jeff Kvaal – Barclays Capital

Okay, so we should not expect a step up either second half of this year or possibly in 2012 then?

Sanjay Jha

I think you will see a sequential increase but you won’t see a dramatic step up.

Jeff Kvaal – Barclays Capital

Okay, thank you very much.

Dean Lindroth

Thank you Jeff. Next question pleases.

Operator

Next we’ll go to Peter Misek from Jefferies. Please go ahead.

Peter Misek – Jefferies

Yes thanks, I guess just my question in terms of follow-up. In your guidance if we walk through the math for smartphone units next quarter, gets you roughly around $5 million. Just want to make I am working out that math correctly for Q3 or you might not have actually guided that, if could clarify?

Marc Rothman

Peter I can clarify that, what I said in my prepared remarks is that the smartphone volume would be up sequentially after the 4.4 million units that we printed this quarter. And I also gave guidance that smartphones and tablets for the full-year would be 21 million to 23 million units.

Peter Misek – Jefferies

Great, thanks. Just to go through some of the carrier dynamics. It’s not – I don’t think it’s a huge surprise that Verizon has expecting another iPhone or they said so on their call in the fall. I wanted to understand dynamically how that’s going to work with DROID BIONIC, obviously a device that I think lot of people are waiting for the LTE. I wanted to make sure that A, you fact that into your guidance and B, how are you working with Verizon to really brand the first LTE Droid device, that would be helpful, thank you.

Sanjay Jha

Peter, first thing is that we have taken a reasonable expectation of what the competitive dynamics will be into account and clearly there are expectations out there of launches from various different competitors of ours and we have taken that into account and thinking about our fourth quarter as well as our in our guidance. In terms of what we will do with BIONIC and how we’ll brand it and how we’ll market it. I really would say that there is a great deal of anticipation of this product and I’ll defer to Verizon in providing detailed response to that question. But there is a strong expectations from the performance of this device.

Dean Lindroth

Thank you. Next question please.

Operator

Next we’ll go to Ehud Gelblum from Morgan Stanley. Please go ahead.

Ehud Gelblum – Morgan Stanley

Thanks guys, I appreciate it. A couple of things. On the R&D side, Sanjay, how much are you spending you think on tablets, and when you look at now kind of at your tablet portfolio, and your tablet business, are there really synergies between smartphones and tablets, I guess, where I’m going is that if you had decided to skip tablets and say you know what, that’s more of a PC, notebook, laptop type of replacement, I’m in the smartphone business. Could you have kept your R&D lower, and if you were to now look in that direction and say you know what, tablets are tougher, they’re different, it’s a different competitive environment. I’m not really going to go after that. Could you be profitable immediately with the smartphone volume you have today? And is there other better numbers that we could be looking at if we were to take out the R&D, and the sales and marketing and everything else that you are putting on the tablet side, and then I have a follow-up.

Sanjay Jha

Ehud, I am sorry, Ehud, I am so sorry, two things to say about tablets. One is if you look at the architecture of our tablets, if you look at the architecture of the XOOM and ATRIX, you’ll be – not for the glass, they are almost entirely identical. So we do spend some money in re-crafting our experiences for larger piece of glass and of course there is some cost doing prototyping and producing products. But I want to tell you that I think of tablet as large smartphones. So I think that its tremendous amount of synergy and I think in places where we believe we can operate differentiated experience we’ll continue to deliver tablets that we develop ourselves. However, already we have seen a development of a strong ODM ecosystem centered around Taiwan which we are quite interested in because they could takes some of the development costs of our book.

So we are prepared to engage in both models where we think we could differentiate, we will go do our own tablets but in lot of places, I think we can leverage our brand name, our distribution, our software experience and leverage the development capabilities and manufacturing capabilities of Taiwanese ODM.

Ehud Gelblum – Morgan Stanley

Go ahead, sorry.

Marc Rothman

With respect to your question around profitability, I would say I don’t think that tablets have such a major impact on R&D or our finances that we could dramatically change our numbers with one decision like that.

Ehud Gelblum – Morgan Stanley

Okay, that’s helpful. Now when you look at the marketing front, and how the XOOM was originally priced and it was promoted, and I guess the ATRIX as well, I’d love to hear your thoughts on how the ATRIX at AT&T did versus your expectations. But most thoughts out externally were that with the laptop dock which was a webtop dock which was just very novel and a super idea but the marketing of it and the price points of the combined product were a little high and to it, the price point of that combined laptop dock came down. You lowered down the price point on the XOOM ended up coming down, you lowered them. There was a lot of talk both on blogs and in the investment community etcetera that the price points that you initially came out with for those two products were high. I assume that your marketing department decided that these were the right places to go, and you can always lower prices. What have you learned between last February when those products were just coming out and today that could help you price some of these products a little more appropriately upfront, it just seems like phones sort of like movies do well over the long-term basis and how their first weekend sort of goes. And if they get this priced upfront, it might be a little harder to make up for it later on. So I’m wondering on the marketing department have you made any changes – are there any changes in personnel, or there any changes in thought process in terms of how to price some of these novel new types of things as you do roll out some new products?

Sanjay Jha

Lots of various things that I could comment on, maybe I could start by saying we continued to do a lot of consumer testing of our webtop capability and we do the testing in enterprise. In both places, we see a lot of interest but believe it or not, the traction is actually greater for the webtop capabilities with the enterprise than it is with consumers. And what you will see us do is actually recognize that the pricing of our initial devices were little higher and you will see us introduce two tiers of laptops, lap docks rather. One in the lower tier to address the consumer needs and another higher tier to address the enterprise needs which the customers there are little less sensitive to pricing and much more careful about the capabilities that they receive. So I think that you will see us responding to that.

There are two other things clearly I think you alluded to the marketing of webtop and lap dock in our opinion and all the research that we have done is continues to indicate that it was a very differentiated capability. We think that we can market that and deliver the message better the next time we have understood the messaging and the particular connection that that best combination has for consumers. And I think we will do that much better going forward. We have much better resolution on the feature set on what was thought as the hardware that touchpad wasn’t resonating quite as much, the keyboard wasn’t sounds to be quite as good. We have very granular understanding of what new things we need to do here Ehud, and I think you would see us deliver on that.

Dean Lindroth

Thanks Ehud. Operator, we’ll take our final question.

Operator

Certainly, our final question comes from Tavis McCourt from Morgan Keegan. Please go ahead.

Tavis McCourt – Morgan Keegan

Great, thanks for taking my question. Sanjay, I think you said you’ll be re-launching the DEFY or a second version of DEFY in US, and I am wondering it’s kind of been a real hit almost everywhere except for in the US. What have you learned from the marketing of that given its success overseas that you might put to work here in the US? And then the second question is you answered a little bit on the enterprise differentiation but what exactly, what exact software are you putting on Motorola devices for the enterprise that are not available on the other Android devices?

Sanjay Jha

All right, first thing on DEFY. Tavis we are not going to launch DEFY plus or the next generation of DEFY in US. It will be almost exclusively and international launch. What has resonated so strongly? There are two things that are resonated very strongly with that product. One, is the ratio of glass to the front surface area. And the second has been the light proof proposition. In Europe there was another factor I think which is the price point hit the very sweet spot where the volume happens in Europe. Those three things drove the European sales. In Latin America light proof and the form factor really resonated and with DEFY plus all we do is keep the same form factor but upgrade the software and some of the processor and some of the components. And we believe that that will continue to do well in the marketplace.

In terms of enterprise, we have – with acquisition of 3LM, we have the full mobile device management software which enables any CIO to provision any Android device, not just ours, ours, HTCs, Sony Ericsson, LG and others. I believe Samsung is the only exception to that rule today. They get provision of any Android device using this software. Within our clients we have a very well tested email client. We have security, we have remote wipe, we have compliance to – I believe about 160 enterprise features which is not found on a standard Android device. Your ability to turn off Bluetooth, your ability to turn off camera, all of these capabilities we will deliver.

Beyond that we are looking at integrating with video – with Polycom and others videoconferencing capability. We have integrated very good document opening and document management capability. And there are few other things that we are very focused on delivering. But we have spent a lot of time with CIOs of Fortune 500 companies to understand from and what they believe is essential for us to win. And I think we’re very focused in delivering all of those experiences.

Tavis McCourt – Morgan Keegan

Great, thanks a lot.

Dean Lindroth

Thanks Tavis. I will now turn the call back to Sanjay for any closing remarks.

Sanjay Jha

Thanks Dean, in the first half year in Mobile Devices we have launched 13 new devices, grown our international business and introduced a new category of accessories to extend the smartphone experience. Our Home business has performed exceptionally well, as we head into the second half of the year, we are focused on delivering on our roadmap of differentiated devices and experiences, particularly in LTE. In Home, we are focused on the developing solution for the transition to IP and converged consumer experiences. As we execute in our priorities and focus in profitable growth, we expect to achieve profitability in mobile devices in the fourth quarter and for the full year and deliver improved operating margin in the Home business for 2011 compared to 2010.

Dean Lindroth

Thanks Sanjay. I want to remind everyone that our audio replay and today’s slide presentation will be available on Motorola Mobility’s website slightly 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. They are based on our current expectations and should not be relied upon as representing our views as of any subsequent date. We can give no assurance of any future results or events discussed will be achieved. Such forward-looking statements include but are not limited to following. Guidance of Motorola Mobility’s future performance, expectations and growth opportunities for the company and product markets, future strategic plans including and with respect to our software, OS, and IP, future product portfolio plans including the expected announcement, launch, unit volume, ASP and financial impact of product shipments including smartphones and tablets, guidance from market demand, or market share, future revenue, operating expenses and other costs, operating profitability and margin, income taxes, earnings per share, cash position and our research and development levels. Because forward-looking statements involve risk and uncertainties, Motorola Mobility’s actual results could differ materially from those statements. Information about factors that could cause and in some cases have caused such differences can be found in today’s press release, our 2010 10-K and other SEC filings.

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

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