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Motorola Inc. (MOT)

Q1 2007 Earnings Call

April 18, 2007 8:00 am ET

Executives

Dean Lindroth - Corporate VP of IR

Ed Zander - Chairman and CEO

Tom Meredith - CFO

Greg Brown - President and COO

Analysts

Scott Coleman - Morgan Stanley

Phil Cusick - Bear Stearns

Tal Liani - Merrill Lynch

Mike Ounjian - Credit Suisse

Jeff Kvaal - Lehman Brothers

Maynard Um - UBS

Todd Koffman - Raymond James

Mark Sue - RBC Capital Markets

Ehud Gelblum - JP Morgan

Brant Thompson - Goldman Sachs

Edward Snyder - Charter Equity Group

Tim Long - Banc of America

Brian Modoff - Deutsche Bank

Presentation

Operator

Good morning and thank you for holding. Your lines have been placed on a listen-only mode until the question-and-answer segment. Today's call is being recorded. If you have any objections, please disconnect at this time.

I would now like to introduce Mr. Dean Lindroth, Corporate Vice President of Investor Relations. Mr. Lindroth, you may begin your conference.

Dean Lindroth

Thank you and good morning. With me today are Ed Zander, Chairman and CEO; Greg Brown, President and Chief Operating Officer; and Tom Meredith, Chief Financial Officer.

A number of forward-looking statements will be made during this presentation. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of Motorola, and there can be no assurance that such expectations will prove to be correct. Because forward-looking statements involve risks and uncertainties, Motorola's actual results could differ materially from these statements.

Information about factors that could cause, and in some cases have caused, such differences can be found on pages 16 through 24 in Item 1A of Motorola's 2006 Annual Report on Form 10-K and in Motorola's other SEC filings.

This presentation is being made on the morning of April 18, 2007. The content of this presentation contains time-sensitive information that is accurate only as of the time hereof. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, Motorola will not be reviewing or updating the material that is contained herein. A replay of this webcast, including questions and answers, will be available later on our website.

With that, I'd now like to turn the call over to Ed.

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Ed Zander

Thanks, Dean and good morning, everyone. As Dean said, with me today are Greg Brown, our President and Chief Operating Officer and Tom Meredith, our Chief Financial Officer. We are here to review our Q1 results and provide perspectives on Q2 and the year.

As you'll hear today, the three of us along with the extended management team are establishing a framework for this company around innovation, operational discipline and execution. We believe we must get it right in all three areas to maintain the kind of performance we have shown in the past.

As far as Q1 goes, our performance was in line with our revised guidance given in March. We have slightly exceeded our revised revenue targets and came in at the higher end of our revised EPS guidance range, excluding highlighted items.

It is very important that we as a management team return Motorola to doing what we said we will do, which has been the case for most of the past three years.

As I said a few weeks ago, the performance in our Mobile Devices business in the first quarter was unacceptable, and we are committed to restoring it to profitability and positive cash flow.

This is a great business with a substantially growing market that requires a high degree of R&D investment, supply chain excellence, a cost structure that requires maniacal focus and flawless execution. We know how to do this and have done it for almost three years. It can also be punishing if we get out of the cycle in any one of these areas, which is the case for this division right now.

We are taking steps for improvements this year and fully expect to improve profitability and revenue growth and positive cash flow. Greg will give you the specifics, but these are six priorities in mobile devices on which we are working.

One, we are accelerating the implementation of our new Linux/Java software platform and multi-source silicon chipset designs. We started shipping Linux/Java products this quarter. We expect more in the second half of 2007 and lots more in 2008. And 3G products are expected in 2008 with a newer lower-cost silicon-based architecture.

Second, more 3G products. We announced new ones during the quarter. We introduced the KRZR K3 over in Europe, 3G Qs which will start shipping shortly, the new Z8 slider and others.

There is more to come this quarter and certainly in the second half of this year. It does take time to launch worldwide and we operate embedded services, but we will get this done.

Third, in the low-tier, we are announcing new low-tier cost effective products like our new W-series and are putting in place new low-cost designs for this market. As I said earlier in March, we are also picking our growth geographies, markets and segments more carefully than before, and Greg will talk more about that in a few minutes.

Fourth, cost reductions in NDB are underway and there is more to do in mobile devices. Tom will provide more details on that.

Five, we are rationalizing our distribution in indirect channels with our direct channel. We need to reduce conflict and channel overlap and provide a more stable basis for monitoring pricing structure in the market.

We've made some good progress in the quarter within every product, in every price tier, and in every geography to make money.

And last, we are moving aggressively to simplify the business through common software platforms, reducing the number of products, driving customer-managed inventory processes, and back to simplified unifying marketing messages worldwide.

Bottom line, we've remained committed to growing market share profitably in our Mobile Device business. The new management team there gets it and it is all about sustained profitability.

Before I turn it over to Tom, I would like to say a few words about a number of things that went well during the quarter. Connected Home had a terrific quarter, with revenue up 32% year-over-year. They continue to outperform their competition in terms of sales growth and are leaders in cable and wireline video technology. Connected Home shipped its 1 millionth IPTV set-top box during Q1.

Network and Enterprise also had a good quarter, growing 20% year-over-year with strong results in the Public Safety and Enterprise Mobility segments. We are now recognized as one of the leaders, if not the leader, in broadband, wireless including WiMAX, end-to-end technologies.

We also completed four very important acquisitions, Good, Symbol, Netopia and Tut, all with great people and great intellectual property. Our patent portfolio, which is a good indicator of the company's intellectual assets, continues to improve. During 2006, Motorola filed over 1,500 patent applications and was awarded over 650 patents.

In addition, the companies that Motorola recently acquired, own about 1,500 granted patents. It's a very important benchmark and underscores how important our strong balance sheet is to our future.

In this quarter, we continue our ongoing efforts to return capital to shareholders. We've accelerated $2 billion of our share repurchase program. In less than two years, we have repurchased approximately $7.1 billion of our common stock within our total authorizations of $11.5 billion.

We have also strengthened our management team. Tom, as CFO and Greg, as COO are important additions to my organization. And together, we have upgraded our talent in marketing, sales and product development in Mobile Devices.

In summary, there is much to do, especially in Mobile Devices, but we are committed to getting it done. We have great people, a powerful brand, strong intellectual property, a good balance sheet and a great strategy around seamless mobility.

We are number one in public safety, number one in enterprise mobility, number one in wireline and cable video, number one in emerging broadband, wireless and WiMAX and number two in mobile devices.

Over time, there is no reason why we can't return to historical levels of double-digit OE company-wide. We will maintain a strong framework around innovation, operational discipline and execution.

Now, here's Tom to take you through the financials.

Tom Meredith

Thanks Ed. We understand the issues at hand and we will be addressing them head on. So, let's start with the quarterly results and then our plan to improve cash flow and profitability. And then, we'll move to our outlook for the second quarter and the full year.

In the first quarter, revenue was $9.4 billion and on a GAAP basis, we had a net loss from continuing operations of $0.09 per share, including charges of $0.11 per share of highlighted items.

Excluding these items, our Q1 earnings from continuing operations were $0.02 per share. As a reminder, stock compensation expense is included in both the current and prior year EPS results and is no longer a highlighted item.

Just to touch on the items called out in the press release, which totaled $0.11. First, I would call your attention to the acquisition-related charges and in-process R&D expenses, which totaled to $0.06 per share.

Second, was a charge of approximately $0.03 per share related to the Telsim securities case settlement, which was a case that having been settled relieves the corporation of a major liability.

And finally, was a business reorganization charge of approximately $0.02 per share related to the previously announced workforce reduction.

Operating cash flow was impacted by profitability and our cash conversion cycle was at 55 days. We do intend to drive significant improvements in these areas going forward. We ended the quarter with net cash of approximately $4.6 billion.

The decrease in our net cash from year-end is primarily due to approximately $4.1 billion in acquisitions, and approximately $2.4 billion of cash used to repurchase shares.

With respect to our stock repurchase program in the first quarter, we increased the current program by $3 billion to a total of $7.5 billion. We accelerated the repurchase, as Ed said, of $2 billion of stock during the quarter.

In total, we purchased 121 million shares, and we now have retired 334 million shares. Approximately $7.1 billion of our $11.1 billion in authorizations has been completed.

The increase we announced in March reflects our assessment of current and future cash flows, the dynamics of our industry and input from our shareholders. We believe we have the right buyback program in place. It makes sense for our company at this time.

Most importantly, we also believe, we have the right process in place to continuously review and make decisions upon our capital structure to ensure the long-term success of the company, and appropriate returns of the capital to our shareholders.

Now, let's talk about our plans to make significant enhancements to our cash flow and profitability. It starts with our cost savings initiative. In January, we announced a $400 million savings program, which included a 3,500 person headcount reduction, realization of cost synergies from our acquisitions and site rationalizations.

The charges for the reduction in force will be completed by the end of the second quarter. We expect to have 18% fewer sites by the end of the year versus what we have today. And lastly, we are starting to realize cost savings from our acquisitions

It is important to note that Ed, Greg and I are determined to reduce costs. We know what we have announced is not enough. We plan to give you an update by June 1 regarding these additional actions. I want to be very clear that these actions will be all about improving our cash flow from operations and profitability. At the same time, rest assured we will prioritize investments for sustainable growth, so stay tuned.

Moving on to guidance, our second quarter outlook for sales is essentially flat with the first quarter. Just to provide a little more color on our segments, I want to reiterate what we said in March. And that is, in the second quarter, it will be another difficult quarter for mobile devices. I want to add though that we expect the operating loss to narrow a bit.

In N&E, we are forecasting revenue to be up slightly compared to the first quarter. In Connected Home, we are expecting to have another strong quarter with revenue approximately flat with our first quarter.

Earnings per share are expected to be in the range of $0.02 to $0.03 per share. This outlook excludes any reorganization of business charges associated with our operating expense reduction initiatives, as well as any items of the variety called out in our quarterly earnings release.

For the full year, we expect to see gradual quarterly improvements in both sales and operating margins in the second half. We expect to be profitable and to generate positive operating cash flow.

In Mobile Devices, we expect a gradual recovery in the second half and to be profitable for the full year. For Networks and Enterprise, we expect mid-teen annual sales growth and double-digit operating margins. For Connected Home, we expect sales to exceed market growth and operating margins to increase compared to the full year 2006.

In this regard, for the full year there are no changes in the projections we gave you in January for stock compensation expense, amortization of intangibles, depreciation or effective tax rate. Interest income is now expected to be approximately $80 million. We still plan to refinance current maturities of our long-term debt later in the year.

Now, Greg will take you through the company operations.

Greg Brown

Thanks, Tom. So, as Ed and Tom have discussed, and we've said consistently, no doubt Q1 was challenging for Mobile Devices. To help get the business back on track, we announced a number of changes to the management team during the quarter. In particular, for several weeks now, we've had Ray Roman and Terry Vega serving as leaders of Mobile Devices.

Ed, Tom and I are working very closely with the new leadership team. And on that point I want to be very clear. We've changed the management team, we've changed the tactical direction, and we are instilling a culture of accountability. We are working to redirect the business and deliver steady improvements.

As we take a closer look at the segment's results for Q1, I'll take you through the numbers and then I'll share some of the actions we are taking to return Mobile Devices to the profitable growth that you've come to expect.

So, let's begin with Mobile Devices. And I want to point out that these results are consistent with the advisory that we issued on March 21. These numbers reflect our decision to adopt a more disciplined approach to pricing and stop chasing market share for the sake of market share.

As a result, we've stabilized ASP performance, which was essentially flat sequentially. We had strong results in North America and Latin America, and we did expand the product portfolio with new and compelling products.

So, it's important that I reflect on the products, because I think it's critical we maintain Motorola's edge on design and product introduction. So, it is in that context that we began shipping eight new devices during the quarter, three Mass Market Devices and one Mid-Tier Device for GSM, three new CDMA designs and one new addition for UMTS.

For GSM, we expanded our W-Series of value-priced, feature-rich devices with the global launch of the W370, W205, W215 for the mass market, and we added the W510 for the mid-tier. These designs offer compelling wireless communication experiences. And we expect them to help strengthen our position in markets worldwide, particularly, in the world's rapidly developing economies.

For CDMA in the W-Series, we added the W355 mass market design. Also for CDMA, we launched a new spin on the Classic StarTAC III for consumers in Korea. And in the US, we launched the feature-packed, experience-rich and ultra-fast 3G RAZR for CDMA-EVDO networks.

Turning to consumers who are seeking all the benefits that UMTS has to offer, we added an important device to our UMTS offerings with the KRZR K3, which delivers elegant style and a compelling suite of data-driven experiences from music and video to imaging, gaming and more.

So, I want to remind also everyone that we announced 18 new products during the quarter. We started the year with CES where we unveiled MOTOMING, for GSM/EDGE a quad-band, touch-screen powerhouse that builds on the success of MING in Asia.

Also at CES, we showcased MOTOROKR E6, our quad-band touch-screen device for GSM/EDGE that delivers a great mobile music experience. And there's much more.

But, in the interest of time, I will just call out some of our newly announced products that blend rich experiences and he compelling design.

MOTORIZR Z8, our innovative kick-slider design for HSDPA that became the star of the headlines at 3GSM World Congress in Barcelona. MOTOROKR Z6, our newest music-enabled slider for CDMA-EVDO networks. MOTO Q GSM, the highly anticipated quad-band Q for GSM, EDGE and MOTO q9, our first messaging and data device for HSDPA.

But as Ed made clear in his opening comments, we must deliver more than just great looking devices and we have identified key elements to drive progress at Mobile Devices now. First, we are working to reduce legacy hardware and software platforms as we transition to our three core operating systems, AJAR for the mass market and low tier, Linux/Java for mid and high-tier devices, and Microsoft/Good for smart phones.

Additionally, we are driving further efficiencies by leveraging our multi-source, multi-tier silicon strategy.

Second, we are expanding our UMTS line-up with compelling new designs and rich experiences.

Third, we have announced and started shipping several new feature rich designs from our W-Series platform for the mass market and mid-tier.

Fourth, we have identified opportunities to further reduce operating costs and eliminate redundancies within the business.

And fifth, we have identified and begun to eliminate conflicts and overlaps in our distribution system to ensure pricing and supply stability for finished goods in the markets we serve.

So, as we wrap up our review of Mobile Devices, I want to emphasize that we will get Mobile Devices back on track to a level of performance that you have come to count on and expect.

As Tom said, Q2 will be a difficult quarter for Mobile Devices, but we do expect the operating loss to improve slightly.

And finally, I'll repeat what Tom said a few minutes ago, we do expect mobile devices to be profitable for the full year.

So, now let's turn our attention for a minute or two to Networks and Enterprise. Looking at the specific results, sales are up approximately 20% year-over-year, driven by our enterprise business in the government and public safety market. As we anticipated, those increases were partially offset by continuing softness in our Carrier Networks business, principally 2G, GSM, and iDEN in the US.

Excluding acquisition and restructuring-related costs, our year-over-year operating earnings were up due to increased sales volume. However, operating margin while still double-digit declined year-over-year, primarily due to continued GSM infrastructure pricing pressure and a decline in volume for iDEN.

Government and Public Safety had a record quarter in sales and operating earnings, driven by continued strength in our state and local business in the U.S. as well as in international markets.

Our Enterprise Mobility business exceeded our expectations in sales, operating earnings, and margin. And overall the integration of Symbol, the second largest acquisition in Motorola's history, is tracking to our expectations.

Let's take a quick look at highlights from other different areas within Networks and Enterprise. First, our government and public safety business continues to be an excellent performer. Coming off of our best year ever in this business, we continued to see strong results in Q1, around the world, including growth in the Americas and the EMEA.

We had some large wins this quarter, including a substantial contract with Riverside County, California to provide a new voice and data system that includes mesh networking.

We continue to demonstrate our leadership with the deployments of our innovative technologies. This included installation of a mesh network in the city of Kissimmee, Florida, which is being used by government agencies and to provide public wireline access.

In Los Angeles, we are proud to be working with the city and the LAPD to install a wireless network with mesh networking and video surveillance system.

And finally, I wanted to mention our participation last month in FOSE which is the abbreviation for the largest government trade show, which is held in Washington DC. At the show, we introduced two new fully rugged wireless-enabled mobile computers, the ML910 Rugged Notebook and the MW810 Mobile Workstation. The ML910 was honored with a Best of FOSE Award in the notebook category.

Moving on to enterprise, this quarter we launched our enterprise mobility business upon completion of the Symbol acquisition. We are beginning to realize the cost synergies we expected in areas like procurement and real estate, and we are making good progress in integrating the two organizations.

This is the most notable in the sales organization where we are progressing well in aligning our enterprise and government sales teams and distribution channels. It was a great first quarter.

We introduced new products, perhaps the most important of which was the first version of a new type of dual-mode enterprise digital assistant called the MC35. It combines advanced GSM voice and data capabilities, including Wi-Fi and Bluetooth, built-in GPS with laptop functionality, a camera, and a barcode reader.

The MC35 joins the durable MC50 and rugged MC70, as the third device in Motorola's family of Enterprise Digital Assistants. This is a great device that complements the Q very well and it is getting positive reviews from the media, industry analysts and customers.

Just last week, we named Kathy Paladino, the new leader of our enterprise mobility business. Kathy was a member of the senior management team at Symbol. She is a terrific leader and has a great team of senior executives working with her in engineering with Boris Metlitsky, product management, supply chain services, and the support functions.

Working together, they will ensure we execute on our integration objectives and timeline and continue to grow this business. And I will be heading out to Holtsville, Long Island later today.

Turning to our public carrier 2G/3G business, I talked earlier about the challenges we face in this space. However, we did make progress. We announced 4 new 2G/3G contracts during Q1 including UMTS contracts and a GSM expansion contract with Celtel Nigeria.

In addition, we have extended our CDMA supply contract with Sprint Nextel, and we signed a CDMA network expansion agreement with KDDI. We also announced a new universal base station for our CDMA customers.

Our iDEN business has declined in the US as we have previously communicated, but strong iDEN growth continues in international markets.

Let's turn to WiMAX. It's the key component of our MOTOwi4 family of wireless broadband technologies. WiMAX is bringing us new customers. The trials and contracts we have in this space, cut across wireline and wireless carriers as well as new entrants.

As of today, we are participating in 25 trials globally and we've signed nine contracts. This quarter we announced a contract to deploy the first WiMAX network in Chile and we announced trials in Brazil and the Netherlands.

At the end of the quarter, Sprint Nextel announced that it was awarding us five additional markets for WiMAX infrastructure build up; namely, Minneapolis, Kansas City, Indianapolis, Detroit and Grand Rapids, Michigan. This is in addition to our current Chicago deployment. We remain as excited as ever about WiMAX's potential for our customers and our business.

So looking out through 2007, we expect Networks and Enterprise to continue to deliver strong and solid results. We are expanding our position in our government and public safety business by introducing new innovative IP-based voice and data solutions. We expect to continue building that momentum by investing to grow wireless broadband with WiMAX leading the way. And at the same time, we will manage our 2G and 3G investments appropriately.

With our acquisition of Symbol Technologies, we've created category leadership in enterprise mobility, and we will seize the growth opportunities across our portfolio and channels.

Now, let's turn to Connected Home Solutions business. The Connected Home Solutions business delivered an extraordinary and exceptional quarter and congratulations to Dan Moloney and the entire worldwide team.

During the quarter, we crossed a significant milestone with more than $1 billion in sales, which is a 42% growth year-over-year versus Q1 of '06. Outstanding!

Operating margin was 10.9%, reflecting the continuing strong earnings result that we delivered last year. During Q1, we shipped nearly 5 million digital entertainment devices, including cable and IP set-tops, an overall record quarter.

Specifically for IP set-tops, shipments increased more than 100% versus last year and we've reached the 1 million IP set top shipment milestone. We remain a leader in this critical, emerging video market.

Following the close of the quarter, we began shipping digital cable host products to US operators in support of the July 2007 set top separable security mandated by the FCC.

Voice and data modem shipments continue to be strong, reaching 2.6 million units and still number one in cable modems, our voice shipments were just shy of 1 million units, representing 50% growth versus last year. With the addition of a robust DSL portfolio, we're well positioned to increase our share of the market in voice and data globally.

We have been investing in the Connected Home VHub of seamless mobility. Motorola's new on-demand solutions business, formally Broadbus, marked significant gain in the video on-demand market, achieving a significant milestone of 500,000 video streams shipped in three years, which is a fantastic accomplishment.

And finally, we continue to add to the intellectual property in Connected Home by recently closing two new acquisitions during the quarter. Netopia, which brings us a robust portfolio of DSL gateways, network management for the IP triple-play solutions, and operators around the world are interested in the Motorola offering as a result of this acquisition. Tut Systems, which expand our ability to help service providers deploy, advanced video services over IP, ATM or RF-based network architectures.

Our strategy for Connected Home Solutions is clear, straightforward and delivering outstanding results today. We're delivering our leadership position and leveraging that. We're delivering innovative end-to-end solutions. And we're enabling new experiences that will define the Home as the hub of seamless mobility.

And with that summary of the operations, I'll now turn it back over to Dean.

Dean Lindroth

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

Dean Lindroth

Thank you. We'll take the first question, please.

Operator

Your first question comes from Scott Coleman of Morgan Stanley.

Scott Coleman - Morgan Stanley

Hi, good morning guys. Thanks. I'm wondering if you could just help us understand what contribution Symbol made to the Networks and Enterprise business this quarter? And then I actually have a question more broadly on handsets, which is, some of the areas that you outlined in terms of moving reduced legacy platforms and moving to three operating systems, a multi-tier silicon strategy. A lot of these items, I think were probably in place before business started to struggle late last year. So, are you really talking about accelerating those endeavors?

And I'm wondering if you can quantify the impact you think these might have on the handset business. How should we track the progress you are making.

Tom Meredith

Hey, Scotty, what I'd like to do is have Greg handle the question on the Symbol acquisition and have Ed turn in his view on the acceleration of the platforms.

Scott Coleman - Morgan Stanley

Great. Thanks.

Greg Brown

So Scott, on Symbol, as I mentioned the integration by the way is tracking exactly to our expectations. It was a strong contributor to Q1 results for Networks and Enterprise. It has gone really, really well both on revenue and earnings contribution and we would expect that to continue for the balance of 2007.

Ed Zander

Scott, I think you are right on. We've been talking about some of these platforms for several years actually. And one of the problems over there has been we just haven't moved with the sense of urgency and priorities. And I think the lack of focus on the realities of 3G, while they were known, weren't executed and that's the reason we've made some of the changes over there.

And the second thing is putting a stake in the ground around when we're going to get Linux/Java out. So, we can do multi-platforms. This was one of our concerns way back in 2004, 2005 that we have to make both an architecture and an operating system transition. And I think some of the delays in lagging and procrastination on some of these things have begun to hurt us back in Q4 and now of course this year.

So, I think what Terry has done over there, with Greg has now really lit the fire. Rich Nottenburg is playing a role in the silicon strategy to get us the multi-sourced silicon in place. We should have been there, and frankly, on Linux/Java we should also be converting much faster, which you are going to start seeing this year.

So, yeah we are reprioritizing our investments and putting a bigger focus. If you don't have that silicon and you can't get that Linux/Java capability into the marketplace, it's very hard to deliver the high-end, compelling experiences and 3G roadmap that we need to compete in the marketplace.

Dean Lindroth

Next question please.

Operator

Your next question comes from Phil Cusick of Bear Stearns.

Phil Cusick - Bear Stearns

Hi guys. Thanks for taking the call. I wonder if you could talk a little bit about handsets and the 500 basis point or so drop quarter-to-quarter in share. I think certainly a big part of that was an inventory draw down.

So, I wonder if you could talk about, one; what regions were weaker around the world, you said North America and Central America were strong. But also, how far down do you think the inventory is drawn? And what do you think maybe sell out share might have been rather than the 17.5% selling? Thanks.

Greg Brown

So from a global perspective, North America and Latin America had solid results. We were challenged in the emerging markets in Europe, in parts of Asia as well. Having said that, as we have referenced, we decided to take proactive action on channel rationalization and pricing actions within Q1. That led to, as we previously referenced, inventory levels that were slightly elevated within the quarter. And we will continue to work aggressively in collaboration with our customers to work that down in Q2.

Phil Cusick - Bear Stearns

So, when we heard from you a month ago it sounded like there are still a couple of months of inventory overhang in the channel. Do you feel like that's drawn down at this point or is there still a few months to go?

Greg Brown

Yeah. We are making progress and we will work it through and will continue to progress in Q2.

Ed Zander

Hi. This is Zander jumping in. I want to also caution that as in some geographies with some channel partners there are areas like here in the United States or in Latin America that are doing quite well and have good levels of inventory with our partners. I think by now you know it's mostly the growth markets, the emerging markets throughout the world, not just Southeast Asia where we exhibited a lot of those challenges. And we are working it down and I expect a lot of it to be cleared by this quarter. It impacted our business.

So, we are making good progress there, but it does take time. And that's what I talked about in terms of rationalizing our indirect and our direct businesses, and I think what Ray is doing with his team is putting in the right kind of contracts and a right kind of discipline with our great distribution partners so that we can effectively return to the kind of indirect balance that we've had in years past.

Dean Lindroth

Next question please.

Operator

Your next question comes from Tal Liani of Merrill Lynch.

Tal Liani - Merrill Lynch

Hello. A question about handsets again. The next quarter margin is probably related to the portfolio you have today. And the question I have is, for the second half is the margin recovery totally depending on your new portfolio, the success of the new portfolio? Or is there anything you are doing, or planning to do that will bring the margins higher to the levels of sort of 4% to 5%.

So, if we look at this sustainable margin level, assuming you don't replicate maybe the success of the RAZR, but you have decent success with any new handset. What is the sustainable margin level that we say? Okay, the company should be able at least to go back to this level even if there is only moderate success for the new handsets.

Greg Brown

Yes. So, I think that our improvements in mobile devices have multi elements. Some are dependent on new product launches, which I think we have gauged pretty well and is reflected in the guidance we've given. We referenced the fact that we had 18 new products already announced and to get them into the shippable category and begin to get traction with our variety of carrier and retail customers obviously has continued importance and we will work diligently on that.

I think also, you'll see us take a more disciplined pricing set of actions that should drive improved profitability and stabilize margins. But there is other elements within our control, not just banking on, if you will, new products and that's the aggressive cost management. And as we've all referenced pretty consistently, we are attacking organizational duplication.

We are going to aggressively continue to work on the supply chain side, on cost of goods efficiencies. But we're also looking at below gross margin opportunities. So, we get the kind of necessary requisite improvement in earnings and operating cash flow to move our business forward and grow it accordingly.

I think you'll also see, quite frankly, some rejuvenated target marketing opportunities. I think for a while Motorola was quite good and effective on certain segment and product marketing and overall marketing that elevated our brand. For a while, I think we got away from that. And you'll see us regenerate that in a targeted way, geared around toward higher margin products. But we think we can differentiate and succeed, so stay tuned on the marking front as well.

Tal Liani - Merrill Lynch

Okay.

Dean Lindroth

Next question please?

Operator

Your next question comes from the line of Mike Ounjian of Credit Suisse.

Mike Ounjian - Credit Suisse

First, just a clarification on the channel inventory situation, you talked about taking actions to improve those levels. I just wanted to find out, is there any kind of rebating or price protection for the distributors that's required? And if so, should we expect to have seen that in the Q1 results or is that part of the Q2 guidance?

And then more broadly, how should we expect the benefits from some of these cost reduction initiatives to flow through the financials over the course of the year? Are you seeing any of that in Q2 or is that really all in the second half?

Greg Brown

So, I think, just to take the second part first, the operating cost efficiencies that will drive, and we've started to take action on in Q1, and specifically in Mobile Devices, Ray Roman and Terry Vega and us will to continue to accelerate. Yes, I think you'll see that get increased traction, which is reflected in the gradual second half recovery in Mobile Devices which puts us in a position, where we expect to be profitable for the overall year.

In terms of the channels, you're right. We are continuing to work with our distribution partners and customers closely to get those at more reasonable levels. And as Ed has already referenced, we expect to make significant progress in that in Q2.

Dean Lindroth

Next question please?

Operator

Your next question comes from the line of Jeff Kvaal of Lehman Brothers.

Jeff Kvaal - Lehman Brothers

Hi, thanks very much. I was wondering if you wouldn't mind commenting a little bit about the stability in ASPs that you generated this quarter and perhaps, which of the product lines that you are thinking about streamlining over the course of 2007? Thanks very much.

Ed Zander

Well, I think, again, you take small signs of progress. But we've had with kind of management direction there in the second half of the year, a constant desire to grow market share, even if it meant sacrificing gross margin percentage and ASPs, and that was reversed in February. And what our direction was and Ray's direction to the field was to put in place pricing architecture and deal flow that would start to stabilize gross margin percentage and ASPs, and we did.

Now, we've got to continue to do that. In fact, we've got to continue to grow it if we can. In reservation to the last question, it is all about new products and it is all about gross margin. And we are going to focus on below the line, but I am just focusing on my time working with Terry in fact on gross margin and above the line in getting the products out there at the right price points, to sell it to the marketplace. So, it is about gross margin. And what's the second question there? There was another one.

Jeff Kvaal - Lehman Brothers

I was just wondering about which phones in particular you were thinking about streamlining again?

Ed Zander

Oh, streamlining, I think we are looking at the entire portfolio. I don't know whether we announced them or not. We've got some products, some architectures that are not producing. And as I said it earlier, I want every product we sell to make money in every geography. I mean there is no ifs, ands, or buts about that. So, we are trimming the portfolio. We deal well with some products that frankly we should have done a while ago. We are trimming some of the designs.

I think we have for example today, I really do, and it was hard to do this when you have the kind of performance. But I believe we have the best GSM/EDGE iconic looking feature phone product line in the industry. I mean sit in front sometimes and look at the RAZR line ups, the new 3G RAZRs that are at Cingular right now and other places. I look at the KRZR products, the new 3G one we just introduced.

We have great mid-range products. The problem, as we said earlier, is they are being squeezed by the high-end which is the 3G and multimedia and of course the low-end new infrastructures.

So, we need to trim in some areas of our portfolio. We have too many price products in the same price points doing the same things. And we have to put that engineering resource on to the areas that we are right now, I think not as competitive, which I said earlier is turning out.

ROKR is our first really, really good music product, which you will be seeing very shortly. We have this video product that we introduced in Europe with this kick slider, we need that. That's where you get the incremental profits and margins. We need more rich-experience products. We need more 3G products.

And at the low-end, we're going to introduce products like MOTOFONE or W-Series. We've got to make money on them. And that's what we are focusing on there. So, what we are doing is redirecting the portfolio, watching more investments on P2K, which is the old software platform moving to Linux/Java as fast as we can. A lot of work, because we spend a lot of money in R&D in Mobile Devices, but we got to get more profit out of that R&D.

The bottom-line is the R&D and Mobile Devices has to start delivering the profitability that we are spending, otherwise we have to think about that R&D expense. So, that's what going on everyday up in Libertyville and around the world with Terry and her team and Greg and I are participating also in this stuff.

Dean Lindroth

Next question please?

Operator

Your next question comes from the line of Maynard Um of UBS.

Maynard Um - UBS

Hi. Thank you. A quick question on cash flow. Obviously, Mobile Devices will be a key part of your cash flow in getting to the positive operating cash flow for the year. But on the balance sheet, specifically for the DSOs in the quarter were higher, inventory returns were lower. Can you just talk about what your target DSOs and inventory returns are implied in your cash flow guidance for the year? And then, if you could just clarification on the charges by the various segments? Thanks.

Tom Meredith

I am sorry. I missed your first name. This is Tom Meredith. Maynard, the cash conversion cycle was something that I think our company is now extremely focused on. And as you know that's just arithmetically, the sum of your inventories and receivables minus your payables. Our cash conversion cycle for the quarter was 55 days, as I mentioned on the talking points. I think it's frankly unsatisfactory and we are going to drive significant changes. I am not going to give you a target right now, but you'll hear more about this whole subject in coming months and no doubt by the time we make the additional announcements before June 1, on cost reductions.

But if you look at my background, you will know that I am a person, who is very focused on following the money. And I think I have a pretty established record on what that means and we will drive the Company through Greg's and Ed's adoption and embracement of cash flow which they have been focused on previously, but we had some missteps in recent quarters and we are going to fix those.

Charges by segment, I would say, why don't you follow-up with Dean and Lorry after the call.

Maynard Um - UBS

Okay, great. Thanks.

Dean Lindroth

Next question please.

Operator

Your next question comes from Todd Koffman of Raymond James.

Todd Koffman - Raymond James

Thank you. You have talked in the last couple of months about some adjustments in your silicon suppliers. What's the timing of those adjustments, as you move into some alternate silicon suppliers? Thank you.

Ed Zander

Todd, this is Ed. I think you will see its mostly a -- well first of all, we use some multiple silicon today, but the kinds of things that we need to do is to have a multi-sourced silicon strategy across many of our tiers, so that like in the case we are in right now, which is, our problem is the ability not to have a lower cost 3G solution with our current chipset supplier.

We have got to get out of that, and that's the think that we are moving towards. It's probably in 2008. Obviously, we are trying to understand whether it's early 2008 or mid 2008, but somewhere in that range. So, we are firing away right now in designs as we speak and looking not only in one spot but in a couple of spots.

So, my goal here is across all of our tiers and we have a mass market tier. We have a feature phone tier. We have the multimedia tier, and we have the messaging tier is to have silicon suppliers with an architecture. And the thing that we really need to have right now is a platform as opposed to a product architecture. With a platform architecture, I can move a way quicker on substituting silicon vendors, if a silicon vendor doesn't meet pricing technology points.

Now, may be I am too technical, but what Rich and Terry's team have been doing is actually designing this, what I call the platform architecture, and that will give us much more flexibility in selecting silicon supplier. So, we are in design right now, as you know sometimes these new things do take six to nine-months to get one of these products out here. But we are looking certainly in 2008, that doesn't mean -- in other way, we are not going to have the 3G products here in 2007, we are not going to bunch out right now. We got more in the second half, I think you're going to like some of them, but to give us the pricing tiers that we need, we need to do that.

The other thing, we are doing is getting suppliers that are best in class for everything from RF baseband and application process. We have been very limited with the architecture of who we can select. And with this new architecture now, not only do we get the processor, but we get the application processor in RF capability and baseband capability among different suppliers. So, I am really very excited about what Rich and his team have done for 2008. Obviously, I wish it was 2007, and we had these products in the marketplace. So, we got to toughen out this year, with what we have. And we will and we're doing cost reductions using supply chain and using just better holding our pricing on 3G, and we do have a portfolio of that. We are getting music, we are going to get video, but 2008 is when we really can explode with a multi-platform design here, that really expands a bigger range of pricing and performance.

Todd Koffman - Raymond James

Thank you.

Operator

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

Mark Sue - RBC Capital Markets

Thank you. Just on your pricing strategy, should we read into your comments that ASP's will hold from hereon forth, is not improved. Can I ask if that’s still a consumer market and carriers are still trying to drive prices lower, and I am sure there is a floor in terms of your acceptable market share and what is that floor?

Ed Zander

Well, great questions, Mark. My forecasting has been very good lately, at least in the last, certainly one or two quarters in this space. All I can tell you is what we are focusing on. And I think the focus in that organization, right or wrong, in last half of 2006 was on market share at all costs, and that was, in retrospect, I think, error in judgment and we fixed that.

So, it's not that we don't want market share, I love market share, I always have. But you've got to make money in what you do. And what we are driving right now and what Ray and Terry and Greg, and myself and Tom is, we've got to make money. And it doesn't mean we don't drive market share. We are in India, we're in Vietnam, we are in all these countries. It's just you've got to pick the spots and you've got to pick the products, and you've got to pick your areas of entry in these areas.

So, ASPs are good indicator. We are looking at it a lot harder. We are driving it. I can't tell you what this quarter or next quarter is going to other than it's a big focus item for us as is gross margin percentage.

And the second question was market share, hard one to call, because of where we are at in terms of what our focus is. We are having reviews, in fact, this week on GEOs, and we look at every geography and looking at their market share growth versus competition. It's something you have to keep in front of you, but having said that, sacrificing a percentage or two in a certain area to gain back your foothold of financial strength in that geography.

The problem is in the growth markets, it isn't just about product, it's about investments. And I think perhaps the area in judgment back in Q4 was that we could drive low-priced products and low-costing product together with all the investments. Because, we're going to go in India, we are going to go in Vietnam, we're going to go in Nigeria, you've got to open up retail, you've got to make the marketing and brand investments. So it's the lower line costs, as well as topper line costs. So, you need the products that give you the profitability to get a measure of country P&L. I think you know where I am going here.

So, we are looking at the country P&L, how much marketing dollars, how much retail dollars, what do you've got to go do, and we have got to be more selective in picking our spots. We are still after number one, but I think you need a better strategy going after that. Everyone is just throwing a lot of products out there, cutting prices and putting distributors in business, which I think was some of the implementation that went on there and we're just fixing it. And that will take us some time. It may hurt a little bit in terms of market share. But I think when we look back this is going to be a real defining moment for us in terms of driving a business here that has long-term profitability and long-term growth. And that's what we did in 2002, 2004 and 2005, and then got a little bit out of control in the middle part of 2006. So, that's it. That's what we are driving.

Mark Sue - RBC Capital Markets

Thank you and good luck.

Dean Lindroth

Next question please?

Operator

Your next question comes from Ehud Gelblum of JP Morgan

Ehud Gelblum - JP Morgan

Hi, thank you very much. As I look back over the last couple of years, you certainly were increasing each quarter the number of handsets you were shipping. I would imagine as you were doing that you were having to go further out in terms of reserving capacity both with component suppliers, as well as with manufacturing capacity and stuff like that. How much, and I'm assuming now that you shipped 45 million, 46 million handsets this quarter, that you have to absorb a lot of pre-reserved capacity that wasn't used.

I'm wondering how much of the minus 4% operating margin this quarter was due to absorbing capacity that wasn't used because of your new plans in terms of pricing? And how many quarters out does that go? And then when I look, before we recover some of that previous old capacity, and then when I look at your guidance, Greg, backing into Mobile Devices' guidance total guidance is flat, Connected Home is flat and Networks is up, implying that Mobile Devices are sort of flattish to downish.

Handset markets generally grow 3% to 5ish% in the second quarter, which means that if you are maintaining share from your 17.5% you should sort of grow volume a little bit, so your ASPs fall. Is that the right way to look at what you kind of baked into your numbers or do you think ASPs kind of next quarter in terms of how you are looking at it to stay roughly the same and perhaps use a little bit of market share in Q2?

Ed Zander

Yeah, that's a good question. I did talk to Stu. One of the best kept secrets and it's hard to see sometimes, but you saw it in last couple of years is the phenomenal work Stu Reed has done in this organization's supply chain. And one of the things we moved away from in the first year of 2004 we just have of bunch of suppliers versus the bunch of strategic partners. And I think what you are seeing or what Stu is working with is that our partners that supply us the key products are working with us through this transition and downturn.

So, I am not sure I can relate to that or whether there was any of that. We have given some of these suppliers who have benefited from the 2005 and 2006 growth are under-spending in 2007, and they are staying with us and working with us on what we've got to go do.

Good question, albeit all. And I will have -- the team will be here. Dean may be talk to Stu on that, and if there is anything in that area, I have not heard anything in that other than they understand we are number two. They understand we still have considerable volume here and if you believe our story, we will be back in not too distant future. So, we work with them on these downturns as well as upturns. So, may be we will follow up on that. But Greg, what was the last question?

Greg Brown

Yeah. Ehud, on the guidance, as you kind of done your back of the envelop, let me just reiterate, just kind of take it by segment, you are right. Connected Home coming off of a record Q1. I think it's only the second $1 billion plus quarter they have ever had and Dan's team is just cooking on all cylinders. So, commensurately with that Q2, you are right we're planning on still a very strong quarter, but sequentially generally in line with Q1.

For Networks and Enterprise and consistent with what we've said before, we've got the Cellular Infrastructure piece of Networks and Enterprise specifically more GSM pricing and margin pressure as we've communicated declining and iDEN in the U.S. declining, that's offset by growth in Public Safety and Symbol or now Enterprise Mobility. So, when you net all those components together, we do see revenue in Networks and Enterprise in Q2 up slightly.

With Q2 and Mobile Devices consistent with what we've said and where we are for all the reasons described, you are right, it's going to be another difficult quarter in Q2. It's good news at least that ASPs stabilized which reverses a decline of ASPs, I think for the last six plus quarters in Mobile Devices. But, yes, we're looking to stabilize ASPs and we're all about looking at, Tom and I and the team and Ed, about increasing gross margin and improving operating earnings between now and the end of the year in the second half.

Ehud Gelblum - JP Morgan

So that means if the market grows, then you will be losing share in the second quarter has the market really grown today?

Ed Zander

I think you could certainly work the math, I think it's April 15. I think look what we need to do is get our legs back on the ground in that division and start executing to numbers that they can deliver, and there is a lot of hatch stuff happening between now and June 30. We're shipping new products as we speak and we just got to go with this plan and basically deliver on what we say we are going to go do and hopefully some of these new products start taking the hold. So, right now, it's very early in the quarter and this is what we see and some of these new products are shipping here. So, that's the best we can give you at this time.

Ehud Gelblum - JP Morgan

Thank you very much

Dean Lindroth

Next question please.

Operator

Your next question comes from the line of Brant Thompson of Goldman Sachs.

Brant Thompson - Goldman Sachs

Great, thanks. I was wondering if you can give us a little more color on some of that ASP trend, as you talked about kind of in February been able to turn it and get stabilized ASPs for the quarter. As you looked out the year, you are going to be ramping more 3G phones, you're going to be picking your spots as you said in emerging market. So, I think that would suggest that your ASPs actually could move up throughout the year. Is there any color you could give us around just a mix of your overall business that wouldn't die, and kind of where it is now, where you might expect it to be that could give us a flavor for how that might play out? Thanks.

Greg Brown

Yes, Brant, I think your logic is right. So, as we've talked about we took proactively pricing actions which stabilized ASPs. Having said that we talked about new products where we've announced, and that we were shipping and we will get traction between now and at the end of the year. We've also talked about not just focusing on cool stuff and iconic design, but marrying that with silicon software and rich experiences that take us up the value chain. So, we can extract higher prices in margin and clearly that's our directional goal. So, that's what we are trying to do between now and the end of the year and in '08.

Ed Zander

Yeah look, I think you said it. If you look at the profit pools of the world of this business we know where they are and Europe represents a profit pool and it's 3G and of that 3G, there is some part of that that is these richer experiences we need to be there. In U.S., we are doing quite well, but still even here if we take some of the GSM customers, they are moving to 3G and subsidizing 3G heavily into their networks. A lot of 3G operators now need to get 3G products even if the user doesn't experience 3G. It is about the network efficiency and what they do with their 3G networks and that's where the subsidies are going, and in some cases, you will find even the GSM products not being subsidized at level which puts it at disadvantage into the market.

So, I will tell you of a profit pool that we just got to get out and it is going to be some in Q2, will better in Q3, even better than that in Q4, and then of course when we get to the things we talked about with [L.J.] and some of the silicon in 2008, a whole lot better. In the other area we got to do which is internal execution is when we are going to announce low-end products, with the new W-Series, we got to make money out of them and we got to pick our spots to go after which will also help to so.

I think in the mid ranges, I said earlier, we are okay, I mean if you at, we always talk about RAZR, but it is still doing quite well. It still had a good quarter. We introduced new 3G versions if you gone down to your Cingular storage. It is a great product, hot product. We just introduced a good 3G one, a new chrome one. We have in the Europe now and I think you will see more in the second half of this year off of the RAZR, this family, and of course the new 3G KRZR which right now is only in Europe. So those all help and what we need to do is get more of those out there, because when you are dealing with whether it's 45 million or whatever the number is, for 200 million units, you need to get more of those units at those higher profits and higher ASPs.

Tom Meredith

And for rest of the people on the call, I hear very loudly from Ed and Greg, a very consistent team. We as a team have historically answered the questions on one dimension, growth and it was measured by market share. What you are hearing is that we are actually much more focused on balance between our cash flow, our profitability and growth. And right now growth is playing third base and we need to get the first and second, and that's what you are going to see. So, it doesn't take a prodigy. And it certainly not near to more like us to figure out that when you look at RIM and what's RIM is doing in the enterprise space and in the messaging space. Now there is an APS that's a pre-desirable ASP, and we think our Q and Q9 product is wonderful from positioning in that market unless I check RIM is more local than global. I would also emphasize that in the context of the rich experiences, we know who is the competition is, its Sony Ericsson and Samsung, and we need to play to their space.

Dean Lindroth

Next question please?

Operator

Your next question comes from the line of Edward Snyder of Charter Equity Group.

Edward Snyder - Charter Equity Group

Thank you. A couple of questions, if I could real quick. You keep talking about 3G and I understand the push for that to stabilize ASPs. But is 3G accretive to your gross margins or operating margins and fallen to this point given your silicon suppliers. There was a talk at ad nauseam now about ASPs. I don't want to be blunt here, but who cares. If you are going to put your 3G phone out there, I mean, if your market shift moves the 3G phones, and you pointed out RIM here, and you are losing money on 3G, you are going to lose more money on ASPs. It's a blended ASP you are talking about anyway, right?

I mean, if you look at your major competitor Nokia, they are shipping a ton of low-end phone, their blended ASPs is moving to the low-end but they're printing money on those phones because their cost basis is much smaller. So, I am guessing, is the focus on ASP really warranted or as Ed said in the past, is it really more of a focus on profit on phones that makes the difference?

Ed Zander

Yeah, you've got it right. I mean, you know me. I have been kind of not indifferent, but certainly not pushing or focusing on ASP, it's profit, it's gross margin percentage. ASP's indicator is probably a symptom, but if you really want to get at the issue in hand, you are looking at your gross margin and percentage of the business. But we saw actually ASPs moving down without the profit with it.

So I agree with you. I've always said that if you look at the number one supplier in this business, when ASPs came down they were generating more profit. But if you look at it by a product-by-product basis, you may use the word ASP, but you look at the net contribution to profit. So, I agree with you.

The 3G products we ship have to make more money. We have got some challenges there, especially, at the high-end of that area with some of the chip manufacturers. But call it ASP, call it gross margin percentage, it's making more money than your profits. So, it has to be your products, is what we are measuring. Right now, we are measuring every product in the product line and every geography on this business, not that we weren't doing it for, but we are really just shining the light on each one of these products.

Tom Meredith

I will add Ed to that. You heard Ed Zander and Greg talk about picking our targets, picking our markets, making sure that we enter the right markets at the tactically important price points and tiers and with the right cost models. And that say, above the line as well as below the line. I am a big believer, again, for those who follow my career, you know, I am a firm as against that low cost always wins. But you need brand and marketing essentially to sustain the gain. You don't have to use your lower cost to establish a lower price or low ASP.

You mentioned that Nokia is printing money. We know that. We can't afford to not be in the markets where they are printing money. So, we have to be more astute in terms of how we go after those markets. And we have to be vigilant in terms of our costs for design as well as how we are investing in those markets, so as to avoid the channel conflict that we inevitably created by going after the market share alone.

Edward Snyder - Charter Equity Group

Okay. So, to your point, if Motorola is widely successful in this restructuring and your new platforms are widely successful; you will be much stronger in the low-end market. We will see your ASPs actually decline, but your profit margins to actually look to rock it, may be even to the double-digit teens. And you didn't talk in '08 or '09, but the point is, as ASPs will go down, but margins will go way up, and you'll be best for possible concern, right?

Tom Meredith

Let me just call out that, and you said if we're widely successful. I'm going to say, when we're widely successful first, and I'm not convinced that we will see declining ASPs if we get the right mix of products. Because of our multiple players across the spectrum against whom we are competing and remember, this is not just a Mobile Device company, it is also a Connected Home and Networks and Enterprise company, all of which have significantly different opportunity profit pools available to them and price points and inventory and receivables and therefore, cash conversion cycles. So from my perspective, watch that space. And three weeks into the job, I'll give you more details along with Ed, Greg, and Dean and Laurie and others as time progresses.

Dean Lindroth

Next question, please?

Operator

Your next question comes from Tim Long of Banc of America.

Tim Long - Banc of America

Thank you and I apologize to Ed Zander for another ASP question here. I just wanted to go back to some comments Ed Zander you made at the Analyst Day, where you did talk about a lot of the prices for the Mobile Device business being set for Q1, so there was going to be an impact there.

I'm just curious how you were able to pull off the flat ASPs? How do we look into that? Does that mean you were able to get out of some of those deals or you just really just avoided a lot of other business that would have had a similar effect on the Company or was there is some other offset?

And secondarily, are there any deals remaining heading into Q2 that are still hangovers from the Q4 timeframe, where there is certain pieces of the business and geographies over certain carriers, where you are unfortunately at a disadvantaged price due to a prior contract? Thank you.

Ed Zander

It's just too hard to go into a quarter and say this is what your ASPs are going to be than back it out. I think what you do is you do your actions, and then you get the results kind of thing. I think as Greg said, in mid-February when we initiated some of the management changes that we wanted to go do. We sat down and basically said this isn't working. And just to plan in place wasn't going to work. And that's when we decided, we looked at, we call it gross margin to get ASP per product, per geography, cost of doing business. And we started to make some priority changes. Where we're going to put our investment dollars, where we're going to put our product focus.

And in those 45 days that turned into what we've got in terms of our performance for the quarter and indeed, yes, it's stabilized ASPs, which was a result of some of the actions we took. And that's what we're, as Tom said, that's the kind of way we are trying to operate the business this quarter and going forward, we are just a little more focused on profitability and investments and how we do things instead of just rushing out, and thinking about units.

The second question was, no I don't know, I really don't know we can get maybe an answer from that, from Ray. But we look at the Q2 numbers in depth, having Greg now and Tom here has been great, because we've got now six eyes looking at this business. One from a financial aspect totally, which is Tom; Greg from the operating numbers and the plan; and meeting with Ray and myself from focusing not only all that, but a lot of focus on strategy and products and competition. And I don't know of any, Greg if we are winning a contract or customer overhang or anything else. I think we've kind of got everything now pretty up well understood. Do you want to add to that?

Greg Brown

Yeah, just a couple of other quick things, as we referenced we did discontinue products in Q1. I think there were seven in total that we discontinued and yes we are working through in Q2 some existing contracts, some better than others, that we still have to work through in Q2. And we're going to progress through the first half of the year and in to the second doing just that.

Tom Meredith

Tim this is Tom. I want to pick up on your word hangovers. I have never been particularly fond of hangovers and I certainly have my shares and especially my youth. But I would call out that, earlier when we were talking about channel rationalization and conflict and working through that, that is a hangover in archetypal sense of the word. And we all know that when you play in a distribution game you give your vendors, distributors either stock rotation rights or pricing protection. And that in fact is part of the hangover we are suffering in Q1 and in the first half. It's just that clear. Maybe, it's not that clear, but it should be.

Tim Long - Banc of America

Okay. I just wanted to ensure that none of those contracts that were set were cancelled and therefore creating potential backlash with carriers or distributors.

Dean Lindroth

Operator, we will take our last question. Thank you.

Operator

Thank you. Your final question comes from the line of Brian Modoff of Deutsche Bank.

Brian Modoff - Deutsche Bank

Yeah guys, couple of questions. First on the Networks side, what was the organic growth rate stripping out Symbol and any other acquisitions that were factored in there?

And then second on the handsets, when are we going to see some new form factors. I mean look at your handsets and I know you are excited some of the ones coming out, but they are really iterations of existing models.

When are we going to start seeing some new designs and some new creativity out of Motorola? What you say the timing of that would be?

Greg Brown

So, on the Networks side we had, you think if there's multiple businesses within this one called Networks and Enterprise. As we communicated in New York in January and on the last earnings call, we did have contraction and pricing pressure on GSM, iDEN in the U.S. declined as well mainly driven by Sprint as they migrate customers in to their CDMA EV-DO network.

Again, that we have communicated that and it's generally as expected. GSM is pretty rugged. Having said that, if you think of it, we have got the decline in the 2G GSM/iDEN U.S. business, being offset by increases in Public Safety or Private Networks growth and then the Enterprise Mobility space vis-à-vis the integration and acquisition of Symbol. So, when you kind of net through that, that's what gets to the 20% year-over-year growth all in from an N&E perspective.

Brian Modoff - Deutsche Bank

What’s the organic growth rate?

Greg Brown

Yeah, we haven't broken out the organic growth rate with or without Symbol, but think of it generally and directionally as contraction of cellular infrastructure, again, mainly GSM and iDEN. By the way, I do want to add CDMA. The CDMA infrastructure business was very good and quiet good on a profitability standpoint and exceeding our expectations mainly driven by Sprint and Verizon and Alltel and in Japan KDDI. So, that's really the system on the growth rates.

Ed Zander

The other thing too is in Q1 the Symbol revenue was also integrated with the existing Enterprise Mobility revenue that we had. As you know, we had a business with Federal Express and UPS and Post Office. So, I think we would have to go back and kind of separate those two to at least figure it out. Because now it doesn't run as Symbol anymore, it runs as an Enterprise Mobility division. So, we put other things in there and I think if we need to Greg is going to go look at that.

Good question Brian on the form factors. I certainly asked that a lot. I have spend a lot of time down in Moto City and lot of time with Chinese people. I mean there is so many ways you can cut this thing. I mean there are flip phones, and sliders and rotators and whatever. And I'm not sure if the design language is something that we necessarily have to go focus on as opposed to experiences, which is where I think, also we will be so critical in 2006. It's an area that we should have paid more attention to.

We talked about our cool experiences. We just didn't execute on it. We were the first ones to have iTunes a couple of years ago. And I think the team just didn't pick-up on that, because that's where I think the action is. We had introduced in Europe, you probably haven't seen it. I'm going to try to show it to you here in a short time is the kick slider which is a novel design, which is a product that's going to deliver blazing video capability and we'll be shipping that hopefully in the end of Q2.

We do have some things off of the initial RAZR family and other things that you'll see. We have some things around video. We have some rugged design language, which I want to talk more about that. It is pretty cool. And we have some techniques, and I don't want to give our [competitors] too much -- that take the slider designs and the candy bar designs and add some technology that we think is going to be breakthrough for us and you'll see at the end of the year. I think we've kind of referred to that in some of the discussions of last July's Analyst Conference.

A question again asked, lot of touch screens, am I see if whether we are going to use this as his main device. I don't know how he does it here in the US, but he does it, is the MING product. MING has been shipping in China now for the better part of a year and a half. It is a full touch screen phone. I don't know what the big deal is with touch screens. This does it. It's great. It's useable. We've tried touch screen here in the US before. They haven't worked, may be they will work now. We are actually bringing MING into other GEOs besides China, as we implement that.

So, the Touch Screen Technology everybody has, you see a lot of competitors in fact Samsung and others that have already introducing touch screens. But I don't know how many other ways to build the phone there is. I worry about some of these phones that have the front side music, the back side keyboards, I looked at one the other day is very hard to use. We got to be careful, as the company that invented core and the company that invented design language, we don't start building things that fall down like Swiss Army Knife and turn upside down and do whatever.

So to me, I'll be honest to you, my focus is on experiences, I think we got some cool designs today, the 3GQ that I've been using that you haven't seen yet here in the U.S., I think it's the best product we produced is RAZR. And it really combines Windows Mobile 6.0 a lot of intuitive stuff has lot of easy buttons for music, for cameras, for flash, for everything. So, we are trying to bring more utility and I think the brouhaha about the product on the West Coast that will be shown in June, is not so much about the form factor, it is about what it does and that's what we as an industry have to move to, what are we going to do with these devices, how do we bring the internet and this rich experiences to whatever form factor it is and that's where I have the team now focused.

Dean Lindroth

Thank you. During this call, we have made a number of forward-looking statements. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of Motorola, and there can be no assurance that such expectations will prove to be correct. Such forward-looking statements include but are not limited to our comments and answers relating to the following topics.

Guidance for Motorola sales and earnings for the second quarter of 2007, guidance for Motorola's profitability and operating cash flow for the year 2007. Expectations regarding the volume and impact of our stock repurchase program, with 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, channel inventory, profitability, operating earnings, operating margin, ASPs and the 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; expected stock compensation expense, amortization of intangibles, depreciation, effective tax rate, interest income, supplier strategy.

Because forward-looking statements involve risks and uncertainties, Motorola's actual results could differ materially from those stated in the forward-looking statements. Information about factors that could cause such differences can be found in this morning's press release on pages 16 through 24 of Item 1A of Motorola's 2006 Annual Report on Form 10-K and in Motorola's other SEC filings. This now concludes our call.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.

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